Apple 2003 Annual Report Download - page 68

remaining benefits from tax losses and credits do not expire. As of September 27, 2003, a valuation allowance of $30 million was recorded
against the deferred tax asset for the benefits of tax losses that may not be realized. The valuation allowance relates primarily to the operating
loss carryforwards acquired from NeXT and other acquisitions. Management believes it is more likely than not that forecasted income,
including income that may be generated as a result of certain tax
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planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax
assets.
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (35% in 2003,
2002, and 2001) to income (loss) before provision for (benefit from) income taxes, is as follows (in millions):
On April 10, 2003, the Internal Revenue Service (IRS) completed its audit of the Company's federal income tax returns for the years 1998
through 2000 and proposed certain adjustments. Certain of these adjustments are being contested through the IRS Appeals Office. Substantially
all IRS audit issues for years prior to 1998 have been resolved. Management believes that adequate provision has been made for any
adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. Should any issues
addressed in the Company's tax audits be resolved in a manner not consistent with management's expectations, the Company could be required
to adjust its provision for income tax in the period such resolution occurs.
Note 7—Shareholders' Equity
CEO Restricted Stock Award
On March 19, 2003, the Company entered into an Option Cancellation and Restricted Stock Award Agreement (the Agreement) with Steven P.
Jobs, its Chief Executive Officer (CEO). The Agreement cancelled stock option awards for the purchase of 27.5 million shares of the
Company's common stock previously granted to Mr. Jobs in 2000 and 2001. Mr. Jobs retained options to purchase 60,000 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. The Agreement replaced the cancelled options with a restricted stock award of 5 million shares of the Company's common
stock. The restricted stock award generally vests three years from date of grant. 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.
The Company has recorded the value of the restricted stock award of $74.75 million as a component of shareholders' equity and is amortizing
that amount on a straight-line basis over the 3-year service/vesting period. The value of the restricted stock award was based on the closing
market price of the Company's
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common stock on the date of the award. Total amortization of approximately $13 million has been included in selling, general, and
administrative expense in 2003 and will continue to be included at approximately $6.2 million per quarter through March 2006. The 5 million
restricted shares have been included in the calculation of diluted earnings per share utilizing the treasury stock method.
2003 2002 2001
Computed expected tax (benefit)
$
32
$
30
$
(18
)
State taxes, net of federal effect
(4
)
7
(7
)
Indefinitely invested earnings of foreign subsidiaries
(13
)
—
—
Nondeductible executive compensation
5
(1
)
—
Stock repurchase
(2
)
—
—
Purchase accounting and asset acquisitions
4
3
10
Change in valuation allowance
—
(
16
)
—
Research & development credit, net
(7
)
(8
)
(5
)
Nondeductible expenses
6
4
3
Other items
3
3
2
Provision for (benefit from) income taxes
$
24
$
22
$
(15
)
Effective tax rate
26
%
25
%
30
%