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GEORGE A. RILEY (State Bar No. 118304) LUANN L. SIMMONS (State Bar No. 203526) 2 O'MELVENY & MYERS LLP Embarcadero Center West 275 Battery Street San Francisco, California 94111-3305 4 Telephone: (415) 984-8700 Facsimile : (415) 984-8701 5 E-Mail: [email protected] [email protected] 6 DAVID M. FURBUSH (State Bar No. 83447) 7 O'MELVENY & MYERS LLP 2765 Sand Hill Road 8 Menlo Park, California 94025 Telephone: (650) 473-2600 9 Facsimile : (650) 473-2601 E-Mail: [email protected] 10 Attorneys for Defendants 11 STEVEN P. JOBS, WILLIAM V. CAMPBELL, MILLARD S. DREXLER, ARTHUR D. LEVINSON, 12 JEROME B. YORK, GARETH C.C. CHANG, PETER O. CRISP, LAWRENCE J. ELLISON, B. JURGEN HINTZ, KATHERINE 13 M. HUDSON, DELANO E. LEWIS, A.C. MARKKULA, JR., EDGAR S. WOOLARD, JR., and APPLE INC. 14
15 UNITED STATES DISTRICT COURT
16 NORTHERN DISTRICT OF CALIFORNIA
17 SAN JOSE DIVISION
18
19 MARTIN VOGEL and KENNETH Case No. C-06-05208-JF MAHONEY, on Behalf of Themselves and 20 All Other Similarly Situated, DECLARATION OF VIVI N. TRAN IN SUPPORT OF MOTION TO 21 Plaintiffs, DISMISS CONSOLIDATED CLASS ACTION COMPLAINT 22 v.
23 STEVEN JOBS, PETER OPPENHEIMER, Date : September 7, 2007 FRED ANDERSON, WILLIAM V. Time: 9 : 00 a.m. 24 CAMPBELL, MILLARD S. DREXLER, Department : Ctrm 3, 5th Floor ALBERT GORE, JR., ARTHUR D. Action Filed: August 24, 2006 25 LEVINSON, JEROME B. YORK AND Trial Date : None Set APPLE COMPUTER, INC. Judge : Honorable Jeremy Fogel 26 Defendants. 27
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TRAN DECLARATION IN SUPPORT OF MOTION TO DISMISS - CASE NO. C-06-05208-JF Case 5:06-cv-05208-JF Document 55 Filed 06/08/2007 Page 2 of 3
1 DECLARATION OF VIVI N. TRAN
2 I, VIVI N. TRAN, declare as follows:
3 1. I am an attorney duly licensed before all of the courts of the State of California. I
4 am an associate in the law firm of O'Melveny & Myers LLP, counsel of record for defendants
5 Apple Inc. ("Apple ), Steven P. Jobs, William V. Campbell, Millard S. Drexler, Arthur D.
6 Levinson, Jerome B. York, Gareth C.C. Chang, Peter O. Crisp, Lawrence J. Ellison, B. Jurgen
7 Hintz, Katherine M. Hudson, Delano E. Lewis, A.C. Markkula, Jr., and Edgar S. Woolard, Jr.
8 ("defendants ). I make this declaration in support of defendants' Motion to Dismiss Consolidated
9 Class Action Complaint. I have personal knowledge of the matters stated herein and, if called
10 upon, could competently testify thereto.
11 2. Attached hereto as Exhibit A is a true and correct copy of Apple 's Definitive
12 Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 on Schedule
13 14A, filed with the United States Securities and Exchange Commission on March 16, 1998. I
14 obtained this true and correct copy from the SEC's official website, at
15 http ://www.sec . gov/Archives/edgar/data/320193 /0001047469-98-010062 .txt, on April 29, 2007.
16 3. Attached hereto as Exhibit B is a true and correct copy of Apple's Current Report
17 Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 8-K, filed with
18 the United States Securities and Exchange Commission on April 24, 2007. I obtained this true
19 and correct copy from the SEC's official website, at
20 http://sec. gov/Archives/edgar/data/320193/00011046590703093 8/0001104659-07-03093 8-
21 index.htm, on May 29, 2007.
22 4. Attached hereto as Exhibit C is a true and correct copy of Apple' s Registration
23 Statement on Form S-8, filed with the United States Securities and Exchange Commission on
24 July 31, 1998. I obtained this true and correct copy from the SEC's official website, at
25 http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt, on April 30, 2007.
26 5. Attached hereto as Exhibit D is a true and correct copy of Apple 's press release
27 dated June 29, 2006, entitled "Apple to Investigate Stock Option Grants. I obtained this true and
28 correct copy from Apple's website, at http://www.apple.com/pr/library/2006/jun/29stock.html, on
TRAN DECLARATION IN SUPPORT OF MOTION TO DISMISS - CASE NO. C-06-05208-JF Case 5:06-cv-05208-JF Document 55 Filed 06/08/2007 Page 3 of 3
1 April 16, 2007.
2 6. Attached hereto as Exhibit E is a true and correct copy of Apple's Annual Report
3 Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, filed with
4 the United States Securities and Exchange Commission on December 29, 2006. I obtained this
5 true and correct copy from the SEC's official website, at
6 http://www. sec. gov/Archives/edgar/data/320193/000110465906084288/0001104659-06-084288-
7 index.htm, on April 20, 2007.
8 7. Attached hereto as Exhibit F is a true and correct copy of Apple's Current Report
9 Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 8-K, filed with
10 the United States Securities and Exchange Commission on May 16, 2007. I obtained this true and
11 correct copy from the SEC's official website, at
12 http://sec. gov/Archives/edgar/data/320193/000110465907040672/0001104659-07-040672-
13 index.htm, on May 23, 2007.
14 I declare under penalty of perjury under the laws of the State of California that the
15 foregoing is true and correct.
16 Executed this 8th day of June 2007 at Menlo Park, California.
17
18 /s/ Vivi N. Tran Vivi N. Tran 19
20 MP1:999013.1 21
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25
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2 TRAN DECLARATION IN SUPPORT OF MOTION TO DISMISS - CASE NO. C-06-05208-JF Case 5:06-cv-05208-JF Document 55-2 Filed 06/08/2007 Page 1 of 67
EXHIBIT A
TO THE DECLARATION OF VIVI N. TRAN IN SUPPORT OF MOTION TO DISMISS CONSOLIDATED CLASS ACTION COMPLAINT Page 1 of 66 Case 5:06-cv-05208-JF Document 55-2 Filed 06/08/2007 Page 2 of 67
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FILER:
COMPANY DATA: COMPANY CONFORMED NAME: APPLE COMPUTER INC CENTRAL INDEX KEY: 0000320193 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [35711 IRS NUMBER: 942404110 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930
FILING VALUES: FORM TYPE: DEF 14A SEC ACT: SEC FILE NUMBER: 000-10030 FILM NUMBER: 98566590
BUSINESS ADDRESS: STREET 1: 1 INFINITE LOOP CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4089961010
MAIL ADDRESS: STREET 1: ONE INFINITE LOOP CITY: CUPERTINO STATE: CA ZIP: 95014
INFORMATION REQUIRED IN PROXY STATEMENT
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SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14 OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/ Filed by a Party other than the Registrant / /
Check the appropriate box: / / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) /X/ Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
APPLE COMPUTER, INC. ------(Name of Registrant as Specified In Its Charter)
------(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required. / / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. 1) Title of each class of securities to which transaction applies: ------2) Aggregate number of securities to which transaction applies: ------3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): ------4) Proposed maximum aggregate value of transaction: ------5) Total fee paid: ------/ / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: ------2) Form, Schedule or Registration Statement No.: ------3) Filing Party: ------4) Date Filed: ------
[LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 22, 1998
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To Holders of Common Stock of
Apple Computer, Inc.:
Notice is hereby given that the Annual Meeting of Shareholders of Apple Computer, Inc., a California corporation (the "COMPANY"), will be held on Wednesday, April 22, 1998 at 10:00 a.m., local time, at the Company's principal executive offices located at 1 Infinite Loop, Cupertino, California 95014, for the following purposes, as more fully described in the accompanying Proxy Statement:
1. To elect three directors to Class II of the Company's Board of Directors.
2. To approve an amendment to the Company's Restated Articles of Incorporation to eliminate the classification of the Company's Board of Directors and thereby ensure that each director will stand for election annually.
3. To approve (i) the Apple Computer, Inc. 1997 Director Stock Option Plan, which provides for the issuance of up to 400,000 shares of the Company's common stock, no par value (the "COMMON STOCK"), and (ii) the grant pursuant to a predecessor stock option plan for non-employee directors of 15,000 stock options to each of Edgar S. Woolard, Jr. and Gareth C.C. Chang, both non-employee directors of the Company, and the reservation of 430,000 shares of Common Stock in the aggregate for issuance pursuant to the 1997 Director Stock Option Plan and such grants.
4. To approve the Apple Computer, Inc. 1998 Executive Officer Stock Plan and the reservation for issuance thereunder of 17,000,000 shares of Common Stock.
5. To ratify the appointment of KPMG Peat Marwick LLP as independent auditors of the Company for fiscal year 1998.
6. To transact such other business as may properly come before the meeting and any postponement(s) or adjournment(s) thereof.
All shareholders are cordially invited to attend the meeting in person. However, to ensure that each shareholder's vote is counted at the meeting, shareholders are requested to mark, sign, date and return the enclosed proxy card as promptly as possible in the envelope provided. Shareholders attending the meeting may vote in person even if they have previously returned proxy cards.
Only shareholders of record as of the close of business on February 23, 1998 are entitled to receive notice of, to attend and to vote at the meeting.
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Sincerely,
[SIGNATURE]
NANCY R. HEINEN
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
Cupertino, California March 16, 1998
PROXY STATEMENT
INTRODUCTION
The enclosed Proxy is solicited on behalf of the Board of Directors (the "BOARD") of Apple Computer, Inc., a California corporation (the "COMPANY"), for use at the Company's annual meeting of shareholders (the "ANNUAL MEETING") to be held on Wednesday, April 22, 1998 at 10:00 a.m., local time, and at any postponement(s) or adjournment(s) thereof. The purposes of the Annual Meeting are set forth in this Proxy Statement and in the accompanying Notice of Annual Meeting of Shareholders. The Annual Meeting will be held at the Company's principal executive offices at the address set forth above.
The Company's complete mailing address is 1 Infinite Loop, Cupertino, California 95014, and its telephone number is (408) 996-1010. Georgeson & Company Inc., which is assisting with the mechanics of the return of the proxies, may be contacted at (800) 223-2064.
These proxy solicitation materials were mailed on or about March 16, 1998 to all shareholders entitled to vote at the Annual Meeting.
PROCEDURAL MATTERS
Shareholders of record as of the close of business on February 23, 1998 (the "RECORD DATE") are entitled to notice of, to attend and to vote at the Annual Meeting. There were 132,761,530 shares of Common Stock issued and outstanding on the Record Date. Each share has one vote on all matters. The closing sale price of Common Stock as reported on the Nasdaq National Market on the Record Date was $21.25 per share.
A shareholder may revoke any proxy given pursuant to this solicitation by attending the Annual Meeting and voting in person, or by delivering to the Company's Corporate Secretary at the Company's principal executive offices referred to above, prior to the Annual Meeting, a written notice of revocation
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or a duly executed proxy bearing a date later than that of the previously submitted proxy.
The Company will bear the cost of this solicitation. The Company has retained the services of Georgeson & Company Inc. to assist in obtaining proxies from brokers and nominees of shareholders for the Annual Meeting. The estimated cost of such services is $12,500 plus out-of-pocket expenses. In addition, the Company will reimburse brokerage firms and other persons representing beneficial owners of shares for their reasonable expenses in forwarding solicitation material to such beneficial owners. Proxies may be solicited by certain of the Company's directors, officers and regular employees, without additional compensation, personally or by telephone, facsimile or telegram.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
In the election of directors, the three candidates receiving the highest number of affirmative votes will be elected as directors. Proposal 2 requires for approval the affirmative vote of a majority of the shares of Common Stock of the Company outstanding as of the Record Date. Proposals 3, 4 and 5 each require for approval (i) the affirmative vote of a majority of the shares "represented and voting" and (ii) the affirmative vote of a majority of the required quorum. The required quorum for the transaction of business at the Annual Meeting is a majority of the shares of Common Stock issued and outstanding on the Record Date (the "QUORUM"). Shares that are voted "FOR", "AGAINST" or "ABSTAIN" in a matter are treated as being present at the meeting for purposes of establishing the Quorum, but only shares voted "FOR" or "AGAINST" are treated as shares "represented and voting" at the Annual Meeting (the "VOTES CAST") with respect to such matter. Accordingly, abstentions and broker non-votes will be counted for purposes of determining the presence or absence of the Quorum for the transaction of business, but will not be counted for purposes of determining the number of Votes Cast with respect to a proposal.
The name of, principal occupation of, and certain additional information about each of the three nominees and the three current directors with unexpired terms are set forth below. On August 5, 1997, all of the members of the Board other than Messrs. Woolard and Chang resigned and were replaced by Steven P. Jobs, Lawrence J. Ellison, William V. Campbell and Jerome B. York. One Class II director seat remained unfilled on Apple's Board after August 5, 1997 and, pursuant to an amendment to the Company's by-laws, has been eliminated, thereby reducing the number of directors on the Board from seven to six.
Shareholders are being asked to approve an amendment to the Company's Restated Articles of Incorporation which would, if approved, eliminate the classification of the Board and ensure that each director will stand for election annually. For a description of this proposal, see the section of this Proxy Statement entitled "PROPOSAL NO. 2--APPROVAL OF AN AMENDMENT TO THE COMPANY'S RESTATED ARTICLES OF INCORPORATION TO ELIMINATE CLASSIFICATION OF THE BOARD OF DIRECTORS".
Listed below are the Class II directors nominated for re-election at the Annual Meeting. If shareholders approve the proposal to declassify the Board, all of the directors elected at the Annual Meeting will serve a one-year term expiring at the next annual meeting of shareholders.
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Listed below are the Class I directors whose two-year terms do not expire until the next annual meeting of shareholders.
WILLIAM V. CAMPBELL has been President and Chief Executive Officer and a director of Intuit Inc. since April 1994. From January 1991 to December 1993, Mr. Campbell was President and Chief Executive Officer of GO Corporation. From 1987 to January 1991, he served as President and Chief Executive Officer of Claris Corporation, a subsidiary of the Company. Mr. Campbell also serves on the board of directors of SanDisk Corporation and Great Plains Software.
GARETH C. C. CHANG has been Corporate Senior Vice President of Hughes Electronics since 1993. Previously, he was Corporate Vice President of McDonnell Douglas Corporation. He is currently a director of Mallinckrodt, Inc.
LAWRENCE J. ELLISON has been Chief Executive Officer and a director of Oracle Corporation ("ORACLE") since he co-founded Oracle in May 1977, and was President of Oracle until June 1996. Mr. Ellison has been Chairman of the Board of Oracle since June 1995. Mr. Ellison is a director of SuperGen, Inc. and Co- Chairman of California's Council on Information Technology.
STEVEN P. JOBS is one of the Company's co-founders and currently serves as its Interim Chief Executive Officer. Mr. Jobs is the also the Chairman and Chief Executive Officer of Pixar Animation Studios. In addition, Mr. Jobs co-founded NeXT Software, Inc. ("NEXT") and served as the Chairman and Chief Executive Officer of NeXT from 1985 until 1997, when NeXT was acquired by the Company.
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JEROME B. YORK has served as Vice Chairman of Tracinda Corporation since September 1995 and has served in a number of executive positions at Chrysler Corporation, including Executive Vice President-Finance and Chief Financial Officer from May 1990 to May 1993. He also served as a director of Chrysler Corporation from 1992 to 1993. In May 1993, he joined International Business Machines Corporation ("IBM") as Senior Vice President and Chief Financial Officer, and he served as a director of IBM from January 1995 to August 1995. Mr. York also is a director of USA Waste Services, Inc., MGM Grand, Inc. and Metro-Goldwyn-Mayer, Inc.
BOARD MEETINGS AND COMMITTEES
The Board met a total of twelve times during fiscal year 1997 and took action once by unanimous written consent in lieu of a meeting. The Board has a standing Audit and Finance Committee and a Compensation Committee. Until September 10, 1997, the Board maintained a Director Affairs Committee.
The current members of the Board's Audit and Finance Committee are Messrs. York and Campbell, neither of whom is an employee of the Company. The Audit and Finance Committee is primarily responsible for reviewing the services performed by the Company's independent auditors and internal audit department, evaluating the Company's accounting policies and its system of internal controls and reviewing significant finance transactions. The Audit and Finance Committee met three times during fiscal year 1997 and took action once by unanimous written consent in lieu of a meeting.
The current members of the Board's Compensation Committee (the "COMPENSATION COMMITTEE") are Messrs. Woolard and Chang, neither of whom is an employee of the Company. In fiscal year 1997, the members of the Compensation Committee were, through January 1997, Delano E. Lewis (Chairman), B. Jurgen Hintz and Katherine M. Hudson. From January 1997 through June 1997, the members of the Compensation Committee were Mr. Lewis (Chairman), Mr. Chang and Ms. Hudson. From June 1997 through July 1997, the Compensation Committee was comprised of Messrs. Lewis (Chairman), Chang and Woolard. In July 1997, Mr. Lewis resigned from the Board and Mr. Woolard became the Chairman of the Compensation Committee. No person who was an employee of the Company in fiscal year 1997 served on the Compensation Committee in fiscal year 1997. The Compensation Committee is primarily responsible for reviewing compensation to be paid to officers of the Company and for administering the Company's equity-based incentive plans. The Compensation Committee met eleven times during fiscal year 1997 and took action four times by unanimous written consent in lieu of a meeting.
Through September 10, 1997, the Board maintained a Director Affairs Committee. Messrs. Lewis and Woolard and Ms. Hudson were members of the Board's Director Affairs Committee at various times. Mr. Lewis and Ms. Hudson resigned from the Board on July 25, 1997 and August 5, 1997, respectively, and the Board officially dissolved the Director Affairs Committee on September 10, 1997. The Director Affairs Committee was primarily responsible for reviewing and recommending qualified candidates for election as directors to the Board. The Director Affairs Committee met three times during fiscal year 1997.
During fiscal year 1997, with the exception of Mr. Ellison, no director attended fewer than 75% of the aggregate of all meetings of the Board and the committees, if any, upon which such director served and which were held during the period of time that such person served on the Board or such committee.
DIRECTOR COMPENSATION
Prior to April 1, 1997, directors who were not employees of the Company were
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paid a retainer of $7,000 per quarter and a fee of $1,000 per Board meeting attended. No additional fees were paid for
3
As of August 5, 1997, the Company ended its practice of paying cash retainers and fees to directors, terminated the Prior Plan and approved the Apple Computer, Inc. 1997 Director Stock Option Plan (the "DIRECTOR PLAN"), pursuant to which the Company's non-employee directors are granted 30,000 stock options upon their initial election to the Board. On the fourth anniversary of a non-employee director's initial election to the Board and on each subsequent anniversary, the director will be entitled to receive 10,000 vested stock options.
Messrs. Woolard and Chang were each granted 15,000 stock options under the Prior Plan on March 25, 1997. In connection with the replacement of the Prior Plan with the Director Plan, Messrs. Woolard and Chang were permitted to retain their grants under the Prior Plan and received only 15,000 stock options for their initial grants under the Director Plan. For a description of the Director Plan and the automatic grants to Messrs. Woolard and Chang under the Prior Plan, see the section of the Proxy Statement entitled "PROPOSAL NO. 3--APPROVAL OF THE APPLE COMPUTER, INC. 1997 DIRECTOR STOCK OPTION PLAN AND INDEPENDENT STOCK OPTION GRANTS TO EDGAR S. WOOLARD, JR. AND GARETH C.C. CHANG". The Company reimburses non-employee directors for travel and other incidental expenses incurred in attending Board and committee meetings.
EXECUTIVE OFFICERS
The following sets forth certain information regarding the executive officers. Information pertaining to Mr. Jobs, who is both a director and an executive officer of the Company, may be found in the section of this Proxy Statement entitled "DIRECTORS".
FRED D. ANDERSON, Executive Vice President and Chief Financial Officer (age 53), joined the Company in April 1996. Prior to joining the Company, Mr. Anderson was Corporate Vice President and Chief Financial Officer of Automatic Data Processing, Inc. ("ADP"), a position he held from August 1992 to March 1996. Prior to joining ADP, Mr. Anderson held several domestic and international executive positions at MAI Basic Four, Inc., including President and Chief Operating Officer.
NANCY R. HEINEN, Senior Vice President, General Counsel and Secretary (age 41), joined the Company in September 1997. Prior to joining the Company, Ms. Heinen held the position of Vice President, General Counsel and Secretary of the Board of Directors at NeXT from February 1994 until the acquisition of NeXT by the Company in February 1997. Prior to joining NeXT, Ms. Heinen was Group Counsel and Assistant Secretary at Tandem Computers Incorporated from 1989 to 1994, and previously had been employed in private legal practice.
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MITCHELL MANDICH, Senior Vice President, Americas Sales and Service (age 49), joined the Company in Feburary 1997 upon the Company's acquisition of NeXT. Mr. Mandich has also served the Company in the position of Vice President, North American Business Division. Prior to joining the Company, Mr. Mandich held the position of Vice President, Worldwide Sales and Service with NeXT from December 1995 through February 1997. Before joining NeXT, Mr. Mandich served in the position of Senior Vice President, Americas Sales and Marketing with Pyramid Technology Corporation from January 1993 to November 1995.
JONATHAN RUBINSTEIN, Senior Vice President, Hardware Engineering (age 41), joined the Company in February 1997. Before joining the Company, Mr. Rubinstein was Executive Vice President and Chief Operating Officer of FirePower Systems Incorporated ("FIREPOWER"), from May 1993 to August 1996. Before joining FirePower, Mr. Rubinstein was Vice President and General Manager, Hardware and Vice President, Hardware Engineering at NeXT.
4
AVADIS TEVANIAN, JR., PH.D., Senior Vice President, Software Engineering (age 37), joined the Company in February 1997 upon the Company's acquisition of NeXT. With NeXT, Dr. Tevanian held several positions, including Vice President, Engineering, from April 1995 to February 1997. Prior to April 1995, Dr. Tevanian worked as an engineer with NeXT and held several management positions.
SINA TAMADDON, Vice President and General Manager, Newton Group (age 40), joined the Company in September 1997. Before joining the Company, Mr. Tamaddon held the position of Vice President, Europe with NeXT from September 1996 through March 1997. From August 1994 to August 1996, Mr. Tamaddon held the position of Vice President, Professional Services with NeXT. Prior to joining NeXT, Mr. Tamaddon served as Vice President, Advanced Technology for Software Alliance Incorporated.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 2, 1998 (the "TABLE DATE"), certain information with respect to the beneficial ownership of Common Stock. Based on information available to the Company, there are no shareholders known to the Company to be the beneficial owner of more than 5% of the outstanding Common Stock. The following table contains information concerning (i) each director of the Company and each nominee; (ii) each Named Executive Officer listed in the Summary Compensation Table below; and (iii) all directors and executive officers of the Company as a group. On the Table Date, 132,760,480 shares of Common Stock were issued and outstanding. Unless otherwise indicated, all persons named as beneficial owners of Common Stock have sole voting power and sole investment power with respect to the shares indicated as beneficially owned.
SECURITY OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
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(1) Dr. Amelio and Ms. Hancock resigned as executive officers of the Company effective as of July 8, 1997 and July 25, 1997, respectively. Messrs. De Luca and Calderoni resigned as executive officers effective as of October 10, 1997 and November 7, 1997, respectively.
(2) Messrs. Jobs and Rubinstein became executive officers of the Company during fiscal year 1997. Dr. Amelio, Messrs. Anderson, De Luca and Calderoni and Ms. Hancock became executive officers of the Company during fiscal year 1996.
(3) Mr. Jobs was granted 30,000 stock options in his capacity as a director of the Company pursuant to the Director Plan, subject to the approval of the Director Plan by shareholders at the Annual Meeting.
(4) Represents Dr. Amelio's annual Component B Bonus paid pursuant to the terms of his employment agreement and his separation agreement. For a description of the terms of Dr. Amelio's separation agreement, see the section of this Proxy Statement entitled "ARRANGEMENTS WITH NAMED EXECUTIVE OFFICERS--SEPARATION AGREEMENT WITH GILBERT F. AMELIO".
(5) For fiscal year 1997, these amounts represent the values on February 5, 1997 of the Common Stock underlying the Performance Shares earned by the Named Executive Officers under the terms of the Performance Share Plan.
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The amounts of Common Stock earned by participating Named Executive Officers are as follows: Dr. Amelio - 33,400; Mr. Anderson - 2,672; Mr. De Luca - 2,004; Mr. Calderoni - 626; and Mr. Rubinstein - 1,253. No dividends were paid on the Performance Shares. As of the last day of fiscal year 1997, the Named Executive Officers held no other Performance Shares or restricted stock.
(6) Consists of (i) a lump sum severance payment of $6,731,871 paid pursuant to the terms of Dr. Amelio's separation agreement, $1,500,000 of which was immediately applied in partial repayment of his outstanding indebtedness to the Company, (ii) $8,272, the value of certain computer equipment that Dr. Amelio was permitted to keep or which the Company agreed to deliver after his termination of employment pursuant to the terms of his separation agreement, (iii) a $4,194 matching contribution made by the Company in accordance with the terms of its 401(k) plan and (iv) the payment by the Company of $4,757 of premiums on a life insurance policy for the benefit of Dr. Amelio.
(7) Represents the value on February 2, 1996 of 130,960 shares of Common Stock earned by Dr. Amelio for fiscal year 1996 under the Performance Share Plan. No dividends were paid on the Performance Shares.
(8) Pursuant to Dr. Amelio's separation agreement, 800,000 of the options granted to him during fiscal year 1996 were forfeited upon his resignation
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of employment, which became effective on September 27, 1997.
(9) Consists of matching contributions made by the Company in accordance with the terms of its 401(k) plan.
(10) Includes the replacement of 500,000, 309,750 and 200,000 options that were previously granted to Messrs. Anderson, De Luca and Rubinstein, respectively, and canceled pursuant to the Stock Option Exchange Program (the "EXCHANGE PROGRAM"), which is described in the section of this Proxy Statement entitled "STOCK OPTION EXCHANGE PROGRAM".
(11) Consists of $245,497 in relocation assistance and $4,992 in matching contributions made by the Company in accordance with the terms of its 401(k) plan.
(12) Consists of $140,155 in relocation assistance and $1,206 in matching contributions made by the Company in accordance with the terms of its 401(k) plan.
(13) Consists of $158,373 in relocation assistance and $11,140 in matching contributions made by the Company in accordance with the terms of its 401(k) plan.
(14) Consists of $49,451 in relocation assistance and $12,876 in matching contributions made by the Company in accordance with the terms of its 401(k) plan.
(15) Paid pursuant to the terms of Mr. Calderoni's employment agreement with the Company, which agreement terminated upon his resignation as an employee of the Company effective November 7, 1997. For a description of employment agreements with Named Executive Officers, see the section of this Proxy Statement entitled "ARRANGEMENTS WITH NAMED EXECUTIVE OFFICERS--EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS".
(16) Paid pursuant to the terms of Ms. Hancock's employment agreement with the Company, which agreement terminated upon her resignation as an employee of the Company effective July 25, 1997.
(17) Consists of a severance payment made by the Company to Ms. Hancock pursuant to the terms of her employment agreement with the Company.
(18) Ms. Hancock forfeited 200,000 of these stock options upon her termination of employment.
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The following table provides information about option grants to the Named Executive Officers during fiscal year 1997.
OPTION GRANTS IN LAST FISCAL YEAR
(1) Based on an aggregate of 19,629,231 options granted to all employees during fiscal year 1997, including 7,866,155 options granted in exchange for the cancellation of the same number of outstanding options as of July 11, 1997 on a one-for-one basis pursuant to the Exchange Program. This amount does not include (i) NeXT options which were converted into Apple options during fiscal year 1997 in connection with Apple's acquisition of NeXT or (ii) Apple options granted to Dr. Amelio during fiscal year 1996 which were subject to shareholder approval obtained during fiscal year 1997. Options vest in three equal annual installments commencing on the first anniversary of the date of grant.
(2) All options were granted at an exercise price equal to fair market value based on the closing market value of Common Stock on the Nasdaq National Market on the trading day immediately preceding the date of grant. For administrative purposes, the Board on November 5, 1997 amended the Company's stock option plans to provide that the exercise price of options granted under such plans will be the fair market value based on the closing market value on the date of grant.
(3) Potential gains are net of exercise price, but before taxes associated with exercise. These amounts represent certain assumed rates of appreciation only, based on SEC rules, and do not represent the Company's estimate or projection of the price of the Company's stock in the future. Actual gains, if any, on stock option exercises depend upon the actual future price of
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Common Stock and the continued employment of the option holders throughout the vesting period. Accordingly, the potential realizable values set forth in this table may not be achieved.
(4) Mr. Jobs was granted 30,000 stock options in his capacity as a director of the Company pursuant to the Director Plan, subject to the approval of the Director Plan by shareholders at the Annual Meeting.
(5) Grants of stock options pursuant to the Exchange Program in exchange for the cancellation of outstanding stock options. The first grant of stock options listed in the table above for each of Messrs. Anderson, De Luca and Rubinstein was canceled in connection with the Exchange Program and is no longer outstanding.
(6) All stock options held by Messrs. De Luca and Calderoni were forfeited upon their termination of employment.
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The following table provides information about stock option exercises by the Named Executive Officers during fiscal year 1997 and stock options held by each of them at fiscal year-end.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
(1) Market value of underlying securities (based on the fair market value of Common Stock on the Nasdaq National Market) at the time of exercise, minus the exercise price.
(2) Market value of securities underlying in-the-money options at the end of fiscal year 1997 (based on $21.3125 per share, the closing price of Common Stock on the Nasdaq National Market on September 26, 1997), minus the exercise price.
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(3) Forfeited upon termination of employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The composition of the Compensation Committee changed several times during fiscal year 1997. No person who was an employee of the Company in fiscal year 1997 served on the Compensation Committee in fiscal year 1997. During fiscal year 1997, no executive officer of the Company (i) served as a member of the compensation committee (or other board committee performing similar functions or, in the absence of any such committee, the board of directors) of another entity, one of whose executive officers served on the Company's Compensation Committee, (ii) served as a director of another entity, one of whose executive officers served on the Company's Compensation Committee, or (iii) served as a member of the compensation committee (or other board committee performing similar functions or, in the absence of any such committee, the board of directors) of another entity, one of whose executive officers served as a director of the Company.
STOCK OPTION EXCHANGE PROGRAM
The following table sets forth certain information concerning the Exchange Program, including (i) the name and position of each executive officer who participated in the Exchange Program, (ii) the date of any such exchange, (iii) the number of securities underlying exchanged options, (iv) the per share market price of the underlying security at the time of the exchange, (v) the original exercise price or base price of the canceled option at the time of exchange, (vi) the per share exercise of the option received in exchange for the existing option and (vii) the original option term remaining at the date of exchange.
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(1) All options received by Messrs. De Luca, Manovich and Douglas pursuant to the Exchange Program were forfeited upon termination of employment.
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After meeting with an outside compensation consultant and considering various alternatives to address employee retention and long-term compensation, the Compensation Committee approved the Exchange Program on July 11, 1997. Pursuant to the Exchange Program, all individuals who held stock options granted under one of the Company's stock option plans were offered the opportunity to exchange all of their stock options for new stock options with an exercise price of $13.25, the fair market value of the Common Stock as determined under the terms of the 1990 Plan. All new stock options issued pursuant to the Exchange Program were issued under the 1990 Plan. No partial exchanges were permitted. Stock options originally granted by NeXT were not permitted to be exchanged under the Exchange Program. In addition, the new stock options issued under the Exchange Program were issued on a one-for-one basis with the stock options exchanged and were made subject to a new three-year vesting schedule. All stock options issued under the Exchange Program will expire on July 11, 2007. A total of 7,866,155 stock options were exchanged by the Company's employees.
Stock options are intended to provide incentives to the Company's officers and employees. The Compensation Committee believes that such equity incentives
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are a significant factor in the Company's ability to attract, retain and motivate employees who are critical to the Company's long-term success. The disparity between the original exercise prices of the Company's outstanding stock options and the market price for the Common Stock did not provide, in the judgment of the Compensation Committee, a meaningful incentive or retention device to the employees holding those stock options and, therefore, the Compensation Committee determined that offering the Exchange Program to employees was in the best interests of the Company and its shareholders.
MEMBERS OF THE COMPENSATION COMMITTEE
Edgar S. Woolard, Jr. (Chairman) Gareth C.C. Chang
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The following graph shows a five-year comparison of cumulative total shareholder return, calculated on a dividend reinvested basis, for the Company, the S&P 500 Composite Index (the "S&P 50011) and the S&P Computers (Hardware) Index (the "INDUSTRY INDEX"). The graph assumes $100 was invested in each of the Common Stock, the S&P 500 and the Industry Index on September 30, 1992. Data points on the graph are annual. Note that historic stock price performance is not necessarily indicative of future stock price performance.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ARRANGEMENTS WITH NAMED EXECUTIVE OFFICERS
The Company has from time to time entered into employment, retention and severance arrangements with certain of its Named Executive Officers. A summary of the terms of such arrangements is set forth in the following paragraphs.
SEPARATION AGREEMENT WITH GILBERT F. AMELIO
Pursuant to a separation agreement with the Company, Dr. Amelio resigned as an officer of the Company as of July 8, 1997 and as an employee of the Company as of September 27, 1997. Pursuant to his separation agreement, Dr. Amelio received a lump sum payment of $6,731,871, less $1,500,000, which was immediately applied to the partial repayment of Dr. Amelio's outstanding $5 million loan from the Company. In addition, Dr. Amelio received a payment of $1,000,000 representing the fiscal year 1997
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Component B Bonus provided for in his employment agreement. Dr. Amelio was permitted to remain a participant in the Performance Share Plan for fiscal year 1997. In addition, Dr. Amelio is entitled to continued health benefits for himself and his family through February 2, 2001, the end of the original term of his employment agreement. Pursuant to the separation agreement, the maturity date of Dr. Amelio's $5 million loan from the Company made to him in accordance with the terms of his employment agreement was extended to September 15, 1998, whereupon the entire outstanding balance will become due and payable. Dr. Amelio forfeited 800,000 unvested stock options upon his termination of employment on September 27, 1997. For more information regarding the loan from the Company to Dr. Amelio, see the section of this Proxy Statement entitled "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
The Company entered into an employment agreement with Mr. Anderson effective April 1, 1996, pursuant to which he serves as Executive Vice President and Chief Financial Officer of the Company. Pursuant to his agreement, Mr. Anderson is entitled to an annual base salary of no less than $500,000 and a target bonus under the Bonus Plan for fiscal year 1997 of 80% of his base salary, which target bonus will thereafter be reviewed annually by the Company. In fiscal year 1997, however, no cash bonuses were paid under the Bonus Plan. During fiscal year 1997, the Company paid Mr. Anderson the second half of an $800,000 hiring bonus. If Mr. Anderson's employment is terminated by the Company without "Cause" at any time during the five-year period following April 1, 1996, he will be entitled to receive a lump sum severance payment equal to the sum of his annual base salary and target bonus. Mr. Anderson's agreement generally defines "Cause" to include a felony conviction, willful disclosure of confidential information or willful and continued failure to perform his employment duties.
The Company entered into an employment agreement with Ms. Hancock, effective July 8, 1996, pursuant to which she served as Executive Vice President and Chief Technology Officer until her termination of employment on July 25, 1997. Pursuant to her agreement, Ms. Hancock was entitled to receive a base salary of $480,000 and a bonus of $360,000 during fiscal year 1997. Upon Ms. Hancock's termination of employment with the Company, she received $480,000 in a lump sum severance payment.
The Company entered into an employment agreement with Mr. Calderoni, effective July 8, 1996, pursuant to which he served as Senior Vice President, Corporate Controller until his termination of employment on November 7, 1997. Pursuant to his agreement, Mr. Calderoni was entitled to receive a base salary of $275,000 and was guaranteed a minimum bonus of $75,000 for fiscal year 1997.
CHANGE IN CONTROL ARRANGEMENTS--STOCK OPTIONS
In the event of a "change in control" of the Company, all outstanding options under the Company's stock option plans will, unless otherwise determined by the plan administrator, become exercisable in full, and will be cashed out at an amount equal to the difference between the applicable "change in control price" and the exercise price. A "change in control" under these plans is generally defined as (i) the acquisition by any person of 50% or more of the combined voting power of the Company's outstanding securities or (ii) the occurrence of a transaction requiring shareholder approval and involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation.
CHANGE IN CONTROL ARRANGEMENTS -- RETENTION AGREEMENTS
The Company is currently party to retention agreements (the "RETENTION
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AGREEMENTS") with two Named Executive Officers (Messrs. Anderson and Rubinstein) providing for certain cash payments in the event of a termination of an executive's employment following a change in control of the Company. For purposes of the Retention Agreements, a "change in control" is defined as (i) a reorganization, merger, consolidation or other corporate transaction in which the holders of voting stock of the Company
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immediately before the corporate transaction will not own more than 50% of the voting shares of the continuing or surviving corporation immediately after such corporate transaction, (ii) the acquisition of 30% or more of the combined voting power of the Company's then-outstanding securities, (iii) a change of 50% in the membership of the Board within a two-year period, unless the election or nomination for election by shareholders of an adequate number of directors within such period was approved by the vote of at least three-fourths of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, (iv) all or substantially all of the assets of the Company are sold, liquidated or distributed, or (v) a "change in control" or a "change in the effective control" of the Company within the meaning of Section 280G of the Code.
In the event of an Involuntary Termination (as defined in the Retention Agreements) of any executive officer who is a party to a Retention Agreement within two years following a change in control, such executive officer will receive a cash payment equal to the sum of (i) three times his annual base salary immediately prior to the date of his termination or, if greater, the highest annualized base salary in effect during the three-year period ending on the change in control, and (ii) three times his target bonus for the year in which the termination occurs or, if greater, the highest target annual bonus applicable to the executive officer in any of the three years ending prior to the change in control. In addition, the executive officer would be eligible to participate in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to him until the second anniversary of his date of termination.
The Retention Agreements further provide that, in the event of an Involuntary Termination of an executive officer on or following a change in control, such executive officer's equity awards granted to him under the Company's equity-based incentive plans (the "EQUITY PLANS") will vest and become exercisable. All equity awards also will vest and become exercisable as of the date of a change in control as defined in the Equity Plans, regardless of whether the executive officer's employment has then terminated. Subject to certain limits on payments, the Retention Agreements also require tax gross-up payments to the executive officers to mitigate any excise tax imposed on the executive officers under Section 4999 of the Code in connection with a change in control.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's use of an aircraft owned by Aero Ventures, an entity wholly owned by Dr. Amelio, the Company made monthly payments of approximately $14,000 to Aero Ventures during fiscal year 1997 through the date of Dr. Amelio's termination of employment. The Company also paid for certain other expenses, including pilot and copilot fees, parking and landing fees and simulator training and fuel expenses. During fiscal year 1997, the Company paid approximately $471,461 to Aero Ventures in the aggregate. Pursuant to the terms of Dr. Amelio's separation agreement, the Company's obligation to make payments
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in connection with the use of his aircraft ended upon his termination of employment.
Pursuant to the terms of Dr. Amelio's employment agreement with the Company, the Company extended a $5 million loan to Dr. Amelio in February 1996, which was to be repaid over a period of 5 years. The largest aggregate amount of indebtedness outstanding on this loan during fiscal year 1997 was $5 million. Upon the termination of Dr. Amelio's employment with the Company, $1.5 million of his severance was immediately applied in partial repayment of the outstanding loan balance. Pursuant to Dr. Amelio's employment agreement, the loan was to become due and payable on the 90th day after his termination of employment. However, in consideration for Dr. Amelio's executing a release of the Company from certain legal claims, the Company agreed to extend the maturity date of the loan to September 15, 1998. The loan bears interest at the rate of 7% and is secured by real estate owned by Dr. Amelio.
In connection with a relocation assistance package, the Company loaned James McCluney (Senior Vice President, Operations) $100,000 bearing interest at the rate of 7.31%. The largest amount of the indebtedness outstanding on this loan during fiscal year 1997 was $100,000.
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This Proxy Statement contains four proposals requiring shareholder action. Proposal No. 1 requests the election of three directors to the Company's Board. Proposal No. 2 requests that shareholders approve an amendment to the Company's Restated Articles of Incorporation which would, if approved, declassify the Board and ensure that each director will stand for election annually. Proposal No. 3 requests approval of the Director Plan, the previous grants of stock options to two non-employee directors of the Company under a prior plan and the reservation for issuance under the Plan and previous grants of 430,000 shares of Common Stock in the aggregate. Proposal No. 4 requests approval of the 1998 Executive Officer Stock Plan and the reservation for issuance thereunder of 17,000,000 shares of Common Stock. Proposal No. 5 requests ratification of the Company's independent auditors. Each of the proposals is discussed in more detail in the pages that follow.
PROPOSAL NO. 1 ELECTION OF DIRECTORS
Three directors are to be elected at the Annual Meeting. The Board has nominated three of the current Class II directors to be re-elected. Holders of proxies solicited by this Proxy Statement will vote the proxies received by them as directed on the proxy card or, if no direction is made, for the election of the Board's three nominees below. If any nominee is unable or declines to serve as a director at the time of the Annual Meeting, the proxy holders will vote for a nominee designated by the present Board to fill the vacancy. It is not presently expected that any nominee will be unable or will decline to serve as a director.
The Board's nominees for re-election at this Annual Meeting are Messrs. Jobs, Woolard and Ellison.
VOTE REQUIRED
The three nominees for director receiving the highest number of affirmative
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votes of the shares entitled to be voted for them shall be elected as directors. Votes withheld from any director are counted for purposes of determining the presence or absence of the Quorum, but have no other legal effect under California law.
RECOMMENDATION
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR RE-ELECTION OF MESSRS. JOBS, WOOLARD AND ELLISON.
PROPOSAL NO. 2 APPROVAL OF AN AMENDMENT TO THE COMPANY'S RESTATED ARTICLES OF INCORPORATION TO ELIMINATE CLASSIFICATION OF THE BOARD OF DIRECTORS
PROPOSED ACTION
The Board is proposing an amendment (the "AMENDMENT") to the Company's Restated Articles of Incorporation (the "RESTATED ARTICLES") to eliminate the classification of the Board and thereby ensure that each director will stand for election annually.
DESCRIPTION OF PROPOSAL
Article VII of the Restated Articles currently provides that the Board shall be divided into two classes, Class I and Class II, each class consisting of one-half of the total number of directors or as close an approximation as possible. The Restated Articles further provide that each director shall be elected for a term running until the second annual meeting of shareholders of the Company next succeeding his or her election. An amendment to the Restated Articles instituting classification of the Board was approved by the shareholders of the Company in January 1990.
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The Board has determined that the declassification of the Board should become effective commencing with the annual meeting of shareholders of the Company in fiscal year 1999, so as not to shorten the term of the Class I directors. Accordingly, if this proposal is approved by the shareholders, the terms of all directors will end at the annual meeting of shareholders of the Company in fiscal year 1999, and all directors elected at that annual meeting will have one-year terms.
If the Amendment is approved by the shareholders, Article VII of the Restated Articles will be amended as set forth in Appendix A hereto.
VOTE REQUIRED
The affirmative vote of a majority of the shares of Common Stock of the Company outstanding as of the Record Date will be required to approve the Amendment.
RECOMMENDATION
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THE BOARD HAS UNANIMOUSLY APPROVED THE AMENDMENT AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE AMENDMENT.
PROPOSAL NO. 3 APPROVAL OF THE APPLE COMPUTER, INC. 1997 DIRECTOR STOCK OPTION PLAN AND INDEPENDENT STOCK OPTION GRANTS TO EDGAR S. WOOLARD, JR. AND GARETH C.C. CHANG
PROPOSED ACTION
The shareholders are being asked to approve (i) the 1997 Director Stock Option Plan (the "DIRECTOR PLAN"), which provides for the reservation for issuance of 400,000 shares of Common Stock to directors of the Company who are not employees of the Company upon the exercise of stock options granted under the Director Plan, and (ii) the grant of 15,000 stock options under the Prior Plan (as defined below) to each of Mr. Woolard and Mr. Chang in connection with the Prior Plan (as defined below), and the reservation of 30,000 shares of Common Stock for issuance in connection with such options.
DESCRIPTION OF PROPOSAL
The Director Plan provides for automatic, non-discretionary awards of stock options to non-employee directors. The Board adopted the Director Plan on August 5, 1997, subject to shareholder approval at the Annual Meeting.
On March 25, 1997, the Board adopted a plan (the "PRIOR PLAN") which provided for a combination of automatic, non-discretionary awards of stock options as well as cash fees to the Company's non-employee directors. Pursuant to the Prior Plan, each non-employee director at that time received a grant of 15,000 stock options (the "PRIOR GRANTS"), subject to the approval of shareholders. In its effort to move away from cash-based retainers for its directors, the Board subsequently terminated the Prior Plan, replacing it with the Director Plan. However, upon terminating the Prior Plan, the Board determined that Messrs. Woolard and Chang would be permitted to keep their Prior Grants, subject to shareholder approval.
Summarized below are certain key provisions of the Director Plan. The following description is subject in its entirety to the text of the Director Plan, which is set forth in Appendix B hereto.
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PURPOSE. The Director Plan provides for the automatic grant of stock options to non-employee directors. The purposes of the Director Plan are to promote the Company's long-term growth and financial success by attracting, motivating and retaining non-employee directors of outstanding ability, and to foster a greater identity of interest between the Company's non-employee directors and shareholders.
ELIGIBILITY. Only directors who are not employees of the Company or any of its subsidiaries may participate in the Plan. All members of the Board are currently eligible to participate in the Director Plan.
SHARES AVAILABLE FOR ISSUANCE. A total of 400,000 shares of Common Stock will be available for issuance under the Director Plan. If an option lapses, expires or is otherwise terminated without the issuance of shares, or if shares are tendered to pay the exercise price of an option, the shares underlying the
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lapsed, expired or terminated option or the tendered shares will not reduce the aggregate number of shares available for issuance under the Plan. Either authorized and unissued shares of Common Stock or treasury shares will be issued under the Director Plan. The number of shares available for issuance will be adjusted if there is a change in the Company's capitalization, a merger, or a similar transaction.
GRANTS OF STOCK OPTIONS. Each non-employee director received an initial grant of 30,000 options on August 14, 1997 ("INITIAL OPTIONS"), except Messrs. Woolard and Chang, who each received 15,000 options. Non-employee directors who are subsequently elected to the Board will similarly be granted 30,000 Initial Options. Each non-employee director will be granted 10,000 options on the fourth anniversary of the non-employee director's initial election or appointment to the Board and on each subsequent anniversary ("ANNUAL OPTIONS"). The exercise price of each option will be the closing sales price for the Common Stock as quoted on the Nasdaq National Market on the date of grant. Initial Options vest and become exercisable in equal annual installments on each of the first through third anniversaries of the date of grant. Annual Options are fully vested and immediately exercisable on their date of grant. Upon a change in control of the Company, all unvested options held by non-employee directors will become fully vested and exercisable and will be cashed out at a price equal to the excess of the value of the consideration offered in connection with the change in control over the exercise price of the options.
TERMINATIONS OF SERVICE. In general, if a non-employee director ceases to be a member of the Board, the director's options will be exercisable by the director for a period of 90 days, to the extent vested at the time of termination of service. If a non-employee director's service on the Board terminates by reason of the director's death, the director's vested options will remain outstanding and the director's beneficiary may exercise the options at any time through the third anniversary of the director's death. If a non- employee director is removed from the Board for "cause" (as determined by the Board in accordance with the Company's by-laws), all of the director's options, whether or not vested, will immediately be forfeited.
ADMINISTRATION. The Chief Financial Officer of the Company or the individual appointed by the Chief Executive Officer of the Company (the "ADMINISTRATOR") will administer the Director Plan. The Administrator will have authority to adopt rules and regulations that it considers necessary or appropriate to carry out the purposes of the Director Plan and to interpret and construe the provisions of the Plan.
AMENDMENT AND TERMINATION. The Board will have authority to amend or terminate the Director Plan at any time. However, the Board may not, without shareholder approval, increase the number of shares available for issuance.
TERM. Unless terminated earlier by the Board, the Director Plan will expire on August 14, 2007. No further stock options will be awarded under the Director Plan after that date.
STOCK PRICE. On February 23, 1998, the closing price of the Common Stock as quoted on the Nasdaq National Market was $21.25.
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effect. The director will not recognize taxable income and the Company will not receive a tax deduction. When the director exercises the option, the director will recognize ordinary income and the Company will receive a tax deduction, in each case measured by the difference between the exercise price and the fair market value of the shares on the date of exercise. When the director sells Common Stock obtained from exercising a stock option, any gain or loss will be taxed as a capital gain or loss (long-term or short-term, depending on how long the shares have been held).
NEW PLAN BENEFITS. The following table sets forth the number of stock options that were awarded in 1997 to current non-employee directors, subject to shareholder approval of the Director Plan and the separate stock option grants to Messrs. Woolard and Chang under the Prior Plan.
NEW PLAN BENEFITS TABLE FOR APPROVAL OF THE APPLE COMPUTER, INC. 1997 DIRECTOR STOCK OPTION PLAN AND THE SEPARATE STOCK OPTION GRANTS TO MESSRS. WOOLARD AND CHANG
* As described above, Messrs. Woolard and Chang each received a grant of 15,000 stock options on March 25, 1997 in connection with grants to all non-employee directors then serving on the Board. The exercise price of these options is $16.50. Upon termination of the Prior Plan and adoption of the Director Plan, Messrs. Woolard and Chang received grants of 15,000, rather than 30,000, options.
** The only executive officer who participates in the Director Plan is Mr. Jobs, who is currently serving as the Company's Interim Chief Executive Officer.
*** Includes the non-employee directors listed in this table, other than Mr. Jobs.
VOTE REQUIRED
The affirmative vote of (i) a majority of the Votes Cast and (ii) a majority of the Quorum will be required to approve this Proposal.
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RECOMMENDATION
THE BOARD HAS APPROVED THE DIRECTOR PLAN AND, PURSUANT TO ITS PRIOR APPROVAL OF THE PRIOR PLAN, THE GRANTS OF 15,000 STOCK OPTIONS EACH TO MESSRS. WOOLARD AND CHANG. ACCORDINGLY, THE BOARD HAS APPROVED THE RESERVATION OF 400,000 SHARES FOR ISSUANCE UNDER THE DIRECTOR PLAN AND 30,000 SHARES UNDER THE TWO PRIOR GRANTS. THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE DIRECTOR PLAN, THE PRIOR GRANTS AND THE RESERVATION OF 430,000 SHARES IN THE AGGREGATE FOR ISSUANCE THEREUNDER.
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PROPOSAL NO. 4 APPROVAL OF THE 1998 EXECUTIVE OFFICER STOCK PLAN
PROPOSED ACTION
The shareholders are being asked to approve the 1998 Executive Officer Stock Plan (the 111998 Plan"). The 1998 Plan is intended to replace the Apple Computer, Inc. 1990 Plan (the "1990 Plan") which was approved by Apple's shareholders at Apple's 1990 Annual Meeting of Shareholders. If the 1998 Plan is approved by shareholders, authority to make future grants under the 1990 Plan will be terminated, although previously granted awards under the 1990 Plan will remain outstanding in accordance with their terms. Apple's Board of Directors decided to adopt an entirely new plan (a) to increase the number of shares of Common Stock that may be subject to awards; (b) to expand the types of stock-based and performance related awards that may be granted to participants; and (c) to otherwise adopt provisions intended to enable the Compensation Committee to better promote its goals and policies with respect to executive compensation. If approved, a total of 17,000,000 shares of Common Stock will be available for issuance under the 1998 Plan upon the exercise of stock options, stock appreciation rights or stock purchase rights granted under the 1998 Plan.
DESCRIPTION OF THE PROPOSAL
The Board of Directors has approved, subject to subsequent shareholder approval at the Annual Meeting, the 1998 Plan, pursuant to which the Chairman and executive officers of the Company at the level of Senior Vice President and above and other key employees may be granted stock options, stock appreciation rights and stock purchase rights. As of February 23, 1998, no stock options, stock appreciation rights or stock purchase rights had been granted pursuant to the 1998 Plan. Shareholder approval of the 1998 Plan is sought to (1) meet the requirements of the Nasdaq National Market; (2) qualify certain compensation under the 1998 Plan as performance-based compensation that is tax deductible without limitation under Section 162(m) of the Code; and (3) qualify certain stock options to be granted under the 1998 Plan as incentive stock options.
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Summarized below are certain key provisions of the 1998 Plan. The following description is subject in its entirety to the text of the 1998 Plan, which is set forth in Appendix C hereto.
DESCRIPTION OF THE 1998 PLAN
PURPOSE. The primary purpose of the 1998 Plan is to attract and retain the best available personnel for positions of substantial responsibility with the Company. In particular, it is contemplated that a substantial majority of the shares reserved for issuance under the 1998 Plan will be used for grants to the Chairman and senior executive officers, including a Chief Executive Officer and Chief Operating Officer and other key employees of the Company. The Board believes that such grants will be necessary to attract and retain critical executive personnel to the Company. Mr. Jobs is currently serving as interim Chief Executive Officer of the Company. In the event that Mr. Jobs continues in this position, the Board intends to grant options, stock appreciation rights or stock purchase rights to him under the 1998 Plan.
ELIGIBILITY; LIMITATIONS. Options, stock appreciation rights and stock purchase rights may be granted under the 1998 Plan. Options granted under the 1998 Plan may be either "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock options. Nonstatutory stock options, stock appreciation rights and stock purchase rights may be granted under the 1998 Plan to the Chairman of the Company and to executive officers of the Company and any parent or subsidiary of the Company. Incentive stock options may only be granted to executive officers of the Company. The Administrator, in its discretion, selects the person(s) to whom options, stock appreciation rights and stock purchase rights may be granted, the time or times at which such options, stock appreciation rights and stock purchase rights shall be granted, and the number of shares subject to
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each such grant. For this reason, it is not possible to determine the benefits or amounts that will be received by any particular individual or individuals in the future. The 1998 Plan provides that no person(s) may be granted, in any fiscal year of the Company, options, stock appreciation rights or stock purchase rights to purchase more than 17,000,000 shares of Common Stock.
SHARES AVAILABLE FOR ISSUANCE. A total of 17,000,000 shares of Common Stock will be available for issuance under the 1998 Plan. If an option, stock appreciation right or stock purchase right lapses, expires or is otherwise terminated without the issuance of shares, or if shares are tendered to pay the exercise price of an option, stock appreciation right or stock purchase right, the shares underlying the lapsed, expired or terminated option, stock appreciation right or stock purchase right or the tendered shares, shall revert to the 1998 Plan. The number of shares available for issuance will be adjusted if there is a change in the Company's capitalization, a merger, or a similar transaction.
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ADMINISTRATION. The Plan may generally be administered by the Board or a Committee appointed by the Board (as applicable, the "Administrator°).
TERMS AND CONDITIONS OF OPTIONS. Each option is evidenced by a stock option agreement between the Company and the optionee, and is subject to the following additional terms and conditions:
(a) EXERCISE PRICE. The Administrator determines the exercise price of options at the time the options are granted. The exercise price of an incentive stock option may not be less than 100% of the fair market value of the Common Stock on the date such option is granted; provided, however, the exercise price of an incentive stock option granted to a 10% shareholder may not be less than 110% of the fair market value of the Common Stock on the date such option is granted. The fair market value of the Common Stock is generally determined with reference to the closing sale price for the Common Stock (or the closing bid if no sales were reported) on the date the option is granted.
(b) EXERCISE OF OPTION; FORM OF CONSIDERATION. The Administrator determines when options become exercisable, and may in its discretion, accelerate the vesting of any outstanding option. Stock options granted under the 1998 Plan generally vest and become exercisable over four years. The 1998 Plan permits payment to be made by cash, check, promissory note, other shares of Common Stock of the Company (with some restrictions), cashless exercises, a reduction in the amount of any Company liability to the optionee, any other form of consideration permitted by applicable law, or any combination thereof.
(c) TERM OF OPTION. All options granted under the 1998 Plan expire ten years from the date of grant, unless a shorter term is provided in the option agreement. The term of an incentive stock option may be no more than ten (10) years from the date of grant; provided that in the case of an incentive stock option granted to a 10% shareholder, the term of the option may be no more than five (5) years from the date of grant. No option may be exercised after the expiration of its term.
(d) TERMINATION OF EMPLOYMENT. If the optionee's employment or status as Chairman terminates for any reason other than death or unless the Administrator otherwise approves, then options may be exercised no later than 90 days after such termination and may be exercised only to the extent the option was exercisable on the termination date. Special provisions apply in the case of death of the optionee.
(e) DEATH. If an optionee ceases to be an employee or Chairman as a result of his or her death, then all options held by such optionee under the 1998 Plan may be exercised at any time within six months after death, or such other period up to twelve months as may be provided in the option agreement, but only to the extent the options would have been exercisable within six months after the date
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of death.
(f) NONTRANSFERABILITY OF OPTIONS, STOCK APPRECIATION RIGHTS OR STOCK PURCHASE RIGHTS. Unless determined otherwise by the Administrator, options, stock appreciation rights and stock purchase rights granted under the 1998 Plan are not transferable other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order, and may be exercised during the optionee's lifetime only
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by the optionee, or in the event of death, by the optionee's estate or by a person who acquires the right to exercise the option, stock appreciation right or stock purchase right.
(g) OTHER PROVISIONS. The stock option agreement may contain other terms, provisions and conditions not inconsistent with the 1998 Plan as may be determined by the Administrator.
STOCK APPRECIATION RIGHTS. The Administrator is authorized to grant stock appreciation rights in connection with all or any part of an option granted under the 1998 Plan, either concurrently with the grant of the option or at any time thereafter, and to grant stock appreciation rights independently of options. A stock appreciation right granted in connection with an option is exercisable only when and to the extent that the underlying option is exercisable, and expires no later than the date on which the underlying option expires. Independent stock appreciation rights are exercisable in whole or in part at such times as the Administrator specifies in the grant or agreement.
The Company's obligations arising upon the exercise of a stock appreciation right may be paid in cash or Common Stock, or any combination of the same, as the Administrator may determine. Shares issued upon the exercise of a stock appreciation right are valued at their fair market value as of the date of exercise. When a stock appreciation right is exercised, the aggregate number of shares of Common Stock available for issuance under the 1998 Plan will be reduced by the number of underlying shares of Common Stock as to which the stock appreciation right is exercised.
STOCK PURCHASE RIGHTS. The Administrator is authorized to grant stock purchase rights under the 1998 Plan, either concurrently with a grant of options or stock appreciation rights and/or cash awards made outside of the 1998 Plan or at any time thereafter, and to grant stock purchase rights independently of other awards. In the case of stock purchase rights, unless the Administrator determines otherwise, the agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the agreement shall be the original price paid by the purchaser and may be paid by cancellation of any
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indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event that the stock of the Company changes by reason of any stock split, reverse stock split, stock dividend, combination, reclassification or other similar change in the capital structure of the Company effected without the receipt of consideration, appropriate adjustments shall be made in the number and class of shares of stock subject to the 1998 Plan, the number and class of shares of stock subject to any option, stock appreciation right or stock purchase right outstanding under the 1998 Plan, and the exercise price of any such outstanding option, stock appreciation right or stock purchase right.
In the event of a liquidation or dissolution, any unexercised options, stock appreciation rights or stock purchase rights will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in its discretion, provide that each optionee shall have the right to exercise all of the optionee's options, stock appreciation rights and stock purchase rights as to all or any part of the optioned stock, stock appreciation right or stock purchase right, including those shares not otherwise exercisable.
CHANGE IN CONTROL. In the event of a "change in control" of the Company (as defined below), all options, stock appreciation rights and stock purchase rights outstanding under the 1998 Plan as of the date on which such change in control occurs will, unless otherwise determined by the Administrator, become fully exercisable and the value of all outstanding options, stock appreciation rights and stock purchase rights will be cashed out. The cash-out price will be the difference between the exercise price and the defined "change in control price."
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A "change in control" is defined as (i) the acquisition by any person of 50% or more of the combined voting power of the Company's outstanding securities, or (ii) the occurrence of a transaction requiring shareholder approval and involving the sale of all or substantially all the assets of the Company or the merger of the Company with or into another corporation. The "change in control price" is determined by the Administrator and may be either (x) the highest closing price of Common Stock as reported in the public market during the 60-calendar-day period immediately preceding the date of determination of the change in control price or (y) the highest price paid or offered (as determined by the Administrator) in any bona fide transaction or offer related to the change in control of the Company during the 60-calendar-day period preceding the date of determination of the change in control price.
In the event of a sale of all or substantially all the assets of the Company or the merger of the Company with or into another corporation, in a transaction in which options, stock appreciation rights or stock purchase rights outstanding under the 1998 Plan are not accelerated and cashed out as provided above, each outstanding option, stock appreciation right or stock purchase right will be
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assumed or an equivalent option, stock appreciation right or stock purchase right will be substituted by the successor corporation in the transaction or by a parent or subsidiary of such successor corporation, unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the optionee shall have the right to exercise the option, stock appreciation right or stock purchase right as to all of the shares subject thereto, including shares that would not otherwise be exercisable. If the Administrator makes an option, stock appreciation right or stock purchase right fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, then the Company shall notify the optionee that the option, stock appreciation right or stock purchase right will be fully exercisable for a period of 30 days from the date of such notice, and the option, stock appreciation right or stock purchase right will terminate upon the expiration of such period.
AMENDMENT AND TERMINATION OF THE 1998 PLAN. The Board may amend, alter, suspend or terminate the 1998 Plan, or any part thereof, at any time and for any reason. However, the Company shall obtain shareholder approval for any amendment to the 1998 Plan to the extent necessary to comply with Section 162(m) and Section 422 of the Code, or any similar rule or statute. No such action by the Board or shareholders may alter or impair any option, stock appreciation right or stock purchase right previously granted under the 1998 Plan without the written consent of the optionee.
STOCK PRICE. On February 23, 1998, the closing price of the Common Stock as quoted on the Nasdaq National Market was $21.25.
FEDERAL INCOME TAX CONSEQUENCES
INCENTIVE STOCK OPTIONS. An optionee who is granted an incentive stock option does not recognize taxable income at the time the option is granted or upon its exercise, although the exercise may subject the optionee to the alternative minimum tax. Upon an optionee's sale of the shares (assuming that the sale occurs at least two years after grant of the option and at least one year after exercise of the option), any gain will be taxed to the optionee as long-term capital gain. If the optionee disposes of the shares prior to the expiration of the above holding periods, then the optionee will recognize ordinary income in an amount generally measured as the difference between the exercise price and the lower of the fair market value of the shares at the exercise date or the sale price of the shares. Any gain or loss recognized on such premature sale of the shares in excess of the amount treated as ordinary income will be characterized as capital gain or loss.
NONSTATUTORY STOCK OPTIONS. An optionee does not recognize any taxable income at the time he or she is granted a nonstatutory stock option. Upon exercise, the optionee recognizes taxable income generally measured by the excess of the then fair market value of the shares over the exercise price. Upon a disposition of such shares by the optionee, any difference between the sale price and the optionee's
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exercise price, to the extent not recognized as taxable income as provided above, is treated as long-term or short-term capital gain or loss, depending on the holding period.
STOCK PURCHASE RIGHTS. Stock purchase rights will generally be taxed in the same manner as nonstatutory stock options. However, restricted stock is generally purchased upon the exercise of a stock purchase right. At the time of purchase, restricted stock is subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code. As a result, the purchaser will not recognize ordinary income at the time of purchase. Instead, the purchaser will recognize ordinary income on the dates when a stock ceases to be subject to a substantial risk of forfeiture. The stock will generally cease to be subject to a substantial risk of forfeiture when it is no longer subject to the Company's right to repurchase the stock upon the purchaser's termination of employment with the Company. At such times, the purchaser will recognize ordinary income measured as the difference between the purchase price and the fair market value of the stock on the date the stock is no longer subject to a substantial risk of forfeiture.
The purchaser may accelerate to the date of purchase his or her recognition of ordinary income, if any, and the beginning of any capital gain holding period by timely filing an election pursuant to Section 83(b) of the Code. In such event, the ordinary income recognized, if any, is measured as the difference between the purchase price and the fair market value of the stock on the date of purchase, and the capital gain holding period commences on such date. The ordinary income recognized by a purchaser who is an employee will be subject to tax withholding by the Company.
STOCK APPRECIATION RIGHTS. No income will be recognized by a recipient in connection with the grant of a stock appreciation right. When the stock appreciation right is exercised, the recipient will generally be required to include as taxable ordinary income in the year of exercise an amount equal to the sum of the amount of cash received and the fair market value of any Common Stock received upon the exercise. In the case of a recipient who is also an employee, any taxable income recognized upon exercise of a stock appreciation right will constitute wages for which withholding will be required. The Company will generally be entitled to a tax deduction in the same amount. Any gain or loss on the resale of Common Stock acquired upon exercise of a stock appreciation right will be treated as a taxable gain or loss.
SECTION 162(m) OF THE CODE. Section 162(m) of the Code generally disallows a public company's tax deduction for compensation to executive officers in excess of $1,000,000 in any tax year beginning on or after January 1, 1994. Compensation that qualifies as "performance-based compensation" is excluded from the $1,000,000 deductibility cap, and therefore remains fully deductible by the company that pays it. To qualify as "performance-based" within the meaning of Section 162(m) of the Code, options and stock appreciation rights must be granted with an exercise price of not less than 100% of the fair market value of
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the Common Stock on the date of the grant, among other things. To the extent these requirements are met, compensation attributable to options and stock appreciation rights granted to executive officers under the 1998 Plan will qualify as performance-based compensation for purposes of Section 162(m) of the Code, and the Company will generally be entitled to a tax deduction in the amount recognized by such officers upon exercise of the options. No tax authority or court has ruled on the applicability of Section 162(m) to the 1998 Plan and any final determination of the deductibility of amounts realized upon exercise of an option granted under the 1998 Plan could ultimately be made by the Internal Revenue Service or a court having final jurisdiction with respect to the matter. The Company retains the right to grant options under the 1998 Plan in accordance with the terms of the 1998 Plan regardless of any final determination as to the applicability of Section 162(m) of the Code to these grants.
Compensation attributable to stock purchase rights granted under the 1998 Plan will not generally qualify as "performance-based" within the meaning of Section 162(m) of the Code. As a result, income recognized by executive officers in connection with stock purchase rights will be subject to the limitations on deductibility under such section.
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THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION UPON OPTIONEES, HOLDERS OF STOCK APPRECIATION RIGHTS, HOLDERS OF STOCK PURCHASE RIGHTS AND THE COMPANY WITH RESPECT TO THE GRANT AND EXERCISE OF OPTIONS, STOCK APPRECIATION RIGHTS AND STOCK PURCHASE RIGHTS UNDER THE 1998 PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF THE EMPLOYEE'S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE EMPLOYEE MAY RESIDE.
VOTE REQUIRED
The affirmative vote of (i) a majority of the Votes Cast and (ii) a majority of the Quorum will be required to approve this Proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE COMPANY'S 1998 PLAN.
PROPOSAL NO. 5 RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed KPMG Peat Marwick LLP ("KPMG"), independent auditors, to audit Apple's consolidated financial statements for fiscal year 1998. KPMG served as the Company's independent auditors for fiscal year 1997. At the Annual Meeting, the shareholders are being asked to ratify the appointment of KPMG as the Company's independent auditors for fiscal year 1998.
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In the event of a negative vote on such ratification, the Board of Directors will reconsider its selection.
Representatives of KPMG are expected to be present at the Annual Meeting and will have the opportunity to respond to appropriate questions and to make a statement if they so desire.
On November 5, 1997, the Audit and Finance Committee of the Board recommended to the full Board that the Company engage KPMG to audit the consolidated financial statements of the Company for fiscal year 1998. On November 5, 1997, the Board adopted the Committee's recommendation and approved the proposed engagement of KPMG.
During fiscal year 1996, Ernst & Young LLP ("ERNST & YOUNG") served as the independent auditor of the Company. At the annual meeting of shareholders held on February 5, 1997, shareholders ratified the decision by the Company's Board of Directors to replace Ernst & Young effective December 19, 1996 as the Company's independent auditors with KPMG. Neither the report of Ernst & Young on the Company's consolidated financial statements for fiscal year 1996 nor the report of KPMG on the Company's consolidated financial statements for fiscal year 1997 contained an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audit of the Company's consolidated financial statements for fiscal year 1996 and the subsequent period up to and including December 19, 1996, there were no disagreements between the Company and Ernst & Young on any matters of accounting principles or practices, financial statement disclosure, or audit scope and procedures which, if not resolved to the satisfaction of Ernst & Young, would have caused Ernst & Young to make reference to the matter in its report.
In connection with the audit of the Company's consolidated financial statements for fiscal year 1997, there were no disagreements between the Company and KPMG on any matters of accounting principles or practices, financial statement disclosure, or audit scope and procedures which, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the matter in its report.
There were no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)) during fiscal years 1996 and 1997 and the subsequent interim period prior to December 1, 1997.
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VOTE REQUIRED
The affirmative vote of (i) a majority of the Votes Cast and (ii) a majority of the Quorum will be required to approve this Proposal.
RECOMMENDATION
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR RATIFICATION OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY ' S INDEPENDENT AUDITORS.
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OTHER MATTERS
The Company knows of no other matters to be submitted to the shareholders at the Annual Meeting. If any other matters properly come before the shareholders at the Annual Meeting, it is the intention of the persons named on the enclosed proxy card to vote the shares they represent as the Board may recommend.
SHAREHOLDER PROPOSALS
Shareholders who intend to present proposals at the next annual meeting of shareholders must send such proposals to the Company for receipt no later than September 1, 1998 in order for such proposals to be considered for inclusion in the proxy statement and form of proxy relating to such meeting.
THE BOARD OF DIRECTORS
Dated: March 16, 1998
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SECTION VII OF THE COMPANY'S RESTATED ARTICLES OF INCORPORATION, AS PROPOSED TO BE AMENDED
"VII.
Through and until immediately prior to the annual meeting of shareholders to be held in fiscal year 1999, the directors shall be divided into two classes, designated Class I and Class II, each consisting of one-half of the directors or as close an approximation as possible, and each director shall serve for a term running until the second annual meeting of shareholders succeeding his or her election and until his or her successor shall have been duly elected and qualified; PROVIDED, HOWEVER, that the terms of all directors shall expire at the annual meeting of shareholders to be held in fiscal year 1999. Commencing at the annual meeting of shareholders to be held in fiscal year 1999, each director shall be elected to serve until the annual meeting of shareholders held in the following fiscal year and until his or her successor shall have been duly elected and qualified."
