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APPLE INC
FORM 10-K
(Annual Report)
Filed 12/01/05 for the Period Ending 09/24/05
Address ONE INFINITE LOOP
CUPERTINO, CA 95014
Telephone (408) 996-1010
CIK 0000320193
Symbol AAPL
SIC Code 3571 - Electronic Computers
Industry Computer Hardware
Sector Technology
Fiscal Year 09/30
http://www.edgar-online.com
© Copyright 2011, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    ...INC FORM 10-K (Annual Report) Filed 12/01/05 for the Period Ending 09/24/05 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year ONE INFINITE LOOP CUPERTINO, CA 95014 (408) 996-1010 0000320193 AAPL 3571 - Electronic Computers Computer Hardware Technology 09/30 http://www.edgar-online...

  • Page 2
    ...434,521,480 based upon the closing price reported for such date on the NASDAQ National Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by executive officers and directors of the registrant...

  • Page 3
    ... and related software, services, peripherals, and networking solutions. The Company also designs, develops, and markets a line of portable digital music players along with related accessories and services including the online distribution of third-party music, audio books, music videos, short films...

  • Page 4
    ... areas such as digital photography, digital video, music, children's software, and home and small business computing. Education For more than 25 years, the Company has focused on the use of technology in education and has been committed to delivering tools to help educators teach and students learn...

  • Page 5
    ...the needs of education customers. These products and services include the eMac™, iMac™, and the iBook®, video creation and editing solutions, wireless networking, student information systems, high-quality curriculum and professional development solutions, and one-to-one (1:1) learning solutions...

  • Page 6
    ... with the Apple Remote, which allows users to play music and view photos and videos via a remote control. eMacâ„¢ The eMac, a desktop personal computer targeted at the Company's education customers, features a PowerPC G4 processor, a high resolution 17-inch flat cathode ray tube display, and...

  • Page 7
    ... offers its iPod® line of digital music players and related accessories to Macintosh and Windows users. The Company also provides an online service to distribute third-party music, audio books, music videos, short films, and television shows through its iTunes Music Store®. iPod ® The iPod is the...

  • Page 8
    ... in certain automobiles. Along with the iPod, the Company has developed the iTunes software and the iTunes Music Store, a service that consumers may use to purchase third-party music, audio books, music videos, short films, and television shows over the Internet. iPod® nano In September 2005, the...

  • Page 9
    ... called widgets. The server version of the Mac OS operating system, Mac OS X Server version 10.4, also began shipping in April 2005. Server Software and Server Solutions Apple Remote Desktopâ„¢ 2 is the second generation of the Company's asset management, software distribution, and help desk support...

  • Page 10
    ... help desk professionals to provide online assistance by observing and controlling the desktops of any remote Macintosh or Virtual Network Computing-enabled computer, including Windows and Linux systems. Xsan®, the Company's enterprise-class Storage Area Network (SAN) file system, began shipping...

  • Page 11
    ... shipping in November 2005. Aperture is an application designed to provide professional photographers with post-production tools to manage, edit, and publish digital pictures. Features include compare and select tools, nondestructive image processing, color managed printing, and custom web and book...

  • Page 12
    ... supports Digital Cinema Desktop with multiple displays. Final Cut Express HD features sound editing tools including 99 audio tracks, real-time volume and audio filter adjustment, a voice-over tool, and Soundtrack music creation software that allows users to compose musical scores for their videos...

  • Page 13
    ... set of Internet tools. .Mac services include: HomePage, for personal web sites; iDisk, a virtual hard drive accessible anywhere with Internet access; .Mac Sync, which keeps Safari bookmarks, iCal® calendars, Address Book information, Keychain® (passwords), and Mac OS X Mail preferences up-to-date...

  • Page 14
    ...lets customers wirelessly share files between Macintosh systems, synchronize and share contact information with Palm-OS based PDAs, and access the Internet through Bluetooth-enabled cell phones. A Bluetooth USB adaptor can Bluetooth-enable any USB-based Macintosh computer running in Mac OS X version...

  • Page 15
    ...or 2003. The Company also sells many of its products and resells certain third-party products in most of its major markets directly to consumers, education customers, and businesses through its retail and online stores in the U.S. and internationally. Over 12% of the Company's net sales in 2005 were...

  • Page 16
    ..., system software, applications software, networking and communications software and solutions, and the Internet. The Company may expand the range of its product offerings and intellectual property through licensing and/or acquisition of thirdparty business and technology. The Company's research and...

