Adobe 2001 Annual Report Download - page 14

Investment in New Markets
We own limited partnership interests in four venture capital limited partnerships, Adobe Ventures
L.P.; Adobe Ventures II, L.P.; Adobe Ventures III, L.P., and Adobe Ventures IV, L.P. (collectively ‘‘Adobe
Ventures’’), that invest in early stage companies with innovative technologies. In addition to the potential
for financial returns, our venture activities increase our knowledge of emerging markets and technologies,
as well as expand our ecosystem of Adobe products and services. The partnerships are managed by Granite
Ventures, an independent venture capital firm and sole general partner of Adobe Ventures.
The investments in Adobe Ventures are accounted for using the equity method of accounting, and
accordingly, the investments are adjusted to reflect our share of Adobe Ventures’ investment income (loss)
and dividend distributions. Adobe Ventures carry their investments in equity securities at estimated fair
market value and unrealized gains and losses are included in investment income (loss). The stock of a
number of technology investments held by the limited partnerships at November 30, 2001 are not publicly
traded, and, therefore, there is no established market for their securities. As such, the fair value of these
investments are determined by Granite Ventures using the most recent round of financing involving new
non-strategic investors or estimates made by Granite Ventures. We also have a policy in place to review the
fair value of these investments held by Adobe Ventures on a regular basis to evaluate the carrying value of
the investments in 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. public companies, and as such, the basis for these evaluations is subject to the timing
and the accuracy of the data received from these companies. If we believe that the carrying value of a
company is carried at an amount in excess of fair value, it is our policy to record a reserve in addition to
our equity method of accounting and the related writedown is recorded as an investment loss on our
consolidated statements of income.
In March 1997, as part of our venture investing program, we established an internal limited
partnership, Adobe Incentive Partners, L.P. (‘‘AIP’’), which allows certain of Adobe’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 certain equity securities
of privately-held companies. Adobe is both the general partner and a limited partner of AIP. Other limited
partners are executive officers and former executive officers of Adobe who are or were involved in Adobe’s
venture investing activities and whose participation was deemed critical to the success of the program. No
limited partnership interests were granted in fiscal 2001, 2000, or 1999.
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 vested
on a monthly basis over three years, and were 25% vested after one year, 50% vested after two years and
fully vested at the end of three years. As of June 30, 2000, all existing partnership interests were fully
vested or ceased vesting. The limited partnership investments are restricted to investments in Adobe
Ventures or in companies that were private at the time of the establishment of AIP, or when the investment
is made, whichever is later. In fiscal 2001, the participating officers received aggregate distributions with a
fair value of $0.6 million, consisting primarily of equity securities. The distributions to the officers
represents their share of nonmarketable securities that became marketable as a result of a public offering,
as well as their share of cash resulting from investments that were liquidated by AIP. At November 30,
2001, the minority interest held by the participating officers was $0.5 million and is included in accrued
expenses on the consolidated balance sheet.
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