UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (Mark One) | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period fromto | ||
Commission file Number: 0-15175
ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) | 77-0019522 (I.R.S. Employer Identification No.) | |
345 Park Avenue, San Jose, California 95110-2704 (Address of principal executive offices and zip code) | ||
(408) 536-6000 (Registrant's telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by checkmark 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 (the "Act") 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 ý No o
Indicate by checkmark 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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated filer ý Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is an accelerated filera shell company (as defined in Rule 12b-2 of the Act). Yes ýo No oý
The aggregate market value of the registrant's common stock, $0.0001 par value per share, held by non-affiliates of the registrant on May 30, 2003,June 3, 2005, the last business day of the registrant's most recently completed second fiscal quarter, was $8,136,680,867$14,128,765,011 (based on the closing sales price of the registrant's common stock on that date). Shares of the registrant's common stock held by each officer and director and each person who owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 30, 2004, 238,469,04427, 2006, 599,810,699 shares of the registrant's common stock, $.0001 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20042006 Annual Meeting of Stockholders (the "Proxy Statement"), to be filed within 120 days of the end of the fiscal year ended November 28, 2003,December 2, 2005, are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
| | Page | |||
|---|---|---|---|---|
| PART I | ||||
Item 1. | Business | 3 | ||
| Item 1A. | Risk Factors | 30 | ||
| Item 1B. | Unresolved Staff Comments | 37 | ||
| Item 2. | Properties | |||
| Item 3. | Legal Proceedings | |||
| Item 4. | Submission of Matters to a Vote of Security Holders | |||
PART II | ||||
Item 5. | Market for Registrant's Common Equity, | |||
| Item 6. | Selected Financial Data | |||
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |||
| Item 8. | Financial Statements and Supplementary Data | |||
| Item | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | |||
| Item | Controls and Procedures | |||
| Item 9B. | Other Information | 65 | ||
PART III | ||||
Item 10. | Directors and Executive Officers of the Registrant | |||
| Item 11. | Executive Compensation | |||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |||
| Item 13. | Certain Relationships and Related Transactions | |||
| Item 14. | Principal Accounting Fees and Services | |||
PART IV | ||||
Item 15. | Exhibits and Financial Statement | |||
Signatures | 103 | |||
| Summary of Trademarks | ||||
| Exhibits | 106 | |||
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Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements, including statements regarding product plans, future growth and investing activities thatmarket opportunities, which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in thethis section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Our Future Performance.under "Risk Factors." You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission ("SEC"), including the Quarterly Reports on Form 10-Q to be filed in 2004.2006. When used in this report, the words "expects," "could," "would", "may," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," "looks for," "looks to," and similar expressions, as well as statements regarding Adobe'sour focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
Founded in 1982, Adobe Systems Incorporated ("Adobe" oris one of the "Company") offerslargest and most diversified software companies in the world. We offer a line of creative, business and mobile software and services forused by high-end consumers, creative professionals, designers, knowledge workers, original equipment manufacturers ("OEM"), developers and enterprises. Our products are market-leading digital imaging, design,enterprises for creating, managing, delivering and document technology platforms which enable customers to create, manageengaging with compelling content and deliver visually rich, compellingexperiences across multiple operating systems, devices and reliable content.media. We distribute our products through a network of distributors and dealers, value-added resellers ("VARs"), systems integrators, independent software vendors ("ISVs") and original equipment manufacturers ("OEMs");OEMs, direct to end users;users, and through our own Web site at www.adobe.com. We also license our technology to major hardware manufacturers, software developers and service providers and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas; Europe, Middle East and Africa ("EMEA"); and Asia. Our software runs on personal computers with Microsoft Windows, Apple Macintosh,OS, Linux, UNIX and various non-personal computerother platforms, depending on the product.
Adobe was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. We maintain executive offices and principal facilities at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000. We maintain a Web site at www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC Web site at www.sec.gov.
InSince the early 1980's, Adobe developed software that pioneered desktop publishing. Today, we continueand technologies have helped redefine how people engage with ideas and information—anytime, anywhere and through any medium. From rich images in print, video, film, and on personal computers and mobile devices to be uniquely positioned to make changes not only to how societydynamic digital content for a variety of media, the impact of Adobe solutions is evident across industries and felt by anyone who creates, visually rich information for printviews and the Web, but also as to how it distributes and accesses that information electronically.interacts with information.
In the simplest of terms, Adobe helps people and businesses communicate better. By delivering powerful graphic design, publishing, animation and imaging software for print, Web and video production and by delivering ubiquitous platforms, we help people express, share, manage and collaborate on their ideas in imaginative and meaningful new ways. For businesses, we provide solutions to improve the way customers and employees interact with information and with each other.
Our strategy is to address the needs of a variety of customers, which include creative professionals—graphic designers, Web designers, videographers, photographers and professional publishers; knowledge
workers—teams of workers and those who deliver presentations; enterprise users—knowledge workers, IT managers, line of business managers and executives; andhigh-end consumers—digital imaging and digital video hobbyists and enthusiasts.enthusiasts; OEM partners—mobile device manufacturers, printer manufacturers, Internet service providers and developers. We execute against this strategy by delivering products that support industry standards and can be deployed on multiple computing environments, depending on the product.
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We categorizeIn fiscal 2005, we categorized our products into four principal business segments: Creative Professional, Digital Imaging and Video, ePaper,Creative Professional, Intelligent Document and OEM PostscriptPostScript and Other. BeginningOn December 1, 2003,3, 2005, we renamedcompleted the acquisition of Macromedia, Inc. ("Macromedia"), a provider of software technologies that enables the development of a wide range of Web and mobile application solutions, for approximately $3.4 billion. Coinciding with the integration of Macromedia and the start of our former ePaper2006 fiscal year, we changed our reported business segments to be aligned with our market opportunities and how we internally manage our combined businesses. Our new business segments are: Creative Solutions, Knowledge Worker Solutions, Mobile and Device Solutions, Enterprise and Developer Solutions, and Other.
This overview combines a review of our fiscal year 2005 business by our prior business segment the Intelligent Documentsclassifications with a discussion of our market opportunities and products as classified in our new business segment. However, no changes were made to product classifications in any of the business segments.segment organization.
Creative ProfessionalFiscal Year 2005 Business Segment Review
Creative Professional Business Summary
In fiscal 2005, we maintained our focus on meeting the software needs of creative professional users through the release of new versions of the Adobe Creative Suite. Available in two options (Standard and Premium), the Adobe Creative Suite incorporates several of our technologies used by creative professionals into one product and is a complete design solution that provides efficiency through improved product integration and powerful Adobe Portable Document Format ("PDF") workflow capabilities.
After achieving record revenue for our Adobe Creative Suite products in the first quarter of fiscal 2005, we delivered a new version 2 of the Creative Suite products beginning in the second quarter of fiscal 2005. In addition, we delivered version "CS2" of our individual Creative Professional software application products (Illustrator, InCopy, InDesign and GoLive, as well as Photoshop from our Digital Imaging and Video business segment) in the second quarter. These new releases combined to achieve record Creative Suite and Creative Professional revenue for Adobe in the second quarter. This performance was followed by another quarter of record Creative Suite and Creative Professional revenue in our third quarter, when the majority of the foreign language versions of the CS2 product family began shipping to customers. As was the case in fiscal 2004, many of our Creative Professional customers chose to migrate from licensing individual products such as Photoshop to licensing the Creative Suite products during fiscal 2005.
Another key component of our Creative Professional business strategy was to grow revenue for InDesign, our professional page layout product. In fiscal 2005, due in part to the new features available in the CS2 version of InDesign and favorable industry reviews, we enjoyed increased adoption by our professional publishing customer, resulting in increased market share in the professional page layout segment. This success resulted in record revenue for InDesign in fiscal 2005.
Digital Imaging and Video Business Summary
In fiscal 2005, we maintained our focus on meeting the digital imaging and video software needs of creative professionals, professional photographers, professional videographers, business users and
hobbyists. These customers rely on Adobe's digital imaging and video editing solutions to create and enhance many of the pictures and video we see everyday in print, on television, in movies and on the Web.
During fiscal 2005, we delivered several new releases of our digital imaging and video software applications. In the second quarter of fiscal 2005, we released the CS2 version of Photoshop—our industry-leading product for digital imaging. This English version release was followed by the delivery of the foreign language versions of the product, which began shipping during the early part of our third quarter of fiscal 2005. The release of Photoshop CS2 received positive reviews from industry press and analysts, and generated strong revenue. However, as indicated previously, many customers began licensing Photoshop capabilities via the Creative Suite products, as opposed to licensing the product via its standalone version. This planned migration has impacted standalone Photoshop revenue, and thus Digital Imaging and Video segment revenue, as we predicted last year.
During fiscal 2005, we also maintained our focus on our digital video products, including Adobe Premiere Pro software for video editing, Adobe After Effects software for adding special effects to video, Adobe Audition software for audio editing and Adobe Encore DVD software for DVD creation. In addition to these individual digital video products, we continued to focus on marketing the Adobe Video Collection which contains these products and comes in two versions: Standard and Professional.
In the fourth quarter of fiscal 2005, we released version 4.0 of our Adobe Photoshop Elements software, which is our digital imaging application targeted for amateur photographers and digital imaging hobbyists. In the same quarter, we released version 2.0 of Adobe Premiere Elements software, which is our video editing software that can be used by hobbyists to enhance and share their digital video memories on DVDs. In addition, we released a software bundle that includes the new versions of Photoshop Elements and Adobe Premiere Elements to target hobbyists who desire both applications in one affordable package.
Intelligent Document Business Summary
In fiscal 2005, we achieved strong year-over-year growth and record revenue in our Intelligent Document business. Driving this performance was the release of version 7.0 of our Acrobat family of products, which began shipping in the first quarter of the fiscal year. The updated product family offers enhanced features that allow workgroups to manage a range of essential business activities such as assembling documents from multiple sources, creating intelligent forms and more securely collaborating on projects. In addition, the new Acrobat 7.0 family of products offers new functionality to address specific customer workflow issues in vertical markets such as architecture, engineering, construction, manufacturing, education, government and financial services. This vertical market focus helped to significantly increase our penetration of Acrobat desktop licenses.
Our focus on the enterprise software server market targeting the document service needs of governments and enterprises also drove record revenue in fiscal 2005. Focusing primarily on our targeted vertical markets of financial services and government, we continued to gain traction in marketing and licensing the capabilities of our Adobe LiveCycle server products. In addition, we made progress with integration of our document generation technologies with other software vendors' platforms, such as those from SAP AG and EMC. As a result, we began generating revenue based on the inclusion of our technologies within their platforms.
OEM Postscript and Other Business Summary
In fiscal 2005, graphics professionals and professional publishers continued to rely on our Postscript technology to meet their sophisticated printing requirements. OEM Postscript revenue, generated by licensing our technology to OEMs that manufacture printers and other output devices, decreased slightly in fiscal 2005 when compared to fiscal 2004. This performance was consistent with our expectations, due to the mature nature of this market.
Fiscal 2006 Business Segments, Products and Market Opportunities
This section provides an overview of our new principal business reporting segments that we began using at the beginning of fiscal year 2006. For each segment, a discussion of the market opportunities, our strategies and our products is provided.
Creative Solutions Business Segment
Creative Solutions Market Opportunity
Since Adobe was founded inOur Creative Solutions business unit focuses primarily on the early 1980's, a core Adobe customer has beenneeds of the creative professional.customer. This new segment combines most of the products of our prior Creative Professional and Digital Imaging and Video business units, along with the creative professional-focused products and solutions that we obtained through our acquisition of Macromedia.
Over the past twenty years, our core customers have been creative professionals. Graphic designers, production artists, Web designers, user interface designers, technical writers, videographers, photographers and prepress professionals who use and rely on Adobe's solutions for professional publishing, Web design, business document publishing,professional photography, video production, animation and motion graphic production, and printing visually rich information. Our software tools are used by creative professionals to create much of the printed and on-line information people see and read every day, including newspapers, magazines, Web sites, catalogs, advertisements, brochures, product documentation, technical manuals, books, memos, reports and banners. Our tools are also used to create and enhance visually rich content, including video, animation and mobile content, that is created by multimedia, film, television, audio and video producers who work in advertising, Web design, music, entertainment, corporate and marketing communications, product design, user interface design, sales training, printing, architecture, and fine arts.
As technology continues to improve, the market dynamics for these creative professionals continue to evolve. Due to the ever changing ways in which people wishchoose to receive information, creative professionals look to their software tools as a means to make their information impactful and repurpose content across a variety of media and applications. They wish to derivedesire greater efficiency from the software they use to streamline their publishing and content creation workflows and to effectively manage their assets. They also look for new and innovative ways to deliver their content and information to hand-held devices such as mobile handsets and consumer electronic devices.
Adobe's brand and customer loyalty in this market continues to be strong. ExistingCreative professional customers purchase upgradeslicense upgrade and new units of our Creative ProfessionalSolutions products due to the high degree of innovative new features and significant productivity gained through their use. In addition, business users at work and hobbyists at home purchase our Creative Solutions products because of the frequent use of thethey desire professional-quality products in their daily workto accomplish tasks such as creating visually-rich sales presentations, real estate flyers, school year books, photo albums, community newsletters, as well as the productivity gained by their use.animations and videos that can be shared or be viewed from Web sites.
The Creative Professional market isbusinesses of creative professionals are sensitive to the economy as most users of Creative Professional software productsthey derive their revenue mainly from corporate marketing, product marketing and ad spending in corporations. In difficult economic times, corporations tend to reduce marketing spending. In such environments,spending and the businesses of creative professionals tends to suffer; there often is a decline in spending by creative professionals on software, a decline in growth of the number of creative professionals, and for Adobe, a decline in revenue in its Creative Professional customer segment.may decline. Conversely, in an environment where the economy is stable or improving, corporations tend to increase their marketing spending. This typically creates anspending, which leads to stable or improved business conditions for creative professionals. Thus, depending on economic conditions and the status of their businesses, these users adjust their spending on items such as hardware and software, market servingand the staffing levels within their company. Due to this correlation, our Creative Solutions opportunity is closely linked to the performance of the economy in each of the countries we do business.
With the increasing use of the Web as a means for marketing and advertising, we believe a key driver of our Creative Solutions business will also be the growing amount of Web site and mobile device content
created by our customers to deliver impactful and compelling Web-based experiences for their constituents.
Another driver of our Creative Solutions business is the growth in the use of digital devices such as digital cameras, digital video cameras, multimedia-enabled computers, DVD players, scanners, Web-capable image and video-enabled handheld devices, cellular phones, and other non-PC Internet-connected devices. In addition, Internet broadband adoption makes the Web a viable platform for the delivery of rich media, especially digital video. In turn, the growth in the use of high definition ("HD") televisions and video is driving the need for HD-enhanced video tools to produce HD content for movies, and cable and commercial television.
As the use of digital photography and digital videography grows, we believe creative professionals and for Adobe, additional opportunitiesprofessional photographers throughout the world will continue to growrequire software solutions to edit, enhance and manage their digital photographs and digital videos. In addition, we believe video professionals are upgrading their systems to support HD video content creation, enhancement and delivery. We also believe hobbyists will use, with more frequency, digital imaging and digital video software as they purchase more affordable digital SLR cameras and digital video cameras.
In fiscal 2006, our Creative Professional segment revenue.Solutions strategy focuses on driving revenue growth and increasing market share of our products through the continued delivery of comprehensive software platforms that meet the evolving needs of our customers. Initially, we have released software bundles that combine our existing Creative Suite products with various Macromedia products to creative professional customers who desire these applications in one affordable package. Over the course of fiscal 2006 and beyond, we will focus on developing improved integration of our Creative Solutions products to enhance product functionality and to enable more efficient collaboration and workflow.
AsIn addition, the creation and enhancement of digital video and motion graphics by creative professionals, and opportunities for the creation, workflow, and delivery of this type of content to mobile and other non-PC related devices, represent an emerging opportunity we intend to address as part of our corporate strategy in fiscal 2003, we increased our focus onCreative Solution offerings.
We believe that, while many customers have made or will make the Creative Professional customer with the establishment of a new Creative Professional business unit that concentrates solely on the needs of this customer. We executed against this strategy by delivering several new major releases ofswitch to our Creative Professional softwareSuite and/or our Studio products from individual applications during fiscal 2003. In additionover time, there continues to releasing newexist an opportunity of upgrading existing individual application users to newer versions of Illustrator, InCopy, InDesign, GoLive, and Photoshop (from our Digital Imaging and Video business segment) in our fourth quarter, we delivered a brand new product platform integrating these new products called the Adobe Creative Suite. Available in two versions (Standard and Premium), the Adobe Creative Suite is a complete design solution that provides efficiency through improved product integration, a new innovative file management tool call Version Cue, and powerful Adobe Portable Document Format ("PDF") workflow capabilities. The Adobe Creative Suite also supports collaboration by providing Acrobat 6.0 Professional in the Premium edition. With the release of the Adobe Creative Suite, in English in fiscal 2003 and in other languages in fiscal 2004,individual applications. In addition, we will market the complete designbenefits of newer versions of the Creative Suite and publishingStudio products to existing Creative Suite and Studio users to drive Creative Suite-to-Creative Suite and Studio-to-Studio upgrades. We also will market the features of these products to new users of creative applications—those who aspire to be creative professionals, or those at home or at work who wish to use the professional-level capabilities of our solutions, but are not trained creative professionals.
We plan to continue to enhance our Photoshop product offerings to meet the evolving needs of professional photographers and creative professional customers, including graphic designers, Web designers, video producers and imaging enthusiasts to drive upgrades and new user adoption. We also plan to improve integrated digital photography workflows by expanding our digital imaging platform benefitsto include Adobe Lightroom, a new product designed for professional photographers. In addition, as we have seen during the past two fiscal years, we believe many customers will continue to license Photoshop capabilities via our Creative Suite products as opposed to licensing the standalone version.
For the digital imaging hobbyist, we plan to continue to enhance our Photoshop Elements product and overall valuepartner with other digital imaging vendors to deliver integrated photo services. With our strong brand in digital imaging, we hope to attract additional digital camera users and migrate them from the low-end and free imaging software they use to our more advanced Photoshop product offerings.
With our set of professional digital video and motion graphic products, we strive to provide the strongest, market-leading digital video, motion graphic and animation authoring platform for our
customers. To grow this business, we will continue to market the benefits of this new productplatform to customers.
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Wecreative professionals and videographers in the film, broadcast, corporate and event videography market segments, and we are working with partners to deliver integrated video systems. With broad adoption of Macromedia Flash Player and its high-quality video playback features, we will continue this strategy in fiscal 2004, focusingwork to provide a seamless video authoring-to-playback capability for those wishing to provide a rich video experience on increasingthe Web. In addition, as the number of Adobe products our customers use by delivering more valuehobbyists desiring easy-to-use video editing solutions grows, we intend to them,enhance the video editing and by enabling more efficient collaboration and workflow through improved product integration.
If we are successful with this strategy, we believe that manyDVD creation capabilities of our Creative Professional customers will migrate from licensing individual products such as Photoshop or Illustrator to licensing them inAdobe Premiere Elements product for the Creative Suite product. This could cause a shift in revenue from our Digital Imaging and Video business segment to our Creative Professional business segment. Given that individual Photoshop product revenue is a significant componentsharing of the Digital Imaging and Video segment, customers may in the future acquire Photoshop via the Creative Suite, the revenue for which is reported in the Creative Professional business segment, instead of by individual Photoshop product purchase, the revenue for which is reported in the Digital Imaging and Video segment.
We also believe that, over time, we can deliver additional revenue generating products and integrated services as add-on offerings to the Creative Suite.
Our Creative Professional strategy also focuses on growing our market share with InDesign in the professional page layout software market, and with Illustrator in the professional graphics illustration software market. In addition, we have implemented anti-piracy measures in Photoshop CS and the Creative Suite to guard against illegal use of the software. As we stated earlier, we believe that this business could benefit from a broad, global economic recovery and subsequent increase in marketing spending, if it were to occur in 2004.digital video memories.
Creative ProfessionalSolutions Products
Adobe Content Server—an easy-to-use, all-in-one systemAfter Effects—professional software used to create sophisticated animation, motion graphics and visual effects found in television broadcast, film, DVD authoring and the Web; available in two versions: After Effects Standard provides basic 2D and 3D compositing, animation and visual effects tools; After Effects Professional adds advanced features such as motion tracking and stabilization, advanced keying and warping tools, more than 30 additional visual effects, and additional audio effects.
Adobe Audition—a professional audio editing environment designed for publishers, distributors, retailers,demanding audio and individual authors to prepare, secure,video professionals; provides advanced audio mixing, editing and license eBooks in Adobe PDF directly from their Web sites.effects processing capabilities.
Adobe Creative Suite Premium Edition—suite ofan integrated software solutionssolution that creative professionals can use as a platform to modify and enhance digital images, create graphics, produce professional-quality printed publications, create and maintain dynamic Web sites, author visually rich content for wireless Web devices, and share content reliably for print and screen display. The different applications share a similar user interface and several commands, tools, palettes and keyboard short-cuts. The suite combines Adobe Acrobat Professional, Adobe GoLive, Adobe Illustrator, Adobe InDesign and Adobe Photoshop technologies as well as a newwith file management and integration technology called Version Cue.Cue and a new navigational control center called Adobe Bridge.
Adobe Creative Suite Standard Edition—suite ofan integrated software solutionssolution that creative professionals can use as a platform to modify and enhance digital images, create graphics, and produce professional-quality printed publications. The different applications share a similar user interface and several commands, tools, palettes and keyboard short-cuts. The suite combines Adobe Illustrator, Adobe InDesign and Adobe Photoshop technologies as well as a newwith file management and integration technology called Version Cue.Cue and a new navigational control center called Adobe Bridge.
Adobe Font Folio OpenType Edition—contains more than 2,200 typefaces from the Adobe Type Library in OpenType format, offering Encore DVD—a complete type solution for print, the Web, digital video, or electronic documents.
Adobe FrameMaker—an application forprofessional DVD authoring and publishing long, structured, content-rich documents including books, documentation, technical manuals,creation software; provides a comprehensive set of design tools and reports;integration with other Adobe software to create a streamlined DVD creation workflow; provides usersability to output projects to recordable DVD formats, ensuring a way to publish their content to multiple output formats, including print, Adobe PDF, HTML, XML, and Microsoft Word.wide degree of playback compatibility.
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Adobe GoLive—Web design and publishing software that provides innovative tools that Web authors requireuse to design, layout, produce and maintain content for Web sites and wireless Web devices without the need for complex multimedia programming.
Adobe Graphics Server—imaging server software used to create and maintain digital graphics and images on frequently updated data-driven content, such as Web sites and printed catalogs, by automating the creation and the reuse of images; integrates with content management and e-commerce systems to automate workflows, and eliminates the tedious manual tasks of refining and reformatting images for specific purposes.
Adobe Illustrator—a vector-based illustration design tool used to create compelling graphic artwork for print publications and the Web.
Adobe InCopy—an editorial tool for collaboration between writers, editors and copy-fitters; Adobe InCopy is a companion to Adobe InDesign.
Adobe InDesign—a page-layout application for publishing professionals; based on an open, object-oriented architecture that is extensible, it enables Adobe and its industry partners to deliver powerful publishing solutions for magazine, newspaper and other high-end publishing applications.
Adobe PageMaker—Lightroom—new, innovative, pre-release beta version software usedthat addresses the unique photography workflow needs of professional photographers; enables users to create high-quality business documents simplyeasily import, develop, enhance, and reliably with robust page layout tools, templates, and stock art.
Adobe Type Basics OpenType Edition—includes Adobe's best-selling typefaces, plus Adobe Type Manager; makes it easy to create beautiful text for print, Web, and video projects.
Adobe Type Classics for Learning—a low-cost, introductory font library designed for students and educators.
Adobe Type Manager—available in Light (free) and Deluxe versions; provides powerful, easy management of all PostScript Type 1, OpenType, and TrueType fonts.
Adobe Type Sets—various Collection packages of Adobe's best-selling typefaces; makes it easy to create beautiful text for print, Web, and video projects.
Digital Imaging and Video
Digital Imaging and Video Market Opportunity
With the first release of Adobe Photoshop more than ten years ago, and with a strong market presence with our imaging and video editing tools today, Adobe sets the standard for digital imaging software. Adobe's digital imaging and video segment consists of powerful software products used by creative professionals, business users, and consumers to create visually rich content. Customers in the Digital Imaging and Video segment include graphic designers, photographers, Web content creators, and multimedia, film, audio, and video producers who work in industries such as advertising, graphic design, book publishing, magazine publishing, newspaper publishing, Web site design, intranet site development, music and entertainment, corporate and marketing communications, product design, user interface design, sales training, printing, architecture, and fine arts. They rely on Adobe's digital imaging and digital video editing solutions to create and enhance many of the pictures and video we see everyday in print, on television, in movies, and on the Web.
Driving the market opportunities for Adobe in this segment is the growth in the useshowcase large volumes of digital devices such as digital cameras, digital video cameras, multi-media-enabled computers, DVD players, scanners, Web-capable and image-enabled handheld devices, and cellular phones. As more users migrate towards digital photography and digital video recording, the potential market for Adobe grows. Internet broadband adoption also makes the Web a viable platform for the delivery of rich media, especially digital video.
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Creative professionals use Adobe's digital imaging and video software to create visually rich content found in communication media such as books, newspapers and magazines, as well as television commercials and movies. Business users utilize digital imaging and digital video software to enhance digital images and video when accomplishing tasks such as enhancing corporate communications, creating presentations and sales training materials, and developing content for internal (Intranet) and external Web sites. Consumers use this type of software to take advantage of the advancements made in digital photography and video technology to enhance, manage, and share their personal photographs and videos.
As the use of digital photography and digital videography grow, we believe creative professionals throughout the world will continue to require software solutions to edit, enhance, and manage their digital photographs and digital videos. We also believe hobbyists will use, with more frequency, digital imaging and digital video software as more people purchase digital still cameras and digital video cameras.
We have responded to these market opportunities by delivering several new releases of our digital imaging and video software applications. In the first quarter of fiscal 2003, we released version 1.0 of our Adobe Photoshop Album product, which is a new easy to use, consumer-focused software product that helps users organize and share their digital photos. In the third quarter of fiscal 2003, we released a new integrated family of digital video products, including a new rewritten version of Adobe Premiere Pro software for video editing, version 6.0 of Adobe After Effects software for adding special effects to video, Adobe Audition software for audio editing, and Adobe Encore DVD software for DVD creation. In addition to these individual digital video products, we released a new Adobe Video Collection that contains these products and comes in two versions: Standard and Professional. In the fourth quarter of fiscal 2003, we released the latest upgrade to Photoshop—Photoshop CS—which is the industry-leading product for digital imaging. We also released version 2.0 of Adobe Photoshop Album, and version 1.0 of Adobe Atmosphere, a new software tool which allows professionals to create three dimensional multimedia interactive environments.
With our digital imaging products, we plan to continue to innovate with our Photoshop product to meet the needs of creative professional customers, including professional photographers, graphic designers, Web designers, and video producers. We plan to improve the integrated digital photography workflow that centers on Photoshop, while expanding the potential customer base by improving the interface of the product to be more accessible to non-professional users (including amateur photographers and consumers). In addition, we have implemented anti-piracy measures in Photoshop CS and the Creative Suite to guard against illegal use of the software.
In the consumer digital imaging market, we offer a comprehensive digital media software product line for consumers, including Photoshop Album for digital photo organization, fixing, and sharing and Photoshop Elements for amateur photographers and digital imaging hobbyists to perfect their photos. We also plan to continue partnering with vendors in the digital imaging and video market to deliver integrated photo services, and we have made Photoshop Album Starter Edition available for free to millions of users via inclusion with Adobe Reader to provide a compelling initial digital imaging experience. Finally, we continue to work on integration of Adobe PDF technology as a means for users to collaborate electronically and share their digital images.
With our new set of digital video products, we strive to provide the strongest, market-leading digital video authoring platform for our customers. To grow our digital video business, we are marketing the benefits of our digital video platform to creative professionals and videographers in the film, broadcast, corporate, and event videography market segments, and we are working with partners to deliver integrated video systems on the Microsoft Windows platform which utilize our software.
Digital Imaging and Video Products
Adobe After Effects—software used to create sophisticated animation, motion compositing, and special effects found in multimedia, television broadcast, film, and the Web; available in two versions:
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After Effects Standard provides basic 2D and 3D compositing, animation, and visual effects tools; After Effects Professional adds advanced features such as motion tracking and stabilization, advanced keying and warping tools, more than 30 additional visual effects, and additional audio effects.
Adobe Atmosphere—a software tool for authoring graphically rich three dimensional worlds that viewers on the Web can figuratively enter and interact in; provides a platform for creating realistic and immersive environments that offer a revolutionary approach to content, Web navigation, community, and communication.
Adobe Audition—a professional audio editing environment designed for demanding audio and video professionals; provides advanced audio mixing, editing, and effects processing capabilities.
Adobe Encore DVD—professional DVD authoring and creation software; provides a comprehensive set of design tools and integration with other Adobe software to create a streamlined DVD creation workflow; provides ability to output projects to all recordable DVD formats, ensuring a wide degree of playback compatibility.
Adobe Photoshop—provides photo design, enhancement and editing capabilities for print, the Internet,Web, and multi-media; used by graphic designers, professional photographers, Web designers, professional publishers and video professionals, as well as amateur photographers and digital imaging hobbyists.
Adobe Photoshop Album—offers unique, easy-to-use interface to find, organize, share and edit digital photographs; designed for consumers to manage their collections of digital photographs, easily share photos via e-mail and the Web, create digital slide shows and photo albums, and get their photographs printed via on-line photo finishing services; works well with Photoshop Elements when more advanced digital photograph editing and touch-up is needed.services.
Adobe Photoshop Album Starter Edition—a limited-feature version of Photoshop Album available for free; lets consumers find photos fast, fix common flaws and easily share images with others.
Adobe Photoshop Elements—offers unique,powerful yet easy-to-use powerful image-editing tools designed specificallyphoto editing functionality plus intuitive organizing, printing and sharing capabilities for amateur photographers and hobbyists who want to create professional-quality images for print and the Web.
Adobe Premiere Pro—Elements—a new, powerful yet easy-to-use video-editing software for home video editing; provides tools for hobbyists to quickly edit and enhance video footage with fun effects and transitions, and create custom DVDs for sharing video with friends and family.
Adobe Premiere Pro—professional digital video-editing software used to create broadcast-quality moviescontent for video, film, DVD, multimedia and streaming over the Web.
Adobe SVG Viewer—Production Studio Premium Edition—a plug-in for Web browsers that allows users to view Web graphics created in Scalable Vector Graphics ("SVG") format.
Adobe Video Collection Professional Edition—new suite of five integrated application products that provides a complete digital video post-production environment and allows users to produce professional-quality video, film and multimedia;DVDs; includes Adobe After Effects Professional Edition, Adobe Audition, Adobe Encore DVD, Adobe Illustrator, Adobe Photoshop, and Adobe Premiere Pro.Pro, along with Creative Suite 2 features for timesaving workflow features such as Adobe Dynamic Link and Adobe Bridge.
Adobe Video CollectionProduction Studio Standard Edition—a new suite of four integrated application products that provides a digital video post-production environment and allows users to produce professional-quality video, film, multimedia;video; includes Adobe After Effects Standard Edition, Adobe Audition, Adobe Encore DVDPhotoshop, and Adobe Premiere Pro.Pro, along with Creative Suite 2 features for timesaving workflow features such as Adobe Dynamic Link and Adobe Bridge.
Macromedia Dreamweaver—a professional software development application used by designers and developers to create a broad range of Web solutions for publishing online commerce, customer service and online educational content; includes capabilities for visually designing HTML pages, coding HTML and application logic and working with application server technologies.
Macromedia Flash Basic—a software development application for creating internet and rich interactive applications which integrate animations, motion graphics, sound, text and video functionality; solutions built with Macromedia Flash are deployed via the Web to browsers and to devices that run the Macromedia Flash Player.
Macromedia Flash Professional—provides an advanced development environment for creating internet applications which integrate animations, motion graphics, sound, text and additional video functionality; solutions built with Macromedia Flash Professional are deployed via the Web to browsers and to devices that run Macromedia Flash Player.
Macromedia Fireworks—a professional graphics design tool for building interactive Web graphics; gives professional designers and developers tools for creating images that can be deployed to Web browsers and the Macromedia Flash Player; integrates with Macromedia Flash and Macromedia Dreamweaver.
Macromedia Studio Professional—an advanced suite of integrated application tools for developers and experienced designers who develop internet and mobile solutions, and require additional video capabilities when developing Flash content; includes Macromedia Dreamweaver, Macromedia Flash Professional, Macromedia Fireworks, Macromedia Contribute and Macromedia Flash Player.
Intelligent DocumentsKnowledge Worker Solutions Business Segment
Intelligent DocumentsKnowledge Worker Solutions Market Opportunity
Enterprises are under increasing pressure to save money, offer improvedOur Knowledge Worker Solutions Business Unit focuses on the needs of the knowledge worker customer, service, adhere to regulatory requirements,who we define as someone focused on creating and leverage existing investments in core systems. We believe that significant market opportunities exist to help enterprises address these issues by making their business processes more efficient.
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Printed documents are an essentialdisseminating information as part of most enterprise business processes because they aretheir job on a familiar method for communicating, collaborating,regular basis. Knowledge workers include a wide variety of job functions such as accountants, administrative assistants, architects, educators, graphic designers, insurance underwriters, software developers and conducting transactions with customers, partners,stock brokers. These jobs typically require the sharing of information, either in an information dissemination (one-way) format, or in a collaborative (multi-way) format.
Knowledge workers must create information and employees. While over time, enterprises may replace documents with Webcontent from a variety of applications, and similar technologies, we believebe able to exchange this information within a reliable and ubiquitous format that many of these documents will continueensures coworkers and constituents can reliably and securely access the information. When appropriate, this information often needs to persist, and organizations will need to integrate electronic versions of printed documentsbe protected or securely managed.
Collaboration among knowledge workers can occur through face-to-face meetings, via phone calls, through e-mail, or through Web conferencing technologies. Knowledge workers that participate in collaborations with their business processes.
A critical componentcolleagues may be located in offices next door to each other, or in different parts of the world. These team members may change with every project and either be part of an organization's business processesemployee base, or, be a consultant or third party partner.
Adobe Knowledge Worker Solutions enable knowledge workers to effectively and more securely engage, communicate and collaborate within their local and extended workgroups. They can collaborate and efficiently manage feedback from their colleagues in both real time and on-demand, and control how, when and by whom information is accessed.
Our Acrobat family of products provides for the needreliable creation and exchange of electronic documents, regardless of platform or application source type. Users can collaborate on documents with electronic comments and tailor the security of a file in order to interact with data stored in enterprise applications. As this need expands beyond the core users of those applications, adapting systems to accommodate a diverse group of users has become an expensive and time-consuming endeavor. The outcome is a proliferation of manual workarounds that result in process inefficiencies, delays, and poor quality of information.distribute reliable Adobe PDF documents.
We believe that Adobe can address these issues and realize significant market opportunities with our Adobe Intelligent Documents business, which provides organizations with a secure and flexible way to extend the power and reachoffer three versions of enterprise applications inside and outside their computer network firewall. Intelligent Documents uses a set of document services to create intelligent electronic documents, and integrate them into existing business processes.
With intelligent documents, customers can create documents from the desktop or from enterprise applications, and collaborate with internal and external people while maintaining the visual fidelity and integrity of the original source documents. It also enables them to capture data more securely through electronic forms, even when working offline; and automate and manage processes that are not managed by core systems.
Our strategy to address these market opportunities consists of delivering an Intelligent Document platform that contains three architecture components:
Intelligent documents interact with core business applications and integrate information contained in those documents into business processes. Because they are exact electronic replicas, intelligent documents retain the best characteristics of paper documents, such as a familiar look. To this, Adobe has added powerful XML-based business logic capabilities, such as data validations and automated routing instructions. These features allow for more efficient interaction with enterprise applications while still providing the ability for people to manually access and interact with the data when necessary.
A universal client is a commonly available interface or access point between people and intelligent documents. Adobe Reader software and Web browsers are examples of universal clients. With more than 500 million distributed copies of Adobe Reader, Adobe has created a ubiquitous platform for accessing and interacting with intelligent documents. Adobe Reader is available on the most common operating system platforms, including Microsoft Windows, Apple Macintosh, Linux, various Unix-based platforms, and portable device systems such as Palm OS, Pocket PC, and the Symbian operating system for cellular phones. As a universal client, Adobe Reader enables users inside and outside the firewall to interact with intelligent PDF documents on most platforms, including desktops, laptops, PDAs, mobile phones, and kiosks, regardless of the application used to author the document.
Finally, document services are underlying technologies that create, integrate, and manage intelligent documents—leveraging the use of a universal client for constituents to interact with data within the document. Document services include, but are not limited to, the following:
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The market opportunity for each of these document services, and Adobe's strategy to realize these opportunities is described below in more detail.
Document Generation
There is a significant document generation market opportunity for transforming raw business data from enterprise applications into visually rich, dynamic, customer-focused documents for delivery on most platforms. In many cases, documents are the main source of interaction governments and businesses have with their constituents, partners, and customers. Documents are used to generate revenue (such as catalogs, brochures, mailers), conduct transactions (such as tax forms, invoices, loan documents and account statements), and transfer knowledge (such as user manuals, product specifications and financial reports). We believe the key to producing documents that drive business is an enterprise class document generation solution that takes content from multiple sources, dynamically generates documents, and securely and reliably delivers those documents over a variety of systems and devices.
Adobe's solutions for document generation are intended to: improve customer satisfaction by enabling customized and personal dynamic document generation for multiple devices and platforms; ensuring that documents appear exactly as intended and are protected from unauthorized changes; and reducing costs by automating document and image production processes. We provide both desktop and server-based solutions for the document generation market.
On the desktop, the Adobe Acrobat product family creates PDF documents from everyday office applications, such as Microsoft Office. In fiscal 2003, we expanded the Acrobat product line from one product into three distinct products to meet the needs of the different types of customers that require Acrobat functionality:our customers:
printed, color separation preview and output, electronic form creation, and one-button PDF creation from software applications such as AutoCAD, Visio and Microsoft Project. Acrobat Professional also contains all of the features found in Acrobat Standard.
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On servers, Adobe offers a combination of products to generate documents, including Adobe Central Pro Output Server and Adobe Document Server. Our server products merge output, including XML-based data, from enterprise applications such as Customer Relationship Management (CRM), Enterprise Resource Planning (ERP), content management, and legacy systems with highly formatted document templates to generate personalized, reliable documents for print or electronic delivery.
Based on customer need, we also released Acrobat Elements Server in fiscal 2003. Acrobat Elements Server provides a means for customers to broadly deploy PDF creation for multiple users, and is an alternative to low-cost Acrobat and PDF generation clone software that exists in the market.
We believe our key advantages in the document generation market include the standardization of PDF in many government agencies and regulated industries as a format for distributing, viewing, printing, and archiving electronic documents. In addition, Adobe Reader is available on most platforms, assuring our customers who generate PDF files that their content will be viewable and printable when distributed. Finally, our solutions employ advanced and comprehensive security technology to help protect a document's authenticity, integrity, and confidentiality.
Adobe desktop products that provide document generation capabilities include:
Adobe server-based document generation products include:
Document Process Management
Enterprises have invested significantly in their infrastructure over the last ten years, resulting in the deployment of complex business systems such as CRM, ERP, and Document Content Management (DCM). Yet many of these back-end systems are not fully connected with each other, or with the software productivity tools used by business users on their desktops. To meet these challenges, Adobe offers document process management solutions that leverage the intelligence and flexibility of intelligent documents.
A key component of our document process management strategy is the utilization of electronic forms as a replacement for paper-based forms. Information entered into and contained in paper-based forms typically must be manually retyped and entered into enterprise applications, which is inefficient, error-prone, and labor-intensive. With Adobe's solutions for document process management, the enterprise's customers, employees, and partners can instead submit information through secure electronic forms. By embedding business logic (such as calculations and data validation) into these forms, our solutions can also improve the accuracy of data that is automatically integrated into core business systems such as CRM, ERP, and DCM enterprise applications.
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In addition, information captured infrom our Web site we offer a "Create Adobe PDF Online" subscription service which provides knowledge workers with an electronic form can trigger rules- and roles-based workflow. For example, an employee can enter data on-line into an expense report that is later submitted electronically for approval; the data can then be automatically senteasy way to a manager for review, or integrated into the organization's accounting system. Additional process tracking and reporting capabilities offer business managers insight into the status of their workflows, and allow them ways to further streamline their processes for better business performance.
Adobe's document process management solutions involve several products, including the Adobe Acrobat product line, Adobe Reader, Adobe Form Client, Adobe Form Designer and Adobe Reader Extensions Server.
Adobe also provides Adobe Form Server, which offers the broadest range of solutions for deploying intelligent forms that can be completed online or offline, across diverse platforms and devices, and, Adobe Workflow Server, which enables enterprises to easily design, deploy, and manage forms-based business processes.
Document Collaboration
The desire by governments and enterprises to have more effective and timely collaboration solutions has created a significant market opportunity. Collaboration can be a difficult task for an enterprise to accomplish because documents must flow within and between organizations, yet all participants in review cycles may not have the same applications or system configurations to support proprietary or specialized document formats. Adobe's solutions for document collaboration enable more secure and reliable distribution of documents to streamline document exchange, review, commenting, and approval on most platforms, while protecting content from unauthorized access and alterations.create Adobe PDF documents without having to buy the desktop application.
Our Breeze product line leverages the installation of Macromedia Flash Player on more than 98% of the internet-connected PCs in the world and allows for knowledge workers to meet, present and train online in a live format, or through on-demand, rich-media presentations which can be experienced at any time. It provides capabilities via the Flash Player for live Web conferencing, as well as on-demand rich presentations. We believe the use of Breeze increases the reach, effectiveness and usability of online communications at lower cost. Leveraging existing infrastructure, users of Breeze can control Web communication costs across their enterprise. Our business model allows for Breeze to be licensed as a server product and as a hosted service.
In fiscal 2006, we plan to continue to market the benefits of our Knowledge Worker Solutions to small and medium-sized businesses, large enterprises, and government institutions around the world. With our Acrobat family of products, we intend to continue to increase our seat penetration in these markets. We also be automatically routed, tracked, and integrated into core applicationsintend to increase our focus on vertical markets such as DCM to manage the full collaboration process.
Benefits to customers using Adobe solutions for document collaboration include the protection of business information and process integrity, the reduction of costs by automating collaborative processes and reducing paper,education, financial services, manufacturing, and the simplificationarchitecture, engineering, and construction markets. To address the needs of the manufacturing market, we have launched a new version of Acrobat called Acrobat 3D, which contains capabilities which enable document-based collaboration between extended teams of designers and engineers. With our Breeze product line, we intend to increase awareness of our solution in targeted horizontal markets such as training and marketing, as well as targeted vertical markets such as manufacturing, financial services and telecommunications. Finally, during the course of fiscal 2006, we intend to market the benefits of how our Acrobat and Breeze solutions can be used together to meet the synchronous and asynchronous collaboration needs in the marketplace.
Knowledge Worker Solutions Products
Adobe Acrobat 3D—enables collaboration between extended teams of designers and engineers to more securely and reliably communicate, visualize, and document sharing between employees, customers,architectural and manufacturing designs using 3D data; allows users to insert and publish 3D designs from major CAD applications in Adobe PDF documents that can easily be shared with suppliers, partners, and other constituents. Governments can shorten the time it takes to approve applications. Enterprise customers can replace paper mailings to customers and suppliers with electronic document distribution, accelerate product and engineering documentation reviews, and streamline contract review and preparation.
In addition to Adobe's desktop solution for document collaboration, Adobe also provides a server-based solution based on Adobe Reader Extensions Server. Reader Extensions Server lets enterprises easily share interactive, intelligent PDF documents with external parties. It unlocks features inusing the free Adobe Reader so that end users can use digital signatures to sign electronic documents, add comments by using electronic sticky notes and other mark-up tools, save the document and fill-in form information. Without these enabled capabilities, users would have to license software to interact with the documents electronically, or, print and manually edit or sign the documents.
Adobe products for document collaboration include the Adobe Acrobat product line, Adobe Reader, and Adobe Reader Extensions Server.
Document Control and Security
By replacing manual paper-based documents processes with electronic document equivalents, enterprises can enhance their quality of service, improve their company's productivity and lower costs. Already today, businesses and consumers frequently interact electronically. For example, consumers place electronic Web-based orders, businesses file government reports on-line, and banks distribute customer account statements via e-mail or the Web. Yet, this migration to electronic document delivery of sensitive
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or confidential information creates inherent risks such as unauthorized access to the information and identity theft.
We believe the movement to the use of electronic documents by enterprises and consumers has created an emerging document control and security market opportunity for Adobe. To address this market need, Adobe has implemented within its desktop and server products advanced technologies to help ensure the authenticity of an electronic document's origin, the integrity of its content, and the confidentiality of the communication.
Adobe products for document control and security include the Adobe Acrobat product line, Adobe Reader, and Adobe Reader Extensions Server.
Intelligent Documents Products
Desktop Document Generation
Adobe Acrobat Capture—enables conversion of legacy paper-based documents into indexed, searchable, platform-independent electronic PDF files for archiving and distribution purposes.software.
Adobe Acrobat Elements—desktop software that enables enterprises to extend the value of their Microsoft Office investment by standardizing on Adobe PDF for reliable document distribution; provides for the easy conversion of Microsoft Office documents to Adobe PDF, preserving document integrity for reliable viewing and printing on other operating systems and hardware platforms inside and outside the enterprise's IT firewall.
Adobe Acrobat Messenger—software that works with a scanner or digital copier and is designed for workgroups and departments to transform paper documents into electronic Adobe PDF files and deliver them via e-mail, Web, or fax; allows users to preview their documents on-screen, crop or rotate pages, and add electronic annotations.
Adobe Acrobat Standard—creates secure, reliable and compact Adobe PDF files from desktop authoring applications such as Microsoft Office software, graphics applications and more. Supports automated collaborative workflows with a rich set of commenting tools and review tracking features; includes everything needed to create and distribute rich electronic documents that can be viewed easily within leading Web browsers or on computer desktops via the free Adobe Reader.
Adobe Acrobat Professional—in addition to all the capabilities of Acrobat Standard, Acrobat Professional delivers specialized capabilities for creative professional and engineering users, such as pre-flighting, color separation and measuring tools.
Create PDF Online—a Web-based subscription service that provides for the easy conversion of Microsoft Office documents and other application files to Adobe PDF for the secure and reliable sharing of rich electronic documents that can be viewed easily within leading Web browsers or on computer desktops via the free Adobe Reader.
Macromedia Breeze—a rich Web-based communication system which enables organizations to deliver online training, marketing, sales and Web conferencing solutions which are instantly accessible by customers, partners and employees using Macromedia Flash content; consists of a core Breeze Server and modules that provide specific application functionality, including Breeze Training and Breeze Meeting; can be deployed with either some or all of these components together; Breeze Training allows organizations to build a complete online training system with Microsoft PowerPoint presentations that include surveys, analysis, course administration and content management; Breeze Meeting allows users to meet instantly with colleagues in virtual online meetings, to provide seminar and training sessions as well as to conduct business presentations through the Web.
Macromedia Flash Media Server—offers streaming media capabilities and a flexible development environment for creating and delivering interactive media applications; utilized as part of our Breeze solution.
Mobile and Device Solutions Business Segment
Server-basedMobile and Device Solutions Market Opportunity
As hundreds of millions of people around the world adopt cellular phones, consumer devices such as digital cameras and electronic educational toys, and internet-connected hand-held devices as a means to communicate, collaborate and entertain, we believe a significant opportunity exists to offer solutions for these devices which provide for the creation and delivery of rich content, user interfaces, and data services which allow users to engage with information more easily and effectively.
Our strategy in addressing the Mobile and Device Solutions market is to license Macromedia Flash Player and Adobe Reader technology to device manufacturers and telecommunications carriers that embed our technology on their platforms, enabling them to provide multimedia content, documents and services to their customers. As Flash Player and Adobe Reader technology penetrates digital devices and platforms, millions of developers will be able to use our content creation products to create engaging consumer content and rich mobile business applications.
To support the delivery of content and services in these millions of devices, we offer client-server solutions which leverage the broad deployment of our Flash Player and Adobe Reader technologies. FlashCast, the first of these service delivery solutions, consists of client software built upon Macromedia Flash Lite runtime technology, as well as server technology that manages the content being delivered to the mobile phone. Just as other Adobe solutions such as Breeze are built upon the Adobe Engagement Platform, we see market opportunities to bring similar solutions to the mobile and device ecosystems.
In fiscal 2006, we intend to continue to grow the use of our Mobile and Device Solutions in these emerging markets. We plan to work closely with mobile device manufacturers, telecommunications carriers, and news and entertainment organizations to have them embed our technology on their platforms, enabling them to provide multimedia content and deliver Flash-based information to their customers. In addition, we plan to offer solutions to these customers that include a mobile device version of the Adobe Reader called Adobe Reader LE which will provide the ability for viewing of, and interaction with, PDF-based content.
Mobile and Device Solutions Products
Adobe Reader LE—a version of the Adobe Reader specifically developed for mobile phones that renders PDF documents on small-sized devices.
Macromedia Flash Lite—a version of the Macromedia Flash player specifically developed for mobile phones and other consumer electronic devices; designed to require fewer device resources and can therefore operate on many devices from feature phones to TVs and digital video recorders.
Macromedia Flash SDK—a software development kit specifically developed for bringing Flash-based content to consumer electronic devices; designed to require fewer device resources and can therefore operate on many devices from game devices to TVs and digital video recorders.
Macromedia FlashCast—an end-to-end, client-server solution that is designed to effectively create, deliver and use rich data services which are viewed as "channels" of information on mobile handsets; consists of the FlashCast client software which is embedded on mobile devices such as cellular phones and is built based on the Flash Lite runtime engine, and FlashCast server software which manages subscriber accounts, aggregates and delivers FlashCast channel updates to subscribers, and generates billing transactions for fulfillment.
Enterprise and Developer Solutions Business Segment
Enterprise and Developer Solutions Opportunity
Enterprises are under increasing pressure to save money, offer improved customer service, adhere to regulatory requirements and leverage existing investments in core systems. As a means to address these issues, a critical component of an organization's business processes is the need to interact with data stored in enterprise applications. As this need expands beyond the core users of those applications, adapting systems to accommodate a diverse group of users has become an expensive and time-consuming endeavor. The outcome is a proliferation of manual workarounds that result in process inefficiencies, delays and poor quality of information.
In addition, enterprises have built Web applications which enjoy the reach of the Web but often fail to deliver a user interface with the ease of use and richness that users expect. This impedes utilization of these applications and increases training costs, reducing the overall return on investment ("ROI") that enterprises expect. Organizations are now looking to Rich Internet Applications ("RIA") to boost their ROI for these Web applications by combining a rich graphical application interface with the universal reach of the Web.
We believe significant opportunities exist to help enterprises address these issues by making their business processes more efficient and their Web applications more engaging. To address these opportunities, we offer Adobe Enterprise and Developer Solutions to securely extend the reach of information, processes and services to engage with customers and constituents. Our solutions leverage our Adobe Engagement Platform, which provides a development platform for delivering applications that dramatically improve how businesses engage with people, processes and information.
Adobe's Engagement Platform utilizes our universal Adobe Reader and Macromedia Flash Player software, which ensure reliable, secure and rich application experiences across browsers, desktops and devices. The Adobe Engagement Platform provides developers with an RIA programming model to integrate and optimize workflows, and a server software framework to simplify integration and leverage existing enterprise infrastructures. We also offer services and other software components to accelerate the creation of compelling, relevant and actionable applications, either through RIAs or through intelligent documents.
We believe our Adobe Engagement Platform revolutionizes how enterprises and government agencies present, deliver, consume and interact with information and content. By providing an integrated client-
server framework and toolset for developers, designers and IT organizations, we believe our Enterprise and Developer Solutions allow our customers to:
Although our Enterprise and Developer Solutions address the needs of a diverse set of enterprise customers, we focus primarily on key vertical industries such as financial services, telecommunications, media and publishing, education, manufacturing, government and life sciences. For these customers, we offer comprehensive, scalable, secure and reliable server products and tools to develop applications tailored to their specific information and business process requirements.
Our Enterprise and Developer Solutions currently offer several families of products that we market to these customers:
These solution sets are built on a common server architecture based on J2EE and XML, allowing for easy integration into enterprise infrastructures.
Our Macromedia Flex solutions utilize the Flash file format and leverage our widely-used Flash Player technology. With Flex, enterprise-class applications are able to combine the rich user interface of desktop software with the reach and ease of deployment of the Web, and the processing power of desktop computers and mobile devices. This combination enables the delivery of more complex interactions than are currently supported by the Web browser model. Flex applications extend the server-based object model to client systems, improving interactivity by eliminating the constant page refreshes and context switches that users frequently experience. As a result, Flex applications enable organizations to provide users with a dramatically improved experience that supports the manipulation of data and information in ways that are impractical in a traditional browser-based environment.
