Apple 1997 Annual Report Download - page 26

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.
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 part of its restructuring actions, the Company sold its Fountain, Colorado, manufacturing facility to SCI and
entered into a related manufacturing outsourcing agreement with SCI; sold its Singapore printed circuit board manufacturing assets to NatSteel
Electronics Pte., Ltd., which is expected to supply main logic boards to the Company under a manufacturing outsourcing agreement; entered
into an agreement with Ryder Integrated Logistics, Inc. to outsource the Company's domestic operations transportation and logistics
management; and has entered into other similar agreements to outsource the Company's European operations transportation and logistics
management. As a result of the foregoing actions, the proportion of the Company's products produced and distributed under outsourcing
arrangements will continue to increase. While outsourcing arrangements may lower the fixed cost of operations, they will also reduce the direct
control the Company has over production and distribution. 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 cancellation 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 consolidated operating results and
financial condition.
Although certain components essential to the Company's business are generally available from multiple sources, other key components
(including microprocessors and application specific integrated circuits ("ASICs")) are currently obtained by the Company from single sources.
If the supply of a key single-sourced component were to be delayed or curtailed, the Company's business and financial performance could be
adversely affected, depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient
quantities from an alternate source. 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 manufacture products. 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 consolidated operating results and financial condition.
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 microprocessor for the Company's Macintosh computers, to supply to Company in adequate numbers
microprocessors that produce superior price/performance results compared with those supplied to the Company's competitors by Intel
Corporation, and other developers and producers of the microprocessors used by most personal computers using the Windows operating
systems. The desire of IBM and Motorola to continue producing these microprocessors may be influenced by Microsoft's decision not to adapt
its Windows NT operating
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