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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 later this year it plans to issue 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 amount of compensation cost 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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The Company has provided formal input to both the FASB and the International Accounting Standards Board (IASB) regarding the IASB’s exposure draft on stock-based compensation and the FASB’s efforts to achieve maximum convergence on accounting for stock-based compensation between U.S. and international accounting standa...
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The Company believes it is important to be involved in the development of accounting standards and plans on continuing its involvement in the process of developing new U.S. and international accounting standards regarding the accounting for employee stock options.
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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 appreciates and takes seriously the views expressed by the Company’s shareholders.
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However, in light of 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 value of and accounting for employee stock options, the Company does not currently int...
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Internet Services Update In April 2003, the Company launched the iTunes® Music Store, an online music store that allows customers to find, purchase, and download music for 99 cents per song.
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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 CD’s for personal use, playing songs on an unlimited number of iPod™ portable digital ...
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The iTunes Music Store currently features over 200,000 songs.
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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 iPod™ The Company introduced new iPod models in April 2003.
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The new iPod is smaller and lighter 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 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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Power Mac® In January 2003, the Company announced a refresh of its Power Macintosh® line of professional desktop systems.
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The new line is priced significantly lower than the models it replaces and features faster processors, FireWire 800, and internal support for 54Mbps AirPort Extreme and Bluetooth wireless networking.
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Peripheral Products Update In January 2003, the Company introduced the 20-inch Apple Cinema Display® and instituted significant price reductions on its 23-inch Cinema HD Display and its 17-inch Apple Studio Display®.
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The new 20-inch Apple Cinema Display features an active-matrix, liquid crystal display that incorporates a digital interface.
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Software Products and Computer Technologies Update Final Cut Pro® 4 Final Cut Pro 4, a major upgrade to the Company’s professional editing software for film and video, was announced in April 2003.
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Final Cut Pro 4 introduces RT Extreme for real-time compositing and effects, new interface customization tools, new high-quality 8- and 10-bit uncompressed formats, and for the first time in an editing system costing less than $100,000, full 32-bit floating point per channel video processing.
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Final Cut Pro 4 also includes three completely new integrated applications - Live Type for advanced titling, Soundtrack for music creation, and Compressor for full featured batch transcoding.
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DVD Studio Pro® 2 The Company announced DVD Studio Pro 2 in April 2003.
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It is a completely new DVD authoring product, rebuilt from the ground up with a new user interface, professionally designed and fully customizable templates, an innovative new menu editor, timeline-based track editing and a new software-based MPEG-2 encoder.
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Shake® 3 The Company announced Shake 3 in April 2003, an upgrade of its compositing and visual effects software.
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Shake 3 includes new Mac® OS X only features such as the Shake Qmaster network render management software and unlimited network rendering licenses which allow visual effects artists to easily distribute rendering tasks across a cluster of Apple’s Xserve rack servers or desktop Power Mac G4 computers for maximum perform...
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Shake 3 also includes new visual effects features available to Mac OS X, Linux and IRIX customers including motion-tracking and real-time broadcast preview.
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Final Cut® Express Final Cut Express is a new product based on Apple’s award-winning Final Cut Pro®.
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Final Cut Express enables small business users, educators, students and advanced hobbyists to perform professional-quality digital video editing.
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Final Cut Express includes key features used by video editors such as the same interface and workflow as Final Cut Pro, powerful video editing tools, hundreds of special effects, and easy delivery of output to DVD, the Internet, or tape.
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Keynote™ Keynote is the Company’s new presentation software that gives users the ability to create high-quality presentations.
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Designed to be easy to use, Keynote includes professionally designed themes, advanced typography, professional-quality image resizing, animated charts and tables that can be created quickly, and cinematic-quality transitions.
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Keynote imports and exports PowerPoint, QuickTime®, and PDF files to simplify the creation and sharing of presentations.
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iLife™ Introduced in January 2003, iLife is the Company’s integrated suite of four digital lifestyle applications that features the Company’s iTunes®, iPhoto™, iMovie™, and iDVD™ software applications.
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These applications are integrated to allow users to easily access their digital music, photos and movies from within each application.
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Safari™ Public Beta Safari is the Company’s new Mac OS® X compatible web browser that is capable of loading web pages more quickly than any other Macintosh-based web browser.
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Safari uses the advanced interface technologies underlying Mac OS X. Airport® Extreme AirPort Extreme is the Company’s next generation of Wi-Fi wireless networking technology based on the new ultra-fast 802.11g standard.
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With speeds up to 54 Mbps, AirPort Extreme delivers almost five times the data rate of today’s 802.11b based products, yet is fully compatible with the millions of 802.11b Wi-Fi devices around the world.
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The new AirPort Extreme Base Stations offer 54 Mbps data rates for up to 50 users, wireless bridging to extend the range beyond just one base station, and USB printer sharing to allow multiple users to wirelessly share USB printers connected directly to the base station.
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Business Outlook For the third quarter of 2003, the Company expects net sales, gross margin, and total operating expenses to be relatively flat as compared to the second quarter of 2003.