  • Page 17
    ... year from the date of purchase by the end-user. The Company also offers a 90-day basic warranty for its service parts used to repair the Company's hardware products. In addition, consumers may purchase extended service coverage on most of the Company's hardware products in all of its major markets...

  • Page 18
    ... facility in Sacramento, California that houses warehousing and distribution operations as well as a customer support call center. In addition, the Company owns approximately 942,000 square feet of facilities located in Cupertino, California, used for research and development and corporate functions...

  • Page 19
    ... lawsuit without prejudice. Bader v. Anderson; Bader v. Apple Computer, Inc. et. al. Plaintiff filed this purported shareholder derivative action against the Company and each of its current executive officers and members of its Board of Directors on May 19, 2005 in Santa Clara County Superior...

  • Page 20
    ... Company's financial position or results of operation. Butzer, et al., v. Apple Computer, Inc. Plaintiffs filed this action on August 23, 2005, in the United States District Court for the Northern District of California, San Jose Division, on behalf of a purported nationwide class of all purchasers...

  • Page 21
    ... firms upon remand. The trial court issued the disqualification order on May 12, 2005. On May 9, 2005 Plaintiff substituted new counsel. The Company has obtained an opinion on the tax issue from the State Board of Equalization. Discovery is stayed. Clark v. Apple Computer, Inc. Plaintiff filed this...

  • Page 22
    ... filed this purported class action in San Francisco County Superior Court on December 5, 2002, alleging that the Company engaged in unfair and deceptive business practices relating to its AppleCare Extended Service and Warranty Plan. Plaintiff asserts causes of action for violation of the California...

  • Page 23
    ...violations of California Business and Professions Code §17200 (unfair competition), the Consumer Legal Remedies Act and false advertising related to the size of the drives. Plaintiffs allege that calculation of hard drive size using the decimal method misrepresents the actual size of the drive. The...

  • Page 24
    ... music purchased on the iTunes Music Store with the purchase of iPods and vice versa and unlawful acquisition or maintenance of monopoly market power. Plaintiff's complaint alleged violations of §§1 and 2 of the Sherman Act (15 U.S.C. §§1 and 2), California Business and Professions Code §16700...

  • Page 25
    ..., LLC and BTG International Inc. v. Microsoft and Apple Computer, Inc. Plaintiffs filed this case on July 20, 2004 in United States District Court for the Northern District of California alleging infringement of U.S. patent 6,557,054, entitled "Method and System for Distributing Updates by...

  • Page 26
    ... Southern District of New York); Jennings, et al., v. Apple Computer, Inc. (filed November 4, 2005, United States District Court for the Northern District of California, San Jose Division). These federal and state court complaints allege that the Company's iPod nano was defectively designed so that...

  • Page 27
    ...of its business. The price range per share of common stock presented below represents the highest and lowest closing prices for the Company's common stock on the NASDAQ National Market during each quarter. On February 28, 2005, the Company effected a two-for-one stock split to shareholders of record...

  • Page 28
    ... common share: Basic Diluted Cash dividends declared per common share Shares used in computing earnings (loss) per share (in thousands): Basic Diluted Cash, cash equivalents, and short-term investments Total assets Long-term debt (including current maturities) Total liabilities Shareholders' equity...

  • Page 29
    ... and related software, services, peripherals, and networking solutions. The Company also designs, develops, and markets a line of portable digital music players along with related accessories and services including the online distribution of third-party music, audio books, music videos, short films...

  • Page 30
    ... Company also sells to customers directly through its online stores around the world. To improve access to the iPod product line, the Company has significantly expanded the number of distribution points where iPods are sold. The iPod product line can be purchased in certain department stores, member...

  • Page 31
    ... programs require management to estimate the number of customers who will actually redeem the incentive based on historical experience and the specific terms and conditions of particular incentive programs. If a greater than estimated proportion of customers redeem such incentives, the Company would...

  • Page 32
    ... are identified. Warranty Costs The Company provides currently for the estimated cost for product warranties at the time the related revenue is recognized based on historical and projected warranty claim rates, historical and projected cost-per-claim, and knowledge of specific product failures that...

  • Page 33
    ... Music Store sales, iPod services, and Apple-branded and third-party iPod accessories. Includes sales of Apple-branded and third-party displays, wireless connectivity and networking solutions, and other hardware accessories. Includes sales of Apple-branded operating system, application software...

