<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
-----------
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 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
-----------
APPLE COMPUTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------
CALIFORNIA 942404110
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1 Infinite Loop
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
--- ---
161,661,155 shares of Common Stock Issued and Outstanding as of January 21, 2000
<PAGE>
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)
<TABLE>
<CAPTION>
Three Months Ended
------------------
January 1, 2000 December 26, 1998
--------------- -----------------
<S> <C> <C>
Net sales......................................... $2,343 $1,710
Cost of sales..................................... 1,736 1,228
------ ------
Gross margin................................... 607 482
------ ------
Operating expenses:
Research and development....................... 90 76
Selling, general, and administrative........... 319 279
Special charges:
Restructuring costs....................... 8 --
Executive bonus........................... 90 --
------ ------
Total operating expenses........... 507 355
------ ------
Operating income ................................. 100 127
Gains from sales of investment.................... 134 32
Interest and other income, net.................... 40 10
------ ------
Total interest and other income, net........... 174 42
------ ------
Income before provision for income taxes.......... 274 169
Provision for income taxes........................ 91 17
------ ------
Net income........................................ $183 $152
====== ======
Earnings per common share:
Basic....................................... $1.14 $1.12
Diluted..................................... $1.03 $0.95
Shares used in computing earnings
per share (in thousands):
Basic....................................... 161,039 135,270
Diluted..................................... 178,417 172,062
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share amounts)
ASSETS
<TABLE>
<CAPTION>
January 1, 2000 September 25,1999
--------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $1,586 $1,326
Short-term investments.................................................. 2,074 1,900
Accounts receivable, less allowances of $66 and $68, respectively....... 892 681
Inventories............................................................. 15 20
Deferred tax assets..................................................... 131 143
Other current assets.................................................... 211 215
------ ------
Total current assets............................................... 4,909 4,285
Property, plant and equipment, net......................................... 318 318
Non-current debt and equity investments.................................... 2,140 345
Other assets............................................................... 219 213
------ ------
Total assets....................................................... $7,586 $5,161
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $1,174 $812
Accrued expenses........................................................ 791 737
------ ------
Total current liabilities.......................................... 1,965 1,549
Long-term debt............................................................. 300 300
Deferred tax liabilities................................................... 907 208
------ ------
Total liabilities.................................................. 3,172 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; 161,224,400
and 160,799,061 shares issued and outstanding, respectively.............
1,345 1,349
Retained earnings....................................................... 1,682 1,499
Accumulated other comprehensive income.................................. 1,237 106
------ ------
Total shareholders' equity......................................... 4,414 3,104
------ ------
Total liabilities and shareholders' equity......................... $7,586 $5,161
====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
APPLE COMPUTER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
<TABLE>
<CAPTION>
Three Months Ended
------------------
January 1, 2000 December 26, 1998
--------------- -----------------
<S> <C> <C>
Cash and cash equivalents, beginning of the period.............................. $1,326 $1,481
------ ------
Operating:
Net income...................................................................... 183 152
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation and amortization................................................ 20 23
Provision for deferred income taxes.......................................... 64 10
Gains from sales of investment.............................................. (134) (32)
(Gain)/Loss on sale of property, plant, and equipment....................... 3 (1)
Changes in operating assets and liabilities:
Accounts receivable.......................................................... (211) 42
Inventories.................................................................. 5 53
Other current assets......................................................... 4 (2)
Other assets................................................................. 3 14
Accounts payable............................................................. 362 (64)
Other current liabilities.................................................... 74 28
------ ------
Cash generated by operating activities.................................... 373 223
------ ------
Investing:
Purchase of short-term investments.............................................. (693) (1,135)
Proceeds from sales and maturities of short-term investments.................... 519 597
Purchase of property, plant, and equipment...................................... (38) (5)
Proceeds from sales of investment............................................... 136 37
Other........................................................................... (13) 20
------ ------
Cash used for investing activities........................................ (89) (486)
------ ------
Financing:
Proceeds from issuance of common stock.......................................... 17 3
Cash used for repurchase of common stock........................................ (41) --
------ ------
Cash generated (used) by financing activities............................. (24) 3
------ ------
Total cash generated (used)..................................................... 260 (260)
------ ------
Cash and cash equivalents, end of the period.................................... $1,586 $1,221
====== ======
Supplemental cash flow disclosures:
Cash paid for interest....................................................... $ -- $ 20
Cash paid (received) for income taxes, net................................... $ 8 $ (7)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
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 fiscal 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). Approximately every six years,
the Company reports a 53-week fiscal year to align its fiscal quarters
with calendar quarters by adding a week to its first fiscal quarter.
