Exhibit III (C) 1: Apple’s Organizational Structure

Exhibit III (D) 3c – Part A: Value Chain Analysis for Apple

Infrastructure	Casual work environment to promote new ideas Highly secretive organizational environment Say ‘no’ to thousands of new ideas-Strict project selection criteria		Locate Apple Stores at high-traffic locations. Apple Online Store	Key: Value & Cost Drivers – Red Value Drivers – Blue Cost Drivers – Green
Human Resources	Creative Industrial Design Engineers Strong software development team		Knowledgeable salespersons at Apple Stores. Apple Sales Consultant Program.
Technology	Breath of technologies-Patents Human Engineering Able to Vertical Integrate without the other team knowing what product is being worked on.	Online information about pre=launch products	iTunes Stores Mac OS X	Online support User discussions
Procurement Negotiation Power
Inbound Logistics Third party manufacturing vendors	Operations Low cost final assembly sites	Outbound Logistics Create user awareness	Marketing & Sales Brand identity Apple Store Focused on simplicity	After-sales Service Apple Care Plan Genius Bar

Exhibit III (D) 3c – Part B: Value Chain Analysis for Cingular

Infrastructure	Largest network in US
Human Resources
Technology Gain license to latest technologies as 3G and GSM			Media Net Integrated voice wireless and wired services Cingular Video	Online support
Procurement	Own a wide spectrum of licenses.
Inbound Logistics Access to newest handset in the market. Exclusive HBO programs	Operations	Outbound Logistics Extensive distribution outlets	Marketing & Sales Brand identity Rollover minutes Family Talk plan Pay-as-you-go Large subscriber base	After-sales Service Customer Support

Key:

Value & Cost Drivers – Red

Value Drivers – Blue

Cost Drivers – Green

Exhibit III (E) 3 – Assumptions for DCF valuation

Ratio Analysis^cli:

COGS/Sales Ratio

• 
  Defines how much of every sales dollar is spent on providing the product or delivering a service
  
• 
  Apple can charge a price premium over its competitors at least in the short run before competitors can come up with similar products that have easy to use user interface.
  
• 
  Manufacturing efficiencies will be realized as Apple starts to capture market share and the need to manufacture more phones arises.
  
• 
  Apple is traditionally known to keep its prices constant even though there is enough competition. It may introduce lower end products at a later stage (similar to iPod shuffle in iPod market) but at this point we assume that Apple will not reduce its cell phone prices.
  
• 
  Lowers COGS/Sales ratio over time due to the above factors.
  
• 
  PALM has COGS/Sales ratio as 68%(Decreased from 83% to 68%) while RIMM has COGS/Sales ratio as 44.8% (Declines from 60%). Since Apple doesn’t have a history in iPhone Cogs/Sales ratio, we anticipate that the industry trend will continue and COGS/Sales ratio will decline
  
• 
  Gross profit margin in industry is 33.7%^clii So over time we expect the COGS/Sales ratio to drop to (1-Gross Profit Margin) = 66.3%
  

R&D/Sales Ratio:

• 
  Expect this ratio to be high in the initial few years during iPhone’s initial introduction and 1^st and 2^nd versions of the product. Later this ratio will decrease as the product becomes mature and enters the mainstream market.
  

SG&A/Sales Ratio:

• 
  SG&A/Sales ratio will increase as commissions paid to sales force in the initial launch of the iPhone will be a huge part of SG&A. Since iPhone will be introduced only in the month of June and majority of sales will continue to take place till September 2008, we have assumed that the SG&A/Sales percentage will increase in the initial couple of years as iPhone goes from Early Adopter market towards mainstream market. After that point(Crossing the Chasm), the SG&A/Sales ratio will reduce. For RIMM and PALM, the ratios are 14% and 16%. For Apple, the previous years SG&A is 13%. So we have assumed that the SG&A/Sales ratio in the terminal year will be around 13%
  

Dep&Amort/Avge PP&E and Intang.

