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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 1, 1995NOVEMBER 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D)
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM -------------- TO --------------
COMMISSION FILE NUMBER: 33-6885
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ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0019522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1585 CHARLESTON ROAD, MOUNTAIN VIEW, 94043-1225
CALIFORNIA 77-0019522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
345 PARK AVENUE, SAN JOSE, CALIFORNIA 95110-2704
(Address of principal executive (Zip Code)
offices)
(Zip Code)
Registrant's telephone number, including area code: (415) 961-4400(408) 536-6000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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__ NO _____Yes /X/ No / /
Indicate by check mark 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. [ ]/X/
The aggregate market value of the common stock held by non-affiliates of the
registrant as of December 29, 199527, 1996 was $4,536,590,592.$2,604,622,692.
The number of shares outstanding of the registrant's common stock as of
December 29, 199527, 1996 was 73,170,816.71,680,962.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 1, 19963, 1997 to be
delivered to shareholders in connection with the Notice of Annual Meeting of
Shareholders to be held on April 10, 19969, 1997 are incorporated by reference into Part
II.
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TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business...................................................................................Business.................................................................................... 3
Item 2. Properties................................................................................. 12Properties.................................................................................. 10
Item 3. Legal Proceedings.......................................................................... 13Proceedings........................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders........................................ 14Holders......................................... 12
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters....................... 15Matters........................ 13
Item 6. Selected Financial Data.................................................................... 16Data..................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 17Operations....... 15
Item 8. Financial Statements and Supplementary Data................................................ 29Supplemental Data.................................................. 27
Item 9. Changes inIn and Disagreements With Accountants on Accounting and Financial Disclosure....... 30Disclosure........ 28
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 31Registrant.......................................... 29
Item 11. Executive Compensation..................................................................... 33Compensation...................................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 34Management.............................. 33
Item 13. Certain Relationships and Related Transactions............................................. 35Transactions.............................................. 34
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............................ 36
Signatures............................................................................................. 388-K............................. 35
Signatures.............................................................................................. 37
Summary of Trademarks..................................................................................Trademarks................................................................................... 38
Financial Statements.................................................................................... 39
Financial Statements................................................................................... 40
Financial Statement Schedule........................................................................... 72
Exhibits............................................................................................... 74Schedule............................................................................ 63
Exhibits................................................................................................ 65
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FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K
CONTAINS FORWARD-LOOKING STATEMENTS 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--FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS." READERS SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER
DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE
COMPANY IN 1997. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL
REPORT ON FORM 10-K. THE COMPANY UNDERTAKES 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
ITEM 1. BUSINESS
BUSINESS OVERVIEW
Adobe Systems Incorporated (the "Company"("the Company" or "Adobe") develops, markets, and
supports computer software products and technologies that enable users to
create, display, manage, communicate,express and use information across all print and electronic materials.media. The Company's
software runs on Microsoft Windows, Apple Macintosh, and UNIX platforms. The
Company offers a market-leading line of application software and type products
for creating and distributing visually rich communication materials; licenses
its industry-standard technologies to major hardware manufacturers, software
developers, and service providers; and offers integrated software solutions to
businesses of all sizes.
The Company was incorporated in California in October 1983. On August 31,
1994, the Company completed its acquisition of Aldus Corporation ("Aldus") after
approval by the shareholders of both companies and the Federal Trade Commission
("FTC"). The FTC approved the acquisition after Adobe agreed to the condition
that the rights to the Aldus FreeHand program revert to Altsys Corporation in
January 1995. Aldus' flagship product was PageMaker, a leading professional page
layout program for Windows and Macintosh platforms. On October 28, 1995, Adobe
completed its acquisition of Frame Technology Corporation ("Frame") following
approval by Frame's shareholders and the FTC. Frame's key product, FrameMaker
software, is used in the writing and publishing business to create and prepare
critical business and technical documents such as books and technical manuals.
Both of these acquisitions were accounted for as poolings of interests and
qualified as tax-free reorganizations.
The Company maintains its executive offices and principal facilities at 1585
Charleston Road, Mountain View,345
Park Avenue, San Jose, California 94043-1225.95110-2704. Its telephone number is
415-961-4400.408-536-6000. The Company also maintains a World Wide Web site at
http:HTTP://www.adobe.com.
BUSINESS OVERVIEW
ElevenWWW.ADOBE.COM.
PRODUCTS
Twelve years ago, Adobe and Aldus developed the software that initiated
desktop publishing. As a result of its acquisitions of Aldus in August 1994 and
Frame and Ceneca Communications, Inc. ("Ceneca") in October 1995,Today, Adobe is uniquely positioned to make a further
dramatic impact not only on how society creates visually rich information, but
also on how it distributes and accesses that information electronically.
While other major software companiescompanies' products deal in raw words, data, and
numbers, Adobe software helps people use the computer to express and share their
ideas in imaginative and meaningful new ways, whether the choice of media is
static or dynamic, paper or electronic. In the simplest terms, Adobe products
enable people to create, send, find, view, and print high-impact information.
Adobe software enables users to work with professional creative tools;
assemble illustrations, images, and text into fully formatted documents; output
documents directly to any kind of printing device; and
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distribute documents on paper, video, or compact disc, over an e-mail system,
corporate network, on-line service, or the Internet. Moreover, Adobe software
enables users to perform all of these tasks across multiple computing
environments, including Microsoft Windows, Apple Macintosh, and UNIX.
PRINTING AND SYSTEMS PRODUCTS
Adobe PostScript--the standard imaging language that delivers the highest
quality output, cross-platform compatibility, and top performance for
printing devices from corporate desktop printers to high-end publishing
printers.
Adobe PrintGear--a new printing architecture that redefines the standards
for high-performance, low-cost, high-quality printing for the small
office/home office and small corporate workgroup environments.
Adobe'sAdobe "Supra"--the innovative new production printing architecture,
code-named Supra, integrates Adobe PostScript page-description language is acceptedand the Portable Document
Format ("PDF"). This architecture has been endorsed by the printing industry
as the worldwidenew standard for high-performance prepress and production printing
electronic documents. More than 5,000 applications now
support PostScript language output and are available for every significant
computer operating system and hardware configuration, from desktop computers to
mainframes.
Today,environments.
GRAPHICS PRODUCTS
Adobe is applying its expertisePhotoshop--the standard in PostScript technology to
facilitate the communication of electronic documents across platforms and
networking schemes while preserving the original look and feel of the creative
material. This effort is embodied in the Adobe Acrobat family of products, which
not only provides tools for creating, distributing, and accessing visually rich
documents, but also is establishing an open, universal file format standard for
electronic publishing.
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Most recently, Adobe announced an enhanced version of Acrobat software that
will enable Internet browsers and on-line service providers to incorporate
Acrobat technology into their software and services for Internet users. With the
acquisition of Ceneca, the Company also acquired two professional-quality tools
for the World Wide Web to simplify the process of creating and managing Web
sites.
PRODUCTS
APPLICATION PRODUCTS
Adobe's application products take professional tools once available only in
massive, dedicated systems -- or not available at all -- and puts them on the
desktop. It gives people the ability to create and manipulate the elements of
visual communication, from photographs to illustrations to typefaces to video
footage, and combine them into complete documents for viewing on the screen or
printed page.
Adobe's flagship applications -- Adobe FrameMaker, Adobe Illustrator, Adobe
PageMaker, Adobe Photoshop, and Adobe Premiere -- established new categories of
software, and continue to provide customers with a growing set of sophisticated
features. These products have spawned mini-industries of third-party accelerator
boards, image libraries, special-effects filters, color and calibration tools,
and other plug-ins that increase customer value and productivity.
Adobe seeks to provide comparable feature sets to users in Windows,
Macintosh, and UNIX environments, and to increase cross-product compatibility
and extensibility.
GRAPHICS
Used for everything from commercial packaging to fine art, Adobe Illustrator
software is a leading illustration and page-design tool. It simplifies the
creation, manipulation, and refinement of artwork with advanced features for
editing, text handling, color support, and other tasks. It offers the most
comprehensive image support of any program, plus built-in production
capabilities. Complementary products include Adobe Dimensions for
three-dimensional design and Adobe Streamline for line-art conversion.
IMAGES
Adobe Photoshop has become the standard photo design and production software
for print, the
Web, and multimedia used by graphic designers, Webmasters, and digital
photographers.
Adobe PageMaker--the most complete solution for creating and producing
professional-quality printed and electronic pages used by designers,
publishers, and prepress publishing, graphics,professionals around the world.
Adobe Illustrator--a leading illustration and photography professionals. This
electronic darkroom enables users topage design artworktool for useprint,
the Web, and multimedia used by illustrators and Web designers.
Adobe Premiere--the industry standard for digital video editing used in
print and on-line
publishing. Users can employ powerful painting and selection tools, or retouch
and correct true color or black-and-white scanned images with image-editing
tools and filters. Accessory products such as Adobe Gallery Effects
special-effects filters and Adobe TextureMaker texture-design software increase
users' creative choices. Adobe Fetch cataloging software makes it easy to store,
find, and retrieve artwork files for reuse.
MOTION AND SOUND
Just as it enabled desktop publishing, Adobe software is now facilitating
the shift toward "desktop broadcasting." For filmmultimedia and video editors, multimedia
producers, and graphics professionals,production.
Adobe offers high-quality alternatives to
using expensive, specialized production equipment. Adobe Premiere software has
become the de factoAfter Effects--the industry standard for editing film, video, and multimedia productions
on the desktop. Adobe After Effects and the After Effects Production Bundle give
television and motion-picture professionals a set of post-production tools for
video2D animation, motion
compositing, motion graphics, and special effects.
PRESENTATIONSeffects used in multimedia, broadcast and film
production.
PUBLISHING PRODUCTS
Adobe Persuasion software is a programFrameMaker--a widely used application for producingauthoring and managing slide,
overhead,publishing
long and on-screen presentations. It enablescomplex documents including books, technical manuals, and reports.
Adobe Type Library--the industry standard in the commercial printing and
graphic arts markets, containing over 2,100 high-quality outline typefaces.
INTERNET PRODUCTS
Adobe Acrobat--the fastest way to publish and distribute business users to build and
automatically generate presentationsdocuments
of any complexity -- including speaker
notes and audience handouts -- from information they gather and createkind on a
personal computer.
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TYPE
Adobe's Type 1 font format iscorporate intranets, the only truly cross-platform type solution.
More than 2,000 Type 1 typefaces are now available from the Adobe Type Library,
which is packaged by family and in special collections. An increasing percentage
of Adobe's type revenue comes from direct purchases through the Adobe Type On
Call CD-ROM, a locked, buy-as-you-go version of the library. The Adobe Font
Folio CD-ROM gives design studios, service bureaus, and other professionals the
entire library, unlocked and ready for immediate use.
Supporting type tools include the Adobe Type Manager ("ATM") utility, which
eliminates jagged type on the computer screen and printed page at any size,
makes Type 1 typefaces available on any printer, and provides access to Adobe's
multiple master type technology. Adobe SuperATM is an enhanced version of ATMWeb, or CD-ROM. Acrobat software
that automatically creates "substitute fonts" to simulate typefaces
missing from a computer.
Through its Image Club catalog, Adobe offers a wide variety of typefaces, as
well as clip art, stock images, and other digital content, directly to desktop
publishers.
PAGE LAYOUT
Adobe PageMaker software makes it easy to create sophisticated print and
electronic communications with powerful color, page design, printing, and
compatibility features. It offers tools for each person in the publishing cycle:
graphic artists and designers; writer, editors, and typesetters; production
artists and prepress professionals. Adobe PageMaker also allows users to
generate Hypertext Markup Language ("HTML") and Adobe Portable Document Format
("PDF") output for electronic publishing needs.
DOCUMENT CREATION
While Adobe PageMaker software is optimized for documents with varied
graphics content, Adobe FrameMaker software is most popular for documents with
long, consistent content, such as books and technical manuals. Adobe FrameMaker
integrates WYSIWYG word processing, graphics, page layout, tables, long-document
building, equations editing, and conditional text for maximum user efficiency,
across computing platforms, and has the ability to output content as either HTML
or PDF. For organizations that create large inventories of documents that need
to be structured and managed enterprise-wide, Adobe FrameMaker + SGML software
combines the functionality of Adobe FrameMaker with interactive structure
validation and Standard Generalized Markup Language ("SGML") support in one
easy-to-use environment. For sharing information electronically, the high-
fidelity Adobe FrameViewer tool displays Adobe FrameMaker documents.
CONSUMER PRODUCTS
As more and more people become information authors, Adobe is leveraging its
technology and worldwide reseller channelsincludes everything needed to create and market robust
applications for small businesses and families. The consumer product line
includes:
- Adobe PhotoDeluxe for enhancing and personalizing photos.
- Adobe Art Explorer, a painting and drawing program especially for
children.
- Adobe SuperPaint for basic painting, drawing, and image processing.
- Adobe HomePublisher for basic desktop publishing.
- Adobe Type Twister for fun text effects.
ACROBAT PRODUCTS
Introduced in 1993, Adobe Acrobat software gives organizations a universal
creation and viewing tool for electronic documents. It offers maximum
flexibility to information authors, and maximum
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distribution options to information publishers: World Wide Web, e-mail, Lotus
Notes software, corporate networks, CD-ROMs, and print-on-demand systems. In
practice, Adobe Acrobat software provides time- and money-saving solutions to
customers in corporate and professional publishing, government agencies,
financial services, and other markets.
The Adobe Acrobat product family allows fully formatteddistribute rich electronic
documents - -- containing distinctive typefaces, color, graphics, and photographs -- tothat can be easily distributed, accessed, and reused, regardless ofviewed seamlessly within the hardware platform,
operating system, or applications usedleading Web browsers.
Adobe PageMill--the tools users need to create the originals. An Adobe Acrobat
document retains its distinctive look, regardless of operating systemfull-featured Web pages
without having to know HTML or software application. Receivers can view, search, navigate, print, and store the
documents on their existing systems.
Adobe Acrobat software describes documents of any size or visual complexity
in a single, universal format called the Portable Document Format, an open,
published specification. Based on the PostScript language, PDF is the only open
format of its kind, the only approach to electronic document delivery that is
independent of computer hardware, application software, operating system, and
networking environment. A PDF file stores the visual (printable) elements of a
document, as well as annotations, hypertext links, "thumbnail" page views,
bookmarks, and other features that make documents easy to access and navigate
on-screen.
To promote acceptance of PDF as a standard, the Adobe Acrobat Reader viewing
tool is available free of charge via the Internet and all major on-line
services. In addition, the reader is bundled with leading software and hardware
products.
The Adobe Acrobat retail product line includes: Adobe Acrobat Exchange for
creating and sharing basic PDF files; Adobe Acrobat Pro for creating and sharing
the most visually complex PDF files; Adobe Acrobat for Workgroups for a network
of as many as ten users; Adobe Acrobat Catalog for creating full-text indexes of
PDF files; Adobe Acrobat Search for CD-ROMs, which offers a low-cost way to
publish fully indexed, searchable information on compact disc; and Adobe Acrobat
Capture for converting printed "legacy" documents into PDF files. Licensed by
third parties, Adobe Acrobat Player technology can be embedded into projection
devices, navigation systems, information panels, and other noncomputer equipment
to enable viewing of PDF files.
INTERNET PRODUCTS
Adobe PageMill allows users to create pages on the World Wide Web ("WWW")
without the necessity of understanding HTML, URL addresses, or various image
file formats. UsingURLs. It's a simple interface,drag-and-drop operation,
from creating or importing text and images to adding audio, video, and
animation.
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Adobe PageMill enables WWW authors to
create individual pages, forms,SiteMill--for advanced Web page authoring and clickable images in a word processing-like
environment. Adobe PageMill automatically convertssite management.
Provides the information input by the
user to standard HTML files which will run on any WWW server.
Adobe SiteMill includes all theediting features of Adobe PageMill and incorporates
WWWpreserves links no
matter how pages and files are renamed or how site management tools.is restructured.
CONSUMER PRODUCTS
Adobe SiteMill displays all resources contained
within a WWW site and provides tools for maintaining the interrelationships
among those resources. When users paste links, rename files, or move files
between folders, Adobe SiteMill software will automatically repair all links so
that they point to the correct location. In addition, Adobe SiteMill can screen
existing WWW sites for errors and provides for easy, one-step correction.
PRINTING AND SYSTEMS
Adobe's Printing and Systems group develops software products based on the
Company's core technologies and licenses them to original equipment
manufacturers ("OEMs"). These products include Adobe PostScript, Adobe Acrobat
Player and Adobe PrintGear.
ADOBE POSTSCRIPT SOFTWARE
The PostScript language is a general-purpose computer language, developed by
Adobe, that describes the appearance of a page to a printer, including elements
such as text, graphics, and scanned images.
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For output devices including printers, slide recorders, imagesetters, and
screen displays, the PostScript language describes and renders documents of any
visual complexity with total precision. Since the Company introduced it in 1985,
PostScript has become the printing and imaging technology of choice for many
multinational corporations, the vast majority of professional publishers, and
the U.S. federal government.
Today, more than 60 manufacturers produce over 300 Adobe PostScript output
devices, offering them at prices ranging from less than $700 to $100,000 and
higher. All major software applications and operating systems support the
PostScript language standard.
CONFIGURABLE POSTSCRIPT INTERPRETER
The Configurable PostScript Interpreter ("CPSI") is an implementation of
Adobe PostScriptPhotoDeluxe--the software that resides in a workstation or a personal computer
rather than in a printer's embedded controller. CPSI is also referredallows consumers and small businesses
to as a
"software RIP" (Raster Image Processor).
PRINT-ON-DEMAND SYSTEMS
Print-on-demand systems use Adobe PostScript technology for final processing
of the print fileeasily modify and typically use proprietary technology during prepress
activities to format and prepare the file for printing.
ADOBE PRINTGEAR
Adobe PrintGear is a new printing architecture targeted at the small
office/home office ("SOHO") market. This imaging technology includes host- and
printer-based components, and features a RISC-like architecture in which a small
set of image operators are supported in the printer, lowering OEM component
costs and raising price performance to the consumer. Adobe PrintGear printers
from Adobe OEMs are expected to ship in 1996 at prices under $1,000.
ADOBE ACROBAT PLAYER
Adobe Acrobat Player is an OEM version of Adobe Acrobat technology. An
embedded controller technology, Acrobat Player will allow Adobe OEMs to enhance
information appliances such as overhead projectors, navigation systems, and
set-top boxes with the capability to display visually rich information.
PREPRESS TOOLS
In January 1996, the Company spun off its prepress application products
business to a newly-established company, Luminous Corporation ("Luminous").
Under the terms of the agreement, Luminous has acquired or licensed and will
continue to develop, market, and distribute Adobe's prepress application
products. Adobe will retain a minority equity interest in Luminous and will
maintain ownership of certain core technologies for Adobe prepress products.personalize their photos.
COMPETITION
APPLICATION PRODUCTS
The markets for Adobe's applicationAdobe products are characterized by intense competition,
evolving industry standards, rapid technology developments, and frequent new
product introductions. Adobe's future success will depend on its ability to
enhance its existing products, introduce new products on a timely and
cost-effective basis, meet changing customer needs, extend its core technology
into new applications, and anticipate or respond to emerging standards and other
technological changes.
The CompanyPRINTING AND SYSTEMS PRODUCTS
Adobe believes that the principal competitive factors for original equipment
manufacturers ("OEMs") in selecting a page description language or a printing
technology are product capabilities, market leadership, reliability, support,
engineering development assistance, and price. The Company believes that it
competes favorably in these areas with technology competency and OEM
relationships. Adobe PostScript and PrintGear software face competition from
Hewlett-Packard's LaserJet product family, with its proprietary PCL page
description language, and from PostScript language clone developers, including
Xionics and Harlequin.
GRAPHICS PRODUCTS
Within its Graphics Products Division, Adobe markets five category-leading
products that fall into two major groupings: professional publishing (Photoshop,
PageMaker, and Illustrator) and video editing (Premiere and After Effects). In
these groupings, the personal
computer applications market include productindividual products compete favorably on the basis of
features and functions, installed base, ease of use, product reliability, and
price and performance characteristics. The majorityIn addition, the products increasingly
work well together, providing broader functionality and minimizing product
learning issues for the professional who uses multiple applications to complete
a project.
A number of companies currently offer one or more products that compete
directly or indirectly with one or more of Adobe's graphics products. These
companies include Quark, Macromedia, Corel, Fractal, Avid, and Microsoft.
With the advent of the World Wide Web, the needs of the graphics
professional are rapidly changing to encompass on-line publishing as well as
print-based publishing. These changing customer needs will create new
opportunities for Adobe's graphics products, drive the Company's product
development cycles, and introduce new potential competitors.
PUBLISHING PRODUCTS
In the authoring products compete favorably in their markets on the basis of these
competitive factors. Adobe also believes that its
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application products gain a competitive benefit from their foundation in
PostScript language technology. However,and publishing market, the Company faces challenges in several
areas and expects to encounter continued competition both from
established
companies and from new companies that are now developing, or may develop,
competing products.
Price competition is a factor encountered by Adobe in several of its product
categories. Suppliers in certain segments of the microcomputer software market
have significantly reduced prices through the use of "site licenses" (which
permit the copying of a program and its documentation), direct price offers,
bundling, software suites, and discount pricing for large-volume retail
customers. The growth of high-volume retailers, which compete primarily on the
basis of price, has intensified the competition among software vendors. Price
competition is particularly keen in the consumer software market, and there is
no assurance that Adobe will be able to maintain current pricing levels.
Large-scalelarge-scale electronic publishing systems for publication and engineering
departments, as well as for other groups requiring page-composition features,
are offereddeveloped by several companies,
including Interleaf Inc. Additionally,Interleaf. Also, companies that develop word-processing software such
as Microsoft and Corel are incorporating desktop publishing features into their
products. Finally, numerous low-end desktopParticipants in this market compete based on the quality and features
of their products, the level of customization and integration with other
publishing packages are available from a variety of software developers, such as
Serif's Page Plus and Microsoft's Publisher. As a result, Adobe expects to face
increasing competition insystem components, the desktop publishing market from a number of other
software developers, some of whom may have greater financing, marketing,hardware platforms supported,
service, and technological resources than Adobe, targeting one or moreprice. The Company believes it can successfully compete in this
market
5
due to the quality and features of the various markets
for which Adobe products are designed.
In recent years, Adobe PageMaker has been subject to increasing competition.
The Windows versionFrameMaker product, its extensive
application programming interface, the large number of Adobe PageMaker competes with software offered by several
vendors, principally Ventura Publisher, marketedplatforms supported, and
sold by Corel Corporation,
and QuarkXPress for Windows. The Macintosh version of Adobe PageMaker competes
with software from a variety of independent vendors, but principally Quark,
Inc.'s QuarkXPress. Adobe FrameMaker for the Windows and Macintosh platforms is
subject to competition from many of the same sources as Adobe PageMaker.other factors.
In the UNIX environment, the primary competitors for Adobe FrameMaker are Interleaf for
technical publishing and WordPerfect and Applix for non-technical publishing.
Adobe Illustrator for the Windows and Macintosh platforms competes with
Macromedia's FreeHand, CorelDraw, and Deneba Canvas. Competition for Adobe
Photoshop on the Windows platform is from Micrografx Picture Publisher and
Fractal Design Painter X2.
Adobe Premiere for the Windows and Macintosh platforms is a video editing
program. Thetypeface software market, for desktop video editing is young; however, the Company faces competition from products such as VideoStudio from U-Lead, Digital Video
Producer from Asymetrix, MediaMerge from ATI, Razor from In:sync,other
vendors of high-quality typeface software, including Agfa, Linotype, and
VideoShop
from Avid.
Adobe After Effects is a motion graphics, digital compositing,Monotype. Participants in this market compete based on the variety,
availability, and special
effects program for broadcast videoprice of their offerings. The Company believes it can compete
successfully in this market due to its large library, global presence,
electronic delivery options, and film forcompetitive pricing. In the Macintosh. The program
typically retails for approximately $995 and competes with software from
companies that include Parallax and Discreet Logic, costing more than $25,000,
and dedicated hardware from Quantel and other companies that costs more than
$500,000.
Competition inlower end of the
digital type market, is intense. Computercomputer operating systems are generally sold with a selection of
typefaces bundled with the operating system by the vendor. Because of this, and
given that prices have fallen significantly in recent years, it is difficult to
achieve retail market presence with other typeface packages.
In addition, prices for
retail typeface packages have fallen significantly in recent years.
Adobe Persuasion for the Windows and Macintosh platformsINTERNET PRODUCTS
The Internet is a business
presentations program whose majornew and highly volatile market, characterized by rapid
technology developments and frequent new product introductions. Adobe faces
intense competition from companies offering similar products and will continue
to face competition from emerging technologies and products. Some of these
competitors include Microsoft's PowerPoint
(the only other such program to support both WindowsMacromedia, Microsoft, Netscape, and Macintosh), Software
Publishing's Harvard Graphics for Windows,Novell.
CONSUMER PRODUCTS
The consumer software market is characterized by extreme competition, price
sensitivity, brand awareness, and Lotus' Freelance Graphics for
Windows.
