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 AprilJuly 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)
-----------
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---- ----
324,969,055 shares of Common Stock Issued and Outstanding as of May 5,July 21, 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 EndedTHREE MONTHS ENDED NINE MONTHS ENDED
------------------ ----------------
April-----------------
JULY 1, 2000 March 27,JUNE 26, 1999 AprilJULY 1, 2000 March 27,JUNE 26, 1999
------------ ------------- --------------------------- ------------- ---------------
Net sales $ 1,945 $ 1,530 $ 4,288 $ 3,240sales............................................ $1,825 $1,558 $6,113 $4,798
Cost of sales 1,396 1,127 3,132 2,355
-------- -------- -------- --------sales........................................ 1,282 1,131 4,414 3,486
------ ------ ------ ------
Gross margin 549 403 1,156 885
-------- -------- -------- --------margin...................................... 543 427 1,699 1,312
------ ------ ------ ------
Operating expenses:
Research and development 92 76 182 152development.......................... 97 80 279 232
Selling, general, and administrative 287 239 606 518administrative.............. 278 243 884 761
Special charges:
Restructuring costscosts........................... 0 90 8 9
Executive bonusbonus............................... 0 0 90 0
-------- -------- -------- -------------- ------ ------ ------
Total operating expenses 379 324 886 679
-------- -------- -------- --------375 323 1,261 1,002
------ ------ ------ ------
Operating income 170 79 270 206.................................... 168 104 438 310
Gains from sales of investment 100 55 234 8750 101 284 188
Interest and other income (expense), net 49 19 89 29
-------- -------- -------- --------52 24 141 53
------ ------ ------ ------
Total interest and other income (expense), net 149 74 323 116
-------- -------- -------- --------102 125 425 241
------ ------ ------ ------
Income before provision for income taxes 319 153 593 322taxes............. 270 229 863 551
Provision for income taxes 86 18 177 35
-------- -------- -------- --------taxes........................... 70 26 247 61
------ ------ ------ ------
Net incomeincome........................................... $ 233200 $ 135203 $ 416616 $ 287
======== ======== ======== ========490
====== ====== ====== ======
Earnings per common share:
Basic $ 1.44 $ 0.99 $ 2.57 $ 2.11
Diluted $ 1.28 $ 0.84 $ 2.32 $ 1.79Basic.......................................... $0.62 $0.70 $1.90 $1.77
Diluted........................................ $0.55 $0.60 $1.71 $1.49
Shares used in computing earnings per share (in thousands):
Basic 162,172 136,371 161,597 135,820
Diluted 181,993 173,204 179,626 172,619Basic.......................................... 325,040 288,107 323,770 277,141
Diluted........................................ 361,817 349,300 359,928 346,660
See accompanying notes to condensed consolidated financial statements.
2
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share amounts)
ASSETS
AprilJULY 1, 2000 September 25, 1999
------------- ------------------SEPTEMBER 25,1999
------------ -----------------
Current assets:
Cash and cash equivalents $1,662equivalents............................................... $1,344 $1,326
Short-term investments 1,947investments.................................................. 2,482 1,900
Accounts receivable, less allowances of $64$63 and $68, respectively 940respectively....... 967 681
Inventories 10Inventories............................................................. 5 20
Deferred tax assets 131assets..................................................... 162 143
Other current assets 222assets.................................................... 197 215
------ ------
Total current assets 4,912assets............................................... 5,157 4,285
Property, plant and equipment, netnet......................................... 314 318
Non-current debt and equity investments 1,544investments.................................... 1,236 339
Other assets 237assets............................................................... 225 219
------ ------
Total assets $7,007assets....................................................... $6,932 $5,161
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,111payable........................................................ $1,040 $ 812
Accrued expenses 742expenses........................................................ 833 737
------ ------
Total current liabilities 1,853liabilities.......................................... 1,873 1,549
Long-term debtdebt............................................................. 300 300
Deferred tax liabilities 639liabilities................................................... 583 208
------ ------
Total liabilities 2,792liabilities.................................................. 2,756 2,057
------ ------
Commitments and contingencies
Shareholders' equity:
Series A non-voting convertible preferred stock, no par value; 150,000
shares authorized, issued and outstandingoutstanding............................... 150 150
