UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
Form 10-KFORM 10-K________________
(Mark One)
| one) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended November 30, 200129, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934OR
For the transition period from to
0-15175(Commission file number)
number: 0-15175
ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware | 77-0019522 | |
(State or other jurisdiction of | (I.R.S. Employer | |
(408) 536-6000
345 Park Avenue, San Jose, California 95110-2704
(Address of principal executive offices)
Registrant's telephone number, including area code)code: (408) 536-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check markcheckmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)15 (d) of the Securities Exchange Act of 1934 (the "Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/[X] No / /[ ]
Indicate by check markcheckmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
The aggregate market value of the registrant's common stock, $0.0001 par value per share, held by non-affiliates of the registrant ason May 31, 2002, the last business day of January 25, 2002the registrant's most recently completed second fiscal quarter, was $7,941,041,154.
The number of shares outstanding$1,462,142,091 (based on the closing sales price of the registrant's common stock ason that date). Shares of the registrant's common stock held by each officer and director and each person who owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 25, 2002 was 236,763,372.24, 2003, 231,074,795 shares of the registrant's common stock, $.0001 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in connection withfor the Notice of2003 Annual Meeting of Stockholders (the "Proxy Statement"), to be held on April 11,filed within 120 days of the end of the fiscal year ended November 29, 2002, are incorporated by reference intoin Part III.
III hereof. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
TABLE OF CONTENTS
Page No. | ||||||||
PART I | ||||||||
Item | Business | 3 | ||||||
Item | Properties | 23 | ||||||
Item 3. | Legal Proceedings | 23 | ||||||
Item 4. | Submission of Matters to a Vote of Security Holders | 25 | ||||||
PART II | ||||||||
Item 5. | Market for Registrant's Common Stock and Related Stockholder Matters | 25 | ||||||
Item 6. | Selected Financial Data | 26 | ||||||
Item 7. | Management's Discussion and Analysis of Financial Condition and | 27 | ||||||
Item 7a. | Quantitative and Qualitative Disclosures About Market Risk | 55 | ||||||
Item 8. | Financial Statements and Supplementary Data | 58 | ||||||
Item | Changes in and Disagreements With Accountants on Accounting | 58 | ||||||
PART III | ||||||||
Item 10. | Directors and Executive Officers of the Registrant | 59 | ||||||
Item 11. | Executive Compensation | 59 | ||||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management | 59 | ||||||
Item 13. | Certain Relationships and Related Transactions | 59 | ||||||
Item 14. | Controls and Procedures | 59 | ||||||
PART IV | ||||||||
Item | Exhibits, Financial Statement | 60 | ||||||
SIGNATURES | 65 | |||||||
CERTIFICATIONS | 66 | |||||||
SUMMARY OF TRADEMARKS | 68 | |||||||
FINANCIAL STATEMENTS | 69 | |||||||
FINANCIAL STATEMENT SCHEDULE | 110 | |||||||
EXHIBITS | ||||||||
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Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements, including, but not limited to, those related to product and marketing plans, that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Operations - Factors That May Affect Our Future Results of Operations.Performance." You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission ("SEC"), including the Quarterly Reports on Form 10-Q to be filed in 2002.2003. When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," "looks for," "looks to," and similar expressions, as well as statements regarding Adobe's focus for the future, are generally intendedin tended to identify forward-looking statements. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
PART I
Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company") builds award-winningoffers a line of software solutions for network publishing, including Web, print, ePaper, video, wirelessconsumers, businesses, and broadband applications. Its graphic design, imaging, and dynamic media authoring toolscreative professional customers. Our products enable customers to create, manage and deliver visually rich, compelling and reliable content. We license our technology to major hardware manufacturers, software developers, and service providers, and we offer integrated software solutions to businesses of all sizes. We distribute our products through a network of distributors and dealers, value-added resellers ("VARs"), systems integrators, and original equipment manufacturers ("OEM"OEMs"); direct to end users through Adobe call centers;users; and through our own Web sitewebsite atwww.adobe.com. www.adobe.com. We have operations in the Americas; Europe, Middle East, and Africa ("EMEA"); and Asia. Our software runs on Microsoft Windows, Apple Macintosh, Linux, UNIX, Palm OS, and Pocket PC, and Symbian platforms.
Adobe was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. We maintain executive offices and principal facilities at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000. We maintain a World Wide Web site atwww.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC website at www.sec.gov.
In 1984,the early 1980s, Adobe developed the software that initiated desktop publishing. Today, we continue to be uniquely positioned to make dramatic changes not only to how society creates visually rich information for print and the Web, but also as to how it distributes and accesses that information electronically.
In the simplest of terms, Adobe helps people communicate better. By delivering powerful graphic design, publishing, and imaging software for print, Web, and Webvideo production, we help people express, share, and manage their ideas in imaginative and meaningful new ways.
Our strategy is to address the needs of a variety of customers, which include creative professionals -- graphic designers;designers, Web designers, videographers, photographers, and professional print, cross-media,publishers; users at work --- knowledge workers, IT managers, line of business managers, and Web publishers; dynamic media artists; communicatorsexecutives; and workers within businessesusers at home --- digital imaging and governments; IS technologistsdigital video hobbyists and developers; hobbyists; and consumers.enthusiasts. We execute on this strategy by delivering products that support industry standards and that can be deployed on multiple computing environments, including Microsoft Windows, Apple Macintosh, Linux, UNIX, Palm OS, and Pocket PC, and Symbian platforms.
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Due to a change in business strategy and organizational structure, we have realigned our business segments beginning in the first quarter of fiscal year 2002. A2003. Beginning November 30, 2002, a newly named GraphicsCreative Professional segment will in the future replacereplaced the former WebCross-media Publishing segment, and will includenow includes Adobe Illustrator. TheIllustrator and Adobe GoLiveGraphics Server (formerly called Adobe AlterCast). In addition, a newly named Digital Imaging and Web Collection products will be reportedVideo segment replaced the former Graphics segment. Our ePaper business segment remains the same, including revenue from our recently-acquired Accelio Corporation ("Accelio") business (acquired in the Cross-media Publishing segment. second quarter of fiscal 2002). Our OEM Postscript and Other segment remains the same.
For more information on our old and new segment reporting, please refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 1617 of our Notes to Consolidated Financial Statements.
Beginning in fiscal 2002,2003, we categorize our products into the four principal business segments as follows:explained below.
GraphicsCreative Professional
GraphicsCreative Professional Market Opportunity
The Graphics segment consistsSince Adobe was founded in the early 1980's, a core customer of powerfulthe Company has been the creative professional. Graphic designers, production artists, Web designers, technical writers, videographers, photographers, and prepress professionals use and rely on Adobe's solutions for professional publishing, Web design, business document publishing, and printing visually rich information. Our software productstools are used by creative professionals to create visually rich information. Thesemuch of the printed and on-line information people see and read every day, including newspapers, magazines, Web sites, catalogs, advertisements, brochures, product documentation, technical manuals, books, eBooks, memos, reports, and banners.
Since the global economic downturn began early in 2001, creative professionals have been under economic duress. They derive their revenue mainly from marketing and ad spending in corporations. With a global reduction in marketing spending, the businesses of creative professionals have suffered. Consequently, there has been a decline in spending by creative professionals on software, a decline in growth of the number of creative professionals, and for Adobe, a decline in revenue from the creative professional customer segment.
However, the Creative Professional market continues to evolve, with increased needs to derive greater efficiency from the software they use, the need to streamline their publishing workflows, and the desire to repurpose content across a variety of media.
Adobe's brand and customer loyalty in this market continues to be strong. Existing customers purchase upgrades and new units of our creative professional products because of the frequent use of the products in their daily work. However, until an economic recovery occurs in the major countries in which we do business, we believe that our creative professional business will continue to be challenging.
As part of our corporate strategy, we are increasing our focus on the creative professional customer. Thus, we have established a new creative professional business unit that will focus solely on the needs of this customer. In fiscal 2003, the creative professional business unit will focus on two key strategies: 1) increasing the number of Adobe products they use and 2) enabling more efficient collaboration and workflow through improved product integration and by offering a professional version of Acrobat to assist in digitizing their publishing workflow.
To accomplish these two strategies, Adobe plans to execute against a number of key imperatives. They include: continue to provide best-of-class products; grow usage of Adobe products such as professional page layout and illustration, introduce a new version of Adobe Acrobat which will have specific features creative professionals can use to increase their productivity; and focus on the licensing of collections of Adobe software applications that provide a more complete integrated solution for various types of creative professionals. In addition, the Company plans to continue to focus on enhancing support for eXtensible Markup Language ("XML") in its products, and to enhance the use of Adobe Portable Document Format ("PDF") creation and workflow capabilities in its products -- both of which we expect to result in fast, reliable multi-device output.
In fiscal 2002, Adobe responded to the needs of our customers by delivering several new releases of our Creative Professional software applications. In the first quarter of fiscal 2002, we released new versions of Adobe InDesign -- our software used for professional page layout -- and Adobe GoLive, which is used for Web site content creation and production. In addition, we also shipped a new graphics server product, Adobe Graphics Server (formerly called Adobe AlterCast) to automate the production of images and graphics for data driven content.
In the second quarter of fiscal 2002, we shipped Adobe FrameMaker 7.0, which is our long-document, technical authoring software application.
In the third quarter of fiscal 2002, we shipped Adobe InCopy 2.0, the companion product to Adobe InDesign for copy editing in the professional page layout market. Finally, we also shipped Adobe Content Server 3.0, which is a server product that customers use to create, manage the rights for, and distribute eBooks.
We will work to enhance the integration of our products and provide creative professionals the best possible design experience with Adobe software tools. We plan to continue to provide solutions that help publishers of printed material reuse and repurpose their information to output formats beyond that of print, including Web and wireless formats.
Creative Professional Products
Adobe Content Server---an easy-to-use, all-in-one system for publishers, distributors, retailers, and individual authors to prepare, secure, and license eBooks in Adobe PDF directly from their Web sites.
Adobe Creative Suite Standard Edition---suite of three application products that offers creative professionals software to modify images, create vector diagrams, and produce graphical layouts; includes Adobe Illustrator, Adobe InDesign, and Adobe Photoshop.
Adobe Creative Suite Premium Edition---suite of six professional and integrated software solutions that creative professionals can use to create, modify, format and manage content to be printed, published on the web, sent over wireless links, and viewed on screen. This suite offers document authoring for the Web and wireless devices, digital imaging modification, and digital document sharing. The different applications share a similar user interface and share several commands, tools, palettes and keyboard short-cuts. The suite includes Adobe Acrobat, Adobe GoLive, Adobe InDesign, Adobe Illustrator, Adobe Photoshop, and Adobe Premiere.
Adobe Design Collection---suite of four award-winning application products that allows creative professionals to create and produce high-quality images, illustrations, and layouts, and to publish documents across multiple media; includes Adobe Acrobat, Adobe Illustrator, Adobe InDesign, and Adobe Photoshop.
Adobe Acrobat eBook Reader---software that displays Adobe PDF-based eBooks on notebook and desktop computers in full color, with the high quality and careful design found in printed books.
Adobe Font Folio---contains the entire Adobe Type Library, unlocked and ready to use.
Adobe FrameMaker---an application for authoring and publishing long, structured, content-rich documents including books, documentation, technical manuals, and reports; provides users a way to publish their content to multiple output formats, including print, Adobe PDF, Hypertext Markup Language ("HTML"), XML, and Microsoft Word.
Adobe GoLive---professional Web design and publishing software that provides innovative tools that Web authors require to design, layout, produce, and maintain content for Web sites and wireless Web devices without the need for complex multimedia programming.
Adobe Graphics Server---formerly called Adobe AlterCast; imaging server software used to create and maintain digital graphics and images on frequently updated data-driven content, such as Web sites and printed catalogs, by automating the creation and the reuse of images; integrates with content management and e-commerce systems to automate workflows, and eliminates the tedious manual tasks of refining and reformatting images for specific purposes.
Adobe Illustrator---a vector-based illustration design tool used to create compelling graphic artwork for print publications and the Web.
Adobe InCopy---an editorial tool for collaboration between writers, editors, and copy-fitters; InCopy is a companion to Adobe InDesign and is licensed through Adobe's system integrator partners servicing the professional publishing market.
Adobe InDesign---a page-layout application for publishing professionals; based on an open, object-oriented architecture that is extensible, it enables Adobe and its industry partners to deliver powerful publishing solutions for magazine, newspaper, and other high-end publishing applications.
Adobe PageMaker---software used to create high-quality business documents simply and reliably with robust page layout tools, templates, and stock art.
Adobe Publishing Collection---suite of four award-winning application products that allows business users to create professional-quality business communications; includes Adobe Acrobat, Adobe Illustrator, Adobe PageMaker, and Adobe Photoshop.
Adobe Type Basics---includes Adobe's best-selling typefaces, plus Adobe Type Manager; makes it easy to create beautiful text for print, Web, and video projects.
Adobe Type Manager---provides powerful, easy management of all PostScript Type 1, OpenType, and TrueType fonts.
Adobe Web Collection---a comprehensive, integrated software suite that allows users to design still and interactive Web graphics, optimize graphics for efficient downloading, and build dynamic Web sites that support the latest technology and standards; includes Adobe Acrobat, Adobe GoLive, Adobe Illustrator, and Adobe Photoshop.
Digital Imaging and Video
Digital Imaging and Video Market Opportunity
With the first release of Adobe Photoshop more than ten years ago, and with a strong market presence with our imaging and video editing tools today, Adobe sets the standard for digital imaging software. Customers in the digital imaging and video segment include graphic designers, photographers, Web content creators, and multimedia, film, and video producers who work in industries such as advertising, marketing communications, graphic design, printing, publishing, architecture, fine arts, Web design/consulting, and entertainment. They userely on Adobe's illustration, digital imaging and digital video editing solutions to create and enhance many of the pictures and video we see everyday in print, on television, and on the Web.
Driving the market opportunities for Adobe in this segment is the growth in the use of digital devices such as digital cameras, digital video cameras, multi-media-enabled computers, scanners, DVD players, Web-capable and image-enabled handheld devices and cellular phones, as well as broadband adoption. As more and more users migrate towards digital photography and digital video recording, the potential market for Adobe grows.
Adobe's digital imaging and video segment consists of powerful software products used by creative professionals, business users, and hobbyists at home to create visually rich content.
Creative professionals use Adobe's digital imaging and video software to create content found in communication media such as books, newspapers, magazines, Web sites, brochures, movies, and television. The digital content they create, which includes graphics, video, photographic images, video, streaming media, animations, and textual items,animations, are created with our software tools in order to make their work stand out and to differentiate their companies' products and services from their competitors.
Business users utilize digital imaging and digital video software to enhance digital images and video when accomplishing tasks such as enhancing corporate communications, creating presentations and sales training materials, and developing content for internal (intranet) websites. Hobbyists use this type of software to take advantage of the advancements made in digital photography and video technology to enhance, manage, and share their personal photographs and videos.
As the use of digital photography and digital video cameras grow,grows, we believe creative professionals throughout the world will continue to require software solutions to edit, enhance, and manage their digital photographs and digital videos. We also believe business and hobbyist users will need digital imaging and digital video software as more people utilizeuse digital cameras and digital camcorders.
In addition, we anticipate that companies will need easier-to-use methods for dynamically populating printed marketing-related materials and Web pages with information stored in databases or data that changes rapidly and comes from multiple sources.
We have responded to these market opportunities by delivering several new releases of our Graphicsdigital imaging and video software applications. In Januarythe second quarter of fiscal 2001, we released Adobe Premiere version 6.0, which is an updated release of our professional digital video editing tool. In April of fiscal 2001,2002, we released version 1.07.0 of our Adobe Photoshop product, which is the industry-leading product for digital imaging. In the third quarter of fiscal 2002, we released version 2.0 of our Adobe Photoshop Elements product, which is a new software tool that offers unique features designed specifically for amateur photographers, hobbyists, and business users who want an easy-to-use, yet powerful,our digital imaging solution. Also in April of fiscal 2001, weproduct targeting the photo editing market for the mid-range hobbyist and enthusiast. We also released version 5.06.5 of Adobe Premiere, an updated release of our Adobe After Effects product, which includes enhanced capabilities for creation of motion graphicsdigital video-editing product.
We plan to work with Intel, Microsoft, Dell and visual effects for film, video, multimedia,Sony to help make Microsoft Windows, and the Web.
In September of fiscal 2001, we introducedIntel architecture a new product called Adobe AlterCast, which is server software that helps companies deliver compelling visual materials on frequently updated printed materials and Web sites by automating the creation and the reuse of images. AlterCast helps reduce the time it takes to reuse the imagesstrong digital video authoring platform for use in different media and enables users to reuse existing images by automatically generating variations based on different color modes, sizes, resolutions, and file types.
In November of fiscal 2001, we released version 10.0 of our Adobe Illustrator product, which includes support for Mac OS X, enhanced creative options, and powerful tools for efficiently publishing artwork on the Web and in print.
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We expect to increasecustomers. With our worldwide presence in illustration, digital imaging and digital video software markets with new software releases and updates as these marketsproducts, we plan to continue to grow.innovate with our Photoshop product to meet the needs of its creative professional customers, while expanding the Photoshop software customer base by improving the interface of the product to be more accessible to non-professional users (business and home users). We have announced plans to introduce new versions of our Adobe Photoshop, Adobe GoLive, Adobe LiveMotion, Adobe Premiere, and Adobe After Effects products in fiscal 2002. We will also strive to continue growing our retail presence for Photoshop Elements in order to gain market share in the growing mid-range digital imaging software market. Finally, we intend to focus on developing products for new and emerging software markets such astargeting home user digital image management and professional DVD authoring.authoring in fiscal 2003. We plan to leverage the rich media content qualities of Adobe PDF and the vast installed base of Adobe Acrobat Readers to let users of these products easily share their digital photographs in Adobe PDF.
GraphicsWith our digital video products, we plan to take advantage of the improved video-related performance of the latest generation of personal computers, which we believe will allow us to expand our volume in shrink-wrapped software sales independent of our traditional third-party computer video board OEM channel. We intend this channel strategy switch to decrease the percentage of digital video revenue derived through our historical third party computer video board OEM channel and increase the percentage derived through our shrink-wrapped software channels.
Digital Imaging and Video Products
Adobe After Effects—softwareEffects---software used to create sophisticated animation, motion compositing, and special effects found in multimedia, television broadcast, film, and the Web.
Adobe AlterCast—new imaging server software used to maintain digital graphics and images on frequently updated content, such as Web sites and printed catalogs, by automating the creation and the reuse of images; integrates with content management and e-commerce systems, and eliminates the tedious manual tasks of refining and reformatting images for specific purposes.
Adobe Atmosphere—a newAtmosphere (beta)---a software tool for authoring graphically rich immersive, three dimensional worlds that viewers on the Web can figuratively enter and interact in; provides a platform for creating realistic and immersive environments that offer a revolutionary approach to content, Web navigation, community, and communication.
Adobe Dimensions—a 3D rendering tool for life-like modeling and visualization; brings 2D structures into 3D and applies textured surfaces, custom lighting effects and more.
Adobe Digital Video Collection—suiteCollection---suite of four integrated application products that allows users to produce professional-quality video, film, multimedia, and Web projects; includes Adobe After Effects, Adobe Premiere,Illustrator, Adobe Photoshop, and Adobe Illustrator.Premiere.
Adobe Illustrator—an illustration design tool used to create compelling graphic artwork for print publications and the Web.
Adobe LiveMotion—aLiveMotion---a software tool that allows professional designers to create two-dimensional Web animations;graphics; it provides designers with a rich set of content creation tools for creating both vector and raster graphics in one application for increased productivity.
Adobe PhotoDeluxe—softwarePhotoDeluxe---software that allows consumers and small businesses to easily enhance and personalize their photos for a wide variety of applications in print and electronic media.
Adobe Photoshop—providesPhotoshop---provides photo design enhancement capabilities for print, the Internet, and multi-media; used by graphic designers, Internet content creators,professional photographers, Web designers, professional publishers, and video professionals, and digital photographers.professionals.
Adobe Photoshop Elements—Album - offers unique, easy-to-use interface to find, organize, share, and edit digital photographs; designed for consumers so that they can manage their collections of digital photographs, easily share photos via e-mail and the Web, create digital slide shows and photo albums, and get their photographs printed via on-line photo finishing services; works well with Photoshop Elements when more advanced digital photograph editing and touch-up is needed.
Adobe Photoshop Elements---offers unique, easy-to-use, powerful image-editing tools designed specifically for amateur photographers hobbyists, and business usershobbyists who want to create professional-quality images for print and the Web.
Adobe Premiere—professionalPremiere---professional digital video-editing software used to create broadcast-quality movies for video, film, DVD, multimedia, and streaming over the Web.
Adobe Streamline—converts scanned bitmap images and shapes into smooth PostScript line art.
Adobe SVG Viewer—aViewer---a plug-in for Web browsers that allows users to view Web graphics created in Scalable Vector Graphics ("SVG") format.
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Cross-media PublishingePaper
Cross-media PublishingePaper Market Opportunity
Graphic designers, production artists, technical writers, Web designers, and prepress professionals use Adobe's solutions for professional page layout, Web publishing, business publishing, and printing visually rich information. Our software tools are used to create much of the printed and on-line information people see and read every day, including magazines, newspapers, Web sites, catalogs, advertisements, brochures, product documentation, technical manuals, books, eBooks, memos, reports, and banners.
We believe that Cross-media Publishing customers have an increased demand for integrated publishing workflows, a need to dynamically deliver personalized content and to deliver the same content to different output mediums and devices, and they therefore must structure and manage their content in formats such as eXtensible Markup Language ("XML"). The need for integrated publishing workflows was the major driver for the change in our business segments beginning in fiscal year 2002.
We have responded to the needs of our customers by delivering several new releases of our Cross-media Publishing software applications. In January of fiscal 2001, we released a new version of Adobe InDesign for the Japanese market called Adobe InDesign-J. InDesign-J was developed to specifically address the unique requirements of the Japanese professional publishing market. In April of fiscal 2001, we shipped Adobe Content Server 2.0, which enables encryption and distribution of Adobe PDF-based eBooks. In July of fiscal 2001, we shipped version 7.0 of PageMaker, which is our page layout program for business, education, and small-and home-office professionals.
Finally, in October of fiscal 2001, we announced availability of Adobe Studio, which is a new design network for creative professionals. Adobe Studio consists of a free area offering design-related content and Adobe DesignTeam, a subscription-based collaboration service.
We expect to maintain and grow our worldwide presence in the professional publishing markets in which we compete and increase our market share in the professional page layout market through licensing and adoption of our InDesign product. We will also work to tightly integrate our products with each other, providing cross-media professionals a complete and creative working environment. We plan to continue to provide solutions that help publishers of printed material reuse and repurpose their information to output formats beyond that of print.
Cross-media Publishing Products
Adobe Acrobat InProduction—a new application built for print production professionals that contains professional tools for PDF print production; increases productivity using a tightly integrated toolset that enables you to control preflight, color separations and conversions, and trim/bleed and trapping parameters within Adobe PDF files.
Adobe Content Server—an easy-to-use, all-in-one system for publishers, distributors, retailers, and individual authors to prepare, secure, and license eBooks.
Adobe Design Collection—suite of four award-winning application products that allows consumers to create and produce professional images, illustrations, and layouts, and to publish documents across media; includes Adobe InDesign, Adobe Photoshop, Adobe Illustrator, and Adobe Acrobat.
Adobe Acrobat eBook Reader—software that displays Adobe PDF-based eBooks in full color with the high quality and careful design found in printed books.
Adobe Font Folio—contains the entire Adobe Type Library of more than 2,750 typefaces on two CD-ROMs, unlocked and ready to use.
Adobe FrameMaker—an application for authoring and publishing long, structured, content-rich documents including books, documentation, technical manuals, and reports; provides users a way to
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publish their content to multiple output formats, including print, Adobe Portable Document Format ("PDF"), Hypertext Markup Language ("HTML"), XML, and Microsoft Word.
Adobe FrameMaker+SGML—integrates all of the capabilities of FrameMaker with additional features designed to simplify the Standard Generalized Markup Language ("SGML") and XML authoring and publishing processes.
Adobe GoLive—professional Web design and publishing software that provides innovative tools Web authors require to design, layout, and produce cutting-edge Web sites without the need for complex multimedia programming.
Adobe InCopy—a powerful editorial tool for smooth collaboration between writers, editors, and copy-fitters; InCopy is a companion to Adobe InDesign and is licensed through Adobe's system integrator partners servicing the professional publishing market.
Adobe InDesign—an innovative page-layout application for publishing professionals; based on a new, open, object-oriented architecture that is highly extensible, it enables Adobe and its industry partners to deliver powerful publishing solutions.
Adobe PageMaker—software used to create high-quality business documents simply and reliably with robust page layout tools, templates, and stock art.
Adobe PDF Transit—a Software Development Kit that enables print providers to develop streamlined, reliable, and secure Adobe PDF-based workflows that begins at their customers' desktops and extends across the Internet to a printing device.
Adobe PressReady—powerful printing software used by professionals and based on Adobe PostScript 3; allow professionals to proof their jobs on inkjet printers.
Adobe Publishing Collection—suite of four award-winning application products that allows business users to create visually compelling print and online communication; includes Adobe PageMaker, Adobe Photoshop, Adobe Illustrator, and Adobe Acrobat.
Adobe Studio—a new Web site service that provides a creative design network for Web and print professionals; includes tips, galleries, and online resources, and a set of subscription services that offer a virtual workspace where users manage projects, collaborate online, and share and deliver files in a secure environment that is tightly integrated with Adobe applications.
Adobe Type Basics—includes Adobe's 65 best-selling typefaces, plus Adobe Type Manager; makes it easy to create beautiful text for print, Web, and video projects.
Adobe Type Library—offers for individual licensing over 2,500 Roman and almost 100 Japanese high-quality outline typefaces that are used by graphics professionals and Internet content creators worldwide.
Adobe Type Manager—provides powerful, easy management of all PostScript Type 1, OpenType, and TrueType fonts.
Adobe Web Collection—a comprehensive, integrated software suite that allows users to design still and interactive Web graphics and animations, optimize graphics for efficient downloading, and build dynamic Web sites that support the latest technology and standards; includes Adobe GoLive, Adobe Illustrator, Adobe LiveMotion, and Adobe Photoshop.
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ePaper Solutions
ePaper Solutions Market Opportunity
A significant opportunity exists to enable intelligent integration of paper and digital document communications with fidelity and reliability in corporations,businesses and governments and education.around the world. Adobe Acrobat software, which contains annotation, collaboration, digital signature, Web capture, and security features, is the cornerstone of Adobe'sour ePaper Solutions platform. Wefamily of products, at its most basic level enables users to create PDF files --- the worldwide standard for secure and reliable electronic document distribution.
With more than 500 million distributed copies of our Acrobat Reader --- the free multi-platform Adobe PDF viewing software --- Adobe has created a ubiquitous platform for the reliable distribution of electronic documents. The Acrobat Reader is available on the most common operating system platforms, including Microsoft Windows, Apple Macintosh, Linux, various Unix-based platforms, and portable device systems such as Palm OS, Pocket PC, and the Symbian operating system for cellular phones. Together, Acrobat, Adobe PDF, and the Acrobat Reader assure creators of electronic documents that their content will display and print the way they are intended, and that the documents are protected, if they choose, from unauthorized access and alterations.
With additional capabilities in Acrobat that allow users to annotate, collaborate, secure, digitally sign, and archive PDF documents, we believe our AcrobatePaper product line delivers unique functionality in many markets. Governments working to deploy eGovernment initiatives, and capabilities that are requiredcompanies in several markets.
Adobe ePaper Solutions, which also includes Adobe Acrobat Reader and Adobe Portable Document Format ("PDF"), enables users to transition from a paper-based to an electronic workflow. Companies in marketsregulated industries such as aerospace, financial services, government, insurance, legal, and pharmaceutical—pharmaceutical --- those with paper-intensive processes—processes --- use Adobe ePaper Solutionssolutions to ensure that their electronic documents are delivered reliably and securely, and can be viewed by the recipient in the exact form that the originator intended. Companies canEnterprises and governments that deploy Adobe ePaper solutions reduce paper and storage costs, through the use of our ePaper Solutionsimprove customer satisfaction, and can realize productivity and time-to-market gains.
We have distributed more than 400 million copies of Acrobat Reader. The adoption of the PDF format by many industries and governments worldwide have contributed to its widespread use. We had a significant increase in revenue from Adobe ePaper Solution products in 2001 due to increased licensing of our Adobe Acrobat product.
Based on the growth in the use of online business processes,electronic document content, the increasing government requirements for paper reduction,focus on eGovernment initiatives, and the desire of enterprise customers to lower expenses throughutilize XML and extend their businesses beyond the leverageconfines of previous Internettheir internal back-end systems, we have increased our investment in our ePaper business during fiscal 2002. These investments include enhancing our research and Intranet investments,development strategy and our solutions-based go-to-market capabilities. In marketing and engineering, we have teams that focus on ePaper desktop-based software opportunities and on end-to-end server-based ePaper solution opportunities. To supplement our solution offerings, we acquired Accelio, a supplier of electronic forms and business process automation software solutions, in the second quarter of fiscal 2002.
In our field organization, we realigned our resources throughout fiscal 2002 to focus more heavily on ePaper opportunities. Our goal is to have a majority of our field-based resources focused on ePaper desktop and server-based solutions targeting corporate and government accounts.
With the previously described emerging market trends, and with the addition of Accelio-derived solutions, Adobe has increasedrefined its investmentstrategy to focus on three distinct ePaper business opportunities in fiscal 2003. They are Document Generation, Document Collaboration, and Document Process Management.
Document Generation
There is a significant Document Generation market opportunity for transforming raw business data into visually rich, dynamic, customer-focused documents for delivery anytime, anywhere, on any device. In many cases, documents are the main source of interaction governments and businesses have with their constituents, partners, vendors, and customers. Documents are used to generate revenue (such as catalogs, brochures, mailers), conduct transactions (such as tax forms, invoices, loan documents and account statements), and transfer knowledge (such as user manuals, product specifications and financial reports).
We believe the key to producing documents that drive business is an enterprise-strength document generation solution that takes content from multiple sources, dynamically generates documents, and securely and reliably delivers those documents over a variety of systems and devices. Adobe's solutions for Document Generation are intended to: improve customer satisfaction by enabling "self-serve" dynamic document generation, anytime, anywhere, on any device; ensure that documents appear exactly as intended and are protected from unauthorized changes; and reduce costs by automating document and image production processes.
We provide both desktop and server-based solutions for the Document Generation market. On the desktop, Adobe Acrobat generates electronic documents from everyday office applications, such as Microsoft Office. On servers, Adobe offers a combination of products to generate documents, including Adobe Output Server and Adobe Document Server. These server products merge output, including XML-based data, from enterprise applications such as Customer Relationship Management ("CRM"), Enterprise Resource Planning ("ERP"), content management, and legacy systems with highly formatted document templates to generate personalized, reliable documents for print or electronic output.
We believe our key advantages in the ePaper business.
In April 2001, we released version 5.0Document Generation market include the standardization of Adobe Acrobat. The new version includes tighter Web integration, support for industry standard protocols like Open DataBase Connectivity ("ODBC") that connect Adobe PDF forms with back-end databases, and easier data exchangeusage in Adobe PDF files through support for XML.
We also shipped a new ePaper product called Acrobat Approval in August of fiscal 2001. Approval allows corporate customers,many government agencies and regulated industries as a format for distributing, viewing, printing, and archiving electronic documents. In addition, Adobe's electronic document viewing solution, providersthe Acrobat Reader, is available on many platforms, assuring our customers who generate PDF files that their content will be viewable and printable when it is distributed. Finally, from a technology standpoint, integration capabilities between XML-based data and Adobe PDF have made the PDF format a rich, intelligent document container --- one that allows electronic documents to deploy cost-effectivebe used on-line and off-line. For example, Adobe PDF-based electronic forms can be filled in off-line (i.e., when a user is not connected to the Internet). Later, when the user reconnects to the Internet, the data entered earlier can be automatically submitted electronically and integrated directly into back-end IS systems such as a co rporate database.
Document Collaboration
The desire by governments and enterprises to have more effective and timely collaboration solutions based onhas created a significant Document Collaboration market opportunity. Our solutions for Document Collaboration enable more secure and reliable distribution of documents to streamline document exchange, review, commenting, and approval, while protecting content from unauthorized access and alterations. Adobe PDF. It enables usersPDF documents can also be automatically routed, tracked, and integrated into core applications such as document management systems to easilymanage the full collaboration process.
Benefits to customers using Adobe solutions for Document Collaboration include the protection of business information and process integrity, the reduction of costs by automating collaborative processes and reducing paper, and the simplification of document sharing with employees, customers, partners, and other constituents. Governments can shorten the time it takes to approve applications. Enterprise customers can replace paper mailings to customers and suppliers with electronic document distribution, accelerate product and engineering documentation reviews, and streamline contract review and preparation.
In addition to the use of Adobe Acrobat Reader and Adobe Acrobat as desktop software that is used as part of Adobe's Document Collaboration solutions, Adobe also provides server-based solution software called Adobe Document Server for Reader Extensions. This new server product allows publishers of Adobe PDF-based forms and documents to embed usage rights in them that enable features in the free Acrobat Reader that normally are not available, such as form fill-in spell-check, digitally sign,and save, and submit eForms that have been created using Acrobat software.digital signatures.
We believe that our ePaper products will help companies integrate legacy paper documents, forms, output from office and database applications, and other paper-based communication devices (such as faxes, letters, air courier shipments, and e-mails) so that companies andFor example, governments can use this server solution to create on-line forms that constituents can fill out and digitally sign in Acrobat Reader; or financial institutions can create electronic forms that are integrated with their back-end systems to provide personalized on-line applications. In both examples, users can fill out such forms in the Internet, intranets,free Acrobat Reader, which later can be directly integrated with their processing systems, so that manual re-keying of data is not necessary. The cost-saving advantages with such a solution for publishers of documents such as tax forms and extranetson-line applications are significant.
Document Process Management
Enterprises have invested significantly in their infrastructure over the last ten years, resulting in the deployment of complex business systems such as safe,CRM, ERP, and Document Content Management ("DCM"). Yet many of these back-end systems are not fully connected with each other, or with how business users work with documents on their desktops on a daily basis. This disconnected workflow has created a market opportunity called Document Process Management, and we have created solutions that enable customers to integrate how they use electronic documents with their internal and external business processes.
With our solutions for Document Process Management, an enterprise's customers, employees, and partners can submit information through intelligent, secure electronic forms via their preferred computer platform or device. The captured information triggers rules-and roles-based workflow, automatically integrating data into core business systems such as CRM, ERP, and reliable communicationDCM. For example, an employee could enter data on-line into an expense report that is submitted electronically; the data could then be automatically integrated into the Company's accounting system. Process tracking and collaboration platforms.reporting capabilities offer business managers insight into the status of their workflows, and allow them ways to further streamline their processes for better business performance.
Customers using Adobe's Document Process Management solutions can reduce costs and improve responsiveness by eliminating inefficient manual, paper-based processes. They can extend the reach of their business processes to customers, partners, and mobile workers with self-service applications via multiple devices. The end result is often an increase in an enterprise's return on investment made on their back-office solutions.
Adobe's Document Process Management solutions involve several components of its ePaper software, including Adobe Acrobat Reader and Adobe Acrobat on the desktop, and Adobe Document Server for Reader Extensions on the server. In fiscal 2002, we planaddition, Adobe provides Adobe Form Client, Adobe Form Server and Adobe Workflow Server to expand our marketing programs,complete its solution offering. Based on XML standards, Adobe Form Client is a data capture product that deploys electronic forms to a wide variety of environments such as the Web, Microsoft Outlook, and our enterprise sales, service,Microsoft Office. Adobe Form Server enables governments and support channels,corporations to meetpost and manage their forms on-line, and Adobe Workflow Server provides the needs of our ability to graphically design, implement, and monitor workflows for document processing.
ePaper customers and to grow our ePaper revenue.Products
ePaper Solutions Products
Adobe Acrobat—softwareAcrobat---software that allows users to publish and distribute business documents using corporate e-mail and intranets, the Internet, or CD-ROM. EnablesCD-ROM; enables users to easily convert files from almost any application to Adobe PDF, a compact cross-platform electronic format that generally preserves layout, fonts, colors, and images. Adobe Acrobat softwareimages; helps users complete timely and efficient document review and approval processes; includes everything needed to create and distribute rich electronic documents that can be viewed easily within leading Web browsers.
Adobe Acrobat Approval—a new applicationApproval---software that enables business workgroup users to quickly fill in, save, and approve electronic forms, marketing materials, and other documents that have been created as interactive PDF files.
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Adobe Acrobat Capture—enablesCapture---enables conversion of legacy paper-based documents into indexable, searchable, platform-independent electronic PDF files for archiving and distribution purposes.
Adobe Acrobat Distiller Server—server-basedServer---server-based software that provides workgroups with a centralized solution for converting PostScript files to Adobe PDF; gives IT and creative professionals the power of increased productivity and the assurance of consistent, high-quality output.
Adobe Acrobat Messenger—softwareMessenger---software that works with a scanner or digital copier and is designed for workgroups and departments to transform paper documents into electronic Adobe PDF files and deliver them via e-mail, Web, or fax; allows users to preview their documents on screen,on-screen, crop or rotate pages, and add electronic annotations.
Adobe Acrobat Reader—freeReader---free software for reliably viewing and printing Adobe PDF files on all major computer platforms, including Microsoft Windows, Apple Macintosh, Linux, UNIX, Palm OS and Pocket PC-based devices.
Adobe Capture Handheld---an advanced, intelligent data capture solution available for handheld devices running Microsoft Pocket PC and Handheld PC; allows mobile workers to capture data through intelligent forms, validate the records entered, and submit the data to back-office systems; biometric signatures can be initiated from the device to ensure validity and to complete a business transaction.
Adobe Central Pro Output Server---server-based software for document generation that allows organizations to create personalized, customer-facing documents from any data source -- including legacy, line-of-business, ERP, or CRM applications; merges data with an electronic document template using a powerful processing engine to dynamically generate electronic documents such as purchase orders, invoices, statements, and checks for delivery via Adobe PDF, the Web, e-mail, fax, or print; works with Adobe Output Designer, which is a companion tool used to create sophisticated document templates.
Adobe Document Server—server-basedServer---server-based software that lets users viewfor the creation, manipulation and assembly of customized Adobe PDF files within a Web browser without requiringdocuments; XML-based data can be inserted into templates to create complex, content-rich documents for more targeted and effective customer communications; integrates with leading enterprise applications as well as custom systems.
Adobe Document Server for Reader Extensions---server-based software which allows enterprises and government agencies to assign additional rights to an Adobe PDF document, enabling users of the free Adobe Acrobat Reader to save and submit electronic form data, add digital signatures, and attach comments, thereby lowering processing costs and virtually eliminating the need for paper-based forms; businesses can leverage their existing paper and Adobe PDF based forms, distribute forms electronically in a format that resembles the paper form, and integrate data that is entered securely into the electronic forms via Acrobat Reader with their current IT structure.
Adobe Form Client---data capture software that enables companies to replace inefficient, paper-based forms processes with intelligent, accessible, and secure electronic data capture solutions to improve organizational agility and productivity; offers flexible desktop deployment options, an XML-based architecture for integration with core business applications, and support for digital signatures; captured information can be routed via industry-standard e-mail and groupware technologies; integrates with Adobe's solution for Document Generation to extend and accelerate business processes within and beyond the organization, and is a key component of Adobe's solution for Document Process Management; works with Adobe Form Server and Adobe Workflow Server.
Adobe Form Designer---a WYSIWYG ("What You See is What You Get") design tool for creating intelligent XML templates, providing users with a simple way to develop and maintain sophisticated data capture solutions without involving third-party tools; creates both HTML and Adobe PDF forms.
Adobe Form Server---server-based software for document process management; enables governments and corporations to post electronic forms on the Web; creates and publishes Adobe PDF or Web-based forms which allow for the verification of the accuracy of data entered in a form, as well as other client software; lets you make PDF content accessiblevalidations, calculations, and confirmations; forms can be used on-line, or saved and used off-line and later reconnected so that data entered in the forms can be submitted electronically and integrated with core business processes; has the ability to the visually impaired by enablingenable secure transactions involving confidential or sensitive information; works together with Adobe Form Designer and Adobe Workflow Server to deliver a complete business process automation solution.
Adobe Output Designer---a WYSIWYG design tool that allows users to convertcreate electronic document templates for use with Adobe solutions for document generation; aids in the creation of electronic documents that exactly replicate existing paper documents.
Adobe Output Pak for mySAP.com---SAP certified server-based software for document generation that enables organizations to optimize their investment in their SAP solution by creating personalized, professional-looking, customer-facing documents; provides an easy, fast, and cost-effective way to create and maintain documents for the SAP environment; integrates directly with an SAP system to extract information which is merged with a document template that defines the layout and formatting of the document; output can be in a variety of formats, including Adobe PDF, files intoprint, fax, e-mail, and the Web, to multiple devices.
Adobe Output Pak for Oracle E-Business Suite---server-based software for document generation which is an Oracle EBSI-approved integration; expands the scope of the Oracle E-Business Suite by allowing customers to easily create, maintain, and integrate high-quality, professional-looking electronic documents with their Oracle business processes in an easy, fast, and cost-effective way; integrates directly with Oracle Reports to extract XML data from other applications which is then merged with a document template that defines the layout and formatting of the document output; used to dynamically generate documents such as purchase orders, invoices, statements, and checks which can then be delivered via Adobe PDF, print, fax, e-mail, and the Web.
Adobe Web Output Pak---server-based software for document generation; creates documents in Adobe PDF and HTML textfor presentation on the Web, and in Wireless Markup Language ("WML") for presentation to a wireless device; allows users to personalize and control the look and feel of documents based on the data the documents contain.
Adobe Workflow Server--- a server-based workflow application that can be interpretedallows for the design, deployment and management of forms-based business processes by conventional screen-reading software.integrating people, processes, and applications to improve organizational agility and productivity; uses a rules-and roles-based design tool that defines business rules a process must follow, as well as the roles of each individual involved in the process; works with Adobe Form Server, Adobe Form Client and Adobe Central Output Server.
Create Adobe PDF Online—aOnline---a Web-hosted fee-based service that allows users to convert documents from a wide variety of applications into Adobe PDF files.
OEM PostScript and Other
OEM PostScript and Other Market Opportunity
Graphics professionals and professional publishers require quality, reliability, and efficiency in production printing, and we believe our printing technology provides advanced functionality to meet the sophisticated requirements of this marketplace. As high-end printing systems evolve and transition to fully digital, composite workflows, Adobe is uniquely positioned to be a supplier of software and technology based on the Adobe PostScript and Adobe PDF standards for use by hardware manufacturers in this industry. Adobe generates revenues by licensing its technology to OEMs that manufacture printers.printers and other output devices.
OEM PostScript and Other Products
Adobe PostScript—aPostScript---a printing and imaging page description language that delivers high quality output, cross-platform compatibility, and top performance for graphically-rich printing output from corporate desktop printers to high-end publishing printers.
Adobe PostScript 3—a printing and imaging page description language that is a standard, and is used by publishers, corporations, and government agencies around the world;printers; gives users the power to create and print visually rich documents with total precision; licensed to printing equipment manufacturers for integration into their printing environments.products.
Adobe Extreme—aExtreme---a printing architecture for service bureaus, prepress shops, and commercial printers; the fastest, most flexible implementation of Adobe printing technology; provides an integrated workflow that automates prepress tasks, optimizing output speeds and quality by using Adobe PDF and job tickets; offers flexibility while delivering a scalable, reliable, and productive printing environment.
For more information on our market segmentsAdobe PDF Transit---a Software Development Kit that enables print providers to develop streamlined, reliable, and information about geographic areas, please refersecure Adobe PDF-based workflows that begins at their customers' desktops and extends across the Internet to Note 16 of our Notes to Consolidated Financial Statements.a printing device.
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The markets for Adobe products are characterized by intense competition, evolving industry standards, rapid technology and hardware developments, and frequent new product introductions. Our future success will depend on our ability to enhance our existing products, introduce new products on a timely and cost-effective basis, meet changing customer needs, extend our core technology into new applications, and anticipate or respond to emerging standards and other technological changes.
Graphics
The graphics software market is a constantly evolving market, characterized by rapid technology developments and frequent new product introductions. The needs of the graphics professionals are rapidly changing to encompass on-line publishing as well as print-based publishing. Adobe's tools in this market, including Adobe Photoshop, Adobe Photoshop Elements, Adobe PhotoDeluxe, Adobe Illustrator, Adobe After Effects, and Adobe Premiere, face significant competition from companies offering similar products and will continue to face competition from emerging products and technologies.Creative Professional
The mid-range consumer digital imaging software market is characterized by intense competition, price sensitivity, brand awareness, and strength in retail distribution. We face direct and indirect competition in this market from a number of companies, including Jasc Software, Roxio (formerly MGI Software), Microsoft, and Ulead Systems. We believe that we lead in market share and compete favorably withIn our Adobe Photoshop Elements product due to consumer awareness of our brand in digital imaging, our strong relationships with critical original equipment manufacturers ("OEM") and market influencers, and a strong feature set.
The professional digital imaging software market is characterized by feature-rich competition, brand awareness, and price sensitivity. We face direct and indirect competition in this market from a number of companies, including Jasc Software and Macromedia. We believe that we lead in market share and compete favorably with our Adobe Photoshop product due to high awareness of the Adobe Photoshop brand in digital imaging, our strong relationships with market influencers, the features and technical capabilities of the product, and our ability to leverage core features from our other established products.
The dynamic media software market is an increasingly competitive market as professional, enthusiast, and home users migrate away from analog video tools towards the use of digital camcorders and digital video production. Adobe After Effects and Adobe Premiere face increased competition from companies such as Apple Computer, Autodesk, Eyeon, Pinnacle, in-sync Corporation, Media 100, Roxio (formerly MGI Software), Avid, Sonic Foundry, and Ulead Systems. In the professional compositing and special effects editing market, we believe that we lead in market share with Adobe After Effects and compete favorably in this market due to our strong feature set and the integration with our other products to create a broad platform for our customers. In the professional digital video editing market we believe that we lead in market share with Adobe Premiere on the Microsoft Windows platform, and compete favorably in this market due to our strong feature set, our OEM relationships, and the integration with our other products to create a broad platform for our customers. In the professional digital video editing market on the Macintosh platform, we believe we trail in market share to Apple Computer's digital video editing product. We believe that our competition on the Macintosh platform with Adobe Premiere is more difficult, based on Apple's marketing advantage relative to their ownership and control of the Macintosh operating system and hardware platform upon which we compete.
The drawing and illustration market is characterized by feature-rich competition, brand awareness, and price sensitivity. Adobe Illustrator faces competition from companies such as Corel and Macromedia. We believe that we lead in market share and compete favorably with our product in this market due to high awareness of the features in our Illustrator product, especially the drawing and illustration functionalities, our strong relationships with market influencers, the features and technical capabilities of the product, and our ability to leverage core technologies from our other established products.
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A number of companies currently offer one or more products that compete directly or indirectly with more than one of Adobe's Graphics products. These companies include Corel, Macromedia, and Roxio.
Cross-media Publishing
In the Cross-media Publishing market,Creative Professional segment, we offer several products, including Adobe GoLive, Adobe Illustrator, Adobe InDesign, Adobe PageMaker, Adobe FrameMaker, and Adobe Type Library.FrameMaker. We believe these individual products compete favorably on the basis of features and functionality, ease of use, product reliability, and price and performance characteristics. In addition, the products increasingly work well together, providing broader functionality and shortened product learning time for the individual who uses multiple applications to complete a project.
We also offer several product "Collections," which are packaged combinations of several of our products. Collections targeting the creative professional customer include the Adobe Design Collection, the Adobe Publishing Collection, and the Adobe Web Collection. The approach of providing packages with multiple Adobe products allows us to market them as complete solutions for specific market needs.
Drawing and illustration products are characterized by feature-rich competition, brand awareness, and price sensitivity. Our Adobe Illustrator product faces competition from companies such as Corel and Macromedia. We believe our product competes favorably due to high awareness of the features in our Illustrator product, especially the drawing and illustration functionalities, the features and technical capabilities of the product, and our ability to leverage core technologies from our other established products.
Our Adobe InDesign product, used for professional page layout, faces tough competition. The main competitive product, Quark XPress, has a leadership position in the professional page layout market. Quark also benefits from an established industry infrastructure that has been built around the use of their XPress product in print shops and service bureaus, and through the development of third party plug-in products. Barriers to the adoption of Adobe InDesign by Quark XPress customers include this infrastructure, as well as the cost of conversion, training, and software/hardware procurement required in a switch to InDesign in a tough economic environment. We believe we will increase adoption of InDesign software due to our superior product offering with new innovative features, such as typographical treatment, the integration of InDesign with other Adobe products used by creative professionals, our strong brand among users, our support for Apple's Mac OS X operating system, and improved infras tructure support by the industry for our overall solution.
The demand for Web page layout market is a constantly evolving and highly volatile, market thatand has been impacted by both the recent global economic downturn and the reduction in Web product spending. We believe Adobe GoLive trails in market share and faces significant direct and indirect competition in thefor Web page layout marketapplications from companies such as Macromedia and Microsoft. Although weWe believe we compete favorably with our product compares favorably due to the features of Adobe GoLive and our ability to leverage core technologies from our other established products,GoLive. However, we believe it will be difficult to take market share away from competitive products in the market dueopportunity for Web-based products continues to be negatively impacted by the entrenched naturecontinuing effects of Macromedia's Dreamweaver product within Web design and consultancy businesses, the broad distribution and use of Microsoft's FrontPage as a mid-range Web page layout solution, and the global economic impact on Web-based businessdownturn that began in 2001.
Our Adobe InDesign product faces tough competition in the professional page layout market. The main competitor product, Quark Xpress, has a leading market share in the Roman language markets for professional page layout in the United States and Europe. Quark Xpress also benefits from an established industry infrastructure that has been built around the use of the Xpress product in print shops and service bureaus, and through the development of third party plug-in products. Barriers to the adoption of Adobe InDesign by Quark Xpress customers include this infrastructure, as well as the cost of conversion, training, and software/hardware procurement required in a switch to InDesign. We believe we can gain market share with InDesign software against Xpress due to our strong brand name, our support of Apple's new Mac OS X operating system, new product capabilities, and the recently improved infrastructure support by the industry for our solution. Adobe recently made available version 2.0 of InDesign, which will compete against the new version of Quark Xpress, version 5.0.
In the technical authoring and publishing market, our Adobe FrameMaker products faceproduct faces competition from large-scale electronic publishing systems, developed by severalXML-based publishing companies such as listed below. Participants in this market competeArbortext, as well as low-end desktop publishing products such as Microsoft Word. Competition is based on the quality and features of their products, the level of customization and integration with other publishing system components, the number of hardware platforms supported, service, and price. We believe we can successfully compete in this market based upon the quality and features of the Adobe FrameMaker product, our extensive application programming interface, and the large number of platforms supported, and other factors.supported.
In the business document publishing and authoring market, our Adobe PageMaker products faceproduct faces competition from other desktop publishing software products, including Microsoft Publisher. Participants in this market competeCompetition is based on the quality and features of their products, ease-of-use, printer service support, and price. We believe we have a strong market shareproduct and can successfully compete in this marketwith these types of applications based upon the quality and features of the Adobe PageMaker product, its strong brand among users, and its widespread adoption among printer service bureaus, and other factors.bureaus.
A number of companies currently offer one or more products that compete directly or indirectly with more than one of Adobe's Cross-media publishingCreative Professional products. These companies include Broadvision,Arbortext, BroadVision, Macromedia, Microsoft, Quark, and Arbortext.Quark.
The Digital Imaging and Video software markets are constantly evolving markets, characterized by rapid technology and hardware developments, and frequent new product introductions. The needs of the users in these markets --- especially at the low-end consumer level --- are rapidly changing as more people become avid users of digital cameras, digital video cameras, and digital imaging and digital video equipped hardware devices and personal computers.
Our tools in this market, including Adobe Photoshop, Adobe Photoshop Elements, Adobe After Effects, and Adobe Premiere software, face significant competition from companies offering similar products and will continue to face competition from emerging products and technologies. In addition, any future products created by Adobe to enter the digital image management and DVD authoring markets will face similar competitive environments.
The mid-range consumer digital imaging and image management software markets are subject to intense competition, price sensitivity, brand awareness, and strength in retail distribution. We face direct and indirect competition in these markets from a number of companies, including ACD Systems, AI Soft (Japan), Apple Computer, ArcSoft, Corel, Image Software, JASC Software, Luna Imaging, Microsoft, Paessler GmbH (Germany), Pegasus Imaging Company, Roxio, TriVista Technologies, Ulead Systems, and VCOM Products.
We believe we compete favorably against other mid-range digital imaging and consumer-focused image management software applications with our Adobe Photoshop Elements product due to strong consumer awareness of our brand in digital imaging, our relationships with significant OEMs, positive recommendations for our products by market influencers, our increased focus on the retail software channel, and a strong feature set.
The professional digital imaging software market is a competitive market where software applications compete based on product features, brand awareness, and price sensitivity. We face direct and indirect competition from a number of companies. We are an industry leader and compete favorably with our Adobe Photoshop product due to high awareness of the Photoshop brand in digital imaging, the positive recommendations for our Photoshop product by market influencers, the features and technical capabilities of the product, and our ability to leverage core features from our other established products.
Applications for digital video editing, compositing and special effects, and DVD authoring face increasing competition as professional, enthusiast, and home users migrate away from analog video tools towards the use of digital camcorders and digital video production on their computers, and DVD systems for rich media playback. Adobe After Effects and Adobe Premiere software face increased competition from companies such as Apple Computer, Autodesk, Avid, Eyeon, in-sync Corporation, Kodak, Pinnacle, Roxio, Sonic Foundry, and Ulead Systems.
Adobe After Effects software is a leader in professional compositing and special effects editing applications due to our strong feature set and the integration with our other products to create a broad platform for our customers.
In professional digital video editing, we are a leader on the Microsoft Windows platform with Adobe Premiere, and compete favorably due to our strong feature set, our OEM relationships, and the integration with our other products to create a broad platform for our customers. In professional digital video editing for the Macintosh platform, we believe we trail in new user adoption to Apple Computer's digital video editing product. We believe that competition on the Macintosh platform with Adobe Premiere is difficult, based on Apple's marketing and development advantage relative to their ownership and control of the Macintosh operating system and hardware platform.
A number of companies currently offer one or more products that compete directly or indirectly with more than one of Adobe's Digital Imaging and Video products. These companies include Apple Computer, Microsoft, Roxio, and Ulead.
ePaper
As we broaden the scope of our ePaper Solutionsproducts and solutions, we face increased competition from entrenched office applications, PDF-based clones of our Acrobat product, electronic forms solution providers, emerging products/technologies, and potentially, enterprise collaboration system providers. Additionally, current office applications and content creation/management tools that use HTML, Macromedia Flash, Microsoft Word, Tagged Information File Format ("TIFF"), and various XML-based formats for electronic document distribution provide alternate solutions to customers, and indirectly compete with Adobe's ePaper products and the use of Adobe PDF.
