Google Inc. v. Rockstar Consortium US LP et al

Filing 50

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 C, # 9 Exhibit D)(Warren, Matthew) (Filed on 3/28/2014)

EXHIBIT B

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UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
MARSHALL DIVISION

ROCKSTAR CONSORTIUM US LP,
AND MOBILESTAR TECHNOLOGIES
LLC,
Plaintiffs,
vs.
HTC CORPORATION AND
HTC AMERICA, INC.,
Defendants.

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Civil Action No. 2:13-cv-895 JRG
JURY TRIAL DEMANDED

DECLARATION OF CURT HOLBREICH IN SUPPORT OF DEFENDANTS HTC
CORPORATION’S AND HTC AMERICA, INC.’S MOTION TO TRANSFER OR,
IN THE ALTERNATIVE, TO STAY
I, Curt Holbreich, declare as follows:
1.

I am a partner at K&L Gates LLP.

I submit this declaration in support of

Defendants’ Motion to Transfer, or in the Alternative to Stay. I have personal knowledge as to
the facts set forth in this Declaration, and would competently testify to them if called upon to do
so.
2.

Attached as Exhibit 1 to this declaration is a true and correct copy of the Google

Inc. v. Rockstar Consortium US LP and Mobilestar Technologies LLC Complaint filed on
December 23, 2013, in the Northern District of California, Case No. 4:13-cv-05933-CW.
3.

Attached as Exhibit 2 to this declaration is a true and correct copy of the

Declaration of Abeer Dubey in support of (Google and Samsung) Defendants’ Motion to Stay or,
in the alternative, to transfer to the Northern District of California, filed on March 21, 2014, in
case number 2:13-cv-00900-JRG (E.D. Tex), Dkt. No. 52-29.

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4.

Attached as Exhibit 3 to this declaration is a true and correct copy of Apple Inc.’s

Form 10-Q, for the quarterly period ending June 25, 2011.
5.

Attached as Exhibit 4 to this declaration is a true and correct copy of a website

page from Weil Gotshal’s website showing Mr. Kyle Krpata’s connection with Apple’s purchase
of the Nortel patent portfolio.
6.

Attached as Exhibit 5 to this declaration is a true and correct copy of the

Declaration of Dale Jachlewski in support of (Google and Samsung) Defendants’ Motion to Stay
or, in the alternative, to transfer to the Northern District of California, filed on March 21, 2014,
in case number 2:13-cv-00900-JRG (E.D. Tex), Dkt. No. 52-31.
7.

Attached as Exhibit 6 to this declaration is a true and correct copy of the

Declaration of Kristin J. Madigan in support of (Google and Samsung) Defendants’ Motion to
Stay or, in the alternative, to transfer to the Northern District of California, filed on March 21,
2014, in case number 2:13-cv-00900-JRG (E.D. Tex), Dkt. No. 52-1, as well as the exhibits cited
in that declaration..
8.

Attached as Exhibit 7 to this declaration is a true and correct copy of a

correspondence from Rockstar Consortium Inc. and Rockstar Consortium US LP to HTC
Corporation, dated March 12, 2012.
9.

Attached as Exhibit 8 to this declaration is a true and correct copy of a Rockstar

press release, titled “Rockstar Consortium Receives Green Light From Department Of Justice,”
dated March 12, 2012.
10.

Attached as Exhibit 9 to this declaration is a true and correct copy of Seventy-

First Report of the Monitor Dated July 6, 2011, filed in the Ontario Superior Court of Justice in
the Bankruptcy matter of Nortel, Court File No. 09-CL-7950.

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I declare under penalty of perjury, under the laws of the United States of America, that
the foregoing is true and correct. Executed on March 28, 2014, at San Francisco, California.

___/s/ Curt Holbreich_____________________
Curt Holbreich

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1 QUINN EMANUEL URQUHART & SULLIVAN, LLP
Sean Pak (Cal. Bar No. 219032)
[e-mail]
2
Amy H. Candido (Cal. Bar No. 237829)
[e-mail]
3
Matthew S. Warren (Cal. Bar No. 230565)
[e-mail]
4
50 California Street, 22nd Floor
5 San Francisco, California 94111
[phone]
6 [phone] (facsimile)
7 Attorneys for Plaintiff GOOGLE INC.
8

UNITED STATES DISTRICT COURT

9

NORTHERN DISTRICT OF CALIFORNIA

10
11 GOOGLE INC.,
Plaintiff,

12
13

CASE NO. 3:13-cv-5933
COMPLAINT FOR DECLARATORY
JUDGMENT OF NON-INFRINGEMENT
OF U.S. PATENT NOS. 5,838,551;
6,037,937; 6,128,298; 6,333,973; 6,463,131;
6,765,591; AND 6,937,572

v.

14 ROCKSTAR CONSORTIUM US LP and
MOBILESTAR TECHNOLOGIES LLC,
15
Defendants.
16

DEMAND FOR JURY TRIAL

17
18

Plaintiff Google Inc. (“Google”) seeks a declaration that Google does not directly or

19 indirectly infringe United States Patent Nos. 5,838,551, 6,037,937, 6,128,298, 6,333,973,
20 6,463,131, 6,765,591, and 6,937,572, as follows:
21
22
23
24
25
26
27
28
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1
2

NATURE OF THE ACTION
1.

This is an action for a declaratory judgment of non-infringement arising under the

3 patent laws of the United States, Title 35 of the United States Code. Google requests this relief
4 because Defendants Rockstar Consortium US LP and MobileStar Technologies LLC (collectively,
5 “Rockstar”) have filed seven lawsuits claiming that Google’s customers infringe some or all of
6 United States Patent Nos. 5,838,551, 6,037,937, 6,128,298, 6,333,973, 6,463,131, 6,765,591, and
7 6,937,572 (the “patents in suit”) by making, using, selling, offering for sale, importing, exporting,
8 supplying, or distributing “certain mobile communication devices having a version (or an adaption
9 thereof) of [the] Android operating system” developed by Google. Rockstar’s litigation campaign
10 has placed a cloud on Google’s Android platform; threatened Google’s business and relationships
11 with its customers and partners, as well as its sales of Nexus-branded Android devices; and created
12 a justiciable controversy between Google and Rockstar.
THE PARTIES

13
14

2.

Plaintiff Google Inc. (“Google”) is a corporation organized and existing under the

15 laws of the state of Delaware, with its principal place of business at 1600 Amphitheatre Parkway,
16 Mountain View, California, 94043. Google’s mission is to organize the world’s information and
17 make it universally accessible and useful. As part of that mission, Google produces Android, an
18 open-source mobile platform that has been adopted by original equipment manufacturers
19 (“OEMs”) worldwide.
20

3.

Defendant Rockstar Consortium US LP (“Rockstar Consortium”) is a limited

21 partnership organized and existing under the laws of the state of Delaware. Rockstar Consortium
22 claims that its principal place of business is at Legacy Town Center 1, 7160 North Dallas
23 Parkway, Suite No. 250, Plano, Texas, 75024, but the substantial majority of its employees,
24 including senior management, are based in Ontario, Canada. Rockstar Consortium is admittedly a
25 “patent licensing business” that produces no products, and instead exists solely to assert its
26 patents. (http://www.ip-rockstar.com/about.)
27

4.

Defendant MobileStar Technologies LLC (“MobileStar”) is a limited liability

28 corporation organized and existing under the laws of the state of Delaware, and also claims that its
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1 principal place of business is at Legacy Town Center 1, 7160 North Dallas Parkway,
2 Suite No. 250, Plano, Texas, 75024. MobileStar claims to be a subsidiary of Rockstar.
3 MobileStar was formed for litigation one day before Rockstar filed its lawsuits against Google’s
4 customers.
5
6

JURISDICTIONAL STATEMENT
5.

This action arises under the Declaratory Judgment Act, 28 U.S.C. § 2201, and

7 under the patent laws of the United States, 35 U.S.C. §§ 1-390.
8

6.

This Court has subject matter jurisdiction over this action under 28 U.S.C. §§ 1331,

9 1338(a), and 2201(a).
10

7.

This Court has personal jurisdiction over Rockstar. Among other things, Rockstar

11 has continuous and systematic business contacts with California. As Rockstar executives have
12 explained to the media, once Rockstar identifies commercially successful products, it approaches
13 the companies behind those products in person and through other means to seek licenses to
14 Rockstar’s patents. Rockstar conducts this business extensively throughout California, including
15 through personnel located in the San Francisco Bay Area. Rockstar’s CEO has publicly stated that
16 Facebook (based in Menlo Park) and LinkedIn (based in Mountain View) infringe Rockstar’s
17 patents. (http://www.wired.com/wiredenterprise/2013/11/veschi/.) In fact, Rockstar’s CEO has
18 stated that it would be difficult to imagine that any tech companies—legions of which call
19 California home—do not infringe Rockstar’s patents. On information and belief, Rockstar’s
20 licensing and enforcement efforts in California have generated substantial revenues.
21

8.

On information and belief, Rockstar’s shareholders direct and participate in

22 Rockstar’s licensing and enforcement efforts against companies in California. For example, Apple
23 Inc. (“Apple”) is a large shareholder in closely-held Rockstar, and maintains a seat on Rockstar’s
24 board of directors. Rockstar’s CEO has publicly stated that Rockstar maintains regular contact
25 with its shareholders. Apple’s headquarters are in Cupertino, California.
26

9.

In addition, this Court has personal jurisdiction over Rockstar for another reason:

27 Rockstar has purposefully directed into California its enforcement activities regarding the patents
28 in suit. As part of this enforcement campaign, Rockstar contacted and met with a series of
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1 California-based companies, accusing their devices that use Google’s Android platform. On
2 information and belief, Rockstar contacted and met with these California-based companies in
3 order to discourage them from continuing to use Google’s Android platform in their devices, and
4 to interfere with Google’s business relationships.
5

10.

Venue is proper in this District under 28 U.S.C. §§ 1391(b), (c), because a

6 substantial part of the events giving rise to Google’s claim occurred in this district, and because
7 Rockstar Consortium and MobileStar are subject to personal jurisdiction here.
8

11.

