___________________________________________________________________________
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 December 30, 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
Cupertino California 95014
[Address of principal executive offices] [Zip Code]
Registrant's telephone number, including area code: (408) 996-1010
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 [ ]
120,762,023 shares of Common Stock Issued and Outstanding as of
February 3, 1995
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLE COMPUTER, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in millions, except per share amounts)
THREE MONTHS ENDED
December 30, December 31,
1994 1993
Net sales $ 2,832 $ 2,469
Costs and expenses:
Cost of sales 2,018 1,877
Research and development 132 152
Selling, general and administrative 415 375
Restructuring costs (17) --
2,548 2,404
Operating income 284 65
Interest and other income
(expense), net 15 --
Income before provision for income taxes 299 65
Provision for income taxes 111 25
Net income $ 188 $ 40
Earnings per common and common
equivalent share $ 1.55 $ .34
Cash dividends paid per common share $ .12 $ .12
Common and common equivalent shares
used in the calculations of
earnings per share 121,600,188 116,956,648
See accompanying notes.
2
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In millions)
December 30, September 30,
1994 1994
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,148 $ 1,203
Short-term investments 439 55
Accounts receivable, net of allowance for
doubtful accounts of $93 ($91 at September
30, 1994) 1,599 1,581
Inventories:
Purchased parts 455 469
Work in process 167 207
Finished goods 462 412
1,084 1,088
Deferred tax assets 269 293
Other current assets 179 256
Total current assets 4,718 4,476
Property, plant, and equipment:
Land and buildings 489 484
Machinery and equipment 584 573
Office furniture and equipment 154 158
Leasehold improvements 235 237
1,462 1,452
Accumulated depreciation and amortization (801) (785)
Net property, plant, and equipment 661 667
Other assets 154 160
$ 5,533 $ 5,303
See accompanying notes.
3
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in millions)
December 30, September 30,
1994 1994
(Unaudited)
Current liabilities:
Short-term borrowings $ 209 $ 292
Accounts payable 956 882
Accrued compensation and employee benefits 129 137
Accrued marketing and distribution 275 178
Accrued restructuring costs 32 58
Other current liabilities 334 397
Total current liabilities 1,935 1,944
Long-term debt 304 305
Deferred tax liabilities 732 671
Shareholders' equity:
Common stock, no par value; 320,000,000
shares authorized; 119,890,480 shares issued
and outstanding at December 30, 1994
(119,542,527 shares at September 30, 1994) 309 298
Retained earnings 2,270 2,096
Accumulated translation adjustment (17) (11)
Total shareholders' equity 2,562 2,383
$ 5,533 $ 5,303
See accompanying notes.
4
APPLE COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
THREE MONTHS ENDED
December 30, December 31,
1994 1993
Cash and cash equivalents, beginning
of the period $ 1,203 $ 676
Operations:
Net income 188 40
Adjustments to reconcile net income to cash
generated by operations:
Depreciation and amortization 38 43
Net book value of property, plant, and
equipment retirements 5 7
Changes in assets and liabilities:
Accounts receivable (18) 134
Inventories 4 168
Other current assets 101 59
Accounts payable 74 (3)
Accrued restructuring costs (26) (56)
Accrued marketing and distribution 97 (20)
Other current liabilities (71) (33)
Deferred tax liabilities 61 31
Cash generated by operations 453 370
Investments:
Purchase of short-term investments (410) (151)
Proceeds from sale of short-term investments 25 217
Purchase of property, plant, and equipment (22) (24)
Other (12) (34)
Cash generated by (used for)
investment activities (419) 8
Financing:
Decrease in short-term borrowings (83) (71)
Decrease in long-term borrowings (1) (2)
Increases in common stock, net of related
tax benefits and changes in notes receivable
from shareholders 9 5
Cash dividends (14) (14)
Cash used for financing activities (89) (82)
Total cash generated (used) (55) 296
Cash and cash equivalents, end of the period $ 1,148 $ 972
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. All adjustments are of a normal
recurring nature unless specified in a separate note included in these
Notes to Consolidated Financial Statements. 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
30, 1994, included in its Annual Report on Form 10-K for the year ended
September 30, 1994 (the "1994 Form 10-K").
