Eyeonpaessler

UNITEDSTATESSECURITIESANDEXCHANGECOMMISSIONWashington,D.
C.
20549Form10-K(Markone)[X]ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthefiscalyearendedNovember29,2002or[]TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthetransitionperiodfromtoCommissionfilenumber:0-15175ADOBESYSTEMSINCORPORATED(Exactnameofregistrantasspecifiedinitscharter)Delaware77-0019522(Stateorotherjurisdictionof(I.
R.
S.
Employerincorporationororganization)IdentificationNo.
)345ParkAvenue,SanJose,California95110-2704(Addressofprincipalexecutiveoffices)Registrant'stelephonenumber,includingareacode:(408)536-6000SecuritiesregisteredpursuanttoSection12(b)oftheAct:NoneSecuritiesregisteredpursuanttoSection12(g)oftheAct:CommonStockIndicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934(the"Act")duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.
Yes[X]No[]IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestofregistrant'sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.
[]Indicatebycheckmarkwhethertheregistrantisanacceleratedfiler(asdefinedinRule12b-2oftheAct).
Yes[X]No[]Theaggregatemarketvalueoftheregistrant'scommonstock,$0.
0001parvaluepershare,heldbynon-affiliatesoftheregistrantonMay31,2002,thelastbusinessdayoftheregistrant'smostrecentlycompletedsecondfiscalquarter,was$1,462,142,091(basedontheclosingsalespriceoftheregistrant'scommonstockonthatdate).
Sharesoftheregistrant'scommonstockheldbyeachofficeranddirectorandeachpersonwhoowns5%ormoreoftheoutstandingcommonstockoftheregistranthavebeenexcludedinthatsuchpersonsmaybedeemedtobeaffiliates.
Thisdeterminationofaffiliatestatusisnotnecessarilyaconclusivedeterminationforotherpurposes.
AsofJanuary24,2003,231,074,795sharesoftheregistrant'scommonstock,$.
0001parvaluepershare,wereissuedandoutstanding.
DOCUMENTSINCORPORATEDBYREFERENCEPortionsoftheProxyStatementforthe2003AnnualMeetingofStockholders(the"ProxyStatement"),tobefiledwithin120daysoftheendofthefiscalyearendedNovember29,2002,areincorporatedbyreferenceinPartIIIhereof.
ExceptwithrespecttoinformationspecificallyincorporatedbyreferenceinthisForm10-K,theProxyStatementisnotdeemedtobefiledasparthereof.
2TABLEOFCONTENTSPageNo.
PARTIItem1.
Business3Item2.
Properties23Item3.
LegalProceedings.
23Item4.
SubmissionofMatterstoaVoteofSecurityHolders.
25PARTIIItem5.
MarketforRegistrant'sCommonStockandRelatedStockholderMatters25Item6.
SelectedFinancialData.
26Item7.
Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations.
27Item7a.
QuantitativeandQualitativeDisclosuresAboutMarketRisk55Item8.
FinancialStatementsandSupplementaryData58Item9ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosure.
58PARTIIIItem10.
DirectorsandExecutiveOfficersoftheRegistrant.
59Item11.
ExecutiveCompensation.
59Item12.
SecurityOwnershipofCertainBeneficialOwnersandManagement.
59Item13.
CertainRelationshipsandRelatedTransactions59Item14.
ControlsandProcedures59PARTIVItem15.
Exhibits,FinancialStatementSchedules,andReportsonForm8-K.
60SIGNATURES65CERTIFICATIONS66SUMMARYOFTRADEMARKS.
68FINANCIALSTATEMENTS69FINANCIALSTATEMENTSCHEDULE.
110EXHIBITS3Forward-LookingStatementsInadditiontohistoricalinformation,thisAnnualReportonForm10-Kcontainsforward-lookingstatements,including,butnotlimitedto,thoserelatedtoproductandmarketingplans,thatinvolverisksanduncertaintiesthatcouldcauseactualresultstodiffermaterially.
Factorsthatmightcauseorcontributetosuchdifferencesinclude,butarenotlimitedto,thosediscussedinthesectionentitled"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-FactorsThatMayAffectOurFuturePerformance.
"YoushouldcarefullyreviewtherisksdescribedinotherdocumentswefilefromtimetotimewiththeSecuritiesandExchangeCommission("SEC"),includingtheQuarterlyReportsonForm10-Qtobefiledin2003.
Whenusedinthisreport,thewords"expects,""anticipates,""intends,""plans,""believes,""seeks,""targets,""estimates,""looksfor,""looksto,"andsimilarexpressions,aswellasstatementsregardingAdobe'sfocusforthefuture,aregenerallyintendedtoidentifyforward-lookingstatements.
Youshouldnotplaceunduerelianceontheforward-lookingstatements,whichspeakonlyasofthedateofthisAnnualReportonForm10-K.
Weundertakenoobligationtopubliclyreleaseanyrevisionstotheforward-lookingstatementsorreflecteventsorcircumstancesafterthedateofthisdocument.
PARTIItem1.
BusinessFoundedin1982,AdobeSystemsIncorporated("Adobe"orthe"Company")offersalineofsoftwareforconsumers,businesses,andcreativeprofessionalcustomers.
Ourproductsenablecustomerstocreate,manageanddelivervisuallyrich,compellingandreliablecontent.
Welicenseourtechnologytohardwaremanufacturers,softwaredevelopers,andserviceproviders,andweofferintegratedsoftwaresolutionstobusinessesofallsizes.
Wedistributeourproductsthroughanetworkofdistributorsanddealers,value-addedresellers("VARs"),systemsintegrators,andoriginalequipmentmanufacturers("OEMs");directtoendusers;andthroughourownwebsiteatwww.
adobe.
com.
WehaveoperationsintheAmericas;Europe,MiddleEast,andAfrica("EMEA");andAsia.
OursoftwarerunsonMicrosoftWindows,AppleMacintosh,Linux,UNIX,PalmOS,PocketPC,andSymbianplatforms.
AdobewasoriginallyincorporatedinCaliforniainOctober1983andwasreincorporatedinDelawareinMay1997.
Wemaintainexecutiveofficesandprincipalfacilitiesat345ParkAvenue,SanJose,California95110-2704.
Ourtelephonenumberis408-536-6000.
WemaintainaWorldWideWebsiteatwww.
adobe.
com.
InvestorscanobtaincopiesofourSECfilingsfromthissitefreeofcharge,aswellasfromtheSECwebsiteatwww.
sec.
gov.
BUSINESSOVERVIEWIntheearly1980s,Adobedevelopedsoftwarethatinitiateddesktoppublishing.
Today,wecontinuetobeuniquelypositionedtomakechangesnotonlytohowsocietycreatesvisuallyrichinformationforprintandtheWeb,butalsoastohowitdistributesandaccessesthatinformationelectronically.
Inthesimplestofterms,Adobehelpspeoplecommunicatebetter.
Bydeliveringpowerfulgraphicdesign,publishing,andimagingsoftwareforprint,Web,andvideoproduction,wehelppeopleexpress,share,andmanagetheirideasinimaginativeandmeaningfulnewways.
Ourstrategyistoaddresstheneedsofavarietyofcustomers,whichincludecreativeprofessionals—graphicdesigners,Webdesigners,videographers,photographers,andprofessionalpublishers;usersatwork—knowledgeworkers,ITmanagers,lineofbusinessmanagers,andexecutives;andusersathome—digitalimaginganddigitalvideohobbyistsandenthusiasts.
Weexecuteonthisstrategybydeliveringproductsthatsupportindustrystandardsandcanbedeployedonmultiplecomputingenvironments,includingMicrosoftWindows,AppleMacintosh,Linux,UNIX,PalmOS,PocketPC,andSymbianplatforms.
PRODUCTSANDMARKETSOVERVIEWDuetoachangeinbusinessstrategyandorganizationalstructure,wehaverealignedourbusinesssegmentsbeginninginthefirstquarteroffiscalyear2003.
BeginningNovember30,2002,anewlynamedCreative4ProfessionalsegmentreplacedtheformerCross-mediaPublishingsegment,andnowincludesAdobeIllustratorandAdobeGraphicsServer(formerlycalledAdobeAlterCast).
Inaddition,anewlynamedDigitalImagingandVideosegmentreplacedtheformerGraphicssegment.
OurePaperbusinesssegmentremainsthesame,includingrevenuefromourrecently-acquiredAccelioCorporation("Accelio")business(acquiredinthesecondquarteroffiscal2002).
OurOEMPostscriptandOthersegmentremainsthesame.
Formoreinformationonouroldandnewsegmentreporting,pleaserefertoItem7,Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations,andNote17ofourNotestoConsolidatedFinancialStatements.
Beginninginfiscal2003,wecategorizeourproductsintothefourprincipalbusinesssegmentsasexplainedbelow.
CreativeProfessionalCreativeProfessionalMarketOpportunitySinceAdobewasfoundedintheearly1980's,acorecustomeroftheCompanyhasbeenthecreativeprofessional.
Graphicdesigners,productionartists,Webdesigners,technicalwriters,videographers,photographers,andprepressprofessionalsuseandrelyonAdobe'ssolutionsforprofessionalpublishing,Webdesign,businessdocumentpublishing,andprintingvisuallyrichinformation.
Oursoftwaretoolsareusedbycreativeprofessionalstocreatemuchoftheprintedandon-lineinformationpeopleseeandreadeveryday,includingnewspapers,magazines,Websites,catalogs,advertisements,brochures,productdocumentation,technicalmanuals,books,eBooks,memos,reports,andbanners.
Sincetheglobaleconomicdownturnbeganearlyin2001,creativeprofessionalshavebeenundereconomicduress.
Theyderivetheirrevenuemainlyfrommarketingandadspendingincorporations.
Withaglobalreductioninmarketingspending,thebusinessesofcreativeprofessionalshavesuffered.
Consequently,therehasbeenadeclineinspendingbycreativeprofessionalsonsoftware,adeclineingrowthofthenumberofcreativeprofessionals,andforAdobe,adeclineinrevenuefromthecreativeprofessionalcustomersegment.
However,theCreativeProfessionalmarketcontinuestoevolve,withincreasedneedstoderivegreaterefficiencyfromthesoftwaretheyuse,theneedtostreamlinetheirpublishingworkflows,andthedesiretorepurposecontentacrossavarietyofmedia.
Adobe'sbrandandcustomerloyaltyinthismarketcontinuestobestrong.
Existingcustomerspurchaseupgradesandnewunitsofourcreativeprofessionalproductsbecauseofthefrequentuseoftheproductsintheirdailywork.
However,untilaneconomicrecoveryoccursinthemajorcountriesinwhichwedobusiness,webelievethatourcreativeprofessionalbusinesswillcontinuetobechallenging.
Aspartofourcorporatestrategy,weareincreasingourfocusonthecreativeprofessionalcustomer.
Thus,wehaveestablishedanewcreativeprofessionalbusinessunitthatwillfocussolelyontheneedsofthiscustomer.
Infiscal2003,thecreativeprofessionalbusinessunitwillfocusontwokeystrategies:1)increasingthenumberofAdobeproductstheyuseand2)enablingmoreefficientcollaborationandworkflowthroughimprovedproductintegrationandbyofferingaprofessionalversionofAcrobattoassistindigitizingtheirpublishingworkflow.
Toaccomplishthesetwostrategies,Adobeplanstoexecuteagainstanumberofkeyimperatives.
Theyinclude:continuetoprovidebest-of-classproducts;growusageofAdobeproductssuchasprofessionalpagelayoutandillustration,introduceanewversionofAdobeAcrobatwhichwillhavespecificfeaturescreativeprofessionalscanusetoincreasetheirproductivity;andfocusonthelicensingofcollectionsofAdobesoftwareapplicationsthatprovideamorecompleteintegratedsolutionforvarioustypesofcreativeprofessionals.
Inaddition,theCompanyplanstocontinuetofocusonenhancingsupportforeXtensibleMarkupLanguage("XML")initsproducts,andtoenhancetheuseofAdobePortableDocumentFormat("PDF")creationandworkflowcapabilitiesinitsproducts–bothofwhichweexpecttoresultinfast,reliablemulti-deviceoutput.
Infiscal2002,AdoberespondedtotheneedsofourcustomersbydeliveringseveralnewreleasesofourCreativeProfessionalsoftwareapplications.
Inthefirstquarteroffiscal2002,wereleasednewversionsofAdobe5InDesign–oursoftwareusedforprofessionalpagelayout–andAdobeGoLive,whichisusedforWebsitecontentcreationandproduction.
Inaddition,wealsoshippedanewgraphicsserverproduct,AdobeGraphicsServer(formerlycalledAdobeAlterCast)toautomatetheproductionofimagesandgraphicsfordatadrivencontent.
Inthesecondquarteroffiscal2002,weshippedAdobeFrameMaker7.
0,whichisourlong-document,technicalauthoringsoftwareapplication.
Inthethirdquarteroffiscal2002,weshippedAdobeInCopy2.
0,thecompanionproducttoAdobeInDesignforcopyeditingintheprofessionalpagelayoutmarket.
Finally,wealsoshippedAdobeContentServer3.
0,whichisaserverproductthatcustomersusetocreate,managetherightsfor,anddistributeeBooks.
WewillworktoenhancetheintegrationofourproductsandprovidecreativeprofessionalsthebestpossibledesignexperiencewithAdobesoftwaretools.
Weplantocontinuetoprovidesolutionsthathelppublishersofprintedmaterialreuseandrepurposetheirinformationtooutputformatsbeyondthatofprint,includingWebandwirelessformats.
CreativeProfessionalProductsAdobeContentServer—aneasy-to-use,all-in-onesystemforpublishers,distributors,retailers,andindividualauthorstoprepare,secure,andlicenseeBooksinAdobePDFdirectlyfromtheirWebsites.
AdobeCreativeSuiteStandardEdition—suiteofthreeapplicationproductsthatofferscreativeprofessionalssoftwaretomodifyimages,createvectordiagrams,andproducegraphicallayouts;includesAdobeIllustrator,AdobeInDesign,andAdobePhotoshop.
AdobeCreativeSuitePremiumEdition—suiteofsixprofessionalandintegratedsoftwaresolutionsthatcreativeprofessionalscanusetocreate,modify,formatandmanagecontenttobeprinted,publishedontheweb,sentoverwirelesslinks,andviewedonscreen.
ThissuiteoffersdocumentauthoringfortheWebandwirelessdevices,digitalimagingmodification,anddigitaldocumentsharing.
Thedifferentapplicationsshareasimilaruserinterfaceandshareseveralcommands,tools,palettesandkeyboardshort-cuts.
ThesuiteincludesAdobeAcrobat,AdobeGoLive,AdobeInDesign,AdobeIllustrator,AdobePhotoshop,andAdobePremiere.
AdobeDesignCollection—suiteoffouraward-winningapplicationproductsthatallowscreativeprofessionalstocreateandproducehigh-qualityimages,illustrations,andlayouts,andtopublishdocumentsacrossmultiplemedia;includesAdobeAcrobat,AdobeIllustrator,AdobeInDesign,andAdobePhotoshop.
AdobeAcrobateBookReader—softwarethatdisplaysAdobePDF-basedeBooksonnotebookanddesktopcomputersinfullcolor,withthehighqualityandcarefuldesignfoundinprintedbooks.
AdobeFontFolio—containstheentireAdobeTypeLibrary,unlockedandreadytouse.
AdobeFrameMaker—anapplicationforauthoringandpublishinglong,structured,content-richdocumentsincludingbooks,documentation,technicalmanuals,andreports;providesusersawaytopublishtheircontenttomultipleoutputformats,includingprint,AdobePDF,HypertextMarkupLanguage("HTML"),XML,andMicrosoftWord.
AdobeGoLive—professionalWebdesignandpublishingsoftwarethatprovidesinnovativetoolsthatWebauthorsrequiretodesign,layout,produce,andmaintaincontentforWebsitesandwirelessWebdeviceswithouttheneedforcomplexmultimediaprogramming.
AdobeGraphicsServer—formerlycalledAdobeAlterCast;imagingserversoftwareusedtocreateandmaintaindigitalgraphicsandimagesonfrequentlyupdateddata-drivencontent,suchasWebsitesandprintedcatalogs,byautomatingthecreationandthereuseofimages;integrateswithcontentmanagementande-commercesystemstoautomateworkflows,andeliminatesthetediousmanualtasksofrefiningandreformattingimagesforspecificpurposes.
6AdobeIllustrator—avector-basedillustrationdesigntoolusedtocreatecompellinggraphicartworkforprintpublicationsandtheWeb.
AdobeInCopy—aneditorialtoolforcollaborationbetweenwriters,editors,andcopy-fitters;InCopyisacompaniontoAdobeInDesignandislicensedthroughAdobe'ssystemintegratorpartnersservicingtheprofessionalpublishingmarket.
AdobeInDesign—apage-layoutapplicationforpublishingprofessionals;basedonanopen,object-orientedarchitecturethatisextensible,itenablesAdobeanditsindustrypartnerstodeliverpowerfulpublishingsolutionsformagazine,newspaper,andotherhigh-endpublishingapplications.
AdobePageMaker—softwareusedtocreatehigh-qualitybusinessdocumentssimplyandreliablywithrobustpagelayouttools,templates,andstockart.
AdobePublishingCollection—suiteoffouraward-winningapplicationproductsthatallowsbusinessuserstocreateprofessional-qualitybusinesscommunications;includesAdobeAcrobat,AdobeIllustrator,AdobePageMaker,andAdobePhotoshop.
AdobeTypeBasics—includesAdobe'sbest-sellingtypefaces,plusAdobeTypeManager;makesiteasytocreatebeautifultextforprint,Web,andvideoprojects.
AdobeTypeManager—providespowerful,easymanagementofallPostScriptType1,OpenType,andTrueTypefonts.
AdobeWebCollection—acomprehensive,integratedsoftwaresuitethatallowsuserstodesignstillandinteractiveWebgraphics,optimizegraphicsforefficientdownloading,andbuilddynamicWebsitesthatsupportthelatesttechnologyandstandards;includesAdobeAcrobat,AdobeGoLive,AdobeIllustrator,andAdobePhotoshop.
DigitalImagingandVideoDigitalImagingandVideoMarketOpportunityWiththefirstreleaseofAdobePhotoshopmorethantenyearsago,andwithastrongmarketpresencewithourimagingandvideoeditingtoolstoday,Adobesetsthestandardfordigitalimagingsoftware.
Customersinthedigitalimagingandvideosegmentincludegraphicdesigners,photographers,Webcontentcreators,andmultimedia,film,andvideoproducerswhoworkinindustriessuchasadvertising,marketingcommunications,graphicdesign,printing,publishing,architecture,finearts,Webdesign/consulting,andentertainment.
TheyrelyonAdobe'sdigitalimaginganddigitalvideoeditingsolutionstocreateandenhancemanyofthepicturesandvideoweseeeverydayinprint,ontelevision,andontheWeb.
DrivingthemarketopportunitiesforAdobeinthissegmentisthegrowthintheuseofdigitaldevicessuchasdigitalcameras,digitalvideocameras,multi-media-enabledcomputers,scanners,DVDplayers,Web-capableandimage-enabledhandhelddevicesandcellularphones,aswellasbroadbandadoption.
Asmoreandmoreusersmigratetowardsdigitalphotographyanddigitalvideorecording,thepotentialmarketforAdobegrows.
Adobe'sdigitalimagingandvideosegmentconsistsofpowerfulsoftwareproductsusedbycreativeprofessionals,businessusers,andhobbyistsathometocreatevisuallyrichcontent.
CreativeprofessionalsuseAdobe'sdigitalimagingandvideosoftwaretocreatecontentfoundincommunicationmediasuchasbooks,newspapers,magazines,Websites,brochures,movies,andtelevision.
Thedigitalcontenttheycreate,whichincludesphotographicimages,video,streamingmedia,andanimations,arecreatedwithoursoftwaretoolsinordertomaketheirworkstandoutandtodifferentiatetheircompanies'productsandservicesfromtheircompetitors.
Businessusersutilizedigitalimaginganddigitalvideosoftwaretoenhancedigitalimagesandvideowhenaccomplishingtaskssuchasenhancingcorporatecommunications,creatingpresentationsandsalestrainingmaterials,anddevelopingcontentforinternal(intranet)websites.
Hobbyistsusethistypeofsoftwaretotake7advantageoftheadvancementsmadeindigitalphotographyandvideotechnologytoenhance,manage,andsharetheirpersonalphotographsandvideos.
Astheuseofdigitalphotographyanddigitalvideocamerasgrows,webelievecreativeprofessionalsthroughouttheworldwillcontinuetorequiresoftwaresolutionstoedit,enhance,andmanagetheirdigitalphotographsanddigitalvideos.
Wealsobelievebusinessandhobbyistuserswillneeddigitalimaginganddigitalvideosoftwareasmorepeopleusedigitalcamerasanddigitalcamcorders.
Wehaverespondedtothesemarketopportunitiesbydeliveringseveralnewreleasesofourdigitalimagingandvideosoftwareapplications.
Inthesecondquarteroffiscal2002,wereleasedversion7.
0ofourAdobePhotoshopproduct,whichistheindustry-leadingproductfordigitalimaging.
Inthethirdquarteroffiscal2002,wereleasedversion2.
0ofourAdobePhotoshopElementsproduct,whichisourdigitalimagingproducttargetingthephotoeditingmarketforthemid-rangehobbyistandenthusiast.
Wealsoreleasedversion6.
5ofAdobePremiere,anupdatedreleaseofourdigitalvideo-editingproduct.
WeplantoworkwithIntel,Microsoft,DellandSonytohelpmakeMicrosoftWindows,andtheIntelarchitectureastrongdigitalvideoauthoringplatformforourcustomers.
Withourdigitalimagingproducts,weplantocontinuetoinnovatewithourPhotoshopproducttomeettheneedsofitscreativeprofessionalcustomers,whileexpandingthePhotoshopsoftwarecustomerbasebyimprovingtheinterfaceoftheproducttobemoreaccessibletonon-professionalusers(businessandhomeusers).
WehaveannouncedplanstointroducenewproductstargetinghomeuserdigitalimagemanagementandprofessionalDVDauthoringinfiscal2003.
WeplantoleveragetherichmediacontentqualitiesofAdobePDFandthevastinstalledbaseofAdobeAcrobatReaderstoletusersoftheseproductseasilysharetheirdigitalphotographsinAdobePDF.
Withourdigitalvideoproducts,weplantotakeadvantageoftheimprovedvideo-relatedperformanceofthelatestgenerationofpersonalcomputers,whichwebelievewillallowustoexpandourvolumeinshrink-wrappedsoftwaresalesindependentofourtraditionalthird-partycomputervideoboardOEMchannel.
WeintendthischannelstrategyswitchtodecreasethepercentageofdigitalvideorevenuederivedthroughourhistoricalthirdpartycomputervideoboardOEMchannelandincreasethepercentagederivedthroughourshrink-wrappedsoftwarechannels.
DigitalImagingandVideoProductsAdobeAfterEffects—softwareusedtocreatesophisticatedanimation,motioncompositing,andspecialeffectsfoundinmultimedia,televisionbroadcast,film,andtheWeb.
AdobeAtmosphere(beta)—asoftwaretoolforauthoringgraphicallyrichthreedimensionalworldsthatviewersontheWebcanfigurativelyenterandinteractin;providesaplatformforcreatingrealisticandimmersiveenvironmentsthatofferarevolutionaryapproachtocontent,Webnavigation,community,andcommunication.
AdobeDigitalVideoCollection—suiteoffourintegratedapplicationproductsthatallowsuserstoproduceprofessional-qualityvideo,film,multimedia,andWebprojects;includesAdobeAfterEffects,AdobeIllustrator,AdobePhotoshop,andAdobePremiere.
AdobeLiveMotion—asoftwaretoolthatallowsprofessionaldesignerstocreatetwo-dimensionalWebgraphics;itprovidesdesignerswitharichsetofcontentcreationtoolsforcreatingbothvectorandrastergraphicsinoneapplicationforincreasedproductivity.
AdobePhotoDeluxe—softwarethatallowsconsumersandsmallbusinessestoeasilyenhanceandpersonalizetheirphotosforawidevarietyofapplicationsinprintandelectronicmedia.
AdobePhotoshop—providesphotodesignenhancementcapabilitiesforprint,theInternet,andmulti-media;usedbygraphicdesigners,professionalphotographers,Webdesigners,professionalpublishers,andvideoprofessionals.
AdobePhotoshopAlbum-offersunique,easy-to-useinterfacetofind,organize,share,andeditdigitalphotographs;designedforconsumerssothattheycanmanagetheircollectionsofdigitalphotographs,easilyshare8photosviae-mailandtheWeb,createdigitalslideshowsandphotoalbums,andgettheirphotographsprintedviaon-linephotofinishingservices;workswellwithPhotoshopElementswhenmoreadvanceddigitalphotographeditingandtouch-upisneeded.
AdobePhotoshopElements—offersunique,easy-to-use,powerfulimage-editingtoolsdesignedspecificallyforamateurphotographersandhobbyistswhowanttocreateprofessional-qualityimagesforprintandtheWeb.
AdobePremiere—professionaldigitalvideo-editingsoftwareusedtocreatebroadcast-qualitymoviesforvideo,film,DVD,multimedia,andstreamingovertheWeb.
AdobeSVGViewer—aplug-inforWebbrowsersthatallowsuserstoviewWebgraphicscreatedinScalableVectorGraphics("SVG")format.
ePaperePaperMarketOpportunityAsignificantopportunityexiststoenableintelligentintegrationofpaperanddigitaldocumentcommunicationswithfidelityandreliabilityinbusinessesandgovernmentsaroundtheworld.
AdobeAcrobatsoftware,thecornerstoneofourePaperfamilyofproducts,atitsmostbasiclevelenablesuserstocreatePDFfiles—theworldwidestandardforsecureandreliableelectronicdocumentdistribution.
Withmorethan500milliondistributedcopiesofourAcrobatReader—thefreemulti-platformAdobePDFviewingsoftware—Adobehascreatedaubiquitousplatformforthereliabledistributionofelectronicdocuments.
TheAcrobatReaderisavailableonthemostcommonoperatingsystemplatforms,includingMicrosoftWindows,AppleMacintosh,Linux,variousUnix-basedplatforms,andportabledevicesystemssuchasPalmOS,PocketPC,andtheSymbianoperatingsystemforcellularphones.
Together,Acrobat,AdobePDF,andtheAcrobatReaderassurecreatorsofelectronicdocumentsthattheircontentwilldisplayandprintthewaytheyareintended,andthatthedocumentsareprotected,iftheychoose,fromunauthorizedaccessandalterations.
WithadditionalcapabilitiesinAcrobatthatallowuserstoannotate,collaborate,secure,digitallysign,andarchivePDFdocuments,webelieveourePaperproductlinedeliversuniquefunctionalityinmanymarkets.
GovernmentsworkingtodeployeGovernmentinitiatives,andcompaniesinregulatedindustriessuchasaerospace,financialservices,insurance,legal,andpharmaceutical—thosewithpaper-intensiveprocesses—useAdobeePapersolutionstoensurethattheirelectronicdocumentsaredeliveredreliablyandsecurely,andcanbeviewedbytherecipientintheexactformthattheoriginatorintended.
EnterprisesandgovernmentsthatdeployAdobeePapersolutionsreducepaperandstoragecosts,improvecustomersatisfaction,andrealizeproductivityandtime-to-marketgains.
Basedonthegrowthintheuseofelectronicdocumentcontent,theincreasingfocusoneGovernmentinitiatives,andthedesireofenterprisecustomerstoutilizeXMLandextendtheirbusinessesbeyondtheconfinesoftheirinternalback-endsystems,wehaveincreasedourinvestmentinourePaperbusinessduringfiscal2002.
Theseinvestmentsincludeenhancingourresearchanddevelopmentstrategyandoursolutions-basedgo-to-marketcapabilities.
Inmarketingandengineering,wehaveteamsthatfocusonePaperdesktop-basedsoftwareopportunitiesandonend-to-endserver-basedePapersolutionopportunities.
Tosupplementoursolutionofferings,weacquiredAccelio,asupplierofelectronicformsandbusinessprocessautomationsoftwaresolutions,inthesecondquarteroffiscal2002.
Inourfieldorganization,werealignedourresourcesthroughoutfiscal2002tofocusmoreheavilyonePaperopportunities.
Ourgoalistohaveamajorityofourfield-basedresourcesfocusedonePaperdesktopandserver-basedsolutionstargetingcorporateandgovernmentaccounts.
Withthepreviouslydescribedemergingmarkettrends,andwiththeadditionofAccelio-derivedsolutions,AdobehasrefineditsstrategytofocusonthreedistinctePaperbusinessopportunitiesinfiscal2003.
TheyareDocumentGeneration,DocumentCollaboration,andDocumentProcessManagement.
9DocumentGenerationThereisasignificantDocumentGenerationmarketopportunityfortransformingrawbusinessdataintovisuallyrich,dynamic,customer-focuseddocumentsfordeliveryanytime,anywhere,onanydevice.
Inmanycases,documentsarethemainsourceofinteractiongovernmentsandbusinesseshavewiththeirconstituents,partners,vendors,andcustomers.
Documentsareusedtogeneraterevenue(suchascatalogs,brochures,mailers),conducttransactions(suchastaxforms,invoices,loandocumentsandaccountstatements),andtransferknowledge(suchasusermanuals,productspecificationsandfinancialreports).
Webelievethekeytoproducingdocumentsthatdrivebusinessisanenterprise-strengthdocumentgenerationsolutionthattakescontentfrommultiplesources,dynamicallygeneratesdocuments,andsecurelyandreliablydeliversthosedocumentsoveravarietyofsystemsanddevices.
Adobe'ssolutionsforDocumentGenerationareintendedto:improvecustomersatisfactionbyenabling"self-serve"dynamicdocumentgeneration,anytime,anywhere,onanydevice;ensurethatdocumentsappearexactlyasintendedandareprotectedfromunauthorizedchanges;andreducecostsbyautomatingdocumentandimageproductionprocesses.
Weprovidebothdesktopandserver-basedsolutionsfortheDocumentGenerationmarket.
Onthedesktop,AdobeAcrobatgenerateselectronicdocumentsfromeverydayofficeapplications,suchasMicrosoftOffice.
Onservers,Adobeoffersacombinationofproductstogeneratedocuments,includingAdobeOutputServerandAdobeDocumentServer.
Theseserverproductsmergeoutput,includingXML-baseddata,fromenterpriseapplicationssuchasCustomerRelationshipManagement("CRM"),EnterpriseResourcePlanning("ERP"),contentmanagement,andlegacysystemswithhighlyformatteddocumenttemplatestogeneratepersonalized,reliabledocumentsforprintorelectronicoutput.
WebelieveourkeyadvantagesintheDocumentGenerationmarketincludethestandardizationofPDFusageinmanygovernmentagenciesandregulatedindustriesasaformatfordistributing,viewing,printing,andarchivingelectronicdocuments.
Inaddition,Adobe'selectronicdocumentviewingsolution,theAcrobatReader,isavailableonmanyplatforms,assuringourcustomerswhogeneratePDFfilesthattheircontentwillbeviewableandprintablewhenitisdistributed.
Finally,fromatechnologystandpoint,integrationcapabilitiesbetweenXML-baseddataandAdobePDFhavemadethePDFformatarich,intelligentdocumentcontainer—onethatallowselectronicdocumentstobeusedon-lineandoff-line.
Forexample,AdobePDF-basedelectronicformscanbefilledinoff-line(i.
e.
,whenauserisnotconnectedtotheInternet).
Later,whentheuserreconnectstotheInternet,thedataenteredearliercanbeautomaticallysubmittedelectronicallyandintegrateddirectlyintoback-endISsystemssuchasacorporatedatabase.
DocumentCollaborationThedesirebygovernmentsandenterprisestohavemoreeffectiveandtimelycollaborationsolutionshascreatedasignificantDocumentCollaborationmarketopportunity.
OursolutionsforDocumentCollaborationenablemoresecureandreliabledistributionofdocumentstostreamlinedocumentexchange,review,commenting,andapproval,whileprotectingcontentfromunauthorizedaccessandalterations.
AdobePDFdocumentscanalsobeautomaticallyrouted,tracked,andintegratedintocoreapplicationssuchasdocumentmanagementsystemstomanagethefullcollaborationprocess.
BenefitstocustomersusingAdobesolutionsforDocumentCollaborationincludetheprotectionofbusinessinformationandprocessintegrity,thereductionofcostsbyautomatingcollaborativeprocessesandreducingpaper,andthesimplificationofdocumentsharingwithemployees,customers,partners,andotherconstituents.
Governmentscanshortenthetimeittakestoapproveapplications.
Enterprisecustomerscanreplacepapermailingstocustomersandsupplierswithelectronicdocumentdistribution,accelerateproductandengineeringdocumentationreviews,andstreamlinecontractreviewandpreparation.
InadditiontotheuseofAdobeAcrobatReaderandAdobeAcrobatasdesktopsoftwarethatisusedaspartofAdobe'sDocumentCollaborationsolutions,Adobealsoprovidesserver-basedsolutionsoftwarecalledAdobeDocumentServerforReaderExtensions.
ThisnewserverproductallowspublishersofAdobePDF-basedformsanddocumentstoembedusagerightsinthemthatenablefeaturesinthefreeAcrobatReaderthatnormallyarenotavailable,suchasformfill-inandsave,anddigitalsignatures.
10Forexample,governmentscanusethisserversolutiontocreateon-lineformsthatconstituentscanfilloutanddigitallysigninAcrobatReader;orfinancialinstitutionscancreateelectronicformsthatareintegratedwiththeirback-endsystemstoprovidepersonalizedon-lineapplications.
Inbothexamples,userscanfilloutsuchformsinthefreeAcrobatReader,whichlatercanbedirectlyintegratedwiththeirprocessingsystems,sothatmanualre-keyingofdataisnotnecessary.
Thecost-savingadvantageswithsuchasolutionforpublishersofdocumentssuchastaxformsandon-lineapplicationsaresignificant.
DocumentProcessManagementEnterpriseshaveinvestedsignificantlyintheirinfrastructureoverthelasttenyears,resultinginthedeploymentofcomplexbusinesssystemssuchasCRM,ERP,andDocumentContentManagement("DCM").
Yetmanyoftheseback-endsystemsarenotfullyconnectedwitheachother,orwithhowbusinessusersworkwithdocumentsontheirdesktopsonadailybasis.
ThisdisconnectedworkflowhascreatedamarketopportunitycalledDocumentProcessManagement,andwehavecreatedsolutionsthatenablecustomerstointegratehowtheyuseelectronicdocumentswiththeirinternalandexternalbusinessprocesses.
WithoursolutionsforDocumentProcessManagement,anenterprise'scustomers,employees,andpartnerscansubmitinformationthroughintelligent,secureelectronicformsviatheirpreferredcomputerplatformordevice.
Thecapturedinformationtriggersrules-androles-basedworkflow,automaticallyintegratingdataintocorebusinesssystemssuchasCRM,ERP,andDCM.
Forexample,anemployeecouldenterdataon-lineintoanexpensereportthatissubmittedelectronically;thedatacouldthenbeautomaticallyintegratedintotheCompany'saccountingsystem.
Processtrackingandreportingcapabilitiesofferbusinessmanagersinsightintothestatusoftheirworkflows,andallowthemwaystofurtherstreamlinetheirprocessesforbetterbusinessperformance.
CustomersusingAdobe'sDocumentProcessManagementsolutionscanreducecostsandimproveresponsivenessbyeliminatinginefficientmanual,paper-basedprocesses.
Theycanextendthereachoftheirbusinessprocessestocustomers,partners,andmobileworkerswithself-serviceapplicationsviamultipledevices.
Theendresultisoftenanincreaseinanenterprise'sreturnoninvestmentmadeontheirback-officesolutions.
Adobe'sDocumentProcessManagementsolutionsinvolveseveralcomponentsofitsePapersoftware,includingAdobeAcrobatReaderandAdobeAcrobatonthedesktop,andAdobeDocumentServerforReaderExtensionsontheserver.
Inaddition,AdobeprovidesAdobeFormClient,AdobeFormServerandAdobeWorkflowServertocompleteitssolutionoffering.
BasedonXMLstandards,AdobeFormClientisadatacaptureproductthatdeployselectronicformstoawidevarietyofenvironmentssuchastheWeb,MicrosoftOutlook,andMicrosoftOffice.
AdobeFormServerenablesgovernmentsandcorporationstopostandmanagetheirformson-line,andAdobeWorkflowServerprovidestheabilitytographicallydesign,implement,andmonitorworkflowsfordocumentprocessing.
ePaperProductsAdobeAcrobat—softwarethatallowsuserstopublishanddistributebusinessdocumentsusingcorporatee-mailandintranets,theInternet,orCD-ROM;enablesuserstoeasilyconvertfilesfromalmostanyapplicationtoAdobePDF,acompactcross-platformelectronicformatthatgenerallypreserveslayout,fonts,colors,andimages;helpsuserscompletetimelyandefficientdocumentreviewandapprovalprocesses;includeseverythingneededtocreateanddistributerichelectronicdocumentsthatcanbeviewedeasilywithinleadingWebbrowsers.
AdobeAcrobatApproval—softwarethatenablesbusinessworkgroupuserstoquicklyfillin,save,andapproveelectronicforms,marketingmaterials,andotherdocumentsthathavebeencreatedasinteractivePDFfiles.
AdobeAcrobatCapture—enablesconversionoflegacypaper-baseddocumentsintoindexable,searchable,platform-independentelectronicPDFfilesforarchivinganddistributionpurposes.
AdobeAcrobatDistillerServer—server-basedsoftwarethatprovidesworkgroupswithacentralizedsolutionforconvertingPostScriptfilestoAdobePDF;givesITandcreativeprofessionalsthepowerofincreasedproductivityandtheassuranceofconsistent,high-qualityoutput.
11AdobeAcrobatMessenger—softwarethatworkswithascannerordigitalcopierandisdesignedforworkgroupsanddepartmentstotransformpaperdocumentsintoelectronicAdobePDFfilesanddeliverthemviae-mail,Web,orfax;allowsuserstopreviewtheirdocumentson-screen,croporrotatepages,andaddelectronicannotations.
AdobeAcrobatReader—freesoftwareforreliablyviewingandprintingAdobePDFfilesonallmajorcomputerplatforms,includingMicrosoftWindows,AppleMacintosh,Linux,UNIX,PalmOSandPocketPC-baseddevices.
AdobeCaptureHandheld—anadvanced,intelligentdatacapturesolutionavailableforhandhelddevicesrunningMicrosoftPocketPCandHandheldPC;allowsmobileworkerstocapturedatathroughintelligentforms,validatetherecordsentered,andsubmitthedatatoback-officesystems;biometricsignaturescanbeinitiatedfromthedevicetoensurevalidityandtocompleteabusinesstransaction.
AdobeCentralProOutputServer—server-basedsoftwarefordocumentgenerationthatallowsorganizationstocreatepersonalized,customer-facingdocumentsfromanydatasource–includinglegacy,line-of-business,ERP,orCRMapplications;mergesdatawithanelectronicdocumenttemplateusingapowerfulprocessingenginetodynamicallygenerateelectronicdocumentssuchaspurchaseorders,invoices,statements,andchecksfordeliveryviaAdobePDF,theWeb,e-mail,fax,orprint;workswithAdobeOutputDesigner,whichisacompaniontoolusedtocreatesophisticateddocumenttemplates.
