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APPLE INC
FORM 10-K
(Annual Report)
Filed 12/29/06 for the Period Ending 09/30/06
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 12/29/06 for the Period Ending 09/30/06 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
    ...,100 based upon the closing price reported for such date on the NASDAQ Global Select 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
    ... non-cash stock-based compensation expense and related tax effects with regard to past stock option grants, and the Company is restating previously filed financial statements in this Form 10-K. These adjustments, after tax, amounted to $4 million, $7 million, and $10 million in fiscal years 2006...

  • Page 4
    ...to the number of option shares, option exercise prices, and share prices in this Explanatory Note have not been adjusted for any subsequent stock splits. With the exception of director grants, all stock option grants were subject to ratification by the Board or Compensation Committee at a meeting or...

  • Page 5
    ... 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. Focal Grants-During the relevant period, 27,096 focal grants were made to employees typically on an annual...

  • Page 6
    ... actual ratification dates are unknown, the total stock-based compensation would have ranged from approximately $35 million to $56 million. CEO Grants-During the relevant period, the Company made two grants to CEO Steve Jobs. The first grant, dated January 12, 2000, was for 10 million option shares...

  • Page 7
    ...2004 2005 2006 Total $ (1 ) 8 13 19 29 16 84 13 7 1 $ 105 $- 6 9 13 23 12 63 10 7 4 $ 84 Additionally, the Company has restated the pro forma expense under Statement of Financial Accounting Standards ("SFAS") No. 123 in Note 1 of the Notes to Consolidated Financial Statements of this Form 10-K to...

  • Page 8
    ... 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. The Company's products and services include the Macintosh® line of desktop and portable computers, the Mac OS...

  • Page 9
    ... Company has designed a range of products and services to meet the needs of education customers. These products and services include the iMac™ and the MacBook®, video creation and editing solutions, wireless networking, professional development solutions, and one-to-one (1:1) learning solutions...

  • Page 10
    ...The Company's operating system, Mac OS X, incorporates powerful graphics and audio technologies and features developer tools to optimize system and application performance when running creative solutions provided by the Company or third-party developers. Business Organization The Company manages its...

  • Page 11
    ...System Xserve is a rack-mount server product designed for simple setup and remote management of intensive input/output (I/O) applications such as digital video, high-resolution digital imagery, and large databases. In November 2006, the Company began shipping Xserve, a 64-bit server featuring Mac OS...

  • Page 12
    ... 385 Mbps. Music Products and Services The Company offers its iPod® line of portable 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, television shows...

  • Page 13
    ...The Company offers a range of software products for education, creative, consumer, and business customers, including Mac OS X, the Company's proprietary operating system software for the Macintosh; server software and related solutions; professional application software; and consumer, education, and...

  • Page 14
    ...as high resolution video; and flexible volume management results in more efficient use of storage resources. Xsan can be used in heterogeneous environments that include Windows, UNIX, and Linux server operating system platforms. Professional Application Software In March 2006, the Company introduced...

  • Page 15
    ...and podcasts and customize websites using editing tools. iPhoto® is the Company's consumer-oriented digital photo software application. iPhoto 6 adds new photo management and editing features, supports up to 250,000 photos, and introduces Photocasting™. Photocasting allows .Mac users to share and...

  • Page 16
    ...-channel audio, and export multiple files while playing back or editing video. .Macâ„¢ The Company's .Mac offering is a suite of Internet services that for an annual fee provides Macintosh users with a powerful set of Internet tools. .Mac services include: HomePage, for personal web sites; iDisk...

  • Page 17
    ...via web browser when users are away from their Mac; .Mac Mail, an ad-free email service; and Learning Center, featuring tutorials for certain software applications. The current version of .Mac includes .Mac Groups, a service that helps members communicate, coordinate schedules, and stay in sync with...

  • Page 18
    ... gross margins. The principal competitive factors include price, relative price/performance, product quality and reliability, design innovation, availability of software, product features, marketing and distribution capability, service and support, availability of hardware peripherals, and corporate...