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Internet publishing is a market which is stillstrength in its infancy. Current
competition forretail distribution. Adobe PageMillfaces
direct and Adobe SiteMill arises primarily from Front
Page for Windows from Vermeer Technologies (acquired by Microsoft Corporation in
January 1996), NaviPress from Navisoft (a division of America Online), and
Netscape Navigator Gold and LiveWire from Netscape. Over time,indirect competition in this area is expected to increase.
All the consumer products have numerous competitors, and price competition
is quite intense in this market.
Electronic document communication, the market for Adobe Acrobat, is still in
its infancy. Athese markets from a number of competing productscompanies,
including Microsoft and technologies have been
introduced, including Common Ground from Hummingbird (which acquired No Hands
Software), Replica from Farallon, and Envoy from Novell.
PRINTING AND SYSTEMS
The Adobe PostScript interpreter faces indirect competition from major
computer companies that have developed or may develop a competitive page
description language. However, to date those products use a proprietary printer
control language that provides less functionality and flexibility than the Adobe
PostScript interpreter.Broderbund. The Company believes that Hewlett-Packard's LaserJet
product family,it will compete
successfully due to its strong relationships with critical OEMs and market
influencers and its proprietary PCL page description language, has the
largest installed base of any low-cost laser printer. Additionally, several
companies have produced their own implementations of the PostScript language,
and some have announced contracts with printer manufacturers, most of whom are
not currently licensing Adobe PostScript softwareability to leverage core competencies from established
products.
Adobe believes that the principal competitive factors for OEMs in selecting
a page description language interpreter are product capabilities, reliability,
support, engineering development assistance, and price. The Company believes
that it competes very favorably in these areas. The Company also believes that
no other page description language interpreter provides equivalent functionality
together with the broad support of software developers.
With the Display PostScript system, the Company also competes with screen
imaging software incorporated in other computer systems' architectures, such as
QuickDraw in the Macintosh, GDI in Windows, and GPI in OS/2. Each computer
platform has its own native screen imaging software. In the Windows, DOS, and
Macintosh platforms, that technology is provided by the operating system vendor.
In the UNIX environment, Display PostScript has been licensed by the substantial
majority of UNIX hardware vendors and has become the de facto standard.
OPERATIONS
MARKETING AND DISTRIBUTION
Adobe markets and distributes its products directly and through various
channels, including retailers, systems integrators, software developers, and
value-added resellers, as well as through OEM and hardware bundle customers.
Adobe supports its worldwide distribution network and end-user customers through
international subsidiaries. Adobe Systems Europe Ltd., established in 1987, is
headquartered in Edinburgh, Scotland, with subsidiaries in France, Germany,
Italy, the Netherlands, Spain, Sweden, and the United Kingdom. Adobe's Pacific
Rim presence includes Adobe Systems Co., Ltd. -- basedLtd.--based in Tokyo and established in
1989 -- as1989--as well as operations in Australia, Hong Kong, and Mexico.
Adobe licenses its PostScript software and other printing systems technology
to computer and printer manufacturers, who in turn distribute their products
worldwide. The Company derives a significant portion of PostScript royalties
from international sales of printers, imagesetters, and other output devices by
its OEM customers. More than 6,000 resellers in the United States and Canada and
more than 300 distributors throughout Europe and the Pacific Rim offer Adobe
software applications and type products.
9
MANUFACTURING
Adobe's primary manufacturing facilities are located in Santa Clara,
California. Manufacturing operations include duplication of disks, assembly of
purchased parts, and final packaging for retail products. Adobe contracts a
majority of its manufacturing activities to third parties, both in the United
States and in Europe.
Disk duplication for European language versions of the Company's products is
managed through the European headquarters. The master disks of European-language
versions of products are forwarded to McQueen Holdings Limited ("McQueen"), an
affiliate of the Company in Scotland, which duplicates the
6
disks, prints, and assembles the components and ships the completed product.
Quality control tests are performed on all duplicate disks and finished
products.
To date, Adobe has not experienced significant difficulties in obtaining raw
materials for the manufacture of its products or in the duplication of disks,
printing, and assembly of components, although an interruption in production by
a supplier could result in a delay in shipment of Adobe's products. There was no
material backlog of orders as of December 29, 1995.27, 1996.
CUSTOMER SUPPORT AND EDUCATION
For Adobe's application software, a technical support and services staff
responds to customer queries by phone and on-line. The Company also informs
customers through its bimonthly ADOBE MAGAZINE and a growing series of how-to
books published by Adobe Press, a joint venture with Macmillan Computer
Publishing. In addition, Adobe prepares and authorizes independent trainers to
teach Adobe software classes, sponsors workshops led by its own graphics staff,
interacts with independent user groups, and conducts regular seeding and testing
programs.
INVESTMENT IN NEW MARKETS
In 1994, Adobe invested in a venture capital limited partnership that is
chartered to invest in innovative companies strategic to its software business.
Adobe Ventures L.P.LP ("AVLP") enables the Company to join other investors in making
new products and services available to computer users and in building new market
opportunities. Adobe has thus invested in new markets, and intends to continue
investing in new markets, both through the limited partnership as well as direct
investments by the Company.
The Company owns a minority interest in certain companies and a majority
interest in AVLP. Investments in publicly traded equity securities that are free
of trading restrictions, or will become free of trading restrictions within one
year, are carried at fair value based on quoted market prices. Investments in
equity securities that are not publicly traded, or are restricted from trading
for more than one year, are carried at the lower of cost or market.
The investment in AVLP is accounted for using the equity method of
accounting and accordingly the investment is adjusted to reflect the Company's
share of AVLP's investment income (loss) and dividend distributions. AVLP
carries its investments in equity securities at an estimated fair market value
and unrealized gains and losses are included in investment income (loss). Most
of the companies in which AVLP invests are not publicly traded and have no
established market, and certain publicly traded investments are restricted from
trading. As such, these investments are valued based on estimates made by the
management of AVLP and typically include a discount to reflect trading
restrictions associated with these investments. The fair value of AVLP's
investments in companies that are publicly traded is based on quoted market
prices.
The Company's portfolio in equity investments including its investment in
AVLP as of November 29, 1996 had a cost basis of $41.2 million and was valued at
$97.7 million. Gross proceeds from the sale of
7
equity securities during 1996 was $72.6 million. The Company's equity
investments and AVLP's investments in equity securities at November 29, 1996
consisted of the following companies:
PRIVATE PUBLIC
------------- -----------
ADOBE EQUITY INVESTMENTS
Ameriquest................................................................. X
Datalogics................................................................. X
McQueen Holdings Ltd....................................................... X
Netscape Communications Corporation........................................ X
Objectivity................................................................ X
Pointcast Incorporated..................................................... X
Verity Incorporated........................................................ X
Vertec Solutions Incorporated.............................................. X
ADOBE VENTURES L.P. EQUITY INVESTMENTS
Cascade Systems International.............................................. X
Cognito Learning Media Inc................................................. X
Crosswise Corporation...................................................... X
Digimarc Corporation....................................................... X
Digital Think Incorporated................................................. X
Electronic Submission Publishing Systems, Incorporated..................... X
Extensis Corporation....................................................... X
Filenet Corporation........................................................ X
Fractal Designs Incorporated............................................... X
Lantana Research Corporation............................................... X
Managing Editor Incorporated............................................... X
mFactory, Inc.............................................................. X
Peerless Systems Corporation............................................... X
Salon Internet, Inc........................................................ X
Siebel Systems Incorporated................................................ X
PRODUCT DEVELOPMENT
Since the personal computer software industry is 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. Adobe
primarily develops its software internally. The Company sometimes acquires
products developed by others by purchasing the stock or assets of the business
entity that held ownership rights to the technology. In other instances, Adobe
has licensed or purchased the intellectual property ownership rights of programs
developed by others with license or technology transfer agreements that may
obligate the Company to pay royalties, typically based on a percentage of the
revenues generated by those programs.
During the years ended November 29, 1996, December 1, 1995 and November 25,
1994, and November 26,
1993, the Company's research and development expenses, including costs related
to contract development, were $152.9 million, $138.6 million, $113.8 million, and $100.2$113.8
million, respectively. During each of the years 1996, 1995, 1994, and 1993,1994, the
Company acquired in purchase transactions one or more software developers. In
each of these transactions, a portion of the purchase price was allocated to
in-process research and development and expensed at the time of the acquisition.
In 1996, 1995, and 1994, $21.3 million, $15.0 million, was expensed related to Ceneca Communications, Inc.; in 1994,and $15.5 million was
expensed, related to LaserTools Corporation and Compumation,
Incorporated; and in 1993, $4.3 million was expensed related to AH Software,
Inc. (doing business as After Hours Software) and The Company of Science & Art.respectively.
8
PRODUCT PROTECTION
Adobe regards its software as proprietary and protects it with copyrights,
patents, trademarks, trade secret laws, internal and external nondisclosure
precautions, and restrictions on disclosure and
10
transferability that are
incorporated into its software license agreements. The Company protects the
source code of its software programs as trade secrets, and makes source code
available to OEM customers only under limited circumstances and specific
security and confidentiality constraints.
The Company's 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. The Company also relies 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. The
enforceability of "shrink wrap" and electronic licenses has not been
conclusively determined. Adobe has obtained many patents and has registered
numerous trademarks 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. Adobe conducts vigorous anti-piracy
programs. Adobe products do not contain copy protection, except on copies for
international distribution in certain countries. Many products, including Adobe
PageMaker, Adobe Photoshop, and Adobe Illustrator, incorporate network
copy-detection features. These capabilities help encourage compliance with the
Company's license agreements by alerting customers about certain concurrent
usage problems over a given network. Network copy detection has become
increasingly popular among higher priced software products.
Adobe believes 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 its
personnel, name recognition, contractual relationships, and ongoing product
development.
EMPLOYEES
As of December 29, 1995,27, 1996, Adobe employed 2,3192,266 people, none of whom are
represented by a labor union. The Company has not experienced work stoppages and
believes its employee relations are good. Competition in recruiting personnel in
the software industry is intense. Adobe believes its future success will depend
in part on its continued ability to recruit and retain highly skilled
management, marketing, and technical personnel.
119
ITEM 2. PROPERTIES
The following table sets forth the location, approximate square footage, and
use of each of the principal properties used by the Company. Except as where
indicated, all of the properties are leased or subleased by the Company. Such
leases expire at various times through May 2007.2015. The annual base rent expense
for all facilities (including operating expenses, property taxes, and
assessments) is currently $21.0$22.6 million and is subject to annual adjustment.
APPROXIMATE
SQUARE
LOCATION FOOTAGE USE
- --------------------------------------------------------------------- ------------ ------------------------------------------------------------------------------------------------------------------------------
The Americas:
Mountain View, California 290,018North America: 354,000 Research, product development, sales, marketing and administration
Seattle, Washington345 Park Avenue
San Jose, California
U.S.A.
333 West San Carlos Avenue 105,970 Sales and administration
San Jose, California
U.S.A.
303 Almaden Boulevard 131,027 Sales, administration, research and product development
San Jose, California
U.S.A.
2400 Condensa Avenue 120,000 Distribution
Santa Clara, California
U.S.A.
411 First Avenue South 185,000 Product development and customer support
Santa Clara, California 127,688 Customer support and warehouse/distribution center
San Jose, California 136,970 Product development and salesSeattle, Washington
U.S.A.
Europe:
Edinburgh, Scotland (Owned) 22,000 Sales, marketing, and administration
Pacific Rim:
Tokyo, JapanFive Mid New Cultins
Edinburgh EH11 4DU
Scotland, United Kingdom
(Owned)
Japan: 20,237 Sales, marketing, and administration
Yebisu Garden Place Tower
4-20-3 Ebisu, Shibuya-ku
Tokyo 150 Japan
In general, all facilities are in good condition and are operating at capacities
which range from 75 percent to 100 percent.
1210
ITEM 3. LEGAL PROCEEDINGS
Quantel Limited, a U.K. corporation, has filed and served on the Company in
January 1996 a complaint alleging that the Adobe Photoshop program infringes
five U.S. patents held by Quantel. The complaint was filed in the United States
District Court for the District of Delaware. Since the complaint arrived without prior notice from
Quantel, the Company is unable at this time to determine whether the complaint
has any merit. The Company is actively investigating the allegations. The complaint seeks a permanent
injunction and unspecified damages. The Company has analyzed the patents and
believes it has adequate legal defenses to the major causes of action and
intends to vigorously defend the lawsuit. The case is currently in the discovery
phase.
On February 6, 1996, a securities class action complaint was filed against
Adobe, certain of its officers and directors, certain former officers of Adobe
and Frame,
Technology Corporation ("Frame"), Hambrecht & Quist, LLP ("H&Q"), investment banker for Frame, and
certain H&Q employees, in connection with the drop in the price of Adobe stock
following its announcement of financial results for the quarter ended December
1, 1995. The complaint was filed in the Superior Court of the State of
California, County of Santa Clara. The complaint alleges that the defendants
misrepresented material adverse information regarding Adobe and Frame and
engaged in a scheme to defraud investors. The complaint seeks unspecified
damages for alleged violations of California law. Adobe believes that the
allegations against it and its officers and directors are without merit and
intends to vigorously defend the lawsuit. 13The case is currently in the discovery
phase.
Management believes that the ultimate resolution of these matters will not
have a material impact on the Company's financial position or results of
operations.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
1412
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on The Nasdaq Stock Market under the
symbol "ADBE." On December 29, 1995,27, 1996, there were 2,0732,238 holders of record of the
Company's common stock. Because many of such shares are held by brokers and
other institutions on behalf of shareholders, the Company is unable to estimate
the total number of shareholders represented by these record holders. The
following table sets forth the high and low sales price per share of the
Company's common stock, and the dividends paid per share, for the periods
indicated.
PRICE RANGE
-------------------- PER SHARE
HIGH LOW DIVIDEND
--------- --------- -----------
Fiscal 1994:
First Quarter......................................................... $ 32.00 $ 19.75 $ 0.05
Second Quarter........................................................ 34.50 21.50 0.05
Third Quarter......................................................... 34.50 24.50 0.05
Fourth Quarter........................................................ 38.50 29.75 0.05
Fiscal Year........................................................... 38.50 19.75 0.20
Fiscal 1995:
First Quarter.........................................................Quarter.................................................................... $ 36.25 $ 27.25 $ 0.05
Second Quarter........................................................Quarter................................................................... 58.75 34.25 0.05
Third Quarter.........................................................Quarter.................................................................... 66.50 49.5044.38 0.05
Fourth Quarter........................................................Quarter................................................................... 70.25 45.00 0.05
Fiscal Year...........................................................Year...................................................................... 70.25 27.25 0.20
Fiscal 1996:
First Quarter.................................................................... $ 74.25 $ 30.00 $ 0.05
Second Quarter................................................................... 45.13 30.75 0.05
Third Quarter.................................................................... 37.88 28.50 0.05
Fourth Quarter................................................................... 44.13 31.50 0.05
Fiscal Year...................................................................... 74.25 28.50 0.20
The Company has paid cash dividends on its common stock each quarter since
the second quarter of 1988. The declaration of future dividends is within the
discretion of the Board of Directors of the Company and will depend upon
business conditions, results of operations, the financial condition of the
Company, and other factors.
1513
ITEM 6. SELECTED FINANCIAL DATA
THE FOLLOWING SELECTED CONSOLIDATED FINANCIAL DATA (PRESENTED IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS AND EMPLOYEE DATA) ARE DERIVED FROM THE COMPANY'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. 29 DEC. 1 NOV. 25 NOV. 26 NOV. 27
NOV. 291996 1995 1994 1993 1992
1991
----------- ----------- ----------- ----------- ----------------------- ---------- ---------- ---------- ----------
Operations:
Revenue.......................................Revenue.......................................... $ 786,563 $ 762,339 $ 675,617 $ 580,103 $ 520,031
$ 452,144
Merger transaction and restructuring costs....costs....... 4,955 31,534 72,183 25,800 --
--
Income before income taxes....................taxes....................... 244,824 163,853 52,946 72,358 89,981
123,350
Net income(1)..................................................................... 153,277 93,485 15,337 42,007 57,664
78,725
Net income per share(1)(2).............................................. 2.04 1.26 0.22 0.62 0.84 1.17
Dividends declared per common share(2)(3)................ 0.20 0.20 0.20 0.160.20 0.16
Financial position:
Cash and short-term investments...............investments.................. 564,116 516,040 444,768 344,714 275,522
234,063
Working capital...............................capital.................................. 506,092 506,472 402,837 347,683 300,180
263,582
Total assets..................................assets..................................... 1,012,285 884,732 710,000 597,696 525,849
437,803
Shareholders' equity..........................equity............................. 706,514 698,417 514,315 457,216 418,771
358,755
Additional data:
Worldwide employees...........................employees.............................. 2,222 2,322 2,055 2,500 2,407 1,970
- ------------------------
(1) ReflectsIncludes $68.9 million in 1996 of investment gains less $26.2 million for
the write-off of acquired in-process research and development costs and
restructuring charges from divested products. Also reflects $46.5 million of
incremental costs incurred during 1995 in connection with the acquisition of
Frame and the write-off of acquired in processin-process research and development
totaling $31.5costs, and $87.7 million and $15.0 million, respectively; and during 1994 in connection with the acquisition of
Aldus and the write-off of acquired in-process research and development
totaling $72.2 million and
$15.5 million, respectively.costs. (For additional information, see Note 2 and Note 8 in the7 of Notes to
Consolidated Financial Statements.)
(2) Adjusted for a two-for-one stock split, effective July 1993.
(3) Amounts prior to the acquisitions of Frame on October 28, 1995 and Aldus on
August 31, 1994 have not been restated to reflect the effects of the
poolings of interest.
1614
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.
EXCEPT FOR THEIN ADDITION TO HISTORICAL INFORMATION, CONTAINED HEREIN, THIS ANNUAL REPORT ON FORM 10-K
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'SUNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS COULDTO DIFFER MATERIALLY. FACTORS THAT COULDMIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN THE SECTION ENTITLED "FACTORS"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS,OPERATIONS." READERS SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER
DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE
COMPANY IN 1997. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS WELL AS THOSE DISCUSSED ELSEWHERE INOF THE COMPANY'S SEC REPORTS
(INCLUDING WITHOUT LIMITATION, ITSDATE OF THIS ANNUAL
REPORT ON FORM 10-K FOR10-K. THE FISCAL YEAR ENDED
DECEMBER 1, 1995).COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE
ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
RESULTS OF OPERATIONS
OVERVIEW
Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets, and
supports computer software products and technologies that enable users to
create, display, manage, communicate, and print electronic documents. The
Company licenses its technology to major computer, printing, and publishing
suppliers, and markets a line of application software products and type products
for authoring and editing visually rich documents. The Company distributes its
products through a network of original equipment manufacturer ("OEM") customers,
distributors and dealers, and value-added resellers ("VARs") and system
integrators. The Company has operations in the Americas,North America, Europe, Japan,
Asia-Pacific and the Pacific
Rim.
InLatin America.
On October 28, 1995, the Company acquired Frame Technology Corporation
("Frame"). Frame, established in 1986, developed, marketed, and supported
writing and publishing software for the creation and distribution of critical
business and technical documents. To effect the combination,issued approximately 8.5 million shares of
Adobe'sits common stock were issued in exchange for all of the outstanding common stock of Frame. The merger was accounted forPrior to its
acquisition by the pooling
of interests method, and accordingly,Company, on July 28, 1995, Frame acquired all annual and interim financial
information prior to the merger has been restated to combine the results of the Company and Frame. In connection with the merger, the Company recorded $11.4common
stock of Mastersoft, Inc. ("Mastersoft") in exchange for approximately 0.6
million equivalent shares of merger transaction costs and $21.1 million of restructuring costs in
the fourth quarter of 1995.
InAdobe common stock. On August 31, 1994, the Company
acquired Aldus Corporation ("Aldus"). Aldus
began operations in 1984 and created computer software solutions that help
people throughout the world effectively communicate information and ideas. Aldus
focused on three lines of business: applications for the professional print
publishing, graphics, and prepress markets; applications for the general
consumer market; and applications for the interactive publishing market. To
effect the combination,issued approximately 14.2 million shares of Adobe'sits common stock were issued in exchange for all
of the outstanding common stock of Aldus. The merger wasThese business combinations have been accounted
for by the poolingas poolings of interests, method, and, accordingly, all annual and interimthe consolidated financial
informationstatements for periods prior to the merger
hascombinations have been restated to combineinclude
the results of operations, financial position, and cash flows of Frame,
Mastersoft, and Aldus.
There were no significant transactions among the Company, Frame, and Aldus. In connection
with the merger, the Company recorded $14.6 million of merger transaction costs
and $57.6 million of restructuring costs in the fourth quarter of 1994. In
addition, the Company incurred one-time expenses that are not included in the
restructuring charge but were relatedAldus
prior to the combinations which required elimination. Prior to the combination
Frame reported revenue and net income of $68.2 million and $10.5 million,
respectively, for the nine-month period ended September 1, 1995 and reported
revenue and net income of $77.8 million and $11.9 million, respectively, for the
year ended November 25, 1994. Prior to the combination, Aldus acquisition. These charges
includedreported revenue
and net income of $172.2 million and $5.1 million, respectively, for the
write-off of certain capitalized software development costs,
transition personnel bonuses,nine-month period ended August 26, 1994. Certain adjustments were made to
Frame's tax provision and relocation expenses among others, and totaled
approximately $10.1 million.deferred tax accounts to reflect tax benefits
available to the combined company.
In January 1996, the Company spun offdivested its prepress applications product
business to a newly established company, Luminous Corporation ("Luminous").
Under the terms of the agreement, Luminous has acquired or licensed and will
continuecontinued to develop, market, and
distribute Adobe's prepress application products.products and Adobe will retain a minority equity interest in Luminous and will
maintainmaintained ownership
of certain core technologies for Adobe prepress products. Luminous will pay royalties to Adobe based on a percentage of revenue from
certain products for the next two years. Revenue from the
prepress application productsbusiness unit was approximately $10.4 million in fiscal
year 1995. 17In October of 1996, the Company sold its remaining interest in
Luminous for approximately $6.8 million which was recorded as a realized gain.
15
REVENUE
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
----------- ------------ ----------- ------------ -------------------- ------------- --------- ------------- ---------
Total revenue...................................revenue..................................................... $ 786.6 3% $ 762.3 13% $ 675.6 16% $ 580.1
Revenue growth in 19951996 and 19941995 is attributable to increases in both
licensing activity related to the Company's PostScript interpreter and
application products shipments resulting from the release of new and enhanced
products. In 1995, the increase in application products revenue was partially
offset by the divestiture of Aldus FreeHand in January 1995 and the
discontinuance of Aldus PhotoStyler in late 1994, as further discussed below.1994. Product unit volume (as
opposed to price) growth was the principal factor in the Company's revenue
growth in application products revenue. No customer accounted for more than 10
percent of the Company's total revenue in 1996, 1995, 1994, or 1993.1994.
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
----------- ------------------------- ----------- ------------------------- -----------
Product group revenue -- Licensing..............revenue--Licensing........................... $ 196.7 7% $ 183.4 17% $ 156.7
7% $ 146.2
Percentage of total revenue.....................revenue................................ 25.0% 24.1% 23.2% 25.2%
Licensing revenue is derived from shipments by OEM customers of products
containing the Adobe PostScript interpreter and the Display PostScript system.
Such products include standard roman printers in both romanas well as printers that work with
Japanese, Chinese, and JapaneseKorean languages, imagesetters, and workstations.
Licensing revenue is also derived from shipments of products containing the
Configurable PostScript Interpreter ("CPSI") by OEM customers. CPSI is a fully
functional PostScript interpreter that resides on the host computer system
rather than in a dedicated controller integrated into an output device. The
configuration flexibility of CPSI allows OEMs and software developers to create
and market a variety of PostScript products independently of controller hardware
development. Adobe PostScript products sell to the small office/home office
("SOHO") market, as well as the corporate enterprise and high-end imagesetter
markets.
The number of units shipped by OEMs continued to grow on an annual basis in
19951996 and 1994.1995. Royalty per unit is generally calculated as a percentage of the
end user list price of a printer, although there are some components of
licensing revenue based on a flat dollar amount per unit that typically do not
change with list prices. During this period, some OEMs introduced lower end
printers or reduced their list prices on lower end printers, which resulted in
lower royalties per unit on such printers. However, in 19951996 and 1994,1995, this trend
was offset by increased demand for CPSI and in 1995, by increased demand for color
capability as well as greater penetration into the Japanese market, all of which
have higher royalties per unit.
The Company has seen year-to-year increases in the number of OEM customers
from which it is receiving licensing revenue and believes that such increases
are attributable to the continued acceptance of PostScript software, as well as
to the diversification of the Company's customer base across multiple platforms.
In 1997, Adobe will introduce new PrintGear products that will serve the SOHO
markets. Also in 1997, one of Adobe's largest PostScript customers,
Hewlett-Packard Company, plans to introduce in the corporate enterprise market
products that do not contain Adobe PostScript software. These products are
expected to contain a non-Adobe clone version of PostScript and are expected to
reach the market in July of 1997. All of these factors may impact the Company's
ability to maintain or sustain revenue growth in this area.
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
----------- ------------------------- ----------- ------------------------- -----------
Product group revenue -- Application products...revenue--Application products................ $ 589.9 2% $ 578.9 12% $ 519.0
20% $ 433.9
Percentage of total revenue.....................revenue................................ 75.0% 75.9% 76.8% 74.8%
16
Application products revenue is derived from shipments of application
software programs marketed through retail and distribution channels; however,
the informationAdobe PageMill, Adobe SiteMill, Adobe FrameMaker, and Adobe Acrobat products are
becoming more widely distributed through VARs and systems integrators.
