Apple 1996 Annual Report Download - page 23

The Company must order components for its products and build inventory well in advance of product shipments. Because the Company's
markets are volatile and subject to rapid technology and price changes, there is a risk that the Company will forecast incorrectly and produce
excess or insufficient inventories of particular products. The Company's operating results and financial condition have been 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.
Certain of the Company's products are manufactured in whole or in part by third-party manufacturers, either pursuant to design specifications
of the Company or otherwise. As a result of the Company's restructuring actions, which include the sale of the Company's Fountain, Colorado,
manufacturing facility to SCI Systems, Inc. ("SCI") and a related manufacturing outsourcing agreement with SCI, the proportion of the
Company's products produced and distributed under outsourcing arrangements will increase. While outsourcing arrangements may lower the
fixed cost of operations, they will also reduce the direct control the Company has over production. 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. Furthermore, any efforts by the Company to manage its inventory under outsourcing arrangements could subject the Company to
liquidated damages or cancelation of the arrangement.
Moreover, although arrangements with such manufacturers may contain provisions for warranty expense reimbursement, the Company remains
at least initially responsible to the ultimate consumer for warranty service. Accordingly, in the event of product defects or warranty liability, the
Company may remain primarily liable. 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.
The Company's ability to satisfy demand for its products may be limited by the availability of key components. The Company has experienced
some limitations in supply of certain microprocessors in the first quarter of 1996. The Company believes that the availability from suppliers to
the personal computer industry of microprocessors and ASICs presents the most significant potential for constraining the Company's ability to
produce products. Specific microprocessors manufactured by IBM and Motorola, Inc. are currently available only from single sources, while
some advanced microprocessors are currently in the early stages of ramp-up for production and thus have limited availability. The Company
and other producers in the personal computer industry also compete for other semiconductor products with other industries that have
experienced increased demand for such products, due to either increased consumer demand or increased use of semiconductors in their
products (such as the cellular phone and automotive industries). Finally, the Company uses some components that are not common to the rest
of the personal computer industry (including certain microprocessors and ASICs). Continued availability of these components may be affected
if producers were to decide to concentrate on the production of common components instead of components customized to meet the Company's
requirements. Such product supply constraints and corresponding increased costs could decrease the Company's net sales and adversely affect
the Company's operating results and financial condition.
Marketing and Distribution
A number of uncertainties may affect the marketing and distribution of the Company's products. Currently, the Company's primary means of
distribution is through third-party computer resellers. Such resellers include consumer channels such as mass-merchandise stores, consumer
electronics outlets, and computer superstores. The Company's business and financial results could be adversely affected if the financial
condition of these resellers weakened or if resellers within consumer channels were to decide not to continue to distribute the Company's
products.
Uncertainty over demand for the Company's products may cause resellers to reduce their ordering and marketing of the Company's products.
Under the Company's arrangements with its resellers, resellers have the option to reduce or eliminate unfilled orders previously placed, in most
instances without financial penalty. Resellers also have the option to return products to the Company without penalty within certain limits,
beyond which they may be assessed fees. The Company has recently experienced a reduction in ordering from historical levels by resellers due
to uncertainty concerning the Company's condition and prospects.
Other Factors
The majority of the Company's research and development activities, its corporate headquarters, and other critical business operations, including
certain major vendors, are located near major seismic faults. The Company's operating results and financial condition could be materially
adversely affected in the event of a major earthquake.
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