Adobe 2002 Annual Report Download - page 70

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We hold equity investments that have recently experienced significant declines in market value. We also have
investments, and may continue to make future investments, in several privately held companies, many of which can
still be considered in the start-up or development stages. These investments are inherently risky, as the market for
the technologies or products they have under development is typically in the early stages and may never materialize.
Our investment activities can impact our net income. We recorded pre-tax losses from marketable securities and
other investments in privately held companies of $17.2 million and $93.4 million in fiscal 2002 and 2001,
respectively. These amounts reflect realized losses from the sale of marketable equity investments, other-than-
temporary declines in the value of marketable equity securities, and net investment losses related to investments in
Adobe Ventures and our cost method investments. In fiscal 2002 and 2001, decreases in the market prices of these
securities resulted in a decrease in our pre-tax income. Future price fluctuations in these securities and any
significant long-term declines in value could reduce our net income in future periods. We are uncertain of future
investment gains and losses, as they are primarily dependent upon the operations of the underlying
investee companies.
Due to the factors noted above, our future earnings and stock price may be subject to significant volatility,
particularly on a quarterly basis. Any shortfall in revenue or earnings, or any delay in the release of any product or
upgrade, compared to analysts’ or investors’ expectations could cause, and has caused in the past, an immediate and
significant decline in the trading price of our common stock. Additionally, we may not learn of such shortfalls or
delays until late in the fiscal quarter, which could result in an even more immediate and greater decline in the trading
price of our common stock. Finally, we participate in a highly dynamic industry. In addition to factors specific to us,
changes in analysts’ earnings estimates for us or our industry and factors affecting the corporate environment, our
industry, or the securities markets in general will often result in significant volatility of our common stock price.
Critical Accounting Policies
We have identified the following as critical accounting policies to our company: revenue recognition,
accounting for our marketable and non-marketable fixed income and equity securities, accounting for leases of
property and equipment, and accounting for income taxes.
Revenue Recognition
We recognize application products revenue upon shipment, net of estimated returns, provided that collection is
determined to be probable and no significant obligations remain. Application products revenue from distributors is
subject to agreements allowing limited rights of return, rebates, and price protection. Accordingly, we reduce
revenue recognized for estimated future returns, price protection, and rebates at the time the related revenue is
recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levels
in the distribution channel, and other related factors.
We provide free technical phone support for our shrink-wrapped application products to customers who are
under warranty for support. We record the estimated cost of free technical phone support upon shipment of software.
We also license software in multiple element arrangements in which a customer purchases a combination of
software, post-contract customer support (“PCS”), and/or professional services. PCS, or maintenance, includes
rights to upgrades, when and if available, telephone support, updates, and enhancements. Professional services relate
to consulting services and training. When vendor specific objective evidence (“VSOE”) of fair value exists for all
elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value of
each of the elements. VSOE of fair value is established by the price charged when the same element is sold
separately. We determine VSOE of fair value of PCS based on renewal rates for the same term PCS. In a multiple
element arrangement whereby VSOE of fair value of all undelivered elements exists but VSOE of fair value does
not exist for one or more delivered elements, revenue is recognized using the residual method. Under the residual
method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is
recognized as revenue, assuming delivery has occurred and collectibility is probable. Revenue allocated to PCS is
recognized ratably over the contractual term (typically one to two years).
The arrangement fees related to fixed-priced consulting contracts are recognized using the percentage of
completion method. Percentage of completion is measured monthly based primarily on input measures, such as on
hours incurred to date compared to total estimated hours to complete, with consideration given to output measures,