Sample uses of Macromedia Flex applications to build RIAs include the following:
purchase. By reducing customer search time and leading customers directly to the items they want, guided selling can increase conversion rates, drive larger sales and reduce shopping cart abandonment;
To build and deliver enterprise-class RIAs, the following components are required:
Our Adobe LiveCycle solutions utilize Adobe PDF documents which interact with core business applications and integrate information contained in those documents into business processes. In addition to being reliable electronic replicas, Adobe PDF documents are "intelligent"—they retain the best characteristics of paper documents, such as a familiar look, but add powerful business logic capabilities such as data validation and automated routing instructions. In addition, arbitrary data (including XML-based data) can be embedded inside of intelligent PDF documents for use or access later on in a business process. These features allow for more efficient interaction with enterprise applications while still providing the ability for people to manually access and interact with the data when necessary.
Our LiveCycle products leverage our Adobe Reader software—with more than 500 million distributed copies of Adobe Reader, we have created a ubiquitous platform for accessing and interacting with intelligent documents. Adobe Reader is available on the most common operating system platforms free of charge, including Microsoft Windows, Apple Macintosh, Linux, various Unix-based platforms, and portable device systems such as Palm OS, Pocket PC and the Symbian operating system for cellular phones. As a universal client, Adobe Reader enables users inside and outside the firewall to interact with intelligent PDF documents on most platforms, including desktops, laptops, PDAs, mobile phones and kiosks, regardless of the application used to author the document.
To address the specific needs of our customers, we offer "document services." Document Generationservices are sets of technologies that create, integrate and manage intelligent documents, and leverage the use of our Adobe Reader software for our customers' constituents to interact with data within the document. Document services that we currently provide include:
Our ColdFusion products provide fast and easy ways to build and deploy powerful Internet applications. Developers can extend or integrate ColdFusion with Java or .NET applications, connect to enterprise data and applications, create and interact via Web services, or interface with SMS on mobile devices or Instant messaging clients. ColdFusion can also be used for business reporting, rich-forms generation, printable document generation, full-text search, and graphing and charting—enabling customers to more fully engage their constituents with better Web experiences.
Enterprise and Developer Solutions Products
Adobe Acrobat Capture—enables conversion of legacy paper-based documents into indexed, searchable, platform-independent electronic PDF files for archiving and distribution purposes.
Adobe Acrobat Distiller Server—a server-based software application that provides workgroups with a centralized solution for converting PostScript files to Adobe PDF files over a network; gives IT and creative professionals the power of increased productivity and the assurance of consistent, high-quality output.
Adobe Acrobat Elements Server—a server-based software application that enables organizations to centrally deploy and manage Adobe PDF creation capabilities across the enterprise. Flexible,enterprise; flexible, server-based deployment options, combined with a Web services Application Programming Interface ("API"), make it easy to integrate Adobe PDF generation into document-based business processes and existing enterprise applications.
Adobe Central Pro Output Server—a server-based software application for document generation that allows organizations to create personalized, customer-facing documents from any data source—including legacy, line-of-business, ERP, or CRM applications; merges data with an electronic document template using a powerful processing engine to dynamically generate electronic documents such as purchase orders,
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invoices, statements and checks for delivery via Adobe PDF, the Web, e-mail, fax, or print; works with Adobe Output Designer, which is a companion tool used to create sophisticated document templates.
Adobe Document Server—a server-based software application for the creation, manipulation and assembly of customized Adobe PDF documents; XML-based data can be inserted into templates to create complex, content-rich documents for more targeted and effective customer communications; integrates with leading enterprise applications as well as custom systems.
Adobe LiveCycle Designer—a desktop software application which simplifies the creation and maintenance of intelligent XML form templates for deployment as Adobe PDF forms or HTML applications; provides an intuitive, graphical design tool for creating XML templates that look exactly as the author intended, and previewing them before deployment. It also simplifies adding intelligence to documents, such as calculations and validations, and binding form fields to arbitrary XML schemes for seamless integration with enterprise applications.
Adobe Output Designer—a design tool that allows users to create electronic document templates for use with Adobe solutions for document generation; aids in the creation of electronic documents that exactly replicate existing paper documents.
Adobe Output Pak for mySAP.com—SAP-certifiedLiveCycle Form Manager—a server-based software for document generation that enables organizationsapplication which simplifies form management and increases user satisfaction by centralizing the management of all forms, regardless of file type, into a single point of access via a Web-based portal; allows administrators to optimize their investment in their SAP solution by creating personalized, professional-looking, customer-facing documents; provides an easy, fast,manage form publication, version control and cost-effective way to create and maintain documents for the SAP environment; integrates directly with an SAP system to extract information which is merged with a document template that defines the layout and formatting of the document; output can be in a variety of formats, including Adobe PDF, print, fax, e-mail, and the Web, to multiple devices.
Adobe Output Pak for Oracle—server-based software for document generation; expands the scope of the Oracle E-Business Suite by allowing customers to easily create, maintain, and integrate high-quality, professional-looking electronic documents with their Oracle business processes in an easy, fast, and cost-effective way; integrates directly with Oracle Reports to extract XML data from other applications which is then merged with a document template that defines the layout and formatting of the document output; used to dynamically generate documents such as purchase orders, invoices, statements, and checks which can then be delivered via Adobe PDF, print, fax, e-mail, and the Web.
Adobe Web Output Pak—server-based software for document generation; creates documents in PDF and HTML for presentation on the Web, and in Wireless Markup Language ("WML") for presentation to a wireless device; allows users to personalize and control the look of documents based on the data the documents contain.
Document Process Management
Adobe solutions for document process management include the following productsuser access, as well as Adobe Reader Extensions Serverestablish ebXML relationships with business partners and Adobe Reader, which are listed under Document Collaboration.customers inside and outside the enterprise.
Adobe Form Designer—simplifies the creation of intelligent XML form templates for deployment as Adobe PDF forms or HTML applications. It provides an intuitive, graphical design tool for creating XML templates that look exactly as the author intended. It also simplifies adding intelligence to documents, such as calculations and validations, and binding form fields to arbitrary XML schemes for seamless integration with enterprise applications.
Adobe Form Server—LiveCycle Forms—offers the broadesta range of solutions for deploying intelligent forms that can be completed online or offline, across diverse platforms and devices. Itdevices; identifies a user's environment to deliver the richest form-filling capabilities supported and integrates with enterprise applications to pre-populate form fields, save captured data, and initiate data-driven workflows.
Adobe Form Client—creates a rich form-filling experience, whenLiveCycle Barcoded Forms—enables organizations to accurately capture user-supplied information from fill-and-print paper forms by using dynamic 2D barcodes; barcodes are initially set up through creation of the users' environmentform with Adobe's Designer application; after the form is known,printed, signed and returned by users of the form, the barcode on the form is scanned and decoded, and form data obtained from the barcode is routed to increase accuracy of data captured and reduce process inefficiencies. It offers flexible desktop, form-deployment options with zero administration, an XML-based architecture for integration with core business applications, and support for digital signatures.the appropriate enterprise application through Adobe's LiveCycle server products.
Adobe WorkflowLiveCycle Document Security Server—a server-based workflowsoftware application that helps organizations automate the processing of electronic documents by providing batch-based capabilities to digitally sign and certify PDF files, validate digital signatures, and encrypt/decrypt PDF documents; safeguards information when it leaves a company's network and integrates with existing public key infrastructures.
Adobe LiveCycle Policy Server—a server-based software application that helps organizations manage information access securely with dynamic, persistent document control; allows for the design, deploymentcontrol and managementmonitoring of forms-based business processes to improve organizational agility and productivity;
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uses a rules-and roles-based design tool that defines business rules a process must follow, as well aselectronic document usage inside or outside the roles of each individual involved in the process.
Adobe Capture Handheld—Adobe Capture Handheld enables mobile workers to submit data captured through intelligent electronic forms directly into core business applications, increasing organizational productivity and agility. It provides the broadest range of features available for capturing data on products for Microsoft Windows Powered Pocket PC and Handheld PC devices, including built-in calculation and validation capabilities, the ability to fill in formsfirewall, online or offline, and supportacross multiple document platforms; lets organizations know when a document has been viewed, printed, or altered, and restricts access so that only intended recipients can open, use and forward a document; allows for industry-standard digital signature technologies.
Document Collaboration
Adobe'spreviously granted document collaboration products includepermissions and access to be revoked; leverages Adobe Acrobat and Adobe Reader Extensions Server (below), as well as the Adobe Acrobat product family (product descriptions for which are listed under Desktop Document Generation).software to author and view protected documents.
Adobe Reader—free software for reliably reviewing and printing Adobe PDF files on a variety of hardware and operating system platforms.
AdobeLiveCycle Reader Extensions Server—a server-based productsoftware application which lets enterprises easily create and share interactive PDF files with external parties who must interact with these documents—without requiring recipients of the documents to acquire Acrobat software that normally would be necessary to interact with the PDF files they receive. On an individual PDF document, it unlocks features so that when such a file is opened in the free Adobe Reader, users have access to functionality that normally would not be available in Adobe Reader. Examples of document collaboration features that can be enabled in Adobe Reader by this server product include the use of digital signatures to electronically sign PDF documents, the ability to provide comments by using electronic sticky notes and other collaborative mark-up tools, the capability to save the document and the ability to fill-in form information.
Document Control and Security
Adobe Acrobat ProfessionalLiveCycle Workflow Server—a server-based workflow application that allows for the design, deployment and management of forms-based business processes to improve organizational agility and productivity; uses a rules-and roles-based design tool that defines business rules a process must follow, as well as the roles of each individual involved in the process.
Adobe Acrobat Standard—(Output Pak for mySAP.com—an SAP-certified server-based software application for document generation that enables organizations to optimize their investment in additiontheir SAP solution by creating personalized, professional-looking, customer-facing documents; provides an easy, fast, and cost-effective way to features described previously) provide extensivecreate and maintain documents for the SAP environment; integrates directly with an SAP system to extract information which is merged with a document controlstemplate that let organizations determine whodefines the layout and formatting of the document; output can open,be in a variety of formats, including Adobe PDF, print, copy, or modify content within fax, e-mail and the Web.
Adobe Output Pak for Oracle e-Business Suite—a PDF document. Also offers supportserver-based software application for digital signature technologiesdocument generation; expands the scope of the Oracle E-Business Suite by allowing customers to easily create, maintain and integrate high-quality, professional-looking electronic documents with their Oracle business processes in an easy, fast and cost-effective way; integrates directly with Oracle Reports to extract XML data from leading security vendorsother applications which is then merged with a document template that defines the layout and formatting of the document output; used to dynamically generate documents such as Entrust, GeoTrust, IBM, RSA Security,purchase orders, invoices, statements and Verisign.checks which can then be delivered via Adobe PDF, print, fax, e-mail and the Web.
Adobe Web Output Pak—a server-based software application for document generation; creates documents in PDF and HTML for presentation on the Web, and in Wireless Markup Language ("WML") for presentation to a wireless device; allows users to personalize and control the look of documents based on the data the documents contain.
Macromedia ColdFusion MX—provides a server-scripting environment and a set of features used by organizations for building database-driven scalable applications that are accessible through Web browsers and the Macromedia Flash Player; built on an open Java technology architecture and can be deployed on third-party Java application servers that support the J2EE specification.
Macromedia Flex—provides a solution for enterprise programmers that build and deploy enterprise class RIAs and leverage Adobe's widely used Flash Player technology. The Flex Product line includes the Flex Framework and compiler; Flex Builder, an Eclipse based IDE for designing, coding, debugging and deploying Flex applications; and Flex Enterprise Services, a powerful server for connecting Flex applications to enterprise infrastructure, including Web services, remote Java objects and real-time data and messaging systems.
Macromedia Flex Builder—bundled with Flex, Flex Builder is a new tool that can be used by designers and enterprise developers for visually architecting and developing RIAs; tightly integrated with Flex, Flex Builder provides features for quickly prototyping, coding, debugging and deploying Flash-based RIAs.
Other Business Segment
Our Other Business Segment contains several of our products and services which address market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and OEM printing businesses, to new strategic opportunities such as OEM revenue generated from our desktop Adobe Engagement Platform—which includes the ubiquitous Adobe Reader and Macromedia Flash Player clients. These opportunities, and the products we offer to address them, are reviewed below in the following categories: Platform, OEM PostScript, and OtherPrint and Classic Publishing.
Platform Opportunities
As previously discussed, central to our long term strategy is the creation of an Adobe Engagement Platform which provides a development platform for delivering applications that dramatically improve how businesses engage with people, processes and information. Today, our new Platform Business Unit focuses on the development and delivery of this Adobe Engagement Platform, utilizing our universal Adobe Reader and Macromedia Flash Player software. These solutions will ensure reliable, secure and rich application experiences across browsers, operating systems and devices.
Based on how these solutions allow enterprises and government agencies to present, deliver, consume and interact with information and content, there exists an opportunity to monetize the use of our Reader and Flash Player software. While typically provided for free, the widely used nature of both desktop applications has created new opportunities with partners whereby we can generate revenue based on the deployment of partner technology as part of our Adobe Engagement Platform products.
In fiscal 2006, we will continue to explore monetization opportunities for our Adobe Engagement Platform solutions, as well as focus on the long-term strategic goal of providing a single ubiquitous Adobe Engagement Platform solution that combines Adobe Reader and Flash Player capabilities.
Platform Products
Adobe Reader—software for reliable reviewing and printing of Adobe PDF files on a variety of hardware and operating system platforms; when used with certain Adobe PDF files created with Adobe LiveCycle Reader Extensions Server or Adobe Acrobat 7.0 Professional, Adobe Reader also can be used to enable collaborative workflows through the addition of collaboration features built into the Adobe PDF file; these features include review and markup tools that normally are not present in the standard Adobe Reader product.
Macromedia Flash Player—the most widely distributed rich client software on PCs and consumer electronic devices, the Flash Player provides a runtime environment for text, graphics, animations, sound, video, application forms and two-way communications.
Macromedia Shockwave Player—a rich media player used for deploying multimedia content for use in internet solutions including education, training, games and commerce.
OEM PostScript and Other Market OpportunityOpportunities
Graphics professionals and professional publishers require quality, reliability and efficiency in production printing, and we believe our printing technology provides advanced functionality to meet the sophisticated requirements of this marketplace. As high-end printing systems evolve and transition to fully digital, composite workflows, Adobe iswe believe we are uniquely positioned to be a supplier of software and technology based on the Adobe PostScript and Adobe PDF standards for use by hardware manufacturers in this industry. Adobe generatesWe generate revenues by licensing our technology to OEMs that manufacture printers and other output devices.
OEM PostScript and Other Products
Adobe PostScript—a printing and imaging page description language that delivers high quality output, cross-platform compatibility and top performance for graphically-rich printing output from corporate desktop printers to high-end publishing printers; gives users the power to create and print visually rich documents with total precision; licensed to printing equipment manufacturers for integration into their printing products.
15Print and Classic Publishing Opportunities
In addition to the market opportunities and our businesses discussed previously, we offer a variety of products and solutions which address many different and unique publishing market needs. Our Print and Classic Publishing Business Unit focuses on these solutions, which address the diverse customer needs in markets such as: business document publishing, CD-ROM publishing, e-learning solutions, on-line help systems, technical document publishing and typography.
Print and Classic Publishing Products
Adobe Font Folio OpenType Edition—contains more than 2,200 typefaces from the Adobe Type Library in OpenType format, offering a complete type solution for print, the Web, digital video or electronic documents.
Adobe FrameMaker—an application for authoring and publishing long, structured, content-rich documents including books, documentation, technical manuals and reports; provides users a way to publish their content to multiple output formats, including print, Adobe PDF, HTML, XML and Microsoft Word.
Adobe Extreme—a printing architecture for service bureaus, prepress shops,PageMaker—software used to create high-quality documents simply and commercial printers; the fastest, most flexible implementation of Adobe printing technology; provides an integrated workflow that automates prepress tasks, optimizing output speedsreliably with robust page layout tools, templates and quality by using Adobe PDF and job tickets; offers flexibility while delivering a scalable, reliable, and productive printing environment.stock art.
Adobe PDF Transit—SVG Viewer—a Software Development Kitplug-in for Web browsers that enablesallows users to view Web graphics created in Scalable Vector Graphics ("SVG") format.
Adobe Type Library—includes Adobe's best-selling typefaces, plus Adobe Type Manager; makes it easy to create beautiful text for print, providersWeb and video projects.
Adobe Type Classics for Learning—a low-cost, introductory font library designed for students and educators.
Adobe Type Manager—available in Light (free) and Deluxe versions; provides powerful, easy management of all PostScript Type 1, OpenType and TrueType fonts.
Adobe Type Sets—various Collection packages of Adobe's best-selling typefaces; makes it easy to create beautiful text for print, Web and video projects.
Macromedia Authorware—a rich media authoring tool used to develop streamlined, reliable,caption based e-learning on Windows and secure Adobe PDF-based workflowsMacintosh based platforms; use of the product ranges from creating Web-based tutorials to simulations incorporating audio and video; applications developed with Macromedia Authorware can be delivered on the Web, over corporate networks or on CD-ROM.
Macromedia Captivate—enables users to create interactive demonstrations and software simulations in the Flash file format; records users' actions in any application and instantly creates Flash simulations with visible and audible mouse movements; the small file size and high resolution make Macromedia Captivate simulations and demonstrations easy to publish online or burn onto a CD for use in training, sales, marketing or user support; often used in combination with Macromedia Breeze, Macromedia Captivate provides a robust technology solution to bring understanding and retention to the end users of rapid training and e-learning solutions.
Macromedia Contribute—an easy way to update, add and publish Web content; non-technical business users can make changes to intranet and internet Websites while automatically maintaining site standards for style, layout and code; as a server application, Macromedia Contribute provides a Web publishing system which enables IT professionals to manage and administer users and permissions as part of the Web publishing process; also content providers and Web professionals to save time and streamline the Web-content maintenance process.
Macromedia Director—a tool for creating professional multimedia content that begins at their customers' desktopscombines images, text, audio and extends acrossvideo into presentations and interactive experiences; for Websites, it provides users with the Internetability to deliver multimedia content that supports three dimensional images and animations for use in various markets, including education, games and commerce; also enables the creation of fixed-media content for CD titles and DVD titles in the entertainment, education and corporate training markets.
Macromedia FreeHand MX—a printing device.professional vector graphics tool designers and illustrators use to create high quality images that can be scaled; supports developing images for print, the Web and the Macromedia Flash Player.
Macromedia JRun—an application server based on the J2EE specification; integrates with our development tool offerings and is used to deploy applications for functions such as online banking and customer service.
Macromedia RoboHelp—an authoring tool used by developers and technical writers to create professional help systems and documentation for desktop and Web-based applications; utilizes support for XML, PDF import/export, content management, distributed workforces, team authoring capabilities, as well as JavaHelp.
The markets for Adobeour products are characterized by intense competition, evolving industry standards, rapid technologysoftware and hardware technology developments, and frequent new product introductions. Our future success will depend on our ability to enhance our existing products, introduce new products on a timely and cost-effective basis, meet changing customer needs, extend our core technology into new applications, and anticipate orand respond to emerging standards and other technological changes.
Creative ProfessionalSolutions
In our Creative ProfessionalSolutions segment, we offer several individual software applications, including Adobe GoLive, Adobe Illustrator, Adobe InDesign, Adobe InCopy, Adobe PageMaker, and Adobe FrameMaker. We believe these individual products compete favorably on the basis of features and functionality, ease of use, product reliability, and price and performance characteristics. In addition, the products work well together, providing broader functionality and shortened product learning time for the individual who uses multiple applications to complete a project.
We also offer the Adobe Creative Suite in two versions, which are new products that consist of combinations of several of our technologies. The Adobe Creative Suite Standard Edition combines the capabilities of Adobe InDesign, Adobe Illustrator and Adobe Photoshop, as well as new file management and integration technology called Version Cue.Cue, and Adobe Bridge which provides a simple interface to easily organize, browse, and locate files. The Adobe Creative Suite Premium Edition adds to this the capabilities of Adobe Acrobat Professional and Adobe GoLive. TheSimilarly, we offer Macromedia Studio, which is a product that combines the capabilities of Macromedia Dreamweaver, Macromedia Flash Professional, Macromedia Fireworks, Macromedia Contribute and Macromedia FlashPaper. We also offer various bundles for customers who desire some of these applications in one affordable package.
Our Creative Solutions products compete with many companies, including Apple Computer, Avid, Corel, Google, Microsoft and Quark, as they increase their presence in the creative software and solutions markets, as well as from Open Source initiatives.
With respect to Microsoft, it announced in September, 2005 a new suite of products, called Expression Studio, scheduled to be released in 2006 and which will compete with our Adobe Creative Suite and Macromedia Studio products and individual Creative Solutions segment products. Expression Studio includes Microsoft Expression Graphic Designer which will compete with our Adobe Photoshop and Adobe Illustrator products; Microsoft Expression Interactive Designer, which will compete with our Macromedia Flash product line; and Microsoft Expression Web Designer, which will compete with our Macromedia Dreamweaver and Adobe GoLive products. Microsoft's new operating system, Windows Vista, which is a complete design and publishing solution for print and Web publishing.expected to ship in late 2006, will also include some features in its Presentation Foundation that will compete with Macromedia Flash.
We believe that no otherour Adobe Creative Suite products and our Macromedia Studio product compete favorably on the basis of features and functionality, ease of use, product reliability, price and performance characteristics. The individual technologies within the Suite and Studio products also work well together, providing broader functionality and shortened product training time for the individual who uses multiple applications to complete a project.
In addition to our Adobe Creative Suite and Macromedia Studio products, we offer the technologies within them as individual software vendor currently provides a similar solution.applications. The competitive nature for these individual Creative Solutions products is discussed below.
Drawing and illustration products are characterized by feature-rich competition, brand awareness and price sensitivity. OurIn addition to competition with Microsoft's Expression Graphic Designer product, our Adobe Illustrator product faces competition from companies such as Autodesk, Corel, Deneba, Mediascape and Macromedia.Xara and the Open Source product called Karbon14. We believe our productAdobe Illustrator competes favorably due to high awareness of the rich features in our Illustrator product, especially the drawing and illustration functionalities, the features and technical capabilities of the product, and our ability to leverage core technologies from our other established products.
The demand for Web page layout and Web content creation tools is constantly evolving and highly volatile. In addition to competition with Microsoft's Expression Interactive Designer and Web Designer products, we believe Macromedia Dreamweaver, Adobe GoLive and Macromedia Flash face direct and indirect competition from desktop software companies such as Bare Bones Software and various proprietary and open source Web authoring tools. We also face competition from Microsoft's Front Page and Visual Studio products, and other integrated development environments that enable developers to create Web applications from companies such as BEA Systems, Borland and IBM. We believe our products compare favorably to these applications; however, our market share may be constrained by Microsoft's ability to target its Web software to users in markets they dominate, including users of Microsoft Office, Microsoft Windows operating system and the Microsoft Internet Explorer Web browser.
The needs of digital imaging and video editing software users are constantly evolving due to rapid technology and hardware advancements in digital cameras, digital video cameras, printers, personal computers, cellular phones and other new devices. Our software offerings, including Macromedia Fireworks, Adobe Photoshop, Adobe Photoshop Album, Adobe Photoshop Album Starter Edition, Adobe Photoshop Elements, Adobe After Effects, Adobe Audition, Adobe Encore DVD, Adobe Premiere Elements and Adobe Premiere Pro software, face significant competition from companies offering similar products and will continue to face competition from emerging products, including those coming from the Open Source movement.
Our mid-range consumer offerings, including Photoshop Elements and Adobe Premiere Elements, are subject to intense competition, price sensitivity, brand awareness and strength in OEM bundling and retail distribution. We face direct and indirect competition from a number of companies that market software which competes with ours, including ACD Systems, AI Soft (Japan), Apple Computer, ArcSoft, Corel, i4 (Japan), Google, Kodak, Nova Development, Magix, Micrografx, Microsoft, Paessler GmbH (Germany), Pegasus Imaging Company, Phase One, Photodex Corporation, Sonic Pinnacle, Sony and Ulead Systems. In addition, we face competition from device, hardware and camera manufacturers such as Apple Computer, Canon, Dell, Hewlett-Packard, Nikon, Sony and others as they try to differentiate their offerings by bundling their own digital imaging software, or those of our competitors. Similarly, we face potential competition from operating system manufacturers such as Apple Computer and Microsoft as they integrate hobbyist-level digital imaging and image management features in future versions of their operating systems. Finally, we face potential competition from Open Source products, including Gimp for Linux.
We believe we compete favorably against other mid-range digital imaging, digital video and consumer-focused image management software applications with our Adobe Photoshop Elements, Adobe Premiere Elements and Adobe Photoshop Album products due to strong consumer awareness of our brand in digital imaging and digital video, our relationships with significant OEMs, positive recommendations for our products by market influencers, our increased focus on the retail software channel, and strong feature sets.
In professional digital imaging, software applications compete based on product features, brand awareness and price sensitivity. In addition to competition with Microsoft's Expression Graphic Designer product, our Adobe Photoshop product faces direct and indirect competition from a number of companies including Apple Computer and Corel. Our Adobe Photoshop product competes favorably due to high awareness of the Photoshop brand in digital imaging, the positive recommendations for our Photoshop product by market influencers, the features and technical capabilities of the product, and our ability to leverage core features from our other established products.
Our Adobe InDesign product, used for professional page layout, faces toughsubstantial competition. The main competitor, Quark, has a competitive product, Quark XPress, which has maintained a leadership positionhistorically strong market share in the professional page layout market. Quark also benefits from an established industry infrastructure that has been built around the use of their XPress product in print shops and service bureaus, and through the development of third party plug-in products. Barriers to the adoption of Adobe InDesign by Quark XPress customers include this infrastructure, as well as the cost of conversion, training
and software/hardware procurement required to switch to InDesign. We have seen an increase in the adoption of InDesign software and we believe we will continue to see market share gains going forward due to a product offering that contains new innovative features, (such as separations preview, nested styles, transparency, typography and enhanced XML support), our strong brand among users, positive reviews by industry experts, adoption of InDesign by major accounts which are influencers in their industries and improved infrastructure support by the industry for our overall solution.
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The demand for Web page layout is constantly evolving and highly volatile. We believe Adobe GoLive trails in market share and faces significant direct and indirect competition for Web page layout applications from companies such as Macromedia and Microsoft. We believe our product compares favorably to these applications; however, our market share may be constrained by Macromedia's entrenched position in the Web page layout market, and by Microsoft's ability to target its Web page layout software to users in markets they dominate, including users of Microsoft Office, Microsoft Windows operating system, and the Microsoft Internet Explorer Web browser.
In the technical authoring and publishing market, our Adobe FrameMaker product faces competition from large-scale electronic publishing systems, XML-based publishing companies such as Arbortext, as well as lower-end desktop publishing products such as Microsoft Word. Competition is based on the quality and features of products, the level of customization and integration with other publishing system components, the number of hardware platforms supported, service, and price. We believe we can successfully compete based upon the quality and features of the Adobe FrameMaker product, our extensive application programming interface, and the number of platforms supported.
In the business document publishing and authoring market, our Adobe PageMaker product faces competition from other desktop publishing software products, including Microsoft Publisher. Competition is based on the quality and features of products, ease-of-use, printer service support, and price. We believe we have a strong product and can successfully compete with these types of applications based upon the quality and features of the Adobe PageMaker product, its strong brand among users, and its widespread adoption among printer service bureaus.
Digital Imaging and Video
The Digital Imaging and Video software markets are constantly evolving, characterized by rapid technological and hardware developments, and frequent new product introductions. The needs of the users in these markets—especially at the low-end consumer level—are rapidly changing as more people become avid users of digital cameras, digital video cameras, and digital imaging and digital video equipped hardware devices, personal computers and cellular phones.
Our tools in the market, including Adobe Photoshop, Adobe Photoshop Album, Adobe Photoshop Elements, Adobe After Effects, Adobe Audition, Adobe Encore DVD, and Adobe Premiere Pro software, face significant competition from companies offering similar products and will continue to face competition from emerging products and technologies.
The mid-range consumer digital imaging and image management software markets are subject to intense competition, price sensitivity, brand awareness and strength in OEM bundling and retail distribution.
We face direct and indirect competition in these markets from a number of companies that market software which competes with ours, including ACD Systems, AI Soft (Japan), Apple Computer, ArcSoft, Corel, i4 (Japan), Image Software, JASC Software, Kelly Media (Germany), Luna Imaging, Macromedia, Micrografx, Microsoft, Paessler GmbH (Germany), Pegasus Imaging Company, Roxio, TriVista Technologies, Ulead Systems, and VCOM Products. In addition, we face competition from device, hardware, and camera manufacturers such as Apple Computer, Canon, Dell, Hewlett-Packard, Nikon, Sony, and others as they try to differentiate their offerings by bundling their own digital imaging software, or those of our competitors. Similarly, we face potential competition from operating system manufacturers such as Apple Computer and Microsoft if they integrate hobbyist-level digital imaging and image management features in future versions of their operating systems.
We believe we compete favorably against other mid-range digital imaging and consumer-focused image management software applications with our Adobe Photoshop Elements and Adobe Photoshop Album products due to strong consumer awareness of our brand in digital imaging, our relationships with
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significant OEMs, positive recommendations for our products by market influencers, our increased focus on the retail software channel, and a strong feature set.
The professional digital imaging software market is a competitive market where software applications compete based on product features, brand awareness, and price sensitivity. We face direct and indirect competition from a number of companies including Corel, Jasc Software, and Macromedia. We are an industry leader and compete favorably with our Adobe Photoshop product due to high awareness of the Photoshop brand in digital imaging, the positive recommendations for our Photoshop product by market influencers, the features and technical capabilities of the product, and our ability to leverage core features from our other established products.
Applications for digital video editing, compositing andmotion graphics, special effects, audio creation and DVD authoring face increasing competition as video professionals and hobbyists migrate away from analog video and audio tools towards the use of digital camcorders and digital video production on their computers and DVD systems for rich media playback. Our Adobe After Effects, Adobe Audition, Adobe Encore DVD and Adobe Premiere Pro software products, as well as the Adobe Video CollectionProduction Studio which contains these products, face competition from companies such as Aist, Apple Computer, Avid, Canopus, Discreet, Sonic Pinnacle, ULead Systems and Sony. Our Adobe Premiere Elements software product, which is targeted for use by hobbyists, faces competition from companies such as Aist, ArcSoft, Avid, Broderbund, Canopus, Cyberlink, Discreet, Magix, Microsoft Muvee, Pinnacle Systems, Roxio, Sonic Solutions, ULead Systems, and Sony.Muvee.
Adobe After Effects software is a leader in professional compositing and specialvisual effects editing applications due to ourits strong feature set and theits integration with our other products tothat helps create a broad video editing platform for our customers. In professional digital video editing, we are a marketan industry leader on the Microsoft Windows platform with Adobe Premiere Pro and compete favorably due to our strong feature set, our OEM relationships and the integration with our other products to create a broad digital video publishing platform for our customers.
Intelligent DocumentsKnowledge Worker Solutions
AsWith our Adobe Acrobat business, we broaden the scope of our Intelligent Documents products and solutions, we face increasedare seeing an increase in competition from entrenched office applications, makersMicrosoft. Microsoft has announced its next generation operating system, called Windows Vista, which is expected to ship in late 2006. Windows Vista will include a proprietary digital rights management technology and a new document format, called XML Paper Specification ("XPS"), which will compete with Adobe PDF. In addition, Microsoft has announced that the next version of productsits widely used Office product, which provide clone capabilitiesalso is expected to ship in late 2006, will contain a feature to save Microsoft Office documents as PDF files. This new PDF feature in Office could compete with Adobe Acrobat. Given Microsoft's market dominance, XPS, the PDF feature in Office and any other competitive Microsoft product or technology that is bundled as part of its Office product or operating system, could harm our overall Knowledge Worker Solutions market opportunity.
Our Adobe Acrobat product electronic forms solution providers, emerging products/technologies, and potentially, enterprise collaboration system providers. Additionally, current office applications and content creation/management tools that use HTML, Macromedia Flash, Macromedia FlashPaper, Microsoft InfoPath, Microsoft Word, Tagged Information File Format ("TIFF"), and various XML-based formats for electronic document distribution provide alternate solutions to customers, and indirectly compete with Adobe's Intelligent Documents products andfamily also faces competition in the use of Adobe PDF.
For document generation solutions—specifically, the desktop and server-based PDF file creation markets—Adobe Acrobat and our server solutions such as Adobe Acrobat Elements Server, Adobe Distiller Server, and Adobe Document Server face competitionmarket from many Acrobat clone products marketed by companies such as AdLib, Active PDF, Ansyr Technology, Apple Computer, eHelp Corporation, Global Graphics, Scansoft, Software995, Sourcenext and others. In addition, other PDF creation solutions can be found at a low cost, or for free, on the Web. Additional competitors in the server-based
For customers that use Adobe Acrobat Standard and Adobe Acrobat Professional as part of document generation market include DocuCorp, Document Sciences, Formscape, Optio,collaboration and StreamServe. However, some PDF creation solution providers in the market today use technologydocument process management solutions, where electronic document delivery, exchange, collaboration, security and archival needs exist, our Acrobat product family faces competition from us, licensedentrenched office applications such as Adobe PDF Libraries, to implement the PDF creation capabilities of their products or solutions.
Microsoft Office. In the higher end of the electronic document market, the release of our new Acrobat product called Acrobat Professional allows us to provide similar value as, andprovides features which compete more directly against,with other creative professional PDF tool providers, such as Enfocus, Dalim, TeamPDF and Zinio. In addition, we are targeting the architecture, engineering and construction worker electronic document collaboration market with our Acrobat Professional product market. The capabilities of our product in this market compete with some aspects of Autodesk's solution.
ForTo address the threats from Microsoft and others, we are working to ensure our Adobe Acrobat applications stay at the forefront of innovation in emerging opportunities such as PDF document generation, document collaboration and document process management solutions, where electronic document delivery, exchange, collaboration, and archival needs exist, our Intelligent Documents productmanagement.
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family Breeze faces competition from entrenched office applicationsmany Web conferencing vendors, including WebEx and Microsoft. WebEx is a market share leader, and Microsoft has steadily increased its marketing of Microsoft Office Live Meeting since its acquisition of Placeware in 2003. To address the threats from Microsoft and others in the Web conferencing space, we focus on providing a differentiated and enhanced user experience through our ubiquitous Macromedia Flash Player.
Mobile and Device Solutions
The markets we address with our Mobile and Device solutions are influenced by evolving industry standards, rapid software and hardware technology developments, and frequent new product and technology introductions by companies or open-source initiatives targeting similar opportunities. Technologies and products which could compete with Macromedia Flash Lite include Java, Brew, SVG, WAP and Microsoft Windows Mobile.
We believe Macromedia Flash Lite solution competes favorably against these technologies and/or solutions due to the ubiquitous distribution of Macromedia Flash Player technology on a broad set of platforms (including PCs and cellular phones), our robust programming model and developer tools used to create Flash content, the large Flash developer community and ecosystem, and the rich expressiveness of Flash, which allows the capability to deliver audio, video, motion graphics, vector graphics and visual effects—resulting in rich user experiences and interfaces on mobile devices which compare favorably to those created by alternate solutions.
Enterprise and Developer Solutions
The markets we address with our Macromedia ColdFusion, Adobe LiveCycle and Macromedia Flex server products are influenced by evolving industry standards, rapid software and hardware technology developments, and new product introductions from competitors such as Microsoft Office. In addition, some content management vendors provide collaboration and business process management capabilities that could directly or indirectly compete with our offerings, although we view our solutions in these areas as an extension of those supplied by such vendors.IBM.
Microsoft has alsoalready brought to market new products and technologies to address many of the emerging Intelligent Documents market needs.needs we focus on with our Adobe LiveCycle family of products. In the Professional version of Microsoft Office 2003, they haveit introduced a new information gathering program called InfoPath 2003. They have also introduced Windows Rights Management Services in their new Windows Server 2003 product, which is designed to allow corporate networks to manage and enforce restrictions built into documents.
As discussed previously, Microsoft has also introduced enhanced collaborativeannounced its next generation operating system, called Windows Vista, which is expected to ship in late 2006. Windows Vista will include a new document review, document security,format, called XPS, which will compete with Adobe PDF. Windows Vista will also include a proprietary digital rights management technology which will compete with Adobe LiveCycle Policy Server. In addition, Microsoft's new version of Office will include an updated version of its SharePoint product which will compete with certain aspects of our Adobe LiveCycle products. Microsoft has also announced the Windows Presentation Foundation (formerly known as Avalon) which is expected to ship as part of the Windows Vista release in 2006, and document distribution capabilities in its versions of Microsoft Office 2003.which will offer an alternative to building RIA applications within the Microsoft.NET framework.
These new and updated Microsoft products and technologies, and their marketing initiatives supporting them, indicate Microsoft is targetingIn the electronic document distribution, collaboration, and forms markets, markets that we are also focused on.
Insolution market, in addition to competition from Microsoft and due to the large size of the document collaboration and document process management opportunities,Infopath-based solutions, we have seen and expect to see new products and technologies from established technology companies that may compete directly or indirectly with our Intelligent Document products and solutions. For example, Macromedia has introduced a new server product called Flex, which is a development environment for creating Internet applications to dynamically display data; and Oracle and Corel have announced a partnership to deliver a solution to enable the creation, storage and delivery of XML content and SVG applications.
We also continue to face competition with our Intelligent Documents from established eForm solution companies such as Cardiff, PureEdge, and FileNET (throughIBM through their acquisition of Shana) foran eForms solution company called PureEdge, other regional based eForm solution providers, and from FileNET's electronic formsform solutions. Similarly, we face competition for document process management solutions from workflow solutionssolution vendors such as FileNET, MetaStorm, Scansoft Staffware, and Ultimus.
We believe that our Intelligent DocumentsAdobe LiveCycle server product family competes favorably against these companies and formats in terms of the combined benefits of superior functionality, cross-platform visual page fidelity/reliability, multi-platform capability, file compression, printing and security of documents expressed using Adobe PDF. We also believe that Adobe PDF and its integration with XML, combined
with the broad distribution of Adobe Reader on all leading hardware platforms, provide a ubiquitous universal multi-platform solution that is more compelling than our competitors' offerings.
Looking toAs we broaden the future,scope of products and solutions offered with our Enterprise and Developer Solutions products, we face increased competition from entrenched office applications, emerging products/technologies and potentially, enterprise collaboration system providers. Additionally, current office applications and content creation/management tools that use HTML, Microsoft Word, Tagged Information File Format ("TIFF") and various XML-based formats for electronic document systems targeting enterprises will continuedistribution provide alternate solutions to be developedcustomers, and will likely be adopted.indirectly compete with our enterprise server products and the use of Adobe PDF.
Our Macromedia Flex server product provides a solution for Java, C++ and C Sharp programmers wanting to deploy Enterprise class, rich Web applications and leverages Macromedia Flash Player technology. Beyond the competitive Microsoft threats previously discussed, vendors such as Tibco and NexaWeb offer competitive solutions in the RIA market that we target with Flex. In addition, Microsoft is working on the next generationnew open source technologies like AJAX provide alternative methods for creating RIAs. Numerous open source groups, as well as a number of its Windows operating system, codenamed Longhorn, which could be released as early as late 2005. It is anticipated that Microsoft will add new electronic document capabilities to Longhorn, potentially providing additional competition to our Intelligent Document products and solutions. Wecommercial software vendors are working to ensurebuild tools and frameworks that could make AJAX competitive with Flex.
Our Macromedia ColdFusion products face competition from major vendors including Microsoft, IBM, BEA and Sun. In addition, ColdFusion competes with several technologies available today at no cost including the PHP and PERL programming environments that are available for the Apache Web server.
Other
In technical authoring and publishing, our Adobe Intelligent Documents applications stay at the forefront of innovation in emerging marketsFrameMaker product faces competition from large-scale electronic publishing systems, XML-based publishing companies such as document generation, document collaborationPTC (via their acquisition of Arbortext), as well as lower-end desktop publishing products such as Microsoft Word. Competition is based on the quality and document process management,features of products, the level of customization and thus are positioned to be leading products in these markets.
OEM PostScriptintegration with other publishing system components, the number of hardware platforms supported, service and Other
price. We believe thatwe can successfully compete based upon the quality and features of the Adobe FrameMaker product and our extensive application programming interface.
In desktop publishing, our Adobe PageMaker product faces competition from other software products, including Microsoft Publisher. Competition is based on the quality and features of products, ease-of-use, printer service support, and price. We believe we have a strong product and can successfully compete with these types of applications based upon the quality and features of the Adobe PageMaker product, its strong brand among users, and its widespread adoption among printer service bureaus.
In printing technologies, we believe the principal competitive factors for OEMs in selecting a page description language or a printing technology are product capabilities, market leadership, reliability, price, support and engineering development assistance. We believe that our competitive advantages include our technology competency, OEM customer relationships and intellectual property portfolio. Adobe PostScript faces competition from Hewlett-Packard's proprietary PCL page description language and from developers of
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other page description languages based on the PostScript language standard, including Global Graphics and Xionics. In addition, as previously discussed, Microsoft has announced its next generation operating system, called Windows Vista, which is expected to ship in late 2006. Windows Vista will include a new document format called XPS, which will compete with Adobe PDF. Certain aspects of XPS may also compete with our Adobe PostScript technologies and solutions.
In e-learning content authoring, our Authorware product faces competition from vertically focused e-learning content authoring solutions. Competition is based on the quality and features of products, ease-of-use and price. We believe we have a strong product and can successfully compete based upon the quality and features of the Macromedia Authorware product and its strong brand among users, and its widespread adoption among e-learning content publishers.
In interactive simulations/e-learning, our Captivate product faces competition from general content development tools such as Microsoft PowerPoint, screen recording tools such as Techsmith's Camtasia and more advanced e-learning and software simulation solutions such as Firefly or OnDemand. Competition is based on speed of development and features of products, ease-of-use and price. We believe we have a strong product and can successfully compete based upon the quality and features of the Macromedia Captivate product, its strong brand among users and its widespread adoption among training developers.
In Web content management, our Contribute products face competition from basic content publishing products such as Microsoft Word and Microsoft Sharepoint, as well as large-scale Web content management systems from companies such as Interwoven, Vignette, IBM and Oracle. Competition is based on the usability, quality and features of products, the level of customization and integration with other Web content management components, the integration with Web design tools, the number of hardware platforms supported, service, and price. We believe we can successfully compete based upon the usability and price of the Macromedia Contribute product, strong brand among users and integration with other Web content management components.
In multimedia content authoring, our Director product faces competition from a variety of multimedia content authoring tools. Competition is based on the quality and features of products, ease-of-use and price. We believe we have a strong product and can successfully compete based upon the quality and features of the Macromedia Director product, its strong brand among users, and its widespread adoption among content developers and publishers.
In technical Web authoring and publishing, our Macromedia RoboHelp product faces competition from large-scale Web publishing systems, XML-based Web publishing companies, as well as lower-end publishing products such as Microsoft Word. Competition is based on the quality and features of products, the level of customization and integration with other publishing system components, the number of hardware platforms supported, service, and price. We believe we can successfully compete based upon the quality and features of the Macromedia RoboHelp product.
Our Macromedia JRun product competes with large Java application server vendors as well as products available at no cost including the Tomcat Java Servlet Engine provided by the Apache Foundation.
Marketing and Sales
We market and distribute our products through sales channels, which include distributors, retailers, software developers, systems integrators, ISV's and VARs, as well as through OEM and hardware bundle customers. We also market and license our products directly using our sales force and through our own Web site at www.adobe.com.
We support our worldwide distribution network and end-user customers with international offices around the world, including locations in Australia, Beijing,Austria, Belgium, Brazil, Canada, China, Czech Republic, Denmark, England, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Korea, Mexico, the Netherlands, Norway, Portugal, Scotland, Singapore, Spain, Sweden, Switzerland and Taiwan.
We license our Adobe PostScript software and other printing systems technology to computer and printer manufacturers, who in turn distribute their products worldwide. We derive a significant portion of Adobe PostScript royalties from international sales of printers, imagesetters, and other output devices by our OEMs.
We also license software with post-contract customermaintenance and support, ("PCS") or maintenance. PCSwhich includes rights to upgrades, when and if available, telephone support, updates and enhancements.
For information regarding our market segments and segment revenue, geographic areas and significant customers, please refer to Note 16 of our Notes to Consolidated Financial Statements.
Order Fulfillment
The procurement of the various components of packaged products, including CDs and printed materials, and the assembly of packages for retail and other applications products is controlled by Order Fulfillmentour
Global Supply Chain Management operations. We outsource our order fulfillment activities to third parties in the United States, Europe and Asia.
To date, we have not experienced significant difficulties in obtaining raw materials for the manufacture of our products or in the replication of CDs, printing and assembly of components, although an interruption in production by a supplier could result in a delay in shipment of our products. The backlog of orders from customers, as of January 30, 200420, 2006 and January 24, 2003,21, 2005, was approximately $13.8$30.9 million and $16.1$13.9 million, respectively.
Services and Support
Adobe providesWe provide professional services, technical support and customer service to a wide variety of customers including consumers, creative professionals and business users. Our service and support revenue consists primarily of consulting fees, software maintenance and support fees, and training fees.
Services
Adobe hasWe have a global Professional ServicesAdobe Consulting team dedicated to developing and implementing solutions for enterprise customers in key vertical markets and to transfer technical expertise to our Solution Partners.solution partners. The Professional ServicesAdobe Consulting team uses a comprehensive, customer-focused methodology to develop high quality solutions, which in turn deliver a significant competitive advantage to our enterprise customers. A portfolio of technical training courses is also available for desktop and server-based products to meet the needs of our enterprise customers and Solution Partners.solution partners.
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Support
A significant portion of our support revenue is composed of our extended Enterprise Maintenanceenterprise maintenance and Supportsupport offerings, which entitles customers to the right to receive product upgrades and enhancements during the term of the maintenance and support period, which is typically one year. Regional Support Centers are charged with providing timely, high quality technical expertise on Intelligent DocumentsEnterprise and Knowledge Worker Solutions products and solutions to meet the growing needs of our customers.
Our support revenue also includes support for our desktop products. Adobe offersWe offer a range of support programs, from fee-based incidents to annual support contracts. Additionally, Adobe provideswe provide extensive self-help and online technical support capabilities via the Web, which allows customers quick and easy access to possible solutions. Adobe providesWe provide product support through a combination of outsourced vendors and internal support centers.
AdobeWe also offersoffer Developer Support to partners and developer organizations. The Adobe Solution Network ("ASN") Developer Program focuses on providing developers with high-quality tools, (Software Development Kits),software development kits, information and services.
As a registered owner of the current version of an Adobe desktop product, customers are eligible to receive complimentary person-to-person support on certain matters. Support for some products and in some countries may vary.
Training
We inform customers about the use of our products through on-line informational services on our Web site (www.adobe.com), and through a growing series of how-to books published by Adobe Press pursuant to a joint publishing agreement with Peachpit Press. In addition, we develop tests to certify independent trainers who teach Adobe software classes. We sponsor workshops, work with professional associations and user groups, and conduct regular beta-testing programs.
Investments
We own limited partnership interests in fourthree venture capital limited partnerships, Adobe Ventures L.P., Adobe Ventures II, L.P., Adobe Ventures III, L.P., and Adobe Ventures IV, L.P. (collectively "Adobe Ventures"), that investhave invested in early stage companies with innovative technologies. We also make direct investments in privately held companies. In addition to the potential for financial returns, our venture activitiesWe view these investments as primarily strategic as they often increase our knowledge of emerging markets and technologies, as well as expand our opportunities to provide Adobe products and services. The partnerships are managed by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures.
The investments in Adobe Ventures are accounted for using the equity method of accounting, and accordingly, the investments are adjusted to reflect our share of Adobe Ventures' investment income (loss) and dividend distributions. Under the terms of the partnership agreements, the general partner has the sole and exclusive right to manage and control the partnerships. Adobe as the limited partner has certain rights, including the ability to approve the replacement of the general partner and investments that exceed certain established parameters. However, these rights are considered protective rights and do not suggest an ability to control the partnerships. Adobe Ventures carry their investments in equity securities at estimated fair market value and unrealized gains and losses are included in investment gain (loss) on our consolidated statements of income. The stocks of a number of technology investments held by Adobe Ventures at November 28, 2003 are not publicly traded and, therefore, there is no established market for these securities. In order to determine the fair market value of these investments, we use the most recent round of financing involving new non-strategic investors or estimates of current market value made by Granite Ventures. It is our policy to review the fair value of these investments held by Adobe Ventures, as well as our direct investments, on a regular basis to evaluate the carrying value of the investments in these
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companies. This evaluation includes, but is not limited to, reviewing each company's cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes and competition. The evaluation process is based on information that we request from these privately held companies. This information is not subject to the same disclosure regulations as U.S. publicly traded companies and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies. If we believe the carrying value of a company is in excess of fair value, it is our policy to write-down the investment to reduce its carrying value to fair value.
Our direct equity investments and Adobe Ventures investments at November 28, 2003 consisted of the following companies:
We intend to continue investing in new markets and technologies through limited partnerships as well as through direct investments.
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Since the personal computer and enterprise software industries are characterized by rapid technological change, a continuous high level of investment is required for the enhancement of existing products and the development of new products. We primarily develop our software internally. We occasionally acquire products developed by others by purchasing the stock or assets of the business entity that held ownership rights to the technology. In other instances, we have licensed or purchased the intellectual property ownership rights of programs developed by others with license or technology transfer agreements that may obligate us to pay royalties, typically based on a dollar amount per unit shipped or a percentage of the revenues generated by those programs.
During fiscal years ended December 2, 2005, December 3, 2004 and November 28, 2003, November 29, 2002 and November 30, 2001, our research and development expenses, including costs related to contract development, were $277.0$365.3 million, $246.1$311.3 million and $224.1$277.0 million, respectively.
On May 19, 2003,During fiscal 2005, we purchased theacquired OKYZ S.A., a privately held company, which provided three dimensional ("3D") technology assets of Syntrillium Softwareand expertise to our Intelligent Document platform.
During fiscal 2004, we acquired Q-Link Technologies, Inc ("Syntrillium"Q-Link"), a privately held company, which developed, published and marketed digital audio tools including its recording application, Cool Edit Pro, now renamed Adobe Audition, all of which have been addedprovided Java-based workflow technology that was integrated with our enterprise server products to our existing line of professional digital imaging and video products. By adding Adobe Audition and the other toolsenable customers to our existing line of products, we have improved the Adobe video workflow and expanded the products and tools available to videographers, DVD authors and independent filmmakers.
On April 12, 2002, we acquired 100% of the outstanding common stock of Accelio Corporation ("Accelio"). Accelio was a provider of Web-enabled solutions that helped customers manage business processes driven by electronic forms. The acquisition of Accelio enhances our ability to broaden our Intelligent Documents solution business by combining Accelio's electronic forms solutionsintegrate document process management with Adobe Acrobat and PDF technologies. Through this combination we can now further extend Acrobat solutions to enterprise users in Global 2000 businesses, governments and educational institutions to deliver greater value to our customers.
In December 2001, we acquired Fotiva, Inc ("Fotiva"). Substantially all of Fotiva's assets were intellectual property. Fotiva was a development stage software company that created solutions to help consumers manage, store, enrich, and share digital photographs and other related personal media. Adobe combined Fotiva's image management technology with Adobe's digital imaging and Intelligent Documents technologies to develop a new product, Adobe Photoshop Album, which was released in the first quarter of fiscal 2003.
core applications. For further information regarding these acquisitions,this acquisition, see Note 2 of our Notes to Consolidated Financial Statements.
We regard our software as proprietary and protect it under the laws of copyrights, patents, trademarks and trade secrets. We protect the source code of our software programs as trade secrets, and make source code available to third parties only under limited circumstances and specific security and confidentiality constraints.
Our products are generally licensed to end users on a "right to use" basis pursuant to a license that restricts the use of the products to a designated number of printers or computers.devices. We also rely on copyright laws and on "shrink wrap" and electronic licenses that are not physically signed by the end user. Copyright protection may be unavailable under the laws of certain countries, however, and the enforceability of "shrink wrap" and electronic licenses has not been conclusively determined in all jurisdictions. We have obtained many patents and have registered numerous copyrights, trademarks, domain names and logos in the United States and foreign countries.
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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. We conduct vigorous anti-piracy programs directly and through certain external software associations. Although our products generally do not contain copy protection or network copy-detection features, we have recently included activation technology in Photoshop CS and Adobe Creative Suitecertain products to guard against illegal use.use and will continue to do so in certain future products.
As of January 30, 2004,27, 2006, we employed 3,5075,734 people. We have not experienced work stoppages and believe our employee relations are good. Competition in recruiting personnel in the software industry, especially highly skilled engineers, is intense. We believe our future success will depend in part on our continued ability to recruit and retain highly skilled technical, management and sales and marketing personnel.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our Investor Relations Web site at www.adobe.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information posted on our Web site is not incorporated into this Annual Report.Report on Form 10-K.