2. In the first quarter of 1995, the Company lowered its estimates of the
total remaining costs associated with its restructuring plan initiated
in the third quarter of 1993 and recorded an adjustment that increased
income by $17 million ($11 million, or $0.09 per share, after taxes).
This adjustment primarily reflected favorable cancellation settlements
of certain R&D project commitments and facility leases and the
completion of other actions at lower costs than originally estimated.
At December 30, 1994, the Company had $32 million of accrued
restructuring costs for actions that are currently under way.
Approximately $26 million in charges to the accrual are expected to be
incurred during the remainder of 1995 with the remaining $6 million to
be incurred beyond 1995. Charges to be incurred beyond 1995 relate
primarily to recurring payments under certain noncancelable operating
leases.
The following table depicts a roll-forward reconciliation of the
activity in the restructuring accrual balance from September 30, 1994
to December 30, 1994:
(In millions)
Balance at Balance at
Category September December
30, 1994 Charges Adjustments 30, 1994
Employee termination payments (C) $ 11 $ 2 $ 5 $ 4
Provisions relating to employees
who will not be terminated (C) 4 * 1 3
Termination payments for leases
and other contracts (C) 20 3 1 16
Write-down of operating assets
to be sold (N) 1 * 1 --
Provisions for litigation (C) 2 1 -- 1
R&D project cancellations (C) 6 * 5 1
Other provisions and write-downs (B) 13 2 4 7
1991 accrued restructuring costs (B) 1 1 -- --
$ 58 $ 9 $ 17 $ 32
C: Cash; N: Noncash; B: Both cash and noncash;
*: Less than $1 million
3. Effective October 1, 1994, the Company adopted Financial Accounting
Standard No. 115 (FAS 115), "Accounting for Certain Investments in Debt
and Equity Securities". In accordance with FAS 115, prior period
financial statements have not been restated to reflect the change in
accounting principle. The cumulative effect of the change was not
material to shareholders' equity as of October 1, 1994. Under FAS 115,
debt securities that a company has both the positive intent and ability
to hold to maturity are carried at amortized cost. Debt securities
that a company does not have the positive intent and ability to hold to
maturity and all marketable equity securities are classified as either
available-for-sale or trading and are carried at fair value.
Generally, unrealized holding gains and losses on securities classified
as available-for-sale are carried as a component of shareholders'
equity. Unrealized holding gains and losses on securities classified
as trading are reported in earnings.
The Company's cash equivalents consist primarily of certificates of
deposit, time deposits and commercial paper with maturities of three
months or less at the date of purchase. Short-term investments consist
principally of commercial paper with maturities between three and
twelve months. As of December 30, 1994, the Company's cash equivalents
and short-term investments are classified as available-for-sale. The
related unrealized gains and losses on the available-for-sale
securities are not material to
6
shareholders' equity as of December 30, 1994. The Company did not
realize any material gains or losses, either individually or in the
aggregate, on sales of available-for-sale securities during the three
months ended December 30, 1994.
4. U.S. income taxes have not been provided on a cumulative total of $360
million of undistributed earnings of the Company's foreign
subsidiaries. It is intended that these earnings will be indefinitely
invested in operations outside 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 for 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.
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.
6. Certain prior year amounts on the consolidated statements of cash flows
have been reclassified to conform to the current period presentation.
7. 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
First First
Quarter Quarter
1995 1994 Change
Net sales $ 2,832 $ 2,469 14.7%
Gross margin $ 814 $ 592 37.5%
Percentage of net sales 28.7% 24.0%
Operating expenses (excluding
restructuring costs) $ 547 $ 527 3.8%
Percentage of net sales 19.3% 21.4%
Restructuring costs $ (17) -- --
Percentage of net sales -0.6%
Net income $ 188 $ 40 370.0%
Earnings per share $ 1.55 $ 0.34 355.9%
Net sales for the first quarter of 1995 increased over the comparable
period of 1994, resulting primarily from a shift in product mix towards the
Company's higher margin products within each product category.
Specifically, the Company recorded strong sales of its Performa(registered
trademark) 630, and of products within the Power Macintosh(trademark)
family and PowerBook(registered trademark) 500 series of personal computers.
