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0000320193
20080201
10-Q
869
By contrast, many of the Company’s competitors seek to compete aggressively on price and maintain very low cost structures.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
870
If the Company is unable to continue to develop and sell innovative new products with attractive margins, its financial condition and operating results may be materially adversely affected.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
871
In the market for personal computers and peripherals, the Company faces a significant number of competitors, many of which have broader product lines and larger installed customer bases.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
872
There has also been a trend toward consolidation that has resulted in larger and potentially stronger competitors.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
873
Price competition has been particularly intense as competitors selling Windows-based personal computers have aggressively cut prices and lowered product margins.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
874
The Company also faces increased competition in certain of its key market segments, including consumer, education, professional and consumer digital video editing, and design and publishing.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
875
An increasing number of Internet devices that include software applications and are smaller and simpler than traditional personal computers compete for market share with the Company’s existing products.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
876
The Company is currently the only maker of hardware using the Mac OS.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
877
The Mac OS has a minority market share in the personal computer market, which is dominated by makers of computers using competing operating systems, most notably Windows.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
878
The Company’s financial condition and operating results substantially depend on its ability to continually develop improvements to the Mac platform to maintain perceived design and functional advantages.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
879
Use of unauthorized copies of the Mac OS on other companies’ hardware products may result in decreased demand for the Company’s hardware products, and materially adversely affect its financial condition and operating results.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
880
The Company is currently focused on opportunities related to digital content distribution, consumer electronic devices, including iPod and Apple TV, and mobile communication devices, including iPhone.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
881
The Company faces substantial competition from companies that have significant technical, marketing, distribution, and other resources, as well as established hardware, software, and digital content supplier relationships, and also competes with illegitimate ways to obtain digital content.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
882
The Company expects competition to intensify as competitors attempt to imitate the Company’s approach to providing these components seamlessly within their individual offerings or work collaboratively to offer integrated solutions.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
883
Some current and potential competitors have substantial resources and experience, and they may be able to provide such products and services at little or no profit or even at a loss.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
884
There can be no assurance the Company will be able to continue to provide products and services that effectively compete.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
885
To remain competitive and stimulate customer demand, the Company must successfully manage frequent product introductions and transitions.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
886
Due to the highly volatile and competitive nature of the personal computer, consumer electronics and mobile communication industries, the Company must continually introduce new products and technologies, enhance existing products, and effectively stimulate customer demand for new and upgraded products.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
887
The success of new product introductions depends on a number of factors, including timely and successful completion of development efforts, market acceptance, the Company’s ability to manage the risks associated with new products and production ramp issues, the availability of application software for new products, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and costs to meet anticipated demand, and the risk that new products may have quality or other defects in the early stages of introduction.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
888
Accordingly, the Company cannot determine in advance the ultimate effect new product introductions and transitions will have on its financial condition and operating results.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
889
The Company faces substantial inventory and other asset risk.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
890
The Company records a write-down for product and component inventories that have become obsolete or are in excess of anticipated demand or net realizable value and accrues necessary reserves for cancellation fees for orders of products and components that have been cancelled.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
891
The Company also reviews its long-lived assets for impairment whenever events or changed circumstances indicate the carrying amount of an asset may not be recoverable.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
892
If the Company determines that impairment exists, it records a write-down equal to the amount by which the carrying value of the assets exceeds its fair market value.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
893
Although the Company believes its inventory, asset, and related provisions are currently adequate, given the rapid and unpredictable pace of product obsolescence in the global personal computer, consumer electronics, and mobile communication industries, no assurance can be given that the Company will not incur additional inventory or asset related charges.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
894
Such charges have had, and may have, a material adverse effect on the Company’s financial condition and operating results.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
895
The Company must order components for its products and build inventory in advance of product announcements and shipments.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
896
Because the Company’s markets are volatile, competitive and subject to rapid technology and price changes, there is a risk the Company will forecast incorrectly and order or produce excess or insufficient inventories of components or products.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
897
Consistent with industry practice, components are normally acquired through a combination of purchase orders, supplier contracts, and open orders based on projected demand.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
898
Such purchase commitments typically cover forecasted component and manufacturing requirements for 30 to 150 days.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
899
The Company’s financial condition and operating results have been in 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.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
900
Future operating results depend upon the Company’s ability to obtain key components, including microprocessors and NAND flash memory, at favorable prices and in sufficient quantities.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
901
Because the Company currently obtains certain key components, including microprocessors, enclosures, certain liquid crystal displays (“LCDs”), certain optical drives, and application-specific integrated circuits (“ASICs”), from single or limited sources, the Company is subject to significant supply and pricing risks.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
