___________________________________________________________________________
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 June 30, 1995 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. EmployerIdentification 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 [ ]
122,691,266 shares of Common Stock Issued and Outstanding as of August 4,1995
___________________________________________________________________________
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 NINE MONTHS ENDED
June 30, July 1, June 30, July 1,
1995 1994 1995 1994
Net sales $ 2,575 $ 2,150 $ 8,059 $ 6,695
Costs and expenses:
Cost of sales 1,847 1,576 5,822 5,030
Research and development 168 135 443 422
Selling, general and 404 333 1,205 1,038
administrative
Restructuring costs (6) (127) (23) (127)
2,413 1,917, 7,447 6,363
Operating income 162 233 612 332
Interest and other income
(expense), net 2 (10) (33) (17)
Income before provision
for income taxes 164 223 579 315
Provision for income taxes 61 85 215 120
Net income $ 103 $ 138 $ 364 $ 195
Earnings per common and
common equivalent share $ 0.84 $ 1.16 $ 2.97 $ 1.65
Cash dividends paid per
common share $ 0.12 $ 0.12 $ 0.36 $ 0.36
Common and common
equivalent shares used in
the calculations of
earnings per share (in
thousands) 123,203 118,860 122,482 118,253
See accompanying notes.
2
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In millions)
June 30, September 30,
1995 1994
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,168 $ 1,203
Short-term investments 508 55
Accounts receivable, net of allowance for
doubtful accounts of $98($91 at September
30, 1994) 1,553 1,581
Inventories:
Purchased parts 690 469
Work in process 188 207
Finished goods 489 412
1,367 1,088
Deferred tax assets 286 293
Other current assets 309 256
Total current assets 5,191 4,476
Property, plant, and equipment:
Land and buildings 486 484
Machinery and equipment 639 573
Office furniture and equipment 150 158
Leasehold improvements 225 237
1,500 1,452
Accumulated depreciation and amortization (809) (785)
Net property, plant, and equipment 691 667
Other assets 230 160
$ 6,112 $ 5,303
See accompanying notes.
3
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in millions)
June 30, September 30,
1995 1994
(Unaudited)
Current liabilities:
Short-term borrowings $ 406 $ 292
Accounts payable 1,048 882
Accrued compensation and employee benefits 145 137
Accrued marketing and distribution 189 178
Other current liabilities 390 455
Total current liabilities 2,178 1,944
Long-term debt 303 305
Deferred tax liabilities 803 671
Shareholders' equity:
Common stock, no par value; 320,000,000
shares authorized; 121,905,285 shares issued
and outstanding at June 30, 1995
(119,542,527 shares at September 30, 1994) 356 298
Retained earnings 2,419 2,096
Accumulated translation adjustment 53 (11)
Total shareholders' equity 2,828 2,383
$ 6,112 $ 5,303
See accompanying notes.
4
APPLE COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
NINE MONTHS ENDED
June 30, July 1,
1995 1994
Cash and cash equivalents, beginning of the $ 1,203 $ 676
period
Operations:
Net income 364 196
Adjustments to reconcile net income to cash
generated by operations:
Depreciation and amortization 104 122
Net book value of property, plant, and
equipment retirements 1 11
Changes in assets and liabilities:
Accounts receivable 28 105
Inventories (279) 310
Other current assets (46) --
Accounts payable 167 (47)
Accrued restructuring costs (43) (233)
Other current liabilities 5 5
Deferred tax liabilities 132 26
Cash generated by operations 433 495
Investments:
Purchase of short-term investments (1,558) (257)
Proceeds from sale of short-term investments 1,105 386
Purchase of property, plant, and equipment (110) (123)
Other (23) (35)
Cash (used for) investment
activities (586) (29)
Financing:
Increase (decrease) in short-term borrowings 114 (308)
Increase (decrease) in long-term borrowings (4) 298
Increases in common stock, net of related
tax benefits and changes in notes receivable
from shareholders 51 52
Cash dividends (43) (42)
Cash generated by (used for)
financing activities 118 --
Total cash generated (used) (35) 466
Cash and cash equivalents, end of the period $ 1,168 $ 1,142
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. The Company lowered its estimates of the total remaining costs
associated with its restructuring plan initiated in the third quarter
of 1993 and recorded adjustments that increased income by $17 million
($11 million, or $0.09 per share, after taxes) and $6 million ($4
million, or $0. 03 per share, after taxes) in the first and third
quarters of 1995, respectively. These adjustments 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 June 30, 1995, the Company had $15 million of accrued restructuring
costs for actions that are currently under way. Approximately $6
million in charges to the accrual are expected to be incurred during
1995 with the remaining $9 million incurred beyond 1995. Charges to be
incurred beyond 1995 relate primarily to recurring payments under
certain noncancelable operating leases.
