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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) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 29, 1996
OR
/ / 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.)
345 PARK AVENUE, SAN JOSE, CALIFORNIA 95110-2704
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (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 / /
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 27, 1996 was $2,604,622,692.
The number of shares outstanding of the registrant's common stock as of
December 27, 1996 was 71,680,962.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 3, 1997 to be
delivered to shareholders in connection with the Notice of Annual Meeting of
Shareholders to be held on April 9, 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.................................................................................... 3
Item 2. Properties.................................................................................. 10
Item 3. Legal Proceedings........................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......................................... 12
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters........................ 13
Item 6. Selected Financial Data..................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 15
Item 8. Financial Statements and Supplemental Data.................................................. 27
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure........ 28
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 29
Item 11. Executive Compensation...................................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 33
Item 13. Certain Relationships and Related Transactions.............................................. 34
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............................. 35
Signatures.............................................................................................. 37
Summary of Trademarks................................................................................... 38
Financial Statements.................................................................................... 39
Financial Statement Schedule............................................................................ 63
Exhibits................................................................................................ 65
2
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" or "Adobe") develops, markets, and
supports computer software products and technologies that enable users to
express and use information across all print and electronic 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 345
Park Avenue, San Jose, California 95110-2704. Its telephone number is
408-536-6000. The Company also maintains a World Wide Web site at
HTTP://WWW.ADOBE.COM.
PRODUCTS
Twelve years ago, Adobe and Aldus developed the software that initiated
desktop publishing. 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 companies' 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, 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 "Supra"--the innovative new production printing architecture,
code-named Supra, integrates Adobe PostScript and the Portable Document
Format ("PDF"). This architecture has been endorsed by the printing industry
as the new standard for high-performance prepress and production printing
environments.
GRAPHICS PRODUCTS
Adobe Photoshop--the standard in photo design and production 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 professionals around the world.
Adobe Illustrator--a leading illustration and page design tool for print,
the Web, and multimedia used by illustrators and Web designers.
Adobe Premiere--the industry standard for digital video editing used in
multimedia and video production.
Adobe After Effects--the industry standard for 2D animation, motion
compositing, and special effects used in multimedia, broadcast and film
production.
PUBLISHING PRODUCTS
Adobe FrameMaker--a widely used application for authoring and publishing
long and complex 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 documents
of any kind on corporate intranets, the Web, or CD-ROM. Acrobat software
includes everything needed to create and distribute rich electronic
documents that can be viewed seamlessly within the leading Web browsers.
Adobe PageMill--the tools users need to create full-featured Web pages
without having to know HTML or URLs. It's a simple drag-and-drop operation,
from creating or importing text and images to adding audio, video, and
animation.
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Adobe SiteMill--for advanced Web page authoring and site management.
Provides the editing features of Adobe PageMill and preserves links no
matter how pages and files are renamed or how site is restructured.
CONSUMER PRODUCTS
Adobe PhotoDeluxe--the software that allows consumers and small businesses
to easily modify and personalize their photos.
COMPETITION
The markets for Adobe 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.
PRINTING 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 individual products compete favorably on the basis of
features and functions, installed base, ease of use, product reliability, and
price and performance characteristics. In 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 and publishing market, the Company faces competition from
large-scale electronic publishing systems developed by several companies,
including Interleaf. Also, companies that develop word-processing software such
as Microsoft and Corel are incorporating desktop publishing features into their
products. Participants in this market compete based on the quality and features
of their products, the level of customization and integration with other
publishing system components, the number of hardware platforms supported,
service, and price. The Company believes it can successfully compete in this
market
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due to the quality and features of the FrameMaker product, its extensive
application programming interface, the large number of platforms supported, and
other factors.
In the typeface software market, the Company faces competition from other
vendors of high-quality typeface software, including Agfa, Linotype, and
Monotype. Participants in this market compete based on the variety,
availability, and price of their offerings. The Company believes it can compete
successfully in this market due to its large library, global presence,
electronic delivery options, and competitive pricing. In the lower end of the
market, computer 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.
INTERNET PRODUCTS
The Internet is a new 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 Macromedia, Microsoft, Netscape, and Novell.
CONSUMER PRODUCTS
The consumer software market is characterized by extreme competition, price
sensitivity, brand awareness, and strength in retail distribution. Adobe faces
direct and indirect competition in these markets from a number of companies,
including Microsoft and Broderbund. The Company believes it will compete
successfully due to its strong relationships with critical OEMs and market
influencers and its ability to leverage core competencies from established
products.
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.--based in Tokyo and established in
1989--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.
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
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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 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 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
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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
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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, the Company's research and development expenses, including costs related
to contract development, were $152.9 million, $138.6 million, and $113.8
million, respectively. During each of the years 1996, 1995, and 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, and $15.5 million was
expensed, respectively.
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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 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 27, 1996, Adobe employed 2,266 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.
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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 2015. The annual base rent expense
for all facilities (including operating expenses, property taxes, and
assessments) is currently $22.6 million and is subject to annual adjustment.
APPROXIMATE
SQUARE
LOCATION FOOTAGE USE
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North America: 354,000 Research, product development, sales, marketing and administration
345 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
Seattle, Washington
U.S.A.
Europe: 22,000 Sales, marketing, and administration
Five 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.
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ITEM 3. LEGAL PROCEEDINGS
Quantel Limited, a U.K. corporation, 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. 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, 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. The 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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 27, 1996, there were 2,238 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 1995:
First Quarter.................................................................... $ 36.25 $ 27.25 $ 0.05
Second Quarter................................................................... 58.75 34.25 0.05
Third Quarter.................................................................... 66.50 44.38 0.05
Fourth Quarter................................................................... 70.25 45.00 0.05
Fiscal 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.