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The Company expects third quarter interest and other income, net to decline significantly to approximately $15 million.
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As a result, the Company currently expects to report a slight profit for the third quarter of 2003.
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The foregoing statements concerning the Company’s anticipated net sales, gross margin, operating expenses, interest and other income, net, and earnings for the third quarter of 2003 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 2002 Form 10-K. Net Sales Net...
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Certain net sales in 2002 fiscal periods related to recent acquisitions and Internet services have been reclassified from Other Segments net sales to Americas segment net sales to conform to the 2003 presentation.
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(b) Power Macintosh figures include server sales.
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(c) Net sales of peripherals and other hardware include sales of iPod, Apple-branded and third-party displays, and other hardware accessories.
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(d) Net sales of software include sale of Apple-branded operating system and application software and sale of third-party software.
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(e) Net sales per Macintosh unit sold are derived by dividing total Macintosh net sales by total Macintosh unit sales.
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Net sales during the second quarter of 2003 fell 1% from the same period in 2002, but were up 3% for the first six months of fiscal 2003 compared to 2002.
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Several factors have contributed favorably to net sales during both the first half and the second quarter of 2003 including: • Net sales of peripherals and other hardware rose $63 million or 41% during the second quarter of 2003 compared to the same quarter in 2002 and rose $101 million or 30% for the first six months ...
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These increases are the result of significant year-over-year increases in iPod sales and in sales of computer accessories, including Apple-branded displays.
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• Net sales of software rose $23 million or 32% during the second quarter of 2003 compared to the same quarter in 2002 and rose $48 million or 36% for the first six months of 2003.
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These increases reflect higher net sales of Apple-branded application software, Mac OS X software, and third-party software.
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Net sales of Apple-branded software during the first six months of 2003 has been favorably affected by several new software titles, including Final Cut Express, iLife, Keynote, and Shake.
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• The Retail segment’s net sales grew to $283 million during the first six months of 2003 from $118 million during the same period in 2002, a 140% increase.
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The Retail segment’s 2003 second quarter net sales rose $65 million or 93% from the second quarter of 2002.
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While the Retail segment may divert some net sales from the Company’s preexisting sales channels in the U.S., the Company believes that a substantial portion of the Retail segment’s net sales is incremental to the Company’s total net sales.
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See additional comments below related to the Retail segment under the heading “Segment Operating Performance.” • Although total Macintosh unit sales are down in fiscal 2003, PowerBook sales have been strong.
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PowerBook net sales were up 78% during the second quarter of 2003 and up 29% during the first six months of 2003.
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New PowerBook models introduced during the first six months of 2003 included two new form factors and the Company’s first portable product capable of burning DVDs.
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• Net sales per Macintosh unit sold were up 4% for the second quarter of 2003 and up 3% for the first six months of 2003.
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These increases reflect the higher proportion of relatively higher value PowerBook models and a shift in mix towards higher value iMac models, including the flat panel models introduced during 2002.
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Offsetting the favorable factors discussed above, the Company’s net sales during the second quarter and first six months of 2003 were negatively impacted by three notable factors.
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• Unit sales of Power Macintosh systems fell 26% during both the second quarter and first six months of 2003 compared to the same periods in 2002.
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These declines are consistent with the declining sales of Power Macintosh systems experienced by the Company during recent years.
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The Company continues to believe that weak economic conditions over the past several years are having a pronounced negative impact on its professional and creative customers and that many of these customers continue to delay upgrades of their Power Macintosh systems due to the Company’s ongoing transition to Mac OS X, ...
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However, the Company did not experience the anticipated increase in Power Macintosh sales that it expected following the introduction of Adobe’s PhotoShop 7 during 2002.
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• The Company experienced weakness in its U.S. education channel during the second quarter of 2003.
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While 2003 first quarter net sales in this channel were relatively flat compared to 2002, second quarter net sales in 2003 in U.S. education fell 8% as compared to 2002, while Macintosh unit sales fell 14%.
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The Company believes this weakness has been caused by multiple factors including funding pressures due to weak economic conditions and large budget deficits in many states and due to increased competition.
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Although the Company has taken steps, and will continue to take steps, to address weakness in the U.S. education channel, it is difficult to anticipate how this trend will affect the remainder of 2003 and thereafter or to anticipate when and if this trend will reverse.
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• The personal computer industry in general, and the Company specifically, continues to see relatively soft demand for its products.
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Sales of professional and consumer oriented Macintosh systems remain far below levels experienced in fiscal 2000 and earlier.
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Worsening global economic conditions over the past three years exacerbated by the economic and political uncertainties caused by terrorist activities and the associated international responses have clearly had a pronounced negative effect on the overall demand for the Company’s products in virtually all of its markets.
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Further, growth in the overall personal computer industry has slowed due to the high market penetration of personal computers and a lengthening of consumer, creative, and business personal computer upgrade cycles.
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In summary, the Company believes that expansion in the overall market for personal computers has slowed and that significant growth continues to await a combination of economic recovery and technological advancements.
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Segment Operating Performance The Company manages its business primarily on a geographic basis.
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