AdobeDocumentServer—server-basedsoftwareforthecreation,manipulationandassemblyofcustomizedAdobePDFdocuments;XML-baseddatacanbeinsertedintotemplatestocreatecomplex,content-richdocumentsformoretargetedandeffectivecustomercommunications;integrateswithleadingenterpriseapplicationsaswellascustomsystems.
AdobeDocumentServerforReaderExtensions—server-basedsoftwarewhichallowsenterprisesandgovernmentagenciestoassignadditionalrightstoanAdobePDFdocument,enablingusersofthefreeAdobeAcrobatReadertosaveandsubmitelectronicformdata,adddigitalsignatures,andattachcomments,therebyloweringprocessingcostsandvirtuallyeliminatingtheneedforpaper-basedforms;businessescanleveragetheirexistingpaperandAdobePDFbasedforms,distributeformselectronicallyinaformatthatresemblesthepaperform,andintegratedatathatisenteredsecurelyintotheelectronicformsviaAcrobatReaderwiththeircurrentITstructure.
AdobeFormClient—datacapturesoftwarethatenablescompaniestoreplaceinefficient,paper-basedformsprocesseswithintelligent,accessible,andsecureelectronicdatacapturesolutionstoimproveorganizationalagilityandproductivity;offersflexibledesktopdeploymentoptions,anXML-basedarchitectureforintegrationwithcorebusinessapplications,andsupportfordigitalsignatures;capturedinformationcanberoutedviaindustry-standarde-mailandgroupwaretechnologies;integrateswithAdobe'ssolutionforDocumentGenerationtoextendandacceleratebusinessprocesseswithinandbeyondtheorganization,andisakeycomponentofAdobe'ssolutionforDocumentProcessManagement;workswithAdobeFormServerandAdobeWorkflowServer.
AdobeFormDesigner—aWYSIWYG("WhatYouSeeisWhatYouGet")designtoolforcreatingintelligentXMLtemplates,providinguserswithasimplewaytodevelopandmaintainsophisticateddatacapturesolutionswithoutinvolvingthird-partytools;createsbothHTMLandAdobePDFforms.
AdobeFormServer—server-basedsoftwarefordocumentprocessmanagement;enablesgovernmentsandcorporationstopostelectronicformsontheWeb;createsandpublishesAdobePDForWeb-basedformswhichallowfortheverificationoftheaccuracyofdataenteredinaform,aswellasothervalidations,calculations,andconfirmations;formscanbeusedon-line,orsavedandusedoff-lineandlaterreconnectedsothatdataenteredintheformscanbesubmittedelectronicallyandintegratedwithcorebusinessprocesses;hastheabilitytoenablesecuretransactionsinvolvingconfidentialorsensitiveinformation;workstogetherwithAdobeFormDesignerandAdobeWorkflowServertodeliveracompletebusinessprocessautomationsolution.
AdobeOutputDesigner—aWYSIWYGdesigntoolthatallowsuserstocreateelectronicdocumenttemplatesforusewithAdobesolutionsfordocumentgeneration;aidsinthecreationofelectronicdocumentsthatexactlyreplicateexistingpaperdocuments.
12AdobeOutputPakformySAP.
com—SAPcertifiedserver-basedsoftwarefordocumentgenerationthatenablesorganizationstooptimizetheirinvestmentintheirSAPsolutionbycreatingpersonalized,professional-looking,customer-facingdocuments;providesaneasy,fast,andcost-effectivewaytocreateandmaintaindocumentsfortheSAPenvironment;integratesdirectlywithanSAPsystemtoextractinformationwhichismergedwithadocumenttemplatethatdefinesthelayoutandformattingofthedocument;outputcanbeinavarietyofformats,includingAdobePDF,print,fax,e-mail,andtheWeb,tomultipledevices.
AdobeOutputPakforOracleE-BusinessSuite—server-basedsoftwarefordocumentgenerationwhichisanOracleEBSI-approvedintegration;expandsthescopeoftheOracleE-BusinessSuitebyallowingcustomerstoeasilycreate,maintain,andintegratehigh-quality,professional-lookingelectronicdocumentswiththeirOraclebusinessprocessesinaneasy,fast,andcost-effectiveway;integratesdirectlywithOracleReportstoextractXMLdatafromotherapplicationswhichisthenmergedwithadocumenttemplatethatdefinesthelayoutandformattingofthedocumentoutput;usedtodynamicallygeneratedocumentssuchaspurchaseorders,invoices,statements,andcheckswhichcanthenbedeliveredviaAdobePDF,print,fax,e-mail,andtheWeb.
AdobeWebOutputPak—server-basedsoftwarefordocumentgeneration;createsdocumentsinAdobePDFandHTMLforpresentationontheWeb,andinWirelessMarkupLanguage("WML")forpresentationtoawirelessdevice;allowsuserstopersonalizeandcontrolthelookandfeelofdocumentsbasedonthedatathedocumentscontain.
AdobeWorkflowServer—aserver-basedworkflowapplicationthatallowsforthedesign,deploymentandmanagementofforms-basedbusinessprocessesbyintegratingpeople,processes,andapplicationstoimproveorganizationalagilityandproductivity;usesarules-androles-baseddesigntoolthatdefinesbusinessrulesaprocessmustfollow,aswellastherolesofeachindividualinvolvedintheprocess;workswithAdobeFormServer,AdobeFormClientandAdobeCentralOutputServer.
CreateAdobePDFOnline—aWeb-hostedfee-basedservicethatallowsuserstoconvertdocumentsfromawidevarietyofapplicationsintoAdobePDFfiles.
OEMPostScriptandOtherOEMPostScriptandOtherMarketOpportunityGraphicsprofessionalsandprofessionalpublishersrequirequality,reliability,andefficiencyinproductionprinting,andwebelieveourprintingtechnologyprovidesadvancedfunctionalitytomeetthesophisticatedrequirementsofthismarketplace.
Ashigh-endprintingsystemsevolveandtransitiontofullydigital,compositeworkflows,AdobeisuniquelypositionedtobeasupplierofsoftwareandtechnologybasedontheAdobePostScriptandAdobePDFstandardsforusebyhardwaremanufacturersinthisindustry.
AdobegeneratesrevenuesbylicensingitstechnologytoOEMsthatmanufactureprintersandotheroutputdevices.
OEMPostScriptandOtherProductsAdobePostScript—aprintingandimagingpagedescriptionlanguagethatdelivershighqualityoutput,cross-platformcompatibility,andtopperformanceforgraphically-richprintingoutputfromcorporatedesktopprinterstohigh-endpublishingprinters;givesusersthepowertocreateandprintvisuallyrichdocumentswithtotalprecision;licensedtoprintingequipmentmanufacturersforintegrationintotheirprintingproducts.
AdobeExtreme—aprintingarchitectureforservicebureaus,prepressshops,andcommercialprinters;thefastest,mostflexibleimplementationofAdobeprintingtechnology;providesanintegratedworkflowthatautomatesprepresstasks,optimizingoutputspeedsandqualitybyusingAdobePDFandjobtickets;offersflexibilitywhiledeliveringascalable,reliable,andproductiveprintingenvironment.
AdobePDFTransit—aSoftwareDevelopmentKitthatenablesprintproviderstodevelopstreamlined,reliable,andsecureAdobePDF-basedworkflowsthatbeginsattheircustomers'desktopsandextendsacrosstheInternettoaprintingdevice.
13COMPETITIONThemarketsforAdobeproductsarecharacterizedbyintensecompetition,evolvingindustrystandards,rapidtechnologyandhardwaredevelopments,andfrequentnewproductintroductions.
Ourfuturesuccesswilldependonourabilitytoenhanceourexistingproducts,introducenewproductsonatimelyandcost-effectivebasis,meetchangingcustomerneeds,extendourcoretechnologyintonewapplications,andanticipateorrespondtoemergingstandardsandothertechnologicalchanges.
CreativeProfessionalInourCreativeProfessionalsegment,weofferseveralproducts,includingAdobeGoLive,AdobeIllustrator,AdobeInDesign,AdobePageMaker,andAdobeFrameMaker.
Webelievetheseindividualproductscompetefavor-ablyonthebasisoffeaturesandfunctionality,easeofuse,productreliability,andpriceandperformancecharacteristics.
Inaddition,theproductsworkwelltogether,providingbroaderfunctionalityandshortenedproductlearningtimefortheindividualwhousesmultipleapplicationstocompleteaproject.
Wealsoofferseveralproduct"Collections,"whicharepackagedcombinationsofseveralofourproducts.
CollectionstargetingthecreativeprofessionalcustomerincludetheAdobeDesignCollection,theAdobePublishingCollection,andtheAdobeWebCollection.
TheapproachofprovidingpackageswithmultipleAdobeproductsallowsustomarketthemascompletesolutionsforspecificmarketneeds.
Drawingandillustrationproductsarecharacterizedbyfeature-richcompetition,brandawareness,andpricesensitivity.
OurAdobeIllustratorproductfacescompetitionfromcompaniessuchasCorelandMacromedia.
WebelieveourproductcompetesfavorablyduetohighawarenessofthefeaturesinourIllustratorproduct,especiallythedrawingandillustrationfunctionalities,thefeaturesandtechnicalcapabilitiesoftheproduct,andourabilitytoleveragecoretechnologiesfromourotherestablishedproducts.
OurAdobeInDesignproduct,usedforprofessionalpagelayout,facestoughcompetition.
Themaincompetitiveproduct,QuarkXPress,hasaleadershippositionintheprofessionalpagelayoutmarket.
QuarkalsobenefitsfromanestablishedindustryinfrastructurethathasbeenbuiltaroundtheuseoftheirXPressproductinprintshopsandservicebureaus,andthroughthedevelopmentofthirdpartyplug-inproducts.
BarrierstotheadoptionofAdobeInDesignbyQuarkXPresscustomersincludethisinfrastructure,aswellasthecostofconversion,training,andsoftware/hardwareprocurementrequiredinaswitchtoInDesigninatougheconomicenvironment.
WebelievewewillincreaseadoptionofInDesignsoftwareduetooursuperiorproductofferingwithnewinnovativefeatures,suchastypographicaltreatment,theintegrationofInDesignwithotherAdobeproductsusedbycreativeprofessionals,ourstrongbrandamongusers,oursupportforApple'sMacOSXoperatingsystem,andimprovedinfrastructuresupportbytheindustryforouroverallsolution.
ThedemandforWebpagelayoutisconstantlyevolvingandhighlyvolatile,andhasbeenimpactedbyboththerecentglobaleconomicdownturnandthereductioninWebproductspending.
WebelieveAdobeGoLivetrailsinmarketshareandfacessignificantdirectandindirectcompetitionforWebpagelayoutapplicationsfromcompaniessuchasMacromediaandMicrosoft.
WebelieveourproductcomparesfavorablyduetothefeaturesofAdobeGoLive.
However,webelievethemarketopportunityforWeb-basedproductscontinuestobenegativelyimpactedbythecontinuingeffectsoftheglobaleconomicdownturnthatbeganin2001.
Inthetechnicalauthoringandpublishingmarket,ourAdobeFrameMakerproductfacescompetitionfromlarge-scaleelectronicpublishingsystems,XML-basedpublishingcompaniessuchasArbortext,aswellaslow-enddesktoppublishingproductssuchasMicrosoftWord.
Competitionisbasedonthequalityandfeaturesofproducts,thelevelofcustomizationandintegrationwithotherpublishingsystemcomponents,thenumberofhardwareplatformssupported,service,andprice.
WebelievewecansuccessfullycompetebaseduponthequalityandfeaturesoftheAdobeFrameMakerproduct,ourextensiveapplicationprogramminginterface,andthelargenumberofplatformssupported.
Inthebusinessdocumentpublishingandauthoringmarket,ourAdobePageMakerproductfacescompetitionfromotherdesktoppublishingsoftwareproducts,includingMicrosoftPublisher.
Competitionisbasedonthequalityandfeaturesofproducts,ease-of-use,printerservicesupport,andprice.
Webelievewehaveastrongproductand14cansuccessfullycompetewiththesetypesofapplicationsbaseduponthequalityandfeaturesoftheAdobePageMakerproduct,itsstrongbrandamongusers,anditswidespreadadoptionamongprinterservicebureaus.
AnumberofcompaniescurrentlyofferoneormoreproductsthatcompetedirectlyorindirectlywithmorethanoneofAdobe'sCreativeProfessionalproducts.
ThesecompaniesincludeArbortext,BroadVision,Macromedia,Microsoft,andQuark.
DigitalImagingandVideoTheDigitalImagingandVideosoftwaremarketsareconstantlyevolvingmarkets,characterizedbyrapidtechnologyandhardwaredevelopments,andfrequentnewproductintroductions.
Theneedsoftheusersinthesemarkets—especiallyatthelow-endconsumerlevel—arerapidlychangingasmorepeoplebecomeavidusersofdigitalcameras,digitalvideocameras,anddigitalimaginganddigitalvideoequippedhardwaredevicesandpersonalcomputers.
Ourtoolsinthismarket,includingAdobePhotoshop,AdobePhotoshopElements,AdobeAfterEffects,andAdobePremieresoftware,facesignificantcompetitionfromcompaniesofferingsimilarproductsandwillcontinuetofacecompetitionfromemergingproductsandtechnologies.
Inaddition,anyfutureproductscreatedbyAdobetoenterthedigitalimagemanagementandDVDauthoringmarketswillfacesimilarcompetitiveenvironments.
Themid-rangeconsumerdigitalimagingandimagemanagementsoftwaremarketsaresubjecttointensecompetition,pricesensitivity,brandawareness,andstrengthinretaildistribution.
Wefacedirectandindirectcompetitioninthesemarketsfromanumberofcompanies,includingACDSystems,AISoft(Japan),AppleComputer,ArcSoft,Corel,ImageSoftware,JASCSoftware,LunaImaging,Microsoft,PaesslerGmbH(Germany),PegasusImagingCompany,Roxio,TriVistaTechnologies,UleadSystems,andVCOMProducts.
Webelievewecompetefavorablyagainstothermid-rangedigitalimagingandconsumer-focusedimagemanagementsoftwareapplicationswithourAdobePhotoshopElementsproductduetostrongconsumerawarenessofourbrandindigitalimaging,ourrelationshipswithsignificantOEMs,positiverecommendationsforourproductsbymarketinfluencers,ourincreasedfocusontheretailsoftwarechannel,andastrongfeatureset.
Theprofessionaldigitalimagingsoftwaremarketisacompetitivemarketwheresoftwareapplicationscompetebasedonproductfeatures,brandawareness,andpricesensitivity.
Wefacedirectandindirectcompetitionfromanumberofcompanies.
WeareanindustryleaderandcompetefavorablywithourAdobePhotoshopproductduetohighawarenessofthePhotoshopbrandindigitalimaging,thepositiverecommendationsforourPhotoshopproductbymarketinfluencers,thefeaturesandtechnicalcapabilitiesoftheproduct,andourabilitytoleveragecorefeaturesfromourotherestablishedproducts.
Applicationsfordigitalvideoediting,compositingandspecialeffects,andDVDauthoringfaceincreasingcompetitionasprofessional,enthusiast,andhomeusersmigrateawayfromanalogvideotoolstowardstheuseofdigitalcamcordersanddigitalvideoproductionontheircomputers,andDVDsystemsforrichmediaplayback.
AdobeAfterEffectsandAdobePremieresoftwarefaceincreasedcompetitionfromcompaniessuchasAppleComputer,Autodesk,Avid,Eyeon,in-syncCorporation,Kodak,Pinnacle,Roxio,SonicFoundry,andUleadSystems.
AdobeAfterEffectssoftwareisaleaderinprofessionalcompositingandspecialeffectseditingapplicationsduetoourstrongfeaturesetandtheintegrationwithourotherproductstocreateabroadplatformforourcustomers.
Inprofessionaldigitalvideoediting,wearealeaderontheMicrosoftWindowsplatformwithAdobePremiere,andcompetefavorablyduetoourstrongfeatureset,ourOEMrelationships,andtheintegrationwithourotherproductstocreateabroadplatformforourcustomers.
InprofessionaldigitalvideoeditingfortheMacintoshplatform,webelievewetrailinnewuseradoptiontoAppleComputer'sdigitalvideoeditingproduct.
WebelievethatcompetitionontheMacintoshplatformwithAdobePremiereisdifficult,basedonApple'smarketinganddevelopmentadvantagerelativetotheirownershipandcontroloftheMacintoshoperatingsystemandhardwareplatform.
15AnumberofcompaniescurrentlyofferoneormoreproductsthatcompetedirectlyorindirectlywithmorethanoneofAdobe'sDigitalImagingandVideoproducts.
ThesecompaniesincludeAppleComputer,Microsoft,Roxio,andUlead.
ePaperAswebroadenthescopeofourePaperproductsandsolutions,wefaceincreasedcompetitionfromentrenchedofficeapplications,PDF-basedclonesofourAcrobatproduct,electronicformssolutionproviders,emergingproducts/technologies,andpotentially,enterprisecollaborationsystemproviders.
Additionally,currentofficeapplicationsandcontentcreation/managementtoolsthatuseHTML,MacromediaFlash,MicrosoftWord,TaggedInformationFileFormat("TIFF"),andvariousXML-basedformatsforelectronicdocumentdistributionprovidealternatesolutionstocustomers,andindirectlycompetewithAdobe'sePaperproductsandtheuseofAdobePDF.
ForDocumentGenerationsolutions—specifically,thedesktopandserver-basedPDFfilecreationmarkets—AdobeAcrobatandourserversolutionssuchasAdobeDistillerServerandAdobeDocumentServerfacecompetitionfromAcrobatcloneproductssuchasthosefromAnsyrTechnology,GlobalGraphics,andothersmallerPDFcreationsolutionsthatcanbefoundatalowcost,orforfree,ontheInternet.
AdditionalcompetitorsintheDocumentGenerationmarketincludeStreamServer,Optio,andFormscape.
However,manyPDFcreationsolutionsinthemarkettodayusetechnologyfromus,licensedasAdobePDFLibraries,toimplementthePDFcreationcapabilitiesoftheirproductsorsolutions.
WehaverecentlyannouncedourintenttoprovidedifferentversionsofourAcrobatdesktopproductin2003tomeettheneedsofdifferenttypesofusers.
ProvidingaPDFcreation-onlyversionofAcrobatmayallowustoachieveourgoalofbroaderproliferationofpaid-forAcrobatsoftware,aswellascompetemoreeffectivelywithlow-endPDF-creationproductcompaniessuchasGlobalGraphics.
Thecreationofanewhigh-endprofessionalversionofAcrobatcoulddirectlyorindirectlypositionAdobeagainstothercreativeprofessionalPDFtoolproviders,suchasEnfocus,Lantana,TeamPDF,andZinio.
ForDocumentCollaborationandDocumentProcessManagementsolutions,whereelectronicdocumentdelivery,exchange,collaboration,andarchivalneedsexist,ourAdobeePaperproductfamilyfacescompetitionfromentrenchedofficeapplicationssuchasMicrosoftOffice.
Inaddition,somecontentmanagementvendorsprovidecollaborationandbusinessprocessmanagementcapabilitiesthatcoulddirectlyorindirectlycompetewithourofferings,althoughweviewoursolutionsintheseareasasanextensionofthosesuppliedbysuchvendors.
InmanyoftheePapermarketopportunitiesthatAdobeistargeting,Microsofthas,overthepastfewyears,attemptedtoimproveitsproductsandtheircapabilities.
Theseareasincludethecollaborativedocumentreview,documentsecurity,andelectronicdocumentdistributioncapabilitiesofitsOfficesuite.
Inaddition,MicrosofthasrecentlyannouncednewXMLand.
NET-basedproductinitiativescodenamedXDocs,ePeriodicals,andJupiterthatarepositionedtobepartofthelaunchofthenextversionofMicrosoftOffice.
Theseinitiatives,targetedfor2003availability,indicateMicrosoftmaybeplanningtohavenewelectronicform,electronicdocumentdistribution,eBook,andrelatedfunctionalitylikethatinAdobeAcrobatthatcoulddirectlyorindirectlycompetewithourePaperproductsthatprovidesimilarcapabilities.
InadditiontoMicrosoft'sXDocsinitiative,wealsofacecompetitionfromCardiff,Shana,andPureEdgeforelectronicformssolutions.
Similarly,wefacecompetitionforDocumentProcessManagementsolutionsfromworkflowsolutionsvendorssuchasMetaStorm,Staffware,andUltimus.
WebelievetheAdobeePaperproductfamilycompetesfavorablyagainstthesecompaniesandformatsintermsofthecombinedbenefitsofsuperiorfunctionality,filecompression,visualpagefidelity/reliability,multi-platformcapability,printingandsecurityofdocumentsexpressedusingAdobePDF.
Lookingtothefuture,electronicdocumentsystemstargetingenterprisesthatuseemergingstandardssuchasXMLandMicrosoft's.
NETinitiativearebeingdevelopedandwilllikelybeadopted.
Weareworkingtoensurethatcompatibilityexistsbetweentheseformats/platformsandtheAdobePDFformat,aswellasourAcrobatsoftwareproductsandotherAdobeePaperapplications.
16OEMPostScriptandOtherWebelievethattheprincipalcompetitivefactorsforOEMsinselectingapagedescriptionlanguageoraprintingtechnologyareproductcapabilities,marketleadership,reliability,price,support,andengineeringdevelopmentassistance.
Webelievethatourcompetitiveadvantagesincludeourtechnologycompetency,OEMcustomerrelationships,andintellectualpropertyportfolio.
AdobePostScriptfacescompetitionfromHewlett-Packard'sproprietaryPCLpagedescriptionlanguage,andfromdevelopersofotherpagedescriptionlanguagesbasedonthePostScriptlanguagestandard,includingGlobalGraphicsandXionics.
AlthoughAdobehasnumerousOEMcustomerrelationshipsthatlicenseAdobePostScripttechnologies,revenuesfromasmallnumberoftheOEMsmakeupamajorityoftherevenueinthismarketsegment.
OPERATIONSMarketingandSalesWemarketanddistributeourproductsthroughsaleschannels,whichincludedistributors,retailers,softwaredevelopers,and,increasingly,systemsintegratorsandvalue-addedresellers("VARs"),aswellasthroughOEMandhardwarebundlecustomers.
Wealsomarketandlicenseourproductsdirectlyusingoursalesforceandthroughourownwebsiteatwww.
adobe.
com.
Wesupportourworldwidedistributionnetworkandend-usercustomerswithinternationalofficesaroundtheworld,includinglocationsinAustralia,Belgium,Brazil,Canada,China,Denmark,England,Finland,France,Germany,HongKong,India,Ireland,Italy,Japan,Korea,Mexico,theNetherlands,Norway,Portugal,Scotland,Singapore,Spain,Sweden,Switzerland,andTaiwan.
WelicenseourAdobePostScriptsoftwareandotherprintingsystemstechnologytocomputerandprintermanufacturers,whointurndistributetheirproductsworldwide.
WederiveasignificantportionofAdobePostScriptroyaltiesfrominternationalsalesofprinters,imagesetters,andotheroutputdevicesbyourOEMs.
Wealsolicensesoftwarewithpost-contractcustomersupport("PCS").
AnamountequaltothefairvalueofthePCSisdeferredandrecognizedasrevenueratablyoverthePCSperiod.
FairvalueoftheundeliveredPCSisdeterminedbytheratechargedtocustomerstorenewtheirPCSarrangement.
PCSincludesrightstoupgrades,whenandifavailable,alimitedperiodoftelephonesupport,updates,andenhancements.
Forinformationregardingourmarketsegmentsandsegmentrevenue,geographicareasandsignificantcustomers,pleaserefertoNote17ofourNotestoConsolidatedFinancialStatements.
OrderFulfillmentTheprocurementofthevariouscomponentsofpackagedproducts,includingCDsandprintedmaterials,andtheassemblyofpackagesforretailandotherapplicationsproductsiscontrolledbyOrderFulfillmentoperations.
WeoutsourceourorderfulfillmentactivitiestothirdpartiesintheUnitedStates,Europe,andAsia.
Todate,wehavenotexperiencedsignificantdifficultiesinobtainingrawmaterialsforthemanufactureofourproductsorinthereplicationofCDs,printing,andassemblyofcomponents,althoughaninterruptioninproductionbyasuppliercouldresultinadelayinshipmentofourproducts.
ThebacklogofordersasofJanuary24,2003wasapproximately$16.
1million.
ThebacklogofordersasofJanuary25,2002wasapproximately$15.
7million.
ServicesandSupportAdobeprovidesProfessionalServices,TechnicalSupportandCustomerServicetoawidevarietyofcustomersincludingconsumers,creativeprofessionalsandthoseintheenterprisemarket.
Ourserviceandsupportrevenueconsistsprimarilyofconsultingfees,softwaremaintenanceandsupportfees,andtrainingfees.
ServicesAdobehasaglobalProfessionalServicesteamdedicatedtodevelopingandimplementingsolutionsforenterprisecustomersinkeyverticalmarketsandtotransfertechnicalexpertisetoourSolutionPartners.
TheProfessionalServicesteamusesacomprehensive,customer-focusedmethodologytodevelophighqualitysolutions,17whichinturndeliverasignificantcompetitiveadvantagetoourenterprisecustomers.
Aportfoliooftechnicaltrainingcoursesisalsoavailablefordesktopandserver-basedproductstomeettheneedsofourenterprisecustomersandSolutionPartners.
SupportAsignificantportionofoursupportrevenueiscomposedofourextendedEnterpriseMaintenanceandSupportofferings,whichentitlescustomerstotherighttoreceiveproductupgradesandenhancementsduringthetermofthemaintenanceandsupportperiod,whichistypicallyoneyear.
Thisalsoincludessupportformission-criticalenterprisesolutions.
RegionalSupportCentersarechargedwithprovidingtimely,highqualitytechnicalexpertiseonePaperproductsandsolutionstomeetthegrowingneedsofourcustomers.
OursupportrevenuealsoincludessupportforourdesktopproductswherebyAdobeoffersarangeofsupportprograms,fromfee-basedincidentstoannualsupportcontracts.
Additionally,Adobeprovidesextensiveself-helpandonlinetechnicalsupportcapabilitiesviatheweb,whichallowscustomersquickandeasyaccesstopossiblesolutions.
Adobeprovidesproductsupportthroughacombinationofoutsourcedvendorsandinternalsupportcenters.
AdobealsooffersDeveloperSupporttopartnersanddeveloperorganizations.
TheAdobeSolutionNetwork("ASN")DeveloperProgramfocusesonprovidingdeveloperswithhigh-qualitytools(SolutionsDevelopmentKits),information,andservices.
Freetelephonesupportisprovidedtocustomerswhoareunderwarrantyforsupport.
ForcustomersinNorthAmericaandAsia,supportisprovideduptoamaximumof30or90daysbeginninguponthecustomer'sfirstcallorforamaximumofoneortwosupportincidents,dependingontheproduct.
ForcustomersinEurope,supportisprovideduntilourreleaseofthesecondnewfullversionaftertheversionpurchasedbythecustomer.
Historically,themajorityofsupportforEuropeancustomersisprovidedwithinthefirst90days.
TrainingWeinformcustomersaboutourproductsthroughon-lineinformationalservicesonourWebsite(www.
adobe.
com),andthroughagrowingseriesofhow-tobookspublishedbyAdobePresspursuanttoajointpublishingagreementwithPeachpitPress.
Inaddition,wedevelopteststocertifyindependenttrainerswhoteachAdobesoftwareclasses.
Wesponsorworkshops,workwithprofessionalassociationsandusergroups,andconductregularbeta-testingprograms.
InvestmentinNewMarketsWeownlimitedpartnershipinterestsinfourventurecapitallimitedpartnerships,AdobeVenturesL.
P.
,AdobeVenturesII,L.
P.
,AdobeVenturesIII,L.
P.
,andAdobeVenturesIV,L.
P.
(collectively"AdobeVentures"),thatinvestinearlystagecompanieswithinnovativetechnologies.
Inadditiontothepotentialforfinancialreturns,ourventureactivitiesincreaseourknowledgeofemergingmarketsandtechnologies,aswellasexpandourecosystemofAdobeproductsandservices.
ThepartnershipsaremanagedbyGraniteVentures,anindependentventurecapitalfirmandsolegeneralpartnerofAdobeVentures.
TheinvestmentsinAdobeVenturesareaccountedforusingtheequitymethodofaccounting,andaccordingly,theinvestmentsareadjustedtoreflectourshareofAdobeVentures'investmentincome(loss)anddividenddistributions.
Underthetermsofthepartnershipagreements,thegeneralpartnerhasthesoleandexclusiverighttomanageandcontrolthepartnerships.
Adobeasthelimitedpartnerhascertainrights,includingreplacingthegeneralpartnerandapprovingacquisitionsthatexceedcertainestablishedparameters.
However,theserightsareconsideredtobeprotectiverightsanddonotsuggestanabilitytocontrolthepartnerships.
AdobeVenturescarrytheirinvestmentsinequitysecuritiesatestimatedfairmarketvalueandunrealizedgainsandlossesareincludedininvestmentincome(loss)onourconsolidatedstatementsofincome.
ThestockofanumberoftechnologyinvestmentsheldbythelimitedpartnershipsatNovember29,2002isnotpubliclytraded,and,therefore,thereisnoestablishedmarketfortheirsecurities.
Inordertodeterminethefairmarketvalueoftheseinvestments,weusethemostrecentroundoffinancinginvolvingnewnon-strategicinvestorsorestimatesmadebyGraniteVenturesbasedontheirassessmentofthecurrentmarketvalue.
ItisourpolicytoreviewthefairvalueoftheseinvestmentsheldbyAdobeVenturesonaregularbasistoevaluatethecarryingvalueoftheinvestmentsinthesecompanies.
Thispolicyincludes,butisnotlimitedto,reviewingeachcompanies'cashposition,financingneeds,earnings/revenueoutlook,operationalperformance,management/ownershipchanges,andcompetition.
Theevaluationprocessisbasedon18informationthatwerequestfromtheseprivately-heldcompanies.
ThisinformationisnotsubjecttothesamedisclosureregulationsasU.
S.
publiclytradedcompanies,andassuch,thebasisfortheseevaluationsissubjecttothetimingandtheaccuracyofthedatareceivedfromthesecompanies.
Ifwebelievethatthecarryingvalueofacompanyiscarriedatanamountinexcessoffairvalue,itisourpolicytorecordareserveinadditiontoourequitymethodofaccounting.
InMarch1997,aspartofourventureinvestingprogram,weestablishedaninternallimitedpartnership,AdobeIncentivePartners,L.
P.
("AIP"),whichallowedcertainofAdobe'sexecutiveofficerstoparticipateincashorstockdistributionsfromAdobe'sventureinvestments.
InNovember2002,thepartnershipwasliquidated.
Immediatelypriortotheliquidation,assetsheldbyAIPincludedAdobe'sentireinterestsinAdobeVenturesL.
P.
andAdobeVenturesII,L.
P.
andcertainequitysecuritiesofprivately-heldcompanies.
AdobewasboththegeneralpartnerandalimitedpartnerofAIP.
OtherlimitedpartnerswereexecutiveofficersandformerexecutiveofficersofAdobewhowereinvolvedinAdobe'sventureinvestingactivitiesandwhoseparticipationwasdeemedcriticaltothesuccessoftheprogram.
Nolimitedpartnershipinterestsweregrantedinfiscal2002,2001,or2000.
Adobe'sClassAseniorlimitedpartnershipinterestinAIPincludedbothaliquidationpreferenceandapreferenceinrecoveryofthecostbasisofeachspecificinvestment.
Theexecutives'ClassBjuniorlimitedpartnershipinterestqualifiedforpartnershipdistributionsonlyafter(a)Adobehadfullyrecoveredthecostbasisofitsinvestmentinthespecificinvesteecompanyforwhichadistributionwasmade;and(b)theparticipatingexecutivehadvestedinhisorherdistributionrights.
Thedistributionrightsgenerallyvestedonamonthlybasisoverthreeyears,andwere25%vestedafteroneyear,50%vestedaftertwoyearsandfullyvestedattheendofthreeyears.
AsofJune30,2000,allexistingpartnershipinterestswerefullyvestedorceasedvesting.
ThelimitedpartnershipinvestmentswererestrictedtoinvestmentsinAdobeVenturesorincompaniesthatwereprivateatthetimeoftheestablishmentofAIP,orwhentheinvestmentwasmade,whicheverwaslater.
Infiscal2002,thecurrentandformerparticipatingofficersreceivedcashdistributionswithanaggregatefairvalueof$0.
6million,includinga$0.
3milliondistributionrelatedtothepartnershipliquidation.
AtNovember29,2002,duetothepartnershipliquidation,therewasnominorityinterestheldbytheparticipatingofficers.
OurequityinvestmentsandAdobeVenturesinvestmentsinequitysecuritiesatNovember29,2002consistedofthefollowingcompanies:PrivatePublicAdobeEquityInvestmentsAvantGo,Inc.
XClassmatesOnline,Inc.
(formerlyeCircles,Inc.
)XDatalogics,Inc.
XDigimarcCorporationXDigitalThink,Inc.
XEngage,Inc.
XInfoGate,Inc.
XJetNetInternetworkingServicesInc.
XObjectivity,Inc.
XOpenPlainsTechnologyInc.
XSalonMediaGroup,Inc.
(formerlySalon.
com)XTumbleweedCommunicationsCorp.
XVicomSystems,Inc.
XViewpointCorporationXVirage,Inc.
XWinsoftXZequraTechnologies,Inc.
X19PrivatePublicAdobeVenturesL.
P.
EquityInvestmentsEngage,Inc.
XImageX.
com,Inc.
XManagingEditorSoftware,Inc.
XAdobeVenturesII,L.
P.
EquityInvestmentsDigitalThink,Inc.
XEngage,Inc.
XHAHTSoftware,Inc.
XImageX.
com,Inc.
XPictureIQCorporationXSalonMediaGroup,Inc.
(formerlySalon.
com)XVirage,Inc.
XAdobeVenturesIII,L.
P.
EquityInvestmentsAvantGo,Inc.
XBiz360,Inc.
XBuildersInformationGroup,Inc.
XCovalentTechnologies,Inc.
XDigitalFountainXDigitalThink,Inc.
XEngage,Inc.
XPictureIQCorporationXSendmail,Inc.
XShutterfly,Inc.
XSlamDunkNetworks,Inc.
XAdobeVenturesIV,L.
P.
EquityInvestmentsBAMSoftware,Inc.
XBiz360,Inc.
XCardiffSoftware,Inc.
XConvio,Inc.
XConvalentTechnologies,Inc.
XDigitalFountainXHAHTSoftware,Inc.
XKontiki,Inc.
XPervasiveSecuritySystems,Inc.
XPictureIQCorporationXSendmail,Inc.
XShutterfly,Inc.
XTuVox,Inc.
XWeintendtocontinueinvestinginnewmarketsthroughlimitedpartnershipsaswellasthroughdirectinvestments.
PRODUCTDEVELOPMENTSincethepersonalcomputerandenterprisesoftwareindustriesarecharacterizedbyrapidtechnologicalchange,acontinuoushighlevelofexpendituresisrequiredfortheenhancementofexistingproductsandthedevelopmentofnewproducts.
Weprimarilydevelopoursoftwareinternally.
Weoccasionallyacquireproductsdevelopedbyothersbypurchasingthestockorassetsofthebusinessentitythatheldownershiprightstothetechnology.
Inotherinstances,wehavelicensedorpurchasedtheintellectualpropertyownershiprightsofprogramsdevelopedbyotherswithlicenseortechnologytransferagreementsthatmayobligateustopayroyalties,typicallybasedonapercentageoftherevenuesgeneratedbythoseprograms.
20DuringfiscalyearsendedNovember29,2002,November30,2001andDecember1,2000,ourresearchanddevelopmentexpenses,includingcostsrelatedtocontractdevelopment,were$246.
1million,$224.
1million,and$240.
2million,respectively.
OnApril12,2002,weacquired100%oftheoutstandingcommonstockofAccelio.
AcceliowasaproviderofWeb-enabledsolutionsthathelpedcustomersmanagebusinessprocessesdrivenbyelectronicforms.
TheacquisitionofAccelioenhancesourabilitytobroadenourePapersolutionbusinessbycombiningAccelio'selectronicformssolutionswithAdobeAcrobatandPDFtechnologies.
ThroughthiscombinationwecannowextendAcrobatsolutionstoenterpriseusersinGlobal2000businesses,governmentsandeducationalinstitutionstodelivergreatervaluetoourcustomers.
Theaggregatepurchasepricewas$70.
2million,whichincludedtheissuanceof1.
8millionsharesofcommonstockofAdobe,valuedat$68.
4million,andcashof$1.
8million.
InDecember2001,weacquiredFotiva,Inc.
("Fotiva").
SubstantiallyallofFotiva'sassetswereintellectualproperty.
Fotivawasadevelopmentstagesoftwarecompanythatcreatedsolutionstohelpconsumersmanage,store,enrich,andsharedigitalphotographsandotherrelatedpersonalmedia.
Inconnectionwiththeacquisition,substantiallyallofthepurchasepriceof$5.
4millioncashwasallocatedtoin-processresearchanddevelopmentandexpensedatthetimeofacquisitionduetothein-processstateofthetechnology.
AtthedateweacquiredFotiva,itwasestimatedthat50%ofthedevelopmentefforthadbeencompletedandthattheremaining50%ofthedevelopmenteffortwouldtakeapproximatelyelevenmonthstocomplete.
Theeffortsrequiredtocompletethedevelopmentofthetechnologyprimarilyincludefinalizationofcoding,internationalization,andextensivequalityassurancetesting.
Wedevelopedanewproduct,AdobePhotoshopAlbum,thatwereleasedinthefirstquarteroffiscal2003usingFotiva'simagemanagementtechnologywithourdigitalimagingandePapertechnologies.
Duringfiscal2000,weacquiredGlassbook,Inc.
foratotalconsiderationofapproximately$28.
0million.
Basedonanindependentappraiser'svaluation,$0.
5millionwasallocatedtoin-processresearchanddevelopmentrelatedtothisacquisition.
TheongoingprojectatGlassbookatthetimeofthepurchaseincludedthedevelopmentoftheGlassbookReaderandtheGlassbookContentServerproducts.
WereleasednewproductsthatcontainedthepurchasedtechnologyinApril2001,withAcrobateBookReader2.
1andAdobeContentServer2.
0.
PRODUCTPROTECTIONWeregardoursoftwareasproprietaryandprotectitunderthelawsofcopyrights,patents,trademarks,andtradesecrets.
Weprotectthesourcecodeofoursoftwareprogramsastradesecrets,andmakesourcecodeavailabletothirdpartiesonlyunderlimitedcircumstancesandspecificsecurityandconfidentialityconstraints.
Ourproductsaregenerallylicensedtoendusersona"righttouse"basispursuanttoalicensethatrestrictstheuseoftheproductstoadesignatednumberofprintersorcomputers.
Wealsorelyoncopyrightlawsandon"shrinkwrap"andelectroniclicensesthatarenotsignedbytheenduser.
