BULKY DOCUMENTS
`
`(Exceeds 100 pages)
`
`Filed:
`
`4 16 2012
`
`Title: OPPOSER’S NOTICE OF FILING REDACTED
`
`TESTIMONY OF THOMAS LA PERLE AND EXHIBITS
`
`Part
`
`3of 4
`
`l91176027I
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`

`
`Page 40 of 87
`
`Index to Consolidated Financial Statements
`Page
`
`lac. Awe:
`
`
`Financial Statements:
`
`Consolidated Balance Sheets as of September 28, 2002, and September 29, 2001
`Consolidated Statements of Operations for the three fiscal years ended September 28, 2002
`Consolidated Statements of Shareholders‘ Equity for the three fiscal years ended September 28, 2002
`Consolidated Statements of Cash Flows for the three fiscal years ended September 28, 2002
`
`Notes to Consolidated Financial Statements
`Selected Quarterly Financial Information (Unaudited)
`Report of Independent Auditors, KPMG LLP
`
`~
`
`49
`50
`5]
`52
`53
`87
`89
`
`All financial statement schedules have been omitted, since the required information is not present or is not present in amounts sufficient
`to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and
`Notes thereto.
`
`
`
`CONSOLIDATED BALANCE SHEETS
`
`(In millions, except share amounts)
`
`ASSETS:
`
`Current assets:
`
`Cash and cash equivalents
`Short—tenn investments
`
`Accounts receivable, less allowances of $51 and $51, respectively
`Inventories
`Deferred tax assets
`Other current assets
`
`Total current assets
`
`Property, plant, and equipment, net
`Non-current debt and equity investments
`Acquired intangible assets
`Other assets
`
`Total assets
`
`LIABILITIES AND SHAREHOLDERS’ EQUITY:
`
`Current liabilities:
`
`Accounts payable
`Accrued expenses
`
`Total current liabilities
`
`Long-term debt
`Deferred tax liabilities
`
`Total liabilities
`
`Commitments and contingencies
`
`September 28, 2002
`
`September 29, 2001
`
`2,310
`2,026
`466
`I I
`169
`16]
`
`5,143
`
`S
`
`$
`
`2,252
`2,085
`565
`45
`166
`275
`
`5,388
`621
`39
`119
`131
`
`$
`
`-' gznmuraa
`
`6,298
`w-ner.4:¢-zzwms.
`
`S
`
`91!
`747
`n¢x=ma;gw
`
`$
`
`801
`717
`2u iaa
`
`1,658
`316
`229
`~.n:w.:v..~r1..vn-.33.-:.-u::-a:=-.::nm.'v
`
`1,518
`317
`266
`vmzi.-:c~:r.raL-_'m-:aev.:':7.~.;.~%:.':n.'.<i
`
`2,203
`zvze.-.-.v»>:=-:e-;:*_~.-at-.-or-ve-/:1-.:<:.:\-tiara:-t-a
`
`2,101
`:fi=1'V*.\'.:€.!u1'.‘::'J'.'.\5.‘ mxt.-;c=::..-:mr-,:.r..
`
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`
`Page 41 of 87
`
`1,826
`(7)
`2,325
`(49)
`
`4,095
`m
`
`1,693
`(1 1)
`2,260
`(22)
`
`3,920
`
`6,021
`$
`
`
`$I
`
`6,298
`IMJUKG-(fi\v~ .. mxmun-aazcsaz
`
`Shareholders’ equity:
`Common stock, no par value; 900,000,000 shares authorized; 358,958,989 and
`350,921,661 shares issued and outstanding, respectively
`Acquisition-related deferred stock compensation
`Retained earnings
`Accumulated other comprehensive income (loss)
`
`Total shareholders’ equity
`
`Total liabilities and shareholders’ equity
`
`See accompanying notes to consolidated financial statements.
`
`49
`
`
`
`CONSOLIDATED STATEMENTS OF OPERATIONS
`
`(In millions, except share and per share amounts)
`
`
`
`Thrcc fiscal years ended September 28, 2002 ‘ , ummwam=anewm|: mmmuuu*u ~mam
`
`
`
`Net sales
`Cost of sales
`
`Gross margin
`
`Operating expenses:
`Research and development
`Selling, general, and administrative
`Special charges:
`Restructuring costs
`In-process research and development
`Executive bonus
`
`Total operating expenses
`
`Operating income (loss)
`
`Other income and expense:
`Gains (losses) on non-current investments, net
`Unrealized loss on convertible securities
`
`Interest and other income, net
`
`Total other income and expense
`
`Income (loss) before provision for income taxes
`Provision for (benefit from) income taxes
`
`Income (loss) before accounting change
`
`Cumulative effect of accounting change, net of income taxes of $5
`
`2002
` -sea-.1
`
`2001
`
`
`2000
`
`
`5,742
`$
`4,139 .