Consequently, an additional week was added to the first quarter of
fiscal 2000.
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):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
1/1/00 12/26/98
------ --------
<S> <C> <C>
Numerator (in millions):
Numerator for basic earnings per share
-- net income $183 $152
Interest expense on convertible debt -- 11
------- -------
Numerator for diluted earnings per share
-- adjusted net income $183 $163
------- -------
Denominator:
Denominator for basic earnings per share
-- weighted-average shares outstanding 161,039 135,270
Effect of dilutive securities:
Convertible preferred stock 9,091 9,091
Dilutive options 8,287 5,059
Convertible debt -- 22,642
------- -------
Dilutive potential common shares 17,378 36,792
------- -------
Denominator for diluted earnings per
share -- adjusted weighted-average
shares and assumed conversions 178,417 172,062
======= =======
Basic earnings per share $1.14 $1.12
======= =======
Diluted earnings per share $1.03 $0.95
======= =======
</TABLE>
5
<PAGE>
Options to purchase approximately 7.4 million and 85,000 shares of common
stock were outstanding at the end of the first quarters of fiscal 2000 and
fiscal 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 quarter of fiscal 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 month period ended December 26, 1998, using the if-converted
method. On April 14, 1999, the Company called for redemption of 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 fiscal 1999. For additional disclosures regarding the Debentures, see
the 1999 Form 10-K.
NOTE 3 - CONSOLIDATED FINANCIAL STATEMENT DETAILS (IN MILLIONS)
<TABLE>
<CAPTION>
INVENTORIES
1/1/00 9/25/99
------ -------
<S> <C> <C>
Purchased parts............................................ $ 5 $ 4
Work in process............................................ -- 3
Finished goods............................................. 10 13
------ -------
Total inventories.......................................... $ 15 $ 20
------ -------
------ -------
PROPERTY, PLANT, AND EQUIPMENT
1/1/00 9/25/99
------ -------
Land and buildings......................................... $ 324 $ 323
Machinery and equipment.................................... 209 220
Office furniture and equipment............................. 61 61
Leasehold improvements..................................... 131 125
Accumulated depreciation and amortization.................. (407) (411)
------ -------
Net property, plant, and equipment......................... $ 318 $ 318
------ -------
------ -------
ACCRUED EXPENSES
1/1/00 9/25/99
------ -------
Accrued compensation and employee benefits................. $ 187 $ 84
Accrued marketing and distribution......................... 168 170
Accrued warranty and related costs......................... 105 105
Other current liabilities.................................. 331 378
------ -------
Total accrued expenses..................................... $ 791 $ 737
------ -------
------ -------
INTEREST AND OTHER INCOME (EXPENSE)
THREE MONTHS ENDED
-----------------------
1/1/00 12/26/98
------ --------
Interest income............................................ $ 47 $ 32
Interest expense........................................... (5) (16)
Other income (expense), net................................ (2) (6)
------ --------
Interest and other income (expense), net................... $ 40 $ 10
------ --------
------ --------
</TABLE>
6
<PAGE>
NOTE 4 - NON-CURRENT DEBT AND EQUITY INVESTMENTS
The Company holds significant investments in ARM Holdings plc (ARM),
Samsung Electronics Co., Ltd (Samsung), and Akamai Technologies, Inc.
