UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2000 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
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APPLE COMPUTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 942404110
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1 Infinite Loop
Cupertino, California 95014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 996-1010
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)
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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
--- ---
162,743,706 shares of Common Stock Issued and Outstanding as of May 5, 2000
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
------------------ ----------------
April 1, 2000 March 27, 1999 April 1, 2000 March 27, 1999
------------- --------------- ------------- ---------------
Net sales $ 1,945 $ 1,530 $ 4,288 $ 3,240
Cost of sales 1,396 1,127 3,132 2,355
-------- -------- -------- --------
Gross margin 549 403 1,156 885
-------- -------- -------- --------
Operating expenses:
Research and development 92 76 182 152
Selling, general, and administrative 287 239 606 518
Special charges:
Restructuring costs 0 9 8 9
Executive bonus 0 0 90 0
-------- -------- -------- --------
Total operating expenses 379 324 886 679
-------- -------- -------- --------
Operating income 170 79 270 206
Gains from sales of investment 100 55 234 87
Interest and other income (expense), net 49 19 89 29
-------- -------- -------- --------
Total interest and other income (expense), net 149 74 323 116
-------- -------- -------- --------
Income before provision for income taxes 319 153 593 322
Provision for income taxes 86 18 177 35
-------- -------- -------- --------
Net income $ 233 $ 135 $ 416 $ 287
======== ======== ======== ========
Earnings per common share:
Basic $ 1.44 $ 0.99 $ 2.57 $ 2.11
Diluted $ 1.28 $ 0.84 $ 2.32 $ 1.79
Shares used in computing earnings per share (in thousands):
Basic 162,172 136,371 161,597 135,820
Diluted 181,993 173,204 179,626 172,619
See accompanying notes to condensed consolidated financial statements.
2
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share amounts)
ASSETS
April 1, 2000 September 25, 1999
------------- ------------------
Current assets:
Cash and cash equivalents $1,662 $1,326
Short-term investments 1,947 1,900
Accounts receivable, less allowances of $64 and $68, respectively 940 681
Inventories 10 20
Deferred tax assets 131 143
Other current assets 222 215
------ ------
Total current assets 4,912 4,285
Property, plant and equipment, net 314 318
Non-current debt and equity investments 1,544 339
Other assets 237 219
------ ------
Total assets $7,007 $5,161
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,111 $ 812
Accrued expenses 742 737
------ ------
Total current liabilities 1,853 1,549
Long-term debt 300 300
Deferred tax liabilities 639 208
------ ------
Total liabilities 2,792 2,057
------ ------
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; 162,679,893
and 160,799,061 shares issued and outstanding, respectively 1,419 1,349
Retained earnings 1,915 1,499
Accumulated other comprehensive income 731 106
------ ------
Total shareholders' equity 4,215 3,104
------ ------
Total liabilities and shareholders' equity $7,007 $5,161
====== ======
See accompanying notes to condensed consolidated financial statements.
3
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
Six Months Ended
----------------
April 1, 2000 March 27, 1999
------------- --------------
Cash and cash equivalents, beginning of the period $ 1,326 $ 1,481
------- -------
Operating:
Net income 416 287
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization 41 47
Provision for deferred income taxes 105 6
Gains on sales of ARM shares (234) (87)
Loss on sale of property, plant, and equipment 1 --
Changes in operating assets and liabilities:
Accounts receivable (259) 151
Inventories 10 60
Other current assets (7) (11)
Other assets (7) 11
Accounts payable 299 72
Other current liabilities 69 (44)
------- -------
Cash generated by operating activities 434 492
------- -------
Investing:
Purchase of short-term investments (1,843) (2,254)
Proceeds from maturities of short-term investments 1,796 1,509
Proceeds from sale of ARM shares 237 96
Purchase of long-term investments (216) --
Net proceeds from property, plant, and equipment retirements 10 20
Purchase of property, plant, and equipment (65) (24)
Other (23) 2
------- -------
Cash used for investing activities (104) (651)
------- -------
Financing:
Proceeds from issuance of common stock 47 36
Cash used for repurchase of common stock (41) --
------- -------
Cash generated by financing activities 6 36
------- -------
Total cash generated (used) 336 (123)
------- -------
Cash and cash equivalents, end of the period $ 1,662 $ 1,358
======= =======
Supplemental cash flow disclosures:
Cash paid for interest $ 10 $ 30
Cash paid (received) for income taxes, net $ 37 $ (1)
See accompanying notes to condensed consolidated financial statements.
4
APPLE COMPUTER, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
Interim information is unaudited; however, in the opinion of the Company's
management, all adjustments of a normal recurring nature necessary for a fair
statement of interim periods presented have been included. 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 year ended September 25,
1999, included in its Annual Report on Form 10-K for the year ended September
25, 1999 (the 1999 Form 10-K). All information is based on the Company's fiscal
calendar.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed by
dividing income available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period increased to include the
number of additional common shares that would have been outstanding if 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.