An immediate, real, and justiciable controversy exists between Google and

9 Rockstar as to whether Google is infringing or has infringed United States Patent Nos. 5,838,551
10 (the “’551 patent”), 6,037,937 (the “’937 patent”), 6,128,298 (the “’298 patent”), 6,333,973 (the
11 “’973 patent”), 6,463,131 (the “’131 patent”), 6,765,591 (the “’591 patent”), and 6,937,572 (the
12 “’572 patent”).
13
14

INTRADISTRICT ASSIGNMENT
12.

For purposes of intradistrict assignment under Civil Local Rules 3-2(c) and 3-5(b),

15 this Intellectual Property Action will be assigned on a district-wide basis.
16
17

ROCKSTAR’S HISTORY AND BUSINESS
13.

In June 2011, five of the world’s largest technology companies—including Google

18 competitors Apple, Research In Motion, and Microsoft—joined forces to obtain a portfolio of
19 patents auctioned during the bankruptcy of Nortel Networks. Bankrolled by these companies, a
20 manufactured entity called “Rockstar Bidco” placed the winning bid of $4.5 billion. According to
21 Apple’s June 2011 Form 10-Q filed with the Securities and Exchange Commission, Apple
22 contributed “approximately $2.6 billion” of that sum.
23

14.

Following its acquisition of Nortel’s portfolio, Rockstar Bidco transferred

24 ownership of thousands of patents to its owners, whom it calls the “founding licensees.” Rockstar
25 Bidco transferred ownership of over 1,000 patents to Apple alone. On information and belief,
26 Rockstar Bidco was then reorganized into Rockstar Consortium.
27

15.

Rockstar produces no products and practices no patents. Instead, Rockstar employs

28 a staff of engineers in Ontario, Canada, who examine other companies’ successful products to find
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1 anything that Rockstar might use to demand and extract licenses to its patents under threat of
2 litigation.
3

16.

Public reports confirm that in the first two months following its purchase of

4 Nortel’s portfolio, Rockstar sought licenses from as many as 100 companies. On information and
5 belief, Rockstar has since sought licenses from many additional companies.
6
7

ROCKSTAR’S CAMPAIGN AGAINST ANDROID
17.

Among the myriad companies ensnared in Rockstar’s patent dragnet are customers

8 and partners of Google who use the Android platform in their devices, including ASUS, HTC,
9 Huawei, LG, Pantech, Samsung, and ZTE.
10

18.

On October 31, 2013, Rockstar brought patent infringement actions against ASUS,

11 HTC, Huawei, LG, Pantech, Samsung, and ZTE in the Marshall Division of the United States
12 District Court for the Eastern District of Texas. Rockstar Consortium US LP v. ASUSTek
13 Computer, Inc., No. 2:13-cv-894; Rockstar Consortium US LP v. HTC Corp., No. 2:13-cv-895;
14 Rockstar Consortium US LP v. Huawei Investment & Holding Co., No. 2:13-cv-896; Rockstar
15 Consortium US LP v. LG Electronics Inc., No. 2:13-cv-898; Rockstar Consortium US LP v.
16 Pantech Co., No. 2:13-cv-899; Rockstar Consortium US LP v. Samsung Electronics Co.,
17 No. 2:13-cv-900; and Rockstar Consortium US LP v. ZTE Corp., No. 2:13-cv-901 (collectively,
18 the “Android OEM Actions” against the “Android OEM Defendants”).
19

19.

In the Android OEM Actions, Rockstar alleges that each Android OEM Defendant

20 infringes some or all of the ’551, ’937, ’298, ’973, ’131, ’591, and ’572 patents by making, using,
21 selling, offering for sale, importing, exporting, supplying, or distributing “certain mobile
22 communication devices having a version (or an adaption thereof) of [the] Android operating
23 system” developed by Google.
24

20.

In the Android OEM Actions, Rockstar accuses Android features including

25 “Mobile Hotspot functionality” which is “designed to route data packets between wireless devices
26 tethered to the Mobile Hotspot to nodes on a public network such as the Internet,” allegedly
27 infringing the ’298 patent; “VPN management functionality,” allegedly infringing the ’591 patent;
28 “Messaging and Notification functionality,” allegedly infringing the ’131 patent; a “navigable
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1 graphical user interface (‘navigable GUI’) that permits a user to manipulate and control the
2 contents of the display to maximize the use of display real estate,” allegedly infringing the ’937
3 patent; “integrated notification message center,” allegedly infringing the ’973 patent; and
4 “Location Services functionality,” allegedly infringing the ’572 patent.
5

21.

Rockstar further accuses devices incorporating Android of infringing the ’551

6 patent by “includ[ing] at least one electronic package comprising a component that is located
7 between an EMI shield and a ground member for performing shielding operations” where “[t]he
8 EMI shield is incorporated into the electronic package, which is then mounted to a circuit board”
9 in the accused devices.
10

22.

As Rockstar’s complaints admit, in the Android OEM Actions Rockstar has

11 asserted its patents only against “certain mobile communication devices having a version (or an
12 adaption thereof) of [the] Android operating system” developed by Google—although each of the
13 Android OEM Defendants also makes other products that do not use Google’s Android platform.
14 Rockstar has further asserted patent infringement by the Nexus 7, a device offered for sale by
15 Google and built by ASUS, one of the Android OEM Defendants.
16

23.

On information and belief, Rockstar intends the Android OEM Actions to harm

17 Google’s Android platform and disrupt Google’s relationships with the Android OEM Defendants.
18 This is an open secret: industry media immediately observed that in filing the Android OEM
19 Actions, Rockstar “launch[ed] an all-out patent attack on Google and Android.”
20 (http://arstechnica.com/tech-policy/2013/10/patent-war-goes-nuclear-microsoft-apple-owned21 rockstar-sues-google/.)
22

24.

For all these reasons, an actual controversy exists between Google and Rockstar

23 regarding the alleged infringement of any claim of the ’551, ’937, ’298, ’973, ’131, ’591, and
24 ’572 patents.
25
26

GOOGLE DOES NOT INFRINGE THE PATENTS IN SUIT
25.

Neither any version of Google’s Android platform nor any of the Nexus 5,

27 Nexus 7, or Nexus 10 devices sold by Google directly or indirectly infringe any claim of the ’551,
28 ’937, ’298, ’973, ’131, ’591, and ’572 patents.
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1

26.

To the best of Google’s knowledge, no third party infringes any claim of the ’551,

2 ’937, ’298, ’973, ’131, ’591, or ’572 patents by using Nexus devices or Google’s Android
3 platform in other devices. Google has not caused, directed, requested, or facilitated any such
4 infringement, much less with specific intent to do so. Neither the Nexus devices nor Google’s
5 Android platform are designed for use in any combination which infringes any claim of the ’551,
6 ’937, ’298, ’973, ’131, ’591, or ’572 patents. To the contrary, each is a product with substantial
7 uses that do not infringe any claim of these patents.
8

FIRST COUNT

9

(Declaration of Non-Infringement of the ’551 Patent)

10

27.

Google restates and incorporates by reference the allegations in paragraphs 1

11 through 26 of this Complaint as if fully set forth herein.
12

28.

Rockstar Consortium claims to own all rights, title, and interest in United States

13 Patent No. 5,838,551 (the “’551 patent”). MobileStar claims to be the exclusive licensee of the
14 ’551 patent. A true and correct copy of the ’551 patent is attached hereto as Exhibit A.
15

29.

In the Android OEM Actions, Rockstar accuses Android OEM defendants ASUS,

16 HTC, Huawei, LG, Pantech, and Samsung of infringing the ’551 patent in that each “makes, uses,
17 sells, offers for sale, imports, exports, supplies and/or distributes within the United States” devices
18 incorporating Google’s Android platform, which devices allegedly include “at least one electronic
19 package comprising a component that is located between an EMI shield and a ground member for
20 performing shielding operations” where “[t]he EMI shield is incorporated into the electronic
21 package, which is then mounted to a circuit board” in the accused devices. In its complaint
22 against ASUS, which manufactures the Nexus 7, Rockstar specifically accuses the Nexus 7, a
23 device offered for sale by Google.
24

30.

A substantial, immediate, and real controversy therefore exists between Google and

25 Rockstar regarding whether the Android platform or any of these Nexus devices infringe or have
26 infringed the ’551 patent. A judicial declaration is necessary to determine the parties’ respective
27 rights regarding the ’551 patent.
28
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1

31.

Google seeks a judgment declaring that Google’s Android platform and the

2 Nexus 5, Nexus 7, and Nexus 10 devices do not directly or indirectly infringe any claim of the
3 ’551 patent.
4

SECOND COUNT

5

(Declaration of Non-Infringement of the ’937 Patent)

6

32.

Google restates and incorporates by reference the allegations in paragraphs 1

7 through 31 of this Complaint as if fully set forth herein.
8

33.

MobileStar claims to own all rights, title, and interest in United States Patent

9 No. 6,037,937 (the “’937 patent”). Rockstar Consortium claims no interest in the ’937 patent, yet
10 seeks a judgment of infringement against the Android OEM Defendants in the Android OEM
11 Actions. A true and correct copy of the ’937 patent is attached hereto as Exhibit B.
12

34.

In the Android OEM Actions, Rockstar accuses Android OEM Defendants ASUS,

13 HTC, Huawei, LG, Pantech, Samsung, and ZTE of infringing the ’937 patent in that each “makes,
14 uses, sells, offers for sale, imports, exports, supplies and/or distributes within the United States”
15 devices incorporating a version of Google’s Android platform that supports a “navigable graphical
16 user interface (‘navigable GUI’) that permits a user to manipulate and control the contents of the
17 display to maximize the use of display real estate.” In its complaint against ASUS, which
18 manufactures the Nexus 7, Rockstar specifically accuses the Nexus 7, a device offered for sale by
19 Google.
20

35.

The Nexus 5, Nexus 7, and Nexus 10 devices use Google’s Android platform.

21

36.

