Apple 1999 Annual Report Download - page 31

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During the last two years, the Company has entered into interest rate derivative transactions, including interest rate swaps 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.
The interest rate swaps qualifying as accounting hedges generally require 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
convert the Company's fixed-rate 10 year debt to floating-rate debt and convert the floating rate investments to fixed rate. The maturity date for
$25 million of the asset swaps is October 1999 with the remaining debt and asset swaps maturing in February and September of 2001. As of
September 25, 1999 and 1998, interest rate debt swaps had a weighted-average receive rate of 6.04%. The weighted-average pay rate on the
debt swaps was 5.45% and 5.73% as of September 25, 1999 and 1998, respectively. As of September 25, 1999, interest rate asset swaps had a
weighted-average receive rate of 5.53% and a weighted-
average pay rate of 5.24%. The unrealized gains and losses on these swaps are deferred
and recognized in income as a component of interest and other income (expense), net in the same period as the hedged transaction. Deferred
losses on such contracts totaled approximately $5 million as of September 25, 1999, while deferred gains on such contracts totaled $7 million
as of September 25, 1998.
FOREIGN CURRENCY RISK
Overall, the Company is a net receiver of currencies other than the U.S. dollar and, as such, benefits from a weaker dollar and is adversely
affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening
of the U.S. dollar, may negatively affect the Company's net sales and gross margins as expressed in U.S. dollars.
The Company enters into foreign exchange forward and option contracts with financial institutions primarily to protect against currency
exchange risks associated with existing assets and liabilities, certain firmly committed transactions, and probable but not firmly committed
transactions. The Company's foreign exchange risk management policy requires it to hedge a majority of its existing material foreign exchange
transaction exposures. However, the Company may not hedge certain foreign exchange transaction exposures that are immaterial either in
terms of their minimal U.S. dollar value or in terms of the related currency's historically high correlation with the U.S. dollar. Foreign exchange
forward contracts are carried at fair value in other current liabilities. The premium costs of purchased foreign exchange option contracts are
recorded in other current assets and marked to market through earnings.
Probable but not firmly committed transactions comprise sales of the Company's products and purchases of raw material, sub-assemblies, and
assembled finished goods in currencies other than the functional currency. A majority of these transactions are made through the Company's
subsidiaries in Europe, Asia (particularly Japan), Canada, and Australia. The Company purchases foreign exchange option contracts to hedge
the currency exchange risks associated with these probable but not firmly committed transactions. The Company also sells foreign exchange
option contracts, in order to partially finance the purchase of these foreign exchange option contracts. The term of the Company's foreign
exchange hedging instruments, whether for firmly committed transactions, probable but not firmly committed transactions, or to partially
finance the foreign risk management program, currently does not extend beyond six months.
Gains and losses on accounting hedges of existing assets or liabilities are generally recorded in income or shareholders' equity against the
losses and gains on the hedged transactions. Gains and losses related to qualifying accounting hedges of firmly committed or probable but not
firmly committed transactions are deferred and recognized in income in the same period as the hedged transactions. Gains and losses on
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