Copyrightprotectionmaybeunavailableunderthelawsofcertaincountries,however,andtheenforceabilityof"shrinkwrap"andelectroniclicenseshasnotbeenconclusivelydetermined.
Wehaveobtainedmanypatentsandhaveregisterednumerouscopyrights,trademarks,domainnames,andlogosintheUnitedStatesandforeigncountries.
Policingunauthorizeduseofcomputersoftwareisdifficult,andsoftwarepiracyisapersistentproblemforthesoftwareindustry.
Thisproblemisparticularlyacuteininternationalmarkets.
Weconductvigorousanti-piracyprograms.
However,ourproductsgenerallydonotcurrentlycontaincopyprotectionornetworkcopy-detectionfeatures.
EMPLOYEESAsofJanuary24,2003,weemployed3,341people.
Wehavenotexperiencedworkstoppagesandbelieveouremployeerelationsaregood.
Competitioninrecruitingpersonnelinthesoftwareindustry,especiallyhighlyskilledengineers,isextremelyintense.
Webelieveourfuturesuccesswilldependinpartonourcontinuedabilitytorecruitandretainhighlyskilledtechnical,managementandmarketingpersonnel.
21EXECUTIVEOFFICERSAdobe'sexecutiveofficersasofJanuary31,2003areasfollows:NameAgePositionsBruceR.
Chizen47PresidentandChiefExecutiveOfficerShantanuNarayen39ExecutiveVicePresident,WorldwideProductsKarenO.
Cottle53SeniorVicePresident,GeneralCounselandCorporateSecretaryMurrayJ.
Demo41SeniorVicePresidentandChiefFinancialOfficerJimStephens45SeniorVicePresident,WorldwideSalesandFieldOperationsBryanLamkin42SeniorVicePresident,DigitalImagingandVideoBusinessUnitMelissaDyrdahl45SeniorVicePresident,CorporateMarketingandCommunicationsTheresaTownsley44SeniorVicePresident,HumanResourcesJamesHeeger46SeniorVicePresident,CreativeProfessionalBusinessUnitIvanKoon45SeniorVicePresident,ePaperBusinessUnitMr.
ChizenjoinedAdobeupontheclosingoftheacquisitionofAldusinAugust1994asVicePresidentandGeneralManager,ConsumerProductsDivision.
InDecember1997,hewaspromotedtoSeniorVicePresidentandGeneralManager,GraphicProductsDivisionandinAugust1998,Mr.
ChizenwaspromotedtoExecutiveVicePresident,ProductsandMarketing.
InApril2000,Mr.
ChizenwaspromotedtoPresidentofAdobeandinDecember2000,healsobecameAdobe'sChiefExecutiveOfficerandjoinedtheAdobeBoardofDirectorsonDecember2000.
PriortojoiningAdobe,Mr.
ChizenwasVicePresidentandGeneralManager,ConsumerDivisionofAldusCorporationfromFebruary1994toAugust1994,andfromNovember1992toFebruary1994,hewasVicePresidentandGeneralManager,ClarisClearChoiceforClarisCorp.
,awhollyownedsubsidiaryofAppleComputer,Inc.
,amanufacturerofcomputersandsoftware.
Mr.
ChizenisamemberoftheBoardofDirectorsofSynopsys,Inc.
Mr.
NarayenjoinedAdobeinJanuary1998asVicePresidentandGeneralManagerofAdobe'sengineeringtechnologygroup.
HewaspromotedtoSeniorVicePresident,WorldwideProductsinJanuary1999andtoExecutiveVicePresident,WorldwideProductMarketingandDevelopmentinMarch2001.
PriortojoiningAdobe,Mr.
Narayenco-foundedPictraInc.
,asoftwareinternetcompany,in1996.
HewasDirectorofDesktopandCollaborationproductsatSiliconGraphicsInc.
andheldvariousseniormanagerpositionsatAppleComputerInc.
beforefoundingPictra.
Ms.
CottlejoinedAdobeinFebruary2002asSeniorVicePresident,GeneralCounselandSecretary.
PriortojoiningAdobe,Ms.
CottleservedasGeneralCounselforVitriaTechnology,Inc.
fromFebruary2000toFebruary2002.
From1996to1999,Ms.
CottleservedasVicePresident,GeneralCounselandSecretaryofRaychemCorporationandfrom1986to1996asDivisionCounselofRaychemCorporation.
Priortothat,Ms.
CottlewasapartnerinFarella,BraunandMartelinSanFrancisco,California.
22Mr.
DemojoinedAdobeinAugust1996astheDirectorofOperationsFinance.
InJuly1998hewaspromotedtoCorporateController.
InOctober1999,hewaspromotedtoVicePresidentandCorporateControllerandinJune2000waspromotedtoSeniorVicePresidentandChiefFinancialOfficer.
PriortojoiningAdobe,Mr.
DemowastheDirectorofFinanceforMillerFreeman,Inc,adivisionofUnitedNews&Media,London,EnglandfromJune1993toJuly1996.
PriortoMillerFreeman,Inc.
,Mr.
DemoheldavarietyofseniorfinanceandbusinessdevelopmentpositionsatFirstFinancialManagement,VisionaryCorporateTechnologies,andHughesElectronics.
Mr.
StephensjoinedAdobeinFebruary1990andheldvariousseniormanagementpositionsinsalesandmarketingforAdobe'sPrintingSystemsDivisionbeforebeingpromotedinNovember1997toVicePresidentofChangeManagement.
InJune1998,hewaspromotedtoVicePresident,InvestorRelationsandinApril1999,Mr.
StephenswaspromotedtoVicePresident,CorporateDevelopment.
InSeptember2000,Mr.
StephenswaspromotedtoSeniorVicePresident,E-businessDevelopment,andinOctober2001,Mr.
StephenswaspromotedtoSeniorVicePresident,WorldwideSales,CustomerCareandFieldMarketing.
FortenyearspriortojoiningAdobe,Mr.
StephensheldsalesandmarketingmanagementpositionsatDataproductsCorporationandTexasInstruments.
Mr.
LamkinjoinedtheCompanyinFebruary1992andheldvariousseniormanagementpositionsinmarketingforAdobe'sgraphicsandpublishingproducts.
InMarch1997,hewaspromotedtoVicePresidentofMarketingandinMarch2000,hewaspromotedtoSeniorVicePresident,ProductMarketing.
Mr.
LamkiniscurrentlySeniorVicePresidentoftheDigitalImagingandVideoBusinessUnit.
PriortojoiningAdobe,Mr.
LamkinheldvariousproductmanagementpositionsatSoftwarePublishingCorporationfrom1986to1992.
Ms.
DyrdahljoinedAdobeupontheclosingoftheacquisitionofAldusinAugust1994asDirectorofMarketingfortheConsumerProductsDivision.
InAugust1998,Ms.
DyrdahlwasappointedVicePresidentofWorldwideMarketingCommunications,andinAprilof2000,shewaspromotedtoSeniorVicePresidentofCorporateMarketingandCommunications.
PriortojoiningAdobe,Ms.
DyrdahlwasDirectorofSalesOperationsofClarisCorp.
,awhollyownedsubsidiaryofAppleComputer,Inc.
,from1988to1993,andpreviouslyheldseveralmarketingmanagementpositionsatHewlett-Packardfrom1983to1988.
Ms.
DyrdahlalsoservesontheBoardofTrusteesfortheSanJoseMuseumofArt.
Ms.
TownsleyjoinedtheCompanyin1988andheldvariousseniormanagementpositionswithinthehumanresourcesgroupbeforebeingpromotedinMay1999toVicePresidentofWorldwideHumanResources.
InDecember1999,shewaspromotedtoSeniorVicePresident,WorldwideHumanResources.
PriortojoiningAdobe,Ms.
TownsleyheldvarioushumanresourcespositionsatFMCCorporationfrom1979to1988.
Mr.
HeegerjoinedAdobeinFebruary2002asSeniorVicePresidentofCrossMediaPublishing,nowSeniorVicePresident,CreativeProfessionalBusinessUnit.
HewasChiefExecutiveOfficerandPresidentofFotiva,Inc.
fromMarch2001toDecember2001,whenFotivawasacquiredbyAdobe.
FromSeptember1993toJune2000,Mr.
HeegerwaswithIntuit,Inc.
,whereheservedasSeniorVicePresidentandGeneralManagerofSmallBusinessDivisionfromJuly1997toJune2000.
InApril1995,Mr.
HeegerbecameChiefFinancialOfficerandservedasChiefFinancialOfficerandSeniorVicePresidentofAdministrationuntilJuly1997;Mr.
HeegerbeganatIntuitasVicePresidentandGeneralManagerofSuppliesDivisionfromDecember1993toApril1995.
PriortoIntuit,Mr.
Heegerspent11yearswithHewlett-Packardinmarketinganddistributionroles.
Mr.
KoonjoinedtheCompanyinAugust2002asSeniorVicePresidentoftheePaperBusinessUnit.
PriortojoiningAdobe,Mr.
KoonwasPresidentoftheNewTechnologiesDivisionatBEASystemsfromNovember1999toJuly2002.
PriortoBEA,Mr.
KoonservedinvariousexecutivemanagementrolesatS2Systems,includingPresidentandChiefOperatingOfficerfromFebruary1997toSeptember1999.
23Item2.
PropertiesThefollowingtablesetsforththelocation,approximatesquarefootage,anduseofeachoftheprincipalpropertiesusedbyAdobe.
Weleaseorsubleasealloftheseproperties;someofthemareleasedunderoperatingleases.
SuchleasesexpireatvarioustimesthroughMarch2091.
Theannualbaserentexpenseforallfacilities(includingoperatingexpenses,propertytaxes,andassessments)iscurrentlyapproximately$26.
6millionandissubjecttoannualadjustmentsaswellaschangesininterestrates.
LocationApproximateSquareFootageUseNorthAmerica:345ParkAvenueSanJose,California,USA360,000Research,productdevelopment,sales,marketingandadministration321ParkAvenueSanJose,California,USA280,000Research,productdevelopment,sales,marketingandadministration801N.
34thStreet-WaterfrontSeattle,WA98103-88255,000Productdevelopment,sales,marketing,technicalsupport,andadministration560RochesterSt.
Ottawa,OntarioCanadaK1S5K2152,000Productdevelopment,sales,marketing,technicalsupport,andadministrationJapanGateCityOhsakiEastTower1-11-2Ohsaki,Shinagawa-kuTokyo141-0032Japan38,000Productdevelopment,sales,marketing,andadministrationIreland:NationalDigitalPark,CitywestBusinessCampusUnit3100,Block3096-3100Dublin,Ireland2411,000AdministrationBlackrockBusinessParkCarysfortAvenue,Block8&9Dublin,Ireland249,500SalesandtechnicalsupportIndiaAdobeTowers,1–1A,Sector25ANoida,201301,U.
P.
India100,000ProductDevelopmentIngeneral,allfacilitiesareingoodconditionandareoperatingatcapacitiesthatrangefrom65%to100%.
WealsoleaseofficespaceintheUnitedStatesandvariousothercountriesunderoperatingleases.
WehaveoneleasedsetofofficesinSanJose,Californiathatwasvacatedinconnectionwiththerestructuringprogramimplementedinthethirdquarteroffiscal1998.
Wehavesubleasedtheofficesbutstillhaveacommitmentunderthisleaseagreementuntil2007.
Item3.
LegalProceedingsOnSeptember3,2002,AdobefiledsuitintheU.
S.
DistrictCourt,NorthernDistrictofCalifornia("theCaliforniaAction"),againstInternationalTypefaceCorporation("ITC")andAgfaMonotypeCorporation("AMT"),companieswhichhavecommonownershipandmanagement,seekingadeclarationthat(a)Adobe'sdistributionoffontsoftware,whichgeneratesITCtypefaces,didnotbreachitscontractpursuanttowhichAdobelicensedcertainrightswithrespecttoITCtypefaces,and(b)AdobedidnotviolatetheDigitalMillenniumCopyrightAct("DMCA")withrespectto,orinduceorcontributetotheinfringementofcopyrightsin,ITC'sandAMT'sTrueTypefontsoftware.
AMThadpreviouslyassertedthatAdobehadcommittedsuchbreachofcontractandviolationoftheDMCA.
24OnSeptember4,2002,AdobeinitiatedarbitrationproceedingsinLondon,England("theLondonArbitration")againstAMT,seekingadeclarationthatAdobe'sdistributionoffontsoftwarethatgeneratesAMTtypefacesdidnotbreachitscontractpursuanttowhichitlicensedcertainrightswithrespecttoAMTtypefaces.
AMThasmadeabreachofcontractclaiminresponsetoAdobe'sarbitrationdemandintheLondonArbitration,assertingthatAdobewrongfullygrantedand/orallowedthirdpartiesgreaterrightstodistributeandembedAMTfontsthanAdobewaslicensedtograntand/orallow.
IfAMTprevailsonitsbreachofcontractclaims,AMTmayhavetherighttoterminateAdobe'srighttodistributeanyofitsproductsthatthenstillcontainfontsoftwarethatgeneratesAMTtypefaces.
Adobeassertsthatitnegotiatedforandobtainedexpress,writtenlicensesfrombothAMTandITCapproximatelytenyearsagopermittingAdobetoallowenduserstoembedAMTandITCfontsinelectronicdocumentsfor"printandview"anddisputestheotherbreachofcontractclaims.
AdobealsoassertsthatAdobeAcrobat5.
0,whichAMTandITCcorrectlyacknowledgehasbeensupercededbyversion5.
05,neitherviolatestheDMCAnorinducesorcontributestotheinfringementofcopyrightsinITC'sandAMT'sTrueTypefontsoftware.
OnSeptember5,2002,AMTandITCfiledsuitagainstAdobeintheU.
S.
DistrictCourt,EasternDistrictofIllinois("theIllinoisAction")againstAdobe,assertingonlythatAdobe'sdistributionofthesuperceded5.
0versionofAdobeAcrobatviolatedtheDMCA,asdescribedabove.
TheIllinoisActionseeksstatutorydamagesof$200-$2,500foreachcopyofAcrobat5.
0foundtoviolatetheDMCA,aclaimthatAdobedisputesasamatteroflawandfact.
TheIllinoisActionalsoseeksinjunctivereliefwithrespecttoAcrobat5.
0,althoughitspecificallyalleges,correctly,thatAdobenolongerdistributesAcrobat5.
0.
OnNovember13,2002,ITCfiledanothersuitagainstAdobeintheUnitedStatesDistrictCourtfortheEasternDistrictofIllinois("theSecondIllinoisAction"),thistimeassertingthatAdobebreacheditscontractwithITCandthatITC,andnotAdobe,ownsthecopyrightsinfontsoftwarecreatedbyAdobewhichgeneratesITCtypefaces.
AMTandITCmadeamotiontodismisstheCaliforniaaction,challengingjurisdictionandvenue.
ThatmotionwasgrantedbythecourtonDecember16,2002.
Assuch,theparties'respectiveclaimswillberesolvedintheotheractionsdescribedabove.
Theresultsofanylitigationareinherentlyuncertain,andAMTandITCmayassertotherclaims.
Adobecannotassurethatitwillbeabletosuccessfullydefenditselfagainstanyoftheactionsdescribedabove.
AMTandITCseekanunspecifiedaggregatedollaramountofdamages.
AfavorableoutcomeforAMTorITCintheseactionscouldhaveamaterialadverseeffectonAdobe'sbusiness,financialconditionandoperatingresults.
WestronglybelievethatallofAMT'sandITC'sclaimsarewithoutmerit,andwillvigorouslydefendagainsttheminadditiontopursuingourownclaimsasdescribedabove.
OnSeptember6,2002,PlaintiffFredB.
DufresnefiledsuitagainstAdobe,MicrosoftCorporation,Macromedia,Inc.
,andTrellixCorporationintheU.
S.
DistrictCourt,DistrictofMassachusetts,alleginginfringementofU.
S.
PatentNo.
5,835,712,entitled"Client-ServerSystemUsingEmbeddedHypertextTagsForApplicationAndDatabaseDevelopment.
"Theplaintiff'sComplaintassertsthat"Defendantshaveinfringed,andcontinuetoinfringeoneormoreclaimsofthe'712patentbymaking,using,sellingand/orofferingforsale,interalia,productssupportingMicrosoftActiveServerPagestechnology.
"Theplaintiffseeksunspecifiedcompensatorydamages,preliminaryandpermanentinjunctiverelief,treblingofdamagesfor"willfulinfringement,"andfeesandcosts.
Adobestronglydisagreeswiththeplaintiff'sclaimsandintendstovigorouslydefendagainstthisaction.
OnNovember18,2002,PlaintiffsShell&SlateSoftwareCorporationandBenWeissfiledacivilactionintheU.
S.
DistrictCourtinLosAngelesagainsttheCompanyallegingfalsedesignationoforigin,tradesecretmisappropriation,breachofcontract,andothercausesofaction.
TheclaimderivesfromthePlaintiffs'beliefthatthe"healingbrush"techniqueofAdobePhotoshopincorporatesPlaintiffs'tradesecrets.
Plaintiffsseekpreliminaryandpermanentinjunctiverelief,compensatory,treble,andpunitivedamages,andfeesandcosts.
Webelievethattheactionhasnomeritandintendtodefendvigorouslyagainstit.
FromtimetotimeAdobeisinvolvedinlawsuits,claims,investigationsandproceedings,inadditiontothoseidentifiedabove,consistingofintellectualproperty,commercial,employmentandothermatters,whichariseintheordinarycourseofbusiness.
InaccordancewithStatementofFinancialAccountingStandardsNo.
5("SFASNo.
5"),"AccountingforContingencies,"Adobemakesaprovisionforaliabilitywhenitisbothprobablethataliabilityhasbeenincurredandtheamountofthelosscanbereasonablyestimated.
Theseprovisionsarereviewedatleastquarterlyandadjustedtoreflecttheimpactsofnegotiations,settlements,rulings,adviceoflegalcounsel,andother25informationandeventspertainingtoaparticularcase.
Litigationisinherentlyunpredictable.
However,Adobebelievesthatithasvaliddefenseswithrespecttothelegalmatterspendingagainstit,aswellasadequateprovisionsforanyprobableandestimablelosses.
Itispossible,nevertheless,thatcashflowsorresultsofoperationscouldbeaffectedinanyparticularperiodbytheresolutionofoneormoreofthesecontingencies.
Item4.
SubmissionofMatterstoaVoteofSecurityHoldersNotapplicable.
PARTIIItem5.
MarketforRegistrant'sCommonStockandRelatedStockholderMattersOurcommonstockistradedonTheNasdaqNationalMarketunderthesymbol"ADBE.
"OnJanuary24,2003,therewere1,819holdersofrecordofourcommonstock.
Becausemanyofsuchsharesareheldbybrokersandotherinstitutionsonbehalfofstockholders,weareunabletoestimatethetotalnumberofstockholdersrepresentedbytheserecordholders.
Thefollowingtablesetsforththehighandlowsalespricepershareofourcommonstockandthecashdividendspaidpershare,fortheperiodsindicated.
PriceRangeHighLowCashDividendPerShareFiscal2002:FirstQuarter39.
20$30.
00$0.
0125SecondQuarter.
43.
3235.
050.
0125ThirdQuarter.
39.
0316.
500.
0125FourthQuarter.
30.
5217.
710.
0125FiscalYear43.
3216.
500.
05Fiscal2001:FirstQuarter77.
56$26.
25$0.
0125SecondQuarter.
48.
8024.
560.
0125ThirdQuarter.
48.
1331.
220.
0125FourthQuarter.
34.
9922.
200.
0125FiscalYear77.
5622.
200.
05Wehavepaidcashdividendsonourcommonstockeachquartersincethesecondquarterof1988.
Underthetermsofourleaseagreementsandrealestatefinancingagreement,wemaypaycashdividendsunlessaneventofdefaulthasoccurred;however,ourabilitytodistributedividendsmaybelimitedifwedonotmeetcertainfinancialratios.
Wehavebeenincompliancewithfinancialratiocovenantrequirementssincetheinceptionofourleaseandrealestatefinancingagreements.
Thedeclarationoffuturedividends,whetherincashorin-kind,iswithinthediscretionofAdobe'sBoardofDirectorsandwilldependuponbusinessconditions,ourresultsofoperations,ourfinancialcondition,andotherfactors.
ForinformationonourequitycompensationplansrefertoItem7,"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"underthesectiontitled"EmployeeStockOptions.
"26Item6.
SelectedFinancialDataThefollowingselectedconsolidatedfinancialdata(presentedinthousands,exceptpershareamountsandemployeedata)arederivedfromAdobe'sconsolidatedfinancialstatements.
Thisdatashouldbereadinconjunctionwiththeconsolidatedfinancialstatementsandnotesthereto,andwithItem7,Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations.
YearsEndedNov.
29,2002Nov.
30,2001Dec.
1,2000Dec.
3,1999Nov.
27,1998Operations:Revenue1,164,788$1,229,720$1,266,378$1,015,434$894,791Incomebeforeincometaxes284,689306,931443,739374,427167,694Netincome(1)191,399205,644287,808237,751105,144Netincomepershare(1)Basic.
0.
810.
861.
210.
980.
40Diluted0.
790.
831.
130.
920.
39Cashdividendsdeclaredpercommonshare.
.
.
.
.
.
.
0.
050.
050.
050.
050.
05Financialposition:Cashandshort-terminvestments.
617,737581,613679,853498,716272,547Workingcapital436,883453,713563,307355,386204,979Totalassets1,051,610932,1731,069,416803,859767,331Stockholders'equity.
674,321616,972752,544512,209516,365Additionaldata:Worldwideemployees3,3193,0432,9472,7452,664Allshareandpershareamountsreferredtointheabovetablehavebeenadjustedtoreflectthetwo-for-onestocksplitsintheformofstockdividendseffectedOctober24,2000andOctober26,1999.
(1)In2002,includesinvestmentlossof$17.
2million,restructuringandotherchargesof$12.
1million,acquiredin-processresearchanddevelopmentof$5.
8million,andamortizationandimpairmentofgoodwillandpurchasedintangiblesof$21.
0million.
In2001,includesinvestmentlossof$93.
4million,restructuringandotherchargesof$12.
1million,andamortizationofgoodwillandpurchasedintangiblesof$14.
3million.
In2000,includesinvestmentgainsof$14.
3million,one-timegainsfromthesaleofassetsof$2.
7million,restructuringandotherchargesof$5.
6million,in-processresearchanddevelopmentof$0.
5million,andamortizationofgoodwillandpurchasedintangiblesof$7.
0million.
In1999,includesinvestmentgainsof$88.
9million,one-timegainsfromthesaleofassetsof$5.
7million,restructuringandotherchargesof$23.
0million,acquiredin-processresearchanddevelopmentof$3.
6million,andamortizationofgoodwillandpurchasedintangiblesof$4.
8million.
In1998,includesinvestmentgainsof$15.
0million,restructuringandotherchargesof$38.
2million,andamortizationofgoodwillandpurchasedintangiblesof$7.
7million.
Thenumberspresentedabovearepretaxamounts.
27Item7.
Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperationsThefollowingdiscussion(presentedinmillions,exceptpershareamounts)shouldbereadinconjunctionwiththeconsolidatedfinancialstatementsandnotesthereto.
Inadditiontohistoricalinformation,thisAnnualReportonForm10-Kcontainsforward-lookingstatementsincluding,butnotlimitedto,thoserelatedtoproductandmarketingplans,thatinvolverisksanduncertaintiesthatcouldcauseactualresultstodiffermaterially.
Factorsthatmightcauseorcontributetosuchdifferencesinclude,butarenotlimitedto,thosediscussedinthesectionentitled"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-FactorsThatMayAffectOurFuturePerformance.
"YoushouldcarefullyreviewtherisksdescribedinotherdocumentswefilefromtimetotimewiththeSecuritiesandExchangeCommission,includingtheQuarterlyReportsonForm10-Qtobefiledin2003.
Whenusedinthisreport,thewords"expects,""anticipates,""intends,""plans,""believes,""seeks,""targets,""estimates,""looksfor,""looksto,"andsimilarexpressions,aswellasstatementsregardingAdobe'sfocusforthefuture,aregenerallyintendedtoidentifyforward-lookingstatements.
Youshouldnotplaceunduerelianceontheseforward-lookingstatements,whichspeakonlyasofthedateofthisAnnualReportonForm10-K.
Weundertakenoobligationtopubliclyreleaseanyrevisionstotheforward-lookingstatementsorreflecteventsorcircumstancesafterthedateofthisdocument.
RESULTSOFOPERATIONSOverviewFoundedin1982,AdobeSystemsIncorporated("Adobe"orthe"Company")offersalineofsoftwareforconsumers,businesses,andcreativeprofessionalcustomers.
Ourproductsenablecustomerstocreate,manageanddelivervisuallyrich,compellingandreliablecontent.
Welicenseourtechnologytohardwaremanufacturers,softwaredevelopers,andserviceproviders,andweofferintegratedsoftwaresolutionstobusinessesofallsizes.
Wedistributeourproductsthroughanetworkofdistributorsanddealers,value-addedresellers("VARs"),systemsintegrators,andoriginalequipmentmanufacturers("OEMs");directtoendusers;andthroughourownwebsiteatwww.
adobe.
com.
WehaveoperationsintheAmericas;Europe,MiddleEast,andAfrica("EMEA");andAsia.
OursoftwarerunsonMicrosoftWindows,AppleMacintosh,Linux,UNIX,PalmOS,PocketPC,andSymbianplatforms.
Revenue2002Change2001Change2000RevenueProducts.
1,153.
2(6)%$1,229.
7(3)%$1,266.
4Servicesandsupport.
11.
6100———$1,164.
8(5)%$1,229.
7(3)%$1,266.
4Wehavefourreportablesegmentsthatofferdifferentproductlines:Graphics,Cross-mediaPublishing,ePaperSolutions,andOEMPostScriptandOther.
TheGraphicssegmentprovidesuserswithsoftwareforcreating,editingandenhancingdigitalimagesandphotographs,digitalvideo,animations,graphics,andillustrations.
TheCross-mediaPublishingsegmentprovidessoftwareforprofessionalpagelayout,professionalWebpagelayout,technicaldocumentpublishing,andbusinesspublishing.
TheePaperSolutionssegmentprovideselectronicdocumentdistributionsoftwarethatallowsuserstocreate,enhance,annotate,andsecurelysendAdobePDFfilesthatcanbeshared,viewed,navigated,andprintedexactlyasintendedonabroadrangeofhardwareandsoftwareplatforms.
Inaddition,ourrecently-acquiredAcceliobusinessfocusingonelectronicformsisincludedinourePapersegment.
TheOEMPostScriptandOthersegmentincludesprintingtechnologytocreateandprintsimpleorvisuallyrichdocumentswithprecision.
RevenuefromourGraphicssegmentisderivedprimarilyfromthelicensingofthefollowingapplicationproducts:Photoshop,Illustrator,AdobePremiere,PhotoshopElements,AfterEffects,AdobeGraphicsServer(formerlycalledAdobeAlterCast),DigitalVideoCollection,AdobePhotoDeluxe,Atmosphere,andLiveMotion.
Cross-mediaPublishingincludesthefollowingapplicationproducts:WebCollection,GoLive,DesignCollection,AdobePublishingCollection,PageMaker,FrameMaker,AdobeTypeproducts,InDesign,AdobeCreativeSuites,28AdobeContentServer,eBooks,andPressReady.
TheePaperSolutionssegmentincludesAdobeAcrobatsoftwareandotherAcrobatrelatedtechnologies,DocumentServer,FormServer,OutputServer,andWorkflowServer.
TheOEMPostscriptandOthersegmentincludesprintingtechnologytocreateandprintsimpleorvisuallyrichdocumentswithprecision.
Beginninginthefirstquarteroffiscalyear2003,werealignedourbusinesssegmentstoreflecttherecentchangeinthewaywemanageourbusiness.
TheformerGraphicssegmenthasbeenrenamedtheDigitalImagingandVideosegment.
TheformerCross-mediaPublishingsegmenthasbeenrenamedtheCreativeProfessionalsegmentandincludestwoproductsthatwereformerlyincludedinourGraphicssegment,AdobeIllustratorandAdobeGraphicsServer(formerlycalledAdobeAlterCast).
TherewerenochangestoourePaperandOEMPostscriptandOthersegments.
Themanagementdiscussionandanalysisthatfollowsisbasedonoursegmentreportingthatwasineffectthroughoutfiscal2002.
Formoreinformationonbothouroldandnewsegmentreporting,pleaserefertoNote17ofourNotestoConsolidatedFinancialStatements.
ProductsFiscal2002RevenueComparedtoFiscal2001RevenueDuringfiscal2002,ourproductsrevenuedecreased6%,or$76.
6million,comparedtofiscal2001,primarilyduetocontinuedeconomicweaknessinAsia,Europe,andtheU.
S.
,aswellasdeclinesinrevenuefromourGraphics,Cross-mediaPublishing,andOEMPostScriptandOthersegments,forreasonsexplainedbelow.
RevenuefromourGraphicssegmentdecreased7%,or$40.
4million,from$543.
4millioninfiscal2001to$503.
0millioninfiscal2002.
TheannualdecreaseinrevenueinourGraphicssegmentwasprimarilyduetoa13%year-over-yeardeclineinourillustrationsoftwarerevenue,duetoproductlifecycletimingandthecontinuedeconomicimpactoncreativeprofessionalcustomers,whoarethemainend-usermarketforthissoftware.
Wealsoexperienceda3%overalldeclineinourdigitalimagingsoftwarerevenue,whichincludestheAdobePhotoshop,AdobePhotoshopElements,andAdobePhotoDeluxeproducts.
Webelievethedeclineindigitalimagingsoftwareisduetoacombinationoftheeconomicweaknessacrosstheworld,theimpactoflowermarketingspendingbycorporationsresultinginareducednumberofcreativeprofessionalcustomers,andthetrendofourcustomersmigratingtowardsthepurchasingofAdobeCollectionproductsasopposedtoindividualproducts.
Inaddition,weexperienceda15%year-over-yeardeclineinourdigitalvideosoftwarelicensing,whichismadeupofourAdobePremiere,AdobeAfterEffects,andourAdobeDigitalVideoCollectionproducts,duetoproductlifecycletimingandtheeconomicimpactonthedigitalvideosoftwaremarket.
RevenuefromourCross-mediaPublishingsegmentdecreased10%,or$29.
4million,from$289.
6millioninfiscal2001to$260.
2millioninfiscal2002.
TheannualdecreaseinrevenuefromourCross-mediaPublishingsegmentduringfiscal2002comparedtofiscal2001wasduetomultiplefactors.
IntheWebpublishingsegment,weexperienceda35%declineinrevenuefromourWeb-focusedproducts:AdobeGoLiveandtheAdobeWebCollection.
WeattributethisdeclinetoweaknessintheWebpublishingsegmentandlesssalesandmarketingemphasis.
Inaddition,weexperienceda23%year-over-yeardeclineinourbusinesspublishingrevenue,whichisderivedfromourPageMakerandAdobePublishingCollectionproducts.
Weattributethisdeclinetotheweakerglobaleconomyin2002whencomparedto2001,theadoptionofourAdobeDesignCollectionproduct(especiallybycreativeprofessionals)insteadoftheAdobePublishingCollectionproduct,andlesssalesandmarketingemphasis.
Finally,weexperienceda29%year-over-yeardeclineintypeandtechnicalpublishingproducts,whichincludesourAdobeFrameMakerproduct,duetooveralleconomicweaknessinthegeographicmarketsinwhichtheseproductsareused.
ThedecreaseinrevenuefromtheseCross-mediaproductsinfiscal2002comparedtofiscal2001waspartiallyoffsetbya42%increaseinrevenueinourprofessionallayoutpublishingproducts,whichincludesrevenuefromourInDesign,AdobeDesignCollection,andAdobeCreativeSuitesproducts.
Weattributethisrevenueincreasetoincreasedmarketingactivitiesandgrowingcustomerdemand.
RevenuefromourOEMPostScriptandOthersegmentdecreased15%,or$15.
8million,from$104.
8millioninfiscal2001to$89.
0millioninfiscal2002,duetothefollowingfactors:continuedweaknessintheprintbusiness,loweraveragesellingpricesgeneratinglessroyaltiesfromcertainOEMcustomers,andsmallerOEMcustomerstransferringtoclonePostScripttechnologies.
Revenuefromthissegmenthasdeclinedoverthelastfewyearsandweexpectthistrendtocontinue,butifitsignificantlyexceedsourexpectations,itmayharmourfutureresults.
29Thedecreaseinrevenuefromtheabove-mentionedsegmentsinfiscal2002comparedtofiscal2001waspartiallyoffsetbyanincreaseof$9.
0million,or3%,inourePaperSolutionssegment.
Thissegmentincreasedfrom$291.
9millioninfiscal2001to$300.
9millioninfiscal2002,primarilyduetoa5%increaseinAcrobatrevenueintheU.
S.
andanincreaseinrevenueof$21.
5millionfromournewly-acquiredAcceliobusiness.
Fiscal2001RevenueComparedtoFiscal2000RevenueDuringfiscal2001,ouroverallproductrevenuedecreased3%,or$36.
7million,comparedtofiscal2000,primarilyduetoadverseeconomicconditions,especiallyintheU.
S.
,andadeclineinrevenuefromourGraphics,Cross-mediaPublishing,andOEMPostScriptandOthersegmentsforthereasonsexplainedbelow.
RevenuefromourGraphicssegmentdecreased10%,or$58.
7million,from$602.
1millioninfiscal2000to$543.
4millioninfiscal2001.
WeattributethisdecreaseinGraphicssegmentrevenueprimarilytosevereeconomicpressureonthecreativeprofessionalandconsumermarkets,aswellasproductlifecycletimingandthedeclineinspendingonWeb-focusedsoftwaretools.
Asaresultofthesefactors,weexperiencedan11%decreaseinourdigitalimagingsoftwarerevenueanda17%decreaseinourillustrationsoftwarerevenuewhencomparingfiscal2001tofiscal2000.
Thedeclinesinourfiscal2001Graphicsbusinesswerepartiallyoffsetbya14%year-over-yearrevenueincreaseinourdigitalvideosoftwareproducts.
Growthinourdigitalvideosoftwarerevenuewasdrivenbynewupdatesofourproductsinfiscal2001.
RevenuefromourCross-mediaPublishingsegmentdecreased11%,or$35.
6million,from$325.
2millioninfiscal2000to$289.
6millioninfiscal2001.
ThelargestfactorscontributingtotheCross-mediaPublishingsegmentrevenuedeclinewerea25%year-over-yeardeclineinourWebpublishingsoftwarerevenueduetoweaknessintheWeblayoutandWebanimationproductsmarket,a23%year-over-yeardeclineintypeandtechnicalpublishingproductsduetoproductlifecycletimingandoveralleconomicweaknessinthegeographicmarketsinwhichtheseproductsareused,anda19%declineinourbusinesspublishingsoftwarerevenueduetotheadoptionofourAdobeDesignCollectionproduct(especiallybycreativeprofessionals)insteadofourAdobePublishingCollectionproduct.
Thedeclinesinourfiscal2001Cross-mediaPublishingsegmentwerepartiallyoffsetbya55%year-over-yearrevenueincreasefromourprofessionalpagelayoutpublishingproductsduetoincreasedmarketingandpromotionalactivitiesfortheseproductsthroughouttheyear.
RevenuefromourOEMPostScriptandOthersegmentdecreased20%,or$26.
7million,from$131.
5millioninfiscal2000to$104.
8millioninfiscal2001,duetothefollowingfactors:continuedweaknessintheprintbusiness,renegotiatedpricingwithcertainOEMcustomers,andtheoutsourcingofcertainOEMaccountstoathirdpartysolutionprovider.
Thedecreaseinrevenuefromtheabovementionedsegmentsinfiscal2001comparedtofiscal2000waspartiallyoffsetbyanincreaseof41%,or$84.
3million,inourePaperSolutionssegment,asitincreasedfrom$207.
6millioninfiscal2000to$291.
9millioninfiscal2001,duetothereleaseofourAcrobat5.
0productinthesecondquarteroffiscal2001,aswellasthecontinuingmovementfrompaper-basedprocessestoelectronicworkflowsbyenterprisesandgovernmentagencieswhichcontributedtobroaderadoptionofourePaperproducts.
ServicesandSupportServicesandsupportiscomposedofprofessionalservices(suchasconsultingservicesandtraining)andsupport(suchasmaintenanceandtechnicalsupport)primarilyrelatedtotheproductsweacquiredfromAccelio.
Professionalservicesrevenueisrecognizedusingthepercentageofcompletionmethodandismeasuredmonthlybasedprimarilyoninputmeasures,suchasonhoursincurredtodatecomparedtototalestimatedhourstocomplete,withconsiderationgiventooutputmeasures,suchascontractmilestones,whenapplicable.
OurprofessionalservicesrevenuedependsinlargepartonoursoftwarelicenserevenuefromtheproductsthatweacquiredfromAccelio.
AsignificantportionofoursupportrevenueiscomposedofourextendedEnterpriseMaintenanceandSupportofferings,whichentitlescustomerstoreceiveproductupgradesandenhancementsduringthetermofthemaintenanceandsupportperiod,whichistypicallyoneyear.
Oursupportrevenuedependsonbothoursoftwarelicenserevenueandrenewalsofourmaintenanceagreements.
Oursupportrevenuealsoincludessupportforour30desktopproductswherebyAdobeoffersarangeofsupportprograms,fromfee-basedincidenttoannualsupportcontracts,andDeveloperSupporttopartnersanddeveloperorganizations.
Forfiscal2002,ourservicesandsupportrevenueincreased$11.
6million,or100%,comparedtofiscal2001solelyduetotheacquisitionoftheAcceliobusinessinApril2002.
GeographicandPlatformInformationWecategorizeourgeographicresultsintothreemajormarketregions:theAmericas,EMEA,andAsia.
RevenuegeneratedintheAmericas,EMEA,andAsiaasapercentageoftotalrevenueispresentedbelow:200220012000Americas50%48%52%EMEA272726Asia232522100%100%100%ThedecreaseinthepercentofrevenuefromAsiaandcorrespondingincreaseintheAmericasin2002comparedto2001wasprimarilyduetoweaknessintheJapaneconomy.
ThedecreaseintheAmericasinfiscal2001comparedto2000wasprimarilyduetoadverseeconomicconditions,especiallyintheU.
S.
Overall,revenuefromourapplicationproductsontheWindowsandMacintoshplatformsdecreased4%and10%,respectively,infiscal2002comparedtofiscal2001.
Infiscal2001comparedtofiscal2000,revenuefromourapplicationproductsontheWindowsplatformincreased9%,andrevenuefromourapplicationproductsontheMacintoshplatformdecreased21%duringthesameperiod.
Infiscal2002,theWindowsandMacintoshplatformsaccountedfor71%and29%,respectively,ofapplicationproductsrevenue,excludingplatform-independentandUNIXproducts,comparedto70%and30%,respectively,infiscal2001,and63%and37%,respectively,infiscal2000.
WeexpectthetrendtowardstheWindowsplatformtocontinueintheforeseeablefuture.
Costofrevenue2002Change2001Change2000CostofrevenueProducts.
96.
919%$81.
5(7)%$87.
3Servicesandsupport7.