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
---------------------------- ---------------------------
4/1/00 3/27/99 4/1/00 3/27/99
Numerator (in millions):
Numerator for basic earnings per share -
Net income $ 233 $ 135 $ 416 $ 287
Interest expense on convertible debt -- 11 -- 22
-------- -------- -------- --------
Numerator for diluted earnings per share
- Adjusted net income $ 233 $ 146 $ 416 $ 309
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share
-- weighted average-shares outstanding 162,172 136,371 161,597 135,820
Effect of dilutive securities:
Convertible preferred stock 9,091 9,091 9,091 9,091
Convertible debt -- 22,642 -- 22,642
Dilutive options 10,730 5,100 8,938 5,066
-------- -------- -------- --------
Dilutive potential common shares 19,821 36,833 18,029 36,799
-------- -------- -------- --------
Denominator for diluted earnings per share
- -- adjusted weighted-average shares and
assumed conversions 181,993 173,204 179,626 172,619
======== ======== ======== ========
Basic earnings per share $ 1.44 $ 0.99 $ 2.57 $ 2.11
======== ======== ======== ========
Diluted earnings per share $ 1.28 $ 0.84 $ 2.32 $ 1.79
======== ======== ======== ========
5
Options to purchase approximately 209,750 and 253,000 shares of common stock
were outstanding as of April 1, 2000, and March 27, 1999, respectively, that
were not included in the computation of diluted earnings per share for these
quarters because the options' exercise price was greater than the average market
price of the Company's common stock during those periods and, therefore, the
effect would be antidilutive.
During the first two quarters of 1999, the Company had outstanding $661 million
of unsecured convertible subordinated debentures (the Debentures) which were
convertible by their holders into approximately 22.6 million shares of common
stock at a conversion price of $29.205 per share. The weighted average common
shares represented by the Debentures upon conversion were included in the
computation of diluted earnings per share for the three and six month periods
ended March 27, 1999, using the if-converted method. On April 14, 1999, the
Company called for redemption the Debentures. As a result, debenture holders
converted virtually all of the outstanding debentures to 22.6 million shares of
the Company's common stock in 1999. For additional disclosures regarding the
Debentures, see the 1999 Form 10-K.
NOTE 3 - CONSOLIDATED FINANCIAL STATEMENT DETAILS (IN MILLIONS)
INVENTORIES
4/1/00 9/25/99
------ -------
Purchased parts $ 2 $ 4
Work in process -- 3
Finished goods 8 13
----- -----
Total inventories $ 10 $ 20
===== =====
PROPERTY, PLANT, AND EQUIPMENT
4/1/00 9/25/99
------ -------
Land and buildings $ 321 $ 323
Machinery and equipment 208 220
Office furniture and equipment 61 61
Leasehold improvements 133 125
Accumulated depreciation and amortization (409) (411)
----- -----
Net property, plant, and equipment $ 314 $ 318
===== =====
ACCRUED EXPENSES
4/1/00 9/25/99
------ -------
Accrued compensation and employee benefits $ 178 $ 84
Accrued marketing and distribution 146 170
Accrued warranty and related costs 106 105
Other current liabilities 312 378
----- -----
Total accrued expenses $ 742 $ 737
===== =====
6
INTEREST AND OTHER INCOME (EXPENSE)
SIX MONTHS ENDED
----------------
4/1/00 3/27/99
------ -------
Interest income $ 96 $ 65
Interest expense (10) (31)
Other income (expense), net 3 (5)
----- -----
Interest and other income (expense), net $ 89 $ 29
===== =====
NOTE 4 - NON-CURRENT DEBT AND EQUITY INVESTMENTS
The Company holds significant investments in ARM Holdings plc (ARM), Samsung
Electronics Co., Ltd (Samsung), Akamai Technologies, Inc. (Akamai) and EarthLink
Network, Inc. (EarthLink). These investments are reflected in the consolidated
balance sheets as non-current debt and equity investments and have been
categorized as available-for-sale requiring that they be carried at fair value
with unrealized gains and losses, net of taxes, reported in equity as a
component of accumulated other comprehensive income. The combined fair value of
these investments was $1.544 billion and $339 million as of April 1, 2000, and
September 25, 1999, respectively. The combined fair value of these investments
has declined to approximately $1.215 billion as of May 5, 2000. The Company
believes it is likely there will continue to be significant fluctuations in the
fair value of these investments in the future.
ARM is a publicly held company in the United Kingdom involved in the design and
licensing of high performance microprocessors and related technology. As of
September 25, 1999, the Company held approximately 16 million shares of ARM
stock with a fair value of $226 million. During the first quarter of 2000, the
Company sold approximately 5.2 million shares of ARM stock for net proceeds of
approximately $136 million and a gain before taxes of $134 million. During the
second quarter of 2000, the Company sold approximately 1.5 million shares of ARM
stock for net proceeds of $101 million and a gain before taxes of $100 million.