3. Interest and other income (expense), net, consists of the following:
(In millions)
Three Months Ended Nine Months Ended
June 30, July 1, June 30, July 1,
1995 1994 1995 1994
Interest income $ 32 $ 9 $ 76 $ 27
Interest expense (16) (9) (33) (27)
Gain (loss) on foreign exchange
instruments 4 (2) (40) 8
Net premiums and discounts earned
(paid) on forward and option foreign
exchange instruments (17) (9) (34) (26)
Other income (expense), net (1) 1 (2) 1
$ 2 $ (10) $ (33) $ (17)
4. 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 reported as a component of shareholders'
equity. Unrealized holding gains and losses on securities classified
as trading are included 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. The Company's marketable equity securities consist of
securities issued by U.S. corporations and are included in "Other
assets" on the accompanying balance sheet. As of June 30, 1995, the
Company's cash equivalents, short-term investments and marketable
equity securities are classified as available-for-sale.
The adjustments recorded to shareholders' equity for unrealized holding
gains (losses) on available-for-sale cash equivalents and short-term
investments were not material either individually or in the aggregate,
at June 30, 1995. The net adjustment recorded to shareholders' equity
for unrealized holding gains (losses) related to marketable equity
securities was an unrealized gain of approximately $39 million at June
30, 1995. The realized gains (losses) recorded to earnings on sales of
available-for-sale securities, either individually or in the aggregate,
were not material for the three and nine months ended June 30, 1995.
6
5. U.S. income taxes have not been provided on a cumulative total of $391
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 (IRS) has proposed federal income tax
deficiencies for the years 1984 through 1991, and the Company has made
certain prepayments thereon. The Company contested the proposed
deficiencies for the years 1984 through 1988, and most of the issues in
dispute for these years have been resolved. On June 29, 1995, the IRS
issued a notice of deficiency proposing increases to the amount of the
Company's federal income taxes for the years 1989 through 1991. The
Company intends to file a petition with the United States Tax Court to
contest these alleged tax deficiencies. Management believes that
adequate provision has been made for any adjustments that may result
from these tax examinations.
6. 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.
7. Certain prior year amounts on the consolidated balance sheets and the
consolidated statements of cash flows have been reclassified to conform
to the current period presentation.
8. On July 18, 1995, the Board of Directors declared a cash dividend of
$0.12 per share for the Company's third fiscal quarter ended June 30,
1995. The dividend is payable on September 8, 1995, to shareholders of
record as of August 18, 1995.