InFor Document Generation solutions --- specifically, the desktop and server-based PDF file creation markets --- Adobe Acrobat and our server solutions such as Adobe Distiller Server and Adobe Document Server face competition from Acrobat clone products such as those from Ansyr Technology, Global Graphics, and other smaller PDF creation solutions that can be found at a low cost, or for free, on the Internet. Additional competitors in the Document Generation market include StreamServer, Optio, and Formscape. However, many PDF creation solutions in the market today use technology from us, licensed as Adobe PDF Libraries, to implement the PDF creation capabilities of their products or solutions.
We have recently announced our intent to provide different versions of our Acrobat desktop product in 2003 to meet the needs of different types of users. Providing a PDF creation-only version of Acrobat may allow us to achieve our goal of broader proliferation of paid-for Acrobat software, as well as compete more effectively with low-end PDF-creation product companies such as Global Graphics. The creation of a new high-end professional version of Acrobat could directly or indirectly position Adobe against other creative professional PDF tool providers, such as Enfocus, Lantana, TeamPDF, and Zinio.
For Document Collaboration and Document Process Management solutions, where electronic document delivery, exchange, collaboration, and archive markets, the electronic forms market, and the PDF file creation market,archival needs exist, our Adobe ePaper product family faces competition from entrenched office applications such as Microsoft Office. In addition, some content management vendors provide collaboration and increased competition from new emergingbusiness process management capabilities that could directly or indirectly compete with our offerings, although we view our solutions in these areas as an extension of those supplied by such vendors.
In many of the ePaper market opportunities that Adobe is targeting, Microsoft has, over the past few years, attempted to improve its products and technologies. Current office applications and Internet content creation/management tools that use Microsoft Word, XML, HTML, and Tagged Information File Format ("TIFF") file formats compete with Adobe PDF and Adobe's ePaper product family. In addition, Microsoft's new Office XP suite targets business users that want improvedtheir capabilities. These areas include the collaborative document review, scanning/optical character recognition ("OCR")document security, and electronic document distribution capabilities of its Office suite. In addition, Microsoft has recently announced new XML and .NET-based product initiatives codenamedXDocs,ePeriodicals, and security capabilities,Jupiter that are positioned to be part of the launch of the next version of Microsoft Office. These initiatives, targeted for 2003 availability, indicate Microsoft may be planning to have new electronic form, electronic document distribution, eBook, and related functionality like that in competitionAdobe Acrobat that could directly or indirectly compete with similar features offered by Adobe'sour ePaper products family.that provide similar capabilities.
In the PDF file creation market, our Adobe ePaper product family faces competition from clone products such as the Jaws product line from Global Graphics (formerly Harlequin), and other smaller PDF creation solutions that can be found for free on the World Wide Web. In the area of electronic forms solutions,addition to Microsoft's XDocs initiative, we also face competition from Cardiff, Shana, and Microsoft,PureEdge for electronic forms solutions. Similarly, we face competition for Document Process Management solutions from workflow solutions vendors such as well as from Accelio (formerly Jetform) unlessMetaStorm, Staffware, and until our proposed acquisition of Accelio is consummated.Ultimus.
We believe the Adobe ePaper product family competes favorably against these companies and formats in terms of the combined benefits of superior functionality, file compression, visual page fidelity/reliability, transmittal time,multi-platform capability, printing and security of documents expressed using Adobe PDF.
Looking to the future, electronic document systems targeting enterprises that utilizeuse emerging standards such as XML and Microsoft's.NETMicrosoft's .NET initiative are being developed and will likely be adopted. Adobe isWe are working to ensure that compatibility and/or migration plans existexists between these formats/platforms and the Adobe PDF format, as well as our Acrobat software products and other Adobe ePaper applications.
OEM PostScript and Other
We believe that the principal competitive factors for OEMs in selecting a page description language or a printing technology are product capabilities, market leadership, reliability, price, support, and engineering development assistance. We believe that our competitive advantages include our technology competency, OEM customer relationships, and intellectual property portfolio. Adobe PostScript and Adobe Extreme software facefaces competition from Hewlett-Packard's proprietary PCL page description language, and from developers of other page description languages based on the PostScript language standard, including Global Graphics (formerly called Harlequin) and Xionics.
Although Adobe has numerous OEM customer relationships that license Adobe PostScript technologies, revenues from a small number of the OEMs make up a majority of the revenue in this market segment.
Marketing and Sales
We market and distribute our products through sales channels, which include distributors, retailers, software developers, and, increasingly, systems integrators software developers, and value-added resellers ("VARs"), as well as through OEM and hardware bundle customers. We also market and license our products directly using our sales force Adobe call centers, and through e-commerce methods via our Adobe.com Web site.own website at www.adobe.com.
We support our worldwide distribution network and end-user customers with international offices around the world, including locations in Australia, Belgium, Brazil, Canada, China, Denmark, England, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Korea, Mexico, the Netherlands, Norway, Portugal, Scotland, Singapore, Spain, Sweden, Switzerland, and Taiwan.
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We license our Adobe PostScript software and other printing systems technology to computer and printer manufacturers, who in turn distribute their products worldwide. We derive a significant portion of Adobe PostScript royalties from international sales of printers, imagesetters, and other output devices by our OEMs.
We also license software with post-contract customer support ("PCS") for two years.. An amount equal to the fair value of the PCS is deferred and recognized as revenue ratably over the two-year term.PCS period. Fair value of the undelivered PCS is determined by the rate charged to customers to renew a two-yeartheir PCS arrangement. PCS includes rights to upgrades, when and if available, a limited period of telephone support, updates, and bug fixes.enhancements.
For information regarding our market segments and segment revenue, geographic areas and significant customers, and geographic areas, please refer to Note 1617 of our Notes to Consolidated Financial Statements.
Order Fulfillment
The procurement of the various components of packaged products, including CDs and printed materials, and the assembly of packages for retail and other applications products is controlled by Order Fulfillment operations. We outsource all of our order fulfillment activities to third parties in the United States, Europe, and Asia.
To date, we have not experienced significant difficulties in obtaining raw materials for the manufacture of our products or in the replication of CDs, printing, and assembly of components, although an interruption in production by a supplier could result in a delay in shipment of Adobe'sour products. The backlog of orders as of January 24, 2003 was approximately $16.1 million. The backlog of orders as of January 25, 2002 was approximately $15.7 million. The backlog of orders as of January 26, 2001 was approximately $22.4 million.
Services and Support
Adobe provides Professional Services, Technical Support and EducationCustomer Service to a wide variety of customers including consumers, creative professionals and those in the enterprise market. Our service and support revenue consists primarily of consulting fees, software maintenance and support fees, and training fees.
For application software,Services
Adobe has a global Professional Services team dedicated to developing and implementing solutions for enterprise customers in key vertical markets and to transfer technical expertise to our Solution Partners. The Professional Services team uses a comprehensive, customer-focused methodology to develop high quality solutions, which in turn deliver a significant competitive advantage to our enterprise customers. A portfolio of technical training courses is also available for desktop and server-based products to meet the needs of our enterprise customers and Solution Partners.
Support
A significant portion of our support revenue is composed of our extended Enterprise Maintenance and Support offerings, which entitles customers to the right to receive product upgrades and enhancements during the term of the maintenance and support period, which is typically one year. This also includes support for mission-critical enterprise solutions. Regional Support Centers are charged with providing timely, high quality technical expertise on ePaper products and solutions to meet the growing needs of our customers.
Our support revenue also includes support for our desktop products whereby Adobe offers a range of support programs, from fee-based incidents to annual support contracts. Additionally, Adobe provides extensive self-help and online technical support capabilities via the web, which allows customers quick and services staff respondseasy access to customer queries received by phone, online, or via e-mail. possible solutions. Adobe provides product support through a combination of outsourced vendors and internal support centers.
Adobe also offers Developer Support to partners and developer organizations. The Adobe Solution Network ("ASN") Developer Program focuses on providing developers with high-quality tools (Solutions Development Kits), information, and services.
Free technical phonetelephone support is provided to customers who are under warranty for support. For customers in North America and Asia, support is provided up to a maximum of 30 or 90 days beginning upon the customer's first call or for a maximum of one or two support incidents, depending on the product. For customers in Europe, support is provided until our release of the second new full version after the version purchased by the customer. Historically, the majority of support for European customers is provided within the first 90 days. We have invested in improving self-help and on-line technical support capabilities so that customers can find answers to their support questions via Adobe's Web site and through user-to-user forums where users can help other users with technical questions. We have also outsourced our initial levels of technical support to provide a consistent standard for customer support on a worldwide basis. We provide a variety of fee-based options for customers seeking technical and developer support, beyond the initial free support provided.
Training
We inform customers about our products through on-line informational services on our Web site (www.adobe.com), and through a growing series of how-to books published by Adobe Press pursuant to a joint publishing agreement with Peachpit Press.Press. In addition, we develop tests to certify independent trainers who teach Adobe software classes. We sponsor workshops, led by our own graphics design staff, work with professional associations and user groups, and conduct regular beta-testing programs.
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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. Under the terms of the partnership agreements, the general partner has the sole and exclusive right to manage and control the partnerships. Adobe as the limited partner has certain rights, including replacing the general partner and approving acquisitions that exceed certain established parameters. However, these rights are considered to be protective rights and do not suggest an ability to control the partnerships. Adobe Ventures carry their investments in equity securities at estimated fair market value and unrealized gains and losses are included in investment income (loss). on our consolidated statements of income. The stock of a number of technology investments held by the limited partnerships at November 30, 2001 are29, 2002 is not publicly traded, and, therefore, there is no establishedestablishe d market for their securities. As such,In order to determine the fair market value of these investments, are determined by Granite Ventures usingwe use the most recent round of financing involving new non-strategic investors or estimates made by Granite Ventures. We also have aVentures based on their assessment of the current market value. It is our 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. publicpublicly traded 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 companyco mpany 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.accounting.
In March 1997, as part of our venture investing program, we established an internal limited partnership, Adobe Incentive Partners, L.P. ("AIP"), which allowsallowed certain of Adobe's executive officers to participate in cash or stock distributions from Adobe's venture investments. AssetsIn November 2002, the partnership was liquidated. Immediately prior to the liquidation, assets held by AIP includeincluded Adobe's entire interests in Adobe Ventures L.P. and Adobe Ventures II, L.P. and certain equity securities of privately-held companies. Adobe iswas both the general partner and a limited partner of AIP. Other limited partners arewere 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 2002, 2001, 2000, or 1999.2000.
Adobe's Class A senior limited partnership interest in AIP includesincluded 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 qualifiesqualified for partnership distributions only after (a) Adobe hashad fully recovered the cost basis of its investment in the specific investee company for which a distribution iswas made; and (b) the participating executive hashad 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 arewere restricted to investments in Adobe Ventures or in companies that were private at the time of the establishment of AIP, or when the investment iswas made, whichever iswas later. In fiscal 2001,2002, the current an d former participating officers received aggregatecash distributions with aan aggregate fair value of $0.6 million, consisting primarily of equity securities. The distributionsincluding a $0.3 million distribution related 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.partnership liquidation. At November 30, 2001,29, 2002, due to the partnership liquidation, there was no minority interest held by the participating officers was $0.5 million and is included in accrued expenses on the consolidated balance sheet.officers.
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Our equity investments and Adobe Ventures investments in equity securities at November 30, 200129, 2002 consisted of the following companies:
Private | Public | ||||||||
Adobe Equity Investments | |||||||||
AvantGo, Inc. | X | ||||||||
Classmates Online, Inc. (formerly eCircles, Inc.) | X | ||||||||
Datalogics, Inc. | X | ||||||||
Digimarc Corporation | X | ||||||||
DigitalThink, Inc. | X | ||||||||
Engage, Inc. | X | ||||||||
InfoGate, Inc. | X | ||||||||
JetNet Internetworking Services Inc. | X | ||||||||
Objectivity, Inc. | X | ||||||||
Open Plains Technology Inc. | X | ||||||||
Salon Media Group, Inc. (formerly | X | ||||||||
Tumbleweed Communications Corp. | X | ||||||||
Vicom Systems, Inc. | X | ||||||||
Viewpoint Corporation | X | ||||||||
Virage, Inc. | X | ||||||||
Winsoft | X | ||||||||
Zequra Technologies, Inc. | X | ||||||||
Adobe Ventures L.P. Equity Investments | |||||||||
Engage, Inc. | X | ||||||||
ImageX.com, Inc. | X | ||||||||
Managing Editor Software, Inc. | X | ||||||||
Adobe Ventures II, L.P. Equity Investments | |||||||||
DigitalThink, Inc. | X | ||||||||
Engage, Inc. | X | ||||||||
HAHT Software, Inc. | X | ||||||||
ImageX.com, Inc. | X | ||||||||
PictureIQ Corporation | X | ||||||||
Salon Media Group, Inc. (formerly Salon.com) | X | ||||||||
Virage, Inc. | X | ||||||||
Adobe Ventures III, L.P. Equity Investments | |||||||||
AvantGo, Inc. | X | ||||||||
Biz 360, Inc. | X | ||||||||
Builders Information Group, Inc. | X | ||||||||
Covalent Technologies, Inc. | X | ||||||||
Digital Fountain | X | ||||||||
DigitalThink, Inc. | X | ||||||||
Engage, Inc. | X | ||||||||
PictureIQ Corporation | X | ||||||||
Sendmail, Inc. | X | ||||||||
Shutterfly, Inc. | X | ||||||||
Slam Dunk Networks, Inc. | X | ||||||||
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Adobe Ventures IV, L.P. Equity Investments | |||||
BAM Software, Inc. | X | ||||
Biz 360, Inc. | X | ||||
Cardiff Software, Inc. | X | ||||
Convio, Inc. | X | ||||
Convalent Technologies, Inc. | X | ||||
Digital Fountain | X | ||||
HAHT Software, Inc. | X | ||||
Kontiki, Inc. | X | ||||
Pervasive Security Systems, Inc. | X | ||||
Picture IQ Corporation | X | ||||
Sendmail, Inc. | X | ||||
Shutterfly, Inc. | X | ||||
TuVox, Inc. | X |
We intend to continue investing in new markets through limited partnerships as well as through direct investments, although we currently do not anticipate investing further through AIP.investments.
Since the personal computer and enterprise software industry isindustries are characterized by rapid technological change, a continuous high level of expenditures is required for the enhancement of existing products and the development of new products. We primarily develop our software internally. We occasionally acquire products developed by others by purchasing the stock or assets of the business entity that held ownership rights to the technology. In other instances, we have licensed or purchased the intellectual property ownership rights of programs developed by others with license or technology transfer agreements that may obligate us to pay royalties, typically based on a percentage of the revenues generated by those programs.
During fiscal years ended November 29, 2002, November 30, 2001 and December 1, 2000, and December 3, 1999, our research and development expenses, including costs related to contract development, were $246.1 million, $224.1 million, and $240.2 million, respectively.
On April 12, 2002, we acquired 100% of the outstanding common stock of Accelio. Accelio was a provider of Web-enabled solutions that helped customers manage business processes driven by electronic forms. The acquisition of Accelio enhances our ability to broaden our ePaper solution business by combining Accelio's electronic forms solutions with Adobe Acrobat and $197.5PDF technologies. Through this combination we can now extend Acrobat solutions to enterprise users in Global 2000 businesses, governments and educational institutions to deliver greater value to our customers. The aggregate purchase price was $70.2 million, respectively. Duringwhich included the first quarterissuance of fiscal 2002,1.8 million shares of common stock of Adobe, valued at $68.4 million, and cash of $1.8 million.
In December 2001, we acquired Fotiva, Inc. for("Fotiva"). Substantially all of Fotiva's assets were intellectual property. Fotiva was a total consideration of approximately $5.3 million. Fotiva is a digital photographydevelopment stage software company developingthat created solutions to help consumers manage, store, enrich, and share digital photographs. Also duringphotographs and other related personal media. In connection with the acquisition, substantially all of the purchase price of $5.4 million cash was allocated to in-process research and development and expensed at the time of acquisition due to the in-process state of the technology. At the date we acquired Fotiva, it was estimated that 50% of the development effort had been completed and that the remaining 50% of the development effort would take approximately eleven months to complete. The efforts required to complete the development of the technology primarily include finalization of coding, internationalization, and extensive quality assurance testing. We developed a new product, Adobe Photoshop Album, that we released in the first quarter of fiscal 2002, we announced a proposed agreement to acquire Ottawa, Canada-based Accelio Corporation ("Accelio"). Accelio is a provider of Web-enabled solutions that help customers manage business processes driven by electronic forms. Under the terms of the agreement, Adobe's common stock valued at $72.0 (US) million on closing will be exchanged for all Accelio equity securities. We expect to record a $12.0-$15.0 million accrual related to the acquisition, which will be added to the purchase price. The proposed acquisition is subject to the execution of customary transaction documents2003 usi ng Fotiva's image management technology with our digital imaging and the satisfaction of customary closing conditions, including the approval of Accelio's shareholders and clearance of the acquisition by U.S. and Canadian regulatory authorities. Initially the transaction was expected to close in March 2002. However, due to certain regulatory and timing requirements, we are now targeting to close in April 2002.ePaper technologies.
During fiscal 2000, we acquired Glassbook, Inc. for a total consideration of approximately $28.0 million. Based on an independent appraiser's valuation, $0.5 million was allocated to in-process research and development related to this acquisition. The ongoing project at Glassbook at the time of the purchase included the development of the Glassbook Reader and the Glassbook Content Server products. We released new products that contained the purchased technology in April 2001, with Acrobat eBook Reader 2.1 and Adobe Content Server 2.0.
During fiscal 1999, we also acquired substantially all of the assets of two software companies, through separate purchase transactions, for an aggregate consideration of approximately $3.6 million, which was allocated to in-process research and development and expensed at the time of acquisition. The ongoing project at Attitude Software at the time of the purchase included the development of the 3D Anarchy authoring product. We are incorporating the purchased technology into one of our products, which has not yet been released. Additionally, we acquired substantially all of the assets, consisting of intellectual property, of Photomerge. This purchased technology was incorporated into our Photoshop Elements
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product, which we released in April 2001. See Management's Discussion and Analysis for further information.
We regard our software as proprietary and protect it withunder the laws of copyrights, patents, trademarks, and trade secret laws, internal and external nondisclosure precautions, and restrictions on disclosure and transferability that are incorporated into our software license agreements.secrets. We protect the source code of our software programs as trade secrets, and make source code available to OEMsthird parties only under limited circumstances and specific security and confidentiality constraints.
Our products are generally licensed to end users on a "right to use" basis pursuant to a license that is nontransferable and restricts the use of the products to the customer's internal purposes on a designated number of printers or computers. We also rely on copyright laws and on "shrink wrap" and electronic licenses that are not signed by the end user. Copyright protection may be unavailable under the laws of certain countries. Thecountries, however, and the enforceability of "shrink wrap" and electronic licenses has not been conclusively determined. We have obtained many patents and have registered numerous copyrights, trademarks, domain names, and logos in the United States and foreign countries.
Policing unauthorized use of computer software is difficult, and software piracy is a persistent problem for the software industry. This problem is particularly acute in international markets. We conduct vigorous anti-piracy programs. However, our products generally do not currently contain copy protection or network copy-detection features.
We believe that, because computer software technology changes and develops rapidly, patent, trade secret, and copyright protection are less significant than factors such as the knowledge, ability, and experience of our personnel, brand recognition, contractual relationships, and ongoing product development.EMPLOYEES
As of January 25, 2002,24, 2003, we employed 3,029 people, none of whom are represented by a labor union.3,341 people. We have not experienced work stoppages and believe our employee relations are good. Competition in recruiting personnel in the software industry, especially highly skilled engineers, is extremely intense. We believe our future success will depend in part on our continued ability to recruit and retain highly skilled technical, management and marketing personnel.
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Adobe's executive officers as of January 25, 200231, 2003 are as follows:
Name | Age | Positions | |||||||
Bruce R. Chizen | 47 | President and Chief Executive Officer | |||||||
Shantanu Narayen | 39 | Executive Vice President, Worldwide | |||||||
Karen O. Cottle | 53 | Senior Vice President, General Counsel and Corporate Secretary | |||||||
Murray J. Demo | 41 | Senior Vice President and | |||||||
Jim Stephens | 45 | Senior Vice President, Worldwide Sales | |||||||
Bryan Lamkin | 42 | Senior Vice President, Digital Imaging and Video Business Unit | |||||||
Melissa Dyrdahl | 45 | Senior Vice President, Corporate Marketing and Communications | |||||||
Theresa Townsley | 44 | Senior Vice President, Human Resources | |||||||
James Heeger | 46 | Senior Vice President, Creative Professional Business Unit | |||||||
Ivan Koon | 45 | Senior Vice President, ePaper Business Unit |
A biography, including the principal occupations for the past five years of each of the executive officers, is provided below.
Mr. Chizen joined Adobe upon the closing of the acquisition of Aldus in August 1994 as Vice President and General Manager, Consumer Products Division. In December 1997, he was promoted to Senior Vice President and General Manager, Graphic Products Division and in August 1998, Mr. Chizen was promoted to Executive Vice President, Products and Marketing. In April 2000, Mr. Chizen was promoted to President of Adobe and in December 2000, he also became Adobe's Chief Executive Officer.Officer and joined the Adobe Board of Directors on December 2000. Prior to joining Adobe, Mr. Chizen was Vice President and General Manager, Consumer Division of Aldus Corporation from February 1994 to August 1994, and from November 1992 to February 1994, he was Vice President and General Manager, Claris Clear Choice for Claris Corp., a wholly owned subsidiary of Apple Computer, Inc., a manufacturer of computers and software. Mr. Chizen is a member of the BoardsBoard of Directors of Viewpoint Corporation and Synopsis,Synopsys, Inc.
Mr. Narayen joined Adobe in January 1998 as Vice President of Engineering and has held various other positions as vice president and general managerGeneral Manager of Adobe's engineering technology group. He was promoted to Senior Vice President, Worldwide Product DevelopmentProducts in January 1999 and to Executive Vice President, Worldwide Product Marketing and Development in March 2001. Prior to joining Adobe, Mr. Narayen co-founded Pictra Inc., a software internet company, in 1996. He was Director of Desktop and Collaboration products at Silicon Graphics Inc. and held various senior manager positions at Apple Computer Inc. before founding Pictra.
Ms. Cottle joined Adobe in February 2002 as Senior Vice President, General Counsel and Secretary. Prior to joining Adobe, Ms. Cottle served as General Counsel for Vitria Technology, Inc. from February 2000 to February 2002. From 1996 to 1999, Ms. Cottle served as Vice President, General Counsel and Secretary of Raychem Corporation and from 1986 to 1996 as Division Counsel of Raychem Corporation. Prior to that, Ms. Cottle was a partner in Farella, Braun and Martel in San Francisco, California.
Mr. Demo joined Adobe in August 1996 as the Director of Operations Finance. In July 1998 he was promoted to Corporate Controller. In October 1999, he was promoted to Vice President and Corporate Controller and in June 2000 was promoted to Senior Vice President and Chief Financial Officer. Prior to joining Adobe, Mr. Demo was the Director of Finance for Miller Freeman, Inc, a division of United News & Media, London, England from June 1993 to July 1996. Prior to Miller Freeman, Inc., Mr. Demo held a variety of senior finance and business development positions at First Financial Management, Visionary Corporate Technologies, and Hughes Electronics.
Mr. Stephens joined Adobe in February 1990 and held various senior management positions in sales and marketing for Adobe's Printing System'sSystems Division before joining the executive teambeing promoted in November 1997 asto Vice President of Change Management. In June 1998, he was promoted to Vice President, Investor Relations and in April 1999, Mr. Stephens was promoted to Vice President, Corporate Development. In September 2000, Mr. Stephens was promoted to Senior Vice President, E-business Development, and in October 2001, Mr. Stephens was promoted to Senior Vice President, Worldwide Sales, Customer Care and Field Marketing. For ten years prior to joining Adobe, Mr. Stephens held sales and marketing management positions at Dataproducts Corporation and Texas Instruments.
18Mr. Lamkin joined the Company in February 1992 and held various senior management positions in marketing for Adobe's graphics and publishing products. In March 1997, he was promoted to Vice President of Marketing and in March 2000, he was promoted to Senior Vice President, Product Marketing. Mr. Lamkin is currently Senior Vice President of the Digital Imaging and Video Business Unit. Prior to joining Adobe, Mr. Lamkin held various product management positions at Software Publishing Corporation from 1986 to 1992.
Ms. Dyrdahl joined Adobe upon the closing of the acquisition of Aldus in August 1994 as Director of Marketing for the Consumer Products Division. In August 1998, Ms. Dyrdahl was appointed Vice President of Worldwide Marketing Communications, and in April of 2000, she was promoted to Senior Vice President of Corporate Marketing and Communications. Prior to joining Adobe, Ms. Dyrdahl was Director of Sales Operations of Claris Corp., a wholly owned subsidiary of Apple Computer, Inc., from 1988 to 1993, and previously held several marketing management positions at Hewlett-Packard from 1983 to 1988. Ms. Dyrdahl also serves on the Board of Trustees for the San Jose Museum of Art.
Ms. Townsley joined the Company in 1988 and held various senior management positions within the human resources group before being promoted in May 1999 to Vice President of Worldwide Human Resources. In December 1999, she was promoted to Senior Vice President, Worldwide Human Resources. Prior to joining Adobe, Ms. Townsley held various human resources positions at FMC Corporation from 1979 to 1988.
Mr. Heeger joined Adobe in February 2002 as Senior Vice President of Cross Media Publishing, now Senior Vice President, Creative Professional Business Unit. He was Chief Executive Officer and President of Fotiva, Inc. from March 2001 to December 2001, when Fotiva was acquired by Adobe. From September 1993 to June 2000, Mr. Heeger was with Intuit, Inc., where he served as Senior Vice President and General Manager of Small Business Division from July 1997 to June 2000. In April 1995, Mr. Heeger became Chief Financial Officer and served as Chief Financial Officer and Senior Vice President of Administration until July 1997; Mr. Heeger began at Intuit as Vice President and General Manager of Supplies Division from December 1993 to April 1995. Prior to Intuit, Mr. Heeger spent 11 years with Hewlett-Packard in marketing and distribution roles.
Mr. Koon joined the Company in August 2002 as Senior Vice President of the ePaper Business Unit. Prior to joining Adobe, Mr. Koon was President of the New Technologies Division at BEA Systems from November 1999 to July 2002. Prior to BEA, Mr. Koon served in various executive management roles at S2 Systems, including President and Chief Operating Officer from February 1997 to September 1999.
The following table sets forth the location, approximate square footage, and use of each of the principal properties used by Adobe. We lease or sublease all of these properties.properties; some of them are leased under operating leases. Such leases expire at various times through January 2025.March 2091. The annual base rent expense for all facilities (including operating expenses, property taxes, and assessments) is currently approximately $22.0$26.6 million and is subject to annual adjustment.adjustments as well as changes in interest rates.
Location | Approximate | Use | |||||||
North America: | 360,000 | Research, product development, sales, marketing and administration | |||||||
321 Park Avenue | 280,000 | Research, product development, sales, marketing and administration | |||||||
801 N. | 255,000 | Product development, sales, marketing, technical support, and administration | |||||||
560 Rochester St. | 152,000 | Product development, sales, marketing, technical support, and administration | |||||||
Japan | 38,000 | Product development, sales, marketing, | |||||||
Ireland: | 11,000 | Administration | |||||||
Blackrock Business Park | 9,500 | Sales and technical support | |||||||
India | 100,000 | Product Development |
In general, all facilities are in good condition and are operating at capacities that range from 65% to 100%.
We also lease office space in the United States and various other countries under operating leases.
We have one leased office buildingset of offices in San Jose, California that was vacated in connection with the restructuring program implemented in the third quarter of fiscal 1998. We have subleased the buildingoffices but still have a commitment under this lease agreement until 2007.
On August 10, 2000,September 3, 2002, Adobe filed suit in the U.S. District Court, Northern District of DelawareCalifornia ("the California Action"), against International Typeface Corporation ("ITC") and Agfa Monotype Corporation ("AMT"), companies which have common ownership and management, seeking a declaration that (a) Adobe's distribution of font software, which generates ITC typefaces, did not breach its contract pursuant to which Adobe licensed certain rights with respect to ITC typefaces, and (b) Adobe did not violate the Digital Millennium Copyright Act ("DMCA") with respect to, or induce or contribute to the infringement of copyrights in, ITC's and AMT's TrueType font software. AMT had previously asserted that Adobe had committed such breach of contract and violation of the DMCA.
On September 4, 2002, Adobe initiated arbitration proceedings in London, England ("the London Arbitration") against AMT, seeking a declaration that Adobe's distribution of font software that generates AMT typefaces did not breach its contract pursuant to which it licensed certain rights with respect to AMT typefaces. AMT has made a breach of contract claim in response to Adobe's arbitration demand in the London Arbitration, asserting that Adobe wrongfully granted and/or allowed third parties greater rights to distribute and embed AMT fonts than Adobe was licensed to grant and/or allow.
If AMT prevails on its breach of contract claims, AMT may have the right to terminate Adobe's right to distribute any of its products that then still contain font software that generates AMT typefaces. Adobe asserts that it negotiated for and obtained express, written licenses from both AMT and ITC approximately ten years ago permitting Adobe to allow end users to embed AMT and ITC fonts in electronic documents for "print and view" and disputes the other breach of contract claims. Adobe also asserts that Adobe Acrobat 5.0, which AMT and ITC correctly acknowledge has been superceded by version 5.05, neither violates the DMCA nor induces or contributes to the infringement of copyrights in ITC's and AMT's TrueType font software.
On September 5, 2002, AMT and ITC filed suit against Adobe in the U.S. District Court, Eastern District of Illinois ("the Illinois Action") against Adobe, asserting only that Adobe's distribution of the superceded 5.0 version of Adobe Acrobat violated the DMCA, as described above. The Illinois Action seeks statutory damages of $200-$2,500 for each copy of Acrobat 5.0 found to violate the DMCA, a claim that Adobe disputes as a matter of law and fact. The Illinois Action also seeks injunctive relief with respect to Acrobat 5.0, although it specifically alleges, correctly, that Adobe no longer distributes Acrobat 5.0.
On November 13, 2002, ITC filed another suit against Adobe in the United States District Court for the Eastern District of Illinois ("the Second Illinois Action"), this time asserting that Adobe breached its contract with ITC and that ITC, and not Adobe, owns the copyrights in font software created by Adobe which generates ITC typefaces.
AMT and ITC made a motion to dismiss the California action, challenging jurisdiction and venue. That motion was granted by the court on December 16, 2002. As such, the parties' respective claims will be resolved in the other actions described above.
The results of any litigation are inherently uncertain, and AMT and ITC may assert other claims. Adobe cannot assure that it will be able to successfully defend itself against any of the actions described above. AMT and ITC seek an unspecified aggregate dollar amount of damages. A favorable outcome for AMT or ITC in these actions could have a material adverse effect on Adobe's business, financial condition and operating results. We strongly believe that all of AMT's and ITC's claims are without merit, and will vigorously defend against them in addition to pursuing our own claims as described above.
On September 6, 2002, Plaintiff Fred B. Dufresne filed suit against Adobe, Microsoft Corporation, Macromedia, Inc. ("Macromedia") for, and Trellix Corporation in the U.S. District Court, District of Massachusetts, alleging infringement of U.S. Patent No. 5,546,528 relating5,835,712, entitled "Client-Server System Using Embedded Hypertext Tags For Application And Database Development." The plaintiff's Complaint asserts that "Defendants have infringed, and continue to Adobe's tabbed palette patent. On September 18, 2000, Adobe amended its complaint to include an additional claiminfringe one or more claims of infringement of U.S. Patent No. 6,084,597 relating to a method of rasterizingthe '712 patent by making, using, selling and/or offering for sale,inter alia, products supporting Microsoft Active Server Pages technology." The plaintiff seeks unspecified compensatory damages, preliminary and rendering complex layered compositions in a movie. The complaint seeks a declaratory andpermanent injunctive relief, as well as actualtrebling of damages for "willful infringement," and treble damages. Macromedia denies it infringes Adobe's patents in its answerfees and costs. Adobe strongly disagrees with the plaintiff's claims and intends to Adobe's amended complaint.vigorously defend against this action.
On September 27, 2000, MacromediaNovember 18, 2002, Plaintiffs Shell & Slate Software Corporation and Ben Weiss filed counterclaimsa civil action in the U.S. District Court in Los Angeles against the Company alleging false designation of Delaware for infringementorigin, trade secret misappropriation, breach of U.S. Patent No. 5,467,443, relating to changingcontract, and other causes of blended elementsaction. The claim derives from the Plaintiffs' belief that the "healing brush" technique of Adobe Photoshop incorporates Plaintiffs' trade secrets. Plaintiffs seek preliminary and U.S. Patent Nos. 5,151,998permanent injunctive relief, compensatory, treble, and 5,204,969, which relates to visual editing of sound waveforms.punitive damages, and fees and costs. We believe that the allegations against Adobe are withoutaction has no merit and intend to defend vigorously defend ourselvesagainst it.
From time to time Adobe is involved in lawsuits, claims, investigations and pursue our original complaint. The counterclaim seeksproceedings, in addition to those identified above, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance with Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies," Adobe makes a declaratoryprovision for a liability when it is both probable that a liability has been incurred and injunctive reliefthe amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, Adobe believes that it has valid defenses with respect to the legal matters pending against it, as well as actualadequate provisions for any probable and treble damages. This caseestimable losses. It is currently in the discovery phase. The court has set a trial date for April 29, 2002. Adobe has denied Macromedia's counterclaims in its answer to Macromedia's counterclaims.
19
On October 19, 2001, Macromedia filed suit in the U.S. District Court for the Northern District of California against Adobe for infringement of U.S. Patent Nos. 5,845,299, relating to draw-based editors for web pages, and 5,911,145, relating to hierarchical structure editors for websites. The complaint seeks declaratory and injunctive relief as well as actual and treble damages. Adobe denied Macromedia's claims in its answer and asserted affirmative defenses.
Management believespossible, nevertheless, that the ultimate resolution of these matters will not have a material impact on our financial positioncash flows or results of operations.operations could be affected in any particular period by the resolution of one or more of these contingencies.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our common stock is traded on The Nasdaq National Market under the symbol "ADBE." On January 25, 2002,24, 2003, there were 1,7281,819 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The following table sets forth the high and low sales price per share of our common stock and the cash dividends paid per share, for the periods indicated, all of which are adjusted for the two-for-one stock split in the form of a stock dividend effected October 2000.indicated.
| | Price Range | | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Cash Dividend Per Share | |||||||||
| | High | Low | ||||||||
| Fiscal 2001: | ||||||||||
| First Quarter | $ | 77.56 | $ | 26.25 | $ | 0.0125 | ||||
| Second Quarter | 48.80 | 24.56 | 0.0125 | |||||||
| Third Quarter | 48.13 | 31.22 | 0.0125 | |||||||
| Fourth Quarter | 34.99 | 22.20 | 0.0125 | |||||||
| Fiscal Year | 77.56 | 22.20 | 0.05 | |||||||
Fiscal 2000: | ||||||||||
| First Quarter | $ | 53.31 | $ | 26.72 | $ | 0.0125 | ||||
| Second Quarter | 65.50 | 38.50 | 0.0125 | |||||||
| Third Quarter | 71.66 | 51.50 | 0.0125 | |||||||
| Fourth Quarter | 87.31 | 60.75 | 0.0125 | |||||||
| Fiscal Year | 87.31 | 26.72 | 0.05 | |||||||
|
| Price Range |
| Cash Dividend |
| ||
|
| High |
| Low |
|
| |
--------- | -------- | ------ | |||||
Fiscal 2002: |
|
|
|
|
|
|
|
First Quarter |
| $39.20 |
| $30.00 |
| $0.0125 |
|
Second Quarter |
| 43.32 |
| 35.05 |
| 0.0125 |
|
Third Quarter |
| 39.03 |
| 16.50 |
| 0.0125 |
|
Fourth Quarter |
| 30.52 |
| 17.71 |
| 0.0125 |
|
Fiscal Year |
| 43.32 |
| 16.50 |
| 0.05 |
|
|
|
|
|
|
|
|
|
Fiscal 2001: |
|
|
|
|
|
|
|
First Quarter |
| $77.56 |
| $26.25 |
| $0.0125 |
|
Second Quarter |
| 48.80 |
| 24.56 |
| 0.0125 |
|
Third Quarter |
| 48.13 |
| 31.22 |
| 0.0125 |
|
Fourth Quarter |
| 34.99 |
| 22.20 |
| 0.0125 |
|
Fiscal Year |
| 77.56 |
| 22.20 |
| 0.05 |
|
We have paid cash dividends on our common stock each quarter since the second quarter of 1988. In March 1997, we established the venture stock dividend program under which we may, from time to time, distribute as a dividend-in-kind shares of our equity holdings in investee companies to our stockholders.
Under the terms of our line of credit agreement, corporate headquarters lease agreements and real estate financing agreement, we may pay cash dividends unless an event of default has occurred oroccurred; however, our ability to distribute dividends may be limited if we do not meet certain financial ratios. We have been in compliance with financial ratio covenant requirements since the inception of our lease and real estate financing agreements. The declaration of future dividends, whether in cash or in-kind, is within the discretion of Adobe's Board of Directors and will depend upon business conditions, our results of operations, our financial condition, and other factors.
20
Equity Compensation Plans
The following table summarizesFor information on our equity compensation plans asrefer to Item 7, "Management's Discussion and Analysis of November 30, 2001:
| | Equity Compensation Plan Information | ||||||
|---|---|---|---|---|---|---|---|
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | ||||
| Equity compensation plans approved by security holders | 19,026,713 | $ | 27.18 | 26,811,909 | |||
| Equity compensation plans not approved by security holders* | 35,257,604 | $ | 41.76 | 4,304,938 | |||
| Total | 54,284,317 | $ | 36.65 | 31,116,847 | |||
21Options."
Item 6. Selected Financial Data
The following selected consolidated financial data (presented in thousands, except per share amounts and employee data) are derived from Adobe's consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto, and with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
| | Years Ended | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Nov. 30, 2001 | Dec. 1, 2000 | Dec. 3, 1999 | Nov. 27, 1998 | Nov. 28, 1997 | ||||||||||||
| Operations: | |||||||||||||||||
| Revenue | $ | 1,229,720 | $ | 1,266,378 | $ | 1,015,434 | $ | 894,791 | $ | 911,894 | |||||||
| Income before income taxes | 306,931 | 443,739 | 374,427 | 167,694 | 296,090 | ||||||||||||
| Net income(1) | 205,644 | 287,808 | 237,751 | 105,144 | 186,837 | ||||||||||||
| Net income per share(1) | |||||||||||||||||
| Basic | 0.86 | 1.21 | 0.98 | 0.40 | 0.65 | ||||||||||||
| Diluted | 0.83 | 1.13 | 0.92 | 0.39 | 0.63 | ||||||||||||
| Cash dividends declared per common share | 0.05 | 0.05 | 0.05 | 0.05 | 0.05 | ||||||||||||
Financial position: | |||||||||||||||||
| Cash and short-term investments | 581,613 | 679,853 | 498,716 | 272,547 | 502,956 | ||||||||||||
| Working capital | 453,713 | 563,307 | 355,386 | 204,979 | 454,299 | ||||||||||||
| Total assets | 930,623 | 1,069,416 | 803,859 | 767,331 | 940,071 | ||||||||||||
| Stockholders' equity | 616,972 | 752,544 | 512,209 | 516,365 | 715,424 | ||||||||||||
Additional data: | |||||||||||||||||
| Worldwide employees | 3,043 | 2,947 | 2,745 | 2,664 | 2,654 | ||||||||||||
| Years Ended |
| |||||||||
|
| Nov. 29, |
| Nov. 30, |
| Dec. 1, |
| Dec. 3, |
| Nov. 27, |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
| --------- |
|
Operations: |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $1,164,788 |
| $1,229,720 |
| $1,266,378 |
| $1,015,434 |
| $894,791 |
|
Income before income taxes |
| 284,689 |
| 306,931 |
| 443,739 |
| 374,427 |
| 167,694 |
|
Net income(1) |
| 191,399 |
| 205,644 |
| 287,808 |
| 237,751 |
| 105,144 |
|
Net income per share(1) |
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 0.81 |
| 0.86 |
| 1.21 |
| 0.98 |
| 0.40 |
|
Diluted |
| 0.79 |
| 0.83 |
| 1.13 |
| 0.92 |
| 0.39 |
|
Cash dividends declared per common share |
| 0.05 |
| 0.05 |
| 0.05 |
| 0.05 |
| 0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial position: |
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments |
| 617,737 |
| 581,613 |
| 679,853 |
| 498,716 |
| 272,547 |
|
Working capital |
| 436,883 |
| 453,713 |
| 563,307 |
| 355,386 |
| 204,979 |
|
Total assets |
| 1,051,610 |
| 932,173 |
| 1,069,416 |
| 803,859 |
| 767,331 |
|
Stockholders' equity |
| 674,321 |
| 616,972 |
| 752,544 |
| 512,209 |
| 516,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional data: |
|
|
|
|
|
|
|
|
|
|
|
Worldwide employees |
| 3,319 |
| 3,043 |
| 2,947 |
| 2,745 |
| 2,664 |
|
______________
All share and per share amounts referred to in the above table have been adjusted to reflect the two-for-one stock splits in the form of stock dividends effected October 24, 2000 and October 26, 1999.
(1)
22The numbers presented above are pretax amounts.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion (presented in millions, except per share amounts) should be read in conjunction with the consolidated financial statements and notes thereto.
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements including, but not limited to, those related to product and marketing plans, that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Operations - Factors That May Affect Our Future Results of Operations.Performance." You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed in 2002.2003. When used in this report, the words "expects," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," "looks for," "looks to," and similar expressions, as well as statements regarding Adobe's focus for the future, are generally intended to identifyidenti fy forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
Overview
Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company") builds award-winningoffers a line of software solutions for network publishing, including Web, ePaper, print, video, wirelessconsumers, businesses, and broadband applications. Its graphic design, imaging, dynamic media and authoring toolscreative professional customers. Our products enable customers to create, manage and deliver visually-rich,visually rich, compelling and reliable content. We license our technology to major hardware manufacturers, software developers, and service providers, and we offer integrated software solutions to businesses of all sizes. We distribute our products through a network of distributors and dealers, VARs,value-added resellers ("VARs"), systems integrators, and OEMs;original equipment manufacturers ("OEMs"); direct to end users through Adobe call centers;users; and through our own Web sitewebsite atwww.adobe.com. www.adobe.com. We have operations in the Americas; Europe, Middle East, and Africa ("EMEA"); and Asia. Our software runs on Microsoft Windows, Apple Macintosh, Linux, UNIX, Palm OS, Pocket PC, and Symbian platforms.
Revenue
| | 2001 | Change | 2000 | Change | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | $ | 1,229.7 | (3 | )% | $ | 1,266.4 | 25 | % | $ | 1,015.4 | |||
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
|
| ---------------- |
| ------- |
| ---------- |
| ------- |
| ----------- |
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
Products |
| $1,153.2 |
| (6 | )% | $1,229.7 |
| (3 | )% | $1,266.4 |
|
Services and support |
| 11.6 |
| 100 |
| --- |
| --- |
| --- |
|
|
| ---------------- |
| ------- |
| ---------- |
| ------- |
| ----------- |
|
|
| $1,164.8 |
| (5 | )% | $1,229.7 |
| (3 | )% | $1,266.4 |
|
|
| ---------------- |
| ------- |
| ---------- |
| ------- |
| ----------- |
|
Revenue is categorized into
We have four major operating segments: Web Publishing,reportable segments that offer different product lines: Graphics, Cross-media Publishing, ePaper Solutions, and OEM PostScript and Other. The Web Publishing,Graphics segment provides users with software for creating, editing and enhancing digital images and photographs, digital video, animations, graphics, and illustrations. The Cross-media Publishing segment provides software for professional page layout, professional Web page layout, technical document publishing, and business publishing. The ePaper Solutions segments include application products revenuesegment provides electronic document distribution software that allows users to create, enhance, annotate, and securely send Adobe PDF files that can be shared, viewed, navigated, and printed exactly as intended on a broad range of hardware and software platforms. In addition, our recently-acquired Accelio business focusing on electronic forms is derived predominantly from shipments of application software programs marketed through retail, VAR, and OEM distribution channels, as well as direct to end users through Adobe call centers andincluded in our Web site.ePaper segment. The OEM PostScript and Other segment includes printing technology to create and print simple or visually rich docu ments with precision.
Revenue from our Graphics segment is derived primarily from the licensing revenue, which is made up of royalties received fromthe following application products: Photoshop, Illustrator, Adobe Premiere, Photoshop Elements, After Effects, Adobe Graphics Server (formerly called Adobe AlterCast), Digital Video Collection, Adobe PhotoDeluxe, Atmosphere, and LiveMotion. Cross-media Publishing includes the following application products: Web Collection, GoLive, Design Collection, Adobe Publishing Collection, PageMaker, FrameMaker, Adobe Type products, InDesign, Adobe Creative Suites, Adobe Content Server, eBooks, and PressReady. The ePaper Solutions segment includes Adobe Acrobat software and other Acrobat related technologies, Document Server, Form Server, Output Server, and Workflow Server. The OEM customers who ship products containing Adobe's PostScript technology.Postscript and Other segment includes printing technology to create and print simple or visually rich documents with precision.
Beginning in the first quarter of fiscal year 2002,2003, we have realigned our business segments. A newly namedsegments to reflect the recent change in the way we manage our business. The former Graphics segment will inhas been renamed the future replace theDigital Imaging and Video segment. The former WebCross-media Publishing segment has been renamed the Creative Professional segment and will include revenuesincludes two products that were formerly included in our Graphics segment, Adobe Illustrator and direct expenses relatedAdobe Graphics Server (formerly called Adobe AlterCast). There were no changes to Adobe Illustrator.our ePaper and OEM Postscript and Other segments. The Adobe GoLive and Web Collection products will be reported in the Cross-media Publishing segment. The management'smanagement discussion and analysis that follows is based on our old segment reporting that was in effect throughout fiscal 2001, 2000, and 1999.2002. For more information on both our old and new segment reporting, please refer to Note 1617 of our Notes to Consolidated Financial Statements.
23Products
Fiscal 2002 Revenue Compared to Fiscal 2001 Revenue
During fiscal 2002, our products revenue decreased 6%, or $76.6 million, compared to fiscal 2001, primarily due to continued economic weakness in Asia, Europe, and the U.S., as well as declines in revenue from our Graphics, Cross-media Publishing, and OEM PostScript and Other segments, for reasons explained below.
Revenue from our Web PublishingGraphics segment decreased 7%, or $40.4 million, from $543.4 million in fiscal 2001 to $503.0 million in fiscal 2002. The annual decrease in revenue in our Graphics segment was primarily due to a 13% year-over-year decline in our illustration software revenue, due to product lifecycle timing and the continued economic impact on creative professional customers, who are the main end-user market for this software. We also experienced a 3% overall decline in our digital imaging software revenue, which includes the Adobe Photoshop, Adobe Photoshop Elements, and Adobe PhotoDeluxe products. We believe the decline in digital imaging software is derived primarily from the licensingdue to a combination of the following application products: Photoshop,economic weakness across the world, the impact of lower marketing spending by corporations resulting in a reduced number of creative professional customers, and the trend of our customers migrating towards the purchasing of Adobe Collection products as opposed to individual products. In addition, we experienced a 15% year-over-y ear revenue decline in our digital video software licensing, which is made up of our Adobe Premiere, Photoshop Elements, Web Collection,Adobe After Effects, AlterCast, GoLive,and our Adobe Digital Video Collection Adobe PhotoDeluxe, Streamline, Atmosphere, Adobe Dimensions, Adobe Viewer,products, due to product lifecycle timing and LiveMotion.the economic impact on the digital video software market.
Revenue from our Cross-media Publishing segment decreased 10%, or $29.4 million, from $289.6 million in fiscal 2001 to $260.2 million in fiscal 2002. The annual decrease in revenue comes primarily from our Cross-media Publishing segment during fiscal 2002 compared to fiscal 2001 was due to multiple factors. In the licensing ofWeb publishing segment, we experienced a 35% decline in revenue from our Web-focused products: Adobe GoLive and the following application products: Illustrator, Design Collection,Adobe Web Collection. We attribute this decline to weakness in the Web publishing segment and less sales and marketing emphasis. In addition, we experienced a 23% year-over-year decline in our business publishing revenue, which is derived from our PageMaker and Adobe Publishing Collection PageMaker,products. We attribute this decline to the weaker global economy in 2002 when compared to 2001, the adoption of our Adobe Design Collection product (especially by creative professionals) instead of the Adobe Publishing Collection product, and less sales and marketing emphasis. Finally, we experienced a 29% year-o ver-year decline in type and technical publishing products, which includes our Adobe FrameMaker Adobe Typeproduct, due to overall economic weakness in the geographic markets in which these products are used.
The decrease in revenue from these Cross-media products in fiscal 2002 compared to fiscal 2001 was partially offset by a 42% increase in revenue in our professional layout publishing products, which includes revenue from our InDesign, Adobe Acrobat InProduction,Design Collection, and Adobe Content Server, Adobe PDF Transit, Adobe Studio, eBooks,Creative Suites products. We attribute this revenue increase to increased marketing activities and PressReady. growing customer demand.
Revenue from our OEM PostScript and Other segment decreased 15%, or $15.8 million, from $104.8 million in fiscal 2001 to $89.0 million in fiscal 2002, due to the following factors: continued weakness in the print business, lower average selling prices generating less royalties from certain OEM customers, and smaller OEM customers transferring to clone PostScript technologies. Revenue from this segment has declined over the last few years and we expect this trend to continue, but if it significantly exceeds our expectations, it may harm our future results.
The decrease in revenue from the above-mentioned segments in fiscal 2002 compared to fiscal 2001 was partially offset by an increase of $9.0 million, or 3%, in our ePaper Solutions segment. This segment is derivedincreased from $291.9 million in fiscal 2001 to $300.9 million in fiscal 2002, primarily due to a 5% increase in Acrobat revenue in the licensingU.S. and an increase in revenue of Adobe Acrobat software and other Acrobat related technologies.$21.5 million from our newly-acquired Accelio business.
Fiscal 2001 Revenue Compared to Fiscal 2000 Revenue
During fiscal 2001, our overall product revenue decreased 3%, or $36.7 million, compared to fiscal 2000, primarily due to adverse economic conditions, especially in the US,U.S., and a decline in revenue from our Web Publishing,Graphics, Cross-media Publishing, and OEM PostScript and Other segments. segments for the reasons explained below.
Revenue from our Web PublishingGraphics segment decreased 10%, or $54.1$58.7 million, from $536.6$602.1 million in fiscal 2000 to $482.5$543.4 million in fiscal 2001. TheWe attribute this decrease in Graphics segment revenue from this segment was primarily due to severe economic pressure on the creative publishing professional market, which resulted in aand consumer markets, as well as product lifecycle timing and the decline in revenue from our Photoshop product. Also contributing to thespending on Web-focused software tools. As a result of these factors, we experienced an 11% decrease in our digital imaging software revenue and a 17% decrease in this segment inour illustration software revenue when comparing fiscal 2001 compared to fiscal 2000 were the following factors: decreased revenue from our GoLive and Web Collection products, due to2000.
The declines in the web layout and web animation products market; decreased revenue from our PhotoDeluxe product due to product lifecycle timing; and decreased revenue from our LiveMotion product due to competitive factors and product lifecycle timing. Our After Effects product also experienced a decline in revenue despite its new version release in the second quarter of fiscal 2001. The decrease in revenue in this segment was2001 Graphics business were partially offset by ana 14% year-over-year revenue increase in revenue from the following products: Photoshop Elements, which was first released in April of fiscal 2001; Digital Video Collection, due to the growth of theour digital video market; and Adobe Premiere, due to thesoftware products. Growth in our digital video software revenue was driven by new version releaseupdates of Adobe Premiere 6.0our products in Januaryfiscal 2001.
Revenue from our Cross-media Publishing segment decreased 10%11%, or $40.0$35.6 million, from $390.5$325.2 million in fiscal 2000 to $350.5$289.6 million in fiscal 2001. The decrease was partiallylargest factors contributing to the Cross-media Publishing segment revenue decline were a 25% year-over-year decline in our Web publishing software revenue due to weakness in the Web layout and Web animation products market, a 23% year-over-year decline in revenue from our Illustratortype and Publishing Collections products throughout fiscal year 2001 due to product lifecycle timings, which more than offset the revenue from their new version releases in the fourth quarter of fiscal 2001. There were also decreases in revenue from our FrameMaker and InDesigntechnical publishing products due to product lifecycle timing and overall economic weakness in the geographic markets in which these products are used, and a 19% decline in our Type product,business publishing software revenue due to decreased marketing activities. Lastly, we experienced a decline in revenue from our PageMaker product in the first halfadoption of fiscal 2001, which more than offset the revenue from the new version release of PageMaker 7.0 in the third quarter of fiscal 2001. The decrease in revenue from this segment was partially offset by an increase in revenue from our Adobe Design Collection product (especially by creative professionals) instead of our Adobe Publishing Collection product.
The declines in our fiscal 2001 Cross-media Publishing segment were partially offset by a 55% year-over-year revenue increase from our professional page layout publishing products due to increased marketing and promotional activities for these products throughout the year.
Revenue from our OEM PostScript and Other segment decreased 20%, or $26.7 million, from $131.5 million in fiscal 2000 to $104.8 million in fiscal 2001, due to the following factors: continued weakness in the print business, customer transition from paper-based processes to electronic workflows, renegotiated pricing with certain OEM customers, and the outsourcing of certain OEM accounts to a third party solution provider.
The decrease in revenue from the above mentioned segments in fiscal 2001 compared to fiscal 2000 was partially offset by an increase of 40%41%, or $84.1$84.3 million, in our ePaper Solutions segment, as it increased from $207.8$207.6 million in fiscal 2000 to $291.9 million in fiscal 2001, due to the release of our Acrobat 5.0 product in the second quarter of fiscal 2001, as well as the continuing movement from paper-based processes to electronic workflows adopted by enterprises and government agencies.agencies which contributed to broader adoption of our ePaper products.
DuringServices and Support
Services and support is composed of professional services (such as consulting services and training) and support (such as maintenance and technical support) primarily related to the products we acquired from Accelio. Professional services revenue is recognized using the percentage of completion method and 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, such as contract milestones, when applicable. Our professional services revenue depends in large part on our software license revenue from the products that we acquired from Accelio. A significant portion of our support revenue is composed of our extended Enterprise Maintenance and Support offerings, which entitles customers to receive product upgrades and enhancements during the term of the maintenance and support period, which is typically one year. Our support revenue depends on both our software license revenue and ren ewals of our maintenance agreements. Our support revenue also includes support for our desktop products whereby Adobe offers a range of support programs, from fee-based incident to annual support contracts, and Developer Support to partners and developer organizations.
