-----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, PZqkOuQ4CQdgbrWD/zcy+GQsKrAeh7s7EI2OIz5zWY6GHk6iJi/1XrYI7ep1TLLe DWuhawDpbMhEc3tVqXp/Vg== 0000912057-96-002896.txt : 19960223 0000912057-96-002896.hdr.sgml : 19960223 ACCESSION NUMBER: 0000912057-96-002896 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951201 FILED AS OF DATE: 19960222 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: 96524043 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 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 DECEMBER 1, 1995 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.) 1585 CHARLESTON ROAD, MOUNTAIN VIEW, 94043-1225 CALIFORNIA (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 961-4400 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. [ ] The aggregate market value of the common stock held by non-affiliates of the registrant as of December 29, 1995 was $4,536,590,592. The number of shares outstanding of the registrant's common stock as of December 29, 1995 was 73,170,816. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement dated March 1, 1996 to be delivered to shareholders in connection with the Notice of Annual Meeting of Shareholders to be held on April 10, 1996 are incorporated by reference into Part II. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE NO. ----------- PART I Item 1. Business................................................................................... 3 Item 2. Properties................................................................................. 12 Item 3. Legal Proceedings.......................................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders........................................ 14 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters....................... 15 Item 6. Selected Financial Data.................................................................... 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 17 Item 8. Financial Statements and Supplementary Data................................................ 29 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....... 30 PART III Item 10. Directors and Executive Officers of the Registrant......................................... 31 Item 11. Executive Compensation..................................................................... 33 Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 34 Item 13. Certain Relationships and Related Transactions............................................. 35 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............................ 36 Signatures............................................................................................. 38 Summary of Trademarks.................................................................................. 39 Financial Statements................................................................................... 40 Financial Statement Schedule........................................................................... 72 Exhibits............................................................................................... 74
2 PART I ITEM 1. BUSINESS Adobe Systems Incorporated (the "Company" or "Adobe") develops, markets, and supports computer software products and technologies that enable users to create, display, manage, communicate, and print electronic materials. 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, is used in the writing and publishing business to create and prepare critical business and technical documents, such as books and technical manuals. Both of these acquisitions were accounted for as poolings of interests and qualified as tax-free reorganizations. The Company maintains its executive offices and principal facilities at 1585 Charleston Road, Mountain View, California 94043-1225. Its telephone number is 415-961-4400. The Company also maintains a World Wide Web site at http://www.adobe.com. BUSINESS OVERVIEW Eleven years ago, Adobe and Aldus developed the software that initiated desktop publishing. As a result of its acquisitions of Aldus in August 1994 and Frame and Ceneca Communications, Inc. ("Ceneca") in October 1995, 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 deal in raw words, data, and numbers, Adobe software helps people use the computer to express and share their ideas in imaginative and meaningful new ways, whether the choice of media is static or dynamic, paper or electronic. In the simplest terms, Adobe products enable people to create, send, find, view, and print high-impact information. Adobe software enables users to work with professional creative tools; assemble illustrations, images, and text into fully formatted documents; output documents directly to any kind of printing device; and 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. Adobe's PostScript page-description language is accepted as the worldwide standard for printing electronic documents. More than 5,000 applications now support PostScript language output and are available for every significant computer operating system and hardware configuration, from desktop computers to mainframes. Today, Adobe is applying its expertise in PostScript technology to facilitate the communication of electronic documents across platforms and networking schemes while preserving the original look and feel of the creative material. This effort is embodied in the Adobe Acrobat family of products, which not only provides tools for creating, distributing, and accessing visually rich documents, but also is establishing an open, universal file format standard for electronic publishing. 3 Most recently, Adobe announced an enhanced version of Acrobat software that will enable Internet browsers and on-line service providers to incorporate Acrobat technology into their software and services for Internet users. With the acquisition of Ceneca, the Company also acquired two professional-quality tools for the World Wide Web to simplify the process of creating and managing Web sites. PRODUCTS APPLICATION PRODUCTS Adobe's application products take professional tools once available only in massive, dedicated systems -- or not available at all -- and puts them on the desktop. It gives people the ability to create and manipulate the elements of visual communication, from photographs to illustrations to typefaces to video footage, and combine them into complete documents for viewing on the screen or printed page. Adobe's flagship applications -- Adobe FrameMaker, Adobe Illustrator, Adobe PageMaker, Adobe Photoshop, and Adobe Premiere -- established new categories of software, and continue to provide customers with a growing set of sophisticated features. These products have spawned mini-industries of third-party accelerator boards, image libraries, special-effects filters, color and calibration tools, and other plug-ins that increase customer value and productivity. Adobe seeks to provide comparable feature sets to users in Windows, Macintosh, and UNIX environments, and to increase cross-product compatibility and extensibility. GRAPHICS Used for everything from commercial packaging to fine art, Adobe Illustrator software is a leading illustration and page-design tool. It simplifies the creation, manipulation, and refinement of artwork with advanced features for editing, text handling, color support, and other tasks. It offers the most comprehensive image support of any program, plus built-in production capabilities. Complementary products include Adobe Dimensions for three-dimensional design and Adobe Streamline for line-art conversion. IMAGES Adobe Photoshop has become the standard photo design and production software for prepress, publishing, graphics, and photography professionals. This electronic darkroom enables users to design artwork for use in print and on-line publishing. Users can employ powerful painting and selection tools, or retouch and correct true color or black-and-white scanned images with image-editing tools and filters. Accessory products such as Adobe Gallery Effects special-effects filters and Adobe TextureMaker texture-design software increase users' creative choices. Adobe Fetch cataloging software makes it easy to store, find, and retrieve artwork files for reuse. MOTION AND SOUND Just as it enabled desktop publishing, Adobe software is now facilitating the shift toward "desktop broadcasting." For film and video editors, multimedia producers, and graphics professionals, Adobe offers high-quality alternatives to using expensive, specialized production equipment. Adobe Premiere software has become the de facto standard for editing film, video, and multimedia productions on the desktop. Adobe After Effects and the After Effects Production Bundle give television and motion-picture professionals a set of post-production tools for video compositing, motion graphics, and special effects. PRESENTATIONS Adobe Persuasion software is a program for producing and managing slide, overhead, and on-screen presentations. It enables business users to build and automatically generate presentations of any complexity -- including speaker notes and audience handouts -- from information they gather and create on a personal computer. 4 TYPE Adobe's Type 1 font format is the only truly cross-platform type solution. More than 2,000 Type 1 typefaces are now available from the Adobe Type Library, which is packaged by family and in special collections. An increasing percentage of Adobe's type revenue comes from direct purchases through the Adobe Type On Call CD-ROM, a locked, buy-as-you-go version of the library. The Adobe Font Folio CD-ROM gives design studios, service bureaus, and other professionals the entire library, unlocked and ready for immediate use. Supporting type tools include the Adobe Type Manager ("ATM") utility, which eliminates jagged type on the computer screen and printed page at any size, makes Type 1 typefaces available on any printer, and provides access to Adobe's multiple master type technology. Adobe SuperATM is an enhanced version of ATM software that automatically creates "substitute fonts" to simulate typefaces missing from a computer. Through its Image Club catalog, Adobe offers a wide variety of typefaces, as well as clip art, stock images, and other digital content, directly to desktop publishers. PAGE LAYOUT Adobe PageMaker software makes it easy to create sophisticated print and electronic communications with powerful color, page design, printing, and compatibility features. It offers tools for each person in the publishing cycle: graphic artists and designers; writer, editors, and typesetters; production artists and prepress professionals. Adobe PageMaker also allows users to generate Hypertext Markup Language ("HTML") and Adobe Portable Document Format ("PDF") output for electronic publishing needs. DOCUMENT CREATION While Adobe PageMaker software is optimized for documents with varied graphics content, Adobe FrameMaker software is most popular for documents with long, consistent content, such as books and technical manuals. Adobe FrameMaker integrates WYSIWYG word processing, graphics, page layout, tables, long-document building, equations editing, and conditional text for maximum user efficiency, across computing platforms, and has the ability to output content as either HTML or PDF. For organizations that create large inventories of documents that need to be structured and managed enterprise-wide, Adobe FrameMaker + SGML software combines the functionality of Adobe FrameMaker with interactive structure validation and Standard Generalized Markup Language ("SGML") support in one easy-to-use environment. For sharing information electronically, the high- fidelity Adobe FrameViewer tool displays Adobe FrameMaker documents. CONSUMER PRODUCTS As more and more people become information authors, Adobe is leveraging its technology and worldwide reseller channels to create and market robust applications for small businesses and families. The consumer product line includes: - Adobe PhotoDeluxe for enhancing and personalizing photos. - Adobe Art Explorer, a painting and drawing program especially for children. - Adobe SuperPaint for basic painting, drawing, and image processing. - Adobe HomePublisher for basic desktop publishing. - Adobe Type Twister for fun text effects. ACROBAT PRODUCTS Introduced in 1993, Adobe Acrobat software gives organizations a universal creation and viewing tool for electronic documents. It offers maximum flexibility to information authors, and maximum 5 distribution options to information publishers: World Wide Web, e-mail, Lotus Notes software, corporate networks, CD-ROMs, and print-on-demand systems. In practice, Adobe Acrobat software provides time- and money-saving solutions to customers in corporate and professional publishing, government agencies, financial services, and other markets. The Adobe Acrobat product family allows fully formatted electronic documents - -- containing distinctive typefaces, color, graphics, and photographs -- to be easily distributed, accessed, and reused, regardless of the hardware platform, operating system, or applications used to create the originals. An Adobe Acrobat document retains its distinctive look, regardless of operating system or software application. Receivers can view, search, navigate, print, and store the documents on their existing systems. Adobe Acrobat software describes documents of any size or visual complexity in a single, universal format called the Portable Document Format, an open, published specification. Based on the PostScript language, PDF is the only open format of its kind, the only approach to electronic document delivery that is independent of computer hardware, application software, operating system, and networking environment. A PDF file stores the visual (printable) elements of a document, as well as annotations, hypertext links, "thumbnail" page views, bookmarks, and other features that make documents easy to access and navigate on-screen. To promote acceptance of PDF as a standard, the Adobe Acrobat Reader viewing tool is available free of charge via the Internet and all major on-line services. In addition, the reader is bundled with leading software and hardware products. The Adobe Acrobat retail product line includes: Adobe Acrobat Exchange for creating and sharing basic PDF files; Adobe Acrobat Pro for creating and sharing the most visually complex PDF files; Adobe Acrobat for Workgroups for a network of as many as ten users; Adobe Acrobat Catalog for creating full-text indexes of PDF files; Adobe Acrobat Search for CD-ROMs, which offers a low-cost way to publish fully indexed, searchable information on compact disc; and Adobe Acrobat Capture for converting printed "legacy" documents into PDF files. Licensed by third parties, Adobe Acrobat Player technology can be embedded into projection devices, navigation systems, information panels, and other noncomputer equipment to enable viewing of PDF files. INTERNET PRODUCTS Adobe PageMill allows users to create pages on the World Wide Web ("WWW") without the necessity of understanding HTML, URL addresses, or various image file formats. Using a simple interface, Adobe PageMill enables WWW authors to create individual pages, forms, and clickable images in a word processing-like environment. Adobe PageMill automatically converts the information input by the user to standard HTML files which will run on any WWW server. Adobe SiteMill includes all the features of Adobe PageMill and incorporates WWW site management tools. Adobe SiteMill displays all resources contained within a WWW site and provides tools for maintaining the interrelationships among those resources. When users paste links, rename files, or move files between folders, Adobe SiteMill software will automatically repair all links so that they point to the correct location. In addition, Adobe SiteMill can screen existing WWW sites for errors and provides for easy, one-step correction. PRINTING AND SYSTEMS Adobe's Printing and Systems group develops software products based on the Company's core technologies and licenses them to original equipment manufacturers ("OEMs"). These products include Adobe PostScript, Adobe Acrobat Player and Adobe PrintGear. ADOBE POSTSCRIPT SOFTWARE The PostScript language is a general-purpose computer language, developed by Adobe, that describes the appearance of a page to a printer, including elements such as text, graphics, and scanned images. 6 For output devices including printers, slide recorders, imagesetters, and screen displays, the PostScript language describes and renders documents of any visual complexity with total precision. Since the Company introduced it in 1985, PostScript has become the printing and imaging technology of choice for many multinational corporations, the vast majority of professional publishers, and the U.S. federal government. Today, more than 60 manufacturers produce over 300 Adobe PostScript output devices, offering them at prices ranging from less than $700 to $100,000 and higher. All major software applications and operating systems support the PostScript language standard. CONFIGURABLE POSTSCRIPT INTERPRETER The Configurable PostScript Interpreter ("CPSI") is an implementation of Adobe PostScript software that resides in a workstation or a personal computer rather than in a printer's embedded controller. CPSI is also referred to as a "software RIP" (Raster Image Processor). PRINT-ON-DEMAND SYSTEMS Print-on-demand systems use Adobe PostScript technology for final processing of the print file and typically use proprietary technology during prepress activities to format and prepare the file for printing. ADOBE PRINTGEAR Adobe PrintGear is a new printing architecture targeted at the small office/home office ("SOHO") market. This imaging technology includes host- and printer-based components, and features a RISC-like architecture in which a small set of image operators are supported in the printer, lowering OEM component costs and raising price performance to the consumer. Adobe PrintGear printers from Adobe OEMs are expected to ship in 1996 at prices under $1,000. ADOBE ACROBAT PLAYER Adobe Acrobat Player is an OEM version of Adobe Acrobat technology. An embedded controller technology, Acrobat Player will allow Adobe OEMs to enhance information appliances such as overhead projectors, navigation systems, and set-top boxes with the capability to display visually rich information. PREPRESS TOOLS In January 1996, the Company spun off its prepress application products business to a newly-established company, Luminous Corporation ("Luminous"). Under the terms of the agreement, Luminous has acquired or licensed and will continue to develop, market, and distribute Adobe's prepress application products. Adobe will retain a minority equity interest in Luminous and will maintain ownership of certain core technologies for Adobe prepress products. COMPETITION APPLICATION PRODUCTS The markets for Adobe's application products are characterized by intense competition, evolving industry standards, rapid technology developments, and frequent new product introductions. Adobe's future success will depend on its ability to enhance its existing products, introduce new products on a timely and cost-effective basis, meet changing customer needs, extend its core technology into new applications, and anticipate or respond to emerging standards and other technological changes. The Company believes that the principal competitive factors in the personal computer applications market include product features and functions, installed base, ease of use, product reliability, and price and performance characteristics. The majority of the Company's authoring products compete favorably in their markets on the basis of these competitive factors. Adobe also believes that its 7 application products gain a competitive benefit from their foundation in PostScript language technology. However, the Company faces challenges in several areas and expects to encounter continued competition both from established companies and from new companies that are now developing, or may develop, competing products. Price competition is a factor encountered by Adobe in several of its product categories. Suppliers in certain segments of the microcomputer software market have significantly reduced prices through the use of "site licenses" (which permit the copying of a program and its documentation), direct price offers, bundling, software suites, and discount pricing for large-volume retail customers. The growth of high-volume retailers, which compete primarily on the basis of price, has intensified the competition among software vendors. Price competition is particularly keen in the consumer software market, and there is no assurance that Adobe will be able to maintain current pricing levels. Large-scale electronic publishing systems for publication and engineering departments, as well as for other groups requiring page-composition features, are offered by several companies, including Interleaf Inc. Additionally, companies that develop word-processing software are incorporating desktop publishing features into their products. Finally, numerous low-end desktop publishing packages are available from a variety of software developers, such as Serif's Page Plus and Microsoft's Publisher. As a result, Adobe expects to face increasing competition in the desktop publishing market from a number of other software developers, some of whom may have greater financing, marketing, and technological resources than Adobe, targeting one or more of the various markets for which Adobe products are designed. In recent years, Adobe PageMaker has been subject to increasing competition. The Windows version of Adobe PageMaker competes with software offered by several vendors, principally Ventura Publisher, marketed and sold by Corel Corporation, and QuarkXPress for Windows. The Macintosh version of Adobe PageMaker competes with software from a variety of independent vendors, but principally Quark, Inc.'s QuarkXPress. Adobe FrameMaker for the Windows and Macintosh platforms is subject to competition from many of the same sources as Adobe PageMaker. In the UNIX environment, the primary competitors for Adobe FrameMaker are Interleaf for technical publishing and WordPerfect and Applix for non-technical publishing. Adobe Illustrator for the Windows and Macintosh platforms competes with Macromedia's FreeHand, CorelDraw, and Deneba Canvas. Competition for Adobe Photoshop on the Windows platform is from Micrografx Picture Publisher and Fractal Design Painter X2. Adobe Premiere for the Windows and Macintosh platforms is a video editing program. The market for desktop video editing is young; however, the Company faces competition from products such as VideoStudio from U-Lead, Digital Video Producer from Asymetrix, MediaMerge from ATI, Razor from In:sync, and VideoShop from Avid. Adobe After Effects is a motion graphics, digital compositing, and special effects program for broadcast video and film for the Macintosh. The program typically retails for approximately $995 and competes with software from companies that include Parallax and Discreet Logic, costing more than $25,000, and dedicated hardware from Quantel and other companies that costs more than $500,000. Competition in the digital type market is intense. Computer operating systems are generally sold with a selection of typefaces bundled with the operating system by the vendor. Because of this, it is difficult to achieve retail market presence with other typeface packages. In addition, prices for retail typeface packages have fallen significantly in recent years. Adobe Persuasion for the Windows and Macintosh platforms is a business presentations program whose major competitors include Microsoft's PowerPoint (the only other such program to support both Windows and Macintosh), Software Publishing's Harvard Graphics for Windows, and Lotus' Freelance Graphics for Windows. 8 Internet publishing is a market which is still in its infancy. Current competition for Adobe PageMill and Adobe SiteMill arises primarily from Front Page for Windows from Vermeer Technologies (acquired by Microsoft Corporation in January 1996), NaviPress from Navisoft (a division of America Online), and Netscape Navigator Gold and LiveWire from Netscape. Over time, competition in this area is expected to increase. All the consumer products have numerous competitors, and price competition is quite intense in this market. Electronic document communication, the market for Adobe Acrobat, is still in its infancy. A number of competing products and technologies have been introduced, including Common Ground from Hummingbird (which acquired No Hands Software), Replica from Farallon, and Envoy from Novell. PRINTING AND SYSTEMS The Adobe PostScript interpreter faces indirect competition from major computer companies that have developed or may develop a competitive page description language. However, to date those products use a proprietary printer control language that provides less functionality and flexibility than the Adobe PostScript interpreter. The Company believes that Hewlett-Packard's LaserJet product family, with its proprietary PCL page description language, has the largest installed base of any low-cost laser printer. Additionally, several companies have produced their own implementations of the PostScript language, and some have announced contracts with printer manufacturers, most of whom are not currently licensing Adobe PostScript software products. Adobe believes that the principal competitive factors for OEMs in selecting a page description language interpreter are product capabilities, reliability, support, engineering development assistance, and price. The Company believes that it competes very favorably in these areas. The Company also believes that no other page description language interpreter provides equivalent functionality together with the broad support of software developers. With the Display PostScript system, the Company also competes with screen imaging software incorporated in other computer systems' architectures, such as QuickDraw in the Macintosh, GDI in Windows, and GPI in OS/2. Each computer platform has its own native screen imaging software. In the Windows, DOS, and Macintosh platforms, that technology is provided by the operating system vendor. In the UNIX environment, Display PostScript has been licensed by the substantial majority of UNIX hardware vendors and has become the de facto standard. OPERATIONS MARKETING AND DISTRIBUTION Adobe markets and distributes its products directly and through various channels, including retailers, systems integrators, software developers, and value-added resellers, as well as through OEM and hardware bundle customers. Adobe supports its worldwide distribution network and end-user customers through international subsidiaries. Adobe Systems Europe Ltd., established in 1987, is headquartered in Edinburgh, Scotland, with subsidiaries in France, Germany, Italy, the Netherlands, Spain, Sweden, and the United Kingdom. Adobe's Pacific Rim presence includes Adobe Systems Co., Ltd. -- 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. 9 MANUFACTURING Adobe's primary manufacturing facilities are located in Santa Clara, California. Manufacturing operations include duplication of disks, assembly of purchased parts, and final packaging for retail products. Adobe contracts a majority of its manufacturing activities to third parties, both in the United States and in Europe. Disk duplication for European language versions of the Company's products is managed through the European headquarters. The master disks of European-language versions of products are forwarded to McQueen Holdings Limited ("McQueen"), an affiliate of the Company in Scotland, which duplicates the disks, prints, and assembles the components and ships the completed product. Quality control tests are performed on all duplicate disks and finished products. To date, Adobe has not experienced significant difficulties in obtaining raw materials for the manufacture of its products or in the duplication of disks, printing, and assembly of components, although an interruption in production by a supplier could result in a delay in shipment of Adobe's products. There was no material backlog of orders as of December 29, 1995. CUSTOMER SUPPORT AND EDUCATION For Adobe's application software, a technical support and services staff responds to customer queries by phone and on-line. The Company also informs customers through its bimonthly ADOBE MAGAZINE and a growing series of how-to books published by Adobe Press, a joint venture with Macmillan Computer Publishing. In addition, Adobe prepares and authorizes independent trainers to teach Adobe software classes, sponsors workshops led by its own graphics staff, interacts with independent user groups, and conducts regular seeding and testing programs. INVESTMENT IN NEW MARKETS In 1994, Adobe invested in a venture capital limited partnership that is chartered to invest in innovative companies strategic to its software business. Adobe Ventures L.P. enables the Company to join other investors in making new products and services available to computer users and in building new market opportunities. 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 December 1, 1995, November 25, 1994, and November 26, 1993, the Company's research and development expenses, including costs related to contract development, were $138.6 million, $113.8 million, and $100.2 million, respectively. During each of 1995, 1994, and 1993, 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 1995, $15.0 million was expensed related to Ceneca Communications, Inc.; in 1994, $15.5 million was expensed related to LaserTools Corporation and Compumation, Incorporated; and in 1993, $4.3 million was expensed related to AH Software, Inc. (doing business as After Hours Software) and The Company of Science & Art. PRODUCT PROTECTION Adobe regards its software as proprietary and protects it with copyrights, patents, trademarks, trade secret laws, internal and external nondisclosure precautions, and restrictions on disclosure and 10 transferability that are incorporated into its software license agreements. The Company protects the source code of its software programs as trade secrets, and makes source code available to OEM customers only under limited circumstances and specific security and confidentiality constraints. The Company's products are generally licensed to end users on a "right to use" basis pursuant to a license that is nontransferable and restricts the use of the products to the customer's internal purposes on a designated number of printers or computers. The Company also relies on copyright laws and on "shrink wrap" and electronic licenses that are not signed by the end user. Copyright protection may be unavailable under the laws of certain countries. The enforceability of "shrink wrap" and electronic licenses has not been conclusively determined. Adobe has obtained many patents and has registered numerous trademarks and logos in the United States and foreign countries. Policing unauthorized use of computer software is difficult, and software piracy is a persistent problem for the software industry. This problem is particularly acute in international markets. Adobe conducts vigorous anti-piracy programs. Adobe products do not contain copy protection, except on copies for international distribution in certain countries. Many products, including Adobe PageMaker, Adobe Photoshop, and Adobe Illustrator, incorporate network copy-detection features. These capabilities help encourage compliance with the Company's license agreements by alerting customers about certain concurrent usage problems over a given network. Network copy detection has become increasingly popular among higher priced software products. Adobe believes that, because computer software technology changes and develops rapidly, patent, trade secret, and copyright protection are less significant than factors such as the knowledge, ability, and experience of its personnel, name recognition, contractual relationships, and ongoing product development. EMPLOYEES As of December 29, 1995, Adobe employed 2,319 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. 11 ITEM 2. PROPERTIES The following table sets forth the location, approximate square footage, and use of each of the principal properties used by the Company. Except as where indicated, all of the properties are leased or subleased by the Company. Such leases expire at various times through May 2007. The annual base rent expense for all facilities (including operating expenses, property taxes, and assessments) is currently $21.0 million and is subject to annual adjustment.
