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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED 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.
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TABLE OF CONTENTS
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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
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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.
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Most recently, Adobe announced an enhanced version of Acrobat software that
will enable Internet browsers and on-line service providers to incorporate
Acrobat technology into their software and services for Internet users. With the
acquisition of Ceneca, the Company also acquired two professional-quality tools
for the World Wide Web to simplify the process of creating and managing Web
sites.
PRODUCTS
APPLICATION PRODUCTS
Adobe's application products take professional tools once available only in
massive, dedicated systems -- or not available at all -- and puts them on the
desktop. It gives people the ability to create and manipulate the elements of
visual communication, from photographs to illustrations to typefaces to video
footage, and combine them into complete documents for viewing on the screen or
printed page.
Adobe's flagship applications -- Adobe FrameMaker, Adobe Illustrator, Adobe
PageMaker, Adobe Photoshop, and Adobe Premiere -- established new categories of
software, and continue to provide customers with a growing set of sophisticated
features. These products have spawned mini-industries of third-party accelerator
boards, image libraries, special-effects filters, color and calibration tools,
and other plug-ins that increase customer value and productivity.
Adobe seeks to provide comparable feature sets to users in Windows,
Macintosh, and UNIX environments, and to increase cross-product compatibility
and extensibility.
GRAPHICS
Used for everything from commercial packaging to fine art, Adobe Illustrator
software is a leading illustration and page-design tool. It simplifies the
creation, manipulation, and refinement of artwork with advanced features for
editing, text handling, color support, and other tasks. It offers the most
comprehensive image support of any program, plus built-in production
capabilities. Complementary products include Adobe Dimensions for
three-dimensional design and Adobe Streamline for line-art conversion.
IMAGES
Adobe Photoshop has become the standard photo design and production software
for 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.
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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
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distribution options to information publishers: World Wide Web, e-mail, Lotus
Notes software, corporate networks, CD-ROMs, and print-on-demand systems. In
practice, Adobe Acrobat software provides time- and money-saving solutions to
customers in corporate and professional publishing, government agencies,
financial services, and other markets.
The Adobe Acrobat product family allows fully 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.
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For output devices including printers, slide recorders, imagesetters, and
screen displays, the PostScript language describes and renders documents of any
visual complexity with total precision. Since the Company introduced it in 1985,
PostScript has become the printing and imaging technology of choice for many
multinational corporations, the vast majority of professional publishers, and
the U.S. federal government.
Today, more than 60 manufacturers produce over 300 Adobe PostScript output
devices, offering them at prices ranging from less than $700 to $100,000 and
higher. All major software applications and operating systems support the
PostScript language standard.
CONFIGURABLE POSTSCRIPT INTERPRETER
The Configurable PostScript Interpreter ("CPSI") is an implementation of
Adobe 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
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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.
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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.
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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
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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
<PAGE>
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.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
LOCATION FOOTAGE USE
- ------------------------------------- ------------ ------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
In general, all facilities are in good condition and are operating at
capacities which range from 75 percent to 100 percent.
12
<PAGE>
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
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
<PAGE>
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.
<TABLE>
<CAPTION>
PRICE RANGE
-------------------- PER SHARE
HIGH LOW DIVIDEND
--------- --------- -----------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------------------------------
DEC. 1 NOV. 25 NOV. 26 NOV. 27 NOV. 29
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(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
<PAGE>
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
<PAGE>
REVENUE
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Total revenue................................... $ 762.3 13% $ 675.6 16% $ 580.1
</TABLE>
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.
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Product group revenue -- Licensing.............. $ 183.4 17% $ 156.7 7% $ 146.2
Percentage of total revenue..................... 24.1% 23.2% 25.2%
</TABLE>
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.
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Product group revenue -- Application products... $ 578.9 12% $ 519.0 20% $ 433.9
Percentage of total revenue..................... 75.9% 76.8% 74.8%
</TABLE>
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
<PAGE>
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
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Direct costs.................................... $ 130.3 7% $ 122.0 13% $ 107.8
Percentage of total revenue..................... 17.1% 18.1% 18.6%
</TABLE>
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
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Software development costs -- Research and
development.................................... $ 138.6 22% $ 113.8 14% $ 100.2
Percentage of total revenue..................... 18.2% 16.8% 17.3%
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Sales, marketing, and customer support.......... $ 242.7 3% $ 234.8 13% $ 206.9
Percentage of total revenue..................... 31.8% 34.7% 35.7%
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
General and administrative.......................... $ 58.5 (3)% $ 60.5 (8)% $ 66.0
Percentage of total revenue......................... 7.7% 9.0% 11.4%
</TABLE>
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.
