Adaptec 2009 Annual Report Download - page 67

Annual Report
There was no impact on previously reported net change in cash and cash equivalents, net income (loss), net
income (loss) per common share or financial position as a result of this change in presentation for any of the
years presented.
NOTE 2. DERIVATIVE INSTRUMENTS
The Company generates revenues in U.S. dollars but incurs a portion of its operating expenses in various
foreign currencies, primarily the Canadian dollar. To minimize the short-term impact of foreign currency
fluctuations on the Company’s operating expenses, the Company uses currency forward contracts.
Currency forward contracts that are used to hedge exposures to variability in forecasted foreign currency
cash flows are designated as cash flow hedges. The maturities of these instruments are less than twelve months.
For these derivatives, the gain or loss from the effective portion of the hedge is initially reported as a component
of other comprehensive income in stockholders’ equity and subsequently reclassified to earnings in the same
period in which the hedged transaction affects earnings. The gain or loss from the ineffective portion of the
hedge is recognized as interest income or expense immediately.
At December 27, 2009, the Company had 18 currency forward contracts outstanding (2008 – 12 currency
forward contracts outstanding) that qualified and were designated as cash flow hedges. The U.S. dollar notional
amount of these contracts was $27.8 million (2008—$43.6 million) and the contracts had a fair value of $0.8
million gain (2008—fair value of $4.6 million loss). No portion of the hedging instrument’s gain or loss was
excluded from the assessment of effectiveness. The ineffective portions of hedges had no significant impact on
earnings, nor are they expected to over the next twelve months.
NOTE 3. FAIR VALUE MEASUREMENTS
ASC Topic 820 specifies a hierarchy of valuation techniques which requires an entity to maximize the use
of observable inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets are available for identical assets and liabilities. The Company’s
Level 1 assets include cash equivalents, short-term investments, and long-term investment securities, which are
generally acquired or sold at par value and are actively traded.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities;
or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities. The Company’s Level 2 liabilities include forward currency contracts whose
value is determined using a pricing model with inputs that are observable in the market or corroborated with
observable market data. Level 2 observable inputs were used in estimating interest rates used to determine the
fair value of the debt component the Company’s senior convertible notes (see Note 1. Summary of Significant
Accounting Policies and Note 9. Long-Term Debt).
Level 3—Pricing inputs include significant inputs that are generally not observable in the marketplace.
These inputs may be used with internally developed methodologies that result in management’s best estimate of
fair value. At each balance sheet date, the Company performs an analysis of all applicable instruments and would
include in Level 3 all of those whose fair value is based on significant unobservable inputs. The Company’s
Level 3 assets include investments in money market funds classified in Short-term investments (see Note 6.
Investment Securities).
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