Adobe 2004 Annual Report Download - page 92

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Interest Rate Hedging - Hedging of Interest Rate Sensitive Obligations
In the past, we have entered into interest rate swap agreements to manage our exposure to operating
lease obligations, on our East and West towers, that were tied to short-term interest rates (LIBOR). The
swaps allowed us to exchange variable interest rate payments for fixed interest rate payments, thereby
securing a fixed payment amount for a portion of the total obligation. These swaps were designated as cash
flow hedges under SFAS No. 133 because they hedged against changes in the amount of future cash flows.
As of December 3, 2004 we did not have any outstanding interest rate swaps. As of November 28, 2003, a
$2.6 million unrealized loss had been recorded in accumulated other comprehensive income (loss) as a
result of the decrease in fair market value of these interest rate hedges. There were no realized gains or
losses due to ineffectiveness of the hedges.
Balance Sheet Hedging - Hedging of Foreign Currency Assets and Liabilities
We hedge our net recognized foreign currency assets and liabilities with forward foreign exchange
contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in
foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are
denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as
other income (loss). These derivative instruments do not subject us to material balance sheet risk due to
exchange rate movements because gains and losses on these derivatives are intended to offset gains and
losses on the assets and liabilities being hedged. At December 3, 2004, the outstanding balance sheet
hedging derivatives had maturities of 90 days or less.
Net gains in other income (loss) relating to balance sheet hedging for fiscal 2004, 2003 and 2002
2004 2003 2002
Gain on foreign currency assets and liabilities:
Net realized gain recognized in other income (loss) ............. $ 4,586 $ 13,535 $ 6,500
Net unrealized gain recognized in other income (loss) ......... 3,949 132 2,549
8,535 13,667 9,049
Gain (loss) on hedges of foreign currency assets and
liabilities:
Net realized loss recognized in other income (loss).............. (11,123) (8,726) (8,587)
Net unrealized gain (loss) recognized in other income
(loss)............................................................................... 3,150 (3,483) 444
(7,973) (12,209) (8,143)
Net gain recognized in other income............................... $ 562 $ 1,458 $ 906
Fair Value Hedges – Hedging of Foreign Currency Denominated Available for Sale Securities
During fiscal 2004, a portion of our investment portfolio was invested in euro denominated securities.
In order to mitigate the currency risk of those euro denominated securities, we entered into forward
contracts. We designated these forward contracts as fair value hedges. As of December 3, 2004, there were
no euro denominated securities in the investment portfolio and no remaining fair value hedges.
Net gains recognized in other income (loss) relating to fair value hedges for fiscal 2004, 2003 and 2002
were as follows:
2004 2003 2002
Gain (loss) on foreign currency assets and liabilities:
Net realized gain recognized in other income (loss) ............. $ 2,234 $ — $ —
Net unrealized loss recognized in other income (loss).......... (1,935) — —
299 — —
Gain (loss) on hedges of foreign currency assets and
liabilities:
Net realized gain recognized in other income (loss) ............. 3,026 — —
Net unrealized loss recognized in other income (loss) ......... (3,482) — —
(456) — —
Net loss recognized in other income ............................... $ (157) $ — $ —