Apple 1996 Annual Report Download - page 22

Global Market Risks
A large portion of the Company's revenue is derived from its international operations. As a result, the Company's operations and financial
results could be significantly affected by international factors, such as changes in foreign currency exchange rates or weak economic conditions
in the foreign markets in which the Company distributes its products. When the U.S. dollar strengthens against other currencies, the U.S. dollar
value of non-U.S. dollar-based sales decreases. When the U.S. dollar weakens, the U.S. dollar value of non-U.S. dollar-based sales increases.
Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs increases when the U.S. dollar weakens and decreases when the U.S.
dollar strengthens. Overall, the Company is a net receiver of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar
and is adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular
a strengthening of the U.S. dollar, may negatively affect the Company's consolidated sales and gross margins (as expressed in U.S. dollars).
To mitigate the short-term impact of fluctuating currency exchange rates on the Company's non-U.S. dollar-based sales, product procurement,
and operating expenses, the Company regularly hedges its non-U.S. dollar- based exposures. Specifically, the Company enters into foreign
exchange forward and option contracts to hedge firmly committed transactions. Currently, hedges of firmly committed transactions do not
extend beyond one year. The Company also purchases foreign exchange option contracts to hedge certain other probable but not firmly
committed transactions. Hedges of probable but not firmly committed transactions currently do not extend beyond one year. To reduce the
costs associated with these ongoing foreign exchange hedging programs, the Company also regularly sells foreign exchange option contracts
and enters into certain other foreign exchange transactions. All foreign exchange forward and option contracts not accounted for as hedges,
including all transactions intended to reduce the costs associated with the Company's foreign exchange hedging programs, are carried at fair
value and are adjusted on each balance sheet date for changes in exchange rates.
While the Company is exposed with respect to fluctuations in the interest rates of many of the world's leading industrialized countries, the
Company's interest income and expense is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in
U.S. interest rates affect the interest earned on the Company's cash, cash equivalents, and short-term investments as well as interest paid on its
notes payable to banks and long-term debt. To mitigate the impact of fluctuations in U.S. interest rates, the Company has entered into interest
rate swap, collar, and floor transactions. Certain of these transactions are intended to better match the Company's floating-rate interest income
on its cash, cash equivalents, and short-term investments with the fixed-rate interest expense on its long-term debt. The Company also enters
into these transactions in order to diversify a portion of the Company's exposure away from fluctuations in short-term U.S. interest rates. These
instruments may extend the Company's cash investment horizon up to a maximum duration of three years.
To ensure the adequacy and effectiveness of the Company's foreign exchange and interest rate hedge positions, as well as to monitor the risks
and opportunities of the nonhedge portfolios, the Company continually monitors its foreign exchange forward and option positions, and its
interest rate swap, option and floor positions both on a stand-alone basis and in conjunction with its underlying foreign currency- and interest
rate-related exposures, respectively, from both an accounting and an economic perspective. However, given the effective horizons of the
Company's risk management activities, there can be no assurance that the aforementioned programs will offset more than a portion of the
adverse financial impact resulting from unfavorable movements in either foreign exchange or interest rates. In addition, the timing of the
accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of
gains and losses related to the underlying economic exposures and, therefore, may adversely affect the Company's operating results and
financial position. The Company generally does not engage in leveraged hedging.
The Company's current financial condition may have an impact on the costs of its hedging transactions, as well as the willingness of its
financial counter-parties to enter into hedging transactions with the Company.
Inventory and Supply
In line with the Company's efforts to redesign its business model, the Company is taking steps to streamline its product portfolios in its key
usage areas in education, business, and the home. This planned simplification of product lines has resulted in inventory reserves. Cancelation
fees related to custom component inventory purchased for anticipated product introductions that have been canceled have also been paid or
accrued. The Company has also separately provided for the estimated cost to correct certain quality problems in certain entry-level, Performa,
PowerBook, and peripheral products. Although the Company believes its inventory and related reserves are adequate, no assurance can be
given that the Company will not incur additional inventory and related charges.
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