Apple 2006 Annual Report Download - page 102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7—Income Taxes (Continued)
The Internal Revenue Service (“IRS”) has substantially completed its field audit of the Company’s federal income tax returns for the years
2002 through 2003 and proposed certain adjustments. The Company intends to contest certain of these adjustments through the IRS Appeals
Office. Substantially all IRS audit issues for years prior to 2002 have been resolved. In addition, the Company is also subject to audits by state,
local, and foreign tax authorities. Management believes that adequate provisions have been made for any adjustments that may result from tax
examinations. However, the outcome of tax audits cannot be predicted with certainty. Should any issues addressed in the Company’s tax audits
be resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax
in the period such resolution occurs. In 2006, the Company recorded a tax benefit of $20 million due to the settlement of prior year tax audits in
the U.S.
Note 8—Shareholders’ Equity
Preferred Stock
The Company has five 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 or alter the rights, preferences, privileges, and restrictions of the
Company’s authorized but 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 period, in two equal installments on
the second and fourth anniversaries of the date of grant, or in equal installments on each of the first through fourth anniversaries of the grant
date. Upon vesting, the restricted stock units will convert into an equivalent number of shares of common stock. The amounts of the restricted
stock units expensed by the Company are based on the closing market price of the Company’s common stock on the date of grant and are
amortized on a straight-line basis over the four-year requisite service period. The restricted stock units have been reflected in the calculation of
diluted earnings per share utilizing the treasury stock method.
2.47 million previously granted restricted stock units vested during 2006. A majority of these vested restricted stock units were net-share
settled such that the Company withheld shares with value equivalent to the employees’
minimum statutory obligation for the applicable income
and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld of 985,833 for 2006 was
based on the value of the restricted stock units on their vesting date as determined by the Company’s closing stock price. Total payments for
the employees’ tax obligations to the taxing authorities were approximately $59 million. These net-share settlements had the effect of share
repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting
and did not represent an expense to the Company.
CEO Restricted Stock Award
On March 19, 2003, the Company’s Board of Directors granted 10 million shares of restricted stock to the Company’s CEO that vested on
March 19, 2006. The amount of the restricted stock award expensed by the Company was based on the closing market price of the Company’s
common stock on the date of grant and was amortized on a straight-line basis over the three-year requisite service period.
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