(Akamai). 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 Company believes
it is likely there will 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. As of January 1, 2000, the Company holds 10.9 million shares of
ARM stock with a fair value of $693 million. During the first quarter of
fiscal 1999, the Company sold approximately 2.9 million shares of ARM stock
for net proceeds of approximately $37 million and a gain before taxes of
$32 million.
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 $100 million as of January 1, 2000.
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 fiscal 2000, the Company categorized its shares in Akamai
as available-for-sale. As of January 1, 2000, the Company's investment in
Akamai has a fair value of $1.347 billion.
NOTE 5 - SHAREHOLDER'S EQUITY
During the first quarter of fiscal 2000, the Company granted employees
options to purchase approximately 8.2 million shares of common stock at a
weighted-average exercise price of $92.94. On January 12, 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 first
quarter of fiscal 2000, adjusted to reflect the grant of 10 million options
to the Company's Chief Executive Officer on January 12, 2000, follows
(option amounts are presented in thousands):
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding - beginning of quarter ....... 18,404 $ 26.39
Granted (as adjusted) ......................... 18,224 $ 89.78
Exercised ..................................... (925) $ 19.48
Forfeited ..................................... (482) $ 42.83
------
Options outstanding - end of quarter (as adjusted) 35,221 $ 59.14
======
Options exercisable - end of quarter (as adjusted) 8,067 $ 60.63
</TABLE>
7
<PAGE>
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 first quarter of 2000, the company repurchased 500,000 shares of
its common stock at a cost of approximately $41 million. 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):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
1/1/00 12/26/98
------ --------
<S> <C> <C>
Net income................................ $ 183 $ 152
Other comprehensive income:
Change in accumulated translation
adjustment........................ (1) 12
Unrealized gains on investments, net
of taxes.......................... 1,233 113
Reclassification adjustment for gains
included in net income............ (101) --
------ --------
Total comprehensive income................ $1,314 $ 277
------ --------
------ --------
</TABLE>
NOTE 7 - SPECIAL CHARGES
RESTRUCTURING ACTIONS
During the first quarter of fiscal 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 million had been spent by January 1, 2000, and
the remainder is expected to be spent over the following two quarters.
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 first quarter of fiscal 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.
8
<PAGE>
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.
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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
1/1/00 12/26/98
------ --------
<S> <C> <C>
Americas:
Net Sales ................. $1,189 $ 960
Operating Income........... $ 166 $ 121
Europe:
Net Sales.................. $ 626 $ 452
Operating Income........... $ 114 $ 63
Japan:
Net Sales.................. $ 412 $ 192
Operating Income........... $ 114 $ 27
Other Segments:
Net Sales.................. $ 116 $ 106
Operating Income........... $ 25 $ 19
</TABLE>
A reconciliation of the Company's segment operating income to the condensed
consolidated financial statements follows (in millions):
<TABLE>
<CAPTION>
1/1/00 12/26/98
------ --------
<S> <C> <C>
Segment Operating Income...... 419 230
Corporate Expenses, net....... 221 103
Restructuring Costs........... 8 --
Executive Bonus............... 90 --
------ ------
Total Operating Income..... $ 100 $ 127
====== ======
</TABLE>
9
<PAGE>
Information regarding net sales by product is as follows (in millions):
<TABLE>
<CAPTION>
1/1/00 12/26/98
------ --------
<S> <C> <C>
Power Macintosh............................... $ 707 $ 611
PowerBook..................................... 212 257
iMac.......................................... 795 574
ibook ........................................ 351 --
Software, Service, and Other Net Sales........ 278 268
------ --------
Total Net Sales............................ $2,343 $ 1,710
------ --------
------ --------
</TABLE>
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 ended January 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.
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.
10
<PAGE>
NOTE 11 - SUBSEQUENT EVENTS
EARTHLINK
On January 4, 2000, the Company agreed to invest $200 million in EarthLink
Network, Inc. (EarthLink), an Internet service provider. The investment is
in EarthLink's Series C Convertible Preferred Stock, which is convertible
by the Company after January 4, 2001, into approximately 4.4 million shares
of EarthLink common stock (subject to appropriate adjustment for stock
splits, dividends, and other similar adjustments). Apple will also receive
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.
