Google Inc. v. Rockstar Consortium US LP et al

Filing 48

NOTICE by Google Inc. Notice of Filing of Motions to Stay or, In the Alternative, to Transfer to the Northern District of California (Attachments: # 1 Exhibit A, # 2 Exhibit B - Part 1, # 3 Exhibit B - Part 2, # 4 Exhibit B - Part 3, # 5 Exhibit B - Part 4, # 6 Exhibit B - Part 5, # 7 Exhibit B - Part 6, # 8 Exhibit B - Part 7, # 9 Exhibit B - Part 8, # 10 Exhibit B - Part 9, # 11 Exhibit C, # 12 Exhibit D, # 13 Exhibit E, # 14 Exhibit F, # 15 Exhibit G, # 16 Exhibit H, # 17 Exhibit I)(Warren, Matthew) (Filed on 3/25/2014)

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The Company participates in several highly competitive markets, including mobile communications and media devices with its iPhone, iPad and
iPod product families; personal computers with its Mac computers; and distribution of third-party digital content and applications through the
iTunes Store, App Store, iBookstore, and Mac App Store. While the Company is widely recognized as a leading innovator in the markets where
it competes, these markets are highly competitive and subject to aggressive pricing. To remain competitive, the Company believes that increased
investment in research and development and marketing and advertising is necessary to maintain or expand its position in the markets where it
competes. The Company’s research and development spending is focused on investing in new hardware and software products, and in further
developing its existing products, including iPhone, iPad, Mac, and iPod hardware; iOS and Mac OS X operating systems; and a variety of
application software and online services. The Company also believes increased investment in marketing and advertising programs is critical to
increasing product and brand awareness.
The Company utilizes a variety of direct and indirect distribution channels, including its retail stores, online stores, and direct sales force, and
third-party cellular network carriers, wholesalers, retailers, and value-added resellers. The Company believes that 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 on its products, and demonstrate the compatibility of the Mac
with the Windows-based platform and networks. The Company further believes providing direct contact with its targeted customers is an
effective way to demonstrate the advantages of its products over those of its competitors and providing a high-quality sales and after-sales
support experience is critical to attracting new and retaining existing customers. To ensure a high-quality buying experience for its products in
which service and education are emphasized, the Company continues to expand and improve its distribution capabilities by expanding the
number of its own retail stores worldwide. Additionally, the Company has invested in programs to enhance reseller sales by placing high quality
Apple fixtures, merchandising materials and other resources within selected third-party reseller locations. Through the Apple Premium Reseller
Program, certain third-party resellers focus on the Apple platform by providing a high level of integration and support services, and product
expertise.
Products
The Company offers a range of mobile communication and media devices, personal computing products, and portable digital music players, as
well as a variety of related software, services, peripherals, networking solutions and various third-party hardware and software products. In
addition, the Company offers its own software products, including iOS, the Company’s proprietary mobile operating system; Mac OS X, the
Company’s proprietary operating system software for its Mac computers; server software; and application software for consumer, education, and
business customers.
In June 2011, the Company introduced iCloud, its new cloud service, which stores music, photos, apps, contacts, calendars, and documents and
wirelessly pushes them to multiple iOS devices, Macs and PCs. iCloud includes iTunes in the Cloud, Photo Stream, Documents in the Cloud,
Contacts, Calendar, Mail, Automatic downloads and purchase history for apps and books, and Backup. Users will be able to sign up for free
access to iCloud using an iOS device running iOS 5 or a Mac running Mac OS ® X Lion (“Mac OS X Lion”). iCloud is expected to be available
in the fall of 2011.
In June 2011, the Company previewed iOS 5, the latest version of its mobile operating system. iOS 5 includes new features such as Notification
Center, a way to view and manage notifications in one place; iMessage, a messaging service that allows users to send text messages, photos and
videos between iOS devices; and Newsstand, a way to purchase and organize newspaper and magazine subscriptions. iOS 5 is expected to be
available in the fall of 2011.
In June 2011, the Company announced Mac OS X Lion, the eighth major release of the Company’s Mac operating system. Mac OS X Lion
includes support for new Multi-Touch™ gestures; system-wide support for full screen applications; Mission Control, a way to view everything
running on a user’s Mac; the Mac App Store; Launchpad, a new home for a user’s applications; and a redesigned Mail application. Mac OS X
Lion was made available in July 2011.
A detailed discussion of the Company’s other products may be found in Part I, Item 1, “Business,” of the Company’s 2010 Form 10-K.
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Japan Earthquake and Tsunami
On March 11, 2011, the northeast coast of Japan experienced a severe earthquake followed by a tsunami, with continuing aftershocks. These
geological events have caused significant damage in the region, including severe damage to nuclear power plants, and have impacted Japan’s
power and other infrastructure as well as its economy. Certain of the Company’s suppliers are located in Japan, and certain of its other suppliers
integrate components or use materials manufactured in Japan in the production of its products. To the extent that component production has been
affected, the Company has generally obtained alternative sources of supply or implemented other measures. The Company does not currently
believe these events will have a material impact on its operations in the fourth quarter of 2011 unless conditions worsen, including, but not
limited to, power outages and expansion of evacuation zones around the nuclear power plants.
Beyond the fourth quarter of 2011, uncertainty exists with respect to the availability of electrical power, the damage to nuclear power plants an d
the impact to other infrastructure. Thus, there is a risk that the Company could in the future experience delays or other constraints in obtaining
key components and products and/or price increases related to such components and products that could materially adversely affect the
Company’s financial condition and operating results.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) and
the Company’s discussion and analysis of its financial condition and operating results require the Company’s management to make judgments,
assumptions, and estimates that affect the amounts reported in its condensed consolidated financial statements and accompanying notes. Note 1,
“Summary of Significant Accounting Policies” of this Form 10-Q and in the Notes to Consolidated Financial Statements in the Company’s 2010
Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s condensed 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, valuation and
impairment of marketable securities, inventory valuation and inventory purchase commitments, warranty costs, income taxes, and legal and other
contingencies. Management considers these policies critical because they are both important to the portrayal of the Company’s financial
condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters. 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, digital content and applications, peripherals, and service and support
contracts. 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 recognition of revenue until the
customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. The Company recognizes
revenue from the sale of hardware products (e.g., iPhones, iPads, Macs, iPods and peripherals), software bundled with hardware that is essential
to the functionality of the hardware, and third-party digital content sold on the iTunes Store in accordance with general revenue recognition
accounting guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following
types of sales transactions: (i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with
hardware not essential to the functionality of the hardware.

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For multi-element arrangements that include tangible products containing software essential to the tangible product’s functionality, undelivered
software elements relating to the tangible product’s essential software, and undelivered non-software services, the Company allocates revenue to
all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be
used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling
price (“TPE”) and (iii) best estimate of the selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately
and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of
elements would be if they were sold regularly on a stand-alone basis.
For sales of iPhone, iPad, Apple TV, for sales of iPod touch beginning in June 2010, and for sales of Mac beginning in June 2011, the Company
has indicated it may from time-to-time provide future unspecified software upgrades and features free of charge to customers. In June 2011, the
Company announced it would provide various non-software services (“the online services”) to owners of qualifying versions of iPhone, iPad,
iPod touch and Mac. Because the Company has neither VSOE nor TPE for embedded unspecified software upgrade rights or the online services,
revenue is allocated to these rights and services based on the Company’s ESPs. Amounts allocated to the embedded unspecified software
upgrade rights and online services are deferred and recognized on a straight-line basis over the estimated lives of each of these devices, which
range from 24 to 48 months. The Company’s process for determining ESPs involves management’s judgment. The Company’s process considers
multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable. If the facts and
circumstances underlying the factors considered change or should future facts and circumstances lead the Company to consider additional
factors, the Company’s ESP for software upgrades and online services related to future sales of these devices could change. If the estimated life
of one or more of the hardware products should change, the future rate of amortization of the revenue allocated to the software upgrade rights
would also change.
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. The Company’s policy requires that, 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. Management’s estimates
are 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 would have a negative
impact on the Company’s results of operations.
Valuation and Impairment of Marketable Securities
The Company’s investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair
value of investments are included in accumulated other comprehensive income, net of tax, as reported in the Company’s Condensed
Consolidated Balance Sheets. Changes in the fair value of investments impact the Company’s net income only when such investments are sold
or an other-than-temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by specific identification
of each security’s cost basis. The Company regularly reviews its investment portfolio to determine if any investment is other-than-temporarily
impaired due to changes in credit risk or other potential valuation concerns, which would require the Company to record an impairment charge in
the period any such determination is made. In making this judgment, the Company evaluates, among other things, the duration and extent to
which the fair value of an investment is less than its cost, the financial condition of the issuer and any changes thereto, and the Company’s intent
to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis.
The Company’s assessment on whether an investment is other-than-temporarily impaired or not, could change in the future due to new
developments or changes in assumptions related to any particular investment.
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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
industries in which the Company competes 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 its results of operations in the period when the write-downs were recorded.
The Company records accruals 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 accruals for
cancellation fees that would negatively affect its results of operations in the period when the cancellation fees are identified and recorded.
Warranty Costs
The Company provides for the estimated cost of 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 materially
affect the Company’s results of operations.
The Company periodically provides updates to its applications and operating system software to maintain the software’s compliance with
specifications. The estimated cost to develop such updates is accounted for as warranty cost that is 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.
Income Taxes

The Company records a tax provision for the anticipated tax consequences of the reported results of operations. 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.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from
such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
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 future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. In
the event that the Company determines all or part of the net deferred tax assets are not realizable in the future, the Company will make an
adjustment to the valuation allowance that would be charged 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 GAAP and complex tax laws.
Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s
financial condition and operating results.
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Legal and Other Contingencies
As discussed in Part II, Item 1 of this Form 10-Q under the heading “Legal Proceedings” and in Note 6, “Commitments and Contingencies” in
Notes to Condensed Consolidated Financial Statements, the Company is subject to various legal proceedings and claims that arise in the ordinary
course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable.
There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the
opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in
excess of a recorded accrual, with respect to loss contingencies. However, the outcome of legal proceedings and claims brought against the
Company are subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if
one or more of these legal matters were resolved against the Company in the same reporting period for amounts in excess of management’s
expectations, the Company’s condensed consolidated financial statements of a particular reporting period could be materially adversely affected.
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Net Sales
The following table summarizes net sales by operating segment and net sales and unit sales by product during the three- and nine-month periods
ended June 25, 2011 and June 26, 2010 (in millions, except unit sales in thousands and per unit amounts):
Three Months Ended
June 25,
June 26,
2011
2010
Change

Net Sales by Operating Segment :
Americas net sales
Europe net sales
Japan net sales
Asia-Pacific net sales
Retail net sales
Total net sales
Net Sales by Product :
Desktops (a)
Portables (b)
Total Mac net sales

