Apple 2002 Annual Report Download - page 50

subsequent 2 month time period. Deferred gains and losses in other comprehensive income associated with such derivative instruments are
immediately reclassified into earnings in other income and expense. Any subsequent changes in fair value of such derivative instruments are
also reflected in current earnings unless they are re-
designated as hedges of other transactions. During 2002, the Company recorded net gains of
$2.5 million in other income and expense related to the loss of hedge designation on discontinued cash flow hedges due to changes in the
Company's forecast of future net sales and cost of sales and due to prevailing market conditions. During 2001, the Company recorded a net gain
of $5.1 million in other income and expense related to the loss of hedge designation on discontinued cash flow hedges due to changes in the
Company's forecast of future net sales and cost of sales.
Interest Rate Risk Management
The Company sometimes enters into interest rate derivative transactions, including interest rate swaps, collars, and floors, with financial
institutions in order to better match the Company's floating-rate interest income on its cash equivalents and short-term investments with its
fixed-rate interest expense on its long-term debt, and/or to diversify a portion of the Company's exposure away from fluctuations in short-term
U.S. interest rates. The Company may also enter into interest rate contracts that are intended to reduce the cost of the interest rate risk
management program. The Company does not hold or transact in such financial instruments for purposes other than risk management.
As of September 30, 2000, the Company had entered into interest rate swaps with financial institutions in order to better match the Company's
floating-rate interest income on its cash equivalents and short-term investments with its fixed-rate interest expense on its long-term debt, and to
diversify a portion of the Company's exposure away from fluctuations in short-term U.S. interest rates. The interest rate swaps generally
required the Company to pay a floating interest rate based on the three- or six-month U.S. dollar LIBOR and receive a fixed rate of interest
without exchanges of the underlying notional amounts. These swaps effectively converted the Company's fixed-rate 10-year debt to floating-
rate debt and converted a portion of the floating rate investments to fixed rate. The Company assumed no ineffectiveness with regard to the
debt interest swaps as each debt interest rate swap met the criteria for accounting under the short-cut method defined in SFAS No. 133 for fair
value hedges of debt instruments. Accordingly, no net gains or losses were recorded in income relative to the Company's underlying debt
interest rate swaps. During fiscal 2001, the Company closed out all of its existing debt interest rate swap positions due to prevailing market
interest rates realizing a gain of $17 million. This gain was deferred, recognized in long-term debt and is being amortized to other income and
expense over the remaining life of the debt.
The unrealized loss on the assets swaps as of September 30, 2000, of $5.7 million was deferred and then recognized in income in 2001 as part
of the SFAS No. 133 transition adjustment effective on October 1, 2000. The Company closed out all of its existing interest rate asset swaps
during 2001 realizing a gain of $1.1 million.
As of September 28, 2002, the Company had no interest rate derivatives outstanding. Due to perceived market risk, the Company entered into
interest rate swaps in early 2002. These interest rate swaps were entered into with financial institutions in order to better match the Company's
floating-rate interest income on its cash equivalents and short-term investments with its fixed-rate interest expense on its long-term debt. The
interest rate swaps required the Company to pay a floating interest rate based on six-month U.S. dollar LIBOR and receive a fixed rate of
interest without exchanges of the underlying notional amounts. These swaps effectively converted the Company's fixed-rate 10-year debt to
floating-rate debt. The Company assumed no ineffectiveness with regard to the debt interest swaps as each debt interest rate swap met the
criteria for accounting under the short-cut method defined in SFAS No. 133 for fair
63
value hedges of debt instruments. Accordingly, no net gains or losses were recorded in income relative to the Company's underlying debt
interest rate swaps during fiscal 2002 until the Company closed out the positions in late 2002 due to prevailing market interest rates. Closing
the debt interest rate swaps resulted in a realized gain of $6 million. This gain was deferred, recognized in long-term debt and is being
amortized to other income and expense over the remaining life of the debt.
Long-Term Debt
During 1994, the Company issued $300 million aggregate principal amount of 6.5% unsecured notes in a public offering registered with the
SEC. The notes were sold at 99.925% of par, for an effective yield to maturity of 6.51%. The notes pay interest semiannually and mature on
February 15, 2004. As of September 28, 2002 and September 29, 2001, the carrying amount of these notes, including unamortized deferred
gains associated with closed debt interest rate swaps, was $316 million and $317 million, respectively, while the fair value was $299 million
and $295 million, respectively. The fair value of the notes is based on their listed market values as of September 28, 2002 and September 29,
2001.
Non-Current Debt and Equity Investments and Related Gains and Losses
The Company has held significant investments in EarthLink Network, Akamai Technologies, Inc. (Akamai), ARM Holdings plc (ARM), and
Samsung Electronics Co., Ltd (Samsung). These investments have been reflected in the consolidated balance sheets as non-current debt and
equity investments, and their combined fair value was $39 million and $128 million as of September 28, 2002, and September 29, 2001,
respectively.