FOOL CONFERENCE CALL SYNOPSIS*
By Dale Wettlaufer (MF Raleigh)

Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %>
One Infinite Loop
Cupertino, CA 95014
(408) 996-1010
http://www.apple.com

WASHINGTON, D.C., (March 25, 1997) /FOOLWIRE/ -- On March 17, 1997 Apple Computer Inc. held a conference call to announce a restructuring of operations. CEO Gil Amelio, CFO Fred Anderson, and Executive VP of Marketing Guerrino DeLuca provided details of the announcement.

GIL AMELIO. The aim of our rebuilding is to focus on the company's core competencies, to reinforce our market position in the areas that have contributed to our success in the past, and to quickly return Apple to profitability. Our agenda involves implementation of a streamlined organization, the simplification of our products lines, and the discontinuance of funding for projects and technologies that are not central to our core business strategy. Last month, we announced a move from an organization designed around business units to a functional organization. This allows us to maintain fewer levels of management. It also enables us to focus our R&D activities on products that are central to our key businesses, unify our many marketing groups, and align our sales teams to our market strengths, and integrate Apple's and NeXT's resources. We also intend to simplify our products offering, working with customers to provide features they want.

Our strategic priorities will be: First, to deliver products, services, and support with superior and reliable quality and user value; Second, to shorten the time-to-market for new and innovative products; Third, to continue to enhance the Mac OS, as we've recently done with the shipment of Mac OS 7.6. We're on schedule to once again, this summer, ship the very first version of Mac OS 8.0, code named Tempo; Fourth, to deliver our next-generation OS code named Rhapsody; Lastly, we've scrutinized all of our research & development activities to determine which ones are central to our business, which ones can be better achieved by third parties, and which ones can be more effectively realized for adoption of industry standards.

We need to stabilize the business around a sustainable revenue level in the short-term in order to prepare for a return to growth and expansion in the longer-term. To accomplish this, it is necessary to take $500 million more, or so, out of our annual operating expenses. The steps we have taken to streamline our organization, simplify our product line, and divest some of our projects and programs are designed to reduce significantly our operating expenses and headcount while maintaining the right level of resources to invest in our mission-critical tasks, namely, delivery of distinctive products to the market, delivery of Rhapsody, and continued enhancements to the Mac OS.

I have to comment that the management team has worked very, very hard during the past year to try and avoid taking necessary risks that we are facing up to at this point in time. It is very painful to have to lay off people who have worked so hard during the past year trying to bring Apple back to health. I think it therefore leads to a sense with the people that are remaining that they have a special responsibility to get this company back to health, and they are an integral part of this company and of the plans that we have made. I trust their passion and skill to do the right thing.

By narrowing our focus, we can significant muscle behind these priorities. We'll listen to the needs of our customers in our core markets to develop the technologies and products to support those specific needs. With that overview, I'd like to turn the call over to Fred Anderson for more detailed discussion of our restructuring activities.

FRED ANDERSON. Our goal is to trim our annual operating expense rate to less than $1.6 billion, so that we can achieve break-even results at $8 billion in revenues or less, assuming gross margins of 20% or better. That translates into a significant reduction from our annualized first quarter 19997 operating expense run-rate (including NeXT expenses) of over $2.1 billion.

As our press release indicates, we will discontinue investment in a number of projects and technologies, either because they are not central to our core business going forward or they can be better-accomplished through industry standard technologies or they represent strong business opportunities for third parties. Some of these technologies will be maintained as part of the Mac OS, but will not receive major upgrades in the future. Such is the case for OpenDoc and CyberDog. We are moving more of our resources for component technology towards Java-based technologies, which is becoming the industry standard. Examples of other projects that we will not continue to fund are the Apple videoconferencing solutions and AIX server software. Apple's videoconferencing is an example of a solution that did not provide sufficient differentiation from third party Mac OS solutions. In the case of AIX server software, Apple will concentrate on Rhapsody and Mac OS our server operating systems in the future. These operating systems host important solutions such as AppleShare and WebObjects. However, it should be pointed out that server hardware remains part of the Apple product line and will continue to be enhanced. We will phase out the AIX platform with the shipment of release 4.1.5 in the next few weeks.

These are just a few examples of the projects we have curtailed. There are a number of other technologies that we have decided not to continue to invest in, but for which we're investigating a range of possibilities, including licensing and business partnerships, as well as sales. We anticipate that the total cost of our current restructuring activities, coupled with those we've previously identified but not yet completed under our 1996 restructuring plan, will be approximately $250 million. Given the balance of our current restructuring reserves, this will necessitate a $155 million net charge to our second quarter 1997 earnings. The majority of the restructuring costs will relate to layoff activity. The remainder will consist of contract cancellation costs, lease cancellations, and asset write-offs.

We expect to lay off approximately 2,700 Apple employees and to significantly reduce out temporary workers and contractors. Of the estimated lay-offs, approximately 55% will apply to U.S. workers -- the balance will apply to international employees. Approximately 80% will come from manufacturing, marketing, and R&D personnel, with the balance from sales, distribution, service, and general & administrative functions. In terms of operating expense reductions, within the next four quarters, we expect to achieve an estimated 30-40% reduction from the Q1 run-rate for marketing and R&D. We also expect to achieve reductions of about 20% from the first quarter 1997 run-rates for sales, distribution, and general & administrative functions. In terms of timing, we expect the largest portion of the restructuring spending, as well as expense reduction, to occur in our third fiscal quarter. We expect approximately 75% of the total restructuring costs to be cash-based, with the remainder consisting of non-cash costs of asset write-downs. We expect to achieve 80% of the operating expense reductions by the end of Q3, 90% by the end of Q4, and the remainder by the end of the first quarter of fiscal 1998.