$ 10,126 $ 6,227
7,098
4,160
1,510
910
6,332
1,825
3,505
2,578
$ 28,571 $ 15,700

June 25,
2011

Nine Months Ended
June 26,
2010
Change

63% $ 28,667 $ 17,312
71%
20,381
13,234
66%
4,326
2,580
247%
16,062
5,524
10,543
6,232
36%
82% $ 79,979 $ 44,882

66%
54%
68%
191%
69%
78%

1,301
3,098
4,399

21% $ 4,752 $ 4,525
10,759
8,084
14%
16%
15,511
12,609

5%
33%
23%

1,325
1,545
1,571
1,214
13,311
5,334
6,046
2,166
517
396
696
646
$ 28,571 $ 15,700

(14)%
6,350
6,797
29%
4,636
3,705
150%
36,077
16,357
179%
13,490
2,166
31%
1,690
1,337
2,225
1,911
8%
82% $ 79,979 $ 44,882

(7)%
25%
121%
523%
26%
16%
78%

$

iPod
Other music related products and services (c)
iPhone and related products and services (d)
iPad and related products and services (e)
Peripherals and other hardware (f)
Software, service and other sales (g)
Total net sales
Unit Sales by Product :
Desktops (a)
Portables (b)
Total Mac unit sales

1,580 $
3,525
5,105

1,155
2,792
3,947

15%
13%
14%

3,391
8,450
11,841

3,385
6,392
9,777

0%
32%
21%

7,535
20,338
9,246

iPod unit sales
iPhone unit sales
iPad unit sales

1,004
2,468
3,472
9,406
8,398
3,270

(20)%
142%
183%

35,998
55,220
21,271

41,261
25,887
3,270

(13)%
113%
550%

(a)

Includes iMac, Mac mini, Mac Pro and Xserve product lines.

(b)

Includes MacBook, MacBook Air and MacBook Pro product lines.

(c)

Includes sales from the iTunes Store, App Store, and iBookstore in addition to sales of iPod services and Apple-branded and third-party
iPod accessories.

(d)

Includes revenue recognized from iPhone sales, carrier agreements, services, and Apple-branded and third-party iPhone accessories.

(e)

Includes revenue recognized from iPad sales, services, and Apple-branded and third-party iPad accessories.

(f)

Includes sales of displays, wireless connectivity and networking solutions, and other hardware accessories.

(g)

Includes sales from the Mac App Store in addition to sales of other Apple-branded and third-party Mac software and Mac and Internet
services.
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Net sales during the third quarter of 2011 and the first nine months of 2011 increased $12.9 billion or 82%, and $35.1 billion or 78%,
respectively, compared to the same periods in 2010. Several factors contributed positively to this increase, including the following:
•

Net sales of iPhone and related products and services were $13.3 billion and $36.1 billion in the third quarter of 2011 and first nine
months of 2011, respectively, representing increases of 150% and 121% over the same periods in 2010. iPhone handset unit sales
totaled 20.3 million and 55.2 million during the third quarter of 2011 and first nine months of 2011, respectively. iPhone unit sales
increased 11.9 million or 142% during the third quarter of 2011 and 29.3 million or 113% during the first nine months of 2011
compared to the same periods in 2010. iPhone year-over-year net sales growth reflected strong demand for iPhone 4 in all of the
Company’s operating segments. The expanded U.S. distribution of iPhone to the Verizon Wireless network beginning in February
2011 and continued expansion and growth of distribution with existing carriers and resellers also contributed to the year-over-year
growth of iPhone. As of June 25, 2011, the Company distributed iPhone in 105 countries through 228 carriers. Net sales of iPhone
and related products and services accounted for 47% and 45% of the Company’s total net sales for the third quarter of 2011 and first
nine months of 2011, respectively.

•

Net sales of iPad and related products and services, which the Company introduced in the third quarter of 2010, were $6.0 billion in
the third quarter of 2011, an increase of 179% over the same period in 2010. Net sales of iPad during the first nine months of 2011
totaled $13.5 billion. Unit sales of iPad were 9.2 million and 21.3 million during the third quarter of 2011 and first nine months of
2011, respectively. The year-over-year unit growth and net sales growth were driven by strong iPad demand in all the Company’s
operating segments. The Company distributes iPad through its direct channels, certain cellular network carriers’ distribution channels
and certain third-party resellers. The Company distributed iPad in 64 countries as of June 25, 2011. Net sales of iPad and related
products and services accounted for 21% and 17% of the Company’s total net sales for the third quarter of 2011 and first nine months
of 2011, respectively.

•

Mac net sales increased by $706 million or 16% and $2.9 billion or 23% in the third quarter of 2011 and first nine months of 2011,
respectively, compared to the same periods in 2010. Mac unit sales increased by 475,000 or 14% and 2.1 million or 21% in the third
quarter of 2011 and first nine months of 2011, respectively, compared to the same periods in 2010. The year-over-year growth in
Mac net sales and unit sales was due primarily to higher demand for MacBook Air and MacBook Pro, which were updated in
October 2010 and February 2011, respectively, and experienced significant growth in all of the Company’s operating segments. Net
sales of the Company’s Macs accounted for 18% and 19% of the Company’s total net sales for the third quarter of 2011 and first nine
months of 2011, respectively.

•

Net sales of other music related products and services increased $357 million or 29% and $931 million or 25% during the third
quarter of 2011 and first nine months of 2011, respectively, compared to the same periods in 2010. The increases were due primarily
to increased net sales from the iTunes Store, which experienced growth in all of the Company’s geographic segments. During the
third quarter of 2011 and the first nine months of 2011, the combined net sales for the iTunes Store, App Store and iBookstore were
$1.4 billion and $3.9 billion, respectively. The Company believes this continued growth is the result of heightened consumer interest
in downloading third-party digital content, continued growth in its customer base of iPhone, iPad and iPod customers, expansion of
third-party audio and video content available for sale and rent via the iTunes Store, and continued interest in and growth of the App
Store. Net sales of other music related products and services accounted for 5% and 6% of the Company’s total net sales for the third
quarter of 2011 and first nine months of 2011, respectively.

Partially offsetting the positive factors contributing to the overall increase in net sales was a decrease in net sales of iPod of $220 million or 14%
during the third quarter of 2011 and a decrease of $447 million or 7% during the first nine months of 2011 compared to the same periods in
2010. Similarly, iPod unit sales decreased by 20% and 13% in the third quarter of 2011 and first nine months of 2011, respectively, compared to
the same periods in 2010. However, net sales per iPod unit sold increased during the third quarter of 2011 and the first nine months of 2011
compared to the same periods in 2010 due primarily to a shift in iPod product mix toward iPod touch. Net sales of iPod accounted for 5% and
8% of the Company’s total net sales for the third quarter of 2011 and first nine months of 2011, respectively.
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Segment Operating Performance
The Company manages its business primarily on a geographic basis. The Company’s reportable operating and reporting segments consist of the
Americas, Europe, Japan, Asia-Pacific and Retail operations. The Americas, Europe, Japan and Asia-Pacific reportable segment results do not
include the results of 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 Asia-Pacific segment includes Australia and Asia, but does not include Japan.
The Retail segment operates Apple retail stores in 11 countries, including the U.S. Each reportable operating segment provides similar hardware
and software products and similar services. Further information regarding the Company’s operating segments may be found in Note 7, “Segment
Information and Geographic Data” in Notes to condensed consolidated financial statements of this Form 10-Q.
Americas
Net sales in the Americas segment during the third quarter of 2011 increased $3.9 billion or 63% compared to the same period in 2010. The
increase in net sales during the third quarter of 2011 was attributable to increased iPhone revenue driven by expanded U.S. distribution on the
Verizon Wireless network beginning in February 2011 and continued growth from existing carriers, the introduction of iPad 2 in March 2011,
higher sales of third-party digital content and applications from the iTunes Store and App Store, and increased sales of Macs, partially offset by a
decrease in iPod net sales. The Americas segment represented 36% and 40% of the Company’s total net sales in the third quarters of 2011 and
2010, respectively.

During the first nine months of 2011, net sales in the Americas segment increased $11.4 billion or 66% compared to the same period in 2010.
The primary contributors to the growth in net sales during the first nine months of 2011 were a significant year-over-year increase in iPhone
revenue from carrier expansion, strong sales of the original iPad and iPad 2, and increased sales of Macs, partially offset by a decrease in iPod
net sales. Higher sales of third-party digital content and applications from the iTunes Store and App Store also drove higher sales during the first
nine months of 2011. The Americas segment represented approximately 36% and 39% of the Company’s total net sales for the first nine months
of 2011 and 2010, respectively.
Europe
Net sales in the Europe segment increased $2.9 billion or 71% during the third quarter of 2011 compared to the same period of 2010. The growth
in net sales was mainly due to an increase in iPhone revenue attributable to country and carrier expansion, the introduction of iPad 2 in March
2011, higher sales of third-party digital content and applications from the iTunes Store and App Store, and strength in the Euro and British
Pound relative to the U.S. dollar. The Europe segment represented 25% and 26% of the Company’s total net sales in the third quarter of 2011
and 2010, respectively.

For the first nine months of 2011, net sales in the Europe segment increased $7.1 billion or 54%, compared to the same period in 2010. The
increase in net sales during the first nine months of 2011 was attributable primarily to the continued year-over-year increase in iPhone revenue,
strong sales of both the original iPad and iPad 2, increased sales of Macs, and higher sales of third-party digital content and applications from the
iTunes Store and App Store, partially offset by a decrease in iPod net sales. The Europe segment represented 26% and 29% of total net sales for
the first nine months in 2011 and 2010, respectively.
Japan

Japan’s net sales increased $600 million or 66% during the third quarter of 2011 and increased $1.7 billion or 68% during the first nine months
of 2011 compared to the same periods in 2010. The key contributors to Japan’s net sales growth for the third quarter and first nine months of
2011 were increased iPhone revenue, strong sales of both the original iPad and iPad 2, increased sales of Macs, and strength in the Japanese Yen
relative to the U.S. dollar. The Japan segment represented 5% of total net sales in the third quarter of 2011 compared to 6% in the year ago
quarter, and 5% of total net sales in the first nine months of 2011 compared to 6% in the first nine months of 2010.
The recent earthquakes and tsunami that struck the northeast coast of Japan have created uncertainty regarding general economic and market
conditions in Japan. Any significant impact of these events on consumer demand could negatively impact the Company’s net sales in Japan in
the future. The Company does not currently believe that the impact of these events will have a material adverse effect on the Company or its
results of operations.
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Asia-Pacific
Net sales in the Asia Pacific segment increased $4.5 billion or 247% during the third quarter of 2011 and increased $10.5 billion or 191% during
the first nine months of 2011 compared to the same periods in 2010. The Company experienced particularly strong year-over-year net sales
growth in China, Hong Kong, Korea, and Australia during the third quarter of 2011 and first nine months of 2011. Higher net sales in the Asia
Pacific segment were due mainly to the increase in iPhone revenue primarily attributable to new carrier launches, strong sales of both the
original iPad and iPad 2, and increased sales of Macs. The Asia Pacific segment represented 22% and 12% of total net sales in the third quarter
of 2011 and 2010, respectively, and 20% and 12% of total net sales in the first nine months of 2011 and 2010, respectively.
Retail