Increased sales of these products contributed to an increase in the
average aggregate revenue per Macintosh(registered trademark) computer unit
of approximately 26% in the first quarter of 1995 over the comparable period
of 1994. Despite an increase in net sales, total Macintosh computer unit
sales remained relatively flat in the first quarter of 1995 over the
comparable period of 1994, when unit growth increased 40% over the
comparable period of 1993. Unit sales growth resulting from strong sales
of the Company's Power Macintosh products and newer product offerings
within the Performa family of desktop personal computers was almost
completely offset by a reduction in sales of certain products within the
Company's PowerBook family of notebook-sized personal computers and certain
of the Company's older product offerings.
International net sales grew 19% in the first quarter of 1995 over the
comparable period of 1994, primarily reflecting strong net sales growth in
the Pacific region, particularly Japan. Net sales for the first quarter of
1995 grew moderately in Europe over the comparable period of 1994.
International net sales represented 47% of total net sales for the first
quarter of 1995, compared with 45% for the corresponding period of 1994.
Domestic net sales grew 11% in the first quarter of 1995 over the
comparable period of 1994, primarily resulting from strong growth in the
consumer market, and to a lesser extent, from growth in the business
market.
The Company has historically experienced increased net sales in its first
and fourth quarters, compared with other quarters in its fiscal year, due
to holiday demand for and calendar year-end buying of some of its products.
The Company does not, however, consider its business to be highly seasonal.
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 attempts to fill orders on the requested delivery
schedules. However, products may be in relatively short supply from time
to time until production volumes have reached a level sufficient to meet
demand or if other production or fulfillment constraints exist. The
Company's backlog increased slightly to approximately $670 million at
February 3, 1995, from approximately $663 million at December 2, 1994.
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 because of over-ordering
by dealers anticipating shortages. Backlog often is reduced sharply once
dealers and customers believe they
8
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. Further information regarding the Company's backlog may be
found under Part I, Item 2 of this Form 10-Q under the heading "Factors
that May Affect Future Results and Financial Condition", which information
is hereby incorporated by reference.
Gross Margin
Gross margin increased both in amount and as a percentage of net sales
during the first quarter of 1995 over the comparable period of 1994. The
increase in gross margin as a percentage of net sales was primarily a
result of a shift in product mix towards the Company's higher margin
products within each product category which included strong sales of the
Company's entry level Macintosh Performa 630, and of products within its
Power Macintosh family and its PowerBook 500 series of personal computers.
The increase in gross margin levels in the first quarter of 1995 over the
comparable period of 1994 was affected somewhat favorably by changes in
foreign currency exchange rates as a result of a weaker U.S. dollar
relative to certain foreign currencies during such period. 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 the Company's gross margin percentage was 28.7% for the first
quarter of 1995, resulting primarily from strong sales of Power Macintosh
computers and the PowerBook 500 series of notebook personal computers, it
is anticipated that gross margins will remain under pressure and could fall
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 Development First First
Quarter Quarter
1995 1994 Change
Research and development $ 132 $ 152 -13.2%
Percentage of net sales 4.7% 6.2%
Research and development expenditures decreased both in amount and as a
percentage of net sales in the first quarter of 1995 when compared with the
corresponding period of 1994. This decrease primarily reflects lower
product development expenditures resulting from the Company's restructuring
actions aimed at reducing costs as well as fewer new product introductions
in the first quarter of 1995 compared with the corresponding period of
1994.
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 increase in amount and as a percentage of net
sales as a result of additional projects scheduled to begin in the later
quarters of 1995.
First First
Quarter Quarter
Selling, General and 1995 1994 Change
Administrative
Selling, general and
administrative $ 415 $ 375 10.7%
Percentage of net sales 14.7% 15.2%
Selling, general and administrative expenses increased in amount in the
first quarter of 1995 when compared with the corresponding period of 1994.
This increase was primarily a result of increased advertising and channel
marketing program spending as the Company continued its efforts to expand
market share. Selling, general and administrative expenses decreased as a
percentage of net sales in the first quarter of 1995 when compared with the
corresponding period of 1994, as a result of an increase in the level of
net sales and the Company's ongoing efforts to manage operating expense
growth.