9. 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
1995 1994 Change 1995 1994 Change
Net sales $ 2,575 $ 2,150 19.8% $ 8,059 $ 6,695 20.4%
Gross margin $ 728 $ 574 26.8% $ 2,237 $ 1,665 34.4%
Percentage of net
sales 28.3% 26.7% 27.8% 24.9%
Operating expenses
(excluding
restructuring
costs) $ 572 $ 468 22.2% $ 1,648 $ 1,460 12.9%
Percentage of net
sales 22.2% 21.8% 20.4% 21.8%
Restructuring
costs $ (6) $ (127) -95.3% $ (23) $ (127) -81.9%
Percentage of
net sales -0.2% -5.9% -0.3% -1.9%
Interest and other
income (expense),
net $ 2 $ (10) 120.0% $ (33) $ (17) -94.1%
Net income $ 103 $ 138 -25.4% $ 364 $ 195 86.7%
Earnings per share $ 0.84 $ 1.16 -27.6% $ 2.97 $ 1.65 80.0%
Net sales for the third quarter and first nine months of 1995 increased
over the comparable periods of 1994, primarily resulting from a combination
of unit growth, higher average selling prices and changes in currency
exchange rates. The increase in average selling prices was driven by a
shift in mix towards the Company's newer products and products with multi-
media configurations. Specifically, the Company recorded strong sales of
products within its Performa(registered trademark) family and the Power
Macintosh(Trademark) family ofpersonal computers. Increased sales of
these products contributed to an increase in the average aggregate revenue
per Macintosh(registered trademark) computer unit of
approximately 8% and 14% in the third quarter and first nine months of
1995, respectively, over the comparable periods of 1994. Total Macintosh
computer unit sales increased 20% and 12% in the third quarter and first
nine months of 1995, respectively, over the comparable periods of 1994.
This unit sales growth principally resulted from strong sales of the
Company's Power Macintosh products which account for over 50% of total unit
shipments at the end of the third quarter of 1995, compared with 27% in the
comparable period of 1994, and from newer product offerings within the
Performa family of desktop personal computers. This unit growth was
partially offset by declining unit sales of certain of the Company's older
product offerings.
International net sales grew 24% and 26% in the third quarter and first
nine months of 1995, respectively, over the comparable periods of 1994,
primarily reflecting strong net sales growth in the Pacific region,
particularly Japan, and favorable changes in currency exchange rates. Net
sales for the third quarter and first nine months of 1995 grew moderately
in Europe over the comparable periods of 1994. International net sales
represented 49% and 50% of total net sales for the third quarter and first
nine months of 1995, respectively, compared with 47% and 48%, respectively,
for the corresponding periods of 1994. Domestic net sales grew 16% in both
the third quarter and first nine months of 1995, respectively, over the
comparable periods of 1994, primarily resulting from strong growth in the
education and business markets.
In general, the Company's resellers typically purchase products on an as-
needed basis. 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 to
approximately $1,047 million at August 4, 1995, from approximately $795
million at May 5, 1995, primarily due to backlog of the Company's Power
Macintosh products.
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 represents the difference between the Company's net sales and
its cost of goods sold. The amount of revenue generated by the sale of
products is influenced principally by the price set by the Company for its
products relative to competitive products. The cost of goods sold is based
primarily on the cost of components and to a lesser extent, direct labor
costs. The type and cost of components included in particular
configurations of the Company's products (such as memory and disk drives)
are often directly related to the need to market products in configurations
competitive with other manufacturers. Competition in the personal computer
industry is intense, and in the short term, frequent changes in pricing and
product configuration are often necessary in order to remain competitive.
Accordingly, gross margin as a percentage of net sales can be significantly
influenced in the short term by actions undertaken by the Company in
response to industry-wide competitive pressures.
Gross margin increased both in amount and as a percentage of net sales
during the third quarter and first nine months of 1995, respectively, over
the comparable periods 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 newer, high margin products within each product
category which included strong sales of certain products within the
Company's entry-level Macintosh Performa family and of products within its
Power Macintosh family of personal computers.
The increase in gross margin levels was affected favorably by changes in
foreign currency exchange rates as a result of a weaker U.S. dollar
relative to certain foreign currencies during the first, second and third
quarters of 1995 compared with the corresponding periods of 1994. 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.
The Company's gross margin percentage improved from 26.2% in the second
quarter of 1995 to 28.3% in the third quarter of 1995, resulting primarily
from the introduction and sale of new products within the entry level and
desktop product categories, including new Power Macintosh products, as well
as from the impact of changes in currency exchange rates. However, 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 industry-wide pricing pressures, increased competition, and
compressed product life cycles.