`
`$
`
`5,363
`4,128
`
`$
`
`1,603
`
`1,235
`c:.:m-aztxsm-.33;-.wnnua
`
`446
`
`1,111
`
`430
`
`1,138
`
`7,983
`5,817
`
`2,166
`
`380
`
`1,166
`
`90
`
`
`1,644
`
`522
`
`
`
`(42)
`
`88
`
`112
`rs.-«_~.:.uu.-.2-1:‘:-.-.-.«r.z.::r.«:.;a..«-
`
`70
`I2n:5..'7:¢b-r.:=¢l»:cm:.:L=La
`
`(13)
`217
`m-.-'.::'z:>;r.£r;p:9nA.J.‘-V:x:::-
`
`292
`
`87
`22
` 93%I
`
`.62)
`..
`(15)K
`
`6 5
`mum”.-sweat,
`
`(37)
`1.-ax:-.7-=.~;-.\=.~.-,-.I:>0..'I:~.vmxor<:x
`
`r;'r.x:.<:\Aer.-,rn?:'.'.: ‘-5>».~-1*:
`
`12
`.x:~.-_-r=.-.-.-cor.-~:<<t.~a~Jn.u::.‘=a~vv
`
`Net income (loss)
`
`65
`$
`L'.‘T.»'£'TZ'.'L".“'_":f:‘3‘2'T1"‘l3.'L".'-’:E‘.‘
`
`$
`Z‘.’.’~'.7.':‘.‘.3I'.
`
`(25)
`'.‘f. i" =".’ ~'.'.-‘-"F7:?:"7.
`
`786
`
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`
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`
`

`
`Earnings (loss) per common share before accounting change:
`Basic
`Diluted
`
`Earnings (loss) per common share:
`Basic
`Diluted
`
`Shares used in computing earnings (loss) per share (in thousands):
`Basic
`Diluted
`
`Page 42 of 87
`
`53
`$
`
`$
`$
`
`0.18
`0.18
`
`0.18
`0.18
`
`$
`$
`
`$
`$
`
`$
`(0.11)
`(0.11) $
`
`(0.07) $
`(0.07) $
`
`2.42
`' 2.18
`
`2.42
`2.18
`
`355,022
`361,785
`
`345,613
`345,613
`
`324,568
`360,324
`
`See accompanying notes to consolidated financial statements.
`
`50
`
`
`
`CONSOLIDATED STATEMENTS OF SHAREHOLDERS‘ EQUITY
`
`(In millions, except share amounts which are in thousands)
`
`Balances as ofScptcmber25, 1999
`Components of comprehensive
`income:
`Net income
`
`Foreign currency translation
`Change in unrealized gain on
`available-for-sale securities, not of‘
`tax
`
`Total comprehensive income
`Common stock issued under stock
`option and purchase plans
`Conversion ofscrics A preferred
`stock
`Common stock rcpurchascd
`Tax benefit related to stock options
`
`Preferred Stock
`Common stock
`
`A"
`Wm
`M“
`
`Retained
`Earnings
`Amount
`Shares
`Amount
`Share-.5
`=xx:$a m=3.!nm
`
`Accumulated
`Acquisition-
`Total
`Other
`Rclatcd
`Shareholders‘
`Comprehensive
`Deferred Stock
`Equity
`Income (Loss)
`Compensation
` =un
`
`150 S
`
`150
`
`321,598 5
`
`l,349 3
`
`1,499 5
`
`-—- S
`
`106 $
`
`3,104
`
`—
`
`——
`
`—
`
`-—-
`
`—-
`
`-—-
`
`--
`
`—
`
`7,632
`
`—
`
`——
`
`85
`
`786
`
`-—
`
`—
`
`—
`
`—
`
`—
`
`——
`
`(17)
`
`786
`
`(i 7)
`
`155
`
`155
`lfiwrbw-zfllaiszliu
`
`924
`
`85
`
`—-
`
`9,000
`(74)
`(74)
`— (2,553)
`—
`—
`—
`—
`
` niazam I "
`
`—
`—
`—
`74
`-—-
`—
`—