Application products revenue grewgrowth in 19951996 was primarily due to increased
demand for Adobe Photoshop, Adobe PageMaker,Illustrator, the Adobe Acrobat family of
products, and sales of PageMill and SiteMill. The increase was partially offset
by decreased demand for FrameMaker and Adobe PageMaker products. The Company
released Photoshop 4.0 for both the AdobeMacintosh and Windows platforms, and Acrobat
3.0 near the end of the fourth quarter of 1996. In addition, PageMill and
SiteMill, which were both released in late 1995, added revenue in 1996. In 1995,
application products revenue increased as a result of higher sales of Photoshop,
PageMaker, FrameMaker, and the Acrobat family of products. The Company released
Adobe PageMaker 6.0 for the Macintosh platform late in the third quarter of
1995, and for the Windows and Windows 95 platformsplatform in the fourth quarter.quarter of 1995. In addition,
the Company released Adobe Photoshop 3.0 for the Windows platform in the first
quarter of 1995 and released new Adobe Acrobat products or new versions of existing
products throughout the year.1995. The 1995 revenue growth was partially offset by the
divestiture of Aldus FreeHand in January 1995 and the discontinuance of Aldus
PhotoStyler late in 1994. These two products aggregated $53.2 million of revenue
in 1994.
18
In 1994,general, the Company's application products revenue increased as a result of higher sales
of Adobe Illustrator, Adobe Photoshop, and Adobe PageMaker, all of which
benefited fromon the release of new versions in 1994. Adobe FrameMaker also showed
strong revenue growth.Windows platform have
experienced greater growth than those on the Macintosh platform during 1996. The
release of Aldus FreeHand 4.0 (divested by the
Company in January 1995) for Windows and the Power Macintosh platforms also
contributedexpects this trend to the 1994 revenue increase. Other factors affecting 1994 revenue
growth include the release of localized versionscontinue for the Japanese market of
Adobe Photoshop, Adobe Illustrator, and Adobe PageMaker for the Macintosh
platform; increased sales of Adobe Premiere, a video editing and sequencing
tool; and the release of Adobe Illustrator and Adobe Photoshop for selected UNIX
platforms. Reduced sales for individual typeface packages offset a portion of
the revenue growth in 1994.foreseeable future.
DIRECT COSTS
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
----------- ------------------------- ----------- ------------------------- -----------
Direct costs....................................costs............................................... $ 141.1 8% $ 130.3 7% $ 122.0
13% $ 107.8
Percentage of total revenue.....................revenue................................ 17.9% 17.1% 18.1% 18.6%
Direct costs include royalties; amortization of acquired technologies; and
direct product, packaging, and shipping costs. During 1994, and 1993, direct costs also
included amortization of typeface production costs, which totaled $4.8 million and $4.6 million, respectively.million.
Gross margins, in general, are affected by the mix of licensing revenue
versus application products revenue as well as the product mix within
application products. The increaseDirect costs were slightly higher in 1996 compared to 1995
as a percentage of revenue due to higher localization costs. Also, there was a
general decline in 1996 in FrameMaker revenue and associated gross margins. In
1995, direct costs decreased as a percentage of revenue from 1994, primarily
from the lump sum payment in absolute dollars, has been mitigated
by actions taken bylieu of all royalty obligations to the Company to reduce direct costs. In 1993,developers
of the Company
achieved lower per unit manufacturing costs for certain products, reduced
royalty agreement rates, and reduced typeface production costs amortization.
These actions also benefited 1995 and 1994. In addition, the 1995 purchase
relating to Adobetechnology underlying Photoshop, as further discussed below, resulted in lowerwhich lowered direct costs for that
product, as well as a percentage of its revenue.
On March 31, 1995,continued benefit from efforts to reduce unit
manufacturing costs, royalty agreement rates and typeface production costs
amortization.
Gross margins for application products are expected to increase slightly in
1997 because the Company entered into an agreement with the developers
of the technology underlying its Adobe Photoshop product under which the Company
made a lump-sum paymentintends to the developers of $34.5 million in lieu of all
royalty obligations incurred in connection with the technology after the
beginning of the fourth quarter of 1994. Accordingly, $8.5 million of the amount
paid to the developers was applied to accrued royalties related to the fourth
quarter of 1994 and the 1995 period prior to the execution of the agreement. The
balance of $26.0 million is being amortized over 30 months. This transaction has
been recorded on the Consolidated Balance Sheets in "Other assets" as part of
purchased technology. Prior to this agreement, the Company paid the developers a
royalty for each copy of Adobe Photoshop sold by the Company. To date, the
amortization expense related to the purchase has been less than the per-copy
royalty expense that would otherwise have been incurred.
The Company also delivers its type library on its Type On Calldistribute more application products via
CD-ROM media,
and end users wishing to license typeface designs call the Company with a credit
card number to receive the unlocking code for the desired typeface. This method
of delivery also contributes to reduced direct costs. Other applications are
also available through the Company's distributors on CD-ROM.media.
OPERATING EXPENSES
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
----------- ------------------------- ----------- ------------------------- -----------
Software development costs -- Researchcosts--Research and development....................................development....... $ 152.9 10% $ 138.6 22% $ 113.8
14% $ 100.2
Percentage of total revenue.....................revenue................................ 19.4% 18.2% 16.8% 17.3%
17
Research and development expenses consist principally of salaries and
benefits for software developers, contracted development efforts, related
facilities costs, and expenses associated with computer equipment used in
software development.
19
Research and development expense has increased significantly over the last
three years as the Company invested in new technologies, new product
development, and the infrastructure to support such activities. The increase
reflects the expansion of the Company's engineering staff and related costs
required to support its continued emphasis on developing new products and
enhancing existing products. Many of these engineers are working with OEM
customers to design and implement PostScript Level 2 devices. The Company
continued working with many of its OEM customers in a co-development program.
This allows customers to be more self-sufficient in new device development by
taking on more of the implementation task themselves rather than relying so
heavily on the Company's engineers. While this mitigates certain costs, the Company continues to make significant
investments in development of its Adobe PostScript and application software
products.products, including those targeted for the emerging Internet market.
The Company believes that continued investments in research and development
are necessary to remain competitive in the marketplace, and are directly related
to continued, timely development of new and enhanced products. Accordingly, the
Company intends to continue recruiting and hiring experienced software
developers. While the Company expects that research and development expenditures
in 19961997 will increase in absolute dollars, such expenditures are expected to
declineremain approximately the same as a percentage of revenue.
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
----------- ----------------------- ----------- ------------ -----------
Software development costs --
Amortizationcosts--Amortization of capitalized
software development costs..............................costs................................... $ 2.5 (77)% $ 11.1 (23)% $ 14.3
36% $ 10.5
Percentage of total revenue.....................revenue.................................... 0.3% 1.5% 2.1% 1.8%
In the implementation of Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed," software development expenditures on Adobe
products, after achieving technological feasibility, were deemed to be
immaterial. Certain software development expenditures on Frame and Aldus
products have been capitalized and are being amortized over the lives of the
respective products. In the fourth quarters of 1995 and 1994, software
development expenditures on Frame and Aldus products, respectively, after
reaching technological feasibility, were immaterial and the Company anticipates
this trend to continue in the future. Accordingly, the fourth quarter of 1994
and all of 1995 reflect the additional expense of amortizing capitalized
software development costs acquired with Aldus. All such capitalized software
development costs acquired with Aldus were fully amortized at the end of 1995.
Likewise, the fourth quarter of 1995 did, and all of 1996 will, reflect the
additional cost of amortizing capitalized software costs acquired with Frame in
addition to the actual development expenditures (classified as research and
development) made prior to achieving technological feasibility.
Amortization of capitalized software development costs
decreased in 1996 and 1995 as a result of achieving full amortization of all
Frame products by the end of 1996 and Aldus products by the end of 1995.
The increase in 1994 was dueFor all of 1996, software development expenditures on all products, after
reaching technological feasibility, were immaterial and the Company expects this
trend to the amortization of Adobe PageMaker 5.0,
releasedcontinue in the second half of 1993, and the release of other new application
products. It is expected that amortization of software development costs will
decrease both in absolute dollars and as a percentage of revenue during 1996 as
the software products acquired with Frame become fully amortized.future.
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
----------- ------------- ----------- ------------------------- -----------
Sales, marketing, and customer support..........support..................... $ 255.0 5% $ 242.7 3% $ 234.8
13% $ 206.9
Percentage of total revenue.....................revenue................................ 32.4% 31.8% 34.7% 35.7%
Sales, marketing, and customer support expenses generally include salaries
and benefits, sales commissions, travel expenses, and related facility costs for
the Company's sales, marketing, customer support, and distribution personnel.
Sales, marketing, and customer support expenses also include the costs of
programs aimed at increasing revenue, such as advertising, trade shows, and
other market development programs.
20
Increases in sales, marketing, and customer support expenses in 1996 are due
to increased advertising and promotional expenditures for upgrades of existing
products and further development of customer and technical support services to
support a growing installed base of customers. In 1995, reduced costs resulting
from the restructuring of the combined company after the acquisition of Aldus in
1994 resulted in a decrease in costs as a percentage of revenue.
This decrease
was partially offset by the effect of the acquisition of Frame as well as
increased advertising relating to the release of Adobe PageMaker 6.0 and
expenses from several major trade shows.
Decreased costs expected to result from the restructuring of the combined
company after the acquisition of Frame will be partially offset by continuing
efforts to expand markets and increase penetration into targeted software
markets, as well as to respond to increased competition in the software
industry. As a result, 1996For 1997, sales, marketing, and customer support expenditures are expected
to increase in absolute dollars, but decrease from 1995 spending levels as a percentage of revenue. The
increase in absolute dollars in 1997 will be due to
18
new product releases, increased investment in the Windows market and programs
related to furthering worldwide recognition of the Adobe brand.
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
----------- ------------- ----------- ------------- ----------------- ------- ------ ------ ------
General and administrative.......................... $ 58.5administrative......................................... $62.0 6% $58.5 (3)% $ 60.5 (8)% $ 66.0$60.5
Percentage of total revenue.........................revenue........................................ 7.9% 7.7% 9.0% 11.4%
General and administrative expenses consist principally of salaries and
benefits, travel expenses, and related facility costs for the finance, human
resources, legal, information services, and administrative personnel of the
Company. General and administrative expenses also include outside legal and
accounting fees, bad debts, and expenses associated with computer equipment and
software used in the administration of the business.
General and administrative expenses have decreased each year since 1993,
bothincreased during 1996 compared to 1995.
The increase resulted primarily from Frame integration costs in absolute dollarsthe first
quarter of 1996 and as a percentage of revenue. The 1993 expense
reflects a higher spending level attributable toheadcount entering fiscal 1996. In addition, the
growth of systems,
processes,increase was driven by salary increases and people necessary to support overall increases in the scope of the
Company's operations,higher rent expense, as well as
additionalhigher systems and legal costs incurred for the legal defense
and settlement of an Aldus class-action securities lawsuit. General and
administrative spending decreased as a percentage of revenue in 1994 from 1993
due to a reduction of salary and depreciation expense resulting from
restructuring activities, as well as reduced legal expenditures.1996. The 1995 decrease compared to 1994
spending reflects savings related to the restructuring of the combined company
after the acquisition of Aldus, partially offset by costs related to the
acquisition of Frame and write-downs related to certain intangible assets.Frame.
The Company expects general and administrative spending in 19961997 to be
slightly lowerhigher than 19951996 levels as a percentage of revenue.revenue as the Company
continues to incur litigation costs and invest in an expanded and more
comprehensive administrative infrastructure.
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
----------- ------------- ----------- ------------ ---------------- ------ ----- ------ -----
Write-off of acquired in-process research and development......................................... $ 15.0development.......... $21.3 42% $15.0 (3)% $ 15.5 261% $ 4.3$15.5
Percentage of total revenue.......................... 2.0% 2.3% 0.7%revenue........................................ 2.7 % 2.0 % 2.3 %
During 1996, 1995, 1994, and 1993,1994, the Company acquired six software companies, in
separate transactions, and accounted for them using the purchase transactions
one or more software developers.method. In each
of these transactions, a portion of the purchase price was allocated to
in-process research and development and was expensed at the time of the
acquisitions. In 1996, 1995 this expense relates to
Ceneca Communications, Inc.; inand 1994, to LaserTools Corporationthe Company expensed $21.3 million, $15.0
million and Compumation,
Incorporated; and in 1993, to AH Software, Inc. (doing business as After Hours
Software) and The Company of Science & Art.$15.5 million, respectively.
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
----------- ----------- ----------- ------------ ---------------- ------ ------ ------ ------
Merger transaction and restructuring costs.......... $ 31.5costs......................... $5.0 (84)% $31.5 (56)% $ 72.2 180% $ 25.8$72.2
Percentage of total revenue.........................revenue........................................ 0.6% 4.1% 10.7% 4.4%
Merger transaction and restructuring costs for 19951996 were $31.5$5.0 million. This
represents charges of $32.5$5.7 million less the reversal of $1.0$0.7 million of excess
reserves related to restructuring costs recorded in prior years. 21
The 1996
charges were recorded in connection with the disposition of two business units
previously owned by Frame.
During the fourth quarterquarters of 1995 the Company recorded merger transaction
and restructuring costs associated with the acquisition of Frame of $11.4
million and $21.1 million, respectively. The restructuring costs included $16.4
million related to cash expenditures and noncash items of $4.7 million,
consisting primarily of write-offs of redundant equipment and intangible assets.
As of December 1, 1995, $20.1 million of the balance in accrued restructuring
costs represented expected future cash expenditures related to the Frame
acquisition, most of which will be spent in 1996.
To execute the acquisition of Frame, the Company incurred transaction costs
consisting principally of transaction fees for investment bankers, attorneys,
accountants, financial printing, and other related charges to negotiate the
merger, conduct financial and technical due diligence, file appropriate
regulatory documents, and solicit shareholder votes.
As a result of the acquisition of Frame, certain sales, technical support,
customer service, distribution, and administration functions have been or will
be combined and/or reduced. Such restructuring costs include severance and
outplacement charges of $11.0 million related to approximately 200 terminated
employees. Affected employees received notification of their termination by
November 8, 1995, and final assignments are expected to be completed by
mid-1996.
To facilitate the operations of the Company, the combined organization
migrated to common management information systems, which resulted in a write-off
of the book value of the abandoned systems, as well as of other redundant
equipment. In addition, certain intangible assets that will have no benefit to
the combined company were written off. The write-off of abandoned equipment and
intangible assets included in restructuring costs was $4.7 million. In addition,
redundant offices in Europe, Japan, Canada, and the United States will be
eliminated. Lease and third-party contract termination payments totaling $5.4
million, resulting from the planned closure of 14 facilities, are accrued as
part of the restructuring costs.
The Company is unable to determine what effects the merger and restructuring
actions will have on future operating results and the financial condition of the
organization.
During the fourth quarter of 1994, the Company recorded merger
transaction and restructuring costs primarily associated with the acquisitionacquisitions
of Frame and Aldus, respectively, of $14.6$31.5 million and $57.6$72.2 million,
respectively. These costs included $46.5 million of
current and future cash expenditures related to merger transaction fees and
expenses, severance and outplacement for approximately 500 terminated employees,
and lease and third-party contract termination payments resulting from the
planned closure of 10 facilities. Noncash items of $25.7 million consisted
primarily of write-offs of redundant information systems and equipment and of
duplicate product lines. As a condition to the acquisition of Aldus, effective
January 1995, the Company no longer sells and distributes FreeHand, the
illustration program previously sold and distributed by Aldus. Also,
PhotoStyler, an image editing software tool, was discontinued in the fourth
quarter of 1994, as the product competed with certain existing products of the
Company. In addition to the acquisition-related expenses recognized in the
restructuring charge, the Company incurred approximately $10.1 million of
certain one-time charges that were recognized in operating expenses. These
charges included writing off certain capitalized software development costs,
transition personnel bonuses, relocation expenses, and expenses incurred for
integrating the two companies' benefit plans.
In the fourth quarter of 1995, the Company analyzed the remaining accrued restructuring
costs related to the acquisition of Aldus.Aldus as well as the remaining accrued
restructuring costs related to a 1993 restructuring implemented by Frame. As a
result of this review,analysis, it was determined that approximately $0.7$1.0 million
represented excess reserves and, therefore, this amount was reversed and
credited to "Merger transaction and restructuring costs" in the Consolidated
Statements of Income.
As of December 1, 1995, $7.0 million ofAt November 29, 1996, the balance in accrued restructuring
costs represented expected future cash expenditures related to the Aldus
acquisition, primarily related to payments under leases on redundant offices
that will be incurred in future periods.
Due to lower than anticipated revenues experienced in the first three
quarters of 1993, Frame undertook certain restructuring measures to reduce the
size and scope of its operations and re-
22
evaluated and redirected its product and distribution strategies. These actions
resulted in restructuring charges totaling $16.0 million. In addition, Frame
incurred other charges relating to the restructuring of approximately $9.8
million, which consisted primarily of write-offs of capitalized software,
obsolete inventory and equipment, and the settlement of certain contingencies.
Of the total restructuring and other charges, $12.8 million resulted from the
write-off of assets, which occurred in 1993, and $13.0 million involved cash
outflows, of which $4.7 million were incurred in 1993.
During 1994, the results of the settlement of certain contingencies and
changes in Frame's foreign distribution in Japan were more favorable than
expected by approximately $2.2 million. However, these amounts were offset by
increased estimates of costs related to facilities previously vacated and
Frame's decision to curtail significantly its Irish operations resulting in a
charge for termination costs, vacated facilities, and fixed asset write-offs. In
1994, Frame paid approximately $1.6 million in salary costs and approximately
$3.3 million related to the settlement of certain contingencies, changing its
foreign distribution in Japan, the relocation of its European headquarters,
lease payments for vacated facilities, and other charges.
During 1995, Frame made cash payments of $1.6 million and $0.2 million
related to the curtailment of its Irish operations and vacated leased
facilities, respectively. In addition, an analysis of its remaining accrued restructuring costs in the fourth quarter of 1995 indicated that approximately
$0.3 million represented excess reserves. This amount was reversed and credited
to "Merger transaction and restructuring costs" in the Consolidated Statements
of Income. As of December 1, 1995, $1.1 million remained accrued and represented
anticipated future cash outflows relatedbalance relates to
lease and third-party contract termination payments, on vacated
facilities.resulting from the planned
closure of duplicate offices in Europe and the United States. These payments are
expected to continue through the lease terms or negotiated early termination
date, if applicable.
19
NONOPERATING INCOME
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993----------- ----------- ------------ ------------ -----------
Investment gain (loss)..................................... $ 68.9 9,223% $ (0.8) (123)% $ (0.3)
Percentage of total revenue................................ 8.8% -- --
Investment gain (loss) consists principally of realized gains or losses from
direct investments as well as mark-to-market valuation adjustments for Adobe
Ventures LP investments.
Investment gains and losses increased in 1996 primarily as a result of
realized gains of approximatley $43.6 million and approximately $6.8 million for
the sale of a portion of the Company's investment in Netscape Communications
Corporation and its entire investment in Luminous Corporation, respectively.
Also, a portion of one of the equity investments included in the Adobe Ventures
LP portfolio was sold for a gain of $13.9 million during 1996 and at November
29, 1996 the remaining portion of this investment was marked-to-market for an
unrealized gain of approximately $3.7 million. These and other gains were
partially offset by write-downs on certain other investments.
1996 CHANGE 1995 CHANGE 1994
----------- ------------- ----------- ------------ -----------
Interest investment, and other income..............income..................................... $ 29.3 181% $ 10.4 (25)29.2 (3)% $ 13.830.0 179% $ 10.8
Percentage of total revenue......................... 3.8% 1.5% 2.4%revenue................................... 3.7% 3.9% 1.6%
Interest investment, and other income consists principally of interest earned on cash,
cash equivalents, and short term investments as well as foreign exchange
transaction gains and losses.
Interest and other income decreased by $0.8 million in 1996 from 1995 and
increased by $18.9$19.3 million in 1995 from 1994 and decreased by $3.4 million1994. The slight decrease in 19941996 from 1993.1995
is primarily due to foreign exchange gains in 1995 combined with foreign
exchange losses in 1996. The increase in 1995 from 1994 is primarily due to a
larger investment base and generally higher interest rates in 1995 compared to
1994. In addition, the Company increased the weighted average days-to-maturity
of its investments in 1995, which generated higher rates of return. Interest and
other income was adversely impacted by $1.5 million in 1994, as the Company sold
several securities (acquired in the Aldus acquisition) for losses in principal
created by increases in interest rates during 1994, and for the write-off of an investment in a privately held
enterprise. Interest, investment, and other income in 1993 included a gain of
$3.9 million on the sale of common stock held as an investment and a $1.0
million write-off of an investment in a privately held enterprise. Interest,
investment, and other income in 1994 would have increased approximately $1.0
million absent the 1993 net gain on the sales of common stock and the losses
experienced in 1994. Such increase is attributable to increased levels of cash
invested and a slight increase in interest earned on the Company's investments
from small increases in prevailing interest rates.
INCOME TAX PROVISION
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
----------- ------------------------- ----------- ------------------------- -----------
Income tax provision................................provision.......................................... $ 91.5 30% $ 70.4 87% $ 37.6
24% $ 30.4
Percentage of total revenue.........................revenue................................... 11.6% 9.2% 5.6%
5.2%
Effective tax rate..................................rate............................................ 37.4% 42.9% 71.0% 41.9%
The Company's effective tax rate in 1996 decreased from 1995, due primarily
to the impact of lower non-deductible merger acquisition costs and lower
non-deductible goodwill amortization. The Company's effective tax rate in 1995
decreased significantly overfrom the effective tax rate of 1994, due primarily to
smaller one-time, nondeductible merger transaction and restructuring costs and
increased tax-exempt income. The
Company's effective tax rate in 1994 increased significantly
23
over the effective tax rate of 1993, due primarily to one-time, nondeductible
merger transaction and restructuring costs. An analysis of the differences between the
statutory and effective income tax rates is provided in Note 98 of Notes to
Consolidated Financial Statements.
20
NET INCOME AND NET INCOME PER SHARE
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
-------- ------ -------- ------ ------------------- ------------- ----------- ------------ -----------
Net Income............................ $93.5income............................................. $ 153.3 64% $ 93.5 510% $15.3 (63)% $42.0$ 15.3
Percentage of total revenue...........revenue............................ 19.5% 12.3% 2.3% 7.2%
Net income per share.................. $1.26share................................... $ 2.04 62% $ 1.26 473% $0.22 (65)% $0.62$ 0.22
Weighted shares (in thousands)................................. 75,064 1% 74,253 6% 70,169 3 % 68,252
Net income for 19951996 represents a 51064 percent increase over 1994,1995, while 19941995
net income decreased 63increased 510 percent from that of 1993.1994. Results of operations in
each of the three years included several one-time charges, and in 1996
significant investment gains that would not normally be included in the
Company's operating results. A reconciliation of the reported results of
operations to the results of operations excluding these one-time charges for
each of the years follows.
