Adobe 2004 Annual Report Download - page 54

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We have commitments to make certain milestone and/or retention payments typically entered into in
conjunction with various acquisitions, for which we have made accruals in our consolidated financial statements. In
connection with certain acquisitions and purchases of technology assets during fiscal 2003 and 2004, we entered into
employee retention agreements and are required to make payments upon satisfaction of certain conditions in the
agreements. These costs are being amortized over the retention period to compensation expense. As of December 3,
2004, we have $1.6 million remaining to be paid under our retention agreements.
As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for
certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The
indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The
maximum potential amount of future payments we could be required to make under these indemnification
agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and
enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these
indemnification agreements in excess of applicable insurance coverage is minimal.
As part of our limited partnership interests in Adobe Ventures, we have provided a general indemnification to
Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events
or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite
Ventures acts in good faith on behalf of the partnerships. We are unable to develop an estimate of the maximum
potential amount of future payments that could potentially result from any hypothetical future claim, but believe the
risk of having to make any payments under this general indemnification to be remote.
Royalties
We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty
expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue. Royalty
expense, which was recorded under our cost of products revenue on our consolidated statements of income, was
approximately $15.9 million, $14.5 million and $14.4 million in fiscal 2004, 2003 and 2002, respectively.
Other Information
Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934 as added by Section 202 of the
Sarbanes-Oxley Act of 2002, we are responsible for listing the audit and non-audit services pre-approved in the
fourth quarter of 2004 by our Audit Committee to be performed by KPMG LLP, our external auditor. Each of the
permitted non-audit services has been pre-approved by the Audit Committee or the Audit Committee’s Chairman
pursuant to delegated authority by the Audit Committee, other than de minimus non-audit services for which the
pre-approval requirements are waived in accordance with the rules and regulations of the SEC. During the fourth
quarter of 2004, the Audit Committee pre-approved the following non-audit services anticipated to be performed by
KPMG LLP: 1) foreign financial statement review and 2) tax audit and compliance services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND
FINANCIAL INSTRUMENTS
All market risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Hedging Instruments
We transact business in foreign countries, in U.S. dollars and in various foreign currencies. In Europe and
Japan, transactions that are denominated in euro or yen subject us to exposure from movements in foreign currency
exchange rates. This exposure is primarily related to yen-denominated product and support revenue in Japan and
euro-denominated product and support revenue in certain European countries. In fiscal 2004, 2003 and 2002, our
exposures were 24.1 billion yen, 21.3 billion yen and 20.5 billion yen, respectively. In fiscal 2004, 2003 and 2002,
our exposures were 375.4 million euros, 274.0 million euros and 288.5 million euros, respectively.
In addition we also have long term investment exposures consisting of the capitalization and retained earnings
in our non-USD functional foreign subsidiaries. For the fiscal years ending December 3, 2004 and November 28,