Common stock, no par value; 320,000,000900,000,000 shares authorized; 162,679,893324,826,267
and 160,799,061321,598,122 shares issued and outstanding, respectively 1,419respectively............. 1,376 1,349
Retained earnings 1,915earnings....................................................... 2,115 1,499
Accumulated other comprehensive income 731income.................................. 535 106
------ ------
Total shareholders' equity 4,215equity......................................... 4,176 3,104
------ ------
Total liabilities and shareholders' equity $7,007equity......................... $6,932 $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
----------------
AprilNINE MONTHS ENDED
-----------------
JULY 1, 2000 March 27,JUNE 26, 1999
------------- ---------------------------
Cash and cash equivalents, beginning of the period $ 1,326 $ 1,481period.............................. $1,326 $1,481
------- -------
Operating:
Net income 416 287income...................................................................... 616 490
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization 41 47amortization................................................ 66 66
Provision for deferred income taxes 105 6taxes.......................................... 152 15
Gains on sales of ARM shares (234) (87)
Loss on sale of property, plant, and equipment 1 --shares................................................. (284) (188)
Changes in operating assets and liabilities:
Accounts receivable (259) 151
Inventories 10 60receivable.......................................................... (286) 59
Inventories.................................................................. 15 71
Other current assets (7) (11)assets......................................................... 18 31
Other assets (7) 11assets................................................................. (21) 6
Accounts payable 299 72payable............................................................. 228 73
Other current liabilities 69 (44)
------- -------liabilities.................................................... 164 (43)
------ ------
Cash generated by operating activities 434 492
------- -------activities.................................... 668 580
------ ------
Investing:
Purchase of short-term investments (1,843) (2,254)investments.............................................. (3,023) (3,039)
Proceeds from maturities of short-term investments 1,796 1,509investments.............................. 2,441 2,525
Proceeds from salesales of ARM shares 237 96shares............................................... 288 201
Purchase of long-term investments (216)investments............................................... (232) --
Net proceeds from property, plant, and equipment retirements 10 2011 21
Purchase of property, plant, and equipment (65) (24)
Other (23) 2
------- -------equipment...................................... (76) (31)
Other........................................................................... (18) (6)
------ ------
Cash used for investing activities (104) (651)
------- -------activities........................................ (609) (329)
------ ------
Financing:
Proceeds from issuance of common stock 47 36stock.......................................... 50 41
Cash used for repurchase of common stock (41)stock........................................ (91) --
------- ------------- ------
Cash generated by (used for) financing activities 6 36
------- -------activities......................... (41) 41
------ ------
Total cash generated (used) 336 (123)
------- -------........................................................... 18 292
------ ------
Cash and cash equivalents, end of the period $ 1,662 $ 1,358
======= =======period.................................... $1,344 $1,773
====== ======
Supplemental cash flow disclosures:
Cash paid for interestinterest....................................................... $ 10 $ 3049
Cash paid (received) for income taxes, netnet................................... $ 3736 $ (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. Certain amounts in the Condensed Consolidated
Balance Sheet as of September 25, 1999, have been reclassified to conform
to the 2000 presentation. 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 SIXNINE MONTHS ENDED
---------------------------- ---------------------------
4/7/1/00 3/27/6/26/99 4/7/1/00 3/27/6/26/99
Numerator (in millions):
Numerator for basic earnings per share -
Net income $ 233200 $ 135203 $ 416616 $ 287490
Interest expense on convertible debt -- 117 -- 22
-------- -------- -------- --------28
----- ------ ----- -----
Numerator for diluted earnings per share
- Adjusted net income $ 233200 $ 146210 $ 416616 $ 309
======== ======== ======== ========518
===== ===== ===== =====
Denominator:
Denominator for basic earnings per share
-- weighted average-shares outstanding 162,172 136,371 161,597 135,820325,040 288,107 323,770 277,141
Effect of dilutive securities:
Convertible preferred stock 9,091 9,091 9,091 9,09118,182 18,182 18,182 18,182
Convertible debt -- 22,64231,434 -- 22,64240,667
