Apple 2003 Annual Report Download - page 53

Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company applies the disclosure
provisions of SFAS No. 123, Accounting for Stock-based Compensation , as amended by SFAS No. 148 , Accounting for Stock-based
Compensation—Transition and Disclosure as if the fair value-based method had been applied in measuring compensation expense. The
Company has elected to follow APB Opinion No. 25 because, as discussed below, the alternative fair value accounting provided for under
SFAS No. 123 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.
As required under SFAS No. 123, the pro forma effects of stock-based compensation on net income and earnings per common share for
employee stock options granted and employee stock purchase plan purchases have been 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 is 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 freely 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 of options 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 freely traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
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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.
For purposes of pro forma disclosures, the estimated fair value of the options and shares is amortized to pro forma net income (loss) over the
options' vesting period and the shares' plan period. The Company's pro forma information for each of the last three fiscal years follows (in
millions, except per share amounts):
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 and restricted stock is reflected in diluted earnings per share by application of the treasury
stock method. Dilutive potential shares of common stock related to stock options were excluded from the calculation of diluted loss per
common share for fiscal 2001 because their effect would have been antidilutive.
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2003 2002 2001
Net income (loss)
—
as reported
$
69
$
65
$
(25
)
Add: Stock-based employee compensation expense included in
reported net income (loss), net of tax
15
5
2
Deduct: Stock-based employee compensation expense determined
under the fair value based method for all awards, net of tax
(181
)
(234
)
(373
)
Net loss
—
pro forma
$
(97
)
$
(164
)
$
(396
)
Net income (loss) per common share
—
as reported
Basic
$
0.19
$
0.18
$
(0.07
)
Diluted
$
0.19
$
0.18
$
(0.07
)
Net loss per common share
—
pro forma
Basic
$
(0.27
)
$
(0.46
)
$
(1.15
)
Diluted
$
(0.27
)
$
(0.46
)
$
(1.15
)