___________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 1, 1994 or
[ ]Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 0-10030
APPLE COMPUTER, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2404110
[State or other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization]
1 Infinite Loop 95014
Cupertino, California [Zip Code]
[Address of principal executive offices]
Registrant's telephone number, including area code: (408) 996-1010
20525 Mariani Avenue
Cupertino, California 95014
[Former address of principal executive offices]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
118,945,060 shares of Common Stock Issued and Outstanding as of
August 5, 1994
___________________________________________________________________________
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLE COMPUTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
July 1, June 25, July 1, June 25,
1994 1993 1994 1993
Net sales $2,149,908 $ 1,861,979 $6,695,462 $5,836,165
Costs and expenses:
Cost of sales 1,576,036 1,255,975 5,030,502 3,658,473
Research and development 135,439 174,169 422,193 500,458
Selling, general and
administrative 332,867 417,645 1,037,759 1,253,193
Restructuring costs (126,855) 320,856 (126,855) 320,856
1,917,487 2,168,645 6,363,599 5,732,980
Operating income (loss) 232,421 (306,666) 331,863 103,185
Interest and other income
(expense), net (9,678) 2,931 (16,504) 32,176
Income (loss) before
income taxes 222,743 (303,735) 315,359 135,361
Income tax provision
(benefit) 84,642 (115,419) 119,836 51,436
Net income (loss) $ 138,101 $(188,316) $ 195,523 $ 83,925
Earnings (loss) per
common and common
equivalent share $ 1.16 $ (1.63) $ 1.65 $ 0.70
Cash dividends paid per
common share $ .12 $ .12 $ .36 $ .36
Common and common
equivalent shares used
in the calculations of
earnings (loss) per share 118,860 115,669 118,253 119,969
See accompanying notes.
2
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
July 1, September 24,
1994 1993
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,141,695 $ 676,413
Short-term investments 86,599 215,890
Accounts receivable, net of allowance for
doubtful accounts of $88,321 ($83,776 at
September 24, 1993) 1,277,083 1,381,946
Inventories:
Purchased parts 486,560 504,201
Work in process 179,401 284,440
Finished goods 531,099 717,997
1,197,060 1,506,638
Prepaid income taxes 256,945 268,085
Other current assets 300,607 289,383
Total current assets 4,259,989 4,338,355
Property, plant, and equipment:
Land and buildings 470,683 404,688
Machinery and equipment 560,201 578,272
Office furniture and equipment 158,498 167,905
Leasehold improvements 236,495 261,792
1,425,877 1,412,657
Accumulated depreciation and amortization (760,895) (753,111)
Net property, plant, and equipment 664,982 659,546
Other assets 198,441 173,511
$5,123,412 $ 5,171,412
See accompanying notes.
3
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in thousands)
July 1, September 24,
1994 1993
(Unaudited)
Current liabilities:
Notes payable $ 515,608 $ 823,182
Accounts payable 696,032 742,622
Accrued compensation and employee benefits 129,665 144,779
Accrued marketing and distribution 155,690 174,547
Accrued restructuring costs 75,189 307,932
Other current liabilities 345,303 315,024
Total current liabilities 1,917,487 2,508,086
Long-term debt 304,815 7,116
Deferred income taxes 655,995 629,832
Shareholders' equity:
Common stock, no par value; 320,000,000 shares
authorized; 118,333,418 shares issued and
outstanding at July 1, 1994;(116,147,035
shares at September 24, 1993) 264,753 203,613
Retained earnings 1,995,836 1,842,600
Accumulated translation adjustment (15,474) (19,835)
Total shareholders' equity 2,245,115 2,026,378
$5,123,412 $5,171,412
See accompanying notes.
4
APPLE COMPUTER, INC.
CONSOLIDATED STATEMENTS OF
CASH FLOWS (Unaudited)
(In thousands)
NINE MONTHS ENDED
July 1, June 25,
1994 1993
Cash and cash equivalents, beginning
of the period $ 676,413 $ 498,557
Operations:
Net income 195,523 83,925
Adjustments to reconcile net income to cash
generated by (used for) operations:
Depreciation and amortization 122,338 123,636
Net book value of property, plant,
and equipment retirements 10,469 6,243
Changes in assets and liabilities:
Accounts receivable 104,863 (178,174)
Inventories 309,578 (658,561)
Prepaid income taxes 11,140 (105,801)
Other current assets (11,224) (78,087)
Accounts payable (46,590) 232,611
Accrued restructuring costs (232,743) 275,199
Other current liabilities 5,440 7,805
Deferred income taxes 26,163 39,465
Cash generated by (used for)
operations 494,957 (251,739)
Investments:
Purchase of short-term investments (257,228) (1,359,796)
Proceeds from short-term investments 386,519 1,833,112
Purchase of property, plant, and equipment (123,375) (165,407)
Other (35,437) (27,772)
Cash generated by (used for)
investment activities (29,521) 280,137
Financing:
Increase (decrease) in short-term borrowings (307,574) 123,718
Increase (decrease) in long-term borrowings 297,699 (10,225)
Increases in common stock, net of related
tax benefits and changes in notes
receivable from shareholders 52,008 67,850
Repurchase of common stock -- (273,458)
Cash dividends (42,287) (41,656)
Cash used for financing activities (154) (133,771)
Total cash generated (used) 465,282 (105,373)
Cash and cash equivalents, end of
the period $ 1,141,695 $ 393,184
See accompanying notes.
