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0000320193
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10-Q
23
The Company’s fiscal year is the 52 or 53-week period that ends on the last Saturday of September.
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The Company’s first quarter of fiscal year 2006 contained 14 weeks and the first quarter of its fiscal year 2005 contained 13 weeks.
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The Company’s fiscal year 2006 will end on September 30, 2006 and include 53 weeks while fiscal year 2005 included 52 weeks.
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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.
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Common Stock Split On February 28, 2005, the Company effected a two-for-one stock split to shareholders of record as of February 18, 2005.
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All share and per share information has been retroactively adjusted to reflect the stock split.
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Software Development Costs Research and development costs are expensed as incurred.
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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) ...
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86, Computer Software to be Sold, Leased, or Otherwise Marketed.
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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.
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In the fourth quarter of 2004, the Company began incurring substantial development costs associated with Mac OS X version 10.4 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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During the first quarter of 2005, the Company capitalized approximately $14.8 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 began shipping Tiger and is being recognized on a straight-line basis over a three-year estimated useful life.
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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 ...
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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 require that such transactions be accounted for using a fair-value-based method.
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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 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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The Company has recorded an incremental $32 million of stock-based compensation expense during the first quarter of 2006 as a result of the adoption of SFAS No.
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123R.
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In accordance with SFAS No.
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123R, beginning in the first quarter of 2006 the Company has presented excess tax benefits from the exercise of stock-based compensation awards as a financing activity in the Condensed Consolidated Statement of Cash Flows.
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No stock-based compensation costs were capitalized as part of the cost of an asset as of December 31, 2005.
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The income tax benefit related to stock-based compensation expense was $14 million for the quarter ended December 31, 2005.
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As of December 31, 2005, $398 million of total unrecognized compensation cost related to stock options and restricted stock units are expected to be recognized over a weighted-average period of 2 years.
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Prior to the adoption of SFAS No.
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123R, the Company measured compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No.
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25.
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The Company applied the disclosure provisions of SFAS No.
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123 as amended by SFAS No.
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148, Accounting for Stock-Based Compensation - Transition and Disclosure as if the fair-value-based method had been applied in measuring compensation expense.
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Under APB Opinion No.
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25, when the exercise price of the Company’s employee stock options was equal to the market price of the underlying stock on the date of the grant, no compensation expense was recognized.
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The following table illustrates the effect on net income after taxes and net income per common share as if the Company had applied the fair value recognition provisions of SFAS No.
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123 to stock-based compensation during the three-month period ended December 25, 2004 (in millions, except per share amounts): Further information regarding stock-based compensation can be found in Note 6 of these Notes to Condensed Consolidated Financial Statements.
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Earnings Per 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.
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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 ...
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The dilutive effect of outstanding options, restricted stock and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method.
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Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from outstanding options, restricted stock, and restricted stock units.
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Additionally, the exercise of employee stock options and the vesting of restricted stock and restricted stock units can result in a greater dilutive effect on earnings per share.
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The following table sets forth the computation of basic and diluted earnings per share (in thousands, except net income and per share amounts): Potentially dilutive securities, including stock options, restricted stock units, and restricted stock to acquire approximately 1.6 million and 1.7 million shares of common sto...
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Note 2 - Financial Instruments Cash, Cash Equivalents and Short-Term Investments The following table summarizes the fair value of the Company’s cash and available-for-sale securities held in its short-term investment portfolio, recorded as cash and cash equivalents or short-term investments as of December 31, 2005, and...
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Foreign securities consist primarily of foreign commercial paper, certificates of deposit, and time deposits with foreign institutions, most of which are denominated in U.S. dollars.
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The Company had net unrealized losses totaling $6.7 million on its investment portfolio, the majority of which related to investments with stated maturities less than one year as of December 31, 2005 and net unrealized losses of $5.9 million on its investment portfolio, approximately half of which related to investment...
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As of December 31, 2005 and September 24, 2005, approximately $172 million and $287 million, respectively, of the Company’s short-term investments had underlying maturities ranging from one to five years.
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The remaining short-term investments had maturities of three to 12 months.
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Derivative Financial Instruments The Company uses derivatives to partially offset its business exposure to foreign exchange and interest rate risk.
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Foreign currency forward and option contracts are used to offset the foreign exchange risk on certain existing assets and liabilities and to hedge the foreign exchange risk on expected future cash flows on certain forecasted revenue and cost of sales.
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From time to time, the Company enters into interest rate derivative agreements to modify the interest rate profile of certain investments and debt.
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The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments.
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The Company records all derivatives on the balance sheet at fair value.
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Derivatives that are not hedges are adjusted to fair value through earnings.