During the first quarter of 1999, the Company sold approximately 11.6 million
shares of ARM stock for net proceeds of approximately $37 million and a gain
before taxes of $32 million. During the second quarter of 1999, the Company sold
8 million shares of ARM stock for net proceeds of approximately $59 million and
a gain before taxes of approximately $55 million. As of April 1, 2000, the
Company holds 9.4 million shares of ARM stock with a fair value of $566 million.
Share data for ARM presented in this Form 10-Q has not been adjusted to reflect
ARM's five-for-one split in April of 2000.
In January 2000, the Company invested $200 million in EarthLink, an Internet
service provider (ISP). The investment is in EarthLink's Series C Convertible
Preferred Stock, which is convertible by the Company after January 4, 2001, into
approximately 7.1 million shares of EarthLink common stock. Apple also received
a seat on EarthLink's Board of Directors. Concurrent with this investment,
Earthlink and the Company entered into a multi-year agreement to deliver ISP
service to Macintosh users in the United States. Under the terms of the
agreement, the Company will profit from each new Mac customer that subscribes to
EarthLink's ISP service, and EarthLink will become the default ISP in Apple's
Internet Setup Software included with all Macintosh computers sold in the United
States. The fair value of the Company's investment in EarthLink is approximately
$138 million as of April 1, 2000.
During the fourth quarter of 1999, the Company invested $100 million in Samsung
to assist in the further expansion of Samsung's TFT-LCD flat-panel display
production capacity. The investment, in the form of three year unsecured bonds,
is convertible into approximately 550,000 shares of Samsung common stock
beginning in June 2000. The bonds carry an annual coupon rate of 2% and pay a
total yield to maturity of 5% if redeemed at their maturity. The fair value of
the Company's investment in Samsung is approximately $179 million as of Apri1 1,
2000.
7
In June 1999, the Company invested $12.5 million in Akamai, a global Internet
content delivery service. The investment was in the form of convertible
preferred stock that converted into 4.1 million shares of Akamai common stock
(adjusted for subsequent stock splits) at the time of Akamai's initial public
offering in October 1999. The Company is restricted from selling more than 25%
of its shares within one year after the date of the closing of the public
offering of Akamai's stock. Beginning in the first quarter of 2000, the Company
categorized its shares in Akamai as available-for-sale. As of April 1, 2000, the
Company's investment in Akamai has a fair value of $661 million.
NOTE 5 - SHAREHOLDERS' EQUITY
During the second quarter of 2000, the Company's Board of Directors granted the
Company's Chief Executive Officer options under the Company's 1998 Executive
Officer Stock Plan to purchase 10 million shares of common stock at an exercise
price of $87.1875 per share, the then fair value of the underlying common stock.
A summary of the Company's stock option activity and related information for the
six-month period ended April 1, 2000, follows (option amounts are presented in
thousands):
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
Options outstanding at 9/25/99 18,404 $ 26.39
Granted 19,536 $ 90.72
Exercised (2,123) $ 17.96
Forfeited (1,227) $ 46.40
------
Options outstanding at 4/1/00 34,590 $ 62.53
======
Options exercisable at 4/1/00 7,362 $ 65.46
In July 1999, the Company's Board of Directors authorized a plan for the Company
to repurchase up to $500 million of its common stock. This repurchase plan does
not obligate the Company to acquire any specific number of shares or acquire
shares over any specified period of time. During the second quarter of 2000, no
shares of common stock were repurchased. Since inception of the stock repurchase
plan, the Company has repurchased a total of 1.75 million shares of its common
stock at a total cost of $116 million.
NOTE 6 - COMPREHENSIVE INCOME
Comprehensive income is comprised of 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.
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, net of taxes, 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):
8
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
4/1/00 3/27/99 4/1/00 3/27/99
-------------------------- ------------------------
Net income $ 233 $ 135 $ 416 $ 287
Other comprehensive income (loss):
Change in accumulated translation
adjustment (5) (10) (6) 2
Unrealized gains (losses) on
investments, net of taxes (428) 142 805 255
Reclassification adjustment for gains
included in net income (73) (50) (174) (50)
------- ------- ------- -------
Total comprehensive income (loss) $ (273) $ 217 $ 1,041 $ 494
======= ======= ======= =======
NOTE 7 - SPECIAL CHARGES
RESTRUCTURING ACTIONS
During the first quarter of 2000, the Company initiated restructuring actions
resulting in recognition of an $8 million restructuring charge. This charge was
comprised of $3 million for the write-off of various operating assets and $5
million for severance payments to approximately 95 employees associated with
consolidation of various domestic and international sales and marketing
functions. Of the $5 million accrued for severance, $1.7 million had been spent
by April 1, 2000, and the remainder is expected to be spent over the following
two quarters. Of the $3 million accrued for the write-off of various assets,
substantially all was utilized by April 1, 2000.
During the fourth quarter of 1999, the Company initiated restructuring actions
resulting in a charge to operations of $21 million comprised of $11 million for
contract cancellation charges associated with the closure of the Company's
outsourced data center, $9.2 million of which had been spent by the end of the
second quarter of 2000, and $10 million for contract cancellation charges
related to supply and development agreements previously discontinued, all of
which had been spent by the end of the first quarter of fiscal 2000.
