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For the first nine months of 2003 and the first nine months of 2002, this resulted in the recognition of additional cost of sales above standard cost by the Retail segment and an offsetting benefit to corporate expenses of approximately $71 million and $32 million, respectively.
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Second, the Retail segment includes in its net sales proceeds from sales of the Company’s extended warranty and support contracts and also recognizes related cost of sales based on the amount such contracts are normally sold to the Company’s resellers operating retail stores in the United States.
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This treatment is consistent with how the Company’s major resellers account for the sales and cost of the Company’s extended warranty and support contracts.
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Because the Company has not yet earned the revenue or incurred the costs associated with the sale of these contracts, an offset to these amounts is recognized in the Americas segment’s net sales and cost of sales.
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For the third quarter of 2003, this resulted in the recognition of net sales and cost of sales by the Retail segment, with corresponding offsets in the Americas segment, of $7.1 million and $4.8 million, respectively.
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For the third quarter of 2002, the net sales and cost of sales recognized by the Retail segment for sales of extended warranty and support contracts were $2.0 million and $1.4 million, respectively.
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For the first nine months of 2003, this resulted in the recognition of net sales and cost of sales by the Retail segment, with corresponding offsets in the Americas segment, of $19.3 million and $13.2 million, respectively.
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This compares to similar adjustments to net sales and cost of sales during the first nine months of 2002 of $5.0 million and $3.5 million, respectively.
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Third, a portion of the operating expenses associated with certain high profile retail stores is allocated from the Retail segment to corporate marketing expense.
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Allocation of these expenses reflects the unique nature of these stores which, given their larger size and extraordinary design elements, function as vehicles for general corporate marketing, corporate sales and marketing events, and brand awareness.
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Allocated operating costs are those in excess of operating costs incurred by one of the Company’s more typical retail locations.
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Stores were open in three such high profile locations in New York, Los Angeles, and Chicago as of June 28, 2003.
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Expenses allocated to corporate marketing resulting from the operations of these stores were $1.1 million in the third quarter of 2003 and $3.3 million for the nine-months ended June 28, 2003.
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These costs were not significant during the first nine months of 2002.
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Summary information by operating segment follows (in millions): (a) Other Segments consists of Asia-Pacific and FileMaker.
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Certain amounts in 2002 fiscal periods related to recent acquisitions and Internet services have been reclassified from Other Segments to the Americas segment to conform to the 2003 presentation.
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A reconciliation of the Company’s segment operating income to the consolidated financial statements follows (in millions): Note 10 - - Earnings Per Share Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding d...
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Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares ...
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The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method.
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The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except net income and per share amounts): Options to purchase approximately 51 million and 45 million shares of common stock that were outstanding at June 28, 2003 and June 29, 2002, respectively, were not inclu...
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Note 11 - Related Party Transactions and Certain Other Transactions In March 2002, the Company entered into a Reimbursement Agreement with its Chief Executive Officer, Mr. Steven P. Jobs, for the reimbursement of expenses incurred by Mr. Jobs in the operation of his private plane when used for Apple business.
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The Reimbursement Agreement is effective for expenses incurred by Mr. Jobs for Apple business purposes since he took delivery of the plane in May 2001.
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The Company recognized a total of $105,000 in expenses pursuant to the Reimbursement Agreement during the third quarter of 2003, and $266,000 in expenses for the nine-months ended June 28, 2003.
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For fiscal 2002, the Company recognized a total of $1,168,000 in expenses pursuant to the Reimbursement Agreement related to expenses incurred by Mr. Jobs during 2001 and 2002.
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All expenses recognized pursuant to the Reimbursement Agreement have been included by the Company in selling, general, and administrative expenses.
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Mr. Jerome York, a member of the Board of Directors of the Company, is a member of an investment group that purchased MicroWarehouse, Inc. (“MicroWarehouse”) in January 2000.
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He also serves as its Chairman, President and Chief Executive Officer.
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MicroWarehouse is a multi-billion dollar specialty catalogue and online retailer and direct marketer of computer products, including products made by the Company, through its MacWarehouse catalogue.
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MicroWarehouse accounted for 2.3% and 2.9% of the Company’s net sales for the three and nine-month periods ended June 28, 2003, respectively, and 3.3% of the Company’s net sales in fiscal 2002.