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Merger transaction and restructuring costs.......... $ 31.5 (56)% $ 72.2 180% $ 25.8
Percentage of total revenue......................... 4.1% 10.7% 4.4%
</TABLE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest, investment, and other income.............. $ 29.3 181% $ 10.4 (25)% $ 13.8
Percentage of total revenue......................... 3.8% 1.5% 2.4%
</TABLE>
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
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
-------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
1995
-----------------------------------------
INCOME
BEFORE INCOME NET
INCOME TAX NET INCOME
TAXES PROVISION INCOME PER SHARE
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
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
-------- --------- -------- ---------
-------- --------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------------
INCOME
BEFORE INCOME NET
INCOME TAX NET INCOME
TAXES PROVISION INCOME PER SHARE
-------- --------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
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
-------- --------- ------- ---------
-------- --------- ------- ---------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
1993
----------------------------------------
INCOME
BEFORE INCOME NET
INCOME TAX NET INCOME
TAXES PROVISION INCOME PER SHARE
-------- --------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
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
-------- --------- ------- ---------
-------- --------- ------- ---------
</TABLE>
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
<PAGE>
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
<PAGE>
FINANCIAL CONDITION
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, and short-term investments.... $ 516.0 16% $ 444.8 29% $ 344.7
</TABLE>
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
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Noncurrent liabilities and shareholders' equity....... $ 698.4 36% $ 514.3 11% $ 464.1
</TABLE>
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
<TABLE>
<CAPTION>
1995 CHANGE 1994 CHANGE 1993
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Working capital....................................... $ 506.5 26% $ 402.8 16% $ 347.7
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------
UNAUDITED QUARTER ENDED AUDITED
-------------------------------------------------- YEAR
MAR. 3 JUNE 2 SEPT. 1 DEC. 1 ENDED
1995 1995 1995 1995 DEC. 1
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
1994
---------------------------------------------------------------
UNAUDITED QUARTER ENDED AUDITED
-------------------------------------------------- YEAR
FEB. 25 MAY 27 AUG. 26 NOV. 25 ENDED
1994 1994 1994 1994 NOV. 25
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
29
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- --------------------------- --- ------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
SCHEDULE
NUMBER FINANCIAL STATEMENT SCHEDULE DESCRIPTION
- -------------- -----------------------------------------
<S> <C>
Schedule II Valuation and Qualifying Accounts
</TABLE>
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
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT -------------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- --------- --------------------------------------------------------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT -------------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- --------- --------------------------------------------------------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
*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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FINANCIAL STATEMENT DESCRIPTION PAGE
- ------------------------------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
- 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
</TABLE>
40
<PAGE>
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
<PAGE>
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
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 1 NOVEMBER 25
1995 1994
------------ ------------
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
43
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
DECEMBER 1 NOVEMBER 25 NOVEMBER 26
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
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
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
44
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
UNREALIZED FOREIGN
COMMON STOCK GAINS CURRENCY
-------------------------- (LOSSES) ON RETAINED TRANSLATION
SHARES AMOUNT INVESTMENTS EARNINGS ADJUSTMENTS TOTAL
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
45
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
UNREALIZED FOREIGN
COMMON STOCK GAINS CURRENCY
-------------------------- (LOSSES) ON RETAINED TRANSLATION
SHARES AMOUNT INVESTMENTS EARNINGS ADJUSTMENTS TOTAL
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
46
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
UNREALIZED FOREIGN
COMMON STOCK GAINS CURRENCY
-------------------------- (LOSSES) ON RETAINED TRANSLATION
SHARES AMOUNT INVESTMENTS EARNINGS ADJUSTMENTS TOTAL
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
------------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
47
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
DECEMBER 1 NOVEMBER 25 NOVEMBER 26
1995 1994 1993
-------------- -------------- ------------
<S> <C> <C> <C>
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
-------------- -------------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
48
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
DECEMBER 1 NOVEMBER 25 NOVEMBER 26
1995 1994 1993
-------------- -------------- ------------
<S> <C> <C> <C>
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
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
49
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
------------------------ --------------------------
SEPTEMBER 1 AUGUST 26 NOVEMBER 25 NOVEMBER 26
1995 1994 1994 1993
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
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
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
AS OF DECEMBER 1, 1995
----------------------------------------------
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AS OF NOVEMBER 25, 1994
----------------------------------------------
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 1 NOVEMBER 25
1995 1994
----------- -----------
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
The cost and estimated fair value of available-for-sale securities by
contractual maturity consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 1, 1995 NOVEMBER 25, 1994
-------------------- --------------------
ESTIMATED ESTIMATED
FAIR FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 1 NOVEMBER 25
1995 1994
----------- -----------
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
56
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 1 NOVEMBER 25
1995 1994
----------- ------------
<S> <C> <C>
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
----------- ------------
----------- ------------
</TABLE>
NOTE 6. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 1 NOVEMBER 25
1995 1994
----------- ------------
<S> <C> <C>
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