902
Many of these and other key components that are available from multiple sources, including NAND flash memory, DRAM memory, and certain LCDs, are subject at times to industry-wide shortages and significant commodity pricing fluctuations.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
903
The Company has entered into certain agreements for the supply of critical components at favorable pricing, but there is no guarantee that the Company will be able to extend or renew these agreements on favorable terms upon expiration or otherwise obtain favorable pricing in the future.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
904
Therefore, the Company remains subject to significant risks of supply shortages and/or price increases that can have a material adverse effect on its financial condition and operating results.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
905
The Company expects to experience decreases in its gross margin percentage in fiscal year 2008, as compared to levels achieved during fiscal year 2007, due in part to current and expected future price increases for certain components.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
906
For additional information refer to Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the subheading “Gross Margin.” The Company’s new products often use custom components from only one source until the Company has evaluated whether there is a need for, and subsequently qualifies, additional suppliers.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
907
Where a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
908
The Company and other producers in the personal computer, consumer electronics and mobile communication industries also compete for various components with other industries that have experienced increased demand for their products.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
909
The Company uses some custom components that are not common to the rest of the personal computer, consumer electronics or mobile communication industries.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
910
Continued availability of these components at acceptable prices may be affected if producers decide to concentrate on the production of components other than those customized to meet the Company’s requirements.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
911
If the supply of a key component for a new or existing product were delayed or constrained, or if such components were available only at significantly higher prices, the Company’s financial condition and operating results could be materially adversely affected.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
912
The Company depends on component and product manufacturing and logistics services provided by third parties, many of whom are located outside of the U.S.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
913
Most of the Company’s components and products are manufactured in whole or in part by third-party manufacturers, most of which are located outside of the U.S. A significant concentration of this outsourced manufacturing is currently performed by only a few third-party manufacturers, often in single locations.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
914
The Company has also outsourced much of its transportation and logistics management.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
915
While these arrangements may lower operating costs, they also reduce the Company’s direct control over production and distribution.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
916
It is uncertain what effect such diminished control will have on the quality or quantity of products or services, or the Company’s flexibility to respond to changing conditions.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
917
In addition, the Company relies on third-party manufacturers to adhere to the Company’s supplier code of conduct.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
918
Although arrangements with such manufacturers may contain provisions for warranty expense reimbursement, the Company may remain responsible to the consumer for warranty service in the event of product defects.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
919
Any unanticipated product defect or warranty liability, whether pursuant to arrangements with contract manufacturers or otherwise, could have a material adverse effect on the Company’s reputation, financial condition and operating results.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
920
Final assembly of the Company’s products is currently performed in the Company’s manufacturing facility in Cork, Ireland, and by external vendors in California, Korea, China and the Czech Republic.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
921
Currently, the supply and manufacture of many critical components is performed by sole-sourced third-party vendors in the U.S., China, Japan, Korea, and Singapore.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
922
Sole-sourced third-party vendors in China perform final assembly of substantially all of the Company’s portable products, including MacBook Pro, MacBook, MacBook Air, iPod and iPhone.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
923
If manufacturing or logistics in these locations is disrupted for any reason, including natural disasters, information technology system failures, military actions or economic, business, labor, environmental, public health, or political issues, the Company’s financial condition and operating results could be materially adversely affected.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
924
The Company relies on third-party digital content, which may not be available to the Company on commercially reasonable terms or at all.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
925
The Company contracts with third parties to offer their digital content through the Company’s iTunes Store.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
926
The Company pays substantial fees to obtain the rights to this content.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
927
The Company’s licensing arrangements with these third parties are short-term and do not guarantee the continuation or renewal of these arrangements on reasonable terms, if at all.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
928
Some third-party content providers currently or may in the future offer competing products and services, and could take action to make it more difficult or impossible for the Company to license their content in the future.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
929
Other content owners, providers or distributors may seek to limit the Company’s access to, or increase the total cost of, such content.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
930
If the Company is unable to continue to offer a wide variety of content at reasonable prices with acceptable usage rules, or continue to expand its geographic reach, the Company’s financial condition and operating results may be materially adversely affected.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
931
Many third-party content providers require that the Company provide certain digital rights management (“DRM”) and other security solutions.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
932
If these requirements change, the Company may have to develop or license new technology to provide these solutions.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
933
There is no assurance the Company will be able to develop or license such solutions at a reasonable cost and in a timely manner.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
934
In addition, certain countries have passed or may propose legislation that would force the Company to license its DRM, which could lessen the protection of content and subject it to piracy and could also affect arrangements with the Company’s content providers.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
935
The Company relies on access to third-party patents and intellectual property, and the Company’s future results could be materially adversely affected if it is alleged or found to have infringed intellectual property rights.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
