Technology

Apple Takes Its Bankroll to Reno


Apple Computer is breaking records with sales of its popular iPod music player -- and has the coffers to prove it. Now the Cupertino, Calif.-based computer maker has come up with what could be a smart way to manage part of that swelling cash pile. Apple has set up a company based in Nevada with the purpose of managing its cash and short-term investments in a tax-advantageous manner, BusinessWeek Online has learned.

According to public documents, Apple has incorporated Braeburn Capital, an asset management company based in Reno, (Nev.) Braeburn -- named for a variety of apple that's uniquely sweet and tart -- will be a vehicle for managing Apple's investment portfolio. By incorporating in Nevada, Apple will be shielded from certain taxes imposed by the state of California, according to a person briefed on the matter.

CASH IN HAND. Like many corporations, Apple (AAPL) is faced with the mixed blessing of a rising cash hoard, a portion of which has to be handed over to the tax man. Some, like Microsoft (MSFT), buy back billions of dollars worth of shares, pay dividends to shareholders and occasionally snap up smaller companies. Intel (INTC) does those things too, but also has a venture capital fund aimed at funding smaller companies and initiatives that in the long run will ensure continued demand for its semiconductors (see BW, 4/10/06, "Corporate Cash: Use It Or Lose It").

Apple's intentions for the cash managed in Reno are less clear, but its pool of funds is certainly on the rise. Apple's cash reserve has nearly doubled over the last two years. At the end of 2005, Apple had $8.7 billion in cash and short term investments, about 15% of its market capitalization. That's up 91%, from $4.6 billion, at the end of 2003. And it compares with much bigger rivals like Dell (DELL), which reported $9 billion in cash and short-term investments for the quarter ended February.

An Apple spokesman said Braeburn will function as a regional treasury office, on par with existing offices in Cupertino, Singapore, and Cork, Ireland. He declined to comment on the tax implications or elaborate on Braeburn's investment plans.

HELP WANTED. Apple has placed ads looking for a senior and junior financial officer who would report to Chief Financial Officer Peter Oppenheimer and Apple's board on a quarterly basis. The ads described Braeburn as "a wholly-owned subsidiary of Apple Computer." The Internet domain braeburncapital.com points directly to Apple's official Web site at www.apple.com. Documents filed with the Nevada Secretary of State's Office include articles of incorporation dated Oct. 3, 2005. They name Oppenheimer, Treasurer Gary Wipfler, and two other Apple executives -- Peter A. Tomei, director of capital markets and Michael Shapiro -- as its officers.

The Braeburn job ads stipulate that the person hired would be given the assignment of finding external money managers specializing in fixed-income and money market investments with maturities ranging from one to five years. That could give a clue to the potential size of Braeburn's portfolio. Apple says that as of Dec. 31, $172 million of its short-term investments is tied up in instruments with maturity dates of "one to five years."

Here's how the rest of Apple's cash breaks down: $233 million in cash; $21 million in government treasury instruments; $2.5 billion corporate securities, mostly commercial paper and certificates of deposit; and another $1.3 billion in foreign securities. Apple's short-term investments -- which it defines as securities with maturity dates of more three months -- included $3.2 billion invested in corporate securities (again, mostly corporate debt) a little more than $1 billion in foreign securities and another $296 million in treasuries.

TAX HAVEN. So why incorporate in Nevada? Nevada has no corporate income tax, no capital-gains tax, and the state doesn't share information with the U.S. Internal Revenue Service, says Neal Chambers, a corporate attorney with the firm of Bullivant Houser Bailey in Las Vegas. California, for its part, collects corporate income, capital gains, and franchise taxes -- all in the ballpark of 9%.

Companies like the online shoe distributor Zappos.com, which last year sold $370 million worth of footware online, moved its operations -- including 221 employees -- from San Francisco to Clark County, Nev. in 2004. Zappos was the biggest of 37 companies that fled California in 2004 for Nevada, in part because of the more favorable tax environment, according to the Nevada Commission on Economic Development.

Whatever the plans for Braeburn, Apple's got a lot of cash, and at some point it may face calls to share more of it with investors. "They could buy back some shares or give more cash compensation to employees instead of stock options," Shaw Wu of American Technology Research says. He says companies like Cisco Systems (CSCO) and Broadcom (BRCM) have started favoring cash to boost compensation and bonuses in lieu of stock options, which dilute shareholder value.

DIVIDENDS REDUX? Apple last authorized a share repurchase, worth $500 million, in 1999, and by the end of 2003, had repurchased $217 million worth of stock. And what about a dividend? The last time Apple paid a dividend -- 48 cents a year -- was in 1995, before the crisis years of 1996 and 1997. It hasn't paid one since.

"If anything, I could see Apple pulling the trigger on buybacks, but not paying a divided," says Charles Wolf, an analyst with Needham & Co. in New York. "Dividends just aren't the Silicon Valley way. And if they did an acquisition, I think they'd rather do it with cash than with stock."

And where better to manage at least part of that cash, than in Nevada.


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