Adobe 2002 Annual Report Download - page 88

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We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines
for our fixed income portfolios. At the present time, the maximum duration of all portfolios is limited to 2.3 years.
The guidelines also establish credit quality standards, limits on exposure to any one security issue, limits on
exposure to any one issuer, and limits on exposure to the type of instrument. The limited duration and credit risk
criteria established in our guidelines do reduce the exposure to interest rate risk and credit risk; however, dramatic
changes to interest rates could result in material changes to the market value of our fixed income securities.
Interest Rate Hedging Instruments
We are exposed to interest rate risk on the operating lease obligations for some of our facilities that are tied to
short-term interest rates (LIBOR). As short-term interest rates rise, it may negatively impact our net income. Our
policy permits us to hedge this interest rate risk using swap agreements. The swap agreements exchange variable
interest rate payments for fixed interest rate payments with high quality counterparties. Our swaps are designated as
cash flow hedges under SFAS No. 133 because they hedge against changes in the amount of future cash flows. The
critical terms of the cash flow hedging instruments are the same as the underlying obligation, so the change in fair
value of the swaps is recognized in accumulated other comprehensive income. If, for some reason, the terms of the
hedge no longer matched the underlying obligation, a portion of the swap may become ineffective. Under SFAS No.
133, the change in value of the ineffective portion would be recognized in other income (loss) on the consolidated
statement of income.
Our swaps mature at various dates through the third quarter of fiscal 2004, consistent with the expiration of the
underlying obligation.
A sensitivity analysis was performed on our interest rate hedges as of November 29, 2002. This sensitivity
analysis was based on a modeling technique that measures the hypothetical market value changes that would result
from a parallel shift in the yield curve of minus 50, 100, or 150 basis points over six-month and twelve-month
time horizons.
Privately Held Investments
We have direct investments, as well as indirect investments through Adobe Ventures, in several privately held
companies, many of which can still be considered in the start-up or development stages. These investments are
inherently risky, as the technologies or products they have under development are typically in the early stages and
may never materialize, and we could lose a substantial part of our entire initial investment in these companies.
It is our policy to review privately-held investments on a regular basis to evaluate the carrying amount and
economic viability of these companies. This policy includes, but is not limited to, reviewing each of the companies’
cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes,
and competition. The evaluation process is based on information that we request from these privately-held
companies. This information is not subject to the same disclosure regulations as U.S. publicly traded companies, and
as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from
these companies.
Potential decrease to the value of fixed income securities given X% increase in interest rates.
0.5% 1.0% 1.5%
6 - month horizon $ (2.9) $ (5.7) $ (8.5)
12 - month horizon $ (2.5) $ (4.9) $ (7.4)
Potential decrease to the value of fixed income securities given X% increase in interest rates.
0.5% 1.0% 1.5%
6 - month horizon $ (0.7) $ (1.5) $ (2.2)
12 - month horizon $ (0.5) $ (1.0) $ (1.4)