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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
1996 1995 1994 1993 1992
------------ ---------- ---------- ---------- ----------
Operations:
Revenue.......................................... $ 786,563 $ 762,339 $ 675,617 $ 580,103 $ 520,031
Merger transaction and restructuring costs....... 4,955 31,534 72,183 25,800 --
Income before income taxes....................... 244,824 163,853 52,946 72,358 89,981
Net income(1).................................... 153,277 93,485 15,337 42,007 57,664
Net income per share(1).......................... 2.04 1.26 0.22 0.62 0.84
Dividends declared per common share(2)........... 0.20 0.20 0.20 0.20 0.16
Financial position:
Cash and short-term investments.................. 564,116 516,040 444,768 344,714 275,522
Working capital.................................. 506,092 506,472 402,837 347,683 300,180
Total assets..................................... 1,012,285 884,732 710,000 597,696 525,849
Shareholders' equity............................. 706,514 698,417 514,315 457,216 418,771
Additional data:
Worldwide employees.............................. 2,222 2,322 2,055 2,500 2,407
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(1) Includes $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-process research and development
costs, and $87.7 million during 1994 in connection with the acquisition of
Aldus and the write-off of acquired in-process research and development
costs. (For additional information, see Note 2 and Note 7 of Notes to
Consolidated Financial Statements.)
(2) 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION (PRESENTED IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO.
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K
CONTAINS FORWARD-LOOKING STATEMENTS 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.
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 North America, Europe, Japan,
Asia-Pacific and Latin America.
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, Inc. ("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.
There were no significant transactions among the Company, Frame, and Aldus
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 reported revenue
and net income of $172.2 million and $5.1 million, respectively, for the
nine-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.
In January 1996, the Company divested its prepress applications product
business to a newly established company, Luminous Corporation ("Luminous").
Under the terms of the agreement, Luminous continued to develop, market, and
distribute Adobe's prepress application products and Adobe maintained ownership
of certain core technologies for Adobe prepress products. Revenue from the
prepress application business unit was approximately $10.4 million in fiscal
year 1995. In 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
--------- ------------- --------- ------------- ---------
Total revenue..................................................... $ 786.6 3% $ 762.3 13% $ 675.6
Revenue growth in 1996 and 1995 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. 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, or 1994.
1996 CHANGE 1995 CHANGE 1994
----------- ------------- ----------- ------------- -----------
Product group revenue--Licensing........................... $ 196.7 7% $ 183.4 17% $ 156.7
Percentage of total revenue................................ 25.0% 24.1% 23.2%
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 as well as printers that work with
Japanese, Chinese, and Korean 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
1996 and 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 1996 and 1995, this trend
was offset by increased demand for CPSI and 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
----------- ------------- ----------- ------------- -----------
Product group revenue--Application products................ $ 589.9 2% $ 578.9 12% $ 519.0
Percentage of total revenue................................ 75.0% 75.9% 76.8%
16
Application products revenue is derived from shipments of application
software programs marketed through retail and distribution channels; however,
Adobe PageMill, Adobe SiteMill, Adobe FrameMaker, and Adobe Acrobat products are
becoming more widely distributed through VARs and systems integrators.
Application products revenue growth in 1996 was primarily due to increased
demand for Adobe Photoshop, Adobe 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 Macintosh 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 platform in the fourth 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 Acrobat products or new versions of existing
products throughout 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.
In general, the Company's application products on the Windows platform have
experienced greater growth than those on the Macintosh platform during 1996. The
Company expects this trend to continue for the foreseeable future.
DIRECT COSTS
1996 CHANGE 1995 CHANGE 1994
----------- ------------- ----------- ------------- -----------
Direct costs............................................... $ 141.1 8% $ 130.3 7% $ 122.0
Percentage of total revenue................................ 17.9% 17.1% 18.1%
Direct costs include royalties; amortization of acquired technologies; and
direct product, packaging, and shipping costs. During 1994, direct costs also
included amortization of typeface production costs, which totaled $4.8 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. Direct 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 lieu of all royalty obligations to the developers
of the technology underlying Photoshop, which lowered direct costs for that
product, as well as a 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 intends to distribute more application products via
CD-ROM media.
OPERATING EXPENSES
1996 CHANGE 1995 CHANGE 1994
----------- ------------- ----------- ------------- -----------
Software development costs--Research and development....... $ 152.9 10% $ 138.6 22% $ 113.8
Percentage of total revenue................................ 19.4% 18.2% 16.8%
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.
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. The Company continues to make significant
investments in development of its Adobe PostScript and application software
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 1997 will increase in absolute dollars, such expenditures are expected to
remain approximately the same as a percentage of revenue.
1996 CHANGE 1995 CHANGE 1994
----------- ------------ ----------- ------------ -----------
Software development costs--Amortization of capitalized
software development costs................................... $ 2.5 (77)% $ 11.1 (23)% $ 14.3
Percentage of total revenue.................................... 0.3% 1.5% 2.1%
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. 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.
For all of 1996, software development expenditures on all products, after
reaching technological feasibility, were immaterial and the Company expects this
trend to continue in the future.
1996 CHANGE 1995 CHANGE 1994
----------- ------------- ----------- ------------- -----------
Sales, marketing, and customer support..................... $ 255.0 5% $ 242.7 3% $ 234.8
Percentage of total revenue................................ 32.4% 31.8% 34.7%
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.
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.
For 1997, sales, marketing, and customer support expenditures are expected
to increase in absolute dollars, but decrease 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
------ ------- ------ ------ ------
General and administrative......................................... $62.0 6% $58.5 (3)% $60.5
Percentage of total revenue........................................ 7.9% 7.7% 9.0%
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 increased during 1996 compared to 1995.
The increase resulted primarily from Frame integration costs in the first
quarter of 1996 and a higher headcount entering fiscal 1996. In addition, the
increase was driven by salary increases and higher rent expense, as well as
higher systems and legal costs in 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.
The Company expects general and administrative spending in 1997 to be
slightly higher than 1996 levels as a percentage of revenue as the Company
continues to incur litigation costs and invest in an expanded and more
comprehensive administrative infrastructure.
1996 CHANGE 1995 CHANGE 1994
----- ------ ----- ------ -----
Write-off of acquired in-process research and development.......... $21.3 42% $15.0 (3)% $15.5
Percentage of total revenue........................................ 2.7 % 2.0 % 2.3 %
During 1996, 1995, and 1994, the Company acquired six software companies, in
separate transactions, and accounted for them using the purchase 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 and 1994, the Company expensed $21.3 million, $15.0
million and $15.5 million, respectively.
