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37
PART II
Additional Consolidated Results
Net Interest Income (Expense)
Net interest income increased to $77 million for fiscal
2006, comparedwith net interest income of $1million for
fiscal 2005. The increase in net interest income was
primarily a resultof higher yields on investments and higher
average investment balances. Fiscal 2006net interest
incomeincluded $8 million of interest expense related to
ourfinancing leases, while fiscal 2005 included $21 million
of interest expense relatedto our financing leases as a
result of correcting our accounting forleases in fiscal 2005.
We reported net interest income of $1 million for fiscal
2005, comparedwith net interest expense of $8 million for
fiscal 2004. The change in net interest income (expense)
was primarily a result of higher yields onshort-term
investments, higher average investment balances and the
repayment in June 2004 of our convertible debentures due
in 2021. These factors were partiallyoffset by a char ge of
$21 million to correct our accounting for leases.
Foradditional information regarding net interest income
(expense), refer to Note 6, Net Interest Income (Expense), of
the Notes to Consolidated Financial Statements, included in
Item 8, Financial Statements and Supplementary Data, of
this Annual Report on Form 10-K.
Effective Income Tax Rate
Our effective income tax rate decreased to 33.7% for fiscal
2006, comparedwith 35.3% for fiscal 2005. The decrease
in the effective income tax rate for fiscal 2006 was primarily
due to increased income tax benefits from our foreign
operations andhigher levels of tax-exempt interest.
Our effective income tax rate decreased to 35.3% for fiscal
2005, down from38.3% for fiscal 2004. The decrease was
due to resolution andclarification of various state and
federal tax matters. During fiscal 2005, we reduced our tax
contingencies reserve due to the favorable resolution and
clarification of certain federal and state income tax matters,
including a favorable ruling from the IRS and the
completion of IRS and certain state tax audits forfiscal
2000 through fiscal 2002.
Impact of Inflation and Changing Prices
The impact of inflation and changing prices has not been
material to our revenue or earnings from continuing
operations in any of the last three fiscal years. Highly
competitive market conditions and the general economic
environment minimized inflation’s impact on the selling
prices of our products and services, and on ourexpenses.
In addition, price deflation and the continued
commoditization of key technology products affect our
ability to increase our gross profit rate.
Liquidity and CapitalResources
Summary
We ended fiscal 2006 with $3.7 billion of cash andcash
equivalentsand short-term investments, an increase from
$3.3 billion at the end of fiscal 2005. Working capital, the
excess of current assets over current liabilities, was $1.9
billion at the end of fiscal 2006, consistent with the end of
fiscal 2005.
Cash equivalents consist of highly liquid investments with
original maturities of three months or less. Our short-term
investments are comprised of municipal and U.S. government
debt securities, with original maturities greater than 90 days
but less than one year. Long-term investments are also
comprised of municipal and U.S. government debt securities,
but with original maturities of one year ormore.
In accordance with our investment policy, we place our
investments in debt securities with issuers who have high-
quality credit and limit the amount of investment exposure
to any one issuer. We seek to preserve principal and
minimize exposure tointerest-rate fluctuations by limiting
default risk, market risk andreinvestment risk.
The carrying amount of ourinvestments in debt securities
approximated fairvalue at February 25, 2006, and
February 26,2005, due to the rapid turnover of our
portfolio and the highly liquid nature of these investments.
Therefore, there were no significant unrealized holding
gains or losses.
During the third quarter of fiscal 2006, we reclassified our
variable-rate demandnotes from cash and cash equivalents
to short-term investments forall periods presented. These
reclassifications had no effect on previously reported total
assets or net earnings.