For fiscal 2000, overall2002, our services and support revenue increased 25%$11.6 million, or 100%, compared to fiscal 1999, driven primarily by increased licensing of products in our Web Publishing, ePaper Solutions, and Cross-media Publishing segments. Our Web Publishing segment provided the majority of the revenue growth in fiscal 2000, as it grew 36% from $394.1 million in fiscal 1999 to $536.6 million in fiscal 2000. The increase in revenue from this segment was primarily driven by the strength of our Photoshop 5.5 product during the first three quarters of fiscal 2000 and the release of our Photoshop 6.0 product in the fourth quarter of fiscal 2000.
24
Also contributing to the growth in this segment in fiscal 2000 compared to fiscal 1999 was the increased revenue from our Web and Dynamic Media Collection products, which were first introduced in the fourth quarter of fiscal 1999, and increased licensing of our LiveMotion, Adobe Premiere, After Effects, GoLive, and ActiveShare products. The increase in revenue in this segment was partially offset by a decline in revenue from our PageMill and PhotoDeluxe products, due to product lifecycle timing and reduced pricing.
Revenue from our ePaper Solutions segment increased 61% from $129.3 million in fiscal 1999 to $207.8 million in fiscal 20002001 solely due to the continuing penetration of Acrobat and its related technologies into major industry sectors and various government agencies.
Revenue from our Cross-media Publishing segment increased 10% from $353.9 million in fiscal 1999 to $390.5 million in fiscal 2000. This $36.6 million increase was primarily due to the new release of Illustrator 9.0 in the third quarter of fiscal 2000. This segment also benefited from the new release of FrameMaker 6.0 in the second quarter of fiscal 2000, as well as increased revenue from our Adobe Design Collection, Adobe Type Manager, Acrobat InProduction, and PressReady products. The increase in revenue from this segment was partially offset by a decline in revenue from our Adobe Publishing Collection product, primarily due to the introduction of our new Adobe Web, Dynamic Media, and Design Collection products, and a decline in revenue in both our InDesign product, due to slower adoption of this product in fiscal 2000 compared to the adoption rate upon the initial release of this product in fiscal 1999, and our PageMaker products, due to product lifecycle timing.
The increase in revenue from the above mentioned segments in fiscal 2000 compared to fiscal 1999 was partially offset by a 5% decline in revenue from our OEM PostScript and Other segment, as it decreased from $138.2 million in fiscal 1999 to $131.5 million in fiscal 2000. Revenue from this segment decreased in fiscal 2000 compared to fiscal 1999 due to lower royalty rates paid by our OEMs and the ongoing weakness in the monochrome laser printer market as a resultacquisition of the following factors: loss of royalty revenue from Hewlett-Packard Company's ("HP") desktop monochrome laser printer division, which has been incorporating a clone version of Adobe PostScript software into its products since the fall of 1997; a declineAccelio business in the average selling price of monochrome laser printers;April 2002.
Geographic and an increase in the use of inkjet printers, resulting in weakness in the monochrome laser printer market.Platform Information
We categorize our geographic results into three major market regions: the Americas, EMEA, and Asia. In fiscal 2001, revenueRevenue generated in the Americas, EMEA, and Asia represented 48%, 27%, and 25%as a percentage of total revenue respectively,is presented below:
|
| 2002 | 2001 | 2000 | |||
----- | ----- | ----- | |||||
Americas |
| 50 | % | 48 | % | 52 | % |
EMEA |
| 27 |
| 27 |
| 26 |
|
Asia |
| 23 | 25 | 22 | |||
----- | ----- | ----- | |||||
|
| 100 | % | 100 | % | 100 | % |
The decrease in the percent of revenue from Asia and corresponding increase in the Americas in 2002 compared to 52%2001 was primarily due to weakness in the Japan economy. The decrease in the Americas in fiscal 2001 compared to 2000 was primarily due to adverse economic conditions, especially in the U.S.
Overall, revenue from our application products on the Windows and Macintosh platforms decreased 4% and 10%, 26%, and 22% of total revenue, respectively, generated in bothfiscal 2002 compared to fiscal 2001. In fiscal 2001 compared to fiscal 2000, and fiscal 1999.
Overall, revenue from our application products on the Windows platform increased 9% in fiscal 2001 compared to fiscal 2000,, and revenue from our application products on the Macintosh platform decreased by 21% in fiscal 2001 over fiscal 2000. In fiscal 2000 compared to fiscal 1999, revenue from our application products on the Windows platform increased 39%, and revenue from our application products on the Macintosh platform increased 15% during the same period. In fiscal 2001,2002, the Windows and Macintosh platforms accounted for 70%71% and 30%29%, respectively, of application products revenue, excluding platform-independent and UNIX products, compared to 70% and 30%, respectively, in fiscal 2001, and 63% and 37%, respectively, in fiscal 2000, and 58% and 42%, respectively, in fiscal 1999.2000. We expect the trend towards the Windows platform to continue in the foreseeable future.
25Cost of revenue
Direct Costs
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
|
| ------------ |
| ------- |
| ---------- |
| ------- |
| -------------- |
|
Cost of revenue | |||||||||||
Products | $96.9 | 19 | % | $81.5 | (7 | )% | $87.3 | ||||
Services and support | 7.4 | 100 | --- | --- | --- | ||||||
|
| ------------ |
| ------- |
| ---------- |
| ------- |
| -------------- |
|
Total cost of revenue | $104.3 | 28 | % | $81.5 | (7 | )% | $87.3 | ||||
Percentage of total revenue |
| 9.0 | % |
|
| 6.6 | % |
|
| 6.9 | % |
| | 2001 | Change | 2000 | Change | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Direct costs | $ | 81.5 | (7 | )% | $ | 87.3 | (8 | )% | $ | 94.5 | ||||
| Percentage of total revenue | 6.6 | % | 6.9 | % | 9.3 | % | ||||||||
Direct costs include
Products
Cost of products revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization related to localization costs and acquired technologies, hosted server costs, and the costs associated with the manufacturing of our products.
DirectCost of products revenue increased in absolute dollars and as a percentage of revenue in fiscal 2002 compared to fiscal 2001 primarily due to increased amortization of website development costs related to Adobe Design Team (formerly Adobe Studio) which launched in the fourth quarter of fiscal 2001, and the subsequent impairment charge for the remaining Adobe Design Team development costs due to the decision to discontinue the Adobe Design Team service in the third quarter of fiscal 2002.
Cost of products revenue decreased in absolute dollars and as a percentage of revenue in fiscal 2001 compared to fiscal 2000, primarily due to loweran 8% decrease in third-party royalties, mainly associated with our PostScript and Type products revenue. In addition, directrevenue, and a 5% decrease in material costs also decreased in fiscal 2001 compared to fiscal 2000 due to lower material costs. The decrease in direct costs in fiscal 2001 compared to fiscal 2000 was partiallydecreased product licensing of shrink-wrapped products. These decreases were offset by ana 2% increase in localization costs primarily due to localization for our Photoshop and Acrobat products, a 2% increase in excess and obsolete inventory expenses, and a 1% increase in hosted server costs due to the launch of Adobe Studio inDesign Team (formerly Adobe Studio).
Services and Support
Cost of fiscal 2001. Direct costs also decreasedservices and support increased in absolute dollars and as a percentage of revenue in fiscal 20002002 compared to fiscal 1999, primarily2001 due to lower localization and royalty costs, as well as a reduction in material costs as a result of our ongoing cost improvement program.
For fiscal 2002, we anticipate that gross margin will be approximately 92% of revenue after the proposed acquisition of the Accelio Corporation ("Accelio").business in April 2002.
Operating Expenses
Research and Development
| | 2001 | Change | 2000 | Change | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Research and development | $ | 224.1 | (7 | )% | $ | 240.2 | 22 | % | $ | 197.5 | ||||
| Percentage of total revenue | 18.2 | % | 19.0 | % | 19.4 | % | ||||||||
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
Research and development |
| $246.1 |
| 10 | % | $224.1 |
| (7 | )% | $240.2 |
|
Percentage of total revenue |
| 21.1 | % |
|
| 18.2 | % |
|
| 19.0 | % |
Research and development expenses consist principally of salary and benefit expenses for software developers, contracted development efforts, related facilities costs, and expenses associated with computer equipment used in software development.
Research and development expenses increased $22.0 million, or 10%, in fiscal 2002 compared to fiscal 2001, primarily due to higher compensation and related benefits related to headcount growth from the acquisition of Accelio to support product development efforts.
Research and development expenses decreased $16.1 million, or 7%, in fiscal 2001 compared to fiscal 2000, primarily2000. Of the 7% change, 3% was due to decreaseda decrease in compensation and related benefits due to lower incentive compensation expenses and lower company bonuses. In addition, research and development expenses also decreased2% was due to lowera decrease in contractor and professional fees as less development work was performed through outside sources. These decreases were partially offset by increased salary and benefit expenses related to headcount growth to support product development efforts.
Research and development expenses increased $42.7 million, or 22%, in fiscal 2000 compared to fiscal 1999, primarily due to higher incentive compensation expenses associated with the improvement in our financial performance in fiscal 2000 over fiscal 1999 and higher salary and benefit expenses as a result of headcount growth.
We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced products. We will continue to focus on long-term opportunities available in the new Network Publishing economyour end markets and make significant investments in the development of our desktop application and server-based software products, including those targeted for the growing digital imaging and digital video franchises. We expect research and development expenses to increase in absolute dollars in fiscal 2002. As communicated on December 13, 2001, we are targeting research and development expenses in the first quarter of fiscal 2002 to be 20-21% of revenue. For fiscal year 2002, we are targeting such expenditures also to be 20-21% of revenue.products.
26
Sales and Marketing
| | 2001 | Change | 2000 | Change | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sales and marketing | $ | 403.7 | 0.6 | % | $ | 401.2 | 22 | % | $ | 328.5 | ||||
| Percentage of total revenue | 32.8 | % | 31.7 | % | 32.3 | % | ||||||||
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
Sales and marketing |
| $380.4 |
| (6 | )% | $403.7 |
| 1 | % | $401.2 |
|
Percentage of total revenue |
| 32.7 | % |
|
| 32.8 | % |
|
| 31.7 | % |
Sales and marketing expenses include salary and benefit expenses, bonuses, sales commissions, travel expenses, and related facilities costs for our sales, marketing, customer support, order management, and distributionorder fulfillment personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations, and other market development programs.
Sales and marketing expenses decreased $23.3 million, or 6%, in fiscal 2002 compared to fiscal 2001, primarily due to decreased marketing and advertising spending.
Sales and marketing expenses increased $2.5 million, or 0.6%1%, in fiscal 2001 compared to fiscal 2000, as2000. The 1% increase was primarily made up of a result of higher salary and benefit expenses related to headcount growth and increased investments in product-specific6% increase from marketing activities. These increases werespending, which was partially offset by a 3% decrease in incentivefrom compensation expenses and company bonuses.
Sales and marketing expenses increased $72.7 million, or 22%, in fiscal 2000 compared to fiscal 1999 as a result of higher incentive compensation expenses and higher outsourced technical support and order management fees. In addition, sales and marketing expenses increased in fiscal 2000 compared to fiscal 1999related benefits due to our focus on general corporate brand advertising, as well as higher marketing, public relations, and trade show activities associated with new product releases.lower incentive compensation.
We expect sales and marketing expenses to increase in absolute dollars in fiscal 2002 to support investments in certain areas including digital imaging, digital video, and ePaper-based businesses. As communicated on December 13, 2001, for the first quarter of fiscal 2002, our sales and marketing expense target is approximately 34-35% of revenue. For fiscal year 2002, we are targeting such expenditures also to be approximately 34-35% of revenue.
General and Administrative
| | 2001 | Change | 2000 | Change | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| General and administrative | $ | 115.6 | (0.8 | )% | $ | 116.5 | 12 | % | $ | 103.6 | ||||
| Percentage of total revenue | 9.4 | % | 9.2 | % | 10.2 | % | ||||||||
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
General and administrative |
| $108.1 |
| (7 | )% | $115.6 |
| (1 | )% | $116.5 |
|
Percentage of total revenue |
| 9.3 | % |
|
| 9.4 | % |
|
| 9.2 | % |
General and administrative expenses consist principally of salary and benefit expenses, travel expenses, and related facilities costs for theour finance, human resources, legal, information services, and executive personnel of Adobe.personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, and expenses associated with computer equipment and software used in the administration of the business.
General and administrative expenses decreased $7.5 million, or 7%, in fiscal 2002 compared to fiscal 2001. The 7% decrease was primarily made up of 3% from a decrease in contractor and professional fees, 3% from a decrease in facility expenses due to lower rent expenses, and 3% from a decrease in compensation and related benefits due to reduced headcount. These decreases were partially offset by a 2% increase from higher depreciation expenses.
General and administrative expenses decreased $0.9 million, or 0.8%1%, in fiscal 2001 compared to fiscal 2000, due to decreased incentive compensation expenses and lower2000. The 1% decrease was primarily made up of 5% from a decrease in bad debt expense. Theexpense related to enhanced global credit evaluations, on-going risk mitigation efforts (such as letters of credit, guarantees, and credit insurance) in Asia, and improved collections of our royalty accounts. This decrease was partially offset by ana 2% increase from higher legal fees due to litigation and a 2% increase from facility expenses due to higher utility costs.
Restructuring and Other Charges
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
Restructuring and other charges |
| $12.1 |
| 1 | % | $12.1 |
| 114 | % | $5.6 |
|
Percentage of total revenue |
| 1.0 | % |
|
| 1.0 | % |
|
| 0.4 | % |
In the fourth quarter of fiscal 2002, we incurred a restructuring charge of $11.1 million, which included severance and related charges and the closure of a facility. The related restructuring program eliminated 239 engineering, sales and marketing, and general and administrative positions worldwide in salaryorder to realign our resources for our future business plans. These plans include adding resources to support our ePaper enterprise business in fiscal 2003.
The restructuring program is expected to be completed in fiscal 2003. Of the $11.1 million in charges, $4.7 million remained accrued at November 29, 2002.
In the second quarter of fiscal 2002, we implemented a restructuring program to eliminate 39 redundant sales and benefit expensesmarketing positions, held by Adobe employees worldwide, as a result of increased headcount.
Generalthe acquisition of Accelio. The restructuring included severance and administrative expenses increased $13.0related charges associated with the reduction in force and the cost of vacating a leased facility. Total restructuring charges were $1.6 million or 12%,and the majority of these payments were paid in fiscal 2000 compared to fiscal 1999, primarily due to higher salary and benefit expenses as a resultthe second quarter of increased headcount, and higher bad debt expense and legal fees. The increase was partially offset by decreases in professional fees and depreciation expense.
We expect that general and administrative spending will increase in absolute dollars in fiscal 2002. As communicated on December 13, 2001, forOf the $1.6 million in charges, $.05 million remains accrued at November 29, 2002. The remaining payments will be paid in the first quarter of fiscal 2002, our general and administrative expense target is approximately 10-11%2003.
During the fourth quarter of revenue. For fiscal year 2002, we are targeting such expenditures to bepaid our remaining obligations under our 2001 restructuring program. We also lowered our estimate of the total costs associated with the restructuring program, resulting in an adjustment of approximately 9-10% of revenue.$0.6 million. The adjustment primarily reflected lower than estimated relocation and severance expenses and related charges.
27
Restructuring and Other Charges
| | 2001 | Change | 2000 | Change | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Restructuring and other charges | $ | 12.1 | 114 | % | $ | 5.6 | (76 | )% | $ | 23.0 | ||||
| Percentage of total revenue | 1.0 | % | 0.4 | % | 2.3 | % | ||||||||
In the fourth quarter of fiscal 2001, we implemented a restructuring plan to realign our workforce to our future strategic goals and to align our resources with our lower fiscal year 2002 revenue targets. We believe thistargets due to adverse economic conditions resulting in part from the events of September 11, 2001. This restructuring will enableenabled us to increase our investment in digital imaging, digital video, and ePaper-based businesses in fiscal 2002. As part of the restructuring program, we implemented a reduction in force of 247 positions, affecting organizations throughout the company. The reductions came predominantly from sales and marketing and in our North American operations, and as of November 30, 2001, the majority of these terminations were completed. The total restructuring and other chargescharge in the fourth quarter of fiscal 2001 was $12.1 million, all of which was all related to severance and related charges associated with the reduction in force. Of the $12.1 million in charges, $9.6 million remained accrued atAs of November 30, 2001. The majority of these severance payments will be paid in early 2002.29, 2002, there was no restructuring liability remaining for our fiscal year 2001 rest ructuring program. For more information, see Note 78 of our Notes to Consolidated Financial Statements.
In fiscal 2000, restructuring and other charges consisted of $6.3 million of other charges relating to the disposal of certain equipment and one-time litigation related expenses, and a credit of $0.7 million related to the fiscal 1999 and fiscal 1998 restructuring programs.
The $0.7 million credit was recorded in the first quarter of fiscal 2000, as we revised our estimates of the total costs associated with the fiscal 1999 and 1998 restructuring programs. The credit primarily reflected lower than estimated severance and related charges attributable to employees whose positions were eliminated as a result of the restructurings but who were able to find alternative employment within Adobe. The remaining credit was due to lower than expected charges related to vacating leased facilities. (For detailed information, see Note 7 of our Notes to Consolidated Financial Statements).
During fiscal 1999 we implemented two different restructuring programs. These separate restructuring programs were directly focused on improving our competitive position as well as enhancing Adobe's allocation of resources.
The two fiscal 1999 restructuring programs resulted in total charges of approximately $19.7 million, which included severance and related charges associated with the reduction in force and charges for vacating leased facilities. During fiscal 1999, we revised our estimate of the total costs associated with the restructuring programs implemented during the year, resulting in an adjustment to the restructuring accrual of approximately $3.2 million. The adjustment was due to lower than estimated severance and related charges attributable to employees whose positions were eliminated as a result of the restructurings but who were able to find alternative employment within Adobe, and lower than expected charges related to vacating leased facilities. In addition, we recorded adjustments during fiscal 1999 related to prior year restructuring programs in the amount of $1.9 million. The $1.9 million adjustment was primarily due to both our success in terminating a lease agreement earlier than the contract term specified and the expiration of other lease termination costs for two facilities.
Other charges recorded in fiscal 1999 of $8.4 million included $2.0 million associated with the cancellation of a contract and $2.2 million for accelerated depreciation related to the adjustment of the useful life of certain assets as a result of decisions made by management as part of the restructuring program. Additionally, we incurred a nonrecurring compensation charge totaling $2.6 million for a terminated employee and incurred consulting fees of $1.6 million to assist in the restructuring of our operations.
As of November 30, 2001 no obligations existed related to the fiscal 1999 and 1998 restructuring programs.
28
Acquired In-Process Research and Development
| | 2001 | Change | 2000 | Change | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Acquired in-process research and development | $ | — | (100 | )% | $ | 0.5 | (87 | )% | $ | 3.6 | ||||
| Percentage of total revenue | — | % | — | % | 0.4 | % | ||||||||
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
Acquired in-process research and development |
| $5.8 |
| 100 | % | $--- |
| (100 | )% | $0.5 |
|
Percentage of total revenue |
| 0.5 | % |
|
| --- |
|
|
| --- |
|
On April 12, 2002, we acquired 100% of the outstanding common stock of Accelio Corporation. Accelio was a provider of Web-enabled solutions that help customers manage business processes driven by electronic forms. We obtained an independent appraiser's valuation to determine the amounts allocated to purchased technology and in-process research and development. The valuation analysis utilized the Income Approach that takes into consideration discounted future cash flows. Based on this valuation $0.4 million was allocated to in-process research and development. The amount allocated to in-process research and development of $0.4 million was expensed as of the date of the acquisition due to the state of the development of certain products and the uncertainty of the technology.
In December 2001, we acquired Fotiva, Inc. ("Fotiva"). Substantially all of Fotiva's assets were intellectual property. Fotiva was a development stage software company that created solutions to help consumers manage, store, enrich, and share digital photographs and other related personal media. In connection with the acquisition, substantially all of the purchase price of $5.4 million cash was allocated to in-process research and development and expensed at the time of acquisition due to the in-process state of the technology. At the date we acquired Fotiva, it was estimated that 50% of the development effort had been completed and that the remaining 50% of the development effort would take approximately eleven months to complete. The efforts required to complete the development of the technology primarily include finalization of coding, internationalization, and extensive quality assurance testing. We developed a new product, Adobe Photoshop Album, that we released in the first quarter of fiscal 2003 using Fotiva's image management technology with our digital imaging and ePaper technologies.
In fiscal 2000, we recorded $0.5 million of acquired in-process research and development related to our acquisition of Glassbook, Inc. ("Glassbook"). The acquisition was accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16 ("APB 16"). Based on an independent appraiser's valuation, $0.5 million of the total $28.0 million purchase price was allocated to in-process research and development due to the state of the development and the uncertainty of the technology.The ongoing projectprojects at Glassbook at the time of the purchase included the development of the Glassbook Reader and the Glassbook Content Server products. We released new products that contained the purchased technology in April 2001, with Acrobat eBook Reader 2.1 and Adobe Content Server 2.0.
Amortization and Impairment of Goodwill and Purchased Intangibles
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
Amortization and impairment of goodwill and purchased intangibles |
| $21.0 |
| 47 | % | $14.3 |
| 104 | % | $7.0 |
|
Percentage of total revenue |
| 1.8 | % |
|
| 1.2 | % |
|
| 0.6 | % |
Acquired in-process research
Amortization of goodwill and development of $3.6purchased intangibles increased $6.7 million, or 47%, in fiscal 1999 included $3.0 million and $0.6 million associated with2002 compared to fiscal 2001, primarily due to the acquisitions of Attitude Software, LLC ("Attitude Software") and Photomerge Technology ("Photomerge"), respectively. The following is a summary ofgoodwill impairment charge for the projects acquired in the acquisitions and the assumptions used in determining theremaining book value of the in-process researchGlassbook acquisition. The impairment charge was determined based on discounted future cash flows.
As part of the acquisition of Accelio in April 2002, we allocated $75.0 million to goodwill which, in accordance with Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and development costs.
Other Intangible Assets," will not be amortized. During the fourth quarter of fiscal 1999,2002, we acquired substantially allrevised our estimate of the assets, consistingcertain costs associated with our acquisition of intellectual property,Accelio, resulting in an increase to goodwill of Attitude Software. The acquisition was accounted for using the purchase method of accounting in accordance with APB 16, and substantially all of the purchase price of $3.0 million cash was allocated to in-process research and development and expensed at the time of acquisition. The ongoing project at Attitude Software at the time of the purchase included the development of the 3D Anarchy authoring product. We purchased this technology to incorporate it into future versions of our existing Adobe products to further enhance the feature sets and user interface contained within the products. We are incorporating the purchased technology into one of our products, which has not yet been released. At the date we acquired Attitude Software, it was estimated that 50% of the development effort had been completed and that the remaining 50% of the development effort would take approximately 18 months to complete and would cost $1.8$2.6 million. The efforts required to complete the development of the technologyadjustment primarily reflected higher than estimated transaction costs and costs related to additional design efforts to integrate the technology into several of Adobe's products, finalization of coding, and completion testing.closing redundant facilities. The value of the in-process technology was determined by estimating the projected net cash flows related to products the technology would be integrated into, including costs to complete the development of the technology and the future net revenues that may be earned from the products, excluding the value attributed to the existing technologygoodwill associated with the products prior to the integrationacquisitions of the purchased technology. These cash flows were discounted back to their net present value using a discount rate of 20%, exclusive of the value attributable to the use of the in-process technologies in future products.Accelio and GoLive will be reviewed for impairment on an annual basis.
Additionally, during the fourth quarter of fiscal 1999, we acquired substantially all of the assets, consisting of intellectual property, of Photomerge. In connection with the acquisition of Photomerge, 100% of the purchase price, or $0.6 million cash, was allocated to in-process research and development due to the early stage of development and the uncertainty of the technology. This purchased technology was incorporated into our Photoshop Elements product, which we released in April 2001.
29
Amortization of Goodwill and Purchased Intangibles
| | 2001 | Change | 2000 | Change | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortization of goodwill and purchased intangibles | $ | 14.3 | 104 | % | $ | 7.0 | 45 | % | $ | 4.8 | ||||
| Percentage of total revenue | 1.2 | % | 0.6 | % | 0.5 | % | ||||||||
Amortization of goodwill and purchased intangibles increased $7.3 million, or 104%, in fiscal 2001 compared to fiscal 2000, due to a full year of amortization of Glassbook goodwill and purchased intangibles.
Amortization of goodwilltotaling $7.2 million and purchased intangibles in fiscal 2000 and 1999 primarily related to the acquisition of substantially all of the assets of GoLive Systems, Inc. and a related partnership (together "GoLive Systems") in December 1998. Amortization of goodwill and purchased intangibles was higher in fiscal 2000 compared to fiscal 1999 primarily due to the additional amortization related to the acquisition of Glassbook in September 2000. (For further information, see Note 2 of our Notes to Consolidated Financial Statements.)$0.1 million.
Nonoperating Income (Loss)
Investment Gain (Loss)
| | 2001 | Change | 2000 | Change | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Investment gain (loss) | $ | (93.4 | ) | (751 | )% | $ | 14.3 | (84 | )% | $ | 88.9 | |||
| Percentage of total revenue | (7.6 | )% | 1.1 | % | 8.8 | % | ||||||||
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
Investment gain (loss) |
| $(17.2 | ) | 82 | % | $(93.4 | ) | (751 | )% | $14.3 |
|
Percentage of total revenue |
| (1.5 | )% |
|
| (7.6 | )% |
|
| 1.1 | % |
Investment gain (loss) consists principally of realized gains or losses from the sale of marketable equity investments, other-than-temporary declines in the value of marketable equity securities, and equity method gains and losses of Adobe Ventures.
During fiscal 2002, investment losses consisted of other-than-temporary writedowns related to our marketable equity securities in DigitalThink, Inc., Tumbleweed Communications Corp., Engage, Inc., Virage, Inc., Viewpoint Corporation, AvantGo, Inc., and Salon Media Group, Inc. (formerly Salon.com) of $11.3 million. These losses were partially offset by gains totaling $7.2 million from the sale of our marketable equity securities. We also recorded net investment losses related to investments in Adobe Ventures and our cost method investments totaling $13.1 million. As of November 29, 2002, our short-term investments included marketable equity securities of $14.1 million and our long-term investments included investments in Adobe Ventures and other cost method investments of $35.6 million. These securities are inherently risky and we may experience further deterioration in fair value in the future.
During fiscal 2001, investment losses consisted of other-than-temporary writedowns related to our short-term investmentsmarketable equity securities in Tumbleweed Communications Corp. ("Tumbleweed"), Salon.com,Salon Media Group, Inc. (formerly Salon.com), Engage, Inc., Liquent, Inc. (formerly ESPS, Inc.), Avantgo,AvantGo, Inc., Viewpoint Corp.,Corporation, and Virage, Inc. of $53.1 million. These losses were partially offset by gains totaling $19.5 million from the sale of our marketable equity securities totaling $20.1 million, of which $0.6 million of premiums were recorded in interest and other income.securities. We also recorded net investment losses related to investments in Adobe Ventures and our cost method investments totaling $59.8 million. As of November 30, 2001, our short-term investments included marketable equity securities of $37.8 million and our long-term investments included investments in Adobe Ventures and other cost method investments of $31.7 million. These securities are inherently risky and we may experience further deterioration in fair value in the future.
During fiscal 2000, we recorded investment gains related to the sale of a portion of our investment in Tumbleweed Communications Corp. ("Tumbleweed") and Digimarc Corporation for $10.4 million and $2.2 million, respectively. Additionally, we recorded investment gains totaling $13.0 million related to the mark-to-market valuation adjustment for AvantGo, Inc. totaling $13.0 million and other net gains totaling approximately $15.0 million related to various other Adobe Ventures investments activities totaling approximately $15.0 million.activities. These gains were partially offset by investment losses related to the writedown of our investments in Engage, Inc.; Classmates Online, Inc. (formerly eCircles, Inc.); Salon.com;Salon Media Group, Inc. (formerly Salon.com); and Impresse Corporation, totaling approximately $26.3 million.
In fiscal 1999, we recorded a realized gain of $58.4 million related to the sale of our investment in Vignette Corporation. We also recorded investment gains from mark-to-market adjustments totaling $17.8 million, $10.4 million, and $7.0 million related to investments in ESPS, Inc.; DigitalThink, Inc.; and Tumbleweed, respectively. These gains were partially offset by an investment loss of $5.2 million related to
30
the acquisition of PointCast, Inc., a former investee of Adobe, by idealab!'s Launchpad Technologies, Inc. ("idealab!"). In connection with the acquisition, we exchanged our shares of PointCast, Inc. for approximately 542,000 shares of idealab! (which has since become InfoGate, Inc.). Additionally, we recorded a net gain totaling $0.5 million related to mark-to-market adjustments of various other Adobe Ventures investments.
We are uncertain of future investment gains or losses as they are primarily dependent upon the operations of the underlying investee companies and market valuations.
Interest and Other Income
| | 2001 | Change | 2000 | Change | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Interest and other income | $ | 21.9 | 3 | % | $ | 21.3 | (17 | )% | $ | 25.7 | ||||
| Percentage of total revenue | 1.8 | % | 1.7 | % | 2.5 | % | ||||||||
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
Interest and other income |
| $14.8 |
| (32 | )% | $21.9 |
| 3 | % | $21.3 |
|
Percentage of total revenue |
| 1.3 | % |
|
| 1.8 | % |
|
| 1.7 | % |
Interest and other income consists principally of interest earned on cash, cash equivalents, and short-term investments, as well asgains and losses on the sale of fixed income investments, foreign exchange transaction gains and losses and realized gains or losses on the disposal of assets.
Interest and other income decreased $7.1 million, or 32%, in fiscal 2002 compared to fiscal 2001 primarily due to a decrease in interest income of $6.0 million due to lower interest rates and lower realized gains of $2.5 million resulting from the sales of fixed income investments. The decreases in interest and other income in fiscal 2002 compared to fiscal 2001 were partially offset by a reduction in losses of $1.1 million related to the lowered cost of purchased options used in foreign currency hedging.
Interest and other income increased $0.6 million, or 3%, in fiscal 2001 compared to fiscal 2000 primarily due to realized gains of $5.9 million resulting from the sale of fixed income investments. Interest and other income also increased in fiscal 2001 compared to fiscal 2000 due to higher average cash balances.balances resulting in an increase in interest income of $1.8 million. The increase in interest and other income in fiscal 2001 compared to fiscal 2000 was partially offset by foreign currency losses.losses of $4.4 million. These foreign currency losses resulted from the implementation of Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities" and subsequent recording of the cost of hedging foreign currency exposures in interest and other income.
Interest In addition, in fiscal 2000, interest and other income decreased $4.4increased due to a one-time gain of $2.5 million or 17%, in fiscal 2000 compared to fiscal 1999 as a result of more investments being made in tax-exempt securities, resulting in lower interest income on a comparative pretax basis. In fiscal 2000, we also recorded foreign exchange transaction losses compared to foreign exchange transaction gains in fiscal 1999. In addition, other income was lower in fiscal 2000, as fiscal 1999 included a $5.7 million gain related tofrom the sale of a corporate facility in Edinburgh, Scotland, in connection with the restructuring program announced in the second quarter of fiscal 1999.Scotland.
We expect interest and other income to decrease slightly to approximately $3.0-$4.0 million per quarter in fiscal 2002 due to a lower interest rate environment. We also believe that any increases in interest income may be offset by the cost of foreign currency purchased options as well as market price volatility under our implementation of SFAS 133. Further, we believe that our cash balances could also be reduced in fiscal 2002 due to the strategic purchase of companies, products, or technologies and our ongoing stock repurchase programs.
Income Tax Provision
| | 2001 | Change | 2000 | Change | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Income tax provision | $ | 101.3 | (35 | )% | $ | 155.9 | 14 | % | $ | 136.7 | ||||
| Percentage of total revenue | 8.2 | % | 12.3 | % | 13.5 | % | ||||||||
| Effective tax rate | 33.0 | % | 35.1 | % | 36.5 | % | ||||||||
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
Income tax provision |
| $93.3 |
| (8 | )% | $101.3 |
| (35 | )% | $155.9 |
|
Percentage of total revenue |
| 8.0 | % |
|
| 8.2 | % |
|
| 12.3 | % |
Effective tax rate |
| 32.8 | % |
|
| 33.0 | % |
|
| 35.1 | % |
Our effective tax rate decreased in fiscal 2002 from fiscal 2001 and from fiscal 2000 and from fiscal 1999 to fiscal 2000,2001, due to tax benefits associated with the restructuring of our international operations.
As communicated on December 13, 2001, we have targeted our effective Part of the tax rate to decrease in fiscal year 2002 was offset by a tax rate increase, approximately 0.8%, due to approximately 32%.the non-tax deductible goodwill impairment expense.
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Factors That May Affect Our Future Results of OperationsPerformance
We believe that in the future our results of operations could be affected by various factors, including:
On December 13, 2001, we stated that we are targeting our revenue for the first quarter of fiscal 2002 to be in the range of $265 to $280 million. On that day, we also stated the followingWe periodically provide operating model targets for the first quarter of fiscal 2002:revenue, expenses, gross margin, of 92-93%, pro forma operating profit, margin of 25-28%, research and development expenses of 20-21% of revenue, sales and marketing expenses of 34-35% of revenue, and general and administrative expenses of 10-11% of revenue. We further stated on December 13, 2001, that we expect our share count to be between 245 to 246 million shares, which collectively results in a pro forma earnings per share target range of $0.20 to $0.22, in the first quarter of fiscal 2002. On January 31, 2002, we reiterated our revenue and earnings per share targets for the first quarter of fiscal 2002 of $265 to $280 million and $0.20 to $0.22, respectively. The reaffirmation of these targets assumes that the third month of the quarter will be a typical seasonally strong February.
Also on December 13, 2001, we reiterated our annual revenue target of $1.3 billion, gross margin target of 93%, and our pre-tax pro forma operating profit margin target of 28% for fiscal year 2002 and a pro forma earnings per share target of approximately $1.03. Additionally, we have stated, the following operating model targets for fiscal 2002: research and development expenses of 20-21% of revenue, sales and marketing expenses of 34-35% of revenue, and general and administrative expenses of 9-10% of revenue. We have stated an effectiveother income, tax rate, target of 32%. We have also previously stated that we are targeting other income to be approximately $4.0 million per quarter. Due to the current interest rate environment, however, we have stated a revised target for interest and other income of approximately $3.0-$4.0 million per quarter in fiscal 2002.
On February 1, 2002, we announced a proposed agreement to acquire Accelio Corporation. Based on an anticipated close date of March 2002, we are targeting incremental revenue associated with this acquisition of approximately $30.0-$35.0 million. In addition, with the acquisition of Accelio, we have lowered our gross margin target from 93% to 92%, and our pro forma operating profit margin target from 28% to 27%. Furthermore, we indicated that the acquisition would be dilutive to pro forma earnings per
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share of $0.02 per share in fiscal year 2002. The proposed acquisition is subject to the execution of customary transaction documents and the satisfaction of customary closing conditions, including the approval of Accelio's shareholders and clearance of the acquisition by U.S. and Canadian regulatory authorities. If these conditions are not satisfied, we may not complete the acquisition. Initially the transaction was expected to close in March 2002. However, due to certain regulatory and timing requirements, we are now targeting to close in April 2002.
In connection with this proposed acquisition, we may not be successful in integrating Accelio or developing products based on Accelio's technology or expertise. We also may not be successful in integrating its distribution channels with ours. Additionally, we may face unanticipated expenses relating to the integration of Accelio personnel and its products, distribution channels, and administrative functions.
count. We use these targets to assist us in making decisions about our allocation of resources and investments, not as predictions of future results. The targets reflect a number of assumptions, including assumptions about:
These and many other factors described in this report affect our financial performance and may cause our future results, including results for the current quarter, to vary materially from these targets.targets or from results for prior periods. In particular, the recent slow-down in some geographic areas, primarily in the U.S., Europe, and Japan, has adversely affected all of our product segments and may adversely affect our ability to achieve our revenue targets. We attribute this slow-down, which is affecting all of our product segments, to weakeningcontinued economic conditions.weakness. These adverse economic conditions in the U.S., Europe, Japan, and potentially other geographic markets may continue in the short term, and they may continue to adversely affect our revenue and earnings. Although there wereare also adverse conditions in other countries, thethese other countries affected represent a much smaller portion of our revenue and thus have less impact on our operational results. Furthermore, if the economic slow-down worsens or spreads to other geographicgeograph ic areas where we do business, it would likely cause our future results, including results for the firstcurrent quarter, of fiscal 2002, to vary materially from our targets. In addition, political conditions in any of the major countries in which we do business may adversely affect our business.
The end markets for our software products are intensely and increasingly competitive and are significantly affected by product introductions and market activities of industry competitors. In the ePaper applications market, a number of competitors have developed and brought to market clones of our Acrobat application to create and enhance PDF files. Through lower pricing and aggressive marketing to existing or potential Adobe customers, these competitors could impact Adobe Acrobat average seat pricing, and our overall ePaper revenue. Additionally, any incorporation into an operating system of software for the creation of PDF files, or other software that competes with our ePaper or graphics applications, could seriously harm our business. Furthermore, Microsoft has increased its presence in the low-end and mid-range consumer digital imaging/graphics markets, as well as indicating that it may include new electronic form, electronic document distribution, eBook and related functionality like that i n Adobe Acrobat and our server-based ePaper software, including announcing a new electronic forms tool that is planned to ship in mid-2003. We believe that, due to Microsoft's market dominance, any new Microsoft products in these markets will be highly competitive with our products. If competing graphics or ePaper products achieve widespread acceptance, our operating results would suffer. In addition, consolidation has occurred among some of the competitors in our markets. Any further consolidations among competitors of ours may result in stronger competitors and may therefore harm our results of operations.
Also, as we seek to further broaden our customer base in the enterprise, government, corporate business and consumer markets, we may not successfully adapt our application software licensing and distribution channels, which could cause our operating results to suffer. As we currently have limited experience in these markets, we believe we will need to recruit, train, and retain personnel with experience in these markets, and our failure to do so may harm our ability to penetrate these markets. We could also experience decreases in average selling prices and some transitions in our distribution channels that could seriously harm our business. In connection with the Accelio acquisition, we may not be successful in integrating Accelio or developing, marketing or licensing products, particularly products for the enterprise, government, corporate business and consumer markets, based on Accelio's technology or expertise. We also may not be successful in integrating its distribution channels with ours, or in dev eloping the necessary relationships with enough significant systems integrators to succeed with these new customer bases. Additionally, we may face unanticipated expenses relating to the integration of Accelio personnel and its products, distribution channels, and administrative functions. All of these factors may affect our realizability of Accelio's assets, including goodwill.
We plan to recruit key talent for our future growth.growth, especially to support our enterprise business. These plans to continue to invest in certain areas will require us to continue to hire additional employees. Competition for high-quality personnel, especially highly skilled engineers, is extremely intense. Our ability to effectively manage this growth will require us to continue to improve our operational and financial controls and information management systems, and to attract, retain, motivate, and manage employees effectively; otherwise our business could be seriously harmed.
Our We rely on our ability to developgrant stock options in order to recruit and marketretain highly skilled employees in a competitive environment. The proposed requirement that stockholder approval would be required for the adoption of all stock option plans and for any material modifications to such plans, as well as the potential requirement to recognize an expense for stock options in our financial statements, may result in our inability to provide adequate incentives to effectively recruit and retain talented employees.
Any delays or failures in developing and marketing our products, including upgrades of current products that successfully adapt to changing customer needs, may also have ana harmful impact on our results of operations. Our ability to extend our core technologies into new applications and new platforms and to anticipate or respond to technological changes could affect our ability to develop these products. A portion of our future revenue will come from these new applications. Delays in product or upgrade introductions could cause a decline in our revenue, earnings, or stock price. We cannot determine the ultimate effect that these new products or upgrades will have on our revenue or results of operations.
We hold equity investments that have recently experienced significant declines in market value.offer our application-based products primarily on Macintosh and Windows platforms, and on some UNIX platforms. We also have investments, and may continue to make future investments, in several privately held companies, many of which can still be considered ingenerally offer our server-based products, but not desktop products, on the start-up or development stages. These investments are inherently risky,Linux platform as well as the marketthree platforms mentioned above. To the extent that there is a slow-down of customer purchases of personal computers on either the Windows or Macintosh platform or in general, or to the extent that significant demand arises for our products or competitive products on the technologies orLinux desktop platform before we choose and are able to offer our products they have under developmenton this platform, our business could be harmed.
We distribute our application products primarily through distributors, resellers, retailers, and increasingly, systems integrators and VARs (collectively referred to as "distributors"). A significant amount of our revenue for application products is typically in
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the early stages and may never materialize. Our investment activities can impactfrom two distributors. In addition, our net income. For fiscal 2001, we recorded pre-tax losses from marketable securities and other investments in privately held companies of $93.4 million, compared to pre-tax gains in fiscal 2000 of $14.3 million. These amounts reflect realized gains or losses from the sale of marketable equity investments, other-than-temporary declines in the value of marketable equity securities, and equity method gains and losses of Adobe Ventures. In fiscal 2001, decreases in the market prices of these securitieschannel program now focuses our efforts on larger distributors, which has resulted in our dependence on a relatively small number of distributors selling through a large amount of our products. Sales through the distribution channel result in unstable pricing and significant reductionproduct returns. Our distributors sell our competitors' products; if our distributors favor our competitors' products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective sales, and in that case, our results would suffer. Additionally, one of our goals is to increase our direct distribution of our products to end users through our online store located on our website at www.adobe.com. Any such increase in our pre-tax income, and future price fluctuationsdirect revenue efforts will place us 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.
The market for our graphics and ePaper applications is intensely and increasingly competitive and is significantly affected by product introductions and market activities of industry competitors. Additionally, Microsoft has increased its presence in the low-end consumer digital imaging/graphics market and the electronic document sharing markets. We believe that, due to Microsoft's market dominance, any new Microsoft products in these markets will be highly competitivecompetition with our products. If competing newchannel distributors and with newer types of distribution of our products achieve widespread acceptance, our operating results would suffer.by online, Internet-based resellers.
In addition, we continue to expand into third-party distribution channels, including VARs and systems integrators, in our effort to further broaden our customer base. As a result, the financial health of these third parties and our continuing relationships with them are becoming more important to our success. Some of these companies are thinly capitalized and may be unable to withstand changes in business conditions. Our business could be seriously harmed if the financial condition of some of these third parties substantially weakens or if our relationships with them deteriorate. Also, as
In connection with the enforcement of our own intellectual property rights or in connection with disputes relating to the validity or alleged infringement of third-party rights, we seek to further broaden our customer basehave been, are currently, and may in the enterprise, corporatefuture be subject to complex, protracted litigation or negotiations as part of our policy to vigorously defend our intellectual property rights, including rights derived from third party licensors. Intellectual property litigation is typically very costly and can be disruptive to our business operations by diverting the attention and consumer markets,energies of management and key technical personnel. Although we have successfully defended or resolved past litigation and disputes, we may not successfully adaptprevail in any ongoing or future litigation and disputes. Adverse decisions in such litigation or disputes could have negative results, including subjecting us to significant liabilities, requiring us to seek licenses from others, preventing us from manufacturing or licensing certain of our application software distribution channels,products, or causing sever e disruptions to our operations or the markets in which could cause our operating results to suffer. As we currently have limited experience in these markets, we believe we will need to recruit, train, and retain personnel with experience in these markets, and our failure to do so may harm our ability to penetrate these markets. We could experience decreases in average selling prices and some transitions in our distribution channels thatcompete, any one of which could seriously harm our business.
Our computer network and applications could be adversely impacted by malicious code such as worms and viruses, which are released into the public Internet using recently discovered vulnerabilities in popular software programs. Although we have a response team that is notified of high-risk malicious events from multiple sources and we take certain preventative measures, these procedures may not be sufficient to avoid harm to our business.
In some markets and for some products, we have adopted a strategy aiming to increase our market share where it is low and therefore may receive significantly less revenue from certain licensing arrangements than we otherwise would receive for licensing these products. Therefore, increasedIncreased market penetration may in fact lead to lower revenue growth in these areas. While we believe that this potential market share increase will ultimately benefit us, this strategy could instead harm our business through reduced revenue growth.
We generally offer our application-based products on Macintosh, Windows, and UNIX platforms, and we generally offer our server-based products on the Linux platform as well as these three platforms. To the extent that there is a slow-down of customer purchases of personal computers on either the Windows or Macintosh platform or in general, our business could be harmed.
We distribute our application products primarily through distributors, resellers, and retailers (collectively referred to as "distributors"). A significant amount of our revenue for application products is from two distributors. One of these distributors recently restructured its operations, reducing the number of facilities it operates, including those handling Adobe products, which may harm our operating results. In addition, we have revised our channel program to reduce the overall number of our distributors worldwide and focus our channel efforts on larger distributors. This revision of the channel program has resulted in an increase in our dependence on a smaller number of distributors selling through a larger amount of our products. Additionally, one of our goals is to increase our direct distribution of our products to end users through our online store located on our Web site atwww.adobe.com. Any such increase in our direct revenue efforts will place us in increased competition with our channel distributors and with newer types of distribution of our products by online, Internet-based resellers of our products. While we anticipate that the restructuring and streamlining of our product distribution channels and the increase in the scope of our
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direct sales efforts will eventually improve our business by decreasing discounts or rebate programs provided to distributors, decreasing product returns, and shortening inventory cycles, these changes could instead seriously harm our business.
We currently rely on five turnkey assemblers of our products, with at least two turnkeys located in each major region we serve. If any significant turnkey assembler terminates its relationship with us, or if our supply from any significant turnkey is interrupted or terminated for any other reason, we may not have enough time or be able to replace the supply of products manufactured by that turnkey assembler to avoid serious harm to our business.
Revenue from our OEM PostScript and Other segment experienced a 20%15% decline in fiscal 20012002 compared to fiscal 2000,2001, primarily as a result of a decline in the print business. We expect this segment to continue to decline in fiscal 20022003 relative to fiscal 2001,2002, which may harm our business if the magnitude of the decline significantly exceeds our expectations. The continuing weakness in the economy is contributing to the decrease in revenue for the monochrome laser printers market, in addition to the decline in average selling prices of monochrome laser printers and the increasing use of inkjet printers. In addition, customer transition from paper-based processes to electronic workflows, renegotiated pricing with certain OEM customers, and the outsourcing of certain OEM accounts toIf a third party solution provider contributed to the decline in revenue in this segment. If anothercurrent major customer also decided to incorporate a clone version instead of Adobe PostScript technology, it could seriously harm our business. Further, OEM partners on occasion seek to renegotiate their royalty arrangements. We evaluate these requests on a case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, which could result in lower licensing revenue for us.
The Internet market is rapidly evolving and is characterized by an increasing number of market entrants that have introduced or developed products addressing authoring and communication over the Internet. As is typical in the case of a new and evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty. The industry for software industry addressingthat addresses authoring and communications over the Internet is still developing. Standards defining Web graphics have not yet been fully adopted. In addition, new models for licensing software will be needed to accommodate new information delivery practices. The new models may be less lucrative for us than our existing business models. Moreover, critical issues concerning the commercial use of the Internet (including security, reliability, ease of use and access, cost, and quality of service) remain unresolved and may affect the growth of Internet use, together with the software standards and electronic media employed in such markets.
We intend to increase our investment in e-business and enhanced marketing activities in an effort to achieve revenue growth, but we can provide no assurance that increased investment in this new market will result in increased revenue.
We derive a significant portion of our revenue and operating income from our customers located in Europe Japan, Asia Pacific, and Latin America.Japan. We generally experience lower revenue from our European operations in the third quarter because many customers reduce their purchasing activities in the summer months. Additionally, weWe are uncertain whether the recent weaknesscurrency appreciation experienced in Europe Asia Pacific and Latin America marketsJapan will continue in the foreseeable future due to possible currency devaluation and liquidity problems in these regions. While most of the revenue of our European subsidiaries had in the past been denominated in U.S. dollars, we now denominate revenue in euros in certain European countries. In addition, the majority of our revenue derived from Japan is denominated in yen, and the majority of all our subsidiaries' operating expenses are denominated in their local currencies. As a result, ourfuture. Our operating results are subject to fluctuations in foreign currency exchange rates. To date, theDramatic fluctuations in foreign currency exchange rates may have significant financial impact of such fluctuations has not been significant. Our hedging policy attemptsimpact. We attempt to mitigate somea portion of these risks through foreign currency hedging, based on our best judgment of the appropriate trade-offs among risk, opportunity, and expense. We have established a hedging program to hedge our exposure to foreign currency exchange rate fluctuations, primarily of the Japanese yen and the euro. We regularly review our hedging program and will make adjustments based on our best judgment. Our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates.
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In connection with the enforcement of our own intellectual property rights or in connection with disputes relating to the validity or alleged infringement of third-party rights, we have been, are currently, and may in the future be subject to complex, protracted litigation as part of our policy to vigorously defend our intellectual property rights. Intellectual property litigation is typically very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved past litigation, we may not prevail in any ongoing or future litigation. Adverse decisions in such litigation could have negative results, including subjecting us to significant liabilities, requiring us to seek licenses from others, preventing us from manufacturing or licensing certain of our products, or causing severe disruptions to our operations or the markets in which we compete, any one of which could seriously harm our business.
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. These principles are subject to interpretation by the American Institute of Certified Public Accountants (the "AICPA"), the Securities and Exchange Commission (the "SEC"), and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results and may even affect the reporting of transactions completed before a change is announced. Our accounting policies that recently have been or may be affected by changes in the accounting rules are as follows:
In particular, new FASB guidelines relating to accounting for goodwill could make our acquisition-related charges less predictable in any given reporting period. It is possible that in the future, we may incur less frequent, but larger, impairment charges related to goodwill we have already recorded, as well as goodwill arising out of potential future acquisitions. See "Recent Accounting Pronouncements" for more information on this new FASB guideline. Changes to these rules or the questioning of current practices may have a significant adverse effect on our reported financial results or in the way in which we conduct our business. See the discussion under "Critical Accounting Policies" below for additional information about our critical accounting policies and some risks associated with these policies.
New FASB guidelines relatingWe hold equity investments that have recently experienced significant declines in market value. We also have investments, and may continue to accountingmake 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 goodwill could makethe technologies or products they have under development is typically in the early stages and may never materialize. Our investment activities can impact our acquisition-related charges less predictablenet income. We recorded pre-tax losses frommarketable securities and other investments in any given reporting period. On Julyprivately held companies of $17.2 million and $93.4 million in fiscal 2002 and 2001, respectively. These amounts reflect realized losses from the FASB issued Statementsale of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwillmarketable equity investments, other-than-temporary declines in the value of marketable equity securities, and Other Intangible Assets," that establishes a new standard for accounting for goodwill acquirednet 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 business combination. This Statement requires that goodwilldecrease in our pre-tax income. Future price fluctuations in these securities and other intangibles with an indefinite useful life not be amortized, but be tested for impairment at least annually. It would continue to require recognitionany significant long-term declines in value could reduce our net income in future periods. We are uncertain of goodwillfuture investment gains and losses, as an asset but would not permit amortization of goodwill as previously required by APB Opinion No. 17, "Intangible Assets." Under SFAS 142, goodwill will be separately tested for impairment using a fair-value-based approach. Any required goodwill impairment charges will be presented as a separate line item withinthey are primarily dependent upon the operating sectionoperations of the income statement. The shift from an amortization approach to an impairment approach would apply to previously recorded goodwill as well as goodwill arising from acquisitions completed after June 30, 2001. We are currently evaluating the impact of this Statement on our financial position and are planning to adopt this standard beginning in fiscal year 2003, as required. It is possible that in the future, we may incur less frequent, but larger, impairment charges related to the goodwill already recorded, as well as goodwill arising out of potential future acquisitions.
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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, and accounting for leases of property and equipment.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 productproducts 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, when given, 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. The estimates and reserves for rebates and price protection are based on historical rates. While management believes it can make reliable estimates for these matters, nevertheless unsold products in these distribution channels are exposed to rapid changes in consumer preferences or technological obsolescence due to new operating environments, product updates or competing products. Accordingly, it is possible that these estimates will change in the near future or that the actual amounts could vary materially from our estimates and that the amounts of such changes could seriously harm our business.
We provide free technical phone support for our shrink-wrapped application products to customers who are under warranty for support. We accruerecord the estimated cost of free technical phone support upon shipment of software and amortize the accrued internal and external cost of telephone support to sales and marketing expense.software.
We also license software within multiple element arrangements in which a customer purchases a combination of software, post-contract customer support ("PCS") for two years., and/or professional services. PCS, or maintenance, includes rights to upgrades, when and if available, a limited period of telephone support, updates, and bug fixes. Statementenhancements. Professional services relate to consulting services and training. When vendor specific objective evidence ("VSOE") of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," as amended, generally requiresfair value exists for all elements in a multiple element arrangement, revenue earned on software arrangements involving multiple elements to beis allocated to each element based on the relative fair value of the elements. The arrangement fee for multiple-element arrangements is allocated to each element of the arrangement, such as maintenance and support services, based on the relative fair values of the elements. We determine theVSOE of fair value of each element in multi-element arrangements based on vendor-specific objective evidence ("VSOE"). VSOE for each element is based onestablished by the price charged when the same element is sold separately. If evidenceWe 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 evidenceVSOE of fair value does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fairf air value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.revenue, assuming delivery has occurred and collectibility is probable. Revenue allocated to maintenance and supportPCS is recognized ratably over the maintenancecontractual term (typically one to two years).
The arrangement fees related to fixed-priced consulting contracts arerecognized 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, such as contract milestones, when applicable. Anticipated losses on fixed-priced contracts are recognized in the period when they become known.
We record OEM licensing revenue, primarily royalties, when OEM partners ship products incorporating Adobe software, provided collection of such revenue is deemed probable. We have no remaining obligations in relation to such licensing revenue.
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We also recognize revenue under a subscription-based model for our Adobe Studio website, which we launched in the fourth quarter of fiscal 2001. Revenue is recognized on a monthly basis from fees received that month for providing software subscriptions for our hosted application.
Deferred revenue includes customer advances under OEM licensing agreements and maintenance revenue for application products. We recognize deferred maintenance revenue ratably over the term of the contract, generally twenty-four months.revenue. In cases where we will provide a specified free upgrade to an existing product, we defer revenue until the future obligation is fulfilled.
We perform ongoing credit evaluations of our customers' financial condition and generally do not require collateral. We maintain allowances for potentialestimated credit losses and such losses have been within our expectations.losses.
