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133 requires that all derivatives be recognized as either assets or liabilities at fair value.
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Derivatives that are not hedges must be adjusted to fair value through income.
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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.
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Net of the related income tax effect of approximately $5 million, adoption of SFAS No.
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133 resulted in a favorable cumulative-effect-type adjustment to other comprehensive income of approximately $12 million, substantially all of which was reclassified to earnings by the end of the second quarter of fiscal 2001.
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As of December 29, 2001, the Company had a net deferred gain associated with cash flow hedges of approximately $29 million net of taxes, substantially all of which is expected to be reclassified to earnings by the end of the third quarter of fiscal 2002.
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The following table summarizes activity in other comprehensive income related to derivatives, net of taxes, held by the Company during the three month periods ending December 29, 2001 and December 30, 2000, respectively, (in millions): Note 5-Shareholders' Equity Stock Repurchase Plan In July 1999, the Company's Board ...
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This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time.
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No shares were repurchased in the first quarter of 2002.
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Since inception of the repurchase plan, the Company has repurchased or committed to repurchase a total of 6.55 million shares of its common stock at a cost of $217 million.
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Comprehensive Income Comprehensive income consists of two components, net income and other comprehensive income.
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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.
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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, from unrealized gains and losses on marketable securities categorized as available-for-sale, and from net deferred gains and losses on certain...
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The following table summarizes the components of accumulated other comprehensive income, net of taxes, (in millions): Note 6-Goodwill and Other Intangible Assets SFAS No.
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141, "Business Combinations," and SFAS No.
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142, "Goodwill and Other Intangible Assets," were issued in July 2001.
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SFAS No.
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141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001.
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SFAS No.
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141 also specifies criteria that intangible assets acquired in a purchase business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately.
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SFAS No.
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142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No.
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142.
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SFAS No.
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142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment in accordance with SFAS No.
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144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
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The Company adopted SFAS 142 in the first quarter of fiscal 2002 and will no longer amortize goodwill.
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The Company established reporting units based on its current reporting structure.
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For purposes of testing goodwill for impairment, goodwill has been allocated to these reporting units to the extent it relates to each reporting unit.
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The Company completed the first step of the transitional goodwill impairment test and has determined that no potential impairment exists.
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As a result, the Company has recognized no transitional impairment loss in the first quarter of 2002 in connection with the adoption of SFAS 142.
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The Company will evaluate goodwill at least on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flow.
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The following table summarizes the components of gross and net intangible asset balances (in millions): Expected future annual amortization expense related to acquired technology and other intangible assets is as follows (in millions): Amortization expense related to intangible assets was as follows (in millions): Pro ...
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Accordingly, the Company recognized a restructuring charge of approximately $24 million during the first quarter of 2002.
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The restructuring plan includes significant changes in the Company's information systems strategy resulting in termination of equipment leases and cancellation of existing projects and activities.
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The restructuring plan will result in the elimination of approximately 425 positions worldwide, 375 of which were eliminated by the end of the first quarter.
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Positions were eliminated primarily in the Company's operations, information systems, and administrative functions.
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The following table summarizes activity during the first quarter associated with the restructuring plan (in millions): The Company currently anticipates that substantially all of the remaining accrual will be spent by the end of its third quarter of 2002.
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Note 8-Segment Information and Geographic Data The Company manages its business primarily on a geographic basis.
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The Company's reportable segments are comprised of the Americas, Europe, Japan, and Retail.
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The Americas segment includes both North and South America, except for the activities of the Retail segment.
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The Europe segment includes European countries as well as the Middle East and Africa.
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The Japan segment includes only Japan.
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The Retail segment operates Apple-owned retail stores in the United States.
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Other operating segments include Asia-Pacific, which includes Australia and Asia except for Japan, and the Company's subsidiary, Filemaker, Inc. Each reportable geographic operating segment provides similar products and services.
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The Company evaluates the performance of its operating segments based on net sales and operating income.
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Net sales for geographic segments are based on the location of the customers.
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Operating income for each segment includes revenue from third-parties, cost of sales, and operating expenses directly attributable to the segment.
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Operating income for each segment excludes other income and expense and certain expenses that are managed outside the operating segments.
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Costs excluded from segment operating income include various corporate expenses, manufacturing costs not included in standard costs, income taxes, and various nonrecurring charges.
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Corporate expenses include research and development, corporate marketing expenses, and other separately managed general and administrative expenses including certain corporate expenses associated with support of the Retail segment.
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Operating income for all segments except Retail includes cost of sales at standard cost.
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Manufacturing expenses and related adjustments not included in segment cost of sales, including variances between standard and actual manufacturing costs, warranty costs, and freight costs, and the mark-up above standard cost for product supplied to the Retail segment, are included in corporate expenses.
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To assess the operating performance of the Retail segment, cost of sales for this segment includes a mark-up above standard cost to approximate the price normally charged to the Company's major channel partners in the United States.
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For the first quarter of 2002, this resulted in the Retail segment recognizing additional cost of sales above standard cost and an offsetting benefit to corporate expenses of approximately $8.6 million.
