Adobe 1998 Annual Report Download - page 7

Customer Support and Education
For Adobe’s application software, a technical support and services staff responds to customer queries
by phone and on-line. The Company also informs customers through its Adobe Magazine and a growing
series of how-to books published by Adobe Press, a joint venture with Macmillan Computer Publishing. In
addition, Adobe prepares and authorizes independent trainers to teach Adobe software classes in person
or increasingly via computer-based and internet-based training programs, sponsors workshops led by its
own graphics staff, interacts with independent user groups, and conducts regular beta-testing programs.
Investment in New Markets
The Company owns a majority interest in two venture capital limited partnerships, Adobe Ventures
L.P. and Adobe Ventures II, L.P., that invest in early stage companies with innovative technologies. These
companies may create new market opportunities for Adobe or enhance the Company’s existing business.
The investments in Adobe Ventures L.P. and Adobe Ventures II, L.P. are accounted for using the
equity method of accounting, and, accordingly, the investments are adjusted to reflect the Company’s share
of Adobe Ventures L.P. and Adobe Ventures II, L.P.’s investment income (loss) and dividend distributions.
Adobe Ventures L.P. and Adobe Ventures II, L.P. carry their investments in equity securities at estimated
fair market value and unrealized gains and losses are included in investment income (loss). Substantially all
of the technology companies held by the limited partnerships at November 27, 1998 are not publicly
traded, and, therefore, there is no established market for these investments. As such, these investments are
valued based on the most recent round of financing involving new non-strategic investors and estimates
made by the general partner, a third party. When investments held by the limited partnerships are publicly
traded, the fair value of such investments is based on quoted market prices, and mark-to-market
adjustments are included in investment income. In general, as a matter of policy of the limited partner-
ships, the investments in the technology companies held by the limited partnerships will be distributed to
the partners prior to the investee company’s initial public offering.
In March 1997, as part of its venture investing program, the Company established an internal limited
partnership, Adobe Incentive Partners, L.P. (‘‘AIP’’), which allows certain of the Company’s executive
officers to participate in cash or stock distributions from Adobe’s venture investments. Assets held by AIP
include Adobe’s entire interests in Adobe Ventures L.P. and Adobe Ventures II, L.P. and equity securities
of privately-held companies. Adobe is both the general partner and a limited partner of AIP. Other limited
partners are executive officers of the Company who are involved in Adobe’s venture investing activities and
whose participation is deemed critical to the success of the program.
Adobe’s Class A senior limited partnership interest in AIP includes both a liquidation preference and
a preference in recovery of the cost basis of each specific investment. The executives’ Class B junior limited
partnership interest qualifies for partnership distributions only after: (a) Adobe has fully recovered the cost
basis of its investment in the specific investee company for which a distribution is made; and (b) the
participating executive has vested in his or her distribution rights. The distribution rights generally vest on
a monthly basis over three years, such that the rights are 25% vested after one year, 50% vested after two
years and fully vested at the end of three years. The limited partnership investments are restricted to
investments in companies that were private at the time of the establishment of AIP or when the investment
is made, whichever is later. Partnership interests may be allocated to designated officers only while the
investee company is still private. In fiscal 1998, the participating officers received aggregate cash distribu-
tions of $707,000. The amount of cash distributed to the officers represents their vested portion of
investments that were liquidated by AIP. At November 27, 1998, the minority interest held by the
participating officers was $1.5 million and is included in accrued expenses on the consolidated balance
sheet.
The Company’s portfolio of equity investments, including those held by AIP at November 27, 1998,
had a cost basis of $65.9 million and a recorded fair market value of $56.3 million. In fiscal 1998, AIP
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