Dilutive options 10,730 5,100 8,938 5,066
-------- -------- -------- --------18,595 11,577 17,976 10,670
------ ------ ------ ------
Dilutive potential common shares 19,821 36,833 18,029 36,799
-------- -------- -------- --------36,777 61,193 36,158 69,519
------- ------ ------ ------
Denominator for diluted earnings per share
-
-- adjusted weighted-average shares and
assumed conversions 181,993 173,204 179,626 172,619
======== ======== ======== ========361,817 349,300 359,928 346,660
======= ======= ======= =======
Basic earnings per share $ 1.44 $ 0.99 $ 2.57 $ 2.11
======== ======== ======== ========$0.62 $0.70 $1.90 $1.77
======= ======= ======= =======
Diluted earnings per share $ 1.28 $ 0.84 $ 2.32 $ 1.79
======== ======== ======== ========$0.55 $0.60 $1.71 $1.49
======= ======= ======= =======
5
Options to purchase approximately 209,7501,853,108 and 253,000160,000 shares of common
stock were outstanding as of AprilJuly 1, 2000, and March 27,June 26, 1999, respectively,
that were not included in the computation of diluted earnings per share for
thesethe quarters then ended 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 22.645.2 million
shares of common stock at a conversion price of $29.205 per share.stock. The weighted averageweighted-average common shares represented by
the Debentures upon conversion were included in the computation of diluted
earnings per share for the three and sixnine month periods ended March 27,June 26,
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 22.645.2 million shares of the
Company's common stock induring the third quarter of 1999. For additional
disclosures regarding the Debentures, see the 1999 Form 10-K.
NOTE 3 - CONSOLIDATED FINANCIAL STATEMENT DETAILS (IN MILLIONS)
INVENTORIES
4/7/1/00 9/25/99
------ -------
Purchased partsparts............................................ $ 21 $ 4
Work in processprocess............................................ -- 3
Finished goods 8goods............................................. 4 13
----- -----
Total inventoriesinventories.......................................... $ 105 $ 20
===== =====
PROPERTY, PLANT, AND EQUIPMENT
4/7/1/00 9/25/99
------ -------
Land and buildingsbuildings......................................... $ 321322 $ 323
Machinery and equipment 208equipment.................................... 205 220
Office furniture and equipmentequipment............................. 61 61
Leasehold improvementsimprovements..................................... 133 125
Accumulated depreciation and amortization (409)amortization.................. (407) (411)
----- -----
Net property, plant, and equipmentequipment......................... $ 314 $ 318
===== =====
ACCRUED EXPENSES
4/7/1/00 9/25/99
------ -------
Accrued compensation and employee benefitsbenefits................. $ 178190 $ 84
Accrued marketing and distribution 146distribution......................... 188 170
Accrued warranty and related costs 106costs......................... 107 105
Other current liabilities 312liabilities.................................. 348 378
----- -----
Total accrued expenses $ 742 $ 737expenses..................................... $833 $737
===== =====
6
INTEREST AND OTHER INCOME (EXPENSE)
SIXNINE MONTHS ENDED
----------------
4/-----------------
7/1/00 3/27/6/26/99
------ -------
Interest incomeincome............................................ $ 96151 $ 65102
Interest expense (10) (31)expense........................................... (15) (42)
Other income (expense), net 3 (5)net................................ 5 (7)
----- -----
Interest and other income (expense), netnet................... $ 89141 $ 2953
===== =====
6
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$1.236 billion and
$339 million as of AprilJuly 1, 2000, and September 25, 1999, respectively.
The combined fair value of these investments has declined to
approximately $1.215$1.062 billion as of May 5,July 28, 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 1680 million shares
of ARM stock with a fair value of $226 million. Share data for ARM
presented in this Form 10-Q has been adjusted to reflect ARM's four-for-one
stock split in April of 1999 and its five-for-one stock split in April of
2000. During the firstthird quarter of 2000, the Company sold approximately 5.25
million shares of ARM stock for net proceeds of approximately $136$51 million
and a gain before taxes of $134$50 million. During the second quarter ofnine months ended July
1, 2000, the Company has 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 11.638 million shares of ARM stock
for net proceeds of approximately $37$288 million and gains before taxes of
approximately $284 million. During the third quarter of 1999, the Company
sold approximately 50 million shares of ARM stock for net proceeds of $105
million and a gain before taxes of $32$101 million. During the second quarter ofnine months
ended June 26, 1999, the Company sold 8approximately 148 million shares of
ARM stock for net proceeds of approximately $59$201 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$188. The fair value of $566 million.
