MacNN | Print: Apple files SEC Form 10-Q for FYQ3 2003

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Wednesday, August 13,2003 @ 9:30am

Apple files SEC Form 10-Q for FYQ3 2003

Apple on Tuesday filed with the SEC its Form 10-Q for the third quarter of fiscal 2003, which is available as an 85-page PDF document. Some annotated highlights about its investment gains, stock repurchase plan, net sales breakdown, retail segment, R&D costs, and legal proceedings are available....

During the third quarter of 2003, Apple sold all of its remaining holdings in both ARM and EarthLink, consisting of 278,000 shares of ARM stock for net proceeds of approximately $295,000, and a gain before taxes of $270,000, and 3,960,000 shares of Earthlink stock for net proceeds of approximately $23 million, and a gain before taxes of $2 million. During the first quarter of 2003, Apple sold 2,580,000 shares of EarthLink stock for net proceeds of approximately $13.7 million, an amount that approximated Apple’s carrying value of the shares. As of June 28, 2003, the fair value of Apple’s remaining investment in Akamai was $14 million.

Apple had net unrealized gains on its investment portfolio of $20 million as of September 28, 2002, and net unrealized losses of $2 million as of June 28, 2003. Apple occasionally sells short-term investments prior to their stated maturities. As a result of such sales, Apple recognized gains of $3 million and $2 million during the third quarters of 2003 and 2002, respectively. Recognized gains on the sale of short-term investments were $21 million and $5 million during the first nine months of 2003 and 2002, respectively.

As part of its Stock Repurchase Plan, Apple entered into a forward purchase agreement (in the fourth quarter of 2001) to acquire 1.5 million shares of its common stock in September of 2003 at an average price of $16.64 per share for a total cost of $25.5 million. The total cost to acquire the same number of shares at the closing price of Apple’s common stock on June 28, 2003, would be approximately $28.7 million.

Net sales of peripherals and other hardware rose $137 million or 93% during the third quarter of 2003 compared to the same quarter in 2002 and rose $238 million or 49% for the first nine months of 2003. These increases are the result of significant year-over-year increases in quarterly and year-to-date iPod net sales experienced in all of Apple’s operating segments.

Net sales of software rose $26 million or 41% during the third quarter of 2003 compared to the same quarter in 2002 and rose $73 million or 37% for the first nine months of 2003. These increases reflect higher net sales of Apple-branded application software, Mac OS X client and server software, and third-party software. Net sales of Apple-branded software during the first nine months of 2003 was favorably affected by several new software titles including Final Cut Express, iLife, Keynote, and titles acquired by Apple from Emagic during the fourth quarter of 2002. Growth in net sales of third-party software was particularly strong in the Retail segment for the third quarter and first nine months of 2003.

Service and other net sales rose $19 million or 33% during the third quarter of 2003 compared to the same quarter in 2002 and rose $30 million or 17% for the first nine months of 2003. These increases are the result of significant year-over-year increases in quarterly and year-to-date net sales associated with AppleCare and related services and increases in net sales associated with Internet service, such as the iTunes Music Store and .Mac

The Retail segment’s net sales grew to $428 million during the first nine months of 2003 from $181 million during the same period in 2002, a 136% increase. The Retail segment’s 2003 third quarter net sales rose $82 million or 130% from the third quarter of 2002. While Apple’s customers in areas where the Retail segment has opened stores may elect to purchase from the Retail segment stores rather than Apple’s preexisting sales channels in the United States, Apple believes that a substantial portion of the Retail segment’s net sales is incremental to Apple’s total net sales.

Although total Macintosh unit sales were down 6% during the first nine months of 2003 compared to the same period in 2002, unit sales of portable systems have been relatively strong. PowerBook unit sales were up 71% and 43% during the first three and nine months of 2003 versus the same periods in 2002, respectively. iBook unit sales were up 12% and 3% during the first three and nine months of 2003 versus the same periods in 2002, respectively. Increased sales of portable systems reflect an overall trend in the industry towards portable systems. Portable systems represented a record high 46% of all Macintosh systems sold during the third quarter of 2003.

Total unit sales of desktop systems fell 23% and 18% during the third quarter and first nine months of 2003 compared to the same periods in 2002. Unit sales of iMac systems were down 24% during the third quarter of 2003 versus the same quarter in 2002 and were down 15% for the first 9 months of 2003 compared to the same period in 2002. iMac sales have been negatively affected by the shift in sales away from desktop systems in favor of portables. Also, the current flat panel iMac form factor is in the seventh quarter of its life cycle.

Unit sales of Power Macintosh systems fell 20% during the third quarter of 2003 and 24% during the first nine months of 2003 compared to the same periods in 2002. Some of Apple’s professional and creative customers may be delaying upgrades of their systems in anticipation of certain software vendors transitioning their professionally oriented Macintosh software applications, such as QuarkXPress, to run natively in Mac OS X. However, Apple did not experience the anticipated increase in Power Macintosh sales that it expected following the introduction of Adobe’s Photoshop 7 for Mac OS X during 2002.

Net sales in U.S. education during the first nine months of 2003 were down approximately 3% from the same period in 2002. Further, although Apple was encouraged that unit sales in U.S. education grew 5% during the third quarter of 2003 compared to the same quarter in 2002, net sales for the quarter were slightly down on a year-over-year basis. Despite the year-over-year increase in unit sales for the third quarter of 2003 in the U.S. education channel, net sales declined primarily as a result of a shift in mix away from higher priced Power Mac and iMac systems towards lower priced eMac and iBook systems.

Apple opened three new retail stores during the third quarter of 2003, bringing the total number of open stores to 59 as of the end of the third quarter of 2003. This compares to 31 stores as of the end of the third quarter of 2002. The Retail segment’s net sales grew to $428 million during the first nine months of 2003 from $181 million during the same period in 2002, a 136% increase. Third quarter net sales in 2003 grew 130% from the same quarter in 2002 and rose $10 million or 7% from the second quarter of 2003. The Retail segment has contributed strongly to the increases in net sales of computer peripherals and software experienced by Apple during 2003. During the first nine months of 2003, approximately 44% of the Retail segment’s net sales came from the sale of Apple-branded and third-party peripherals and software. This compares to 27% for Apple as a whole. As measured by Apple’s operating segment reporting, the Retail segment lost $6 million during the first nine months of 2003 compared to $18 million during the same period in 2002. This improvement is primarily attributable the segment’s year-over-year increase in net sales.

Expenditures for research and development increased 13% and 9% for the three and nine month periods ending in June of 2003 compared to the same periods in 2002. These increases were primarily the result of increased R&D headcount to support expanded R&D activities. Apple has continued to expand R&D even though its net sales and profitability are under pressure.

Apple settled the Pitney Bowes's patent infringement action (brought on June 18, 2001; alleging patent infringement relating to laser printer technology) during the second quarter of 2003 for an amount that did not have a material adverse effect on its financial condition, liquidity or results of operations.