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 March 27, 1999 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 942404110
(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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Common Share Purchase Rights
(Titles of classes)
___________
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 ____
137,058,898 shares of Common Stock Issued and Outstanding as of April 30, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except share and per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
March 27, March 27, March 27, March 27,
1999 1998 1999 1998
Net sales $1,530 $1,405 $3,240 $2,983
Cost of sales 1,127 1,056 2,355 2,281
Gross margin 403 349 885 702
Operating expenses:
Research and development 76 75 152 154
Selling, general, and
administrative 239 223 518 457
Restructuring costs 9 -- 9 --
Total operating expenses 324 298 679 611
Operating income 79 51 206 91
Gain from sale of investment 55 -- 87 --
Interest and other income
(expense), net 19 8 29 15
Total interest and other
income (expense), net 74 8 116 15
Income before provision for
income taxes 153 59 322 106
Provision for income taxes 18 4 35 4
Net income $ 135 $ 55 $ 287 $ 102
Earnings per common share:
Basic $ 0.99 $ 0.42 $ 2.11 $ 0.78
Diluted $ 0.84 $ 0.38 $ 1.79 $ 0.71
Shares used in computing earnings
per share (in thousands):
Basic 136,371 131,969 135,820 130,021
Diluted 173,204 145,915 172,619 142,769
See accompanying notes to condensed consolidated financial statements.
2
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share amounts)
ASSETS
March 27, 1999 September 25,1998
Current assets:
Cash and cash equivalents $1,358 $1,481
Short-term investments 1,564 819
Accounts receivable, less allowances of
$79 and $81, respectively 804 955
Inventories 18 78
Deferred tax assets 154 182
Other current assets 194 183
Total current assets 4,092 3,698
Property, plant, and equipment, net 330 348
Other assets 513 243
Total assets $4,935 $4,289
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 791 $ 719
Accrued expenses 753 801
Total current liabilities 1,544 1,520
Long-term debt 955 954
Deferred tax liabilities 261 173
Total liabilities 2,760 2,647
Commitments and contingencies
Shareholders' equity:
Series A non-voting convertible preferred
stock, no par value; 150,000 shares
authorized, issued and outstanding 150 150
Common stock, no par value; 320,000,000
shares authorized; 136,656,673 and
135,192,769 shares issued and
outstanding, respectively 672 633
Retained earnings 1,185 898
Accumulated other comprehensive
income (loss) 168 (39)
Total shareholders' equity 2,175 1,642
Total liabilities and
shareholders' equity $4,935 $4,289
See accompanying notes to condensed consolidated financial statements.
3
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
SIX MONTHS ENDED
March 27, 1999 March 27, 1998
Cash and cash equivalents,
beginning of the period $1,481 $1,230
Operating:
Net income 287 102
Adjustments to reconcile net income to
cash generated by operating activities:
Depreciation and amortization 47 56
Provision for deferred income taxes 6 1
Gain on sale of ARM shares (87) --
Changes in operating assets and liabilities:
Accounts receivable 151 220
Inventories 60 180
Other current assets (11) 89
Other assets 11 (9)
Accounts payable 72 (162)
Other current liabilities (44) (190)
Cash generated by operating activities 492 287
Investing:
Purchase of short-term investments (2,254) (941)
Proceeds from sales and maturities of
short-term investments 1,509 632
Net proceeds from property, plant, and
equipment retirements 20 45
Purchase of property, plant, and equipment (24) (12)
Proceeds from sale of ARM shares 96 --
Other 2 32
Cash used for investing activities (651) (244)
Financing:
Decrease in notes payable to banks -- (2)
Increase in long-term borrowings 1 2
Increases in common stock 35 12
Cash generated by financing activities 36 12
Total cash used (123) 55
Cash and cash equivalents, end of the period $1,358 $1,285
Supplemental cash flow disclosures:
Cash paid for interest $ 30 $ 30
Cash paid (received) for income taxes, net $ (1) $ (5)
See accompanying notes to condensed consolidated financial statements.
4
APPLE COMPUTER, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation
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 Condensed Consolidated
Financial Statements (Unaudited). The results for interim periods are not
necessarily indicative of results to be expected for the entire year. These
condensed consolidated financial statements and accompanying notes should be
read in conjunction with the Company's annual consolidated financial
statements and the notes thereto for the fiscal year ended September 25, 1998,
included in its Annual Report on Form 10-K for the year ended September 25,
1998 (the 1998 Form 10-K).
During the first quarter of 1999, the Company amended its By-laws to provide
that beginning with the first fiscal quarter of 1999 each of the Company's
fiscal quarters would end on Saturday rather than Friday. Accordingly, one day
was added to the first quarter of 1999 so that the quarter ended on Saturday,
December 26, 1998. This change did not have a material effect on the
Company's results of operations for either the first or second quarters of
fiscal 1999 and had no effect on the amount of revenue recognized in either
quarter.
Note 2 - Earnings Per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding during the period increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of outstanding
options is reflected in diluted earnings per share by application of the
treasury stock method. The dilutive effect of convertible securities is
reflected using the if-converted method.
5
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except net income and per share amounts):
For the Three Months Ended For the Six Months Ended
3/27/99 3/27/98 3/27/99 3/27/98
Numerator:
Numerator for basic
earnings per share -
Net income (in millions) $ 135 $ 55 $ 287 $ 102
Interest expense on
convertible debt 11 -- 22 --
Numerator for diluted
earnings per share - Adjusted
net income (in millions) $ 146 $ 55 $ 309 $ 102
Denominator:
Denominator for basic earnings
per share -- weighted average
shares outstanding 136,371 131,969 135,820 130,021
Effect of dilutive securities:
Convertible preferred stock 9,091 9,091 9,091 9,091
Convertible debt 22,642 -- 22,642 --
Dilutive options 5,100 4,855 5,066 3,657
Dilutive potential
common shares 36,833 13,946 36,799 12,748
Denominator for diluted
earnings per share -- adjusted
weighted-average shares and
assumed conversions 173,204 145,915 172,619 142,769
Basic earnings per share $ 0.99 $ 0.42 $ 2.11 $ 0.78
Diluted earnings per share $ 0.84 $ 0.38 $ 1.79 $ 0.71
Options to purchase approximately 253,000 weighted-average shares of common
stock were outstanding during the quarter ended March 27, 1999, that were not
included in the computation of diluted earnings per share for the three months
ended March 27, 1999, because the options' exercise price was greater than the
average market price of the Company's common stock during the period and,
therefore, the effect would be antidilutive.