Share data forthe Company's investment in
ARM presented in this Form 10-Q has not been adjusted to reflect
ARM's five-for-one split in Aprilis approximately $450 million as of July 1, 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$110 million as of AprilJuly 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 JuneJuly 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$188 million as of Apri1July 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. AsThe fair value of April 1, 2000, the Company's investment in Akamai has a fair valueis
approximately $488 million as of $661 million.July 1, 2000.
7
NOTE 5 - SHAREHOLDERS' EQUITY
On June 21, 2000, the Company effected a two-for-one stock split in the
form of a stock dividend. Accordingly, share and per share information
presented in this Form 10-Q has been adjusted to reflect this stock split.
On April 20, 2000, the Company's shareholders approved an increase in the
number of the Company's authorized shares from 320,000,000 to 900,000,000.
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 1020 million shares of common stock
at an exercise price of $87.1875$43.59 per share, the then fair value of the
underlying common stock.stock (share and per share figures for this option grant
are adjusted for the June 2000 two-for-one stock split). A summary of the
Company's stock option activity and related information for the six-monthnine-month
period ended AprilJuly 1, 2000, follows (option amounts are presented in
thousands):
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------------- --------------
Options outstanding at 9/25/99 18,40499............................ 36,808 $13.19
Granted.............................................. 44,002 $46.27
Exercised............................................ (4,527) $ 26.39
Granted 19,536 $ 90.72
Exercised (2,123) $ 17.96
Forfeited (1,227) $ 46.409.05
Forfeited............................................ (3,912) $26.49
------
Options outstanding at 4/7/1/00 34,590 $ 62.5300........................... 72,371 $32.84
======
Options exercisable at 4/7/1/00 7,362 $ 65.4600........................... 14,941 $32.56
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 secondthird quarter of 2000, noapproximately 1 million shares of common
stock were repurchased.repurchased at a cost of approximately $50 million. Since
inception of the stock repurchase plan, the Company has repurchased a total
of 1.754.5 million shares of its common stock at a total cost of $116$166 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 for additional information
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 SIXNINE MONTHS
ENDED ENDED
4/7/1/00 3/27/6/26/99 4/7/1/00 3/27/6/26/99
-------------------------- -----------------------------------------------------
Net incomeincome................................. $200 $ 233203 $616 $ 135 $ 416 $ 287490
Other comprehensive income (loss):
Change in accumulated translation
adjustmentadjustment........................ (2) (5) (10) (6) 2(8) (3)
Unrealized gains (losses) on
investments, net of taxes (428) 142 805 255taxes......... (157) 18 648 273
Reclassification adjustment for gains
included in net income (73) (50) (174) (50)
------- ------- ------- -------income............ (37) (89) (211) (139)
----- ----- ------ -----
Total comprehensive income (loss)income................ $ (273)4 $127 $1,045 $ 217 $ 1,041 $ 494
======= ======= ======= =======621
===== ==== ====== =====
8
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$2.5 million had been spent by AprilJuly 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 millionsubstantially all of which had been
spent by the end of the secondthird quarter of 2000, and $10 million for contract
cancellation charges related to supply and development agreements
previously discontinued, substantially all of which had been spentutilized 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 SIXNINE MONTHS ENDED
4/7/1/00 3/27/6/26/99 4/7/1/00 3/27/6/26/99
---------------------------------------------------------------------------------------------------------
Americas:
Net sales 989 787 2,178 1,747................... 1,021 881 3,199 2,628
Operating income 137 101 303 222............ 155 121 458 343
Europe:
Net sales 469 368 1,095 820................... 353 297 1,448 1,117
Operating income 63 52 177 115............ 23 27 200 142
Japan:
