___________________________________________________________________________
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 29, 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. Employer Identification No.]
of incorporation or organization]
1 Infinite Loop 95014
Cupertino California [Zip Code]
[Address of principal executive offices]
Registrant's telephone number, including area code: (408) 996-1010
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 [ ]
123,656,178 shares of Common Stock Issued and Outstanding as of
February 2, 1996
___________________________________________________________________________
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLE COMPUTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in millions, except per share amounts)
THREE MONTHS ENDED
December 29, December 30,
1995 1994
Net sales $ 3,148 $ 2,832
Costs and expenses:
Cost of sales 2,673 2,018
Research and development 153 132
Selling, general and administrative 441 415
Restructuring costs -- (17)
3,267 2,548
Operating income (loss) (119) 284
Interest and other income
(expense), net 10 15
Income (loss) before income taxes (109) 299
Income tax provision (benefit) (40) 111
Net income (loss) $ (69) $ 188
Earnings (loss) per common and
common equivalent share $(0.56) $ 1.55
Cash dividends paid per common share $ .12 $ .12
Common and common equivalent shares
used in the calculations of
earnings (loss) per share (in
thousands) 122,994 121,600
See accompanying notes.
2
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In millions)
December 29, September 29,
1995 1995
(Unaudited)
Current assets:
Cash and cash equivalents $ 824 $ 756
Short-term investments 276 196
Accounts receivable, net of allowance for
doubtful accounts of $92 ($87 at September
29, 1995) 1,944 1,931
Inventories:
Purchased parts 707 841
Work in process 250 291
Finished goods 990 643
1,947 1,775
Deferred tax assets 302 251
Other current assets 258 315
Total current assets 5,551 5,224
Property, plant, and equipment:
Land and buildings 516 504
Machinery and equipment 646 638
Office furniture and equipment 143 145
Leasehold improvements 199 205
1,504 1,492
Accumulated depreciation and amortization (792) (781)
Net property, plant, and equipment 712 711
Other assets 290 296
$ 6,553 $ 6,231
See accompanying notes.
3
APPLE COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Dollars in millions)
December 29, September 29,
1995 1995
(Unaudited)
Current liabilities:
Short-term borrowings $ 498 $ 461
Accounts payable 1,431 1,165
Accrued compensation and employee benefits 125 131
Accrued marketing and distribution 284 206
Other current liabilities 367 362
Total current liabilities 2,705 2,325
Long-term debt 304 303
Deferred tax liabilities 750 702
Shareholders' equity:
Common stock, no par value; 320,000,000
authorized; 123,118,433 shares issued
and outstanding at December 29, 1995
(122,921,601 shares at September 29, 1995) 404 398
Retained earnings 2,380 2,464
Accumulated translation adjustment and other 10 39
Total shareholders' equity 2,794 2,901
$ 6,553 $ 6,231
See accompanying notes.
4
APPLE COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
THREE MONTHS ENDED
December 29, December 30,
1995 1994
Cash and cash equivalents, beginning of the
period $ 756 $ 1,203
Operations:
Net income (loss) (69) 188
Adjustments to reconcile net income (loss)
to cash generated by operations:
Depreciation and amortization 42 38
Net book value of property, plant, and
equipment retirements 1 5
Changes in assets and liabilities:
Accounts receivable (13) (18)
Inventories (172) 4
Deferred tax assets (51) 24
Other current assets 57 77
Accounts payable 266 74
Income taxes payable (67) (31)
Accrued marketing and distribution 78 97
Other current liabilities 67 (66)
Deferred tax liabilities 48 61
Cash generated by operations 187 453
Investments:
Purchase of short-term investments (244) (410)
Proceeds from sale of short-term investments 164 25
Purchase of property, plant, and equipment (31) (22)
Other (36) (12)
Cash used for investment activities (147) (419)
Financing:
Increase (decrease) in short-term borrowings 37 (83)
Increase (decrease) in long-term borrowings 1 (1)
Increases in common stock, net of related
tax benefits 5 9
Cash dividends (15) (14)
Cash generated by (used for)
financing activities 28 (89)
Total cash generated (used) 68 (55)
Cash and cash equivalents, end of the period $ 824 $ 1,148
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
29, 1995, included in its Annual Report on Form 10-K for the year ended
September 29, 1995 (the "1995 Form 10-K").
