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0000320193
20061229
10-Q
50
Two director grants were made pursuant to a 1997 plan that dated the grants on the enactment of the plan.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
51
The remaining fifteen grants were automatically made under the Director Stock Option Plan for non-employee directors, which was approved by shareholders in 1998, on the date of a director’s election or appointment to the Board and on subsequent anniversaries, beginning on the fourth anniversary.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
52
Accordingly, the analysis determined that the originally assigned grant date for each director grant is the measurement date, and no accounting adjustments are required.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
53
Monday/Tuesday Grants - Beginning in December 1998, 3,892 new hire grants and grants for promotion and retention purposes (“promotion/retention grants”) were made during the relevant period under the “Monday/Tuesday Plan.” Under the Monday/Tuesday Plan, new hire grants made within pre-established guidelines approved by...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
54
The Company’s analysis showed this process to be reliable with very low error rates.
0001104659-06-084286/full-submission.txt
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20061229
10-Q
55
Promotion/retention grants, also based on pre-established guidelines, were made generally on the first Tuesday of each month.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
56
The Company has concluded that the new hire and promotion/retention grants made pursuant to the Monday/Tuesday Plan within pre-established guidelines do not require adjustment, with the exception of six grants that were erroneously dated before the employees’ start dates.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
57
For 120 new hire and promotion/retention grants made outside the guidelines, however, the Company has concluded that the measurement dates are the dates of ratification by the Board or Compensation Committee rather than the dates used for grants within guidelines.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
58
Accordingly, based on the methodology described above, the Company has recognized stock-based compensation expense of $6 million from 126 grants.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
59
If other dates in the period between the preparation of the UWC and the preparation of the Secretary’s Certificate had been used as measurement dates for grants whose actual ratification dates are unknown, the total stock-based compensation expense would have ranged from approximately $3 million to $7 million.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
60
Focal Grants - During the relevant period, 27,096 focal grants were made to employees typically on an annual basis as part of an extensive process that required several months to complete.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
61
Pursuant to limits, guidelines and practices previously approved by the Board or Compensation Committee, managers throughout the Company would make recommendations for grants to employees in their areas of responsibility.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
62
After senior management had determined that the grants were made in accordance with these established limits, guidelines and practices, management treated the grants as final when they were submitted to the Board or Compensation Committee for ratification.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
63
The Company has concluded that for 5,595 grants on five dates, the originally assigned grant dates are not the proper measurement dates.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
64
For these grants, management’s process for finalizing the grants was completed after the originally assigned grant dates.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
65
As a result, the Company has recognized $29 million of stock-based compensation expense.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
66
For two of the five grant dates comprising 3,744 grants, the evidence shows that the grants were finalized and the measurement date occurred one day after the originally assigned grant dates.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
67
The grants on these two dates represent more than $16 million of the total $29 million of stock-based compensation expense resulting from focal grants.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
68
Other Meeting Grants - During the relevant period, meetings of the Board or Compensation Committee were held to ratify 9,988 grants that are not Monday/Tuesday, focal or CEO grants.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
69
The grant dates and measurement dates for these grants are the meeting dates when the grants were ratified, with the exception of 46 grants.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
70
Forty-two of these 46 grants are dated concurrent with a meeting that considered and approved certain grants, but the evidence indicates that all of the grants may not have been finalized until a later date.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
71
One of the 46 grants was approved and dated at another meeting, but the recipient, who was becoming employed by the Company as part of a corporate acquisition, did not start until a later date.
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20061229
10-Q
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Two other grants were approved before the employees’ start dates.
0001104659-06-084286/full-submission.txt
0000320193
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10-Q
73
Another grant was mistakenly cancelled and subsequently reinstated, requiring an accounting adjustment.
0001104659-06-084286/full-submission.txt
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20061229
10-Q
74
Thus, for these 46 grants the Company has concluded that the originally assigned grant dates are not the proper measurement dates.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
75
As a result, the Company has recognized $2 million of stock-based compensation expense.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
76
Other UWC Grants - During the relevant period, 1,082 grants were approved by UWCs for a variety of purposes, including executive recruitment, retention, promotion and new hires outside the Monday/Tuesday process.