EXECUTIVE BONUS
In December 1999, the Company's Board of Directors approved a special executive
bonus for past services for the Company's Chief Executive Officer in the form of
an aircraft with a total cost to the company of approximately $90 million, the
majority of which is not tax deductible. Approximately half of the total charge
is the cost of the aircraft. The other half represents all other costs and taxes
associated with the purchase.
NOTE 8 - SEGMENT INFORMATION AND GEOGRAPHIC DATA
The Company manages its business primarily on a geographic basis. The Company's
reportable segments are comprised of the Americas, Europe, and Japan. The
Americas segment includes both North and South America. The European segment
includes European countries as well as the Middle East and Africa. Other
operating segments include Asia-Pacific, which includes Australia and Asia
except for Japan, and the Company's subsidiary, Filemaker, Inc. Each reportable
operating segment provides similar products and services, and the accounting
policies of the various segments are the same as those described in the 1999
Form 10-K.
9
The Company evaluates the performance of its operating segments based on net
sales and operating income. Operating income for each segment includes revenue,
cost of sales, and operating expenses directly attributable to the segment. Net
sales are based on the location of the customers. Operating income for each
segment excludes other income and expense and certain expenses that are managed
outside the reportable segment. Costs excluded from segment operating income
include various corporate expenses, income taxes, and nonrecurring charges for
purchased in-process research and development, restructuring, and acquisition
related costs. Corporate expenses include research and development,
manufacturing expenses not included in segment cost of sales, corporate
marketing expenses, and other separately managed general and administrative
expenses. The Company does not include intercompany transfers between segments
for management reporting purposes. Summary information by segment follows (in
millions):
THREE MONTHS ENDED SIX MONTHS ENDED
4/1/00 3/27/99 4/1/00 3/27/99
-----------------------------------------------
Americas:
Net sales 989 787 2,178 1,747
Operating income 137 101 303 222
Europe:
Net sales 469 368 1,095 820
Operating income 63 52 177 115
Japan:
Net sales 349 262 761 454
Operating income 97 70 211 97
Other segments:
Net sales 138 113 254 219
Operating income 39 18 64 38
A reconciliation of the Company's segment operating income to the condensed
consolidated financial statements follows (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
4/1/00 3/27/99 4/1/00 3/27/99
----------------------------------------
Segment operating income 336 241 755 472
Corporate expenses, net 166 153 387 257
Restructuring costs -- 9 8 9
Executive bonus -- -- 90 --
---- ---- ---- ----
Total operating income $170 $ 79 $270 $206
==== ==== ==== ====
10
Information regarding net sales by product is as follows (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
4/1/00 3/27/99 4/1/00 3/27/99
----------------------------------------------------
Power Macintosh $ 686 $ 730 $1,380 $1,321
PowerBook 252 146 464 403
iMac 540 358 1,335 932
iBook 174 -- 525 --
Software, service, and other net sales 293 296 584 584
------ ------ ------ ------
Total net sales $1,945 $1,530 $4,288 $3,240
====== ====== ====== ======
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
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. The adoption of SOP 98-1 did not have a material
impact on the Company's consolidated results of operations or financial position
during the quarter and six-months ended April 1, 2000.
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, hedging activities, and exposure definition. SFAS No. 133 requires
an entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings, or recognized in
other comprehensive income until the hedged item is recognized in earnings. In
June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities- Deferral of the Effective Date of FASB Statement No. 133" was
issued. The statement defers the effective date of SFAS No. 133 until the first
quarter of fiscal 2001. 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 financial position or overall trends
in results of operations and does not believe adoption will result in
significant changes to its financial risk management practices. However, the
impact of adoption of SFAS No. 133 on the Company's results of operations is
dependent upon the fair values of the Company's derivatives and related
financial instruments at the date of adoption and may result in more pronounced
quarterly fluctuations in other income and expense.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The
objective of this SAB is to provide further guidance on revenue recognition
issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry. The Company is required to follow the
guidance in the SAB no later than the first quarter of its fiscal year 2001.
Adoption of this guidance is not expected to have a material impact on the
Company's financial position or results of operations. The SEC has recently
indicated it intends to issue further guidance with respect to adoption of
specific issues addressed by SAB No. 101. Until such time as this additional
guidance is issued, the Company is unable to assess the impact, if any, it may
have on its financial position or results of operations.
11
NOTE 10 - CONTINGENCIES
The Company is subject to various legal proceedings and claims that are
discussed in detail in the 1999 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 most of the issues for these years have been
resolved, certain issues still remain in dispute and are being contested by the
Company. Management believes adequate provision has been made for any
adjustments that may result from tax examinations.
NOTE 11 - RECLASSIFICATIONS
Certain amounts in the Condensed Consolidated Balance Sheet as of September 25,
1999, have been reclassified to conform to the 2000 presentation.
NOTE 12 - SUBSEQUENT EVENTS
On April 19, 2000, the Company's Board of Directors authorized a two-for-one
stock split, to be effected in the form of a stock dividend, subject to
shareholder approval of an amendment to the Company's Restated Articles of
Incorporation to increase the number of shares of Common Stock to 900,000,000.