  • Page 19
    ..., 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 third-party business and technology. The Company's research and development...

  • Page 20
    ...8 of this Form 10-K and in the Notes to Consolidated Financial Statements at Note 11, "Segment Information and Geographic Data." Seasonal Business The Company has historically experienced increased net sales in its first and fourth fiscal quarters compared to other quarters in its fiscal year due to...

  • Page 21
    ..., 2006, the Company had 17,787 full-time equivalent employees and an additional 2,399 temporary equivalent employees and contractors. Available Information The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant...

  • Page 22
    ... the Company has accounted for and reported, or not reported, the financial impact. Accordingly, there is a risk the Company may have to further restate its prior financial statements, amend prior filings with the SEC, or take other actions not currently contemplated. The Company's past stock option...

  • Page 23
    ... hostile acts, labor 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...

  • Page 24
    ...Company is currently the only maker of hardware using the Mac OS. The Mac OS has a minority market share in the personal computer market, which is dominated by makers of computers utilizing competing operating systems, including Windows and Linux. The Company's future operating results and financial...

  • Page 25
    ... DRAM, NAND flash-memory, and TFT-LCD flat-panel displays), while currently available to the Company from multiple sources, are at times subject to industry-wide availability and pricing pressures. In addition, new products introduced by the Company often initially utilize custom components obtained...

  • Page 26
    ... contracts, and open orders based on projected demand information. Such purchase commitments typically cover the Company's forecasted component and manufacturing requirements for periods ranging from 30 to 150 days. The Company's operating results and financial condition have been in the past...

  • Page 27
    ... of return or incremental revenue to offset this investment. Over the past several years, an increasing proportion of the Company's net sales have been made by the Company directly to end-users through its online stores around the world and through its retail stores in the U.S., Canada, Japan, and...

  • Page 28
    ... Company's products and more inclined to devote their resources to developing and upgrading software for the larger Windows market or growing Linux market. The Company's recent announcement that it plans to add a feature to the next version of Mac OS X that will enable Intel-based Macintosh systems...

  • Page 29
    ... music management, desktop-based database management, word processing, and high-quality presentations. Discontinuance of third-party software products for the Macintosh platform could have an adverse effect on the Company's net sales and results of operations. The Company's business relies on access...

  • Page 30
    ...factors that have a negative impact on general retail activity; inability to manage costs associated with store construction and operation; inability to sell third-party hardware and software products at adequate margins; failure to manage relationships with existing retail channel partners; lack of...

  • Page 31
    ... 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 32
    ...value of the U.S. dollar versus the local currency in which the products are sold and goods and services are purchased. The Company's primary exposure to movements in foreign currency exchange rates relate to non-U.S. dollar denominated sales in Europe, Japan, Australia, Canada, and certain parts of...

  • Page 33
    ...operations. In December 2004, the FASB issued new guidance that addresses the accounting for share-based payments, Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004) ("SFAS No. 123R"), Share-Based Payment , which the Company adopted in 2006. In 2006, stock-based compensation...

  • Page 34
    ... distribution operations as well as a customer support call center. In addition, the Company owns approximately 1.9 million square feet of facilities for research and development and corporate functions in Cupertino, California, including approximately 948,000 square feet purchased during 2006 for...

  • Page 35
    ... the .Mac services and Apple computers and servers running iTunes, QuickTime, or the other named Apple software products. The Burst patents allegedly relate to methods and devices used for "burst" transmission of audio or video files. The case is in discovery. A claim construction hearing is set for...

  • Page 36
    ... filed this purported class action on May 16, 2006 in the United States District Court for the Northern District of California, San Jose Division, on behalf of a nationwide class of iPod purchasers between May 2002 and the present. The complaint alleged various problems with the iPod hard drive...

