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Apple files SEC Form 10Q for March quarter

updated 01:30 am EDT, Thu May 5, 2005

Apple files SEC Form 10Q

Apple yesterday filed its SEC Form 10Q, which discloses information about the company's financial performance during the March quarter. The company revealed details about the capitalization of software development on Tiger and FileMaker, restructuring charges, its new performance plan for management, lease payments, flagship store expenses, reimbursements to Jobs for 'business expenses', retail growth, iPod and Mac sales numbers, retail investments, and several new lawsuits and updates on other legal proceedings.


  • Apple capitalizes $34 million for Tiger: During the second quarter and first quarter of 2005 and the fourth quarter of 2004, Apple capitalized approximately $14.7 million, $14.8 million and $4.5 million, respectively, of costs associated with the development of Tiger.

  • FileMaker Pro 7 development costs: During the second quarter of 2004, the Company incurred substantial development costs associated with FileMaker Pro 7 subsequent to achievement of technological feasibility. During the second quarter of 2004, Apple capitalized approximately $2.3 million of costs associated with the development of FileMaker Pro 7.

  • Restructuring charges hit $23 million: The Company recorded total restructuring charges of approximately $23 million during the year ended September 25, 2004, including approximately $14 million in severance costs, $5.5 million in asset impairments, and a $3.5 million charge for lease cancellations.

  • New performance plan approved: At the Annual Meeting of Shareholders held on April 21, 2005, the Company's shareholders approved the Performance Bonus Plan, a performance-based annual cash incentive plan for the Company's executive officers. The shareholders also approved amendments to the 2003 Employee Stock Option Plan, including an increase in the number of shares reserved for issuance under the plan by 49 million shares.

  • Lease payments total nearly $500 million: As of September 25, 2004, the Company's total future minimum lease payments under noncancelable operating leases were $617 million, of which $436 million related to leases for retail space. As of March 26, 2005, total future minimum lease payments related to leases for retail space increased to $489 million.

  • Flagship stores add marketing expense: Expenses allocated to corporate marketing resulting from the operations of the flagship stores (New York, Los Angeles, Chicago, San Francisco, Tokyo, Osaka, and London) were $7.1 million and $4.0 million in the second quarters of 2005 and 2004, respectively, and $14.0 million and $6.2 million for the first six months of 2005 and 2004, respectively.

  • Jobs charges Apple:The Reimbursement Agreement became effective for expenses incurred by Mr. Jobs for Apple business purposes since he took delivery of the plane in May 2001. The Company recognized a total of $62,000 and $40,000 in expenses pursuant to the Reimbursement Agreement during the second quarters of 2005 and 2004, respectively, and $481,000 and $322,000 in expenses for the first six months of 2005 and 2004.

  • iPod sales numbers: Net sales of iPods increased $750 million, or 284% during the second quarter of 2005 compared to the same period in 2004, and increased $1.705 billion or 328% in the first half of 2005. Unit sales of iPods totaled 5.3 million during the second quarter of 2005, which represents an increase of 558% from the 807,000 units sold in the second quarter of 2004. For the first six months of 2005, iPod unit sales increased 542% to 9.9 million units sold compared to 1.5 million units sold in the prior year. Since introduction of the iPod product line in fiscal 2002, the Company has sold in excess of 15 million iPods.

  • iTMS, iPod accesories increase: Other music products consist of sales associated with the iTunes Music Store and iPod related services and accessories. Net sales of other music products increased 260% to $216 million in the second quarter of 2005 compared to the same period in 2004. A similar increase of 267% in net sales of other music products was experienced for the first half of 2005 compared to the first half of 2004.


  • iMac, iBook sales drive Mac sales: Total Macintosh net sales increased by 29% and 28% during the second quarter and first six months of 2005 compared with the same periods in 2004. Unit sales during the second quarter and first half of 2005 also reflected increases of 43% and 34%, respectively, compared to the same period in the prior year. These increases in net sales and unit sales relate primarily to strong demand for the Company's consumer-oriented iMac and iBook products, offset by a slight decline in Power Macintosh net sales.

  • Consumer demand increases: Net sales of consumer-oriented products increased 60% and 77% for the three and six months ended March 26, 2005, respectively, compared to the same periods in 2004. Unit sales showed increases of approximately 71% for both the second quarter and first half of 2005 compared to the same period in the prior year. These increases are largely attributable to the introduction of the Mac mini in January 2005, the iMac G5 at the end of fiscal 2004 and the upgrade of the iBook in October 2004. In addition, PowerBook net sales increased 23% in the second quarter of 2005 compared with the same period in 2004, primarily as a result of a refresh and a simultaneous price drop to the PowerBook product line in the second quarter of 2005.