5
APPLE COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Interim information is unaudited; however, in the opinion of the
Company's management, all adjustments necessary for a fair statement of
interim results have been included. The results for interim periods
are not necessarily indicative of results to be expected for the entire
year. These financial statements and notes should be read in
conjunction with the Company's annual consolidated financial statements
and the notes thereto for the fiscal year ended September 24, 1993,
included in its Annual Report on Form 10-K for the year ended September
24, 1993 (the "1993 Form 10-K").
2. Effective September 25, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 - Accounting for Income Taxes (FAS 109),
which changes the method of accounting for income taxes from the
deferred method to the liability method. This change in accounting
principle has been adopted on a prospective basis, and the financial
statements of prior years have not been restated. The cumulative
effect of the change was not material.
Under FAS 109, deferred income taxes reflect the future income tax
effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and their tax bases.
Prior to 1994, the Company accounted for income taxes under the
provisions of APB Opinion No. 11, which recognized deferred taxes for
the effect of timing differences between pretax accounting income and
taxable income.
At September 25, 1993, the significant components of the Company's
deferred tax assets and liabilities were:
(In thousands)
Deferred tax assets:
Accounts receivable and
inventory reserves $ 123,158
Accrued liabilities and other reserves 170,632
Basis of capital assets and investments 79,104
Total deferred tax assets 372,894
Deferred tax liabilities:
Unremitted earnings of subsidiaries 707,242
Other 27,399
Total deferred tax liabilities 734,641
Net deferred tax liability $361,747
U.S. income taxes have not been provided on a cumulative total of $285
million of undistributed earnings of the Company's foreign
subsidiaries. It is intended that these earnings will be indefinitely
invested in operations outside of the United States. It is not
practicable to determine the income tax liability that might be
incurred if these earnings were to be distributed. Except for such
indefinitely invested earnings, the Company provides federal and state
income taxes currently on undistributed earnings of foreign
subsidiaries.
The Internal Revenue Service has proposed federal income tax
deficiencies for the years 1984 through 1988, and the Company has made
prepayments thereon. The Company has contested these alleged
deficiencies and is pursuing administrative and judicial remedies.
Management believes that adequate provision has been made for any
adjustments that may result from these tax examinations.
6
3. On February 10, 1994, the Company issued $300 million aggregate
principal amount of 6.5% unsecured notes under the Company's $500
million omnibus shelf registration statement filed with the Securities
and Exchange Commission. The notes were sold at 99.925% of par, for an
effective yield to maturity of 6.51%. The notes pay interest semi-
annually and mature on February 15, 2004.
4. In the third quarter of 1993, the Company initiated a plan to
restructure its operations worldwide in order to address the
competitive conditions in the personal computer industry, including the
increased market demand for lower-priced products. In connection with
this plan, the Company recorded a $321 million charge to operating
expenses ($199 million, or $1.72 per share, after taxes). The
restructuring costs included $162 million of estimated employee-related
expenses and $159 million of estimated facilities, equipment, and other
expenses associated with the consolidation of operations and the
relocation and termination of certain operations and employees.
In the third quarter of 1994, the Company lowered its estimate of the
total costs associated with the restructuring and recorded an
adjustment which increased income by $127 million ($79 million, or
$0.66 per share, after taxes). This adjustment primarily reflects the
modification or cancellation of certain elements of the Company's
original restructure plan because changing business and economic
conditions have made certain elements of the Company's original
restructure plan financially less attractive than originally
anticipated. In addition, some actions were completed at a lower cost
than originally estimated. For further discussion, see "Results of
Operations - Restructuring Costs."
5. Earnings per share is computed using the weighted average number of
common and dilutive common equivalent shares attributable to stock
options outstanding during the period. Loss per share is computed
using the weighted average number of common shares outstanding during
the period.
6. Certain prior year amounts on the consolidated balance sheets and
statements of cash flows have been reclassified to conform to the
current period presentation.