Retail segment net sales increased $927 million or 36% during the third quarter of 2011 compared to the same period of 2010. The increase in
net sales was driven primarily by strong demand for iPad, a significant year-over-year increase in iPhone sales, and higher sales of Macs. The
Company opened four new retail stores during the third quarter of 2011, all of which were international stores, ending the quarter with 327 stores
open compared to 293 stores at the end of the third quarter of 2010. With an average of 325 stores and 287 stores open during the third quarter of
2011 and 2010, respectively, average revenue per store increased 20% to $10.8 million in the third quarter of 2011 compared to the third quarter
of 2010. The Retail segment represented 12% and 16% of total net sales in the third quarter of 2011 and 2010, respectively.
Retail net sales grew $4.3 billion or 69% during the first nine months of 2011 compared to the same period in 2010 driven primarily by strong
sales of both the original iPad and iPad 2, a significant year-over-year increase in iPhone sales, and higher sales of Macs. Average revenue per
store increased 48% to $32.6 million for the first nine months of 2011 compared to the same period in 2010. The Retail segment represented
13% and 14% of total net sales for the first nine months of 2011 and 2010, respectively.
The Retail segment reported operating income of $828 million and $593 million during the third quarter of 2011 and the third quarter of 2010,
respectively. The Retail segment reported operating income of $2.7 billion during the first nine months of 2011 compared to $1.4 billion during
the first nine months of 2010. The year-over-year increase in Retail operating income was primarily attributable to higher overall net sales and a
more favorable sales mix toward products with higher gross margin, which resulted in significantly higher average revenue per store during the
third quarter and first nine months of 2011 compared to the same periods in 2010.
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 asset purchases associated with the Retail segment since
inception totaled $2.5 billion through the third quarter of 2011. As of June 25, 2011, the Retail segment had approximately 30,600 full-time
equivalent employees and had outstanding lease commitments associated with retail space and related facilities of $2.2 billion. The Company
would incur substantial costs if it were to close multiple retail stores and such costs could adversely affect the Company’s financial condition and
operating results.
Gross Margin
Gross margin for the three- and nine-month periods ended June 25, 2011 and June 26, 2010 was as follows (in millions, except gross margin
percentages):
Three Months Ended
June 25,
June 26,
2011
2010

Net sales
Cost of sales
Gross margin
Gross margin percentage

$
$

28,571
16,649
11,922
41.7%

$
$

15,700
9,564
6,136
39.1%

Nine Months Ended
June 25,
June 26,
2011
2010

$
$

79,979
47,541
32,438
40.6%

$
$

44,882
26,710
18,172
40.5%

The gross margin percentage in the third quarter of 2011 was 41.7%, compared to 39.1% in the third quarter of 2010. This year-over-year
increase in gross margin is largely driven by a more favorable sales mix towards products with higher gross margins, primarily iPhone, a weaker
U.S. dollar and lower commodity and other manufacturing costs. The gross margin percentage for the first nine months of 2011 was relatively
flat at 40.6% compared to 40.5% for the first nine months of 2010.
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The Company expects to experience decreases in its gross margin percentage in future periods, as compared to levels achieved during the first
nine months of 2011, largely due to a higher mix of new and innovative products that have higher cost structures and deliver greater value to
customers, and expected and potential future component cost and other cost increases.
The foregoing statements regarding the Company’s expected gross margin percentage are forward-looking and could differ from anticipated
levels because of several factors including, but not limited to certain of those set forth below in Part II, Item 1A, “Risk Factors” under the
subheading “ Future operating results depend upon the Company’s ability to obtain key components including but not limited to
microprocessors, NAND flash memory, DRAM and LCDs at favorable prices and in sufficient quantities ,” which is incorporated herein by
reference. In general, gross margins and margins on individual products will remain under downward pressure due to a variety of factors,
including continued industry wide global product pricing pressures, increased competition, compressed product life cycles, product transitions
and potential and expected increases in the cost of key components including but not limited to microprocessors, NAND flash memory, DRAM
and LCDs, as well as potential increases in the costs of outside manufacturing services and a potential shift in the Company’s sales mix towards
products with lower gross margins. In response to these competitive pressures, the Company expects it will continue to take product pricing
actions, which would adversely affect gross margins. Gross margins could also be affected by the Company’s ability to manage product quality
and warranty costs effectively 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.
Operating Expenses
Operating expenses for the three- and nine-month periods ended June 25, 2011 and June 26, 2010, were as follows (in millions, except for
percentages):
Three Months Ended
June 25,
June 26,
2011
2010

Research and development
Percentage of net sales
Selling, general and administrative
Percentage of net sales

$
$

628
2%
1,915
7%

$
$

464
3%
1,438
9%

Nine Months Ended
June 25,
June 26,
2011
2010

$
$

1,784
2%
5,574
7%

$
$

1,288
3%
3,946
9%

Research and Development Expense (“R&D”)

R&D expense increased $164 million or 35% to $628 million during the third quarter of 2011 compared to the same period of 2010, and
increased $496 million or 39% to $1.8 billion during the first nine months of 2011 compared to the same period in 2010. These increases were
due primarily to an increase in headcount and related expenses to support expanded R&D activities.
Although total R&D expense increased 35% and 39% during the third quarter of 2011 and first nine months of 2011, compared to the same
periods in 2010, respectively, it declined slightly as a percentage of net sales, due to the 82% and 78% year-over-year growth in the Company’s
net sales during the third quarter and first nine months of 2011, respectively. 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”)
SG&A expense increased $477 million or 33% to $1.9 billion during the third quarter of 2011 compared to the same period of 2010, and
increased $1.6 billion or 41% to $5.6 billion during the first nine months of 2011 compared to the same period in 2010. These increases were due
primarily to the Company’s continued expansion of its Retail segment, increased headcount, higher spending on marketing and advertising
programs, and increased variable costs associated with the overall growth of the Company’s net sales.
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Other Income and Expense
Total other income and expense increased $114 million or 197% to $172 million during the third quarter of 2011 compared to the same period of
2010, due primarily to lower premium expense on foreign exchange option contracts and higher interest income on larger cash, cash equivalents
and marketable securities balances. Total other income and expense increased $193 million or 137% to $334 million during the first nine months
of 2011 compared to the same period in 2010, due primarily to higher interest income and net realized gains on sales of marketable securities.
The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities was flat at 0.76% during the
third quarters of 2011 and 2010.
Provision for Income Taxes
The Company’s effective tax rate for the three- and nine-month periods ended June 25, 2011 was approximately 24%, compared to
approximately 24% and 26% for the three- and nine-month periods ended June 26, 2010, respectively. The Company’s effective rates for both
periods differ 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. The lower effective tax rate during the first nine
months of 2011 compared to the same period in 2010 is due primarily to a higher proportion of foreign earnings and the recognition of a tax
benefit as a result of legislation enacted during the first quarter of 2011 retroactively reinstating the research and development tax credit.
The Internal Revenue Service (the “IRS”) has completed its field audit of the Company’s federal income tax returns for the years 2004 through
2006 and proposed certain adjustments. The Company has contested certain of these adjustments through the IRS Appeals Office. The IRS is
currently examining the years 2007 through 2009. All IRS audit issues for years prior to 2004 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. If any issues addressed in the
Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its
provision for income taxes in the period such resolution occurs.
Liquidity and Capital Resources
The following table summarizes selected financial information and statistics as of June 25, 2011 and September 25, 2010 (in millions):
June 25, 2011

Cash, cash equivalents and marketable securities
Accounts receivable, net
Inventory
Working capital

$
$
$
$

76,156
6,102
889
20,039

September 25, 2010

$
$
$
$

51,011
5,510
1,051
20,956

As of June 25, 2011, the Company had $76.2 billion in cash, cash equivalents and marketable securities, an increase of $25.1 billion from
September 25, 2010. The principal component of this net increase was the cash generated by operating activities of $27.1 billion, which was
partially offset by payments for acquisition of property, plant and equipment of $2.6 billion and payments for acquisition of intangible assets of
$266 million. The Company believes its existing balances of cash, cash equivalents and marketable securities will be sufficient to satisfy its
working capital needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with its existing operations
over the next 12 months.
The Company’s marketable securities investment portfolio is invested primarily in highly rated securities and its policy generally limits the
amount of credit exposure to any one issuer. The Company’s investment policy requires investments to generally be investment grade, primarily
rated single-A or better with the objective of minimizing the potential risk of principal loss. As of June 25, 2011 and September 25, 2010, $47.6
billion and $30.8 billion, respectively, of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and
are generally based in U.S. dollar-denominated holdings.
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Capital Assets
The Company’s capital expenditures were $3.1 billion during the first nine months of 2011 consisting of approximately $316 million for retail
store facilities and $2.8 billion for other capital expenditures, including product tooling and manufacturing process equipment, real estate for the
future development of the Company’s second corporate campus, and other corporate facilities and infrastructure. The Company’s actual cash
payments for capital expenditures during the first nine months of 2011 were $2.6 billion, of which $315 million relates to retail store facilities.
The Company anticipates utilizing approximately $5.0 billion for capital expenditures during 2011, including approximately $650 million for
retail store facilities and approximately $4.35 billion for product tooling and manufacturing process equipment, and corporate facilities an d
infrastructure, including information systems hardware, software and enhancements.
Historically the Company has opened between 25 and 50 new retail stores per year. During 2011, the Company expects to open about 40 new
retail stores, with about 70% expected to be located outside of the U.S.
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.
Lease Commitments

The Company’s major facility leases are typically for terms not exceeding 10 years and generally provide renewal options for terms not
exceeding five additional years. Leases for retail space are for terms ranging from five to 20 years, the majority of which are for 10 years, and
often contain multi-year renewal options. As of June 25, 2011, the Company’s total future minimum lease payments under noncancelable
operating leases were $2.7 billion, of which $2.2 billion related to leases for retail space.
Purchase Commitments with Outsourcing Partners and Component Suppliers