`([16)
`—-
`—
`—
`110
`
` $b K % "‘
`
`—
`(116)
`1 i0
`2$!s§
`
`244 S
`
`4,107
`
`Balances as of September 30, 2000
`Components of comprehensive
`income (loss):
`
`Net income (loss)
`Foreign currency translation
`Change in unrealized gain on
`available;-for—salc securities, net of
`tax
`Change in unrealized gain on
`dcrivativc investments, net of tax
`
`Total comprehensive income
`(I055)
`Issuance of common stock and
`assumption of stock options in
`connection with acquisition
`Amortization of acquisition-related
`dcfcrrcd stock compensation
`Common stock issued under stock
`option and purchase plans
`Conversion ofscrics A preferred
`stock
`Tax benefit related to stock options
`
`76 5
`
`76
`
`335,677 S
`
`1,502 $
`
`2,285 5
`
`—
`
`~
`
`—
`
`—
`
`—
`
`~
`
`(76)
`~
`
`—
`
`—
`
`—
`
`—
`
`——
`
`——
`
`(76)
`-
`
`—
`
`~—
`
`—
`
`2,403
`
`-—-
`
`3,660
`
`9,132
`—
`
`—
`
`—
`
`—
`
`66
`
`——
`
`42
`
`76
`7
`
`(25)
`—
`
`—-
`
`—
`
`—
`
`—
`
`—
`
`—
`—
`
`- S
`
`V
`
`—
`
`~
`
`—
`
`(l3)
`
`2
`
`-—
`
`~
`—-
`
`(3)
`
`(267)
`
`(25)
`(3)
`
`(267)
`
`4
`
`4
`:..«.:m_-;-»:u:a.:n.—.u:u
`
`(291)
`
`53
`
`2
`
`42
`
`_
`7
`
`—
`
`—
`
`_
`—
`
`http://www.sec.goV/Archives/edgar/data/320193/000104746902007674/a2096490zl0-k.htm
`
`8/27/2010
`
`

`
`Balances as of September 29, 2001
`Components of comprehensive
`income (loss):
`
`Net income (loss)
`Foreign currency translation
`Change in unrealized gain on
`available-for-sale securities, net of
`tax
`Change in unrealized gain on
`derivative investments, net oftax
`
`Total camprchcnsivc income
`(loss)
`Amortization of acquisition-related
`deferred stock compensation
`Common stock issued under stock
`
`option and purchase plans
`Tax benefit related to stock options
`
`Balances as ofsepternbcr 28, 2002
`
`
`uwnra5mm “ $% muunaun-as-.un-so
`-- $
`——
`350,922 5
`1,693 3
`2,260 3
`(1 l) S
`(22) 3
`3,920
`
`i
`
`Page 43 of 87
`
`——
`
`—
`
`—
`
`—
`
`—
`
`—
`
`—
`
`— ‘
`
`~—
`
`—
`
`.
`
`—
`
`——
`
`~—
`
`—~
`
`—
`
`—
`
`65
`—
`
`—
`
`—
`
`—
`
`—
`
`—
`
`—
`
`,
`
`4
`
`5
`
`(:7)
`
`65
`5
`
`(17)
`
`(15)
`
`(15)
` %
`
`—
`
`38
`
`4
`
`105
`—
`-—
`105
`8,037
`—
`—
`28
`—
`—
`- —
`28
`-——-
`—
`—
`TEE I E I. € :Z
`i — S
`——
`358,959 5
`1.826 5
`2.325 S
`(7) $
`(49) 3
`4,095
`
`
`See accompanying notes to consolidated financial statements.
`
`51
`
`3.\€££'
`
`
`
`CONSOLIDATED STATEMENTS OF CASH FLOWS
`
`(In millions)
`
`Three fiscal years ended September 28, 2002
`2002
`.
