Apple 1999 Annual Report Download - page 49

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--FINANCIAL INSTRUMENTS (CONTINUED)
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.
Purchased floors are options that limit the Company's exposure to falling interest rates on its cash equivalents and short-term investments by
locking in a minimum interest rate. The Company receives a payment when interest rates fall below a predetermined level. A purchased floor
generally qualifies for hedge accounting treatment and is reported on the balance sheet at its premium cost, which is amortized over the life of
the floor. The purchased floors are generally designated and effective as hedges against interest rate risk on the Company's securities classified
as available-for-sale and are carried at fair value in other current liabilities with the unrealized gains and losses recorded as a component of
accumulated other comprehensive income. Purchased floors outstanding as of September 25, 1998, provided the Company with the option of a
weighted-average interest rate of 5.15% on the notional amount of $525 million. Gains and losses are recognized in income as a component of
interest and other income (expense), net in the same period as the hedged transaction. Unrealized gains and losses on such contracts were
immaterial as of September 25, 1999 and 1998.
The foreign exchange forward contracts not accounted for as hedges are carried at fair value in other current liabilities with the gains and losses
recorded currently in income as a component of interest and other income (expense), net. The foreign exchange forward contracts that are
designated and effective as hedges are also carried at fair value in other current liabilities with gains and losses recorded currently in income as
a component of interest and other income (expense), net, against the losses and gains on the hedged transactions. As of September 25, 1999, all
foreign exchange forward contracts held by the Company mature within three months.
If the option contract is designated and effective as a hedge of a firmly committed transaction, or a probable but not firmly committed
transaction, then any gain or loss is deferred until the occurrence of the hedged transaction. Deferred gains and losses on such contracts were
not significant as of September 25, 1999 and 1998. If the option contract is used to hedge an asset or liability, then the option is carried at fair
value in other current liabilities with the gains and losses recorded currently in income as a component of interest and other income (expense),
net, against the losses and gains on the hedged transaction. As of September 25, 1999, maturity dates for purchased foreign exchange option
contracts and sold option contracts ranged from one to four months.
The counterparties to the agreements relating to the Company's investments and foreign exchange and interest rate instruments consist of a
number of major international financial institutions. To date, no such counterparty has failed to meet its financial obligations to the Company.
The Company does not believe there is significant risk of nonperformance by these counterparties because the Company continually monitors
its positions and the credit ratings of such counterparties, and limits the financial exposure and the number of agreements and contracts it enters
into with any one party. The Company generally does not require collateral from counterparties, except for margin agreements associated with
the ten-year interest rate swaps on the Company's ten-year unsecured notes. To mitigate the credit risk associated with these ten-year swap
transactions, which mature in 2004, the Company entered into margining agreements with its third-
party bank counterparties. These agreements
require the Company or the counterparty to post margin only if certain credit risk thresholds are exceeded. The amounts held in margin
accounts were not significant as of September 25, 1999.
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