Adobe 2000 Annual Report Download - page 46

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We believe that if either or both of the lines of credit are canceled or amounts are not
available under the lines, it would not substantially harm our financial results, liquidity,
or capital resources.
Under the terms of the lines of credit and the lease agreement, we may pay cash dividends
unless an event of default has occurred or we do not meet certain financial ratios.
DERIVATIVES AND FINANCIAL INSTRUMENTS
(QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK)
Foreign Currency Hedging Instruments We transact business in various foreign currencies,
primarily in certain European countries and Japan. Accordingly, we are subject to expo-
sure from movements in foreign currency exchange rates. This exposure is primarily
related to yen denominated licenses in Japan and local currency denominated operating
expenses in Europe, where we license primarily in U.S. dollars. Beginning in the first quar-
ter of fiscal 2001, we began to denominate revenue in euros in certain European countries.
Our Japanese operating expenses are in yen, which mitigates a portion of the exposure
related to yen denominated licenses in Japan. In addition, we hedge firmly committed
transactions using primarily forward contracts. We also hedge a percentage of forecasted
international revenue with purchased options. At December 1, 2000, total outstanding
contracts included $23.2 million in foreign currency forward exchange contracts and
purchased put option contracts with a notional value of $43.3 million. All contracts
expire at various times through March 2001. Our hedging policy is designed to reduce
the impact of foreign currency exchange rate movements, and we expect any gain or loss
in the hedging portfolio to be offset by a corresponding gain or loss in the underlying
exposure being hedged.
A sensitivity analysis was performed on our hedging portfolio as of December 1, 2000.
This sensitivity analysis was based on a modeling technique that measures the hypothetical
market value resulting from a 10% and 15% shift in the value of exchange rates relative to
the U.S. dollar. An increase in the value of the U.S. dollar (and a corresponding decrease in
the value of the hedged foreign currency asset) would lead to an increase in the fair value
of our financial hedging instruments by $5.5 million and $7.4 million, respectively.
Conversely, a decrease in the value of the U.S. dollar would result in a decrease in the fair
value of these financial instruments by $3.4 million and $4.7 million, respectively.
Our accounting policies for these instruments are based on our designation of such
instruments as hedging transactions. We recognize gains and losses associated with the
mark-to-market of outstanding foreign exchange forward contracts that are designated
and effective as hedges of existing transactions, for which a firm commitment has been
attained, as other income in the current period. Corresponding gains and losses on the
foreign currency denominated transactions being hedged are recognized as other income
in that same period. In this manner, the gains and losses on foreign currency denomi-
nated transactions will be offset by the gains and losses on the foreign currency contracts.
We do not anticipate any material adverse effect on our consolidated financial position,
results of operations, or cash flows as a result of these instruments.
We do not use derivative financial instruments for speculative trading purposes, nor do
we hedge our foreign currency exposure in a manner that entirely offsets the effects of
changes in foreign exchange rates.
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