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APPLE INC
FORM 10-K
(Annual Report)
Filed 12/19/02 for the Period Ending 09/28/02
Address ONE INFINITE LOOP
CUPERTINO, CA 95014
Telephone (408) 996-1010
CIK 0000320193
Symbol AAPL
SIC Code 3571 - Electronic Computers
Industry Computer Hardware
Sector Technology
Fiscal Year 09/30
http://www.edgar-online.com
© Copyright 2011, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    APPLE INC FORM 10-K (Annual Report) Filed 12/19/02 for the Period Ending 09/28/02 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year ...-online.com © Copyright 2011, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms...

  • Page 2
    ...pursuant to Section 12(g) of the Act: Common Stock, no par value Common Share Purchase Rights (Titles of classes) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months...

  • Page 3
    ... State of California on January 3, 1977. The Company designs, manufactures and markets personal computers and related personal computing solutions for sale primarily to education, creative, consumer, and business customers. Substantially all of the Company's net sales over the last five years have...

  • Page 4
    ... and services designed to help schools maximize their investments in technology. This commitment is manifest in many of the Company's products and services, including hardware that meets the needs of education customers, video editing solutions, wireless networking capabilities, student information...

  • Page 5
    ... set up and manage all key Mac OS X Server network services remotely. Server Monitor, a new hardware monitoring tool, allows system administrators to remotely monitor one or many servers. The Company offers a choice of services and support programs including 4-hour onsite response, 24x7 technical...

  • Page 6
    ... version of Sherlock®, the Company's advanced Internet search engine. Jaguar also features accelerated graphics performance, increased compatibility with Windows networks, and a UNIX-based foundation with enhancements including FreeBSD 4.4 and GCC 3.1-based developer tools. Mac OS X server software...

  • Page 7
    ...music; automatically create custom web pages of their photos; email photos to friends and family; order professionally-processed prints and enlargements online; or easily design and order customprinted, linen-covered hard bound photo books online. Prints, enlargements, and hard bound book production...

  • Page 8
    ... Do list management; quickly locate any event via a search tool; and take calendars to go using iSync with Bluetooth-enabled mobile phones, Palm OS devices and iPod. iSync Public Beta is a preview version of Apple's new software application that automatically synchronizes address books and calendars...

  • Page 9
    ...â„¢ for Mac OS X software enables users, teachers and administrators to remotely manage other Macintosh systems anywhere on a local network, AirPort wireless network or across the Internet. With Apple Remote Desktop, teachers can view students' computer screens, perform group demonstrations and help...

  • Page 10
    ... and Windows computers; the iBook Wireless Mobile Lab that allows teachers and students to share iBook computers, a printer, and a wireless network/Internet connection stored on a cart for mobility between classrooms; and three special Digital Media Studio solutions designed for education, including...

  • Page 11
    ... products in the areas of hardware and peripherals, system software, applications software, networking and communications software and solutions, and the Internet. The Company's research and development expenditures, before any charges for purchased in-process research and development, totaled...

  • Page 12
    ... net sales or financial performance. Warranty The Company offers a limited parts and labor warranty on its hardware products. The warranty period is typically one year from the date of purchase by the end user. The Company also offers a 90-day warranty for Apple software and for Apple service parts...

  • Page 13
    ..., in Europe, Japan, and the Asia Pacific region. Leased space in the United States includes 395,000 square feet of retail space. Leases are generally for terms of 5 to 10 years, and usually provide renewal options for terms of 3 to 5 additional years. The Company owns its manufacturing facilities in...

  • Page 14
    ...'s financial position or results of operations. FTC Inquiry-Prado v. Apple Computer, Inc. (and related actions) In October 1997, Apple began charging all U.S. non-education customers for live telephone technical support beyond 90 days after purchase of Apple products. In late 1997, the Federal Trade...

  • Page 15
    ... advertising and unfair business practices (among other causes of action) by advertising that the AirPort System is Internet-ready and failing to disclose that the AirPort System is incompatible with certain Internet service providers, primarily America Online. The Company answered the complaint...

