cash flow hedging instruments and five did not qualify for hedge accounting. Prior to December 31, 2001, none of the
derivatives qualified for hedge accounting treatment due to the strict documentation requirements of SFAS No. 133.
The majority of the derivatives held by the Company match the terms of the underlying, which qualifies for the "matched-
terms" method to assess hedge effectiveness. The Company uses the hypothetical derivative method to assess the hedge
effectiveness of all instruments that do not qualify for the "matched-terms" method. The fair value of derivatives are based
on the amount at which the instruments could be settled at the date of the balance sheet based on estimates obtained
from financial institutions.
In addition, the Company had currency derivatives embedded in lease contracts of some of its foreign subsidiaries. These
embedded derivatives have not been designated as hedges and the Company accounts for these derivatives at fair value
with gains and losses recognized in the statement of operations at each reporting period under US GAAP. Gains and losses
on these instruments are reflected as "Selling, general and administrative Expenses."
Fair Value Hedges
Changes in the fair value of derivatives that hedge interest rate risk are recorded in net financial expense each period with
the offsetting changes in the fair values of the related debt are also recorded in net financial expense. The Company
maintains no other fair value hedges. For fiscal 2002 and 2001, the Company recognized no ineffectiveness for any of the
fair-value hedges. All components of the Company's interest rate swap gains or losses were included in the assessment of
hedge effectiveness.
Cash Flow Hedges
The effects of hedges of financial instruments in foreign currency-denominated cash receipts are reported in net financial
expense, and the effects of hedges of payments are reported in the same line item of the underlying payment. The effects
of hedges of commodity prices are reported in cost of sales. In fiscal 2002, hedge ineffectiveness for cash flow hedges
resulted in less than EUR 1 being recognized in the consolidated statements of operations and no amounts were
reclassified to earnings for forecasted transactions that did not occur. During fiscal 2002 and 2001, the Company
reclassified a loss of EUR 10 (net of 6 tax benefit) and a loss of EUR 17 (net of 9 tax benefit) respectively, from
accumulated other comprehensive income (loss) to other financial income and expense related to its cash flow hedges.
The estimated net amount of the existing gains or losses on the reporting date that are expected to be reclassified to
earnings within the next twelve months amounts to a loss of EUR 17 (net of 8 tax benefit). Cash flow hedge results are
reclassified into earnings during the same period in which the related exposure impacts earnings. If a hedged forecasted
transaction is no longer probable of occurring, application of hedge accounting ceases and amounts previously deferred in
accumulated other comprehensive income are frozen and reclassified to income in the same period in which the previously
hedged transaction affects earnings. However, if it is considered probable that the originally forecast transaction will not
occur by the end of the originally specified time period, the unrealized gain or loss in accumulated other comprehensive
income is reclassified immediately to income.
Other derivative instruments
In countries were the local currency is subject to large fluctuations, the Company often enters into lease agreements
denominated in currencies that differ from local currency (historically, this included the US dollar and currencies
subsequently replaced by the Euro). As a result, the Company had embedded foreign exchange derivatives in certain lease
contracts in the Czech Republic, Slovakia and Poland. To the extent that the currency in which the lease payments are
made is not the functional currency of either the Company or the lease counterparty, these embedded derivatives are
required to be separately accounted for at fair value on the balance sheet under SFAS No. 133 rules. The fair value of
these embedded derivatives were EUR (17) and EUR 26 at December 29, 2002 and December 30, 2001, respectively.
Hedges of Net Investment in a Foreign Entity
The Company does not maintain any hedges of a net investment in a foreign entity.
186