4100———Totalcostofrevenue104.
328%$81.
5(7)%$87.
3Percentageoftotalrevenue9.
0%6.
6%6.
9%ProductsCostofproductrevenueincludesproductpackaging,third-partyroyalties,excessandobsoleteinventory,amortizationrelatedtolocalizationcostsandacquiredtechnologies,hostedservercosts,andthecostsassociatedwiththemanufacturingofourproducts.
Costofproductrevenueincreasedinabsolutedollarsandasapercentageofrevenueinfiscal2002comparedtofiscal2001primarilyduetoincreasedamortizationofwebsitedevelopmentcostsrelatedtoAdobeDesignTeam(formerlyAdobeStudio)whichlaunchedinthefourthquarteroffiscal2001,andthesubsequentimpairmentchargefortheremainingAdobeDesignTeamdevelopmentcostsduetothedecisiontodiscontinuetheAdobeDesignTeamserviceinthethirdquarteroffiscal2002.
Costofproductrevenuedecreasedinabsolutedollarsandasapercentageofrevenueinfiscal2001comparedtofiscal2000,primarilyduetoan8%decreaseinthird-partyroyalties,mainlyassociatedwithourPostScriptandTypeproductsrevenue,anda5%decreaseinmaterialcostsduetodecreasedproductlicensingofshrink-wrappedproducts.
Thesedecreaseswereoffsetbya2%increaseinlocalizationcostsprimarilyduetolocalizationforourPhotoshopandAcrobatproducts,a2%increaseinexcessandobsoleteinventoryexpenses,anda1%increaseinhostedservercostsduetothelaunchofAdobeDesignTeam(formerlyAdobeStudio).
31ServicesandSupportCostofservicesandsupportiscomposedprimarilyofemployee-relatedcostsandtherelatedinfrastructurecostsincurredtoprovideconsultingservices,training,andproductsupportforourAcceliobusiness.
Costofservicesandsupportincreasedinabsolutedollarsandasapercentageofrevenueinfiscal2002comparedtofiscal2001duetotheacquisitionoftheAcceliobusinessinApril2002.
OperatingExpensesResearchandDevelopment2002Change2001Change2000Researchanddevelopment246.
110%$224.
1(7)%$240.
2Percentageoftotalrevenue.
21.
1%18.
2%19.
0%Researchanddevelopmentexpensesconsistprincipallyofsalaryandbenefitexpensesforsoftwaredevelopers,contracteddevelopmentefforts,relatedfacilitiescosts,andexpensesassociatedwithcomputerequipmentusedinsoftwaredevelopment.
Researchanddevelopmentexpensesincreased$22.
0million,or10%,infiscal2002comparedtofiscal2001,primarilyduetohighercompensationandrelatedbenefitsrelatedtoheadcountgrowthfromtheacquisitionofAcceliotosupportproductdevelopmentefforts.
Researchanddevelopmentexpensesdecreased$16.
1million,or7%,infiscal2001comparedtofiscal2000.
Ofthe7%change,3%wasduetoadecreaseincompensationandrelatedbenefitsduetolowerincentivecompensationexpensesand2%wasduetoadecreaseincontractorandprofessionalfeesaslessdevelopmentworkwasperformedthroughoutsidesources.
Webelievethatinvestmentsinresearchanddevelopment,includingtherecruitingandhiringofsoftwaredevelopers,arecriticaltoremaincompetitiveinthemarketplaceandaredirectlyrelatedtocontinuedtimelydevelopmentofnewandenhancedproducts.
Wewillcontinuetofocusonlong-termopportunitiesavailableinourendmarketsandmakesignificantinvestmentsinthedevelopmentofourdesktopapplicationandserver-basedsoftwareproducts.
SalesandMarketing2002Change2001Change2000Salesandmarketing.
380.
4(6)%$403.
71%$401.
2Percentageoftotalrevenue.
32.
7%32.
8%31.
7%Salesandmarketingexpensesincludesalaryandbenefitexpenses,salescommissions,travelexpenses,andrelatedfacilitiescostsforoursales,marketing,customersupport,ordermanagement,andorderfulfillmentpersonnel.
Salesandmarketingexpensesalsoincludethecostsofprogramsaimedatincreasingrevenue,suchasadvertising,tradeshows,publicrelations,andothermarketdevelopmentprograms.
Salesandmarketingexpensesdecreased$23.
3million,or6%,infiscal2002comparedtofiscal2001,primarilyduetodecreasedmarketingandadvertisingspending.
Salesandmarketingexpensesincreased$2.
5million,or1%,infiscal2001comparedtofiscal2000.
The1%increasewasprimarilymadeupofa6%increasefrommarketingspending,whichwaspartiallyoffsetbya3%decreasefromcompensationandrelatedbenefitsduetolowerincentivecompensation.
GeneralandAdministrative2002Change2001Change2000Generalandadministrative.
108.
1(7)%$115.
6(1)%$116.
5Percentageoftotalrevenue.
9.
3%9.
4%9.
2%Generalandadministrativeexpensesconsistprincipallyofsalaryandbenefitexpenses,travelexpenses,andrelatedfacilitiescostsforourfinance,humanresources,legal,informationservices,andexecutivepersonnel.
32Generalandadministrativeexpensesalsoincludeoutsidelegalandaccountingfees,provisionforbaddebts,andexpensesassociatedwithcomputerequipmentandsoftwareusedintheadministrationofthebusiness.
Generalandadministrativeexpensesdecreased$7.
5million,or7%,infiscal2002comparedtofiscal2001.
The7%decreasewasprimarilymadeupof3%fromadecreaseincontractorandprofessionalfees,3%fromadecreaseinfacilityexpensesduetolowerrentexpenses,and3%fromadecreaseincompensationandrelatedbenefitsduetoreducedheadcount.
Thesedecreaseswerepartiallyoffsetbya2%increasefromhigherdepreciationexpenses.
Generalandadministrativeexpensesdecreased$0.
9million,or1%,infiscal2001comparedtofiscal2000.
The1%decreasewasprimarilymadeupof5%fromadecreaseinbaddebtexpenserelatedtoenhancedglobalcreditevaluations,on-goingriskmitigationefforts(suchaslettersofcredit,guarantees,andcreditinsurance)inAsia,andimprovedcollectionsofourroyaltyaccounts.
Thisdecreasewaspartiallyoffsetbya2%increasefromhigherlegalfeesduetolitigationanda2%increasefromfacilityexpensesduetohigherutilitycosts.
RestructuringandOtherCharges2002Change2001Change2000Restructuringandothercharges12.
11%$12.
1114%$5.
6Percentageoftotalrevenue.
1.
0%1.
0%0.
4%Inthefourthquarteroffiscal2002,weincurredarestructuringchargeof$11.
1million,whichincludedseveranceandrelatedchargesandtheclosureofafacility.
Therelatedrestructuringprogrameliminated239engineering,salesandmarketing,andgeneralandadministrativepositionsworldwideinordertorealignourresourcesforourfuturebusinessplans.
TheseplansincludeaddingresourcestosupportourePaperenterprisebusinessinfiscal2003.
Therestructuringprogramisexpectedtobecompletedinfiscal2003.
Ofthe$11.
1millionincharges,$4.
7millionremainedaccruedatNovember29,2002.
Inthesecondquarteroffiscal2002,weimplementedarestructuringprogramtoeliminate39redundantsalesandmarketingpositions,heldbyAdobeemployeesworldwide,asaresultoftheacquisitionofAccelio.
Therestructuringincludedseveranceandrelatedchargesassociatedwiththereductioninforceandthecostofvacatingaleasedfacility.
Totalrestructuringchargeswere$1.
6millionandthemajorityofthesepaymentswerepaidinthesecondquarteroffiscal2002.
Ofthe$1.
6millionincharges,$.
05millionremainsaccruedatNovember29,2002.
Theremainingpaymentswillbepaidinthefirstquarteroffiscal2003.
Duringthefourthquarteroffiscal2002,wepaidourremainingobligationsunderour2001restructuringprogram.
Wealsoloweredourestimateofthetotalcostsassociatedwiththerestructuringprogram,resultinginanadjustmentofapproximately$0.
6million.
Theadjustmentprimarilyreflectedlowerthanestimatedrelocationandseveranceexpensesandrelatedcharges.
Inthefourthquarteroffiscal2001,weimplementedarestructuringplantorealignourworkforcetoourfuturestrategicgoalsandtoalignourresourceswithourlowerfiscal2002revenuetargetsduetoadverseeconomicconditionsresultinginpartfromtheeventsofSeptember11,2001.
Thisrestructuringenabledustoincreaseourinvestmentindigitalimaging,digitalvideo,andePaper-basedbusinessesinfiscal2002.
Aspartoftherestructuringprogram,weimplementedareductioninforceof247positions,affectingorganizationsthroughoutthecompany.
ThereductionscamepredominantlyfromsalesandmarketingandinourNorthAmericanoperations,andasofNovember30,2001,themajorityoftheseterminationswerecompleted.
Therestructuringchargeinthefourthquarteroffiscal2001was$12.
1million,allofwhichrelatedtoseveranceandrelatedchargesassociatedwiththereductioninforce.
AsofNovember29,2002,therewasnorestructuringliabilityremainingforourfiscalyear2001restructuringprogram.
Formoreinformation,seeNote8ofourNotestoConsolidatedFinancialStatements.
Infiscal2000,restructuringandotherchargesconsistedof$6.
3millionofotherchargesrelatingtothedisposalofcertainequipmentandone-timelitigationrelatedexpenses,andacreditof$0.
7millionrelatedtothefiscal1999andfiscal1998restructuringprograms.
The$0.
7millioncreditwasrecordedinthefirstquarteroffiscal2000,aswerevisedourestimatesofthetotalcostsassociatedwiththefiscal1999and1998restructuringprograms.
ThecreditprimarilyreflectedlowerthanestimatedseveranceandrelatedchargesattributabletoemployeeswhosepositionswereeliminatedasaresultoftherestructuringsbutwhowereabletofindalternativeemploymentwithinAdobe.
Theremainingcreditwasduetolowerthanexpectedchargesrelatedtovacatingleasedfacilities.
33AcquiredIn-ProcessResearchandDevelopment2002Change2001Change2000Acquiredin-processresearchanddevelopment5.
8100%$—(100)%$0.
5Percentageoftotalrevenue.
0.
5%——OnApril12,2002,weacquired100%oftheoutstandingcommonstockofAccelioCorporation.
AcceliowasaproviderofWeb-enabledsolutionsthathelpcustomersmanagebusinessprocessesdrivenbyelectronicforms.
Weobtainedanindependentappraiser'svaluationtodeterminetheamountsallocatedtopurchasedtechnologyandin-processresearchanddevelopment.
ThevaluationanalysisutilizedtheIncomeApproachthattakesintoconsiderationdiscountedfuturecashflows.
Basedonthisvaluation$0.
4millionwasallocatedtoin-processresearchanddevelopment.
Theamountallocatedtoin-processresearchanddevelopmentof$0.
4millionwasexpensedasofthedateoftheacquisitionduetothestateofthedevelopmentofcertainproductsandtheuncertaintyofthetechnology.
InDecember2001,weacquiredFotiva,Inc.
("Fotiva").
SubstantiallyallofFotiva'sassetswereintellectualproperty.
Fotivawasadevelopmentstagesoftwarecompanythatcreatedsolutionstohelpconsumersmanage,store,enrich,andsharedigitalphotographsandotherrelatedpersonalmedia.
Inconnectionwiththeacquisition,substantiallyallofthepurchasepriceof$5.
4millioncashwasallocatedtoin-processresearchanddevelopmentandexpensedatthetimeofacquisitionduetothein-processstateofthetechnology.
AtthedateweacquiredFotiva,itwasestimatedthat50%ofthedevelopmentefforthadbeencompletedandthattheremaining50%ofthedevelopmenteffortwouldtakeapproximatelyelevenmonthstocomplete.
Theeffortsrequiredtocompletethedevelopmentofthetechnologyprimarilyincludefinalizationofcoding,internationalization,andextensivequalityassurancetesting.
Wedevelopedanewproduct,AdobePhotoshopAlbum,thatwereleasedinthefirstquarteroffiscal2003usingFotiva'simagemanagementtechnologywithourdigitalimagingandePapertechnologies.
Infiscal2000,werecorded$0.
5millionofacquiredin-processresearchanddevelopmentrelatedtoouracquisitionofGlassbook,Inc.
("Glassbook").
TheacquisitionwasaccountedforunderthepurchasemethodofaccountinginaccordancewithAccountingPrinciplesBoardOpinionNo.
16("APB16").
Basedonanindependentappraiser'svaluation,$0.
5millionofthetotal$28.
0millionpurchasepricewasallocatedtoin-processresearchanddevelopmentduetothestateofthedevelopmentandtheuncertaintyofthetechnology.
TheongoingprojectsatGlassbookatthetimeofthepurchaseincludedthedevelopmentoftheGlassbookReaderandtheGlassbookContentServerproducts.
WereleasednewproductsthatcontainedthepurchasedtechnologyinApril2001,withAcrobateBookReader2.
1andAdobeContentServer2.
0.
AmortizationandImpairmentofGoodwillandPurchasedIntangibles2002Change2001Change2000Amortizationandimpairmentofgoodwillandpurchasedintangibles21.
047%$14.
3104%$7.
0Percentageoftotalrevenue.
1.
8%1.
2%0.
6%Amortizationofgoodwillandpurchasedintangiblesincreased$6.
7million,or47%,infiscal2002comparedtofiscal2001,primarilyduetothegoodwillimpairmentchargefortheremainingbookvalueoftheGlassbookacquisition.
Theimpairmentchargewasdeterminedbasedondiscountedfuturecashflows.
AspartoftheacquisitionofAccelioinApril2002,weallocated$75.
0milliontogoodwillwhich,inaccordancewithStatementofFinancialAccountingStandardsNo.
142("SFAS142"),"GoodwillandOtherIntangibleAssets,"willnotbeamortized.
Duringthefourthquarteroffiscal2002,werevisedourestimateofcertaincostsassociatedwithouracquisitionofAccelio,resultinginanincreasetogoodwillofapproximately$2.
6million.
Theadjustmentprimarilyreflectedhigherthanestimatedtransactioncostsandcostsrelatedtoclosingredundantfacilities.
ThegoodwillassociatedwiththeacquisitionsofAccelioandGoLivewillbereviewedforimpairmentonanannualbasis.
Amortizationofgoodwillandpurchasedintangiblesincreased$7.
3million,or104%,infiscal2001comparedtofiscal2000,duetoafullyearofamortizationofGlassbookgoodwilltotaling$7.
2millionandpurchasedintangiblesof$0.
1million.
34NonoperatingIncome(Loss)InvestmentGain(Loss)2002Change2001Change2000Investmentgain(loss)17.
2)82%$(93.
4)(751)%$14.
3Percentageoftotalrevenue.
1.
5)%(7.
6)%1.
1%Investmentgain(loss)consistsprincipallyofrealizedgainsorlossesfromthesaleofmarketableequityinvestments,other-than-temporarydeclinesinthevalueofmarketableequitysecurities,andequitymethodgainsandlossesofAdobeVentures.
Duringfiscal2002,investmentlossesconsistedofother-than-temporarywritedownsrelatedtoourmarketableequitysecuritiesinDigitalThink,Inc.
,TumbleweedCommunicationsCorp.
,Engage,Inc.
,Virage,Inc.
,ViewpointCorporation,AvantGo,Inc.
,andSalonMediaGroup,Inc.
(formerlySalon.
com)of$11.
3million.
Theselosseswerepartiallyoffsetbygainstotaling$7.
2millionfromthesaleofourmarketableequitysecurities.
WealsorecordednetinvestmentlossesrelatedtoinvestmentsinAdobeVenturesandourcostmethodinvestmentstotaling$13.
1million.
AsofNovember29,2002,ourshort-terminvestmentsincludedmarketableequitysecuritiesof$14.
1millionandourlong-terminvestmentsincludedinvestmentsinAdobeVenturesandothercostmethodinvestmentsof$35.
6million.
Thesesecuritiesareinherentlyriskyandwemayexperiencefurtherdeteriorationinfairvalueinthefuture.
Duringfiscal2001,investmentlossesconsistedofother-than-temporarywritedownsrelatedtoourmarketableequitysecuritiesinTumbleweedCommunicationsCorp.
,SalonMediaGroup,Inc.
(formerlySalon.
com),Engage,Inc.
,Liquent,Inc.
(formerlyESPS,Inc.
),AvantGo,Inc.
,ViewpointCorporation,andVirage,Inc.
of$53.
1million.
Theselosseswerepartiallyoffsetbygainstotaling$19.
5millionfromthesaleofourmarketableequitysecurities.
WealsorecordednetinvestmentlossesrelatedtoinvestmentsinAdobeVenturesandourcostmethodinvestmentstotaling$59.
8million.
AsofNovember30,2001,ourshort-terminvestmentsincludedmarketableequitysecuritiesof$37.
8millionandourlong-terminvestmentsincludedinvestmentsinAdobeVenturesandothercostmethodinvestmentsof$31.
7million.
Duringfiscal2000,werecordedinvestmentgainsrelatedtothesaleofaportionofourinvestmentinTumbleweedCommunicationsCorp.
andDigimarcCorporationfor$10.
4millionand$2.
2million,respectively.
Additionally,werecordedinvestmentgainstotaling$13.
0millionrelatedtothemark-to-marketvaluationadjustmentforAvantGo,Inc.
andothernetgainstotalingapproximately$15.
0millionrelatedtovariousotherAdobeVenturesinvestmentsactivities.
ThesegainswerepartiallyoffsetbyinvestmentlossesrelatedtothewritedownofourinvestmentsinEngage,Inc.
;ClassmatesOnline,Inc.
(formerlyeCircles,Inc.
);SalonMediaGroup,Inc.
(formerlySalon.
com);andImpresseCorporation,totalingapproximately$26.
3million.
Weareuncertainoffutureinvestmentgainsorlossesastheyareprimarilydependentupontheoperationsoftheunderlyinginvesteecompaniesandmarketvaluations.
InterestandOtherIncome2002Change2001Change2000Interestandotherincome.
14.
8(32)%$21.
93%$21.
3Percentageoftotalrevenue.
1.
3%1.
8%1.
7%Interestandotherincomeconsistsprincipallyofinterestearnedoncash,cashequivalents,andshort-terminvestments,gainsandlossesonthesaleoffixedincomeinvestments,foreignexchangetransactiongainsandlossesandrealizedgainsorlossesonthedisposalofassets.
Interestandotherincomedecreased$7.
1million,or32%,infiscal2002comparedtofiscal2001primarilyduetoadecreaseininterestincomeof$6.
0millionduetolowerinterestratesandlowerrealizedgainsof$2.
5millionresultingfromthesalesoffixedincomeinvestments.
Thedecreasesininterestandotherincomeinfiscal2002comparedtofiscal2001werepartiallyoffsetbyareductioninlossesof$1.
1millionrelatedtotheloweredcostofpurchasedoptionsusedinforeigncurrencyhedging.
Interestandotherincomeincreased$0.
6million,or3%,infiscal2001comparedtofiscal2000primarilyduetorealizedgainsof$5.
9millionresultingfromthesaleoffixedincomeinvestments.
Interestandotherincomealso35increasedinfiscal2001comparedtofiscal2000duetohigheraveragecashbalancesresultinginanincreaseininterestincomeof$1.
8million.
Theincreaseininterestandotherincomeinfiscal2001comparedtofiscal2000waspartiallyoffsetbyforeigncurrencylossesof$4.
4million.
TheseforeigncurrencylossesresultedfromtheimplementationofStatementofFinancialAccountingStandardsNo.
133("SFASNo.
133"),"AccountingforDerivativeInstrumentsandHedgingActivities"andsubsequentrecordingofthecostofhedgingforeigncurrencyexposuresininterestandotherincome.
Inaddition,infiscal2000,interestandotherincomeincreasedduetoaone-timegainof$2.
5millionfromthesaleofacorporatefacilityinEdinburgh,Scotland.
IncomeTaxProvision2002Change2001Change2000Incometaxprovision93.
3(8)%$101.
3(35)%$155.
9Percentageoftotalrevenue.
8.
0%8.
2%12.
3%Effectivetaxrate.
32.
8%33.
0%35.
1%Oureffectivetaxratedecreasedinfiscal2002fromfiscal2001andfromfiscal2000tofiscal2001,duetotaxbenefitsassociatedwiththerestructuringofourinternationaloperations.
Partofthetaxratedecreaseinfiscalyear2002wasoffsetbyataxrateincrease,approximately0.
8%,duetothenon-taxdeductiblegoodwillimpairmentexpense.
FactorsThatMayAffectOurFuturePerformanceWebelievethatinthefutureourresultsofoperationscouldbeaffectedbyvariousfactors,including:adversechangesingeneraleconomicorpoliticalconditionsinanyofthemajorcountriesinwhichwedobusinessintroductionofnewproductsbyexistingandnewcompetitors,particularlyMicrosoftdelaysinshipmentofournewproductsormajornewversionsofexistingproductsdifficultiesintransitionstonewmarkets,includingtheenterprise,government,corporatebusinessandconsumermarketsinabilitytoattractandretainkeypersonnellackofmarketacceptanceofnewproductsandupgradesweaknessindemandforapplicationsoftware,computers,andprintersdownwardsalespriceadjustmentsintellectualpropertydisputesandlitigationindustrytransitionstonewbusinessmodelsrenegotiationorterminationofroyaltyorintellectualpropertylicensingarrangementschangesinaccountingrulesmarketrisksassociatedwithourequityinvestments(asdiscussedlaterunder"QuantitativeandQualitativeDisclosuresaboutMarketRisk")Weperiodicallyprovideoperatingmodeltargetsforrevenue,expenses,grossmargin,operatingprofit,otherincome,taxrate,andsharecount.
Weusethesetargetstoassistusinmakingdecisionsaboutourallocationofresourcesandinvestments,notaspredictionsoffutureresults.
Thetargetsreflectanumberofassumptions,includingassumptionsabout:productpricinganddemandmanufacturingcostsandvolumesthemixofapplicationproductsandlicensingrevenue,fullandupgradeproducts,distributionchannels,andgeographicdistributionnochangeoccurringintheglobalmarketconditionsaffectingourcustomers36Theseandmanyotherfactorsdescribedinthisreportaffectourfinancialperformanceandmaycauseourfutureresults,includingresultsforthecurrentquarter,tovarymateriallyfromthesetargetsorfromresultsforpriorperiods.
Inparticular,theslow-downinsomegeographicareas,primarilyintheU.
S.
,Europe,andJapan,hasadverselyaffectedallofourproductsegmentsandmayadverselyaffectourabilitytoachieveourtargets.
Weattributethisslow-down,whichisaffectingallofourproductsegments,tocontinuedeconomicweakness.
TheseadverseeconomicconditionsintheU.
S.
,Europe,Japan,andpotentiallyothergeographicmarketsmaycontinueintheshortterm,andtheymaycontinuetoadverselyaffectourrevenueandearnings.
Althoughtherearealsoadverseconditionsinothercountries,theseothercountriesrepresentamuchsmallerportionofourrevenueandthushavelessimpactonouroperationalresults.
Furthermore,iftheeconomicslow-downworsensorspreadstoothergeographicareaswherewedobusiness,itwouldlikelycauseourfutureresults,includingresultsforthecurrentquarter,tovarymateriallyfromourtargets.
Inaddition,politicalconditionsinanyofthemajorcountriesinwhichwedobusinessmayadverselyaffectourbusiness.
Theendmarketsforoursoftwareproductsareintenselyandincreasinglycompetitiveandaresignificantlyaffectedbyproductintroductionsandmarketactivitiesofindustrycompetitors.
IntheePaperapplicationsmarket,anumberofcompetitorshavedevelopedandbroughttomarketclonesofourAcrobatapplicationtocreateandenhancePDFfiles.
ThroughlowerpricingandaggressivemarketingtoexistingorpotentialAdobecustomers,thesecompetitorscouldimpactAdobeAcrobataverageseatpricing,andouroverallePaperrevenue.
Additionally,anyincorporationintoanoperatingsystemofsoftwareforthecreationofPDFfiles,orothersoftwarethatcompeteswithourePaperorgraphicsapplications,couldseriouslyharmourbusiness.
Furthermore,Microsofthasincreaseditspresenceinthelow-endandmid-rangeconsumerdigitalimaging/graphicsmarkets,aswellasindicatingthatitmayincludenewelectronicform,electronicdocumentdistribution,eBookandrelatedfunctionalitylikethatinAdobeAcrobatandourserver-basedePapersoftware,includingannouncinganewelectronicformstoolthatisplannedtoshipinmid-2003.
Webelievethat,duetoMicrosoft'smarketdominance,anynewMicrosoftproductsinthesemarketswillbehighlycompetitivewithourproducts.
IfcompetinggraphicsorePaperproductsachievewidespreadacceptance,ouroperatingresultswouldsuffer.
Inaddition,consolidationhasoccurredamongsomeofthecompetitorsinourmarkets.
Anyfurtherconsolidationsamongcompetitorsofoursmayresultinstrongercompetitorsandmaythereforeharmourresultsofoperations.
Also,asweseektofurtherbroadenourcustomerbaseintheenterprise,government,corporatebusinessandconsumermarkets,wemaynotsuccessfullyadaptourapplicationsoftwarelicensinganddistributionchannels,whichcouldcauseouroperatingresultstosuffer.
Aswecurrentlyhavelimitedexperienceinthesemarkets,webelievewewillneedtorecruit,train,andretainpersonnelwithexperienceinthesemarkets,andourfailuretodosomayharmourabilitytopenetratethesemarkets.
Wecouldalsoexperiencedecreasesinaveragesellingpricesandsometransitionsinourdistributionchannelsthatcouldseriouslyharmourbusiness.
InconnectionwiththeAccelioacquisition,wemaynotbesuccessfulinintegratingAccelioordeveloping,marketingorlicensingproducts,particularlyproductsfortheenterprise,government,corporatebusinessandconsumermarkets,basedonAccelio'stechnologyorexpertise.
Wealsomaynotbesuccessfulinintegratingitsdistributionchannelswithours,orindevelopingthenecessaryrelationshipswithenoughsignificantsystemsintegratorstosucceedwiththesenewcustomerbases.
Additionally,wemayfaceunanticipatedexpensesrelatingtotheintegrationofAcceliopersonnelanditsproducts,distributionchannels,andadministrativefunctions.
AllofthesefactorsmayaffectourrealizabilityofAccelio'sassets,includinggoodwill.
Weplantorecruitkeytalentforourfuturegrowth,especiallytosupportourenterprisebusiness.
Theseplanstocontinuetoinvestincertainareaswillrequireustocontinuetohireadditionalemployees.
Competitionforhigh-qualitypersonnel,especiallyhighlyskilledengineers,isextremelyintense.
Ourabilitytoeffectivelymanagethisgrowthwillrequireustocontinuetoimproveouroperationalandfinancialcontrolsandinformationmanagementsystems,andtoattract,retain,motivate,andmanageemployeeseffectively;otherwiseourbusinesscouldbeseriouslyharmed.
Werelyonourabilitytograntstockoptionsinordertorecruitandretainhighlyskilledemployeesinacompetitiveenvironment.
Theproposedrequirementthatstockholderapprovalwouldberequiredfortheadoptionofallstockoptionplansandforanymaterialmodificationstosuchplans,aswellasthepotentialrequirementtorecognizeanexpenseforstockoptionsinourfinancialstatements,mayresultinourinabilitytoprovideadequateincentivestoeffectivelyrecruitandretaintalentedemployees.
Anydelaysorfailuresindevelopingandmarketingourproducts,includingupgradesofcurrentproductsthatsuccessfullyadapttochangingcustomerneeds,mayalsohaveaharmfulimpactonourresultsofoperations.
Ourabilitytoextendourcoretechnologiesintonewapplicationsandnewplatformsandtoanticipateorrespondto37technologicalchangescouldaffectourabilitytodeveloptheseproducts.
Aportionofourfuturerevenuewillcomefromthesenewapplications.
Delaysinproductorupgradeintroductionscouldcauseadeclineinourrevenue,earnings,orstockprice.
Wecannotdeterminetheultimateeffectthatthesenewproductsorupgradeswillhaveonourrevenueorresultsofoperations.
Weofferourapplication-basedproductsprimarilyonMacintoshandWindowsplatforms,andonsomeUNIXplatforms.
Wegenerallyofferourserver-basedproducts,butnotdesktopproducts,ontheLinuxplatformaswellasthethreeplatformsmentionedabove.
Totheextentthatthereisaslow-downofcustomerpurchasesofpersonalcomputersoneithertheWindowsorMacintoshplatformoringeneral,ortotheextentthatsignificantdemandarisesforourproductsorcompetitiveproductsontheLinuxdesktopplatformbeforewechooseandareabletoofferourproductsonthisplatform,ourbusinesscouldbeharmed.
Wedistributeourapplicationproductsprimarilythroughdistributors,resellers,retailers,andincreasingly,systemsintegratorsandVARs(collectivelyreferredtoas"distributors").
Asignificantamountofourrevenueforapplicationproductsisfromtwodistributors.
Inaddition,ourchannelprogramnowfocusesoureffortsonlargerdistributors,whichhasresultedinourdependenceonarelativelysmallnumberofdistributorssellingthroughalargeamountofourproducts.
Salesthroughthedistributionchannelresultinunstablepricingandsignificantproductreturns.
Ourdistributorssellourcompetitors'products;ifourdistributorsfavorourcompetitors'productsforanyreason,theymayfailtomarketourproductsaseffectivelyortodevoteresourcesnecessarytoprovideeffectivesales,andinthatcase,ourresultswouldsuffer.
Additionally,oneofourgoalsistoincreaseourdirectdistributionofourproductstoendusersthroughouronlinestorelocatedonourwebsiteatwww.
adobe.
com.
Anysuchincreaseinourdirectrevenueeffortswillplaceusinincreasedcompetitionwithourchanneldistributorsandwithnewertypesofdistributionofourproductsbyonline,Internet-basedresellers.
Inaddition,wecontinuetoexpandintothird-partydistributionchannels,includingVARsandsystemsintegrators,inourefforttofurtherbroadenourcustomerbase.
Asaresult,thefinancialhealthofthesethirdpartiesandourcontinuingrelationshipswiththemarebecomingmoreimportanttooursuccess.
Someofthesecompaniesmaybeunabletowithstandchangesinbusinessconditions.
Ourbusinesscouldbeseriouslyharmedifthefinancialconditionofsomeofthesethirdpartiessubstantiallyweakensorifourrelationshipswiththemdeteriorate.
Inconnectionwiththeenforcementofourownintellectualpropertyrightsorinconnectionwithdisputesrelatingtothevalidityorallegedinfringementofthird-partyrights,wehavebeen,arecurrently,andmayinthefuturebesubjecttocomplex,protractedlitigationornegotiationsaspartofourpolicytovigorouslydefendourintellectualpropertyrights,includingrightsderivedfromthirdpartylicensors.
Intellectualpropertylitigationistypicallyverycostlyandcanbedisruptivetoourbusinessoperationsbydivertingtheattentionandenergiesofmanagementandkeytechnicalpersonnel.
Althoughwehavesuccessfullydefendedorresolvedpastlitigationanddisputes,wemaynotprevailinanyongoingorfuturelitigationanddisputes.
Adversedecisionsinsuchlitigationordisputescouldhavenegativeresults,includingsubjectingustosignificantliabilities,requiringustoseeklicensesfromothers,preventingusfrommanufacturingorlicensingcertainofourproducts,orcausingseveredisruptionstoouroperationsorthemarketsinwhichwecompete,anyoneofwhichcouldseriouslyharmourbusiness.
Ourcomputernetworkandapplicationscouldbeadverselyimpactedbymaliciouscodesuchaswormsandviruses,whicharereleasedintothepublicInternetusingrecentlydiscoveredvulnerabilitiesinpopularsoftwareprograms.
Althoughwehavearesponseteamthatisnotifiedofhigh-riskmaliciouseventsfrommultiplesourcesandwetakecertainpreventativemeasures,theseproceduresmaynotbesufficienttoavoidharmtoourbusiness.
Insomemarketsandforsomeproducts,wehaveadoptedastrategyaimingtoincreaseourmarketsharewhereitislowandthereforemayreceivesignificantlylessrevenuefromcertainlicensingarrangementsthanweotherwisewouldreceiveforlicensingtheseproducts.
Increasedmarketpenetrationmayinfactleadtolowerrevenuegrowthintheseareas.
Whilewebelievethatthispotentialmarketshareincreasewillultimatelybenefitus,thisstrategycouldinsteadharmourbusinessthroughreducedrevenuegrowth.
Wecurrentlyrelyonfiveturnkeyassemblersofourproducts,withatleasttwoturnkeyslocatedineachmajorregionweserve.
Ifanysignificantturnkeyassemblerterminatesitsrelationshipwithus,orifoursupplyfromanysignificantturnkeyisinterruptedorterminatedforanyotherreason,wemaynothaveenoughtimeorbeabletoreplacethesupplyofproductsmanufacturedbythatturnkeyassemblertoavoidseriousharmtoourbusiness.
38RevenuefromourOEMPostScriptandOthersegmentexperienceda15%declineinfiscal2002comparedtofiscal2001,primarilyasaresultofadeclineintheprintbusiness.
Weexpectthissegmenttocontinuetodeclineinfiscal2003relativetofiscal2002,whichmayharmourbusinessifthemagnitudeofthedeclinesignificantlyexceedsourexpectations.
Thecontinuingweaknessintheeconomyiscontributingtothedecreaseinrevenueforthemonochromelaserprintersmarket,inadditiontothedeclineinaveragesellingpricesofmonochromelaserprintersandtheincreasinguseofinkjetprinters.
IfacurrentmajorcustomerdecidedtoincorporateacloneversioninsteadofAdobePostScripttechnology,itcouldseriouslyharmourbusiness.
Further,OEMpartnersonoccasionseektorenegotiatetheirroyaltyarrangements.
Weevaluatetheserequestsonacase-by-casebasis.
Ifanagreementisnotreached,acustomermaydecidetopursueotheroptions,whichcouldresultinlowerlicensingrevenueforus.
TheInternetmarketisrapidlyevolvingandischaracterizedbyanincreasingnumberofmarketentrantsthathaveintroducedordevelopedproductsaddressingauthoringandcommunicationovertheInternet.
Asistypicalinthecaseofanewandevolvingindustry,demandandmarketacceptanceforrecentlyintroducedproductsandservicesaresubjecttoahighlevelofuncertainty.
TheindustryforsoftwarethataddressesauthoringandcommunicationsovertheInternetisstilldeveloping.
StandardsdefiningWebgraphicshavenotyetbeenfullyadopted.
Inaddition,newmodelsforlicensingsoftwarewillbeneededtoaccommodatenewinformationdeliverypractices.
Thenewmodelsmaybelesslucrativeforusthanourexistingbusinessmodels.
Moreover,criticalissuesconcerningthecommercialuseoftheInternet(includingsecurity,reliability,easeofuseandaccess,cost,andqualityofservice)remainunresolvedandmayaffectthegrowthofInternetuse,togetherwiththesoftwarestandardsandelectronicmediaemployedinsuchmarkets.
WederiveasignificantportionofourrevenueandoperatingincomefromourcustomerslocatedinEuropeandJapan.
WegenerallyexperiencelowerrevenuefromourEuropeanoperationsinthethirdquarterbecausemanycustomersreducetheirpurchasingactivitiesinthesummermonths.
WeareuncertainwhethertherecentcurrencyappreciationexperiencedinEuropeandJapanwillcontinueintheforeseeablefuture.
Ouroperatingresultsaresubjecttofluctuationsinforeigncurrencyexchangerates.
Dramaticfluctuationsinforeigncurrencyexchangeratesmayhavesignificantfinancialimpact.
Weattempttomitigateaportionoftheserisksthroughforeigncurrencyhedging,basedonourbestjudgmentoftheappropriatetrade-offsamongrisk,opportunity,andexpense.
Wehaveestablishedahedgingprogramtohedgeourexposuretoforeigncurrencyexchangeratefluctuations,primarilyoftheJapaneseyenandtheeuro.
Weregularlyreviewourhedgingprogramandwillmakeadjustmentsbasedonourbestjudgment.
Ourhedgingactivitiesmaynotoffsetmorethanaportionoftheadversefinancialimpactresultingfromunfavorablemovementinforeigncurrencyexchangerates.
WeprepareourfinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.
TheseprinciplesaresubjecttointerpretationbytheAmericanInstituteofCertifiedPublicAccountants(the"AICPA"),theSecuritiesandExchangeCommission(the"SEC"),andvariousbodiesformedtointerpretandcreateappropriateaccountingpolicies.
Achangeinthesepoliciescanhaveasignificanteffectonourreportedresultsandmayevenaffectthereportingoftransactionscompletedbeforeachangeisannounced.
Ouraccountingpoliciesthatrecentlyhavebeenormaybeaffectedbychangesintheaccountingrulesareasfollows:softwarerevenuerecognitionstockoptiongrantsandaccountingforstockoptionsaccountingforbusinesscombinationsaccountingforvariableinterestentitiesgoodwillandotherintangibleassetsaccountingInparticular,newFASBguidelinesrelatingtoaccountingforgoodwillcouldmakeouracquisition-relatedchargeslesspredictableinanygivenreportingperiod.
Itispossiblethatinthefuture,wemayincurlessfrequent,butlarger,impairmentchargesrelatedtogoodwillwehavealreadyrecorded,aswellasgoodwillarisingoutofpotentialfutureacquisitions.
See"RecentAccountingPronouncements"formoreinformationonthisnewFASBguideline.
Changestotheserulesorthequestioningofcurrentpracticesmayhaveasignificantadverseeffectonourreportedfinancialresultsorinthewayinwhichweconductourbusiness.
Seethediscussionunder"CriticalAccountingPolicies"belowforadditionalinformationaboutourcriticalaccountingpoliciesandsomerisksassociatedwiththesepolicies.
39Weholdequityinvestmentsthathaverecentlyexperiencedsignificantdeclinesinmarketvalue.
Wealsohaveinvestments,andmaycontinuetomakefutureinvestments,inseveralprivatelyheldcompanies,manyofwhichcanstillbeconsideredinthestart-upordevelopmentstages.
Theseinvestmentsareinherentlyrisky,asthemarketforthetechnologiesorproductstheyhaveunderdevelopmentistypicallyintheearlystagesandmaynevermaterialize.
Ourinvestmentactivitiescanimpactournetincome.
Werecordedpre-taxlossesfrommarketablesecuritiesandotherinvestmentsinprivatelyheldcompaniesof$17.
2millionand$93.
4millioninfiscal2002and2001,respectively.
Theseamountsreflectrealizedlossesfromthesaleofmarketableequityinvestments,other-than-temporarydeclinesinthevalueofmarketableequitysecurities,andnetinvestmentlossesrelatedtoinvestmentsinAdobeVenturesandourcostmethodinvestments.
Infiscal2002and2001,decreasesinthemarketpricesofthesesecuritiesresultedinadecreaseinourpre-taxincome.
Futurepricefluctuationsinthesesecuritiesandanysignificantlong-termdeclinesinvaluecouldreduceournetincomeinfutureperiods.