• 
  Apple uses straight line depreciation for its property and plant. Apple capitalizes costs it incurred to develop or acquire internal-use software and uses straight line amortization over the useful life of assets which is usually 3-5 years.
  
• 
  Net Property Plan and equipment for 2006 is $1281 million^cliii
  

Interest Expense/Avge Debt

• 
  Apple has no debt currently and so this ratio will continue to be zero.
  

Non-Operating Income/Sales

• 
  Interest income affected by US interest rates
  
• 
  Interest income has been doubling for the last two years^cliv
  
• 
  Apple did not pay any dividends and it anticipates that it will retain its earnings for use in operations. (Apple Inc., Form 10-k, Page 46)
  
• 
  Company writes down any devices that are excess in inventory but no clear number has been given
  
• 
  (Page 79 Form 10k) Apple did not incur any impairment charges
  
• 
  From 10-k, “Note 6—Restructuring Charges “During 2004, the Company recorded total restructuring charges of approximately $23.0 million, including approximately $14.0 million in severance costs, $5.5 million in asset impairments, and $3.5 million for lease cancellations. The lease cancellations relate to vacating a leased sales facility from a European workforce reduction during 2004. Of the $23.0 million charges, $21.3 million had been utilized by the end of 2006, with the remainder consisting of $1.7 million for lease cancellations. These actions have resulted in the termination of 452 positions”
  

Effective Tax Rate

• 
  The 10-k doesn’t reveal anything to the effect that Apple is proactively working on reducing its tax rate. Since we have projected that the revenues will continue to go up, we expect that the effective tax rate may slightly increase
  

Minority Interest/After Tax Income

• 
  This will continue to be zero since Apple owns 100% of its subsidiaries
  

Other Income/Sales

• 
  Other income will remain at zero
  

Ext. Items & Disc. Ops./Sales

• 
  Extraordinary Items will remain zero
  

Pref. Dividends/Avge Pref. Stock

• 
  Apple does not give out any preferred dividends
  

Ending Operating Cash/Sales

• 
  Typically firms need 3% of sales. Apple seems to have historically maintained this ratio in the range of 59%-81% although the trend seems to be decreasing.
  
• 
  In view of the decreasing trend, we have taken this ratio as 30% in the terminal year.
  

Ending Receivables/Sales

• 
  The company has historically maintained low levels of Ending Receivables/Sales ratio. We expect that this ratio may slightly increase in the initial years as Apple moves towards the digital lifestyle products such as iPhone and sell through new channels such as Cingular. Later this ratio may reduce. Apple has relatively low receivables compared to its competitors and we expect that its policy on receivables might not shift drastically
  

Ending Inventories/COGS:

• 
  This ratio has historically been in the range of 0.3 to 1.7 and the trend has been increasing ratio. We anticipate that as Apple gets into consumer lifestyle products and as products become obsolete, it will begin to accumulate inventories.
  

.

Ending Other Current Assets/Sales

• 
  This ratio has been fluctuating a bit for last couple of years and there is no clear trend. The 10k also does not state anything extraordinary about this line. So left the ratios as is.
  

Ending Accounts Payable/COGS

• 
  Apple will have significant power over its suppliers. So this ratio may increase in the initial years and then converge towards industry standard as rivals tend to copy similar products and supplier power may increase..
  

Ending Other Current Liabs/Sales

• 
  10k doesn’t talk much about this. Need to discus how this ratio will be affected
  

Ending Net PP&E/Sales:

• 
  From 10k page 59, “Expansion of the Retail segment has required and will continue to require a substantial investment in fixed assets and related infrastructure, operating lease commitments, personnel, and other operating expenses. Capital expenditures associated with the Retail segment were $200 million in 2006, bringing the total capital expenditures since inception of the Retail segment to approximately $729 million. As of September 30, 2006, the Retail segment had approximately 5,787 employees and had outstanding operating lease commitments associated with retail store space and related facilities of approximately $887 million. The Company would incur substantial costs if it were to close its retail stores. Such costs could adversely affect the Company’s results of operations and financial condition”.
  