A substantial, immediate, and real controversy therefore exists between Google and

22 Rockstar regarding whether the Android platform or any of these Nexus devices infringe or have
23 infringed the ’937 patent. A judicial declaration is necessary to determine the parties’ respective
24 rights regarding the ’937 patent.
25

37.

Google seeks a judgment declaring that Google’s Android platform and the

26 Nexus 5, Nexus 7, and Nexus 10 devices do not directly or indirectly infringe any claim of the
27 ’937 patent.
28
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1

THIRD COUNT

2

(Declaration of Non-Infringement of the ’298 Patent)

3

38.

Google restates and incorporates by reference the allegations in paragraphs 1

4 through 37 of this Complaint as if fully set forth herein.
5

39.

Rockstar Consortium claims to own all rights, title, and interest in United States

6 Patent No. 6,128,298 (the “’298 patent”). MobileStar claims to be the exclusive licensee of ’298
7 patent. A true and correct copy of the ’298 patent is attached hereto as Exhibit C.
8

40.

In the Android OEM Actions, Rockstar accuses Android OEM Defendants ASUS,

9 HTC, Huawei, LG, Pantech, Samsung, and ZTE of infringing the ’298 patent in that each “makes,
10 uses, sells, offers for sale, imports, exports, supplies and/or distributes within the United States”
11 devices incorporating a version of Google’s Android platform that supports “Mobile Hotspot
12 functionality [which] is designed to route data packets between wireless devices tethered to the
13 Mobile Hotspot to nodes on a public network such as the Internet.” In its complaint against
14 ASUS, which manufactures the Nexus 7, Rockstar specifically accuses the Nexus 7, a device
15 offered for sale by Google.
16

41.

The Nexus 5, Nexus 7, and Nexus 10 devices use Google’s Android platform.

17

42.

A substantial, immediate, and real controversy therefore exists between Google and

18 Rockstar regarding whether the Android platform or any of these Nexus devices infringe or have
19 infringed the ’298 patent. A judicial declaration is necessary to determine the parties’ respective
20 rights regarding the ’298 patent.
21

43.

Google seeks a judgment declaring that Google’s Android platform and the

22 Nexus 5, Nexus 7, and Nexus 10 devices do not directly or indirectly infringe any claim of the
23 ’298 patent.
24

FOURTH COUNT

25

(Declaration of Non-Infringement of the ’973 Patent)

26

44.

Google restates and incorporates by reference the allegations in paragraphs 1

27 through 43 of this Complaint as if fully set forth herein.
28
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1

45.

MobileStar claims to own all rights, title, and interest in United States Patent

2 No. 6,333,973 (the “’973 patent”). Rockstar Consortium claims no interest in the ’973 patent, yet
3 seeks a judgment of infringement against the Android OEM Defendants in the Android OEM
4 Actions. A true and correct copy of the ’973 patent is attached hereto as Exhibit D.
5

46.

In the Android OEM Actions, Rockstar accuses Android OEM Defendants ASUS,

6 HTC, Huawei, LG, Pantech, Samsung, and ZTE of infringing the ’973 patent in that each “makes,
7 uses, sells, offers for sale, imports, exports, supplies and/or distributes within the United States”
8 devices incorporating a version of Google’s Android platform that supports an “integrated
9 notification message center.” In its complaint against ASUS, which manufactures the Nexus 7,
10 Rockstar specifically accuses the Nexus 7, a device offered for sale by Google.
11

47.

The Nexus 5, Nexus 7, and Nexus 10 devices use Google’s Android platform.

12

48.

A substantial, immediate, and real controversy therefore exists between Google and

13 Rockstar regarding whether the Android platform or any of these Nexus devices infringe or have
14 infringed the ’973 patent. A judicial declaration is necessary to determine the parties’ respective
15 rights regarding the ’973 patent.
16

49.

Google seeks a judgment declaring that Google’s Android platform and the

17 Nexus 5, Nexus 7, and Nexus 10 devices do not directly or indirectly infringe any claim of the
18 ’973 patent.
19

FIFTH COUNT

20

(Declaration of Non-Infringement of the ’131 Patent)

21

50.

Google restates and incorporates by reference the allegations in paragraphs 1

22 through 49 of this Complaint as if fully set forth herein.
23

51.

MobileStar claims to own all rights, title, and interest in United States Patent

24 No. 6,463,131 (the “’131 patent”). Rockstar Consortium claims no interest in the ’131 patent, yet
25 seeks a judgment of infringement against the Android OEM Defendants in the Android OEM
26 Actions. A true and correct copy of the ’131 patent is attached hereto as Exhibit E.
27

52.

In the Android OEM Actions, Rockstar accuses Android OEM Defendants ASUS,

28 HTC, Huawei, LG, Pantech, Samsung, and ZTE of infringing the ’131 patent in that each “makes,
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1 uses, sells, offers for sale, imports, exports, supplies and/or distributes within the United States”
2 devices incorporating a version of Google’s Android platform that supports “Messaging and
3 Notification functionality.” In its complaint against ASUS, which manufactures the Nexus 7,
4 Rockstar specifically accuses the Nexus 7, a device offered for sale by Google.
5

53.

The Nexus 5, Nexus 7, and Nexus 10 devices use Google’s Android platform.

6

54.

A substantial, immediate, and real controversy therefore exists between Google and

7 Rockstar regarding whether the Android platform or any of these Nexus devices infringe or have
8 infringed the ’131 patent. A judicial declaration is necessary to determine the parties’ respective
9 rights regarding the ’131 patent.
10

55.

Google seeks a judgment declaring that Google’s Android platform and the

11 Nexus 5, Nexus 7, and Nexus 10 devices do not directly or indirectly infringe any claim of the
12 ’131 patent.
13

SIXTH COUNT

14

(Declaration of Non-Infringement of the ’591 Patent)

15

56.

Google restates and incorporates by reference the allegations in paragraphs 1

16 through 55 of this Complaint as if fully set forth herein.
17

57.

MobileStar claims to own all rights, title, and interest in United States Patent

18 No. 6,765,591 (the “’591 patent”). Rockstar Consortium claims no interest in the ’591 patent, yet
19 seeks a judgment of infringement against the Android OEM Defendants in the Android OEM
20 Actions. A true and correct copy of the ’591 patent is attached hereto as Exhibit F.
21

58.

In the Android OEM Actions, Rockstar accuses Android OEM Defendants ASUS,

22 HTC, Huawei, LG, Pantech, Samsung, and ZTE of infringing the ’591 patent in that each “makes,
23 uses, sells, offers for sale, imports, exports, supplies and/or distributes within the United States”
24 devices incorporating a version of Google’s Android platform that supports “VPN management
25 functionality.” In its complaint against ASUS, which manufactures the Nexus 7, Rockstar
26 specifically accuses the Nexus 7, a device offered for sale by Google.
27

59.

The Nexus 5, Nexus 7, and Nexus 10 devices use Google’s Android platform.

28
01980.00011/5659994.7

- 11 COMPLAINT FOR DECLARATORY JUDGMENT OF NON-INFRINGEMENT

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Case4:13-cv-05933-CW Document1 Filed12/23/13 Page12 of 13

1

60.

A substantial, immediate, and real controversy therefore exists between Google and

2 Rockstar regarding whether the Android platform or any of these Nexus devices infringe or have
3 infringed the ’591 patent. A judicial declaration is necessary to determine the parties’ respective
4 rights regarding the ’591 patent.
5

61.

Google seeks a judgment declaring that Google’s Android platform and the

6 Nexus 5, Nexus 7, and Nexus 10 devices do not directly or indirectly infringe any claim of the
7 ’591 patent.
8

SEVENTH COUNT

9

(Declaration of Non-Infringement of the ’572 Patent)

10

62.

Google restates and incorporates by reference the allegations in paragraphs 1

11 through 61 of this Complaint as if fully set forth herein.
12

63.

Rockstar Consortium claims to own all rights, title, and interest in United States

13 Patent No. 6,937,572 (the “’572 patent”). MobileStar claims no interest in the ’572 patent, yet
14 seeks a judgment of infringement against the Android OEM Defendants in the Android OEM
15 Actions. A true and correct copy of the ’572 patent is attached hereto as Exhibit G.
16

64.

In the Android OEM Actions, Rockstar accuses Android OEM Defendants ASUS,

17 HTC, Huawei, LG, Pantech, Samsung, and ZTE of infringing the ’572 patent in that each “makes,
18 uses, sells, offers for sale, imports, exports, supplies and/or distributes within the United States”
19 devices incorporating a version of Google’s Android platform that supports “Location Services
20 functionality.” In its complaint against ASUS, which manufactures the Nexus 7, Rockstar
21 specifically accuses the Nexus 7, a device offered for sale by Google.
22

65.

The Nexus 5, Nexus 7, and Nexus 10 devices use Google’s Android platform.

23

66.

A substantial, immediate, and real controversy therefore exists between Google and

24 Rockstar regarding whether the Android platform or any of these Nexus devices infringe or have
25 infringed the ’572 patent. A judicial declaration is necessary to determine the parties’ respective
26 rights regarding the ’572 patent.
27
28
01980.00011/5659994.7

- 12 COMPLAINT FOR DECLARATORY JUDGMENT OF NON-INFRINGEMENT

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Case4:13-cv-05933-CW Document1 Filed12/23/13 Page13 of 13

1

67.

Google seeks a judgment declaring that Google’s Android platform and the

2 Nexus 5, Nexus 7, and Nexus 10 devices do not directly or indirectly infringe any claim of the
3 ’572 patent.
4

PRAYER FOR RELIEF

5 WHEREFORE, Google prays for judgment and relief as follows:
6

A.

Declaring that Google’s Android platform and the Nexus 5, Nexus 7, and Nexus 10

7 do not infringe any of the ’551, ’937, ’298, ’973, ’131, ’591, or ’572 patents;
8

B.

Declaring that judgment be entered in favor of Google and against Rockstar

9 Consortium and MobileStar on each of Google’s claims;
10

C.

Finding that this an exceptional case under 35 U.S.C. § 285;

11

D.