9
The Company will continue to face the challenge of managing selling,
general and administrative expenses relative to gross margin levels,
particularly in light of the Company's expectation of continued pressure on
gross margin, and continued competitive pressures worldwide. The Company
anticipates that selling, general and administrative expenses will decrease
in amount during the remaining quarters of 1995, but will continue to be
higher than 1994 levels.
Restructuring costs First First
Quarter Quarter
1995 1994 Change
Restructuring costs $ (17) -- --
Percentage of net sales (0.6%) -- --
For information regarding the Company's restructuring actions, refer to
Note 2 of the Notes to Consolidated Financial Statements (Unaudited) in
Part I, Item 1 of this Quarterly Report on Form 10-Q, which information is
hereby incorporated by reference.
Interest and Other Income First First
(Expense), Net Quarter Quarter
1995 1994 Change
Interest and other income
(expense), net $ 15 $ 0 100.0%
Interest and other income (expense), net increased by approximately $15
million in income in the first quarter of 1995 compared with the same
period in 1994. Higher cash and short-term investment balances coupled
with higher investment interest rates resulted in increased interest income
of approximately $8 million. Other factors contributing to the increase in
interest and other income (expense), net include a net gain from foreign
exchange activity and a decrease in interest expense resulting from lower
worldwide short-term borrowing balances.
Provision for Income Taxes First First
Quarter Quarter
1995 1994 Change
Provision for income taxes $ 111 $ 25 344.0%
Effective tax rate 37% 38%
The information contained in Note 4 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.
Factors That May Affect Future 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 availability of application software for new products, 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.
10
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 lines of personal computers and servers from the Motorola 68000
series of microprocessors to the PowerPC(registered trademark)
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 processor-based products, to successfully manage inventory levels
of both product lines simultaneously, and to continue to coordinate the
timely development and distribution by independent software vendors of
new "native" software applications specifically designed for the PowerPC
processor-based products.
The rate of product shipments immediately following introduction of a new
product is not necessarily an indication of the 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 that tends to purchase
new technology prior to its acceptance by the majority of users ("early
adopters"); purchases in satisfaction of pent-up demand by users 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 product previously in backlog.
Backlog is often volatile after new product introductions due to the
aforementioned demand factors, often increasing sharply coincident with
introduction, and then reducing sharply once dealers and customers believe
they can obtain sufficient supply of 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 the Company's new products outside the United
States, although localized versions of the products may be available.
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 of
industrywide pricing pressures and continue to realize the anticipated cost-
reduction benefits associated with the 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.
On November 7, 1994, the Company reached an agreement with International
Business Machines Corporation (IBM) and Motorola, Inc. on a new hardware
reference platform for the PowerPC microprocessor that is intended to
deliver a much wider range of operating system and application choices for
computer customers. As a result of this agreement, the Company intends to
make the Macintosh operating system available on the common platform.
Accordingly, the Company's future operating results and financial
condition may be affected by its ability to implement this and certain
other collaboration agreements entered into, and to manage the associated
competitive risk.
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. Although the Company recently announced the licensing
of the Macintosh operating system to other personal computer vendors, it is
currently the only maker of hardware that uses the Macintosh operating
system, and it has a minority market share in the personal computer market,
which is dominated by makers of computers that run the
MS-DOS(registered trademark) and Microsoft Windows(trademark)
operating systems. Certain of the Company's personal computer products are
capable of running application software designed for the MS-DOS or Windows
operating system, through software emulation of Intel Corporation
microprocessor
11
chips 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. The Company also recently introduced
products which include both the RISC-based PowerPC 601 microprocessor and
the 486 DX2/66 microprocessor which enable users to switch between
Macintosh and DOS computing environments. In addition, as a result of the
collaboration agreement noted in the preceding paragraph, the Company
believes it may have the opportunity to increase its market share in the
personal computer business as the Macintosh operating system becomes
available on computers based on the new hardware reference platform.
Decisions by customers to purchase the Company's personal computers, as
opposed to MS-DOS or Windows-based systems, 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
developers' perception and analysis of the relative benefits of developing
such software for the Company's products versus software for the larger MS-
DOS and Windows market. This analysis is based on factors such as the
relative market share of the Company's products, the anticipated potential
revenue that may be earned, and the costs of developing such software
products.