Accounting for our Marketable and Non-marketable Fixed Income and Equity Securities
We classify all of our cash equivalents and short-term investments that are free of trading restrictions, or become free of trading restrictions within one year, as "available-for-sale." We carry these investments at fair value, based on quoted market prices, and unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders' equity. Realized gains and losses are recognized when realized onin our consolidated statements of income. WeThe market prices in our short-term equity investments have abeen volatile in the past. It is our policy in place to review our equity holdings on a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing each of the companies' cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership. If we believe that an other-than-temporaryother - -than-temporary decline exists in one of our marketable equity securities, it is our policy to write down these equity investments to the market value and record the related writedown as an investment loss on our consolidated statements of income. The ultimate value realized on these equity investments is subject to market volatility until they are sold. For morefurther information on our cash, cash equivalents and short-term investments, please refer to Note 31 of our Notes to Consolidated Financial Statements.
Our long-term investments include direct investments and indirect investments in privately-heldprivately held companies. 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. Under the terms of the partnership agreements, the general partner has the sole and exclusive right to manage and control the partnerships. Adobe as the limited partner has certain rights, including replacing the general partner and approving acquisitions that exceed certain established parameters. However, these rights are considered to be protective rights and do not suggest an ability to control the partnerships. Adobe Ventures carry their investments in equity securities at estimated fair market value and unrealized gains and losses are included in investment incomegain (loss). The stock of a number of technology investments held by the limited partnerships at November 30, 2001 are29, 2002 is not publicly traded, and, therefore, there is no established market for their securities. As such,In order to determine the fair market value of these investments, are determined by Granite Ventures usingwe use the most recent round of financing involving new non-strategic investors or estimates made by Granite Ventures. We have aVentures based on their assessment of the current market value. It is our 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-heldprivately held companies. This information is not subject to the same disclosure regulations as U.S. publicpublicly traded 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
38
our equity method of accounting and the related writedown is recorded as an investment loss on our consolidated statements of income.accounting. Estimating 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 51 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, CA.California. The agreements qualify for operating lease accounting treatment under Statement of Financial Accounting Standards No. 13 ("SFAS 13,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 itdoes 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 paymentwe purchase the building for an amount equal to the lessor's investment,current lease balance, or require us to purchase, facilitatethat we remarket or relinquish the sale of the buildings to a third party, or surrender the buildings.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 facilitate the saleremarket or surrenderrelinquish 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 30, 2001,29, 2002, we were in compliance with all covenants. For further information on these leases, please refer to our "Commitments" section under "Liquidity and Capital Resources" and Note 1314 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 (the "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 c onsider 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 Market. See the "Report of the Executive Compensation Committee" appearing in the Company's 2003 Proxy Statement for further information concerning the policies and procedures of the Company and the Executive Compensation Committee regarding the use of stock options.
Distribution and Dilutive Effect of Options
The table below provides information about stock options granted for 2002, 2001, and, 2000 to our Chief Executive Officer and our four other most highly compensated executive officers as of November 29, 2002, who will also be identified in our 2003 Proxy Statement. This group is referred to as the Named Executive Officers. Please refer to the section headed "Executive Options" below for the Named Executive Officers.
Options granted to employees, directors and Named Executive Officers for the fiscal years 2000 through 2002 are summarized as follows:
Employees, Directors and Named Executive Officers Option Grants in 2002, 2001, and 2000(1)
|
| 2002 |
| 2001 |
| 2000 |
|
Net grants during the period as % of outstanding shares | 3% | 6% | 6% | ||||
Net grants to Named Executive Officers during the period as % of | 21% | 11% | 15% | ||||
Net grants to Named Executive Officers during the period as % of | 1% | 1% | 1% | ||||
Cumulative options held by Named Executive Officers as % of total | 15% | 12% | 10% |
(1) "Net grants" equals the sum of the number of shares subject to options granted during the specified period reduced by the number of shares subject to options which were canceled or otherwise terminated during such period. Net grants as a percentage of outstanding shares is based on 232 million shares, 236 million shares, and 241 million shares of our common stock outstanding as of November 29, 2002, November 30, 2001 and December 1, 2000, respectively. All options and outstanding shares referred to in the above table have been adjusted to reflect the two-for-one stock split in the form of a stock dividend effected October 24, 2000.
During fiscal 2002, we granted options to purchase approximately 12.0 million shares of our stock to our employees and directors, which was a net grant of approximately 7.0 million options after deducting approximately 5.0 million shares for options canceled. For additional information about our employee stock option plan activity for the years 2000 through 2002, and pro forma earnings presentation as if we had accounted for our grant of employee stock options using the fair value method of accounting under Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation,"please refer to Note 11 of our Notes to Consolidated Financial Statements.
For fiscal 2002, options granted to the Named Executive Officers amounted to 21% of the grants made to all employees and directors. Options granted to the Named Executive Officers as a percentage of the total options granted to all employees and directors vary from year to year. In 2002, the Named Executive Officers received a higher percentage of total grants than in other years because, although total grants to the Named Executive Officers remained relatively the same, overall there were fewer options granted to all employees. For additional information about the compensation of our executive officers and stock option grants to our Named Executive Officers, please refer to our 2003 Proxy Statement.
General Option Information
The following table sets forth the summary of activity under the Plans for our fiscal year ended November 29, 2002 and November 30, 2001 (in actual amounts):
Summary of Option Activity
| Years Ended | ||||||||||||
--------------------------------------------------------------------------------------------------------------------------------------- | |||||||||||||
| November 29, 2002 |
| November 30, 2001 | ||||||||||
-------------------------------------------------------------- | --------------------------------------------- | ||||||||||||
| Options Available |
| Number of Options Outstanding |
| Weighted Average Exercise Price |
| Options Available for Grant |
| Number of Options Outstanding |
| Weighted Average Exercise Price |
| |
------------- | ---------------- | -------------- | --------------- | -------------- | ---------------- | ||||||||
Beginning of period | 12,818,238 |
| 54,284,317 |
| $ 36.66 |
| 26,911,978 |
| 45,017,400 |
| $38.26 |
| |
Granted | (11,973,680 | ) | 11,973,680 |
| 28.77 |
| (19,177,315 | ) | 19,177,315 |
| 28.38 |
| |
Exercised | -- |
| (3,688,534 | ) | 15.99 |
| -- |
| (4,826,823 | ) | 12.55 |
| |
Canceled | 4,722,413 |
| (4,722,413 | ) | 45.20 |
| 5,083,575 |
| (5,083,575 | ) | 44.89 |
| |
------------- | ---------------- | -------------- | --------------- | -------------- | ---------------- | ||||||||
End of period | 5,566,971 |
| 57,847,050 |
| $35.64 |
| 12,818,238 |
| 54,284,317 |
| $36.66 |
| |
======== | ========= | ========= | ======== | ======== | ========= | ||||||||
The following table sets forth a comparison as of November 29, 2002, of the number of shares subject to our options whose exercise prices were at or below the closing price of our common stock on November 29, 2002 ("In-the-Money" options) to the number of shares subject to options whose exercise prices were greater than the closing price of our common stock on such date ("Out-of-the-Money" options) (in actual shares):
In-the-Money and Out-of-the-Money Option Information as of November 29, 2002(1)
|
| Exercisable |
| Unexercisable |
| Total |
| Percentage of Total Options Outstanding |
------------ | ------------ | --------- | -------------- | |||||
In-the-Money |
| 10,410,743 |
| 20,941,290 |
| 31,352,033 |
| 54% |
Out-of-the-Money |
| 15,991,496 |
| 10,503,521 |
| 26,495,017 |
| 46% |
------------ | ------------ | --------- | -------------- | |||||
Total Options Outstanding |
| 26,402,239 |
| 31,444,811 |
| 57,847,050 |
| 100% |
======== | ======== | ====== | ========= |
(1)The closing price of our common stock on November 29, 2002, was $29.53, as reported by the Nasdaq National Market.
Executive Options
The following table sets forth information regarding stock options granted in the fiscal year ended November 29, 2002, to our Named Executive Officers, each under the 1994 Stock Option Plan, as amended. All options were granted with an exercise price equal to the closing price of our common stock on the date of grant. Potential realizable values are net of exercise price, but before taxes associated with exercise. These amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the option term of seven (7) years. The assumed 5% and 10% rates of stock price appreciation are provided for purposes of illustration only and do not represent our estimate or projection of the future price of our common stock.
Option Grants in Last Fiscal Year
| Individual Grants |
|
| ||||||||||
------------------------------------------------------ | Potential Realizable Value at | ||||||||||||
| Number of |
| % of Total |
| Exercise |
| Expiration | ||||||
|
|
|
| ||||||||||
|
|
|
| ||||||||||
Granted | |||||||||||||
5% | 10% | ||||||||||||
----------------------- | -------------- |
| --------------- |
| ------------- |
| ----------- |
| ------------ |
| ---------------- | ||
Bruce R. Chizen | 1,090 |
| 0.01 | % | $26.47 |
| 11/12/09 |
| $11,746 |
| $27,373 | ||
| 848,910 |
| 7.20 |
| 26.47 |
| 11/12/09 |
| 9,147,810 |
| 21,318,288 | ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Shantanu Narayen | 4,100 |
| 0.03 |
| 26.47 |
| 11/12/09 |
| 44,181 |
| 102,961 | ||
| 495,900 |
| 4.20 |
| 26.47 |
| 11/12/09 |
| 5,343,793 |
| 12,453,309 | ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Murray J. Demo | 3,850 |
| 0.03 |
| 26.47 |
| 11/12/09 |
| 41,487 |
| 96,683 | ||
| 496,150 |
| 4.21 |
| 26.47 |
| 11/12/09 |
| 5,346,487 |
| 12,459,588 | ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Jim Stephens | 4,150 |
| 0.04 |
| 26.47 |
| 11/12/09 |
| 44,720 |
| 104,217 | ||
| 295,850 |
| 2.51 |
| 26.47 |
| 11/12/09 |
| 3,188,064 |
| 7,429,545 | ||
|
|
|
|
|
|
|
|
|
|
|
| ||
Bryan Lamkin | 4,475 |
| 0.04 |
| 26.47 |
| 11/12/09 |
| 48,222 |
| 112,379 | ||
| 295,525 |
| 2.50 |
| 26.47 |
| 11/12/09 |
| 3,184,562 |
| 7,421,384 | ||
(1)Based on approximately 12.0 million shares subject to options granted to employees under our option plans during fiscal 2002.
Stock Option Exercises and Option Holdings
The following table shows stock options exercised by the Named Executive Officers in fiscal 2002, including the total value of gains on the date of exercise based on actual sale prices or on the closing price that day if the shares were not sold that day, in each case less the exercise price of the stock options. In addition, the number of shares covered by both exercisable and non-exercisable stock options, as of November 29, 2002, is shown. Also reported are the values for "In-the-Money" options. The dollar amounts shown in the "In-the-Money" column represent the positive spread between the exercise price of any such existing stock options and closing price as of November 29, 2002 of our common stock.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values (in actual shares and dollars)
Number of Securities | Value of Unexercised | ||||||||||
Number | Value | ||||||||||
Name |
|
| Exercisable |
| Unexercisable |
| Exercisable |
| Unexercisable | ||
------------------------------ | --------------- |
| ---------------- |
| -------------- |
| ----------------- |
| -------------- |
| --------------- |
Bruce R. Chizen | 150,000 |
| $3,905,278 |
| 1,396,990 |
| 1,762,501 |
| $539,591 |
| $3,944,678 |
Shantanu Narayen | 27,000 |
| 723,928 |
| 826,532 |
| 1,004,168 |
| 1,386,678 |
| 2,282,449 |
Murray J. Demo | --- |
| --- |
| 580,157 |
| 920,835 |
| 457,822 |
| 2,056,715 |
Jim Stephens | 52,500 |
| 1,561,705 |
| 480,834 |
| 608,334 |
| 208,838 |
| 1,390,975 |
Bryan Lamkin | --- |
| --- |
| 559,604 |
| 614,584 |
| 346,934 |
| 1,342,600 |
(1)The "value realized" represents the total value of gains on the date of exercise based on actual sale prices or on the closing price that day if the shares were not sold that day, in each case less the exercise price of the stock options.
(2)Option values are based on the closing price of our common stock on November 29, 2002 of $29.53, as reported by the Nasdaq National Market.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued upon the exercise of options under all of our existing equity compensation plans as of November 29, 2002, including Adobe's 1984 Stock Option Plan, as amended, 1994 Stock Option Plan, 1994 Performance and Restricted Stock Plan, 1996 Outside Directors Stock Option Plan, as amended, 1997 Employee Stock Purchase Plan, and the 1999 Equity Incentive Plan.
Equity Compensation Plan Information | |||||||
Plan Category(1) |
| Number of securities to be issued upon exercise of outstanding options |
| Weighted average exercise price of outstanding options |
| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|
-------------------------------- |
| -------------------- |
| -------------------- |
| -------------------------- |
|
Equity compensation plans approved by security holders |
| 19,768,520 |
| $ 28.47 |
| 22,952,840(2) |
|
Equity compensation plans not approved by security holders*(3) |
| 38,050,350 |
| $ 39.39 |
| 741,983 |
|
-------------------------------- |
| -------------------- |
| -------------------- |
| -------------------------- |
|
Total |
| 57,818,870 |
| $ 35.66 |
| 23,694,823 |
|
(1) The information presented in this table excludes options assumed by the Company in connection with acquisitions of other companies. As of November 29, 2002, 28,180 shares of our common stock were issuable upon the exercise of these assumed options, at a weighted average exercise price of $5.22 per share.
(2) Includes 15,369,793 million shares that are reserved for issuance under the 1997 Employee Stock Purchase Plan.
(3)Consists of options that are outstanding and shares available for future issuance under our 1999 Equity Incentive Plan (the "1999 Plan"). Neither the Nasdaq current listing standards nor federal law has required stockholder approval of the 1999 Plan, and accordingly it has not been approved by our stockholders. The material features of the 1999 Plan are described in Note 11 of our Notes to Consolidated Financial Statements.
We Disclose Pro Forma Financial Information
We prepare and release quarterly unaudited financial statements prepared in accordance with generally accepted accounting principles ("GAAP"). We also disclose and discuss certain pro forma financial information in the related earnings release and investor conference call. Our pro forma financial information does not include unusual or non-recurring events or transactions,restructuring and other charges, acquired in-process research and development, amortization and impairment of goodwill and purchased intangibles, gain or loss on the sale of specific assets (e.g. building), and gains and losses on investments in equity securities. We believe the disclosure of the pro forma financial information helps investors more meaningfully evaluate and compare the results of our ongoing operations.operations from quarter to quarter and from year to yearbecause it removes certain items from the financial information to more clearly reveal our ongoing operating results. However, we urge investors to carefullycarefull y review the GAAP financial information included as part of our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K andthat are filed with the SEC, as well as our quarterly earnings releases, and compare thatthe GAAP financial information with the pro forma financial results disclosed in our quarterly earnings releases and investor calls.calls, as well as in some of our other reports.
39
The following table shows the Company's pro forma results reconciled to the GAAP Consolidated Statement of Income for the fiscal yearyears ended November 29, 2002, and November 30, 2001.2001, and December 1, 2000. Our pro forma information, including the information presented below, is a non-GAAP measure and may not be comparable to similarly titled measures reported by other companies. Our pro forma results for the fiscal year 2002, 2001, and 2000 exclude restructuring and other charges, acquired in-process research and development, amortization and impairment of goodwill and purchased intangibles, investment gains and investment loss.losses, and gain on the sale of a building.
| | Year ended November 30, 2001 | ||||
|---|---|---|---|---|---|
| GAAP income before income taxes | $ | 306,931 | |||
Restructuring and other charges | 12,063 | ||||
| Amortization of goodwill and purchased intangibles | 14,281 | ||||
| Investment loss | 93,414 | ||||
| Pro forma income before income taxes | 426,689 | ||||
| Income tax provision | 140,807 | ||||
| Pro forma net income | 285,882 | ||||
Basic pro forma net income per share | $ | 1.20 | |||
| Shares used in computing basic net income per share | 238,461 | ||||
| Diluted net income per share | $ | 1.15 | |||
| Shares used in computing diluted net income per share | 249,145 | ||||
Years Ended | ||||||
November 29, | November 30, | December 1, | ||||
(in thousands) | ||||||
GAAP income before income taxes | $284,689 |
| $306,931 |
| $443,739 |
|
Restructuring and other charges | 12,148 |
| 12,063 |
| 5,629 |
|
Acquired in-process research and development | 5,769 |
| --- |
| 470 |
|
Amortization and impairment of goodwill and purchased intangibles | 20,973 |
| 14,281 |
| 7,013 |
|
Investment (gain) loss | 17,185 |
| 93,414 |
| (14,345 | ) |
Gain on the sale of a building | --- |
| --- |
| (2,718 | ) |
------------------- | ------------------- | ---------------- | ||||
Pro forma income before income taxes | 340,764 |
| 426,689 |
| 439,788 |
|
Income tax provision | 109,044 |
| 140,807 |
| 154,542 |
|
------------------- | ------------------- | ---------------- | ||||
Pro forma net income | $231,720 |
| $285,882 |
| $285,246 |
|
============ | ============ | ========== | ||||
Pro Forma Fair Value Disclosures on Employee Stock Plans
We account for our employee stock plans, consisting of fixed stock option plans anand our employee stock purchase plan, and a performance and restricted stock plan using the intrinsic value method. Please see our Note 1011 of the Notes to Consolidated Financial Statements for the pro forma amounts of net income and net income per share that would have resulted if we accounted for our employee stock plans under the fair value recognition provisions of SFAS 123, "Accounting for Stock-Based Compensation."No. 123.
Recent Accounting Pronouncements
DuringIn July 2001, the FASB issued Statement of Financial Accounting Standards No. 141Board ("SFAS 141"FASB"), "Business Combinations." This Statement requires all business combinations to be accounted for using the purchase method of accounting and redefines goodwill and other intangibles that should be recognized separate from goodwill. SFAS 141 is effective for all business combinations initiated after June 30, 2001.
During July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." This Statement requires that goodwill and other intangibles with an indefinite useful life not be amortized, but be tested for impairment at least annually. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, for new business combinations that occur after June 30, 2001, SFAS No. 142 is effective for those transactions.effective. In accordance with SFAS No. 142, goodwill resulting from our recent acquisition of Accelio in April 2002 is not amortized. We will fully adopt SFAS No. 142 beginning in our fiscal year 2003. We are currently evaluatingdo not expect the impactadoption of SFAS No. 142 to have a material impact on our financial statementsposition or results of operations. Amortization and related disclosures.impairment of goodwill in fiscal 2002, 2001, and 2000 was $21.0 million, $14.3 million, and $7.0 million, respectively.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, or normal use of the asset. As used in this Statement, a legal obligation results from existing law, statute, ordinance, written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppel. SFAS No. 143 is
40
effective for fiscal years beginning after June 15, 2002. We will adopt SFAS No. 143 beginning in our fiscal year 2003. We do not expect the adoption of SFAS No. 143 to have a material impact on our financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 ("APB No. 30,30"), "Reporting the Results of Operations for a Disposal of a Segment of a Business." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We will adopt SFAS No. 144 beginning in our fiscal year 2003. We do not expect the adoption of SFAS No. 144 to have a material impact on our financial position or results of operations.
In November 2001,April 2002, the Emerging Issues Task ForceFASB issued Statement of Financial Accounting Standards No. 145 ("EITF") reached a consensus on EITFSFAS No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Among other provisions, SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt." Accordingly, gains or a Resellerlosses from extinguishment of debt shall not be reported as extraordinary items unless the Vendor's Products." EITFextinguishment qualifies as an extraordinary item under the criteria of APB No. 01-09 addresses the accounting for consideration given by a vendor to a customer and is a codification30. Gains or losses from extinguishment of EITF No. 00-14, "Accounting for Certain Sales Incentives," EITF No. 00-22, "Accounting for "Points' and Certain Other Time-Based or Volume-Based Sales Incentives Offers and Offers for Free Products or Services to be Delivered in the Future" and EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." We are evaluating the impact of EITF No. 01-09 anddebt that do not believemeet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. We will adopt SFAS No. 145 beginning in our fiscal year 2003. We do not expect the adoption willof SFAS No. 145 to have a material impact on our financial statements.position or results of operations.
In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring)," required an exit cost liability be recognized at the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002. We do not expect the adoption of SFAS No. 146 to have a material impact on our financial position or results of operations.
In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147 ("SFAS No. 147"), "Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9." The provisions of this statement relate to the application of the purchase method of accounting for all acquisitions of financial institutions, except transactions between two or more mutual enterprises. The provisions of this statement also relate to certain long-term customer-relationship intangible assets recognized in an acquisition of a financial institution, including those acquired in transactions between mutual enterprises. The provisions of this statement are effective on or after October 1, 2002. There will be no material impact upon the adoption of SFAS No. 147 on our financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment to FASB Statement No. 123, Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of Statement 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We do not expect the adoption of SFAS No. 148 to have a material impact on our financial position or resu lts of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 expands on the accounting guidance of Statements No. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. FIN No. 45 will affect leasing transactions involving residual guarantees, vendor and manufacturer guarantees, and tax and environmental indemnities. All such guarantees will need to be disclosed in the notes to the financial statements starting with the period ending after December 15, 2002. For guarantees issued after December 31, 2002, the fair value of the obligation must be reported on the balance sheet. Existing guarantees will be grandfathered and will not be recognized on the balance sheet. We are currently evaluating the impact of FIN No. 45 on our financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest Entities." FIN No. 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Disclosure requirements apply to any financial statements issued after January 31, 2003. The Company has considered the provisions of FIN No. 46 and believes it will not be necessary to include in the Company's financial statements any assets, liabilities, or activities of the entities holding the Company's corporate headquarters leases. The Company has provided certain disclosures in other areas of this filing (see Note 6 and Note 14 of our Notes to Consolidated Financial Statements) and will continue to evaluate the impact of FIN No. 46 on our financial statements and related disclosures.
LIQUIDITY AND CAPITAL RESOURCES
| | 2001 | Change | 2000 | Change | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash, cash equivalents, and short-term investments | $ | 581.6 | (14 | )% | $ | 679.9 | 36 | % | $ | 498.7 | |||
| Working capital | $ | 453.7 | (19 | )% | $ | 563.3 | 59 | % | $ | 355.4 | |||
| Stockholders' equity | $ | 617.0 | (18 | )% | $ | 752.5 | 47 | % | $ | 512.2 | |||
|
| 2002 |
| Change |
| 2001 |
| Change |
| 2000 |
|
Cash, cash equivalents, and short-term investments |
| $617.7 |
| 6 | % | $581.6 |
| (14 | )% | $679.9 |
|
Working capital |
| $436.9 |
| (4 | )% | $453.7 |
| (19 | )% | $563.3 |
|
Stockholders' equity |
| $674.3 |
| 9 | % | $617.0 |
| (18 | )% | $752.5 |
|
Our cash, cash equivalents, and short-term investments consist principally of money market funds, U.S. Treasuries, corporate notes, municipal bonds, and marketable equity securities. All of our short-term investments are classified as available-for-sale under the provisions of SFASStatement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The securities are carried at fair market value with the unrealized gains and losses, net of tax, included in accumulated other comprehensive income, which is reflected as a separate component of stockholders' equity. Realized gains and losses are recognized when realized on thein our consolidated statements of income.
Cash provided by operating activities was $329.3 million, $418.7 million, and $444.6 million in fiscal 2002, 2001, and 2000, respectively. The $329.3 million of cash provided by operating activities for the year ended November 29, 2002, was primarily due to net income of $191.4 million, net non-cash related expenses of $118.9 million, and a net increase in operating assets and liabilities of $19.0 million. The $418.7 million of cash provided by operating activities for the year ended November 30, 2001, was primarily due to net income of $205.6 million, net non-cash related expenses of $197.1 million, and a net increase in operating assets and liabilities of $16.0 million. The $444.6 million of cash provided by operating activities for the year ended December 1, 2000, was primarily due to net income of $287.8 million net non-cash related expenses of $173.6 million, partially offset by a net decrease in operating assets and liabilities of $16.8 million. Our cash provided by operating activities decreased in fiscal 2002 compared to fiscal 2001 and in fiscal 2001 compared to fiscal 2000 as a result of decreases in revenue and operating income that occurred primarily as a result of weak economic conditions.
Cash used for investing activities was $142.3 million, $26.4 million, and $228.1 million in fiscal 2002, 2001, and 2000, respectively. The $142.3 million of cash equivalents, andused for investing activities for the year ended November 29, 2002, was primarily due to net purchases of short-term investments decreased $98.3of $91.8 million, or 14%,purchases of long-term investments and other assets of $38.0 million, and acquisitions of property and equipment of $31.6 million. The cash used for investing activities was partially offset by proceeds from the sale of equity securities of $11.7 million and proceeds of $7.3 million related to our Accelio acquisition. The $26.4 million of cash used for investing activities for the year ended November 30, 2001, was primarily due to acquisitions of property and equipment of $43.2 million and purchases of long-term investments and other assets of $35.3 million. The cash used for investing activities was partially offset by net cash provided by short-term investments of $20.6 million and proceeds from the sale of equity securities of $31.5 million. The $228.1 million of cash used for investing activities for the year ended December 1, 2000, was primarily due to net purchases of short-term investments of $137.9 million, purchases of long-term investments and other assets of $59.1 million, and acquisitions of property and equipment of $29.8 million. The cash used for investing activities was partially offset by proceeds from the sales of equity securities and a building of $17.8 million and $5.4 million, respectively. We expect to continue to invest in short-term investments and purchase additional property and equipment to support our growth.
The increase in cash used for investing activities in fiscal 2002 compared to 2001 was primarily due to increased purchases of short-term investments because of lower treasury stock purchases. The decrease in cash used for investment activities in fiscal 2001 compared to 2000 was primarily due to a reduction in purchases of short-term and long-term investments in order to purchase treasury stock.
Cash used for financing activities was $223.3 million, $409.6 million, and $148.3 million in fiscal 2002, 2001, and 2000, respectively. The $223.3 of cash used for financing activities for the year ended November 29, 2002, was primarily due to the purchase of $293.2 million of treasury stock in the amount of $485.1 million, the purchase of long-term investments and other assets for $32.0 million, capital expenditures of $46.6 million, and the payment of dividends totaling $12.0of $11.9 million. In addition, our short-term investments decreased due to the writedown of certain short-term marketable equity investments totaling $53.1 million and the sale of marketable equity investments with a cost basis of $7.8 million.
These decreases were partiallyCash used for financing activities in 2002 was offset by cash generated from operationsproceeds of $418.7$81.9 million and proceeds from the issuance of treasury stock related to the exercise of stock options under our stock option plans and the sale of stock under the Employee Stock Purchase. The $409.6 million of cash used for financing activities for the year ended November 30, 2001, was primarily due to the purchase of $485.1 million of treasury stock and payment of dividends of $12.0 million. Cash used for financing activities in 2001 was offset by proceeds of $87.5 million from the issuance of treasury stock related to the exercise of stock options under our stock option plans and the sale of stock under the Employee Stock Purchase Plan of $87.5 million. Another sourcePlan. The $148.4 million of cash includedused for financing activities for the year ended December 1, 2000, was primarily due to the purchase of $255.5 million of treasury stock and payment of dividends of $12.0 million. Cash used for financing activities in 2000 was offset by proceeds of $119.1 million from the issuance of treasury stock related to the exercise of stock options under our stock option plans and the sale of equity securitiesstock under the Employee Stock Purchase Plan.
The decrease in cash used for financing activities in fiscal 2002 compared to 2001 was primarily due to less cash used for the purchase of $31.5 million.treasury stock due to a lower average per share cost. The increase in cash used for financing activities in fiscal 2001 compared to 2000 was due to an increase in the purchase of treasury stock.
Trade receivables decreased $9.2 million in 2002 from 2001 and our days sales outstanding ("DSO") in receivables decreased 6 days in 2002 from 2001. The decrease in trade receivables and DSO was primarily due to our improved collections in 2002. Other receivables increased $12.1 million in 2002 from 2001 primarily due to an increase in indirect tax refund receivables from increased product purchases from our third party manufacturers outside of the U.S. Net property and equipment decreased $6.5 million in 2002 from 2001 primarily due to depreciation and asset retirements. The decrease in net property and equipment was partially offset by an increase related to our India building that we placed into service during fiscal 2002. Other assets increased $4.5 million in 2002 from 2001 due to additional investments in Adobe Ventures.
Trade and other payables increased $6.9 million in 2002 from 2001 due to an increase in indirect taxes payable resulting from an increase in foreign sales. Our income tax payable increased approximately $41.1 million in 2002 from 2001 due to an increase in taxable income. Taxable income increased in 2002 over 2001 even though book income did not increase because of certain expenses that are not currently deductible for tax purposes. Also, the company accounts for tax contingencies in the United States and foreign tax jurisdictions in accordance with SFAS No. 5. Please see Note 9 of our Notes to Consolidated Financial Statements for a summary of the changes in the income taxes payable account. Deferred revenue increased $9.5 million in 2002 from 2001 primarily due to increased maintenance contracts resulting from our acquisition of Accelio.
Our existing cash, cash equivalentequivalents, and investment balances may decline further during fiscal 2002, although2003 due to further weakening of the economy or changes in our planned cash outlay. However, we believe that our existing balances together with our anticipated cash flows from operations will be sufficient to meet our working capital and operating resource expenditure requirements for the next 12twelve months. IfCash from operations could be affected by various risks and uncertainties, including, but not limited to: adverse changes in general economic or political conditions in any of the global economy weakens further,major countries in which we do business; customer acceptance of new products and upgrades; delays in shipment of our new products or major new versions of existing products; weakness in demand for application software, computers and printers; downward sales price adjustments; the declineimpact of competition; and other risks detailed in cash, cash equivalents and investments balances may be greater than presently anticipated.the section "Factors That May Affect Our Future Performance."
41
We expect to continue our investing activities, including expenditures for computer systems for research and development, sales and marketing, product support, and administrative staff. Furthermore, cash reserves may be used to purchase treasury stock and strategically acquire software companies, products, or technologies.technologies that are complementary to our business.
Adobe's Board of Directors approved two separatea two-for-one stock splitssplit in the form of stock dividends of our common stock to stockholders effected October 24, 2000 and October 26, 1999.2000. All share and per share amounts referred to in the consolidated financial statements have been adjusted to reflect thesethis stock splits.split.
We have paid cash dividends on our common stock each quarter since the second quarter of 1988. Adobe's Board of Directors declared a cash dividend on our common stock of $0.0125 per common share for each of the four quarters in fiscal 2002, 2001, 2000, and 1999.2000. The declaration of future dividends, whether in cash or in-kind, is within the discretion of Adobe's Board of Directors and will depend on business conditions, our results of operations and financial condition, and other factors.
Stock Repurchase Program I—I -- On-going Dilution Coverage
To facilitate our stock repurchase program which is designed to minimize dilution from stock issuance primarily from employee stock plans, we sold put warrants to independent third parties in fiscal 2002, 2001, 2000, and 1999.2000. Each put warrant entitles the holder to sell one share of Adobe's common stock to Adobe at a specified price for cash or stock at Adobe's option. Approximately 7.5 million, 5.6 million, 7.0 million, and 10.37.0 million put warrants were written in fiscal 2002, 2001, 2000, and 1999,2000, respectively. At November 30, 2001,29, 2002, approximately 3.81.9 million put warrants were outstanding that expire through JulyDecember 2002, with an average exercise price of $22.28$26.71 per share, resulting in a total potential cash outlay of approximately $84.0$50.5 million in fiscal 20022003 if all puts warrants are exercised.
In addition, in fiscal 2002, 2001, 2000, and 1999,2000, we purchased call options from independent third parties that entitled us to buy 4.9 million, 3.9 million, 4.2 million, and 4.94.2 million shares, respectively, of our common stock on certain dates at specified prices. At November 30, 2001,29, 2002, approximately 2.61.2 million call options were outstanding that expire on various dates through JulyDecember 2002 with an average exercise price of $24.09$28.08 per share, resulting in a total potential cash outlay of approximately $63.3$34.1 million in fiscal 20022003 if all calls options are exercised.
Currently, allOur put warrants have a correspondingand call option contracts provide that, at our option, we can settle with an identical expiry date. Consequently, eitherphysical delivery or net shares equal to the calldifference between the exercise price and the value of the option or put warrant, but not both, will be exercised.as determined by the contract.
We repurchased approximately 8.6 million, 5.9 million, 7.2 million, and 22.47.2 million shares in fiscal 2002, 2001, 2000, and 1999,2000, respectively, at a cost of $255.0 million, $319.9 million, and $255.5 million, respectively. Subsequent to November 29, 2002, we repurchased 1.6 million shares at a cost of $45.1 million through the exercise of outstanding put warrants and $448.7call options under this plan. As of December 18, 2002, no put warrants or call options remained outstanding under this plan. The authorization to repurchase shares to cover on-going dilution is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances. As of November 29, 2002, 9.6 million respectively.shares remained authorized for repurchase, based on net stock issuances less repurchases under this plan.
Stock Repurchase Program II—II -- Additional Authorization above Dilution Coverage
In September 1997, Adobe's Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 60.0 million shares of our common stock over a two-year period. This program was completed in the first quarter of fiscal 1999. Under this program, we repurchased approximately 3.3 million shares in fiscal 1999 at a cost of $30.5 million.
In April 1999, the Board authorized a 5.0 million share repurchase program, which allowsallowed us to purchase shares in the open market and enter into contracts to repurchase shares during future quarters by selling put warrants and buying call options. During fiscal 2001, approximately 4.9 million put warrants were written and 3.5 million call options were purchased at prices ranging from $32.60 to $39.58. As of November 30, 2001, there were no put warrants or options outstanding in this program. During fiscal 2001, we repurchased approximately 4.7 million shares at a cost of $165.2 million. We did not repurchase any shares under this program in fiscal 2000. This program expired in fiscal 2001.
42
In addition to the April 1999 5.0 million share repurchase program, our Board of Directors authorized in March 2001, subject to certain business and market conditions, our Board of Directors authorized the purchase of up to an additional 5.0 million shares of our common stock over a two-year period. We have not made any purchasesDuring fiscal year 2002, approximately 3.1 million put warrants were written and approximately 2.1 million call options were purchased under this 5.0 million share repurchase program.
Combined ProgramsAs of November 29, 2002, under our March 2001 5.0 million share program, approximately 3.0 million put warrants were outstanding that expire through December 2002 with an average exercise price of $25.20 per share. In addition, as of November 29, 2002, approximately 2.0 million call options were outstanding that expire at various dates through December 2002 with an average price of $27.23 per share.
Our put and call option contracts provide that, we, at our option, we can settle with physical delivery or net shares equal to the difference between the exercise price and the value of the option as determined by the contract.
In fiscal 2002, we repurchased approximately 2.0 million shares at a cost of $38.2 million under our March 2001 5.0 million share repurchase program.We did not make any repurchases under this plan in fiscal 2001.
During December 2002, all outstanding put warrants and call options under the March 2001 5.0 million share repurchase program expired without any cost to Adobe and as of December 20, 2002, there were no put warrants or call options outstanding. As of December 20, 2002, authorization to repurchase 3.0 million shares remained under the plan until it expires in March 2003.
On September 25, 2002, subject to certain business and market conditions, our Board of Directors authorized the purchase of up to an additional 5.0 million shares of our common stock over a three-year period. We have not made any purchases under this 5.0 million share repurchase program. This plan will expire in September 2005.
For more information on our puts and calls, please see Note 1 of our Notes to Consolidated Financial Statements.
CommitmentsThe tables below represent our authorized stock repurchase plans and summary of stock repurchases as of November 29, 2002.
Authorized Stock Repurchase Plans as of November 29, 2002 (in thousands)
Board Approval |
| Expiration |
| Authorized |
| Repurchases |
| Authorization |
| Put Options |
| Remaining |
|
|
|
|
|
|
|
| |||||||
---------------------- | --------------------- | -------------- | ----------------- | ----------------- | ---------------- | ------------------ | |||||||
December 1997 | N/A | Ongoing dilution | 44,550 | N/A | 1,890 | 9,578(1) | |||||||
April 1999 |
| April 2001 |
| 5,000 |
| 4,687 |
| 313 |
| --- |
| --- |
|
March 2001 |
| March 2003 |
| 5,000 |
| --- |
| --- |
| 2,986 |
| --- |
|
September 2002 |
| September 2005 |
| 5,000 |
| --- |
| --- |
| --- |
| 5,000 |
|
Summary of Stock Repurchases for fiscal years 2002, 2001, and 2000 as of November 29, 2002 (in thousands, except average amounts)
Board Approval |
| Repurchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2002 |
| Average |
| 2001 |
| Average |
| 2000 |
| Average |
| ||
December 1997 | From employees(2) | 83 | $35.55 | 733 | $42.01 | 164 | $60.98 | ||||||||
|
| Open market |
| --- |
| --- |
| 452 |
| 35.64 |
|
|
|
|
|
|
| Option exercises |
| 8,517 |
| 29.60 |
| 4,726 |
| 57.78 |
| 7,020 |
| 34.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1999 |
| Open market |
| --- |
| --- |
| --- |
| --- |
| --- |
| --- |
|
|
| Option exercises |
| --- |
| --- |
| 4,687 |
| 35.24 |
| --- |
| --- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2001 |
| Open market |
| 1,899 |
| 18.58 |
| --- |
| --- |
| --- |
| --- |
|
|
| Option exercises |
| 116 |
| 28.58 |
| --- |
| --- |
| --- |
| --- |
|
--------- | --------- | --------- | ----------- | --------- | -------- | ||||||||||
Total shares |
|
|
| 10,615 |
| $27.63 |
| 10,598 |
| $45.77 |
| 7,184 |
| $35.56 |
|
Total cost | $293,241 | $485,115 | $255,456 |
_______________________
(1) The remaining authorization for the ongoing stock repurchase plan is determined by subtracting repurchases from all stock issuances, net of any canceled shares, beginning in the first quarter of fiscal 1998.
(2) The repurchases from employees represent shares canceled when surrendered in lieu of cash payments for the option exercise price or withholding taxes due.
Commitments
Our principal commitments as of November 30, 200129, 2002, consist of obligations under operating leases, a line of credit agreement, a real estate financing agreement, venture investing activities, royalty agreements, and various service agreements. We expect to fulfill all of the below commitments from our working capital.
Lease Commitments
We lease certain of our facilities and some of our equipment under noncancelable operating lease arrangements that expire at various dates through 2025.2091. Rent expense, net of sublease income, for these leases aggregated $26.6 million, $22.0 million, $25.6 million, and $29.4$25.6 million during fiscal 2002, 2001, and 2000, and 1999, respectively.
As of November 30, 2001,29, 2002, future minimum lease payments under noncancelableundernoncancelable operating leases, net of sublease income, and future minimum sublease income under noncancelable subleases are as follows: 2002—$29.6 million; 2003—$32.3 million; 2004—$35.7 million; 2005—$28.5 million; 2006—$17.0 million; and $33.2 million thereafter.
Year |
| Future minimum lease payments |
| Future minimum sublease income |
2003 |
| $19.5 |
| $6.8 |
2004 |
| $17.4 |
| $6.9 |
2005 |
| $12.9 |
| $6.8 |
2006 |
| $10.9 |
| $5.5 |
2007 |
| $ 7.9 |
| $3.1 |
2008 and after |
| $34.7 |
| $3.4 |
In September 2001, we entered into a real estate development agreement for the construction of an additional office building for our corporate headquarters in downtown San Jose, California. Under the agreement, the lessor will finance up to $117.0 million over a two-year period, toward the construction and associated costs of the building. As part of the agreement, we entered into a five-year lease beginning upon completion of the building. We have anthe option to purchase the building at any time during the term for an amount equal to the total investment of the lessor.lease balance. The agreement and lease are subject to standard covenants including liquidity, leverage and profitability ratios that are reported to the lessor quarterly. As of November 30, 2001,29, 2002, we were in compliance with all covenants. In the case of a default, the lessor may terminate all remaining commitments (if any remain) and they may demand paymentwe purchase the building for an amount equal to the lessor's investment,current lease balance, or require that we purchase, facilitateremarket or relinquish the sale of the building to a third party, or surrender the building.buil ding. The agreement qualifies for operating lease accounting treatment under SFAS No. 13, and, as such, the building and the related obligation are not included on our balance sheet, but the lease payments are reflected in the schedule of future minimum lease payments. At the end of the lease term, we can either purchase the building for an amount equal to the lessor's investment,lease balance, which will be approximately $117.0 million, request to extend the maturity date of the leaseremarket, or remarketrelinquish the building. If we electchoose to remarket or are required to do so upon relinquishing the building, we are obligatedbound to arrange the sale of the building to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lessor's investment,lease balance, up to athe maximum recourse amount as set forth in the lease. The lessor is a multi-asset leasing company with a substantive net worth, not a special purpose entity.of $103.0 million.
In August 1999, Adobe entered into a five-year lease agreement for our corporate headquarters office buildings in San Jose, California. Under the agreement, we have anthe option to purchase the buildings at any time during the lease term for $142.5 million,the lease balance, which is the total investment of the lessor.approximately $142.5 million. The lease is subject to standard covenants including liquidity, leverage and profitability ratios that are reported to the lessor quarterly. As of November 30, 2001,29, 2002, we were in compliance with all covenants. In the case of a default
43
the lessor may demand paymentwe purchase the building for an amount equal to the lessor's investmentlease balance, or require that we surrenderremarket or relinquish the buildings.building. The agreement qualifies for operating lease accounting treatment under SFAS No. 13, and, as such, the buildingsbuilding and the related obligation are not included on our balance sheet, but the lease payments are reflected in the schedule of future minimum lease payments. At the end of the lease term, we can either purchase the buildingsbuilding for an amount equal to the lessor's investment, which is approximately $142.5 million,lease balance, remarket, or terminaterelinquish the lease.building. If we electchoose to terminate,remarket or are required to do so upon relinquishing the building, we are obligated to use our best effortsbound to arrange the sale of the buildingsbuilding to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lessor's investment,lease balance, up to athe maximum guaranteed residualrecourse amount as set forth in the lease. The lessor is a multi-asset leasing company with a substantive net worth, not a special purpose entity.of $132.6 million.
Line of Credit
In August 1999, Adobe entered into twoan unsecured revolving credit facilities,facility of $100.0 million each, with a group of banks, for general corporate purposes, subject to certain financial covenants. One of the facilitiesThe facility expired in August 20012002 and waswe elected not renewed, andto renew the other $100.0 million facility expires in August 2002. Outstanding balances would accrue interest at London Interbank Offered Rate ("LIBOR") plus a margin that is based on our financial ratios. There were no outstanding balances on the credit facility as of November 30, 2001. In addition, as of November 30, 2001, we were in compliance with all financial covenants.facility.
We believe that if our line of credit is canceled or amounts are not available under the line, our financial results, liquidity, or capital resources would not be adversely impacted.Royalties
Under the terms of the line of credit agreement, corporate headquarters lease agreement, and real estate financing agreement, we may pay cash dividends unless an event of default has occurred or we do not meet certain financial ratios.
Royalties
We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue. Royalty expense, which was recorded under our cost of products revenue on our consolidated statements of income, was approximately $14.4 million, $14.1 million, $20.8 million, and $24.5$20.8 million in fiscal 2002, 2001, and 2000, and 1999, respectively.
Adobe Ventures
We have commitments to the Adobe Venture limited partnerships. The following table shows the capital commitments and the capital contributed as of November 30, 2001:29, 2002:
| | Capital Commitment | Capital Contributed | ||||
|---|---|---|---|---|---|---|
| Adobe Ventures L.P. | $ | 40,000,000 | $ | 40,475,757 | ||
| Adobe Ventures II, L.P. | $ | 40,000,000 | $ | 36,947,363 | ||
| Adobe Ventures III, L.P. | $ | 60,000,000 | $ | 56,162,222 | ||
| Adobe Ventures IV, L.P. | $ | 100,000,000 | $ | 18,292,333 | ||
| Capital Commitment |
| Capital Contributed |
| (in thousands) |
| (in thousands) |
Adobe Ventures L.P. | $ 40,000 |
| $ 40,476 |
Adobe Ventures II, L.P. | $ 40,000 |
| $ 37,541 |
Adobe Ventures III, L.P. | $ 60,000 |
| $ 57,353 |
Adobe Ventures IV, L.P. | $ 100,000 |
| $ 35,418 |
The capital commitment is the amount that Adobe has agreed to contribute to the Partnership. The capital commitment amount is contributed over the term of each Partnership, which is ten years. We can contribute more than the capital commitment, at our discretion. We can cease funding at any time after the earlier of: a) two years after the effective date of the Partnership or b) the date on which the Company has made capital contributions to the Partnership in an amount in excess of $10.0 million, $10.0 million, $20.0 million, and $33.0 million for Adobe Ventures L.P., Adobe Ventures II, L.P., Adobe Ventures III, L.P., and Adobe Ventures IV, L.P., respectively.
In addition to these venture partnerships, we have direct investments in public and privately-held companies. In total, as of November 30, 2001,29, 2002, we have invested $194.9$213.9 million through our venture partnerships and direct investments. As of November 30, 2001,29, 2002, net returns were $354.3$348.7 million, including stock dividends and net gains in market value of investments.
44
Legal Actions
On September 3, 2002, Adobe filed suit in the U.S. District Court, Northern District of California ("the California Action"), against International Typeface Corporation ("ITC") and Agfa Monotype Corporation ("AMT"), companies which have common ownership and management, seeking a declaration that (a) Adobe's distribution of font software, which generates ITC typefaces, did not breach its contract pursuant to which Adobe licensed certain rights with respect to ITC typefaces, and (b) Adobe did not violate the Digital Millennium Copyright Act ("DMCA") with respect to, or induce or contribute to the infringement of copyrights in, ITC's and AMT's TrueType font software. AMT had previously asserted that Adobe had committed such breach of contract and violation of the DMCA.
On September 4, 2002, Adobe initiated arbitration proceedings in London, England ("the London Arbitration") against AMT, seeking a declaration that Adobe's distribution of font software that generates AMT typefaces did not breach its contract pursuant to which it licensed certain rights with respect to AMT typefaces. AMT has made a breach of contract claim in response to Adobe's arbitration demand in the London Arbitration, asserting that Adobe wrongfully granted and/or allowed third parties greater rights to distribute and embed AMT fonts than Adobe was licensed to grant and/or allow.
If AMT prevails on its breach of contract claims, AMT may have the right to terminate Adobe's right to distribute any of its products that then still contain font software that generates AMT typefaces. Adobe asserts that it negotiated for and obtained express, written licenses from both AMT and ITC approximately ten years ago permitting Adobe to allow end users to embed AMT and ITC fonts in electronic documents for "print and view" and disputes the other breach of contract claims. Adobe also asserts that Adobe Acrobat 5.0, which AMT and ITC correctly acknowledge has been superceded by version 5.05, neither violates the DMCA nor induces or contributes to the infringement of copyrights in ITC's and AMT's TrueType font software.
On September 5, 2002, AMT and ITC filed suit against Adobe in the U.S. District Court, Eastern District of Illinois ("the Illinois Action") against Adobe, asserting only that Adobe's distribution of the superceded 5.0 version of Adobe Acrobat violated the DMCA, as described above. The Illinois Action seeks statutory damages of $200-$2,500 for each copy of Acrobat 5.0 found to violate the DMCA, a claim that Adobe disputes as a matter of law and fact. The Illinois Action also seeks injunctive relief with respect to Acrobat 5.0, although it specifically alleges, correctly, that Adobe no longer distributes Acrobat 5.0.
On November 13, 2002, ITC filed another suit against Adobe in the United States District Court for the Eastern District of Illinois ("the Second Illinois Action"), this time asserting that Adobe breached its contract with ITC and that ITC, and not Adobe, owns the copyrights in font software created by Adobe which generates ITC typefaces.
AMT and ITC made a motion to dismiss the California action, challenging jurisdiction and venue. That motion was granted by the court on December 16, 2002. As such, the parties' respective claims will be resolved in the other actions described above.
The results of any litigation are inherently uncertain, and AMT and ITC may assert other claims. Adobe cannot assure that it will be able to successfully defend itself against any of the actions described above. AMT and ITC seek an unspecified aggregate dollar amount of damages. A favorable outcome for AMT or ITC in these actions could have a material adverse effect on Adobe's business, financial condition and operating results. We strongly believe that all of AMT's and ITC's claims are engagedwithout merit, and will vigorously defend against them in certain legal actions arisingaddition to pursuing our own claims as described above.
On September 6, 2002, Plaintiff Fred B. Dufresne filed suit against Adobe, Microsoft Corporation, Macromedia, Inc., and Trellix Corporation in the U.S. District Court, District of Massachusetts, alleging infringement of U.S. Patent No. 5,835,712, entitled "Client-Server System Using Embedded Hypertext Tags For Application And Database Development." The plaintiff's Complaint asserts that "Defendants have infringed, and continue to infringe one or more claims of the '712 patent by making, using, selling and/or offering for sale,inter alia, products supporting Microsoft Active Server Pages technology." The plaintiff seeks unspecified compensatory damages, preliminary and permanent injunctive relief, trebling of damages for "willful infringement," and fees and costs. Adobe strongly disagrees with the plaintiff's claims and intends to vigorously defend against this action.
On November 18, 2002, Plaintiffs Shell & Slate Software Corporation and Ben Weiss filed a civil action in the U.S. District Court in Los Angeles against the Company alleging false designation of origin, trade secret misappropriation, breach of contract, and other causes of action. The claim derives from the Plaintiffs' belief that the "healing brush" technique of Adobe Photoshop incorporates Plaintiffs' trade secrets. Plaintiffs seek preliminary and permanent injunctive relief, compensatory, treble, and punitive damages, and fees and costs. We believe that the action has no merit and intend to defend vigorously against it.
From time to time Adobe is involved in lawsuits, claims, investigations and proceedings, in addition to those identified above, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. We believeIn accordance with SFAS No. 5, Adobe makes a provision for a liability when it is both probable that we havea liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, Adobe believes that it has valid defenses with respect to the legal matters pending against it, as well as adequate legal defensesprovisions for any probable and estimable losses. It is possible, nevertheless, that cash flows or results of operations could be affected in any particular period by the ultimate outcomeresolution of one or m ore of these actions will not have a material adverse effect on our financial position and results of operations.contingencies.
Derivatives and Financial Instruments
(Item 7a. Quantitative and Qualitative Disclosures About Market Risk)
Foreign Currency Hedging Instruments
We transact business in various foreign currencies, primarily in certain European countries and Japan. Accordingly, we are subject to exposure from movements in foreign currency exchange rates. This exposure is primarily related to yen denominatedrevenue from yen-denominated licenses in Japan and beginning in fiscal 2001, euro denominatedeuro-denominated licenses in certain European countries.
Our Japanese operating expenses are in yen, and our European operating expenses are primarily in euro, which mitigates a portion of the exposure related to yen and euro denominated licenses. In addition, we hedge firmly committed transactions using forward contracts. We also hedge a percentage of forecasted international revenue with forward and purchased option contracts. At November 30, 2001, total outstanding contracts included $98.3 million in foreign currency forward exchange contracts and purchased put option contracts with a notional value of $82.3 million. All contracts expire at various times through May 2002. Our hedging policy is designed to reduce the impact of foreign currency exchange rate movements, and we expect any gain or loss in the hedging portfolio to be offset by a corresponding gain or loss in the underlying exposure being hedged. These contracts do subject us to risk of accounting gains and losses; however, the gains and losses on these contracts typically offset or partially offset gains and losses on the assets, liabilities, and transactions being hedged. We also hedge a percentage of forecasted international revenue with forward and purchased option contracts. Our revenue hedging policy is designed to reduce the negative impact on our forecasted revenue due to foreign currency exchange rate movements. At November 29, 2002, total outstanding contracts included the equivalent of $72.4 million in foreign currency forward exchange contracts and purchased put option contracts with a notional value of $65.2 million. As of November 29, 2002, all contracts were set to expi re at various times through June 2003. The bank counterparties in these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk we only contract with high quality counterparties with specific minimum rating requirements. In addition, our hedging policy establishes maximum limits for each counterparty.
Economic Hedging—Hedging -- Hedges of Forecasted Transactions
We use option and forward foreign exchange contracts to hedge certain operational ("cash flow") exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, may have a duration between threeone to twelve months. Such cash flow exposures result from portions of our forecasted revenues denominated in currencies other than the U.S. dollar, ("USD"), primarily the Japanese yen and the euro. We enter into these foreign exchange contracts to hedge forecasted product licensing revenue in the normal course of business, and accordingly, they are not speculative in nature.
We record changes in the fairintrinsic value of these cash flow hedges in accumulated other comprehensive income (loss), until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to interest and other income (loss) on the consolidated statement of income at that time. For the fiscal year ended November 30, 2001,29, 2002, there were no such net gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur.
The critical terms of the cash flow hedging instruments are the same as the underlying forecasted transactions. The changes in fair value of the derivatives are intended to offset changes in the expected cash flows from the forecasted transactions. We record any ineffective portion of the hedging instruments
45
in other income on the consolidated statement of income. The time value of purchased derivative instruments is deemed to be ineffective and is recorded in other income over the life of the contract.
Balance Sheet Hedging—Hedging - Hedging of Foreign Currency Assets and Liabilities
We hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as other income (loss). These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At November 30, 2001,29, 2002, the outstanding balance sheet hedging derivatives had maturities of 6090 days or less.
A sensitivity analysis was performed on all of our foreign exchange derivatives as of November 30, 2001.29, 2002. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value resulting from a 10% and 15% shift in the value of exchange rates relative to the U.S. dollar. A 10% and 15% increase in the value of the U.S. dollar (and a corresponding decrease in the value of the hedged foreign currency asset) would lead to an increase in the fair value of our financial hedging instruments by $16.0$12.1 million and $23.9$18.5 million, respectively. Conversely, a 10% and 15% decrease in the value of the U.S. dollar would result in a decrease in the fair value of these financial instruments by $12.5$9.0 million and $18.1$13.1 million, respectively.
We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates.
As a general rule, we do not use financial instruments to hedge local currency denominated operating expenses in countries where these expenses create a natural hedge exists.against foreign currency receivables. For example, in many countries revenue from the local currency product licenses substantially offsets the local currency denominated operating expenses. We assess the need to utilize financial instruments to hedge currency exposures, primarily related to operating expenses, on an ongoing basis.
We regularly review our hedging program and may as part of this review determine at any time to change our hedging program.
Equity Investments
We are exposed to equity price risk on our portfolio of marketable equity securities. As of November 30, 2001,29, 2002, our total equity holdings in publicly traded companies were valued at $37.8$14.1 million compared to $90.2$37.8 million at December 1, 2000,November 30, 2001, a decrease of 58%63%. We believe that it is reasonably possible that the fair values of these securities could experience further adverse changes in the near term. We have aIt is our policy in place to review our equity holdings on a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing each of the companies' cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership. If we believe that an other-than-temporary decline exists in one of our marketable equity securities, it is our policy to write down these equity investments to the market value and record the related writedown in our consolidated statementsstateme nts of income.