  • Page 34
    ... of the iPod is having a positive impact on Macintosh net sales by introducing new customers to the Company's other products. Desktop demand was stimulated in 2005 due to the new iMac G5 and the introduction of the Mac mini in January 2005. Net sales and unit sales of desktop products increased 45...

  • Page 35
    ... Protection Plan (APP) extended service and support contracts, driven primarily by higher associated Macintosh computer sales. Additionally, the Company experienced increases in net sales of .Mac Internet service, professional and consumer applications, third-party software, and Mac OS X that...

  • Page 36
    ... system software, including Mac OS X version 10.3 "Panther," which was released in October 2003. Net sales of Panther accounted for approximately $74 million or over 50% of the increase in software net sales for 2004 compared to 2003. • The Company's U.S. education channel experienced year...

  • Page 37
    ... significant year-over-year increase in iPod sales, sales of other music related products and services, and strong sales of desktop and portable Macintosh systems. This increase was partially offset by a shift in sales to the Retail segment, which had 117 stores in the U.S. and Canada as of the end...

  • Page 38
    ... upgrades by some professional and creative customers who were awaiting the release of Quark XPress 6 for Mac OS X, which did not occur until September 2004. The decrease in net sales was partially offset by strong iPod and iBook sales during 2004 compared to 2003. Retail The Company opened 38 new...

  • Page 39
    ... by the Company's ability to effectively manage product quality and warranty costs and to stimulate demand for certain of its products. Due to the Company's significant international operations, financial results can be significantly affected in the short-term by fluctuations in exchange rates. 37

  • Page 40
    ... 2004; and $14.7 million related to the development of Mac OS X Panther in 2003. Further information related to the Company's capitalization of software development costs may be found in Part II, Item 8 of this Form 10-K at Note 1 of Notes to Consolidated Financial Statements. Selling, General, and...

  • Page 41
    ... domestic and international markets, an increase in discretionary spending on marketing and advertising, an increase in amortization costs associated with restricted stock compensation, and higher direct and channel selling expenses resulting from the increase in net sales and employee salary merit...

  • Page 42
    ...Company on its cash, cash equivalents, and short-term investments increased to 2.70% in 2005 compared to the 1.38% and 1.89% rates earned during 2004 and 2003, respectively. The Company occasionally sells short-term investments prior to their stated maturities. As a result of such sales, the Company...

  • Page 43
    ... issued SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment , that addresses the accounting for share-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...

  • Page 44
    ... table presents selected financial information and statistics for each of the last three fiscal years (dollars in millions): September 24, 2005 September 25, 2004 September 27, 2003 Cash, cash equivalents, and short-term investments Accounts receivable, net Inventory Working capital Days sales in...

  • Page 45
    ...'s Retail segment and the remainder utilized to support normal replacement of existing capital assets and enhancements to general information technology infrastructure. Stock Repurchase Plan In July 1999, the Company's Board of Directors authorized a plan for the Company to repurchase up to $500...

  • Page 46
    ... are primarily related to Internet and telecommunications services. Indemnifications The Company generally does not indemnify end-users of its operating system and application software against legal claims that the software infringes third-party intellectual property rights. Other agreements entered...

  • Page 47
    ... disputes, public health issues, and other events beyond its control. The majority of the Company's research and development activities, its corporate headquarters, information technology systems, and other critical business operations, including certain component suppliers and manufacturing vendors...

  • Page 48
    ..., including iPods. The Company faces increasing competition from other companies promoting their own digital music products, including music enabled cell phones, distribution services, and free peer-to-peer music services. These competitors include both new entrants with different market approaches...

  • Page 49
    ... new products using Intel microprocessors, the timely innovation and delivery of related hardware and software products, including the Company's applications, to support Intel microprocessors, market acceptance of Intel-based Macintosh computers, the development and availability on acceptable terms...

  • Page 50
    ... number of factors, including market acceptance; the Company's ability to manage the risks associated with product transitions, including the transition to Intel-based Macintosh computers, and production ramp issues; the availability of application software for new products; the effective management...

  • Page 51
    ...'s ability to manage its inventory levels and respond to short-term shifts in customer demand patterns. The Company is dependent on manufacturing and logistics services provided by third parties, many of whom are located outside of the U.S. Most of the Company's products are manufactured in whole or...

  • Page 52
    ... of whom distribute products from competing manufacturers. In addition, the Company sells many of its products and resells certain third-party products in most of its major markets directly to end users, certain education customers, and certain resellers through its online stores around the world...