The Company has outstanding $661 million of unsecured convertible subordinated
debentures (the Debentures) which are convertible by their holders into
approximately 22.6 million shares of common stock at a conversion price of
$29.205 per share subject to the adjustments as defined in the Debenture
agreement. The common shares represented by these Debentures upon conversion
6
were included in the computation of diluted earnings per share for the three
and six month periods ended March 27, 1999, as the effect of using the if-
converted method was dilutive for that period. The common shares represented
by these Debentures were not included in the computation of diluted earnings
per share for the three and six month periods ended March 27, 1998, because
the effect of using the if-converted method for those periods would be anti-
dilutive. For additional disclosures regarding the outstanding preferred
stock, employee stock options and the Debentures, see the 1998 Form 10-K and
footnote 10 of these notes to Condensed Consolidated Financial Statements.
Note 3 - Consolidated Financial Statement Details (in millions)
Inventories 03/27/99 9/25/98
Purchased parts $ 2 $ 32
Work in process 2 5
Finished goods 14 41
Total inventories $ 18 $ 78
Property, Plant, and Equipment 03/27/99 9/25/98
Land and buildings $ 326 $ 338
Machinery and equipment 307 277
Office furniture and equipment 74 80
Leasehold improvements 124 129
Accumulated depreciation and amortization (501) (476)
Net property, plant, and equipment $ 330 $ 348
Accrued Expenses 03/27/99 9/25/98
Accrued compensation and employee benefits $ 77 $ 99
Accrued marketing and distribution 171 205
Accrued warranty and related costs 114 132
Other current liabilities 391 365
Total accrued expenses $ 753 $ 801
Interest and Other Income (Expense) Six Months Ended
03/27/99 03/27/98
Interest income $ 65 $ 45
Interest expense (31) (32)
Other income (expense), net (5) 2
Interest and other income (expense), net $ 29 $ 15
7
Note 4 - Equity Investment Gains
As of September 25, 1998, the Company owned 25.9% of the outstanding stock of
ARM Holdings plc (ARM), a publicly held company in the United Kingdom
involved in the design of high performance microprocessors and related
technology. Through September 25, 1998, the Company accounted for this
investment using the equity method. During the first quarter of fiscal 1999,
the Company sold 2.9 million shares of ARM stock for net proceeds of
approximately $37 million, recorded a gain of approximately $32 million as
other income, and recognized related income tax expense of approximately $3
million. During the second quarter of fiscal 1999, the Company sold 2 million
shares of ARM stock for net proceeds of approximately $59 million, recorded a
gain before taxes of approximately $55 million as other income, and recognized
related income tax expense of approximately $5 million. Subsequent to this
sale, the Company held approximately 7.3 million shares of ARM stock.
As a result of the sale of ARM stock in October 1998, the Company's ownership
interest in ARM fell to 19%. Consequently, beginning in the first quarter of
fiscal 1999, the Company ceased accounting for its remaining investment in
ARM using the equity method and has categorized its remaining shares as
available for sale requiring the shares be carried at fair value, with
unrealized gains and losses net of taxes reported as a component of
accumulated other comprehensive income in shareholders' equity. As of March
27, 1999, the carrying value of the Company's remaining shares in ARM
included in other assets was approximately $326 million, and the total
unrealized gains net of taxes included in equity as a component of accumulated
other comprehensive income was approximately $205 million. For additional
disclosures regarding the Company's investment in ARM, see footnote 10 of
these notes to Condensed Consolidated Financial Statements (Unaudited).
8
Note 5 - Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," beginning with the Company's first
quarter of 1999. SFAS No. 130 separates comprehensive income into two
components, net income and other comprehensive income. Other comprehensive
income refers to revenue, expenses, gains and losses that under generally
accepted accounting principles are recorded as an element of shareholders'
equity but are excluded from net income. While SFAS No. 130 establishes new
rules for the reporting and display of comprehensive income, it has no impact
on the Company's net income or total shareholders' equity. The Company's
other comprehensive income is comprised of foreign currency translation
adjustments from those subsidiaries not using the U.S. dollar as their
functional currency and from unrealized gains and losses on marketable
securities categorized as available for sale. See Note 4 regarding unrealized
gains on available for sale securities.
The components of comprehensive income, net of tax, are as
follows (in millions):
For the Three For the Six
Months Ended Months Ended
3/27/99 3/27/98 3/27/99 3/27/98
Net income $ 135 $ 55 $ 287 $ 102
Other comprehensive income:
Change in accumulated
translation adjustment (10) (2) 2 (6)
Unrealized gain on investments, net 142 -- 255 --
Reclassification adjustment for
gain included in net income (50) -- (50) --
Total comprehensive income $ 217 $ 53 $ 494 $ 96
Note 6 - Restructuring Costs
During the second quarter of 1999, the Company took further actions to improve
the flexibility and efficiency of its manufacturing operations by moving final
assembly of certain of its products to third-party manufacturers. These
restructuring actions resulted in the Company recognizing a charge to
operations of approximately $9 million during the second quarter of 1999 which
was comprised of $6 million for severance benefits to be paid to employees
involuntarily terminated, $2 million for the write-down of operating assets
to be disposed of, and $1 million for payments on cancelled contracts. As of
March 27, 1999, the Company had utilized approximately $1 million of these
reserves in the form of severance payments to terminated employees.
9
Note 7 - Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", and in
June 1998 issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." A discussion of these accounting standards is included in
the notes to consolidated financial statements included in the 1998 Form 10-K
under the subheading "Recent Accounting Pronouncements." Although the
Company continues to review the effect of the implementation of SFAS No.
133, the Company does not currently believe its adoption will have a material
impact on its consolidated results of operations or financial position and
does not believe adoption will result in significant changes to its financial
risk management practices.