In an effort to increase overall market share, the Company has commenced
licensing the Macintosh operating system to other personal computer
vendors. The Company anticipates that the licensing activities will result
in a variety of these vendors bringing to market personal computers that
will run application software based on the Macintosh operating system. The
Company also believes that licensing will offer software vendors a broader
installed base on which they can develop and provide technical innovations
for the Macintosh platform, but there can be no assurance on the number of
or the rate at which vendors will bring to market application software
based on the Macintosh operating system. Accordingly, the Company cannot
determine the ultimate effect that licensing of the Macintosh operating
system will have on its sales or results of operations.
Microsoft Corporation is the developer of the MS-DOS and 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 Microsoft's 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
microprocessors 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 IBM's perception of its interests as a
competing manufacturer of personal computers and as a competing operating
system vendor.
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 the markets
for on-line services and personal digital assistant (PDA) products.
Global Market Risks
A large portion of the Company's revenue is derived from its international
operations. As a result, the Company's operations and financial results
could be significantly affected by international factors, such as changes
in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. When the
U.S. dollar strengthens against other currencies, the U.S. dollar value of
non-U.S. dollar-based sales decreases. When the U.S. dollar weakens, the
U.S. dollar value of non-U.S. dollar-based sales increases.
Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs
increases when the U.S. dollar weakens and decreases when the U.S. dollar
strengthens. Overall, the Company is a net receiver of currencies other
than the U.S. dollar and, as such, benefits from a weaker dollar and is
adversely affected by a stronger dollar relative to major currencies
worldwide. Accordingly, changes in exchange rates may negatively affect
the Company's consolidated sales and gross margins (as expressed in U.S.
dollars).
12
To mitigate the short-term impact of fluctuating currency exchange rates on
the Company's non-U.S. dollar-based sales, product procurement, and
operating expenses, the Company regularly hedges its non-U.S. dollar-based
exposures. Specifically, the Company enters into foreign exchange forward
and option contracts to hedge firmly committed transactions. Currently,
hedges of firmly committed transactions do not extend beyond one year. The
Company also purchases foreign exchange option contracts to hedge certain
other probable, but not firmly committed transactions. Hedges of probable,
but not firmly committed transactions do not extend beyond one year. To
reduce the costs associated with these ongoing foreign exchange hedging
programs, the Company also regularly sells foreign exchange option
contracts and enters into certain other foreign exchange transactions. All
foreign exchange forward and option contracts not accounted for as hedges,
including all transactions intended to reduce the costs associated with the
Company's foreign exchange hedging programs, are carried at fair value and
are adjusted on each balance sheet date for changes in exchange rates.
While the Company is exposed with respect to fluctuations in the interest
rates of many of the world's leading industrialized countries, the
Company's interest income and expense is most sensitive to fluctuations in
the general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on the Company's cash, cash
equivalents, and short-term investments as well as interest paid on its
short-term borrowings and long-term debt. To mitigate the impact of
fluctuations in U.S. interest rates, the Company has entered into interest
rate swap and option transactions. Certain of these swaps are intended to
better match the Company's floating-rate interest income on its cash, cash
equivalents, and short-term investments with the fixed-rate interest
expense on its long-term debt. The Company also enters into interest rate
swap, swaption, and option transactions in order to extend the effective
duration of a portion of its cash, cash equivalent, and short-term
investment portfolios. These swaps may extend the Company's cash investment
horizon up to a maximum effective duration of three years.
To ensure the adequacy and effectiveness of the Company's foreign exchange
and interest rate hedge positions, as well as to monitor the risks and
opportunities of the nonhedge portfolios, the Company continually monitors
its foreign exchange forward and option positions, and its interest rate
swap, swaption, and option positions on a stand-alone basis and in
conjunction with its underlying foreign currency- and interest rate-
related exposures, respectively, from both an accounting and an economic
perspective. However, given the effective horizons of the Company's risk
management activities, there can be no assurance that the aforementioned
programs will offset more than a portion of the adverse financial impact
resulting from unfavorable movements in either foreign exchange or interest
rates. As such, the Company's operating results and financial position may
be adversely affected.
Inventory
The Company's products include certain components, such as specific
microprocessors manufactured by Motorola, Inc., 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 that would adversely affect
the Company's results of operations and financial condition.