Such approval was received at the Company's Annual Meeting of Shareholders held
on April 20, 2000. Shareholders of record on May 19, 2000 will be entitled to
one additional share of common stock for each share of the Company's common
stock held on that date. Share and per share data presented in this Form 10-Q
have not been adjusted to give effect to this stock split.
12
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 1999 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.
RESULTS OF OPERATIONS
Tabular information (dollars in millions, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
4/01/00 3/27/99 CHANGE 4/01/00 3/27/99 CHANGE
------------------------------- --------------------------------
Macintosh CPU unit sales
(in thousands) 1,043 827 26% 2,420 1,771 37%
Avg. revenue per Macintosh shipped $1,820 $1,813 0% $1,737 $1,793 (3%)
Net sales $1,945 $1,530 27% $4,288 $3,240 32%
Gross margin $ 549 $ 403 36% $1,156 $ 885 31%
Percentage of net sales 28.2% 26.3% 27.0% 27.3%
Operating expense $ 379 $ 315 20% $ 788 $ 670 18%
Percentage of net sales 19.5% 20.6% 18.4% 20.7%
Special charges $ -- $ 9 $ 98 $ 9
Gains from sales of investment $ 100 $ 55 $ 234 $ 87
Interest and other income, net $ 49 $ 19 158% $ 89 $ 29 207%
Provision for income taxes $ 86 $ 18 378% $ 177 $ 35 406%
Effective tax rate 27.0% 11.8% 29.8% 11.0%
Net income $ 233 $ 135 73% $ 416 $ 287 45%
Diluted earnings per share $ 1.28 $ 0.84 52% $ 2.32 $ 1.79 30%
NET SALES
Net sales for geographic operating segments and Macintosh unit sales by
geographic segment and by product follow (net sales in millions and Macintosh
unit sales in thousands):
13
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
4/1/00 3/27/99 CHANGE 4/1/00 3/27/99 CHANGE
------ ------- ------ ------ ------- ------
Americas net sales $ 989 $ 787 26% $2,178 $1,747 25%
Europe net sales $ 469 $ 368 27% $1,095 $ 820 34%
Japan net sales $ 349 $ 262 33% $ 761 $ 454 68%
Asia Pacific net sales $ 92 $ 82 12% $ 169 $ 157 8%
Americas Macintosh unit sales 541 421 29% 1,249 946 32%
Europe Macintosh unit sales 275 203 35% 664 455 46%
Japan Macintosh unit sales 174 156 12% 409 275 49%
Asia Pacific Macintosh unit sales 53 47 13% 98 95 3%
------ ------ ------ ------ ------
Total Macintosh unit sales 1,043 827 26% 2,420 1,771 37%
====== ====== ====== ====== ======
Power Macintosh unit sales 354 401 (12%) 709 727 (2%)
PowerBook unit sales 100 75 33% 184 174 6%
iMac unit sales 474 351 35% 1,176 870 35%
iBook unit sales 115 -- 100% 351 -- 100%
------ ------ ------ ------ ------
Total Macintosh unit sales 1,043 827 26% 2,420 1,771 37%
====== ====== ====== ====== ======
Net sales increased $415 million or 27% to $1.945 billion in the second quarter
of 2000 compared to the same quarter in 1999. The primary source of this growth
was an overall 26% increase in Macintosh unit sales, which reflects strong unit
growth in the Company's three largest geographic operating segments.
Approximately half of the year-over-year increase in quarterly Macintosh unit
shipments was attributable to sales of iBook, the Company's new education and
consumer oriented portable computer, which was not shipped until the fourth
quarter of 1999. The average revenue per Macintosh system, a function of total
net sales generated by hardware shipments and total Macintosh CPU unit sales,
for the second quarter of 2000 of $1,820 was comparable to the $1,813
experienced in the same quarter in 1999.
For the first six months of 2000, net sales increased $1.048 billion or 32% over
the same period in 1999. A 37% increase in year-to-date Macintosh unit sales,
also reflective of strong growth in the Company's three largest geographic
operating segments, was the principal cause of the increase in net sales during
the first six months of 2000.
Net sales declined sequentially during the second quarter of 2000 compared to
the first quarter of 2000 by $398 million or 17%. Similarly, Macintosh unit
sales decreased 24% during the second quarter of 2000 compared to the first
quarter. The sequential decline in both net sales and unit sales during the
second quarter is consistent with the historical pattern experienced by the
Company due to lower demand in the Company's consumer markets following the
holiday season. The sequential decrease in unit sales was somewhat offset by a
sequential increase in the average revenue per Macintosh system, which rose from
$1,673 during the first quarter of 2000 to $1,820 during the second quarter. The
increase during the current quarter in the average revenue per Macintosh system
is primarily attributable to the shift in the Company's unit mix towards
higher-priced professional oriented products such that Power Macintosh and
PowerBook units comprised 44% of total Macintosh units sales during the second
quarter of 2000 versus 32% during the first quarter.