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which provides guidance on accounting for the costs of computer
software intended for internal use. SOP 98-1 must be adopted by the Company
effective as of fiscal 2000 and is not expected to have a material impact on
the Company's consolidated results of operations or financial position.
During the first quarter of 1999, the Company adopted AICPA SOP 97-2,
"Software Revenue Recognition." SOP 97-2 established standards relating to
the recognition of software revenue. SOP 97-2 was effective for transactions
entered into by the Company beginning in the first quarter of fiscal 1999. The
adoption of this accounting standard did not have a material impact on the
Company's results of operations.
Note 8 - Contingencies
The Company is subject to various legal proceedings and claims which are
discussed in detail in the 1998 Form 10-K. The Company is also subject to
certain other legal proceedings and claims which have arisen in the ordinary
course of business and which have not been fully adjudicated. The results of
legal proceedings cannot be predicted with certainty; however, in the opinion
of management, the Company does not have a potential liability related to any
legal proceedings and claims that would have a material adverse effect on its
financial condition or results of operations.
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 by filing
petitions with the United States Tax Court, and most of the issues in dispute
have now been resolved. On June 30, 1997, the IRS proposed income tax
adjustments for the years 1992 through 1994. Although a substantial number of
issues for these years have been resolved, certain issues still remain in
dispute and are being contested by the Company. Management believes that
adequate provision has been made for any adjustments that may result from tax
examinations.
10
Note 9 - Reclassifications
Certain amounts in the Condensed Consolidated Statement of Cash Flows for
the six months ended March 27, 1998, have been reclassified to conform to the
1999 presentation.
Note 10 - Subsequent Events
On April 14, 1999, the Company announced the call for redemption on June 1,
1999, of all of its 6 percent convertible subordinated debentures due June 1,
2001. Debentures in an aggregate principal amount outstanding totaled
approximately $661 million as of March 27, 1999, which includes
approximately $7 million of unamortized debt issuance costs which would have
to be expensed during the third quarter of 1999 in the event the debentures
are redeemed. Debenture holders have the option of receiving principal plus a
2.4% call premium of approximately $16 million or converting their debentures
into Apple common stock at a conversion price of $29.205 per share. For
additional disclosures regarding the outstanding Debentures, see the 1998 Form
10-K.
On April 22, 1999, ARM effected a 4 for 1 stock split which increased the
Company's holdings in ARM stock to approximately 29 million shares. On
April 29, 1999, the Company sold approximately 9 million shares of ARM stock
for net proceeds of approximately $95 million and a gain before taxes of
approximately $90 million which will be recognized as other income by the
Company in the third quarter of 1999. Subsequent to this sale, the Company
holds 20 million shares of ARM stock.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the subsection entitled "Factors That May
Affect Future Results and Financial Condition" below. The following discussion
should be read in conjunction with the 1998 Form 10-K and the condensed
consolidated financial statements and notes thereto included elsewhere in this
Form 10-Q. All information is based on the Company's fiscal calendar.
11
Results of Operations
Tabular information (dollars in millions, except per share amounts):
Three Months Ended Six Months Ended
3/27/99 3/27/98 Change 3/27/99 3/27/98 Change
Net sales $1,530 $1,405 9% $3,240 $2,983 9%
Macintosh CPU
unit sales 827,000 650,000 27% 1,771,000 1,285,000 38%
Gross margin $403 $349 15% $885 $702 26%
Percentage of net sales 26% 25% 27% 24%
Research and development $ 76 $ 75 1% $152 $154 (1%)
Percentage of net sales 5% 5% 5% 5%
Selling, general and
administrative $239 $223 7% $518 $457 13%
Percentage of net sales 16% 16% 16% 15%
Restructuring costs $ 9 $ -- $ 9 $ --
Other income (expense), net $ 74 $ 8 825% $116 $ 15 673%
Provision for income taxes $ 18 $ 4 350% $ 35 $ 4 775%
Effective tax rate 11.8% 6.8% 11% 3.8%
Net income $135 $ 55 145% $287 $102 181%
Basic earnings per share $0.99 $0.42 136% $2.11 $0.78 171%
Diluted earnings per share $0.84 $0.38 121% $1.79 $0.71 152%
Three Months Ended
3/27/99 12/25/98 Change
Net sales $1,530 $1,710 (11%)
Macintosh CPU
unit sales 827,000 944,000 (12%)
Gross margin $403 $482 (16%)
Percentage of net sales 26% 28%
Research and development $ 76 $ 76 0%
Percentage of net sales 5% 4%
Selling, general and
administrative $239 $279 (14%)
Percentage of net sales 16% 16%
Restructuring costs $ 9 $ --
Other income (expense), net $ 74 $ 42 76%
Provision for income taxes $ 18 $ 17 6%
Effective tax rate 11.8% 10%
Net income $135 $152 (11%)
Basic earnings per share $0.99 $1.12 (12%)
Diluted earnings per share $0.84 $0.95 (12%)
12
Net income for the first quarter of 1999 includes a $32 million gain before
tax associated with the sale by the Company of 2.9 million shares of its
investment in ARM which was recognized as other income. Income tax expense
recognized in the first quarter on this gain was approximately $3 million. Net
income for the second quarter of 1999 includes a $55 million gain before tax
associated with the sale by the Company of 2 million shares of its investment
in ARM which was recognized as other income. Income tax expense recognized
in the second quarter on this gain was approximately $5 million.
Net Sales
Net sales for the second quarter of 1999 were $1.53 billion, a 9% increase
over the same quarter in 1998. The increase in net sales is primarily
attributable to a year-over-year 27% increase in Macintosh CPU unit volume.
Volumes were favorably affected by sales of iMac, the Company's moderately
priced Macintosh system designed for education and consumer markets
introduced during the fourth quarter of 1998, which represented 42% or 351,000
of the total Macintosh CPU units sales during the second quarter of 1999.
During the second quarter of 1999, the Company also experienced year-over-
year unit volume growth in its Power Macintosh G3 product line of 13%.