Weareuncertainoffutureinvestmentgainsandlosses,astheyareprimarilydependentupontheoperationsoftheunderlyinginvesteecompanies.
Duetothefactorsnotedabove,ourfutureearningsandstockpricemaybesubjecttosignificantvolatility,particularlyonaquarterlybasis.
Anyshortfallinrevenueorearnings,oranydelayinthereleaseofanyproductorupgrade,comparedtoanalysts'orinvestors'expectationscouldcause,andhascausedinthepast,animmediateandsignificantdeclineinthetradingpriceofourcommonstock.
Additionally,wemaynotlearnofsuchshortfallsordelaysuntillateinthefiscalquarter,whichcouldresultinanevenmoreimmediateandgreaterdeclineinthetradingpriceofourcommonstock.
Finally,weparticipateinahighlydynamicindustry.
Inadditiontofactorsspecifictous,changesinanalysts'earningsestimatesforusorourindustryandfactorsaffectingthecorporateenvironment,ourindustry,orthesecuritiesmarketsingeneralwilloftenresultinsignificantvolatilityofourcommonstockprice.
CriticalAccountingPoliciesWehaveidentifiedthefollowingascriticalaccountingpoliciestoourcompany:revenuerecognition,accountingforourmarketableandnon-marketablefixedincomeandequitysecurities,accountingforleasesofpropertyandequipment,andaccountingforincometaxes.
RevenueRecognitionWerecognizeapplicationproductsrevenueuponshipment,netofestimatedreturns,providedthatcollectionisdeterminedtobeprobableandnosignificantobligationsremain.
Applicationproductsrevenuefromdistributorsissubjecttoagreementsallowinglimitedrightsofreturn,rebates,andpriceprotection.
Accordingly,wereducerevenuerecognizedforestimatedfuturereturns,priceprotection,andrebatesatthetimetherelatedrevenueisrecorded.
Theestimatesforreturnsareadjustedperiodicallybaseduponhistoricalratesofreturns,inventorylevelsinthedistributionchannel,andotherrelatedfactors.
Weprovidefreetechnicalphonesupportforourshrink-wrappedapplicationproductstocustomerswhoareunderwarrantyforsupport.
Werecordtheestimatedcostoffreetechnicalphonesupportuponshipmentofsoftware.
Wealsolicensesoftwareinmultipleelementarrangementsinwhichacustomerpurchasesacombinationofsoftware,post-contractcustomersupport("PCS"),and/orprofessionalservices.
PCS,ormaintenance,includesrightstoupgrades,whenandifavailable,telephonesupport,updates,andenhancements.
Professionalservicesrelatetoconsultingservicesandtraining.
Whenvendorspecificobjectiveevidence("VSOE")offairvalueexistsforallelementsinamultipleelementarrangement,revenueisallocatedtoeachelementbasedontherelativefairvalueofeachoftheelements.
VSOEoffairvalueisestablishedbythepricechargedwhenthesameelementissoldseparately.
WedetermineVSOEoffairvalueofPCSbasedonrenewalratesforthesametermPCS.
InamultipleelementarrangementwherebyVSOEoffairvalueofallundeliveredelementsexistsbutVSOEoffairvaluedoesnotexistforoneormoredeliveredelements,revenueisrecognizedusingtheresidualmethod.
Undertheresidualmethod,thefairvalueoftheundeliveredelementsisdeferredandtheremainingportionofthearrangementfeeisrecognizedasrevenue,assumingdeliveryhasoccurredandcollectibilityisprobable.
RevenueallocatedtoPCSisrecognizedratablyoverthecontractualterm(typicallyonetotwoyears).
Thearrangementfeesrelatedtofixed-pricedconsultingcontractsarerecognizedusingthepercentageofcompletionmethod.
Percentageofcompletionismeasuredmonthlybasedprimarilyoninputmeasures,suchasonhoursincurredtodatecomparedtototalestimatedhourstocomplete,withconsiderationgiventooutputmeasures,40suchascontractmilestones,whenapplicable.
Anticipatedlossesonfixed-pricedcontractsarerecognizedintheperiodwhentheybecomeknown.
WerecordOEMlicensingrevenue,primarilyroyalties,whenOEMpartnersshipproductsincorporatingAdobesoftware,providedcollectionofsuchrevenueisdeemedprobable.
DeferredrevenueincludescustomeradvancesunderOEMlicensingagreementsandmaintenancerevenue.
Incaseswherewewillprovideaspecifiedfreeupgradetoanexistingproduct,wedeferrevenueuntilthefutureobligationisfulfilled.
Weperformongoingcreditevaluationsofourcustomers'financialconditionandgenerallydonotrequirecollateral.
Wemaintainallowancesforestimatedcreditlosses.
AccountingforourMarketableandNon-marketableFixedIncomeandEquitySecuritiesWeclassifyallofourcashequivalentsandshort-terminvestmentsthatarefreeoftradingrestrictions,orbecomefreeoftradingrestrictionswithinoneyear,as"available-for-sale.
"Wecarrytheseinvestmentsatfairvalue,basedonquotedmarketprices,andunrealizedgainsandlosses,netoftaxes,areincludedinaccumulatedothercomprehensiveincome,whichisreflectedasaseparatecomponentofstockholders'equity.
Realizedgainsandlossesarerecognizedwhenrealizedinourconsolidatedstatementsofincome.
Themarketpricesinourshort-termequityinvestmentshavebeenvolatileinthepast.
Itisourpolicytoreviewourequityholdingsonaregularbasistoevaluatewhetherornoteachsecurityhasexperiencedanother-than-temporarydeclineinfairvalue.
Ourpolicyincludes,butisnotlimitedto,reviewingeachofthecompanies'cashposition,earnings/revenueoutlook,stockpriceperformanceoverthepastsixmonths,liquidityandmanagement/ownership.
Ifwebelievethatanother-than-temporarydeclineexistsinoneofourmarketableequitysecurities,itisourpolicytowritedowntheseequityinvestmentstothemarketvalueandrecordtherelatedwritedownasaninvestmentlossonourconsolidatedstatementsofincome.
Theultimatevaluerealizedontheseequityinvestmentsissubjecttomarketvolatilityuntiltheyaresold.
Forfurtherinformationonourcashequivalentsandshort-terminvestments,pleaserefertoNote1ofourNotestoConsolidatedFinancialStatements.
Ourlong-terminvestmentsincludedirectinvestmentsandindirectinvestmentsinprivatelyheldcompanies.
Weownlimitedpartnershipinterestsinfourventurecapitallimitedpartnerships,AdobeVenturesL.
P.
,AdobeVenturesII,L.
P.
,AdobeVenturesIII,L.
P.
,andAdobeVenturesIV,L.
P.
(collectively"AdobeVentures"),thatinvestinearlystagecompanieswithinnovativetechnologies.
Inadditiontothepotentialforfinancialreturns,ourventureactivitiesincreaseourknowledgeofemergingmarketsandtechnologies,aswellasexpandourecosystemofAdobeproductsandservices.
ThepartnershipsaremanagedbyGraniteVentures,anindependentventurecapitalfirmandsolegeneralpartnerofAdobeVentures.
TheinvestmentsinAdobeVenturesareaccountedforusingtheequitymethodofaccounting,andaccordingly,theinvestmentsareadjustedtoreflectourshareofAdobeVentures'investmentincome(loss)anddividenddistributions.
Underthetermsofthepartnershipagreements,thegeneralpartnerhasthesoleandexclusiverighttomanageandcontrolthepartnerships.
Adobeasthelimitedpartnerhascertainrights,includingreplacingthegeneralpartnerandapprovingacquisitionsthatexceedcertainestablishedparameters.
However,theserightsareconsideredtobeprotectiverightsanddonotsuggestanabilitytocontrolthepartnerships.
AdobeVenturescarrytheirinvestmentsinequitysecuritiesatestimatedfairmarketvalueandunrealizedgainsandlossesareincludedininvestmentgain(loss).
ThestockofanumberoftechnologyinvestmentsheldbythelimitedpartnershipsatNovember29,2002isnotpubliclytraded,and,therefore,thereisnoestablishedmarketfortheirsecurities.
Inordertodeterminethefairmarketvalueoftheseinvestments,weusethemostrecentroundoffinancinginvolvingnewnon-strategicinvestorsorestimatesmadebyGraniteVenturesbasedontheirassessmentofthecurrentmarketvalue.
ItisourpolicytoreviewthefairvalueoftheseinvestmentsheldbyAdobeVenturesonaregularbasistoevaluatethecarryingvalueoftheinvestmentsinthesecompanies.
Thispolicyincludes,butisnotlimitedto,reviewingeachcompanies'cashposition,financingneeds,earnings/revenueoutlook,operationalperformance,management/ownershipchanges,andcompetition.
Theevaluationprocessisbasedoninformationthatwerequestfromtheseprivatelyheldcompanies.
ThisinformationisnotsubjecttothesamedisclosureregulationsasU.
S.
publiclytradedcompanies,andassuch,thebasisfortheseevaluationsissubjecttothetimingandtheaccuracyofthedatareceivedfromthesecompanies.
Ifwebelievethatthecarryingvalueofacompanyiscarriedatanamountinexcessoffairvalue,itisourpolicytorecordareserveinadditiontoourequitymethodofaccounting.
Estimating41thefairvalueofnon-marketableequityinvestmentsinearly-stagetechnologycompaniesisinherentlysubjectiveandmaycontributetosignificantvolatilityinourreportedresultsofoperations.
Werecognizerealizedgainsandlossesuponsaleormaturityoftheseinvestmentsusingthespecificidentificationmethod.
Forfurtherinformationonourlong-terminvestments,pleaserefertoNote1ofourNotestoConsolidatedFinancialStatements.
AccountingforLeasesofPropertyandEquipmentWeenteredintotwooperatingleaseagreementsin1999and2001(thelatterforabuildingcurrentlyunderconstruction)relatedtoourheadquarterofficebuildingsinSanJose,California.
TheagreementsqualifyforoperatingleaseaccountingtreatmentunderStatementofFinancialAccountingStandardsNo.
13("SFASNo.
13"),"AccountingforLeases,"and,assuch,thebuildingsarenotincludedonourbalancesheet.
AccordingtoSFASNo.
13,aleaseisclassifiedasoperatingifitdoesnotmeetanyofthefollowingcriteriaatitsinception:1)theleasetransfersownershipofthepropertytothelesseeattheendoftheleaseterm,2)theleasecontainsabargainpurchaseoption,3)theleasetermisequalto75%ormoreoftheeconomiclifeoftheleasedproperty,4)thepresentvalueoftheminimumleasepaymentsequalsorexceeds90%ofthefairvalueoftheleasedproperty.
Theseagreementsaresubjecttostandardcovenants,includingliquidity,leverage,andprofitabilityratiosthatarereportedtothelessorsquarterly.
Webelievewewillbeabletomeetourobligationsundertheagreements,butifwedefaultonourcommitmentsandareunabletoremedythedefaultquicklyenough,thelessorsmayterminateallremainingcommitments(ifanyremain),andtheymaydemandwepurchasethebuildingforanamountequaltothecurrentleasebalance,orrequirethatweremarketorrelinquishthebuilding.
Ifwearerequiredtopurchasethebuildingsanddonotelecttorefinance,thiswillsubstantiallydecreaseourcashavailableforworkingcapitalandrequireustoaddthevalueofthebuildingstoourbalancesheet.
Ifweremarketorrelinquishthebuildings,thiscouldrequireustofindalternatefacilitiesontermsthatmaynotbeasfavorableasthecurrentarrangement.
AsofNovember29,2002,wewereincompliancewithallcovenants.
Forfurtherinformationontheseleases,pleaserefertoNote14ofourNotestoConsolidatedFinancialStatements.
IncomeTaxesStatementofFinancialAccountingStandardsNo.
109,"AccountingforIncomeTaxes,"establishesfinancialaccountingandreportingstandardsfortheeffectofincometaxes.
Theobjectivesofaccountingforincometaxesaretorecognizetheamountoftaxespayableorrefundableforthecurrentyearanddeferredtaxliabilitiesandassetsforthefuturetaxconsequencesofeventsthathavebeenrecognizedinanentity'sfinancialstatementsortaxreturns.
JudgmentisrequiredinassessingthefuturetaxconsequencesofeventsthathavebeenrecognizedintheCompany'sfinancialstatementsortaxreturns.
FluctuationsintheactualoutcomeofthesefuturetaxconsequencescouldmateriallyimpacttheCompany'sfinancialpositionoritsresultsofoperations.
EmployeeandDirectorStockOptionsOptionProgramDescriptionOurstockoptionprogramisabroad-based,long-termretentionprogramthatisintendedtoattract,retain,andprovideperformanceincentivesfortalentedemployees,officersanddirectors,andtoalignstockholderandemployeeinterests.
Currently,wegrantoptionsfromthreestockplans:1)the1994StockOptionPlan,underwhichofficersandkeyemployeesaregrantedoptionstopurchasesharesofourstock,2)the1999EquityIncentivePlan,ourbroad-basedplanunderwhichoptionsmaybegrantedtoallemployeesandoutsideconsultants,and3)the1996OutsideDirectorsStockOptionPlan,asamended,underwhichoptionsaregrantedautomaticallyunderapre-determinedformulatonon-employeedirectors.
Inaddition,ourstockoptionprogramincludestheAdobe1984StockOptionPlan,asamended,andtheAldus1984RestatedStockOptionPlanfromwhichwecurrentlydonotgrantoptions.
Theplanslistedabovearecollectivelyreferredtointhefollowingdiscussionas"thePlans.
"Weconsiderouroptionprogramscriticaltoouroperationandproductivity;essentiallyallofouremployeesparticipate.
OptionvestingperiodsaregenerallythreeyearsforallofthePlans.
Allstockoptiongrantstocurrentexecutiveofficersaremadeafterareviewby,andwiththeapprovalof,theExecutiveCompensationCommitteeoftheBoardofDirectors.
AllmembersoftheExecutiveCompensationCommitteeareindependentdirectors,asdefinedintherulesapplicabletoissuerstradedonTheNasdaqStock42Market.
Seethe"ReportoftheExecutiveCompensationCommittee"appearingintheCompany's2003ProxyStatementforfurtherinformationconcerningthepoliciesandproceduresoftheCompanyandtheExecutiveCompensationCommitteeregardingtheuseofstockoptions.
DistributionandDilutiveEffectofOptionsThetablebelowprovidesinformationaboutstockoptionsgrantedfor2002,2001,and2000toourChiefExecutiveOfficerandourfourothermosthighlycompensatedexecutiveofficersasofNovember29,2002,whowillalsobeidentifiedinour2003ProxyStatement.
ThisgroupisreferredtoastheNamedExecutiveOfficers.
Pleaserefertothesectionheaded"ExecutiveOptions"belowfortheNamedExecutiveOfficers.
Optionsgrantedtoemployees,directorsandNamedExecutiveOfficersforthefiscalyears2000through2002aresummarizedasfollows:Employees,DirectorsandNamedExecutiveOfficersOptionGrantsin2002,2001,and2000(1)200220012000Netgrantsduringtheperiodas%ofoutstandingshares.
3%6%6%NetgrantstoNamedExecutiveOfficersduringtheperiodas%oftotaloptionsgranted21%11%15%NetgrantstoNamedExecutiveOfficersduringtheperiodas%ofOutstandingshares.
1%1%1%CumulativeoptionsheldbyNamedExecutiveOfficersas%oftotaloptionsoutstanding.
15%12%10%(1)"Netgrants"equalsthesumofthenumberofsharessubjecttooptionsgrantedduringthespecifiedperiodreducedbythenumberofsharessubjecttooptionswhichwerecanceledorotherwiseterminatedduringsuchperiod.
Netgrantsasapercentageofoutstandingsharesisbasedon232millionshares,236millionshares,and241millionsharesofourcommonstockoutstandingasofNovember29,2002,November30,2001andDecember1,2000,respectively.
Alloptionsandoutstandingsharesreferredtointheabovetablehavebeenadjustedtoreflectthetwo-for-onestocksplitintheformofastockdividendeffectedOctober24,2000.
Duringfiscal2002,wegrantedoptionstopurchaseapproximately12.
0millionsharesofourstocktoouremployeesanddirectors,whichwasanetgrantofapproximately7.
0millionoptionsafterdeductingapproximately5.
0millionsharesforoptionscanceled.
Foradditionalinformationaboutouremployeestockoptionplanactivityfortheyears2000through2002,andproformaearningspresentationasifwehadaccountedforourgrantofemployeestockoptionsusingthefairvaluemethodofaccountingunderStatementofFinancialAccountingStandardsNo.
123("SFASNo.
123"),"AccountingforStock-BasedCompensation,"pleaserefertoNote11ofourNotestoConsolidatedFinancialStatements.
Forfiscal2002,optionsgrantedtotheNamedExecutiveOfficersamountedto21%ofthegrantsmadetoallemployeesanddirectors.
OptionsgrantedtotheNamedExecutiveOfficersasapercentageofthetotaloptionsgrantedtoallemployeesanddirectorsvaryfromyeartoyear.
In2002,theNamedExecutiveOfficersreceivedahigherpercentageoftotalgrantsthaninotheryearsbecause,althoughtotalgrantstotheNamedExecutiveOfficersremainedrelativelythesame,overalltherewerefeweroptionsgrantedtoallemployees.
ForadditionalinformationaboutthecompensationofourexecutiveofficersandstockoptiongrantstoourNamedExecutiveOfficers,pleaserefertoour2003ProxyStatement.
43GeneralOptionInformationThefollowingtablesetsforththesummaryofactivityunderthePlansforourfiscalyearendedNovember29,2002andNovember30,2001(inactualamounts):SummaryofOptionActivityYearsEndedNovember29,2002November30,2001OptionsAvailableforGrantNumberofOptionsOutstandingWeightedAverageExercisePriceOptionsAvailableforGrantNumberofOptionsOutstandingWeightedAverageExercisePriceBeginningofperiod.
.
…12,818,23854,284,317$36.
6626,911,97845,017,400$38.
26Granted…11,973,680)11,973,68028.
77(19,177,315)19,177,31528.
38Exercised………….
….
(3,688,534)15.
99(4,826,823)12.
55Canceled…4,722,413(4,722,413)45.
205,083,575(5,083,575)44.
89Endofperiod…….
….
.
.
5,566,97157,847,050$35.
6412,818,23854,284,317$36.
66ThefollowingtablesetsforthacomparisonasofNovember29,2002,ofthenumberofsharessubjecttoouroptionswhoseexercisepriceswereatorbelowtheclosingpriceofourcommonstockonNovember29,2002("In-the-Money"options)tothenumberofsharessubjecttooptionswhoseexercisepricesweregreaterthantheclosingpriceofourcommonstockonsuchdate("Out-of-the-Money"options)(inactualshares):In-the-MoneyandOut-of-the-MoneyOptionInformationasofNovember29,2002(1)ExercisableUnexercisableTotalPercentageofTotalOptionsOutstandingIn-the-Money.
10,410,74320,941,29031,352,03354%Out-of-the-Money15,991,49610,503,52126,495,01746%TotalOptionsOutstanding26,402,23931,444,81157,847,050100%(1)TheclosingpriceofourcommonstockonNovember29,2002,was$29.
53,asreportedbytheNasdaqNationalMarket.
ExecutiveOptionsThefollowingtablesetsforthinformationregardingstockoptionsgrantedinthefiscalyearendedNovember29,2002,toourNamedExecutiveOfficers,eachunderthe1994StockOptionPlan,asamended.
Alloptionsweregrantedwithanexercisepriceequaltotheclosingpriceofourcommonstockonthedateofgrant.
Potentialrealizablevaluesarenetofexerciseprice,butbeforetaxesassociatedwithexercise.
Theseamountsrepresenthypotheticalgainsthatcouldbeachievedfortheoptionsifexercisedattheendoftheoptiontermofseven(7)years.
Theassumed5%and10%ratesofstockpriceappreciationareprovidedforpurposesofillustrationonlyanddonotrepresentourestimateorprojectionofthefuturepriceofourcommonstock.
44OptionGrantsinLastFiscalYearIndividualGrantsPotentialRealizableValueatAssumedAnnualRatesofStockPriceAppreciationforOptionTerm(inactualdollars)GrantedNumberofSecuritiesUnderlyingOptionsGranted(actualshares)%ofTotalOptionsGrantedtoEmployeesinFiscalYear(1)ExercisePrice(pershare)ExpirationDate5%10%BruceR.
Chizen.
.
.
.
.
.
.
1,0900.
01%$26.
4711/12/09$11,746$27,373848,9107.
2026.
4711/12/099,147,81021,318,288ShantanuNarayen.
.
.
.
4,1000.
0326.
4711/12/0944,181102,961495,9004.
2026.
4711/12/095,343,79312,453,309MurrayJ.
Demo.
.
.
.
.
.
.
3,8500.
0326.
4711/12/0941,48796,683496,1504.
2126.
4711/12/095,346,48712,459,588JimStephens….
.
.
.
…4,1500.
0426.
4711/12/0944,720104,217295,8502.
5126.
4711/12/093,188,0647,429,545BryanLamkin…….
.
4,4750.
0426.
4711/12/0948,222112,379295,5252.
5026.
4711/12/093,184,5627,421,384(1)Basedonapproximately12.
0millionsharessubjecttooptionsgrantedtoemployeesunderouroptionplansduringfiscal2002.
StockOptionExercisesandOptionHoldingsThefollowingtableshowsstockoptionsexercisedbytheNamedExecutiveOfficersinfiscal2002,includingthetotalvalueofgainsonthedateofexercisebasedonactualsalepricesorontheclosingpricethatdayiftheshareswerenotsoldthatday,ineachcaselesstheexercisepriceofthestockoptions.
Inaddition,thenumberofsharescoveredbybothexercisableandnon-exercisablestockoptions,asofNovember29,2002,isshown.
Alsoreportedarethevaluesfor"In-the-Money"options.
Thedollaramountsshowninthe"In-the-Money"columnrepresentthepositivespreadbetweentheexercisepriceofanysuchexistingstockoptionsandclosingpriceasofNovember29,2002ofourcommonstock.
AggregatedOptionExercisesinLastFiscalYearandFiscalYearEndOptionValues(inactualsharesanddollars)NumberofSecuritiesNumberofUnderlyingUnexercisedValueofUnexercisedIn-the-SharesAcquiredonValueOptionsatNovember29,2002MoneyOptionsatNovember29,2002(2)NameExerciseRealized(1)ExercisableUnexercisableExercisableUnexercisableBruceR.
Chizen…………150,000$3,905,2781,396,9901,762,501$539,591$3,944,678ShantanuNarayen………27,000723,928826,5321,004,1681,386,6782,282,449MurrayJ.
Demo……….
.
.
580,157920,835457,8222,056,715JimStephens……….
.
….
52,5001,561,705480,834608,334208,8381,390,975BryanLamkin………….
.
559,604614,584346,9341,342,600(1)The"valuerealized"representsthetotalvalueofgainsonthedateofexercisebasedonactualsalepricesorontheclosingpricethatdayiftheshareswerenotsoldthatday,ineachcaselesstheexercisepriceofthestockoptions.
(2)OptionvaluesarebasedontheclosingpriceofourcommonstockonNovember29,2002of$29.
53,asreportedbytheNasdaqNationalMarket.
45EquityCompensationPlanInformationThefollowingtablegivesinformationaboutourcommonstockthatmaybeissuedupontheexerciseofoptionsunderallofourexistingequitycompensationplansasofNovember29,2002,includingAdobe's1984StockOptionPlan,asamended,1994StockOptionPlan,1994PerformanceandRestrictedStockPlan,1996OutsideDirectorsStockOptionPlan,asamended,1997EmployeeStockPurchasePlan,andthe1999EquityIncentivePlan.
EquityCompensationPlanInformation(inactualshares)PlanCategory(1)Numberofsecuritiestobeissueduponexerciseofoutstandingoptions(a)Weightedaverageexercisepriceofoutstandingoptions(b)Numberofsecuritiesremainingavailableforfutureissuanceunderequitycompensationplans(excludingsecuritiesreflectedincolumn(a))(c)Equitycompensationplansapprovedbysecurityholders19,768,520$28.
4722,952,840(2)Equitycompensationplansnotapprovedbysecurityholders(3)38,050,350$39.
39741,983Total57,818,870$35.
6623,694,823(1)TheinformationpresentedinthistableexcludesoptionsassumedbytheCompanyinconnectionwithacquisitionsofothercompanies.
AsofNovember29,2002,28,180sharesofourcommonstockwereissuableupontheexerciseoftheseassumedoptions,ataweightedaverageexercisepriceof$5.
22pershare.
(2)Includes15,369,793millionsharesthatarereservedforissuanceunderthe1997EmployeeStockPurchasePlan.
(3)Consistsofoptionsthatareoutstandingandsharesavailableforfutureissuanceunderour1999EquityIncentivePlan(the"1999Plan").
NeithertheNasdaqcurrentlistingstandardsnorfederallawhasrequiredstockholderapprovalofthe1999Plan,andaccordinglyithasnotbeenapprovedbyourstockholders.
Thematerialfeaturesofthe1999PlanaredescribedinNote11ofourNotestoConsolidatedFinancialStatements.
WeDiscloseProFormaFinancialInformationWeprepareandreleasequarterlyunauditedfinancialstatementspreparedinaccordancewithgenerallyacceptedaccountingprinciples("GAAP").
Wealsodiscloseanddiscusscertainproformafinancialinformationintherelatedearningsreleaseandinvestorconferencecall.
Ourproformafinancialinformationdoesnotincluderestructuringandothercharges,acquiredin-processresearchanddevelopment,amortizationandimpairmentofgoodwillandpurchasedintangibles,gainorlossonthesaleofspecificassets(e.
g.
building),andgainsandlossesoninvestmentsinequitysecurities.
Webelievethedisclosureoftheproformafinancialinformationhelpsinvestorsmoremeaningfullyevaluateandcomparetheresultsofourongoingoperationsfromquartertoquarterandfromyeartoyearbecauseitremovescertainitemsfromthefinancialinformationtomoreclearlyrevealourongoingoperatingresults.
However,weurgeinvestorstocarefullyreviewtheGAAPfinancialinformationincludedaspartofourQuarterlyReportsonForm10-QandourAnnualReportsonForm10-KthatarefiledwiththeSEC,aswellasourquarterlyearningsreleases,andcomparetheGAAPfinancialinformationwiththeproformafinancialresultsdisclosedinourquarterlyearningsreleasesandinvestorcalls,aswellasinsomeofourotherreports.
46ThefollowingtableshowstheCompany'sproformaresultsreconciledtotheGAAPConsolidatedStatementofIncomeforthefiscalyearsendedNovember29,2002,November30,2001,andDecember1,2000.
Ourproformainformation,includingtheinformationpresentedbelow,isanon-GAAPmeasureandmaynotbecomparabletosimilarlytitledmeasuresreportedbyothercompanies.
Ourproformaresultsforfiscalyear2002,2001,and2000excluderestructuringandothercharges,acquiredin-processresearchanddevelopment,amortizationandimpairmentofgoodwillandpurchasedintangibles,investmentgainsandlosses,andgainonthesaleofabuilding.
YearsEndedNovember29,2002November30,2001December1,2000(inthousands)GAAPincomebeforeincometaxes$284,689$306,931$443,739Restructuringandothercharges12,14812,0635,629Acquiredin-processresearchanddevelopment5,769—470Amortizationandimpairmentofgoodwillandpurchasedintangibles20,97314,2817,013Investment(gain)loss17,18593,414(14,345)Gainonthesaleofabuilding——(2,718)Proformaincomebeforeincometaxes340,764426,689439,788Incometaxprovision109,044140,807154,542Proformanetincome$231,720$285,882$285,246ProFormaFairValueDisclosuresonEmployeeStockPlansWeaccountforourfixedstockoptionplansandouremployeestockpurchaseplanusingtheintrinsicvaluemethod.
PleaseseeourNote11oftheNotestoConsolidatedFinancialStatementsfortheproformaamountsofnetincomeandnetincomepersharethatwouldhaveresultedifweaccountedforouremployeestockplansunderthefairvaluerecognitionprovisionsofSFASNo.
123.
RecentAccountingPronouncementsInJuly2001,theFinancialAccountingStandardsBoard("FASB")issuedStatementofFinancialAccountingStandardsNo.
142("SFASNo.
142"),"GoodwillandOtherIntangibleAssets.
"ThisStatementrequiresthatgoodwillandotherintangibleswithanindefiniteusefullifenotbeamortized,butbetestedforimpairmentatleastannually.
SFASNo.
142iseffectiveforfiscalyearsbeginningafterDecember15,2001;however,fornewbusinesscombinationsthatoccurafterJune30,2001,SFASNo.
142iseffective.
InaccordancewithSFASNo.
142,goodwillresultingfromourrecentacquisitionofAccelioinApril2002isnotamortized.
WewillfullyadoptSFASNo.
142beginninginourfiscalyear2003.
WedonotexpecttheadoptionofSFASNo.
142tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
Amortizationandimpairmentofgoodwillinfiscal2002,2001,and2000was$21.
0million,$14.
3million,and$7.
0million,respectively.
InJune2001,theFASBissuedStatementofFinancialAccountingStandardsNo.
143("SFASNo.
143"),"AccountingforAssetRetirementObligations.
"ThisStatementaddressesfinancialaccountingandreportingforobligationsassociatedwiththeretirementoftangiblelong-livedassetsandtheassociatedassetretirementcosts.
ThisStatementappliestolegalobligationsassociatedwiththeretirementoflong-livedassetsthatresultfromtheacquisition,construction,development,ornormaluseoftheasset.
AsusedinthisStatement,alegalobligationresultsfromexistinglaw,statute,ordinance,writtenororalcontract,orbylegalconstructionofacontractunderthedoctrineofpromissoryestoppel.
SFASNo.
143iseffectiveforfiscalyearsbeginningafterJune15,2002.
WewilladoptSFASNo.
143beginninginourfiscalyear2003.
WedonotexpecttheadoptionofSFASNo.
143tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
InAugust2001,theFASBissuedStatementofFinancialAccountingStandardsNo.
144("SFASNo.
144"),"AccountingfortheImpairmentorDisposalofLong-LivedAssets.
"ThisStatementaddressesfinancialaccountingandreportingfortheimpairmentordisposaloflong-livedassetsandsupersedesSFASNo.
121,"AccountingfortheImpairmentofLong-LivedAssetsandforLong-LivedAssetstobeDisposedOf,"andtheaccountingandreportingprovisionsofAccountingPrinciplesBoardOpinionNo.
30("APBNo.
30"),"ReportingtheResultsofOperations47foraDisposalofaSegmentofaBusiness.
"SFASNo.
144iseffectiveforfiscalyearsbeginningafterDecember15,2001.
WewilladoptSFASNo.
144beginninginourfiscalyear2003.
WedonotexpecttheadoptionofSFASNo.
144tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
InApril2002,theFASBissuedStatementofFinancialAccountingStandardsNo.
145("SFASNo.
145"),"RescissionofFASBStatementsNo.
4,44,and64,AmendmentofFASBStatementNo.
13,andTechnicalCorrections.
"Amongotherprovisions,SFASNo.
145rescindsSFASNo.
4,"ReportingGainsandLossesfromExtinguishmentofDebt.
"Accordingly,gainsorlossesfromextinguishmentofdebtshallnotbereportedasextraordinaryitemsunlesstheextinguishmentqualifiesasanextraordinaryitemunderthecriteriaofAPBNo.
30.
GainsorlossesfromextinguishmentofdebtthatdonotmeetthecriteriaofAPBNo.
30shouldbereclassifiedtoincomefromcontinuingoperationsinallpriorperiodspresented.
SFASNo.
145iseffectiveforfiscalyearsbeginningafterMay15,2002.
WewilladoptSFASNo.
145beginninginourfiscalyear2003.
WedonotexpecttheadoptionofSFASNo.
145tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
InJuly2002,theFASBissuedStatementofFinancialAccountingStandardsNo.
146("SFASNo.
146"),"AccountingforCostsAssociatedwithExitorDisposalActivities.
"SFASNo.
146addressesfinancialaccountingandreportingforcostsassociatedwithexitordisposalactivities.
Thisstatementrequiresthataliabilityforacostassociatedwithanexitordisposalactivityberecognizedwhentheliabilityisincurred.
Previousguidance,providedunderEITFNo.
94-3,"LiabilityRecognitionforCertainEmployeeTerminationBenefitsandOtherCoststoExitanActivity(includingcertaincostsincurredinarestructuring),"requiredanexitcostliabilityberecognizedatthedateofanentity'scommitmenttoanexitplan.
TheprovisionsofthisstatementareeffectiveforexitordisposalactivitiesthatareinitiatedbyacompanyafterDecember31,2002.
WedonotexpecttheadoptionofSFASNo.
146tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
InOctober2002,theFASBissuedStatementofFinancialAccountingStandardsNo.
147("SFASNo.
147"),"AcquisitionsofCertainFinancialInstitutions-anamendmentofFASBStatementsNo.
72and144andFASBInterpretationNo.
9.
"Theprovisionsofthisstatementrelatetotheapplicationofthepurchasemethodofaccountingforallacquisitionsoffinancialinstitutions,excepttransactionsbetweentwoormoremutualenterprises.
Theprovisionsofthisstatementalsorelatetocertainlong-termcustomer-relationshipintangibleassetsrecognizedinanacquisitionofafinancialinstitution,includingthoseacquiredintransactionsbetweenmutualenterprises.
TheprovisionsofthisstatementareeffectiveonorafterOctober1,2002.
TherewillbenomaterialimpactupontheadoptionofSFASNo.
147onourfinancialpositionorresultsofoperations.
InDecember2002,theFASBissuedStatementofFinancialAccountingStandardsNo.
148("SFASNo.
148"),"AccountingforStock-BasedCompensation-TransitionandDisclosure-anamendmenttoFASBStatementNo.
123,AccountingforStock-BasedCompensation.
"SFASNo.
148providesalternativemethodsoftransitionforavoluntarychangetothefairvaluebasedmethodofaccountingforstock-basedemployeecompensation.
Inaddition,SFASNo.
148amendsthedisclosurerequirementsofStatement123torequiremoreprominentandmorefrequentdisclosuresinfinancialstatementsabouttheeffectsofstock-basedcompensation.
ThetransitionguidanceandannualdisclosureprovisionsofSFASNo.
148areeffectiveforfiscalyearsendingafterDecember15,2002.
TheinterimdisclosureprovisionsareeffectiveforfinancialreportscontainingfinancialstatementsforinterimperiodsbeginningafterDecember15,2002.
WedonotexpecttheadoptionofSFASNo.
148tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
InNovember2002,theFASBissuedInterpretationNo.
45("FINNo.
45"),"Guarantor'sAccountingandDisclosureRequirementsforGuarantees,IncludingIndirectGuaranteesofIndebtednessofOthers.
"FINNo.
45expandsontheaccountingguidanceofStatementsNo.
5,57,and107andincorporateswithoutchangetheprovisionsofFASBInterpretationNo.
34,whichisbeingsuperseded.
FINNo.
45willaffectleasingtransactionsinvolvingresidualguarantees,vendorandmanufacturerguarantees,andtaxandenvironmentalindemnities.
AllsuchguaranteeswillneedtobedisclosedinthenotestothefinancialstatementsstartingwiththeperiodendingafterDecember15,2002.
ForguaranteesissuedafterDecember31,2002,thefairvalueoftheobligationmustbereportedonthebalancesheet.
Existingguaranteeswillbegrandfatheredandwillnotberecognizedonthebalancesheet.
WearecurrentlyevaluatingtheimpactofFINNo.
45onourfinancialpositionandresultsofoperations.
InJanuary2003,theFASBissuedInterpretationNo.
46("FINNo.
46"),"ConsolidationofVariableInterestEntities.
"FINNo.
46expandsuponandstrengthensexistingaccountingguidancethataddresseswhenacompany48shouldincludeinitsfinancialstatementstheassets,liabilitiesandactivitiesofanotherentity.
Avariableinterestentityisacorporation,partnership,trust,oranyotherlegalstructureusedforbusinesspurposesthateither(a)doesnothaveequityinvestorswithvotingrightsor(b)hasequityinvestorsthatdonotprovidesufficientfinancialresourcesfortheentitytosupportitsactivities.
FINNo.
46requiresavariableinterestentitytobeconsolidatedbyacompanyifthatcompanyissubjecttoamajorityoftheriskoflossfromthevariableinterestentity'sactivitiesorisentitledtoreceiveamajorityoftheentity'sresidualreturnsorboth.
TheconsolidationrequirementsofFINNo.
46applyimmediatelytovariableinterestentitiescreatedafterJanuary31,2003.
TheconsolidationrequirementsapplytoolderentitiesinthefirstfiscalyearorinterimperiodbeginningafterJune15,2003.
DisclosurerequirementsapplytoanyfinancialstatementsissuedafterJanuary31,2003.
TheCompanyhasconsideredtheprovisionsofFINNo.
46andbelievesitwillnotbenecessarytoincludeintheCompany'sfinancialstatementsanyassets,liabilities,oractivitiesoftheentitiesholdingtheCompany'scorporateheadquartersleases.
TheCompanyhasprovidedcertaindisclosuresinotherareasofthisfiling(seeNote6andNote14ofourNotestoConsolidatedFinancialStatements)andwillcontinuetoevaluatetheimpactofFINNo.
46onourfinancialstatementsandrelateddisclosures.
LIQUIDITYANDCAPITALRESOURCES2002Change2001Change2000Cash,cashequivalents,andshort-terminvestments.
.
.
.
$617.
76%$581.
6(14)%$679.
9Workingcapital436.
9(4)%$453.
7(19)%$563.
3Stockholders'equity.
674.
39%$617.
0(18)%$752.
5Ourcash,cashequivalents,andshort-terminvestmentsconsistprincipallyofmoneymarketfunds,U.
S.
Treasuries,corporatenotes,municipalbonds,andmarketableequitysecurities.
Allofourshort-terminvestmentsareclassifiedasavailable-for-saleundertheprovisionsofStatementofFinancialAccountingStandardsNo.
115,"AccountingforCertainInvestmentsinDebtandEquitySecurities.
"Thesecuritiesarecarriedatfairmarketvaluewiththeunrealizedgainsandlosses,netoftax,includedinaccumulatedothercomprehensiveincome,whichisreflectedasaseparatecomponentofstockholders'equity.
Realizedgainsandlossesarerecognizedwhenrealizedinourconsolidatedstatementsofincome.
Cashprovidedbyoperatingactivitieswas$329.
3million,$418.
7million,and$444.
6millioninfiscal2002,2001,and2000,respectively.
The$329.
3millionofcashprovidedbyoperatingactivitiesfortheyearendedNovember29,2002,wasprimarilyduetonetincomeof$191.
4million,netnon-cashrelatedexpensesof$118.
9million,andanetincreaseinoperatingassetsandliabilitiesof$19.
0million.
The$418.
7millionofcashprovidedbyoperatingactivitiesfortheyearendedNovember30,2001,wasprimarilyduetonetincomeof$205.
6million,netnon-cashrelatedexpensesof$197.
1million,andanetincreaseinoperatingassetsandliabilitiesof$16.
0million.
The$444.
6millionofcashprovidedbyoperatingactivitiesfortheyearendedDecember1,2000,wasprimarilyduetonetincomeof$287.