  • Page 37
    ... the same factual claims as the previous complaints, such as alleged selling of used equipment as new, alleged failure to honor warranties and service contracts for the consumer plaintiffs, and alleged fraud related to the opening of the Apple retail stores. Plaintiffs continued to assert causes of...

  • Page 38
    ... two new plaintiffs (Charoensak and Rosen). On November 2, 2006, the Company filed an answer to the amended complaint denying all material allegations and asserting numerous affirmative defenses. The hearing on class certification is set for April 16, 2007. Contois Music Technology LLC v. Apple...

  • Page 39
    ... of operations. Davis v. Apple Computer, Inc. Plaintiff 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...

  • Page 40
    ... advertising related to the size of the drives. Plaintiffs alleged that calculation of hard drive size using the decimal method misrepresents the actual size of the drive. The complaint sought restitution and other relief. Plaintiffs filed an amended complaint on March 30, 2004 and the Company filed...

  • Page 41
    ... On June 30, 2006, a putative derivative action captioned Karant v. Jobs, et. al. , was filed in the United States District Court for the Northern District of California, San Jose Division. A number of related actions were filed in the subsequent weeks and have been consolidated into a single action...

  • Page 42
    ... current and former executive officers and members of the Board of Directors alleging improper backdating of stock option grants to maximize certain defendants' profits, failing to properly account for and take tax deductions for those grants and issuing false financial statements. The Company...

  • Page 43
    ... allege that the Company treated Macsolutions unfairly compared to other resellers, that the Company has competed unfairly in opening the Apple retail stores, and has allegedly sold used goods as new. Macsolutions filed an amended complaint on June 5, 2006, adding Tech Data Corporation as a 42

  • Page 44
    ...Texas, Marshall Division, alleging infringement by the Company of U.S. Patent numbers 6,243,725 and 6,763,345 both entitled "List Building System." The complaint seeks unspecified damages and other relief. The Company filed an answer on January 13, 2006 denying all material allegations and asserting...

  • Page 45
    ... District of California against the Company and certain of the Company's current and former officers and directors alleging improper backdating of stock option grants to maximize certain defendants' profits, failing to properly account for those grants and issuing false financial statements. The...

  • Page 46
    ... be heard on December 18, 2006. No further dates have been set. A similar complaint, Mund v. Apple Canada Inc. and Apple Computer, Inc., was filed in Ontario, Canada on January 9, 2006 seeking authorization to institute a class action on behalf of iPod nano purchasers in Canada. In the two Quebec...

  • Page 47
    ... The price range per share of common stock presented below represents the highest and lowest sales prices for the Company's common stock on the NASDAQ Global Select Market during each quarter of the two most recent fiscal years. On February 28, 2005, the Company effected a two-for-one stock split to...

  • Page 48
    ... by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in such previouslyfiled reports should no longer be relied upon. Five fiscal years ended September 30, 2006 (In millions, except share and per share amounts) 2006 2005 As...

  • Page 49
    ... Fiscal Year Ended September 28, 2002 As As Reported Adjustments Restated Net sales Cost of sales Gross margin Total operating expenses Operating income (loss) Income before accounting changes Cumulative effects of accounting changes, net of income taxes Net income Earnings (loss) per common share...

  • Page 50
    ...Company's products and services include the Macintosh line of desktop and notebook computers, the iPod line of portable digital music players, the Xserve server and Xserve RAID storage products, a portfolio of consumer and professional software applications, the Mac OS X operating system, the iTunes...

  • Page 51
    ... 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-only warehouse stores, large retail chains...

  • Page 52
    ... insurance are outstanding with the Company's distribution and retail channel partners. The allowance for doubtful accounts is based on management's assessment of the collectibility of specific customer accounts and includes consideration of the credit worthiness and financial condition of those...

  • Page 53
    .... If actual product failure rates or repair costs differ from estimates, revisions to the estimated warranty liability would be required and could negatively affect the Company's results of operations. The Company periodically provides updates to its applications and system software to maintain...