1996 CHANGE 1995 CHANGE 1994
----- ------ ------ ------ ------
Merger transaction and restructuring costs......................... $5.0 (84)% $31.5 (56)% $72.2
Percentage of total revenue........................................ 0.6% 4.1% 10.7%
Merger transaction and restructuring costs for 1996 were $5.0 million. This
represents charges of $5.7 million less the reversal of $0.7 million of excess
reserves related to restructuring costs recorded in prior years. The 1996
charges were recorded in connection with the disposition of two business units
previously owned by Frame.
During the fourth quarters of 1995 and 1994, the Company recorded merger
transaction and restructuring costs primarily associated with the acquisitions
of Frame and Aldus, respectively, of $31.5 million and $72.2 million,
respectively. In 1995, the Company analyzed the remaining accrued restructuring
costs related to the acquisition of Aldus as well as the remaining accrued
restructuring costs related to a 1993 restructuring implemented by Frame. As a
result of this analysis, it was determined that approximately $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.
At November 29, 1996, the remaining accrued restructuring balance relates to
lease and third-party contract termination payments, 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
----------- ----------- ------------ ------------ -----------
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 and other income..................................... $ 29.2 (3)% $ 30.0 179% $ 10.8
Percentage of total revenue................................... 3.7% 3.9% 1.6%
Interest 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 $19.3 million in 1995 from 1994. The slight decrease in 1996 from 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.
INCOME TAX PROVISION
1996 CHANGE 1995 CHANGE 1994
----------- ------------- ----------- ------------- -----------
Income tax provision.......................................... $ 91.5 30% $ 70.4 87% $ 37.6
Percentage of total revenue................................... 11.6% 9.2% 5.6%
Effective tax rate............................................ 37.4% 42.9% 71.0%
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 from the effective tax rate of 1994, due primarily to
smaller one-time, nondeductible merger transaction and restructuring costs and
increased tax-exempt income. An analysis of the differences between the
statutory and effective income tax rates is provided in Note 8 of Notes to
Consolidated Financial Statements.
20
NET INCOME AND NET INCOME PER SHARE
1996 CHANGE 1995 CHANGE 1994
----------- ------------- ----------- ------------ -----------
Net income............................................. $ 153.3 64% $ 93.5 510% $ 15.3
Percentage of total revenue............................ 19.5% 12.3% 2.3%
Net income per share................................... $ 2.04 62% $ 1.26 473% $ 0.22
Weighted shares (in thousands)......................... 75,064 1% 74,253 6% 70,169
Net income for 1996 represents a 64 percent increase over 1995, while 1995
net income increased 510 percent from that of 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.
1996
---------------------------------------------------
INCOME BEFORE INCOME TAX NET INCOME
INCOME TAXES PROVSION NET INCOME PER SHARE
------------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reported results of operations.............................. $ 244,824 $ 91,547 $ 153,277 $ 2.04
Write-off of acquired in-process research and development
costs..................................................... 21,251 1,837 19,414 0.26
Restructuring costs......................................... 4,955 1,505 3,450 0.05
Other one-time 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 (gains).... $ 205,072 $ 76,902 $ 128,170 $ 1.71
------------- ----------- ---------- -----------
------------- ----------- ---------- -----------
1995
----------------------------------------------------
INCOME BEFORE INCOME TAX NET INCOME
INCOME TAXES PROVSION NET INCOME PER SHARE
------------- ----------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reported results of operations.............................. $ 163,853 $ 70,368 $ 93,485 $ 1.26
Write-off of acquired in-process research and development... 14,983 -- 14,983 0.20
Acquisition of Frame:
Merger transaction costs.................................. 11,399 -- 11,399 0.15
Restructuring costs....................................... 20,135 6,086 14,049 0.19
Other one-time 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............ $ 213,530 $ 77,938 $ 135,592 $ 1.80
------------- ----------- ---------- -----
------------- ----------- ---------- -----
21
1994
----------------------------------------------------
INCOME BEFORE INCOME TAX NET INCOME
INCOME TAXES PROVSION NET INCOME PER SHARE
------------- ----------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Reported results of operations.............................. $ 52,946 $ 37,609 $ 15,337 $ 0.22
Write-off of acquired in-process research and development... 15,469 -- 15,469 0.21
Acquisition of Aldus:
Merger transaction costs.................................. 14,618 -- 14,618 0.21
Restructuring 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............ $ 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, and 1994,
the net income per share, excluding the above one-time charges (gains), would
have been $1.73, $1.82 and $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 and Frame product lines; 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.
The Company's ability to develop and market products, including upgrades of
currently shipping products, that successfully adapt to changing 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
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. If there is a slowdown of customer purchases in the higher
end Macintosh market or if the Company is unable to increase its sales to
Windows 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,
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 corporate 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 is 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 is effective for
fiscal years beginning after December 15, 1995, and requires 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.
24
FINANCIAL CONDITION
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
1996 CHANGE 1995 CHANGE 1994
--------- ------------- --------- ------------- ---------
Cash, cash equivalents, and short-term investments................ $ 564.1 9% $ 516.0 16% $ 444.8
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 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, 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
--------- ------------- --------- ------------- ---------
Noncurrent liabilities and shareholders' equity................... $ 781.7 12% $ 698.4 36% $ 514.3
Included above is shareholders' equity and at November 29, 1996, deferred
income taxes related to unrealized gains and losses on equity investments, and
obligations for put warrants. The Company has no long-term debt. Shareholders'
equity as of November 29, 1996 was $706.5 million, compared to $698.4 million as
of December 1, 1995 and $514.3 million as of November 25, 1994. The year-to-year
increases in shareholders' equity includes 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 1996, the Company paid cash dividends of
$0.20 per common share. 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
--------- ------------- --------- ------------- ---------
Working capital................................................... $ 506.1 -- $ 506.5 26% $ 402.8
Net working capital was $506.1 million as of November 29, 1996, compared to
$506.5 million as of December 1, 1995. Cash flow provided by operations during
1996 was $198.1 million.
Expenditures for property and equipment in 1996 totaled $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 the future, additional cash may be used to acquire
software products or technologies complementary to the Company's business. Net
cash used by financing activities
25
during 1996 was $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.
The Company's principal commitments as of November 29, 1996 consisted of
obligations under operating leases, a real estate development agreement, and
various service and lease guarantee agreements with a related party.
During 1994, the Company entered into a real estate development agreement
and an operating lease agreement in connection with the construction of an
office facility. In August 1996, the construction was completed and the
operating lease 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 instruments
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 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.
