Quantitative and Qualitative Disclosures about Market Risk
CASH AND CASH EQUIVALENTS AND TOTAL INVESTMENTS
We consider investments purchased with an original or remaining maturity of less than three months at the date of
purchase to be cash equivalents. We maintain an investment portfolio of various holdings, types, and maturities. (See
Note 7 to the Consolidated Financial Statements.) These securities are generally classified as available for sale and
consequently are recorded on the Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income (loss), net of tax. The following table summarizes our cash
and cash equivalents and total investments (in millions):
Cash and cash equivalents and total investments decreased by $804 million during fiscal 2003 due to a decrease in cash
and cash equivalents of $5.6 billion partially offset by an increase in fixed income securities of $4.6 billion. The
changes in cash and cash equivalents and fixed income securities were related to our portfolio management strategies and
did not have a material adverse impact on our existing levels of interest rate risk.
At any time, a sharp rise in interest rates could have a material adverse impact on the fair value of our investment
portfolio. Conversely, declines in interest rates could have a material impact on interest earnings for our investment
portfolio. We do not currently hedge these interest rate exposures. The following table presents the hypothetical changes
in fair value in investment securities held at July 26, 2003 that are sensitive to changes in interest rates (in
millions):
These instruments are not leveraged and are held for purposes other than trading. The modeling technique used measures
the change in fair value arising from selected potential changes in interest rates. Market changes reflect immediate
hypothetical parallel shifts in the yield curve of plus or minus 50 basis points ("BPS"), 100 BPS, and 150 BPS.
The values of our equity investments in several publicly traded companies are subject to market price volatility. The
following analysis presents the hypothetical changes in fair value of public equity investments that are sensitive to
changes in the stock market (in millions):
Our equity portfolio consists of securities with characteristics that most closely match the S&P Index or companies
traded on the Nasdaq National Market. These equity securities are held for purposes other than trading. The modeling
technique used measures the change in fair values arising from selected hypothetical changes in each stock's price. Stock
price fluctuations of plus or minus 25%, 50%, and 75% were selected based on the probability of their occurrence. During
the first quarter of fiscal 2003 and 2002, we recognized a charge of $412 million and $858 million, respectively,
attributable to the impairment of certain publicly traded equity securities. The impairment charges were related to the
decline in the fair value of certain publicly traded equity investments below their cost basis that was judged to be
other-than-temporary.
INVESTMENTS IN PRIVATELY HELD COMPANIES
We have invested in privately held companies, many of which can still be considered in the startup or development stages.
These investments are inherently risky as the markets for the technologies or products they have under development are
typically in the early stages and may never materialize. We could lose our entire initial investment in these companies.
As of July 26, 2003, these investments were $516 million, compared with $477 million at July 27, 2002.
Our evaluation of equity investments in private and public companies is based on the fundamentals of the business,
including among other factors, the nature of their technologies and potential for financial return to us.
DERIVATIVE INSTRUMENTS
We enter into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on
foreign currency receivables, investments, and payables, primarily denominated in Australian, Canadian, Japanese, and
several European currencies, including the euro and British pound. We also periodically hedge foreign currency forecasted
transactions related to certain operating expenses with currency options. The impact of foreign currency fluctuations on
foreign currency sales has not been material because our sales are primarily denominated in U.S. dollars.
Foreign exchange forward and option contracts as of July 26, 2003 are summarized as follows (in millions):
Our foreign exchange forward contracts related to current assets and liabilities generally range from one to three months
in original maturity. Additionally, we have entered into foreign exchange forward contracts related to long-term
financings with maturities of up to two years. The foreign exchange forward contracts related to investments generally
have maturities of less than one year. Currency option contracts generally have maturities of less than one year. We do
not enter into foreign exchange forward and option contracts for trading purposes.
We do not expect gains or losses on these derivative instruments to have a material impact on our financial results (See
Note 8 to the Consolidated Financial Statements.)
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