APPLE COMPUTER, INC. 1997 DIRECTOR STOCK OPTION PLAN
1. PURPOSES. The purposes of the Plan are to retain the services of qualified individuals who are not employees of the Company to serve as members of the Board and to secure for the Company the benefits of the incentives inherent in increased Common Stock ownership by such individuals by granting such individuals Options to purchase shares of Common Stock.
2. ADMINISTRATION. The Administrator will be responsible for administering the Plan. The Administrator will have authority to adopt such rules as it may deem appropriate to carry out the purposes of the Plan, and shall have authority to interpret and construe the provisions of the Plan and any agreements and notices under the Plan and to make determinations pursuant to any Plan provision. Each interpretation, determination or other action made or taken by
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the Administrator pursuant to the Plan shall be final and binding on all persons. The Administrator shall not be liable for any action or determination made in good faith, and shall be entitled to indemnification and reimbursement in the manner provided in the Company's Articles of Incorporation and By-Laws as such documents may be amended from time to time.
3. SHARES AVAILABLE. Subject to the provisions of Section 7(b) of the Plan, the maximum number of shares of Common Stock which may be issued under the Plan shall not exceed 400,000 shares (the "SECTION 3 LIMIT"). Either authorized and unissued shares of Common Stock or treasury shares may be delivered pursuant to the Plan. For purposes of determining the number of shares that remain available for issuance under the Plan, the following rules shall apply:
(a) the number of shares of Common Stock underlying Options shall be charged against the Section 3 Limit; and
(b) the Section 3 Limit shall be increased by (i) the number of shares subject to an Option which lapses, expires or is otherwise terminated without the issuance of such shares, and (ii) the number of shares, if any, tendered to pay the exercise price of an Option.
4. OPTIONS. Each Non-Employee Director shall receive grants of Options under the Plan as follows:
(a) OPTION GRANTS.
(i) INITIAL GRANT. Non-Employee Directors who were members of the Board on the day prior to the Effective Date shall be granted an Initial Option to purchase 15,000 shares of Common Stock as of August 14, 1997 ("INITIAL GRANT DATE"), PROVIDED that such individual continues to serve as a Non-Employee Director through the Initial Grant Date. Non-Employee Directors who were elected or appointed to the Board on the Effective Date shall be granted an Initial Option to purchase 30,000 shares of Common Stock on the Initial Grant Date, PROVIDED that such individual continues to serve as a Non-Employee Director through the Initial Grant Date. Non-Employee Directors who are elected or appointed to the Board after the Effective Date shall be granted an Initial Option to purchase 30,000 shares of Common Stock as of the date of their election or appointment to the Board. The provisions of this Section 4(a)(i) shall not apply to any member of the Board who first becomes a Non-Employee Director by reason of such member's ceasing to be an employee of the Company and its Subsidiaries.
(ii) ANNUAL GRANTS. Each Non-Employee Director shall receive an Annual Option to purchase 10,000 shares of Common Stock on the fourth anniversary of the Non-Employee Director's initial election or appointment to the Board and on each subsequent anniversary thereof, PROVIDED that the individual has remained in continuous service as a director of the Company through such anniversary date and is a Non-Employee Director on the applicable anniversary date.
(b) EXERCISE PRICE. The per share exercise price of each Option shall be the Fair Market Value of a share of Common Stock as of the date of grant of the Option determined in accordance with the provisions of the Plan.
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exercisable on their date of grant.
(d) TERM OF OPTIONS.
(i) TEN-YEAR TERM. Each Option shall expire ten (10) years from its date of grant, subject to earlier termination as provided herein.
(ii) EXERCISE FOLLOWING TERMINATION OF SERVICE DUE TO DEATH. If a Non-Employee Director ceases to be a member of the Board by reason of such Non-Employee Director's death, the Options granted to such Non-Employee Director may be exercised by such Non-Employee Director's Beneficiary, but only to the extent the Option was exercisable at the time of the Non-Employee Director's death, at any time within three (3) years after the date of such termination of service, subject to the earlier expiration of such Options as provided for in Section 4(d)(i) above. At the end of such three-year period, the vested portion of the Option shall expire. The unvested portion of the Option shall expire on the date of the Non-Employee Director's death.
(iii) TERMINATION OF OPTIONS IF A NON-EMPLOYEE DIRECTOR IS REMOVED FROM THE BOARD FOR CAUSE. In the event a Non-Employee Director is removed from the Board for "cause," all Options granted to such Non-Employee Director (whether or not then vested and exercisable) shall immediately terminate and be of no further force and effect as of the effective date of such removal from the Board. Whether a Non-Employee Director is removed by the Board for "cause" shall be determined by the Board in accordance with the By-Laws of the Company.
(iv) EXERCISE FOLLOWING OTHER TERMINATIONS OF SERVICE. If a Non-Employee Director ceases to be a member of the Board for any reason other than death or removal from the Board for cause, the Options granted to such Non-Employee Director may be exercised by such Non-Employee Director, but only to the extent the Option was exercisable at the time of the Non-Employee Director's termination, at any time within ninety (90) days after the date of such termination of service, subject to the earlier expiration of such Options as provided for in Section 4(d)(i) above. At the end of such ninety-day period, the vested portion of the Option shall expire. The unvested portion of the Option shall expire on the date of the Non-Employee Director's termination of service with the Board.
(e) TIME AND MANNER OF EXERCISE OF OPTIONS.
(i) NOTICE OF EXERCISE. Subject to the other terms and conditions hereof, a Non-Employee Director may exercise any Option, to the extent such Option is vested, by giving written notice of exercise to the Company; PROVIDED, HOWEVER, that in no event shall an Option be exercisable for a fractional share. The date of exercise of an Option shall be the later of (A) the date on which the Company receives such written notice and (B) the date on which the conditions provided in Section 4(e) (ii) are satisfied.
(ii) METHOD OF PAYMENT. The consideration to be paid for the shares to be issued upon exercise of an Option may consist of (A) cash, (B) check, (C) 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 the Option shall be exercised and which have been owned by the Non-Employee Director for at least six (6) months at the time of exercise, (D) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the
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Company the amount of proceeds required to pay the exercise price, or (E) any combination of the foregoing methods of payment.
B-2
(iv) LIMITATION ON EXERCISE. No option shall be exercisable unless the Common Stock subject thereto has been registered under the Securities Act and qualified under applicable state "blue sky" laws in connection with the offer and sale thereof, or the Company has determined that an exemption from registration under the Securities Act and from qualification under such state "blue sky" laws is available.
(v) ISSUANCE OF SHARES. Subject to the foregoing conditions, as soon as is reasonably practicable after its receipt of a proper notice of exercise and payment of the exercise price of the Option for the number of shares with respect to which the Option is exercised, the Company shall deliver to the Non-Employee Director (or following the Non-Employee Director's death, the Beneficiary entitled to exercise the Option), at the principal office of the Company or at such other location as may be acceptable to the Company and the Non-Employee Director (or such Beneficiary), one or more stock certificates for the appropriate number of shares of Common Stock issued in connection with such exercise. Shares sold in connection with a "cashless exercise" described in clause C of Section 4(e)(ii) shall be delivered to the broker referred to therein in accordance with the procedures established by the Company from time to time.
(f) RESTRICTIONS ON TRANSFER. An Option may not be transferred, pledged, assigned, or otherwise disposed of, except by will or by the laws of descent and distribution; PROVIDED, HOWEVER, that an Option may be, with the approval of the Administrator, transferred to a Non-Employee Director's family members or to one or more trusts established in whole or in part for the benefit of one or more of such family members. The Option shall be exercisable, during the Non-Employee Director's lifetime, only by the Non-Employee Director or by the individual or entity to whom the Option has been transferred in accordance with the previous sentence. No assignment or transfer of the Option, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, except by will or the laws of descent and distribution, shall vest in the assignee or transferee any interest or right in the Option, but immediately upon any attempt to assign or transfer the Option the same shall terminate and be of no force or effect.
5. DESIGNATION OF BENEFICIARY.
(a) BENEFICIARY DESIGNATIONS. Each Non-Employee Director may designate a Beneficiary to exercise an option upon the Non-Employee Director's death by executing a Beneficiary Designation Form.
(b) CHANGE OF BENEFICIARY DESIGNATION. A Non-Employee Director may change an earlier Beneficiary designation by executing a later Beneficiary
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Designation Form and delivering it to the Administrator. The execution of a Beneficiary Designation Form and its receipt by the Administrator will revoke and rescind any prior Beneficiary Designation Form.
6. CHANGE IN CONTROL.
Anything in the Plan to the contrary notwithstanding, in the event of a Change in Control of the Company, the following provisions shall apply:
(a) Any Options outstanding as of the date such Change in Control is determined to have occurred that are not yet exercisable and vested on such date shall become fully exercisable and vested.
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(c) If the Administrator shall receive an opinion from a nationally recognized firm of accountants to the Company that the cash-out provisions in Section 6(b) above with respect to Options will prohibit the utilization of "pooling of interests" accounting in connection with the transaction resulting in the Change in Control of the Company, then the following shall apply, but only to the extent necessary to permit such accounting treatment: (i) the provisions of Section 6(b) shall not apply to the Options, (ii) each such Option shall become immediately vested and exercisable as of the date such opinion is received by the Administrator, and (iii) the Administrator shall promptly inform each Non-Employee Director of such opinion and of the accelerated vesting and exercisability of the Option sufficiently prior to the anticipated date of the Change in Control, so as to permit the Option to be exercised prior to the date of the Change in Control.
7. RECAPITALIZATION OR REORGANIZATION.
(a) AUTHORITY OF THE COMPANY AND SHAREHOLDERS. The existence of the Plan shall not affect or restrict in any way the right or power of the Company or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.
(b) CHANGE IN CAPITALIZATION. Notwithstanding any other provision of the Plan, in the event of any change in the outstanding Common Stock by reason of a stock dividend, recapitalization, reorganization, merger, consolidation, stock split, combination or exchange of shares (a "CHANGE IN CAPITALIZATION"), (i) such proportionate adjustments as may be necessary (in the form determined by the Administrator in its sole discretion) to reflect such change shall be made to prevent dilution or enlargement of the rights of Non-Employee Directors under the Plan with respect to the aggregate
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number of shares of Common Stock authorized to be awarded under the Plan, the number of shares of Common Stock covered by each outstanding Option and the exercise prices in respect thereof and the number of shares of Common Stock covered by future Option grants and (ii) the Administrator may make such other adjustments, consistent with the foregoing, as it deems appropriate in its sole discretion.
(c) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, each outstanding Option will vest and become exercisable on a date prior to the consummation of the proposed action that is reasonably sufficient to enable the Non-Employee Directors to exercise their Options.
8. TERMINATION AND AMENDMENT OF THE PLAN.
(a) TERMINATION. The Plan shall terminate on the tenth anniversary of the Effective Date. Following such date, no further grants of Options shall be made pursuant to the Plan.
(b) GENERAL POWER OF BOARD. Notwithstanding anything herein to the contrary, the Board may at any time and from time to time terminate, modify, suspend or amend the Plan in whole or in part; PROVIDED, HOWEVER, that no such termination, modification, suspension or amendment shall be effective
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(c) WHEN NON-EMPLOYEE DIRECTORS' CONSENTS REQUIRED. The Board may not alter, amend, suspend, or terminate the Plan without the consent of any Non-Employee Director to the extent that such action would adversely affect his or her rights with respect to Options that have previously been granted.
9. MISCELLANEOUS.
(a) NO RIGHT TO REELECTION. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any of its members for reelection by the Company's stockholders, nor confer upon any Non-Employee Director the right to remain a member of the Board for any period of time, or at any particular rate of compensation.
(b) SECURITIES LAW RESTRICTIONS. The Administrator may require each Non-Employee Director purchasing or acquiring shares of Common Stock pursuant to the Plan to agree with the Company in writing that such Non-Employee Director is acquiring the shares for investment and not with a view to the distribution thereof. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission or any exchange upon which the Common Stock is then listed, and any applicable federal or state securities law, and the Administrator may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. No shares of Common Stock shall be issued hereunder unless the Company shall have determined that such issuance is in compliance with, or pursuant to an exemption from, all applicable federal and state securities laws.
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(c) EXPENSES . The costs and expenses of administering the Plan shall be borne by the Company.
(d) APPLICABLE LAW. Except as to matters of federal law, the Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of California without giving effect to conflicts of law principles.
(e) EFFECTIVE DATE. The Plan shall be effective as of the Effective Date, subject to the approval thereof by the stockholder 3 of the Company by no later than the next Annual Meeting to occur after the Effective Date. If such stockholder approval is not obtained by the date of such Annual Meeting, all prior Option grants shall be void AB INITIO and of no further force and effect.
10. DEFINITIONS. Capitalized words not otherwise defined in the Plan have the meanings set forth below:
"ADMINISTRATOR" means the Chief Financial Officer of the Company or the individual appointed by the Chief Executive Officer of the Company to administer the Plan.
"ANNUAL MEETING" means an annual meeting of the Company's stockholders.
"ANNUAL OPTION" means an Option granted to a Non-Employee Director pursuant to Section 4(a)(ii) of the Plan.
"BENEFICIARY" or "BENEFICIARIES" means an individual or entity designated by a Non-Employee Director on a Beneficiary Designation Form to exercise options in the event of the Non-Employee Director's death; PROVIDED, HOWEVER, that, if no such individual or entity is designated or if no such designated individual is alive at the time of the Non-Employee Director's death, Beneficiary shall mean the Non-Employee Director's estate.
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"BOARD" means the Board of Directors of the Company.
"CHANGE IN CONTROL" means the happening of any of the following:
(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 any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or
(ii) The occurrence of a transaction requiring shareholder approval, and involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation.
"CHANGE IN CONTROL PRICE" means, as determined by the Administrator, (i) the highest Fair Market Value at any time within the sixty-day period
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immediately preceding the date of determination of the Change in Control Price by the Administrator (the "SIXTY-DAY PERIOD"), or (ii) the highest price paid or offered, as determined by the Administrator, in any bona fide transaction or bona fide offer related to the Change in Control of the Company, at any time within the Sixty-Day Period.
"CODE" means the Internal Revenue Code of 1986, as amended, and the applicable rules and regulations promulgated thereunder.
"COMMON STOCK" means the common stock of the Company, no par value per share.
"COMPANY" means Apple Computer, Inc., a California corporation, or any successor to substantially all of its business.
"EFFECTIVE DATE" means, subject to Section 9(e), August 5, 1997.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations promulgated thereunder.
"FAIR MARKET VALUE" means the value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or a national market system (including without limitation the Nasdaq National Market), its Fair Market Value shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or exchange (or the exchange with the greatest volume of trading in the Common Stock) for the date of determination or, if the date of determination is not a trading day, the immediately preceding trading day, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable.
(ii) If the Common Stock is regularly quoted on the Nasdaq system (but not on the Nasdaq National Market) or quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high and low asked prices for the Common Stock on the date of determination or, if there are no quoted prices on the date of determination, on the last day on which there are quoted prices prior to the date of determination.
(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator.
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"NON-EMPLOYEE DIRECTOR" means a member of the Board who is not an employee of the Company or any of its Subsidiaries.
"OPTION " means an option to purchase shares of Common Stock awarded to a Non-Employee Director pursuant to the Plan and includes Initial Options and Annual Options.
"PLAN" means the Apple Computer, Inc. 1997 Director Stock Option Plan.
"SECTION 3 LIMIT" shall have the meaning set forth in Section 3 of the
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Plan.
"SUBSIDIARY" means any corporation which is a "subsidiary corporation" within the meaning of Section 424(f) of the Code with respect to the Company.
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APPENDIX C
APPLE COMPUTER, INC. 1998 EXECUTIVE OFFICER STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are:
- to attract and retain the best available personnel for positions of substantial responsibility;
- to provide additional incentive to the Chairman and/or Executive Officers and other key employees; and
- to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options (as defined under Section 422 of the Code) or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock appreciation rights ("SARs") may be granted under the Plan in connection with Options or independently of Options. Stock Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "AGREEMENT" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option, SAR or Stock Purchase Right grant. The Agreement is subject to the terms and conditions of the Plan.
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(c) "APPLICABLE LAWS" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options, SARs or Stock Purchase Rights are, or will be, granted under the Plan.
(d) "BOARD" means the Board of Directors of the Company.
(e) "CHAIRMAN" means the Chairman of the Board.
(f) "CODE" means the Internal Revenue Code of 1986, as amended.
(g) "COMMITTEE" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan.
(h) "COMMON STOCK" means the common stock of the Company.
(i) "COMPANY" means Apple Computer, Inc., a California corporation.
(j) "CONTINUOUS STATUS AS CHAIRMAN" unless determined otherwise by the Administrator, means the absence of any interruption or termination as Chairman of the Board with the Company. Continuous Status as Chairman shall not be considered interrupted in the case of medical leave, military leave, family leave, or any other leave of absence approved by the Administrator, provided, in each case, that such leave does not result in termination as Chairman with the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute status as "Chairman" by the Company.
(k) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any interruption or termination of the employment relationship with the Company or any Subsidiary. Continuous Status as an Employee shall not be considered interrupted in the case of (i) medical leave, military leave, family leave, or any other leave of absence approved by the Administrator, provided, in each case, that such leave does not result in termination of the employment relationship with the Company or any Subsidiary, as the case may be, under the terms of the respective Company policy for such leave; or (ii) in the case of transfers between locations of the Company or between the Company, its Subsidiaries, or its
successor. For purposes of Incentive Stock Options, no such leave may exceed
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ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 91st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as 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.
(1) "DIRECTOR " means a member of the Board.
(m) "EMPLOYEE" means any person employed by the Company or any Parent or Subsidiary of the Company subject to (k) above.
(n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(o) "EXECUTIVE OFFICER" means any person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
(p) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system, on the date of determination or, if the date of determination is not a trading day, the immediately preceding trading day, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination or, if there are no quoted prices on the date of determination, on the last day on which there are quoted prices prior to the date of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
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the Fair Market Value shall be determined in good faith by the Administrator.
(q) "INCENTIVE STOCK OPTION" means an option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder and is expressly designated by the Administrator at the time of grant as an incentive stock option.
(r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option.
(s) "OPTION" means a stock option granted pursuant to the Plan.
(t) "OPTIONED STOCK" means the Common Stock subject to an Option, SAR or Stock Purchase Right.
(u) "OPTIONEE" means the holder of an outstanding Option, SAR or Stock Purchase Right.
(v) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e ) of the Code.
(w) "PLAN" means this 1998 Executive Officer Stock Plan.
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(x) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 12 of the Plan.
(y) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.
(z) °SAR" means a stock appreciation right granted pursuant to Section 10 below.
(aa) "SECTION 16(B)" means Section 16(b) of the Exchange Act.
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(bb) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 15 of the Plan.
(cc) "STOCK PURCHASE RIGHT" means the right to purchase Common Stock pursuant to Section 12 of the Plan, as evidenced by an Agreement.
(dd) "SUBSIDIARY" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 15 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan or for which SARs or Stock Purchase Rights may be granted and exercised is 17,000,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock.
In the discretion of the Administrator, any or all of the Shares authorized under the Plan may be subject to SARs issued pursuant to the Plan.
If an Option, SAR or Stock Purchase Right issued under the Plan should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for other Options, SARs or Stock Purchase Rights under this Plan (unless the Plan has terminated); however, should the Company reacquire Shares which were issued pursuant to the exercise of an Option or SAR, such Shares shall not become available for future grant under the Plan. If Shares of Restricted Stock are repurchased by the Company at their original purchase price, such shares shall become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3 promulgated under the Exchange Act or any successor rule thereto, as in effect at the time that discretion is being exercised with respect to the Plan, and by the legal requirements of the Applicable Laws relating to the administration of stock plans such as the Plan, if any, the Plan may (but need not) be administered by different administrative bodies with respect to (A) Directors who are not Employees, (B) Directors who are Employees, (C) Officers who are not Directors and (D) Employees who are neither Directors nor Officers.
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(ii) SECTION 162(M). To the extent that the Administrator determines it to be desirable to qualify Options or SARs granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code.
(iii) RULE 16B-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.
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(iv) OTHER ADMINISTRATION. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the person ( s) to whom Options , SARs and Stock Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be covered by each Option, SAR or Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option, SAR or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the date of grant, the time or times when Options, SARs or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option, SAR or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole
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discretion, shall determine;
(vi) to reduce the exercise price of any Option, SAR or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option, SAR or Stock Purchase Right shall have declined since the date the Option, SAR or Stock Purchase Right was granted;
(vii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws;
(ix) to modify or amend each Option, SAR or Stock Purchase Right (subject to Section 17(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan;
(x) to allow Optionees 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 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 withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;
(xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option, SAR or Stock Purchase Right previously granted by the Administrator; and
(xii) to make all other determinations deemed necessary or advisable for administering the Plan.
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(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options, SARs or Stock Purchase Rights.
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5. ELIGIBILITY. Nonstatutory Stock Options, SARs and Stock Purchase Rights may be granted to the Chairman, Executive Officers and other key employees or to such other individuals as determined by the Administrator whom the Company has offered a position of Chairman or Executive Officer. Incentive Stock Options may be granted only to Executive Officers and other key employees.
6. LIMITATIONS.
(a) Each Option shall be designated in the Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding 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 Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option, SAR or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as an Employee with or Chairman of the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options and SARs:
(i) No participant shall be granted, in any fiscal year of the Company, Options or SARs to purchase more than 17,000,000 Shares;
(ii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 15;
(iii) If an Option or SAR is canceled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 15), the canceled Option will be counted against the limits set forth in subsections (i) above. For this purpose, if the exercise price of an Option or SAR is reduced, the transaction will be treated as a cancellation of the Option or SAR and the grant of a new Option or SAR.
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7. TERM OF PLAN. Subject to Section 21 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 16 of the Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Agreement.
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9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following:
(i) In the case of an Incentive Stock Option;
(A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant; or
(B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant;
(ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant;
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(iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant as determined by the Administrator or pursuant to a merger or other corporate transaction.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised.
(c) FORM OF CONSIDERATION. The Administrator shall determine the acceptable form of consideration for exercising an option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) 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;
(v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the Optionee , including any liability attributable to the Optionee's participation in any Company - sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.
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10. STOCK APPRECIATION RIGHTS.
(a) GRANTED IN CONNECTION WITH OPTIONS. At the sole discretion of the Administrator, SARs may be granted in connection with all or any part of an Option, either concurrently with the grant of the Option or at any time thereafter during the term of the Option. The following provisions apply to SARs that are granted in connection with Options:
(i) The SAR shall entitle the Optionee to exercise the SAR by surrendering to the Company unexercised a portion of the related Option. The Optionee 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 portion of the related Option. Notwithstanding the foregoing, the Administrator may place limits on the amount that may be paid upon exercise of a SAR; provided, however, that such limit shall not restrict the exercisability of the related Option;
(ii) When a SAR is exercised, the related Option, to the extent surrendered, shall no longer be exercisable;
(iii) A SAR shall be exercisable only when and to the extent that the related Option is exercisable and shall expire no later than the date on which the related Option expires; and
(iv) A SAR may only be exercised at a time when the Fair Market Value of the Common Stock covered by the related Option exceeds the exercise price of the Common Stock covered by the related Option.
(b) INDEPENDENT SARS. At the sole discretion of the Administrator, SARs may be granted without related Options. The following provisions apply to SARs that are not granted in connection with Options:
(i) The SAR shall entitle the Optionee, by exercising the SAR, to receive from the Company an amount equal to the excess of (x) the Fair Market Value of the Common Stock covered by exercised portion of the SAR, as of the date of such exercise, over (y) the Fair Market Value of the Common Stock covered by the exercised portion of the SAR, as of the date on which the SAR was granted; provided, however, that the Administrator may place limits on the amount that may be paid upon exercise of a SAR;
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and
(ii) SARs shall be exercisable, in whole or in part, at such times as the Administrator shall specify in the Optionee's Agreement.
(c) FORM OF PAYMENT. The Company's obligation arising upon the exercise of a SAR may be paid in Common Stock or in cash, or in any combination of Common Stock and cash, as the Administrator, in its sole discretion, may determine. Shares issued upon the exercise of a SAR shall be valued at their Fair Market Value as of the date of exercise.
(d) RULE 16B-3. SARs granted hereunder shall contain such additional restrictions as may be required to be contained in the Plan or Agreement in order for the SAR to qualify for the maximum exemption provided by Rule 16b-3.
11. EXERCISE 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 Agreement. An Option may not be exercised for a fraction of a Share.
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An Option or SAR shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the terms of the Option or SAR) from the person entitled to exercise the Option or SAR, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 15 of the Plan.
Exercising an option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the
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Option, by the number of Shares as to which the Option is exercised. Exercise of a SAR in any manner shall, to the extent the SAR is exercised, result in a decrease in the number of Shares which thereafter shall be available for purposes of the Plan, and the SAR shall cease to be exercisable to the extent it has been exercised.
(b) TERMINATION OF CONTINUOUS STATUS AS CHAIRMAN. Upon termination of an Optionee's Continuous Status as Chairman (other than termination by reason of the Optionee's death), the Optionee may, but only within ninety (90) days after the date of such termination, exercise his or her Option or SAR to the extent that it was exercisable at the date of such termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant.
(c) TERMINATION OF CONTINUOUS EMPLOYMENT. Upon termination of an Optionee's Continuous Status as Employee (other than termination by reason of the Optionee's death), the Optionee may, but only within ninety (90) days after the date of such termination, exercise his or her Option or SAR to the extent that it was exercisable at the date of such termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant.
(d) DEATH OF OPTIONEE. If an Optionee dies (i) while an Employee or Chairman, the Option or SAR may be exercised at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and terminated his or her employment six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) after the date of death; or (ii) within ninety (90) days after the termination of Continuous Status as an Employee or Chairman, the Option or SAR may be exercised, at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option or SAR by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. If the Option or SAR is not so exercised within the time specified herein, the Option or SAR shall terminate, and the Shares covered by such Option or SAR shall revert to the Plan.
Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant.
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(e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for 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 Optionee at the time that such offer is made.
12. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the Optionee in writing or electronically, of the terms, conditions and restrictions related to the offer, including the number of Shares that the Optionee shall be entitled to purchase, the price to be paid, and the time within which the Optionee must accept such offer. The offer shall be accepted by execution of an Agreement in the form determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines otherwise, the Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator.
(c) OTHER PROVISIONS. The Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 15 of the Plan.
13. TRANSFERABILITY OF OPTIONS, SARS AND STOCK PURCHASE RIGHTS. Unless determined otherwise by the Administrator, an Option, SAR or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order as defined by the Code or Title 1 of the Employee Retirement Income Security Act, and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option, SAR or Stock Purchase Right transferable, such Option, SAR or Stock Purchase Right shall contain such additional terms and conditions as the
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Administrator deems appropriate.
14. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. When an Optionee incurs tax liability in connection with the exercise of an Option, SAR or Stock Purchase Right, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation (including, at the election of the Optionee, any additional amount which the Optionee desires to have withheld in order to satisfy in whole or in part the Optionee's full estimated tax in connection with the exercise) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option, or the Shares to be issued upon exercise of the SAR or Stock Purchase Right, if any, that number of Shares having a Fair Market Value equal to the amount required to be withheld (and any additional amount desired to be withheld, as aforesaid). The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions:
(i) the election must be made on or prior to the applicable Tax Date; and
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(ii) all elections shall be subject to the consent or disapproval of the Administrator.
In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which the Option, SAR or Stock Purchase Right is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date.
15. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, SAR or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options, SARs or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or
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expiration of an Option, SAR or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option, SAR or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option, SAR or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options, SARs and Stock Purchase Rights will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option, SAR or Stock Purchase Right shall terminate as of a date fixed by the Administrator and give each Optionee the right to exercise his or her Option, SAR or Stock Purchase Right as to all or any part of the Optioned Stock, including Shares as to which the Option, SAR or Stock Purchase Right would not otherwise be exercisable.
(c) MERGER OR ASSET SALE. Unless otherwise determined by the Administrator, in the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option, SAR and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, SAR or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option, SAR or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option, SAR or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option, SAR or Stock Purchase Right shall be fully vested and exercisable for a period of thirty (30) days from the date of such notice, and the Option, SAR or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option, SAR or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option, SAR or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether
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stock, cash, or other securities or property) received in the merger or sale
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of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, SAR or Stock Purchase Right, for each Share of Optioned Stock subject to the Option, SAR or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.
(d) CHANGE IN CONTROL. In the event of a "Change in Control" of the Company, as defined in paragraph (e) below, unless otherwise determined by the Administrator prior to the occurrence of such Change in Control, the following acceleration and valuation provisions shall apply:
(i) Any Options, SARs and Stock Purchase Rights outstanding as of the date such Change in Control is determined to have occurred that are not yet exercisable and vested on such date shall become fully exercisable and vested; and
(ii) The value of all outstanding Options, SARs and Stock Purchase Rights shall, unless otherwise determined by the Administrator at or after grant, be cashed-out. The amount at which such Options, SARs and Stock Purchase Rights shall be cashed out shall be equal to the excess of (x) the Change in Control Price (as defined below) over (y) the exercise price of the Common Stock covered by the Option, SAR or Stock Purchase Right. The cash-out proceeds shall be paid to the Optionee or, in the event of death of an Optionee prior to payment, to the estate of the Optionee or to a person who acquired the right to exercise the Option, SAR or Stock Purchase Right by bequest or inheritance.
(e) DEFINITION OF "CHANGE IN CONTROL". For purposes of this Section 15, a "Change in Control" means the happening of any of the following:
(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 any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or
(ii) The occurrence of a transaction requiring shareholder approval, and involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation.
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(f) CHANGE IN CONTROL PRICE. For purposes of this Section 15, "Change in Control Price" shall be, as determined by the Administrator, (i) the highest Fair Market Value at any time within the 60-day period immediately preceding the date of determination of the Change in Control Price by the Administrator (the 1160-Day Period"), or (ii) the highest price paid or offered, as determined by the Administrator, in any bona fide transaction or bona fide offer related to the Change in Control of the Company, at any time within the 60-Day Period.
16. DATE OF GRANT. The date of grant of an Option, SAR or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, SAR or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant.
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17. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or terminate the Plan.
(b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION . No amendment , alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options, SARs or Stock Purchase Rights granted under the Plan prior to the date of such termination.
18. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise of an Option, SAR or Stock Purchase Right unless the exercise of such Option, SAR or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.
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(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, SAR or Stock Purchase Right, the Company may require the person exercising such Option, SAR or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.
19. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.
20. 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 the requirements of the Plan.
21. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws.
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[LOGO] PRINTED ON RECYCLED PAPER
748-PS-98
PROXY CARD
APPLE COMPUTER, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 22, 1998
The undersigned shareholder of Apple Computer, Inc., a California corporation, hereby acknowledges receipt of the Notice of Annual Meeting of Shareholders and Proxy Statement with respect to the Annual Meeting of Shareholders of Apple Computer, Inc. to be held at 1 Infinite Loop, Cupertino, California 95014 on Wednesday, April 22, 1998 at 10:00 a.m., and hereby appoints Fred D. Anderson and Nancy R. Heinen, and each of them, proxies and attorneys-in-fact, each with power of substitution and
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revocation, and each with all powers that the undersigned would possess if personally present, to vote the Apple Computer, Inc. Common Stock of the undersigned at such meeting and any postponements or adjournments of such meeting, as set forth below, and in their discretion upon any other business that may properly come before the meeting (and any such postponements or adjournments).
THIS PROXY WILL BE VOTED AS SPECIFIED OR, IF NO CHOICE IS SPECIFIED, FOR THE ELECTION OF THE NOMINEES, FOR PROPOSALS 2, 3, 4 AND 5 AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING AND ANY POSTPONEMENTS OR ADJOURNMENTS THEREOF.
IMPORTANT - TO BE SIGNED AND DATED ON REVERSE SIDE
[MAP]
In the interest of saving time and money, Apple has opted to provide you with the enclosed Form 10-K for fiscal 1997 in lieu of producing a glossy annual report.
/X/ Please mark votes as in this example.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN THIS CARD.
1. To elect three directors to Class II of the Company's Board of Directors.
NOMINEES: Steven P. Jobs, Lawrence J. Ellison and Edgar S. Woolard, Jr.
WITHHELD FOR ALL FROM ALL NOMINEES NOMINEES
------For all nominees except as noted above
MARK HERE FOR / / ADDRESS CHANGE AND NOTE BELOW
FOR AGAINST ABSTAIN
2. To approve an amendment to the Company's Restated Articles of Incorporation to eliminate the classification of the Company's Board of Directors and thereby ensure that each director will stand for election annually.
3. To approve (i) the Apple Computer, Inc. 1997 / / / /
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Director Stock Option Plan, which provides for the issuance of up to 400,000 shares of the Company's Common Stock, and (ii) the grant pursuant to a predecessor stock option plan for non-employee directors of 15,000 stock options to each of Edgar S. Woolard, Jr. and Gareth C.C. Chang, both non-employee directors of the Company, and the reservation of 430,000 shares of Common Stock in the aggregate for issuance pursuant to the 1997 Director Stock Option Plan and such grants.
4. To approve the Apple Computer, Inc. 1998 / / Executive Officer Stock Plan and the reservation for issuance thereunder of 17,000,000 shares of Common Stock.
5. To ratify the appointment of KPMG Peat / / Marwick LLP as independent auditors of the Company for fiscal year 1998.
6. To transact such other business as may / / properly come before the meeting or any adjournment(s) thereof.
This proxy card should be signed by the shareholder(s) exactly as his or her name(s) appear(s) hereon, dated and returned promptly in the enclosed envelope. Persons signing in a fiduciary capacity should so indicate.If shares are held by joint tenants or as community property, both persons should sign.
Signature Date Signature Date -----END PRIVACY- ENHANCED MESSAGE-----
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EXHIBIT B
TO THE DECLARATION OF VIVI N. TRAN IN SUPPORT OF MOTION TO DISMISS CONSOLIDATED CLASS ACTION COMPLAINT Page 1 of 4 Case 5 : 06-cv-05208-JF Document 55-3 Filed 06/08/2007 Page 2 of 7
8-K 1 a07-12261 18k.htm 8-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K
CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
April 24, 2007 Date of Report (date of earliest event reported) APPLE INC. (Exact name of Registrant as specified in its charter)
California 000-10030 94-2404110 (State or other jurisdiction (Commission File Number) (I.R.S. Employer of incorporation) Identification Number)
1 Infinite Loop, Cupertino, CA 95014 (Address of principal executive offices)
(408) 996-1010 (Registrant's telephone number, including area code)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
q Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) q Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) q Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) q Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Item 8.01 Other Events.
On Tuesday, April 24, 2007, the United States Securities and Exchange Commission (the "Commission ) issued a press release announcing that the Commission has filed a civil action against two former officers of Apple Inc. ("Apple ) in connection with past stock option grants. According to the press release, in connection with the filing of the complaints, the Commission announced that it would not bring an enforcement action against Apple. In its press release, the Commission stated: "The Commission also announced today that it would not bring any enforcement action against Apple based in part on its swift, extensive, and extraordinary cooperation in the Commission's investigation. Apple's cooperation consisted of, among other things, prompt self-reporting, an independent internal investigation, the sharing of the results of that investigation with the government, and the implementation of new controls designed to prevent the recurrence of fraudulent conduct.
The full text of the press release issued by the Commission is attached hereto as Exhibit 99.1 and is incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
The following exhibit is furnished herewith:
Exhibit Number Description 99.1 Text of press release issued by the United States Securities and Exchange Commission dated April 24, 2007.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
APPLE INC. Date: April 24, 2007 By: /s/ Peter Oppenheimer Peter Oppenheimer Senior Vice President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number
99.1 Text of press release issued by the United States Securities and Exchange Commission dated April 24, 2007.
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EX-99.1 2 a07- 12261 1 ex99d1.htm EX-99.1
Exhibit 99.1
SEC CHARGES FORMER APPLE GENERAL COUNSEL FOR ILLEGAL STOCK OPTION BACKDATING
Commission Also Settles Claims Against Former Apple CFO for $3.5 Million
FOR IMMEDIATE RELEASE 2007-70
Washington, D.C., April 24, 2007 - The Securities and Exchange Commission today filed charges against two former senior executives of Apple, Inc. in a matter involving improper stock option backdating. The Commission accused former General Counsel Nancy R. Heinen of participating in the fraudulent backdating of options granted to Apple's top officers that caused the company to underreport its expenses by nearly $40 million. The Commission's complaint alleges that Heinen, of Portola Valley, Calif., caused Apple to backdate two large options grants to senior executives of Apple - a February 2001 grant of 4.8 million options to Apple's Executive Team and a December 2001 grant of 7.5 million options to Apple Chief Executive Officer Steve Jobs - and altered company records to conceal the fraud.
The Commission also filed, and simultaneously settled, charges against former Apple Chief Financial Officer Fred D. Anderson, of Atherton, Calif., alleging that Anderson should have noticed Heinen's efforts to backdate the Executive Team grant but failed to take steps to ensure that Apple's financial statements were correct. As part of the settlement, Anderson agreed (without admitting or denying the allegations) to pay approximately $3.5 million in disgorgement and penalties.
Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, stated, "The Apple case demonstrates the Commission's ongoing commitment to take action against stock options backdating and other executive compensation abuses. When corporate officers enrich themselves at the expense of a company's shareholders, the Commission will hold the responsible individuals accountable, particularly where, as here, the responsible individuals are among those obligated to ensure that the company complies with all applicable securities laws and that its financial statements are accurate.
Marc J. Fagel, Associate Regional Director of the SEC's San Francisco Regional Office, stated, "Apple's shareholders relied on Heinen and Anderson, as respected legal and accounting professionals, to ensure the accurate reporting of the company's executive compensation. Instead, they failed in their duties as gatekeepers and caused Apple to conceal millions of dollars in stock option expenses.
According to the Commission's complaint, filed in the Northern District of California, Apple granted 4.8 million options to six members of its executive team (including Heinen and Anderson) in February 2001. Because the options were in-the- money when granted (i.e. could be exercised to purchase Apple shares at a below market price), Apple was required to report a compensation charge in its publicly filed financial statements. The Commission alleges that, in order to avoid reporting this expense, Heinen caused Apple to backdate options to January 17, 2001, when Apple's share price was substantially lower. Heinen is also alleged to have directed her staff to prepare documents falsely indicating that Apple's Board had approved the Executive Team grant on January 17. As a result, Apple failed to record approximately $18.9 million in compensation expenses associated with the option grant. Anderson, who should have realized the implications of Heinen's actions, failed to disclose key information to Apple's auditors and neglected to ensure that the company's financial statements were accurate. Both Heinen and Anderson personally received millions of dollars in unreported compensation as a result of the backdating.
The Commission's complaint also alleges improprieties in connection with a December 2001 grant of 7.5 million options to CEO Steve Jobs. Although the options were in-the-money at that time, Heinen - as with
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the Executive Team grant - caused Apple to backdate the grant to October 19, 2001, when Apple's share price was lower. As a result, the Commission alleges that Heinen caused Apple to improperly fail to record $20.3 million in compensation expense associated with the in-the-money options grant. The Commission further alleges that Heinen then signed fictitious Board minutes stating that the Board had approved the grant to Jobs on October 19 at a "Special Meeting of the Board of Directors - a meeting that, in fact, never occurred.
Heinen is charged with, among other things, violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, lying to Apple ' s auditors , and violating prohibitions on circumventing internal controls. The Commission is seeking injunctive relief, disgorgement, and money penalties against Heinen, in addition to an order barring her from serving as an officer or director of a public company.
Anderson, without admitting or denying the allegations in the Commission's complaint, has agreed to a permanent injunction from further violations of the antifraud, reporting, internal controls, and other provisions of the federal securities laws. Anderson also will disgorge approximately $3.49 million in ill-gotten gains and prejudgment interest, representing the in-the- money portion of the Executive Team options grant that Anderson exercised, and will pay a civil penalty of $150,000.
The Commission also announced today that it would not bring any enforcement action against Apple based in part on its swift, extensive, and extraordinary cooperation in the Commission's investigation. Apple's cooperation consisted of, among other things, prompt self-reporting, an independent internal investigation, the sharing of the results of that investigation with the government, and the implementation of new controls designed to prevent the recurrence of fraudulent conduct.
### For more information, contact:
Marc J. Fagel Associate Regional Director San Francisco Regional Office (415) 705-2449
Michael S. Dicke Assistant Regional Director San Francisco Regional Office (415) 705-2458
Additional materials : Litigation Release No. 20086 http://www. sec.gov/news/Press/2007/2007-70.htm
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EXHIBIT C
TO THE DECLARATION OF VIVI N. TRAN IN SUPPORT OF MOTION TO DISMISS CONSOLIDATED CLASS ACTION COMPLAINT Page 1 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 2 of 49
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FILER:
COMPANY DATA: COMPANY CONFORMED NAME: APPLE COMPUTER INC CENTRAL INDEX KEY: 0000320193 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [35711 IRS NUMBER: 942404110 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930
FILING VALUES: FORM TYPE: S-8 SEC ACT: SEC FILE NUMBER: 333-60455 FILM NUMBER: 98675834
BUSINESS ADDRESS: STREET 1: 1 INFINITE LOOP CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4089961010
MAIL ADDRESS: STREET 1: ONE INFINITE LOOP CITY: CUPERTINO STATE: CA ZIP: 95014
As filed with the Securities and Exchange Commission on July 31, 1998 Registration No. 333-
Form S-8
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SECURITIES AND EXCHANGE COMMISSION WASHINGTON , D.C. 20549
APPLE COMPUTER, INC. (Exact name of registrant as specified in its charter)
REGISTRATION STATEMENT under THE SECURITIES ACT OF 1933
CALIFORNIA 94-2404110 (State of other I.R.S. Employer jurisdiction of Identification No. Incorporation or Organization
One Infinite Loop Cupertino, California 95014 (Address, including zip code, of principal executive offices)
1997 Director Stock Option Plan 1997 Employee Stock Option Plan 1998 Executive Officer Stock Plan Stock Option Grants to Edgar S. Woolard, Jr. and Gareth C.C. Chang (Full title of the plan)
Michael C. Wyatt, Esq. Associate General Counsel Apple Computer, Inc. One Infinite Loop, M/S 301-4CL Cupertino, California 95014 (408) 996-1010 (Name, address, including zip code, and telephone number, including area code, of agent for service)
Copy to:
Tom Klein, Esq. Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304
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CALCULATION OF REGISTRATION FEE
(1) Pursuant to Rule 429 promulgated under the Securities Act of 1933, as amended (the "Securities Act"), the prospectus relating to this Registration statement also relates to shares registered under Form S-8 Registration Statements Nos. 2-70449, 2-85095, 33-866, 33-23650, 33-31075, 33-47596, 33-53895, 333-07437 and 333-23725. A total of 7,600,000 shares issuable under the 1998 Executive Officer Stock Plan and its predecessors, the 1990 Stock Option Plan and the 1981 Stock Option Plan, have been previously registered under the Securities Act.
(2) Estimated in accordance with Rule 457(h) solely for the purpose of calculating the filing fee on the basis of $33.8125 per share, which represents the average of the high and low prices of the Common Stock reported on the NASDAQ National Market for July 28, 1998.
(3) Estimated pursuant to Rule 457 solely for purposes of calculating the registration fee. Amount of the Registration Fee was calculated pursuant to Section 6(b) of the Securities Act of 1933, as amended, and was determined by multiplying the aggregate offering amount by .000295. 2
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 3 Incorporation of Documents by Reference.
There are hereby incorporated by reference into this Registration Statement the following documents and information heretofore filed with the Securities and Exchange Commission (the "Commission"):
(a) The Registrant's annual report on Form 10-K for the fiscal year ended September 26, 1997;
(b) The Registrant's quarterly report on Form 10-Q for the quarters ended December 26, 1997 and March 27, 1998;
(c) All other reports filed by the Registrant pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
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Act"), since September 26, 1997; and
(d) The description of the Registrant's common stock and associated common stock purchase rights, contained in the Registrant's Registration Statements on Form 8-A filed with the Commission on October 30, 1981 and May 26, 1989, respectively, registering such shares and associated rights pursuant to Section 12 of the Exchange Act, including any amendment or report updating such descriptions.
All documents subsequently filed by the Registrant pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-effective amendment which indicates that all securities offered hereby have been sold or which deregisters all securities then remaining unsold, also shall be deemed to be incorporated by reference in this Registration Statement and to be part hereof from the date of filing of such documents.
Item 4. Description of Securities.
Not Applicable.
Item 5. Interests of Named Experts and Counsel.
Not Applicable.
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Item 6. Indemnification of Directors and Officers.
Section 317 of the California General Corporations Law (the "CGCL") authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers who are parties or are threatened to be made parties to any proceeding (with certain exceptions) by reason of the fact that the person is or was an agent of the corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with the proceeding if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation. Section 204 of the CGCL provides that this limitation on liability has no effect on a director's liability if (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of a serious injury to the corporation or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the
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corporation or its shareholders, (vi) under Section 310 of the CGCL (concerning contracts or transactions between the corporation and a director) or (vii) under Section 316 of the CGCL (directors' liability for improper dividends, loans and guarantees). Section 317 does not extend to acts or omissions of a director in his capacity as an officer. Further, Section 317 has no effect on claims arising under federal or state securities laws and does not affect the availability of injunctions and other equitable remedies available to the Company's shareholders for any violation of a director's fiduciary duty to the Company or its shareholders.
In accordance with Section 317, the Restated Articles of Incorporation, as amended (the "Articles"), of the Company limit the liability of a director to the Company or its shareholders for monetary damages to the fullest extent permissible under California law. The Articles further authorize the Company to provide indemnification to its agents (including officers and directors), subject to the limitations set forth above. The Articles and the Company's By-Laws further provide for indemnification of corporate agents to the maximum extent permitted by the CGCL.
Pursuant to the authority provided in the Articles, the Company has entered into indemnification agreements with each of its executive officers and directors, indemnifying them against certain potential liabilities that may arise as a result of their service to the Company, and providing for certain other protection.
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The Company also maintains insurance policies which insure its officers and directors against certain liabilities.
The foregoing summaries are necessarily subject to the complete text of the statute, the Articles, the By-Laws and the agreements referred to above and are qualified in their entirety by reference thereto.
Item 7. Exemption from Registration Claimed.
Not Applicable.
Item 8. Exhibits.
The following exhibits are filed as part of this Registration Statement:
Exhibit No. Description
1(1) Common Shares Rights Agreement dated as of May 15, 1989 between the Registrant and the First National Bank of Boston, as Rights Agent. 4.5 Form of Option Agreement 5.1 Opinion of counsel as to the legality of the securities being registered hereby 10.A.49 1997 Employee Stock Option Plan, as amended through November 1997 10.A.50 1997 Director Stock Option Plan, as amended through
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November 1997 10.A.51 1998 Executive Officer Stock Plan 23.1 Consent of counsel (included in Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, independent auditors, with respect to the consolidated financial statements of the Registrant. 23.3 Consent of KPMG Peat Marwick LLP, independent auditors, with respect to the consolidated financial statements of the Registrant. 24.1 Power of Attorney (included on page 8).
(1) Incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A filed with the Commission on May 26, 1989.
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Item 9. Undertakings.
(a) The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such
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liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act, and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cupertino, County of Santa Clara, State of California, on the 31day of July, 1998.
APPLE COMPUTER, INC.
By: /s/Fred D. Anderson Fred D. Anderson Executive Vice President and Chief Financial Officer
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Steven P. Jobs, Fred D. Anderson, Nancy R. Heinen and Michael C. Wyatt, and each of them individually and without the others, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities to sign any amendments to the Registration Statement, and to file the same, with exhibits thereto and other documents in connection therewith, with the Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
Interim Chief Executive July 31, 1998 /s/Steven P. Jobs Officer and Director Steven P. Jobs (Principal Executive Officer)
Executive Vice President July 31, 1998 /s/Fred D. Anderson and Chief Financial Officer Fred D. Anderson (Principal Financial Officer)
/s/Gareth C.C. Chang Director July 31, 1998 Gareth C. C Chang
/s/William V. Campbell Director July 31, 1998 William V. Campbell
/s/Lawrence J. Ellison Director July 31, 1998 Lawrence J. Ellison
/s/Jerome B. York Director July 31, 1998 Jerome B. York
/s/Edgar S. Woolard, Jr. Director July 31, 1998
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Edgar S. Woolard, Jr.
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EXHIBIT INDEX
Exhibit Page No. Description No.
1(1) Common Shares Rights Agreement dated as of May 15, 1989 between the Registrant and the First National Bank of Boston, as Rights Agent. 4.5 Form of Option Agreement 10 5.1 Opinion of counsel as to the legality of the securities 12 being registered hereby 10.A.49 1997 Employee Stock Option Plan, as amended through 14 November 1997 10.A.50 1997 Director Stock Option Plan, as amended through 25 November 1997 10.A.51 1998 Executive Officer Stock Plan 35 23.1 Consent of counsel (included in Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, independent auditors, 51 with respect to the consolidated financial statements of the Registrant. 23.3 Consent of KPMG Peat Marwick LLP, independent auditors, 52 with respect to the consolidated financial statements of the Registrant. 24.1 Power of Attorney 8
------(1) Incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A filed with the Commission on May 26, 1989.
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STOCK OPTION AGREEMENT RE: Non-Employee Director
Date of Grant: Option price per share: Total number of shares granted:
On the Date of Grant shown above, Apple Computer, Inc. (the "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 (the "Option°).
1. OPTION PRICE. The option price indicated above for each share of Common Stock, is equal to the fair market value per share of Common Stock on the date of grant of this Option (the "Option Price"), as determined by the Administrator.
2. EXERCISE OF OPTION. This Option shall be exercisable as follows: (i) RIGHT TO EXERCISE . This Option shall be exercisable, cumulatively, as follows:
Number of Shares Can be Exercised On Must be Exercised Before
(ii) METHOD OF EXERCISE. This Option shall be exercisable by written Notice of Exercise which shall state the election to exercise this Option, the number of shares in respect of which this Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company. Such Notice of Exercise shall be signed by the Optionee and shall be delivered in person or by mail or by facsimile to the Company. When exercising the Option, the Notice of Exercise form shall be accompanied by payment of the Option Price, which shall be by cash, check, or any other method approved by the Administrator. When executing a same-day-sale, the Notice of Exercise form must be submitted to Shareholder Relations by 3:00 PM the next business day following the day of sale. The certificate or certificates for shares of Common Stock as to which this Option shall be exercised shall be registered in the name of the Optionee.
(iii) RESTRICTIONS ON EXERCISE. This Option may not be exercised if the issuance of such shares upon such exercise would constitute a violation of any applicable federal or state securities law or other law or regulation. As a condition to the exercise of this Option, the Company may require the Optionee to make such representations, and warranties to the Company as may be required by any applicable law or regulation, including the execution and delivery of a representation letter at the time of exercise of this Option.
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3. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution or
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pursuant to a qualified domestic relations order as defined by the Internal Revenue Code or Title I of the Employee Retirement Income Security Act or the rules thereunder. This Option may be exercised during the lifetime of the Optionee only by the Optionee. The terms of this option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.
4. TERMINATION OF SERVICE - This Option shall terminate 90 days following the date of termination of service on Apple's Board of Directors and may be exercised during such 90-day period only to the extent vested and exercisable as of the date of termination of service.
5. MISCELLANEOUS. This Option (a) shall be binding upon and inure to the benefit of any successor of the Company, (b) shall be governed by the laws of the State of California, and any applicable laws of the United States, and (c) may not be amended except in writing. No contract, right of nomination for reelection to the Board of Directors or right to remain a member of the Board of Directors shall be implied by this Agreement, nor shall this Agreement in any way interfere with Optionee's right or the Company's right to terminate Optionee's status as a member of the Board of Directors at any time.
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July 31, 1998
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Apple Computer, Inc. 1 Infinite Loop Cupertino, California 95014
RE: Registration Statement on Form S-8 for the 1997 Director Stock Option Plan, 1997 Employee Stock Option Plan, 1998 Executive Officer Stock Plan and stock option grants to Edgar S. Woolard, Jr. and Gareth C.C. Chang
Ladies and Gentlemen:
I have examined the Registration Statement on Form S-8 to be filed with the Securities and Exchange Commission on or about July 31 , 1998 (the "Registration Statement ") in connection with the registration under the Securities Act of 1933 , as amended , of (i) 400,000 additional shares of Apple Computer , Inc.'s Common Stock, no par value , authorized for issuance under the 1997 Director Stock Option Plan, as amended ( the "Director Plan°); (ii) 5,000,000 additional shares of Apple Computer , Inc.'s Common Stock, no par value , authorized for issuance under the 1997 Employee Stock Option Plan, as amended ( the "Employee Plan" ); ( iii) 9,400,000 shares of Apple Computer, Inc.'s Common Stock, no par value , authorized for issuance under the 1998 Executive Officer Stock Plan ( the "Executive Officer Plan °); and (iv ) 30,000 additional shares of Apple Computer , Inc.'s Common Stock, no par value, authorized for issuance pursuant to stock options to Edgar S. Woolard, Jr. and Gareth C.C. Chang for 15 , 000 shares each . The shares of Apple Common Stock to be registered under the Registration Statement are hereinafter referred to collectively as the "Shares ". As counsel in connection with this transaction , I have examined the actions taken, and I am familiar with the actions proposed to be taken , in connection with the issuance and sale of the Shares pursuant to the Director Plan, the Employee Plan, the Executive Plan and the individual grants to Edgar S. Woolard, Jr. and Gareth C.C. Chang.
It is my opinion that, when issued and sold in the manner described in the Director Plan, Employee Plan, Executive Plan and the individual stock option grants to Edgar S. Woolard, Jr. and Gareth C.C. Chang and pursuant to the agreements which accompany each grant, the Shares will be legally and validly issued, fully paid and nonassessable.
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I consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of my name wherever appearing in the Registration Statement.