----------- ------------
----------- ------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 1 NOVEMBER 25
1995 1994
----------- ------------
<S> <C> <C>
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
----------- ------------
----------- ------------
</TABLE>
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:
<TABLE>
<CAPTION>
PERIOD FROM ACQUISITION
TO
PROVISION DECEMBER 1, 1995
RECORDED AT ------------------------ ACCRUED AS
ACQUISITION CASH OF DECEMBER
DATE WRITE-OFFS PAYMENTS 1 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
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
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
PERIOD FROM
ACQUISITION TO
PROVISION NOVEMBER 25, 1994 ACCRUED
RECORDED AT -------------------- AS OF
ACQUISITION CASH NOVEMBER 25
DATE WRITE-OFFS PAYMENTS 1994
----------- --------- --------- ------------
<S> <C> <C> <C> <C>
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
----------- --------- --------- ------------
----------- --------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
ACCRUED YEAR ENDED DECEMBER 1, 1995 ACCRUED
AS OF ----------------------------------- AS OF
NOV. 25 CASH CHANGE IN DEC. 1
1994 WRITE-OFFS PAYMENTS ESTIMATE 1995
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
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
--------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ---------
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
DECEMBER 1 NOVEMBER 25 NOVEMBER 26
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
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
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
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:
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
DECEMBER 1 NOVEMBER 25 NOVEMBER 26
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
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
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
61
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 1 NOVEMBER 25
1995 1994
----------- ------------
<S> <C> <C>
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
----------- ------------
----------- ------------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
OPTIONS ------------------------------
AVAILABLE NUMBER OF
FOR GRANT SHARES PRICE PER SHARE
------------ ------------- ---------------
<S> <C> <C> <C>
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
------------ ------------- ---------------
------------ ------------- ---------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
OPTIONS --------------------------
AVAILABLE NUMBER OF
FOR GRANT SHARES PRICE PER SHARE
--------- --------- ---------------
<S> <C> <C> <C>
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
--------- --------- ---------------
--------- --------- ---------------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 1 NOVEMBER 25 NOVEMBER 26
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
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
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
68
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
SCHEDULE
NUMBER FINANCIAL STATEMENT SCHEDULE DESCRIPTION
- -------------- -----------------------------------------------------------------
<S> <C>
Schedule II Valuation and Qualifying Accounts
</TABLE>
72
<PAGE>
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
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OPERATING OTHER END OF
OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS PERIOD
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
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
<PAGE>
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:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
<C> <S>
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
</TABLE>
74
<PAGE>
ADOBE SYSTEMS INCORPORATED
EXHIBIT 3.2.8
RESTATED BYLAWS
RESTATED
BY-LAWS
OF
ADOBE SYSTEMS INCORPORATED
DECEMBER 20, 1995
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
ARTICLE IX
AMENDMENTS
9.1 Power of Shareholders . . . . . . . . . . . . . . . . . . . . . 21
9.2 Power of Directors. . . . . . . . . . . . . . . . . . . . . . . 22
v
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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
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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.
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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.
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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.
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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.
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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,
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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.
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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
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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
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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.
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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.
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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.
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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.
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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.
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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.
<PAGE>
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
<PAGE>
(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,
<PAGE>
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
<PAGE>
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]
<PAGE>
EXHIBIT 11
ADOBE SYSTEMS INCORPORATED
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
DECEMBER 1 NOVEMBER 25 NOVEMBER 26
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
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
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
<PAGE>
EXHIBIT 21
ADOBE SYSTEMS INCORPORATED
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
SUBSIDIARY LEGAL NAME JURISDICTION OF INCORPORATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
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
</TABLE>
All subsidiaries of the registrant are wholly owned and do business under their
legal names.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-01-1995
<PERIOD-START> NOV-26-1994
<PERIOD-END> DEC-01-1995
<CASH> 58,493
<SECURITIES> 457,547
<RECEIVABLES> 136,906
<ALLOWANCES> 3,698
<INVENTORY> 7,277
<CURRENT-ASSETS> 692,787
<PP&E> 155,943
<DEPRECIATION> 104,235
<TOTAL-ASSETS> 884,732
<CURRENT-LIABILITIES> 186,315
<BONDS> 0
0
0
<COMMON> 293,258
<OTHER-SE> 405,159
<TOTAL-LIABILITY-AND-EQUITY> 884,732
<SALES> 183,437
<TOTAL-REVENUES> 762,339
<CGS> 130,301
<TOTAL-COSTS> 130,301
<OTHER-EXPENSES> 495,429
<LOSS-PROVISION> 2,038
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 163,853
<INCOME-TAX> 70,368
<INCOME-CONTINUING> 93,485
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93,485
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.26
</TABLE>