Net sales 349 262 761 454................... 303 269 1,064 723
Operating income 97 70 211 97............ 81 62 292 159
Other segments:
Net sales 138 113 254 219................... 148 111 402 330
Operating income 39 18 64 38............ 47 22 111 60
A reconciliation of the Company's segment operating income to the condensed
consolidated financial statements follows (in millions):
THREE MONTHS ENDED SIXNINE MONTHS ENDED
4/7/1/00 3/27/6/26/99 4/7/1/00 3/27/6/26/99
-----------------------------------------------------------------------------------
Segment operating income 336 241 755 472........................ 306 232 1,061 704
Corporate expenses, net 166 153 387 257......................... 138 128 525 385
Restructuring costs ............................. -- 9-- 8 9
Executive bonus ................................. -- -- 90 --
---- ---- ---- ---------- ------ ------ ------
Total operating income $170....................... $ 79 $270 $206
==== ==== ==== ====168 $ 104 $ 438 $ 310
====== ====== ====== ======
10
Information regarding net sales by product is as follows (in millions):
THREE MONTHS ENDED SIXNINE MONTHS ENDED
4/7/1/00 3/27/6/26/99 4/7/1/00 3/27/6/26/99
----------------------------------------------------
Power MacintoshMacintosh............................. $ 686643 $ 730 $1,380 $1,321
PowerBook 252 146 464 403
iMac 540 358 1,335 932
iBook 174600 $2,055 $1,967
PowerBook................................... 286 177 750 580
iMac........................................ 453 517 1,788 1,449
iBook....................................... 163 -- 525688 --
Software, service, and other net sales 293 296 584 584sales...... 280 264 832 802
------ ------ ------ ------
Total net sales $1,945 $1,530 $4,288 $3,240sales.......................... $1,825 $1,558 $6,113 $4,798
====== ====== ====== ======
10
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 in
fiscal 2000 did not have a material impact on the Company's consolidated
results of operations or financial position during the quarter and six-monthsnine
months ended AprilJuly 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, as amended by SFAS No. 138, 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"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 followadopt the guidance in the SAB no later than the firstfourth 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)amounts and for the
average revenue per Macintosh shipped):
THREE MONTHS ENDED SIXNINE MONTHS ENDED
------------------ ----------------
4/01/7/1/00 3/27/6/26/99 CHANGE 4/01/7/1/00 3/27/6/26/99 CHANGE
------------------------------- -----------------------------------------------------------------
Macintosh CPU unit sales
(in thousands) 1,043 827 26% 2,420 1,771 37%1,016 905 12% 3,436 2,676 28%
Avg. revenue per Macintosh shipped $1,820 $1,813 0% $1,737 $1,793 (3%$1,749 $1,683 4% $1,740 $1,756 (1%)
Net sales $1,945 $1,530$1,825 $1,558 17% $6,113 $4,798 27% $4,288 $3,240 32%
Gross margin $ 549543 $ 403 36% $1,156 $ 885 31%427 27% $1,699 $1,312 29%
Percentage of net sales 28.2% 26.3% 27.0%29.8% 27.4% 27.8% 27.3%
Operating expense $ 379375 $ 315 20%323 16% $1,163 $ 788 $ 670 18%993 17%
Percentage of net sales 19.5% 20.6% 18.4%20.5% 20.7% 19.0% 20.7%
Special charges $ -- $ 9-- $ 98 $ 9
Gains from sales of investment $ 10050 $ 55101 $ 234284 $ 87188
Interest and other income, net $ 4952 $ 19 158%24 117% $ 89141 $ 29 207%53 166%
Provision for income taxes $ 8670 $ 18 378%26 169% $ 177247 $ 35 406%61 305%
Effective tax rate 27.0% 11.8% 29.8% 11.0%25.9% 11.4% 28.6% 11.1%
Net income $ 233200 $ 135 73%203 (1%) $ 416616 $ 287 45%490 26%
Diluted earnings per share $ 1.280.55 $ 0.84 52%0.60 (8%) $ 2.321.71 $ 1.79 30%1.49 15%
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 SIXNINE MONTHS ENDED
------------------ ----------------
4/-----------------
7/1/00 3/27/6/26/99 CHANGE 4/7/1/00 3/27/6/26/99 CHANGE
------ ------- ------ ------ ------- ------
Americas net sales .............. $1,021 $ 989 $ 787 26% $2,178 $1,747 25%881 16% $3,199 $2,628 22%
Europe net sales ................ $ 469353 $ 368 27% $1,095 $ 820 34%297 19% $1,448 $1,117 30%
Japan net sales ................ $ 349303 $ 262 33%269 13% $1,064 $ 761 $ 454 68%723 47%
Asia Pacific net sales .......... $ 92100 $ 82 12%81 23% $ 169269 $ 157 8%238 13%
Americas Macintosh unit sales 541 421 29% 1,249 946 32%... 570 519 10% 1,819 1,465 24%
Europe Macintosh unit sales 275 203 35% 664 455 46%..... 222 167 33% 886 622 42%