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Very truly yours,
By: /s/ Nancy R. Heinen Nancy R. Heinen General Counsel
13 [EXHIBIT 10.A.49] APPLE COMPUTER, INC. 1997 EMPLOYEE STOCK OPTION PLAN ( as amended through 11/5/97) http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 14 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 15 of 49 1. Purposes of the Plan. The purposes of this 1997 Employee Stock Option Plan are to assist the Company in attracting and retaining high quality personnel, to provide additional incentive to Employees who are not Directors or Officers of the Company and to promote the success of the Company's business. Options granted under the Plan shall be Nonstatutory Stock Options. SARs granted under the Plan may be granted in connection with Options or independently of Options. 2. Definitions. As used herein, the following definitions shall apply: "Administrator" means the Board or any of its Committees, as shall be administering the Plan from time to time pursuant to Section 4 of the Plan. "Affiliated Company" means a corporation which is not a Subsidiary but with respect to which the Company owns, directly or indirectly through one or more Subsidiaries, at least twenty percent of the total voting power, unless the Administrator determines in its discretion that such corporation is not an Affiliated Company. "Applicable Laws" shall have the meaning set forth in Section 4 of the Plan. " Board" means the Board of Directors of the Company. "Change in Control" shall have the meaning set forth in Section 10 of the Plan. "Change in Control Price" shall have the meaning set forth in Section 12 of the Plan. "Common Stock" means the common stock, no par value, of the Company. "Company" means Apple Computer, Inc., a California corporation, or its successor. "Committee" means a Committee, if any, appointed by the Board in accordance with Section 4(a) of the Plan. 14 "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. "Continuous Status as an Employee" means the absence of any interruption or termination of the employment relationship with the Company or any Subsidiary or Affiliated Company. Continuous Status as an Employee shall not be considered interrupted in the case of (i) medical leave, military leave, family leave, or any other leave of absence approved by the Administrator, provided, in each case, that such leave does not result in termination of the employment relationship with the Company or any Subsidiary or Affiliated Company, as the case may be, under the terms of the respective Company policy for such leave; or (ii) in the case of transfers between locations of the Company or between the Company, its Subsidiaries, its successor or its Affiliated Companies. "Director" means a member of the Board. http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 15 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 16 of 49 "Employee" means any person, employed by and on the payroll of the Company, any Subsidiary or any Affiliated Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system (including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System), its Fair Market Value shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or exchange (or the exchange with the greatest volume of trading in the Common Stock) for the date of determination or, if the date of determination is not a trading day, the immediately preceding trading day, as reported in The Wall Street Journal or such other source as the Administrator deems reliable. (ii) If the Common Stock is regularly quoted on the NASDAQ System (but not on the National Market System) or quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high and low asked prices for the Common Stock on the date of determination or, if there are no quoted prices on the date of determination, on the last day on which there are quoted prices prior to the date of determination. (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. "Nonstatutory Stock Option" means an Option that is not intended to be an incentive stock option within the meaning of Section 422 of the Code. 15 "Option" means an option granted pursuant to the Plan. "Optioned Stock" means the Common Stock subject to an Option or SAR. "Optionee " means an Employee who receives an option or SAR. "Parent" corporation shall have the meaning defined in Section 424(e) of the Code. "Plan" means this Apple Computer, Inc. 1997 Employee Stock Option Plan. "SAR" means a stock appreciation right granted pursuant to Section 9 below. "Section 3 Limit" shall have the meaning set forth in Section 3 of the Plan. "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan. http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 16 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 17 of 49 "Sixty-Day Period " shall have the meaning set forth in Section 12(f) of the Plan. "Subsidiary" corporation has the meaning defined in Section 424(f) of the Code. "Tax Date" shall have the meaning set forth in Section 9 of the Plan. 3. Stock Subject to the Plan. (a) Limit. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan or for which SARs may be granted and exercised is 5,000,000 Shares (the "Section 3 Limit"). The Shares may be authorized but unissued or reacquired Common Stock. In the discretion of the Administrator, any or all of the Shares authorized under the Plan may be subject to SARs issued pursuant to the Plan. (b) Rules Applicable to the Calculation of the Section 3 Limit. In calculating the number of Shares available for issuance under the Plan, the following rules shall apply: (i) The Section 3 Limit shall be reduced by the number of Shares of Optioned Stock subject to each outstanding Option or freestanding SAR. (ii) The Section 3 Limit shall be increased by the number of Shares of Optioned Stock subject to the portion of an Option or SAR that expires unexercised or is forfeited for any reason. 16 (iii) The Section 3 Limit shall be increased by the number of Shares tendered to pay the exercise price of an Option or the number of Shares of Optioned Stock withheld to satisfy an Optionee's tax liability in connection with the exercise of an Option or SAR. (iv) Option Stock subject to both an outstanding Option and SAR granted in connection with the Option shall be counted only once in calculating the Section 3 Limit. 4. Administration of the Plan. (a) Composition of Administrator. The Plan may be administered by (i) the Board or (ii) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the applicable securities laws, California corporate law and the Code (collectively, "Applicable Laws"). Once a Committee has been appointed pursuant to this Section 4(a), such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of the Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 17 of 48 Case 5 : 06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 18 of 49 its discretion: (i) to determine the Fair Market Value of the Common Stock in accordance with the Plan; (ii) to determine, in accordance with Section 8(a) of the Plan, the exercise price per Share of Options and SARs to be granted; (iii) to determine the Employees to whom, and the time or times at which, Options and SARs shall be granted and the number of Shares to be represented by each Option or SAR (including, without limitation, whether or not a corporation shall be excluded from the definition of Affiliated Company); (iv) to construe and interpret the provisions of the Plan and any agreements or certificates issued under or in connection with the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or SAR granted hereunder (including, but not limited to, any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option or SAR or the Shares relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion); (vi) to approve forms of agreement for use under the Plan; (vii) to prescribe, amend and rescind rules and regulations relating to the Plan; (viii) to modify or amend each Option or SAR or accelerate the exercise date of any Option or SAR; (ix) to reduce the exercise price of any Option or SAR to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or SAR shall have declined since the date the Option or SAR was granted; (x) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an 17 (c) Effect of Decisions by the Administrator. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options. 5. Eligibility. The Administrator may grant Options and SARs only to individuals who are Employees or who are consultants to the Company, or a Subsidiary or Affiliated Company. In no event may an Option or SAR be granted to any individual who, at the time of grant, is an Officer or Director. An Employee who has been granted an Option or SAR may, if he or she is otherwise eligible, be granted an additional Option or Options, SAR or SARs. Each Option shall be evidenced by a written Option agreement, which shall be in such form and contain such provisions as the Administrator shall from time to time deem appropriate. Without limiting the foregoing, the Administrator may, at any time, or from time to time, authorize the Company, with the consent of the respective recipients, to issue new Options or Options in exchange for the surrender and cancellation of any or all outstanding Options, other options, SARs or other stock appreciation rights. Neither the Plan nor any option or SAR agreement shall confer upon any Optionee any right with respect to continuation of employment by the Company (or any Parent, Subsidiary or Affiliated Company), nor shall it interfere in any way with the Optionee's right or the right of the Company (or any Parent, Subsidiary or Affiliated Company) to terminate the Optionee's employment at any time or for any reason. If an Option or SAR is granted to an individual who is a consultant to the Company or any Subsidiary or Affiliate, all references in the Plan to "Employee" shall be deemed to include the term "consultant" and all references in the Plan to "employment," "Continuous Status as an Employee" and "termination of employment". shall be deemed to refer to the individual's consultancy or status as a consultant. http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 18 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 19 of 49 6. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten years unless sooner terminated under Section 14 of the Plan. 7. Term of Option. The term of each Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option agreement. 8. Exercise Price and Consideration. (a) Exercise Price. The per Share exercise price for the Shares issuable pursuant to an Option shall be such price as is determined by the Administrator, but shall in no event be less than 100% of the Fair Market Value of Common Stock, determined as of the date of grant of the Option. In the event that the Administrator shall reduce the exercise price, the exercise price shall be no less than 100% of the Fair Market Value as of the date of that reduction. 18 9. Stock Appreciation Rights. (a) Granted in Connection with Options. At the sole discretion of the Administrator, SARs may be granted in connection with all or any part of an Option, either concurrently with the grant of the Option or at any time thereafter during the term of the Option. The following provisions apply to SARs that are granted in connection with Options: (i) The SAR shall entitle the Optionee to exercise the SAR by surrendering to the Company unexercised a portion of the related Option. The Optionee 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 portion of the related Option. Notwithstanding the foregoing, the Administrator may place limits on the amount that may be paid upon exercise of an SAR; provided, however, that such limit shall not restrict the exercisability of the related Option. (ii) When an SAR is exercised, the related Option, to the extent surrendered, shall no longer be exercisable. (iii) An SAR shall be exercisable only when and to the extent that the related Option is exercisable and shall expire no later than the date on which the related Option expires. (iv) An SAR may only be exercised at a time when the Fair Market Value of the Common Stock covered by the related Option exceeds the exercise price of the Common Stock covered by the related Option. http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 19 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 20 of 49 (b) Independent SARs. At the sole discretion of the Administrator, SARs may be granted without related Options. The following provisions apply to SARs that are not granted in connection with Options: (i) The SAR shall entitle the Optionee, by exercising the SAR, to receive from the Company an amount equal to the excess of (x) the Fair Market Value of the Common Stock covered by exercised portion of the SAR, as of the date of such exercise, over (y) the Fair Market Value of the Common Stock covered by the exercised portion of the SAR, as of the date on which the SAR was granted; 19 (ii) SARs shall be exercisable, in whole or in part, at such times as the Administrator shall specify in the Optionee's SAR agreement. (c) Form of Payment. The Company's obligation arising upon the exercise of an SAR may be paid in Common Stock or in cash, or in any combination of Common Stock and cash, as the Administrator, in its sole discretion, may determine. Shares issued upon the exercise of an SAR shall be valued at their Fair Market Value as of the date of exercise. 10. Method of Exercise. (a) Procedure for Exercise; Rights as a Shareholder. Any Option or SAR granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator and as shall be permissible under the terms of the Plan. An Option or SAR shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option or SAR by the person entitled to exercise the Option or SAR and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator and permitted by the Option agreement, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. An Option or SAR may not be exercised with respect to a fraction of a Share. (b) Termination of Continuous Employment. Upon termination of an Optionee's Continuous Status as Employee (other than termination by reason of the Optionee's death), the Optionee may, but only within ninety days after the date of such termination, exercise his or her Option or SAR to the extent that it was exercisable at the date of such termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant. (c) Death of Optionee. In the event of the death of an Optionee: http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 20 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 21 of 49 (i) Who is at the time of death an Employee and who shall have been in Continuous Status as an Employee since the date of grant of the Option, the Option or SAR may be exercised at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the 20 (ii) Within ninety days after the termination of Continuous Status as an Employee, the Option or SAR may be exercised, at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant. (d) Stock Withholding to Satisfy Withholding Tax Obligations. When an Optionee incurs tax liability in connection with the exercise of an Option or SAR, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation (including, at the election of the Optionee, any additional amount which the Optionee desires to have withheld in order to satisfy in whole or in part the Optionee's full estimated tax in connection with the exercise) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option, or the Shares to be issued upon exercise of the SAR, if any, that number of Shares having a Fair Market Value equal to the amount required to be withheld (and any additional amount desired to be withheld, as aforesaid). The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). All elections by an Optionee to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (i) the election must be made on or prior to the applicable Tax Date; and (ii) all elections shall be subject to the consent or disapproval of the Administrator. 11. Non-Transferability of Options. Options and SARs may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder; provided, however, that the Administrator may grant Nonstatutory Stock Options that are freely transferable. The designation of a beneficiary by an Optionee or holder of an SAR does not constitute a transfer. An Option or an SAR may be 21 http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 21 of 48 Case 5 : 06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 22 of 49 12. Adjustments Upon Changes in Capitalization or Merger. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option and SAR, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options or SARs have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or SAR, as well as the price per Share covered by each such outstanding Option or SAR, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the aggregate number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option or SAR. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options and SARs will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option or SAR shall terminate as of a date fixed by the Administrator and give each Optionee the right to exercise his or her Option or SAR as to all or any part of the Optioned Stock or SAR, including Shares as to which the Option or SAR would not otherwise be exercisable. (c) Sale of Assets or Merger. Subject to the provisions of Section 12(d), in the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding Option and SAR shall be assumed or an equivalent option or stock appreciation right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option or SAR as to all of the Optioned Stock, including Shares as to which the Option or SAR would not otherwise be exercisable. If the Administrator makes an Option or SAR fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Company shall notify the Optionee that the Option or SAR shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option or SAR will terminate upon the expiration of such period. For purposes of this paragraph, an Option granted under the Plan shall be deemed 22 http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 22 of 48 Case 5 : 06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 23 of 49 the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the sale of assets or merger was not solely Common Stock of the successor corporation or its parent, the Administrator may, with the consent of the successor corporation and the participant, provide for the per share consideration to be received upon exercise of the Option to be solely Common Stock of the successor corporation or its parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the sale of assets or merger. (d) Change in Control. In the event of a "Change in Control" of the Company, as defined in Section 12(e), unless otherwise determined by the Administrator prior to the occurrence of such Change in Control, the following acceleration and valuation provisions shall apply: (i) Any Options and SARs outstanding as of the date such Change in Control is determined to have occurred that are not yet exercisable and vested on such date shall become fully exercisable and vested; and (ii) The value of all outstanding Options and SARs shall, unless otherwise determined by the Administrator at or after grant, be cashed-out. The amount at which such Options and SARs shall be cashed out shall be equal to the excess of (x) the Change in Control Price (as defined below) over (y) the exercise price of the Common Stock covered by the Option or SAR. The cash-out proceeds shall be paid to the Optionee or, in the event of death of an Optionee prior to payment, to the estate of the Optionee or to a person who acquired the right to exercise the Option or SAR by bequest or inheritance. (e) "Definition of "Change in Control". For purposes of this Section 12, a "Change in Control" means the happening of any of the following: (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 any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or (ii) The occurrence of a transaction requiring shareholder approval, and involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation. (f) Change in Control Price. For purposes of this Section 12, "Change 23 http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 23 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 24 of 49 a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan, as it may deem advisable. (b) Effect of Amendment or Termination. Any such amendment, alteration, suspension or termination of the Plan shall not impair the rights of any Optionee or SAR holder under any grant theretofore made without his or her consent. Such Options and SARs shall remain in full force and effect as if this Plan had not been amended or terminated. 15. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an Option or SAR unless the exercise of such Option or SAR and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option or SAR or the issuance of Shares upon exercise of an Option or SAR, the Company may require the person exercising such Option or SAR to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the non-issuance or sale of such Shares as to which such requisite authority shall not have been obtained. 16. 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 the requirements of the Plan. 24 EXHIBIT 10.A.50 Apple Computer, Inc. 1997 Director Stock Option Plan (Effective as of August 5, 1997) http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 24 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 25 of 49 25 Apple Computer, Inc. 1997 Director Stock Option Plan 1. Purposes. The purposes of the Plan are to retain the services of qualified individuals who are not employees of the Company to serve as members of the Board and to secure for the Company the benefits of the incentives inherent in increased Common Stock ownership by such individuals by granting such individuals Options to purchase shares of Common Stock. 2. Administration. The Administrator will be responsible for administering the Plan. The Administrator will have authority to adopt such rules as it may deem appropriate to carry out the purposes of the Plan, and shall have authority to interpret and construe the provisions of the Plan and any agreements and notices under the Plan and to make determinations pursuant to any Plan provision. Each interpretation, determination or other action made or taken by the Administrator pursuant to the Plan shall be final and binding on all persons. The Administrator shall not be liable for any action or determination made in good faith, and shall be entitled to http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 25 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 26 of 49 indemnification and reimbursement in the manner provided in the Company's Articles of Incorporation and By-Laws as such documents may be amended from time to time. 3. Shares Available. Subject to the provisions of Section 7(b) of the Plan, the maximum number of shares of Common Stock which may be issued under the Plan shall not exceed 400,000 shares (the "Section 3 Limit"'). Either authorized and unissued shares of Common Stock or treasury shares may be delivered pursuant to the Plan. For purposes of determining the number of shares that remain available for issuance under the Plan, the following rules shall apply: (a) the number of shares of Common Stock underlying Options shall be charged against the Section 3 Limit; and (b) the Section 3 Limit shall be increased by (i) the number of shares subject to an Option which lapses, expires or is otherwise terminated without the issuance of such shares, and (ii) the number of shares, if any, tendered to pay the exercise price of an Option. 4. Options. Each Non-Employee Director shall receive grants of Options under the Plan as follows (a) Option Grants. 26 (i) Initial Grants. Non-Employee Directors who were members of the Board on the day prior to the Effective Date shall be granted an Initial Option to purchase 15,000 shares of Common Stock as of August 14, 1997 ("Initial Grant Date"), provided that such individual continues to serve as a Non-Employee Director through the Initial Grant Date. Non- Employee Director who were elected or appointed to the Board on the Effective Date an Initial Option to purchase 30,000 shares of Common Stock on the Initial Grant Due, provided that such individual continues to serve as a Non-Employee Director through the Initial Grant Date. Non- Employee Directors who are elected or appointed to the Board after the Effective Date shall be granted an Initial Option to purchase 30,000 shares of Common Stock as of the date of their election or appointment to the Board. The provisions of this Section 4(a)(i) shall not apply to any member of the Board who first becomes a Non-Employee Director by reason of such member's ceasing to be an employee of the Company and its Subsidiaries. (ii) Annual Grants. Each Non-Employee Director shall receive an Annual Option to purchase 10,000 shares of Common Stock on the fourth anniversary of the Non-Employee Director's initial election or appointment to the Board and on each subsequent anniversary thereof, provided that the individual has remained in continuous service as a director of the Company through such anniversary date and is a Non- Employee Director on the applicable anniversary date. http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 26 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 27 of 49 (b) Exercise Period. The per share exercise price of each Option shall be the Fair Market Value of a share of Common Stock as of the date of grant of the Option determined in accordance with the provisions of the Plan. (c) Vesting. Initial Options shall vest and become exercisable in annual installments on each of the first through third anniversaries of the date of grant, provided that the Non-Employee Director has remained in continuous service as a director of the Company through each such anniversary date. Annual Options shall be fully vested and immediately exercisable on their date of grant. (d) Term of Options. (i) Ten-Year Term. Each Option shall expire ten (10) years from its date of grant, subject to earlier termination as provided herein. (ii) Exercise Following Termination of Service Due to Death. If a Non-Employee Director ceases to be a member of the Board by reason of such Non-Employee Director's death, the Options granted to such Non- Employee Director may be exercised by such Non-Employee Director's Beneficiary, but only to the extent the Option was exercisable at the time of the Non-Employee Director's death, at any time within three (3) years alter the date of such termination of service, subject to the earlier expiration of such Options as provided for in Section 4(d)(i) above. At the 27 (iii) Termination of Options if a Non-Employee Director is Removed from the Board for Cause. In the event a Non-Employee Director is removed from the Board for "cause," all Options granted to such Non-Employee Director (whether or not then vested and exercisable) shall immediately terminate and be of no further force and effect as of the effective date of such removal from the Board. Whether a Non-Employee Director is removed by the Board for "cause" shall be determined by the Board in accordance with the By-Laws of the Company. (iv) Exercise Following Other Terminations of Service. If a Non- Employee Director ceases to be a member of the Board for any reason other than death or removal from the Board for cause, the Options granted to such Non-Employee Director may be exercised by such Non- Employee Director, but only to the extent the Option was exercisable at the time of the Non-Employee Director's termination, at any time within ninety (90) days after the date of such termination of service, subject to the earlier expiration of such Options as provided for in Section 4(d)(i) above. At the end of such ninety-day period, the vested portion of the Option shall expire. The unvested portion of the Option shall expire on the date of the Non-Employee Director's termination of service with the Board. (e) Time and Manner of Exercise of Options. (i) Notice of Exercise. Subject to the other terms and conditions hereof, a Non-Employee Director may exercise any Option, to the extent such Option is vested, by giving written notice of exercise to the Company; provided, however, that in no event shall an Option be http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 27 of 48 Case 5 : 06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 28 of 49 exercisable for a fractional share. The date of exercise of an Option shall be the later of (A) the date on which the Company receives such written notice and (B) the date on which the conditions provided in Section 4(e) (ii) are satisfied. (ii) Method of Payment. The consideration to be paid for the shares to be issued upon exercise of an option may consist of (A) cash, (B) check, (C) 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 the Option shall be exercised and which have been owned by the Non- Employee Director for at least six (6) months at the time of exercise, (D) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of proceeds required to pay the exercise price, or (E) any combination of the foregoing methods of payment. (iii) Stockholder Rights. A Non-Employee Director shall have no rights as a stockholder with respect to any shares of Common Stock issuable upon exercise of an Option until a certificate evidencing such 28 shares shall have been issued to the Non-Employee Director pursuant to Section 4(e)(v), and no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date upon which the Non-Employee Director shall become the holder of record thereof. (iv) Limitation on Exercise. No Option shall be exercisable unless the Common Stock subject thereto has been registered under the Securities Act and qualified under applicable state "blue sky" laws in connection with the offer and sale thereof, or the Company has determined that an exemption from registration under the Securities Act and from qualification wider such state "blue sky" laws is available. (v) Issuance of Shares. Subject to the foregoing conditions, as soon as is reasonably practicable after its receipt of a proper notice of exercise and payment of the exercise price of the Option for the number of shares with respect to which the Option is exercised, the Company shall deliver to the Non-Employee Director (or following the Non-Employee Director's death, the Beneficiary entitled to exercise the Option), at the principal office of the Company or at such other location as may be acceptable to the Company and the Non-Employee Director (or such Beneficiary), one or more stock certificates for the appropriate number of shares of Common Stock Issued in connection with such exercise. Shares sold in connection with a "cashless exercise" described in clause C of Section 4(e)(ii) shall be delivered to the broker referred to therein in accordance with the procedures established by the Company from time to time. (f) Restrictions on Transfer. An Option may not be transferred, pledged, assigned, or otherwise disposed of, except by will or by the laws of descent and distribution; provided, however, that an Option may be transferred to a Non-Employee Director's family members or to one or more trusts established in whole or in part for the benefit of one or more of such family members. The Option shall be exercisable, during the Non-Employee Director's lifetime, only by the Non-Employee Director or by the individual or entity to whom the Option has been transferred in accordance with the previous sentence. No assignment or transfer of the Option, or of the rights http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 28 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 29 of 49 represented thereby, whether voluntary or involuntary, by operation of law or otherwise, except by will or the laws of descent and distribution, shall vest in the assignee or transferee any interest or right in the Option, but immediately upon any attempt to assign or transfer the Option the same shall terminate and be of no force or effect. 5. Designation of Beneficiary. (a) Beneficiary Designations. Each Non-Employee Director may designate a Beneficiary to exercise an option upon the Non-Employee Director's death by executing a Beneficiary Designation Form. 29 (b) Change of Beneficiary Designation. A Non-Employee Director may change an earlier Beneficiary designation by executing a later Beneficiary Designation Form and delivering it to the Administrator. The execution of a Beneficiary Designation Form and its receipt by the Administrator will revoke and rescind any prior Beneficiary Designation Form. 6. Change in Control. Anything in the Plan to the contrary notwithstanding, in the event of a Change in Control of the Company, the following provisions shall apply: (a) Any Options outstanding as of the date such Change in Control is determined to have occurred that are not yet exercisable and vested on such date shall become fully exercisable and vested. (b) The value of all outstanding Options (to the extent not previously exercised) shall be cashed out on the date of the Change in Control. The amount at which such Options shall be cashed out shall be equal to the excess, if any, of (i) the Change in Control Price over (ii) the exercise price of the Common Stock covered by the Option. The cash-out proceeds shall be paid to the Non-Employee Director or, in the event of death of the Non-Employee Director prior to payment, to the Beneficiary thereof. (c) If the Administrator shall receive an opinion from a nationally recognized firm of accountants to the Company that the cash-out provisions in Section 6(b) above with respect to Options will prohibit the utilization of "pooling of interests" accounting in connection with the transaction resulting in the Change in Control of the Company, then the following shall apply, but only to the extent necessary to permit such accounting treatment: (i) the provisions of Section 6(b) shall not apply to the Options, (ii) each such Option shall become immediately vested and exercisable as of the date such opinion is received by the Administrator, and (iii) the Administrator shall promptly inform each Non-Employee Director of such opinion and of the accelerated vesting and exercisability of the Option sufficiently prior to the anticipated date of the Change in Control, so as to permit the Option to be exercised prior to the date of the Change in Control. 7. Recapitalization or Reorganization. (a) Authority of the Company and Shareholders. The existence of the Plan shall not affect or restrict in any way the right or power of the Company or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 29 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 30 of 49 any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 30 (b) Change in Capitalization. Notwithstanding any other provision of the Plan, in the event of any change in the outstanding Common Stock by reason of a stock dividend, recapitalization, reorganization, merger, consolidation, stock split, combination or exchange of shares (a "change in Capitalization°), (i) such proportionate adjustments as may be necessary (in the form determined by the Administrator in its sole discretion) to reflect such change shall be made to prevent dilution or enlargement of the rights of Non-Employee Directors under the Plan with respect to tile aggregate number of shares of Common Stock authorized to be awarded under the Plan, the number of shares of Common Stock covered by each outstanding Option and the exercise prices in respect thereof and the number of shares of Common Stock covered by future Option grants and (ii) the Administrator may make such other adjustments, consistent with the foregoing, as it deems appropriate in its sole discretion. (c) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, each outstanding Option will vest and become exercisable on a date prior to the consummation of the proposed action that is reasonably sufficient to enable the Non-Employee Directors to exercise their Options. 8. Termination and Amendment of the Plan. (a) Termination. The Plan shall terminate on the tenth anniversary of the Effective Date, Following such date, no further grants of Options shall be made pursuant to the Plan. (b) General Power of Board. Notwithstanding anything herein to the contrary, the Board may at any time and from time to time terminate, modify, suspend or amend the Plan in whole or in part; provided, however, that no such termination, modification, suspension or amendment shall be effective without shareholder approval if such approval is required to comply with any applicable law or stock exchange rule; and provided further, that the Board may not, without shareholder approval, increase the maximum number of shares issuable under the Plan except as provided in Section 7(b) above. (c) When Non-Employee Directors' Consents Required. The Board may not alter, amend, suspend, or terminate the Plan without the consent of any Non-Employee Director to the extent that such action would adversely affect his or her rights with respect to Options that have previously been granted. 9. Miscellaneous. (a) No Right to Reelection. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any of its members for reelection by the Company's stockholders, nor confer upon any Non-Employee Director the right to remain a member of the Board for any period of time, or at any particular rate of compensation http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 30 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 31 of 49 31 (b) Securities Law Restrictions. The Administrator may require each Non-Employee Director purchasing or acquiring shares of Common Stock pursuant to the Plan to agree with the Company in writing that such Non- Employee Director is acquiring the shares for investment and not with a view to the distribution thereof. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission or any exchange upon which the Common Stock is then listed, and any applicable federal or state securities law, and the Administrator may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. No shares of Common Stock shall be issued hereunder unless the Company shall have determined that such issuance is in compliance with, or pursuant to an exemption from, all applicable federal and state securities laws. (c) Expenses . The costs and expenses of administering the Plan shall be borne by the Company. (d) Applicable Law. Except as to matters of federal law, the Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of California without giving effect to conflicts of law principles. (e) Effective Date. The Plan shall be effective as of the Effective Date, subject to the approval thereof by the stockholders of the Company by no later than the next Annual Meeting to occur after the Effective Date. If such stockholder approval is not obtained by the date of such Annual Meeting, all prior Option grants shall be void ab initio and of no further force and effect. 10. Definitions. Capitalized words not otherwise defined in the Plan have the meanings set forth below: "Administrator" means the Chief Executive Officer of the Company or the individual appointed by the Chief Executive Officer of the Company to administer the Plan. "Annual Meeting" means an annual meeting of the Company's stockholders. "Annual Option" means an Option granted to a Non-Employee Director pursuant to Section 4(a)(ii) of the Plan. "Beneficiary" or "Beneficiaries" means an individual or entity designated by a Non-Employee Director on a Beneficiary Designation Form to exercise Options in the event of the Non-Employee Director's death; provided, however, that, if no such individual or entity is designated or if no such designated individual is alive at the time of the Non- Employee Director's death, Beneficiary shall mean the Non-Employee Director's estate. 32 "Beneficiary Designation Form" means a document, in a form http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 31 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 32 of 49 approved by the Administrator to be used by Non-Employee Directors to name their respective Beneficiaries. No Beneficiary Designation Form shall be effective unless it is signed by the Non-Employee Director and received by the Administrator prior to the date of death of the Non- Employee Director. " Board" means the Board of Directors of the Company. "Change in Control" means the happening of any of the following: (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 any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or (ii) The occurrence of a transaction requiring shareholder approval, and involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation. "Change in Control Price" means, as determined by the Administrator, (i) the highest Fair Market Value at any time within the sixty-day period immediately preceding the date of determination of the Change in Control price by the Administrator (the "Sixty-Day Period"), or (ii) the highest price paid or offered, as determined by the Administrator, in any bona fide transaction or bona fide offer related to the Change in Control of the Company, at any time within the Sixty-Day Period. "Code," means the Internal Revenue Code of 1986, as amended, and the applicable rules and regulations promulgated thereunder. "Common Stock" means the common stock of the Company, no par value per share. "Company" means Apple Computer, Inc., a California corporation, or any successor to substantially all of its business. "Effective Date" means, subject to Section 9(e), August 5, 1997. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the applicable rules and relations promulgated thereunder. "Fair Market Value" means the value of Common Stock determined as follows: 33 (i) If the Common Stock is listed on any established stock exchange or a national market system (including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System), its Fair Market Value shall be the closing sales price for such stock or the closing bid if no sales were reported, as quoted on such system or exchange (or the exchange with the greatest volume of trading in the Common Stock) for the date of http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 32 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 33 of 49 determination or, if the date of determination is not a trading day, the immediately preceding trading day, as reported in The Wall Street Journal or such other source as the Administrator deems reliable. (ii) If the Common Stock is regularly quoted on the NASDAQ System (but not on the National Market System) or quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high and low asked prices for the Common Stock on the date of determination or, if there are no quoted prices on the date of determination, on the last day on which there are quoted prices prior to the date of determination. (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. "Initial Option" means an Option granted to a Non-Employee Director pursuant to Section 4(a)(i) of the Plan. "Non-Employee Director" means a member of the Board who is not an employee of the Company or any of its Subsidiaries. "Option "means an option to purchase shares or Common Stock awarded to a Non-Employee Director pursuant to the Plan and includes Initial Options and Annual Options. "Plan" means the Apple Computer, Inc. 1997 Director Stock Option Plan. "Section 3 Limit " shall have the meaning set forth in Section 3 of the Plan. "Subsidiary" means any corporation which is a "subsidiary corporation" within the meaning of Section 424(f) of the Code with respect to the Company. 34 EXHIBIT 10.A.51 APPLE COMPUTER , INC. 1998 EXECUTIVE OFFICER STOCK PLAN April 22, 1998 http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 33 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 34 of 49 1. Purposes of the Plan. The purposes of this Stock Plan are: -- To attract and retain the best available personnel for positions of substantial responsibility; -- To provide additional incentive to the Chairman and/or Executive Officers and other key employees; and -- To promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options (as defined under Section 422 of the Code) or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock appreciation rights ("SARs") may be granted under the Plan in connection with Options or independently of Options. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Agreement" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option, SAR or Stock Purchase Right grant. The Agreement is subject to the terms and conditions of the Plan. (c) "Applicable Laws" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options, SARs or Stock Purchase Rights are, or will be, granted under the Plan. (d) "Board" means the Board of Directors of the Company. (e) "Chairman" means the Chairman of the Board. 35 (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan. (h) "Common Stock" means the common stock of the Company. (i) "Company" means Apple Computer, Inc., a California corporation. (j) "Continuous Status as Chairman" unless determined otherwise by the Administrator, means the absence of any interruption or termination as Chairman of the Board with the Company. Continuous Status as Chairman shall not be considered interrupted in the case of medical leave, military leave, family leave, or any other leave of absence approved by the Administrator, provided, in each case, that such leave does not result in termination as Chairman with the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute status as "Chairman" by the Company. http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 34 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 35 of 49 (k) "Continuous Status as an Employee" means the absence of any interruption or termination of the employment relationship with the Company or any Subsidiary. Continuous Status as an Employee shall not be considered interrupted in the case of (i) medical leave, military leave, family leave, or any other leave of absence approved by the Administrator, provided, in each case, that such leave does not result in termination of the employment relationship with the Company or any Subsidiary, as the case may be, under the terms of the respective Company policy for such leave; or (ii) in the case of transfers between locations of the Company or between the Company, its Subsidiaries, or its successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 91st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as 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. (1) "Director" means a member of the Board. (m) "Employee" means any person employed by the Company or any Parent or Subsidiary of the Company subject to (k) above. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (o) "Executive Officer" means any person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (p) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: 36 (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system, on the date of determination or, if the date of determination is not a trading day, the immediately preceding trading day, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination or, if there are no quoted prices on the date of determination, on the last day on which there are quoted prices prior to the date of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (q) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder and is expressly designated by the http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 35 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 36 of 49 Administrator at the time of grant as an incentive stock option. (r) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (s) "Option" means a stock option granted pursuant to the Plan. (t) "Optioned Stock" means the Common Stock subject to an Option, SAR or Stock Purchase Right. (u) "Optionee" means the holder of an outstanding Option, SAR or Stock Purchase Right. (v) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. ( w) "Plan" means this 1998 Executive Officer Stock Plan. (x) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 12 of the Plan. (y) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (z) °SAR" means a stock appreciation right granted pursuant to Section 10 below. 37 (aa) "Section 16(b)" means Section 16(b) of the Exchange Act. (bb) "Share" means a share of the Common Stock, as adjusted in accordance with Section 15 of the Plan. (cc) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 12 of the Plan, as evidenced by an Agreement. (dd) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject To The Plan. Subject to the provisions of Section 15 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan or for which SARs or Stock Purchase Rights may be granted and exercised is 17,000,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. In the discretion of the Administrator, any or all of the Shares authorized under the Plan may be subject to SARs issued pursuant to the Plan. If an Option, SAR or Stock Purchase Right issued under the Plan should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for other Options, SARs or Stock Purchase Rights under this Plan (unless the Plan has terminated); however, should the Company reacquire Shares which were issued pursuant to the exercise of an Option or SAR, such Shares shall not become available for future grant under the Plan. If Shares of Restricted Stock are repurchased by the Company at their original purchase price, such shares shall become available for future grant under the Plan. http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 36 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 37 of 49 4. Administration of the Plan. (a) Procedure. (i) Multiple Administrative Bodies. If permitted by Rule 16b-3 promulgated under the Exchange Act or any successor rule thereto, as in effect at the time that discretion is being exercised with respect to the Plan, and by the legal requirements of the Applicable Laws relating to the administration of stock plans such as the Plan, if any, the Plan may (but need not) be administered by different administrative bodies with respect to (A) Directors who are not Employees, (B) Directors who are Employees, (C) Officers who are not Directors and (D) Employees who are neither Directors nor Officers. (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options or SARs granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. 38 (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the person ( s) to whom Options, SARs and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option, SAR or Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option, SAR or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the date of grant, the time or times when Options, SARs or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option, SAR or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option, SAR or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 37 of 48 Case 5 : 06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 38 of 49 Common Stock covered by such Option, SAR or Stock Purchase Right shall have declined since the date the Option, SAR or Stock Purchase Right was granted; (vii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (ix) to modify or amend each Option, SAR or Stock Purchase Right (subject to Section 17(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; 39 (x) to allow Optionees 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 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 withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option, SAR or Stock Purchase Right previously granted by the Administrator; and (xii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options, SARs or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options, SARs and Stock Purchase Rights may be granted to the Chairman, Executive Officers and other key employees or to such other individuals as determined by the Administrator whom the Company has offered a position of Chairman or Executive Officer. Incentive Stock Options may be granted only to Executive Officers and other key employees. 6. Limitations. (a) Each Option shall be designated in the Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding 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 Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 38 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 39 of 49 (b) Neither the Plan nor any Option, SAR or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as an Employee with or Chairman of the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options and SARs: 40 (i) No participant shall be granted, in any fiscal year of the Company, Options or SARs to purchase more than 17,000,000 Shares; (ii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 15; (iii) If an Option or SAR is canceled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 15), the canceled Option will be counted against the limits set forth in subsections (i) above. For this purpose, if the exercise price of an Option or SAR is reduced, the transaction will be treated as a cancellation of the Option or SAR and the grant of a new Option or SAR. 7. Term of Plan. Subject to Section 21 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 16 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Agreement. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option; (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant; or (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant; http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 39 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 40 of 49 41 (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant; (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant as determined by the Administrator or pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) 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; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee , including any liability attributable to the Optionee's participation in any Company - sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 42 http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 40 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 41 of 49 10. Stock Appreciation Rights. (a) Granted in Connection with Options. At the sole discretion of the Administrator, SARs may be granted in connection with all or any part of an Option, either concurrently with the grant of the Option or at any time thereafter during the term of the Option. The following provisions apply to SARs that are granted in connection with Options: (i) The SAR shall entitle the Optionee to exercise the SAR by surrendering to the Company unexercised a portion of the related Option. The Optionee 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 portion of the related Option. Notwithstanding the foregoing, the Administrator may place limits on the amount that may be paid upon exercise of a SAR; provided, however, that such limit shall not restrict the exercisability of the related Option; (ii) When a SAR is exercised, the related Option, to the extent surrendered, shall no longer be exercisable; (iii) A SAR shall be exercisable only when and to the extent that the related Option is exercisable and shall expire no later than the date on which the related Option expires; and (iv) A SAR may only be exercised at a time when the Fair Market Value of the Common Stock covered by the related Option exceeds the exercise price of the Common Stock covered by the related Option. (b) Independent SARs. At the sole discretion of the Administrator, SARs may be granted without related Options. The following provisions apply to SARs that are not granted in connection with Options: (i) The SAR shall entitle the Optionee, by exercising the SAR, to receive from the Company an amount equal to the excess of (x) the Fair Market Value of the Common Stock covered by exercised portion of the SAR, as of the date of such exercise, over (y) the Fair Market Value of the Common Stock covered by the exercised portion of the SAR, as of the date on which the SAR was granted; provided, however, that the Administrator may place limits on the amount that may be paid upon exercise of a SAR; and (ii) SARs shall be exercisable, in whole or in part, at such times as the Administrator shall specify in the Optionee's Agreement. (c) Form of Payment. The Company's obligation arising upon the exercise of a SAR may be paid in Common Stock or in cash, or in any combination of Common Stock and cash, as the Administrator, in its sole discretion, may determine. Shares issued upon the exercise of a SAR shall be valued at their Fair Market Value as of the date of exercise. 43 (d) Rule 16b-3. SARs granted hereunder shall contain such additional restrictions as may be required to be contained in the Plan or Agreement in order for the SAR to qualify for the maximum exemption provided by Rule 16b-3. 11. Exercise of Option or SAR. http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 41 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 42 of 49 (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 Agreement. An Option may not be exercised for a fraction of a Share. An Option or SAR shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the terms of the Option or SAR) from the person entitled to exercise the Option or SAR, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 15 of the Plan. Exercising an option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. Exercise of a SAR in any manner shall, to the extent the SAR is exercised, result in a decrease in the number of Shares which thereafter shall be available for purposes of the Plan, and the SAR shall cease to be exercisable to the extent it has been exercised. (b) Termination of Continuous Status as Chairman. Upon termination of an Optionee's Continuous Status as Chairman (other than termination by reason of the Optionee's death), the Optionee may, but only within ninety (90) days after the date of such termination, exercise his or her Option or SAR to the extent that it was exercisable at the date of such termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant. 44 (c) Termination of Continuous Employment. Upon termination of an Optionee's Continuous Status as Employee (other than termination by reason of the Optionee's death), the Optionee may, but only within ninety (90) days after the date of such termination, exercise his or her Option or SAR to the extent that it was exercisable at the date of such termination. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant. (d) Death of Optionee. If an Optionee dies (i) while an Employee or Chairman, the Option or SAR may be exercised at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 42 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 43 of 49 by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and terminated his or her employment six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) after the date of death; or (ii) within ninety (90) days after the termination of Continuous Status as an Employee or Chairman, the Option or SAR may be exercised, at any time within six (6) months (or such other period of time not exceeding twelve (12) months as determined by the Administrator) following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option or SAR by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. If the Option or SAR is not so exercised within the time specified herein, the Option or SAR shall terminate, and the Shares covered by such Option or SAR shall revert to the Plan. Notwithstanding the foregoing, however, an Option or SAR may not be exercised after the date the Option or SAR would otherwise expire by its terms due to the passage of time from the date of grant. (e) Buyout Provisions. The Administrator may at any time offer to buy out for 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 Optionee at the time that such offer is made. 12. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the Optionee in writing or electronically, of the terms, conditions and restrictions related to the offer, including the number of Shares that the Optionee shall be entitled to purchase, the price to be paid, and the time within which the Optionee must accept such offer. The offer shall be accepted by execution of an Agreement in the form determined by the Administrator. 45 (b) Repurchase Option. Unless the Administrator determines otherwise, the Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 43 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 44 of 49 made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 15 of the Plan. 13. Transferability of Options, SARs and Stock Purchase Rights. Unless determined otherwise by the Administrator, an Option, SAR or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order as defined by the Code or Title 1 of the Employee Retirement Income Security Act, and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option, SAR or Stock Purchase Right transferable, such Option, SAR or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 14. Stock Withholding to Satisfy Withholding Tax Obligations. When an Optionee incurs tax liability in connection with the exercise of an Option, SAR or Stock Purchase Right, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation (including, at the election of the Optionee, any additional amount which the Optionee desires to have withheld in order to satisfy in whole or in part the Optionee's full estimated tax in connection with the exercise) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option, or the Shares to be issued upon exercise of the SAR or Stock Purchase Right, if any, that number of Shares having a Fair Market Value equal to the amount required to be withheld (and any additional amount desired to be withheld, as aforesaid). The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). 46 All elections by an Optionee to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (i) the election must be made on or prior to the applicable Tax Date; and (ii) all elections shall be subject to the consent or disapproval of the Administrator. In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which the Option, SAR or Stock Purchase Right is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 15. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, SAR or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 44 of 48 Case 5 : 06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 45 of 49 but as to which no Options, SARs or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, SAR or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option, SAR or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option, SAR or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options, SARs and Stock Purchase Rights will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option, SAR or Stock Purchase Right shall terminate as of a 47 date fixed by the Administrator and give each Optionee the right to exercise his or her Option, SAR or Stock Purchase Right as to all or any part of the Optioned Stock, including Shares as to which the Option, SAR or Stock Purchase Right would not otherwise be exercisable. (c) Merger or Asset Sale. Unless otherwise determined by the Administrator, in the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option, SAR and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, SAR or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option, SAR or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option, SAR or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option, SAR or Stock Purchase Right shall be fully vested and exercisable for a period of thirty (30) days from the date of such notice, and the Option, SAR or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option, SAR or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option, SAR or Stock Purchase Right 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 holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 45 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 46 of 49 a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, SAR or Stock Purchase Right, for each Share of Optioned Stock subject to the Option, SAR or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. (d) Change in Control. In the event of a "Change in Control" of the Company, as defined in paragraph (e) below, unless otherwise determined by the Administrator prior to the occurrence of such Change in Control, the following acceleration and valuation provisions shall apply: (i) Any Options, SARs and Stock Purchase Rights outstanding as of the date such Change in Control is determined to have occurred that are not yet exercisable and vested on such date shall become fully exercisable and vested; and 48 (ii) The value of all outstanding Options, SARs and Stock Purchase Rights shall, unless otherwise determined by the Administrator at or after grant, be cashed-out. The amount at which such Options, SARs and Stock Purchase Rights shall be cashed out shall be equal to the excess of (x) the Change in Control Price (as defined below) over (y) the exercise price of the Common Stock covered by the Option, SAR or Stock Purchase Right. The cash-out proceeds shall be paid to the Optionee or, in the event of death of an Optionee prior to payment, to the estate of the Optionee or to a person who acquired the right to exercise the Option, SAR or Stock Purchase Right by bequest or inheritance. (e) Definition of "Change in Control". For purposes of this Section 15, a "Change in Control" means the happening of any of the following: (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 any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or (ii) The occurrence of a transaction requiring shareholder approval, and involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation. (f) Change in Control Price. For purposes of this Section 15, "Change in Control Price" shall be, as determined by the Administrator, (i) the highest Fair Market Value at any time within the 60-day period immediately preceding the date of determination of the Change in Control Price by the Administrator (the 1160-Day Period"), or (ii) the highest price paid or offered, as determined by the Administrator, in any bona fide transaction or bona fide offer related to the Change in Control of the Company, at any time within the 60-Day Period. 16. Date of Grant. The date of grant of an Option, SAR or Stock Purchase http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 46 of 48 Case 5:06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 47 of 49 Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, SAR or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 17. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. 49 (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options, SARs or Stock Purchase Rights granted under the Plan prior to the date of such termination. 18. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option, SAR or Stock Purchase Right unless the exercise of such Option, SAR or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, SAR or Stock Purchase Right, the Company may require the person exercising such Option, SAR or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 19. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 20. 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 the requirements of the Plan. 21. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. 50 http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 47 of 48 Case 5 : 06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 48 of 49 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8) pertaining to the 1997 Director Stock Option Plan, 1997 Employee Stock Option Plan, 1998 Executive Officer Stock Plan, and the Stock Option grants to Edgar S. Woolard, Jr. and Garreth C.C. Chang, of our report dated October 14, 1996, with respect to the consolidated financial statements and schedule of Apple Computer, Inc., as of September 27, 1996 and for the two years then ended, included in its Annual Report (Form 10-K) for the year ended September 26, 1997, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP ERNST & YOUNG LLP San Jose, California July 29, 1998 51 http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Page 48 of 48 Case 5 : 06-cv-05208-JF Document 55-4 Filed 06/08/2007 Page 49 of 49 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Apple Computer, Inc.: We consent to incorporation by reference in the registration statement on Form S-8 of Apple Computer, Inc. of our report dated October 15, 1997, relating to the consolidated balance sheet of Apple Computer, Inc. and subsidiaries as of September 26, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended, and the related schedule, which report appears in the September 26, 1997, annual report on Form 10-K of Apple Computer, Inc. /s/ KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP Mountain View, California July 29, 1998 52 -----END PRIVACY-ENHANCED MESSAGE----- http://www.sec.gov/Archives/edgar/data/320193/0000320193-98-000007.txt 4/30/2007 Case 5:06-cv-05208-JF Document 55-5 Filed 06/08/2007 Page 1 of 2 EXHIBIT D TO THE DECLARATION OF VIVI N. TRAN IN SUPPORT OF MOTION TO DISMISS CONSOLIDATED CLASS ACTION COMPLAINT Apple to Investigate Stock Option Grants Page 1 of 1 Case 5:06-cv-05208-JF Document 55-5 Filed 06/08/2007 Page 2 of 2 Apple to Investigate Stock Option Grants CUPERTINO, California-June 29, 2006-Apple® today announced that an internal investigation has discovered irregularities related to the issuance of certain stock option grants made between 1997 and 2001. One of the grants in question was to CEO Steve Jobs, but it was subsequently cancelled and resulted in no financial gain to the CEO. A special committee of Apple's outside directors has hired independent counsel to perform an investigation and the company has informed the SEC. Apple executives will refrain from commenting further on this matter until the independent investigation is concluded. "Apple is a quality company, and we are proactively and transparently disclosing what we have discovered to the SEC," said Apple CEO Steve Jobs. "We are focused on resolving these issues as quickly as possible." Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning desktop and notebook computers, OS X operating system, and Life and professional applications. Apple is also spearheading the digital music revolution with its iPod portable music players and iTunes online music store. Press Contacts: Steve Dowling (408) 974-1896 dowlingeapple.com NOTE TO EDITORS: For additional information visit Apple's PR website , or call Apple's Media Helpline at (408) 974-2042. Apple, the Apple logo, Mac, Mac OS and Macintosh are trademarks of Apple. Other company and product names may be trademarks of their respective owners. Home > Press Info > Press Release Copyright © 2007 Apple Inc. All rights reserved. http://www.apple.com/pr/library/2006/jun/29stock.html 4/16/2007 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 1 of 143 EXHIBIT E TO THE DECLARATION OF VIVI N. TRAN IN SUPPORT OF MOTION TO DISMISS CONSOLIDATED CLASS ACTION COMPLAINT Page 1 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 2 of 143 10-K 1 a06-25759 210k.htm ANNUAL REPORT PURSUANT TO SECTION 13 AND 15(D) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington , D.C. 20549 Form 10-K (Mark One) q ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2006 or q TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-10030 APPLE COMPUTER, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 942404110 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1 Infinite Loop Cupertino, California 95014 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 996-1010 Securities registered pursuant to Section 12(b) of the Act: Common Stock, no par value (Title of class) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes q No 0 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes q No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No q Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. q Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer 0 Accelerated filer q Non-accelerated filer q Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes q No 0 The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, as of April 1, 2006, was approximately $45,716,583,100 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 have been excluded because such persons may be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes. 859,273,757 shares of Common Stock Issued and Outstanding as of December 13, 2006 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 2 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 3 of 143 The Business section and other parts ofthis Annual Report on Form 10-K ("Form 10-K') containforward-looking statements that involve risks and uncertainties. Many oftheforward-looking statements are located in "Management's Discussion and Analysis ofFinancial Condition and Results of Operations. " Forward-looking statements provide current expectations offuture events based on certain assumptions and include any statement that does not directly relate to any historical or currentfact. Forward-looking statements can also be identified by words such as "anticipates, " "believes, " "estimates, " "expects, " "intends, " `plans, " `predicts, " and similar terms. Forward-looking statements are not guarantees offuture performance and the Company's actual results may differ significantly from the results discussed in theforward- looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled `Risk Factors" under Part 1, Item IA ofthis Form 10-K. The Company assumes no obligation to revise or update anyforward-looking statementsfor any reason, except as required by law. Explanatory Note In this Form 10-K, Apple Computer, Inc. ("Apple or "the Company ) is restating its consolidated balance sheet as of September 24, 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. This Form 10-K also reflects the restatement of "Selected Consolidated Financial Data in Item 6 for the fiscal years ended September 2005, 2004, 2003, and 2002, and "Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 for the fiscal years ended September 24, 2005 and September 25, 2004. Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected by the restatements have not been amended and should not be relied on. On June 29, 2006, the Company announced that an internal review had discovered irregularities related to the issuance of certain stock option grants made between 1997 and 2001, including a grant to its Chief Executive Officer ("CEO ) Steve Jobs. The Company also announced that a Special Committee of outside directors ("Special Committee ) had been formed and had hired independent counsel to conduct a full investigation of the Company's past stock option granting practices. On October 4, 2006, the Company announced the key results of the Special Committee's investigation, which are set forth in the Company's Form 8-K filed on that date. As a result of the internal review and the independent investigation, management has concluded, and the Audit and Finance Committee of the Board of Directors agrees, that incorrect measurement dates were used for financial accounting purposes for certain stock option grants made in prior periods. Therefore, the Company has recorded additional 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, 2005 and 2004, respectively. The adjustment to 2006 was recorded in the fourth quarter of fiscal year 2006 due to its insignificance. The independent counsel and its forensic accountants ("Investigative Team ) reviewed the facts and circumstances surrounding stock option grants made on 259 dates. The Investigative Team spent over 26,500 person-hours searching more than one million physical and electronic documents and interviewing more than 40 current and former directors, officers, employees, and advisors. Based on a review of the totality of evidence and the applicable law, the Special Committee found no misconduct by current management. The Special Committee's investigation identified a number of grants for which grant dates were intentionally selected in order to obtain favorable exercise prices. The terms of these and certain other grants, as discussed below, were finalized after the originally assigned grant dates. The Special Committee concluded that the procedures for granting, accounting for, and reporting stock option grants http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 3 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 4 of 143 did not include sufficient safeguards to prevent manipulation. Although the investigation found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, he did not receive or financially benefit from these grants or appreciate the accounting implications. The Special Committee also found that the investigation had raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants. Based on the evidence and findings from the Company's internal review and the Special Committee's independent investigation, an analysis was performed of the measurement dates for the 42,077 stock option grants made on 259 dates between October 1996 and January 2003 (the "relevant period ). The Company believes that the analysis was properly limited to the relevant period. In addition to analyzing all grants made during the relevant period, the Company sampled certain grants between 1994 and 1997 and found none that required accounting adjustments. The first grants for which stock- based compensation expense is required are dated December 29, 1997. The Company also examined grants made after the relevant period and found none that required accounting adjustments. Moreover, in the years after 2002, Apple made significant changes in its stock option granting practices in response to evolving legal, regulatory and accounting requirements. Consistent with the accounting literature and recent guidance from the Securities and Exchange Commission ("SEC ), the grants during the relevant period were organized into categories based on grant type and process by which the grant was finalized. The Company analyzed the evidence related to each category of grants including, but not limited to, electronic and physical documents, document metadata, and witness interviews. Based on the relevant facts and circumstances, the Company applied the controlling accounting standards to determine, for every grant within each category, the proper measurement date. If the measurement date is not the originally assigned grant date, accounting adjustments were made as required, resulting in stock-based compensation expense and related tax effects. The 42,077 grants were classified as follows: (1) 17 grants to persons elected or appointed to the Board of Directors ("director grants ); (2) 3,892 grants to employees under the Monday/Tuesday Plan described below ("Monday/Tuesday grants ); (3) 27,096 grants made in broad-based awards to large numbers of employees, usually on an annual basis ("focal grants ); (4) 9,988 other grants ratified at meetings of the Board or Compensation Committee ("meeting grants ); (5) 1,082 other grants ratified by unanimous written consent ("UWC ) of the Board or Compensation Committee ("other UWC grants ); and (6) two grants to the CEO ("CEO grants ). All references 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 by UWC. Following approval of the grants at a meeting or by UWC, the Company's legal staff would prepare a Secretary's Certificate certifying the ratification of the grants. Based on the facts and circumstances described below, the Company has concluded that the recipients and terms of certain grants were fixed for accounting purposes before ratification pursuant to parameters previously approved by the Board or Compensation Committee through the Monday/Tuesday Plan and the focal process. As further discussed below, within these parameters, management had the authority to determine the recipients and terms for each grant. Thus, the Company has concluded that the measurement dates for these grants occurred when management's process for allocating these grants was completed and the grants were ready for ratification, which was considered perfunctory. With regard to all other grants, the Company has concluded that the grants were finalized and the measurement dates occurred when the grants were ratified. For many grants, however, the dates of ratification cannot be established because the dates the UWCs were executed by the Board or Compensation Committee members or received by the Company are not available. For such grants, the Company has concluded that the date of the preparation of the Secretary's Certificate is the best alternative for determining the actual date of ratification. http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 4 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 5 of 143 As discussed below, the Company's analysis determined that the originally assigned grant dates for 6,428 grants on 42 dates are not the proper measurement dates. Accordingly, after accounting for forfeitures, the Company has recognized stock-based compensation expense of $105 million on a pre-tax basis over the respective awards' vesting terms. No adjustments were required for the remaining 35,649 grants. The adjustments were determined by category as follows: Director Grants-Seventeen director grants were made during the relevant period. Two director grants were made pursuant to a 1997 plan that dated the grants on the enactment of the plan. The remaining fifteen grants were automatically made under the Director Stock Option Plan for non-employee directors, which was approved by shareholders in 1998, on the date of a director's election or appointment to the Board and on subsequent anniversaries, beginning on the fourth anniversary. Accordingly, the analysis determined that the originally assigned grant date for each director grant is the measurement date, and no accounting adjustments are required. Monday/Tuesday Grants-Beginning in December 1998, 3,892 new hire grants and grants for promotion and retention purposes ("promotion/retention grants ) were made during the relevant period under the "Monday/Tuesday Plan. Under the Monday/Tuesday Plan, new hire grants made within pre-established guidelines approved by the Board or Compensation Committee were dated on the Monday that the recipient started work (or the following Monday, if the recipient started on another day). The Company's analysis showed this process to be reliable with very low error rates. Promotion/retention grants, also based on pre-established guidelines, were made generally on the first Tuesday of each month. The Company has concluded that the new hire and promotion/retention grants made pursuant to the Monday/Tuesday Plan within pre- established guidelines do not require adjustment, with the exception of six grants that 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 grants within guidelines. Accordingly, based on the methodology described above, the Company has recognized stock-based compensation expense of $6 million from 126 grants. If other dates in the period between the preparation of the UWC and the preparation of the Secretary's Certificate had 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 basis as part of an extensive process that required several months to complete. Pursuant to limits, guidelines and practices previously approved by the Board or Compensation Committee, managers throughout the Company would make recommendations for grants to employees in their areas of responsibility. After senior management had determined that the grants were made in accordance with these established limits, guidelines and practices, management treated the grants as final when they were submitted to the Board or Compensation Committee for ratification. The Company has concluded that for 5,595 grants on five dates, the originally assigned grant dates are not the proper measurement dates. For these grants, management's process for finalizing the grants was completed after the originally assigned grant dates. As a result, the Company has recognized $29 million of stock-based compensation expense. For two of the five grant dates comprising 3,744 grants, the evidence shows that the grants were finalized and the measurement date occurred one day after the originally assigned grant dates. The grants on these two dates represent more than $16 million of the total $29 million of stock-based compensation expense resulting from focal grants. Other Meeting Grants-During the relevant period, meetings of the Board or Compensation Committee were held to ratify 9,988 grants that are not Monday/Tuesday, focal or CEO grants. The grant dates and measurement dates for these grants are the meeting dates when the grants were ratified, with the exception of 46 grants. Forty-two of these 46 grants are dated concurrent with a meeting that considered and approved certain grants, but the evidence indicates that all of the grants may not have been finalized until a 4 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 5 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 6 of 143 later date. One of the 46 grants was approved and dated at another meeting, but the recipient, who was becoming employed by the Company as part of a corporate acquisition, did not start until a later date. Two other grants were approved before the employees' start dates. Another grant was mistakenly cancelled and subsequently reinstated, requiring an accounting adjustment. Thus, for these 46 grants the Company has concluded that the originally assigned grant dates are not the proper measurement dates. As a result, the Company has recognized $2 million of stock-based compensation expense. Other UWC Grants-During the relevant period, 1,082 grants were approved by UWCs for a variety of purposes, including executive recruitment, retention, promotion and new hires outside the Monday/Tuesday process. These grants were not made pursuant to pre-established guidelines adopted by the Board or Compensation Committee. Therefore, the Company has concluded that these grants were not finalized for accounting purposes until ratification by the Board or Compensation Committee. Accordingly, for 660 grants, the Company has concluded that the originally assigned grant dates are not the proper measurement dates. As a result, the Company has recognized $48 million of stock-based compensation expense. If other dates in the period from the preparation of the UWC to the preparation of the Secretary's Certificate had been used as measurement dates for grants whose 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. The second grant, dated October 19, 2001, was for 7.5 million option shares. Both grants were cancelled in March 2003 prior to being exercised, when Mr. Jobs received 5 million shares of restricted stock. With respect to the grant dated January 12, 2000, the Board on December 2, 1999, authorized a special "CEO Compensation Committee to grant Mr. Jobs up to 15 million shares. The evidence indicates that the CEO Compensation Committee finalized the terms of the grant on January 12, 2000, although the Committee's action was memorialized in a UWC transmitted on January 18, 2000. Because the measurement date is the originally assigned grant date, the Company has not recognized any stock-based compensation expense from this grant. If the Company had determined that the measurement date was the date when the UWC was executed or received, then additional stock-based compensation would have been recognized. The grant dated October 19, 2001 was originally approved at a Board meeting on August 29, 2001, with an exercise price of $17.83. The terms of the grant, however, were not finalized until December 18, 2001. The grant was dated October 19, 2001, with an exercise price of $18.30. The approval for the grant was improperly recorded as occurring at a special Board meeting on October 19, 2001. Such a special 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 price on December 18, 2001 of $21.01. http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 6 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 7 of 143 The incremental impact from recognizing stock-based compensation expense resulting from the investigation of past stock option grants is as follows (dollars in millions): Pre-Tax Expense After Tax Fiscal Year (Income) Expense 1998 $ (1) $- 1999 8 6 2000 13 9 2001 19 13 2002 29 23 2003 16 12 Total 1998 - 2003 impact 84 63 2004 13 10 2005 7 7 2006 1 4 Total $ 0_5 $ 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 reflect the impact of these adjustments for the years ended September 24, 2005 and September 25, 2004. 6 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 7 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 8 of 143 PART I Item 1 . Business Company Background Apple Computer, Inc. ("Apple or the "Company ) was incorporated under the laws of the State of California on January 3, 1977. The Company designs, manufactures, and markets personal computers 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 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® X operating system, the iPod® line of portable digital music players, the iTunes Store®, a portfolio of peripherals that support and enhance the Macintosh and iPod product lines, a portfolio of consumer and professional software applications, a variety of other service and support offerings, and the Xserve® and Xserve RAID server and storage products. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. In addition, the Company sells a variety of third-party Macintosh and iPod compatible products including application software, printers, storage devices, speakers, headphones, and various other accessories and supplies through its online and retail stores. The Company sells to education, consumer, creative professional, business, and government customers. The Company's fiscal year ends on the last Saturday of September. Unless otherwise stated, all information presented in this Form 10-K is based on the Company's fiscal calendar. Business Strategy The Company is committed to bringing the best personal computing and portable digital music experience to students, educators, creative professionals, businesses, government agencies, and consumers through its innovative hardware, software, peripherals, services, and Internet offerings. The Company's business strategy leverages its unique ability to design and develop its own operating system, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative industrial design. The Company believes continual investment in research and development is critical to facilitate innovation of new and improved products and technologies. Besides updates to its existing line of personal computers and related software, services, peripherals, and networking solutions, the Company continues to capitalize on the convergence of digital consumer electronics and the personal computer by creating and refining innovations like the iPod and iTunes Store. The Company's strategy also includes expanding its distribution network to effectively reach more of its targeted customers and provide them with a high-quality sales and after- sales support experience. Digital Lifestyle The Company believes that for both professionals and consumers the personal computer has become the center of an evolving digital lifestyle by integrating and enhancing the utility of advanced digital devices such as the Company's iPods, digital video and still cameras, televisions, CD and DVD players, cellular phones, personal digital assistants, and other consumer electronic devices. The attributes of the personal computer that enable this functionality include a high-quality user interface, easy access to relatively inexpensive data storage, the ability to run complex applications, and the ability to connect easily to a wide variety of other digital devices and to the Internet. The Company is the only participant in the personal computer industry that controls the design and development of the entire personal computer-from the hardware and operating system to sophisticated applications. This, along with its products' original industrial designs, intuitive ease-of-use, built-in graphics, multimedia and networking capabilities, uniquely positions the Company to offer innovative integrated digital lifestyle solutions. http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 8 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 9 of 143 Expanded Distribution The Company believes a high-quality buying experience with knowledgeable salespersons that can convey the value of the Company's products and services greatly enhances its ability to attract and retain customers. The Company 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. The Company has also invested in programs to enhance reseller sales, including the Apple Sales Consultant Program, which places Apple employees and contractors at selected third-party reseller locations. The Company believes providing direct contact with its targeted customers is an efficient way to demonstrate the advantages of its Macintosh computer and other products over those of its competitors. The Company has significantly increased the points of distribution for the iPod product family in order to make its products available at locations where its customers shop. By the end of fiscal 2006, the Company had opened a total of 165 retail stores, including 147 stores in the U.S. and a total of 18 stores in Canada, Japan, and the U.K. The Company opened 5 additional stores in October and November 2006. The Company has typically located its stores at high-traffic locations in quality shopping malls and urban shopping districts. One of the goals of the retail initiative is to bring new customers to the Company and expand its installed base through sales to computer users who currently do not own a Macintosh computer and first time personal computer buyers. By operating its own stores and building them in desirable high-traffic locations, the Company is able to better control the customer retail experience and attract new customers. The stores are designed to simplify and enhance the presentation and marketing of personal computers and related products. To that end, retail store configurations have evolved into various sizes in order to accommodate market demands. The stores employ experienced and knowledgeable personnel who provide product advice and certain hardware support services. The stores offer a wide selection of third-party hardware, software, and various other computing products and supplies selected to complement the Company's own products. Additionally, the stores provide a forum in which the Company is able to offer specialized service and personalized training. Education Throughout its history, 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. The Company believes effective integration of technology into classroom instruction can result in higher levels of student achievement, especially when used to support collaboration, information access, and the expression and representation of student thought and ideas. The Company creates solutions that enable new modes of curriculum delivery, better ways of conducting research, and opportunities for professional development of faculty, students, and staff. The Company has designed a range of products and services to meet the needs of education customers. These products and services include the iMacTM and the MacBook®, video creation and editing solutions, wireless networking, professional development solutions, and one-to-one (1:1) learning solutions. A 1:1 learning solution typically consist of a portable computer for every student and teacher along with the installation of a wireless network. Creative Professionals Creative professionals constitute one of the Company's most important markets for both hardware and software products. This market is also important to many third-party developers who provide Macintosh-compatible hardware and software solutions. Creative customers utilize the Company's products for a variety of activities including digital video and film production and editing; digital video and film special effects, compositing and titling; digital still photography and workflow management; graphic design, publishing, and print production; music creation and production; audio production and sound design; and web design, development, and administration. http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 9 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 10 of 143 The Company designs its high-end hardware solutions, including servers, desktops, and portable Macintosh systems, to incorporate the power, expandability, and features desired by creative professionals. 