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Adobe's executive officers as of January 30, 200427, 2006 are as follows:
| Name | Age | Positions | ||
|---|---|---|---|---|
| Bruce R. Chizen | ||||
Karen O. Cottle | Senior Vice President, General Counsel and Corporate Secretary | |||
Murray J. Demo | ||||
President and Chief Operating Officer | ||||
Peg Wynn | 54 | Senior Vice President, Human Resources |
Mr. Chizen joined Adobe upon the closing of the acquisition of Aldus in August 1994 as Vice President and General Manager, Consumer Products Division. In December 1997, he was promoted to Senior Vice President and General Manager, Graphic Products Division and in August 1998, Mr. Chizen was promoted to Executive Vice President, Products and Marketing. In April 2000, Mr. Chizen was promoted to President of Adobe and in December 2000, he also became Adobe's Chief Executive Officer and joined the Adobe Board of Directors in December 2000. Prior to joining Adobe,In January 2005, Mr. Chizen was Vicerelinquished the title of President, but remains as Adobe's Chief Executive Officer and General Manager, Consumer Divisiona member of Aldus Corporation from February 1994 to August 1994, and from November 1992 to February 1994, he was Vice President and General Manager, Claris Clear Choice for Claris Corp., a wholly owned subsidiaryAdobe's Board of Apple Computer, Inc., a manufacturer of computers and software.Directors. Mr. Chizen is a member of the Board of Directors of Synopsys, Inc.
Mr. Narayen joined Adobe in January 1998 as Vice President and General Manager of Adobe's engineering technology group. He was promoted to Senior Vice President, Worldwide Products in January 1999 and to Executive Vice President, Worldwide Product Marketing and Development in March 2001. Prior to joining Adobe, Mr. Narayen co-founded Pictra Inc., an internet software company, in 1996. He was Director of Desktop and Collaboration products at Silicon Graphics Inc. and held various senior manager positions at Apple Computer Inc. before founding Pictra.
Ms. Cottle joined Adobe in February 2002 as Senior Vice President, General Counsel and Secretary. Prior to joining Adobe, Ms. Cottle served as General Counsel for Vitria Technology, Inc. from February 2000 to February 2002. From 1996 to 1999, Ms. Cottle served as Vice President, General Counsel and Secretary of Raychem Corporation and from 1986 to 1996 as Division Counsel of Raychem Corporation. Prior to that, Ms. Cottle was a partner in Farella, Braun and Martel in San Francisco, California.
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Mr. Demo joined Adobe in August 1996 as the Director of Operations Finance. In July 1998 he was promoted to Corporate Controller. In October 1999, he was promoted to Vice President and Corporate Controller and in June 2000 was promoted to Senior Vice President and Chief Financial Officer. Prior to joining Adobe,In April 2005, Mr. Demo was the Director of Finance for Miller Freeman, Inc, a division of United Business Media, London, England from June 1993promoted to July 1996. Prior to Miller Freeman, Inc.,Executive Vice President and Chief Financial Officer. On
December 13, 2005, Mr. Demo heldannounced his intention to resign as Chief Financial Officer of Adobe Systems Incorporated. Mr. Demo will remain as the Chief Financial Officer through March 31, 2006, or longer if his successor has not been hired by then. Mr. Demo is a varietymember of senior financethe Board of Directors of Citrix Systems, Inc. and business development positions at First Financial Management, Visionary Corporate Technologies, and Hughes Electronics.is the Vice Chairman of the national Board of Directors of AeA, the nation's largest high-tech trade association.
Ms. DyrdahlMr. Elop joined Adobe upon the closing of the acquisition of AldusMacromedia in August 1994December 2005 as DirectorPresident, Worldwide Field Operations. Prior to joining Adobe, Mr. Elop served as Chief Executive Officer and a director of Marketing for the Consumer Products Division. In August 1998, Ms. Dyrdahl was appointedMacromedia from January 2005 to December 2005. Prior to this, Mr. Elop served as Chief Operating Officer of Macromedia from July 2004 to January 2005, Executive Vice President of Worldwide Marketing Communications, and in April of 2000, she was promoted to Senior Vice President of Corporate Marketing and Communications. Prior to joining Adobe, Ms. Dyrdahl was Director of SalesField Operations of Claris Corp., a wholly owned subsidiaryMacromedia from April 2001 to January 2005, General Manager, eBusiness Solutions of Apple Computer, Inc.,Macromedia from 1988December 1999 to 1993,April 2001, and previously held several marketing management positions at Hewlett-PackardChief Information Officer of Macromedia from 1983March 1998 to 1988. Ms. Dyrdahl also serves on the Board of Trustees for the San Jose Museum of Art.December 1999.
Mr. HeegerNarayen joined Adobe in February 2002 as Senior Vice President of Cross Media Publishing, now Senior Vice President, Creative Professional Business Unit. He was Chief Executive Officer and President of Fotiva. from March 2001 to December 2001, when Fotiva was acquired by Adobe. From September 1993 to June 2000, Mr. Heeger was with Intuit, Inc., where he served as Senior Vice President and General Manager of Small Business Division from July 1997 to June 2000. In April 1995, Mr. Heeger became Chief Financial Officer and served as Chief Financial Officer and Senior Vice President of Administration until July 1997. Mr. Heeger began at IntuitJanuary 1998 as Vice President and General Manager of Supplies Division from December 1993 to April 1995. Prior to Intuit, Mr. Heeger spent 11 years with Hewlett-Packard in marketing and distribution roles.
Mr. Koon joined Adobe in August 2002 as Senior Vice President of the Intelligent Documents Business Unit. Prior to joining Adobe, Mr. Koon was President of the New Technologies Division at BEA Systems from NovemberAdobe's engineering technology group. In January 1999, to July 2002. Prior to BEA, Mr. Koon served in various executive management roles at S2 Systems, including President and Chief Operating Officer from February 1997 to September 1999.
Mr. Lamkin joined Adobe in February 1992 and held various senior management positions in marketing for Adobe's graphics and publishing products. In March 1997, he was promoted to Vice President of Marketing and in March 2000, he was promoted to Senior Vice President, Product Marketing. Mr. Lamkin is currently SeniorWorldwide Products and in March 2001 he was promoted to Executive Vice President, Worldwide Product Marketing and Development. In January 2005, Mr. Narayen was promoted to President and Chief Operating Officer of the Digital Imaging and Video Business Unit.Adobe. Prior to joining Adobe, Mr. Lamkin held various product management positionsNarayen co-founded Pictra Inc., a digital photo sharing software company, in 1996. He was Director of Desktop and Collaboration products at Software Publishing Corporation from 1986 to 1992.
Mr. Stephens joined Adobe in February 1990Silicon Graphics Inc. and held various senior managementmanager positions at Apple Computer Inc. before founding Pictra.
Ms. Wynn joined Adobe in sales and marketing for Adobe's Printing Systems Division before being promoted in November 1997 to Vice President of Change Management. In June 1998, he was promoted to Vice President, Investor Relations and in April 1999, Mr. Stephens was promoted to Vice President, Corporate Development. In September 2000, Mr. Stephens was promoted toJanuary 2006 as Senior Vice President, E-business Development, and in October 2001, Mr. Stephens was promoted to Senior Vice President, Worldwide Sales, Customer Care and Field Marketing. For ten years prior to joining Adobe, Mr. Stephens held sales and marketing management positions at Dataproducts Corporation and Texas Instruments.
Ms. Townsley joined Adobe in 1988 and held various senior management positions within the human resources group before being promoted in May 1999 to Vice President of Worldwide Human Resources. In December 1999, she was promoted to Senior Vice President, Worldwide Human Resources. Prior to joining Adobe, Ms. TownsleyWynn served as Vice President of Human Resources at Xilinx, Inc. from October 1999 to January 2006, and Director of Human Resources from October 1998 to October 1999.
As previously discussed, our actual results could differ materially from our forward looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed below. These and many other factors described in this report could adversely affect our operations, performance and financial condition.
Adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect our operating results.
If the economy worsens in any geographic areas where we do business, it would likely cause our future results to vary materially from our targets. A slower economy also may adversely affect our ability to grow. Political instability in any of the major countries in which we do business also may adversely affect our business.
Delays in development or shipment of new products or major new versions of existing products could cause a decline in our revenue.
As part of our transition to new business models and markets, we are planning the release of new products and new versions of current products. Additionally, following our acquisition of Macromedia, we plan to release products that integrate our existing products with products acquired in the Macromedia acquisition. Any delays or failures in developing and marketing our products, including upgrades of current products and the integration of Macromedia products into our product line, may have a harmful impact on our results of operations. We may have particular difficulty and delays developing products that integrate Adobe and Macromedia products, since our products are highly complex, have been designed independently and were designed without regard to such integration. Our inability to extend our core technologies into new applications and new platforms and to anticipate or respond to technological changes could affect continued market acceptance of our products and our ability to develop new products.
Delays in product or upgrade introductions could cause a decline in our revenue, earnings or stock price. We cannot determine the ultimate effect these delays or the introduction of new products or upgrades will have on our revenue or results of operations.
Introduction of new products by existing and new competitors could harm our competitive position and results of operations.
The end markets for our software products are intensely and increasingly competitive, and are significantly affected by product introductions and market activities of industry competitors. If these competing products achieve widespread acceptance, our operating results could suffer. In addition, consolidation has occurred among some of the competitors in our markets. Any further consolidations among our competitors may result in stronger competitors and may therefore harm our results of operations. For information regarding our competition and the risks arising out of the competitive environment in which we operate, see the section entitled "Competition" contained in Item 1 of this report.
If we fail to successfully manage transitions to new business models and markets, our results of operations could be negatively impacted.
We are devoting significant resources to the development of technologies and service offerings where we have a limited operating history, including the enterprise and government markets and the mobile and device markets. In the enterprise and government markets, we intend to increase our focus on vertical markets such as education, financial services, manufacturing, and the architecture, engineering and construction markets. With our Breeze product line, we intend to increase awareness in targeted horizontal markets such as training and marketing and vertical markets such as manufacturing, financial services and telecommunications. These new offerings and markets require a considerable investment of technical, financial and sales resources, and a scaleable organization. Many of our competitors may have advantages over us due to their larger presence, larger developer network, deeper experience in the enterprise and government markets and the mobile and device markets, and greater sales and marketing resources. In the mobile and device markets, our intent is to license our technology to device makers manufacturers and telecommunications carriers that embed our technology on their platforms, and in the enterprise and government market our intent is to form strategic alliances with leading enterprise and government solutions and service providers to provide additional resources to further enable penetration of such markets. If we are unable to successfully enter into strategic alliances with device maker manufacturers, telecommunication carriers and leading enterprise and government solutions and service providers, or if they are not as productive as we anticipate, our market penetration may not proceed as rapidly as we anticipate and our results of operations could be negatively impacted.
Revenues from our new business segments may be difficult to predict.
As previously discussed, we are devoting significant resources to the development of product and service offerings where we have a limited operating history. This makes it difficult to predict revenues. For example, we intend to expand the use of our Mobile and Device Solutions by licensing our products for use in mobile phones, set-top boxes, game devices, personal digital assistants, hand-held computers and other consumer electronic devices; however, we have a limited history of licensing products in these markets and may experience a number of factors that will make our revenue less predictable, including longer than expected sales and implementation cycles, potential deferral of revenue due to multiple-element revenue arrangements and alternate licensing arrangements.
If we fail to anticipate and develop new products in response to changes in demand for application software, computers and printers, our business could be harmed.
Any failure to anticipate changing customer requirements and develop and deploy new products in response to changing market conditions may have a material impact on our results of operations. As previously discussed, we plan to release numerous new product offerings and upgrade versions of our current products in connection with our transition to new business models and the acquisition of Macromedia. Market acceptance of our new product or version releases will be dependent on our ability to include functionality and usability in such releases that address the requirements of customer demographics with which we have limited prior experience. To the extent we incorrectly estimate customer requirements for such products and version releases or if there is a delay in market acceptance of such products and version releases, our business could be harmed.
We offer our Creative Solutions and Knowledge Worker Solutions application-based products primarily on Windows and Macintosh platforms and on some UNIX platforms. We generally offer our server-based products, but not desktop application products, on the Linux platform as well as the Windows and UNIX platforms. To the extent that there is a slowdown of customer purchases of personal computers on either the Windows or Macintosh platform or in general, or to the extent that significant demand arises for our products or competitive products on the Linux desktop platform before we choose and are able to offer our products on this platform, our business could be harmed. Additionally, to the extent that we have difficulty transitioning product or version releases to new Windows and Macintosh operating systems or to the extent new releases of operating systems or other third party products make it more difficult for our products to perform, our business could be harmed.
We may incur substantial costs enforcing our intellectual property rights and defending against third-party claims as a result of litigation or other proceedings.
In connection with the enforcement of our own intellectual property rights or in connection with disputes relating to the validity or alleged infringement of third-party rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation are typically very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. Adverse decisions in such litigation or disputes could have negative results, including subjecting us to significant liabilities, requiring us to seek licenses from others, preventing us from manufacturing or licensing certain of our products, or causing severe disruptions to our operations or the markets in which we compete, any one of which could seriously harm our business.
We may not be able to protect our intellectual property rights, including our source code, from third-party infringers, or unauthorized copying, use, disclosure or malicious attack.
Although we defend our intellectual property rights and combat unlicensed copying and use of software and intellectual property rights through a variety of techniques, preventing unauthorized use or infringement of our rights is inherently difficult. We actively pursue software pirates as part of our enforcement of our intellectual property rights, but we nonetheless lose revenue due to illegal use of our software. If piracy activities increase, it may further harm our business.
Additionally, we take significant measures to protect the secrecy of large portions of our source code, the detailed program commands for our software programs. If unauthorized disclosure of a significant portion of our source code occurs, we could potentially lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third parties to compete with our products by copying functionality, which could adversely affect our revenue and operating margins.
We also devote significant resources to maintaining the security of our products from malicious hackers who develop and deploy viruses, worms, and other malicious software programs that attack our products. Nevertheless, actual or perceived security vulnerabilities in our products could harm our reputation and lead some customers to seek to return products, to reduce or delay future purchases, to use competitive products or to make claims against us. Also, with the introduction of hosted services with some of our product offerings, our customers may use such services to share confidential and sensitive information. If a breach of security occurs on these hosted systems, we could be held variousliable to our customers. Additionally, such breaches could lead to interruptions, delays and data loss and protection concerns as well as harm our reputation.
We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management.
We have in the past and may in the future acquire additional companies, products or technologies. Most recently, we completed the acquisition of Macromedia in December 2005. We may not realize the anticipated benefits of this or any other acquisition and each acquisition has numerous risks. These risks include:
Mergers and acquisitions of high technology companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not
realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition or results of operations.
We rely on distributors to sell our products and any adverse change in our relationship with our distributors could result in a loss of revenue and harm our business.
We distribute our application products primarily through distributors, resellers, retailers and increasingly systems integrators, ISVs and VARs (collectively referred to as "distributors"). A significant amount of our revenue for application products is from two distributors, Ingram Micro, Inc. and Tech Data Corporation. In addition, our channel program focuses our efforts on larger distributors, which has resulted in our dependence on a relatively small number of distributors licensing a large amount of our products. Our distributors also sell our competitors' products, and if they favor our competitors' products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective sales, which would cause our results to suffer. In addition, the financial health of these distributors and our continuing relationships with them are important to our success. Some of these distributors may be unable to withstand adverse changes in business conditions. Our business could be seriously harmed if the financial condition of some of these distributors substantially weakens.
Catastrophic events may disrupt our business.
We are a highly automated business and rely on our network infrastructure and enterprise applications, internal technology systems and our Website for our development, marketing, operational, support and sales activities. A disruption or failure of these systems in the event of a major earthquake, fire, telecommunications failure, cyber-attack, terrorist attack, or other catastrophic event could cause system interruptions, delays in our product development and loss of critical data and could prevent us from fulfilling our customers' orders. Our corporate headquarters, a significant portion of our research and development activities, and certain other critical business operations are located in San Jose, California, which is near major earthquake faults. We have developed disaster recovery plans and backup systems to reduce the potentially adverse effect of such events, but a catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected.
We rely on turnkey assemblers and any adverse change in our relationship with our turnkey assemblers could result in a loss of revenue and harm our business.
We currently rely on six turnkey assemblers of our products, with at FMC Corporationleast two turnkeys located in each major region we serve. If any significant turnkey assembler terminates its relationship with us, or if our supply from 1979any significant turnkey assembler is interrupted or terminated for any other reason, we may not have enough time or be able to 1988.replace the supply of products replicated by that turnkey assembler to avoid serious harm to our business.
26Our future operating results are difficult to predict and are likely to fluctuate substantially from quarter to quarter and as a result the market price of our common stock may be volatile and our stock price could decline.
As a result of a variety of factors discussed herein, our quarterly revenues and operating results for a particular period are difficult to predict. Our revenues may grow at a slower rate than experienced in previous periods and, in particular periods, may decline. Additionally, we periodically provide operating model targets. These targets reflect a number of assumptions, including assumptions about product pricing and demand, economic and seasonal trends, manufacturing costs and volumes, the mix of shrink-wrap and licensing revenue, full and upgrade products, distribution channels and geographic markets. If one or more
of these assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated or projected.
Due to the factors noted above, our future earnings and stock price may be subject to volatility, particularly on a quarterly basis. Shortfalls in revenue or earnings or delays in the release of products or upgrades compared to analysts' or investors' expectations have caused and could cause in the future an immediate and significant decline in the trading price of our common stock. Additionally, we may not learn of such shortfalls or delays until late in the fiscal quarter, which could result in an even more immediate and greater decline in the trading price of our common stock. Finally, we participate in a highly dynamic industry. In addition to factors specific to us, changes in analysts' earnings estimates for us or our industry, and factors affecting the corporate environment, our industry, or the securities markets in general, have resulted, and may in the future result, in volatility of our common stock price.
We are subject to risks associated with international operations which may harm our business.
We typically generate over 50% of our total revenue from sales to customers outside of the Americas. Sales to these customers subject us to a number of risks, including (i) foreign currency fluctuations, (ii) changes in government preferences for software procurement, (iii) international economic and political conditions, (iv) unexpected changes in, or impositions of, international legislative or regulatory requirements, (v) inadequate local infrastructure, (vi) delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions, (vii) transportation delays, (viii) the burdens of complying with a variety of foreign laws, including more stringent consumer and data protection laws, and other factors beyond our control, including terrorism, war, natural disasters and diseases. If sales to any of our customers outside of the Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.
We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.
Our operating results are subject to fluctuations in foreign currency exchange rates. We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity and expense. We have established a hedging program to partially hedge our exposure to foreign currency exchange rate fluctuations, primarily the Japanese yen and the euro. We regularly review our hedging program and will make adjustments as necessary based on the judgment factors discussed above. Our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates, which could adversely affect our financial condition or results of operations.
Changes in, or interpretations of, accounting principles, such as expensing of stock options, could result in unfavorable accounting charges.
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Our accounting principles that recently have been or may be affected by changes in the accounting principles are as follows:
In particular, the FASB recently issued SFAS 123R which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. The accounting provisions of SFAS 123R are effective for annual periods beginning after June 15, 2005. We are required to adopt SFAS 123R in the first quarter of fiscal year 2006. We believe that the adoption of SFAS 123R will have a significant adverse effect on our reported financial results and may impact the way in which we conduct our business. Please refer to the section entitled "Recent Accounting Pronouncements" for further information regarding SFAS 123R.
If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.
Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined resulting in an impact on our results of operations.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities
In addition, we are subject to the continual examination of our income tax returns by the Internal Revenue Service and other domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Any adverse outcome from these continual examinations may have an adverse effect on our operating results and financial position.
If we are unable to recruit and retain key personnel our business may be harmed.
Much of our future success depends on the continued service and availability of our senior management, including our Chief Executive Officer and other members of our executive team. These individuals have acquired specialized knowledge and skills with respect to Adobe. The loss of any of these individuals could harm our business. Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled personnel. Experienced personnel in the information technology industry are in high demand and competition for their talents is intense, especially in the Silicon Valley, where the majority of our employees are located. We have relied on our ability to grant equity compensation as one mechanism for recruiting and retaining such highly skilled personnel. Recently enacted accounting regulations requiring the expensing of equity compensation may impair our ability to provide these incentives without incurring significant compensation costs. If we are unable to continue to successfully attract and retain key personnel, our business may be harmed.
We may suffer losses from our equity investments which could harm our business.
We hold equity investments in public companies that have experienced significant declines in market value. We also have investments and may continue to make future investments in privately held companies, many of which are considered in the start-up or development stages. These investments are inherently
risky, as the market for the technologies or products these companies have under development is typically in the early stages and may never materialize. Our investment activities can impact our net income. Future price fluctuations in these securities and any significant long-term declines in value of any of our investments could reduce our net income in future periods.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
The following table sets forth the location, approximate square footage and use of each of the principal properties used by Adobe.Adobe during fiscal 2005. We lease or sublease all of these properties with the exception of our property in India, where we own the building and lease the land. All properties are leased under operating leases. Such leases expire at various times through 2025, with the exception of the land lease that expires in 2091. The annual base rent expense for all facilities (including operating expenses, property taxes and assessments)assessments, as applicable) for all facilities, excluding those assumed in the acquisition of Macromedia, is currently approximately $32.4$49.7 million and is subject to annual adjustments as well as changes in interest rates.
| Location | Approximate Square Footage | Use | ||
|---|---|---|---|---|
| North America: | ||||
345 Park Avenue San Jose, California, USA | Research, product development, sales and marketing | |||
321 Park Avenue San Jose, California, USA | Research, product development, sales and marketing | |||
151 Almaden Boulevard San Jose, California, USA | Administration, product development and sales | |||
801 N. 34th Street-Waterfront Seattle, WA 98103-88 | 255,000 | Product development, | ||
560 Rochester St. Ottawa, Ontario Canada K1S 5K2 | 152,000 | Product development, | ||
India: | ||||
Adobe Towers, 1-1A, Sector 25A Noida, 201301, U.P. India | Product development, sales and marketing, and administration | |||
Japan: | ||||
Gate City Ohsaki East Tower 1-11-2 Ohsaki, Shinagawa-ku Tokyo 141-0032 Japan | Product development, sales | |||
Germany: | ||||
Grobe Elbstrable 27 Hamburg, 22767 | 27,000 | Product development | ||
UK: | ||||
3 Roundview Avenue Stockley Park, Middlesex | 21,000 | Sales, marketing and |
In general, all facilities are in good condition and are operating at capacitiesan average capacity of 66% and above.approximately 74%.
WeIn addition to the facilities listed above, we also lease other office space in the United States and various other countries under operating leases. We have one leased set of offices in San Jose, California that was vacated in connection with the restructuring program implemented in fiscal 1998. We have subleased the offices but still have a commitment under the lease agreement until 2007.
With the close of the acquisition of Macromedia on December 3, 2005, the following table sets forth the location, approximate square footage and use of each principal property that we assumed in the acquisition. We lease or sublease all of these properties with the exception of our property in San Francisco, California, where we own the building and the land.
| Location | Approximate Square Footage | Use | ||
|---|---|---|---|---|
| North America: | ||||
1-3 Riverside Center Newton, California, USA | 348,000 | * | Research, product development and sales | |
601 and 625 Townsend San Franscisco, California, USA | 263,000 | Research, product development, sales, marketing, and general and administrative | ||
India: | ||||
Salapuria Infinity Bangalore, India | 56,000 | Research and product development | ||
UK: | ||||
12 Park Crescent London | 82,000 | Sales |
In early 2002, International Typeface Corporation ("ITC") and Agfa Monotype Corporation ("AMT"), companies which have common ownership and management, each charged, by way of informal letters to Adobe, that Adobe's distribution of font software, which generates ITC and AMT typefaces, breaches its contracts with ITC and AMT, respectively, pursuant to which Adobe licensed certain rights with respect to ITC and AMT typefaces. AMT and ITC further charged that Adobe violated the Digital
27
Millennium Copyright Act ("DMCA") with respect to, or induced or contributed to, the infringement of copyrights in, ITC's and AMT's TrueType font software.
On September 4, 2002, Adobe initiated arbitration proceedings in London, England ("the London Arbitration") against AMT, seeking a declaration that Adobe's distribution of font software that generates AMT typefaces did not breach its contract pursuant to which it licensed certain rights with respect to AMT typefaces. AMT has made a breach of contract claim in response to Adobe's arbitration demand in the London Arbitration, asserting that Adobe wrongfully granted and/or allowed third parties greater rights to distribute and embed AMT fonts than Adobe was licensed to grant and/or allow.
Adobe asserts that it negotiated for and obtained express, written licenses from both AMT and ITC approximately ten years ago permitting Adobe to allow end users to embed AMT and ITC fonts in electronic documents for "print and view" and disputes the other breach of contract claims. Adobe also asserts that Adobe Acrobat 5.0, which AMT and ITC correctly acknowledge has been superseded by subsequent versions, neither violates the DMCA nor induces or contributes to the infringement of copyrights in ITC's and AMT's TrueType font software.
On September 5, 2002, AMT and ITC filed suit against Adobe in the U.S. District Court, Eastern District of Illinois ("the Illinois Action"), asserting only that Adobe's distribution of the superseded 5.0 version of Adobe Acrobat violated the DMCA, as described above. The Illinois Action seeks statutory damages of $200 to $2,500 for each copy of Acrobat 5.0 found to violate the DMCA, a claim that Adobe disputes as a matter of law and fact. The Illinois Action also seeks injunctive relief with respect to Acrobat 5.0, although it specifically alleges, correctly, that Adobe no longer distributes Acrobat 5.0.
On November 13, 2002, ITC filed another suit against Adobe in the United States District Court for the Eastern District of Illinois, this time asserting that Adobe breached its contract with ITC and that ITC, not Adobe, owns the copyrights in font software created by Adobe which generates ITC typefaces.
If either AMT or ITC prevails on its breach of contract claims, AMT or ITC may have the right to terminate Adobe's right to distribute any of its products that then still contain font software that generates AMT or ITC typefaces. Adobe denies these claims and is vigorously defending against these actions.
The results of any litigation are inherently uncertain and Adobe cannot assure that it will be able to successfully defend itself against any of the actions described above. AMT and ITC seek an unspecified aggregate dollar amount of damages. A favorable outcome for AMT or ITC in these actions could have a material adverse effect on Adobe's financial position, cash flows or results of operations. We believe that all of AMT's and ITC's claims are without merit and will vigorously defend against them in addition to pursuing our own claims as described above.
On September 6, 2002, Plaintiff Fred B. Dufresne filed suit against Adobe, Microsoft Corporation, Macromedia, Inc. and Trellix Corporation in the U.S. District Court, District of Massachusetts, alleging infringement of U.S. Patent No. 5,835,712, entitled "Client-Server System Using Embedded Hypertext Tags for Application and Database Development." The Plaintiff's complaint asserts that "Defendants"defendants have infringed, and continue to infringe, one or more claims of the "712 patent by making, using, selling and/or offering for sale,inter alia, products supporting Microsoft Active Server Pages technology." The plaintiffPlaintiff seeks unspecified compensatory damages, preliminary and permanent injunctive relief, trebling of damages for "willful infringement," and fees and costs. Adobe disagrees with the Plaintiff's claims and intends to vigorously defend against this action.
On November 18, 2002, Plaintiffs Shell & Slate Software Corporation and Ben Weiss filed a civil action in the U.S. District Court in Los Angeles against Adobe alleging false designation of origin, trade secret misappropriation, breach of contract and other causes of action. The claim derives from the Plaintiffs' belief that the "healing brush" technique of Adobe Photoshop software incorporates the Plaintiffs' trade secrets. The Plaintiffs seek preliminary and permanent injunctive relief, compensatory, treble and punitive damages and fees and costs. We believe that the action has no merit and intendare vigorously defending against it.
On June 13, 2005, Plaintiff Steve Staehr filed a shareholder derivative action entitled "Steve Staehr, Derivatively on Behalf of Adobe Systems Incorporated v. Bruce R. Chizen, et. al.," in the Superior Court of the State of California for the County of Santa Clara against Adobe's directors and naming Adobe as a nominal defendant. The complaint alleges that the defendants breached their fiduciary duties of loyalty and due care and caused Adobe to waste corporate assets by failing to renegotiate or terminate the acquisition agreement with Macromedia following the announcement by Macromedia that it would restate its financial results for the fiscal years ended March 31, 1999 through 2004. The complaint seeks, among other things, unspecified monetary damages, attorneys' fees and certain forms of equitable relief. On August 18, 2005, Plaintiff amended his complaint to add a purported class action. Adobe has obligations
28
under certain circumstances to hold harmless and indemnify each of the defendant directors against judgments, fines, settlements and expenses related to claims against such directors and otherwise to the fullest extent permitted under Delaware law and Adobe's bylaws and certificate of incorporation. Such obligations may apply to this lawsuit. We believe the action has no merit and are vigorously defenddefending against it.
In connection with our anti-piracy efforts, conducted both internally and through the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other local law and have recently increased in frequency, especially in Latin American countries. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of these counter-claims.
One such case is Consultores en Computación y Contabilidad, S.C. ("CCC") v. Microsoft, Adobe, Symantec, and Autodesk (the "Defendants"). On September 9, 2003, AdobeMarch 1, 2002, CCC, a Mexican hardware/software reseller, filed a counter-claimlawsuit in the Mexico Court of First Instance against Ben Weissthe Defendants (all members of the Business Software Alliance). CCC had previously been the target of a criminal anti-piracy enforcement action carried out by the Mexican police authorities on the basis of a piracy complaint filed by the Defendants based on evidence provided to the Defendants. CCC alleged in the lawsuit that it had suffered damages to its reputation as a result of the enforcement action. CCC did not claim economic damages. On November 11, 2002, the trial court judge ruled in favor of the Defendants, holding that no moral damage occurred. After subsequent appeals which were favorable to the Defendants, a court of appeals held that the Defendants were liable to CCC for breach"moral" damages, and the court remanded the case to the Court of contractFirst Instance for a determination of the amount. In December 2005, the Court of First Instance awarded CCC $90 million in damages. The Defendants are appealing the verdict, as are the plaintiffs who seek additional damages. If, after all appeals have been exhausted, the existing verdict stands and misappropriationis enforceable, Adobe would be responsible for approximately $15 million of trade secrets. Adobe seeks compensatory, statutory and punitive damages.the judgment.
From time to time, in addition to those identified above, Adobe is subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with U.S. generally accepted accounting principles, Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, Adobe believeswe believe that it haswe have valid defenses with respect to the legal matters pending against it.Adobe. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of thesesuch contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.No matters were submitted to a vote of security holders during the quarter ended December 2, 2005.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Our common stock is traded on the Nasdaq National Market under the symbol "ADBE." On January 30, 2004,27, 2006, there were 1,7461,758 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The following table sets forth the high and low sales price per share of our common stock and the cash dividends paid per share, for the periods indicated. All per share amounts in the following table have been adjusted to reflect the two-for-one stock split in the form of a stock dividend effected May 23, 2005.
| | Price Range | | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Cash Dividend Per Share | |||||||||
| | High | Low | ||||||||
| Fiscal 2003: | ||||||||||
| First Quarter | $ | 29.34 | $ | 24.27 | $ | 0.0125 | ||||
| Second Quarter | 38.38 | 25.64 | 0.0125 | |||||||
| Third Quarter | 40.00 | 30.46 | 0.0125 | |||||||
| Fourth Quarter | 46.38 | 36.23 | 0.0125 | |||||||
| Fiscal Year | 46.38 | 24.27 | 0.05 | |||||||
Fiscal 2002: | ||||||||||
| First Quarter | $ | 39.20 | $ | 30.00 | $ | 0.0125 | ||||
| Second Quarter | 43.32 | 35.05 | 0.0125 | |||||||
| Third Quarter | 39.03 | 16.50 | 0.0125 | |||||||
| Fourth Quarter | 30.52 | 17.71 | 0.0125 | |||||||
| Fiscal Year | 43.32 | 16.50 | 0.05 | |||||||
| | Price Range | | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Cash Dividend Per Share | |||||||||
| | High | Low | ||||||||
| Fiscal 2005: | ||||||||||
| First Quarter | $ | 32.56 | $ | 27.40 | $ | 0.00625 | ||||
| Second Quarter | 34.48 | 26.57 | — | |||||||
| Third Quarter | 32.92 | 25.80 | — | |||||||
| Fourth Quarter | 35.68 | 26.67 | — | |||||||
| Fiscal Year | 35.68 | 25.80 | 0.00625 | |||||||
Fiscal 2004: | ||||||||||
| First Quarter | $ | 21.50 | $ | 17.78 | $ | 0.00625 | ||||
| Second Quarter | 23.44 | 17.15 | 0.00625 | |||||||
| Third Quarter | 23.68 | 19.66 | 0.00625 | |||||||
| Fourth Quarter | 31.57 | 23.27 | 0.00625 | |||||||
| Fiscal Year | 31.57 | 17.15 | 0.02500 | |||||||
We have paid cash dividends on our common stock each quarter since the second quarter of 1988. Adobe's Board of Directors declared a cash dividend on our common stock of $0.0125 per common share for each of the four quarters in fiscal 2003 and 2002. Under the terms of our lease agreements for our San Jose headquarters, we are not prohibited from paying cash dividends unless an event of default occurs. The declarationWe discontinued our quarterly cash dividend after the payment of future dividends, whether inthe dividend for the first quarter of fiscal 2005. We intend to use the cash or in-kind, is withinpreviously used to pay the discretion of Adobe's Board of Directors and will depend on business conditions,quarterly dividend for our results of operations and financial condition, and other factors.ongoing stock repurchase programs.
For information on our equity compensation plans, and financial covenant ratios, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the sections titled "Employee and Director Stock Options"Options."
(c) Below is a summary of stock repurchases for the quarter ended December 2, 2005 (in thousands, except average price per share). See Note 11 of our Notes to Consolidated Financial Statements for information regarding our stock repurchase programs.
| Plan/Period | Shares Repurchased(1) | Average Price Per Share | Maximum Number of Shares that May Yet be Purchased | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Stock Repurchase Program I | ||||||||||
| Beginning shares available to be repurchased as of September 2, 2005 | 60,314,885 | |||||||||
September 3 - 30, 2005 | ||||||||||
| From employees(2) | 31 | $ | 29.43 | |||||||
October 1 - 28, 2005 | ||||||||||
| From employees(2) | 168 | 30.11 | ||||||||
| Structured repurchases | 6,205,809 | 29.34 | ||||||||
October 29, 2005 - December 2, 2005 | ||||||||||
| From employees(2) | 31 | 32.31 | ||||||||
| Structured repurchases | 5,002,423 | 32.59 | ||||||||
| Total shares repurchased | 11,208,462 | (11,208,462 | ) | |||||||
| Adjustments to repurchase authority for net dilution | 6,933,376 | (3) | ||||||||
| Ending shares available to be repurchased as of December 2, 2005 | 56,039,799 | (4) | ||||||||
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data (presented in thousands, except per share amounts and employee data) are derived from Adobe'sour 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. All share and per share amounts referred to in the table below have been adjusted to reflect the two-for-one stock splitssplit in the form of stock dividends effected October 24, 2000 and October 26, 1999.May 23, 2005.
| | | Years Ended | | Fiscal Years | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Nov. 28, 2003 | Nov. 29, 2002 | Nov. 30, 2001 | Dec. 1, 2000 | Dec. 3, 1999 | | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||
| Operations: | Operations: | Operations: | ||||||||||||||||||||||||||||||||
| Revenue | $ | 1,294,749 | $ | 1,164,788 | $ | 1,229,720 | $ | 1,266,378 | $ | 1,015,434 | Revenue | $ | 1,966,321 | $ | 1,666,581 | $ | 1,294,749 | $ | 1,164,788 | $ | 1,229,720 | |||||||||||||
| Gross profit | 1,201,727 | 1,060,500 | 1,148,269 | 1,179,123 | 920,894 | Gross profit | 1,853,743 | 1,562,203 | 1,201,727 | 1,060,500 | 1,148,269 | |||||||||||||||||||||||
| Income before income taxes | 380,492 | 284,689 | 306,931 | 443,739 | 374,427 | Income before income taxes | 765,776 | 608,645 | 380,492 | 284,689 | 306,931 | |||||||||||||||||||||||
| Net income(*) | 266,344 | 191,399 | 205,644 | 287,808 | 237,751 | Net income* | 602,839 | 450,398 | 266,344 | 191,399 | 205,644 | |||||||||||||||||||||||
| Net income per share(*) | Net income per share* | |||||||||||||||||||||||||||||||||
| Basic | 1.14 | 0.81 | 0.86 | 1.21 | 0.98 | Basic | 1.23 | 0.94 | 0.57 | 0.41 | 0.43 | |||||||||||||||||||||||
| Diluted | 1.10 | 0.79 | 0.83 | 1.13 | 0.92 | Diluted | 1.19 | 0.91 | 0.55 | 0.40 | 0.42 | |||||||||||||||||||||||
| Cash dividends declared per common share | 0.05 | 0.05 | 0.05 | 0.05 | 0.05 | Cash dividends declared per common share | 0.00625 | 0.025 | 0.025 | 0.025 | 0.025 | |||||||||||||||||||||||
Financial position: | Financial position: | Financial position: | ||||||||||||||||||||||||||||||||
| Cash, cash equivalents and short-term investments | 1,096,533 | 617,737 | 581,613 | 679,853 | 498,716 | Cash, cash equivalents and short-term investments | 1,700,834 | 1,313,221 | 1,096,533 | 617,737 | 581,613 | |||||||||||||||||||||||
| Working capital | 892,498 | 436,883 | 453,713 | 563,307 | 355,386 | Working capital | 1,528,183 | 1,107,142 | 892,498 | 436,883 | 453,713 | |||||||||||||||||||||||
| Total assets | 1,555,045 | 1,051,610 | 932,173 | 1,069,416 | 803,859 | Total assets | 2,440,315 | 1,958,632 | 1,555,045 | 1,051,610 | 932,173 | |||||||||||||||||||||||
| Stockholders' equity | 1,100,800 | 674,321 | 616,972 | 752,544 | 512,209 | Stockholders' equity | 1,864,326 | 1,423,477 | 1,100,800 | 674,321 | 616,972 | |||||||||||||||||||||||
Additional data: | Additional data: | Additional data: | ||||||||||||||||||||||||||||||||
| Worldwide employees | 3,515 | 3,319 | 3,043 | 2,947 | 2,745 | Worldwide employees | 4,285 | 3,848 | 3,515 | 3,319 | 3,043 | |||||||||||||||||||||||
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion (presented in millions, except share and per share amounts) should be read in conjunction with theour consolidated financial statements and notes thereto. The share and per share data below have been adjusted to give effect to our stock split as of May 23, 2005.
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements, including statements regarding product plans, future growth and investing activities, thatmarket opportunities, which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in thisthe section under "Factors That May Affect Future Performance.titled "Business—Risk Factors." You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission ("SEC"),SEC, including the Quarterly Reports on Form 10-Q to be filed in 2004.2006. When used in this report, the words "expects," "could," "would", "may," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," "looks for," "looks to," and similar expressions, as well as statements regarding Adobe'sour focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
On December 3, 2005, we completed the acquisition of Macromedia for approximately $3.4 billion. We expect the acquisition to have a significant impact on our consolidated financial position, results of operations and cash flows. We expect our revenues, cost of revenues and operating expenses to increase in the future, but we also anticipate cost saving synergies. In addition, we expect to incur estimated restructuring charges of $20 million to $25 million in the next fiscal year, primarily in the first quarter. Coinciding with the integration of Macromedia and the start of our 2006 fiscal year, we changed the reporting of our principal business segments to be aligned with our market opportunities and how we manage our various businesses. The discussions in this section of the Annual Report on Form 10-K, as well as the financial statements contained herein, relate to Adobe as a standalone entity and do not reflect the impact of the acquisition.
Founded in 1982, Adobe offersSystems Incorporated is one of the largest and most diversified software companies in the world. We offer a line of creative, business and mobile software forand services used by high-end consumers, creative professionals, designers, knowledge workers, OEM partners, developers and enterprises. Our products enable customers to create, manageenterprises for creating, managing, delivering and deliver visually rich,engaging with compelling content and reliable content.experiences across multiple operating systems, devices and media. We distribute our products through a network of distributors and dealers, VARs, systems integrators, ISVs and OEMs; direct to end users; and through our own Web site at www.adobe.com. We also license our technology to major hardware manufacturers, software developers and service providers and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas, EMEA and Asia. Our software runs on Microsoft Windows, Apple Macintosh,OS, Linux, UNIX and various non-personal computer platforms, depending on the product.
In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our net revenue, operating income and net income, as well as on the value of certain assets and liabilities onamounts reported in our consolidated balance sheet.financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We also discuss our critical accounting estimates
with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition and income taxes and valuation of non marketable equity securities have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on theour critical accounting policies, see the discussion in the section titled "Recent Accounting Pronouncements" below and Note 1 of our Notes to Consolidated Financial Statements.
Revenue Recognition
We recognize revenue in accordance with current U.S. generally accepted accounting principles that have been prescribed for the software industry. Revenue recognition requirements in the software industry are very complex and are subject to change. Our revenue recognition policy is one of our critical accounting policies because revenue is a key component of our results of operations and is based on complex rules which require us to make judgments and estimates. In applying our revenue recognition policy we must
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determine which portions of our revenue are recognized currently and which portions, if any, must be deferred. In order to determine current and deferred revenue, we make judgments and estimates with regard to future deliverable products and services and the appropriate pricing for those products and services. Our assumptions and judgments regarding future products and services could differ from actual events.events, thus materially impacting our financial position and results of operations.
We have to estimate provisions for returns which are recorded against our revenues. In determining our estimate for returns, and in accordance with our internal policy regarding global channel inventory which is used to determine the level of product held by our distributors on which we have recognized revenue, we rely upon historical data, the estimated amount of product inventory in our distribution channel, the rate at which our product sells through to the end user, product plans and other factors. Our estimated provisions for returns can vary from what actually occurs. More or less product may be returned from what was estimated. The amount of inventory in the channel could be different than what is estimated. Our estimate of the rate of sell through for product in the channel could be different than what actually occurs. There could be a delay in the release of our products. These factors and unanticipated changes in the economic and industry environment could make our return estimates differ from actual.
Income Taxes
We provide for the effect of income taxes onactual returns, thus materially impacting our financial position and results of operations in accordance with Statement of Financial operations.
Accounting Standards No. 109, "Accounting for Income Taxes."Taxes
We use the asset and liability method of accounting for income taxes. Under this current accounting pronouncement,method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and foryear. In addition, deferred tax assets and liabilities and assetsare recognized for the expected future tax consequences of events that have been recognized in an entity'stemporary differences between the financial statements orreporting and tax returns.bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make significant assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against our neta deferred tax asset. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial position and results of operations.statements. Our assumptions, judgments and estimates relative to the value of our neta deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate,inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards 123—revised 2004 ("SFAS 123R"), "Share-Based Payment" which replaces Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." SFAS 123R requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our Marketableconsolidated statements of income. In April 2005, the SEC announced that the accounting provisions of SFAS 123R are to be applied in the first quarter of the fiscal year beginning after June 15, 2005. As a result, we are now required to adopt SFAS 123R in the first quarter of fiscal 2006 and Non-Marketable Equity Securities
It iswill recognize stock-based compensation expense using the modified prospective method. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See Note 1 in our policyNotes to review our equity holdings onConsolidated Financial Statements for the pro forma net income and net income per share amounts as if we had used a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing the cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership of each investment. If we believe that an other-than-temporary decline exists in one of our marketable equity securities, it is our policy to write down these equity investmentsfair-value-based method similar to the market valuemethods required under SFAS 123R to measure compensation expense for employee stock incentive awards. We are evaluating the requirements under SFAS 123R and recordexpect the related write-down as an investment lossadoption to have a significant adverse impact on our consolidated statements of income. The ultimate value realized on these equity investments is subject to market volatility until they are sold.income and net income per share.
The stocks of a number of technology investments held both directly and by Adobe Ventures are not publicly traded and, therefore, there is no established market for these securities. In order to determine the fair market value of these investments, we use the most recent round of financing involving new non-strategic investors or other estimates of current market value. It is our policy to review the fair value of these investments held by Adobe Ventures on a regular basis to evaluate the carrying value of the investments in these companies. The evaluation process is based on information we request from these privately held companies. This information is not subject to the same disclosure regulations as U.S.
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publicly traded companies and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies. Estimating the fair value of non-marketable equity investments in early-stage technology companies is inherently subjective, requiring significant judgment by management, and may contribute to significant volatilitySee Note 1 in our reported results.Notes to Consolidated Financial Statements for information regarding other recent accounting pronouncements.
Overview of 20032005
InDuring fiscal 2003, our primary goal was2005, we continued to deliver a series of innovative productsfocus on delivering comprehensive technology platforms to our customers to drive revenue and earnings growth. WithIn our Intelligent Document business, we achieved year-over-year growth primarily due to our Acrobat 7.0 family of products which began shipping in the first quarter. Acrobat 7.0 has numerous new releasesfeatures to help drive increased adoption by users in enterprises, governments and specialized vertical markets such as architecture, engineering and construction. We also achieved year-over-year growth in our Creative Professional business due primarily to the release of version 2 of our Acrobat desktopAdobe Creative Suite products beginning in the second quarter of the fiscal year. Creative Suite 2.0 integrates new full-versions of Adobe's design and server products,publishing software, along with Version Cue CS2 and a new videovisual file browser called Adobe Bridge. Beginning in fiscal 2004, many customers began licensing Photoshop capabilities via the Creative Suite products, as opposed to licensing the standalone version of the product. This planned migration has impacted the revenues from our Digital Imaging and Video business segment. However, our total revenue in the Digital Imaging and Video business grew in fiscal 2005 due to the strength of our Adobe Photoshop Elements and Adobe Premiere Elements software suite,bundle, new versions of our Creative Professional products andwhich were released in the introductionfourth quarter of Adobe Creative Suite, Adobe delivered more new releases in 2003 than in any previous year. The new releases of our Acrobat desktop products supported our ePaper segment strategy (which we renamed Intelligent Documents beginning in fiscal 2004), which was to concentrate on the adoption of Acrobat across several identified markets. The release of Adobe Creative Suite was also in line with our strategy for the Creative Professional business segment which was to continue our commitment to Creative Professionals by enabling more efficient collaboration and workflow through improved product integration and new functionality. Additionally, our overall revenues were positively impacted by the strength of the euro and the yen during fiscal 2003.
We continue to focus on delivering innovative products and solutions for our customers to drive revenue and earnings growth. In fiscal 2004, we expect to see continued growth in our business segments. Our success could be limited by several factors, including the timely release of new products, continued market acceptance of our products, the introduction of new products by existing or new competitors and unfavorable exchange rate fluctuations. For a further discussion of these and other risk factors, see the section titled "Factors That May Affect Future Performance."2005.
Revenue
| | | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | | Fiscal 2005 | % Change 2005 to 2004 | Fiscal 2004 | % Change 2004 to 2003 | Fiscal 2003 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Product | Product | $ | 1,269.0 | 10 | % | $ | 1,153.2 | (6 | )% | $ | 1,229.7 | Product | $ | 1,923.3 | 18 | % | $ | 1,634.0 | 29 | % | $ | 1,269.0 | ||||||||
| Percentage of total revenues | 98 | % | 99 | % | 100 | % | Percentage of total revenues | 98 | % | 98 | % | 98 | % | |||||||||||||||||
| Services and support | Services and support | 25.7 | * | % | 11.6 | * | % | — | Services and support | 43.0 | 32 | % | 32.6 | 27 | % | 25.7 | ||||||||||||||
| Percentage of total revenues | 2 | % | 1 | % | — | Percentage of total revenues | 2 | % | 2 | % | 2 | % | ||||||||||||||||||
| Total revenues | $ | 1,294.7 | 11 | % | $ | 1,164.8 | (5 | )% | $ | 1,229.7 | Total revenues | $ | 1,966.3 | 18 | % | $ | 1,666.6 | 29 | % | $ | 1,294.7 | |||||||||
We haveIn fiscal 2005, we had four reportable segments that offer different product lines:segments: Digital Imaging and Video, Creative Professional, ePaper,Intelligent Document, and OEM PostScript and Other. The Digital Imaging and Video segment provides
users with software for creating, editing, enhancing and sharing digital images and photographs, digital video, audio and animations. The Creative Professional segment provides software for professional page layout, professional Web page layout, graphic and illustration creation, technical document publishing and business publishing. Additionally, this segment includes Photoshop and Acrobat Professional as part of its Adobe Creative Suite products. The ePaperIntelligent Document segment provides electronic document distribution software that allows users to create, enhance, annotate and securely send Adobe PDF files that can be shared, viewed, navigated and printed exactly as intended on a broad range of hardware and software platforms. In addition, this segment provides server-based solutions for enterprises, and government agencies in the areas of document generation, document process management, anddocument collaboration, and document control and security. The OEM PostScript and Other segment includes printing technology used to create and print simple or visually rich documents with precision.
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Services Our services and support revenue is composed of professional services (such as consulting services and training) and support (such as maintenance and technical support)support, primarily related to the licensing of our ePaperIntelligent Document server solutionssolution products. ProfessionalOur support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. Our professional services revenue is recognized using the percentage of completionproportional performance method and is measured monthly based on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. A significant portion of ourOur maintenance and support revenue comprises our extended Enterprise Maintenance and Support offerings, which entitlesentitle customers to receive product upgrades and enhancements duringor technical support, depending on the offering, are recognized ratably over the term of the maintenance and support period, which is typically one year. Our support revenue also includes support forarrangement.
Segment Information
| | Fiscal 2005 | % Change 2005 to 2004 | Fiscal 2004 | % Change 2004 to 2003 | Fiscal 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Digital Imaging and Video | $ | 432.8 | 1 | % | $ | 430.2 | 10 | % | $ | 392.4 | |||||
| Percentage of total revenues | 22 | % | 26 | % | 30 | % | |||||||||
| Creative Professional | 743.8 | 21 | % | 613.1 | 66 | % | 368.5 | ||||||||
| Percentage of total revenues | 38 | % | 37 | % | 29 | % | |||||||||
| Intelligent Document | 708.0 | 31 | % | 541.8 | 22 | % | 444.1 | ||||||||
| Percentage of total revenues | 36 | % | 32 | % | 34 | % | |||||||||
| OEM PostScript and Other | 81.7 | — | % | 81.5 | (9 | )% | 89.7 | ||||||||
| Percentage of total revenues | 4 | % | 5 | % | 7 | % | |||||||||
| Total revenues | $ | 1,966.3 | 18 | % | $ | 1,666.6 | 29 | % | $ | 1,294.7 | |||||
Beginning in the first quarter of fiscal year 2006 with the completion of our desktop products wherebyacquisition of Macromedia, we offer a rangechanged the reporting of support programs, from fee-based incident to annual support contracts and developer support to partners and developer organizations.
As noted in our 2002 Annual Report on Form 10-K, we realigned our business segments at the beginning of fiscal 2003.to be aligned with our market opportunities and how we manage our combined businesses. Our new business segments are Creative Solutions, Knowledge Worker Solutions, Enterprise and Developer Solutions, Mobile and Device Solutions, and Other. The results for fiscal years 2002management discussion and 2001, and the discussionanalysis that follows have been reclassified to reflectis based on the realignment of the operating segments.
| | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Digital Imaging and Video | $ | 392.4 | (5 | )% | $ | 411.9 | (6 | )% | $ | 439.7 | |||||
| Percentage of total revenues | 30 | % | 35 | % | 36 | % | |||||||||
| Creative Professional | 368.5 | 5 | % | 351.3 | (11 | )% | 393.3 | ||||||||
| Percentage of total revenues | 29 | % | 30 | % | 32 | % | |||||||||
| ePaper* | 444.1 | 42 | % | 312.6 | 7 | % | 291.9 | ||||||||
| Percentage of total revenues | 34 | % | 27 | % | 24 | % | |||||||||
| OEM PostScript and Other | 89.7 | 1 | % | 89.0 | (15 | )% | 104.8 | ||||||||
| Percentage of total revenues | 7 | % | 8 | % | 8 | % | |||||||||
| Total revenues | $ | 1,294.7 | 11 | % | $ | 1,164.8 | (5 | )% | $ | 1,229.7 | |||||
Fiscal 20032005 Revenue Compared to Fiscal 20022004 Revenue
Revenue from our Digital Imaging and Video segment decreased duringgrew slightly for fiscal 20032005 as compared to fiscal 2002 primarily2004. The growth in the segment was due to a decrease in revenues from our digital imaging software products. Overall, we experienced a 7% decreasethe 3% increase in revenues from our digital imaging software products which was mainly attributable to product lifecycle timing. With the introductionas a result of Adobe Creative Suite, which includes Photoshop, we have experienced a shift in revenue from Photoshop to the Adobe Creative Suite which is reported in the Creative Professional segment. The 7% decrease in revenues from our digital imaging software products was partially offset by an 8% increase in revenues from our digital video software products. The increase in revenues from our digital video software products was due primarily to new releases of our Adobe Video Collection.Photoshop Elements product as well as the new software bundle that combines our Adobe Photoshop Elements and Adobe Premiere Elements products.
