Apple 2004 Annual Report Download - page 57

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The Company has higher research and development and selling, general and administrative costs, as a percentage of revenue, than many of its
competitors.
The Company's ability to compete successfully and maintain attractive gross margins and revenue growth is heavily dependent upon its ability to
ensure a continuing and timely flow of innovative and competitive products and technologies to the marketplace. As a result, the Company
incurs higher research and development costs as a percentage of revenue than its competitors who sell personal computers based on other
operating systems. Many of these competitors seek to compete aggressively on price and maintain very low cost structures. Further, as a result of
the expansion of the Company's Retail segment and costs associated with marketing the Company's brand including its unique operating system,
the Company incurs higher selling costs as a percentage of revenue than many of its competitors. If the Company is unable to continue to
develop and sell innovative new products with attractive gross margins, its results of operations may be materially adversely affected by its
operating cost structure.
The Company is exposed to credit risk on its accounts receivables. This risk is heightened during periods when economic conditions worsen.
The Company distributes its products through third-party computer resellers and retailers and directly to certain educational institutions and
commercial customers. A substantial majority of the Company's outstanding trade receivables are not covered by collateral or credit insurance.
The Company also has unsecured non-
trade receivables from certain of its manufacturing vendors resulting from the sale by the Company of raw
material components to these manufacturing vendors who manufacture sub-assemblies or assemble final products for the Company. While the
Company has procedures in place to monitor and limit exposure to credit risk on its trade and non-trade receivables, there can be no assurance
that such procedures will be effective in limiting its credit risk and avoiding losses. Additionally, if the global economy and regional economies
fail to improve or continue to deteriorate, it becomes more likely that the Company will incur a material loss or losses as a result of the
weakening financial condition of one or more of its customers or manufacturing vendors.
The Company's success depends largely on its ability to attract and retain key personnel.
Much of the future success of the Company depends on the continued service and availability of skilled personnel, including its Chief Executive
Officer, members of its executive team, and those in technical, marketing and staff positions. Experienced personnel in the information
technology industry are in high demand and competition for their talents is intense, especially in the Silicon Valley, where the majority of the
Company's key employees are located. The Company has relied on its ability to grant stock options as one mechanism for recruiting and
retaining this highly skilled talent. Potential accounting regulations requiring the expensing of stock options may impair the Company's future
ability to provide these incentives without incurring significant compensation costs. There can be no assurance that the Company will continue to
successfully attract and retain key personnel.
The Company is subject to risks associated with the availability and cost of insurance.
The Company has observed rapidly changing conditions in the insurance markets relating to nearly all areas of traditional commercial insurance.
Such conditions have and may continue to result in higher premium costs, higher policy deductibles, lower coverage limits and may also yield
possible policy form exclusions. For some risks, because of cost and/or availability, the Company does not have insurance coverage. Because the
Company retains some portion of its insurable risks, and in some cases self insures completely, unforeseen or catastrophic losses in excess of
insured limits may have a material adverse effect on the Company's results of operations and financial position.
Failure of information technology systems and breaches in the security of data upon which the Company relies could adversely affect the
Company's future operating results.
Information technology system failures and breaches of data security could disrupt the Company's ability to function in the normal course of
business by potentially causing delays or cancellation of customer
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