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 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, whereby the Company contracted
with McQueen to perform product localization and technical support functions and
to provide printing, assembly, and 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.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL 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".
SUPPLEMENTAL 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 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
WHICH WAS ACCOUNTED FOR AS A POOLING OF INTERESTS. SEE NOTE 2 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
----------------------------------------------------------
QUARTER ENDED
----------------------------------------------
MAR. 3 JUNE 2 SEPT. 1 DEC. 1 YEAR ENDED
1995 1995 1995 1995 DEC. 1
---------- ---------- ---------- ---------- ----------
Revenue.............................................. $ 188,845 $ 189,498 $ 183,120 $ 200,876 $ 762,339
Gross margin......................................... 154,991 157,188 155,637 164,222 632,038
Merger transaction and restructuring costs........... -- -- -- 31,534 31,534
Income (loss) before income 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.......................... 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
27
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.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
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 9, 1997. Such information is incorporated herein by
reference.
EXECUTIVE OFFICERS
The executive officers of the Company as of February 21, 1997 are as
follows:
NAME AGE POSITIONS
- -------------------------- --- ------------------------------------------------------------
John E. Warnock 56 Chairman of the Board and Chief Executive Officer
Charles M. Geschke 57 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 47 Senior Vice President and General Manager, Adobe Europe
Hachiro 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
Robert A. Roblin 44 Senior Vice President,
Corporate Marketing
Fredrick A. Schwedner 55 Senior Vice President and General Manager, Printing and
Systems Division
A biography, including 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 the 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 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 17 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.
Mr. Kimura joined the Company in November 1993 as President and General
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. Prior to that time, Mr. Kimura was Vice President of Sales and Services
at Applied Materials Japan Corporation.
Mr. Kunze joined the Company in December 1985 as Product Manager for the
Adobe Type Library. In September 1994, he was promoted to Vice President of
Graphics Products. In May 1996, he was promoted to Vice President of 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.
Mr. 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 9, 1997. Such information is incorporated herein by
reference.
32
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 9, 1997. Such
information is incorporated herein by reference.
33
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 9, 1997. Such information is incorporated herein by reference.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1. Financial statements
- Management's Report
- Independent Auditors' Report
- 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 Shareholders' Equity
Years Ended November 29, 1996, December 1, 1995,
and November 25, 1994
- Consolidated Statements of Cash Flows
Years Ended November 29, 1996, December 1, 1995,
and November 25, 1994
- Notes to Consolidated Financial Statements
2. Financial statement schedule
- Schedule II--Valuation and Qualifying Accounts
3. Exhibits
(a) Index to Exhibits
INCORPORATED BY REFERENCE
EXHIBIT ------------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- --------- ---------------------------------------------------- --------- --------- --------- -------------
3.1.1 Amended and Restated 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
3.1.3 Certificate of Amendment 10-K 11/29/91 3.1.3
of Articles of Incorporation
3.1.4 Certificate of Amendment 10-K 11/26/93 3.1.4
of Articles of Incorporation
3.2.8 Restated Bylaws 10-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 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 10-K 11/30/90 10.17.2
between the Company and Apple Computer, Inc.,
dated November 27, 1990 (confidential treatment
granted)
10.21.2 Revised Bonus Plan* 10-K 11/26/93 10.21.2
10.24.1 1994 Performance and Restricted Stock Plan* S-4 07/27/94 10.1
10.25 Form of Indemnity Agreement* 10-K 11/30/88 10.25
10.32 Sublease of the Land and Lease of the Improvements 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 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 S-4 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*
10.36 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 Independent Auditors' Report on Schedule and Consent X
23.1 Consent of Ernst & Young LLP, Independent Auditors X
27 Financial Data Schedule X
- ------------------------
*Compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended November 29, 1996.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADOBE SYSTEMS INCORPORATED
By: /s/ P. JACKSON BELL
-----------------------------------------
P. Jackson Bell,
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER,
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 21st day of February, 1997.
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ JOHN E. WARNOCK Chairman of the Board of
- ------------------------------ Directors
John E. Warnock and Chief Executive
Officer
(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/ P. JACKSON BELL Executive Vice President,
- ------------------------------ Chief Financial Officer,
P. Jackson Bell Chief Administration
Officer,
and Assistant Secretary
(Principal Financial
Officer)
/s/ MICHAEL M. CULLY Vice President and
- ------------------------------ Corporate Controller
Michael M. Cully (Principal Accounting
Officer)
37
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 Illustrator PostScript
Acrobat PageMaker Premiere
After Effects PageMill PrintGear
Aldus PhotoDeluxe SiteMill
Frame Photoshop Type Library
FrameMaker Photostyler
All other brand or product names are trademarks or registered trademarks of
their respective holders.
38
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.................................................................................... 39
- - Independent Auditors' Report........................................................................... 40
- - Consolidated Balance Sheets............................................................................ 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
- - Consolidated Statements of Shareholders' Equity........................................................ 43
Years Ended November 29, 1996, December 1, 1995, and November 25, 1994
- - Consolidated Statements of Cash Flows.................................................................. 44
Years Ended November 29, 1996, December 1, 1995, and November 25, 1994
- - Notes to Consolidated Financial Statements............................................................. 45
39
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 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.