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Trade receivables from MicroWarehouse were $12.7 million and $20.9 million as of June 28, 2003, and September 28, 2002, respectively.
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Sales to MicroWarehouse and related trade receivables are generally subject to the same terms and conditions as those with the Company’s other resellers.
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In addition, the Company purchases miscellaneous equipment and supplies from MicroWarehouse.
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Total purchases amounted to approximately $431,000 and $1.7 million for the three and nine-month periods ended June 28, 2003, respectively, and $2.9 million in fiscal 2002.
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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, including statements regarding the expected timing and features of new product introductions, statements under the...
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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 2002 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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Unless otherwise stated, references in this report to particular years or quarters refer to the Company’s fiscal years ended in September and the associated quarters of those fiscal years.
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Available Information Beginning in fiscal 2003, the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available on our website at www.apple.com/in...
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The contents of this website are not incorporated into this filing.
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Further, our reference to the URL for this website is intended to be an inactive textual reference only.
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Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company’s discussion and analysis of its financial condition and results of operations requires the Company’s management to make judgments, assumptions, a...
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Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2002 Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements.
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Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
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Actual results may differ from these estimates.
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Management believes the Company’s critical accounting policies are those related to revenue recognition, allowance for doubtful accounts, inventory valuation and exposures related to inventory purchase commitments, valuation of long-lived assets including acquired intangibles, and valuation of non-current debt and equi...
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Management believes these policies to be critical because they are both important to the portrayal of the Company’s financial condition and results, and they require management to make judgments and estimates about matters that are inherently uncertain.
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Additional information about these critical accounting policies may by found in the Company’s 2002 Form 10-K in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies.” Accounting for Stock-Based Compensation The Company currently...
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The Company has elected to follow APB No.
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25 because, as discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements provided in this Form 10-Q, the alternative fair value accounting provided for under SFAS No.
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123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options and employee stock purchase plan shares.
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Under APB Opinion No.
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25, when the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.
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The Financial Accounting Standards Board (FASB) decided on April 22, 2003 to require all companies to expense the value of employee stock options.
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Companies will be required to measure the cost of employee stock options according to their fair value.
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The FASB has indicated that it plans to issue in the near future an exposure draft of a new accounting standard addressing this matter.
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This new accounting standard could become effective as early as 2004.
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Prior to issuance of this exposure draft, the FASB has indicated it will be addressing several significant technical issues.
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Among other things, the FASB must determine the extent to which the new accounting standard will permit adjustments to recognized expense for actual option forfeitures and actual performance outcomes.
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This determination will affect the timing and amount of compensation expense recognized.
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Also, a method to determine the fair value of employee stock options must be established.
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Current accounting standards require use of an option-pricing model, such as the Black-Scholes model, to determine fair value and provide guidance on adjusting some of the input factors used in the model.
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This valuation approach has received significant criticism and may be subject to changes that could have a significant impact on the calculated fair value of employee stock options under the new standard.
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At the Company’s annual shareholder’s meeting on April 24, 2003, shareholders approved a proposal requesting that the Company’s Board of Directors (the Board) establish a policy of expensing the value of all future employee stock options issued by the Company.
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The Board and management appreciate and take seriously the views expressed by the Company’s shareholders.
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As discussed in the Company’s Form 10-Q for the period ended March 29, 2003, the Company had decided not to expense the value of employee stock options until the FASB finalizes its new accounting standard on the matter.
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The Company based this decision on the FASB’s announced intention to soon require all companies to expense the value of employee stock options and the FASB’s near-term review of technical issues that will play a significant role in determining the fair value of and accounting for employee stock options.
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The Company monitors progress at the FASB and other developments with respect to the general issue of employee stock compensation.
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Further, the Company is evaluating its current employee compensation programs.
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In the future, should the Company expense the value of employee stock options, either out of choice or due to new requirements issued by the FASB, and/or decide to alter its current employee compensation programs to provide other benefits in place of options, including restricted stock grants or additional cash bonuses...
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Internet Services Update In April 2003, the Company launched the iTunes® Music Store in the United States, an online music store that allows customers to find, purchase, and download music for 99 cents per song or, in most cases, $9.99 per album.