8millionandnetnon-cashrelatedexpensesof$173.
6million,partiallyoffsetbyanetdecreaseinoperatingassetsandliabilitiesof$16.
8million.
Ourcashprovidedbyoperatingactivitiesdecreasedinfiscal2002comparedtofiscal2001andinfiscal2001comparedtofiscal2000asaresultofdecreasesinrevenueandoperatingincomethatoccurredprimarilyasaresultofweakeconomicconditions.
Cashusedforinvestingactivitieswas$142.
3million,$26.
4million,and$228.
1millioninfiscal2002,2001,and2000,respectively.
The$142.
3millionofcashusedforinvestingactivitiesfortheyearendedNovember29,2002,wasprimarilyduetonetpurchasesofshort-terminvestmentsof$91.
8million,purchasesoflong-terminvestmentsandotherassetsof$38.
0million,andacquisitionsofpropertyandequipmentof$31.
6million.
Thecashusedforinvestingactivitieswaspartiallyoffsetbyproceedsfromthesaleofequitysecuritiesof$11.
7millionandproceedsof$7.
3millionrelatedtoourAccelioacquisition.
The$26.
4millionofcashusedforinvestingactivitiesfortheyearendedNovember30,2001,wasprimarilyduetoacquisitionsofpropertyandequipmentof$43.
2millionandpurchasesoflong-terminvestmentsandotherassetsof$35.
3million.
Thecashusedforinvestingactivitieswaspartiallyoffsetbynetcashprovidedbyshort-terminvestmentsof$20.
6millionandproceedsfromthesaleofequitysecuritiesof$31.
5million.
The$228.
1millionofcashusedforinvestingactivitiesfortheyearendedDecember1,2000,wasprimarilyduetonetpurchasesofshort-terminvestmentsof$137.
9million,purchasesoflong-terminvestmentsandotherassetsof$59.
1million,andacquisitionsofpropertyandequipmentof$29.
8million.
Thecashusedforinvestingactivitieswaspartiallyoffsetbyproceedsfromthesalesofequitysecuritiesandabuildingof$17.
8millionand$5.
4million,respectively.
Weexpecttocontinuetoinvestinshort-terminvestmentsandpurchaseadditionalpropertyandequipmenttosupportourgrowth.
49Theincreaseincashusedforinvestingactivitiesinfiscal2002comparedto2001wasprimarilyduetoincreasedpurchasesofshort-terminvestmentsbecauseoflowertreasurystockpurchases.
Thedecreaseincashusedforinvestmentactivitiesinfiscal2001comparedto2000wasprimarilyduetoareductioninpurchasesofshort-termandlong-terminvestmentsinordertopurchasetreasurystock.
Cashusedforfinancingactivitieswas$223.
3million,$409.
6million,and$148.
3millioninfiscal2002,2001,and2000,respectively.
The$223.
3ofcashusedforfinancingactivitiesfortheyearendedNovember29,2002,wasprimarilyduetothepurchaseof$293.
2millionoftreasurystockandpaymentofdividendsof$11.
9million.
Cashusedforfinancingactivitiesin2002wasoffsetbyproceedsof$81.
9millionfromtheissuanceoftreasurystockrelatedtotheexerciseofstockoptionsunderourstockoptionplansandthesaleofstockundertheEmployeeStockPurchasePlan.
The$409.
6millionofcashusedforfinancingactivitiesfortheyearendedNovember30,2001,wasprimarilyduetothepurchaseof$485.
1millionoftreasurystockandpaymentofdividendsof$12.
0million.
Cashusedforfinancingactivitiesin2001wasoffsetbyproceedsof$87.
5millionfromtheissuanceoftreasurystockrelatedtotheexerciseofstockoptionsunderourstockoptionplansandthesaleofstockundertheEmployeeStockPurchasePlan.
The$148.
4millionofcashusedforfinancingactivitiesfortheyearendedDecember1,2000,wasprimarilyduetothepurchaseof$255.
5millionoftreasurystockandpaymentofdividendsof$12.
0million.
Cashusedforfinancingactivitiesin2000wasoffsetbyproceedsof$119.
1millionfromtheissuanceoftreasurystockrelatedtotheexerciseofstockoptionsunderourstockoptionplansandthesaleofstockundertheEmployeeStockPurchasePlan.
Thedecreaseincashusedforfinancingactivitiesinfiscal2002comparedto2001wasprimarilyduetolesscashusedforthepurchaseoftreasurystockduetoaloweraveragepersharecost.
Theincreaseincashusedforfinancingactivitiesinfiscal2001comparedto2000wasduetoanincreaseinthepurchaseoftreasurystock.
Tradereceivablesdecreased$9.
2millionin2002from2001andourdayssalesoutstanding("DSO")inreceivablesdecreased6daysin2002from2001.
ThedecreaseintradereceivablesandDSOwasprimarilyduetoourimprovedcollectionsin2002.
Otherreceivablesincreased$12.
1millionin2002from2001primarilyduetoanincreaseinindirecttaxrefundreceivablesfromincreasedproductpurchasesfromourthirdpartymanufacturersoutsideoftheU.
S.
Netpropertyandequipmentdecreased$6.
5millionin2002from2001primarilyduetodepreciationandassetretirements.
ThedecreaseinnetpropertyandequipmentwaspartiallyoffsetbyanincreaserelatedtoourIndiabuildingthatweplacedintoserviceduringfiscal2002.
Otherassetsincreased$4.
5millionin2002from2001duetoadditionalinvestmentsinAdobeVentures.
Tradeandotherpayablesincreased$6.
9millionin2002from2001duetoanincreaseinindirecttaxespayableresultingfromanincreaseinforeignsales.
Ourincometaxpayableincreasedapproximately$41.
1millionin2002from2001duetoanincreaseintaxableincome.
Taxableincomeincreasedin2002over2001eventhoughbookincomedidnotincreasebecauseofcertainexpensesthatarenotcurrentlydeductiblefortaxpurposes.
Also,thecompanyaccountsfortaxcontingenciesintheUnitedStatesandforeigntaxjurisdictionsinaccordancewithSFASNo.
5.
PleaseseeNote9ofourNotestoConsolidatedFinancialStatementsforasummaryofthechangesintheincometaxespayableaccount.
Deferredrevenueincreased$9.
5millionin2002from2001primarilyduetoincreasedmaintenancecontractsresultingfromouracquisitionofAccelio.
Ourexistingcash,cashequivalents,andinvestmentbalancesmaydeclineduringfiscal2003duetofurtherweakeningoftheeconomyorchangesinourplannedcashoutlay.
However,webelievethatourexistingbalancestogetherwithouranticipatedcashflowsfromoperationswillbesufficienttomeetourworkingcapitalandoperatingresourceexpenditurerequirementsforthenexttwelvemonths.
Cashfromoperationscouldbeaffectedbyvariousrisksanduncertainties,including,butnotlimitedto:adversechangesingeneraleconomicorpoliticalconditionsinanyofthemajorcountriesinwhichwedobusiness;customeracceptanceofnewproductsandupgrades;delaysinshipmentofournewproductsormajornewversionsofexistingproducts;weaknessindemandforapplicationsoftware,computersandprinters;downwardsalespriceadjustments;theimpactofcompetition;andotherrisksdetailedinthesection"FactorsThatMayAffectOurFuturePerformance.
"Weexpecttocontinueourinvestingactivities,includingexpendituresforcomputersystemsforresearchanddevelopment,salesandmarketing,productsupport,andadministrativestaff.
Furthermore,cashreservesmaybeusedtopurchasetreasurystockandacquiresoftwarecompanies,products,ortechnologiesthatarecomplementarytoourbusiness.
50Adobe'sBoardofDirectorsapprovedatwo-for-onestocksplitintheformofstockdividendsofourcommonstocktostockholderseffectedOctober24,2000.
Allshareandpershareamountsreferredtointheconsolidatedfinancialstatementshavebeenadjustedtoreflectthisstocksplit.
Wehavepaidcashdividendsonourcommonstockeachquartersincethesecondquarterof1988.
Adobe'sBoardofDirectorsdeclaredacashdividendonourcommonstockof$0.
0125percommonshareforeachofthefourquartersinfiscal2002,2001,and2000.
Thedeclarationoffuturedividends,whetherincashorin-kind,iswithinthediscretionofAdobe'sBoardofDirectorsandwilldependonbusinessconditions,ourresultsofoperationsandfinancialcondition,andotherfactors.
StockRepurchaseProgramI–On-goingDilutionCoverageTofacilitateourstockrepurchaseprogramdesignedtominimizedilutionfromstockissuanceprimarilyfromemployeestockplans,wesoldputwarrantstoindependentthirdpartiesinfiscal2002,2001,and2000.
EachputwarrantentitlestheholdertoselloneshareofAdobe'scommonstocktoAdobeataspecifiedpriceforcashorstockatAdobe'soption.
Approximately7.
5million,5.
6million,and7.
0millionputwarrantswerewritteninfiscal2002,2001,and2000,respectively.
AtNovember29,2002,approximately1.
9millionputwarrantswereoutstandingthatexpirethroughDecember2002,withanaverageexercisepriceof$26.
71pershare,resultinginatotalpotentialcashoutlayofapproximately$50.
5millioninfiscal2003ifallputswarrantsareexercised.
Inaddition,infiscal2002,2001,and2000,wepurchasedcalloptionsfromindependentthirdpartiesthatentitledustobuy4.
9million,3.
9million,and4.
2millionshares,respectively,ofourcommonstockoncertaindatesatspecifiedprices.
AtNovember29,2002,approximately1.
2millioncalloptionswereoutstandingthatexpireonvariousdatesthroughDecember2002withanaverageexercisepriceof$28.
08pershare,resultinginatotalpotentialcashoutlayofapproximately$34.
1millioninfiscal2003ifallcallsoptionsareexercised.
Ourputandcalloptioncontractsprovidethat,atouroption,wecansettlewithphysicaldeliveryornetsharesequaltothedifferencebetweentheexercisepriceandthevalueoftheoptionasdeterminedbythecontract.
Werepurchasedapproximately8.
6million,5.
9million,and7.
2millionsharesinfiscal2002,2001,and2000,respectively,atacostof$255.
0million,$319.
9million,and$255.
5million,respectively.
SubsequenttoNovember29,2002,werepurchased1.
6millionsharesatacostof$45.
1millionthroughtheexerciseofoutstandingputwarrantsandcalloptionsunderthisplan.
AsofDecember18,2002,noputwarrantsorcalloptionsremainedoutstandingunderthisplan.
Theauthorizationtorepurchasesharestocoveron-goingdilutionisnotsubjecttoexpiration.
However,thisrepurchaseprogramislimitedtocoveringnetdilutionfromstockissuances.
AsofNovember29,2002,9.
6millionsharesremainedauthorizedforrepurchase,basedonnetstockissuanceslessrepurchasesunderthisplan.
StockRepurchaseProgramII–AdditionalAuthorizationaboveDilutionCoverageInApril1999,theBoardauthorizeda5.
0millionsharerepurchaseprogram,whichallowedustopurchasesharesintheopenmarketandenterintocontractstorepurchasesharesduringfuturequartersbysellingputwarrantsandbuyingcalloptions.
Duringfiscal2001,approximately4.
9millionputwarrantswerewrittenand3.
5millioncalloptionswerepurchasedatpricesrangingfrom$32.
60to$39.
58.
AsofNovember30,2001,therewerenoputwarrantsoroptionsoutstandinginthisprogram.
Duringfiscal2001,werepurchasedapproximately4.
7millionsharesatacostof$165.
2million.
Wedidnotrepurchaseanysharesunderthisprograminfiscal2000.
Thisprogramexpiredinfiscal2001.
InMarch2001,subjecttocertainbusinessandmarketconditions,ourBoardofDirectorsauthorizedthepurchaseofuptoanadditional5.
0millionsharesofourcommonstockoveratwo-yearperiod.
Duringfiscalyear2002,approximately3.
1millionputwarrantswerewrittenandapproximately2.
1millioncalloptionswerepurchasedunderthis5.
0millionsharerepurchaseprogram.
AsofNovember29,2002,underourMarch20015.
0millionshareprogram,approximately3.
0millionputwarrantswereoutstandingthatexpirethroughDecember2002withanaverageexercisepriceof$25.
20pershare.
Inaddition,asofNovember29,2002,approximately2.
0millioncalloptionswereoutstandingthatexpireatvariousdatesthroughDecember2002withanaveragepriceof$27.
23pershare.
Ourputandcalloptioncontractsprovidethat,atouroption,wecansettlewithphysicaldeliveryornetsharesequaltothedifferencebetweentheexercisepriceandthevalueoftheoptionasdeterminedbythecontract.
51Infiscal2002,werepurchasedapproximately2.
0millionsharesatacostof$38.
2millionunderourMarch20015.
0millionsharerepurchaseprogram.
Wedidnotmakeanyrepurchasesunderthisplaninfiscal2001.
DuringDecember2002,alloutstandingputwarrantsandcalloptionsundertheMarch20015.
0millionsharerepurchaseprogramexpiredwithoutanycosttoAdobeandasofDecember20,2002,therewerenoputwarrantsorcalloptionsoutstanding.
AsofDecember20,2002,authorizationtorepurchase3.
0millionsharesremainedundertheplanuntilitexpiresinMarch2003.
OnSeptember25,2002,subjecttocertainbusinessandmarketconditions,ourBoardofDirectorsauthorizedthepurchaseofuptoanadditional5.
0millionsharesofourcommonstockoverathree-yearperiod.
Wehavenotmadeanypurchasesunderthis5.
0millionsharerepurchaseprogram.
ThisplanwillexpireinSeptember2005.
Formoreinformationonourputsandcalls,pleaseseeNote1ofourNotestoConsolidatedFinancialStatements.
ThetablesbelowrepresentourauthorizedstockrepurchaseplansandsummaryofstockrepurchasesasofNovember29,2002.
AuthorizedStockRepurchasePlansasofNovember29,2002(inthousands)BoardApprovalExpirationAuthorizedRepurchasesAuthorizationPutOptionsRemainingDateDateSharesToDateExpiredOutstandingAuthorizationDecember1997N/AOngoingdilution44,550N/A1,8909,578(1)April1999April20015,0004,687313——March2001March20035,000——2,986—September2002September20055,000———5,000SummaryofStockRepurchasesforfiscalyears2002,2001,and2000asofNovember29,2002(inthousands,exceptaverageamounts)BoardApprovalRepurchasesDateUnderthePlan2002Average2001Average2000AverageDecember1997.
Fromemployees(2)83$35.
55733$42.
01164$60.
98Openmarket——45235.
64Optionexercises8,51729.
604,72657.
787,02034.
96April1999.
OpenmarketOptionexercises——4,68735.
24—March2001.
Openmarket1,89918.
58———Optionexercises11628.
58———Totalshares10,615$27.
6310,598$45.
777,184$35.
56Totalcost$293,241$485,115$255,456(1)Theremainingauthorizationfortheongoingstockrepurchaseplanisdeterminedbysubtractingrepurchasesfromallstockissuances,netofanycanceledshares,beginninginthefirstquarteroffiscal1998.
(2)Therepurchasesfromemployeesrepresentsharescanceledwhensurrenderedinlieuofcashpaymentsfortheoptionexercisepriceorwithholdingtaxesdue.
52CommitmentsOurprincipalcommitmentsasofNovember29,2002,consistofobligationsunderoperatingleases,arealestatefinancingagreement,ventureinvestingactivities,royaltyagreements,andvariousserviceagreements.
Weexpecttofulfillallofthebelowcommitmentsfromourworkingcapital.
LeaseCommitmentsWeleasecertainofourfacilitiesandsomeofourequipmentundernoncancelableoperatingleasearrangementsthatexpireatvariousdatesthrough2091.
Rentexpense,netofsubleaseincome,fortheseleasesaggregated$26.
6million,$22.
0million,and$25.
6millionduringfiscal2002,2001,and2000,respectively.
AsofNovember29,2002,futureminimumleasepaymentsundernoncancelableoperatingleases,netofsubleaseincome,andfutureminimumsubleaseincomeundernoncancelablesubleasesareasfollows:YearFutureminimumleasepaymentsFutureminimumsubleaseincome(inmillions)(inmillions)2003$19.
5$6.
82004$17.
4$6.
92005$12.
9$6.
82006$10.
9$5.
52007$7.
9$3.
12008andafter$34.
7$3.
4InSeptember2001,weenteredintoarealestatedevelopmentagreementfortheconstructionofanadditionalofficebuildingforourcorporateheadquartersindowntownSanJose,California.
Undertheagreement,thelessorwillfinanceupto$117.
0millionoveratwo-yearperiod,towardtheconstructionandassociatedcostsofthebuilding.
Aspartoftheagreement,weenteredintoafive-yearleasebeginninguponcompletionofthebuilding.
Wehavetheoptiontopurchasethebuildingatanytimeduringthetermforanamountequaltotheleasebalance.
Theagreementandleasearesubjecttostandardcovenantsincludingliquidity,leverageandprofitabilityratiosthatarereportedtothelessorquarterly.
AsofNovember29,2002,wewereincompliancewithallcovenants.
Inthecaseofadefault,thelessormayterminateallremainingcommitments(ifanyremain)andtheymaydemandwepurchasethebuildingforanamountequaltothecurrentleasebalance,orrequirethatweremarketorrelinquishthebuilding.
TheagreementqualifiesforoperatingleaseaccountingtreatmentunderSFASNo.
13,and,assuch,thebuildingandtherelatedobligationarenotincludedonourbalancesheet,buttheleasepaymentsarereflectedinthescheduleoffutureminimumleasepayments.
Attheendoftheleaseterm,wecaneitherpurchasethebuildingfortheleasebalance,whichwillbeapproximately$117.
0million,remarket,orrelinquishthebuilding.
Ifwechoosetoremarketorarerequiredtodosouponrelinquishingthebuilding,weareboundtoarrangethesaleofthebuildingtoanunrelatedpartyandwillberequiredtopaythelessoranyshortfallbetweenthenetremarketingproceedsandtheleasebalance,uptothemaximumrecourseamountof$103.
0million.
InAugust1999,Adobeenteredintoafive-yearleaseagreementforourcorporateheadquartersofficebuildingsinSanJose,California.
Undertheagreement,wehavetheoptiontopurchasethebuildingsatanytimeduringtheleasetermfortheleasebalance,whichisapproximately$142.
5million.
Theleaseissubjecttostandardcovenantsincludingliquidity,leverageandprofitabilityratiosthatarereportedtothelessorquarterly.
AsofNovember29,2002,wewereincompliancewithallcovenants.
Inthecaseofadefaultthelessormaydemandwepurchasethebuildingforanamountequaltotheleasebalance,orrequirethatweremarketorrelinquishthebuilding.
TheagreementqualifiesforoperatingleaseaccountingtreatmentunderSFASNo.
13,and,assuch,thebuildingandtherelatedobligationarenotincludedonourbalancesheet,buttheleasepaymentsarereflectedinthescheduleoffutureminimumleasepayments.
Attheendoftheleaseterm,wecaneitherpurchasethebuildingfortheleasebalance,remarket,orrelinquishthebuilding.
Ifwechoosetoremarketorarerequiredtodosouponrelinquishingthebuilding,weareboundtoarrangethesaleofthebuildingtoanunrelatedpartyandwillberequiredtopaythelessoranyshortfallbetweenthenetremarketingproceedsandtheleasebalance,uptothemaximumrecourseamountof$132.
6million.
53LineofCreditInAugust1999,Adobeenteredintoanunsecuredrevolvingcreditfacilityof$100.
0millionwithagroupofbanks,forgeneralcorporatepurposes,subjecttocertainfinancialcovenants.
ThefacilityexpiredinAugust2002andweelectednottorenewthefacility.
RoyaltiesWehavecertainroyaltycommitmentsassociatedwiththeshipmentandlicensingofcertainproducts.
Royaltyexpenseisgenerallybasedonadollaramountperunitshippedorapercentageoftheunderlyingrevenue.
Royaltyexpense,whichwasrecordedunderourcostofproductsrevenueonourconsolidatedstatementsofincome,wasapproximately$14.
4million,$14.
1million,and$20.
8millioninfiscal2002,2001,and2000,respectively.
AdobeVenturesWehavecommitmentstotheAdobeVenturelimitedpartnerships.
ThefollowingtableshowsthecapitalcommitmentsandthecapitalcontributedasofNovember29,2002:CapitalCommitmentCapitalContributed(inthousands)(inthousands)AdobeVenturesL.
P.
$40,000$40,476AdobeVenturesII,L.
P.
$40,000$37,541AdobeVenturesIII,L.
P.
$60,000$57,353AdobeVenturesIV,L.
P.
$100,000$35,418ThecapitalcommitmentistheamountthatAdobehasagreedtocontributetothePartnership.
ThecapitalcommitmentamountiscontributedoverthetermofeachPartnership,whichistenyears.
Wecancontributemorethanthecapitalcommitment,atourdiscretion.
Wecanceasefundingatanytimeaftertheearlierof:a)twoyearsaftertheeffectivedateofthePartnershiporb)thedateonwhichtheCompanyhasmadecapitalcontributionstothePartnershipinanamountinexcessof$10.
0million,$10.
0million,$20.
0million,and$33.
0millionforAdobeVenturesL.
P.
,AdobeVenturesII,L.
P.
,AdobeVenturesIII,L.
P.
,andAdobeVenturesIV,L.
P.
,respectively.
Inadditiontotheseventurepartnerships,wehavedirectinvestmentsinpublicandprivately-heldcompanies.
Intotal,asofNovember29,2002,wehaveinvested$213.
9millionthroughourventurepartnershipsanddirectinvestments.
AsofNovember29,2002,netreturnswere$348.
7million,includingstockdividendsandnetgainsinmarketvalueofinvestments.
LegalActionsOnSeptember3,2002,AdobefiledsuitintheU.
S.
DistrictCourt,NorthernDistrictofCalifornia("theCaliforniaAction"),againstInternationalTypefaceCorporation("ITC")andAgfaMonotypeCorporation("AMT"),companieswhichhavecommonownershipandmanagement,seekingadeclarationthat(a)Adobe'sdistributionoffontsoftware,whichgeneratesITCtypefaces,didnotbreachitscontractpursuanttowhichAdobelicensedcertainrightswithrespecttoITCtypefaces,and(b)AdobedidnotviolatetheDigitalMillenniumCopyrightAct("DMCA")withrespectto,orinduceorcontributetotheinfringementofcopyrightsin,ITC'sandAMT'sTrueTypefontsoftware.
AMThadpreviouslyassertedthatAdobehadcommittedsuchbreachofcontractandviolationoftheDMCA.
OnSeptember4,2002,AdobeinitiatedarbitrationproceedingsinLondon,England("theLondonArbitration")againstAMT,seekingadeclarationthatAdobe'sdistributionoffontsoftwarethatgeneratesAMTtypefacesdidnotbreachitscontractpursuanttowhichitlicensedcertainrightswithrespecttoAMTtypefaces.
AMThasmadeabreachofcontractclaiminresponsetoAdobe'sarbitrationdemandintheLondonArbitration,assertingthatAdobewrongfullygrantedand/orallowedthirdpartiesgreaterrightstodistributeandembedAMTfontsthanAdobewaslicensedtograntand/orallow.
IfAMTprevailsonitsbreachofcontractclaims,AMTmayhavetherighttoterminateAdobe'srighttodistributeanyofitsproductsthatthenstillcontainfontsoftwarethatgeneratesAMTtypefaces.
Adobeassertsthatitnegotiatedforandobtainedexpress,writtenlicensesfrombothAMTandITCapproximatelytenyearsagopermittingAdobetoallowenduserstoembedAMTandITCfontsinelectronicdocumentsfor"printandview"and54disputestheotherbreachofcontractclaims.
AdobealsoassertsthatAdobeAcrobat5.
0,whichAMTandITCcorrectlyacknowledgehasbeensupercededbyversion5.
05,neitherviolatestheDMCAnorinducesorcontributestotheinfringementofcopyrightsinITC'sandAMT'sTrueTypefontsoftware.
OnSeptember5,2002,AMTandITCfiledsuitagainstAdobeintheU.
S.
DistrictCourt,EasternDistrictofIllinois("theIllinoisAction")againstAdobe,assertingonlythatAdobe'sdistributionofthesuperceded5.
0versionofAdobeAcrobatviolatedtheDMCA,asdescribedabove.
TheIllinoisActionseeksstatutorydamagesof$200-$2,500foreachcopyofAcrobat5.
0foundtoviolatetheDMCA,aclaimthatAdobedisputesasamatteroflawandfact.
TheIllinoisActionalsoseeksinjunctivereliefwithrespecttoAcrobat5.
0,althoughitspecificallyalleges,correctly,thatAdobenolongerdistributesAcrobat5.
0.
OnNovember13,2002,ITCfiledanothersuitagainstAdobeintheUnitedStatesDistrictCourtfortheEasternDistrictofIllinois("theSecondIllinoisAction"),thistimeassertingthatAdobebreacheditscontractwithITCandthatITC,andnotAdobe,ownsthecopyrightsinfontsoftwarecreatedbyAdobewhichgeneratesITCtypefaces.
AMTandITCmadeamotiontodismisstheCaliforniaaction,challengingjurisdictionandvenue.
ThatmotionwasgrantedbythecourtonDecember16,2002.
Assuch,theparties'respectiveclaimswillberesolvedintheotheractionsdescribedabove.
Theresultsofanylitigationareinherentlyuncertain,andAMTandITCmayassertotherclaims.
Adobecannotassurethatitwillbeabletosuccessfullydefenditselfagainstanyoftheactionsdescribedabove.
AMTandITCseekanunspecifiedaggregatedollaramountofdamages.
AfavorableoutcomeforAMTorITCintheseactionscouldhaveamaterialadverseeffectonAdobe'sbusiness,financialconditionandoperatingresults.
WestronglybelievethatallofAMT'sandITC'sclaimsarewithoutmerit,andwillvigorouslydefendagainsttheminadditiontopursuingourownclaimsasdescribedabove.
OnSeptember6,2002,PlaintiffFredB.
DufresnefiledsuitagainstAdobe,MicrosoftCorporation,Macromedia,Inc.
,andTrellixCorporationintheU.
S.
DistrictCourt,DistrictofMassachusetts,alleginginfringementofU.
S.
PatentNo.
5,835,712,entitled"Client-ServerSystemUsingEmbeddedHypertextTagsForApplicationAndDatabaseDevelopment.
"Theplaintiff'sComplaintassertsthat"Defendantshaveinfringed,andcontinuetoinfringeoneormoreclaimsofthe'712patentbymaking,using,sellingand/orofferingforsale,interalia,productssupportingMicrosoftActiveServerPagestechnology.
"Theplaintiffseeksunspecifiedcompensatorydamages,preliminaryandpermanentinjunctiverelief,treblingofdamagesfor"willfulinfringement,"andfeesandcosts.
Adobestronglydisagreeswiththeplaintiff'sclaimsandintendstovigorouslydefendagainstthisaction.
OnNovember18,2002,PlaintiffsShell&SlateSoftwareCorporationandBenWeissfiledacivilactionintheU.
S.
DistrictCourtinLosAngelesagainsttheCompanyallegingfalsedesignationoforigin,tradesecretmisappropriation,breachofcontract,andothercausesofaction.
TheclaimderivesfromthePlaintiffs'beliefthatthe"healingbrush"techniqueofAdobePhotoshopincorporatesPlaintiffs'tradesecrets.
Plaintiffsseekpreliminaryandpermanentinjunctiverelief,compensatory,treble,andpunitivedamages,andfeesandcosts.
Webelievethattheactionhasnomeritandintendtodefendvigorouslyagainstit.
FromtimetotimeAdobeisinvolvedinlawsuits,claims,investigationsandproceedings,inadditiontothoseidentifiedabove,consistingofintellectualproperty,commercial,employmentandothermatters,whichariseintheordinarycourseofbusiness.
InaccordancewithSFASNo.
5,Adobemakesaprovisionforaliabilitywhenitisbothprobablethataliabilityhasbeenincurredandtheamountofthelosscanbereasonablyestimated.
Theseprovisionsarereviewedatleastquarterlyandadjustedtoreflecttheimpactsofnegotiations,settlements,rulings,adviceoflegalcounsel,andotherinformationandeventspertainingtoaparticularcase.
Litigationisinherentlyunpredictable.
However,Adobebelievesthatithasvaliddefenseswithrespecttothelegalmatterspendingagainstit,aswellasadequateprovisionsforanyprobableandestimablelosses.
Itispossible,nevertheless,thatcashflowsorresultsofoperationscouldbeaffectedinanyparticularperiodbytheresolutionofoneormoreofthesecontingencies.
55DerivativesandFinancialInstruments(Item7a.
QuantitativeandQualitativeDisclosuresAboutMarketRisk)ForeignCurrencyHedgingInstrumentsWetransactbusinessinvariousforeigncurrencies,primarilyincertainEuropeancountriesandJapan.
Accordingly,wearesubjecttoexposurefrommovementsinforeigncurrencyexchangerates.
Thisexposureisprimarilyrelatedtorevenuefromyen-denominatedlicensesinJapanandeuro-denominatedlicensesincertainEuropeancountries.
OurJapaneseoperatingexpensesareinyen,andourEuropeanoperatingexpensesareprimarilyineuro,whichmitigatesaportionoftheexposurerelatedtoyenandeurodenominatedlicenses.
Inaddition,wehedgefirmlycommittedtransactionsusingforwardcontracts.
Thesecontractsdosubjectustoriskofaccountinggainsandlosses;however,thegainsandlossesonthesecontractstypicallyoffsetorpartiallyoffsetgainsandlossesontheassets,liabilities,andtransactionsbeinghedged.
Wealsohedgeapercentageofforecastedinternationalrevenuewithforwardandpurchasedoptioncontracts.
Ourrevenuehedgingpolicyisdesignedtoreducethenegativeimpactonourforecastedrevenueduetoforeigncurrencyexchangeratemovements.
AtNovember29,2002,totaloutstandingcontractsincludedtheequivalentof$72.
4millioninforeigncurrencyforwardexchangecontractsandpurchasedputoptioncontractswithanotionalvalueof$65.
2million.
AsofNovember29,2002,allcontractsweresettoexpireatvarioustimesthroughJune2003.
Thebankcounterpartiesinthesecontractsexposeustocredit-relatedlossesintheeventoftheirnonperformance.
However,tomitigatethatriskweonlycontractwithhighqualitycounterpartieswithspecificminimumratingrequirements.
Inaddition,ourhedgingpolicyestablishesmaximumlimitsforeachcounterparty.
EconomicHedging–HedgesofForecastedTransactionsWeuseoptionandforwardforeignexchangecontractstohedgecertainoperational("cashflow")exposuresresultingfromchangesinforeigncurrencyexchangerates.
Theseforeignexchangecontracts,carriedatfairvalue,mayhaveadurationbetweenonetotwelvemonths.
SuchcashflowexposuresresultfromportionsofourforecastedrevenuesdenominatedincurrenciesotherthantheU.
S.
dollar,primarilytheJapaneseyenandtheeuro.
Weenterintotheseforeignexchangecontractstohedgeforecastedproductlicensingrevenueinthenormalcourseofbusiness,andaccordingly,theyarenotspeculativeinnature.
Werecordchangesintheintrinsicvalueofthesecashflowhedgesinaccumulatedothercomprehensiveincome(loss),untiltheforecastedtransactionoccurs.
Whentheforecastedtransactionoccurs,wereclassifytherelatedgainorlossonthecashflowhedgetorevenue.
Intheeventtheunderlyingforecastedtransactiondoesnotoccur,oritbecomesprobablethatitwillnotoccur,wereclassifythegainorlossontherelatedcashflowhedgefromaccumulatedothercomprehensiveincome(loss)tointerestandotherincome(loss)ontheconsolidatedstatementofincomeatthattime.
ForthefiscalyearendedNovember29,2002,therewerenosuchnetgainsorlossesrecognizedinotherincomerelatingtohedgesofforecastedtransactionsthatdidnotoccur.
Thecriticaltermsofthecashflowhedginginstrumentsarethesameastheunderlyingforecastedtransactions.
Thechangesinfairvalueofthederivativesareintendedtooffsetchangesintheexpectedcashflowsfromtheforecastedtransactions.
Werecordanyineffectiveportionofthehedginginstrumentsinotherincomeontheconsolidatedstatementofincome.
Thetimevalueofpurchasedderivativeinstrumentsisdeemedtobeineffectiveandisrecordedinotherincomeoverthelifeofthecontract.
BalanceSheetHedging-HedgingofForeignCurrencyAssetsandLiabilitiesWehedgeournetrecognizedforeigncurrencyassetsandliabilitieswithforwardforeignexchangecontractstoreducetheriskthatourearningsandcashflowswillbeadverselyaffectedbychangesinforeigncurrencyexchangerates.
Thesederivativeinstrumentshedgeassetsandliabilitiesthataredenominatedinforeigncurrenciesandarecarriedatfairvaluewithchangesinthefairvaluerecordedasotherincome(loss).
Thesederivativeinstrumentsdonotsubjectustomaterialbalancesheetriskduetoexchangeratemovementsbecausegainsandlossesonthesederivativesareintendedtooffsetgainsandlossesontheassetsandliabilitiesbeinghedged.
AtNovember29,2002,theoutstandingbalancesheethedgingderivativeshadmaturitiesof90daysorless.
56AsensitivityanalysiswasperformedonallofourforeignexchangederivativesasofNovember29,2002.
Thissensitivityanalysiswasbasedonamodelingtechniquethatmeasuresthehypotheticalmarketvalueresultingfroma10%and15%shiftinthevalueofexchangeratesrelativetotheU.
S.
dollar.
A10%and15%increaseinthevalueoftheU.
S.
dollar(andacorrespondingdecreaseinthevalueofthehedgedforeigncurrencyasset)wouldleadtoanincreaseinthefairvalueofourfinancialhedginginstrumentsby$12.
1millionand$18.
5million,respectively.
Conversely,a10%and15%decreaseinthevalueoftheU.
S.
dollarwouldresultinadecreaseinthefairvalueofthesefinancialinstrumentsby$9.
0millionand$13.
1million,respectively.
Wedonotusederivativefinancialinstrumentsforspeculativetradingpurposes,nordowehedgeourforeigncurrencyexposureinamannerthatentirelyoffsetstheeffectsofchangesinforeignexchangerates.
Asageneralrule,wedonotusefinancialinstrumentstohedgelocalcurrencydenominatedoperatingexpensesincountrieswheretheseexpensescreateanaturalhedgeagainstforeigncurrencyreceivables.
Forexample,inmanycountriesrevenuefromthelocalcurrencyproductlicensessubstantiallyoffsetsthelocalcurrencydenominatedoperatingexpenses.
Weassesstheneedtoutilizefinancialinstrumentstohedgecurrencyexposures,primarilyrelatedtooperatingexpenses,onanongoingbasis.
Weregularlyreviewourhedgingprogramandmayaspartofthisreviewdetermineatanytimetochangeourhedgingprogram.
EquityInvestmentsWeareexposedtoequitypriceriskonourportfolioofmarketableequitysecurities.
AsofNovember29,2002,ourtotalequityholdingsinpubliclytradedcompanieswerevaluedat$14.
1millioncomparedto$37.
8millionatNovember30,2001,adecreaseof63%.
Webelievethatitisreasonablypossiblethatthefairvaluesofthesesecuritiescouldexperiencefurtheradversechangesinthenearterm.
Itisourpolicytoreviewourequityholdingsonaregularbasistoevaluatewhetherornoteachsecurityhasexperiencedanother-than-temporarydeclineinfairvalue.
Ourpolicyincludes,butisnotlimitedto,reviewingeachofthecompanies'cashposition,earnings/revenueoutlook,stockpriceperformanceoverthepastsixmonths,liquidityandmanagement/ownership.
Ifwebelievethatanother-than-temporarydeclineexistsinoneofourmarketableequitysecurities,itisourpolicytowritedowntheseequityinvestmentstothemarketvalueandrecordtherelatedwritedowninourconsolidatedstatementsofincome.
Thefollowingtablerepresentsthepotentialdecreaseinfairvaluesofourmarketableequitysecuritiesthataresensitivetochangesinthestockmarket.
Fairvaluedeteriorationsof50%,35%,and15%wereselectedbasedontheprobabilityoftheiroccurrence.
FixedIncomeInvestmentsAtNovember29,2002,wehadaninvestmentportfoliooffixedincomesecurities,includingthoseclassifiedascashequivalents,of$581.
7millioncomparedto$521.
8millionatNovember30,2001,anincreaseof11%.
Thesesecuritiesaresubjecttointerestratefluctuations.
Changesininterestratescouldadverselyaffectthemarketvalueofourfixedincomeinvestments.
AsensitivityanalysiswasperformedonourinvestmentportfolioasofNovember29,2002.
Thissensitivityanalysiswasbasedonamodelingtechniquethatmeasuresthehypotheticalmarketvaluechangesthatwouldresultfromaparallelshiftintheyieldcurveofplus50,100,or150basispointsoversix-monthandtwelve-monthtimehorizons.
PotentialdecreasetothevalueofsecuritiesgivenX%decreaseineachstock'sprice(50%)(35%)(15%)FairValueasofNovember29,2002Marketableequitysecurities$(7.
0)$(4.
9)$(2.
1)$14.
157Welimitourexposuretointerestrateandcreditriskbyestablishingandmonitoringclearpoliciesandguidelinesforourfixedincomeportfolios.
Atthepresenttime,themaximumdurationofallportfoliosislimitedto2.
3years.
Theguidelinesalsoestablishcreditqualitystandards,limitsonexposuretoanyonesecurityissue,limitsonexposuretoanyoneissuer,andlimitsonexposuretothetypeofinstrument.
Thelimiteddurationandcreditriskcriteriaestablishedinourguidelinesdoreducetheexposuretointerestrateriskandcreditrisk;however,dramaticchangestointerestratescouldresultinmaterialchangestothemarketvalueofourfixedincomesecurities.
InterestRateHedgingInstrumentsWeareexposedtointerestrateriskontheoperatingleaseobligationsforsomeofourfacilitiesthataretiedtoshort-terminterestrates(LIBOR).
Asshort-terminterestratesrise,itmaynegativelyimpactournetincome.
Ourpolicypermitsustohedgethisinterestrateriskusingswapagreements.
Theswapagreementsexchangevariableinterestratepaymentsforfixedinterestratepaymentswithhighqualitycounterparties.
OurswapsaredesignatedascashflowhedgesunderSFASNo.
133becausetheyhedgeagainstchangesintheamountoffuturecashflows.
Thecriticaltermsofthecashflowhedginginstrumentsarethesameastheunderlyingobligation,sothechangeinfairvalueoftheswapsisrecognizedinaccumulatedothercomprehensiveincome.
If,forsomereason,thetermsofthehedgenolongermatchedtheunderlyingobligation,aportionoftheswapmaybecomeineffective.
UnderSFASNo.
133,thechangeinvalueoftheineffectiveportionwouldberecognizedinotherincome(loss)ontheconsolidatedstatementofincome.
Ourswapsmatureatvariousdatesthroughthethirdquarteroffiscal2004,consistentwiththeexpirationoftheunderlyingobligation.
AsensitivityanalysiswasperformedonourinterestratehedgesasofNovember29,2002.