2. Interest and other income (expense), net, consists of the
following: (In millions)
Three Months Ended
December 29, December 30,
1995 1994
Interest income $ 17 $ 19
Interest expense (17) (7)
Gain on foreign exchange instruments 18 9
Net premiums and discounts paid on
forward and option foreign exchange
instruments (7) (3)
Other income (expense), net (1) (3)
$ 10 $ 15
3. The Company's cash equivalents consist primarily of U.S. Government
securities, Euro-dollar deposits, and commercial paper with maturities
of three months or less at the date of purchase. Short-term
investments consist principally of Euro-dollar deposits and 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. The Company's cash equivalents, short-term investments,
and marketable equity securities are classified and accounted for as
available-for-sale and are generally held until maturity.
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 December 29, 1995. The net adjustment recorded to shareholders'
equity for unrealized holding gains (losses) related to marketable
equity securities was an unrealized gain of approximately $18 million
at December 29, 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 months ended December
29, 1995.
4. U.S. income taxes have not been provided on a cumulative total of $400
million of undistributed earnings of certain of the Company's foreign
subsidiaries. It is intended that these earnings will be indefinitely
invested in operations outside of the United States. It is not
practicable to determine the income tax liability that might be
incurred if these earnings were to be distributed. Except for such
indefinitely invested earnings, the Company provides 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 has filed 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.
5. Earnings per share is computed using the weighted average number of
common and dilutive common equivalent shares attributable to stock
options outstanding during the period. Loss per share is computed
using the weighted average number of common shares outstanding during
the period.
6
6. Certain prior year amounts on the Consolidated Statements of Cash Flows
have been reclassified to conform to the current period presentation.
7. No dividend has been declared for the first quarter of 1996, and the
Board of Directors does not anticipate that dividends will be declared
in the near future given the financial condition of the Company.
8. The information set forth in Item 1 of Part II hereof is hereby
incorporated by reference.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with the
consolidated financial statements and notes thereto. All information is
based on Apple's fiscal calendar.
(Tabular information: Dollars in millions, except per share amounts)
Except for historical information contained herein, the statements set
forth in this Item 2 are forward-looking and involve risks and
uncertainties. For information regarding potential factors that could
affect the Company's financial results refer to pages 11 - 15 of this
Management Discussion and Analysis of Financial Condition and Results of
Operations under the heading "Factors That May Affect Future Results and
Financial Condition."
Results of Operations
First First
Quarter Quarter
1996 1995 Change
Net sales $ 3,148 $ 2,832 11.2%
Gross margin $ 475 $ 814 -41.6%
Percentage of net sales 15.1% 28.7%
Operating expenses (excluding
restructuring costs) $ 594 $ 547 8.6%
Percentage of net sales 18.9% 19.3%
Restructuring costs $ -- $ (17) --
Percentage of net sales -- -0.6%
Net income (loss) $ (69) $ 188 -136.7%
Earnings (loss) per share $ (0.56) $ 1.55 -136.1%
Net Sales
Net sales for the first quarter of 1996 increased over the comparable
period of 1995, primarily resulting from a combination of unit growth and
slightly higher average aggregate revenue per Macintosh (registered trademark)
computer unit. Total Macintosh computer unit sales increased 12% in the
first quarter of 1996, over the comparable period of 1995. This unit
sales growth principally resulted from strong sales of the Company's
PowerPC (registered trademark) products, which accounted for over 78% of
total unit shipments at the end of the first quarter of 1996, compared
with 26% in the comparable period of 1995. Specifically, unit sale increases
were within the Power Macintosh (trademark) and the Performa (registered
trademark) families of desktop personal computers. This unit growth was
partially offset by declining unit sales of certain of the Company's older
product offerings. The increase in average aggregate revenue per Macintosh
computer unit of approximately 7% in the first quarter of 1996 over the
comparable period of 1995 was driven by a shift in mix towards the
Company's newer products and products with multi-media configurations.