11
<PAGE>
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):
<TABLE>
<CAPTION>
-------------------------------------------------------------------
FIRST FIRST FIRST FOURTH
QUARTER QUARTER CHANGE QUARTER QUARTER CHANGE
2000 1999 2000 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales ......................... $2,343 $1,710 37% $2,343 $1,336 75%
Macintosh CPU unit sales
(in thousands) .............. 1,377 944 46% 1,377 772 78%
Gross margin ...................... $ 607 $ 482 26% $ 607 $ 384 58%
Percentage of net sales ........ 25.9% 28.2% 25.9% 28.7%
Research and development .......... $ 90 $ 76 18% $ 90 $ 82 10%
Percentage of net sales ........ 4% 4% 4% 6%
Selling, general and
administrative .................... $ 319 $ 279 14% $ 319 $ 235 36%
Percentage of net sales ........ 14% 16% 14% 18%
Special Charges ................... $ 98 $-- NM $ 98 $-- NM
Gains from sales of investment .... $ 134 $ 32 319% $ 134 $ 42 219%
Interest and other income, net .... $ 40 $ 10 300% $ 40 $ 34 18%
Provision for income taxes ........ $ 91 $ 17 435% $ 91 $ 14 550%
Effective tax rate ............. 33% 10% 33% 11%
Net income ........................ $ 183 $ 152 20% $ 183 $ 111 65%
Basic earnings per share .......... $ 1.14 $ 1.12 2% $ 1.14 $ 0.69 65%
Diluted earnings per share ........ $ 1.03 $ 0.95 8% $ 1.03 $ 0.63 63%
</TABLE>
NM: Not Meaningful
12
<PAGE>
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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
-------------------- YR-TO-YR -------------------- SEQUENTIAL
1/1/00 12/26/98 CHANGE 1/1/00 9/25/99 CHANGE
------ -------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Americas net sales ................. $1,189 $ 960 24% $1,189 $ 899 32%
Europe net sales ................... $ 626 $ 452 38% $ 626 $ 200 213%
Japan net sales .................... $ 412 $ 192 115% $ 412 $ 135 205%
Asia Pacific net sales ............. $ 77 $ 75 3% $ 77 $ 68 13%
Americas Macintosh unit sales ...... 708 525 35% 708 557 27%
Europe Macintosh unit sales ........ 389 252 54% 389 102 281%
Japan Macintosh unit sales ......... 235 119 97% 235 74 218%
Asia Pacific Macintosh unit sales... 45 48 (6%) 45 39 15%
------ ------ ------ ------
Total Macintosh unit sales .... 1,377 944 46% 1,377 772 78%
====== ====== ====== ======
Power Macintosh unit sales ......... 355 326 9% 355 223 59%
PowerBook unit sales ............... 84 99 (15%) 84 98 (14%)
iMac unit sales .................... 702 519 35% 702 445 58%
iBook unit sales ................... 236 -- -- 236 6 3,833%
------ ------ ------ ------
Total Macintosh unit sales .... 1,377 944 46% 1,377 772 78%
====== ====== ====== ======
</TABLE>
Net sales increased $633 million or 37% to $2.343 billion in the first quarter
of 2000 compared to the same quarter in 1999. The primary source of this growth
was an overall 46% increase in Macintosh unit sales, which was reflective of
strong unit growth in the Company's three largest geographic operating segments.
Unit shipments during the first quarter of 2000 also increased compared to the
same period in fiscal 1999 because it was the first full quarter during which
iBook, the Company's new education and consumer oriented portable computer, was
shipping in volume. Offsetting the rise in unit shipments was a decline in the
average revenue per Macintosh system, a function of total net sales generated by
hardware shipments and total Macintosh CPU unit sales, which fell 6% to $1,673
during the first quarter of 2000 from $1,776 in 1998. The decline during the
current quarter in the average revenue per Macintosh system is primarily
attributable to the shift in the Company's unit mix toward lower-priced consumer
and education products such that iMac and iBook units comprised 68% of total
Macintosh unit sales during the first quarter of fiscal 2000 versus 55% during
the first quarter of 1999.