Japan Macintosh unit sales 174 156 12% 409 275 49%...... 165 175 (6%) 574 450 28%
Asia Pacific Macintosh unit sales 53 4759 44 34% 157 139 13% 98 95 3%
------
------ ------ ------ ------
Total Macintosh unit sales 1,043 827 26% 2,420 1,771 37%
======. 1,016 905 12% 3,436 2,676 28%
====== ====== ====== ======
Power Macintosh unit sales 354 401 (12%) 709 727 (2%...... 351 346 1% 1,060 1,073 (1%)
PowerBook unit sales 100 75 33% 184 174 6%............ 113 72 57% 297 246 21%
iMac unit sales 474 351 35% 1,176 870 35%................. 447 487 (8%) 1,623 1,357 20%
iBook unit sales 115................ 105 -- 100% 351456 -- 100%
------
------ ------ ------ ------
Total Macintosh unit sales 1,043 827 26% 2,420 1,771 37%
======. 1,016 905 12% 3,436 2,676 28%
====== ====== ====== ======
12
Net sales increased $415$267 million or 27%17% to $1.945$1.825 billion in the secondthird quarter
of 2000 compared to the same quarter in 1999. On a year-over-year basis,
quarterly net sales increased in all of the Company's geographic operating
segments. The primary source of this growth was an overall 26%12% increase in
Macintosh unit sales, which reflects strong unit growth in the Company's three largest geographic operating segments.
Approximately half of theAmericas and
Europe somewhat offset by a decline in unit sales in Japan. Further contributing
to year-over-year quarterly growth in net sales was a 4% 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.sales.
For the first sixnine months of 2000, net sales increased $1.048$1.315 billion or 32%27%
over the same period in 1999. A 37%28% increase in year-to-date Macintosh unit
sales, also reflective of strong growth in all of the Company's three largest geographic operating
segments, was the principal cause of the increase in net sales during the first
sixnine months of 2000.
Net sales declined sequentially during the secondthird quarter of 2000 compared to the
firstsecond quarter of 2000 by $398$120 million or 17%6%. Similarly, Macintosh unit sales
decreased 24%3% during the secondthird quarter of 2000 compared to the firstsecond quarter.
The sequential decline in both net sales and unit sales during the secondthird quarter
is consistent withwas primarily the historical pattern experienced by the
Company due to lower demandresult of a sequential quarterly decline in the Company's consumer markets following the
holiday season. The sequential decrease iniMac unit sales was somewhat offset byof
6% and a sequential increasedecline in the average revenue per Macintosh system, which rose from
$1,673system. The
Company believes that iMac unit sales during the firstthird quarter were negatively
impacted by anticipation of 2000 to $1,820 duringproduct updates expected at the secondbeginning of the
fourth quarter. The
increase during the current quarter in the average revenue per Macintosh system is primarily attributable tofor the shift in the Company's unit mix towards
higher-priced professional oriented products such that Power Macintosh and
PowerBook units comprised 44%third quarter
of total Macintosh units sales during2000 declined 4% from the second quarter of 2000 versus 32%to $1,749. This decline was due to a
shift during the firstquarter towards lower-priced versions of its consumer products
purchased by the Company's education customers and by price protection
recognized during the third quarter resulting from planned product transitions
in the fourth 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.Data," 14
and in the 1999 Form 10-K.
AMERICAS
Net sales in the Americas segment during the secondthird quarter of 2000 increased
$202$140 million or 26%16% compared to the same period in 1999. Macintosh quarterly
unit sales in the Americas increased 29%10% on a year-over-year basis, reflecting
strong growth in iMac unit sales and unit sales of professional products, particularly PowerBooks,
and the recently introduced iBook.impact on unit sales of iBook which was first shipped at the beginning
of fiscal 2000. These increases in unit sales were partially offset by an 8%
decline in unit sales of iMac ahead of the anticipated product updates at the
beginning of the fourth quarter. During the second quartersthird quarter of both 2000, and 1999, the Americas
segment represented approximately 51%56% of the Company's total net sales.sales compared
to 57% during the same quarter in 1999.