Awarding Google its costs and attorneys’ fees in connection with this action; and

12

E.

Such further and additional relief as the Court deems just and proper.

13
14

JURY DEMAND
Google demands a jury trial on all issues and claims so triable.

15 DATED: December 23, 2013

Respectfully submitted,

16

QUINN EMANUEL URQUHART & SULLIVAN, LLP

17

By /s Matthew S. Warren
Matthew S. Warren
Attorneys for Google Inc.

18
19
20
21
22
23
24
25
26
27
28
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- 13 COMPLAINT FOR DECLARATORY JUDGMENT OF NON-INFRINGEMENT

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CERTIFICATE OF SERVICE
I hereby certify that all counsel of record have consented to electronic service and are
being served with a copy of this document via the Court’s CM/ECF system per Local Rule CV5(a)(3) on March 21, 2014.
/s/ J. Mark Mann
J. Mark Mann

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 1 of 54 PageID #: 251

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 2 of 54 PageID #: 252

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark One)



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 25, 2011
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from

to

.

Commission file number: 000-10030

APPLE INC.
(Exact name of Registrant as specified in its charter)
California

94-2404110

(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer Identification No.)

1 Infinite Loop
Cupertino, California

95014

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: [phone]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes 

No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
Yes 

No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer


(Do not check if a smaller reporting company)

Accelerated filer
Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes

No 

927,090,886 shares of common stock issued and outstanding as of July 8, 2011

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 3 of 54 PageID #: 253
PART I. FINANCIAL INFORMATION
Item 1.

Financial Statements
APPLE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except share amounts which are reflected in thousands and per share amounts)
Three Months Ended
June 25,
June 26,
2011
2010

Net sales
Cost of sales
Gross margin

$

28,571
16,649
11,922

$

15,700
9,564
6,136

Nine Months Ended
June 25,
June 26,
2011
2010

$

79,979
47,541
32,438

$

44,882
26,710
18,172

Operating expenses:
Research and development
Selling, general and administrative
Total operating expenses

628
1,915
2,543

464
1,438
1,902

1,784
5,574
7,358

1,288
3,946
5,234

Operating income
Other income and expense
Income before provision for income taxes

9,379
172
9,551

4,234
58
4,292

25,080
334
25,414

12,938
141
13,079

Provision for income taxes
Net income

$

2,243
7,308

$

1,039
3,253

$

6,115
19,299

$

3,374
9,705

Earnings per common share:
Basic
Diluted

$
$

7.89
7.79

$
$

3.57
3.51

$
$

20.91
20.63

$
$

10.69
10.51

Shares used in computing earnings per share:
Basic
Diluted

926,108
937,810

912,197
927,361

See accompanying Notes to Condensed Consolidated Financial Statements.
2

922,917
935,688

907,762
923,341

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 4 of 54 PageID #: 254
APPLE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share amounts)
June 25,
2011

ASSETS:
Current assets:
Cash and cash equivalents
Short-term marketable securities
Accounts receivable, less allowances of $55 in each period
Inventories
Deferred tax assets
Vendor non-trade receivables
Other current assets
Total current assets

$

Long-term marketable securities
Property, plant and equipment, net
Goodwill
Acquired intangible assets, net
Other assets
Total assets

$

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Total current liabilities

$

Deferred revenue - non-current
Other non-current liabilities
Total liabilities

12,091
16,304
6,102
889
1,892
5,369
4,251
46,898
47,761
6,749
741
1,169
3,440
106,758

15,270
7,597
3,992
26,859

September 25,
2010

$

$

$

11,261
14,359
5,510
1,051
1,636
4,414
3,447
41,678
25,391
4,768
741
342
2,263
75,183

12,015
5,723
2,984
20,722

1,407
9,149
37,415

1,139
5,531
27,392

12,715
56,239
389
69,343

10,668
37,169
(46)
47,791

Commitments and contingencies
Shareholders’ equity:
Common stock, no par value; 1,800,000,000 shares authorized; 926,903,779 and
915,970,050 shares issued and outstanding, respectively
Retained earnings
Accumulated other comprehensive income/(loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity

$

See accompanying Notes to Condensed Consolidated Financial Statements.
3

106,758

$

75,183

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 5 of 54 PageID #: 255
APPLE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
Nine Months Ended
June 25,
June 26,
2011
2010

Cash and cash equivalents, beginning of the period
Operating activities:
Net income
Adjustments to reconcile net income to cash generated by operating activities:
Depreciation, amortization and accretion
Stock-based compensation expense
Deferred income tax expense
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories
Vendor non-trade receivables
Other current and non-current assets
Accounts payable
Deferred revenue
Other current and non-current liabilities
Cash generated by operating activities
Investing activities:
Purchases of marketable securities
Proceeds from maturities of marketable securities
Proceeds from sales of marketable securities
Payments made in connection with business acquisitions, net of cash acquired
Payments for acquisition of property, plant and equipment
Payments for acquisition of intangible assets
Other
Cash used in investing activities
Financing activities:
Proceeds from issuance of common stock
Excess tax benefits from equity awards
Taxes paid related to net share settlement of equity awards
Cash generated by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents, end of the period
Supplemental cash flow disclosure:
Cash paid for income taxes, net

$

11,261

$

5,263

19,299

9,705

1,271
870
2,232

698
655
1,298

(592)
162
(955)
(1,551)
2,480
1,276
2,608
27,100

(79)
(487)
(1,256)
(1,001)
2,812
806
(239)
12,912

(75,133)
16,396
34,301
0
(2,615)
(266)
34
(27,283)

(41,318)
19,758
14,048
(615)
(1,245)
(63)
(36)
(9,471)

577
915
(479)
1,013

733
652
(384)
1,001

$

4

$

4,442
9,705

$

See accompanying Notes to Condensed Consolidated Financial Statements.

830
12,091
2,563

$

2,657

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 6 of 54 PageID #: 256
Apple Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Summary of Significant Accounting Policies
Apple Inc. and its wholly-owned subsidiaries (collectively “Apple” or the “Company”) designs, manufactures, and markets mobile
communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services,
peripherals, networking solutions, and third-party digital content and applications. The Company sells its products worldwide through its retail
stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers and value-added
resellers. In addition, the Company sells a variety of third-party iPhone, iPad, Macintosh (“Mac”), and iPod compatible products including
application software, printers, storage devices, speakers, headphones, and various other accessories and supplies through its online and retail
stores. The Company sells to consumers, small and mid-sized businesses, education, enterprise and government customers.
Basis of Presentation and Preparation
The accompanying condensed consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions
have been eliminated. The preparation of these condensed consolidated financial statements in conformity with U.S. generally accepted
accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these condensed
consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Certain prior period
amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the current period’s
presentation.
These condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual
consolidated financial statements and the notes thereto for the fiscal year ended September 25, 2010, included in its Annual Report on Form 10K (the “2010 Form 10-K”). Unless otherwise stated, references to particular years or quarters refer to the Company’s fiscal years ended in
September and the associated quarters of those fiscal years.
During the first quarter of 2011, the Company adopted the Financial Accounting Standard Board’s (“FASB”) new accounting standard on
consolidation of variable interest entities. This new accounting standard eliminates the mandatory quantitative approach in determining control
for evaluating whether variable interest entities need to be consolidated in favor of a qualitative analysis, and requires an ongoing
reassessment of control over such entities. The adoption of this new accounting standard did not impact the Company’s condensed consolidated
financial statements.
Revenue Recognition
Revenue Recognition for Arrangements with Multiple Deliverables
For multi-element arrangements that include tangible products containing software that is 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.
5

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 7 of 54 PageID #: 257
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. The Company has identified up to three deliverables in arrangements involving the sale of these devices. The first
deliverable is the hardware and software essential to the functionality of the hardware device delivered at the time of sale. The second
deliverable is the embedded right included with the purchase of iPhone, iPad, iPod touch, Mac and Apple TV to receive on a when-and-ifavailable basis, future unspecified software upgrades and features relating to the product’s essential software. The third deliverable is the online
services to be provided to qualifying versions of iPhone, iPad, iPod touch and Mac. The Company allocates revenue between these deliverables
using the relative selling price method. Because the Company has neither VSOE nor TPE for these deliverables, the allocation of revenue has
been based on the Company’s ESPs. Amounts allocated to the delivered hardware and the related essential software are recognized at the time of
sale provided the other conditions for revenue recognition have been met. Amounts allocated to the embedded unspecified software upgrade
rights and the 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. Cost of sales related to delivered hardware and related essential software, including estimated warranty costs, are
recognized at the time of sale. Costs incurred to provide non-software services are recognized as cost of sales as incurred, and engineering and
sales and marketing costs are recognized as operating expenses as incurred.
The Company’s process for determining its ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon
the unique facts and circumstances related to each deliverable. The Company believes its customers, particularly consumers, would be reluctant
to buy the types of unspecified software upgrade rights embedded with iPhone, iPad, iPod touch, Mac and Apple TV. This view is primarily
based on the fact that unspecified upgrade rights do not obligate the Company to provide upgrades at a particular time or at all, and do not
specify to customers which upgrades or features will be delivered. The Company also believes its customers would be unwilling to pay a
significant amount for access to the online services because other companies offer similar services at little or no cost to users. Therefore, the
Company has concluded that if it were to sell upgrade rights or access to the online services on a standalone basis, including those rights and
services attached to iPhone, iPad, iPod touch, Mac and Apple TV, the selling price would be relatively low. Key factors considered by the
Company in developing the ESPs for the upgrade rights include prices charged by the Company for similar offerings, market trends for pricing
of Mac and iOS software, the Company’s historical pricing practices, the nature of the upgrade rights (e.g., unspecified and when-and-ifavailable), and the relative ESP of the upgrade rights as compared to the total selling price of the product. The Company may also consider,
when appropriate, the impact of other products and services, including advertising services, on selling price assumptions when developing and
reviewing its ESPs for software upgrade rights and related deliverables. The Company may also consider additional factors as appropriate,
including the pricing of competitive alternatives if they exist and product-specific business objectives. When relevant, the same factors are
considered by the Company in developing ESPs for service offerings such as the online services; however, the primary consideration in
developing ESPs for the online services is the estimated cost to provide such services over the life of the related devices, including consideration
for a reasonable profit margin.
Beginning with the Company’s June 2011 announcement of the upcoming release of the online services and Mac OS X Lion, the Company’s
combined ESP for the unspecified software upgrade rights and the right to receive the online services are as follows: $16 for iPhone and iPad,
$11 for iPod touch, and $22 for Mac. The Company’s ESP for the embedded unspecified software upgrade right included with each Apple TV is
$5 for 2011. Amounts allocated to the embedded unspecified software upgrade rights and the online services associated with iPhone, iPad, iPod
touch and Apple TV are recognized on a straight-line basis over 24 months, and amounts allocated to the embedded unspecified software
upgrade rights and the online services associated with Mac are recognized on a straight-line basis over 48 months.
The Company recognizes revenue in accordance with industry specific software accounting guidance for sales of software upgrades. Therefore,
beginning in July 2011 the Company will defer all revenue from the sale of upgrades to the Mac OS and iLife software and recognize it ratably
over 36 months.
Earnings Per Common Share
Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares
of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common
shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of
additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive
securities include outstanding options, shares to be purchased under the employee stock purchase plan, and unvested restricted stock units
(“RSUs”). The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury
stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater
dilutive effect from potentially dilutive securities.
6