7. On July 20, 1994, the Board of Directors declared a cash dividend of
$0.12 per share for shareholders of record as of August 19, 1994, which
will be distributed on September 9, 1994.
8. The information set forth in Item 1 of Part II hereof is hereby
incorporated by reference.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with the
consolidated financial statements and notes thereto. All information is
based on Apple's fiscal calendar.
(Tabular information: Dollars in millions, except per share amounts)
Results of Operations
Third Quarter Nine Months
1994 1993 Change 1994 1993 Change
Net sales $ 2,150 $ 1,862 15.5% $ 6,695 $ 5,836 14.7%
Gross margin $ 574 $ 606 -5.3% $ 1,665 $ 2,178 -23.5%
Percentage of net
sales 26.7% 32.5% 24.9% 37.3%
Operating expenses
(excluding
restructuring
costs) $ 468 $ 592 -20.9% $ 1,460 $ 1,754 -16.7%
Percentage of net
sales 21.8% 31.8% 21.8% 30.0%
Restructuring
costs $ (127) $ 321 -139.5% $ (127) $ 321 -139.5%
Percentage of net
sales 5.9% 17.2% 1.9% 5.5%
Net income (loss) $ 138 $ (188) 173.3% $ 196 $ 84 133.0%
Earnings (loss)
per share $ 1.16 $(1.63) 171.2% $ 1.65 $ 0.70 135.7%
Net sales for the third quarter and first nine months of 1994 increased
over the comparable periods of 1993. Total Macintosh (registered
trademark) computer unit sales increased 14% and 21% in the third quarter
and first nine months of 1994, respectively, over the comparable periods of
1993. This unit sales growth resulted principally from strong sales of the
Company's new Power Macintosh (trademark) products first introduced on
March 14, 1994, and from newer product offerings within the Performa
(registered trademark) family of desktop personal computers and, to a
lesser extent, within the PowerBook (registered trademark) family of
notebook personal computers. This unit growth was partially offset by
declining unit sales of certain of the Company's older product offerings.
The average aggregate revenue per Macintosh computer unit increased
slightly in the third quarter of 1994 over the comparable period of 1993,
primarily as a result of a shift in unit sales from the Company's entry
level desktop personal computers to its mid-range desktop personal
computers. The average aggregate revenue per Macintosh computer unit
declined 5% in the first nine months of 1994 over the comparable period of
1993, primarily as a result of pricing actions undertaken by the Company in
response to continuing industrywide pricing pressures and the Company's
relatively high levels of inventory.
International net sales grew 17% in the third quarter and 19% in the first
nine months of 1994 over the comparable periods of 1993. The increases
primarily reflected strong net sales growth in the Pacific region,
particularly Japan. Net sales for the third quarter and first nine months
of 1994 grew slightly in Europe over the comparable periods of 1993 despite
generally weak economic conditions and competitive pressures in various
European countries. International net sales represented 47% and 48% of
total net sales for the third quarter and first nine months of 1994,
respectively, compared with 46% for both the third quarter and first nine
months of 1993. Domestic net sales grew 14% in the third quarter and 11%
in the first nine months of 1994 over the comparable periods of 1993.
8
In general, the Company's resellers typically purchase products on an as-
needed basis due to the Company's distribution strategy, which is designed
to expedite the filling of orders. Resellers frequently change delivery
schedules and order rates depending on changing market conditions.
Unfilled orders ("backlog") can be, and often are, canceled at will. The
Company's backlog increased to approximately $767 million at August 5,
1994, from approximately $496 million at April 29, 1994, primarily due to
new product introductions which occurred during the Company's third
quarter.
In the Company's experience, the actual amount of product backlog at any
particular time is not a meaningful indication of its future business
prospects. In particular, backlog often increases in anticipation of or
immediately following introduction of new products, such as the recently
introduced Power Macintosh and PowerBook 500 series of notebook personal
computers, because of over-ordering by dealers anticipating shortages.
Backlog often is reduced sharply once dealers and customers believe they
can obtain sufficient supply. Because of the foregoing, as well as other
factors affecting the Company's backlog, backlog should not be considered a
reliable indicator of the Company's future revenue or financial
performance. See "Factors That May Affect Future Operating Results and
Financial Condition" below.
Gross Margin
Gross margin declined both in amount and as a percentage of net sales
during the third quarter and first nine months of 1994, respectively, over
the comparable periods of 1993. The decline in gross margin as a percentage
of net sales was primarily a result of pricing and promotional actions
undertaken by the Company in response to industrywide pricing pressures
(including the increasing price competition that the Company is
experiencing in the Japanese market) and relatively high levels of
inventory. Gross margin was also adversely affected by increased costs
associated with providing customers a wider variety of product
configuration options.