1995
-----------------------------------------1996
---------------------------------------------------
INCOME BEFORE INCOME NET INCOME TAX NET INCOME
INCOME TAXES PROVISIONPROVSION NET INCOME PER SHARE
-------- --------- -------- ---------------------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reported results of operations............ $163,853operations.............................. $ 70,368244,824 $ 93,48591,547 $ 1.26153,277 $ 2.04
Write-off of acquired in-process research and development:
Ceneca Communications, Inc.............. 14,983 -- 14,983 0.20
Acquisition of Frame:
Merger transaction costs................ 11,399 -- 11,399 0.15development
costs..................................................... 21,251 1,837 19,414 0.26
Restructuring costs..................... 20,135 6,086 14,049 0.19costs......................................... 4,955 1,505 3,450 0.05
Other one-time charges.................... 3,160 1,484 1,676 0.02
Effect of fourth quarter antidilutive
common stock equivalents................. -- -- -- (0.02)
-------- --------- -------- ---------charges...................................... 2,917 886 2,031 0.03
Net investment gain......................................... (68,875) (18,873) (50,002) (0.67)
------------- ----------- ---------- -----------
Results of operations excluding one-time charges.................................. $213,530charges (gains).... $ 77,938 $135,592205,072 $ 1.80
-------- --------- -------- ---------
-------- --------- -------- ---------76,902 $ 128,170 $ 1.71
------------- ----------- ---------- -----------
------------- ----------- ---------- -----------
1994
----------------------------------------1995
----------------------------------------------------
INCOME BEFORE INCOME NET INCOME TAX NET INCOME
INCOME TAXES PROVISIONPROVSION NET INCOME PER SHARE
-------- --------- ------- ---------------------- ----------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reported results of operations.............operations.............................. $ 52,946163,853 $ 37,609 $15,337 $0.2270,368 $ 93,485 $ 1.26
Write-off of acquired in-process research and development:
Compumation, Incorporated................ 3,045development... 14,983 -- 3,045 0.04
LaserTools Corporation................... 12,424 -- 12,424 0.1714,983 0.20
Acquisition of Aldus:Frame:
Merger transaction costs................. 14,618costs.................................. 11,399 -- 14,618 0.2111,399 0.15
Restructuring costs...................... 57,565 19,922 37,643 0.53costs....................................... 20,135 6,086 14,049 0.19
Other one-time expenses resulting from
the acquisition......................... 10,092 3,734 6,358 0.09
-------- --------- ------- ---------charges...................................... 3,160 1,484 1,676 0.02
Effect of fourth quarter antidilutive common stock
equivalents............................................... -- -- -- (0.02)
------------- ----------- ---------- -----
Results of operations excluding one-time charges................................... $150,690charges............ $ 61,265 $89,425 $1.26
-------- --------- ------- ---------
-------- --------- ------- ---------213,530 $ 77,938 $ 135,592 $ 1.80
------------- ----------- ---------- -----
------------- ----------- ---------- -----
2421
1993
----------------------------------------1994
----------------------------------------------------
INCOME BEFORE INCOME NET INCOME TAX NET INCOME
INCOME TAXES PROVISIONPROVSION NET INCOME PER SHARE
-------- --------- ------- ---------------------- ----------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reported results of operations.............operations.............................. $ 72,35852,946 $ 30,351 $42,007 $0.6237,609 $ 15,337 $ 0.22
Write-off of acquired in-process research and development:
AH Software, Inc. and The Companydevelopment... 15,469 -- 15,469 0.21
Acquisition of Science & Art........................... 4,285Aldus:
Merger transaction costs.................................. 14,618 -- 4,285 0.0614,618 0.21
Restructuring of Frame's operations........ 25,800 9,030 16,770 0.24
-------- --------- ------- ---------costs....................................... 57,565 19,922 37,643 0.53
Other one-time charges resulting from the acquisition..... 10,092 3,734 6,358 0.09
------------- ----------- ---------- -----
Results of operations excluding one-time charges................................... $102,443charges............ $ 39,381 $63,062 $0.92
-------- --------- ------- ---------
-------- --------- ------- ---------150,690 $ 61,265 $ 89,425 $ 1.26
------------- ----------- ---------- -----
------------- ----------- ---------- -----
Furthermore, the future effective tax rate for fiscal 1997 is expected to be
approximately 36 percent. Had this rate been in effect in 1996, 1995, 1994, and 1993,1994,
the net income per share, excluding the above one-time charges (gains), would
have been $1.73, $1.82 $1.36,
and $0.96$1.36 per share, respectively.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that in the future its results of operations could be
affected by various factors such as the ability of the Company to integrate
Adobe Aldus, and Frame product lines; renegotiation of royalty arrangements; delays in shipment of the Company's new products
and major new versions of existing products; market acceptance of new products
and upgrades; renegotiation of royalty arrangements; growth in worldwide
personal computer and printer sales and sales price adjustments; consolidation
in the OEM printer business; industry transitions to new business and
information delivery models; and adverse changes in general economic conditions
in any of the countries in which the Company does business.
In connection with the merger with Frame, the Company has sought to reduce
combined expenses by the elimination of duplicate or unnecessary facilities,
employees, marketing programs, and other expenses. The Company believes that the
major impact of such reductions will occur in the first and second quarters of
1996 but expects some additional impact in later quarters of 1996. The Company
expects that these reductions will benefit future operating results, but the
reductions could adversely impact the earnings of the combined company. In
addition, the integration of the product lines of the two companies could have a
material adverse effect on the results of operations, including the potential
for charges for certain discontinued business components.
As previously stated, effective January 1, 1995, the Company no longer
markets FreeHand and discontinued marketing of PhotoStyler in late 1994. These
two products aggregated $53.2 million of revenue and $35.4 million of gross
profit in 1994. There can be no assurance that the Company will be able to
continue to replace this lost revenue or that it will be able to do so as
profitably.
The Company's OEM customers on occasion seek to renegotiate their royalty
arrangements. The Company evaluates these requests on a case-by-case basis. If
an agreement is not reached, a customer may decide to pursue other options,
including licensing a PostScript language compatible interpreter from a third
party, which could result in lower licensing revenue for the Company.
The Company derives a significant portion of its revenue and operating
income from its subsidiaries located in Europe and the Pacific Rim. While most
of the revenue of these subsidiaries is denominated in U.S. dollars, the
majority of their expense transactions are denominated in foreign currencies,
including the Japanese yen and most major European currencies. As a result, the
Company's operating results are subject to fluctuations in foreign currency
exchange rates. To date the impact of such fluctuations has been insignificant
and the Company has not engaged in any significant activities to hedge its
exposure to foreign currency exchange rate fluctuations.
The Company's ability to develop and market products, including upgrades of
currently shipping products, that successfully adapt to current marketchanging customer needs
may also have an impact on the results of operations. The Company's ability to
extend its core technologies into new applications and to anticipate or respond
to technological changes could effect its ability to develop these products. A
portion of the Company's future revenue will come from these products. Delays in
25
product introductions could have an adverse effect on the Company's revenue,
earnings, or stock price. The Company cannot determine the ultimate effect that
these new products or upgrades will have on its sales or results of operations.
Although the Company generally offers its application products on Macintosh,
Windows, and UNIX platforms, a majority of the overall sales of these products
to date has been for the Macintosh platform, particularly for the higher end
Macintosh computers. To the extent thatIf there is a slowdown of customer purchases in the higher
end Macintosh market or if other operating systems, such
asthe Company is unable to increase its sales to
Windows 95, become more prevalent among the Company's customers, the Company's operating results could be materially adversely
affected. Also, if the Company broadens its customer base to achieve greater
penetration in the corporate business and consumer markets, the Company may need
to adapt its application software distribution channels. The Company could
experience decreases in average selling prices and some transitions in its
distribution channel which could materially adversely affect its operating
results. In addition, to the extent that there is a slowdown of customer
purchases of personal computers in general, the Company's operating results
could be materially adversely affected.
The Company's OEM customers on occasion seek to renegotiate their royalty
arrangements. The Company evaluates these requests on a case-by-case basis. If
an agreement is not reached, a customer may decide to pursue other options,
including licensing a PostScript language compatible interpreter from a third
party, which could result in lower licensing revenue for the Company. During the
first quarter of 1996, there was a change in part of the Company's business
relationship with Hewlett-Packard Company
22
("Hewlett-Packard"). Beginning in the second half of 1997, Hewlett-Packard plans
not to incorporate Adobe PostScript software in some Hewlett-Packard LaserJet
printers. The Company expects to continue working with Hewlett-Packard printer
operations to incorporate Adobe PostScript and other technologies in other
Hewlett-Packard products.
Through its acquisitions, the Company has experienced significant growth.
The Company's ability to effectively manage its growth will require it to
continue to improve its operational and financial controls and information
management systems, and to attract, retain, motivate and manage employees
effectively. The failure of the Company to effectively manage growth and
transition in multiple areas of its business could have a material adverse
effect on its results of operations.
During 1995, the Company entered the Internet market, which has only
recently begun to develop. The Internet market is rapidly evolving and is
characterized by an increasing number of market entrants who 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 software industry addressing the authoring and
electronic publishing requirements of the Internet is young and has few proven
products. In addition, new models for licensing software to accomodate new
information delivery practices will be needed. Moreover, critical issues
concerning the commercial use of the Internet (including security, reliability,
cost, ease of use and access, cost, and quality of service) remain unresolved and may
impact the growth of Internet use, together with the software standards and
electronic media employed in such markets.
The Company derives a significant portion of its revenue and operating
income from its subsidiaries located in Europe, Japan, Asia-Pacific, and Latin
America. While most of the revenue of these subsidiaries is denominated in U.S.
dollars, the majority of their expense transactions are denominated in foreign
currencies, including the Japanese yen and most major European currencies. As a
result, the Company's operating results are subject to fluctuations in foreign
currency exchange rates. To date, the impact of such fluctuations has been
insignificant and the Company has not engaged in any significant activities to
hedge its exposure to foreign currency exchange rate fluctuations. In addition,
the Company generally experiences lower revenue from its European operations in
the third quarter because many customers reduce their business activities in the
summer months.
Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's common stock in any given period. Additionally, the
Company may not learn of such shortfalls until late in the fiscal quarter, which
could result in an even more immediate and adverse effect on the trading price
of the Company's common stock. Finally, the Company participates in a highly
dynamic industry. In addition to factors specific to the Company, changes in
analysts' earnings estimates for the Company or its industry and factors
affecting the coproratecorporate environment or the securities markets in general will
often result in significant volatility of the Company's common stock price.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 121 will beis effective for fiscal years beginning after
December 15, 1995, and requires long-lived assets to be evaluated for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The Company will adopt SFAS No. 121 in fiscal
1997 and does not expect its provisions to have a material effect on the
Company's consolidated results of operations in the year of adoption.
23
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 will beis effective for
fiscal years beginning after December 15, 1995, and will requirerequires that the Company
either recognize in its consolidated financial statements costs related to its
employee stock-based compensation plans, such as stock option and stock purchase
plans, using a prescribed methodology, or make pro forma disclosure of such
costs in a footnote to the consolidated financial statements.
The Company expects to continue to use the intrinsic value based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its consolidated financial statements for fiscal 1997, the Company will make the
required pro forma disclosures in a footnote to the consolidated financial
statements. SFAS No. 123 is not expected to have a material effect on the
Company's consolidated results of operations or financial position.
2624
FINANCIAL CONDITION
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
--------- ------------------------ --------- ------------------------ ---------
Cash, cash equivalents, and short-term investments....investments................ $ 564.1 9% $ 516.0 16% $ 444.8 29% $ 344.7
The Company's cash balances and short-term investments have increased each
year due to profitable operations, partially offset by expenditures for the
repurchase of stock, capital outlays, other investments, and other investments. In 1995 and 1994, growth in cash balances and
short-term investments was reduced by increased merger and acquisition activity.deposits required
under real estate development agreements.
Cash equivalents consist of highly liquid money market instruments. All of
the Company's cash equivalents and short-term investments, consisting
principally of municipal bonds, commercial paper, auction rate certificate securities, United
States government and government agency securities, and asset-backed securities,
are classified as available-for-sale under the provisions of SFAS No. 115. The
securities are carried at fair value with the unrealized gains and losses, net
of tax, reported as a separate component of shareholders' equity.
NONCURRENT LIABILITIES AND SHAREHOLDERS' EQUITY
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
--------- ------------------------ --------- ------------------------ ---------
Noncurrent liabilities and shareholders' equity.......equity................... $ 781.7 12% $ 698.4 36% $ 514.3 11% $ 464.1
Included above areis shareholders' equity and in 1993,at November 29, 1996, deferred
income taxes related to unrealized gains and losses on equity investments, and
obligations for put warrants. AsThe Company has no long-term debt. Shareholders'
equity as of December 1, 1995, the Company had no noncurrent liabilities. Shareholders'
equityNovember 29, 1996 was $706.5 million, compared to $698.4 million as
of December 1, 1995 was $698.4 million, compared toand $514.3 million as of November 25, 1994 and $457.2 million as of November 26, 1993. A significant
portion of the1994. The year-to-year
increases in shareholders' equity is attributable to
issuanceincludes issuances of common stock under the
Company's stock option and employee stock purchase plans. For 1996, this
increase was offset by the repurchase of stock.
Under its stock repurchase program, the Company repurchased 3,321,500 shares
at a cost of $124.5 million in 1996. The Company intends to continue to directly
repurchase common shares and arrange options to purchase common shares to
partially fund the Company's employee stock purchase and stock option plans.
The Company has paid cash dividends on its common stock each quarter since
the second quarter of 1988. During 1995,1996, the Company paid cash dividends of
$0.20 per common share. The Company's Board of Directors approved a two-for-one
stock split on July 9, 1993, payable in the form of a stock dividend for
shareholders of record as of July 27, 1993, with a distribution date of August
10, 1993. All share and per share data has been restated to reflect this stock
split. The declaration of future dividends is within the
discretion of the Company's Board of Directors and will depend upon business
conditions, results of operations, the financial condition of the Company, and
other factors.
WORKING CAPITAL
1996 CHANGE 1995 CHANGE 1994
CHANGE 1993
--------- ------------------------ --------- ------------------------ ---------
Working capital.......................................capital................................................... $ 506.1 -- $ 506.5 26% $ 402.8 16% $ 347.7
Net working capital grewwas $506.1 million as of November 29, 1996, compared to
$506.5 million as of December 1, 1995, compared
to $402.8 million as of November 25, 1994.1995. Cash flow provided by operations during
19951996 was $177.0$198.1 million.
Expenditures for property and equipment in 1996 totaled $34.1$45.9 million. Such
expenditures are expected to continue, including expenditures for computer
systems for development, sales and marketing, product support, and
administrative staff. In addition, in 1995 the Company paid approximately $67.4
million to acquire Ceneca Communications, Inc., to buy out its future royalty
obligation with respect to its Adobe Photoshop product, and to invest in various
companies, either directly or through a limited partnership arrangement. In the future, additional cash may be used to acquire
software products or technologies complementary to the Company's business. Net
cash providedused by financing activities
25
during 19951996 was $36.9$101.5 million, primarily resulting from the repurchase of
common stock and payment of dividends partially offset by issuance of common
stock under employee stock plans, partially offset by repurchases of
common stock and payment of dividends.
27
plans.
The Company's principal commitments as of December 1, 1995November 29, 1996 consisted of
obligations under operating leases, a real estate development agreement, and
various service and lease guarantee agreements with a related party.
TheDuring 1994, the Company has entered into a real estate development agreement
forand an operating lease agreement in connection with the construction of an
office facilityfacility. In August 1996, the construction was completed and in 1996 will enter into anthe
operating lease agreement for this facility.commenced. The Company will have the option to purchase the
facility at the end of the lease term. In the event the Company chooses not to
exercise this option, the Company is obligated to arrange for the sale of the
facility to an unrelated party and is required to pay the lessor any difference
between the net sales proceeds and the lessor's net investment in the facility,
in an amount not to exceed that which would preclude classification of the lease
as an operating lease, approximately $52.0$57.3 million. The Company also is
required, periodically duringDuring the construction
period, the Company was required to deposit funds withpledge certain interest-bearing instruments
to the lessor as collateral to secure the performance of its obligations under
the lease. During 1995,1996, the Company increased its deposits bydeposited approximately $33.4$30.5 million, and
as of December 1, 1995,November 29, 1996, the Company's deposits under this agreement totaled
approximately $35.6$66.1 million in United States government treasury notes and money
market mutual funds. These deposits are included in "Other assets" in the
Consolidated Balance Sheets.
During the third quarter of 1996, the Company exercised its option under the
development agreement to begin a second phase of development for an additional
office facility. In August 1996, the Company entered into a construction
agreement and an operating lease agreement for this facility. The operating
lease will commence on completion of construction in 1998. The Company haswill have
the option to purchase the facility at the end of the lease term. In the event
the Company chooses not to exercise this option, the Company is obligated to
arrange for the sale of the facility to an unrelated party and is required to
pay the lessor any difference between the net sales proceeds and the lessor's
net investment in the facility, in an amount not to exceed that which would
preclude classification of the lease as an operating lease, approximately $64.3
million. The Company also is required, periodically during the construction
period, to deposit funds with the lessor as an interest bearing security deposit
to secure the performance of its obligations under the lease. During the second
half of 1996, the Company deposited approximately $3.3 million. These deposits
are included in "Other assets" in the Consolidated Balance Sheets.
The Company holds a 17 percent equity interest in McQueen Holdings Limited
("McQueen") and accounts for the investment at cost. During 1994, the Company
entered into various agreements with McQueen, Holdings
Limited ("McQueen"), a European operating entity, whereby the Company has agreedcontracted
with McQueen to guarantee obligations under operating leases for certain European facilities
utilized by McQueen,perform product localization and technical support functions and
to guarantee certain levels of business between Adobeprovide printing, assembly, and McQueen. The Company currently owns 16 percent of the outstanding stock in
McQueen. The Company's ownership percentage has increased over that of 1994
because McQueen repurchased some of its previously outstanding shares.warehousing services.
The Company believes that existing cash, cash equivalents, and short-term
investments, together with cash generated from operations, will provide
sufficient funds for the Company to meet its operating cash requirements in the
foreseeable future.
2826
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARYSUPPLEMENTAL DATA
FINANCIAL STATEMENTS
The Company's financial statements required by this item are submitted as a
separate section of this Form 10-K. See Item 14.(a)1. for a listing of financial
statements provided in the section titled "FINANCIAL STATEMENTS."STATEMENTS".
SUPPLEMENTAL DATA
THE FOLLOWING TABLES (PRESENTED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SET
FORTH QUARTERLY SUPPLEMENTARY DATA 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 December 1,FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD
ENDED NOVEMBER 29, 1996 AND REFLECT THE RESULTS OF THE COMPANY AS RESTATED TO
REFLECT THE ACQUISITION BY THE COMPANY OF FRAME TECHNOLOGY CORPORATION IN 1995
and reflect the results of the Company as restated to
reflect the acquisitions by the Company of Frame Technology Corporation in 1995
and Aldus Corporation in 1994, both of which were accounted for as poolings of
interests. See NoteWHICH WAS ACCOUNTED FOR AS A POOLING OF INTERESTS. SEE NOTE 2 in Notes to Consolidated Financial Statements.OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
1996
----------------------------------------------------------
QUARTER ENDED
----------------------------------------------
MAR. 1 MAY 31 AUG. 30 NOV. 29 YEAR ENDED
1996 1996 1996 1996 NOV. 29
---------- ---------- ---------- ---------- ----------
Revenue.............................................. $ 193,642 $ 204,337 $ 180,909 $ 207,675 $ 786,563
Gross margin......................................... 158,434 168,259 147,292 171,431 645,416
Merger transaction and restructuring costs........... -- -- -- 4,955 4,955
Income before income taxes........................... 53,861 39,787 48,686 102,490 244,824
Net income........................................... 33,663 22,009 29,847 67,758 153,277
Net income per share................................. 0.44 0.29 0.40 0.92 2.04
Shares used in computing net income per share........ 76,394 75,638 74,309 73,913 75,064
1995
---------------------------------------------------------------
UNAUDITED----------------------------------------------------------
QUARTER ENDED
AUDITED
-------------------------------------------------- YEAR----------------------------------------------
MAR. 3 JUNE 2 SEPT. 1 DEC. 1 YEAR ENDED
1995 1995 1995 1995 DEC. 1
----------- ----------- ----------- ----------- --------------------- ---------- ---------- ---------- ----------
Revenue.........................................Revenue.............................................. $ 188,845 $ 189,498 $ 183,120 $ 200,876 $ 762,339
Gross margin....................................margin......................................... 154,991 157,188 155,637 164,222 632,038
Merger transaction and restructuring costs......costs........... -- -- -- 31,534 31,534
Income (loss) before income taxes...............taxes.................... 57,246 55,913 52,354 (1,660) 163,853
Net income (loss)................................................................... 36,144 35,245 33,886 (11,790) 93,485
Net income (loss) per share.....................share.......................... 0.50 0.47 0.44 (0.16) 1.26
Shares used in computing net income (loss) per
share.......................................... 72,888 75,321 76,325 72,477 74,253
1994
---------------------------------------------------------------
UNAUDITED QUARTER ENDED AUDITED
-------------------------------------------------- YEAR
FEB. 25 MAYshare.............................................. 72,888 75,321 76,325 72,477 74,253
27 AUG. 26 NOV. 25 ENDED
1994 1994 1994 1994 NOV. 25
----------- ----------- ----------- ----------- -----------
Revenue......................................... $ 153,128 $ 168,228 $ 166,612 $ 187,649 $ 675,617
Gross margin.................................... 124,654 137,781 138,010 153,149 553,594
Merger transaction and restructuring costs...... -- -- -- 72,183 72,183
Income (loss) before income taxes............... 32,139 30,260 32,401 (41,854) 52,946
Net income (loss)............................... 20,626 19,263 20,605 (45,157) 15,337
Net income (loss) per share..................... 0.30 0.27 0.29 (0.65) 0.22
Shares used in computing net income (loss) per
share.......................................... 69,698 70,353 71,548 69,076 70,169
29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements on any matter of accounting principles,
financial statement disclosure, or auditing scope or procedure to be reported
under this item.
3028
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTREGISTRANTS
DIRECTORS
Information with respect to Directors may be found in the section captioned
"Election of Directors" appearing in the definitive Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held on April 10, 1996.9, 1997. Such information is incorporated herein by
reference.
EXECUTIVE OFFICERS
The executive officers of the Company as of February 20, 199621, 1997 are as
follows:
NAME AGE POSITIONS
- ----------------------------------------------------- --- ------------------------------------------------------------
John E. Warnock 5556 Chairman of the Board and Chief Executive Officer
Charles M. Geschke 5657 President and Director
P. Jackson Bell 55 Executive Vice President, Chief Financial Officer, Chief
Administration Officer, and Assistant Secretary
Ross A. Bott 45 Senior Vice President, General Manager, Graphics Product
Division
John H. Brandon 41 Vice President,
North America Sales and Support
Derek J. Gray 4647 Senior Vice President and General Manager, Adobe Europe
Stephen A. MacDonald 50 SeniorHachiro Kimura 54 President,
Adobe Systems Japan
John H. Kunze 33 Vice President and General Manager, Internet Products
Division
Colleen M. Pouliot 38 Vice President, General Counsel and Secretary
David B. Pratt 57 Executive Vice President and Chief Operating Officer
M. Bruce Nakao 52Robert A. Roblin 44 Senior Vice President,
Finance and Administration, Chief
Financial Officer, Treasurer, and Assistant Secretary
David B. Pratt 56Corporate Marketing
Fredrick A. Schwedner 55 Senior Vice President and Chief Operating Officer
Colleen M. Pouliot 37 Vice President, General CounselManager, Printing and
SecretarySystems Division
A biography, ofincluding the principal occupations for the past five years of
each of the executive officers is provided below.
Dr. Warnock was a founder of the Company and has been its Chairman of the
Board since April 1989. He has been a director and Chief Executive Officer since
1982 and was itsthe Company's President from December 1982 through March 1989. From
April 1978 until founding the Company, Dr. Warnock was Principal Scientist of
the Imaging Sciences Laboratory at Xerox Corporation's Palo Alto Research
Center. Dr. Warnock received a Ph.D. in electrical engineering from the
University of Utah.
Dr. Geschke was a founder of the Company and has been its President since
April 1989.1989 and a director since 1982. He was Chief Operating Officer from
December 1986 until July 1994, and was Executive Vice President from December
1982 through March 1989. Dr. Geschke also served as the Company's Secretary from
December 1982 until September 1987. From October 1972 until founding the
Company, Dr. Geschke
29
was the Manager of the Imaging Sciences Laboratory at Xerox Corporation's Palo
Alto Research Center. Dr. Geschke received a Ph.D. in computer science from
Carnegie-Mellon University.
Mr. Bell joined the Company in November 1996 as Executive Vice President,
Chief Financial Officer, Chief Administration Officer, and Assistant Secretary.
From September 1993 to March 1996, Mr. Bell was Executive Vice President and
Chief Financial Officer of Conner Peripherals Incorporated. From 1991 through
September 1993, Mr. Bell was Senior Vice President of Planning and Senior Vice
President of Strategic Programs for American Airlines Incorporated.
Mr. Bott joined the Company in December 1996 as Senior Vice President and
General Manager, Graphics Division. From August 1996, through December 1996, he
served as Senior Vice President of Enterprise Technologies at Silicon Graphics
Incorporated. Prior to that time, he was Vice President and Chief Technology
Officer of Pyramid Technology Corporation.
Mr. Brandon joined the Company in March 1987 as the Western Regional Sales
Manager for the Application Products Division. In December 1989, he was promoted
to National Sales Manager and in December 1991, to Vice President of Sales and
Support for North America and became an Executive Officer in May 1996.
Mr. Gray joined the Company upon the closing of the acquisition of Aldus in
August 1994, at which time he was elected Senior Vice President of the Company
and General Manager, Adobe Europe. Prior to that time, Mr. Gray served as
Managing Director of Aldus Europe Limited since 1986. Mr. Gray is a co-founder
and, for the ten years prior to joining Aldus, Managing Director of McQueen
Holdings Limited, a distributor of computer hardware and software, of which the
Company is a 1617 percent shareholder by virtue of the acquisition of Aldus.
Pursuant to a reorganization of the Company's Europe entity, Mr. Gray was
elected General Manager of Adobe Systems Europe in April 1995.
31
Mr. MacDonaldKimura joined the Company in May 1983November 1993 as Vice President. In August
1989, he was promoted to Senior Vice President and in November 1995, to Chief
Operating Officer. From February 1972General
Manager of Adobe Systems, Japan. In May 1996, Mr. Kimura was appointed as a
corporate officer of The Company. Mr. Kimura was President of SCI Japan, the
subsidiary of Systems Center Incorporated, from June 1992 until he joined the
Company,Company. Prior to that time, Mr. MacDonaldKimura was a Marketing Manager for Hewlett-Packard Company.Vice President of Sales and Services
at Applied Materials Japan Corporation.
Mr. NakaoKunze joined the Company in May 1986 and was elected Vice President,
Chief Financial Officer, Treasurer, and Assistant Secretary in June 1986.December 1985 as Product Manager for the
Adobe Type Library. In December 1992, he was promoted to Senior Vice President. From February 1982 to
May 1986, Mr. Nakao was Vice President, Chief Financial Officer, Treasurer, and
Assistant Secretary of Ross Systems, Inc. From January 1980 to February 1982,
Mr. Nakao was Vice President, Chief Financial Officer, and Treasurer of Dividend
Industries, Inc.
