Adobe 2002 Annual Report Download - page 72

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the fair value of non-marketable equity investments in early-stage technology companies is inherently subjective and
may contribute to significant volatility in our reported results of operations.
We recognize realized gains and losses upon sale or maturity of these investments using the specific
identification method. For further information on our long-term investments, please refer to Note 1 of our Notes to
Consolidated Financial Statements.
Accounting for Leases of Property and Equipment
We entered into two operating lease agreements in 1999 and 2001 (the latter for a building currently under
construction) related to our headquarter office buildings in San Jose, California. The agreements qualify for
operating lease accounting treatment under Statement of Financial Accounting Standards No. 13 (“SFAS No. 13”),
“Accounting for Leases,” and, as such, the buildings are not included on our balance sheet. According to SFAS No.
13, a lease is classified as operating if it does not meet any of the following criteria at its inception: 1) the lease
transfers ownership of the property to the lessee at the end of the lease term, 2) the lease contains a bargain purchase
option, 3) the lease term is equal to 75% or more of the economic life of the leased property, 4) the present value of
the minimum lease payments equals or exceeds 90% of the fair value of the leased property. These agreements are
subject to standard covenants, including liquidity, leverage, and profitability ratios that are reported to the lessors
quarterly. We believe we will be able to meet our obligations under the agreements, but if we default on our
commitments and are unable to remedy the default quickly enough, the lessors may terminate all remaining
commitments (if any remain), and they may demand we purchase the building for an amount equal to the current
lease balance, or require that we remarket or relinquish the building. If we are required to purchase the buildings and
do not elect to refinance, this will substantially decrease our cash available for working capital and require us to add
the value of the buildings to our balance sheet. If we remarket or relinquish the buildings, this could require us to
find alternate facilities on terms that may not be as favorable as the current arrangement. As of November 29, 2002,
we were in compliance with all covenants. For further information on these leases, please refer to Note 14 of our
Notes to Consolidated Financial Statements.
Income Taxes
Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” establishes financial
accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are
to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for
the future tax consequences of events that have been recognized in an entity's financial statements or tax returns.
Judgment is required in assessing the future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could
materially impact the Company's financial position or its results of operations.
Employee and Director Stock Options
Option Program Description
Our stock option program is a broad-based, long-term retention program that is intended to attract, retain, and
provide performance incentives for talented employees, officers and directors, and to align stockholder and
employee interests. Currently, we grant options from three stock plans: 1) the 1994 Stock Option Plan, under which
officers and key employees are granted options to purchase shares of our stock, 2) the 1999 Equity Incentive Plan,
our broad-based plan under which options may be granted to all employees and outside consultants, and 3) the 1996
Outside Directors Stock Option Plan, as amended, under which options are granted automatically under a pre-
determined formula to non-employee directors. In addition, our stock option program includes the Adobe 1984
Stock Option Plan, as amended, and the Aldus 1984 Restated Stock Option Plan from which we currently do not
grant options. The plans listed above are collectively referred to in the following discussion as “the Plans.” We
consider our option programs critical to our operation and productivity; essentially all of our employees participate.
Option vesting periods are generally three years for all of the Plans.
All stock option grants to current executive officers are made after a review by, and with the approval of, the
Executive Compensation Committee of the Board of Directors. All members of the Executive Compensation
Committee are independent directors, as defined in the rules applicable to issuers traded on The Nasdaq Stock