The Company utilizes several outsourcing partners to manufacture sub-assemblies for the Company’s products and to perform final assembly
and test of finished products. These outsourcing partners 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. As of June 25, 2011, the Company had outstanding offbalance sheet third-party manufacturing commitments and component purchase commitments of $11.0 billion.
The Company has also entered into long-term agreements to secure the supply of certain inventory components. These agreements generally
expire between 2011 and 2022. As of June 25, 2011, the Company had off-balance sheet commitments under long-term supply agreements
totaling approximately $1.7 billion to make additional inventory component prepayments and to acquire capital equipment in 2011 and beyond.
Other Obligations
Other outstanding obligations were $1.6 billion as of June 25, 2011, and were comprised mainly of commitments to acquire product tooling and
manufacturing process equipment, in addition to that noted above under long-term supply agreements, and commitments related to advertising,
research and development, Internet and telecommunications services and other obligations.
The Company’s other non-current liabilities in the Condensed Consolidated Balance Sheets consist primarily of deferred tax liabilities, gross
unrecognized tax benefits and the related gross interest and penalties. As of June 25, 2011, the Company had non-current deferred tax liabilities
of $7.3 billion. Additionally, as of June 25, 2011, the Company had gross unrecognized tax benefits of $1.2 billion and an additional $266
million for gross interest and penalties classified as non-current liabilities. At this time, the Company is unable to make a reasonably reliable
estimate of the timing of payments in individual years due to uncertainties in the timing of tax audit outcomes.
On June 27, 2011, the Company, as part of a consortium, participated in the acquisition of Nortel’s patent portfolio for an overall purchase price
of $4.5 billion, of which the Company’s contribution will be approximately $2.6 billion. This asset acquisition is subject to approval by various
regulatory agencies.
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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 it or an indemnified third-party. In the opinion of management, there was not at least a reasonable possibility the Company
may have incurred a material loss with respect to indemnification of end-users of its operating system or application software for infringement of
third-party intellectual property rights. The Company did not record a liability for infringement costs related to indemnification as of either
June 25, 2011 or September 25, 2010.
The Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has
agreed to indemnify such individuals to the fullest extent permitted by law against liabilities that arise by reason of their status as directors or
officers and to advance expenses incurred by such individuals in connection with related legal proceedings. It is not possible to determine the
maximum potential amount of payments the Company could be required to make under these agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in each claim. However, the Company maintains directors and officers
liability insurance coverage to reduce its exposure to such obligations, and payments made under these agreements historically have not been
material.
Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risk profile has not changed significantly during the first nine months of 2011.
Interest Rate and Foreign Currency Risk Management

The Company regularly reviews its foreign exchange forward 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 financial condition and operating results.
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. As such, changes in U.S. interest rates affect the
interest earned on the Company’s cash, cash equivalents and marketable securities, the fair value of those investments, as well as costs
associated with foreign currency hedges.
The Company’s investment policy and strategy are focused on preservation of capital and supporting the liquidity requirements of the Company.
A portion of the Company’s cash is managed by external managers within the guidelines of the Company’s investment policy and to objective
market benchmarks. The Company’s internal portfolio is benchmarked against external manager performance.
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio. The Company
typically invests in highly rated securities and its policy generally limits the amount of credit exposure to any one issuer. The Company’s
investment policy requires investments to generally be investment grade, primarily rated single-A or better with the objective of minimizing the
potential risk of principal loss. All highly liquid investments with initial maturities of three months or less at the date of purchase are classified as
cash equivalents. The Company’s marketable debt and equity securities have been classified and accounted for as available-for-sale.
Management determines the appropriate classification of its investments at the time of purchase and reevaluates the available-for-sale
designations as of each balance sheet date. The Company classifies its marketable debt securities as either short-term or long-term based on each
instrument’s underlying contractual maturity date. Marketable debt securities with maturities 12 months or less are classified as short-term and
marketable debt securities with maturities greater than 12 months are classified as long-term. The Company classifies its marketable equity
securities, including mutual funds, as either short-term or long-term based on the nature of each security and its availability for use in current
operations. The Company may sell certain of its marketable securities prior to their stated maturities for strategic reasons including, but not
limited to anticipation of credit deterioration and duration management.
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Foreign Currency Risk
In general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a
strengthening of the U.S. dollar, will negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars. There is also a
risk that 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 certain 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 material foreign exchange exposures, typically for three to
six months. However, the Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not
limited to immateriality, accounting considerations and the prohibitive economic cost of hedging particular exposures.
Item 4.

Controls and Procedures

Evaluation of Disclosure 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 June 25, 2011 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.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the third quarter of 2011, which were identified in
connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.

Legal Proceedings

As of June 25, 2011, the end of the quarterly period covered by this report, the Company was subject to the various legal proceedings and claims
discussed below, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary
course of business. In the opinion of management, there was not least a reasonable possibility the Company may have incurred a material loss, or
a material loss in excess of a recorded accrual, with respect to loss contingencies. However, the outcome of legal proceedings and claims brought
against the Company are subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be
remote, if one or more of these legal matters were resolved against the Company in the same reporting period for amounts in excess of
management’s expectations, the Company’s condensed consolidated financial statements of a particular reporting period could be materially
adversely affected. See the risk factors “ The Company’s future results could be materially adversely affected if it is found to have infringed on
intellectual property rights. ” and “ Unfavorable results of legal proceedings could materially adversely affect the Company. ” in Part II,
Item 1A of this Quarterly Report on Form 10-Q under the heading “Risk Factors.” The Company settled certain matters during the third quarter
of 2011 that did not individually or in the aggregate have a material impact on the Company’s financial condition and results of operations.
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In re Apple & ATTM Antitrust Litigation (brought on behalf of named plaintiffs Kliegerman, Holman, Rivello, Smith, Lee, Macasaddu,
Morikawa, Scotti and Sesso)
This is a purported class action filed against the Company and AT&T Mobility in the United States District Court for the Northern District of
California. The Consolidated Complaint alleges that the Company and AT&T Mobility violated the federal antitrust laws by monopolizing
and/or attempting to monopolize the “aftermarket for voice and data services” for the iPhone and that the Company monopolized and/or
attempted to monopolize the “aftermarket for software applications for iPhones.” Plaintiffs are seeking unspecified compensatory and punitive
damages for the class, treble damages, injunctive relief and attorneys fees. On July 8, 2010 the Court granted in part plaintiffs’ motion for class
certification. Following a favorable Supreme Court ruling for AT&T Mobility in its case against Conception, defendants have filed Motions to
Compel Arbitration and to Decertify the Class.
The Apple iPod iTunes Antitrust Litigation (formerly Charoensak v. Apple Computer, Inc. and Tucker v. Apple Computer, Inc.); Somers v. Apple
Inc.
These related cases have been filed on January 3, 2005, July 21, 2006 and December 31, 2007 in the United States District Court for the
Northern District of California on behalf of a purported class of direct and indirect purchasers of iPods and iTunes Store content, alleging various
claims including alleged unlawful tying of music and video purchased on the iTunes Store with the purchase of iPods and unlawful acquisition
or maintenance of monopoly market power and unlawful acquisition or maintenance of monopoly market power under §§1 and 2 of the Sherman
Act, the Cartwright Act, California Business & Professions Code §17200 (unfair competition), the California Consumer Legal Remedies Act and
California monopolization law. Plaintiffs are seeking unspecified compensatory and punitive damages for the class, treble damages, injunctive
relief, disgorgement of revenues and/or profits and attorneys fees. Plaintiffs are also seeking digital rights management (“DRM”) free versions of
any songs downloaded from iTunes or an order requiring the Company to license its DRM to all competing music players. The cases are
currently pending.
Item 1A.

Risk Factors

Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, 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.
Economic conditions could materially adversely affect the Company.

The Company’s operations and performance depend significantly on worldwide economic conditions. Uncertainty about current global
economic conditions poses a risk as consumers and businesses may continue to postpone spending in response to tighter credit, unemployment,
negative financial news and/or declines in income or asset values, which could have a material negative effect on demand for the Company’s
products and services. Demand also could differ materially from the Company’s expectations since the Company generally raises prices on
goods and services sold outside the U.S. to offset the effect of a strengthening of the U.S. dollar. Other factors that could influence demand
include increases in fuel and other energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit,
consumer confidence, and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could
materially adversely affect demand for the Company’s products and services and the Company’s financial condition and operating results.
In the event of renewed financial turmoil affecting the banking system and financial markets, additional consolidation of the financial services
industry, or significant financial service institution failures, there could be a new or incremental tightening in the credit markets, low liquidity,
and extreme volatility in fixed income, credit, currency, and equity markets. In addition, the risk remains that there could be a number of followon effects from the credit crisis on the Company’s business, including the insolvency of key outsourcing partners or suppliers or their inability to
obtain credit to finance development and/or manufacture products resulting in product delays; inability of customers, including channel partners,
to obtain credit to finance purchases of the Company’s products and/or customer, including channel partner, insolvencies; and failure of
derivative counterparties and other financial institutions negatively impacting the Company’s treasury operations. Other income and expense
also could vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment
charges resulting from revaluations of debt and equity securities and other investments; interest rates; cash balances; and changes in fair value of
derivative instruments. Increased volatility in the financial markets and overall economic uncertainty would increase the risk of the actual
amounts realized in the future on the Company’s financial instruments differing significantly from the fair values currently assigned to them.
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Uncertainty about current global economic conditions could also continue to increase the volatility of the Company’s stock price.
Global markets for the Company’s products and services are highly competitive and subject to rapid technological change. If the Company is
unable to compete effectively in these markets, its financial condition and operating results could be materially adversely affected.
The Company competes in highly competitive global markets characterized by aggressive price cutting, with resulting 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, and price sensitivity on the part of
consumers.
The Company’s ability to compete successfully depends heavily on its ability to ensure a continuing and timely introduction of innovative new
products and technologies to the marketplace. The Company believes it is unique in that it designs and develops nearly the entire solution for its
products, including the hardware, operating system, numerous software applications, and related services. As a result, the Company must make
significant investments in research and development and as such, the Company currently holds a significant number of patents and copyrights
and has registered and/or has applied to register numerous patents, trademarks and service marks. By contrast, many of the Company’s
competitors seek to compete primarily through aggressive pricing and very low cost structures. If the Company is unable to continue to develop
and sell innovative new products with attractive margins or if other companies infringe on the Company’s intellectual property, the Company’s
ability to maintain a competitive advantage could be negatively affected and its financial condition and operating results could be materially
adversely affected.
The Company currently markets certain mobile communication and media devices, and third-party digital content and applications. The
Company faces substantial competition from companies that have significant technical, marketing, distribution and other resources, as well as
established hardware, software and digital content supplier relationships. Additionally, the Company faces significant price competition as
competitors reduce their selling prices and attempt to imitate the Company’s product features and applications within their own products or,
alternatively, collaborate with each other to offer solutions that are more competitive than those they currently offer. The Company also
competes with illegitimate ways to obtain third-party digital content and applications. The Company has entered the mobile communications and
media device markets, and many of its competitors in these markets have significantly greater experience, product breadth and distribution
channels than the Company. Because some current and potential competitors have substantial resources and/or experience and a lower cost
structure, they may be able to provide such products and services at little or no profit or even at a loss. The Company also expects competition to
intensify as competitors attempt to imitate the Company’s approach to providing these components seamlessly within their individual offerings
or work collaboratively to offer integrated solutions.
The Company currently receives subsidies from its carriers providing cellular network service for iPhone. There is no assurance that such
subsidies will be continued at all or in the same amounts upon renewal of the Company’s agreements with these carriers or in agreements the
Company enters into with new carriers.
In the market for personal computers and peripherals, the Company faces a significant number of competitors, many of which have broader
product lines, lower priced products, and larger installed customer bases. Consolidation in this market has resulted in larger and potentially
stronger competitors. Price competition has been particularly intense as competitors selling Windows-based personal computers have
aggressively cut prices and lowered product margins. The Company also faces increased competition in key market segments, including
consumer, SMB, education, enterprise, government and creative markets. An increasing number of Internet devices that include software
applications and are smaller and simpler than traditional personal computers compete for market share with the Company’s existing products.
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The Company is currently the only authorized maker of hardware using the Mac OS. The Mac OS has a minority market share in the personal
computer market, which is dominated by computer makers using competing operating systems, most notably Windows. The Company’s
financial condition and operating results depend substantially on the Company’s ability to continually improve the Mac platform to maintain
functional and design advantages. Use of unauthorized copies of the Mac OS on other companies’ hardware products may result in decreased
demand for the Company’s hardware products, and could materially adversely affect the Company’s financial condition and operating results.
There can be no assurance the Company will be able to continue to provide products and services that compete effectively.
To remain competitive and stimulate customer demand, the Company must successfully manage frequent product introductions and transitions.
Due to the highly volatile and competitive nature of the industries in which the Company competes, the Company must continually introduce
new products, services and technologies, enhance existing products and services, and effectively stimulate customer demand for new and
upgraded products. The success of new product introductions depends on a number of factors including but not limited to timely and successful
product development, market acceptance, the Company’s ability to manage the risks associated with new products 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 of new product introductions and transitions on its financial condition and operating results.
The Company faces substantial inventory and other asset risk in addition to purchase commitment cancellation risk.
The Company records a write-down for product and component inventories that have become obsolete or exceed anticipated demand or net
realizable value and accrues necessary cancellation fee reserves for orders of excess products and components. The Company also reviews its
long-lived assets for impairment whenever events or changed circumstances indicate the carrying amount of an asset may not be recoverable. If
the Company determines that impairment has occurred, it records a write-down equal to the amount by which the carrying value of the assets
exceeds its fair market value. Although the Company believes its provisions related to inventory, other assets and purchase commitments are
currently adequate, no assurance can be given that the Company will not incur additional related charges given the rapid and unpredictable pace
of product obsolescence in the industries in which the Company competes. Such charges could materially adversely affect the Company’s
financial condition and operating results.
The Company must order components for its products and build inventory in advance of product announcements and shipments. Consistent with
industry practice, components are normally acquired through a combination of purchase orders, supplier contracts, open orders and, where
appropriate, inventory component prepayments, in each case based on projected demand. Such purchase commitments typically cover forecasted
component and manufacturing requirements for periods ranging from 30 to 150 days. Because the Company’s markets are volatile, competitive
and subject to rapid technology and price changes, there is a risk the Company will forecast incorrectly and order or produce excess or
insufficient amounts of components or products, or not fully utilize firm purchase commitments. The Company’s financial condition and
operating results have been in the past and could be in the future materially adversely affected by the Company’s ability to manage its inventory
levels and respond to short-term shifts in customer demand patterns.
Future operating results depend upon the Company’s ability to obtain key components including but not limited to microprocessors, NAND flash
memory, DRAM and LCDs at favorable prices and in sufficient quantities.