Specifically, the Company recorded increased revenue from the sale of
products within the Power Macintosh family of personal computers.
International net sales grew 19% in the first quarter of 1996, over the
comparable period of 1995, primarily reflecting strong net sales growth in
Japan and certain countries within Europe. International net sales
represented 51% of total net sales for the first quarter of 1996, compared
with 47% for the corresponding period of 1995. Domestic net sales grew
approximately 4% in the first quarter of 1996, over the comparable period
of 1995.
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. The Company's backlog
decreased to approximately $365 million at February 2, 1996, from
approximately $618 million at December 1, 1995, primarily due to the
Company satisfying product backlog that existed at December 1, 1995.
In the Company's experience, the actual amount of product backlog at any
particular time is not necessarily 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 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 ability to achieve any particular level of revenue or
financial performance.
8
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 industrywide competitive pressures.
Gross margin decreased both in amount and as a percentage of net sales
during the first quarter of 1996, over the comparable period of 1995. The
decrease in gross margin as a percentage of net sales was primarily a
result of: aggressive pricing actions in Japan in response to extreme
competitive actions by other companies attempting to gain market share;
pricing actions in both the U.S. and Europe on certain configurations of
entry level and PowerBook (registered trademark) products in order to
stimulate demand; lower of cost or market adjustments charged to cost of
sales due to pricing certain products in specific markets (particularly
Japan) at below manufactured cost in response to competitive actions;
and implementing changes in production plans in response to lower
than expected demand, which necessitated the financial write-off of
components, canceling component orders and incurring cancellation charges.
Pressures on gross margin are continuing in the second quarter of 1996 as
the Company has taken further initiatives to lower prices and reduce
inventories. These actions could result in further inventory charges,
expenses related to changes in production plans and cancellation charges.
The decrease in gross margin levels in the first quarter of 1996 compared
with the corresponding period of 1995 was somewhat offset by a weaker U.S.
dollar relative to certain foreign currencies. 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.
It is anticipated that gross margins will continue to remain under pressure
and will remain below prior years' levels due to a variety of factors,
including continued industrywide pricing pressures around the world,
increased competition, compressed product life cycles, and the need to
reduce current inventory levels. Gross margins declined in the first
quarter of 1996 compared with the fourth quarter of 1995 and are likely to
decline further in the second quarter of 1996.
Research and Development First First
Quarter Quarter
1996 1995 Change
Research and development $ 153 $ 132 15.9%
Percentage of net sales 4.9% 4.7%
Research and development expenditures increased in amount in the first
quarter of 1996 when compared with the corresponding period of 1995. This
increase is primarily 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 first quarter of 1996 when compared
with the corresponding period of 1995.
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. Going forward, the Company intends to simplify
its product portfolio to focus its offerings primarily on innovative,
differentiated and best-of-class products in its key market segments in
education, business and the home.
9
First First
Quarter Quarter
Selling, General and 1996 1995 Change
Administrative
Selling, general and $ 441 $ 415 6.3%
administrative
Percentage of net sales 14.0% 14.7%
Selling, general and administrative expenses increased in amount in the
first quarter of 1996 when compared with the corresponding period of 1995.
This increase was primarily a result of increased spending related to
marketing and advertising programs. Selling, general and administrative
expenses decreased as a percentage of net sales in the first quarter of
1996 when compared with the corresponding period of 1995, primarily as a
result of an increase in the level of net sales and the Company's ongoing
efforts to manage operating expense growth as a percentage of net sales.
The Company will continue to face the challenge of managing selling,
general and administrative expenses, particularly in light of the Company's
expectation of continued pressure on gross margins and continued
competitive pressures worldwide.
Restructuring Costs First First
Quarter Quarter
1996 1995 Change
Restructuring costs -- $ (17) --
Percentage of net sales -- (0.6%) --
For information regarding the Company's current restructuring actions,
refer to Management's Discussion and Analysis of Financial Condition and
Results of Operations under the heading "Factors That May Affect Future
Results and Financial Condition" under the subheading "Restructuring of
Operations."
