Apple 2004 Annual Report Download - page 55

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property rights of others. 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. Several pending claims are in various stages of evaluation. The Company may consider
the desirability of entering into licensing agreements in certain of these cases. However, no assurance can be given that such licenses can be
obtained on acceptable terms or that litigation will not occur. 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 adversely affected. Information regarding
certain claims and litigation involving the Company related to alleged patent infringement and other matters is set forth in Part I, Item 3 of this
Form 10-K. 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 results of operations, or financial condition. However, the results of such legal proceedings cannot
be predicted with certainty. 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 I, Item 3 of this Form 10-K or should several of these matters be resolved against the Company in the
same reporting period, the operating results of a particular reporting period could be materially adversely affected.
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.
Through September 2004, the Company has opened 86 retail stores. The Company's retail initiative has required substantial investment in
equipment and leasehold improvements, information systems, inventory, and personnel. The Company has also entered into substantial operating
lease commitments for retail space with lease terms ranging from 5 to 16 years, the majority of which are for 10 years. The Company could incur
substantial costs should it choose to terminate this initiative or close individual stores. Such costs could adversely affect the Company's results of
operations and financial condition. Additionally, a relatively high proportion of the Retail segment's costs are fixed because of depreciation on
store construction costs and lease expense. As a result, significant losses would result should the Retail segment experience a decline in sales for
any reason.
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. 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. The Company has opened seven such
stores through November 2004. 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. Current leases on such locations have terms ranging
from 10 to 16 years with total commitments per location over the lease terms ranging from $25 million to $50 million. 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.
Many of the general risks and uncertainties the Company faces could also have an adverse impact on its Retail segment. 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 results of operations. 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 acceptance of the Company's retail approach; failure to attract new users to
the Macintosh platform; inability to sell third-party hardware and software products at adequate margins; failure to manage relationships with
existing retail channel partners; lack of experience
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