-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GHT2weS7QDaDac13MDuOR/iEJCf+Cgy6MFtGmzpTUAKkh7v3k4XsKt0ozx1HVNMW dbrcFnI23n9aTmFLtGEgHQ== 0000912057-97-006476.txt : 19970223 0000912057-97-006476.hdr.sgml : 19970223 ACCESSION NUMBER: 0000912057-97-006476 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961129 FILED AS OF DATE: 19970221 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADOBE SYSTEMS INC CENTRAL INDEX KEY: 0000796343 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770019522 STATE OF INCORPORATION: CA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15175 FILM NUMBER: 97541318 BUSINESS ADDRESS: STREET 1: 1585 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1225 BUSINESS PHONE: 4159614400 MAIL ADDRESS: STREET 1: P.O. BOX 7900 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94039-7900 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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 ------------------------ 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 ------------------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ------------------------ Indicate by check 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE NO. --------- 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 3 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. 4 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 5 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 6 disks, prints, and assembles the components and ships the completed product. Quality control tests are performed on all duplicate disks and finished products. To date, Adobe has not experienced significant difficulties in obtaining raw materials for the manufacture of its products or in the duplication of disks, printing, and assembly of components, although an interruption in production by a supplier could result in a delay in shipment of Adobe's products. There was no material backlog of orders as of December 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 7 equity securities during 1996 was $72.6 million. The Company's equity investments and AVLP's investments in equity securities at November 29, 1996 consisted of the following companies:
PRIVATE PUBLIC ------------- ----------- ADOBE EQUITY INVESTMENTS Ameriquest................................................................. X Datalogics................................................................. X McQueen Holdings Ltd....................................................... X Netscape Communications Corporation........................................ X Objectivity................................................................ X Pointcast Incorporated..................................................... X Verity Incorporated........................................................ X Vertec Solutions Incorporated.............................................. X ADOBE VENTURES L.P. EQUITY INVESTMENTS Cascade Systems International.............................................. X Cognito Learning Media Inc................................................. X Crosswise Corporation...................................................... X Digimarc Corporation....................................................... X Digital Think Incorporated................................................. X Electronic Submission Publishing Systems, Incorporated..................... X Extensis Corporation....................................................... X Filenet Corporation........................................................ X Fractal Designs Incorporated............................................... X Lantana Research Corporation............................................... X Managing Editor Incorporated............................................... X mFactory, Inc.............................................................. X Peerless Systems Corporation............................................... X Salon Internet, Inc........................................................ X Siebel Systems Incorporated................................................ X
PRODUCT DEVELOPMENT Since the personal computer software industry is characterized by rapid technological change, a continuous high level of expenditures is required for the enhancement of existing products and the development of new products. Adobe primarily develops its software internally. The Company sometimes acquires products developed by others by purchasing the stock or assets of the business entity that held ownership rights to the technology. In other instances, Adobe has licensed or purchased the intellectual property ownership rights of programs developed by others with license or technology transfer agreements that may obligate the Company to pay royalties, typically based on a percentage of the revenues generated by those programs. During the years ended November 29, 1996, December 1, 1995 and November 25, 1994, 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. 8 PRODUCT PROTECTION Adobe regards its software as proprietary and protects it with copyrights, patents, trademarks, trade secret laws, internal and external nondisclosure precautions, and restrictions on disclosure and 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. 9 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 - -------------------------------- ------------ ------------------------------------------------------------------ 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. 10 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. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 12 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. 13 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
