Apple would have had to reduce its announced first quarter 2005 earnings by $20 million if it had expensed stock options, the company revealed in its 10Q SEC filing released yesterday.

The company also revealed its intention to expense stock options (as is now generally done in corporate America as part of a response to prevent future Enron or WorldCom scandals) beginning in the fourth quarter this year. This will "have a material impact on its results of operations", the company said.

Apple digital music - a success, a threat

Perhaps the biggest highlight of Apple's legal news was the revelation that it had filed its defence against The Beatles' Apple Corps case with the courts on December 23 2004.

Apple's relationship with Microsoft also engendered some observations from Apple's management, which said that while it "believes its relationship with Microsoft has been and will continue to be beneficial to the company", some risks exist.

"Microsoft’s interest in producing application software for the Mac OS following expiration of the agreements may be influenced by Microsoft’s perception of its interests as the vendor of the Windows operating system and competing digital media applications, including music distribution service and technology," Apple warned.

Retail activity set to increase

Meanwhile, the cost of selling products and administration rose 37 per cent to $470 million in the quarter, year-on-year. This was due to increased sales, Apple said, and the expansion of its retail segment. Apple saw $33 million in capital expenditure for its retail ops, and another $25 million went on "corporate infrastructure". The marketing and advertising budget also rose.

More retail store activity is expected this year. Apple management has budgeted $125 million on expanding its retail division this year. Apple's retail stores leave the company in a potential hole of they flop - as of September 25, 2004, Apple had $436 million in leasehold liabilities that related to retail space.

Apple's seven high profile retail stores leave the company particularly exposed, it said: "Current leases on such locations have terms ranging from 10 to 16 years with total commitments per location over the lease terms ranging from $25 million to $50 million. Closure or poor performance of one of these high profile stores could have a particularly significant negative impact on the company’s results of operations and financial condition."

It's not all costs at retail - the company is seeing profit, too: net sales reached $561 million in the first quarter 2005, up $288 million from the year ago quarter. Mac unit sales also climbed 63 per cent. Average revenue per store climbed 48 per cent year-on-year in the quarter.

Cash reserves climb

The company also added close to $1 billion to its cash reserves in the year, raising these to $6.448 billion in "cash, cash reserves and short-term investments". Apple's reassuring cash mountain grew because of cash generated through mysterious "operating activities" and from selling stock under stock plans.

Apple added that around $3.5 billion of the Apple money mountain is held by foreign subsidiaries: this means for Cupertino to bring the money home, it would have to pay US income tax on the money. The company may choose to bring home some of its bacon in an effort to "reduce tax liabilities".

Apple headcount falls as Jobs' jet flies high

Apple is to lay off an additional 70 employees in the coming months, making a total of 485 employees redundant in the last year, the report reveals. Apple CEO Steve Jobs' Gulfstream V jet's been handy for the company though, its spent $701,000 using the plane.