APPROXIMATE SQUARE LOCATION FOOTAGE USE - ------------------------------------- ------------ ------------------------------------------------------------ The Americas: Mountain View, California 290,018 Research, product development, sales, marketing, and administration Seattle, Washington 185,000 Product development and customer support Santa Clara, California 127,688 Customer support and warehouse/distribution center San Jose, California 136,970 Product development and sales Europe: Edinburgh, Scotland (Owned) 22,000 Sales, marketing, and administration Pacific Rim: Tokyo, Japan 20,237 Sales, marketing, and administration
In general, all facilities are in good condition and are operating at capacities which range from 75 percent to 100 percent. 12 ITEM 3. LEGAL PROCEEDINGS Quantel Limited, a U.K. corporation, has filed and served on the Company a complaint alleging that the Adobe Photoshop program infringes five U.S. patents held by Quantel. The complaint was filed in the United States District Court for the District of Delaware. Since the complaint arrived without prior notice from Quantel, the Company is unable at this time to determine whether the complaint has any merit. The Company is actively investigating the allegations. The complaint seeks a permanent injunction and unspecified damages. On February 6, 1996, a securities class action complaint was filed against Adobe, certain of its officers and directors, certain former officers of Frame Technology Corporation ("Frame"), Hambrecht & Quist, LLP ("H&Q"), investment banker for Frame, and certain H&Q employees, in connection with the drop in the price of Adobe stock following its announcement of financial results for the quarter ended December 1, 1995. The complaint was filed in the Superior Court of the State of California, County of Santa Clara. The complaint alleges that the defendants misrepresented material adverse information regarding Adobe and Frame and engaged in a scheme to defraud investors. The complaint seeks unspecified damages for alleged violations of California law. Adobe believes that the allegations against it and its officers and directors are without merit and intends to vigorously defend the lawsuit. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's common stock is traded on The Nasdaq Stock Market under the symbol "ADBE." On December 29, 1995, there were 2,073 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 estimate the total number of shareholders represented by these record holders. The following table sets forth the high and low sales price per share of the Company's common stock, and the dividends paid per share, for the periods indicated.
PRICE RANGE -------------------- PER SHARE HIGH LOW DIVIDEND --------- --------- ----------- Fiscal 1994: First Quarter......................................................... $ 32.00 $ 19.75 $ 0.05 Second Quarter........................................................ 34.50 21.50 0.05 Third Quarter......................................................... 34.50 24.50 0.05 Fourth Quarter........................................................ 38.50 29.75 0.05 Fiscal Year........................................................... 38.50 19.75 0.20 Fiscal 1995: First Quarter......................................................... $ 36.25 $ 27.25 $ 0.05 Second Quarter........................................................ 58.75 34.25 0.05 Third Quarter......................................................... 66.50 49.50 0.05 Fourth Quarter........................................................ 70.25 45.00 0.05 Fiscal Year........................................................... 70.25 27.25 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. 15 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 --------------------------------------------------------------- DEC. 1 NOV. 25 NOV. 26 NOV. 27 NOV. 29 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- Operations: Revenue....................................... $ 762,339 $ 675,617 $ 580,103 $ 520,031 $ 452,144 Merger transaction and restructuring costs.... 31,534 72,183 25,800 -- -- Income before income taxes.................... 163,853 52,946 72,358 89,981 123,350 Net income(1)................................. 93,485 15,337 42,007 57,664 78,725 Net income per share(1)(2).................... 1.26 0.22 0.62 0.84 1.17 Dividends declared per common share(2)(3)..... 0.20 0.20 0.20 0.16 0.16 Financial position: Cash and short-term investments............... 516,040 444,768 344,714 275,522 234,063 Working capital............................... 506,472 402,837 347,683 300,180 263,582 Total assets.................................. 884,732 710,000 597,696 525,849 437,803 Shareholders' equity.......................... 698,417 514,315 457,216 418,771 358,755 Additional data: Worldwide employees........................... 2,322 2,055 2,500 2,407 1,970
- ------------------------ (1) Reflects incremental costs incurred during 1995 in connection with the acquisition of Frame and the write-off of acquired in process research and development, totaling $31.5 million and $15.0 million, respectively; and during 1994 in connection with the acquisition of Aldus and the write-off of acquired in-process research and development, totaling $72.2 million and $15.5 million, respectively. (For additional information, see Note 2 and Note 8 in the Notes to Consolidated Financial Statements.) (2) Adjusted for a two-for-one stock split, effective July 1993. (3) Amounts prior to the acquisitions of Frame on October 28, 1995 and Aldus on August 31, 1994, have not been restated to reflect the effects of the poolings of interest. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION (PRESENTED IN MILLIONS, EXCEPT PER SHARE AMOUNTS) SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S SEC REPORTS (INCLUDING WITHOUT LIMITATION, ITS REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 1, 1995). RESULTS OF OPERATIONS OVERVIEW Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets, and supports computer software products and technologies that enable users to create, display, manage, communicate, and print electronic documents. The Company licenses its technology to major computer, printing, and publishing suppliers, and markets a line of application software products and type products for authoring and editing visually rich documents. The Company distributes its products through a network of original equipment manufacturer ("OEM") customers, distributors and dealers, and value-added resellers ("VARs") and system integrators. The Company has operations in the Americas, Europe, and the Pacific Rim. In October 1995, the Company acquired Frame Technology Corporation ("Frame"). Frame, established in 1986, developed, marketed, and supported writing and publishing software for the creation and distribution of critical business and technical documents. To effect the combination, approximately 8.5 million shares of Adobe's common stock were issued in exchange for all of the outstanding common stock of Frame. The merger was accounted for by the pooling of interests method, and accordingly, all annual and interim financial information prior to the merger has been restated to combine the results of the Company and Frame. In connection with the merger, the Company recorded $11.4 million of merger transaction costs and $21.1 million of restructuring costs in the fourth quarter of 1995. In August 1994, the Company acquired Aldus Corporation ("Aldus"). Aldus began operations in 1984 and created computer software solutions that help people throughout the world effectively communicate information and ideas. Aldus focused on three lines of business: applications for the professional print publishing, graphics, and prepress markets; applications for the general consumer market; and applications for the interactive publishing market. To effect the combination, approximately 14.2 million shares of Adobe's common stock were issued in exchange for all of the outstanding common stock of Aldus. The merger was accounted for by the pooling of interests method, and accordingly, all annual and interim financial information prior to the merger has been restated to combine the results of the Company and Aldus. In connection with the merger, the Company recorded $14.6 million of merger transaction costs and $57.6 million of restructuring costs in the fourth quarter of 1994. In addition, the Company incurred one-time expenses that are not included in the restructuring charge but were related to the Aldus acquisition. These charges included the write-off of certain capitalized software development costs, transition personnel bonuses, and relocation expenses among others, and totaled approximately $10.1 million. In January 1996, the Company spun off its prepress applications product business to a newly established company, Luminous Corporation ("Luminous"). Under the terms of the agreement, Luminous has acquired or licensed and will continue to develop, market, and distribute Adobe's prepress application products. Adobe will retain a minority equity interest in Luminous and will maintain ownership of certain core technologies for Adobe prepress products. Luminous will pay royalties to Adobe based on a percentage of revenue from certain products for the next two years. Revenue from prepress application products was approximately $10.4 million in fiscal 1995. 17 REVENUE
1995 CHANGE 1994 CHANGE 1993 ----------- ------------ ----------- ------------ ----------- Total revenue................................... $ 762.3 13% $ 675.6 16% $ 580.1
Revenue growth in 1995 and 1994 is attributable to increases in both licensing activity related to the Company's PostScript interpreter and application products shipments resulting from the release of new and enhanced products. In 1995, the increase in application products revenue was partially offset by the divestiture of Aldus FreeHand in January 1995 and the discontinuance of Aldus PhotoStyler in late 1994, as further discussed below. 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 1995, 1994, or 1993.
1995 CHANGE 1994 CHANGE 1993 ----------- ------------ ----------- ------------ ----------- Product group revenue -- Licensing.............. $ 183.4 17% $ 156.7 7% $ 146.2 Percentage of total revenue..................... 24.1% 23.2% 25.2%
Licensing revenue is derived from shipments by OEM customers of products containing the Adobe PostScript interpreter and the Display PostScript system. Such products include printers in both roman and Japanese 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. The number of units shipped by OEMs continued to grow on an annual basis in 1995 and 1994. 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 1995 and 1994, this trend was offset by increased demand for CPSI and, in 1995, by increased demand for color capability as well as greater penetration into the Japanese market, all of which have higher royalties per unit. The Company has seen year-to-year increases in the number of OEM customers from which it is receiving licensing revenue and believes that such increases are attributable to the continued acceptance of PostScript software, as well as to the diversification of the Company's customer base across multiple platforms.
1995 CHANGE 1994 CHANGE 1993 ----------- ------------ ----------- ------------ ----------- Product group revenue -- Application products... $ 578.9 12% $ 519.0 20% $ 433.9 Percentage of total revenue..................... 75.9% 76.8% 74.8%
Application products revenue is derived from shipments of application software programs marketed through retail and distribution channels; however, the information products are becoming more widely distributed through VARs and systems integrators. Application products revenue grew in 1995 primarily due to increased demand for Adobe Photoshop, Adobe PageMaker, Adobe FrameMaker, and the Adobe Acrobat family of products. The Company released Adobe PageMaker 6.0 for the Macintosh platform late in the third quarter, and for the Windows and Windows 95 platforms in the fourth quarter. In addition, the Company released Adobe Photoshop 3.0 for the Windows platform in the first quarter and released new Adobe Acrobat products or new versions of existing products throughout the year. The 1995 revenue growth was partially offset by the divestiture of Aldus FreeHand in January 1995 and the discontinuance of Aldus PhotoStyler late in 1994. These two products aggregated $53.2 million of revenue in 1994. 18 In 1994, application products revenue increased as a result of higher sales of Adobe Illustrator, Adobe Photoshop, and Adobe PageMaker, all of which benefited from the release of new versions in 1994. Adobe FrameMaker also showed strong revenue growth. The release of Aldus FreeHand 4.0 (divested by the Company in January 1995) for Windows and the Power Macintosh platforms also contributed to the 1994 revenue increase. Other factors affecting 1994 revenue growth include the release of localized versions for the Japanese market of Adobe Photoshop, Adobe Illustrator, and Adobe PageMaker for the Macintosh platform; increased sales of Adobe Premiere, a video editing and sequencing tool; and the release of Adobe Illustrator and Adobe Photoshop for selected UNIX platforms. Reduced sales for individual typeface packages offset a portion of the revenue growth in 1994. DIRECT COSTS
1995 CHANGE 1994 CHANGE 1993 ----------- ------------ ----------- ------------ ----------- Direct costs.................................... $ 130.3 7% $ 122.0 13% $ 107.8 Percentage of total revenue..................... 17.1% 18.1% 18.6%
Direct costs include royalties; amortization of acquired technologies; and direct product, packaging, and shipping costs. During 1994 and 1993, direct costs also included amortization of typeface production costs, which totaled $4.8 million and $4.6 million, respectively. Gross margins are affected by the mix of licensing revenue versus application products revenue, as well as the product mix within application products. The increase in direct costs, in absolute dollars, has been mitigated by actions taken by the Company to reduce direct costs. In 1993, the Company achieved lower per unit manufacturing costs for certain products, reduced royalty agreement rates, and reduced typeface production costs amortization. These actions also benefited 1995 and 1994. In addition, the 1995 purchase relating to Adobe Photoshop, as further discussed below, resulted in lower direct costs for that product as a percentage of its revenue. On March 31, 1995, the Company entered into an agreement with the developers of the technology underlying its Adobe Photoshop product under which the Company made a lump-sum payment to the developers of $34.5 million in lieu of all royalty obligations incurred in connection with the technology after the beginning of the fourth quarter of 1994. Accordingly, $8.5 million of the amount paid to the developers was applied to accrued royalties related to the fourth quarter of 1994 and the 1995 period prior to the execution of the agreement. The balance of $26.0 million is being amortized over 30 months. This transaction has been recorded on the Consolidated Balance Sheets in "Other assets" as part of purchased technology. Prior to this agreement, the Company paid the developers a royalty for each copy of Adobe Photoshop sold by the Company. To date, the amortization expense related to the purchase has been less than the per-copy royalty expense that would otherwise have been incurred. The Company also delivers its type library on its Type On Call CD-ROM media, and end users wishing to license typeface designs call the Company with a credit card number to receive the unlocking code for the desired typeface. This method of delivery also contributes to reduced direct costs. Other applications are also available through the Company's distributors on CD-ROM. OPERATING EXPENSES
1995 CHANGE 1994 CHANGE 1993 ----------- ------------ ----------- ------------ ----------- Software development costs -- Research and development.................................... $ 138.6 22% $ 113.8 14% $ 100.2 Percentage of total revenue..................... 18.2% 16.8% 17.3%
Research and development expenses consist principally of salaries and benefits for software developers, contracted development efforts, related facilities costs, and expenses associated with computer equipment used in software development. 19 Research and development expense has increased significantly over the last three years as the Company invested in new technologies, new product development, and the infrastructure to support such activities. The increase reflects the expansion of the Company's engineering staff and related costs required to support its continued emphasis on developing new products and enhancing existing products. Many of these engineers are working with OEM customers to design and implement PostScript Level 2 devices. The Company continued working with many of its OEM customers in a co-development program. This allows customers to be more self-sufficient in new device development by taking on more of the implementation task themselves rather than relying so heavily on the Company's engineers. While this mitigates certain costs, the Company continues to make significant investments in development of its PostScript and application software products. 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 1996 will increase in absolute dollars, such expenditures are expected to decline as a percentage of revenue.
1995 CHANGE 1994 CHANGE 1993 ----------- ----------- ----------- ------------ ----------- Software development costs -- Amortization of capitalized software development costs.............................. $ 11.1 (23)% $ 14.3 36% $ 10.5 Percentage of total revenue..................... 1.5% 2.1% 1.8%
In the implementation of Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," software development expenditures on Adobe products, after achieving technological feasibility, were deemed to be immaterial. Certain software development expenditures on Frame and Aldus products have been capitalized and are being amortized over the lives of the respective products. In the fourth quarters of 1995 and 1994, software development expenditures on Frame and Aldus products, respectively, after reaching technological feasibility, were immaterial and the Company anticipates this trend to continue in the future. Accordingly, the fourth quarter of 1994 and all of 1995 reflect the additional expense of amortizing capitalized software development costs acquired with Aldus. All such capitalized software development costs acquired with Aldus were fully amortized at the end of 1995. Likewise, the fourth quarter of 1995 did, and all of 1996 will, reflect the additional cost of amortizing capitalized software costs acquired with Frame in addition to the actual development expenditures (classified as research and development) made prior to achieving technological feasibility. Amortization of capitalized software development costs decreased in 1995 as a result of achieving full amortization of all Aldus products by the end of 1995. The increase in 1994 was due to the amortization of Adobe PageMaker 5.0, released in the second half of 1993, and the release of other new application products. It is expected that amortization of software development costs will decrease both in absolute dollars and as a percentage of revenue during 1996 as the software products acquired with Frame become fully amortized.
1995 CHANGE 1994 CHANGE 1993 ----------- ------------- ----------- ------------ ----------- Sales, marketing, and customer support.......... $ 242.7 3% $ 234.8 13% $ 206.9 Percentage of total revenue..................... 31.8% 34.7% 35.7%
Sales, marketing, and customer support expenses generally include salaries and benefits, sales commissions, travel expenses, and related facility costs for the Company's sales, marketing, customer support, and distribution personnel. Sales, marketing, and customer support expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, and other market development programs. 20 Increases in sales, marketing, and customer support expenses are due to increased advertising and promotional expenditures for upgrades of existing products and further development of customer and technical support services to support a growing installed base of customers. In 1995, reduced costs resulting from the restructuring of the combined company after the acquisition of Aldus in 1994 resulted in a decrease in costs as a percentage of revenue. This decrease was partially offset by the effect of the acquisition of Frame as well as increased advertising relating to the release of Adobe PageMaker 6.0 and expenses from several major trade shows. Decreased costs expected to result from the restructuring of the combined company after the acquisition of Frame will be partially offset by continuing efforts to expand markets and increase penetration into targeted software markets, as well as to respond to increased competition in the software industry. As a result, 1996 sales, marketing, and customer support expenditures are expected to decrease from 1995 spending levels as a percentage of revenue.
1995 CHANGE 1994 CHANGE 1993 ----------- ------------- ----------- ------------- ----------- General and administrative.......................... $ 58.5 (3)% $ 60.5 (8)% $ 66.0 Percentage of total revenue......................... 7.7% 9.0% 11.4%
General and administrative expenses consist principally of salaries and benefits, travel expenses, and related facility costs for the finance, human resources, legal, information services, and administrative personnel of the Company. General and administrative expenses also include outside legal and accounting fees, bad debts, and expenses associated with computer equipment and software used in the administration of the business. General and administrative expenses have decreased each year since 1993, both in absolute dollars and as a percentage of revenue. The 1993 expense reflects a higher spending level attributable to the growth of systems, processes, and people necessary to support overall increases in the scope of the Company's operations, as well as additional costs incurred for the legal defense and settlement of an Aldus class-action securities lawsuit. General and administrative spending decreased as a percentage of revenue in 1994 from 1993 due to a reduction of salary and depreciation expense resulting from restructuring activities, as well as reduced legal expenditures. The 1995 decrease reflects savings related to the restructuring of the combined company after the acquisition of Aldus, partially offset by costs related to the acquisition of Frame and write-downs related to certain intangible assets. The Company expects general and administrative spending in 1996 to be slightly lower than 1995 levels as a percentage of revenue.
1995 CHANGE 1994 CHANGE 1993 ----------- ------------- ----------- ------------ ----------- Write-off of acquired in-process research and development......................................... $ 15.0 (3)% $ 15.5 261% $ 4.3 Percentage of total revenue.......................... 2.0% 2.3% 0.7%
During 1995, 1994, and 1993, 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 was expensed at the time of the acquisitions. In 1995, this expense relates to Ceneca Communications, Inc.; in 1994, to LaserTools Corporation and Compumation, Incorporated; and in 1993, to AH Software, Inc. (doing business as After Hours Software) and The Company of Science & Art.