0001104659-06-084286/full-submission.txt
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20061229
10-Q
77
These grants were not made pursuant to pre-established guidelines adopted by the Board or Compensation Committee.
0001104659-06-084286/full-submission.txt
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20061229
10-Q
78
Therefore, the Company has concluded that these grants were not finalized for accounting purposes until ratification by the Board or Compensation Committee.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
79
Accordingly, for 660 grants, the Company has concluded that the originally assigned grant dates are not the proper measurement dates.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
80
As a result, the Company has recognized $48 million of stock-based compensation expense.
0001104659-06-084286/full-submission.txt
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20061229
10-Q
81
If other dates in the period from the preparation of the UWC to the preparation of the Secretary’s Certificate had been used as measurement dates for grants whose actual ratification dates are unknown, the total stock-based compensation would have ranged from approximately $35 million to $56 million.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
82
CEO Grants - During the relevant period, the Company made two grants to CEO Steve Jobs.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
83
The first grant, dated January 12, 2000, was for 10 million option shares.
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20061229
10-Q
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The second grant, dated October 19, 2001, was for 7.5 million option shares.
0001104659-06-084286/full-submission.txt
0000320193
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10-Q
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Both grants were cancelled in March 2003 prior to being exercised, when Mr. Jobs received 5 million shares of restricted stock.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
86
With respect to the grant dated January 12, 2000, the Board on December 2, 1999, authorized a special “CEO Compensation Committee” to grant Mr. Jobs up to 15 million shares.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
87
The evidence indicates that the CEO Compensation Committee finalized the terms of the grant on January 12, 2000, although the Committee’s action was memorialized in a UWC transmitted on January 18, 2000.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
88
Because the measurement date is the originally assigned grant date, the Company has not recognized any stock-based compensation expense from this grant.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
89
If the Company had determined that the measurement date was the date when the UWC was executed or received, then additional stock-based compensation would have been recognized.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
90
The grant dated October 19, 2001 was originally approved at a Board meeting on August 29, 2001, with an exercise price of $17.83.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
91
The terms of the grant, however, were not finalized until December 18, 2001.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
92
The grant was dated October 19, 2001, with an exercise price of $18.30.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
93
The approval for the grant was improperly recorded as occurring at a special Board meeting on October 19, 2001.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
94
Such a special Board meeting did not occur.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
95
There was no evidence, however, that any current member of management was aware of this irregularity.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
96
The Company has recognized $20 million in stock-based compensation expense for this grant, reflecting the difference between the exercise price of $18.30 and the share price on December 18, 2001 of $21.01.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
97
The incremental impact from recognizing stock-based compensation expense resulting from the investigation of past stock option grants is as follows (dollars in millions): Additionally, the Company has restated the pro forma expense under Statement of Financial Accounting Standards (“SFAS”) No.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
98
123 in Note 1 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q and in Note 1 of the Notes to Consolidated Financial Statements of the 2006 Form 10-K to reflect the impact of these adjustments.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
99
PART I.
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10-Q
100
FINANCIAL INFORMATION Item 1.
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20061229
10-Q
101
Financial Statements APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in millions, except share and per share amounts) (1) See Note 2, “Restatement of Condensed Consolidated Financial Statements,” in Notes to Condensed Consolidated Financial Statements.
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10-Q
102
(2) Includes stock-based compensation expense, which was allocated as follows: See accompanying Notes to Condensed Consolidated Financial Statements.
0001104659-06-084286/full-submission.txt
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20061229
10-Q
103
APPLE COMPUTER, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in millions, except share amounts) (1) See Note 2, “Restatement of Condensed Consolidated Financial Statements,” in Notes to Condensed Consolidated Financial Statements.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
104
See accompanying Notes to Condensed Consolidated Financial Statements.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
105
APPLE COMPUTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions) (1) See Note 2, “Restatement of Condensed Consolidated Financial Statements,” in Notes to Condensed Consolidated Financial Statements.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
106
See accompanying Notes to Condensed Consolidated Financial Statements.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
107
APPLE COMPUTER, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 - Summary of Significant Accounting Policies Apple Computer, Inc. and its wholly-owned subsidiaries (“Apple” or “the Company”) designs, manufactures, and markets personal computers and related software, services, peripherals, a...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
108
The Company also designs, develops, and markets a line of portable digital music players along with related accessories and services including the online sale of third-party audio and video products.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
109
The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers.