  • Consumer-shift decreases average Mac selling price: The Company also believes that a shift in customer preference from desktop systems to portable systems continues. Net sales per Macintosh unit sold during the second quarter of 2005 decreased 10% to $1,396 compared to the same quarter in 2004, and decreased 5% to $1,465 during the first six months of 2005 from $1,539 in 2004. These decreases were the result of changes in overall unit mix towards relatively lower-priced consumer products, specifically the impact of the new Mac mini product, partially offset by an increase in direct sales.

  • Same-store increases, more stores drive retail revenue: The Retail segment's net sales grew 115% to $571 million during the second quarter of 2005 and grew by 110% to $1.132 billion in the first half of 2005 compared to the same periods in the prior year. These increases are largely attributable to the increase in total stores from 78 at the end of the second quarter of 2004 to 103 as of March 26, 2005, as well as a 60% year-over-year increase in average revenue per store.


  • Channel sales 'incremental' to retail revenue: While the Company's customers in areas where the Retail segment has opened stores may elect to purchase from the Retail segment stores rather than the Company's preexisting sales channels in the U.S., Japan, and the U.K., the Company believes that a substantial portion of the Retail segment's net sales is incremental to the Company's total net sales.


  • Higher education drives education sales: The Company's U.S. education channel experienced an increase in net sales and unit sales of 25% and 21%, respectively for the second quarter of 2005 compared to the same period in the prior year. For the first six months of 2005, net sales and unit sales increased 22% and 16%, respectively, compared to the first half of 2004. These increases were driven predominantly by strength in the higher education market.

  • Software decline driven by declining Panther sales: Net sales of software rose $7 million or 6% during the second quarter of 2005 compared to the same quarter in 2004, while decreasing $25 million or 9% for the first six months of 2005 compared to the same period in the prior year. The slight increase in software for the quarter reflects higher sales of application software in 2005 compared to 2004. The year-over-year decrease in software for the first half of 2005 is attributable primarily to a decrease in sales of the Company's Mac OS X Panther operating system.

  • AppleCare, .Mac drive revenue: Service and other sales rose over 75% during the second quarter and rose 63% for the first six months of 2005 compared to the same periods in 2004. These increases are the result of significant year-over-year increases in net sales associated with AppleCare Protection Plan (APP) extended maintenance and support services, as well as increases in net sales associated with the Company's .Mac Internet service. Increased net sales associated with APP are primarily the result of higher Macintosh unit sales and higher attach rates on APP over the last several years.

  • Power Mac sales continue to decline: Net sales and unit sales of the Company's Power Macintosh declined in the second quarter of 2005 and for the first half of 2005, compared to the same periods in the prior year. Power Macintosh net sales decreased 8% and 6% for the second quarter and first half of 2005, respectively, compared to the same periods in 2004. Unit sales also decreased 19% for both the three and six month periods ending March 26, 2005, compared to the same periods in 2004. These declines in Power Macintosh are partially attributable to strong sales in the first and second quarters of 2004, following the products' introduction at the end of the fourth quarter of 2003. In addition, the Company believes that the Power Macintosh decline in 2005 may have resulted from a shift in customer preference away from the single processor Power Mac G5 towards the iMac G5 and the continued shift to portable systems.

  • Retail expansion drives capital expenditures: The Company's total capital expenditures were $101 million during the first six months of fiscal 2005, $49 million of which were for retail store facilities and equipment related to the Retail segment and $52 million of which were for corporate infrastructure, including information systems enhancements and operating facilities enhancements and expansions. The Company currently anticipates it will utilize approximately $280 million for capital expenditures during 2005, approximately $140 million of which is expected to be utilized for expansion of the Company's Retail segment and the remainder utilized to support normal replacement of existing capital assets and enhancements to general corporate infrastructure.


  • Advanced Audio Devices v Apple Plaintiff Advanced Audio Devices (AAD) filed this action on March 3, 2005 in the United States District Court for the Northern District of Illinois, Eastern Division, alleging infringement by the Company of U.S. Patent 6,587,403 entitled "Music Jukebox." The complaint seeks unspecified damages and other relief. The Company filed an answer on May 4, 2005 denying all material allegations and asserting numerous affirmative defenses. The Company is investigating this claim.