  • Page 54
    ... Consolidated Financial Statements of this Form 10-K. Income Taxes The Company records a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with SFAS No. 109, Accounting for Income Taxes , the provision for income taxes is computed using the asset...

  • Page 55
    ... of iTunes 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 56
    ...and support contracts and application software, partially offset by a decrease in sales of Mac OS X. Mac OS X sales were particularly high in 2005 due to the release of Mac OS X Tiger in April 2005. Offsetting the favorable factors discussed above, the Company's net sales during 2006 were negatively...

  • Page 57
    ...to increased net sales in 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 58
    ..., and Mac OS X. The decrease in desktop products and displays net sales reflects the overall shift in product mix toward portable Macintosh systems. Mac OS X sales decreased from 2005 since the Company has not released a new version of Mac OS X since Tiger began shipping in April 2005. During 2006...

  • Page 59
    ... in desktop products and displays reflect the overall shift in product mix toward portable Macintosh systems. Mac OS X sales have decreased from 2005 since the Company has not released a new version of Mac OS X since Tiger began shipping in April 2005. Total Macintosh unit sales during 2006 remained...

  • Page 60
    ... more favorable pricing on certain commodity components including LCD flat-panel displays and DRAM memory and higher overall revenue that provided for more leverage on fixed production costs, offset by an increase in lower margin iPod sales and other music-related services. The Company anticipates...

  • Page 61
    ... including LCD flat-panel displays and DRAM memory; an increase in higher margin software sales; a favorable shift in direct sales related primarily to the Company's retail and online stores; and higher overall revenue that provided for more leverage on fixed production costs. These increases to...

  • Page 62
    ... week added to the first fiscal quarter of 2006 . The weighted average interest rate earned by the Company on its cash, cash equivalents, and short-term investments increased to 4.58% in 2006 compared to the 2.70% and 1.38% rates earned during 2005 and 2004, respectively. The current year increase...

  • Page 63
    ... of tax planning strategies to recognize deferred tax assets that were previously not recognizable within certain foreign subsidiaries. The Internal Revenue Service ("IRS") has substantially completed its field audit of the Company's federal income tax returns for the years 2002 through...

  • Page 64
    ... set forth a summary of the Company's quarterly financial information for each of the four quarters in the years ended September 30, 2006 and September 24, 2005 (in millions, except share and per share amounts): 2006 Fourth Quarter Third Quarter Second Quarter First Quarter Net sales Cost of sales...

  • Page 65
    ... Item 1 and Note 2, "Restatement of Consolidated Financial Statements," in Notes to Consolidated Financial Statements of this Form 10-K. Includes stock-based compensation expense, which was allocated as follows: Cost of sales Research and development Selling, general, and administrative $ $ $ 1 1 10...

  • Page 66
    ... As As Reported (1) Restated Three Months Ended June 25, 2005 As Reported Adjustments (1) As Restated Net sales Cost of sales (2) Gross margin Operating expenses: Research and development (2) Selling, general, and administrative (2) Total operating expenses Operating income Other income and expense...

  • Page 67
    ... Restated Three Months Ended December 25, 2004 As Reported Adjustments (1) As Restated Net sales Cost of sales (2) Gross margin Operating expenses: Research and development (2) Selling, general, and administrative (2) Total operating expenses Operating income Other income and expense Income before...

  • Page 68
    ... No. 157, management does not currently believe adoption will have a material impact on the Company's results of operations or financial position. In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109...

  • Page 69
    ...Company's second corporate campus and its new data center, and approximately $265 million 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...

  • Page 70
    ... for flash memory components during 2006. These prepayments will be applied to inventory purchases made over the life of each respective agreement. Asset Retirement Obligations The Company's asset retirement obligations are associated with commitments to return property subject to operating leases...

  • Page 71
    ..., 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 and interest rate...

  • Page 72
    ..., to the Company's foreign exchange portfolio due to adverse movements in rates. The VAR model is not intended to represent 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...

