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0000320193
20030513
10-Q
591
Continued availability of these components may be affected if producers were to decide to concentrate on the production of components other than those customized to meet the Company’s requirements.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
592
If the supply of a key component were to be delayed or constrained on a new or existing product, including rights to music titles sold on the iTunes Music Store, the Company’s results of operations and financial condition could be adversely affected.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
593
The Company’s ability to produce and market competitive products is also dependent on the ability and desire of IBM and Motorola, the sole suppliers of the PowerPC RISC-based microprocessor for the Company’s Macintosh computers, to provide the Company with a sufficient supply of microprocessors with price/performance f...
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
594
Further, despite its efforts to educate the marketplace to the contrary, the Company 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 ...
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
595
There have been instances in recent years where the inability of the Company’s suppliers to provide advanced PowerPC G4 and G3 microprocessors with higher clock speeds in sufficient quantity has had significant adverse effects on the Company’s results of operations.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
596
The inability in the future of the Company to obtain microprocessors in sufficient quantities with competitive price/performance features could have an adverse impact on the Company’s results of operations and financial condition.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
597
The Company is dependent on manufacturing and logistics services provided by third parties, many of whom are located outside of the United States.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
598
Many of the Company’s products are manufactured in whole or in part by third-party manufacturers.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
599
In addition, the Company has outsourced much of its transportation and logistics management.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
600
While outsourcing arrangements may lower the fixed cost of operations, they also reduce the Company’s direct control over production and distribution.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
601
It is uncertain what effect such diminished control will have on the quality or quantity of the products manufactured, or the flexibility of the Company to respond to changing market conditions.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
602
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 or in the event of product defects.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
603
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.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
604
Final assembly of products sold by the Company is conducted in the Company’s manufacturing facilities in Sacramento, California, and Cork, Ireland, and by external vendors in Fremont, California, Fullerton, California, Taiwan, Korea, the People’s Republic of China, and the Czech Republic.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
605
Currently, manufacture of many of the components used in the Company’s products and final assembly of all of the Company’s portable products including PowerBooks, iBooks, and the iPod is performed by third-party vendors in Taiwan.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
606
If for any reason manufacturing or logistics in any of these locations is disrupted by regional economic, business, environmental, medical, political, or military conditions or events, the Company’s results of operations and financial condition could be adversely affected.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
607
The Company’s products could experience quality problems that result in decreased net sales and operating profits.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
608
The Company sells highly complex hardware and software products that may contain defects in design and manufacture.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
609
Sophisticated operating system software and applications such as the Company sells often contains “bugs” that can unexpectedly interfere with the operation of the software.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
610
Defects may also occur in components and products the Company purchases from third parties that may be beyond its control.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
611
There can be no assurance that the Company will be able to detect and fix all defects in the hardware and software it sells.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
612
Failure to do so could result in lost revenues, loss of reputation, and significant expense to remedy.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
613
The Company’s retail initiative requires a substantial investment and commitment of resources and is subject to numerous risks and uncertainties.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
614
Since May of 2001, the Company has opened 55 retail stores in the United States and anticipates opening more stores during the remainder of calendar 2003.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
615
The Company’s retail initiative has required substantial investment in equipment and leasehold improvements, information systems, inventory, and personnel.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
616
The Company has also entered into substantial operating leases commitments for retail space with lease terms ranging from 5 to 12 years.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
617
The Company would incur substantial costs should it choose to terminate this initiative or close individual stores.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
618
Such costs could adversely affect the Company’s results of operations and financial condition.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
619
Additionally, a relatively high proportion of the Retail segment’s costs are fixed because of depreciation on store construction costs and lease expense.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
620
As a result, should the Retail segment experience a decline in sales for any reason, significant losses would result.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
621
Certain of the Company’s stores have been designed and built to serve as high profile venues that function as vehicles for general corporate marketing, corporate events, and brand awareness.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
622
Because of their unique design elements, locations and size, these stores require substantially more investment in equipment and leasehold improvements than the Company’s more typical retail stores.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
623
The Company has opened two such stores and has several others under development.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
624
Because of their location and size, these high profile stores also require the Company to enter into substantially larger operating lease commitments compared to those required for its more typical stores.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
625
Current leases on such locations have terms ranging from 5 to 10 years with total commitments per location over the lease terms ranging from $25 million to $50 million.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
626
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.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
627
Many of the general risks and uncertainties the Company faces could also have an adverse impact on its Retail segment.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
628
Also, many factors unique to retail operations present risks and uncertainties, some of which are beyond the Company’s control, that could adversely affect the Retail segment’s future results, cause its actual results to differ from those currently expected, and/or have an adverse effect on the Company’s consolidated r...