Revenue from our Creative Professional segment increased during fiscal 20032005 as compared to fiscal 20022004 primarily due to a 57%32% increase in revenues from our professional page layout products. The growth in revenues from our professional page layout products was due to the releasenew versions of new products during fiscal 2003, primarily the introduction ofour Adobe Creative Suite as well as the planned migration of customers from our business publishing products. This increase was partially offset by decreases in revenues from our other products in the Creative Professional segment. Revenues from our business publishing products decreased 26% due to the planned migration of customers to our professional page
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layout products. Finally, revenues from our illustration, type and technical publishing, and Web publishing products decreased by 15%, which was primarily attributable to product lifecycle timing.
Revenue from our ePaper segment increased during fiscal 2003 as compared to fiscal 2002 primarily due to new releases of our Acrobat desktop productswere released during the second quarter of fiscal 2003,2005. There were no notable decreases for fiscal 2005.
Revenue from our Intelligent Document segment increased during fiscal 2005 as well as increased sales and marketing focus, enhanced corporate and government licensing programs, and product price increases. Overall we experiencedcompared to fiscal 2004 primarily due to a 37%36% increase in revenues from our Acrobat desktop products. The increase in revenues from our Acrobat desktop products which was driven byis due to continued adoption of Acrobat desktop products in government, financial services, manufacturing,by enterprises and technical professionals, as well as the architecture, engineering and construction markets among others. Additionally, revenues from our ePaper segment increased due to a 79% increase in revenues from licensingrelease of our ePaper server solution products and the professional services and support revenue associated with these products. The increase in revenue generated from the licensing of our ePaper server solution products and associated professional services and support was primarily attributable to the acquisition of AccelioAcrobat 7.0 during the secondfirst quarter of fiscal 2002. While2005. Revenue from our Intelligent Document LiveCycle products increased approximately 10% during fiscal 2005 due to increased licensing and server support revenue, as we expectcontinue to focus on both the government sector and financial services. Additionally, revenue from our server products to continue to grow inIntelligent Document segment increased during fiscal 2004, we expect Acrobat desktop product growth to be lower in fiscal 20042005 due to our strong resultsan increase in consulting revenues. There were no notable decreases for fiscal 2003.2005.
Revenue from our OEM PostScript and Other segment remained relatively stableflat during fiscal 20032005 as compared to fiscal 2002. This was due to an increase in royalty revenues from our larger OEM customers during the first half of fiscal 2003. This increase was offset by a decline in revenues due to continued weakness in the print business throughout the year and smaller OEM customers moving to clone PostScript technologies.2004. Revenue from this segment has declined over the last few years and we expect this trend to continue, but if the decline significantly exceeds our expectations, it may harm our future results.continue.
Fiscal 20022004 Revenue Compared to Fiscal 20012003 Revenue
Revenue from our Digital Imaging and Video segment decreasedincreased during fiscal 20022004 as compared to fiscal 2001 primarily2003 due to an 18% decreaseincreases in revenues from both our digital video and digital imaging software products. Revenue from our digital video software products dueincreased 9% during fiscal 2004 which was attributable to a combination of product lifecycle timing and the economic impact on the digital video software market. We also experienced a 4% overall decline in revenues from our digital imaging software products. We believe the decrease in revenuesnew releases during fiscal 2004. Revenue from our digital imaging software products wasincreased 10% during fiscal 2004 due to a combinationcontinued success with Adobe Photoshop CS which was released at the end of fiscal 2003 as well as the economic weakness across the world, the impactrelease of lower marketing spending by corporations resultingPhotoshop Elements 3.0 in a reduced number of Creative Professional customers, and the trend of our customers migrating towards the purchasing of Adobe Collection products as opposed to individual products, which are reported in the Creative Professional segment.fiscal 2004.
Revenue from our Creative Professional segment decreased inincreased during fiscal 20022004 as compared to fiscal 2001,2003 primarily due to a 23% decrease in revenues fromthe continued strength of our business publishing products. This decrease in revenues was due to a weaker global economy in 2002 when compared to 2001. There was a 29% decline in revenues from our type and technical publishingAdobe Creative Suite products due to overall economic weaknesswhich were initially released in the geographic markets in which these products are used. Additionally, there was a 35% decrease in revenues from our Web publishing products which we attributed to weakness in the Web-publishing market as well as less sales and marketing emphasis on these products. Finally, there was a 13% decrease in revenues from our illustration software due to product lifecycle timing and the continued economic impact on Creative Professional customers, who are the main end-user for this software.fourth quarter of fiscal 2003. The decreases in revenue in our Creative Professional segment were partially offset by a 42% increase in revenues from our professionalAdobe Creative Suite products were partially offset by decreases in revenues in our business and technical page layout software products which is attributabledue to a planned migration of customers from our business publishing products, increased marketing activities and growing customer demand.product lifecycle timing.
Revenue from our ePaperIntelligent Document segment increased during fiscal 20022004 as compared to fiscal 2001,2003 primarily due to ana 17% increase in licensingrevenues from our Acrobat desktop products as a result of continued adoption of Acrobat desktop products launched in fiscal 2003. Additionally, revenue from our ePaper Server SolutionsIntelligent Document server-based products and the professional services and support revenue associated with these products. This increase isincreased 50% due to the acquisition of Accelio during the second quarter of fiscal 2002.increased licensing and server support revenue.
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Revenue from our OEM PostScript and Other segment decreased during fiscal 20022004 as compared to fiscal 2001,2003 due to a decline in pricing resulting from competition from clone PostScript technologies and lower prices of output devices.
Geographic Information
| | Fiscal 2005 | % Change 2005 to 2004 | Fiscal 2004 | % Change 2004 to 2003 | Fiscal 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Americas | $ | 939.7 | 22 | % | $ | 770.6 | 20 | % | $ | 640.2 | |||||
| Percentage of total revenues | 48 | % | 46 | % | 49 | % | |||||||||
| EMEA | 612.7 | 13 | % | 541.5 | 46 | % | 370.2 | ||||||||
| Percentage of total revenues | 31 | % | 33 | % | 29 | % | |||||||||
| Asia | 413.9 | 17 | % | 354.5 | 25 | % | 284.3 | ||||||||
| Percentage of total revenues | 21 | % | 21 | % | 22 | % | |||||||||
| Total revenues | $ | 1,966.3 | 18 | % | $ | 1,666.6 | 29 | % | $ | 1,294.7 | |||||
Revenue in the Americas increased during fiscal 2005 as compared to fiscal 2004 due to the following factors: continued weaknessstrength of our Digital Imaging and Video, Creative Professional and Intelligent Document products.
Revenue in EMEA and Asia increased during fiscal 2005 as compared to fiscal 2004 due to the print business, lower average selling prices generating less royalty revenue from certain OEM customers,strength of our Creative Professional and smaller OEM customers transferring to clone PostScript technologies.Intelligent Document products.
Geographic and Platform Information
| | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Americas | $ | 640.2 | 10 | % | $ | 583.8 | (1 | )% | $ | 591.5 | |||||
| Percentage of total revenues | 49 | % | 50 | % | 48 | % | |||||||||
| EMEA | 370.2 | 17 | % | 317.6 | (3 | )% | 326.5 | ||||||||
| Percentage of total revenues | 29 | % | 27 | % | 27 | % | |||||||||
| Asia | 284.3 | 8 | % | 263.4 | (15 | )% | 311.7 | ||||||||
| Percentage of total revenues | 22 | % | 23 | % | 25 | % | |||||||||
| Total revenues | $ | 1,294.7 | 11 | % | $ | 1,164.8 | (5 | )% | $ | 1,229.7 | |||||
The increase in revenues, in fiscal 20032004 as compared to fiscal 2002,2003, in each of our geographic segments was primarily due to the strength of our ePaper desktopCreative Professional products.
Additionally, revenuedue to the strength of the euro and the yen, revenues in EMEA and Asia increased due to the overall strength of the euro, in EMEA,approximately $15.0 million and the yen in Asia,$3.0 million, respectively, during fiscal 2003. The decrease in revenue from Asia in2005 over fiscal 2002 compared to fiscal 2001 was primarily due to weakness in the Japan economy. The decreases in the Americas2004 and EMEAincreased $50.2 million and $18.0 million, respectively, during fiscal 2002 compared to2004 over fiscal 2001 were due to product lifecycle timing and a weak economy that negatively impacted the Creative Professional customer.2003.
Total application platform mix (excluding platform independent and UNIX revenues) for fiscal 2003 was split 74% on Windows and 26% on Macintosh compared to 71% and 29%, respectively, in fiscal 2002 and 70% and 30%, respectively, in fiscal 2001.Platform Information
| | Fiscal 2005 | Fiscal 2004 | Fiscal 2003 | ||||
|---|---|---|---|---|---|---|---|
| Windows | 75 | % | 73 | % | 74 | % | |
| Macintosh | 25 | % | 27 | % | 26 | % |
We expect thea growth trend towards the Windows platform over the long term due to continue inour targeting of business users with our Intelligent Document desktop products, where the foreseeable future as a significant majority of our ePaper revenues are onusers run the Windows platform.operating system.
Inventory Information
In Adobe'sAt the end of fiscal 2005 our overall channel inventory position was within our global inventory policy which allows, on an overall basis, up to 4.5 weeks of anticipated total product supply at our distributors.
With regard to our product backlog, our experience is that the actual amount of product backlog at any particular time ismay not be a meaningful indicator of our future business prospects. PriorFor example, prior to major product releases,the finalization and release of new products, we tend tomay have significant levels of orders for new product releases. Our backlog butof unfulfilled orders at the end of fiscal 2005, other times backlog is minimalthan those associated with new product releases, those pending credit review and we normally ship products within a few daysthose due to the application of receiving an order, subject to credit verification and our global channel inventory policy. Backlog is also subject to variability beyond our global channel inventory policy, was approximately 8% of fourth quarter fiscal 2005 revenue. The comparable backlog at the end of a reporting period, in amounts typically less than 5%third quarter of reportedfiscal 2005 was approximately 2% of third quarter fiscal 2005 revenue.
Our global channel inventory position continues to be within company policy.
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Cost of RevenueRevenues
| | | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | | Fiscal 2005 | % Change 2005 to 2004 | Fiscal 2004 | % Change 2004 to 2003 | Fiscal 2003 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Product | Product | $ | 79.9 | (18 | )% | $ | 96.9 | 19 | % | $ | 81.5 | Product | $ | 90.0 | 4 | % | $ | 86.6 | 8 | % | $ | 79.9 | ||||||||
| Percentage of total revenues | 6 | % | 8 | % | 7 | % | Percentage of total revenues | 5 | % | 5 | % | 6 | % | |||||||||||||||||
| Services and support | Services and support | 13.1 | 76 | % | 7.4 | * | % | — | Services and support | 22.6 | 27 | % | 17.8 | 36 | % | 13.1 | ||||||||||||||
| Percentage of total revenues | 1 | % | 1 | % | — | Percentage of total revenues | 1 | % | 1 | % | 1 | % | ||||||||||||||||||
| Total cost of revenues | $ | 93.0 | (11 | )% | $ | 104.3 | 28 | % | $ | 81.5 | Total cost of revenues | $ | 112.6 | 8 | % | $ | 104.4 | 12 | % | $ | 93.0 | |||||||||
Product
Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization related to localization costs and acquired technologies and the costs associated with the manufacturing of our products. In fiscal 2001 and fiscal 2002, cost of product revenue also included hosted server costs associated with the Adobe DesignTeam.
Cost of product revenue decreasedincreased 5% during fiscal 20032005 as compared to fiscal 2002 primarily2004 due to material costs related to higher shrink-wrap revenue, 3% due to an increase in our localization costs related to our
product mix. During fiscal 2003, we received higher licensing revenue versus shrink-wrappedlaunches, 2% related to royalties for licensed technologies, 1% related to excess and obsolete inventory and other expenses. These increases were partially offset by an 8% decrease in cost of product revenue compareddue to a one time charge related to a litigation settlement that occurred during the second quarter of fiscal 2002, which resulted2004. The remaining 1% increase in lower material costs. Additionally, cost of product revenue for fiscal 2002 included the amortization and impairment costs associated with the Adobe DesignTeam, which2005 was discontinued during the third quarter of fiscal 2002. An impairment charge of $5.5 million for capitalized hosted server costs associated with Adobe DesignTeam was recorded during fiscal 2002.due to various individually insignificant items.
Cost of product revenue increased induring fiscal 20022004 as compared to fiscal 20012003 primarily due to increased amortizationlicensing costs as a result of Web site developmentlitigation settlements that occurred in fiscal 2004 and an increase in localization costs related to Adobe DesignTeam which was launchedour product launches. These increases were partially offset by a decrease in the fourth quarter of fiscal 2001 and the subsequent impairment charge for the remaining developmentoverall material costs.
Services and Support
Cost of services and support revenue is composed primarily of employee-related costs and the related costs incurred to provide consulting services, training and product support.
Cost of services and support revenue increased during fiscal 20032005 as compared to fiscal 2002,2004 primarily due to increases in headcount related expenses, including higher compensation and fromrelated benefits, as well as outsourced consulting fees.
Cost of services and support revenue increased during fiscal 20022004 as compared to fiscal 2001, primarily2003 due to the acquisition of Acceliocosts associated with our Expert Support program that was initiated during the second quarter of fiscal 2002.2004. Additionally, cost of services and support revenue increased due to compensation and related benefits as a result of higher headcount and incentive compensation related to increases in services and support activities in fiscal 2004.
Operating Expenses
Research and Development
| | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expenses | 277.0 | 13 | % | $ | 246.1 | 10 | % | $ | 224.1 | |||||
| Percentage of total revenues | 21 | % | 21 | % | 18 | % | ||||||||
| | Fiscal 2005 | % Change 2005 to 2004 | Fiscal 2004 | % Change 2004 to 2003 | Fiscal 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expenses | $ | 365.3 | 17 | % | $ | 311.3 | 12 | % | $ | 277.0 | |||||
| Percentage of total revenues | 19 | % | 19 | % | 21 | % | |||||||||
Research and development expenses consist principally of salary and benefit expenses for software developers, contracted development efforts, related facilities costs and expenses associated with computer equipment used in software development.
Research and development expenses increased during fiscal 2003 as compared to fiscal 2002. Of the 13% total increase in research and development expenses during fiscal 2003, 7 percentage points of the increase werefluctuated due to compensation and related benefits associated with headcount growth and higher incentive compensation and 2 percentage points were due to an accrual for major product releases. The remaining 4 percentage points of the increase were due to various individually insignificant items.following:
Research and development expenses increased in fiscal 2002 compared to fiscal 2001, primarily due to higher compensation and related benefits associated to headcount growth from the acquisition of Accelio to support product development efforts.
| | % Change 2005 to 2004 | % Change 2004 to 2003 | ||||
|---|---|---|---|---|---|---|
| Compensation and related benefits associated with headcount growth and higher incentive compensation | 10 | % | 8 | % | ||
| Increased use of contractors | 1 | — | ||||
| Increased purchases of equipment and software licenses | 2 | — | ||||
| Various individually insignificant items | 4 | 4 | ||||
| Total change | 17 | % | 12 | % | ||
We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced products. We will continue to focus on long-term opportunities available in our end markets and make significant investments in the development of our desktop application and server-based software products.
Sales and Marketing
| | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expenses | 423.4 | 11 | % | $ | 380.4 | (6 | )% | $ | 403.7 | |||||
| Percentage of total revenues | 33 | % | 33 | % | 33 | % | ||||||||
| | Fiscal 2005 | % Change 2005 to 2004 | Fiscal 2004 | % Change 2004 to 2003 | Fiscal 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expenses | $ | 593.3 | 14 | % | $ | 521.1 | 23 | % | $ | 423.4 | |||||
| Percentage of total revenues | 30 | % | 31 | % | 33 | % | |||||||||
Sales and marketing expenses include salary and benefit expenses, sales commissions, travel expenses and related facilities costs for our sales, marketing, customer support, order management and order fulfillmentglobal supply chain management personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs.
Sales and marketing expenses increased during fiscal 2003 as compared to fiscal 2002. Of the 11% total increase in sales and marketing expenses, 9 percentage points of the increase werefluctuated due to compensation and related benefits associated with headcount growth, higher incentive compensation and higher sales commissions. The remaining 2 percentage points of the increase were due to various individually insignificant items.following:
Sales and marketing expenses decreased in fiscal 2002 compared to fiscal 2001, primarily due to decreased marketing and advertising spending.
| | % Change 2005 to 2004 | % Change 2004 to 2003 | ||||
|---|---|---|---|---|---|---|
| Compensation and related benefits associated with headcount growth and higher incentive compensation | 7 | % | 12 | % | ||
| Increased marketing spending related to product launches and overall marketing efforts to further increase revenues | 4 | 9 | ||||
| Various individually insignificant items | 3 | 2 | ||||
| Total change | 14 | % | 23 | % | ||
General and Administrative
| | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expenses | 122.4 | 13 | % | $ | 108.1 | (7 | )% | $ | 115.6 | |||||
| Percentage of total revenues | 9 | % | 9 | % | 9 | % | ||||||||
| | Fiscal 2005 | % Change 2005 to 2004 | Fiscal 2004 | % Change 2004 to 2003 | Fiscal 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expenses | $ | 166.7 | 21 | % | $ | 138.0 | 13 | % | $ | 122.4 | |||||
| Percentage of total revenues | 8 | % | 8 | % | 9 | % | |||||||||
General and administrative expenses consist principally of salarycompensation and benefit expenses, directors and officers' insurance, travel expenses, and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, and expenses associated with computer equipment and software used in the administration of the business.
General and administrative expenses increased in fiscal 2003 as compared to fiscal 2002. Of the 13% overall increase in general and administrative expenses, 12 percentage points of the increase werefluctuated due to compensation and related benefits associated with headcount growth and higher incentive compensation and 4 percentage points were due to increased insurance costs. These increases were slightly offsetthe following:
| | % Change 2005 to 2004 | % Change 2004 to 2003 | ||||
|---|---|---|---|---|---|---|
| Compensation and related benefits associated with headcount growth and higher incentive compensation | 8 | % | 10 | % | ||
| Increased professional fees | 6 | 3 | ||||
| Increased depreciation and amortization | 3 | — | ||||
| Increased repairs and maintenance | 2 | — | ||||
| Decreased legal fees | (2 | ) | — | |||
| Various individually insignificant items | 4 | — | ||||
| Total change | 21 | % | 13 | % | ||
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by 3 percentage points due to a decrease in depreciation related to assets that were written off in the prior fiscal year.
General and administrative expenses decreased in fiscal 2002 compared to fiscal 2001. Of the 7% overall decrease, 3 percentage points were due to a decrease in contractor and professional fees, 3 percentage points were due to a decrease in facility expenses as a result of lower rent expenses, and 3 percentage points were due to a decrease in compensation and related benefits due to reduced headcount. These decreases were partially offset by 2 percentage points due to an increase in depreciation expenses.
Restructuring and Other Charges
| | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expenses | $ | (0.5 | ) | * | % | $ | 12.1 | 1 | % | $ | 12.1 | ||||
| Percentage of total revenues | — | 1 | % | 1 | % | ||||||||||
| | Fiscal 2005 | % Change 2005 to 2004 | Fiscal 2004 | % Change 2004 to 2003 | Fiscal 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expenses | $ | — | — | % | $ | — | * | % | $ | (0.5 | ) | ||||
| Percentage of total revenues | — | — | * | % | |||||||||||
*
We did not incur any restructuring and other charges in fiscal 2005 and 2004. During fiscal 2003, we revised our estimates of certain costs associated with our restructuring program that was implemented in the fourth quarter of fiscal 2002. As a result, duringwe revised the third and fourth quarters of fiscal 2003, we reversed the excess accrual related to severance and other charges and facilities.
In the fourth quarter of fiscal 2002, we incurred a restructuring charge of $11.1 million, which included severance and related charges and the closure of a facility. The related restructuring program eliminated 239 engineering, sales and marketing, and general and administrative positions worldwide in order to realign our resources for our future business plans. This restructuring plan was completed during the fourth quarter of fiscal 2003.
Also, in the second quarter of fiscal 2002, we implemented a restructuring plan to eliminate 39 redundant sales and marketing positions, held by Adobe employees worldwide, as a result of the acquisition of Accelio. The total restructuring charges, of $1.6 million, included severance and related charges associated with the reduction in force and the cost of vacating a leased facility. This restructuring plan was completed during the second quarter of fiscal 2003.
In the fourth quarter of fiscal 2001, we implemented a restructuring plan to realign our workforce to our future strategic goals and to align our resources with our lower fiscal 2002 revenue targets due to adverse economic conditions resulting in part from the events of September 11, 2001. This restructuring also enabled us to increase our investment in digital imaging, digital video and ePaper-based businesses in fiscal 2002. The restructuring charge in the fourth quarter of fiscal 2001 was $12.1 million, all of which related to severance and related charges associated with the reduction in force. During fiscal 2002, we lowered our estimate of the total costs associated with this restructuring plan, resulting in an adjustment of approximately $0.6 million. The adjustment primarily reflected lower than estimated relocation and severance expenses and related charges. This restructuring plan was completed in the fourth quarter of fiscal 2002.
Acquired In-Process Research and DevelopmentNon-operating Income
| | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expenses | $ | — | * | % | $ | 5.8 | * | % | $ | — | ||||
| Percentage of total revenues | — | * | % | — | ||||||||||
| | Fiscal 2005 | % Change 2005 to 2004 | Fiscal 2004 | % Change 2004 to 2003 | Fiscal 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Investment gain (loss) | $ | (1.3 | ) | * | % | $ | 2.5 | * | % | $ | (12.9 | ) | |||
| Percentage of total revenues | * | % | * | % | (1 | )% | |||||||||
| Interest and other income | 38.6 | * | % | 14.3 | 3 | % | 13.9 | ||||||||
| Percentage of total revenues | 2 | % | 1 | % | 1 | % | |||||||||
| Total non-operating income | $ | 37.3 | * | % | $ | 16.8 | * | % | $ | 1.0 | |||||
*
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On April 12, 2002, we acquired 100% of the outstanding common stock of Accelio. Accelio was a provider of Web-enabled solutions that help customers manage business processes driven by electronic forms. We obtained an independent appraiser's valuation to determine the amounts allocated to purchased technology and in-process research and development. The valuation analysis utilized the Income Approach that takes into consideration discounted future cash flows. Based on this valuation $0.4 million was allocated to in-process research and development, which was expensed as of the date of the acquisition due to the state of the development of certain products and the uncertainty of the technology.
In December 2001, we acquired Fotiva. Substantially all of Fotiva's assets were intellectual property. Fotiva was a development stage software company that created solutions to help consumers manage, store, enrich, and share digital photographs and other related personal media. In connection with the acquisition, substantially all of the purchase price of $5.4 million cash was allocated to in-process research and development and expensed at the time of acquisition due to the in-process state of the technology. At the date we acquired Fotiva, it was estimated that 50% of the development effort had been completed and that the remaining 50% of the development effort would take approximately eleven months to complete. The efforts required to complete the development of the technology primarily include finalization of coding, internationalization, and extensive quality assurance testing. We developed a new product, Adobe Photoshop Album, that we released in the first quarter of fiscal 2003 using Fotiva's image management technology combined with our digital imaging and ePaper technologies.
Amortization and Impairment of Goodwill and Purchased and Other Intangibles
| | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Expenses | $ | — | * | % | $ | 21.0 | 47 | % | $ | 14.3 | |||||
| Percentage of total revenues | — | 2 | % | 1 | % | ||||||||||
In accordance with Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," goodwill and intangible assets with indefinite lives are no longer amortized. Instead, the goodwill associated with past and any future acquisitions is reviewed annually for impairment. For further information, see Notes 1 and 5 in our Notes to Consolidated Financial Statements. Intangible assets with definite lives are still being amortized and are included in cost of product revenue.
During the second quarter of fiscal 2003, we assessed our goodwill for impairment. This assessment did not result in an impairment of goodwill.
Amortization and impairment of goodwill and purchased and other intangibles increased in fiscal 2002 compared to fiscal 2001, primarily due to a goodwill impairment charge for the remaining book value of the Glassbook acquisition. The impairment charge was determined based on discounted future cash flows.
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Non-operating Income (Loss)
| | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Investment loss | $ | (12.9 | ) | 25 | % | $ | (17.2 | ) | 82 | % | $ | (93.4 | ) | ||
| Percentage of total revenues | (1 | )% | (1 | )% | (8 | )% | |||||||||
| Interest and other income | 13.9 | (6 | )% | 14.9 | (32 | )% | 21.9 | ||||||||
| Percentage of total revenues | 1 | % | 1 | % | 2 | % | |||||||||
| Total non-operating income (loss) | $ | 1.0 | * | % | $ | (2.3 | ) | 97 | % | $ | (71.5 | ) | |||
Investment LossGain (Loss)
Investment lossgain (loss) consists principally of realized gains or losses from the sale of marketable equity investments, other-than-temporary declines in the value of marketable and non-marketable equity securities, and equity method gains and losses of Adobe Ventures.
During fiscal 2003, net investment losses included net losses related to our investments in Adobe Ventures and our cost method investments totaling $12.0 million. This loss of $12.0 million was partially offset by gains of $3.1 million from the sale of our marketable equity securities. During fiscal 2003, investment losses also included write-downs due to other-than-temporary declines in value of $4.0 million related to our short-term investments in Salon Media Group, Viewpoint Corporation and Virage, Inc.
During fiscal 2002, investment losses consisted of net investment losses related to investments in Adobe Ventures and our cost method investments totaling $13.1 million. We also recorded other-than-temporary write-downs related to our marketable equity securities in DigitalThink, Inc., Tumbleweed Communications Corp., Engage, Inc., Virage, Inc., Viewpoint Corporation, AvantGo, Inc., and Salon Media Group, Inc. of $11.3 million. These losses were partially offset by gains totaling $7.2 million from the sale of our marketable equity securities.
During fiscal 2001, investment losses consisted of other-than-temporary write-downs related to our marketable equity securities in Tumbleweed Communications Corp., Salon Media Group, Inc., Engage, Inc., Liquent, Inc. (formerly ESPS, Inc.), AvantGo, Inc., Viewpoint Corporation, and Virage, Inc. of $53.1 million. These losses were partially offset by gains totaling $19.5 million from the sale of our marketable equity securities. We also recorded net investment losses related to investments in Adobe Ventures and our cost method investments totaling $59.8 million.
| | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net losses related to our investments in Adobe Ventures and cost method investments | $ | (1.0 | ) | $ | (0.1 | ) | $ | (12.0 | ) | ||
| Write-downs due to other-than-temporary declines in value of our marketable equity securities | (0.6 | ) | — | (4.0 | ) | ||||||
| Gains from sale of short-term investments | 0.1 | 2.5 | 3.1 | ||||||||
| Gains on stock warrants | 0.2 | 0.1 | — | ||||||||
| Total investment gain (loss) | $ | (1.3 | ) | $ | 2.5 | $ | (12.9 | ) | |||
We are uncertain of future investment gains or losses as they are primarily dependent upon market conditions and the operations of the underlying companies and market valuations. These marketable equity securities are inherently risky investments and we may experience further deterioration in fair value in the future.investee companies.
Interest and Other Income
The largest component of interest and other income is interest earned on cash, cash equivalents and short-term fixed income investments, but also includes gains and losses on the sale of fixed income investments, foreign exchange transactiontransactions including hedging gains and losses, and interest expense.
While the average amount of our invested cashInterest and other income increased from $595.0 million in fiscal 20022005 as compared to $753.6 million in fiscal 2003, our earned interest actually decreased by $0.4 million2004 primarily due to the lowerhigher interest rate environment. We also recognized $1.7 million less in recognizedincome as a result of higher levels of cash and higher interest rates during fiscal 2005, as well as higher gains on our fixed income
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portfolio. Those decreases were partially offset by an increase of $1.1 million in other miscellaneous income.foreign currency hedging program.
Interest and other income decreasedincreased in fiscal 20022004 as compared to fiscal 2001 primarily2003 due to a decrease in interest incomehigher levels of $6.0 million as a result of lower interest rates and lower realized gains of $2.5 million from the sales of fixed income investments. The decreases incash during fiscal 2002 compared to fiscal 2001 were partially offset by a reduction in losses of $1.1 million related to the lowered cost of purchased options used in foreign currency hedging.2004.
Income Tax Provision
| | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Provision | $ | 114.1 | 22 | % | $ | 93.3 | (8 | )% | $ | 101.3 | |||||
| Percentage of total revenues | 9 | % | 8 | % | 8 | % | |||||||||
| Effective tax rate | 30.0 | % | 32.8 | % | 33.0 | % | |||||||||
| | Fiscal 2005 | % Change 2005 to 2004 | Fiscal 2004 | % Change 2004 to 2003 | Fiscal 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Provision | $ | 162.9 | 3 | % | $ | 158.2 | 39 | % | $ | 114.1 | |||||
| Percentage of total revenues | 8 | % | 10 | % | 9 | % | |||||||||
| Effective tax rate | 21 | % | 26 | % | 30 | % | |||||||||
Our effective tax rate decreased 4 percentage points during fiscal 2005 as compared to fiscal 2004 due to a $29.3 million tax benefit recognized for the repatriation of certain foreign earnings under FASB Staff Position No. FAS 109-2 ("FAS 109-2"), "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004 ("AJCA")." See Note 1 in our Notes to Consolidated Financial Statements for information regarding FAS 109-2. The net tax benefit includes a $72.8 million reversal for taxes on foreign earnings for which a deferred tax liability had been previously accrued. In addition, our effective tax rate decreased 1 percentage point due to a variety of factors, including higher profits earned by our international trading company which are taxed at a lower statutory rate and a reduction of a valuation allowance against certain deferred tax assets.
Our effective tax rate decreased in fiscal 20032004 from fiscal 2002 and in fiscal 2002 from fiscal 2001,2003 due to the benefits associated with the structure ofhigher profits earned by our international operations. Part of the tax rate decrease in fiscal 2002 was offset by a tax rate increase, approximately 0.8%, due to the non-tax deductible goodwill impairment expense.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
We believe that in the future our results of operations could be affected by various factors, including:
We periodically provide operating model targets for revenue, gross margin, operating expenses, operating margin, other income, tax rate, share count and earnings per share. We use these targets to assist
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us in making decisions about our allocation of resources and investments, not as predictions of future results. The targets reflect a number of assumptions, including assumptions about:
These and many other factors described in this report affect our financial performance and may cause our future results to vary materially from these targets or from results from prior periods. Furthermore, if the economy worsens or the economic slow-down spreads to other geographic areas where we do business, it would likely cause our future results to vary materially from our targets. The slower economy may also adversely affect our ability to grow, and political instability in any of the major countries in which we do business may adversely affect our business.
The end markets for our software products are intensely and increasingly competitive, and are significantly affected by product introductions and market activities of industry competitors. In the markets served by our ePaper business (which was renamed Intelligent Documents business beginning in fiscal 2004), Microsoft has recently launched a new electronic form tool called InfoPath as part of the new version of their professional Office product. We believe that Microsoft's new InfoPath product competes with certain aspects of our Intelligent Documents product line. Given Microsoft's market dominance, InfoPath, or any new competitive Microsoft product or technology that is bundled as part of their Office product or operating system, could harm our overall Intelligent Documents market opportunity. In addition, Microsoft is working on the next generation of its Windows operating system, codenamed Longhorn, which could be released as early as late 2005. It is anticipated that Microsoft will add new electronic document capabilities to Longhorn, potentially providing additional competition to our Intelligent Document products and solutions. Furthermore, Microsoft has increased its presence in the low-end and mid-range consumer digital imaging markets. If competing Microsoft products achieve widespread acceptance, our operating results could suffer. In addition, consolidation has occurred among some of the competitors in our markets. Any further consolidations among our competitors may result in stronger competitors and may therefore harm our results of operations.
Also, as we seek to further broaden our customer base in the enterprise, government, consumer and creative professional markets, we may not successfully adapt our application software products, business models, or licensing and distribution channels to these changes, which could cause our operating results to suffer. If we are unable to successfully implement as planned any of our strategic alliances or develop the necessary relationships with enough significant systems integrators to adapt to these changes, our business could be harmed. Additionally, these new markets may result in higher costs and higher acceptance, warranty and indemnification risks than our other markets.
We plan to recruit key talent for our future growth, especially to support our enterprise business. Competition for such high-quality personnel, especially highly skilled engineers, is intense. Our ability to effectively manage this growth will require us to continue to improve our operational and financial controls and information management systems; otherwise our business could be seriously harmed. We rely on equity compensation in order to recruit and retain highly skilled employees in a competitive environment. If we are unable to provide adequate equity compensation incentives to effectively recruit and retain talented employees, our business may be harmed.
Any delays or failures in developing and marketing our products, including upgrades of current products, may also have a harmful impact on our results of operations. Our ability to extend our core technologies into new applications and new platforms and to anticipate or respond to technological changes could affect our ability to develop these products. A portion of our future revenue will come from
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these new applications. Delays in product or upgrade introductions could cause a decline in our revenue, earnings or stock price. We cannot determine the ultimate effect these delays or the introduction of new products or upgrades will have on our revenue or results of operations.
We offer our application-based products primarily on Windows and Macintosh platforms and on some UNIX platforms. We generally offer our server-based products, but not desktop products, on the Linux platform as well as the Windows and UNIX platforms. To the extent that there is a slowdown of customer purchases of personal computers on either the Windows or Macintosh platform or in general, or to the extent that significant demand arises for our products or competitive products on the Linux desktop platform before we choose and are able to offer our products on this platform, our business could be harmed.
We distribute our application products primarily through distributors, resellers, retailers and increasingly systems integrators, ISVs and VARs (collectively referred to as "distributors"). A significant amount of our revenue for application products is from two distributors. In addition, our channel program now focuses our efforts on larger distributors, which has resulted in our dependence on a relatively small number of distributors licensing a large amount of our products. Our distributors sell our competitors' products; if our distributors favor our competitors' products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective sales, which would cause our results to suffer. In addition, the financial health of these distributors and our continuing relationships with them are becoming more important to our success. Some of these distributors may be unable to withstand changes in business conditions. Our business could be seriously harmed if the financial condition of some of these distributors substantially weakens.
In connection with the enforcement of our own intellectual property rights or in connection with disputes relating to the validity or alleged infringement of third-party rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation as part of our policy to vigorously defend our intellectual property rights, including rights derived from third-party licensors. Intellectual property disputes and litigation are typically very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. Adverse decisions in such litigation or disputes could have negative results, including subjecting us to significant liabilities, requiring us to seek licenses from others, preventing us from manufacturing or licensing certain of our products, or causing severe disruptions to our operations or the markets in which we compete, any one of which could seriously harm our business. Additionally, although we actively pursue software pirates as part of our enforcement of our intellectual property rights, we do lose revenue due to illegal use of our software. If piracy activities increase, it may further harm our business.
Our computer network and applications could be adversely impacted by malicious code such as worms and viruses,trading company which are released into the public Internet using recently discovered vulnerabilities in popular software programs. The documents created by our applications, even those with security features, are also vulnerable to malicious acts such as hacking. Although we havetaxed at a response team that is notified of high-risk malicious events from multiple sources and we take certain preventative measures, these procedures may not be sufficient to avoid harm to our business.
We currently rely on six turnkey assemblers of our products, with at least two turnkeys located in each major region we serve. If any significant turnkey assembler terminates its relationship with us, or if our supply from any significant turnkey assembler is interrupted or terminated for any other reason, we may not have enough time or be able to replace the supply of products manufactured by that turnkey assembler to avoid serious harm to our business.
Although revenue from our OEM PostScript and Other segment remained relatively stable during fiscal 2003 as compared to fiscal 2002, we expect revenue from this segment to decline in the future. Our
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overall business may be harmed if the magnitude of the decline significantly exceeds our expectations. The continuing weakness in the economy and aggressive competition among printer manufacturers is contributing to pressure on the average selling price of printers, which may result in the reduction of our royalty arrangements or the adoption by an OEM of alternative technology.
The Internet market is rapidly evolving and is characterized by an increasing number of market entrants that have introduced or developed products addressing authoring and communications 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 industry for software that addresses authoring and communications over the Internet is still developing. Standards defining Web graphics have not yet been fully adopted. In addition, new models for licensing software may be needed to accommodate new information delivery practices. The new models may be less lucrative for us than our existing business models. Moreover, critical issues concerning the commercial use of the Internet (including security, reliability, ease of use and access, cost and quality of service) remain unresolved and may affect the growth of Internet use, together with the software standards and electronic media employed in such markets.
Our quarterly revenues and operating results are difficult to forecast and are likely to fluctuate substantially from quarter to quarter due to a number of factors. These factors include:
Our operating results are subject to fluctuations in foreign currency exchange rates. Dramatic fluctuations in foreign currency exchange rates may have significant financial impact. We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity and expense. We have established a hedging program to hedge our exposure to foreign currency exchange rate fluctuations, primarily the Japanese yen and the euro. We regularly review our hedging program and will make adjustments based on our judgment. Our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates.
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. These principles are subject to interpretation by the American Institute of Certified Public Accountants (the "AICPA"), the Securities and Exchange Commission (the "SEC") and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Our accounting policies that recently have been or may be affected by changes in the accounting rules are as follows:
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In particular, new FASB guidelines relating to accounting for goodwill could make our acquisition-related charges less predictable in any given reporting period. It is possible that in the future, we may incur less frequent, but larger, impairment charges related to goodwill we have already recorded, as well as goodwill arising out of potential future acquisitions. See "Goodwill and Purchased and Other Intangible Assets" in Note 1 of our Notes to Condensed Consolidated Financial Statements for more information on this new FASB pronouncement. Changes to these rules or the questioning of current practices may have a significant adverse effect on our reported financial results or in the way in which we conduct our business.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by unanticipated decreases in the amount of revenue or earnings in countries with lowlower statutory tax rates, changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or the interpretation of tax laws. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other domestic and foreign tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial position.
We hold equity investments in public companies that have experienced significant declines in market value. We also have investments and may continue to make future investments in privately held companies, many of which are considered in the start-up or development stages. These investments are inherently risky, as the market for the technologies or products these companies have under development is typically in the early stages and may never materialize. Our investment activities can impact our net income. We recorded pre-tax losses from marketable securities and other investments in privately held companies of $12.9 million, $17.2 million and $93.4 million during fiscal 2003, 2002 and 2001, respectively. These amounts reflect realized losses from the sale of marketable equity investments, other-than-temporary declines in the value of marketable equity securities and net investment losses related to investments in Adobe Ventures and our cost method investments. In fiscal 2003 and 2002, decreases in the market prices of our marketable equity securities resulted in decreases in our pre-tax income. Future price fluctuations in these securities and any significant long-term declines in value of any of our investments could reduce our net income in future periods. We are uncertain about future investment gains and losses, as they are primarily dependent upon the operations of the underlying investee companies.
Due to the factors noted above, our future earnings and stock price may be subject to volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings or any delay in the release of any product or upgrade compared to analysts' or investors' expectations has caused and could cause in the future an immediate and significant decline in the trading price of our common stock. Additionally, we may not learn of such shortfalls or delays until late in the fiscal quarter, which could result in an even more immediate and greater decline in the trading price of our common stock. Finally, we participate in a highly dynamic industry. In addition to factors specific to us, changes in analysts' earnings estimates for us or our industry, and factors affecting the corporate environment, our industry, or the securities markets in general, will often result in volatility of our common stock price.
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EMPLOYEE AND DIRECTOR STOCK OPTIONS
Option Program Description
Our stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. We consider our stock option program critical to our operation and productivity.productivity; essentially all of our employees participate. Option vesting periods are generally three years for all of the plans within our stock option program. For further information regarding our stock option program, see Note 1110 of our Notes to Consolidated Financial Statements.
All stock option grants to executive officers are made after a review by and with the approval of the Executive Compensation Committee of the Board of Directors. All members of the Executive Compensation Committee are independent directors, as defined in the current rules applicable to issuers traded on the Nasdaq Stock Market. See the "Report of the Executive Compensation Committee" appearing in our 20042006 Proxy Statement for further information concerning the policies and procedures, of the CompanyAdobe and the Executive Compensation Committee, regarding the use of stock options for executive officers.
In May 2003, a stock option exchange program was initiated that allowed eligible employees to exchange options granted with an option price greater than $40 per share for a lesser number of new options, according to specified exchange ratios. The program excluded executive officers and members of our Board of Directors. The cancellation date for the program was June 16, 2003. On June 17, 2003 we accepted for cancellation, options to purchase approximately 7.1 million shares of common stock. On December 17, 2003, eligible employees received new options to purchase approximately 3.4 million shares of common stock, in exchange for such cancelled options, with an exercise price of $39.10. The tables below include options to purchase 3.5 million shares as estimated as of November 28, 2003.
Distribution and Dilutive Effect of Options
The table below provides information about stock options granted for fiscal years 2003, 2002,2005, 2004 and 20012003 to our Chief Executive Officer and our four other most highly compensated executive officers as of November 28, 2003.officers. This group is referred to as the Named Executive Officers. Please refer to the section below, titled "Stock Option Exercises and Option Holdings," for the Named Executive Officers.
Options granted to employees, directors and Named Executive Officers for the fiscal years 20012003 through 20032005 are summarized as follows (*):follows:
| | 2003 | 2002 | 2001 | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net grants during the period as % of outstanding shares | (3 | )% | 3 | % | 6 | % | ||||||||
| Net grants† during the period as % of outstanding shares | 2 | % | 4 | % | (3 | )% | ||||||||
Net grants to Named Executive Officers during the period as % of total options granted | 0 | % | 21 | % | 11 | % | 12 | % | 9 | % | 0 | % | ||
Net grants to Named Executive Officers during the period as % of outstanding shares | 0 | % | 1 | % | 1 | % | * | % | * | % | 0 | % | ||
Cumulative options held by Named Executive Officers as % of total options outstanding | 16 | % | 15 | % | 12 | % | 15 | % | 16 | % | 16 | % | ||
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During fiscal 2003, we granted options to purchase approximately 2.0 million shares of our stock to our employees and directors and canceled approximately 9.4 million shares. For additional information about our employee stock option plan activity for the years 2001 through 2003, and pro forma earnings presentation as if we had accounted for our grant of employee stock options using the fair value method of accounting under Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," refer to NoteNotes 1 and 11 of our Notes to Consolidated Financial Statements.
We did not grant any stock options to our Named Executive Officers in fiscal 2003. Options granted to the Named Executive Officers as a percentage of the total options granted to all employees and directors vary from year to year. For additional information about the compensation of our executive officers and stock option grants to our Named Executive Officers, refer to our 20042006 Proxy Statement.Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on March 28, 2006.
General Option Information
The following table sets forth the summary of option activity under our stock option program for fiscal years 2003, 20022005, 2004 and 2001 (in actual amounts):2003:
| | | Outstanding Options | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Options Available for Grant | Number of Shares | Weighted Average Exercise Price | |||||||||||||
| | (in actual amounts) | |||||||||||||||
| December 1, 2000 | 26,911,978 | 45,017,400 | $ | 38.26 | ||||||||||||
| Granted | (19,177,315 | ) | 19,177,315 | 28.38 | ||||||||||||
| Exercised | — | (4,826,823 | ) | 12.55 | ||||||||||||
| Canceled | 5,083,575 | (5,083,575 | ) | 44.89 | ||||||||||||
| November 30, 2001 | 12,818,238 | 54,284,317 | 36.66 | |||||||||||||
| Granted | (11,973,680 | ) | 11,973,680 | 28.77 | ||||||||||||
| Exercised | — | (3,688,534 | ) | 15.99 | ||||||||||||
| Canceled | 4,722,413 | (4,722,413 | ) | 45.20 | | | Outstanding Options | |||||||||
| | Options Available for Grant | Number of Shares | Weighted Average Exercise Price | |||||||||||||
| November 29, 2002 | November 29, 2002 | 5,566,971 | 57,847,050 | 35.64 | November 29, 2002 | 11,133,942 | 115,694,100 | $ | 17.82 | |||||||
| Granted | (1,994,130 | ) | 1,994,130 | 33.12 | Granted | (3,988,260 | ) | 3,988,260 | 16.56 | |||||||
| Exercised | — | (7,978,054 | ) | 23.81 | Exercised | — | (15,956,108 | ) | 11.91 | |||||||
| Canceled | 9,388,535 | (9,393,473 | ) | 58.00 | Canceled | 18,777,070 | (18,786,946 | ) | 29.00 | |||||||
| Expired | (8,006 | ) | — | — | Expired | (16,012 | ) | — | — | |||||||
| November 28, 2003 | November 28, 2003 | 12,953,370 | 42,469,653 | 32.80 | November 28, 2003 | 25,906,740 | 84,939,306 | 16.40 | ||||||||
| Granted | (20,759,510 | ) | 20,759,510 | 21.07 | ||||||||||||
| Exercised | — | (26,587,728 | ) | 13.55 | ||||||||||||
| Canceled | 2,578,456 | (2,578,456 | ) | 20.46 | ||||||||||||
| Expired | (18,518 | ) | — | — | ||||||||||||
| Increased authorization | 9,000,000 | — | — | |||||||||||||
| December 3, 2004 | December 3, 2004 | 16,707,168 | 76,532,632 | 18.52 | ||||||||||||
| Granted | (11,418,499 | ) | 11,418,499 | 31.88 | ||||||||||||
| Exercised | — | (20,494,162 | ) | 15.32 | ||||||||||||
| Canceled | 2,205,685 | (2,205,685 | ) | 21.52 | ||||||||||||
| Increased authorization | 16,800,000 | — | — | |||||||||||||
| December 2, 2005 | December 2, 2005 | 24,294,354 | 65,251,284 | $ | 21.76 | |||||||||||
The following table sets forth a comparison, as of November 28, 2003,December 2, 2005, of the number of shares subject to our options whose exercise prices were at or below the closing price of our common stock on November 28, 2003December 2, 2005 ("In-the-Money" options) to the number of shares subject to options whose exercise
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prices were greater than the closing price of our common stock on such date ("Out-of-the-Money" options):
| | Exercisable | Unexercisable | Total | Percentage of Total Options Outstanding | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (in actual shares) | |||||||||
| In-the-Money(*) | 20,165,696 | 14,930,020 | 35,095,716 | 83 | % | |||||
| Out-of-the-Money(*) | 7,074,844 | 299,093 | 7,373,937 | 17 | % | |||||
| Total Options Outstanding | 27,240,540 | 15,229,113 | 42,469,653 | 100 | % | |||||
| | Exercisable | Unexercisable | Total | Percentage of Total Options Outstanding | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| In-the-Money* | 41,989,006 | 23,152,478 | 65,141,484 | 100 | % | |||||
| Out-of-the-Money* | 109,800 | — | 109,800 | † | % | |||||
| Total Options Outstanding | 42,098,806 | 23,152,478 | 65,251,284 | 100 | % | |||||
Stock Option Exercises and Option Holdings
The following table shows aggregated stock options exercised by the Named Executive Officers in fiscal 2003, including the total value of gains on the date of exercise based on actual sale prices or on the closing price that day if the shares were not sold that day, in each case less the exercise price of the stock options. In addition, the number of shares covered by both exercisable and non-exercisable stock options, as of November 28, 2003, is shown. Also reported are the values for "In-the-Money" options. The dollar amounts shown in the "In-the-Money" column represent the positive spread between the exercise price of any such existing stock options and closing price as of November 28, 2003 of our common stock.
| | | | Number of Securities Underlying Unexercised Options at November 28, 2003 | | | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | Value of Unexercised In-the-Money Options at November 28, 2003(2) | ||||||||||||
| Name | Number of Shares Acquired Upon Exercise | Value Realized Upon Exercise(1) | |||||||||||||
| Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||
| | (in actual shares and dollars) | ||||||||||||||
| Bruce R. Chizen | 350,000 | $ | 4,246,000 | 1,853,239 | 956,252 | $ | 6,791,996 | $ | 13,845,170 | ||||||
| Shantanu Narayen | 310,150 | 4,443,441 | 947,589 | 548,961 | 4,200,383 | 7,927,622 | |||||||||
| Murray J. Demo | 243,325 | 4,124,788 | 758,706 | 498,961 | 2,226,070 | 7,218,842 | |||||||||
| Jim Stephens | 241,666 | 2,672,235 | 508,958 | 338,544 | 1,754,895 | 4,879,326 | |||||||||
| James Heeger | — | — | 179,166 | 370,834 | 1,401,540 | 3,742,960 | |||||||||
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Equity Compensation Plan Information
The following table gives information about our common stock that may be issued under our existing equity compensation plans as of November 28, 2003 (in actual amounts):December 2, 2005:
| Plan Category(1) | Number of Securities to Be Issued Upon Exercise of Outstanding Options (a) | Weighted Average Exercise Price of Outstanding Options (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Plan Category | Number of Securities to Be Issued Upon Exercise of Outstanding Options (a) | Weighted Average Exercise Price of Outstanding Options (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | ||||||||||||
| Equity compensation plans approved by stockholders | 42,457,107 | $ | 32.80 | 29,930,261 | (2) | 65,251,284 | $ | 21.76 | 52,533,618* | ||||||
LIQUIDITY AND CAPITAL RESOURCES
| | Year Ended November 28, 2003 | % Change 2002 to 2003 | Year Ended November 29, 2002 | % Change 2001 to 2002 | Year Ended November 30, 2001 | Fiscal 2005 | % Change 2005 to 2004 | Fiscal 2004 | % Change 2004 to 2003 | Fiscal 2003 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash, cash equivalents and short-term investments | $ | 1,096.5 | 78 | % | $ | 617.7 | 6 | % | $ | 581.6 | $ | 1,700.8 | 30 | % | $ | 1,313.2 | 20 | % | $ | 1,096.5 | ||||||
| Working capital | 892.5 | 104 | % | 436.9 | (4 | )% | 453.7 | 1,528.2 | 38 | % | 1,107.1 | 24 | % | 892.5 | ||||||||||||
| Stockholders' equity | 1,100.8 | 63 | % | 674.3 | 9 | % | 617.0 | $ | 1,864.3 | 31 | % | $ | 1,423.5 | 29 | % | $ | 1,100.8 | |||||||||
Adobe ended fiscal 2003 with $1,096.5 million in cash, cash equivalents and short-term investments, an increase of $478.8 million compared to fiscal 2002 year end. Our primary source of cash is receipts from revenue. The primary uses of cash are payroll (salaries, bonuses, and benefits), general operating expenses (marketing, travel, office rent) and cost of product revenue. Another source of cash is proceeds from the exercise of employee options and another use of cash is our stock repurchase program, which is detailed below.
In fiscal 2005, we reclassified all auction rate securities and variable rate demand obligations to short-term investments pursuant to an interpretation of Statement of Financial Accounting Standards No. 95 ("SFAS 95"), "Statement of Cash Flows" relating to the definition of cash equivalents. This interpretation and subsequent reclassification has resulted in a presentation of our consolidated balance sheet that may understate the true liquidity of our fixed income portfolio. As of December 2, 2005, $158.2 million of the securities now classified as short-term investments have structural features that allow us to sell the securities at par within 90 days and thus retain similar liquidity characteristics as cash equivalents.
Cash provided by operating activities for fiscal 2005, of $730.4 million, primarily comprised net income, net of non-cash related expenses. Working capital sources of cash were increases in accrued expenses, income taxes payable and deferred revenue. Accrued expenses increased primarily due to compensation related costs and marketing expenses. Income taxes payable increased as a result of higher current tax liabilities related to repatriation of certain foreign earnings and overall increased taxable income. Deferred revenue increased primarily due to increased maintenance and support obligations. Working capital uses of cash included increases in trade receivables and other current assets. Our accounts receivable increased due to higher revenue during the period. As compared to fiscal 2004, our days sales outstanding in trade receivables ("DSO") was 31 days, one day higher than fiscal 2004. Other current assets increased due to an increase in prepaid expenses primarily related to acquisition costs.
Cash provided by operating activities for fiscal 2004, of $683.7, million primarily comprised net income, net of non-cash related expenses. Working capital sources of cash were increases in accrued expenses, deferred revenue and a decrease in accounts receivable. Accrued expenses increased primarily
due to compensation related costs. Deferred revenue increased primarily due to increased maintenance and support obligations. Our accounts receivable decreased due to increased levels of cash collections. Our trade DSO decreased from 37 days at November 28, 2003 to 30 days at December 3, 2004. Working capital uses of cash included a decrease in income taxes payable due to tax payments made for both agreed and disputed tax assessments.
Cash provided by operating activities for fiscal 2003, of $433.1 million, primarily comprised net income, net of non-cash related expenses, of $140.1 million, and increases in accrued expenses, income taxes payable and deferred revenue. Accrued expenses increased primarily due to incentive compensation related costs, sales and marketing programs, legal fees and accruals for major product releases. Income taxes payable increased due to an increase in taxable income. Deferred revenue increased primarily due to increased maintenance obligations. These increases were partially offset by an increase in receivables at the end of the year and a decrease in accrued restructuring charges. The increase in receivables was primarily due to the increase in revenues during the year and the launch of our new Creative Suites and related CS products at the end of the year. The decrease in accrued restructuring is primarily due to the payments of severance and facility costs.
During fiscal 2002, cash provided by operating activities of $329.3 million was primarily due to net income, net non-cash related expenses of $118.9 million, an increase in income taxes payable and deferred revenue and a decrease in accounts receivable. Income taxes payable increased due to an increase in taxable income. Deferred revenue increased primarily due to increased maintenance obligations. The decrease in trade receivables was primarily due to our improved collections during fiscal 2002. These
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increases in cash were partially offset by a decrease in accrued restructuring charges and accrued expenses. Accrued restructuring charges decreased primarily due to the payment of severance and related charges. Accrued expenses decreased primarily due to incentive compensation related costs.
