Apple 2002 Annual Report Download - page 48

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The Company has 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. The Company
purchases these raw material components directly from suppliers. These non-trade receivables, which are included in the consolidated balances
sheets in other current assets, totaled $142 million and $68 million as of September 28, 2002, and September 29, 2001, respectively. The
Company does not recognize any profits on these sales or reflect the sale of these components in its net sales.
Inventory Prepayment
In April 2002, the Company made a $100 million prepayment to an Asian supplier for the purchase of components over the following nine
months. In return for this deposit, the supplier agreed to supply the Company with a specified level of components in the three consecutive
fiscal quarters ending December 28, 2002. If the supplier fails to supply the agreed upon level of components in any of those three fiscal
quarters, the Company may cancel the arrangement and receive the amount of the prepayment not utilized plus a penalty. Approximately
$53 million of this deposit remained unused as of September 28, 2002, and is reflected in the condensed consolidated balance sheets in other
current assets. The amount of the prepayment not utilized by the Company on or before December 31, 2002, is refundable to the Company by
January 31, 2003.
Although the supplier's existing debt is unrated, its public debt pricing is consistent with other BBB rated companies. The deposit is unsecured
and has no stated interest component. The Company is imputing an amount to cost of sales and interest income during each period the deposit
is outstanding at an appropriate market interest rate to reflect the economics of this transaction. In light of the supplier's implied debt rating and
because the Company's prepayment is unsecured, non-performance by and/or economic deterioration of the supplier could place all or some of
the Company's deposit at risk.
Derivative Financial Instruments
The Company uses derivatives to partially offset its business exposure to foreign exchange and interest rate risk. Foreign currency forward and
option contracts are used to offset the foreign exchange risk on certain existing assets and liabilities and to hedge the foreign exchange risk on
expected future cash flows on certain forecasted revenues and cost of sales. From time to time, the Company enters into interest rate swap
agreements to modify the interest rate profile of certain investments and debt. The Company's accounting policies for these instruments are
based on whether the instruments are designated as hedge or non-hedge instruments. The Company records all derivatives on the balance sheet
at fair value.
60
The following table shows the notional principal, net fair value, and credit risk amounts of the Company's interest rate derivative and foreign
currency instruments as of September 28, 2002 and September 29, 2001 (in millions).
The notional principal amounts for derivative instruments provide one measure of the transaction volume outstanding as of year-end, and do
not represent the amount of the Company's exposure to credit or market loss. The credit risk amount shown in the table above represents the
Company's gross exposure to potential accounting loss on these transactions if all counterparties failed to perform according to the terms of the
contract, based on then-current currency exchange and interest rates at each respective date. The Company's exposure to credit loss and market
risk will vary over time as a function of interest rates and currency exchange rates.
September 28, 2002
September 29, 2001
Notional
Principal
Fair
Value
Credit Risk
Amounts
Notional
Principal
Fair
Value
Credit Risk
Amounts
Transactions qualifying as accounting hedges:
Interest rate instruments:
Swaps $
—
$
—
$
—
$
—
$
—
$
—
Foreign exchange instruments:
Spot/Forward contracts, net $
462
$
1
$
1
$
562
$
8
$
8
Purchased options, net $
196
$
—
$
—
$
551
$
11
$
11
Sold options, net $
392
$
(4
) $
—
$
712
$
(8
) $
—
Transactions other than accounting hedges:
Foreign exchange instruments:
Spot/Forward contracts, net $
302
$
—
$
—
$
455
$
(4
) $
—
Purchased options, net $
—
$
—
$
—
$
334
$
1
$
1
Sold options, net $
—
$
—
$
—
$
354
$
(1
) $
—