Interest and Other Income First First
(Expense), Net Quarter Quarter
1996 1995 Change
Interest and other income
(expense), net $ 10 $ 15 -33.3%
Interest and other income (expense), net decreased to $10 million in income
in the first quarter of 1996 compared with $15 million in income during the
same period in 1995. This $5 million decrease in interest and other income
(expense), net is comprised of $14 million unfavorable variance related to:
increased interest expense as a result of higher debt balances and
borrowing rates; increased foreign exchange hedging costs due to higher
foreign currency receivable balances; and decreased interest income as cash
balances were lower. The unfavorable change in interest and other income
was offset in part by a $9 million increase in income related primarily to
realized and unrealized foreign exchange hedging gains in the first quarter
of 1996 compared with the same period in 1995. The Company expects that
its cost of funds will increase as a result of the recent downgrading of
its short- and long-term debt to P-3 and Baa3, respectively, by Moody's
Investor Services, and to B and BB-, respectively, by Standard and Poor's
Rating Agency.
Income Tax Provision First First
(Benefit) Quarter Quarter
1996 1995 Change
Income tax provision (benefit) $ (40) $ 111 -136.0%
Effective tax rate 37% 37%
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.
10
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. Potential risks and
uncertainties that could affect the Company's future operating results and
financial condition include, without limitation, continued competitive
pressures in the marketplace; the effect any reaction to such competitive
pressures has on inventory levels and inventory valuations; the effects of
significant adverse publicity; the impact of uncertainties concerning the
Company's strategic direction and financial condition on revenue and
liquidity; the effect of continued degradation in the Company's liquidity;
and the need for and effect of any business restructuring actions.
The Company expects to report an operating loss for the second quarter of
1996 that will significantly exceed the operating loss of $69 million,
after taxes, reported in the first quarter of 1996. The anticipated
operating loss, which is largely attributable to declining sales due to
marketplace uncertainty about the Company's strategic direction and
prospects, does not include the financial impact of charges related to
restructuring actions.
Restructuring of Operations
As announced on January 17, 1996, the Company is currently implementing a
reorganization plan which is aimed at beginning to bring the Company's
business model in line with major strategic goals and at the same time to
move toward improving the cost and competitiveness of its operations.
Initial actions planned to begin in the second quarter of 1996 will focus
on streamlining the Company's business operations. These initial actions
are expected to result in pre-tax charges of at least $125 million, and are
primarily comprised of headcount reductions in the selling, general and
administrative areas of at least 1,300 full-time employees, as well as
evaluating the Company's various business investments. The Company expects
to incur future restructuring charges as the several phases of the business
reorganization are developed and implemented. These plans may include,
among other actions, outsourcing of certain administrative and
manufacturing functions. In addition, the Company intends to refine its
product plans by reducing the number of products within certain categories
in an effort to improve overall contribution. The Company's future
operating results and financial condition could be adversely affected by
its ability to effectively manage the transition to the new business model
and cost structure.
Implementation of the Company's restructuring actions may adversely affect
the Company's ability to retain and motivate employees. In addition, while
the restructuring actions are expected to lower the fixed cost of
operations, it could also reduce the direct control that the Company
currently has over various functions which may be outsourced. As such, the
Company cannot determine the ultimate effect on the quality or efficiency
of work performed in the event of outsourcing various functions.
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, the
manufacturing of products in appropriate quantities to meet anticipated
demand, and the risk that new products may have quality or other defects in
the early stages of introduction that were not anticipated in the design of
those products. Accordingly, the Company cannot determine the ultimate
effect that new products will have on its sales or results of operations.
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 overordering 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.
11
Backlog is often volatile after new product introductions due to the
aforementioned demand factors, often increasing coincident with
introduction, and then decreasing 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.
As part of its restructuring plan, the Company may reduce the number of new
product introductions and intends to reduce the number of products in
certain categories within its product portfolio in order to focus its
offerings on the Company's key markets and reduce required investments.
This simplification within product lines may have an adverse effect on
sales and on the Company's results of operations and financial condition in
the future.