Overall, total net sales only from the sale of Macintosh CPU's rose 12% or
$134 million during the second quarter of 1999 compared to the same quarter
in 1998. The positive effect of increased unit volume on second quarter 1999
net sales was partially offset by a decline in the average revenue per
Macintosh system, a function of total net sales related to hardware shipments
and total Macintosh CPU unit sales, which fell 13% to $1,813 during the second
quarter of 1999 as compared to the same quarter in 1998. The decline in the
average revenue per Macintosh system was the result of lower priced iMac
systems comprising a significant portion of second quarter 1999 net sales, the
decline in net sales from the phase out of certain peripheral products, and
the overall industry trend towards lower priced products.
Net sales for the first six months of 1999 increased $257 million or 9% over
the same period in 1998. A 38% increase in Macintosh CPU unit volume was
the principal cause of the year-over-year increase in net sales. The impact of
the increase in unit volume was partially offset by a decline in the average
revenue per Macintosh system described above.
Net sales declined sequentially $180 million or 11% during the second quarter
of 1999 as compared to the first quarter of 1999. The sequential revenue
decline is primarily attributable to a 12% decrease in Macintosh unit
shipments and a sequential decline in net sales from MacOS 8.5 upgrades, the
current version of the Company's operating system which was introduced in the
first quarter of 1999. The decline in unit sales during the second quarter is
consistent with the historical seasonal pattern experienced by the Company
due to lower demand in that time frame from its domestic education and
consumer markets.
International net sales for both the second quarter of 1999 and the second
quarter of 1998 represented 50% of consolidated net sales and represented 47%
of consolidated net sales for the first quarter of fiscal 1999. In total,
international net sales during the second quarter of 1999 increased
13
approximately 10% or $70 million over the same period in 1998 and fell
approximately 5% or $40 million sequentially from the first quarter of 1999.
The year over year increase and the relatively small sequential decline in
international net sales reflect strong growth in international unit sales. On
a year-over-year basis, total Macintosh unit sales during the second quarter
of 1999 increased 52% in Japan, 41% in the rest of Asia, and 26% in Europe.
Domestic net sales increased 8% or $55 million during the second quarter of
1999 as compared to 1998 while declining sequentially from the first quarter
of 1999 $140 million or 16% due to the historical seasonal pattern experienced
in the Company's domestic education and consumer markets.
Gross Margin
Gross margin for the second quarter of 1999 was 26.3% compared to 24.8% for
the same quarter in 1998 and 28.2% for the first quarter of 1999. Gross margin
for the first six months of 1999 was 27.3% as compared to 23.5% for the same
period in 1998. The year-over-year increase in gross margin for both the
second quarter and the first six months of the fiscal year is attributable to
various operational changes made by the Company throughout fiscal 1998 and the
first half of fiscal 1999 that improved operational efficiency and reduced
product costs. These changes included simplification of the Company's product
line, focus on the use of industry standard parts, expanded use of supplier
inventory hubs, outsourcing of various aspects of product manufacturing, and
streamlining of product distribution channels and policies. Margins have also
been favorably impacted during the last year by the declining cost of various
components of the Company's products, particularly those sourced from Asia.
The sequential decrease in gross margin from the first quarter of 1999 to the
second quarter of 1999 is primarily attributable to aggressive pricing on
Power Macintosh G3 and iMac systems, lower selling prices experienced on sales
of Powerbooks, and the impact on the first quarter of high margin incremental
net sales of MacOS 8.5. Sales of MacOS 8.5 accounted for a sequential
improvement in first quarter 1999 gross margin of approximately 1.5 percentage
points that was not repeated during the second quarter.
There can be no assurance that current or targeted consolidated gross margin
levels will be achieved or that current margins on existing individual
products will be maintained. In general, gross margins and margins on
individual products will remain under significant downward pressure due to a
variety of factors, including continued industry wide global pricing
pressures, increased competition, compressed product life cycles, potential
increases in the cost of raw material and outside manufacturing services, and
potential changes to the Company's product mix, including higher unit sales of
consumer products with lower average selling prices and lower gross margins.
In response to these downward pressures, the Company expects that it will
continue to take pricing actions with respect to its products. Gross margins
could also be affected by the Company's ability to effectively manage quality
problems and warranty costs, to stimulate demand for certain of its products,
and to effectively manage the final assembly of certain of its products by
third parties. The Company's operating strategy and pricing take into account
anticipated changes in foreign currency exchange rates over time; however, the
Company's results of operations can be significantly affected in the short
term by fluctuations in exchange rates.
14
Operating Expenses
Selling, general and administrative expenses, not including restructuring
costs, increased approximately $16 million or 7% during the second quarter of
1999 as compared to the same period in 1998 and decreased sequentially $40
million or 14% from the first quarter of 1999. Selling, general and
administrative expenses for the first six months of 1999 increased $61 million
or 13% as compared to same period in 1998. The year-over-year increases for
both the second quarter and the first six months of the fiscal year were due
primarily to higher advertising and marketing costs. The sequential decline
from the first quarter of 1999 reflects a typical seasonal decline in
advertising and promotional activity associated with the 1998 holiday season
and the first quarter worldwide introduction of iMac and MacOS 8.5.
Expenditures for research and development remained relatively consistent in
terms of absolute dollars between the second quarter of 1999, the same quarter
in 1998, and the first quarter of 1999.
During the second quarter of 1999, the Company took further actions to improve
the flexibility and efficiency of its manufacturing operations by moving final
assembly of certain of its products to third party manufacturers. These
restructuring actions resulted in the Company recognizing a charge to
operations of approximately $9 million during the second quarter of 1999
primarily for severance benefits to be paid to employees to be involuntarily
terminated.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, is comprised of interest income on
the Company's cash and investment balances, interest expense on the Company's
debt, gains and losses recognized on investments accounted for using the
equity method, realized gains and losses on the sale of securities, certain
foreign exchange gains and losses, and other miscellaneous income and expense
items. The call for redemption on April 14, 1999, of the Company's 6 percent
convertible subordinated debentures discussed below under the heading
"Liquidity" will result in approximately $3 million less interest expense
being incurred in the third quarter of 1999 and approximately $10.5 million
less interest expense being incurred in all quarters thereafter.