  • Page 73
    ..., 2006 Consolidated Statements of Shareholders' Equity for the three fiscal years ended September 30, 2006 Consolidated Statements of Cash Flows for the three fiscal years ended September 30, 2006 Notes to Consolidated Financial Statements Selected Quarterly Financial Information (Unaudited) Reports...

  • Page 74
    ... except share amounts) September 30, 2006 September 24, 2005 As Restated(1) ASSETS: Current assets: Cash and cash equivalents Short-term investments Accounts receivable, less allowances of $52 and $46, respectively Inventories Deferred tax assets Other current assets Total current assets Property...

  • Page 75
    ...,776 $ $ $ $ $ $ $ $ $ See Note 2, "Restatement of Consolidated Financial Statements," in Notes to Consolidated Financial Statements. Includes stock-based compensation expense, which was allocated as follows: Cost of sales Research and development Selling, general, and administrative $ $ $ 21 53...

  • Page 76
    ... loss on derivative investments, net of tax Total comprehensive income Common stock repurchased Stock-based compensation Deferred compensation Common stock issued under stock plans Tax benefit related to stock-based compensation Balances as of September 30, 2006 (1) Common Stock Shares Amount As...

  • Page 77
    ... accretion Stock-based compensation expense Provision for deferred income taxes Excess tax benefits from stock options Gain on sale of PowerSchool net assets Loss on disposition of property, plant, and equipment Gains on sales of investments, net Changes in operating assets and liabilities: Accounts...

  • Page 78
    ... 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 sale of third-party audio and video products. The Company sells its products...

  • Page 79
    ...The Company capitalizes eligible costs to acquire or develop internal-use software that are incurred subsequent to the preliminary project stage. Capitalized costs related to internal-use software are amortized using the straight-line method over the estimated useful lives of the assets, which range...

  • Page 80
    ... TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1-Summary of Significant Accounting Policies (Continued) 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...

  • Page 81
    ... 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 from other companies. The Company...

  • Page 82
    ... to revenue for expected future 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...

  • Page 83
    ... in 2006 the Company has presented excess tax benefits from the exercise of stock-based compensation awards as a financing activity in the consolidated statement of cash flows. No stock-based compensation costs have been capitalized as of September 30, 2006. The income tax benefit related to stock...

  • Page 84
    ... CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1-Summary of Significant Accounting Policies (Continued) SFAS No. 123R prohibits recognition of a deferred tax asset for an excess tax benefit that has not been realized. The Company will recognize a benefit from stock-based compensation in equity...

  • Page 85
    ... as available-for-sale, and net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges. Segment Information The Company reports segment information based on the "management" approach. The management approach designates the internal reporting used by management...

  • Page 86
    ... 2005, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the fiscal years ended September 24, 2005 and September 25, 2004, and each of the quarters in fiscal year 2005. Previously filed annual reports on Form 10-K and quarterly reports on Form 10...

  • Page 87
    ... CEO ("CEO grants"). All references to the number of option shares, option exercise prices, and share prices in this Note 2 have not been adjusted for any subsequent stock splits. With the exception of director grants, all stock option grants were subject to ratification by the Board or Compensation...

  • Page 88
    ... were erroneously dated before the employees' start dates. 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...

  • Page 89
    ... Board meeting did not occur. There was no evidence, however, that any current member of management was aware of this irregularity. 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...

  • Page 90
    ... the stock-based compensation and related tax adjustments made to the Company's previously reported consolidated balance sheet as of September 24, 2005 (in millions, except share amounts): September 24, 2005 As Reported Adjustments As Restated ASSETS: Current assets: Cash and cash equivalents Short...

  • Page 91
    ... of Consolidated Financial Statements (Continued) The following table presents the effects of the stock-based compensation and related tax adjustments made to the Company's previously reported consolidated statements of operations (in millions, except share and per share amounts): Fiscal Year Ended...