`1001
`
`
`1000
`
`Cash and cash equivalents, beginning of the year
`
`$
`
`2,310
`
`$
`
`1,191
`
`$
`
`1,326
`
`1
`
`Operating:
`‘
`Net income (loss)
`Cumulative effect of accounting change, net of taxes
`Adjustments to reconcile net income to cash generated by operating activities:
`Depreciation and amortization
`-
`Provision for deferred income taxes
`Loss on disposition of property, plant, and equipment
`(Gains) losses on investments, net
`Unrealized loss on convertible securities
`Purchased in-process research and development
`Changes in operating assets and liabilities:
`Accounts receivable
`Inventories
`Other current assets
`Other assets
`Accounts payable
`Other current liabilities
`
`Cash generated by operating activities
`
`Investing:
`Purchase of short-term investments
`Proceeds from maturities ofshort—term investments
`Proceeds from sales ofshort-term investments
`Purchases of long-temr investments
`
`65
`—-
`
`118
`(34)
`7
`35
`—
`1
`
`(99)
`(34)
`(1 14)
`(1 1)
`1 10
`45
`
`89
`
`(25)
`(12)
`
`102
`(36)
`9
`(88)
`13
`11
`
`487
`22
`106
`12
`(356)
`(60)
`
`185
`
`786
`-
`
`84
`163
`IO
`(367)
`—
`—
`
`(272)
`(13)
`(37)
`20
`313
`176
`
`868
`
`'
`
`'
`
`‘
`
`(4,144)
`2,846
`1,254
`——
`
`(4,268)
`4,811
`278
`(1)
`
`(4,267)
`3,075
`256
`(232)
`
`http://www.sec.gov/Archives/edgar/data/320193/000104746902007674/a2096490zI0-k.htm
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`

`
`Page 44 of 87
`
`Purchase of property, plant, and equipment
`Proceeds from sales of equity investments
`Cash used for business acquisitions
`Other
`
`Cash generated by (used for) investing activities
`
`Financing:
`Proceeds from issuance of common stock
`Cash used for repurchase of common stock
`
`Cash generated by (used for) financing activities
`
`(174)
`25
`(52)
`(7)
`
`(252)
`
`105
`_
`
`105
`
`(232)
`340
`—
`(36)
`
`892
`
`42
`—
`
`42
`
`Increase (decrease) in cash and cash equivalents
`
`(58)
`
`1,119
`
`(142)
`372
`-
`(34)
`
`(972)
`
`85
`(116)
`
`(31)
`
`(135)
`
`Cash and cash equivalents, end of the year
`
`Supplemental cash flow disclosures:
`Cash paid during the year for interest
`Cash paid for income taxes, net
`Noncash transactions:
`
`Issuance of common stock for conversion of Series A preferred stock
`Issuance of common stock in connection with acquisition
`
`1,l9l
`$
`2,310
`$
`.
`- Ma-x:r-:.>4-
`
`
`$
`$
`
`S
`S
`
`20
`11
`
`$
`$
`
`-— $
`— $
`
`20
`42
`
`76
`66
`
`$
`S
`
`$
`$
`
`20
`47
`
`74
`—
`
`See accompanying notes to consolidated financial statements.
`
`52
`
`
`namu=::=:==u=n:-tr.-an
`.
`-
`. 1smusnsmrnnswmznmu :mmium uznT4w.ra-;ruv~z-.anw-nntmsarauwzuaaausaagt-3-wmaua-stuvmnn
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
`
`Note l—Summary of Significant Accounting Policies
`
`Apple Computer, Inc. and its subsidiaries (the Company) designs, manufactures, and markets personal computers and related personal
`computing and communicating solutions for sale primarily to education, creative, consumer, and business customers.
`
`Basis of Presentation and Preparation
`
`The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions
`have been eliminated. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting
`principles requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial
`statements and accompanying notes. Actual results could differ materially from those estimates.
`
`Typically, the Company's fiscal year ends on the last Saturday of September. Fiscal years 2002 and 2001 were each 52-week years.
`However, approximately every six years, the Company reports a 53—week fiscal year to align its fiscal quarters with calendar quarters
`by adding a week to its first fiscal quarter. Consequently, an additional week was added to the first quarter of fiscal 2000. All
`infomiation presented herein is based on the Company's fiscal calendar.
`
`Financial Instruments
`
`Investments
`
`The Company places its short-term investments in highly liquid securities issued by high credit quality issuers. All highly liquid
`investments with maturities of three months or less at the date of purchase are classified as cash equivalents; highly liquid investments
`with maturities greater than three months are classified as short-temi investments. Management determines the appropriate
`classification of its investments in debt and marketable equity securities at the time ofpurchasc and reevaluates such designation as of
`each balance sheet date. The Company's marketable debt and equity securities have been classified and accounted for as available-for
`
`http://www.sec.gov/Archives/edgar/data/320193/000104746902007674/a2096490zlO-k.htrn
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`
`. ____.,
`
`. Page 45 of 87
`
`sale. These securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of
`shareholders’ equity. The cost of securities sold is based upon the specific identification method.
