Note 6 – Shareholders’ Equity and Share-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 classified 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 AOCI, net of taxes, as of September 24, 2011, September 25, 2010, and September 26, 2009 (in millions):


	2011		2010			2009
Net unrealized gains/losses on marketable securities	$	130	$	171		$	48
Net unrecognized gains/losses on derivative instruments		290		(252	)		1
Cumulative foreign currency translation		23		35			28

Accumulated other comprehensive income/(loss)	$	443	$	(46	)	$	77

The change in fair value of available-for-sale securities included in other comprehensive income was $(41) million, $123 million and $118 million, net of taxes in 2011, 2010 and 2009, respectively. The tax effect related to the change in unrealized gains/losses on available-for-sale securities was $24 million, $(72) million and $(78) million for 2011, 2010 and 2009, respectively.

The following table summarizes activity in other comprehensive income related to derivatives, net of taxes, held by the Company during the three years ended September 24, 2011 (in millions):


	2011		2010			2009
Changes in fair value of derivatives	$	92	$	(180	)	$	204
Adjustment for net gains/losses realized and included in net income		450		(73	)		(222	)

Change in unrecognized gains/losses on derivative instruments	$	542	$	(253	)	$	(18	)

The tax effect related to the changes in fair value of derivatives was $(50) million, $97 million and $(135) million for 2011, 2010 and 2009, respectively. The tax effect related to derivative gains/losses reclassified from other comprehensive income to income was $(250) million, $43 million and $149 million for 2011, 2010 and 2009, respectively.

Employee Benefit Plans

2003 Employee Stock Plan

The 2003 Employee Stock Plan (the “2003 Plan”) is a shareholder approved plan that provides for broad-based equity grants to employees, including executive officers. The 2003 Plan permits the granting of incentive stock options, nonstatutory stock options, RSUs, stock appreciation rights, stock purchase rights and performance-based awards. Options granted under the 2003 Plan generally expire seven to ten years after the grant date and generally become exercisable over a period of four years, based on continued employment, with either annual, semi-annual or quarterly vesting. In general, RSUs granted under the 2003 Plan vest over two to four years, based on continued employment and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. Each share issued with respect to an award granted under the 2003 Plan (other than a stock option or stock appreciation right) reduces the number of shares available for grant under the plan by two shares, whereas shares issued in respect of an option or stock appreciation right count against the number of shares available for grant on a one-for-one basis. As of September 24, 2011, approximately 50.8 million shares were reserved for future issuance under the 2003 Plan.

1997 Director Stock Plan

The 1997 Director Stock Plan (the “Director Plan”) is a shareholder approved plan that (i) permits the Company to grant awards of RSUs or stock options to the Company’s non-employee directors, (ii) provides for automatic initial grants of RSUs upon a non-employee director joining the Board and automatic annual grants of RSUs at each annual meeting of shareholders, and (iii) permits the Board to prospectively change the relative mixture of stock options and RSUs for the initial and annual award grants and the methodology for determining the number of shares of the Company’s common stock subject to these grants without shareholder approval. Each share issued with respect to RSUs granted under the Director Plan reduces the number of shares available for grant under the plan by two shares. The Director Plan expires November 9, 2019. As of September 24, 2011, approximately 190,000 shares were reserved for future issuance under the Director Plan.

Rule 10b5-1 Trading Plans

During the fourth quarter of 2011, executive officers Timothy D. Cook, Peter Oppenheimer, D. Bruce Sewell, Phil Schiller 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.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan (the “Purchase Plan”) is a shareholder approved plan under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods. An employee’s payroll deductions under the Purchase Plan are limited to 10% of the employee’s compensation and employees may not purchase more than $25,000 of stock during any calendar year. As of September 24, 2011, approximately 3.1 million shares were reserved for future issuance under the Purchase Plan.

Employee Savings Plan

The Employee Savings Plan (the “Savings Plan”) is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit ($16,500 for calendar year 2011). The Company matches 50% to 100% of each employee’s contributions, depending on length of service, up to a maximum 6% of the employee’s eligible earnings. The Company’s matching contributions to the Savings Plan were $90 million, $72 million and $59 million in 2011, 2010 and 2009, respectively.