Net sales increased sequentially during the first quarter of 2000 compared to
the fourth quarter of 1999 by $1.007 billion or 75%. Similarly, Macintosh
unit sales increased 78% during the first quarter of 2000 compared to the
fourth quarter of 1999. The sequential increase in both net sales and unit
sales is attributable to the increase in sales during to the holiday season
consistent with the Company's normal seasonal pattern and strong market
acceptance of the Company's recent consumer and education oriented iMac and
iBook products. Also, net sales during the fourth quarter of 1999 were
negatively impacted by lower than planned deliveries of PowerPC G4 processors
from Motorola and production interruptions at vendors supplying PowerBooks
and iBooks experienced during the last week of the fourth quarter of 1999 as
a result of the earthquake in Taiwan on September 20, 1999. The shortage of
G4 processors reduced net sales by approximately $200 million during the
fourth quarter of 1999.
13
<PAGE>
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."
AMERICAS
Net sales in the Americas segment during the first quarter of fiscal 2000
increased $229 million or 24% compared to the same period in 1999. Macintosh
unit sales in the Americas increased 35% on a year-over-year basis, reflecting
strong growth in iMac unit sales and unit sales of the recently introduced
iBook. During the first quarter of fiscal years 2000 and 1999, the Americas
segment represented approximately 51% and 56% of the Company's total net sales,
respectively. The results experienced by this segment in the first quarter of
fiscal 2000 versus the same quarter in 1999 reflect the Company's overall
results characterized by strong growth in sales of the Company's consumer and
education oriented products and moderate growth of the Company's professional
oriented products, partially offset by a decline in the average revenue per
Macintosh system.
EUROPE
Net sales in the Europe segment increased $174 million or 38% during the first
quarter of 2000 as compared to the same quarter in 1999, while the segment's
Macintosh unit sales increased 54%. Like the Americas segment, Europe's results
in the first quarter of fiscal 2000 as compared to 1999 are indicative of strong
growth in Macintosh unit sales, particularly iMac and iBook, offset by a decline
in the average revenue per Macintosh system.
JAPAN
Sales in Japan rose 115% or $220 million during the first quarter of 2000 as
compared to the same quarter in 1999. This increase was due to a 97% increase in
unit shipments in Japan during the first quarter of 2000 as compared to the same
quarter in 1999 and reflects strong growth in unit sales in Japan across the
Company's entire product line.
GROSS MARGIN
Gross margin for the first quarter of 2000 was 25.9% compared to 28.2% for the
same quarter in 1999 and 28.7% for the fourth quarter of 1999. Gross margin
during the first quarter of 2000 was negatively impacted by three primary
factors. First, component costs were higher during the first quarter of 2000
compared to previous quarters. Costs for DRAM was especially high as a result of
worldwide shortages through much of the first quarter of fiscal 2000. Second,
the Company incurred substantially higher air freight costs during the first
quarter of 2000 compared to both the fourth and first quarters of 1999 in order
to get recently introduced products into the sales channel in time for the
holiday selling season. Third, the Company's overall product mix shifted towards
lower-priced, lower margin consumer products. Net sales of iMac and iBook
accounted for 49% of net sales in the first quarter 2000, and only 34% of net
sales in the same quarter in 1999.
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, 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
<PAGE>
OPERATING EXPENSES
Selling, general and administrative expenses, excluding special charges,
increased $40 million or 14% during the first quarter of 2000 as compared to the
same period in 1999. However, expressed as a percent of net sales, selling,
general and administrative expenses fell to 13.6% during the first quarter of
2000 compared to 16.3% during the same quarter in 1999. The absolute increase in
selling, general and administrative expenses during the first quarter is the
result of higher variable selling and marketing expenses resulting from the
year-over-year 37% 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 18% between the first quarter of fiscal
2000 and the same quarter in 1999 primarily as a result of increased spending in
2000 to support multiple new product manufacturing ramps and increased research
and development headcount.