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 8 of 54 PageID #: 258
The following table summarizes the computation of basic and diluted earnings per common share for the three- and nine-month periods ended
June 25, 2011 and June 26, 2010 (in thousands, except net income in millions and per share amounts):
Three Months Ended
June 25,
June 26,
2011
2010

Numerator:
Net income
Denominator:
Weighted-average shares outstanding
Effect of dilutive securities
Weighted-average diluted shares

$

7,308

$

926,108
11,702
937,810

Basic earnings per common share
Diluted earnings per common share

$
$

7.89
7.79

3,253

Nine Months Ended
June 25,
June 26,
2011
2010

$

912,197
15,164
927,361
$
$

3.57
3.51

19,299

$

922,917
12,771
935,688
$
$

20.91
20.63

9,705
907,762
15,579
923,341

$
$

10.69
10.51

Potentially dilutive securities representing approximately 2,000 shares and 220,000 shares of common stock for the three months ended June 25,
2011 and June 26, 2010, respectively, and 206,000 shares and 498,000 shares of common stock for the nine months ended June 25, 2011 and
June 26, 2010, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect
would have been antidilutive.
Fair Value Measurements
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure
fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the
fair value measurement:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar
assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use
in pricing the asset or liability.
7

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 9 of 54 PageID #: 259
Note 2 – Financial Instruments
Cash, Cash Equivalents and Marketable Securities
All highly liquid investments with 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 of 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 following tables summarize the Company’s available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and
fair value by significant investment category recorded as cash and cash equivalents or short-term or long-term marketable securities as of
June 25, 2011 and September 25, 2010 (in millions):
June 25, 2011
Adjusted
Cost

Cash

$

Unrealized
Losses

Fair
Value

Cash and
Cash
Equivalents

Short-Term
Marketable
Securities

Long-Term
Marketable
Securities

0 $

2,769 $

2,769 $

0
0
0

0
0
0

1,414
150
1,564

1,414
0
1,414

0
150
150

0
0
0

51
17
18

0
(1)
(1)

10,787
10,002
6,144

1,139
391
427

1,876
1,980
1,952

7,772
7,631
3,765

4,538
6,326
30,441
3,389
71,543
$

0 $

10,736
9,986
6,127

Level 2:
U.S. Treasury securities
U.S. agency securities
Non-U.S. government securities
Certificates of deposit and time
deposits
Commercial paper
Corporate securities
Municipal securities
Subtotal

2,769 $
1,414
150
1,564

Level 1:
Money market funds
Mutual funds
Subtotal

Total

Unrealized
Gains

4
0
167
35
292

0
0
(9)
(1)
(12)

4,542
6,326
30,599
3,423
71,823

893
4,977
81
0
7,908

1,231
1,349
7,242
524
16,154

2,418
0
23,276
2,899
47,761

75,876 $

292 $

(12) $

76,156 $

16,304 $

47,761

8

12,091 $

0 $

0

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 10 of 54 PageID #: 260
September 25, 2010
Adjusted
Cost

Cash

$

Unrealized
Losses

Fair
Value

Cash and
Cash
Equivalents

Short-Term
Marketable
Securities

Long-Term
Marketable
Securities

0 $

1,690 $

1,690 $

0 $

0

0

0

2,753

2,753

0

0

42
10
13

0
0
0

9,914
8,727
2,661

2,571
1,916
10

2,130
4,339
865

5,213
2,472
1,786

2,735
3,168
17,349
1,899
46,388
$

0 $

9,872
8,717
2,648

Level 2:
U.S. Treasury securities
U.S. agency securities
Non-U.S. government securities
Certificates of deposit and time
deposits
Commercial paper
Corporate securities
Municipal securities
Subtotal

1,690 $
2,753

Level 1:
Money market funds

Total

Unrealized
Gains

5
0
102
19
191

(1)
0
(9)
(1)
(11)

2,739
3,168
17,442
1,917
46,568

374
1,889
58
0
6,818

850
1,279
4,522
374
14,359

1,515
0
12,862
1,543
25,391

50,831 $

191 $

(11) $

51,011 $

14,359 $

25,391

11,261 $

The net unrealized gains as of June 25, 2011 and September 25, 2010 related primarily to long-term marketable securities. 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. The Company recognized net realized gains of $14 million and $70 million during the three- and ninemonth periods ended June 25, 2011, respectively. The Company recognized no significant net realized gains or losses during the three- and ninemonth periods ended June 26, 2010. The maturities of the Company’s long-term marketable securities generally range from one year to five
years.
As of June 25, 2011 and September 25, 2010, gross unrealized losses related to individual securities that had been in a continuous loss position
for 12 months or longer were not significant.
The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. 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. Fair values were determined for each individual security in the investment portfolio. When evaluating the
investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has
been below cost basis, the financial condition of the issuer and 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. During the three- and nine-month
periods ended June 25, 2011 and June 26, 2010, the Company did not recognize any significant impairment charges. As of June 25, 2011, the
Company does not consider any of its investments to be other-than-temporarily impaired.
Derivative Financial Instruments
The Company uses derivatives to partially offset its business exposure to foreign currency exchange risk. The Company may enter into foreign
currency forward and option contracts to offset some of the foreign exchange risk on expected future cash flows on certain forecasted revenue
and cost of sales, on net investments in certain foreign subsidiaries, and on certain existing assets and liabilities. To help protect gross margins
from fluctuations in foreign currency exchange rates, certain of the Company’s subsidiaries whose functional currency is the U.S. dollar hedge a
portion of forecasted foreign currency revenue. The Company’s subsidiaries whose functional currency is not the U.S. dollar and who sell in
local currencies may hedge a portion of forecasted inventory purchases not denominated in the subsidiaries’ functional currencies. The Company
typically hedges portions of its forecasted foreign currency exposure associated with revenue and inventory purchases for three to six months. To
help protect the net investment in a foreign operation from adverse changes in foreign currency exchange rates, the Company may enter into
foreign currency forward and option contracts to offset the changes in the carrying amounts of these investments due to fluctuations in foreign
currency exchange rates. The Company may also enter into foreign currency forward and option contracts to partially offset the foreign currency
exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-functional currencies. However,
the Company may choose not to hedge certain foreign currency exchange exposures for a variety of reasons including, but not limited to,
materiality, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges
will offset more than a portion of the financial impact resulting from movements in foreign currency exchange rates.
9

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 11 of 54 PageID #: 261
The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge
instruments. The Company records all derivatives on the Condensed Consolidated Balance Sheets at fair value. The effective portions of cash
flow hedges are recorded in other comprehensive income until the hedged item is recognized in earnings. The effective portions of net
investment hedges are recorded in other comprehensive income as a part of the cumulative translation adjustment. The ineffective portions of
cash flow hedges and net investment hedges are recorded in other income and expense. Derivatives that are not designated as hedging
instruments are adjusted to fair value through earnings in the financial statement line item the derivative relates to.
The Company had a net deferred gain associated with cash flow hedges of approximately $21 million and a net deferred loss associated with
cash flow hedges of approximately $252 million, net of taxes, recorded in other comprehensive income as of June 25, 2011 and September 25,
2010, respectively. Deferred gains and losses associated with cash flow hedges of foreign currency revenue are recognized as a component of net
sales in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of inventory purchases
are recognized as a component of cost of sales in the same period as the related costs are recognized. Substantially all of the Company’s hedged
transactions as of June 25, 2011 are expected to occur within six months.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction
will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in other
comprehensive income associated with such derivative instruments are reclassified immediately into earnings through other income and expense.
Any subsequent changes in fair value of such derivative instruments are reflected in other income and expense unless they are re-designated as
hedges of other transactions. The Company did not recognize any significant net gains or losses related to the loss of hedge designation on
discontinued cash flow hedges during the three- and nine-month periods ended June 25, 2011 and June 26, 2010.
The Company’s unrealized net gains and losses on net investment hedges, included in the cumulative translation adjustment account of
accumulated other comprehensive income (“AOCI”), were not significant as of June 25, 2011 and September 25, 2010, respectively. The
ineffective portions and amounts excluded from the effectiveness test of net investment hedges are recorded in other income and expense.
The Company recognized in earnings a net loss on foreign currency forward and option contracts not designated as hedging instruments of $45
million and $100 million during the three- and nine-month periods ended June 25, 2011, respectively, and a net gain on foreign currency forward
and option contracts not designated as hedging instruments of $25 million and $15 million during the three- and nine-month periods ended
June 26, 2010, respectively. These amounts, recorded in other income and expense, represent the net gain or loss on the derivative contracts and
do not include changes in the related exposures, which generally offset a portion of the gain or loss on the derivative contracts.
10

