Adobe 2004 Annual Report Download - page 90

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claims alleging improper use of litigation or violation of other local law and have recently increased in
frequency, especially in Latin American countries. We believe we have valid defenses with respect to such
counter-claims; however, it is possible that our consolidated financial position, cash flows or results of
operations could be affected in any particular period by the resolution of one or more of these counter-
claims.
From time to time, in addition to those identified above, Adobe is subject to legal proceedings, claims,
investigations and proceedings in the ordinary course of business, including claims of alleged infringement
of third-party patents and other intellectual property rights, commercial, employment and other matters. In
accordance with generally accepted accounting principles, Adobe makes a provision for a liability when it
is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular
case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect
to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated financial
position, cash flows or results of operations could be affected by the resolution of one or more of these
contingencies.
Note 16. Financial Instruments
Fair Value of Financial Instruments
In accordance with Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting
for Derivative Instruments and Hedging Activities,” we recognize derivative instruments and hedging
activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses
resulting from changes in fair value are accounted for depending on the use of the derivative and whether it
is designated and qualifies for hedge accounting.
As of December 3, 2004, our cash equivalents, short-term investments, and marketable equity
securities, are carried at fair value, based on quoted market prices for these or similar investments. For
further information, see Note 3.
Our portfolio of investments in privately held companies, which includes our direct investments, as
well as indirect investments through Adobe Ventures, is included in other assets on our Consolidated
Balance Sheet. For further information, see Note 6.
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, 2003 this long term investment exposure totaled a notional equivalent of $40.1 million and
$30.8 million, respectively. At this time we do not hedge these long term investment exposures.
Our Japanese operating expenses are in yen, and our European operating expenses are primarily in
euro, which mitigates a portion of the exposure related to yen and euro denominated product revenue. In
addition, we hedge firmly committed transactions using forward contracts. These contracts do subject us to
risk of accounting gains and losses; however, the gains and losses on these contracts largely offset gains
and losses on the assets, liabilities and transactions being hedged. We also hedge a percentage of forecasted
international revenue with forward and purchased option contracts. Our revenue hedging policy is designed
to reduce the negative impact on our forecasted revenue due to foreign currency exchange rate movements.
At December 3, 2004, total outstanding contracts included the notional equivalent of $110.9 million in
foreign currency forward exchange contracts and purchased put option contracts with a notional value of