Mr. Pratt joined the Company in May 1988 as General Manager of the
Application Products Division. In August 1989,September 1994, he was promoted to Vice President.President of
Graphics Products. In September 1992,May 1996, he was promoted to Senior Vice President and in
November 1995, to Chief Operating Officer. From October 1987 to April 1988, Mr.
Pratt was Executive Vice President and Chief Operating Officer of Logitech
Corporation. From May 1986 to June 1987, Mr. Pratt was Senior Vice President and
Chief Operating Officer of Quantum Corporation. From March 1982 through January
1986, Mr. Pratt was President and Chief Executive Officer of Boschert
Incorporated.the
Internet Products Division.
Ms. Pouliot joined the Company in July 1988 as Associate General Counsel and
became the Corporate Secretary in April 1989. In December 1990, she was promoted
to General Counsel. In December 1992, she was promoted to Vice President. Ms.
Pouliot was an associate at the law firm of Ware & Freidenrich from November
1983 until she joined the Company.
32Mr. Pratt joined the Company in May 1988 as General Manager of the
Application Products Division. In August 1989, he was promoted to Vice
President. In September 1992, he was promoted to Senior Vice President, in
December 1995 to Chief Operating Officer, and in May 1996 he was promoted to
Executive Vice President. From October 1987 to April 1988, Mr. Pratt was
Executive Vice President and Chief Operating Officer of Logitech Corporation.
Mr. Roblin joined the Company in June 1996 as Senior Vice President,
Corporate Marketing. Prior to that time, Mr. Roblin served as Vice President of
Marketing for IBM Corporation's Consumer Division from April 1994 until joining
Adobe. Prior to IBM, Mr. Roblin was Vice President of Marketing for AT&T's EO
personal communicator company as a result of AT&T's acquisition of Pensoft
Corporation which he joined as Vice President of Marketing in 1992. From 1989 to
1992, Mr. Roblin was Vice President of Marketing at Apple Computer Inc.'s Claris
software subsidiary.
30
Mr. Schwedner joined the Company in August 1989, as Director of Engineering,
and in 1991 was promoted to Vice President of Engineering, Systems Product
Division. In May 1996, he was promoted to Senior Vice President and General
Manager of the Printing and Systems Division.
31
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found in the section captioned
"Executive Compensation" appearing in the definitive Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held on April 10, 1996.9, 1997. Such information is incorporated herein by
reference.
3332
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the definitive Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held April 10, 1996.9, 1997. Such
information is incorporated herein by reference.
3433
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found in the section captioned
"Certain Transactions" appearing in the definitive Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held April 10, 1996.9, 1997. Such information is incorporated herein by reference.
3534
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTSTATEMENTS SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1. Financial statements
FINANCIAL STATEMENT DESCRIPTION
-Management's- Management's Report
-Independent- Independent Auditors' Report
-Consolidated- Consolidated Balance Sheets
November 29, 1996 and December 1, 1995
- Consolidated Statements of Income
Years Ended November 29, 1996, December 1, 1995,
and November 25, 1994
-Consolidated Statements of Income
Years Ended December 1, 1995, November 25, 1994, and November 26, 1993
-Consolidated- Consolidated Statements of Shareholders' Equity
Years Ended November 29, 1996, December 1, 1995,
and November 25, 1994
and November 26, 1993
-Consolidated- Consolidated Statements of Cash Flows
Years Ended November 29, 1996, December 1, 1995,
and November 25, 1994
and November 26, 1993
-Notes- Notes to Consolidated Financial Statements
-Report of Ernst & Young LLP, Independent Auditors on Frame Technology
Corporation
-Report of Ernst & Young LLP, Independent Auditors on Aldus Corporation
2. Financial statement schedule
SCHEDULE
NUMBER FINANCIAL STATEMENT SCHEDULE DESCRIPTION
- -------------- -----------------------------------------
Schedule II Valuation- Schedule II--Valuation and Qualifying Accounts
Other financial statement schedules have been omitted since they are either
not required, not applicable, or the required information is shown in the
consolidated financial statements or notes thereto.
3. Exhibits
(a) Index to Exhibits
INCORPORATED BY REFERENCE
EXHIBIT --------------------------------------------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- --------- ------------------------------------------------------------------------------------------------------------------- --------- ---------- --------- --------- -------------
3.1.1 Amended and Restated Articles of Incorporation 10-K 11/30/88 3.1.1
Articles of Incorporation
3.1.2 Certificate of Amendment 10-K 11/30/88 3.1.2
of Articles of Incorporation
10-K 11/30/88 3.1.2
3.1.3 Certificate of Amendment 10-K 11/29/91 3.1.3
of Articles of Incorporation
10-K 11/29/91 3.1.3
3.1.4 Certificate of Amendment 10-K 11/26/93 3.1.4
of Articles of Incorporation
10-K 11/26/93 3.1.4
3.2.8 Restated Bylaws X10-K 12/01/95 3.1.4
3.2.9 Restated Bylaws 10-Q 05/31/96 3.2.9
4.1 Shareholders Rights Plan, as amended 10-Q 05/31/96 4.1
10.1.6 1984 Stock Option Plan, as amended* 10-Q 07/02/93 10.1.6
10.1.7 1994 Stock Option Plan* 10-Q 05/27/94 10.1.7
10.12.1 1988 Employee Stock Purchase Plan, as amended* 10-Q 07/06/94 10.12.1
35
INCORPORATED BY REFERENCE
EXHIBIT ------------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- --------- ---------------------------------------------------- --------- --------- --------- -------------
10.17.1 License Agreement Restatement between the Company and Apple 10-K 11/30/88 10.17.1
and Apple Computer, Inc., dated April 1, 1987
(confidential treatment granted)
10.17.2 Amendment No. 1 to the License Agreement Restatement between 10-K 11/30/90 10.17.2
between the Company and Apple Computer, Inc.,
dated November 27, 1990 (confidential treatment
granted)
10.18 Lease Agreement dated November 11, 1983, between Mozart Family S-1 07/01/86 10.18
Trust and Epson America Inc.
10.19 Assignment of Lease dated November 11, 1983, between Epson S-1 07/01/86 10.19
America Inc. and the Company dated February 1, 1986
36
INCORPORATED BY REFERENCE
EXHIBIT -------------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- --------- --------------------------------------------------------------- --------- ---------- --------- ---------
10.20 Lease Agreement between Mozart Family Trust and the Company S-1 07/01/86 10.20
dated November 30, 1983
10.21.2 Revised Bonus Plan* 10-K 11/26/93 10.21.2
10.22.4 Restricted Stock Option Plan, as amended* 10-Q 07/06/94 10.22.4
10.23 Amended and Restated Software License Agreement between the 10-K 11/30/88 10.23
Company and QMS, Inc., dated May 15, 1987 (confidential
treatment granted)
10.24.1 1994 Performance and Restricted Stock PlanPlan* S-4 07/27/94 10.1
10.25 Form of Indemnity AgreementAgreement* 10-K 11/30/88 10.25
10.26 Lease Agreement by and between Charleston Place Associates and 10-K 11/30/88 10.26
Adobe Systems Incorporated dated April 14, 1987
10.26.1 Amendment One to Lease Agreement dated March 1, 1988 10-K 11/30/88 10.26.1
10.26.2 Amendment Two to Lease Agreement dated September 1, 1988 10-K 11/30/88 10.26.2
10.27 Lease Agreement by and between John Mozart and Adobe Systems 10-K 11/30/88 10.27
Incorporated dated July 20, 1988
10.31 Restated Agreement and Plan of Merger and Reorganization By and S-4 07/13/94 10.31
Among Adobe Systems Incorporated, P Acquisition Corp and Aldus
Corporation
10.32 Sublease of the Land and Lease of the Improvements By and 10-K 11/25/94 10.32
By and Between Sumitomo Bank Leasing and Finance
Inc. and Adobe Systems Incorporated (Phase 1)
10.33 Sale of Rights under Software Development and Acquisition 10-Q 06/02/95 10.33
Acquisition Agreement By and Between Adobe Systems
Incorporated and Thomas Knoll and John Knoll
(confidential treatment granted)
10.34 Agreement and Plan of Merger and Reorganization By and Among S-4 8/08/18/95 2.1
and Among Adobe Systems Incorporated, J
Acquisition Corporation and Frame Technology
Corporation
10.35 Form of Executive Severance and Change of Control 10-K 12/01/95 10.35
Agreement*
X10.36 1996 Outside Directors Stock Option plan* 10-Q 05/31/96 10.36
10.37 Confidential Resignation Agreement* 10-Q 05/31/96 10.37
10.38 Sublease of the Land and Lease of the Improvements 10-Q 08/30/96 10.38
By and Between Sumitomo Bank Leasing and Finance
Inc. and Adobe Systems Incorporated (Phase 2)
11 Computation of Earnings Per Common Share X
21 Subsidiaries of the Registrant X
23 Consent of Independent AuditorsAuditors' Report on Schedule and Consent X
23.1 Consent of Ernst & Young LLP, Independent Auditors X
23.2 Consent of Ernst & Young LLP, Independent Auditors X
27 Financial Data Schedule X
- ------------------------
*Compensatory plan or arrangement
(b) Reports on Form 8-K
One reportNo reports on Form 8-K dated October 28, 1995, as amended on Form 8-K/A
dated Novem-
ber 24, 1995, waswere filed byin the Company describing the completion of the
acquisition of Frame Technology Corporation and incorporating the
required financial statements related to the acquisition.
37quarter ended November 29, 1996.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrantregistrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of
Mountain View, California, on the 20th day of February, 1996.authorized.
ADOBE SYSTEMS INCORPORATED
ByBy: /s/ M. BRUCE NAKAO
-----------------------------------
M. Bruce Nakao,
SENIORP. JACKSON BELL
-----------------------------------------
P. Jackson Bell,
EXECUTIVE VICE PRESIDENT FINANCE AND
ADMINISTRATION,
CHIEF FINANCIAL OFFICER,
TREASURER,CHIEF ADMINISTRATION OFFICER,
AND ASSISTANT SECRETARY
(PRINCIPAL FINANCIAL OFFICER)
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 20th21st day of February, 1996.1997.
SIGNATURE TITLE
- -------------------------------------------------- ------------------------------------------------------- --------------------------
/s/ JOHN E. WARNOCK Chairman of the Board of
/s/ JOHN- ------------------------------ Directors
John E. WARNOCK DirectorsWarnock and Chief ------------------------------------------- Executive
Officer
John E. Warnock
(Principal Executive
Officer)
/s/ CHARLES M. GESCHKE ------------------------------------------- President and Director
- ------------------------------
Charles M. Geschke
/s/ WILLIAM R. HAMBRECHT ------------------------------------------- Director
- ------------------------------
William R. Hambrecht
/s/ ROBERT SEDGEWICK ------------------------------------------- Director
- ------------------------------
Robert Sedgewick
/s/ DELBERT W. YOCAM ------------------------------------------- Director
- ------------------------------
Delbert W. Yocam
/s/ WILLIAM J. SPENCER ------------------------------------------- Director
- ------------------------------
William J. Spencer
/s/ GENE P. CARTER ------------------------------------------- Director
- ------------------------------
Gene P. Carter
/s/ PAUL BRAINERD
------------------------------------------- Director
Paul Brainerd
SeniorP. JACKSON BELL Executive Vice President,
Finance and Administra-
/s/ M. BRUCE NAKAO tion,- ------------------------------ Chief Financial ------------------------------------------- Officer,
Treasurer,P. Jackson Bell Chief Administration
Officer,
and
M. Bruce Nakao Assistant Secretary
(Principal Financial
Officer)
/s/ MICHAEL M. CULLY Vice President and
-------------------------------------------- ------------------------------ Corporate Controller (Principal
Michael M. Cully (Principal Accounting
Officer)
3837
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 Catalog
Acrobat Exchange
Acrobat Player
Acrobat Search
After Effects
Aldus
Art Explorer
ATM
Brilliant Screens
ColorBurst
Color Central
Dimensions
Display PostScript
Fetch
Font Folio
Adobe Illustrator PostScript
Acrobat PageMaker Premiere
After Effects PageMill PrintGear
Aldus PhotoDeluxe SiteMill
Frame Photoshop Type Library
FrameMaker
FrameViewer
Gallery Effects
Home Publisher
Illustrator
Image Club
IntelliDraw
Memory Booster
PageMaker
PageMill
Paint & Publish
Persuasion
PhotoDeluxe
Photoshop Photostyler
PixelBurst
PostScript
Premiere
PrintGear
ScreenReady
SiteMill
Streamline
SuperATM
SuperPaint
TextureMaker
Type Manager
Type On Call
Type Reunion
Type Twister
All other brand or product names are trademarks or registered trademarks of
their respective holders.
3938
FINANCIAL STATEMENTS
As required under Item 8. Financial Statements and Supplementary Data, the
consolidated financial statements of the Company are provided in this separate
section. The consolidated financial statements included in this section are as
follows:
FINANCIAL STATEMENT DESCRIPTION PAGE
- ------------------------------------------------------------------------------------------------------------------- ---------
------------------------------------------------------------------------------------------------------------------ -----------
- - Management's Report..................................................................................... 41Report.................................................................................... 39
- - Independent Auditors' Report............................................................................ 42Report........................................................................... 40
- - Consolidated Balance SheetsSheets............................................................................ 41
November 29, 1996 and December 1, 1995
- - Consolidated Statements of Income...................................................................... 42
Years Ended November 29, 1996, December 1, 1995, and November 25, 1994................................................................. 431994
- Consolidated Statements of Income
Years Ended December 1, 1995, November 25, 1994, and November 26, 1993................................. 44 - Consolidated Statements of Shareholders' EquityEquity........................................................ 43
Years Ended November 29, 1996, December 1, 1995, and November 25, 1994
and November 26, 1993................................. 45- - Consolidated Statements of Cash FlowsFlows.................................................................. 44
Years Ended November 29, 1996, December 1, 1995, and November 25, 1994
and November 26, 1993................................. 48- - Notes to Consolidated Financial Statements.............................................................. 50
- Report of Ernst & Young LLP, Independent Auditors on Frame Technology
Corporation............................................................................................ 69
- Report of Ernst & Young LLP, Independent Auditors on Aldus Corporation.................................. 70
- Report of Ernst & Young LLP, Independent Auditors on supplemental consolidated financial statements of
Frame Technology Corporation........................................................................... 71Statements............................................................. 45
4039
MANAGEMENT'S REPORT
Management is responsible for all the information and representations
contained in the consolidated financial statements and other sections of this
FORM 10-K. Management believes that the consolidated financial statements have
been prepared in conformity with generally accepted accounting principles
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 this FORM 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 control.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 generally accepted
accounting principles. 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 Peat Marwick 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 Peat Marwick 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.
M. Bruce Nakao
SENIORBy /s/ P. JACKSON BELL
-----------------------------------
P. Jackson Bell,
EXECUTIVE VICE PRESIDENT, FINANCE AND
ADMINISTRATION,
CHIEF FINANCIAL OFFICER,
TREASURER,CHIEF ADMINISTRATION OFFICER,
AND ASSISTANT SECRETARY
(PRINCIPAL FINANCIAL OFFICER)
December 19, 1995
4117, 1996
40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Adobe Systems Incorporated:
We have audited the accompanying consolidated balance sheets of Adobe
Systems Incorporated and subsidiaries as of November 29, 1996 and December 1,
1995, and November 25,
1994, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 1,
1995. In connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule as listed in the accompanying
index.November 29,
1996. 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 did not audit the
consolidated financial statements of Frame Technology Corporation, a company
acquired by the Company in a business combination accounted for as a pooling of
interests, as described in Note 2 to the consolidated financial statements,
which statements reflect total assetsrevenue constituting 12 percent as of November 25, 1994, and total
revenues constituting 12 and 10 percent in fiscal 1994 and 1993, respectively,
of the related consolidated totals. We also did not audit the consolidated
financial statements of Aldus Corporation, a company acquired by the Company in
a business combination accounted for as a pooling of interests, as described in
Note 2 to the consolidated financial statements, which statements reflect total
revenues constituting 36 percent of consolidated
fiscal 1993 revenues.1994 revenue. The financial statements of Frame Technology Corporation and Aldus Corporation
were audited by other auditors whose reports havereport has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Frame Technology
Corporation, and Aldus
Corporation, is based solely upon the reportsreport of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 signi cantsignificant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reportsreport of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reportsreport of the other auditors,
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, 1996 and December 1, 1995, and November 25, 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 1, 1995,November 29, 1996, in conformity with generally accepted accounting
principles. 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 Peat Marwick LLP
San Jose, California
December 19, 1995
4217, 1996
41
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETSTHOUSANDS)
NOVEMBER 29 DECEMBER 1
NOVEMBER 251996 1995
1994
------------ -----------------------
ASSETS
Current assets:
Cash and cash equivalents..........................................................equivalents............................................................ $ 110,745 $ 58,493
$ 204,120
Short-term investments.............................................................investments............................................................... 453,371 457,547
240,648
Receivables........................................................................Receivables, net of allowances of $5,196 and $3,698, respectively.................... 126,715 133,208 111,290
Inventories........................................................................ 7,277 10,113
Other current assets............................................................... 11,924 11,302
Deferred income taxes.............................................................. 24,338 21,049assets................................................................. 45,875 43,539
------------ -----------------------
Total current assets.............................................................assets............................................................... 736,706 692,787 598,522
Property and equipment...............................................................equipment................................................................. 80,231 51,708
46,568
Other assets......................................................................... 135,735 51,426
Deferred income taxes................................................................ 4,502 13,484assets........................................................................... 195,348 140,237
------------ -----------------------
$1,012,285 $ 884,732
$ 710,000
------------ -----------
------------ ------------ -----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade and other payables...........................................................payables............................................................. $ 43,056 $ 25,639
$ 34,354
Accrued expenses...................................................................expenses..................................................................... 93,957 94,848 88,954
Accrued restructuring costs........................................................costs.......................................................... 10,854 28,151 31,688
Income taxes payable...............................................................payable................................................................. 67,210 19,420
24,982
Deferred revenue...................................................................revenue..................................................................... 15,537 18,257
15,707
------------ -----------------------
Total current liabilities........................................................liabilities.......................................................... 230,614 186,315
195,685
------------ -----------------------
Deferred income taxes.................................................................. 3,809 --
Put warrants........................................................................... 71,348 --
Shareholders' equity:
Preferred stock, no par value; 2,000,0002,000 shares authorized; none issued............issued.................. -- --
Common stock, no par value; 200,000,000200,000 shares authorized; 72,834,44471,476 and 69,389,59172,834 shares
issued and outstanding, as of December 1, 1995 and November 25,
1994, respectively................................................................respectively............................................... 148,602 293,258
204,033Retained earnings.................................................................... 529,546 390,793
Unrealized gains (losses) on investments...........................................investments...................................................... 33,514 18,831
(1,277)
Retained earnings.................................................................. 390,793 315,611
Cumulative foreign currency translation adjustments................................adjustment.................................................... (5,148) (4,465)
(4,052)
------------ -----------------------
Total shareholders' equity.......................................................equity......................................................... 706,514 698,417
514,315
------------ -----------------------
$1,012,285 $ 884,732
$ 710,000
------------ -----------
------------ ------------ -----------------------
See accompanying Notes to Consolidated Financial Statements.
4342
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED
--------------------------------------------------------------------------------
NOVEMBER 29 DECEMBER 1 NOVEMBER 25
NOVEMBER 261996 1995 1994
1993------------ ----------- ------------ ------------
Revenue:
Licensing............................. $183,437 $156,652 $146,176Licensing............................................................. $ 196,693 $ 183,437 $ 156,652
Application products..................products.................................................. 589,870 578,902 518,965
433,927------------ ----------- ------------
------------
Total revenue.......................revenue........................................................... 786,563 762,339 675,617
580,103
Direct costs............................costs............................................................ 141,147 130,301 122,023
107,792------------ ----------- ------------
------------
Gross margin............................margin............................................................ 645,416 632,038 553,594
472,311------------ ----------- ------------ ------------
Operating expenses:
Software development costs:
Research and development............development............................................ 152,914 138,616 113,797 100,200
Amortization of capitalized software development costs..................costs.............. 2,504 11,095 14,329 10,498
Sales, marketing, and customer support..............................support................................ 254,972 242,713 234,771
206,946
General and administrative............administrative............................................ 62,034 58,526 60,531 66,048
Write-off of acquired in-process research and development............. 21,251 14,983 15,469 4,285
Merger transaction and restructuring costs................................costs............................ 4,955 31,534 72,183
25,800------------ ----------- ------------ ------------
Total operating expenses............expenses................................................ 498,630 497,467 511,080
413,777------------ ----------- ------------
------------
Operating income........................income........................................................ 146,786 134,571 42,514
58,534
Nonoperating income:
Investment gain (loss)................................................ 68,875 (755) (338)
Interest investment, and other income...............................income............................................. 29,163 30,037 10,770
------------ ----------- ------------
Total nonoperating income............................................... 98,038 29,282 10,432
13,824------------ ----------- ------------ ------------
Income before income taxes..............taxes.............................................. 244,824 163,853 52,946
72,358
Income tax provision....................provision.................................................... 91,547 70,368 37,609
30,351------------ ----------- ------------
------------
Net income..............................income.............................................................. $ 153,277 $ 93,485 $ 15,337
$ 42,007------------ ----------- ------------
------------ ----------- ------------
------------
Net income per share....................share.................................................... $ 2.04 $ 1.26 $ 0.22
$ 0.62------------ ----------- ------------
------------ ----------- ------------ ------------
Shares used in computing net income per share..................................share........................... 75,064 74,253 70,169 68,252
----------- ------------
------------ ----------- ------------
------------ ----------- ------------
See accompanying Notes to Consolidated Financial Statements.
43
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
UNREALIZED
COMMON STOCK GAINS CUMULATIVE
---------------------- RETAINED (LOSSES) ON TRANSLATION
SHARES AMOUNT EARNINGS INVESTMENTS ADJUSTMENT TOTAL
----------- --------- ----------- ----------- ----------- ---------
Balances as of November 26, 1993............... 66,420 $ 145,189 $ 316,331 $ -- $ (4,304) $ 457,216
Stock issued under employee stock and stock
option plans................................. 3,381 47,180 -- -- -- 47,180
Tax benefit from employee stock option plans... -- 14,418 -- -- -- 14,418
Stock compensation expense..................... -- 1,064 -- -- -- 1,064
Adjustment for change in Aldus Corporation
fiscal year-end.............................. (131) (3,265) (4,394) -- 487 (7,172)
Dividends declared............................. -- -- (10,418) -- -- (10,418)
Subchapter S distributions of Mastersoft....... -- -- (1,245) -- -- (1,245)
Shares issued in connection with acquisition... 105 2,105 -- -- -- 2,105
Repurchase of common stock..................... (385) (10,283) -- -- -- (10,283)
Proceeds from sales of put warrants............ -- 719 -- -- -- 719
Reclassification of put warrant obligations.... -- 6,906 -- -- -- 6,906
Unrealized losses on investments............... -- -- -- (1,277) -- (1,277)
Cumulative translation adjustment.............. -- -- -- -- (235) (235)
Net income..................................... -- -- 15,337 -- -- 15,337
----------- --------- ----------- ----------- ----------- ---------
Balances as of November 25, 1994............... 69,390 204,033 315,611 (1,277) (4,052) 514,315
----------- --------- ----------- ----------- ----------- ---------
Stock issued under employee stock and stock
option plans................................. 3,914 70,367 -- -- -- 70,367
Tax benefit from employee stock option plans... -- 32,445 -- -- -- 32,445
Stock compensation expense..................... -- 4,433 -- -- -- 4,433
Adjustment for change in Frame Technology
Corporation fiscal year-end.................. (10) (171) (1,784) -- -- (1,955)
Dividends declared............................. -- -- (13,177) -- -- (13,177)
Subchapter S distributions of Mastersoft....... -- -- (3,342) -- -- (3,342)
Repurchase of common stock..................... (460) (17,849) -- -- -- (17,849)
Unrealized gains on investments................ -- -- -- 20,108 -- 20,108
Cumulative translation adjustment.............. -- -- -- -- (413) (413)
Net income..................................... -- -- 93,485 -- -- 93,485
----------- --------- ----------- ----------- ----------- ---------
Balances as of December 1, 1995................ 72,834 $ 293,258 $ 390,793 $ 18,831 $ (4,465) $ 698,417
----------- --------- ----------- ----------- ----------- ---------
Stock issued under employee stock and stock
option plans................................. 2,032 39,870 -- -- -- 39,870
Tax benefit from employee stock option plans... -- 10,828 -- -- -- 10,828
Stock compensation expense..................... -- 2,772 -- -- -- 2,772
Dividends declared............................. -- -- (14,524) -- -- (14,524)
Repurchase of common stock..................... (3,390) (126,778) -- -- -- (126,778)
Reclassification of put warrant obligations.... -- (71,348) -- -- -- (71,348)
Unrealized gains on investments................ -- -- -- 14,683 -- 14,683
Cumulative translation adjustment.............. -- -- -- -- (683) (683)
Net income..................................... -- -- 153,277 -- -- 153,277
----------- --------- ----------- ----------- ----------- ---------
Balances as of November 29, 1996............... 71,476 $ 148,602 $ 529,546 $ 33,514 $ (5,148) $ 706,514
----------- --------- ----------- ----------- ----------- ---------
----------- --------- ----------- ----------- ----------- ---------
See accompanying Notes to Consolidated Financial Statements.