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
629
Potential risks and uncertainties unique to retail operations that could have an adverse impact on the Retail segment include, among other things, macro-economic factors that have a negative impact on general retail activity; inability to manage costs associated with store construction and operation; lack of consumer a...
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
630
Unit sales of the Company’s professionally oriented desktop systems have declined sharply over past two to three years negatively impacting net sales and gross margin.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
631
Unit sales of Power Macintosh systems fell 18% during 2002 as compared to 2001 and fell 35% in 2001 from 2000.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
632
Power Macintosh unit sales have fallen as a percentage of total Macintosh unit sales from 38% in 1999 to 25% in 2002 and 22% during the first six months of fiscal 2003.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
633
The Company believes that weak economic conditions over the past several years are having a pronounced negative impact on its professional and creative customers who are the primary users of such systems.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
634
The Company also believes that many of these customers continue to delay upgrades of their Power Macintosh systems due to the Company’s ongoing transition to Mac OS X and in anticipation of certain software vendors transitioning their professionally oriented Macintosh software applications to run natively in Mac OS X.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
635
Also, it is likely that many of the Company's current and potential customers, particularly professional and creative customers who are most likely to utilize the Company's Power Macintosh systems, believe that the relatively slower MHz rating or clock speed of the microprocessors it utilizes in its Macintosh systems c...
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
636
In addition to the negative impact on net sales, declining sales of Power Macintosh systems also have a negative effect on the Company’s overall gross margin because Power Macintosh systems generally have higher individual gross margins than the Company’s other Macintosh systems.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
637
Continued deterioration in Power Macintosh unit sales will adversely affect the Company’s future net sales and gross margin.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
638
If future unit sales of Power Macintosh systems fail to partially or fully recover, it will be difficult for the Company to improve its overall profitability.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
639
The Company faces increasing competition in the U.S. education market.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
640
Sales in the United States to both elementary and secondary schools, as well as for college and university customers, remains a core market for Apple.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
641
Net sales in these markets fell to 21% of the Company’s total net sales in 2002 from 26% in 2001.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
642
The drop in 2002 reflects declines in both net sales and Macintosh unit sales in these markets of 15% and 14%, respectively, in fiscal 2002 compared to 2001.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
643
Additionally, the Company experienced a 14% decline during the first six months of 2003 as compared to the same period in 2002.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
644
These developments are consistent with industry data showing the Company losing market share in the U.S. education market in each of the last two full fiscal years.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
645
Several competitors of the Company have either targeted or announced their intention to target the education market for personal computers.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
646
Although the Company has taken certain steps to strengthen its position in the education market, there can be no assurance that the Company will be able to increase its share of the education market or maintain its existing share of that market.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
647
Failure to increase or maintain market share in the education market may have an adverse impact on the Company’s operating results and financial condition.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
648
The Company’s future operating performance is dependent on the performance of distributors and other resellers of the Company’s products.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
649
The Company distributes its products through a variety of resellers including wholesalers, national and regional retailers and cataloguers, many of who distribute products from competing manufacturers.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
650
In addition, the Company also 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.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
651
The Company also sells its own products and certain third-party products through its retail stores in the United States.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
652
Many of the Company’s significant resellers operate on narrow product margins and have been negatively affected by current economic conditions.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
653
Considerable trade receivables that are not covered by collateral or credit insurance are outstanding with the Company’s distribution and retail channel partners.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
654
The Company’s business and financial results could be adversely affected if the financial condition of these resellers weakened, 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 orde...
