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0000320193
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10-Q
56
For purposes of the pro forma disclosures provided pursuant to SFAS No.
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123, the expected volatility assumptions used by the Company prior to the third quarter of 2003 have been based solely on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options.
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Beginning in the third quarter of 2003, the Company has modified this approach to consider other relevant factors including implied volatility in market traded options on the Company’s common stock and the impact of unusual fluctuations not reasonably expected to recur on the historical volatility of the Company’s comm...
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The Company will continue to monitor these and other relevant factors in developing the expected volatility assumption used to value future awards.
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Beginning in the third quarter of 2003, the Company shortened its estimate of the expected life of new options granted to its employees from 4 years to 3.5 years.
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The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees.
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The change in the expected life assumption made during the third quarter of 2003 was the result of the expected impact of shortening the contractual life of new options granted to employees from 10 years to 7 years and changing the vesting provisions of new options granted to employees from 4 year straight-line annual ...
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For purposes of pro forma disclosures, the estimated fair value of the options and shares is amortized to pro forma net income over the options’ vesting period and the shares’ plan period.
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The Company’s pro forma information for the three and nine month periods ended June 28, 2003 and June 29, 2002 follows (in millions, except per share amounts): Note 2 - Financial Instruments Cash, Cash Equivalents and Short-Term Investments The following table summarizes the fair value of the Company’s cash and availab...
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The Company’s U.S. corporate securities consist primarily of commercial paper, certificates of deposit, time deposits, and corporate debt securities.
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Foreign securities consist primarily of foreign commercial paper, certificates of deposit and time deposits with foreign institutions, most of which are denominated in U.S. dollars.
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The Company had net unrealized gains on its investment portfolio of $20 million as of September 28, 2002, and net unrealized losses of $2 million as of June 28, 2003.
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The Company occasionally sells short-term investments prior to their stated maturities.
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As a result of such sales, the Company recognized gains of $3 million and $2 million during the third quarters of 2003 and 2002, respectively.
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Recognized gains on the sale of short-term investments were $21 million and $5 million during the first nine months of 2003 and 2002, respectively.
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These gains were included in interest and other income, net.
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As of June 28, 2003, and September 28, 2002, $338 million and $1.087 billion, respectively, of the Company’s investment portfolio that was classified as short-term investments had maturities ranging from 1 to 5 years.
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The remainder of the Company’s short-term investments had underlying maturities of between 3 and 12 months.
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Non-Current Debt and Equity Investments and Related Gains The Company has held significant investments in ARM Holdings plc (ARM), Akamai Technologies, Inc. (Akamai) and EarthLink Network, Inc. (EarthLink).
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These investments have been reflected in the consolidated balance sheets as long term assets within other assets 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 comprehensi...
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All realized gains on the sale of these investments have been included in interest and other income.
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The combined fair value of these investments held by the Company was $39 million as of September 28, 2002.
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During the third quarter of 2003, the Company sold all of its remaining holdings in both ARM and EarthLink, consisting of 278,000 shares of ARM stock for net proceeds of approximately $295,000, and a gain before taxes of $270,000, and 3,960,000 shares of Earthlink stock for net proceeds of approximately $23 million, an...
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During the first quarter of 2003, the Company sold 2,580,000 shares of EarthLink stock for net proceeds of approximately $13.7 million, an amount that approximated the Company’s carrying value of the shares.
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As of June 28, 2003, the fair value of the Company’s remaining investment in Akamai was $14 million.
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During the first quarter of 2002, the Company sold 4.7 million shares of ARM stock for both net proceeds and a gain before taxes of $21 million.
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During the first quarter of 2002, the Company also sold 250,000 shares of Akamai and 117,000 shares of EarthLink stock for net proceeds of approximately $2 million each and a gain before taxes of $710,000 and $223,000, respectively.
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Debt The Company currently has debt outstanding in the form of $300 million of aggregate principal amount 6.5% unsecured notes that was originally issued in 1994.
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The notes, which pay interest semiannually, were sold at 99.925% of par, for an effective yield to maturity of 6.51%.
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The notes, along with approximately $7 million of related unamortized deferred gains on closed interest rate swaps, are due in February of 2004 and therefore have been classified as current debt as of June 28, 2003.
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Derivative Financial Instruments The Company uses derivatives to partially offset its business exposure to foreign exchange and interest rate risk.
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Foreign currency forward and option contracts are used to offset the foreign exchange risk on certain existing assets and liabilities and to hedge the foreign exchange risk on expected future cash flows on certain forecasted revenues and cost of sales.