44
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
CUMULATIVE
UNREALIZED FOREIGN
COMMON STOCK GAINS CURRENCY
-------------------------- (LOSSES) ON RETAINED TRANSLATION
SHARES AMOUNT INVESTMENTS EARNINGS ADJUSTMENTS TOTAL
------------- ----------- ----------- ----------- ----------- -----------
Balances as of November 27, 1992........... 65,233,723 $ 137,478 $ -- $ 285,136 $ (3,843) $ 418,771
Issuance of common stock under Stock Option
Plans..................................... 1,597,587 16,285 -- -- -- 16,285
Issuance of common stock under Employee
Stock Purchase Plan....................... 558,301 7,741 -- -- -- 7,741
Issuance of common stock under Restricted
Stock Plans............................... 50,300 -- -- -- -- --
Tax benefit from employee stock plans...... -- 11,234 -- -- -- 11,234
Stock compensation expense................. -- 1,651 -- -- -- 1,651
Dividends declared......................... -- -- -- (9,005) -- (9,005)
Subchapter S distributions of Mastersoft... -- -- -- (1,807) -- (1,807)
Shares issued in connection with
acquisition............................... 105,049 2,545 -- -- -- 2,545
Repurchase of common stock................. (1,124,613) (25,533) -- -- -- (25,533)
Proceeds from sales of put warrants........ -- 694 -- -- -- 694
Reclassification of put warrant
obligations............................... -- (6,906) -- -- -- (6,906)
Foreign currency translation adjustment.... -- -- -- -- (461) (461)
Net income................................. -- -- -- 42,007 -- 42,007
------------- ----------- ----------- ----------- ----------- -----------
Balances as of November 26, 1993........... 66,420,347 145,189 -- 316,331 (4,304) 457,216
See accompanying Notes to Consolidated Financial Statements.
45
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CUMULATIVE
UNREALIZED FOREIGN
COMMON STOCK GAINS CURRENCY
-------------------------- (LOSSES) ON RETAINED TRANSLATION
SHARES AMOUNT INVESTMENTS EARNINGS ADJUSTMENTS TOTAL
------------- ----------- ----------- ----------- ----------- -----------
Balances as of November 26, 1993........... 66,420,347 $ 145,189 $ -- $ 316,331 $ (4,304) $ 457,216
Issuance of common stock under Stock Option
Plans..................................... 2,647,740 37,103 -- -- -- 37,103
Issuance of common stock under Employee
Stock Purchase Plan....................... 679,392 10,077 -- -- -- 10,077
Issuance of common stock under Restricted
Stock Plans............................... 53,500 -- -- -- -- --
Tax benefit from employee stock plans...... -- 14,418 -- -- -- 14,418
Stock compensation expense................. -- 1,064 -- -- -- 1,064
Adjustment for change in Aldus Corporation
fiscal year-end........................... (130,534) (3,265) -- (4,394) 487 (7,172)
Dividends declared......................... -- -- -- (10,418) -- (10,418)
Subchapter S distributions of Mastersoft... -- -- -- (1,245) -- (1,245)
Shares issued in connection with
acquisition............................... 104,520 2,105 -- -- -- 2,105
Repurchase of common stock................. (385,374) (10,283) -- -- -- (10,283)
Proceeds from sales of put warrants........ -- 719 -- -- -- 719
Reclassification of put warrant
obligations............................... -- 6,906 -- -- -- 6,906
Unrealized losses on investments........... -- -- (1,277) -- -- (1,277)
Foreign currency translation adjustment.... -- -- -- -- (235) (235)
Net income................................. -- -- -- 15,337 -- 15,337
------------- ----------- ----------- ----------- ----------- -----------
Balances as of November 25, 1994........... 69,389,591 204,033 (1,277) 315,611 (4,052) 514,315
See accompanying Notes to Consolidated Financial Statements.
46
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
CUMULATIVE
UNREALIZED FOREIGN
COMMON STOCK GAINS CURRENCY
-------------------------- (LOSSES) ON RETAINED TRANSLATION
SHARES AMOUNT INVESTMENTS EARNINGS ADJUSTMENTS TOTAL
------------- ----------- ----------- ----------- ----------- -----------
Balances as of November 25, 1994........... 69,389,591 $ 204,033 $ (1,277) $ 315,611 $ (4,052) $ 514,315
Issuance of common stock under Stock Option
Plans..................................... 3,179,073 58,417 -- -- -- 58,417
Issuance of common stock under Employee
Stock Purchase Plan....................... 594,129 11,950 -- -- -- 11,950
Issuance of common stock under Restricted
Stock Plans............................... 141,000 -- -- -- -- --
Tax benefit from employee stock plans...... -- 32,445 -- -- -- 32,445
Stock compensation expense................. -- 4,433 -- -- -- 4,433
Adjustment for change in Frame Technology
Corporation fiscal year-end............... (9,516) (171) -- (1,784) -- (1,955)
Dividends declared......................... -- -- -- (13,177) -- (13,177)
Subchapter S distributions of Mastersoft... -- -- -- (3,342) -- (3,342)
Repurchase of common stock................. (459,833) (17,849) -- -- -- (17,849)
Unrealized gains on investments............ -- -- 20,108 -- -- 20,108
Foreign currency translation adjustment.... -- -- -- -- (413) (413)
Net income................................. -- -- -- 93,485 -- 93,485
------------- ----------- ----------- ----------- ----------- -----------
Balances as of December 1, 1995............ 72,834,444 $ 293,258 $ 18,831 $ 390,793 $ (4,465) $ 698,417
------------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- -----------
See accompanying Notes to Consolidated Financial Statements.
47
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
--------------------------------------------------------------------------------------
NOVEMBER 29 DECEMBER 1 NOVEMBER 25
NOVEMBER 261996 1995 1994
1993
-------------- -------------------------- ----------- ------------
Cash flows from operating activities:
Net income.......................................................income...................................... $ 153,277 $ 93,485 $ 15,337 $ 42,007
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense.....................................expense.................... 2,772 4,433 1,064
1,651
Depreciation and amortization..................................amortization................. 55,621 60,435 57,794
49,841
Deferred income taxes.......................................... (6,828)taxes......................... (6,715) (6,828 ) (11,663)
(10,993)
Unrealized lossEquity in net income of Adobe Ventures........ (19,001) 755 --
Gains on investments.................................sales of equity securitites.......... (53,216) -- -- (113)
Provision for losses on accounts receivable....................receivable... 1,927 2,038 1,963 1,842
Tax benefit from employee stock plans..........................option
plans....................................... 10,828 32,445 14,418 11,234
Write-off of acquired in-process research and
development......development................................. 21,251 14,983 15,469
4,285
Noncash restructuring costs....................................costs................... 2,525 4,714 25,735 10,936
Changes in operating assets and liabilities:
Receivables.................................................. (26,586)Receivables................................. 6,629 (26,586 ) (17,648) (3,239)
Inventories.................................................. 2,496 962 1,028
Other current assets......................................... (1,868) (1,274) (304)assets........................ (1,173) 628 (312)
Trade and other payables..................................... (7,032)payables.................... 8,534 (7,032 ) 11,979
5,473
Accrued expenses.............................................expenses............................ (7,198) 3,161 14,505
8,878
Accrued restructuring costs..................................costs................. (20,229) 1,835 23,384
8,304
Income taxes payable......................................... (5,184)payable........................ 46,063 (5,184 ) 2,452
11,544
Deferred revenue.............................................revenue............................ (3,781) 4,474 1,259
710
-------------- -------------------------- ----------- ------------
Net cash provided by operating activities.......................... 177,001activities......... 198,114 177,756 155,736
143,084
-------------- -------------------------- ----------- ------------
See accompanying Notes to Consolidated Financial Statements.
48
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEARS ENDED
--------------------------------------------
DECEMBER 1 NOVEMBER 25 NOVEMBER 26
1995 1994 1993
-------------- -------------- ------------
Cash flows from investing activities:
Purchases of short-term investments.............................. $ (2,614,349) $ (1,766,916) $ (754,767)investments............. $(2,363,993) $(2,614,349) $(1,766,916)
Maturities and sales of short-term
investments...................investments................................... 2,363,793 2,403,631 1,724,612 722,759
Acquisitions of property and equipment........................... (34,071)equipment.......... (45,869) (34,071 ) (32,700) (25,508)
Capitalization of software development costs..................... (2,175) (10,953) (14,129)
Additions to other assets........................................ (93,791) (17,663) (4,755)assets....................... (65,399) (96,721 ) (28,616)
Acquisitions, net of cash acquired............................... (15,158)acquired.............. (8,027) (15,158 ) (14,750)
(9,304)
-------------- --------------Proceeds from sales of equity securities........ 72,630 -- --
------------ ----------- ------------
Net cash used for investing activities............................. (355,913)activities.......... (46,865) (356,668 ) (118,370)
(85,704)
-------------- -------------------------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock...........................stock.......... 39,870 70,367 47,180 15,376
Proceeds from sales of put warrants..............................warrants............. -- -- 719 694
Repurchase of common stock....................................... (17,849)stock...................... (126,778) (17,849 ) (10,283) (25,533)
Payment of dividends............................................. (12,310)dividends............................ (14,586) (12,310 ) (9,906) (8,523)
Payment of Subchapter S distributions of
Mastersoft.............. (3,342)Mastersoft.................................... -- (3,342 ) (1,245)
(1,807)
-------------- -------------------------- ----------- ------------
Net cash provided by (used for) financing
activities...............activities....................................... (101,494) 36,866 26,465 (19,793)
Effect of foreign currency exchange rates on cash
and cash equivalents.......................................................equivalents............................. 2,497 10 (1,297)
(516)
-------------- -------------------------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents............... (142,036)equivalents...................................... 52,252 (142,036 ) 62,534 37,071
Adjustment for change in acquired companies'
fiscal year-ends......................................................... (3,591)year-ends................................. -- (3,591 ) (3,554) --
Cash and cash equivalents at beginning of year.....................year.... 58,493 204,120 145,140
108,069
-------------- -------------------------- ----------- ------------
Cash and cash equivalents at end of year...........................year.......... $ 110,745 $ 58,493 $ 204,120
$ 145,140
-------------- -------------- ------------ -------------- ------------------------- ------------
------------ ----------- ------------
Supplemental disclosures:
Cash paid during the year for income taxes.......................taxes...... $ 30,463 $ 44,470 $ 26,121
$ 22,362
-------------- -------------- ------------ -------------- ------------------------- ------------
------------ ----------- ------------
Noncash investing and financing activities:
Dividends declared but not paid................................paid............... $ 3,582 $ 3,645 $ 2,778
$ 2,262
-------------- -------------- ------------ -------------- ------------------------- ------------
------------ ----------- ------------
Reclassification of put warrants...............................warrants.............. $ 71,348 $ -- $ (6,906)
------------ ----------- ------------
------------ ----------- ------------
Issuance of notes for acquisition............. $ 6,906
-------------- --------------9,473 $ -- $ --
------------ -------------- ------------------------- ------------
------------ ----------- ------------
See accompanying Notes to Consolidated Financial Statements.
4945
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")
develops, markets, and supports computer software products and technologies that
enable users to create, display, manage, communicate, and print electronic
documents. The Company licenses its technology to major computer, printing, and
publishing suppliers, and markets a line of application software products and
type products for authoring and editing visually rich documents. Additionally,
the Company markets a line of powerful, easy-to-use products for home and small
business users. The Company distributes its products through a network of
original equipment manufacturer ("OEM") customers, distributors and dealers, and
value-added resellers ("VARs") and system integrators. The Company has
operations in the Americas,North America, Europe, Japan, Asia-Pacific and Pacific Rim regions.
In October 1995, Adobe acquired Frame Technology Corporation ("Frame"), a
developer of software applications for the creation, management, and
distribution of documents for individuals and workgroups. In July 1995, Frame
acquired Mastersoft, Inc. ("Mastersoft"), a developer of file conversion,
viewing, and document comparison software. In August 1994, Adobe acquired Aldus
Corporation ("Aldus"), a developer of software applications for the professional
publishing, graphics, and prepress markets; interactive publishing; and the
general consumer market. Each of these acquisitions was made through a pooling
of interests. Accordingly, the Company's consolidated financial statements have
been restated, for all periods prior to the acquisitions, to include the results
of operations, financial position, and cash flows of Frame, Mastersoft, and
Aldus.Latin America.
FISCAL YEAR
The Company's current 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 its wholly ownedwholly-owned subsidiaries, after elimination of all significant
intercompany accounts and transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to 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.
All of the Company's cash equivalents and short-term investments, and
certain noncurrent investments, consisting principally of United States government and
government agency securities, municipal bonds, commercial paper, auction rate
preferred stocks, and asset-backed securities, are classified as
available-for-sale under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115. The Company'snon-current investments in equity securities, that
are free of trading
restrictions, or that willto become free of trading restrictions during the next 12 monthswithin one year, are also
classified as available-for-
sale. The securities"available-for-sale." These investments are carried at fair value,
with thebased on quoted market prices, and unrealized gains and losses, net of taxes,
are reported as a separate component of shareholders' equity.
The amortized cost of available-for-sale debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Realized gains and losses, and
declines in value judged to be other than temporary, on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest,
investment, and other income.
50
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of certain foreign subsidiaries, whose functional
currency is the local currency, are translated from their respective functional
currencies to U.S. dollars at year-end exchange rates.
Income and expense items are translated at the average rates of exchange
prevailing during the year. The adjustment resulting from translating the
financial statements of such foreign subsidiaries is reflected as a separate
component of shareholders' equity. Certain other transaction gains or losses,
which have not been material, are reported in results of operations.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market (net realizable value).46
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are statedrecorded at cost less accumulated depreciationcost. Depreciation and amortization. Depreciation of a building in Edinburgh, Scotland is calculated
using the straight-line method over 35 years. Depreciation of equipment and
furniture and fixtures isamortization
are calculated using the straight-line method over the estimated useful livesshorter of the respective assets, generally two to seven years.
Leasehold improvements are amortized over the lesser of the lease term or the estimated
useful lives (two to seven years) or lease terms (five to nine years) of the
related assets, generally five to nine years.respective assets.
OTHER ASSETS
Purchased technology, goodwill, and licensing agreementscertain other intangible assets are
stated at cost less accumulated amortization. Amortization is provided on the
straight-line method over the estimated useful lives of the respective assets,
generally three years for technology, five to seven years for goodwill, and three to six years
for licensing agreements. The Company periodically reviews the net realizable
valueyears. Capitalization of its intangible assets and adjusts the carrying amount accordingly.
Research andcomputer software development
costs are charged to expense when incurred. Costs
incurred inbegins upon the research and developmentestablishment of new software products and
enhancements to existing software products are also expensed as incurred until
the technological feasibility of the product has been established. After
technological feasibility has been established, any additional costs are
capitalized in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," and are included
in "Other assets" in the Consolidated Balance Sheets.feasibility. Such costs are
amortized using the greater of the ratio of current product revenue to the total
current and anticipated product revenue or the straight-line method of the
software's estimated economic life, generally 9 to 36 months. The Company
periodically reviews the net realizable value of its intangible assets and
adjusts the carrying amount accordingly.
The Company owns a minority interest in certain technology companies and a
majority interest in a limited partnership, established to invest in technology
companies, and accounts for such investments under the cost and equity methods,
respectively.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of Position
91-1, "Software Revenue Recognition," and SFAS No. 48, "Revenue Recognition When
Right of Return Exists." Application products revenue is recognized upon shipment. Revenue from
distributors is subject to agreements allowing limited rights of return and
price protection. The Company provides for estimated future returns and price protection.at the time
the related revenue is recorded.
Licensing revenue is recognized when the Company's OEM customers ship their
products incorporating Adobe's software to their end user customers. The Company
also enters into contractssoftware. Revenue associated with 51
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OEMs to adaptadapting the
Company's software products to the OEMs' hardware products.
Revenue on such contractsproducts is recognized based
on the percentage-of-completion method and is included in licensing revenue.
Deferred revenue consists ofincludes customer advances under OEM licensing agreements andagreements.
Additionally, maintenance contractsrevenue for application products which areis deferred and
recognized ratably over the term of the contract, generally 12 months.
DIRECT COSTS
Direct costs include royalties, amortization of typeface production costs;costs,
amortization of acquired technologies;technologies, and direct product, packaging, and
shipping costs.
INCOME TAXES
The Company accountsuses the asset and liability method of accounting for its income
taxes under SFAS No. 109, "Accounting
for Income Taxes."taxes. Under the asset and liability method, of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities measured
using existing tax rates. Under SFAS No. 109, the effect on deferredliabilities. A valuation allowance is recorded to reduce tax assets
and liabilities due to a change in tax ratesan amount whose realization is recognized in income in the
period that includes the enactment date.more likely than not. The Company does not
provide deferred income taxes for unremitted earnings of foreign subsidiaries,
as it is management's intent to reinvest these earnings indefinitely.
47
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
Net income per share is based upon weighted average common and dilutive
common equivalent shares outstanding using the treasury stock method. Dilutive
common equivalent shares include stock options and restricted stock. The
difference between primary and fully diluted net income per share is not
significant in all periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995,On November 30, 1996 the Company will adopt Statement of Financial
Accounting Standards Board issued SFAS("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 will be effective for fiscal years beginning after
December 15, 1995, and
requires long-lived assets to be evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company will adoptdoes not expect the adoption of SFAS No. 121 in fiscal
1997 and does not expect its provisions to have
a material effect on the Company's consolidated results of operationsoperations.
The Company accounts for its stock option plans, employee stock purchase
plan, and restricted stock plan in accordance with the yearprovisions of adoption.the
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees." In October 1995, the Financial Accounting Standards Board issuedreleased SFAS
No. 123 "Accounting for Stock-BasedStock Based Compensation." SFAS No.123 provides an
alternative to APB No. 123 will be25 and is effective for fiscal years beginning after
December 15, 1995, and will require that the
Company either recognize in its consolidated financial statements costs related
to its employee stock-based compensation plans, such as stock option and stock
purchase plans, or make pro forma disclosures of such costs in a footnote to the
consolidated financial statements.1995. The Company expectsintends to continue to use the intrinsic value based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee
stock-based compensation plans. Therefore,stock and stock option plans in its Consolidated financial statements for fiscal 1997, the Company will make the
required pro forma disclosures in a footnote to the consolidated financial
statements.accordance with APB No. 25. Accordingly, SFAS
No. 123 is not expected to have a material effectimpact on the Company's consolidatedConsolidated
results of operations or financial position.
52
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)operations.
RECLASSIFICATIONS
Certain reclassifications were made to the 19941995 and 19931994 consolidated
financial statements to conform to the 19951996 presentation.
NOTE 2. ACQUISITIONS
POOLINGS OF INTERESTS
On October 28, 1995, the Company issued approximately 8.5 million shares of
its common stock in exchange for all of the common stock of Frame. Prior to its
acquisition by the Company, on July 28, 1995, Frame acquired all of the common
stock of Mastersoft in exchange for approximately 0.6 million equivalent shares
of Adobe common stock. On August 31, 1994, the Company issued approximately 14.2
million shares of its common stock in exchange for all of the common stock of
Aldus. These business combinations have been accounted for as poolings of
interests, and, accordingly, the consolidated financial statements for periods
prior to the combinations have been restated to include the results of
operations, financial position, and cash flows of Frame, Mastersoft, and Aldus.
Prior to the combinations, Frame's and Aldus' fiscal years ended on December
31. In recording the business combination, Frame's financial statements for the
12 months ended December 1, 1995 were combined with the Company's consolidated
financial statements for the same period. Frame's financial statements for the
years ended December 31, 1994 and 1993 were combined with the Company's
consolidated financial statements for the years ended November 25, 1994 and
November 26, 1993, respectively. Revenue and net income of Frame for the month
ended December 31, 1994 were $8.6 million and $2.3 million, respectively. Net
income, Subchapter S distributions of Mastersoft, the issuance of common stock,
and the net decrease in cash and cash equivalents were adjusted to eliminate the
effect of including Frame's results of operations, financial position, and cash
flows for the month ended December 31, 1994 in the years ended December 1, 1995
and November 25, 1994.
Similarly, Aldus' financial statements for the 12 months ended November 25,
1994 were combined with the Company's for the same period. Aldus' financial
statements for the year ended December 31, 1993 were combined with the Company's
consolidated financial statements for the year ended November 26, 1993. Revenue
and net income of Aldus for the month ended December 31, 1993 were $26.1 million
and $4.4 million, respectively. Net income, the foreign currency translation
adjustment, the issuance of common stock, and the net increase in cash and cash
equivalents were adjusted to eliminate the effect of including Aldus' results of
operations, financial position, and cash flows for the month ended December 31,
1993 in the years ended November 25, 1994 and November 26, 1993.
COMBINED RESULTS OF OPERATIONS
There were no significant transactions among the Company, Frame, and Aldus
prior to the combinations which required elimination, and no adjustments were
required to conform Aldus' accounting policies to those of the Company. Certain
adjustments were made to Frame's tax provision and deferred tax accounts to
reflect tax benefits availableelimination. Prior to the combined company. In addition, certain
reclassifications were made to Frame's 1994combination
Frame reported revenue and 1993 financial statements to
conform tonet income of $68.2 million and $10.5 million,
respectively, for the nine month period ended September 1, 1995 presentation.
53and reported
revenue and net income of $77.8 million and $11.9 million, respectively, for the
year ended
48
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2. ACQUISITIONS (CONTINUED)
The table below provides information for periods priorNovember 25, 1994. Prior to the combinations
regarding the resultscombination, Aldus reported revenue and net
income of operations$172.2 million and $5.1 million, respectively, for the separate enterprises.
NINE MONTHS ENDED YEARS ENDED
------------------------ --------------------------
SEPTEMBER 1 AUGUST 26 NOVEMBER 25 NOVEMBERnine month
period ended August 26, 1994. Certain adjustments were made to Frame's tax
provision and deferred tax accounts to reflect tax benefits available to the
combined company.
PURCHASES
During 1996, 1995 and 1994, 1994 1993
----------- ----------- ------------ ------------
Revenue:
Adobe................................................... $ 493,238 $ 260,112 $ 597,772 $ 313,457
Frame................................................... 68,225 55,646 77,845 59,866
Aldus................................................... -- 172,210 -- 206,780
----------- ----------- ------------ ------------
Combined.............................................. $ 561,463 $ 487,968 $ 675,617 $ 580,103
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Net Income:
Adobe................................................... $ 97,705 $ 49,329 $ 6,309 $ 57,030
Frame................................................... 10,476 7,950 11,870 (32,392)
Aldus................................................... -- 5,131 -- 9,515
Adjustment to Frame's tax provision..................... (2,906) (1,916) (2,842) 7,854
----------- ----------- ------------ ------------
Combined.............................................. $ 105,275 $ 60,494 $ 15,337 $ 42,007
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
PURCHASES
In October 1995, the Company acquired Ceneca Communications, Inc.six software companies, in
separate transactions, for an aggregate consideration of approximately $15.2$54.3
million in cash, notes payable and assumedthe assumption of certain liabilities. Of this amount,
$15.0 million was allocated toThese
acquisitions were accounted for using the purchase method of accounting and
resulted in the write-off of acquired in-process research and development and expensed
at the time of
acquisition. The remainder of the purchase price was allocated
primarily to goodwill.
During 1994, the Company acquired LaserTools Corporation$21.3 million, $15.0 million, and Compumation,
Incorporated for an aggregate purchase price of $17.0 million. Approximately $15.5 million was allocated to in-process researchduring fiscal 1996, 1995, and
development, and was
expensed at the time of these acquisitions.1994, respectively. The operating results of the acquired companies have been
included in the accompanying consolidated financial statements from their dates
of acquisition. 54The operating results of each company acquired are not
considered material to the consolidated financial statements of Adobe and,
accordingly, pro forma information has not been presented.