  • Page 53
    ...analysis may be based on factors such as the perceived strength of the Company and its products, the anticipated potential revenue that may be generated, continued acceptance by customers of Mac OS X, and the costs of developing such software products. To the extent the minority market share held by...

  • Page 54
    ... property rights of others. Many of the Company's products are designed to include intellectual property obtained from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of its products and business methods, the Company believes that based...

  • Page 55
    ...PowerPC G5 processor used in the Company's Power Macs, and unique design featuring a flat panel screen. Potential PowerBook customers may also choose to purchase iBooks instead due to their price performance and screen size. Additionally, significant future growth in iPod sales without corresponding...

  • Page 56
    ... costs associated with marketing the Company's brand including its unique operating system, the Company incurs higher selling costs as a percentage of revenue than many of its competitors. If the Company is unable to continue to develop and sell innovative new products with attractive gross margins...

  • Page 57
    ...of customer orders, impeding the manufacture or shipment of products, or resulting in the unintentional disclosure of customer or Company information. Management has taken steps to address these concerns for its own systems by implementing sophisticated network security and internal control measures...

  • Page 58
    ...from current accounting standards could have a significant effect on the Company's results of operations. In December 2004, the FASB issued new guidance that addresses the accounting for share-based payments, SFAS No. 123R. In April 2005, the SEC deferred the effective date of SFAS No. 123R to years...

  • Page 59
    ...the Company's cash, cash equivalents, and short-term investments as well as costs associated with foreign currency hedges. The Company's short-term investment policy and strategy is to ensure the preservation of capital, meet liquidity requirements, and optimize return in light of the current credit...

  • Page 60
    ... actual losses but is used as a risk estimation and management tool. The model assumes normal market conditions. Forecasted transactions, firm commitments, and assets and liabilities denominated in foreign currencies were excluded from the model. Based on the results of the model, the Company...

  • Page 61
    ... Statements of Cash Flows for the three fiscal years ended September 24, 2005 Notes to Consolidated Financial Statements Selected Quarterly Financial Information (Unaudited) Reports of Independent Registered Public Accounting Firm, KPMG LLP 60 61 62 63 64 97 98 All financial statement schedules...

  • Page 62
    ..., except share amounts) September 24, 2005 September 25, 2004 ASSETS: Current assets: Cash and cash equivalents Short-term investments Accounts receivable, less allowances of $46 and $47, respectively Inventories Deferred tax assets Other current assets Total current assets Property, plant...

  • Page 63
    CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except share and per share amounts) Three fiscal years ended September 24, 2005 2005 2004 2003 Net sales Cost of sales Gross margin Operating expenses: Research and development Selling, general, and administrative Restructuring costs Total ...

  • Page 64
    ... STATEMENTS OF SHAREHOLDERS' EQUITY (In millions, except share amounts...Total comprehensive income Amortization of deferred stock compensation Write-off of deferred stock compensation Common stock issued under stock plans Settlement of forward purchase agreement Tax benefit related to stock options...

  • Page 65
    ...Stock-based compensation expense Non-cash restructuring Provision for (benefit from) deferred income taxes Tax benefit from stock options Loss on disposition of property, plant, and equipment Gains on sales of short-term investments, net Gains on non-current investments, net Gain on forward purchase...

  • Page 66
    ... and related software, services, peripherals, and networking solutions. The Company also designs, develops, and markets a line of portable digital music players along with related accessories and services including the online distribution of third-party music, audio books, music videos, short films...

  • Page 67
    ... forward contract, including changes in fair value based on the differential between the spot and forward exchange rates, are recognized in current earnings in other income and expense. Inventories Inventories are stated at the lower of cost, computed using the first-in, first-out method, or market...

  • Page 68
    ... difference between the gross expected future cash flow and its present value is accreted over the life of the related lease as an operating expense. All of the Company's existing asset retirement obligations are associated with commitments to return property subject to operating leases to original...

  • Page 69
    ... the service coverage periods. These contracts typically include extended phone support, repair services, web-based support resources, diagnostic tools, and extend the service coverage offered under the Company's one-year limited warranty. The Company sells software and peripheral products obtained...

  • Page 70
    ... product returns based on the Company's historical experience. Generally, the Company does not offer specified or unspecified upgrade rights to its customers in connection with software sales or the sale of extended warranty and support contracts. When the Company does offer specified upgrade rights...

  • Page 71
    ..., respectively. Stock-Based Compensation The Company currently measures compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees . The Company applies...

  • Page 72
    ...issued SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment , which addresses the accounting for share-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...