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 12 of 54 PageID #: 262
The following table summarizes the notional principal amounts of the Company’s outstanding derivative instruments and credit risk amounts
associated with outstanding or unsettled derivative instruments as of June 25, 2011 and September 25, 2010 (in millions):
June 25, 2011
Notional
Credit Risk
Principal
Amounts

September 25, 2010
Notional
Credit Risk
Principal
Amounts

Instruments qualifying as accounting hedges:
Foreign exchange contracts

$

12,282

$

128

$

13,957

$

62

Instruments other than accounting hedges:
Foreign exchange contracts

$

6,415

$

14

$

10,727

$

45

The notional principal amounts for outstanding derivative instruments provide one measure of the transaction volume outstanding and do not
represent the amount of the Company’s exposure to credit or market loss. The credit risk amounts represent the Company’s gross exposure to
potential accounting loss on derivative instruments that are outstanding or unsettled if all counterparties failed to perform according to the terms
of the contract, based on then-current currency exchange rates at each respective date. The Company’s gross exposure on these transactions may
be further mitigated by collateral received from certain counterparties. The Company’s exposure to credit loss and market risk will vary over
time as a function of currency exchange rates. Although the table above reflects the notional principal and credit risk amounts of the Company’s
foreign exchange instruments, it does not reflect the gains or losses associated with the exposures and transactions that the foreign exchange
instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and
losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
The Company generally enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the
same counterparty. To further limit credit risk, the Company generally enters into collateral security arrangements that provide for collateral to
be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. The Company
presents its derivative assets and derivative liabilities at their gross fair values. As of June 25, 2011, the Company received cash collateral related
to the derivative instruments under its collateral security arrangements of $8 million, which it recorded as accrued expenses in the Condensed
Consolidated Balance Sheet. As of September 25, 2010, the Company posted cash collateral related to the derivative instruments under its
collateral security arrangements of $445 million, which it recorded as other current assets in the Condensed Consolidated Balance Sheet. The
Company did not have any derivative instruments with credit-risk related contingent features that would require it to post additional collateral as
of June 25, 2011 or September 25, 2010.
11

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 13 of 54 PageID #: 263
The following tables summarize the gross fair value of the Company’s derivative instruments as reflected in the Condensed Consolidated
Balance Sheets as of June 25, 2011 and September 25, 2010 (in millions):
June 25, 2011
Fair Value of
Derivatives
Not Designated

Fair Value of
Derivatives
Designated
as Hedge
Instruments

as Hedge
Instruments

Total
Fair Value

Derivative assets (a):
Foreign exchange contracts

$

125 $

14 $

139

Derivative liabilities (b):
Foreign exchange contracts

$

64 $

6 $

70

Fair Value of
Derivatives
Designated
as Hedge
Instruments

September 25, 2010
Fair Value of
Derivatives
Not Designated
as Hedge
Instruments

Total
Fair Value

Derivative assets (a):
Foreign exchange contracts

$

62 $

45 $

107

Derivative liabilities (b):
Foreign exchange contracts

$

488 $

118 $

606

(a)

The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets in the Condensed
Consolidated Balance Sheets.

(b)

The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued expenses in the Condensed
Consolidated Balance Sheets.

The following table summarizes the pre-tax effect of the Company’s derivative instruments designated as cash flow and net investment hedges in
the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended June 25, 2011 and June 26, 2010 (in
millions):
Three Month Periods

Gains/(Losses)
Reclassified
from AOCI
into Income Effective
Portion (e)
June 25,
June 26,
2011 (a)
2010 (b)

Gains/(Losses)
Recognized in
OCI Effective
Portion (e)
June 25,
June 26,
2011
2010

Cash flow hedges:
Foreign exchange contracts

June 26,
2010

Other income
$

12 $

83 $

(162) $

Net investment hedges:
Foreign exchange contracts

Total

Location

Gains/(Losses)
Recognized –
Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing
June 25,
2011

67 and expense $

15 $

(50)

1
16 $

0
(50)

Other income

$

(7)
5 $

(18)
65 $
12

0
(162) $

0 and expense
67
$

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 14 of 54 PageID #: 264
Nine Month Periods

Gains/(Losses)
Reclassified
from AOCI
into Income Effective
Portion (e)
June 25,
June 26,
2011 (c)
2010 (d)

Gains/(Losses)
Recognized in
OCI Effective
Portion (e)
June 25,
June 26,
2011
2010

Cash flow hedges:
Foreign exchange contracts

June 26,
2010

Other income
$

(270) $

145 $

(701) $

Net investment hedges:
Foreign exchange contracts

Total

Location

Gains/(Losses)
Recognized –
Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing
June 25,
2011

80 and expense $

(104) $

(88)

1
(103) $

0
(88)

Other income

$

(21)
(291) $

(16)
129 $

0
(701) $

0 and expense
80
$

(a)

Includes gains/(losses) reclassified from AOCI into income for the effective portion of cash flow hedges, of which $(101) million and
$(61) million were recognized within net sales and cost of sales, respectively, within the Condensed Consolidated Statement of Operations
for the three months ended June 25, 2011. There were no amounts reclassified from AOCI into income for the effective portion of net
investment hedges for the three months ended June 25, 2011.

(b)

Includes gains/(losses) reclassified from AOCI into income for the effective portion of cash flow hedges, of which $78 million and $(11)
million were recognized within net sales and cost of sales, respectively, within the Condensed Consolidated Statement of Operations for
the three months ended June 26, 2010. There were no amounts reclassified from AOCI into income for the effective portion of net
investment hedges for the three months ended June 26, 2010.

(c)

Includes gains/(losses) reclassified from AOCI into income for the effective portion of cash flow hedges, of which $(382) million and
$(319) million were recognized within net sales and cost of sales, respectively, within the Condensed Consolidated Statement of
Operations for the nine months ended June 25, 2011. There were no amounts reclassified from AOCI into income for the effective portion
of net investment hedges for the nine months ended June 25, 2011.

(d)

Includes gains/(losses) reclassified from AOCI into income for the effective portion of cash flow hedges, of which $109 million and $(29)
million were recognized within net sales and cost of sales, respectively, within the Condensed Consolidated Statement of Operations for
the nine months ended June 26, 2010. There were no amounts reclassified from AOCI into income for the effective portion of net
investment hedges for the nine months ended June 26, 2010.

(e)

Refer to Note 5, “Shareholders’ Equity and Stock-Based Compensation” of this Form 10-Q, which summarizes the activity in AOCI
related to derivatives.

Accounts Receivable
The Company has considerable trade receivables outstanding with its third-party cellular network carriers, wholesalers, retailers, value-added
resellers, small and mid-sized businesses, and education, enterprise and government customers that are not covered by collateral, third-party
financing arrangements or credit insurance. As of June 25, 2011, trade receivables from one customer accounted for 12% of the Company’s total
trade receivables. Trade receivables from two of the Company’s customers accounted for 15% and 12% of total trade receivables as of
September 25, 2010. The Company’s cellular network carriers accounted for 60% and 64% of trade receivables as of June 25, 2011 and
September 25, 2010, respectively.
Additionally, the Company has non-trade receivables from certain of its manufacturing vendors. Vendor non-trade receivables from two of the
Company’s vendors accounted for 56% and 22% of total non-trade receivables as of June 25, 2011 and vendor non-trade receivables from two of
the Company’s vendors accounted for 57% and 24% of total non-trade receivables as of September 25, 2010.
13

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 15 of 54 PageID #: 265
Note 3 – Condensed Consolidated Financial Statement Details
The following tables summarize the Company’s condensed consolidated financial statement details as of June 25, 2011 and September 25, 2010
(in millions):
Property, Plant and Equipment
June 25, 2011

Land and buildings
Machinery, equipment and internal-use software
Office furniture and equipment
Leasehold improvements
Gross property, plant and equipment
Accumulated depreciation and amortization
Net property, plant and equipment

$

$

September 25, 2010

2,028 $
5,789
172
2,359
10,348
(3,599)
6,749 $

1,471
3,589
144
2,030
7,234
(2,466)
4,768

Accrued Expenses
June 25, 2011

Accrued warranty and related costs
Deferred margin on component sales
Accrued taxes
Accrued compensation and employee benefits
Accrued marketing and selling expenses
Other current liabilities
Total accrued expenses

$

$

1,190
1,362
1,130
546
488
2,881
7,597

September 25, 2010

$

$

761
663
524
436
396
2,943
5,723

Non-Current Liabilities
June 25, 2011

Deferred tax liabilities
Other non-current liabilities
Total other non-current liabilities

$
$

7,331
1,818
9,149

September 25, 2010

$
$

4,300
1,231
5,531

Note 4 – Income Taxes
As of June 25, 2011, the Company recorded gross unrecognized tax benefits of $1.2 billion, of which $534 million, if recognized, would affect
the Company’s effective tax rate. As of September 25, 2010, the total amount of gross unrecognized tax benefits was $943 million, of which
$404 million, if recognized, would affect the Company’s effective tax rate. The Company’s total gross unrecognized tax benefits are classified as
other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company had $266 million and $247 million of gross interest
and penalties accrued as of June 25, 2011 and September 25, 2010, respectively, which are classified as other non-current liabilities in the
Condensed Consolidated Balance Sheets.
Management believes that an 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 tax in the period such resolution
occurs. Although timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its
unrecognized tax benefits would materially change in the next 12 months.
14

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 16 of 54 PageID #: 266
Note 5 – Shareholders’ Equity and Stock-Based Compensation
Preferred Stock
The Company has five million shares of authorized preferred stock, none of which is issued or outstanding. Under the terms of the Company’s
Restated Articles of Incorporation, the Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of
the Company’s authorized but unissued shares of preferred stock.
Comprehensive Income
Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to
revenue, expenses, gains, and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. The
Company’s other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as
their functional currency, unrealized gains and losses on marketable securities categorized as available-for-sale, and net deferred gains and losses
on certain derivative instruments accounted for as cash flow hedges.
The following table summarizes the components of total comprehensive income, net of taxes, during the three- and nine-month periods ended
June 25, 2011 and June 26, 2010 (in millions):
Three Months Ended
June 25,
June 26,
2011
2010