• 
  Increased pp&e initially and then flatten out since in the next few years there will be expansion into retail segment.
  

Ending Intangibles/Sales

• 
  The trend has been increasing in the past yrs due to increased spending in R&D and Apple trying to come up with innovative products for consumer digital lifestyle involves generating patents and thereby increases the intangibles.
  

Ending Other Assets/Sales

• 
  Increased this ratio initially since pre-opening expenses for retail stores need to be accounted for.
  

Deferred Taxes/Sales

• 
  Since asset base will grow in next few yrs, the ratio will increase and then reduce
  

Calculating cost of equity:

Beta

Valueline: 1.05

Yahoo: 2.4

Ameritrade: 1.4

Median: 1.4

Cost of equity, based on CAPM, is defined as:

Cost of Equity = Risk-Free Rate + (Beta x Equity Premium)

where:

Risk-free Rate = 30-yr Treasury Bill rate^clv = 5.44%

Beta = 1.4

Equity Premium = Market Premium obtained from the Ibbotson’s data^clvi = 7.17%

Therefore, Cost of Equity = 5.44% + 1.4*7.17% = 15.48%

Scenario II: Without the strategic move

No iPhone
Sales growth: Sales growth will continue to decline as phones and MP3 players continue to be integrated. Also, players like OmniPhone are coming up with music services aimed at cell phone users^clvii. So iPod sales will continue to decline.
COGS/Sales ratio has been kept constant. All other ratios have been kept constant except.Net PP&Sales and Ending other assets/sales since Apple will continue to expand its retail outlets.

1 Ericsson Annual Report 2005, Page 17, Accessed on Feb 11^th 2007

2 Ericsson Annual Report 2005, Page 08, Accessed on Feb 11^th 2007

iVII. BIBLIOGRAPHY

^ Media Companies must make content available for Apple iPhone, McGuire,M, Baker, V,L; Gartner Research, 15^th Jan 2007

ii http://0-global.factiva.com.sculib.scu.edu/ha/default.aspx - Link not working

iii Perton, M, (2004, December 14). Worldwide cellphone usage doubles , engadget, Retrieved from http://www.engadget.com/2004/12/14/worldwide-cellphone-usage-doubles/, on January 26^th 2007

iv Guide to the wireless industry, Plunkett Research, Ltd, Jan 22^nd 2007

v Mobile Phones and Network Providers – UK – April 2006, Mintel Market Research Report, Retrived Jan 30^th 2007 from Santa clara University, Mintel database.

vi Guide to the wireless industry, Plunkett Research, Ltd, Jan 22^nd 2007

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viii Leon, K, & Kawaguchi, K, Standard & Poor’s Industry Surveys, Telecommunications: Wireless, Retrieved on Jan 26^th 2007

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xv Poulsen, K, (2005, January 11), Hacker penetrates T-Mobile systems, Security Focus, Retrieved on January 27^th 2007 from http://www.securityfocus.com/news/10271

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xxiii Palm Inc, 10k for Fiscal Year ending 06/02/06: http://investor.palm.com/secfiling.cfm?filingID=1193125-06-155911

xxiv Palm Inc, 10k for Fiscal Year ending 06/02/06: http://investor.palm.com/secfiling.cfm?filingID=1193125-06-155911

xxv RIM Annual Information Form - Fiscal 2006 http://rim.com/investors/pdf/AIF_Fiscal_2006.pdf

xxvi RIM Annual Information Form - Fiscal 2006 http://rim.com/investors/pdf/AIF_Fiscal_2006.pdf

xxvii Samsung Electronics Annual Report 2005, Page 61, Accessed on Feb 10^th 2007