As of September 25, 1998, the Company owned 25.9% of the outstanding stock
of ARM Holdings plc (ARM), a publicly held company in the United Kingdom
involved in the design of high performance microprocessors and related
technology. During the first quarter of 1999, the Company sold 2.9 million
shares of ARM stock for net proceeds of approximately $37 million, a gain of
approximately $32 million recorded as other income, and related income tax
expense of approximately $3 million. During the second quarter of 1999, the
Company sold 2 million shares of ARM stock for net proceeds of approximately
$59 million and a gain before taxes of approximately $55 million recorded as
other income, and related tax expense of approximately $5 million. Subsequent
to this sale and subsequent to ARM's 4 for 1 stock split which was effective
on April 22, 1999, the Company held approximately 29 million shares of ARM
stock.
15
On April 29, 1999, the Company sold approximately 9 million shares of ARM
stock for net proceeds of approximately $95 million and a gain before taxes of
approximately $90 million which will be recognized as other income by the
Company in the third quarter of 1999. Subsequent to this sale, the Company
holds 20 million shares of ARM stock.
Provision for Income Taxes
As of March 27, 1999, the Company had deferred tax assets arising from
deductible temporary differences, tax losses, and tax credits of $625 million
before being offset against certain deferred tax liabilities for presentation
on the Company's balance sheet. A substantial portion of this asset is
realizable based on the ability to offset existing deferred tax liabilities.
As of March 27, 1999, a valuation allowance of $142 million was recorded
against the deferred tax asset for the benefits of tax losses which may not be
realized. Realization of approximately $73 million of the asset representing
tax loss and credit carryforwards is dependent on the Company's ability to
generate approximately $209 million of future U.S. taxable income.
Management believes that it is more likely than not that forecasted U.S.
income, including income that may be generated as a result of certain tax
planning strategies, will be sufficient to utilize the tax carryforwards prior
to their expiration in 2011 and 2012 to fully recover this asset. However,
there can be no assurance that the Company will meet its expectations of
future U.S. taxable income. As a result, the amount of the deferred tax assets
considered realizable could be reduced in the near and long term if estimates
of future taxable U.S. income are reduced. Such an occurrence could materially
adversely affect the Company's consolidated financial results. The Company
will continue to evaluate the realizability of the deferred tax assets
quarterly by assessing the need for and amount of the valuation allowance.
The Company's effective tax rate for the second quarter of 1999 was
approximately 12% which brings the tax rate for the 6 months ended March 27,
1999, to 11%. The overall effective tax rate of 11% is less than the statutory
federal income tax rate of 35% due primarily to the reversal of a portion of
the previously established valuation allowance for tax loss and credit
carryforwards and certain undistributed foreign earnings for which no U.S.
taxes were provided.
The Company anticipates that its tax rate for the remainder of fiscal 1999
will be between 11% and 15%. The Company anticipates that its tax rate will
increase significantly in fiscal 2000 as its currently available valuation
allowance for tax loss and credit carryforwards is reversed. The foregoing
statements are forward looking. The Company's actual results could differ
because of several factors, including those set forth below in the subsection
entitled "Factors That May Affect Future Results and Financial Condition."
16
Liquidity and Capital Resources
The following table presents selected financial information and statistics for
each of fiscal quarters ending on the dates indicated (dollars in millions):
3/27/99 9/25/98 3/27/98
Cash, cash equivalents,
and short-term investments $2,922 $ 2,300 $1,823
Accounts receivable, net $804 $955 $807
Inventory $ 18 $ 78 $257
Working capital $2,548 $2,178 $1,829
Days sales in accounts receivable (a) 48 56 52
Days of supply in inventory (b) 1 6 22
Days payables outstanding (c) 64 60 52
Operating cash flow $269 $282 $153
(a) Based on ending net trade receivables and most recent quarterly net sales
for each period
(b) Based on ending inventory and most recent quarterly cost of sales for each
period
(c) Based on ending accounts payable and most recent quarterly cost of sales
adjusted for the change in inventory
As of March 27, 1999, the Company had approximately $2.9 billion in cash,
cash equivalents, and short-term investments, an increase of over $600 million
over the same balances at the end of fiscal 1998. During the second quarter of
1999, the most significant sources of cash were $135 million of net income, a
decline in net accounts receivable of $109 million, an increase in accounts
payable of $136 million, and proceeds on the sales of ARM shares of $59
million. These factors were partially offset by the net purchase of short term
investments of $207 million and a decrease in other current liabilities of $72
million. The Company's cash and cash equivalent balances as of March 27,
1999, and September 25, 1998, include $4 million and $56 million,
respectively, pledged as collateral to support letters of credit.
The Company's debt ratings are currently non-investment grade. As of March
27, 1998, the Company's senior and subordinated long-term debt ratings were
B- and CCC, respectively, by Standard and Poor's (S&P) Rating Agency, and B3
and Caa2, respectively, by Moody's Investor Services (Moody's). In June 1998,
Moody's upgraded the Company's senior debt to B2 from B3 and subordinated
debt to Caa1 from Caa2 citing strengthened debtholder protection measurements
as the major reason for the upgrade. On November 9, 1998, S&P upgraded the
Company's senior debt to B+ from B- and upgraded its subordinated debt to B-
from CCC citing the Company's improved profitability and financial profile for
the upgrade. Despite these recent upgrades, the Company's continued non-
investment grade debt ratings will maintain pressure on the Company's cost of
funds in future periods and may require the Company to pledge additional
collateral or agree to more stringent debt covenants.
17
On April 14, 1999, the Company announced the call for redemption on June 1,
1999, of all of its 6 percent convertible subordinated debentures due June 1,
2001. Debentures in an aggregate principal amount outstanding totaled
approximately $661 million as of March 27, 1999. Debenture holders have the
option of receiving principal plus a 2.4% call premium of approximately $16
million or of converting their debentures into Apple common stock at a
conversion price of $29.205 per share.
The Company believes that its balances of cash, cash equivalents, and short-
term investments will be sufficient to meet its cash requirements over the
next twelve months, including any cash that may be utilized as a result of the
early call of its 6 percent convertible subordinated debentures. However,
given the Company's current debt ratings, if the Company should need to obtain
short-term borrowings, there can no assurance that such borrowings could be
obtained at favorable rates. The inability to obtain such borrowings at
favorable rates could materially adversely affect the Company's results of
operations, financial condition, and liquidity.
