NOTE 12 . FINANCIAL INSTRUMENTS

Investments  As of September 30, 1999 and 1998, the company held $102 million and $126 million, respectively, of securities classified as available for sale. Realized gains and losses are determined principally on an average cost basis. In 1999, the company recognized $70 million in gains on sales of securities; in 1998 and 1997, realized gains and losses were not material. In 1999, 1998 and 1997, unrealized gains and losses on available-for-sale securities were not material.

    During the year, the company hedged certain investment holdings using collar and forward sale contracts. The collar contracts were terminated during the year, and the forward contracts, with notional amounts totaling $718 million, expire in five years.

Interest Rate Risk Management  The company is exposed to the impact of interest rate changes. The company’s objective is to manage the impact of interest rate changes on earnings and cash flows and on the market value of its investments and borrowings. The company maintains fixed rate debt as a percentage of its net debt between a minimum and maximum percentage, which is set by policy.

    The company uses interest rate swaps and other instruments to manage net exposure to interest rate changes related to its borrowings and investments and to lower its overall borrowing costs. Significant interest rate risk management instruments held by the company during 1999 and 1998 included pay-floating and pay-fixed swaps and interest rate caps. Pay-floating swaps effectively convert medium and long-term obligations to LIBOR or commercial paper rate indexed variable rate instruments. These swap agreements expire in one to 30 years. Pay-fixed swaps and interest rate caps effectively convert floating rate obligations to fixed rate instruments. The pay-fixed swaps expire in two to three years. The interest rate caps either expired or were terminated during the year.

    The following table reflects incremental changes in the notional or contractual amounts of the company’s interest rate contracts during 1999 and 1998. Activity representing renewal of existing positions is excluded.

    The impact of interest rate risk management activities on income in 1999, 1998 and 1997, and the amount of deferred gains and losses from interest rate risk management transactions at September 30, 1999 and 1998 were not material.

Foreign Exchange Risk Management  The company transacts business in virtually every part of the world and is subject to risks associated with changing foreign exchange rates. The company’s objective is to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business issues and challenges. Accordingly, the company enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency assets and liabilities, commitments and anticipated foreign currency revenues. By policy, the company maintains hedge coverage between minimum and maximum percentages of its anticipated foreign exchange exposures for periods not to exceed five years. The gains and losses on these contracts offset changes in the value of the related exposures.

    It is the company’s policy to enter into foreign currency transactions only to the extent considered necessary to meet its objectives as stated above. The company does not enter into foreign currency transactions for speculative purposes.

    The company uses option strategies that provide for the sale of foreign currencies to hedge probable, but not firmly committed, revenues. While these hedging instruments are subject to fluctuations in value, such fluctuations are offset by changes in the value of the underlying exposures being hedged. The principal currencies hedged are the European euro, Japanese yen, Australian dollar, Canadian dollar and British pound. The company also uses forward contracts to hedge foreign currency assets and liabilities. Cross-currency swaps are used to hedge foreign currency-denominated borrowings.

    At September 30, 1999 and 1998, the notional amounts of the company’s foreign exchange risk management contracts, net of notional amounts of contracts with counterparties against which the company has a legal right of offset, the related exposures hedged and the contract maturities are as follows:

    Gains and losses on contracts hedging anticipated foreign currency revenues and foreign currency commitments are deferred until such revenues are recognized or such commitments are met, and offset changes in the value of the foreign currency revenues and commitments. At September 30, 1999 and 1998, the company had deferred gains of $38 million and $245 million, respectively, and deferred losses of $26 million and $118 million, respectively, related to foreign currency hedge transactions. Deferred amounts to be recognized can change with market conditions and will be substantially offset by changes in the value of the related hedged transactions. The impact of foreign exchange risk management activities on operating income in 1999 and in 1998 was a net gain of $66 million and $227 million, respectively.