Because the Company currently obtains certain key components including but not limited to microprocessors, enclosures, certain LCDs, certain
optical drives, and ASICs, from single or limited sources, the Company is subject to significant supply and pricing risks. Many of these and other
key components that are available from multiple sources including but not limited to NAND flash memory, DRAM and certain LCDs, are
subject at times to industry-wide shortages and significant commodity pricing fluctuations. The Company has entered into certain agreements for
the supply of key components including but not limited to microprocessors, NAND flash memory, DRAM and LCDs with favorable pricing, but
there can be no guarantee that the Company will be able to extend or renew these agreements on similar favorable terms, or at all, upon
expiration or otherwise obtain favorable pricing in the future. The follow-on effects from the credit crisis on the Company’s key suppliers,
referred to in “ Economic conditions could materially adversely affect the Company” above, which is incorporated herein by reference, also
could affect the Company’s ability to obtain key components . Therefore, the Company remains subject to significant risks of supply shortages
and/or price increases that could materially adversely affect the Company’s financial condition and operating results. The Company expects to
experience decreases in its gross margin percentage in future periods, as compared to levels achieved during the first nine months of 2011,
largely due to a higher mix of new and innovative products that have higher cost structures and deliver greater value to customers, and expected
and potential future component cost and other cost increases. For additional information refer to Part I, Item 2, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” under the subheading “Gross Margin,” which is incorporated herein by reference.
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The Company and other participants in the mobile communication and media device, and personal computer industries compete for various
components with other industries that have experienced increased demand for their products. The Company uses some custom components that
are not common to the rest of these industries. The Company’s new products often utilize custom components available from only one source.
When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or
manufacturing capacity has increased. Continued availability of these components at acceptable prices, or at all, may be affected if those
suppliers decided to concentrate on the production of common components instead of components customized to meet the Company’s
requirements. If the supply of a key single-sourced component for a new or existing product were delayed or constrained, if such components
were available only at significantly higher prices, or if a key manufacturing vendor delayed shipments of completed products to the Company,
the Company’s financial condition and operating results could be materially adversely affected.
Please also refer to the discussion of risks related to the March 11, 2011, Japan earthquake and tsunami in Part I, Item 2, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” under the subheading “Japan Earthquake and Tsunami,” which is
incorporated herein by reference.
The Company depends on component and product manufacturing and logistical services provided by third parties, many of whom are located
outside of the U.S.
Substantially all of the Company’s manufacturing is performed in whole or in part by a few outsourcing partners. The Company has also
outsourced much of its transportation and logistics management. While these arrangements may lower operating costs, 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 products or services, or the Company’s flexibility to respond to changing conditions. Although arrangements with such
manufacturers or individual component suppliers may contain provisions for warranty expense reimbursement, the Company may remain
responsible to the consumer for warranty service in the event of product defects. In addition, the Company relies on third-party manufacturers to
adhere to the Company’s supplier code of conduct. Any unanticipated product defect or warranty liability, whether pursuant to arrangements
with outsourcing partners or otherwise, or material violations of the supplier code of conduct, could materially adversely affect the Company’s
reputation, financial condition and operating results.
The supply and manufacture of many critical components is performed by sole-sourced third-party vendors in the U.S., Asia and Europe. Singlesourced third-party vendors in Asia perform final assembly of substantially all of the Company’s hardware products. If manufacturing or
logistics in these locations is disrupted for any reason including, but not limited to, natural disasters, information technology system failures,
military actions or economic, business, labor, environmental, public health, or political issues, the Company’s financial condition and operating
results could be materially adversely affected.
Please also refer to the discussion of risks related to the March 11, 2011, Japan earthquake and tsunami in Part I, Item 2, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” under the subheading “Japan Earthquake and Tsunami,” which is
incorporated herein by reference.
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The Company relies on third-party intellectual property and digital content, which may not be available to the Company on commercially
reasonable terms or at all.
Many of the Company’s products are designed to include third-party intellectual property, and in the future the Company may need to seek or
renew licenses relating to various aspects of its products and business. Although the Company believes that, based on past experience an d
industry practice, such licenses generally could be obtained on reasonable terms, there is no assurance that the necessary licenses would be
available on acceptable terms or at all. If the Company is unable to obtain or renew critical licenses on reasonable terms, the Company’s
financial condition and operating results may be materially adversely affected.
The Company also contracts with certain third parties to offer their digital content through the Company’s iTunes Store. The Company’s
licensing arrangements with these third parties are short-term and do not guarantee the continuation or renewal of these arrangements on
reasonable terms, if at all. Some third-party content providers currently or in the future may offer competing products and services, and could
take action to make it more difficult or impossible for the Company to license their content in the future. Other content owners, providers or
distributors may seek to limit 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 content at reasonable prices with acceptable usage rules, or continue to expand its geographic reach, the Company’s financial
condition and operating results may be materially adversely affected.
Many third-party content providers require that the Company provide certain DRM and other security solutions. If these requirements change,
the Company may have to develop or license new technology to provide these solutions. There is no assurance the Company will be able to
develop or license such solutions at a reasonable cost and in a timely manner. In addition, certain countries have passed or may propose
legislation that would force the Company to license its DRM, which could lessen the protection of content and subject it to piracy and also could
affect arrangements with the Company’s content providers.
The Company’s future results could be materially adversely affected if it is found to have infringed on intellectual property rights.
Technology companies, including many of the Company’s competitors, frequently enter into litigation based on allegations of patent
infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have
purchased or otherwise obtained. As the Company has grown, the intellectual property rights claims against it have increased and may continue
to increase as it develops new products and technologies. In particular, with the introduction of iPhone and 3G enabled iPads, the Company
began to compete with mobile communication and media device companies that hold significant patent portfolios, and the number of patent
claims against the Company in that technological space has increased. The Company is vigorously defending infringement actions in courts in a
number of U.S. jurisdictions and before the U.S. International Trade Commission, as well as internationally in Europe and Asia. The plaintiffs in
these actions frequently seek injunctions and substantial damages.
The Company’s products and technologies may not be able to withstand these or any other third-party claims regardless of the merits of the
claim.
Regardless of the scope or validity of such patents or the merits of any patent claims by potential or actual litigants, the Company may have to
engage in protracted litigation, enter into expensive license agreements or settlements, pay significant damage awards, and/or modify or even
discontinue one or more of its products or technologies. Any of these events could have a material adverse impact on the Company’s financial
condition and operating results.
In certain cases, the Company may consider the desirability of entering into licensing agreements, although no assurance can be given that such
licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase the Company’s
operating expenses. If the Company is found to be infringing one or more patents, it may be required to pay substantial damages. If there is a
temporary or permanent injunction prohibiting the Company from marketing or selling certain products or a successful claim of infringement
against the Company requires it to pay royalties to a third party, the Company’s financial condition and operating results could be materially
adversely affected, regardless of whether it can develop non-infringing technology.
In management’s opinion there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in
excess of a recorded accrual, with respect to loss contingencies. However, the outcome of litigation is inherently uncertain. Therefore, although
management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company
in the same reporting period for amounts in excess of management’s expectations, the Company’s condensed consolidated financial statements
of a particular reporting period could be materially adversely affected.
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The Company’s future performance depends on support from third-party software developers. If third-party software applications and services
cease to be developed and maintained for the Company’s products, customers may choose not to buy the Company’s products.
The Company believes decisions by customers to purchase its hardware products, including its iPhones, iPads, Macs and iPods, are often based
to a certain extent on the availability of third-party software applications, and services, including online services. There is no assurance that
third-party developers will continue to develop and maintain applications and services for the Company’s products on a timely basis or at all, and
discontinuance or delay of these applications and services could materially adversely affect the Company’s financial condition and operating
results.
With respect to its Mac products, the Company believes the availability of third-party software applications and services depends in part on the
developers’ perception and analysis of the relative benefits of developing, maintaining, and upgrading such software for the Company’s products
compared to Windows-based products. This analysis may be based on factors such as the perceived strength of the Company and its products,
the anticipated revenue that may be generated, continued acceptance by customers of Mac OS X, and the costs of developing such applications
and services. If the Company’s minority share of the global personal computer market causes developers to question the Company’s prospects,
developers could be less inclined to develop or upgrade software for the Company’s products and more inclined to devote their resources to
developing and upgrading software for the larger Windows market. The Company’s development of its own software applications and services
may also negatively affect the decisions of third-party developers, such as Microsoft, Adobe and Google, to develop, maintain, and upgrade
similar or competitive software and services for the Company’s products.
With respect to iPhone, iPad and iPod touch, the Company relies on the continued availability and development of compelling and innovative
software applications. Unlike third-party software applications for Mac products, the software applications for the iPhone, iPad and iPod touch
platforms are distributed through a single distribution channel, the App Store. The absence of multiple distribution channels, which are available
for competing platforms, may limit the availability and acceptance of third-party applications by the Company’s customers, thereby causing
developers to curtail significantly, or stop, development for the Company’s platforms. In addition, iPhone, iPad and iPod touch are subject to
rapid technological change, and, if third-party developers are unable to keep up with this pace of change, third-party applications might not
successfully operate and may result in dissatisfied customers. Further, if the Company develops its own software applications and services, such
development may negatively affect the decisions of third-party developers to develop, maintain, and upgrade similar or competitive applications
for the iPhone, iPad and iPod touch platforms. As with applications for the Company’s Mac products, the availability and development of these
applications also depend on developers’ perceptions and analysis of the relative benefits of developing software for the Company’s products
rather than its competitors’ products, including devices that use competing platforms. If developers focus their efforts on these competing
platforms, the availability and quality of applications for the Company’s devices may suffer.
The Company’s future operating performance depends on the performance of distributors, carriers and other resellers.
The Company distributes its products through wholesalers, resellers, national and regional retailers, value-added resellers, and cataloguers, many
of whom distribute products from competing manufacturers. The Company also sells many of its products and resells third-party products in
most of its major markets directly to customers, certain education customers, cellular network carriers’ distribution channels and certain resellers
through its online and retail stores.
Many resellers operate on narrow operating margins and have been negatively affected in the past by weak economic conditions. Some resellers
have perceived the expansion of the Company’s direct sales as conflicting with their business interests as distributors and resellers of the
Company’s products. Such a perception could discourage resellers from investing resources in the distribution and sale of the Company’s
products or lead them to limit or cease distribution of those products. The Company’s financial condition and operating results could be
materially adversely affected if the financial condition of these resellers weakens, if resellers stopped distributing 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 programs to enhance reseller sales, including staffing selected resellers’ stores with
Company employees and contractors and improving product placement displays. These programs could require a substantial investment while
providing no assurance of return or incremental revenue.
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The Company’s Retail business has required and will continue to require a substantial investment and commitment of resources and is subject to
numerous risks and uncertainties.
The Company’s retail stores have required substantial fixed investment in equipment and leasehold improvements, information systems,
inventory and personnel. The Company also has entered into substantial operating lease commitments for retail space, with terms ranging from
five to 20 years, the majority of which are for 10 years. Certain stores have been designed and built to serve as high-profile venues to promote
brand awareness and serve as vehicles for corporate sales and marketing activities. Because of their unique design elements, locations and size,
these stores require substantially more investment than the Company’s more typical retail stores. Due to the high fixed cost structure associated
with the Retail segment, a decline in sales or the closure or poor performance of individual or multiple stores could result in significant lease
termination costs, write-offs of equipment and leasehold improvements, and severance costs that could materially adversely affect the
Company’s financial condition and operating results.
Many factors unique to retail operations, some of which are beyond the Company’s control, pose risks and uncertainties that could materially
adversely affect the Company’s financial condition and operating results. These risks and uncertainties include, but are not limited to, macroeconomic factors that could have a negative effect on general retail activity, as well as the Company’s inability to manage costs associated with
store construction and operation, inability to sell third-party products at adequate margins, failure to manage relationships with existing retail
channel partners, more challenging environment in managing retail operations outside the U.S., costs associated with unanticipated fluctuations
in the value of 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 present risks not originally
contemplated.