The following table represents the potential decrease in fair values of our marketable equity securities that are sensitive to changes in the stock market. Fair value deteriorations of minus 50%, 35%, and 15% were selected based on the probability of their occurrence.
46
----------------------------------------------------------------------------------------------------------------------- | |||||||
| (50%) |
| (35%) |
| (15%) |
| Fair Value as of November 29, 2002 |
-------------------------------- | --------- |
| -------------- |
| -------------- |
| ------------------------- |
Marketable equity securities | $ (7.0) |
| $ (4.9) |
| $ (2.1) |
| $14.1 |
-------------------------------- | --------- |
| -------------- |
| -------------- |
| ------------------------- |
Potential decrease to the value of securities given X% decrease in each stock's price
| | (50%) | (35%) | (15%) | Fair Value as of November 30, 2001 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Marketable equity securities | $ | (18.9 | ) | $ | (13.2 | ) | $ | (5.7 | ) | $ | 37.8 | |
Equity Forward Contracts
We also have a policy to hedge a certain portion of our equity holdings in publicly traded companies. From time to time, we have entered into forward contracts to sell portions of our equity holdings in future periods. We account for these forward contracts as "Fair Value Hedges," in accordance with SFAS 133 and mark them to market at the end of each period, offsetting changes in the fair market value of the equities being hedged. An increase (decrease) in the market value of the underlying equities will result in a corresponding decrease (increase) in the value of the forward contract. We have no outstanding forward contracts hedging marketable equity securities remaining as of November 30, 2001. As of December 1, 2000, the value of our forward contracts hedging equity securities was $10.7 million.
Fixed Income Investments
At November 30, 2001,29, 2002, we had an investment portfolio of fixed income securities, including those classified as cash equivalents, of $404.1$581.7 million compared to $369.7$521.8 million at December 1, 2000,November 30, 2001, an increase of 9%11%. These securities are subject to interest rate fluctuations. Changes in interest rates could adversely affect the market value of our fixed income investments.
A sensitivity analysis was performed on our investment portfolio as of November 30, 2001.29, 2002. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value changes that would result from a parallel shift in the yield curve of plus 50, 100, or 150 basis points over six-month and twelve-month time horizons.
Potential decrease to the value of fixed income securities given X% increase in interest rates.
------------------------------------------------------------------------------------------------------------------------ | ||||||
| 0.5% |
| 1.0% |
| 1.5% |
|
---------------------------------- | -------------------- |
| ------------------- |
| ------------------ |
|
6 - month horizon | $ (2.9) |
| $ (5.7) |
| $ (8.5) |
|
---------------------------------- | -------------------- |
| ------------------- |
| ------------------ |
|
12 - month horizon | $ (2.5) |
| $ (4.9) |
| $ (7.4) |
|
---------------------------------- | -------------------- |
| ------------------- |
| ------------------ |
|
| | 0.5% | 1.0% | 1.5% | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 6-month horizon | $ | (2.3 | ) | $ | (4.5 | ) | $ | (6.8 | ) | |
| 12-month horizon | $ | (2.1 | ) | $ | (4.1 | ) | $ | (6.2 | ) | |
We do not currently have any derivative financial instruments outstanding to manage interest rate risks. However, we have established policies and procedures to allow entering into derivative financial instruments to hedge interest rate risk if appropriate. We also limit our exposure to interest rate and credit risk by establishing and strictly monitoring clear policies and guidelines for our fixed income portfolios. At the present time, the maximum duration of all portfolios is limited to 2.3 years. The guidelines also establish credit quality standards, limits on exposure to any one security issue, limits on exposure to any one issuer, and limits on exposure to the type of instrument. Due to theThe limited duration and credit risk criteria established in our guidelines we do not expectreduce the exposure to interest rate risk and credit risk; however, dramatic changes to interest rates could result in material changes to the market value of our fixed income securities.
Interest Rate Hedging Instruments
We are exposed to interest rate risk on the operating lease obligations for some of our facilities that are tied to short-term interest rates (LIBOR). As short-term interest rates rise, it may negatively impact our net income. Our policy permits us to hedge this interest rate risk using swap agreements. The swap agreements exchange variable interest rate payments for fixed interest rate payments with high quality counterparties. Our swaps are designated as cash flow hedges under SFAS No. 133 because they hedge against changes in the amount of future cash flows. The critical terms of the cash flow hedging instruments are the same as the underlying obligation, so the change in fair value of the swaps is recognized in accumulated other comprehensive income. If, for some reason, the terms of the hedge no longer matched the underlying obligation, a portion of the swap may become ineffective. Under SFAS No. 133, the change in value of the ineffective portion would be material.recognized in other income (loss) on the consolidated statement of income.
Our swaps mature at various dates through the third quarter of fiscal 2004, consistent with the expiration of the underlying obligation.
A sensitivity analysis was performed on our interest rate hedges as of November 29, 2002. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value changes that would result from a parallel shift in the yield curve of minus 50, 100, or 150 basis points over six-month and twelve-month time horizons.
---------------------------------------------------------------------------------------------------------------------- | ||||||
| 0.5% |
| 1.0% |
| 1.5% |
|
---------------------------------- | ------------------- |
| ------------------ |
| ------------------ |
|
6 - month horizon | $ (0.7) |
| $ (1.5) |
| $ (2.2) |
|
---------------------------------- | ------------------- |
| ------------------ |
| ------------------ |
|
12 - month horizon | $ (0.5) |
| $ (1.0) |
| $ (1.4) |
|
---------------------------------- | ------------------- |
| ------------------ |
| ------------------ |
|
Privately Held Investments
We have direct investments, as well as indirect investments through Adobe Ventures, 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 technologies or products they have under development are typically in the early stages and may never materialize, and we could lose a substantial part of our entire initial investment in these companies.
47
We have aIt is our policy in place to review privately-held investments on a regular basis to evaluate the carrying amount and economic viability of 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. publicpublicly traded 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 an investment 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.
Facility Leases
We are exposed to interest rate risk associated with leases of our facilities whose payments are tied to the LIBOR and have evaluated the hypothetical changes in lease obligations arising from selected hypothetical changes in LIBOR. Market changes reflected immediate hypothetical parallel increases in the LIBOR curve of plus or minus 50, 100, and 150 basis points for a twelve-month period. Based on this analysis, such charges would not be material to our results of operations or financial position.
Item 8. Financial Statements and Supplementary Data
Our financial statements required by this item are submitted as a separate section of this Form 10-K. See Item 1415 (a)(1) for a listing of financial statements provided in the section titled "FINANCIAL STATEMENTS".
48
The following tables (presented in thousands, except per share amounts) set forth quarterly supplementary data for each of the years in the two-year period ended November 30, 2001. All share29, 2002.
|
| 2002 |
| ||||||||
|
| Quarter Ended |
| Year Ended |
| ||||||
|
| Mar. 1 |
| May 31 |
| Aug. 30 |
| Nov. 29 |
| Nov. 29 |
|
|
| ----------- |
| ----------- |
| ----------- |
| ---------- |
| ----------- |
|
Revenue |
| $267,896 |
| $317,359 |
| $284,879 |
| $294,654 |
| $1,164,788 |
|
Gross profit |
| 246,899 |
| 292,226 |
| 253,243 |
| 268,132 |
| 1,060,500 |
|
Income before income taxes |
| 73,247 |
| 79,855 |
| 69,413 |
| 62,174 |
| 284,689 |
|
Net income (1) |
| 49,808 |
| 54,301 |
| 47,201 |
| 40,089 |
| 191,399 |
|
Basic net income per share (1) |
| 0.21 |
| 0.23 |
| 0.20 |
| 0.17 |
| 0.81 |
|
Shares used in computing basic net income per share |
| 236,581 |
| 238,202 |
| 238,010 |
| 233,838 |
| 236,834 |
|
Diluted net income per share |
| 0.20 |
| 0.22 |
| 0.19 |
| 0.17 |
| 0.79 |
|
Shares used in computing diluted net income per share |
| 245,245 |
| 247,687 |
| 243,375 |
| 238,407 |
| 243,119 |
|
|
| 2001 |
| ||||||||
|
| Quarter Ended |
| Year Ended |
| ||||||
|
| Mar. 2 |
| June 1 |
| Aug. 31 |
| Nov. 30 |
| Nov. 30 |
|
------------ | ----------- | ----------- | ---------- | ----------- | |||||||
Revenue |
| $328,969 |
| $344,093 |
| $292,118 |
| $264,540 |
| $1,229,720 |
|
Gross profit |
| 308,953 |
| 321,734 |
| 272,077 |
| 245,505 |
| 1,148,269 |
|
Income before income taxes |
| 104,113 |
| 91,500 |
| 60,140 |
| 51,178 |
| 306,931 |
|
Net income (2) |
| 69,756 |
| 61,305 |
| 40,294 |
| 34,289 |
| 205,644 |
|
Basic net income per share (2) |
| 0.29 |
| 0.26 |
| 0.17 |
| 0.15 |
| 0.86 |
|
Shares used in computing basic net income per share |
| 240,078 |
| 238,163 |
| 238,051 |
| 236,361 |
| 238,461 |
|
Diluted net income per share |
| 0.28 |
| 0.25 |
| 0.16 |
| 0.14 |
| 0.83 |
|
Shares used in computing diluted net income per share |
| 253,609 |
| 250,127 |
| 248,566 |
| 243,411 |
| 249,145 |
|
(1) In 2002, net income and net income per share amounts referred to inincludes the table below have been adjusted to reflectfollowing: the two-for-one stock split infirst quarter includes investment gain of $4.5 million, acquired in-process research and development of $5.4 million, and amortization of goodwill and purchased intangibles of $3.5 million; the formsecond quarter includes investment loss of a stock dividend$13.7 million, restructuring and other charges of our common stock effected October 24, 2000.$1.6 million, acquired in-process research and development of $0.4 million, and amortization of goodwill and purchased intangibles of $3.5 million; the third quarter includes investment loss of $4.2 million and amortization of goodwill and purchased intangibles of $3.5 million; the fourth quarter includes investment loss of $3.8 million, restructuring and other charges of $10.5 million, and amortization and impairment of goodwill and purchased intangibles of $10.4 million. The numbers presented above are pretax amounts.
| | 2001 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Quarter Ended | | |||||||||||||
| | Year Ended Nov. 30 | ||||||||||||||
| | Mar. 2 | June 1 | Aug. 31 | Nov. 30 | |||||||||||
| Revenue | $ | 328,969 | $ | 344,093 | $ | 292,118 | $ | 264,540 | $ | 1,229,720 | |||||
| Gross profit | 308,953 | 321,734 | 272,077 | 245,505 | 1,148,269 | ||||||||||
| Income before income taxes | 104,113 | 91,500 | 60,140 | 51,178 | 306,931 | ||||||||||
| Net income(1) | 69,756 | 61,305 | 40,294 | 34,289 | 205,644 | ||||||||||
| Basic net income per share(1) | 0.29 | 0.26 | 0.17 | 0.15 | 0.86 | ||||||||||
| Shares used in computing basic net income per share | 240,078 | 238,163 | 238,051 | 236,361 | 238,461 | ||||||||||
| Diluted net income per share | 0.28 | 0.25 | 0.16 | 0.14 | 0.83 | ||||||||||
| Shares used in computing diluted net income per share | 253,609 | 250,127 | 248,566 | 243,411 | 249,145 | ||||||||||
| | 2000 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Quarter Ended | | |||||||||||||
| | Year Ended Dec. 1 | ||||||||||||||
| | Mar. 3 | June 2 | Sep. 1 | Dec. 1 | |||||||||||
| Revenue | $ | 282,232 | $ | 300,085 | $ | 328,867 | $ | 355,194 | $ | 1,266,378 | |||||
| Gross profit | 261,510 | 279,481 | 305,199 | 332,933 | 1,179,123 | ||||||||||
| Income before income taxes | 99,331 | 101,195 | 120,429 | 122,785 | 443,739 | ||||||||||
| Net income(2) | 64,565 | 65,777 | 78,270 | 79,196 | 287,808 | ||||||||||
| Basic net income per share(2) | 0.27 | 0.28 | 0.33 | 0.33 | 1.21 | ||||||||||
| Shares used in computing basic net income per share | 237,256 | 237,516 | 238,464 | 239,640 | 238,292 | ||||||||||
| Diluted net income per share | 0.26 | 0.26 | 0.31 | 0.31 | 1.13 | ||||||||||
| Shares used in computing diluted net income per share | 252,978 | 255,348 | 255,828 | 257,294 | 255,774 | ||||||||||
(2) In 2001, net income and net income per share includes the following: first quarter includes investment loss of $17.0 million and amortization of goodwill and purchased intangibles of $3.6 million; the second quarter includes investment loss of $31.0 million and amortization of goodwill and purchased intangibles of $3.6 million; the third quarter includes investment loss of $39.4 million and amortization of goodwill and purchased intangibles of $3.6 million; the fourth quarter includes investment loss of $5.9 million, restructuring and other charges of $12.1 million, and amortization of goodwill and purchased intangibles of $3.6 million.
49 The numbers presented above are pretax amounts.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 10.10 Directors and Executive Officers of the Registrant
For information regarding our Directors and compliance with Section 16(a) of the Securities Exchange Act of 1934, we direct you to the sections entitled "Proposal 1—1 -- Election of Directors," and "Section 16(a) Beneficial Ownership Reporting Compliance," respectively, in the Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on April 11, 2002.9, 2003. Information regarding our Executive Officers is contained in Item 1, Business"Business," of this report.
We are incorporating the information contained in those sections of our Proxy Statement here by reference.
Item 11. Executive Compensation
For information regarding our Executive Compensation, we direct you to the section entitled "Executive Compensation" in the Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on April 11, 2002.9, 2003.
We are incorporating the information contained in that section of our Proxy Statement here by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
You will find this information in the section captioned "Security Ownership of Certain Beneficial Owners and Management," which will appear in the Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on April 11, 2002.9, 2003. We are incorporating that information here by reference.
Item 13. Certain Relationships and Related Transactions
During fiscal 1999, we entered into two separate loan agreements with Graham Freeman, an executive officer, to assist with his relocation to San Jose, California. The first loan in the amount of $550,000, with an interest rate of 8.25% per annum, was repaid on December 31, 1999. The second loan, in the amount of $1.0 million, is interest-free and is secured by Mr. Freeman's principal residence. Under the terms of the agreement, Mr. Freeman is required to repay this loan at $200,000 per year over the five years beginning December 2000. His second payment was made in December 2001, leaving a balance of $600,000 as of January 25, 2002. The loan was amended in November 2001 in connection with Mr. Freeman's resignation from the Company to include an agreement by the Company that it would not exercise its right to accelerate the payment of unpaid principal because of Mr. Freeman's termination of employment. The Company reserved the right to accelerate payment for any other reason authorized by the agreement.
Also in connection with Mr. Freeman's resignation from his employment with us, which was effective November 30, 2001, we entered into an agreement with him to: (i) pay him a lump sum equal to his total target compensation (base pay and management incentive plan bonuses) for twelve (12) months, (ii) pay for his COBRA premiums until the earlier of November 1, 2002 or the date he receives coverage under another group health insurance plan, and (iii) allow him to keep his laptop computer. We also amended his loan agreement with us, as described in the previous paragraph. In addition, he remained eligible for any bonuses earned through his resignation date, although no bonuses were earned or paid.
Adobe hashave entered into indemnity agreements with certain officers and directors which provide, among other things, that Adobewe will indemnify such officer or director, under the circumstances and to the
50
extent provided for in the agreements, for expenses, damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings which he or she is or may be made a party to by reason of his or her position as a director, officer or other agent of Adobe, and otherwise to the full extent permitted under Delaware law and Adobe'sour Bylaws.
Item 14. Controls and Procedures
(a) Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended, within the 90 day period prior to the filing date of this report. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of that date.
(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.
PART IV
Item 14.15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)
1.
2.
51
(a)(b) Index to Exhibits
| | | Incorporated by Reference | | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Exhibit Number | | Filed Herewith | ||||||||
| Exhibit Description | Form | Date | Number | |||||||
| 3.2.11 | Amended and Restated Bylaws as currently in effect | 10-Q | 7/16/01 | 3.2.11 | ||||||
| 3.4 | Agreement and Plan of Merger effective 5/30/97 (by virtue of a reincorporation), by and between Adobe Systems Incorporated, a California corporation and Adobe Systems (Delaware) Incorporated, a Delaware corporation | 10-Q | 05/30/97 | 2.1 | ||||||
| 3.6 | Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on 5/22/01 | 10-Q | 7/16/01 | 3.6 | ||||||
| 4.2 | Fourth Amended and Restated Agreement between the Company and Computershare Investor Services, LLC | 8-K | 7/3/00 | 1 | ||||||
| 10.1.6 | 1984 Stock Option Plan, as amended* | 10-Q | 07/02/93 | 10.1.6 | ||||||
| 10.21.3 | Revised Bonus Plan* | 10-Q | 02/28/97 | 10.21.3 | ||||||
| 10.23 | Amended 1994 Performance and Restricted Stock Plan* | 10-Q | 05/29/98 | 10.24.2 | ||||||
| 10.24 | 1994 Stock Option Plan* | 10-Q | 5/27/94 | 10.1.7 | ||||||
| 10.25 | 1994 Stock Option Plan, as amended* | S-8 | 05/30/97 | 10.40 | ||||||
| 10.26 | 1997 Employee Stock Purchase Plan, as amended* | 10-K | 12/1/00 | 10.70 | ||||||
| 10.27 | Amended 1997 Employee Stock Purchase Plan* | S-8 | 6/21/99 | 10.51 | ||||||
| 10.28 | 1996 Outside Directors Stock Option Plan* | 10-Q | 05/31/96 | 10.36 | ||||||
| 10.29 | 1996 Outside Directors' Stock Option Plan, as amended* | S-8 | 6/16/00 | 4.7 | ||||||
| 10.30 | Forms of Stock Option Agreements used in connection with the 1996 Outside Directors' Stock Option Plan* | S-8 | 6/16/00 | 4.8 | ||||||
| 10.31 | 1996 Outside Directors Stock Option Plan, as amended* | 10-Q | 7/16/01 | 10.75 | ||||||
| 10.32 | 1999 Nonstatutory Stock Option Plan* | S-8 | 9/15/99 | 4.6 | ||||||
| 10.33 | 1999 Nonstatutory Stock Option Plan, as amended* | S-8 | 12/22/00 | 4.6 | ||||||
| 10.34 | 1999 Nonstatutory Stock Option Plan, as amended* | S-8 | 3/15/01 | 4.7 | ||||||
| 10.35 | 1999 Nonstatutory Stock Option Plan, as amended* | S-8 | 10/29/01 | 4.6 | ||||||
| 10.40 | Form of Indemnity Agreement* | 10-K | 11/30/90 | 10.17.2 | ||||||
| 10.41 | Form of Indemnity Agreement* | 10-Q | 05/30/97 | 10.25.1 | ||||||
| 10.42 | Amended and Restated Limited Partnership Agreement of Adobe Incentive Partners, L.P.* | 10-Q | 8/28/98 | 10.42 | ||||||
| 10.43 | Amendment to Limited Partnership Agreement of Adobe Incentive Partners, L.P.* | 10-Q | 6/4/99 | 10.52 | ||||||
52
Exhibit |
| Exhibit Description |
| Incorporated by Reference |
| Filed |
| ||||
|
| Form |
| Date |
| Number |
|
| |||
3.2 |
| Amended and Restated Bylaws as currently in effect |
|
|
|
|
|
|
| X |
|
3.4 |
| Agreement and Plan of Merger effective 5/30/97 (by virtue of a reincorporation), by and between Adobe Systems Incorporated, a California corporation and Adobe Systems (Delaware) Incorporated, a Delaware corporation |
| 10-Q |
| 05/30/97 |
| 2.1 |
|
|
|
3.6 |
| Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on 5/22/01 |
| 10-Q |
| 7/16/01 |
| 3.6 |
|
|
|
4.2 |
| Fourth Amended and Restated Rights Agreement between the Company and Computershare Investor Services, LLC |
| 8-K |
| 7/3/00 |
| 1 |
|
|
|
10.1.6 |
| 1984 Stock Option Plan, as amended* |
| 10-Q |
| 07/02/93 |
| 10.1.6 |
|
|
|
10.21.3 |
| Revised Bonus Plan* |
| 10-Q |
| 02/28/97 |
| 10.21.3 |
|
|
|
10.23 |
| Amended 1994 Performance and Restricted Stock Plan* |
| 10-Q |
| 05/29/98 |
| 10.24.2 |
|
|
|
10.24 |
| 1994 Stock Option Plan* |
| 10-Q |
| 5/27/94 |
| 10.1.7 |
|
|
|
10.25 |
| 1994 Stock Option Plan, as amended* |
| S-8 |
| 05/30/97 |
| 10.40 |
|
|
|
10.26 |
| 1997 Employee Stock Purchase Plan, as amended* |
| 10-K |
| 12/1/00 |
| 10.70 |
|
|
|
10.28 |
| 1996 Outside Directors Stock Option Plan* |
| 10-Q |
| 05/31/96 |
| 10.36 |
|
|
|
10.29 |
| 1996 Outside Directors' Stock Option Plan, as amended* |
| S-8 |
| 6/16/00 |
| 4.7 |
|
|
|
10.30 |
| Forms of Stock Option Agreements used in connection with the 1996 Outside Directors' Stock Option Plan* |
| S-8 |
| 6/16/00 |
| 4.8 |
|
|
|
10.31 |
| 1996 Outside Directors Stock Option Plan, as amended* |
| 10-Q |
| 7/16/01 |
| 10.75 |
|
|
|
10.32 |
| 1996 Outside Directors' Stock Option Plan, as amended |
| S-8 |
| 6/14/02 |
| 4.6 |
|
|
|
10.33 |
| 1999 Nonstatutory Stock Option Plan* |
| S-8 |
| 9/15/99 |
| 4.6 |
|
|
|
10.34 |
| 1999 Nonstatutory Stock Option Plan, |
| S-8 |
| 12/22/00 |
| 4.6 |
|
|
|
10.35 |
| 1999 Nonstatutory Stock Option Plan, as amended* |
| S-8 |
| 3/15/01 |
| 4.7 |
|
|
|
10.36 |
| 1999 Nonstatutory Stock Option Plan, as amended* |
| S-8 |
| 10/29/01 |
| 4.6 |
|
|
|
10.37 |
| 1999 Equity Incentive Plan, as amended* |
|
|
|
|
|
|
| X |
|
10.41 |
| Form of Indemnity Agreement* |
| 10-Q |
| 05/30/97 |
| 10.25.1 |
|
|
|
10.42 |
| Amended and Restated Limited |
| 10-Q |
| 8/28/98 |
| 10.42 |
|
|
|
10.43 |
| Amendment to Limited Partnership Agreement of Adobe Incentive Partners, L.P.* |
| 10-Q |
| 6/4/99 |
| 10.52 |
|
|
|
10.44 |
| Adobe Incentive Partners, L.P. Consent to Dissolve and Terminate Partnership* |
|
|
|
|
|
|
| X |
|
10.45 |
| Forms of Retention Agreement* |
| 10-K |
| 11/28/97 |
| 10.44 |
|
|
|
10.53 |
| Amended, Restated and Consolidated Master Lease of Land and Improvements by and between Sumitomo Bank Leasing and Finance, Inc. and Adobe Systems Incorporated |
| 10-Q |
| 9/3/99 |
| 10.53 |
|
|
|
10.54 |
| Credit Agreement among Adobe Systems Incorporated, Lenders named therein and ABN AMRO Bank N.V., as Administrative Agent, with certain related Credit Documents |
| 10-Q |
| 9/3/99 |
| 10.54 |
|
|
|
10.56 |
| Note Secured by Deed of Trust and Promissory Note* |
| 10-K |
| 12/3/99 |
| 10.56 |
|
|
|
10.66 |
| Credit Agreement among Adobe Systems Incorporated, Lenders Named therein and ABN Amro Bank N.V., as Administrative Agent, with Certain Related Credit Documents |
| 10-Q |
| 9/1/00 |
| 10.66 |
|
|
|
10.67 |
| Amendment No. 1 to 1999 Credit Agreement among Adobe Systems Incorporated, Lenders Named Therein and ABN Amro Bank N.V., as Administrative Agent, with Certain Related Credit Documents |
| 10-Q |
| 9/1/00 |
| 10.67 |
|
|
|
10.68 |
| Amendment No. 1 to Amended, Restated and Consolidated Master Lease of Land and Improvements between Adobe Systems Incorporated and Sumitomo Bank Leasing and Finance, Inc. |
| 10-Q |
| 7/16/01 |
| 10.68 |
|
|
|
10.69 |
| Amendment No. 2 to Amended, Restated, and Consolidated Master Lease of Land and Improvements between Adobe Systems Incorporated and Sumitomo Bank Leasing and Finance, Inc. |
| 10-Q |
| 9/1/00 |
| 10.68 |
|
|
|
10.77 |
| Lease agreement between Adobe Systems and Selco Service Corporation |
| 10-K |
| 2/21/02 |
| 10.77 |
|
|
|
10.78 |
| Participation agreement among Adobe Systems, Selco Service Corporation, et al. |
| 10-K |
| 2/21/02 |
| 10.78 |
|
|
|
10.79 |
| Confidential Resignation Agreement* |
| 10-K |
| 2/21/02 |
| 10.79 |
|
|
|
10.80 |
| Executive Severance Plan in the Event of a Change of Control* |
| 10-K |
| 2/21/02 |
| 10.80 |
|
|
|
10.81 |
| Amendment No.1 to Lease Agreement between Adobe and Selco Services Corporation |
|
|
|
|
|
|
| X |
|
21 |
| Subsidiaries of the Registrant |
|
|
|
|
|
|
| X |
|
23 |
| Consent of KPMG LLP |
|
|
|
|
|
|
| X |
|
99.1 |
| Certification of Chief Executive Officer |
|
|
|
|
|
|
| X |
|
99.2 |
| Certification of Chief Financial Officer |
|
|
|
|
|
|
| X |
|
| 10.44 | Forms of Retention Agreement* | 10-K | 11/28/97 | 10.44 | ||||||
| 10.48 | Letter of Release and Waiver* | 10-K | 11/27/98 | 10.48 | ||||||
| 10.53 | Amended, Restated and Consolidated Master Lease of Land and Improvements by and between Sumitomo Bank Leasing and Finance, Inc. and Adobe Systems Incorporated | 10-Q | 9/3/99 | 10.53 | ||||||
| 10.54 | Credit Agreement among Adobe Systems Incorporated, Lenders named therein and ABN AMRO Bank N.V., as Administrative Agent, with certain related Credit Documents | 10-Q | 9/3/99 | 10.54 | ||||||
| 10.56 | Note Secured by Deed of Trust and Promissory Note* | 10-K | 12/3/99 | 10.56 | ||||||
| 10.66 | Credit Agreement among Adobe Systems Incorporated, Lenders Named therein and ABN Amro Bank N.V., as Administrative Agent, with Certain Related Credit Documents | 10-Q | 9/1/00 | 10.66 | ||||||
| 10.67 | Amendment No. 1 to 1999 Credit Agreement among Adobe Systems Incorporated, Lenders Named Therein and ABN Amro Bank N.V., as Administrative Agent, with Certain Related Credit Documents | 10-Q | 9/1/00 | 10.67 | ||||||
| 10.68 | Amendment No. 1 to Amended, Restated and Consolidated Master Lease of Land and Improvements between Adobe Systems Incorporated and Sumitomo Bank Leasing and Finance, Inc. | 10-Q | 7/16/01 | 10.68 | ||||||
| 10.69 | Amendment No. 2 to Amended, Restated, and Consolidated Master Lease of Land and Improvements between Adobe Systems Incorporated and Sumitomo Bank Leasing and Finance, Inc. | 10-Q | 9/1/00 | 10.68 | ||||||
| 10.77 | Lease agreement between Adobe Systems and Selco Service Corporation | X | ||||||||
| 10.78 | Participation agreement among Adobe Systems, Selco Service Corporation, et al. | X | ||||||||
| 10.79 | Confidential Resignation Agreement* | X | ||||||||
| 10.80 | Executive Severance Plan in the Event of a Change of Control* | X | ||||||||
| 21 | Subsidiaries of the Registrant | X | ||||||||
| 23 | Consent of KPMG LLP | X |
______________
*
53(c) Reports on Form 8-K
Date of Report |
| Filing Date | Item Reported | ||
October 15, 2002 | October 15, 2002 | 5 |
On October 15, 2002, we filed a report on Form 8-K under Item 5 in compliance with Commission Order 4-460 requiring the filing of sworn statements pursuant to Section 21(a)(1) of the Exchange Act of 1934.
We will furnish any exhibit listed above that is not included here. You must specifically request the exhibit you would like to receive and pay our reasonable expenses in furnishing it to you. You should call or write:
Investor Relations Department
345 Park Avenue
San Jose, CA 95110-2704
408-536-4416
Fax 408-537-4034
E-mail: ir@adobe.com
Many of the above exhibits are also available through our EDGAR filings atwww.sec.gov.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ADOBE SYSTEMS INCORPORATED | |||
By: | /s/ Demo | ||
Murray J. Demo, |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 21st26th day of February, 2002.2003.
Signature | |||
Title | |||
/s/ John E. Warnock | |||
John E. Warnock | Chairman of the Board of Directors | ||
/s/ Charles M. Geschke | |||
Charles M. Geschke | Chairman of the Board of Directors | ||
/s/ Bruce R. Chizen | |||
Bruce R. Chizen | Director, President and Chief Executive Officer | ||
/s/ Carol Mills Baldwin | |||
Carol Mills Baldwin | Director | ||
/s/ James E. Daley | |||
James E. Daley | Director | ||
/s/ Colleen M. Pouliot | |||
Colleen M. Pouliot | Director | ||
/s/ Robert Sedgewick | |||
Robert Sedgewick | Director | ||
/s/ Delbert W. Yocam | |||
Delbert W. Yocam | Director | ||
/s/ Murray J. Demo | |||
Murray J. Demo | Senior Vice President and Chief Financial Officer |
55
I, Bruce R. Chizen, Chief Executive Officer of the registrant, certify that:
1. I have reviewed this annual report on Form 10-K of Adobe Systems Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: February 26, 2003/s/ BRUCE R. CHIZEN
Bruce R. Chizen
Chief Executive Officer
I, Murray J. Demo, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this annual report on Form 10-K of Adobe Systems Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: February 26, 2003/s/ MURRAY J. DEMO
Murray J. Demo
Chief Financial Officer
SUMMARY OF TRADEMARKS
The following trademarks of Adobe Systems Incorporated or its subsidiaries, which may be registered in certain jurisdictions, are referenced in this Form 10-K:
Adobe
Acrobat
Acrobat Capture
Acrobat eBook Reader
Acrobat Reader
Acrobat MessengerActiveShareAdobe Dimensions
Adobe Font Folio
Adobe PhotoDeluxe
Adobe Premiere
Adobe Studio
Adobe Type Manager
After Effects
AlterCast
Atmosphere
Distiller
ePaper
Extreme
FrameMaker
GoLive
Illustrator
InCopy
InDesignInProduction
LiveMotion
PageMakerPageMill
PDF TransitPhotomerge
Photoshop
PostScriptPostScript 3
PressReadyStreamline
All other brand or product names are trademarks or registered trademarks of their respective holders.
As required under Item 8. Financial Statements and Supplementary Data, Adobe's consolidated financial statements are provided in this separate section. The consolidated financial statements included in this section are as follows:
Page |
Independent Auditors' Report | 70 | |||
Consolidated Balance Sheets | 71 | |||
Consolidated Statements of Income | 72 | |||
Consolidated Statements of Stockholders' Equity and Other | 73 | |||
Consolidated Statements of Cash Flows | 75 | |||
Notes to Consolidated Financial Statements | 77 |
57
Management is responsible for all the information and representations contained in the consolidated financial statements and other sections of thisForm 10-K. Management believes that the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances to reflect, in all material respects, the substance of events and transactions that should be included, and that the other information in thisForm 10-K is consistent with those statements. In preparing the consolidated financial statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being accounted for.
In meeting its responsibility for the reliability of the consolidated financial statements, management depends on the Company's system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization, and are recorded properly to permit the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. In designing control procedures, management recognizes that errors or irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. Management believes that the Company's accounting controls provide reasonable assurance that errors or irregularities that could be material to the consolidated financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions.
The Board of Directors pursues its oversight role for these consolidated financial statements through the Audit Committee, which is comprised solely of Directors who are not officers or employees of the Company. The Audit Committee meets with management periodically to review their work and to monitor the discharge of each of their responsibilities. The Audit Committee also meets periodically with KPMG LLP, the independent auditors, who have free access to the Audit Committee or the Board of Directors, without management present, to discuss internal accounting control, auditing, and financial reporting matters.
KPMG LLP is engaged to express an opinion on our consolidated financial statements. Their opinion is based on procedures believed by them to be sufficient to provide reasonable assurance that the consolidated financial statements are not materially misleading and do not contain material errors.
58
To the Board of Directors and Stockholders of Adobe Systems Incorporated:
We have audited the accompanying consolidated financial statements of Adobe Systems Incorporated and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adobe Systems Incorporated and subsidiaries as of November 29, 2002 and November 30, 2001, and December 1, 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended November 30, 2001,29, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Mountain View, California
December 11, 200110, 2002
59
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| | November 30, 2001 | December 1, 2000 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| ASSETS | |||||||||
| Current assets: | |||||||||
| Cash and cash equivalents | $ | 218,662 | $ | 236,866 | |||||
| Short-term investments | 362,951 | 442,987 | |||||||
| Trade receivables, net of allowances for doubtful accounts of $10,099 and $8,788, respectively | 124,106 | 140,514 | |||||||
| Other receivables | 18,299 | 19,599 | |||||||
| Deferred income taxes | 22,726 | 23,460 | |||||||
| Other current assets | 20,620 | 14,486 | |||||||
| Total current assets | 767,364 | 877,912 | |||||||
| Property and equipment, net | 80,993 | 64,268 | |||||||
| Other assets | 70,672 | 127,236 | |||||||
| Deferred income taxes, long-term | 11,594 | — | |||||||
| $ | 930,623 | $ | 1,069,416 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
| Current liabilities: | |||||||||
| Trade and other payables | $ | 30,891 | $ | 40,280 | |||||
| Accrued expenses | 119,258 | 181,861 | |||||||
| Accrued restructuring charges | 9,573 | — | |||||||
| Income taxes payable | 132,228 | 74,768 | |||||||
| Deferred revenue | 21,701 | 17,696 | |||||||
| Total current liabilities | 313,651 | 314,605 | |||||||
| Deferred income taxes | — | 2,267 | |||||||
| Stockholders' equity: | |||||||||
| Preferred stock, $0.0001 par value; 2,000 shares authorized; none issued | — | — | |||||||
| Common stock, $0.0001 par value; Authorized: 900,000 shares; Issued: 295,764 shares in 2001 and 2000; and additional paid-in capital | 625,386 | 530,801 | |||||||
| Retained earnings | 1,366,205 | 1,172,504 | |||||||
| Accumulated other comprehensive income (loss) | 3,918 | (698 | ) | ||||||
| Treasury stock, at cost (59,745 and 54,818 shares in 2001 and 2000, respectively), net of reissuances | (1,378,537 | ) | (950,063 | ) | |||||
| Total stockholders' equity | 616,972 | 752,544 | |||||||
| $ | 930,623 | $ | 1,069,416 | ||||||
|
| November 29, |
| November 30, |
|
----------- | ------------ | ||||
ASSETS |
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash and cash equivalents |
| $183,684 |
| $218,662 |
|
Short-term investments |
| 434,053 |
| 362,951 |
|
Trade receivables, net of allowances for doubtful accounts of $7,531 and $8,549, respectively |
| 116,506 |
| 125,656 |
|
Other receivables |
| 30,367 |
| 18,299 |
|
Deferred income taxes |
| 31,530 |
| 22,726 |
|
Other current assets |
| 18,032 |
| 20,620 |
|
---------------- | ---------------- | ||||
Total current assets |
| 814,172 |
| 768,914 |
|
Property and equipment, net |
| 71,090 |
| 77,611 |
|
Goodwill and other intangible assets, net |
| 99,772 |
| 36,402 |
|
Other assets |
| 42,126 |
| 37,652 |
|
Deferred income taxes, long-term |
| 24,450 |
| 11,594 |
|
---------------- | ---------------- | ||||
|
| $1,051,610 |
| $932,173 |
|
======== | ======== | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Trade and other payables |
| $37,765 |
| $30,891 |
|
Accrued expenses |
| 135,028 |
| 130,381 |
|
Income taxes payable |
| 173,311 |
| 132,228 |
|
Deferred revenue |
| 31,185 |
| 21,701 |
|
|
| ---------------- |
| ---------------- |
|
Total current liabilities |
| 377,289 |
| 315,201 |
|
|
| ---------------- |
| ---------------- |
|
|
|
|
|
|
|
Commitments and contingencies |
| --- |
| --- |
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
Preferred stock, $0.0001 par value; 2,000 shares authorized; none issued |
| --- |
| --- |
|
Common stock, $0.0001 par value; Authorized: 900,000 shares; Issued: 295,764 shares in 2002 and 2001 |
| 29,576 |
| 29,576 |
|
Additional paid-in capital |
| 710,273 |
| 595,810 |
|
Retained earnings |
| 1,545,776 |
| 1,366,205 |
|
Accumulated other comprehensive income (loss) |
| (3,950 | ) | 3,918 |
|
Treasury stock, at cost (63,809 and 59,745 shares in 2002 and 2001, respectively), net of reissuances |
| (1,607,354 | ) | (1,378,537 | ) |
---------------- | ---------------- | ||||
Total stockholders' equity |
| 674,321 |
| 616,972 |
|
---------------- | ---------------- | ||||
|
| $1,051,610 |
| $ 932,173 |
|
======== | ======== |
See accompanying Notes to Consolidated Financial Statements.
60
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| | Years Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | November 30, 2001 | December 1, 2000 | December 3, 1999 | |||||||
| Revenue | $ | 1,229,720 | $ | 1,266,378 | $ | 1,015,434 | ||||
| Direct costs | 81,451 | 87,255 | 94,540 | |||||||
| Gross profit | 1,148,269 | 1,179,123 | 920,894 | |||||||
Operating expenses: | ||||||||||
| Research and development | 224,122 | 240,212 | 197,476 | |||||||
| Sales and marketing | 403,720 | 401,188 | 328,505 | |||||||
| General and administrative | 115,626 | 116,528 | 103,622 | |||||||
| Restructuring and other charges | 12,063 | 5,629 | 23,028 | |||||||
| Amortization of goodwill and purchased intangibles | 14,281 | 7,013 | 4,830 | |||||||
| Acquired in-process research and development | — | 470 | 3,580 | |||||||
| Total operating expenses | 769,812 | 771,040 | 661,041 | |||||||
Operating income | 378,457 | 408,083 | 259,853 | |||||||
Nonoperating income (loss), net: | ||||||||||
| Investment gain (loss), net | (93,414 | ) | 14,345 | 88,891 | ||||||
| Interest and other income | 21,888 | 21,311 | 25,683 | |||||||
| Total nonoperating income (loss), net | (71,526 | ) | 35,656 | 114,574 | ||||||
| Income before income taxes | 306,931 | 443,739 | 374,427 | |||||||
| Income tax provision | 101,287 | 155,931 | 136,676 | |||||||
Net income | $ | 205,644 | $ | 287,808 | $ | 237,751 | ||||
Basic net income per share | $ | 0.86 | $ | 1.21 | $ | 0.98 | ||||
Shares used in computing basic net income per share | 238,461 | 238,292 | 241,572 | |||||||
Diluted net income per share | $ | 0.83 | $ | 1.13 | $ | 0.92 | ||||
Shares used in computing diluted net income per share | 249,145 | 255,774 | 258,410 | |||||||
|
| Years Ended |
| ||||
|
| November 29, |
| November 30, |
| December 1, |
|
----------- | ----------- | ------------ | |||||
Revenue: | |||||||
Products | $1,153,169 | $1,229,720 | $1,266,378 | ||||
Services and support | 11,619 | --- | --- | ||||
----------- | ----------- | ------------ | |||||
Total revenue | 1,164,788 | 1,229,720 | 1,266,378 | ||||
Cost of revenue: | |||||||
Products | 96,853 | 81,451 | 87,255 | ||||
Services and support | 7,435 | --- | --- | ||||
----------- | ----------- | ------------ | |||||
Total cost of revenue | 104,288 | 81,451 | 87,255 | ||||
----------- | ----------- | ------------ | |||||
Gross profit | 1,060,500 | 1,148,269 | 1,179,123 | ||||
----------- | ----------- | ------------ | |||||
Operating expenses: |
| ||||||
Research and development | 246,082 | 224,122 | 240,212 | ||||
Sales and marketing | 380,367 | 403,720 | 401,188 | ||||
General and administrative | 108,134 | 115,626 | 116,528 | ||||
Restructuring and other charges | 12,148 | 12,063 | 5,629 | ||||
Acquired in-process research and development | 5,769 | --- | 470 | ||||
Amortization and impairment of goodwill and purchased intangibles | 20,973 | 14,281 | 7,013 | ||||
----------- | ----------- | ------------ | |||||
Total operating expenses | 773,473 | 769,812 | 771,040 | ||||
----------- | ----------- | ------------ | |||||
Operating income | 287,027 | 378,457 | 408,083 | ||||
----------- | ----------- | ------------ | |||||
Nonoperating income (loss), net: | |||||||
Investment gain (loss), net | (17,185 | ) | (93,414 | ) | 14,345 | ||
Interest and other income | 14,847 | 21,888 | 21,311 | ||||
----------- | ----------- | ------------ | |||||
Total nonoperating income (loss), net | (2,338 | ) | (71,526 | ) | 35,656 | ||
----------- | ----------- | ------------ | |||||
Income before income taxes | 284,689 | 306,931 | 443,739 | ||||
Income tax provision | 93,290 | 101,287 | 155,931 | ||||
----------- | ----------- | ------------ | |||||
Net income | $191,399 | $205,644 | $287,808 | ||||
======== | ======== | ======== | |||||
Basic net income per share | $0.81 | $0.86 | $1.21 | ||||
======== | ======== | ======== | |||||
Shares used in computing basic net income per share | 236,834 | 238,461 | 238,292 | ||||
======== | ======== | ======== | |||||
Diluted net income per share | $0.79 | $0.83 | $1.13 | ||||
======== | ======== | ======== | |||||
Shares used in computing diluted net income per share | 243,119 | 249,145 | 255,774 | ||||
======== | ======== | ======== | |||||
See accompanying Notes to Consolidated Financial Statements.
61
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(In thousands)
| | Common Stock and Additional Paid-in Capital | | | | | | | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | Treasury Stock | | |||||||||||||||||||
| | Retained Earnings | Comprehensive Income | Accumulated Other Comprehensive Income (Loss) | | ||||||||||||||||||||
| | Shares | Amount | Shares | Amount | Total | |||||||||||||||||||
| Balances as of November 27, 1998 | 295,764 | $ | 306,859 | $ | 732,730 | — | $ | (1,879 | ) | (52,200 | ) | $ | (521,345 | ) | $ | 516,365 | ||||||||
| Comprehensive income: | ||||||||||||||||||||||||
| Net income | — | — | 237,751 | $ | 237,751 | — | — | — | 237,751 | |||||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||||||
| Net unrealized gain on investments | — | — | — | 128,076 | 128,076 | — | — | 128,076 | ||||||||||||||||
| Reclassification adjustment | — | — | — | (58,570 | ) | (58,570 | ) | — | — | (58,570 | ) | |||||||||||||
| Tax provision on above | — | — | — | (26,698 | ) | (26,698 | ) | — | — | (26,698 | ) | |||||||||||||
| Foreign currency translation adjustments | — | — | — | (597 | ) | (597 | ) | — | — | (597 | ) | |||||||||||||
| Other comprehensive income | — | — | — | 42,211 | — | — | — | — | ||||||||||||||||
| Comprehensive income, net of tax | — | — | — | $ | 279,962 | — | — | — | — | |||||||||||||||
| Tax benefit from employee stock option plans | — | 58,478 | — | — | — | — | — | 58,478 | ||||||||||||||||
| Stock compensation expense | — | 2,742 | — | — | — | 278 | 2,530 | 5,272 | ||||||||||||||||
| Dividends declared | — | — | (12,623 | ) | — | — | — | — | (12,623 | ) | ||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | (26,212 | ) | (479,161 | ) | (479,161 | ) | |||||||||||||
| Reissuance of treasury stock under employee stock and stock option plans | — | — | (61,619 | ) | — | — | 19,448 | 204,557 | 142,938 | |||||||||||||||
| Proceeds from sale of put warrants | — | 978 | — | — | — | — | — | 978 | ||||||||||||||||
| Balances as of December 3, 1999 | 295,764 | $ | 369,057 | $ | 896,239 | — | $ | 40,332 | (58,686 | ) | $ | (793,419 | ) | $ | 512,209 | |||||||||
| Comprehensive income: | ||||||||||||||||||||||||
| Net income | — | — | 287,808 | $ | 287,808 | — | — | — | 287,808 | |||||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||||||
| Net unrealized loss on investments | — | — | — | (66,840 | ) | (66,840 | ) | — | — | (66,840 | ) | |||||||||||||
| Reclassification adjustment | — | — | — | 4,282 | 4,282 | — | — | 4,282 | ||||||||||||||||
| Tax provision on above | — | — | — | 24,073 | 24,073 | — | — | 24,073 | ||||||||||||||||
| Foreign currency translation adjustments | — | — | — | (2,545 | ) | (2,545 | ) | — | — | (2,545 | ) | |||||||||||||
| Other comprehensive loss | — | — | — | (41,030 | ) | — | — | — | — | |||||||||||||||
| Comprehensive income, net of tax | — | — | — | $ | 246,778 | — | — | — | — | |||||||||||||||
| Tax benefit from employee stock option plans | — | 124,922 | — | — | — | — | — | 124,922 | ||||||||||||||||
| Stock compensation expense | — | 10,896 | — | — | — | 569 | 5,603 | 16,499 | ||||||||||||||||
| Dividends declared | — | — | (11,543 | ) | — | — | — | — | (11,543 | ) | ||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | (7,184 | ) | (255,456 | ) | (255,456 | ) | |||||||||||||
| Reissuance of treasury stock under employee stock and stock option plans | — | 25,926 | — | — | 10,483 | 93,209 | 119,135 | |||||||||||||||||
| Balances as of December 1, 2000 | 295,764 | $ | 530,801 | $ | 1,172,504 | — | $ | (698 | ) | (54,818 | ) | $ | (950,063 | ) | $ | 752,544 | ||||||||
62
|
| Common Stock |
| Additional Paid-in Capital Amount |
| Retained |
| Comprehensive |
| Accumulated Other |
| Treasury Stock |
| Total |
| |||||||||||||||||||||||||
|
| Shares |
| Amount |
|
|
|
|
| Shares |
| Amount |
|
| ||||||||||||||||||||||||||
|
| ---------- |
| ----------- |
| ------------ |
| ---------- |
| ------------ |
| ------------- |
| ------------ |
| ------------- |
| ----------- |
| |||||||||||||||||||||
Balances as of December 3, 1999 |
| 295,764 |
| $29,576 |
| $339,481 |
| $ 896,239 |
| --- |
| $ 40,332 |
| (58,686 | ) | $(793,419 | ) | $512,209 |
| |||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net income |
| --- |
| --- |
| --- |
| 287,808 |
| $ 287,808 |
| --- |
| --- |
| --- |
| 287,808 |
| |||||||||||||||||||||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net unrealized loss on investments |
| --- |
| --- |
| --- |
| --- |
| (66,840 | ) | (66,840 | ) | --- |
| --- |
| (66,840 | ) | |||||||||||||||||||||
Reclassification adjustment |
| --- |
| --- |
| --- |
| --- |
| 4,282 |
| 4,282 |
| --- |
| --- |
| 4,282 |
| |||||||||||||||||||||
Tax provision on above |
| --- |
| --- |
| --- |
| --- |
| 24,073 |
| 24,073 |
| --- |
| --- |
| 24,073 |
| |||||||||||||||||||||
Foreign currency translation adjustments |
| --- |
| --- |
| --- |
| --- |
| (2,545 | ) | (2,545 | ) | --- |
| --- |
| (2,545 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ---------------- |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Other comprehensive loss |
| --- |
| --- |
| --- |
| --- |
| (41,030 | ) | --- |
| --- |
| --- |
| --- |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ---------------- |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Comprehensive income, net of tax |
| --- |
| --- |
| --- |
| --- |
| $246,778 |
| --- |
| --- |
| --- |
| --- |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ======= |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Tax benefit from employee stock option plans |
| --- |
| --- |
| 124,922 |
| --- |
| --- |
| --- |
| --- |
| --- |
| 124,922 |
| |||||||||||||||||||||
Issuance of compensatory stock |
| --- |
| --- |
| 10,896 |
| --- |
| --- |
| --- |
| 569 |
| 5,603 |
| 16,499 |
| |||||||||||||||||||||
Dividends declared |
| --- |
| --- |
| --- |
| (11,543 | ) | --- |
| --- |
| --- |
| --- |
| (11,543 | ) | |||||||||||||||||||||
Purchase of treasury stock |
| --- |
| --- |
| --- |
| --- |
| --- |
| --- |
| (7,184 | ) | (255,456 | ) | (255,456 | ) | |||||||||||||||||||||
Reissuance of treasury stock under employee stock and stock |
| --- |
| 29,576 |
| 25,926 |
| --- |
| --- |
| --- |
| 10,483 |
| 93,209 |
| 119,135 |
| |||||||||||||||||||||
|
| ---------- |
| ----------- |
| ------------ |
| -------------- |
| ------------ |
| ------------ |
| ----------- |
| ----------- |
| ---------- |
| |||||||||||||||||||||
Balances as of December 1, 2000 |
| 295,764 |
| $29,576 |
| $501,225 |
| $ 1,172,504 |
| --- |
| $ (698 | ) | (54,818 | ) | $ (950,063 | ) | $ 752,544 |
| |||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net income | --- | --- | --- | 205,644 | $ 205,644 | --- | --- | --- | 205,644 | |||||||||||||||||||||||||||||||
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net unrealized loss on investments |
| --- |
| --- |
| --- |
| --- |
| (28,884 | ) | (28,884 | ) | --- |
| --- |
| (28,884 | ) | |||||||||||||||||||||
Reclassification adjustment |
| --- |
| --- |
| --- |
| --- |
| 33,571 |
| 33,571 |
| --- |
| --- |
| 33,571 |
| |||||||||||||||||||||
Tax provision on above |
| --- |
| --- |
| --- |
| --- |
| (1,759 | ) | (1,759 | ) | --- |
| --- |
| (1,759 | ) | |||||||||||||||||||||
Foreign currency translation adjustments |
| --- |
| --- |
| --- |
| --- |
| (894 | ) | (894 | ) | --- |
| --- |
| (894 | ) | |||||||||||||||||||||
Net gain on derivative instruments (cash flow hedges), net of taxes |
| --- |
| --- |
| --- |
| --- |
| 2,582 |
| 2,582 |
| --- |
| --- |
| 2,582 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ------------ |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Other comprehensive income |
| --- |
| --- |
| --- |
| --- |
| 4,616 |
| --- |
| --- |
| --- |
| --- |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ------------ |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Comprehensive income, net of tax |
| --- |
| --- |
| --- |
| --- |
| $ 210,260 |
| --- |
| --- |
| --- |
| --- |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| ======= |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Tax benefit from employee stock option plans |
| --- |
| --- |
| 45,692 |
| --- |
| --- |
| --- |
| --- |
| --- |
| 45,692 |
| |||||||||||||||||||||
Issuance of compensatory stock |
| --- |
| --- |
| 13,494 |
| --- |
| --- |
| --- |
| 458 |
| 4,503 |
| 17,997 |
| |||||||||||||||||||||
Dividends declared |
| --- |
| --- |
| --- |
| (11,943 | ) | --- |
| --- |
| --- |
| --- |
| (11,943 | ) | |||||||||||||||||||||
Purchase of treasury stock |
| --- |
| --- |
| --- |
| --- |
| --- |
| --- |
| (10,598 | ) | (485,115 | ) | (485,115 | ) | |||||||||||||||||||||
Reissuance of treasury stock under employee stock and stock |
| --- |
| --- |
| 35,399 |
| --- |
| --- |
| --- |
| 5,213 |
| 52,138 |
| 87,537 |
| |||||||||||||||||||||
|
| ---------- |
| ----------- |
| ------------ |
| ---------- |
| ------------ |
| ------------ |
| ----------- |
| ------------- |
| ----------- |
| |||||||||||||||||||||
Balances as of November 30, 2001 |
| 295,764 |
| $29,576 |
| $595,810 |
| $1,366,205 |
| --- |
| $ 3,918 |
| (59,745 | ) | $(1,378,537 | ) | $ 616,972 |
| |||||||||||||||||||||
|
| ===== |
| ===== |
| ====== |
| ======= |
| ======== |
| ======== |
| ===== |
| ======= |
| ======= |
| |||||||||||||||||||||
| Balances as of December 1, 2000 | 295,764 | $ | 530,801 | $ | 1,172,504 | — | $ | (698 | ) | (54,818 | ) | $ | (950,063 | ) | $ | 752,544 | ||||||||
| Comprehensive income: | ||||||||||||||||||||||||
| Net income | — | — | 205,644 | $ | 205,644 | — | — | — | 205,644 | |||||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||||||
| Net unrealized loss on investments | — | — | — | (28,884 | ) | (28,884 | ) | — | — | (28,884 | ) | |||||||||||||
| Reclassification adjustment | — | — | — | 33,571 | 33,571 | — | — | 33,571 | ||||||||||||||||
| Tax provision on above | — | — | — | (1,759 | ) | (1,759 | ) | — | — | (1,759 | ) | |||||||||||||
| Foreign currency translation adjustments | — | — | — | (894 | ) | (894 | ) | — | — | (894 | ) | |||||||||||||
| Net gain on derivative instruments, net of taxes | — | — | — | 2,582 | 2,582 | — | — | 2,582 | ||||||||||||||||
| Other comprehensive income | — | — | — | 4,616 | — | — | — | — | ||||||||||||||||
| Comprehensive income, net of tax | — | — | — | $ | 210,260 | — | — | — | — | |||||||||||||||
| Tax benefit from employee stock option plans | — | 45,692 | — | — | — | — | — | 45,692 | ||||||||||||||||
| Stock compensation expense | — | 13,494 | — | — | — | 458 | 4,503 | 17,997 | ||||||||||||||||
| Dividends declared | — | — | (11,943 | ) | — | — | — | — | (11,943 | ) | ||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | (10,598 | ) | (485,115 | ) | (485,115 | ) | |||||||||||||
| Reissuance of treasury stock under employee stock and stock option plans | — | 35,399 | — | — | 5,213 | 52,138 | 87,537 | |||||||||||||||||
| Balances as of November 30, 2001 | 295,764 | $ | 625,386 | $ | 1,366,205 | — | $ | 3,918 | (59,745 | ) | $ | (1,378,537 | ) | $ | 616,972 | |||||||||
See accompanying Notes to Consolidated Financial Statements.