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 business primarily on a geographic basis. The Company's reportable operating segments are comprised of the Americas, Europe, Japan, and Retail. The Americas, Europe, and Japan reportable segments do not include activities related to the Retail segment. The Americas segment includes both North and South America. The Europe segment includes European countries as well as the Middle East and Africa. The Retail segment currently operates Apple-owned retail stores in the U.S., Canada, Japan, and the U.K. Other operating segments include Asia-Pacific, which includes Australia and Asia except for Japan, and the Company's subsidiary, FileMaker, Inc. Each reportable geographic operating segment provides similar hardware and software products and similar services. Further information regarding the Company's operating segments may be found in Part II, Item 7 of this Form 10-K under the heading "Segment Operating Performance, and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements at Note 11, "Segment Information and Geographic Data. Hardware Products The Company offers a range of personal computing products including desktop and notebook computers, server and storage products, related devices and peripherals, and various third-party hardware products. The Company's Macintosh® systems, excluding servers and storage systems, features the Company's Mac OS® X Version 10.4 TigerT' and iLife® suite of software for digital photography, music, movies, and music and website creation. Macintosh® Computers In June 2005, the Company announced its plan to begin using Intel microprocessors in its computers. During 2006, the Company introduced new Intel-based models of the MacBookTM Pro, MacBook, Mac® Pro, iMac®, and Mac mini computers. All Intel-based Macintosh systems feature a fully native version of Mac OS X Version 10.4 Tiger, including the RosettaT'translation technology, which allows most PowerPC-based Macintosh applications to run on Intel-based Macintosh computers. The Company's transition to Intel microprocessors for Macintosh systems was completed in August 2006, and its transition for Xserve® was completed in November 2006. There are potential risks and uncertainties associated with the transition to Intel microprocessors, which are further discussed in Item 1A of this 10-K under the heading "Risk Factors. MacBookTM Pro The MacBook Pro family of notebook computers is designed for professionals and advanced consumer users. Introduced in January 2006, the MacBook Pro includes either a 15-inch or 17-inch widescreen display, a built-in iSight video camera, Front Row with the Apple Remote, and the MagSafeTM power adapter. Current MacBook Pro models include Intel Core 2 Duo processors at 2.16GHz or 2.33GHz, ATI Mobility Radeon X1600 graphics, 667MHz DDR2 main memory, a Serial ATA hard drive, and a slot-loading double-layer SuperDriveT'. Every MacBook Pro features a 1-inch thin aluminum enclosure and includes AirPort Extreme wireless networking, Bluetooth 2.0+EDR, Gigabit Ethernet, two or three USB 2.0 ports, FireWire 400 and 800 ports, combination analog and optical digital audio input and output ports, a full-sized DVI video-out port, an ExpressCard/34 slot, scrolling trackpad, and backlit keyboard. http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 10 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 11 of 143 MacBookTM The MacBook is designed for consumer and education users. Introduced in May 2006, the MacBook includes a 13-inch widescreen display, a built-in iSight video camera, Front Row with the Apple Remote, and the MagSafe magnetic power adapter. Current MacBook models include Intel Core 2 Duo processors at 1.83GHz and 2.0GHz, Intel integrated GMA 950 graphics, 667MHz DDR2 main memory, a Serial ATA hard drive, and a slot-loading Combo optical drive or double-layer SuperDrive. Available in either black or white, every MacBook includes built-in AirPort Extreme wireless networking, Bluetooth 2.0+EDR, Gigabit Ethernet, two USB 2.0 ports, one FireWire 400 port, combination analog and optical digital audio input and output ports, a mini-DVI video output port, and scrolling trackpad. Mac® Pro The Mac Pro desktop computer is targeted at business and professional users and is designed to meet the performance, expansion, and networking needs of the most demanding Macintosh user. Introduced in August 2006, the Mac Pro features two Intel Xeon dual-core processors running up to 3.0GHz, each with 4MB of shared Level 2 cache and independent 1.33GHz front-side buses, 667MHz fully buffered memory, and a 256-bit wide memory architecture. The Mac Pro also features a direct attach storage solution for snap-in installation of up to four 750GB Serial ATA hard drives for a total of 3TB of internal storage and support for two optical drives to simultaneously read and/or write to CDs and DVDs. Every Mac Pro includes three full-length PCI Express expansion slots and one double-wide PCI Express graphics slot to support double-wide graphics cards. The Mac Pro also includes dual Gigabit Ethernet ports, optical digital input and output ports, analog audio input and output ports, and multiple FireWire 400, FireWire 800 and USB 2.0 ports. iMac® The iMac desktop computer is targeted at consumer and education markets. Introduced in January 2006 and updated in September 2006, the Intel-based iMac is currently available with an integrated 17-inch widescreen LCD display, 512MB or 1GB of 667MHz DDR2 memory expandable to 2GB or 3GB, a 1.83GHz or 2.0GHz Intel Core 2 Duo processor, Intel integrated GMA 950 or ATI Radeon X1600 graphics, and a 160GB Serial ATA hard drive. The iMac is also available with a 20-inch or 24-inch widescreen LCD display, 1GB of 667MHz memory expandable to 3GB, a 2.16GHz processor, ATI Radeon X1600 or NVIDIA GeForce 7300 GT graphics, and 250GB Serial ATA hard drive. All models include a built-in iSight video camera, mini-DVI video-out port, multiple USB 2.0 and FireWire ports, built-in Gigabit Ethernet, and AirPort Extreme 802.11g wireless networking. Most models also include built-in Bluetooth 2.0+EDR, the Apple Remote, and a slot- loading double-layer SuperDrive. Mac® mini In February 2006, the Company introduced the Intel-based Mac mini that includes Front Row with the Apple Remote. The new Mac mini offers 512MB of 667MHz memory expandable to 2GB and either a 1.66GHz or 1.83GHz Intel Core Duo processor. Every Mac mini now includes built-in Gigabit Ethernet, AirPort Extreme 802.11 g wireless networking, Bluetooth 2.0+EDR, and a total of four USB 2.0 ports. Mac mini includes a full-size DVI interface and a VGA-out adapter to connect to a variety of displays, including televisions, and features both analog and digital audio outputs. Xserve® and Xserve RAID Storage 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® X Server 10.4 on two Intel Xeon dual-core processors running at 2.0GHz, 2.66GHz, or 3.0GHz, with support for up to 32GB of memory. Xserve includes PCI Express and independent 1.33GHz front side buses with 4MB of shared Level 2 memory cache. Two eight-lane PCI Express expansion slots provide up to 2GB of 10 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 11 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 12 of 143 throughput each to support fibre channel, networking, and graphics cards. Xserve supports up to 2.25TB of hot-plug storage. The Company's Xserve RAID storage system delivers up to 7TB of storage capacity and also expanded support for heterogeneous environments. The dual independent RAID controllers with 512MB cache per controller offer sustained throughput of over 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, movies, and iPod games through its iTunes Store. In addition to the Company's own iPod accessories, thousands of third-party iPod compatible products are available, including portable and desktop speaker systems, headphones, car radio solutions, voice recorders, cables and docks, power supplies and chargers, and carrying cases and armbands. iPod® The iPod is the Company ' s hard-drive based portable digital music player and was updated in September 2006. The iPod is available in a 30GB model capable of holding up to 7,500 songs , 25,000 photos , or 75 hours of video , and an 80GB model capable of holding up to 20,000 songs , 25,000 photos, or 100 hours of video. The iPod features up to 20 hours of battery life and includes a 2.5-inch color screen that can display album artwork, photos , and video content including music videos, video and audio podcasts , short films , television shows, movies , and games . Other key features of the iPod include a calendar, contact utility, and data storage capability. The iPod features the Company ' s patent-pending Click Wheel, a touch-sensitive wheel with five push buttons for one-handed navigation. The iPod also includes the Company's patent-pending Auto-Sync technology that automatically synchronizes and updates the iPod's digital music and other content whenever it is connected to a Macintosh or Windows computer via USB. All iPods work with the Company ' s iTunes digital music management software ("iTunes software ) available for both Macintosh and Windows-based computers. iPod® nano In September 2006 , the Company introduced the second-generation version of its flash-memory-based iPod nano featuring an aluminum body and up to 24 hours of battery life. The second-generation iPod nano includes the Click Wheel, a smaller and lighter design, a brighter color screen than its predecessor, and new Search and Quick Scroll features that make it easier to fmd content. The iPod nano is available in 2GB , 4GB and 8GB configurations and in a variety of colors. iPod® shuffle In September 2006 , the Company introduced a new version of its flash-memory-based iPod shuffle. The new iPod shuffle weighs half an ounce and features an all-new aluminum design and a built-in clip. The new iPod shuffle contains one gigabyte of flash memory capable of holding up to 240 songs and provides up to 12 hours of battery life. The iPod shuffle is based on the Company ' s shuffle feature that allows users to listen to their music in random order. iPod shuffle works with iTunes and its patent-pending AutoFill option that automatically selects songs to fill the iPod shuffle from a user' s iTunes library. iTunes® Store The Company' s iTunes Store, available for both Macintosh and Windows -based computers , is a service that allows customers to find, purchase, and download third-party digital music, audio books, music videos, short films , television shows and movies, and iPod games. The iTunes Store also features the Podcast Directory that allows customers to search for and download audio programs to their computers and automatically receive new episodes over the Internet. Customers can search the contents of the store catalog to locate works by title, artist, or album, or browse the entire contents of the store by genre and 11 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 12 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 13 of 143 artist. Originally introduced in the U.S. in April 2003, the iTunes Store now serves customers in 22 countries. The iTunes Store is fully integrated with iTunes software allowing customers to preview, purchase, download, organize, share, and transfer digital content to an iPod using a single software application. Further discussion of the iTunes software may be found below under the heading "Software Products and Computer Technologies. The iTunes Store offers customers a broad range of personal rights to the third-party content they have purchased. Content purchased through the store may also be used in certain applications such as iPhoto®, iMovie®, and iDVD®. Additional features of the iTunes Store include gift certificates that can be sent via e-mail; prepaid music cards; an "allowance feature that enables users to automatically deposit funds into an iTunes Store account every month; online gift options that let customers give specific content to anyone with an email address; parental controls; and album reviews. Peripheral Products The Company sells a variety of Apple-branded and third-party computer hardware peripheral products directly to end-users through its retail and online stores, including printers, storage devices, computer memory, digital video and still cameras, and various other computing products and supplies. Displays The Company manufactures a family of widescreen flat panel displays including the 30-inch Apple Cinema HD DisplayT ', a widescreen active-matrix LCD with 2560-by-1600 pixel resolution, the 23-inch Apple Cinema HD Display with 1920-by- 1200 pixel resolution and the 20-inch Apple Cinema Display® with 1680-by-1050 pixel resolution. These displays feature built-in dual FireWire and dual USB 2.0 ports and use the industry standard DVI interface for a pure digital connection with the Company's latest Mac Pro, MacBook Pro, and MacBook systems. The Cinema Displays feature an aluminum design with a thin bezel, suspended by an aluminum stand that allows viewing angle adjustment. Software Products and Computer Technologies 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 business oriented application software. Operating System Software Mac OS X is built on an open-source UNIX-based foundation. The most recent version, Mac OS X Tiger, is the fifth major release of Mac OS X. Tiger incorporates innovations including SpotlightT ', a desktop search technology that lets users fmd items stored on their Macintosh computers, including documents, emails, contacts, and images; and Dashboard, a way to instantly access information such as weather forecasts and stock quotes, using a new class of mini-applications called widgets. Mac OS X Server version 10.4 is the server version of the Mac OS operating system. Server Software and Server Solutions In April 2006, the Company introduced Apple Remote Desktop 3, the Company's third generation desktop management application. Apple Remote Desktop 3 is a Universal application, meaning that it runs natively on both Intel and PowerPC- based Macintosh computers (Universal) for asset management and remote assistance that enables Spotlight searches across multiple Tiger systems and includes over 30 Automator actions for automating repetitive system administration tasks, a Dashboard Widget that provides observation of remote systems, and Autolnstall for installing software automatically on mobile systems when they return online. 12 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 13 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 14 of 143 Xsan®, the Company ' s enterprise -class Storage Area Network ("SAN ) file system, is a 64-bit cluster file system for Mac OS X that enables organizations to consolidate storage resources and provide multiple computers with concurrent file-level read/write access to shared volumes over Fibre Channel. Advanced features such as metadata controller failover and Fibre Channel multipathing ensure high availability; file-level locking allows multiple systems to read and write concurrently to the same volume which is ideal for complex workflows ; bandwidth reservation provides for effective ingestion of bandwidth- intensive data streams, such 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 Final Cut Studio® 5.1, the Company's High Definition ("HD ) video production suite. Final Cut Studio features Final Cut Pro® 5, Soundtrack® Pro, Motion 2, and DVD Studio Pro® 4. All of these applications are Universal. Final Cut Pro® 5.1, the latest version of the Company's video editing software, includes editing tools that work natively with most formats, from Digital Video ("DV ) and High Definition Video ("HDV ) to fully uncompressed HD. With a real-time multi-stream effects architecture, multicam editing tools, and advanced color correction, Final Cut Pro 5.1 enables users to view and cut from multiple sources in real time, group up to 128 sources together into multi-clips, then add or subtract cameras at any time. DVD Studio Pro® 4 is the latest version of the Company's professional DVD authoring application. With DVD Studio Pro 4 users can author Standard Definition ("SD ) or HD DVDs in a graphic interactive environment. DVD Studio Pro 4 includes Compressor 2, a full-featured video and audio compression application. Compressor gives users control over encoding, including the ability to encode several clips in one batch operation to a wide variety of formats including H.264. Motion 2 is a real-time motion graphics software application that enables Final Cut Pro editors to add motion graphics to their projects. Motion 2 features interactive animation of text and graphics for DVD motion menus, video or film in real time, and quick output rendering by built-in GPU acceleration at 8-bit, 16-bit, or 32-bit float film quality. With Motion 2's design tool, Replicator, users can automatically generate and animate multiple copies of a graphic, shape, or movie. Soundtrack® Pro is an audio editing and sound design application that gives audio and video professionals a way to edit, mix, and repair audio. Soundtrack Pro features a waveform editor with flexible Action Layers that allow users to re- order, bypass, or change any edit, effect, or process. Find-and-Fix features identify and repair common audio problems such as background noise, pops, clicks, and hum. An integrated multitrack mixer allows editors to apply common effects to multiple tracks and group common tracks. Soundtrack Pro also features over 50 professional plug-ins for enhancing sounds, and over 5,000 music and sound effect loops. In February 2006, the Company introduced Logic® Pro 7.2, a Universal version of the Company's music creation and audio production software. Logic Pro 7.2 is used by musicians around the world and by professionals in music production and film scoring. It combines digital music composition, notation, and audio production facilities in one comprehensive product and includes software instruments such as Sculpture®, a component-modeling based synthesizer; UltraBeat®, a drum synthesizer with built-in step sequencer; and digital signal processing (DSP) plug-ins including Guitar Amp Pro, a full-featured guitar amplifier simulator. Along with workflow enhancements, mastering plug-ins, and support for Apple Loops, Logic Pro 7 adds distributed audio processing, a technology that allows professionals to utilize multiple Macintosh systems to expand available DSP power via an Ethernet network. 13 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 14 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 15 of 143 Consumer, Education, and Business Oriented Application Software iLife® `06 In January 2006, the Company introduced iLife `06, an upgrade to its consumer-oriented digital lifestyle application suite, which features iWebTM, iPhoto® 6, iMovie® HD 6, iDVD® 6, GarageBandTM 3, and iTunes®. All of these applications are Universal. iWebTM is a new application in the iLife ` 06 suite. iWeb allows users to create online photo albums , blogs, 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 PhotocastingTM. Photocasting allows Mac users to share and automatically update photo albums over the Internet with anyone who uses a Macintosh or Windows-based computer. iMovie® HD is the Company's consumer-oriented digital video editing software application. iMovie HD 6 includes new real-time effects that take advantage of Core Video technology, which uses the computer's video card's graphics processing unit to deliver hardware acceleration to quickly preview video effects. iMovie HD 6 also provides a solution to make video podcasts, which can be published with iWeb, and includes audio enhancement tools and sound effects. iDVD® is the Company's consumer-oriented software application that enables users to turn iMovie files, QuickTime® files, and digital pictures into DVDs that can be played on most consumer DVD players. iDVD® 6 allows users to take content shot with HDV and widescreen DV cameras and author custom DVDs with widescreen menus, movies, and high resolution slideshows. iDVD 6 features 10 new Apple-designed menu themes in both widescreen (16:9) and standard (4:3) formats. GarageBandTM is the Company's consumer-oriented music creation software application that allows users to play, record and create music using a simple interface. With GarageBand, recorded performances, digital audio and looping tracks can be arranged and edited to create songs. GarageBand 3 allows users to record, produce, and publish through iWeb their own podcasts, including artwork, sound effects, and music jingles. iLife ` 06 also includes iTunes, the Company's digital music jukebox software application that allows users to purchase a variety of digital content available through the Company ' s iTunes Store. iTunes organizes content using searching, browsing, and playlists , and also includes features such as iMix playlist sharing and provides integration with the complete family of iPods . In September 2006, the Company introduced iTunes 7 , the latest version of its iTunes software. iTunes 7 delivers new features such as album and Cover Flow views of music, television shows, and movies, enabling users to quickly find titles in their library as well as casually browse through titles they already own. iWorkTM `06 In January 2006, the Company introduced iWork `06, a new Universal version of the Company's suite of productivity software designed to help users create, present, and publish documents and presentations. iWork `06 includes Pages® 2 and Keynote® 3. Pages® gives users the tools to create letters, newsletters, reports, brochures and resumes with advanced typography, multiple columns, footnotes, tables of content and styles. Pages 2 features mail merge with Mac OS X Address Book, which allows users to personalize documents by dragging and dropping individual contacts into documents using templates with predefined fields. Pages 2 also features new templates for newsletters, flyers, posters, school reports, scrapbooks, brochures, business proposals, and invoices. Pages 2 allows users to insert tables that have basic calculation functionality within any document and users can export their Pages 2 document to other formats. 14 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 15 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 16 of 143 Keynote® is the Company's presentation software that gives users the ability to create presentations, portfolios, interactive slideshows, and storyboards. Keynote 3 offers additional ways to create presentations and interactive slideshows. It features new cinematic transitions including vertical and horizontal blinds, revolving door, and swoosh. A new view mode, Light Table, allows users to view an entire presentation and reorganize slides using drag and drop. Final Cut® Express HD enables users to capture, edit, and output DV and HDV over a single FireWire cable, and supports Digital Cinema Desktop with multiple displays. In May 2006, the Company introduced a Universal version of Final Cut Express HD 3.5. Features introduced in this version include Dynamic RT for real-time playback of multi-stream effects, Soundtrack 1.5 with a suite of audio production tools, and LiveType 2.1 with animated text and titles. In March 2006, the Company introduced Logic® Express 7.2, a Universal version of the Company's streamlined version of Logic Pro 7.2 that provides a basic set of professional tools to compose and produce music for students, educators, and advanced hobbyists. Its high-resolution audio of up to 24-bit/96kHz, the adaptive self-configuring track mixer, and 32-bit floating-point math provides professional sound quality. Logic Express 7 comes with support for projects from GarageBand, offering users a smooth migration path to high-end audio production. FileMaker, Inc., a wholly owned subsidiary of the Company, develops , publishes , and distributes desktop-based database management application software for both Macintosh and Windows-based computers . The FileMaker® Pro database software and related products offer relational databases and desktop-to-web publishing capabilities. In July 2006, the Company introduced FileMaker Pro 8 . 5, a Universal version of its database management application. New features of FileMaker Pro 8 . 5 include FileMaker Web Viewer, which allows for a live web browser to be put into a database. Internet Software and Services The Company is focused on delivering seamless integration with and access to the Internet throughout the Company's products and services . The Company' s Internet solutions adhere to many industry standards to provide an optimized user experience through interoperability. Safari Safari, the Company ' s Mac OS X compatible web browser, uses the advanced interface technologies underlying Mac OS X and includes built-in Google search; SnapBackTM to instantly return to search results; a way to name, organize and present bookmarks ; tabbed browsing; and automatic "pop-up ad blocking. QuickTime® QuickTime, the Company ' s multimedia software for Macintosh or Windows -based computers, features streaming of live and stored video and audio over the Internet and playback of high-quality audio and video on computers . QuickTime 7 features H.264 encoding and can automatically determine a user' s connection speed to ensure they are getting the highest-quality content stream possible. QuickTime 7 also delivers multi-channel audio and supports audio formats , including AIFF, WAV, MOV, MP4 (AAC only), CAF, and AAC/ADTS. The Company offers several other QuickTime products . QuickTime 7 Pro, a suite of software tools , allows creation and editing of Internet-ready audio and video files. QuickTime 7 Pro allows users to create H.264 video , capture audio and video, create multi-channel audio , and export multiple files while playing back or editing video. .MaOm 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, a 15 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 16 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 17 of 143 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 across multiple Macintosh computers and available 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 private groups of friends or colleagues; an updated version of Mac Backup software that allows members to archive the content of their iLife Home folder; and combined iDisk and email storage of up to 1 GB for individuals and 2GB for families. Wireless Connectivity and Networking AirPort Extreme® AirPort Extreme is the Company's Wi-Fi wireless networking technology. AirPort Extreme is based on the 802.11g standard, which supports speeds up to 54 Mbps, and is fully compatible with most Wi-Fi devices that use the 802.1 lb standard. AirPort Extreme Base Stations can serve up to 50 Macintosh and Windows users simultaneously, provide wireless bridging to extend the range beyond just one base station, and support USB printer sharing to allow multiple users to wirelessly share USB printers connected directly to the base station. AirPort Extreme client technology is built into most Macintosh models, and is an available option for all. AirPort® ExpressTM AirPort Express is the first 802.11 g mobile base station that can be plugged directly into the wall for wireless Internet connections and USB printing. Airport Express also features analog and digital audio outputs that can be connected to a stereo and AirTunesTM music networking software that works with iTunes, giving users a way to wirelessly stream iTunes music from their Macintosh or Windows-based computer to any room in the house. AirPort Express features a single piece design weighing 6.7 ounces. Other Connectivity and Networking Solutions Mac OS X includes capabilities for Bluetooth technology. Bluetooth is an industry standard for wirelessly connecting computers and peripherals that supports transmission of data at up to 3 Mbps within a range of approximately 30 feet. Bluetooth technology for Mac OS X 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. Bluetooth is built into most Macintosh models. Bonjour®, the Company's zero configuration networking technology, is based on open Internet Engineering Task Force ("IETF ) Standard Protocols such as IP, ARP, and DNS and is built into Mac OS X. This technology uses industry standard networking protocols and zero configuration technology including Ethernet or 802.11-based wireless networks like the Company's AirPort products. The source code for this technology also includes software to support UNIX, Linux, and Windows-based systems and devices. The Company developed FireWire, a high-speed serial I/O technology for connecting digital devices such as digital camcorders and cameras to desktop and portable computers. FireWire has high data-transfer speed and "hot plug-and-play capability and is currently integrated in all Macintosh systems. Product Support and Services AppleCare® offers a range of support options for the Company's customers. These options include assistance that is built into software products, printed and electronic product manuals, online support including comprehensive product information as well as technical assistance, and the AppleCare Protection Plan. The AppleCare Protection Plan is a fee-based service that typically includes three years of phone support and hardware repairs, dedicated web-based support resources, and user diagnostic tools. 16 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 17 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 18 of 143 Markets and Distribution The Company's customers are primarily in the education, creative, consumer, and business markets. The Company distributes its products through wholesalers, resellers, national and regional retailers and cataloguers. No individual customer accounted for more than 10% of net sales in 2006, 2005, or 2004. 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 own sales force and retail and online stores. Ten percent of the Company's net sales in 2006 were through its U.S. education channel, including sales to elementary and secondary schools, higher education institutions, and individual customers. Competition The Company is confronted by aggressive competition in all areas of its business. The markets for consumer electronics, personal computers and related software and peripheral products are highly competitive. These markets are characterized by rapid technological advances in both hardware and software that have substantially increased the capabilities and use of personal computers and other digital electronic devices and have resulted in the frequent introduction of new products with competitive price, feature, and performance characteristics. Over the past several years, price competition in these markets have been particularly intense. The Company's competitors who sell personal computers based on other operating systems have aggressively cut prices and lowered their product margins to gain or maintain market share. The Company's results of operations and financial condition can be adversely affected by these and other industry-wide downward pressures on 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 reputation. Further, as the personal computer industry and its customers place more reliance on the Internet, an increasing number of Internet devices that are smaller, simpler, and less expensive than traditional personal computers may compete for market share with the Company's existing products. The Company's music products and services have faced significant competition from other companies promoting their own digital music and content products and services, including those offering free peer-to-peer music and video services. The Company believes it currently retains a competitive advantage from innovation and by more effectively integrating the entire solution including the hardware (personal computer and iPod), software (iTunes), and distribution of content (iTunes Store). However, the Company expects competition in this space to intensify as competitors attempt to imitate the Company's approach to tightly integrate these components within their individual offerings or, alternatively, collaborate with each other to offer solutions that are more integrated than those they currently offer. Some of these current and potential competitors have substantial resources and may be able to provide such products and services at little or no profit or even at a loss to compete with the Company's offerings. The Company's future operating results and financial condition are substantially dependent on the Company's ability to continue to develop improvements to the Macintosh platform and to the Company's hardware, software and services related to digital content to maintain perceived functional and design advantages over competing platforms. Raw Materials Although most components essential to the Company's business are generally available from multiple sources, certain key components including microprocessors and application-specific integrated circuits ("ASICs ) are currently obtained by the Company from single or limited sources. Some key components, while currently available to the Company from multiple sources, are at times subject to industry-wide availability constraints and pricing pressures. In addition, the Company uses some components uncommon to the rest of the personal computer and consumer electronics industries, and new products introduced by 17 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 18 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 19 of 143 the Company often initially utilize custom components obtained from only one source until the Company has evaluated whether there is a need for, and subsequently qualifies, additional suppliers. If the supply of a key or single-sourced component to the Company were to be delayed or curtailed or in the event a key manufacturing vendor delays shipments of completed products to the Company, the Company's ability to ship related products in desired quantities and in a timely manner could be adversely affected. The Company's business and financial performance could also be adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued availability of these components may be affected if producers were to decide to concentrate on the production of common components instead of components customized to meet the Company's requirements. The Company attempts to mitigate these potential risks by working closely with these and other key suppliers on product introduction plans, strategic inventories, coordinated product introductions, and internal and external manufacturing schedules and levels. Consistent with industry practice, the Company acquires components through a combination of formal purchase orders, supplier contracts, and open orders based on projected demand information. The Company's purchase commitments typically cover its requirements for periods ranging from 30 to 150 days. The Company believes there are several component suppliers and manufacturing vendors whose loss to the Company could have a material adverse effect upon the Company's business and financial position. At this time, such vendors include Agere Systems, Inc., Ambit Microsystems Corporation, Amperex Technology Limited, ASUSTeK Corporation, ATI Technologies, Inc., Atheros Communications Inc., AU Optronics Corporation, Broadcom Corporation, Chi Mei Optoelectronics Corporation, Cypress Semiconductor Corporation, Hitachi Global Storage Technologies, Hon Hai Precision Industry Co., Ltd., Intel Corporation, Inventec Appliances Corporation, LG. Phillips Co., Ltd., Matsushita, NVIDIA Corp., PortalPlayer, Inc., Quanta Computer, Inc., Renesas Semiconductor Co. Ltd., Samsung Electronics, Sony Corporation, Synaptics, Inc., Texas Instruments, and Toshiba Corporation. Research and Development Because the personal computer and consumer electronics industries are characterized by rapid technological advances, the Company's ability to compete successfully is heavily dependent upon its ability to ensure a continuing and timely flow of competitive products, services, and technologies to the marketplace. The Company continues to develop new products and technologies and to enhance existing products in the areas of hardware and peripherals, consumer electronic products, 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 third-party business and technology. The Company's research and development expenditures totaled $712 million, $535 million (as restated(')), and $491 million (as restated(')) in 2006, 2005, and 2004, respectively. Patents, Trademarks , Copyrights and Licenses The Company currently holds rights to patents and copyrights relating to certain aspects of its computer systems, iPods, peripherals, software, and services. In addition, the Company has registered, and/or has applied to register, trademarks and service marks in the U.S. and a number of foreign countries for "Apple, the Apple logo, "Macintosh, "iPod, "iTunes, "iTunes Store, and numerous other trademarks and service marks. Although the Company believes the ownership of such patents, copyrights, trademarks and service marks is an important factor in its business and that its success does depend in part on the ownership thereof, the Company relies primarily on the innovative skills, technical competence, and marketing abilities of its personnel. (1) See the "Explanatory Note immediately preceding Part I, Item 1 and Note 2, "Restatement of Consolidated Financial Statements in Notes to Consolidated Financial Statements of this Form 10-K. 18 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 19 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 20 of 143 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, based upon past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms; however, there is no guarantee that such licenses could be obtained at all. Because of technological changes in the computer industry, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible certain components of the Company's products and business methods may unknowingly infringe existing patents of others. From time to time, the Company has been notified that it may be infringing certain patents or other intellectual property rights of third-parties. Foreign and Domestic Operations and Geographic Data The U.S. represents the Company's largest geographic marketplace. Approximately 60% of the Company's net sales in 2006 came from sales to customers inside the U.S. Final assembly of products sold by the Company is currently performed in the Company's manufacturing facility in Cork, Ireland, and by external vendors in Fremont, California; Fullerton, California; Taiwan; the Republic of Korea; the People's Republic of China; and the Czech Republic. Currently, manufacturing of many of the components used in the Company's products is performed by third-party vendors in Taiwan, China, Japan, Korea, and Singapore. Final assembly of substantially all of the Company's portable products, including MacBook Pros, MacBooks, and iPods, is performed by third-party vendors in China. Margins on sales of the Company's products in foreign countries, and on sales of products that include components obtained from foreign suppliers, can be adversely affected by foreign currency exchange rate fluctuations and by international trade regulations, including tariffs and antidumping penalties. Information regarding financial data by geographic segment is set forth in Part II, Item 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 seasonal demand related to the holiday season and the beginning of the school year. This historical pattern should not be considered a reliable indicator of the Company's future net sales or financial performance. Warranty The Company offers a basic limited parts and labor warranty on its hardware products. The basic warranty period for hardware products is typically one 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. Backlog In the Company's experience, the actual amount of product backlog at any particular time is not a meaningful indication of its future business prospects. In particular, backlog often increases in anticipation of or immediately following new product introductions as dealers anticipate shortages. Backlog is often reduced once dealers and customers believe they can obtain sufficient supply. Because of the foregoing, backlog should not be considered a reliable indicator of the Company's ability to achieve any particular level of revenue or financial performance. 19 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 20 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 21 of 143 Environmental Laws Compliance with federal, state, local, and foreign laws enacted for the protection of the environment has to date had no material effect on the Company's capital expenditures, earnings, or competitive position. In the future, these laws could have a material adverse effect on the Company. 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 responsibility for environmentally safe disposal or recycling with the Company. Such laws and regulations have recently been passed in several jurisdictions in which the Company operates including various European Union member countries, Japan and certain states within the U.S. Although the Company does not anticipate any material adverse effects in the future based on the nature of its operations and the thrust of such laws, there is no assurance that such existing laws or future laws will not have a material adverse effect on the Company's financial condition, liquidity, or results of operations. Employees As of September 30, 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 to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are filed with the U.S. Securities and Exchange Commission (SEC). Such reports and other information filed by the Company with the SEC are available on the Company's website at http://www.apple.com/investor when such reports are available on the SEC website. The public may read and copy any materials filed by the Company with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company's references to the URLs for these websites are intended to be inactive textual references only. Item 1A. Risk Factors Because of the following factors, as well as other factors affecting the Company's operating results and financial condition, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. The matters relating to the investigation by the Special Committee ofthe Board ofDirectors and the restatement ofthe Company's consolidatedfinancial statements may result in additional litigation and governmental enforcement actions. On June 29, 2006, the Company announced that an internal review had discovered irregularities related to the issuance of certain stock option grants made between 1997 and 2001, including a grant to its Chief Executive Officer ("CEO ), Steve Jobs. The Company also announced a Special Committee of outside directors ("Special Committee ) had been formed and had hired independent counsel to conduct a full investigation of the Company's past stock option granting practices. As described in the Explanatory Note immediately preceding Part I, Item 1, and in Note 2 "Restatement of Consolidated Financial Statements in Notes to Consolidated Financial Statements in this Form 10-K, as a result of the internal review and independent investigation, management has concluded, and the Audit and Finance Committee agrees, that incorrect measurement dates were used for financial accounting purposes for stock option grants made in 20 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 21 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 22 of 143 certain prior periods. As a result, the Company has recorded additional non-cash stock-based compensation expense, and related tax effects, with regard to certain past stock option grants, and the Company has restated certain previously filed financial statements included in this Form 10-K. The internal review, the independent investigation, and related activities have required the Company to incur substantial expenses for legal, accounting, tax and other professional services, have diverted management's attention from the Company's business, and could in the future harm its business, financial condition, results of operations and cash flows. While the Company believes it has made appropriate judgments in determining the correct measurement dates for its stock option grants, the SEC may disagree with the manner in which 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 granting practices and the restatement of prior financial statements have exposed the Company to greater risks associated with litigation, regulatory proceedings and government enforcement actions. As described in Part I, Item 3, "Legal Proceedings , several derivative complaints and a class action complaint have been filed in state and federal courts against the Company's directors and certain of its executive officers pertaining to allegations relating to stock option grants. The Company has provided the results of its internal review and independent investigation to the SEC and the United States Attorney's Office for the Northern District of California, and in that regard the Company has responded to informal requests for documents and additional information. The Company intends to continue full cooperation. No assurance can be given regarding the outcomes from litigation, regulatory proceedings or government enforcement actions relating to the Company's past stock option practices. The resolution of these matters will be time consuming, expensive, and will distract management from the conduct of the Company's business. Furthermore, if the Company is subject to adverse findings in litigation, regulatory proceedings or government enforcement actions, the Company could be required to pay damages or penalties or have other remedies imposed, which could harm its business, financial condition, results of operations and cash flows. In August 2006, the Company received a NASDAQ Staff Determination letter stating that, as a result of the delayed filing of the Company's Form 10-Q for the quarter ended July 1, 2006 (the "Third Quarter Form 10-Q ), the Company was not in compliance with the filing requirements for continued listing as set forth in Marketplace Rule 4310(c)(14) and was therefore subject to delisting from the NASDAQ Stock Market. On October 24, 2006, the NASDAQ Listing Qualifications Panel granted the Company's request for continued listing, subject to the Company filing the Third Quarter Form 10-Q, and any required restatements, with the SEC by December 29, 2006. On December 29, 2006, the Company filed the Third Quarter Form 10-Q with the SEC. With the filing of this Form 10-K, the Company believes that it has remedied its non-compliance with Marketplace Rule 4310(c)(14), subject to NASDAQ's affirmative completion of its compliance protocols and its notification of the Company accordingly. However, if the SEC disagrees with the manner in which the Company has accounted for and reported, or not reported, the financial impact of past stock option grants, there could be further delays in filing subsequent SEC reports that might result in delisting of the Company's common stock from the NASDAQ Global Select Market. Unfavorable results oflegal proceedings could adversely affect the Company's results ofoperations. The Company is subject to various legal proceedings and claims that are discussed in Part I, Item 3 of this Form 10-K. The Company is also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and which have not been fully adjudicated. Results of legal proceedings cannot be predicted with certainty. In addition, litigation may be disruptive to the Company's normal 21 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 22 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 23 of 143 business operations. Should the Company fail to prevail in certain legal matters, the Company's financial condition, liquidity, or results of operations could be adversely affected. Economic conditions andpolitical events could adversely affect the demandfor the Company's products and thefinancial health ofits suppliers, distributors, and resellers. The Company's operating performance depends significantly on economic conditions in the U.S. and abroad. At times in the past, demand for the Company's products has been negatively impacted by difficult global economic conditions. Uncertainty about future economic conditions makes it difficult to forecast future demand for the Company's products and related operating results. Should global and/or regional economic conditions deteriorate, demand for the Company's products could be adversely affected, as could the financial health of its suppliers, distributors, and resellers. War, terrorism, public health issues, and other circumstances could disrupt supply, delivery, or demand ofproducts, which could negatively affect the Company's operations andperformance. War, terrorism, public health issues, and other business interruptions, whether in the U.S. or abroad, have caused and could cause damage or disruption to international commerce and global economy, and thus may have a strong negative impact on the global economy, the Company, and the Company's suppliers or customers. The Company's major business operations are subject to interruption by earthquake, other natural disasters, fire, power shortages, terrorist attacks and other 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 manufacturing vendors, are located near major seismic faults. Because the Company does not carry earthquake insurance for direct quake-related losses, the Company's operating results and financial condition could be materially adversely affected in the event of a major earthquake or other natural or man-made disaster. Although it is impossible to predict the occurrences or consequences of any such events, such events could result in a decrease in demand for the Company's products, make it difficult or impossible for the Company to deliver products to its customers or to receive components from its suppliers, and create delays and inefficiencies in the Company's supply chain. In addition, should major public health issues including pandemics arise, the Company could be negatively affected by more stringent employee travel restrictions, additional limitations in the availability of freight services, governmental actions limiting the movement of products between various regions, delays in production ramps of new products, and disruptions in the operations of the Company's manufacturing vendors and component suppliers. The Company's operating results and financial condition have been, and in the future may be, adversely affected by such events. The marketfor personal computers and related peripherals and services, as well as digital music devices and related services, is highly competitive. If the Company is unable to effectively compete in these markets, its results ofoperations could be adversely affected. The personal computer industry is highly competitive and is characterized by aggressive pricing practices, downward pressure on gross margins , frequent introduction of new products, short product life cycles , evolving industry standards, continual improvement in product price/performance characteristics , rapid adoption of technological and product advancements by competitors , price sensitivity on the part of consumers , and a large number of competitors. Price competition in the market for personal computers and related peripherals has been particularly intense as competitors who sell Windows and Linux based personal computers have aggressively cut prices and lowered their product margins for personal computing products. The Company 's results of operations and financial condition have been, and in the future may continue to be, adversely affected by these and other industry-wide pricing pressures and downward pressures on gross margins. 22 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 23 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 24 of 143 The personal computer industry has also been characterized by rapid technological advances in software functionality, hardware performance, and features based on existing or emerging industry standards. Further, as the personal computer industry and its customers place more reliance on the Internet, an increasing number of Internet devices that are smaller and simpler than traditional personal computers may compete for market share with the Company's existing products. Several competitors of the Company have targeted certain of the Company's key market segments, including consumer, education, professional and consumer digital video editing, and design and publishing. Several of the Company's competitors have introduced digital music products and/or online stores offering digital music distribution that mimic many of the unique design, technical features, and solutions of the Company's products. The Company has a significant number of competitors, many of whom have broader product lines and larger installed customer bases than those of the Company. Additionally, there has been a trend towards consolidation in the personal computer industry that has resulted in larger and potentially stronger competitors in the Company's markets. The 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 condition are substantially dependent on its ability to continue to develop improvements to the Macintosh platform to maintain perceived design and functional advantages over competing platforms. Additionally, if unauthorized copies of the Mac OS are used on other companies' hardware products and result in decreased demand for the Company's hardware products, the Company's results of operations may be adversely affected. The Company is currently focused on market opportunities related to digital music distribution and related consumer electronic devices, including iPods. The Company faces significant competition from other companies promoting their own digital music products including MP3 players, music enabled cell phones, free peer-to-peer music and video services, and free streaming of digital content via the Internet. These competitors include both new entrants with different market approaches, such as subscription services models, and also larger companies that may have significant technical, marketing, distribution, and other resources, as well as established hardware, software, and digital content supplier relationships. Failure to effectively compete could negatively affect the Company's operating results and financial position. The Company expects competition in this space to intensify as competitors attempt to imitate the Company's approach to tightly integrating these components within their individual offerings or work more collaboratively with each other to offer solutions that are more integrated than those they offer currently. Some of these current and potential competitors have substantial resources and may be able to provide such products and services at little or no profit or even at a loss to compete with the Company's offerings. There can be no assurance the Company will be able to continue to provide products and services that effectively compete in these markets. The Company may also have to respond to price competition by lowering prices and/or increasing features which could adversely affect the Company's music product gross margins as well as overall Company gross margins. The Company also faces significant competition in the U.S. education market. U.S. elementary and secondary schools, as well as college and university customers, remain a core market for the Company. In an effort to gain market share and remain competitive, the Company will continue to pursue one-to-one (1:1) learning solutions in education. 1:1 learning solutions typically consist of a portable computer for every student and teacher along with the installation of a wireless network. These 1:1 learning solutions and other strategic sales are generally priced more aggressively and could result in significantly less profitability or financial losses, particularly for larger deals. Although the Company believes it has taken certain steps to strengthen its position in the education market, there can be no assurance that the Company will be able to increase or maintain its share of the education market or execute profitably on large strategic 23 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 24 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 25 of 143 arrangements. Failure to do so may have an adverse impact on the Company's operating results and financial condition. Future operating results are dependent upon the Company's ability to obtain a sufficient supply ofcomponents, including microprocessors, some ofwhich are in short supply or available onlyfrom limited sources. Although most components essential to the Company's business are generally available from multiple sources, certain key components including microprocessors and ASICs are currently obtained by the Company from single or limited sources. Some key components (including without limitation 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 from only one source until the Company has evaluated whether there is a need for, and subsequently qualifies, additional suppliers. In situations where a component or product utilizes new technologies, initial capacity constraints may exist until such time as the suppliers' yields have matured. The Company and other producers in the personal computer and consumer electronics industries also compete for various components with other industries that have experienced increased demand for their products. The Company uses some components that are not common to the rest of the personal computer or consumer electronics industries. Continued availability of these components may be affected if producers decided to concentrate on the production of components other than those customized to meet the Company's requirements. If the supply of a key component were delayed or constrained on a new or existing product, the Company's results of operations and financial condition could be adversely affected. The Company must successfully managefrequent product introductions and transitions to remain competitive and effectively stimulate customer demand. Due to the highly volatile and competitive nature of the personal computer and consumer electronics industries, which are characterized by dynamic customer demand patterns and rapid technological advances, the Company must continually introduce new products and technologies, enhance existing products to remain competitive, and effectively stimulate customer demand for new products and upgraded versions of the Company's existing products. The success of new product introductions is dependent on a 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 of purchase commitments and inventory levels in line with anticipated product demand; the availability of products in appropriate quantities and costs to meet anticipated demand; and the risk that new products may have quality or other defects in the early stages of introduction. Accordingly, the Company cannot determine in advance the ultimate effect new products will have on its sales or results of operations. In June 2005, the Company announced its plan to begin using Intel microprocessors in its computers. During 2006, the Company introduced new Intel-based models of the MacBook Pro, MacBook, Mac Pro, iMac, and Mac mini computers. The Company's transition to Intel microprocessors for Macintosh systems was completed in August 2006, and its transition for Xserve was completed in November 2006. This transition has been and will continue to be subject to numerous risks and uncertainties including the timely innovation and delivery of related hardware and software products to support Intel microprocessors, market acceptance of Intel-based Macintosh computers, and the development and availability on acceptable terms of components and services essential to enable the Company to timely deliver Intel-based Macintosh computers. In addition, the Company is dependent on third-party software developers such as Microsoft and Adobe to timely develop current and future applications that run on Intel-based Macintosh computers. Universal versions of Microsoft Office and Adobe's Creative Suite applications are not currently available. Additionally, there can be no assurance that the Company will be able to maintain its 24 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 25 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 26 of 143 historical gross margin percentages on its products, including Intel-based Macintosh computers, which may adversely impact the Company's results of operations. The Company 's productsfrom time to time experience quality problems that can result in decreased net sales and operating profits. The Company sells highly complex hardware and software products that can contain defects in design and manufacture. Sophisticated operating system software and applications , such as those sold by the Company, often contain "bugs that can unexpectedly interfere with the operation of the software . Defects may also occur in components and products the Company purchases from third-parties . There can be no assurance that the Company will be able to detect and fix all defects in the hardware and software it sells. Failure to do so could result in lost revenue, loss of reputation, and significant warranty and other expense to remedy. Because ordersfor components, and in some cases commitments to purchase components, must be placed in advance of customer orders, the Companyfaces substantial inventory risk The Company records a write-down for inventories of components and products that have become obsolete or are in excess of anticipated demand or net realizable value and accrues necessary reserves for cancellation fees for orders of products and components that have been cancelled. Although the Company believes its inventory and related provisions are currently adequate, given the rapid and unpredictable pace of product obsolescence in the computer and consumer electronics industries and the transition to Intel-based Macintosh computers, no assurance can be given that the Company will not incur additional inventory and related charges. In addition, such charges have had, and may have, a material effect on the Company's financial position and results of operations. The Company must order components for its products and build inventory in advance of product shipments. Because the Company's markets are volatile and subject to rapid technology and price changes, and because of the transition to Intel- based Macintosh computers, there is a risk the Company will forecast incorrectly and produce or order from third parties excess or insufficient inventories of particular products. Consistent with industry practice, components are normally acquired through a combination of purchase orders, supplier 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 and may in the future be materially adversely affected by the Company'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 ofwhom are located outside ofthe U.S. Most of the Company's products are manufactured in whole or in part by third-party manufacturers. In addition, the Company has outsourced much of its transportation and logistics management. While outsourcing arrangements may lower the cost of operations, they also reduce the Company's direct control over production and distribution. It is uncertain what effect such diminished control will have on the quality or quantity of the products manufactured or services rendered, or the flexibility of the Company to respond to changing market conditions. In addition, the Company is reliant on third-party manufacturers to adhere to the Company's supplier code of conduct. Moreover, although arrangements with such manufacturers may contain provisions for warranty expense reimbursement, the Company may remain at least initially responsible to the consumer for warranty service in the event of product defects. Any unanticipated product defect or warranty liability, whether pursuant to arrangements with contract manufacturers or otherwise, could adversely affect the Company's future operating results and financial condition. 25 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 26 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 27 of 143 Final assembly of products sold by the Company is currently performed in the Company's manufacturing facility in Cork, Ireland, and by external vendors in Fremont, California; Fullerton, California; Taiwan; the Republic of Korea; the People's Republic of China; and the Czech Republic. Currently, manufacturing of many of the components used in the Company's products is performed by third-party vendors in Taiwan, China, Japan, Korea, and Singapore. Final assembly of substantially all of the Company's portable products, including MacBook Pros, MacBooks, and iPods, is performed by third-party vendors in China. If for any reason manufacturing or logistics in any of these locations is disrupted by regional economic, business, labor, environmental, public health, or political issues, or due to information technology system failures or military actions, the Company's results of operations and financial condition could be adversely affected. The Company'sfuture operating performance is dependent on the performance ofdistributors and other resellers ofthe Company's products. The Company distributes its products through wholesalers, resellers, national and regional retailers, and cataloguers, many 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 and its retail stores. Many of the Company's resellers operate on narrow product margins and have been negatively impacted in the past by weak economic conditions. Considerable trade receivables that are not covered by collateral or credit insurance are outstanding with the Company's distribution and retail channel partners. The Company's business and financial results could be adversely affected if the financial condition of these resellers weakens, if resellers within consumer channels were to cease distribution of the Company's products, or if uncertainty regarding demand for the Company's products caused resellers to reduce their ordering and marketing of the Company's products. The Company has invested and will continue to invest in various programs to enhance reseller sales, including staffing selected resellers' stores with Company employees and contractors. These programs could require a substantial investment from the Company, while providing no assurance 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 the U.K. Some of the Company's resellers have perceived this expansion of the Company's direct sales as conflicting with their own businesses and economic interests as distributors and resellers of the Company's products. Perception of such a conflict could discourage the Company's resellers from investing additional resources in the distribution and sale of the Company's products or lead them to limit or cease distribution of the Company's products. The Company's business and financial results could be adversely affected if expansion of its direct sales to end-users causes some or all of its resellers to cease or limit distribution of the Company's products. The Company relies on thirdparty digital content, which may not be available to the Company on commercially reasonable terms or at all. The Company contracts with third parties to offer their digital content to customers through the Company's iTunes Store. The Company pays substantial fees to obtain the rights to offer to its customers this third-party digital content. The Company's licensing arrangements with these third-party content providers are short-term in nature and do not guarantee the future renewal of these arrangements at commercially reasonable terms, if at all. Certain parties in the music industry have consolidated and formed alliances, which could limit the availability and increase the fees required to offer digital content to customers through the iTunes Store. Some third-party content providers currently or may in the future offer music products and services that compete with the Company's music products and services, and could take action to make it more difficult or impossible for the Company to license their digital content in the future. Further, other distributors of third-party content or third-party content owners may seek to limit 26 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 27 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 28 of 143 the Company's access to or increase the total cost of such content. If the Company is unable to continue to offer a wide variety of digital content at reasonable prices with acceptable usage rules, or continue to expand its geographic reach outside the U.S., then sales and gross margins of the Company's iTunes Store, as well as related hardware and peripherals, including iPods, may be adversely affected. Third-party content providers and artists require that the Company provide certain digital rights management ("DRM ) solutions and other security mechanisms. If the requirements from content providers or artists change, then the Company may be required to further develop or license technology to address such new rights and requirements. In addition, certain countries have passed legislation or may propose legislation that would force the Company to license its DRM solutions so that content would be interoperable with competitor devices, which could lessen the protection of content subjecting it to piracy and could affect arrangements with the Company's content suppliers. There is no assurance the Company will be able to develop or license such solutions at a reasonable cost and in a timely manner, if at all, which could have a materially adverse effect on the Company's operating results and financial position. The Company's future performance is dependent upon supportfrom thirdparty software developers. If thirdparty software applications cease to be developed or available for the Company's hardware products, then customers may choose not to buy the Company's products. The Company believes decisions by customers to purchase the Company's personal computers, as opposed to Windows- based systems, are often based on the availability of third-party software applications such as Microsoft Office. The Company also believes the availability of third-party application software for the Company's hardware products depends in part on third-party developers' perception and analysis of the relative benefits of developing, maintaining, and upgrading such software for the Company's products versus software for the larger Windows market or growing Linux market. This 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 the Company in the personal computer market has caused software developers to question the Company's prospects in the personal computer market, developers could be less inclined to develop new application software or upgrade existing software for the 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 to run Windows XP may deter developers from creating software applications for Mac OS X if such applications are available for the Windows platform. Moreover, there can be no assurance software developers will continue to develop software for Mac OS X on a timely basis or at all. In June 2005, the Company announced its plan to begin using Intel microprocessors in its computers. During 2006, the Company introduced new Intel-based models of the MacBook Pro, MacBook, Mac Pro, iMac, and Mac mini computers. The Company's transition to Intel microprocessors for Macintosh systems was completed in August 2006, and its transition for Xserve was completed in November 2006. The Company depends on third-party software developers to timely develop current and future applications that run on Intel microprocessors. Universal versions of Microsoft Office and Adobe's Creative Suite applications are not currently available. The lack of applications that run on Intel-based Macintosh systems, including Microsoft Office and Adobe Creative Suite, could have a materially adverse effect on the Company's operating results and financial position. In addition, past and future development by the Company of its own software applications and solutions may negatively impact the decision of software developers, such as Microsoft and Adobe, to develop, maintain, and upgrade similar or competitive software for the Company's products. The Company currently markets and sells a variety of software applications for use by professionals, consumers, and education customers that could influence the decisions of third-party software developers to develop or 27 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 28 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 29 of 143 upgrade Macintosh-compatible software products. Software applications currently marketed by the Company include software for professional film and video editing, professional compositing and visual effects for large format film and video productions, professional music production and music post production, professional and consumer DVD encoding and authoring, professional digital photo editing and workflow management, consumer digital video and digital photo editing and management, digital 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 to patents and intellectual property obtainedfrom third parties, and the Company's future results could be adversely affected ifit is alleged orfound to have infringed on the intellectual 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 upon past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms. However, there can be no assurance that the necessary licenses would be available or available on acceptable terms. Because of technological changes in the computer and consumer electronics industries, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible certain components of the Company's products and business methods may unknowingly infringe existing patents of others. The Company has from time to time been notified that it may be infringing certain patents or other intellectual property rights of others. Responding to such claims, regardless of their merit, can be time-consuming, result in significant expenses, and cause the diversion of management and technical personnel. Several pending claims are in various stages of evaluation. The Company may consider the desirability of entering into licensing agreements in certain of these cases. However, no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. In the event there is a temporary or permanent injunction entered prohibiting the Company from marketing or selling certain of its products or a successful claim of infringement against the Company requiring it to pay royalties to a third-party, the Company's future operating results and financial condition could be adversely affected. Information regarding certain claims and litigation involving the Company related to alleged patent infringement and other matters is set forth in Part I, Item 3 of this Form 10-K. In the opinion of management, the Company does not have a potential liability for damages or royalties from any current legal proceedings or claims related to the infringement of patent or other intellectual property rights of others that would individually or in the aggregate have a material adverse effect on its results of operations or financial condition. However, the results of such legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any of the matters related to infringement of patent or other intellectual property rights of others described in Part I, Item 3 of this Form 10-K or should several of these matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected. The Company's retail initiative has required and will continue to require a substantial investment and commitment of resources and is subject to numerous risks and uncertainties. Through September 30, 2006, the Company had opened 165 retail stores. The Company's retail initiative has required substantial investment in equipment and leasehold improvements, information systems, inventory, and personnel. The Company has also entered into substantial operating lease commitments for retail space with lease terms ranging from 5 to 20 years, the majority of which are for 10 years. The Company could incur substantial costs should it choose to terminate these commitments or close individual stores. Such costs could adversely affect the Company's results of operations and financial condition. Additionally, a relatively high proportion of the Retail segment's costs are fixed because of personnel costs, 28 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 29 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 30 of 143 depreciation of store construction costs, and lease expense. As a result, significant losses would result should the Retail segment experience a significant decline in sales for any reason. Certain of the Company's stores have been designed and built to serve as high-profile venues that function as vehicles for general corporate marketing, corporate events, and brand awareness. Because of their unique design elements, locations and size, these stores require substantially more investment in equipment and leasehold improvements than the Company's more typical retail stores. The Company has opened eight such stores through September 2006. Because of their location and size, these high-profile stores also require the Company to enter into substantially larger operating lease commitments compared to those required for its more typical stores. Current leases on such locations have terms ranging from 10 to 14 years with total remaining commitments per location ranging from $4 million to $33 million. Closure or poor performance of one of these high-profile stores could have a significant negative impact on the Company's results of operations and financial condition. Many of the general risks and uncertainties the Company faces could also have an adverse impact on its Retail segment. Also, many factors unique to retail operations present risks and uncertainties, some of which are beyond the Company's control, that could adversely affect the Retail segment's future results, cause its actual results to differ from those currently expected, and/or have an adverse effect on the Company's consolidated results of operations. Potential risks and uncertainties unique to retail operations that could have an adverse impact on the Retail segment include, among other things, macro- economic 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 experience in managing retail operations outside the U.S.; costs associated with unanticipated fluctuations in the value of Apple-branded and third-party retail inventory; and inability to obtain and renew leases in quality retail locations at a reasonable cost. Investment in new business strategies and initiatives could disrupt the Company's ongoing business and may present risks not originally contemplated. The Company has and may in the future invest in new business strategies or engage in acquisitions that complement the Company's strategic direction and product roadmap. Such endeavors may involve significant risks and uncertainties, including distraction of management's attention away from current business operations; insufficient revenue generation to offset liabilities assumed and expenses associated with the strategy; and unidentified issues not discovered in the Company's due diligence process. Because these new ventures are inherently risky, no assurance can be given that such strategies and initiatives will be successful and will not materially adversely affect the Company's business, operating results or financial condition. Declines in the sales ofthe Company's professional products, software, accessories, or service and support contracts, or increases in sales ofconsumer products, including iPods, may negatively impact the Company's gross margin and operating margin percentages. The Company's professional products, including MacBook Pro and Mac Pro systems, software, accessories, and service and support contracts, generally have higher gross margins than the Company's consumer products, including the iMac, Mac mini, MacBook, iPod, and content from the iTunes Store. A shift in sales mix away from higher margin professional products towards lower margin consumer products could adversely affect the Company's future gross margin and operating margin percentages. The Company's traditional professional customers may choose to buy consumer products, specifically the iMac and MacBook, instead of professional products. Professional users may choose to buy the iMac due to its relative price performance and unique design featuring a flat panel screen. Professional users may also choose to purchase MacBooks instead of the Company's professional-oriented portable products due to their price performance and screen size. Additionally, significant future growth in iPod sales without 29 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 30 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 31 of 143 corresponding growth in higher margin product sales could also reduce gross margin and operating margin percentages. The Company expects its quarterly revenue and operating results tofluctuate for a variety ofreasons. The Company's profit margins vary among its products and its distribution channels. The Company's direct sales, primarily through its retail and online stores, generally have higher associated profitability than its indirect sales. As a result, the Company's gross margin and operating margin percentages, as well as overall profitability may be adversely impacted as a result of a shift in product, geographic or channel mix, or new product announcements, including the transition to Intel-based Macintosh computers. In addition, the Company generally sells more product during the third month of each quarter than it does during either of the first two months, a pattern typical in the personal computer and consumer electronics industries. This sales pattern can produce pressure on the Company's internal infrastructure during the third month of a quarter and may adversely impact the Company's ability to predict its financial results accurately. Furthermore, the Company has typically experienced greater net sales in the first and fourth fiscal quarters compared to other quarters in the fiscal year due to seasonal demand related to the holiday season and the beginning of the school year. Developments late in a quarter, such as lower-than-anticipated demand for the Company's products, an internal systems failure, or failure of one of the Company's key logistics, components suppliers, or manufacturing partners, could have significant adverse impacts on the Company and its results of operations and financial condition. The Company has higher research and development and selling, general and administrative costs, as a percentage of revenue, than many ofits competitors. The Company's ability to compete successfully and maintain attractive gross margins and revenue growth is heavily dependent upon its ability to ensure a continuing and timely flow of innovative and competitive products and technologies to the marketplace. As a result, the Company generally incurs higher research and development costs as a percentage of revenue than its competitors who sell personal computers based on other operating systems. Many of these competitors seek to compete aggressively on price and maintain very low cost structures. Further, as a result of the expansion of the Company's Retail segment and 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, its results of operations may be materially adversely affected by its operating cost structure. The Company is exposed to credit risk on its accounts receivable and prepayments related to long-term supply agreements. This risk is heightened during periods when economic conditions worsen. The Company distributes its products through third-party computer resellers and retailers and directly to certain educational institutions and commercial customers. A substantial majority of the Company's outstanding trade receivables are not covered by collateral or credit insurance. The Company also has unsecured non-trade receivables from certain of its manufacturing vendors resulting from the sale by the Company of raw material components to these manufacturing vendors who manufacture sub-assemblies or assemble final products for the Company. In addition, the Company has entered into long-term supply agreements to secure supply of NAND flash-memory and has prepaid a total of $1.25 billion under these agreements. While the Company has procedures in place to monitor and limit exposure to credit risk on its trade and non- trade receivables as well as long-term prepayments, there can be no assurance such procedures will be effective in limiting its credit risk and avoiding losses. Additionally, if the global economy or regional economies deteriorate, the Company would be more likely to incur a material loss or losses as a result of the weakening financial condition of one or more of its customers or manufacturing vendors. 30 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 31 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 32 of 143 The Company's success depends largely on its ability to attract and retain key personnel. Much of the future success of the Company depends on the continued service and availability of skilled personnel, including its Chief Executive Officer, members of its executive team, and those in technical, marketing and staff positions. Experienced personnel in the information technology industry are in high demand and competition for their talents is intense, especially in the Silicon Valley, where the majority of the Company's key employees are located. The Company has relied on its ability to grant stock options as one mechanism for recruiting and retaining this highly skilled talent. Recent accounting regulations requiring the expensing of stock options have resulted in increased stock-based compensation expense, which may cause the Company to reduce the amount of stock-based awards issued to employees. There can be no assurance that the Company will continue to successfully attract and retain key personnel. The Company is subject to risks associated with the availability and coverage ofinsurance. For certain risks, the Company does not maintain insurance coverage because of cost and/or availability. Because the Company retains some portion of its insurable risks, and in some cases self insures completely, unforeseen or catastrophic losses in excess of insured limits may have a material adverse effect on the Company's results of operations and financial position. Failure ofinformation technology systems and breaches in the security ofdata upon which the Company relies could adversely affect the Company sfuture operating results. Information technology system failures and breaches of data security could disrupt the Company's ability to function in the normal course of business by potentially causing delays or cancellation 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. However, there can be no assurance that a system failure or data security breach of the Company or a third-party vendor will not have a material adverse effect on the Company's results of operations. The Company's business is subject to the risks of international operations. A large portion of the Company's revenue is derived from its international operations. As a result, the Company's operating results and financial condition could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign subsidiaries), and changes in the 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 Asia and non-dollar denominated operating expenses incurred throughout the world. Weaknesses in foreign currencies, particularly the Japanese Yen and the Euro, can adversely impact consumer demand for the Company's products and the U.S. dollar value of the Company's foreign currency denominated sales. Conversely, a strengthening in these and other foreign currencies can cause the Company to modify international pricing and affect the value of the Company's foreign denominated sales, and in some cases, may also increase the cost to the Company of some product components. Margins on sales of the Company's products in foreign countries, and on sales of products that include components obtained from foreign suppliers, can be adversely affected by foreign currency exchange rate fluctuations and by international trade regulations, including tariffs and antidumping penalties. Derivative instruments, such as foreign exchange forward and option positions have been utilized by the Company to hedge exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movements in foreign exchange rates. 31 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 32 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 33 of 143 Further information related to the Company's global market risks may be found in Part II, Item 7A of this Form 10-K under the subheading "Foreign Currency Risk and may be found in Part II, Item 8 of this Form 10-K at Notes 1 and 3 of Notes to Consolidated Financial Statements. The Company is subject to risks associated with environmental regulations. 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 responsibility for environmentally safe disposal or recycling with the Company. Such laws and regulations have recently been passed in several jurisdictions in which the Company operates, including various European Union member countries, Japan and certain states within the U.S. Although the Company does not anticipate any material adverse effects in the future based on the nature of its operations and the thrust of such laws, there is no assurance such existing laws or future laws will not have a material adverse effect on the Company's financial condition, liquidity, or results of operations. Changes in accounting rules could affect the Company sfuture operating results. Financial statements are prepared in accordance with U.S. generally accepted accounting principles. These principles are subject to interpretation by various governing bodies, including the Financial Accounting Standards Board ("FASB ) and the SEC, who create and interpret appropriate accounting standards. A change 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, 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 expense reduced diluted earnings per common share by approximately $0.14. Although the adoption of SFAS No. 123R is expected to continue to have a significant impact on the Company's results of operations, future changes to various assumptions used to determine the fair-value of awards issued or the amount and type of equity awards granted create uncertainty as to the amount of future stock-based compensation expense. Changes in the Company's tax rates could affect itsfuture results. The Company's future effective tax rates could be favorably or unfavorably affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of the Company's deferred tax assets and liabilities, or by changes in tax laws or their interpretation. In addition, the Company is subject to the continuous examination of its income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. There can be no assurance the outcomes from these continuous examinations will not have an adverse effect on the Company's results of operations and financial condition. The Company's stockprice may be volatile. The Company's stock has at times experienced substantial price volatility as a result of variations between its actual and anticipated financial results and as a result of announcements by the Company and its competitors. The stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in ways that may have been unrelated to the operating performance of these companies. Furthermore, the Company believes its stock price reflects high future growth and profitability expectations. If the Company fails to meet these expectations its stock price may significantly decline. In addition, increases in the Company's stock price may result in greater dilution of earnings per share. 