By /s/ P. JACKSON BELL
-----------------------------------
P. Jackson Bell,
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER,
CHIEF ADMINISTRATION OFFICER,
AND ASSISTANT SECRETARY
(PRINCIPAL FINANCIAL OFFICER)
December 17, 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 the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended November 29,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements 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 revenue constituting 12 percent of consolidated
fiscal 1994 revenue. The financial statements of Frame Technology Corporation
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Frame Technology
Corporation, is based solely upon the report 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 significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report 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 the results of
their operations and their cash flows for each of the years in the three-year
period ended November 29, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Jose, California
December 17, 1996
41
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
NOVEMBER 29 DECEMBER 1
1996 1995
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 110,745 $ 58,493
Short-term investments............................................................... 453,371 457,547
Receivables, net of allowances of $5,196 and $3,698, respectively.................... 126,715 133,208
Other current assets................................................................. 45,875 43,539
------------ -----------
Total current assets............................................................... 736,706 692,787
Property and equipment................................................................. 80,231 51,708
Other assets........................................................................... 195,348 140,237
------------ -----------
$1,012,285 $ 884,732
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade and other payables............................................................. $ 43,056 $ 25,639
Accrued expenses..................................................................... 93,957 94,848
Accrued restructuring costs.......................................................... 10,854 28,151
Income taxes payable................................................................. 67,210 19,420
Deferred revenue..................................................................... 15,537 18,257
------------ -----------
Total current liabilities.......................................................... 230,614 186,315
------------ -----------
Deferred income taxes.................................................................. 3,809 --
Put warrants........................................................................... 71,348 --
Shareholders' equity:
Preferred stock, no par value; 2,000 shares authorized; none issued.................. -- --
Common stock, no par value; 200,000 shares authorized; 71,476 and 72,834 shares
issued and outstanding, respectively............................................... 148,602 293,258
Retained earnings.................................................................... 529,546 390,793
Unrealized gains on investments...................................................... 33,514 18,831
Cumulative translation adjustment.................................................... (5,148) (4,465)
------------ -----------
Total shareholders' equity......................................................... 706,514 698,417
------------ -----------
$1,012,285 $ 884,732
------------ -----------
------------ -----------
See accompanying Notes to Consolidated Financial Statements.
42
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED
---------------------------------------
NOVEMBER 29 DECEMBER 1 NOVEMBER 25
1996 1995 1994
------------ ----------- ------------
Revenue:
Licensing............................................................. $ 196,693 $ 183,437 $ 156,652
Application products.................................................. 589,870 578,902 518,965
------------ ----------- ------------
Total revenue........................................................... 786,563 762,339 675,617
Direct costs............................................................ 141,147 130,301 122,023
------------ ----------- ------------
Gross margin............................................................ 645,416 632,038 553,594
------------ ----------- ------------
Operating expenses:
Software development costs:
Research and development............................................ 152,914 138,616 113,797
Amortization of capitalized software development costs.............. 2,504 11,095 14,329
Sales, marketing, and customer support................................ 254,972 242,713 234,771
General and administrative............................................ 62,034 58,526 60,531
Write-off of acquired in-process research and development............. 21,251 14,983 15,469
Merger transaction and restructuring costs............................ 4,955 31,534 72,183
------------ ----------- ------------
Total operating expenses................................................ 498,630 497,467 511,080
------------ ----------- ------------
Operating income........................................................ 146,786 134,571 42,514
Nonoperating income:
Investment gain (loss)................................................ 68,875 (755) (338)
Interest and other income............................................. 29,163 30,037 10,770
------------ ----------- ------------
Total nonoperating income............................................... 98,038 29,282 10,432
------------ ----------- ------------
Income before income taxes.............................................. 244,824 163,853 52,946
Income tax provision.................................................... 91,547 70,368 37,609
------------ ----------- ------------
Net income.............................................................. $ 153,277 $ 93,485 $ 15,337
------------ ----------- ------------
------------ ----------- ------------
Net income per share.................................................... $ 2.04 $ 1.26 $ 0.22
------------ ----------- ------------
------------ ----------- ------------
Shares used in computing net income per share........................... 75,064 74,253 70,169
------------ ----------- ------------
------------ ----------- ------------
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 CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
------------------------------------------
NOVEMBER 29 DECEMBER 1 NOVEMBER 25
1996 1995 1994
------------ ----------- ------------
Cash flows from operating activities:
Net income...................................... $ 153,277 $ 93,485 $ 15,337
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense.................... 2,772 4,433 1,064
Depreciation and amortization................. 55,621 60,435 57,794
Deferred income taxes......................... (6,715) (6,828 ) (11,663)
Equity in net income of Adobe Ventures........ (19,001) 755 --
Gains on sales of equity securitites.......... (53,216) -- --
Provision for losses on accounts receivable... 1,927 2,038 1,963
Tax benefit from employee stock option
plans....................................... 10,828 32,445 14,418
Write-off of acquired in-process research and
development................................. 21,251 14,983 15,469
Noncash restructuring costs................... 2,525 4,714 25,735
Changes in operating assets and liabilities:
Receivables................................. 6,629 (26,586 ) (17,648)
Other current assets........................ (1,173) 628 (312)
Trade and other payables.................... 8,534 (7,032 ) 11,979
Accrued expenses............................ (7,198) 3,161 14,505
Accrued restructuring costs................. (20,229) 1,835 23,384
Income taxes payable........................ 46,063 (5,184 ) 2,452
Deferred revenue............................ (3,781) 4,474 1,259
------------ ----------- ------------
Net cash provided by operating activities......... 198,114 177,756 155,736
------------ ----------- ------------
Cash flows from investing activities:
Purchases of short-term investments............. $(2,363,993) $(2,614,349) $(1,766,916)
Maturities and sales of short-term
investments................................... 2,363,793 2,403,631 1,724,612
Acquisitions of property and equipment.......... (45,869) (34,071 ) (32,700)
Additions to other assets....................... (65,399) (96,721 ) (28,616)
Acquisitions, net of cash acquired.............. (8,027) (15,158 ) (14,750)
Proceeds from sales of equity securities........ 72,630 -- --
------------ ----------- ------------
Net cash used for investing activities.......... (46,865) (356,668 ) (118,370)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock.......... 39,870 70,367 47,180
Proceeds from sales of put warrants............. -- -- 719
Repurchase of common stock...................... (126,778) (17,849 ) (10,283)
Payment of dividends............................ (14,586) (12,310 ) (9,906)
Payment of Subchapter S distributions of
Mastersoft.................................... -- (3,342 ) (1,245)
------------ ----------- ------------
Net cash provided by (used for) financing
activities....................................... (101,494) 36,866 26,465
Effect of foreign currency exchange rates on cash
and cash equivalents............................. 2,497 10 (1,297)
------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents...................................... 52,252 (142,036 ) 62,534
Adjustment for change in acquired companies'
fiscal year-ends................................. -- (3,591 ) (3,554)
Cash and cash equivalents at beginning of year.... 58,493 204,120 145,140
------------ ----------- ------------
Cash and cash equivalents at end of year.......... $ 110,745 $ 58,493 $ 204,120
------------ ----------- ------------
------------ ----------- ------------
Supplemental disclosures:
Cash paid during the year for income taxes...... $ 30,463 $ 44,470 $ 26,121
------------ ----------- ------------
------------ ----------- ------------
Noncash investing and financing activities:
Dividends declared but not paid............... $ 3,582 $ 3,645 $ 2,778
------------ ----------- ------------
------------ ----------- ------------
Reclassification of put warrants.............. $ 71,348 $ -- $ (6,906)
------------ ----------- ------------
------------ ----------- ------------
Issuance of notes for acquisition............. $ 9,473 $ -- $ --
------------ ----------- ------------
------------ ----------- ------------
See accompanying Notes to Consolidated Financial Statements.