63
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(In thousands)
(Continued)
| | Years Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | November 30, 2001 | December 1, 2000 | December 3, 1999 | ||||||||||
| Cash flows from operating activities: | |||||||||||||
| Net income | $ | 205,644 | $ | 287,808 | $ | 237,751 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||
| Depreciation and amortization | 56,645 | 43,275 | 50,770 | ||||||||||
| Stock compensation expense | 17,997 | 16,499 | 5,272 | ||||||||||
| Deferred income taxes | (17,600 | ) | 1,398 | 694 | |||||||||
| Provision for losses on receivables | 1,435 | 7,140 | (3,319 | ) | |||||||||
| Tax benefit from employee stock option plans | 45,692 | 124,922 | 58,478 | ||||||||||
| Equity method (gains) loss of Adobe Ventures and cost method investments | 59,873 | (33,258 | ) | (30,600 | ) | ||||||||
| Loss on other-than-temporary declines of equity securities | 53,068 | 26,342 | — | ||||||||||
| Gains on sales of equity securities | (20,054 | ) | (12,660 | ) | (59,377 | ) | |||||||
| Gain on sale of buildings | — | (1,052 | ) | (5,729 | ) | ||||||||
| Noncash restructuring and other charges | — | 1,011 | 14,379 | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||||
| Receivables | 16,273 | (88,487 | ) | 65,733 | |||||||||
| Other current assets | (3,552 | ) | (5,407 | ) | 842 | ||||||||
| Trade and other payables | (9,389 | ) | 4,588 | (12,989 | ) | ||||||||
| Accrued expenses | (61,083 | ) | 46,760 | 21,265 | |||||||||
| Accrued restructuring charges | 9,573 | (8,003 | ) | (14,571 | ) | ||||||||
| Income taxes payable | 60,175 | 31,730 | 1,257 | ||||||||||
| Deferred revenue | 4,005 | 2,020 | 4,343 | ||||||||||
| Net cash provided by operating activities | 418,702 | 444,626 | 334,199 | ||||||||||
| Cash flows from investing activities: | |||||||||||||
| Purchases of short-term investments | (817,173 | ) | (443,875 | ) | (270,960 | ) | |||||||
| Maturities and sales of short-term investments | 837,755 | 305,950 | 232,973 | ||||||||||
| Proceeds from the release of restricted funds | — | — | 130,260 | ||||||||||
| Acquisitions of property and equipment | (46,556 | ) | (29,836 | ) | (42,206 | ) | |||||||
| Purchases of long-term investments and other assets | (31,956 | ) | (59,059 | ) | (43,474 | ) | |||||||
| Acquisitions, net of cash acquired | — | (24,448 | ) | (36,932 | ) | ||||||||
| Proceeds from sales of buildings | — | 5,420 | 40,613 | ||||||||||
| Proceeds from sales of equity securities | 31,505 | 17,788 | 63,876 | ||||||||||
| Net cash provided by (used for) investing activities | (26,425 | ) | (228,060 | ) | 74,150 | ||||||||
64
|
| Common Stock |
| Additional Paid-in Capital |
| Retained |
| Comprehensive |
| Accumulated Other |
| Treasury Stock |
|
| |||||
|
| Shares |
| Amount |
|
|
|
|
| Shares |
| Amount |
| Total |
| ||||
|
| ----------- |
| ----------- |
| ------------- |
| -------------- |
| --------------- |
| --------------- |
| ----------- |
| -------------- |
| -------------- |
|
Balances as of November 30, 2001 |
| 295,764 |
| $ 29,576 |
| $595,810 |
| $ 1,366,205 |
| --- |
| $3,918 |
| (59,745 | ) | $(1,378,537 | ) | $616,972 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| --- |
| --- |
| --- |
| 191,399 |
| $191,399 |
| --- |
| --- |
| --- |
| 191,399 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on investments |
| --- |
| --- |
| --- |
| --- |
| (11,724 |
) | (11,724 | ) | --- |
| --- |
| (11,724 | ) |
Reclassification adjustment |
| --- |
| --- |
| --- |
| --- |
| 4,063 |
| 4,063 |
| --- |
| --- |
| 4,063 |
|
Tax provision on above |
| --- |
| --- |
| --- |
| --- |
| 2,997 |
| 2,997 |
| --- |
| --- |
| 2,997 |
|
Foreign currency translation adjustments |
| --- |
| --- |
| --- |
| --- |
| 1,307 |
| 1,307 |
| --- |
| --- |
| 1,307 |
|
Net loss on derivative instruments (cash flow hedges), net of taxes |
| --- |
| --- |
| --- |
| --- |
| (4,511 | ) | (4,511 | ) | --- |
| --- |
| (4,511 | ) |
|
|
|
|
|
|
|
|
|
| ----------------- |
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
| --- |
| --- |
| --- |
| --- |
| (7,868 |
) | --- |
| --- |
| --- |
| --- |
|
|
|
|
|
|
|
|
|
|
| ---------------- |
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax |
| --- |
| --- |
| --- |
| --- |
| $183,531 |
| --- |
| --- |
| --- |
| --- |
|
|
|
|
|
|
|
|
|
|
| ======== |
|
|
|
|
|
|
|
|
|
Tax benefit from employee stock option plans |
| --- |
| --- |
| 21,830 |
| --- |
| --- |
| --- |
| --- |
| --- |
| 21,830 |
|
Issuance of compensatory stock |
| --- |
| --- |
| 5,489 |
| --- |
| --- |
| --- |
| 132 |
| 1,297 |
| 6,786 |
|
Dividends declared |
| --- |
| --- |
| --- |
| (11,828 | ) | --- |
| --- |
| --- |
| --- |
| (11,828 | ) |
Purchase of treasury stock |
| --- |
| --- |
| --- |
| --- |
| --- |
| --- |
| (10,614 | ) | (293,241 | ) | (293,241 | ) |
Reissuance of treasury stock under employee stock and stock option plans |
| --- |
| --- |
| 36,578 |
| --- |
| --- |
| --- |
| 4,604 |
| 45,281 |
| 81,859 |
|
Stock issued for acquisition |
| --- |
| --- |
| 50,566 |
| --- |
| --- |
| --- |
| 1,814 |
| 17,846 |
| 68,412 |
|
|
| ----------- |
| ----------- |
| ------------ |
| ------------ |
| ----------------- |
| ----------------- |
| ----------- |
| ------------- |
| ------------ |
|
Balances as of November 29, 2002 |
| 295,764 |
| $29,576 |
| $710,273 |
| $1,545,776 |
| --- |
| $(3,950 | ) | (63,809 | ) | $ (1,607,354 | ) | $ 674,321 |
|
|
| ===== |
| ====== |
| ====== |
| ======= |
| ======== |
| ======== |
| ====== |
| ======= |
| ====== |
|
| Cash flows from financing activities: | |||||||||||||
| Purchase of treasury stock | (485,115 | ) | (255,456 | ) | (479,161 | ) | |||||||
| Proceeds from reissuance of treasury stock | 87,536 | 119,135 | 142,938 | ||||||||||
| Proceeds from sale of put warrants | — | — | 978 | ||||||||||
| Payment of dividends | (12,007 | ) | (11,979 | ) | (12,233 | ) | |||||||
| Net cash used for financing activities | (409,586 | ) | (148,300 | ) | (347,478 | ) | |||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | (895 | ) | (2,545 | ) | (597 | ) | |||||||
| Net increase (decrease) in cash and cash equivalents | (18,204 | ) | 65,721 | 60,274 | |||||||||
| Cash and cash equivalents at beginning of year | 236,866 | 171,145 | 110,871 | ||||||||||
| Cash and cash equivalents at end of year | $ | 218,662 | $ | 236,866 | $ | 171,145 | |||||||
| Supplemental disclosures: | |||||||||||||
| Cash paid during the year for income taxes | $ | 16,862 | $ | 13,195 | $ | 68,770 | |||||||
| Noncash investing and financing activities: | |||||||||||||
| Cash dividends declared but not paid | $ | 2,952 | $ | 3,016 | $ | 3,452 | |||||||
| Unrealized gains (losses) on available-for-sale securities, net of taxes | $ | 2,928 | $ | (38,485 | ) | $ | 42,808 | ||||||
See accompanying Notes to Consolidated Financial Statements.
65
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years Ended |
| |||||
|
| November 29, |
| November 30, |
| December 1, |
| |
----------- | ---------- | -------- | ||||||
Cash flows from operating activities: |
|
|
|
|
|
|
| |
Net income |
| $191,399 |
| $205,644 |
| $287,808 |
| |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
| |
Depreciation and amortization | 63,481 | 56,645 | 43,275 | |||||
Stock compensation expense | 6,787 | 17,997 | 16,499 | |||||
Deferred income taxes |
| (5,486 | ) | (17,600 | ) | 1,398 |
| |
Provision for losses on receivables |
| 1,527 |
| 1,435 |
| 7,140 |
| |
Tax benefit from employee stock option plans |
| 21,830 |
| 45,692 |
| 124,922 |
| |
Acquired in-process research and development |
| 410 |
| --- |
| --- |
| |
Impairment of property, plant, and equipment and goodwill |
| 13,175 |
| --- |
| --- |
| |
Equity method (gains) losses of Adobe Ventures and cost |
| 13,122 |
| 59,873 |
| (33,258 | ) | |
Gains on sales of equity securities |
| (7,194 | ) | (20,054 | ) | (12,660 | ) | |
Loss on other-than-temporary declines of equity securities |
| 11,257 |
| 53,068 |
| 26,342 |
| |
Gain on sale of buildings |
| --- |
| --- |
| (1,052 | ) | |
Noncash restructuring and other charges |
| --- |
| --- |
| 1,011 |
| |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |
Receivables |
| 5,910 |
| 16,273 |
| (88,487 | ) | |
Other current assets |
| 1,856 |
| (3,552 | ) | (5,407 | ) | |
Trade and other payables |
| (2,277 | ) | (9,389 | ) | 4,588 |
| |
Accrued expenses |
| (8,312 | ) | (61,083 | ) | 46,760 |
| |
Accrued restructuring charges |
| (15,435 | ) | 9,573 |
| (8,003 | ) | |
Income taxes payable |
| 30,157 |
| 60,175 |
| 31,730 |
| |
Deferred revenue |
| 7,124 |
| 4,005 |
| 2,020 |
| |
---------------- | ---------------- | ------------ | ||||||
Net cash provided by operating activities |
| 329,331 |
| 418,702 |
| 444,626 |
| |
---------------- | ---------------- | ----------- | ||||||
Cash flows from investing activities: |
|
|
|
|
|
|
| |
Purchases of short-term investments |
| (579,154 | ) | (436,333 | ) | (443,875 | ) | |
Maturities and sales of short-term investments |
| 487,391 |
| 456,915 |
| 305,950 |
| |
Acquisitions of property and equipment |
| (31,578 | ) | (43,174 | ) | (29,836 | ) | |
Purchases of long-term investments and other assets |
| (37,951 | ) | (35,338 | ) | (59,059 | ) | |
Acquisitions, net of cash acquired |
| 7,345 |
| --- |
| (24,448 | ) | |
Proceeds from sales of buildings |
| --- |
| --- |
| 5,420 |
| |
Proceeds from sales of equity securities |
| 11,684 |
| 31,505 |
| 17,788 |
| |
---------------- | ---------------- | ----------- | ||||||
Net cash used for investing activities |
| (142,263 | ) | (26,425 | ) | (228,060 | ) | |
---------------- | ---------------- | ----------- | ||||||
|
| Years Ended |
| |||||
|
| November 29, |
| November 30, |
| December 1, | ||
------------ | ------------ | -------------- | ||||||
Cash flows from financing activities: |
|
|
|
|
|
| ||
Purchase of treasury stock |
| (293,241 | ) | (485,115 | ) | (255,456 | ) | |
Proceeds from reissuance of treasury stock |
| 81,859 |
| 87,536 |
| 119,135 |
| |
Payment of dividends |
| (11,881 | ) | (12,007 | ) | (11,979 | ) | |
------------ | ------------ | -------------- | ||||||
Net cash used for financing activities |
| (223,263 | ) | (409,586 | ) | (148,300 | ) | |
Effect of foreign currency exchange rates on cash and cash equivalents |
| 1,217 |
| (895 | ) | (2,545 | ) | |
------------ | ------------ | -------------- | ||||||
Net (decrease) increase in cash and cash equivalents |
| (34,978 | ) | (18,204 | ) | 65,721 | ||
Cash and cash equivalents at beginning of year |
| 218,662 |
| 236,866 |
| 171,145 | ||
------------ | ------------ | -------------- | ||||||
Cash and cash equivalents at end of year |
| $183,684 |
| $218,662 |
| $236,866 | ||
======== | ======== | ======== | ||||||
Supplemental disclosures: |
|
|
|
|
|
| ||
Cash paid during the year for income taxes |
| $32,773 |
| $16,862 |
| $13,195 | ||
======== | ======== | ======= | ||||||
Noncash investing and financing activities: |
|
|
|
|
|
| ||
Cash dividends declared but not paid |
| $2,900 |
| $2,952 |
| $3,016 | ||
======= | ======= | ======= | ||||||
Unrealized gains (losses) on available-for-sale securities, |
| $(4,664 | ) | $2,928 |
| $(38,485 | ) | |
======== | ======== | ======= | ||||||
Common stock issued for acquisition |
| $68,412 |
| --- |
| --- |
| |
======== | ======== | ======= | ||||||
See accompanying Notes to Consolidated Financial Statements.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Note 1. Significant Accounting Policies
Operations
Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company") builds award-winningoffers a line of software solutions for Network Publishing, including Web, print, video, wirelessconsumers, businesses, and broadband applications. Its graphic design, imaging, dynamic media and authoring toolscreative professional customers. Our products enable customers to create, manage and deliver visually-rich,visually rich, compelling and reliable content. We license our technology to major hardware manufacturers, software developers, and service providers, and we offer integrated software solutions to businesses of all sizes. We distribute our products through a network of distributors and dealers, value-added resellers ("VARs"), systems integrators, and original equipment manufacturers ("OEMs"); direct to end users through Adobe call centers;users; and through our own Web sitewebsite at www.adobe.com. We have operations in the Americas; Europe, Middle East, and Africa ("EMEA"); and Asia. Our software runs on Microsoft Windows, Apple Macintosh, Linux, UNIX, Palm OS, Pocket PC, and
Symbian platforms.
Fiscal Year
Our fiscal year is a 52/53-week year ending on the Friday closest to November 30.
Basis of Consolidation
The accompanying consolidated financial statements include those of Adobe and our subsidiaries, after elimination of all intercompany accounts and transactions.
The accompanying consolidated financial statements also include those of Adobe Incentive Partners, L.P. ("AIP"). AIP holds limited partnership interests in Adobe Ventures L.P. and Adobe Ventures II, L.P., which are accounted for using the equity method of accounting.
Use of Estimates
In the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, we must make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities, at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents and Short-term Investments
Cash equivalents consist of instruments with maturities of three months or less at the time of purchase.
We classify all of our cash equivalents and short-term investments that are free of trading restrictions or become free of trading restrictions within one year as "available-for-sale." We carry these investments at fair value, based on quoted market prices, and unrealizedprices. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders' equity. Realized gains and lossesGains are recognized when realized onin our consolidated statements of income. WeLosses are recognized as realized or when we have adetermined that an other-than-temporary decline in fair value has occurred.
It is our policy in place to review our equity holdings on a regular basis to evaluate whether or not eachany security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing each of the companies' cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership. If we believe that an
66
other-than-temporary decline exists in one of our marketable equity securities, it is our policy to write down these equity investments to the market value and record the related writedown as an investment loss on our consolidated statements of income.
During fiscal 2002, 2001, and 2000, we recorded investment gains (losses) of $(17.2) million, $(93.4) million, and $14.3 million, respectively, of which, $(11.3) million, $(53.1) million, and $(26.3) million, respectively, related to other-than-temporary declines of our short-term investments.
Foreign Currency Translation
We translate assets and liabilities of foreign subsidiaries, whose functional currency is the local currency, at exchange rates in effect at the balance sheet date. We translate revenues and expenses at the monthly average rates of exchange prevailing during the year. We include the adjustment resulting from translating the financial statements of such foreign subsidiaries in accumulated other comprehensive income, which is reflected as a separate component of stockholders' equity. Foreign currency transaction gains or losses are reported in interest and other income. For the years ended November 29, 2002, November 30, 2001, and December 1, 2000, we reported a foreign exchange transaction gain of $9.0 million and foreign exchange transaction losses of $3.2 million and $1.6 million, respectively. We also reported net gains onOn our foreign currency hedges of these transactions, we reported a net loss of $8.1 million and net gains of $3.2 million and $0.5 million, for fiscal years 2002, 2001, and 2000, respectively.
Property and Equipment
We record property and equipment at cost. Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives (thirty-five years for buildings; two to seven years for furniture and equipment) or lease terms (five to ten years for leasehold improvements) of the respective assets. We alsodo not currently have any capitalized website development costs. However, it is our policy to capitalize certain costs related to our website development in accordance with Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Amortization on a straight-line basis begins once the website is ready for its intended use.
Goodwill and Other Intangible Assets
Other assets includes goodwill, purchased technology, certain other intangible assets, and long-term investments.
Goodwill, purchased technology, and certain other intangible assets are stated at cost less accumulated amortization. We record amortization and are reviewed periodically for impairment. In accordance with Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," goodwill and purchased intangibles with indefinite useful lives acquired after June 30, 2001 are not amortized but will be reviewed periodically for impairment. Accordingly, goodwill resulting from our acquisition of Accelio Corporation ("Accelio") in April 2002 was not amortized. For goodwill and purchased intangiblesacquired prior to and on June 30, 2001 and for purchased intangibles with definite useful lives acquiredsubsequent to June 30, 2001, amortization is recorded utilizing the straight-line method, which approximates the pattern of consumption, over the estimated useful lives of the respective assets, generally upfrom one to thirteen years.
Capitalization of computer software development costs, when material, begins upon the establishment of technological feasibility, which is generally the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. To date, software development costs incurred between completion of a working prototype and general availability of the related product have not been material.
Other Assets
Other assets include long-term investments and security deposits.
Our long-term investments include direct investments and indirect investments through Adobe Ventures in privately-heldprivately held companies. 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
67
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. Under the terms of the partnership agreements, the general partner has the sole and exclusive right to manage and control the partnerships. Adobe as the limited partner has certain rights, including replacing the general partner and approving acquisitions that exceed certain established parameters. However, these rights are considered to be protective rights and do not suggest an ability to control the partnerships. Adobe Ventures carry their investments in equity securities at estimated fair market value and unrealized gains and losses are included in investment incomegain (loss). on our consolidated statements of income. The stock of a number of technology investments held by the limited partnerships at November 30, 2001 are29, 2002 is not publicly traded, and, therefore, there is no established market for their securities. As such,In order to determine the fair market value of these investments, are determined by Granite Ventures usingwe use the most recent round of financing involving new non-strategic investors or estimates made by Granite Ventures. We have aVentures based on their assessment of the current market value. It is our policy in place to review the fair value of these investments held by Adobe Ventures, as well as our direct investments, 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-heldprivately held companies. This information is not subject to the same disclosure regulations as U.S. publicpublicly traded 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 believebelie ve 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.accounting.
We recognize realized gains and losses upon sale or maturity of these investments using the specific identification method. During fiscal 2002, 2001, and 2000, we recorded investment gains (losses) of $(17.2) million, $(93.4) million, and $14.3 million, respectively, of which $(13.1) million, $(59.9) million, and $33.3 million, respectively, related to our investments in Adobe Ventures and our cost method investments.
Impairment of Long-lived Assets
We currently evaluate our long-lived assets, including goodwill and certain identifiable intangibles, in accordance with the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. We consider factors such as significant changes in the business climate and projected discounted cash flows from the respective asset. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds its fair value.
During the fourth quarter of fiscal 2002, we recognized a $6.8 million goodwill impairment charge for the remaining book value related to the Glassbook acquisition. This impairment charge is presented under amortization and impairment of goodwill and purchased intangibles on our consolidated statements of income. The impairment charge was determined based on discounted future cash flows.
During the third and fourth quarter of fiscal 2002, we recognized a $6.3 million pre-tax impairment charge for capitalized Adobe Design Team (formerly Adobe Studio) hosted server development costs. The impairment charge was recorded on our consolidated statement of income under cost of products revenue. The impairment charge was determined based on discounted future cash flows. For segment reporting purposes, the charge was included in our Cross-media Publishing segment.
In JulyAugust 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142144 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 142 requires goodwill to be tested for impairment at least annually, and written off when impaired, rather than being amortized as previous standards required. We will adopt SFAS 142 beginning in our fiscal year 2003. We are currently assessing the impact of SFAS 142 on our operating results and financial condition. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 ("APB No. 30,30"), "Reporting the Results of Operations for a Disposal of a Segment of a
68
Business". Business." We will adopt SFAS No. 144 beginning in our fiscal year 2003. We do not expect the adoption of SFAS No. 144 to have a material impact on our financial position or results of operations.
Stock SplitsSplit
Adobe's Board of Directors approved two separatea two-for-one stock splitssplit in the form of stock dividends of our common stock to stockholders effected October 24, 2000 and October 26, 1999.2000. All share and per share amounts referred to in the consolidated financial statements have been adjusted to reflect thesethis stock splits.split.
Employee Stock Plans
We account for ourOur employee stock plans which consist ofinclude fixed stock option plans, an employee stock purchase plan, andequity incentive plans, a performance and restricted stock plan, and an employee stock purchase plan. We account for our fixed stock option plans and our employee stock purchase plan using the intrinsic value method.
Revenue Recognition
In fiscal 2000, we adopted Statement of Position No. 98-9 ("SOP 98-9"), "Modifications of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." The adoption of SOP 98-9 did not have a significant impact on our financial position or results of operations.
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 productproducts 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, when given, 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. The estimates and reserves for rebates and price protection are based on historical rates.
We provide free technical phone support for our shrink-wrapped application products to customers who are under warranty for support. We accruerecord the estimated cost of free technical phone support upon shipment of software and amortize the accrued internal and external cost of telephone support to sales and marketing expense.software.
We also license software within multiple element arrangements in which a customer purchases a combination of software, post-contract customer support ("PCS") for two years., and/or professional services. PCS, or maintenance, includes rights to upgrades, when and if available, a limited period of telephone support, updates, and bug fixes. Statementenhancements. Professional services relate to consulting services and training. When vendor specific objective evidence ("VSOE") of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," as amended, generally requiresfair value exists for all elements in a multiple element arrangement, revenue earned on software arrangements involving multiple elements to beis allocated to each element based on the relative fair value of the elements. The arrangement fee for multiple-element arrangements is allocated to each element of the arrangement, such as maintenance and support services, based on the relative fair values of the elements. We determine theVSOE of fair value of each element in multi-element arrangements based on vendor-specific objective evidence ("VSOE"). VSOE for each element is based onestablished by the price charged when the same element is sold separately. If evidenceWe 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 evidenceVSOE of fair value does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fairf air value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.revenue, assuming delivery has occurred and collectibility is probable. Revenue allocated to maintenance and supportPCS is recognized ratably over the maintenancecontractual term (typically one to two years).
69The arrangement fees related to fixed-priced consulting contracts arerecognized 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, such as contract milestones, when applicable. Anticipated losses on fixed-priced contracts are recognized in the period when they become known.
We record OEM licensing revenue, primarily royalties, when OEM partners ship products incorporating Adobe software, provided collection of such revenue is deemed probable. We have no remaining obligations in relation to such licensing revenue.
We also recognize revenue under a subscription-based model for our Adobe Studio website, which we launched in the fourth quarter of fiscal 2001. Revenue is recognized on a monthly basis from fees received that month for providing software subscriptions for our hosted application.
Deferred revenue includes customer advances under OEM licensing agreements and maintenance revenue for application products. We recognize deferred maintenance revenue ratably over the term of the contract, generally twenty-four months.revenue. In cases where we will provide a specified free upgrade to an existing product, we defer revenuethe VSOE of fair value for the specified upgrade right, until the future obligation is fulfilled.
We perform ongoing credit evaluations of our customers' financial condition and generally do not require collateral. We maintain allowances for potentialestimated credit losses and such losses have been within our expectations.losses.
Direct Costs
Direct costs include the costs associated with the manufacturingCost of our products,Revenue
Cost of revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization related to localization costs and acquired technologies, and hosted server costs.costs, and the costs associated with the manufacturing of our products.
Cost of revenue also includes employee-related costs and the related infrastructure costs incurred to provide professional services, training, and product support for our Accelio business.
Advertising Costs
We expense all advertising costs as incurred and classify these costs under sales and marketing expense.
Advertising costs for fiscal years 2002, 2001, and 2000 and 1999 were $26.7 million, $30.5 million, and $32.9 million, and $22.4 million, respectively.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under the asset and liability method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. We record a valuation allowance to reduce deferred tax assets to an amount whosefor which realization is more likely than not. We also account for any income tax contingencies in accordance with Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies."
Foreign Currency and Other Hedging Instruments
On December 2, 2000, we adopted Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities and requires us to recognize these as either assets or liabilities on the balance sheet and measure them at fair value. As described in Note 15,16, gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. The adoption of this accounting standard did not have a material impact on our financial position or results of operations.
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Prior to our adoption of SFAS 133, we accounted for our derivatives under SFAS 52, "Foreign Currency Translation."
Put Warrants and Call Options
We utilize put warrants and call options ("puts and calls") to facilitate the repurchase of our common stock. Our put and call option contracts provide that we, at our option, can settle with physical delivery or net shares equal to the difference between the exercise price and the value of the option as determined by the contract. Accordingly, these investments are initially measured at fair value and reported in stockholders' equity as additional paid-in-capital. Subsequent changes in fair value are not recognized. If these instruments are settled through the payment or receipt of cash, additional paid-in-capital is adjusted.
Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Items of comprehensive income (loss) that we currently report are unrealized gains and losses on marketable securities categorized as available-for-sale, foreign currency translation adjustments, and gains and losses on derivative instruments qualifying as cash flow hedges, such as (i) hedging a forecasted transaction, (ii) the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), or (iii) a foreign currency cash-flow hedge.hedge, or (iv) interest rate hedges. We display comprehensive income and its components on our Consolidated Statements of Stockholders' Equity and Other Comprehensive Income.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." This Statement requires all business combinations to be accounted for using the purchase method of accounting and redefines goodwill and other intangibles that should be recognized separate from goodwill. SFAS 141 is effective for all business combinations initiated after June 30, 2001.
In July 2001, the FASB issued SFAS No. 142. "Goodwill and Other Intangible Assets." This Statement requires that goodwill and other intangibles with an indefinite useful life not be amortized, but be tested for impairment at least annually. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, for new business combinations that occur after June 30, 2001, SFAS No. 142 is effective for those transactions.effective. In accordance with SFAS No. 142, goodwill resulting from our recent acquisition of Accelio in April 2002 is not amortized. We will fully adopt SFAS No. 142 beginning in our fiscal year 2003. We are currently evaluatingdo not expect the impactadoption of SFAS No. 142 to have a material impact on our financial statementsposition or results of operations. Amortization and related disclosures.impairment of goodwill in fiscal 2002, 2001, and 2000 was $21.0 million, $14.3 million, and $7.0 million, respectively.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, or normal use of the asset. As used in this Statement, a legal obligation results from existing law, statute, ordinance, written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppel. SFAS No. 143 is
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effective for fiscal years beginning after June 15, 2002. We will adopt SFAS No. 143 beginning in our fiscal year 2003. We do not expect the adoption of SFAS No. 143 to have a material impact on our financial position or results of operations.
In August 2001, the FASB issued SFAS 144.No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business."30. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We will adopt SFAS No. 144 beginning in our fiscal year 2003. We do not expect the adoption of SFAS No. 144 to have a material impact on our financial position or results of operations.
In November 2001,April 2002, the Emerging Issues Task ForceFASB issued Statement of Financial Accounting Standards No. 145 ("EITF") reached a consensus on EITFSFAS No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Among other provisions, SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt." Accordingly, gains or a Resellerlosses from extinguishment of debt shall not be reported as extraordinary items unless the Vendor's Products." EITFextinguishment qualifies as an extraordinary item under the criteria of APB No. 01-9 addresses the accounting for consideration given by a vendor to a customer and is a codification30. Gains or losses from extinguishment of EITF No. 00-14, "Accounting for Certain Sales Incentives," EITF No. 00-22, "Accounting for "Points' and Certain Other Time-Based or Volume-Based Sales Incentives Offers and Offers for Free Products or Services to be Delivered in the Future," and EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." We are evaluating the impact of EITF No. 01-09 anddebt that do not believemeet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. We will adopt SFAS No. 145 beginning in our fiscal year 2003. We do not expect the adoption willof SFAS No. 145 to have a material impact on our financial statements.position or results of operations.
ReclassificationsIn July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring)," required an exit cost liability be recognized at the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002. We do not expect the adoption of SFAS No. 146 to have a material impact on our financial position or results of operations.
In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147 ("SFAS No. 147"), "Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9." The provisions of this statement relate to the application of the purchase method of accounting for all acquisitions of financial institutions, except transactions between two or more mutual enterprises. The provisions of this statement also relate to certain long-term customer-relationship intangible assets recognized in an acquisition of a financial institution, including those acquired in transactions between mutual enterprises. The provisions of this statement are effective on or after October 1, 2002. There will be no material impact upon the adoption of SFAS No. 147 on our financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment to FASB Statement No. 123, Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of Statement 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We do not expect the adoption of SFAS No. 148 to have a material impact on our financial position or r esults of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 expands on the accounting guidance of Statements No. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. FIN No. 45 will affect leasing transactions involving residual guarantees, vendor and manufacturer guarantees, and tax and environmental indemnities. All such guarantees will need to be disclosed in the notes to the financial statements starting with the period ending after December 15, 2002. For guarantees issued after December 31, 2002, the fair value of the obligation must be reported on the balance sheet. Existing guarantees will be grandfathered and will not be recognized on the balance sheet. We are currently evaluating the impact of FIN No. 45 on our financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest Entities." FIN No. 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Disclosure requirements apply to any financial statements issued after January 31, 2003. The Company has considered the provisions of FIN No. 46 and believes it will not be necessary to include in the Company's financial statements any assets, liabilities, or activities of the entities holding the Company's corporate headquarters leases. The Company has provided certain disclosures in other areas of this filing (see Note 6 and Note 14 of our Notes to Consolidated Financial Statements) and will continue to evaluate the impact of FIN No. 46 on our financial statements and related disclosures.
Reclassifications
We made certain reclassifications toa reclassification on our fiscal 20002001 presentation of other assets on our consolidated balance sheet by reclassifying certain intangible assets$3.4 million of land from purchased technologyProperty and licensing agreementsEquipment to intangibles and other assets,Other Assets, to conform to the fiscal 20012002 presentation. These reclassificationsThis reclassification did not impact total assets in fiscal 2000.2001.
We made certain reclassifications toa reclassification on our fiscal 20002001 presentation of current assets and 1999 reporting of our Comprehensive Incomecurrent liabilities on our Consolidated Statementsconsolidated balance sheet by reclassifying $1.6 million of Stockholder's Equity and Other Comprehensive Incomebad debt allowance from Net Trade Receivable to comply with SFAS 130. These reclassifications did not impactAccrued Expenses, to conform to the fiscal 2002 presentation. This reclassification increased our total stockholder's equity in fiscal 2000 or 1999.assets and liabilities by $1.6 million.
Note 2. Acquisitions
On April 12, 2002, we acquired 100% of the outstanding common stock of Accelio Corporation ("Accelio"). The results of Accelio's operations have been included in our consolidated financial statements since that date. Accelio was a provider of Web-enabled solutions that help customers manage business processes driven by electronic forms. The acquisition of Accelio enhances Adobe's ability to broaden our ePaper solution business by combining Accelio's electronic forms solutions with Adobe Acrobat and Adobe Portable Document Format ("PDF") technologies. Through this combination Adobe can now extend broader ePaper solutions to enterprise users in Global 2000 businesses, governments and educational institutions to deliver greater value to our customers. The aggregate purchase price was $70.2 million, which included the issuance of 1.8 million shares of common stock of Adobe, valued at $68.4 million, and cash of $1.8 million. The value of the 1.8 million common shares issued was determined based on the aver age market price of Adobe's common shares over the 2-day period before the measurement date, which was $37.71. The measurement date was the acquisition date due to the variability of the number of shares issued in the acquisition.
The following table summarizes the purchase price allocation:
Cash and cash equivalents | $ 9,117 | ||
Accounts receivable, net | 11,906 | ||
Other current assets | 4,735 | ||
Purchased technology. | 2,710 | ||
Goodwill. | 77,649 | ||
In-process research and development | 410 | ||
Trademarks and other intangible assets | 1,029 | ||
------------------ | |||
Total assets acquired | 107,556 | ||
Current liabilities | (18,176 | ) | |
Liabilities recognized in connection with the business combination | (16,836 | ) | |
Deferred revenue | (2,360 | ) | |
------------------ | |||
Total liabilities assumed | (37,372 | ) | |
Net assets acquired | $70,184 | ||
========== |
We obtained an independent appraiser's valuation to determine the amounts allocated to purchased technology and in-process research and development. The valuation analysis utilized the Income Approach that takes into consideration discounted future cash flows. Based on this valuation $2.7 million and $0.4 million was allocated to purchased technology and in-process research and development, respectively. The amount allocated to purchased technology of $2.7 million represented the fair market value of the technology for each of the existing products, as of the date of the acquisition. The purchased technology of $2.7 million was assigned a useful life of three years and will be amortized to cost of goods sold. The amount allocated to in-process research and development of $0.4 million was expensed at the time of acquisition due to the state of the development of certain products and the uncertainty of the technology. At the date we acquired Accelio, it was estimated that 10% of the development effort had b een completed and that the remaining 90% of the development effort would be completed at various times over the next 24 months. The efforts required to complete the development of the technology primarily includes finalization of coding and completion testing.
The remaining purchase price was allocated to goodwill because Accelio's business fits Adobe's long-term strategy, shortens time to market, and provides a market position in the eForms business for Adobe to build upon. The total purchase price allocated to goodwill of $75.0 million was assigned to our ePaper Solutions segment. In accordance with SFAS No. 142, the goodwill will not be amortized but will be reviewed for impairment on an annual basis. During the fourth quarter of fiscal 2002, we revised our estimate of certain costs associated with our acquisition of Accelio, resulting in an increase to goodwill of approximately $2.6 million. The adjustment primarily reflected higher than estimated transaction costs and costs related to closing redundant facilities.
The $1.0 million of acquired trademarks and other intangible assets will be amortized over their useful lives ranging from six-months to three years.
In the second quarter of fiscal 2002, we recognized liabilities in connection with the acquisition of Accelio. The liabilities recognized included severance and related charges associated with a worldwide reduction in force ofAccelio employees, transaction costs, costs related to closing redundant facilities and terminating contracts, and other exit costs associated with the acquisition. As of November 29, 2002, the majority of the restructuring transactions were completed. Total liabilities recognized in connection with the acquisition were $14.5 million, of which $6.2 million remains accrued at November 29, 2002. The majority of the remaining payments will be paid through May 2003.
The following table depicts the activity for the liabilities recognized in connection with the acquisition of Accelio through November 29, 2002:
Initial liability recognized at April 12, 2002 | Cash Payments | Adjustments | Balance at | ||||||
----------------- | ----------- | --------------- | --------------- | ||||||
Severance and related charges | $6,034 | $(4,973 | ) | $ (414 | ) | $647 | |||
Transaction costs | 3,095 | (3,537 | ) | 1,069 | 627 | ||||
Cost of closing redundant facilities | 2,845 | (620 | ) | 2,217 | 4,442 | ||||
Contract termination costs | 1,412 | (1,057 | ) | (288 | ) | 67 | |||
Other exit costs | 1,116 | (471 | ) | (250 | ) | 395 | |||
------------------ | ----------- | ---------------- | ---------------- | ||||||
$14,502 | $(10,658 | ) | $2,334 | $6,178 | |||||
========== | ====== | ======== | ======== |
The following pro forma results of operations reflect the combined results of Adobe and Accelio for years ended November 29, 2002 and November 30, 2001, as if the business combination occurred as of the beginning of each respective fiscal year. The information used for Accelio's fiscal year 2002 pro forma disclosure was obtained from reports filed by Accelio with the Securities and Exchange Commission ("SEC") for the period ended January 31, 2002 and internal financial reports prepared by Accelio from January 31, 2002 through the date of acquisition, April 12, 2002. The information used for Accelio's fiscal year 2001 pro forma disclosure was obtained from reports filed by Accelio with the SEC for the periods ended January 31, 2001, April 30, 2001, July 31, 2001, and October 31, 2001. Accelio's fiscal quarters did not coincide with Adobe's fiscal quarters. Nonetheless, we combined the results of operations from Accelio's fiscal quarters that are closest to Adobe's fiscal quarters to arrive at the pro forma amounts disclosed below.
|
|
| Years Ended |
| ||
|
|
| November 29, 2002 |
| November 30, 2001 |
|
--------------------- | --------------------- | |||||
Revenue | $1,189,604 | $1,309,643 | ||||
Net income |
|
| $178,665 |
| $172,942 |
|
--------------------- | --------------------- | |||||
Basic net income per share |
|
| $.75 |
| $.72 |
|
============ | ============ | |||||
Shares used in computing basic net income per share |
|
| 237,492 |
| 240,276 |
|
============ | ============ | |||||
Diluted net income per share |
|
| $.73 |
| $.69 |
|
============ | ============ | |||||
Shares used in computing diluted net income per share |
|
| 243,777 |
| 250,960 |
|
============ | ============ | |||||
In December 2001, we acquired Fotiva, Inc. ("Fotiva"). The acquisition was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations." Substantially all of Fotiva's assets were intellectual property. Fotiva was a development stage software company that created solutions to help consumers manage, store, enrich, and share digital photographs and other related personal media. In connection with the acquisition, substantially all of the purchase price of $5.4 million cash was allocated to in-process research and development and expensed at the time of acquisition due to the in-process state of the technology. At the date we acquired Fotiva, it was estimated that 50% of the development effort had been completed and that the remaining 50% of the development effort would take approximately eleven months to complete. The efforts required to complete the development of the technology primarily include finali zation of coding, localization, and extensive quality assurance testing. Adobe combined Fotiva's image management technology with Adobe's digital imaging and ePaper technologies to develop a new product, Adobe Photoshop Album, that was released in the first quarter of fiscal 2003.
During the fourth quarter of fiscal 2000, we acquired Boston, Massachusetts-based Glassbook, Inc. ("Glassbook"). Glassbook iswas a developer of consumer and commercial software for the eBook market, automating the supply chain for publishers, booksellers, distributors, and libraries. The acquisition was accounted for using the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16 ("APB No. 16"), "Business Combinations." The purchase price of the acquisition was approximately $24.4 million cash plus additional liabilities assumed of approximately $3.6 million. Based on an independent appraiser's valuation, $0.5 million of the purchase price was allocated to in-process research and development due to the state of the development and the uncertainty of the technology and expensed upon acquisition. The remaining $27.5 million was allocated $26.9 million to goodwill, $0.4 million to intangible assets, and $0.2 million to other assets. The goodwill and intangible assets are amortizeda mortized on a straight-line basis over a three-year period. The ongoing project at Glassbook at the time of the purchase included the development of the Glassbook Reader and the Glassbook Content Server
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products. We released new products that contained the purchased technology in April 2001, with Acrobat eBook Reader 2.1 and Adobe Content Server 2.0.
During the fourth quarter of fiscal 1999,2002, we acquired substantially all of the assets, consisting of intellectual property, of Attitude Software, LLC ("Attitude Software"). The acquisition was accountedrecognized a $6.8 million goodwill impairment charge for using the purchase method of accounting in accordance with APB 16, and substantially all of the purchase price of $3.0 million cash was allocated to in-process research and development and expensed at the time of acquisition. The ongoing project at Attitude Software at the time of the purchase included the development of the 3D Anarchy authoring product. We purchased this technology to incorporate it into future versions of existing Adobe products to further enhance the feature sets and user interface contained within the products. We are incorporating the purchased technology into one of our products, which has not yet been released. At the date we acquired Attitude Software, it was estimated that 50% of the development effort had been completed and that the remaining 50% of the development effort would take approximately eighteen months to complete and would cost $1.8 million. The efforts required to complete the development of the technology primarilybook value related to additional design efforts to integrate the technology into severalGlassbook acquisition. This impairment charge is presented under amortization and impairment of goodwill and purchased intangibles on our products, finalizationconsolidated statements of coding, and completion testing. The value of the in-process technology was determined by estimating the projected net cash flows related to products the technology will be integrated into, including costs to complete the development of the technology and the future net revenues that may be earned from the products, excluding the value attributed to the existing technology with the products prior to the integration of the purchased technology. These cash flows were discounted back to their net present value using a discount rate of 20%, exclusive of the value attributable to the use of the in-process technologies in future products.income.
Additionally, during the fourth quarter of fiscal 1999, we acquired substantially all of the assets, consisting of intellectual property, of Photomerge Technology. In connection with the acquisition of Photomerge Technology, 100% of the purchase price, or $0.6 million cash, was allocated to in-process research and development, due to the state of completion and the uncertainty of the technology. This purchased technology was incorporated into our Photoshop Elements product, which we released in April 2001.
On December 22, 1998, we acquired substantially all of the assets, consisting of intellectual property and a minimal amount of fixed assets, of both GoLive Systems, Inc., a Delaware corporation, and GoLive Systems GmbH and Co. KG, a German limited partnership (together "GoLive Systems"). GoLive Systems creates Web site development software, which enables users to effectively use the Internet for professional publishing and communication. The acquisition was accounted for under the purchase method of accounting in accordance with APB 16. The initial purchase price of the acquisition was approximately $31.0 million cash, plus additional contingency payments of up to $8.0 million based on achieving certain technical and employment milestones. We determined that certain milestones had been reached as of March 5, 1999, and as such, $4.0 million in contingent payments were recorded as additional purchase price and paid throughout fiscal 1999. Approximately $11.4 million of the purchase price was allocated to the developed technology, and the remaining $23.6 million was allocated to trademark, the value of the assembled workforce, and goodwill. These are amortized on a straight-line basis over a five-year period.
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Note 3. Cash, cash equivalents, and short-term investments
Cash, cash equivalents, and short-term investments consisted of the following:
| | As of November 30, 2001 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Value | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||
| Classified as current assets: | |||||||||||||||
| Cash | $ | 22,039 | $ | — | $ | — | $ | 22,039 | |||||||
| Cash equivalents: | |||||||||||||||
| Money market mutual funds | 120,699 | — | — | 120,699 | |||||||||||
| State and municipal bonds and notes | 75,910 | 14 | — | 75,924 | |||||||||||
| Total cash equivalents | 196,609 | 14 | — | 196,623 | |||||||||||
| Total cash and cash equivalents | 218,648 | 14 | — | 218,662 | |||||||||||
Short-term investments: | |||||||||||||||
| State and municipal bonds | 319,392 | 2,947 | (253 | ) | 322,086 | ||||||||||
| United States Treasury Notes | 3,079 | 8 | — | 3,087 | |||||||||||
| Other marketable equity securities, including equity hedging instruments* | 26,339 | 11,439 | — | 37,778 | |||||||||||
| Total short-term investments | 348,810 | 14,394 | (253 | ) | 362,951 | ||||||||||
| Total cash, cash equivalents, and short-term investments | $ | 567,458 | $ | 14,408 | $ | (253 | ) | $ | 581,613 | ||||||
| | As of December 1, 2000 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Value | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||
| Classified as current assets: | |||||||||||||||
| Cash | $ | 11,997 | $ | — | $ | — | $ | 11,997 | |||||||
| Cash equivalents: | |||||||||||||||
| Money market mutual funds | 198,629 | — | — | 198,629 | |||||||||||
| State and municipal bonds and notes | 26,240 | — | — | 26,240 | |||||||||||
| Total cash equivalents | 224,869 | — | — | 224,869 | |||||||||||
| Total cash and cash equivalents | 236,866 | — | — | 236,866 | |||||||||||
Short-term investments: | |||||||||||||||
| State and municipal bonds | 340,091 | 536 | (589 | ) | 340,038 | ||||||||||
| Other marketable equity securities, including equity hedging instruments* | 92,527 | 31,629 | (23,211 | ) | 100,945 | ||||||||||
| Corporate notes | 1,994 | 10 | — | 2,004 | |||||||||||
| Total short-term investments | 434,612 | 32,175 | (23,800 | ) | 442,987 | ||||||||||
| Total cash, cash equivalents, and short-term investments | $ | 671,478 | $ | 32,175 | $ | (23,800 | ) | $ | 679,853 | ||||||
|
| As of November 29, 2002 |
| ||||||
|
| Carrying Value |
| Unrealized |
| Unrealized |
| Estimated |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Classified as current assets: |
|
|
|
|
|
|
|
|
|
Cash |
| $21,911 |
| $--- |
| $--- |
| $21,911 |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
Money market mutual funds |
| 128,073 |
| --- |
| --- |
| 128,073 |
|
State and municipal bonds and notes |
| 33,635 |
| 65 |
| --- |
| 33,700 |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Total cash equivalents |
| 161,708 |
| 65 |
| --- |
| 161,773 |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Total cash and cash equivalents |
| 183,619 |
| 65 |
| --- |
| 183,684 |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
State and municipal bonds |
| 396,953 |
| 3,583 |
| (294 | ) | 400,242 |
|
United States Treasury Notes |
| 9,688 |
| 107 |
| (9 | ) | 9,786 |
|
Corporate Bonds |
| 9,890 |
| 37 |
| (2 | ) | 9,925 |
|
Marketable equity securities* |
| 11,092 |
| 3,008 |
| --- |
| 14,100 |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Total short-term investments |
| 427,623 |
| 6,735 |
| (305 | ) | 434,053 |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Total cash, cash equivalents, and |
| $611,242 |
| $6,800 |
| $(305 | ) | $617,737 |
|
|
| ====== |
| ====== |
| ====== |
| ====== |
|
|
| As of November 30, 2001 |
| ||||||
|
| Carrying Value |
| Unrealized |
| Unrealized |
| Estimated |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Classified as current assets: |
|
|
|
|
|
|
|
|
|
Cash |
| $22,039 |
| $--- |
| $--- |
| $22,039 |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
Money market mutual funds |
| 120,699 |
| --- |
| --- |
| 120,699 |
|
State and municipal bonds and notes |
| 75,910 |
| 14 |
| --- |
| 75,924 |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Total cash equivalents |
| 196,609 |
| 14 |
| --- |
| 196,623 |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Total cash and cash equivalents |
| 218,648 |
| 14 |
| --- |
| 218,662 |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
State and municipal bonds |
| 319,392 |
| 2,947 |
| (253 | ) | 322,086 |
|
United States Treasury Notes |
| 3,079 |
| 8 |
| --- |
| 3,087 |
|
Marketable equity securities* |
| 26,339 |
| 11,439 |
| --- |
| 37,778 |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Total short-term investments |
| 348,810 |
| 14,394 |
| (253 | ) | 362,951 |
|
|
| --------- |
| --------- |
| --------- |
| --------- |
|
Total cash, cash equivalents, and |
| $567,458 |
| $14,408 |
| $(253 | ) | $581,613 |
|
|
| ====== |
| ====== |
| ====== |
| ====== |
|
*The carrying value of other marketable equity securities includeshas been reduced by other-than-temporary declines in the fair value of these securities.
74
Approximately $196.6$161.8 million and $224.9$196.6 million in investments are classified as cash equivalents as of November 30, 200129, 2002 and December 1, 2000, respectively. Unrealized gains (losses) on securities, net of taxes, are included in accumulated other comprehensive income, which is a separate component of stockholders' equity, and totaled $8.1 million and $5.1 million as of November 30, 2001, and December 1, 2000, respectively.
We recorded net realized gains (losses) from the sale of fixed income investments for the yearyears ended November 29, 2002 and November 30, 2001 of $3.3 million and December 1, 2000 of $5.8 million, and $(70,000), respectively. We also recorded net realized gains from the sale of our short-term equity investments for the years ended November 29, 2002 and November 30, 2001 and December 1, 2000 of $19.5$7.2 million and $12.7$19.5 million, respectively. In addition, we recorded losses related to other-than-temporary declines in the fair value of our marketable equity securities totaling $11.3 million for the year ended November 29, 2002 and $53.1 million for the year ended November 30, 2001 and $16.9 million for the year ended December 1, 2000. (See Note 1 for our policy on recording other-than-temporary declines in our marketable equity securities.)securities). All of the above gains and losses were included in investment gain (loss) on our consolidated statements of income.
As of November 30, 2001,29, 2002, the cost and estimated fair value of current debt securities and money market mutual funds with a maturity of one year or less were $287.9$290.6 million and $288.8$291.0 million, respectively, and the cost and estimated fair value of current debt securities with maturities ranging from one to five years was $225.9$287.6 million and $227.8$290.7 million, respectively. We have no securities with maturities over five years. These securities are classified as current assets based on the Company's intent and ability to use these securities as necessary to satisfy significant short-term liquidity requirements that may arise.
Note 4. Property and Equipment
Property and equipment consisted of the following:
| | November 30, 2001 | December 1, 2000 | ||||
|---|---|---|---|---|---|---|
| Land | $ | 3,382 | $ | — | ||
| Equipment | 139,850 | 140,205 | ||||
| Furniture and fixtures | 25,150 | 24,824 | ||||
| Capital projects in-progress | 12,593 | 7,915 | ||||
| Leasehold improvements | 38,384 | 27,013 | ||||
| 219,359 | 199,957 | |||||
| Less accumulated depreciation and amortization | 138,366 | 135,689 | ||||
| $ | 80,993 | $ | 64,268 | |||
|
| November 29, 2002 |
| November 30, 2001 |
|
|
| -------------- |
| -------------- |
|
Computers and equipment |
| $158,623 |
| $139,850 |
|
Furniture and fixtures |
| 28,728 |
| 25,150 |
|
Capital projects in-progress |
| 2,315 |
| 12,593 |
|
Leasehold improvements |
| 40,902 |
| 38,384 |
|
Building |
| 4,756 |
| --- |
|
|
| -------------- |
| -------------- |
|
|
| 235,324 |
| 215,977 |
|
Less accumulated depreciation and amortization |
| 164,234 |
| 138,366 |
|
|
| -------------- |
| -------------- |
|
|
| $71,090 |
| $77,611 |
|
|
| ======== |
| ======== |
|
We capitalize certain costs related to our website development in accordance with SOP 98-1. We amortize on a straight-line basis over eighteen to thirty-six months once the website is ready for its intended use. We launched Adobe StudioDesign Team (formerly Adobe Studio) in fiscal 2001 and subsequently recorded amortization expenseexpense.
During fiscal year 2002, we placed in service a building that we constructed in India.
During the third and fourth quarter of $0.9fiscal 2002, we recognized a $6.3 million pre-tax impairment charge for capitalized Adobe Design Team (formerly Adobe Studio) hosted server development costs. The impairment charge was recorded on our consolidated statement of income under cost of products revenue. The impairment charge was determined based on discounted future cash flows. For segment reporting purposes, the charge was included in our Cross-media Publishing segment.
Depreciation for the years ended November 29, 2002, November 30, 2001, and December 1, 2000 was $34.7 million, $29.8 million, and $29.3 million, respectively.
Note 5. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following:
|
| November |
| November |
| |||||||
|
| ------------ |
| --------- |
| |||||||
Goodwill |
| $100,915 |
| $53,679 |
| |||||||
Purchased technology and licensing agreements |
| 26,304 |
| 16,754 |
| |||||||
Other intangible assets |
| 13,978 |
| 11,036 |
| |||||||
|
| ------------ |
| --------- |
| |||||||
|
| 141,197 |
| 81,469 |
| |||||||
Less accumulated amortization |
| 41,425 |
| 45,067 |
| |||||||
|
| ------------ |
| --------- |
| |||||||
|
| $99,772 |
| $36,402 |
| |||||||
|
| ======== |
| ======== |
| |||||||
Amortization of goodwill and purchased intangibles for fiscal 2002 and 2001 primarily relates to the acquisitions of Glassbook, Inc. ("Glassbook") and GoLive Systems, Inc., a Delaware corporation, and GoLive Systems GmbH and Co. KG, a German limited partnership (together "GoLive").
As part of the acquisition of Accelio in April 2002, we allocated $75.0 million to goodwill which, in accordance with SFAS No. 142, will not be amortized. During the fourth quarter of fiscal 2002, we revised our estimate of certain costs associated with our acquisition of Accelio, resulting in an increase to goodwill of approximately $2.6 million. The adjustment primarily reflected higher than estimated transaction costs and costs related to closing redundant facilities. The goodwill associated with the acquisitions of Accelio and GoLive will be reviewed for impairment on an annual basis.
During the fourth quarter of fiscal 2002, we recognized a $6.8 million goodwill impairment charge for the remaining book value related to the Glassbook acquisition. This impairment charge is presented under amortization and impairment of goodwill and purchased intangibles on our consolidated statement of income. The impairment charge was determined based on discounted future cash flows.
As of November 29, 2002, other intangible assets consisted primarily of capitalized localization costs of $10.0 million and other intangible assets of $4.0 million. As of November 30, 2001, the amountintangibles and other assets consisted primarily of unamortized website development cost was $8.5 million.
75
Depreciation, which includes the amortization for website development cost, for the years ended November 30, 2001, December 1, 2000, and December 3, 1999 was $29.8 million, $29.3capitalized localization costs of $9.1 million and $32.6other intangible assets of $1.9 million. Amortization expense related to goodwill, purchased technology, capitalized localization, and other intangible assets was $28.8 million, $26.8 million, and $14.0 million in fiscal 2002, 2001, and 2000, respectively.
Note 5.6. Other Assets
Other assets consisted of the following:
| | November 30, 2001 | December 1, 2000 | ||||
|---|---|---|---|---|---|---|
| Investments | $ | 31,703 | $ | 72,490 | ||
| Goodwill | 53,679 | 53,679 | ||||
| Purchased technology and licensing agreements | 16,754 | 16,703 | ||||
| Intangibles and other assets | 13,603 | 7,719 | ||||
| 115,739 | 150,591 | |||||
| Less accumulated amortization | 45,067 | 23,355 | ||||
| $ | 70,672 | $ | 127,236 | |||
|
| November 29, 2002 |
| November 30, 2001 |
|
|
| -------------- |
| -------------- |
|
Investments |
| $35,617 |
| $31,703 |
|
Security deposits |
| 3,186 |
| 2,567 |
|
Land deposit |
| 3,323 |
| 3,382 |
|
|
| -------------- |
| -------------- |
|
|
| $42,126 |
| $37,652 |
|
|
| ======== |
| ======= |
|
We own a minority interest in certain companies and limited partnership interests in Adobe Ventures. The limited partnership investments are accounted for under the equity method, as contractually the partnerships are controlled by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures.