The Company has invested, and in the future may invest, in new business strategies or acquisitions. Such endeavors may involve significant risks
and uncertainties, including distraction of management from current operations, insufficient revenue to offset liabilities assumed and expenses
associated with the strategy, inadequate return of capital, and unidentified issues not discovered in the Company’s due diligence. 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 financial condition and operating results.
The Company’s products and services experience quality problems from time to time that can result in decreased sales and operating margin.
The Company sells highly complex hardware and software products and services 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 software’s intended operation. Defects may also occur in components and products the Company purchases from third parties.
There can be no assurance the Company will be able to detect and fix all defects in the hardware, software and services it sells. Failure to do so
could result in lost revenue, harm to reputation, and significant warranty and other expenses, and could have a material adverse impact on the
Company’s financial condition and operating results.
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The Company is subject to risks associated with laws, regulations and industry-imposed standards related to mobile communications and media
devices.
Laws and regulations related to mobile communications and media devices in the many jurisdictions in which the Company operates are
extensive and subject to change. Such changes, which could include but are not limited to restrictions on production, manufacture, distribution,
and use of the device, locking the device to a carrier’s network, or mandating the use of the device on more than one carrier’s network, could
materially adversely affect the Company’s financial condition and operating results.
Mobile communication and media devices, such as iPhones and 3G enabled iPads, are subject to certification and regulation by governmental
and standardization bodies, as well as by cellular network carriers for use on their networks. These certification processes are extensive and time
consuming, and could result in additional testing requirements, product modifications or delays in product shipment dates, which could
materially adversely affect the Company’s financial condition and operating results.
The Company’s success depends largely on the continued service and availability of key personnel.
Much of the Company’s future success depends on the continued availability and service of key personnel, including its CEO, its executive team
and highly skilled employees in technical, marketing and staff positions. Experienced personnel in the technology industry are in high demand
and competition for their talents is intense, especially in the Silicon Valley, where most of the Company’s key personnel are located. The
Company’s CEO has taken a medical leave of absence and will continue to be involved in major strategic decisions during his leave. There can
be no assurance that the Company will continue to attract and retain key personnel.
Political events, war, terrorism, public health issues, natural disasters and other circumstances could materially adversely affect the Company.

War, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or
disruption to international commerce and the global economy, and thus could have a strong negative effect on the Company, its suppliers,
logistics providers, manufacturing vendors and customers, including channel partners. The Company’s business operations are subject to
interruption by natural disasters, fire, power shortages, nuclear power plant accidents, terrorist attacks, and other hostile acts, labor disputes,
public health issues, and other events beyond its control. Such events could decrease demand for the Company’s products, make it difficult or
impossible for the Company to make and deliver products to its customers, including channel partners, or to receive components from its
suppliers, and create delays and inefficiencies in the Company’s supply chain. Should major public health issues, including pandemics, arise, the
Company could be negatively affected by more stringent employee travel restrictions, additional limitations in freight services, governmental
actions limiting the movement of products between regions, delays in production ramps of new products, and disruptions in the operations of the
Company’s manufacturing vendors and component suppliers. 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 in locations that could be affected by natural disasters. In the event of a natural disaster, losses and significant recovery time could
be required to resume operations and the Company’s financial condition and operating results could be materially adversely affected.
Please also refer to the discussion of risks related to the March 11, 2011, Japan earthquake and tsunami in Part I, Item 2, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” under the subheading “Japan Earthquake and Tsunami,” which is
incorporated herein by reference.
The Company may be subject to information technology system failures or network disruptions that could damage the Company’s reputation,
business operations, and financial conditions.
The Company may be subject to information technology system failures and network disruptions. These may be caused by natural disasters,
accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, or similar
events or disruptions. System redundancy may be ineffective or inadequate, and the Company’s disaster recovery planning may not be sufficient
for all eventualities. Such failures or disruptions could prevent access to the Company’s online stores and services, preclude retail store
transactions, compromise Company or customer data, and result in delayed or cancelled orders. System failures and disruptions could also
impede the manufacturing and shipping of products, transactions processing and financial reporting.
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The Company may be subject to breaches of its information technology systems, which could damage the Company’s reputation, business
partner and customer relationships, and access to online stores and services. Such breaches could subject the Company to significant
reputational, financial, legal, and operational consequences.
The Company’s business requires it to use and store customer, employee, and business partner personally identifiable information (“PII”). This
may include names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers, and payment account
information. Although malicious attacks to gain access to PII affect many companies across various industries, the Company may be at a
relatively greater risk of being targeted because of its high profile and the amount of PII managed.
The Company requires user names and passwords in order to access its information technology systems. The Company also uses encryption an d
authentication technologies to secure the transmission and storage of data. These security measures may be compromised as a result of thirdparty security breaches, employee error, malfeasance, faulty password management, or other irregularity, and result in persons obtaining
unauthorized access to Company data or accounts. Third parties may attempt to fraudulently induce employees or customers into disclosing user
names, passwords or other sensitive information, which may in turn be used to access the Company’s information technology systems. To help
protect customers and the Company, the Company monitors accounts and systems for unusual activity and may freeze accounts under suspicious
circumstances, which may result in the delay or loss of customer orders.
The Company devotes significant resources to network security, data encryption, and other security measures to protect its systems and data, but
these security measures cannot provide absolute security. The Company may experience a breach of its systems and may be unable to protect
sensitive data. Moreover, if a computer security breach affects the Company’s systems or results in the unauthorized release of PII, the
Company’s reputation and brand could be materially damaged and use of the Company’s products and services could decrease. The Company
would also be exposed to a risk of loss or litigation and possible liability, which could result in a material adverse effect on the Company’s
business, results of operations and financial condition.
The Company’s business is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.
The Company is subject to federal, state and international laws relating to the collection, use, retention, security and transfer of PII. In many
cases, these laws apply not only to third-party transactions, but also to transfers of information between the Company and its subsidiaries, and
among the Company, its subsidiaries and other parties with which the Company has commercial relations. Several jurisdictions have passed new
laws in this area, and other jurisdictions are considering imposing additional restrictions. These laws continue to develop and may be
inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing international requirements may cause the Company to
incur substantial costs or require the Company to change its business practices. Noncompliance could result in penalties or significant legal
liability.
The Company’s privacy policies and practices concerning the use and disclosure of data are posted on its website. Any failure by the Company,
its suppliers or other parties with whom the Company does business to comply with its posted privacy policies or with other federal, state or
international privacy-related or data protection laws and regulations could result in proceedings against the Company by governmental entities or
others, which could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company is also subject to payment card association rules and obligations under its contracts with payment card processors. Under these
rules and obligations, if information is compromised, the Company could be liable to payment card issuers for the cost of associated expenses
and penalties. In addition, if the Company fails to follow payment card industry security standards, even if no customer information is
compromised, the Company could incur significant fines or experience a significant increase in payment card transaction costs.
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The Company expects its quarterly revenue and operating results to fluctuate for a variety of reasons.
The Company’s profit margins vary among its products and its distribution channels. The Company’s software, accessories, and service and
support contracts generally have higher gross margins than certain of the Company’s other products. Gross margins on the Company’s hardware
products vary across product lines and can change over time as a result of product transitions, pricing and configuration changes, and
component, warranty, and other cost fluctuations. The Company’s direct sales generally have higher associated gross margins than its indirect
sales through its channel partners. In addition, the Company’s gross margin and operating margin percentages, as well as overall profitability,
may be materially adversely impacted as a result of a shift in product, geographic or channel mix, new products, component cost increases,
strengthening U.S. dollar, or price competition. The Company has typically experienced greater net sales in the first and fourth fiscal quarters
compared to the second and third fiscal quarters due to seasonal demand related to the holiday season and the beginning of the school year,
respectively. Furthermore, the Company sells more products from time-to-time during the third month of a quarter than it does during either of
the first two months. Developments late in a quarter, such as lower-than-anticipated demand for the Company’s products, issues with new
product introductions, an internal systems failure, or failure of one of the Company’s key logistics, components supply, or manufacturing
partners, could have a material adverse impact on the Company’s financial condition and operating results.
The Company’s stock price continues to be volatile.
The Company’s stock has at times experienced substantial price volatility due to a number of factors including, but not limited to variations
between its actual and anticipated financial results, announcements by the Company and its competitors, and uncertainty about current global
economic conditions. The stock market as a whole also 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 these companies’ operating performance. 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, which could have a material adverse impact on investor confidence and employee retention.
The Company’s business is subject to the risks of international operations.
The Company derives a significant portion of its revenue and earnings from its international operations. Compliance with U.S. and foreign laws
and regulations that apply to the Company’s international operations, including without limitation import and export requirements, anticorruption laws, tax laws (including U.S. taxes on foreign subsidiaries), foreign exchange controls and cash repatriation restrictions, data privacy
requirements, labor laws, and anti-competition regulations, increases the costs of doing business in foreign jurisdictions, and any such costs,
which may rise in the future as a result of changes in these laws and regulations or in their interpretation. Furthermore, the Company has
implemented policies and procedures designed to ensure compliance with these laws and regulations, but there can be no assurance that the
Company’s employees, contractors, or agents will not violate such laws and regulations or the Company’s policies. Any such violations could
individually or in the aggregate materially adversely affect the Company’s financial condition or operating results.
The Company’s financial condition and operating results also could be significantly affected by other risks associated with international
activities including, but not limited to, economic and labor conditions, increased duties, taxes and other costs, political instability, and changes in
the value of the U.S. dollar versus local currencies. Margins on sales of the Company’s products in foreign countries, and on sales of products
that include components obtained from foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations
and by international trade regulations, including duties, tariffs and antidumping penalties. Additionally, the Company is exposed to credit and
collectability risk on its trade receivables with customers in certain international markets. There can be no assurance it can effectively limit its
credit risk and avoid losses, which could materially adversely affect the Company’s financial condition and operating results.
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, as well as non-U.S. dollar denominated operating expenses incurred throughout the world.
Weakening of foreign currencies relative to the U.S. dollar will adversely affect the U.S. dollar value of the Company’s foreign currencydenominated sales and earnings, and generally will lead the Company to raise international pricing, potentially reducing demand for the
Company’s products. In some circumstances, due to competition or other reasons, the Company may decide not to raise local prices to the full
extent of the dollar’s strengthening, or at all, which would adversely affect the U.S. dollar value of the Company’s foreign currency denominated
sales and earnings. Conversely, a strengthening of foreign currencies, while generally beneficial to the Company’s foreign currency-denominated
sales and earnings, could cause the Company to reduce international pricing and incur losses on its foreign currency derivative instruments,
thereby limiting the benefit. Additionally, strengthening of foreign currencies may also increase the Company’s cost of product components
denominated in those currencies, thus adversely affecting gross margins.
The Company has used derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations
in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects
of unfavorable movements in foreign exchange rates over the limited time the hedges are in place.
46

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The Company is exposed to credit risk and fluctuations in the market values of its investment portfolio.
Although the Company has not recognized any significant losses to date on its cash, cash equivalents and marketable securities, any significant
future declines in their market values could materially adversely affect the Company’s financial condition and operating results. Given the global
nature of its business, the Company has investments both domestically and internationally. Credit ratings and pricing of these investments can be
negatively impacted by liquidity, credit deterioration or losses, financial results, economic and political risk, or other factors. As a result, the
value or liquidity of the Company’s cash, cash equivalents and marketable securities could decline and result in a material impairment, which
could materially adversely affect the Company’s financial condition and operating results.
The Company is exposed to credit risk on its trade accounts receivable, vendor non-trade receivables 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 cellular network carriers, wholesalers, retailers and value-added resellers. A substantial
majority of the Company’s outstanding trade receivables are not covered by collateral or credit insurance. The Company’s exposure to credit and
collectability risk on its trade receivables are increased in certain international markets and its ability to mitigate such risks may be limited.
Cellular network carriers accounted for a significant portion of the Company’s trade receivables as of June 25, 2011. The Company also has
unsecured vendor non-trade receivables resulting from purchases of components by outsourcing partners and other vendors that manufacture
sub-assemblies or assemble final products for the Company. Two vendors accounted for a significant portion of the Company’s non-trade
receivables as of June 25, 2011. In addition, the Company has made prepayments associated with long-term supply agreements to secure supply
of certain inventory components. While the Company has procedures to monitor and limit exposure to credit risk on its trade and vendor nontrade receivables as well as long-term prepayments, there can be no assurance such procedures will effectively limit its credit risk and avoid
losses, which could materially adversely affect the Company’s financial condition and operating results.
Unfavorable results of legal proceedings could materially adversely affect the Company.
The Company is subject to various legal proceedings and claims that have arisen out of the ordinary conduct of its business and are not yet
resolved and additional claims may arise in the future. Results of legal proceedings cannot be predicted with certainty. Regardless of merit,
litigation may be both time-consuming and disruptive to the Company’s operations and cause significant expense and diversion of management
attention. In recognition of these considerations, the Company may enter into material settlements. Although management considers the
likelihood of such an outcome to be remote, should the Company fail to prevail in certain matters or if one or more of these legal matters were
resolved against the Company in the same reporting period for amounts in excess of management’s expectations, the Company’s condensed
consolidated financial statements of a particular reporting period could be materially adversely affected. In such circumstances, the Company
may be faced with significant compensatory, punitive or trebled monetary damages, disgorgement of revenues or profits, remedial corporate
measures or injunctive relief against it that would materially adversely affect a portion of its business.
47

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The Company is subject to risks associated with laws and regulations related to health, safety and environmental protection.
The Company’s products and services, and the production and distribution of those goods and services, are subject to a variety of laws and
regulations. These may require the Company to offer customers the ability to return a 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 been passed in several jurisdictions in which
the Company operates, including various countries within Europe and Asia and certain states and provinces within North America. Although the
Company does not anticipate any material adverse effects based on the nature of its operations and the focus of such laws, there is no assurance
such existing laws or future laws will not materially adversely affect the Company’s financial condition and operating results.
Changes in the Company’s tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities could
affect its future results.
The Company is subject to taxes in the United States and numerous foreign jurisdictions. The Company’s future effective tax rates could be
affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and
liabilities, or changes in tax laws or their interpretation. In addition, the current administration and Congress have announced proposals for new
U.S. tax legislation that, if adopted, could adversely affect the Company’s tax rate. Any of these changes could have a material adverse effect on
the Company’s profitability. The Company is also subject to the continual 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 taxes. There can be no assurance that the outcomes from these examinations will not materially adversely affect the
Company’s financial condition and operating results.
The Company is subject to risks associated with the availability and coverage of insurance.
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 could
materially adversely affect the Company’s financial condition and operating results.
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 5.

Other Information

None.

48

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Item 6.

Exhibits

(a) Index to Exhibits

Exhibit Description

Incorporated by
Reference
Filing Date/
Period End
Date
Form

3.1

Restated Articles of Incorporation, filed with the Secretary of State of the State of California on July 10, 2009.

10-Q

6/27/09

3.2

Bylaws of the Registrant, as amended through April 20, 2011.

10-Q

3/26/11

4.1

Form of Stock Certificate of the Registrant.

10-Q

12/30/06

10.1*

Employee Stock Purchase Plan, as amended through March 8, 2010.

10-Q

3/27/10

10.2*

Form of Indemnification Agreement between the Registrant and each director and executive officer of the
Registrant.

10-Q

6/27/09

10.3*

1997 Director Stock Plan, as amended through February 25, 2010.

8-K

3/1/10

10.4*

2003 Employee Stock Plan, as amended through February 25, 2010.

8-K

3/1/10

10.5*

Reimbursement Agreement dated as of May 25, 2001 by and between the Registrant and Steven P. Jobs.

10-Q

6/29/02

10.6*

Form of Option Agreement.

10-K

9/24/05

10.7*

Form of Restricted Stock Unit Award Agreement effective as of August 28, 2007.

10-K

9/29/07

10.8*

Form of Restricted Stock Unit Award Agreement effective as of November 11, 2008.

10-Q

12/27/08

10.9*

Form of Restricted Stock Unit Award Agreement effective as of November 16, 2010.

10-Q

12/25/10

14.1

Business Conduct Policy of the Registrant dated July 2010.

10-K

9/25/10

31.1**

Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.

31.2**

Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.

32.1***

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.

Exhibit
Number

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

*

Indicates management contract or compensatory plan or arrangement.

**

Filed herewith.

***

Furnished herewith.
49

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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, thereunto duly authorized.
July 20, 2011

APPLE INC.
By: /s/ Peter Oppenheimer
Peter Oppenheimer
Senior Vice President,
Chief Financial Officer
50

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Exhibit 31.1
CERTIFICATIONS
I, Steven P. Jobs, certify that:
1.

I have reviewed this quarterly report on Form 10-Q of Apple 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)

(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)

5.

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;

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 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: July 20, 2011
By: /s/ Steven P. Jobs
Steven P. Jobs
Chief Executive Officer

Case 2:13-cv-00894-JRG Document 41-3 Filed 03/25/14 Page 115 of 176 PageID #: 675
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Exhibit 31.2
CERTIFICATIONS
I, Peter Oppenheimer, certify that:
1.

I have reviewed this quarterly report on Form 10-Q of Apple 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)

(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)

5.

