Adobe 1999 Annual Report Download - page 78

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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(Continued)
77
NOTE 15. FINANCIAL INSTRUMENTS (Continued)
The Company’s portfolio of equity investments at December 3, 1999 had a cost basis of $67.5 million
and a fair market value of $75.8 million. (For further information, see Note 5.)
Foreign currency hedging instruments
The Company enters into forward exchange contracts to hedge foreign currency exposures on a
continuing basis for periods consistent with its committed exposures. These transactions do subject the
Company to risk of accounting gains and losses; however, the gains and losses on these contracts offset
gains and losses on the assets, liabilities, and transactions being hedged. The Company is exposed to credit-
related losses in the event of nonperformance by the counterparties in these contracts. The amounts of
unrealized gains and losses are immaterial. As of December 3, 1999 and November 27, 1998, the Company
held $16.8 million and $19.5 million, respectively, of aggregate foreign currency forward exchange
contracts for the sale of Japanese yen. As of December 3, 1999 and November 27, 1998, the Company held
$64.0 million and $12.5 million, respectively, in option contracts also for the sale of Japanese yen.
Concentration of risk
Financial instruments that potentially subject the Company to concentrations of credit risk are
primarily cash, cash equivalents, short-term investments, and accounts receivable.
The Company’s investment portfolio consists of investment-grade securities diversified among security
types, industries, and issuers. The Company’s investments are managed by recognized financial institutions
that follow the Company’s investment policy. The Company’s policy limits the amount of credit exposure
to any one issue or issuer, and the Company believes no significant concentration of credit risk exists with
respect to these investments.
Credit risk in receivables is limited to OEM customers and to dealers and distributors of hardware
and software products to the retail market. The Company adopts credit policies and standards to keep
pace with the evolving software industry. Management believes that any risk of accounting loss is
significantly reduced due to the diversity of its products, end users, and geographic sales areas. The
Company performs ongoing credit evaluations of its customers’ financial condition and requires letters of
credit or other guarantees, whenever deemed necessary. (For discussion of significant customers as of
December 3, 1999, see Note 16.)
A significant portion of the Company’s licensing revenue is derived from a small number of OEM
customers. The Company’s OEM customers on occasion seek to renegotiate their royalty arrangements.
The Company evaluates these requests on a case-by-case basis. If an agreement is not reached, a customer
may decide to pursue other options, which could result in lower licensing revenue for the Company. Also,
in the fall of 1997, one of Adobe’s largest PostScript customers, Hewlett-Packard Company, introduced a
clone version of Adobe PostScript in one family of monochrome laser printers.