Net income
Other comprehensive income:
Change in unrecognized gains/losses on derivative instruments
Change in foreign currency translation
Change in unrealized gains/losses on marketable securities
Total comprehensive income

$

7,308

$

$

112
11
140
7,571 $

Nine Months Ended
June 25,
June 26,
2011
2010

3,253

$

19,299

13
(54)
24
3,236 $

273
101
61
19,734

$

9,705

$

41
(43)
33
9,736

The following table summarizes activity in other comprehensive income related to derivatives, net of taxes, held by the Company during the
three- and nine-month periods ended June 25, 2011 and June 26, 2010 (in millions):
Three Months Ended
June 25,
June 26,
2011
2010

Change in fair value of derivatives
Adjustment for net gains/losses realized and included in income
Change in unrecognized gains/losses on derivative instruments

$
$

8 $
104
112 $

Nine Months Ended
June 25,
June 26,
2011
2010

55 $
(42)
13 $

(175) $
448
273 $

91
(50)
41

The following table summarizes the components of AOCI, net of taxes, as of June 25, 2011 and September 25, 2010 (in millions):
June 25, 2011

Net unrealized gains/losses on marketable securities
Net unrecognized gains/losses on derivative instruments
Cumulative foreign currency translation
Accumulated other comprehensive income/(loss)

$

$
15

232
21
136
389

September 25, 2010

$

$

171
(252)
35
(46)

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 17 of 54 PageID #: 267
Equity Awards
A summary of the Company’s RSU activity and related information for the nine months ended June 25, 2011, is as follows (in thousands, except
per share amounts):
WeightedAverage
Grant Date
Fair Value

Number of
Shares

Balance at September 25, 2010
RSUs granted
RSUs vested
RSUs cancelled
Balance at June 25, 2011

13,034
5,232
(4,224)
(609)
13,433

$
$
$
$
$

165.63
296.08
166.49
183.53
215.35

Aggregate
Intrinsic
Value

$ 4,383,924

RSUs that vested during the three- and nine-month periods ended June 25, 2011 had a fair value of $637 million and $1.4 billion, respectively, as
of the vesting dates. RSUs that vested during the three- and nine-month periods ended June 26, 2010 had a fair value of $353 million and $990
million, respectively, as of the vesting dates.
A summary of the Company’s stock option activity and related information for the nine months ended June 25, 2011, is as follows (in thousands,
except per share amounts and contractual term in years):
WeightedAverage
Exercise
Price

Number
of Shares

Balance at September 25, 2010
Options granted
Options cancelled
Options exercised
Balance at June 25, 2011
Exercisable at June 25, 2011
Expected to vest after June 25, 2011

21,725
1
(149)
(7,822)
13,755
12,431
1,324

$
$
$
$
$
$
$

90.46
342.62
124.71
63.20
105.62
99.59
162.24

WeightedAverage
Remaining
Contractual
Term

Aggregate
Intrinsic
Value

2.54 $ 3,036,128
2.43 $ 2,818,845
3.57 $ 217,283

Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the fiscal period in excess of the
weighted-average exercise price multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value excludes stock
options that have a zero or negative intrinsic value. The total intrinsic value of options at the time of exercise was $248 million and $2.1 billion
for the three- and nine-month periods ended June 25, 2011, respectively, and $559 million and $1.6 billion for the three- and nine-month periods
ended June 26, 2010, respectively.
The Company had approximately 53.6 million shares and 62.7 million shares reserved for future issuance under the Company’s stock plans as of
June 25, 2011 and September 25, 2010, respectively. RSUs granted are deducted from the shares available for grant under the Company’s stock
plans utilizing a factor of two times the number of RSUs granted. Similarly, RSUs cancelled are added back to the shares available for grant
under the Company’s stock plans utilizing a factor of two times the number of RSUs cancelled.
16

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 18 of 54 PageID #: 268
Stock-Based Compensation
Stock-based compensation cost for RSUs is measured based on the closing fair market value of the Company’s common stock on the date of
grant. Stock-based compensation cost for stock options and employee stock purchase plan rights (“stock purchase rights”) is estimated at the
grant date and offering date, respectively, based on the fair-value as calculated using the Black-Scholes Merton (“BSM”) option-pricing model.
The BSM option-pricing model incorporates various assumptions including expected volatility, expected life and interest rates. The expected
volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the expected life
of the Company’s stock options and other relevant factors including implied volatility in market traded options on the Company’s common
stock. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock awards it grants
to employees. The Company recognizes stock-based compensation cost as expense on a straight-line basis over the requisite service period.
The Company did not grant any stock options during the three-month periods ended June 25, 2011 and June 26, 2010. The Company granted
1,370 stock options with a weighted-average grant date fair value of $181.13 per share during the nine months ended June 25, 2011 and granted
approximately 34,000 stock options with a weighted-average grant date fair value of $108.58 per share during the nine months ended June 26,
2010.
The Company did not assume any stock options during the three- and nine-month periods ended June 25, 2011. During the three- and ninemonth periods ended June 26, 2010, the Company assumed 31,000 and 98,000 stock options, respectively, in conjunction with certain business
combinations. The weighted-average fair value of stock options assumed during the three- and nine-month periods ended June 26, 2010 was
$256.63 and $216.82, respectively.
The weighted-average fair value of stock purchase rights per share was $72.63 and $67.70 during the three- and nine-month periods ended
June 25, 2011, respectively, and was $46.82 and $41.98 during the three- and nine-month periods ended June 26, 2010, respectively.
The following table summarizes the stock-based compensation expense included in the Condensed Consolidated Statements of Operations for
the three- and nine-month periods ended June 25, 2011 and June 26, 2010 (in millions):
Three Months Ended
June 25,
June 26,
2011
2010

Cost of sales
Research and development
Selling, general and administrative
Total stock-based compensation expense

$

$

52
119
113
284

$

$

38
80
101
219

Nine Months Ended
June 25,
June 26,
2011
2010

$

$

155
336
379
870

$

$

112
240
303
655

The income tax benefit related to stock-based compensation expense was $113 million and $349 million for the three- and nine-month periods
ended June 25, 2011, respectively, and $77 million and $238 million for the three- and nine-month periods ended June 26, 2010, respectively. As
of June 25, 2011, the total unrecognized compensation cost related to outstanding stock options and RSUs was $2.3 billion, which the Company
expects to recognize over a weighted-average period of 2.8 years.
Employee Benefit Plans
Rule 10b5-1 Trading Plans
During the third quarter of 2011, executive officers Timothy D. Cook, Peter Oppenheimer, D. Bruce Sewell and Jeffrey E. Williams, and
directors William V. Campbell and Arthur D. Levinson had trading plans pursuant to Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). A trading plan is a written document that pre-establishes the amounts, prices and dates (or a formula for
determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including the exercise and sale of employee
stock options and shares acquired pursuant to the Company’s employee stock purchase plan and upon vesting of RSUs.
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Note 6 – Commitments and Contingencies
Accrued Warranty and Indemnifications
The following table summarizes changes in the Company’s accrued warranties and related costs for the three- and nine-month periods ended
June 25, 2011 and June 26, 2010 (in millions):
Three Months Ended
June 25,
June 26,
2011
2010

Beginning accrued warranty and related costs
Cost of warranty claims
Accruals for product warranty
Ending accrued warranty and related costs