During the first quarter of fiscal 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 employee termination benefits associated with consolidation
of various domestic and international sales and marketing functions.
In December 1999, 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 300% to $40
million during the first quarter of fiscal 2000 compared to the same quarter in
1999. This increase is primarily attributable to two factors. First, the
Company's cash, cash equivalents, and short-term investments were higher by
approximately $1.1 billion or 42% at the end of the first quarter of fiscal 2000
versus the same balances at the end the first quarter of fiscal 1999. This
resulted in a $15 million or 47% increase in interest income between the first
quarter of 2000 and the first quarter of 1999. Second, interest expense declined
$11 million or 69% during the first quarter of fiscal 2000 compared to the same
quarter in 1999 as the result of conversion to common stock of the Company's
convertible subordinated debentures during the third quarter of fiscal 1999.
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 first quarter of fiscal 1999, the
Company sold approximately 2.9 million shares of ARM stock for net proceeds of
approximately $37 million and a gain before taxes of $32 million.
PROVISION FOR INCOME TAXES
As of January 1, 2000, the Company had deferred tax assets arising from
deductible temporary differences, tax losses, and tax credits of $569 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 January
1, 2000, a valuation allowance of $53 million was recorded against the deferred
tax asset for the benefits of tax losses that may not be realized. The valuation
allowance 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.
15
<PAGE>
The Company's effective tax rate for the three months ended January 1, 2000, was
approximately 33% and includes the effect of the special executive bonus accrued
during the quarter. The effective tax rate during the first quarter of 2000
without this charge was approximately 25%. 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
FISCAL 2000 WILL BE APPROXIMATELY 25%. THE COMPANY ANTICIPATES THAT ITS
EFFECTIVE TAX RATE WILL INCREASE IN FISCAL 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 fiscal quarters ending on the dates indicated (dollars in millions):
<TABLE>
<CAPTION>
1/1/00 9/25/99 12/26/98
------ ------- --------
<S> <C> <C> <C>
Cash, cash equivalents, and short-term investments $3,660 $3,226 $2,578
Accounts receivable, net ......................... $ 892 $ 681 $ 913
Inventory ........................................ $ 15 $ 20 $ 25
Working capital .................................. $2,944 $2,736 $2,383
Non-current debt and equity investments .......... $2,140 $ 345 $ 197
Long-term debt ................................... $ 300 $ 300 $ 954
Days sales in accounts receivable (a) ............ 37 46 49
Days of supply in inventory (b) .................. 1 2 2
Days payables outstanding (c) .................... 66 77 51
Operating cash flow (quarterly) .................. $ 373 $ 218 $ 223
</TABLE>
(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 January 1, 2000, the Company had approximately $3.7 billion in cash, cash
equivalents, and short-term investments, an increase of $434 million over the
same balances at the end of fiscal 1999. For the first quarter of fiscal 2000,
the Company's primary source of cash was $373 million in cash flows from
operating activities. Cash generated by operations was primarily from net income
of $183 million and a combined increase in accounts payable and other current
liabilities of $436 million partially offset by an increase in accounts
receivable of $211 million. In addition to operating cash flow, other
significant cash flow items during the first quarter of fiscal 2000 included net
purchases of short-term investments of $174 million, $41 million utilized for
the repurchase of common stock, and cash proceeds from the sale of ARM stock of
$136 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 first quarter of fiscal
2000, the Company repurchased 500,000 shares at a cost of $41 million. 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
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.
16
<PAGE>
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, and Akamai. 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. As of January 1, 2000, the estimated fair value of these
investments is $2.14 billion. The Company believes it is likely there will 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."
YEAR 2000 COMPLIANCE
THE INFORMATION PRESENTED BELOW RELATED TO YEAR 2000 (Y2K) COMPLIANCE CONTAINS
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED BELOW AND
ELSEWHERE IN THIS FORM 10-Q REGARDING Y2K COMPLIANCE.