  • Page 73
    ...share by application of the treasury stock method. 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. Additionally, the exercise of employee...

  • Page 74
    ... based on the "management" approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company's reportable segments. Information about the Company's products, major customers, and geographic areas...

  • Page 75
    ...which may be sufficient for anticipated recovery in market value. Accounts Receivable Trade Receivables The Company distributes its products through third-party resellers and directly to certain education, consumer, and commercial customers. The Company generally does not require collateral from its...

  • Page 76
    ... to the end customer at which time the profit is recognized as a reduction of cost of sales. Derivative Financial Instruments The Company uses derivatives to partially offset its business exposure to foreign exchange and interest rate risk. Foreign currency forward and option contracts are used to...

  • Page 77
    ... the terms of the contract, based on then-current currency exchange rates at each respective date. The Company's exposure to credit loss and market risk will vary over time as a function of currency exchange rates. The estimates of fair value are based on applicable and commonly used pricing models...

  • Page 78
    ... the related assets or liabilities. Due to currency market movements, changes in option time value can lead to increased volatility in other income and expense. Interest Rate Risk Management From time to time, the Company historically entered into interest rate derivative transactions with financial...

  • Page 79
    ...tax assets Capitalized software development costs, net Other assets Total other assets Accrued Expenses $ 183 38 117 $ 338 $ $ 86 25 80 191 2005 2004 Deferred revenue-current Accrued marketing and distribution Accrued compensation and employee benefits Accrued warranty and related costs Other...

  • Page 80
    ... on sales of short term investments Other income (expense), net Total interest and other income, net Note 4-Goodwill and Other intangible Assets $ 183 - - (18 ) $ 165 $ 64 (3 ) 1 (9 ) $ 53 $ 69 (8 ) 21 1 $ 83 The Company is currently amortizing its acquired intangible assets with definite lives...

  • Page 81
    ...off deferred compensation, $7.1 million in asset impairments, and a $7.3 million charge for lease cancellations primarily related to the closure of the Company's Singapore manufacturing operations during the first quarter of 2003. Of the $26.8 million charge, all had been utilized by the end of 2005...

  • Page 82
    ... table summarizes activity associated with restructuring actions initiated during 2003 (in millions): Employee Severance Benefits Deferred Compensation Write-off Asset Impairments Lease Cancellations Totals Total charge Total spending through September 24, 2005 Total non-cash items Adjustments...

  • Page 83
    ...tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to...

  • Page 84
    ... tax in the period such resolution occurs. Note 7-Shareholders' Equity Preferred Stock The Company has 5 million shares of authorized preferred stock, none of which is outstanding. Under the terms of the Company's Restated Articles of Incorporation, the Board of Directors is authorized to determine...

  • Page 85
    ...-year requisite service period. The value of the restricted stock units was based on the closing market price of the Company's common stock on the date of grant. The restricted stock units have been included in the calculation of diluted earnings per share utilizing the treasury stock method. CEO...

  • Page 86
    ... of shareholders' equity but are excluded from net income. 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...

  • Page 87
    ... employees, other than executive officers and members of the Board of Directors, had an opportunity to exchange outstanding options with exercise prices at or above $12.50 per share for a predetermined smaller number of new stock options issued with exercise prices equal to the fair market value...

  • Page 88
    ... payroll deductions at a price equal to 85% of the lower of the fair market values as of the beginning and end of six month offering periods. Stock purchases under the Purchase Plan are limited to 10% of an employee's compensation, up to a maximum of $25,000 in any calendar year. Beginning with the...

  • Page 89
    ... STATEMENTS (Continued) Note 8-Employee Benefit Plans (Continued) Stock Option Activity A summary of the Company's stock option activity and related information for the last three fiscal years follows (share amounts are presented in thousands): Shares Available for Grant Outstanding Options Number...

  • Page 90
    ... 1 of these Notes to Consolidated Financial Statements of the effect on net income and earnings per share as if the fair value method of accounting for stock compensation had been used for its employee stock option grants and employee stock purchase plan purchases. These pro forma effects have been...

  • Page 91
    ...Stock-Based Compensation (Continued) The assumptions used for each of the last three fiscal years and the resulting estimate of weighted-average fair value per share of options granted during those years are as follows: 2005 2004 2003 Expected life of stock options Expected life of stock purchases...

  • Page 92
    ...warranty and related costs $ 105 $ 67 $ 69 (188 ) (105 ) (71 ) 271 143 69 $ 188 $ 105 $ 67 The Company generally does not indemnify end-users of its operating system and application software against legal claims that the software infringes third-party intellectual property rights. Other agreements...

