Apple 2001 Annual Report Download - page 18

investments in privately held companies was other than temporary and, accordingly, recognized a charge to earnings of approximately
$8 million. The charges for these write-downs were included in gains on non-current investments, net.
Further information related to the Company's non-current debt and equity investments may be found in Part II, Item 8 of this Form 10-K at
Note 2 of Notes to Consolidated Financial Statements, which information is hereby incorporated by reference.
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Accounting for Derivatives and Cumulative Effect of Accounting Change
On October 1, 2000, the Company adopted SFAS No. 133. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, hedging activities, and exposure definition. Net of the related income tax effect of approximately $5 million, adoption of SFAS
No. 133 resulted in a favorable cumulative
-effect-type adjustment to net income of approximately $12 million for the first quarter of 2001. The
$17 million gross transition adjustment was comprised of a $23 million favorable adjustment for the restatement to fair value of the derivative
component of the Company's investment in Samsung Electronics Co., Ltd. (Samsung), partially offset by the unfavorable adjustments to certain
foreign currency and interest rate derivatives. SFAS No. 133 also required the Company to adjust the carrying value of the derivative
component of its investment in Samsung to earnings during the first quarter of 2001, the before tax effect of which was an unrealized loss of
approximately $13 million.
Interest and Other Income
Net interest and other income increased $14 million or 7% to $217 million during 2001. The increase was due in part to interest income from
higher cash and invested balances in 2001, partially offset by declining interest rates and investment yields, and a rebalancing of the aggregate
investment portfolio to a higher proportion of lower risk and better credit investments. For all of 2001, the weighted average interest rate earned
by the Company on its cash and cash equivalents and short-term investments decreased to 5.38% from 6.12% for all of 2000.
During 2000, the Company experienced a $116 million or 133% increase in net interest income, primarily the result of higher cash and
investment balances, higher yields on its short-term investments due to higher market interest rates, and a decline in interest expense of
$26 million resulting from the conversion of approximately $661 million of the Company's convertible subordinated notes to common stock
during the second half of 1999.
The Company expects interest and other income, net to decline substantially in 2002 as declines in interest rates continue to impact earnings on
the Company's investment portfolio. The foregoing statement is forward-looking. Interest and other income, net could differ from expected
levels because of several factors, including certain of those set forth below in the subsection entitled "Factors That May Affect Future Results
and Financial Condition." Additionally, actual future interest and other income, net may be significantly impacted by unforeseen changes in
market interest rates, foreign currency exchange rates, and the fair value of the Company's short-term and long-term investments.
Provision for Income Taxes
As of September 29, 2001, the Company had deferred tax assets arising from deductible temporary differences, tax losses, and tax credits of
$509 million before being offset against certain deferred tax liabilities for presentation on the Company's balance sheet. Management believes
it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, will be
sufficient to fully recover the remaining net deferred tax assets. As of September 29, 2001, a valuation allowance of $33 million was recorded
against the deferred tax asset for the benefits of tax losses that may not be realized. The valuation allowance relates principally to the operating
loss carryforwards acquired from NeXT, the utilization of which is subject to certain limitations imposed by the Internal Revenue Code. The
Company will continue to evaluate the realizability of the deferred tax assets quarterly by assessing the need for and amount of the valuation
allowance. The Company's effective tax rate for 2001 was 30% compared to the higher statutory rate due primarily to a state tax benefit and a
credit for increasing research activities, net of nondeductible charges associated with acquisitions.
On February 15, 2001, the Internal Revenue Service (IRS) proposed adjustments to the Company's federal income tax returns for the years
1995 through 1997. The Company disagrees with most of the proposed adjustments and is contesting them through the IRS Appeals Office.
Substantially all IRS audit issues for
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years prior to 1995 have been resolved. Management believes that adequate provision has been made for any adjustments that may result from
tax examinations.
Recent Accounting Pronouncements
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," were issued in July 2001. SFAS
No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all
purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a
purchase business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an