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January 30, 1996

Apple Freezes Most Spending for Research

By LAWRENCE M. FISHER

SAN FRANCISCO -- Uncertainty about Apple Computer Inc.'s future continued to gnaw at the company Monday, as Apple froze most research spending, while Standard & Poor's downgraded Apple's debt rating and a selloff of shares pushed the company's stock to a new 52-week low.

An internal memo announcing the research freeze said that Apple's management was preparing a reorganization plan that would be presented to the board within two weeks.

The memo gave no details of what that revamping might entail, but it was the first indication from inside the company that Apple has been continuing independently to explore a recovery strategy since it received a stock-swap merger offer last Tuesday from Sun Microsystems Inc. That offer valued Apple at only about $23 a share.

Apple shares closed at $29.125, down $1.50, in Nasdaq trading, still far higher than the Sun offer. Shares of Sun Microsystems closed at $44.25, up $2, as many investors apparently concluded that Sun was not in a hurry to overextend itself by acquiring Apple.

Meanwhile, people in the Silicon Valley investment banking community said that Apple, which is based in Cupertino, Calif., had started exploring the interest of several companies that had previously considered acquiring it, including IBM and Motorola Inc. Those companies would not comment Monday.

In temporarily freezing most research and development spending, Apple is trying to contain the part of its cost structure that is frequently cited as a reason for the company's current financial woes.

Because Apple must develop and maintain its own hardware and software standards while the rest of the personal computer industry adheres to common standards set by Intel Corp. for hardware and Microsoft Corp. for operating-system software, the company has been hard pressed to weather the PC price wars of recent years.

According to the memo, which was circulated Friday to the research-and-development staff and signed by David Nagel, an Apple senior vice president, Apple's management will present its reorganization plan to the board within two weeks.

"After that, I will be in a much better position to talk more openly about where and how this new strategy will affect the R&D organization," Nagel wrote. "I do not expect this situation to last for more than several weeks."

The memo, first reported in the World Wide Web version of the trade publication PC Week, did not refer to any possibility of a merger.

Michael Spindler, Apple's president and chief executive, has been under pressure from shareholders and industry critics to articulate a strategy for turning the company around. But other than to announce the cutting of 1,300 jobs -- roughly 8 percent of Apple's work force -- Spindler has publicly offered no specifics of how the company intends to return to profitability.

Earlier this month Apple posted a $69 million loss for the quarter that ended in December, normally its most profitable period; the company has said it expects another loss in the current quarter.

Attempting to reassure its customers, Apple ran advertisements Monday in a number of daily newspapers, including The New York Times and The Wall Street Journal, with a signed statement from Spindler. The statement said that "the top priority of Apple's board and management team is to take action to prepare Apple for its next chapter of growth and profitability."

The reassurances did not stop Standard & Poor's from lowering its rating on Apple's senior debt Monday from BBB, an investment-grade rating, to BB-, a rating applied to investments considered speculative.

S&P said that the drop reflected the expectation that recent operating losses would continue in the near term; uncertainties with regard to the strategic direction of the company, and management turmoil. About $300 million of debt is affected.

Apple and Sun had been in merger discussions since the fall, but Apple's realization that it would report a substantial loss for the December quarter came as a surprise to both sides.

"I don't think it works now," one executive said. "I think they have to get their house in order first."


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