  • Page 16
    ...Stock Exchange under the symbol APCD. As of December 6, 2002, there were 28,310 shareholders of record. On June 21, 2000, the Company effected a two-for-one stock split in the form of a Common Stock dividend to shareholders of record as of May 19, 2000. All share price and per share data and numbers...

  • Page 17
    ... Doubtful Accounts The Company distributes its products through third-party computer resellers and directly to certain education, consumer, and commercial customers. The Company generally does not require collateral from its customers. However, when possible, the Company does attempt to limit credit...

  • Page 18
    ... their book value, the Company is required to estimate the fair value of all identifiable assets and liabilities of those business units in a manner similar to a purchase price allocation for an acquired business. This requires independent valuation of certain internally developed and unrecognized...

  • Page 19
    ... Financial Condition." Net Sales Net sales and Macintosh unit sales for geographic segments and by product follow (net sales in millions and Macintosh unit sales in thousands): 2002 Change 2001 Change 2000 Americas net sales Europe net sales Japan net sales Retail net sales Other segments net sales...

  • Page 20
    ... associated with extended maintenance and support contracts. The growth in software revenue was primarily the result of increased sales of third-party software in the Company's retail and online stores and expansion in recent years in the number of Apple-branded software titles. Second, overall unit...

  • Page 21
    ... hardware and software products and similar services. Further information regarding the Company's operating segments may be found in Part II, Item 8 on this Form 10-K in the Notes to Consolidated Financial Statements at Note 11, "Segment Information and Geographic Data." Americas Net sales for the...

  • Page 22
    ... effect of falling consumer demand in the Americas segment was partially offset by strong U.S. education sales. The Company's unit sales in U.S. education markets rose 7% in 2001 driven by the acceptance of the 25 Company's new portable products, particularly the iBook, and reflect a general shift...

  • Page 23
    ... Company's operating results and financial condition have been in the past and may in the future be materially adversely affected by the Company's ability to manage its inventory levels and outstanding purchase commitments and to respond to short-term shifts in customer demand patterns. Gross margin...

  • Page 24
    ... SG&A costs in light of lower net sales and to reduce discretionary marketing and advertising expenses. Given current economic conditions and the Company's continued strategic investments in new product development and its Retail segment, the Company is currently identifying additional opportunities...

  • Page 25
    ... net cash flows back to their present value using a discount rate of 25%. Executive Bonus During the first quarter of 2000, the Company's Board of Directors approved a special executive bonus for the Company's Chief Executive Officer for past services in the form of an aircraft with a total cost to...

  • Page 26
    ... in other income and expense. Further information related to the Company's non-current debt and equity investments may be found in Part II, Item 8 of this Form 10-K at Note 2 of Notes to Consolidated Financial Statements. During 2002, the Company determined that declines in the fair value of certain...

  • Page 27
    ..., net may be significantly impacted by unforeseen changes in market interest rates, foreign currency exchange rates, and the fair value of the Company's short-term and long-term investments. Provision for Income Taxes The Company's effective tax rate for 2002 was 25% compared to the higher statutory...

  • Page 28
    ... information and statistics for each of the last three fiscal years (dollars in millions): 2002 2001 2000 Cash, cash equivalents, and short-term investments Accounts receivable, net Inventory Working capital Days sales in accounts receivable (a) Days of supply in inventory (b) Annual operating cash...

  • Page 29
    ... value of these investments in the future. Further information related to the Company's non-current debt and equity investments may be found in Part II, Item 8 of this Form 10-K at Note 2 of Notes to Consolidated Financial Statements. Factors That May Affect Future Results and Financial Condition...

  • Page 30
    ...of the unique design, technical features, and solutions of the Company's products. The Company has many substantial competitors, many of whom have greater financial, marketing, manufacturing, and technological resources, as well as broader product lines and larger installed customer bases than those...

  • Page 31
    ... of operations and financial condition could be adversely affected. The Company's products could experience quality problems that result in decreased net sales and operating profits. The Company sells highly complex hardware and software products that may contain defects in design and manufacture...