32 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 33 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 34 of 143 Item 1B. Unresolved Staff Comments None. Item 2. Properties The Company's headquarters are located in Cupertino, California. The Company has a manufacturing facility in Cork, Ireland. As of September 30, 2006, the Company leased approximately 3.6 million square feet of space, primarily in the U.S., and to a lesser extent, in Europe, Japan, Canada, and the Asia Pacific region. The major facility leases are for terms of 5 to 15 years and generally provide renewal options for terms of 3 to 5 additional years. Leased space includes approximately 1.2 million square feet of retail space, a majority of which is in the U.S. Lease terms for retail space range from 5 to 20 years, the majority of which are for 10 years, and often contain multi-year renewal options. The Company owns a 352,000 square-foot manufacturing facility in Cork, Ireland that also houses a customer support call center. The Company also owns 805,000 square feet of facilities in Sacramento, California that include warehousing and 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 the future development of the Company's second corporate campus, and approximately 107,000 square feet for a data center in Newark, California. Outside the U.S., the Company owns additional facilities totaling approximately 169,000 square feet. The Company believes its existing facilities and equipment are well maintained and in good operating condition. The Company has invested in internal capacity and strategic relationships with outside manufacturing vendors, and therefore believes it has adequate manufacturing capacity for the foreseeable future. The Company continues to make investments in capital equipment as needed to meet anticipated demand for its products. Item 3. Legal Proceedings The Company is subject to various legal proceedings and claims that are discussed below. The Company is also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and which have not been fully adjudicated. In the opinion of management, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on its financial condition, liquidity or results of operations. However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected. The Company settled certain matters during 2006 that did not individually or in the aggregate have a material impact on the Company's results of operations. Allen v. Apple Computer, Inc. On January 28, 2005, a plaintiff filed a purported nationwide class action in Los Angeles Superior Court alleging that a defect in the Company's 17-inch Studio Display monitors results in dimming of half of the screen and constant blinking of the power light. Plaintiff filed an amended complaint on October 24, 2005, adding additional named plaintiffs and expanding the alleged class to include purchasers of the 20-inch Apple Cinema Display and the 23-inch Apple Cinema HD Display. The amended complaint alleges that the displays have a purported defect that causes dimming of one-half of the screen, and that the Company misrepresented the quality of the displays and/or concealed the purported defect. Plaintiffs assert claims under California Business & Professions Code § 17200 (unfair competition); California Business & Professions Code § 17500 (false advertising) and the Consumer Legal Remedies Act. The amended complaint seeks remedies including damages and equitable relief. On November 14, 2005, the Company 33 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 34 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 35 of 143 filed an answer to the amended complaint as to the allegations regarding the 17-inch display and a demurrer/motion to strike as to the allegations regarding the 20-inch and 23-inch displays on the ground that plaintiffs failed to allege that they purchased those displays. At a status conference on November 1, 2005, the Court ordered Plaintiffs to amend their complaint. Plaintiff filed an amended complaint on December 12, 2005, and the Company answered on January 5, 2006 denying all allegations and asserting numerous affirmative defenses. The Company has reached a settlement in this matter, which was given preliminary approval by the Court on September 18, 2006. The final approval hearing is scheduled for February 15, 2007. Settlement of this matter will not have a material effect on the Company's financial position or results of operations. Apple Computer, Inc. v. Burst.com, Inc. The Company filed an action for declaratory judgment against Defendant Burst.com, Inc. on January 4, 2006 in the United States District Court for the Northern District of California. The Company seeks declaratory judgment that U.S. Patent Nos. 4,963,995, 5,164,839, 5,057,932 and 5,995,705 ("Burst patents ) are invalid and not infringed by the Company. Burst filed an answer and counterclaim on April 17, 2006. Burst alleges that the following Apple products and services infringe U.S. Patent Nos. 4,963,995, 5,057,932, 5,164,839, and 5,995,705; iTunes Store, iPod devices, QuickTime products (including QuickTime player and QuickTime Streaming Server), iTunes software, other Apple software products (Final Cut Studio, GarageBand, iMovie, iDVD, iWeb), the use of 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 February 8, 2007. Trial is set for February 26, 2008. Apple Corps Ltd. v. Apple Computer, Inc.; Apple Computer, Inc. v. Apple Corps Ltd. Plaintiff Apple Corps filed this action on July 4, 2003 in the High Court of Justice, Chancery Division, in London alleging that the Company has breached a 1991 agreement that resolved earlier trademark litigation between the parties regarding use of certain Apple marks. Plaintiff seeks an injunction, unspecified damages, and other relief. The Company filed a motion on October 13, 2003, challenging jurisdiction in the U.K. The Court denied this motion on April 7, 2004. The Company filed an appeal of the Court's decision but subsequently withdrew the appeal. In November 2004, Plaintiff served the Company with an Amended Bill of Particulars and on December 23, 2004, the Company filed a Defence. On November 24, 2005, Plaintiff filed a Re-Amended Bill of Particulars and the Company filed its Defence on December 16, 2005. Trial took place from March 29, 2006 through April 5, 2006. Judgment was given in favor of the Company on May 8, 2006 and Apple Corps was ordered to pay a portion of the Company's fees, the amount to be agreed or determined in a subsequent proceeding. Apple Corps has filed an appeal, which is scheduled to be heard in late February 2007. On October 8, 2003, the Company filed a lawsuit against Apple Corps in the United States District Court for the Northern District of California requesting a declaratory judgment that the Company has not breached the 1991 agreement. Apple Corps challenged jurisdiction in the California case but the Court denied that challenge on March 25, 2004. Apple Corps subsequently prevailed on a motion to stay the California case during the pendency of the U.K. action. The Company has dismissed the California lawsuit without prejudice. Bader v. Anderson, et al. Plaintiff filed this purported shareholder derivative action against the Company and each of its then current executive officers and members of its Board of Directors on May 19, 2005 in Santa Clara County Superior Court asserting claims for breach of fiduciary duty, material misstatements and omissions, and violations of California Businesses & Professions Code § 17200 (unfair competition). Plaintiff alleges that the Company's March 14, 2005, proxy statement was false and misleading for failure to disclose certain information relating to the Apple Computer, Inc. Performance Bonus Plan, which was approved by 34 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 35 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 36 of 143 shareholders at the annual meeting held on April 21, 2005. Plaintiff, who ostensibly brings suit on the Company's behalf, has made no demand on the Board of Directors and alleges that such demand is excused. Plaintiff seeks injunctive and other relief for purported injury to the Company. On July 27, 2005, Plaintiff filed an amended complaint alleging that, in addition to the purported derivative claims, adoption of the bonus plan and distribution of the proxy statement describing that plan also inflicted injury on her directly as an individual shareholder. On January 10, 2006, the Court sustained defendants' demurrer to the amended complaint, with leave to amend. Plaintiff filed a second amended complaint on February 7, 2006, and the Company filed a demurrer. After a hearing on June 13, 2006, the Court sustained the demurrer without leave to amend as to the non-director officers and with leave to amend as to the directors. On July 24, 2006, plaintiff filed a third amended complaint, which purports to bring claims derivatively as well as directly on behalf of a class of common stock holders who have been or will be harmed by virtue of the allegedly misleading proxy statement. In addition to reasserting prior causes of action, the third amended complaint includes a claim that the Company violated the terms of the plan, and a claim for waste related to restricted stock unit grants to certain officers in 2003 and 2004 and an option grant to the Company's CEO in January 2000. A demurrer that the Company filed to the third amended complaint as well as a motion to disqualify the Company's lawyers will be heard on January 30, 2007. Baghdasarian, et al. v. Apple Computer, Inc. Plaintiffs filed this action in Los Angeles County Superior Court on October 31, 2005, on behalf of a purported nationwide class of all purchasers of all Apple wireless products (router, modem, or adaptor) sold at any time. The complaint alleges that the Company misrepresented the transmission rates of these products. The complaint alleges causes of action for breach of express warranty and for violations of the Consumer Legal Remedies Act, California Business & Professions Code § 17200 (unfair competition) and California Business & Professions Code § 17500 (false advertising). The complaint seeks damages and equitable remedies. On December 15, 2005, the Company filed an answer denying all allegations and asserting numerous affirmative defenses. The parties have reached a tentative settlement, which is not expected to have a material effect on the Company's financial position or results of operations. Barry et al. v. Apple Computer, Inc. Two Plaintiffs 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, including skipping and limited lifespan. Plaintiffs alleged violations of California Business & Professions Code § 17200 (unfair competition), the Consumer Legal Remedies Act, the Song-Beverly Consumer Warranty Act and breach of warranties. The complaint sought damages and equitable relief. The plaintiffs voluntarily dismissed this case, without prejudice, on September 18, 2006. Birdsong v. Apple Computer, Inc.; Patterson v. Apple Computer, Inc. These federal court complaints allege that the Company's iPod music players, and the ear bud headphones sold with them, are inherently defective in design and are sold without adequate warnings concerning the risk of noise-induced hearing loss by iPod users. The Birdsong action was initially filed on January 30, 2006 in the United States District Court for the Western District of Louisiana on behalf of a purported Louisiana class of iPod purchasers and alleges violations of the Louisiana Products Liability Act, breaches of implied warranties, unjust enrichment, and negligent misrepresentation. The Patterson action was filed on January 31, 2006 in the United States District Court for the Northern District of California on behalf of a purported class of all iPod purchasers within the four-year period before January 31, 2006. That action alleged breaches of implied and express warranties, violations of California Business & Professions Code § 17200 (unfair competition), California Business & Professions Code § 17500 (false advertising), the Consumer Legal Remedies Act, breaches of express and implied warranties, negligent misrepresentation and unjust enrichment. The Birdsong action was transferred to the Northern District of California, and the 35 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 36 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 37 of 143 Patterson action was dismissed. An amended complaint was subsequently filed in Birdsong, dropping the Louisiana law- based claims and adding California law-based claims equivalent to those in Patterson. The Company filed a motion to dismiss on November 3, 2006. Plaintiffs will not oppose the motion but instead will file a second amended complaint by January 15, 2007. A similar complaint, Royer-Brennan v. Apple Computer, Inc. and Apple Canada, Inc., was filed in Montreal, Quebec, Canada, on February 1, 2006, seeking authorization to institute a class action on behalf of iPod purchasers in Quebec. A hearing on the motion for class certification is scheduled for February 8 and 9, 2007, although Plaintiff counsel has now requested that the hearing be delayed pending a ruling on the motion to dismiss in the U.S. case. Branning et al. v. Apple Computer, Inc. Plaintiffs originally filed this purported class action in San Francisco County Superior Court on February 17, 2005. The initial complaint alleged violations of California Business & Professions Code § 17200 (unfair competition) and violation of the Consumer Legal Remedies Act (CLRA) regarding a variety of purportedly unfair and unlawful conduct including, but not limited to, allegedly selling used computers as new and failing to honor warranties . Plaintiffs also brought causes of action for misappropriation of trade secrets, breach of contract, and violation of the Song-Beverly Consumer Warranty Act. Plaintiffs requested unspecified damages and other relief. On May 9 , 2005 , the Court granted the Company ' s motion to transfer the case to Santa Clara County Superior Court. On May 2 , 2005 , Plaintiffs filed an amended complaint adding two new named plaintiffs and three new causes of action including a claim for treble damages under the Cartwright Act (California Business & Professions Code § 16700 et seq.) and a claim for false advertising . The Company filed a demurrer to the amended complaint, which the Court sustained in its entirety on November 10, 2005 . The Court granted Plaintiffs leave to amend and they filed an amended complaint on December 29, 2005. Plaintiffs' amended complaint added three plaintiffs and alleged many of 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 action for unfair competition (§ 17200), violations of the CLRA, breach of contract, misappropriation of trade secrets, violations of the Cartwright Act and alleged new causes of action for fraud, conversion and breach of the implied covenant of good faith and fair dealing. The Company filed a demurrer to the amended complaint on January 31, 2006 , which the Court sustained on March 3 , 2006 on sixteen of seventeen causes of action. Plaintiffs filed an amended complaint adding one new plaintiff. The Company filed a demurrer, which was granted in part on September 9, 2006. Plaintiffs filed a further amended complaint on September 21, 2006 . On October 2, 2006, the Company filed an answer denying all allegations and asserting numerous affirmative defenses. The case is in discovery. Butter, et al. v. Apple Computer, Inc.; Wirges v. Apple Computer, Inc.; Blackwell v. Apple Computer, Inc. Plaintiffs filed the Butzer 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 of the Company' s PowerBook G4 portable computers . The complaint alleged defects in the memory of the computers. The complaint alleged that this purported defect extends to other series of the Company' s portables and stated that plaintiffs reserved the right to amend the complaint to include these other series. Plaintiffs asserted claims for alleged violations of California Business & Professions Code § 17200 (unfair competition), California Business & Professions Code § 17500 (false advertising), the Consumer Legal Remedies Act (CLRA) and the Song-Beverly Consumer Warranty Act. The complaint sought remedies including restitution and/or damages and injunctive relief. The Wirges action was filed on January 20, 2006 in the United States District Court for the Eastern District of Arkansas, also on behalf of a purported nationwide class, and made similar allegations . Plaintiffs asserted claims for breach of warranties , violation of the Magnuson-Moss Act, strict products liability and unjust enrichment. The complaint sought restitution , damages and other remedies . The Blackwell action was filed on February 10, 2006 in the 36 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 37 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 38 of 143 United States District Court for the Northern District of California, on behalf of a purported nationwide class, and made identical allegations to those made in the Butzer case. Plaintiffs asserted claims for breach of express and implied warranties, violation of the CLRA, violation of the Song-Beverly Act, false advertising and unfair competition. The complaint sought restitution, an injunction and other remedies. The Company filed an answer to the Butzer complaint on October 19, 2005 denying all material allegations and asserting numerous affirmative defenses. The Company filed an answer to the Wirges action on February 28, 2006, and also filed a motion to transfer the Wirges case to the Northern District of California. The Company filed an answer to the Blackwell complaint on March 15, 2006 denying all material allegations and asserting numerous affirmative defenses. The Company has reached a settlement with the named plaintiffs in all three cases and these matters are concluded. Settlement of these matters did not have a material effect on the Company's financial position or results of operations. Charoensak v. Apple Computer, Inc. (formerly Slattery v. Apple Computer, Inc) The original Plaintiff (Slattery) filed this purported class action on January 3, 2005 in the United States District Court for the Northern District of California alleging various claims including alleged unlawful tying of music purchased on the iTunes Store with the purchase of iPods and vice versa and unlawful acquisition or maintenance of monopoly market power. Plaintiffs complaint alleged violations of §§1 and 2 of the Sherman Act (15 U.S.C. §§1 and 2), California Business and Professions Code § 16700 et seq. (the Cartwright Act), California Business and Professions Code § 17200 (unfair competition), common law unjust enrichment and common law monopolization. Plaintiff sought unspecified damages and other relief. The Company filed a motion to dismiss on February 10, 2005. On September 9, 2005, the Court denied the motion in part and granted it in part. Plaintiff filed an amended complaint on September 23, 2005 and the Company filed an answer on October 18, 2005. On May 8, 2006, the Court heard Plaintiffs motion for leave to file a second amended complaint to substitute two new plaintiffs for Slattery. In August 2006, the court dismissed Slattery without prejudice and allowed plaintiffs to file an amended complaint naming 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 Computer, Inc. Plaintiff Contois Music Technology filed this action on June 13, 2005 in the United States District Court for Vermont, alleging infringement by the Company of U.S. Patent No. 5,864,868, entitled "Computer Control System and User Interface for Media Playing Devices . The complaint sought unspecified damages and other relief. The Company filed an answer on November 23, 2005 denying all material allegations and asserting numerous affirmative defenses . A Markman hearing was held on June 13, 2006 and the court issued a claim construction ruling on July 24, 2006. The parties agreed to a settlement and the case was dismissed on August 18, 2006. This matter is now concluded . Settlement of this matter did not have a material effect on the Company ' s financial position or results of operations. Creative Technology Ltd. and Creative Labs, Inc. v. Apple Computer, Inc. (filed on May 15, 2006, International Trade Comission), Creative Technology Ltd. v. Apple Computer, Inc. (filed on May 15, 2006, United States District Court for the Northern District of California), Apple Computer, Inc. v. Creative Technology Ltd. and Creative Labs, Inc. (filed May 15, 2006, United States District Court for the Western District of Wisconsin), Apple Computer, Inc. v. Creative Technology Ltd. and Creative Labs, Inc. (filed on June 1, 2007, International Trade Comission), Apple Computer, Inc. v. Creative Technology Ltd. and Creative Labs (filed on June 1, 2006, United States District Court for the Eastern District of Texas) On May 15, 2006, Creative Labs, Inc., and Creative Technology Ltd. (collectively "Creative ) filed a complaint with the U.S. International Trade Commission ("ITC ) alleging that the Company infringed U.S. patent number 6,928,433 ("`433 patent ) and seeking an order permanently barring iPods from importation into the United States. On May 15, 2006, Creative also brought suit against the Company in 37 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 38 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 39 of 143 the United States District Court for the Northern District of California, also alleging that the iPod infringed the `433 patent. The District Court action was stayed pending resolution of the Creative ITC Action. On May 15, 2006, the Company brought suit against Creative in the United States District Court for the Western District of Wisconsin ("Wisconsin Action ), alleging that Creative infringed U.S. patent number 5,479,602 ("`602 patent ), U.S. patent number 5,586,237 ("`237 patent ), U.S. patent number 5,898,434 ("`434 patent ), and U.S. patent number 6,731,312 ("`312 patent ). On May 17, 2006, the Company filed an amended complaint in the Wisconsin Action alleging that Creative also infringed U.S. patent number 5,341,293 ("`293 patent ), U.S. patent number 6,047,342 ("`342 patent ), and U.S. patent number 5,799,280 ("`280 patent ). On June 1, 2006, the Company brought suit against Creative in the United States District Court for the Eastern District of Texas, ("Texas Action ), alleging that Creative infringed U.S. patent number 6,157,363 ("`363 patent ), U.S. patent number 5,640,566 ("`566 patent ), and U.S. patent number 5,504,852 ("`852 patent ). On June 27, 2006, the Company filed an amended complaint in the Texas Action alleging that Creative also infringed U.S. patent number 7,046,230 ("`230 patent ) and U.S. patent number 6,282,646 ("`646 patent ). At the suggestion of the District Court, the Company filed separate actions in the Eastern District of Texas regarding the Company's allegations relating to the `230 patent and the `646 patent. On June 1, 2006, the Company filed a complaint with the ITC alleging that Creative infringed the `230 patent, the `293 patent, and the `434 patent. On June 5, 2006, the Company filed an amended complaint with the ITC alleging that Creative also infringed the `646 patent. The parties reached a settlement of all of the above matters and all cases were dismissed as of October 13, 2006. These matters are concluded. Settlement of these matters did not have a material effect on the Company's financial position or results 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 asserts causes of action for violation of California Business & Professions Code § 17200 (unfair competition), California Business & Professions Code § 17500 (false advertising), breach of the Song-Beverly Warranty Act, intentional misrepresentation and concealment. Plaintiff requests unspecified damages and other relief. The Company filed a demurrer and motion to strike, which were granted, in part, and Plaintiff filed an amended complaint. The Company filed an answer on April 17, 2003 denying all allegations and asserting numerous affirmative defenses. Plaintiff subsequently amended his complaint. On October 29, 2003, the Company filed a motion to disqualify Plaintiffs counsel in his role as counsel to the purported class and to the general public. The Court granted the motion but allowed Plaintiff to retain substitute counsel. Plaintiff did engage new counsel for the general public, but not for the class. The Company moved to disqualify Plaintiff s new counsel and to have the Court dismiss the general public claims for equitable relief. The Court declined to disqualify Plaintiffs new counsel or to dismiss the equitable claims, but did confirm that the class action claims were dismissed. The Company appealed the ruling and the case was stayed pending the outcome of the appeal. The Court of Appeals denied the appeal on August 17, 2005, affirming the trial court's decision. The Company filed a Petition for review with the California Supreme Court, which was denied on November 23, 2005. The case was remanded back to the trial court. The parties have reached a settlement and the matter is concluded. Settlement of this matter did not have a material effect on the Company's financial position or results of operations. 38 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 39 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 40 of 143 European Commission Investigation The European Commission has notified the Company it is investigating certain matters relating to the iTunes Store in the European Union ("EU ). The European Commission is investigating claims made by Which?, a United Kingdom (UK) consumer association, that the Company is violating EU competition law by charging more for online music in the UK than in Eurozone countries and preventing UK consumers from purchasing online music from the iTunes Store for Eurozone countries. The Which? claims were originally lodged with the UK Office of Fair Trading, which subsequently referred them to the European Commission. The European Commission is investigating the charges under Articles 81 and 82 of the European Commission Treaty. Euro Tec Enterprises, Inc. et al. v. Apple Computer, Inc. et al. This is a purported class action copyright infringement case filed on May 16, 2006 in the United States District Court for the Central District of California by certain independent music publishers against the Company and several other defendants for allegedly failing to secure a compulsory license for copyrighted musical compositions being sold as downloads. Plaintiffs' complaint seeks an injunction, damages and other relief. The Company filed an answer on July 28, 2006 denying all material allegations and asserting numerous affirmative defenses. The case is in discovery and is set for trial on November 13, 2007 if no class is certified or on June 10, 2008 if a class is certified. Plaintiffs filed an amended complaint on October 23, 2006 and the Company filed an amended answer on November 28, 2006 denying all material allegations and asserting numerous affirmative defenses. Gillis et al. v. Apple Computer, Inc. Plaintiffs filed this purported class action on December 23, 2005 in San Diego County Superior Court alleging the Company has misrepresented the hard drive capacity of two Powerbook G4 computers: the 12-inch, 1.5GHz computer with 512MB of memory and a 100GB hard drive; and the 15-inch, 1.67GHz computer with 1 GB of memory and a 100GB hard drive. Plaintiffs alleged that the Company's standard disclosure on its packaging regarding hard drive size was not present on the packaging for these two models. The complaint alleged violations of the California Business & Professions Code § 17200 (unfair competition), California Business & Professions Code §17500 (false advertising), the Consumer Legal Remedies Act, and causes of action for deceit and negligent misrepresentation. Plaintiffs sought restitution and other relief. On February 28, 2006, the Company filed a demurrer and a motion to strike. The Company withdrew the demurrer and motion to strike per stipulation. The Company has reached a Court-approved settlement with the Plaintiffs in this action and the matter is concluded. The settlement of this matter did not have a material effect on the Company's financial position or results of operations. Goldberg, et al. v. Apple Computer, Inc., et al. Plaintiffs filed this purported class action on September 22, 2003 in Los Angeles County Superior Court against the Company and other members of the computer industry on behalf of an alleged nationwide class of purchasers of certain computer hard drives. The case alleged violations of California Business & Professions Code § 17200 (unfair competition), the Consumer Legal Remedies Act and false 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 an answer on September 23, 2004, denying all allegations and asserting numerous affirmative defenses. Defendants filed a motion to strike portions of the complaint based on sales by resellers and filed a motion for judgment on the pleadings based upon Proposition 64. The Court granted both motions at a hearing on April 6, 2005. Plaintiffs thereafter filed an amended complaint on May 6, 2005. The Defendants filed a demurrer on June 6, 2005, which the Court granted in part and denied in part. Plaintiffs filed an amended complaint and the Company filed an answer on December 15, 2005 denying all allegations and asserting numerous assertive defenses. The Company reached a Court-approved settlement with the Plaintiffs in this action 39 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 40 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 41 of 143 and the matter is concluded. The settlement of this matter did not have a material effect on the Company's financial position or results of operations. Gordon v. Apple Computer, Inc. Plaintiff filed this purported class action on August 31, 2006 in the United States District Court for the Northern District of California, San Jose Division, on behalf of a purported nationwide class of consumers who purchased 65W Power Adapters for iBooks and Powerbooks between November 2002 and the present. The complaint alleges various problems with the 65W Adapter, including fraying, sparking and premature failure. Plaintiffs allege violations of California Business & Professions Code § 17200 (unfair competition), the Consumer Legal Remedies Act, the Song-Beverly Consumer Warranty Act and breach of warranties. The complaint seeks damages and equitable relief. The Company filed an answer on October 20, 2006 denying the material allegations and asserting numerous affirmative defenses. Mediation is set for March 13, 2007. Greaves v. Apple Computer, Inc. On June 30, 2006 Plaintiff filed this purported class action in San Diego Superior Court on behalf of a purported class of California purchasers alleging discoloration of the MacBook case. Plaintiff asserts claims under California Business & Professions Code § 17500 (false advertising), California Business & Professions Code § 17200 (unfair competition), the Consumer Legal Remedies Act and misrepresentation. Plaintiffs complaint seeks damages and equitable relief. Plaintiff filed a First Amended Complaint on August 16, 2006. The Company filed an answer on October 3, 2006 denying all allegations and asserting numerous affirmative defenses. Honeywell International, Inc., et al. v. Apple Computer, Inc., et al. Plaintiffs Honeywell International, Inc. and Honeywell Intellectual Properties, Inc. filed this action on October 6, 2004 in the United States District Court in Delaware alleging infringement by the Company and other defendants of U.S. Patent 5,280,371 entitled "Directional Diffuser for a Liquid Crystal Display. Plaintiffs seek unspecified damages and other relief. The Company filed an answer on December 21, 2004 denying all material allegations and asserting numerous affirmative defenses. The Company has tendered the case to several LCD manufacturer suppliers. On May 18, 2005 the Court stayed the case against the Company and the other non-manufacturer defendants. Plaintiffs filed an amended complaint on November 7, 2005 adding additional defendants and expanding the scope of the accused products. Given the stay, the Company's response to the amended complaint is not yet due. In re Apple Computer, Inc. Derivative Litigation (formerly Karant v. Jobs, et al. and Related Actions) (Federal Action) 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 captioned In re Apple Computer, Inc. Derivative Litigation, Master File No. C-06- 04128-JF before the Hon. Jeremy Fogel. A Consolidated Shareholder Derivative Complaint was filed on December 18, 2006. The action purports to assert claims on behalf of the Company against several 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, insider trading and issuing false financial statements. The Company is named as a nominal defendant. The consolidated complaint alleges various causes of action under federal and California law, including claims for unjust enrichment, breach of fiduciary duty, violation of the California Corporations Code, abuse of control, gross mismanagement, rescission, constructive fraud and waste of corporate assets, as well as claims under Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act. Plaintiffs seek damages, disgorgement, restitution and imposition of a constructive trust. The actions were filed after the Company's 40 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 41 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 42 of 143 announcement on June 29, 2006 that an internal investigation had discovered irregularities related to the issuance of certain stock option grants made between 1997 and 2001, that a special committee of the Company's outside directors had retained independent counsel to perform an investigation, and that the Company had informed the Securities and Exchange Commission. The Company's response to the Consolidated Complaint is not yet due. In re Apple Computer, Inc. Derivative Litigation (formerly Plumbers and Pipefitters v. Jobs, et al. and Related Actions) (State Action); Boston Retirement Board v. Apple Computer, Inc. On July 5, 2006, a putative derivative action captioned Plumbers and Pipefitters v. Jobs, et. al., was filed in California Superior Court for the County of Santa Clara. A number of related actions were filed in the subsequent weeks, and have been consolidated into a single action captioned In re Apple Computer, Inc. Derivative Litigation, No. 1:06CV066692, assigned to the Hon. Joseph Huber. These actions purport to assert claims on behalf of the Company against several 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 is named as a nominal defendant. A consolidated complaint was filed on October 5, 2006, alleging a variety of causes of action under California law, including claims for unjust enrichment, breach of fiduciary duty, violation of the California Corporations Code, abuse of control, accounting, constructive trust, rescission, deceit, gross mismanagement and waste of corporate assets. On December 7, 2006, the Court granted the Company's motion to stay these actions. On November 3, 2006, the Boston Retirement Board, a purported shareholder, filed a petition for writ of mandate against the Company in California Superior Court for the County of Santa Clara County (Boston Retirement Board v. Apple Computer Inc.). The petition seeks to compel the Company to allow inspection of certain corporate records relating to the Company's option practices and the Special Committee's investigation. The Company's response to the petition is not yet due. Lenzi v. Apple Canada, Inc.; Wolfe v. Apple Computer, Inc. and Apple Canada, Inc.; Hirst v. Apple Canada, Inc.; Hamilton v. Apple Computer, Inc. and Apple Canada, Inc. Plaintiff filed a purported class action on June 7, 2005, in Superior Court, in Montreal, Quebec, Canada allegedly on behalf of Quebec customers claiming false advertising and breach of warranty relating to iPod battery life. Plaintiff sought authorization to institute a class action on behalf of Generations 1, 2 and 3 iPod owners in Quebec. On February 2, 2006, the Court dismissed Plaintiffs motion for authorization to institute a class action. Plaintiff has appealed this ruling, and the appeal will be heard on February 22, 2007. Two similar complaints relative to iPod battery life, Wolfe v. Apple and Hirst v. Apple, were filed in Toronto, Ontario, Canada on August 15, 2005 and September 12, 2005, respectively. Both actions define the purported class as a national class consisting of all persons in Canada who have purchased or who own an iPod. Counsel has proposed an amended complaint to which the Company has not consented. In addition, a similar complaint regarding iPod battery life, Hamilton v. Apple Computer, Inc. and Apple Canada, Inc. was filed in Alberta, Calgary, Canada on October 5, 2005, purportedly on behalf of all purchasers of iPods in Alberta, Canada. That complaint has not been served. MacTech Systems v. Apple Computer, Inc.; Macadam v. Apple Computer, Inc.; Computer International, Inc. v. Apple Computer, Inc.; Elite Computers and Software, Inc. v. Apple Computer, Inc.; The Neighborhood Computer Store v. Apple Computer, Inc.; MacAccessory Center, Inc. v. Apple Computer, Inc.; Creative Online Computer Services, Inc., DBA MacOnline v. Apple Computer, Inc.; MacGuys, Inc. v. Apple Computer, Inc. (all in Santa Clara County Superior Court) Eight resellers filed similar lawsuits against the Company between late 2002 and early 2006 asserting various causes of action including breach of contract, fraud, negligent and intentional interference with 41 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 42 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 43 of 143 economic relationship, negligent misrepresentation, trade libel, unfair competition and false advertising. Plaintiffs requested unspecified damages and other relief. The Company answered the Computer International complaint on November 12, 2003, denying all allegations and asserting numerous affirmative defenses. The Company filed an answer in the Macadam case on December 3, 2004 denying all allegations and asserting numerous defenses. Three of the other Plaintiffs filed amended complaints on February 7, 2005, and on March 16, 2005 the Company filed answers to these claims denying all allegations and asserting numerous affirmative defenses. A sixth Plaintiff, MacAccessory Center, filed a complaint on February 23, 2005. The Company filed an answer to this complaint on April 20, 2005 denying all allegations and asserting numerous affirmative defenses. On February 28, 2006, MacGuys and Creative Online filed complaints against the Company. All of these cases with the exception of Macadam were coordinated for discovery (along with the Branning class action) in Santa Clara Superior Court. The Elite, Neighborhood Computer Store, MacTech and MacAccessory cases were set for trial on November 27, 2006. The Company has reached settlements with Computer International, MacTech Systems, Elite Computers and Software, Inc., MacAccessory Center, Inc., The Neighborhood Computer Store, Creative Online Computer Services, Inc., and MacGuys, Inc. and these matters are concluded. These settlements did not have a material effect on the Company's financial position or results of operations. On October 1, 2003, one of the reseller Plaintiffs, Macadam, was deauthorized as an Apple reseller. Macadam filed a motion for a temporary order to reinstate it as a reseller, which the Court denied. The Court denied Macadam's motion for a preliminary injunction on December 19, 2003. On December 6, 2004, Macadam filed for Chapter 11 Bankruptcy in the Northern District of California, which placed a stay on the litigation as to Macadam only. The Company filed a claim in the bankruptcy proceedings on February 16, 2005. The Macadam bankruptcy case was converted to Chapter 7 (liquidation) on April 29, 2005. The Company has reached a settlement of the Macadam case with the Chapter 7 Bankruptcy Trustee. The Bankruptcy Court approved the settlement on July 17, 2006 over the objection of Tom Santos, MacAdam's principal. Santos has appealed the ruling approving the settlement. On December 19, 2005, Tom Santos, who was an original plaintiff in the Macadam case, filed a Fifth Amended Complaint on his own behalf (not on behalf of Macadam) alleging fraud, violations of California Business & Professions Code § 17200 (unfair competition), California Business & Professions Code §17500 (false advertising) and the Consumer Legal Remedies Act. The Company filed a demurrer to Santos' amended complaint and a special motion to strike the defamation cause of action on January 20, 2006. Those motions were heard on February 17, 2006, and the Court sustained the demurrer without leave to amend as to one cause of action, overruled the demurrer as to one cause of action and sustained the demurrer with leave to amend as to two causes of action. The Court also denied the special motion to strike. Santos filed a further amended complaint on July 14, 2006. The Company filed a demurrer, which was granted on September 9, 2006. Santos filed an amended complaint. The Company filed a motion to strike, which was granted in part and denied in part on December 15, 2006. The Company also filed a cross complaint against Santos on January 20, 2006 alleging violations of California Business & Professions Code § 17200 and California Penal Code §502, fraud and deceit, and breach of contract. Macsolutions, Inc. v. Apple Computer, Inc. Plaintiff Macsolutions, Inc., a former Apple authorized reseller, filed this lawsuit against the Company on January 20, 2006 alleging breach of contract, fraud, misappropriation of trade secrets, intentional interference with economic advantage, violation of the Cartwright Act, violation of California Business & Professions Code § 17200 (unfair competition) and fraudulent concealment. The factual allegations in this complaint are similar to those in the eight other reseller cases and the Branning class action. Principally, Plaintiffs 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 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 43 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 44 of 143 defendant. The Company filed an answer on July 5, 2006 generally denying all allegations and asserting numerous affirmative defenses . The case is in discovery. The case is set for trial on June 18, 2007. PhatRat Technology LLC v. Apple Computer, Inc. Plaintiff PhatRat Technology LLC filed this action on October 24, 2006 in the United States District Court for the District of Colorado alleging infringement of U.S. Patent number 6,499 ,000 entitled "System and Method for Determining Loft Time, Speed, Height and Distance, U.S. Patent number 6,885,971 entitled "Methods and Systems for Assessing Athletics Performance, U.S. Patent number 6,963,818 entitled "Mobile Speedometer Systems and Associated Methods, and U.S. Patent number 7,092, 846 entitled "Systems and Methods for Determining Performance Data, as well as allowed U.S. Patent Application number 11 /358,508 entitled "Shoes Employing Monitoring Devices , and Associated Methods. Plaintiff asserts that the Nike+iPod products infringe these patents. The Company' s response to the complaint is not yet due. Premier International Associates LLC v. Apple Computer, Inc. Plaintiff Premier International Associates LLC filed this action on November 3, 2005 in the United States District Court for the Eastern District of 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 numerous affirmative defenses. The Company also asserted counter claims for a declaratory judgment of noninfringement and invalidity. A Markman hearing is set for May 17, 2007 and trial is scheduled for December 3, 2007. Quantum Technology Management, Ltd. v. Apple Computer, Inc. Plaintiff filed this action on December 21, 2005 in the United States District Court for the District of Maryland against the Company and Fingerworks , Ltd., alleging infringement of U.S. Patent number 5,730,165 entitled "Time Domain Capacitive Field Detector. The complaint seeks unspecified damages and other relief. On May 11 , 2006, Quantum filed an amended complaint adding Cypress Semiconductor/MicroSystems , Inc. as a defendant. On July 31, 2006, the Company filed an answer denying all material allegations and asserting numerous affirmative defenses and also filed counterclaims for non- infringment and invalidity. On November 30, 2006 Plaintiff filed a reply to the Company's counterclaims and a More Definite Statement. St-Germain v. Apple Canada, Inc. Plaintiff filed this case in Montreal , Quebec , Canada, on August 5, 2005 , seeking authorization to institute a class action for the refund by the Company of the Canadian Private Copying Levy that was applied to the iPod purchase price in Quebec between December 12, 2003 and December 14, 2004 but later declared invalid by the Canadian Court. The Company has completed a refund program for this levy. A class certification hearing took place January 13, 2006 . On February 24, 2006, the Court granted class certification and notice was published during the last week of March 2006. Discovery is closed and the case is prepared for trial, which the Company anticipates will take place in 2007. Tse v. Apple Computer, Inc. et al. Plaintiff Ho Keung Tse filed this action against the Company and other defendants on August 5, 2005 in the United States District Court for the District of Maryland alleging infringement by the Company of U.S. Patent number 6,665 ,797 entitled "Protection of Software Again [sic] Against Unauthorized Use. The complaint seeks unspecified damages and other relief. The Company filed an answer on October 31 , 2005 denying all material allegations and asserting numerous affirmative defenses . On October 28, 2005 , the Company and the other defendants filed a motion to transfer the case to the Northern District of California, which was granted on August 31, 2006. 43 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 44 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 45 of 143 Tucker v. Apple Computer, Inc. Plaintiff filed this purported class action on July 21, 2006 in the United States District Court for the Northern District of California alleging various claims including alleged unlawful tying of music and videos purchased on the iTunes Store with the purchase of iPods and vice versa and unlawful acquisition or maintenance of monopoly market power. The complaint alleges violations of §§1 and 2 of the Sherman Act (15 U.S.C. §§1 and 2), California Business & Professions Code § 16700 et seq. (the Cartwright Act), California Business & Professions Code § 17200 (unfair competition), and the California Consumer Legal Remedies Act. Plaintiff seeks unspecified damages and other relief. On November 3, 2006, the Company filed a motion to dismiss the complaint, which was heard on November 20, 2006. On December 20, 2006, the Court denied the motion to dismiss. Union Federale des Consummateurs - Que Choisir v. Apple Computer Frances. .r. 1. and iTunes s. .r.l. Plaintiff, a consumer association in France, filed this complaint on February 9, 2005 alleging that the above-listed entities are violating consumer law by (1) omitting to mention that the iPod is allegedly not compatible with music from online music services other than the iTunes Store and that the music from the iTunes Store is only compatible with the iPod and (2) allegedly tying the sales of iPods to the iTunes Store and vice versa. Plaintiff seeks damages, injunctive relief and other relief. The first hearing on the case took place on May 24, 2005. The Company's response to the complaint was served on November 8, 2005. Plaintiffs responsive pleading was filed on February 10, 2006. The Company filed a reply on June 6, 2006 and UFC filed a response on September 19, 2006. Vitt v. Apple Computer, Inc. Plaintiff filed this purported class action on November 7, 2006 in the United States District Court for the Central District of California on behalf of a purported nationwide class of all purchasers of the iBook G4 alleging that the computer' s logic board fails at an abnormally high rate. The complaint alleges violations of California Business & Professions Code § 17200 (unfair competition) and California Business & Professions Code § 17500 (false advertising). Plaintiff seeks unspecified damages and other relief. The Company' s response to the complaint is not yet due. Vogel v. Jobs et al. Plaintiff filed this purported class action on August 24, 2006, in the United States District Court for the Northern 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 lawsuit purports to be brought on behalf of all purchasers of the Company's stock from December 1, 2005 through August 11, 2006, and asserts claims under Sections 10(b) and 14(a) of the Securities Exchange Act as well as control person claims. A motion for appointment of lead plaintiff and counsel was scheduled to be heard on December 4, 2006 but was taken off calendar when the case was re-assigned to the Hon. Jeremy Fogel. The motion therefore is still pending. Defendants' responses to the complaint are not yet due. Wimmer v. Apple Computer, Inc. (originally filed as Tomczak v. Apple Computer, Inc. on October 19, 2005 in the United States District Court for the Northern District of California, San Jose Division; amended complaint filed October 26, 2005); Moschella, et al., v. Apple Computer, Inc. (filed October 26, 2005 United States District Court for the Northern District of California, San Jose Division); Calado, et al. v. Apple Computer, Inc. (filed October 26, 2005, Los Angeles County Superior Court); Kahan, et al., v. Apple Computer, Inc. (filed October 31, 2005, United States District Court for the 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); Rappel v. Apple Computer, Inc. (filed on November 23, 2005, United States District Court for the District of New Jersey); Mayo v. Apple Computer, Inc. (filed on December 7, 2005, United States District Court for the Middle District of Louisiana); Valencia v. Apple Computer, Inc. (filed on December 22, 2005, United States District Court for 44 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 45 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 46 of 143 the Northern District of California); Williamson v. Apple Computer, Inc. (filed on December 29, 2005, United States District Court for the Middle District of Louisiana); Sioson v. Apple Computer, Inc. (filed on February 9, 2006, San Mateo County Superior Court; First Amended Complaint filed March 16, 2006) These federal and state court complaints allege that the Company's iPod nano was defectively designed so that it scratches excessively during normal use, rendering the screen unreadable. The federal actions were coordinated in the United States District Court for the Northern District of California and assigned to the Hon. Ronald Whyte pursuant to an April 17, 2006, order of the Judicial Panel on Multidistrict Litigation. Plaintiffs filed a First Consolidated and Amended Master Complaint on September 21, 2006, alleging violations of California and other states' consumer protection and warranty laws and claiming unjust enrichment. The Master Complaint alleges two putative plaintiff classes: (1) all U.S. residents (excluding California residents) who purchased an iPod nano that was not manufactured or designed using processes necessary to ensure normal resistance to scratching of the screen; and (2) all iPod nano purchasers other than U.S. residents who purchased an iPod nano that was not manufactured or designed using processes necessary to ensure normal resistance to scratching of the screen. Pursuant to stipulation, the Wimmer, Valencia, and Rappel federal complaints were dismissed without prejudice and the Mayo and Williamson complaints were administratively closed without prejudice. The Company answered the Master Complaint on November 20, 2006. The two California state actions were coordinated on May 4, 2006, and assigned to the Hon. West in Los Angeles Superior Court. Plaintiffs filed a Consolidated Amended Class Action Complaint on June 8, 2006, alleging violations of California state consumer protection, unfair competition, false advertising, and warranty laws and claiming unjust enrichment. The Consolidated Complaint alleges a putative plaintiff class of all California residents who own an iPod nano containing a manufacturing defect that results in the nano being susceptible to excessive scratching. The Company answered the Consolidated Amended Complaint on October 6, 2006. Two similar complaints, Carpentier v. Apple Canada, Inc., and Royer-Brennan v. Apple Computer, Inc. and Apple Canada, Inc. were filed in Montreal, Quebec, Canada on October 27, 2005 and November 9, 2005, respectively, seeking authorization to institute class actions on behalf of iPod nano purchasers in Quebec. The Royer-Brennan file was stayed in May 2006 in favor of the Carpentier file, in which Apple's preliminary motion for leave to file evidence will 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 class actions, a motion to stay the Royer-Brennan case is stayed in favor of the previously filed Carpentier case. In the Ontario Action, Apple Canada Inc. and Apple Computer, Inc., have served Notices of Intent to defend. On December 18, 2006, plaintiffs counsel advised that a substitution of attorneys will occur, most likely in January 2007. The file is now stayed, and the Company's motion to examine petitioner and for leave to file evidence at certification will be set after the new counsel appears. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ended September 30, 2006. 45 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 46 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 47 of 143 PART H Item 5. Market for Registrant' s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The Company' s common stock is traded on the over-the-counter market and is quoted on the NASDAQ Global Select Market under the symbol AAPL and on the Frankfurt Stock Exchange under the symbol APCD. Price Range of Common Stock 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 shareholders of record as of February 18, 2005. All share and per share information has been retroactively adjusted to reflect the stock split. Fourth Quarter Third Quarter Second Quarter First Quarter Fiscal 2006 price range per common share $ 77.78-$50.16 $ 73.80-$55.41 $ 86.40-$57.67 $ 75.46-$47.87 Fiscal 2005 price range per common share $ 53.20-$36.37 $ 43.74-$34.13 $ 45.06-$31.58 $ 34.22-$18.65 Holders As of December 13, 2006, there were 29,317 shareholders of record. Dividends The Company did not declare or pay cash dividends in either 2006 or 2005. The Company anticipates that, for the foreseeable future, it will retain any earnings for use in the operation of its business. Securities Authorized for Issuance under Equity Compensation Plans The description of equity compensation plans required by Regulation S-K, Item 201(d) is incorporated herein by reference to Part III, Item 12 of this Form 10-K. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. Item 6. Selected Financial Data The consolidated balance sheet as of September 24, 2005 and the consolidated statements of operations for the fiscal years ended September 24, 2005 and September 25, 2004 have been restated as set forth in the 2006 Form 10-K. The data for the consolidated balance sheets as of September 2004, 2003, and 2002 and the consolidated statements of operations for the fiscal years ended September 2003 and 2002 have been restated to reflect the impact of the stock-based compensation adjustments, but such restated data have not been audited and is derived from the books and records of the Company. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below. The information presented in the following tables has been adjusted to reflect the restatement of the Company's financial results, which is more fully described in the "Explanatory Note immediately preceding Part I, Item 1 and in Note 2, "Restatement of Consolidated Financial Statements in Notes to Consolidated Financial Statements of this Form 10-K. 46 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 47 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 48 of 143 The Company has not amended its previously-filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in such previously-filed reports should no longer be relied upon. Five fiscal years ended September 30, 2006 (In millions, except share and per share amounts) 2006 2005 2004 2003 2002 As As As As Restated (1) Restated (1) Restated (2) Restated (2) Net sales $ 19,315 $ 13,931 $ 8,279 $ 6,207 $ 5,742 Net income $ 1,989 $ 1,328 $ 266 $ 57 $ 42 Earnings per common share: Basic $ 2.36 $ 1.64 $ 0.36 $ 0.08 $ 0.06 Diluted $ 2.27 $ 1.55 $ 0.34 $ 0.08 $ 0.06 Cash dividends declared per common share $ - $ - $ - $ - $ - Shares used in computing earnings per share (in thousands): Basic 844,058 808,439 743,180 721,262 710,044 Diluted 877,526 856,878 774,776 723,352 721,445 Cash, cash equivalents, and short-term investments $ 10,110 $ 8,261 $ 5,464 $ 4,566 $ 4,337 Total assets $ 17,205 $ 11,516 $ 8,039 $ 6,817 $ 6,305 Long-term debt (including current maturities) $ - $ - $ - $ 304 $ 316 Total liabilities $ 7,221 $ 4,088 $ 2,976 $ 2,594 $ 2,205 Shareholders' equity $ 9,984 $ 7,428 $ 5,063 $ 4,223 $ 4,100 Net gains before taxes related to the Company's non-current debt and equity investments of $4 million and $10 million were recognized in 2004 and 2003, respectively. A net loss before taxes related to the Company's non-current debt and equity investments of $42 million was recognized in 2002. Net charges related to Company restructuring actions of $23 million, $26 million, and $30 million were recognized in 2004, 2003, and 2002, respectively. In 2003, settlement of the Company's forward stock purchase agreement resulted in a gain of $6 million. Net income during 2005 benefited by $81 million from the reversal of certain tax contingency reserves and adjustments to net deferred tax assets, including reductions to valuation allowances. Favorable cumulative-effect type adjustments from the adoption of new accounting standards, net of taxes of $1 million was recognized in 2003. (1) See the "Explanatory Note immediately preceding Part I, Item 1 and Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements of this Form 10-K. 47 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 48 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 49 of 143 (2) The Selected Financial Data for 2003 and 2002 has been restated to reflect adjustments related to stock-based compensation expense and the associated tax impact as further described in the "Explanatory Note immediately preceding Part I, Item 1 of this Form 10-K. As a result of these adjustments, net income was reduced by $12 million and $23 million for the years ended September 27, 2003 and September 28, 2002, respectively as follows: Fiscal Year Ended September 27, Fiscal Year Ended September 28, 2003 2002 As As As As Reported Adjustments Restated Reported Adjustments Restated Net sales $ 6,207 $ - $ 6,207 $ 5,742 $ - $ 5,742 Cost of sales 4,499 1 4,500 4,139 3 4,142 Gross margin 1,708 (1) 1,707 1,603 (3) 1,600 Total operating expenses 1,709 15 1,724 1,586 26 1,612 Operating income (loss) (1) (16) (17) 17 (29) (12) Income before accounting changes 68 (12) 56 65 (23) 42 Cumulative effects of accounting changes, net of income taxes Net income 69 $ (12) $ 57 $ 65 $ (23) $ 42 Earnings (loss) per common share before accounting changes: Basic $ 0.09 $ (0.01) $ 0.08 $ 0.09 $ (0.03) $ 0.06 Diluted $ 0.09 $ (0.01) $ 0.08 $ 0.09 $ (0.03) $ 0.06 Earnings per common share: Basic $ 0.10 $ (0.02) $ 0.08 $ 0.09 $ (0.03) $ 0.06 Diluted $ 0.09 $ (0.01) $ 0.08 $ 0.09 $ (0.03) $ 0.06 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section and other parts ofthis Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as "anticipates, " "expects, " "believes, " `plans, " `predicts, " and similar terms. Forward-looking statements are not guarantees offuture performance and the Company's actual results may differ significantlyfrom the results discussed in theforward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Risk Factors" above. The following discussion should be read in conjunction with the consolidatedfinancial statements and notes thereto included in Item 8 ofthis Form 10-K. All information presented herein is based on the Company'sfiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to the Company'sfiscal years ended in September and the associated quarters ofthosefiscal years. The Company assumes no obligation to revise or update anyforward-looking statementsfor any reason, except as required by law. The following information has been adjusted to reflect the restatement of the Company's financial results, which is more fully described in the "Explanatory Note immediately preceding Part I, Item 1 and in Note 2, "Restatement of Consolidated Financial Statements in Notes to Consolidated Financial Statements of this Form 10-K. The net of tax impact of the adjustments, which amounted to $4 million in 2006, was recorded by the Company in its fourth quarter of 2006. The net of tax impact of the restatements on the Company's results of operations amounted to $7 million and $10 million in 2005 and 2004, 48 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 49 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 50 of 143 respectively. The impact of these adjustments was not significant to the Company's operating results, trends, or liquidity for the annual or quarterly periods in 2006, 2005, and 2004. Executive Overview The Company designs, manufactures, and markets personal computers 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, television shows, movies, and iPod games. The 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 Store, a portfolio of peripherals that support and enhance the Macintosh and iPod product lines, and a variety of other service and support offerings. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third- party wholesalers, resellers, and value-added resellers. In addition, the Company sells a variety of third-party Macintosh and iPod compatible products including application software, printers, storage devices, speakers, headphones, and various other accessories and supplies through its online and retail stores. The Company sells to education, consumer, creative professional, business, and government customers. A further description of the Company's products may be found in Part I, Item 1 of this Form 10-K under the heading "Business. The Company believes that for both professionals and consumers the personal computer has become the center of an evolving digital lifestyle by integrating and enhancing the utility of advanced digital devices such as the Company's iPods, digital video and still cameras, televisions, CD and DVD players, cellular phones, personal digital assistants, and other consumer electronic devices. The attributes of the personal computer that enable this functionality include a high-quality user interface, easy access to relatively inexpensive data storage, the ability to run complex applications, and the ability to connect easily to a wide variety of other digital devices and to the Internet. The Company is the only participant in the personal computer industry that controls the design and development of the entire personal computer-from the hardware and operating system to sophisticated applications. This, along with its products' innovative industrial designs, intuitive ease-of- use, built-in graphics, multimedia and networking capabilities, uniquely positions the Company to offer innovative integrated digital lifestyle solutions. The Company's business strategy leverages its ability, through the design and development of its own operating system, hardware, and many software applications and technologies, to bring to its customers around the world compelling new products and solutions with superior ease-of-use, seamless integration, and innovative industrial design. The Company participates in several highly competitive markets, including personal computers with its Macintosh line of computers, consumer electronics with its iPod line of portable digital music players, and distribution of third-party digital content through its online iTunes Store. While the Company is widely recognized as an innovator in the personal computer and consumer electronic markets as well as a leader in the emerging market for distribution of digital content, these are all highly competitive markets that are subject to aggressive pricing and increased competition. To remain competitive, the Company believes increased investment in research and development ("R&D ) and marketing and advertising is necessary to maintain and extend its position in the markets where it competes. The Company's R&D spending is focused on delivering timely updates and enhancements to its existing line of personal computers, displays, operating systems, software applications, and portable digital music players; developing new digital lifestyle consumer and professional software applications; and investing in new product areas such as rack-mount servers, RAID storage systems, and wireless technologies. The Company also believes investment in marketing and advertising programs is critical to increasing product and brand awareness. 49 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 50 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 51 of 143 In June 2005, the Company announced its plan to begin using Intel microprocessors in its computers. During 2006, the Company introduced new Intel-based models of the MacBook Pro, MacBook, Mac Pro, iMac, and Mac mini computers. The Company ' s transition to Intel microprocessors for Macintosh systems was completed in August 2006 , and its transition for Xserve was completed in November 2006 . The MacBook Pro, MacBook, Mac Pro, iMac, and Mac mini feature Mac OS X version 10.4 Tiger, iLife ` 06, and the Company ' s new translation technology, Rosetta, which allows most PowerPC-based Macintosh applications to run on Intel-based Macintosh computers . There are potential risks and uncertainties that may occur due to this transition, which are further discussed in Item 1A under the heading "Risk Factors. The Company utilizes a variety of direct and indirect distribution channels. The Company believes sales of its innovative and differentiated products are enhanced by knowledgeable salespersons who can convey the value of the hardware, software, and peripheral integration, demonstrate the unique digital lifestyle solutions that are available only on Macintosh computers, and demonstrate the compatibility of the Macintosh with the Windows platform and networks. The Company further believes providing a high-quality sales and after-sales support experience is critical to attracting and retaining customers. To ensure a high-quality buying experience for its products in which service and education are emphasized, the Company has expanded and improved its distribution capabilities by opening its own retail stores in the U.S. and internationally. The Company had 165 stores open as of September 30, 2006. The Company also staffs selected third-party stores with the Company's own employees to improve the buying experience through reseller channels. The Company has deployed Apple employees and contractors in reseller locations around the world including the U.S., Europe, Japan, and Australia. The 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-only warehouse stores, large retail chains, and specialty retail stores, as well as through the channels listed above. Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and the Company's discussion and analysis of its financial condition and results of operations require the Company's management to make judgments, assumptions, and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1 of the Notes to Consolidated Financial Statements of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material. Management believes the Company's critical accounting policies and estimates are those related to revenue recognition, allowance for doubtful accounts, inventory valuation and inventory purchase commitments, warranty costs, stock-based compensation, and income taxes. Management believes these policies to be critical because they are both important to the portrayal of the Company's financial condition and results, and they require management to make judgments and estimates about matters that are inherently uncertain. The Company's senior management has reviewed these critical accounting policies and related disclosures with the Audit and Finance Committee of the Company's Board of Directors. Revenue Recognition Net sales consist primarily of revenue from the sale of hardware, software, peripherals, digital content, and service and support contracts. The Company recognizes revenue pursuant to applicable accounting 50 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 51 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 52 of 143 standards, including American Institute of Certified Public Accountants Statement of Position ("SOP ) No. 97-2, Software Revenue Recognition, as amended, and SEC Staff Accounting Bulletin ("SAB ) No. 104, Revenue Recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped, and title and risk of loss have been transferred. For most of the Company's product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. If at the outset of an arrangement the Company determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and subsequently recognized as amounts become due and payable and all other criteria for revenue recognition have been met. The Company records reductions to revenue for estimated commitments related to price protection and for customer incentive programs, including reseller and end-user rebates, and other sales programs and volume-based incentives. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be reasonably and reliably estimated and the other conditions for revenue recognition have been met. If refunds cannot be reliably estimated, revenue is not recognized until reliable estimates can be made or the price protection lapses. For customer incentive programs, the estimated cost of these programs is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records reductions to revenue for expected future product returns based on the Company's historical experience. Future market conditions and product transitions may require the Company to increase customer incentive programs and incur incremental price protection obligations that could result in additional reductions to revenue at the time such programs are offered. Additionally, certain customer incentive 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 be required to record additional reductions to revenue, which could have a material adverse impact on the Company's results of operations. Allowance for Doubtful Accounts The Company distributes its products through third-party distributors and resellers and directly to certain education, consumer, and commercial customers. The Company generally does not require collateral from its customers; however, the Company will require collateral in certain instances to limit credit risk. In addition, when possible, the Company does attempt to limit credit risk on trade receivables with credit insurance for certain customers in Latin America, Europe, Asia, and Australia and by arranging with third-party financing companies to provide flooring arrangements and other loan and lease programs to the Company's direct customers. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements. However, considerable trade receivables that are not covered by collateral, third-party flooring arrangements, or credit 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 specific customers. The Company records an allowance to reduce the specific receivables to the amount that is reasonably believed to be collectible. The Company also records an allowance for all other trade receivables based on multiple factors including historical experience with bad debts, the general economic 51 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 52 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 53 of 143 environment, the financial condition of the Company's distribution channels, and the aging of such receivables. If there is a deterioration of a major customer's financial condition, if the Company becomes aware of additional information related to the credit worthiness of a major customer, or if future actual default rates on trade receivables in general differ from those currently anticipated, the Company may have to adjust its allowance for doubtful accounts, which would affect earnings in the period the adjustments were made. Inventory Valuation and Inventory Purchase Commitments The Company must order components for its products and build inventory in advance of product shipments. The Company records a write-down for inventories of components and products, including third-party products held for resale, which have become obsolete or are in excess of anticipated demand or net realizable value. The Company performs a detailed review of inventory each fiscal quarter that considers multiple factors including demand forecasts, product life cycle status, product development plans, current sales levels, and component cost trends. The personal computer and consumer electronic industries are subject to a rapid and unpredictable pace of product and component obsolescence and demand changes. If future demand or market conditions for the Company's products are less favorable than forecasted or if unforeseen technological changes negatively impact the utility of component inventory, the Company may be required to record additional write-downs which would negatively affect gross margins in the period when the write-downs were recorded. The Company accrues reserves for estimated cancellation fees related to component orders that have been cancelled or are expected to be cancelled. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. These commitments typically cover the Company's requirements for periods ranging from 30 to 150 days. If there is an abrupt and substantial decline in demand for one or more of the Company's products or an unanticipated change in technological requirements for any of the Company's products, the Company may be required to record additional reserves for cancellation fees that would negatively affect gross margins in the period when the cancellation fees are identified. Warranty Costs The Company provides currently for the estimated cost for hardware and software 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 are outside of the Company's typical experience. Each quarter, the Company reevaluates its estimates to assess the adequacy of its recorded warranty liabilities considering the size of the installed base of products subject to warranty protection and adjusts the amounts as necessary. 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 the software's compliance with specifications. The estimated cost to develop such updates is accounted for as warranty costs that are recognized at the time related software revenue is recognized. Factors considered in determining appropriate accruals related to such updates include the number of units delivered, the number of updates expected to occur, and the historical cost and estimated future cost of the resources necessary to develop these updates. Stock-Based Compensation The Company accounts for stock-based compensation in accordance with SFAS No. 123R. Under the provisions of SFAS No. 123R, stock-based compensation cost is estimated at the grant date based on the award's fair value as calculated by the Black-Scholes-Merton ("BSM ) option-pricing model and is recognized as expense ratably over the requisite service period. The BSM model requires various highly 52 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 53 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 54 of 143 judgmental assumptions including volatility, forfeiture rates , and expected option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In connection with the Company's restatement of its consolidated financial statements, the Company has applied judgment in choosing whether to revise measurement dates for prior option grants. Information regarding the restatement, including ranges of possible additional stock-based compensation expense if other measurement dates had been selected for certain grants, is set forth in the "Explanatory Note immediately preceding Part I, Item 1 and in Note 2, "Restatement of Consolidated Financial Statements in Notes to 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, Accountingfor Income Taxes, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax assets. In the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. Similarly, if the Company subsequently realizes deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management's expectations could have a material impact on the Company's results of operations and financial position. 53 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 54 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 55 of 143 Net Sales Net sales and Macintosh unit sales by operating segment and net sales and unit sales by product follow (net sales in millions and unit sales in thousands): September 30, September 24, September 25, 2006 Change 2005 Change 2004 Net Sales by Operating Segment: Americas net sales $ 9,307 41% $ 6,590 64% $ 4,019 Europe net sales 4,094 33% 3,073 71% 1,799 Japan net sales 1,208 31% 920 36% 677 Retail net sales 3,359 43% 2,350 98% 1,185 Other Segments net sales (a) 1,347 35% 998 67% 599 Total net sales $19,315 39% $13,931 68% $ 8,279 Unit Sales by Operating Segment: Americas Macintosh unit sales 2,432 11% 2,184 30% 1,682 Europe Macintosh unit sales 1,346 18% 1,138 47% 773 Japan Macintosh unit sales 304 (3)% 313 8% 291 Retail Macintosh unit sales 886 45% 609 94% 314 Other Segments Macintosh unit sales (a) 335 16% 290 26% 230 Total Macintosh unit sales 5,303 17% 4,534 38% 3,290 Net Sales by Product: Desktops (b) $ 3,319 (3)% $ 3,436 45% $2,373 Portables (c) 4,056 43% 2,839 11% 2,550 Total Macintosh net sales 7,375 18% 6,275 27% 4,923 iPod 7,676 69% 4,540 248% 1,306 Other music related products and services (d) 1,885 110% 899 223% 278 Peripherals and other hardware (e) 1,100 (2)% 1,126 18% 951 Software, service, and other sales (f) 1,279 17% 1,091 33% 821 Total net sales $19,315 39% $13,931 68% $ 8,279 Unit Sales by Product: Desktops (b) 2,434 (3)% 2,520 55% 1,625 Portables (c) 2,869 42% 2,014 21% 1,665 Total Macintosh unit sales 5,303 17% 4,534 38% 3,290 Net sales per Macintosh unit sold (g) $ 1,391 1 % $ 1,384 (7)% $1,496 iPod unit sales 39,409 75% 22,497 409% 4,416 Net sales per iPod unit sold (h) $ 195 (3)% $ 202 (32)% $ 296 Notes: (a) Other Segments include Asia Pacific and FileMaker. (b) Includes iMac, eMac, Mac mini, Mac Pro, Power Mac, and Xserve product lines. (c) Includes MacBook, iBook, MacBook Pro, and PowerBook product lines. (d) Consists of iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories. (e) Includes sales of Apple-branded and third-party displays, wireless connectivity and networking solutions, and other hardware accessories. (f) Includes sales of Apple-branded operating system, application software, third-party software, AppleCare, and Internet services. (g) Derived by dividing total Macintosh net sales by total Macintosh unit sales. (h) Derived by dividing total iPod net sales by total iPod unit sales. 54 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 55 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 56 of 143 Fiscal Year 2006 versus 2005 Net sales during 2006 increased 39% or $5.4 billion from 2005. This increase was due in part to the fact that 2006 spanned 53 weeks while 2005 spanned 52 weeks. Several other factors contributed to these increases including the following: • Net sales of iPods increased $3.1 billion or 69% during 2006 compared to 2005. Unit sales of iPods totaled 39.4 million in 2006, which represents an increase of 75% from 22.5 million iPod units sold in 2005. Strong iPod sales during 2006 reflected significant sales of both the hard-drive based iPod that supports video, first introduced in October of 2005 and the iPod nano, introduced in September 2005, as well as continued expansion of iPod distribution points. During 2006, the net sales per iPod unit sold decreased by 3% compared to 2005 primarily due to an overall decrease in average selling prices for all iPods as well as a shift in product mix to the iPod nano. From the introduction of the iPod in 2002 through 2006, the Company has sold approximately 68 million iPods. • Macintosh net sales increased $1.1 billion or 18% during 2006 compared to 2005. Macintosh unit sales increased by 769,000 units or 17% during 2006 compared to 2005. These increases were mainly due to strong demand for the Intel-based MacBook and MacBook Pro systems and reflect a shift in product mix to portable products in all of the Company's operating segments. Net sales and unit sales of the Company's portable products increased 43% and 42%, respectively, during 2006 compared to 2005. Macintosh desktop net sales and unit sales both decreased by 3% during 2006 compared to 2005. The decrease in sales of the Company's Macintosh desktops was due to declines in sales of the Company's professional-oriented desktop products. The Company believes the decline in the Company's professional-oriented desktop products was due to customers delaying purchases of such products in anticipation of the release of the Intel-based Mac Pro, which did not begin shipping until August 2006, and updated software applications capable of running on Intel-based Macintosh computers, and the trend toward portable computers. A slight increase of 1% during 2006 in net sales per Macintosh unit sold was due to a shift in mix to higher-priced portable products, partially offset by price reductions on certain Macintosh systems. • Other music related products and services consists of sales associated with the iTunes Store and iPod services and accessories. Net sales of other music related products and services increased $986 million or 110% during 2006 compared to 2005. The increase was primarily due to increased net sales from the iTunes Store and Apple-branded and third-party iPod accessories and services. The increase in sales from the iTunes Store stemmed from significant growth in U.S. sales and the opening of The iTunes Store in Japan during August 2005 and Australia during October 2005. The increased sales from the iTunes Store were also attributable to the availability of videos, television shows, and feature-length movie downloads. • Net sales of software, service, and other sales increased $188 million or 17% during 2006 compared to 2005. The growth was primarily attributable to increased net sales of AppleCare Protection Plan ("APP ) extended service 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 impacted by the following: • Net sales of peripherals and other hardware declined $26 million or 2% compared to 2005 primarily due to price decreases and a decrease in net sales of displays relating to a shift in mix from desktop to portable systems. The decrease in net sales of displays for 2006 is consistent with the overall decrease in unit sales of Macintosh professional desktop systems. 55 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 56 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 57 of 143 Fiscal Year 2005 versus 2004 During 2005, net sales increased 68% or $5.7 billion from 2004. Several factors contributed favorably to net sales during 2005: • Net sales of iPods rose $3.2 billion or 248% during 2005 compared to 2004. Unit sales of iPods totaled 22.5 million in 2005, which represented an increase of 409% from the 4.4 million iPod units sold in 2004. Strong sales of iPods during 2005 were experienced in all of the Company's operating segments and was driven by strong demand for the iPod shuffle introduced in January 2005, the release of an updated version of the iPod mini in February 2005, the release of the iPod nano in September 2005, and expansion of the iPod's distribution network. Net sales per iPod unit sold decreased 32% primarily due to the introduction of the lower priced iPod shuffle in January 2005 and iPod mini pricing reductions in February 2005. From the introduction of the iPod in 2002 through 2005, the Company had sold approximately 28 million iPods. • Net sales of other music related products and services increased $621 million or 223% during 2005 compared to 2004. The Company experienced strong growth in sales of iPod services and accessories consistent with the increase in overall iPod unit sales for 2005. The increased sales from the iTunes Store were primarily due to substantial growth of net sales in the U.S. and expansion in Europe, Canada, and Japan. • Total Macintosh net sales increased $1.4 billion or 27% during 2005 compared to 2004. Unit sales of Macintosh systems increased 1.2 million units or 38% during 2005 compared to 2004. The increases in Macintosh net sales and unit sales related primarily to strong demand for the Company's desktop products, which was experienced in all of the Company's operating segments. The Company believes that the success of the iPod had 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 iMac G5 and the introduction of the Mac mini in January 2005. Net sales and unit sales of desktop products increased 45% and 55%, respectively, during 2005 compared to 2004. Macintosh net sales and unit sales also included sales of the Company's portable products, which increased 11 % and 21 %, respectively, compared to 2004. Net sales per Macintosh unit sold decreased 7% on a year-over-year basis. The decrease was the result of changes in the overall unit mix towards relatively lower-priced consumer products, specifically the impact of the Mac mini product, and desktop and portable price reductions. This decrease was partially offset by an increase in the proportion of direct sales. • Net sales of peripherals and other hardware rose by 18% during 2005 compared to 2004 primarily due to an increase in net sales of displays and other computer accessories. Net sales of other hardware include AirPort cards and base stations, Xserve RAID storage, iSight digital video cameras, and third-party hardware products. • Net sales of software, service and other sales rose $270 million or 33% during 2005 compared to 2004. This growth was primarily attributable 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 was primarily attributable to the release of version 10.4 Tiger in April 2005. Segment Operating Performance The Company manages its business primarily on a geographic basis. The Company's reportable operating segments are comprised of the Americas, Europe, Japan, and Retail. The Americas, Europe, and Japan reportable segments do not include activities related to the Retail segment. The Americas segment includes both North and South America. The Europe segment includes European countries as well as the 56 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 57 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 58 of 143 Middle East and Africa. The Retail segment operated Apple-owned retail stores in the U.S., Canada, Japan, and the U.K. during 2006. Each reportable geographic operating segment provides similar hardware and software products and similar services. Further information regarding the Company's operating segments may be found in Note 11, "Segment Information and Geographic Data in Notes to Consolidated Financial Statements of this Form 10-K. Americas During 2006, net sales in the Americas segment increased $2.7 billion, or 41 %, compared to 2005. The main factors for this increase were significant increases in net sales of iPods, other music related products and services, Macintosh portable systems, and APP. Sales of iPods increased primarily due to the introduction of the updated iPod with video-playing capabilities in October 2005 and the iPod nano during September 2005. The increase in other music related products and services was due to increases in sales of Apple-branded and third-party iPod accessories and sales from the iTunes Store. The increase in sales of Macintosh portable systems in the Americas was due to strong sales of the Intel-based MacBook and MacBook Pro during 2006. The overall increase in net sales was partially offset by a decline in net sales of desktops, displays, 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, the Americas segment represented approximately 48% of the Company's total net sales as compared to 47% in the same period of 2005. During 2006, U.S. education channel net sales and Macintosh unit sales increased by 13% and 11%, respectively, compared to 2005. Net sales from the higher education market grew 22% during 2006 compared to 2005 due to strong sales of Macintosh portable products and iPods. Net sales were relatively flat for K-12 due to continued budget constraints. During 2005, net sales in the Americas segment grew 64% or $2.6 billion compared to 2004. The increase in net sales during 2005 was primarily attributable to the 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 of 2005. Macintosh unit sales also increased by 30% in 2005 compared to 2004, driven primarily by strong sales of desktop systems largely attributable to strong sales from the updated iMac, which began shipping in September 2004, and the Mac mini, which was introduced in January 2005. During 2005 and 2004, the Americas segment represented approximately 47% and 49%, respectively, of the Company's total net sales and represented approximately 48% and 51%, respectively, of total Macintosh unit sales. The Company experienced an increase in both U.S. education channel net sales and unit sales of 21% for 2005 compared to 2004. Strength in higher education sales related primarily to strong iMac and portable system shipments. This strength drove year-over-year growth in net sales of 32% for the higher education channel during 2005. Despite challenges in the K-12 market from continued budget constraints and competitive pressures, the Company's K-12 net sales grew year-over-year by 11% during 2005 due to increased iBook sales and 1:1 education sales. Europe Europe segment net sales increased $1.0 billion or 33% during 2006 compared to 2005. Consistent with the Americas segment, these increases were a result of strong growth in iPod sales, other music related products and services, and Macintosh portable systems. Sales of iPods increased primarily due to the introduction of the updated iPod with video- playing capabilities in October 2005 and the iPod nano during September 2005. The increase in other music related products and services was due to increases in sales of Apple-branded and third-party iPod accessories and sales from the iTunes Store. The increase in sales of portable systems in Europe was due to strong sales of the Intel-based MacBook and MacBook Pro that were introduced during 2006. In addition, Europe also reported increased sales in APP related to the increase in Macintosh unit sales. These increases were partially offset by a decrease in desktop and 57 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 58 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 59 of 143 Mac OS X net sales during 2006 compared to 2005. The decrease in desktop net sales was due to the 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. During 2005, net sales in the Europe segment grew $1.3 billion or 71% from 2004. Total Macintosh unit sales in Europe also experienced growth during the current year by increasing 47% in 2005 compared to 2004. Consistent with the Americas segment, Europe experienced strong net sales of desktop products, iPod, other music related products and services, and software and service sales. Demand in Europe during 2005 was particularly strong for the Company's desktop computers, which experienced a year-over-year increase of 56% from 2004. Similar to the results of the Company's other segments, net sales of iPods, peripherals and software were strong in 2005. Japan Japan's net sales increased $288 million or 31% during 2006 compared to 2005. The Japan segment experienced increased net sales in iPods, Macintosh portable products, and other music related products and services. Consistent with the Company's other segments, Japan experienced increases in sales of iPods due to the introduction of the iPod with video- playing capabilities and the iPod nano in October and September of 2005, respectively. Japan also experienced strong sales of the Intel-based MacBook and increased sales from the iTunes Store. These increases were partially offset by decreases in net sales of Macintosh desktop products, displays, and Mac OS X. The decreases 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 relatively flat compared to 2005. The relatively flat growth in Macintosh unit sales is partially attributable to Japan's overall slow consumer PC market growth. The Company is continuing to evaluate ways to improve its indirect and direct channel sales in Japan. Japan's net sales and Macintosh unit sales were up 36% and 8%, respectively, during 2005 compared to 2004. Japan experienced increased net sales in desktop products, iPod, and other music related products and services. Desktop net sales and unit sales increased by 31% and 41%, respectively, and iPod sales increased by 220% during 2005 compared to 2004. The overall increase in net sales was partially offset by a decline in portable system net sales during 2005 compared to 2004, which the Company believes might have been attributable to a shift in sales from portables to the iMac G5 and Mac mini, and a shift to the Retail segment as a result of opening two additional stores in Japan during 2005. Retail The Company opened 41 new retail stores during 2006, including a total of 10 international stores in the U.K., Japan, and Canada, bringing the total number of open stores to 165 as of September 30, 2006. This compares to 124 open stores as of September 24, 2005 and 86 open stores as of September 25, 2004. The Retail segment's net sales increased by 43% to $3.4 billion during 2006 compared to 2005. Retail segment Macintosh unit sales increased 45% during 2006 compared to 2005. With an average of 142 stores open during 2006, average revenue per store increased to $23.6 million compared to $22.4 million during 2005 and $15.6 million in 2004. The current year increase was primarily due to strong sales of Macintosh portable and desktop products, iPods, and other music related products and services. Sales of iPods increased primarily due to the introduction of the updated iPod with video-playing capabilities in October 2005 and the iPod nano during September 2005. The increase in other music related products and services was due to increased sales of Apple-branded and third-party iPod accessories. Macintosh portable and desktop sales increased due to strong sales of the Intel-based MacBook, MacBook Pro, and iMac. As measured by the Company's operating segment reporting, the Retail segment reported operating income of $198 million during 2006 as compared to operating income of $151 million during 2005 and 58 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 59 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 60 of 143 operating income of $39 million during 2004. This improvement was primarily attributable to the impact of opening new stores and the segment's year-over-year increase in average revenue per store, which resulted in higher leverage on occupancy, depreciation, and other fixed costs. Expansion of the Retail segment has required and will continue to require a substantial investment in fixed assets and related infrastructure, operating lease commitments , personnel , and other operating expenses. Capital expenditures associated with the Retail segment were $200 million in 2006, bringing the total capital expenditures since inception of the Retail segment to approximately $729 million. As of September 30, 2006, the Retail segment had approximately 5,787 employees and had outstanding operating lease commitments associated with retail store space and related facilities of approximately $887 million. The Company would incur substantial costs if it were to close its retail stores . Such costs could adversely affect the Company ' s results of operations and financial condition. Gross Margin Gross margin for each of the last three fiscal years are as follows (in millions, except gross margin percentages): September 30, September 24, September 25, 2006 2005 2004 As Restated (1) As Restated (1) Net sales $ 19,315 $ 13,931 $ 8,279 Cost of sales 13,717 9,889 6,022 Gross margin $ 5,598 $ 4,042 $ 2,257 Gross margin percentage 29.0% 29.0% 27.3% (1) See the "Explanatory Note immediately preceding Part I, Item 1 and Note 2, "Restatement of Consolidated Financial Statements in Notes to Consolidated Financial Statements of this Form 10-K. Gross margin percentage of 29.0% in 2006 remained flat as compared to 2005 . The Company experienced 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 that its gross margin and the gross margins of the personal computer and consumer electronics industries will be under pressure due to price competition. The Company expects gross margin percentage to decline sequentially in the first quarter of 2007 primarily as a result of a shift in the mix of revenue toward lower margin products such as the iPod and content from the iTunes Store. The foregoing statements regarding the Company's expected gross margin percentage are forward-looking. There can be no assurance that current gross margin percentage will be maintained or targeted gross margin percentage levels will be achieved. In general, gross margins and margins on individual products, including iPods, will remain under significant downward pressure due to a variety of factors, including continued industry wide global pricing pressures, increased competition, compressed product life cycles, potential increases in the cost and availability of raw material and outside manufacturing services, and potential changes to the Company's product mix, including higher unit sales of consumer products with lower average selling prices and lower gross margins. In response to these competitive pressures, the Company expects it will continue to take pricing actions with respect to its products. Gross margins could also be affected 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. The Company orders components for its products and builds inventory in advance of product shipments. Because the Company's markets are volatile and subject to rapid technology and price changes, there is a 59 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 60 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 61 of 143 risk the Company will forecast incorrectly and produce or order from third-parties excess or insufficient inventories of particular products or components. The Company's operating results and financial condition in the past have been and may in the future be materially adversely affected by the Company's ability to manage its inventory levels and outstanding purchase commitments and to respond to short-term shifts in customer demand patterns. Gross margin percentage increased in 2005 to 29.0% of net sales from 27.3% of net sales in 2004. The Company's gross margin during 2005 increased due to more favorable pricing on certain commodity components 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 gross margin were partially offset by an increase in lower margin iPod sales. Operating Expenses Operating expenses for each of the last three fiscal years are as follows (in millions, except for percentages): September 30, September 24, September 25, 2006 2005 2004 As Restated (1) As Restated (1) Research and development $ 712 $ 535 $ 491 Percentage of net sales 4% 4% 6% Selling, general, and administrative expenses $ 2,433 $1,864 $1,430 Percentage of net sales 13% 13% 17% Restructuring costs $ - $ - $ 23 (1) See the "Explanatory Note immediately preceding Part I, Item 1 and Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements of this Form 10-K. Research and Development (R&D) Expenditures for R&D increased 33% or $177 million to $712 million in 2006 compared to $535 million in 2005. The increase was due primarily to an increase in R&D headcount in the current year to support expanded R&D activities, an increase of $46 million in stock-based compensation recognized as R&D expense resulting from the adoption of SFAS No. 123R, and higher overall expenses due to the 14th week added to the first fiscal quarter of 2006 to realign the Company's fiscal quarters with calendar quarters. In addition, during 2005, the Company capitalized approximately $29.7 million of costs associated with the development of Mac OS X Tiger. No software development costs were capitalized during 2006. 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. Despite the increase in expenditures, R&D as a percentage of net sales remained relatively flat in 2006 as compared to 2005 due to the significant increase in revenue. The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the Company's core business strategy. As such, the Company expects to make further investments in R&D to remain competitive. Selling, General, and Administrative Expense (SG&A) Expenditures for SG&A increased $569 million or 31% during 2006 compared to 2005. These increases are due primarily to the Company's continued expansion of its Retail segment in both domestic and international markets, an increase of $50 million in stock-based compensation expense recognized as 60 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 61 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 62 of 143 SG&A expense resulting from the adoption of SFAS No. 123R, a current year increase in discretionary spending on marketing and advertising, higher direct and channel selling expenses resulting from the increase in net sales and employee salary merit increases, and the expenses associated with the 14th week added to the first fiscal quarter of 2006. Despite the increase in expenditures, SG&A as a percentage of total net sales in 2006 remained flat as compared to 2005. Expenditures for SG&A increased $434 million or 30% during 2005 compared to 2004. These increases are due primarily to the Company's continued expansion of its Retail segment in both domestic and international markets, a current year increase in discretionary spending on marketing and advertising, and higher direct and channel selling expenses resulting from the increase in net sales and employee salary merit increases. SG&A as a percentage of total net sales in 2005 was 13%, down from 17% in 2004, which is due to the increase in total net sales of 68% for the Company during 2005. Fiscal 2004 Restructuring Actions During 2004, the Company recorded total restructuring charges of approximately $23.0 million, including approximately $14.0 million in severance costs, $5.5 million in asset impairments, and $3.5 million for lease cancellations. The lease cancellations relate to vacating a leased sales facility as a result of a European workforce reduction during 2004. Of the $23.0 million charges, $21.3 million had been utilized by the end of 2006, with the remainder consisting of $1.7 million for lease cancellations. These actions resulted in the termination of 452 positions. Other Income and Expense Other income and expense for each of the last three fiscal years are as follows (in millions): September 30, September 24, September 25, 2006 2005 2004 Gains on non-current investments, net $ - $ - $ 4 Interest income $ 394 $183 $ 64 Interest expense (3) Other income (expense), net __^29) __Q8) _) Interest and other income, net $ 365 $165 $ 53 Total other income and expense $ 365 $165 $ 57 Gains and Losses on Non-current Investments The Company previously held significant investments in ARM Holdings plc (ARM), Akamai Technologies, Inc. (Akamai), and EarthLink Network, Inc. (EarthLink). The Company sold all of the remaining holdings in these non-current investments in 2004 and 2003. Pretax gains recorded upon the sale of these non-current investments were $4 million in 2004. Interest and Other Income, Net Total interest and other income, net increased $200 million or 121% to $365 million during 2006 compared to $165 million in 2005 and $53 million in 2004. These increases are attributable primarily to higher cash and short-term investment balances and increasing investment yields resulting from higher market interest rates and the 14th 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 in other income was partially offset by higher foreign currency hedging expenses. Interest expense in 2004 consisted primarily of interest on the Company's $300 million aggregate principal amount unsecured notes, which were repaid upon their maturity in February 2004. The unsecured notes 61 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 62 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 63 of 143 were sold at 99.925% of par for an effective yield to maturity of 6.51 %. Total deferred gain resulting from the closure of debt swaps of approximately $23 million was fully amortized as of the notes' maturity in February 2004. Provision for Income Taxes The Company's effective tax rate for the year ended September 30, 2006 was approximately 29%. The Company's effective rate differs from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S. In addition, the Company recorded a tax benefit of $20 million due to settlement of prior year tax audits in the U.S., and a net benefit of $20 million resulting from the dividend repatriation under the American Jobs Creation Act of 2004 ("AJCA ) and international tax planning strategies associated with the repatriation as further discussed below. As of September 30, 2006 , the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of $739 million before being offset against certain deferred liabilities and a valuation allowance for presentation on the Company ' s balance sheet. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies , together with the tax effects of the deferred tax liabilities , will be sufficient to fully recover the remaining deferred tax assets. As of September 30, 2006 and September 24, 2005 , a valuation allowance of $5 million was recorded against the deferred tax asset for the benefits of state operating losses that may not be realized. The Company will continue to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation allowance. On October 22, 2004, the AJCA was signed into law. The AJCA included a provision for the deduction of 85% of certain foreign earnings that were repatriated, as defined in the AJCA, within a specified time frame. Among other requirements, dividends qualifying for the 85 % deduction must be reinvested in the United States in certain qualified investments pursuant to a domestic reinvestment plan approved by the CEO and Board of Directors. During 2006, the Company repatriated approximately $1.6 billion of foreign earnings . Of the earnings repatriated, $755 million is eligible for the reduced tax rate provided by the AJCA. Accordingly, the Company recorded a tax charge of $51 million related to the repatriation of foreign earnings under the provisions of the AJCA. In addition, the Company recorded a tax benefit of $71 million resulting from the implementation 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 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 subject to audits by state, local, and foreign tax authorities. Management believes that adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. Should any issues addressed in the Company's tax audits be resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. 