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0000320193
20061229
10-Q
1,250
The Company must successfully manage frequent product introductions and transitions to remain competitive and effectively stimulate customer demand.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,251
Due to the highly volatile and competitive nature of the personal computer and consumer electronics industries, which are characterized by dynamic customer demand patterns and rapid technological advances, the Company must continually introduce new products and technologies, enhance existing products to remain competit...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,252
The success of new product introductions is dependent on a number of factors, including market acceptance; the Company’s ability to manage the risks associated with product transitions, including the transition to Intel-based Macintosh computers, and production ramp issues; the availability of application software for ...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,253
Accordingly, the Company cannot determine in advance the ultimate effect new products will have on its sales or results of operations.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,254
In June 2005, the Company announced its plan to begin using Intel microprocessors in its computers.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,255
During 2006, the Company introduced new Intel-based models of the MacBook Pro, MacBook, Mac Pro, iMac, and Mac mini computers.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,256
The Company’s transition to Intel microprocessors for Macintosh systems was completed in August 2006, and its transition for Xserve was completed in November 2006.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,257
This transition has been and will continue to be subject to numerous risks and uncertainties including the timely innovation and delivery of related hardware and software products to support Intel microprocessors, market acceptance of Intel-based Macintosh computers, and the development and availability on acceptable t...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,258
In addition, the Company is dependent on third-party software developers such as Microsoft and Adobe to timely develop current and future applications that run on Intel-based Macintosh computers.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,259
Universal versions of Microsoft Office and Adobe’s Creative Suite applications are not currently available.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,260
Additionally, there can be no assurance that the Company will be able to maintain its historical gross margin percentages on its products, including Intel-based Macintosh computers, which may adversely impact the Company’s results of operations.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,261
The Company’s products from time to time experience quality problems that can result in decreased net sales and operating profits.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,262
The Company sells highly complex hardware and software products that can contain defects in design and manufacture.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,263
Sophisticated operating system software and applications, such as those sold by the Company, often contain “bugs” that can unexpectedly interfere with the operation of the software.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,264
Defects may also occur in components and products the Company purchases from third-parties.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,265
There can be no assurance that the Company will be able to detect and fix all defects in the hardware and software it sells.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,266
Failure to do so could result in lost revenue, loss of reputation, and significant warranty and other expense to remedy.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,267
Because orders for components, and in some cases commitments to purchase components, must be placed in advance of customer orders, the Company faces substantial inventory risk.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,268
The Company records a write-down for inventories of components and products that have become obsolete or are in excess of anticipated demand or net realizable value and accrues necessary reserves for cancellation fees for orders of products and components that have been cancelled.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,269
Although the Company believes its inventory and related provisions are currently adequate, given the rapid and unpredictable pace of product obsolescence in the computer and consumer electronics industries and the transition to Intel-based Macintosh computers, no assurance can be given that the Company will not incur a...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,270
In addition, such charges have had, and may have, a material effect on the Company’s financial position and results of operations.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,271
The Company must order components for its products and build inventory in advance of product shipments.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,272
Because the Company’s markets are volatile and subject to rapid technology and price changes, and because of the transition to Intel-based Macintosh computers, there is a risk the Company will forecast incorrectly and produce or order from third parties excess or insufficient inventories of particular products.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,273
Consistent with industry practice, components are normally acquired through a combination of purchase orders, supplier contracts, and open orders based on projected demand information.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,274
Such purchase commitments typically cover the Company’s forecasted component and manufacturing requirements for periods ranging from 30 to 150 days.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,275
The Company’s operating results and financial condition have been in the past and may in the future be materially adversely affected by the Company’s ability to manage its inventory levels and respond to short-term shifts in customer demand patterns.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,276
The Company is dependent on manufacturing and logistics services provided by third parties, many of whom are located outside of the U.S.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,277
Most of the Company’s products are manufactured in whole or in part by third-party manufacturers.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,278
In addition, the Company has outsourced much of its transportation and logistics management.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,279
While outsourcing arrangements may lower the cost of operations, they also reduce the Company’s direct control over production and distribution.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,280
It is uncertain what effect such diminished control will have on the quality or quantity of the products manufactured or services rendered, or the flexibility of the Company to respond to changing market conditions.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,281
In addition, the Company is reliant on third-party manufacturers to adhere to the Company’s supplier code of conduct.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,282
Moreover, although arrangements with such manufacturers may contain provisions for warranty expense reimbursement, the Company may remain at least initially responsible to the consumer for warranty service in the event of product defects.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,283
Any unanticipated product defect or warranty liability, whether pursuant to arrangements with contract manufacturers or otherwise, could adversely affect the Company’s future operating results and financial condition.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,284