  • Page 92
    ... FINANCIAL STATEMENTS (Continued) Note 2-Restatement of Consolidated Financial Statements (Continued) The following table presents the cumulative adjustments of each component of shareholders' equity at the end of each fiscal year (in millions): Deferred Stock Fiscal Year Common Stock Compensation...

  • Page 93
    ... of such sales. These net gains were included in interest and other income, net. As of September 30, 2006 and September 24, 2005, approximately $921 million and $287 million, respectively, of the Company's short-term investments had underlying maturities ranging from 1 to 5 years. The remaining...

  • Page 94
    ...exchange risk on expected future cash flows on certain forecasted revenue and cost of sales. From time to time, the Company enters into interest rate derivative agreements to modify the interest rate profile of certain investments and debt. The Company's accounting policies for these instruments are...

  • Page 95
    ... 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...

  • Page 96
    ...changes in option time value can lead to increased volatility in other income and expense. Note 4-Consolidated Financial Statement Details (in millions) Other Current Assets 2006 2005 Vendor non-trade receivables NAND flash memory prepayments Other current assets Total other current assets $ 1,593...

  • Page 97
    ... NAND flash memory prepayments Non-current deferred tax assets Capitalized software development costs, net Other assets Total other assets Accrued Expenses $ 1,042 - 21 175 $ 1,238 $ - 148 38 117 $ 303 2006 2005 As Restated(1) Deferred revenue-current Accrued warranty and related costs Accrued...

  • Page 98
    ... for acquired technology was 8.5 years and 5.5 years, respectively. During 2006, the Company sold certain assets related to its PowerSchool web-based student information system operations. In connection with this sale, the Company reduced goodwill by $31 million for the outstanding balance from the...

  • Page 99
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 5-Goodwill and Other Intangible Assets (Continued) Expected annual amortization expense related to acquired technology is as follows (in millions): Fiscal Years: 2007 2008 2009 2010 2011 Thereafter Total $ 24 21 18 14 13 49 $ 139 ...

  • Page 100
    ... must be reinvested in the United States in certain qualified investments pursuant to a domestic reinvestment plan approved by the Chief Executive Officer ("CEO") and Board of Directors. During 2006, the Company repatriated approximately $1.6 billion of foreign earnings. Of the earnings repatriated...

  • Page 101
    ...rate (1) See Note 2, "Restatement of Consolidated Financial Statements." $ 987 86 (224 ) 11 (12 ) (19 ) $ 829 29 % $ 633 (19 ) (98 ) 14 (26 ) (24 ) $ 480 27 % $ 129 (5 ) (31 ) 12 (5 ) 4 $ 104 28 % The Company's income taxes payable has been reduced by the tax benefits from employee stock options...

  • Page 102
    ...unissued shares of preferred stock. Restricted Stock Units The Company's Board of Directors has granted restricted stock units to members of the Company's senior management team, excluding its CEO. These restricted stock units generally vest over four years either at the end of the four-year service...

  • Page 103
    ... TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 8-Shareholders' Equity (Continued) Upon vesting during 2006, the restricted stock award was net-share settled such that the Company withheld shares with value equivalent to the CEO's minimum statutory obligation for the applicable income and...

  • Page 104
    ..., new stock options totaling 13,394,736 shares were issued to employees at an exercise price of $11.38 per share, which is equivalent to the closing price of the Company's stock on that date. No financial or accounting impact to the Company's financial position, results of operations or cash flows...

  • Page 105
    ...CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 8-Shareholders' Equity (Continued) 1997 Director Stock Option Plan In August 1997, the Company's Board of Directors adopted a Director Stock Option Plan ("Director Plan") for non-employee directors of the Company, which was approved by shareholders...

  • Page 106
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 8-Shareholders' Equity (Continued) Stock Option Activity A summary of the Company's stock option activity and related information for the last three fiscal years follows (stock award amounts and aggregate intrinsic value are presented in ...

  • Page 107
    ... to Consolidated Financial Statements of the effect on net income and earnings per share for the years ended September 24, 2005 and September 25, 2004 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...