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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.
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As of December 31, 2005, the Company had a net deferred gain associated with cash flow hedges of approximately $5.5 million net of taxes, substantially all of which is expected to be reclassified to earnings by the end of the third quarter of fiscal 2006.
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As of the end of the first quarter of 2006, the general nature of the Company’s risk management activities and the general nature and mix of the Company’s derivative financial instruments have not changed materially from the end of 2005.
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Foreign Exchange Risk Management The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risk associated with existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows, and net investments in fore...
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Generally, the Company’s practice is to hedge a majority of its existing material foreign exchange transaction exposures.
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However, the Company may not hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of hedging particular exposures, or limited availability of appropriate hedging instruments.
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Note 3 - Condensed Consolidated Financial Statement Details (in millions) Other Current Assets Property, Plant, and Equipment, Net Other Assets Accrued Expenses Non-Current Liabilities Other Income and Expense Note 4 - Restructuring Actions 2004 Restructuring Actions The Company recorded total restructuring charges of ...
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Of the $23 million charge, $20.4 million had been utilized by the end of the first quarter of 2006, with the remaining $2.6 million consisting of $0.2 million for employee severance benefits and $2.4 million for lease cancellations.
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These actions will result in the termination of 452 positions, 450 of which had been terminated prior to the end of the first quarter of 2006.
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The following table summarizes activity associated with restructuring actions initiated during 2004 (in millions): 2003 Restructuring Actions The Company recorded total restructuring charges of approximately $26.8 million during 2003, including approximately $7.4 million in severance costs, a $5.0 million charge to wri...
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Of the $26.8 million charge, all had been utilized by the end of the first quarter of 2006, except for approximately $1.6 million related to operating lease costs on abandoned facilities.
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The following table summarizes activity associated with restructuring actions initiated during 2003 (in millions): Note 5 - Shareholders’ Equity Preferred Stock The Company has 5 million shares of authorized preferred stock, none of which is outstanding.
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Under the terms of the Company’s Restated Articles of Incorporation, the Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of the Company’s authorized but unissued shares of preferred stock.
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Restricted Stock Units The Company’s Board of Directors has approved several grants of restricted stock units to members of the Company’s senior management team, excluding its CEO.
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These restricted stock units generally vest over four years either in two equal installments on the second and fourth anniversaries of the date of grant or in equal installments on each of the first through fourth anniversaries of the grant date.
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Upon vesting, the restricted stock units will convert into an equivalent number of shares of common stock.
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The value of the restricted stock units is based on the closing market price of the Company’s common stock on the date of grant and are amortized on a straight-line basis over the four-year requisite service period.
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The restricted stock units have been reflected in the calculation of diluted earnings per share utilizing the treasury stock method.
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CEO Restricted Stock Award On March 19, 2003, the Company entered into an Option Cancellation and Restricted Stock Award Agreement (the Agreement) with Mr. Steven P. Jobs, its CEO.
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The Agreement cancelled stock option awards for the purchase of 55 million shares of the Company’s common stock previously granted to Mr. Jobs in 2000 and 2001.
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Mr. Jobs retained options to purchase 120,000 shares of the Company’s common stock granted in August of 1997 in his capacity as a member of the Company’s Board of Directors, prior to becoming the Company’s CEO.
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The Agreement replaced the cancelled options with a restricted stock award of 10 million shares of the Company’s common stock.
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The restricted stock award generally vests three years from the date of grant.
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Vesting of some or all of the restricted shares will be accelerated in the event Mr. Jobs is terminated without cause, dies, or has his management role reduced following a change in control of the Company.
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Stock Repurchase Plan In July 1999, the Company’s Board of Directors authorized a plan for the Company to repurchase up to $500 million of its common stock.
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This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time.
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The Company has not engaged in any transactions to repurchase its common stock since 2003.
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Since inception of the stock repurchase plan, the Company had repurchased a total of 13.1 million shares at a cost of $217 million.
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The Company was authorized to repurchase up to an additional $283 million of its common stock as of December 31, 2005.
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Comprehensive Income Comprehensive income consists of two components, net income and other comprehensive income.
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Other comprehensive income refers to revenue, expenses, gains, and losses that under U.S. generally accepted accounting principles are recorded as an element of shareholders’ equity but are excluded from net income.
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The Company’s other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses on marketable securities categorized as available-for-sale, and net deferred gains and losses on certain derivative in...
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The following table summarizes components of total comprehensive income, net of taxes, during the three-month periods ended December 31, 2005, and December 25, 2004 (in millions): The following table summarizes activity in other comprehensive income related to derivatives, net of taxes, held by the Company during the t...
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