Apple Now Debt Free, Says Internal Memo 627
An anonymous reader writes "99mac.se publishes an internal memo from Steve Jobs to Apple employees today.
According to the Memo, Jobs states that "Today is a historic day of sorts for our company." Apple used $300 million in cash to pay off the rest of their debt, and is now a debt-free company. A big turnaround from over $1 billion in debt in mid-1997.
Also noted in the memo is that Apple has $4.8 billion in the bank at this time." (Since this is not coming straight from Apple, confirmation -- or debunking -- would be helpful.)
$4.8 billion (Score:5, Informative)
Bad? (Score:2, Informative)
Re:why wait so long? (Score:5, Informative)
I don't understand why a company with $4.8 billion (or $5.1 billion pre-$300mill hit) would wait this long to pay off the $300 million owed.
When they say $4.8 billion in the bank, they don't mean $4.8 billion sitting there doing nothing. They mean $4.8 billion, part of which is earmarked for salaries in the next quarter, part of which is for office space, maintainance, etc, part of which is for production of new units, part of which is for research and development, and maybe a very tiny bit that's actually not earmarked for anything. And it's that tiny bit not earmarked for anything that they can use to pay off the debts. Remember: $4.8 billion is a lot of cash, but Apple is a huge company these days, and it takes a lot of cash to keep that going.
Re:Because.. (Score:5, Informative)
Re:Because.. (Score:5, Informative)
that sounds right (Score:5, Informative)
according to their last sec filing, they had 300 million in debt and about 5 billion cash.
see this for details. [yahoo.com]
MS long gone... (Score:2, Informative)
Re:why wait so long? (Score:4, Informative)
Plausible based on last quarterly report (Score:4, Informative)
According to their balance sheet, they had $3.7B in cash as of Dec 27, 2003. At that time they also had a little over $300M in debt. The numbers add up with what is reported in the story, so I wouldn't say there is any reason to believe it isn't true. I would think that something like this would make a press release, but maybe they are waiting for the market close?
Re:want confirmation? - SEC filling just happened (Score:3, Informative)
Re:Bad? (Score:3, Informative)
If you as a business consultant, they'll tell you the best thing you can do for a home business is pay off your house, but exercise a line of equity. You don't have to actually USE the equity line, and no one can tell how much you HAVE used.
So, someone who slips and falls on your property and considers suing you simply to take your house will think twice, as you may have borrowed a huge amount on it and it would cost them more to repay it.
I'm sure corporations exercise similar concepts. Being out-of-debt is always a good thing. Ensuring that you don't look like a good target requires creative ways of _appearing_ in debt.
Re:First to say - Well Done (Score:5, Informative)
Solvency is the ability to cover current debts (loans due in less than 1 year) with current assets (cash, inventory, short-term paper etc...). As others have pointed out, carrying debt can have a number of advantages, including tax treatments, treasury management, leverage etc...
For example, loans increase the usable cash for a company, which allow you to make more money than you could with just equity. And, since someone else has loaned you the money your return on equity (ROE) is higher. Since high ROE is a good thing, debt is an important part of the equation.
Re:$4.8 billion (Score:5, Informative)
Get serious. It's cash reserves, collecting Bank interest.
Daily operations of $4.8 Billion would make zero sense due to the fact it takes them 6 months to generate that much in gross sales alone.
It would be quite difficult to claim zero debt now wouldn't it?Seems reasonable (Score:5, Informative)
What they don't mention is that (of course) they have plenty of accounts payable. Not explicitly debt, they are still liabilities that are owed. No big deal, though, every company's got that.
I don't understand, though, why they're so eager to get rid of their debt. $300M isn't that much money (when they've got $3B cash, i.e.) and there's nothing wrong with a moderately leveraged firm (debt is of course usable capital, and they've effectively just lost $300M of "project money"), and I don't think that Apple was at any risk of defaulting.