  • Page 93
    ...materially adversely affected. Production and marketing of products in certain states and countries may subject the Company to environmental and other regulations including, in some instances, the requirement to provide customers the ability to return product at the end of its useful life, and place...

  • Page 94
    ...SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information , the Company reports segment information based on the "management" approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of...

  • Page 95
    ...the Company's service and support contracts at the time of sale. Because the Company has not yet earned the revenue or incurred the costs associated with the sale of these contracts, an offset to these amounts is recognized in other operating segments' net sales and cost of sales. For the year ended...

  • Page 96
    ... FINANCIAL STATEMENTS (Continued) Note 11-Segment Information and Geographic Data (Continued) Summary information by operating segment follows (in millions): 2005 2004 2003 Americas: Net sales Operating income Depreciation, amortization, and accretion Segment assets (a) Europe: Net sales...

  • Page 97
    ... include research and development, corporate marketing expenses, manufacturing costs and variances not included in standard costs, and other separately managed general and administrative expenses including certain corporate expenses associated with support of the Retail segment. No single customer...

  • Page 98
    ...-party iPod accessories. (d) Includes sales of Apple-branded and third-party displays, wireless connectivity and networking solutions, and other hardware accessories. (e) Includes sales of Apple-branded operating system, application software, third-party software, AppleCare, and Internet services...

  • Page 99
    ... STATEMENTS (Continued) Note 13-Selected Quarterly Financial Information (Unaudited) Fourth Quarter Third Quarter Second Quarter First Quarter (Tabular amounts in millions, except per share amounts) 2005 Net sales Gross margin Net income Earnings per common share: Basic Diluted 2004 Net sales...

  • Page 100
    ..., shareholders' equity and cash flows for each of the years in the three-year period ended September 24, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on...

  • Page 101
    ... of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Apple Computer, Inc. as of September 24, 2005 and September 25, 2004, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the...

  • Page 102
    ... (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee...

  • Page 103
    ... public accounting firm, KPMG LLP, has issued an attestation report on the Company's assessment of its internal control over financial reporting. The report on the audit of internal control over financial reporting appears on page 99 of this Form 10-K. Changes in Internal Control Over Financial...

  • Page 104
    ... P. Jobs Arthur D. Levinson Jerome B. York Director Co-lead Director Director Director Director and Chief Executive Officer Co-lead Director Director 61 65 61 57 50 55 67 2004 1997 1999 2003 1997 2000 1997 Fred D. Anderson has been a founding partner of Elevation Partners, a private equity firm...

  • Page 105
    ...the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. Code of Ethics The Company has a code of ethics that applies to all of the Company's employees, including its principal executive officer, principal financial officer, principal accounting officer and its Board of Directors...

  • Page 106
    ... December 1995 to March 1997 and was Director of Product Marketing at FirePower Systems, Inc. from 1993 to December 1995. Prior to that, Mr. Schiller spent six years at the Company in various marketing positions. Bertrand Serlet, Ph.D. , Senior Vice President, Software Engineering (age 44), joined...

  • Page 107
    ... in such ownership with the Securities and Exchange Commission (" SEC "). Officers, directors and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon a review of the copies...

  • Page 108
    ... grant date. Market value of restricted stock units granted on March 24, 2004 (based on $12.75 per share, the closing price of the Company's common stock on the NASDAQ National Market on the day of grant). Restricted stock units generally vest over four years with 50% of the total number of shares...

  • Page 109
    ... exercisable on their date of grant. As of the end of the fiscal year, there were options for 740,000 shares outstanding under the Director Plan. Since accepting the position of CEO, Mr. Jobs is no longer eligible for grants under the Director Plan. Non-employee directors also receive a $50...

  • Page 110
    ...to the difference between the applicable "change in control price" and the exercise price. The Director Plan provides that upon a "change in control" of the Company, all outstanding options held by non-employee directors will automatically become fully exercisable and will be cashed out at an amount...

  • Page 111
    ... Fremont Street, San Francisco, CA 94105. Based on a Form 13F filed November 14, 2005, by AXA. AXA lists its address as 25, Avenue Matigon, Paris, France 10. Includes 120,000 shares of Common Stock that Mr. Jobs has the right to acquire by exercise of stock options. Includes 210,000 shares of Common...

  • Page 112
    ...officers or directors have the right to acquire by exercise of stock options. Does not include 4.4 million of restricted stock units. * Represents less than 1% of the issued and outstanding shares of Common Stock on the Table Date. Equity Compensation Plan Information The following table sets forth...