Gross margin was also affected somewhat adversely by changes in foreign
currency exchange rates as a result of a stronger U.S. dollar relative to
certain foreign currencies during both the first and second quarters of
1994, compared with the corresponding periods of 1993. Gross margin was
relatively unaffected by changes in foreign currency exchange rates during
the third quarter of 1994, compared with the corresponding period of 1993.
The Company's operating strategy and pricing take into account changes in
exchange rates over time; however, the Company's results of operations can
be significantly affected in the short term by fluctuations in foreign
currency exchange rates.
Although gross margin increased from 24.0% in the second quarter of 1994 to
26.7% in the third quarter of 1994, primarily due to increased sales of
Power Macintosh products coupled with strong early demand for the new
PowerBook 500 series of notebook personal computers, the Company
anticipates that gross margins will remain under pressure and below prior
years' levels worldwide due to a variety of factors, including continued
industrywide pricing pressures, increased competition and compressed
product life cycles.
Research and Third Quarter Nine Months
Development
1994 1993 Change 1994 1993 Change
Research and
development $135 $174 -22.2% $422 $500 -15.6%
Percentage of net
sales 6.3% 9.4% 6.3% 8.6%
Research and development expenditures decreased both in amount and as a
percentage of net sales in the third quarter and first nine months of 1994,
compared with the corresponding periods of 1993. This decrease reflects
the results of the Company's restructuring actions aimed at reducing costs,
including product development expenditures.
The Company believes that continued 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. The Company anticipates that research and
development expenditures will decrease slightly as a percentage of net
sales during the remainder of 1994, as the Company maintains its efforts to
manage operating expense levels relative to gross margin levels.
9
Selling, General and
Administrative
Third Quarter Nine Months
1994 1993 Change 1994 1993 Change
Selling, general and
administrative $333 $418 -20.3% $1,038 $1,253 -17.2%
Percentage of net
sales 15.5% 22.4% 15.5% 21.5%
Selling, general and administrative expenses decreased both in amount and
as a percentage of net sales in the third quarter and first nine months of
1994, compared with the corresponding periods of 1993. This decrease was
primarily attributable to the Company's restructuring actions initiated in
the third quarter of 1993, which resulted in a decrease in employee-related
expenses. Lower selling expenses also contributed to the decrease as the
Company continued its efforts to manage operating expense levels relative
to gross margin levels.
The Company will continue to face the challenge of managing selling,
general and administrative expense levels relative to gross margin levels,
particularly in light of the Company's expectation of continued pressure on
gross margins, and continued weak economic conditions worldwide.
Restructuring Costs Third Quarter Nine Months
1994 1993 Change 1994 1993 Change
Restructuring costs $(127) $321 -139.5% $(127) $321 -139.5%
Percentage of net
sales -5.9% 17.2% -1.9% 5.5%
In the third quarter of 1993, the Company initiated a plan to restructure
its operations worldwide in order to address the competitive conditions in
the personal computer industry, including the increased market demand for
lower-priced products. In connection with this plan, the Company recorded
a $321 million charge to operating expenses ($199 million, or $1.72 per
share, after taxes). The restructuring costs included $162 million of
estimated employee-related expenses and $159 million of estimated
facilities, equipment, and other expenses associated with the consolidation
of operations and the relocation and termination of certain operations and
employees.
In the third quarter of 1994, the Company lowered its estimate of the total
costs associated with the restructuring and recorded an adjustment which
increased income by $127 million ($79 million, or $0.66 per share, after
taxes). This adjustment primarily reflects the modification or
cancellation of certain elements of the Company's original restructure plan
because changing business and economic conditions have made certain
elements of the Company's original restructure plan financially less
attractive than originally anticipated. In addition, some actions were
completed at a lower cost than originally estimated.
The most significant element of the adjustment is associated with $61
million in costs accrued to move a number of employees from the San
Francisco Bay Area to a lower cost location. This part of the Company's
original restructure plan was expected to result in the termination or
relocation of approximately 2,000 employees and the closure of certain
leased facilities, at a cost of $39 million and $22 million respectively.
The expected benefits of this move have been reduced since the plan's
inception because of changes to the cost differential between the Company's
current and alternative locations. For example, the Company favorably
renegotiated the lease terms of certain facilities in its current location,
the salary growth rate differentials between the Bay Area and alternative
locations have been reduced and recent changes to the California income tax
code make it more attractive for companies to do business in California.
The Company canceled this action in the current quarter
10
when management decided that the extended estimated pay-back period no
longer justified the initial cash investment and the unquantifiable cost of
business disruption that such a move would precipitate.