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Requiring no subscription fee, the iTunes Music Store offers customers a broad range of personal rights to the songs they purchase including playing songs on up to three Macintosh® computers, burning songs onto an unlimited number of CDs for personal use, playing songs on an unlimited number of iPod™ portable digital m...
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The Company currently expects to deliver a Windows version of the iTunes Music Store before the end of calendar 2003.
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Users can easily search the contents of the entire music store to locate songs by title, artist, or album, or browse the entire contents of the music store by genre and artist.
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Users can also listen to a free 30-second preview of any song in the store.
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The iTunes Music Store is fully integrated into the latest version of iTunes, allowing customers to purchase, download, organize, share, and listen to their digital music using a single application.
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Hardware Products Update Power Mac® G5 In June 2003, the Company announced the Power Mac G5 that is expected to be available in August 2003.
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Powered by the PowerPC G5 processor designed by IBM and Apple and featuring up to a 1 GHz front-side bus and the ability to address up to 8GB of memory, the Power Mac G5 utilizes 64-bit processing technology for advanced 64-bit computation, while running existing 32-bit applications natively.
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The PowerPC G5 processor architecture is based on a completely new execution core that features massively parallel computation, full symmetric multi-processing, two double precision floating point units and an optimized Velocity Engine™.
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Power Mac G5 systems include Gigabit Ethernet, FireWire® 800, two FireWire 400 ports, three USB 2.0 ports, dual display support, optical digital audio input and output, analog audio input and output, and a headphone jack.
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The system also supports 54 Mbps AirPort® Extreme wireless networking and is Bluetooth ready for wireless connections to a host of Bluetooth-enabled peripherals.
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The Power Mac G5 features a new anodized aluminum alloy enclosure designed to meet the needs of professional users.
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The new enclosure is built around four independently controlled thermal zones for advanced airflow management, with fans in each zone that are individually controlled based on a sophisticated combination of thermal and power monitoring, resulting in the Power Mac G5 running substantially quieter than the previous Power...
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The G5 enclosure also features an easy-to-open access panel allowing quick access to internal components for tool-less installation of memory, hard drives, optical drives or an AirPort Extreme card.
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Front and rear handles allow professionals to rapidly and safely move Power Mac G5s when and where they need them, and front-mounted FireWire, USB 2.0, and headphone ports provide convenient access for popular peripherals.
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iPod™ The Company introduced new iPod models in April 2003.
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The new iPod is smaller and lighter than previous versions and is available in three models with storage capacity of either 10GB, 15GB, or 30GB; the latter holding up to 7,500 songs.
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In addition to MP3, iPod now supports the AAC audio format.
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The new iPod also features solid-state interfaces and is available with a new dock that facilitates fast and easy connection to a computer or stereo.
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Xserve® and Xserve RAID Storage System In February 2003, the Company upgraded its Xserve 1U rack servers with more powerful processors, more storage capacity, and a FireWire® 800 interface.
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At the same time, the Company introduced the Xserve RAID Storage System, a rack storage system that holds up to 14 hot-swapable drive modules capable of holding up to 2.5 terabytes of data.
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Xserve RAID architecture combines affordable, high-capacity ATA/100 drive technology with a Fibre channel interface for reliable and fast data access.
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Xserve RAID provides RAID level 5 throughput that supports affordable real-time HD 1080i video editing.
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PowerBook® In January 2003, the Company introduced two new PowerBook models.
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The 17-inch PowerBook G4 features a 17-inch wide-format active-matrix display, is encased in a durable aluminum alloy enclosure, is 1-inch thick, and weighs as little as 6.8 pounds.
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The new 17-inch PowerBook G4 also features built-in support for AirPort® Extreme 54 Mbps 802.11g wireless networking, new high-speed FireWire 800, a backlit keyboard with ambient light sensors, and built-in Bluetooth for wireless connection to cell phones and other Bluetooth equipped peripherals.
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The 12-inch PowerBook G4 features a 12-inch, active-matrix display housed in a lightweight, durable aluminum alloy enclosure weighing approximately 4.6 pounds.
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The 12-inch PowerBook G4 features a high-speed PowerPC G4 processor, NVIDIA graphics, built-in Bluetooth wireless networking, and battery life of up to five hours on a single charge.
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