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
655
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 United States.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
656
The Company’s resellers may perceive this expansion of the Company’s direct sales as conflicting with their own business and economic interests as distributors and resellers of the Company’s products.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
657
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.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
658
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.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
659
The Company’s business is subject to the risks of international operations.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
660
A large portion of the Company’s revenue is derived from its international operations.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
661
As a result, the Company’s operating results and financial condition could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign subsidiaries), and changes in the value of the U.S. dollar ver...
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
662
The Company’s primary exposure to movements in foreign currency exchange rates relate to non-dollar denominated sales in Europe, Japan, Australia, Canada, and certain parts of Asia and non-dollar denominated operating expenses incurred throughout the world.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
663
Weaknesses in foreign currencies, particularly the Japanese Yen and the Euro, can adversely impact consumer demand for the Company’s products and the U.S. dollar value of the Company’s foreign currency denominated sales.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
664
Conversely, strengthening in these and other foreign currencies can increase the cost to the Company of product components, negatively affecting the Company’s results of operations.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
665
Margins on sales of Apple products in foreign countries, and on sales of products that include components obtained from foreign suppliers, can be adversely affected by foreign currency exchange rate fluctuations and by international trade regulations, including tariffs and antidumping penalties.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
666
Further information related to the Company’s global market risks may be found in Part I, Item 3 of this Form 10-Q under the subheading “Foreign Currency Risk,” and also in the 2002 Form 10-K.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
667
The Company’s future performance is dependent upon support from third-party software developers.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
668
The Company believes that decisions by customers to purchase the Company’s personal computers, as opposed to Windows-based systems or other devices, are often based on the availability of third-party software for particular applications such as Microsoft Office.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
669
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...
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
670
This analysis is based on factors such as the perceived strength of the Company and its products, the anticipated potential revenue that may be generated, acceptance by customers of Mac OS X, and the costs of developing such software products.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
671
To the extent the Company’s financial losses in prior years and the minority market share held by the Company in the personal computer market, as well as the Company’s decision to end its Mac OS licensing program, have caused software developers to question the Company’s prospects in the personal computer market, devel...
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
672
Moreover, there can be no assurance software developers will continue to develop software for Mac OS X, the Company's new operating system, on a timely basis or at all.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
673
In addition, past and future development by the Company of its own software applications and solutions may negatively impact the decision of software developers to develop, maintain, and upgrade similar or competitive software for the Company’s products.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
674
The company currently markets and sells a variety of software applications for use by professionals, consumers and education customers that could influence the decision of third-party software developers to develop or upgrade Macintosh-compatible software products.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
675
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, consum...
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
676
The Company also markets an integrated productivity application that incorporates word processing, page layout, image manipulation, spreadsheets, databases, and presentations in a single application.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
677
In August 1997, the Company and Microsoft Corporation entered into patent cross license and technology agreements.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
678
In addition, for a period of five years through August 2002, and subject to certain limitations related to the number of Macintosh computers sold by the Company, Microsoft was required to make versions of its Microsoft Office and Internet Explorer products for the Mac OS.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
679
Although Microsoft has released Microsoft Office and Internet Explorer for Mac OS X, Microsoft is not obligated to produce future versions of its products subsequent to August 2002.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
680
While the Company believes its relationship with Microsoft has been and will continue to be beneficial to the Company and to its efforts to increase the installed base for the Mac OS, the Company does compete directly with Microsoft in a number of key areas.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
681
Accordingly, 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.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
682
Discontinuance of Microsoft Office and other Microsoft products for the Macintosh platform would have an adverse effect on the Company’s net sales and results of operations.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
683
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.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
684
Many of the Company’s products are designed to include intellectual property obtained from third parties.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
685
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.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
686
However, there can be no assurance that the necessary licenses would be available or available on acceptable terms.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
687
Because of technological changes in the computer industry, 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.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
688
The Company has from time to time been notified that it may be infringing certain patents or other intellectual property rights of others.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
689
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.
0001104659-03-009489/full-submission.txt
0000320193
20030513
10-Q
690
Several pending claims are in various stages of evaluation.
0001104659-03-009489/full-submission.txt