45
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 North America, Europe, Japan, Asia-Pacific and Latin America.
FISCAL YEAR
The Company's 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-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 non-current investments in equity securities, free of trading
restrictions, or to become free of trading restrictions within one year, are
classified as "available-for-sale." These investments are carried at fair value,
based on quoted market prices, and unrealized gains and losses, net of taxes,
are reported as a separate component of shareholders' equity.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of certain foreign subsidiaries, whose functional
currency is the local currency, are translated 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.
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 recorded at cost. Depreciation and amortization
are calculated using the straight-line method over the shorter of the estimated
useful lives (two to seven years) or lease terms (five to nine years) of the
respective assets.
OTHER ASSETS
Purchased technology, goodwill, and certain 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 to seven years. Capitalization of computer software development
costs begins upon the establishment of technological 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
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 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. Revenue associated with adapting the
Company's software products to the OEMs' hardware products is recognized based
on the percentage-of-completion method and is included in licensing revenue.
Deferred revenue includes customer advances under OEM licensing agreements.
Additionally, maintenance revenue for application products is deferred and
recognized ratably over the term of the contract, generally 12 months.
DIRECT COSTS
Direct costs include royalties, amortization of typeface production costs,
amortization of acquired technologies, and direct product, packaging, and
shipping costs.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, 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. A valuation allowance is recorded to reduce tax assets
to an amount whose realization is 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
On November 30, 1996 the Company will adopt Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
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 does not expect the adoption of SFAS No. 121 to have
a material effect on the Company's consolidated results of operations.
The Company accounts for its stock option plans, employee stock purchase
plan, and restricted stock plan in accordance with the provisions of the
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees." In 1995, the Financial Accounting Standards Board released SFAS
No. 123 "Accounting for Stock Based Compensation." SFAS No.123 provides an
alternative to APB No. 25 and is effective for fiscal years beginning after
December 15, 1995. The Company intends to continue to account for its employee
stock and stock option plans in accordance with APB No. 25. Accordingly, SFAS
No. 123 is not expected to have a material impact on the Company's Consolidated
results of operations.
RECLASSIFICATIONS
Certain reclassifications were made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 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.
There were no significant transactions among the Company, Frame, and Aldus
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
48
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2. ACQUISITIONS (CONTINUED)
November 25, 1994. Prior to the combination, Aldus reported revenue and net
income of $172.2 million and $5.1 million, respectively, for the nine 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, the Company acquired six software companies, in
separate transactions, for an aggregate consideration of approximately $54.3
million in cash, notes payable and the assumption of certain liabilities. These
acquisitions were accounted for using the purchase method of accounting and
resulted in the write-off of acquired in-process research and development of
$21.3 million, $15.0 million, and $15.5 million during fiscal 1996, 1995, and
1994, respectively. The operating results of the acquired companies have been
included in the accompanying consolidated financial statements from their dates
of acquisition. The 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 INVESTMENTS (CONTINUED)
AS OF DECEMBER 1, 1995
------------------------------------------------
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ----------- ----------- ----------
Classified as current assets:
Money market mutual funds...................................... $ 23,387 $ -- $ -- $ 23,387
United States government treasury notes and agency discount
notes........................................................ 129,350 2,356 -- 131,706
State and municipal bonds and notes............................ 245,758 1,911 (80) 247,589
Corporate and bank notes....................................... 54,493 710 (26) 55,177
Auction-rate securities........................................ 13,700 -- -- 13,700
Asset-backed securities........................................ 15,131 122 (182) 15,071
---------- ----------- ----------- ----------
Total current.................................................. 481,819 5,099 (288) 486,630
---------- ----------- ----------- ----------
Classified as noncurrent assets:
Money market mutual funds...................................... 353 -- -- 353
United States government treasury notes........................ 35,237 44 -- 35,281
Equity securities.............................................. 2,000 26,835 -- 28,835
---------- ----------- ----------- ----------
Total noncurrent............................................... 37,590 26,879 -- 64,469
---------- ----------- ----------- ----------
Total securities............................................... $ 519,409 $ 31,978 $ (288) $ 551,099
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
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 $23.0 million and $12.9 million as of November 29, 1996
and December 1, 1995, respectively. Net realized gains for the years ended
November 29, 1996 and December 1, 1995 of $48.4 million and $1.4 million,
respectively, are included in 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 the cost
and estimated fair value of debt securities with 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 dates and auction-rate securities of $10.0 million. Included in
auction-rate securities are Auction Rate Certificate Securities whose stated
maturities exceed ten years. However, the Company has the option of adjusting
the respective interest rates or liquidating these investments at auction on
stated auction dates every 35 days.
50
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
NOVEMBER 29 DECEMBER 1
1996 1995
----------- -----------
Land.............................................. $ 782 $ 782
Building.......................................... 4,615 4,615
Equipment......................................... 121,044 122,794
Furniture and fixtures............................ 18,126 18,962
Leasehold improvements............................ 13,036 8,790
----------- -----------
157,603.. 155,943
Less accumulated depreciation and amortization.... 77,372 104,235
----------- -----------
$ 80,231 $ 51,708
----------- -----------
----------- -----------
NOTE 5. OTHER ASSETS
Other assets consisted of the following:
NOVEMBER 29 DECEMBER 1
1996 1995
----------- -----------
Equity investments................................ $ 97,679 $ 53,091
Purchased technology and licensing agreements..... 32,211 51,945
Restricted funds and security deposits............ 69,443 35,634
Miscellaneous other assets........................ 35,470 66,606
----------- -----------
234,803 207,276
Less accumulated amortization..................... 39,455 67,039
----------- -----------
$195,348 $140,237
----------- -----------
----------- -----------
Included above in equity investments at November 29, 1996, are unrealized
gains and losses. The equity investment in Netscape Communications Corporation
was marked-to-market for an unrealized gain of $47.7 million. In addition,
during 1996, the Company recorded realized gains of approximately $43.6 million
and approximately $6.8 million for the sale of a portion of its investment in
Netscape and its entire investment in Luminous, respectively.
