Note 5 – 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, and 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 presents the components of comprehensive income, net of taxes, during the three- and nine-month periods ended June 30, 2012 and June 25, 2011 (in millions):


	Three Months Ended					Nine Months Ended
	June 30, 2012			June 25, 2011		June 30, 2012			June 25, 2011
Net income	$	8,824		$	7,308	$	33,510		$	19,299
Other comprehensive income:
Change in unrecognized gains/losses on derivative instruments		96			112		(89	)		273
Change in foreign currency translation		(91	)		11		(88	)		101
Change in unrealized gains/losses on marketable securities		3			140		266			61

Total comprehensive income	$	8,832		$	7,571	$	33,599		$	19,734

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 30, 2012 and June 25, 2011 (in millions):


	Three Months Ended					Nine Months Ended
	June 30, 2012			June 25, 2011		June 30, 2012			June 25, 2011
Change in fair value of derivatives	$	150		$	8	$	216		$	(175	)
Adjustment for net gains/losses realized and included in net income		(54	)		104		(305	)		448

Change in unrecognized gains/losses on derivative instruments	$	96		$	112	$	(89	)	$	273

The following table shows the components of AOCI, net of taxes, as of June 30, 2012 and September 24, 2011 (in millions):


	June 30, 2012			September 24, 2011
Net unrealized gains/losses on marketable securities	$	396		$	130
Net unrecognized gains/losses on derivative instruments		201			290
Cumulative foreign currency translation		(65	)		23

Accumulated other comprehensive income	$	532		$	443

Equity Awards

A summary of the Company’s RSU activity and related information for the nine months ended June 30, 2012 is as follows (in thousands, except weighted-average grant date fair value amounts):


	Number of RSUs			Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value
Balance at September 24, 2011		14,446		$	231.49
RSUs granted		7,223		$	414.88
RSUs vested		(5,955	)	$	202.92
RSUs cancelled		(812	)	$	245.20

Balance at June 30, 2012		14,902		$	331.05	$	8,702,991

RSUs that vested during the three- and nine-month periods ended June 30, 2012 had fair values of $1.5 billion and $3.1 billion, respectively, as of their applicable vesting dates. RSUs that vested during the three- and nine-month periods ended June 25, 2011 had fair values of $637 million and $1.4 billion, respectively, as of their applicable vesting dates.

A summary of the Company’s stock option activity and related information for the nine months ended June 30, 2012 is as follows (in thousands, except weighted-average exercise price amounts and weighted-average remaining contractual term in years):


	Number of Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Balance at September 24, 2011		11,866		$	108.64
Options granted		—		$	—
Options assumed		41		$	30.92
Options cancelled		(23	)	$	103.35
Options exercised		(3,910	)	$	85.19

Balance at June 30, 2012		7,974		$	119.75		1.9	$	3,702,090

Exercisable at June 30, 2012		7,869		$	119.93		1.9	$	3,652,052

Expected to vest after June 30, 2012		105		$	106.00		4.9	$	50,039

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 total intrinsic value of options at the time of exercise was $332 million and $1.5 billion for the three- and nine-month periods ended June 30, 2012, respectively, and $248 million and $2.1 billion for the three- and nine-month periods ended June 25, 2011, respectively.

The Company had approximately 38.2 million shares reserved for future issuance under the Company’s stock plans as of June 30, 2012. 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.

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 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 estimated expected life of the Company’s stock options and other relevant factors including implied volatility in market traded options on the Company’s common stock. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock awards it grants to employees. The Company recognizes share-based compensation cost as expense on a straight-line basis over the requisite service period.

During the nine-month period ended June 30, 2012, in conjunction with certain business combinations, the Company assumed 41,000 stock options with a weighted-average fair value per share of $400.79.

The weighted-average fair value per share of stock purchase rights was $114.01 and $102.41 during the three- and nine-month periods ended June 30, 2012, respectively, and was $72.63 and $67.70 during the three- and nine-month periods ended June 25, 2011, respectively.

The following table provides a summary of the share-based compensation expense included in the Condensed Consolidated Statements of Operations for the three- and nine-month periods ended June 30, 2012 and June 25, 2011 (in millions):


	Three Months Ended				Nine Months Ended
	June 30, 2012		June 25, 2011		June 30, 2012		June 25, 2011
Cost of sales	$	70	$	52	$	196	$	155
Research and development		172		119		500		336
Selling, general and administrative		206		113		596		379

Total share-based compensation expense	$	448	$	284	$	1,292	$	870

The income tax benefit related to share-based compensation expense was $131 million and $432 million for the three- and nine-month periods ended June 30, 2012, respectively, and $113 million and $349 million for the three- and nine-month periods ended June 25, 2011, respectively. As of June 30, 2012, the total unrecognized compensation cost related to outstanding stock options and RSUs expected to vest was $4.3 billion, which the Company expects to recognize over a weighted-average period of 3.4 years.

Employee Benefit Plans

Rule 10b5-1 Trading Plans

During the three-month period ended June 30, 2012, executive officers Timothy D. Cook, Peter Oppenheimer, D. Bruce Sewell, Philip W. Schiller, and Jeffrey E. Williams, and directors William V. Campbell and Arthur D. Levinson had equity trading plans adopted in accordance with Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). An equity trading plan is a written document that pre-establishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including shares acquired pursuant to the Company’s employee equity plans.

Dividend and Stock Repurchase Program

In March 2012, the Board of Directors of the Company approved a dividend policy pursuant to which it plans to make, subject to subsequent declaration, quarterly dividends of $2.65 per share, beginning in the fourth quarter of 2012. Additionally, in March 2012, the Company’s Board of Directors authorized a program to repurchase up to $10 billion of the Company’s common stock beginning in 2013. The repurchase program is expected to be executed over a three-year period with the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs. The repurchase program does not obligate the Company to acquire any specific number of shares.