Apple 2006 Annual Report Download - page 109

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10—Commitments and Contingencies (Continued)
The Company generally does not indemnify end-users of its operating system and application software against legal claims that the software
infringes third-party intellectual property rights. Other agreements entered into by the Company sometimes include indemnification provisions
under which the Company could be subject to costs and/or damages in the event of an infringement claim against the Company or an
indemnified third-party. However, the Company has not been required to make any significant payments resulting from such an infringement
claim asserted against itself or an indemnified third-party and, in the opinion of management, does not have a potential liability related to
unresolved infringement claims subject to indemnification that would have a material adverse effect on its financial condition, liquidity or
results of operations. Therefore, the Company did not record a liability for infringement costs as of either September 30, 2006 or September 24,
2005.
Concentrations in the Available Sources of Supply of Materials and Product
Although most 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 or
limited sources. Some other key components, while currently available to the Company from multiple sources, are at times subject to industry-
wide availability and pricing pressures. In addition, the Company uses some components that are not common to the rest of the personal
computer industry, and new products introduced by the Company often initially utilize custom components obtained from only one source until
the Company has evaluated whether there is a need for and subsequently qualifies additional suppliers. If the supply of a key single-sourced
component to the Company were to be delayed or curtailed, or in the event a key manufacturing vendor delays shipments of completed
products to the Company, the Company’s ability to ship related products in desired quantities and in a timely manner could be adversely
affected. The Company’s business and financial performance could also 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 alternative source. 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. Finally, significant portions of the Company’s CPUs, logic boards, and assembled products
are now manufactured by outsourcing partners, primarily in various parts of Asia. Although the Company works closely with its outsourcing
partners on manufacturing schedules, the Company’s operating results could be adversely affected if its outsourcing partners were unable to
meet their production obligations.
Long-Term Supply Agreements
During 2006, the Company entered into long-term supply agreements with Hynix Semiconductor, Inc., Intel Corporation, Micron
Technology, Inc., Samsung Electronics Co., Ltd., and Toshiba Corporation to secure supply of NAND flash memory through calendar year
2010. As part of these agreements, the Company prepaid $1.25 billion for flash memory components during 2006. These prepayments will be
applied to inventory purchases made over the life of each respective agreement.
Contingencies
The Company is subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and have not been
fully adjudicated. In the opinion of management, the Company does not have a potential liability related to any current legal proceedings and
claims that would individually or in the aggregate have a material adverse effect on its financial condition, liquidity, or results of operations.
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