Apple 1998 Annual Report Download - page 49

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of the 10 year unsecured notes is based on their listed market values as of September 25, 1998, and September 26, 1997. The fair
value of the convertible subordinated notes is based on an estimate from a financial institution.
EQUITY INVESTMENT AND RELATED GAINS
As of September 26, 1997, the Company owned 42.3% of the outstanding stock of ARM Holdings plc (ARM), a privately held company in the
United Kingdom involved in the design of high performance microprocessors and related technology. The Company has accounted for this
investment using the equity method through September 25, 1998. On April 17, 1998, ARM completed an initial public offering of its stock on
the London Stock Exchange and the NASDAQ National Market. The Company sold 18.9% of its shares in the offering for a gain before
foreign taxes of approximately $24 million, which was recognized as other income. Foreign taxes recognized on this gain was approximately
$7 million.
At the time an equity method investee sells existing or newly issued common stock to unrelated parties in excess of its book value, the equity
method requires that the net book value of the investment be adjusted to reflect the investor's share of the change in the investee's shareholders'
equity resulting from the sale. It is the Company's policy to record an adjustment reflecting its share of the change in the investee's
shareholders' equity resulting from such a sale as a gain or loss in other income. Consequently, the Company also recognized in the third
quarter of 1998 other income of approximately $16 million to reflect its remaining 25.9% ownership interest in the increased net book value of
ARM following its initial public offering. As of September 25, 1998, the carrying value of the Company's investment in ARM carried in other
assets in the consolidated balance sheet was approximately $22 million. The fair value of this investment as of September 25, 1998, based on
listed market quotes was approximately $186 million.
On October 14, 1998, the Company sold an additional 2.9 million shares of ARM stock for net proceeds of approximately $37.5 million and a
gain before foreign taxes of approximately $32 million which will be recognized as other income by the Company in the first quarter of fiscal
1999. As a result of this sale, the Company's ownership interest in ARM has fallen to 19.7%, and the Company no longer has significant
influence over the management or operating policies of ARM. Consequently, beginning in the first quarter of fiscal 1999, the Company will no
longer account for its remaining investment in ARM using the equity method and has categorized its remaining shares as available for sale
requiring the shares be carried at fair value, with unrealized gains and losses reported as a component of shareholders' equity. Subsequent to the
sale of shares on October 14, 1998, the carrying value of the Company's investment in ARM was approximately $16.9 million, and the fair
value, based on listed market quotes, was approximately $135 million. The Company is subject to a "lock-up" agreement under which it is
restricted from selling any of its remaining ARM shares before January 12, 1999.
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