The Company continues to search for ways to permanently reduce its cost
structure; however, the Company has achieved a lower level of operating
expenses without fully implementing all of the restructuring actions as
originally planned. For example, operating expenses (excluding
restructure) in the third quarter of fiscal 1994 have been reduced by $124
million from the same quarter a year ago.
As of July 1, 1994, the Company had $75 million of accrued restructuring
costs for actions that are currently underway and expected to be completed
within one year. Of this remaining $75 million reserve, approximately $70
million represents cash charges, the majority of which are expected to be
incurred within one year. Spending beyond one year primarily relates to
approximately $6 million of recurring payments under noncancelable
operating leases, which will extend beyond the initiation of the
restructure action.
Interest and Other Third Quarter Nine Months
Income (Expense),Net 1994 1993 Change 1994 1993 Change
Interest and other
income (expense),
net $(10) $3 -430.2% $(17) $32 -151.3%
Interest and other income (expense), net, decreased during the third
quarter of 1994, compared with the corresponding period of 1993. Nine
million dollars of this decline reflected gains of six million dollars
related to the Company's ongoing hedging activities recorded in the third
quarter of 1993, compared with losses of three million dollars related to
the same activities, recorded in the third quarter of 1994. In general,
gains and losses on foreign exchange activity recorded to interest and
other income (expense), net, relate to transaction exposure hedging and
include the mark-to-market results of all foreign exchange contracts that
are not eligible for hedge accounting treatment. Also attributable to the
decline, was an increase in interest expense of six million dollars due to
higher interest rates and larger borrowing balances used to fund working
capital needs. The Company's interest rate hedging strategies are
generally designed to better match the Company's floating-rate interest
earnings on its cash equivalents and short-term investments with the fixed-
rate interest expense on its long-term debt. In line with this strategy,
the Company entered into derivative interest rate transactions on a
majority of its long-term debt, swapping its fixed-rate obligation to a
floating-rate obligation.
Interest and other income (expense), net, decreased in the first nine
months of 1994, compared with the corresponding period of 1993. This
decrease primarily reflected the following non-recurring transactions which
occurred in the first nine months of 1993: interest earned on an income tax
refund from the Internal Revenue Service and a gain on the sale of certain
of the Company's venture capital investments. Also contributing to this
decrease was an increase in interest expense in 1994 due to higher interest
rates and larger borrowing balances used to fund working capital needs.
This decrease was offset in part by certain financing expenses recorded in
1993 that did not recur in 1994.
Income Tax Provision Third Quarter Nine Months
(Benefit) 1994 1993 Change 1994 1993 Change
Income tax provision
(benefit) $85 $(115) 173.3% $120 $51 133.0%
Effective tax rate 38% 38% 38% 38%
The information contained in Note 2 of the Notes to Consolidated Financial
Statements (Unaudited) in Part I, Item 1 of this Quarterly Report on Form
10-Q is incorporated by reference into this discussion.
11
Factors That May Affect Future Operating Results and Financial Condition
The Company's future operating results and financial condition are
dependent on the Company's ability to successfully develop, manufacture and
market technologically innovative products in order to meet dynamic
customer demand patterns. Inherent in this process are a number of factors
that the Company must successfully manage in order to achieve favorable
future operating results and financial condition.
Product Introductions and Transitions
Due to the highly volatile nature of the personal computer industry which
is characterized by dynamic customer demand patterns and rapid
technological advances, the Company frequently introduces new products and
product enhancements. The success of new product introductions is
dependent on a number of factors including market acceptance, the Company's
ability to manage the risks associated with product transitions, the
effective management of inventory levels in line with anticipated product
demand, and the manufacturing of products in appropriate quantities to meet
anticipated demand. Accordingly, the Company cannot determine the ultimate
effect that new products will have on its sales or results of operations.
On March 14, 1994, the Company introduced Power Macintosh, a new line of
Macintosh computers based on a new PowerPC family of RISC microprocessors.
The Company's results of operations and financial condition may be
adversely affected if it is unable to successfully complete the transition
of its line of Macintosh personal computers and servers from the Motorola
68000 series of microprocessors to the PowerPC microprocessor. The success
of this ongoing transition will depend on the Company's ability to continue
to sell products based on the Motorola 68000 series of microprocessors
while gaining market acceptance of the new PowerPC-based products, to
successfully manage inventory levels of both product lines simultaneously,
and to coordinate the timely development and distribution of new "native"
versions of commonly-used software products specifically designed for the
PowerPC-based products by independent software vendors. For example,
potential users may defer a decision to purchase Power Macintosh products
until certain productivity applications (such as Microsoft (registered
trademark) Excel (registered trademark) and Word (registered trademark))
are available as native software products for Power Macintosh.