  • Page 108
    ... 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. The Company provides currently for the estimated cost that may be incurred under its basic limited product warranties at the time related revenue...

  • Page 109
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 10-Commitments and Contingencies (Continued) 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. ...

  • Page 110
    ... corporate expenses associated with support of the Retail segment. The Company does not include intercompany transfers between segments for management reporting purposes. Segment assets exclude corporate assets. Corporate assets include cash, short-term and long-term investments, manufacturing...

  • Page 111
    ...for management reporting purposes that are not included in the results of the Company's other segments. First, the Retail segment's operating income includes cost of sales for Apple products at an amount normally charged to major channel partners in the U.S. operating retail stores, less the cost of...

  • Page 112
    ... information by operating segment follows (in millions): 2006 2005 2004 Americas: Net sales Operating income Depreciation, amortization, and accretion Segment assets (a) Europe: Net sales Operating income Depreciation, amortization, and accretion Segment assets Japan: Net sales Operating income...

  • Page 113
    ... of the Company's segment operating income and assets to the consolidated financial statements follows (in millions): 2006 2005 As Restated (1) 2004 As Restated (1) Segment operating income Retail manufacturing margin (a) Other corporate expenses, net (b) Stock-based compensation expense...

  • Page 114
    ...iTunes Store sales and iPod services, and Apple-branded and third-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 and application...

  • Page 115
    ... basic and diluted per share information may not equal annual basic and diluted earnings per share. Net income during the third quarter of 2006 benefited by $20 million resulting from the dividend repatriation under the AJCA and international tax planning strategies associated with the repatriation...

  • Page 116
    ... 0.35 789,032 838,805 See Note 2, "Restatement of Consolidated Financial Statements." Includes stock-based compensation expense, which was allocated as follows: Cost of sales Research and development Selling, general, and administrative $ $ $ 1 1 10 $ $ $ - 2 10 $ $ $ 1 2 9 $ $ $ 1 2 10 The impact...

  • Page 117
    ...Months Ended June 25, 2005 As As Reported Adjustments (1) Restated Net sales Cost of sales (2) Gross margin Operating expenses: Research and development (2) Selling, general, and administrative (2) Total operating expenses Operating income Other income and expense Income before provision for income...

  • Page 118
    ... Restated Three Months Ended December 25, 2004 As As Reported Adjustments (1) Restated Net sales Cost of sales (2) Gross margin Operating expenses: Research and development (2) Selling, general, and administrative (2) Total operating expenses Operating income Other income and expense Income before...

  • Page 119
    ... 24, 2005, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended September 30, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express...

  • Page 120
    ... of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2006, and our report dated December 29, 2006 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Mountain View, California December 29, 2006...

  • Page 121
    ... officers of the Corporation engaged in conduct that raises serious concerns in connection with the granting, accounting, recording, and reporting of stock options • CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, but he did not receive or financially benefit...

  • Page 122
    ... for senior management to undertake professional training to enhance awareness and understanding of standards and principles for accounting and financial reporting, particularly those relevant to stock options • The Company will review all current policies, practices, and controls related to...

  • Page 123
    ... the Company's assets that could have a material effect on the financial statements. Management, including the Company's CEO and CFO, does not expect that the Company's internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can...

  • Page 124
    ..., Inc., a computer networking company, and, from April 1997 to July 2001, as the Chief Executive Officer of Novell. Dr. Schmidt was a director of Siebel Systems until January 2006. Jerome B. York has been Chief Executive Officer of Harwinton Capital Corporation, a private investment company that he...

  • Page 125
    ...the Board; Corporate Governance Matters It is the paramount duty of the Board of Directors to oversee the Chief Executive Officer and other senior management in the competent and ethical operation of the Company on a day-to-day basis and to assure that the long-term interests of the shareholders are...