Thissensitivityanalysiswasbasedonamodelingtechniquethatmeasuresthehypotheticalmarketvaluechangesthatwouldresultfromaparallelshiftintheyieldcurveofminus50,100,or150basispointsoversix-monthandtwelve-monthtimehorizons.
PrivatelyHeldInvestmentsWehavedirectinvestments,aswellasindirectinvestmentsthroughAdobeVentures,inseveralprivatelyheldcompanies,manyofwhichcanstillbeconsideredinthestart-upordevelopmentstages.
Theseinvestmentsareinherentlyrisky,asthetechnologiesorproductstheyhaveunderdevelopmentaretypicallyintheearlystagesandmaynevermaterialize,andwecouldloseasubstantialpartofourentireinitialinvestmentinthesecompanies.
Itisourpolicytoreviewprivately-heldinvestmentsonaregularbasistoevaluatethecarryingamountandeconomicviabilityofthesecompanies.
Thispolicyincludes,butisnotlimitedto,reviewingeachofthecompanies'cashposition,financingneeds,earnings/revenueoutlook,operationalperformance,management/ownershipchanges,andcompetition.
Theevaluationprocessisbasedoninformationthatwerequestfromtheseprivately-heldcompanies.
ThisinformationisnotsubjecttothesamedisclosureregulationsasU.
S.
publiclytradedcompanies,andassuch,thebasisfortheseevaluationsissubjecttothetimingandtheaccuracyofthedatareceivedfromthesecompanies.
PotentialdecreasetothevalueoffixedincomesecuritiesgivenX%increaseininterestrates.
0.
5%1.
0%1.
5%6-monthhorizon$(2.
9)$(5.
7)$(8.
5)12-monthhorizon$(2.
5)$(4.
9)$(7.
4)PotentialdecreasetothevalueoffixedincomesecuritiesgivenX%increaseininterestrates.
0.
5%1.
0%1.
5%6-monthhorizon$(0.
7)$(1.
5)$(2.
2)12-monthhorizon$(0.
5)$(1.
0)$(1.
4)58Item8.
FinancialStatementsandSupplementaryDataFINANCIALSTATEMENTSOurfinancialstatementsrequiredbythisitemaresubmittedasaseparatesectionofthisForm10-K.
SeeItem15(a)(1)foralistingoffinancialstatementsprovidedinthesectiontitled"FINANCIALSTATEMENTS".
SUPPLEMENTARYDATAThefollowingtables(presentedinthousands,exceptpershareamounts)setforthquarterlysupplementarydataforeachoftheyearsinthetwo-yearperiodendedNovember29,2002.
2002QuarterEndedYearEndedMar.
1May31Aug.
30Nov.
29Nov.
29Revenue.
267,896$317,359$284,879$294,654$1,164,788Grossprofit.
246,899292,226253,243268,1321,060,500Incomebeforeincometaxes73,24779,85569,41362,174284,689Netincome(1)49,80854,30147,20140,089191,399Basicnetincomepershare(1)0.
210.
230.
200.
170.
81Sharesusedincomputingbasicnetincomepershare236,581238,202238,010233,838236,834Dilutednetincomepershare.
0.
200.
220.
190.
170.
79Sharesusedincomputingdilutednetincomepershare245,245247,687243,375238,407243,1192001QuarterEndedYearEndedMar.
2June1Aug.
31Nov.
30Nov.
30Revenue.
328,969$344,093$292,118$264,540$1,229,720Grossprofit.
308,953321,734272,077245,5051,148,269Incomebeforeincometaxes.
104,11391,50060,14051,178306,931Netincome(2)69,75661,30540,29434,289205,644Basicnetincomepershare(2)0.
290.
260.
170.
150.
86Sharesusedincomputingbasicnetincomepershare240,078238,163238,051236,361238,461Dilutednetincomepershare.
0.
280.
250.
160.
140.
83Sharesusedincomputingdilutednetincomepershare253,609250,127248,566243,411249,145(1)In2002,netincomeandnetincomepershareincludesthefollowing:thefirstquarterincludesinvestmentgainof$4.
5million,acquiredin-processresearchanddevelopmentof$5.
4million,andamortizationofgoodwillandpurchasedintangiblesof$3.
5million;thesecondquarterincludesinvestmentlossof$13.
7million,restructuringandotherchargesof$1.
6million,acquiredin-processresearchanddevelopmentof$0.
4million,andamortizationofgoodwillandpurchasedintangiblesof$3.
5million;thethirdquarterincludesinvestmentlossof$4.
2millionandamortizationofgoodwillandpurchasedintangiblesof$3.
5million;thefourthquarterincludesinvestmentlossof$3.
8million,restructuringandotherchargesof$10.
5million,andamortizationandimpairmentofgoodwillandpurchasedintangiblesof$10.
4million.
Thenumberspresentedabovearepretaxamounts.
(2)In2001,netincomeandnetincomepershareincludesthefollowing:firstquarterincludesinvestmentlossof$17.
0millionandamortizationofgoodwillandpurchasedintangiblesof$3.
6million;thesecondquarterincludesinvestmentlossof$31.
0millionandamortizationofgoodwillandpurchasedintangiblesof$3.
6million;thethirdquarterincludesinvestmentlossof$39.
4millionandamortizationofgoodwillandpurchasedintangiblesof$3.
6million;thefourthquarterincludesinvestmentlossof$5.
9million,restructuringandotherchargesof$12.
1million,andamortizationofgoodwillandpurchasedintangiblesof$3.
6million.
Thenumberspresentedabovearepretaxamounts.
Item9.
ChangesinandDisagreementsWithAccountantsonAccountingandFinancialDisclosureNotapplicable.
59PARTIIIItem10.
DirectorsandExecutiveOfficersoftheRegistrantForinformationregardingourDirectorsandcompliancewithSection16(a)oftheSecuritiesExchangeActof1934,wedirectyoutothesectionsentitled"Proposal1–ElectionofDirectors,"and"Section16(a)BeneficialOwnershipReportingCompliance,"respectively,intheProxyStatementwewilldelivertoourstockholdersinconnectionwithourAnnualMeetingofStockholderstobeheldonApril9,2003.
InformationregardingourExecutiveOfficersiscontainedinItem1,"Business,"ofthisreport.
WeareincorporatingtheinformationcontainedinthosesectionsofourProxyStatementherebyreference.
Item11.
ExecutiveCompensationForinformationregardingourExecutiveCompensation,wedirectyoutothesectionentitled"ExecutiveCompensation"intheProxyStatementwewilldelivertoourstockholdersinconnectionwithourAnnualMeetingofStockholderstobeheldonApril9,2003.
WeareincorporatingtheinformationcontainedinthatsectionofourProxyStatementherebyreference.
Item12.
SecurityOwnershipofCertainBeneficialOwnersandManagementYouwillfindthisinformationinthesectioncaptioned"SecurityOwnershipofCertainBeneficialOwnersandManagement,"whichwillappearintheProxyStatementwewilldelivertoourstockholdersinconnectionwithourAnnualMeetingofStockholderstobeheldonApril9,2003.
Weareincorporatingthatinformationherebyreference.
Item13.
CertainRelationshipsandRelatedTransactionsWehaveenteredintoindemnityagreementswithcertainofficersanddirectorswhichprovide,amongotherthings,thatwewillindemnifysuchofficerordirector,underthecircumstancesandtotheextentprovidedforintheagreements,forexpenses,damages,judgments,finesandsettlementsheorshemayberequiredtopayinactionsorproceedingswhichheorsheisormaybemadeapartytobyreasonofhisorherpositionasadirector,officerorotheragentofAdobe,andotherwisetothefullextentpermittedunderDelawarelawandourBylaws.
Item14.
ControlsandProcedures(a)Underthesupervisionandwiththeparticipationofourmanagement,includingourchiefexecutiveofficerandchieffinancialofficer,weevaluatedtheeffectivenessofthedesignandoperationofourdisclosurecontrolsandprocedures,assuchtermisdefinedunderRule13a-14(c)promulgatedundertheSecuritiesExchangeActof1934,asamended,withinthe90dayperiodpriortothefilingdateofthisreport.
Basedonthisevaluation,ourchiefexecutiveofficerandchieffinancialofficerconcludedthatourdisclosurecontrolsandprocedureswereeffectiveasofthatdate.
(b)Therehavebeennosignificantchanges(includingcorrectiveactionswithregardtosignificantdeficienciesormaterialweaknesses)inourinternalcontrolsorinotherfactorsthatcouldsignificantlyaffectthesecontrolssubsequenttothedateoftheevaluationreferencedinparagraph(a)above.
60PARTIVItem15.
Exhibits,FinancialStatementSchedules,andReportsonForm8-K(a)Documentsfiledaspartofthisreport1.
FinancialstatementsIndependentAuditors'ReportConsolidatedBalanceSheetsNovember29,2002andNovember30,2001ConsolidatedStatementsofIncomeYearsEndedNovember29,2002,November30,2001,andDecember1,2000ConsolidatedStatementsofStockholders'EquityandOtherComprehensiveIncomeYearsEndedNovember29,2002,November30,2001,andDecember1,2000ConsolidatedStatementsofCashFlowsYearsEndedNovember29,2002,November30,2001,andDecember1,2000NotestoConsolidatedFinancialStatements2.
FinancialstatementscheduleScheduleII—ValuationandQualifyingAccounts3.
Exhibits61(b)IndextoExhibitsExhibitIncorporatedbyReferenceFiledNumberExhibitDescriptionFormDateNumberHerewith3.
2AmendedandRestatedBylawsascurrentlyineffectX3.
4AgreementandPlanofMergereffective5/30/97(byvirtueofareincorporation),byandbetweenAdobeSystemsIncorporated,aCaliforniacorporationandAdobeSystems(Delaware)Incorporated,aDelawarecorporation10-Q05/30/972.
13.
6RestatedCertificateofIncorporation,asfiledwiththeSecretaryofStateoftheStateofDelawareon5/22/0110-Q7/16/013.
64.
2FourthAmendedandRestatedRightsAgreementbetweentheCompanyandComputershareInvestorServices,LLC8-K7/3/00110.
1.
61984StockOptionPlan,asamended*10-Q07/02/9310.
1.
610.
21.
3RevisedBonusPlan*10-Q02/28/9710.
21.
310.
23Amended1994PerformanceandRestrictedStockPlan*10-Q05/29/9810.
24.
210.
241994StockOptionPlan*10-Q5/27/9410.
1.
710.
251994StockOptionPlan,asamended*S-805/30/9710.
4010.
261997EmployeeStockPurchasePlan,asamended*10-K12/1/0010.
7010.
281996OutsideDirectorsStockOptionPlan*10-Q05/31/9610.
3610.
291996OutsideDirectors'StockOptionPlan,asamended*S-86/16/004.
710.
30FormsofStockOptionAgreementsusedinconnectionwiththe1996OutsideDirectors'StockOptionPlan*S-86/16/004.
810.
311996OutsideDirectorsStockOptionPlan,asamended*10-Q7/16/0110.
7510.
321996OutsideDirectors'StockOptionPlan,asamendedS-86/14/024.
610.
331999NonstatutoryStockOptionPlan*S-89/15/994.
610.
341999NonstatutoryStockOptionPlan,asamended*S-812/22/004.
610.
351999NonstatutoryStockOptionPlan,asamended*S-83/15/014.
710.
361999NonstatutoryStockOptionPlan,asamended*S-810/29/014.
610.
371999EquityIncentivePlan,asamended*X10.
41FormofIndemnityAgreement*10-Q05/30/9710.
25.
110.
42AmendedandRestatedLimitedPartnershipAgreementofAdobeIncentivePartners,L.
P.
*10-Q8/28/9810.
4262ExhibitIncorporatedbyreferenceFiledNumberExhibitDescriptionFormDateNumberHerewith10.
43AmendmenttoLimitedPartnershipAgreementofAdobeIncentivePartners,L.
P.
*10-Q6/4/9910.
5210.
44AdobeIncentivePartners,L.
P.
ConsenttoDissolveandTerminatePartnership*X10.
45FormsofRetentionAgreement*10-K11/28/9710.
4410.
53Amended,RestatedandConsolidatedMasterLeaseofLandandImprovementsbyandbetweenSumitomoBankLeasingandFinance,Inc.
andAdobeSystemsIncorporated10-Q9/3/9910.
5310.
54CreditAgreementamongAdobeSystemsIncorporated,LendersnamedthereinandABNAMROBankN.
V.
,asAdministrativeAgent,withcertainrelatedCreditDocuments10-Q9/3/9910.
5410.
56NoteSecuredbyDeedofTrustandPromissoryNote*10-K12/3/9910.
5610.
66CreditAgreementamongAdobeSystemsIncorporated,LendersNamedthereinandABNAmroBankN.
V.
,asAdministrativeAgent,withCertainRelatedCreditDocuments10-Q9/1/0010.
6610.
67AmendmentNo.
1to1999CreditAgreementamongAdobeSystemsIncorporated,LendersNamedThereinandABNAmroBankN.
V.
,asAdministrativeAgent,withCertainRelatedCreditDocuments10-Q9/1/0010.
6710.
68AmendmentNo.
1toAmended,RestatedandConsolidatedMasterLeaseofLandandImprovementsbetweenAdobeSystemsIncorporatedandSumitomoBankLeasingandFinance,Inc.
10-Q7/16/0110.
6810.
69AmendmentNo.
2toAmended,Restated,andConsolidatedMasterLeaseofLandandImprovementsbetweenAdobeSystemsIncorporatedandSumitomoBankLeasingandFinance,Inc.
10-Q9/1/0010.
6810.
77LeaseagreementbetweenAdobeSystemsandSelcoServiceCorporation10-K2/21/0210.
7710.
78ParticipationagreementamongAdobeSystems,SelcoServiceCorporation,etal.
10-K2/21/0210.
7810.
79ConfidentialResignationAgreement*10-K2/21/0210.
7910.
80ExecutiveSeverancePlanintheEventofaChangeofControl*10-K2/21/0210.
8010.
81AmendmentNo.
1toLeaseAgreementbetweenAdobeandSelcoServicesCorporationX21SubsidiariesoftheRegistrantX23ConsentofKPMGLLPX63ExhibitIncorporatedbyreferenceFiledNumberExhibitDescriptionFormDateNumberHerewith99.
1CertificationofChiefExecutiveOfficerX99.
2CertificationofChiefFinancialOfficerX*Compensatoryplanorarrangement(c)ReportsonForm8-KDateofReportFilingDateItemReportedOctober15,2002October15,20025OnOctober15,2002,wefiledareportonForm8-KunderItem5incompliancewithCommissionOrder4-460requiringthefilingofswornstatementspursuanttoSection21(a)(1)oftheExchangeActof1934.
64Wewillfurnishanyexhibitlistedabovethatisnotincludedhere.
Youmustspecificallyrequesttheexhibityouwouldliketoreceiveandpayourreasonableexpensesinfurnishingittoyou.
Youshouldcallorwrite:InvestorRelationsDepartment345ParkAvenueSanJose,CA95110-2704408-536-4416Fax408-537-4034E-mail:ir@adobe.
comManyoftheaboveexhibitsarealsoavailablethroughourEDGARfilingsatwww.
sec.
gov.
65SIGNATURESPursuanttotherequirementsoftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.
ADOBESYSTEMSINCORPORATEDBy:/s/MurrayJ.
DemoMurrayJ.
Demo,SeniorVicePresidentandChiefFinancialOfficer(PrincipalFinancialandAccountingOfficer)PursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheregistrantandinthecapacitiesindicatedonthe26thdayofFebruary,2003.
SignatureTitle/s/JohnE.
WarnockJohnE.
WarnockChairmanoftheBoardofDirectors/s/CharlesM.
GeschkeCharlesM.
GeschkeChairmanoftheBoardofDirectors/s/BruceR.
ChizenBruceR.
ChizenDirector,PresidentandChiefExecutiveOfficer(PrincipalExecutiveOfficer)/s/CarolMillsBaldwinCarolMillsBaldwinDirector/s/JamesE.
DaleyJamesE.
DaleyDirector/s/ColleenM.
PouliotColleenM.
PouliotDirector/s/RobertSedgewickRobertSedgewickDirector/s/DelbertW.
YocamDelbertW.
YocamDirector/s/MurrayJ.
DemoMurrayJ.
DemoSeniorVicePresidentandChiefFinancialOfficer(PrincipalFinancialandAccountingOfficer)66CERTIFICATIONSI,BruceR.
Chizen,ChiefExecutiveOfficeroftheregistrant,certifythat:1.
IhavereviewedthisannualreportonForm10-KofAdobeSystemsIncorporated;2.
Basedonmyknowledge,thisannualreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessaryinordertomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisannualreport;3.
Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisannualreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisannualreport;4.
Theregistrant'sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-14and15d-14)fortheregistrantandwehave:(a)designedsuchdisclosurecontrolsandprocedurestoensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisannualreportisbeingprepared;(b)evaluatedtheeffectivenessoftheregistrant'sdisclosurecontrolsandproceduresasofadatewithin90dayspriortothefilingdateofthisannualreport(the"EvaluationDate");and(c)presentedinthisannualreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandproceduresbasedonourevaluationasoftheEvaluationDate;5.
Theregistrant'sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluation,totheregistrant'sauditorsandtheauditcommitteeoftheregistrant'sboardofdirectors(orpersonsperformingtheequivalentfunction):(a)allsignificantdeficienciesinthedesignoroperationofinternalcontrolswhichcouldadverselyaffecttheregistrant'sabilitytorecord,process,summarizeandreportfinancialdataandhaveidentifiedfortheregistrant'sauditorsanymaterialweaknessesininternalcontrols;and(b)anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant'sinternalcontrols;and6.
Theregistrant'sothercertifyingofficerandIhaveindicatedinthisannualreportwhetherornotthereweresignificantchangesininternalcontrolsorinotherfactorsthatcouldsignificantlyaffecttheinternalcontrolssubsequenttothedateofourmostrecentevaluation,includinganycorrectiveactionswithregardtosignificantdeficienciesandmaterialweaknesses.
Dated:February26,2003/s/BRUCER.
CHIZENBruceR.
ChizenChiefExecutiveOfficer67I,MurrayJ.
Demo,ChiefFinancialOfficeroftheregistrant,certifythat:1.
IhavereviewedthisannualreportonForm10-KofAdobeSystemsIncorporated;2.
Basedonmyknowledge,thisannualreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessaryinordertomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisannualreport;3.
Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisannualreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisannualreport;4.
Theregistrant'sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-14and15d-14)fortheregistrantandwehave:(a)designedsuchdisclosurecontrolsandprocedurestoensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisannualreportisbeingprepared;(b)evaluatedtheeffectivenessoftheregistrant'sdisclosurecontrolsandproceduresasofadatewithin90dayspriortothefilingdateofthisannualreport(the"EvaluationDate");and(c)presentedinthisannualreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandproceduresbasedonourevaluationasoftheEvaluationDate;5.
Theregistrant'sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluation,totheregistrant'sauditorsandtheauditcommitteeoftheregistrant'sboardofdirectors(orpersonsperformingtheequivalentfunction):(a)allsignificantdeficienciesinthedesignoroperationofinternalcontrolswhichcouldadverselyaffecttheregistrant'sabilitytorecord,process,summarizeandreportfinancialdataandhaveidentifiedfortheregistrant'sauditorsanymaterialweaknessesininternalcontrols;and(b)anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant'sinternalcontrols;and6.
Theregistrant'sothercertifyingofficerandIhaveindicatedinthisannualreportwhetherornotthereweresignificantchangesininternalcontrolsorinotherfactorsthatcouldsignificantlyaffecttheinternalcontrolssubsequenttothedateofourmostrecentevaluation,includinganycorrectiveactionswithregardtosignificantdeficienciesandmaterialweaknesses.
Dated:February26,2003/s/MURRAYJ.
DEMOMurrayJ.
DemoChiefFinancialOfficer68SUMMARYOFTRADEMARKSThefollowingtrademarksofAdobeSystemsIncorporatedoritssubsidiaries,whichmayberegisteredincertainjurisdictions,arereferencedinthisForm10-K:AdobeAcrobatAcrobatCaptureAcrobateBookReaderAcrobatReaderAcrobatMessengerAdobeFontFolioAdobePhotoDeluxeAdobePremiereAdobeStudioAdobeTypeManagerAfterEffectsAlterCastAtmosphereDistillerePaperExtremeFrameMakerGoLiveIllustratorInCopyInDesignLiveMotionPageMakerPDFTransitPhotoshopPostScriptPressReadyAllotherbrandorproductnamesaretrademarksorregisteredtrademarksoftheirrespectiveholders.
69FINANCIALSTATEMENTSAsrequiredunderItem8.
FinancialStatementsandSupplementaryData,Adobe'sconsolidatedfinancialstatementsareprovidedinthisseparatesection.
Theconsolidatedfinancialstatementsincludedinthissectionareasfollows:PageIndependentAuditors'Report.
70ConsolidatedBalanceSheetsNovember29,2002andNovember30,200171ConsolidatedStatementsofIncomeYearsEndedNovember29,2002,November30,2001,andDecember1,200072ConsolidatedStatementsofStockholders'EquityandOtherComprehensiveIncomeYearsEndedNovember29,2002,November30,2001,andDecember1,200073ConsolidatedStatementsofCashFlowsYearsEndedNovember29,2002,November30,2001,andDecember1,200075NotestoConsolidatedFinancialStatements.
7770INDEPENDENTAUDITORS'REPORTTotheBoardofDirectorsandStockholdersofAdobeSystemsIncorporated:WehaveauditedtheaccompanyingconsolidatedfinancialstatementsofAdobeSystemsIncorporatedandsubsidiariesaslistedintheaccompanyingindex.
Inconnectionwithourauditsoftheconsolidatedfinancialstatements,wealsohaveauditedtheaccompanyingfinancialstatementschedule.
TheseconsolidatedfinancialstatementsandfinancialstatementschedulearetheresponsibilityoftheCompany'smanagement.
Ourresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsandfinancialstatementschedulebasedonouraudits.
WeconductedourauditsinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.
Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.
Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.
Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.
Webelievethatourauditsprovideareasonablebasisforouropinion.
Inouropinion,theconsolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialpositionofAdobeSystemsIncorporatedandsubsidiariesasofNovember29,2002andNovember30,2001,andtheresultsoftheiroperationsandtheircashflowsforeachoftheyearsinthethree-yearperiodendedNovember29,2002,inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.
Also,inouropinion,therelatedfinancialstatementschedule,whenconsideredinrelationtothebasicconsolidatedfinancialstatementstakenasawhole,presentsfairly,inallmaterialrespects,theinformationsetforththerein.
KPMGLLPMountainView,CaliforniaDecember10,200271ADOBESYSTEMSINCORPORATEDCONSOLIDATEDBALANCESHEETS(Inthousands,exceptpersharedata)November29,2002November30,2001ASSETSCurrentassets:Cashandcashequivalents.
183,684$218,662Short-terminvestments434,053362,951Tradereceivables,netofallowancesfordoubtfulaccountsof$7,531and$8,549,respectively.
116,506125,656Otherreceivables.
30,36718,299Deferredincometaxes.
31,53022,726Othercurrentassets.
18,03220,620Totalcurrentassets814,172768,914Propertyandequipment,net.
71,09077,611Goodwillandotherintangibleassets,net99,77236,402Otherassets.
42,12637,652Deferredincometaxes,long-term24,45011,594$1,051,610$932,173LIABILITIESANDSTOCKHOLDERS'EQUITYCurrentliabilities:Tradeandotherpayables.
37,765$30,891Accruedexpenses.
135,028130,381Incometaxespayable173,311132,228Deferredrevenue.
31,18521,701Totalcurrentliabilities.
377,289315,201Commitmentsandcontingencies.
Stockholders'equity:Preferredstock,$0.
0001parvalue;2,000sharesauthorized;noneissuedCommonstock,$0.
0001parvalue;Authorized:900,000shares;Issued:295,764sharesin2002and2001.
29,57629,576Additionalpaid-incapital.
710,273595,810Retainedearnings.
1,545,7761,366,205Accumulatedothercomprehensiveincome(loss)3,950)3,918Treasurystock,atcost(63,809and59,745sharesin2002and2001,respectively),netofreissuances1,607,354)(1,378,537)Totalstockholders'equity674,321616,972$1,051,610$932,173SeeaccompanyingNotestoConsolidatedFinancialStatements.
72ADOBESYSTEMSINCORPORATEDCONSOLIDATEDSTATEMENTSOFINCOME(Inthousands,exceptpersharedata)YearsEndedNovember29,2002November30,2001December1,2000Revenue:Products.
1,153,169$1,229,720$1,266,378Servicesandsupport11,619——Totalrevenue.
1,164,7881,229,7201,266,378Costofrevenue:Products.
96,85381,45187,255Servicesandsupport7,435——Totalcostofrevenue104,28881,45187,255Grossprofit.
1,060,5001,148,2691,179,123Operatingexpenses:Researchanddevelopment.
246,082224,122240,212Salesandmarketing380,367403,720401,188Generalandadministrative.
108,134115,626116,528Restructuringandothercharges.
12,14812,0635,629Acquiredin-processresearchanddevelopment.
5,769—470Amortizationandimpairmentofgoodwillandpurchasedintangibles.
20,97314,2817,013Totaloperatingexpenses773,473769,812771,040Operatingincome287,027378,457408,083Nonoperatingincome(loss),net:Investmentgain(loss),net17,185)(93,414)14,345Interestandotherincome.
14,84721,88821,311Totalnonoperatingincome(loss),net2,338)(71,526)35,656Incomebeforeincometaxes.
284,689306,931443,739Incometaxprovision93,290101,287155,931Netincome.
191,399$205,644$287,808Basicnetincomepershare0.
81$0.
86$1.
21Sharesusedincomputingbasicnetincomepershare.
236,834238,461238,292Dilutednetincomepershare.
0.
79$0.
83$1.
13Sharesusedincomputingdilutednetincomepershare.
243,119249,145255,774SeeaccompanyingNotestoConsolidatedFinancialStatements.
73ADOBESYSTEMSINCORPORATEDCONSOLIDATEDSTATEMENTSOFSTOCKHOLDERS'EQUITYANDOTHERCOMPREHENSIVEINCOME(Inthousands)CommonStockAdditionalPaid-inCapitalRetainedComprehensiveAccumulatedOtherComprehensiveTreasuryStockSharesAmountAmountEarningsIncomeIncome(Loss)SharesAmountTotalBalancesasofDecember3,1999295,764$29,576$339,481$896,239—$40,332(58,686)$(793,419)$512,209Comprehensiveincome:Netincome287,808$287,808———287,808Othercomprehensiveincome,netoftax:Netunrealizedlossoninvestments.
66,840)(66,840)——(66,840)Reclassificationadjustment4,2824,282——4,282Taxprovisiononabove.
24,07324,073——24,073Foreigncurrencytranslationadjustments2,545)(2,545)——(2,545)Othercomprehensiveloss.
41,030)Comprehensiveincome,netoftax.
246,778————Taxbenefitfromemployeestockoptionplans.
124,922124,922Issuanceofcompensatorystock.
10,896———5695,60316,499Dividendsdeclared.
11,543)11,543)Purchaseoftreasurystock.
7,184)(255,456)(255,456)Reissuanceoftreasurystockunderemployeestockandstockoptionplans29,57625,926———10,48393,209119,135BalancesasofDecember1,2000295,764$29,576$501,225$1,172,504—$(698)(54,818)$(950,063)$752,544Comprehensiveincome:Netincome.
205,644$205,644———205,644Othercomprehensiveincome,netoftax:Netunrealizedlossoninvestments.
28,884)(28,884)——(28,884)Reclassificationadjustment.
33,57133,571——33,571Taxprovisiononabove.
1,759)(1,759)——(1,759)Foreigncurrencytranslationadjustments.
894)(894)——(894)Netgainonderivativeinstruments(cashflowhedges),netoftaxes.
2,5822,582——2,582Othercomprehensiveincome.
4,616————Comprehensiveincome,netoftax.
210,260————Taxbenefitfromemployeestockoptionplans.
45,69245,692Issuanceofcompensatorystock13,494———4584,50317,997Dividendsdeclared.
11,943)11,943)Purchaseoftreasurystock.
10,598)(485,115)(485,115)Reissuanceoftreasurystockunderemployeestockandstockoptionplans35,399———5,21352,13887,537BalancesasofNovember30,2001.
.
.
.
.
.
295,764$29,576$595,810$1,366,205—$3,918(59,745)$(1,378,537)$616,972SeeaccompanyingNotestoConsolidatedFinancialStatements.
74ADOBESYSTEMSINCORPORATEDCONSOLIDATEDSTATEMENTSOFSTOCKHOLDERS'EQUITYANDOTHERCOMPREHENSIVEINCOME(Inthousands)(Continued)CommonStockAdditionalPaid-inCapitalRetainedComprehensiveAccumulatedOtherComprehensiveTreasuryStockSharesAmountAmountEarningsIncomeIncome(Loss)SharesAmountTotalBalancesasofNovember30,2001.
295,764$29,576$595,810$1,366,205—$3,918(59,745)$(1,378,537)$616,972Comprehensiveincome:Netincome.
191,399$191,399———191,399Othercomprehensiveincome,netoftax:Netunrealizedlossoninvestments.
11,724)(11,724)——(11,724)Reclassificationadjustment.
4,0634,063——4,063Taxprovisiononabove2,9972,997——2,997Foreigncurrencytranslationadjustments.
1,3071,307——1,307Netlossonderivativeinstruments(cashflowhedges),netoftaxes.
4,511)(4,511)——(4,511)Othercomprehensiveloss.
7,868)Comprehensiveincome,netoftax.
183,531————Taxbenefitfromemployeestockoptionplans.
21,83021,830Issuanceofcompensatorystock.
——5,489———1321,2976,786Dividendsdeclared.
11,828)11,828)Purchaseoftreasurystock10,614)(293,241)(293,241)Reissuanceoftreasurystockunderemployeestockandstockoptionplans.
36,578———4,60445,28181,859Stockissuedforacquisition.
50,566———1,81417,84668,412BalancesasofNovember29,2002295,764$29,576$710,273$1,545,776—$(3,950)(63,809)$(1,607,354)$674,321SeeaccompanyingNotestoConsolidatedFinancialStatements.
75ADOBESYSTEMSINCORPORATEDCONSOLIDATEDSTATEMENTSOFCASHFLOWS(Inthousands)YearsEndedNovember29,2002November30,2001December1,2000Cashflowsfromoperatingactivities:Netincome191,399$205,644$287,808Adjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivities:Depreciationandamortization.
63,48156,64543,275Stockcompensationexpense6,78717,99716,499Deferredincometaxes5,486)(17,600)1,398Provisionforlossesonreceivables.
1,5271,4357,140Taxbenefitfromemployeestockoptionplans.
21,83045,692124,922Acquiredin-processresearchanddevelopment.
410——Impairmentofproperty,plant,andequipmentandgoodwill.
13,175——Equitymethod(gains)lossesofAdobeVenturesandcostmethodinvestments.
13,12259,873(33,258)Gainsonsalesofequitysecurities.
7,194)(20,054)(12,660)Lossonother-than-temporarydeclinesofequitysecurities.
11,25753,06826,342Gainonsaleofbuildings1,052)Noncashrestructuringandothercharges.
1,011Changesinoperatingassetsandliabilities:Receivables5,91016,273(88,487)Othercurrentassets1,856(3,552)(5,407)Tradeandotherpayables.
2,277)(9,389)4,588Accruedexpenses.
8,312)(61,083)46,760Accruedrestructuringcharges.
15,435)9,573(8,003)Incometaxespayable30,15760,17531,730Deferredrevenue.
7,1244,0052,020Netcashprovidedbyoperatingactivities.
329,331418,702444,626Cashflowsfrominvestingactivities:Purchasesofshort-terminvestments.
579,154)(436,333)(443,875)Maturitiesandsalesofshort-terminvestments.
487,391456,915305,950Acquisitionsofpropertyandequipment31,578)(43,174)(29,836)Purchasesoflong-terminvestmentsandotherassets.
37,951)(35,338)(59,059)Acquisitions,netofcashacquired.
7,345—(24,448)Proceedsfromsalesofbuildings.
5,420Proceedsfromsalesofequitysecurities.
11,68431,50517,788Netcashusedforinvestingactivities142,263)(26,425)(228,060)SeeaccompanyingNotestoConsolidatedFinancialStatements.
76ADOBESYSTEMSINCORPORATEDCONSOLIDATEDSTATEMENTSOFCASHFLOWS(Inthousands)(Continued)YearsEndedNovember29,2002November30,2001December1,2000Cashflowsfromfinancingactivities:Purchaseoftreasurystock.
293,241)(485,115)(255,456)Proceedsfromreissuanceoftreasurystock.
81,85987,536119,135Paymentofdividends.
11,881)(12,007)(11,979)Netcashusedforfinancingactivities.
223,263)(409,586)(148,300)Effectofforeigncurrencyexchangeratesoncashandcashequivalents1,217(895)(2,545)Net(decrease)increaseincashandcashequivalents.
34,978)(18,204)65,721Cashandcashequivalentsatbeginningofyear218,662236,866171,145Cashandcashequivalentsatendofyear183,684$218,662$236,866Supplementaldisclosures:Cashpaidduringtheyearforincometaxes32,773$16,862$13,195Noncashinvestingandfinancingactivities:Cashdividendsdeclaredbutnotpaid2,900$2,952$3,016Unrealizedgains(losses)onavailable-for-salesecurities,netoftaxes4,664)$2,928$(38,485)Commonstockissuedforacquisition.
68,412——SeeaccompanyingNotestoConsolidatedFinancialStatements.
77ADOBESYSTEMSINCORPORATEDNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(Inthousands,exceptshareandpersharedata)Note1.
SignificantAccountingPoliciesOperationsFoundedin1982,AdobeSystemsIncorporated("Adobe"orthe"Company")offersalineofsoftwareforconsumers,businesses,andcreativeprofessionalcustomers.
Ourproductsenablecustomerstocreate,manageanddelivervisuallyrich,compellingandreliablecontent.
Welicenseourtechnologytomajorhardwaremanufacturers,softwaredevelopers,andserviceproviders,andweofferintegratedsoftwaresolutionstobusinessesofallsizes.
Wedistributeourproductsthroughanetworkofdistributorsanddealers,value-addedresellers("VARs"),systemsintegrators,andoriginalequipmentmanufacturers("OEMs");directtoendusers;andthroughourownwebsiteatwww.
adobe.
com.
WehaveoperationsintheAmericas;Europe,MiddleEast,andAfrica("EMEA");andAsia.
OursoftwarerunsonMicrosoftWindows,AppleMacintosh,Linux,UNIX,PalmOS,PocketPC,andSymbianplatforms.
FiscalYearOurfiscalyearisa52/53-weekyearendingontheFridayclosesttoNovember30.
BasisofConsolidationTheaccompanyingconsolidatedfinancialstatementsincludethoseofAdobeandoursubsidiaries,aftereliminationofallintercompanyaccountsandtransactions.
UseofEstimatesInthepreparationoffinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica,wemustmakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentliabilities,atthedateofthefinancialstatements,andreportedamountsofrevenuesandexpensesduringthereportingperiod.
Actualresultscoulddifferfromthoseestimates.
CashEquivalentsandShort-termInvestmentsCashequivalentsconsistofinstrumentswithmaturitiesofthreemonthsorlessatthetimeofpurchase.
Weclassifyallofourcashequivalentsandshort-terminvestmentsthatarefreeoftradingrestrictionsorbecomefreeoftradingrestrictionswithinoneyearas"available-for-sale.
"Wecarrytheseinvestmentsatfairvalue,basedonquotedmarketprices.
Unrealizedgainsandlosses,netoftaxes,areincludedinaccumulatedothercomprehensiveincome(loss),whichisreflectedasaseparatecomponentofstockholders'equity.
Gainsarerecognizedwhenrealizedinourconsolidatedstatementsofincome.
Lossesarerecognizedasrealizedorwhenwehavedeterminedthatanother-than-temporarydeclineinfairvaluehasoccurred.
Itisourpolicytoreviewourequityholdingsonaregularbasistoevaluatewhetherornotanysecurityhasexperiencedanother-than-temporarydeclineinfairvalue.
Ourpolicyincludes,butisnotlimitedto,reviewingeachofthecompanies'cashposition,earnings/revenueoutlook,stockpriceperformanceoverthepastsixmonths,liquidityandmanagement/ownership.
Ifwebelievethatanother-than-temporarydeclineexistsinoneofourmarketableequitysecurities,itisourpolicytowritedowntheseequityinvestmentstothemarketvalueandrecordtherelatedwritedownasaninvestmentlossonourconsolidatedstatementsofincome.
Duringfiscal2002,2001,and2000,werecordedinvestmentgains(losses)of$(17.
2)million,$(93.
4)million,and$14.
3million,respectively,ofwhich,$(11.
3)million,$(53.
1)million,and$(26.
3)million,respectively,relatedtoother-than-temporarydeclinesofourshort-terminvestments.
78ForeignCurrencyTranslationWetranslateassetsandliabilitiesofforeignsubsidiaries,whosefunctionalcurrencyisthelocalcurrency,atexchangeratesineffectatthebalancesheetdate.
Wetranslaterevenuesandexpensesatthemonthlyaverageratesofexchangeprevailingduringtheyear.
Weincludetheadjustmentresultingfromtranslatingthefinancialstatementsofsuchforeignsubsidiariesinaccumulatedothercomprehensiveincome,whichisreflectedasaseparatecomponentofstockholders'equity.
Foreigncurrencytransactiongainsorlossesarereportedininterestandotherincome.
FortheyearsendedNovember29,2002,November30,2001,andDecember1,2000,wereportedaforeignexchangetransactiongainof$9.
0millionandforeignexchangetransactionlossesof$3.
2millionand$1.
6million,respectively.
Onourforeigncurrencyhedgesofthesetransactions,wereportedanetlossof$8.
1millionandnetgainsof$3.
2millionand$0.
5million,forfiscalyears2002,2001,and2000,respectively.
PropertyandEquipmentWerecordpropertyandequipmentatcost.
Depreciationandamortizationarecalculatedusingthestraight-linemethodovertheshorteroftheestimatedusefullives(thirty-fiveyearsforbuildings;twotosevenyearsforfurnitureandequipment)orleaseterms(fivetotenyearsforleaseholdimprovements)oftherespectiveassets.
Wedonotcurrentlyhaveanycapitalizedwebsitedevelopmentcosts.
However,itisourpolicytocapitalizecertaincostsrelatedtowebsitedevelopmentinaccordancewithStatementofPosition98-1("SOP98-1"),"AccountingfortheCostsofComputerSoftwareDevelopedorObtainedforInternalUse.
"Amortizationonastraight-linebasisbeginsoncethewebsiteisreadyforitsintendeduse.
GoodwillandOtherIntangibleAssetsGoodwill,purchasedtechnology,andcertainotherintangibleassetsarestatedatcostlessaccumulatedamortizationandarereviewedperiodicallyforimpairment.
InaccordancewithStatementofFinancialAccountingStandardsNo.
142("SFASNo.
142"),"GoodwillandOtherIntangibleAssets,"goodwillandpurchasedintangibleswithindefiniteusefullivesacquiredafterJune30,2001arenotamortizedbutwillbereviewedperiodicallyforimpairment.