  • Apple Corps v. Apple: Plaintiff Apple Corps filed this action on July 4, 2003 in the High Court of Justice, Chancery Division, in London alleging that the Company has breached a 1991 agreement that resolved earlier trademark litigation between the parties regarding use of Apple marks. Plaintiff seeks an injunction, unspecified damages and other relief. Trial is set for the week of March 27, 2006 (Apple has dismissed the California lawsuit without prejudice.)

  • Blumenau v Apple: Plaintiff Trevor Blumenau filed this action on September 29, 2004 in the United States District Court for the Northern District of Texas alleging infringement of U.S. Patent 5, 664,216 entitled "Iconic Audiovisual Data Editing Environment". Plaintiff's complaint alleges that the Company's Shake software infringes the patent. The Company received service of the complaint on March 8, 2005 and its response is not yet due. The Company is investigating this claim.


  • Branning et al. v Apple: Plaintiffs filed this purported class action in San Francisco County Superior Court on February 17, 2005. The complaint alleges violations of California Business & Professions Code section 17200 (unfair competition) regarding a variety of purportedly unfair and unlawful conduct including, but not limited to, allegedly selling used computers as new, failing to honor warranties, misappropriating trade secrets and breach of contract. Plaintiffs request unspecified damages and other relief. Plaintiffs filed an amended complaint on or about April 29, 2005 adding two new named Plaintiffs and three new causes of action. The Company is investigating these claims and has commenced discovery against Plaintiffs.

  • Burrow v Apple: Plaintiff filed this purported class action in Orange County Superior Court on February 17, 2005 alleging false advertising regarding the copy protection capabilities of DVD Studio Pro. The Complaint alleges violations of California Business & Professions Code section 17200 (unfair competition) and Code section 17500 (false advertising) and negligent misrepresentation. Plaintiff requests unspecified damages and other relief. The Company was served on March 8, 2005 and filed an answer on April 7, 2005 denying all allegations and asserting numerous affirmative defenses. The Company is investigating these claims.

  • Clark v Apple: Plaintiff filed this purported class action on February 2, 2005 in Santa Clara County Superior Court alleging defects in the Company's "yo-yo" power adapters. Plaintiffs request unspecified damages and other relief. The parties have reached a tentative settlement in this matter. The Court granted preliminary approval of the settlement on April 19, 2005 and the final approval hearing is set for September 27, 2005. Settlement of this matter will not have a material effect on the Company's financial position or results of operation.

  • Three shareholder lawsuits dismissed: Beginning on September 27, 2001, three shareholder class action lawsuits were filed in the United States District Court for the Northern District of California against the Company and its CEO. These purport to bring suit on behalf of persons who purchased stock between July 19, 2000, and September 28, 2000. The complaints allege violations of the 1934 Securities Exchange Act and seek unspecified compensatory damages and other relief. The Ninth Circuit Court of Appeal affirmed the District Court's dismissal in an unpublished decision dated April 4, 2005. Plaintiffs will not seek further review and the matter is concluded.


  • More resellers join lawsuit: Six resellers have filed similar lawsuits against the Company for various causes of action including breach of contract, fraud, negligent and intentional interference with economic relationship, negligent misrepresentation, trade libel, unfair competition and false advertising. Plaintiffs request unspecified damages and other relief. hree of the other plaintiffs filed amended complaints on February 7, 2005 and on March 16, 2005, the Company filed answers denying all allegations and asserting numerous affirmative defenses. All cases except Macadam are in discovery. A sixth Plaintiff, MacAccessory Center filed a complaint on February 23, 2005. The Company filed a response on April 20, 2005.

  • Tiger Direct v Apple: Plaintiff Tiger Direct filed this trademark infringement action alleging infringement of the word mark TIGER. Plaintiff claims to have a valid registration in the mark TIGER and alleges that the Company's use of TIGER in reference to the latest version of Mac OS X infringes the mark. Plaintiff attempted to obtain an ex parte preliminary injunction barring the Company's use of the TIGER mark on April 27, 2005 but the motion was denied. Plaintiff served the Company on April 27, 2005 and again moved for a preliminary injunction which was heard on May 3, 2005. The Company denied all allegations and vigorously opposed Plaintiff's motion. On May 3, 2005 the court heard the matter and has not yet issued a ruling.




by MacNN Staff

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