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. For
example, in Japan, other companies have initiated extreme competitive
actions in order to gain market share, and as a result, the Company has
implemented aggressive pricing and promotional activities. In the first
quarter of 1996, the Company's results of operations and financial
condition were, and in the near future are expected to be, adversely
affected by industrywide pricing pressures and downward pressures on gross
margins.
The Company's future operating results and financial condition may also be
affected by the Company's ability to offer customers competitive
technologies while effectively managing the impact on inventory levels and
the potential for customer confusion created by product proliferation. The
Company's future operating results and financial condition may also be
affected by overall demand for personal computers and general customer
preferences for one platform over another or one set of product features
over another.
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 is moving
forward with its efforts to make the Macintosh operating system available
on the common platform. In line with its efforts, on November 13, 1995,
the Company, IBM, and Motorola, Inc. announced the availability of the
"PowerPC Platform" specifications, which define a "unified" personal
computer architecture and combine the Power Macintosh platform and the PC
environment. Accordingly, the Company's future operating results and
financial condition may be affected by its ability to continue to implement
this agreement and to manage the risk associated with the transition to
this new hardware reference platform.
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. The Company's future operating results and financial
condition may be affected by its 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 currently sell product that utilize the Macintosh operating
system. The success of the Company's efforts to increase its overall
market share through licensing of the Macintosh operating system will
depend in part on the Company's ability to manage the risks associated
with competing with 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
pricing and unit 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 that licensing will 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. As a result of the introduction of Windows 95 in August 1995,
the Company has taken and will continue to take steps to address the
additional
12
challenges to and competitive pressures on its efforts in developing and
marketing the Company's products. Accordingly, the Company's future
operating results and financial condition could be adversely affected
should the Company be unable to effectively manage the competitive pressure
and other challenges presented by the introduction of Windows 95.
Certain of the Company's personal computer products are capable of running
application software designed for the MS-DOS or Windows operating systems
("Cross-Platform Products"), 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 that include both the RISC-based
PowerPC 601 microprocessor and the 486 DX2/66 microprocessor, which enable
users to switch between the Macintosh and DOS or Windows computing
environments.
The Company plans to supply customers who purchase Cross-Platform Products
capable of running the MS-DOS or Windows 3.1 operating system with
operating system software under a licensing agreement with Microsoft. This
license agreement expired on December 31, 1995 (the "Old License
Agreement"). The Company has attempted to license Windows 95 software from
Microsoft but has been unable to do so because of the Company's
unwillingness to consent to Microsoft's demand under Microsoft's proposed
license agreement (the "New License Agreement") that the Company agree not
to sue Microsoft if Microsoft infringes any of the Company's patents.
Microsoft has also informed the Company that it will not renew the Old
License Agreement unless the Company accepts the New License Agreement.
Accordingly, the Company is currently unable to supply customers with any
of Microsoft's operating systems on Cross-Platform Products except for such
product that was in inventory as of December 31, 1995. Although customers
could obtain copies of such software from other sources, the Company is
unable to predict the effect of such a situation on the demand for Cross-
Platform Products. Although Cross-Platform Products represented only a
small portion of the Company's unit sales during 1995, the Company is
unable to predict the effect of such a situation on the Company's future
operating results.
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
perceived strength of the Company and its 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
PowerPC RISC microprocessor for certain of the Company's products, to
continue to supply to the Company microprocessors that 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 and capitalize on
its investments in other markets, such as the markets for Internet 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
13
worldwide. Accordingly, changes in exchange rates, and in particular a
strengthening of the U.S. dollar, 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 currently 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 and option transactions in order to diversify a portion of the
Company's exposure away from fluctuations in short-term U.S. interest
rates. These instruments 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 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. The Company generally does not engage in
leveraged hedging.
Inventory and Supply
In line with the Company's efforts to redesign its business model, the
Company intends to streamline its product offerings in its key market
segments in education, business and the home. However, this simplification
of product lines may result in inventory reserves or cancellation fees
related to custom component inventory purchased for anticipated product
introductions that may be canceled. Furthermore, the Company may incur
lower of cost or market adjustments in order to sell through current
product offerings which may be discontinued in the near term.