62 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 63 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 64 of 143 Quarterly Financial Information The following tables 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 $ 4,837 $ 4,370 $ 4,359 $ 5,749 Cost of sales (1) 3,425 3,045 3,062 4,185 Gross margin 1,412 1,325 1,297 1,564 Operating expenses: Research and development (1) 179 175 176 182 Selling, general, and administrative (1) 625 584 592 632 Total operating expenses 804 759 768 814 Operating income 608 566 529 750 Other income and expense 113 95 76 81 Income before provision for income taxes 721 661 605 831 Provision for income taxes 179 189 195 266 Net income $ 542 $ 472 $ 410 $ 565 Earnings per common share: Basic $ 0.63 $ 0.55 $ 0.49 $ 0.68 Diluted $ 0.62 $ 0.54 $ 0.47 $ 0.65 Shares used in computing earnings per share (in thousands): Basic 854,187 851,375 840,910 830,781 Diluted 878,757 876,368 878,537 874,207 (1) Includes stock-based compensation expense, which was allocated as follows: Cost of sales $ 5 $ 6 $ 5 $ 5 Research and development $ 13 $ 12 $ 13 $ 15 Selling, general, and administrative $ 22 $ 19 $ 24 $ 24 The net of tax impact of the stock-based compensation adjustments in 2006, which amounted to $4 million, was recorded by the Company in its fourth quarter of 2006 and are described in the Explanatory Note immediately preceding Part I, Item 1 and Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements of this Form 10-K. 63 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 64 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 65 of 143 2005 Fourth Quarter Third Quarter Second Quarter First Quarter As Restated (1) As Restated (1) As Restated (1) As Restated (1) Net sales $ 3,678 $ 3,520 $ 3,243 $ 3,490 Cost of sales (2) 2,643 2,476 2,275 2,495 Gross margin 1,035 1,044 968 995 Operating expenses: Research and development (2) 147 145 120 123 Selling, general, and administrative (2) 471 473 448 472 Total operating expenses 618 618 568 595 Operating income 417 426 400 400 Other income and expense 60 46 33 26 Income before provision for income taxes 477 472 433 426 Provision for income taxes 49 153 145 133 Net income $ 428 $ 319 $ 288 $ 293 Earnings per common share: Basic $ 0.52 $ 0.39 $ 0.36 $ 0.37 Diluted $ 0.49 $ 0.37 $ 0.34 $ 0.35 Shares used in computing earnings per share (in thousands): Basic 821,420 815,092 808,172 789,032 Diluted 866,483 860,803 857,568 838,805 (1) See the "Explanatory Note immediately preceding Part I, Item 1 and Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements of this Form 10-K. (2) Includes stock-based compensation expense, which was allocated as follows: Cost of sales $ 1 $ - $ 1 $ 1 Research and development $ 1 $ 2 $ 2 $ 2 Selling, general, and administrative $ 10 $ 10 $ 9 $ 10 The impact of the stock-based compensation adjustments as described in the Explanatory Note immediately preceding Part I, Item 1 and Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements of this Form 10-K was not significant to the interim balance sheets of 2006 and 2005. 64 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 65 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 66 of 143 The following tables present the effects of adjustments made to the Company's previously reported quarterly financial information during 2005 (in millions, except per share amounts): Three Months Ended September 24, 2005 Three Months Ended June 25, 2005 As Adjustments As As Adjustments As Reported (1) Restated Reported (1) Restated Net sales $ 3,678 $ - $ 3,678 $ 3,520 $ - $ 3,520 Cost of sales (2) 2,643 - 2,643 2,476 - 2,476 Gross margin 1,035 1,035 1,044 - 1,044 Operating expenses: Research and development (2) 147 147 145 - 145 Selling, general, and administrative (2) 470 1 471 472 1 473 Total operating expenses 617 1 618 617 1 618 Operating income 418 (1) 417 427 (1) 426 Other income and expense 60 - 60 46 - 46 Income before provision for income taxes 478 (1) 477 473 (1) 472 Provision for income taxes 48 1 49 153 - 153 Net income $ 430 $ (2 ) $ 428 $ 320 j) $ 319 Earnings per common share: Basic $ 0.52 $ - $ 0.52 $ 0.39 $ - $ 0.39 Diluted $ 0.50 $ (0.01) $ 0.49 $ 0.37 $ - $ 0.37 Shares used in computing earnings per share (in thousands): Basic 821,420 - 821,420 815,092 - 815,092 Diluted 866,404 79 866,483 860,688 115 860,803 (1) See the "Explanatory Note immediately preceding Part I, Item 1 and Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements of this Form 10-K. (2) Includes stock-based compensation expense, which was allocated as follows: Cost of sales $ 1 $ - $ 1 $ - $ - $ - Research and development $ 1 $ - $ 1 $ 2 $ - $ 2 Selling, general, and administrative $ 9 $ 1 $ 10 $ 9 $ 1 $ 10 65 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 66 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 67 of 143 Three Months Ended March 26, 2005 Three Months Ended December 25, 2004 As Adjustments As As As Reported (1) Restated Reported Adjustments (1) Restated Net sales $ 3,243 $ - $ 3,243 $ 3,490 $ - $ 3,490 Cost of sales (2) 2,275 - 2,275 2,494 1 2,495 Gross margin 968 - 968 996 1) 995 Operating expenses: Research and development (2) 119 1 120 123 - 123 Selling, general, and administrative (2) 447 1 448 470 2 472 Total operating expenses 566 2 568 593 2 595 Operating income 402 (2) 400 403 (3) 400 Other income and expense 33 - 33 26 - 26 Income before provision for income taxes 435 (2) 433 429 (3) 426 Provision for income taxes 145 - 145 134 -Li) 133 Net income $ 290 _) $ 288 $ 295 _) $ 293 Earnings per common share: Basic $ 0.36 $ - $ 0.36 $ 0.37 $ - $ 0.37 Diluted $ 0.34 $ - $ 0.34 $ 0.35 $ - $ 0.35 Shares used in computing earnings per share (in thousands): Basic 808,172 - 808,172 789,032 - 789,032 Diluted 857,011 557 857,568 838,174 631 838,805 (1) See the "Explanatory Note immediately preceding Part I, Item 1 and Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements of this Form 10-K. (2) Includes stock-based compensation expense, which was allocated as follows: Cost of sales $ 1 $ - $ 1 $ - $ 1 $ 1 Research and development $ 1 $ 1 $ 2 $ 2 $ - $ 2 Selling, general, and administrative $ 8 $ 1 $ 9 $ 8 $ 2 $ 10 Recent Accounting Pronouncements In September 2006, the SEC issued SAB No. 108, Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in current year financial statements for purposes of determining whether the current year's financial statements are materially misstated. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Although the Company will continue to evaluate the application of SAB No. 108, management does not currently believe adoption will have a material impact on the Company's results of operations or financial position. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company beginning in the 66 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 67 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 68 of 143 first quarter of fiscal 2009. Although the Company will continue to evaluate the application of SFAS 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, Accountingfor Uncertainty in Income Taxes-an Interpretation ofFASB Statement No. 109. FIN No. 48 clarifies the accounting for uncertainty in income taxes by creating a framework for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions that they have taken or expect to take in a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by the Company beginning in the first quarter of fiscal 2008. Although the Company will continue to evaluate the application of FIN No. 48, management does not currently believe adoption will have a material impact on the Company's results of operations or financial position. In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial StatementsAn Amendment ofAPB Opinion No. 28. SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principal unless it is not practicable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2007. Although the Company will continue to evaluate the application of SFAS No. 154, management does not currently believe adoption will have a material impact on the Company's results of operations or financial position. Liquidity and Capital Resources The following table presents selected financial information and statistics for each of the last three fiscal years (dollars in millions): September 30, September 24, September 25, 2006 2005 2004 As Restated (1) As Restated (1) Cash, cash equivalents, and short-term investments $ 10,110 $ 8,261 $ 5,464 Accounts receivable, net $ 1,252 $ 895 $ 774 Inventory $ 270 $ 165 $ 101 Working capital $ 8,038 $ 6,813 $ 4,403 Days sales in accounts receivable (DSO) (a) 24 22 30 Days of supply in inventory (b) 7 6 5 Days payables outstanding (DPO) (c) 89 62 76 Annual operating cash flow $ 2,220 $ 2,535 $ 934 (1) See the "Explanatory Note immediately preceding Part I, Item 1 and Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements of this Form 10-K. (a) DSO is based on ending net trade receivables and most recent quarterly net sales for each period. (b) Days supply of inventory is based on ending inventory and most recent quarterly cost of sales for each period. (c) DPO is based on ending accounts payable and most recent quarterly cost of sales adjusted for the change in inventory. As of September 30, 2006 , the Company had $10.11 billion in cash, cash equivalents , and short-term investments, an increase of $1.85 billion over the same balances at the end of 2005 . The principal 67 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 68 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 69 of 143 components of this increase were cash generated by operating activities of $2.22 billion, proceeds of $318 million from the issuance of common stock under stock plans, and excess tax benefits from stock-based compensation of $361 million, partially offset by cash used to purchase property, plant, and equipment of $657 million and repurchases of common stock of $355 million in conjunction with net-share settlements on vested restricted stock and restricted stock units. Cash generated from operating activities includes the impact of the $1.25 billion prepayment for NAND flash memory components. The Company's short-term investment portfolio is primarily invested in high credit quality, liquid investments. As of September 30, 2006, approximately $4.1 billion of the Company's cash, cash equivalents, and short-term investments were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S. The Company believes its existing balances of cash, cash equivalents, and short-term investments will be sufficient to satisfy its working capital needs, capital expenditures, stock repurchase activity, outstanding commitments, and other liquidity requirements associated with its existing operations over the next 12 months. Capital Expenditures The Company's total capital expenditures were $657 million during 2006, consisting of $200 million for retail store facilities and equipment related to the Company's Retail segment, $263 million for real estate acquisitions for the Company's second corporate campus and for a new data center, and $194 million for corporate infrastructure, including information systems enhancements. The Company currently anticipates it will utilize approximately $675 million for capital expenditures during 2007, including approximately $360 million for expansion of the Company's Retail segment, approximately $50 million for real estate acquisitions including the 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 for the Company to repurchase up to $500 million of its common stock. This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time. The Company has repurchased a total of 13.1 million shares at a cost of $217 million under this plan and was authorized to repurchase up to an additional $283 million of its common stock as of September 30, 2006. Off-Balance Sheet Arrangements and Contractual Obligations The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company. The following table presents certain payments due by the Company under contractual obligations with minimum firm commitments as of September 30, 2006 and excludes amounts already recorded on the Company's balance sheet as current liabilities (in millions): Payments Due Payments Payments Due Payments Due in Less Due in in in More Total Than 1 Year 1-3 Years 4-5 Years Than 5 Years Operating Leases $1,154 $ 134 $ 268 $ 254 $ 498 Purchase Obligations 2,306 2,306 Asset Retirement Obligations 19 3 3 7 6 Other Obligations 39 29 10 Total $ 3,518 $ 2,472 $ 281 $ 261 $ 504 68 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 69 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 70 of 143 Lease Commitments As of September 30, 2006 , the Company had total outstanding commitments on noncancelable operating leases of approximately $ 1.2 billion, $887 million of which related to the lease of retail space and related facilities. Lease terms on the Company ' s existing major facility operating leases range from 5 to 15 years. Purchase Commitments with Contract Manufacturers and Component Suppliers The Company utilizes several contract manufacturers to manufacture sub-assemblies for the Company's products and to perform final assembly and test of finished products. These contract manufacturers acquire components and build product based on demand information supplied by the Company, which typically covers periods ranging from 30 to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier 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. As of September 30, 2006, the Company had outstanding third-party manufacturing commitments and component purchase commitments of approximately $2.3 billion. During 2006, the Company entered into long-term supply agreements with Hynix Semiconductor, Inc., Intel Corporation, Micron Technology, Inc., Samsung Electronics Co., Ltd., and Toshiba Corporation to secure supply of NAND flash memory through calendar year 2010. As part of these agreements, the Company prepaid $1.25 billion 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 to original condition upon lease termination. As of September 30, 2006, the Company estimates that gross expected future cash flows of approximately $19 million will be required to fulfill these obligations. Other Obligations The Company' s other obligations of approximately $39 million 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 into by the Company sometimes include indemnification provisions under which the Company could be subject to costs and/or damages in the event of an infringement claim against the Company or an indemnified third-party. However, the Company has not been required to make any significant payments resulting from such an infringement claim asserted against itself or an indemnified third-party and, in the opinion of management, does not have a liability related to unresolved infringement claims subject to indemnification that would have a material adverse effect on its financial condition, liquidity or results of operations. 69 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 70 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 71 of 143 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate and Foreign Currency Risk Management The Company regularly reviews its foreign exchange forward and option positions and its interest rate swap and option positions, both on a stand-alone basis and in conjunction with its underlying foreign currency and interest rate related exposures. However, given the effective horizons of the Company's risk management activities and the anticipatory nature of the exposures, there can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in either foreign exchange or interest rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company's operating results and financial position. Interest Rate Risk While the Company is exposed to interest rate fluctuations in many of the world's leading industrialized countries, the Company's interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on 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 and interest rate environment. A portion of the Company's cash is managed by external managers within the guidelines of the Company's investment policy and to an objective market benchmark. The Company's internal portfolio is benchmarked against external manager performance, allowing for differences in liquidity needs. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company places its short-term investments in highly liquid securities issued by high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company's general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. All highly liquid investments with initial maturities of three months or less are classified as cash equivalents; highly liquid investments with initial maturities greater than three months are classified as short-term investments. As of September 30, 2006, approximately $921 million of the Company's short-term investments had underlying maturities ranging from 1 to 5 years. As of September 24, 2005, $287 million of the Company's short-term investments had underlying maturities ranging from 1 to 5 years. The remainder all had underlying maturities of less than 12 months. The Company may sell its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration or for duration management. The Company recognized net losses before taxes of $434,000 and $137,000 in 2006 and 2005, respectively, and a net gain before taxes of $1 million in 2004 as a result of such sales. To provide a meaningful assessment of the interest rate risk associated with the Company's investment portfolio, the Company performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of September 30, 2006, a hypothetical 100 basis point increase in interest rates across all maturities would result in a $15.2 million decline in the fair market value of the portfolio. As of September 24, 2005, a similar 100 basis point shift in the yield curve would have resulted in a $19.9 million decline in fair value. Such losses would only be realized if the Company sold the investments prior to maturity. 70 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 71 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 72 of 143 Foreign Currency Risk In general, the Company is a net receiver of foreign currencies. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect the Company's net sales and gross margins as expressed in U.S. dollars. There is also a risk the Company will have to adjust local currency product pricing due to competitive pressures when there has been significant volatility in foreign currency exchange rates. The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risks associated with existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows, and net investments in foreign subsidiaries. Generally, the Company's practice is to hedge a majority of its existing material foreign exchange transaction exposures. However, the Company may not hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of hedging particular exposures, and limited availability of appropriate hedging instruments. To provide a meaningful assessment of the foreign currency risk associated with certain of the Company's foreign currency derivative positions, the Company performed a sensitivity analysis using a value-at-risk ("VAR ) model to assess the potential impact of fluctuations in exchange rates. The VAR model consisted of using a Monte Carlo simulation to generate 3,000 random market price paths. The VAR is the maximum expected loss in fair value, for a given confidence interval, 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 liabilities denominated in foreign currencies were excluded from the model. Based on the results of the model, the Company estimates with 95% confidence a maximum one-day loss in fair value of $9.2 million as of September 30, 2006 compared to a maximum one-day loss of $10.0 million as of September 24, 2005. Because the Company uses foreign currency instruments for hedging purposes, losses incurred on those instruments are generally offset by increases in the fair value of the underlying exposures. Actual future gains and losses associated with the Company's investment portfolio and derivative positions may differ materially from the sensitivity analyses performed as of September 30, 2006 due to the inherent limitations associated with predicting the changes in the timing and amount of interest rates, foreign currency exchanges rates, and the Company's actual exposures and positions. 71 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 72 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 73 of 143 Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Consolidated Balance Sheets as of September 30, 2006 and September 24, 2005 73 Consolidated Statements of Operations for the three fiscal years ended September 30, 2006 74 Consolidated Statements of Shareholders' Equity for the three fiscal years ended September 30, 2006 75 Consolidated Statements of Cash Flows for the three fiscal years ended September 30, 2006 76 Notes to Consolidated Financial Statements 77 Selected Quarterly Financial Information (Unaudited) 114 Reports of Independent Registered Public Accounting Firm, KPMG LLP 118 All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and Notes thereto. 72 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 73 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 74 of 143 CONSOLIDATED BALANCE SHEETS (In millions, except share amounts) September 30, 2006 September 24, 2005 As Restated(1) ASSETS: Current assets: Cash and cash equivalents $ 6,392 $ 3,491 Short-term investments 3,718 4,770 Accounts receivable, less allowances of $52 and $46, respectively 1,252 895 Inventories 270 165 Deferred tax assets 607 331 Other current assets 2,270 648 Total current assets 14,509 10,300 Property, plant, and equipment, net 1,281 817 Goodwill 38 69 Acquired intangible assets, net 139 27 Other assets 1,238 303 Total assets $ 17,205 $ 11,516 LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 3,390 $ 1,779 Accrued expenses 3,081 1,708 Total current liabilities 6,471 3,487 Non-current liabilities 750 601 Total liabilities 7,221 4,088 Commitments and contingencies Shareholders' equity: Common stock, no par value; 1,800,000,000 shares authorized; 855,262,568 and 835,019,364 shares issued and outstanding, respectively 4,355 3,564 Deferred stock compensation - (61) Retained earnings 5,607 3,925 Accumulated other comprehensive income 22 - Total shareholders' equity 9,984 7,428 Total liabilities and shareholders' equity $ 17,205 $ 11,516 (1) See Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements. See accompanying Notes to Consolidated Financial Statements. 73 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 74 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 75 of 143 CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except share and per share amounts) Three fiscal years ended September 30, 2006 2006 2005 2004 As Restated (1) As Restated (1) Net sales $ 19,315 $ 13,931 $ 8,279 Cost of sales (2) 13,717 9,889 6,022 Gross margin 5,598 4,042 2,257 Operating expenses: Research and development (2) 712 535 491 Selling, general, and administrative (2) 2,433 1,864 1,430 Restructuring costs 23 Total operating expenses 3,145 2,399 1,944 Operating income 2,453 1,643 313 Other income and expense 365 165 57 Income before provision for income taxes 2,818 1,808 370 Provision for income taxes 829 480 104 Net income $ 1,989 $ 1,328 $ 266 Earnings per common share: Basic $ 2.36 $ 1.64 $ 0.36 Diluted $ 2.27 $ 1.55 $ 0.34 Shares used in computing earnings per share (in thousands): Basic 844,058 808,439 743,180 Diluted 877,526 856,878 774,776 (1) See Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements. (2) Includes stock-based compensation expense, which was allocated as follows: Cost of sales $ 21 $ 3 $ 3 Research and development $ 53 $ 7 $ 6 Selling, general, and administrative $ 89 $ 39 $ 37 See accompanying Notes to Consolidated Financial Statements. 74 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 75 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 76 of 143 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In millions, except share amounts which are in thousands) Accumulated Other Total Common Stock Deferred Stock Retained Comprehensive Shareholders' Shares Amount Compensation Earnings Income (Loss) Equity As As As As Restated (1) Restated (1) Restated (1) Restated (1) Balances as of September 27, 2003 as previously reported 733,454 $ 1,926 $ (62) $ 2,394 $ (35) $ 4,223 Adjustments to opening shareholders' equity - 85 22) 63) - - Balance as of September 27, 2003 as restated 733,454 $ 2,011 $ (84) $ 2,331 $ (35) $ 4,223 Components of comprehensive income: Net income - - - 266 - 266 Change in foreign currency translation 13 13 Change in unrealized gain on available-for-sale securities, net of tax (5) (5) Change in unrealized loss on derivative investments, net of tax 12 12 Total comprehensive income 286 Issuance of stock-based compensation awards - 63 (63) - - - Adjustment to common stock related to a prior year acquisition (159) (2) (2) Stock-based compensation - - 46 - - 46 Common stock issued under stock plans 49,592 427 427 Tax benefit related to stock options - 83 - - - 83 Balances as of September 25, 2004 782,887 $ 2,582 $ (101) $ 2,597 $ (15) T5,063 Components of comprehensive income: Net income - - - 1,328 - 1,328 Change in foreign currency translation 7 7 Change in unrealized gain on derivative investments, net of tax 8 8 Total comprehensive income 1,343 Issuance of stock-based compensation awards - 7 (7) - - - Stock-based compensation - - 47 - - 47 Common stock issued under stock plans 52,132 547 547 Tax benefit related to stock options - 428 - - - 428 Balances as of September 24, 2005 835,019 $ 3,564 $ (61) $ 3,925 $ - $ 7,428 Components of comprehensive income: Net income - - - 1,989 - 1,989 Change in foreign currency translation 19 19 Change in unrealized gain on available-for-sale securities, net of tax 4 4 Change in unrealized loss on derivative investments, net of tax (1) (1) Total comprehensive income 2,011 Common stock repurchased (4,574) (48) - (307) - (355) Stock-based compensation - 163 - - - 163 Deferred compensation - (61) 61 - - - Common stock issued under stock plans 24,818 318 318 Tax benefit related to stock-based compensation - 419 - - - 419 Balances as of September 30, 2006 855,263 $ 4,355 $ - $ 5,607 $ 22 $ 9,984 (1) See Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements. See accompanying Notes to Consolidated Financial Statements. 75 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 76 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 77 of 143 CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Three fiscal years ended September 30, 2006 2006 2005 2004 As Restated (1) As Restated (1) Cash and cash equivalents, beginning of the year $ 3,491 $ 2,969 $ 3,396 Operating Activities: Net income 1,989 1,328 266 Adjustments to reconcile net income to cash generated by operating activities: Depreciation, amortization and accretion 225 179 150 Stock-based compensation expense 163 49 46 Provision for deferred income taxes 53 50 19 Excess tax benefits from stock options - 428 83 Gain on sale of PowerSchool net assets (4) Loss on disposition of property, plant, and equipment 15 9 7 Gains on sales of investments, net (5) Changes in operating assets and liabilities: Accounts receivable (357) (121) (8) Inventories (105) (64) (45) Other current assets (1,626) (150) (176) Other assets (1,040) (35) (25) Accounts payable 1,611 328 297 Other liabilities 1,296 534 325 Cash generated by operating activities 2,220 2,535 934 Investing Activities: Purchases of short-term investments (7,255) (11,470) (3,270) Proceeds from maturities of short-term investments 7,226 8,609 1,141 Proceeds from sales of investments 1,086 586 806 Purchases of long-term investments (25) Proceeds from sale of PowerSchool net assets 40 Purchases of property, plant, and equipment (657) (260) (176) Other 58 21 11 Cash generated by (used for) investing activities 357 2,556 1,488 Financing Activities: Payment of long-term debt (300) Proceeds from issuance of common stock 318 543 427 Excess tax benefits from stock-based compensation 361 Repurchases of common stock 355 Cash generated by financing activities 324 543 127 Increase (decrease) in cash and cash equivalents 2,901 522 427 Cash and cash equivalents, end of the year $ 6,392 $ 3,491 $ 2,969 Supplemental cash flow disclosures: Cash paid during the year for interest $ - $ - $ 10 Cash paid (received) for income taxes, net $ 194 $ 17 $ (7) (1) See Note 2, "Restatement of Consolidated Financial Statements, in Notes to Consolidated Financial Statements. See accompanying Notes to Consolidated Financial Statements. 76 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 77 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 78 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1-Summary of Significant Accounting Policies Apple Computer, Inc. and its wholly-owned subsidiaries (the Company) designs, manufactures, and markets personal computers 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 sale of third- party audio and video products. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. In addition, the Company sells a variety of third- party Macintosh and iPod compatible products including application software, printers, storage devices, speakers, headphones, and various other accessories and supplies through its online and retail stores. The Company sells to education, consumer, creative professional, business, and government customers. Basis of Presentation and Preparation The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Certain prior year amounts in the consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation. Typically, the Company's fiscal year ends on the last Saturday of September. Fiscal years 2005 and 2004 were each 52-week years. However, approximately every six years, the Company reports a 53-week fiscal year to align its fiscal quarters with calendar quarters by adding a week to its first fiscal quarter. The Company added this additional week in the first fiscal quarter of its fiscal year 2006. All information presented herein is based on the Company's fiscal calendar. Common Stock Split On February 28, 2005, the Company effected a two-for-one stock split to shareholders of record as of February 18, 2005. All share and per share information has been retroactively adjusted to reflect the stock split. Financial Instruments Cash Equivalents and Short-term Investments All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Highly liquid investments with maturities greater than three months at the date of purchase are classified as short-term investments. The Company's debt and marketable equity securities have been classified and accounted for as available-for- sale. Management determines the appropriate classification of its investments in debt and marketable equity securities at the time of purchase and reevaluates the available-for-sale designations as of each balance sheet date. These securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of shareholders' equity. The cost of securities sold is based upon the specific identification method. Derivative Financial Instruments The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives that are not defined as hedges in Statement of Financial Accounting Standards ("SFAS ) No. 133, Accountingfor Derivative Instruments and Hedging Activities, as amended, must be adjusted to fair value through earnings. If the derivative is a hedge, depending on the nature of the hedge, 77 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 78 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 79 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1-Summary of Significant Accounting Policies (Continued) changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income in shareholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. For derivative instruments that hedge the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges, the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment. For forward contracts designated as net investment hedges, the Company excludes changes in fair value relating to changes in the forward carry component from its definition of effectiveness. Accordingly, any gains or losses related to this component are recognized in current earnings. Inventories Inventories are stated at the lower of cost, computed using the first-in, first-out method, or market. If the cost of the inventories exceeds their market value, provisions are made currently for the difference between the cost and the market value. The Company's inventories consist primarily of finished goods for all periods presented. Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Depreciation is computed by use of the straight-line method over the estimated useful lives of the assets, which for buildings is the lesser of 30 years or the remaining life of the underlying building, up to 5 years for equipment, and the shorter of lease terms or 10 years for leasehold improvements. 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 from 3 to 5 years. Depreciation and amortization expense on property and equipment was $180 million, $141 million, and $126 million during 2006, 2005, and 2004, respectively. Asset Retirement Obligations The Company records obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs in accordance with SFAS No. 143, Accountingfor Asset Retirement Obligations. The Company reviews legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. If it is determined that a legal obligation exists, the fair value of the liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The difference between the gross expected future cash flow and its 78 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 79 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 80 of 143 NOTES 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 property subject to operating leases to original condition upon lease termination. The following table reconciles changes in the Company' s asset retirement liabilities for fiscal 2006 and 2005 (in millions): Asset retirement liability as of September 25, 2004 $ 8.2 Additional asset retirement obligations recognized 2.8 Accretion recognized 0.7 Asset retirement liability as of September 24, 2005 $11.7 Additional asset retirement obligations recognized 2.5 Accretion recognized 0.5 Asset retirement liability as of September 30, 2006 $14.7 Long-Lived Assets Including Goodwill and Other Acquired Intangible Assets The Company reviews property, plant, and equipment and certain identifiable intangibles, excluding goodwill, for impairment in accordance with SFAS No. 144, Accountingfor the Impairment ofLong-Lived Assets andfor Long-Lived Assets to Be Disposed Of. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of its carrying amount to future undiscounted cash flows the assets are expected to generate. If property, plant, and equipment and certain identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value. For the three fiscal years ended September 30, 2006, the Company had no material impairment of its long-lived assets, except for the impairment of certain assets in connection with the restructuring actions described in Note 6 of these Notes to Consolidated Financial Statements. SFAS No. 142, Goodwill and Other Intangible Assets requires that goodwill and intangible assets with indefinite useful lives should not be amortized but rather be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. The Company performs its goodwill impairment tests on or about August 30 of each year. The Company did not recognize any goodwill or intangible asset impairment charges in 2006, 2005, or 2004. The Company established reporting units based on its current reporting structure. For purposes of testing goodwill for impairment, goodwill has been allocated to these reporting units to the extent it relates to each reporting unit. SFAS No. 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment in accordance with SFAS No. 144. The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 3 to 10 years. Foreign Currency Translation The Company translates the assets and liabilities of its international non-U.S. functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are credited or charged to foreign currency translation 79 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 80 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 81 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1-Summary of Significant Accounting Policies (Continued) included in "accumulated other comprehensive income in shareholders' equity. The Company's foreign manufacturing subsidiaries and certain other international subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property, and nonmonetary assets and liabilities at historical rates. Gains and losses from these translations were insignificant and have been included in the Company's results of operations. Revenue Recognition Net sales consist primarily of revenue from the sale of hardware, software, peripherals, digital content, and service and support contracts. The Company recognizes revenue pursuant to applicable accounting standards, including American Institute of Certified Public Accountants Statement of Position ("SOP ) No. 97-2, Software Revenue Recognition, as amended, and Securities and Exchange Commission ("SEC ) Staff Accounting Bulletin ("SAB ) No. 104, Revenue Recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company's product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company legally retains a portion of the risk of loss on these sales during transit. If at the outset of an arrangement the Company determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and subsequently recognized as amounts become due and payable. Revenue from service and support contracts is deferred and recognized ratably over 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 from other companies. The Company establishes its own pricing and retains related inventory risk, is the primary obligor in sales transactions with its customers, and assumes the credit risk for amounts billed to its customers. Accordingly, the Company recognizes revenue for the sale of products obtained from other companies based on the gross amount billed. Revenue on arrangements that include multiple elements such as hardware, software, and services is allocated to each element based on the relative fair value of each element. Each element's allocated revenue is recognized when revenue recognition criteria for that element have been met. Fair value is generally determined by vendor specific objective evidence ("VSOE ), which is based on the price charged when each element is sold separately. If the Company cannot objectively determine the fair value of any undelivered element included in a multiple-element arrangement, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. When the fair value of a delivered element has not been established, the Company uses the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. 80 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 81 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 82 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1-Summary of Significant Accounting Policies (Continued) The Company records reductions to revenue for estimated commitments related to price protection and for customer incentive programs, including reseller and end-user rebates, and other sales programs and volume-based incentives. The estimated cost of these programs is accrued as a reduction to revenue in the period the Company has sold the product and committed to a plan. The Company also records reductions 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 offer specified upgrade rights, the Company defers revenue for the fair value of the specified upgrade right until the future obligation is fulfilled or when the right to the specified upgrade expires. Additionally, a limited number of the Company's software products are available with maintenance agreements that grant customers rights to unspecified future upgrades over the maintenance term on a when and if available basis. Revenue associated with such maintenance is recognized ratably over the maintenance term. Allowance for Doubtful Accounts The Company records its allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, credit quality of the Company's customers, current economic conditions, and other factors that may affect customers' ability to pay. Shipping Costs For all periods presented, amounts billed to customers related to shipping and handling are classified as revenue, and the Company's shipping and handling costs are included in cost of sales. Warranty Expense The Company provides for the estimated cost of hardware and software warranties at the time the related revenue is recognized . The Company assesses the adequacy of its preexisting warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future estimates. Software Development Costs Research and development costs are expensed as incurred. Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers pursuant to SFAS No. 86, Computer Software to be Sold, Leased, or Otherwise Marketed. In most instances, the Company's products are released soon after technological feasibility has been established. Therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally all software development costs have been immediately expensed. In 2004, the Company began incurring substantial development costs associated with Mac OS X version 10.4 Tiger ("Tiger ) subsequent to achievement of technological feasibility as evidenced by public demonstration in August 2004 and the subsequent release of a developer beta version of the product. The Company capitalized approximately $29.7 million and $4.5 million during 2005 and 2004, respectively, of costs associated with the development of Tiger. In accordance with SFAS No. 86, amortization of this asset to cost of sales began in April 2005 when the Company began shipping Tiger and is being recognized on a straight-line basis over a three-year estimated useful life. 81 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 82 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 83 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1-Summary of Significant Accounting Policies (Continued) During 2004, the Company incurred substantial development costs associated with FileMaker Pro 7 subsequent to achievement of technological feasibility as evidenced by public demonstration and release of a developer beta version, and prior to the release of the final version of the product in March 2004. Therefore, during 2004, the Company capitalized approximately $2.3 million of costs associated with the development of FileMaker Pro 7. In accordance with SFAS No. 86, amortization of this asset to cost of sales began in March 2004 when the Company began shipping FileMaker Pro 7 and is being recognized on a straight-line basis over a three-year estimated useful life. Total amortization related to capitalized software development costs was $17.8 million, $15.7 million, and $10.7 million in 2006, 2005, and 2004, respectively. Advertising Costs Advertising costs are expensed as incurred. Advertising expense was $338 million, $287 million, and $206 million for 2006, 2005, and 2004, respectively. Stock-Based Compensation On September 25, 2005, the Company adopted SFAS No. 123 (revised 2004) ("SFAS No. 123R ), Share-Based Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. In January 2005, the SEC issued SAB No. 107, which provides supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board ("APB ) Opinion No. 25, Accountingfor Stock Issued to Employees, and instead generally requires that such transactions be accounted for using a fair-value-based method. The Company uses the Black-Scholes-Merton ("BSM ) option-pricing model to determine the fair-value of stock-based awards under SFAS No. 123R, consistent with that used for pro forma disclosures under SFAS No. 123, Accounting for Stock-Based Compensation. The Company has elected to use the modified prospective transition method as permitted by SFAS No. 123R and accordingly prior periods have not been restated to reflect the impact of SFAS No. 123R. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options, restricted stock, restricted stock units, and employee stock purchase plan shares that are ultimately expected to vest as the requisite service is rendered beginning on September 25, 2005, the first day of the Company's fiscal year 2006. Stock-based compensation expense for awards granted prior to September 25, 2005 is based on the grant-date fair-value as determined under the pro forma provisions of SFAS No. 123. The Company recognized incremental stock-based compensation expense of $117 million during 2006 as a result of the adoption of SFAS No. 123R. Diluted earnings per common share was reduced by $0.10 for the year ended September 30, 2006 due to the adoption of SFAS No. 123R. In accordance with SFAS No. 123R, beginning 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- based compensation expense was $39 million for the year ended September 30, 2006. As of September 30, 2006, $375.2 million of total unrecognized compensation cost related to stock options and restricted stock units is expected to be recognized over a weighted-average period of 2.91 years. 82 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 83 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 84 of 143 NOTES TO 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 if an incremental tax benefit is realized by following the ordering provisions of the tax law. In addition, the Company accounts for the indirect effects of stock-based compensation on the research tax credit, the foreign tax credit, and the domestic manufacturing deduction through the income statement. Prior to the adoption of SFAS No. 123R, the Company measured compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25. The Company applied the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure, as if the fair-value-based method had been applied in measuring compensation expense. Under APB Opinion No. 25, when the exercise price of the Company's employee stock options was equal to the market price of the underlying stock on the date of the grant, no compensation expense was recognized. The following table illustrates the effect on net income after taxes and net income per common share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation during 2005 and 2004 (in millions , except per share amounts): 2005 2004 As Restated (1) As Restated (1) Net income $1,328 $ 266 Add: Stock-based employee compensation expense included in reported net income, net of tax 45 43 Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of tax (118 ) (148 ) Net income-pro forma $ 1,255 $ 161 Net income per common share Basic $ 1.64 $ 0.36 Diluted $ 1.55 $ 0.34 Net income per common share-pro forma Basic $ 1.55 $ 0.22 Diluted $ 1.47 $ 0.21 (1) See Note 2, "Restatement of Consolidated Financial Statements. Further information regarding stock-based compensation can be found in Note 9. Earnings Per Common Share Basic earnings per common share is computed by dividing income available to common shareholders by the weighted- average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued. The dilutive effect of outstanding options, restricted stock, and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. Under the 83 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 84 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 85 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 1-Summary of Significant Accounting Policies (Continued) 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 stock options and the vesting of restricted stock and restricted stock units can result in a greater dilutive effect on earnings per share. The following table sets forth the computation of basic and diluted earnings per share: Three fiscal years ended September 30, 2006 2006 2005 2004 As Restated (1) As Restated (1) Numerator (in millions): Net income $ 1,989 $ 1,328 $ 266 Denominator (in thousands): Weighted-average shares outstanding, excluding unvested restricted stock 844,058 808,439 743,180 Effect of dilutive options, restricted stock units and unvested restricted stock 33,468 48,439 31,596 Denominator for diluted earnings per share 877,526 856,878 774,776 Basic earnings per share $ 2.36 $ 1.64 $ 0.36 Diluted earnings per share $ 2.27 $ 1.55 $ 0.34 Potentially dilutive securities representing approximately 3.9 million, 12.7 million (as restated(1)), and 8.9 million (as restated(1)) shares of common stock for the years ended September 30, 2006, September 24, 2005, and September 25, 2004, respectively, were excluded from the computation of diluted earnings per share for these periods because their effect would have been antidilutive. These potentially dilutive securities include stock options, unvested restricted stock, and restricted stock units. (1) See Note 2, "Restatement of Consolidated Financial Statements. Comprehensive Income Comprehensive income consists of two components: net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains, and losses that under generally accepted accounting principles are recorded as an element of shareholders' equity but are excluded from net income. The Company's other comprehensive income is comprised of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses on marketable securities categorized as available-for-sale, and net deferred gains and losses on certain derivative 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 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 on a company-wide basis is also disclosed. 84 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 85 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 86 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2-Restatement of Consolidated Financial Statements The Company is restating its consolidated balance sheet as of September 24, 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-Q affected by the restatements have not been amended and should not be relied on. On June 29, 2006, the Company announced that an internal review had discovered irregularities related to the issuance of certain stock option grants made between 1997 and 2001, including a grant to its Chief Executive Officer ("CEO ) Steve Jobs. The Company also announced that a Special Committee of outside directors ("Special Committee ) had been formed and had hired independent counsel to conduct a full investigation of the Company's past stock option granting practices. As a result of the internal review and the independent investigation, management has concluded, and the Audit and Finance Committee of the Board of Directors agrees, that incorrect measurement dates were used for financial accounting purposes for certain stock option grants made in prior periods. Therefore, the Company has recorded additional 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, 2005 and 2004, respectively. The adjustment to 2006 was recorded in the fourth quarter of fiscal year 2006 due to its insignificance. The independent counsel and its forensic accountants ("Investigative Team ) reviewed the facts and circumstances surrounding stock option grants made on 259 dates. Based on a review of the totality of evidence and the applicable law, the Special Committee found no misconduct by current management. The Special Committee's investigation identified a number of grants for which grant dates were intentionally selected in order to obtain favorable exercise prices. The terms of these and certain other grants, as discussed below, were finalized after the originally assigned grant dates. The Special Committee concluded that the procedures for granting, accounting for, and reporting stock option grants did not include sufficient safeguards to prevent manipulation. Although the investigation found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, he did not receive or financially benefit from these grants or appreciate the accounting implications. The Special Committee also found that the investigation had raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants. Based on the evidence and findings from the Company's internal review and the Special Committee's independent investigation, an analysis was performed of the measurement dates for the 42,077 stock option grants made on 259 dates between October 1996 and January 2003 (the "relevant period ). The Company believes that the analysis was properly limited to the relevant period. In addition to analyzing all grants made during the relevant period, the Company sampled certain grants between 1994 and 1997 and found none that required accounting adjustments. The first grants for which stock- based compensation expense is required are dated December 29, 1997. The Company also examined grants made after the relevant period and found none that required accounting adjustments. Moreover, in the years after 2002, Apple made significant changes in its stock option granting practices in response to evolving legal, regulatory and accounting requirements. Consistent with the accounting literature and recent guidance from the Securities and Exchange Commission ("SEC ), the grants during the relevant period were organized into categories based on grant 85 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 86 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 87 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2-Restatement of Consolidated Financial Statements (Continued) type and process by which the grant was finalized. The Company analyzed the evidence related to each category of grants including, but not limited to, electronic and physical documents, document metadata, and witness interviews. Based on the relevant facts and circumstances, the Company applied the controlling accounting standards to determine, for every grant within each category, the proper measurement date. If the measurement date is not the originally assigned grant date, accounting adjustments were made as required, resulting in stock-based compensation expense and related tax effects. The 42,077 grants were classified as follows: (1) 17 grants to persons elected or appointed to the Board of Directors ("director grants ); (2) 3,892 grants to employees under the Monday/Tuesday Plan described below ("Monday/Tuesday grants ); (3) 27,096 grants made in broad-based awards to large numbers of employees, usually on an annual basis ("focal grants ); (4) 9,988 other grants ratified at meetings of the Board or Compensation Committee ("meeting grants ); (5) 1,082 other grants ratified by unanimous written consent ("UWC ) of the Board or Compensation Committee ("other UWC grants ); and (6) two grants to the 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 Committee at a meeting or by UWC. Following approval of the grants at a meeting or by UWC, the Company's legal staff would prepare a Secretary's Certificate certifying the ratification of the grants. Based on the facts and circumstances described below, the Company has concluded that the recipients and terms of certain grants were fixed for accounting purposes before ratification pursuant to parameters previously approved by the Board or Compensation Committee through the Monday/Tuesday Plan and the focal process. As further discussed below, within these parameters, management had the authority to determine the recipients and terms for each grant. Thus, the Company has concluded that the measurement dates for these grants occurred when management's process for allocating these grants was completed and the grants were ready for ratification, which was considered perfunctory. With regard to all other grants, the Company has concluded that the grants were finalized and the measurement dates occurred when the grants were ratified. For many grants, however, the dates of ratification cannot be established because the dates the UWCs were executed by the Board or Compensation Committee members or received by the Company are not available. For such grants, the Company has concluded that the date of the preparation of the Secretary's Certificate is the best alternative for determining the actual date of ratification. As discussed below, the Company's analysis determined that the originally assigned grant dates for 6,428 grants on 42 dates are not the proper measurement dates. Accordingly, after accounting for forfeitures, the Company has recognized stock-based compensation expense of $105 million on a pre-tax basis over the respective awards' vesting terms. No adjustments were required for the remaining 35,649 grants. The adjustments were determined by category as follows: Director Grants-Seventeen director grants were made during the relevant period. Two director grants were made pursuant to a 1997 plan that dated the grants on the enactment of the plan. The remaining fifteen grants were automatically made under the Director Stock Option Plan for non-employee directors, which was approved by shareholders in 1998, on the date of a director's election or appointment to the Board and on subsequent anniversaries, beginning on the fourth anniversary. Accordingly, the analysis determined that the originally assigned grant date for each director grant is the measurement date, and no accounting adjustments are required. 86 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 87 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 88 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2-Restatement of Consolidated Financial Statements (Continued) Monday/Tuesday Grants-Beginning in December 1998, 3,892 new hire grants and grants for promotion and retention purposes ("promotion/retention grants ) were made during the relevant period under the "Monday/Tuesday Plan. Under the Monday/Tuesday Plan, new hire grants made within pre-established guidelines approved by the Board or Compensation Committee were dated on the Monday that the recipient started work (or the following Monday, if the recipient started on another day). The Company's analysis showed this process to be reliable with very low error rates. Promotion/retention grants, also based on pre-established guidelines, were made generally on the first Tuesday of each month. The Company has concluded that the new hire and promotion/retention grants made pursuant to the Monday/Tuesday Plan within pre- established guidelines do not require adjustment, with the exception of six grants that 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 grants within guidelines. Accordingly, based on the methodology described above, the Company has recognized stock-based compensation expense of $6 million from 126 grants. Focal Grants-During the relevant period, 27,096 focal grants were made to employees typically on an annual basis as part of an extensive process that required several months to complete. Pursuant to limits, guidelines and practices previously approved by the Board or Compensation Committee, managers throughout the Company would make recommendations for grants to employees in their areas of responsibility. After senior management had determined that the grants were made in accordance with these established limits, guidelines and practices, management treated the grants as final when they were submitted to the Board or Compensation Committee for ratification. The Company has concluded that for 5,595 grants on five dates, the originally assigned grant dates are not the proper measurement dates. For these grants, management's process for finalizing the grants was completed after the originally assigned grant dates. As a result, the Company has recognized $29 million of stock-based compensation expense. For two of the five grant dates comprising 3,744 grants, the evidence shows that the grants were finalized and the measurement date occurred one day after the originally assigned grant dates. The grants on these two dates represent more than $16 million of the total $29 million of stock-based compensation expense resulting from focal grants. Other Meeting Grants-During the relevant period, meetings of the Board or Compensation Committee were held to ratify 9,988 grants that are not Monday/Tuesday, focal or CEO grants. The grant dates and measurement dates for these grants are the meeting dates when the grants were ratified, with the exception of 46 grants. Forty-two of these 46 grants are dated concurrent with a meeting that considered and approved certain grants, but the evidence indicates that all of the grants may not have been finalized until a later date. One of the 46 grants was approved and dated at another meeting, but the recipient, who was becoming employed by the Company as part of a corporate acquisition, did not start until a later date. Two other grants were approved before the employees' start dates. Another grant was mistakenly cancelled and subsequently reinstated, requiring an accounting adjustment. Thus, for these 46 grants the Company has concluded that the originally assigned grant dates are not the proper measurement dates. As a result, the Company has recognized $2 million of stock-based compensation expense. Other UWC Grants-During the relevant period, 1,082 grants were approved by UWCs for a variety of purposes, including executive recruitment, retention, promotion and new hires outside the Monday/Tuesday process. These grants were not made pursuant to pre-established guidelines adopted by the Board or Compensation Committee. Therefore, the Company has concluded that these grants were 87 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 88 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 89 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2-Restatement of Consolidated Financial Statements (Continued) not finalized for accounting purposes until ratification by the Board or Compensation Committee. Accordingly, for 660 grants, the Company has concluded that the originally assigned grant dates are not the proper measurement dates. As a result, the Company has recognized $48 million of stock-based compensation expense. 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. The second grant, dated October 19, 2001, was for 7.5 million option shares. Both grants were cancelled in March 2003 prior to being exercised, when Mr. Jobs received 5 million shares of restricted stock. With respect to the grant dated January 12, 2000, the Board on December 2, 1999, authorized a special "CEO Compensation Committee to grant Mr. Jobs up to 15 million shares. The evidence indicates that the CEO Compensation Committee finalized the terms of the grant on January 12, 2000, although the Committee's action was memorialized in a UWC transmitted on January 18, 2000. Because the measurement date is the originally assigned grant date, the Company has not recognized any stock-based compensation expense from this grant. If the Company had determined that the measurement date was the date when the UWC was executed or received, then additional stock-based compensation would have been recognized. The grant dated October 19, 2001 was originally approved at a Board meeting on August 29, 2001, with an exercise price of $17.83. The terms of the grant, however, were not finalized until December 18, 2001. The grant was dated October 19, 2001, with an exercise price of $18.30. The approval for the grant was improperly recorded as occurring at a special Board meeting on October 19, 2001. Such a special 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 price on December 18, 2001 of $21.01. The incremental impact from recognizing stock-based compensation expense resulting from the investigation of past stock option grants is as follows (dollars in millions): Pre-Tax Expense After Tax Fiscal Year (Income) Expense 1998 $ (1) $ - 1999 8 6 2000 13 9 2001 19 13 2002 29 23 2003 16 12 Total 1998 - 2003 impact 84 63 2004 13 10 2005 7 7 2006 1 4 Total $ 105 $ 84 Additionally, the Company has restated the pro forma expense under Statement of Financial Accounting Standards (SFAS) No. 123 in Note 1 to reflect the impact of these adjustments. 88 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 89 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 90 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2-Restatement 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 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 $ 3,491 $ - $ 3,491 Short-term investments 4,770 - 4,770 Accounts receivable, less allowance of $46 895 - 895 Inventories 165 - 165 Deferred tax assets 331 - 331 Other current assets 648 - 648 Total current assets 10,300 - 10,300 Property, plant, and equipment, net 817 - 817 Goodwill 69 - 69 Acquired intangible assets, net 27 - 27 Other assets 338 _) 303 Total assets $ 11,551 _) $ 11,516 LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 1,779 $ - $ 1,779 Accrued expenses 1,705 3 1,708 Total current liabilities 3,484 3 3,487 Non-current liabilities 601 - 601 Total liabilities 4,085 3 4,088 Commitments and contingencies Shareholders' equity: Common stock, no par value; 1,800,000,000 shares authorized; 835,019,364 shares issued and outstanding 3,521 43 3,564 Deferred stock compensation (60) (1) (61) Retained earnings 4,005 (80) 3,925 Accumulated other comprehensive income Total shareholders' equity 7,466 =) 7,428 Total liabilities and shareholders' equity $ 11,551 $ 11,516 89 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 90 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 91 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 2-Restatement 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 September 24, 2005 Fiscal Year Ended September 25, 2004 As As As As Reported Adjustments Restated Reported Adjustments Restated Net sales $ 13,931 $ - $ 13,931 $ 8,279 $ - $ 8,279 Cost of sales (1) 9,888 1 9,889 6,020 2 6,022 Gross margin 4,043 (1) 4,042 2,259 (2 ) 2,257 Operating expenses: Research and development (1) 534 1 535 489 2 491 Selling, general, and administrative (1) 1,859 5 1,864 1,421 9 1,430 Restructuring costs - - - 23 - 23 Total operating expenses 2,393 6 2,399 1,933 11 1,944 Operating income 1,650 (7) 1,643 326 (13 ) 313 Other income and expense 165 165 57 - 57 Income before provision for income taxes 1,815 (7) 1,808 383 (13) 370 Provision for income taxes 480 - 480 107 (3 ) 104 Net income $ 1,335 $ (7 ) $ 1,328 $ 276 $ (10 ) $ 266 Earnings per common share: Basic $ 1.65 $ (0.01) $ 1.64 $ 0.37 $ (0.01) $ 0.36 Diluted $ 1.56 $ (0.01) $ 1.55 $ 0.36 $ (0.02) $ 0.34 Shares used in computing earnings per share (in thousands): Basic 808,439 - 808,439 743,180 - 743,180 Diluted 856,780 98 856,878 774,622 154 774,776 (1) Includes stock-based compensation expense, which was allocated as follows: Cost of sales $ 2 $ 1 $ 3 $ 1 $ 2 $ 3 Research and development $ 6 $ 1 $ 7 $ 4 $ 2 $ 6 Selling, general, and administrative $ 34 $ 5 $ 39 $ 28 $ 9 $ 37 90 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 91 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 92 of 143 NOTES TO CONSOLIDATED 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 Net Impact to Fiscal Year Common Stock Compensation Retained Earnings Shareholders ' Equity 1998 $ 26 $(27) $ - $ (1) 1999 36 (32) (6) (2) 2000 56 (43) (15) (2) 2001 81 (49) (28) 4 2002 105 (49) (51) 5 2003 85 (22) (63) - 2004 68 (8) (73) (13) 2005 43 (1) (80) (38) Note 3-Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair value due to the short maturities of those instruments. Cash, Cash Equivalents and Short-Term Investments The following table summarizes the fair value of the Company's cash and available-for-sale securities held in its short-term investment portfolio, recorded as cash and cash equivalents or short-term investments (in millions): September 30, September 24, 2006 2005 Cash $ 200 $ 127 U.S. Treasury and Agency securities 52 89 U.S. Corporate Securities 4,309 2,030 Foreign Securities 1,831 1,245 Total cash equivalents 6,192 3,364 U.S. Treasury and Agency securities 447 216 U.S. Corporate Securities 2,701 3,662 Foreign Securities 570 892 Total short-term investments 3,718 4,770 Total cash, cash equivalents, and short-term investments $ 10,110 $ 8,261 The Company's U.S. corporate securities consist primarily of commercial paper, certificates of deposit, time deposits, and corporate debt securities. Foreign securities consist primarily of foreign commercial paper, certificates of deposit, and time deposits with foreign institutions, most of which are denominated in U.S. dollars. The Company had net unrealized losses totaling $687,000 on its investment portfolio, primarily related to investments with stated maturities less than 1 year, as of September 30, 2006, and net unrealized losses of $5.9 million on its investment portfolio, approximately half of which related to investments with stated maturities less than 1 year, as of September 24, 2005. The Company may sell its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or 91 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 92 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 93 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 3-Financial Instruments (Continued) for duration management. The Company recognized net losses before taxes of $434,000 and $137,000 in 2006 and 2005, respectively, and a net gain before taxes of $1 million in 2004 as a result 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 short-term investments as of September 30, 2006 and September 24, 2005 had maturities less than 12 months. In accordance with FASB Staff Position ("FSP ) FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, the following table shows the gross unrealized losses and fair value for those investments that were in an unrealized loss position as of September 30, 2006 and September 24, 2005, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions): 2006 Less than 12 Months 12 Months or Greater Total Fair Unrealized Fair Unrealized Fair Unrealized Security Description Value Loss Value Loss Value Loss U.S. Treasury and Agency Securities $ 234 $ - $ 26 $- $ 260 $ - U.S. Corporate Securities 943 - 102 (1) 1,045 (1) Foreign Securities 164 - 34 - 198 - Total $1,341 $ $162 $ (1) $1,503 $ (1) 2005 Less than 12 Months 12 Months or Greater Total Fair Unrealized Fair Unrealized Fair Unrealized Security Description Value Loss Value Loss Value Loss U.S. Treasury and Agency securities $ 160 $ (1) $ 2 $- $ 162 $ (1) U.S. corporate securities 3,960 (4) 25 3,985 (4) Foreign Securities 1,382 (1 ) 1 1,383 (1 ) Total $ 5,502 $ (6) $ 28 $- $ 5,530 $ (6) The unrealized losses on the Company ' s investments during 2006 in U.S . Government securities and during 2005 in U.S. Government securities , U.S. corporate securities , and foreign securities were caused primarily by changes in interest rates. The Company typically invests in highly-rated securities with low probabilities of default. The Company' s investment policy requires investments to be rated single-A or better. Therefore , the Company considers the declines to be temporary in nature. As of September 30, 2006 , the Company does not consider the investments to be other-than-temporarily impaired. Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis , the financial condition of the issuer, and the Company ' s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market value. 92 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 93 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 94 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 3-Financial Instruments (Continued) Accounts Receivable Trade Receivables The Company distributes its products through third-party distributors and resellers and directly to certain education, consumer, and commercial customers. The Company generally does not require collateral from its customers; however, the Company will require collateral in certain instances to limit credit risk. In addition, when possible, the Company does attempt to limit credit risk on trade receivables with credit insurance for certain customers in Latin America, Europe, Asia, and Australia and by arranging with third-party financing companies to provide flooring arrangements and other loan and lease programs to the Company's direct customers. These credit-financing arrangements are directly between the third-party financing company and the end customer. As such, the Company generally does not assume any recourse or credit risk sharing related to any of these arrangements. However, considerable trade receivables that are not covered by collateral, third-party flooring arrangements, or credit insurance are outstanding with the Company's distribution and retail channel partners. No customer accounted for more than 10% of trade receivables as of September 30, 2006 or September 24, 2005. The following table summarizes the activity in the allowance for doubtful accounts (in millions): September 30, September 24, September 25, 2006 2005 2004 Beginning allowance balance $ 46 $ 47 $ 49 Charged to costs and expenses 17 8 3 Deductions(a) ^) _0 _L5) Ending allowance balance $ 52 $ 46 $ 47 (a) Represents amounts written off against the allowance, net of recoveries. Vendor Non-Trade Receivables The Company has non-trade receivables from certain of its manufacturing vendors resulting from the sale of raw material components to these manufacturing vendors who manufacture sub-assemblies or assemble final products for the Company. The Company purchases these raw material components directly from suppliers. These non-trade receivables, which are included in the consolidated balance sheets in other current assets, totaled $1.6 billion and $417 million as of September 30, 2006 and September 24, 2005, respectively. The Company does not reflect the sale of these components in net sales and does not recognize any profits on these sales until the products are sold through 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 risk. Foreign currency forward and option contracts are used to offset the foreign exchange risk on certain existing assets and liabilities and to hedge the foreign exchange risk on expected future cash flows on certain forecasted revenue and cost of sales. 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 based on whether the instruments are designated as hedge or non-hedge instruments. The Company records all derivatives on the balance sheet at fair value. 93 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 94 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 95 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 3-Financial Instruments (Continued) The following table shows the notional principal, net fair value, and credit risk amounts of the Company's foreign currency instruments as of September 30, 2006 and September 24, 2005 (in millions): September 30, 2006 September 24, 2005 Notional Fair Credit Risk Notional Fair Creit Risk Principal Value Amounts Principal Value Amounts Foreign exchange instruments qualifying as accounting hedges: Spot/Forward contracts $ 351 $ 6 $ 6 $ 662 $10 $10 Purchased options $1,256 $ 9 $ 9 $1,668 $17 $17 Sold options $ 80 $ (1) $ - $1,087 $ (5) $ - Foreign exchange instruments other than accounting hedges: Spot/Forward contracts $1,103 $ 2 $ 2 $ 833 $ (3) $ 1 Purchased options $ 167 $ 1 $ - $ 115 $ - $ - Sold options $ - $ - $ - $ - $ - $ - The notional principal amounts for derivative instruments provide one measure of the transaction volume outstanding as of year-end, and do not represent the amount of the Company's exposure to credit or market loss. The credit risk amounts shown in the table above represents the Company's gross exposure to potential accounting loss on these transactions if all counterparties failed to perform according to 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 and prevailing financial market information as of September 30, 2006 and September 24, 2005. Although the table above reflects the notional principal, fair value, and credit risk amounts of the Company's foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that the foreign exchange instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments. Foreign Exchange Risk Management The Company may enter into foreign currency forward and option contracts with financial institutions to protect against foreign exchange risk associated with existing assets and liabilities, certain firmly committed transactions, forecasted future cash flows, and net investments in foreign subsidiaries. Generally, the Company's practice is to hedge a majority of its existing material foreign exchange transaction exposures. However, the Company may not hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of hedging particular exposures, or limited availability of appropriate hedging instruments. To help protect gross margins from fluctuations in foreign currency exchange rates, the Company's U.S. dollar functional subsidiaries hedge a portion of forecasted foreign currency revenue, and the Company's non-U.S. dollar functional subsidiaries selling in local currencies hedge a portion of forecasted inventory purchases not denominated in the subsidiaries' functional currency. Other comprehensive income 94 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 95 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 96 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 3-Financial Instruments (Continued) associated with hedges of foreign currency revenue is recognized as a component of net sales in the same period as the related sales are recognized, and other comprehensive income related to inventory purchases is recognized as a component of cost of sales in the same period as the related costs are recognized. Typically, the Company hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases over a time horizon of up to 6 months. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable that the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent 2 month time period. Deferred gains and losses in other comprehensive income associated with such derivative instruments are immediately reclassified into earnings in other income and expense. Any subsequent changes in fair value of such derivative instruments are also reflected in current earnings unless they are re-designated as hedges of other transactions. The Company recognized a net gain of approximately $421,000 in 2006 and net losses of $1.6 million and $2.8 million in 2005 and 2004, respectively, in other income and expense related to the loss of hedge designation on discontinued cash flow hedges due to changes in the Company's forecast of future net sales and cost of sales and due to prevailing market conditions. As of September 30, 2006, the Company had a net deferred gain associated with cash flow hedges of approximately $2.8 million, net of taxes, substantially all of which is expected to be reclassified to earnings by the end of the second quarter of fiscal 2007. The net gain or loss on the effective portion of a derivative instrument designated as a net investment hedge is included in the cumulative translation adjustment account of accumulated other comprehensive income within shareholders' equity. For the years ended September 30, 2006 and September 24, 2005, the Company had net gains of $7.4 million and $673,000, respectively, included in the cumulative translation adjustment. The Company may also enter into foreign currency forward and option contracts to offset the foreign exchange gains and losses generated by the re-measurement of certain assets and liabilities recorded in non-functional currencies. Changes in the fair value of these derivatives are recognized in current earnings in other income and expense as offsets to the changes in the fair value of 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. Note 4-Consolidated Financial Statement Details (in millions) Other Current Assets 2006 2005 Vendor non-trade receivables $1,593 $ 417 NAND flash memory prepayments 208 - Other current assets 469 231 Total other current assets $ 2,270 $648 95 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 96 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 97 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4-Consolidated Financial Statement Details (in millions) (Continued) Property, Plant, and Equipment 2006 2005 Land and buildings $ 626 $__361 Machinery, equipment, and internal-use software 595 470 Office furniture and equipment 94 81 Leasehold improvements 760 569 2,075 1,481 Accumulated depreciation and amortization (794 ) (664 ) Net property, plant, and equipment $1,281 $ 817 Other Assets 2006 2005 As Restated(1) Long-term NAND flash memory prepayments $ 1,042 $ - Non-current deferred tax assets - 148 Capitalized software development costs, net 21 38 Other assets 175 117 Total other assets $ 1 ,238 $ 303 Accrued Expenses 2006 2005 As Restated(1) Deferred revenue-current $ 746 $ 501 Accrued warranty and related costs 284 188 Accrued marketing and distribution 298 221 Accrued compensation and employee benefits 221 167 Other accrued tax liability 388 196 Deferred margin on component sales 324 26 Other current liabilities 820 409 Total accrued expenses $ 3,081 $1,708 Non-Current Liabilities 2006 2005 Deferred tax liabilities $ 381 $ 308 Deferred revenue-non-current 355 281 Other non-current liabilities 14 12 Total non-current liabilities $ 750 $ 601 96 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 97 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 98 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 4-Consolidated Financial Statement Details (in millions) (Continued) Other Income and Expense 2006 2005 2004 Gains on non-current investments, net $ - $ - $ 4 Interest income $ 394 $183 $ 64 Interest expense (3) Other income (expense), net __^29) __^ 18) _) Total interest and other income, net 365 165 53 Total other income and expense $ 365 $165 $ 57 (1) See Note 2, "Restatement of Consolidated Financial Statements. Note 5-Goodwill and Other Intangible Assets The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 3 to 10 years. The following table summarizes the components of gross and net intangible asset balances (in millions): September 30, 2006 September 24, 2005 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amnrtizafinn Amount Amount Amortization Amount Goodwill $ 38 $ - $ 38 $ 69 $ - $ 69 Acquired technology 181 J) 139 61 .) 27 Total acquired intangible assets $ 219 ) $177 $130 ) $ 96 As of September 30, 2006, and September 24, 2005 , the weighted-average amortization period 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 acquisition of PowerSchool, Inc. in 2001 and recognized a $4 million pre-tax gain, which is reflected in other income and expense in the consolidated statement of operations. During 2005, the Company recorded an adjustment of approximately $11 million to goodwill relating to a reduction of valuation allowances that were recorded at the time certain net operating loss carryforwards ("NOLs ) were acquired in previous business combinations. During 2005, these NOLs were deemed to be more likely than not to be realized and accordingly the valuation allowances were reversed against the related goodwill that was recognized at the time of the acquisitions. 97 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 98 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 99 of 143 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 $ 24 2008 21 2009 18 2010 14 2011 13 Thereafter 49 Total $139 Amortization expense related to acquired intangible assets was $12 million, $9 million, and $7 million in 2006, 2005, and 2004, respectively. Note 6-Restructuring Charges During 2004, the Company recorded total restructuring charges of approximately $23.0 million, including approximately $14.0 million in severance costs, $5.5 million in asset impairments, and $3.5 million for lease cancellations. The lease cancellations relate to vacating a leased sales facility from a European workforce reduction during 2004. Of the $23.0 million charges, $21.3 million had been utilized by the end of 2006, with the remainder consisting of $1.7 million for lease cancellations. These actions have resulted in the termination of 452 positions. Note 7-Income Taxes The provision for income taxes consisted of the following (in millions): 2006 2005 2004 As Restated (1) As Restated (1) Federal: Current $ 619 $ 305 $ 34 Deferred 56 144 53 675 449 87 State: Current 56 66 5 Deferred 14 _j) __Q8) 70 __(25) 3) Foreign: Current 101 59 46 Deferred _^17) 3) 16) 84 56 30 Provision for income taxes $ 829 $ 480 $104 ( 1) See Note 2, "Restatement of Consolidated Financial Statements. The foreign provision for income taxes is based on foreign pretax earnings of approximately $1.5 billion, $922 million, and $384 million in 2006 , 2005 , and 2004 , respectively. As of September 30, 2006, 98 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 99 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 100 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 7-Income Taxes (Continued) approximately $4.1 billion of the Company's cash, cash equivalents, and short-term investments were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S. The Company's consolidated financial statements provide for any related tax liability on amounts that may be repatriated, aside from undistributed earnings of certain of the Company's foreign subsidiaries that are intended to be indefinitely reinvested in operations outside the U.S. U.S. income taxes have not been provided on a cumulative total of $823 million of such earnings. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be distributed. On October 22, 2004, the American Jobs Creation Act of 2004 ("AJCA ) was signed into law. The AJCA included a provision for the deduction of 85% of certain foreign earnings that were repatriated, as defined in the AJCA, within a specified time frame. Among other requirements , dividends qualifying for the 85 % deduction 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, $755 million is eligible for the reduced tax rate provided by the AJCA. Accordingly, the Company recorded a tax charge of $51 million related to the repatriation of foreign earnings under the provisions of the AJCA. In addition, the Company recorded a tax benefit of $71 million resulting from the implementation of tax planning strategies to recognize deferred tax assets that were previously not recognizable within certain foreign subsidiaries. Deferred tax assets and liabilities reflect the effects of tax losses, credits, and the future income 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 be recovered or settled. As of September 30, 2006 and September 24, 2005, the significant components of the Company' s deferred tax assets and liabilities were (in millions): 2006 2005 As Restated (1) Deferred tax assets: Accrued liabilities and other reserves $ 485 $ 321 Tax losses and credits 55 262 Basis of capital assets and investments 124 96 Accounts receivable and inventory reserves 45 36 Other 30 17 Total deferred tax assets 739 732 Less valuation allowance 5 5 Net deferred tax assets 734 727 Deferred tax liabilities: Unremitted earnings of subsidiaries 514 557 Total deferred tax liabilities 514 557 Net deferred tax asset $ 220 $170 (1) See Note 2, "Restatement of Consolidated Financial Statements. 99 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 100 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 101 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 7-Income Taxes (Continued) As of September 30, 2006 , the Company has state and foreign tax loss and state credit carryforwards , the tax effect of which is $55 million. Certain of those carryforwards, the tax effect of which is $12 million, expire between 2016 and 2019. A portion of these carryforwards was acquired from the Company ' s previous acquisitions , the utilization of which is subject to certain limitations imposed by the Internal Revenue Code. The remaining benefits from tax losses and credits do not expire. As of September 30, 2006 and September 24, 2005 , a valuation allowance of $ 5 million was recorded against the deferred tax asset for the benefits of state operating losses that may not be realized. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies , together with the tax effects of the deferred tax liabilities , will be sufficient to fully recover the remaining deferred tax assets. A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate (35% in 2006, 2005, and 2004) to income before provision for income taxes, is as follows (in millions): 2006 2005 2004 As Restated (1) As Restated (1) Computed expected tax $ 987 $ 633 $129 State taxes, net of federal effect 86 (19) (5) Indefinitely invested earnings of foreign subsidiaries (224) (98) (31) Nondeductible executive compensation 11 14 12 Research and development credit, net (12) (26) (5) Other items (19 ) J) 4 Provision for income taxes $ 829 $ 480 $104 Effective tax rate 29% 27% 28% (1) See Note 2, "Restatement of Consolidated Financial Statements. The Company's income taxes payable has been reduced by the tax benefits from employee stock options. The Company receives an income tax benefit calculated as the difference between the fair market value of the stock issued at the time of the exercise and the option price, tax effected. The net tax benefits from employee stock option transactions were $419 million, $428 million (as restated(1)), and $83 million (as restated(1)) in 2006, 2005, and 2004, respectively, and were reflected as an increase to common stock in the consolidated statements of shareholders' equity. 100 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 101 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 102 of 143 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. 101 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 102 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 103 of 143 NOTES 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 other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld of 4.6 million was based on the value of the restricted stock award on the vesting date as determined by the Company's closing stock price of $64.66. The remaining shares net of those withheld were delivered to the Company's CEO. Total payments for the CEO's tax obligations to the taxing authorities were approximately $296 million. The net-share settlement had the effect of share repurchases by the Company as it reduced and retired the number of shares outstanding and did not represent an expense to the Company. Stock Repurchase Plan In July 1999, the Company's Board of Directors authorized a plan for the Company to repurchase up to $500 million of its common stock. This repurchase plan does not obligate the Company to acquire any specific number of shares or acquire shares over any specified period of time. The Company has repurchased a total of 13.1 million shares at a cost of $217 million under this plan and was authorized to repurchase up to an additional $283 million of its common stock as of September 30, 2006. Comprehensive Income Comprehensive income consists of two components: net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains, and losses that under U.S. generally accepted accounting principles are recorded as an element of shareholders' equity but are excluded from net income. The Company's other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses on marketable securities categorized as available-for-sale, and net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges. The following table summarizes the components of accumulated other comprehensive income (loss), net of taxes (in millions): 2006 2005 2004 Unrealized losses on available-for-sale securities $- $ (4) $ (4) Unrealized gains/(losses) on derivative investments 3 4 (4) Cumulative foreign currency translation 19 - _L7) Accumulated other comprehensive income/(loss) $ 22 $ - j) The following table summarizes activity in other comprehensive income related to available-for-sale securities, net of taxes (in millions): 2006 2005 2004 Change in fair value of available-for-sale securities $ 4 $ - $ (1) Adjustment for net gains/losses realized and included in net income _L4 Change in unrealized gain/loss on available-for-sale securities $ 4 $- LU5 The tax effect related to the change in unrealized gain/loss on available-for-sale securities was $(2) million, zero, and $4 million for 2006, 2005, and 2004, respectively. The tax effect on the reclassification adjustment for net gains/losses realized and included in net income was $1 million for 2004. 102 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 103 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 104 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 8-Shareholders ' Equity (Continued) The following table summarizes activity in other comprehensive income related to derivatives, net of taxes , held by the Company (in millions): 2006 2005 2004 Changes in fair value of derivatives $ 11 $ 7 $ (21) Adjustment for net losses realized and included in net income _) 1 33 Change in unrealized gain/loss on derivative instruments $1 ) T8_ $ _l 2 The tax effect related to the changes in fair value of derivatives was $(8) million, $(3) million, and $10 million for 2006, 2005, and 2004, respectively. The tax effect related to derivative gains/losses reclassified from other comprehensive income to net income was $8 million, $(2) million, and $(13) million for 2006, 2005, and 2004, respectively. Employee Benefit Plans 2003 Employee Stock Plan The 2003 Employee Stock Plan (the "2003 Plan ) is a shareholder approved plan that provides for broad-based grants to employees, including executive officers. Based on the terms of individual option grants, options granted under the 2003 Plan generally expire 7 to 10 years after the grant date and generally become exercisable over a period of 4 years, based on continued employment, with either annual or quarterly vesting. The 2003 Plan permits the granting of incentive stock options, nonstatutory stock options, restricted stock units, stock appreciation rights, and stock purchase rights. 1997 Employee Stock Option Plan In August 1997, the Company's Board of Directors approved the 1997 Employee Stock Option Plan (the "1997 Plan ), a non-shareholder approved plan for grants of stock options to employees who are not officers of the Company. Based on the terms of individual option grants, options granted under the 1997 Plan generally expire 7 to 10 years after the grant date and generally become exercisable over a period of 4 years, based on continued employment, with either annual or quarterly vesting. In October 2003, the Company terminated the 1997 Employee Stock Option Plan and cancelled all remaining unissued shares totaling 28,590,702. No new options can be granted from the 1997 Plan. Employee Stock Option Exchange Program On March 20, 2003, the Company announced a voluntary employee stock option exchange program (the "Exchange Program ) whereby eligible 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 of one share of the Company's common stock on the day the new awards were issued, which was to be at least six months plus one day after the exchange options were cancelled. On April 17, 2003, in accordance with the Exchange Program, the Company cancelled options to purchase 33,138,386 shares of its common stock. On October 22, 2003, 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 was associated with this transaction. 103 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 104 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 105 of 143 NOTES TO 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 in 1998. Pursuant to the Director Plan, the Company's non- employee directors are granted an option to acquire 30,000 shares of Common Stock upon their initial election to the Board ("Initial Options'). The Initial Options vest and become exercisable in three equal annual installments on each of the first through third anniversaries of the grant date. On the fourth anniversary of a non-employee director's initial election to the Board and on each subsequent anniversary thereafter, the director will be entitled to receive an option to acquire 10,000 shares of Common Stock ("Annual Options ). Annual Options are fully vested and immediately exercisable on their date of grant. Rule 10b5-1 Trading Plans Certain of the Company's executive officers, including Mr. Timothy D. Cook, Mr. Peter Oppenheimer, Mr. Philip W. Schiller, and Dr. Bertrand Serlet, have entered into trading plans pursuant to Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934, as amended. A trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company's stock including the exercise and sale of employee stock options and shares acquired pursuant to the Company's employee stock purchase plan and upon vesting of restricted stock units. Employee Stock Purchase Plan The Company has a shareholder approved employee stock purchase plan (the "Purchase Plan ), under which substantially all employees may purchase common stock through 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. The number of shares authorized for issuance is limited to a total of 1 million shares per offering period. During 2006, 2005, and 2004, adjusted for the February 2005 stock split, 1.5 million, 2.3 million, and 3.9 million shares, respectively, were issued under the Purchase Plan. As of September 30, 2006, approximately 2.3 million shares were reserved for future issuance under the Purchase Plan. Employee Savings Plan The Company has an employee savings plan (the "Savings Plan ) qualifying as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating U.S. employees may defer a portion of their pre-tax earnings , up to the Internal Revenue Service annual contribution limit ($15,000 for calendar year 2006). The Company matches 50% to 100% of each employee's contributions, depending on length of service, up to a maximum 6% of the employee' s earnings . The Company's matching contributions to the Savings Plan were approximately $33 million, $28 million, and $24 million in 2006, 2005, and 2004, respectively. 104 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 105 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 106 of 143 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 thousands): Outstandin g Options Weighted- Shares Average Available Number of Weighted-Average Remaining Aggregate for Grant Shares Exercise Price Contractual Term Intrinsic Value Balance at September 27, 2003 91,660 126,024 $ 9.54 Restricted Stock Granted (5,030) Options Granted (36,394) 36,394 $ 11.48 Options Cancelled 6,010 (6,010) $ 10.35 Options Exercised - (45,686) $ 8.60 Plan Shares Expired (32 , 196 - - Balance at September 25, 2004 24,050 110,722 $ 10.52 Additional Options Authorized 49,000 Restricted Stock Units Granted (460) Options Granted (16,214) 16,214 $ 42.52 Options Cancelled 3,844 (3,844) $ 13.28 Restricted Stock Units Cancelled 230 Options Exercised - (49,871) $ 10.05 Plan Shares Expired -( 1 ,493) Balance at September 24, 2005 58,957 73,221 $ 17.79 Restricted Stock Units Granted (2,950) - Options Granted (3,881) 3,881 $ 65.28 Options Cancelled 2,325 (2,325) $ 29.32 Restricted Stock Units Cancelled 625 Options Exercised - (21,795) $ 11.78 Plan Shares Expired 82 - - Balance at September 30, 2006 54,994 52,982 $ 23.23 4.78 $ 2,848,896 Exercisable at September 30, 2006 31,184 $ 14.69 4.35 $ 1,942,486 Expected to Vest after September 30, 2006 21,798 $ 35.40 5.40 $ 906,410 In conjunction with the amendments to the 2003 Plan that were approved at the Annual Meeting of Shareholders held on April 21, 2005, the number of shares available for grant under the 2003 Plan will be reduced by two times the number of restricted shares and restricted stock units granted. This amendment is effective for all grants made after April 21, 2005. Aggregate intrinsic value represents the value of the Company's closing stock price on the last trading day of the fiscal period in excess of the exercise price multiplied by the number of options outstanding or exercisable. Total intrinsic value of options at time of exercise was $1.2 billion, $1.1 billion, and $266.9 million for 2006, 2005, and 2004, respectively. As of September 30, 2006, the Company had 3.41 million restricted stock units outstanding with a total grant-date fair value of $135.1 million that were excluded from the options outstanding balances in the preceding table. The weighted-average grant date fair value of restricted stock units granted during 2006, 2005, and 2004 was $70.92, $45.04, and $12.81, respectively. Aggregate intrinsic value of unvested restricted stock units at September 30, 2006 was $262.5 million. Restricted stock units that vested during 2006 totaled 2.47 million and had a fair value of $148.5 million as of the vesting date. Granted restricted stock units have been deducted from the shares available for grant under the Company's stock option plans. 