936
Many of the Company’s products are designed to include third-party intellectual property, and it may be necessary in the future to seek or renew licenses relating to various aspects of its products and business methods.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
937
Although the Company believes that, based on past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms, there is no assurance that the necessary licenses would be available on acceptable terms or at all.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
938
Because of technological changes in the global personal computer, consumer electronics and mobile communication industries, current extensive patent coverage, and the rapid issuance of new patents, it is possible that certain components of the Company’s products and business methods may unknowingly infringe the patents or other intellectual property rights of third parties.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
939
From time to time, the Company has been notified that it may be infringing such rights.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
940
Regardless of merit, responding to such claims can consume significant time and expense.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
941
At present, the Company is vigorously defending more than 17 patent infringement cases, eight of which were filed during fiscal 2008, and several pending claims are in various stages of evaluation.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
942
In certain cases, the Company may consider the desirability of entering into licensing agreements, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
943
If the Company is found to be infringing such rights, it may be required to pay substantial damages.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
944
If there is a temporary or permanent injunction prohibiting the Company from marketing or selling certain products or a successful claim of infringement against the Company requires it to pay royalties to a third party, the Company’s financial condition and operating results could be materially adversely affected, regardless of whether it can develop non-infringing technology.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
945
Information regarding certain claims and litigation related to alleged patent infringement and other matters is set forth in Part II, Item 1, “Legal Proceedings.” In management’s opinion, the Company does not have a potential liability for damages or royalties from any known current legal proceedings or claims related to the infringement of patent or other intellectual property rights that would individually or in the aggregate have a material adverse effect on its financial condition and operating results.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
946
However, the results of such legal proceedings cannot be predicted with certainty.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
947
Should the Company fail to prevail in any of the matters related to infringement of patent or other intellectual property rights of others, including without limitation those described in Part II, Item 1, “Legal Proceedings,” or should several of these matters be resolved against the Company in the same reporting period, the Company’s financial condition and operating results could be materially adversely affected.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
948
With the June 2007 introduction of iPhone, the Company has begun to compete with mobile communication device companies that hold significant patent portfolios.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
949
Regardless of the scope or validity of such patents or the merits of any potential patent claims by competitors, the Company may have to engage in protracted litigation, enter into expensive agreements or settlements and/or modify its products.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
950
Any of these events could have a material adverse impact on the Company’s financial condition and operating results.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
951
The Company’s products experience quality problems from time to time that can result in decreased sales and operating margin.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
952
The Company sells highly complex hardware and software products that can contain defects in design and manufacture.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
953
Sophisticated operating system software and applications, such as those sold by the Company, often contain “bugs” that can unexpectedly interfere with the software’s operation.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
954
Defects may also occur in components and products the Company purchases from third parties.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
955
There can be no assurance that the Company will be able to detect and fix all defects in the hardware and software it sells.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
956
Failure to do so could result in lost revenue, harm to reputation, and significant warranty and other expenses, and could have a material adverse impact on the Company’s financial condition and operating results.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
957
The Company expects its quarterly revenue and operating results to fluctuate for a variety of reasons.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
958
The Company’s profit margins vary among its products and its distribution channels.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
959
The Company’s software, accessories, and service and support contracts generally have higher gross margins than certain of the Company’s other products, including third-party content from the iTunes Store.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
960
Gross margins on the Company’s hardware products vary across product lines and can change over time as a result of product transitions, pricing and configuration changes, and component, warranty, and other cost fluctuations.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
961
The Company’s direct sales generally have higher associated gross margins than its indirect sales through its channel partners.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
962
In addition, the Company’s gross margin and operating margin percentages, as well as overall profitability, may be materially adversely impacted as a result of a shift in product, geographic or channel mix, or new product announcements.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
963
The Company has typically experienced greater net sales in the first and fourth fiscal quarters compared to other quarters in the fiscal year due to seasonal demand related to the holiday season and the beginning of the school year.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
964
Furthermore, the Company from time-to-time sells more products during the third month of a quarter than it does during either of the first two months.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
965
Developments late in a quarter, such as lower-than-anticipated demand for the Company’s products, an internal systems failure, or failure of one of the Company’s key logistics, components supply, or manufacturing partners, could have a material adverse impact on the Company’s financial condition and operating results.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
966
The Company currently relies on a single cellular network carrier for iPhone in each of the U.S., U.K., Germany and France.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
967
AT&T, O2, T-Mobile and Orange are the Company’s cellular network carriers for iPhone in the U.S., U.K., Germany and France, respectively.
0001193125-08-017426/full-submission.txt
0000320193
20080201
10-Q
968
If these carriers cannot successfully compete with other carriers in their markets for any reason, including but not limited to the quality and coverage of wireless voice and data services, performance and timely build-out of advanced wireless networks, and pricing and terms of end-user contracts, iPhone sales may be adversely affected.
0001193125-08-017426/full-submission.txt