1. DATA DISCLOSURES Chapter 5

2. CHAPTER 5 OBJECTIVES Understand why the overall economic and industry conditions matter to financial statement analysis. Understand why the overall economic and industry conditions matter to financial statement analysis. Explain the state of the U.S. and international economy for 1993—1998. Explain the state of the U.S. and international economy for 1993—1998. Discuss the background, environment, markets, and trends in the personal computer (PC) industry. Discuss the background, environment, markets, and trends in the personal computer (PC) industry.

3. CHAPTER 5 OBJECTIVES (CONT.) Describe the performance of Apple Computer during the period analyzed. Describe the performance of Apple Computer during the period analyzed. List some of Apple’s competitors. List some of Apple’s competitors. Define the new, or information, economy and explain the role of the PC industry in it. Define the new, or information, economy and explain the role of the PC industry in it.

4. ECONOMIC CONDITIONS Provide an overall context for industry and corporate analysis Provide an overall context for industry and corporate analysis U.S. Economy—prosperous during the period examined. U.S. Economy—prosperous during the period examined.

9. ECONOMIC CONDITIONS (CONT.) Global economy Global economy Mixed results in 1997 and 1998 Mixed results in 1997 and 1998 Healthy throughout the world from 1993 to 1996 Healthy throughout the world from 1993 to 1996 Asian, Russian, and Latin American economies declined in 1997 and 1998 Asian, Russian, and Latin American economies declined in 1997 and 1998 Thailand no longer pegs baht’s value to that of the U.S. dollar Thailand no longer pegs baht’s value to that of the U.S. dollar Set of a domino effect throughout Asia—known as the Asian contagion Set of a domino effect throughout Asia—known as the Asian contagion

10. ECONOMIC CONDITIONS (CONT.) Western Europe Western Europe Remained healthy in 1997 and 1998 Remained healthy in 1997 and 1998 Development of European Union contributed to economic growth Development of European Union contributed to economic growth Countries become more pro business and globally competitive Countries become more pro business and globally competitive

11. PERSONAL COMPUTER INDUSTRY Companies that design, manufacture, and distribute PCs and related devices to businesses and individuals Companies that design, manufacture, and distribute PCs and related devices to businesses and individuals

12. PERSONAL COMPUTER INDUSTRY (CONT.) Industry changes Industry changes Rapidly expanding sales—90 million units shipped in 1998 (Exhibit 5-5) Rapidly expanding sales—90 million units shipped in 1998 (Exhibit 5-5) Declining prices—machine prices declined by 50% from 1993 to 1998 (Exhibit 5-6) Declining prices—machine prices declined by 50% from 1993 to 1998 (Exhibit 5-6) Product changes—Laptops and servers are growing products, but desk-top machines still dominate sales (Exhibit 5-7) Product changes—Laptops and servers are growing products, but desk-top machines still dominate sales (Exhibit 5-7)

15. PERSONAL COMPUTER INDUSTRY (CONT.) Market share Market share Fragmented industry—top four companies command only 36% of the market (Exhibit 5-8) Fragmented industry—top four companies command only 36% of the market (Exhibit 5-8) Shift in market leaders from 1993 to 1998 (Exhibit 5-8) Shift in market leaders from 1993 to 1998 (Exhibit 5-8) Apple Computer no longer a top-tier firm Apple Computer no longer a top-tier firm

16. PERSONAL COMPUTER INDUSTRY (CONT.) Geographical purchases Geographical purchases United States dominates with 38% of purchases (Exhibit 5-9) United States dominates with 38% of purchases (Exhibit 5-9) Rapid growth in Western Europe (Exhibit 5- 10) Rapid growth in Western Europe (Exhibit 5- 10) No growth in Asia in 1997 and 1998 (Exhibits 5-10 and 5-11) No growth in Asia in 1997 and 1998 (Exhibits 5-10 and 5-11)

18. PERSONAL COMPUTER INDUSTRY (CONT.) Mature markets—industry became entrenched during the 1990’s as evidenced by Mature markets—industry became entrenched during the 1990’s as evidenced by Intense competition Intense competition Shrinking profit margins Shrinking profit margins Greater cost controls Greater cost controls Aggressive inventory management Aggressive inventory management Expanded products and services Expanded products and services Lack of product differentiation Lack of product differentiation Business consolidation Business consolidation Revamped distribution networks Revamped distribution networks

19. PERSONAL COMPUTER COMPANIES Apple Computer’s financial performance Apple Computer’s financial performance Poor during the period examined Poor during the period examined Compound annual growth rates declined from 1993 to 1998 Compound annual growth rates declined from 1993 to 1998

20. PERSONAL COMPUTER COMPANIES (CONT.) Compaq, Dell, and Gateway selected as benchmarks Compaq, Dell, and Gateway selected as benchmarks Four firms have similar financial reporting policies (Exhibit 5-13) Four firms have similar financial reporting policies (Exhibit 5-13) Industry comparability (similar accounting methods) Industry comparability (similar accounting methods)

21. PERSONAL COMPUTER COMPANIES (CONT.) Shift in fortunes Shift in fortunes Compaq and Dell began to dominate sales (Exhibit 5-14) Compaq and Dell began to dominate sales (Exhibit 5-14) Dell become the most profitable (Exhibit 5- 15) Dell become the most profitable (Exhibit 5- 15) All companies decreased inventory (Exhibit 5-16) All companies decreased inventory (Exhibit 5-16)

22. ECONOMIC CHANGE Shift in economy from an industrial to a service base Shift in economy from an industrial to a service base Differential between “old” economy and “new” economy Differential between “old” economy and “new” economy Information is a major component of the new economy Information is a major component of the new economy

23. ECONOMIC CHANGE (CONT.) Disruptive technology—replaces entrenched ways of doing things, such as the PC Disruptive technology—replaces entrenched ways of doing things, such as the PC PCs also increased productivity for old economy firms PCs also increased productivity for old economy firms Productivity of the computer industry far surpassed that of the overall economy (Exhibit 5-17) Productivity of the computer industry far surpassed that of the overall economy (Exhibit 5-17)