  • Page 126
    ... Business Worldwide," is available on the Company's website at www.apple.com/investor. The Company intends to disclose any changes in or waivers from its code of ethics by posting such information on its website or by filing a Form 8-K. Executive Officers The following sets forth certain information...

  • Page 127
    ... for Arthur D. Levinson on August 17, 2006 to report an automatic stock option grant under the Company's 1997 Director Stock Option Plan made on August 14, 2006; and (ii) one Form 4 was filed for Anthony Fadell on September 1, 2006 with respect to the purchase and sale by Mr. Fadell's trust of 300...

  • Page 128
    ... $76.98 per share, the closing price of the Company's common stock on the NASDAQ Global Select Market on September 29, 2006 (the last day of trading for the 2006 fiscal year). The table has been adjusted to reflect the Company's two-for-one stock split in February 2005. Number of Unvested Restricted...

  • Page 129
    ...2004 (based on $12.75 per share, the split-adjusted closing price of the Company's common stock on the NASDAQ Global Select Market on the day of grant). The restricted stock units granted on this date generally vest over four years with 50% of the total number of shares vesting on each of the second...

  • Page 130
    ...-money options at the end of fiscal year 2006 (based on $76.98 per share, the closing price of Common Stock on the NASDAQ Global Select Market on September 29, 2006), minus the exercise price. Consists of 120,000 options granted to Mr. Jobs in his capacity as a director pursuant to the 1997 Director...

  • Page 131
    ... (ii) each director; (iii) each Named Executive Officer listed in the Summary Compensation Table under the heading " Executive Compensation; " and (iv) all directors and executive officers as a group. On the Table Date, 859,202,448 shares of Common Stock were issued and outstanding. Unless otherwise...

  • Page 132
    ..., in such filing. Based on a Form 13F filed January 25, 2006, by Barclays Global Investors. Barclays Global Investors lists its address as 45 Fremont Street, San Francisco, CA 94105. Includes 120,000 shares of Common Stock that Mr. Jobs has the right to acquire by exercise of stock options. Includes...

  • Page 133
    ... Stock that executive officers or directors have the right to acquire by exercise of stock options. Does not include 2.7 million unvested restricted stock units. * Represents less than 1% of the issued and outstanding shares of Common Stock on the Table Date. Equity Compensation Plan Information...

  • Page 134
    ... audit of the Company's annual financial statements 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. Fiscal year 2006 also includes fees...

  • Page 135
    ..., 2006 Consolidated Statements of Shareholders' Equity for the three fiscal years ended September 30, 2006 Consolidated Statements of Cash Flows for the three fiscal years ended September 30, 2006 Notes to Consolidated Financial Statements Selected Quarterly Financial Information (Unaudited) Reports...

  • Page 136
    ...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 137
    ... on page 137 of this Annual Report on Form 10-K). Rule13a-14(a) / 15d-14(a) Certification of Chief Executive Officer. Rule13a-14(a) / 15d-14(a) Certification of Chief Financial Officer. Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. 42 42 42 42 Confidential...

  • Page 138
    ... P. Jobs and Peter Oppenheimer, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith...

  • Page 139
    ... COMPUTER, INC.* Jurisdiction of Incorporation Name Apple Operations International (formerly Apple Computer Inc. Limited) Apple Operations Europe (formerly Apple Computer Limited) Apple Computer International Braeburn Capital, Inc. * Ireland Ireland Ireland United States Pursuant to Item 601...

  • Page 140
    ... September 24, 2005, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2006, and management's assessment of the effectiveness of internal control over financial reporting as of September 30...

  • Page 141
    ... 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: December 29, 2006 By: /s/ STEVEN P. JOBS Steven P. Jobs Chief Executive Officer

  • Page 142
    ..., 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: December 29, 2006 By: /s/ PETER OPPENHEIMER Peter Oppenheimer Senior Vice...

  • Page 143
    ... 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. December 29, 2006 By: /s/ STEVEN P. JOBS Steven P. Jobs Chief Executive Officer I, Peter Oppenheimer, certify, pursuant to...