  • Page 32
    ... to manage costs associated with store construction and operation; lack of consumer acceptance of the Company's retail approach; failure to attract new users to the Macintosh platform; inability to sell third-party hardware and software products at adequate margins; failure to manage relationships...

  • Page 33
    ... new application software or upgrade existing software for the Company's products and more inclined to devote their resources to developing and upgrading software for the larger Windows market. In addition, past and future development by the Company of its own software applications and solutions...

  • Page 34
    ... of the Windows operating system. Discontinuance of Microsoft Office and other Microsoft products for the Macintosh platform would have an adverse effect on the Company's net sales and results of operations. The Company's business relies on access to patents and intellectual property obtained from...

  • Page 35
    ... accounts receivables. This risk is heightened as economic conditions worsen. The Company distributes its products through third-party computer resellers and retailers and directly to certain educational institutions and commercial customers. A substantial majority of the Company's outstanding trade...

  • Page 36
    ... the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash, cash equivalents, and short-term investments as well as costs associated with foreign currency hedges. The Company's fixed income investment policy and strategy...

  • Page 37
    ... market price paths. The value-at-risk is the maximum expected loss in fair value, for a given confidence interval, to the Company's foreign exchange portfolio due to adverse movements in rates. The VAR model is not intended to represent actual losses but is used as a risk estimation and management...

  • Page 38
    ... limitations associated with predicting the changes in the timing and amount of interest rates, foreign currency exchanges rates, and the Company's actual exposures and positions. 47 Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Financial...

  • Page 39
    ... notes to consolidated financial statements. 49 CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except share and per share amounts) Three fiscal years ended September 28, 2002 2002 2001 2000 Net sales Cost of sales Gross margin Operating expenses: Research and development Selling, general...

  • Page 40
    ... net of tax Total comprehensive income Common stock issued under stock option and purchase plans Conversion of Series A preferred stock Common stock repurchased Tax benefit related to stock options Balances as of September 30, 2000 Components of comprehensive income (loss): Net income (loss) Foreign...

  • Page 41
    ... accompanying notes to consolidated financial statements. 51 CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Three fiscal years ended September 28, 2002 2002 2001 2000 Cash and cash equivalents, beginning of the year Operating: Net income (loss) Cumulative effect of accounting change, net of...

  • Page 42
    ... 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...

  • Page 43
    ...designation as of each balance sheet date. The Company's marketable debt and equity securities have been classified and accounted for as available-for-sale. These securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of shareholders' equity...

  • Page 44
    ... at year-end exchange 55 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. Revenue Recognition Net sales consist primarily of revenue from the sale of products...

  • Page 45
    ..., 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. Under APB Opinion No. 25, when the exercise price of the Company's employee stock options equals the market...

  • Page 46
    ...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...

  • Page 47
    ...years. The remaining short-term investments as of September 29, 2001, all had maturities of between 3 and 12 months. Accounts Receivable Trade Receivables The Company distributes its products through third-party computer resellers and directly to certain education and consumer customers. The Company...

  • Page 48
    ...forecasted revenues and cost of sales. From time to time, the Company enters into interest rate swap agreements to modify the interest rate profile of certain investments and debt. The Company's accounting policies for these instruments are based on whether the instruments are designated as hedge or...

  • Page 49
    ... of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of September 28, 2002 and September 29, 2001. In certain instances where judgment is required in estimating fair value, price quotes were obtained from several of the Company...

  • Page 50
    ... risk management. As of September 30, 2000, the Company had entered into interest rate swaps 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-rate interest expense on its long-term debt...

  • Page 51
    ... of three year unsecured bonds, which were convertible into approximately 550,000 shares of Samsung common stock beginning in July 2000. The bonds carried an annual coupon rate of 2% and pay a total yield to maturity of 5% if redeemed at their maturity. The fair value of the Company's investment in...

  • Page 52
    ... of September 28, 2002, the Company has no private debt or equity investments reflected in its consolidated balance sheet. Note 3-Consolidated Financial Statement Details Inventories (in millions) 2002 2001 Purchased parts Work in process Finished goods Total inventories $ 9 - 36 45 $ 1 - 10 11...