Initially, we expect to trim approximately $25 million from our quarterly "other costs of sales," which include overhead related to the production process. This should have a positive impact on gross margin going forward. We believe that these measures, though painful, will provide Apple with the opportunity to reach our targeted return to profitability in the fourth quarter of fiscal 1997. We also believe these measures will leave us with a simplified, more efficient framework for focusing on our core strengths as a company.

As I indicated following the announcement of our first quarter results, we exited the first quarter with surplus channel inventory, which we estimate to be approximately $200 million. We've been extremely pleased with the results of our channel sell-through of that inventory this quarter, particularly in the United States. But as I suggested would happen, this surplus channel sell-off has been offset by reduced sell-ins during the quarter in order to restore a more normalized channel inventory level. This phenomenon, when coupled with the traditional seasonal softness in demand in our fiscal second quarter, suggests it will generate somewhere between $1.6 and $1.7 billion in revenues this quarter. Also, as we previously indicated, we expect to generate an operating loss this quarter, in addition to the estimates restructuring charge, of $155 million, and the estimated $300-325 million write-off of in-process R&D related to the NeXT acquisition. As you know, we exited the first fiscal quarter with about $1.8 billion in cash and we feel that our cash position is adequate to meet our liquidity needs for the foreseeable future. We expect that our restructuring activities will have a rapid positive impact on our operating results going forward and we expect a significantly smaller loss in our third fiscal quarter than in the second fiscal quarter.

FURTHER COMMENTS FROM GIL AMELIO. Despite the very painful employee actions that we've had to take, I and the rest of the management team have an optimism about the future. We've made the right decisions to focus our energies, and these decisions I am absolutely convinced will put us back on the road to health. We'll be looking a very different situation over the next few quarters.

QUESTION AND ANSWER SESSION. Newton will not be affected by the restructuring plan and the company is keeping all its options open in understanding the future of Newton.

The combined lay-off number will be about 4,100, which includes 1,400 temporary associates and contractors.

The reduction in staff will be made from a base of approximately 13,400 employees, both temporary and full-time.

The break-even goal is to get to $8 billion or lower. In addition to working on the revenue line, Apple will be working the gross margin line very hard. Material costs represent over 90% of gross expenses, so that's where the company will focus on getting gross margin about 20% and lower the break-even below $8 billion in annual sales.

Licensing remains part of the company's strategy. Apple is determined to have good relationships with licensing partners. Based on the Mac OS licensing, the company has given customers a choice. The company is moving to a completely different architecture of our deliverables to its licensees. Up until now, the licensees have had to pay Apple for software licensing as well as for licensing fees for hardware design. Now, it is possible to build a Mac with a hardware design different from Apple's. Moving forward with the delivery of the Mac 8.0 CHRP, licensees will have a completely different proposition. They will be able to extend the architecture on basically all industry standards and therefore will not have to pay licensing fees for the hardware. Therefore, the company is working with licensees to make sure that the licensing fees for that software is adjusted accordingly. The company has completed those negotiations to its satisfaction but will wait to make an announcement.

The company intends to license Rhapsody. Current terms of the 7.X licensing have not changed, the different licensing arrangements are applicable to the CHRP-enabled version of the Mac OS. The deliverable available to licensees will include everything they need to build a CHRP-compliant Mac OS.

With the decisions the company has made on the Mac OS, it has created elements of stability for third party developers. They will have a stable API to which they can port and move their applications to. The company has the opportunity to establish a new platform program -- developer relations are as important as marketing to Apple. The company is fully focused on two fronts: 1. Sustain and support current Mac OS developers and their party hardware developers and 2. Make sure technical information and support are in place for developers utilizing Rhapsody. OpenStep and Rhapsody will provider developers a unique opportunity for cross-platform deployment and open applications, giving them a much wider marketplace. Developers are a key priority and this reorganization doesn't effect these partners.

Rhapsody's architecture has a very portable micro kernel, which can be deployed on any microprocessor architecture. Choice is a good thing, but the target market for Rhapsody is the PowerPC.

Multiple brands for Apple has caused confusion -- the Performa is being supplanted by entry-level Power Macs. The company will continue to aggressively price entry-level Power Macs. The company won't try to take control of the distribution channel and will continue to maintain multiple types of distribution relationships. Clones will compete first and foremost against Wintel machines but also against Apple computers across the spectrum of price points.

The company is focusing on getting Macs to the whole spectrum of customers who demand them, through whatever channel, and doing that economically. It does recognize its key markets, such as publishing, education, and the Internet -- great products lead to market share.

The cost of the NeXT acquisition from a cash perspective was about $400 million. Most of that has been paid.

Total headcount at 13,400 at the end of February has come down about 4,000 from five quarters ago.

It is possible that net cash (cash minus debt) could go negative during the third quarter, but the company foresees that current cash will be sufficient to fund operations.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.

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