NOTE 3. CASH EQUIVALENTS AND INVESTMENTS
All cash equivalents, short-term investments and certain noncurrent
investments consisted of the following:
AS OF NOVEMBER 29, 1996
------------------------------------------------
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
Classified as current assets:
Money market mutual funds...................................... $ 39,381 $ -- $ -- $ 39,381
United States government treasury notes and agency discount
notes........................................................ 90,617 424 (247) 90,794
State and municipal bonds and notes............................ 358,612 1,894 (36) 360,470
Corporate and bank notes....................................... 38,598 405 (33) 38,970
Auction-rate securities........................................ 10,000 -- -- 10,000
Asset-backed securities........................................ 11,740 91 (110) 11,721
---------- ----------- ----------- ----------
Total current.................................................. 548,948 2,814 (426) 551,336
---------- ----------- ----------- ----------
Classified as noncurrent assets:
Money market mutual funds...................................... 15,977 -- -- 15,977
United States government treasury notes........................ 50,327 -- (183) 50,144
Equity securities.............................................. 3,882 54,216 (19) 58,079
---------- ----------- ----------- ----------
Total noncurrent............................................... 70,186 54,216 (202) 124,200
---------- ----------- ----------- ----------
Total securities............................................... $ 619,134 $ 57,030 $ (628) $ 675,536
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
49
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS All cash equivalents, short-term investments, noncurrent investments, and
certain investments in equity securities have been classified as
available-for-sale securities and consisted of the following:(CONTINUED)
AS OF DECEMBER 1, 1995
----------------------------------------------------------------------------------------------
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- --------------------- ----------- ----------
Classified as current assets:
Money market mutual funds...........funds...................................... $ 23,387 $ -- $ -- $ 23,387
United States government treasury notes and agency discount
notes....notes........................................................ 129,350 2,356 -- 131,706
State and municipal bonds and notes..............................notes............................ 245,758 1,911 (80) 247,589
Corporate and bank notes............notes....................................... 54,493 710 (26) 55,177
Auction-rate securities.............securities........................................ 13,700 -- -- 13,700
Asset-backed securities.............securities........................................ 15,131 122 (182) 15,071
-------- ---------- --------------------- ----------- ----------
Total current.....................current.................................................. 481,819 5,099 (288) 486,630
-------- ---------- --------------------- ----------- ----------
Classified as noncurrent assets:
Money market mutual funds...........funds...................................... 353 -- -- 353
United States government treasury notes..............................notes........................ 35,237 44 -- 35,281
Equity securities...................securities.............................................. 2,000 26,835 -- 28,835
-------- ---------- --------------------- ----------- ----------
Total noncurrent..................noncurrent............................................... 37,590 26,879 -- 64,469
-------- ---------- --------------------- ----------- ----------
Total securities.................. $519,409 $31,978securities............................................... $ 519,409 $ 31,978 $ (288) $ 551,099
------------------ ----------- ----------- ----------
---------- ----------
-------- ---------- --------------------- ----------- ----------
AS OF NOVEMBER 25, 1994
----------------------------------------------
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
Classified as current assets:
Money market mutual funds and time
deposits........................... $ 11,050 $ -- $ (7) $ 11,043
United States government treasury
notes and agency discount notes.... 134,209 -- (702) 133,507
State and municipal bonds and
notes.............................. 147,882 -- (958) 146,924
Corporate and bank notes............ 16,094 -- (42) 16,052
Auction-rate securities............. 80,865 -- -- 80,865
Asset-backed securities............. 7,199 -- (322) 6,877
Other securities.................... 5,504 -- (46) 5,458
-------- ---------- ---------- ----------
Total current..................... 402,803 -- (2,077) 400,726
-------- ---------- ---------- ----------
Classified as noncurrent assets:
Money market mutual funds and time
deposits........................... 2,245 4 -- 2,249
-------- ---------- ---------- ----------
Total securities.................. $405,048 $ 4 $(2,077) $ 402,975
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
Approximately $97.9 million and $29.1 million in investments are classified
as cash equivalents as of November 29, 1996 and December 1, 1995, respectively,
and all non-current investments are included in other assets. Unrealized gains
(losses) on all securities are reported as a separate component of shareholders'
equity, net of taxes of $12.9$23.0 million and $0.8$12.9 million as of November 29, 1996
and December 1, 1995, and November 25, 1994, respectively. Net realized gains for the years ended
November 29, 1996 and December 1, 1995 and November 25, 1994 of $1.4$48.4 million and $0.2$1.4 million,
respectively, are included in interest, investment gain.
As of November 29, 1996, the cost, which approximated fair value, of debt
securities with a maturity of one year or less, was $102.7 million, and other income.
55
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (CONTINUED)
The Company's investments are classified as follows:
DECEMBER 1 NOVEMBER 25
1995 1994
----------- -----------
Cash equivalents................................... $ 29,083 $ 160,078
Short-term investments............................. 457,547 240,648
Other assets -- equity investments................. 28,835 --
Other assets -- restricted funds................... 35,634 2,249
----------- -----------
$ 551,099 $ 402,975
----------- -----------
----------- -----------
Thethe cost
and estimated fair value of available-for-saledebt securities by
contractualwith maturities ranging from one to
five years was $424.5 million and $426.9 million, respectively. Other debt
securities include asset-backed securities of $11.7 million with multiple
maturity consisteddates and auction-rate securities of the following:
DECEMBER 1, 1995 NOVEMBER 25, 1994
-------------------- --------------------
ESTIMATED ESTIMATED
FAIR FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
Debt securities:
One year or less............................... $ 89,895 $ 89,940 $ 267,511 $ 266,654
One to three years............................. 363,167 367,196 49,473 48,579
Three to five years............................ 35,516 36,357 -- --
Auction-rate securities........................ 13,700 13,700 80,865 80,865
--------- --------- --------- ---------
502,278 507,193 397,849 396,098
Asset-backed securities........................ 15,131 15,071 7,199 6,877
--------- --------- --------- ---------
Total debt securities............................ 517,409 522,264 405,048 402,975
Equity securities................................ 2,000 28,835 -- --
--------- --------- --------- ---------
Total securities................................. $ 519,409 $ 551,099 $ 405,048 $ 402,975
--------- --------- --------- ---------
--------- --------- --------- ---------
$10.0 million. Included in
auction-rate securities in 1994 are Select Auction Variable Rate Certificate Securities ("SAVRS") whose stated
maturities exceed ten years. However, the Company hadhas the option of adjusting
the respective interest rates or liquidating these investments at auction on
stated auction dates every 35 days.
NOTE 4. RECEIVABLES
Receivables consisted of the following:
DECEMBER 1 NOVEMBER 25
1995 1994
----------- -----------
Trade receivables.................................. $ 91,296 $ 84,568
Royalty receivables................................ 34,017 26,800
Interest and other receivables..................... 11,593 3,815
----------- -----------
136,906 115,183
Less allowance for doubtful accounts............... 3,698 3,893
----------- -----------
$ 133,208 $ 111,290
----------- -----------
----------- -----------
5650
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 5.4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
NOVEMBER 29 DECEMBER 1
NOVEMBER 251996 1995
1994
----------- -----------------------
Land...............................................................Land.............................................. $ 782 $ 782
Building...........................................................Building.......................................... 4,615 4,615
Equipment..........................................................Equipment......................................... 121,044 122,794 107,078
Furniture and fixtures.............................................fixtures............................ 18,126 18,962
20,042
Leasehold improvements.............................................improvements............................ 13,036 8,790
4,146
----------- -----------------------
157,603.. 155,943 136,663
Less accumulated depreciation and amortization.....................amortization.... 77,372 104,235
90,095
----------- -----------------------
$ 80,231 $ 51,708
$ 46,568
----------- ------------
-----------
----------------------- -----------
NOTE 6.5. OTHER ASSETS
Other assets consisted of the following:
NOVEMBER 29 DECEMBER 1
NOVEMBER 251996 1995
1994
----------- -----------------------
Licensing agreements...............................................Equity investments................................ $ 16,31997,679 $ 15,565
Goodwill........................................................... 13,753 25,26253,091
Purchased technology............................................... 35,626 355
Software development costs......................................... 36,988 33,260
Equity investments................................................. 53,091 5,927technology and licensing agreements..... 32,211 51,945
Restricted funds...................................................funds and security deposits............ 69,443 35,634 2,249
Miscellaneous other assets......................................... 11,363 8,202assets........................ 35,470 66,606
----------- ------------
202,774 90,820-----------
234,803 207,276
Less accumulated amortization......................................amortization..................... 39,455 67,039
39,394
----------- ------------
$ 135,735 $ 51,426
-----------
------------$195,348 $140,237
----------- -----------------------
----------- -----------
Included above in equity investments at November 29, 1996, are unrealized
gains and losses. The following significant transactions and activities are includedequity investment in other
assets:
PURCHASED TECHNOLOGY
During 1995,Netscape Communications Corporation
was marked-to-market for an unrealized gain of $47.7 million. In addition,
during 1996, the Company entered into an agreement with the developersrecorded realized gains of the technology underlying its Adobe Photoshop product under which the Company
made a lump-sum payment of $34.5 million in lieu of all royalty obligations
incurred in connection with the technology after the beginning of the fourth
quarter of 1994. Accordingly, $8.5 million of the amount paid to the developers
was applied to accrued royalties related to the fourth quarter of 1994 and the
1995 period prior to the execution of the agreement. The balance of $26.0
million is being amortized over 30 months, and as of December 1, 1995, the
remaining unamortized cost was $18.2 million. Prior to this agreement, the
Company paid the developers a royalty for each copy of Adobe Photoshop sold by
the Company.
SOFTWARE DEVELOPMENT COSTS
Unamortized software development costs were $2.5approximately $43.6 million
and $11.6 million
as of December 1, 1995 and November 25, 1994, respectively. Amortization of
software development costs was $11.1 million, $14.3 million, and $10.5approximately $6.8 million for the years ended December 1, 1995, November 25, 1994,sale of a portion of its investment in
Netscape and November 26, 1993,its entire investment in Luminous, respectively.
57NOTE 6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
NOVEMBER
29 DECEMBER 1
1996 1995
---------- ----------
Accrued compensation and benefits................. $24,673 $26,730
Sales and marketing allowances.................... 24,644 24,586
Other............................................. 44,640 43,532
---------- ----------
$93,957 $94,848
---------- ----------
---------- ----------
51
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
DECEMBER 1 NOVEMBER 25
1995 1994
----------- ------------
Royalties.......................................................... $ 7,194 $ 10,824
Accrued compensation and benefits.................................. 26,730 22,748
Sales and marketing allowances..................................... 24,586 20,697
Other.............................................................. 36,338 34,685
----------- ------------
$ 94,848 $ 88,954
----------- ------------
----------- ------------
NOTE 8. ACCRUED RESTRUCTURING COSTS
ASSOCIATED WITH THE ACQUISITION OF FRAME
On October 28,In 1995 and 1994, the Company acquired Frame and Aldus, respectively,
described in "Note 2 --
Acquisitions,2--Acquisitions," and initiated a plan to combine the
operations of the two
companies. On this date,In connection with these acqusitions, in 1995 and
1994 the Company recorded a $32.5charges of $31.5 million chargeand $72.2 million,
respectively, to operating expenses related to merger transaction and
restructuring costs. Merger transaction costs consist principally of transaction fees for
investment bankers, attorneys, accountants, financial printing, and other
related charges. Restructuring costs include the elimination of redundant
equipment, the write-off ofIn addition, Frame undertook certain intangible assets, severance and
outplacement of terminated employees, and cancellation of certain contractual
agreements.restructuring measures
in 1993 due to lower than anticipated revenues.
Merger transaction and restructuring costs are summarized below:
PERIOD FROM ACQUISITION
TO
PROVISION DECEMBER 1, 1995
RECORDED AT ------------------------ ACCRUED AS
ACQUISITION CASHREDUNDANT CANCELLATION
INFORMATION ASSETS OF DECEMBER
DATE WRITE-OFFS PAYMENTS 1 1995FACILITY
MERGER SEVERANCE SYSTEMS ASSOCIATED LEASES AND
TRANSACTION AND AND WITH DUPLICATE OTHER
COST OUT-PLACEMENT EQUIPMENT PRODUCT LINES CONTRACTS TOTAL
----------- ----------- ------------------------ ------------ -------------- -------------- ----------
Merger transaction costs....................................... $ 11,399
Balances as of
November 27, 1993................... $ -- $ 6,3411,600 $ 5,058
Restructuring costs:
Severance and outplacement...................................-- $ -- $ 6,704 $ 8,304
Additions related to Aldus
acquisition......................... 14,618 20,784 10,778 14,957 11,046 72,183
Non-cash write offs................... -- -- (10,778) (14,957) -- (25,735)
Cash payments......................... (8,755) (10,836) -- -- (3,473) (23,064)
----------- ------------- ------------ -------------- ------- ----------
Balances as of
November 25, 1994................... 5,863 11,548 -- -- 14,277 31,688
Additions related to Frame
acquisition......................... 11,399 10,958 -- 1,346 9,612
Redundant equipment and intangibles.......................... 4,452 4,452 -- 5,664 32,473
Non-cash write offs................... -- Cancellation-- (4,452) -- (3,617) (8,069)
Cash payments......................... (12,204) (9,462) -- -- (5,336) (27,002)
Change in estimate.................... -- (3,432) -- -- 2,493 (939)
----------- ------------- ------------ -------------- ------- ----------
Balances as of
facility leases and other contracts.......... 5,664 262December 1, 1995.................... 5,058 9,612 -- 5,402-- 13,481 28,151
Change in estimate.................... (328) 948 -- -- 4,335 4,955
Non-cash write offs................... -- -- -- -- (2,525) (2,525)
Cash payments......................... (4,730) (10,560) -- -- (4,437) (19,727)
----------- ------------- ------------ -------------- ------- ----------
Balances as of
November 29, 1996................... $ -- $ -- $ -- $ -- $ 10,854 $ 10,854
----------- ------------- ------------ -------------- ------- ----------
----------- ------------- ------------ $ 32,473 $ 4,714 $ 7,687 $ 20,072
----------- ----------- ----------- ------------
----------- ----------- ----------- -------------------------- ------- ----------
The nature, timing,At November 29, 1996, the remaining accrued restructuring balance primarily
relates to lease and extentthird-party contract termination payments, resulting from
the planned closure of restructuring costs follow:
SEVERANCE AND OUTPLACEMENT
As a result ofduplicate offices in Europe and the merger, certain technical support, customer service,
distribution, and administrative functions were combined and reduced.
Restructuring included severance and outplacement charges related to
approximately 200 terminated employees. Affected employees had received
notification of their termination by November 8, 1995, and final assignmentsUnited States. These
payments are expected to be completed by mid-1996.
REDUNDANT EQUIPMENT AND INTANGIBLES
To facilitatecontinue through the operations of the Company, the combined organization
migrated to common management information systems, which resulted in a write-off
of the book value of the abandoned systems as well as other redundant equipment.
In addition, certain intangible assets that will have no benefit to the combined
company were written off. Redundant equipment was either disposed of during the
fourth quartercontract terms or written down to its estimated net realizable value.
58negotiated early
termination date, if applicable.
52
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)DATE)
NOTE 8. ACCRUED RESTRUCTURING COSTS (CONTINUED)
CANCELLATION OF FACILITY LEASES AND OTHER CONTRACTS
The Company has consolidated duplicate offices in Europe, Japan, Canada, and
the United States. Lease and third-party contract termination payments,
resulting from the planned closure of these facilities, are expected to continue
through the lease term or negotiated early termination date, if applicable.
ASSOCIATED WITH THE ACQUISITION OF ALDUS
On August 31, 1994, the Company merged with Aldus, described in "Note 2 --
Acquisitions," and initiated a plan to combine the operations of the two
companies. On this date, the Company recorded a $72.2 million charge to
operating expenses related to merger transaction and restructuring costs.
Merger transaction costs consisted principally of transaction fees for
investment bankers, attorneys, accountants, financial printing, and other
related charges. Restructuring costs included the elimination of redundant
information systems and equipment, severance and outplacement of terminated
employees, the write-off of certain assets related to product lines to be
divested or eliminated, and cancellation of certain contractual agreements.
Merger transaction and restructuring costs are summarized below:
PERIOD FROM
ACQUISITION TO
PROVISION NOVEMBER 25, 1994 ACCRUED
RECORDED AT -------------------- AS OF
ACQUISITION CASH NOVEMBER 25
DATE WRITE-OFFS PAYMENTS 1994
----------- --------- --------- ------------
Merger transaction costs....................................... $ 14,618 $ -- $ 8,755 $ 5,863
Restructuring costs:
Severance and outplacement................................... 20,784 -- 9,236 11,548
Redundant information systems and equipment.................. 10,778 10,778 -- --
Assets associated with duplicate product lines............... 14,957 14,957 -- --
Cancellation of facility leases and other contracts.......... 11,046 -- -- 11,046
----------- --------- --------- ------------
$ 72,183 $ 25,735 $ 17,991 $ 28,457
----------- --------- --------- ------------
----------- --------- --------- ------------
ACCRUED YEAR ENDED DECEMBER 1, 1995 ACCRUED
AS OF ----------------------------------- AS OF
NOV. 25 CASH CHANGE IN DEC. 1
1994 WRITE-OFFS PAYMENTS ESTIMATE 1995
--------- ----------- --------- ----------- ---------
Merger transaction costs................................. $ 5,863 $ -- $ 5,863 $ -- $ --
Restructuring costs:
Severance and outplacement............................. 11,548 -- 8,116 3,432 --
Cancellation of facility leases and other contracts.... 11,046 3,226 3,580 (2,743) 6,983
--------- ----------- --------- ----------- ---------
$ 28,457 $ 3,226 $ 17,559 $ 689 $ 6,983
--------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ---------
The nature, timing, and extent of restructuring costs follow:
SEVERANCE AND OUTPLACEMENT
As a result of the merger, certain technical support, customer service,
distribution, and administrative functions were combined and reduced.
Restructuring included severance and outplacement charges related to
approximately 500 terminated employees. Affected employees received notification
of their termination by September 9, 1994, and final assignments were completed
during 1995.
59
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 8. ACCRUED RESTRUCTURING COSTS (CONTINUED)
REDUNDANT INFORMATION SYSTEMS AND EQUIPMENT
To facilitate the operations of the Company, the combined organization
migrated to a common management information system, which resulted in the
write-off of the book value of approximately $10.8 million of the abandoned
systems. The sale or disposal of duplicate information systems and equipment was
completed in the fourth quarter of 1994.
DUPLICATE PRODUCT LINES
As a condition of the merger, the Company no longer (after January 1995)
sells and distributes FreeHand, the illustration program previously sold and
distributed by Aldus. In addition, PhotoStyler, an image editing software tool,
was discontinued in the fourth quarter of 1994, as the product competed with
certain existing products of the Company. The respective inventories and
capitalized software development costs and technologies of these duplicate
product lines, totaling approximately $15.0 million, were written off in the
fourth quarter of 1994.
CANCELLATION OF FACILITY LEASES AND OTHER CONTRACTS
The Company has consolidated duplicate offices in Europe, Japan, Canada, and
the United States. Lease and third-party contract termination payments,
resulting from the planned closure of these facilities, are expected to continue
through the lease term or negotiated early termination date, if applicable.
RESTRUCTURING OF FRAME'S OPERATIONS IN 1993
Due to lower than anticipated revenues experienced in the first three
quarters of 1993, Frame undertook certain restructuring measures primarily
related to reducing the size and scope of its operations and re-evaluating and
redirecting its product and distribution strategies. These actions resulted in
restructuring charges totaling $16.0 million. In addition, Frame incurred other
charges relating to the restructuring of approximately $9.8 million, which
consisted primarily of write-offs of capitalized software, obsolete inventory
and equipment, and the settlement of certain contingencies. Of the total
restructuring and other charges, $12.8 million resulted from the write-off of
assets, which occurred in 1993, and $13.0 million involved cash outflows, of
which $4.7 million were incurred in 1993.
During 1994, the results of the settlement of certain contingencies and
changes in Frame's foreign distribution in Japan were more favorable than
expected by approximately $2.2 million. However, these amounts were offset by
increased estimates of costs related to facilities previously vacated and
Frame's decision to curtail significantly its Irish operations, resulting in a
charge for termination costs, vacated facilities, and fixed asset write-offs. In
1994, Frame paid approximately $1.6 million in salary costs and approximately
$3.3 million related to the settlement of certain contingencies, changing its
foreign distribution in Japan, the relocation of its European headquarters,
lease payments for vacated facilities, and other charges.
During 1995, Frame made cash payments of $1.6 million and $0.2 million
related to the curtailment of its Irish operations and vacated leased
facilities, respectively. In addition, an analysis of its remaining accrued
restructuring expenses in the fourth quarter of 1995 indicated that
approximately $0.3 million represented excess reserves. This amount was reversed
and credited to "Merger transaction and restructuring costs" in the Consolidated
Statements of Income. As of December 1, 1995, $1.1 million remained accrued and
represented anticipated future cash outflows related to lease payments on
vacated facilities.
60
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 9. INCOME TAXES
Income before income taxes includes net income (loss) from foreign
operations of approximately $25.4 million, $19.2 million, $(8.7) million, and $12.7$(8.7) million for
the years ended November 29, 1996, December 1, 1995, and November 25, 1994, and November 26, 1993,
respectively.
The provision for income taxes consisted of the following:
YEARS ENDED
---------------------------------------
NOVEMBER 29 DECEMBER 1 NOVEMBER 25
NOVEMBER 261996 1995 1994
1993------------ ----------- ------------ ------------
Current:
United States federal................................................. $ 65,118 $ 21,466 $ 22,048
$ 13,413
Foreign............................................................... 12,290 18,418 8,336 8,849
State and local....................................................... 12,731 5,206 7,170
6,470------------ ----------- ------------ ------------
Total current........................................................... 90,139 45,090 37,554
28,732------------ ----------- ------------ ------------
Deferred:
United States federal................................................. (6,825) (6,305) (10,683)
(10,379)
Foreign............................................................... (780) (986) (1,785) 964
State and local....................................................... (1,815) 124 (1,895)
(200)------------ ----------- ------------ ------------
Total deferred.......................................................... (9,420) (7,167) (14,363)
(9,615)------------ ----------- ------------ ------------
Charge in lieu of taxes attributable to employee stock plans............ 10,828 32,445 14,418
11,234------------ ----------- ------------
------------$ 91,547 $ 70,368 $ 37,609
$ 30,351------------ ----------- ------------
------------ ----------- ------------ ------------
Total income tax expense differs from the expected tax expense (computed by
multiplying the United States federal statutory rate of approximately 35 percent
for 1996, 1995, 1994, and 19931994 to income before income taxes) as a result of the
following:
YEARS ENDED
---------------------------------------
NOVEMBER 29 DECEMBER 1 NOVEMBER 25
NOVEMBER 261996 1995 1994
1993------------ ----------- ------------ ------------
Computed "expected" tax expense......................................... $ 85,689 $ 57,349 $ 18,531 $ 25,325
State tax expense, net of federal benefit............................... 9,819 6,442 3,429 5,171
Nondeductible merger costs.............................................. -- 4,078 5,209 --
Nondeductible write-off of acquired in-process research and
development............................................................development........................................................... 5,310 5,244 5,475
489
Nondeductible goodwill.................................................. 772 3,689 1,741
--
Tax-exempt income....................................................... (3,304) (3,532) -- --
Tax credits............................................................. (4,912) (3,904) (1,755) (3,433)
Foreign losses, not benefited........................................... -- 2,706 3,550 2,038
Foreign tax rate differential........................................... (4,003) 1,130 2,027
--
Other, net.............................................................. 2,176 (2,834) (598)
761------------ ----------- ------------
------------$ 91,547 $ 70,368 $ 37,609
$ 30,351------------ ----------- ------------
------------ ----------- ------------ ------------
6153
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)DATE)
NOTE 9.8. INCOME TAXES (CONTINUED)
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of 19951996 and 19941995 are
presented below:
NOVEMBER 29 DECEMBER 1
NOVEMBER 251996 1995
1994------------ ----------- ------------
Deferred tax assets:
Acquired technology.................................................................. $ 4,75012,037 $ 3,3064,750
Reserves and deferred revenue........................................................ 24,615 25,025
24,501
Depreciation.........................................................................Depreciation and amortization........................................................ 7,662 3,544 2,438
Net operating loss carryforwards..................................................... 4,278 10,625 5,130
Tax credits and other carryforwards.................................................. 1,614 5,702
12,486
Other................................................................................ 5,800 3,468
2,278------------ ----------- ------------
Total gross deferred tax assets.................................................... 56,006 53,114 50,139
Deferred tax asset valuation allowance............................................. (5,950) (10,204)
(11,611)------------ ----------- ------------
Total deferred tax assets.......................................................... 50,056 42,910
38,528------------ ----------- ------------
Deferred tax liabilities:
Basis difference of acquired assets.................................................. (113) (694)
Capitalized costs.................................................................... (29) (2,315)
Investments.......................................................................... (22,888) (12,860)
--
Other................................................................................ (1,068) (986)(1,943) (1,210)
------------ ----------- ------------
Total deferred tax liabilities..................................................... (24,831) (14,070)
(3,995)------------ ----------- ------------
Net deferred tax assets................................................................ $ 25,225 $ 28,840
$ 34,533------------ -----------
------------ ----------- ------------
As of December 1, 1995,November 29, 1996, the Company had United States federal net operating
loss carryforwards of approximately $17.0 million, which expire in 2008, and tax credit carryforwards of
approximately $5.0$1.6 million, which expire in years 1997 through 2009. The
carryforwards are attributable to the premerger years of Aldus
and Frame and are subject
to certain limitations on usage. The Company also has foreign operating loss
carryovers in various jurisdictions of approximately $16.0$8.2 million with various
expiration dates. For financial reporting purposes, a valuation allowance has
been established to fully offset the deferred tax assets related to foreign
operating losses due to uncertainties in utilizing these losses.losses and certain
other deferred tax assets relating to foreign operations. 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.
NOTE 10. EMPLOYEE9. BENEFIT PLANS
STOCK OPTION PLAN
As of December 1, 1995, the Company had reserved 20,000,000 shares of commonPLANS
The employee stock for issuance under its Stock Option Plan.