In March 1997, as part of our venture investing program, we established an internal limited partnership, Adobe Incentive Partners, L.P. ("AIP"), which allowsallowed certain of Adobe's executive officers to participate in cash or stock distributions from Adobe's venture investments. AssetsIn November 2002, the partnership was liquidated. Immediately prior to the liquidation, assets held by AIP includeincluded Adobe's entire interests in Adobe Ventures L.P. and Adobe Ventures II, L.P. and certain equity securities of privately-held companies. Adobe iswas both the general partner and a limited partner of AIP. Other limited partners arewere 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. In fiscal 2002, the participating officers received cash distributions with an aggregate fair value of $0.6 million, including a $0.3 million distribution related to the partnership liquidation. At November 2 9, 2002, due to the partnership liquidation, there was no minority interest held by the participating officers. The liquidation of the partnership did not have any material impact on our financial statements.
The investments in Adobe Ventures L.P.; Adobe Ventures II, L.P.; Adobe Ventures III, L.P.; and Adobe Ventures IV, L.P., which were established to invest in emerging technology companies strategic to Adobe's software business, totaled $1.7 million, $3.1 million, $7.3 million, and $22.7 million, respectively, as of November 29, 2002, and totaled $4.2 million, $7.8 million, $12.8 million, and $11.7 million, respectively, as of November 30, 2001, and totaled $4.8 million, $15.7 million, $44.2 million, and $4.1 million, respectively, as of December 1, 2000.2001. Our investments in the limited partnerships are adjusted to reflect our equity interest in Adobe Ventures L.P.; Adobe Ventures II, L.P.; Adobe Ventures III, L.P.; and Adobe Ventures IV, L.P.'s investment income (loss) and dividend distributions, which totaled $(15.4) million, $(49.2) million, $0.4 million, and $12.4$0.4 million in fiscal years 2002, 2001, 2000, and 1999,2000, respectively.
76
We have commitments to the Adobe Venture limited partnerships. The following table shows the capital commitments and the capital contributed as of November 30, 2001:29, 2002:
| | Capital Commitment | Capital Contributed | ||||
|---|---|---|---|---|---|---|
| Adobe Ventures L.P. | $ | 40,000,000 | $ | 40,475,757 | ||
| Adobe Ventures II, L.P. | $ | 40,000,000 | $ | 36,947,363 | ||
| Adobe Ventures III, L.P. | $ | 60,000,000 | $ | 56,162,222 | ||
| Adobe Ventures IV, L.P. | $ | 100,000,000 | $ | 18,292,333 | ||
| Capital Commitment |
| Capital Contributed |
Adobe Ventures L.P. | $ 40,000 |
| $ 40,476 |
Adobe Ventures II, L.P. | $ 40,000 |
| $ 37,541 |
Adobe Ventures III, L.P. | $ 60,000 |
| $ 57,353 |
Adobe Ventures IV, L.P. | $ 100,000 |
| $ 35,418 |
The capital commitment is the amount that Adobe has agreed to contribute to the Partnership. The capital commitment amount is contributed over the term of each Partnership, which is ten years. We can contribute more than the capital commitment, at our discretion. We can cease funding at any time after the earlier of: a) two years after the effective date of the Partnership or b) the date on which the Company has made capital contributions to the Partnership in an amount in excess of $10.0 million, $10.0 million, $20.0 million, and $33.0 million for Adobe Ventures L.P., Adobe Ventures II, L.P., Adobe Ventures III, L.P., and Adobe Ventures IV, L.P., respectively.
In addition to these venture partnerships, we have direct investments in public and privately-held companies. In total, as of November 30, 2001,29, 2002, we have invested $194.9$213.9 million through our venture partnerships and direct investments. As of November 30, 2001,29, 2002, net returns were $354.3$348.7 million, including stock dividends and net gains in market value of investments.
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. Under the terms of the partnership agreements, the general partner has the sole and exclusive right to manage and control the partnerships. Adobe as the limited partner has certain rights, including replacing the general partner and approving acquisitions that exceed certain established parameters. However, these rights are considered to be protective rights and do not suggest an ability to control the partnerships. 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, 200129, 2002 are not publicly traded, and, therefore, there is no established market for their securities. As such,In order to determine the fair market value of these investments, are determined by Granite Ventures usingwe use the most recent round of financing involving new non-strategic investors or estimates made by Granite Ventures. We have aVentures based on their assessment of the current market value. It is our 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. publicpublicly traded 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.
We own minority interests in certain technology companies totaling $0.7 million and $3.8 million asAs of November 30, 200129, 2002 and December 1, 2000, respectively.
As of November 30, 2001, our portfolio of investments included in Other Assets had an estimated fair market value of $35.6 million and $31.7 million.
77
As of November 30, 2001, intangibles and other assets consisted primarily of capitalized localization costs of $9.1 million and other intangible assets of $4.5 million. As of December 1, 2000, intangibles and other assets consist primarily of capitalized localization costs of $4.5 million and other intangible assets of $3.2 million. Amortization expense related to goodwill, purchased technology, capitalized localization, and other intangible assets was $26.8 million and $14.0 million in fiscal 2001 and 2000, respectively.
Note 6.7. Accrued Expenses
Accrued expenses consisted of the following:
| | November 30, 2001 | December 1, 2000 | ||||
|---|---|---|---|---|---|---|
| Accrued compensation and benefits | $ | 44,555 | $ | 96,162 | ||
| Sales and marketing allowances | 4,956 | 6,435 | ||||
| Minority interest | 544 | 1,999 | ||||
| Other | 69,203 | 77,265 | ||||
| $ | 119,258 | $ | 181,861 | |||
|
| November 29, 2002 |
| November 30, 2001 |
|
-------------- | -------------- | ||||
Accrued compensation and benefits |
| $54,117 |
| $44,555 |
|
Sales and marketing allowances |
| 7,371 |
| 4,956 |
|
Accrued restructuring |
| 10,975 |
| 9,573 |
|
Other |
| 62,565 |
| 71,297 |
|
-------------- | -------------- | ||||
|
| $135,028 |
| $130,381 |
|
======== | ======== |
Note 7.8. Restructuring and Other Charges
Fiscal 2002 restructuring program
In the fourth quarter of fiscal 2002, we incurred a restructuring charge of $11.1 million, which included severance and related charges and charges related to the closure of a facility. The related restructuring program eliminated 239 engineering, sales and marketing, and general and administrative positions worldwide in order to realign our resources for our future business plans. These plans include adding resources to support our ePaper enterprise business in fiscal 2003.
The restructuring program is expected to be completed in fiscal 2003. Of the $11.1 million in charges, $4.7 million remains accrued at November 29, 2002.
The following table depicts the activity for the fourth quarter 2002 restructuring program through November 29, 2002:
Accrued Balance at November 30, 2001 | Total Charges | Cash Payments | Accrued Balance at November 29, 2002 | ||||||
--------------- | ---------------- | ---------- | -------------- | ||||||
Severance and related charges | $ --- | $10,119 | $(6,349 | ) | $3,771 | ||||
Facility | --- | 975 | --- | 975 | |||||
-------------- | ---------------- | ---------- | -------------- | ||||||
$--- | $11,094 | $(6,349 | ) | $4,746 | |||||
========= | ========== | ======= | ========= |
In the second quarter of fiscal 2002, we implemented a restructuring program to eliminate 39 redundant sales and marketing positions held by Adobe employees worldwide as a result of the acquisition of Accelio. The restructuring included severance and related charges associated with the reduction in force and the cost of vacating a leased facility. Total restructuring and other charges were $1.6 million and the majority of these payments were paid in the second quarter of fiscal 2002. Of the $1.6 million in charges, $.05 million remains accrued at November 29, 2002. The remaining payments will be paid in the first quarter of fiscal 2003.
The following table depicts the activity for the second quarter fiscal 2002 restructuring program through November 29, 2002:
Accrued Balance at November 30, 2001 | Total Charges | Cash Payments | Accrued Balance at November 29, 2002 | ||||||
----------------- | ------------------ | ------------- | ----------------- | ||||||
Severance and related charges | $ --- | $1,600 | $(1,553 | ) | $47 | ||||
Facility | --- | 5 | --- | 5 | |||||
----------------- | ------------------ | ------------- | ----------------- | ||||||
$--- | $1,605 | $(1,553 | ) | $52 | |||||
========== | ========== | ======= | ========= |
Fiscal 2001 restructuring program
In the fourth quarter of fiscal 2001, we implemented a restructuring plan to realign our workforce to our future strategic goals and to align our resources with our lower fiscal 2002 revenue targets. We believe thistargets due to adverse economic conditions resulting in part from the events of September 11, 2001. This restructuring will enableenabled us to increase our investment in digital imaging, digital video, and ePaper-based businesses in fiscal 2002. As part of the restructuring program, we implemented a reduction in force of 247 positions, affecting organizations throughout the company. The reductions came predominantly from sales and marketing and in our North American operations, and as of November 30, 2001, the majority of these terminations were completed. TotalThe restructuring and other chargescharge in the fourth quarter of fiscal 2001 was $12.1 million, all of which all related to severance and related charges associated with the reduction in force. Of the $12.1 million in charges, $9.6 million remains accrued at November 30, 2001. The majority of these severance payments will be paid in early 2002.
The following table depicts the restructuring and other charges at November 30, 2001:
| | Accrual Balance at December 1, 2000 | Total Charges (Credits) | Cash Payments | Accrued Balance at November 30, 2001 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Severance and related charges | $ | — | $ | 12,063 | $ | (2,490 | ) | $ | 9,573 | |||
During fiscal 1999 and 1998, we implemented three different restructuring programs. These separate restructuring programs were directly focused on improving our competitive position as well as enhancing our allocation of resources.
78
During the secondfourth quarter of fiscal 2000,2002, we paid our remaining obligations totaling $8.0 million, related to the three fiscal 1999 and fiscal 1998 restructuring programs. In addition to the cash payments made, weunder our 2001 restru cturing program. We also revised our estimate of the total costs associated with the restructuring programs,program, resulting in an adjustment of approximately $0.7$0.6 million. The adjustment primarily reflected lower than estimated severance and related charges attributable to employees whose positions were eliminated as a result of the restructurings but who were able to find alternative employment within Adobe. The remaining adjustment was due to lower than expected charges related to vacating leased facilities.charges. As of December 1, 2000,November 29, 2002, there was no restructuring liability remaining for our fiscal 1999 and 1998year 2001 restructuring programs. The tables below show the breakdown of the cash payments and adjustments made in fiscal 2000 for the three separate restructuring programs.
Fiscal 1999 restructuring programs
The fourth quarter 1999 restructuring program was implemented to enhance our worldwide customer support activity and to streamline the product distribution and warehouse operations in North America. This restructuring program included a reduction in force of 86 positions and the closure of the North American distribution warehouse as a result of our decision to outsource our North American distribution operation and the majority of our customer support services. The reduction in force primarily affected employees in Seattle, Washington and Santa Clara, California. We incurred $2.1 million in total charges in the fourth quarter of fiscal 1999 as a result of the restructuring, which included severance and related charges associated with the reduction in force and charges related to vacating leased facilities. During fiscal 2000, we paid our remaining obligation, and as of December 1, 2000, no restructuring liability existed.program.
The following table depicts the activity for the 1999 fourth-quarterfiscal year 2001 restructuring program through December 1, 2000:November 29, 2002:
| | Accrued Balance at December 3, 1999 | Cash Payments | Accrued Balance at December 1, 2000 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Severance and related charges | $ | 1,953 | $ | (1,953 | ) | $ | — | ||
| Lease termination costs | 103 | (103 | ) | — | |||||
| $ | 2,056 | $ | (2,056 | ) | $ | — | |||
Accrued Balance at November 30, 2001 | Cash Payments | Adjustments | Accrued Balance at November 29, 2002 | ||||||
----------------- | ------------- | ---------------- | ---------------- | ||||||
Severance and related charges | $9,573 | $(9,022 | ) | $(551 | ) | $--- | |||
========= | ======= | ======== | ======== |
The 1999 restructuring program that we implemented throughout the second and third quarters of fiscal 1999 was directly related to the centralization of our worldwide sales and administrative organizations and the realignment of our Printing Solutions business. This program included a reduction in force of 198 positions, two of which were executive positions. The reduction in force primarily affected our European headquarters in Edinburgh, Scotland and our North American headquarters in San Jose, California. In addition to severance and related charges associated with the reduction in force, the restructuring program included charges for vacating leased facilities. These restructuring actions in the second and third quarters of fiscal 1999 resulted in total charges of $17.6 million, of which approximately $0.1 million were noncash charges. During fiscal 2000, we paid our remaining obligation related to this restructuring program, and as of December 1, 2000, no restructuring liability existed.
79
The following table depicts the activity for the 1999 second-quarter restructuring program through December 1, 2000:
| | Accrued Balance at December 3, 1999 | Cash Payments | Adjustments | Accrued Balance at December 1, 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Severance and related charges | $ | 5,207 | $ | (4,787 | ) | $ | (420 | ) | $ | — | ||
| Lease termination costs | 435 | (426 | ) | (9 | ) | — | ||||||
| Other charges | 205 | (205 | ) | — | — | |||||||
| $ | 5,847 | $ | (5,418 | ) | $ | (429 | ) | $ | — | |||
Fiscal 1998 restructuring program
The 1998 restructuring program was implemented to refocus our product development efforts and to eliminate management redundancies in our organization. This program consisted of severance and related charges for 364 positions, four of which were executive positions. In addition, we divested two business units, canceled certain contracts, and vacated leased facilities. These restructuring actions in fiscal 1998 resulted in total charges of $38.2 million, of which approximately $9.1 million were noncash charges. During fiscal 2000, we paid our remaining obligation related to this restructuring program, and as of December 1, 2000, no restructuring liability existed.
| | Accrued Balance at December 3, 1999 | Cash Payments | Adjustments | Accrued Balance at December 1, 2000 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Severance and related charges | $ | 259 | $ | (87 | ) | $ | (172 | ) | $ | — | ||
| Lease termination costs | 78 | (7 | ) | (71 | ) | — | ||||||
| Other charges | 435 | (435 | ) | — | — | |||||||
| $ | 772 | $ | (529 | ) | $ | (243 | ) | $ | — | |||
Other Charges
During the second quarter of fiscal 2000, we recorded other charges of approximately $6.3 million that were unusual in nature. These charges related to the disposal of certain equipment and one-time litigation-related expenses.
During the third and fourth quarters of fiscal 1999, we recorded other charges of approximately $8.4 million that were unusual in nature. These charges included $2.0 million associated with the cancellation of a contract and $2.2 million for accelerated depreciation related to the adjustment of the useful life of certain assets as a result of decisions made by our management as part of the restructuring program. We also incurred a nonrecurring compensation charge of $2.6 million for a terminated employee and consulting fees of $1.6 million to assist in the restructuring of our operations.
As of November 30, 2001 no obligations existed related to the fiscal 1999 and 1998 restructuring programs.
80
Note 8.9. Income Taxes
Income before income taxes includes net income from foreign operations of approximately $163.0 million, $90.0 million, $39.0 million, and $23.1$39.0 million for the years ended November 29, 2002, November 30, 2001;2001, and December 1, 2000; and December 3, 1999,2000, respectively.
The provision for income taxes consisted of the following:
| | Years Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | November 30, 2001 | December 1, 2000 | December 3, 1999 | ||||||||
| Current: | |||||||||||
| United States federal | $ | 52,355 | $ | 13,096 | $ | 54,097 | |||||
| Foreign | 16,087 | 11,452 | 11,346 | ||||||||
| State and local | 4,753 | 5,063 | 12,061 | ||||||||
| Total current | 73,195 | 29,611 | 77,504 | ||||||||
| Deferred: | |||||||||||
| United States federal | (14,494 | ) | (1,569 | ) | (569 | ) | |||||
| Foreign | (767 | ) | 3,568 | 1,810 | |||||||
| State and local | (2,339 | ) | (601 | ) | (547 | ) | |||||
| Total deferred | (17,600 | ) | 1,398 | 694 | |||||||
| Charge in lieu of taxes attributable to employee stock plans | 45,692 | 124,922 | 58,478 | ||||||||
| $ | 101,287 | $ | 155,931 | $ | 136,676 | ||||||
|
| Years Ended |
| ||||
|
| November 29, |
| November 30, |
| December 1, |
|
---------- | ----------- | --------- | |||||
Current: |
|
|
|
|
|
|
|
United States federal |
| $63,547 |
| $52,355 |
| $13,096 |
|
Foreign |
| 8,344 |
| 16,087 |
| 11,452 |
|
State and local |
| 5,055 |
| 4,753 |
| 5,063 |
|
---------- | ----------- | -------- | |||||
Total current |
| 76,946 |
| 73,195 |
| 29,611 |
|
---------- | ----------- | -------- | |||||
Deferred: |
|
|
|
|
|
|
|
United States federal |
| (4,984 | ) | (14,494 | ) | (1,569 | ) |
Foreign |
| 259 |
| (767 | ) | 3,568 |
|
State and local |
| (761 | ) | (2,339 | ) | (601 | ) |
---------- | ----------- | -------- | |||||
Total deferred |
| (5,486 | ) | (17,600 | ) | 1,398 |
|
---------- | ----------- | -------- | |||||
Charge in lieu of taxes attributable to employee stock plans |
| 21,830 |
| 45,692 |
| 124,922 |
|
---------- | ----------- | -------- | |||||
|
| $93,290 |
| $101,287 |
| $155,931 |
|
======== | ======== | ====== | |||||
Total income tax expense differs from the expected tax expense (computed by multiplying the United States federal statutory rate of 35% for fiscal year 2002, 2001, 2000, and 19992000 by income before income taxes) as a result of the following:
| | Years Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | November 30, 2001 | December 1, 2000 | December 3, 1999 | |||||||
| Computed "expected" tax expense | $ | 107,426 | $ | 155,309 | $ | 131,050 | ||||
| State tax expense, net of federal benefit | 6,983 | 12,403 | 14,419 | |||||||
| Nondeductible goodwill | 3,178 | 958 | — | |||||||
| Tax-exempt income | (4,496 | ) | (3,868 | ) | (2,650 | ) | ||||
| Tax credits | (8,000 | ) | (8,000 | ) | (2,450 | ) | ||||
| Foreign tax rate differential | (2,653 | ) | (571 | ) | — | |||||
| Other, net | (1,151 | ) | (300 | ) | (3,693 | ) | ||||
| $ | 101,287 | $ | 155,931 | $ | 136,676 | |||||
81
|
| Years Ended |
| ||||
|
| November 29, 2002 |
| November 30, 2001 |
| December 1, |
|
---------------- | ---------------- | ----------------- | |||||
Computed "expected" tax expense |
| $99,641 |
| $107,426 |
| $155,309 |
|
State tax expense, net of federal benefit |
| 6,477 |
| 6,983 |
| 12,403 |
|
Nondeductible goodwill |
| 7,437 |
| 3,178 |
| 958 |
|
Tax-exempt income |
| (3,915 | ) | (4,496 | ) | (3,868 | ) |
Tax credits |
| (6,000 | ) | (8,000 | ) | (8,000 | ) |
Differences between statutory rate and foreign effective |
| (9,487 | ) | (2,653 | ) | (571 | ) |
Other, net |
| (863 | ) | (1,151 | ) | (300 | ) |
---------------- | ---------------- | ----------------- | |||||
|
| $93,290 |
| $101,287 |
| $155,931 |
|
========= | ========= | ========= | |||||
The tax effects of the temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of fiscal 20012002 and 20002001 are presented below:
| | November 30, 2001 | December 1, 2000 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Deferred tax assets: | |||||||||
| Acquired technology | $ | 12,980 | $ | 11,920 | |||||
| Reserves and deferred revenue | 28,738 | 29,625 | |||||||
| Unrealized losses on investments | 1,886 | — | |||||||
| Other | — | 608 | |||||||
| Total gross deferred tax assets | 43,604 | 42,153 | |||||||
| Deferred tax asset valuation allowance | (525 | ) | (525 | ) | |||||
| Total deferred tax assets | 43,079 | 41,628 | |||||||
| Deferred tax liabilities: | |||||||||
| Depreciation and amortization | (6,041 | ) | (5,164 | ) | |||||
| Unrealized gains on investments | — | (14,379 | ) | ||||||
| Other | (2,718 | ) | (892 | ) | |||||
| Total deferred tax liabilities | (8,759 | ) | (20,435 | ) | |||||
| Net deferred tax assets | $ | 34,320 | $ | 21,193 | |||||
|
| November 29, 2002 |
| November 30, 2001 |
|
------------ | ------------- | ||||
Deferred tax assets: |
|
|
|
|
|
Acquired technology |
| $13,845 |
| $12,980 |
|
Reserves and deferred revenue |
| 25,621 |
| 28,738 |
|
Unrealized losses on investments |
| 26,159 |
| 1,886 |
|
Credits |
| 1,500 |
| --- |
|
------------ | ------------- | ||||
Total gross deferred tax assets |
| 67,125 |
| 43,604 |
|
Deferred tax asset valuation allowance |
| --- |
| (525 | ) |
------------ | ------------- | ||||
Total deferred tax assets |
| 67,125 |
| 43,079 |
|
------------ | ------------- | ||||
Deferred tax liabilities: |
|
|
|
|
|
Depreciation and amortization |
| (8,264 | ) | (6,041 | ) |
Other |
| (2,881 | ) | (2,718 | ) |
------------ | ------------- | ||||
Total deferred tax liabilities |
| (11,145 | ) | (8,759 | ) |
------------ | ------------- | ||||
Net deferred tax assets |
| $55,980 |
| $34,320 |
|
======== | ======== |
We provide United States income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are considered permanently reinvested outside the United States. To the extent that the foreign earnings previously treated as permanently reinvested are repatriated, the related United States tax liability may be reduced by any foreign income taxes paid on these earnings.
For financial reporting purposes, a valuation allowance hashad been established for certain deferred assets related to the writedownwrite-down of investments. The valuation allowance decreased $0.5 million during the year. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.
At the end of fiscal 2002, the Company had state tax credit carryforwards of approximately $1.5 million that can be carried forward indefinitely.
Below is a summary roll-forward schedule of the income tax payable accounts as of November 29, 2002 and November 30, 2001:
|
| November 29, 2002 |
| November 30, 2001 |
|
-------------- | -------------- | ||||
Beginning balance |
| $132,228 |
| $74,768 |
|
Plus: Current year liability |
| 76,946 |
| 73,195 |
|
Less: Payments and reclasses |
| (35,863 | ) | (15,735 | ) |
-------------- | -------------- | ||||
Ending balance |
| $173,311 |
| $132,228 |
|
======== | ======== |
Note 9.10. Benefit Plans
Pretax Savings Plan
In 1987, we adopted an Employee Investment Plan, qualified under Section 401(k) of the Internal Revenue Code, which is a pretax savings plan covering substantially all of our United States employees. Under the plan, eligible employees may contribute up to 18% of their pretax salary, subject to the Internal Revenue Service annual contribution limits. In fiscal 2001,2002, we matched 50% of the first 6% of the employee's contribution. We contributed approximately $6.0 million, $5.8 million, $4.5 million, and $2.2$4.5 million in fiscal 2002, 2001, 2000, and 1999,2000, respectively. We can terminate matching contributions at our discretion.
Profit Sharing Plan
We have a profit sharing plan that provides for profit sharing payments to all eligible employees following each quarter in which we achieve at least 80% of our budgeted earnings for the quarter. The plan, as well as the annual operating budget on which the plan is based, is approved by our Board of
82
Directors. We contributed approximately $10.3$18.8 million, $21.4$11.6 million, and $23.2$21.7 million to the plan in fiscal 2002, 2001, and 2000, and 1999, respectively.
Adobe Incentive Partners
In March 1997, as part of our venture investing program, we established an internal limited partnership, Adobe Incentive Partners, L.P. ("AIP"), which allowsallowed certain of ourAdobe's executive officers to participate in cash or stock distributions from Adobe's venture investments. In November 2002, the partnership was liquidated. Immediately prior to the liquidation, assets held by AIP included Adobe's entire interests in Adobe isVentures L.P. and Adobe Ventures II, L.P. and certain equity securities of privately-held companies. Adobe was both the general partner and a limited partner of AIP. Other limited partners arewere 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 2002, 2001, 2000, or 1999.2000.
Adobe's Class A senior limited partnership interest includesin AIP included 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 qualifiesqualified for partnership distributions only after (a) Adobe hashad fully recovered the cost basis of ourits investment in the specific investee company for which a distribution is made,was made; and (b) the participating executive hashad vested in his or her distribution rights. The distribution rights generally vested on a monthly basis over three years, such that the rightsand 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 hadwere fully vested or ceased vesting. The limited partnership investments arewere restricted to investments in Adobe Ventures or in companies that arewere private at the time of the establishment of AIP, or when the investment iswas made, whichever iswas later. Class B interests may not exceed a maximum of 20% ofIn fiscal 2002, the venture investments included in AIP.
Assets held by AIP include Adobe's entire interests in Adobe Ventures L.P. and Adobe Ventures II, L.P., as well as securities of certain privately held companies. At November 30, 2001, the cost basis and recordedparticipat ing officers received cash distributions with an aggregate fair value of all investments included in AIP were $24.9 million and $12.7 million, respectively. In fiscal 2001, AIP recorded net loss of $30.1 million. In fiscal 2001, the participating officers received aggregate distributions of $0.6 million, consisting primarily of equity securities. Theincluding a $0.3 million distribution related to the officers represents their share of nonmarketable securities that become marketable as a result of a public offering, as well as their share of cash resulting from investments that were liquidated by AIP.partnership liquidation. At November 30, 2001,29, 2002, due to the partnership liquidation, there was no minority interest held by the participating officers was $0.5 millionofficers.
Note 11. Employee and is included in accrued expenses on the Consolidated Balance Sheet.
Note 10. EmployeeDirector Stock Plans
Stock Option PlansEquity Compensation
As of November 30, 2001, we had reserved 176.2 million shares29, 2002, our equity compensation plans consist of common stock for issuance, under the 1983 Stock Option Plan, 1984 Stock Option Plan, as amended, the Aldus 1984 Restated Stock Option Plan, the 1994 Stock Option Plan (the "1994 Plan"), and the 1999 Equity Incentive Plan (the "1999 Plan"), formerly called the 1999 Nonstatutory Stock Option Plan (the "1999 Plan") (collectively, the "Option Plans"), for employees. The Option Plans provide for the granting of stock options to employees and officers at the fair market value of our common stock aton the grant date. Additionally, the 1999 Plan provides for awards in the form of stock appreciation rights, stock purchase rights, stock bonuses, performance shares and performance units, although no awards of these types have been made from the 1999 Plan to date. Currently, we grant options only from the 1994 Plan and the 1999 Plan. Initial options and some subsequent options granted under the Option Plans, except for the 1984 Restated Stock Option Plan,
83
generally vest 25% after the first year and ratably thereafter such that 50% and 100% are vested after the second and third year, respectively; the remainingrespectively, although some subsequent options granted under the Option Plans generally vest ratably over the entire term such that 50% and 100% are vested after the second and third year, respectively. Options ingranted under the 1984 Restated Stock Option Plan have a five year vestvesting period and 20% vest after the first year and monthly thereafter.thereafter; all such options are fully vested or have ceased vesting. Outstanding option terms under the Option Plans range from five to ten years. TheOption terms under the 1999 Plan are generally has option termseight years under existing options of eight years.options. A limited number of the options granted in fiscal 2000 under the 1999 Plan had a vesting acceleration feature so that they would vest in full in November 2000 if certain milestones were met by Adobe; if the milestones were not met, the options would have vested in full in September 2002Adobe (the milestones were met). Those options expire in September 2003. As of November 30, 2001,29, 2002, approximately 53.657.0 million shares arewere reserved for issuance upon exercise of outstanding options andunder the Option Plans a nd approximately 11.64.6 million shares arewere available for grant under the Option Plans. The Company's 1994 Plan expires on December 17, 2003. The Company's 1999 Plan will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the 1999 Plan have been issued and restrictions on issued shares have lapsed. Neither the Nasdaq current listing standards nor federal law has required stockholder approval of this 1999 Equity Incentive Plan, and accordingly it has not been approved by the Company'sour stockholders.
As of November 30, 2001,29, 2002, we had reserved 2.93.3 million shares of common stock for issuance under our 1996 Outside Directors Stock Option Plan, as amended (the "1996"Directors Plan") and the 1987 Restricted Stock Option Plan (collectively, the "Outside Directors Plans"). The Outside Directors Plans providePlan provides for the granting of nonqualified stock options to nonemployee directors. Currently, we grant options only from the 1996 Plan. Option grants are limited to 40,000 shares per person in each fiscal year, except for a new non-employee director, who is granted 60,000 shares upon election as a director. All optionsOptions have a ten-year term and are exercisable as vested within a ten-year term. Options generallyand vest over three years: 25% on the day preceding each of Adobe's next two annual meetings of stockholders and 50% on the day preceding Adobe's third annual meeting of stockholders after the grant of the option. The exercise price of the options that are issued is equal to the fair market value of our common stock on the date of grant. In fiscal 2002, we granted options for an aggregate of 240,000 shares with an exercise price of $39.04 to existing directors and an option for 60,000 shares to a new director with a n exercise price of $33.00. In fiscal 2001, we granted options for an aggregate of 200,000 shares with an exercise price of $41.06 to existing directors. In fiscal 2000, we granted options for an aggregate of 160,000 shares with an exercise price of $61.72 to existing directors and an option for 60,000 shares to a new director with an exercise price of $78.88. In fiscal 1999, we granted options for an aggregate of 80,000 shares with an exercise price of $14.86 to existing directors. As of November 30, 2001,29, 2002, approximately 0.60.8 million shares arewere reserved for issuance upon exercise of outstanding options under the Outside Directors Plans and approximately 0.51.0 million shares arewere available for grant under the 1996Directors Plan. The Directors Plan will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued and restrictions on issued shares
have lapsed.
84
Stock option activity for fiscal 2002, 2001, 2000, and 19992000 is presented below:
| | Years Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | November 30, 2001 | December 1, 2000 | December 3, 1999 | ||||||||||||
| | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||||
| Outstanding, beginning of year | 45,017,400 | $ | 38.26 | 38,149,038 | $ | 18.56 | 41,763,280 | $ | 7.92 | ||||||
| Granted | 19,177,315 | 28.38 | 19,669,375 | 60.90 | 18,588,080 | 29.68 | |||||||||
| Exercised | (4,826,823 | ) | 12.55 | (8,724,580 | ) | 11.17 | (17,042,800 | ) | 7.50 | ||||||
| Canceled | (5,083,575 | ) | 44.89 | (4,076,433 | ) | 21.15 | (5,159,522 | ) | 9.06 | ||||||
| Outstanding, end of year | 54,284,317 | 36.66 | 45,017,400 | 38.26 | 38,149,038 | 18.56 | |||||||||
| Exercisable, end of year | 20,844,567 | 29.27 | 11,478,693 | 18.53 | 9,799,482 | 7.92 | |||||||||
| Weighted average fair value of options granted during the year | $ | 15.20 | $ | 29.89 | $ | 11.66 | |||||||||
|
| Years Ended |
| |||||||||||||||||||||||||||||||||||||
|
| November 29, 2002 |
| November 30, 2001 |
| December 1, 2000 |
| |||||||||||||||||||||||||||||||||
|
| Number of Options Outstanding |
| Weighted Average Exercise Price |
| Number of Options Outstanding |
| Weighted Average Exercise Price |
| Number of Options Outstanding |
| Weighted Average Exercise Price |
| |||||||||||||||||||||||||||
|
| ------------- |
| -------- |
| ---------- |
| ---------- |
| ----------- |
| --------- |
| |||||||||||||||||||||||||||
Outstanding, beginning of year |
| 54,284,317 |
| $36.66 |
| 45,017,400 |
| $38.26 |
| 38,149,038 |
| $18.56 |
| |||||||||||||||||||||||||||
Granted |
| 11,973,680 |
| 28.77 |
| 19,177,315 |
| 28.38 |
| 19,669,375 |
| 60.90 |
| |||||||||||||||||||||||||||
Exercised |
| (3,688,534 | ) | 15.99 |
| (4,826,823 | ) | 12.55 |
| (8,724,580 | ) | 11.17 |
| |||||||||||||||||||||||||||
Canceled |
| (4,722,413 | ) | 45.20 |
| (5,083,575 | ) | 44.89 |
| (4,076,433 | ) | 21.15 |
| |||||||||||||||||||||||||||
|
| ------------ |
|
|
| ---------- |
|
|
| ---------- |
|
|
| |||||||||||||||||||||||||||
Outstanding, end of year |
| 57,847,050 |
| 35.64 |
| 54,284,317 |
| 36.66 |
| 45,017,400 |
| 38.26 |
| |||||||||||||||||||||||||||
|
| ======== |
|
|
| ========= |
|
|
| ======== |
|
|
| |||||||||||||||||||||||||||
Exercisable, end of year |
| 26,402,239 |
| 35.65 |
| 20,844,567 |
| 29.27 |
| 11,478,693 |
| 18.53 |
| |||||||||||||||||||||||||||
|
| ======== |
|
|
| ========= |
|
|
| ======== |
|
|
| |||||||||||||||||||||||||||
Weighted average fair value of |
|
|
| $13.49 |
|
|
| $15.20 |
|
|
| $29.89 |
| |||||||||||||||||||||||||||
Information regarding the stock options outstanding at November 30, 200129, 2002 is summarized below:
| | Options Outstanding | Options Exercisable | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices | Shares Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Shares Exercisable | Weighted Average Exercise Price | |||||||
| $2.56 - $3.66 | 135,368 | 0.87 years | $ | 3.62 | 135,368 | $ | 3.62 | |||||
| $4.06 - $5.97 | 43,810 | 1.69 years | 5.04 | 43,810 | 5.04 | |||||||
| $6.22 - $8.44 | 1,372,986 | 3.55 years | 7.66 | 1,370,751 | 7.66 | |||||||
| $8.45 | 5,794,010 | 4.49 years | 8.45 | 5,774,608 | 8.45 | |||||||
| $9.66 - $14.09 | 1,193,142 | 5.24 years | 11.62 | 1,026,050 | 11.49 | |||||||
| $14.86 - $21.34 | 774,346 | 5.64 years | 17.85 | 506,370 | 17.62 | |||||||
| $24.11 - $26.16 | 399,326 | 6.48 years | 24.83 | 146,091 | 24.75 | |||||||
| $26.95 | 7,144,750 | 7.91 years | 26.95 | 0 | 0 | |||||||
| $27.14 - $27.69 | 9,341,105 | 7.24 years | 27.68 | 1,538,033 | 27.69 | |||||||
| $27.94 - $41.78 | 11,029,903 | 6.11 years | 35.55 | 4,664,443 | 35.48 | |||||||
| $44.05 - $65.81 | 15,595,038 | 6.56 years | 60.24 | 5,223,815 | 59.14 | |||||||
| $66.63 - $83.19 | 1,460,533 | 6.95 years | 74.86 | 415,228 | 75.96 | |||||||
| 54,284,317 | 6.42 years | $ | 36.66 | 20,844,567 | $ | 29.27 | ||||||
|
| Options Outstanding |
| Options Exercisable |
| ||||||
Range of Exercise Prices |
| Number Outstanding |
| Weighted Average Remaining Contractual Life |
| Weighted Average Exercise Price |
| Number Exercisable |
| Weighted Average Exercise Price |
|
|
| ----------------- |
| ------------------- |
| -------------- |
| ------------------- |
| ------------------ |
|
$3.38---$4.69 |
| 12,554 |
| 0.59 years |
| $3.69 |
| 12,514 |
| $3.69 |
|
$5.22---$7.75 |
| 537,681 |
| 1.54 years |
| 6.89 |
| 521,881 |
| 6.89 |
|
$7.91---$8.34 |
| 583,241 |
| 3.41 years |
| 8.24 |
| 579,641 |
| 8.24 |
|
$8.45 |
| 4,384,610 |
| 3.49 years |
| 8.45 |
| 4,345,910 |
| 8.45 |
|
$9.66---$14.09 |
| 644,558 |
| 4.37 years |
| 11.61 |
| 642,105 |
| 11.61 |
|
$14.86---$22.19 |
| 1,019,181 |
| 6.40 years |
| 18.31 |
| 452,366 |
| 18.01 |
|
$24.11---$26.47 |
| 8,948,429 |
| 7.87 years |
| 26.40 |
| 199,596 |
| 24.78 |
|
$26.95 |
| 6,703,250 |
| 6.91 years |
| 26.95 |
| 698,196 |
| 26.95 |
|
$27.00---$27.69 |
| 8,190,232 |
| 6.26 years |
| 27.67 |
| 2,731,467 |
| 27.68 |
|
$27.94---$41.78 |
| 11,901,845 |
| 5.62 years |
| 36.20 |
| 7,912,306 |
| 35.58 |
|
$44.05---$65.81 |
| 13,722,563 |
| 5.56 years |
| 60.22 |
| 7,791,807 |
| 59.20 |
|
$66.63---$83.19 |
| 1,198,906 |
| 5.87 years |
| 74.57 |
| 514,450 |
| 74.53 |
|
|
| ----------------- |
|
|
|
|
| ------------------- |
|
|
|
|
| 57,847,050 |
| 5.98 years |
| $35.64 |
| 26,402,239 |
| $35.65 |
|
|
| ========= |
|
|
|
|
| =========== |
|
|
|
Performance and Restricted Stock Plan
The 1994 Performance and Restricted Stock Plan ("the Restricted Stock Plan") provides for the granting of restricted stock and/or performance awards to officers and key employees. As of November 30, 2001,29, 2002, we had reserved 8.0 million shares of our common stock for issuance under the Plan.
85
Restricted shares issued under the Restricted Stock Plan generally vest annually betweenover two to three years but are considered outstanding at the time of grant, as the stockholders are entitled to dividends and voting rights. As of November 30, 2001, 316,47429, 2002, 82,714 shares were outstanding and not yet vested. In fiscal 2002, 2001, 2000, and 1999,2000, we granted 56,146,9,321; 56,146; and 453,885 and 1,047,920 shares of restricted stock, respectively, and the weighted average fair value of the shares was $27.88, $39.44, $58.66, and $22.71,$58.66, respectively. Additionally, we charged $6.8 million, $18.0 million, $16.5 million, and $5.3$16.5 million to expense associated with restricted stock in fiscal 2002, 2001, 2000, and 1999,2000, respectively. As of November 30, 2001,29, 2002, approximately 2.8 million shares arewere available for grant under this Plan.
Performance awards issued under the Restricted Stock Plan entitle the recipient to receive, at our discretion, shares or cash upon completion of the performance period subject to attaining identified performance goals. Performance awards are generally measured over a three-year period and cliff vest at the end of the three-year period. We accrue the projected value of these awards and charge this amount to expense over the three-year performance period. We did not grant performance awards in fiscal 2002, 2001 2000 or 1999.2000. As of November 29, 2002 and November 30, 2001, and December 1, 2000, there were no performance awards outstanding. As
The 1999 Plan also provides for the granting of December 3, 1999,restricted stock and/or performance awards to employees, although no awards of this type have been made under the 1999 Plan to date.
The Restricted Stock Plan will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for 640,720issuance under the plan have been issued and restrictions on issued shares were outstanding and $0.4 million was credited to expense in fiscal 1999.have lapsed.
Employee Stock Purchase Plan
Our 1997 Employee Stock Purchase Plan (the "ESPP") allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. For offerings commencing before September 2000, the planESPP consisted of twelve-month offerings with two six-month purchase periods in each offering period; in September 2000, the planESPP was amended to increase the offering periods for offerings commencing after that date to twenty-four-month offering periods with four six-month purchase periods in each offering period. As of January 1, 2001, all employees participating in the planESPP have twenty-four-month offering periods. Employees purchase shares in each purchase period at 85% of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower. As of November 30, 2001,29, 2002, we had reserved 38.0 million shares of our common stock for issuance under this plan,the ESPP, and approximately 16.315.4 million shares remain available for future issuance.
The weighted average fair value of the purchase rights granted in fiscal 2002, 2001, and 2000 were $11.59, $22.91, and 1999 were $22.91, $21.34, and $5.19, respectively.
The ESPP will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued.
Cash Incentive Awards
We grant Cash Incentive Awards ("CIAs"), a form of phantom stock, to designated key employees to reward them based on their contributions to a project. The cash value of the CIA is structured to mirror our Restricted Stock Plan. WeThe CIAs, which we grant CIAs to designated employees, that generally vest annually over a three-year period. Upon each vest date, the employee is paid the market value of the stock on the date of vest multiplied by the number of vested shares. In fiscal 2001, due to the reduction of market value of our stock, CIA expense was approximately ($2.5) million. We charged approximately $0.4 million, $(2.5) million, and $12.8 million and $7.9 million to CIA expense for shares vested in fiscal 2002, 2001 and 2000, respectively. All existing CIAs were fully vested in fiscal 2002, and 1999, respectively. Wewe currently do not intend to grant cash incentive awardsCIAs in the future.
86
Stock Appreciation Rights
In fiscal 2000 and 1999, we granted Stock Appreciation Rights ("SARs"), a form of phantom stock, to designated key employees based on their performance. Additionally, we grant SARs to employees in certain countries outside of the U.S. in lieu of stock options, generally with similar vesting schedules to our option-vestingoption vesting schedule; these SARs generally expire eight years after the grant date. The 1999 Plan also provides for the granting of stock appreciation rights to employees, although no awards of this type have been made under the 1999 Plan to date.
The performance-based SARs generally vest four years from the date of grant but contain an acceleration feature that allows for a two-year vesting period based on Adobe achieving predetermined performance goals. These performance-based SARs expire five years from the date of grant. Under our SAR plan, designated employees are awarded rights that are equal to one share of Adobe's common stock for each right awarded with an exercise price based on the fair market value on the grant date. When the award vests, employees generally have the right to exercise the award and receive the then-current value in cash of the appreciation from the exercise price of the exercised number of rights of our common stock. We did not award any stock appreciation rightsSARs in fiscal 2002 and 2001. We awarded 800 rights in fiscal 2000 with an exercise price of $50.19 and 28,200 rights in fiscal 1999 with an exercise price of $35.69.$50.19. We charged $0.5approximately $0.009 million, $23.2$(0.5) million, and $9.8$23.2 million to expense in fiscal 2002, 2001 2000 and 1999,2000, respectively. We currently do not intend to grant stock appreciation rightsSARs in the future, except to certain employees outside of the U.SU.S. in lieu of stock options.
Pro Forma Fair Value Disclosures
We account for our employee stock plans, consisting of fixed stock option plans anand our employee stock purchase plan, and a performance and restricted stock plan using the intrinsic value method. The following table sets forth the pro forma amounts of net income and net income per share that would have resulted if we accounted for our employee stock plans under the fair value recognition provisions of SFASStatement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
| | Years Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | November 30, 2001 | December 1, 2000 | December 3, 1999 | ||||||||
| Net income: | |||||||||||
| As reported | $ | 205,644 | $ | 287,808 | $ | 237,751 | |||||
| Pro forma | $ | 30,225 | $ | 196,153 | $ | 198,787 | |||||
Net income per share: | |||||||||||
| As reported: | |||||||||||
| Basic | $ | 0.86 | $ | 1.21 | $ | 0.98 | |||||
| Diluted | $ | 0.83 | $ | 1.13 | $ | 0.92 | |||||
Pro forma: | |||||||||||
| Basic | $ | 0.13 | $ | 0.82 | $ | 0.82 | |||||
| Diluted | $ | 0.12 | $ | 0.77 | $ | 0.78 | |||||
|
| Years Ended |
| ||||
|
| November 29, 2002 |
| November 30, 2001 |
| December 1, |
|
|
| ------------ |
| ------------- |
| ----------- |
|
Net income: |
|
|
|
|
|
|
|
As reported |
| $191,399 |
| $205,644 |
| $287,808 |
|
Pro forma |
| $6,646 |
| $30,225 |
| $196,153 |
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
As reported: |
|
|
|
|
|
|
|
Basic | $0.81 | $0.86 | $1.21 | ||||
Diluted |
| $0.79 |
| $0.83 |
| $1.13 |
|
|
|
|
|
|
|
|
|
Pro forma: |
|
|
|
|
|
|
|
Basic |
| $0.03 |
| $0.13 |
| $0.82 |
|
Diluted |
| $0.03 |
| $0.12 |
| $0.77 |
|
For purposes of computing pro forma net income, we estimate the fair value of each option grant, restricted stock grant, and Employee Stock Purchase Plan purchase right on the date of grant using the
87
Black-Scholes option pricing model. The assumptions used to value the option grants and purchase rights are stated as follows:
| | Years Ended | |||||
|---|---|---|---|---|---|---|
| | November 30, 2001 | December 1, 2000 | December 3, 1999 | |||
| Expected life of options | 3 years | 3 years | 3 years | |||
| Expected life of restricted stock | 3 years | 3 years | 3 years | |||
| Expected life of purchase rights | 1.23 years | 0.75 years | 0.75 years | |||
| Volatility | 80% | 68% | 51% | |||
| Risk-free interest rate | 2.9 - 5.3% | 5.7 - 6.8% | 4.5 - 5.9% | |||
| Dividend yield | 0.125% | 0.125% | 0.125% | |||
|
| Years Ended |
| ||||
|
| November 29, |
| November 30, |
| December 1, |
|
|
| --------------- |
| --------------- |
| -------------- |
|
Expected life of options |
| 3 years |
| 3 years |
| 3 years |
|
Expected life of restricted stock |
| 3 years |
| 3 years |
| 3 years |
|
Expected life of purchase rights |
| 1.24 years |
| 1.23 years |
| 0.75 years |
|
Volatility |
| 69 | % | 80 | % | 68 | % |
Risk-free interest rate |
| 2.1---4.1 | % | 2.9---5.3 | % | 5.7---6.8 | % |
Dividend yield |
| 0.125 | % | 0.125 | % | 0.1255 | % |
Options and restricted stock grants vest over several years, and new option and restricted stock grants are generally made each year. Because of this, the pro forma amounts shown above may not be representative of the pro forma effect on reported net income in future years.
Note 11.12. Stockholders' Equity
Stockholder Rights Plan
Our Stockholder Rights Plan is intended to protect stockholders from unfair or coercive takeover practices. In accordance with this plan, the Board of Directors declared a dividend distribution of one common stock purchase right on each outstanding share of our common stock held as of July 24, 1990 and on each share of common stock issued by Adobe thereafter. In July 2000, the Stockholder Rights Plan was amended to extend it for ten years so that each right entitles the holder to purchase one unit of Series A Preferred Stock, which is equal to 1/1000 share of Series A Preferred Stock, par value $0.0001 per share, at a price of $700 per unit. As adjusted for our 2000 stock split in the form of a dividend, each share of common stock now entitles the holder to one-half of such a purchase right. Each whole right still entitles the registered holder to purchase from Adobe a unit of preferred stock at $700. The rights become exercisable in certain circumstances, including upon an entityentity's acquiring or announcingannou ncing the intention to acquire beneficial ownership of 15% or more of our common stock without the approval of the Board of Directors or upon usour being acquired by any person in a merger or business combination transaction. The rights are redeemable by Adobe prior to exercise at $0.01 per right and expire on July 23, 2010.
Stock Repurchase Program I—I -- On-going Dilution Coverage
To facilitate our stock repurchase program which is designed to minimize dilution from stock issuance primarily from employee stock plans, we sold put warrants to independent third parties in fiscal 2002, 2001, 2000, and 1999.2000. Each put warrant entitles the holder to sell one share of Adobe's common stock to Adobe at a specified price for cash or stock at Adobe's option. Approximately 7.5 million, 5.6 million, 7.0 million, and 10.37.0 million put warrants were written in fiscal 2002, 2001, 2000, and 1999,2000, respectively. At November 30, 2001,29, 2002, approximately 3.81.9 million put warrants were outstanding that expire through JulyDecember 2002, with an average exercise price of $22.28$26.71 per share, resulting in a total potential cash outlay of approximately $84.0$50.5 million in fiscal 20022003 if all putputs warrants are exercised.
88
In addition, in fiscal 2002, 2001, 2000, and 1999,2000, we purchased call options from independent third parties that entitled us to buy 4.9 million, 3.9 million, 4.2 million, and 4.94.2 million shares, respectively, of our common stock on certain dates at specified prices. At November 30, 2001,29, 2002, approximately 2.61.2 million call options were outstanding that expire on various dates through JulyDecember 2002 with an average exercise price of $24.09$28.08 per share, resulting in a total potential cash outlay of approximately $63.3$34.1 million in fiscal 20022003 if all callcalls options are exercised.
Currently, allOur put warrants have a correspondingand call option contracts provide that, at our option, we can settle with an identical expiry date. Consequently, eitherphysical delivery or net shares equal to the calldifference between the exercise price and the value of the option or put warrant, but not both, will be exercised.
as determined by the contract.
We repurchased approximately 8.6 million, 5.9 million, 7.2 million, and 22.47.2 million shares in fiscal 2002, 2001, 2000, and 1999,2000, respectively, at a cost of $255.0 million, $319.9 million, and $255.5 million, respectively. Subsequent to
November 29, 2002, we repurchased 1.6 million shares at a cost of $45.1 million through the exercise of outstanding put warrants and $448.7call options under this plan. As of December 18, 2002, no put warrants or call options remained outstanding under this plan. The authorization to repurchase shares to cover on-going dilution is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances. As of November 29, 2002, 9.6 million respectively.shares remained authorized for repurchase, based on net stock issuances less repurchases under this plan.
Stock Repurchase Program II—II -- Additional Authorization above Dilution Coverage
In September 1997, Adobe's Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 60.0 million shares of our common stock over a two-year period. This program was completed in the first quarter of fiscal 1999. Under this program, we repurchased approximately 3.3 million shares in fiscal 1999 at a cost of $30.5 million.
In April 1999, the Board authorized a 5.0 million share repurchase program, which allowsallowed us to purchase shares in the open market and enter into contracts to repurchase shares during future quarters by selling put warrants and buying call options. During fiscal 2001, approximately 4.9 million put warrants were written and 3.5 million call options were purchased at prices ranging from $32.60 to $39.58. As of November 30, 2001, there were no put warrants or options outstanding in this program. During fiscal 2001, we repurchased approximately 4.7 million shares at a cost of $165.2 million. We did not repurchase any shares under this program in fiscal 2000. This program expired in fiscal 2001.
In addition to the April 1999 5.0 million share repurchase program, our Board of Directors authorized in March 2001, subject to certain business and market conditions, our Board of Directors authorized the purchase of up to an additional 5.0 million shares of our common stock over a two-year period. We have not made any purchasesDuring fiscal year 2002, approximately 3.1 million put warrants were written and approximately 2.1 million call options were purchased under this 5.0 million share repurchase program.
Combined ProgramsAs of November 29, 2002, under our March 2001 5.0 million share program, approximately 3.0 million put warrants were outstanding that expire through December 2002 with an average exercise price of $25.20 per share. In addition, as of November 29, 2002, approximately 2.0 million call options were outstanding that expire at various dates through December 2002 with an average price of $27.23 per share.
Our put and call option contracts provide that, we, at our option, we can settle with physical delivery or net shares equal to the difference between the exercise price and the value of the option as determined by the contract.
89In fiscal 2002, we repurchased approximately 2.0 million shares at a cost of $38.2 million under our March 2001 5.0 million share repurchase program. We did not make any repurchases under this plan in fiscal 2001.
During December 2002, all outstanding put warrants and call options under the March 2001 5.0 million share repurchase program expired without any cost to Adobe and as of December 20, 2002, there were no put warrants or call options outstanding. As of December 20, 2002, authorization to repurchase 3.0 million shares remained under the plan until it expires in March 2003.
On September 25, 2002, subject to certain business and market conditions, our Board of Directors authorized the purchase of up to an additional 5.0 million shares of our common stock over a three-year period. We have not made any purchases under this 5.0 million share repurchase program. This plan will expire in September 2005.
The tables below represent our authorized stock repurchase plans and summary of stock repurchases as of November 29, 2002.
Authorized Stock Repurchase Plans as of November 29, 2002
Board Approval |
| Expiration |
| Authorized |
| Repurchases |
| Authorization |
| Put Options |
| Remaining |
|
|
|
|
|
|
|
| |||||||
----------------------- | --------------------- | -------------- | ------------------ | ------------------ | ------------------ | -------------------- | |||||||
December 1997 | N/A | Ongoing dilution | 44,550 | N/A | 1,890 | 9,578(1) | |||||||
April 1999 |
| April 2001 |
| 5,000 |
| 4,687 |
| 313 |
| --- |
| --- |
|
March 2001 |
| March 2003 |
| 5,000 |
| --- |
| --- |
| 2,986 |
| --- |
|
September 2002 |
| September 2005 |
| 5,000 |
| --- |
| --- |
| --- |
| 5,000 |
|
Summary of Stock Repurchases for fiscal years 2002, 2001, and 2000 as of November 29, 2002
Board Approval | Repurchases | 2002 | Average | 2001 | Average | 2000 | Average | ||||||||
------------------------ | --------------------- | ----------- | ----------- | ------------ | ------------ | ------------ | ----------- | ||||||||
December 1997 | From employees(2) | 83 | $35.55 | 733 | $42.01 | 164 | $60.98 | ||||||||
|
| Open market |
| --- |
| --- |
| 452 |
| 35.64 |
|
|
|
|
|
|
| Option exercises |
| 8,517 |
| 29.60 |
| 4,726 |
| 57.78 |
| 7,020 |
| 34.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1999 |
| Open market |
| --- |
| --- |
| --- |
| --- |
| --- |
| --- |
|
|
| Option exercises |
| --- |
| --- |
| 4,687 |
| 35.24 |
| --- |
| --- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2001 |
| Open market |
| 1,899 |
| 18.58 |
| --- |
| --- |
| --- |
| --- |
|
|
| Option exercises |
| 116 |
| 28.58 |
| --- |
| --- |
| --- |
| --- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2002 |
| Open market |
| --- |
| --- |
| --- |
| --- |
| --- |
| --- |
|
|
| Option exercises |
| --- |
| --- |
| --- |
| --- |
| --- |
| --- |
|
----------- | ----------- | ------------ | ------------ | ------------ | ----------- | ||||||||||
Total shares |
|
|
| 10,615 |
| $27.63 |
| 10,598 |
| $45.77 |
| 7,184 |
| $35.56 |
|
Total cost | $293,241 | $485,115 | $255,456 |
________________________
(1.) The remaining authorization for the ongoing stock repurchase plan is determined by subtracting repurchases from all stock issuances, net of any canceled shares, beginning in the first quarter of fiscal 1998.
(2.) The repurchases from employees represent shares canceled when surrendered in lieu of cash payments for the option exercise price or withholding taxes due.