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20061229
10-Q
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In addition, the Company sells a variety of third-party Macintosh and iPod compatible products including application software, printers, storage devices, speakers, headphones, and various other accessories and supplies through its online and retail stores.
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20061229
10-Q
111
The Company sells to education, consumer, creative professional, business, and government customers.
0001104659-06-084286/full-submission.txt
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20061229
10-Q
112
Basis of Presentation and Preparation The accompanying condensed consolidated financial statements include the accounts of the Company.
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20061229
10-Q
113
Intercompany accounts and transactions have been eliminated.
0001104659-06-084286/full-submission.txt
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20061229
10-Q
114
The preparation of these condensed 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 condensed consolidated financial statements and accompanying notes.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
115
Actual results could differ materially from those estimates.
0001104659-06-084286/full-submission.txt
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20061229
10-Q
116
Certain prior year amounts in the consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation.
0001104659-06-084286/full-submission.txt
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20061229
10-Q
117
These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and the notes thereto for the fiscal year ended September 30, 2006, included in the 2006 Annual Report on Form 10-K to be filed with the Securities and Excha...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
118
Typically, the Company’s fiscal year ends on the last Saturday of September.
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10-Q
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Fiscal year 2005 was a 52-week year.
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10-Q
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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.
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10-Q
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The Company added this additional week in the first fiscal quarter of its fiscal year 2006.
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10-Q
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Unless otherwise stated, references to particular years or quarters refer to the Company’s fiscal years ended in September and the associated quarters of those fiscal years.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
123
Software Development Costs Research and development costs are generally expensed as incurred.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
124
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 pursuant to Statement of Financial Accounting Standards (“SFAS”...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
125
86, Computer Software to be Sold, Leased, or Otherwise Marketed.
0001104659-06-084286/full-submission.txt
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10-Q
126
In most instances, the Company’s products are released soon after technological feasibility has been established.
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Therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally all software development costs have been expensed as incurred.
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20061229
10-Q
128
In 2004, the Company began incurring substantial development costs associated with Mac OS X version 10.4 Tiger (“Tiger”) subsequent to achievement of technological feasibility as evidenced by public demonstration in August 2004 and the subsequent release of a developer beta version of the product.
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20061229
10-Q
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During the first nine months of 2005, the Company capitalized $29.7 million of costs associated with the development of Tiger.
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In accordance with SFAS No.
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86, amortization of this asset to cost of sales began in April 2005 when the Company started shipping Tiger and is being recognized on a straight-line basis over a three-year estimated useful life.
0001104659-06-084286/full-submission.txt
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Stock-Based Compensation On September 25, 2005, the Company adopted SFAS No.
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123 (revised 2004) (“SFAS No.
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123R”), Share-Based Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by...
0001104659-06-084286/full-submission.txt
0000320193
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10-Q
135
In January 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No.
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107, which provides supplemental implementation guidance for SFAS No.
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123R.
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SFAS No.
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123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No.
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25, Accounting for Stock Issued to Employees, and instead generally requires that such transactions be accounted for using a fair-value-based method.
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20061229
10-Q
141
The Company uses the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair-value of stock-based awards under SFAS No.
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123R, consistent with that used for pro forma disclosures under SFAS No.
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123, Accounting for Stock-Based Compensation.
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The Company has elected to use the modified prospective transition method as permitted by SFAS No.
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123R and accordingly prior periods have not been restated to reflect the impact of SFAS No.
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123R.
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The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options, restricted stock, restricted stock units, and employee stock purchase plan shares that are ultimately expected to vest as the requisite service is rendered beginning on September...
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Stock-based compensation expense for awards granted prior to September 25, 2005 is based on the grant-date fair-value as determined under the pro forma provisions of SFAS No.
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123.
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