18
Year 2000 Compliance
The information presented below related to Year 2000 (Y2K) compliance
contains forward looking statements that are subject to risks and
uncertainties. The Company's actual results may differ significantly from
those discussed below and elsewhere in this Form 10-Q regarding Year 2000
compliance.
Year 2000
The Year 2000 (Y2K) issue is the result of certain computer hardware,
operating system software and software application programs having been
developed using two digits rather than four to define a year. For example the
clock circuit in the hardware may be incapable of holding a date beyond the
year 1999; some operating systems may recognize a date using "00" as the year
1900 rather than 2000 and certain applications may have limited date
processing capabilities. These problems could result in the failure of major
systems or miscalculations, which could have a material impact on companies
through business interruption or shutdown, financial loss, damage to
reputation, and legal liability to third parties.
State of Readiness
The Company's Information Systems and Technology department (IS&T) began
addressing the Y2K issue in 1996 as part of its Next Generation strategy,
which addressed the need for ongoing enhancement and replacement of the
Company's various disparate legacy information technology (IT) Systems. In
1998, the Company established a Year 2000 Executive Steering Committee
(Steering Committee) comprised of senior executives of the Company and the
Company's Year 2000 Project Management Office (PMO). The PMO reports to
the Executive Vice President and Chief Financial Officer, the Steering
Committee, and the Audit and Finance Committee of the Board of Directors.
The PMO developed and manages the Company's worldwide Y2K strategic plan
(Y2K Plan) to address the potential impact of Y2K on the Company's operations
and business processes. In particular, the Y2K Plan addresses four principal
areas that may be impacted by the Y2K issue: Apple Branded Products; Third
Party Relationships; Non-IT Business Systems; and IT Systems. Regardless of
the planned or actual status of any of the principal areas of the Y2K Plan,
all areas remain under review and subject to modification as deemed necessary
throughout the remainder of calendar 1999. With respect to the IT Systems and
Non-IT Business Systems, the Y2K Plan consists of four separate but
overlapping phases: Phase I - Inventory and Risk Assessments; Phase II -
Remediation Cost Estimation; Phase III - Remediation; and Phase IV -
Remediation Testing. In addition, the Company has an ongoing Y2K Awareness
Program designed to keep employees informed about Y2K issues. The Company's
goal is to substantially complete Phase III - Remediation during the third
quarter of 1999; substantially complete Phase IV - Remediation Testing during
the fourth quarter of 1999, and to continue compliance efforts throughout the
remainder of calendar year 1999. There have been no significant changes made
to this schedule during the first half of 1999, and the Company remains on
schedule to meet these goals.
19
Apple Products
The Company designs and manufacturers microprocessor-based personal
computers, related peripherals, operating system software and application
software, including Macintosh personal computers and the Mac OS which are
marketed under the "Apple" brand (collectively "Apple Branded Products"). The
Company tested certain Apple Branded Products to determine Y2K compliance,
although such testing did not include third party products bundled with Apple
Branded Products and certain Apple Branded Products no longer supported by the
Company. For purposes of this discussion, Y2K compliant means a product will
not produce errors processing date data in connection with the year change
from December 31, 1999, to January 1, 2000, when used with accurate date data
in accordance with its documentation, provided all other products (including
other software, firmware and hardware) used with it properly exchange date
data with it. A Y2K compliant product will recognize the Year 2000 as a leap
year. Information regarding the Y2K readiness of all Apple Branded Products is
available on the Apple corporate web site at www.apple.com. Such information
is not to be considered part of this quarterly report. The Company believes
that the unsupported Apple Branded Products are Y2K compliant because, unlike
other company's personal computers and related products, the Company's
products do not rely upon the two digit date format but use a long word
approach which allows the correct representation of dates up to the year 2040.
The current date and time utilities utilized by Apple Branded Products are 64
bit signed value which covers dates from 30081 BC to 29940 AD. Since the
Company does not control the design of non-Apple Branded Products or third
party products bundled with Apple Branded Products, it cannot assure they are
Y2K compliant. Certain products acquired from NeXT Software, Inc., including
OpenStep and NextStep, and prior versions of WebObjects which incorporate
technology from OpenStep and NextStep, are not currently Y2K compliant. The
Company intends to develop and make available during the third quarter of 1999
a software patch intended to allow such products to become Y2K compliant. The
Company recently discovered that certain prior versions of its FileMaker Pro
database application software are not fully Y2K compliant. The Company plans
to have a patch available for these versions of the product in the third
quarter of fiscal 1999 or early in the fourth quarter.
Third Party Relationships
The Company's business operations are heavily dependent on third party
corporate service vendors, materials suppliers, outsourced operations
partners, distributors and others. The Company is working with key external
parties to identify and attempt to mitigate the potential risks to it of Y2K.
The failure of external parties to resolve their own Y2K issues in a timely
manner could result in a material financial risk to the Company. As part of
its overall Y2K program and to establish the state of readiness of certain
third parties, the Company is actively communicating on an ongoing basis with
certain third parties whose lack of Y2K compliance would present a high degree
of risk to the Company. Based on information obtained from various sources,
the Company believes that it is reasonably possible there will be short-term
interruptions in airfreight services early in calendar year 2000 that could
20
result in shipping delays of raw material and finished goods. See further
discussion regarding this issue below under the heading "Contingency Plans."
The Company believes that its review of certain third parties is approximately
25% complete as of the end of the second quarter of fiscal 1999. Although
numerous third parties have advised the Company that they are addressing their
Y2K issues on a timely basis, the readiness of third parties overall varies
widely. Because the Company's Y2K compliance is dependent on the timely Y2K
compliance of third parties, there can be no assurances that the Company's
efforts alone will resolve all Y2K issues.