`
`Derivative Financial Instruments
`
`On October 1, 2000, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accountingfiir Derivative
`Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standardsfor derivative instruments, hedging
`activities, and exposure definition. SFAS No. 133 requires that all derivatives be recognized as either assets or liabilities at fair value.
`Derivatives that are not hedges must be adjusted to fair value through income. 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. Net of
`the related income tax effect of approximately $5 million, adoption of SFAS No. B} resulted in a favorable cumulative-effect-type
`adjustment to net income of approximately $12 million. Net of the related income tax effect of approximately $5 million, adoption of
`SFAS No. 133 resulted in a favorable curnulative—effect—type adjustment to other comprehensive income of approximately $12 million,
`all of which was reclassified to earnings during 2001. Management does not believe that ongoing application of SFAS No. 133 will
`significantly alter the Company's hedging strategies. However, its application may increase the volatility of other income and expense
`and other comprehensive income.
`
`For derivative instruments that hedge the exposure to variability in expected future cash flows that are attributable to a particular risk
`and that are designated as cash flow hedges, the net gain or loss on the
`
` ' «m2 :anm\%w '
`
`
`53
`
`derivative instrument is reported as a component of other comprehensive income in stockholders’ equity and reclassified into earnings
`in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting treatment, cash flow
`hedges must be highly effective in achieving offsetting changes to expected future cash flows on hedged transactions. For derivative
`instruments that hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that are
`attributable to a particular risk and that are designated as fair value hedges, the net gain or loss on the derivative instrument as well as
`the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. The net
`gain or loss on_the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency
`translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation
`adjustment. For forward contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes
`in the forward can'y component from its definition of effectiveness. Accordingly, any gains or losses related to this component are
`recognized in current eamings. For derivative instruments not designated as hedging instruments, changes in fair value are recognized
`in earnings in the current period.
`
`For foreign currency forward contracts designated as cash flow hedges, hedge effectiveness is measured based on changes in the fair
`value of the contract attributable to changes in the forward exchange rate. Changes in the expected future cash flows on the forecaster!
`hedged transaction and changes in the fair value of the forward hedge are both measured from the contract rate to the forward exchange
`rate associated with the forward contract's maturity date. For currency option contracts designated as cash flow hedges, hedge
`effectiveness is measured based on changes in total fair value of the option contract. Hedge effectiveness is assessed by comparing the
`present value of the cumulative change in expected cash flows on the hedged transactions determined as the sum of the probability-
`weighted outcomes with respect to the option strike rates with the total change in fair value of the option hedge. For interest rate swap
`agreements qualifying as fair value hedges, the Company assumes no ineffectiveness because these swaps meet the criteria for
`accounting under the short—cut method defined in SFAS No. 133.
`
`Inventories
`
`Inventories are stated at the lower of cost (first-in, first—out) or market. If the cost of the inventories exceeds their market value,
`provisions are made currently for the difference between the cost and the market value.
`
`Property, Plant, and Equipment
`
`Property, plant, and equipment are stated at cost. Depreciation is computed by use of the declining balance and straight—line methods
`over the estimated useful lives of the assets, which are 30 years for buiidings, from 2 to 5 years for equipment, and the shorter of lease
`terms or estimated useful lives for leasehold improvements. The Company capitalizes eligible costs to acquire or develop intemal-use
`software that. are incurred subsequent to the preliminary project stage. Capitalized costs related to internal-use software are amortized
`using the straight-line method over the estimated useful lives of the assets, which range from 3 to 5 years.
`
`Prior to the fourth quarter of 2001, the Company had classified capitalized costs related to intemal-use software on the balance sheet in
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`other assets. Effective as of September 29, 2001, and for all other periods presented, the Company has reclassified intemal-use software
`to property, plant, and equipment and reclassified related cash flows for the purchase or development of intemal-use software from cash
`flow from operations to cash flow from investing activities.
