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No. of Recommendations: 8
No cash was used to repurchase shares during the quarter, even though the stock hit $13.36 on 10/8/02.

The company disclosed quarterly pro-forma options expense for the first time, and expanded on their excuse for not expensing option:

"The Company has elected to follow APB No. 25 because, as discussed below, the alternative fair value accounting provided for under SFAS No. 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."

The "fair value" of options, according to Apple's use of the Black-Sholes formula, granted during Q1 2003 were $53 million, vs $57 million in Q1 2002. The 2002 figure included Steve's 7.5 million options granted at $18.30 on 10/19/01. Based on the similar dollar values, it looks like Fred and the other top VPs may have gotten their big grants late in calendar 2002, vs. January of 2001 and March in 2002.

Apple is correct to suggest that the Black-Sholes model is not especially good at predicting the true value of an options grant. The model, which requires Apple to input certain volatility and duration variables, appears to predict that Steve's latest grant is worth something less than $57 million. If Apple stock appreciates just 5% per year over the life of his options, they'll eventually be worth over $86 million. If the stock appreciates 10% per year on average, they'll be worth over $218 million. Apple is essentially arguing that it is better to say that the options are worth nothing than it would be to underestimate their value.

Rodg.
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