Cash provided by operating activities for fiscal 2001 of $418.7 million was primarily due to net income, net non-cash related expenses of $197.1 million, and a net increase in operating assets and liabilities of $16.0 million.
Net cash used infor investing activities in fiscal 2005 of $320.4 million decreased from net cash used in fiscal 2004 of $330.3 million because there was not an investment in a lease receivable (related to our corporate headquarter office buildings) in 2005 as there was in 2004. This was partially offset by higher net purchases of short-term investments in fiscal 2005. Net cash used for investing activities in fiscal 2004 decreased from net cash used in fiscal 2003 of $548.4$577.8 million due primarily to lower net purchases of short-term investments in fiscal 2004.
Cash used for financing activities in fiscal 2005 of $246.6 million increased from cash used in fiscal 20022004 of $142.3$224.5 million primarily due to purchases of short-term investments, net of maturities and sales. The increasea decrease in purchases of short-term investments is attributable to an increase in cash from operations and proceeds received from the re-issuance of treasury stock duringas a result of a lower number of options being exercised. Cash used for financing activities in fiscal 2003. Net cash used in investing activities for fiscal 20022004 increased from the cash used in fiscal 2001 of $26.4 million primarily due to increased purchases of short-term investments because of lower treasury stock purchases.
Cash provided by financing activities in fiscal 2003 of $117.0 million increased from cash used in fiscal 2002 of $223.3 million. During fiscal 2003, more employees exercised their stock options due to higher stock prices. In fiscal 2003, the net result of exercised options and stock repurchases was an inflow of $128.6 million due to the rise in stock price and lower stock repurchases as we were targeting higher cash levels. Cash used for financing activities for fiscal 2002 decreased from cash used in fiscal 2001 of $409.6 million primarily due to stock repurchase activities.repurchases of stock. Cash used for stock repurchases induring fiscal 2002 decreased2004 increased from fiscal 2003 due to a lowerhigher average cost per share, cost.a higher number of shares being repurchased and remaining prepayments related to stock repurchase agreements (see the section titled "Stock Repurchase Program I—On-Going Dilution").
We have paiddiscontinued our quarterly cash dividends on our common stock each quarter sincedividend after the secondpayment of the dividend for the first quarter of 1988. Adobe's Board of Directors declared afiscal 2005. We intend to use the cash previously used to pay the quarterly dividend onfor our commonongoing stock of $0.0125 per common share for each of the four quarters in fiscal 2003 and 2002.repurchase programs. Under the terms of our lease agreements for our San Jose headquarters, we are not prohibited from paying cash dividends unless an event of default occurs. The declaration of future dividends, whether in cash or in-kind, is within the discretion of Adobe's Board of Directors and will depend on business conditions, our results of operations and financial condition, and other factors.
We expect to continue our investing activities, including investments in short-term and long-term investments and purchases of computer systems for research and development, sales and marketing, product support, and administrative staff. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase programs and strategically acquire software companies, products or technologies that are complementary to our business.
Adobe uses highly regardedprofessional investment management firms to manage most of our invested cash. The total return on invested balances in fiscal 2003 was 3.45%, exceeding the industry standard benchmarks established for our investment management firms. External investment firms actively managed, on average, 88% of Adobe's invested balances during fiscal 2005. Within the year. TheU.S., the fixed income portfolio is primarily invested in municipal bonds withinbonds. Outside of the U.S., our fixed income portfolio is primarily invested in U.S. Treasury notes and inother sovereign obligations, and highly rated corporate and sovereign obligations outside of the U.S.notes. The balance of the fixed income portfolio is managed internally and invested primarily in money market funds for working capital purposes. All investments are made according to guidelines and within compliance of policies approved by the Board of Directors.
During fiscal 2005, we completed our evaluation of the repatriation provisions of the AJCA and repatriated $558.3 million of certain foreign earnings. The effect of the repatriation was to increase liquidity in the United States with a corresponding reduction in liquidity in foreign subsidiaries. We expect
that our foreign subsidiaries will have sufficient positive cash flow from operations to meet ongoing liquidity needs over the next 12 months. Further information regarding the tax effects of the AJCA can be found in Note 8 of our Notes to Consolidated Financial Statements.
Our existing cash, cash equivalents and investment balances may decline during fiscal 20042006 in the event of furthera weakening of the economy or changes in our planned cash outlay. However, based on our current business plan and revenue prospects, we believe that our existing balances together with our anticipated cash flows from operations will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks detailed in the section "Factors That May Affect Future Performance.entitled "Business—Risk Factors." Also, while we currently have no committed lines of credit, we believe
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that our banking relationships and good credit should afford us the opportunity to raise sufficient debt in the bank or public market, if required.
Acquisition of Macromedia
On December 3, 2005, we completed the acquisition of Macromedia, Inc. for approximately $3.4 billion. Under the terms of the agreement, which was approved by the boards of directors and the stockholders of both companies, Macromedia stockholders received, at a fixed exchange ratio, 1.38 shares of Adobe common stock for every share of Macromedia common stock in a tax-free exchange. This fixed exchange ratio gives effect to the two-for-one stock split in the form of a stock dividend paid on May 23, 2005 to the stockholders of Adobe. We expect to incur significant incremental costs, such as direct costs related to the acquisition and costs associated with restructuring our operations. We believe that our existing cash and cash equivalents, short-term investments and cash generated from operations will be sufficient to meet these cash outlays.
Stock Repurchase Program I—On-going Dilution Coverage
To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuance primarily from employee stock plans,issuances, we have historically repurchasedrepurchase shares in the open market sold put warrants and purchased call options.from time to time enter into structured stock repurchase agreements with third parties.
Authorization to repurchase shares to cover on-going dilution is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances and is subject to business conditions and cash flow requirements as determined by our Board of Directors from time to time. Refer to Part II, Item 5(c) in this report for share repurchases during the quarter ended December 2, 2005.
InDuring fiscal 2003,2005, we did not sell any put warrants. In fiscal 2002 and 2001,entered into several structured stock repurchase agreements with large financial institutions. Under these agreements, we sold approximately 7.5 million and 5.6 million put warrants, respectively. Each put warrant entitledprovided the holderfinancial institutions with up-front payments totaling $600.0 million. The financial institutions agreed to sell one sharedeliver to us, at certain intervals during the contract term, a certain number of Adobe's common stock to Adobe atour shares based on the volume weighted average price during such intervals less a specified pricediscount. Upon payment, the $600.0 million was classified as treasury stock on our balance sheet. As of December 2, 2005, approximately $154.9 million of the up-front payments remained under the agreements which expired on December 22, 2005.
On April 17, 2005, the Board of Directors approved the use of $1.0 billion for cash or stock at Adobe's option.repurchase commencing upon the close of the Macromedia acquisition. At November 28, 2003, no put warrants were outstanding.
In fiscal 2003, we did not purchase any call options. In fiscal 2002 and 2001, we purchased call options that entitled us to buy 4.9 million and 3.9 million shares, respectively,the beginning of our commonfiscal 2006, we entered into additional structured stock repurchase agreements with large financial institutions. Under these agreements, we provided the financial institutions with up-front payments totaling $500.0 million. The financial institutions agreed to deliver to us, at certain intervals during the contract term, a certain number of shares based on the volume weighted average price during such intervals less a specified discount. The $500.0 million will be classified as treasury stock on certain dates at specified prices. At November 28, 2003, no call options were outstanding.our balance sheet.
Stock Repurchase Program II—Additional Authorization above Dilution Coverage
In April 1999, the Board authorized a 5.0 million share repurchase program, which allowed us to purchase shares in the open market and enter into contracts to repurchase shares during future quarters by selling put warrants and buying call options. This program expired in fiscal 2001.
In March 2001, our Board of Directors authorized a program to purchase up to an additional 5.0 million shares of our common stock over a two-year period, subject to certain business and cash flow requirements. The program expired on March 2, 2003.
On September 25, 2002, our Board of Directors authorized a program to purchase up to an additional 5.010.0 million shares of our common stock over a three-year period, subject to certain business and cash flow requirements. We have not made any purchases under this 10.0 million share repurchase program. The authorization for this program will expireexpired in September 2005.
The tables below represent our authorized stock repurchase plans and summary of stock repurchases as of November 28, 2003.
Authorized Stock Repurchase Plans as of November 28, 2003 (in thousands)
| Board Approval Date | Expiration Date | Authorized Shares | Repurchases To Date | Authorization Expired | Remaining Authorization | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| December 1997 | N/A | Ongoing dilution | 47,319 | N/A | 23,526 | (1) | |||||
| April 1999 | April 2001 | 5,000 | 4,687 | 313 | — | ||||||
| March 2001 | March 2003 | 5,000 | 2,014 | 2,986 | — | ||||||
| September 2002 | September 2005 | 5,000 | — | — | 5,000 |
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Summary of Stock Repurchases for fiscal years2005, 2004 and 2003 2002 and 2001
(in thousands, except average amounts)
| | | 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Repurchases Under the Plan | |||||||||||||||||||||||||||||||||||||||
| Board Approval Date | Repurchases Under the Plan | 2003 | Average | 2002 | Average | 2001 | Average | Shares | Average | Shares | Average | Shares | Average | |||||||||||||||||||||||||||
| December 1997 | From employees(1) Open market Option exercises(2) | 18 1,185 1,584 | $ | 34.99 32.96 28.47 | 83 — 8,517 | $ | 35.55 — 29.60 | 733 452 4,726 | $ | 42.01 35.64 57.78 | From employees(1) | 7 | $ | 29.16 | 10 | $ | 25.65 | 36 | $ | 17.50 | ||||||||||||||||||||
April 1999 | Open market Option exercises(2) | — — | — — | — — | — — | — 4,687 | — 35.24 | |||||||||||||||||||||||||||||||||
March 2001 | Open market Option exercises(2) | — — | — — | 1,899 115 | 18.40 28.58 | — — | — — | |||||||||||||||||||||||||||||||||
March 2001 | Open market Option exercises(2) | — — | — — | — — | — — | — — | ||||||||||||||||||||||||||||||||||
| Open market | — | — | 12,414 | 20.82 | 2,370 | 16.48 | ||||||||||||||||||||||||||||||||||
| Option exercises(2) | — | — | — | — | 3,168 | 14.23 | ||||||||||||||||||||||||||||||||||
| Structured repurchases(3) | 18,708 | 30.61 | 9,532 | 23.33 | — | — | ||||||||||||||||||||||||||||||||||
| Total shares | 2,787 | $ | 30.42 | 10,614 | $ | 27.63 | 10,598 | $ | 45.77 | 18,715 | $ | 30.61 | 21,956 | $ | 21.91 | 5,574 | $ | 15.21 | ||||||||||||||||||||||
| Total cost | $ | 84,777 | $ | 293,241 | $ | 485,115 | $ | 572,930 | $ | 481,075 | $ | 84,777 | ||||||||||||||||||||||||||||
| Shares used in computing diluted income per share | 241,450 | 243,119 | 249,145 | |||||||||||||||||||||||||||||||||||||
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Our principal commitments as of November 28, 2003,December 2, 2005, consist of obligations under operating leases, real estate financing agreements, royalty agreements and various service agreements. We expect to fulfill all of the following commitments from our working capital.
Lease Commitments
WeThe two lease certain of our facilities and some of our equipment under noncancelable operating lease arrangements that expire at various dates through 2091. Rent expense, net of sublease income, for these leases aggregated $32.4 million, $26.6 million and $22.0 million during fiscal 2003, 2002 and 2001, respectively.
In September 2001, we entered into a real estate development agreement for the construction of an additional office building for our corporate headquartersagreements discussed in downtown San Jose, California. Under the agreement, the lessor agreed to finance up to $117.0 million over a two-year period, toward the construction and associated costs of the building. The construction of the building was completed in December 2003. Due to lower than expected financing and construction costs, the final lease balance was lowered to $103.0 million. As part of the agreement, we entered into a five-year lease that began upon the completion of the building. At the end of the lease term, we can purchase the building for the lease balance, remarket or relinquish the building. If we choose to remarket or are required to do so upon relinquishing the building, we are bound to arrange the sale of the building to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the maximum recourse amount of $90.8 million ("residual value guarantee"). See Note 14 inof our Notes to Consolidated Financial Statements for further information.
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In August 1999, we entered into a five-year lease agreement for our other two office buildings that currently serve as our corporate headquarters in San Jose, California. Under the agreement, we have the option to purchase the buildings at any time during the lease term for the lease balance, which is approximately $142.5 million. We are in the process of evaluating alternative financing methods at expiration of the lease in fiscal 2004 and believe that several suitable financing options will be available to us. At the end of the lease term, we can purchase the buildings for the lease balance, remarket or relinquish the buildings. If we choose to remarket or are required to do so upon relinquishing the buildings, we are bound to arrange the sale of the buildings to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the maximum recourse amount of $132.6 million ("residual value guarantee"). For further information, see Note 14 in our Notes to Consolidated Financial Statements.
The two lease agreements discussed above are subject to standard financial covenants. The agreements limit the amount of indebtedness we can incur. A leverage covenant requires us to keep our debt to EBITDA ratio less than 2.5:1.0. As of November 28, 2003,December 2, 2005 we were in compliance with all of our debt to EBITDA ratio was 0.53:1.0, well within the limit. We also have a liquidity covenant which requires us to maintain a quick ratio equal to or greater than 1.0. As of November 28, 2003, our quick ratio was 2.2, well above the minimum.financial covenants. We expect to remain within compliance in the next 12 months. We are comfortable with these limitations and believe they will not impact our cashcredit or creditcash in the coming year or restrict our ability to execute our business plan. See Note 14 of our Notes to Consolidated Financial Statements for further information regarding our lease commitments.
The following table summarizes our contractual commitments as of November 28, 2003:December 2, 2005:
| | Total | Less than 1 year | 1-3 years | 3-5 years | Over 5 years | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Non-cancelable operating leases, net of sublease income | $ | 83.9 | $ | 23.6 | $ | 25.9 | $ | 16.3 | $ | 18.1 | |||||
| | Total | Less than 1 year | 1-3 years | 3-5 years | Over 5 years | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Non-cancelable operating leases, net of sublease income | $ | 160.4 | $ | 29.9 | $ | 44.9 | $ | 27.2 | $ | 58.4 | |||||
Indemnifications
In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
We have commitments to make certain milestone and/or retention payments typically entered into in conjunction with various acquisitions, for which we have made accruals in our consolidated financial statements. In connection with our purchases of technology assets during fiscal 2003, we entered into employee retention agreements totaling $2.2 million. We are required to make payments upon satisfaction of certain conditions inTo the agreements.
Asextent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
As part of our limited partnership interests in Adobe Ventures, we have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request
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in such capacity provided that Granite Ventures acts in good faith on behalf of the partnerships. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote.
Royalties
We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue.revenue and are not included in the table above. Royalty expense, which was recorded under our cost of products revenue on our consolidated statements of income, was approximately $14.5$17.8 million, $14.4$15.9 million and $14.1$14.5 million in fiscal 2005, 2004 and 2003, 2002 and 2001, respectively.
Other Information
Consistent with Section 10A(i)(2) Certain royalty commitments have minimum commitment obligations, however, as of the Securities Exchange Act of 1934 as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for listing the audit and non-audit services pre-approved in the fourth quarter of 2003 by our Audit Committee to be performed by KPMG LLP, our external auditor. Each of the permitted non-audit services has been pre-approved by the Audit Committee or the Audit Committee's Chairman pursuant to delegated authority by the Audit Committee, other than de minimus non-audit services for which the pre-approval requirements are waived in accordance with the rules and regulations of the SEC. During the fourth quarter of 2004, the Audit Committee pre-approved the following non-audit services anticipated to be performed by KPMG LLP: 1) fiscal 2003 tax return services and 2) general tax consulting services.
December 2, 2005 all such obligations were immaterial.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND FINANCIAL INSTRUMENTS
All market risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Hedging Instruments
We transact business in foreign countries, in U.S. dollars and in various foreign currencies. In Europe and Japan, those transactions that are denominated in euro or yen subject us to exposure from movements in foreign currency exchange rates. This exposure is primarily related to yen-denominated product and support revenue in Japan and euro-denominated product and support revenue in certain European countries. In fiscal 2005, 2004 and 2003, and 2002, our revenue exposures were 21.326.4 billion yen, 24.1 billion yen and 20.521.3 billion yen, respectively. In fiscal 2005, 2004 and 2003, and 2002, our revenue exposures were 411.4 million euros, 375.4 million euros and 274.0 million euros, and 288.5 million euros, respectively.
In addition we also have long term investment exposures consisting of the capitalization and retained earnings in our non-USD functional foreign subsidiaries. For the fiscal years ending November 28, 2003 and November 29, 2002 this long term investment exposure totaled a notional equivalent of $30.8 million and $33.9 million, respectively. At this time we do not hedge these long term investment exposures.
Our Japanese operating expenses are in yen and our European operating expenses are primarily in euro, which mitigates a portion of the exposure related to yen and euro denominated product revenue. In addition, we hedge firmly committed transactions using forward contracts. These contracts do subject us to risk of accounting gains and losses; however, the gains and losses on these contracts largely offset gains and losses on the assets, liabilities and transactions being hedged. We also hedge a percentage of forecasted international revenue with forward and purchased option contracts. Our revenue hedging policy is designedintended to reduce the negative impact on our forecasted revenue due to foreign currency exchange rate movements. At November 28, 2003,December 2, 2005, total outstanding contracts were $339.3 million which included the
notional equivalent of $191.5$133.0 million in foreign currency forward exchange contracts which hedged our balance sheet exposures and purchasedthe notional equivalent of $206.3 million in put option contracts with a notional value of $112.4 million.which hedged our forecasted revenue. As of November 28, 2003,December 2, 2005, all contracts were set to expire at various times through April 2004.2006. The bank counterparties in these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk we only contract with counterparties with specific minimum rating requirements. In addition, our hedging policy establishes maximum limits for each counterparty.
In addition we also have long term investment exposures consisting of the capitalization and retained earnings in our non-USD functional currency foreign subsidiaries. For the fiscal years ending December 2, 2005 and December 3, 2004 this long term investment exposure totaled a notional equivalent of $56.7 million and $40.1 million, respectively. At this time we do not hedge these long term investment exposures.
Economic Hedging—Hedges of Forecasted Transactions
We use option and forward foreign exchange contracts to hedge certain operational ("cash flow") exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. Such cash flow exposures result from portions of our forecasted revenues denominated in currencies other than the U.S. dollar, primarily the Japanese yen and the euro. We enter into these foreign exchange contracts to hedge forecasted product licensing revenue in the normal course of business, and accordingly, they are not speculative in nature.
We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss), until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to interest and other income (loss) on the consolidated statement of income at that time. For the fiscal year ended November 28, 2003,December 2, 2005, there were no such net gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur.
The critical terms of the cash flow hedging instruments are the same as the underlying forecasted transactions. The changes in fair value of the derivatives are intended to offset changes in the expected
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cash flows from the forecasted transactions. We record any ineffective portion of the hedging instruments in other income (loss) on the consolidated statement of income. The time value of purchased derivative instruments is deemed to be ineffective and is recorded in other income (loss) over the life of the contract.
See also Note 15 in our Notes to Consolidated Financial Statements.
Balance Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities
We hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as other income (loss). These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At November 28, 2003,December 2, 2005, the outstanding balance sheet hedging derivatives had maturities of 90150 days or less.
A sensitivity analysis was performed on all of our foreign exchange derivatives as of November 28, 2003.December 2, 2005. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value resulting from a 10% and 15% shift in the value of exchange rates relative to the U.S. dollar. For option contracts, the Black-Scholes equation model was used. For forward contracts, duration modeling was used where hypothetical changes are made to the spot rates of the currency. A 10% and 15% increase in the value of the U.S. dollar (and a corresponding decrease in the value of the hedged foreign currency asset) would lead to an increase in the fair value of our financial hedging instruments by $21.3$26.2 million and $34.0$39.9 million, respectively. Conversely, a 10% and 15% decrease in the value of the U.S. dollar would result in a decrease in the fair value of these financial instruments by $16.3$16.9 million and $24.7$22.1 million, respectively.
We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates.
As a general rule, we do not use financial instruments to hedge local currency denominated operating expenses in countries where a natural hedge exists. For example, in many countries revenue from the local currency product licenses substantially offsets the local currency denominated operating expenses. We assess the need to utilize financial instruments to hedge currency exposures, primarily related to operating expenses, on an ongoing basis.
We regularly review our hedging program and may as part of this review determine at any time to change our hedging program.
See also Note 15 in our Notes to Consolidated Financial Statements.
Equity Investments
We are exposed to equity price risk on our portfolio of marketable equity securities. As of November 28, 2003,December 2, 2005, our total equity holdings in publicly traded companies were valued at $7.2$1.8 million compared to $14.1$2.8 million at November 29, 2002,December 3, 2004, a decrease of 49%34%. The decrease was due to sales of $4.0$1.2 million and $0.6 million write-downs due to an other-than-temporary decline in value of $4.0 million, which were partiallyour marketable equity securities offset by a $1.1 millionan increase of $0.8 in market value adjustment.adjustments. We believe that it is reasonably possible that the fair values of these securities could adversely change in the near term. We have a policy in place to review our equity holdings on a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing each company's cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership. If we believe that an other-than-temporary decline in value exists in one of our marketable equity
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securities, it is our policy to write down these equity investments to the market value and record the related write-down in our consolidated statements of income.
The following table represents the potential decrease in fair values of our marketable equity securities that are sensitive to changes in the stock market. Fair value deteriorations of 50%, 35%, and 15% were selected based on the probability of their occurrence.
| | 50% | 35% | 15% | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Marketable equity securities | $ | (3.6 | ) | $ | (2.5 | ) | $ | (1.1 | ) | |
| | 50% | 35% | 15% | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Marketable equity securities | $ | (0.9 | ) | $ | (0.6 | ) | $ | (0.3 | ) | |
Fixed Income Investments
At November 28, 2003,December 2, 2005, we had an investment portfolio of fixed income securities, including those classified as cash equivalents, of $1,069.0$1,657.3 million compared to $581.7$1,272.8 million at November 29, 2002,December 3, 2004, an increase of 84%30%. This increase was primarily due to strong operational cash flow, proceeds from stock option exercises and lower levels of stock repurchases. These securities are subject to interest rate fluctuations. Changes in interest rates could adversely affect the market value of our fixed income investments. The table below separates the remaining maturities of our fixed income securities into segments, based on stated maturities, to show the approximate exposure to interest rates. A significant proportion of securities classified as "due after three years," based on the stated maturity, have structural features that allow us to sell the securities, at par, in less than three years.
| Less than one year | $ | 517.8 | |
| One year to two years | 322.0 | ||
| Greater than two years | 229.2 | ||
| Total | $ | 1,069.0 | |
| Due within one year | $ | 818.6 | |
| Due within two years | 315.3 | ||
| Due within three years | 114.1 | ||
| Due after three years | 409.3 | ||
| Total | $ | 1,657.3 | |
A sensitivity analysis was performed on our investment portfolio as of November 28, 2003.December 2, 2005. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value changes that would result from a parallel shift in the yield curve of plus 50, 100, or 150 basis points over six-month and twelve-month time horizons. The following table represents the potential decrease to the value of our fixed income securities given a negative shift in the yield curve used in our sensitivity analysis.
| | 0.5% | 1.0% | 1.5% | 0.5% | 1.0% | 1.5% | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 6 month horizon | $ | (5.0 | ) | $ | (9.9 | ) | $ | (14.5 | ) | $ | (3.7 | ) | $ | (7.2 | ) | $ | (10.9 | ) | ||
| 12 month horizon | $ | (4.2 | ) | $ | (8.4 | ) | $ | (13.9 | ) | $ | (1.3 | ) | $ | (2.5 | ) | $ | (3.8 | ) | ||
We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines for our fixed income portfolios. AtOur investment policy limits the present time, the maximum weighted average duration of all portfolios is limitedinvested funds to 2.5 years. The guidelines also establish credit quality standards, limits on exposure to any one security issue, limits on exposure to any one issuer and limits on exposure to the type of instrument. Due to limited duration and credit risk criteria established in our guidelines we do not expect the exposure to interest rate risk and credit risk to be material.
Interest Rate Hedging Instruments
We are exposed to interest rate risk on operating lease obligations that are tied to short-term interest rates (LIBOR). While the exposure of our fixed income portfolio to similar short-term interest rates may naturally offset some of the risk, in general as short-term interest rates rise, it may negatively impact our operating income. It is our strategy to hedge a portion of that risk. Our policy permits us to hedge this interest rate risk using swap agreements. The swap agreements exchange variable interest rate payments for fixed interest rate payments with high quality counterparties. Our swaps are designated as cash flow hedges under SFAS No. 133 because they hedge against changes in the amount of future cash flows. The critical terms of the cash flow hedging instruments are the same as the underlying lease obligation, so the
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change in fair value of the swaps is recognized in accumulated other comprehensive income. If, for some reason, the terms of the hedge no longer matched the underlying obligation, the change in value of the ineffective portion would be recognized in other income (loss) on the consolidated statement of income.
Our swaps mature at various dates through the third quarter of fiscal 2004, consistent with the expiration of the underlying lease obligations. The total amount of lease obligations subject to interest rate risk is $245.5 million. We have hedged $121.8 million using interest rate swaps.
A sensitivity analysis was performed on our interest rate hedges as of November 28, 2003. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value changes that would result from a parallel shift in the yield curve of minus 50, 100, or 150 basis points over a six-month time horizon. The following table represents the potential decrease to the value of our interest rate hedges given a negative shift in the yield curve used in our sensitivity analysis.
| | 0.5% | 1.0% | 1.5% | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 6 month horizon | $ | (0.1 | ) | $ | (0.2 | ) | $ | (0.2 | ) | |
See also Note 15 in our Notes to Consolidated Financial Statements.
Privately Held Investments
We have direct investments, as well as indirect investments through Adobe Ventures, in several privately held companies, many of which can still be considered in the start-up or development stages. These investments are inherently risky, as the technologies or products these companies have under development are typically in the early stages and may never materialize, and we could lose a substantial part of our initial investment in these companies.
It is our policy to review privately-held investments on a regular basis to evaluate the carrying amount and economic viability of these companies. This policy includes, but is not limited to, reviewing each of the companies' cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes and competition. The evaluation process is based on information that we request from these privately-held companies. This information is not subject to the same disclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies.
See also Note 1 in our Notes to Consolidated Financial Statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements required by this item are submitted as a separate section of this Form 10-K. See Item 15(a)15 (a)(1) for a listing of financial statements provided in the section titled "Financial Statements."
The following tables (presented in thousands, except per share amounts) set forth supplementary data for each of the quarters (unaudited) in the two-year period ended November 28, 2003.December 2, 2005. The share and per share data below have been adjusted to give effect to our stock split as of May 23, 2005.
| | 2003 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Quarter Ended | | |||||||||||||
| | Year Ended November 28 | ||||||||||||||
| | February 28 | May 30 | August 29 | November 28 | |||||||||||
| Revenue | $ | 296,895 | $ | 320,146 | $ | 319,122 | $ | 358,586 | $ | 1,294,749 | |||||
| Gross profit | 274,533 | 296,790 | 297,045 | 333,359 | 1,201,727 | ||||||||||
| Income before income taxes | 77,465 | 91,780 | 92,177 | 119,070 | 380,492 | ||||||||||
| Net income(1) | 54,225 | 64,246 | 64,524 | 83,349 | 266,344 | ||||||||||
| Basic net income per share(1) | 0.23 | 0.28 | 0.28 | 0.35 | 1.14 | ||||||||||
| Shares used in computing basic net income per share | 231,084 | 232,124 | 233,364 | 235,899 | 234,246 | ||||||||||
| Diluted net income per share | 0.23 | 0.27 | 0.27 | 0.34 | 1.10 | ||||||||||
| Shares used in computing diluted net income per share | 235,294 | 239,237 | 240,495 | 245,512 | 241,450 | ||||||||||
| | 2002 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Quarter Ended | | |||||||||||||
| | Year Ended November 29 | ||||||||||||||
| | March 1 | May 31 | August 30 | November 29 | |||||||||||
| Revenue | $ | 267,896 | $ | 317,359 | $ | 284,879 | $ | 294,654 | $ | 1,164,788 | |||||
| Gross profit | 246,899 | 292,226 | 253,243 | 268,132 | 1,060,500 | ||||||||||
| Income before income taxes | 73,247 | 79,855 | 69,413 | 62,174 | 284,689 | ||||||||||
| Net income(2) | 49,808 | 54,301 | 47,201 | 40,089 | 191,399 | ||||||||||
| Basic net income per share(2) | 0.21 | 0.23 | 0.20 | 0.17 | 0.81 | ||||||||||
| Shares used in computing basic net income per share | 236,581 | 238,202 | 238,010 | 233,838 | 236,834 | ||||||||||
| Diluted net income per share | 0.20 | 0.22 | 0.19 | 0.17 | 0.79 | ||||||||||
| Shares used in computing diluted net income per share | 245,245 | 247,687 | 243,375 | 238,407 | 243,119 | ||||||||||
| | 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Quarter Ended | | |||||||||||||
| | Year Ended December 2 | ||||||||||||||
| | March 4 | June 3 | September 2 | December 2 | |||||||||||
| Revenue | $ | 472,882 | $ | 496,029 | $ | 487,039 | $ | 510,371 | $ | 1,966,321 | |||||
| Gross profit | 445,913 | 468,595 | 459,559 | 479,676 | 1,853,743 | ||||||||||
| Income before income taxes | 176,785 | 187,808 | 193,964 | 207,219 | 765,776 | ||||||||||
| Net income(1) | 151,894 | 149,778 | 144,916 | 156,251 | 602,839 | ||||||||||
| Basic net income per share(1) | 0.31 | 0.31 | 0.29 | 0.32 | 1.23 | ||||||||||
| Shares used in computing basic net income per share | 486,260 | 488,765 | 491,710 | 492,517 | 489,921 | ||||||||||
| Diluted net income per share | 0.30 | 0.29 | 0.29 | 0.31 | 1.19 | ||||||||||
| Shares used in computing diluted net income per share | 506,182 | 508,156 | 507,821 | 508,562 | 508,070 | ||||||||||
| | 2004 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Quarter Ended | | |||||||||||||
| | Year Ended December 3 | ||||||||||||||
| | March 5 | June 4 | September 3 | December 3 | |||||||||||
| Revenue | $ | 423,281 | $ | 410,085 | $ | 403,713 | $ | 429,502 | $ | 1,666,581 | |||||
| Gross profit | 399,099 | 382,830 | 380,144 | 400,130 | 1,562,203 | ||||||||||
| Income before income taxes | 166,263 | 147,839 | 141,163 | 153,380 | 608,645 | ||||||||||
| Net income(2) | 123,035 | 109,401 | 104,461 | 113,501 | 450,398 | ||||||||||
| Basic net income per share(2) | 0.26 | 0.23 | 0.22 | 0.24 | 0.94 | ||||||||||
| Shares used in computing basic net income per share | 476,768 | 477,238 | 476,942 | 479,740 | 477,658 | ||||||||||
| Diluted net income per share | 0.25 | 0.22 | 0.21 | 0.23 | 0.91 | ||||||||||
| Shares used in computing diluted net income per share | 492,174 | 493,946 | 494,226 | 500,620 | 495,626 | ||||||||||
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includes investment lossgain of $3.8 million, restructuring and other charges of $10.5 million, and amortization and impairment of goodwill and purchased and other intangibles of $10.4$4.2 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
Based on their evaluation as of November 28, 2003,December 2, 2005, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by us in this annual reportAnnual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and instructions for Form 10-K.
There were no changes in our internal controls over financial reporting during the quarter ended November 28, 2003 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Adobe have been detected.
(b) Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 2, 2005. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Our management has concluded that, as of December 2, 2005, our internal control over financial reporting is effective based on these criteria. Our independent registered public accounting firm, KPMG LLP, have issued an audit report on our assessment of our internal control over financial reporting, which is included herein.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the quarter ended December 2, 2005 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
(d) Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Adobe Systems Incorporated:
We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting appearing under Item 9A(b), that Adobe Systems Incorporated maintained effective internal control over financial reporting as of December 2, 2005, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management of Adobe Systems Incorporated is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the internal control over financial reporting of Adobe Systems Incorporated based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Adobe Systems Incorporated maintained effective internal control over financial reporting as of December 2, 2005, is fairly stated, in all material respects, based on criteria established inInternal Control—Integrated Framework issued by COSO. Also, in our opinion, Adobe Systems Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 2, 2005, based on the criteria established inInternal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of December 2, 2005 and December 3, 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 2, 2005, and our report dated February 8, 2006 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Mountain View, California
February 8, 2006
Attached as Exhibit 100 to this Annual Report on Form 10-K are the following materials, formatted in Extensible Business Reporting Language ("XBRL"): (i) the Consolidated Balance Sheets at December 2, 2005 and December 3, 2004, (ii) the Consolidated Statements of Income for the years ended December 2, 2005, December 3, 2004 and November 28, 2003 and (iii) the Consolidated Statements of Stockholders' Equity for the years ended December 2, 2005, December 3, 2004 and November 28, 2003 and (iv) the
Consolidated Statements of Cash Flows for the years ended December 2, 2005, December 3, 2004 and November 28, 2003. The financial information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of the Registrant. The purpose of submitting these XBRL documents is to test the related format and technology and, as a result, investors should continue to rely on the official filed version of the furnished documents and not rely on this information in making investment decisions.
The information in Exhibit 100 attached hereto shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of any general incorporation language in such filing.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding our Directors, Code of Ethics and compliance with Section 16(a) of the Securities Exchange Act of 1934, we direct you to the sections entitled "Proposal 1—Election of Directors," "Code of Ethics" and "Section 16(a) Beneficial Ownership Reporting Compliance," respectively, in the Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on AprilMarch 28, 2004.2006. Information regarding our Executive Officers is contained in this report in Part I, Item 1 titled "Business."
We are incorporating the information contained in those sections of our Proxy Statement here by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information regarding our Executive Compensation, we direct you to the section entitled "Executive Compensation" in the Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on AprilMarch 28, 2004.2006.
We are incorporating the information contained in that section of our Proxy Statement here by reference.
62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
You will find this information in the section captioned "Security Ownership of Certain Beneficial Owners and Management," which will appear in the Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on AprilMarch 28, 2004.2006. We are incorporating the information contained in that section here by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
You will find this information in the section captioned "Certain Relationships and Related Transactions," which will appear in the Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on AprilMarch 28, 2004.2006. We are incorporating the information contained in that section here by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
You will find this information in the section captioned "Principal Accounting Fees and Services," which will appear in the Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on AprilMarch 28, 2004.2006. We are incorporating the information contained in that section here by reference.
ItemITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-KEXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| | | | | Page | |
|---|---|---|---|---|---|
| (a) | Documents filed as part of this report | ||||
1. | Financial statements | ||||
• | Independent Auditors' Report | 65 | |||
• | Consolidated Balance Sheets November 28, 2003 and November 29, 2002 | 66 | |||
• | Consolidated Statements of Income Years Ended November 28, 2003, November 29, 2002, and November 30, 2001 | 67 | |||
• | Consolidated Statements of Stockholders' Equity and Other Comprehensive Income Years Ended November 28, 2003, November 29, 2002, and November 30, 2001 | 68 | |||
• | Consolidated Statements of Cash Flows Years Ended November 28, 2003, November 29, 2002, and November 30, 2001 | 69 | |||
• | Notes to Consolidated Financial Statements | 70 | |||
2. | Financial statement schedule | ||||
• | Schedule II—Valuation and Qualifying Accounts | 103 | |||
3. | Exhibits | 107 | |||
The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report. | |||||
| | | | Page | |||
|---|---|---|---|---|---|---|
| 1. | Financial statements | |||||
• | Report of Independent Registered Public Accounting Firm | 69 | ||||
• | Consolidated Balance Sheets December 2, 2005 and December 3, 2004 | 70 | ||||
• | Consolidated Statements of Income Years Ended December 2, 2005, December 3, 2004 and November 28, 2003 | 71 | ||||
• | Consolidated Statements of Stockholders' Equity Years Ended December 2, 2005, December 3, 2004 and November 28, 2003 | 72 | ||||
• | Consolidated Statements of Cash Flows Years Ended December 2, 2005, December 3, 2004 and November 28, 2003 | 73 | ||||
• | Notes to Consolidated Financial Statements | 74 | ||||
2. | Exhibits | 106 | ||||
(i) On September 10, 2003, AdobeThe exhibits listed in the accompanying Index to Exhibits are filed a report on Form 8-K under Item 12 announcing its financial results for the quarter ended August 29, 2003.or incorporated by reference as part of this report.
64
REPORT OF INDEPENDENT AUDITORS' REPORTREGISTERED PUBLIC ACCOUNTING FIRM
To theThe Board of Directors and Stockholders of
Adobe Systems Incorporated:
We have audited the accompanying consolidated financial statementsbalance sheets of Adobe Systems Incorporated and subsidiaries as listedof December 2, 2005 and December 3, 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the accompanying index.three-year period ended December 2, 2005. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule.statements. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management.management of Adobe Systems Incorporated. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (United States). 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 financial position of Adobe Systems Incorporated and subsidiaries as of November 28, 2003December 2, 2005 and November 29, 2002,December 3, 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended November 28, 2003,December 2, 2005, in conformity with accounting principlesU.S. generally accepted accounting principles.
We also have audited, in accordance with the United States of America. 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.
As discussed in Note 1standards of the Notes to Consolidated Financial Statements,Public Company Accounting Oversight Board (United States), the Company changed its methodeffectiveness of accounting for goodwillAdobe Systems Incorporated's internal control over financial reporting as of December 2, 2005, based on the criteria established in 2003.Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 8, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.
/s/KPMG LLP
Mountain View, CaliforniaDecember 9, 2003February 8, 2006
65
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| | | November 28, 2003 | November 29, 2002 | | December 2, 2005 | December 3, 2004 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | ASSETS | ASSETS | ||||||||||||||||
Current assets: | Current assets: | Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 189,917 | $ | 183,684 | Cash and cash equivalents | $ | 420,818 | $ | 259,061 | |||||||||
| Short-term investments | 906,616 | 434,053 | Short-term investments | 1,280,016 | 1,054,160 | |||||||||||||
| Trade receivables, net of allowances for doubtful accounts of $7,903 and $7,531, respectively | 146,311 | 116,506 | Trade receivables, net of allowances for doubtful accounts of $5,376 and $6,191, respectively | 173,245 | 141,945 | |||||||||||||
| Other receivables | 27,731 | 30,367 | Other receivables | 31,504 | 25,495 | |||||||||||||
| Deferred income taxes | 35,875 | 31,530 | Deferred income taxes | 58,710 | 51,751 | |||||||||||||
| Other current assets | 22,578 | 18,032 | Prepaid expenses and other assets | 44,285 | 18,617 | |||||||||||||
| Total current assets | 1,329,028 | 814,172 | Total current assets | 2,008,578 | 1,551,029 | |||||||||||||
| Property and equipment, net | Property and equipment, net | 77,007 | 71,090 | Property and equipment, net | 103,549 | 99,675 | ||||||||||||
| Goodwill | Goodwill | 95,971 | 82,746 | Goodwill | 118,683 | 110,287 | ||||||||||||
| Purchased and other intangibles, net | Purchased and other intangibles, net | 15,318 | 16,067 | Purchased and other intangibles, net | 16,477 | 15,513 | ||||||||||||
| Investment in lease receivable | Investment in lease receivable | 126,800 | 126,800 | |||||||||||||||
| Other assets | Other assets | 37,721 | 43,085 | Other assets | 66,228 | 55,328 | ||||||||||||
| Deferred income taxes | — | 24,450 | ||||||||||||||||
| $ | 1,555,045 | $ | 1,051,610 | $ | 2,440,315 | $ | 1,958,632 | |||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | Current liabilities: | Current liabilities: | ||||||||||||||||
| Trade and other payables | $ | 37,437 | $ | 37,765 | Trade and other payables | $ | 41,042 | $ | 43,192 | |||||||||
| Accrued expenses | 160,009 | 135,028 | Accrued expenses | 226,985 | 202,762 | |||||||||||||
| Income taxes payable | 193,484 | 173,311 | Income taxes payable | 154,529 | 145,913 | |||||||||||||
| Deferred revenue | 45,600 | 31,185 | Deferred revenue | 57,839 | 52,020 | |||||||||||||
| Total current liabilities | 436,530 | 377,289 | Total current liabilities | 480,395 | 443,887 | |||||||||||||
Deferred income taxes | 17,715 | — | ||||||||||||||||
Other long term liabilities: | Other long term liabilities: | |||||||||||||||||
| Deferred revenue | 9,731 | 7,521 | ||||||||||||||||
| Deferred income taxes | 78,800 | 78,909 | ||||||||||||||||
| Other liabilities | 7,063 | 4,838 | ||||||||||||||||
| Total liabilities | 575,989 | 535,155 | ||||||||||||||||
Commitments and contingencies | Commitments and contingencies | Commitments and contingencies | ||||||||||||||||
Stockholders' equity: | Stockholders' equity: | Stockholders' equity: | ||||||||||||||||
| Preferred stock, $0.0001 par value; 2,000 shares authorized; none issued | — | — | Preferred stock, $0.0001 par value; 2,000 shares authorized; none issued | — | — | |||||||||||||
| Common stock, $0.0001 par value; 900,000 shares authorized; 295,764 shares issued and outstanding in 2003 and 2002 | 29,576 | 29,576 | Common stock, $0.0001 par value; 900,000 shares authorized; 591,528 shares issued and outstanding, respectively | 29,600 | 29,576 | |||||||||||||
| Additional paid-in-capital | 874,126 | 710,273 | Additional paid-in-capital | 1,321,146 | 1,164,643 | |||||||||||||
| Retained earnings | 1,800,398 | 1,545,776 | Retained earnings | 2,838,566 | 2,238,807 | |||||||||||||
| Accumulated other comprehensive loss | (999 | ) | (3,950 | ) | Accumulated other comprehensive loss | (914 | ) | (2,289 | ) | |||||||||
| Treasury stock, at cost (57,464 and 63,809 shares in 2003 and 2002, respectively), net of re-issuances | (1,602,301 | ) | (1,607,354 | ) | Treasury stock, at cost (102,799 and 107,154 shares, respectively), net of re- issuances | (2,324,072 | ) | (2,007,260 | ) | |||||||||
| Stockholders' equity | 1,100,800 | 674,321 | Total stockholders' equity | 1,864,326 | 1,423,477 | |||||||||||||
| $ | 1,555,045 | $ | 1,051,610 | $ | 2,440,315 | $ | 1,958,632 | |||||||||||
See accompanying Notes to Consolidated Financial Statements.