1995 CHANGE 1994 CHANGE 1993 ----------- ----------- ----------- ------------ ----------- Merger transaction and restructuring costs.......... $ 31.5 (56)% $ 72.2 180% $ 25.8 Percentage of total revenue......................... 4.1% 10.7% 4.4%
Merger transaction and restructuring costs for 1995 were $31.5 million. This represents charges of $32.5 million less the reversal of $1.0 million of excess reserves related to restructuring costs recorded in prior years. 21 During the fourth quarter of 1995, the Company recorded merger transaction and restructuring costs associated with the acquisition of Frame of $11.4 million and $21.1 million, respectively. The restructuring costs included $16.4 million related to cash expenditures and noncash items of $4.7 million, consisting primarily of write-offs of redundant equipment and intangible assets. As of December 1, 1995, $20.1 million of the balance in accrued restructuring costs represented expected future cash expenditures related to the Frame acquisition, most of which will be spent in 1996. To execute the acquisition of Frame, the Company incurred transaction costs consisting principally of transaction fees for investment bankers, attorneys, accountants, financial printing, and other related charges to negotiate the merger, conduct financial and technical due diligence, file appropriate regulatory documents, and solicit shareholder votes. As a result of the acquisition of Frame, certain sales, technical support, customer service, distribution, and administration functions have been or will be combined and/or reduced. Such restructuring costs include severance and outplacement charges of $11.0 million related to approximately 200 terminated employees. Affected employees received notification of their termination by November 8, 1995, and final assignments are expected to be completed by mid-1996. To facilitate the operations of the Company, the combined organization migrated to common management information systems, which resulted in a write-off of the book value of the abandoned systems, as well as of other redundant equipment. In addition, certain intangible assets that will have no benefit to the combined company were written off. The write-off of abandoned equipment and intangible assets included in restructuring costs was $4.7 million. In addition, redundant offices in Europe, Japan, Canada, and the United States will be eliminated. Lease and third-party contract termination payments totaling $5.4 million, resulting from the planned closure of 14 facilities, are accrued as part of the restructuring costs. The Company is unable to determine what effects the merger and restructuring actions will have on future operating results and the financial condition of the organization. During the fourth quarter of 1994, the Company recorded merger transaction and restructuring costs associated with the acquisition of Aldus of $14.6 million and $57.6 million, respectively. These costs included $46.5 million of current and future cash expenditures related to merger transaction fees and expenses, severance and outplacement for approximately 500 terminated employees, and lease and third-party contract termination payments resulting from the planned closure of 10 facilities. Noncash items of $25.7 million consisted primarily of write-offs of redundant information systems and equipment and of duplicate product lines. As a condition to the acquisition of Aldus, effective January 1995, the Company no longer sells and distributes FreeHand, the illustration program previously sold and distributed by Aldus. Also, PhotoStyler, an image editing software tool, was discontinued in the fourth quarter of 1994, as the product competed with certain existing products of the Company. In addition to the acquisition-related expenses recognized in the restructuring charge, the Company incurred approximately $10.1 million of certain one-time charges that were recognized in operating expenses. These charges included writing off certain capitalized software development costs, transition personnel bonuses, relocation expenses, and expenses incurred for integrating the two companies' benefit plans. In the fourth quarter of 1995, the Company analyzed the remaining accrued restructuring costs related to the acquisition of Aldus. As a result of this review, it was determined that approximately $0.7 million represented excess reserves and, therefore, this amount was reversed and credited to "Merger transaction and restructuring costs" in the Consolidated Statements of Income. As of December 1, 1995, $7.0 million of the balance in accrued restructuring costs represented expected future cash expenditures related to the Aldus acquisition, primarily related to payments under leases on redundant offices that will be incurred in future periods. Due to lower than anticipated revenues experienced in the first three quarters of 1993, Frame undertook certain restructuring measures to reduce the size and scope of its operations and re- 22 evaluated and redirected its product and distribution strategies. These actions resulted in restructuring charges totaling $16.0 million. In addition, Frame incurred other charges relating to the restructuring of approximately $9.8 million, which consisted primarily of write-offs of capitalized software, obsolete inventory and equipment, and the settlement of certain contingencies. Of the total restructuring and other charges, $12.8 million resulted from the write-off of assets, which occurred in 1993, and $13.0 million involved cash outflows, of which $4.7 million were incurred in 1993. During 1994, the results of the settlement of certain contingencies and changes in Frame's foreign distribution in Japan were more favorable than expected by approximately $2.2 million. However, these amounts were offset by increased estimates of costs related to facilities previously vacated and Frame's decision to curtail significantly its Irish operations resulting in a charge for termination costs, vacated facilities, and fixed asset write-offs. In 1994, Frame paid approximately $1.6 million in salary costs and approximately $3.3 million related to the settlement of certain contingencies, changing its foreign distribution in Japan, the relocation of its European headquarters, lease payments for vacated facilities, and other charges. During 1995, Frame made cash payments of $1.6 million and $0.2 million related to the curtailment of its Irish operations and vacated leased facilities, respectively. In addition, an analysis of its remaining accrued restructuring costs in the fourth quarter of 1995 indicated that approximately $0.3 million represented excess reserves. This amount was reversed and credited to "Merger transaction and restructuring costs" in the Consolidated Statements of Income. As of December 1, 1995, $1.1 million remained accrued and represented anticipated future cash outflows related to lease payments on vacated facilities. NONOPERATING INCOME
1995 CHANGE 1994 CHANGE 1993 ----------- ------------ ----------- ----------- ----------- Interest, investment, and other income.............. $ 29.3 181% $ 10.4 (25)% $ 13.8 Percentage of total revenue......................... 3.8% 1.5% 2.4%
Interest, investment, and other income increased by $18.9 million in 1995 from 1994 and decreased by $3.4 million in 1994 from 1993. The increase in 1995 from 1994 is primarily due to a larger investment base and generally higher interest rates in 1995 compared to 1994. In addition, the Company increased the weighted average days-to-maturity of its investments in 1995, which generated higher rates of return. Interest and other income was adversely impacted by $1.5 million in 1994, as the Company sold several securities (acquired in the Aldus acquisition) for losses in principal created by increases in interest rates during 1994, and for the write-off of an investment in a privately held enterprise. Interest, investment, and other income in 1993 included a gain of $3.9 million on the sale of common stock held as an investment and a $1.0 million write-off of an investment in a privately held enterprise. Interest, investment, and other income in 1994 would have increased approximately $1.0 million absent the 1993 net gain on the sales of common stock and the losses experienced in 1994. Such increase is attributable to increased levels of cash invested and a slight increase in interest earned on the Company's investments from small increases in prevailing interest rates. INCOME TAX PROVISION
1995 CHANGE 1994 CHANGE 1993 ----------- ------------ ----------- ------------ ----------- Income tax provision................................ $ 70.4 87% $ 37.6 24% $ 30.4 Percentage of total revenue......................... 9.2% 5.6% 5.2% Effective tax rate.................................. 42.9% 71.0% 41.9%
The Company's effective tax rate in 1995 decreased significantly over the effective tax rate of 1994, due primarily to smaller one-time, nondeductible merger transaction and restructuring costs and increased tax-exempt income. The Company's effective tax rate in 1994 increased significantly 23 over the effective tax rate of 1993, due primarily to one-time, nondeductible merger transaction and restructuring costs. An analysis of the differences between the statutory and effective income tax rates is provided in Note 9 of Notes to Consolidated Financial Statements. NET INCOME AND NET INCOME PER SHARE
1995 CHANGE 1994 CHANGE 1993 -------- ------ -------- ------ -------- Net Income............................ $93.5 510% $15.3 (63)% $42.0 Percentage of total revenue........... 12.3% 2.3% 7.2% Net income per share.................. $1.26 473% $0.22 (65)% $0.62 Weighted shares (in thousands)........ 74,253 6% 70,169 3 % 68,252
Net income for 1995 represents a 510 percent increase over 1994, while 1994 net income decreased 63 percent from that of 1993. Results of operations in each of the three years included several one-time charges that would not normally be included in the Company's operating results. A reconciliation of the reported results of operations to the results of operations excluding these one-time charges for each of the years follows.
1995 ----------------------------------------- INCOME BEFORE INCOME NET INCOME TAX NET INCOME TAXES PROVISION 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: Ceneca Communications, Inc.............. 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 -------- --------- -------- --------- -------- --------- -------- ---------
1994 ---------------------------------------- INCOME BEFORE INCOME NET INCOME TAX NET INCOME TAXES PROVISION 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: Compumation, Incorporated................ 3,045 -- 3,045 0.04 LaserTools Corporation................... 12,424 -- 12,424 0.17 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 expenses 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 -------- --------- ------- --------- -------- --------- ------- ---------
24
1993 ---------------------------------------- INCOME BEFORE INCOME NET INCOME TAX NET INCOME TAXES PROVISION INCOME PER SHARE -------- --------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Reported results of operations............. $ 72,358 $ 30,351 $42,007 $0.62 Write-off of acquired in-process research and development: AH Software, Inc. and The Company of Science & Art........................... 4,285 -- 4,285 0.06 Restructuring of Frame's operations........ 25,800 9,030 16,770 0.24 -------- --------- ------- --------- Results of operations excluding one-time charges................................... $102,443 $ 39,381 $63,062 $0.92 -------- --------- ------- --------- -------- --------- ------- ---------
Furthermore, the future effective tax rate is expected to be approximately 36 percent. Had this rate been in effect in 1995, 1994, and 1993, the net income per share, excluding the above one-time charges, would have been $1.82, $1.36, and $0.96 per share, respectively. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS The Company believes that in the future its results of operations could be affected by various factors such as the ability of the Company to integrate Adobe, Aldus, and Frame product lines; renegotiation of royalty arrangements; delays in shipment of the Company's new products and major new versions of existing products; market acceptance of new products and upgrades; growth in worldwide personal computer and printer sales and sales price adjustments; consolidation in the OEM printer business; and adverse changes in general economic conditions in any of the countries in which the Company does business. In connection with the merger with Frame, the Company has sought to reduce combined expenses by the elimination of duplicate or unnecessary facilities, employees, marketing programs, and other expenses. The Company believes that the major impact of such reductions will occur in the first and second quarters of 1996 but expects some additional impact in later quarters of 1996. The Company expects that these reductions will benefit future operating results, but the reductions could adversely impact the earnings of the combined company. In addition, the integration of the product lines of the two companies could have a material adverse effect on the results of operations, including the potential for charges for certain discontinued business components. As previously stated, effective January 1, 1995, the Company no longer markets FreeHand and discontinued marketing of PhotoStyler in late 1994. These two products aggregated $53.2 million of revenue and $35.4 million of gross profit in 1994. There can be no assurance that the Company will be able to continue to replace this lost revenue or that it will be able to do so as profitably. The Company's OEM customers on occasion seek to renegotiate their royalty arrangements. The Company evaluates these requests on a case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, including licensing a PostScript language compatible interpreter from a third party, which could result in lower licensing revenue for the Company. The Company derives a significant portion of its revenue and operating income from its subsidiaries located in Europe and the Pacific Rim. While most of the revenue of these subsidiaries is denominated in U.S. dollars, the majority of their expense transactions are denominated in foreign currencies, including the Japanese yen and most major European currencies. As a result, the Company's operating results are subject to fluctuations in foreign currency exchange rates. To date the impact of such fluctuations has been insignificant and the Company has not engaged in any significant activities to hedge its exposure to foreign currency exchange rate fluctuations. The Company's ability to develop and market products, including upgrades of currently shipping products, that successfully adapt to current market needs may also have an impact on the results of operations. A portion of the Company's future revenue will come from these products. Delays in 25 product introductions could have an adverse effect on the Company's revenue, earnings, or stock price. The Company cannot determine the ultimate effect that these new products or upgrades will have on its sales or results of operations. Although the Company generally offers its application products on Macintosh, Windows, and UNIX platforms, a majority of the overall sales of these products to date has been for the Macintosh platform, particularly for the higher end Macintosh computers. To the extent that there is a slowdown of customer purchases in the higher end Macintosh market or if other operating systems, such as Windows 95, become more prevalent among the Company's customers, the Company's operating results could be materially adversely affected. 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. Moreover, critical issues concerning the commercial use of the Internet (including security, reliability, cost, ease of use and access, 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. 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 coprorate environment or the securities markets in general will often result in significant volatility of the Company's common stock price. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 will be effective for fiscal years beginning after December 15, 1995, and requires long-lived assets to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company will 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. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 will be effective for fiscal years beginning after December 15, 1995, and will require that the Company either recognize in its consolidated financial statements costs related to its employee stock-based compensation plans, such as stock option and stock purchase plans, 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. 26 FINANCIAL CONDITION CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
1995 CHANGE 1994 CHANGE 1993 --------- ----------- --------- ----------- --------- Cash, cash equivalents, and short-term investments.... $ 516.0 16% $ 444.8 29% $ 344.7
The Company's cash balances and short-term investments have increased each year due to profitable operations, partially offset by expenditures for capital outlays and other investments. In 1995 and 1994, growth in cash balances and short-term investments was reduced by increased merger and acquisition activity. Cash equivalents consist of highly liquid money market instruments. All of the Company's cash equivalents and short-term investments, consisting principally of municipal bonds, commercial paper, auction rate 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
1995 CHANGE 1994 CHANGE 1993 --------- ----------- --------- ----------- --------- Noncurrent liabilities and shareholders' equity....... $ 698.4 36% $ 514.3 11% $ 464.1
Included above are shareholders' equity and, in 1993, put warrants. As of December 1, 1995, the Company had no noncurrent liabilities. Shareholders' equity as of December 1, 1995 was $698.4 million, compared to $514.3 million as of November 25, 1994 and $457.2 million as of November 26, 1993. A significant portion of the year-to-year increases in shareholders' equity is attributable to issuance of common stock under the Company's stock option and employee stock purchase plans. The Company has paid cash dividends on its common stock each quarter since the second quarter of 1988. During 1995, the Company paid cash dividends of $0.20 per common share. The Company's Board of Directors approved a two-for-one stock split on July 9, 1993, payable in the form of a stock dividend for shareholders of record as of July 27, 1993, with a distribution date of August 10, 1993. All share and per share data has been restated to reflect this stock split. The declaration of future dividends is within the discretion of the Company's Board of Directors and will depend upon business conditions, results of operations, the financial condition of the Company, and other factors. WORKING CAPITAL
1995 CHANGE 1994 CHANGE 1993 --------- ----------- --------- ----------- --------- Working capital....................................... $ 506.5 26% $ 402.8 16% $ 347.7
Net working capital grew to $506.5 million as of December 1, 1995, compared to $402.8 million as of November 25, 1994. Cash flow provided by operations during 1995 was $177.0 million. Expenditures for property and equipment totaled $34.1 million. Such expenditures are expected to continue, including expenditures for computer systems for development, sales and marketing, product support, and administrative staff. In addition, in 1995 the Company paid approximately $67.4 million to acquire Ceneca Communications, Inc., to buy out its future royalty obligation with respect to its Adobe Photoshop product, and to invest in various companies, either directly or through a limited partnership arrangement. In the future, additional cash may be used to acquire software products or technologies complementary to the Company's business. Net cash provided by financing activities during 1995 was $36.9 million, primarily resulting from the issuance of common stock under employee stock plans, partially offset by repurchases of common stock and payment of dividends. 27 The Company's principal commitments as of December 1, 1995 consisted of obligations under operating leases, a real estate development agreement, and various service and lease guarantee agreements with a related party. The Company has entered into a real estate development agreement for the construction of an office facility and in 1996 will enter into an operating lease agreement for this facility. The Company will have the option to purchase the facility at the end of the lease term. In the event the Company chooses not to exercise this option, the Company is obligated to arrange for the sale of the facility to an unrelated party and is required to pay the lessor any difference between the net sales proceeds and the lessor's net investment in the facility, in an amount not to exceed that which would preclude classification of the lease as an operating lease, approximately $52.0 million. The Company also is required, periodically during the construction period, to deposit funds with the lessor to secure the performance of its obligations under the lease. During 1995, the Company increased its deposits by approximately $33.4 million, and as of December 1, 1995, the Company's deposits under this agreement totaled approximately $35.6 million in United States government treasury notes and money market mutual funds. These deposits are included in "Other assets" in the Consolidated Balance Sheets. The Company has also entered into various agreements with McQueen Holdings Limited ("McQueen"), a European operating entity, whereby the Company has agreed to guarantee obligations under operating leases for certain European facilities utilized by McQueen, and to guarantee certain levels of business between Adobe and McQueen. The Company currently owns 16 percent of the outstanding stock in McQueen. The Company's ownership percentage has increased over that of 1994 because McQueen repurchased some of its previously outstanding shares. 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. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY 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." SUPPLEMENTARY DATA The following tables (presented in thousands, except per share amounts) set forth quarterly supplementary data for each of the years in the two-year period ended December 1, 1995 and reflect the results of the Company as restated to reflect the acquisitions by the Company of Frame Technology Corporation in 1995 and Aldus Corporation in 1994, both of which were accounted for as poolings of interests. See Note 2 in Notes to Consolidated Financial Statements.