$

$

1,103 $
(288)
375
1,190 $

588 $
(155)
157
590 $

Nine Months Ended
June 25,
June 26,
2011
2010

761 $
(790)
1,219
1,190 $

577
(427)
440
590

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.
Concentrations in the Available Sources of Supply of Materials and Product
Although most components essential to the Company’s business are generally available from multiple sources, certain key components including
but not limited to microprocessors, enclosures, certain liquid crystal displays (“LCDs”), certain optical drives and application-specific integrated
circuits (“ASICs”) are currently obtained by the Company from single or limited sources, which subjects the Company 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, dynamic random access memory (“DRAM”) and certain LCDs, are subject at times to industry-wide shortages and significant
commodity pricing fluctuations. In addition, 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. Therefore, the Company remains subject to significant risks of supply shortages and/or price increases that can materially adversely
affect its financial condition and operating results.
The Company and other participants in the mobile communication and media device, and personal computer industries also compete for various
components with other industries that have experienced increased demand for their products. In addition, the Company uses some custom
components that are not common to the rest of these industries, and new products introduced by the Company 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. If the Company’s 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 outsourcing partner
delayed shipments of completed products to the Company, the Company’s financial condition and operating results could be materially
adversely affected. The Company’s business and financial performance could also be adversely affected depending on the time required to
obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued
availability of these components 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.
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Substantially all of the Company’s iPhones, iPads, Macs, iPods, logic boards and other assembled products are manufactured by outsourcing
partners, primarily in various parts of Asia. A significant concentration of this outsourced manufacturing is currently performed by only a few
outsourcing partners of the Company, often in single locations. Certain of these outsourcing partners are the sole-sourced supplier of components
and manufacturing outsourcing for many of the Company’s key products including but not limited to final assembly of substantially all of the
Company’s hardware products. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company’s
operating results could be adversely affected if its outsourcing partners were unable to meet their production commitments. The Company’s
purchase commitments typically cover its requirements for periods ranging from 30 to 150 days.
Long-Term Supply Agreements
The Company has 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 a total of $2.4 billion of inventory component prepayments outstanding, of
which $701 million are classified as other current assets and $1.7 billion are classified as other assets in the Condensed Consolidated Balance
Sheets. The Company had a total of $956 million of inventory component prepayments outstanding as of September 25, 2010. The Company’s
outstanding prepayments will be applied to certain inventory component purchases made during the term of each respective agreement. 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 Off-Balance Sheet Commitments
The Company leases various equipment and facilities, including retail space, under noncancelable operating lease arrangements. The Company
does not currently utilize any other off-balance sheet financing arrangements. The major facility leases are 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.
Additionally, as of June 25, 2011, the Company had outstanding off-balance sheet commitments for outsourced manufacturing and component
purchases of $11.0 billion. 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 and commitments related to advertising, research and development, Internet and
telecommunications services and other obligations. These commitments exclude the off-balance sheet commitments under the long-term supply
agreements described above.
Contingencies
The Company is subject to various legal proceedings and claims that have arisen in the ordinary course of business and have not been fully
adjudicated, which are discussed in Part II, Item 1 of this Form 10-Q under the heading “Legal Proceedings” and in Part II Item 1A under the
heading “Risk Factors.” 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 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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On March 14, 2008, Mirror Worlds, LLC filed an action against the Company alleging that certain of its products infringed on three patents
covering technology used to display files. On October 1, 2010, a jury returned a verdict against the Company, and awarded damages of $208
million per patent for each of the three patents asserted. On April 4, 2011, the Judge overturned the verdict in the Company’s favor. Mirror
Worlds has appealed the ruling. The Company had not recorded a loss contingency for this action.
Production and marketing of products in certain states and countries may subject the Company to environmental, product safety and other
regulations including, in some instances, the requirement to provide customers the ability to return product at the end of its useful life, and place
responsibility for environmentally safe disposal or recycling with the Company. Such laws and regulations have 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 in the future based on the nature of its operations and the thrust
of such laws, there can be no assurance that such existing laws or future laws will not materially adversely affect the Company’s financial
condition or operating results.
Note 7 – Segment Information and Geographic Data
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting
used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. Accordingly, the Company determined its operating and reporting
segments, which are generally based on the nature and location of its customers, to be the Americas, Europe, Japan, Asia-Pacific and Retail
operations. The Americas, Europe, Japan and Asia-Pacific reportable segment results do not include 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. The accounting
policies of the various segments are the same as those described in 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.
The Company evaluates the performance of its operating segments based on net sales and operating income. Net sales for geographic segments
are generally based on the location of customers, while Retail segment net sales are based on sales from the Company’s retail stores. Operating
income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment.
Advertising expenses are generally included in the geographic segment in which the advertising occurs. Operating income for each segment
excludes other income and expense and certain expenses managed outside the operating segments. Costs excluded from segment operating
income include various corporate expenses such as manufacturing costs and variances not included in standard costs, research and development,
corporate marketing expenses, stock-based compensation expense, income taxes, various nonrecurring charges, and other separately managed
general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
Segment assets exclude corporate assets, such as cash, cash equivalents, short-term and long-term investments, manufacturing and corporate
facilities, miscellaneous corporate infrastructure, goodwill and other acquired intangible assets. Except for the Retail segment, capital
expenditures for long-lived assets are not reported to management by segment.
The Company has certain retail stores that 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. The Company allocates certain operating expenses associated with
its high-profile stores to corporate expense to reflect the estimated Company-wide benefit. The allocation of these operating costs to corporate
expense is based on the amount incurred for a high-profile store in excess of that incurred by a more typical Company retail location. The
Company had opened a total of 16 high-profile stores as of June 25, 2011. Amounts allocated to corporate expense resulting from the operations
of high-profile stores were $26 million and $75 million during the three- and nine-month periods ended June 25, 2011, respectively, and $18
million and $54 million during the three- and nine-month periods ended June 26, 2010, respectively.
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Summary information by operating segment for the three- and nine-month periods ended June 25, 2011 and June 26, 2010 is as follows (in
millions):
Three Months Ended
June 25,
June 26,
2011
2010

Americas:
Net sales
Operating income
Europe:
Net sales
Operating income
Japan:
Net sales
Operating income
Asia-Pacific:
Net sales
Operating income
Retail:
Net sales
Operating income

Nine Months Ended
June 25,
June 26,
2011
2010

$
$

10,126
3,596

$
$

6,227
1,997

$
$

28,667
10,250

$
$

17,312
5,482

$
$

7,098
3,107

$
$

4,160
1,631

$
$

20,381
8,414

$
$

13,234
5,457

$
$

1,510
735

$
$

910
390

$
$

4,326
1,996

$
$

2,580
1,185

$
$

6,332
2,782

$
$

1,825
841

$
$

16,062
6,869

$
$

5,524
2,553

$
$

3,505
828

$
$

2,578
593

$
$

10,543
2,665

$
$

6,232
1,447

A reconciliation of the Company’s segment operating income to the condensed consolidated financial statements for the three- and nine-month
periods ended June 25, 2011 and June 26, 2010 is as follows (in millions):
Three Months Ended
June 25,
June 26,
2011
2010

Segment operating income
Stock-based compensation expense
Other corporate expenses, net (a)
Total operating income
(a)

$

$

11,048 $
(284)
(1,385)
9,379 $

5,452 $
(219)
(999)
4,234 $

Nine Months Ended
June 25,
June 26,
2011
2010

30,194 $
(870)
(4,244)
25,080 $

16,124
(655)
(2,531)
12,938

Other corporate expenses include research and development, corporate marketing expenses, manufacturing costs and variances not
included in standard costs, and other separately managed general and administrative expenses, including certain corporate expenses
associated with support of the Retail segment.

Note 8 – Related Party Transactions and Certain Other Transactions
In 2001, the Company entered into a Reimbursement Agreement with its CEO, Steve Jobs, for the reimbursement of expenses incurred by
Mr. Jobs in the operation of his private plane when used for Apple business. The Company did not recognize any expenses pursuant to the
Reimbursement Agreement during the three months ended June 25, 2011 and recognized a total of $15,000 in expenses pursuant to the
Reimbursement Agreement during the nine months ended June 25, 2011. The Company recognized a total of $12,000 and $155,000 in expenses
pursuant to the Reimbursement Agreement during the three- and nine-month periods ended June 26, 2010, respectively. All expenses recognized
pursuant to the Reimbursement Agreement have been included in selling, general and administrative expenses in the Condensed Consolidated
Statements of Operations.
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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking
statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking
statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A, “Risk
Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the Company’s Annual
Report on Form 10-K for the year ended September 25, 2010 (the “2010 Form 10-K”) filed with the U.S. Securities and Exchange Commission
(“SEC”) and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. All information
presented herein is based on the Company’s fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters
refer to the Company’s fiscal years ended in September and the associated quarters of those fiscal years. The Company assumes no obligation to
revise or update any forward-looking statements for any reason, except as required by law.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed
pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) are filed with the SEC. Such reports
and other information filed by the Company with the SEC are available on the Company’s website at http://www.apple.com/investor when such
reports are available on the SEC website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information
statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov . The contents of these websites
are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual
references only.
Executive Overview
The Company designs, manufactures, and markets a range of mobile communication and media devices, personal computers, and portable digital
music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications.
The Company’s products and services include iPhone ® , iPad ® , Mac ® , iPod ® , Apple TV ® , a portfolio of consumer and professional software
applications, the iOS and Mac OS ® X operating systems, iCloud ® , and a variety of related accessories, services and support offerings. The
Company also sells and delivers third-party digital content and applications through the iTunes Store ® , App Store SM , iBookstore SM , and Mac
App Store SM . The Company sells its products worldwide through its retail stores, online stores, and direct sales force, as well as through thirdparty cellular network carriers, wholesalers, retailers, and value-added resellers. In addition, the Company sells a variety of third-party iPhone,
iPad, Mac and iPod compatible products, including application software, printers, storage devices, speakers, headphones, and various other
accessories and peripherals through its online and retail stores. The Company sells to consumers, small and mid-sized businesses, education,
enterprise and government customers.
The Company is committed to bringing the best user experience to its customers through its innovative hardware, software, peripherals, services,
and Internet offerings. The Company’s business strategy leverages its unique ability to design and develop its own operating systems, hardware,
application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and
innovative industrial design. The Company believes continual investment in research and development is critical to the development and
enhancement of innovative products and technologies. In conjunction with its strategy, the Company continues to build and host a robust
platform for the discovery and delivery of third-party digital content and applications through the iTunes Store. Within the iTunes Store, the
Company has expanded its offerings through the App Store and iBookstore, which allow customers to browse, search for, and purchase thirdparty applications and books through either a Mac or Windows-based computer or by wirelessly downloading directly to an iPhone, iPad or iPod
touch ® . In January 2011, the Company opened the Mac App Store allowing customers to easily find, download and install Apple-branded and
third-party applications for their Macs. The Company also works to support a community for the development of third-party software and
hardware products and digital content that complement the Company’s offerings. Additionally, the Company’s strategy includes expanding its
distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience. The
Company is therefore uniquely positioned to offer superior and well-integrated digital lifestyle and productivity solutions.
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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 and
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.
28

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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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Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 31 of 54 PageID #: 281
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 and
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 and
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 and
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.
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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.
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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.
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Item 6.

Exhibits

(a) Index to Exhibits

Exhibit Description

Incorporated by
Reference
Filing Date/
Period End
Form
Date

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.
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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
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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-00895-JRG Document 34-4 Filed 03/28/14 Page 53 of 54 PageID #: 303
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

Case 2:13-cv-00895-JRG Document 34-4 Filed 03/28/14 Page 54 of 54 PageID #: 304
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.

Case 2:13-cv-00895-JRG Document 34-5 Filed 03/28/14 Page 1 of 2 PageID #: 305

Kyle Krpata was named a "Leading" Lawyer for Corporate/M&A in Northern California -... Page 1 of 1
Case 2:13-cv-00895-JRG Document 34-5 Filed 03/28/14 Page 2 of 2 PageID #: 306

Kyle Krpata was named a "Leading" Lawyer for
Corporate/M&A in Northern California
Date: 2012
Presenter: Chambers USA 2012
Recipient: Krpata, Kyle C.
Kyle Krpata led the Weil team in its representation of Apple in the Nortel patent portfolio sale. He also
advised Apple on its $450 million purchase of assets from Novell.

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3/25/2014

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CERTIFICATE OF SERVICE
I hereby certify that all counsel of record have consented to electronic service and are
being served with a copy of this document via the Court’s CM/ECF system per Local Rule CV5(a)(3) on March 21, 2014.
/s/ J. Mark Mann
J. Mark Mann