66
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| | | Years Ended | | Years Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | November 28, 2003 | November 29, 2002 | November 30, 2001 | | December 2, 2005 | December 3, 2004 | November 28, 2003 | ||||||||||||||||
| Revenue: | Revenue: | Revenue: | ||||||||||||||||||||||
| Products | $ | 1,269,004 | $ | 1,153,169 | $ | 1,229,720 | Products | $ | 1,923,278 | $ | 1,633,959 | $ | 1,269,004 | |||||||||||
| Services and support | 25,745 | 11,619 | — | Services and support | 43,043 | 32,622 | 25,745 | |||||||||||||||||
| Total revenue | 1,294,749 | 1,164,788 | 1,229,720 | Total revenue | 1,966,321 | 1,666,581 | 1,294,749 | |||||||||||||||||
Costs of revenue: | Costs of revenue: | Costs of revenue: | ||||||||||||||||||||||
| Products | 79,902 | 96,853 | 81,451 | Products | 89,942 | 86,572 | 79,902 | |||||||||||||||||
| Services and support | 13,120 | 7,435 | — | Services and support | 22,636 | 17,806 | 13,120 | |||||||||||||||||
| Total cost of revenue | 93,022 | 104,288 | 81,451 | Total cost of revenue | 112,578 | 104,378 | 93,022 | |||||||||||||||||
Gross profit | Gross profit | 1,201,727 | 1,060,500 | 1,148,269 | Gross profit | 1,853,743 | 1,562,203 | 1,201,727 | ||||||||||||||||
Operating expenses: | Operating expenses: | Operating expenses: | ||||||||||||||||||||||
| Research and development | 276,980 | 246,082 | 224,122 | Research and development | 365,328 | 311,296 | 276,980 | |||||||||||||||||
| Sales and marketing | 423,417 | 380,367 | 403,720 | Sales and marketing | 593,323 | 521,143 | 423,417 | |||||||||||||||||
| General and administrative | 122,427 | 108,134 | 115,626 | General and administrative | 166,658 | 137,970 | 122,427 | |||||||||||||||||
| Restructuring and other charges | (544 | ) | 12,148 | 12,063 | Restructuring and other charges | — | — | (544 | ) | |||||||||||||||
| Acquired in-process research and development | — | 5,769 | — | |||||||||||||||||||||
| Amortization and impairment of goodwill and purchased and other intangibles | — | 20,973 | 14,281 | Total operating expenses | 1,125,309 | 970,409 | 822,280 | |||||||||||||||||
| Total operating expenses | 822,280 | 773,473 | 769,812 | |||||||||||||||||||||
| Operating income | Operating income | 379,447 | 287,027 | 378,457 | Operating income | 728,434 | 591,794 | 379,447 | ||||||||||||||||
| Non-operating income (loss): | ||||||||||||||||||||||||
| Non-operating income: | Non-operating income: | |||||||||||||||||||||||
| Investment loss, net | (12,875 | ) | (17,185 | ) | (93,414 | ) | Investment gain (loss), net | (1,301 | ) | 2,506 | (12,875 | ) | ||||||||||||
| Interest and other income | 13,920 | 14,847 | 21,888 | Interest and other income | 38,643 | 14,345 | 13,920 | |||||||||||||||||
| Total non-operating income (loss) | 1,045 | (2,338 | ) | (71,526 | ) | Total non-operating income | 37,342 | 16,851 | 1,045 | |||||||||||||||
| Income before income taxes | Income before income taxes | 380,492 | 284,689 | 306,931 | Income before income taxes | 765,776 | 608,645 | 380,492 | ||||||||||||||||
| Provision for income taxes | Provision for income taxes | 114,148 | 93,290 | 101,287 | Provision for income taxes | 162,937 | 158,247 | 114,148 | ||||||||||||||||
| Net income | Net income | $ | 266,344 | $ | 191,399 | $ | 205,644 | Net income | $ | 602,839 | $ | 450,398 | $ | 266,344 | ||||||||||
| Basic net income per share | Basic net income per share | $ | 1.14 | $ | 0.81 | $ | 0.86 | Basic net income per share | $ | 1.23 | $ | 0.94 | $ | 0.57 | ||||||||||
| Shares used in computing basic income per share | Shares used in computing basic income per share | 234,246 | 236,834 | 238,461 | Shares used in computing basic income per share | 489,921 | 477,658 | 468,492 | ||||||||||||||||
| Diluted net income per share | Diluted net income per share | $ | 1.10 | $ | 0.79 | $ | 0.83 | Diluted net income per share | $ | 1.19 | $ | 0.91 | $ | 0.55 | ||||||||||
| Shares used in computing diluted income per share | Shares used in computing diluted income per share | 241,450 | 243,119 | 249,145 | Shares used in computing diluted income per share | 508,070 | 495,626 | 482,900 | ||||||||||||||||
| Cash dividends declared per share | Cash dividends declared per share | $ | 0.00625 | $ | 0.025 | $ | 0.025 | |||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
67
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
| | | Common Stock | | | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | | | Common Stock | | | Accumulated Other Comprehensive (Loss) | Treasury Stock | | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Additional Paid-In Capital | Retained Earnings | | | Additional Paid-In Capital | Retained Earnings | | ||||||||||||||||||||||||||||||||||||||||
| | | Shares | Amount | Accumulated Other Comprehensive Income (Loss) | Total | | Shares | Amount | Accumulated Other Comprehensive (Loss) | Total | ||||||||||||||||||||||||||||||||||||||
| Balances at December 1, 2000 | 295,764 | $ | 29,576 | $ | 501,225 | $ | 1,172,504 | $ | (698 | ) | (54,818 | ) | $ | 752,544 | ||||||||||||||||||||||||||||||||||
| Balances at November 29, 2002 | Balances at November 29, 2002 | 591,528 | $ | 29,576 | $ | 710,273 | $ | 1,545,776 | $ | (3,950 | ) | (127,618 | ) | $ | 674,321 | |||||||||||||||||||||||||||||||||
| Comprehensive income: | Comprehensive income: | Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 205,644 | — | — | — | 205,644 | ||||||||||||||||||||||||||||||||||||||||
| Change in unrealized gain on available- for-sale securities, net of taxes | — | — | — | — | 2,928 | — | — | 2,928 | ||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | (894 | ) | — | — | (894 | ) | Net income | — | 266,344 | — | — | 266,344 | ||||||||||||||||||||||||||||||||
| Net gain in derivative instruments, net of taxes | — | — | — | — | 2,582 | — | — | 2,582 | Other comprehensive income, net of taxes | — | — | — | — | 2,951 | — | — | 2,951 | |||||||||||||||||||||||||||||||
| Total comprehensive income, net of taxes | Total comprehensive income, net of taxes | — | — | — | — | — | — | — | 210,260 | Total comprehensive income, net of taxes | 269,295 | |||||||||||||||||||||||||||||||||||||
| Tax benefit from employee stock option plans | Tax benefit from employee stock option plans | — | — | 45,692 | — | — | — | — | 45,692 | Tax benefit from employee stock option plans | — | — | 37,436 | — | — | — | — | 37,436 | ||||||||||||||||||||||||||||||
| Issuance of compensatory stock | Issuance of compensatory stock | — | — | 13,494 | — | — | 458 | 4,503 | 17,997 | Issuance of compensatory stock | 2,320 | 102 | 506 | 2,826 | ||||||||||||||||||||||||||||||||||
| Dividends declared | Dividends declared | — | — | — | (11,943 | ) | — | — | — | (11,943 | ) | Dividends declared | — | (11,722 | ) | — | — | — | (11,722 | ) | ||||||||||||||||||||||||||||
| Purchase of treasury stock | Purchase of treasury stock | — | — | — | — | — | (10,598 | ) | (485,115 | ) | (485,115 | ) | Purchase of treasury stock | — | — | — | — | — | (5,574 | ) | (84,777 | ) | (84,777 | ) | ||||||||||||||||||||||||
| Re-issuance of treasury stock under employee stock purchase and stock option plans | — | — | 35,399 | — | — | 5,213 | 52,138 | 87,537 | ||||||||||||||||||||||||||||||||||||||||
| Reissuance of treasury stock under employee stock purchase and stock option plans | Reissuance of treasury stock under employee stock purchase and stock option plans | 124,097 | 18,162 | 89,324 | 213,421 | |||||||||||||||||||||||||||||||||||||||||||
| Balances at November 30, 2001 | 295,764 | $ | 29,576 | $ | 595,810 | $ | 1,366,205 | $ | 3,918 | (59,745 | ) | $ | (1,378,537 | ) | $ | 616,972 | ||||||||||||||||||||||||||||||||
| Balances at November 28, 2003 | Balances at November 28, 2003 | 591,528 | $ | 29,576 | $ | 874,126 | $ | 1,800,398 | $ | (999 | ) | (114,928 | ) | $ | (1,602,301 | ) | $ | 1,100,800 | ||||||||||||||||||||||||||||||
| Comprehensive income: | Comprehensive income: | Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 191,399 | — | — | — | 191,399 | ||||||||||||||||||||||||||||||||||||||||
| Change in unrealized loss on available- for-sale securities, net of taxes | — | — | — | — | (4,664 | ) | — | — | (4,664 | ) | ||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | 1,307 | — | — | 1,307 | Net income | — | — | — | 450,398 | — | �� | — | — | 450,398 | ||||||||||||||||||||||||||||||
| Net loss in derivative instruments, net of taxes | — | — | — | — | (4,511 | ) | — | — | (4,511 | ) | Other comprehensive loss, net of taxes | — | — | — | — | (1,290 | ) | — | — | (1,290 | ) | |||||||||||||||||||||||||||
| Total comprehensive income, net of taxes | Total comprehensive income, net of taxes | — | — | — | — | — | — | — | 183,531 | Total comprehensive income, net of taxes | 449,108 | |||||||||||||||||||||||||||||||||||||
| Tax benefit from employee stock option plans | Tax benefit from employee stock option plans | — | — | 21,830 | — | — | — | — | 21,830 | Tax benefit from employee stock option plans | — | — | 97,794 | — | — | — | — | 97,794 | ||||||||||||||||||||||||||||||
| Issuance of compensatory stock | Issuance of compensatory stock | — | — | 5,489 | — | — | 132 | 1,297 | 6,786 | Issuance of compensatory stock | — | — | 225 | — | — | 20 | 115 | 340 | ||||||||||||||||||||||||||||||
| Dividends declared | Dividends declared | — | — | — | (11,828 | ) | — | — | — | (11,828 | ) | Dividends declared | — | — | — | (11,989 | ) | — | — | — | (11,989 | ) | ||||||||||||||||||||||||||
| Purchase of treasury stock | Purchase of treasury stock | — | — | — | — | — | (10,614 | ) | (293,241 | ) | (293,241 | ) | Purchase of treasury stock | — | — | — | — | — | (21,956 | ) | (608,681 | ) | (608,681 | ) | ||||||||||||||||||||||||
| Re-issuance of treasury stock under employee stock purchase and stock option plans | — | — | 36,578 | — | — | 4,604 | 45,281 | 81,859 | ||||||||||||||||||||||||||||||||||||||||
| Stock issued for acquisition | — | — | 50,566 | — | — | 1,814 | 17,846 | 68,412 | ||||||||||||||||||||||||||||||||||||||||
| Reissuance of treasury stock under employee stock purchase and stock option plans | Reissuance of treasury stock under employee stock purchase and stock option plans | — | — | 192,498 | — | — | 29,710 | 203,607 | 396,105 | |||||||||||||||||||||||||||||||||||||||
| Balances at November 29, 2002 | 295,764 | $ | 29,576 | $ | 710,273 | $ | 1,545,776 | $ | (3,950 | ) | (63,809 | ) | $ | (1,607,354 | ) | $ | 674,321 | |||||||||||||||||||||||||||||||
| Balances at December 3, 2004 | Balances at December 3, 2004 | 591,528 | $ | 29,576 | $ | 1,164,643 | $ | 2,238,807 | $ | (2,289 | ) | (107,154 | ) | $ | (2,007,260 | ) | $ | 1,423,477 | ||||||||||||||||||||||||||||||
| Comprehensive income: | Comprehensive income: | Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 266,344 | — | — | — | 266,344 | ||||||||||||||||||||||||||||||||||||||||
| Change in unrealized gain on available- for-sale securities, net of taxes | — | — | — | — | 5,249 | — | — | 5,249 | ||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | 4,471 | — | — | 4,471 | Net income | — | — | — | 602,839 | — | — | — | 602,839 | |||||||||||||||||||||||||||||||
| Net loss in derivative instruments, net of taxes | — | — | — | — | (6,769 | ) | — | — | (6,769 | ) | Other comprehensive income, net of taxes | — | — | — | — | 1,375 | — | — | 1,375 | |||||||||||||||||||||||||||||
| Total comprehensive income, net of taxes | Total comprehensive income, net of taxes | — | — | — | — | — | — | — | 269,295 | Total comprehensive income, net of taxes | 604,214 | |||||||||||||||||||||||||||||||||||||
| Tax benefit from employee stock option plans | Tax benefit from employee stock option plans | — | — | 37,436 | — | — | — | — | 37,436 | Tax benefit from employee stock option plans | — | — | 82,852 | — | — | — | — | 82,852 | ||||||||||||||||||||||||||||||
| Issuance of compensatory stock | Issuance of compensatory stock | — | — | 2,320 | — | — | 51 | 506 | 2,826 | Issuance of compensatory stock | 189 | — | — | 16 | 202 | 391 | ||||||||||||||||||||||||||||||||
| Dividends declared | Dividends declared | — | — | — | (11,722 | ) | — | — | — | (11,722 | ) | Dividends declared | — | — | — | (3,056 | ) | — | — | — | (3,056 | ) | ||||||||||||||||||||||||||
| Purchase of treasury stock | Purchase of treasury stock | — | — | — | — | — | (2,787 | ) | (84,777 | ) | (84,777 | ) | Purchase of treasury stock | — | — | — | — | — | (18,715 | ) | (600,099 | ) | (600,099 | ) | ||||||||||||||||||||||||
| Re-issuance of treasury stock under employee stock purchase and stock option plans | — | 124,097 | — | 9,081 | 89,324 | 213,421 | ||||||||||||||||||||||||||||||||||||||||||
| Reissuance of treasury stock under employee stock purchase and stock option plans | Reissuance of treasury stock under employee stock purchase and stock option plans | — | — | 73,462 | — | — | 23,054 | 283,085 | 356,547 | |||||||||||||||||||||||||||||||||||||||
| Stock dividend | Stock dividend | — | 24 | — | (24 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Balances at November 28, 2003 | 295,764 | $ | 29,576 | $ | 874,126 | $ | 1,800,398 | $ | (999 | ) | (57,464 | ) | $ | (1,602,301 | ) | $ | 1,100,800 | |||||||||||||||||||||||||||||||
| Balances at December 2, 2005 | Balances at December 2, 2005 | 591,528 | $ | 29,600 | $ | 1,321,146 | $ | 2,838,566 | $ | (914 | ) | (102,799 | ) | $ | (2,324,072 | ) | $ | 1,864,326 | ||||||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
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ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | Years Ended | | Years Ended | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | November 28, 2003 | November 29, 2002 | November 30, 2001 | | December 2, 2005 | December 3, 2004 | November 28, 2003 | ||||||||||||||||||||
| Cash flows from operating activities: | Cash flows from operating activities: | Cash flows from operating activities: | ||||||||||||||||||||||||||
| Net income | $ | 266,344 | $ | 191,399 | $ | 205,644 | ||||||||||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||||||
| Depreciation and amortization | 49,014 | 63,482 | 56,645 | |||||||||||||||||||||||||
| Stock compensation expense | 2,826 | 6,786 | 17,997 | Net income | $ | 602,839 | $ | 450,398 | $ | 266,344 | ||||||||||||||||||
| Deferred income taxes | 36,460 | (5,486 | ) | (17,600 | ) | Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||
| Provision for losses on receivables | 2,038 | 1,527 | 1,435 | Depreciation and amortization | 64,335 | 60,808 | 49,014 | |||||||||||||||||||||
| Tax benefit from employee stock option plans | 37,436 | 21,830 | 45,692 | Stock-based compensation expense | 391 | 340 | 2,826 | |||||||||||||||||||||
| Acquired in-process research and development | — | 410 | — | Deferred income taxes | (7,068 | ) | 46,270 | 36,460 | ||||||||||||||||||||
| Impairment of property, plant and equipment and goodwill | — | 13,175 | — | Provision for (recovery of) losses on receivables | 394 | (443 | ) | 2,038 | ||||||||||||||||||||
| Losses on equity and cost method investments | 11,981 | 13,122 | 59,873 | Tax benefit from employee stock option plans | 82,852 | 97,794 | 37,436 | |||||||||||||||||||||
| Gains on sales of equity securities | (3,090 | ) | (7,194 | ) | (20,054 | ) | Retirements of property and equipment | 1,093 | 804 | — | ||||||||||||||||||
| Loss on other-than-temporary declines of equity securities | 3,984 | 11,257 | 53,068 | Net (gains) losses on sales and impairments of investments | 1,322 | (2,506 | ) | 12,875 | ||||||||||||||||||||
| Non-cash restructuring and other charges | (544 | ) | — | — | Non-cash restructuring and other charges | — | — | (544 | ) | |||||||||||||||||||
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | |||||||||||||||||||||||||||
| Receivables | (29,148 | ) | 5,910 | 16,273 | Receivables | (36,091 | ) | 9,221 | (29,148 | ) | ||||||||||||||||||
| Other current assets | (2,055 | ) | 1,856 | (3,552 | ) | Other current assets | (20,181 | ) | 4,908 | (2,055 | ) | |||||||||||||||||
| Trade and other payables | (328 | ) | (2,277 | ) | (9,389 | ) | Trade and other payables | (2,456 | ) | 5,755 | (328 | ) | ||||||||||||||||
| Accrued expenses | 32,929 | (8,312 | ) | (61,083 | ) | Accrued expenses | 26,278 | 44,896 | �� | 32,930 | ||||||||||||||||||
| Accrued restructuring charges | (9,300 | ) | (15,435 | ) | 9,573 | Accrued restructuring charges | — | (871 | ) | (9,300 | ) | |||||||||||||||||
| Income taxes payable | 20,173 | 30,157 | 60,175 | Income taxes payable | 8,616 | (47,571 | ) | 20,173 | ||||||||||||||||||||
| Deferred revenue | 14,415 | 7,124 | 4,005 | Deferred revenue | 8,029 | 13,941 | 14,415 | |||||||||||||||||||||
| Net cash provided by operating activities | 433,136 | 329,331 | 418,702 | Net cash provided by operating activities | 730,353 | 683,744 | 433,136 | |||||||||||||||||||||
| Cash flows from investing activities: | Cash flows from investing activities: | Cash flows from investing activities: | ||||||||||||||||||||||||||
| Purchases of short-term investments | (907,231 | ) | (579,154 | ) | (436,333 | ) | Purchases of short-term investments | (1,851,962 | ) | (1,867,337 | ) | (1,186,192 | ) | |||||||||||||||
| Maturities and sales of short-term investments | 428,429 | 487,391 | 456,915 | Maturities and sales of short-term investments | 1,620,873 | 1,772,008 | 677,946 | |||||||||||||||||||||
| Purchases of long-term investments and other assets | (20,699 | ) | (37,951 | ) | (35,338 | ) | Purchases of long-term investments and other assets | (32,196 | ) | (35,286 | ) | (20,699 | ) | |||||||||||||||
| Acquisitions of property and equipment | (39,454 | ) | (31,578 | ) | (43,174 | ) | Acquisitions of property and equipment | (48,875 | ) | (63,226 | ) | (39,454 | ) | |||||||||||||||
| Cash (paid for) received from acquisitions | (16,500 | ) | 7,345 | — | Cash paid for acquisitions | (9,541 | ) | (15,545 | ) | (16,500 | ) | |||||||||||||||||
| Proceeds from sale of equity investments | 7,063 | 11,684 | 31,505 | Investment in lease receivable | — | (126,800 | ) | — | ||||||||||||||||||||
| Proceeds from sale of equity securities and other assets | 1,338 | 5,933 | 7,063 | |||||||||||||||||||||||||
| Net cash used for investing activities | (548,392 | ) | (142,263 | ) | (26,425 | ) | ||||||||||||||||||||||
| Net cash used for investing activities | (320,363 | ) | (330,253 | ) | (577,836 | ) | ||||||||||||||||||||||
| Cash flows from financing activities: | Cash flows from financing activities: | Cash flows from financing activities: | ||||||||||||||||||||||||||
| Purchase of treasury stock | (84,777 | ) | (293,241 | ) | (485,115 | ) | Purchase of treasury stock | (600,099 | ) | (608,681 | ) | (84,777 | ) | |||||||||||||||
| Proceeds from re-issuance of treasury stock | 213,421 | 81,859 | 87,536 | Proceeds from re-issuance of treasury stock | 356,547 | 396,105 | 213,421 | |||||||||||||||||||||
| Payment of dividends | (11,626 | ) | (11,881 | ) | (12,007 | ) | Payment of dividends | (3,044 | ) | (11,942 | ) | (11,626 | ) | |||||||||||||||
| Net cash provided by (used for) financing activities | 117,018 | (223,263 | ) | (409,586 | ) | Net cash provided by (used for) financing activities | (246,596 | ) | (224,518 | ) | 117,018 | |||||||||||||||||
| Effect of exchange rate on cash and cash equivalents | 4,471 | 1,217 | (895 | ) | Effect of exchange rates on cash and cash equivalents | (1,637 | ) | 3,566 | 4,471 | |||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | Net increase (decrease) in cash and cash equivalents | 6,233 | (34,978 | ) | (18,204 | ) | Net increase (decrease) in cash and cash equivalents | 161,757 | 132,539 | (23,211 | ) | |||||||||||||||||
| Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 183,684 | 218,662 | 236,866 | Cash and cash equivalents at beginning of year | 259,061 | 126,522 | 149,733 | ||||||||||||||||||||
| Cash and cash equivalents at end of year | Cash and cash equivalents at end of year | $ | 189,917 | $ | 183,684 | $ | 218,662 | Cash and cash equivalents at end of year | $ | 420,818 | $ | 259,061 | $ | 126,522 | ||||||||||||||
| Supplemental disclosures: | Supplemental disclosures: | Supplemental disclosures: | ||||||||||||||||||||||||||
| Cash paid for income taxes | $ | 18,695 | $ | 32,773 | $ | 16,862 | Cash paid for income taxes, net of refunds | $ | 78,633 | $ | 61,423 | $ | 18,695 | |||||||||||||||
| Non-cash investing and financing activities: | Non-cash investing and financing activities: | |||||||||||||||||||||||||||
| Cash dividends declared but not paid | $ | 2,979 | $ | 2,900 | $ | 2,952 | Cash dividends declared but not paid | $ | — | $ | 3,027 | $ | 2,979 | |||||||||||||||
| Unrealized gains (losses) on available-for-sale securities, net of taxes | $ | 5,249 | $ | (4,664 | ) | $ | 2,928 | Unrealized gains (losses) on available-for-sale securities, net of taxes | $ | (2,306 | ) | $ | (7,345 | ) | $ | 2,451 | ||||||||||||
| Treasury stock issued for acquisition | $ | — | $ | 68,412 | $ | — | ||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
69
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 offers a line of creative, business and mobile software and services forused by high-end consumers, creative professionals, designers, knowledge workers, OEM partners, developers and enterprises. Our products are market-leading digital imaging, design,enterprises for creating, managing, delivering and document technology platforms which enable customers to create, manageengaging with compelling content and deliver visually rich, compellingexperiences across multiple operating systems, devices and reliable content.media. We distribute our products through a network of distributors and dealers, value-added resellers ("VARs"),VARs, systems integrators, independent software vendors ("ISVs")ISVs and original equipment manufacturers ("OEMs");OEMs; direct to end users; and through our own Web site at www.adobe.com. We also license our technology to major hardware manufacturers, software developers and service providers and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas; Europe, Middle East and Africa ("EMEA");Americas, EMEA and Asia. Our software runs on Microsoft Windows, Apple Macintosh, Linux, UNIX and various non-personal computer platforms, depending on the product.
Fiscal Year
Our fiscal year is a52/53-week year ending on the Friday closest to November 30. Our fiscal year 2004 will end December 3, 2004.
Basis of ConsolidationPresentation
The accompanying consolidated financial statements include those of Adobe and our subsidiaries, after elimination of all intercompany accounts and transactions.
Reclassification
Certain amounts Adobe has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the prior fiscal year have been reclassified to conform to the presentation adopted in the current fiscal year. Goodwill has been reclassified from goodwill and purchased and other intangibles to goodwill in our condensed consolidated balance sheets.United States of America.
Use of Estimates
In the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, we must make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the balance sheet, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fiscal Year
Our fiscal year is a 52/53-week year ending on the Friday closest to November 30.
Reclassification
Certain amounts in fiscal 2004, as reported on the Consolidated Balance Sheet, and in fiscal 2004 and 2003, as reported on the Consolidated Statements of Cash Flows, have been reclassified to conform to the current year presentation. We reclassified $117.1 million in auction rate securities and variable rate demand obligations from cash and cash equivalents to short-term investments on the December 3, 2004, Consolidated Balance Sheet. The reclassification to short-term investments is based on an interpretation of cash equivalents pursuant to SFAS 95. We also reclassified deferred revenue, of $7.5 million, from short-term liabilities on the Consolidated Balance Sheet.
Stock Dividend
On March 16, 2005, our Board of Directors approved a two-for-one stock split, in the form of a stock dividend, of our common stock payable on May 23, 2005 to stockholders of record as of May 2, 2005. Share and per share data, for all periods presented, have been adjusted to give effect to this stock split.
Cash Equivalents and Short-term Investments
Cash equivalents consist of instruments with remaining maturities of three months or less at the time of purchase.
We classify all of our cash equivalents and short-term investments that are free of trading restrictions or become free of trading restrictions within one year as "available-for-sale." We carry these investments at fair value, based on quoted market prices. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders' equity. Gains are recognized when realized in our consolidated statements of income. Losses are recognized as realized or when we have determined that an other-than-temporary decline in fair value has occurred.
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It is our policy to review our marketable equity securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing the cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership of each company we invest in. If we believe that an other-than-temporary decline exists in one of our marketable equity securities, it is our policy to write down these equity investments to the market value and record the related write-down as an investment loss on our consolidated statements of income.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. We review our trade receivable by aging category to identify significant customers with known disputes or collection issues. For accounts not specifically identified, we provide reserves based on the age of the receivable. In determining the reserve, we make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. We also consider our historical level of credit losses and current economic trends that might impact the level of future credit losses.
| | Beginning Balance | Charged/ (Credited) to Operating Expenses | Deductions* | Ending Balance | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Allowance for doubtful accounts: | ||||||||||||||
| Year Ended: | ||||||||||||||
| December 2, 2005 | $ | 6,191 | $ | 394 | $ | (1,209 | ) | $ | 5,376 | |||||
| December 3, 2004 | 7,903 | (443 | ) | (1,269 | ) | 6,191 | ||||||||
| November 28, 2003 | 7,531 | 2,038 | (1,666 | ) | 7,903 | |||||||||
Foreign Currency Translation
We translate assets and liabilities of foreign subsidiaries, whose functional currency is the local currency, at exchange rates in effect at the balance sheet date. We translate revenues and expenses at the monthly average rates of exchange prevailing during the year. We include the adjustment resulting from translating the financial statements of such foreign subsidiaries in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders' equity.
Property and Equipment
We record property and equipment at cost. Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives (thirty-five years for buildings; two to
seven years for furniture and equipment) or lease terms (five to ten years for leasehold improvements) of the respective assets. We do not currently have any capitalized Web site development costs. However,Additionally, it is our policy to capitalize certain costs related to Web sitefor internal-use software incurred during the application development stage, in accordance with Statement of Position 98-1, ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Amortization on a straight-line basis begins once the Web sitesoftware is ready for its intended use.
Goodwill and Purchased and Other Intangibles
In accordance with Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," we review our goodwill for impairment annually, or more frequently, if facts and purchased and other intangibles with indefinite useful lives are no longer amortized but are reviewed periodically for impairment. With the adoption of SFAS 142 in the first quarter of fiscal 2003, we discontinued amortizing the remaining balances of goodwill and workforce-in-place.
circumstances warrant a review. The provisions of SFAS 142 require that a two-step test be performed to assess goodwill for impairment. First, the fair value of each reporting unit is compared to its carrying value. If the fair value exceeds the carrying value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The implied fair value of the reporting unit's goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded.
Upon adoption of SFAS 142, weWe completed our transitional and annual goodwill impairment tests astest during the second quarter of November 30, 2002 and April 1, 2003, respectively,fiscal 2005 and determined that the carrying amount of goodwill was not impaired. We will continue to perform our goodwill impairment review annually or more frequently if facts and circumstances warrant a review.
SFAS 142 also requires that intangible assets with definite lives be amortized over their estimated useful life and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144 ("SFAS 144.144"), "Accounting for the Impairment or Disposal of Long-Lived Assets."
We are currently amortizing acquired intangible assets with definite liveslives. Purchased technology is amortized over its useful life, which is generally three years and other intangibles assets are amortized over periods from one1 to five years and the13 years. The amortization expense is primarily classified as cost of product revenue in our consolidated statements of income.
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The following table presents net income and per share amounts for all periods presented, as adjusted, to exclude the amortization of goodwill and purchased and other intangibles as if the provisions of SFAS 142 had been in effect from the beginning of fiscal 2001.
| | Year Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | November 28, 2003 | November 29, 2002 | November 30, 2001 | ||||||
| Net income as reported | $ | 266,344 | $ | 191,399 | $ | 205,644 | |||
| Add back: Amortization and impairment of goodwill and purchased and other intangibles | — | 20,973 | 14,281 | ||||||
| Adjusted net income | $ | 266,344 | $ | 212,372 | $ | 219,925 | |||
Basic net income per share: | |||||||||
Net income per share as reported | $ | 1.14 | $ | 0.81 | $ | 0.86 | |||
| Add back: Amortization and impairment of goodwill and purchased and other intangibles per share | — | 0.09 | 0.06 | ||||||
| Adjusted net income per share | $ | 1.14 | $ | 0.90 | $ | 0.92 | |||
Diluted net income per share: | |||||||||
Net income per share as reported | $ | 1.10 | $ | 0.79 | $ | 0.83 | |||
| Add back: Amortization and impairment of goodwill and purchased and other intangibles per share | — | 0.09 | 0.06 | ||||||
| Adjusted net income per share | $ | 1.10 | $ | 0.88 | $ | 0.89 | |||
Software Development Costs
Capitalization of software development costs begins upon the establishment of technological feasibility, which is generally the completion of a working prototype that has been certified as having no critical bugs and is a release candidate or when alternative future use exists. To date, software development costs incurred between completion of a working prototype and general availability of the related product have not been material and in accordance with our policy, have not been capitalized.
Other Assets
Other assets include long-term investments, long-term prepaid royaltiessecurity deposits and security deposits.a land deposit. Other assets also include the fair value, at inception, of the residual value guarantee associated with our lease on two buildings we occupy as part of our headquarters, in accordance with FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Our long-term investments include investments in privately held companies that we make either directly or indirectly through venture capital limited partnerships. We own limited partnership interests in fourthree venture capital limited partnerships—Adobe Ventures L.P., Adobe Ventures II, L.P., Adobe Ventures III, L.P. and Adobe Ventures IV, L.P. (collectively "Adobe Ventures")—that invest in early stage companies with innovative technologies. In addition to the potential for financial returns, our venture activities often increase our knowledge of emerging markets and technologies, as well as expand our opportunities to provide Adobe products and services. The partnerships are managed by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures.
The investments in Adobe Ventures are accounted for using the equity methodconsolidated in accordance with FASB Interpretation No. 46R ("FIN 46R") a revision to FASB Interpretation No. 46 ("FIN 46"), "Consolidation of accounting, and accordingly, the investments are adjusted to reflect our share of Adobe Ventures' investment income (loss) and dividend distributions. Under the terms of the partnership agreements, the general partner has the sole and exclusive right to manage and control the partnerships. Adobe as the limited partner has certain rights, including the ability to approve the replacement of the general partner and investments that exceed certain established parameters. However, these rights are considered protective rights and do not suggest
72
an ability to control the partnerships.Variable Interest Entities." Adobe Ventures carry their investments in equity securities at estimated fair market
value and unrealized gains and losses are included in investment gain (loss) on our consolidated statements of income. The stock of a number of technology investments held by Adobe Ventures at November 28, 2003December 2, 2005 and December 3, 2004 is not publicly traded and, therefore, there is no established market for these securities. In order to determine the fair market value of these investments, we use the most recent round of financing involving new non-strategic investors or estimates of current market value made by Granite Ventures. It is our policy to review the fair value of these investments held by Adobe Ventures, as well as our direct investments, on a regular basis to evaluate the carrying value of the investments in these companies. This evaluation includes, but is not limited to, reviewing each company's cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes and competition. In the case of privately held companies, this evaluation is based on information that we request from these companies. This information is not subject to the same disclosure regulations as U.S. publicly traded companies and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies. If we believe the carrying value of a company is in excess of fair value, it is our policy to write-down the investments to reduce its carrying value to fair value.
Revenue Recognition
Our revenue is derived from the licensing of desktop and server-based application software products, professional services, and maintenance and support. We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable.
Impairment of Long-lived AssetsProduct revenue
We evaluaterecognize our long-lived assetsproduct revenue upon shipment, provided collection is determined to be probable and no significant obligations remain. Our desktop application products revenue from distributors is subject to agreements allowing limited rights of return, rebates and price protection. Our direct sales and OEM sales are also subject to limited rights of return. Accordingly we reduce revenue recognized for estimated future returns, price protection and rebates at the time the related revenue is recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levels in accordance with the provisionsdistribution channel and other related factors.
We record the estimated costs of Statementproviding free technical phone support to customers for our software products.
We record OEM licensing revenue, primarily royalties, when OEM partners ship products incorporating Adobe software, provided collection of Financial Accounting Standards No. 144 ("SFAS 144"), "Accountingsuch revenue is deemed probable.
Our product-related deferred revenue includes maintenance upgrade revenue and customer advances under OEM license agreements. Our maintenance upgrade revenue for our desktop application products is included in our product revenue line item as the maintenance primarily entitles customers to receive product upgrades. In cases where we provide a specified free upgrade to an existing product, we defer the fair value for the Impairmentspecified upgrade right until the future obligation is fulfilled or Disposalwhen the right to the specified free upgrade expires.
Services and support revenue
Our services and support revenue is composed of Long-Lived Assets." SFAS 144 became effective at the beginning of our fiscal 2003professional services (such as consulting services and supersedes Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment or Disposal of Long-Lived Assetstraining) and for Long-Lived Assets to Be Disposed Of"maintenance and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 ("APB 30"), "Reporting the Results of Operations for a Disposal of a Segment of a Business." The adoption of SFAS 144 did not have a material impact on our consolidated financial position, results of operations or cash flows.
During the fourth quarter of fiscal 2002, we recognized a $6.8 million goodwill impairment charge for the remaining book valuesupport, primarily related to the Glassbook acquisition. This impairment chargelicensing of our Intelligent Document server solution products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products.
Our professional services revenue is presented under amortizationrecognized using the proportionate performance method and impairment of goodwill and purchased and other intangibles on our consolidated statements of income. The impairment charge was determinedis measured monthly based on discounted future cash flows. For segment reporting purposes,input measures, such as on hours incurred to date compared to total estimated
hours to complete, with consideration given to output measures, such as contract milestones when applicable. Our maintenance and support offerings, which entitle customers to receive product upgrades and enhancements or technical support, depending on the charge was includedoffering, are recognized ratably over the term of the arrangement.
Multiple element arrangements
We enter into revenue arrangements in our Creative Professional segment.
Also, during fiscal 2002,which a customer may purchase a combination of software, upgrades, maintenance and support, and professional services (multiple-element arrangements). When vendor-specific objective evidence ("VSOE") of fair value exists for all elements, we recognized a $6.3 million pre-tax impairment charge for capitalized Adobe Design Team hosted server development costs. The impairment charge was recorded on our consolidated statement of income under cost of products revenue. The impairment charge was determinedallocate revenue to each element based on discounted future cash flows.the relative fair value of each of the elements. VSOE of fair value is established by the price charged when that element is sold separately. For segment reporting purposes,maintenance and support, VSOE of fair value is established by renewal rates. For arrangements where VSOE of fair value exists only for the charge was includedundelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.
We perform ongoing credit evaluations of our customers' financial condition and in our Creative Professional segment.some cases we require various forms of security. We also maintain allowances for estimated losses on receivables.
Stock-Based Incentive Compensation
Beginning in the second quarter of fiscal 2003, we adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment to Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation." See "Recent Accounting Pronouncements" for further information regarding SFAS 148. We account for our fixed stock option plans and our employee stock purchase plan under APB 25, using the intrinsic value method. The following table sets forth the pro forma amounts
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of net income and net income per share that would have resulted if we had accounted for our employee stock plans under the fair value recognition provisions of SFAS 123.
| | | Year Ended | | Fiscal Years | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | November 28, 2003 | November 29, 2002 | November 30, 2001 | | 2005 | 2004 | 2003 | ||||||||||||||
| Net income: | Net income: | Net income: | ||||||||||||||||||||
| As reported | $ | 266,344 | $ | 191,399 | $ | 205,644 | As reported | $ | 602,839 | $ | 450,398 | $ | 266,344 | |||||||||
| Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 1,837 | 4,411 | 11,697 | Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 255 | 221 | 1,837 | |||||||||||||||
| Less: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects | (188,427 | ) | (189,164 | ) | (187,116 | ) | Less: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects | (88,603 | ) | (105,883 | ) | (188,427 | ) | |||||||||
| Pro forma | $ | 79,754 | $ | 6,646 | $ | 30,225 | Pro forma | $ | 514,491 | $ | 344,736 | $ | 79,754 | |||||||||
Basic net income per share: | Basic net income per share: | Basic net income per share: | ||||||||||||||||||||
As reported | $ | 1.14 | $ | 0.81 | $ | 0.86 | As reported | $ | 1.23 | $ | 0.94 | $ | 0.57 | |||||||||
| Pro forma | $ | 0.34 | $ | 0.03 | $ | 0.13 | Pro forma | $ | 1.05 | $ | 0.72 | $ | 0.17 | |||||||||
Diluted net income per share: | Diluted net income per share: | Diluted net income per share: | ||||||||||||||||||||
As reported | $ | 1.10 | $ | 0.79 | $ | 0.83 | As reported | $ | 1.19 | $ | 0.91 | $ | 0.55 | |||||||||
| Pro forma | $ | 0.33 | $ | 0.03 | $ | 0.12 | Pro forma | $ | 1.01 | $ | 0.70 | $ | 0.16 | |||||||||
For purposes of computing pro forma net income, we estimate the fair value of each option grantgrants and employee stock purchase plan purchase right on the date of grantrights using the Black-Scholes option pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants and employee stock purchase plan shares. Additionally, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because our employee stock
options and employee stock purchase plan shares have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not provide a reliable single measure of the fair value of its stock-based awards.
For purposes of the pro forma disclosures, the expected volatility assumptions we used priorgive consideration to the third quarter of fiscal 2003 were based solely on the historical volatility of our common stock over the most recent period commensurate with the estimated expected life of our stock options. Beginning with the third quarter of fiscal 2003, we modified our approach and expected volatility by considering other relevant factors in accordance with SFAS 123. We considered implied volatility in market-tradedmarket traded options on our common stock as well as third party volatility quotes. In addition, we considered historical volatility. Weand will continue to monitor these and other relevant factors used to measure expected volatility for future option grants.
Also, beginning with the third quarter of fiscal 2003, we decreased our estimate of the expected life of new options granted to our employees from 3 years to 2.5 years. We based our expected life assumption on historical experience as well as the terms and vesting periods of the options granted. The reduction in the estimated expected life was a result of an analysis of our historical experience, including the same periods of time used for our volatility analysis.
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The assumptions used to value the option grants andare as follows:
| Fiscal Years | |||||||
|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2003 | |||||
| Expected life (in years) | 3.0 - 3.9 | 2.5 | 2.5 - 3.0 | ||||
| Volatility | 30 - 37 | % | 34 - 40 | % | 40 - 66 | % | |
| Risk free interest rate | 3.38 - 4.49 | % | 2.18 - 3.11 | % | 1.37 - 2.23 | % | |
| Dividend yield | — | 0.093 - 0.125 | % | 0.125 | % | ||
The assumptions used to value the purchase rights are stated as follows:
| | Year Ended | ||||||
|---|---|---|---|---|---|---|---|
| | November 28, 2003 | November 29, 2002 | November 30, 2001 | ||||
| Expected life of options (in years) | 2.5 - 3 | 3 | 3 | ||||
| Expected life of purchase rights (in years) | 1.25 | 1.24 | 1.23 | ||||
| Volatility | 40 - 66 | % | 69 | % | 80 | % | |
| Risk free interest rate—options | 1.37 - 2.23 | % | 2.14 - 4.14 | % | 2.92 - 4 .77 | % | |
| Risk free interest rate—purchase rights | 1.12 - 1.74 | % | 1.96 - 3.03 | % | 3.62 - 4.81 | % | |
| Dividend yield | 0.125 | % | 0.125 | % | 0.125 | % | |
| | Fiscal Years | ||||||
|---|---|---|---|---|---|---|---|
| | 2005 | 2004 | 2003 | ||||
| Expected life (in years) | 1.25 | 1.25 | 1.25 | ||||
| Volatility | 32 - 37 | % | 34 - 40 | % | 40 - 66 | % | |
| Risk free interest rate | 3.03 - 3.58 | % | 1.24 - 1.76 | % | 1.12 - 1.74 | % | |
| Dividend yield | — | 0.093 - 0.125 | % | 0.125 | % | ||
Options and restricted stock grants vest over several years, and new option and restricted stock grants are generally made each year. Because of this, the pro forma amounts shown above may not be representative of the pro forma effect on reported net income in future years.
Revenue Recognition
We recognize desktop application products revenue upon shipment, net of estimated returns, provided collection is determined to be probable and no significant obligations remain. Desktop application products revenue from distributors is subject to agreements allowing limited rights of return, rebates and price protection. Accordingly, we reduce revenue recognized for estimated future returns, price protection and rebates at the time the related revenue is recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levels in the distribution channel and other related factors.
We provide free technical phone support to customers for our shrink-wrapped application products under warranty. We record the estimated cost of free technical phone support upon shipment of software.
We also license software in multiple element arrangements in which a customer purchases a combination of software, post-contract customer support ("PCS") and professional services. PCS, or maintenance, includes rights to upgrades, when and if available, telephone support, updates and enhancements. Professional services relate to consulting services and training. When vendor specific objective evidence ("VSOE") of fair value exists for all elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when the same element is sold separately. We determine VSOE of fair value of PCS based on renewal rates for the same term PCS. Revenue allocated to PCS is recognized ratably over the contractual term (typically one to two years). In a multiple element arrangement whereby VSOE of fair value of all undelivered elements exists but VSOE of fair value does not exist for one or more delivered elements, revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue, assuming all other criteria for revenue recognition have been met.
The arrangement fees related to fixed-priced consulting contracts are recognized using the percentage of completion method. Percentage of completion is measured monthly based primarily on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. Anticipated losses on fixed-priced contracts are recognized in the period when they become known.
We record OEM licensing revenue, primarily royalties, when OEM partners ship products incorporating Adobe software, provided collection of such revenue is deemed probable.
Deferred revenue includes customer advances under OEM licensing agreements and maintenance revenue. In cases where we provide a specified free upgrade to an existing product, we defer the VSOE of fair value for the specified upgrade right, until the future obligation is fulfilled or when the right to the specified free upgrade expires.
We perform ongoing credit evaluations of our customers' financial condition and generally do not require collateral. We also maintain allowances for estimated credit losses.
Guarantees
We adopted FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" at the beginning of our fiscal 2003. See "Recent Accounting Pronouncements" for further information regarding FIN 45.
The lease agreements for our three office buildings in San Jose, California provide for residual value guarantees. These lease agreements were in place prior to December 31, 2002 and are disclosed in Note 14.
In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
We have commitments to make certain milestone and/or retention payments typically entered into in conjunction with various acquisitions, for which we have made accruals in our consolidated financial statements. In connection with our purchases of technology assets during fiscal 2003, we entered into employee retention agreements totaling $2.2 million. We are required to make payments upon satisfaction of certain conditions in the agreements.
As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
As part of our limited partnership interests in Adobe Ventures, we have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnerships. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote.
We accrue for costs associated with future obligations which include costs for undetected bugs that are discovered only after the product is installed and used by customers. The accrual remaining at the end of fiscal 2003 primarily relates to new releases of our Creative Suites products during the fourth quarter of fiscal 2003. The table below summarizes the activity related to the accrual during fiscal 2003:
| Balance at November 29, 2002 | Accruals | Payments | Balance at November 28, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| $ | — | $ | 5,554 | $ | (2,369 | ) | $ | 3,185 | ||
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Advertising Expenses
We expense all advertising costs as incurred and classify these costs under sales and marketing expense. Advertising expenses for fiscal years2005, 2004 and 2003 2002,were $39.0 million, $31.9 million and 2001 were $24.0 million, $26.7 million and $30.5 million, respectively.
Foreign Currency and Other Hedging Instruments
We transact business in foreign countries, in U.S. dollars and in various foreign currencies. In Europe and Japan, transactions that are denominated in euro and yen subject us to exposure from movements in foreign currency exchange rates. We hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. We use options and forward foreign exchange contracts to reduce our exposure to foreign currency rate changes on non-functional currency denominated forecasted product licensing revenue, primarily yen-denominated and euro-denominated revenue.
Adobe accounts for its derivative instruments as either assets or liabilities on the balance sheet and measures them at fair value. Derivatives that are not defined as hedges in Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments and hedging activities and requires usmust be adjusted to recognize these as either assets or liabilities on the balance sheet and measure them at fair value.value through earnings. As described in Note 15, gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. See Note 15 for further information.
Gains and losses from the forward foreign exchange contracts hedging certain balance sheet positions, primarily non-functional currency denominated assets, such as trade receivable, and liabilities, such as accounts payable, are recorded each period in other income (expense) in the consolidated statements of
operations. Forward foreign exchange contracts hedging forecasted non-functional currency denominated forecasted product licensing revenue, are designated as cash flow hedges under SFAS 133, with gains and losses recorded net of tax, as a component of other comprehensive income in stockholders' equity and reclassified into revenue at the time the forecasted transactions occur.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the asset and liability method, we recognizeamount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for theexpected future tax consequences attributable toof temporary differences between the financial statement carrying amountsreporting and the tax basisbases of existing assets and liabilities.liabilities, and for operating losses and tax credit carryforwards. We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. We also account for any income tax contingencies in accordance with Statement of Financial Accounting Standards No. 5 ("SFAS 5"), "Accounting for Contingencies."
Recent Accounting Pronouncements
In November 2002,May 2005 the FASB issued FIN 45 which expands on the accounting guidance of StatementsStatement of Financial Accounting Standards No. 5, 57154 ("SFAS 154"), "Accounting Changes and 107Error Corrections," which replaces Accounting Principles Board No. 20 ("APB 20"), "Accounting Changes," and incorporates withoutStatement of Financial Accounting Standards No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change the provisions of FASB Interpretation No. 34, which has been superseded. FIN 45 affects, among other things, leasing transactions involving residual guarantees, vendor and manufacturer guarantees and tax and environmental indemnities. All such guarantees are requiredin accounting principle. SFAS 154 requires retrospective application to be disclosed in the notes to theprior periods' financial statements startingof a voluntary change in accounting principle unless it is impracticable. APB 20 previously required that most voluntary changes in accounting principle be recognized with a cumulative effect adjustment in net income of the period endingof the change. SFAS 154 is effective for accounting changes made in annual periods beginning after December 15, 2002. For guarantees2005.
In December 2004, the FASB issued after December 31, 2002,SFAS 123R requires the fair valuemeasurement of all employee share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. In April 2005, the SEC announced that the accounting provisions of SFAS 123R are to be applied in the first quarter of the obligation mustfiscal year beginning after June 15, 2005. As a result, we are now required to adopt SFAS 123R in the first quarter of fiscal 2006 and will recognize stock-based compensation expense using the modified prospective method. The pro forma disclosures previously permitted under SFAS 123 no longer will be reportedan alternative to financial statement recognition. See "Stock-Based Incentive Compensation" above for the pro forma net income and net income per share amounts, for fiscal 2003 through fiscal 2005, as if we had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. We are evaluating the requirements under SFAS 123R and expect the adoption to have a significant adverse impact on our consolidated statements of income and net income per share.
In December 2004, the balance sheet. Existing guarantees are permittedFASB issued FASB Staff Position No. FAS 109-1 ("FAS 109-1"), "Application of FASB Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004." The AJCA introduced a special 9% tax deduction on qualified production activities. FAS 109-1 clarifies that this tax deduction should be grandfathered and areaccounted for as a special tax deduction in accordance with Statement 109. Pursuant to the AJCA, Adobe will not recognized onbe able to claim this tax benefit until the balance sheet. Thefirst quarter of fiscal 2006. We do not expect the adoption of FIN 45, at the beginning of our fiscal year 2003, did notthese new tax provisions to have a material impact on our consolidated financial position, results of operations or cash flows. See "Guarantees" for additional disclosures.
In December 2002,2004, the FASB issued SFAS 148, which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFASFASB Staff Position No. 148 amends the disclosure requirements of SFAS 123 to require more prominentFAS 109-2 ("FAS 109-2"), "Accounting and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS 148 did not have a material impact on our consolidated financial position, results of operations or cash flows. See "Stock-Based Incentive Compensation" for our required pro forma disclosures.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 expands upon existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resourcesDisclosure Guidance for the entity to support its activities. FIN 46 requiresForeign Earnings Repatriation Provision within the American Jobs Creations Act of 2004." The AJCA introduced a variable interest entity to be consolidated by a company if that company is subjectlimited time 85% dividends received deduction on the repatriation of certain foreign earnings to a majority of the risk of loss
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from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period ending after December 15, 2003. Disclosure requirements apply to any financial statements issued after January 31, 2003. We have considered the provisions of FIN 46 and believe it will not be necessary to include in our financial statements any assets, liabilities, or activities of the third-party entities holding our corporate headquarters leases. We haveU.S. taxpayer (repatriation provision), provided certain disclosures related to these leasescriteria are met. Starting in other areas of this Annual Report on Form 10-K (see "Guarantees" above and Note 14 of our Notes to Condensed Consolidated Financial Statements). Beginning with the first quarter of fiscal 2004, we will be consolidating2005, Adobe Ventures. This consolidation will not have a material impact on our consolidated financial position, results of operations or cash flows.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 ("SFAS 149"), Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifiesadopted the accounting and disclosure requirements as outlined in FAS 109-2. See Note 8 for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on our consolidated financial position, results of operations or cash flows.further information regarding this provision.
Note 2. Acquisitions
On May 19, 2003,3, 2004, we purchased the technology assets of Syntrillium,acquired Q-Link Technologies, Inc ("Q-Link"), a privately held company, for $16.5 million cash. Syntrillium developed, published and marketed digital audio tools including its recording application, Cool Edit Pro (renamed Adobe Audition), all of which have been added to our existing line of professional digital imaging and video products. By adding Adobe Audition and the other tools to our existing line of products, we have improved the Adobe video workflow and expanded the products and tools available to videographers, DVD authors and independent filmmakers. In connection with the purchase, we allocated $13.7 million to goodwill, $2.7 million to purchased technology and $0.1 million to tangible assets. We also accrued $0.1$15.9 million in acquisition-related legal and accounting fees.cash. Q-Link provided Java-based workflow technology that was integrated with our Intelligent Document platform to enable customers to integrate document process management with core applications. Goodwill has beenwas allocated to our Digital Imaging and VideoIntelligent Document segment. Purchased technology is being amortized to cost of product revenue over its estimated useful life of three years. The consolidated financial statements include the operating results of the purchased technology assetsQ-Link from the date of purchase. Pro forma results of operations have not been presented because the effect of this acquisition was not material.
In April 2002, we acquired all of the outstanding common stock of Accelio. Accelio was a provider of Web-enabled solutions that helped customers manage business processes driven by electronic forms. The acquisition of Accelio broadened our ePaper solution business. At the date of acquisition, the aggregate purchase price was $70.2 million, which included the issuance of 1.8 million shares of common stock of Adobe, valued at $68.4 million, and cash of $1.8 million.
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The following table summarizes the purchase price allocation:
| Cash and cash equivalents | $ | 9,117 | ||||
| Accounts receivable, net | 11,906 | |||||
| Other current assets | 4,735 | |||||
| Purchased technology | 2,710 | |||||
| Goodwill | 77,009 | |||||
| In-process research and development | 410 | |||||
| Trademarks and other intangible assets | 1,029 | |||||
| Total assets acquired | 106,916 | |||||
Current liabilities | (18,176 | ) | ||||
Liabilities recognized in connection with the business combination | (16,196 | ) | ||||
| Deferred revenue | (2,360 | ) | ||||
| Total liabilities assumed | (36,732 | ) | ||||
| Net assets acquired | $ | 70,184 | ||||
We allocated $2.7 million to purchased technology and $0.4 million to in-process research and development. The amount allocated to purchased technology represented the fair market value of the technology for each of the existing products, as of the date of the acquisition. The purchased technology was assigned a useful life of three years and is being amortized to cost of product revenue. The amount allocated to in-process research and development was expensed at the time of acquisition due to the state of the development of certain products and the uncertainty of the technology.
The remaining purchase price was allocated to goodwill and was assigned to our ePaper segment (which was renamed Intelligent Documents beginning in fiscal 2004). In accordance with SFAS No. 142, the goodwill will not be amortized but will be reviewed for impairment on an annual basis. During the fourth quarter of fiscal 2002, we revised our estimate of certain costs associated with our acquisition of Accelio, resulting in an increase to goodwill of approximately $2.6 million. The adjustment primarily reflected higher than estimated transaction costs and costs related to closing redundant facilities. During fiscal 2003, we revised our estimate of certain costs associated with our acquisition of Accelio to reflect the nature of our remaining liabilities. An excess accrual of $0.6 million was reversed as a reduction to goodwill and an additional $0.3 million was reversed to operating expenses. See Note 8 for information regarding the liabilities recognized in connection with this acquisition.
The $1.0 million of acquired trademarks and other intangible assets is being amortized over their useful lives ranging from six-months to three years.
In December 2001, we acquired Fotiva, which was a development stage software company that created solutions to help consumers manage, store, enrich and share digital photographs and other related personal media. In connection with the acquisition, substantially all of the purchase price of $5.4 million cash was allocated to in-process research and development and expensed at the time of acquisition due to the in-process state of the technology. Adobe combined Fotiva's image management technology with Adobe's digital imaging and ePaper technologies to develop a new product, Adobe Photoshop Album, which was released in the first quarter of fiscal 2003.
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Note 3. Cash, cash equivalents and short-term investments
Cash, cash equivalents and short-term investments consisted of the following as of December 2, 2005:
| | Carrying Value | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Classified as current assets: | |||||||||||||||
| Cash | $ | 41,682 | $ | — | $ | — | $ | 41,682 | |||||||
| Cash equivalents: | |||||||||||||||
| Money market mutual funds | 334,933 | — | — | 334,933 | |||||||||||
| Bank time deposits | 24,339 | — | — | 24,339 | |||||||||||
| Corporate bonds | 19,864 | — | — | 19,864 | |||||||||||
| Total cash equivalents | 379,137 | — | — | 379,137 | |||||||||||
| Total cash and cash equivalents | 420,818 | — | — | 420,818 | |||||||||||
Short-term investments: | |||||||||||||||
| State and municipal bonds | 1,091,538 | 22 | (8,168 | ) | 1,083,392 | ||||||||||
| United States Treasury notes | 112,093 | — | (614 | ) | 111,479 | ||||||||||
| Corporate bonds | 74,449 | 101 | (240 | ) | 74,310 | ||||||||||
| Obligations of foreign sovereigns | 9,004 | — | (25 | ) | 8,979 | ||||||||||
| Marketable equity securities* | 131 | 1,725 | — | 1,856 | |||||||||||
| Total short-term investments | 1,287,215 | 1,848 | (9,047 | ) | 1,280,016 | ||||||||||
| Total cash, cash equivalents, and short-term investments | $ | 1,708,034 | $ | 1,848 | $ | (9,047 | ) | $ | 1,700,835 | ||||||
| | As of November 28, 2003 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Value | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||
| Classified as current assets: | |||||||||||||||
| Cash | $ | 20,314 | $ | — | $ | — | $ | 20,314 | |||||||
| Cash equivalents: | |||||||||||||||
| Money market mutual funds | 88,478 | — | — | 88,478 | |||||||||||
| Bank time deposits | 10,192 | — | — | 10,192 | |||||||||||
| State and municipal bonds and notes | 70,918 | 15 | — | 70,933 | |||||||||||
| Total cash equivalents | 169,588 | 15 | — | 169,603 | |||||||||||
| Total cash and cash equivalents | 189,902 | 15 | — | 189,917 | |||||||||||
Short-term investments: | |||||||||||||||
| State and municipal bonds | 636,798 | 3,265 | (397 | ) | 639,666 | ||||||||||
| United States Treasury notes | 95,274 | 34 | (235 | ) | 95,073 | ||||||||||
| Corporate bonds | 59,837 | 34 | (192 | ) | 59,679 | ||||||||||
| Asset-backed securities | 6,340 | — | (12 | ) | 6,328 | ||||||||||
| Obligations of foreign sovereigns | 76,366 | 8 | (352 | ) | 76,022 | ||||||||||
| Bonds of multi-lateral government agencies | 22,655 | — | (25 | ) | 22,630 | ||||||||||
| Marketable equity securities* | 3,135 | 4,083 | — | 7,218 | |||||||||||
Total short-term investments | 900,405 | 7,424 | (1,213 | ) | 906,616 | ||||||||||
| Total cash, cash equivalents, and short-term investments | $ | 1,090,307 | $ | 7,439 | $ | (1,213 | ) | $ | 1,096,533 | ||||||
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| | As of November 29, 2002 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Value | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||
| Classified as current assets: | |||||||||||||||
| Cash | $ | 21,911 | $ | — | $ | — | $ | 21,911 | |||||||
| Cash equivalents: | |||||||||||||||
| Money market mutual funds | 128,073 | — | — | 128,073 | |||||||||||
| State and municipal bonds and notes | 33,635 | 65 | — | 33,700 | |||||||||||
| Total cash equivalents | 161,708 | 65 | — | 161,773 | |||||||||||
| Total cash and cash equivalents | 183,619 | 65 | — | 183,684 | |||||||||||
Short-term investments: | |||||||||||||||
| State and municipal bonds | 396,953 | 3,583 | (294 | ) | 400,242 | ||||||||||
| United States Treasury Notes | 9,688 | 107 | (9 | ) | 9,786 | ||||||||||
| Corporate Bonds | 9,890 | 37 | (2 | ) | 9,925 | ||||||||||
| Marketable equity securities* | 11,092 | 3,008 | — | 14,100 | |||||||||||
| Total short-term investments | 427,623 | 6,735 | (305 | ) | 434,053 | ||||||||||
| Total cash, cash equivalents, and short-term investments | $ | 611,242 | $ | 6,800 | $ | (305 | ) | $ | 617,737 | ||||||
| | Carrying Value | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Classified as current assets: | |||||||||||||||
| Cash | $ | 37,546 | $ | — | $ | — | $ | 37,546 | |||||||
| Cash equivalents: | |||||||||||||||
| Money market mutual funds | 180,400 | — | — | 180,400 | |||||||||||
| Bank time deposits | 16,507 | — | — | 16,507 | |||||||||||
| United States Treasury notes | 20,790 | — | (6 | ) | 20,784 | ||||||||||
| Corporate bonds | 3,825 | — | (1 | ) | 3,824 | ||||||||||
| Total cash equivalents | 221,522 | — | (7 | ) | 221,515 | ||||||||||
| Total cash and cash equivalents | 259,068 | — | (7 | ) | 259,061 | ||||||||||
Short-term investments: | |||||||||||||||
| State and municipal bonds | 653,315 | 200 | (3,287 | ) | 650,228 | ||||||||||
| United States Treasury notes | 278,738 | 5 | (926 | ) | 277,817 | ||||||||||
| Corporate bonds | 98,995 | 5 | (555 | ) | 98,445 | ||||||||||
| Obligations of foreign sovereigns | 11,865 | — | (71 | ) | 11,794 | ||||||||||
| Bonds of multi-lateral government agencies | 13,070 | — | (25 | ) | 13,045 | ||||||||||
| Marketable equity securities* | 1,923 | 908 | — | 2,831 | |||||||||||
| Total short-term investments | 1,057,906 | 1,118 | (4,864 | ) | 1,054,160 | ||||||||||
| Total cash, cash equivalents, and short-term investments | $ | 1,316,974 | $ | 1,118 | $ | (4,871 | ) | $ | 1,313,221 | ||||||
In accordance with EITF 03-1, the following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 2, 2005:
| | Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||
| State and municipal bonds | $ | 630,745 | $ | (4,753 | ) | $ | 279,231 | $ | (3,415 | ) | $ | 909,976 | $ | (8,168 | ) | |||||
| United States Treasury notes | 94,253 | (407 | ) | 17,226 | (207 | ) | 111,479 | (614 | ) | |||||||||||
| Corporate bonds | 19,000 | (9 | ) | 22,013 | (231 | ) | 41,013 | (240 | ) | |||||||||||
| Obligations of foreign sovereigns | — | — | 8,979 | (25 | ) | 8,979 | (25 | ) | ||||||||||||
| Total | $ | 743,998 | $ | (5,169 | ) | $ | 327,449 | $ | (3,878 | ) | $ | 1,071,447 | $ | (9,047 | ) | |||||
Market values were determined for each individual security in the investment portfolio. The declines in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature.
See Note 1 for our policy on recording other-than-temporary declines in our marketable equity securities. We recorded netrecognize realized gains from theand losses upon sale of fixed income investments forusing the years ended November 28, 2003 and November 29, 2002 of $1.6 million and $3.3 million, respectively. We also recordedspecific identification method. See Note 6 for net realized gains from the sale of our short-term equity investments for the years ended November 28, 2003 and November 29, 2002 of $3.1 million and $7.2 million, respectively. In addition, we recorded losses related to other-than-temporary declines in the fair value of our marketable equity securities.