Research and Third Quarter Nine Months
Development
1995 1994 Change 1995 1994 Change
Research and
development $168 $135 24.4% $443 $422 5.0%
Percentage of net
sales 6.5% 6.3% 5.5% 6.3%
Research and development expenditures increased in amount in the third
quarter and first nine months of 1995 when compared with the corresponding
periods of 1994, due to higher project- and headcount-related spending as
the Company continues to invest in the development of new products and
technologies.
As a percentage of net sales, research and development expenditures
remained relatively consistent in the third quarter of 1995 when compared
with the corresponding period of 1994. Research and development
expenditures in the first nine months of 1995 decreased as a percentage of
net sales when compared with the corresponding period of 1994, primarily
due to the increase in the level of net sales.
The Company anticipates that research and development expenditures will
decrease as a percentage of net sales during the remaining quarter of 1995.
9
Selling, General Third Quarter Nine Months
and Administrative 1995 1994 Change 1995 1994 Change
Selling, general
and administrative $404 $333 21.3% $1,205 $1,038 16.1%
Percentage of net
sales 15.7% 15.5% 15.0% 15.5%
Selling, general and administrative expenses increased in amount in the
third quarter and first nine months of 1995 when compared with the
corresponding periods of 1994. This increase was primarily a result of
increased advertising and channel marketing program spending as the Company
continued its efforts to expand its market share. Although the Company has
increased its selling and marketing expenses in an effort to expand its
market share, there can be no assurance that such an increase in spending
will result in a corresponding increase in market share. Despite this
increase in expenditures, selling, general and administrative expenses
remained relatively flat as a percentage of net sales in the third quarter
and first nine months of 1995 when compared with the corresponding periods
of 1994, primarily as a result of the increase in the level of net sales
combined with the Company's ongoing efforts to manage total operating
expense growth.
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 margins, and continued competitive pressures worldwide. The Company
anticipates that selling, general and administrative expenses will increase
in amount during the remaining quarter of 1995.
Restructuring costs Third Quarter Nine Months
1995 1994 Change 1995 1994 Change
Restructuring costs $(6) $(127) -95.3% $(23) $(127) -81.9%
Percentage of net
sales -0.2% -5.9% -0.3% -1.9%
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 Third Quarter Nine Months
Income (Expense), Net 1995 1994 Change 1995 1994 Change
Interest and other
income (expense), net $2 $(10) 120.0% $(33) $(17) -94.1%
Interest and other income (expense), net, increased by approximately $12
million in income in the third quarter of 1995 compared with the
corresponding period of 1994. Higher cash and short-term investment
balances coupled with higher investment interest rates resulted in
increased interest income of approximately $15 million. The increase in
income was partially offset by increased interest expense due to higher
borrowing rates and increased hedging costs as a result of increased
volatility in the currency exchange markets as the value of the U.S. dollar
declined relative to other foreign currencies.
Interest and other income (expense), net, increased by approximately $16
million in expense in the first nine months of 1995 when compared with the
corresponding period of 1994. Net losses recorded for the mark-to-market
valuation of outstanding currency forwards and sold currency options
undertaken for currency risk management purposes and costs related to
foreign exchange risk management activity during the second and third
quarters of 1995 resulted in increased expenses of approximately $56
million when compared with the corresponding periods of 1994. This
increase in expense was partially offset by an approximate $41 million
increase in interest and other income, net, during the first nine months of
1995 when compared with the corresponding period of 1994, reflecting higher
cash and short-term investment balances coupled with higher investment
interest rates.
10
Notional principal amounts on certain of the Company's foreign exchange
instruments increased significantly compared with the balances at September
30, 1994, in accordance with the Company's currency risk management
strategies. Specifically, notional principal amounts on purchased and sold
foreign exchange options not accounted for as hedges increased
approximately $2.2 billion and $2.0 billion, respectively, compared with
the balances at September 30. 1994. The notional principal amounts for off-
balance-sheet instruments provide one measure of the transaction volume
outstanding at a particular point in time, and do not necessarily represent
the amount of the Company's exposure to credit or market risk.