If this debt was raised long ago (when rates were high), then I figure it's reasonable, but if this debt is recent, then it doesn't explicitly make sense to me (IANACFO), because that's cheap money for
To me, this seems to be an indication that Apple's going to be a bit more conservative and slow down new projects and products and such. When a company pays off debt, this must mean that interest rates cost more than the returns of the projects this money could finance.
This ranks Apple right up with Microsoft (since Microsoft started dividends a while back) as cash cow companies. I would be careful about buying.
Just my thoughts.br.
Confirmation - WSJ (Score:5, Informative)
Re:How does this compare with other companies? (Score:5, Informative)
If I were to invest $10 in a new research effort, if it were "borrowed" money the cost of capital would be only the interest on that $10 until I expected the research to pay back $10.
However, if that $10 came from my debt-free bank account, my shareholders would expect a certain rate of return on that investment which is typically much higher than interest rates are right now (which is why people invest in stocks in the first place, they're higher risk, but they expect higher returns).
Typically, cost of capital can be 15%, 20%, or more depending on the industry and stock performance. Borrowed money is cheap.
MadCow.
Re:First to say - Well Done (Score:3, Informative)
Blockquoth the poster:
Small correction: to be solvent, you merely need to have more assets than debts. Most companies are solvent by this definition, and in corporations, the difference is considered "stockholder equity": the cash that would be divided amongst the stockholders if/when the company was liquidated.
On the other hand, for a corporation to be completely debt-free is a rare achievement.
Re:want confirmation? (Score:5, Informative)
Since they've got way more than $300 million in the bank, they would be able to cover these notes in cash, which is apparently what they did.
In other words (Score:4, Informative)
Re:why wait so long? (Score:5, Informative)
If the $300M was comprised of corporate bonds, (and the phrase 'which we decided to hold to maturity' indicates that it was) then paying them off earlier would have meant giving the bond holders back their capital. Since those bond holders would have had to reinvest at last year's lower interest rates, Apple would have been doing them a dis-service. By holding them to maturity they make those bond holders more likely to purchase Apple corporate debt in the future, which could lower their total borrowing costs down the line
Re:Because.. (Score:5, Informative)
For example, with more debt you incur more yearly interest and your times interest earned ratio (net profits / interest costs) decreases, which can bring about questions of solvency.
Tech companies especially need to have very conservative ratios to show their financial viability. A lot of cash and not a lot of debt seems to be the rule of thumb when you look at the NASDAQ.
InternalMemos.com has the real memo (Score:5, Informative)
Re:Bad - Enterpise Value (Score:5, Informative)
Lets assume I want to buy Apple - all of it
First I buy all of the shares
Now I get access to their bank account - if the company has net debt (see Disney) I have to pay that off (either through loan payments, or through other means)
If the company has net cash (see Microsoft) I can take that money and do whatever I want with it
So Enterprise value of a company is
The cost of all of the shares of stock
Plus the debt of the company
Minus the cash/etc. of the company
End result is paying debt off from cash is a net wash on enterprise value because the cash is smaller, but the debt is as well.
End result is I prefer companies with smaller debt loads - it is easier to predict their earnings (every penny they make goes to profit, not debt service) however companies with large debt loads can have huge swings in earnings because the first 10 bucks they make go to debt service, and every penny beyond that goes to profit - so a small change in profits look a lot bigger (compare 10.02 to 10.01 dollars vs. 0.02 vs 0.01 as a percentage)
Re:Lets see... (Score:5, Informative)
I just bought five albums on iTunes. Not one of them was on an RIAA label. One of the labels I bought from is owned by the artist himself (Pete Namlook's FAX label [hyperreal.org]). The others were similar independent labels (Ninja Tune [ninjatune.net] and Tresor [tresorberlin.de]). There is non-RIAA music on iTunes in spades, and I will continue to buy from them.
Re:How does this compare with other companies? (Score:3, Informative)
One of the indicators investors and managers look at is cash flow. By closing lines of credit, the company has less liquidity should a downturn happen. The bankers may be willing to re-open accounts, and resell bonds, but there is a cost involved.
In a high interest-rate enviroment, this would be financially wise thing to do.