For the first nine months of 2000, net sales in the Americas segment increased
$571 million or 22% from the same period in 1999, while Macintosh unit sales
increased 24%. The results experienced by the Americas segment induring the second quarterfirst
nine months of 2000 versus the same quarterperiod in 1999 reflect the Company's overall
results characterized by strong year-to-date growth in unit sales of iMac and
netPowerBook products, sales of iBook which was first shipped at the beginning of
fiscal 2000, and stable unit sales of the Company's consumer and education oriented
products and moderate growth in net sales of the Company's professional orientedPower Macintosh products.
13
EUROPE
Net sales in the Europe segment increased $101$56 million or 27%19% during the secondthird
quarter of 2000 as compared to the same quarter in 1999, while the segment's
Macintosh unit sales increased 35%33%. LikeGrowth in year-over-year unit sales was
experienced in the Europe segment in all four of the Company's principal product
families. Sequentially, net sales in the Europe segment declined $116 million or
25% during the third quarter of 2000 compared to the second quarter, while
Macintosh unit sales declined 19%. The sequential decline in the Europe's
segment net sales and unit sales is attributable primarily to two factors.
First, like the Americas segment, Europe's results in the secondthird quarter of 2000
as compared to 1999 are indicative of strong
growththe second quarter reflect a sequential decline in MacintoshiMac unit
sales particularly unitin anticipation of upcoming product updates. Second, the Company has
historically experienced a modest seasonal decline in net sales of iMac and iBook.in Europe during
its third fiscal quarter.
JAPAN
Net sales in Japan rose 33%13% or $87$34 million during the secondthird quarter of 2000 as
compared to the same quarter in 1999. However, the segment's quarterly Macintosh
unit sales decreased 6% on a year-over-year basis. The Japan segment's unit
sales during the third 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 declinereflect declines in unit sales of iMac.the Company's desktop products, particularly
iMac, prior to the anticipated product introductions in the fourth quarter,
partially offset by increases in sales of portable products. This shift in mix
towards higher-priced portable products led to the year-over-year increase in
net sales.
GROSS MARGIN
Gross margin for the secondthird quarter of 2000 was 28.2%29.8% compared to 26.3%27.4% for the
same quarter in 1999 and 25.9%28.2% for the firstsecond quarter of 2000. Gross margin
during the secondthird quarter of 2000 was favorably impacted by threetwo principal
factors. First, component costs incurred to manufacture the Company's products
were lower during the secondthird quarter of 2000 compared to both the previous
quarters. In particular, costs for DRAM fell closequarter and to levels not experienced since the fourthsame quarter ofin 1999. Second, freight costs
declined sequentially fromduring the firstthird 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 overallmix of product mixsales shifted somewhat away from its consumer
products towards higher-priced,its higher margin professional products. Net sales of Power Macintoshdesktop 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.portable products.
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.
14
OPERATING EXPENSES
Selling, general and administrative expenses, excluding special charges,
increased $48$35 million or 20%14% during secondthe third quarter of 2000 as compared to the
same period in 1999 and decreased sequentially $32declined $9 million or 10%3% from the firstsecond 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 sixnine months of
2000 increased $88$123 million or 17%16% 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 sixnine 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 secondthird quarter and the
first sixnine months of 2000 isare primarily 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 secondthird
quarter of fiscal 2000 and the same quarter in 1999 and increased 20% during the
first sixnine 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$2.5 million had been spent
by AprilJuly 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$28 million or 158%117% to $49$52
million during the secondthird quarter of 2000 compared to the same quarter in 1999
and increased $60$88 million or 207%166% for the first sixnine months of 2000 over the
same period in 1999. These increases are attributable primarily to two factors.
First, interest income increased $18 million or 48% between the Company'sthird quarter of
2000 and the third quarter of 1999 as a result of higher cash, cash equivalents,
and short-term investments wereinvestment balances and due to an increase in the overall yield
earned on the Company's investment portfolio resulting from higher by
approximately $687 million or 24% at the endmarket
interest rates and a modest lengthening 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.portfolio's average maturity.
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$6 million or 67%55% during the secondthird quarter of 2000 compared to the same
quarter in 1999 and decreased $21$27 million or 68%64% for the comparable sixnine month
periods.