Final assembly of products sold by the Company is currently performed in the Company’s manufacturing facility in Cork, Ireland, and by external vendors in Fremont, California; Fullerton, California; Taiwan; the Republic of Korea; the People’s Republic of China; and the Czech Republic.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,285
Currently, manufacturing of many of the components used in the Company’s products is performed by third-party vendors in Taiwan, China, Japan, Korea, and Singapore.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,286
Final assembly of substantially all of the Company’s portable products, including MacBook Pros, MacBooks, and iPods, is performed by third-party vendors in China.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,287
If for any reason manufacturing or logistics in any of these locations is disrupted by regional economic, business, labor, environmental, public health, or political issues, or due to information technology system failures or military actions, the Company’s results of operations and financial condition could be adverse...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,288
The Company’s future operating performance is dependent on the performance of distributors and other resellers of the Company’s products.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,289
The Company distributes its products through wholesalers, resellers, national and regional retailers, and cataloguers, many of whom distribute products from competing manufacturers.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,290
In addition, the Company sells many of its products and resells certain third-party products in most of its major markets directly to end-users, certain education customers, and certain resellers through its online stores around the world and its retail stores.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,291
Many of the Company’s resellers operate on narrow product margins and have been negatively impacted in the past by weak economic conditions.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,292
Considerable trade receivables that are not covered by collateral or credit insurance are outstanding with the Company’s distribution and retail channel partners.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,293
The Company’s business and financial results could be adversely affected if the financial condition of these resellers weakens, if resellers within consumer channels were to cease distribution of the Company’s products, or if uncertainty regarding demand for the Company’s products caused resellers to reduce their order...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,294
The Company has invested and will continue to invest in various programs to enhance reseller sales, including staffing selected resellers’ stores with Company employees and contractors.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,295
These programs could require a substantial investment from the Company, while providing no assurance of return or incremental revenue to offset this investment.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,296
Over the past several years, an increasing proportion of the Company’s net sales have been made by the Company directly to end-users through its online stores around the world and through its retail stores in the U.S., Canada, Japan, and the U.K.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,297
Some of the Company’s resellers have perceived this expansion of the Company’s direct sales as conflicting with their own businesses and economic interests as distributors and resellers of the Company’s products.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,298
Perception of such a conflict could discourage the Company’s resellers from investing additional resources in the distribution and sale of the Company’s products or lead them to limit or cease distribution of the Company’s products.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,299
The Company’s business and financial results could be adversely affected if expansion of its direct sales to end-users causes some or all of its resellers to cease or limit distribution of the Company’s products.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,300
The Company relies on third-party digital content, which may not be available to the Company on commercially reasonable terms or at all.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,301
The Company contracts with third parties to offer their digital content to customers through the Company’s iTunes Store.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,302
The Company pays substantial fees to obtain the rights to offer to its customers this third-party digital content.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,303
The Company’s licensing arrangements with these third-party content providers are short-term in nature and do not guarantee the future renewal of these arrangements at commercially reasonable terms, if at all.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,304
Certain parties in the music industry have consolidated and formed alliances, which could limit the availability and increase the fees required to offer digital content to customers through the iTunes Store.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,305
Some third-party content providers currently or may in the future offer music products and services that compete with the Company’s music products and services, and could take action to make it more difficult or impossible for the Company to license their digital content in the future.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,306
Further, other distributors of third-party content or third-party content owners may seek to limit the Company’s access to or increase the total cost of such content.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,307
If the Company is unable to continue to offer a wide variety of digital content at reasonable prices with acceptable usage rules, or continue to expand its geographic reach outside the U.S., then sales and gross margins of the Company’s iTunes Store, as well as related hardware and peripherals, including iPods, may be ...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,308
Third-party content providers and artists require that the Company provide certain digital rights management (“DRM”) solutions and other security mechanisms.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,309
If the requirements from content providers or artists change, then the Company may be required to further develop or license technology to address such new rights and requirements.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,310
In addition, certain countries have passed legislation or may propose legislation that would force the Company to license its DRM solutions so that content would be interoperable with competitor devices, which could lessen the protection of content subjecting it to piracy and could affect arrangements with the Company’...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,311
There is no assurance the Company will be able to develop or license such solutions at a reasonable cost and in a timely manner, if at all, which could have a materially adverse effect on the Company’s operating results and financial position.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,312
The Company’s future performance is dependent upon support from third-party software developers.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,313
If third-party software applications cease to be developed or available for the Company’s hardware products, then customers may choose not to buy the Company’s products.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,314
The Company believes decisions by customers to purchase the Company’s personal computers, as opposed to Windows-based systems, are often based on the availability of third-party software applications such as Microsoft Office.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,315
The Company also believes the availability of third-party application software for the Company’s hardware products depends in part on third-party developers’ perception and analysis of the relative benefits of developing, maintaining, and upgrading such software for the Company’s products versus software for the larger...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,316