Then again, the PR value of this news shouldn't be underestimated.
Re:How does this compare with other companies? (Score:5, Informative)
Re:How does this compare with other companies? (Score:5, Informative)
It's up to the finance guys to say, "Hey, we can borrow another $300 mill for 5% while we're making 6% on our investments." If they can't say that, then they won't borrow more money unless they need it.
Re:First to say - Well Done (Score:2, Informative)
Re:First to say - Well Done (Score:1, Informative)
Sure, many economists believe that in a faltering economy it is the government's responsibility to increase spending to "pick up the slack", but Bush has gotten out of control, spending $100B+ [costofwar.com] on war (apparently it costs San Francisco about $284M alone). Not to mention the human cost of course.
And, oh, the war did bring some great amount of wealth to America. In the form of contracts [export.gov] to big American corporations. So altruistic.
So running a deficit isn't a big deal, as long as you have good credit and you can finance the interest (or equivalent). It doesn't seem that Bush is doing us any favors by running up a deficit and hurting our credibility globally.
Re:want confirmation? - SEC filling just happened (Score:5, Informative)
Re:First to say - Well Done (Score:3, Informative)
If I remember correctly:
ROE = net income/shareholder equity
If cash from a loan will not increase your net income, it won't affect ROE
Re:Because.. (Score:3, Informative)
Any incompetant finance prof, that is. The Modigliani-Miller theorem [investopedia.com] has that premise, but it can be broken down because of tax differences, risk preferences, and of course efficient capital markets. In theory, different types of firm have different optimal capital structures (and in practice there are differences between different types of firm).
If you're interested in the theory then check out the paper [repec.org] Miller wrote in retrospect.
Apple has had several billions in cash for years (Score:5, Informative)
Maybe you remember the MacExpo keynote from 1997, where Steve Jobs announced that a) Microsoft had aquired shares of Apple worth $US 150 million and b) guaranteed that they would continue to offer MS Office for MacOS for at least another five years. Today this is still recalled by a lot of PC fans as the day Microsoft saved Apple by buying stock. But what most people did not see was that at that time Apple already had several billions in reserve (I think it were four) and the stock Microsoft bought was basically symbolic, the major news was the Office deal. (http://antibogon.org/Stepwise/TheHolyGrail.html [antibogon.org] mentiones that Apple was worth $US 7 billion at that time.)
So if Apple now claims to be debt free this does not mean at all that they finally earned enought to pay back their debt. They could have done that years ago. It just means that they decided (for some strange fiscal reasons) to pay back everything in 2004 (remember, debt is positive from a tax point of view) and that, as usual, Steve Jobs takes this non-news and transforms it into holy water for the mac users.
Posted from my blessed iBook
Re:Because.. (Score:5, Informative)
Re:want confirmation? (Score:5, Informative)
Apple sold debt in 1994 that was due in February 2004 (10 year debt). For examples sake (and easy math), Apple said to bond holders: "Loan me $100,000 and I'll pay you 6.5% interest. On February 2004, I'll pay you back $100,000. However, instead of giving me $100,000, I'll let you give me $99,925 today (99.925% of par), but still give you back $100,000 in February 2004." The bond holder make the 6.5% interest and an extra $75. The "effective yield" is that 6.5% plus the $75.
The interest rate swaps are a little harder to explain. Essentially, Apple is covering themselves in case of large interest rate swings.
If you would like to read up on bond things, you might want to look at the Bond Market Association Publication list [mbrservices.info]. Click the PDF links. The prices listed are for if you want a hard copy.
Re:First to say - Well Done (Score:3, Informative)
As far as I know, that's a direct violation of the Balanced Budget Amendment. Even Republicans like Sen. John McCain have major problems with the Bush Administration's spending spree.
Re:debunk (Score:3, Informative)
In all reality, there is little reason for PCs to ship with multi-button mice. I did technical support for 3 years and you would not believe the odd silence, tantarums, and general ignorance exposed when asking someone (who's had their computer for two years) to 'right click' on an icon. I would say a solid third of the people I dealt with had never used that mouse button and confused by it.