- ------------------------ (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. 14 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 EX-11 2 EXHIBIT 11 COMPUTATIONS OF EARNINGS ADOBE SYSTEMS INCORPORATED EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED --------------------------------------- NOVEMBER 29 DECEMBER 1 NOVEMBER 25 1996 1995 1994 ------------ ----------- ------------ Net income.............................................................. $ 153,277 $ 93,485 $ 15,337 ------------ ----------- ------------ ------------ ----------- ------------ Primary shares outstanding: Weighted average shares outstanding during the year................... 72,557 71,456 67,755 Common stock equivalent shares........................................ 2,507 2,797 2,414 ------------ ----------- ------------ 75,064 74,253 70,169 ------------ ----------- ------------ ------------ ----------- ------------ Fully diluted shares outstanding: Weighted average shares outstanding during the year................... 72,557 71,456 67,755 Common stock equivalent shares........................................ 2,670 2,958 2,613 ------------ ----------- ------------ 75,227 74,414 70,368 ------------ ----------- ------------ ------------ ----------- ------------ Primary net income per common stock and common stock equivalent share... $ 2.04 $ 1.26 $ 0.22 ------------ ----------- ------------ ------------ ----------- ------------ Fully diluted net income per common stock and common stock equivalent share................................................................. $ 2.04 $ 1.26 $ 0.22 ------------ ----------- ------------ ------------ ----------- ------------
EX-21 3 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT ADOBE SYSTEMS INCORPORATED EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY LEGAL NAME JURISDICTION OF INCORPORATION - ------------------------------------ --------------------------------- The Americas: Adobe Systems FSC, Inc. Territory of Guam Ares Software Corporation California LTC OEM Corporation California Ceneca Communications, Inc. California OCR Systems, Inc. Pennsylvania Frame International, Inc. Delaware Frame Canada Limited Canada Mastersoft Corporation Arizona Visualware Incorporated California Europe: Adobe Systems Europe Ltd. United Kingdom Adobe Systems Direct Ltd. United Kingdom Adobe Systems Holding BV The Netherlands Adobe Systems Nordic AB Sweden Adobe Systems Benelux BV The Netherlands Adobe Systems GmbH Federal Republic of Germany Aldus Manutius Software AG Switzerland Adobe Systems France SARL France Adobe Systems Italia SRL Italy Adobe Systems Informatica Spain Adobe Systems U.K., Ltd. United Kingdom Aldus Ireland Ireland Frame International Limited Ireland Frame International Limited United Kingdom Frame Technology GmbH Federal Republic of Germany Curo Technology Europe BV The Netherlands Japan: Adobe Systems Company Ltd. Japan Adobe Systems Japan, Inc. California Asia, Pacific and Latin America: Adobe Australia Pty. Ltd. Australia
All subsidiaries of the registrant are wholly owned and do business under their legal names. EX-23 4 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS ADOBE SYSTEMS INCORPORATED EXHIBIT 23 INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT To the Board of Directors and Shareholders of Adobe Systems Incorporated: The audits referred to in our report dated December 17, 1996, included the related financial statement schedule for each of the years in the three-year period ended November 29, 1996, included in this FORM 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, based on our audits, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the incorporation by reference in the Registration Statements (No. 33-10753, No. 33-18986, No. 33-23171, No. 33-30976, No. 33-36501, No. 33-38387, No. 33-48210, No. 33-63518, No. 33-78506, No. 33-83030, No. 33-83502, No. 33-83504, No. 33-84396 , No. 33-86482, No. 33-59335, No. 33-63849 and No. 33-63851) on FORM S-8 of Adobe Systems Incorporated of our reports dated December 17, 1996, relating to the 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, appearing on page 41 of this FORM 10-K. As indicated in our report, for the year ended December 31, 1994, we did not audit the consolidated financial statements of Frame Technology Corporation and subsidiaries, a company acquired by Adobe Systems Incorporated in a business combination accounted for as a pooling of interests. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Frame Technology Corporation, is based solely on the report of the other auditors. KPMG Peat Marwick LLP San Jose, California February 17, 1997 EX-23.1 5 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG ADOBE SYSTEMS INCORPORATED EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (No. 33-10753, No. 33-18986, No. 33-23171, No. 33-30976, No. 33-36501, No. 33-38387, No. 33-48210, No. 33-63518, No. 33-78506, No. 33-83030, No. 33-83502, No. 33-83504, No. 33-84396, No. 33-86482, No. 33-59335, No. 33-63849 and No. 33-63851) on FORM S-8 of Adobe Systems Incorporated of our report dated January 30, 1995, appearing elsewhere herein, with respect to the consolidated statement of operations, shareholder's equity and cash flows of Frame Technology Corporation for the year ended December 31, 1994, and our report dated May 31, 1995, except for Note 13, as to which the date is June 22, 1995, appearing elsewhere herein, with respect to the supplemental consolidated statement of operations, shareholder's equity and cash flows of Frame Technology Corporation as of December 31, 1994. Ernst & Young LLP San Jose, California February 17, 1997 EX-27 6 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT NOVEMBER 29, 1996 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED NOVEMBER 29, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS NOV-29-1996 DEC-02-1995 NOV-29-1996 110,745 522,814 121,519 5,196 8,055 736,706 80,231 77,372 1,012,285 230,614 0 0 0 148,602 557,912 1,012,285 196,693 786,563 141,147 141,147 497,132 1,498 0 244,824 91,547 153,277 0 0 0 153,277 2.04 2.04
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