Apple 1997 Annual Report Download - page 18

effectively manage quality problems and warranty costs, and to stimulate demand for certain of its products.
Gross margin decreased to 10% in 1996 compared with 26% in 1995. This decrease is primarily the result of a $616 million charge in the
second quarter of 1996 for the write-down of certain inventory, as well as the costs of cancelling excess component orders, necessitated by
significantly lower than expected demand for many of the Company's products, primarily its entry-level products. The Company separately
incurred approximately $145 million in charges during the last nine months of 1996 to provide for the estimated costs of correcting certain
quality problems in certain of the "Value" line of Power Macintosh products as well as PowerBook and peripheral products, covering both
goods held in inventory and shipped goods. The Company also incurred greater warranty expenses per unit sold during 1996 compared with
1995. The decrease in gross margin was also due to the Company's response to extreme competitive actions by other companies attempting to
gain market share, including the Company's pricing actions in the U.S., Japan and Europe across most product lines, which were partially offset
by a decrease in the cost of certain product components.
RESEARCH AND DEVELOPMENT
Research and development expenditures decreased in dollar amounts in 1997 when compared with 1996, primarily due to certain restructuring
actions, including a reduction in headcount and the cancellation of certain research and development related contracts, taken during 1997. The
increase in research and development expenses as a percentage of net sales resulted from a decrease in the level of net sales. There was a slight
decrease in research and development expenditures during 1996 compared with 1995. The slight increase as a percentage of net sales in 1996
over 1995 was the result of a decrease in net sales during 1996.
The Company believes that continued and focused investments in research and development are critical to its future growth and competitive
position in the marketplace and are directly related to continued, timely development of new and enhanced products that are central to the
Company's core business strategy. The Company believes that research and development expenditures will decrease in 1998 compared to 1997
as the Company completes and more fully realizes the cost reduction benefits of its restructuring plan.
Information relating to in-process research and development may be found in this Part II, Item 7 of Form 10-K under the subheading "In-
process Research and Development" included under the heading "Special Charges," which information is hereby incorporated by reference.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenditures decreased in dollar amounts in 1997 when compared to 1996, primarily due to certain
restructuring actions, including a reduction in headcount, the closing of facilities, and the writedown of assets, taken during 1997, and to lower
variable expenses. The increase in selling, general and administrative expenditures as a percentage of net sales resulted from a decrease in the
level of net sales. In 1996, selling, general and administrative expenditures remained essentially flat when
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1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ------------- ---------
Research and development......................................... $ 485 (20%) $ 604 (2%) $ 614
Percentage of net sales........................................ 7% 6% 6%
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ------------- ---------
Selling, general and administrative......................... $ 1,286 (18%) $ 1,568 (1%) $ 1,583
Percentage of net sales................................... 18% 16% 14%