I use a Apple keyboard on my PC, so I can't blame a Apple user using a PC mouse. Thank god for USB, eh?
Re:want confirmation? (Score:5, Informative)
A very common way of borrowing money in the corporate setting is by selling promissory notes ("notes"), or loan contracts. Like private loans, every note has associated with it a principle amount (how much was borrowed), an interest rate (how much extra the lender gets per annum for lending the money), and sometimes a security (what the lender gets if the borrower fails to live up to the terms of the notes).
Most notes are standardized in their particulars: The principle is usually $1000, the payment plan is usually interest payed quarterly or semiannually and the principle payed off in full at the end of a pre-defined period. The only variables of import are the length of the loan and the interest rate.
In this case, the notes in question have a lifetime of 10 years, and pay 6.50% interest semiannually. If you owned one of these notes you would get two checks a year of $32.50 each until now, when you would get a check for $1000. If you had bought it when originally sold by Apple, you would have paid $999.25 for it instead of $1000.
So what Apple is saying is that there were $300Mil of these notes (or 300,000 of them) still outstanding in February, and they planned to pay them off with cash on hand.
Re:want confirmation? (Score:1, Informative)
$5 just isn't going to pay off much debt, now is it?
Don't quit your dayjob. Unless you're in finance - then quit right away!
Re:Because.. (Score:5, Informative)
Someone with a bent for Truth. Thank you.
And I'd like to add that Apple Engineering enhances or completely refactors bits and pieces of the NetBSD, OpenBSD, FreeBSD code, and give back accordingly per any licensing agreements.
This reminds me of when people give Adobe the credits to developing Display Postcript and NeXT just licensed it. DUH! Without NeXT it wouldn't have come about, let alone Display PDF, etc. Let's give credit for ideas and code where they are due.
Apple paid cause the debt was due (Score:3, Informative)
-Ryan
Re:why wait so long? (Score:2, Informative)
Re:want confirmation? - SEC filling just happened (Score:2, Informative)
Quarterly means four times a year.
Your confusion probably arises from the fact that there are only three school terms, the word 'term' being an anglification of 'tri-mester'. To compound that, the prefix 'se-' before 'mester' in those schools which work with two longer terms (sems?) could easily be confused with 'semi'.
Re:Lets see... (Score:5, Informative)
I believe membership fees for the RIAA are based on gross revenues... ahh this [riaa.com] outlines it.
In some ways the RIAA is like the ACLU [aclu.org], almost everyone hates it at some point until it is defending a constitutional right that they care about.
-Shawn
Re:First to say - Well Done (Score:4, Informative)
Re:First to say - Well Done (Score:3, Informative)
Incorrect.
Spain was quite successful in the 1500's, otherwise known as the Siglo de Oro, or century of gold built up from their, uh, ventures in the New World.
At the time they were considered a pre-eminent world power. The British were quite nervous about the might of the Spanish Armada when they attacked in 1588, but were fortunate in that the Spanish fleet had to contend with a series of bad weather at inopportune times.
Re:First to say - Well Done (Score:1, Informative)
You say income tax revenues increased by 99.1% the next year after the Reagan tax cuts? Check the facts. The personal income tax rate cuts were phased in during 1982 and 1983. Personal income taxes raised $286 billion in 1981, $298 bn in 1982, $289 bn in 1983, and $298 bn in 1984. Corporate income tax revenues were $61 bn in 1981, $49 bn in 1982, $37 bn in 1983, and $57 bn in 1984.
Gee, that 99.1% sounded so authoritative with the decimal place and all, but it's total fabrication.
Besides, the supply-side economics mythology conveniently forgets that Reagan had to repeal about half the business tax cuts with the Tax Equity and Fiscal Responsibility Act of 1982. Also included was a massive increase in Social Security payroll tax rates. Those revenues rose from $183 bn in 1981, $201 bn in 1982, $209 bn in 1983, $239 bn in 1984, $265 bn in 1985.