NOTE 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 RESTRUCTURING COSTS
In 1995 and 1994, the Company acquired Frame and Aldus, respectively,
described in "Note 2--Acquisitions," and initiated a plan to combine the
operations of the companies. In connection with these acqusitions, in 1995 and
1994 the Company recorded charges of $31.5 million and $72.2 million,
respectively, to operating expenses related to merger transaction and
restructuring costs. In addition, Frame undertook certain restructuring measures
in 1993 due to lower than anticipated revenues.
Merger transaction and restructuring costs are summarized below:
REDUNDANT CANCELLATION
INFORMATION ASSETS OF FACILITY
MERGER SEVERANCE SYSTEMS ASSOCIATED LEASES AND
TRANSACTION AND AND WITH DUPLICATE OTHER
COST OUT-PLACEMENT EQUIPMENT PRODUCT LINES CONTRACTS TOTAL
----------- ------------- ------------ -------------- -------------- ----------
Balances as of
November 27, 1993................... $ -- $ 1,600 $ -- $ -- $ 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 4,452 -- 5,664 32,473
Non-cash write offs................... -- -- (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
December 1, 1995.................... 5,058 9,612 -- -- 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
----------- ------------- ------------ -------------- ------- ----------
----------- ------------- ------------ -------------- ------- ----------
At November 29, 1996, the remaining accrued restructuring balance primarily
relates to lease and third-party contract termination payments, resulting from
the planned closure of duplicate offices in Europe and the United States. These
payments are expected to continue through the contract terms or negotiated early
termination date, if applicable.
52
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
NOTE 8. INCOME TAXES
Income before income taxes includes net income (loss) from foreign
operations of approximately $25.4 million, $19.2 million, and $(8.7) million for
the years ended November 29, 1996, December 1, 1995, and November 25, 1994,
respectively.
The provision for income taxes consisted of the following:
YEARS ENDED
---------------------------------------
NOVEMBER 29 DECEMBER 1 NOVEMBER 25
1996 1995 1994
------------ ----------- ------------
Current:
United States federal................................................. $ 65,118 $ 21,466 $ 22,048
Foreign............................................................... 12,290 18,418 8,336
State and local....................................................... 12,731 5,206 7,170
------------ ----------- ------------
Total current........................................................... 90,139 45,090 37,554
------------ ----------- ------------
Deferred:
United States federal................................................. (6,825) (6,305) (10,683)
Foreign............................................................... (780) (986) (1,785)
State and local....................................................... (1,815) 124 (1,895)
------------ ----------- ------------
Total deferred.......................................................... (9,420) (7,167) (14,363)
------------ ----------- ------------
Charge in lieu of taxes attributable to employee stock plans............ 10,828 32,445 14,418
------------ ----------- ------------
$ 91,547 $ 70,368 $ 37,609
------------ ----------- ------------
------------ ----------- ------------
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, and 1994 to income before income taxes) as a result of the
following:
YEARS ENDED
---------------------------------------
NOVEMBER 29 DECEMBER 1 NOVEMBER 25
1996 1995 1994
------------ ----------- ------------
Computed "expected" tax expense......................................... $ 85,689 $ 57,349 $ 18,531
State tax expense, net of federal benefit............................... 9,819 6,442 3,429
Nondeductible merger costs.............................................. -- 4,078 5,209
Nondeductible write-off of acquired in-process research and
development........................................................... 5,310 5,244 5,475
Nondeductible goodwill.................................................. 772 3,689 1,741
Tax-exempt income....................................................... (3,304) (3,532) --
Tax credits............................................................. (4,912) (3,904) (1,755)
Foreign losses, not benefited........................................... -- 2,706 3,550
Foreign tax rate differential........................................... (4,003) 1,130 2,027
Other, net.............................................................. 2,176 (2,834) (598)
------------ ----------- ------------
$ 91,547 $ 70,368 $ 37,609
------------ ----------- ------------
------------ ----------- ------------
53
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
NOTE 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 1996 and 1995 are
presented below:
NOVEMBER 29 DECEMBER 1
1996 1995
------------ -----------
Deferred tax assets:
Acquired technology.................................................................. $ 12,037 $ 4,750
Reserves and deferred revenue........................................................ 24,615 25,025
Depreciation and amortization........................................................ 7,662 3,544
Net operating loss carryforwards..................................................... 4,278 10,625
Tax credits and other carryforwards.................................................. 1,614 5,702
Other................................................................................ 5,800 3,468
------------ -----------
Total gross deferred tax assets.................................................... 56,006 53,114
Deferred tax asset valuation allowance............................................. (5,950) (10,204)
------------ -----------
Total deferred tax assets.......................................................... 50,056 42,910
------------ -----------
Deferred tax liabilities:
Investments.......................................................................... (22,888) (12,860)
Other................................................................................ (1,943) (1,210)
------------ -----------
Total deferred tax liabilities..................................................... (24,831) (14,070)
------------ -----------
Net deferred tax assets................................................................ $ 25,225 $ 28,840
------------ -----------
------------ -----------
As of November 29, 1996, the Company had tax credit carryforwards of
approximately $1.6 million, which expire in years 1997 through 2009. The
carryforwards are attributable to the premerger years of Frame and are subject
to certain limitations on usage. The Company also has foreign operating loss
carryovers in various jurisdictions of approximately $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 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 9. BENEFIT PLANS
STOCK OPTION PLANS
The employee stock option 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 25 percent after the first year and
ratably thereafter such that 50 percent and 100 percent are vested after the
second and third year, respectively. The option terms range from five to ten
years.