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xxix Samsung Electronics Annual Report 2005, Page 31, Accessed on Feb 10^th 2007

xxx http://www.samsung.com/AboutSAMSUNG/ELECTRONICSGLOBAL/InvestorRelations/CorporateGovernance/CEOMessage/index.htm, CEO Message, Accessed on Feb 10^th 2007

xxxi Samsung Electronics Annual Report 2005, Page 47, Accessed on Feb 10^th 2007

xxxii Investment in R&D, Accessed on Feb 10^th 2007 from http://www.samsung.com/AboutSAMSUNG/ELECTRONICSGLOBAL/CompanyProfile/InvestmentinRD/index.htm,

^ (2007, January 12). Public Disclosure. Subject: Share buyback.

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xxxiv LGE Global Network website accessed Mar. 8, 2007 from http://www.lge.com/about/design/design_global.jsp

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xxxvii LG Design Philosophy website accessed on Mar. 8, 2007 from http://www.lge.com/about/design/design_philosophy.jsp

xxxviii LG Press Release: Mobile Innovation Meets Avant-Garde Design, Accessed on Feb. 11, 2007 from http://www.lge.com/about/press_release/detail/PRO|NEWS%5EPRE|MENU_20328_PRE|MENU.jhtml,

xxxix Richards, J, (2007, February 8). LG takes a bite out of Apple’s iPhone market , TIMESONLINE, Retrieved on Feb. 11, 2007 from http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article1350277.ece,

xl LG Press Release: Mobile Innovation Meets Avant-Garde Design, Accessed on Feb. 11, 2007, http://www.lge.com/about/press_release/detail/PRO|NEWS%5EPRE|MENU_20328_PRE|MENU.jhtml,

xli LG Design Philosophy website accessed on Mar. 8, 2007 from http://www.lge.com/about/design/design_philosophy.jsp

xlii Ericsson Annual Report 2005, Page 17, Accessed on Feb 11^th 2007

xliii Ericsson Annual Report 2005, Page 17, Accessed on Feb 11^th 2007

xliv http://www.ericsson.com/ericsson/investors/financial_reports/index.shtml, Interim Reports:Q4 2006, CEO Slides, Slide 22, Accessed on Feb 11^th 2007

xlv http://www.sonyericsson.com/spg.jsp?cc=global&lc=en&ver=4001&template=pc3_1_1&zone=pc&lm=pc3&prid=6351, Q3 FY 06 highlights, Accessed on Feb 11th 2007

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lvi VASCELLARO, J.E, (2007, Feb 12 ) Research In Motion RevampscBlackBerry for Businesses, The Wall Street Journal Online, Retrived on February 12^th 2007 from http://online.wsj.com/article/SB117125124957805498-search.html?KEYWORDS=RIMM&COLLECTION=wsjie/6month

lvii VASCELLARO, J.E, (2007, Feb 12 ) Research In Motion RevampscBlackBerry for Businesses, The Wall Street Journal Online, Retrived on February 12^th 2007 from http://online.wsj.com/article/SB117125124957805498-search.html?KEYWORDS=RIMM&COLLECTION=wsjie/6month

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http://online.wsj.com/article/SB117305781931426531-search.html?KEYWORDS=palm&COLLECTION=wsjie/6month,; Cheng R, (2007, March 9⁾ Palm Hires Former Apple Engineer, The Wall Street Journal Online, http://online.wsj.com/article/SB117345129683432186-search.html?KEYWORDS=palm&COLLECTION=wsjie/6month

lixYoffie, D, B; Slind, M; (2006), Apple Computer, 2006; Harvard Business School, 9-706-496 , “According to Cost structure of iTunes, out of 99 cents a song, 65 cents goes to distributors and 22 cents goes towards credit card processing”,

lx http://online.wsj.com/article/SB117211001262715655-search.html?KEYWORDS=cisco&COLLECTION=wsjie/6month, Wingfield, Nick; 22^nd Feb 2007

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