1995 --------------------------------------------------------------- UNAUDITED QUARTER ENDED AUDITED -------------------------------------------------- YEAR MAR. 3 JUNE 2 SEPT. 1 DEC. 1 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 1994 --------------------------------------------------------------- UNAUDITED QUARTER ENDED AUDITED -------------------------------------------------- YEAR FEB. 25 MAY 27 AUG. 26 NOV. 25 ENDED 1994 1994 1994 1994 NOV. 25 ----------- ----------- ----------- ----------- ----------- Revenue......................................... $ 153,128 $ 168,228 $ 166,612 $ 187,649 $ 675,617 Gross margin.................................... 124,654 137,781 138,010 153,149 553,594 Merger transaction and restructuring costs...... -- -- -- 72,183 72,183 Income (loss) before income taxes............... 32,139 30,260 32,401 (41,854) 52,946 Net income (loss)............................... 20,626 19,263 20,605 (45,157) 15,337 Net income (loss) per share..................... 0.30 0.27 0.29 (0.65) 0.22 Shares used in computing net income (loss) per share.......................................... 69,698 70,353 71,548 69,076 70,169
29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements on any matter of accounting principles, financial statement disclosure, or auditing scope or procedure to be reported under this item. 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS Information with respect to Directors may be found in the section captioned "Election of Directors" appearing in the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on April 10, 1996. Such information is incorporated herein by reference. EXECUTIVE OFFICERS The executive officers of the Company as of February 20, 1996 are as follows:
NAME AGE POSITIONS - --------------------------- --- ------------------------------------------------------------ John E. Warnock 55 Chairman of the Board and Chief Executive Officer Charles M. Geschke 56 President and Director Derek J. Gray 46 Senior Vice President and General Manager, Adobe Europe Stephen A. MacDonald 50 Senior Vice President and Chief Operating Officer M. Bruce Nakao 52 Senior Vice President, Finance and Administration, Chief Financial Officer, Treasurer, and Assistant Secretary David B. Pratt 56 Senior Vice President and Chief Operating Officer Colleen M. Pouliot 37 Vice President, General Counsel and Secretary
A biography of 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 its 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 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. 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 16 percent shareholder by virtue of the acquisition of Aldus. Pursuant to a reorganization of the Company's Europe entity, Mr. Gray was elected General Manager of Adobe Systems Europe in April 1995. 31 Mr. MacDonald joined the Company in May 1983 as Vice President. In August 1989, he was promoted to Senior Vice President and in November 1995, to Chief Operating Officer. From February 1972 until he joined the Company, Mr. MacDonald was a Marketing Manager for Hewlett-Packard Company. Mr. Nakao joined the Company in May 1986 and was elected Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary in June 1986. In December 1992, he was promoted to Senior Vice President. From February 1982 to May 1986, Mr. Nakao was Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary of Ross Systems, Inc. From January 1980 to February 1982, Mr. Nakao was Vice President, Chief Financial Officer, and Treasurer of Dividend Industries, Inc. Mr. Pratt joined the Company in May 1988 as General Manager of the Application Products Division. In August 1989, he was promoted to Vice President. In September 1992, he was promoted to Senior Vice President and in November 1995, to Chief Operating Officer. From October 1987 to April 1988, Mr. Pratt was Executive Vice President and Chief Operating Officer of Logitech Corporation. From May 1986 to June 1987, Mr. Pratt was Senior Vice President and Chief Operating Officer of Quantum Corporation. From March 1982 through January 1986, Mr. Pratt was President and Chief Executive Officer of Boschert Incorporated. 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. 32 ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item may be found in the section captioned "Executive Compensation" appearing in the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on April 10, 1996. Such information is incorporated herein by reference. 33 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item may be found in the section captioned "Security Ownership of Certain Beneficial Owners and Management" appearing in the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 10, 1996. Such information is incorporated herein by reference. 34 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item may be found in the section captioned "Certain Transactions" appearing in the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 10, 1996. Such information is incorporated herein by reference. 35 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) Documents filed as part of this report 1. Financial statements FINANCIAL STATEMENT DESCRIPTION -Management's Report -Independent Auditors' Report -Consolidated Balance Sheets December 1, 1995 and November 25, 1994 -Consolidated Statements of Income Years Ended December 1, 1995, November 25, 1994, and November 26, 1993 -Consolidated Statements of Shareholders' Equity Years Ended December 1, 1995, November 25, 1994, and November 26, 1993 -Consolidated Statements of Cash Flows Years Ended December 1, 1995, November 25, 1994, and November 26, 1993 -Notes to Consolidated Financial Statements -Report of Ernst & Young LLP, Independent Auditors on Frame Technology Corporation -Report of Ernst & Young LLP, Independent Auditors on Aldus Corporation 2. Financial statement schedule
SCHEDULE NUMBER FINANCIAL STATEMENT SCHEDULE DESCRIPTION - -------------- ----------------------------------------- Schedule II Valuation and Qualifying Accounts
Other financial statement schedules have been omitted since they are either not required, not applicable, or the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits
INCORPORATED BY REFERENCE EXHIBIT -------------------------------- FILED NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH - --------- --------------------------------------------------------------- --------- ---------- --------- --------- 3.1.1 Amended and Restated Articles of Incorporation 10-K 11/30/88 3.1.1 3.1.2 Certificate of Amendment of Articles of Incorporation 10-K 11/30/88 3.1.2 3.1.3 Certificate of Amendment of Articles of Incorporation 10-K 11/29/91 3.1.3 3.1.4 Certificate of Amendment of Articles of Incorporation 10-K 11/26/93 3.1.4 3.2.8 Restated Bylaws X 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 10.17.1 License Agreement Restatement between the Company and Apple 10-K 11/30/88 10.17.1 Computer, Inc., dated April 1, 1987 (confidential treatment granted) 10.17.2 Amendment No. 1 to the License Agreement Restatement between 10-K 11/30/90 10.17.2 the Company and Apple Computer, Inc., dated November 27, 1990 (confidential treatment granted) 10.18 Lease Agreement dated November 11, 1983, between Mozart Family S-1 07/01/86 10.18 Trust and Epson America Inc. 10.19 Assignment of Lease dated November 11, 1983, between Epson S-1 07/01/86 10.19 America Inc. and the Company dated February 1, 1986
36
INCORPORATED BY REFERENCE EXHIBIT -------------------------------- FILED NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH - --------- --------------------------------------------------------------- --------- ---------- --------- --------- 10.20 Lease Agreement between Mozart Family Trust and the Company S-1 07/01/86 10.20 dated November 30, 1983 10.21.2 Revised Bonus Plan* 10-K 11/26/93 10.21.2 10.22.4 Restricted Stock Option Plan, as amended* 10-Q 07/06/94 10.22.4 10.23 Amended and Restated Software License Agreement between the 10-K 11/30/88 10.23 Company and QMS, Inc., dated May 15, 1987 (confidential treatment granted) 10.24.1 1994 Performance and Restricted Stock Plan S-4 07/27/94 10.1 10.25 Form of Indemnity Agreement 10-K 11/30/88 10.25 10.26 Lease Agreement by and between Charleston Place Associates and 10-K 11/30/88 10.26 Adobe Systems Incorporated dated April 14, 1987 10.26.1 Amendment One to Lease Agreement dated March 1, 1988 10-K 11/30/88 10.26.1 10.26.2 Amendment Two to Lease Agreement dated September 1, 1988 10-K 11/30/88 10.26.2 10.27 Lease Agreement by and between John Mozart and Adobe Systems 10-K 11/30/88 10.27 Incorporated dated July 20, 1988 10.31 Restated Agreement and Plan of Merger and Reorganization By and S-4 07/13/94 10.31 Among Adobe Systems Incorporated, P Acquisition Corp and Aldus Corporation 10.32 Sublease of the Land and Lease of the Improvements By and 10-K 11/25/94 10.32 Between Sumitomo Bank Leasing and Finance Inc. and Adobe Systems Incorporated 10.33 Sale of Rights under Software Development and Acquisition 10-Q 06/02/95 10.33 Agreement By and Between Adobe Systems Incorporated and Thomas Knoll and John Knoll (confidential treatment granted) 10.34 Agreement and Plan of Merger and Reorganization By and Among S-4 8/18/95 2.1 Adobe Systems Incorporated, J Acquisition Corporation and Frame Technology Corporation 10.35 Form of Executive Severance and Change of Control Agreement* X 11 Computation of Earnings Per Common Share X 21 Subsidiaries of the Registrant X 23 Consent of Independent Auditors X 23.1 Consent of Ernst & Young LLP, Independent Auditors X 23.2 Consent of Ernst & Young LLP, Independent Auditors X 27 Financial Data Schedule X
- ------------------------ *Compensatory plan or arrangement (b) Reports on Form 8-K One report on Form 8-K dated October 28, 1995, as amended on Form 8-K/A dated Novem- ber 24, 1995, was filed by the Company describing the completion of the acquisition of Frame Technology Corporation and incorporating the required financial statements related to the acquisition. 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Mountain View, California, on the 20th day of February, 1996. ADOBE SYSTEMS INCORPORATED By /s/ M. BRUCE NAKAO ----------------------------------- M. Bruce Nakao, SENIOR VICE PRESIDENT, FINANCE AND ADMINISTRATION, CHIEF FINANCIAL OFFICER, TREASURER, 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 20th day of February 1996. SIGNATURE TITLE - -------------------------------------------------- ------------------------- Chairman of the Board of /s/ JOHN E. WARNOCK Directors and Chief ------------------------------------------- Executive Officer John E. Warnock (Principal Executive Officer) /s/ CHARLES M. GESCHKE ------------------------------------------- President and Director Charles M. Geschke /s/ WILLIAM R. HAMBRECHT ------------------------------------------- Director William R. Hambrecht /s/ ROBERT SEDGEWICK ------------------------------------------- Director Robert Sedgewick /s/ DELBERT W. YOCAM ------------------------------------------- Director Delbert W. Yocam /s/ WILLIAM J. SPENCER ------------------------------------------- Director William J. Spencer /s/ GENE P. CARTER ------------------------------------------- Director Gene P. Carter /s/ PAUL BRAINERD ------------------------------------------- Director Paul Brainerd Senior Vice President, Finance and Administra- /s/ M. BRUCE NAKAO tion, Chief Financial ------------------------------------------- Officer, Treasurer, and M. Bruce Nakao Assistant Secretary (Principal Financial Officer) /s/ MICHAEL M. CULLY Vice President and ------------------------------------------- Controller (Principal Michael M. Cully Accounting Officer) 38 SUMMARY OF TRADEMARKS The following trademarks of Adobe Systems Incorporated or its subsidiaries, which may be registered in certain jurisdictions, are referenced in this Form 10-K: Adobe Acrobat Acrobat Capture Acrobat Catalog Acrobat Exchange Acrobat Player Acrobat Search After Effects Aldus Art Explorer ATM Brilliant Screens ColorBurst Color Central Dimensions Display PostScript Fetch Font Folio Frame FrameMaker FrameViewer Gallery Effects Home Publisher Illustrator Image Club IntelliDraw Memory Booster PageMaker PageMill Paint & Publish Persuasion PhotoDeluxe Photoshop Photostyler PixelBurst PostScript Premiere PrintGear ScreenReady SiteMill Streamline SuperATM SuperPaint TextureMaker Type Manager Type On Call Type Reunion Type Twister All other brand or product names are trademarks or registered trademarks of their respective holders. 39 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..................................................................................... 41 - Independent Auditors' Report............................................................................ 42 - Consolidated Balance Sheets December 1, 1995 and November 25, 1994................................................................. 43 - Consolidated Statements of Income Years Ended December 1, 1995, November 25, 1994, and November 26, 1993................................. 44 - Consolidated Statements of Shareholders' Equity Years Ended December 1, 1995, November 25, 1994, and November 26, 1993................................. 45 - Consolidated Statements of Cash Flows Years Ended December 1, 1995, November 25, 1994, and November 26, 1993................................. 48 - Notes to Consolidated Financial Statements.............................................................. 50 - Report of Ernst & Young LLP, Independent Auditors on Frame Technology Corporation............................................................................................ 69 - Report of Ernst & Young LLP, Independent Auditors on Aldus Corporation.................................. 70 - Report of Ernst & Young LLP, Independent Auditors on supplemental consolidated financial statements of Frame Technology Corporation........................................................................... 71
40 MANAGEMENT'S REPORT Management is responsible for all the information and representations contained in the consolidated financial statements and other sections of this FORM 10-K. Management believes that the consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances to reflect in all material respects the substance of events and transactions that should be included, and that the other information in this FORM 10-K is consistent with those statements. In preparing the consolidated financial statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being accounted for. In meeting its responsibility for the reliability of the consolidated financial statements, management depends on the Company's system of internal accounting control. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization, and are recorded properly to permit the preparation of consolidated financial statements in accordance with generally accepted accounting principles. In designing control procedures, management recognizes that errors or irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. Management believes that the Company's accounting controls provide reasonable assurance that errors or irregularities that could be material to the consolidated financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions. The Board of Directors pursues its oversight role for these consolidated financial statements through the Audit Committee, which is comprised solely of Directors who are not officers or employees of the Company. The Audit Committee meets with management periodically to review their work and to monitor the discharge of each of their responsibilities. The Audit Committee also meets periodically with KPMG Peat Marwick LLP, the independent auditors, who have free access to the Audit Committee or the Board of Directors, without management present, to discuss internal accounting control, auditing, and financial reporting matters. KPMG Peat Marwick LLP is engaged to express an opinion on our consolidated financial statements. Their opinion is based on procedures believed by them to be sufficient to provide reasonable assurance that the consolidated financial statements are not materially misleading and do not contain material errors. M. Bruce Nakao SENIOR VICE PRESIDENT, FINANCE AND ADMINISTRATION, CHIEF FINANCIAL OFFICER, TREASURER, AND ASSISTANT SECRETARY December 19, 1995 41 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 December 1, 1995 and November 25, 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 1, 1995. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We did not audit the consolidated financial statements of Frame Technology Corporation, a company acquired by the Company in a business combination accounted for as a pooling of interests, as described in Note 2 to the consolidated financial statements, which statements reflect total assets constituting 12 percent as of November 25, 1994, and total revenues constituting 12 and 10 percent in fiscal 1994 and 1993, respectively, of the related consolidated totals. We also did not audit the consolidated financial statements of Aldus Corporation, a company acquired by the Company in a business combination accounted for as a pooling of interests, as described in Note 2 to the consolidated financial statements, which statements reflect total revenues constituting 36 percent of consolidated fiscal 1993 revenues. The statements of Frame Technology Corporation and Aldus Corporation 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 and Aldus Corporation, is based solely upon the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signi cant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports 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 December 1, 1995 and November 25, 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 1, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP San Jose, California December 19, 1995 42 ADOBE SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 1 NOVEMBER 25 1995 1994 ------------ ------------ Current assets: Cash and cash equivalents.......................................................... $ 58,493 $ 204,120 Short-term investments............................................................. 457,547 240,648 Receivables........................................................................ 133,208 111,290 Inventories........................................................................ 7,277 10,113 Other current assets............................................................... 11,924 11,302 Deferred income taxes.............................................................. 24,338 21,049 ------------ ------------ Total current assets............................................................. 692,787 598,522 Property and equipment............................................................... 51,708 46,568 Other assets......................................................................... 135,735 51,426 Deferred income taxes................................................................ 4,502 13,484 ------------ ------------ $ 884,732 $ 710,000 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade and other payables........................................................... $ 25,639 $ 34,354 Accrued expenses................................................................... 94,848 88,954 Accrued restructuring costs........................................................ 28,151 31,688 Income taxes payable............................................................... 19,420 24,982 Deferred revenue................................................................... 18,257 15,707 ------------ ------------ Total current liabilities........................................................ 186,315 195,685 ------------ ------------ Shareholders' equity: Preferred stock, no par value; 2,000,000 shares authorized; none issued............ -- -- Common stock, no par value; 200,000,000 shares authorized; 72,834,444 and 69,389,591 shares issued and outstanding as of December 1, 1995 and November 25, 1994, respectively................................................................ 293,258 204,033 Unrealized gains (losses) on investments........................................... 18,831 (1,277) Retained earnings.................................................................. 390,793 315,611 Cumulative foreign currency translation adjustments................................ (4,465) (4,052) ------------ ------------ Total shareholders' equity....................................................... 698,417 514,315 ------------ ------------ $ 884,732 $ 710,000 ------------ ------------ ------------ ------------
See accompanying Notes to Consolidated Financial Statements. 43 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED ----------------------------------------- DECEMBER 1 NOVEMBER 25 NOVEMBER 26 1995 1994 1993 ----------- ------------ ------------ Revenue: Licensing............................. $183,437 $156,652 $146,176 Application products.................. 578,902 518,965 433,927 ----------- ------------ ------------ Total revenue....................... 762,339 675,617 580,103 Direct costs............................ 130,301 122,023 107,792 ----------- ------------ ------------ Gross margin............................ 632,038 553,594 472,311 ----------- ------------ ------------ Operating expenses: Software development costs: Research and development............ 138,616 113,797 100,200 Amortization of capitalized software development costs.................. 11,095 14,329 10,498 Sales, marketing, and customer support.............................. 242,713 234,771 206,946 General and administrative............ 58,526 60,531 66,048 Write-off of acquired in-process research and development............. 14,983 15,469 4,285 Merger transaction and restructuring costs................................ 31,534 72,183 25,800 ----------- ------------ ------------ Total operating expenses............ 497,467 511,080 413,777 ----------- ------------ ------------ Operating income........................ 134,571 42,514 58,534 Nonoperating income: Interest, investment, and other income............................... 29,282 10,432 13,824 ----------- ------------ ------------ Income before income taxes.............. 163,853 52,946 72,358 Income tax provision.................... 70,368 37,609 30,351 ----------- ------------ ------------ Net income.............................. $ 93,485 $ 15,337 $ 42,007 ----------- ------------ ------------ ----------- ------------ ------------ Net income per share.................... $ 1.26 $ 0.22 $ 0.62 ----------- ------------ ------------ ----------- ------------ ------------ Shares used in computing net income per share.................................. 74,253 70,169 68,252 ----------- ------------ ------------ ----------- ------------ ------------
See accompanying Notes to Consolidated Financial Statements. 44 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CUMULATIVE UNREALIZED FOREIGN COMMON STOCK GAINS CURRENCY -------------------------- (LOSSES) ON RETAINED TRANSLATION SHARES AMOUNT INVESTMENTS EARNINGS ADJUSTMENTS TOTAL ------------- ----------- ----------- ----------- ----------- ----------- Balances as of November 27, 1992........... 65,233,723 $ 137,478 $ -- $ 285,136 $ (3,843) $ 418,771 Issuance of common stock under Stock Option Plans..................................... 1,597,587 16,285 -- -- -- 16,285 Issuance of common stock under Employee Stock Purchase Plan....................... 558,301 7,741 -- -- -- 7,741 Issuance of common stock under Restricted Stock Plans............................... 50,300 -- -- -- -- -- Tax benefit from employee stock plans...... -- 11,234 -- -- -- 11,234 Stock compensation expense................. -- 1,651 -- -- -- 1,651 Dividends declared......................... -- -- -- (9,005) -- (9,005) Subchapter S distributions of Mastersoft... -- -- -- (1,807) -- (1,807) Shares issued in connection with acquisition............................... 105,049 2,545 -- -- -- 2,545 Repurchase of common stock................. (1,124,613) (25,533) -- -- -- (25,533) Proceeds from sales of put warrants........ -- 694 -- -- -- 694 Reclassification of put warrant obligations............................... -- (6,906) -- -- -- (6,906) Foreign currency translation adjustment.... -- -- -- -- (461) (461) Net income................................. -- -- -- 42,007 -- 42,007 ------------- ----------- ----------- ----------- ----------- ----------- Balances as of November 26, 1993........... 66,420,347 145,189 -- 316,331 (4,304) 457,216
See accompanying Notes to Consolidated Financial Statements. 45 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
CUMULATIVE UNREALIZED FOREIGN COMMON STOCK GAINS CURRENCY -------------------------- (LOSSES) ON RETAINED TRANSLATION SHARES AMOUNT INVESTMENTS EARNINGS ADJUSTMENTS TOTAL ------------- ----------- ----------- ----------- ----------- ----------- Balances as of November 26, 1993........... 66,420,347 $ 145,189 $ -- $ 316,331 $ (4,304) $ 457,216 Issuance of common stock under Stock Option Plans..................................... 2,647,740 37,103 -- -- -- 37,103 Issuance of common stock under Employee Stock Purchase Plan....................... 679,392 10,077 -- -- -- 10,077 Issuance of common stock under Restricted Stock Plans............................... 53,500 -- -- -- -- -- Tax benefit from employee stock plans...... -- 14,418 -- -- -- 14,418 Stock compensation expense................. -- 1,064 -- -- -- 1,064 Adjustment for change in Aldus Corporation fiscal year-end........................... (130,534) (3,265) -- (4,394) 487 (7,172) Dividends declared......................... -- -- -- (10,418) -- (10,418) Subchapter S distributions of Mastersoft... -- -- -- (1,245) -- (1,245) Shares issued in connection with acquisition............................... 104,520 2,105 -- -- -- 2,105 Repurchase of common stock................. (385,374) (10,283) -- -- -- (10,283) Proceeds from sales of put warrants........ -- 719 -- -- -- 719 Reclassification of put warrant obligations............................... -- 6,906 -- -- -- 6,906 Unrealized losses on investments........... -- -- (1,277) -- -- (1,277) Foreign currency translation adjustment.... -- -- -- -- (235) (235) Net income................................. -- -- -- 15,337 -- 15,337 ------------- ----------- ----------- ----------- ----------- ----------- Balances as of November 25, 1994........... 69,389,591 204,033 (1,277) 315,611 (4,052) 514,315
See accompanying Notes to Consolidated Financial Statements. 46 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
CUMULATIVE UNREALIZED FOREIGN COMMON STOCK GAINS CURRENCY -------------------------- (LOSSES) ON RETAINED TRANSLATION SHARES AMOUNT INVESTMENTS EARNINGS ADJUSTMENTS TOTAL ------------- ----------- ----------- ----------- ----------- ----------- Balances as of November 25, 1994........... 69,389,591 $ 204,033 $ (1,277) $ 315,611 $ (4,052) $ 514,315 Issuance of common stock under Stock Option Plans..................................... 3,179,073 58,417 -- -- -- 58,417 Issuance of common stock under Employee Stock Purchase Plan....................... 594,129 11,950 -- -- -- 11,950 Issuance of common stock under Restricted Stock Plans............................... 141,000 -- -- -- -- -- Tax benefit from employee stock plans...... -- 32,445 -- -- -- 32,445 Stock compensation expense................. -- 4,433 -- -- -- 4,433 Adjustment for change in Frame Technology Corporation fiscal year-end............... (9,516) (171) -- (1,784) -- (1,955) Dividends declared......................... -- -- -- (13,177) -- (13,177) Subchapter S distributions of Mastersoft... -- -- -- (3,342) -- (3,342) Repurchase of common stock................. (459,833) (17,849) -- -- -- (17,849) Unrealized gains on investments............ -- -- 20,108 -- -- 20,108 Foreign currency translation adjustment.... -- -- -- -- (413) (413) Net income................................. -- -- -- 93,485 -- 93,485 ------------- ----------- ----------- ----------- ----------- ----------- Balances as of December 1, 1995............ 72,834,444 $ 293,258 $ 18,831 $ 390,793 $ (4,465) $ 698,417 ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- -----------