The following table summarizes the cost and estimated fair value of current debt securities totaling $4.0 million for fiscal 2003 and $11.3 million for fiscal 2002 (see Note 1 for our policy on recording other-than-temporary declines in our marketable equity securities). Allmoney market mutual funds, classified by the stated maturity of the above gains and losses were includedsecurity. A significant proportion of securities classified as "due after three years," based on the stated maturity, have structural features that allow us to sell the securities, at par, in investment loss on our consolidated statements of income.less than three years.
| | Cost | Estimated Fair Value | |||||
|---|---|---|---|---|---|---|---|
| Due within one year | $ | 820,549 | $ | 818,588 | |||
| Due within two years | 318,550 | 315,250 | |||||
| Due within three years | 115,450 | 114,140 | |||||
| Due after three years | 411,672 | 409,319 | |||||
| Total | $ | 1,666,221 | $ | 1,657,297 | |||
Note 4. Property and Equipment
Property and equipment consisted of the following:following as of December 2, 2005 and December 3, 2004:
| | November 28, 2003 | November 29, 2002 | |||||
|---|---|---|---|---|---|---|---|
| Computers and equipment | $ | 169,455 | $ | 158,623 | |||
| Furniture and fixtures | 30,882 | 28,728 | |||||
| Capital projects in-progress | 14,862 | 2,315 | |||||
| Leasehold improvements | 44,813 | 40,902 | |||||
| Buildings | 4,756 | 4,756 | |||||
| 264,768 | 235,324 | ||||||
| Less accumulated depreciation and amortization | (187,761 | ) | (164,234 | ) | |||
| Property and equipment, net | $ | 77,007 | $ | 71,090 | |||
| | 2005 | 2004 | |||||
|---|---|---|---|---|---|---|---|
| Computers and equipment. | $ | 196,912 | $ | 194,605 | |||
| Furniture and fixtures. | 37,604 | 33,563 | |||||
| Capital projects in-progress. | 565 | 18,117 | |||||
| Leasehold improvements. | 68,100 | 55,861 | |||||
| Buildings | 9,611 | 4,782 | |||||
| 312,792 | 306,928 | ||||||
| Less accumulated depreciation and amortization. | (209,243 | ) | (207,253 | ) | |||
| Property and equipment, net | $ | 103,549 | $ | 99,675 | |||
During fiscal 2003,2005, we capitalized costs in connection withcontinued our deployment of a new Customer Relations Management ("CRM") database, which aresystem. The capitalized costs in connection with the CRM system were included in capital projects in-progress.
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Depreciationprojects-in-progress for the years ended November 28,modules that were to be deployed. As the modules were deployed, they were reclassified to computers and equipment. The reclassification of CRM costs to computers and equipment were partially offset by the retirement of fully depreciated assets.
Depreciation expense for fiscal 2005, 2004 and 2003 November 29, 2002was $43.9 million, $39.8 million and November 30, 2001 was $33.7 million, $34.7 million and $29.8 million, respectively.
Note 5. Goodwill and Purchased and Other Intangibles
Upon adoption of SFAS 142, at the beginning of fiscal 2003, we transferred the unamortized balance of workforce-in-place to goodwill. As of November 28, 2003,December 2, 2005, the goodwill balance relates to our acquisitions of Accelio, Q-Link, Syntrillium, Accelio,OKYZ, GoLive Systems, Inc and GoLive Systems GmbH and Co. KG (together "GoLive") and Inscriber Technology Corporation. In accordance with SFAS 142, goodwill is no longer amortized; instead it is reviewed periodically for impairment. As required by SFAS 142, we have allocated goodwill to our reportable segments. Below is our goodwill net of amortization, reported by segment as of November 28, 2003:December 2, 2005 and December 3, 2004:
| | Digital Imaging and Video | Creative Professional | ePaper | Total | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Goodwill, net of amortization | $ | 14,112 | $ | 4,650 | $ | 77,209 | $ | 95,971 | ||||
| | 2005 | 2004 | ||||
|---|---|---|---|---|---|---|
| Digital Imaging and Video | $ | 14,112 | $ | 14,112 | ||
| Creative Professional | 4,650 | 4,650 | ||||
| Intelligent Document | 99,921 | 91,525 | ||||
| Total goodwill | $ | 118,683 | $ | 110,287 | ||
During fiscal 2005, our goodwill increased due to the acquisition of OKYZ. OKYZ provides three dimensional ("3D") technology and expertise to our Intelligent Document platform.
Purchased and other intangible assets consisted of the following:
| | November 28, 2003 | November 29, 2002 | |||||
|---|---|---|---|---|---|---|---|
| Purchased technology and licensing agreements | 28,509 | 26,304 | |||||
| Other intangible assets | 11,556 | 11,719 | |||||
| 40,065 | 38,023 | ||||||
| Less accumulated amortization | (24,747 | ) | (21,956 | ) | |||
| Total purchased and other intangible assets | $ | 15,318 | $ | 16,067 | |||
Identifiable intangible assets, subject to amortization, were as follows as of November 28, 2003:December 2, 2005:
| | Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Purchased technology | $ | 28,509 | $ | (18,875 | ) | $ | 9,634 | $ | 18,785 | $ | (11,153 | ) | $ | 7,632 | ||||
Localization | $ | 10,540 | $ | (5,348 | ) | $ | 5,192 | $ | 20,512 | $ | (11,901 | ) | $ | 8,611 | ||||
| Trademarks | 300 | (97 | ) | 203 | 225 | (82 | ) | 143 | ||||||||||
| Other intangibles | 716 | (427 | ) | 289 | 301 | (210 | ) | 91 | ||||||||||
| Total other intangible assets | $ | 11,556 | $ | (5,872 | ) | $ | 5,684 | $ | 21,038 | $ | (12,193 | ) | $ | 8,845 | ||||
| Total purchased and other intangible assets | $ | 40,065 | $ | (24,747 | ) | $ | 15,318 | $ | 39,823 | $ | (23,346 | ) | $ | 16,477 | ||||
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Identifiable Purchased and other intangible assets, subject to amortization, were as follows as of November 29, 2002:December 3, 2004:
| | Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Purchased technology | $ | 26,129 | $ | (14,958 | ) | $ | 11,171 | $ | 41,009 | $ | (29,266 | ) | $ | 11,743 | ||||
| Licensing agreements | 175 | (154 | ) | 21 | ||||||||||||||
| Total purchased technology and licensing agreements | $ | 26,304 | $ | (15,112 | ) | $ | 11,192 | |||||||||||
Localization | $ | 10,009 | $ | (5,915 | ) | $ | 4,094 | $ | 10,404 | $ | (7,109 | ) | $ | 3,295 | ||||
| Trademarks | 970 | (730 | ) | 240 | 300 | (133 | ) | 167 | ||||||||||
| Other intangibles | 740 | (199 | ) | 541 | 1,105 | (797 | ) | 308 | ||||||||||
| Total other intangible assets | $ | 11,719 | $ | (6,844 | ) | $ | 4,875 | $ | 11,809 | $ | (8,039 | ) | $ | 3,770 | ||||
| Total purchased and other intangible assets | $ | 38,023 | $ | (21,956 | ) | $ | 16,067 | $ | 52,818 | $ | (37,305 | ) | $ | 15,513 | ||||
Amortization expense of identifiable intangible assets is primarily included in costcosts of product revenue. Amortization expense related to identifiable intangible assets was $15.4$20.4 million, $28.8$21.1 million and $26.8$15.4 million for fiscal 2003, 20022005, 2004 and 2001,2003, respectively. Amortization expense, as of November 28, 2003,December 2, 2005, is expected to be as follows:
| Fiscal Year | Fiscal Year | Purchased Technology | Other Intangible Assets | Fiscal Year | Purchased Technology | Other Intangible Assets | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | $ | 5,873 | $ | 5,462 | ||||||||||
| 2005 | 3,214 | 80 | ||||||||||||
| 2006 | 2006 | 547 | 17 | 2006 | $ | 3,782 | $ | 7,705 | ||||||
| 2007 | 2007 | — | 17 | 2007 | 2,338 | 1,009 | ||||||||
| 2008 | 2008 | — | 17 | 2008 | 559 | 40 | ||||||||
| 2009 | 2009 | 315 | 17 | |||||||||||
| 2010 | 2010 | 315 | 17 | |||||||||||
| Thereafter | Thereafter | — | 91 | Thereafter | 323 | 57 | ||||||||
| Total expected amortization expense | $ | 9,634 | $ | 5,684 | Total expected amortization expense | $ | 7,632 | $ | 8,845 | |||||
Other assets consisted of the following:following as of December 2, 2005 and December 3, 2004:
| | | November 28, 2003 | November 29, 2002 | | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Investments | Investments | $ | 30,840 | $ | 35,617 | Investments | $ | 51,707 | $ | 41,382 | ||||
| Security deposits and other | Security deposits and other | 3,503 | 4,145 | Security deposits and other | 7,419 | 5,768 | ||||||||
| Land deposit | Land deposit | 3,378 | 3,323 | Land deposit | 3,301 | 3,340 | ||||||||
| Prepaid rent | Prepaid rent | 3,801 | 4,838 | |||||||||||
| Total other assets | $ | 37,721 | $ | 43,085 | Total other assets | $ | 66,228 | $ | 55,328 | |||||
We own limited partnership interests in Adobe Ventures.Ventures which are consolidated in accordance with FASB Interpretation No. 46R a revision to FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." The limited partnership investments are accounted for under the equity method, as the partnerships are controlled by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures. As of November 28, 2003 and November 29, 2002,
The following table summarizes the estimated fair value of our investments in Adobe Ventures was $30.6 million and $34.9 million, respectively.
Our investments in the limited partnerships are adjusted to reflect our equity interest in Adobe Ventures L.P.; Adobe Ventures II, L.P.; Adobe Ventures III, L.P.; and Adobe Ventures IV, L.P.'s investment loss and dividend distributions, which totaled $10.2 million, $15.4 million and $49.2 million in fiscal years 2003, 2002, and 2001, respectively.
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In addition to these venture partnerships, we have direct investments in public and privately-held companies. Since inception through November 28, 2003, we have invested $222.0 million through our venture partnerships and direct investments. Since inception through November 28, 2003, net returns were $346.1 million, including stock dividends and net gains in market value of investments.
We recognize realized gains and losses upon sale of investments using the specific identification method. During fiscal 2003, 2002 and 2001, we recorded investment losses of $12.9 million, $17.2 million and $93.4 million, respectively, which comprise gains and losses from our short-terminvestments for fiscal 2005, 2004 and long-term investments. Of these losses, $12.0 million, $13.1 million and $59.8 million, respectively, related to our investments in Adobe Ventures and our cost method investments.2003.
| | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net losses related to our investments in Adobe Ventures and cost method investments | $ | (1,021 | ) | $ | (81 | ) | $ | (11,981 | ) | ||
| Write-downs due to other-than-temporary declines in value of our marketable equity securities | (558 | ) | — | (3,984 | ) | ||||||
| Gains from sale of short-term investments | 104 | 2,493 | 3,090 | ||||||||
| Gains on stock warrants | 153 | 94 | — | ||||||||
| Other investment gains | 21 | — | — | ||||||||
| Total investment gain (loss) | $ | (1,301 | ) | $ | 2,506 | $ | (12,875 | ) | |||
During fiscal 2003, 2002 and 2001, investment losses also included write-downs due to other-than-temporary declines in2004, we restructured the lease for two of our headquarter office buildings. See Note 14 for additional information. The lease agreement provides for a residual value guarantee. In accordance with FIN 45, we recognized the fair value of $4.0the residual value guarantee of $5.2 million $11.3 million and $53.1 million, respectively, relatedas a long-term liability on our balance sheet with the offsetting entry to our short-term investments.prepaid rent in other assets. The losses for fiscal 2003, 2002 and 2001 were partially offset by gainsbalance will be amortized to the income statement over five years, the life of $3.1 million, $7.2 million and $19.5 million, respectively, from the salelease. As of marketable equity securities.December 2, 2005, the unamortized portion of the fair value of the residual value guarantee remaining in prepaid rent was $3.8 million.
Note 7. Accrued Expenses
Accrued expenses consisted of the following:following as of December 2, 2005 and December 3, 2004:
| | | November 28, 2003 | November 29, 2002 | | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accrued compensation and benefits | Accrued compensation and benefits | $ | 65,870 | $ | 54,117 | Accrued compensation and benefits | $ | 112,362 | $ | 98,108 | ||||
| Sales and marketing allowances | Sales and marketing allowances | 14,169 | 7,371 | Sales and marketing allowances | 16,306 | 11,857 | ||||||||
| Accrued restructuring | 1,132 | 10,975 | ||||||||||||
| Other | Other | 78,838 | 62,565 | Other | 98,317 | 92,797 | ||||||||
| Total accrued expenses | $ | 160,009 | $ | 135,028 | Total accrued expenses | $ | 226,985 | $ | 202,762 | |||||
Note 8. Restructuring and Other Charges
In fiscal 2002, we implemented two restructuring plans. The first plan, implemented in the second quarter of fiscal 2002, was to eliminate 39 redundant sales and marketing positions held by Adobe employees worldwide as a result of the acquisition of Accelio. The restructuring included severance and related charges associated with the reduction in force and the cost of vacating a leased facility. Total restructuring and other charges were $1.6 million and the majority of these payments were paid in the second quarter of fiscal 2002. This restructuring plan was completed during the second quarter of fiscal 2003 and there was no balance remaining in accrued restructuring.
The second plan was implemented in the fourth quarter of fiscal 2002 and was designed to eliminate 239 engineering, sales and marketing and general and administrative positions worldwide in order to realign our resources for our future business plans. These plans include adding resources to support our ePaper enterprise business in fiscal 2003. We incurred a restructuring charge of $11.1 million, which included severance and related charges and charges related to the closure of a facility. During fiscal 2003, we revised our estimate of certain costs associated with this restructuring program. The excess accrual was reversed to restructuring and other charges on our consolidated statement of income. This restructuring plan was completed during the fourth quarter of fiscal 2003 and there was no balance remaining in accrued restructuring.
84
A summary of restructuring activities, for both plans, is as follows:
| | Balance at November 29, 2002 | Cash Payments | Adjustments | Balance at November 28, 2003 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Severance and related charges | $ | 3,817 | $ | (3,386 | ) | $ | (431 | ) | $ | — | |||
| Facilities | 980 | (867 | ) | (113 | ) | — | |||||||
| Total | $ | 4,797 | $ | (4,253 | ) | $ | (544 | ) | $ | — | |||
In connection with our acquisition of Accelio in the second quarter of fiscal 2002, we recognized liabilities associated with a worldwide reduction in force of Accelio employees, transaction costs, costs related to closing redundant facilities and terminating contracts and other exit costs associated with the acquisition. During fiscal 2003, we revised our estimate of certain costs associated with our acquisition of Accelio to reflect the nature of our remaining liabilities. An excess accrual of $0.6 million was reversed as a reduction to goodwill and an additional $0.3 million was reversed to operating expenses. As of November 28, 2003, $1.1 million remained accrued and comprised transaction, facilities and other exit costs. Transaction costs primarily relate to the liquidation of Accelio's subsidiaries and are expected to be paid through fiscal 2004. Facility costs relate to leases we assumed upon acquisition of Accelio and terminate through September 2006. Other exit costs relate to specifically identified contingent liabilities which will be paid through fiscal 2004.
A summary of restructuring activities, related to our acquisition of Accelio, is as follows:
| | Balance at November 29, 2002 | Cash Payments | Adjustments | Balance at November 28, 2003 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Severance and related charges | $ | 647 | $ | (507 | ) | $ | (140 | ) | $ | — | |||
| Transaction costs | 627 | (253 | ) | (119 | ) | 255 | |||||||
| Cost of closing redundant facilities | 4,442 | (2,432 | ) | (1,181 | ) | 829 | |||||||
| Contract termination costs | 67 | (74 | ) | 7 | — | ||||||||
| Other exit costs | 395 | (844 | ) | 497 | 48 | ||||||||
| Total | $ | 6,178 | $ | (4,110 | ) | $ | (936 | ) | $ | 1,132 | |||
Note 9. Income Taxes
Income before income taxes includes net income from foreign operations of approximately $348.7 million, $298.0 million and $197.0 million $163.0 millionfor fiscal 2005, 2004 and $90.0 million for the years ended November 28, 2003, November 29, 2002 and November 30, 2001, respectively.
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The provision for income taxes consisted of the following:following for fiscal 2005, 2004 and 2003:
| | Years Ended | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | November 28, 2003 | November 29, 2002 | November 30, 2001 | | 2005 | 2004 | 2003 | ||||||||||||||
| Current: | Current: | Current: | ||||||||||||||||||||
| United States federal | $ | 32,751 | $ | 63,547 | $ | 52,355 | United States federal | $ | 63,932 | $ | 1,769 | $ | 32,751 | |||||||||
| Foreign | 11,814 | 8,344 | 16,087 | Foreign | 18,550 | 11,728 | 11,814 | |||||||||||||||
| State and local | 1,090 | 5,055 | 4,753 | State and local | 4,671 | 1,638 | 1,090 | |||||||||||||||
| Total current | Total current | 45,655 | 76,946 | 73,195 | Total current | 87,153 | 15,135 | 45,655 | ||||||||||||||
| Deferred: | Deferred: | Deferred: | ||||||||||||||||||||
| United States federal | 31,815 | (4,984 | ) | (14,494 | ) | United States federal | (7,653 | ) | 56,641 | 31,815 | ||||||||||||
| Foreign | (1,072 | ) | 259 | (767 | ) | Foreign | 93 | (970 | ) | (1,072 | ) | |||||||||||
| State and local | 314 | (761 | ) | (2,339 | ) | State and local | 492 | (10,353 | ) | 314 | ||||||||||||
| Total deferred | Total deferred | 31,057 | (5,486 | ) | (17,600 | ) | Total deferred | (7,068 | ) | 45,318 | 31,057 | |||||||||||
| Charge in lieu of taxes attributable to employee stock plans | Charge in lieu of taxes attributable to employee stock plans | 37,436 | 21,830 | 45,692 | Charge in lieu of taxes attributable to employee stock plans | 82,852 | 97,794 | 37,436 | ||||||||||||||
| $ | 114,148 | $ | 93,290 | $ | 101,287 | $ | 162,937 | $ | 158,247 | $ | 114,148 | |||||||||||
Total income tax expense differs from the expected tax expense (computed by multiplying the United States federal statutory rate of 35% for fiscal 2003, 2002, and 2001 by income before income taxes) as a result of the following:
| | 2005 | 2004 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Computed "expected" tax expense | $ | 268,022 | $ | 213,026 | $ | 133,172 | ||||
| State tax expense, net of federal benefit | 9,878 | 6,826 | 2,473 | |||||||
| Tax-exempt income | (7,196 | ) | (4,284 | ) | (3,786 | ) | ||||
| Tax credits | (8,977 | ) | (9,500 | ) | (4,878 | ) | ||||
| Differences between statutory rate and foreign effective tax rate | (62,561 | ) | (47,622 | ) | (24,816 | ) | ||||
| Change in deferred tax asset valuation allowance | (5,836 | ) | (1,238 | ) | 11,856 | |||||
| Tax benefit for repatriation of certain foreign earnings under the AJCA | (29,271 | ) | — | — | ||||||
| Other, net | (1,122 | ) | 1,039 | 127 | ||||||
| $ | 162,937 | $ | 158,247 | $ | 114,148 | |||||
During fiscal 2005, we completed our evaluation of the repatriation provisions of the AJCA. The AJCA introduced a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. Although the AJCA contains a number of limitations related to the repatriation and some uncertainty remains on key elements of the provision, we made a determination for a planned repatriation of $558.3 million of certain foreign earnings, of which $500.0 million qualifies for the 85% dividends received deduction. We completed the repatriation of $558.3 million of certain foreign earnings during fiscal 2005.
The total income tax provision of $162.9 million, for fiscal 2005, includes a tax provision of $43.5 million for the repatriation of certain foreign earnings. Additionally, it includes a reversal of $72.8 million for income taxes on certain foreign earnings for which a deferred tax liability had been previously accrued. As a result, a net income tax benefit of $29.3 million was recognized for the difference between income taxes previously provided on certain foreign earnings at the federal statutory tax rate and income taxes at the lower rate under the repatriation provisions of the AJCA. The tax provision of
| | Years Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | November 28, 2003 | November 29, 2002 | November 30, 2001 | |||||||
| Computed "expected" tax expense | $ | 133,172 | $ | 99,641 | $ | 107,426 | ||||
| State tax expense, net of federal benefit | 2,473 | 6,477 | 6,983 | |||||||
| Non-deductible goodwill | — | 7,437 | 3,178 | |||||||
| Tax-exempt income | (3,786 | ) | (3,915 | ) | (4,496 | ) | ||||
| Tax credits | (4,878 | ) | (6,000 | ) | (8,000 | ) | ||||
| Differences between statutory rate and foreign effective tax rate | (24,816 | ) | (9,487 | ) | (2,653 | ) | ||||
| Change in deferred tax asset valuation allowance | 11,856 | — | — | |||||||
| Other, net | 127 | (863 | ) | (1,151 | ) | |||||
| $ | 114,148 | $ | 93,290 | $ | 101,287 | |||||
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$43.5 million for the repatriation of certain foreign earnings is based upon currently available U.S. Treasury Department guidance.
The tax effects of the temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of fiscal 2002December 2, 2005 and 2001December 3, 2004 are presented below:
| | | November 28, 2003 | November 29, 2002 | | 2005 | 2004 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Deferred tax assets: | Deferred tax assets: | Deferred tax assets: | |||||||||||||||||
| Acquired technology | $ | 9,048 | $ | 7,886 | |||||||||||||||
| Acquired technology | $ | 14,711 | $ | 13,845 | Reserves | 29,716 | 16,515 | ||||||||||||
| Reserves and deferred revenue | 39,568 | 25,621 | Deferred revenue | 11,409 | 8,475 | ||||||||||||||
| Unrealized losses on investments | 13,574 | 26,159 | Unrealized losses on investments | 8,238 | 12,336 | ||||||||||||||
| Credits | 8,230 | 1,500 | Credits | 24,899 | 30,600 | ||||||||||||||
| Total gross deferred tax assets | 76,083 | 67,125 | Total gross deferred tax assets | 83,310 | 75,812 | ||||||||||||||
| Deferred tax asset valuation allowance | (13,574 | ) | — | Deferred tax asset valuation allowance | (8,238 | ) | (12,336 | ) | |||||||||||
| Total deferred tax assets | 62,509 | 67,125 | Total deferred tax assets | 75,072 | 63,476 | ||||||||||||||
Deferred tax liabilities: | Deferred tax liabilities: | Deferred tax liabilities: | |||||||||||||||||
| Depreciation and amortization | (9,422 | ) | (8,264 | ) | Depreciation and amortization | (22,650 | ) | (8,138 | ) | ||||||||||
| Undistributed earnings of foreign subsidiaries | (30,562 | ) | — | Undistributed earnings of foreign subsidiaries | (71,373 | ) | (81,585 | ) | |||||||||||
| Other | (4,365 | ) | (2,881 | ) | Other | (1,139 | ) | (911 | ) | ||||||||||
| Total deferred tax liabilities | (44,349 | ) | (11,145 | ) | Total deferred tax liabilities | (95,162 | ) | (90,634 | ) | ||||||||||
| Net deferred tax assets | $ | 18,160 | $ | 55,980 | |||||||||||||||
| Net deferred tax assets (liabilities) | Net deferred tax assets (liabilities) | $ | (20,090 | ) | $ | (27,158 | ) | ||||||||||||
We provide United States income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are considered permanently reinvested outside the United States. To the extent that the foreign earnings previously treated as permanently reinvested are repatriated, the related United States tax liability may be reduced by any foreign income taxes paid on these earnings. At November 28, 2003,As of December 2, 2005, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $229$230.4 million. The unrecognized deferred tax liability for these earnings is approximately $71$78.3 million.
For financial reporting purposes, a valuation allowance has been established in the amount of $13.6 million for certain deferred tax assets related to the write-down of investments. Management believesAt the end of fiscal 2005, our valuation allowance was $8.2 million.
We are currently under examination by the Internal Revenue Service for our fiscal 2001, 2002, and 2003 tax returns. Although the ultimate outcome is unknown, we have reserved for potential adjustments that it is more likely than notmay result from the current examination and we believe that the final outcome will not have a material effect on our results of future operations will generate sufficient taxable income to realize the remaining net deferred tax assets.operations.
At the end of fiscal 2003, the Company2005, we had state tax credit carry-forwards of approximately $8.2$24.9 million that can be carried forward indefinitely.
Below is a summary roll-forward schedule of theour income tax payable accounts as of November 28, 2003activity for fiscal 2005 and November 29, 2002:2004:
| | November 28, 2003 | November 29, 2002 | 2005 | 2004 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Beginning balance | $ | 173,311 | $ | 132,228 | $ | 145,913 | $ | 193,484 | ||||||
| Add: Current year liability | 45,655 | 76,946 | 87,153 | 15,135 | ||||||||||
| Less: Payments and reclasses | (25,482 | ) | (35,863 | ) | ||||||||||
| Less: Payments and reclassifications | (78,537 | ) | (62,706 | ) | ||||||||||
| Ending balance | $ | 193,484 | 173,311 | $ | 154,529 | $ | 145,913 | |||||||
Pretax Savings Plan
In 1987, we 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 our United States employees.
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Under the plan, eligible employees may contribute up to 18%30% of their pretax salary, subject to the Internal Revenue Service annual contribution limits. In fiscal 2003,2005, we matched 50% of the first 6% of the employee's contribution. We contributed approximately $6.1$8.9 million, $6.0$6.5 million and $5.8$6.1 million in fiscal 2003, 20022005, 2004 and 2001,2003, respectively. We can terminate matching contributions at our discretion.
Profit Sharing Plan
We have a profit sharing plan that provides for profit sharing payments to all eligible employees following each quarter in which we achieve at least 80% of our budgeted earnings for the quarter. The plan, as well as the annual operating budget on which the plan is based, is approved by our Board of Directors. We contributed approximately $28.8$45.7 million, $18.8$42.6 million and $11.6$28.8 million to the plan in fiscal 2005, 2004 and 2003, 2002 and 2001, respectively.
Note 11.10. Employee and Director Stock Plans
Stock Options
Our stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. In April 2003, the 2003 Equity Incentive Plan ("2003 Plan") was approved by our stockholders which replaced 1) the 1994 Stock Option Plan ("1994 Plan"), under which officers and key employees were granted options to purchase shares of our stock and 2) the 1999 Equity Incentive Plan ("1999 Plan"), our plan under which options could be granted to all employees, excluding executive officers, and outside consultants. As of November 28, 2003, we had reserved 12.6 million shares of common stock under our 2003 Plan.
Currently, we grant options from the 1) 2003 Equity Incentive Plan ("2003 Plan"), under which options could be granted to all employees, including executive officers, and outside consultants and 2) the 1996 Outside Directors Stock Option Plan (the "Directors Plan"), as amended, under which options are granted automatically under a pre-determined formula to non-employee directors. In addition, our stock option program includes the Adobe 1984 Stock Option Plan, as amended, and the Aldus 1984 Restated Stock Option Plan from which we currently do not grant options. The plans listed above are collectively referred to in the following discussion as "the Plans." We consider the Plans critical to our operation and productivity. Option vesting periods are generally three years for allthe Plans. As of the Plans.December 2, 2005, we had reserved 53.7 million and 5.2 million shares of common stock for issuance under our 2003 Plan and Directors Plan, respectively. As of December 2, 2005, we had 23.0 million and 1.3 million shares available for grant under our 2003 Plan and Directors Plan, respectively.
All stock option grants to current executive officers are made after a review by and with the approval of the Executive Compensation Committee of the Board of Directors. All members of the Executive Compensation Committee are independent directors, as defined in the current and proposed rules applicable to issuers traded on the Nasdaq Stock Market.
In May 2003, a stock option exchange program was initiated that allowed eligible employees to exchange options granted with an option price greater than $40 per share for a lesser number of new options, according to specified exchange ratios. The program excluded executive officers and members of our Board of Directors. The cancellation date for the program was June 16, 2003. On June 17, 2003 we accepted for cancellation, options to purchase approximately 7.1 million shares of common stock. Eligible employees, subject to their continued employment with Adobe on December 17, 2003, the grant date of the new options, received new options to purchase shares of common stock in exchange for such cancelled options. See Note 17 for final results of the stock option exchange program. The tables include options to purchase 3.5 million shares as estimated as of November 28, 2003.
As of November 28, 2003, we had reserved 3.3 million shares of common stock for issuance under our 1996 Outside Directors Stock Option Plan, as amended (the "Directors Plan"). The Directors Plan provides for the granting of nonqualified stock options to non-employee directors. Option grants are limited to 40,00025,000 shares per person in each fiscal year, except for a new non-employee director, who is
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granted to whom 60,000 shares are granted upon election as a director. Effective fiscal 2004, option grants are limited to 25,000 shares per person in each fiscal year, except for the new non-employee director to whom 50,000 shares are granted upon election as a director. Options have a ten-year term and are exercisable and vest over three years: 25% on the day preceding each of Adobe's next two annual meetings of stockholders and 50% on the day preceding Adobe's third annual meeting of stockholders after the grant of the option. The exercise price of the options that are issued is equal to the fair market value of our common stock on the date of grant. In
Options granted to directors for fiscal 2005, 2004 and 2003 we granted options for an aggregate of 280,000 shares with an exercise of $32.41 to existing directors. In fiscal 2002, we granted options for an aggregate of 240,000 shares with an exercise price of $39.04 to existing directors and an option for 60,000 shares to a new director with an exercise price of $33.00. In fiscal 2001, we granted options for an aggregate of 200,000 shares with an exercise price of $41.06 to existing directors.are as follows:
| | 2005 | 2004 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Options granted to existing directors | 400,000 | 350,000 | 560,000 | ||||||
| Exercise price | $ | 29.74 | $ | 20.83 | $ | 16.21 | |||
Options granted to new directors | 50,000 | 100,000 | — | ||||||
| Exercise price | $ | 26.83 | $ | 21.05 | $ | — | |||
As of November 28, 2003,December 2, 2005, approximately 1.02.3 million shares were reserved for issuance upon exercise of outstanding options and approximately 0.7 million shares were available for grant under the Directors Plan. The Directors Plan will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued and restrictions on issued shares have lapsed.
Stock option activity for fiscal 2003, 20022005, 2004 and 20012003 is presented below (in actual amounts):
| | November 28, 2003 | November 29, 2002 | November 30, 2001 | December 2, 2005 | December 3, 2004 | November 28, 2003 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | ||||||||||||||||||
| Outstanding at beginning of year | 57,847,050 | $ | 35.64 | 54,284,317 | $ | 36.66 | 45,017,400 | $ | 38.26 | 76,532,632 | $ | 18.52 | 84,939,306 | $ | 16.40 | 115,694,100 | $ | 17.82 | ||||||||||||
| Options granted | 1,994,130 | $ | 33.12 | 11,973,680 | $ | 28.77 | 19,177,315 | $ | 28.38 | 11,418,499 | 31.88 | 20,759,510 | 21.07 | 3,988,260 | 16.56 | |||||||||||||||
| Options exercised | (7,978,054 | ) | $ | 23.81 | (3,688,534 | ) | $ | 15.99 | (4,826,823 | ) | $ | 12.55 | (20,494,162 | ) | 15.32 | (26,587,728 | ) | 13.55 | (15,956,108 | ) | 11.91 | |||||||||
| Options canceled | (9,393,473 | ) | $ | 58.00 | (4,722,413 | ) | $ | 45.20 | (5,083,575 | ) | $ | 44.89 | (2,205,685 | ) | 21.52 | (2,578,456 | ) | 20.46 | (18,786,946 | ) | 29.00 | |||||||||
| Outstanding at end of year | 42,469,653 | $ | 32.80 | 57,847,050 | $ | 35.64 | 54,284,317 | $ | 36.66 | 65,251,284 | 21.76 | 76,532,632 | 18.52 | 84,939,306 | 16.40 | |||||||||||||||
| Exercisable at end of year | 27,240,540 | $ | 34.60 | 26,402,239 | $ | 35.65 | 20,844,567 | $ | 29.27 | 42,098,806 | 44,873,414 | 18.51 | 54,481,080 | 17.30 | ||||||||||||||||
| Weighted average fair value of options granted during the year | $ | 11.69 | $ | 13.49 | $ | 15.20 | $ | 9.08 | $ | 5.63 | $ | 5.85 | ||||||||||||||||||
Information regarding the stock options outstanding at November 28, 2003December 2, 2005 is summarized below:
| | Options Outstanding | Options Exercisable | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||
| $ 4.67 - 7.00 | 173,489 | 1.32 years | $ | 6.50 | 173,449 | $ | 6.46 | |||||
| $ 7.13 - 8.34 | 526,945 | 2.35 years | 8.17 | 526,945 | 8.17 | |||||||
| $ 8.45 | 3,132,913 | 2.50 years | 8.45 | 3,132,343 | 8.45 | |||||||
| $ 9.66 - 14.09 | 322,818 | 3.17 years | 11.78 | 322,068 | 11.78 | |||||||
| $14.86 - 22.19 | 632,833 | 5.81 years | 18.47 | 266,478 | 18.35 | |||||||
| $24.11 - 26.75 | 8,743,182 | 5.93 years | 26.41 | 2,114,086 | 26.28 | |||||||
| $26.95 | 5,127,619 | 5.91 years | 26.95 | 1,904,508 | 26.95 | |||||||
| $27.00 - 27.69 | 5,537,400 | 5.32 years | 27.65 | 3,954,894 | 27.68 | |||||||
| $27.94 - 41.78 | 11,184,767 | 4.99 years | 36.01 | 8,055,716 | 35.93 | |||||||
| $44.05 - 65.34 | 6,930,021 | 4.75 years | 59.06 | 6,633,628 | 59.06 | |||||||
| $67.31 - 81.50 | 157,666 | 4.84 years | 72.83 | 156,425 | 73.39 | |||||||
| 42,469,653 | 5.06 years | $ | 32.80 | 27,240,540 | $ | 34.60 | ||||||
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| | Options Outstanding | Options Exercisable | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||
| $3.42 - 13.24 | 8,888,158 | 3.04 years | $ | 10.65 | 8,761,321 | $ | 10.62 | |||||
| $13.37 - 13.84 | 7,529,423 | 3.58 years | 13.67 | 7,471,181 | 13.68 | |||||||
| $13.97 - 17.84 | 7,615,413 | 2.64 years | 17.39 | 7,064,075 | 17.47 | |||||||
| $17.94 - 20.14 | 7,560,403 | 4.32 years | 19.54 | 3,682,253 | 19.54 | |||||||
| $20.29 - 21.36 | 1,262,743 | 6.24 years | 20.78 | 706,429 | 20.65 | |||||||
| $21.78 - 21.78 | 7,795,296 | 5.46 years | 21.78 | 2,521,526 | 21.77 | |||||||
| $21.97 - 28.17 | 7,358,914 | 3.27 years | 26.39 | 5,827,701 | 27.16 | |||||||
| $28.45 - 32.20 | 8,254,548 | 4.16 years | 31.25 | 5,781,120 | 31.99 | |||||||
| $32.42 - 40.75 | 8,986,386 | 6.39 years | 32.63 | 283,200 | 35.68 | |||||||
| 65,251,284 | 4.18 years | $ | 21.76 | 42,098,806 | $ | 19.32 | ||||||
Performance and Restricted Stock
The 1994 Performance and Restricted Stock Plan ("the Restricted Stock Plan") provides for the granting of restricted stock and/or performance awards to officers and key employees. As of November 28, 2003,December 2, 2005, we had reserved 8.016.0 million shares of our common stock for issuance under the Plan.
Restricted shares issued under the Restricted Stock Plan generally vest annually over two to three years but are considered outstanding at the time of grant, as the stockholders are entitled to dividends and voting rights. As of November 28, 2003, 24,593December 2, 2005, 0.4 million shares were outstanding and not yet vested. In fiscal 2003, 2002, and 2001, we granted 3,277, 9,321 and 56,146 shares of restricted stock, respectively, and the weighted average fair value of the shares was $32.37, $27.88 and $39.44, respectively. Additionally, we charged $2.8$0.4 million, $6.8$0.3 million and $18.0$2.8 million to expense associated with restricted stock in fiscal 2003, 20022005, 2004 and 2001,2003, respectively. As of November 28, 2003,December 2, 2005, approximately 2.85.5 million shares were available for grant under this Plan.
Restricted stock issued for fiscal 2005, 2004 and 2003 are as follows:
| | 2005 | 2004 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Restricted stock granted | 25,832 | 13,786 | 6,554 | ||||||
| Average fair value of shares | $ | 30.86 | $ | 21.44 | $ | 16.19 | |||
Performance awards issued under the Restricted Stock Plan entitle the recipient to receive, at our discretion, shares or cash upon completion of the performance period subject to attaining identified performance goals. Performance awards are generally measured over a three-year period and cliff vest at the end of the three-year period. We accrue the projected value of these awards and charge this amount to expense over the three-year performance period. We did not grant performance awards in fiscal 2003, 2002 or 2001.2005, 2004 and 2003. As of November 28, 2003December 2, 2005 and November 29, 2002,December 3, 2004, there were no performance awards outstanding.
The 1999 Plan also provides for the granting of restricted stock and/or performance awards to employees, although no awards of this type have been made under the 1999 Plan to date.
The Restricted Stock Plan will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued and restrictions on issued shares have lapsed.
Employee Stock Purchase Plan
Our 1997 Employee Stock Purchase Plan (the "ESPP") allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of twenty-four-month offering periods with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower. As of November 28, 2003,December 2, 2005, we had reserved 38.076.0 million shares of our common stock for issuance under the ESPP and approximately 14.222.8 million shares remain available for future issuance.
The weighted average fair value of the purchase rights granted in fiscal 2005, 2004 and 2003 2002were $9.08, $6.27 and 2001 were $10.98 million, $11.59 and $22.91,$5.49, respectively.
The ESPP will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued.
Cash Incentive Awards
We grant Cash Incentive Awards ("CIAs"), a form of phantom stock, to designated key employees to reward them based on their contributions to a project. The cash value of the CIA is structured to mirror our Restricted Stock Plan. The CIAs, which we grant to designated employees, generally vest annually over a three-year period. Upon each vest date, the employee is paid the market value of the stock on the date of vest multiplied by the number of vested shares. We charged approximately $0.4 million and $(2.5) million for shares vested (forfeited) in fiscal 2002 and 2001, respectively. There was no charge in fiscal 2003. All existing CIAs were fully vested in fiscal 2002, and we currently do not intend to grant CIAs in the future.
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Stock Appreciation Rights
Under the 2003 Plan, we are authorized to grant Stock Appreciation Rights ("SARs"), a form of phantom stock, to designated key employees based on their performance. Additionally, we grant SARs to employees in certain countries outside of the U.S. in lieu of stock options, generally with similar vesting schedules to our option vesting schedule; these SARs generally expire eight years after the grant date. The 1999 Plan also provides for the granting of stock appreciation rights to employees, although no awards of this type have been made under the 1999 Plan to date.
The performance-based SARs generally vest four years from the date of grant but contain an acceleration feature that allows for a two-year vesting period based on Adobe achieving predetermined performance goals. These performance-based SARs expire five years from the date of grant. Under our SAR plan, designated employees are awarded rights that are equal to one share of Adobe's common stock for each right awarded with an exercise price based on the fair market value on the grant date. When the award vests, employees generally have the right to exercise the award and receive the then-current value in cash of the appreciation from the exercise price of the exercised number of rights of our common stock. We did not award anygrant SARs in fiscal 2003, 20022005, 2004 and 2001.2003. We charged approximately $0.1 million, $0.01$0.2 million and $(0.5)$0.1 million to expense in fiscal2005, 2004 and 2003, 2002 and 2001, respectively. We currently do not intend to grantrespectively, for outstanding SARs. As of December 2, 2005, there were no SARs in the future, except to certain employees outside of the U.S. in lieu of stock options.outstanding.
Note 12.11. Stockholders' Equity
Stockholder Rights Plan
Our Stockholder Rights Plan is intended to protect stockholders 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 our common stock held as of July 24, 1990 and on each share of common stock issued by Adobe thereafter. In July 2000, the Stockholder Rights Plan was amended to extend it for ten years so that each right entitles the holder to purchase one unit of Series A Preferred Stock, which is equal to 1/1000 share of Series A Preferred Stock, par value $0.0001 per share, at a price of $700 per unit. As adjusted for our 2000 and 2005 stock splitsplits each in the form of a dividend, each share of common stock now entitles the holder to one-halfone-quarter of such a purchase right. Each whole right still entitles the registered holder to purchase from Adobe a unit of preferred stock at $700. The rights become exercisable in certain circumstances, including upon an entity's acquiring or announcing the intention to acquire beneficial ownership of 15% or more of our common stock without the approval of the Board of Directors or upon our being acquired by any person in a merger or business combination transaction. The rights are redeemable by Adobe prior to exercise at $0.01 per right and expire on July 23, 2010.
Stock Repurchase Program I—On-going Dilution Coverage
To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuance primarily from employee stock plans,issuances, we have repurchasedrepurchase shares in the open market sold put warrants and purchased call options.from time to time enter into structured stock repurchase agreements with third parties.
Authorization to repurchase shares to cover on-going dilution is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances and is subject to business conditions and cash flow requirements as determined by our Board of Directors from time to time. We
On April 17, 2005, the Board of Directors approved the use of $1.0 billion for stock repurchases commencing upon the close of the Macromedia acquisition.
During fiscal 2005, we entered into several structured stock repurchase agreements with large financial institutions. Under these agreements, we provided the financial institutions with up-front payments totaling $600.0 million. The financial institutions agreed to deliver to us, at certain intervals during the contract term, a certain number of our shares based on the volume weighted average price during such intervals less a specified discount. Upon payment, the $600.0 million was classified as treasury stock on our balance sheet. As of December 2, 2005, approximately $154.9 million of the up-front payments remained under the agreements.
During fiscal 2005, we repurchased approximately 2.818.7 million 8.6shares at an average price of $30.61 through structured repurchase agreements. During fiscal 2004, we repurchased 22.0 million shares at an average price of $21.91 through open market repurchases and 5.9 million in fiscal 2003, 2002 and 2001, respectively, at a cost of $84.8 million, $255.0 million and $319.9 million, respectively.
Instructured repurchase agreements. During fiscal 2003, we did not sell any put warrants. In fiscal 2002 and 2001, we sold approximately 7.5 million andrepurchased 5.6 million shares at an average price of $15.21 through open market repurchases and the exercise of put warrants, respectively. Each put warrant entitled the holder to sell one share of Adobe's common stock to Adobe at a specified price for cash or stock at Adobe's option. At November 28, 2003, no put warrants were outstanding.
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In fiscal 2003, we did not purchase anyand call options. In fiscal 2002 and 2001, we purchased call options that entitled us to buy 4.9 million and 3.9 million shares, respectively, of our common stock on certain dates at specified prices. At November 28, 2003, no call options were outstanding.
Stock Repurchase Program II—Additional Authorization above Dilution Coverage
In March 2001, our Board of Directors authorized a program to purchase up to an additional 5.0 million shares of our common stock over a two-year period, subject to certain business and cash flow requirements. Under this program, we repurchased approximately 2.0 million shares at a cost of $38.2 million during fiscal 2002. We did not make any repurchases under this plan in fiscal years 2003 and 2001. The authorization for the remaining 3.0 million shares expired on March 2, 2003.
On September 25, 2002, our Board of Directors authorized a program to purchase up to an additional 5.010.0 million shares of our common stock over a three-year period, subject to certain business and cash flow requirements. We have not made any purchases under this 5.010.0 million share repurchase program. The authorization for this program will expireexpired in September 2005.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Items of comprehensive income that we currently report are unrealized gains and losses on marketable securities categorized as available-for-sale and foreign currency translation adjustments. We also report gains and losses on derivative instruments qualifying as cash flow hedges such as (i) hedging a forecasted foreign currency transaction, (ii) the variability of cash flows to be received or paid related to a recognized asset or liability and (iii) interest rate hedges.
The following table sets forth the components of other comprehensive income for fiscal 2005, 2004 and 2003:
| | Unrealized Gain (Loss) on | | | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Available- for-Sale Securities | Derivative Instruments | Foreign Currency Translation | Total | |||||||||
| Balance at November 29, 2002 | $ | 3,411 | $ | (1,929 | ) | $ | (5,432 | ) | $ | (3,950 | ) | ||
| Unrealized gain (loss) | 416 | (3,383 | ) | — | (2,967 | ) | |||||||
| Reclassification adjustment for (gains) losses recognized during the period | (685 | ) | 3,489 | — | 2,804 | ||||||||
| Tax effect of above | (691 | ) | (666 | ) | — | (1,357 | ) | ||||||
| Translation adjustments | — | — | 4,471 | 4,471 | |||||||||
Other comprehensive income (loss) | (960 | ) | (560 | ) | 4,471 | 2,951 | |||||||
Balance at November 28, 2003 | 2,451 | (2,489 | ) | (961 | ) | (999 | ) | ||||||
Unrealized gain (loss) | (6,696 | ) | 3,097 | — | (3,599 | ) | |||||||
| Reclassification adjustment for (gains) losses recognized during the period | (3,283 | ) | 405 | — | (2,878 | ) | |||||||
| Tax effect of above | 2,634 | (1,013 | ) | — | 1,621 | ||||||||
| Translation adjustments | — | — | 3,566 | 3,566 | |||||||||
Other comprehensive income (loss) | (7,345 | ) | 2,489 | 3,566 | (1,290 | ) | |||||||
Balance at December 3, 2004 | (4,894 | ) | — | 2,605 | (2,289 | ) | |||||||
Unrealized gain (loss) | (4,529 | ) | 12,771 | — | 8,242 | ||||||||
| Reclassification adjustment for (gains) losses recognized during the period | 2,223 | (7,453 | ) | — | (5,230 | ) | |||||||
| Translation adjustments | — | — | (1,637 | ) | (1,637 | ) | |||||||
Other comprehensive income (loss) | (2,306 | ) | 5,318 | (1,637 | ) | 1,375 | |||||||
Balance at December 2, 2005 | $ | (7,200 | ) | $ | 5,318 | $ | 968 | $ | (914 | ) | |||
Note 13. Net Income Per Share
Basic net income per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested restricted stock. Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive potential common equivalent shares, including unvested restricted common stock and stock options and put warrants using the treasury stock method.
| | Years Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | November 28, 2003 | November 29, 2002 | November 30, 2001 | |||||||
| Net income | $ | 266,344 | $ | 191,399 | $ | 205,644 | ||||
| Shares used to compute basic net income per share (weighted average shares outstanding during the period, excluding unvested restricted stock) | 234,246 | 236,834 | 238,461 | |||||||
| Dilutive common equivalent shares: | ||||||||||
| Unvested restricted stock | 25 | 83 | 318 | |||||||
| Stock options | 7,179 | 6,132 | 10,366 | |||||||
| Put warrants | — | 70 | — | |||||||
| Shares used to compute diluted net income per share | 241,450 | 243,119 | 249,145 | |||||||
| Basic net income per share | $ | 1.14 | $ | 0.81 | $ | 0.86 | ||||
| Diluted net income per share | $ | 1.10 | $ | 0.79 | $ | 0.83 | ||||
The following table sets forth the computation of basic and diluted net income per share for fiscal 2005, 2004 and 2003.
| | 2005 | 2004 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net income | $ | 602,839 | $ | 450,398 | $ | 266,344 | ||||
| Shares used to compute basic net income per share (weighted average shares outstanding during the period, excluding unvested restricted stock) | 489,921 | 477,658 | 468,492 | |||||||
| Dilutive common equivalent shares: | ||||||||||
| Unvested restricted stock | 35 | 22 | 50 | |||||||
| Stock options | 18,114 | 17,946 | 14,358 | |||||||
| Shares used to compute diluted net income per share | 508,070 | 495,626 | 482,900 | |||||||
| Basic net income per share | $ | 1.23 | $ | 0.94 | $ | 0.57 | ||||
| Diluted net income per share | $ | 1.19 | $ | 0.91 | $ | 0.55 | ||||
For the years ended December 2, 2005, December 3, 2004 and November 28, 2003, November 29, 2002 and November 30, 2001, options to purchase approximately 16.711.6 million, 26.514.0 million and 17.733.4 million shares, respectively, of common stock with exercise prices greater than the annual average fair market value of our stock of $33.95, $30.44$30.33, $22.23 and $39.57,$16.98, respectively, were not included in the calculation because the effect would have been antidilutive.
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Note 14. Commitments and Contingencies
Lease Commitments
We lease certain of our facilities and some of our equipment under noncancelable operating lease arrangements that expire at various dates through 2025. We also have one land lease that expires in 2091. Rent expense net ofand sublease income for these leases aggregated $32.4 million, $26.6 million and $22.0 million duringfor fiscal 2003 2002through 2005 were as follows:
| | 2005 | 2004 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Rent expense | $ | 58,215 | $ | 55,333 | $ | 39,376 | |||
| Sublease income | 4,995 | 5,681 | 6,962 | ||||||
| Net rent expense | $ | 53,220 | $ | 49,652 | $ | 32,414 | |||
We occupy three office buildings in San Jose, California where our corporate headquarters are located. We reference these office buildings as the "Almaden tower" and 2001, respectively.the "East and West towers."
In September 2001,December 2003, upon completion of construction, we entered intobegan a real estate developmentfive year lease agreement for the construction of an additional office building for our corporate headquarters in downtown San Jose, California.Almaden tower. Under the agreement, the lessor agreed to finance up to $117.0 million over a two-year period, toward the construction and associated costs of the building. The construction of the building was completed in December 2003. Due to lower than expected financing and construction costs, the final lease balance was lowered to $103.0 million.
As part of the agreement, we entered into a five-year lease that began upon the completion of the building. We have the option to purchase the building at any time during the term for an amount equal to the lease balance. The agreement and lease are subject to standard covenants including liquidity, leverage and profitability ratios that are reported to the lessor quarterly. As of November 28, 2003, we were in compliance with all covenants. In the case of a default, the lessor may terminate all remaining commitments and may demand we purchase the building for an amount equal to the current lease balance, or require we remarket or relinquish the building. The agreement qualifies for operating lease accounting treatment under Statement of Financial Accounting Standards No. 13 ("SFAS 13"), "Accounting for Leases," and, as such, the building and the related obligation are not included on our balance sheet. We utilized this type of financing because it allows us to access bank-provided funding at the most favorable rates and allows us to maintain our cash balances for other corporate purposes. At the end of the lease term we can purchase the building for the lease balance, remarket or relinquish the building. If we choose to remarket or are required to do so upon relinquishing the building, we are bound to arrange the sale of the building to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to thewhich is approximately $103.0 million. The maximum recourse amount of $90.8 million ("residual value guarantee"). under this obligation is $90.8 million.
In August 1999,2004, we entered into a five-yearextended the lease agreement for our other two office buildings that currently serveEast and West towers for an additional five years with an option to extend for an additional five years solely at Adobe's election. As part of the lease extension, we purchased a portion of the lease receivable of the lessor for $126.8 million, which is recorded as an investment in lease receivable on our corporate headquarters in San Jose, California.consolidated balance sheet. This purchase may be credited against the residual value guarantee if we purchase the properties or repaid from the sale proceeds if the properties are sold to third parties. Under the agreement for the East and West towers, we have the option to purchase the buildings at any time during the lease term for the lease balance, which is approximately $142.5$143.2 million. The leasemaximum recourse amount ("residual value guarantee") under this obligation is $126.8 million.
These two leases are both subject to standard covenants including liquidity, leverage and profitability ratios that are reported to the lessorlessors quarterly. As of November 28, 2003,December 2, 2005, we were in compliance with all covenants. In the case of a default, the lessor may demand we purchase the buildings for an amount equal to the lease balance, or require that we remarket or relinquish the buildings. The agreement qualifiesBoth leases qualify for operating lease accounting treatment under SFASStatement of Financial Accounting Standards No. 13, "Accounting for Leases," and, as such, the buildings and the related obligationobligations are not included on our consolidated balance sheet. We utilized this type of financing because it allows usin order to access bank-provided funding at the most favorable rates and allows us to maintain our cash balancesprovide the lowest total cost of occupancy for other corporate purposes.the headquarter buildings. At the end of the lease term, we can extend the lease for an additional five year term (for the East and West towers lease only), purchase the buildings for the lease balance, remarket or relinquish the buildings. If we choose to remarket or are required to do so upon relinquishing the buildings, we are bound to arrange the sale of the buildings to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the maximum recourse amount of $132.6 million ("residual value guarantee"). There were no changes in the agreement or level of obligations from the end of fiscal 2002. We are in the process of evaluating alternative financing methods at expiration of the lease in fiscal 2004 and believe that several suitable financing options will be available to us.amount.
As of November 28, 2003,December 2, 2005, future minimum lease payments under noncancelable operating leases and future minimum sublease income under noncancelable subleases are as follows:
| Fiscal Year | Future Minimum Lease Payments | Future Minimum Sublease Income | |||||
|---|---|---|---|---|---|---|---|
| 2006 | $ | 35,265 | $ | 5,328 | |||
| 2007 | 26,616 | 3,250 | |||||
| 2008 | 23,155 | 1,678 | |||||
| 2009 | 19,824 | 1,719 | |||||
| 2010 | 10,221 | 1,093 | |||||
| Thereafter | 58,398 | — | |||||
| Total | $ | 173,479 | $ | 13,068 | |||
Guarantees
| Fiscal Year | Future Minimum Lease Payments | Future Minimum Sublease Income | |||||
|---|---|---|---|---|---|---|---|
| 2004 | $ | 29,454 | $ | 5,859 | |||
| 2005 | 20,746 | 5,798 | |||||
| 2006 | 16,796 | 5,839 | |||||
| 2007 | 12,188 | 3,819 | |||||
| 2008 | 9,596 | 1,678 | |||||
| Thereafter | 20,900 | 2,811 | |||||
| Total | $ | 109,680 | $ | 25,804 | |||
The lease agreements for our corporate headquarters provide for residual value guarantees. Under FIN 45, the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002, must be recognized as a liability on our consolidated balance sheet. As such, we recognized a $5.2 million liability related to the East and West tower lease that was extended in August 2004. This liability is recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the lease. As of December 2, 2005, the unamortized portion of the fair value of the residual value guarantee remaining in other long-term liabilities and prepaid rent was $3.8 million.