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Summary information by operating segment follows (in millions): A reconciliation of the Company's segment operating income to the consolidated financial statements follows (in millions): Note 9-Contingencies Beginning on September 27, 2001, three shareholder class action lawsuits were filed in the United States Distric...
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The lawsuits are essentially identical, and purport to bring suit on behalf of those who purchased the Company's publicly traded common stock between July 19, 2000, and September 28, 2000.
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The complaints allege violations of the 1934 Securities Act and seek unspecified compensatory damages and other relief.
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The Company believes these claims are without merit and intends to defend them vigorously.
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The Company is subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and have not been fully adjudicated.
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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 current legal proceedings and claims that would have a material adverse effect on its financial condition, liquidity or results of operations.
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On February 15, 2001, the Internal Revenue Service (IRS) proposed adjustments to the Company's federal income tax returns for the years 1995 through 1997.
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The Company disagrees with most of the proposed adjustments and is contesting them through the IRS Appeals Office.
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Substantially all IRS audit issues for years prior to 1995 have been resolved.
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Management believes that adequate provision has been made for any adjustments that may result from tax examinations.
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Item 2.
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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.
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The Company's actual results may differ significantly from the results discussed in the forward-looking statements.
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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.
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The following discussion should be read in conjunction with the 2001 Form 10-K and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.
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All information is based on the Company's fiscal calendar.
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Business Update Hardware Products In January 2002, the Company introduced a new iMac with an innovative industrial design that incorporates an adjustable 15" LCD flat panel display and an ultra-compact base.
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The new iMac features PowerPC G4 processors, advanced graphics capabilities, a SuperDrive on one model for playing and burning custom CDs and DVDs, and includes Apple's suite of software for digital photography, music, and movies.
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The new iMac will initially be available in three configurations, all of which are expected to ship during the second quarter of 2002.
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The Company continues to offer two configurations of its original CRT iMac design at suggested retail prices under $1,000.
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In January 2002, the Company also updated its iBook line of portable computers and added a new model with a 14.1-inch display.
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The Company upgraded its Power Mac line of desktop personal computers at the end of January 2002.
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New Power Mac models feature new system architecture, new graphics processors, and dual 1GHz PowerPC G4 processors in the most advanced model.
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The SuperDrive remains standard on high-end Power Mac systems.
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Software Products The Company announced that beginning in January 2002, it would make Mac OS X the default operating system on all new Macintosh systems by the end of January 2002.
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Mac OS X has been included, along with Mac OS 9, on all of the Company's Macintosh systems shipped since May 2001.
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Mac OS 9 will continue to be shipped on all of the Company's systems, enabling users to run Mac OS 9 applications in "Classic" mode from within Mac OS X, or have the option of booting into Mac OS 9 if they choose.
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Through December 2001, software developers had delivered more than 2,500 native Mac OS X applications.
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The Company introduced iPhoto in January 2002.
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Designed exclusively for Mac OS X, iPhoto makes it easy to import, edit, save, share, and print digital photos, as well as organize and manage an entire digital photo collection containing thousands of photos.
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Users are able to view their photos in full-screen; cross-dissolve slide shows accompanied by their favorite music; automatically create custom web pages of their photos; email photos to friends and family; order professionally-processed prints and enlargements online; or easily create and order custom-printed, linen-c...
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Business Outlook The Company expects net sales to rise sequentially during the second quarter of 2002 to approximately $1.5 billion and expects second quarter earnings to be relatively flat as compared to the first quarter.
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Second quarter operating expenses are expected to decline by between $10 million to $15 million due to seasonally lower advertising and promotional expenses.
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The impact of higher net sales and lower operating expenses on earnings during the second quarter is expected to be offset by lower gross margins and lower net other income.
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The foregoing statements concerning the Company's anticipated net sales, gross margin, operating expenses, and earnings for the second quarter of 2002 are forward-looking.
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The Company's actual results could differ.
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The Company's future operating results and financial condition are dependent upon general economic conditions, market conditions within the PC industry, and the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet the dynamic conditions within the highl...
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Some of the potential risks and uncertainties that could affect the Company's future operating results and financial condition are discussed throughout this Item 2, including the discussion under the heading below "Factors That May Affect Future Results and Financial Condition," and in the 2001 Form 10-K.
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Results of Operations Tabular information (dollars in millions, except per share amounts): 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): NM: Not Meaningful Net sales during the fir...
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The decline resulted primarily from a shortfall in sales in iMac due to the iMac's mature form factor and widespread speculation about a new iMac product introduction in January 2002.
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Unit sales of Power Mac systems also declined from the fourth quarter as a result of general economic conditions.
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The Company continues to believe that many of its professional users are delaying upgrades of their Power Macintosh systems due to the Company's ongoing transition to Mac OS X, its new operating system, and in anticipation of certain software vendors transitioning their Mac applications to run natively in Mac OS X.
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Unit sales of iBook in the first quarter declined to more normal levels following strong seasonal sales to U.S. education customers in the fourth quarter.
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First quarter net sales were also negatively impacted by some K-12 educational institutions delaying technology purchases due to concerns about the overall impact of the weaker economy on their available funding.
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First quarter 2002 net sales were impacted favorably by several factors.
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