105 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 106 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 107 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 8-Shareholders ' Equity (Continued) The number of shares of restricted stock that vested during 2006 was 10 million, which had a fair value of $646.6 million. The grant-date fair value of restricted stock that fully vested during 2006 was $7.48 per share. For the years ended September 30, 2006, September 24, 2005, and September 25, 2004, compensation expense related to restricted stock was $4.6 million, $24.9 million, and $24.9 million, respectively. Note 9-Stock-Based Compensation The Company has provided pro forma disclosures in Note 1 of these Notes 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 purchases. These pro forma effects have been estimated at the date of grant and beginning of the period, respectively, using the BSM option pricing model. The weighted average assumptions used for 2006, 2005, and 2004 and the resulting estimates of weighted-average fair value per share of options granted and for stock purchases during those periods are as follows: 2006 2005 2004 Expected life of stock options 3.56 years 3.57 years 3.50 years Expected life of stock purchases 6 months 6 months 6 months Interest rate-stock options 4.60% 3.73% 2.40% Interest rate-stock purchases 4.29% 2.54% 1.18% Volatility- stock options 40.34% 39.52% 40.00% Volatility- stock purchases 39.56% 40.88% 35.82% Dividend yields Weighted-average fair value of options granted during the year $ 23.16 $ 14.41 $ 3.69 Weighted-average fair value of stock purchases during the year $ 14.06 $ 7.55 $ 2.78 Pursuant to SFAS No. 123R, the expected volatility assumptions used by the Company are based on the historical volatility of the Company's common stock over the most recent period commensurate with the estimated expected life of the Company's stock options and other relevant factors including implied volatility in market traded options on the Company's common stock. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. Note 10-Commitments and Contingencies Lease Commitments The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company does not currently utilize any other off-balance-sheet financing arrangements. The major facility leases are for terms of 5 to 15 years and generally provide 106 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 107 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 108 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 10-Commitments and Contingencies (Continued) renewal options for terms of 3 to 5 additional years. Leases for retail space are for terms of 5 to 20 years, the majority of which are for 10 years, and often contain multi-year renewal options. As of September 30, 2006, the Company's total future minimum lease payments under noncancelable operating leases were approximately $1.2 billion, of which $887 million related to leases for retail space. Rent expense under all operating leases, including both cancelable and noncancelable leases, was $138 million, $ 140 million, and $103 million in 2006, 2005 , and 2004, respectively. Future minimum lease payments under noncancelable operating leases having remaining terms in excess of one year as of September 30, 2006, are as follows (in millions): Fiscal Years 2007 $ 134 2008 134 2009 134 2010 132 2011 122 Thereafter 498 Total minimum lease payments $1,154 Accrued Warranty and Indemnifications The Company offers a basic limited parts and labor warranty on its hardware products. The basic warranty period for hardware products is typically one 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. The Company provides currently for the estimated cost that may be incurred under its basic limited product warranties at the time related revenue is recognized. Factors considered in determining appropriate accruals for product warranty obligations include the size of the installed base of products subject to warranty protection, historical and projected warranty claim rates, historical and projected cost-per- claim, and knowledge of specific product failures that are outside of the Company's typical experience. The Company assesses the adequacy of its preexisting warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future estimates. The Company periodically provides updates to its applications and system software to maintain the software's compliance with specifications. The estimated cost to develop such updates is accounted for as warranty costs that are recognized at the time related software revenue is recognized. Factors considered in determining appropriate accruals related to such updates include the number of units delivered, the number of updates expected to occur, and the historical cost and estimated future cost of the resources necessary to develop these updates. The following table reconciles changes in the Company' s accrued warranties and related costs (in millions): 2006 2005 2004 Beginning accrued warranty and related costs $ 188 $ 105 $ 67 Cost of warranty claims (267) (188) (105) Accruals for product warranties 363 271 143 Ending accrued warranty and related costs $ 284 $ 188 $ 105 107 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 108 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 109 of 143 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. Other agreements entered into by the Company sometimes include indemnification provisions under which the Company could be subject to costs and/or damages in the event of an infringement claim against the Company or an indemnified third-party. However, the Company has not been required to make any significant payments resulting from such an infringement claim asserted against itself or an indemnified third-party and, in the opinion of management, does not have a potential liability related to unresolved infringement claims subject to indemnification that would have a material adverse effect on its financial condition, liquidity or results of operations. Therefore, the Company did not record a liability for infringement costs as of either September 30, 2006 or September 24, 2005. Concentrations in the Available Sources of Supply of Materials and Product Although most components essential to the Company's business are generally available from multiple sources, other key components (including microprocessors and application-specific integrated circuits ("ASICs )) are currently obtained by the Company from single or limited sources. Some other key components, while currently available to the Company from multiple sources, are at times subject to industry-wide availability and pricing pressures. In addition, the Company uses some components that are not common to the rest of the personal computer industry, and new products introduced by the Company often initially utilize custom components obtained from only one source until the Company has evaluated whether there is a need for and subsequently qualifies additional suppliers. If the supply of a key single-sourced component to the Company were to be delayed or curtailed, or in the event a key manufacturing vendor delays shipments of completed products to the Company, the Company's ability to ship related products in desired quantities and in a timely manner could be adversely affected. The Company's business and financial performance could also be adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued availability of these components may be affected if producers were to decide to concentrate on the production of common components instead of components customized to meet the Company's requirements. Finally, significant portions of the Company's CPUs, logic boards, and assembled products are now manufactured by outsourcing partners, primarily in various parts of Asia. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company's operating results could be adversely affected if its outsourcing partners were unable to meet their production obligations. Long-Term Supply Agreements During 2006, the Company entered into long-term supply agreements with Hynix Semiconductor, Inc., Intel Corporation, Micron Technology, Inc., Samsung Electronics Co., Ltd., and Toshiba Corporation to secure supply of NAND flash memory through calendar year 2010. As part of these agreements, the Company prepaid $1.25 billion for flash memory components during 2006. These prepayments will be applied to inventory purchases made over the life of each respective agreement. Contingencies The Company is subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and have not been fully adjudicated. In the opinion of management, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on its financial condition, liquidity, or results of operations. 108 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 109 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 110 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 10-Commitments and Contingencies (Continued) However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be 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 responsibility for environmentally safe disposal or recycling with the Company. Such laws and regulations have recently been passed in several jurisdictions in which the Company operates including various European Union member countries, Japan and certain states within the U.S. Although the Company does not anticipate any material adverse effects in the future based on the nature of its operations and the thrust of such laws, there is no assurance that such existing laws or future laws will not have a material adverse effect on the Company's financial condition, liquidity, or results of operations. Note 11-Segment Information and Geographic Data In accordance with SFAS No. 131, Disclosures about Segments ofan 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 the Company's reportable segments. The Company manages its business primarily on a geographic basis. The Company's reportable operating segments are comprised of the Americas, Europe, Japan, and Retail. The Americas, Europe, and Japan reportable segments do not include activities related to the Retail segment. The Americas segment includes both North and South America. The Europe segment includes European countries as well as the Middle East and Africa. The Retail segment operates Apple-owned retail stores in the U.S., Canada, Japan, and the U.K. Other operating segments include Asia-Pacific, which includes Australia and Asia except for Japan, and the Company's subsidiary, FileMaker, Inc. Each reportable geographic operating segment provides similar hardware and software products and similar services, and the accounting policies of the various segments are the same as those described in Note 1, "Summary of Significant Accounting Policies, except as described below for the Retail segment. The Company evaluates the performance of its operating segments based on net sales. The Retail segment's performance is also evaluated based on operating income. Net sales for geographic segments are generally based on the location of the customers. Operating income for each segment includes net sales to third parties, related cost of sales, and operating expenses directly attributable to the segment. Operating income for each segment excludes other income and expense and certain expenses that are managed outside the operating segments. Costs excluded from segment operating income include various corporate expenses such as manufacturing costs and variances not included in standard costs, research and development, corporate marketing expenses, stock-based compensation expense, income taxes, various nonrecurring charges, and other separately managed general and administrative expenses including certain 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 facilities, miscellaneous corporate infrastructure, goodwill and other acquired intangible assets, and retail store construction-in-progress that is not subject to depreciation. Except for the Retail segment, capital 109 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 110 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 111 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 11-Segment Information and Geographic Data (Continued) expenditures for long-lived assets are not reported to management by segment. Capital expenditures by the Retail segment were $200 million, $132 million, and $104 million for 2006, 2005, and 2004, respectively.Operating income for all segments, except Retail, includes cost of sales at manufacturing standard cost, other cost of sales, related sales and marketing costs, and certain general and administrative costs. This measure of operating income, which includes manufacturing profit, provides a comparable basis for comparison between the Company's various geographic segments. Certain manufacturing expenses and related adjustments not included in segment cost of sales , including variances between standard and actual manufacturing costs and the mark-up above standard cost for product supplied to the Retail segment, are included in corporate expenses. Management assesses the operating performance of the Retail segment differently than it assesses the operating performance of the Company's geographic segments. The Retail segment revenue and operating income is intended to depict a measure comparable to that of the Company's major channel partners in the U.S. operating retail stores so the Company can evaluate the Retail segment performance as if it were a channel partner. Therefore, the Company makes three significant adjustments to the Retail segment 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 sales programs and incentives provided to those channel partners and the Company's cost to support those partners. For the years ended September 30, 2006, September 24, 2005, and September 25, 2004, this resulted in the recognition of additional cost of sales above standard cost by the Retail segment and an offsetting benefit to corporate expenses of approximately $663 million, $435 million, and $213 million, respectively. Second, the Company's service and support contracts are transferred to the Retail segment at the same cost as that charged to the Company's major retail channel partners in the U.S., resulting in a measure of revenue and gross margin for those items that is comparable between the Company's retail stores and those retail channel partners. The Retail segment recognizes the full amount of revenue and cost of sales of 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 September 30, 2006, this resulted in the recognition of net sales and cost of sales by the Retail segment, with corresponding offsets in other operating segments, of $159 million and $109 million, respectively. For the year ended September 24, 2005, this resulted in the recognition of net sales and cost of sales by the Retail segment of $92 million and $64 million, respectively. For the year ended September 25, 2004, this resulted in the recognition of net sales and cost of sales by the Retail segment of $54 million and $37 million, respectively. Third, the Company had opened a total of eight high-profile stores as of September 30, 2006. These high-profile stores are larger than the Company's typical retail stores and were designed to further promote brand awareness and provide a venue for certain corporate sales and marketing activities, including corporate briefings. As such, the Company allocates certain operating expenses associated with these stores to corporate marketing expense to reflect the estimated benefit realized Company-wide. The allocation of these operating costs is based on the amount incurred for a high-profile store in excess of that incurred by a more typical Company retail location. Expenses allocated to corporate marketing resulting 110 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 111 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 112 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 11-Segment Information and Geographic Data (Continued) from the operations of these stores were $33 million, $31 million, and $16 million for the years ended September 30, 2006, September 24, 2005, and September 25, 2004, respectively.Summary information by operating segment follows (in millions): 2006 2005 2004 Americas: Net sales $ 9,307 $ 6,590 $ 4,019 Operating income $1,665 $ 798 $ 465 Depreciation, amortization, and accretion $ 6 $ 6 $ 6 Segment assets (a) $ 896 $ 705 $ 563 Europe: Net sales $ 4,094 $ 3,073 $ 1,799 Operating income $ 607 $ 454 $ 280 Depreciation, amortization, and accretion $ 4 $ 4 $ 4 Segment assets $ 471 $ 289 $ 259 Japan: Net sales $1,208 $ 920 $ 677 Operating income $ 201 $ 140 $ 115 Depreciation, amortization, and accretion $ 3 $ 3 $ 2 Segment assets $ 181 $ 165 $ 114 Retail: Net sales $ 3,359 $ 2,350 $ 1,185 Operating income $ 198 $ 151 $ 39 Depreciation, amortization, and accretion (b) $ 59 $ 43 $ 35 Segment assets (b) $ 651 $ 589 $ 351 Other Segments (c): Net sales $1,347 $ 998 $ 599 Operating income $ 235 $ 118 $ 90 Depreciation, amortization, and accretion $ 3 $ 2 $ 2 Segment assets $ 180 $ 133 $ 124 (a) The Americas asset figures do not include fixed assets held in the U.S. Such fixed assets are not allocated specifically to the Americas segment and are included in the corporate assets figures below. (b) Retail segment depreciation and asset figures reflect the cost and related depreciation of its retail stores and related infrastructure. Retail store construction-in-progress, which is not subject to depreciation, is reflected in corporate assets. (c) Other Segments include Asia-Pacific and FileMaker. 111 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 112 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 113 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 11-Segment Information and Geographic Data (Continued) A reconciliation of the Company 's segment operating income and assets to the consolidated financial statements follows (in millions): 2006 2005 2004 As Restated ( 1) As Restated (1) Segment operating income $ 2,906 $ 1,661 $ 989 Retail manufacturing margin (a) 663 435 213 Other corporate expenses, net (b) (953) (404) (820) Stock-based compensation expense (163) (49) (46) Restructuring costs (23 ) Consolidated operating income $ 2,453 $ 1,643 $ 313 Segment assets $ 2,379 $ 1,881 $1,411 Corporate assets 14,826 9,635 6,628 Consolidated assets $17,205 $11,516 $ 8,039 Segment depreciation, amortization, and accretion $ 75 $ 58 $ 49 Corporate depreciation, amortization, and accretion 150 121 101 Consolidated depreciation, amortization, and accretion $ 225 $ 179 $ 150 (1) See Note 2, "Restatement of Consolidated Financial Statements. (a) Represents the excess of the Retail segment's cost of sales over the Company's standard cost of sales for products sold through the Retail segment. (b) Corporate expenses 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 accounted for more than 10% of net sales in 2006, 2005, or 2004. Net sales and long-lived assets related to operations in the U.S., Japan, and other foreign countries are as follows (in millions): 2006 2005 2004 Net sales: U.S. $11,486 $ 8,194 $ 4,893 Japan 1,327 1,021 738 Other countries 6,502 4,716 2,648 Total net sales $ 19,315 $ 13,931 $ 8,279 Long-lived assets: U.S. $ 1,150 $ 738 $ 637 Japan 64 63 52 Other countries 154 112 72 Total long-lived assets $ 1,368 $ 913 $ 761 112 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 113 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 114 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 11-Segment Information and Geographic Data (Continued) Information regarding net sales by product is as follows (in millions): 2006 2005 2004 Net sales: Desktops (a) $ 3,319 $ 3,436 $ 2,373 Portables (b) 4,056 2,839 2,550 Total Macintosh net sales 7,375 6,275 4,923 iPod 7,676 4,540 1,306 Other music related products and services (c) 1,885 899 278 Peripherals and other hardware (d) 1,100 1,126 951 Software, service, and other net sales (e) 1,279 1,091 821 Total net sales $ 19,315 $ 13,931 $ 8,279 (a) Includes iMac, eMac, Mac mini, Power Mac, Mac Pro, and Xserve product lines. (b) Includes MacBook, iBook, MacBook Pro, and PowerBook product lines. (c) Consists of 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 software, third-party software, AppleCare, and Internet services. Note 12-Related Party Transactions and Certain Other Transactions In March 2002, the Company entered into a Reimbursement Agreement with its CEO, Steve Jobs, for the reimbursement of expenses incurred by Mr. Jobs in the operation of his private plane when used for Company business. The Reimbursement Agreement became effective for expenses incurred by Mr. Jobs for Company business purposes since he took delivery of the plane in May 2001. The Company recognized a total of $202,000, $1,100,000, and $483,000 in expenses pursuant to the Reimbursement Agreement during 2006, 2005, and 2004, respectively. All expenses recognized pursuant to the Reimbursement Agreement have been included in selling, general, and administrative expenses in the consolidated statements of operations. In 2006, the Company entered into an agreement with Pixar to sell certain of Pixar's short films on the iTunes Store. Mr. Jobs was the CEO, Chairman, and a large shareholder of Pixar. On May 5, 2006, The Walt Disney Company ("Disney ) acquired Pixar, which resulted in Pixar becoming a wholly-owned subsidiary of Disney. Upon Disney's acquisition of Pixar, Mr. Jobs' shares of Pixar common stock were exchanged for Disney's common stock and he was elected to the Disney Board of Directors. Royalty expense recognized by the Company under the arrangement with Pixar from September 25, 2005 through May 5, 2006 was less than $1 million. 113 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 114 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 115 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 13-Selected Quarterly Financial Information (Unaudited) The following tables set forth a summary of the Company's quarterly financial information for each of the four quarters 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 $ 4,837 $ 4,370 $ 4,359 $ 5,749 Cost of sales (1) 3,425 3,045 3,062 4,185 Gross margin 1,412 1,325 1,297 1,564 Operating expenses: Research and development (1) 179 175 176 182 Selling, general, and administrative (1) 625 584 592 632 Total operating expenses 804 759 768 814 Operating income 608 566 529 750 Other income and expense 113 95 76 81 Income before provision for income taxes 721 661 605 831 Provision for income taxes 179 189 195 266 Net income $ 542 $ 472 $ 410 $ 565 Earnings per common share: Basic $ 0.63 $ 0.55 $ 0.49 $ 0.68 Diluted $ 0.62 $ 0.54 $ 0.47 $ 0.65 Shares used in computing earnings per share (in thousands): Basic 854,187 851,375 840,910 830,781 Diluted 878,757 876,368 878,537 874,207 (1) Includes stock-based compensation expense, which was allocated as follows: Cost of sales $ 5 $ 6 $ 5 $ 5 Research and development $ 13 $ 12 $ 13 $ 15 Selling, general, and administrative $ 22 $ 19 $ 24 $ 24 The net of tax impact of the stock-based compensation adjustments in 2006, which amounted to $4 million, was recorded by the Company in its fourth quarter of 2006 and is described in Note 2, "Restatement of Consolidated Financial Statements. Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore , the sum of quarterly 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. Net 114 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 115 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 116 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 13-Selected Quarterly Financial Information (Unaudited) (Continued) income during the fourth quarter of 2006 benefited by $20 million due to the settlement of prior year tax audits in the U.S. 2005 Fourth Quarter Third Quarter Second Quarter First Quarter As Restated (1) As Restated (1) As Restated (1) As Restated (1) Net sales $ 3,678 $ 3,520 $ 3,243 $ 3,490 Cost of sales (2) 2,643 2,476 2,275 2,495 Gross margin 1,035 1,044 968 995 Operating expenses: Research and development (2) 147 145 120 123 Selling, general, and administrative (2) 471 473 448 472 Total operating expenses 618 618 568 595 Operating income 417 426 400 400 Other income and expense 60 46 33 26 Income before provision for income taxes 477 472 433 426 Provision for income taxes 49 153 145 133 Net income $ 428 $ 319 $ 288 $ 293 Earnings per common share: Basic $ 0.52 $ 0.39 $ 0.36 $ 0.37 Diluted $ 0.49 $ 0.37 $ 0.34 $ 0.35 Shares used in computing earnings per share (in thousands): Basic 821,420 815,092 808,172 789,032 Diluted 866,483 860,803 857,568 838,805 (1) See Note 2, "Restatement of Consolidated Financial Statements. (2) Includes stock-based compensation expense, which was allocated as follows: Cost of sales $ 1 $ - $ 1 $ 1 Research and development $ 1 $ 2 $ 2 $ 2 Selling, general, and administrative $ 10 $ 10 $ 9 $ 10 The impact of the stock-based compensation adjustments was not significant to any of the interim balance sheets for fiscal year 2005. Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share. Net income during the fourth quarter of 2005 benefited by $81 million from the reversal of certain tax contingency reserves and adjustments to net deferred tax assets, including reductions to valuation allowances. 115 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 116 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 117 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 13-Selected Quarterly Financial Information (Unaudited) (Continued) The following tables present the effects of adjustments made to the Company's previously reported quarterly financial information as of September 24, 2005 (in millions, expect per share amounts): Three Months Ended September 24, 2005 Three Months Ended June 25, 2005 As As As As Reported Adjustments (1) Restated Reported Adjustments (1) Restated Net sales $ 3,678 $ - $ 3,678 $ 3,520 $ - $ 3,520 Cost of sales (2) 2,643 - 2,643 2,476 - 2,476 Gross margin 1,035 - 1,035 1,044 - 1,044 Operating expenses: Research and development (2) 147 - 147 145 - 145 Selling, general, and administrative (2) 470 1 471 472 1 473 Total operating expenses 617 1 618 617 1 618 Operating income 418 (1) 417 427 (1) 426 Other income and expense 60 - 60 46 - 46 Income before provision for income taxes 478 (1) 477 473 (1) 472 Provision for income taxes 48 1 49 153 153 Net income $ 430 $ (2 ) $ 428 $ 320 1 ) $ 319 Earnings per common share: Basic $ 0.52 $ $ 0.52 $ 0.39 $ - $ 0.39 Diluted $ 0.50 $ (0.01) $ 0.49 $ 0.37 $ - $ 0.37 Shares used in computing earnings per share (in thousands): Basic 821,420 - 821,420 815,092 - 815,092 Diluted 866,404 79 866,483 860,688 115 860,803 (1) See Note 2, "Restatement of Consolidated Financial Statements. (2) Includes stock-based compensation expense, which was allocated as follows: Cost of sales $ 1 $ - $ 1 $ - $ - $ - Research and development $ 1 $ - $ 1 $ 2 $ - $ 2 Selling, general, and administrative $ 9 $ 1 $ 10 $ 9 $ 1 $ 10 116 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 117 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 118 of 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 13-Selected Quarterly Financial Information (Unaudited) (Continued) Three Months Ended March 26, 2005 Three Months Ended December 25, 2004 As As As As Reported Adjustments (1) Restated Reported Adjustments (1) Restated Net sales $ 3,243 $ $ 3,243 $ 3,490 $ - $ 3,490 Cost of sales (2) 2,275 2,275 2,494 1 2,495 Gross margin 968 968 996 1 995 Operating expenses: Research and development (2) 119 1 120 123 - 123 Selling, general, and administrative (2) 447 1 448 470 2 472 Total operating expenses 566 2 568 593 2 595 Operating income 402 (2) 400 403 (3) 400 Other income and expense 33 - 33 26 - 26 Income before provision for income taxes 435 (2) 433 429 (3) 426 Provision for income taxes 145 - 145 134 133 Net income $ 290 $ 2 ) $ 288 $ 295 _L2) $ 293 Earnings per common share: Basic $ 0.36 $ - $ 0.36 $ 0.37 $ - $ 0.37 Diluted $ 0.34 $ - $ 0.34 $ 0.35 $ - $ 0.35 Shares used in computing earnings per share (in thousands): Basic 808,172 - 808,172 789,032 - 789,032 Diluted 857,011 557 857,568 838,174 631 838,805 (1) See Note 2, "Restatement of Consolidated Financial Statements. (2) Includes stock-based compensation expense, which was allocated as follows: Cost of sales $ 1 $ - $ 1 $ - $ 1 $ 1 Research and development $ 1 $ 1 $ 2 $ 2 $ - $ 2 Selling, general, and administrative $ 8 $ 1 $ 9 $ 8 $ 2 $ 10 117 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 118 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 119 of 143 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Apple Computer, Inc.: We have audited the accompanying consolidated balance sheets of Apple Computer, Inc. and subsidiaries (the Company) as of September 30, 2006 and 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. 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 our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2006 and September 24, 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2006, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the Consolidated Financial Statements, the consolidated financial statements as of September 24, 2005 and for each of the years in the two-year period ended September 24, 2005 have been restated. As discussed in Note 1 to the Consolidated Financial Statements, effective September 25, 2005, the Company adopted the provision of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of September 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 29, 2006 expressed an unqualified opinion on management' s assessment of, and the effective operation of internal control over financial reporting. /s/ KPMG LLP Mountain View, California December 29, 2006 118 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 119 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 120 of 143 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Apple Computer, Inc.: We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting, that Apple Computer, Inc. and subsidiaries maintained effective internal control over financial reporting as of September 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Apple Computer, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Apple Computer, Inc.'s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Apple Computer, Inc. maintained effective internal control over financial reporting as of September 30, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control- Integrated Framework issued by COSO. Also, in our opinion, Apple Computer, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2006, based on criteria established in Internal Control- Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Apple Computer, Inc. as of September 30, 2006 and 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 our report dated December 29, 2006 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Mountain View, California December 29, 2006 119 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 120 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 121 of 143 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Special Committee Review into Stock Option Grant Practices and Restatement As discussed in the Explanatory Note preceding Part I and in Note 2 in Notes to Consolidated Financial Statements of this Form 10-K, the Company on June 29, 2006, announced that an internal review had discovered irregularities related to the issuance of certain past stock option grants, including a grant to its CEO Steve Jobs. The Company also announced that a Special Committee of outside directors ("Special Committee ) had been formed and had hired independent counsel to conduct a full investigation of the Company's past stock option granting practices. As a result of the internal review and the independent investigation, management has concluded, and the Audit and Finance Committee of the Board of Directors agrees, that incorrect measurement dates were used for financial accounting purposes for certain stock option grants made in prior periods. Therefore, the Company has recorded additional 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. The internal review and the Special Committee's independent investigation identified a number of occasions between October 1996 and January 2003 (the "relevant period ) when the Company used incorrect measurement dates for stock option grants. The independent investigation also found that during the relevant period: • Procedures for granting, accounting, and reporting of stock option grants did not include sufficient safeguards to prevent manipulation • The grant dates for a number of grants were intentionally selected in order to obtain favorable exercise prices • Two former 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 from these grants or appreciate the accounting implications From 2003 through 2005, the Company implemented improvements to procedures, processes, and systems to provide additional safeguards and greater internal control over the stock option granting and administration function in compliance with the Sarbanes-Oxley Act ("SOX ) and evolving accounting guidance. These improvements included: • Documenting and assessing the design and operation of internal controls • Segregating responsibilities, adding reviews and reconciliations, and redefining roles and responsibilities • Upgrading systems and system controls that support the processes • Obtaining training in the stock administration function • Implementing before the adoption of SFAS No. 123R the practice of using the receipt of the final Board or Compensation Committee approval as the grant and measurement date for stock option grants • Identifying key controls, developing test plans, and testing controls in the stock granting and administration function 120 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 121 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 122 of 143 • Certifying stock administration and other controls for SOX Section 404 compliance in fiscal year 2005 The internal review and the independent investigation discovered no stock option grant after January 2003 that required accounting adjustments. In coming to the conclusion that the Company's disclosure controls and procedures and the Company's internal control over financial reporting were effective as of September 30, 2006, management considered, among other things, the impact of the restatement to the financial statements and the effectiveness of the internal controls in this area as of the fiscal years ended 2006 and 2005. Management has concluded, therefore, that control deficiencies resulting in the restatement of previously issued financial statements did not constitute a material weakness in disclosure controls and procedures, or internal controls and procedures over financial reporting, as of September 30, 2006. In addition to the significant improvements implemented between 2003 and 2005 discussed above, the Company will adopt other measures identified by the Special Committee and management to enhance the oversight of the stock option granting and administration function and the review and preparation of financial statements, including: • The Company will engage experienced General Counsel, increase the resources of the Corporate Legal Department, and review the adequacy of its procedures and practices • The CFO will arrange 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 the granting of stock options and provide education and training to those who implement those policies and processes, as needed • The Company will establish improved procedures for regular communication among the General Counsel, the CFO, and stock administrators to improve monitoring of all Company practices with regard to stock option grants, including formal written confirmation that all grant dates correspond precisely with the dates authorized • The Company will also establish improved procedures for the review of the preparation and presentation of financial statements by senior management Evaluation ofDisclosure Controls and Procedures Based on an evaluation under the supervision and with the participation of the Company's management, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act) were effective as of September 30, 2006 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 121 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 122 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 123 of 143 Inherent Limitations Over Internal Controls The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company' s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of 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 provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management's Annual Report on Internal Control Over Financial Reporting The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (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 of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the Company's internal control over financial reporting was effective as of September 30, 2006. The Company's independent registered 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 119 of this Form 10-K. Changes in Internal Control Over Financial Reporting There were no significant changes in the Company's internal control over financial reporting identified in management's evaluation during the fourth quarter of fiscal 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information None. 122 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 123 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 124 of 143 PART III Item 10. Directors and Executive Officers of the Registrant Directors Listed below are the Company's seven directors whose terms expire at the next annual meeting of shareholders. Name Position With the Company Age Director Since William V. Campbell Co-lead Director 66 1997 Millard S. Drexler Director 62 1999 Albert A. Gore, Jr. Director 58 2003 Steven P. Jobs Director and Chief Executive Officer 51 1997 Arthur D. Levinson Co-lead Director 56 2000 Eric E. Schmidt Director 51 2006 Jerome B. York Director 68 1997 William V. Campbell has been Chairman of the Board of Directors of Intuit, Inc. ("Intuit') since August 1998. From September 1999 to January 2000, Mr. Campbell acted as Chief Executive Officer of Intuit. From April 1994 to August 1998, Mr. Campbell was President and Chief Executive Officer and a director of Intuit. From January 1991 to December 1993, Mr. Campbell was President and Chief Executive Officer of GO Corporation. Mr. Campbell also serves on the Board of Directors of Opsware, Inc. Millard S. Drexler has been Chairman and Chief Executive Officer of J. Crew Group, Inc. since January 2003. Previously, Mr. Drexler was Chief Executive Officer of Gap Inc. from 1995 and President from 1987 until September 2002. Mr. Drexler was also a member of the Board of Directors of Gap Inc. from November 1983 until October 2002. Albert A. Gore, Jr. has served as a Senior Advisor to Google, Inc. since 2001. He has also served as Executive Chairman of Current TV since 2002 and as Chairman of Generation Investment Management since 2004. He is a visiting professor at Middle Tennessee State University. Mr. Gore was inaugurated as the 45th Vice President of the United States in 1993. He was re-elected in 1996 and served for a total of eight years as President of the Senate, a member of the Cabinet and the National Security Council. Prior to 1993, he served eight years in the U.S. Senate and eight years in the U.S. House of Representatives. Steven P. Jobs is one of the Company's co-founders and currently serves as its Chief Executive Officer. Mr. Jobs is also a director of The Walt Disney Company. Arthur D. Levinson, Ph.D. has been Chief Executive Officer and a Director of Genentech Inc. ("Genentech ") since July 1995. Dr. Levinson has been Chairman of the Board of Directors of Genentech since September 1999. He joined Genentech in 1980 and served in a number of executive positions, including Senior Vice President of R&D from 1993 to 1995. Dr. Levinson also serves on the Board of Directors of Google, Inc. Eric E. Schmidt, Ph.D. has served as the Chief Executive Officer of Google, Inc. ("Google ) since July 2001 and as a member of Google's Board of Directors since March 2001, where he served as Chairman of the Board from March 2001 to April 2004. In April 2004, Dr. Schmidt was named Chairman of the Executive Committee of Google's Board of Directors. From April 1997 to November 2001, Dr. Schmidt served as Chairman of the Board of Directors of Novell, 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 controls, since September 2003. From January 2000 until September 2003, Mr. York was 123 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 124 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 125 of 143 Chairman and Chief Executive Officer of MicroWarehouse, Inc., a reseller of computer hardware, software and peripheral products. From September 1995 to October 1999, he was Vice Chairman of Tracinda Corporation. From May 1993 to September 1995 he was Senior Vice President and Chief Financial Officer of IBM Corporation, and served as a member of IBM's Board of Directors from January 1995 to August 1995. Mr. York is also a director of Tyco International Ltd. Role of 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 being served. To satisfy this duty, the directors take a proactive, focused approach to their position, and set standards to ensure that the Company is committed to business success through maintenance of the highest standards of responsibility and ethics. Members of the Board bring to the Company a wide range of experience, knowledge and judgment. These varied skills mean that governance is far more than a "check the box approach to standards or procedures. The governance structure in the Company is designed to be a working structure for principled actions, effective decision-making and appropriate monitoring of both compliance and performance. The key practices and procedures of the Board are outlined in the Corporate Governance Guidelines available on the Company's website at www.apple.com/investor. Board Committees The Board has a standing Compensation Committee, a Nominating and Corporate Governance Committee ("Nominating Committee ") and an Audit and Finance Committee ("Audit Committee ). All committee members are independent under the listing standards of the NASDAQ Global Select Market. The Audit Committee is primarily responsible for overseeing the services performed by the Company's independent auditors and internal audit department, evaluating the Company's accounting policies and its system of internal controls and reviewing significant financial transactions. Members of the Audit Committee are Messrs. Campbell and York and Dr. Levinson. The Compensation Committee is primarily responsible for reviewing the compensation arrangements for the Company's executive officers, including the Chief Executive Officer, and for administering the Company's equity compensation plans. Members of the Compensation Committee are Messrs. Campbell, Drexler, and Gore. The Nominating Committee assists the Board in identifying qualified individuals to become directors, determines the composition of the Board and its committees, monitors the process to assess Board effectiveness and helps develop and implement the Company's corporate governance guidelines. The Nominating Committee also considers nominees proposed by shareholders. Members of the Nominating Committee are Messrs. Drexler and Gore and Dr. Levinson. The Audit, Compensation and Nominating Committees operate under written charters adopted by the Board. These charters are available on Apple's website at www.apple.com/investor. Audit Committee Financial Expert All members of the Company's Audit Committee, Messrs. Campbell and York and Dr. Levinson, qualify as "audit committee financial experts under Item 401(h) of Regulation S-K and are considered "independent as 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. A copy of this code, 124 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 125 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 126 of 143 "Ethics: The Way We Do 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 regarding executive officers of the Company. Information pertaining to Mr. Jobs, who is both a director and an executive officer of the Company, may be found in the section entitled "Directors. Timothy D. Cook, Chief Operating Officer (age 46), joined the Company in March 1998. Mr. Cook also served with the Company as Executive Vice President, Worldwide Sales and Operations from 2002 to 2005. In 2004, his responsibilities were expanded to include the Company's Macintosh hardware engineering. From 2000 to 2002, Mr. Cook served in the role of Senior Vice President, Worldwide Operations, Sales , Service and Support. From 1998 to 2000, Mr. Cook served in the position of Senior Vice President, Worldwide Operations. Prior to joining the Company, Mr. Cook held the position of Vice President, Corporate Materials for Compaq Computer Corporation ("Compaq'). Previous to his work at Compaq, Mr. Cook was the Chief Operating Officer of the Reseller Division at Intelligent Electronics. Mr. Cook also spent 12 years with IBM, most recently as Director of North American Fulfillment. Mr. Cook also serves as a member of the Board of Directors of Nike, Inc. Anthony Fadell, Senior Vice President, iPod Division (age 37), joined the Company in 2001. From 2004 to April 2006, Mr. Fadell was Vice President of iPod Engineering. From 2001 to 2004, Mr. Fadell was the Senior Director of the Company's iPod Engineering Team. Prior to joining Apple, Mr. Fadell was a co-founder, CTO, and director of engineering of the Mobile Computing Group at Philips Electronics where he was responsible for all aspects of business and product development for a variety of products. Mr. Fadell later became VP of Business Development for Philips U.S. Strategy & Ventures, focusing on building the company's digital media strategy and investment portfolio. Prior to joining Philips, Mr. Fadell was a hardware and software architect at General Magic. Ronald B. Johnson, Senior Vice President, Retail (age 48), joined the Company in January 2000. Prior to joining the Company, Mr. Johnson spent 16 years with Target Stores, most recently as Senior Merchandising Executive. Peter Oppenheimer, Senior Vice President and Chief Financial Officer (age 44), joined the Company in July 1996. Mr. Oppenheimer also served with the Company in the position of Vice President and Corporate Controller, and as Senior Director of Finance for the Americas. Prior to joining the Company, Mr. Oppenheimer was CFO of one of the four business units for Automatic Data Processing, Inc. ("ADP'). Prior to joining ADP, Mr. Oppenheimer spent six years in the Information Technology Consulting Practice with Coopers and Lybrand. Donald J. Rosenberg, Senior Vice President, General Counsel and Secretary (age 55), joined the Company in December 2006. Prior to joining the Company Mr. Rosenberg spent 31 years with IBM, most recently as Senior Vice President and General Counsel. Prior to that he held a number of senior positions at IBM, including over ten years as Vice President and Assistant General Counsel for litigation. Philip W. Schiller, Senior Vice President, Worldwide Product Marketing (age 46), rejoined the Company in 1997. Prior to rejoining the Company, Mr. Schiller was Vice President of Product Marketing at Macromedia, Inc. from 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 46), joined the Company in February 1997 upon the Company' s acquisition of NeXT. At NeXT, Dr. Serlet held several engineering 125 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 126 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 127 of 143 and managerial positions, including Director of Web Engineering. Prior to NeXT, from 1985 to 1989, Dr. Serlet worked as a research engineer at Xerox PARC. Sina Tamaddon, Senior Vice President, Applications (age 49), joined the Company in September 1997. Mr. Tamaddon has also served with the Company in the position of Senior Vice President, Worldwide Service and Support, and Vice President and General Manager, Newton Group. Before joining the Company, Mr. Tamaddon held the position of Vice President, Europe with NeXT from September 1996 through March 1997. From August 1994 to August 1996, Mr. Tamaddon held the position of Vice President, Professional Services with NeXT. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of securities ownership and changes 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 of such forms furnished to the Company or written representations that no Forms 5 were required, the Company believes that all Section 16(a) filing requirements were met during fiscal year 2006, except for the following: (i) one Form 4 was filed 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 and 25 shares, respectively, of the Company's Common Stock in June 2006 and August 2006. 126 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 127 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 128 of 143 Item 11. Executive Compensation Information Regarding Executive Compensation The following table summarizes compensation information for the last three fiscal years for (i) Mr. Jobs, Chief Executive Officer, and (ii) the four most highly compensated executive officers other than the Chief Executive Officer who were serving as executive officers of the Company at the end of the fiscal year (collectively, the "Named Executive Officers'). SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation Securities Restricted Underlying All Other Fiscal Salary Bonus Stock Award Options* Compensation Name and Principal Position Year ($) ($) ($)(1) (#) ($) Steven P. Jobs 2006 1 -(2) Chief Executive Officer 2005 1 2004 1 Timothy D. Cook 2006 696,880 525,000 21,603,000(3) 13,200(5) Chief Operating Officer 2005 602,434 600,239 12,600(5) 2004 602,632 - 7,650,000(4) 12,588(5) Peter Oppenheimer 2006 615,006 450,000 14,402,000(3) 13,200(5) Senior Vice President and 2005 552,189 550,202 21,092(5) Chief Financial Officer 2004 450,739 - 6,375,000(4) - 3,808(5) Ronald B . Johnson 2006 592,476 450,000 14,402,000(3) Senior Vice President, Retail 2005 552,795 550,202 2004 484,836 1,500,000 6,375,000(4) Philip W. Schiller 2006 494,942 375,000 10,801,500(3) - 5,769(5) Senior Vice President, 2005 402,244 400,239 5,539(5) Worldwide Product Marketing 2004 402,277 - 6,375,000(4) - 5,308(5) (1) The following table reflects the aggregated restricted stock holdings for each of the Company's Named Executive Officers as of the end of the 2006 fiscal year and the value of such restricted stock based on $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 Value of Unvested Restricted Shares at Restricted Shares at September 30, 2006 September 30, 2006 Named Executive Officer (#) M Steven P. Jobs 0 0 Timothy D. Cook (a) 600,000 46,188,000 Peter Oppenheimer (b) 450,000 34,641,000 Ronald B. Johnson (b) 450,000 34,641,000 Philip W. Schiller (c) 400,000 30,792,000 (a) Includes 300,000 unvested restricted stock units that are part of a grant of 600,000 restricted stock units (split- adjusted) made on March 24, 2004. Fifty percent (50%) of such units vested in March 2006, and the remainder is scheduled to vest in March 2008. Also includes 300,000 unvested restricted stock units that were granted on December 14, 2005, and are scheduled to 127 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 128 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 129 of 143 vest in their entirety in March 2010. The restricted stock units do not include the right to receive dividends prior to vesting. (b) Includes 250,000 unvested restricted stock units that are part of a grant of 500,000 restricted stock units (split- adjusted) made on March 24, 2004. Fifty percent (50%) of such units vested in March 2006, and the remainder is scheduled to vest in March 2008. Also includes 200,000 unvested restricted stock units that were granted on December 14, 2005, and are scheduled to vest in their entirety in March 2010. The restricted stock units do not include the right to receive dividends prior to vesting. (c) Includes 250,000 unvested restricted stock units that are part of a grant of 500,000 restricted stock units (split- adjusted) made on March 24, 2004. Fifty percent (50%) of such units vested in March 2006, and the remainder is scheduled to vest in March 2008. Also includes 150,000 unvested restricted stock units that were granted on December 14, 2005, and are scheduled to vest in their entirety in March 2010. The restricted stock units do not include the right to receive dividends prior to vesting. (2) In March 2003, Mr. Jobs voluntarily cancelled all of his outstanding options, excluding those granted to him in his capacity as a Director. In March 2003, the Board awarded Mr. Jobs 10 million (split-adjusted) restricted shares of the Company's Common Stock, which vested in full in March 2006. (3) Market value of restricted stock units granted on December 14, 2005 (based on $72.01 per share, the closing price of the Company's common stock on the NASDAQ Global Select Market on the day of grant). The restricted stock units vest in March 2010. (4) Market value of restricted stock units granted on March 24, 2004 (based on $12.75 per share, the split-adjusted closing price of the Company's common stock on the NASDAQ Global Select Market on the day of grant). The restricted stock units granted on this date generally vest over four years with 50% of the total number of shares vesting on each of the second and fourth anniversaries of the grant date. (5) Consists of matching contributions made by the Company in accordance with the terms of the 401(k) plan. Option Grants in Last Fiscal Year There were no options granted to the Named Executive Officers during fiscal year 2006. Grants of restricted stock units to the Named Executive Officers are disclosed above in the Summary Compensation Table. Options Exercised and Year-End Option Holdings The following table provides information about stock option exercises by the Named Executive Officers during fiscal year 2006 and stock options held by each of them at fiscal year-end. The table has been adjusted to reflect the Company's two-for- one stock split in February 2005. 128 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 129 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 130 of 143 AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES Number of Securities Underlying Value of Unexercised Shares Unexercised In-the-Money Options Acquired on Value Options at Fiscal at Fiscal Exercise Realized Year-End (#) Year-End ($)(1) Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable Steven P. Jobs 120,000 (2) $ 8,547,600(2) Timothy D. Cook - - - -(3) Peter Oppenheimer 1,145, 000 $ 55 ,851,613 - -(3) - Ronald B. Johnson 350,000 $ 15 ,653,210 1,900,000 -(3) $ 102,994,688 Philip W. Schiller 162,500 $ 9,454,728 - -(3) - (1) Market value of securities underlying in-the-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. (2) Consists of 120,000 options granted to Mr. Jobs in his capacity as a director pursuant to the 1997 Director Stock Option Plan. Since accepting the position of CEO, Mr. Jobs is no longer eligible to receive option grants under the Director Plan. In March 2003, Mr. Jobs voluntarily cancelled all of his outstanding options, excluding those granted to him in his capacity as a director. (3) Excludes 600,000 restricted stock units granted to Mr. Cook that are currently unvested, 450,000 restricted stock units granted to each of Messrs. Oppenheimer and Johnson that are currently unvested, and 400,000 restricted stock units granted to Mr. Schiller that are currently unvested. Director Compensation The form and amount of director compensation are determined by the Board after a review of recommendations made by the Nominating Committee. The current practice of the Board is to base a substantial portion of a director's annual retainer on equity. In 1998, shareholders approved the 1997 Director Stock Option Plan (the "Director Plan') and 1,600,000 shares were reserved for issuance thereunder. Pursuant to the Director Plan, the Company's non-employee directors are granted an option to acquire 30,000 shares of Common Stock upon their initial election to the Board ("Initial Options'). The Initial Options vest and become exercisable in three equal annual installments on each of the first through third anniversaries of the grant date. On the fourth anniversary of a non-employee director's initial election to the Board and on each subsequent anniversary thereafter, the director will be entitled to receive an option to acquire 10,000 shares of Common Stock ("Annual Options'). Annual Options are fully vested and immediately exercisable on their date of grant. As of the end of the fiscal year, there were options for 760,000 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 $50,000 annual retainer paid in quarterly increments. In addition, directors receive up to two free computer systems per year and are eligible to purchase additional equipment at a discount. Directors do not receive any additional consideration for serving on committees or as committee chairperson. Compensation Committee Interlocks and Insider Participation The current members of the Compensation Committee are Messrs. Campbell, Drexler and Gore, none of whom are employees of the Company and all of whom are considered "independent directors under the applicable NASDAQ rules. There were no interlocks or insider participation between any member of the Board or Compensation Committee and any member of the board of directors or compensation committee of another company. 129 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 130 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 131 of 143 Arrangements with Named Executive Officers Change In Control Arrangements-Stock Options and Restricted Stock Units In the event of a "change in control of the Company, all outstanding options under the Company's stock option plans, except the Director Plan, and all restricted stock units granted on or after January 1, 2005, will, unless otherwise determined by the plan administrator, become fully exercisable, and will be cashed out at an amount equal 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 equal to the difference between the applicable "change in control price and the exercise price of the options. A "change in control under these plans is generally defined as (i) the acquisition by any person of 50% or more of the combined voting power of the Company's outstanding securities, or (ii) the occurrence of a transaction requiring shareholder approval and involving the sale of all or substantially all of the assets of the Company or the merger of the Company with or into another corporation. Agreements governing certain restricted stock units granted to the Named Executive Officers and other officers prior to January 1, 2005 generally provide that in the event there is a "change in control, as defined in the Company's stock option plans, and if in connection with or following such "change in control, their employment is terminated without "Cause or if they should resign for "Good Reason, those options, restricted stock, and restricted stock units outstanding that are not yet vested as of the date of such "change in control shall become fully vested. Further, these restricted stock unit agreements also provide that, in the event the Company terminates the Officer without cause at any time, the restricted stock and restricted stock units will vest in full. Generally, "Cause is defined to include a felony conviction, willful disclosure of confidential information, or willful and continued failure to perform his or her employment duties. "Good Reason includes resignation of employment as a result of a substantial diminution in position or duties, or an adverse change in title or reduction in annual base salary. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information as of November 30, 2006 (the "Table Date ) with respect to the beneficial ownership of the Company's Common Stock by (i) each person the Company believes beneficially holds more than 5% of the outstanding shares of Common Stock; (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 indicated, all persons named as beneficial owners of Common Stock have sole voting power and sole investment power with respect to the shares indicated as beneficially owned. In addition, unless otherwise indicated, all persons named below can be reached at Apple Computer, Inc., 1 Infinite Loop, Cupertino, CA 95014. 130 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_21 Ok.h... 4/20/2007 Page 131 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 132 of 143 Security Ownership of 5% Holders, Directors , Nominees and Executive Officers Shares of Common Stock Percent of Common Stock Name of Beneficial Owner Beneficially Owned(1) Outstanding Fidelity Investments 57,162,311(2) 6.65% AllianceBernstein LP 48,637,731(3) 5.66% Steven P. Jobs 5,546,451(4) William V. Campbell 221,004(5) Timothy D. Cook 12,597(6) Millard S. Drexler 220,000(7) Albert A. Gore, Jr. 60,000(8) Ronald B. Johnson 2,049,890(9) Arthur D. Levinson 362,400 (10) Peter Oppenheimer 149,768 (11) Philip W. Schiller 256(12) Eric E. Schmidt 12,284(13) Jerome B. York 80,000(14) All current executive officers and directors as a group (15 persons) 9,378,423 (15) 1.09% (1) Represents shares of Common Stock held and/or options held by such individuals that were exercisable at the Table Date or within 60 days thereafter. This does not include options or restricted stock units that vest after 60 days. The share numbers have been adjusted to reflect the Company's two-for-one stock split in February 2005. (2) Based on a Form 13G/A filed February 14, 2005 by FMR Corp. FMR Corp. lists its address as 82 Devonshire Street, Boston, MA 02109, in such filing. (3) 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. (4) Includes 120,000 shares of Common Stock that Mr. Jobs has the right to acquire by exercise of stock options. (5) Includes 220,000 shares of Common Stock that Mr. Campbell has the right to acquire by exercise of stock options. (6) Excludes 600,000 unvested restricted stock units. (7) Includes 40,000 shares of Common Stock that Mr. Drexler holds indirectly and 180,000 shares of Common Stock that Mr. Drexler has the right to acquire by exercise of stock options. (8) Consists of 60,000 shares of Common Stock that Mr. Gore has the right to acquire by exercise of stock options. (9) Includes 1,900,000 shares of Common Stock that Mr. Johnson has the right to acquire by exercise of stock options and excludes 450,000 unvested restricted stock units. (10) Includes 2,000 shares of Common Stock that Dr. Levinson holds indirectly and 100,000 shares of Common Stock that Dr. Levinson has the right to acquire by exercise of stock options. (11) Excludes 450,000 unvested restricted stock units. (12) Excludes 400,000 unvested restricted stock units. 131 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 132 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 133 of 143 (13) Consists of 12,284 shares of Common Stock that Dr. Schmidt holds indirectly. Dr. Schmidt has declined to participate in the 1997 Director Stock Option Plan. (14) Includes 40,000 shares of Common Stock that Mr. York has the right to acquire by exercise of stock options. (15) Includes 3,063,371 shares of Common 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 The following table sets forth certain information, as of September 30, 2006, concerning shares of common stock authorized for issuance under all of the Company's equity compensation plans. The table has been adjusted to reflect the Company's two-for-one stock split in February 2005. Number of Securities Number of Securities Remaining Available for to be Issued Upon Weighted Average Future Issuance Under Exercise of Exercise Price of Equity Compensation Plans Outstanding Options, Outstanding Options, (Excluding Securities Warrants and Rights Warrants and Rights Reflected in Column (a)) (a) (b) (c) Equity compensation plans approved by shareholders 34,827,183 $ 30.03 57,290,691(1) Equity compensation plans not approved by shareholders 18,137,049 $10.19 - Total equity compensation plans (2) 52,964,232 $ 23.24 57,290,691 (1) This number includes 2,297,225 shares of common stock reserved for issuance under the Employee Stock Purchase Plan, 400,000 shares available for issuance under the 1997 Director Stock Option Plan, and 54,593,466 shares available for issuance under the 2003 Employee Stock Plan. The grant of 3,410,000 restricted stock units has been deducted from the number of shares available for future issuance. Shares of restricted stock and restricted stock units granted after April 2005 count against the shares available for grant as two shares for every share granted. This amount does not include shares under the 1990 Stock Option Plan that was terminated in 1997. No new options can be granted under the 1990 Stock Option Plan. (2) This table does not include 17,266 shares of Common Stock underlying options assumed in connection with a prior acquisition of a company that originally granted those options. These assumed options have a weighted average exercise price of $4.30 per share. No additional options may be granted under the assumed plan. Item 13. Certain Relationships and Related Transactions In March 2002, the Company entered into a Reimbursement Agreement with its CEO, Steve Jobs, for the reimbursement of expenses incurred by Mr. Jobs in the operation of his private plane when used for Company business. The Reimbursement Agreement became effective for expenses incurred by Mr. Jobs for Company business purposes since he took delivery of the plane in May 2001. The Company recognized a total of $202,000 in expenses pursuant to the Reimbursement Agreement during 2006. In 2006, the Company entered into an agreement with Pixar to sell certain of Pixar's short films on the iTunes Store. Mr. Jobs was the CEO, Chairman, and a large shareholder of Pixar. On May 5, 2006, The Walt Disney Company ("Disney ) acquired Pixar, which resulted in Pixar becoming a wholly-owned subsidiary of Disney. Upon Disney's acquisition of Pixar, Mr. Jobs' shares of Pixar common stock were 132 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 133 of 137 Case 5:06-cv-05208 -JF Document 55-6 Filed 06/08/2007 Page 134 of 143 exchanged for Disney's common stock and he was elected to the Disney Board of Directors. Royalty expense recognized by the Company under the arrangement with Pixar from September 25, 2005 through May 5, 2006 was less than $1 million. Item 14. Principal Accountant Fees and Services The following table sets forth the fees accrued or paid to the Company's independent registered public accounting firm, KPMG LLP, during fiscal years 2006 and 2005. Audit and Non-Audit Fees 2006 2005 Audit Fees $ 7,912,700(1) $ 6,948,800 Audit-Related Fees 28,000(2) 46,700 Tax Fees 820,500(3) 923,000 All Other Fees Total $ 8,761,200 $ 7,918,500 (1) Audit fees relate to professional services rendered in connection with the 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 incurred in connection with the Special Committee of the Company's Board of Directors' investigation into stock option practices, no such fees were incurred during 2005. (2) Audit-related fees primarily relate to professional services for the audits of employee benefit plans. (3) 2006 tax fees include $728,600 for professional services rendered in connection with tax compliance and preparation relating to the Company's expatriate program, tax audits and international tax compliance; and $91,900 for international tax consulting and planning services. The Company does not engage KPMG to perform personal tax services for its executive officers. Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services Performed by the Independent Auditors Prior to the enactment of the Sarbanes-Oxley Act of 2002 (the "Act ), the Company adopted an auditor independence policy that banned its auditors from performing non-financial consulting services, such as information technology consulting and internal audit services. This auditor independence policy also mandates that the audit and non-audit services and related budget be approved by the Audit Committee in advance, and that the Audit Committee be provided with quarterly reporting on actual spending. In accordance with this policy, all services to be performed by KPMG were pre-approved by the Audit Committee. Subsequent to the enactment of the Act, the Audit Committee met with KPMG to further understand the provisions of that Act as it relates to auditor independence . KPMG previously rotated the lead audit partner in fiscal year 2005 , rotated other partners in 2006, and will rotate additional partners as appropriate in compliance with the Act. The Audit Committee will continue to monitor the activities undertaken by KPMG to comply with the Act. 133 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 134 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 135 of 143 PART IV Item 15. Exhibits and Financial Statement Schedules. (a) Documents filed as part of this report (1) All financial statements Index to Consolidated Financial Statements Page Consolidated Balance Sheets as of September 30, 2006 and September 24, 2005 73 Consolidated Statements of Operations for the three fiscal years ended September 30, 2006 74 Consolidated Statements of Shareholders' Equity for the three fiscal years ended September 30, 2006 75 Consolidated Statements of Cash Flows for the three fiscal years ended September 30, 2006 76 Notes to Consolidated Financial Statements 77 Selected Quarterly Financial Information (Unaudited) 114 Reports of Independent Registered Public Accounting Firm, KPMG LLP 118 All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and Notes thereto. (2) Index to Exhibits Incorporated by Reference Filed/ Exhibit Filing Date/ Furnished Number Exhibit Description Form Period End Date Herewith 3.1 Restated Articles of Incorporation, filed with the S-3 7/27/88 Secretary of State of the State of California on January 27, 1988. 3.2 Amendment to Restated Articles of Incorporation, filed 10-Q 5/11/00 with the Secretary of State of the State of California on May 4, 2000. 3.3 By-Laws of the Company, as amended through June 7, 10-Q 6/26/04 2004. 3.4 Certificate of Amendment to Restated Articles of 10-Q 3/26/05 Incorporation, as amended, filed with the Secretary of State of the State of California on February 25, 2005. 4.8 Registration Rights Agreement, dated June 7, 1996 S-3 8/28/96 among the Company and Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated. 4.9 Certificate of Determination of Preferences of Series A 10-K 9/26/97 Non-Voting Convertible Preferred Stock of Apple Computer, Inc. 10.A.3** Apple Computer, Inc. Savings and Investment Plan, as 10-K 9/27/91 amended and restated effective as of October 1, 1990. 10.A.3-1 ** Amendment of Apple Computer, Inc. Savings and 10-K 9/25/92 Investment Plan dated March 1, 1992. 10.A.3-2** Amendment No. 2 to the Apple Computer, Inc. Savings 10-Q 3/28/97 and Investment Plan. 134 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 135 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 136 of 143 10.A.5** 1990 Stock Option Plan, as amended through 10-Q 12/26/97 November 5, 1997. 10.A.6** Apple Computer, Inc. Employee Stock Purchase Plan, as 10-Q 3/26/05 amended through April 21, 2005. 10.A.8** Form of Indemnification Agreement between the 10-K 9/26/97 Registrant and each officer of the Registrant. 10.A.43** NeXT Computer, Inc. 1990 Stock Option Plan, as S-8 3/21/97 amended. 10.A.49** 1997 Employee Stock Option Plan, as amended through 10-K 9/28/02 October 19, 2001. 10.A.50** 1997 Director Stock Option Plan. 10-Q 3/27/98 10.A.51** 2003 Employee Stock Plan, as amended through 10-K 9/24/05 November 9, 2005. 10.A.52** Reimbursement Agreement dated as of May 25, 2001 by 10-Q 6/29/02 and between the Registrant and Steven P. Jobs. 10.A.53** Option Cancellation and Restricted Stock Award 10-Q 6/28/03 Agreement dated as of March 19, 2003 by and between the Registrant and Steven P. Jobs. 10.A.54** Form of Restricted Stock Unit Award Agreement. 10-Q 3/27/04 10.A.54-1 ** Alternative Form of Restricted Stock Unit Award 10-K 9/24/05 Agreement. 10.A.55** Apple Computer, Inc. Performance Bonus Plan dated 10-Q 3/26/05 April 21, 2005. 10.A.56** Form of Election to Satisfy Tax Withholding with Stock. 8-K 8/15/05 10.A.57** Form of Option Agreements. 10-K 9/24/05 10.B.18* Custom Sales Agreement effective October 21, 2002 10-K 9/27/03 between the Registrant and International Business Machines Corporation. 10.B.19* Purchase Agreement effective August 10, 2005 between 10-K 9/24/05 the Registrant and Freescale Semiconductor, Inc. 10.B.20 Consulting Agreement dated as of April 17, 2006 by and 10-Q 7/1/06 between the Registrant and J.R. Ruby Consulting Corp. 14.1 Code of Ethics of the Company. 10-K 9/27/03 21 *** Subsidiaries of Apple Computer, Inc. 23.1 *** Consent of Independent Registered Public Accounting Firm. 135 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 136 of 137 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 137 of 143 24.1 *** Power of Attorney (included on page 137 of this Annual Report on Form 10-K). 31.1*** Rulel3a-14(a) / 15d-14(a) Certification of Chief Executive Officer. 31.2*** Rulel3a-14(a) / 15d-14(a) Certification of Chief Financial Officer. 32.1**** Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. * Confidential Treatment requested as to certain portions of this exhibit. ** Indicates management contract or compensatory plan or arrangement. *** Filed herewith. * * * * Furnished herewith. 136 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 137 of 137 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 138 of 143 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 29th day of December 2006. APPLE COMPUTER, INC. By: /s/ PETER OPPENHEIMER Peter Oppenheimer Senior Vice President and ChiefFinancial Officer Power of Attorney KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven 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, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Name Title Date /s/ STEVEN P. JOBS Chief Executive Officer and Director December 29, 2006 STEVEN P. JOBS (Principal Executive Officer) Senior Vice President and Chief Financial /s/ PETER OPPENHEIMER Officer (Principal Financial and December 29, 2006 PETER OPPENHEIMER Principal Accounting Officer) /s/ WILLIAM V. CAMPBELL Director December 29, 2006 WILLIAM V. CAMPBELL /s/ MILLARD S. DREXLER Director December 29, 2006 MILLARD S. DREXLER /s/ ALBERT GORE, JR Director December 29, 2006 ALBERT GORE, JR. /s/ ARTHUR D. LEVINSON Director December 29, 2006 ARTHUR D. LEVINSON /s/ ERIC E. SCHMIDT Director December 29, 2006 ERIC E. SCHMIDT /s/ JEROME B. YORK Director December 29, 2006 JEROME B. YORK 137 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_210k.h... 4/20/2007 Page 1 of 1 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 139 of 143 EX-21 2 06-25759 2ex21.htm EX-21 Exhibit 21 SUBSIDIARIES OF APPLE COMPUTER, INC.* Jurisdiction Name of Incorporation Apple Operations International (formerly Apple Computer Inc. Limited) Ireland Apple Operations Europe (formerly Apple Computer Limited) Ireland Apple Computer International Ireland Braeburn Capital, Inc. United States * Pursuant to Item 601 (b)(2 1)(ii) of Regulation S-K, the names of other subsidiaries of Apple Computer, Inc. are omitted because, considered in the aggregate, they would not constitute a significant subsidiary as of the end of the year covered by this report. http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_2ex21.... 4/20/2007 Page 1 of 1 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 140 of 143 EX-23.1 3 a06-25759 2ex23d1.htm EX-23 Exhibit 23.1 Consent of Independent Registered Public Accounting Firm The Board of Directors Apple Computer, Inc.: We consent to the incorporation by reference in the registration statements on Forms S-8 (Nos. 2-70449, 2-77563, 2-85095, 33-00866, 33-23650, 33-31075, 33-40877, 33-47596, 33-57092, 33-57080, 33-53873, 33-53879, 33-53895, 33-60279, 33- 60281, 333-07437, 333-23719, 333-23725, 333-60455, 333-82603, 333-93471, 333-37012, 333-52116, 333-61276, 333- 70506, 333-75930, 333-102184, 333-106421, and 333-125148) and the registration statements on Forms S-3 (Nos. 33-23317, 33-29578, and 33-62310) of Apple Computer, Inc. of our reports dated December 29, 2006 with respect to the consolidated balance sheets of Apple Computer, Inc. and subsidiaries as of September 30, 2006 and 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, 2006 and the effectiveness of internal control over financial reporting as of September 30, 2006, which reports appear in the September 30, 2006 annual report on Form 10-K of Apple Computer, Inc. As discussed in Note 2 to the Consolidated Financial Statements, the consolidated financial statements as of September 24, 2005 and for each of the years in the two-year period ended September 24, 2005 have been restated. As discussed in Note 1 to the Consolidated Financial Statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, on September 25, 2005. /s/ KPMG LLP Mountain View, California December 29, 2006 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_2ex23 ... 4/20/2007 Page 1 of 1 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 141 of 143 EX-31.1 4 a06-257592ex31 dl.htm EX-31 Exhibit 31.1 CERTIFICATIONS I, Steven P. Jobs, certify that: 1. I have reviewed this annual report on Form 10-K of Apple Computer, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, 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 http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_2ex31... 4/20/2007 Page 1 of 1 Case 5 : 06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 142 of 143 EX-31.2 5 a06-257592ex31d2.htm EX-31 Exhibit 31.2 CERTIFICATIONS I, Peter Oppenheimer, certify that: 1. I have reviewed this annual report on Form 10-K of Apple Computer, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, 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 President and Chief Financial Officer http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_2ex31... 4/20/2007 Page 1 of 1 Case 5:06-cv-05208-JF Document 55-6 Filed 06/08/2007 Page 143 of 143 EX-32.1 6 a06-25759 2ex32d1.htm EX-32 Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven P. Jobs, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Apple Computer, Inc. on Form 10-K for the fiscal year ended September 30, 2006 fully complies with the requirements of Section 13(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. December 29, 2006 By: /s/ STEVEN P. JOBS Steven P. Jobs Chief Executive Officer I, Peter Oppenheimer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Apple Computer, Inc. on Form 10-K for the fiscal year ended September 30, 2006 fully complies with the requirements of Section 13(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. December 29, 2006 By: /s/ PETER OPPENHEIMER Peter Oppenheimer Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Apple Computer, Inc. and will be retained by Apple Computer, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. http://www.sec. gov/Archives/edgar/data/320193/000110465906084288/a06-25759_2ex32... 4/20/2007 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 1 of 38 EXHIBIT F TO THE DECLARATION OF VIVI N. TRAN IN SUPPORT OF MOTION TO DISMISS CONSOLIDATED CLASS ACTION COMPLAINT Page 1 of 4 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 2 of 38 8-K 1 a07-14288 18k.htm 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): May 10, 2007 APPLE INC. (Exact Name of Registrant as Specified in its Charter) California 000-10030 94-2404110 (State or Other Jurisdiction of (Commission File Number) (I.R.S. Employer Identification No.) Incorporation or Organization) 1 Infinite Loop Cupertino, California 95014 (Address of Principal Executive Offices) (Zip Code) (408) 996-1010 (Registrant's Telephone Number, Including Area Code) Not applicable (Former name or former address, if changed since last report.) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: q Written communications pursuant to Rule 425 under the Securities Act (17 CFR 240.425) q Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) q Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) q Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) http ://sec.gov/Archives/edgar/datal320193/000110465907040672/a07-14288_18k.htm 5/23/2007 Page 2 of 4 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 3 of 38 Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. (e) Compensatory Arrangements of Certain Officers. 2003 Employee Stock Plan Amendments The Board of Directors (the "Board ) of Apple Inc. (the "Company ) previously approved, subject to shareholder approval, amendments to the Company's 2003 Employee Stock Plan (the "2003 Plan ) that would (i) increase the number of shares of the Company's common stock that may be delivered pursuant to awards granted under the 2003 Plan by an additional 28,000,000 shares, (ii) extend the term of the 2003 Plan to May 10, 2017, and (iii) give the Company the flexibility to grant certain performance-based awards that would be payable in cash and would be designed to satisfy the requirements for deductibility of compensation under Section 162(m) of the U.S. Internal Revenue Code. According to the preliminary results from the Company's annual shareholders meeting held on May 10, 2007, the Company's shareholders approved those amendments to the 2003 Plan. The foregoing description of the amendments is qualified in its entirety by reference to the text of the amended version of the 2003 Plan, which is filed as Exhibit 10.1 hereto and incorporated herein by reference. Employee Stock Purchase Plan Amendment The Board previously approved an amendment, subject to shareholder approval, to the Company's Employee Stock Purchase Plan (the "ESPP ) that would increase the number of shares of the Company's common stock that may be delivered pursuant to awards granted under the ESPP Plan by an additional 6,000,000 shares. According to the preliminary results from the Company's annual shareholders meeting held on May 10, 2007, the Company's shareholders approved that amendment to the ESPP. The foregoing description of the amendment is qualified in its entirety by the text of the amended version of the ESPP, which is filed as Exhibit 10.2 hereto and incorporated herein by reference. 1997 Director Stock Plan Amendments The Board previously approved amendments, subject to shareholder approval, to the Company's 1997 Director Stock Option Plan (the "Director Plan ) that would extend the term of the Director Plan to May 10, 2012 and make certain other technical changes. According to the preliminary results from the Company's annual shareholders meeting held on May 10, 2007, the Company's shareholders approved those amendments to the Director Plan. The foregoing description of the amendments is qualified in its entirety by the text of the amended version of the Director Plan, which is filed as Exhibit 10.3 hereto and incorporated herein by reference. Item 9.01 Financial Statements and Exhibits (d) Exhibits. 10.1 Apple Inc. 2003 Employee Stock Plan, as amended. 10.2 Apple Inc. Employee Stock Purchase Plan, as amended. 10.3 Apple Inc. 1997 Director Stock Option Plan, as amended. http://sec.gov/Archives/edgar/datal320193/000110465907040672/a07-14288_18k.htm 5/23/2007 Page 3 of 4 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 4 of 38 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Apple Inc. (Registrant) By: /s/ Peter Oppenheimer Date: May 16, 2007 Peter Oppenheimer Senior Vice President and Chief Financial Officer http://sec.gov/Archives/edgar/datal320193/000110465907040672/a07-14288_18k.htm 5/23/2007 Page 4 of 4 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 5 of 38 EXHIBIT INDEX Exhibit Number Description 10.1 Apple Inc. 2003 Employee Stock Plan, as amended. 10.2 Apple Inc. Employee Stock Purchase Plan, as amended. 10.3 Apple Inc. 1997 Director Stock Option Plan, as amended. 4 http://sec.gov/Archives/edgar/datal320193/000110465907040672/a07-14288_18k.htm 5/23/2007 Page 1 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 6 of 38 EX-10.1 2 a07-14288 lexlOdl.htm EX-10.1 Exhibit 10.1 APPLE INC. 2003 EMPLOYEE STOCK PLAN (Effective as of May 10, 2007) http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 2 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 7 of 38 APPLE INC. 2003 EMPLOYEE STOCK PLAN SECTION 1 . INTRODUCTION. On April 9, 2007 the Board adopted amendments to this 2003 Employee Stock Plan, which shall govern all grants of Awards made after this amendment and restatement, and which shall become effective upon its approval by the Company's stockholders (the "Effective Date ). For the terms and conditions of the Plan applicable to Awards granted before the Effective Date, refer to the version of the Plan in effect as of the date such Award was granted. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by offering Participants the opportunity to share in such long-term success by acquiring a proprietary interest in the Company. The Plan seeks to achieve this purpose by providing for discretionary long-term incentive Awards in the form of Options (which may be Incentive Stock Options or Nonstatutory Stock Options), Stock Appreciation Rights, Stock Grants, Restricted Stock Units and Cash Bonus Awards. The Plan shall be governed by, and construed in accordance with, the laws of the State of California (except its choice- of-law provisions). Capitalized terms shall have the meaning provided in Section 2 unless otherwise provided in this Plan or any related Award Agreement. SECTION 2. DEFINITIONS. (a) "Applicable Laws means all applicable laws, rules, regulations and requirements relating to the administration of stock plans, including, but not limited to, all applicable U.S. federal and state laws, the rules and regulations of any stock exchange or quotation system on which the Common Stock is listed or quoted, and the applicable laws, rules, regulations or requirements of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan or where Participants reside or provide services, as such laws, rules, regulations and requirements shall be in place from time to time. (b) "Award means an Option, SAR, Stock Grant or Restricted Stock Unit. (c) "Award Agreement means any Stock Option Agreement, SAR Agreement, Stock Grant Agreement, Restricted Stock Unit Agreement or any written document that evidences a Cash Bonus Award granted under the Plan. Award Agreements shall consist of either (1) a written award agreement in a form approved by the Committee and executed by the Company by an officer duly authorized to act on its behalf, or (2) an electronic notice of award grant in a form approved by the Committee and recorded by the Company (or its designee) in an electronic recordkeeping system used for the purpose of tracking award grants under the Plan generally, as the Committee may provide and, in each case and if required by the Committee, executed or otherwise electronically accepted by the recipient of the Award in such form and manner as the Committee may require. The Committee may authorize any officer of the Company (other than the particular Award recipient) to execute any or all Award Agreements on behalf of the Company. (d) "Board means the Board of Directors of the Company, as constituted from time to time. (e) "Cash Bonus Award means an Award granted pursuant to Section 10(b) of the Plan. (f) "Cashless Exercise means, to the extent that a Stock Option Agreement so provides and as permitted by Applicable Laws, a program approved by the Committee in which payment of the aggregate Exercise Price and/or satisfaction of any applicable tax withholding obligations may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares subject to an Option and to deliver all or part of the sale proceeds to the Company. http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 3 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 8 of 38 (g) "Code means the Internal Revenue Code of 1986, as amended, and the regulations and interpretations promulgated thereunder. (h) "Committee has the meaning given to such term in Section 3. (i) "Common Stock means the Company's common stock. 0) "Company means Apple Inc., a California corporation. (k) "Consultant means an individual who provides bona fide services to the Company, a Parent or a Subsidiary, other than as an Employee or Director. (1) "Covered Employees means those persons who the Committee determines are subject to the limitations of Code Section 162(m). (m) "Director means a member of the Board. (n) "Disability means that the Participant is classified as disabled under the long-term disability policy of the Company or, if no such policy applies, the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months; provided, however, that with respect to an Option intended to qualify as an ISO, "Disability shall mean a "permanent and total disability within the meaning of Section 22(e) (3) of the Code. (o) "Employee means any individual who is a common-law employee of the Company, a Parent or a Subsidiary (including any Director that is also an Employee). (p) "Exchange Act means the Securities Exchange Act of 1934, as amended. (q) "Exercise Price means, in the case of an Option, the amount for which a Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. "Exercise Price, in the case of a SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value at the time such SAR is exercised in determining the amount payable upon exercise of such SAR. (r) "Fair Market Value means, unless otherwise determined or provided by the Committee in the circumstances, the last price (in regular trading) for a share of Common Stock as furnished by the National Association of Securities Dealers, Inc. (the "NASD ) through the NASDAQ Global Market Reporting System (the "Global Market ) for the date in question or, if no sales of Common Stock were reported by the NASD on the Global Market on that date, the last price (in regular trading) for a share of Common Stock as furnished by the NASD through the Global Market for the next preceding day on which sales of Common Stock were reported by the NASD. The Committee may, however, provide with respect to one or more Awards that the Fair Market Value shall equal the last price for a share of Common Stock as furnished by the NASD through the Global Market on the last trading day preceding the date in question or the average of the high and low trading prices of a share of Common Stock as furnished by the NASD through the Global Market for the date in question or the most recent trading day. If the Common Stock is no longer listed or is no longer actively traded on the Global Market as of the applicable date, the Fair Market Value of the Common Stock shall be the value as reasonably determined by the Committee for purposes of the Award in the circumstances. The Committee also may adopt a different methodology for determining Fair Market Value with respect to one or more Awards if a different methodology is necessary or advisable to secure any intended favorable tax, legal or other treatment for the particular Award(s) (for example, and without limitation, the Committee may provide that Fair Market Value for purposes of one or more Awards will be based on an average of closing prices (or the average of high and low daily trading prices) for a specified period preceding the relevant date). http ://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exI Odl .htm 5/23/2007 Page 4 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 9 of 38 (s) "Fiscal Year means the Company's fiscal year. (t) "Grant Date means the date on which the Committee makes the determination to grant an Award or such later date as the Committee may specify in making such determination. (u) "Incentive Stock Option or "ISO means an incentive stock option described in Code Section 422. (v) "Non-Employee Director means a member of the Board who is not an Employee. (w) "Nonstatutory Stock Option or "NSO means a stock option that is not an ISO. (x) "Option means an ISO or NSO granted under the Plan entitling the Participant to purchase Shares. (y) "Parent means any corporation or other entity that beneficially owns directly or indirectly a majority of the Company's outstanding voting stock or voting power. An entity that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. (z) "Participant means an Employee or Consultant who has been selected by the Committee to receive an Award under the Plan or any individual, estate or other entity that holds an Award. (aa) "Performance Goals means one or more objective measurable performance goals established by the Committee with respect to a Performance Period based upon one or more of the following criteria: (i) operating income; (ii) earnings before interest, taxes, depreciation and amortization; (iii) earnings; (iv) cash flow; (v) market share; (vi) sales or revenue; (vii) expenses; (viii) cost of goods sold; (ix) profit/loss or profit margin; (x) working capital; (xi) return on equity or assets; (xii) earnings per share; (xiii) total shareholder return; (xiv) price/earnings ratio; (xv) debt or debt-to-equity; (xvi) accounts receivable; (xvii) writeoffs; (xviii) cash; (xix) assets; (xx) liquidity; (xxi) operations; (xxii) intellectual property (e.g., patents); (xxiii) product development; (xxiv) manufacturing, production or inventory; (xxv) mergers and acquisitions or divestitures; and/or (xxvi) individual performance objective. Any criteria used may be measured, as applicable, (a) in absolute terms, (b) in relative terms (including but not limited to, the passage of time and/or against other companies or financial metrics), (c) on a per share and/or share per capita basis, (d) against the performance of the Company as a whole or against particular entities, segments, operating units or products of the Company and /or (e) on a pre-tax or after tax basis. Awards issued to persons who are not Covered Employees may take into account any other factors deemed appropriate by the Committee. (bb) "Performance Period means any period not exceeding 60 months as determined by the Committee, in its sole discretion. The Committee may establish different Performance Periods for different Participants, and the Committee may establish concurrent or overlapping Performance Periods. (cc) "Plan means this Apple Inc. 2003 Employee Stock Plan as it may be amended from time to time. (dd) "Re-Price means that the Company has lowered or reduced the Exercise Price of outstanding Options and/or outstanding SARs for any Participant(s) whether through amendment, cancellation or replacement grants, or any other means. (ee) "Restricted Stock Unit means a bookkeeping entry representing the equivalent of one Share awarded under the Plan and represents an unfunded and unsecured obligation of the Company. (ff) "Restricted Stock Unit Agreement means the agreement described in Section 9 evidencing a Restricted Stock Unit Award. (gg) "SAR Agreement means the agreement described in Section 7 evidencing a Stock Appreciation Right. http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 5 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 10 of 38 (hh) "SEC means the Securities and Exchange Commission. (ii) "Section 16 Persons means those officers , directors or other persons who are subject to Section 16 of the Exchange Act. (jj) "Securities Act means the Securities Act of 1933 , as amended. (kk) "Share means one share of Common Stock. (11) "Stock Appreciation Right or "SAR means a stock appreciation right awarded under the Plan. (mm) "Stock Grant means Shares awarded under the Plan pursuant to Section 8. (nn) "Stock Grant Agreement means the agreement described in Section 8 evidencing a Stock Grant. (oo) "Stock Option Agreement means the agreement described in Section 6 evidencing an Option. (pp) "Subsidiary means any corporation or other entity a majority of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. An entity that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. (qq) "10-Percent Stockholder means an individual who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company or of its parent corporation or subsidiary corporation (as defined in Sections 424 (e) and (f) of the Code). In determining stock ownership, the attribution rules of Code Section 424(d) shall be applied. (rr) "Termination of Service means (i) in the case of an Employee, a cessation of the employee-employer relationship between the Employee and the Company and its Subsidiaries for any reason, including but not by way of limitation, a termination by resignation, discharge, death, disability, or retirement, but excluding any such termination where there is a simultaneous reemployment by the Company or a Subsidiary and excluding any bona fide and Company (or Subsidiary) approved leave of absence; and (ii) in the case of a Consultant, a cessation of the service relationship (as determined by the Committee in its sole discretion) between the Consultant and the Company and its Subsidiaries for any reason, including but not by way of limitation, a termination by resignation, discharge, death or disability, but excluding any such termination where there is a simultaneous re-engagement of the Consultant by the Company or a Subsidiary. For purposes of the Plan and any Award, if an entity ceases to be a Subsidiary of the Company, a Termination of Service shall be deemed to have occurred with respect to each Employee and Consultant in respect of such Subsidiary who does not continue as an Employee or Consultant in respect of the Company or another Subsidiary that continues as such after giving effect to the transaction or other event giving rise to the change in status. SECTION 3. ADMINISTRATION. (a) Committee Composition. The Board or a Committee appointed by the Board shall administer the Plan. The Committee shall generally have membership composition which enables (i) Awards to Section 16 Persons to qualify as exempt from liability under Section 16(b) of the Exchange Act and (ii) Awards to Covered Employees to qualify as performance-based compensation as provided under Code Section 162(m). However, the Board may also appoint one or more separate Committees, each composed of one or more directors of the Company who need not qualify under Rule 16b-3 or Code Section 162(m), that may administer the Plan with respect to Participants who are not Section 16 Persons or Covered Employees, respectively, may grant Awards under the Plan to such Participants and may determine all terms of such Awards. Members of any such Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of any Committee and reassume all powers and authority previously delegated to the Committee. 