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 and ASICs presents the most significant potential for
constraining the Company's ability to produce products. 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 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. Such product supply constraints and corresponding
increased costs could adversely affect the Company's future operating
results and financial condition, including loss of market share. In the
past, the Company's operating results and financial condition have been and
may in the future 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
14
customer demand patterns. In addition, if unit sales growth for current or
future product offerings is not realized, the Company's results of
operations and financial condition could be adversely affected.
Certain of the Company's products are manufactured in whole or in part by
third-party manufacturers, either pursuant to design specifications of the
Company or otherwise. As a result of the Company's restructuring plan,
the proportion of its products produced under such arrangements may
increase. While such arrangements may lower the fixed cost of operations,
it may also reduce the direct control the Company currently has over
production, and it is uncertain what the effect such lowered control will
have on the quality of the products manufactured or the flexibility of the
Company to respond to changing market conditions. Moreover, although
arrangements with such manufacturers may contain provisions for warranty
expense reimbursement, the Company remains at least initially responsible
to the ultimate consumer for warranty service. Accordingly, in the event
of product defects or warranty liability, the Company may remain at least
primarily liable. Any unanticipated product defect or warrant liability,
whether pursuant to arrangements with contract manufacturers or otherwise,
could adversely affect the Company's future operating results and financial
condition.
Marketing and Distribution
A number of uncertainties may affect the marketing and distribution of the
Company's products. Currently, the Company's primary means of distribution
is through third-party computer resellers. The Company also distributes
product through 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 resellers weakens or if resellers within consumer channels decide not
to continue to distribute the Company's products.
Uncertainty over the demand for the Company's products may cause resellers
to reduce the ordering and marketing of the Company's products. Under the
Company's arrangements with its resellers, resellers have the option to
reduce or eliminate unfilled orders previously placed, in most instances
without financial penalty. Resellers also have the option to return
products to the Company without penalty within certain limits, beyond which
they may be assessed fees. In the second quarter of 1996, the Company is
experiencing a reduction in ordering by resellers from historical levesl in
certain regions due to uncertainty concerning the Company's condition.
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.
Production and marketing of products in certain states and countries may
subject the Company to environmental and other regulations which include,
in some instances, the requirement that the Company provide consumers with
the ability to return to the Company product at the end of its useful life,
and leave responsibility for environmentally safe disposal or recycling
with the Company. It is unclear what the effect of such regulation will
have on the Company's future operating results and financial condition.
The Company is currently in the process of replacing its current
transaction systems (which include order management, distribution, 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 if it is unable 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
The Company's financial position with respect to cash, cash equivalents,
and short-term investments, net of short-term borrowings, increased to $602
million at December 29, 1995, from $491 million at September 29, 1995.
15
Cash generated by operations during the first three months of 1996 totaled
$187 million. Cash was generated primarily as a result of higher accounts
payable levels, reflecting longer payment terms obtained from vendors as
well as growth in inventory levels. Cash generated by operations was
partially offset by cash used for the purchase of inventory. Despite the
higher sales level achieved during the first quarter of 1996 compared with
the same period of 1995, less cash was generated by operations in 1996
primarily because of the growth in inventory and the operating loss
incurred primarily due to competitive pricing actions.
Net cash used for the purchase of property, plant, and equipment totaled
$31 million in the first three months of 1996, and was primarily made up of
increases in manufacturing machinery and equipment and buildings. The
Company anticipates that capital expenditures in 1996 will decline relative
to 1995 expenditure levels.
Short-term borrowings at December 29, 1995, were approximately $37 million
higher than at September 29, 1995. These borrowings were primarily made to
fund expected working capital growth in certain markets worldwide.
Domestically, $88 million of U.S. commercial paper was issued and $10
million of short-term borrowings were incurred from U.S. banks during the
first quarter of 1996. Outside the United States, short-term borrowings
decreased by $61 million. Apple Japan, Inc. and Apple Computer BV
(Netherlands), subsidiaries of the Company, held short-term borrowings from
several banks, totaling approximately $197 million and $203 million,
respectively, at December 29, 1995. These loans mature in March 1996 and
April 1996, respectively. In the second quarter of 1996, the Company
largely discontinued its issuance of commercial paper.