Royalties
We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue. Royalty expense, which was recorded under our cost of products revenue on our consolidated statements of income, was approximately $14.5$17.8 million, $14.4$15.9 million and $14.1$14.5 million in fiscal 2003, 20022005, 2004 and 2001,2003, respectively.
GuaranteesIndemnifications
We adopted FIN 45 atIn the beginningnormal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our fiscal year 2003. See "Guarantees"products. Historically, costs related to these indemnification provisions have not been significant and "Recent Accounting Pronouncements"we are unable
to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in Note 1such capacity. The indemnification period covers all pertinent events and occurrences during the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
As part of our Noteslimited partnership interests in Adobe Ventures, we have provided a general indemnification to Consolidated Financial StatementsGranite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for further information regarding FIN 45.certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnerships. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote.
Legal Actions
In early 2002, International Typeface Corporation ("ITC") and Agfa Monotype Corporation ("AMT"), companies which have common ownership and management, each charged, by way of informal letters to Adobe, that Adobe's distribution of font software, which generates ITC and AMT typefaces, breaches its contracts with ITC and AMT, respectively, pursuant to which Adobe licensed certain rights with respect to ITC and AMT typefaces. AMT and ITC further charged that Adobe violated the Digital Millennium Copyright Act ("DMCA") with respect to, or induced or contributed to, the infringement of copyrights in, ITC's and AMT's TrueType font software.
On September 4, 2002, Adobe initiated arbitration proceedings in London, England ("the London Arbitration") against AMT, seeking a declaration that Adobe's distribution of font software that generates AMT typefaces did not breach its contract pursuant to which it licensed certain rights with respect to AMT typefaces. AMT has made a breach of contract claim in response to Adobe's arbitration demand in the London Arbitration, asserting that Adobe wrongfully granted and/or allowed third parties greater rights to distribute and embed AMT fonts than Adobe was licensed to grant and/or allow.
Adobe asserts that it negotiated for and obtained express, written licenses from both AMT and ITC approximately ten years ago permitting Adobe to allow end users to embed AMT and ITC fonts in electronic documents for "print and view" and disputes the other breach of contract claims. Adobe also asserts that Adobe Acrobat 5.0, which AMT and ITC correctly acknowledge has been superseded by subsequent versions, neither violates the DMCA nor induces or contributes to the infringement of copyrights in ITC's and AMT's TrueType font software.
On September 5, 2002, AMT and ITC filed suit against Adobe in the U.S. District Court, Eastern District of Illinois ("the Illinois Action"), asserting only that Adobe's distribution of the superseded
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5.0 version of Adobe Acrobat violated the DMCA, as described above. The Illinois Action seeks statutory damages of $200 to $2,500 for each copy of Acrobat 5.0 found to violate the DMCA, a claim that Adobe disputes as a matter of law and fact. The Illinois Action also seeks injunctive relief with respect to Acrobat 5.0, although it specifically alleges, correctly, that Adobe no longer distributes Acrobat 5.0.
On November 13, 2002, ITC filed another suit against Adobe in the United States District Court for the Eastern District of Illinois, this time asserting that Adobe breached its contract with ITC and that ITC, not Adobe, owns the copyrights in font software created by Adobe which generates ITC typefaces.
If either AMT or ITC prevails on its breach of contract claims, AMT or ITC may have the right to terminate Adobe's right to distribute any of its products that then still contain font software that generates AMT or ITC typefaces. Adobe denies these claims and is vigorously defending against these actions.
The results of any litigation are inherently uncertain and Adobe cannot assure that it will be able to successfully defend itself against any of the actions described above. AMT and ITC seek an unspecified aggregate dollar amount of damages. A favorable outcome for AMT or ITC in these actions could have a material adverse effect on Adobe's financial position, cash flows or results of operations. We believe that all of AMT's and ITC's claims are without merit and will vigorously defend against them in addition to pursuing our own claims as described above. We cannot estimate the possible loss at this time.
On September 6, 2002, Plaintiff Fred B. Dufresne filed suit against Adobe, Microsoft Corporation, Macromedia, Inc. and Trellix Corporation in the U.S. District Court, District of Massachusetts, alleging infringement of U.S. Patent No. 5,835,712, entitled "Client-Server System Using Embedded Hypertext Tags for Application and Database Development." The Plaintiff's complaint asserts that "Defendants"defendants have infringed, and continue to infringe, one or more claims of the "712 patent by making, using, selling and/or offering for sale,inter alia, products supporting Microsoft Active Server Pages technology." The plaintiffPlaintiff seeks unspecified compensatory damages, preliminary and permanent injunctive relief, trebling of damages for "willful infringement," and fees and costs. Adobe disagrees withWe believe the Plaintiff's claimsaction has no merit and intends toare vigorously defenddefending against this action.it. We cannot estimate theany possible loss at this time.
On November 18, 2002, Plaintiffs Shell & Slate Software Corporation and Ben WeissJune 13, 2005, Plaintiff Steve Staehr filed a civilshareholder derivative action entitled "Steve Staehr, Derivatively on Behalf of Adobe Systems Incorporated v. Bruce R. Chizen, et. al.," in the U.S. DistrictSuperior Court in Los Angelesof the State of California for the County of Santa Clara against Adobe's directors and naming Adobe alleging false designation of origin, trade secret misappropriation, breach of contract and other causes of action.as a nominal defendant. The claim derives from the Plaintiffs' beliefcomplaint alleges that the "healing brush" techniquedefendants breached their fiduciary duties of loyalty and due care and caused Adobe Photoshop software incorporatesto waste corporate assets by failing to renegotiate or terminate the Plaintiffs' trade secrets.acquisition agreement with Macromedia following the announcement by Macromedia that it would restate its financial results for the fiscal years ended March 31, 1999 through 2004. The Plaintiffs seek preliminary and permanent injunctive relief, compensatory, treble and punitivecomplaint seeks, among other things, unspecified monetary damages, andattorneys' fees and costs.certain forms of equitable relief. On August 18, 2005, Plaintiff amended his complaint to add a purported class action. Adobe has obligations under certain circumstances to hold harmless and indemnify each of the defendant directors against judgments, fines, settlements and expenses related to claims against such directors and otherwise to the fullest extent permitted under Delaware law and Adobe's bylaws and certificate of incorporation. Such obligations may apply to this lawsuit. We believe that the action has no merit and intend toare vigorously defenddefending against it. On September 9, 2003, Adobe filed a counter-claim against Ben Weiss for breach of contract and misappropriation of trade secrets. Adobe seeks compensatory, statutory and punitive damages. We cannot estimate theany possible loss at this time.
In connection with our anti-piracy efforts, conducted both internally and through the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other local law and have recently increased in frequency, especially in Latin American countries. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of these counter-claims.
One such case is Consultores en Computación y Contabilidad, S.C. ("CCC") v. Microsoft, Adobe, Symantec, and Autodesk (the "Defendants"). On March 1, 2002, CCC, a Mexican hardware/software reseller, filed a lawsuit in the Mexico Court of First Instance against the Defendants (all members of the Business Software Alliance). CCC had previously been the target of a criminal anti-piracy enforcement action carried out by the Mexican police authorities on the basis of a piracy complaint filed by the Defendants based on evidence provided to the Defendants. CCC alleged in the lawsuit that it had suffered damages to its reputation as a result of the enforcement action. CCC did not claim economic damages. On November 11, 2002, the trial court judge ruled in favor of the Defendants, holding that no moral damage occurred. After subsequent appeals which were favorable to the Defendants, a court of appeals held that the Defendants were liable to CCC for "moral" damages, and the court remanded the case to the Court of First Instance for a determination of the amount. In December 2005, the Court of First Instance awarded CCC $90 million in damages. The Defendants are appealing the verdict, as are the plaintiffs who seek additional damages. If, after all appeals have been exhausted, the existing verdict stands and is enforceable, Adobe would be responsible for approximately $15 million of the judgment. No amounts have been accrued as a loss is not considered probable or estimable at this time.
From time to time, in addition to those identified above, Adobe is subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with SFAS 5, "Accounting for Contingencies,"U.S. generally accepted accounting principles, Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, Adobe believeswe believe that it haswe have valid defenses with respect to the legal matters pending against it.Adobe. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be affected by the resolution of one or more of such contingencies.
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Note 15. Financial Instruments
Fair Value of Financial Instruments
In accordance with Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," we recognize derivative instruments and hedging activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.
As of November 28, 2003,December 2, 2005, our cash equivalents, short-term investments, and marketable equity securities, are carried at fair value, based on quoted market prices for these or similar investments. For further information, see Note 3.
Our portfolio of investments in privately held companies, which includes our direct investments, as well as indirect investments through Adobe Ventures, is included in other assets on our Consolidated Balance Sheet. For further information, see Note 6.
Foreign Currency Hedging Instruments
We transact business in foreign countries, in U.S. dollars as well asand in various foreign currencies. In Europe and Japan, those transactions that are denominated in euro or yen subject us to exposure from movements in foreign currency exchange rates. This exposure is primarily related to yen-denominated product and support revenue in Japan and euro-denominated product and support revenue in certain European countries. In fiscal 20032005, 2004 and 2002,2003, our exposures were 21.326.4 billion yen, 24.1 billion yen and 20.521.3 billion yen, respectively. In fiscal 20032005, 2004 and 2002,2003, our exposures were 411.4 million euros, 375.4 million euros and 274.0 million euros, and 288.5 million euros, respectively.
In addition we also have long term investment exposures consisting of the capitalization and retained earnings in our non-USD functional foreign subsidiaries. For the fiscal years ending November 28, 2003 and November 29, 2002 this long term investment exposure totaled a notional equivalent of $30.8 million and $33.9 million, respectively. At this time we do not hedge these long term investment exposures.
Our Japanese operating expenses are in yen, and our European operating expenses are primarily in euro, which mitigates a portion of the exposure related to yen and euro denominated product revenue. In addition, we hedge firmly committed transactions using forward contracts. These contracts do subject us to risk of accounting gains and losses; however, the gains and losses on these contracts largely offset gains and losses on the assets, liabilities and transactions being hedged. We also hedge a percentage of forecasted international revenue with forward and purchased option contracts. Our revenue hedging policy is designedintended to reduce the negative impact on our forecasted revenue due to foreign currency exchange rate movements. At November 28, 2003,December 2, 2005, total outstanding contracts were $339.3 million which included the notional equivalent of $191.5$133.0 million in foreign currency forward exchange contracts which hedged our balance sheet exposures and purchasedthe notional equivalent of $206.3 million in put option contracts with a notional value of $112.4 million.which hedged our forecasted revenue. As of November 28, 2003,December 2, 2005, all contracts were set to expire at various times through April 2004.2006. The bank counterparties in these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk we only contract with counterparties with specific minimum rating requirements. In addition, our hedging policy establishes maximum limits for each counterparty.
In addition we also have long term investment exposures consisting of the capitalization and retained earnings in our non-USD functional foreign subsidiaries. For the fiscal years ending December 2, 2005 and December 3, 2004 this long term investment exposure totaled a notional equivalent of $56.7 million and $40.1 million, respectively. At this time we do not hedge these long term investment exposures.
Economic Hedging—Hedges of Forecasted Transactions
We use option and forward foreign exchange contracts to hedge certain operational ("cash flow") exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. The maximum original duration of options and forward foreign exchange contracts is twelve months. Such cash flow exposures result from portions of our forecasted revenues denominated in currencies other than the U.S. dollar, primarily
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the Japanese yen and the euro. We enter into these foreign exchange contracts to hedge forecasted product licensing revenue in the normal course of business, and accordingly, they are not speculative in nature.
To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss), until the forecasted transaction occurs. As of December 2, 2005, we estimate that $5.3 million of existing gains will be reclassified into revenue from accumulated other comprehensive income (loss) within the next twelve months.
When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. During fiscal 2005, 2004 and 2003, net gains (losses) of $7.5 million, $(0.4) million and $(3.5) million, respectively, were reclassified from accumulated other comprehensive income (loss) to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or lossrelated hedge gains and losses on the related cash flow hedge are reclassified from accumulated other comprehensive income (loss) to interest and other income (loss) on the consolidated statement of income at that time. For the fiscal year ended November 28, 2003,2005, there were no such net gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur.
The critical terms of the cash flowWe evaluate hedging instruments are the same as the underlying forecasted transactions. The changes in fair value of the derivatives are intended to offset changes in the expected cash flows from the forecasted transactions. Weeffectiveness prospectively and retrospectively and record any ineffective portion of the hedging instruments in other income (loss) on the consolidated statement of income. The net gain (loss) recognized in other income (expense) for cash flow hedges due to hedge ineffectiveness was insignificant for fiscal 2005, 2004 and 2003. The time value of purchased derivative instruments is deemed to be ineffective and is recorded in other income (loss) over the life of the contract. Other income (loss)
Gain (Loss) on Hedgesfor fiscal 2005, 2004 and 2003 included $2.6 million, $(2.6) million and $(1.1) million of Forecasted Transactions:net gains (losses), respectively, representing the cost of the purchased options.
| | Balance Sheet | Income Statement | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Years Ended | ||||||||||||||||||||
| | As of November 28, 2003 | |||||||||||||||||||||
| | November 28, 2003 | November 29, 2002 | November 30, 2001 | |||||||||||||||||||
| | Other Comprehensive Income (Loss) | Revenue | Other Income (Loss) | Revenue | Other Income (Loss) | Revenue | Other Income (Loss) | |||||||||||||||
| Realized—Closed Transactions: | ||||||||||||||||||||||
| Realized net loss reclassified from other comprehensive income (loss) to revenue | $ | — | $ | (3,489 | ) | $ | — | $ | (463 | ) | $ | — | $ | 7,848 | $ | — | ||||||
| Realized net loss from the cost of purchased options and gains or losses from any ineffective portion of hedges | — | — | (5,047 | ) | — | (5,251 | ) | — | (4,786 | ) | ||||||||||||
Recognized but Unrealized—Open Transactions: | ||||||||||||||||||||||
| Unrealized net loss remaining in other comprehensive income (loss) | (867 | ) | — | — | — | — | ||||||||||||||||
Unrealized net loss from time value degradation and any ineffective portion of hedges | — | — | (1,078 | ) | — | (29 | ) | — | (730 | ) | ||||||||||||
| $ | (867 | ) | $ | (3,489 | ) | $ | (6,125 | ) | $ | (463 | ) | $ | (5,280 | ) | $ | 7,848 | $ | (5,516 | ) | |||
Balance Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities
We hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as other income (loss).income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and
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losses on the assets and liabilities being hedged. At November 28, 2003,December 2, 2005, the outstanding balance sheet hedging derivatives had maturities of 90150 days or less.
Net Gain (Loss) Recognizedgains in Other Income Relatingother income relating to Balance Sheet Hedging:balance sheet hedging for fiscal 2005, 2004 and 2003
| | Years Ended | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | November 28, 2003 | November 29, 2002 | November 30, 2001 | | 2005 | 2004 | 2003 | ||||||||||||||||
| Gain (loss) on foreign currency assets and liabilities: | Gain (loss) on foreign currency assets and liabilities: | Gain (loss) on foreign currency assets and liabilities: | ||||||||||||||||||||||
| Realized net gain (loss) recognized in other income (loss) | $ | 13,535 | $ | 6,500 | $ | (3,288 | ) | Net realized gain (loss) recognized in other income | $ | (9,604 | ) | $ | 4,586 | $ | 13,535 | |||||||||
| Unrealized net gain recognized in other income (loss) | 132 | 2,549 | 109 | Net unrealized gain (loss) recognized in other income | (4,088 | ) | 3,949 | 132 | ||||||||||||||||
| 13,667 | 9,049 | (3,179 | ) | (13,692 | ) | 8,535 | 13,667 | |||||||||||||||||
Gain (loss) on hedges of foreign currency assets and liabilities: | Gain (loss) on hedges of foreign currency assets and liabilities: | Gain (loss) on hedges of foreign currency assets and liabilities: | ||||||||||||||||||||||
| Realized net gain (loss) recognized in other income (loss) | (8,726 | ) | (8,587 | ) | 3,834 | Net realized gain (loss) recognized in other income | 9,893 | (11,123 | ) | (8,726 | ) | |||||||||||||
| Unrealized net gain (loss) recognized in other income (loss) | (3,483 | ) | 444 | (622 | ) | Net unrealized gain (loss) recognized in other income | 5,747 | 3,150 | (3,483 | ) | ||||||||||||||
| (12,209 | ) | (8,143 | ) | 3,212 | 15,640 | (7,973 | ) | (12,209 | ) | |||||||||||||||
| Net gain recognized in other income | $ | 1,458 | $ | 906 | $ | 33 | Net gain recognized in other income | $ | 1,948 | $ | 562 | $ | 1,458 | |||||||||||
Interest Rate Hedging—Fair Value Hedges—Hedging of Interest Rate Sensitive ObligationsForeign Currency Denominated Available for Sale Securities
We entered into interest rate swap agreements to manage our exposure to operating lease obligations that are tied to short-term interest rates (LIBOR). The swaps allow us to exchange variable interest rate payments for fixed interest rate payments, thereby securing a fixed payment amount for a portion of the total obligation of $142.5 million. As of November 28, 2003, we had entered into interest rate swaps to hedge the floating cash flow payments associated with $121.8 million of our outstanding lease obligations. The swaps mature at various dates through the third quarter ofDuring fiscal 2004, consistent with the expiration of the underlying facility lease. Under the swap agreements, we will receive a variable rate based on one month LIBOR and pay fixed rates ranging from 3.13% to 5.14%. The impact of these swaps will cap a portion of our rent expense at these levels.
These swaps areinvestment portfolio was invested in euro denominated securities. In order to mitigate the currency risk of those euro denominated securities, we entered into forward currency contracts designated as cash flowfair value hedges. During fiscal 2005 we did not invest in euro denominated securities.
Net gains recognized in other income relating to fair value hedges under SFAS No. 133 because they hedge against changes in the amount of future cash flows. As of November 28, 2003, a $2.6 million unrealized loss was recorded in accumulated other comprehensive income (loss)for fiscal 2004 were as a result of the decrease in fair market value of these interest rate hedges. There was no realized gain or loss due to ineffectiveness of the hedges.follows:
| | 2004 | |||||
|---|---|---|---|---|---|---|
| Gain on foreign currency assets and liabilities: | ||||||
| Net realized gain recognized in other income | $ | 2,234 | ||||
| Net unrealized loss recognized in other income | (1,935 | ) | ||||
| 299 | ||||||
| Loss on hedges of foreign currency assets and liabilities: | ||||||
| Net realized gain recognized in other income | 3,026 | |||||
| Net unrealized loss recognized in other income | (3,482 | ) | ||||
| (456 | ) | |||||
| Net loss recognized in other income | $ | (157 | ) | |||
Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk are short-term investments, primarily fixed-income securities, derivatives, hedging foreign currency and interest rate risk, and accounts receivable.
Our investment portfolio consists of investment-grade securities diversified among security types, industries, and issuers. Our cash and investments are held and managed by recognized financial institutions that follow Adobe's investment policy. Our policy limits the amount of credit exposure to any one security issue or issuer, and we believe no significant concentration of credit risk exists with respect to these investments.
98
We mitigate concentration of risk related to foreign currency hedges as well as interest rate hedges through a policy that establishes counterparty limits. We also have minimum rating requirements for all bank counterparties.
Credit risk in receivables is limited to OEM partners, dealers and distributors of hardware and software products to the retail market, and to customers whereby we license software directly. Management believes that any risk of loss is reduced due to the diversity of our customers and geographic sales areas. A credit review is completed for our new distributors, dealers, and OEM partners. We also perform ongoing credit evaluations of our customers' financial condition and require letters of credit or other guarantees, whenever deemed necessary. The credit limit given to the customer is based on our risk assessment of their ability to pay, country risk, and other factors and is not contingent on the resale of the product or on the collection of payments from their customers. We also purchase credit insurance to mitigate credit risk in some foreign markets where we believe it is warranted. If we license our software to a customer where we have a reason to believe the customer's ability to pay is not probable, due to country risk or credit risk, we will not recognize the revenue. We will revert to recognizing the revenue on a cash basis, assuming all other criteria for revenue recognition has been met. For discussion of significant customers as of November 28, 2003,December 2, 2005, see Note 16.
We derive a significant portion of our OEM PostScript and Other licensing revenue from a small number of OEM partners. Our OEM partners on occasion seek to renegotiate their royalty arrangements. We evaluate these requests on a case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, which could result in lower licensing revenue for us.
Note 16. Industry Segment, Geographic Information, and Significant Customers
At the beginning of fiscal 2003, we realigned our business segments to reflect the way we manage our business. We have four reportable segments that offer different product lines:segments: Digital Imaging and Video, Creative Professional, ePaper (renamed Intelligent Documents beginning fiscal 2004),Document, and OEM PostScript and Other. The Digital Imaging and Video segment provides users with
software for creating, editing, enhancing and sharing digital images and photographs, digital video, audio and animations. The Creative Professional segment provides software for professional page layout, professional Web page layout, graphic and illustration creation, technical document publishing and business publishing. Additionally, this segment includes Photoshop and Acrobat Professional as part of its Adobe Creative Suite products. The ePaperIntelligent Document segment provides electronic document distribution software that allows users to create, enhance, annotate and securely send Adobe PDF files that can be shared, viewed, navigated and printed exactly as intended on a broad range of hardware and software platforms. In addition, this segment provides server-based solutions for enterprises, and government agencies in the areas of document generation, document process management, document collaboration, document workflow and document process management.control and security. The OEM PostScript and Other segment includes printing technology used to create and print simple or visually rich documents with precision.
The accounting policies of the operating segments are the same as those described in Note 1. With the exception of goodwill, we do not identify or allocate our assets by operating segment. See Note 5 for the allocation of goodwill to our reportable segments.
99 Coinciding with the integration of Macromedia and the start of our 2006 fiscal year, we changed the reporting of our principal business segments to be aligned with our market opportunities and how we manage our combined businesses. Our new business segments are Creative Solutions, Knowledge Worker Solutions, Enterprise and Developer Solutions, Mobile and Device Solutions, and Other. The tables that follow are based on our segment reporting that was in effect throughout fiscal 2005.
Our results for fiscal years 2003, 20022005, 2004 and 20012003 are reported by operating segments below:
| | Digital Imaging and Video | Creative Professional | Intelligent Document | OEM PostScript and Other | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fiscal 2005 | |||||||||||||||||
Revenue | $ | 432,800 | $ | 743,825 | $ | 708,035 | $ | 81,661 | $ | 1,966,321 | |||||||
| Cost of revenue. | 36,390 | 23,400 | 46,354 | 6,434 | 112,578 | ||||||||||||
| Gross profit | $ | 396,410 | $ | 720,425 | $ | 661,681 | $ | 75,227 | $ | 1,853,743 | |||||||
| Gross profit as a percentage of revenues | 92 | % | 97 | % | 93 | % | 92 | % | 94 | % | |||||||
Fiscal 2004 | |||||||||||||||||
Revenue | $ | 430,177 | $ | 613,062 | $ | 541,804 | $ | 81,538 | $ | 1,666,581 | |||||||
| Cost of revenue | 40,149 | 21,125 | 38,077 | 5,027 | 104,378 | ||||||||||||
| Gross profit | $ | 390,028 | $ | 591,937 | $ | 503,727 | $ | 76,511 | $ | 1,562,203 | |||||||
| Gross profit as a percentage of revenues | 91 | % | 97 | % | 93 | % | 94 | % | 94 | % | |||||||
Fiscal 2003 | |||||||||||||||||
Revenue | $ | 392,442 | $ | 368,549 | $ | 444,056 | $ | 89,702 | $ | 1,294,749 | |||||||
| Cost of revenue | 33,501 | 20,818 | 33,501 | 5,202 | 93,022 | ||||||||||||
| Gross profit | $ | 358,941 | $ | 347,731 | $ | 410,555 | $ | 84,500 | $ | 1,201,727 | |||||||
| Gross profit as a percentage of revenues | 92 | % | 94 | % | 92 | % | 94 | % | 93 | % | |||||||
| | Digital Imaging and Video | Creative Professional | ePaper | OEM PostScript and Other | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fiscal 2003 | |||||||||||||||||
Revenue | $ | 392,442 | $ | 368,549 | $ | 444,056 | $ | 89,702 | $ | 1,294,749 | |||||||
| Cost of revenue | 33,501 | 20,818 | 33,501 | 5,202 | 93,022 | ||||||||||||
| Gross profit | $ | 358,941 | $ | 347,731 | $ | 410,555 | $ | 84,500 | $ | 1,201,727 | |||||||
| Gross profit as a percentage of revenues | 92 | % | 94 | % | 92 | % | 94 | % | 93 | % | |||||||
Fiscal 2002 | |||||||||||||||||
Revenue | $ | 411,929 | $ | 351,268 | $ | 312,544 | $ | 89,047 | $ | 1,164,788 | |||||||
| Cost of revenue | 30,073 | 43,761 | 24,682 | 5,772 | 104,288 | ||||||||||||
| Gross profit | $ | 381,856 | $ | 307,507 | $ | 287,862 | $ | 83,275 | $ | 1,060,500 | |||||||
| Gross profit as a percentage of revenues | 93 | % | 88 | % | 92 | % | 94 | % | 91 | % | |||||||
Fiscal 2001 | |||||||||||||||||
Revenue | $ | 439,734 | $ | 393,309 | $ | 291,886 | $ | 104,791 | $ | 1,229,720 | |||||||
| Cost of revenue | 26,563 | 33,827 | 15,835 | 5,226 | 81,451 | ||||||||||||
| Gross profit | $ | 413,171 | $ | 359,482 | $ | 276,051 | $ | 99,565 | $ | 1,148,269 | |||||||
| Gross profit as a percentage of revenues | 94 | % | 91 | % | 95 | % | 95 | % | 93 | % | |||||||
A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements for the fiscal years2005, 2004 and 2003 2002 and 2001 is as follows:
| | Years Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | November 28, 2003 | November 29, 2002 | November 30, 2001 | 2005 | 2004 | 2003 | |||||||||||||
| Total gross profit from operating segments above | $ | 1,201,727 | $ | 1,060,500 | $ | 1,148,269 | $ | 1,853,743 | $ | 1,562,203 | $ | 1,201,727 | |||||||
| Total operating expenses* | 822,280 | 773,473 | 769,812 | 1,125,309 | 970,409 | 822,280 | |||||||||||||
| Total operating income | 379,447 | 287,027 | 378,457 | 728,434 | 591,794 | 379,447 | |||||||||||||
| Non-operating income (loss) | 1,045 | (2,338 | ) | (71,526 | ) | 37,342 | 16,851 | 1,045 | |||||||||||
| Income before income taxes | $ | 380,492 | $ | 284,689 | $ | 306,931 | $ | 765,776 | $ | 608,645 | $ | 380,492 | |||||||
We categorize our geographic information into three major market regions: the Americas, EMEA, and Asia. The Americas region includes the U.S., Canada, and Latin America. The EMEA region includes Europe, Middle East, and Africa. The Asia region includes Japan and the Asian Pacific countries.
For fiscal 2003, 20022005, 2004 and 2001,2003, our revenues and property and equipment, net of accumulated depreciation, are presented below by geographic area. With the exception of property and equipment, we do not identify or allocate our assets by operating segment.
| Revenue | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Americas: | |||||||||||
| United States | $ | 864,274 | $ | 706,064 | $ | 588,631 | |||||
| Other | 75,443 | 64,500 | 51,551 | ||||||||
| Total Americas | 939,717 | 770,564 | 640,182 | ||||||||
| EMEA | 612,721 | 541,528 | 370,181 | ||||||||
| Asia: | |||||||||||
| Japan | 284,528 | 262,685 | 212,505 | ||||||||
| Other | 129,355 | 91,804 | 71,881 | ||||||||
| Total Asia | 413,883 | 354,489 | 284,386 | ||||||||
| Total revenue | $ | 1,966,321 | $ | 1,666,581 | $ | 1,294,749 | |||||
Property and Equipment | 2005 | 2004 | 2003 | ||||||||
| Americas: | |||||||||||
| United States | $ | 65,351 | $ | 72,857 | $ | 57,753 | |||||
| Other | 4,060 | 4,771 | 4,903 | ||||||||
| Total Americas | 69,411 | 77,628 | 62,656 | ||||||||
| EMEA | 19,891 | 10,543 | 7,032 | ||||||||
| Asia: | |||||||||||
| India | 13,060 | 10,306 | 6,357 | ||||||||
| Other | 1,187 | 1,198 | 962 | ||||||||
| Total Asia | 14,247 | 11,504 | 7,319 | ||||||||
| Total long-lived assets | $ | 103,549 | $ | 99,675 | $ | 77,007 | |||||
Significant Customers
100
Revenue
| | Year Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | November 28, 2003 | November 29, 2002 | November 30, 2001 | ||||||||
| Americas: | |||||||||||
| United States | $ | 588,631 | $ | 541,578 | $ | 547,630 | |||||
| Other | 51,551 | 42,176 | 43,878 | ||||||||
| Total Americas | 640,182 | 583,754 | 591,508 | ||||||||
EMEA | 370,181 | 317,638 | 326,499 | ||||||||
Asia: | |||||||||||
| Japan | 212,505 | 195,457 | 228,744 | ||||||||
| Other | 71,881 | 67,939 | 82,969 | ||||||||
| Total Asia | 284,386 | 263,396 | 311,713 | ||||||||
| Total revenue | $ | 1,294,749 | $ | 1,164,788 | $ | 1,229,720 | |||||
Property and Equipment
| | Year Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | November 28, 2003 | November 29, 2002 | November 30, 2001 | ||||||||
| Americas: | |||||||||||
| United States | $ | 57,753 | $ | 52,648 | $ | 67,303 | |||||
| Canada | 4,898 | 3,837 | — | ||||||||
| Other | 5 | 5 | — | ||||||||
| Total Americas | 62,656 | 56,490 | 67,303 | ||||||||
EMEA | 7,032 | 6,583 | 6,470 | ||||||||
Asia: | |||||||||||
| Japan | 764 | 964 | 1,796 | ||||||||
| India | 6,357 | 6,685 | 1,446 | ||||||||
| Other | 198 | 368 | 596 | ||||||||
| Total Asia | 7,319 | 8,017 | 3,838 | ||||||||
| Total long-lived assets | $ | 77,007 | $ | 71,090 | $ | 77,611 | |||||
In The table below lists our significant customers for fiscal 2003 licenses of application products to Ingram Micro, Inc. ("Ingram")through 2005. As listed, our significant customers are distributors and Tech Data Corporation ("Tech Data"), including their respective affiliates, accounted for 28% and 13%, respectively,thus impact each of our total revenue. In fiscal 2002, licenses of application products to Ingram and Tech Data accounted for 27% and 14%, respectively,reporting segments. The amounts listed below are a percentage of our total revenue. In fiscal 2001, licenses of application products to Ingram and Tech Data accounted for 24% and 15%, respectively,net revenues.
| | 2005 | 2004 | 2003 | ||||
|---|---|---|---|---|---|---|---|
| Ingram Micro | 26 | % | 23 | % | 28 | % | |
| Tech Data | 11 | % | 13 | % | 13 | % |
The amounts listed below are receivables, from our significant customers, as a percentage of our total revenue.
As of November 28, 2003,gross trade receivables from Ingramfor fiscal 2005 and Tech Data accounted for 34% and 9%, respectively, of our total receivables. Receivables from Ingram and Tech Data accounted for 22% and 12%, respectively, of our total receivables at November 29, 2002. As of November 30, 2001, receivables from Ingram and Tech Data accounted for 31% and 21%, respectively, of our total receivables.2004.
101
| | 2005 | 2004 | |||
|---|---|---|---|---|---|
| Ingram Micro | 26 | % | 21 | % | |
| Tech Data | 10 | % | 12 | % |
Note 17. Subsequent EventEvents
On December 3, 2005, we completed the acquisition of Macromedia, a provider of software technologies that enables the development of a wide range of internet and mobile application solutions, for approximately $3.4 billion. Under the terms of the agreement, which was approved by the boards of directors and the stockholders of both companies, Macromedia stockholders received, at a fixed exchange ratio, 1.38 shares of Adobe common stock for every share of Macromedia common stock in a tax-free exchange. This fixed exchange ratio gives effect to the two-for-one stock split in the form of a stock dividend paid on May 23, 2005 to the stockholders of Adobe. The $3.4 billion estimated purchase price for the acquisition includes the estimated fair value of Adobe common stock issued, stock options and restricted stock assumed, as well as estimated direct transaction costs. We derived this estimate using an average market price per share of Adobe common stock of $29.43, which was based on an average of the closing prices for a range of trading days (April 14, 2005 through April 20, 2005) around the announcement date (April 18, 2005) of the proposed transaction.
In connectionconjunction with our stock option exchange programthe acquisition of Macromedia, on December 3, 2005, the Adobe board of directors approved a restructuring plan to better align Adobe's resources among its client and product groups. We expect to incur restructuring charges in fiscal year 2006, primarily in the first quarter. These restructuring expenses relate only to those employees and facilities that we initiatedwere associated with Adobe prior to the acquisition of Macromedia on December 3, 2005. These expenses will be a charge to earnings in May 2003, we granted approximately 3.4 million shares with an exercisethe respective quarter in which they are incurred. We expect to incur additional restructuring expenses relating to Macromedia's operations. These costs will be included in the assumed liabilities of Macromedia as of December 3, 2005 and will be recorded as part of the total acquisition purchase price of $39.10Macromedia.
In December 2005, we entered into additional structured stock repurchase agreements with large financial institutions. Under these agreements, we provided the financial institutions with up-front payments totaling $500.0 million. The financial institutions agreed to deliver to us, at certain intervals during the contract term, a certain number of shares based on December 17, 2003. See Note 11 for further information regardingthe volume weighted average price during such intervals less a specified discount. The $500.0 million will be classified as treasury stock on our stock option exchange program.balance sheet.
ADOBE SYSTEMS INCORPORATEDSCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS(In thousands)
Valuation and Qualifying Accounts Which are Deducted in theBalance Sheet from the Assets to Which They Apply
| | Balance at Beginning of Period | Charged/ Credited to Operating Expenses | Deductions* | Balance at End of Period | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Allowance for doubtful accounts: | ||||||||||||||
| Year Ended: | ||||||||||||||
| November 28, 2003 | $ | 7,531 | $ | 2,038 | $ | (1,666 | ) | $ | 7,903 | |||||
| November 29, 2002 | 8,549 | 1,527 | (2,545 | ) | 7,531 | |||||||||
| November 30, 2001 | 8,788 | 1,435 | (1,674 | ) | 8,549 | |||||||||
103
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 5, 2004.8, 2006.
| ADOBE SYSTEMS INCORPORATED | |||
| By: | /s/ MURRAY J. DEMO Murray J. Demo, Chief Financial Officer (Principal Financial and Accounting 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 5th8th day of February, 2004.2006.
| Signature | Title | |||
|---|---|---|---|---|
| /s/ JOHN E. WARNOCK John E. Warnock | Chairman of the Board of Directors | |||
/s/ CHARLES M. GESCHKE Charles M. Geschke | Chairman of the Board of Directors | |||
/s/ BRUCE R. CHIZEN Bruce R. Chizen | Director | |||
Edward W. Barnholt | Director | |||
/s/ | Director | |||
/s/ MICHAEL R. CANNON Michael R. Cannon | Director | |||
/s/ JAMES E. DALEY James E. Daley | Director | |||
/s/ CAROL MILLS Carol Mills | Director | |||
/s/ COLLEEN M. POULIOT Colleen M. Pouliot | Director |
104
/s/ ROBERT SEDGEWICK Robert Sedgewick | Director | |||
/s/ DELBERT W. YOCAM Delbert W. Yocam | Director | |||
/s/ MURRAY J. DEMO Murray J. Demo |
105
The following trademarks of Adobe Systems Incorporated or its subsidiaries, which may be registered in the United States and/or other countries, are referenced in this Form 10-K:
Adobe
Acrobat
Acrobat Capture
Acrobat Messenger
Adobe Audition
Adobe Encore DVD
Adobe Premiere
Adobe Type Manager
After Effects
Atmosphere
Distiller
ePaper
Extreme
Font Folio
FrameMaker
GoLive
Illustrator
InCopy
InDesign
PageMaker
PDF Transit
Photoshop
PostScript
Reader
Version Cue
| Adobe | ||
| Acrobat | ||
| Acrobat Capture | ||
| Acrobat Messenger | ||
| Adobe Audition | ||
| Adobe Encore | ||
| Adobe LiveCycle | ||
| Adobe Premiere | ||
| Adobe Type Manager | ||
| After Effects | ||
| Authorware | ||
| Breeze | ||
| Captivate | ||
| ColdFusion | ||
| Contribute | ||
| Director | ||
| Distiller | ||
| Dreamweaver | ||
| Fireworks | ||
| Flash | ||
| FlashCast | ||
| Flash Lite | ||
| Flex | ||
| Flex Builder | ||
| Font Folio | ||
| FrameMaker | ||
| FreeHand | ||
| GoLive | ||
| Illustrator | ||
| InCopy | ||
| InDesign | ||
| JRun | ||
| Macromedia | ||
| PageMaker | ||
| Photoshop | ||
| PostScript | ||
| Reader | ||
| RoboHelp | ||
| Shockwave | ||
| Version Cue |
All other trademarks are the property of their respective owners.
106
As required under Item 15.15, Exhibits and 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:
| | | Incorporated by Reference | | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Exhibit Number | | Filed Herewith | ||||||||
| Exhibit Description | Form | Date | Number | |||||||
| 3.2 | Amended and Restated Bylaws as currently in effect | 10-K | 02/26/03 | 3.2 | ||||||
3.4 | Agreement and Plan of Merger effective 5/30/97 (by virtue of a reincorporation), by and between Adobe Systems Incorporated, a California corporation and Adobe Systems (Delaware) Incorporated, a Delaware corporation | 10-Q | 05/30/97 | 2.1 | ||||||
3.6 | Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on 5/22/01 | 10-Q | 7/16/01 | 3.6 | ||||||
4.2 | Fourth Amended and Restated Rights Agreement between the Company and Computershare Investor Services, LLC | 8-K | 7/3/00 | 1 | ||||||
10.1.6 | 1984 Stock Option Plan, as amended* | 10-Q | 07/02/93 | 10.1.6 | ||||||
10.21.3 | Revised Bonus Plan* | 10-Q | 02/28/97 | 10.21.3 | ||||||
10.23 | Amended 1994 Performance and Restricted Stock Plan* | 10-Q | 05/29/98 | 10.24.2 | ||||||
10.24 | 1994 Stock Option Plan* | 10-Q | 5/27/94 | 10.1.7 | ||||||
10.25 | 1994 Stock Option Plan, as amended* | S-8 | 05/30/97 | 10.40 | ||||||
10.26 | 1997 Employee Stock Purchase Plan, as amended* | 10-K | 12/1/00 | 10.70 | ||||||
10.28 | 1996 Outside Directors Stock Option Plan* | 10-Q | 05/31/96 | 10.36 | ||||||
10.29 | 1996 Outside Directors' Stock Option Plan, as amended* | S-8 | 6/16/00 | 4.7 | ||||||
10.30 | Forms of Stock Option Agreements used in connection with the 1996 Outside Directors' Stock Option Plan* | S-8 | 6/16/00 | 4.8 | ||||||
10.31 | 1996 Outside Directors Stock Option Plan, as amended* | 10-Q | 7/16/01 | 10.75 | ||||||
10.32 | 1996 Outside Directors' Stock Option Plan, as amended* | S-8 | 6/14/02 | 4.6 | ||||||
10.33 | 1996 Outside Directors' Stock Option Plan, as amended* | X | ||||||||
10.34 | 1999 Nonstatutory Stock Option Plan* | S-8 | 9/15/99 | 4.6 | ||||||
10.35 | 1999 Nonstatutory Stock Option Plan, as amended* | S-8 | 12/22/00 | 4.6 | ||||||
10.36 | 1999 Nonstatutory Stock Option Plan, as amended* | S-8 | 3/15/01 | 4.7 | ||||||
10.37 | 1999 Nonstatutory Stock Option Plan, as amended* | S-8 | 10/29/01 | 4.6 | ||||||
10.38 | 1999 Equity Incentive Plan, as amended* | 10-K | 02/26/03 | 10.37 | ||||||
| | | Incorporated by Reference** | | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Exhibit Number | | Filed Herewith | ||||||||
| Exhibit Description | Form | Date | Number | |||||||
| 3.1 | Amended and Restated Bylaws | 8-K | 9/23/05 | 3.1 | ||||||
3.2 | Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on 5/22/01 | 10-Q | 7/16/01 | 3.6 | ||||||
3.2.1 | Certificate of Correction of Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware | 10-Q | 4/11/03 | 3.6.1 | ||||||
3.3 | Certificate of Designation of Series A Preferred Stock of Adobe Systems Incorporated | 10-Q | 7/8/03 | 3.3 | ||||||
4.1 | Fourth Amended and Restated Rights Agreement between the Company and Computershare Investor Services, LLC | 8-K | 7/3/00 | 1 | ||||||
4.1.1 | Amendment No. 1 to Fourth Amended and Restated Rights Agreement between the Company and Computershare Investor Services, LLC | 8-A/2G/A | 5/23/03 | 7 | ||||||
10.1 | 1984 Stock Option Plan, as amended* | 10-Q | 7/02/93 | 10.1.6 | ||||||
10.2 | Amended 1994 Performance and Restricted Stock Plan* | 10-Q | 10/5/05 | 10.2 | ||||||
10.3 | Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan* | 10-Q | 10/7/04 | 10.7 | ||||||
10.4 | 1994 Stock Option Plan, as amended* | S-8 | 5/30/97 | 10.40 | ||||||
10.5 | 1997 Employee Stock Purchase Plan, as amended* | 10-K | 12/1/00 | 10.70 | ||||||
10.6 | 1996 Outside Directors' Stock Option Plan, as amended* | DEF 14A | 3/14/05 | Appendix B | ||||||
10.7 | Forms of Stock Option Agreements used in connection with the 1996 Outside Directors' Stock Option Plan* | S-8 | 6/16/00 | 4.8 | ||||||
10.8 | 1999 Nonstatutory Stock Option Plan, as amended* | S-8 | 10/29/01 | 4.6 | ||||||
10.9 | 1999 Equity Incentive Plan, as amended* | 10-K | 2/26/03 | 10.37 | ||||||
10.10 | 2003 Equity Incentive Plan, as amended* | DEF 14A | 3/14/05 | Appendix A | ||||||
107
10.41 | Form of Indemnity Agreement* | 10-Q | 05/30/97 | 10.25.1 | ||||||
10.42 | Amended and Restated Limited Partnership Agreement of Adobe Incentive Partners, L.P.* | 10-Q | 8/28/98 | 10.42 | ||||||
10.43 | Amendment to Limited Partnership Agreement of Adobe Incentive Partners, L.P.* | 10-Q | 6/4/99 | 10.52 | ||||||
10.44 | Adobe Incentive Partners, L.P. Consent to Dissolve and Terminate Partnership* | 10-K | 02/26/03 | 10.44 | ||||||
10.45 | Forms of Retention Agreement* | 10-K | 11/28/97 | 10.44 | ||||||
10.53 | Amended, Restated and Consolidated Master Lease of Land and Improvements by and between Sumitomo Bank Leasing and Finance, Inc. and Adobe Systems Incorporated | 10-Q | 9/3/99 | 10.53 | ||||||
10.54 | Credit Agreement among Adobe Systems Incorporated, Lenders named therein and ABN AMRO Bank N.V., as Administrative Agent, with certain related Credit Documents | 10-Q | 9/3/99 | 10.54 | ||||||
10.56 | Note Secured by Deed of Trust and Promissory Note* | 10-K | 12/3/99 | 10.56 | ||||||
10.66 | Credit Agreement among Adobe Systems Incorporated, Lenders Named therein and ABN Amro Bank N.V., as Administrative Agent, with Certain Related Credit Documents | 10-Q | 9/1/00 | 10.66 | ||||||
10.67 | Amendment No. 1 to 1999 Credit Agreement among Adobe Systems Incorporated, Lenders Named Therein and ABN Amro Bank N.V., as Administrative Agent, with Certain Related Credit Documents | 10-Q | 9/1/00 | 10.67 | ||||||
10.68 | Amendment No. 1 to Amended, Restated and Consolidated Master Lease of Land and Improvements between Adobe Systems Incorporated and Sumitomo Bank Leasing and Finance, Inc. | 10-Q | 7/16/01 | 10.68 | ||||||
10.69 | Amendment No. 2 to Amended, Restated, and Consolidated Master Lease of Land and Improvements between Adobe Systems Incorporated and Sumitomo Bank Leasing and Finance, Inc. | 10-Q | 9/1/00 | 10.68 | ||||||
10.77 | Lease agreement between Adobe Systems and Selco Service Corporation | 10-K | 2/21/02 | 10.77 | ||||||
10.78 | Participation agreement among Adobe Systems, Selco Service Corporation, et al. | 10-K | 2/21/02 | 10.78 | ||||||
10.79 | Confidential Resignation Agreement* | 10-K | 2/21/02 | 10.79 | ||||||
10.80 | Executive Severance Plan in the Event of a Change of Control* | 10-K | 2/21/02 | 10.80 |
108
10.11 | Forms of Stock Option and Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan | 10-Q | 10/7/04 | 10.11 | ||||||
10.12 | Form of Indemnity Agreement* | 10-Q | 5/30/97 | 10.25.1 | ||||||
10.13 | Forms of Retention Agreement* | 10-K | 11/28/97 | 10.44 | ||||||
10.14 | Second Amended and Restated Master Lease of Land and Improvements by and between SMBC Leasing and Finance, Inc. and Adobe Systems Incorporated | 10-Q | 10/7/04 | 10.14 | ||||||
10.15 | Lease agreement between Adobe Systems and Selco Service Corporation | 10-K | 2/21/02 | 10.77 | ||||||
10.16 | Participation agreement among Adobe Systems, Selco Service Corporation, et al. | 10-K | 2/21/02 | 10.78 | ||||||
10.17 | Amendment No. 1 to Lease Agreement between Adobe and Selco Services Corporation | 10-K | 2/26/03 | 10.81 | ||||||
10.18 | Lease Agreement by and between Allaire Corporation and EOP Riverside Project LLC dated November 23, 1999 | 10-K | 3/30/00 | 10.23 | ||||||
10.19 | First Amendment to Lease Agreement by and between Allaire Corporation and EOP Riverside Project LLC dated May 31, 2000 | 10-Q | 8/14/00 | 10.3 | ||||||
10.20 | Executive Severance Plan in the Event of a Change of Control* | 10-K | 2/21/02 | 10.80 | ||||||
10.21 | Amendment to the Executive Severance Plan in the Event of a Change of Control* | 8-K | 4/18/05 | 10.2 | ||||||
10.22 | Adobe Systems Incorporated 2004 Annual Executive Incentive Plan* | 8-K | 1/13/05 | 10.1 | ||||||
10.23 | Adobe Systems Incorporated 2005 Annual Executive Incentive Plan* | 8-K | 1/13/05 | 10.2 | ||||||
10.24 | Description of 2005 Director Compensation* | 10-K | 2/2/05 | 10.21 | ||||||
10.25 | Description of 2006 Director Compensation* | 8-K | 9/23/05 | 10.1 | ||||||
10.26 | Adobe Systems Incorporated 2006 Management Team Annual Incentive Plan* | 8-K | 1/13/06 | 10.1 | ||||||
10.27 | 2005 Equity Incentive Assumption Plan* | 8-K | 12/07/05 | 10.2 | ||||||
10.28 | Form of Stock Option Agreement used in connection with the 2005 Equity Incentive Assumption Plan* | 8-K | 12/07/05 | 10.3 | ||||||
10.81 | Amendment No.1 to Lease Agreement between Adobe and Selco Services Corporation | 10-K | 02/26/03 | 10.81 | ||||||
21 | Subsidiaries of the Registrant | X | ||||||||
23 | Independent Auditors' Consent | X | ||||||||
31.1 | Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | X | ||||||||
31.2 | Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | X | ||||||||
32.1 | Certification of Chief Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | X | ||||||||
32.2 | Certification of Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | X |
10.29 | Allaire Corporation 1997 Stock Incentive Plan* | S-8 | 03/27/01 | 4.06 | ||||||
10.30 | Allaire Corporation 1998 Stock Incentive Plan* | S-8 | 03/27/01 | 4.07 | ||||||
10.31 | Allaire Corporation 2000 Stock Incentive Plan* | S-8 | 03/27/01 | 4.08 | ||||||
10.32 | Andromedia, Inc. 1996 Stock Option Plan* | S-8 | 12/07/99 | 4.07 | ||||||
10.33 | Andromedia, Inc. 1997 Stock Option Plan* | S-8 | 12/07/99 | 4.08 | ||||||
10.34 | Andromedia, Inc. 1999 Stock Plan* | S-8 | 12/07/99 | 4.09 | ||||||
10.35 | ESI Software, Inc. 1996 Equity Incentive Plan* | S-8 | 10/18/99 | 4.08 | ||||||
10.36 | eHelp Corporation 1999 Equity Incentive Plan* | S-8 | 12/29/03 | 4.08 | ||||||
10.37 | Blue Sky Software Corporation 1996 Stock Option Plan* | S-8 | 12/29/03 | 4.07 | ||||||
10.38 | Bright Tiger Technologies, Inc. 1996 Stock Option Plan* | S-8 | 03/27/01 | 4.11 | ||||||
10.39 | Live Software, Inc. 1999 Stock Option/Stock Issuance Plan* | S-8 | 03/27/01 | 4.10 | ||||||
10.40 | Macromedia, Inc. 1999 Stock Option Plan* | S-8 | 08/17/00 | 4.07 | ||||||
10.41 | Macromedia, Inc. 1993 Directors Stock Option Plan* | 10-Q | 08/03/01 | 10.02 | ||||||
10.42 | Macromedia, Inc. 1992 Equity Incentive Plan* | 10-Q | 08/03/01 | 10.01 | ||||||
10.43 | Macromedia, Inc. 2002 Equity Incentive Plan* | S-8 | 08/10/05 | 4.08 | ||||||
10.44 | Form of Macromedia, Inc. Stock Option Agreement* | S-8 | 08/10/05 | 4.09 | ||||||
10.45 | Middlesoft, Inc. 1999 Stock Option Plan* | S-8 | 08/17/00 | 4.09 | ||||||
10.46 | Form of Macromedia, Inc. Revised Non-Plan Stock Option Agreement* | S-8 | 11/23/04 | 4.10 | ||||||
10.47 | Form of Macromedia, Inc. Restricted Stock Purchase Agreement* | 10-Q | 2/8/05 | 10.01 | ||||||
10.48 | Restricted Stock Purchase Agreement between Macromedia, Inc. and Stephen Elop, dated January 24, 2005* | 10-Q | 2/8/05 | 10.02 | ||||||
10.49 | Restricted Stock Purchase Agreement between Macromedia, Inc. and Robert Burgess, dated January 24, 2005* | 10-Q | 2/8/05 | 10.03 | ||||||
10.50 | Amended and Restated Employment Agreement by and between Robert K. Burgess, dated January 21, 2005* | 8-K | 1/21/05 | 10.01 | ||||||
10.51 | Amendment to Employment Agreement by and between Adobe Systems Incorporated, Adobe Macromedia Software LLC and Robert K. Burgess, dated December 7, 2005* | 8-K | 12/12/05 | 10.2 | ||||||
10.52 | Amended and Restated Employment Agreement between Adobe Systems Incorporated and Stephen Elop, dated May 23, 2005* | S-4 | 6/28/05 | 10.1 | ||||||
10.53 | Executive Resignation Agreement and General Release of Claims, dated April 15, 2005, between Adobe Systems Incorporated and Jimmie E. Stephens* | 8-K | 4/18/05 | 10.1 | ||||||
10.54 | Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan* | 8-K | 2/3/06 | 10.1 | ||||||
10.55 | Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* | 8-K | 2/3/06 | 10.2 | ||||||
10.56 | Form of Maximum Award Grant Notice used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan* | 8-K | 2/3/06 | 10.3 | ||||||
10.57 | Form of Performance Share Maximum Award Agreement used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan* | 8-K | 2/3/06 | 10.4 | ||||||
10.58 | Form of Maximum Award Grant Notice used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* | 8-K | 2/3/06 | 10.5 | ||||||
10.59 | Form of Performance Share Maximum Award Agreement used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* | 8-K | 2/3/06 | 10.6 | ||||||
21 | Subsidiaries of the Registrant | X | ||||||||
23.1 | Independent Registered Public Accounting Firm's Consent | X | ||||||||
31.1 | Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | X | ||||||||
31.2 | Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | X | ||||||||
32.1 | Certification of Chief Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934† | X | ||||||||
32.2 | Certification of Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934† | X | ||||||||
100.INS | XBRL Instance | X | ||||||||
100.SCH | XBRL Taxonomy Extension Schema | X | ||||||||
100.CAL | XBRL Taxonomy Extension | X | ||||||||
100.LAB | XBRL Taxonomy Extension Labels | X | ||||||||
100.PRE | XBRL Taxonomy Extension | X |