  • Page 113
    ...and internal control over financial reporting, quarterly review of financial statements included in the Company's Forms 10-Q, and audit services provided in connection with other statutory and regulatory filings. Audit-related fees primarily relate to professional services for the audits of employee...

  • Page 114
    ... Investment Plan dated March 1, 1992. Amendment No. 2 to the Apple Computer, Inc. Savings and Investment Plan. 1990 Stock Option Plan, as amended through November 5, 1997. Apple Computer, Inc. Employee Stock Purchase Plan, as amended through April 21, 2005. Form of Indemnification Agreement between...

  • Page 115
    ...Agreement. Apple Computer, Inc. Performance Bonus Plan dated April 21, 2005. Form of Election to Satisfy Tax Withholding with Stock. Form of Option Agreements. Custom Sales Agreement effective October 21, 2002 between the Registrant and International Business Machines Corporation. Purchase Agreement...

  • Page 116
    ... in the capacities and on the dates indicated: Name Title Date /s/ STEVEN P. JOBS STEVEN P. JOBS Chief Executive Officer and Director (Principal Executive Officer) Senior Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer) Director November 29, 2005...

  • Page 117
    ... the Company's or a business unit's net sales for the Fiscal Year, determined in accordance with generally accepted accounting principles. (c) " Applicable Laws " means the requirements relating to the administration of stock plans under U.S. state corporate laws, U.S. federal and state securities...

  • Page 118
    ... a Nonstatutory Stock Option. Neither service as a Chairman nor as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (p) " Director " means a member of the Board. (q) " Dividend Equivalent " means a credit, payable in cash, made...

  • Page 119
    ... performance objectives related to the Participant's job responsibilities with the Company. (u) (k) above. (v) (w) " Exchange Act " means the Securities Exchange Act of 1934, as amended. " Fair Market Value " means, as of any date, the value of Common Stock determined as follows: " Employee " means...

  • Page 120
    ... 14. " Plan " means this 2003 Employee Stock Plan. " Restricted Stock " means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under (kk) " Restricted Stock Unit " means a bookkeeping entry representing an amount equal to the Fair Market Value of one Share, granted...

  • Page 121
    ... granted on or after the date of receiving shareholder approval of the amended Plan in 2005, any Shares subject to Stock Purchase Rights, Performance Shares or Restricted Stock Units with a per share or unit purchase price lower than 100% of Fair Market Value on the date of grant shall be counted...

  • Page 122
    ... the Fair Market Value; to select the person(s) to whom Awards may be granted hereunder; to determine the number of shares of Common Stock to be covered by each Award granted hereunder; to approve forms of Award Agreement for use under the Plan; (v) to determine the terms and conditions, not...

  • Page 123
    ... years; (x) to allow Participants to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option, SAR or Stock Purchase Right or upon vesting or payout of another Award, that number of Shares or cash having a Fair Market Value...

  • Page 124
    ... a Nonstatutory Stock Option. However, not withstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and...

  • Page 125
    ... (3) cash; check; promissory note; (4) other Shares which have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised (which may include Shares that would otherwise be issued pursuant to the Option); (5) Company in...

  • Page 126
    ...Participant shall receive in exchange from the Company an amount equal to the excess of (x) the Fair Market Value on the date of exercise of the SAR of the Common Stock covered by the surrendered portion of the related Option over (y) the exercise price of the Common Stock covered by the surrendered...

  • Page 127
    ... of Option or SAR . (a) Procedure for Exercise; Rights as a Shareholder . Any Option or SAR granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may...

  • Page 128
    ... a payment in cash or Shares an Option or SAR previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Participant at the time that such offer is made. 12. Stock Purchase Rights . (a) Rights to Purchase . Stock Purchase Rights may be issued...

  • Page 129
    ... in cash again shall be available for grant under the Plan. (e) Cancellation . On the date set forth in the Restricted Stock Unit Award Agreement, all unearned Restricted Stock Units shall be forfeited to the Company. 14. Performance Shares . (a) Grant of Performance Shares . Subject to the terms...

  • Page 130
    ... from the Shares to be issued upon exercise of the Option, SAR or Stock Purchase Right or the Shares to be issued upon payout or vesting of the other Award, if any, that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be...

  • Page 131
    ... or sale of assets, the assumed Award confers the right to purchase or receive, for each Share of Awarded Stock subject to the Award immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by...