  • Page 53
    ...Accrued compensation and employee benefits Accrued marketing and sales programs Deferred revenue Accrued warranty and related costs Other current liabilities Total accrued expenses $ 93 136 253 69 196 747 $ 88 131 184 87 227 717 $ $ Interest and Other Income, Net (in millions) 2002 2001 2000...

  • Page 54
    ... employment by certain employees that will be allocated to future compensation expense in the appropriate periods over the next 3 years. The acquisition has been accounted for as a purchase. The portion of the purchase price allocated to purchased in-process research and development (IPR&D) was...

  • Page 55
    ...schools to record, access, report, and manage their student data and performance in real-time, and gives parents realtime web access to track their children's progress. The consolidated financial statements include the operating results of PowerSchool from the date of acquisition. The purchase price...

  • Page 56
    ... general economic conditions and to partially offset the cost of continuing investments in new product development and investments in the Company's Retail operating segment. During the fourth quarter of 2002, the Company's management approved and initiated restructuring actions with a total cost of...

  • Page 57
    ... all was utilized before the end of 2000. Executive Bonus During the first quarter of 2000, the Company's Board of Directors approved a special executive bonus for the Company's Chief Executive Officer for past services in the form of an aircraft with a total cost to the Company of approximately...

  • Page 58
    ...cash equivalents, and short-term investments is held by foreign subsidiaries and is generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries would be subject to U.S. income taxation on repatriation to the United States. The Company's consolidated financial statements...

  • Page 59
    ... federal income tax returns for fiscal years 1998 through 2000. Management believes that adequate provision has been made for any adjustments that may result from tax examinations. Note 7-Shareholders' Equity Stock Repurchase Plan In July 1999, the Company's Board of Directors authorized a plan for...

  • Page 60
    ... subsequent annual grants of 10,000 options are fully vested at grant. Prior to adoption of the DSOP, 60,000 options were granted in total to two then-current members of the Company's Board of Directors. Employee Stock Purchase Plan The Company has a shareholder approved employee stock purchase plan...

  • Page 61
    ... arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the Internal Revenue Service annual contribution limit ($11,000 for calendar year 2002). The Company matches 50% to 100% of each...

  • Page 62
    ... information regarding net income (loss) per share is required by SFAS 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...

  • Page 63
    ... of the Company's CPUs, logic boards, and assembled products are now manufactured by outsourcing partners, the majority of which occurs in various parts of Asia. Although the Company works closely with its outsourcing partners on manufacturing schedules and levels, the Company's operating results...

  • Page 64
    ...The Company evaluates the performance of its operating segments based on net sales and operating income. Net sales for geographic segments are based on the location of the customers. Operating income for each segment includes revenue from third-parties, cost of sales, and operating expenses directly...

  • Page 65
    ... the Company's segment operating income, and assets to the consolidated financial statements follows (in millions): 2002 2001 2000 Segment operating income Corporate expenses, net Purchased in-process research and development Restructuring costs Executive bonus Consolidated operating income $ 608...

  • Page 66
    ... instability, labor problems, trade restrictions, and changes in tariff and freight charges. During 2000, a single distributor, Ingram Micro Inc. accounted for approximately 11.5% of the Company's net sales. Net sales during 2000 to Ingram Micro Inc. in the Americas and Europe segments were $651...

  • Page 67
    ... price was greater than the average market price of the Company's common shares for that year and, therefore, the effect would be antidilutive. Note 13-Related Party Transactions Mr. Jerome York, a member of the Board of the Directors of the Company, is a member of an investment group that purchased...

  • Page 68
    ... 29, 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended September 28, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express...

  • Page 69
    ... for each of the years in the three-year period ended September 28, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2002...

  • Page 70
    ... to April 1995, Dr. Tevanian worked as an engineer with NeXT and held several management positions. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors, and persons who own more than...