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`Non-Current Debt and Equity Investments
`
`Investments categorized as non-current debt and equity investments on the consolidated balance sheet are in equity and debt
`instruments of public companies. They are not categorized as current assets either because, given their nature, they are not readily
`convertible into cash or because they represent potentially longer-tenn investments by the Company. Further, the fair value of these
`investments has been subject to a high degree of volatility. The Company's non-current debt and equity investments 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 comprehensive income. However, the Company recognizes an impairment charge to
`earnings in the event a decline in fair value below the cost basis of one of these investments is determined to be other-than-temporary,
`The Company includes recognized gains and losses resulting from the sale or from other-than-temporary declines in fair value
`associated with these investments in other income and expense. Occasionally, the Company uses short—term equity derivatives to
`manage potential dispositions of non—cur-rent debt and equity investments. Any gains or losses associated with such derivatives are
`recognized currently in other income and expense.
`
`Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets
`
`The Company reviews property, plant, and equipment and certain identifiable intangibles, excluding goodwill, for impairment
`whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these
`assets is measured by comparison of its carrying amount to future undiscounted cash flows the assets are expected to generate. If
`property, plant, and equipment and certain identifiable intangibles are considered to be impaired, the impairment to be recognized
`equals the amount by which the carrying value of the assets exceeds its fair market value. For the three years ended September 28,
`2002, the Company has made no material adjustments to its long-lived assets except those made in connection with the restructuring
`actions described in Note 5.
`-
`
`The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, in the first quarter of fiscal 2002. SFAS No. 142 requires
`that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least
`annually or sooner whenever events or changes in circumstances indicate that they may be impaired. Prior to fiscal 2002, goodwill was
`amortized using the straight-line method over its estimated useful life. The Company completed its transitional and annual goodwill
`impairment tests as of October 1, 2001, and August 30, 2002, respectively, and found no impairment. The Company established
`reporting units based on its current reporting structure. For purposes of testing goodwill for impairment, goodwill has been allocated to
`these reporting units to the extent it relates to each reporting unit.
`
`SFAS No. 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. 144, A ccountingfor the Impairment ofLong-Lived Assets andfor Long—Lived Assets to Be
`Disposed Of. The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 3 to
`7 years.
`
`Foreign Currency Translation
`
`The Company translates the assets and liabilitiesof its international non—U.S. functional currency subsidiaries into U.S. dollars using
`exchange rates in effect at the end of each period. Revenues and expenses for these subsidiaries are translated using rates that
`approximate those in effect during the period. Gains and losses from these translations are credited or charged to "accumulated
`translation adjustment" included in "accumulated other comprehensive income (loss)" in shareholders’ equity. The Company's foreign
`manufacturing subsidiaries and certain other international subsidiaries that use the U.S. dollar as their functional currency, remeasure
`monetary assets and liabilities at year—end exchange
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`
`rates, and inventories, property, and nonmonetary assets and liabilities at historical rates. Gains and losses from these translations are
`included in the Company's results of operations.
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`Revenue Recognition
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`Net sales consist primarily of revenue from the sale of products (hardware, software, and peripherals), consulting and implementation
`services, and extended warranty and support contracts. The Company recognizes revenue pursuant to applicable accounting standards,
`including Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as amended. Revenue is recognized when persuasive,
`, evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable. Product
`is considered delivered to the customer once it has been shipped, and title and risk of loss have been transferred. For online sales to
`individuals, for some sales to education customers in the United States, and for certain other sales, the Company defers revenue until
`product is received by the customer because the Company legally retains a portion of the risk of loss on these sales during transit. For
`other product sales, these criteria are met by the Company at the time product is shipped. The Company records reductions to revenue
`for estimated commitments related to price protection and for customer incentive programs, including reseller and end user rebates and
`other sales programs and volume-based incentives.
`
`Revenue for consulting and implementation services is recognized upon performance and acceptance by the customer. Revenue from
`extended warranty and support contracts is recognized ratably over the contract period. Amounts billed to customers in excess of
`revenue recognized on extended warranty and support contracts are recognized as deferred revenue until revenue recognition criteria
`are met.
`'
`
`Revenue on arrangements that include multiple elements such as hardware, software, and services is allocated to each element based on
`vendor specific objective evidence of the fair value of each element. Allocated revenue for each element is recognized when revenue
`recognition criteria have been met for each element. Vendor specific objective evidence of fair value is generally determined based on '
`the price charged when each element is sold separately.
`
`Shipping Costs
`
`The Company's shipping and handling costs are included in cost of sales for all periods presented.
`
`Warranty Expense
`
`The Company provides currently for the estimated cost that may be incurred under product warranties at the time related revenue is
`recognized.