  • Page 132
    ...: Definition of "Change in Control" . For purposes of this Section 17, a "Change in Control" means the happening of (i) When any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, a Subsidiary or a Company employee benefit plan, including...

  • Page 133
    ... in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 22. Reservation of Shares . The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy...

  • Page 134
    ...: Grant of Restricted Stock Units . Apple hereby grants to Grantee as of the Date of Grant, an award of 1. restricted stock units (the "Units") pursuant to the terms and conditions contained herein and the terms and conditions of the 2003 Employee Stock Option Plan ("2003 Plan") . 2. Vesting of the...

  • Page 135
    ... Release Date, the amount due for employment taxes. [Note: For grants permitting net share settlement: Grantee may satisfy such tax withholding obligations, in whole or in part by: (a) paying cash, or (b) electing to have Apple withhold otherwise deliverable Shares having a fair market value equal...

  • Page 136
    ... "Company"), a California corporation, granted to you (the "Optionee") an option to purchase shares of Common Stock, no par value, of the Company, in the number and at the price as shown above, and in all respects subject to the terms, definitions and provisions of the 2003 Employee Stock Plan, as...

  • Page 137

  • Page 138
    ... paragraph. The Company, its related entities, and your employer hold certain personal information about you, including your name, home address and telephone number, date of birth, social security number or other employee identification number, salary, nationality, job title, any shares of stock or...

  • Page 139
    ...are placed. Freescale will ship all MPUs ordered on or before the Delivery Date. If an MPU [**], Freescale will [**] Apple and will [**] Apple's [**] to the [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment...

  • Page 140
    ... the MPU [**] set forth in the [**] . Independent Efforts and Similar Products Nothing in this Purchase Agreement will impair Apple's right to develop, manufacture, purchase or use products or services competitive with those offered by Freescale. Confidentiality The terms, conditions and existence...

  • Page 141
    ... to Apple: (i) obtain for Apple the right to use and sell the MPUs; (ii) substitute an equivalent product(s) reasonably acceptable to Apple and extend this indemnity to that product(s); or, if neither of the above is possible, (iii) accept the return of the MPUs and refund the purchase price paid...

  • Page 142
    ... such subject matter with the express exception of the parties' previously executed nondisclosure agreements. Any different or additional terms and conditions in a Purchase Order (other than the quantity and ship to location), purchase order acknowledgment, on a web site, or otherwise, will be of...

  • Page 143
    ... 1 Definitions Whenever capitalized in this Purchase Agreement: " Apple " means Apple Computer, Inc., a California Corporation, with offices at 1 Infinite Loop, Cupertino, CA 95014. "Authorized Purchaser" means Apple, any of its wholly-owned subsidiaries, and any of its contract manufacturers...

  • Page 144
    Attachment 2 Pricing Pricing The purchase price for [**] and [**] MPUs ordered by Apple and its Authorized Purchasers will be as set forth below Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been ...

  • Page 145
    ... Contemporaneously with the execution of this Purchase Agreement, Apple or its Authorized Purchasers will place Purchase Orders ("Additional WIP Purchase Orders") for a total of [**] MPUs, described in more detail below, at the prices set forth in Attachment 2. Apple will take delivery of all MPUs...

  • Page 146
    ... Remixes will [**] . If remixed, [**] , and all other terms and conditions applicable to the Purchase Order will remain in effect. [**] Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with...

  • Page 147
    ... Authorized Purchaser wrongfully rejects delivery, revokes acceptance of, or fails to pay for MPUs delivered in accordance with this Purchase Agreement, [**] . Neither Apple nor the Authorized Purchaser will be liable for [**] not expressly set forth in this Section. [**] Certain information on this...

  • Page 148
    Attachment 5 Payments Payment Terms Payments for [**] will be due [**] after (i) delivery, or (ii) the invoice date, whichever is later. Payment for all other MPUs delivered pursuant to this Purchase Agreement will be due [**] after, (i) delivery, or (ii) the invoice date, whichever is later. [**] ...

  • Page 149
    ... September 25, 2004, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended September 24, 2005, and management's assessment of the effectiveness of internal control over financial reporting as of September 24...

  • Page 150
    ... and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 29, 2005 By: /s/ STEVEN P. JOBS Steven P. Jobs Chief Executive Officer...

  • Page 151
    ...(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Apple Computer, Inc. By: /s/ STEVEN P. JOBS Steven P. Jobs Chief Executive Officer I, Peter Oppenheimer...

  • Page 152