SEGMENT OPERATING PERFORMANCE
The Company manages its business primarily on a geographic basis. The Company's
reportable geographic segments include the Americas, Europe, and Japan. The
Americas segment includes both North and South America. The European segment
includes European countries as well as the Middle East and Africa. The Japan
segment includes only Japan. Each geographic operating segment provides similar
hardware and software products and similar services. Further information
regarding the Company's operating segments may be found in this Form 10-Q in the
Notes to Condensed Consolidated Financial Statements at Note 8, "Segment
Information and Geographic Data."
14
AMERICAS
Net sales in the Americas segment during the second quarter of 2000 increased
$202 million or 26% compared to the same period in 1999. Macintosh unit sales in
the Americas increased 29% on a year-over-year basis, reflecting strong growth
in iMac unit sales and unit sales of the recently introduced iBook. During the
second quarters of both 2000 and 1999, the Americas segment represented
approximately 51% of the Company's total net sales. The results experienced by
the Americas segment in the second quarter of 2000 versus the same quarter in
1999 reflect the Company's overall results characterized by strong growth in
unit sales and net sales of the Company's consumer and education oriented
products and moderate growth in net sales of the Company's professional oriented
products.
EUROPE
Net sales in the Europe segment increased $101 million or 27% during the second
quarter of 2000 as compared to the same quarter in 1999, while the segment's
Macintosh unit sales increased 35%. Like the Americas segment, Europe's results
in the second quarter of 2000 as compared to 1999 are indicative of strong
growth in Macintosh unit sales, particularly unit sales of iMac and iBook.
JAPAN
Net sales in Japan rose 33% or $87 million during the second quarter of 2000 as
compared to the same quarter in 1999 while Macintosh unit sales increased 12%.
The increase in net sales was primarily the result of increased unit sales of
professional oriented products and iBook, partially offset by a moderate decline
in unit sales of iMac.
GROSS MARGIN
Gross margin for the second quarter of 2000 was 28.2% compared to 26.3% for the
same quarter in 1999 and 25.9% for the first quarter of 2000. Gross margin
during the second quarter of 2000 was favorably impacted by three principal
factors. First, component costs were lower during the second quarter of 2000
compared to previous quarters. In particular, costs for DRAM fell close to
levels not experienced since the fourth quarter of 1999. Second, freight costs
declined sequentially from the first quarter of 2000 because substantially
higher air freight costs were incurred during the first quarter of 2000 compared
to the second quarter in order to get products introduced during the first
quarter into the sales channel in time for the holiday selling season. Third,
the Company's overall product mix shifted towards higher-priced, higher margin
professional products. Net sales of Power Macintosh and PowerBook products
accounted for 48.2% of total net sales during the second quarter of 2000 and
39.2% of net sales during the first quarter of 2000.
There can be no assurance targeted gross margin levels will be achieved or
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 and availability of raw material and outside
manufacturing services, fluctuations in freight costs incurred to deliver the
Company's products to market, 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 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 and to stimulate demand
for certain of its products. 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.
OPERATING EXPENSES
Selling, general and administrative expenses, excluding special charges,
increased $48 million or 20% during second quarter of 2000 as compared to the
same period in 1999 and decreased sequentially $32 million or 10% from the first
quarter of 2000. The sequential decline from the first quarter of 2000 reflects
15
the typical seasonal decline in advertising and promotional activity associated
with the 1999 holiday season. Selling, general and administrative expenses for
the first six months of 2000 increased $88 million or 17% as compared to the
same period in 1999. However, as a result of growing net sales, selling, general
and administrative expenses fell to 14% of net sales during the first six months
of 2000 compared to 16% during the same period in 1999. The absolute
year-over-year increases in selling, general and administrative expenses for
both the second quarter and the first six months of 2000 is the result of higher
variable selling and marketing expenses resulting from the year-over-year
increase in net sales and due to higher discretionary spending on marketing and
advertising in 2000 as compared to 1999.
Expenditures for research and development increased 21% between the second
quarter of fiscal 2000 and the same quarter in 1999 and increased 20% during the
first six months of 2000 compared to the same period in 1999. These increases
resulted primarily from increased spending in 2000 to support product
development activities and increased research and development headcount.
SPECIAL CHARGES
During the first quarter of 2000, the Company initiated restructuring actions
resulting in recognition of an $8 million restructuring charge. This charge was
comprised of $3 million for the write-off of various operating assets and $5
million for severance payments to approximately 95 employees associated with
consolidation of various domestic and international sales and marketing
functions. Of the $5 million accrued for severance, $1.7 million had been spent
by April 1, 2000, and the remainder is expected to be spent over the following
two quarters. Of the $3 million accrued for the write-off of various assets,
substantially all was utilized by April 1, 2000.
During the first quarter of 2000, the Company's Board of Directors approved a
special executive bonus for the Company's Chief Executive Officer for past
services in the form of an aircraft with a total cost to the company of
approximately $90 million, the majority of which is not tax deductible.