Further information regarding the Company's foreign exchange hedging
programs may be found in Part I, Item 2 of this Form 10-Q under the
subheading "Global Market Risks" included under the heading "Factors that
May Affect Future Results and Financial Condition."
Provision for Income Third Quarter Nine Months
Taxes
1995 1994 Change 1995 1994 Change
Provision for income
taxes $61 $85 -28.2% $215 $120 79.2%
Effective tax rate 37% 38% 37% 38%
The information contained in Note 5 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.
In 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
11
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, even though localized versions of the Company's 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
industry-wide pricing pressures.
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 agreement and
certain other collaboration agreements, and to manage the associated
competitive risk.
The Company is currently the primary 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. Future operating results and financial condition may be
affected by the Company's ability to increase market share in its personal
computer business. As part of its efforts to increase overall market
share, the Company announced the licensing of the Macintosh operating
system to other personal computer vendors in January 1995, and several
vendors are currently selling product
which utilizes the Macintosh operating system. The Company's efforts to
increase its overall market share through licensing of the Macintosh
operating system will depend in part on the success of the Company's
ability to manage the risks associated with competing companies producing
Macintosh OS-based computer systems. Accordingly, the Company cannot
determine the ultimate effect that licensing of the Macintosh operating
system will have on its product sales or future operating results and
financial condition. The Company believes that licensing the operating
system will result in a broader installed base on which software vendors
can develop and provide technical innovations for the Macintosh platform.
However, there can be no assurance that the installed base will be
broadened by the licensing of the operating system or result in an increase
in the number of application software titles or the rate at which vendors
will bring to market application software based on the Macintosh operating
system.
The Company's principal competitor in producing operating system software,
Microsoft Corporation, is a large, well-financed corporation which has a
dominant position in various segments of the personal computer software
industry. Microsoft Corporation is expected to release Windows 95, another
of its operating system offerings, in the next several weeks. The Company
believes that this event will likely create competitive pressure on the
Company and will further challenge the Company's efforts in developing and
marketing the Company's products. Accordingly, the Company's future
operating results and financial condition could be adversely affected by
the release of Windows 95.
Certain of the Company's personal computer products are capable of running
application software designed for the MS-DOS or
12
Windows operating systems, through software emulation of Intel Corporation
microprocessor 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
has also 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.
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. Microsoft Corporation is 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).
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,
13
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 non hedge 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. In addition, the timing of the accounting for recognition of gains
and losses related to mark-to-market instruments for any given period may
not coincide with the timing of gains and losses related to the underlying
economic exposures, and as such, may adversely affect the Company's
operating results and financial position.
Inventory and Supply
The Company's ability to satisfy demand for its products may be limited by
the availability of key components. The Company believes that the
availability from suppliers to the personal computer industry of
microprocessors, application specific integrated circuits (ASIC's) and
dynamic random access memory (DRAM) present the most significant potential
for constraining the Company's ability to produce product. Specific
microprocessors manufactured by Motorola, Inc., and IBM are currently
available only from single sources, while some advanced microprocessors are
currently in the early stages of ramp-up for production and thus have
limited availability. The current market for DRAM is very constrained, and
competition for DRAM among producers of personal computers is intense,
based in part on the increased requirements for DRAM made by newer
operating systems such as Windows 95. The Company and other producers in
the personal computer industry also compete for other semiconductor
products with other industries that have experienced increased demand for
such products due to either increased consumer demand or increased use of
semiconductors in their products (such as the cellular phone and automotive
industries.) Finally, the Company uses some components that are not common
to the rest of the personal computer industry (including certain ASICs).