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;

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 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: July 20, 2011
By: /s/ Peter Oppenheimer
Peter Oppenheimer
Senior Vice President,
Chief Financial Officer

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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
Quarterly Report of Apple Inc. on Form 10-Q for the period ended June 25, 2011 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-Q fairly presents in all material respects the financial
condition and results of operations of Apple Inc.
Date: July 20, 2011
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 Quarterly Report of Apple Inc. on Form 10-Q for the period ended June 25, 2011 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-Q fairly presents in all material respects the financial
condition and results of operations of Apple Inc.
Date: July 20, 2011
By: /s/ Peter Oppenheimer
Peter Oppenheimer
Senior Vice President,
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Apple Inc. and will be retained by Apple Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.

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EXHIBIT 5

Case 2:13-cv-00894-JRG Document 41-3 Filed 03/25/14 Page 118 of 176 PageID #: 678
Case 2:13-cv-00900-JRG Document 52-6 Filed 03/21/14 Page 2 of 2 PageID #: 1911

Case 2:13-cv-00894-JRG Document 41-3 Filed 03/25/14 Page 119 of 176 PageID #: 679

Case 2:13-cv-00900-JRG Document 52-7 Filed 03/21/14 Page 1 of 2 PageID #: 1912

EXHIBIT 6

Case 2:13-cv-00894-JRG Document 41-3 Filed 03/25/14 Page 120 of 176 PageID #: 680
Case 2:13-cv-00900-JRG Document 52-7 Filed 03/21/14 Page 2 of 2 PageID #: 1913

Case 2:13-cv-00894-JRG Document 41-3 Filed 03/25/14 Page 121 of 176 PageID #: 681

Case 2:13-cv-00900-JRG Document 52-8 Filed 03/21/14 Page 1 of 2 PageID #: 1914

EXHIBIT 7

Case 2:13-cv-00894-JRG Document 41-3 Filed 03/25/14 Page 122 of 176 PageID #: 682
Case 2:13-cv-00900-JRG Document 52-8 Filed 03/21/14 Page 2 of 2 PageID #: 1915

Case 2:13-cv-00894-JRG Document 41-3 Filed 03/25/14 Page 123 of 176 PageID #: 683

Case 2:13-cv-00900-JRG Document 52-9 Filed 03/21/14 Page 1 of 2 PageID #: 1916

EXHIBIT 8

Case 2:13-cv-00894-JRG Document 41-3 Filed 03/25/14 Page 124 of 176 PageID #: 684
Case 2:13-cv-00900-JRG Document 52-9 Filed 03/21/14 Page 2 of 2 PageID #: 1917

Case 2:13-cv-00894-JRG Document 41-3 Filed 03/25/14 Page 125 of 176 PageID #: 685

Case 2:13-cv-00900-JRG Document 52-10 Filed 03/21/14 Page 1 of 8 PageID #: 1918

EXHIBIT 9

Case 2:13-cv-00894-JRG Document 41-3 Filed 03/25/14 Page 126 of 176 PageID #: 686
http://www.wired.com/wiredenterprise/2013/11/veschi/

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Rockstar — the closely watched consortium that sued Google, Samsung, and six other handset makers
on Thursday — says that another big-name company is infringing its vast patent portfolio: Facebook.
Enterprise
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23

Facebook Infringes My Patents Too, Says
CEO Who Just Sued Google
By Robert McMillan
11.01.13
7:54 PM
Follow @bobmcmillan

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Inside the reverse-engineering lab at Rockstar, Scott Widdowson is looking for products that
infringe on the company’s 4,000 patents. Photo: Rockstar
Rockstar — the closely watched consortium that sued Google, Samsung, and six other handset
makers on Thursday — says that another big-name company is infringing its vast patent portfolio:
Facebook.
Rockstar CEO John Veschi doesn’t want to get into the details, but he believes his company’s 4,000patents — which it inherited after Apple, Microsoft, Blackberry, Sony, and Ericsson purchased the
majority of patents owned by the imploded Canadian telecom giant, Nortel — cover, or “read on,”
the kind of social network operated by Facebook.
“I’m definitely aware of many that ‘read on’ features that are in any social network, whether it’s
Facebook LinkedIn or any other thing like that,” he says. Though he declined to say more, Veschi
has said in the past that his patent portfolio is so great that it’s hard to imagine any high-tech
companies that don’t use techniques covered by the Nortel patents.
Rockstar had been negotiating with technology companies for more than a year and a half, trying to
get outfits such as Google to license its portfolio of more than 4,000 patents, which cover a wide
range of areas. The company has been trying to cut intellectual property licensing deals across six
broad sectors — including social media. And while Rockstar has sealed a “fairly small number” of
deals to date, it’s been a difficult business.

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After surviving the Nortel meltdown, Rockstar CEO John Veschi now controls 4,000 patents related
to mobile devices and computer networks. Photo: Dan Krauss/WIRED
That’s what’s forcing the lawsuits, the first of which were filed on Thursday in federal court in Texas.
“We’ve gotten to a point with many of them where they even say to us: ‘Look, you need to sue us. I
can’t really get the attention of management because we have other people who have sued us. And if
you don’t sue us, you haven’t basically put the table stakes down to get to the big table.’”
Veschi says that, although Rockstar sued Google (over search technology patents) and seven of
Google’s Android partners on Thursday, that it is incorrect to see Rockstar as a proxy agent for
Apple, Microsoft, and Blackberry — all of whom are part-owners of Rockstar with seats on its board
of directors. “It was basically all my decision-making,” he says. “I think it’s important for people to
realize that my shareholders had nothing to do with this.”
Veschi, like many of Rockstar’s employees is an ex-Nortel worker. He was hired by the
telecommunications giant in 2008 to find patent licensing revenue — something Nortel hadn’t ever
done effectively. He says that Nortel that the search and mobile phone lawsuits that were filed
yesterday can be traced back to the first work he did at Nortel five years ago. “Mobile and the
internet search are in some ways the most ripe because they were actually the two franchises I built
first when I joined Nortel in 2008.”
Rockstar revealed yesterday that it has set up subsidiaries to manage its patent licensing activities in
mobile and search. The company is also dividing up its patents to include licensing for
telecommunication services providers, networking equipment, enterprise technology and social
networking, Veschi says.
From Veschi’s perspective, Rockstar is simply seeking the revenue that Nortel had coming to it for
its pioneering work in telecommunications. Not surprisingly, the Electronic Frontier Foundation,
which has long fought against such patent suits, sees things differently. “The marketplace is where
this entire fight should be taking place,” says Julie Samuels, senior staff attorney with the EFF.
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“Nortel made its money off its products. Now people are trying to squeeze water form the rock that
was Nortel. In any rational economic system there would be no there there, but because of our
messed-up patent system, they’re able to do that.”

Robert McMillan is a writer with Wired Enterprise. Got a tip? Send him an email at:
robert_mcmillan [at] wired.com.
Read more by Robert McMillan
Follow @bobmcmillan on Twitter.

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34 Comments

Allen Bryce

•

The original point of patents is to encorrage companies to do more, they are increasingly being
used as a weapon to harm the industry and make some money in the process. It's past time the
system was reviewed.
•

Lefty

•

They do not harm the industry ! If you invent something let`s use Tesla for example what
did he come up with ? Then got screwed died alone in a hotel room and who got the credit
? Cash makes the world go round and in a land were you can sue for a ham sandwich
who is at fault now the patent office or the courts.
•

MW

•

Tesla's situation does not describe the patent environment in the 21st century. That
was around 100 years ago.
•

NooYawker

•

We're not talking major breakthroughs here. The bulk of these patents are so small
and insignificant yet somehow gets patented, it inhibits everyone. Slide to unlock is
not a breakthrough, it's not inventive, and it should never have gotten patented. I'm
sure 99.9% of these patents are of the same nature.
•

IP what

•

"to encorrage companies to do more"
Well sure, but do what? Today, most pro-patent people have given up or downplay the
argument that patents are needed to incentivize invention (excepting perhaps
pharmaceuticals). The much stronger argument is that patents play an important role in
getting the inventor to disclose what they've done - discouraging trade secrets and black
boxes.
In my opinion, the biggest problem with Myriad, the case that holds you can't patent
genes, is that genetic medicine companies are simply not going to tell you what genes
they've identified as predictive of disease. Before Myriad, if you were a genetics lab, you
could say to the world - hey, this chunk of DNA indicates a propensity for breast cancer,
without worrying that every university lab in the country would start testing destroying any
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Rockstar
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Let innovation thrive
Rockstar is deeply committed to advancing innovation worldwide through its
patent licensing program. Intellectual property is a strategic asset. Acquisition of
such an asset from Rockstar through a license or purchase can provide significant
strategic value to our partners and customers. Our licensees gain access to the

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immense power and know-how of the patented technologies in Rockstar’s
portfolio, in addition to gaining freedom of design, improving time-to-market
product development and delivering better end-customer satisfaction.

Protect when necessary
Licensing is always the preferred route at Rockstar. However, with a portfolio that
is widely regarded by peers and analysts as one of the most significant, highquality collections in the technology industry today, Rockstar is committed to
protecting its intellectual property where necessary.

When patent infringement occurs
Today, a vast number of companies in the marketplace are using technology
products or processes built directly from patents in Rockstar’s portfolio. When
patent infringement occurs, there is typically one of two consequences: either the
infringing businesses obtain the legal right to use that technology via a patent
license, or the parties pursue the case through litigation—a step that can be costly
and time consuming for both parties.

How evidence of patent infringement is collected
While Rockstar prefers to help innovation in the marketplace grow through the
licensing route, we also aggressively pursue those who refuse to respect and
compensate patent holders. Evidence of patent infringement is collected and
analyzed by Rockstar at our in-house labs. Rockstar engineers—many of whom are
patent holders themselves—conduct extensive reverse engineering on products that
are suspected of patent infringement. When evidence of use is established, a claim
report is created and an infringing company is contacted to discuss next steps.

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Find out more about patent licensing and sales
At Rockstar, licensing and sales are the preferred way of bringing innovation to
the market. For authorized representatives of firms who develop technology-based
products and processes, contact our Sales Department today for more information
on patent sales and licensing options for your firm.
Rockstar | Patent licensing and patent sales
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https://www.linkedin.com/company/rockstar-consortium

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Rockstar Consortium
Overview

Careers

Rockstar is an intellectual property (IP) licensing company. We celebrate the
value and power of innovation: the ideas that fuel a better way of doing things.
Based on Nortel Networks’ groundbreaking innovation engine, Rockstar
manages a highly valued patent portfolio relevant to all telecom and high tech
services and devices. We count among our most valuable assets a
professional staff of technology industry veterans—many of whom were part of
Nortel’s innovation engine, and are inventors and patent holders themselves.

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Type
Privately Held
Company Size
11-50 employees
Website
http://www.ip-rockstar.com
Industry
Telecommunications
Founded
2011

Headquarters
515 Legget Drive, Suite 300
Ottawa, Ontario K2K 3G4
CANADA

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