Approximately half of the total charge is the cost of the aircraft. The other
half represents all other costs and taxes associated with the purchase.
TOTAL INTEREST AND OTHER INCOME, NET
Interest and other income and expense (net) increased $30 million or 158% to $49
million during the second quarter of 2000 compared to the same quarter in 1999
and increased $60 million or 207% for the first six months of 2000 over the same
period in 1999. These increases are attributable to two factors. First, the
Company's cash, cash equivalents, and short-term investments were higher by
approximately $687 million or 24% at the end of the second quarter of 2000
versus the same balances at the end the second quarter of 1999. This resulted in
a $16 million or 48% increase in interest income between the second quarter of
2000 and the second quarter of 1999 and an increase of $31 million or 48% for
the comparable six month periods. Second, as the result of conversion to common
stock of the Company's convertible subordinated debentures during the third
quarter of 1999, interest expense declined $10 million or 67% during the second
quarter of 2000 compared to the same quarter in 1999 and decreased $21 million
or 68% for the comparable six month periods.
During the second quarter of 2000, the Company sold approximately 1.5 million
shares of ARM stock for net proceeds of approximately $101 million and a gain
before taxes of $100 million. For the six-month period ended on April 1, 2000,
the Company sold approximately 6.7 million shares of ARM stock for net proceeds
of $237 million and a gain before taxes of $234 million. During the second
quarter of 1999, the Company sold approximately 8.0 million shares of ARM stock
for net proceeds of approximately $59 million and a gain before taxes of $55
million. For the six-month period ended on March 27, 1999, the Company sold
approximately 19.6 million shares of ARM stock for net proceeds of $96 million
and a gain before taxes of $87 million.
PROVISION FOR INCOME TAXES
As of April 1, 2000, the Company had deferred tax assets arising from deductible
temporary differences, tax losses, and tax credits of $580 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 April 1, 2000,
a valuation allowance of $45 million was recorded against the deferred tax asset
for the benefits of tax losses that may not be realized. The valuation allowance
16
primarily relates to the operating loss carryforwards acquired from NeXT and to
tax benefits in certain foreign jurisdictions. 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 first quarter of 2000, was
approximately 33% and includes the effect of the special executive bonus accrued
during that quarter. The effective tax rate during the first quarter of 2000
without this charge was approximately 25%. The Company's effective tax rate for
the three months ended April 1, 2000, was approximately 27% which brings the
effective tax rate without the special executive bonus for the six months ended
April 1, 2000, to 26%. This effective rate 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 CURRENTLY BELIEVES THAT ITS EFFECTIVE TAX RATE FOR THE REMAINDER OF
2000 WILL BE APPROXIMATELY 26%. THE COMPANY ANTICIPATES THAT ITS EFFECTIVE TAX
RATE WILL INCREASE IN 2001. 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." ADDITIONALLY, THE ACTUAL FUTURE TAX RATE WILL
BE SIGNIFICANTLY IMPACTED BY THE AMOUNT OF AND JURISDICTION IN WHICH THE
COMPANY'S FOREIGN PROFITS ARE EARNED.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected financial information and statistics for
each of the quarters ending on the dates indicated (dollars in millions):
4/1/00 1/1/00 9/25/99
------ ------ -------
Cash, cash equivalents, and short-term investments $3,609 $3,660 $3,226
Accounts receivable, net $ 940 $ 892 $ 681
Inventory $ 10 $ 15 $ 20
Working capital $3,059 $2,944 $2,736
Non-current debt and equity investments $1,544 $2,140 $ 339
Long-term debt $ 300 $ 300 $ 300
Days sales in accounts receivable (a) 44 37 46
Days of supply in inventory (b) 1 1 2
Days payables outstanding (c) 73 66 77
Operating cash flow (quarterly) $ 61 $ 373 $ 218
(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 April 1, 2000, the Company had approximately $3.6 billion in cash, cash
equivalents, and short-term investments, an increase of $383 million over the
same balances at the end of 1999. For the six months ended April 1, 2000, the
Company's primary source of cash was $434 million in cash flows from operating
activities. Cash generated by operations was primarily from net income of $416
million and a combined increase in accounts payable and other current
liabilities of $368 million partially offset by an increase in accounts
receivable of $259 million. In addition to operating cash flow, other
significant cash flow items during the six months ended April 1, 2000 included
net purchases of short-term investments of $47 million, $216 million utilized
for the purchase of long-term investments, $65 million for the purchase of
property, plant and equipment, and cash proceeds from the sale of ARM stock of
$237 million.
In July 1999, the Company's Board of Directors authorized a plan for the Company
to repurchase up to $500 million of its common stock. This repurchase plan does
not obligate the Company to acquire any specific number of shares or acquire
shares over any specified period of time. During the second quarter of 2000, no
shares of common stock were repurchased. Since inception of the repurchase plan,
the Company has repurchased 1.75 million shares at a cost of $116 million.
