Report from a Shareholder's Meeting

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By RodgerRafter
April 23, 2004

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I went to the Apple (AAPL) shareholder's meeting today, making it the 5th straight year. I go so I can let management know how they can better serve shareholders and to ask the CFO questions face to face about the company's books.

3 years ago I went up to the mike and told them that their levels of compensation through stock options were an order of magnitude too high and that they should switch to restricted stock from options to eliminate conflicts of interest and bring the incentive program more in line with the interests of long term shareholders. At the time they politely suggested this was nuts, but amazingly, the company actually did what I suggested the next time bonuses were dished out (late March). They waited a year longer than they originally planned, then gave out 200,000-300,000 shares worth of restricted stock, vesting over 4 years. This was probably worth about 1/10th as much as the 1,000,000 shares worth of options they each got with the price at its low in 2001 as part of an every other year bonus schedule. Although I know they'll never give me credit for the idea, I'll take credit for planting the seed and re-fertilizing it in January of 2003.

2 years ago I went up to the mike and criticized them for using the share repurchase plan to buy back stock at prices around $50 and then not using it when the price dipped to $13. The next year, when the stock dipped into the thirteens, they pulled the trigger and bought back a large chunk of stock. I'll take 80% of the credit for that one.

Last year I had a long meeting with the CFO to talk about governance well in advance of the meeting, with board composition being a big issue, and they've made good progress on that one as well (although the nominating committee still hasn't contacted me yet). ;-)

This year, with little to say about governance other than complementing them for their progress, I decided to press them on their decision to close their manufacturing plant in Sacramento, CA and to urge them to focus more on exporting to other markets. In between I rambled on about the country's need for manufacturing jobs, the $500 Billion trade gap, and the dollar's soon to be resumed fall. When Steve Jobs interrupted me and asked just what my question was, I narrowed the focus to how much they were saving by closing the plant and what they were trying to do to expand sales in foreign markets.

The VP in charge of sales and operations took my question and said that his decision to close the plant was very difficult but that they were paying for retraining for the laid off employees and that all jobs were moved to Southern California and not out of the country. He also cited a bunch of minor efforts to sell product in other countries that everyone was already well aware of. Steve Jobs just bluntly said I was "wrong" about their not putting enough emphasis on exports. That's pretty much what he said about my restricted stock idea 3 years ago and their repurchase activity 2 years ago, so I wasn't offended.

After the Q&A I cornered the CFO, as usual, to try and extract as many details as possible in a polite and cordial manner. I congratulated him on his approaching retirement and said that I was glad that he'll be serving on the board because he'll be a significant shareholder. I told him that a big problem with the other board members was that they were our representatives but were not accessible to us. He agreed that he should be accessible to shareholders when he joins the board.

I also told him that it looked really bad that so many of the VPs sold shares all at once and that it will look even worse if the stock starts to drop significantly right after that. He didn't think it would, partly because the economy was going well. I reminded him of my shareholder proposal (blocked by the company) about repurchasing shares and suggested that they should keep that in mind if the stock did start falling soon.

I also re-grilled him and his replacement as CFO (the current controller) about the plant closing and found out that they were outsourcing to save money on labor costs and a variety of other things. The old plant in Sacramento was still being used as a call center and distribution center.

Talking to the controller alone, I reconfirmed a bunch of old things I'd learned from the CFO at past meetings. Sadly, they buy into the same mainstream economic BS that gets heaped on the general public. They think that the economy is strong and growing, but don't really worry about credit bubbles or economic cycles. I asked if they follow or try to forecast currency fluctuations (like we do on this board) and he said, "No, we leave that to the bankers." They just hedge their currency risks out 3 to 6 months, which really just means that they don't benefit from a falling dollar until 3 to 6 months after it falls. The company does think that rates will eventually go up, so they've shifted to shorter maturities on their cash and short term investments, which is resulting in very low interest income for now. I have to give them credit for that.

While Apple is unique in a large number of ways, I think they are typical in terms of going with the flow in terms of economic outlooks. The financial types are mainly tuned into the finances of the company and, as the incoming CFO said, they leave the forecasting to the bankers. Unfortunately, this compounds the problems of economic cycles because they ramp up production in good times, just in time for things to turn bad. They don't seem to understand how cyclical things really are. Many companies are enjoying the boom now and planning as if it will continue forever, when they should be locking away profits and paying down debt. At least that's my impression.


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