The Company's balance of long-term debt remained relatively constant during
the first quarter of 1996. 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 was for the registration of debt and other securities for an
aggregate offering amount of $500 million. The notes were sold at 99.925%
of par, for an effective yield to maturity of 6.51%. The notes pay
interest semi-annually and mature on February 15, 2004.
The Company expects that it will borrow in the near to intermediate term to
finance its working capital needs and capital expenditures, particularly
because it is unlikely that the Company will continue to generate cash from
operations in this time frame.
The Internal Revenue Service 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 has filed 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.
As noted on page 10 under the subheading "Interest and other income(expense),
net, the Company expects that its cost of funds will increase in 1996. In
addition, the Company may be required to pledge collateral with respect to
certain of its borrowings and to agree to more stringent covenants than
in the past. The Company is seeking alternative sources of liquidity and
is discussing financing alternatives with several financial institutions.
Although the Company believes it will be able to arrange short- and
intermediate-term financing that will cover its needs, it currently
does not have commitments from lenders to provide such funding. The Company
believes that its balances of cash, cash equivalents, and short-term
investments, together with short- and long-term borrowings that the Company
believes it will be able to obtain, will be sufficient to meet its short-
and long-term operating cash requirements, including the impact of planned
restructuring actions, on a short- and long-term basis.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Management is not aware of any pending legal proceedings to which the
Company is a party that are likely to have a material adverse effect on the
Company's financial condition and results of operations as reported in the
accompanying financial statements. In January 1996, two purported class
action complaints naming the Company and its directors as defendants were
filed in Superior Court in the state of California, styled as Abraham and
Evelyn Kostick Trust v. Peter O. Crisp, et al., and Manson v. Peter O.
Crisp, et al. These complaints seek injunctive relief and unspecified
compensatory damages based on substantially identical allegations of acts
of mismanagement resulting in a depressed price for the Company. The
Company has reviewed the allegations of the complaints and believes they
are without merit, and intends to defend itself vigorously.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
10.A.5 1990 Stock Option Plan, revised December 1995.
10.A.6 Apple Computer, Inc. Employee Stock Purchase Plan,
as amended December 6, 1995.
10.A.7 1996 Senior/Executive Incentive Bonus Plan.
10.A.19 Executive Severance Plan as amended and restated
effective as of January 15, 1996.
10.A.23 Separation Agreement dated December 1, 1995,
between Registrant and Daniel Eilers.
10.A.24 Separation Agreement dated October 31, 1995,
between Registrant and Joseph A. Graziano.
10.A.25 Summary of Principal Terms of Employment between
Registrant and Gilbert F. Amelio.
11 Computation of per share earnings
27 Financial Data Schedule
b) Reports on Form 8-K
None.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLE COMPUTER, INC.
(Registrant)
DATE: February 12, 1996 BY /s/ Jeanne Seeley
Jeanne Seeley
Vice President, Finance and
Corporate Controller
(Chief Accounting Officer)
18
APPLE COMPUTER, INC.
INDEX TO EXHIBITS
Exhibit Description Page Number
Index
10.A.5 1990 Stock Option Plan, revised 20
December 1995.
10.A.6 Apple Computer, Inc. Employee Stock 33
Purchase Plan, as amended December 6,
1995.
10.A.7 1996 Senior/Executive Incentive Bonus 41
Plan.
10.A.19 Executive Severance Plan as amended 52
and restated effective as of January
15, 1996.
10.A.23 Separation Agreement dated December 107
1, 1995, between Registrant and
Daniel Eilers.
10.A.24 Separation Agreement dated October 121
31, 1995, between Registrant and
Joseph A. Graziano.
10.A.25 Summary of Principal Terms of 130
Employment between Registrant and
Gilbert F. Amelio.
11 Computation of per share earnings 135
27 Financial Data Schedule 136
19