Restricted Stock Units

A summary of the Company’s RSU activity and related information for the three years ended September 24, 2011, is as follows (in thousands, except per share amounts):


	Number of RSUs			Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value
Balance at September 27, 2008		7,040		$	134.91
RSUs units granted		7,786		$	111.80
RSUs vested		(1,935	)	$	124.87
RSUs cancelled		(628	)	$	121.28


Balance at September 26, 2009		12,263		$	122.52
RSUs units granted		6,178		$	214.37
RSUs vested		(4,685	)	$	119.85
RSUs cancelled		(722	)	$	147.56


Balance at September 25, 2010		13,034		$	165.63
RSUs units granted		6,667		$	312.63
RSUs vested		(4,513	)	$	168.08
RSUs cancelled		(742	)	$	189.08


Balance at September 24, 2011		14,446		$	231.49	$	5,840,503

The fair value as of the vesting date of RSUs was $1.5 billion, $1.0 billion and $221 million for 2011, 2010 and 2009, respectively. The majority of RSUs that vested in 2011, 2010 and 2009, were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 1.6 million, 1.8 million and 707,000 for 2011, 2010 and 2009, respectively, and were based on the value of the RSUs on their vesting date as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to the taxing authorities were $520 million, $406 million and $82 million in 2011, 2010 and 2009, respectively, and are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.

Stock Option Activity

A summary of the Company’s stock option activity and related information for the three years ended September 24, 2011, is as follows (in thousands, except per share amounts and contractual term in years):


	Outstanding Options
	Number of Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Balance at September 27, 2008		44,146		$	74.39
Options granted		234		$	106.84
Options cancelled		(1,241	)	$	122.98
Options exercised		(8,764	)	$	41.78


Balance at September 26, 2009		34,375		$	81.17
Options granted		34		$	202.00
Options assumed		98		$	11.99
Options cancelled		(430	)	$	136.27
Options exercised		(12,352	)	$	62.69


Balance at September 25, 2010		21,725		$	90.46
Options granted		1		$	342.62
Options cancelled		(163	)	$	128.42
Options exercised		(9,697	)	$	67.63


Balance at September 24, 2011		11,866		$	108.64		2.38	$	3,508,243


Exercisable at September 24, 2011		11,089		$	104.97		2.31	$	3,319,374
Expected to vest after September 24, 2011		777		$	161.23		3.38	$	188,869

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. Total intrinsic value of options at time of exercise was $2.6 billion, $2.0 billion and $827 million for 2011, 2010 and 2009, respectively.

Share-based Compensation

Share-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. Share-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 by the 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 share-based compensation cost as expense on a straight-line basis over the requisite service period.

The Company granted 1,370 stock options, 34,000 stock options and 234,000 stock options during 2011, 2010 and 2009, respectively. The weighted-average grant date fair value of stock options granted during 2011, 2010 and 2009 was $181.13, $108.58 and $46.71 per share, respectively.

The Company did not assume any stock options in conjunction with business combinations during 2011 or 2009. During 2010, the Company assumed 98,000 stock options, which had a weighted-average fair value of $216.82 per share.

The weighted-average fair value of stock purchase rights per share was $71.47, $45.03 and $30.62 during 2011, 2010 and 2009, respectively.

The following table provides a summary of the share-based compensation expense included in the Consolidated Statements of Operations for the three years ended September 24, 2011 (in millions):


	2011		2010		2009
Cost of sales	$	200	$	151	$	114
Research and development		450		323		258
Selling, general and administrative		518		405		338

Total share-based compensation expense	$	1,168	$	879	$	710

The income tax benefit related to share-based compensation expense was $467 million, $314 million and $266 million for 2011, 2010 and 2009, respectively. As of September 24, 2011, the total unrecognized compensation cost related to outstanding stock options and RSUs was $2.6 billion, which the Company expects to recognize over a weighted-average period of 3.7 years.