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Notes from Apple\'s Q3 SEC form 10-Q

updated 03:30 pm EDT, Thu August 5, 2004

Q3 2004 SEC 10-Q

We have compiled a number of notes and highlights from Apple's 86-page SEC form 10-Q filing for its fiscal third quarter, released today, including notes about additional layoffs as part its restructuring, Virgin Mega's complaint over licensing of Apple's FairPlay DRM, its "high-profile" retail store costs, dragging sales in Japan, growth in higher education sales, and increased research & development costs during the quarter.


  • As of June 26, 2004 Apple had $4.966 billion in cash and short-term investments, an increase of $400 million from the previous year.

  • Apple recognized a charge related to restructuring activities of approximately $7.9 million for the third quarter. This charge included finalizing the closure of its Sacramento manufacturing facility, which was initiated in the second quarter of 2004. These restructuring actions will ultimately result in the termination of 83 positions. These lay-offs come on top of the 348 Apple announced during the second quarter of 2004, primarily due to Sacramento (200 total) as well as headcount reductions related primarily to various sales and marketing activities in the Company's Americas and Europe operating segments.

    • In the fourth quarter of fiscal 2004, Apple expects to incur restructuring charges of approximately $5 million primarily related to vacating certain European sales office space.

  • Apple leases various equipment and facilities, including retail space, under noncancellable operating lease arrangements. Apple's major facility leases are for terms of 5 to 10 years while leases for retail space are for terms of 5 to 15 years. As of September 27, 2003, the Company's total future minimum lease payments under noncancellable operating leases were $600 million, of which $354 million related to leases for retail space. As of June 26, 2004, total future minimum lease payments related to leases for retail space increased to $386 million.

  • Apple expects to open its high-profile stores in London, England and Osaka, Japan by the end of the year. The stores will increase the number of flagship locations to seven, after New York, Los Angeles, Chicago, San Francisco and Tokyo, Japan.

    • "These high profile stores are larger than the Company's typical retail stores and were designed to further promote brand awareness and provide a venue for certain corporate sales and marketing activities, including corporate briefings. As such, the Company allocates certain operating expenses associated with these stores to corporate marketing expense to reflect the estimated benefit realized Company-wide."

    • "The allocation of these operating costs is based on the excess amount incurred for a high profile store to that of a more typical Company retail location. Expenses allocated to corporate marketing resulting from the operations of these stores were $4.7 million and $1.1 million in the third quarters of 2004 and 2003, respectively, and $10.9 million and $3.3 million for the first nine months of 2004 and 2003, respectively."

  • Apple experienced double-digit across-the-board gains in most of its products and segments compared to the year-ago quarter as well as the year-ago nine month period.

    • Japan was the notable exception: while sales for the third-quarter increased to $172 million compared with $168 in the year-ago quarter, nine month sales declined to $502 million from $527 million in the year-ago period. However, when sales from Apple's Tokyo store, which are accounted for under the Retail segment, are added in, sales were up eight% for the quarter and flat for the nine-month-period.

    • Japan unit sales of Macs declined 4% for the quarter and 11% for the nine month period, compared to year-ago totals (this again excludes sales from Apple's Tokyo store).

    • iMac unit sales declined 15% for the quarter and 18% for the nine month period, compared to year-ago totals. "Sales of flat panel iMac systems, which have a suggested retail price starting at $1,299, have been negatively affected by a shift in consumer preference to portable systems and competitor desktop models with price points below $1,000... Apple had planned to release a new iMac, based on the G5 processor, early in the fourth quarter of 2004. However, because of the manufacturing problems at IBM, the Company could not secure sufficient supply of G5 processors to launch the new iMac as originally scheduled and now plans on announcing and shipping the new iMac in September."

    • iPod unit sales increased 183% for the quarter and 298% for the for the nine month period, compared to year-ago totals. Net sales increased 124% and 243%, respectively.

    • "Other Music" sales, which includes iPod peripherals and iTunes Music Store sales, increased 508% for the quarter and 800% for the nine month period, compared to year-ago totals.

    • For every $1 spent on iPods, 37 cents was spent on "Other Music" in the third quarter. This ratio compares with 16 cents spent on "Other Music" in the year-ago quarter.

    • Retail revenue grew 86% to $270 million for the quarter, from $145 million in the year-ago. This translated into a profit of $7 million, compared with a loss of $2 million. For the nine-month period, profit totaled $21 million, compared with a loss of $6 million in the year-ago period.

    • Net sales from each Mac totaled $1,442 for the quarter, an increase of 2%. Nine month figures also increased 2%. "These increases were the result of various changes in overall unit mix towards relatively higher-priced Power Macintosh and PowerBook systems and an increase in direct sales primarily from the Company's retail and online stores. The impact of these factors was somewhat offset by lower year-over-year pricing for the first nine months of 2004 on comparable Macintosh systems for some of the Company's Macintosh product lines in response to industry pricing pressure."

    • Net sales of software rose $23 million or 26% during the third quarter of 2004 compared to the same quarter in 2003, and increased $118 million or 43% for the first nine months of 2004 compared to the same period in the prior year. "These increases reflect higher net sales of the Company's Apple-branded software and in particular, higher net sales of the Company's operating system software, Mac OS X version 10.3 'Panther,' which was released in October 2003 and accounted for approximately $11 million and $68 million of the increase in software net sales for the three and nine month periods ended June 26, 2004, respectively."

  • Apple's U.S. education channel experienced year-over-year growth in net sales of approximately 16% during the third quarter and 18% for the first nine months of 2004, compared to the same period in 2003, resulting in Apple's highest U.S. education channel revenue in three years. "The Company believes that the K-12 market continues to be challenged by a weak funding environment; however, revenue in this market did grow 3% and 1% for the three and nine month periods ended June 26, 2004 as compared to the same period in 2003."

  • Apple opened two new retail stores during the second quarter, bringing the total number of open stores to 80 as of the end of the third quarter of 2004. This compares to 59 stores open as of the end of the third quarter of 2003. Capital expenditures associated with the Retail segment since its inception totaled $290 million through the end of fiscal 2003, and totaled $69 million during the first nine months of 2004. As of June 26, 2004, the Retail segment had approximately 1,720 employees.

  • Apple recognized a $220,000 reimbursement charge in the third quarter related to the use of CEO Steve Jobs' Gulfstream jet for Apple business. The company entered into a Reimbursement Agreement with Jobs after he took delivery of the plane in 2001. This compares to a $105,000 charge the company realized in the year-ago quarter. For the first nine months of 2004, Apple has realized a total of $543,000 in charges related to the jet, compared with $266,000 in the year-ago period.

  • R&D increased by 4% and 2% for the third quarter and first nine months of 2004, respectively, compared to the same periods in 2003. R&D as a percentage of net sales decreased to approximately 6% in both the three- and nine- months ended June 26, 2004. "The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and expects to continue to invest heavily in R&D to remain competitive."

    • In the fourth quarter of fiscal 2004, Apple expects to capitalize R&D costs of approximately $5 million related to the development of Mac OS X "Tiger."

  • As noted earlier today, on June 28, 2004 Virgin Mega filed a complaint against Apple Computer France with the French Competition Council alleging that the Company has wrongfully refused to license Fairplay DRM technology to competitors. Virgin is seeking "Interim Measures," pending the determination of the merits of the case. A hearing on Virgin's request for such measures will likely be heard in October or November 2004.




by MacNN Staff

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