Adobe 2006 Annual Report Download - page 58

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Indemnifications
In the normal course of business, we provide indemnifications of varying scope to customers against claims
of intellectual property infringement made by third parties arising from the use of our products. Historically, costs
related to these indemnification provisions have not been significant and we are unable to estimate the maximum
potential impact of these indemnification provisions on our future results of operations.
To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and
directors for certain events or occurrences while the officer or director is, or was serving, at our request in such
capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s
lifetime. The maximum potential amount of future payments we could be required to make under these
indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces
our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value
of these indemnification agreements in excess of applicable insurance coverage is minimal.
As part of our limited partnership interests in Adobe Ventures, we have provided a general indemnification to
Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain
events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that
Granite Ventures acts in good faith on behalf of the partnerships. We are unable to develop an estimate of the
maximum potential amount of future payments that could potentially result from any hypothetical future claim,
but believe the risk of having to make any payments under this general indemnification to be remote.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All market risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Hedging Instruments
We transact business in foreign countries, in U.S. dollars and in various foreign currencies. In Europe and
Japan, transactions that are denominated in euro or yen subject us to exposure from movements in foreign
currency exchange rates. This exposure is primarily related to yen-denominated product and support revenue in
Japan and euro-denominated product and support revenue in certain European countries. In fiscal 2006, 2005 and
2004, our revenue exposures were 32.8 billion yen, 26.4 billion yen, and 24.1 billion yen, respectively. In fiscal
2006, 2005 and 2004, our revenue exposures were 504.7 million euros, 411.4 million euros, and 375.4 million
euros, respectively.
Our Japanese operating expenses are in yen and our European operating expenses are primarily in euro,
which mitigates a portion of the exposure related to yen and euro denominated product revenue. In addition, we
hedge firmly committed transactions using forward contracts. These contracts do subject us to risk of accounting
gains and losses; however, the gains and losses on these contracts largely offset gains and losses on the assets,
liabilities and transactions being hedged. We also hedge a percentage of forecasted international revenue with
forward and purchased option contracts. Our revenue hedging policy is intended to neutralize the impact on our
forecasted revenue due to foreign currency exchange rate movements. At December 1, 2006, total outstanding
contracts were $646.8 million which included the notional equivalent of $434.7 million in EUR, $176.1 million in
JPY, and $36.0 million in other foreign currencies. These hedges are foreign currency forward exchange contracts
which hedged our balance sheet exposures. In addition, we had the notional equivalent of $419.0 million in
purchased put option contracts which hedged our forecasted revenue. As of December 1, 2006, all contracts were
set to expire at various times through July 2007. The bank counterparties in these contracts expose us to credit-
related losses in the event of their nonperformance. However, to mitigate that risk we only contract with
counterparties with specific minimum rating requirements. In addition, our hedging policy establishes maximum
limits for each counterparty.
In addition we also have long term investment exposures consisting of the capitalization and retained
earnings in our non-USD functional currency foreign subsidiaries. For the fiscal years ending December 1, 2006
and December 2, 2005 this long term investment exposure totaled a notional equivalent of $85.9 million and
$56.7 million, respectively. At this time we do not hedge these long term investment exposures.