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From time to time, the Company enters into interest rate swap agreements to modify the interest rate profile of certain investments and debt.
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The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments.
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The Company records all derivatives on the balance sheet at fair value.
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As of the end of the third quarter of 2003, the general nature of the Company’s risk management activities and the general nature and mix of the Company’s derivative financial instruments have not changed materially from the end of fiscal 2002.
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Foreign Exchange Risk Management The Company enters into foreign currency forward and option contracts with financial institutions primarily to protect against foreign exchange risk associated with existing assets and liabilities, certain firmly committed transactions and certain probable but not firmly committed trans...
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Generally, the Company’s practice is to hedge a majority of its existing material foreign exchange transaction exposures.
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However, the Company may not hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of hedging particular exposures, or limited availability of appropriate hedging instruments.
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Interest Rate Risk Management The Company sometimes enters into interest rate derivative transactions, including interest rate swaps, collars, 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-ra...
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The Company may also enter into interest rate contracts that are intended to reduce the cost of the interest rate risk management program.
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The Company does not hold or transact in such financial instruments for purposes other than risk management.
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Accounting for Derivative Financial Instruments On October 1, 2000, the Company adopted SFAS No.
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133, Accounting for Derivative Instruments and Hedging Activities.
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SFAS No.
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133 established accounting and reporting standards for derivative instruments, hedging activities, and exposure definition.
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SFAS No.
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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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As of June 28, 2003, the Company had a net deferred loss associated with cash flow hedges of approximately $4 million net of taxes, substantially all of which is expected to be reclassified to earnings by the end of the first quarter of fiscal 2004.
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Note 3 - Condensed Consolidated Financial Statement Details (in millions) Inventories Other Current Assets Property, Plant, and Equipment Other Assets Accrued Expenses Interest and Other Income, Net Inventory Prepayment In April 2002, the Company made a $100 million prepayment to an Asian supplier for the purchase of c...
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In return for this deposit, the supplier agreed to supply the Company with a specified level of components during the three consecutive fiscal quarters ending December 28, 2002.
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Approximately $53 million of this deposit remained unused as of September 28, 2002 and was reflected in the condensed consolidated balance sheets in other current assets.
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During the first six months of 2003, the remainder of the deposit balance was fully utilized for the purchase of components.
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The deposit was unsecured and had no stated interest component.
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The Company imputed an amount to cost of sales and interest income during each period the deposit was outstanding at a 3.25% interest rate to reflect the economics of this transaction.
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Goodwill and Other Intangible Assets The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 3 to 7 years.
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The Company ceased amortization of goodwill at the beginning of fiscal 2002 when it adopted SFAS No.
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142, Goodwill and Other Intangible Assets.
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The following table summarizes the components of gross and net intangible asset balances (in millions): (a) Accumulated amortization related to goodwill of $55 million arising prior to the adoption of SFAS No.
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142 has been reflected in the gross carrying amount of goodwill as of June 28, 2003, and September 28, 2002.
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Amortization associated with acquired technology for the three and nine-month periods ended June 28, 2003 and June 29, 2002 follows (in millions): Note 4 - Restructuring Actions Fiscal 2003 Restructuring Actions The Company recorded total restructuring charges of approximately $27 million during the nine months ended J...
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Of the $27 million, nearly all had been spent by the end of the third quarter of 2003, except for approximately $500,000 of severance costs and approximately $5.0 million related to operating lease costs on abandoned facilities.
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During the third quarter of 2003, approximately $500,000 of the amount originally accrued for lease cancellations was determined to be in excess due to the sublease of a property sooner than originally estimated and an approximately $500,000 shortfall was identified in the severance accrual due to higher than expected ...
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These adjustments had no net effect on reported operating expense.
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Q2’03 Restructuring Actions During the second quarter of 2003, the Company’s management approved and initiated restructuring actions that resulted in recognition of a total restructuring charge of $2.8 million, including $2.4 million in severance costs and $400,000 for asset write-offs and lease payments on an abandone...
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Actions taken in the second quarter were for the most part supplemental to actions initiated in the prior two quarters and focused on further headcount reductions in various sales and marketing functions in the Company’s Americas and Europe operating segments and further reductions associated with PowerSchool-related a...
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The second quarter actions resulted in the termination of 93 employees, 87 of who were terminated prior to the end of the third quarter of 2003.
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Except for certain costs associated with operating leases on the abandoned facility, the Company currently anticipates that substantially all of the remaining accrual for severance costs of approximately $300,000 will be spent by the end of the fourth quarter of fiscal 2003.