During the secondthird quarter of 2000, the Company sold approximately 1.55 million
shares of ARM stock for net proceeds of approximately $101$51 million and a gain
before taxes of $100$50 million. ForDuring the six-month periodnine months ended on AprilJuly 1, 2000, the
Company has 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 8.038 million shares of ARM stock for net proceeds
of approximately $59$288 million and a gaingains before taxes of $55approximately $284
million. ForDuring the six-month period ended on March 27,third quarter of 1999, the Company sold approximately 19.650
million shares of ARM stock for net proceeds of $96$105 million and a gain before
taxes of $87$101 million. During the nine months ended June 26, 1999, the Company
sold approximately 148 million shares of ARM stock for net proceeds of
approximately $201 million and a gain before taxes of approximately $188.
15
PROVISION FOR INCOME TAXES
As of AprilJuly 1, 2000, the Company had deferred tax assets arising from deductible
temporary differences, tax losses, and tax credits of $580$535 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 AprilJuly 1, 2000,
a valuation allowance of $45$40 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 AprilJuly 1, 2000, was approximately 27% which brings the26%. The
effective tax rate without the special executive bonus for the sixnine months
ended AprilJuly 1, 2000, tois also 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.16
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):
4/7/1/00 1/4/1/00 9/25/99
------ ------ -------
Cash, cash equivalents, and short-term investments $3,609 $3,660 $3,226investments................... $ 3,826 $ 3,609 $ 3,226
Accounts receivable, netnet............................................. $ 967 $ 940 $ 892681
Inventory............................................................ $ 681
Inventory5 $ 10 $ 15 $ 20
Working capital $3,059 $2,944 $2,736capital...................................................... $ 3,284 $ 3,059 $ 2,736
Non-current debt and equity investments $1,544 $2,140investments.............................. $ 1,236 $ 1,544 $ 339
Long-term debtdebt....................................................... $ 300 $ 300 $ 300
Days sales in accounts receivable (a)................................ 48 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...................................... < 1 1 2
Days payables outstanding (c)........................................ 74 73 77
Operating cash flow (quarterly)...................................... $ 234 $ 61 $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 AprilJuly 1, 2000, the Company had approximately $3.6$3.8 billion in cash, cash
equivalents, and short-term investments, an increase of $383$600 million over the
same balances at the end of fiscal 1999. For the sixnine months ended AprilJuly 1, 2000,
the Company's primary source of cash was $434$668 million in cash flows from
operating activities. Cash generated by operations was primarily from net income
of $416$616 million and a combined increase in accounts payable and other current
liabilities of $368$392 million partially offset by an increase in accounts
receivable of $259$286 million. In addition to operating cash flow, other
significant cash flow items during the sixnine months ended AprilJuly 1, 2000 included
net purchases of short-term investments of $47$582 million, $216$232 million utilized
for the purchase of long-term investments, $65$76 million for the purchase of
property, plant and equipment, and cash proceeds from the sale of ARM stock of
$237$288 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 secondthird quarter of 2000,
noapproximately 1 million shares of common stock were repurchased.repurchased at a cost of
approximately $50 million. Since inception of the stock repurchase plan, the
Company has repurchased 1.75a total of 4.5 million shares of its common stock at a
total cost of $116$166 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.EarthLink.
These investments are reflected in the consolidated balancesbalance 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
17
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$1.236
billion and $339 million as of AprilJuly 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 isare 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 in debt securities 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 AprilJuly 1, 2000,
substantially all of the Company's investments in debt securities 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.
19
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.
20
ITEM 6. EXHIBITS
AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Report:
Exhibit
Number DescriptionEXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.2 Amendment to Restated Articles of Incorporation, filed with
the Secretary of State3.3 By-laws of the State of California on May 4,Company, as amended through April 20, 2000.
10.A.49 1997 Employee Stock Option Plan, as amended through May 3,June 27, 2000.
10.A.51 1998 Executive Officer Stock Plan, as amended through May 3,June 27, 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,July 31, 2000
22
INDEX TO EXHIBITS
Exhibit
Index
Number Description
- ------ -----------
3.2 Amendment to Restated Articles of Incorporation, filed with the
Secretary of State3.3 By-laws of the State of California on May 4,Company, as amended through April 20, 2000.
10.A.49 1997 Employee Stock Option Plan, as amended through May 3,June 27, 2000.
10.A.51 1998 Executive Officer Stock Plan, as amended through May 3,June 27, 2000.
27 Financial Data Schedule.
23