As part of its regular schedule of filings with the United States Securities and Exchange Commission (SEC), Apple today offered its Form 10-K, an annual report which describes the company’s business strategy and product offerings. It examines the company’s past performance, as well as a measure of how well it’s doing today. The 10-K also offers a unique insight, in the company’s own words, to Apple’s business plan as the Cupertino, Calif.-based computer manufacturer faces some significant challenges moving forward.
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Apple noted a seven percent increase in net sales from 2001 to 2002, but said that Mac unit sales were relatively flat from year to year. The company attributes sluggish demand in the European and Japanese markets as one possible explanation for the lack of worldwide growth.
On the positive end of things. Apple said that net sales from software, service and other sources — a high margin profit center — rose 26 percent in 2002 to $248 million. More than half of that revenue — $143 million — was attributed to the iPod, Apple’s FireWire-based digital music player. Sales of laptop Macs grew for the year by about 10 percent, or 92,000 units, with growth most pronounced in iBook sales — 14 percent better from year-to-year. Gross margin increased from year to year, as well — rising to 28 percent from 23 percent for 2001, and doing a point better than 2000 as well.
Retail stores multiplied in number from 8 to 40 from the end of fiscal 2001 to the end of 2002, according to Apple, with retail net sales expanding from $19 to $283 million in that same time. Apple admits that the retail stores cannibalize net sales from other retailers, but believes that “a substantial portion of the Retail segment’s net sales are incremental to the Company’s total net sales.”
Apple says the retail operation “has required and will continue to require a substantial investment in fixed assets and related infrastructure, operating lease commitments, personnel, and other operating expenses.” At the end of September 2002, Apple had outstanding commitments for its 897 retail employees, store leases and related facilities of $209 million.
Apple did note that backing out of its retail strategy could adversely affect the company’s bottom line. “The Company would incur substantial costs should it choose to terminate its Retail segment or close individual stores. Such costs could adversely affect the Company’s results of operations and financial condition.”
Apple attributes slow sales of its Power Macintosh G4 systems to economic factors and continued delay in customer adoption of Mac OS X. And while Apple notes that some customers may have delayed purchasing Power Macs due to software applications — including Quark — the company paradoxically noted that it “did not experience the anticipated increase” it expected in Power Mac sales when Adobe released Photoshop 7.
Apple also recognizes weakness in the U.S. education channel — an area where Apple has, in the past, enjoyed unparalleled success. With net sales in education dropping a whopping 15 percent in 2002 (compared to a 4 percent decline in 2001), Apple blames the market loss to increased competition from PC vendors and more skittish buying habits from cash-strapped school districts. While Apple said it has taken steps to fix the problem, the company doesn’t know when things will improve. “It is difficult to anticipate how this trend will affect fiscal 2003 and to anticipate when and if this trend will reverse,” said Apple.
Apple knows the value of research and development, and the company’s balance sheets reflect it: The company increased R&D spending $16 million for 2002 to $446 million, but kept that number in line as a percentage of net sales to around 8 percent. The company noted that much of the increase was the result of new projects, as well capitalized costs associated with the development of Mac OS X 10.2, “Jaguar,” and PowerSchool, Apple’s school information technology system.
In 2002, Apple noted restructuring costs $30 million of which $6 million was incurred in the fourth quarter of 2002 related to reducing headcount costs in Corporate operations and sales and to adjust its PowerSchool product strategy. Apple eliminated approximately 180 positions worldwide at a cost of $1.8 million
The shift in product strategy at PowerSchool included discontinuing development and marketing of a PowerSchool product that resulted in the impairment of previously capitalized development costs associated with the product in the amount of $4.5 million. The remaining charge in 2002 of $24 million was incurred in the first quarter of 2002 and will ultimately result in the elimination of approximately 425 positions worldwide, 415 of which were eliminated by September 28, 2002, at a cost of $8 million.
As part of its 10-K filing, Apple must outline factors that may affect the company’s future results and financial condition. SEC regulations require Apple to outline just about any plausible circumstance where it might suffer adverse financial conditions. While Apple specified general economic conditions, the competitive nature of the personal computer marketplace, and myriad other factors, the company also noted an issue that has long been a sore spot for Mac enthusiasts and industry analysts familiar with Apple’s products — the clock speed deficit that its systems suffer compared to their Intel-based competitors.
“[Apple] believes that many of its current and potential customers believe that the relatively slower MHz rating or clock speed of the microprocessors it utilizes in its Macintosh systems compares unfavorably to those utilized by Windows-based systems and translates to slower overall system performance. There have been instances in recent years where the inability of the Company’s suppliers to provide advanced G4 and G3 microprocessors with higher clock speeds in sufficient quantity has had significant adverse effects on the Company’s results of operations.”
Apple representatives were not available for further comment on the story.