Each option assumed by Adobe under the merger agreements with Frame and
Aldus will continue to have, and be subject to, the same terms and conditions
set forth in the relevant Stock Option Plan after, in the case of Frame,
application of the exchange ratio to the number of shares and the exercise price
of each option. The Frame plan provided for the granting of stock options to
employees, consultants, and officers under terms and conditions determined by
Frame's Board of Directors at the time of the grant. The Aldus plan provided for
the granting of stock options to employees and officers at the fair market value
at the grant date. Options under the Aldus plan vest at 20 percent after the
first year and ratably each month for the next four years.
62
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Adobe plan provides for the granting of stock options to
employees and officers at the fair market value of the Company's common stock at
the grant date. Options generally vest over three years: 25 percent after the first year and
the remainder vesting each month for the next two years soratably thereafter such that the options
are 50 percent and 100 percent are vested after the
second and third year, and fully vested after the third
year. All options have a five-, seven-, or ten-year term. Stockrespectively. The option activity
for 1995, 1994, and 1993 is presented below.
OPTIONS OUTSTANDING
OPTIONS ------------------------------
AVAILABLE NUMBER OF
FOR GRANT SHARES PRICE PER SHARE
------------ ------------- ---------------
Balances as of November 27, 1992................................... 3,419,085 10,361,204 $ 0.02-47.25
Additional shares reserved......................................... 5,224,880 -- --
Options granted.................................................... (4,858,298) 4,858,298 2.17-33.75
Options exercised.................................................. -- (1,592,587) 0.02-27.40
Options repriced................................................... 437,320 (437,320) 12.98-43.27
Options canceled................................................... 1,255,101 (1,255,101) 0.58-43.27
------------ ------------- ---------------
Balances as of November 26, 1993................................... 5,478,088 11,934,494 0.06-47.25
Additional shares reserved......................................... 299,000 -- --
Options granted.................................................... (2,678,550) 2,678,550 3.44-36.38
Options exercised.................................................. -- (2,627,318) 0.06-33.75
Options canceled................................................... 979,842 (979,842) 0.58-43.27
Adjustment for change in Aldus' fiscal year-end.................... 142,314 (51,421) --
Aldus options retired.............................................. (968,713) -- --
------------ ------------- ---------------
Balances as of November 25, 1994................................... 3,251,981 10,954,463 0.25-47.25
Additional shares reserved......................................... 338,000 -- --
Options granted.................................................... (2,351,568) 2,351,568 3.45-67.00
Options exercised.................................................. -- (2,967,042) 0.25-50.75
Options canceled................................................... 430,195 (430,195) 0.57-58.25
Adjustment for change in Frame's fiscal year-end................... (5,688) 18,873 --
Frame options retired.............................................. (228,903) -- --
Aldus options retired.............................................. (65,451) -- --
------------ ------------- ---------------
Balances as of December 1, 1995.................................... 1,368,566 9,927,667 $ 2.60-67.00
------------ ------------- ---------------
------------ ------------- ---------------
Of the options outstanding, 5,573,788 were exercisable as of December 1,
1995.
RESTRICTED STOCK OPTION PLANterms range from five to ten
years.
As of December 1, 1995,November 29, 1996, the Company had reserved 500,000 shares of common
stock for issusance under its RestrictedOutside Directors Stock Option Plan, which
provides for the granting of nonqualified stock options to nonemployee
directors and
consultants.directors. Option grants are limited to 10,000 shares per person in each fiscal
year except for a new nonemployee director who may be granted 15,000 shares upon
joining 63the Board. All
54
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)DATE)
NOTE 10. EMPLOYEE9. BENEFIT PLANS (CONTINUED)
the Board. All
options are immediately exercisable within a ten-year term. Options generally
vest over three years: 25 percent in each of the first two years and 50 percent
in the third year.
On March 22, 1996, the Company offered its employees a stock option
repricing program which allowed the employees to exchange on a two for three
share basis any options priced above the March 29, 1996 closing price of Adobe
stock, which was $32.25. As a result, approximately 1,252,000 options were
surrendered by eligible employees for approximately 834,000 repriced options.
The repriced options were not exerciseable until November 1, 1996.
Stock option activity for 1996, 1995 and 1994 and 1993 is as follows:presented in the following
table:
OPTIONS OUTSTANDING
OPTIONS ------------------------------------------------------
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES PRICE PER SHARE
--------- --------- -------------------------- ------------ --------------
Balances as of November 27, 1992......................................... 32,500 140,00026, 1993...................................... 5,490,588 12,089,494 $ 4.13-27.00
Options granted.......................................................... (40,000) 40,000 23.94
Options exercised........................................................ -- (5,000) 11.13
Options canceled......................................................... 20,000 (20,000) 21.56-27.00
--------- --------- ---------------
Balances as of November 26, 1993......................................... 12,500 155,000 4.13-27.000.06-47.25
Additional shares reserved............................................... 50,000reserved.......................................... 349,000 -- --
Options granted.......................................................... (45,000) 45,000 21.88-31.75
--------- --------- ---------------granted..................................................... (2,723,550) 2,723,550 3.44-36.38
Options exercised................................................... -- (2,627,318) 0.06-33.75
Options cancelled................................................... 979,842 (979,842) 0.58-43.27
Adjustment for change in Aldus' fiscal year-end..................... 142,314 (51,421) --
Aldus options retired............................................... (968,713) -- --
----------- ------------ --------------
Balances as of November 25, 1994......................................... 17,500 200,000 4.13-31.751994...................................... 3,269,481 11,154,463 0.25-47.25
Additional shares reserved............................................... 250,000reserved.......................................... 588,000 -- --
Options granted.......................................................... (40,000) 40,000 48.25granted..................................................... (2,391,568) 2,391,568 3.45-67.00
Options exercised........................................................exercised................................................... -- (41,875) 11.13-27.00
--------- --------- ---------------(3,008,917) 0.25-50.75
Options cancelled................................................... 430,195 (430,195) 0.57-58.25
Adjustment for change in Frame's fiscal year-end.................... (5,688) 18,873 --
Frame options retired............................................... (228,903) -- --
Aldus options retired............................................... (65,451) -- --
----------- ------------ --------------
Balances as of December 1, 1995.......................................... 227,500 198,1251995....................................... 1,596,066 10,125,792 2.60-67.00
Additional shares reserved.......................................... 3,600,000 -- --
Options granted..................................................... (2,670,673) 2,670,673 30.88-64.13
Options exercised................................................... -- (1,470,762) 2.60-50.75
Options cancelled................................................... 2,028,515 (2,028,515) 5.77-67.00
Frame options retired............................................... (336,467) -- --
Aldus options retired............................................... (22,252) -- --
----------- ------------ --------------
Balances as of November 29, 1996...................................... 4,195,189 9,297,188 $ 4.13-48.25
--------- --------- ---------------
--------- --------- ---------------3.28-67.00
----------- ------------ --------------
----------- ------------ --------------
55
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
NOTE 9. BENEFIT PLANS (CONTINUED)
Of the options outstanding for the stock option plans, 5,867,122 were
exercisable as of November 29, 1996. All options outstanding were exercisable as
of December 1, 1995November 29, 1996 under the Restricted Stock Option Plan. In addition, Adobe assumed 65,000 outstanding
options under the Frame Director's Stock Option Plan and 95,375 outstanding
options under the Aldus Restricted Stock Option Plan. All such assumed options
had been exercised as of December 1, 1995 for an aggregate exercise price of
$6.1 million.described below.
PERFORMANCE AND RESTRICTED STOCK PLAN
The Performance and Restricted Stock Plan provides for the granting of
restricted stock and/or performance units to officers and key employees. As of
December 1, 1995,November 29, 1996, the Company had reserved 1,500,000 shares of its common stock
for issuance under this plan. Restricted shares issued under this plan generally
vest annually over three years but are considered outstanding at the time of
grant, as the shareholders are entitled to dividends and voting rights. As of
December
1, 1995, 836,090November 29, 1996, 112,742 shares were outstanding under this plan, of which 167,002 wereand not yet vested.
Performance units issued under this plan entitle the recipient to receive
shares or cash upon completion of the performance period subject to attaining
identified performance goals. Performance units are generally earned over a
three-year period and shares earned are issued at the end of the three-year
period. The ultimate value of the performance units is dependent upon the
Company's revenue and operating margin growth (as defined by the Plan) during
the three-year performance period adjusted by a factor determined by comparing
the growth in the Company's stock price to an index of comparable stocks. The
projected value of these units is accrued by the Company and charged to expense
over the three-year performance period. As of November 29, 1996, and December 1,
1995, performance units for 94,745 and 75,420 shares were outstanding,
respectively, and $(0.2) million and $2.5 million was charged to expense for this
plan in 1995.1996
and 1995, respectively. There were no performance units outstanding during the
yearsyear ended November 25, 1994 and November 26, 1993.1994.
EMPLOYEE STOCK PURCHASE PLAN
Under the terms of the Company's Employee Stock Purchase Plan, eligible
employee participants may purchase shares of the Company's common stock
semiannually at 85 percent of the market price, 64
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10. EMPLOYEE BENEFIT PLANS (CONTINUED)
on either the purchase date or
the offering date, whichever price is lower. As of December 1, 1995,November 29, 1996, the
Company had reserved 4,000,000 shares of its common stock for issuance under
this plan and 1,490,448932,404 shares remain available for future issuance.
PRETAX SAVINGS PLAN
In 1987, the Company 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 the Company's United States employees. Under the
plan, eligible employees may contribute up to 18 percent of their pretax salary,
subject to certain limitations. There were 2,382 employees under the planThe Company matches approximately 25% of
employee contributions and contributed approximately $1.6 million, $1.2 million,
and $0.7 million in 1996, 1995, and 841 employees under the plan in 1994. Commencing in 1992, the Company
matched a portion of employee contributions. Company matching1994, respectively. Matching contributions
which
can be terminated at the Company's discretion, were $1.2 million, $0.7
million, and $0.6 million in 1995, 1994, and 1993, respectively.discretion.
56
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
NOTE 11.10. CAPITAL STOCK
SHAREHOLDER RIGHTS PLAN
The Company's Shareholder Rights Plan is intended to protect shareholders
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 its common stock held as of July 24, 1990,
and on each share of common stock issued by the Company thereafter. Each right
entitles the registered holder to purchase from the Company a share of common
stock at $115. The rights become exercisable in certain circumstances including
upon an entity acquiring or announcing the following circumstances:
- The rights become exercisable ten days after a public announcement by
another entity that it has acquired beneficial ownership of 20 percent or
more of the shares (and that is without the approval of the Board of
Directors) or, if earlier, a public announcement of another entity's
intention to commence a tender offer to acquire beneficial
ownership of 20 percent or more of the shares.
- The rights become exercisable if another entity engages in certain
self-dealing transactions withCompany's common stock without the
approval of the Board of Directors or upon the Company or becomes the beneficial owner
of 20 percent or more of the shares.
- The rights become exercisable if the Company isbeing acquired by any
person in a merger or business combination transaction, or if 50 percent or more of
the Company's assets or earnings powers are being sold to another entity.transaction. The rights are
redeemable by the Company prior to exercise at $0.01 per right and expire on
July 24, 2000.
PUT WARRANTS
In a series of private placements in 19941996 and 1993,1994, the Company sold put
warrants entitling the holder of each warrant to sell one share of common stock
to the Company at a specified price. The Company received $719,000 and $694,000$0.7 million for the
sale of put warrants in 1994 and 1993, respectively.1994. The Company's $6.9$71.3 million potential buyback
obligation, as of November 26,
1993,29, 1996, was removed from shareholders' equity and
recorded as put warrants. At the
prevailing market prices for the Company's common stock, there was no dilutive
effect on earnings per share in 1993. No put warrants were outstanding as of December 1,
19951995. The approximately 2.3 million put warrants outstanding at November 29,
1996 expire on various dates through April 1997 and November 25, 1994.
65
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)have exercise prices ranging
from $29.70 to $32.41 per share, with an average exercise price of $31.29 per
share.
NOTE 12.11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has operating leases for its corporate headquarters, field sales
offices and certain office equipment that expire at various dates through 2015.
Rent expense for these leases aggregated $18.3 million, $21.0 million, and $16.9
million during 1996, 1995, and $18.7
million during 1995, 1994, and 1993, respectively. As of December 1, 1995,November 29, 1996,
future minimum lease payments under noncancelable operating leases are as
follows: 1996 -- $16.71997--$17.2 million; 1997 -- $9.01998--$13.6 million; 1998 -- $7.41999--$10.3 million;
1999
- -- $4.72000--$8.0 million; 2000 -- $2.82001--$6.9 million; and $18.0$14.3 million, thereafter.
REAL ESTATE DEVELOPMENT AGREEMENT
InDuring 1994, the Company entered into a real estate development agreement
forand an operating lease agreement in connection with the construction of an
office facilityfacility. In August 1996, the construction was completed and in 1996 will enter into anthe
operating lease agreement for this facility.commenced. The Company will have the option to purchase the
facility at the end of the lease term. In the event the Company chooses not to
exercise this option, the Company is obligated to arrange for the sale of the
facility to an unrelated party and is required to pay the lessor any difference
between the net sales proceeds and the lessor's net investment in the facility,
in an amount not to exceed that which would preclude classification of the lease
as an operating lease, approximately $57.3 million. During the construction
period, the Company was required to pledge certain interest bearing intruments
to the lessor as collateral to secure the performance of its obligations under
the lease. During 1996, the Company deposited approximately $30.5 million, and
as of November 29, 1996, the Company's
57
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
deposits under this agreement totaled approximately $66.1 million in United
States government treasury notes and money market mutual funds. These deposits
are included in "Other assets" in the Consolidated Balance Sheets.
REAL ESTATE DEVELOPMENT AGREEMENT
During the third quarter of 1996, the Company exercised its option under the
development agreement to begin a second phase of development for an additional
office facility. In August 1996, the Company entered into a construction
agreement and an operating lease agreement for this facility. The operating
lease will commence on completion of construction in 1998. The Company will have
the option to purchase the facility at the end of the lease term. In the event
the Company chooses not to exercise this option, the Company is obligated to
arrange for the sale of the facility to an unrelated party and is required to
pay the lessor any difference between the net sales proceeds and the lessor's
net investment in the facility, in an amount not to exceed that which iswould
preclude classification of the lease as an operating lease, approximately $52.0$64.3
million. The Company also is required, periodically during the construction
period, to deposit funds with the lessor as an interest bearing security deposit
to secure the performance of its obligations under the lease, and aslease. During the second
half of December 1, 1995,1996, the Company had deposited approximately $35.6 million$3.3 million. These deposits
are included in United States government treasury notes and money market mutual funds."Other assets" in the Consolidated Balance Sheets.
ROYALTIES
The Company has certain royalty commitments associated with the shipment and
licensing of certain products. While royalty expense is generally based on a
dollar amount per unit shipped, ranging from $0.05$0.005 to $40.83, certain royalties
are based on a percentage, ranging from 0.05 percent to 50 percent, of the
underlying revenue. Royalty expense was approximately $19.8 million, $23.1
million, $35.2
million, and $32.8$35.2 million for the years ended November 29, 1996, December 1,
1995, and November 25, 1994, and November 26, 1993, respectively.
LEGAL ACTIONS
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and believes that
the ultimate outcome of these actions will not have a material effect on the
Company's financial position and results of operations.
66
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 13.12. TRANSACTIONS WITH AFFILIATE
The Company holds a 1617 percent equity interest in McQueen Holdings Limited
("McQueen") and accounts for the investment at cost. During 1994, the Company
entered into various agreements with McQueen, whereby the Company contracted
with McQueen to perform product localization and technical support functions and
to provide printing, assembly, and warehousing services, and has agreed to
guarantee obligations under operating leases for certain facilities utilized by
McQueen and to guarantee a certain level of business between the Company and
McQueen. The remaining aggregate contingent liability for nonpayment of rent,
through September 1999, for facilities occupied by McQueen was approximately
$1.8 million, andservices. Adobe makes minimum
annual payments Adobe will make to McQueen for certain services are approximately $4.6 million andwhich amounted to $4.8 million
in 1996 and 1997,
respectively.fiscal 1996. Purchases from McQueen amounted to $34.3 million, $23.6 million,
and $13.0 million during 1996, 1995, and $12.6 million during 1995, 1994, and 1993, respectively.
58
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
NOTE 14.13. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's cash equivalents, short-term investments, restricted funds,
put options, and investments inmarketable equity securities that are free of trading restrictions or
that will become free of trading restrictions during the next 12 months are carried at fair value, based
on quoted market prices for these or similar investments. (See Note 3.)
The Company's investment in equity securities which are subject to trading
restrictions are carried at cost, which aggregates $4.4 million. The fair value
of these securities as of December 1, 1995, based on quoted market prices, was
$125.9 million. These investments are recorded as equity securities in other
assets.
The Company's majority interest in a limited partnership,Adobe Ventures LP, accounted for using
the equity method, is carried at $18.5$30.7 million as partwhich is believed to approximate
the fair value of equity
securitiesunderlying investments in other assets.technology companies. Most of the
technology companies in which the limited partnership invests are not publicly
traded, and therefore there is no established market for these investments. One investmentAs
such, these investments are valued based on estimates made by the management of
Adobe Ventures LP. For investments of the limited partnership isthat are publicly
traded, and the fair value of this investment isthe investments are based on quoted market price.prices, and
mark-to-market adjustments are included in investment income.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk are primarily cash, cash equivalents, short-term investments, and
accounts receivable. The Company's investment portfolio consists of
investment-grade securities diversified among security types, industries, and
issuers. The Company's investments are managed by recognized financial
institutions that follow the Company's investment policy. The Company's policy
limits the amount of credit exposure in any one issue, and the Company believes
no significant concentration of credit risk exists with respect to these
investments.
Credit risk in receivables is limited to OEMs, and to dealers and
distributors of hardware and software products to the retail market. The Company
adopts credit policies and standards to keep pace with the evolving software
industry. Management believes that any risk of accounting loss is significantly
reduced due to the diversity of its products, end users, and geographic sales
areas. The Company performs ongoing credit evaluations of its customers'
financial condition and requires letters of credit or other guarantees, whenever
deemed necessary.
67
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 14. FINANCIAL INSTRUMENTS (CONTINUED)
INDUSTRY SEGMENT
Adobe and its subsidiaries operate in one dominant industry segment. The
Company is engaged principally in the design, development, manufacture, and
licensing of computer software. No customer accounted for more than 10 percent
of the Company's total revenue in 1996, 1995 1994, or 1993.1994.
59
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
NOTE 15. INDUSTRY SEGMENT REPORTING AND14. FOREIGN OPERATIONS
The Americas operations include revenue and results of operations in North
America, South America, Mexico, and Latin America, as well as licensing revenue
recognized on a worldwide basis. Licensing revenue is not available on a
geographic basis, because the source of licensing revenue is known only by the
OEMs' headquarters, and not necessarily by the geographic region providing the
revenue stream to the OEMs. Accordingly, all licensing revenue is included in
the Americas. Substantially all of the merger transaction and restructuring
costs and write-off of in-process research and development costs were incurred
in the Americas and therefore have been charged against the Americas operating
income.
European operations primarily include subsidiaries in the Netherlands, the
United Kingdom, France, Germany, and Sweden, while Pacific Rim operations
include subsidiaries in Japan and Australia. Transfers between subsidiaries are
accounted for at amounts that are generally above cost and consistent with rules
and regulations of governing tax authorities. Such transfers are eliminated in
the consolidated financial statements. Identifiable assets are those assets that
can be directly associated with a particular geographic area and subsidiary.
Geographic information for each of the years in the three-year period ended
December 1, 1995November 29, 1996, is presented below.below:
YEARS ENDED
-------------------------------------------------------------------------------
NOVEMBER 29 DECEMBER 1 NOVEMBER 25
NOVEMBER 261996 1995 1994
1993
------------ ----------------------- ------------
Revenue:
The Americas.....................................North America......................................................... $ 526,251 $ 533,332 $ 494,525
$ 434,111
Europe...........................................Europe................................................................ 134,879 133,982 124,283
118,859
Pacific Rim......................................Japan, Asia-Pacific, and Latin America................................ 176,490 107,357 72,036
51,495
Eliminations.....................................Eliminations.......................................................... (51,057) (12,332) (15,227)
(24,362)
------------ ----------- ------------
------------$ 786,563 $ 762,339 $ 675,617
$ 580,103------------ ----------- ------------
------------ ------------
------------ ----------------------- ------------
Operating income:
The Americas.....................................North America......................................................... $ 31,186 $ 26,446 $ 7,991
$ 31,084
Europe...........................................Europe................................................................ 16,408 37,319 1,818
21,685
Pacific Rim......................................Japan, Asia-Pacific, and Latin America................................ 103,002 70,416 32,745
21,645
Eliminations.....................................Eliminations.......................................................... (3,810) 390 (40)
(15,880)
------------ ----------- ------------
------------$ 146,786 $ 134,571 $ 42,514
$ 58,534------------ ----------- ------------
------------ ------------
------------ ----------------------- ------------
Identifiable assets:
The Americas.....................................North America......................................................... $1,024,005 $ 944,484 $ 670,650
$ 672,961
Europe...........................................Europe................................................................ 69,458 64,807 60,375
50,662
Pacific Rim......................................Japan, Asia-Pacific, and Latin America................................ 22,102 14,258 18,633
9,885
Eliminations.....................................Eliminations.......................................................... (103,280) (138,817) (39,658)
(135,812)
------------ ----------- ------------
------------$1,012,285 $ 884,732 $ 710,000
$ 597,696------------ ----------- ------------
------------ ------------
------------ ----------------------- ------------
6860
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Frame Technology Corporation
We have audited the consolidated balance sheetstatement of operations, shareholder's
equity, and cash flows of Frame Technology Corporation as of December 31, 1994 and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the two years in
the period then ended
(not presented separately herein). These financial statements are the
responsibility of Frame's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial positionresults of operations
and cash flows of Frame Technology Corporation at December 31, 1994, and the consolidated results
of its operations and its cash flows for each of the two years in the period
then ended, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
January 30, 1995
69
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Adobe Systems Incorporated
We have audited the balance sheet of Aldus Corporation as of December 31,
1993, and the related consolidated statements of income, shareholders' equity,
and cash flows for the year then ended (not presented separately herein). These
financial statements are the responsibility of Aldus' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Aldus
Corporation at December 31, 1993, and the consolidated results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Seattle, Washington
January 28, 1994
7061
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Frame Technology Corporation
We have audited the supplemental consolidated balance sheetstatements of operations,
shareholder's equity, and cash flows of Frame Technology Corporation (formed as
a result of the consolidation of Frame Technology Corporation and Mastersoft,
Inc.) as offor the year ended December 31, 1994 and the
related supplemental consolidated statements of operations, shareholders'
equity, and cash flows for each of the two years in the period then ended (not presented separately herein).
The supplemental consolidated financial statements give retroactive effect to
the merger of Frame Technology Corporation and Mastersoft, Inc. on July 28,
1995, which has been accounted for using the pooling of interests method as
described in the notes to the supplemental consolidated financial statements.
These supplemental financial statements are the responsibility of the management of Frame
Technology Corporation. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 supplemental consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
positionresults of
operations and cash flows of Frame Technology Corporation at December 31, 1994 and the
consolidated results of its operations and its cash flows for each of the two
years in the period then ended,
after giving effect to the merger of Mastersoft, Inc. as described in the notes
to the supplemental consolidated financial statements, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
May 31, 1995
except for Note 13, as to which
the date is June 22, 1995
7162
FINANCIAL STATEMENT SCHEDULE
As required under Item 8. Financial Statements and Supplementary Data, the
financial statement schedule of the Company is provided in this separate
section. The financial statement schedule included in this section is as
follows:
SCHEDULE
NUMBER FINANCIAL STATEMENT SCHEDULE DESCRIPTION
- -------------- ------------------------------------------------------------------------------ ----------------------------------------------------------------------------
Schedule II Valuation and Qualifying Accounts
7263
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
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF OPERATING OTHER END OF
OF PERIOD EXPENSES ACCOUNTS (1)ACCOUNTS(1) DEDUCTIONS PERIOD
----------- ----------- ------------- ----------- ----------------------- ------------ ------------ ------------ ------------
Allowance for doubtful accounts:
Year Ended:
November 29, 1996..................................... $ 3,698 $ 1,927 $ -- $ 429 $ 5,196
December 1, 1995................................1995...................................... $ 3,893 $ 2,038 $ (423)(423 ) $ 1,810 $ 3,698
November 25, 1994...............................1994..................................... 2,516 1,963 -- 586 3,893
November 26, 1993............................... 2,202 1,842 -- 1,528 2,516586 3,893
- ------------------------
Deductions related to the allowance for doubtful accounts, represent amounts
written off against the allowance.
- ------------------------
(1) The $423,000$423 reduction in 1995 relectsreflects the effect of including Frame allowance
activity for the month ended December 31, 1994 in the years ended November
25, 1994 and December 1, 1995. See Note 2 of Notes to Consolidated Financial
Statements.
See accompanying independent auditors' report.
73Independent Auditors' Report.
64
EXHIBITS
As required under Item 14. 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
NUMBER EXHIBIT DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------
3.2.8 Restated Bylaws
10.35 Form of Executive Severance and Change of Control Agreement
11 Computation of Earnings per Common Share
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
23.1 Consent of Ernst & Young LLP, Independent Auditors for Frame Technology Corporation
23.2 Consent of Ernst & Young LLP, Independent Auditors for Aldus Corporation
27 Financial Data Schedule
7465