Apple 2003 Annual Report Download - page 58

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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. No net gains, or losses, of a similar nature were recorded
in 2003.
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.
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 asset 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 27, 2003 and 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. 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
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
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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.
Debt
The Company currently has debt outstanding in the form of $300 million of aggregate principal amount 6.5% unsecured notes that were
originally issued in 1994. The notes, which pay interest semiannually, were sold at 99.925% of par, for an effective yield to maturity of 6.51%.
The notes, along with approximately $4 million of related unamortized deferred gains on closed interest rate swaps, are due in February of
2004 and therefore have been classified as current debt as of September 27, 2003. As of September 27, 2003 and September 28, 2002, the
carrying amount of these notes, including unamortized deferred gains associated with closed debt interest rate swaps, was $304 million and
$316 million, respectively, while the fair value was $302 million and $299 million, respectively. The fair value of the notes is based on their
listed market values as of September 27, 2003 and September 28, 2002.
Non-Current Debt and Equity Investments and Related Gains and Losses
The Company has held investments in EarthLink, Inc. (EarthLink), Akamai Technologies, Inc. (Akamai), ARM Holdings plc (ARM), and