Adobe 2000 Annual Report Download - page 47

Beginning in the first quarter of fiscal 2001, we began to denominate revenue in euros in
certain European countries. As a rule, we do not use financial instruments to hedge local
currency denominated operating expenses in Europe where a natural hedge exists. For
example, in many countries the local currency revenue from product upgrades substan-
tially offsets the local currency denominated operating expenses. We assess the need to
utilize financial instruments to hedge European currency exposure on an ongoing basis.
We regularly review our hedging program and may as part of this review determine at any
time to change our hedging program.
Equity Investments We are exposed to equity price risk on our portfolio of equity securi-
ties. As of December 1, 2000, our total equity holdings in publicly traded companies were
valued at $90.2 million. We believe that it is reasonably possible that the prices of these
securities could experience adverse changes in the near term. For example, as a result of
recent market price volatility of our publicly traded equity investments, we experienced a
$20.2 million after-tax unrealized gain during the third quarter of fiscal 2000 and a $38.5
million after-tax unrealized loss during the fourth quarter of fiscal 2000 on these invest-
ments. We have a policy in place to review our equity holdings on a regular basis to
evaluate the economic viability of these publicly traded companies, which includes, but is
not limited to, reviewing each of the companies’ cash positions, revenue models, stock
price activity over the past six months, and future prospects. If we believe that an other-
than-temporary impairment exists in one of our equity investments in these publicly
traded companies, it is our policy to write down these equity investments to the market
value on the last day of our reporting period.
In addition, we have investments in several privately held companies, many of which can
still be considered in the start-up or development stages. These investments are inher-
ently risky, as the market for the technologies or products they have under development
are typically in the early stages and may never materialize. We could lose a substantial
part of or our entire initial investment in these companies.
The following table represents the potential decrease in fair values of our public equity
investments that are sensitive to changes in the stock market. Stock price fluctuations of
minus 50%, 35%, and 15% were selected based on the probability of their occurrence.
Potential Decrease to the Value of Securities Given X% Decrease in Each Stock’s Price
FAIR VA LUE AS
OF DECEMBER 1
(50%) (35%) (15%) 2000
Corporate equities $ (45.1) $ (31.6) $ (13.5) $ 90.2
We also have a policy to hedge a certain portion of our equity holdings in publicly traded
companies. From time to time, we have entered into forward contracts to sell portions of
our equity holdings in future periods. These forward contracts are accounted for at fair
market value offsetting changes in the value of the equities being hedged. As of December
1, 2000, the value of our forward contracts hedging equity securities was $10.7 million.