I absolutely agree that going into debt to finance investment is a great idea, provided that you actually finance investment, but the idea is that your investments repay the debt and leave you better off. Instead, Reagan, Bush, and little Bush gave us perpetually increasing debt.
Re:Because.. (Score:5, Informative)
Then you should credit Sun. Their NeWS client-server windowing system (which began development in 1985) used PostScript to describe objects on the screen, but predated NeXT and Adobe's Display PostScript. See http://www.postscript.org/FAQs/language/node73.htm l [postscript.org]
and http://en.wikipedia.org/wiki/NeWS [wikipedia.org] for corroboration.
NeWS eventually was absorbed into Sun's OpenLook environment. To this day, Sun's X server supports Display PostScript, as anyone who uses a Sun workstation knows. (A logo to this effect is displayed when the X server starts.)
I don't mean to belittle NeXT here - I've been a NeXT user for a decade and still have a working NeXTStation TurboColor and NeXTLaser Printer. Display PostScript wasn't really a NeXT innovation, however. (Objective-C on the other hand, was all NeXT)
-Isaac
Re:As opposed to Red Ink Republicans? (Score:1, Informative)
Re:Market share isn't everything! (Score:4, Informative)
market share decreases, their price would go UP
Check 1. Apple's market share HAS decreased since the mid 1990s, and yet their price points, even when not adjusted for inflation, have gone down. The cheapest apple laptops used to be in the $2500 range. Now they're at $1100.
expensive computers to maintain
Check 2. Not in my experience. I have spent less money maintaing the apple computers in my house than the PCS. In fact, going back to my still running Mac Classic, the only problems I've ever had have been with power supplies and hard drives. The power supplies were always replaced for under $100.
with no applications to run
Check 3. The mac currently has an analog for every major PC application. It runs nearly every open source application. And even if Apple dissipated, there would still be development. There is still development for the Amiga.
cannot comunicate easily with others computers
Check 4. My macs communicate fine with Linux, fine with Windows. Office suites use the same formats. Internet apps work the same. They all use Samba file and printer sharing. But maybe you use mostly IBM mainframes. I hope so, because the mac works with them too.
It's good to see FUD is alive and well in the PC community. I'd hate to think you guys learned nothing from Microsoft.
Re:How does this compare with other companies? (Score:3, Informative)
Oddly enough risky investments are sometimes ok to borrow against, it's a matter of the level of risk tolerance you are comfortable with. Real Estate is ultimately a risky asset, but most of us are comfortable borrowing and lending against it, as there are considerable forces absorbing and reducing that risk. Oh, and the only risk free investment are government treasury bonds (The US seems to be the gold standard, although I'm be comfortable with Euro zone and Japanese bonds, too especially last year with the nice currency boost) banks are only as good as the government that insures them. Ultimately governments can print money so they will always pay their debts, although the currency might not be worth much, as a bunch of pensioners are learning about Argentina's bonds. Finally, it's very hard to find people who will loan money to a startup, if you do you have a very good friend.
Re:want confirmation? (Score:3, Informative)
prime = 4% = 4/100 = 0.04
But thanks for the links to the historical data.
Well, Apple said this would happen (Score:5, Informative)
Well, given that at the announcement of their last quarterly results they stated that they would likely pay off their debt this quarter, it seems likely that this is true.
Their last filing (Score:3, Informative)
Objective-C (Score:3, Informative)
NeXT made a decision that it would be the next big thing due to its dynamic binding qualities, required for the AppKit and other kits, so they licensed it.
Re:Because.. (Score:3, Informative)
1. Whatever the relationship with Sun, it is a fact that Adobe and NeXT worked together on the standard used on the latter's boxes.
2. NeXT did not develop Objective-C. Brad Cox did. NeXT licenced Objective-C from Brad's company Stepstone until 1995, when they bought the rights outright.
Et voila.
Re:Wasn't he also acting CEO? (Score:3, Informative)
Supplementary Math Lesson (Score:4, Informative)