The Year 2000 (Y2K) issue is the result of certain computer hardware, operating
system software and software application programs having been developed using
two digits rather than four to define a year. These problems could result in the
failure of major systems or miscalculations, which could have a material impact
on companies through business interruption or shutdown, financial loss, damage
to reputation, and legal liability to third parties. The Company's worldwide Y2K
strategic plan (Y2K Plan) was described in the Company's 1999 Form 10-K. This
plan was substantially completed prior to the end of the first quarter of fiscal
2000. Through January of 2000, the Company's total incremental external spending
over the life of its Y2K plan was approximately $10 million.
The Company's business operations are heavily dependent on third party corporate
service vendors, materials suppliers, outsourced operations partners,
distributors and others. Through January of 2000, the Company's key third party
suppliers and service providers have not reported any significant Y2K compliance
problems, and the Company's financial results have not been negatively impacted
by Y2K failures of third parties. However, because the Company's continued Y2K
compliance in calendar 2000 is in part dependent on the continued Y2K compliance
of third parties, there can be no assurance that the Company's efforts alone
have resolved all Y2K issues or that key third parties will not experience Y2K
compliance failures as calendar year 2000 progresses.
Through January of 2000, the Company experienced a limited number of minor
malfunctions in its information technology (IT) systems as the result of the
date change. None of these failures had a material impact on the Company's
financial performance. The Company believes it could experience additional
minor malfunctions of its IT systems and Non-IT business systems not
previously detected but that these additional malfunctions will not have a
material impact on the Company's results of operations or financial
condition. As discussed above, the Company's continued Y2K compliance in
calendar 2000 is in part dependent on the continued Y2K compliance of third
parties.
17
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company operates in a rapidly changing environment that involves a number
of uncertainties, some of which are beyond the Company's control. In addition
to the uncertainties described elsewhere in this report, there are many
factors that will affect the Company's future results and business, which may
cause the actual results to differ from those currently expected. The
Company's future operating results and financial condition are dependent upon
the Company's ability to successfully develop, manufacture, and market
technologically innovative products in order to meet dynamic customer demand
patterns. Inherent in this process are a number of factors that the Company
must successfully manage in order to achieve favorable future operating
results and a favorable financial condition.
Potential risks and uncertainties that could affect the Company's future
operating results and financial condition include, among other things, continued
competitive pressures in the marketplace and the effect of any 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; and the Company's ability to retain the
operational and cost benefits derived from its recently completed restructuring
program.
For a discussion of these and other factors affecting the Company's future
results and financial condition, see "Item 7 -- Management's Discussion and
Analysis -- Factors That May Affect Future Results and Financial Condition" in
the Company's 1999 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
THE INFORMATION PRESENTED BELOW REGARDING MARKET RISK CONTAINS FORWARD
LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED BELOW AND
ELSEWHERE IN THIS FORM 10-Q REGARDING MARKET RISK. THE FOLLOWING DISCUSSION
SHOULD BE READ IN CONJUNCTION WITH THE 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. 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 January 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.
18
<PAGE>
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.
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
<PAGE>
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None
20
<PAGE>
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
January 31, 2000
21
<PAGE>
INDEX TO EXHIBITS
Exhibit
Index
Number Description Page
- ------ ----------- ----
27 Financial Data Schedule. 23
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> JAN-01-2000
<CASH> 1,586
<SECURITIES> 2,074
<RECEIVABLES> 958
<ALLOWANCES> 66
<INVENTORY> 15
<CURRENT-ASSETS> 4,909
<PP&E> 725
<DEPRECIATION> 407
<TOTAL-ASSETS> 7,586
<CURRENT-LIABILITIES> 1,965
<BONDS> 300
0
150
<COMMON> 1,345
<OTHER-SE> 1,237
<TOTAL-LIABILITY-AND-EQUITY> 7,586
<SALES> 2,343
<TOTAL-REVENUES> 2,343
<CGS> 1,736
<TOTAL-COSTS> 1,736
<OTHER-EXPENSES> 507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 274
<INCOME-TAX> 91
<INCOME-CONTINUING> 183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 183
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.03
</TABLE>