The rate of product shipment immediately following introduction of a new
product is not necessarily an indication of the anticipated future rate of
shipments for that product, which depends on many factors, some of which
are not under the control of the Company. These factors may include:
initial large purchases by a small segment of the user population which
tends to purchase new technology prior to its acceptance by the majority of
users (early adopters); purchases in satisfaction of pent-up demand by
persons who anticipated new technology and as a result deferred purchases
of other products; and over-ordering by dealers who anticipate shortages
due to the aforementioned factors. The preceding may also be offset by
other factors, such as: the deferral of purchases by many users until new
technology is accepted as "proven" and for which commonly used software
products are available; and the reduction of orders by dealers once they
believe they can obtain sufficient supply of previously backlogged product.
The measurement of demand for newly introduced products is further
complicated by the availability of different product configurations, which
may include various types of built-in peripherals and software.
Configurations may also require certain localization (such as language) for
various markets and, as a result, demand in different geographic areas may
be a function of the availability of third-party software in those
localized versions. For example, the availability of European language
versions of software products manufactured by U.S. producers may lag behind
the availability of U.S. versions by a quarter or more. This may result in
lower initial demand for new products in geographic areas outside of the
United States, although localized versions of the Company's new products
may be available.
Backlog is often volatile after new product introductions due to the above
demand factors, often increasing sharply coincident with introduction, and
then reducing sharply once dealers and customers believe they can obtain
sufficient supply.
12
Competition
The personal computer industry is highly competitive and continues to be
characterized by consolidations in the hardware and software industries,
aggressive pricing practices, and downward pressure on gross margins. The
Company's results of operations and financial condition could be adversely
affected should the Company be unable to effectively manage the impact on
the Company of industrywide pricing pressures and continue to realize the
anticipated cost-reduction benefits associated with its restructuring plan
initiated in the third quarter of 1993.
The Company's future operating results and financial condition may also be
affected by the Company's ability to offer customers competitive
technologies while effectively managing the impact on inventory levels and
the potential for customer confusion created by product proliferation.
The Company's future operating results and financial condition may also be
affected by the Company's ability to implement and manage the competitive
risk associated with certain of the Company's collaboration agreements with
other companies, such as the agreements with International Business
Machines Corporation (IBM).
The Company's future operating results and financial condition may also be
affected by the Company's ability to increase market share in its personal
computer business. The Company is currently the only maker of hardware
which uses the Macintosh operating system; however, the Company has only a
minority market share in the personal computer market, which is dominated
by makers of computers which run the MS-DOS(registered trademark) and
Microsoft Windows(trademark) operating systems. Although certain of
the Company's personal computer products are capable of running software
designed for the MS-DOS or Windows operating systems, they do so by
means of software emulation of Intel microprocessor chips (except for
one product, which does so by means of a co-processor card). However,
optimal performance of the Company's products is obtained by use of
software specifically designed for the Company's products, either
those based on the Motorola 68000 series of microprocessors
or those based on the PowerPC microprocessor.
Decisions by customers to purchase the Company's personal computers, as
opposed to a MS-DOS or Windows-based system, are often based on the
availability of third-party software for particular applications. The
Company believes that the availability of third-party application software
for the Company's hardware products depends in part on the third-party
developer's perception and analysis of the relative benefits of developing
such software for the Company's products as opposed to the larger MS-
DOS/Windows market. This analysis is based on factors such as the relative
market share of the Company's products, the anticipated potential revenue
which may be earned, and the associated costs of developing such software
products.
Microsoft Corporation is the developer of MS-DOS and the Windows operating
systems, which are the principal competing operating systems to the
Company's Macintosh operating system. Microsoft is also an important
developer of application software for the Company's products. Accordingly,
Microsoft's interest in producing application software for the Company's
products may be influenced by its perception of its interests as an
operating system vendor.
The Company's ability to produce and market competitive products is also
dependent on the ability of IBM and Motorola, Inc., the suppliers of the
new PowerPC RISC microprocessor for certain of the Company's products, to
continue to supply to the Company microprocessors which produce superior
price/performance results compared with those supplied to the Company's
competitors by Intel Corporation, the developer and producer of the
microprocessor used by most personal computers using the MS-DOS and Windows
operating systems. IBM produces personal computers based on the Intel
microprocessors as well as on the PowerPC microprocessor, and is also the
developer of OS/2, a competing operating system to the Company's Macintosh
operating system. Accordingly, IBM's interest in supplying the Company
with improved versions of microprocessors for the Company's products may be
influenced by its perception of its interests as a competing manufacturer
of personal computers and as a competing operating system vendor.