Note 12.13. Net Income Per Share
Basic net income per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested restricted stock. Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive common equivalent shares, including unvested restricted common stock, stock options using the treasury stock method, and put warrants using the reverse treasury
stock method.
| | Years Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | November 30, 2001 | December 1, 2000 | December 3, 1999 | |||||||
| | (in thousands except per share data) | |||||||||
| Net income | $ | 205,644 | $ | 287,808 | $ | 237,751 | ||||
| Shares used to compute basic net income per share (weighted average shares outstanding during the period, excluding unvested restricted stock) | 238,461 | 238,292 | 241,572 | |||||||
| Dilutive common equivalent shares: | ||||||||||
| Unvested restricted stock | 318 | 930 | 1,130 | |||||||
| Stock options | 10,366 | 16,539 | 15,636 | |||||||
| Put warrants | — | 13 | 72 | |||||||
| Shares used to compute diluted net income per share | 249,145 | 255,774 | 258,410 | |||||||
| Basic net income per share | $ | 0.86 | $ | 1.21 | $ | 0.98 | ||||
| Diluted net income per share | $ | 0.83 | $ | 1.13 | $ | 0.92 | ||||
|
| Years Ended |
| ||||
|
| November 29, |
| November 30, |
| December 1, |
|
|
| ---------------- |
| ---------------- |
| --------------- |
|
|
| (in thousands except per share data) |
| ||||
Net income |
| $191,399 |
| $205,644 |
| $287,808 |
|
|
| ======== |
| ======== |
| ======== |
|
Shares used to compute basic net income per share (weighted |
| 236,834 |
| 238,461 |
| 238,292 |
|
Dilutive common equivalent shares: |
|
|
|
|
|
|
|
Unvested restricted stock |
| 83 |
| 318 |
| 930 |
|
Stock options |
| 6,132 |
| 10,366 |
| 16,539 |
|
Put warrants |
| 70 |
| --- |
| 13 |
|
|
| ---------------- |
| ----------------- |
| --------------- |
|
Shares used to compute diluted net income per share |
| 243,119 |
| 249,145 |
| 255,774 |
|
|
| ========= |
| ========== |
| ========= |
|
Basic net income per share |
| $0.81 |
| $0.86 |
| $1.21 |
|
|
| ========= |
| ========== |
| ========= |
|
Diluted net income per share |
| $0.79 |
| $0.83 |
| $1.13 |
|
|
| ========= |
| ========== |
| ========= |
|
For the years ended November 29, 2002, November 30, 2001, and December 1, 2000, and December 3, 1999, options to purchase approximately 26.5 million, 17.7 million, 12.1 million, and 7.212.1 million shares, respectively, of common stock with exercise prices greater than the average fair market value of our stock for the period of $30.44, $39.57, $56.63, and $39.75,$56.63, respectively, were not included in the calculation because the effect would have been antidilutive.
Note 13.14. Commitments and Contingencies
Lease Commitments
We lease certain of our facilities and some of our equipment under noncancelable operating lease arrangements that expire at various dates through 2025.2091. Rent expense, net of sublease income, for these leases aggregated $26.6 million, $22.0 million, $25.6 million, and $29.4$25.6 million during fiscal 2002, 2001, and 2000, and 1999, respectively.
As of November 30, 2001,29, 2002, future minimum lease payments under noncancelableundernoncancelable operating leases, net of sublease income, and future minimum sublease income under noncancelable subleases are as follows: 2002—$29.6 million; 2003—$32.3 million; 2004—$35.7 million; 2005—$28.5 million; 2006—$17.0 million; and $33.2 million thereafter.
Year |
| Future minimum lease payments |
| Future minimum sublease income |
2003 |
| $19.5 |
| $6.8 |
2004 |
| $17.4 |
| $6.9 |
2005 |
| $12.9 |
| $6.8 |
2006 |
| $10.9 |
| $5.5 |
2007 |
| $ 7.9 |
| $3.1 |
2008 and after |
| $34.7 |
| $3.4 |
In September 2001, we entered into a real estate development agreement for the construction of an additional office building for our corporate headquarters in downtown San Jose, California. Under the agreement, the lessor will finance up to $117.0 million over a two-year period, toward the construction and associated costs of the building. As part of the agreement, we entered into a five-year lease beginning upon completion of the building. We have anthe option to purchase the building at any time during the term for an amount equal to the total investment of
90
the lessor.lease balance. The agreement and lease are subject to standard covenants including liquidity, leverage and profitability ratios that are reported to the lessor quarterly. As of November 30, 2001,29, 2002, we were in compliance with all covenants. In the case of a default, the lessor may terminate all remaining commitments (if any remain) and they may demand paymentwe purchase the building for an amount equal to the lessor's investment,current lease balance, or require that we purchase, facilitateremarket or relinquish the sale of the building to a third party, or surrender the building.buil ding. The agreement qualifies for operating lease accounting treatment under Statement of Financial Accounting Standards No. 13 ("SFAS 13,No. 13"), "Accounting for Leases," and, as such, the building and the related obligation are not included on our balance sheet, but the future minimum lease payments are reflected in the schedule of future minimum lease payments. At the end of the lease term, we can either purchase the building for an amount equal to the lessor's investment,lease balance, which will be approximately $117.0 million, request to extend the maturity date of the leaseremarket, or remarketrelinquish the building. If we electchoose to remarket or are required to do so upon relinquishing the building, we are obligatedbound to arrange the sale of the building to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lessor's investment,lease balance, up to athe maximum recourse amount as set forth in the lease. The lessor is a multi-asset leasing company with a substantive net worth, not a special purpose entity.of $103.0 million.
In August 1999, Adobe entered into a five-year lease agreement for our corporate headquarters office buildings in San Jose, California. Under the agreement, we have anthe option to purchase the buildings at any time during the lease term for $142.5 million,the lease balance, which is the total investment of the lessor.approximately $142.5 million. The lease is subject to standard covenants including liquidity, leverage and profitability ratios that are reported to the lessor quarterly. As of November 30, 2001,29, 2002, we were in compliance with all covenants. In the case of a default the lessor may demand paymentwe purchase the building for an amount equal to the lessor's investmentlease balance, or require that we surrenderremarket or relinquish the buildings.building. The agreement qualifies for operating lease accounting treatment under SFAS No. 13, and, as such, the buildingsbuilding and the related obligation isare not included on our balance sheet, but the future minimum lease payments are reflected in the schedule of future minimum lease payments. At the end of the lease term, we can either purchase the buildingsbuilding for an amount equal to the lessor's investment, which is approximately $142.5 million,lease balance, remarket, or terminaterelinquish the lease.building. If we electchoose to terminate,remarket or are required to do so upon relinquishing the building, we are obligated to use our best effortsbound to arrange the sale of the buildingsbuilding to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lessor's investment,lease balance, up to athe maximum guaranteed residualrecourse amount as set forth in the lease. The lessor is a multi-asset leasing company with a substantive net worth, not a special purpose entity.of $132.6 million.
Line of Credit
In August 1999, weAdobe entered into twoan unsecured revolving credit facilities,facility of $100.0 million each, with a group of banks, for general corporate purposes, subject to certain financial covenants. One of the facilitiesThe facility expired in August 20012002 and waswe elected not renewed, andto renew the other $100.0 million facility expires in August 2002. Outstanding balances accrue interest at London Interbank Offered Rate ("LIBOR") plus a margin that is based on our financial ratios. There were no outstanding balances on the credit facility as of November 30, 2001. In addition, as of November 30, 2001, we were in compliance with all financial covenants.facility.
Royalties
We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying
91
revenue. Royalty expense, which was recorded under our cost of products revenue on our consolidated statements of income, was approximately $14.4 million, $14.1 million, $20.8 million, and $24.5$20.8 million in fiscal 2002, 2001, and 2000, and 1999, respectively.
Adobe Ventures
We have commitments to the Adobe Venture limited partnerships. The following table shows the capital commitments and the capital contributed as of November 30, 2001:29, 2002:
| | Capital Commitment | Capital Contributed | ||||
|---|---|---|---|---|---|---|
| Adobe Ventures L.P. | $ | 40,000,000 | $ | 40,475,757 | ||
| Adobe Ventures II, L.P. | $ | 40,000,000 | $ | 36,947,363 | ||
| Adobe Ventures III, L.P. | $ | 60,000,000 | $ | 56,162,222 | ||
| Adobe Ventures IV, L.P. | $ | 100,000,000 | $ | 18,292,333 | ||
| Capital Commitment |
| Capital Contributed |
Adobe Ventures L.P. | $ 40,000 |
| $ 40,476 |
Adobe Ventures II, L.P. | $ 40,000 |
| $ 37,541 |
Adobe Ventures III, L.P. | $ 60,000 |
| $ 57,353 |
Adobe Ventures IV, L.P. | $ 100,000 |
| $ 35,418 |
The capital commitment is the amount that Adobe has agreed to contribute to the Partnership. The capital commitment amount is contributed over the term of each Partnership, which is ten years. We can contribute more than the capital commitment, at our discretion. We can cease funding at any time after the earlier of: a) two years after the effective date of the Partnership or b) the date on which the Company has made capital contributions to the Partnership in an amount in excess of $10.0 million, $10.0 million, $20.0 million, and $33.0 million for Adobe Ventures L.P., Adobe Ventures II, L.P., Adobe Ventures III, L.P., and Adobe Ventures IV, L.P., respectively.
In addition to these venture partnerships, we have direct investments in public and privately-held companies. In total, as of November 30, 2001,29, 2002, we have invested $194.9$213.9 million through our venture partnerships and direct investments. And as of November 30, 2001,29, 2002, net returns were $354.3$348.7 million, including stock dividends to stockholders and net gains in market value of investments.
Legal Actions
On September 3, 2002, Adobe filed suit in the U.S. District Court, Northern District of California ("the California Action"), against International Typeface Corporation ("ITC") and Agfa Monotype Corporation ("AMT"), companies which have common ownership and management, seeking a declaration that (a) Adobe's distribution of font software, which generates ITC typefaces, did not breach its contract pursuant to which Adobe licensed certain rights with respect to ITC typefaces, and (b) Adobe did not violate the Digital Millennium Copyright Act ("DMCA") with respect to, or induce or contribute to the infringement of copyrights in, ITC's and AMT's TrueType font software. AMT had previously asserted that Adobe had committed such breach of contract and violation of the DMCA.
On September 4, 2002, Adobe initiated arbitration proceedings in London, England ("the London Arbitration") against AMT, seeking a declaration that Adobe's distribution of font software that generates AMT typefaces did not breach its contract pursuant to which it licensed certain rights with respect to AMT typefaces. AMT has made a breach of contract claim in response to Adobe's arbitration demand in the London Arbitration, asserting that Adobe wrongfully granted and/or allowed third parties greater rights to distribute and embed AMT fonts than Adobe was licensed to grant and/or allow.
If AMT prevails on its breach of contract claims, AMT may have the right to terminate Adobe's right to distribute any of its products that then still contain font software that generates AMT typefaces. Adobe asserts that it negotiated for and obtained express, written licenses from both AMT and ITC approximately ten years ago permitting Adobe to allow end users to embed AMT and ITC fonts in electronic documents for "print and view" and disputes the other breach of contract claims. Adobe also asserts that Adobe Acrobat 5.0, which AMT and ITC correctly acknowledge has been superceded by version 5.05, neither violates the DMCA nor induces or contributes to the infringement of copyrights in ITC's and AMT's TrueType font software.
On September 5, 2002, AMT and ITC filed suit against Adobe in the U.S. District Court, Eastern District of Illinois ("the Illinois Action") against Adobe, asserting only that Adobe's distribution of the superceded 5.0 version of Adobe Acrobat violated the DMCA, as described above. The Illinois Action seeks statutory damages of $200-$2,500 for each copy of Acrobat 5.0 found to violate the DMCA, a claim that Adobe disputes as a matter of law and fact. The Illinois Action also seeks injunctive relief with respect to Acrobat 5.0, although it specifically alleges, correctly, that Adobe no longer distributes Acrobat 5.0.
On November 13, 2002, ITC filed another suit against Adobe in the United States District Court for the Eastern District of Illinois ("the Second Illinois Action"), this time asserting that Adobe breached its contract with ITC and that ITC, and not Adobe, owns the copyrights in font software created by Adobe which generates ITC typefaces.
AMT and ITC made a motion to dismiss the California action, challenging jurisdiction and venue. That motion was granted by the court on December 16, 2002. As such, the parties' respective claims will be resolved in the other actions described above.
The results of any litigation are inherently uncertain, and AMT and ITC may assert other claims. Adobe cannot assure that it will be able to successfully defend itself against any of the actions described above. AMT and ITC seek an unspecified aggregate dollar amount of damages. A favorable outcome for AMT or ITC in these actions could have a material adverse effect on Adobe's business, financial condition and operating results. We strongly believe that all of AMT's and ITC's claims are engagedwithout merit, and will vigorously defend against them in certain legal actions arisingaddition to pursuing our own claims as described above.
On September 6, 2002, Plaintiff Fred B. Dufresne filed suit against Adobe, Microsoft Corporation, Macromedia, Inc., and Trellix Corporation in the U.S. District Court, District of Massachusetts, alleging infringement of U.S. Patent No. 5,835,712, entitled "Client-Server System Using Embedded Hypertext Tags For Application And Database Development." The plaintiff's Complaint asserts that "Defendants have infringed, and continue to infringe one or more claims of the '712 patent by making, using, selling and/or offering for sale,inter alia, products supporting Microsoft Active Server Pages technology." The plaintiff seeks unspecified compensatory damages, preliminary and permanent injunctive relief, trebling of damages for "willful infringement," and fees and costs. Adobe strongly disagrees with the plaintiff's claims and intends to vigorously defend against this action.
On November 18, 2002, Plaintiffs Shell & Slate Software Corporation and Ben Weiss filed a civil action in the U.S. District Court in Los Angeles against the Company alleging false designation of origin, trade secret misappropriation, breach of contract, and other causes of action. The claim derives from the Plaintiffs' belief that the "healing brush" technique of Adobe Photoshop incorporates Plaintiffs' trade secrets. Plaintiffs seek preliminary and permanent injunctive relief, compensatory, treble, and punitive damages, and fees and costs. We believe that the action has no merit and intend to defend vigorously against it.
From time to time Adobe is involved in lawsuits, claims, investigations and proceedings, in addition to those identified above, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. We believeIn accordance with SFAS No. 5, Adobe makes a provision for a liability when it is both probable that we havea liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, Adobe believes that it has valid defenses with respect to the legal matters pending against it, as well as adequate legal defensesprovisions for any probable and estimable losses. It is possible, nevertheless, that cash flows or results of operations could be affected in any particular period by the ultimate outcomeresolution of one or m ore of these actions will not have a material adverse effect on our financial position and results of operations.contingencies.
Note 14.15. Related Party Transactions
During the fiscal year ended November 29, 2002, we had related party transactions with Electronic Data Systems Corporation ("EDS"). EDS is considered a related party because one of its executive officers joined the Adobe Board of Directors in December 2001.
During fiscal 1999, we entered into two separate loan agreements with an executive officeryear 2002, Adobe paid approximately $6.1 million to assist with his relocationEDS for services related to San Jose, California. The first loan in the amount of $550,000, with an interest rate of 8.25% per annum, was repaid on December 31, 1999. The second loan, in the amount of $1.0 million, is interest-free and is secured by his principal residence. Underinformation systems support (i.e. "helpdesk" support services), including, under the terms of the agreement, he is required to repay this loan at $200,000 per year over the five years beginning December 2000. His second payment was made in December 2001, leavingcontract, a balance of $600,000 as of January 25, 2002. The loan was amended in November 2001one-time termination fee paid in connection with his resignation from the Company to include an agreement by the Company that it would not exercise its right to accelerate the payment of unpaid principal because of hisour termination of employment. The Company reserved the right to accelerate payment for any other reason authorized by the agreement.
Also in connection with his resignation from his employment with us, which was effective November 30, 2001, we entered into anour agreement with him to: (i) pay him a lump sum equal to his totalEDS effective August 2002.
92
target compensation (base pay and management incentive plan bonuses) for twelve (12) months, (ii) pay for his COBRA premiums until the earlier of November 1, 2002 or the date he receives coverage under another group health insurance plan, and (iii) allow him to keep his laptop computer. We also amended his loan agreement with us, as described in the previous paragraph. In addition, he remained eligible for any bonuses earned through his resignation date, although no bonuses were earned or paid.
Note 15.16. Financial Instruments
Fair Value of Financial Instruments
OurAs of November 29, 2002, our cash equivalents, short-term investments, and marketable equity securities, are carried at fair value, based on quoted market prices for these or similar investments. Our total cash equivalents, short-term investments, and marketable equity securities had a cost basis of $567.5$589.3 million and a fair market value of $581.6$595.8 million. Our portfolio of marketable equity securities included in our short-term investments had a cost basis of $26.3$11.1 million and a fair market value of $37.8$14.1 million. (For further information, see Note 3.)3)
Our portfolio of investments included in Other Assets at November 30, 2001,29, 2002, which includes our direct investments, as well as indirect investments through Adobe Ventures, had an estimated fair market value of $31.7$35.6 million. (For further information, see Note 5.)6)
Foreign Currency Hedging Instruments
We enter into forward exchange contractstransact business in various foreign currencies, primarily in certain European countries and Japan. Accordingly, we are subject to hedgeexposure from movements in foreign currency exposures onexchange rates. This exposure is primarily related to revenue from yen-denominated licenses in Japan and euro-denominated licenses in certain European countries.
Our Japanese operating expenses are in yen, and our European operating expenses are primarily in euro, which mitigates a continuing basis for periods consistent with ourportion of the exposure related to yen and euro denominated licenses. In addition, we hedge firmly committed exposures.transactions using forward contracts. These transactionscontracts do subject us to risk of accounting gains and losses; however, the gains and losses on these contracts typically offset or partially offset gains and losses on the assets, liabilities, and transactions being hedged. We also hedge a percentage of forecasted international revenue with forward and purchased option contracts. Our revenue hedging policy is designed to reduce the negative impact on our forecasted revenue due to foreign currency exchange rate movements. As of November 29, 2002, all contracts were set to expire at various times through June 2003. The bank counterparties in these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk we only contract with high quality counterparties with specific minimum rating requirements. In addition, our hedging policy establishes maximum limits for each counterparty. As of November 30, 2001 and December 1, 2000, we held $98.3 million and $23.2 million, respectively, of aggregate foreign currency forward exchange contracts. As of November 30, 2001 and December 1, 2000, we held $82.3 million and $43.3 million, respectively, in foreign currency option contracts.
Economic Hedging—Hedging -- Hedges of Forecasted Transactions
We use option and forward foreign exchange contracts to hedge certain operational ("cash flow") exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, may have a duration between threeone to twelve months. Such cash flow exposures result from portions of our forecasted revenues denominated in currencies other than the U.S. dollar ("USD"), primarily the Japanese yen and the euro. We enter into these foreign exchange contracts to hedge forecasted product licensing revenue in the normal course of business, and accordingly, they are not speculative in nature.
We record changes in the fairintrinsic value of these cash flow hedges in accumulated other comprehensive income (loss), until the forecasted transaction occurs. The time value of purchased derivative instruments is deemed to be ineffective and is recorded in other income over the life of the contract. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted
93
transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to interest and other income (loss) on the consolidated statement of income at that time. For the fiscal year ended November 30, 2001,29, 2002, there were no such net gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur.
The critical terms of the cash flow hedging instruments are the same as the underlying forecasted transactions. The changes in fair value of the derivatives are intended to offset changes in the expected cash flows from the forecasted transactions. We record any ineffective portion of the hedging instruments in other income on the consolidated statement of income. The time value of purchased derivative instruments is deemed to be ineffective and is recorded in other income over the life of the contract.
The following table depicts the activity for the fiscal year ended November 29, 2002 and November 30, 2001.
Gain (Loss)(loss) on Hedges of Forecasted Transactions:Transactions:
| | Balance Sheet | Income Statement | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | As of November 30, 2001 | Year ended November 30, 2001 | ||||||||
| | Other Comprehensive Income | Revenue | Other Income (Loss) | |||||||
| Realized—Closed Transactions: | ||||||||||
| Realized net gain reclassified from other comprehensive income to revenue | $ | — | $ | 7,848 | $ | — | ||||
| Realized net loss from ineffective portion of hedges and time value degradation | — | — | (4,786 | ) | ||||||
Recognized but Unrealized—Open Transactions: | ||||||||||
| Unrealized gain remaining in other comprehensive income | 2,582 | — | — | |||||||
| Unrealized loss from ineffective portion of hedges and time value degradation | — | — | (730 | ) | ||||||
| $ | 2,582 | $ | 7,848 | $ | (5,516 | ) | ||||
Balance Sheet | Income Statement | ||||||||||
As of | Year ended | Year ended | |||||||||
Other Comprehensive Income (Loss) | Revenue | Other Income (Loss) | Revenue | Other Income (Loss) | |||||||
----------------- | ------- | ---------- | ------- | ----------- | |||||||
Realized -- Closed Transactions: | |||||||||||
Realized net gain (loss) reclassified | $--- | $(463 | ) | $--- | $7,848 | $--- | |||||
Realized net loss from the cost of | --- | --- | (5,251 | ) | --- | (4,786 | ) | ||||
Recognized but Unrealized -- | |||||||||||
Unrealized net loss remaining in other | (759 | ) | --- | --- | --- | --- | |||||
Unrealized net loss from time value | --- |
| --- | (29 | ) | --- | (730 | ) | |||
------------------------ | --------- | ------------- | --------- | --------------- | |||||||
$(759 | ) | $(463 | ) | $(5,280 | ) | $7,848 | $(5,516 | ) | |||
============== | ====== | ======== | ====== | ========= | |||||||
As of November 30, 2001, $2.629, 2002, $0.8 million in other comprehensive income (loss) represents the total intrinsic value loss of our outstanding economic hedges on forecasted revenue.
During the fiscal year ended November 29, 2002, a $0.5 million loss was recognized in revenue relating to hedged transactions that occurred. The total loss recognized in other income (loss) was $5.3 million, which consisted of a $5.3 million realized net loss relating to the cost of purchased options and the gains or losses realized on any ineffective portion of hedges of forecasted transactions. Additionally, we recognized a $0.03 million unrealized net loss for the ineffective portion of hedges of forecasted transactions, the majority of which was related to the time value degradation of outstanding purchased options at November 29, 2002.
During the fiscal year ended November 30, 2001, $7.8 million was recognized in revenue relating to hedged transactions which occurred;that occurred. The total loss recognized in other income (loss) was $5.5 million, which consisted of a $4.8 million realized net loss relatedrelating to the cost of matured purchased options and the gains or losses realized on any ineffective portion of hedges of forecasted transactions. Additionally, we recognized a $0.7 million unrealized net loss that was recognized for the ineffective portion relating toof hedges forof forecasted transactions, andthe majority of which was related to the time value degradation of outstanding purchased options.options at November 30, 2001.
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Balance Sheet Hedging—Hedging - Hedging of Foreign Currency Assets and Liabilities
We hedge our netcertain recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as other income (loss). These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives offset gains and losses on the assets and liabilities being hedged. At November 30, 2001,29, 2002, the outstanding balance sheet hedging derivatives had maturities of 6090 days or less.
Net Gain (Loss) Recognized in Other Income Relating to Balance Sheet Hedging:
| | Year ended November 30, 2001 | Year ended December 1, 2000 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Loss on foreign currency assets and liabilities: | |||||||||
| Realized net gain (loss) recognized in other income | $ | (3,288 | ) | $ | 240 | ||||
| Unrealized net gain (loss) recognized in other income | 109 | (1,803 | ) | ||||||
| (3,179 | ) | (1,563 | ) | ||||||
| Gain on hedges of foreign currency assets and liabilities: | |||||||||
| Realized net gain recognized in other income | 3,834 | 33 | |||||||
| Unrealized net gain (loss) recognized in other income | (622 | ) | 491 | ||||||
| 3,212 | 524 | ||||||||
| Net gain (loss) recognized in other income | $ | 33 | $ | (1,039 | ) | ||||
Year ended | Year ended | ||||
Gain (Loss) on foreign currency assets and liabilities: | |||||
Realized net gain (loss) recognized in other income (loss) | $6,500 | $(3,288 | ) | ||
Unrealized net gain recognized in other income (loss) | 2,549 | 109 | |||
|
| ------------------------ |
| ------------------------ |
|
|
| 9,049 |
| (3,179 | ) |
Gain on hedges of foreign currency assets and liabilities: |
|
|
|
|
|
Realized net gain (loss) recognized in other income (loss) | (8,587 | ) | 3,834 | ||
Unrealized net gain (loss) recognized in other income (loss) | 444 | (622 | ) | ||
|
| ------------------------ |
| ------------------------ |
|
|
| (8,143 | ) | 3,212 |
|
|
| ------------------------ |
| ------------------------ |
|
Net gain recognized in other income | $906 | $33 | |||
|
| ============= |
| ============= |
|
Interest Rate Hedging Instruments- Hedging of Interest Rate Sensitive Obligations
We alsoentered into interest rate swap agreements to manage our exposure to operating lease obligations that are tied to short-term interest rates (LIBOR). The swaps allow us to exchange variable interest rate payments for fixed interest rate payments, thereby securing a fixed payment amount for a portion of the total obligation of $142.5 million. As of November 29, 2002, we had entered into interest rate swaps to hedge market value fluctuationsthe floating cash flow payments associated with $121.8 million of certain equity holdingsour outstanding lease obligations. In some cases, we hedged a portion of our obligation with two separate swap agreements, a current swap together with a forward swap. These two swaps cover two sequential time periods. As of November 29, 2002, the total notional amount of interest rate swaps was $196.8 million, which includes $75.0 million of forward dated swaps. The swaps mature at various dates through the third quarter of 2004, consistent with the expiration of the underlying facility lease. Under the swap agreements, the Company will receive a variable rate based on one month LIBOR and pay fixed rates ranging from 2.80% to 5.14%.
These swaps are designated as cash flow hedges under SFAS No. 133 because they hedge against changes in publicly traded companies with forward contracts. These are accounted forthe amount of future cash flows. As of November 29, 2002, a $2.7 million unrealized loss was recorded in accumulated other comprehensive income (loss) as "Fair Value Hedges"a result of the decrease in accordance with SFAS 133. The difference between the cost andfair market value of these interest rate hedges. There was no realized gain or loss due to ineffectiveness of the equity investments prior to entering into fair value hedges remains in other comprehensive income until the hedge contract is settled; at which time it is reclassified to investment gain (loss). Subsequent gains and losses on the forward contract and the equity securities being hedged are recorded in investment gain (loss) on the consolidated statement of income. We have no outstanding forward contracts hedging equity investments remaining as of November 30, 2001.hedges.
Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk are primarily cash, cash equivalents, short-term investments, primarily fixed-income securities, derivatives, hedging foreign currency and interest rate risk, and accounts receivable.
95
Our investment portfolio consists of investment-grade securities diversified among security types, industries, and issuers. Our cash and investments are held and managed by recognized financial institutions that follow Adobe's investment policy. Our policy limits the amount of credit exposure to any one security issue or issuer, and we believe no significant concentration of credit risk exists with respect to these investments.
We mitigate concentration of risk related to foreign currency hedges as well as interest rate hedges through a policy that establishes counterparty limits. We also have minimum rating requirements for all bank counterparties.
Credit risk in receivables is limited to OEM partners, and to dealers and distributors of hardware and software products to the retail market. We adopt credit policiesmarket, and standards to keep pace with the evolvingcustomers whereby we license software industry.directly. Management believes that any risk of accounting loss is significantly reduced due to the diversity of our products, end users,customers and geographic sales areas. A credit review is completed for our new distributors, dealers, and OEM partners. We also perform ongoing credit evaluations of our customers' financial condition and require letters of credit or other guarantees, whenever deemed necessary. The credit limit given to the customer is based on our risk assessment of their ability to pay, country risk, and other factors and is not contingent on the resale of the product or on the collection of payments from their customers. If we license our software to a customer where we have a reason to believe the customer's ability to pay is not probable, due to country risk or credit risk, we will not recognize the revenue. We will revert to recognizing the revenue on a cash basis, assuming all other criteria for revenue recognition has been met. For discussion of significant customers as of November 30, 2001,29, 2002, see Note 16.17.
We distribute our application products primarily through distributors, resellers, retailers, and, retailersincreasingly, systems integrators and VARs (collectively referred to as "distributors"). A significant amount of our revenue for application products is from two distributors. One of these distributors recently restructured its operations, reducing the number of facilities it operates, including those handling Adobe products, which may harm our operating results. In addition, we have revised our channel program to reduce the overall number ofnow focuses our distributors worldwide and focus our channel efforts on larger distributors. This revision of the channel programdistributors, which has resulted in an increase in our dependence on a smallerrelatively small number of distributors selling through a largerlarge amount of our products. Sales through the distribution channel result in unstable pricing and significant product returns. Our distributors sell our competitors' products; if our distributors favor our competitors' products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective sales and in that case our results would suffer. Additionally, one of our goals is to increase our direct distribution of our products to end users through our online store located on our Web sitewebsite at www.adobe.comwww.adobe.com.. Any such increase in our direct revenue efforts will place us in increased competition with our channel distributors and with newer types of distribution of our products by online, Internet-based resellers of our products. While we anticipate that the restructuring and streamlining of our product distribution channels and the increase in the scope of our direct sales efforts will eventually improve our business by decreasing discounts or rebate programs provided to distributors, decreasing product returns, and shortening inventory cycles, these changes could instead seriously harm our business.resellers.
We derive a significant portion of our OEM PostScript and Other licensing revenue from a small number of OEM partners. Our OEM partners on occasion seek to renegotiate their royalty arrangements. We evaluate these requests on a case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, which could result in lower licensing revenue for us.
Note 16.17. Industry Segment, and Geographic Information, and Significant Customers
Beginning inIn the first quarter of fiscal year 2002, we have realigned our business segments to reflect the way we will manage our business. Please see Item 1 ofThe former Web Publishing segment was renamed to the Graphics segment and included our business sectionAdobe Illustrator product in fiscal 2002. Our Adobe GoLive and Web Collection products, which were formerly being reported in the Web Publishing segment, were reported in the Cross-media Publishing segment in fiscal 2002. Our fiscal 2001 and 2000 segment disclosures have been restated for details onconsistent presentation with our new segments. fiscal 2002 disclosure.
During fiscal 2002, 2001, and 2000, we evaluated our business using our old segments.
During fiscal 2001, 2000, and 1999, we hadhave four reportable segments that offeredoffer different product lines: Web Publishing,Graphics, Cross-media Publishing, ePaper Solutions, and OEM PostScript and Other. The Web PublishingGraphics segment provides users with software for creating, Web page layouts and Web animations and editing and enhancing digital images and photographs, digital video, animations, graphics, and video.illustrations. The Cross-media Publishing segment provides software for professional page layout, illustration, businessprofessional Web page layout, technical document publishing, and printing.business publishing. The ePaper Solutions segment provides electronic document distribution software that allows users to speed the distribution of information with documentscreate, enhance, annotate, and securely send Adobe PDF files that can be shared, viewed, approvednavigated, and printed acrossexactly as intended by anyone on a broad range of hardware and software
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platforms. In addition, the recently acquired Accelio business focusing on electronic form solutions is included in our ePaper segment. The OEM PostScript and Other segment includes printing technologytechnolog y to create and print simple or visually rich documents with precision.
During and prior to fiscal 2000, we evaluated our business based on the contribution margins of each of our four segments. During fiscal year 2001, our executive management team changed the way it evaluates the performance of our business and revised their focus on evaluating the gross margins of each of our segments. Our prior periodfiscal 2000 segment disclosures have been revised here to reflect that change. In addition, we reclassified certain direct costs between our operating segments in fiscal year 2000 to conform to the fiscal year 2001 presentation.
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. We do not identify or allocate our assets by operating segments. As such, segment asset information is not disclosed.
During the second quarter of fiscal 2001, we reclassified our eBook business-related revenue and related expenses from our ePaper Solutions segment to our Cross-media segment in order to better align our eBooks business goals with our Cross-media segment strategy. These reclassifications did not impact total gross profit.
The following results are broken out by our old operating segments for the fiscal years 2002, 2001, 2000, and 1999:2000:
| | Web Publishing | Cross-media Publishing | ePaper Solutions | OEM PostScript and Other | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fiscal 2001 | |||||||||||||||||
| Revenue | $ | 482,535 | $ | 350,477 | $ | 291,917 | $ | 104,791 | $ | 1,229,720 | |||||||
| Direct costs | 34,859 | 25,519 | 15,847 | 5,226 | 81,451 | ||||||||||||
| Gross profit | $ | 447,676 | $ | 324,958 | $ | 276,070 | $ | 99,565 | $ | 1,148,269 | |||||||
| 93 | % | 93 | % | 95 | % | 95 | % | 93 | % | ||||||||
| Fiscal 2000 | |||||||||||||||||
| Revenue | $ | 536,614 | $ | 390,497 | $ | 207,780 | $ | 131,487 | $ | 1,266,378 | |||||||
| Direct costs | 35,870 | 30,239 | 12,860 | 8,286 | 87,255 | ||||||||||||
| Gross profit | $ | 500,744 | $ | 360,258 | $ | 194,920 | $ | 123,201 | $ | 1,179,123 | |||||||
| 93 | % | 92 | % | 94 | % | 94 | % | 93 | % | ||||||||
| Fiscal 1999 | |||||||||||||||||
| Revenue | $ | 394,073 | $ | 353,863 | $ | 129,333 | $ | 138,165 | $ | 1,015,434 | |||||||
| Direct costs | 33,505 | 33,792 | 14,533 | 12,710 | 94,540 | ||||||||||||
| Gross profit | $ | 360,568 | $ | 320,071 | $ | 114,800 | $ | 125,455 | $ | 920,894 | |||||||
| 91 | % | 90 | % | 89 | % | 91 | % | 91 | % | ||||||||
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|
| Graphics |
| Cross-media Publishing |
| ePaper Solutions |
| OEM PostScript and Other |
| Total |
|
|
| ---------- |
| -------- |
| --------- |
| --------- |
| ----------- |
|
Fiscal 2002 |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $503,000 |
| $260,197 |
| $312,544 |
| $89,047 |
| $1,164,788 |
|
Cost of revenue |
| 36,678 |
| 37,155 |
| 24,683 |
| 5,772 |
| 104,288 |
|
|
| ---------- |
| -------- |
| --------- |
| --------- |
| ----------- |
|
Gross profit |
| $466,322 |
| $223,042 |
| $287,861 |
| $83,275 |
| $1,060,500 |
|
|
| ======= |
| ====== |
| ====== |
| ====== |
| ======== |
|
Gross margin |
| 93 | % | 86 | % | 92 | % | 94 | % | 91 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2001 |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $543,419 |
| $289,624 |
| $291,886 |
| $104,791 |
| $1,229,720 |
|
Cost of revenue |
| 33,366 |
| 27,024 |
| 15,835 |
| 5,226 |
| 81,451 |
|
|
| ---------- |
| -------- |
| --------- |
| --------- |
| ----------- |
|
Gross profit |
| $510,053 |
| $262,600 |
| $276,051 |
| $99,565 |
| $1,148,269 |
|
|
| ======= |
| ====== |
| ====== |
| ====== |
| ======== |
|
Gross margin |
| 94 | % | 91 | % | 95 | % | 95 | % | 93 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $602,101 |
| $325,162 |
| $207,628 |
| $131,487 |
| $1,266,378 |
|
Cost of revenue |
| 36,400 |
| 29,539 |
| 12,445 |
| 8,871 |
| 87,255 |
|
|
| ---------- |
| -------- |
| --------- |
| --------- |
| ----------- |
|
Gross profit |
| $565,701 |
| $295,623 |
| $195,183 |
| $122,616 |
| $1,179,123 |
|
|
| ======= |
| ====== |
| ====== |
| ====== |
| ======= |
|
Gross margin |
| 94 | % | 91 | % | 94 | % | 93 | % | 93 | % |
A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements for the fiscal years 2002, 2001, 2000, and 19992000 is as follows:
| | Years Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | November 30, 2001 | December 1, 2000 | December 3, 1999 | ||||||
| Total gross profit from operating segments above | $ | 1,148,269 | $ | 1,179,123 | $ | 920,894 | |||
| Total operating expenses(a) | 769,812 | 771,040 | 661,041 | ||||||
| Total operating income | 378,457 | 408,083 | 259,853 | ||||||
| Non-operating income (loss) | (71,526 | ) | 35,656 | 114,574 | |||||
| Income before taxes | $ | 306,931 | $ | 443,739 | $ | 374,427 | |||
|
| Years Ended |
| ||||
|
| November 29, 2002 |
| November 30, 2001 |
| December 1, 2000 |
|
|
| -------------------- |
| -------------------- |
| -------------------- |
|
Total gross profit from operating segments above |
| $1,060,500 |
| $1,148,269 |
| $1,179,123 |
|
Total operating expenses (a) |
| 773,473 |
| 769,812 |
| 771,040 |
|
|
| -------------------- |
| -------------------- |
| -------------------- |
|
Total operating income |
| 287,027 |
| 378,457 |
| 408,083 |
|
Nonoperating income (loss) |
| (2,338 | ) | (71,526 | ) | 35,656 |
|
|
| -------------------- |
| -------------------- |
| -------------------- |
|
Income before taxes |
| $284,689 |
| $306,931 |
| $443,739 |
|
|
| ========== |
| ========== |
| ========== |
|
______________
(a)
Beginning in the first quarter of fiscal year 2002,2003, we realigned our business segments to reflect the recent change in the way we willnow manage our business. A newly namedThe former Graphics segment will inhas been renamed the future replace theDigital Imaging and Video segment. The former WebCross-media Publishing segment has been renamed the Creative Professional segment and will includeincludes two products that were formerly included in our Graphics segment, Adobe Illustrator. TheIllustrator and Adobe GoLiveGraphics Server (formerly AlterCast). There were no changes to our ePaper and Web Collection products will be reported in the Cross-media Publishing segment.OEM Postscript and Other segments. For more information on our new segments, please see Item 1 of our business section.
The following results are broken out by our new operating segments for the fiscal years 2002, 2001, 2000, and 1999.2000.
| New Segments | Graphics | Cross-media Publishing | ePaper Solutions | OEM PostScript and Other | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fiscal 2001 | |||||||||||||||||
| Revenue | $ | 543,419 | $ | 289,624 | $ | 291,886 | $ | 104,791 | $ | 1,229,720 | |||||||
| Direct costs | 33,366 | 27,024 | 15,835 | 5,226 | 81,451 | ||||||||||||
| Gross profit | $ | 510,053 | $ | 262,600 | $ | 276,051 | $ | 99,565 | $ | 1,148,269 | |||||||
| 94 | % | 91 | % | 95 | % | 95 | % | 93 | % | ||||||||
| Fiscal 2000 | |||||||||||||||||
| Revenue | $ | 602,101 | $ | 325,162 | $ | 207,628 | $ | 131,487 | $ | 1,266,378 | |||||||
| Direct costs | 36,400 | 29,539 | 12,445 | 8,871 | 87,255 | ||||||||||||
| Gross profit | $ | 565,701 | $ | 295,623 | $ | 195,183 | $ | 122,616 | $ | 1,179,123 | |||||||
| 94 | % | 91 | % | 94 | % | 93 | % | 93 | % | ||||||||
| Fiscal 1999 | |||||||||||||||||
| Revenue | $ | 442,220 | $ | 305,716 | $ | 129,333 | $ | 138,165 | $ | 1,015,434 | |||||||
| Direct costs | 37,810 | 31,364 | 12,883 | 12,483 | 94,540 | ||||||||||||
| Gross profit | $ | 404,410 | $ | 274,352 | $ | 116,450 | $ | 125,682 | $ | 920,894 | |||||||
| 91 | % | 90 | % | 90 | % | 91 | % | 91 | % | ||||||||
New Segments |
| Digital Imaging and Video |
| Creative Professional |
| ePaper |
| OEM PostScript and Other |
| Total |
|
|
| ----------- |
| --------- |
| --------- |
| --------- |
| ----------- |
|
Fiscal 2002 |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $411,929 |
| $351,268 |
| $312,544 |
| $89,047 |
| $1,164,788 |
|
Cost of revenue |
| 30,073 |
| 43,761 |
| 24,682 |
| 5,772 |
| 104,288 |
|
|
| ----------- |
| --------- |
| --------- |
| --------- |
| ----------- |
|
Gross profit |
| $381,856 |
| $307,507 |
| $287,862 |
| $83,275 |
| $1,060,500 |
|
|
| ======== |
| ====== |
| ====== |
| ====== |
| ======== |
|
Gross margin |
| 93 | % | 88 | % | 92 | % | 94 | % | 91 | % |
Fiscal 2001 | |||||||||||
Revenue |
| $439,734 |
| $393,309 |
| $291,886 |
| $104,791 |
| $1,229,720 |
|
Cost of revenue |
| 26,563 |
| 33,827 |
| 15,835 |
| 5,226 |
| 81,451 |
|
|
| ----------- |
| --------- |
| --------- |
| --------- |
| ----------- |
|
Gross profit |
| $413,171 |
| $359,482 |
| $276,051 |
| $99,565 |
| $1,148,269 |
|
|
| ======== |
| ====== |
| ====== |
| ====== |
| ======== |
|
Gross margin |
| 94 | % | 91 | % | 95 | % | 95 | % | 93 | % |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2000 |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $476,713 |
| $450,550 |
| $207,628 |
| $131,487 |
| $1,266,378 |
|
Cost of revenue |
| 27,738 |
| 38,201 |
| 12,445 |
| 8,871 |
| 87,255 |
|
|
| ----------- |
| --------- |
| --------- |
| --------- |
| ----------- |
|
Gross profit |
| $448,975 |
| $412,349 |
| $195,183 |
| $122,616 |
| $1,179,123 |
|
|
| ======== |
| ====== |
| ====== |
| ====== |
| ======== |
|
Gross margin |
| 94 | % | 92 | % | 94 | % | 93 | % | 93 | % |
We categorize our geographic information into three major market regions: the Americas, EMEA, and Asia. The Americas region includes the U.S., Canada, Latin America, and CentralLatin America. The EMEA region includes Europe, Middle East, and Africa. The Asia region includes Japan and the Asian Pacific countries.
98
Revenue and long-lived asset information by geographic areas for each of the years in the three-year period ended November 30, 200129, 2002 is presented below:
Revenue
| | Years Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | November 30, 2001 | December 1, 2000 | December 3, 1999 | ||||||||
| Americas: | |||||||||||
| United States | $ | 547,630 | $ | 616,733 | $ | 497,842 | |||||
| Other | 43,878 | 42,334 | 32,311 | ||||||||
| Total Americas | 591,508 | 659,067 | 530,153 | ||||||||
| EMEA | 326,499 | 323,037 | 265,981 | ||||||||
| Asia: | |||||||||||
| Japan | 228,744 | 224,326 | 175,122 | ||||||||
| Other | 82,969 | 59,948 | 44,178 | ||||||||
| Total Asia | 311,713 | 284,274 | 219,300 | ||||||||
| Total revenue | $ | 1,229,720 | $ | 1,266,378 | $ | 1,015,434 | |||||
|
| Years Ended |
| ||||
|
| November 29, |
| November 30, |
| December 1, |
|
|
| ---------- |
| ----------- |
| ----------- |
|
Americas: |
|
|
|
|
|
|
|
United States |
| $541,578 |
| $ 547,630 |
| $616,733 |
|
Other |
| 42,176 |
| 43,878 |
| 42,334 |
|
|
| ---------- |
| ----------- |
| ----------- |
|
Total Americas |
| 583,754 |
| 591,508 |
| 659,067 |
|
|
| ---------- |
| ----------- |
| ----------- |
|
EMEA |
| 317,638 |
| 326,499 |
| 323,037 |
|
|
| ---------- |
| ----------- |
| ----------- |
|
Asia: |
|
|
|
|
|
|
|
Japan |
| 195,457 |
| 228,744 |
| 224,326 |
|
Other |
| 67,939 |
| 82,969 |
| 59,948 |
|
|
| ---------- |
| ----------- |
| ----------- |
|
Total Asia |
| 263,396 |
| 311,713 |
| 284,274 |
|
|
| ---------- |
| ----------- |
| ----------- |
|
Total revenue |
| $1,164,788 |
| $1,229,720 |
| $1,266,378 |
|
|
| ======= |
| ======== |
| ======== |
|
Long-Lived Assets
| | Years Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | November 30, 2001 | December 1, 2000 | December 3, 1999 | ||||||||
| Americas: | |||||||||||
| United States | $ | 67,303 | $ | 56,894 | $ | 53,890 | |||||
| Total Americas | 67,303 | 56,894 | 53,890 | ||||||||
| EMEA | 6,470 | 3,182 | 8,706 | ||||||||
| Asia: | |||||||||||
| Japan | 1,796 | 2,868 | 4,616 | ||||||||
| India | 4,828 | 876 | 1,096 | ||||||||
| Other | 596 | 448 | 830 | ||||||||
| Total Asia | 7,220 | 4,192 | 6,542 | ||||||||
| Total long-lived assets | $ | 80,993 | $ | 64,268 | $ | 69,138 | |||||
|
| Years Ended |
| ||||
|
| November 29, |
| November 30, |
| December 1, |
|
|
| --------- |
| ----------- |
| ----------- |
|
Americas: |
|
|
|
|
|
|
|
United States |
| $52,648 |
| $67,303 |
| $56,894 |
|
Canada |
| 3,837 |
| --- |
| --- |
|
Other |
| 5 |
| --- |
| --- |
|
|
| --------- |
| ----------- |
| ----------- |
|
Total Americas |
| 56,490 |
| 67,303 |
| 56,894 |
|
EMEA |
| 6,583 |
| 6,470 |
| 3,182 |
|
|
| --------- |
| ----------- |
| ----------- |
|
Asia: |
|
|
|
|
|
|
|
Japan |
| 964 |
| 1,796 |
| 2,868 |
|
India |
| 6,685 |
| 1,446 |
| 876 |
|
Other |
| 368 |
| 596 |
| 448 |
|
|
| --------- |
| ----------- |
| ----------- |
|
Total Asia |
| 8,017 |
| 3,838 |
| 4,192 |
|
|
| --------- |
| ----------- |
| ----------- |
|
Total long-lived assets |
| $71,090 |
| $77,611 |
| $64,268 |
|
|
| ======= |
| ======== |
| ======== |
|
In fiscal 2001,2002, licenses of application products to Ingram Micro, Inc. ("Ingram") and Tech Data Corporation ("Tech Data"), including their respective affiliates, accounted for 27% and 14%, respectively, of our total revenue. In fiscal 2001, licenses of application products to Ingram and Tech Data accounted for 24% and 15%, respectively, of our total revenue. Inrevenue, and in fiscal 2000, licenses of application products to Ingram and Tech Data accounted for
99
30% and 14%, respectively, of our total revenue,revenue.
Receivables from Ingram and in 1999 licenses of application products to IngramTech Data accounted for 27%22% and 12%, respectively, of our total revenue.
Receivablesreceivables at November 29, 2002. As of November 30, 2001, receivables from Ingram and Tech Data accounted for 31% and 21%, respectively, of our total receivables, at November 30, 2001. As of December 1,and in fiscal 2000 receivables from Ingram and Tech Data accounted for 32% and 18%, respectively, of our total receivables, and in fiscal 1999 receivables from Tech Data accounted for 11% of our total receivables.
Note 17. Subsequent Events (Unaudited)
During the first quarter of fiscal 2002, we acquired Santa Rosa, California-based Fotiva, Inc. ("Fotiva"). Fotiva is a digital photography software company developing solutions to help consumers manage, store, enrich, and share digital photographs. The acquisition was accounted for using the purchase method of accounting. The cash purchase price of the acquisition was approximately $5.3 million.
Also during the first quarter of fiscal 2002, we announced a proposed agreement to acquire Ottawa, Canada-based Accelio Corporation ("Accelio"). Accelio is a provider of Web-enabled solutions that help customers manage business processes driven by electronic forms. Under the terms of the agreement, Adobe's common stock valued at $72.0 (US) million on closing will be exchanged for all Accelio equity securities. The Accelio business will be integrated into our operations. We expect to record a $12.0-$15.0 million accrual related to the acquisition, which will be added to the purchase price. The proposed acquisition is subject to the execution of customary transaction documents and the satisfaction of customary closing conditions, including the approval of Accelio's shareholders and clearance of the acquisition by U.S. and Canadian regulatory authorities. Initially the transaction was expected to close in March 2002. However, due to certain regulatory and timing requirements, we are now targeting to close in April 2002.
100
As required under Item 8, Financial Statements and Supplementary Data, Adobe's financial statement schedule is provided in this separate section. The financial statement schedule included in this section is as follows:
Schedule | Financial Statement Schedule Description | |||
|---|---|---|---|---|
Schedule II | Valuation and Qualifying Accounts |
101
ADOBE SYSTEMS INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Valuation and Qualifying Accounts which are Deducted in the
Balance Sheet from the Assets to which They Apply
|
| Balance at Beginning of Period |
| Charged/Credited to Operating Expenses |
| Deductions* |
| Balance at End of Period |
|
|
| ------- |
| -------- |
| --------- |
| ------- |
|
Allowance for doubtful accounts: |
|
|
|
|
|
|
|
|
|
Year Ended: |
|
|
|
|
|
|
|
|
|
November 29, 2002 |
| $8,549 |
| $357 |
| $(1,375 | ) | $7,531 |
|
November 30, 2001 |
| $8,788 |
| $(115 | ) | $(124 | ) | $8,549 |
|
December 1, 2000 |
| $5,170 |
| $7,140 |
| $(3,522 | ) | $8,788 |
|
______________
| | Balance at Beginning of Period | Charged to Operating Expenses | Charged to Revenue | Deductions* | Balance at End of Period | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Allowance for doubtful accounts: | |||||||||||||||||
| Year Ended: | |||||||||||||||||
| November 30, 2001 | $ | 8,788 | $ | 1,435 | $ | — | $ | 124 | $ | 10,099 | |||||||
| December 1, 2000 | $ | 5,170 | $ | 7,140 | $ | — | $ | 3,522 | $ | 8,788 | |||||||
| December 3, 1999 | $ | 6,399 | $ | (3,319 | ) | $ | 2,090 | $ | — | $ | 5,170 | ||||||
*
In fiscal 2002, the increase in deductions in fiscal 2002 as compared to fiscal 2001 was primarily due to the write-off of receivables from three insolvent royalty customers.
In fiscal 2001, the increase in the allowance for doubtful accounts was due to the overall deterioration in the economic environment globally, resulting in higher estimated bad debt write-offs. The decreased charge to operating expenses in fiscal 2001 as compared to the charge in fiscal 2000 reflects the results of enhanced global credit evaluation, on-going risk mitigation efforts (e.g.(such as letters of credit, guarantees, and credit insurance) in Asia, and improved collections of our Royaltyroyalty accounts.
In fiscal 2000, the charge to operating expenses related primarily to two separate bankruptcy filings, one involving a U.S. and the other a European distributor,distributor; an insolvent royalty customer,customer; and higher potential bad debt expense as a result of higher accounts receivable balances at the end of fiscal 2000. The deductions represent amounts written off against the allowance.
In fiscal 1999, the overall reserve decreased due to reduced credit risks, mainly in Asia. In addition, we invoiced certain royalty customers whose accounts were deemed potentially uncollectible. Consequently, we recorded an increase to the allowance for doubtful accounts and recorded a charge to revenue. As such we did not recognize revenue associated with these accounts.EXHIBITS
102
As required under Item 14.15. Exhibits, Financial Statement Schedules and Reports on Form 8-K, the exhibits filed as part of this report are provided in this separate section. The exhibits included in this section are as follows:
Exhibit | Description | |||
|---|---|---|---|---|
3.2 | Amended and Restated Bylaws as currently in effect | |||
10.37 | 1999 Equity Incentive Plan, as amended | |||
10.44 | Adobe Incentive Partners, L.P. Consent to Dissolve and Terminate Partnership | |||
10.81 | Amendment No.1 to Lease | |||
21 | ||||
Subsidiaries of the Registrant | ||||
23 | Consent of KPMG LLP | |||
99.1 | Certification of Chief Executive Officer | |||
99.2 | Certification of Chief Financial Officer |
ADOBE SYSTEMS INCORPORATED
EXHIBIT 21QuickLinks
Subsidiary Legal Name | Jurisdiction of Incorporation/Formation |
The Americas: | |
Adobe International, Inc. | Delaware |
Adobe Systems Brasil Limitada | Brazil |
Adobe Systems FSC, Inc. | Territory of Guam |
Glassbook, Inc. | Delaware |
Fotiva, Inc. | Delaware |
Proactive Systems Inc. | California |
Eclipse Corporation | Georgia |
Accelio Corporation | Delaware |
Adobe Systems Canada Inc. | Canada |
Europe: | |
Accelio AB | Sweden |
Accelio France SA | France |
Accelio Ireland Ltd. | Ireland |
Accelio UK Ltd. | United Kingdom |
Adobe Systems Benelux BV | The Netherlands |
Adobe Systems Danmark ApS | Denmark |
Adobe Systems Direct Ltd. | Scotland |
Adobe Systems Engineering GmbH | Germany |
Adobe Systems Europe Ltd. | Scotland |
Adobe Systems France SARL | France |
Adobe Systems GmbH | Germany |
Adobe Systems (Schweiz) GmbH | Federal Republic of Switzerland |
Adobe Systems Iberica SL | Spain |
Adobe Systems Italia SRL | Italy |
Adobe Systems Nordic AB | Sweden |
Adobe Systems Norge AS | Norway |
Adobe Software Trading Company Limited | Ireland |
Adobe Systems Software Ireland Limited | Ireland |
Frame Technology International Limited | Ireland |
Oilecca (Ireland) Ltd. | Ireland |
Jetform BV | Netherlands |
Jetform Norge | Norway |
Asia: | |
JF A'Asia Pty. Ltd. | Australia |
Accelio Japan Ltd. | Japan |
Adobe Systems Company Ltd. | Japan |
Adobe Systems India Pvt. Ltd. | India |
Adobe Systems Korea Ltd. | Korea |
Adobe Systems Pte. Ltd. | Singapore |
Adobe Systems Pty. Ltd. | Australia |
All subsidiaries of the Registrant
ADOBE SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
To the Board of Directors of Adobe Systems Incorporated:
We consent to the incorporation by reference in the Balance Sheet fromRegistration Statements (No. 33-10753, No. 33-18986, No. 33-23171, No. 33-30976, No. 33-36501, No. 33-38387, No. 33-48210, No. 33-63518, No. 33-78506, No. 33-83030, No. 33-83502, No. 33-83504, No. 33-84396, No. 33-86482, No. 33-59335, No. 33-63849, No. 33-63851, No. 333-28195, No. 333-28203, No. 333-28207, No. 333-57589, No. 333-81191, No. 333-87165, No. 333-39524, No. 333-52214, No. 333-57074, No. 333-72424, and No. 333-90518) onForm S-8 of Adobe Systems Incorporated of our report dated December 10, 2002, relating to the Assets to which They Apply
KPMG LLPEXHIBITSMountain View, California
February 24, 2003