See accompanying Notes to Consolidated Financial Statements. 47 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED -------------------------------------------- DECEMBER 1 NOVEMBER 25 NOVEMBER 26 1995 1994 1993 -------------- -------------- ------------ Cash flows from operating activities: Net income....................................................... $ 93,485 $ 15,337 $ 42,007 Adjustments to reconcile net income to net cash provided by operating activities: Stock compensation expense..................................... 4,433 1,064 1,651 Depreciation and amortization.................................. 60,435 57,794 49,841 Deferred income taxes.......................................... (6,828) (11,663) (10,993) Unrealized loss on investments................................. -- -- (113) Provision for losses on accounts receivable.................... 2,038 1,963 1,842 Tax benefit from employee stock plans.......................... 32,445 14,418 11,234 Write-off of acquired in-process research and development...... 14,983 15,469 4,285 Noncash restructuring costs.................................... 4,714 25,735 10,936 Changes in operating assets and liabilities: Receivables.................................................. (26,586) (17,648) (3,239) Inventories.................................................. 2,496 962 1,028 Other current assets......................................... (1,868) (1,274) (304) Trade and other payables..................................... (7,032) 11,979 5,473 Accrued expenses............................................. 3,161 14,505 8,878 Accrued restructuring costs.................................. 1,835 23,384 8,304 Income taxes payable......................................... (5,184) 2,452 11,544 Deferred revenue............................................. 4,474 1,259 710 -------------- -------------- ------------ Net cash provided by operating activities.......................... 177,001 155,736 143,084 -------------- -------------- ------------
See accompanying Notes to Consolidated Financial Statements. 48 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
YEARS ENDED -------------------------------------------- DECEMBER 1 NOVEMBER 25 NOVEMBER 26 1995 1994 1993 -------------- -------------- ------------ Cash flows from investing activities: Purchases of short-term investments.............................. $ (2,614,349) $ (1,766,916) $ (754,767) Maturities and sales of short-term investments................... 2,403,631 1,724,612 722,759 Acquisitions of property and equipment........................... (34,071) (32,700) (25,508) Capitalization of software development costs..................... (2,175) (10,953) (14,129) Additions to other assets........................................ (93,791) (17,663) (4,755) Acquisitions, net of cash acquired............................... (15,158) (14,750) (9,304) -------------- -------------- ------------ Net cash used for investing activities............................. (355,913) (118,370) (85,704) -------------- -------------- ------------ Cash flows from financing activities: Proceeds from issuance of common stock........................... 70,367 47,180 15,376 Proceeds from sales of put warrants.............................. -- 719 694 Repurchase of common stock....................................... (17,849) (10,283) (25,533) Payment of dividends............................................. (12,310) (9,906) (8,523) Payment of Subchapter S distributions of Mastersoft.............. (3,342) (1,245) (1,807) -------------- -------------- ------------ Net cash provided by (used for) financing activities............... 36,866 26,465 (19,793) Effect of foreign currency exchange rates on cash and cash equivalents....................................................... 10 (1,297) (516) -------------- -------------- ------------ Net increase (decrease) in cash and cash equivalents............... (142,036) 62,534 37,071 Adjustment for change in acquired companies' fiscal year-ends......................................................... (3,591) (3,554) -- Cash and cash equivalents at beginning of year..................... 204,120 145,140 108,069 -------------- -------------- ------------ Cash and cash equivalents at end of year........................... $ 58,493 $ 204,120 $ 145,140 -------------- -------------- ------------ -------------- -------------- ------------ Supplemental disclosures: Cash paid during the year for income taxes....................... $ 44,470 $ 26,121 $ 22,362 -------------- -------------- ------------ -------------- -------------- ------------ Noncash investing and financing activities: Dividends declared but not paid................................ $ 3,645 $ 2,778 $ 2,262 -------------- -------------- ------------ -------------- -------------- ------------ Reclassification of put warrants............................... $ -- $ (6,906) $ 6,906 -------------- -------------- ------------ -------------- -------------- ------------
See accompanying Notes to Consolidated Financial Statements. 49 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES OPERATIONS Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets, and supports computer software products and technologies that enable users to create, display, manage, communicate, and print electronic documents. The Company licenses its technology to major computer, printing, and publishing suppliers, and markets a line of application software products and type products for authoring and editing visually rich documents. Additionally, the Company markets a line of powerful, easy-to-use products for home and small business users. The Company distributes its products through a network of original equipment manufacturer ("OEM") customers, distributors and dealers, and value-added resellers ("VARs") and system integrators. The Company has operations in the Americas, Europe, and Pacific Rim regions. In October 1995, Adobe acquired Frame Technology Corporation ("Frame"), a developer of software applications for the creation, management, and distribution of documents for individuals and workgroups. In July 1995, Frame acquired Mastersoft, Inc. ("Mastersoft"), a developer of file conversion, viewing, and document comparison software. In August 1994, Adobe acquired Aldus Corporation ("Aldus"), a developer of software applications for the professional publishing, graphics, and prepress markets; interactive publishing; and the general consumer market. Each of these acquisitions was made through a pooling of interests. Accordingly, the Company's consolidated financial statements have been restated, for all periods prior to the acquisitions, to include the results of operations, financial position, and cash flows of Frame, Mastersoft, and Aldus. FISCAL YEAR The Company's current fiscal year is a 52/53 week year ending on the Friday closest to November 30. BASIS OF CONSOLIDATION The accompanying consolidated financial statements include those of Adobe and its wholly owned subsidiaries, after elimination of all significant intercompany accounts and transactions. 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, short-term investments, and certain noncurrent investments, consisting principally of United States government and government agency securities, municipal bonds, commercial paper, auction rate preferred stocks, and asset-backed securities, are classified as available-for-sale under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115. The Company's investments in equity securities that are free of trading restrictions or that will become free of trading restrictions during the next 12 months are also classified as available-for- sale. The securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a separate component of shareholders' equity. The amortized cost of available-for-sale debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses, and declines in value judged to be other than temporary, on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest, investment, and other income. 50 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN CURRENCY TRANSLATION Assets and liabilities of certain foreign subsidiaries, whose functional currency is the local currency, are translated from their respective functional currencies to U.S. dollars at year-end exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the year. The adjustment resulting from translating the financial statements of such foreign subsidiaries is reflected as a separate component of shareholders' equity. Certain other transaction gains or losses, which have not been material, are reported in results of operations. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of a building in Edinburgh, Scotland is calculated using the straight-line method over 35 years. Depreciation of equipment and furniture and fixtures is calculated using the straight-line method over the estimated useful lives of the respective assets, generally two to seven years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the related assets, generally five to nine years. OTHER ASSETS Purchased technology, goodwill, and licensing agreements are stated at cost less accumulated amortization. Amortization is provided on the straight-line method over the estimated useful lives of the respective assets, generally three years for technology, five to seven years for goodwill, and three to six years for licensing agreements. The Company periodically reviews the net realizable value of its intangible assets and adjusts the carrying amount accordingly. Research and development costs are charged to expense when incurred. Costs incurred in the research and development of new software products and enhancements to existing software products are also expensed as incurred until the technological feasibility of the product has been established. After technological feasibility has been established, any additional costs are capitalized in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," and are included in "Other assets" in the Consolidated Balance Sheets. 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 owns a minority interest in certain technology companies and a majority interest in a limited partnership, established to invest in technology companies, and accounts for such investments under the cost and equity methods, respectively. REVENUE RECOGNITION The Company recognizes revenue in accordance with Statement of Position 91-1, "Software Revenue Recognition," and SFAS No. 48, "Revenue Recognition When Right of Return Exists." Application products revenue is recognized upon shipment. Revenue from distributors is subject to agreements allowing limited rights of return and price protection. The Company provides for estimated future returns and price protection. Licensing revenue is recognized when the Company's OEM customers ship their products incorporating Adobe's software to their end user customers. The Company also enters into contracts with 51 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OEMs to adapt the Company's software products to the OEMs' hardware products. Revenue on such contracts is recognized based on the percentage-of-completion method and is included in licensing revenue. Deferred revenue consists of customer advances under OEM licensing agreements and maintenance contracts for application products, which are 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 accounts for its income taxes under SFAS No. 109, "Accounting for Income Taxes." Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities measured using existing tax rates. Under SFAS No. 109, the effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. 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. 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. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 will be effective for fiscal years beginning after December 15, 1995, and requires long-lived assets to be evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company will 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. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 will be effective for fiscal years beginning after December 15, 1995, and will require that the Company either recognize in its consolidated financial statements costs related to its employee stock-based compensation plans, such as stock option and stock purchase plans, or make pro forma disclosures of such costs in a footnote to the consolidated financial statements. 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. 52 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS Certain reclassifications were made to the 1994 and 1993 consolidated financial statements to conform to the 1995 presentation. NOTE 2. ACQUISITIONS POOLINGS OF INTERESTS On October 28, 1995, the Company issued approximately 8.5 million shares of its common stock in exchange for all of the common stock of Frame. Prior to its acquisition by the Company, on July 28, 1995, Frame acquired all of the common stock of Mastersoft in exchange for approximately 0.6 million equivalent shares of Adobe common stock. On August 31, 1994, the Company issued approximately 14.2 million shares of its common stock in exchange for all of the common stock of Aldus. These business combinations have been accounted for as poolings of interests, and, accordingly, the consolidated financial statements for periods prior to the combinations have been restated to include the results of operations, financial position, and cash flows of Frame, Mastersoft, and Aldus. Prior to the combinations, Frame's and Aldus' fiscal years ended on December 31. In recording the business combination, Frame's financial statements for the 12 months ended December 1, 1995 were combined with the Company's consolidated financial statements for the same period. Frame's financial statements for the years ended December 31, 1994 and 1993 were combined with the Company's consolidated financial statements for the years ended November 25, 1994 and November 26, 1993, respectively. Revenue and net income of Frame for the month ended December 31, 1994 were $8.6 million and $2.3 million, respectively. Net income, Subchapter S distributions of Mastersoft, the issuance of common stock, and the net decrease in cash and cash equivalents were adjusted to eliminate the effect of including Frame's results of operations, financial position, and cash flows for the month ended December 31, 1994 in the years ended December 1, 1995 and November 25, 1994. Similarly, Aldus' financial statements for the 12 months ended November 25, 1994 were combined with the Company's for the same period. Aldus' financial statements for the year ended December 31, 1993 were combined with the Company's consolidated financial statements for the year ended November 26, 1993. Revenue and net income of Aldus for the month ended December 31, 1993 were $26.1 million and $4.4 million, respectively. Net income, the foreign currency translation adjustment, the issuance of common stock, and the net increase in cash and cash equivalents were adjusted to eliminate the effect of including Aldus' results of operations, financial position, and cash flows for the month ended December 31, 1993 in the years ended November 25, 1994 and November 26, 1993. COMBINED RESULTS OF OPERATIONS There were no significant transactions among the Company, Frame, and Aldus prior to the combinations which required elimination, and no adjustments were required to conform Aldus' accounting policies to those of the Company. Certain adjustments were made to Frame's tax provision and deferred tax accounts to reflect tax benefits available to the combined company. In addition, certain reclassifications were made to Frame's 1994 and 1993 financial statements to conform to the 1995 presentation. 53 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 2. ACQUISITIONS (CONTINUED) The table below provides information for periods prior to the combinations regarding the results of operations for the separate enterprises.
NINE MONTHS ENDED YEARS ENDED ------------------------ -------------------------- SEPTEMBER 1 AUGUST 26 NOVEMBER 25 NOVEMBER 26 1995 1994 1994 1993 ----------- ----------- ------------ ------------ Revenue: Adobe................................................... $ 493,238 $ 260,112 $ 597,772 $ 313,457 Frame................................................... 68,225 55,646 77,845 59,866 Aldus................................................... -- 172,210 -- 206,780 ----------- ----------- ------------ ------------ Combined.............................................. $ 561,463 $ 487,968 $ 675,617 $ 580,103 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------ Net Income: Adobe................................................... $ 97,705 $ 49,329 $ 6,309 $ 57,030 Frame................................................... 10,476 7,950 11,870 (32,392) Aldus................................................... -- 5,131 -- 9,515 Adjustment to Frame's tax provision..................... (2,906) (1,916) (2,842) 7,854 ----------- ----------- ------------ ------------ Combined.............................................. $ 105,275 $ 60,494 $ 15,337 $ 42,007 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------
PURCHASES In October 1995, the Company acquired Ceneca Communications, Inc. for approximately $15.2 million in cash and assumed liabilities. Of this amount, $15.0 million was allocated to in-process research and development and expensed at the time of acquisition. The remainder of the purchase price was allocated primarily to goodwill. During 1994, the Company acquired LaserTools Corporation and Compumation, Incorporated for an aggregate purchase price of $17.0 million. Approximately $15.5 million was allocated to in-process research and development, and was expensed at the time of these acquisitions. The operating results of the acquired companies have been included in the accompanying consolidated financial statements from their dates of acquisition. 54 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS All cash equivalents, short-term investments, noncurrent investments, and certain investments in equity securities have been classified as available-for-sale securities and consisted of the following:
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 -------- ---------- ---------- ---------- -------- ---------- ---------- ----------
AS OF NOVEMBER 25, 1994 ---------------------------------------------- UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE -------- ---------- ---------- ---------- Classified as current assets: Money market mutual funds and time deposits........................... $ 11,050 $ -- $ (7) $ 11,043 United States government treasury notes and agency discount notes.... 134,209 -- (702) 133,507 State and municipal bonds and notes.............................. 147,882 -- (958) 146,924 Corporate and bank notes............ 16,094 -- (42) 16,052 Auction-rate securities............. 80,865 -- -- 80,865 Asset-backed securities............. 7,199 -- (322) 6,877 Other securities.................... 5,504 -- (46) 5,458 -------- ---------- ---------- ---------- Total current..................... 402,803 -- (2,077) 400,726 -------- ---------- ---------- ---------- Classified as noncurrent assets: Money market mutual funds and time deposits........................... 2,245 4 -- 2,249 -------- ---------- ---------- ---------- Total securities.................. $405,048 $ 4 $(2,077) $ 402,975 -------- ---------- ---------- ---------- -------- ---------- ---------- ----------
Unrealized gains (losses) are reported as a separate component of shareholders' equity, net of taxes of $12.9 million and $0.8 million as of December 1, 1995 and November 25, 1994, respectively. Net realized gains for the years ended December 1, 1995 and November 25, 1994 of $1.4 million and $0.2 million, respectively, are included in interest, investment, and other income. 55 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (CONTINUED) The Company's investments are classified as follows:
DECEMBER 1 NOVEMBER 25 1995 1994 ----------- ----------- Cash equivalents................................... $ 29,083 $ 160,078 Short-term investments............................. 457,547 240,648 Other assets -- equity investments................. 28,835 -- Other assets -- restricted funds................... 35,634 2,249 ----------- ----------- $ 551,099 $ 402,975 ----------- ----------- ----------- -----------
The cost and estimated fair value of available-for-sale securities by contractual maturity consisted of the following:
DECEMBER 1, 1995 NOVEMBER 25, 1994 -------------------- -------------------- ESTIMATED ESTIMATED FAIR FAIR COST VALUE COST VALUE --------- --------- --------- --------- Debt securities: One year or less............................... $ 89,895 $ 89,940 $ 267,511 $ 266,654 One to three years............................. 363,167 367,196 49,473 48,579 Three to five years............................ 35,516 36,357 -- -- Auction-rate securities........................ 13,700 13,700 80,865 80,865 --------- --------- --------- --------- 502,278 507,193 397,849 396,098 Asset-backed securities........................ 15,131 15,071 7,199 6,877 --------- --------- --------- --------- Total debt securities............................ 517,409 522,264 405,048 402,975 Equity securities................................ 2,000 28,835 -- -- --------- --------- --------- --------- Total securities................................. $ 519,409 $ 551,099 $ 405,048 $ 402,975 --------- --------- --------- --------- --------- --------- --------- ---------
Included in auction-rate securities in 1994 are Select Auction Variable Rate Securities ("SAVRS") whose stated maturities exceed ten years. However, the Company had the option of adjusting the respective interest rates or liquidating these investments at auction on stated auction dates every 35 days. NOTE 4. RECEIVABLES Receivables consisted of the following:
DECEMBER 1 NOVEMBER 25 1995 1994 ----------- ----------- Trade receivables.................................. $ 91,296 $ 84,568 Royalty receivables................................ 34,017 26,800 Interest and other receivables..................... 11,593 3,815 ----------- ----------- 136,906 115,183 Less allowance for doubtful accounts............... 3,698 3,893 ----------- ----------- $ 133,208 $ 111,290 ----------- ----------- ----------- -----------
56 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 5. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
DECEMBER 1 NOVEMBER 25 1995 1994 ----------- ------------ Land............................................................... $ 782 $ 782 Building........................................................... 4,615 4,615 Equipment.......................................................... 122,794 107,078 Furniture and fixtures............................................. 18,962 20,042 Leasehold improvements............................................. 8,790 4,146 ----------- ------------ 155,943 136,663 Less accumulated depreciation and amortization..................... 104,235 90,095 ----------- ------------ $ 51,708 $ 46,568 ----------- ------------ ----------- ------------
NOTE 6. OTHER ASSETS Other assets consisted of the following:
DECEMBER 1 NOVEMBER 25 1995 1994 ----------- ------------ Licensing agreements............................................... $ 16,319 $ 15,565 Goodwill........................................................... 13,753 25,262 Purchased technology............................................... 35,626 355 Software development costs......................................... 36,988 33,260 Equity investments................................................. 53,091 5,927 Restricted funds................................................... 35,634 2,249 Miscellaneous other assets......................................... 11,363 8,202 ----------- ------------ 202,774 90,820 Less accumulated amortization...................................... 67,039 39,394 ----------- ------------ $ 135,735 $ 51,426 ----------- ------------ ----------- ------------
The following significant transactions and activities are included in other assets: PURCHASED TECHNOLOGY During 1995, the Company entered into an agreement with the developers of the technology underlying its Adobe Photoshop product under which the Company made a lump-sum payment of $34.5 million in lieu of all royalty obligations incurred in connection with the technology after the beginning of the fourth quarter of 1994. Accordingly, $8.5 million of the amount paid to the developers was applied to accrued royalties related to the fourth quarter of 1994 and the 1995 period prior to the execution of the agreement. The balance of $26.0 million is being amortized over 30 months, and as of December 1, 1995, the remaining unamortized cost was $18.2 million. Prior to this agreement, the Company paid the developers a royalty for each copy of Adobe Photoshop sold by the Company. SOFTWARE DEVELOPMENT COSTS Unamortized software development costs were $2.5 million and $11.6 million as of December 1, 1995 and November 25, 1994, respectively. Amortization of software development costs was $11.1 million, $14.3 million, and $10.5 million for the years ended December 1, 1995, November 25, 1994, and November 26, 1993, respectively. 57 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 7. ACCRUED EXPENSES Accrued expenses consisted of the following:
DECEMBER 1 NOVEMBER 25 1995 1994 ----------- ------------ Royalties.......................................................... $ 7,194 $ 10,824 Accrued compensation and benefits.................................. 26,730 22,748 Sales and marketing allowances..................................... 24,586 20,697 Other.............................................................. 36,338 34,685 ----------- ------------ $ 94,848 $ 88,954 ----------- ------------ ----------- ------------
NOTE 8. ACCRUED RESTRUCTURING COSTS ASSOCIATED WITH THE ACQUISITION OF FRAME On October 28, 1995, the Company acquired Frame, described in "Note 2 -- Acquisitions," and initiated a plan to combine the operations of the two companies. On this date, the Company recorded a $32.5 million charge to operating expenses related to merger transaction and restructuring costs. Merger transaction costs consist principally of transaction fees for investment bankers, attorneys, accountants, financial printing, and other related charges. Restructuring costs include the elimination of redundant equipment, the write-off of certain intangible assets, severance and outplacement of terminated employees, and cancellation of certain contractual agreements. Merger transaction and restructuring costs are summarized below:
PERIOD FROM ACQUISITION TO PROVISION DECEMBER 1, 1995 RECORDED AT ------------------------ ACCRUED AS ACQUISITION CASH OF DECEMBER DATE WRITE-OFFS PAYMENTS 1 1995 ----------- ----------- ----------- ------------ Merger transaction costs....................................... $ 11,399 $ -- $ 6,341 $ 5,058 Restructuring costs: Severance and outplacement................................... 10,958 -- 1,346 9,612 Redundant equipment and intangibles.......................... 4,452 4,452 -- -- Cancellation of facility leases and other contracts.......... 5,664 262 -- 5,402 ----------- ----------- ----------- ------------ $ 32,473 $ 4,714 $ 7,687 $ 20,072 ----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------
The nature, timing, and extent of restructuring costs follow: SEVERANCE AND OUTPLACEMENT As a result of the merger, certain technical support, customer service, distribution, and administrative functions were combined and reduced. Restructuring included severance and outplacement charges related to approximately 200 terminated employees. Affected employees had received notification of their termination by November 8, 1995, and final assignments are expected to be completed by mid-1996. REDUNDANT EQUIPMENT AND INTANGIBLES To facilitate the operations of the Company, the combined organization migrated to common management information systems, which resulted in a write-off of the book value of the abandoned systems as well as other redundant equipment. In addition, certain intangible assets that will have no benefit to the combined company were written off. Redundant equipment was either disposed of during the fourth quarter or written down to its estimated net realizable value. 58 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 8. ACCRUED RESTRUCTURING COSTS (CONTINUED) CANCELLATION OF FACILITY LEASES AND OTHER CONTRACTS The Company has consolidated duplicate offices in Europe, Japan, Canada, and the United States. Lease and third-party contract termination payments, resulting from the planned closure of these facilities, are expected to continue through the lease term or negotiated early termination date, if applicable. ASSOCIATED WITH THE ACQUISITION OF ALDUS On August 31, 1994, the Company merged with Aldus, described in "Note 2 -- Acquisitions," and initiated a plan to combine the operations of the two companies. On this date, the Company recorded a $72.2 million charge to operating expenses related to merger transaction and restructuring costs. Merger transaction costs consisted principally of transaction fees for investment bankers, attorneys, accountants, financial printing, and other related charges. Restructuring costs included the elimination of redundant information systems and equipment, severance and outplacement of terminated employees, the write-off of certain assets related to product lines to be divested or eliminated, and cancellation of certain contractual agreements. Merger transaction and restructuring costs are summarized below:
PERIOD FROM ACQUISITION TO PROVISION NOVEMBER 25, 1994 ACCRUED RECORDED AT -------------------- AS OF ACQUISITION CASH NOVEMBER 25 DATE WRITE-OFFS PAYMENTS 1994 ----------- --------- --------- ------------ Merger transaction costs....................................... $ 14,618 $ -- $ 8,755 $ 5,863 Restructuring costs: Severance and outplacement................................... 20,784 -- 9,236 11,548 Redundant information systems and equipment.................. 10,778 10,778 -- -- Assets associated with duplicate product lines............... 14,957 14,957 -- -- Cancellation of facility leases and other contracts.......... 11,046 -- -- 11,046 ----------- --------- --------- ------------ $ 72,183 $ 25,735 $ 17,991 $ 28,457 ----------- --------- --------- ------------ ----------- --------- --------- ------------
ACCRUED YEAR ENDED DECEMBER 1, 1995 ACCRUED AS OF ----------------------------------- AS OF NOV. 25 CASH CHANGE IN DEC. 1 1994 WRITE-OFFS PAYMENTS ESTIMATE 1995 --------- ----------- --------- ----------- --------- Merger transaction costs................................. $ 5,863 $ -- $ 5,863 $ -- $ -- Restructuring costs: Severance and outplacement............................. 11,548 -- 8,116 3,432 -- Cancellation of facility leases and other contracts.... 11,046 3,226 3,580 (2,743) 6,983 --------- ----------- --------- ----------- --------- $ 28,457 $ 3,226 $ 17,559 $ 689 $ 6,983 --------- ----------- --------- ----------- --------- --------- ----------- --------- ----------- ---------
The nature, timing, and extent of restructuring costs follow: SEVERANCE AND OUTPLACEMENT As a result of the merger, certain technical support, customer service, distribution, and administrative functions were combined and reduced. Restructuring included severance and outplacement charges related to approximately 500 terminated employees. Affected employees received notification of their termination by September 9, 1994, and final assignments were completed during 1995. 59 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 8. ACCRUED RESTRUCTURING COSTS (CONTINUED) REDUNDANT INFORMATION SYSTEMS AND EQUIPMENT To facilitate the operations of the Company, the combined organization migrated to a common management information system, which resulted in the write-off of the book value of approximately $10.8 million of the abandoned systems. The sale or disposal of duplicate information systems and equipment was completed in the fourth quarter of 1994. DUPLICATE PRODUCT LINES As a condition of the merger, the Company no longer (after January 1995) sells and distributes FreeHand, the illustration program previously sold and distributed by Aldus. In addition, PhotoStyler, an image editing software tool, was discontinued in the fourth quarter of 1994, as the product competed with certain existing products of the Company. The respective inventories and capitalized software development costs and technologies of these duplicate product lines, totaling approximately $15.0 million, were written off in the fourth quarter of 1994. CANCELLATION OF FACILITY LEASES AND OTHER CONTRACTS The Company has consolidated duplicate offices in Europe, Japan, Canada, and the United States. Lease and third-party contract termination payments, resulting from the planned closure of these facilities, are expected to continue through the lease term or negotiated early termination date, if applicable. RESTRUCTURING OF FRAME'S OPERATIONS IN 1993 Due to lower than anticipated revenues experienced in the first three quarters of 1993, Frame undertook certain restructuring measures primarily related to reducing the size and scope of its operations and re-evaluating and redirecting its product and distribution strategies. These actions resulted in restructuring charges totaling $16.0 million. In addition, Frame incurred other charges relating to the restructuring of approximately $9.8 million, which consisted primarily of write-offs of capitalized software, obsolete inventory and equipment, and the settlement of certain contingencies. Of the total restructuring and other charges, $12.8 million resulted from the write-off of assets, which occurred in 1993, and $13.0 million involved cash outflows, of which $4.7 million were incurred in 1993. During 1994, the results of the settlement of certain contingencies and changes in Frame's foreign distribution in Japan were more favorable than expected by approximately $2.2 million. However, these amounts were offset by increased estimates of costs related to facilities previously vacated and Frame's decision to curtail significantly its Irish operations, resulting in a charge for termination costs, vacated facilities, and fixed asset write-offs. In 1994, Frame paid approximately $1.6 million in salary costs and approximately $3.3 million related to the settlement of certain contingencies, changing its foreign distribution in Japan, the relocation of its European headquarters, lease payments for vacated facilities, and other charges. During 1995, Frame made cash payments of $1.6 million and $0.2 million related to the curtailment of its Irish operations and vacated leased facilities, respectively. In addition, an analysis of its remaining accrued restructuring expenses in the fourth quarter of 1995 indicated that approximately $0.3 million represented excess reserves. This amount was reversed and credited to "Merger transaction and restructuring costs" in the Consolidated Statements of Income. As of December 1, 1995, $1.1 million remained accrued and represented anticipated future cash outflows related to lease payments on vacated facilities. 60 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 9. INCOME TAXES Income before income taxes includes net income (loss) from foreign operations of approximately $19.2 million, $(8.7) million, and $12.7 million for the years ended December 1, 1995, November 25, 1994, and November 26, 1993, respectively. The provision for income taxes consisted of the following:
YEARS ENDED --------------------------------------- DECEMBER 1 NOVEMBER 25 NOVEMBER 26 1995 1994 1993 ----------- ------------ ------------ Current: United States federal................................................. $ 21,466 $ 22,048 $ 13,413 Foreign............................................................... 18,418 8,336 8,849 State and local....................................................... 5,206 7,170 6,470 ----------- ------------ ------------ Total current........................................................... 45,090 37,554 28,732 ----------- ------------ ------------ Deferred: United States federal................................................. (6,305) (10,683) (10,379) Foreign............................................................... (986) (1,785) 964 State and local....................................................... 124 (1,895) (200) ----------- ------------ ------------ Total deferred.......................................................... (7,167) (14,363) (9,615) ----------- ------------ ------------ Charge in lieu of taxes attributable to employee stock plans............ 32,445 14,418 11,234 ----------- ------------ ------------ $ 70,368 $ 37,609 $ 30,351 ----------- ------------ ------------ ----------- ------------ ------------
Total income tax expense differs from the expected tax expense (computed by multiplying the United States federal statutory rate of approximately 35 percent for 1995, 1994, and 1993 to income before income taxes) as a result of the following:
YEARS ENDED --------------------------------------- DECEMBER 1 NOVEMBER 25 NOVEMBER 26 1995 1994 1993 ----------- ------------ ------------ Computed "expected" tax expense......................................... $ 57,349 $ 18,531 $ 25,325 State tax expense, net of federal benefit............................... 6,442 3,429 5,171 Nondeductible merger costs.............................................. 4,078 5,209 -- Nondeductible write-off of acquired in-process research and development............................................................ 5,244 5,475 489 Nondeductible goodwill.................................................. 3,689 1,741 -- Tax-exempt income....................................................... (3,532) -- -- Tax credits............................................................. (3,904) (1,755) (3,433) Foreign losses, not benefited........................................... 2,706 3,550 2,038 Foreign tax rate differential........................................... 1,130 2,027 -- Other, net.............................................................. (2,834) (598) 761 ----------- ------------ ------------ $ 70,368 $ 37,609 $ 30,351 ----------- ------------ ------------ ----------- ------------ ------------
61 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 9. 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 1995 and 1994 are presented below:
DECEMBER 1 NOVEMBER 25 1995 1994 ----------- ------------ Deferred tax assets: Acquired technology.................................................................. $ 4,750 $ 3,306 Reserves and deferred revenue........................................................ 25,025 24,501 Depreciation......................................................................... 3,544 2,438 Net operating loss carryforwards..................................................... 10,625 5,130 Tax credits and other carryforwards.................................................. 5,702 12,486 Other................................................................................ 3,468 2,278 ----------- ------------ Total gross deferred tax assets.................................................... 53,114 50,139 Deferred tax asset valuation allowance............................................. (10,204) (11,611) ----------- ------------ Total deferred tax assets.......................................................... 42,910 38,528 ----------- ------------ Deferred tax liabilities: Basis difference of acquired assets.................................................. (113) (694) Capitalized costs.................................................................... (29) (2,315) Investments.......................................................................... (12,860) -- Other................................................................................ (1,068) (986) ----------- ------------ Total deferred tax liabilities..................................................... (14,070) (3,995) ----------- ------------ Net deferred tax assets................................................................ $ 28,840 $ 34,533 ----------- ------------ ----------- ------------
As of December 1, 1995, the Company had United States federal net operating loss carryforwards of approximately $17.0 million, which expire in 2008, and tax credit carryforwards of approximately $5.0 million, which expire in years 1997 through 2009. The carryforwards are attributable to the premerger years of Aldus and Frame and are subject to certain limitations on usage. The Company also has foreign operating loss carryovers in various jurisdictions of approximately $16.0 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. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. NOTE 10. EMPLOYEE BENEFIT PLANS STOCK OPTION PLAN As of December 1, 1995, the Company had reserved 20,000,000 shares of common stock for issuance under its Stock Option Plan. Each option assumed by Adobe under the merger agreements with Frame and Aldus will continue to have, and be subject to, the same terms and conditions set forth in the relevant Stock Option Plan after, in the case of Frame, application of the exchange ratio to the number of shares and the exercise price of each option. The Frame plan provided for the granting of stock options to employees, consultants, and officers under terms and conditions determined by Frame's Board of Directors at the time of the grant. The Aldus plan provided for the granting of stock options to employees and officers at the fair market value at the grant date. Options under the Aldus plan vest at 20 percent after the first year and ratably each month for the next four years. 62 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 10. EMPLOYEE BENEFIT PLANS (CONTINUED) The Adobe plan provides for the granting of stock options to employees and officers at the fair market value of the Company's common stock at the grant date. Options generally vest over three years: 25 percent after the first year, and the remainder vesting each month for the next two years so that the options are 50 percent vested after the second year and fully vested after the third year. All options have a five-, seven-, or ten-year term. Stock option activity for 1995, 1994, and 1993 is presented below.
OPTIONS OUTSTANDING OPTIONS ------------------------------ AVAILABLE NUMBER OF FOR GRANT SHARES PRICE PER SHARE ------------ ------------- --------------- Balances as of November 27, 1992................................... 3,419,085 10,361,204 $ 0.02-47.25 Additional shares reserved......................................... 5,224,880 -- -- Options granted.................................................... (4,858,298) 4,858,298 2.17-33.75 Options exercised.................................................. -- (1,592,587) 0.02-27.40 Options repriced................................................... 437,320 (437,320) 12.98-43.27 Options canceled................................................... 1,255,101 (1,255,101) 0.58-43.27 ------------ ------------- --------------- Balances as of November 26, 1993................................... 5,478,088 11,934,494 0.06-47.25 Additional shares reserved......................................... 299,000 -- -- Options granted.................................................... (2,678,550) 2,678,550 3.44-36.38 Options exercised.................................................. -- (2,627,318) 0.06-33.75 Options canceled................................................... 979,842 (979,842) 0.58-43.27 Adjustment for change in Aldus' fiscal year-end.................... 142,314 (51,421) -- Aldus options retired.............................................. (968,713) -- -- ------------ ------------- --------------- Balances as of November 25, 1994................................... 3,251,981 10,954,463 0.25-47.25 Additional shares reserved......................................... 338,000 -- -- Options granted.................................................... (2,351,568) 2,351,568 3.45-67.00 Options exercised.................................................. -- (2,967,042) 0.25-50.75 Options canceled................................................... 430,195 (430,195) 0.57-58.25 Adjustment for change in Frame's fiscal year-end................... (5,688) 18,873 -- Frame options retired.............................................. (228,903) -- -- Aldus options retired.............................................. (65,451) -- -- ------------ ------------- --------------- Balances as of December 1, 1995.................................... 1,368,566 9,927,667 $ 2.60-67.00 ------------ ------------- --------------- ------------ ------------- ---------------
Of the options outstanding, 5,573,788 were exercisable as of December 1, 1995. RESTRICTED STOCK OPTION PLAN As of December 1, 1995, the Company had reserved 500,000 shares of common stock for issusance under its Restricted Stock Option Plan, which provides for the granting of nonqualified stock options to nonemployee directors and consultants. 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 63 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 10. EMPLOYEE BENEFIT PLANS (CONTINUED) the Board. All options are immediately exercisable within a ten-year term. Options generally vest over three years: 25 percent in each of the first two years and 50 percent in the third year. Stock option activity for 1995, 1994, and 1993 is as follows:
OPTIONS OUTSTANDING OPTIONS -------------------------- AVAILABLE NUMBER OF FOR GRANT SHARES PRICE PER SHARE --------- --------- --------------- Balances as of November 27, 1992......................................... 32,500 140,000 $ 4.13-27.00 Options granted.......................................................... (40,000) 40,000 23.94 Options exercised........................................................ -- (5,000) 11.13 Options canceled......................................................... 20,000 (20,000) 21.56-27.00 --------- --------- --------------- Balances as of November 26, 1993......................................... 12,500 155,000 4.13-27.00 Additional shares reserved............................................... 50,000 -- -- Options granted.......................................................... (45,000) 45,000 21.88-31.75 --------- --------- --------------- Balances as of November 25, 1994......................................... 17,500 200,000 4.13-31.75 Additional shares reserved............................................... 250,000 -- -- Options granted.......................................................... (40,000) 40,000 48.25 Options exercised........................................................ -- (41,875) 11.13-27.00 --------- --------- --------------- Balances as of December 1, 1995.......................................... 227,500 198,125 $ 4.13-48.25 --------- --------- --------------- --------- --------- ---------------
All options outstanding were exercisable as of December 1, 1995 under the Restricted Stock Option Plan. In addition, Adobe assumed 65,000 outstanding options under the Frame Director's Stock Option Plan and 95,375 outstanding options under the Aldus Restricted Stock Option Plan. All such assumed options had been exercised as of December 1, 1995 for an aggregate exercise price of $6.1 million. PERFORMANCE AND RESTRICTED STOCK PLAN The Performance and Restricted Stock Plan provides for the granting of restricted stock and/or performance units to officers and key employees. As of December 1, 1995, the Company had reserved 1,500,000 shares of its common stock for issuance under this plan. Restricted shares issued under this plan vest annually over three years but are considered outstanding at the time of grant, as the shareholders are entitled to dividends and voting rights. As of December 1, 1995, 836,090 shares were outstanding under this plan, of which 167,002 were not yet vested. Performance units issued under this plan entitle the recipient to receive shares 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 December 1, 1995, performance units for 75,420 shares were outstanding and $2.5 million was charged to expense for this plan in 1995. There were no performance units outstanding during the years ended November 25, 1994 and November 26, 1993. EMPLOYEE STOCK PURCHASE PLAN Under the terms of the Company's Employee Stock Purchase Plan, eligible employee participants may purchase shares of the Company's common stock semiannually at 85 percent of the market price, 64 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 10. EMPLOYEE BENEFIT PLANS (CONTINUED) on either the purchase date or the offering date, whichever price is lower. As of December 1, 1995, the Company had reserved 4,000,000 shares of its common stock for issuance under this plan and 1,490,448 shares remain available for future issuance. PRETAX SAVINGS PLAN In 1987, the Company adopted an Employee Investment Plan, qualified under Section 401(k) of the Internal Revenue Code, which is a pretax savings plan covering substantially all of the Company's United States employees. Under the plan, eligible employees may contribute up to 18 percent of their pretax salary, subject to certain limitations. There were 2,382 employees under the plan in 1995 and 841 employees under the plan in 1994. Commencing in 1992, the Company matched a portion of employee contributions. Company matching contributions, which can be terminated at the Company's discretion, were $1.2 million, $0.7 million, and $0.6 million in 1995, 1994, and 1993, respectively. NOTE 11. 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 the following circumstances: - The rights become exercisable ten days after a public announcement by another entity that it has acquired beneficial ownership of 20 percent or more of the shares (and that is without the approval of the Board of Directors) or, if earlier, a public announcement of another entity's intention to commence a tender offer to acquire beneficial ownership of 20 percent or more of the shares. - The rights become exercisable if another entity engages in certain self-dealing transactions with the Company or becomes the beneficial owner of 20 percent or more of the shares. - The rights become exercisable if the Company is acquired by any person in a merger or business combination transaction, or if 50 percent or more of the Company's assets or earnings powers are being sold to another entity. 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 1994 and 1993, the Company sold put warrants entitling the holder of each warrant to sell one share of common stock to the Company at a specified price. The Company received $719,000 and $694,000 for the sale of put warrants in 1994 and 1993, respectively. The Company's $6.9 million potential buyback obligation, as of November 26, 1993, was removed from shareholders' equity and recorded as put warrants. At the prevailing market prices for the Company's common stock, there was no dilutive effect on earnings per share in 1993. No put warrants were outstanding as of December 1, 1995 and November 25, 1994. 65 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 12. 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 $21.0 million, $16.9 million, and $18.7 million during 1995, 1994, and 1993, respectively. As of December 1, 1995, future minimum lease payments under noncancelable operating leases are as follows: 1996 -- $16.7 million; 1997 -- $9.0 million; 1998 -- $7.4 million; 1999 - -- $4.7 million; 2000 -- $2.8 million; and $18.0 million thereafter. REAL ESTATE DEVELOPMENT AGREEMENT In 1994, the Company entered into a real estate development agreement for the construction of an office facility and in 1996 will enter into an operating lease agreement for this facility. 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, which is approximately $52.0 million. The Company also is required, periodically during the construction period, to deposit funds with the lessor to secure the performance of its obligations under the lease, and as of December 1, 1995, the Company had deposited approximately $35.6 million in United States government treasury notes and money market mutual funds. ROYALTIES The Company has certain royalty commitments associated with the shipment and licensing of certain products. While royalty expense is generally based on a dollar amount per unit shipped, ranging from $0.05 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 $23.1 million, $35.2 million, and $32.8 million for the years ended December 1, 1995, November 25, 1994, and November 26, 1993, respectively. LEGAL ACTIONS The Company is engaged in certain legal actions arising in the ordinary course of business. The Company believes it has adequate legal defenses and believes that the ultimate outcome of these actions will not have a material effect on the Company's financial position and results of operations. 66 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 13. TRANSACTIONS WITH AFFILIATE The Company holds a 16 percent equity interest in McQueen Holdings Limited ("McQueen") and accounts for the investment at cost. During 1994, the Company entered into various agreements with McQueen, whereby the Company contracted with McQueen to perform product localization and technical support functions and to provide printing, assembly, and warehousing services, and has agreed to guarantee obligations under operating leases for certain facilities utilized by McQueen and to guarantee a certain level of business between the Company and McQueen. The remaining aggregate contingent liability for nonpayment of rent, through September 1999, for facilities occupied by McQueen was approximately $1.8 million, and minimum annual payments Adobe will make to McQueen for certain services are approximately $4.6 million and $4.8 million in 1996 and 1997, respectively. Purchases from McQueen amounted to $23.6 million, $13.0 million, and $12.6 million during 1995, 1994, and 1993, respectively. NOTE 14. FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's cash equivalents, short-term investments, restricted funds, and investments in equity securities that are free of trading restrictions or that will become free of trading restrictions during the next 12 months are carried at fair value, based on quoted market prices for these or similar investments. (See Note 3.) The Company's investment in equity securities which are subject to trading restrictions are carried at cost, which aggregates $4.4 million. The fair value of these securities as of December 1, 1995, based on quoted market prices, was $125.9 million. These investments are recorded as equity securities in other assets. The Company's majority interest in a limited partnership, accounted for using the equity method, is carried at $18.5 million as part of equity securities in other assets. Most of the technology companies in which the limited partnership invests are not publicly traded, and therefore there is no established market for these investments. One investment of the limited partnership is publicly traded, and the fair value of this investment is based on quoted market price. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, short-term investments, and accounts receivable. The Company's investment portfolio consists of investment-grade securities diversified among security types, industries, and issuers. The Company's investments are managed by recognized financial institutions that follow the Company's investment policy. The Company's policy limits the amount of credit exposure in any one issue, and the Company believes no significant concentration of credit risk exists with respect to these investments. Credit risk in receivables is limited to OEMs, and to dealers and distributors of hardware and software products to the retail market. The Company adopts credit policies and standards to keep pace with the evolving software industry. Management believes that any risk of accounting loss is significantly reduced due to the diversity of its products, end users and geographic sales areas. The Company performs ongoing credit evaluations of its customers' financial condition and requires letters of credit or other guarantees, whenever deemed necessary. 67 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 14. FINANCIAL INSTRUMENTS (CONTINUED) INDUSTRY SEGMENT Adobe and its subsidiaries operate in one dominant industry segment. The Company is engaged principally in the design, development, manufacture and licensing of computer software. No customer accounted for more than 10 percent of the Company's total revenue in 1995, 1994, or 1993. NOTE 15. INDUSTRY SEGMENT REPORTING AND FOREIGN OPERATIONS The Americas operations include revenue and results of operations in North America, South America, Mexico, and Latin America, as well as licensing revenue recognized on a worldwide basis. Licensing revenue is not available on a geographic basis, because the source of licensing revenue is known only by the OEMs' headquarters, and not necessarily by the geographic region providing the revenue stream to the OEMs. Accordingly, all licensing revenue is included in the Americas. Substantially all of the merger transaction and restructuring costs and write-off of in-process research and development costs were incurred in the Americas and therefore have been charged against the Americas operating income. European operations primarily include subsidiaries in the Netherlands, the United Kingdom, France, Germany, and Sweden, while Pacific Rim operations include subsidiaries in Japan and Australia. Transfers between subsidiaries are accounted for at amounts that are generally above cost and consistent with rules and regulations of governing tax authorities. Such transfers are eliminated in the consolidated financial statements. Identifiable assets are those assets that can be directly associated with a particular geographic area and subsidiary. Geographic information for each of the years in the three-year period ended December 1, 1995 is presented below.