This analysis may be based on factors such as the perceived strength of the Company and its products, the anticipated potential revenue that may be generated, continued acceptance by customers of Mac OS X, and the costs of developing such software products.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,317
To the extent the minority market share held by the Company in the personal computer market has caused software developers to question the Company’s prospects in the personal computer market, developers could be less inclined to develop new application software or upgrade existing software for the Company’s products an...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,318
The Company’s recent announcement that it plans to add a feature to the next version of Mac OS X that will enable Intel-based Macintosh systems to run Windows XP may deter developers from creating software applications for Mac OS X if such applications are available for the Windows platform.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,319
Moreover, there can be no assurance software developers will continue to develop software for Mac OS X on a timely basis or at all.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,320
In June 2005, the Company announced its plan to begin using Intel microprocessors in its computers.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,321
During 2006, the Company introduced new Intel-based models of the MacBook Pro, MacBook, Mac Pro, iMac, and Mac mini computers.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,322
The Company’s transition to Intel microprocessors for Macintosh systems was completed in August 2006, and its transition for Xserve was completed in November 2006.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,323
The Company depends on third-party software developers to timely develop current and future applications that run on Intel microprocessors.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,324
Universal versions of Microsoft Office and Adobe’s Creative Suite applications are not currently available.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,325
The lack of applications that run on Intel-based Macintosh systems, including Microsoft Office and Adobe Creative Suite, could have a materially adverse effect on the Company’s operating results and financial position.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,326
In addition, past and future development by the Company of its own software applications and solutions may negatively impact the decision of software developers, such as Microsoft and Adobe, to develop, maintain, and upgrade similar or competitive software for the Company’s products.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,327
The Company currently markets and sells a variety of software applications for use by professionals, consumers, and education customers that could influence the decisions of third-party software developers to develop or upgrade Macintosh-compatible software products.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,328
Software applications currently marketed by the Company include software for professional film and video editing, professional compositing and visual effects for large format film and video productions, professional music production and music post production, professional and consumer DVD encoding and authoring, profes...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,329
Discontinuance of third-party software products for the Macintosh platform could have an adverse effect on the Company’s net sales and results of operations.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,330
The Company’s business relies on access to patents and intellectual property obtained from third parties, and the Company’s future results could be adversely affected if it is alleged or found to have infringed on the intellectual property rights of others.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,331
Many of the Company’s products are designed to include intellectual property obtained from third parties.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,332
While it may be necessary in the future to seek or renew licenses relating to various aspects of its products and business methods, the Company believes that based upon past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,333
However, there can be no assurance that the necessary licenses would be available or available on acceptable terms.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,334
Because of technological changes in the computer and consumer electronics industries, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible certain components of the Company’s products and business methods may unknowingly infringe existing patents of others.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,335
The Company has from time to time been notified that it may be infringing certain patents or other intellectual property rights of others.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,336
Responding to such claims, regardless of their merit, can be time-consuming, result in significant expenses, and cause the diversion of management and technical personnel.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,337
Several pending claims are in various stages of evaluation.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,338
The Company may consider the desirability of entering into licensing agreements in certain of these cases.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,339
However, no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,340
In the event there is a temporary or permanent injunction entered prohibiting the Company from marketing or selling certain of its products or a successful claim of infringement against the Company requiring it to pay royalties to a third-party, the Company’s future operating results and financial condition could be ad...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,341
Information regarding certain claims and litigation involving the Company related to alleged patent infringement and other matters is set forth in Part II, Item 1 of this Form 10-Q and Part I, Item 3 of the 2006 Form 10-K.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,342
In the opinion of management, the Company does not have a potential liability for damages or royalties from any current legal proceedings or claims related to the infringement of patent or other intellectual property rights of others that would individually or in the aggregate have a material adverse effect on its resu...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,343
However, the results of such legal proceedings cannot be predicted with certainty.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,344
Should the Company fail to prevail in any of the matters related to infringement of patent or other intellectual property rights of others described in Part II, Item 1 of this Form 10-Q or should several of these matters be resolved against the Company in the same reporting period, the operating results of a particular...
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,345
The Company’s retail initiative has required and will continue to require a substantial investment and commitment of resources and is subject to numerous risks and uncertainties.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,346
Through July 31, 2006, the Company had opened 156 retail stores.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,347
The Company’s retail initiative has required substantial investment in equipment and leasehold improvements, information systems, inventory, and personnel.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,348
The Company has also entered into substantial operating lease commitments for retail space with lease terms ranging from 5 to 20 years, the majority of which are for 10 years.
0001104659-06-084286/full-submission.txt
0000320193
20061229
10-Q
1,349
The Company could incur substantial costs should it choose to terminate these commitments or close individual stores.
0001104659-06-084286/full-submission.txt