13
The Company's future operating results and financial condition may also be
affected by the Company's ability to successfully expand its new
businesses and product offerings into other markets such as broadening
industry acceptance of the Newton (trademark) personal digital assistant
(PDA) products and effectively licensing Newton technology and marketing
the related products and services.
Global and General Economic Conditions
A large portion of the Company's revenues in recent years has come from its
international operations. As a result, the Company's operating results and
financial condition could be significantly affected by international
factors, such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets in which the Company distributes its
products. The Company's operating strategy and pricing take into account
changes in exchange rates over time; however, the Company's results of
operations can be significantly affected in the short term by fluctuations
in foreign currency exchange rates.
Inventory
The Company's products include certain components, such as specific
microprocessors manufactured by Motorola Inc. and monochrome active-matrix
displays manufactured by Hosiden Corporation, that are currently available
only from single sources. Any availability limitations, interruptions in
supplies, or price increases of these and other components could adversely
affect the Company's business and financial results. The Company's future
operating results and financial condition may also be adversely affected
by the Company's ability to manage inventory levels and lead times required
to obtain components in order to be more responsive to short-term shifts in
customer demand patterns. In addition, if anticipated unit sales growth
for new and current product offerings is not realized, inventory valuation
reserves may be necessary which could adversely impact the Company's
results of operations and financial condition.
Marketing and Distribution
A number of uncertainties exist regarding the marketing and distribution of
the Company's products. Currently, the Company's primary means of
distribution is through third-party computer resellers. However, in
response to changing industry practices and customer preferences, the
Company is continuing its expansion into various consumer channels such as
mass-merchandise stores (such as Sears and Wal-Mart), consumer electronics
outlets, and computer superstores. The Company's business and financial
results could be adversely affected if the financial condition of these
sellers weakens or if sellers within consumer channels decide not to
continue to distribute the Company's products.
Other
The majority of the Company's research and development activities, its
corporate headquarters, and other critical business operations are located
near major seismic faults. The Company's operating results and financial
condition could be materially adversely affected in the event of a major
earthquake.
The Company plans to replace its current transaction systems (which include
order management, distribution, manufacturing and finance) with a single
integrated system as part of its ongoing effort to increase operational
efficiency. The Company's future operating results and financial condition
could be adversely affected by its ability to implement and effectively
manage the transition to this new integrated system.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial
performance should not be considered to be a reliable indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods. In addition, the Company's
participation in a highly dynamic industry often results in significant
volatility of the Company's common stock price.
14
Liquidity and Capital Resources
Nine Months
1994
Cash generated by operations $ 495
Cash used for investment
activities, excluding short-
term investments $ 159
The Company's financial position with respect to cash, cash equivalents and
short-term investments, net of short-term borrowings increased to $713
million at July 1, 1994, from $69 million at September 24, 1993. This
increase includes $300 million in long-term debt proceeds due to the
implementation of long-term financing arrangements which replaced short-
term financing. This increase was also attributable to the Company's
continued efforts to improve profit levels and to manage working capital,
particularly in the area of inventory management.
Cash generated by operations during the first nine months of 1994 totaled
$495 million. Cash was generated primarily by the decrease in inventory
levels which resulted from improved inventory management, improved 1994
sales levels attributable to various pricing and promotional actions, and
sales of inventory which had been built up in preparation for the
introduction of Power Macintosh products. Increased sales and improved
profit levels also contributed to cash generated by operations during the
first nine months of 1994. Accounts receivable decreased over the nine-
month period, reflecting improved cash collection activity.
Cash generated by operations was partially offset by cash used for
restructuring of $106 million, as the restructuring actions initiated in
the third quarter of 1993 continued to be implemented. In addition, in the
third quarter of 1994, the Company lowered its estimate of the costs
associated with the restructuring and recorded an adjustment which
increased income by $127 million ($79 million, or $0.66 per share, after
taxes). This adjustment primarily reflects the modification or
cancellation of certain elements of the Company's original restructuring
plan because changing business and economic conditions have made certain
elements of the Company's original restructure plan financially less
attractive than originally anticipated.
Cash used for the purchase of property, plant and equipment totaled
approximately $123 million during the first nine months of 1994. These
purchases were primarily for land, buildings, machinery and equipment. The
Company anticipates that capital expenditures in 1994 will be slightly
below 1993 expenditures of $213 million.
In January 1994, a wholly-owned subsidiary of the Company exercised its
option to purchase for $51.9 million the remaining partnership interest in
the Cupertino Gateway Partners partnership, a general partnership, which
owned the Company's campus-type office facilities located in Cupertino,
California (the "Campus"). As a result of this purchase, the Company's
wholly-owned subsidiary now owns 100% of the right, title and interest in
the Campus. The $51.9 million payment is included in the $123 million of
property, plant and equipment purchased during the first nine months of
1994.