Certain of the Company's products include components which are manufactured
by suppliers located in Japan. As a result of the January 17, 1995
earthquake in Kobe, Japan, supplies of these components may be constrained
due to potential damage to facilities of the Company's direct suppliers and
their source suppliers located in or around the earthquake area. However,
at the date of this Form 10-Q, the full impact of the damage to facilities
and supply chains is not known, and as a result, the Company cannot fully
determine the effect of the earthquake on its future operating results 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 (for example, 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.
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Other Factors
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.
Liquidity and Capital Resources
First
Quarter
1995
Cash, cash equivalents and short-term
investments, net of short-term
borrowings $ 1,378
Cash generated by operations $ 453
Cash used for investment activities,
excluding short-term investments $ 34
Cash used for financing activities $ 89
The Company's financial position with respect to cash, cash equivalents and
short-term investments, net of short-term borrowings increased to $1,378
million at December 30, 1994 from $966 million at September 30, 1994. This
increase was primarily attributable to the Company's continued efforts to
increase profit levels and to manage working capital, particularly in the
areas of inventory and accounts receivable.
Cash generated by operations during the first three months of 1995 totaled
$453 million. Cash was generated primarily by higher sales levels related
to a shift in product mix towards higher-margin products which typically
have higher average selling prices.
Net cash used for the purchase of property, plant and equipment totaled
approximately $22 million during the first quarter of 1995. These
purchases primarily included manufacturing machinery and equipment. The
Company anticipates that capital expenditures in 1995 will be relatively
consistent with 1994 expenditures of $160 million.
Short-term borrowings at December 30, 1994 were approximately $83 million
lower than at September 30, 1994, as commercial paper borrowing activity
decreased due to the increased level of cash generated by operations. In
general, the Company's short-term borrowings reflect borrowings made under
its commercial paper program and short-term uncommitted bid-line
arrangements with certain commercial banks. In particular, Apple Japan,
Inc., a wholly owned subsidiary of the Company, incurred short-term yen-
denominated borrowings from several Japanese banks during 1994, the balance
of which aggregated the U.S. dollar equivalent of approximately $209
million at December 30, 1994.
Long-term borrowings of $304 million at December 30, 1994 remained
consistent with the balance at September 30, 1994. Substantially the
entire amount of long-term borrowings represents $300 million aggregate
principal amount of 6.5% unsecured notes issued under an omnibus shelf
registration statement filed with the Securities and Exchange Commission in
1994. This shelf registration covers the registration of debt and other
securities for an aggregate offering price of up to $500 million. The
notes were
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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.
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 a substantial portion of the Company's cash,
cash equivalents, and short-term investments is 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.
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.
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 on a short- and long-term basis.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to page 39 of the Company's 1994 Annual Report on Form 10-
K under the subheading "Litigation" for a discussion of certain litigation
involving Microsoft Corporation and Hewlett-Packard Company; 1993
Securities and State Court Shareholders Action Litigation; and litigation
involving a complaint filed by Jerome Lemelson.
In the case of Apple Computer, Inc. v. Microsoft Corporation and Hewlett-
Packard Company, the Company filed a petition for a writ of certiorari in
------------------
the Supreme Court of the United States on December 19, 1994.
On December 9, 1994, Lemelson v. Apple Computer, Inc. was resolved.
The Company continues to believe the pending suits cited above, in which
the Company is a defendant, to be without merit and intends to vigorously
defend against these actions. The Company believes the resolution of all
of these matters will not have a material adverse effect on its financial
condition and results of operations as reported in the accompanying
financial statements. However, depending on the amount and timing of an
unfavorable resolution of these lawsuits, it is possible that the Company's
future results of operations or cash flows could be materially affected in
a particular period.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
3.3 By-Laws of the Company, as amended through
November 2, 1994
11 Computation of per share earnings
27 Financial Data Schedule
b) Reports on Form 8-K
None.
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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: February 8, 1995 BY /s/ Joseph A. Graziano
Joseph A. Graziano
Executive Vice President and
Chief Financial Officer
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APPLE COMPUTER, INC.
INDEX TO EXHIBITS
Exhibit Description Page Number
Index
3.3 By-Laws of the Company, as amended 18
through November 2, 1994
11 Computation of per share earnings 38
27 Financial Data Schedule 39
17