Continued availability of these components may be affected if producers
were to decide to concentrate on the production of common components
instead of custom components. The Company's future operating results and
financial condition could be adversely affected by such product constraints
and increased costs, including loss of market share.
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.
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, the
Company is continuing its expansion into various consumer channels, such as
mass-merchandise stores 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 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
14
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.
In April 1995, the Company announced a company-wide reorganization designed
to more closely align the Company's organizational structure with the
Company's business strategy of placing increased focus on customer needs
and expanding its presence in the home, education, and business markets.
The Company's future operating results and financial condition could be
adversely affected by its ability to effectively manage the transition to
this new organizational structure.
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
Nine
Months
1995
Cash, cash equivalents and short-term
investments, net of short-term borrowings $1,270
Cash generated by operations $433
Cash used for investment activities,
excluding short-term investments $133
Cash generated by financing activities $118
The Company's financial position with respect to cash, cash equivalents and
short-term investments, net of short-term borrowings increased to $1,270
million at June 30, 1995 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, accounts payable and accounts receivable.
Cash generated by operations during the first nine months of 1995 totaled
$433 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 $110 million during the first nine months 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 June 30, 1995 were approximately $114 million
higher than at September 30, 1994. These borrowings were primarily made to
fund expected working capital growth in certain markets worldwide. In
general, the Company's short-term borrowings typically reflect borrowings
made under its commercial paper program and short-term uncommitted bid-line
arrangements with certain commercial banks. In particular, Apple Japan,
Inc., and Apple Computer BV, (Netherlands) wholly owned subsidiaries of the
Company, incurred short-term borrowings from several banks, totaling
approximately $233 million and $173 million, respectively, at June 30,
1995.
Long-term borrowings of $303 million at June 30, 1995 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 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 generally to finance U.S. working capital
needs and capital expenditures, because a substantial portion of the
Company's cash, cash equivalents, and short-term
15
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 it reasonably expects may be repatriated.
The Internal Revenue Service (IRS) has proposed federal income tax
deficiencies for the years 1984 through 1991, and the Company has made
certain prepayments thereon. The Company contested the proposed
deficiencies for the years 1984 through 1988, and most of the issues in
dispute for these years have been resolved. On June 29, 1995, the IRS
issued a notice of deficiency proposing increases to the amount of the
Company's federal income taxes for the years 1989 through 1991. The
Company intends to file a petition with the United States Tax Court to
contest these alleged tax deficiencies. 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.
In the case of Apple Computer, Inc. v. Microsoft Corporation and Hewlett-
Packard Company, the Company's petition for a writ of certiorari was denied
by the Supreme Court of the United States on February 21, 1995.
Accordingly, the decision of the appellate court affirming the dismissal of
the Company's copyright infringement case against Microsoft Corporation
("Microsoft") and Hewlett-Packard Company ("HP") is now final. HP's
request for attorneys' fees has been settled by agreement between the
Company and HP. Microsoft's request for attorneys' fees remains pending.
The Company believes the resolution of the above matter 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 the
matter, 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
10.A.19-1 Supplement to the Executive Severance Plan effective
as of June 9, 1995
10.A.21 Form of Senior Executive Retention Agreement dated
June 9, 1995
10.A.22 Retention Agreement dated June 9, 1995 between the
Registrant and Michael H. Spindler
11 Computation of per share earnings
27 Financial Data Schedule
b) Reports on Form 8-K
None.
16
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 10, 1995 BY /s/ Joseph A. Graziano
Joseph A. Graziano
Executive Vice President and
Chief Financial Officer
17
APPLE COMPUTER, INC.
INDEX TO EXHIBITS
Exhibit Description Page Number
Index
10.A.19-1 Supplement to the Executive Severance
Plan effective as of June 9, 1995 19
10.A.21 Form of Senior Executive Retention 25
Agreement dated June 9, 1995
10.A.22 Retention Agreement dated June 9,
1995 between the Registrant and 35
Michael H. Spindler
11 Computation of per Share Earnings 45
27 Financial Data Schedule 46
18