Adobe 1998 Annual Report Download - page 29

lessor any difference between the net sales proceeds and the lessor’s net investment in the facility, in an
amount not to exceed that which would preclude classification of the lease as an operating lease,
approximately $64.3 million. The Company was required to deposit funds with the lessor as an interest-
bearing security deposit pursuant to its obligations under the lease. As of November 27, 1998, the
Company’s deposits under this agreement totaled approximately $64.3 million. These deposits are included
in ‘‘Other assets’’ on the Consolidated Balance Sheet.
During 1998, the Company entered into a real estate development agreement for the construction of
an office building in Edinburgh, Scotland. As of November 27, 1998, the Company has paid $11.5 million
for land, fees, and construction costs. The expected completion date of the building is August 1999.
At November 28, 1997, the Company held a 13% equity interest in McQueen International Limited
(‘‘McQueen’’) and accounted for the investment using the cost method. During 1994, the Company
entered into various agreements with McQueen, whereby the Company contracted with McQueen to
perform product localization and technical support functions and to provide printing, assembly, and
warehousing services. Effective December 31, 1997, McQueen was acquired by Sykes Enterprises, Incorpo-
rated (‘‘Sykes’’), a publicly traded company. In connection with the acquisition, the Company exchanged its
shares of McQueen for 486,676 shares of Sykes’ common stock and recorded a gain on the exchange of
$6.7 million in fiscal 1998. In the third quarter of fiscal 1998, these shares were sold. The Company expects
that Sykes will continue to provide services to the Company for the foreseeable future.
Derivatives and Financial Instruments
(Item 7a. Quantitative and Qualitative Disclosures About Market Risk)
Foreign currency hedging instruments
The Company transacts business in various foreign currencies, primarily in certain European countries
and Japan. Accordingly, the Company is subject to exposure from movements in foreign currency exchange
rates. This exposure is primarily related to yen denominated licenses in Japan and local currency
denominated operating expenses in Europe, where the Company licenses primarily in U.S. Dollars.
The Company’s Japanese operating expenses are in yen, which mitigates a portion of the exposure
related to yen denominated licenses in Japan. In addition, the Company hedges firmly committed
transactions using primarily forward contracts with maturities of less than three months. The Company
also hedges a percentage of forecasted international revenue with purchased options. At November 27,
1998, total outstanding contracts include $19.8 million in foreign currency forward exchange contracts and
purchased Japanese yen put option contracts with a notional value of $12.5 million. All contracts expire at
various times through March 1999. The Company’s hedging policy is designed to reduce the impact of
foreign currency exchange rate movements, and any gain or loss in the hedging portfolio is expected to be
offset by a corresponding gain or loss in the underlying exposure being hedged.
A sensitivity analysis was performed on the Company’s hedging portfolio as of November 27, 1998.
This sensitivity analysis is based on a modeling technique that measures the hypothetical market value
resulting from a 10% and 15% shift in the value of exchange rates relative to the U.S. Dollar. An increase
in the value of the U.S. Dollar (and a corresponding decrease in the value of the hedged foreign currency
asset) would lead to an increase in the fair value of the Company’s financial hedging instruments by
$1.9 million and $2.9 million, respectively. Conversely, a decrease in the value of the U.S. Dollar would
result in a decrease in the fair value of these financial instruments by $1.2 million and $1.7 million,
respectively.
The Company’s accounting policies for these instruments are based on the Company’s designation of
such instruments as hedging transactions. Gains and losses associated with the mark-to-market of out-
standing foreign exchange forward contracts that are designated and effective as hedges of existing
transactions, for which a firm commitment has been attained, are recognized in income in the current
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