IT Systems and Non-IT Business Systems
Phase I - Inventory and Risk Assessment:
This Phase requires an inventory and assessment of the Non-IT Business systems
used by the Company including systems with embedded technology, building
access systems, and health and safety systems. This Phase also includes
inventory and assessment of IT Systems used by the Company which include
large IS&T systems, desktop hardware and software, and network hardware and
software. Each such system is evaluated and the business risk is quantified as
being High, Medium or Low Risk to the Company's Business. Systems which
are High Risk are those which if uncorrected would cause an interruption of or
complete failure to conduct the Company's business. Medium Risks are those
which would negatively impact the business but complete cessation could be
avoided with some inconvenience. Low Risks are those where the risk to
business interruption or cessation are remote. High and Medium Risk items
will be remediated or replaced, and Low risk items will likely not be
addressed prior to the Year 2000. As of the end the second quarter of fiscal
1999, the Company is substantially complete with this Phase for both IT
Systems and Non-IT Systems. However, the Company will continue to review
information developed as the result of its overall Y2K effort which could
result in additional items being added to its Y2K inventory.
Phase II - Remediation Cost Estimation:
This Phase involves the analysis of each High and Medium Risk to determine
how such risks may be remediated and the cost of such remediation. The
Company has substantially completed this Phase for the IT Systems and is
approximately 85% complete for the identified Non-IT Business Systems. The
Company anticipates that this Phase will be substantially completed during the
third quarter of fiscal 1999
Phase III - Remediation:
This Phase includes the replacement or correction of the High and Medium Risk
Non-IT Business Systems and IT Systems. A detailed project plan for such
remediation has been developed and is currently being implemented. This Phase
is substantially complete for the IT Systems and is approximately 50% complete
for the Non-IT Business Systems. The Company anticipates that this Phase will
be completed during the third quarter of fiscal 1999.
21
Phase IV - Remediation Testing:
This Phase includes the future date testing of the remediation efforts made in
Phase III to confirm that the changes made bring the affected systems into
compliance, no new problems have arisen as a result of the remediation, and
that new systems which replaced noncompliant systems are Y2K compliant.
This Phase is approximately 50% complete for the IT Systems and has just
commenced for the Non-IT Systems. The Company anticipates that this Phase
will be completed by the fourth quarter of fiscal 1999.
Costs to Address Y2K
The costs of the Y2K program are primarily costs associated with the
utilization of existing internal resources and incremental external spending.
The Company has incurred approximately $6.4 million of incremental external
spending directly associated with Y2K issues through March 27, 1999. Based on
the current status of the Company's remediation cost estimation discussed
above, the Company estimates it will incur future incremental external
spending associated with Y2K issues of approximately $6.8 million to address
those risks identified as High or Medium. The Company's estimate of total
incremental external spending has increased by approximately $4 million to
$13.2 million primarily as a result of increased costs identified to address
the Y2K compliance of certain Apple Branded Products. As the Company's Y2K
Plan continues, the actual future incremental external spending may prove to
be higher. Also, this estimate does not include the costs that could be
incurred by the Company if one or more of its significant third party vendors
fails to achieve Y2K compliance. The Company is not separately identifying and
including in these estimates the Y2K costs incurred that are the result of
utilization of the Company's existing internal resources.
Contingency Plans.
Under the guidance and management of the PMO, the Company is in the process
of preparing Y2K contingency plans to mitigate the potential impact of various
Y2K failures. The Company's contingency plans, which will be based in part on
the assessment of the magnitude and probability of potential risks, will
primarily focus on proactive steps to prevent Y2K failures from occurring, or
if they should occur, to detect them quickly, minimize their impact and
expedite their repair. The Y2K contingency plans will supplement disaster
recovery and business continuity plans already in place, and are expected to
include measures such as selecting alternative suppliers and channels of
distribution. The Company believes development of its Y2K contingency plans is
approximately 10% complete as of the end of the second quarter of fiscal 1999
and expects to be substantially complete by the end of the fourth quarter of
fiscal 1999.
As noted above, the Company believes that it is reasonably possible there will
be short-term interruptions in airfreight services early in calendar year 2000
that could result in shipping delays of raw material and finished goods. The
Company currently believes it can develop and implement contingency plans to
mitigate the effects of a short-term interruption in such service. However, if
the Company fails to develop and implement adequate contingency plans, if the
interruption in service lasts for an extended period of time, or if
22
alternative Y2K compliant services are not readily available at reasonable
cost, there could be material adverse effects on the Company's consolidated
results of operations and financial position.
Risk Factors
At this point, the Company has not completed its assessment of reasonably
likely worst case scenario of Non-IT Business Systems and/or IT Systems
failures and related consequences. However, based on current information, the
Company believes that the most likely worst case scenario is that it will
experience a number of minor malfunctions and failures of its IT Systems and
Non-IT Business Systems at the beginning of the Year 2000 that were not
previously detected during the Company's inventory and risk assessment and
remediation activities. The Company currently believes these malfunctions and
failures will not have a material impact on its consolidated results of
operations or financial condition. However, there can be no assurance that
the Y2K remediation by the Company or third parties will be properly and
timely completed, and the failure to do so could have a material adverse
effect on the Company, its business, its consolidated results of operations,
and its financial condition. In particular, the Company has not yet completed
its assessment of the Y2K readiness of its significant third party vendors.
Completion of this assessment may result in the identification of additional
issues which could have a material adverse effect on the Company's results of
operations. In addition, important factors that could cause results to differ
materially include, but are not limited to, the ability of the Company to
successfully identify systems and vendors which have a Y2K issue, the nature
and amount of remediation effort required to fix the affected systems, the
adequacy of such remediation efforts, the production-related contingency
plans of competitors with the Company's third party suppliers, and the costs
and availability of labor and resources to successfully address the Y2K
issues and/or to execute on any required contingency plans.
Factors That May Affect Future Results and Financial Condition
The Company operates in a rapidly changing environment that involves a number
of uncertainties, some of which are beyond the Company's control. In addition
to the uncertainties described elsewhere in this report, there are many
factors that will affect the Company's future results and business which may
cause the actual results to differ from those currently expected. The
Company's future operating results and financial condition are dependent upon
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 a favorable financial condition.
