Adobe 2003 Annual Report Download - page 45

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Internal Revenue Service and other domestic and foreign tax authorities. We regularly assess the likelihood of
adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on
our operating results and financial position.
We hold equity investments in public companies that have experienced significant declines in market value. We
also have investments and may continue to make future investments in privately held companies, many of which are
considered in the start-up or development stages. These investments are inherently risky, as the market for the
technologies or products these companies 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 $12.9 million, $17.2 million and $93.4 million
during fiscal 2003, 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 2003 and 2002,
decreases in the market prices of our marketable equity securities resulted in decreases in our pre-tax income. Future
price fluctuations in these securities and any significant long-term declines in value of any of our investments could
reduce our net income in future periods. We are uncertain about 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 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 has caused and could cause in the future 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 volatility of our common stock price.
EMPLOYEE AND DIRECTOR STOCK OPTIONS
Option Program Description
Our stock option program is a long-term retention program that is intended to attract, retain and provide
incentives for talented employees, officers and directors, and to align stockholder and employee interests. We
consider our stock option program critical to our operation and productivity. Option vesting periods are generally
three years for all of the plans within our stock option program. For further information regarding our stock option
program, see Note 11 of our Notes to Consolidated Financial Statements.
All stock option grants to 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 current rules applicable to issuers traded on the Nasdaq Stock Market. See
the “Report of the Executive Compensation Committee” appearing in our 2004 Proxy Statement for further
information concerning the policies and procedures, of the Company and the Executive Compensation Committee,
regarding the use of stock options for executive officers.
In May 2003, a stock option exchange program was initiated that allowed eligible employees to exchange
options granted with an option price greater than $40 per share for a lesser number of new options, according to
specified exchange ratios. The program excluded executive officers and members of our Board of Directors. The
cancellation date for the program was June 16, 2003. On June 17, 2003 we accepted for cancellation, options to
purchase approximately 7.1 million shares of common stock. On December 17, 2003, eligible employees received
new options to purchase approximately 3.4 million shares of common stock, in exchange for such cancelled options,
with an exercise price of $39.10. The tables below include options to purchase 3.5 million shares as estimated as of
November 28, 2003.