4 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exI Odl .htm 5/23/2007 Page 6 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 11 of 38 The Board and any Committee appointed to administer the Plan is referred to herein as the "Committee. (b) Authority of the Committee. Subject to the provisions of the Plan, the Committee shall have the full authority, in its sole discretion, to take any actions it deems necessary or advisable for the administration of the Plan. Such actions shall include: (i) selecting Participants who are to receive Awards under the Plan; (ii) determining the Fair Market Value for purposes of any Award; (iii) determining the type of and number of securities to be subject to each Award, and the Grant Date, vesting requirements and other features and conditions of such Awards; (iv) approving the forms of Award Agreements to be used under the Plan; (v) amending any outstanding Awards; (vi) accelerating the vesting or extending the post-termination exercise term of Awards at any time and under such terms and conditions as it deems appropriate (including, without limitation, in connection with a termination of employment or services or other events of a personal nature) subject to any required consent under Section 15; (vii) construing and interpreting the Plan and any agreements defining the rights and obligations of the Company, its Subsidiaries, and Participants under the Plan; (viii) correcting any defect, supplying any omission or reconciling any inconsistency in the Plan or any Award Agreement; (ix) adopting such rules or guidelines as it deems appropriate to implement the Plan; (x) authorizing any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously authorized by the Committee; (xi) adjusting the number of shares of Common Stock subject to any Award, adjusting the price of any or all outstanding Awards or otherwise changing previously imposed terms and conditions, in such circumstances as the Committee may deem appropriate, in each case subject to Sections 5 and 15, and provided that in no case (except due to an adjustment contemplated by Section 11 or any Re-Pricing that may be approved by shareholders) shall such an adjustment constitute a Re-Pricing (by amendment, substitution, cancellation and regrant, exchange or other means) of the per share Exercise Price of any Option or SAR; (xii) determining whether, and the extent to which, adjustments are required pursuant to Section 13 hereof and authorizing the termination, conversion, substitution or succession of Awards upon the occurrence of an event of the type described in Section 13; (xiii) acquiring or settling (subject to Sections 13 and 15) rights under Awards in cash, stock of equivalent value, or other consideration, provided, however, that in no case without stockholder approval shall the Company effect a Re-Pricing of an Option or SAR granted under the Plan by purchasing the Option or SAR at a time when the Exercise Price of the Award is greater than the Fair Market Value of a share of Common Stock; (xiv) making all other decisions relating to the operation of the Plan; and (xv) adopting such plans or subplans as may be deemed necessary or appropriate to comply with the laws of other countries, allow for tax-preferred treatment of Awards or otherwise provide for the participation by Participants who reside outside of the U.S. http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 7 of 17 Case 5 : 06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 12 of 38 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 8 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 13 of 38 The Committee's determinations under the Plan shall be final and binding on all persons. (c) Indemnification. To the maximum extent permitted by Applicable Laws, each member of the Committee shall be indemnified and held harmless by the Company against and from (i) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any Award Agreement, and (ii) from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless. (d) Reliance on Experts. In making any determination or in taking or not taking any action under the Plan, the Committee may obtain and may rely upon the advice of experts, including employees and professional advisors to the Company. No director, officer or agent of the Company or any of its Subsidiaries shall be liable for any such action or determination taken or made or omitted in good faith. SECTION 4. GENERAL. (a) General Eligibility. Only Employees and Consultants shall be eligible to participate in the Plan. Non-Employee Directors are not eligible for Award grants under the Plan. (b) Incentive Stock Options. Only Participants who are Employees of the Company, a "parent corporation of the Company (within the meaning of Section 424(e) of the Code) or a "subsidiary corporation of the Company (within the meaning of Section 424(f) of the Code) shall be eligible for the grant of ISOs. In addition, a 10-Percent Stockholder shall not be eligible for the grant of an ISO unless the requirements set forth in Code Section 422(c)(5) are satisfied. (c) Restrictions on Transfer. (i) Unless otherwise expressly provided in (or pursuant to) this Section 4(c) or required by Applicable Law: (A) all Awards are non-transferable and shall not be subject in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge; (B) Awards shall be exercised only by the Participant; and (C) amounts payable or Shares issuable pursuant to any Award shall be delivered only to (or for the account of) the Participant. (ii) The Committee may permit Awards to be exercised by and paid to, or otherwise transferred to, other persons or entities pursuant to such conditions and procedures, including limitations on subsequent transfers, as the Committee may, in its sole discretion, establish in writing. Any permitted transfer shall be subject to compliance with applicable federal and state securities laws and shall not be for value (other than nominal consideration, settlement of marital property rights, or for interests in an entity in which more than 50% of the voting interests are held by the Participant or by the Participant's family members). (iii) The exercise and transfer restrictions in Section 4(c) shall not apply to: (A) transfers to the Company (for example, in connection with the expiration or termination of the Award), (B) the designation of a beneficiary to receive benefits in the event of the Participant's death or, if the Participant has died, transfers to or exercise by the Participant's 6 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 9 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 14 of 38 beneficiary, or, in the absence of a validly designated beneficiary, transfers by will or the laws of descent and distribution, (C) subject to any applicable limitations on ISOs, transfers to a family member (or former family member) pursuant to a domestic relations order if approved or ratified by the Company, (D) if the Participant has suffered a disability, permitted transfers or exercises on behalf of the participant by his or her legal representative, or (E) the authorization by the Committee of Cashless Exercise procedures with third parties who provide financing for the purpose of (or who otherwise facilitate) the exercise of Awards consistent with applicable laws and the express authorization of the Committee. (d) Beneficiaries. If permitted by the Committee in the Award Agreement, a Participant under the Plan may name a beneficiary or beneficiaries to whom any vested but unpaid Award shall be paid in the event of the Participant's death. Each such designation shall revoke all prior beneficiary designations by the Participant and shall be effective only if given in a form and manner acceptable to the Committee. In the absence of any such designation, any vested benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate and, subject to the terms of the Plan and of the applicable Award Agreement, any unexercised vested Award may be exercised by the administrator or executor of the Participant's estate. (e) No Rights as a Stockholder. A Participant, or a transferee of a Participant, shall have no rights as a stockholder with respect to any Common Stock covered by an Award until such person has satisfied all of the terms and conditions to receive such Common Stock, has satisfied any applicable withholding or tax obligations relating to the Award and the Shares have been issued (as evidenced by an appropriate entry on the books of the Company or a duly authorized transfer agent of the Company). (f) Termination of Service. The Committee shall establish the effect of a Termination of Service on the rights and benefits under each Award under the Plan and in so doing may make distinctions based upon, inter alia, the cause of termination and type of Award. (g) Consideration. The purchase price for any Award granted under the Plan or the Common Stock to be delivered pursuant to an award, as applicable, may be paid by means of any lawful consideration as determined by the Committee. SECTION 5. SHARES SUBJECT TO PLANAND SHARE LIMITS. (a) Basic Limitation. The stock issuable under the Plan shall be authorized but unissued Shares. The aggregate number of Shares reserved for Awards under the Plan is 173,000,000, subject to adjustment pursuant to Section 11. (b) Share Count. Shares issued pursuant to Awards of Stock Grants or as Restricted Stock Units will count against the Shares available for issuance under the Plan as two (2) Shares for every one (1) Share issued in connection with the Award. Shares issued pursuant to the exercise of Options will count against the Shares available for issuance under the Plan as one (1) Share for every one (1) Share to which such exercise relates. The total number of Shares subject to SARs that are settled in Shares shall be counted in full against the number of Shares available for issuance under the Plan, regardless of the number of Shares actually issued upon settlement of the SARs. If Awards are settled in cash, the Shares that would have been delivered had there been no cash settlement shall not be counted against the Shares available for issuance under the Plan. If Awards are forfeited or are terminated for any reason before vesting or being exercised, then the Shares underlying such Awards shall again become available for Awards under the Plan; provided that any one (1) Share issued pursuant to a Stock Grant or subject to a http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exi Odl.htm 5/23/2007 Page 10 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 15 of 38 Restricted Stock Unit Award that is forfeited or terminated shall be credited as two (2) Shares when determining the number of Shares that shall again become available for Awards under the Plan if upon grant, the Shares underlying such forfeited or terminated Awards were counted as two (2) Shares against the Plan reserve. Shares that are exchanged by a Participant or withheld by the Company as full or partial payment in connection with any Award under the Plan, as well as any Shares exchanged by a Participant or withheld by the Company or one of its Subsidiaries to satisfy the tax withholding obligations related to any Award, shall not be available for subsequent Awards under the Plan. (c) Share Limits. (i) Limits on Options. No Participant shall receive Options or SARs during any Fiscal Year covering, in the aggregate, in excess of 15,000,000 Shares, subject to adjustment pursuant to Section 11. (ii) Limits on Stock Grants and Restricted Stock Units. No Participant shall receive Stock Grants or Restricted Stock Units during any Fiscal Year covering, in the aggregate, in excess of 5,000,000 Shares, subject to adjustment pursuant to Section 11. (d) Reservation of Shares; No Fractional Shares. The Company shall at all times reserve a number of shares of Common Stock sufficient to cover the Company's obligations and contingent obligations to deliver Shares with respect to Awards then outstanding under the Plan (exclusive of any dividend equivalent obligations to the extent the Company has the right to settle such rights in cash). No fractional Shares shall be delivered under the Plan. The Committee may pay cash in lieu of any fractional Shares in settlements of Awards under the Plan. SECTION 6. TERMS AND CONDITIONS OF OPTIONS. (a) Stock Option Agreement. Each Option granted under the Plan shall be evidenced and governed exclusively by a Stock Option Agreement between the Participant and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions that are not inconsistent with the Plan and that the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. (b) Number of Shares. Each Stock Option Agreement shall specify the number of Shares that are subject to the Option, which number is subject to adjustment in accordance with Section 11. (c) Exercise Price. Each Stock Option Agreement shall specify the Option's Exercise Price which shall be established by the Committee and is subject to adjustment in accordance with Section 11. The Exercise Price of an Option shall not be less than 100% of the Fair Market Value (110% for an ISO granted to a 10-Percent Stockholder) on the Grant Date. (d) Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable and/or any performance conditions or Performance Goals pursuant to Section 10 that must be satisfied before the Option may be exercised. The Stock Option Agreement shall also specify the maximum term of the Option; provided that the maximum term of an Option shall in no event exceed seven (7) years from the Grant Date. A Stock Option Agreement may provide for accelerated vesting in the event of the Participant's death, Disability or other events and may provide for tolling of vesting in the event of a Participant's leave of absence. Notwithstanding any other provision of the Plan or the Stock Option Agreement, no Option can be exercised after the expiration date provided in the applicable Stock Option Agreement. http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exI Odl .htm 5/23/2007 Page 11 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 16 of 38 (e) Method of Exercise. An Option may be exercised, in whole or in part, by giving written notice of exercise to the Company or the Company's designee (or, subject to Applicable Laws and if the Company permits, by electronic or voice methods) of the number of Shares to be purchased. Such notice shall be accompanied by payment in full of the aggregate Exercise Price, plus any required withholdings (unless satisfactory arrangements have been made to satisfy such withholdings). The Company reserves the right to delay issuance of the Shares until the such payment obligations are fully satisfied. (f) Payment for Option Shares. The Exercise Price of an Option shall be paid in cash at the time of exercise, except as follows and if so provided for in the applicable Stock Option Agreement: (i) Cashless Exercise. Payment of all or a part of the Exercise Price may be made through Cashless Exercise. (ii) Other Forms of Payment Payment may be made in any other form that is consistent with Applicable Laws, regulations and rules and approved by the Committee. In the case of an ISO granted under the Plan, except to the extent permitted by Applicable Laws, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. In the case of an NSO granted under the Plan, the Committee may, in its discretion at any time, accept payment in any form(s) described in this Section 6(f). SECTION 7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS. (a) SAR Agreement Each SAR granted under the Plan shall be evidenced by a SAR Agreement between the Participant and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. A SAR Agreement may provide for a maximum limit on the amount of any payout notwithstanding the Fair Market Value on the date of exercise of the SAR. The provisions of the various SAR Agreements entered into under the Plan need not be identical. (b) Number of Shares. Each SAR Agreement shall specify the number of Shares to which the SAR pertains, which number is subject to adjustment in accordance with Section 11. (c) Exercise Price. Each SAR Agreement shall specify the Exercise Price, which is subject to adjustment in accordance with Section 11. A SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding, provided that in all cases the Exercise Price of a SAR shall not be less than 100% of the Fair Market Value on the Grant Date. (d) Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable and/or any performance conditions or Performance Goals pursuant to Section 10 that must be satisfied before the SAR is exercised. The SAR Agreement shall also specify the maximum term of the SAR which shall not exceed seven (7) years from the Grant Date. A SAR Agreement may provide for accelerated vesting in the event of the Participant's death, Disability or other events and may provide for tolling of vesting in the event of a Participant's leave of absence. SARs may be awarded in combination with Options or Stock Grants, and such an Award shall provide that the SARs will not be exercisable unless the related Options or Stock Grants are forfeited. A SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or at any subsequent time, but not later than six months before the expiration of such NSO. Notwithstanding any other provision of the Plan or the SAR Agreement, no SAR can be exercised after the expiration date provided in the applicable SAR Agreement. (e) Exercise of SARs. Upon exercise of a SAR, the Participant (or any person having the right to exercise the SAR after Participant's death) shall receive from the Company (i) Shares, (ii) cash or (iii) any combination of Shares and cash, as the Committee shall determine at the time of grant of the SAR, in its sole discretion. The amount of cash and/or the Fair Market Value of Shares received upon exercise of http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 12 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 17 of 38 SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of exercise) of the Shares subject to the SARs exceeds the Exercise Price of the Shares. SECTION 8. TERMS AND CONDITIONS FOR STOCK GRANTS. (a) Time, Amount and Form of Awards. Awards under this Section 8 may be granted in the form of a Stock Grant. A Stock Grant may be awarded in combination with NSOs, and such an Award may provide that the Stock Grant will be forfeited in the event that the related NSOs are exercised. (b) Stock Grant Agreement Each Stock Grant awarded under the Plan shall be evidenced and governed exclusively by a Stock Grant Agreement between the Participant and the Company. Each Stock Grant shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions that are not inconsistent with the Plan that the Committee deems appropriate for inclusion in the applicable Stock Grant Agreement. The provisions of the Stock Grant Agreements entered into under the Plan need not be identical. (c) Number of Shares. Each Stock Grant Agreement shall specify the number of Shares to which the Stock Grant pertains, which number is subject to adjustment in accordance with Section 11. (d) Vesting Conditions. The Committee shall determine the vesting schedule of each Stock Grant. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Grant Agreement which may include performance conditions or Performance Goals pursuant to Section 10. Except for any accelerated vesting required or permitted pursuant to Section 12 and except as otherwise provided in the following provisions of this Section 8(d), and subject to such additional vesting requirements or conditions as the Committee may establish with respect to the Award, each Stock Grant under this Plan shall be subject to the following minimum vesting requirements: (a) if the Stock Grant includes a performance-based vesting condition, the Stock Grant shall not vest earlier than the first anniversary of the Grant Date and vesting shall occur only if the Participant is an Employee or Consultant of the Company or one of its Subsidiaries on such vesting date; and (b) if the Stock Grant does not include a performance-based vesting condition, the Stock Grant shall not vest more rapidly than in monthly installments over the three-year period immediately following the Grant Date and vesting of any vesting installment of the Stock Grant shall occur only if the Participant is an Employee or Consultant of the Company or one of its Subsidiaries on the date such installment is scheduled to vest; provided that the Committee may accelerate or provide in the applicable Award Agreement for the accelerated vesting of any Stock Grant in connection with a change in control of the Participant's employer (or a parent thereof), the termination of the Participant's employment (including a termination of employment due to the Participant's death, disability or retirement, but not including a termination of employment by the Participant's employer for cause), or as consideration or partial consideration for a release by the Participant of pending or threatened claims against the Company, the Participant's employer, or any of their respective officers, directors or other affiliates (regardless of whether the release is given in connection with a termination of employment by the Participant's employer for cause or other circumstances). The Committee may, however, accelerate or provide in the applicable Award Agreement for the accelerated vesting of any Stock Grant, and/or any Restricted Stock Unit Award as provided in Section 9(c), in circumstances not contemplated by the preceding sentence, and/or provide for a vesting schedule for such Stock Grant or Restricted Stock Unit Award that is shorter than the minimum schedule contemplated by the preceding sentence, in such circumstances as the Committee may deem appropriate; provided, however, that the total number of Shares subject to the portion of any such Stock Grant and any such Restricted Stock Unit Award that vests earlier than the minimum vesting dates that would be applicable pursuant to the minimum vesting requirements of the preceding sentence (or, as to any accelerated vesting, provides for accelerated vesting other than in the circumstances contemplated by the preceding sentence) shall not exceed five percent (5%) of the Plan's aggregate Share limit set forth in Section 5(a). 10 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 13 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 18 of 38 (e) Voting and Dividend Rights. The holder of a Stock Grant awarded under the Plan shall have the same voting, dividend and other rights as the Company's other stockholders, except as otherwise stated in the Stock Grant Agreement. A Stock Grant Agreement may require that the holder of such Stock Grant invest any cash dividends received in additional Shares subject to the Stock Grant. Such additional Shares and any Shares received as a dividend pursuant to the Stock Grant shall be subject to the same conditions and restrictions as the Stock Grant with respect to which the dividends were paid. SECTION 9. TERMS AND CONDITIONS OF RESTRICTED STOCK UNITS. (a) Restricted Stock Unit Agreement. Each Restricted Stock Unit granted under the Plan shall be evidenced by a Restricted Stock Unit Agreement between the Participant and the Company. Such Restricted Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Stock Unit Agreements entered into under the Plan need not be identical. (b) Number of Shares. Each Restricted Stock Unit Agreement shall specify the number of Restricted Stock Units to which the Restricted Stock Unit Award pertains, which number is subject to adjustment in accordance with Section 11. (c) Vesting Conditions. The Committee shall determine the vesting schedule of each Restricted Stock Unit Award. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock Unit Agreement which may include performance conditions or Performance Goals pursuant to Section 10. Each Restricted Stock Unit Award shall be subject to the same minimum vesting provisions applicable to Stock Grants as set forth in Section 8(d), including (without limitation) the Committee's discretion under the last sentence of Section 8(d) to grant Awards that do not comply with such minimum vesting provisions, subject to the Share limit set forth in such sentence. (d) Form and Time of Settlement of Restricted Stock Units. Settlement of vested Restricted Stock Units may be made in the form of (i) cash, (ii) Shares or (iii) any combination of both, as determined by the Committee at the time of the grant of the Restricted Stock Units, in its sole discretion. Vested Restricted Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when the vesting conditions applicable to the Restricted Stock Units have been satisfied or have lapsed, or, if the Committee so provides in the Restricted Stock Unit Agreement, it may be deferred, in accordance with Applicable Laws, to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents, as determined by the Committee and provided in the Restricted Stock Unit Agreement. (e) Voting and Dividend Rights. The holders of Restricted Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Restricted Stock Unit awarded under the Plan may, at the Committee's discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Share while the Restricted Stock Unit is outstanding. Dividend equivalents may be converted into additional Restricted Stock Units and may be made subject to the same conditions and restrictions as the Restricted Stock Units to which they attach. Settlement of dividend equivalents may be made in the form of cash, in the form of Shares, or in a combination of both. (f) Creditors' Rights. A holder of Restricted Stock Units shall have no rights other than those of a general creditor of the Company. Restricted Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Restricted Stock Unit Agreement. SECTION 10. PERFORMANCE-BASED AWARDS. (a) General. The Committee may, in its discretion, include performance conditions in an Award. If performance conditions are included in Awards to Covered Employees and such Awards are intended to 11 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 14 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 19 of 38 qualify as "performance-based compensation under Code Section 162(m), then such Awards will be subject to the achievement of Performance Goals with respect to a Performance Period established by the Committee. Such Awards shall be granted and administered pursuant to the requirements of Code Section 162(m). Performance Goals shall be adjusted to mitigate the unbudgeted impact of material, unusual or nonrecurring gains and losses, accounting changes or other extraordinary events not foreseen at the time the targets were set unless the Committee provides otherwise at the time of establishing the targets. Before any Shares underlying an Award or any Award payments are released to a Covered Employee with respect to a Performance Period, the Committee shall certify in writing that the Performance Goals for such Performance Period have been satisfied. Awards with performance conditions that are granted to Participants who are not Covered Employees need not comply with the requirements of Code Section 162(m). (b) Cash Bonus Awards. The Committee may, in its discretion, grant Cash Bonus Awards under the Plan to one or more Employees of the Company or any of its Subsidiaries. Cash Bonus Awards shall be subject to performance conditions as described above and, to the extent such Cash Bonus Awards are granted to Covered Persons and intended to qualify as "performance-based compensation under Section 162(m), shall be subject to the requirements of Section 162(m), including without limitation, the establishment of Performance Goals and certification of performance by the Committee as set forth above. In addition, the aggregate amount of compensation to be paid to any one participant in respect of all Cash Bonus Awards payable only in cash and not related to shares of Common Stock and granted to that participant in any one calendar year shall not exceed $5,000,000. Awards that are cancelled during the year shall be counted against this limit to the extent required by Section 162(m) of the Code. (c) Expiration of Grant Authority. As required pursuant to Section 162(m) of the Code and the regulations promulgated thereunder, the Committee's authority to grant new awards that are intended to qualify as performance-based compensation within the meaning of Section 162(m) of the Code (other than Options and SARs with an Exercise Price that is not less than the Fair Market Value of a share of Common Stock on the Grant Date) shall terminate upon the first meeting of the Company's shareholders that occurs in 2012. SECTION 11 . PROTECTIONAGAINSTDILUTION. (a) Adjustments. Subject to Section 12, upon (or, as may be necessary to effect the adjustment, immediately prior to): any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend) or reverse stock split; any merger, combination, consolidation, or other reorganization; any spin-off, split-up, or similar extraordinary dividend distribution in respect of the Common Stock; or any exchange of Common Stock or other securities of the Company, or any similar, unusual or extraordinary corporate transaction in respect of the Common Stock; then the Committee shall equitably and proportionately adjust (1) the number and type of Shares of Common Stock (or other securities) that thereafter may be made the subject of Awards (including the specific Share limits, maximums and numbers of Shares set forth elsewhere in the Plan), (2) the number, amount and type of Shares of Common Stock (or other securities or property) subject to any outstanding Awards, (3) the grant, purchase, or Exercise Price of any outstanding Awards, and/or (4) the securities, cash or other property deliverable upon exercise or payment of any outstanding Awards, in each case to the extent necessary to preserve (but not increase) the level of incentives intended by the Plan and the then-outstanding Awards. Unless otherwise expressly provided in the applicable Award Agreement, upon (or, as may be necessary to effect the adjustment, immediately prior to) any event or transaction described in the preceding paragraph or a sale of all or substantially all of the business or assets of the Company as an entirety, the Company shall equitably and proportionately adjust the Performance Goals applicable to any then-outstanding performance-based Awards to the extent necessary to preserve (but not increase) the level of incentives intended by the Plan and the then-outstanding performance-based Awards. 12 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 15 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 20 of 38 It is intended that, if possible, any adjustments contemplated by the preceding two paragraphs be made in a manner that satisfies applicable legal, tax (including, without limitation and as applicable in the circumstances, Section 424 of the Code, Section 409A of the Code and Section 162(m) of the Code) and accounting (so as to not trigger any charge to earnings with respect to such adjustment) requirements. Without limiting the generality of Section 3, any good faith determination by the Committee as to whether an adjustment is required in the circumstances pursuant to this Section 11(a), and the extent and nature of any such adjustment, shall be conclusive and binding on all persons. (b) Participant Rights. Except as provided in this Section 11, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. If by reason of an adjustment pursuant to this Section 11 a Participant's Award covers additional or different shares of stock or securities, then such additional or different shares and the Award in respect thereof shall be subject to all of the terms, conditions and restrictions which were applicable to the Award and the Shares subject to the Award prior to such adjustment. SECTION 12. CORPORATE TRANSACTIONS. Upon the occurrence of any of the following: any merger, combination, consolidation, or other reorganization; any exchange of Common Stock or other securities of the Company; a sale of all or substantially all the business, stock or assets of the Company; a dissolution of the Company; or any other event in which the Company does not survive (or does not survive as a public company in respect of its Common Stock); then the Committee may make provision for a cash payment in settlement of, or for the assumption, substitution or exchange of any or all outstanding Share-based Awards or the cash, securities or property deliverable to the holder of any or all outstanding Share-based Awards, based upon, to the extent relevant under the circumstances, the distribution or consideration payable to holders of the Common Stock upon or in respect of such event. Upon the occurrence of any event described in the preceding sentence, then, unless the Committee has made a provision for the substitution, assumption, exchange or other continuation or settlement of the Award or the Award would otherwise continue in accordance with its terms in the circumstances, each Award shall terminate upon the related event; provided that the holder of an Option or SAR shall be given reasonable advance notice of the impending termination and a reasonable opportunity to exercise his or her outstanding vested Options and SARs in accordance with their terms before the termination of such Awards (except that in no case shall more than ten days' notice of the impending termination be required. The Committee may adopt such valuation methodologies for outstanding Awards as it deems reasonable in the event of a cash or property settlement and, in the case of Options, SARs or similar rights, but without limitation on other methodologies, may base such settlement solely upon the excess if any of the per share amount payable upon or in respect of such event over the Exercise Price of the Award. In any of the events referred to in this Section 12, the Committee may take such action contemplated by this Section 12 prior to such event (as opposed to on the occurrence of such event) to the extent that the Committee deems the action necessary to permit the Participant to realize the benefits intended to be conveyed with respect to the underlying Shares. Without limiting the generality of Section 3, any good faith determination by the Committee pursuant to its authority under this Section 12 shall be conclusive and binding on all persons. SECTION 13. LIMITATIONS ON RIGHTS. (a) Participant Rights. A Participant's rights, if any, in respect of or in connection with any Award are derived solely from the discretionary decision of the Company to permit the individual to participate in 13 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 16 of 17 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 21 of 38 the Plan and to benefit from a discretionary Award. By accepting an Award under the Plan, a Participant expressly acknowledges that there is no obligation on the part of the Company to continue the Plan and/or grant any additional Awards. Any Award granted hereunder is not intended to be compensation of a continuing or recurring nature, or part of a Participant's normal or expected compensation, and in no way represents any portion of a Participant's salary, compensation, or other remuneration for purposes of pension benefits, severance, redundancy, resignation or any other purpose. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an employee, consultant or director of the Company, a Parent, or any Subsidiary. The Company and its Parent and Subsidiaries reserve the right to terminate the service of any person at any time, and for any reason, subject to Applicable Laws, the Company's Articles of Incorporation and Bylaws and any applicable written employment agreement (if any), and such terminated person shall be deemed irrevocably to have waived any claim to damages or specific performance for breach of contract or dismissal, compensation for loss of office, tort or otherwise with respect to the Plan or any outstanding Award that is forfeited and/or is terminated by its terms or to any future Award. (b) Shareholders' Rights. Except as provided in Section 9(f), a Participant shall have no dividend rights, voting rights or other rights as a shareholder with respect to any Shares covered by his or her Award prior to the issuance of such Shares (as evidenced by an appropriate entry on the books of the Company or a duly authorized transfer agent of the Company). No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such Shares are issued, except as expressly provided in Sections 9(f) and 11. (c) Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Shares or other securities under the Plan shall be subject to all Applicable Laws and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Shares or other securities pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Shares or other securities, to their registration, qualification or listing or to an exemption from registration, qualification or listing. The person acquiring any securities under the Plan will, if requested by the Company or one of its Subsidiaries, provide such assurances and representations to the Company or one of its Subsidiaries as the Committee may deem necessary or desirable to assure compliance with all applicable legal and accounting requirements. SECTION 14. WITHHOLDING TAXES. (a) General. A Participant shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with his or her Award. The Company shall have the right to deduct from any amount payable under the Plan, including delivery of Shares to be made pursuant to an Award granted under the Plan, all federal, state, city, local or foreign taxes of any kind required by law to be withheld with respect to such payment and the Company may take any such actions as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Company shall not be required to issue any Shares or make any cash payment under the Plan until such obligations are satisfied. (b) Share Withholding. The Committee may (i) permit or require a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Shares that otherwise would be issued to him or her, or (ii) permit a Participant to satisfy such obligations by Cashless Exercise or by surrendering all or a portion of any Shares that he or she previously acquired; provided that Shares withheld or previously owned Shares that are tendered shall not exceed the amount necessary to satisfy the Company's tax withholding obligations at the minimum statutory withholding rates, including, but not limited to, U.S. federal and state income taxes, payroll taxes and foreign taxes, if applicable, unless the previously owned Shares have been held for a minimum duration determined satisfactory as established by the Committee in its sole and absolute discretion. Any payment of taxes by 14 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 17 of 17 Case 5 : 06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 22 of 38 assigning Shares to the Company may be subject to restrictions , including , but not limited to, any restrictions required by rules of the SEC. If any Shares are used to satisfy withholding taxes , such Shares shall be valued based on the Fair Market Value thereof on the date when the withholding for taxes is required to be made. SECTION 15. DURATIONAND AMENDMENTS; MISCELLANEOUS. (a) Term of the Plan. The Plan shall terminate on May 10, 2017 and may be terminated on any earlier date pursuant to this Section 15. (b) Amendment or Termination of the Plan. The Board may, at any time, terminate or, from time to time, amend, modify or suspend the Plan, in whole or in part. No awards may be granted during any period that the Board suspends the Plan. To the extent then required by Applicable Laws or required under Sections 162, 422 or 424 of the Code to preserve the intended tax consequences of the Plan, or deemed necessary or advisable by the Board, any amendment to the Plan shall be subject to shareholder approval. (c) Amendments to Awards. Without limiting any other express authority of the Committee under (but subject to) the express limits of the Plan, the Committee by agreement or resolution may waive conditions of or limitations on Awards to Participants that the Committee in the prior exercise of its discretion has imposed, without the consent of a Participant, and (subject to the requirements of Sections 3 and 15 (d)) may make other changes to the terms and conditions of Awards. Any amendment or other action that would constitute a Re-Pricing of an Award is subject to the limitations set forth in Section 3 (b). (d) Limitations on Amendments to Plan and Awards. No amendment, suspension or termination of the Plan or amendment of any outstanding Award Agreement shall, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of the Participant or obligations of the Company under any Award granted under the Plan prior to the effective date of such change. Changes , settlements and other actions contemplated by Section 11 shall not be deemed to constitute changes or amendments for purposes of this Section 15. (e) Governing Law. The Plan shall be governed by, and construed in accordance with the laws of the State of California (except its choice-of-law provisions) and applicable U.S. Federal Laws. (f) Severability . If a court of competent jurisdiction holds any provision invalid and unenforceable, the remaining provisions of the Plan shall continue in effect. (g) Section Headings. Captions and headings are given to the sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (h) No Corporate Action Restriction. The existence of the Plan , the Award Agreements and the Awards granted hereunder shall not limit, affect or restrict in any way the right or power of the Board or the shareholders of the Company to make or authorize : (i) any adjustment, recapitalization, reorganization or other change in the capital structure or business of the Company or any Subsidiary, (ii) any merger, amalgamation, consolidation or change in the ownership of the Company or any Subsidiary, (iii) any issue of bonds , debentures, capital , preferred or prior preference stock ahead of or affecting the capital stock (or the rights thereof) of the Company or any Subsidiary, (iv) any dissolution or liquidation of the Company or any Subsidiary, (v) any sale or transfer of all or any part of the assets or business of the Company or any Subsidiary, or (vi) any other corporate act or proceeding by the Company or any Subsidiary. No Participant, beneficiary or any other person shall have any claim under any Award or Award agreement against any member of the Board or the Committee, or the Company or any employees, officers or agents of the Company or any Subsidiary, as a result of any such action. 15 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 exl 0d1.htm 5/23/2007 Page 1 of 9 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 23 of 38 EX-10.2 3 a07-14288 1ex10d2.htm EX-10.2 Exhibit 10.2 APPLE INC. AMENDED EMPLOYEE STOCK PURCHASE PLAN (Effective as of May 10, 2007) On April 9, 2007 the Board adopted this amended Employee Stock Purchase Plan, which shall govern all grants of Options made after this amendment and restatement, and which shall become effective upon its approval by the Company's stockholders (the "Effective Date ). For the terms and conditions of the Plan applicable to Option granted before the Effective Date, refer to the version of the Plan in effect as of the date such Option was granted. 1. Purpose of the Plan. The purpose of this Employee Stock Purchase Plan is to encourage and enable Eligible Employees of the Company and certain of its Subsidiaries to acquire proprietary interests in the Company through the ownership of Shares. It is the intention of the Company to have this Plan and the Options granted pursuant to this Plan satisfy the requirements for "employee stock purchase plans that are set forth under Section 423 of the Code, although the Company makes no undertaking nor representation to maintain the qualified status of this Plan or such Options. In addition, Options that do not satisfy the requirements for "employee stock purchase plans that are set forth under Section 423 of the Code may be granted under this Plan pursuant to the rules, procedures or sub-plans adopted by the Board for non-U.S. Eligible Employees. 2. Definitions . Unless otherwise provided in the Plan, capitalized terms, when used herein, shall have the following respective meanings: (a) "Account shall mean a bookkeeping account established and maintained to record the amount of funds accumulated pursuant to the Plan with respect to a Participant for the purpose of purchasing Shares under this Plan. (b) "Administrator shall mean the Board, the Compensation Committee of the Board or any other committee appointed by the Board. (c) "Applicable Laws shall mean all applicable laws, rules, regulations and requirements, including, but not limited to, U.S. state corporate laws, U.S. federal and state securities laws, the Code, the rules of any stock exchange or quotation system on which the Shares are listed or quoted and the applicable laws, rules, regulations and requirements of any other country or jurisdiction where Options are granted under the Plan or where Eligible Employees reside or provide services, as such laws, rules, regulations and requirements shall be in effect from time to time. (d) "Board shall mean the Company's Board of Directors. (e) "Code shall mean the U.S. Internal Revenue Code of 1986, as amended, and the regulations and interpretations promulgated thereunder. (f) "Common Stock shall mean the Company's common stock. (g) "Company shall mean Apple Inc., a California corporation. (h) "Designated Subsidiaries shall mean any Subsidiary designated by the Administrator from time to time, in its sole discretion, whose employees may participate in the Plan, if such employees otherwise qualify as Eligible Employees. The Administrator may provide that the non U.S. Eligible Employees of any Designated Subsidiary shall only be eligible to participate in the Non-Section 423(b) Plan. (i) "Eligible Compensation shall mean and refer to the Participant's cash compensation paid through the Company's or a Designated Subsidiary's payroll system for personal services actually rendered in the course of employment. "Eligible Compensation shall be limited to amounts received by the Participant during the period he or she is participating in the Plan and includes salary, wages and other incentive payments, amounts contributed by the Participant to any benefit plan maintained http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d2.htm 5/23/2007 Page 2 of 9 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 24 of 38 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d2.htm 5/23/2007 Page 3 of 9 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 25 of 38 by the Company or any Designated Subsidiary (including any 401(k) plan, 125 plan, or any other deferred compensation plan), overtime pay, commissions, draws against commissions, shift premiums, sick pay, vacation pay, holiday pay, and shutdown pay, except to the extent that the exclusion of any such item (or a sub-set of any such item) is specifically directed by the Administrator for all Eligible Employees. "Eligible Compensation does not include any remuneration paid in a form other than cash, fringe benefits (including car allowances and relocation payments), employee discounts, expense reimbursement or allowances, long-term disability payments, workmen's compensation payments, welfare benefits, and any contributions that the Company or any Designated Subsidiary makes to any benefit plan (including any 401(k) plan or any other welfare or retirement plan). 0) "Eligible Employee shall mean any person, including an officer, who is regularly employed by the Company or any Designated Subsidiary except for those persons whose customary employment is for less than 20 hours per week or for not more than five months in any calendar year (unless otherwise specified by the Administrator). (k) "Enrollment Agreement means an agreement between the Company and an Eligible Employee, in such form as may be established by the Administrator from time to time, pursuant to which an Eligible Employee elects to participate in this Plan, or elects to make changes with respect to such participation as permitted by this Plan. (1) "Enrollment Period shall mean that period of time prescribed by the Administrator during which Eligible Employees may elect to participate in an Offering Period. The duration and timing of Enrollment Periods may be changed or modified by the Administrator from time to time. (m) "Fair Market Value shall mean, unless otherwise determined or provided by the Administrator in the circumstances, the last price (in regular trading) for a share of Common Stock as furnished by the National Association of Securities Dealers, Inc. (the "NASD ) through the NASDAQ Global Market Reporting System (the "Global Market ) for the date in question or, if no sales of Common Stock were reported by the NASD on the Global Market on that date, the last price (in regular trading) for a share of Common Stock as furnished by the NASD through the Global Market for the next preceding day on which sales of Common Stock were reported by the NASD. The Administrator may, however, provide with respect to one or more Options that the Fair Market Value shall equal the last price for a share of Common Stock as furnished by the NASD through the Global Market on the last trading day preceding the date in question or the average of the high and low trading prices of a share of Common Stock as furnished by the NASD through the Global Market for the date in question or the most recent trading day. If the Common Stock is no longer listed or is no longer actively traded on the Global Market as of the applicable date, the Fair Market Value of the Common Stock shall be the value as reasonably determined by the Administrator for purposes of the Award in the circumstances. The Administrator also may adopt a different methodology for determining Fair Market Value with respect to one or more Options if a different methodology is necessary or advisable to secure any intended favorable tax, legal or other treatment for the particular Option(s) (for example, and without limitation, the Administrator may provide that Fair Market Value for purposes of one or more Options will be based on an average of closing prices (or the average of high and low daily trading prices) for a specified period preceding the relevant date). (n) "Maximum Offering shall mean the maximum number of Shares that may be issued pursuant to the Plan during any given time period. Unless otherwise designated by the Administrator, the Maximum Offering shall be 3,000,000 Shares over any two consecutive Offering Periods where the first such Offering Period begins on the first business day of the Company's second fiscal quarter. With respect to some or all Participants in any Non-423(b) Plan adopted for Participants in specified countries, locations or Designated Subsidiaries, it may also mean a maximum number or value of Shares made available for purchase during a specified period (e.g., a 12 month period) as the http ://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d2.htm 5/23/2007 Page 4 of 9 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 26 of 38 Administrator deems necessary or appropriate to avoid securities filings, to achieve tax objectives or to meet other Company objectives. (o) "Non-423(b) Plan shall mean the rules, procedures or sub-plans, if any, adopted by the Administrator as apart of this Plan, pursuant to which Options that do not satisfy the requirements for "employee stock purchase plans that are set forth under Section 423 of the Code may be granted to non-US Eligible Employees. (p) "Offering Date shall mean the first business day of each Offering Period as designated by the Administrator. (q) "Offering Period shall mean the period established in advance by the Administrator during which payroll deductions shall be collected to purchase Shares pursuant to an offering made under this Plan. Unless otherwise established by the Administrator prior to the start of an Offering Period, each Offering Period shall consist of two fiscal quarters of the Company, with each such Offering Period beginning on the first business day of the second and fourth fiscal quarter of each year, and ending on the last business day of the fiscal quarter that immediately follows each such second and fourth fiscal quarter. (r) "Option shall mean the right granted to Participants to purchase Shares pursuant to an offering made under this Plan. (s) "Outstanding Election shall mean a Participant's then-current election to purchase Shares in an Offering Period, or that part of such an election which has not been cancelled (including any voluntary cancellation under Section 9 and deemed cancellation under Section 14) prior to the close of business on the last Trading Day of the Offering Period or such other date as determined by the Administrator. (t) "Participant" shall mean an Eligible Employee who has elected to participate in the Plan pursuant to Section 6. (u) "Plan " shall mean this Apple Inc. Employee Stock Purchase Plan, as it may be amended from time to time. (v) "Purchase Price Per Share shall be the lower of (i) eighty-five percent (85%) of the Fair Market Value on the Offering Date or (ii) eighty-five percent (85%) of the Fair Market Value on the last Trading Day of the Offering Period. (w) "Shares shall mean one share of Common Stock. (x) "Subsidiary shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. (y) "Termination ofService means, in the case of an Employee, a cessation of the employee-employer relationship between the Employee and the Company or a Subsidiary for any reason, including but not by way of limitation, a termination by resignation, discharge, death, disability, retirement or the disaffiliation of a Subsidiary but excluding such termination where there is a simultaneous reemployment by the Company or a Subsidiary, and excluding any bona fide and Company approved leave of absence such as family leave, medical leave, personal leave and military leave. (z) "Trading Day shall mean a day on which the NASDAQ is open for trading. http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d2.htm 5/23/2007 Page 5 of 9 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 27 of 38 3. Shares Reserved for Plan. Subject to adjustment pursuant to Section 17, a maximum of 76,000,000 Shares may be delivered pursuant to Options granted under this Plan. The Shares reserved for issuance pursuant to this Plan shall be authorized but unissued Shares. If any Option granted under the Plan shall for any reason terminate without having been exercised, the Shares not purchased under such Option shall again become available for issuance under the Plan. If the number of Shares to be purchased by Participants on the last day of an Offering Period exceeds (i) the total number of Shares then available under the Plan, or (ii) the Maximum Offering, then the Administrator shall make a pro-rata allocation of any Shares that may be issued pursuant to the Plan in as uniform and equitable a manner as is reasonably practicable, as determined in the Administrator's sole discretion. In such event, the Company shall provide written notice to each affected Participant of the reduction of the number of Shares to be purchased under the Participant's Option. If the Administrator determines that some or all of the Shares to be purchased by Participants on the last day of an Offering Period would not be issued in accordance with Applicable Laws or any approval by any regulatory body as may be required, or the Shares would not be issued pursuant to an effective Form S-8 registration statement or that the issuance of some or all of such Shares pursuant to a Form S-8 registration statement is not advisable due to the risk that such issuance will violate Applicable Laws, the Administrator may, without Participant consent, terminate any outstanding Offering Period and the Options granted pursuant thereto and refund in cash all affected Participants' entire Account balances for such Offering Period as soon as practicable thereafter. 4. Administration of the Plan. The Administrator shall have the authority and responsibility for the day-to-day administration of the Plan, which, to the extent permitted by Applicable Laws, it may delegate to a sub-committee. Subject to the provisions of the Plan, the Administrator shall have full authority, in its sole discretion, to take any actions it deems necessary or advisable for the administration of the Plan, including, but not limited to: (a) Interpreting the Plan and adopting rules and regulations it deems appropriate to implement the Plan including amending any outstanding Option as it may deem advisable or necessary to comply with Applicable Laws, and making all other decisions relating to the operation of the Plan; (b) Establishing the timing and length of Offering Periods; (c) Establishing minimum and maximum contribution rates; (d) Establishing new or changing existing limits on the number of Shares an Eligible Employee may elect to purchase with respect to any Offering Period if such limits are announced prior to the first Offering Period to be affected; (e) Adopting such rules or subplans as may be deemed necessary or appropriate to comply with the laws of other countries, allow for tax-preferred treatment of the Options or otherwise provide for the participation by Eligible Employees who reside outside of the U.S., including determining which Eligible Employees are eligible to participate in the Non-423(b) Plan or other subplans established by the Administrator. (f) Establishing the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars and permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the processing of properly completed enrollment forms. The Administrator's determinations under the Plan shall be final and binding on all persons. 4 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d2.htm 5/23/2007 Page 6 of 9 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 28 of 38 5. Grant of Option; Limitations. (a) Grant of Option. On each Offering Date, each Participant shall automatically be granted an Option to purchase as many whole Shares as the Participant will be able to purchase with the payroll deductions credited to the Participant's Account during the applicable Offering Period. (b) Limit on Number ofShares Purchased. Notwithstanding the above, the maximum number of Shares a Participant may purchase shall be limited by the Maximum Offering as described in Section 3. (c) Limit on Value ofShares Purchased. Any provisions of the Plan to the contrary notwithstanding, excluding Options granted pursuant to any Non-423(b) Plan, no Participant shall be granted an Option to purchase Shares under this Plan which permits the Participant's rights to purchase Shares under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of the Fair Market Value of such Shares (determined at the time such Options are granted) for each calendar year in which such Options are outstanding at any time. (d) 5% Owner Limit. Any provisions of the Plan to the contrary notwithstanding, no Participant shall be granted an Option to purchase Shares under this Plan if such Participant (or any other person whose stock would be attributed to such Participant pursuant to Section 424(d) of the Code), immediately after such Option is granted, would own or hold options to purchase Shares possessing five percent (5%) or more of the total combined voting power or value of all classes of Shares or any of its Subsidiaries. (e) Other Limitation. The Administrator may determine, as to any Offering Period, that the offer will not be extended to highly compensated Eligible Employees within the meaning of Section 414(q) of the Code. 6. Participation in the Plan. An Eligible Employee may become a Participant for an Offering Period by completing the prescribed enrollment agreement and submitting such form to the Company (or the Company's designee), or by following an electronic or other enrollment process as prescribed by the Company, during the Enrollment Period prior to the commencement of the Offering Period to which it relates. Such enrollment agreement shall contain the payroll deduction authorization described in Section 8. A payroll deduction authorization will be effective for the first Offering Period following the submission of the enrollment agreement and all subsequent Offering Periods as provided by Section 7 until it is terminated in accordance with Sections 9 or 14, it is modified by filing another enrollment agreement in accordance with this Section 6 or an election is made to decrease payroll deductions in accordance with Section 8 or until the Participant's employment terminates or the Participant is otherwise ineligible to participate in the Plan. 7. Automatic Re-Enrollment. Following the end of each Offering Period, each Participant shall be automatically re- enrolled in the next Offering Period at the applicable rate of payroll deductions in effect on the last Trading Day of the prior Offering Period or otherwise as provided under Section 8, unless the Participant has elected to withdraw from the Plan in accordance with Section 9, the Participant's employment terminates or the Participant is otherwise ineligible to participate in the next Offering Period. Notwithstanding the foregoing, the Administrator may require current Participants to complete and submit a new enrollment agreement at any time it deems necessary or desirable to facilitate Plan administration or for any other reason. 8. Payroll Deductions. Each Participant's enrollment agreement shall contain a payroll deduction authorization pursuant to which he or she shall elect to have a designated whole percentage of Eligible Compensation between I% and 10% deducted on each payday during the Offering Period and credited to the Participant's Account for the purchase of Shares pursuant to the offering. Payroll deductions shall http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d2.htm 5/23/2007 Page 7 of 9 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 29 of 38 commence on the Offering Date of the first Offering Period to which the enrollment agreement relates (or as soon as administratively practicable thereafter) and shall continue through subsequent Offering Periods pursuant to Section 7. Participants shall not be permitted to make any separate cash payments into their Account for the purchase of Shares pursuant to an offering. Notwithstanding the foregoing, if local law prohibits payroll deductions, a Participant may elect to participate in an Offering Period through contributions to his or her Account in a form acceptable to the Administrator. In such event, any such Participant shall be deemed to participate in a sub-plan to the Plan, unless the Administrator otherwise expressly provides that such Participant shall be treated as participating in the Plan. If in any payroll period, a Participant has no pay or his or her pay is insufficient (after other authorized deductions) to permit deduction of the full amount of his or her payroll deduction election, then (i) the payroll deduction election for such payroll period shall be reduced to the amount of pay remaining, if any, after all other authorized deductions, and (ii) the percentage or dollar amount of Eligible Compensation shall be deemed to have been reduced by the amount of the reduction in the payroll deduction election for such payroll period. Deductions of the full amount originally elected by the Participant will recommence as soon as his or her pay is sufficient to permit such payroll deductions; provided, however, no additional amounts will be deducted to satisfy the Outstanding Election. A Participant may elect to decrease, but not increase, the rate of his or her payroll deductions during an Offering Period by submitting the prescribed form to the Company (or the Company's designee) at any time prior to the first day of the last calendar month of such Offering Period. Any such payroll deduction change will be effective as soon as administratively practicable thereafter and will remain in effect for successive Offering Periods as provided in Section 7 unless the Participant submits a new enrollment agreement for a later Offering Period, the Participant elects to decrease his or her payroll deductions, the Participants elects to withdraw from the Plan in accordance with Section 9, or the Participant is withdrawn from the Plan in accordance with Section 14 or is otherwise ineligible to participate in the Plan. A Participant may only increase his or her rate of payroll deductions to be effective for the next Offering Period by completing and filing with the Company a new enrollment agreement authorizing the payroll deductions. Notwithstanding the foregoing, the Company may adjust a Participant's payroll deductions at any time during an Offering Period to the extent necessary to comply with Section 423(b)(8) of the Code and the limitations of Section 5. Payroll deductions will recommence and be made in accordance with the Outstanding Election prior to such Company adjustment starting with the first Offering Period that begins in the next calendar year (or such other time as is determined by the Administrator) unless the Participant withdraws in accordance with Section 9, is withdrawn from the Plan in accordance with Section 14 or is otherwise ineligible to participate in the Plan. 9. Withdrawal from Offering Period After Offering Date. An Eligible Employee may withdraw from any Offering Period after the applicable Offering Date, in whole but not in part, at any time prior to the date specified by the Administrator or, if no such date is specified by the Administrator, the last Trading Day of such Offering Period, by submitting the prescribed withdrawal notice to the Company (or the Company's designee). If a Participant withdraws from an Offering Period, the Participant's Option for such Offering Period will automatically be terminated, and the Company will refund in cash the Participant's entire Account balance for such Offering Period as soon as practicable thereafter. A Participant's withdrawal from a particular Offering Period shall be irrevocable. If a Participant wishes to participate in a subsequent Offering Period, he or she must re-enroll in the Plan by timely submitting a new enrollment agreement in accordance with Section 6. 10. Purchase of Stock. On the last Trading Day of each Offering Period, the Administrator shall cause the amount credited to each Participant's Account to be applied to purchase as many Shares pursuant to the Participant's Option as possible at the Purchase Price Per Share, subject to limitations of 6 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d2.htm 5/23/2007 Page 8 of 9 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 30 of 38 Sections 3 and 5. In no event may Shares be purchased pursuant to an Option more than 27 months after the Offering Date of such Option. The amount applied to purchase Shares pursuant to the Option shall be deducted from the Participant's Account. Any amounts remaining credited to the Participant's Account on the last Trading Day of the Offering Period shall be retained in the Participant's Account and rolled forward to the next Offering Period. 11. Interest on Payments. No interest shall be paid on sums withheld from a Participant's pay for the purchase of Shares under this Plan unless otherwise determined necessary by the Administrator for Participants in the Non-423(b) Plan. 12. Rights as Shareholder. A Participant will not be a shareholder with respect to Shares subject to the Participant's Options issued under the Plan until the Shares are purchased pursuant to the Options and such Shares are transferred into the Participant's name on the Company's books and records. 13. Options Not Transferable. A Participant's Options under this Plan may not be sold, pledged, assigned, or transferred in any manner. If a Participant sells, pledges , assigns or transfers his or her Options in violation of this Section 13, such Options shall immediately terminate, and the Participant shall immediately receive a refund of the amount then credited to the Participant's Account. 14. Deemed Cancellations. (a) Termination ofEmployment. In the event of a Participant's Termination of Service, any outstanding Option held by the Participant shall immediately terminate, the Participant shall be withdrawn from the Plan and the Participant shall receive a refund of the amount then credited to the Participant's Account. (b) Death ofa Participant. If a Participant dies, any outstanding Option held by the Participant shall immediately terminate and the Participant shall be withdrawn from the Plan. As soon as administratively practicable after the Participant's death, the amount then credited to the Participant's Account shall be remitted to the executor, administrator or other legal representative of the Participant's estate or, if the Administrator permits a beneficiary designation, to the beneficiary or beneficiaries designated by the Participant if such designation has been filed with the Company or the Company's designee before such Participant's death. If such executor, administrator or other legal representative of the Participant's estate has not been appointed (to the knowledge of the Company) or if the beneficiary or beneficiaries are no longer living at the time of the Participant's death, the Company, in its discretion, may deliver the outstanding Account balance to the spouse or to any one or more dependents or relatives of the Participant or to such other person as the Company may designate. 15. Application of Funds. All funds received by the Company in payment for Shares purchased under this Plan and held by the Company at any time may be used for any valid corporate purpose. 16. No Employment/Service Rights. Neither the action of the Company in establishing the Plan, nor any action taken under the Plan by the Board or the Administrator, nor any provision of the Plan itself, shall be construed so as to grant any person the right to remain in the employ of the Company or any Subsidiary for any period of specific duration, and such person's employment may be terminated at any time, with or without cause. 17. Adjustments . Subject to Section 18, upon (or, as may be necessary to effect the adjustment, immediately prior to): any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend) or reverse stock split; any merger, combination, consolidation, or other reorganization; any spin-off, split-up, or similar extraordinary dividend distribution in respect of the Common Stock; or any exchange of Common Stock or other securities of the Company, or any similar, unusual or extraordinary corporate transaction in respect of the Common Stock; then the Administrator shall equitably and proportionately adjust (1) the number and type of Shares of Common Stock (or other http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d2.htm 5/23/2007 Page 9 of 9 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 31 of 38 securities) that thereafter may be made the subject of Options (including the specific Share limits, maximums and numbers of Shares set forth elsewhere in the Plan), (2) the number, amount and type of Shares of Common Stock (or other securities or property) subject to any outstanding Options, (3) the Purchase Price Per Share of any outstanding Options, and/or (4) the securities, cash or other property deliverable upon exercise or payment of any outstanding Options, in each case to the extent necessary to preserve (but not increase) the level of incentives intended by the Plan and the then-outstanding Options. It is intended that, if possible, any adjustments contemplated by the preceding paragraph be made in a manner that satisfies applicable legal, tax (including, without limitation and as applicable in the circumstances, Section 424 of the Code and Section 409A of the Code) and accounting (so as to not trigger any charge to earnings with respect to such adjustment) requirements. Without limiting the generality of Section 4, any good faith determination by the Administrator as to whether an adjustment is required in the circumstances pursuant to this Section 17, and the extent and nature of any such adjustment, shall be conclusive and binding on all persons. 18. Merger or Liquidation of Company. In the event the Company or its shareholders enter into an agreement to dispose of all or substantially all of the assets or outstanding capital stock of the Company by means of a sale, merger or reorganization in which the Company will not be the surviving corporation (other than a reorganization effected primarily to change the State in which the Company is incorporated, a merger or consolidation with a wholly-owned Subsidiary, or any other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings, regardless of whether the Company is the surviving corporation) or in the event the Company is liquidated, then all outstanding Options under the Plan shall automatically be exercised immediately prior to the consummation of such sale, merger, reorganization or liquidation (deemed the end of the Offering Period in such case) by causing all amounts credited to each Participant's Account to be applied to purchase as many Shares pursuant to the Participant's Option as possible at the Purchase Price Per Share, subject to the limitations of Sections 3 and 5. 19. Acquisitions and Dispositions. The Administrator may, in its sole and absolute discretion and in accordance with principles under Section 423 of the Code, create special Offering Periods for individuals who become Eligible Employees solely in connection with the acquisition of another company or business by merger, reorganization or purchase of assets and, notwithstanding Section 14(b), may provide for special purchase dates for Participants who will cease to be Eligible Employees solely in connection with the disposition of all or a portion of any Designated Subsidiary or a portion of the Company, which Offering Periods and purchase rights granted pursuant thereto shall, notwithstanding anything stated herein, be subject to such terms and conditions as the Administrator considers appropriate in the circumstances. 20. Government Approvals or Consents. This Plan and any offering and sales of Shares or delivery of Shares under this Plan to Eligible Employees under it are subject to any governmental or regulatory approvals or consents that may be or become applicable in connection therewith. 21. Plan Amendment; Plan Termination. The Board may from time to time amend or terminate the Plan in any manner it deems necessary or advisable; provided, however, that no such action shall adversely affect any then outstanding and vested Options under the Plan unless such action is required to comply with Applicable Laws; and provided, further, that no such action of the Board shall be effective without the approval of the Company's shareholders if such approval is required by Applicable Laws. Upon the termination of the Plan, any balance in a Participant's Account shall be refunded to him or her as soon as practicable thereafter. 22. Governing Law. The Plan shall be governed by, and construed in accordance with the laws of the State of California (except its choice-of-law provisions) and applicable U.S. Federal Laws. 8 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d2.htm 5/23/2007 Page 1 of 7 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 32 of 38 EX-10.3 4 a07-14288 1ex10d3.htm EX-10.3 Exhibit 10.3 APPLE INC. 1997 DIRECTOR STOCK OPTION PLAN (Effective as of May 10, 2007) On April 9, 2007 the Board adopted this amended 1997 Director Stock Option Plan (the "Plan ), which shall govern all grants of Options made after this amendment and restatement, and which shall become effective upon its approval by the Company's shareholders (the "Effective Date ). For the terms and conditions of the Plan applicable to Options granted before the Effective Date, refer to the version of the Plan in effect as of the date such Option was granted. 1. PURPOSES. The purposes of the Plan are to retain the services of qualified individuals who are not employees of the Company to serve as members of the Board and to secure for the Company the benefits of the incentives inherent in increased Common Stock ownership by such individuals by granting such individuals Options to purchase shares of Common Stock. 2. ADMINISTRATION. The Administrator will be responsible for administering the Plan. The Administrator will have authority to adopt such rules as it may deem appropriate to carry out the purposes of the Plan, and shall have authority to interpret and construe the provisions of the Plan and any agreements and notices under the Plan and to make determinations pursuant to any Plan provision. Each interpretation, determination or other action made or taken by the Administrator pursuant to the Plan shall be final and binding on all persons. The Administrator shall not be liable for any action or determination made in good faith, and shall be entitled to indemnification and reimbursement in the manner provided in the Company's Articles of Incorporation and By-Laws as such documents may be amended from time to time. 3. SHARES AVAILABLE. Subject to the provisions of Section 7(b) of the Plan, the maximum number of shares of Common Stock which may be issued under the Plan shall not exceed 1,600,000 shares (the "SECTION 3 LIMIT ). Either authorized and unissued shares of Common Stock or treasury shares may be delivered pursuant to the Plan. If Options are forfeited or are terminated for any reason before vesting or being exercised, then the shares underlying such Options shall again become available for Options under the Plan. Shares that are exchanged by a Non-Employee Director or withheld by the Company as full or partial payment in connection with any Option under the Plan shall not be available for subsequent Options under the Plan. 4. OPTIONS. Each Non-Employee Director shall receive grants of Options under the Plan as follows: (a) OPTION GRANTS. (i) INITIAL GRANT. Non-Employee Directors who were members of the Board on the day prior to the Effective Date shall be granted an Initial Option to purchase 15,000 shares of Common Stock as of August 14, 1997 ("INITIAL GRANT DATE ), PROVIDED that such individual continues to serve as a Non-Employee Director through the Initial Grant Date. Non-Employee Directors who were elected or appointed to the Board on the Effective Date shall be granted an Initial Option to purchase 30,000 shares of Common Stock on the Initial Grant Date, PROVIDED that such individual continues to serve as a Non-Employee Director through the Initial Grant Date. Non-Employee Directors who are elected or appointed to the Board after the Effective Date shall be granted an Initial Option to purchase 30,000 shares of Common Stock as of the date of their election or appointment to the Board. The provisions of this Section 4(a)(i) shall not apply to any member of the Board who first becomes a Non- Employee Director by reason of such member's ceasing to be an employee of the Company and its Subsidiaries. http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d3.htm 5/23/2007 Page 2 of 7 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 33 of 38 (ii) ANNUAL GRANTS. Each Non-Employee Director shall receive an Annual Option to purchase 10,000 shares of Common Stock on the fourth anniversary of the Non-Employee Director' s initial election or appointment to the Board and on each subsequent anniversary thereof, PROVIDED that the individual has remained in continuous service as a director of the Company through such anniversary date and is a Non-Employee Director on the applicable anniversary date. (b) EXERCISE PRICE. The per share exercise price of each Option shall be the Fair Market Value of a share of Common Stock as of the date of grant of the Option determined in accordance with the provisions of the Plan. (c) VESTING. Initial Options shall vest and become exercisable in equal annual installments on each of the first through third anniversaries of the date of grant, PROVIDED that the Non-Employee Director has remained in continuous service as a director of the Company through each such anniversary date. Annual Options shall be fully vested and immediately exercisable on their date of grant. (d) TERM OF OPTIONS. (i) TEN-YEAR TERM. Each Option shall expire ten (10) years from its date of grant, subject to earlier termination as provided herein. (ii) EXERCISE FOLLOWING TERMINATION OF SERVICE DUE TO DEATH. If a Non-Employee Director ceases to be a member of the Board by reason of such Non-Employee Director's death, the Options granted to such Non-Employee Director may be exercised by such Non-Employee Director's Beneficiary, but only to the extent the Option was exercisable at the time of the Non-Employee Director's death, at any time within three (3) years after the date of such termination of service, subject to the earlier expiration of such Options as provided for in Section 4(d)(i) above. At the end of such three-year period, the vested portion of the Option shall expire. The unvested portion of the Option shall expire on the date of the Non-Employee Director's death. (iii) TERMINATION OF OPTIONS IF A NON-EMPLOYEE DIRECTOR IS REMOVED FROM THE BOARD FOR CAUSE. In the event a Non-Employee Director is removed from the Board for "cause, all Options granted to such Non-Employee Director (whether or not then vested and exercisable) shall immediately terminate and be of no further force and effect as of the effective date of such removal from the Board. Whether a Non- Employee Director is removed by the Board for "cause shall be determined by the Board in accordance with the By-Laws of the Company. (iv) EXERCISE FOLLOWING OTHER TERMINATIONS OF SERVICE. If a Non-Employee Director ceases to be a member of the Board for any reason other than death or removal from the Board for cause, the Options granted to such Non-Employee Director may be exercised by such Non-Employee Director, but only to the extent the Option was exercisable at the time of the Non-Employee Director's termination, at any time within ninety (90) days after the date of such termination of service, subject to the earlier expiration of such Options as provided for in Section 4(d)(i) above. At the end of such ninety-day period, the vested portion of the Option shall expire. The unvested portion of the Option shall expire on the date of the Non-Employee Director's termination of service with the Board. (e) TIME AND MANNER OF EXERCISE OF OPTIONS. (i) NOTICE OF EXERCISE. Subject to the other terms and conditions hereof, a Non-Employee Director may exercise any Option, to the extent such Option is vested, by giving http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d3.htm 5/23/2007 Page 3 of 7 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 34 of 38 written notice of exercise to the Company; PROVIDED, HOWEVER, that in no event shall an Option be exercisable for a fractional share. The date of exercise of an Option shall be the later of (A) the date on which the Company receives such written notice and (B) the date on which the conditions provided in Section 4(e)(ii) are satisfied. (ii) METHOD OF PAYMENT. The consideration to be paid for the shares to be issued upon exercise of an Option may consist of (A) cash, (B) check, (C) 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 the Option shall be exercised and which have been owned by the Non-Employee Director for at least six (6) months at the time of exercise, (D) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of proceeds required to pay the exercise price, or (E) any combination of the foregoing methods of payment. (iii) STOCKHOLDER RIGHTS. A Non-Employee Director shall have no rights as a stockholder with respect to any shares of Common Stock issuable upon exercise of an Option until a certificate evidencing such shares shall have been issued to the Non-Employee Director pursuant to Section 4(e)(v), and no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date upon which the Non-Employee Director shall become the holder of record thereof. (iv) LIMITATION ON EXERCISE. No Option shall be exercisable unless the Common Stock subject thereto has been registered under the Securities Act and qualified under applicable state "blue sky laws in connection with the offer and sale thereof, or the Company has determined that an exemption from registration under the Securities Act and from qualification under such state "blue sky laws is available. (v) ISSUANCE OF SHARES. Subject to the foregoing conditions, as soon as is reasonably practicable after its receipt of a proper notice of exercise and payment of the exercise price of the Option for the number of shares with respect to which the Option is exercised, the Company shall deliver to the Non-Employee Director (or following the Non-Employee Director's death, the Beneficiary entitled to exercise the Option), at the principal office of the Company or at such other location as may be acceptable to the Company and the Non-Employee Director (or such Beneficiary), one or more stock certificates for the appropriate number of shares of Common Stock issued in connection with such exercise. Shares sold in connection with a "cashless exercise described in clause C of Section 4(e)(ii) shall be delivered to the broker referred to therein in accordance with the procedures established by the Company from time to time. (f) RESTRICTIONS ON TRANSFER. An Option may not be transferred, pledged, assigned, or otherwise disposed of, except by will or by the laws of descent and distribution; PROVIDED, HOWEVER, that an Option may be, with the approval of the Administrator, transferred to a Non-Employee Director's family members or to one or more trusts established in whole or in part for the benefit of one or more of such family members. The Option shall be exercisable, during the Non-Employee Director's lifetime, only by the Non-Employee Director or by the individual or entity to whom the Option has been transferred in accordance with the previous sentence. No assignment or transfer of the Option, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, except by will or the laws of descent and distribution, shall vest in the assignee or transferee any interest or right in the Option, but immediately upon any attempt to assign or transfer the Option the same shall terminate and be of no force or effect. http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d3.htm 5/23/2007 Page 4 of 7 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 35 of 38 5. DESIGNATION OF BENEFICIARY. (a) BENEFICIARY DESIGNATIONS. Each Non-Employee Director may designate a Beneficiary to exercise an Option upon the Non-Employee Director's death by executing a Beneficiary Designation Form. (b) CHANGE OF BENEFICIARY DESIGNATION. A Non-Employee Director may change an earlier Beneficiary designation by executing a later Beneficiary Designation Form and delivering it to the Administrator. The execution of a Beneficiary Designation Form and its receipt by the Administrator will revoke and rescind any prior Beneficiary Designation Form. 6. ADJUSTMENTS. (a) Subject to Section 7, upon (or, as may be necessary to effect the adjustment, immediately prior to): any reclassification, recapitalization, stock split (including a stock split in the form of a stock dividend) or reverse stock split; any merger, combination, consolidation, or other reorganization; any spin-off, split-up, or similar extraordinary dividend distribution in respect of the Common Stock; or any exchange of Common Stock or other securities of the Company, or any similar, unusual or extraordinary corporate transaction in respect of the Common Stock; then the Committee shall equitably and proportionately adjust (1) the number and type of shares of Common Stock (or other securities) that thereafter may be made the subject of Options (including the Section 3 Limit), (2) the number, amount and type of shares of Common Stock (or other securities or property) subject to any outstanding Options, (3) the exercise price of any outstanding Options, and/or (4) the securities, cash or other property deliverable upon exercise or payment of any outstanding Options, in each case to the extent necessary to preserve (but not increase) the level of incentives intended by the Plan and the then-outstanding Options. Any good faith determination by the Administrator as to whether an adjustment is required in the circumstances pursuant to this Section 6(a), and the extent and nature of any such adjustment, shall be conclusive and binding on all persons. (b) It is intended that, if possible, any adjustments contemplated by the preceding two paragraphs be made in a manner that satisfies applicable legal, tax (including, without limitation and as applicable in the circumstances, Section 409A of the Code) and accounting (so as to not trigger any charge to earnings with respect to such adjustment) requirements. 7. CORPORATE TRANSACTIONS. (a) Upon the occurrence of any of the following: any merger, combination, consolidation, or other reorganization; any exchange of Common Stock or other securities of the Company; a sale of all or substantially all the business, stock or assets of the Company; a dissolution of the Company; or any other event in which the Company does not survive (or does not survive as a public company in respect of its Common Stock); then the Administrator may make provision for a cash payment in settlement of, or for the assumption, substitution or exchange of any or all outstanding Options or the cash, securities or property deliverable to the holder of any or all outstanding Options, based upon, to the extent relevant under the circumstances, the distribution or consideration payable to holders of the Common Stock upon or in respect of such event. Upon the occurrence of any event described in the preceding sentence, then, unless the Administrator has made a provision for the substitution, assumption, exchange or other continuation or settlement of the Option or the Option would otherwise continue in accordance with its terms in the circumstances, each Option shall terminate upon the related event; provided that the holders of such Options shall be given reasonable advance notice of the impending termination and a reasonable opportunity to exercise their outstanding vested Options in accordance with their terms before the termination of such Options (except that in no case shall more than ten days' notice of the impending termination be required. 4 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d3.htm 5/23/2007 Page 5 of 7 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 36 of 38 (c) The Administrator may adopt such valuation methodologies for outstanding Options as it deems reasonable in the event of a cash or property settlement and, without limitation on other methodologies , may base such settlement solely upon the excess if any of the per share amount payable upon or in respect of such event over the exercise price of the Option. In any of the events referred to in this Section 7 , the Administrator may take such action contemplated by this Section 7 prior to such event (as opposed to on the occurrence of such event) to the extent that the Administrator deems the action necessary to permit the Non-Employee Director to realize the benefits intended to be conveyed with respect to the underlying shares. Without limiting the generality of Section 2, any good faith determination by the Administrator pursuant to its authority under this Section 7 shall be conclusive and binding on all persons. 8. TERMINATION AND AMENDMENT OF THE PLAN. (a) TERMINATION. Unless earlier terminated by the Board, the Plan shall terminate on May 10, 2012. Following such date, no further grants of Options shall be made pursuant to the Plan. (b) GENERAL POWER OF BOARD. Notwithstanding anything herein to the contrary, the Board may at any time and from time to time terminate, modify, suspend or amend the Plan in whole or in part or, subject to Sections 8 (c) and 8(d), amend the terms of any outstanding Option; PROVIDED, HOWEVER, that no such termination, modification, suspension or amendment shall be effective without shareholder approval if such approval is required to comply with any applicable law or stock exchange rule; and PROVIDED FURTHER that the Board may not, without shareholder approval, increase the maximum number of shares issuable under the Plan except as provided in Section 6 above. (c) WHEN NON-EMPLOYEE DIRECTORS' CONSENTS REQUIRED. The Board may not alter, amend, suspend, or terminate the Plan or amend the terms of any outstanding Option without the consent of any Non-Employee Director to the extent that such action would adversely affect his or her rights with respect to Options that have previously been granted. (d) NO REPRICING. Notwithstanding any other provision herein or in any agreement evidencing any Option, in no case (except due to an adjustment contemplated by Section 6 or any repricing that may be approved by shareholders) shall any action be taken with respect to the Plan or any Option hereunder that would constitute a repricing (by amendment, substitution, cancellation and regrant, exchange or other means) of the per share exercise price of any Option. 9. MISCELLANEOUS. (a) NO RIGHT TO REELECTION. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any of its members for reelection by the Company's shareholders, nor confer upon any Non- Employee Director the right to remain a member of the Board for any period of time, or at any particular rate of compensation. (b) SECURITIES LAW RESTRICTIONS. The Administrator may require each Non-Employee Director or any other person purchasing or acquiring shares of Common Stock pursuant to the Plan to agree with the Company in writing that such Non-Employee Director is acquiring the shares for investment and not with a view to the distribution thereof or provide such other assurances and representations to the Company as the Administrator may deem necessary or desirable to assure compliance with all applicable legal and accounting requirements. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission or any exchange upon which the Common Stock is then listed, and any applicable federal or state securities law, and the Administrator may cause a legend or legends to be put on any such certificates to make appropriate reference to such http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d3.htm 5/23/2007 Page 6 of 7 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 37 of 38 restrictions. No shares of Common Stock shall be issued hereunder unless the Company shall have determined that such issuance is in compliance with, or pursuant to an exemption from, all applicable federal and state securities laws. (c) EXPENSES. The costs and expenses of administering the Plan shall be borne by the Company. (d) APPLICABLE LAW. Except as to matters of federal law, the Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of California without giving effect to conflicts of law principles. (e) AUTHORITY OF THE COMPANY AND SHAREHOLDERS. The existence of the Plan shall not affect or restrict in any way the right or power of the Company or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company ' s capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options , warrants or rights to purchase stock or of bonds , debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business , or any other corporate act or proceeding, whether of a similar character or otherwise. 10. DEFINITIONS. Capitalized words not otherwise defined in the Plan have the meanings set forth below: "ADMINISTRATOR means the Board. The Board may delegate ministerial, non-discretionary functions to individuals who are officers or employees of the Company or any of its Subsidiaries or to third parties. "ANNUAL MEETING means an annual meeting of the Company' s shareholders. "ANNUAL OPTION means an Option granted to a Non-Employee Director pursuant to Section 4(a)(ii) of the Plan. "BENEFICIARY or "BENEFICIARIES means an individual or entity designated by a Non-Employee Director on a Beneficiary Designation Form to exercise Options in the event of the Non-Employee Director's death; PROVIDED, HOWEVER, that, if no such individual or entity is designated or if no such designated individual is alive at the time of the Non-Employee Director's death, Beneficiary shall mean the Non-Employee Director's estate. "BENEFICIARY DESIGNATION FORM means a document, in a form approved by the Administrator to be used by Non-Employee Directors to name their respective Beneficiaries. No Beneficiary Designation Form shall be effective unless it is signed by the Non-Employee Director and received by the Administrator prior to the date of death of the Non-Employee Director. "BOARD means the Board of Directors of the Company. "CODE means the Internal Revenue Code of 1986, as amended, and the applicable rules and regulations promulgated thereunder. "COMMON STOCK means the common stock of the Company, no par value per share. "COMPANY means Apple Inc., a California corporation, or any successor to substantially all of its business. "EFFECTIVE DATE has the meaning given to such term in the preamble. 6 http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d3.htm 5/23/2007 Page 7 of 7 Case 5:06-cv-05208-JF Document 55-7 Filed 06/08/2007 Page 38 of 38 "EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations promulgated thereunder. "FAIR MARKET VALUE means, unless otherwise determined or provided by the Administrator in the circumstances, the last price (in regular trading) for a share of Common Stock as furnished by the National Association of Securities Dealers, Inc. (the "NASD ) through the NASDAQ Global Market Reporting System (the "GLOBAL MARKET ) for the date in question or, if no sales of Common Stock were reported by the NASD on the Global Market on that date, the last price (in regular trading) for a share of Common Stock as furnished by the NASD through the Global Market for the next preceding day on which sales of Common Stock were reported by the NASD. The Administrator may, however, provide with respect to one or more Options that the Fair Market Value shall equal the last price for a share of Common Stock as furnished by the NASD through the Global Market on the last trading day preceding the date in question or the average of the high and low trading prices of a share of Common Stock as furnished by the NASD through the Global Market for the date in question or the most recent trading day. If the Common Stock is no longer listed or is no longer actively traded on the Global Market as of the applicable date, the Fair Market Value of the Common Stock shall be the value as reasonably determined by the Administrator for purposes of the Option in the circumstances. The Administrator also may adopt a different methodology for determining Fair Market Value with respect to one or more Options if a different methodology is necessary or advisable to secure any intended favorable tax, legal or other treatment for the particular Option(s) (for example, and without limitation, the Administrator may provide that Fair Market Value for purposes of one or more Options will be based on an average of closing prices (or the average of high and low daily trading prices) for a specified period preceding the relevant date). "INITIAL OPTION means an Option granted to a Non-Employee Director pursuant to Section 4(a)(i) of the Plan. "NON-EMPLOYEE DIRECTOR means a member of the Board who is not an employee of the Company or any of its Subsidiaries. "OPTION means an option to purchase shares of Common Stock awarded to a Non-Employee Director pursuant to the Plan and includes Initial Options and Annual Options. "PLAN has the meaning given to such term in the preamble. "SECTION 3 LIMIT shall have the meaning set forth in Section 3 of the Plan. "SUBSIDIARY means any corporation or other entity a majority of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. An entity that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. http://sec.gov/Archives/edgar/data/320193/000110465907040672/aO7-14288_1 ex10d3.htm 5/23/2007