As of November 29, 1996, the Company had reserved 500,000 shares of common
stock for issusance under its Outside Directors Stock Option Plan, which
provides for the granting of nonqualified stock options to nonemployee
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 the Board. All
54
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
NOTE 9. BENEFIT PLANS (CONTINUED)
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 is presented in the following
table:
OPTIONS OUTSTANDING
OPTIONS ----------------------------
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE
----------- ------------ --------------
Balances as of November 26, 1993...................................... 5,490,588 12,089,494 $ 0.06-47.25
Additional shares reserved.......................................... 349,000 -- --
Options 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...................................... 3,269,481 11,154,463 0.25-47.25
Additional shares reserved.......................................... 588,000 -- --
Options granted..................................................... (2,391,568) 2,391,568 3.45-67.00
Options exercised................................................... -- (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....................................... 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 $ 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 November 29, 1996 under the Restricted Stock Option Plan 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
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
November 29, 1996, 112,742 shares were outstanding and 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 in 1996
and 1995, respectively. There were no performance units outstanding during the
year ended November 25, 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, on either the purchase date or
the offering date, whichever price is lower. As of November 29, 1996, the
Company had reserved 4,000,000 shares of its common stock for issuance under
this plan and 932,404 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. The Company matches approximately 25% of
employee contributions and contributed approximately $1.6 million, $1.2 million,
and $0.7 million in 1996, 1995, and 1994, respectively. Matching contributions
can be terminated at the Company's discretion.
56
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
NOTE 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 intention to acquire beneficial
ownership of 20 percent or more of the Company's common stock without the
approval of the Board of Directors or upon the Company being acquired by any
person in a merger or business combination 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 1996 and 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 $0.7 million for the
sale of put warrants in 1994. The Company's $71.3 million potential buyback
obligation, as of November 29, 1996, was removed from shareholders' equity and
recorded as put warrants. No put warrants were outstanding as of December 1,
1995. The approximately 2.3 million put warrants outstanding at November 29,
1996 expire on various dates through April 1997 and have exercise prices ranging
from $29.70 to $32.41 per share, with an average exercise price of $31.29 per
share.
NOTE 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 1994, respectively. As of November 29, 1996,
future minimum lease payments under noncancelable operating leases are as
follows: 1997--$17.2 million; 1998--$13.6 million; 1999--$10.3 million;
2000--$8.0 million; 2001--$6.9 million; and $14.3 million, thereafter.
REAL ESTATE DEVELOPMENT AGREEMENT
During 1994, the Company entered into a real estate development agreement
and an operating lease agreement in connection with the construction of an
office facility. In August 1996, the construction was completed and the
operating lease 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 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.
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 $0.005 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, and $35.2 million for the years ended November 29, 1996, December 1,
1995, and November 25, 1994, 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 that
the ultimate outcome of these actions will not have a material effect on the
Company's financial position and results of operations.
NOTE 12. TRANSACTIONS WITH AFFILIATE
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, whereby the Company contracted
with McQueen to perform product localization and technical support functions and
to provide printing, assembly, and warehousing services. Adobe makes minimum
annual payments to McQueen for certain services which amounted to $4.8 million
in fiscal 1996. Purchases from McQueen amounted to $34.3 million, $23.6 million,
and $13.0 million during 1996, 1995, and 1994, respectively.
58
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
NOTE 13. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's cash equivalents, short-term investments, restricted funds,
put options, and marketable equity securities are carried at fair value, based
on quoted market prices for these or similar investments. (See Note 3.)
The Company's majority interest in Adobe Ventures LP, accounted for using
the equity method, is carried at $30.7 million which is believed to approximate
the fair value of underlying investments in 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. As
such, these investments are valued based on estimates made by the management of
Adobe Ventures LP. For investments of the limited partnership that are publicly
traded, the fair value of the investments are based on quoted market 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.
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 or 1994.
59
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
NOTE 14. FOREIGN OPERATIONS
Geographic information for each of the years in the three-year period ended
November 29, 1996, is presented below:
YEARS ENDED
---------------------------------------
NOVEMBER 29 DECEMBER 1 NOVEMBER 25
1996 1995 1994
------------ ----------- ------------
Revenue:
North America......................................................... $ 526,251 $ 533,332 $ 494,525
Europe................................................................ 134,879 133,982 124,283
Japan, Asia-Pacific, and Latin America................................ 176,490 107,357 72,036
Eliminations.......................................................... (51,057) (12,332) (15,227)
------------ ----------- ------------
$ 786,563 $ 762,339 $ 675,617
------------ ----------- ------------
------------ ----------- ------------
Operating income:
North America......................................................... $ 31,186 $ 26,446 $ 7,991
Europe................................................................ 16,408 37,319 1,818
Japan, Asia-Pacific, and Latin America................................ 103,002 70,416 32,745
Eliminations.......................................................... (3,810) 390 (40)
------------ ----------- ------------
$ 146,786 $ 134,571 $ 42,514
------------ ----------- ------------
------------ ----------- ------------
Identifiable assets:
North America......................................................... $1,024,005 $ 944,484 $ 670,650
Europe................................................................ 69,458 64,807 60,375
Japan, Asia-Pacific, and Latin America................................ 22,102 14,258 18,633
Eliminations.......................................................... (103,280) (138,817) (39,658)
------------ ----------- ------------
$1,012,285 $ 884,732 $ 710,000
------------ ----------- ------------
------------ ----------- ------------
60
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Frame Technology Corporation
We have audited the consolidated statement of operations, shareholder's
equity, and cash flows of Frame Technology Corporation as of December 31, 1994
(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 results of operations
and cash flows of Frame Technology Corporation at December 31, 1994, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
January 30, 1995
61
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Frame Technology Corporation
We have audited the supplemental consolidated statements 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.) for the year ended December 31, 1994 (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 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 results of
operations and cash flows of Frame Technology Corporation at December 31, 1994
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
62
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
63
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
PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS PERIOD
------------ ------------ ------------ ------------ ------------
Allowance for doubtful accounts:
Year Ended:
November 29, 1996..................................... $ 3,698 $ 1,927 $ -- $ 429 $ 5,196
December 1, 1995...................................... $ 3,893 $ 2,038 $ (423 ) $ 1,810 $ 3,698
November 25, 1994..................................... 2,516 1,963 -- 586 3,893
Deductions related to the allowance for doubtful accounts, represent amounts
written off against the allowance.
- ------------------------
(1) The $423 reduction in 1995 reflects 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.
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
- --------- --------------------------------------------------------------------------------------------------
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
27 Financial Data Schedule
65