YEARS ENDED ---------------------------------------- DECEMBER 1 NOVEMBER 25 NOVEMBER 26 1995 1994 1993 ------------ ------------ ------------ Revenue: The Americas..................................... $ 533,332 $ 494,525 $ 434,111 Europe........................................... 133,982 124,283 118,859 Pacific Rim...................................... 107,357 72,036 51,495 Eliminations..................................... (12,332) (15,227) (24,362) ------------ ------------ ------------ $ 762,339 $ 675,617 $ 580,103 ------------ ------------ ------------ ------------ ------------ ------------ Operating income: The Americas..................................... $ 26,446 $ 7,991 $ 31,084 Europe........................................... 37,319 1,818 21,685 Pacific Rim...................................... 70,416 32,745 21,645 Eliminations..................................... 390 (40) (15,880) ------------ ------------ ------------ $ 134,571 $ 42,514 $ 58,534 ------------ ------------ ------------ ------------ ------------ ------------ Identifiable assets: The Americas..................................... $ 944,484 $ 670,650 $ 672,961 Europe........................................... 64,807 60,375 50,662 Pacific Rim...................................... 14,258 18,633 9,885 Eliminations..................................... (138,817) (39,658) (135,812) ------------ ------------ ------------ $ 884,732 $ 710,000 $ 597,696 ------------ ------------ ------------ ------------ ------------ ------------
68 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Shareholders Frame Technology Corporation We have audited the consolidated balance sheet of Frame Technology Corporation as of December 31, 1994, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period then ended (not presented separately herein). These financial statements are the responsibility of Frame's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Frame Technology Corporation at December 31, 1994, and the consolidated results of its operations and its cash flows for each of the two years in the period then ended, in conformity with generally accepted accounting principles. Ernst & Young LLP San Jose, California January 30, 1995 69 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Shareholders Adobe Systems Incorporated We have audited the balance sheet of Aldus Corporation as of December 31, 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented separately herein). These financial statements are the responsibility of Aldus' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aldus Corporation at December 31, 1993, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Ernst & Young LLP Seattle, Washington January 28, 1994 70 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Shareholders Frame Technology Corporation We have audited the supplemental consolidated balance sheet of Frame Technology Corporation (formed as a result of the consolidation of Frame Technology Corporation and Mastersoft, Inc.) as of December 31, 1994, and the related supplemental consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period then ended (not presented separately herein). The supplemental consolidated financial statements give retroactive effect to the merger of Frame Technology Corporation and Mastersoft, Inc. on July 28, 1995, which has been accounted for using the pooling of interests method as described in the notes to the supplemental consolidated financial statements. These supplemental financial statements are the responsibility of the management of Frame Technology Corporation. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Frame Technology Corporation at December 31, 1994, and the consolidated results of its operations and its cash flows for each of the two years in the period then ended, after giving effect to the merger of Mastersoft, Inc. as described in the notes to the supplemental consolidated financial statements, in conformity with generally accepted accounting principles. Ernst & Young LLP San Jose, California May 31, 1995 except for Note 13, as to which the date is June 22, 1995 71 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
72 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 OPERATING OTHER END OF OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS PERIOD ----------- ----------- ------------- ----------- ----------- Allowance for doubtful accounts: Year Ended: December 1, 1995................................ $ 3,893 $ 2,038 $ (423) $ 1,810 $ 3,698 November 25, 1994............................... 2,516 1,963 -- 586 3,893 November 26, 1993............................... 2,202 1,842 -- 1,528 2,516
- ------------------------ Deductions related to the allowance for doubtful accounts, represent amounts written off against the allowance. (1) The $423,000 reduction in 1995 relects 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 to Consolidated Financial Statements. See accompanying independent auditors' report. 73 EXHIBITS As required under Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K, the exhibits filed as part of this report are provided in this separate section. The exhibits included in this section are as follows:
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ----------- ------------------------------------------------------------------------------------ 3.2.8 Restated Bylaws 10.35 Form of Executive Severance and Change of Control Agreement 11 Computation of Earnings per Common Share 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 23.1 Consent of Ernst & Young LLP, Independent Auditors for Frame Technology Corporation 23.2 Consent of Ernst & Young LLP, Independent Auditors for Aldus Corporation 27 Financial Data Schedule
74 EX-3.2-8 2 EXHIBIT 3.2.8 ADOBE SYSTEMS INCORPORATED EXHIBIT 3.2.8 RESTATED BYLAWS RESTATED BY-LAWS OF ADOBE SYSTEMS INCORPORATED DECEMBER 20, 1995 INDEX SECTION PAGE - ------- ---- ARTICLE I OFFICES 1.1 Principal Executive Office. . . . . . . . . . . . . . . . . . . 1 1.2 Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II MEETING OF SHAREHOLDERS 2.1 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . 2 2.4 Notice of Meetings or Reports . . . . . . . . . . . . . . . . . 2 2.5 Adjourned Meetings and Notice Thereof . . . . . . . . . . . . . 3 2.6 Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.7 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.8 Consent of Absentees. . . . . . . . . . . . . . . . . . . . . . 4 2.9 Action Without Meeting. . . . . . . . . . . . . . . . . . . . . 4 2.10 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.11 Regulation of Conduct of Shareholder Meetings . . . . . . . . . 5 2.12 Advance Notice of Shareholder Proposals and Directors Nominations . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III DIRECTORS 3.1 Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 Number of Directors . . . . . . . . . . . . . . . . . . . . . . 7 3.3 Election, Term of Office and Vacancies. . . . . . . . . . . . . 7 3.4 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.5 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ii 3.6 Organization Meeting. . . . . . . . . . . . . . . . . . . . . . 9 3.7 Other Regular Meetings. . . . . . . . . . . . . . . . . . . . . 9 3.8 Called Meetings . . . . . . . . . . . . . . . . . . . . . . . . 9 3.9 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . 9 3.10 Telephonic Meetings . . . . . . . . . . . . . . . . . . . . . . 9 3.11 Notice of Special Meetings. . . . . . . . . . . . . . . . . . . 9 3.12 Waiver of Notice. . . . . . . . . . . . . . . . . . . . . . . . 10 3.13 Action Without Meeting. . . . . . . . . . . . . . . . . . . . . 10 3.14 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.15 Adjournment . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.16 Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . 11 3.17 Fees and Compensation . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE IV EXECUTIVE COMMITTEE AND OTHER COMMITTEES 4.1 Executive Committee . . . . . . . . . . . . . . . . . . . . . . 11 4.2 Other Committees. . . . . . . . . . . . . . . . . . . . . . . . 12 4.3 Minutes and Reports . . . . . . . . . . . . . . . . . . . . . . 12 4.4 Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.5 Term of Office of Committee Members . . . . . . . . . . . . . . 12 ARTICLE V OFFICERS 5.1 Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.2 Election. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.3 Subordinate Officers, etc . . . . . . . . . . . . . . . . . . . 13 5.4 Removal and Resignation . . . . . . . . . . . . . . . . . . . . 13 5.5 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.6 Chairman of the Board . . . . . . . . . . . . . . . . . . . . . 14 5.7 President . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.8 Vice President. . . . . . . . . . . . . . . . . . . . . . . . . 14 5.9 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 iii 5.10 Treasurer and Chief Financial Officer . . . . . . . . . . . . . 15 5.11 Assistant Secretary . . . . . . . . . . . . . . . . . . . . . . 15 5.12 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VI MISCELLANEOUS 6.1 Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.2 Inspection of Corporate Records . . . . . . . . . . . . . . . . 16 6.3 Execution of Corporate Instruments. . . . . . . . . . . . . . . 17 6.4 Ratification by Shareholders. . . . . . . . . . . . . . . . . . 17 6.5 Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.6 Representation of Shares of Other Corporations. . . . . . . . . 18 6.7 Inspection of By-Laws . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE VII SHARES OF STOCK 7.1 Form of Certificates. . . . . . . . . . . . . . . . . . . . . . 19 7.2 Transfer of Shares. . . . . . . . . . . . . . . . . . . . . . . 19 7.3 Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . 19 7.4 Employee Stock Purchase Plan. . . . . . . . . . . . . . . . . . 20 ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS 8.1 Indemnification by Corporation. . . . . . . . . . . . . . . . . 20 8.2 Advancing Expenses. . . . . . . . . . . . . . . . . . . . . . . 20 8.3 Non-Exclusivity of Rights . . . . . . . . . . . . . . . . . . . 20 8.4 Indemnification Contracts . . . . . . . . . . . . . . . . . . . 21 8.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.6 Effect of Amendment . . . . . . . . . . . . . . . . . . . . . . 21 iv ARTICLE IX AMENDMENTS 9.1 Power of Shareholders . . . . . . . . . . . . . . . . . . . . . 21 9.2 Power of Directors. . . . . . . . . . . . . . . . . . . . . . . 22 v BY-LAWS OF ADOBE SYSTEMS INCORPORATED ARTICLE 1 OFFICES SECTION 1.1 PRINCIPAL EXECUTIVE OFFICE. The principal executive office for the transaction of business of the corporation is hereby fixed and located at 1585 Charleston Road, Mountain View, County of Santa Clara, State of California. The Board of Directors is hereby granted full power and authority to change said principal office from one location to another. SECTION 1.2 OTHER OFFICES. Branch or subordinate offices may at any time be established by the Board of Directors at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 2.1 PLACE OF MEETINGS. All meetings of shareholders shall be held either at the principal executive office or at any other place within or without the State of California which may be designated either by the Board of Directors or by the written consent of a majority of the shareholders entitled to vote thereat as determined pursuant to Section 6.1 of these By-Laws given either before or after the meeting. SECTION 2.2 ANNUAL MEETINGS. The annual meetings of shareholders shall be held on such day and at such hour as may be fixed by the Board of Directors. At such meeting, Directors shall be elected, and any other proper business may be transacted. 1 SECTION 2.3 SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by the Board of Directors, the Chairman of the Board, the President, or by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting. Within five business days after receiving such a written request from shareholders of the corporation, the Board of Directors shall determine whether shareholders owning not less than ten percent (10%) of the shares entitled to cast votes at the meeting support the call of a special meeting and notify the requesting party of its finding. Notice of such special meeting shall be given in the same manner as for the annual meeting of shareholders. Notices of any special meetings shall specify in addition to the place, date and hour of such meeting, the general nature of the business to be transacted thereat. SECTION 2.4 NOTICE OF MEETINGS OR REPORTS. Written notice of each meeting of shareholders shall be given not less than ten (10) days nor more than sixty (60) days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall be given either personally or by mail or other means of written communication, addressed or delivered to each shareholder entitled to vote at such meeting at the address of such shareholder appearing on the books of the corporation or given by him to the corporation for the purpose of such notice. If no such address appears or is given, notice shall be given either personally or by mail or other means of written communication addressed to the shareholder at the place where the principal executive office of the corporation is located, or by publication at least once in a newspaper of general circulation in the county in which said office is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. The same procedure for the giving of notice shall apply to the giving of any report to shareholders. All such notices shall state the place, the date and the hour of such meeting, and shall state such matters, if any, as may be expressly required by the California Corporations Code. Upon request by any person or persons entitled to call a special meeting, the Chairman of the Board, President, Vice President or Secretary shall within twenty (20) days after receipt of the request cause notice to be given to the shareholders entitled to vote that a special meeting will be held at a time requested by the person or persons calling the meeting, but not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. 2 All other notices shall be sent by the Secretary or an Assistant Secretary, or if there be no such officer, or in the case of his neglect or refusal to act, by any other officer, or by persons calling the meeting. SECTION 2.5 ADJOURNED MEETINGS AND NOTICE THEREOF. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, represented either in person or by proxy, but in the absence of a quorum, no other business may be transacted at such meeting, except as provided in Section 2.7 of these By-Laws. When a shareholders' meeting is adjourned to another time or place, notice of the adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken; except that if the adjournment is for more than forty-five (45) days or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each shareholder of record entitled to vote thereat. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. SECTION 2.6 VOTING. Except as provided below or as otherwise provided by the Articles of Incorporation or By-Laws, a shareholder shall be entitled to one vote for each share held of record on the record date fixed for the determination of the shareholders entitled to vote at a meeting or, if no such date is fixed, the date determined in accordance with law. Upon the demand of any shareholder made at a meeting before the voting begins, the election of directors shall be by ballot. No shareholder will be permitted to cumulate votes at any election of directors. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it shall be conclusively presumed that the shareholder's approving vote is with respect to all shares said shareholder is entitled to vote. SECTION 2.7 QUORUM. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. If a quorum is present, the affirmative vote of a majority of the shares represented at the 3 meeting and entitled to vote on any matter shall be the act of the shareholders, unless otherwise required by the Articles of Incorporation. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. SECTION 2.8 CONSENT OF ABSENTEES. The transactions of any meeting of shareholders, if not duly called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the shareholders entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when a person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened; provided, that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by law or these By- Laws to be included in the notice but not so included if such objection is expressly made at the meeting. SECTION 2.9 ACTION WITHOUT MEETING. Any action which may be taken at any meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the actions so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, that except to fill a vacancy as provided in Section 3.6 of these By-Laws, Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of Directors. Within five business days after receiving such a written request from shareholders of the corporation, the Board of Directors shall determine whether holders of outstanding share having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted have properly consented thereto in writing and notify the requesting party of its finding. 4 Unless the consents of all shareholders entitled to vote have been solicited in writing, notice of the following actions approved by shareholders without a meeting by less than unanimous written consent shall be given to those shareholders entitled to vote who have not consented in writing at least ten (10) days before the consummation of the action authorized by such approval: 1. Approval of a contract or other transaction between the corporation and one or more of its Directors, or between the corporation and any corporation, firm or association in which one or more of its Directors has a material financial interest. 2. Approval of any indemnification to be made by the corporation of a person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that such person was or is an agent of the corporation. 3. Approval of the principal terms of a reorganization. 4. Approval of a plan of distribution of the shares, obligations or securities of any other corporation, or assets other than money, which is not in accordance with the liquidation rights of the preferred shares as specified in the Articles of Incorporation or a Certificate of Determination. Unless the consents of all shareholders entitled to vote have been solicited in writing, prompt notice of the taking of any corporate action not listed above which is approved by shareholders without a meeting by less than unanimous written consent, shall be given to those shareholders entitled to vote who have not consented in writing. Such notice shall be given as provided in Section 2.4 of these By- Laws. SECTION 2.10 PROXIES. Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. SECTION 2.11 REGULATION OF CONDUCT OF SHAREHOLDERS MEETINGS At every meeting of the shareholders, the Chairman, if there is such an officer, or if not, the President of the Corporation, or in his absence any Vice President designated by the President or the Secretary, or in the absence of the President or any Vice President or the Secretary a Chairman chosen by the majority of the voting shares represented in person or by proxy, shall act as Chairman. The Secretary of the Corporation or a person designated by the 5 Chairman shall act as Secretary of the meeting. Unless otherwise approved by the Chairman, attendance at the Shareholders' Meeting is restricted to shareholders of record, persons authorized in accordance with Article II of these By-Laws to act by proxy, and officers of the corporation. The Chairman shall call the meeting to order, establish the agenda and conduct the business of the meeting in accordance therewith or, at the Chairman's discretion, it may be conducted otherwise in accordance with the wishes of the shareholders in attendance. The Chairman shall also conduct the meeting in an orderly manner, rule on the precedence of, and procedure on, motions and other procedural matters, and exercise discretion with respect to such procedural matters with fairness and good faith toward all those entitled to take part. The Chairman may impose reasonable limits on the amount of time taken up at the meeting on discussion in general or on remarks by any one shareholder. Should any person in attendance become unruly or obstruct the meeting proceedings, the Chairman shall have the power to have such person removed from participation. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 2.11. The Chairman of a meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 2.11, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. SECTION 2.12 ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND DIRECTORS NOMINATIONS At an annual or special meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) properly brought before the meeting by or at the direction of the Board of Directors, (c) properly brought before an annual meeting by a shareholder, or (d) properly brought before a special meeting by a shareholder, but if, and only if, the notice of a special meeting provides for business to be brought before the meeting by shareholders. For business to be properly brought before a meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder proposal to be presented at an annual meeting shall be received at the Corporation's principal executive offices not less than 120 calendar days in advance of the date that the Corporation's (or the Corporation's predecessor's) proxy statement was released to shareholders in connection with the previous year's annual meeting of shareholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been 6 changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, or in the event of a special meeting, notice by the shareholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual or special meeting (a) a brief description of the business desired to be brought before the annual or special meeting and the reasons for conducting such business at the annual or special meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. ARTICLE III DIRECTORS SECTION 3.1 POWERS. Subject to the limitations stated in the Articles of Incorporation, these By-Laws, and the California Corporations Code as to actions which shall be approved by the shareholders or by the affirmative vote of a majority of the outstanding shares entitled to vote, and subject to the duties of Directors as prescribed by the California Corporations Code, all corporate powers shall be exercised by, or under the direction of, and the business and affairs of the corporation shall be managed by, the Board of Directors. SECTION 3.2 NUMBER OF DIRECTORS. The authorized number of Directors of the corporation shall not be less than five (5) nor more than eight (8) and the exact number of Directors authorized shall be eight (8). The exact number of Directors may be fixed within the limits specified in this Section 3.2 by a By-Law duly adopted by the shareholders or by resolution of the Board of Directors. The minimum or maximum number of Directors provided in this Section 3.2 may be changed or a definite number fixed without provision for an indefinite number, by a By-Law duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote. SECTION 3.3 ELECTION, TERM OF OFFICE AND VACANCIES. The directors shall be divided into two classes, designated Class I and Class II, as nearly equal in number as reasonably possible, with any overage allocated in the discretion of the Board of Directors. The initial term of office of 7 the Class I directors will expire at the 1992 annual meeting of shareholders and the initial term of office of the Class II directors will expire at the 1993 annual meeting of shareholders. At the 1992 annual meeting of shareholders and at each annual meeting of shareholders thereafter, directors shall be elected, to succeed directors of the class whose term expires, for a term of office to expire at the second succeeding annual meeting after their election. All directors, including directors elected to fill vacancies, shall hold office until the expiration of the term for which elected and until their successors are elected and qualified, except in the case of death, resignation or removal of any director. The Board of Directors may declare vacant the office of a director who has been declared to be of unsound mind by court order or convicted of a felony. Vacancies on the Board of Directors not caused by removal may be filled by a majority of the directors then in office, regardless of whether they constitute a quorum, or by the sole remaining director. The shareholders may elect a director at any time to fill any vacancy not filled, or which cannot be filled, by the Board of Directors. SECTION 3.4 RESIGNATION. Any Director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. SECTION 3.5 REMOVAL. Except as described below, any or all of the directors may be removed without cause if such removal is approved by the affirmative vote of the majority of the outstanding shares entitled to vote. No director may be removed if the votes cast against removal, or not consenting in writing to removal, would be sufficient to elect a director if voted cumulatively at an election at which (i) the same total number of votes were cast (or, if removal is sought through action by written consent, all shares entitled to vote were voted) and (ii) either the number of directors elected at the most recent annual meeting of shareholders, or if greater, the number of directors for whom removal is being sought, were then being elected. 8 SECTION 3.6 ORGANIZATION MEETING. Immediately after each annual meeting of shareholders, the Board of Directors shall hold a regular meeting for the purpose of organization, the election of officers and the transaction of other business. No notice of such meeting need be given. SECTION 3.7 OTHER REGULAR MEETINGS. The Board of Directors may provide by resolution the time and place for the holding of regular meetings of the Board; provided, however, that if the date so designated falls upon a legal holiday, then the meeting shall be held at the same time and place on the next succeeding day which is not a legal holiday. No notice of such regular meetings of the Board need be given. SECTION 3.8 CALLING MEETINGS. Meetings of the Board of Directors for any purpose or purposes shall be held whenever called by the Chairman of the Board, the President or the Secretary or any two Directors of the corporation. SECTION 3.9 PLACE OF MEETINGS. Meetings of the Board of Directors shall be held at any place within or without the State of California which may be designated in the notice of the meeting, or, if not stated in the notice or there is no notice, designated by resolution of the Board. In the absence of such designation, meetings of the Board of Directors shall be held at the principal executive office of the corporation. SECTION 3.10 TELEPHONIC MEETINGS. Members of the Board may participate in a regular or special meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting pursuant to this Section 3.10 constitutes presence in person at such meeting. SECTION 3.11 NOTICE OF SPECIAL MEETINGS. Written notice of the time and place of special meetings of the Board of Directors shall be delivered personally to each Director, or sent to each Director by mail, telephone, telegraph or electronic transmission. In case such notice is sent by mail, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally, or by telephone, telegraph or 9 electronic transmission, it shall be so delivered at least twenty-four (24) hours prior to the time of the holding of the meeting. Such notice may be given by the Secretary of the corporation or by the persons who called said meeting. Such notice need not specify the purpose of the meeting, and notice shall not be necessary if appropriate waivers, consents and/or approvals are filed in accordance with Sections 3.12 of these By-Laws. SECTION 3.12 WAIVER OF NOTICE. Notice of a meeting need not be given to any Director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such Director. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the Directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 3.13 ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such Directors. SECTION 3.14 QUORUM. A majority of the authorized number of Directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the Directors present at a meeting duly held at which a quorum is present shall be the act of the Board of Directors, unless the Articles of Incorporation, or the California Corporations Code, specifically requires a greater number. In the absence of a quorum at any meeting of the Board of Directors, a majority of the Directors present may adjourn the meeting as provided in Section 3.15 of these By-Laws. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of enough Directors to leave less than a quorum, if any action taken is approved by at least a majority of the required quorum for such meeting. 10 SECTION 3.15 ADJOURNMENT. Any meeting of the Board of Directors, whether or not a quorum is present, may be adjourned to another time and place by the vote of a majority of the Directors present. Notice of the time and place of the adjourned meeting need not be given to absent Directors if said time and place are fixed at the meeting adjourned. SECTION 3.16 INSPECTION RIGHTS. Every Director shall have the absolute right at any time to inspect, copy and make extra copies of, in person or by agent or attorney, all books, records and documents of every kind and to inspect the physical properties of the corporation. SECTION 3.17 FEES AND COMPENSATION. Directors shall not receive any stated salary for their services as Directors; however, by resolution of the Board, non-employee Directors may receive a fixed annual retainer for their services as Directors, as well as a fixed fee, with or without expenses of attendance, for attendance at each Board meeting, and each Board Committee meeting. Nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation therefor. ARTICLE IV EXECUTIVE COMMITTEE AND OTHER COMMITTEES SECTION 4.1 EXECUTIVE COMMITTEE. The Board of Directors may, by resolution adopted by a majority of the authorized number of Directors, appoint an executive committee, consisting of two or more Directors. The Board may designate one or more Directors as an alternate member of such committee, who may replace any absent member of any meeting of the committee. The executive committee, subject to any limitations imposed by the California Corporations Code, or by resolution adopted by the affirmative vote of a majority of the authorized number of Directors, or imposed by the Articles of Incorporation or by these By-Laws, shall have and may exercise all of the powers of the Board of Directors. 11 SECTION 4.2 OTHER COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the authorized number of Directors, designate such other committees, each consisting of two or more Directors, as it may from time to time deem advisable to perform such general or special duties as may from time to time be delegated to any such committee by the Board of Directors, subject to the limitations contained in the California Corporations Code, or imposed by the Articles of Incorporation or by these By-Laws. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. SECTION 4.3 MINUTES AND REPORTS. Each committee shall keep regular minutes of its proceedings, which shall be filed with the Secretary. All action by any committee shall be reported to the Board of Directors at the next meeting thereof, and, insofar as rights of third parties shall not be affected thereby, shall be subject to revision and alteration by the Board of Directors. SECTION 4.4 MEETINGS. Except as otherwise provided in these By-Laws or by resolution of the Board of Directors, each committee shall adopt its own rules governing the time and place of holding and the method of calling its meetings and the conduct of its proceedings and shall meet as provided by such rules, and it shall also meet at the call of any member of the committee. Unless otherwise provided by such rules or by resolution of the Board of Directors, committee meetings shall be governed by Sections 3.11, 3.12 and 3.13 of these By-Laws. SECTION 4.5 TERM OF OFFICE OF COMMITTEE MEMBERS. The term of office of any committee member shall be as provided in the resolution of the Board of Directors designating him but shall not exceed his term as a Director. Any member of a committee may be removed at any time by resolution adopted by Directors holding a majority of the directorships, either present at a meeting of the Board or by written approval thereof. 12 ARTICLE V OFFICERS SECTION 5.1 OFFICERS. The officers of the corporation shall be a President, a Vice President, a Secretary, and a Treasurer, who shall be the Chief Financial Officer of the corporation. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more additional Vice Presidents, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3. One person may hold two or more offices. SECTION 5.2 ELECTION. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 and 5.5, shall be chosen annually by the Board of Directors and each shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. SECTION 5.3 SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these By-Laws or as the Board of Directors may from time to time determine. SECTION 5.4 REMOVAL AND RESIGNATION. Any officer may be removed, either with or without cause, by a majority of the Directors at the time in office, at any regular or special meeting of the Board, or, except in case of an officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 13 SECTION 5.5 VACANCIES. A vacancy in the office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these By-Laws for regular appointments to such office. SECTION 5.6 CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors as prescribed by these By-Laws. SECTION 5.7 PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the general manager and chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and officers of the corporation. He shall preside at all meetings of the shareholders. He shall be ex officio a member of all the standing committees, including the executive committee, if any, and shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have other powers and duties as may be prescribed by the Board of Directors or by these By-Laws. SECTION 5.8 VICE PRESIDENT. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or these By-Laws. SECTION 5.9 SECRETARY. The Secretary shall keep, or cause to be kept, a book of minutes in written form of the proceedings of the Board of Directors, committees of the Board, and shareholders. Such minutes shall include all waivers of notice, consents to the holding of meetings, or approvals of the minutes of meetings executed pursuant to these By-Laws or the California Corporations Code. The Secretary shall keep, or cause to be kept at the principal executive office or at the office of the corporation's transfer agent or registrar, a record of its shareholders, 14 giving the name and addresses of all shareholders and the number and class of shares held by each. The Secretary shall give or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required by these By-Laws or by law to be given, and shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these By-Laws. SECTION 5.10 TREASURER AND CHIEF FINANCIAL OFFICER. The Treasurer and Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account in written form or any other form capable of being converted into written form. The Treasurer and Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He shall disburse all funds of the corporation as may be ordered by the Board of Directors, shall render to the President and Directors, whenever they request it, an account of all of his transactions as Treasurer and Chief Financial Officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these By-Laws. SECTION 5.11 ASSISTANT SECRETARY. The Assistant Secretary shall have all the powers, and perform all the duties of, the Secretary in the absence or inability of the Secretary to act. SECTION 5.12 COMPENSATION. The compensation of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such compensation by reason of the fact that he is also a Director of the corporation. 15 ARTICLE VI MISCELLANEOUS SECTION 6.1 RECORD DATE. The Board of Directors may fix, in advance, a time in the future as the record date for the determination of shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action. Shareholders on the record date are entitled to notice and to vote or receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares in the books of the corporation after the record date, except as otherwise provided by law. Said record date shall not be more than sixty (60) or less than ten (10) days prior to the date of any such meeting, nor more than sixty (60) days prior to any other action. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. In order that the corporation may determine the shareholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any shareholder of record seeking to have the shareholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in no event later than ten (10) days after the date on which such request is received, adopt a resolution fixing the record date. If no record date is fixed by the Board of Directors, the record date shall be fixed pursuant to the California Corporations Code. SECTION 6.2 INSPECTION OF CORPORATE RECORDS. The accounting books and records, and minutes of proceedings of the shareholders and the Board of Directors and committees of the Board shall be open to inspection upon written demand made upon the corporation by any shareholder or the holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to his interest as a 16 shareholder, or as the holder of such voting trust certificate. The record of shareholders shall also be open to inspection by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. Such inspection may be made in person or by an agent or attorney, and shall include the right to copy and to make extracts. SECTION 6.3 EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the statutory officer or officers, or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the corporation. Unless otherwise specifically determined by the Board of Directors, formal contracts of the corporation, promissory notes, mortgages, evidences of indebtedness, share certificates, conveyances or other instruments in writing, and any assignment or endorsement thereof, executed or entered into between the corporation and any person, shall be signed by the Chairman of the Board, the President or any Vice President and the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of the corporation. SECTION 6.4 RATIFICATION BY SHAREHOLDERS. The Board of Directors may, subject to applicable notice requirements, in its discretion, submit any contract or act for approval or ratification of the shareholders at any annual meeting of shareholders, or at any special meeting of shareholders called for that purpose; and any contract or act which shall be approved or ratified by the affirmative vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of shareholders, shall be as valid and binding upon the corporation and upon the shareholders thereof as though approved or ratified by each and every shareholder of the corporation, unless a greater vote is required by law for such purpose. SECTION 6.5 ANNUAL REPORT. For so long as the corporation has less than 100 holders of record of its shares, the mandatory requirement of an annual report is hereby expressly waived. The Board of Directors may, in its discretion, cause an annual report to be sent to the shareholders. Such reports shall contain at least a balance sheet as of the close of such fiscal year and an income statement and statement of cash flows for such fiscal year, and shall be accompanied by any report thereon of independent accountants, or if there is no such report, the certificate of 17 an authorized officer of the corporation that such statements were prepared without audit in the books and records of the corporation. A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement and/or a balance sheet of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more that thirty (30) days prior to the date of the request, and such statement shall be delivered or mailed to the person making the request within thirty (30) days thereafter. Such statements shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificates of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. SECTION 6.6 REPRESENTATIONS OF SHARES OF OTHER CORPORATIONS. The President and Vice President of this corporation are authorized to vote, represent and exercise on behalf of the corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation and any other corporation or corporations may be exercised either by such officers in person or by any person authorized so to do by proxy or power of attorney and duly executed by said officers. SECTION 6.7 INSPECTION OF BY-LAWS. The corporation shall keep in its principal executive office in this State the original or a copy of the By-Laws as amended or otherwise altered to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. 18 ARTICLE VII SHARES OF STOCK SECTION 7.1 FORM OF CERTIFICATES. Certificates for shares of stock of the corporation shall be in such form and design as the Board of Directors shall determine and shall be signed in the name of the corporation by the Chairman of the Board, or the President or Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or any Assistant Secretary. Each certificate shall state the certificate number, the date of issuance, the number, class or series and the name of the record holder of the shares represented thereby, the name of the corporation, and, if the shares of the corporation are classified or if any class of shares has two or more series, there shall appear the statement required by the California Corporations Code. SECTION 7.2 TRANSFER OF SHARES. Shares of stock may be transferred in any manner permitted or provided by law. Before any transfer of stock is entered upon the books of the corporation, or any new certificate issued therefor, the older certificate, properly endorsed, shall be surrendered and cancelled, except when a certificate has been lost, stolen or destroyed. SECTION 7.3 LOST CERTIFICATES. The Board of Directors may order a new certificate for shares of stock to be issued in the place of any certificate alleged to have been lost, stolen or destroyed, but in every such case, the owner or the legal representative of the owner of the lost, stolen or destroyed certificates may be required to give the corporation a bond (or other adequate security) in such form and amount as the Board may deem sufficient to indemnify it against any claim that may be made against the corporation (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or issuance of such new certificate. 19 SECTION 7.4 EMPLOYEE STOCK PURCHASE PLAN. The Board of Directors shall have the authority, in its discretion, to adopt and carry out an employee stock purchase plan or agreement, containing such terms and conditions as the Board may prescribe, for the issue and sale of unissued shares of the corporation, or of its issued shares acquired or to be acquired, to the employees of the corporation or to the employees of its subsidiary corporations or to a trustee on their behalf, and for the payment of such shares in installments or at one time, and for such consideration as may be fixed by the Board, and may provide for aiding any such employees in paying for such shares by compensation for services rendered, promissory notes or otherwise. ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 8.1 INDEMNIFICATION BY CORPORATION. The corporation shall indemnify any Director, officer, employee or other agent of the corporation against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in a proceeding (including a derivative action on behalf of the corporation) to which that person was or is threatened to be made a party by reason of the fact that he was or is an agent of the corporation, to the maximum extent permissible under the California Corporations Code. SECTION 8.2 ADVANCING EXPENSES. The corporation shall advance to each Director or officer the expenses incurred in defending any proceeding referred to in SECTION 8.1 of these By-Laws prior to the final disposition of such proceeding as provided in the California Corporations Code. SECTION 8.3 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person in SECTIONS 8.1 and 8.2 shall not be exclusive of any other right which such persons may have or hereafter acquire under any statute, provision of the Articles of Incorporation, By-Law, agreement, vote of shareholders or disinterested Directors or otherwise. 20 SECTION 8.4 INDEMNIFICATION CONTRACTS. The Board of Directors is authorized to enter into a contract with any Director, officer, employee or agent of the corporation, or any person serving at the request of the corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article VIII. SECTION 8.5 INSURANCE. The corporation shall maintain insurance to the extent reasonably available, at its expense, to protect itself and any such Director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the California Corporations Code. SECTION 8.6 EFFECT OF AMENDMENT. Any amendment, repeal or modification of any provision of this Article VIII by the shareholders and the Directors of the corporation shall not adversely affect any right or protection of a Director or officer of the corporation existing at the time of such amendment, repeal or modification. ARTICLE IX AMENDMENTS SECTION 9.1 POWER OF SHAREHOLDERS. New By-Laws may be adopted or these By-Laws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote or by the written consent thereof, except as otherwise provided by law or by the Articles of Incorporation. 21 SECTION 9.2 POWER OF DIRECTORS. Subject to the right of shareholders as provided in Section 9.1 of these By-Laws, By-Laws other than a By-Law or amendment thereof specifying or changing the authorized number of Directors, or the minimum or maximum number of a variable Board of Directors, or changing from a fixed to a variable Board of Directors or vice versa, may be adopted, amended or repealed by the approval of the Board of Directors. 22 EX-10.35 3 EXHIBIT 10.35 ADOBE SYSTEMS INCORPORATED EXHIBIT 10.35 FORM OF EXECUTIVE SEVERANCE AND CHANGE OF CONTROL AGREEMENT [date] [Officer Name] [Address] RE: SEVERANCE AND CHANGE OF CONTROL AGREEMENT Dear _____________________: Adobe Systems Incorporated (the "Company") has determined that it will make available to you and certain of the Company's other officers special severance payments and benefits in the event that your employment terminates under certain conditions. The Company is pleased to offer these severance arrangements to you on the terms set out in this Severance and Change of Control Agreement (the "Agreement"). 1. DEFINITIONS: As used in this Agreement, the following terms are defined as set forth in this paragraph. (a) "BASE SALARY" means an amount equal to the greater of your annual base salary (excluding any bonus or incentive payments) on (i) the effective date of a Change of Control or (ii) the date your employment terminates. (b) "BOARD" means the Company's Board of Directors. (c) "CHANGE OF CONTROL" AND "OWNERSHIP CHANGE". An "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange by the shareholders of the Company of all or substantially all of the stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange, or transfer to one (1) or more subsidiary corporations); or (iv) a liquidation or dissolution of the Company. A "Change of Control" shall mean an Ownership Change in which the shareholders of the Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Company after such transaction or in which the Company is not the surviving corporation. In the event of a Change of Control, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be, shall assume the Company's rights and obligations under this Agreement. (d) "CHANGE IN DUTIES" means: (i) a significant reduction in the nature or scope of your authority or the duties that you perform; (ii) a reduction in your annual base salary; (iii) a significant diminution in your employee benefits, perquisites or incentive bonus opportunity (other than changes made as part of a program or plan modification that applies to you and your peers); (iv) a change of more than 50 miles in your principal place of employment (not including business travel or temporary assignments); or (v) a determination by the Board that you are unable to exercise your authority or perform your duties as a result of a Change of Control. (e) "COMPANY" means Adobe Systems Incorporated and any of its legal successors. (f) "COVERED PERIOD" means the one-year period following the effective date of a Change of Control. (g) "FOR CAUSE": you are terminated for cause if you are terminated for any of the following reasons: (i) theft, dishonesty, or falsification of any employment or Company records; (ii) improper disclosure of the Company's confidential or proprietary information; (iii) any action by you which has a material detrimental effect on the Company's reputation or business; (iv) your failure or inability to perform any reasonable assigned duties after written notice of, and a reasonable opportunity to cure, such failure or inability; or (v) your conviction of any criminal act which impairs your ability to perform your duties for the Company. (h) "SEVERANCE" means an amount equal to your annual Base Salary plus your annual Target Incentive. (i) "TARGET INCENTIVE" means an amount equal to your Base Salary times your target incentive opportunity percentage under the Company's MBO Bonus and Profit Sharing Plans (or their successor plans, if any, then in effect). 2. AT WILL EMPLOYMENT: Notwithstanding any prior agreement or representation to the contrary, we agree that your employment with the Company is for no specified term, and may be terminated by you or the Company at any time, with or without cause. Upon the termination of your employment, neither you nor the Company shall have any further obligation or liability to the other, except as set forth in this Agreement. 3. TERMINATION WITHOUT SEVERANCE BENEFITS: If at any time (i) you voluntarily resign or retire from your employment with the Company, (ii) your employment terminates as a result of your death or disability, or (iii) your employment is terminated by the Company For Cause, you shall receive no compensation or benefits from the Company other than those actually earned through the date of your termination. In particular, you shall not be entitled to any bonus or incentive payments unless such payments became earned and payable prior to the date of your termination. You agree that if you resign or retire from your employment with the Company for any reason, you shall provide the Company with [two] months' written notice of your termination. The Company may, in its sole discretion, elect to waive all or any part of such notice period and accept your resignation or retirement at an earlier date. 4. TERMINATION WITH SEVERANCE BENEFITS: In the event your employment is terminated by the Company for the reasons set forth below, you shall receive the following severance benefits. (a) TERMINATION WITHIN COVERED PERIOD: If your employment is terminated by the Company within a Covered Period for any reason other than those described in paragraph 3, you will receive: (i) the Severance, which amount shall be paid in a lump sum on or before the 15th calendar day following the date of your termination; and (ii) to the extent permitted by law and the Company's insurance carriers, continued medical, dental, vision and life insurance coverage for you and your dependents (to the extent that those dependents were covered by such insurance immediately prior to your termination) under the Company's applicable insurance plans until the earlier of one year after the date of your termination or the date on which you first became eligible to obtain comparable insurance coverage from a subsequent employer [(the "Coverage Period")]. Such continued coverage shall be subject to your payment of any portion of the premiums for that coverage that is normally paid by the Company's employees, and the Company may deduct your premium contributions, if any, from the payments described in subsection (i). In the event that the Company or its successor is unable to provide you with this continued insurance coverage, it shall reimburse you for the COBRA premiums that you incur to obtain continued medical, dental and/or vision insurance coverage during the Coverage Period. (b) INVOLUNTARY RESIGNATION WITHIN COVERED PERIOD: If you are subject to a Change in Duties during a Covered Period, and you then resign from your employment with the Company during that Covered Period, you shall receive the severance benefits described in subsections 4(a)(i) and (ii) above. (c) TERMINATION OUTSIDE COVERED PERIOD: If your employment is terminated by the Company at any time other than during a Covered Period AND it is terminated for a reason other than those described in paragraph 3, you shall receive the severance benefits described in subsections 4(a)(i) and (ii) above. 5. SEVERANCE REDUCTION: In the event that the provision to you of any of the severance payments or benefits described in this Agreement will be deemed to be "excess parachute payments" under Internal Revenue Code section 280(G), the Company may reduce or eliminate such payments or benefits to the extent necessary to avoid all taxes and penalties under that section, and you shall not be entitled to receive any additional or different compensation or benefits as a result of such reduction or elimination. 6. EXCLUSIVE REMEDY: We agree that the severance payments and benefits described in this Agreement shall be your sole and exclusive remedy in the event that the Company terminates your employment. 7. CONFIDENTIALITY AND ASSIGNMENT OF INVENTIONS AGREEMENTS: In the event that your employment with the Company terminates for any reason, you agree that you shall continue to be bound by and comply with the terms and conditions of any confidentiality or assignment of inventions agreements between you and the Company. 8. TERM: This Agreement shall become effective on the date it is signed by you below, and it shall remain effective for a period of two years following that date. Unless you or the Company provides the other with written notice of your desire not to renew this agreement at least 60 days prior to the end of its term, it shall automatically renew for successive one year terms thereafter, subject to the right of both parties prior to the end of each term to give notice of non-renewal as described in this sentence. 9. DISPUTE RESOLUTION: In the event of any dispute or claim relating to or arising out of this Agreement, your employment relationship with the Company, or the termination of that relationship (including, but not limited to, any claims of wrongful termination or age, sex, race, disability or other discrimination), we agree that all such disputes or claims shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in Santa Clara County, California. In view of that agreement, we knowingly waive our rights to have such disputes tried by a judge or jury. Provided, however, that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the actual or alleged misuse or misappropriation of the Company's property or proprietary information. 10. ATTORNEYS' FEES: The prevailing party shall be entitled to recover from the losing party its attorneys' fees and costs incurred in any action brought to enforce any right arising out of this Agreement. 11. INTERPRETATION AND SEVERABILITY: This Agreement shall be interpreted in accordance with and governed by the laws of the State of California. The invalidity or unenforceability of any provision(s) of this Agreement shall not affect the validity or enforceability of any other provision(s) of this Agreement, which shall remain in full force and effect. 12. SUCCESSORS: This Agreement shall be binding upon any legal successor to the Company in the same manner and to the same extent that it is binding upon the Company. 13. ENTIRE AGREEMENT: This Agreement, along with any stock option or performance or restricted stock plan or agreements between you and the Company, constitute the entire agreement between you and the Company regarding the termination of your employment with the Company, and they supersede all prior negotiations, representations or agreements between you and the Company regarding that subject, whether written or oral. 14. MODIFICATION: This Agreement may only be modified or amended by a supplemental written agreement signed by you and an authorized member of the Board. Thank you for your ongoing service to Adobe Systems Incorporated. Please sign and date this letter on the spaces provided below to acknowledge your acceptance of this Agreement. Sincerely, ADOBE SYSTEMS INCORPORATED By:______________________________________ Charles M Geschke President I agree to and accept the terms and conditions of this Severance and Change of Control Agreement. Date: _______________________, 1995 _______________________________________ [Employee Signature] EX-11 4 EXHIBIT 11 EXHIBIT 11 ADOBE SYSTEMS INCORPORATED COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED --------------------------------------- DECEMBER 1 NOVEMBER 25 NOVEMBER 26 1995 1994 1993 ----------- ------------ ------------ Net income.............................................................. $ 93,485 $ 15,337 $ 42,007 ----------- ------------ ------------ ----------- ------------ ------------ Primary shares outstanding: Weighted average shares outstanding during the year................... 71,456 67,755 65,756 Common stock equivalent shares........................................ 2,797 2,414 2,496 ----------- ------------ ------------ 74,253 70,169 68,252 ----------- ------------ ------------ ----------- ------------ ------------ Fully diluted shares outstanding: Weighted average shares outstanding during the year................... 71,456 67,755 65,756 Common stock equivalent shares........................................ 2,958 2,613 2,540 ----------- ------------ ------------ 74,414 70,368 68,296 ----------- ------------ ------------ ----------- ------------ ------------ Primary net income per common stock and common stock equivalent share... $ 1.26 $ 0.22 $ 0.62 ----------- ------------ ------------ ----------- ------------ ------------ Fully diluted net income per common stock and common stock equivalent share.................................................................. $ 1.26 $ 0.22 $ 0.62 ----------- ------------ ------------ ----------- ------------ ------------
EX-21 5 EXHIBIT 21 EXHIBIT 21 ADOBE SYSTEMS INCORPORATED SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY LEGAL NAME JURISDICTION OF INCORPORATION - -------------------------------------------------------- -------------------------------------------------------- The Americas: Adobe Systems FSC, Inc. Territory of Guam Image Club Graphics, Inc. Canada LTC OEM Corporation California Ceneca Communications, Inc. California OCR Systems, Inc. Pennsylvania Frame Technology Corporation California Frame International, Inc. Delaware Frame International (Barbados), Inc. Barbados Frame Canada Limited Canada Mastersoft Corporation Arizona 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 Aldus Software GmbH Federal Republic of Germany Aldus Manutius Software AG Switzerland Adobe Systems France SARL France Adobe Systems Italia SRL Italy Adobe 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 Logicadre SARL France Curo Technology Europe BV The Netherlands Pacific Rim: Adobe Systems Company Ltd. Japan Adobe Systems Japan California Adobe Australia Pty. Australia
All subsidiaries of the registrant are wholly owned and do business under their legal names. EX-23 6 EXHIBIT 23 EXHIBIT 23 ADOBE SYSTEMS INCORPORATED CONSENT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Adobe Systems Incorporated: 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 December 19, 1995, relating to the consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of December 1, 1995 and November 25, 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 1, 1995, and related schedule for each of the years in the three-year period ended December 1, 1995, appearing on page 42 of this Form 10-K. As indicated in our report, we did not audit the consolidated Financial statements of Aldus Corporation and subsidiaries or Frame Technology Corporation and subsidiaries, companies acquired by Adobe Systems Incorporated in business combinations accounted for as poolings 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 Aldus Corporation and Frame Technology Corporation, is based solely on the reports of the other auditors. KPMG PEAT MARWICK LLP San Jose, California February 16, 1996 EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 ADOBE SYSTEMS INCORPORATED 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 balance sheet of Frame Technology Corporation as of December 31, 1994 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period then ended 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 balance sheet of Frame Technology Corporation as of December 31, 1994 and the related supplemental consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period then ended. ERNST & YOUNG LLP San Jose, California February 16, 1996 EX-23.2 8 EXHIBIT 23.2 EXHIBIT 23.2 ADOBE SYSTEMS INCORPORATED 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 28, 1994, relating to the consolidated balance sheet of Aldus Corporation as of December 31, 1993 and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended, appearing on page 70 of this Form 10-K. ERNST & YOUNG LLP Seattle, Washington February 16, 1996 EX-27 9 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 1, 1995 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 1, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-01-1995 NOV-26-1994 DEC-01-1995 58,493 457,547 136,906 3,698 7,277 692,787 155,943 104,235 884,732 186,315 0 0 0 293,258 405,159 884,732 183,437 762,339 130,301 130,301 495,429 2,038 0 163,853 70,368 93,485 0 0 0 93,485 1.26 1.26
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