Highlights from Apple's quarterly SEC filing [updated]
May 7, 2004 - 00:01 PDT   By Larry Angell - Apple filed its quarterly report (SEC form 10-Q) with the Securities and Exchange Commission Thursday. In the filing, which is available as a 65-page PDF document, Apple discloses several details on net sales, its retail stores, job cuts, iTunes and more.

Net sales during the second quarter of 2004 rose 29% or US$434 million from the same period in 2003, and increased 33% or $968 million for the first six months of fiscal 2004 compared to the same period of fiscal 2003. According to Apple, several factors contributed favorably to the net sales:

• Sales of peripherals and other hardware rose $320 million or 148% compared to the same quarter in 2003 primarily from an increase in iPod sales. Sales of displays and other computer accessories rose by 47% in the same time period.


• Total Mac sales increased by 6% and 11% during the second quarter and first six months of 2004 compared with the same periods last year. Unit sales during these periods reflected increases of 5% and 9%, respectively.


• Sales from Apple's retail segment grew 97% to $266 million due to the increase in total stores from 53 at the end of the second quarter of 2003 to 78 as of March 27, 2004, as well as a 35% year-over-year increase in average revenue per store.


• Software sales rose $32 million or 34% during the quarter thanks to higher net sales of Apple-branded software including iLife and Mac OS X version 10.3 (Panther).


• Apple's U.S. education channel experienced year-over-year growth in net sales of approximately 18% during the second quarter and first half of 2004.


• Service and other sales increased more than 30% in the quarter as a result of significant year-over-year increases in net sales associated with AppleCare Protection Plan.

• Net sales and unit sales of iMacs were down 17% and 15%, respectively, during the second quarter. Sales of iMacs, which start 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," according to Apple.


• In addition to the negative impact on net sales, declining sales of Power Macs also had a negative effect on Apple's overall gross margin because Power Macs generally have higher individual gross margins than the company's consumer Macs. Apple said that if future unit sales of Power Macs fail to partially or fully recover, "it could be difficult for the company to improve its overall profitability."


• Net sales and unit sales in the Japan segment declined during the second quarter due to "the continued weakness in consumer PC shipments throughout Japan, Apple's belief that its professional and creative customers have delayed computer upgrades pending the release in Japan of certain Mac OS X native applications, such as Quark Xpress 6, and a shift in sales from the Japan Segment to the Retail segment as a result of the opening of the Tokyo store in the first quarter of 2004."

The document also contained a few other interesting details:

• During the second quarter of 2004, Apple's management approved total restructuring charges of $9.6 million related to the closing of the company's Sacramento manufacturing operations and headcount reductions to various sales and marketing activities in Apple's Americas and Europe operating segments. These restructuring actions will result in the termination of 348 positions.


• Apple's gross margin of 27.8% was down from 28.3% in the second quarter of 2003. The decline was due to "the increase in mix towards more lower margin iPod and 1:1 iBook sales, pricing actions on certain Power Mac G5 models that were transitioned during 2004, purchase order cancellation costs associated with these G5 product transitions, and higher freight and duty costs in the current year," according to Apple.


• As of March 27, 2004, Apple had $4.594 billion in cash, cash equivalents, and short-term investments, an increase of $28 million at the end of fiscal 2003.


• The company's retail segment, which as of March 27 had 1,660 workers, reported profit of $5 million and $14 million during the second quarter and first six months of 2004 as compared to losses of $3 million and $4 million last year.


• During the first half of 2004, approximately 54% of Apple's retail sales came from iPods, other Apple-branded and third-party peripherals, software and services.


• Apple said iTunes faces "increasing competition" from other digital music services, free peer-to-peer music services, and larger companies that may have "greater resources, including technical and marketing resources, and supplier relationships." The company said failure to effectively compete could negatively affect its bottom line. "There can be no assurance that [we] will be able to provide products and services that effectively compete in these markets or successfully distribute and sell digital music outside the U.S."

The quarterly report also revealed several new lawsuits that Apple is involved in:

• Cagney v. Apple - Plaintiff alleges improper collection of sales tax in transactions involving mail-in rebates and seeks unspecified damages.


• Wagya v. Apple; Yamin v. Apple - Two new plaintiffs filed purported class action cases alleging misrepresentations by the company relative to iPod battery life.


• Dunlap v. Apple; Chiaco v. Apple - Two separate plaintiffs filed class action cases in California courts alleging problems with the iBook logic board. They seek unspecified damages.


• East Texas Technology Partners v. Apple - Plaintiff alleges infringement of patent 6,574,239 relating to "Virtual Connection of a Remote Unit to a Server." Plaintiff seeks unspecified damages from Apple and seven other defendants.


• Gobeli Research v. Apple - Plaintiff alleges that Mac OS 9 and OS X infringe on patent 5,418,968 related to a "System and Method of Controlling Interrupt Processing." They seek unspecified damages from both Apple and Sun Microsystems.


• Shipman v. Apple - Plaintiff claims infringement of patent 6,217,183 related to a "Keyboard Having Illuminated Keys." Plaintiff alleges that Apple's PowerBooks introduced in 2003 infringe this patent.  The plaintiff seeks unspecified damages, a preliminary injunction, and other relief.

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