`
`Research and Development
`
`Research and development costs are expensed as incurred. Development costs of computer software to be sold, leased or otherwise
`marketed are subject to capitalization beginning when a product's technological feasibility has been established and ending when a
`product is available for general release to customers. ln most instances, the Company's products are released soon after technological
`feasibility has been established. Therefore, costs incurred subsequent to achievement of technological feasibility are usually not
`significant, and generally all software development costs have been expensed.
`
`During the third and fourth quarter of 2002, the Company incurred substantial development costs associated with the development of
`Mac OS X version l0.2 (code-named "Jaguar") subsequent to achievement of technological feasibility as evidenced by public
`demonstration and release of a developer beta in May 2002 and prior to release of the final version of the product in the fourth quarter.
`As such, the Company capitalized approximately $13.3 million of development costs associated with development of
`
` =1.-r;-.u:~n-u:=:.:.u.'-.m«.19:-.~.-u:.~.\-._~v\-_-,x-u.-;zur..-_-33:.-r -u::s.‘.':::c.~t~:e-.varr.-1.:-z_v_-_-.—.:_~.v.7a:t:u:::-m;ne-.=n
`
`56
`
`Jaguar. Amortization of this asset began in the fouith quaner when Jaguar was shipped and is being recognized on a straight-line basis
`over 3 years. In addition, during 2002, the Company also began capitalizing certain costs related to development of its new
`Powerschool enterprise student information system. Capitalization, which began upon achievement of technological feasibility in the
`first quarter, amounted to approximately $6 million during the first nine months of fiscal.2002. The final version of the enterprise
`student information system was released in July.
`
`During 2001 the Company incurred substantial development costs associated with the development of the original version of Mac OS
`X, subsequent to release of a public beta version of the product and prior to release of the final product version. As a result, the
`Company capitalized approximately $5.4 million of development costs during 2001 associated with development of Mac OS X. Related
`amortization is computed by use of the straight-line method over the estimated useful life of the asset of 8 years.
`
`Total amortization related to capitalized software development costs was $1.2 milliorrand $350,000 in 2002 and 2001, respectively.
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`Advertising Costs
`
`Advertising costs are expensed as incurred. Advertising expense was $209 million, $261 million, and $281 million for 2002, 2001, and
`2000, respectively.
`
`Stock-Based Compensation
`
`The Company measures compensation expense for its employee stock-based compensation plans using the intrinsic value method
`prescribed by Accounting Principles Board (APB) Opinion 25, Accountingfor Stock Issued to Employees and has provided pro forma
`disclosures of the effect on net income and earnings per share as if the fair value-based method had been applied in measuring
`compensation expense. The Company has elected to follow APB No. 25 because, as discussed below, the alternative fair value
`accounting provided for under SFAS No. 123, Accountingfor 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. Under APB Opinion No. 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.
`
`Pro forma information regarding net income (loss) per share is required by SPAS No. 123 and has been determined as if the Company
`had accounted for its employee stock options granted and employee stock purchase plan purchases subsequent to September 29, 1995,
`under the fair value method of that statement. The fair values for these options and stock purchases were estimated at the date of grant
`and beginning of the period, respectively, using a Black~Scholes option pricing model. For purposes of pro forma disclosures, the
`estimated fair value of the options and shares are amortized to pro forma net income over the options‘ vesting period and the shares‘
`plan period.
`'
`
`_
`
`The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting
`restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including
`the expected life ofoptions and the Company's expected stock price volatility. Because the Company's employee stock options and
`employee stock purchase plan shares have characteristics significantly different from those of traded options, and because changes in
`the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not
`provide a reliable measure of the fair value of the Company's employee stock options and employee stock purchase plan shares.
`
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`
`For purposes of the pro forma disclosures pursuant to SFAS No. 123 provided in the Company's annual reports through 2002, the
`expected volatility assumptions used by the Company have been based solely on historical volatility rates of the Company's common
`stock. The Company has made no adjustments to its expected volatility assumptions based on current market conditions, current market
`trends, or expected volatility implicit in market traded options on the Company's stock. The Company will continue to monitor the
`propriety of this approach to developing its expected volatility assumption and could determine for future periods that adjustments to
`historical volatility and/or use of a methodology that is based on the expected volatility implicit in market traded options on the
`Company's common stock are more appropriate based on the facts and circumstances existing in future periods.
`
`Earnings Per Common 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 during the period. 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 of
`common stock had been issued. The dilutive effect of outstanding options is reflected in diluted earnings per share by application of