The Company's aggregate short- and long-term borrowings at July 1, 1994,
were approximately $821 million, comprised of approximately $516 million in
short-term borrowings and approximately $305 million in long-term
borrowings. Aggregate borrowings at September 24, 1993 were $830 million.
15
The balance of long-term debt increased during the first nine months of
1994, due to the issuance of $300 million aggregate principal amount of
6.5% unsecured notes under an omnibus shelf registration statement filed
with the Securities and Exchange Commission. This shelf registration was
for the registration of debt and other securities for an aggregate
offering amount of $500 million. The notes were sold at 99.925% of par,
for an effective yield to maturity of 6.51%. The notes pay interest
semi-annually and mature on February 15, 2004.
Short-term borrowings at July 1, 1994, were approximately $308 million
lower than at September 24, 1993, as the proceeds from the issuance of $300
million in long-term debt were used to pay down the balance of short-term
borrowings. The Company's short-term borrowings are principally under its
commercial paper program. From time to time, the Company also borrows to
finance operations pursuant to short-term uncommitted bid-line arrangements
with commercial banks. During the first quarter of 1994, the Company
entered into a $500 million unsecured revolving credit facility with a
syndicate of banks to support its commercial paper program. No borrowings
have been made under this facility. In addition, during the first nine
months of 1994, Apple Japan, Inc., a wholly-owned subsidiary of the
Company, incurred short-term yen-denominated borrowings from several
Japanese banks, the balance of which aggregated the U.S. dollar equivalent
of approximately $260 million at July 1, 1994.
The Company expects that it will continue to incur short- and long-term
borrowings from time to time to finance U.S. working capital needs and
capital expenditures, because substantially all of the Company's cash, cash
equivalents, and short-term investments are held by foreign subsidiaries,
generally in U.S. dollar-denominated holdings. Amounts held by foreign
subsidiaries would be subject to U.S. income taxation upon repatriation to
the United States; the Company's financial statements fully provide for any
related tax liability on amounts that may be repatriated. See Note 2 of
the "Notes to Consolidated Financial Statements (Unaudited)" in Part I,
Item 1 for further discussion.
The Internal Revenue Service has proposed federal income tax deficiencies
for the years 1984 through 1988, which the Company is contesting. The
Company believes the resolution of any tax liability for these proposed tax
deficiencies will occur over the course of the next several years.
Although payment of any assessment is not required until the end of such
process, the Company elected to make a prepayment in April 1991 for the
years 1984 through 1986, and a prepayment in May 1993 for the years 1987
through 1988.
The Company believes that its balances of cash, cash equivalents, and short-
term investments, together with funds generated from operations and short-
and long-term borrowing capabilities, will be sufficient to meet its
operating cash requirements in the foreseeable future.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to pages 34 through 36 of the Company's 1993 Form 10-K
under the heading "Litigation", for a discussion of certain litigation
involving Microsoft Corporation and Hewlett-Packard Company; 1993
Securities and Derivative Litigation; litigation involving a complaint
filed by Jerome Lemelson; and litigation involving a complaint filed by
Richard B. Grant.
On July 11, 1994 there were oral arguments in Apple Computer, Inc. v.
Microsoft Corporation & Hewlett-Packard Company before the Ninth Circuit
Court of Appeals relating to the appeal by Apple from the final judgment
entered in the District Court. The Court of Appeals has not yet issued its
decision.
Lemelson v. Apple Computer, Inc. is scheduled to go to jury trial in
January, 1995. Mr. Lemelson has not specified damages claimed in that case
but has requested injunctive relief. Grant v. Apple Computer, Inc. is
scheduled to go to jury trial in October, 1994. Mr. Grant claims damages
up to $729 million dollars, has requested these damages be trebled, and has
requested injunctive relief.
The Company continues to believe the suits cited above to be without merit
and intends to vigorously defend against these actions. The Company
believes resolution of all these matters will not have a material adverse
effect on its financial condition and results of operations as reported in
the accompanying financial statements.
16
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
Exhibit 3.3 By-Laws of the Company, as amended through
April 20, 1994.
b) Reports on Form 8-K
None.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLE COMPUTER, INC.
(Registrant)
DATE: August 11, 1994 BY /s/ Joseph A. Graziano
Joseph A. Graziano
Executive Vice President and
Chief Financial Officer
18
APPLE COMPUTER, INC.
INDEX TO EXHIBITS
Exhibit Description Page Number
Index
Exhibit 3.3 By-Laws of the Company, as amended
through April 20, 1994. 20
19