Potential risks and uncertainties that could affect the Company's future
operating results and financial condition include, among other things,
continued competitive pressures in the marketplace and the effect of any
23
reaction by the Company to such competitive pressures, including pricing
actions by the Company; risks associated with international operations,
including economic and labor conditions, the continuing economic problems
being experienced in Asia and Latin America, political instability, tax laws,
and currency fluctuations; increasing dependence on third-parties for
manufacturing and other outsourced functions such as logistics; the
availability of key components on terms acceptable to the Company; the
continued availability of certain components and services essential to the
Company's business currently obtained by the Company from sole or limited
sources, including PowerPC RISC microprocessors developed by and obtained
from IBM and Motorola and the final assembly of certain of the Company's
products; the Company's ability to supply products in certain categories; the
Company's ability to supply products free of latent defects or other faults;
the Company's ability to make timely delivery to the marketplace of
technological innovations, including its ability to continue to make timely
delivery of planned enhancements to the current Mac OS and timely delivery of
future versions of the Mac OS; the availability of third-party software for
particular applications; the Company's ability to attract, motivate and retain
key employees; the effect of Y2K compliance issues; managing the continuing
impact of the European Union's transition to the Euro as its common legal
currency; and the Company's ability to retain the operational and cost
benefits derived from its recently completed restructuring program.
For a discussion of these and other factors affecting the Company's future
results and financial condition, see "Item 7 - Management's Discussion and
Analysis -- Factors That May Affect Future Results and Financial Condition"
in the Company's 1998 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information presented below regarding Market Risk contains forward
looking statements that are subject to risks and uncertainties. The Company's
actual results may differ significantly from those discussed below and
elsewhere in this Form 10-Q regarding market risk. The following discussion
should be read in conjunction with the 1998 Form 10-K and the condensed
consolidated financial statements and notes thereto included elsewhere in this
Form 10-Q.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investments and long-term debt obligations and
related derivative financial instruments. The Company places its investments
with high credit quality issuers and, by policy, limits the amount of credit
exposure to any one issuer. The Company's general policy is to limit the risk
of principal loss and ensure the safety of invested funds by limiting market
and credit risk. All highly liquid investments with a maturity of three months
or less at the date of purchase are considered to be cash equivalents;
investments with maturities between three and twelve months are considered to
be short-term investments. As of March 27, 1999, there are no investments with
maturities greater than 12 months.
24
The Company enters into interest rate derivative transactions, including
interest rate swaps, collars, and floors, with financial institutions in
order to better match the Company's floating-rate interest income on its cash
equivalents and short-term investments with its fixed-rate interest expense on
its long-term debt, and/or to diversify a portion of the Company's exposure
away from fluctuations in short-term U.S. interest rates. The Company may also
enter into interest rate contracts that are intended to reduce the cost of the
interest rate risk management program. The Company does not hold or transact
in such financial instruments for purposes other than risk management.
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, 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.
The Company enters into foreign exchange forward and option contracts with
financial institutions primarily to protect against currency exchange risks
associated with existing assets and liabilities, certain firmly committed
transactions, and probable but not firmly committed transactions. The
Company's foreign exchange risk management policy requires it to hedge a
majority of its existing material foreign exchange transaction exposures.
However, the Company may not hedge certain foreign exchange transaction
exposures that are immaterial either in terms of their minimal U.S. dollar
value or in terms of the related currency's historically high correlation with
the U.S. dollar. Foreign exchange forward contracts are carried at fair value
in other current liabilities. The premium costs of purchased foreign exchange
option contracts are recorded in other current assets and amortized over the
life of the option.
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,
option and floor positions both 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 and
the anticipatory nature of the exposures intended to hedge, 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, therefore, may adversely affect the
Company's consolidated operating results and financial position.
25
For a complete description of the Company's interest rate and foreign currency
related market risks, see the discussion in Part II, Item 7A of the Company's
1998 Form 10-K. There has not been a material change in the Company's
exposure to interest rate and foreign currency risks since the date of the
1998 Form 10-K.
26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various legal proceedings and claims which are
discussed in the 1998 Form 10-K. The Company is also subject to certain other
legal proceedings and claims which have arisen in the ordinary course of
business and which have not been fully adjudicated. The results of legal
proceedings cannot be predicted with certainty; however, in the opinion of
management, the Company does not have a potential liability related to any
legal proceedings and claims that would have a material adverse effect on its
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on March 24, 1999. All matters
voted on were approved. The results are as follows:
PROPOSAL I
The following directors were elected at the meeting to serve a one-year term
as Class I directors:
For Authority Withheld
Gareth C.C. Chang 114,130,859 853,852
William V. Campbell 114,037,235 947,476
Jerome B. York 114,129,231 855,480
The following directors are continuing to serve their two-year terms as
Class II directors which will expire at the next annual meeting:
Steven P. Jobs
Lawrence J. Ellison
Edgar S. Woolard, Jr.
PROPOSAL II
The proposal to amend the Company's Restated Articles of Incorporation to
eliminate the classification of the Board of Directors and thereby ensure that
each director will stand for election annually was approved. As a result, the
Company's Restated Articles of Incorporation will be amended to eliminate the
classification of the Board and the terms of all directors will end at next
year's annual meeting of shareholders.
For Against Abstained Broker Non-Vote
73,065,031 611,254 459,798 40,848,628
27
<PAGE
PROPOSAL III
Ratification of appointment of KPMG LLP as the Company's independent
auditors for fiscal year 1999.
For Against Abstained Broker Non-Vote
114,313,398 183,870 487,443 -0-
The proposals above are described in detail in the Registrant's definitive
proxy statement dated February 9, 1999, for the Annual Meeting of
Shareholders held on March 24, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
3.2 Amendment to Restated Articles of Incorporation, filed with
the Secretary of State of the state of California on
April 22, 1999
3.3 By-Laws of the Company, as amended through March 24, 1999.
10.A.49 1997 Employee Stock Option Plan, as amended through 12/1/98.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None
28
SIGNATURES
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)
By: /s/ Fred D. Anderson
Fred D. Anderson
Executive Vice President and Chief Financial Officer
May 11, 1999
29
INDEX TO EXHIBITS
Exhibit
Index
Number Description Page
3.2 Amendment to Restated Articles of Incorporation, filed with
the Secretary of State of the State of California on
April 22, 1999 31
3.3 By-Laws of the Company, as amended through March 24, 1999 33
10.A.49 1997 Employee Stock Option Plan, as amended through 12/1/98 57
27 Financial Data Schedule. 69
30