On November 18, 1999, the Company entered into a $100 million revolving credit
agreement with Bank of America. Loans under the agreement pay interest at LIBOR
17
plus 1%, and the Company is required to pay a commitment fee of 0.2% of the
unused portion of the credit facility. No advances have been made against this
credit facility. This revolving credit agreement is intended to provide the
Company with an additional source of short-term liquidity.
The Company believes its balances of cash, cash equivalents, short-term
investments, and available credit facilities will be sufficient to meet its
cash requirements over the next twelve months, including any cash that may be
utilized by its stock repurchase plan. However, given the Company's current
non-investment grade debt ratings, if the Company should need to obtain
short-term borrowings, there can no assurance 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.
OTHER INVESTMENTS
The Company holds significant investments in ARM, Samsung, Akamai and
Earthlink. These investments are reflected in the consolidated balances sheets
as non-current debt and equity investments and have been categorized as
available-for-sale requiring that they be carried at fair value with
unrealized gains and losses, net of taxes, reported in equity as a component
of accumulated other comprehensive income. The combined fair value of these
investments was $1.544 billion and $339 million as of April 1, 2000, and
September 25, 1999, respectively. The combined fair value of these investments
has declined to approximately $1.215 billion as of May 5, 2000. The Company
believes it is likely there will continue to be significant fluctuations in
the fair value of these investments in the future. Additional information
regarding these investment may be found in this Form 10-Q in the Notes to
Condensed Consolidated Financial Statements at Note 4, "Non-Current Debt and
Equity Investments."
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 is 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
reaction by the Company to such competitive pressures, including pricing
actions by the Company; risks associated with international operations,
including economic and labor conditions, regional economic problems, 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 previously undetected Y2K compliance issues;
managing the continuing impact of the European Union's transition to the Euro
as its common legal currency; continuing fluctuations in the fair value of the
Company's non-current debt and equity investments, and the Company's ability
to retain the operational and cost benefits derived from its recently
completed restructuring programs.
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 1999 Form 10-K.
18
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 1999 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. Excluding those investments classified as non-current debt and
equity investments, 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 April 1, 2000, substantially all of the Company's
investments have maturities less than 12 months.
During the last two years, the Company has entered into interest rate derivative
transactions, including interest rate swaps 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 net 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 marked to market through earnings.
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 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
operating results and financial position.
19
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 1999 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 1999 Form 10-K.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims which are
discussed in the 1999 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 April 20, 2000. 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
directors:
For Authority Withheld
William V. Campbell 139,530,349 1,526,408
Gareth C.C. Chang 139,671,948 1,384,809
Millard S. Drexler 139,281,278 1,775,479
Lawrence J. Ellison 130,301,339 10,755,418
Steven P. Jobs 139,687,954 1,368,803
Jerome B. York 139,682,237 1,374,520
PROPOSAL II
The proposal to amend the Company's Restated Articles of Incorporation to
increase the number of authorized shares of Common Stock from 320,000,000 to
900,000,000 shares was approved. As a result, the Company's Restated Articles of
Incorporation were amended to increase the number of authorized shares to
900,000,000.
For Against Abstained Broker Non-Vote
120,834,875 19,682,413 537,666 1,803
PROPOSAL III
The proposal to amend the Company's 1998 Executive Officer Stock Plan (the 1998
Plan) to increase the number of shares reserved for issuance thereunder by
2,000,000 shares, bringing the total number of shares of Common Stock reserved
for issuance under the 1998 Plan to 19,000,000, was approved. As a result, the
1998 Plan was amended to reserve an additional 2,000,000 shares of Common Stock
for issuance thereunder.
For Against Abstained Broker Non-Vote
87,975,961 52,315,384 761,685 3,727
20
PROPOSAL IV
Ratification of appointment of KPMG LLP as the Company's independent auditors
for fiscal year 2000.
For Against Abstained Broker Non-Vote
140,342,114 168,893 545,750 -0-
The proposals above are described in detail in the Registrant's definitive proxy
statement dated March 6, 2000, for the Annual Meeting of Shareholders held on
April 20, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Report:
Exhibit
Number Description
- ------ -----------
3.2 Amendment to Restated Articles of Incorporation, filed with
the Secretary of State of the State of California on May 4,
2000.
10.A.49 1997 Employee Stock Option Plan, as amended through May 3, 2000.
10.A.51 1998 Executive Officer Stock Plan, as amended through May 3, 2000.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K dated January 19, 2000, to report
under Item 5 (Other Events) that the Company's Board of Directors had granted
the Company's CEO, Steven P. Jobs, stock options to purchase ten million shares
of the Apple common stock and to give Mr. Jobs a Gulfstream V airplane in
recognition of his service to the Company during the preceding two and a half
years.
21
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, 2000
22
INDEX TO EXHIBITS
Exhibit
Index
Number Description
- ------ -----------
3.2 Amendment to Restated Articles of Incorporation, filed with the
Secretary of State of the State of California on May 4, 2000.
10.A.49 1997 Employee Stock Option Plan, as amended through May 3, 2000.
10.A.51 1998 Executive Officer Stock Plan, as amended through May 3, 2000.
27 Financial Data Schedule.