  • Page 71
    ... Officer for past services, in the form of an aircraft with a total cost to the Company of approximately $90,000,000. This amount was previously reported as a bonus for fiscal year 2000 in the Company's 2000 Form 10-K and 2000 Proxy Statement. Because the aircraft was transferred to Mr. Jobs in 2001...

  • Page 72
    ... Mr. Jobs, 25% were vested as of the date of grant and the remainder vest in three equal annual installments commencing on the first anniversary of the date of grant. All options were granted at an exercise price equal to the fair market value based on the closing market value of Common Stock on the...

  • Page 73
    ... year, there were options for 360,000 shares outstanding under the Director Plan. Since accepting the position of CEO, Mr. Jobs is no longer eligible for grants under the Director Plan. Compensation Committee Interlocks and Insider Participation The current members of the Compensation Committee...

  • Page 74
    ... equity compensation plans 44,867 64,563 109,430 $ $ $ 29.75 27.07 28.17 7,497(1) 1,221(2) 8,718 (1) This number includes 2,146,906 shares of common stock reserved for issuance under the Employee Stock Purchase Plan, 360,000 shares available for issuance under the 1997 Director Stock Option...

  • Page 75
    ... online retailer and direct marketer of computer products, including products made by the Company, through its MacWarehouse catalogue. During fiscal year 2002, MicroWarehouse accounted for 3.3% of the Company's net sales. The Company also purchases products from MicroWarehouse for its own internal...

  • Page 76
    ... the information required is included in the Consolidated Financial Statements and Notes thereto under Part II, Item 8 of this Form 10-K. 3. Exhibits The following exhibits are filed as part of this Form 10-K. Exhibit Number Description 10.A.49** 21 23.1 99.1 1997 Employee Stock Option Plan, as...

  • Page 77
    .... Apple Computer, Inc. Employee Stock Purchase Plan, as amended through October 6, 1999. Form of Indemnification Agreement between the Registrant and each officer of the Registrant. NeXT Computer, Inc. 1990 Stock Option Plan, as amended. 1997 Director Stock Option Plan. 1998 Executive Officer Stock...

  • Page 78
    ...02/3Q 02K Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3 (file no. 33-23317) filed July 27, 1988. Incorporated by reference to the exhibit of that number in the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1991 (the "1991...

  • Page 79
    ... with respect to the period covered by this annual report; Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as...

  • Page 80
    ... with respect to the period covered by this annual report; Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as...

  • Page 81
    ...'s Common Equity and Related Shareholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data CONSOLIDATED BALANCE SHEETS...

  • Page 82
    ... "Common Stock" means the common stock, no par value, of the Company. "Company" means Apple Computer, Inc., a California corporation, or its successor. "Committee" means a Committee, if any, appointed by the Board in accordance with Section 4(a) of the Plan. "Code" means the Internal Revenue Code of...

  • Page 83
    ... Automated Quotation ("NASDAQ") System), its Fair Market Value shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or exchange (or the exchange with the greatest volume of trading in the Common Stock) for the date of determination or...

  • Page 84
    ... 3 Limit shall be increased by the number of Shares tendered to pay the exercise price of an Option or the number of Shares of Optioned Stock withheld to satisfy an Optionee's tax liability in connection with the exercise of an Option or SAR. (iv) Option Stock subject to both an outstanding Option...

  • Page 85
    ... of payment, shall be determined by the Administrator and may consist of (i) cash, (ii) check, (iii) promissory note, (iv) other Shares which have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (v) delivery...

  • Page 86
    ... 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with...

  • Page 87
    ...the Plan upon cancellation or expiration of an Option or SAR, as well as the price per Share covered by each such outstanding Option or SAR, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend...

  • Page 88
    ..., and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option or SAR or the issuance of...

  • Page 89
    ..., and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended September 28, 2002, which report appears in the September 28, 2002 annual report on Form 10-K of Apple Computer, Inc. KPMG LLP Mountain View, California

  • Page 90
    ... 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Apple Computer, Inc. By: /s/ STEVEN P. JOBS Steven P. Jobs Chief Executive Officer I, Fred D. Anderson...