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Q1’03 Restructuring Actions During the first quarter of 2003, the Company’s management approved and initiated restructuring actions with a total cost of $24 million that resulted in the termination of manufacturing operations at the Company-owned facility in Singapore, further reductions in headcount resulting from the...
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These restructuring actions will ultimately result in the elimination of 260 positions worldwide, all but one of which were eliminated by the third quarter of 2003.
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Closure of the Company’s Singapore manufacturing operations resulted in severance costs of $1.8 million and costs of $6.7 million to write-off manufacturing related fixed assets, whose use ceased during the first quarter.
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PowerSchool related costs included severance of approximately $550,000 and recognition of $5 million of previously deferred stock compensation that arose when PowerSchool was acquired by the Company in 2001 related to certain PowerSchool employee stockholders who were terminated in the first quarter of 2003.
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Termination of sales and marketing activities and employees, principally in the United States and Europe, resulted in severance costs of $2.8 million and accrual of costs associated with operating leases on closed facilities of $6.7 million.
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The total net restructuring charge of $23 million recognized during the first quarter of 2003 also reflects the reversal of $600,000 of unused restructuring accrual originally made during the first quarter of 2002.
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Except for certain costs associated with operating leases on closed facilities, the Company currently anticipates that all of the remaining accrual for severance costs of approximately $200,000 will be spent by the end of the fourth quarter of fiscal 2003.
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The following table summarizes activity associated with restructuring actions initiated during the first and second quarters of 2003 (in millions): Fiscal 2002 Restructuring Actions During fiscal 2002, the Company recorded total restructuring charges of approximately $30 million related to actions intended to eliminate...
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Q4’02 Restructuring Actions During the fourth quarter of 2002, the Company’s management approved and initiated restructuring actions with a total cost of approximately $6 million designed to reduce headcount costs in corporate operations and sales and to adjust its PowerSchool product strategy.
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These restructuring actions resulted in the elimination of approximately 180 positions worldwide at a cost of $1.8 million, 176 of which were eliminated by June 28, 2003.
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Eliminated positions were primarily in corporate operations, sales, and PowerSchool related research and development in the Americas operating segment.
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The shift in product strategy at PowerSchool included discontinuing development and marketing of PowerSchool’s PSE product.
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This shift resulted in the impairment of previously capitalized development costs associated with the PSE product in the amount of $4.5 million.
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As of June 28, 2003, substantially all of the severance accrual had been utilized, except for insignificant severance and related costs associated with 4 remaining employees identified for subsequent termination.
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Q1’02 Restructuring Actions During the first quarter of 2002, the Company’s management approved and initiated restructuring actions with a total cost of approximately $24 million.
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These restructuring actions resulted in the elimination of approximately 425 positions worldwide at a cost of $8 million.
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Positions were eliminated primarily in the Company’s operations, information systems, and administrative functions.
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In addition, these restructuring actions also included 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 Company ceased using the assets associated with first quarter 2002 restructuring actions during that same quarter.
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Related lease and contract cancellation charges totaled $12 million, and charges for asset impairments totaled $4 million.
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The first quarter 2002 restructuring actions were primarily related to corporate activity not allocated to operating segments.
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During the first quarter of 2003, the Company reversed the remaining unused accrual of $600,000.
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The following table summarizes activity associated with restructuring actions initiated during the first and fourth quarters of 2002 (in millions): Note 5 - Shareholders’ Equity CEO Restricted Stock Award On March 19, 2003, the Company entered into an Option Cancellation and Restricted Stock Award Agreement (the Agreem...
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The Agreement cancelled stock option awards previously granted to Mr. Jobs in 2000 and 2001 for the purchase of 27.5 million common shares of the Company’s common stock.
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Mr. Jobs retained options to purchase 60,000 shares of the Company’s common stock granted in August of 1997 in his capacity as a member of the Company’s Board of Directors, prior to becoming the Company’s CEO.
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The Agreement replaced the cancelled options with a restricted stock award of 5 million shares of the Company’s common stock.
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The restricted stock award generally vests three years from date of grant.
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Vesting of some or all of the restricted shares will be accelerated in the event Mr. Jobs is terminated without cause, dies, or has his management role reduced following a change in control of the Company.
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The Company has recorded the value of the restricted stock award of $74.75 million as a component of shareholders’ equity and is amortizing that amount on a straight-line basis over the 3-year service/vesting period.
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The value of the restricted stock award was based on the closing market price of the Company’s common stock on the date of the award.
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