Accordingly,goodwillresultingfromouracquisitionofAccelioCorporation("Accelio")inApril2002wasnotamortized.
ForgoodwillandpurchasedintangiblesacquiredpriortoandonJune30,2001andforpurchasedintangibleswithdefiniteusefullivesacquiredsubsequenttoJune30,2001,amortizationisrecordedutilizingthestraight-linemethod,whichapproximatesthepatternofconsumption,overtheestimatedusefullivesoftherespectiveassets,generallyfromonetothirteenyears.
Capitalizationofcomputersoftwaredevelopmentcosts,whenmaterial,beginsupontheestablishmentoftechnologicalfeasibility,whichisgenerallythecompletionofaworkingprototypethathasbeencertifiedashavingnocriticalbugsandisareleasecandidate.
Todate,softwaredevelopmentcostsincurredbetweencompletionofaworkingprototypeandgeneralavailabilityoftherelatedproducthavenotbeenmaterial.
OtherAssetsOtherassetsincludelong-terminvestmentsandsecuritydeposits.
Ourlong-terminvestmentsincludedirectinvestmentsandindirectinvestmentsthroughAdobeVenturesinprivatelyheldcompanies.
Weownlimitedpartnershipinterestsinfourventurecapitallimitedpartnerships,AdobeVenturesL.
P.
,AdobeVenturesII,L.
P.
,AdobeVenturesIII,L.
P.
,andAdobeVenturesIV,L.
P.
(collectively"AdobeVentures"),thatinvestinearlystagecompanieswithinnovativetechnologies.
Inadditiontothepotentialforfinancialreturns,ourventureactivitiesincreaseourknowledgeofemergingmarketsandtechnologies,aswellasexpandourecosystemofAdobeproductsandservices.
ThepartnershipsaremanagedbyGraniteVentures,anindependentventurecapitalfirmandsolegeneralpartnerofAdobeVentures.
TheinvestmentsinAdobeVenturesareaccountedforusingtheequitymethodofaccounting,andaccordingly,theinvestmentsareadjustedtoreflectourshareofAdobeVentures'investmentincome(loss)anddividenddistributions.
Underthetermsofthepartnershipagreements,thegeneralpartnerhasthesoleandexclusiverighttomanageandcontrolthepartnerships.
Adobeasthelimitedpartnerhascertainrights,includingreplacingthegeneralpartnerandapprovingacquisitionsthatexceedcertainestablishedparameters.
However,theserightsareconsideredtobeprotectiverightsanddonotsuggestanabilitytocontrolthepartnerships.
AdobeVenturescarrytheir79investmentsinequitysecuritiesatestimatedfairmarketvalueandunrealizedgainsandlossesareincludedininvestmentgain(loss)onourconsolidatedstatementsofincome.
ThestockofanumberoftechnologyinvestmentsheldbythelimitedpartnershipsatNovember29,2002isnotpubliclytraded,and,therefore,thereisnoestablishedmarketfortheirsecurities.
Inordertodeterminethefairmarketvalueoftheseinvestments,weusethemostrecentroundoffinancinginvolvingnewnon-strategicinvestorsorestimatesmadebyGraniteVenturesbasedontheirassessmentofthecurrentmarketvalue.
ItisourpolicytoreviewthefairvalueoftheseinvestmentsheldbyAdobeVentures,aswellasourdirectinvestments,onaregularbasistoevaluatethecarryingvalueoftheinvestmentsinthesecompanies.
Thispolicyincludes,butisnotlimitedto,reviewingeachcompanies'cashposition,financingneeds,earnings/revenueoutlook,operationalperformance,management/ownershipchanges,andcompetition.
Theevaluationprocessisbasedoninformationthatwerequestfromtheseprivatelyheldcompanies.
ThisinformationisnotsubjecttothesamedisclosureregulationsasU.
S.
publiclytradedcompanies,andassuch,thebasisfortheseevaluationsissubjecttothetimingandtheaccuracyofthedatareceivedfromthesecompanies.
Ifwebelievethatthecarryingvalueofacompanyiscarriedatanamountinexcessoffairvalue,itisourpolicytorecordareserveinadditiontoourequitymethodofaccounting.
Werecognizerealizedgainsandlossesuponsaleormaturityofinvestmentsusingthespecificidentificationmethod.
Duringfiscal2002,2001,and2000,werecordedinvestmentgains(losses)of$(17.
2)million,$(93.
4)million,and$14.
3million,respectively,ofwhich$(13.
1)million,$(59.
9)million,and$33.
3million,respectively,relatedtoourinvestmentsinAdobeVenturesandourcostmethodinvestments.
ImpairmentofLong-livedAssetsWecurrentlyevaluateourlong-livedassets,includinggoodwillandcertainidentifiableintangibles,inaccordancewiththeprovisionsofStatementofFinancialAccountingStandardsNo.
121("SFASNo.
121"),"AccountingfortheImpairmentofLong-LivedAssetsandforLong-LivedAssetstobeDisposedof,"forimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofsuchassetsorintangiblesmaynotberecoverable.
Weconsiderfactorssuchassignificantchangesinthebusinessclimateandprojectedcashflowsfromtherespectiveasset.
Impairmentlossesaremeasuredastheamountbywhichthecarryingamountoftheassetexceedsitsfairvalue.
Duringthefourthquarteroffiscal2002,werecognizeda$6.
8milliongoodwillimpairmentchargefortheremainingbookvaluerelatedtotheGlassbookacquisition.
Thisimpairmentchargeispresentedunderamortizationandimpairmentofgoodwillandpurchasedintangiblesonourconsolidatedstatementsofincome.
Theimpairmentchargewasdeterminedbasedondiscountedfuturecashflows.
Duringthethirdandfourthquarteroffiscal2002,werecognizeda$6.
3millionpre-taximpairmentchargeforcapitalizedAdobeDesignTeam(formerlyAdobeStudio)hostedserverdevelopmentcosts.
Theimpairmentchargewasrecordedonourconsolidatedstatementofincomeundercostofproductsrevenue.
Theimpairmentchargewasdeterminedbasedondiscountedfuturecashflows.
Forsegmentreportingpurposes,thechargewasincludedinourCross-mediaPublishingsegment.
InAugust2001,theFinancialAccountingStandardsBoard("FASB")issuedStatementofFinancialAccountingStandardsNo.
144("SFASNo.
144"),"AccountingfortheImpairmentorDisposalofLong-LivedAssets.
"ThisStatementaddressesfinancialaccountingandreportingfortheimpairmentordisposaloflong-livedassetsandsupersedesSFASNo.
121andtheaccountingandreportingprovisionsofAccountingPrinciplesBoardOpinionNo.
30("APBNo.
30"),"ReportingtheResultsofOperationsforaDisposalofaSegmentofaBusiness.
"WewilladoptSFASNo.
144beginninginourfiscalyear2003.
WedonotexpecttheadoptionofSFASNo.
144tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
StockSplitAdobe'sBoardofDirectorsapprovedatwo-for-onestocksplitintheformofstockdividendsofourcommonstocktostockholderseffectedOctober24,2000.
Allshareandpershareamountsreferredtointheconsolidatedfinancialstatementshavebeenadjustedtoreflectthisstocksplit.
80EmployeeStockPlansOuremployeestockplansincludefixedstockoptionplans,equityincentiveplans,aperformanceandrestrictedstockplan,andanemployeestockpurchaseplan.
Weaccountforourfixedstockoptionplansandouremployeestockpurchaseplanusingtheintrinsicvaluemethod.
RevenueRecognitionWerecognizeapplicationproductsrevenueuponshipment,netofestimatedreturns,providedthatcollectionisdeterminedtobeprobableandnosignificantobligationsremain.
Applicationproductsrevenuefromdistributorsissubjecttoagreementsallowinglimitedrightsofreturn,rebates,andpriceprotection.
Accordingly,wereducerevenuerecognizedforestimatedfuturereturns,priceprotection,andrebatesatthetimetherelatedrevenueisrecorded.
Theestimatesforreturnsareadjustedperiodicallybaseduponhistoricalratesofreturns,inventorylevelsinthedistributionchannel,andotherrelatedfactors.
Weprovidefreetechnicalphonesupportforourshrink-wrappedapplicationproductstocustomerswhoareunderwarrantyforsupport.
Werecordtheestimatedcostoffreetechnicalphonesupportuponshipmentofsoftware.
Wealsolicensesoftwareinmultipleelementarrangementsinwhichacustomerpurchasesacombinationofsoftware,post-contractcustomersupport("PCS"),and/orprofessionalservices.
PCS,ormaintenance,includesrightstoupgrades,whenandifavailable,telephonesupport,updates,andenhancements.
Professionalservicesrelatetoconsultingservicesandtraining.
Whenvendorspecificobjectiveevidence("VSOE")offairvalueexistsforallelementsinamultipleelementarrangement,revenueisallocatedtoeachelementbasedontherelativefairvalueofeachoftheelements.
VSOEoffairvalueisestablishedbythepricechargedwhenthesameelementissoldseparately.
WedetermineVSOEoffairvalueofPCSbasedonrenewalratesforthesametermPCS.
InamultipleelementarrangementwherebyVSOEoffairvalueofallundeliveredelementsexistsbutVSOEoffairvaluedoesnotexistforoneormoredeliveredelements,revenueisrecognizedusingtheresidualmethod.
Undertheresidualmethod,thefairvalueoftheundeliveredelementsisdeferredandtheremainingportionofthearrangementfeeisrecognizedasrevenue,assumingdeliveryhasoccurredandcollectibilityisprobable.
RevenueallocatedtoPCSisrecognizedratablyoverthecontractualterm(typicallyonetotwoyears).
Thearrangementfeesrelatedtofixed-pricedconsultingcontractsarerecognizedusingthepercentageofcompletionmethod.
Percentageofcompletionismeasuredmonthlybasedprimarilyoninputmeasures,suchasonhoursincurredtodatecomparedtototalestimatedhourstocomplete,withconsiderationgiventooutputmeasures,suchascontractmilestones,whenapplicable.
Anticipatedlossesonfixed-pricedcontractsarerecognizedintheperiodwhentheybecomeknown.
WerecordOEMlicensingrevenue,primarilyroyalties,whenOEMpartnersshipproductsincorporatingAdobesoftware,providedcollectionofsuchrevenueisdeemedprobable.
DeferredrevenueincludescustomeradvancesunderOEMlicensingagreementsandmaintenancerevenue.
Incaseswherewewillprovideaspecifiedfreeupgradetoanexistingproduct,wedefertheVSOEoffairvalueforthespecifiedupgraderight,untilthefutureobligationisfulfilled.
Weperformongoingcreditevaluationsofourcustomers'financialconditionandgenerallydonotrequirecollateral.
Wemaintainallowancesforestimatedcreditlosses.
CostofRevenueCostofrevenueincludesproductpackaging,third-partyroyalties,excessandobsoleteinventory,amortizationrelatedtolocalizationcostsandacquiredtechnologies,hostedservercosts,andthecostsassociatedwiththemanufacturingofourproducts.
Costofrevenuealsoincludesemployee-relatedcostsandtherelatedinfrastructurecostsincurredtoprovideprofessionalservices,training,andproductsupportforourAcceliobusiness.
81AdvertisingCostsWeexpensealladvertisingcostsasincurredandclassifythesecostsundersalesandmarketingexpense.
Advertisingcostsforfiscalyears2002,2001,and2000were$26.
7million,$30.
5million,and$32.
9million,respectively.
IncomeTaxesWeusetheassetandliabilitymethodofaccountingforincometaxes.
Undertheassetandliabilitymethod,werecognizedeferredtaxassetsandliabilitiesforthefuturetaxconsequencesattributabletodifferencesbetweenthefinancialstatementcarryingamountsandthetaxbasisofexistingassetsandliabilities.
Werecordavaluationallowancetoreducedeferredtaxassetstoanamountforwhichrealizationismorelikelythannot.
WealsoaccountforanyincometaxcontingenciesinaccordancewithStatementofFinancialAccountingStandardsNo.
5("SFASNo.
5"),"AccountingforContingencies.
"ForeignCurrencyandOtherHedgingInstrumentsOnDecember2,2000,weadoptedStatementofFinancialAccountingStandardsNo.
133("SFASNo.
133"),"AccountingforDerivativeInstrumentsandHedgingActivities.
"SFASNo.
133establishesaccountingandreportingstandardsforderivativeinstrumentsandhedgingactivitiesandrequiresustorecognizetheseaseitherassetsorliabilitiesonthebalancesheetandmeasurethematfairvalue.
AsdescribedinNote16,gainsandlossesresultingfromchangesinfairvalueareaccountedfordependingontheuseofthederivativeandwhetheritisdesignatedandqualifiesforhedgeaccounting.
Theadoptionofthisaccountingstandarddidnothaveamaterialimpactonourfinancialpositionorresultsofoperations.
PutWarrantsandCallOptionsWeutilizeputwarrantsandcalloptions("putsandcalls")tofacilitatetherepurchaseofourcommonstock.
Ourputandcalloptioncontractsprovidethatwe,atouroption,cansettlewithphysicaldeliveryornetsharesequaltothedifferencebetweentheexercisepriceandthevalueoftheoptionasdeterminedbythecontract.
Accordingly,theseinvestmentsareinitiallymeasuredatfairvalueandreportedinstockholders'equityasadditionalpaid-in-capital.
Subsequentchangesinfairvaluearenotrecognized.
Iftheseinstrumentsaresettledthroughthepaymentorreceiptofcash,additionalpaid-in-capitalisadjusted.
ComprehensiveIncomeStatementofFinancialAccountingStandardsNo.
130("SFASNo.
130"),"ReportingComprehensiveIncome,"establishesstandardsforthereportinganddisplayofcomprehensiveincomeanditscomponentsinthefinancialstatements.
Itemsofcomprehensiveincome(loss)thatwecurrentlyreportareunrealizedgainsandlossesonmarketablesecuritiescategorizedasavailable-for-sale,foreigncurrencytranslationadjustments,andgainsandlossesonderivativeinstrumentsqualifyingascashflowhedges,suchas(i)hedgingaforecastedtransaction,(ii)thevariabilityofcashflowstobereceivedorpaidrelatedtoarecognizedassetorliability("cashflowhedge"),(iii)aforeigncurrencycash-flowhedge,or(iv)interestratehedges.
WedisplaycomprehensiveincomeanditscomponentsonourConsolidatedStatementsofStockholders'EquityandOtherComprehensiveIncome.
RecentAccountingPronouncementsInJuly2001,theFASBissuedSFASNo.
142,"GoodwillandOtherIntangibleAssets.
"ThisStatementrequiresthatgoodwillandotherintangibleswithanindefiniteusefullifenotbeamortized,butbetestedforimpairmentatleastannually.
SFASNo.
142iseffectiveforfiscalyearsbeginningafterDecember15,2001;however,fornewbusinesscombinationsthatoccurafterJune30,2001,SFASNo.
142iseffective.
InaccordancewithSFASNo.
142,goodwillresultingfromourrecentacquisitionofAccelioinApril2002isnotamortized.
WewillfullyadoptSFASNo.
142beginninginourfiscalyear2003.
WedonotexpecttheadoptionofSFASNo.
142tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
Amortizationandimpairmentofgoodwillinfiscal2002,2001,and2000was$21.
0million,$14.
3million,and$7.
0million,respectively.
82InJune2001,theFASBissuedStatementofFinancialAccountingStandardsNo.
143("SFASNo.
143"),"AccountingforAssetRetirementObligations.
"ThisStatementaddressesfinancialaccountingandreportingforobligationsassociatedwiththeretirementoftangiblelong-livedassetsandtheassociatedassetretirementcosts.
ThisStatementappliestolegalobligationsassociatedwiththeretirementoflong-livedassetsthatresultfromtheacquisition,construction,development,ornormaluseoftheasset.
AsusedinthisStatement,alegalobligationresultsfromexistinglaw,statute,ordinance,writtenororalcontract,orbylegalconstructionofacontractunderthedoctrineofpromissoryestoppel.
SFASNo.
143iseffectiveforfiscalyearsbeginningafterJune15,2002.
WewilladoptSFASNo.
143beginninginourfiscalyear2003.
WedonotexpecttheadoptionofSFASNo.
143tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
InAugust2001,theFASBissuedSFASNo.
144,"AccountingfortheImpairmentorDisposalofLong-LivedAssets.
"ThisStatementaddressesfinancialaccountingandreportingfortheimpairmentordisposaloflong-livedassetsandsupersedesSFASNo.
121,andtheaccountingandreportingprovisionsofAPBNo.
30.
SFASNo.
144iseffectiveforfiscalyearsbeginningafterDecember15,2001.
WewilladoptSFASNo.
144beginninginourfiscalyear2003.
WedonotexpecttheadoptionofSFASNo.
144tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
InApril2002,theFASBissuedStatementofFinancialAccountingStandardsNo.
145("SFASNo.
145"),"RescissionofFASBStatementsNo.
4,44,and64,AmendmentofFASBStatementNo.
13,andTechnicalCorrections.
"Amongotherprovisions,SFASNo.
145rescindsSFASNo.
4,"ReportingGainsandLossesfromExtinguishmentofDebt.
"Accordingly,gainsorlossesfromextinguishmentofdebtshallnotbereportedasextraordinaryitemsunlesstheextinguishmentqualifiesasanextraordinaryitemunderthecriteriaofAPBNo.
30.
GainsorlossesfromextinguishmentofdebtthatdonotmeetthecriteriaofAPBNo.
30shouldbereclassifiedtoincomefromcontinuingoperationsinallpriorperiodspresented.
SFASNo.
145iseffectiveforfiscalyearsbeginningafterMay15,2002.
WewilladoptSFASNo.
145beginninginourfiscalyear2003.
WedonotexpecttheadoptionofSFASNo.
145tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
InJuly2002,theFASBissuedStatementofFinancialAccountingStandardsNo.
146("SFASNo.
146"),"AccountingforCostsAssociatedwithExitorDisposalActivities.
"SFASNo.
146addressesfinancialaccountingandreportingforcostsassociatedwithexitordisposalactivities.
Thisstatementrequiresthataliabilityforacostassociatedwithanexitordisposalactivityberecognizedwhentheliabilityisincurred.
Previousguidance,providedunderEITFNo.
94-3,"LiabilityRecognitionforCertainEmployeeTerminationBenefitsandOtherCoststoExitanActivity(includingcertaincostsincurredinarestructuring),"requiredanexitcostliabilityberecognizedatthedateofanentity'scommitmenttoanexitplan.
TheprovisionsofthisstatementareeffectiveforexitordisposalactivitiesthatareinitiatedbyacompanyafterDecember31,2002.
WedonotexpecttheadoptionofSFASNo.
146tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
InOctober2002,theFASBissuedStatementofFinancialAccountingStandardsNo.
147("SFASNo.
147"),"AcquisitionsofCertainFinancialInstitutions-anamendmentofFASBStatementsNo.
72and144andFASBInterpretationNo.
9.
"Theprovisionsofthisstatementrelatetotheapplicationofthepurchasemethodofaccountingforallacquisitionsoffinancialinstitutions,excepttransactionsbetweentwoormoremutualenterprises.
Theprovisionsofthisstatementalsorelatetocertainlong-termcustomer-relationshipintangibleassetsrecognizedinanacquisitionofafinancialinstitution,includingthoseacquiredintransactionsbetweenmutualenterprises.
TheprovisionsofthisstatementareeffectiveonorafterOctober1,2002.
TherewillbenomaterialimpactupontheadoptionofSFASNo.
147onourfinancialpositionorresultsofoperations.
InDecember2002,theFASBissuedStatementofFinancialAccountingStandardsNo.
148("SFASNo.
148"),"AccountingforStock-BasedCompensation-TransitionandDisclosure-anamendmenttoFASBStatementNo.
123,AccountingforStock-BasedCompensation.
"SFASNo.
148providesalternativemethodsoftransitionforavoluntarychangetothefairvaluebasedmethodofaccountingforstock-basedemployeecompensation.
Inaddition,SFASNo.
148amendsthedisclosurerequirementsofStatement123torequiremoreprominentandmorefrequentdisclosuresinfinancialstatementsabouttheeffectsofstock-basedcompensation.
ThetransitionguidanceandannualdisclosureprovisionsofSFASNo.
148areeffectiveforfiscalyearsendingafterDecember15,2002.
TheinterimdisclosureprovisionsareeffectiveforfinancialreportscontainingfinancialstatementsforinterimperiodsbeginningafterDecember15,2002.
WedonotexpecttheadoptionofSFASNo.
148tohaveamaterialimpactonourfinancialpositionorresultsofoperations.
83InNovember2002,theFASBissuedInterpretationNo.
45("FINNo.
45"),"Guarantor'sAccountingandDisclosureRequirementsforGuarantees,IncludingIndirectGuaranteesofIndebtednessofOthers.
"FINNo.
45expandsontheaccountingguidanceofStatementsNo.
5,57,and107andincorporateswithoutchangetheprovisionsofFASBInterpretationNo.
34,whichisbeingsuperseded.
FINNo.
45willaffectleasingtransactionsinvolvingresidualguarantees,vendorandmanufacturerguarantees,andtaxandenvironmentalindemnities.
AllsuchguaranteeswillneedtobedisclosedinthenotestothefinancialstatementsstartingwiththeperiodendingafterDecember15,2002.
ForguaranteesissuedafterDecember31,2002,thefairvalueoftheobligationmustbereportedonthebalancesheet.
Existingguaranteeswillbegrandfatheredandwillnotberecognizedonthebalancesheet.
WearecurrentlyevaluatingtheimpactofFINNo.
45onourfinancialpositionandresultsofoperations.
InJanuary2003,theFASBissuedInterpretationNo.
46("FINNo.
46"),"ConsolidationofVariableInterestEntities.
"FINNo.
46expandsuponandstrengthensexistingaccountingguidancethataddresseswhenacompanyshouldincludeinitsfinancialstatementstheassets,liabilitiesandactivitiesofanotherentity.
Avariableinterestentityisacorporation,partnership,trust,oranyotherlegalstructureusedforbusinesspurposesthateither(a)doesnothaveequityinvestorswithvotingrightsor(b)hasequityinvestorsthatdonotprovidesufficientfinancialresourcesfortheentitytosupportitsactivities.
FINNo.
46requiresavariableinterestentitytobeconsolidatedbyacompanyifthatcompanyissubjecttoamajorityoftheriskoflossfromthevariableinterestentity'sactivitiesorisentitledtoreceiveamajorityoftheentity'sresidualreturnsorboth.
TheconsolidationrequirementsofFINNo.
46applyimmediatelytovariableinterestentitiescreatedafterJanuary31,2003.
TheconsolidationrequirementsapplytoolderentitiesinthefirstfiscalyearorinterimperiodbeginningafterJune15,2003.
DisclosurerequirementsapplytoanyfinancialstatementsissuedafterJanuary31,2003.
TheCompanyhasconsideredtheprovisionsofFINNo.
46andbelievesitwillnotbenecessarytoincludeintheCompany'sfinancialstatementsanyassets,liabilities,oractivitiesoftheentitiesholdingtheCompany'scorporateheadquartersleases.
TheCompanyhasprovidedcertaindisclosuresinotherareasofthisfiling(seeNote6andNote14ofourNotestoConsolidatedFinancialStatements)andwillcontinuetoevaluatetheimpactofFINNo.
46onourfinancialstatementsandrelateddisclosures.
ReclassificationsWemadeareclassificationonourfiscal2001presentationofassetsonourconsolidatedbalancesheetbyreclassifying$3.
4millionoflandfromPropertyandEquipmenttoOtherAssets,toconformtothefiscal2002presentation.
Thisreclassificationdidnotimpacttotalassetsinfiscal2001.
Wemadeareclassificationonourfiscal2001presentationofcurrentassetsandcurrentliabilitiesonourconsolidatedbalancesheetbyreclassifying$1.
6millionofbaddebtallowancefromNetTradeReceivabletoAccruedExpenses,toconformtothefiscal2002presentation.
Thisreclassificationincreasedourtotalassetsandliabilitiesby$1.
6million.
Note2.
AcquisitionsOnApril12,2002,weacquired100%oftheoutstandingcommonstockofAccelioCorporation("Accelio").
TheresultsofAccelio'soperationshavebeenincludedinourconsolidatedfinancialstatementssincethatdate.
AcceliowasaproviderofWeb-enabledsolutionsthathelpcustomersmanagebusinessprocessesdrivenbyelectronicforms.
TheacquisitionofAccelioenhancesAdobe'sabilitytobroadenourePapersolutionbusinessbycombiningAccelio'selectronicformssolutionswithAdobeAcrobatandAdobePortableDocumentFormat("PDF")technologies.
ThroughthiscombinationAdobecannowextendbroaderePapersolutionstoenterpriseusersinGlobal2000businesses,governmentsandeducationalinstitutionstodelivergreatervaluetoourcustomers.
Theaggregatepurchasepricewas$70.
2million,whichincludedtheissuanceof1.
8millionsharesofcommonstockofAdobe,valuedat$68.
4million,andcashof$1.
8million.
Thevalueofthe1.
8millioncommonsharesissuedwasdeterminedbasedontheaveragemarketpriceofAdobe'scommonsharesoverthe2-dayperiodbeforethemeasurementdate,whichwas$37.
71.
Themeasurementdatewastheacquisitiondateduetothevariabilityofthenumberofsharesissuedintheacquisition.
84Thefollowingtablesummarizesthepurchasepriceallocation:Cashandcashequivalents9,117Accountsreceivable,net…11,906Othercurrentassets…4,735Purchasedtechnology…2,710Goodwill…77,649In-processresearchanddevelopment…410Trademarksandotherintangibleassets…1,029Totalassetsacquired…107,556Currentliabilities…18,176)Liabilitiesrecognizedinconnectionwiththebusinesscombination………….
.
(16,836)Deferredrevenue…2,360)Totalliabilitiesassumed…37,372)Netassetsacquired…70,184Weobtainedanindependentappraiser'svaluationtodeterminetheamountsallocatedtopurchasedtechnologyandin-processresearchanddevelopment.
ThevaluationanalysisutilizedtheIncomeApproachthattakesintoconsiderationdiscountedfuturecashflows.
Basedonthisvaluation$2.
7millionand$0.
4millionwasallocatedtopurchasedtechnologyandin-processresearchanddevelopment,respectively.
Theamountallocatedtopurchasedtechnologyof$2.
7millionrepresentedthefairmarketvalueofthetechnologyforeachoftheexistingproducts,asofthedateoftheacquisition.
Thepurchasedtechnologyof$2.
7millionwasassignedausefullifeofthreeyearsandwillbeamortizedtocostofgoodssold.
Theamountallocatedtoin-processresearchanddevelopmentof$0.
4millionwasexpensedatthetimeofacquisitionduetothestateofthedevelopmentofcertainproductsandtheuncertaintyofthetechnology.
AtthedateweacquiredAccelio,itwasestimatedthat10%ofthedevelopmentefforthadbeencompletedandthattheremaining90%ofthedevelopmenteffortwouldbecompletedatvarioustimesoverthenext24months.
Theeffortsrequiredtocompletethedevelopmentofthetechnologyprimarilyincludesfinalizationofcodingandcompletiontesting.
TheremainingpurchasepricewasallocatedtogoodwillbecauseAccelio'sbusinessfitsAdobe'slong-termstrategy,shortenstimetomarket,andprovidesamarketpositionintheeFormsbusinessforAdobetobuildupon.
Thetotalpurchasepriceallocatedtogoodwillof$75.
0millionwasassignedtoourePaperSolutionssegment.
InaccordancewithSFASNo.
142,thegoodwillwillnotbeamortizedbutwillbereviewedforimpairmentonanannualbasis.
Duringthefourthquarteroffiscal2002,werevisedourestimateofcertaincostsassociatedwithouracquisitionofAccelio,resultinginanincreasetogoodwillofapproximately$2.
6million.
Theadjustmentprimarilyreflectedhigherthanestimatedtransactioncostsandcostsrelatedtoclosingredundantfacilities.
The$1.
0millionofacquiredtrademarksandotherintangibleassetswillbeamortizedovertheirusefullivesrangingfromsix-monthstothreeyears.
Inthesecondquarteroffiscal2002,werecognizedliabilitiesinconnectionwiththeacquisitionofAccelio.
TheliabilitiesrecognizedincludedseveranceandrelatedchargesassociatedwithaworldwidereductioninforceofAccelioemployees,transactioncosts,costsrelatedtoclosingredundantfacilitiesandterminatingcontracts,andotherexitcostsassociatedwiththeacquisition.
AsofNovember29,2002,themajorityoftherestructuringtransactionswerecompleted.
Totalliabilitiesrecognizedinconnectionwiththeacquisitionwere$14.
5million,ofwhich$6.
2millionremainsaccruedatNovember29,2002.
ThemajorityoftheremainingpaymentswillbepaidthroughMay2003.
85ThefollowingtabledepictstheactivityfortheliabilitiesrecognizedinconnectionwiththeacquisitionofAcceliothroughNovember29,2002:InitialliabilityrecognizedatApril12,2002CashPaymentsAdjustmentsBalanceatNovember29,2002Severanceandrelatedcharges.
6,034$(4,973)$(414)$647Transactioncosts3,095(3,537)1,069627Costofclosingredundantfacilities.
.
.
2,845(620)2,2174,442Contractterminationcosts.
1,412(1,057)(288)67Otherexitcosts.
1,116(471)(250)395$14,502$(10,658)$2,334$6,178ThefollowingproformaresultsofoperationsreflectthecombinedresultsofAdobeandAccelioforyearsendedNovember29,2002andNovember30,2001,asifthebusinesscombinationoccurredasofthebeginningofeachrespectivefiscalyear.
TheinformationusedforAccelio'sfiscalyear2002proformadisclosurewasobtainedfromreportsfiledbyAcceliowiththeSecuritiesandExchangeCommission("SEC")fortheperiodendedJanuary31,2002andinternalfinancialreportspreparedbyAcceliofromJanuary31,2002throughthedateofacquisition,April12,2002.
TheinformationusedforAccelio'sfiscalyear2001proformadisclosurewasobtainedfromreportsfiledbyAcceliowiththeSECfortheperiodsendedJanuary31,2001,April30,2001,July31,2001,andOctober31,2001.
Accelio'sfiscalquartersdidnotcoincidewithAdobe'sfiscalquarters.
Nonetheless,wecombinedtheresultsofoperationsfromAccelio'sfiscalquartersthatareclosesttoAdobe'sfiscalquarterstoarriveattheproformaamountsdisclosedbelow.
YearsEndedNovember29,2002November30,2001Revenue.
1,189,604$1,309,643Netincome178,665$172,942Basicnetincomepershare.
75$.
72Sharesusedincomputingbasicnetincomepershare.
237,492240,276Dilutednetincomepershare.
73$.
69Sharesusedincomputingdilutednetincomepershare.
.
.
.
.
.
243,777250,960InDecember2001,weacquiredFotiva,Inc.
("Fotiva").
TheacquisitionwasaccountedforusingthepurchasemethodofaccountinginaccordancewithStatementofFinancialAccountingStandardsNo.
141("SFASNo.
141"),"BusinessCombinations.
"SubstantiallyallofFotiva'sassetswereintellectualproperty.
Fotivawasadevelopmentstagesoftwarecompanythatcreatedsolutionstohelpconsumersmanage,store,enrich,andsharedigitalphotographsandotherrelatedpersonalmedia.
Inconnectionwiththeacquisition,substantiallyallofthepurchasepriceof$5.
4millioncashwasallocatedtoin-processresearchanddevelopmentandexpensedatthetimeofacquisitionduetothein-processstateofthetechnology.
AtthedateweacquiredFotiva,itwasestimatedthat50%ofthedevelopmentefforthadbeencompletedandthattheremaining50%ofthedevelopmenteffortwouldtakeapproximatelyelevenmonthstocomplete.
Theeffortsrequiredtocompletethedevelopmentofthetechnologyprimarilyincludefinalizationofcoding,localization,andextensivequalityassurancetesting.
AdobecombinedFotiva'simagemanagementtechnologywithAdobe'sdigitalimagingandePapertechnologiestodevelopanewproduct,AdobePhotoshopAlbum,thatwasreleasedinthefirstquarteroffiscal2003.
Duringthefourthquarteroffiscal2000,weacquiredBoston,Massachusetts-basedGlassbook,Inc.
("Glassbook").
GlassbookwasadeveloperofconsumerandcommercialsoftwarefortheeBookmarket,automatingthesupplychainforpublishers,booksellers,distributors,andlibraries.
TheacquisitionwasaccountedforusingthepurchasemethodofaccountinginaccordancewithAccountingPrinciplesBoardOpinionNo.
16("APBNo.
16"),"BusinessCombinations.
"Thepurchasepriceoftheacquisitionwasapproximately$24.
4millioncashplus86additionalliabilitiesassumedofapproximately$3.
6million.
Basedonanindependentappraiser'svaluation,$0.
5millionofthepurchasepricewasallocatedtoin-processresearchanddevelopmentduetothestateofthedevelopmentandtheuncertaintyofthetechnologyandexpenseduponacquisition.
Theremaining$27.
5millionwasallocated$26.
9milliontogoodwill,$0.
4milliontointangibleassets,and$0.
2milliontootherassets.
Thegoodwillandintangibleassetsareamortizedonastraight-linebasisoverathree-yearperiod.
TheongoingprojectatGlassbookatthetimeofthepurchaseincludedthedevelopmentoftheGlassbookReaderandtheGlassbookContentServerproducts.
WereleasednewproductsthatcontainedthepurchasedtechnologyinApril2001,withAcrobateBookReader2.
1andAdobeContentServer2.
0.
Duringthefourthquarteroffiscal2002,werecognizeda$6.
8milliongoodwillimpairmentchargefortheremainingbookvaluerelatedtotheGlassbookacquisition.
Thisimpairmentchargeispresentedunderamortizationandimpairmentofgoodwillandpurchasedintangiblesonourconsolidatedstatementsofincome.
Note3.
Cash,cashequivalents,andshort-terminvestmentsCash,cashequivalents,andshort-terminvestmentsconsistedofthefollowing:AsofNovember29,2002CarryingValueUnrealizedGainsUnrealizedLossesEstimatedFairValueClassifiedascurrentassets:Cash.
21,91121,911Cashequivalents:Moneymarketmutualfunds.
128,073——128,073Stateandmunicipalbondsandnotes.
33,6356533,700Totalcashequivalents161,70865161,773Totalcashandcashequivalents.
183,61965183,684Short-terminvestments:Stateandmunicipalbonds.
396,9533,583(294)400,242UnitedStatesTreasuryNotes9,688107(9)9,786CorporateBonds.
9,89037(2)9,925Marketableequitysecurities*11,0923,00814,100Totalshort-terminvestments.
427,6236,735(305)434,053Totalcash,cashequivalents,andShort-terminvestments.
611,242$6,800$(305)$617,737AsofNovember30,2001CarryingValueUnrealizedGainsUnrealizedLossesEstimatedFairValueClassifiedascurrentassets:Cash.
22,03922,039Cashequivalents:Moneymarketmutualfunds.
120,699——120,699Stateandmunicipalbondsandnotes.
75,9101475,924Totalcashequivalents196,60914196,623Totalcashandcashequivalents.
218,64814218,662Short-terminvestments:Stateandmunicipalbonds.
319,3922,947(253)322,086UnitedStatesTreasuryNotes3,0798—3,087Marketableequitysecurities*26,33911,439—37,778Totalshort-terminvestments.
348,81014,394(253)362,951Totalcash,cashequivalents,andshort-terminvestments567,458$14,408$(253)$581,613*Thecarryingvalueofmarketableequitysecuritieshasbeenreducedbyother-than-temporarydeclinesinthefairvalueofsecurities.
87Approximately$161.
8millionand$196.
6millionininvestmentsareclassifiedascashequivalentsasofNovember29,2002andNovember30,2001,respectively.
WerecordednetrealizedgainsfromthesaleoffixedincomeinvestmentsfortheyearsendedNovember29,2002andNovember30,2001of$3.
3millionand$5.
8million,respectively.
Wealsorecordednetrealizedgainsfromthesaleofourshort-termequityinvestmentsfortheyearsendedNovember29,2002andNovember30,2001of$7.
2millionand$19.
5million,respectively.
Inaddition,werecordedlossesrelatedtoother-than-temporarydeclinesinthefairvalueofourmarketableequitysecuritiestotaling$11.
3millionfortheyearendedNovember29,2002and$53.
1millionfortheyearendedNovember30,2001(SeeNote1forourpolicyonrecordingother-than-temporarydeclinesinourmarketableequitysecurities).
Alloftheabovegainsandlosseswereincludedininvestmentgain(loss)onourconsolidatedstatementsofincome.
AsofNovember29,2002,thecostandestimatedfairvalueofcurrentdebtsecuritiesandmoneymarketmutualfundswithamaturityofoneyearorlesswere$290.
6millionand$291.
0million,respectively,andthecostandestimatedfairvalueofcurrentdebtsecuritieswithmaturitiesrangingfromonetofiveyearswas$287.
6millionand$290.
7million,respectively.
Wehavenosecuritieswithmaturitiesoverfiveyears.
ThesesecuritiesareclassifiedascurrentassetsbasedontheCompany'sintentandabilitytousethesesecuritiesasnecessarytosatisfysignificantshort-termliquidityrequirementsthatmayarise.
Note4.
PropertyandEquipmentPropertyandequipmentconsistedofthefollowing:November29,2002November30,2001Computersandequipment.
158,623$139,850Furnitureandfixtures28,72825,150Capitalprojectsin-progress.
2,31512,593Leaseholdimprovements.
40,90238,384Building.
4,756—235,324215,977Lessaccumulateddepreciationandamortization164,234138,366$71,090$77,611WecapitalizecertaincostsrelatedtoourwebsitedevelopmentinaccordancewithSOP98-1.
Weamortizeonastraight-linebasisovereighteentothirty-sixmonthsoncethewebsiteisreadyforitsintendeduse.
WelaunchedAdobeDesignTeam(formerlyAdobeStudio)infiscal2001andsubsequentlyrecordedamortizationexpense.
Duringfiscalyear2002,weplacedinserviceabuildingthatweconstructedinIndia.
Duringthethirdandfourthquarteroffiscal2002,werecognizeda$6.
3millionpre-taximpairmentchargeforcapitalizedAdobeDesignTeam(formerlyAdobeStudio)hostedserverdevelopmentcosts.
Theimpairmentchargewasrecordedonourconsolidatedstatementofincomeundercostofproductsrevenue.
Theimpairmentchargewasdeterminedbasedondiscountedfuturecashflows.
Forsegmentreportingpurposes,thechargewasincludedinourCross-mediaPublishingsegment.
DepreciationfortheyearsendedNovember29,2002,November30,2001,andDecember1,2000was$34.
7million,$29.
8million,and$29.
3million,respectively.
88Note5.
GoodwillandOtherIntangibleAssetsGoodwillandotherintangibleassetsconsistedofthefollowing:November29,2002November30,2001Goodwill.
100,915$53,679Purchasedtechnologyandlicensingagreements.
26,30416,754Otherintangibleassets.
13,97811,036141,19781,469Lessaccumulatedamortization.
41,42545,067$99,772$36,402Amortizationofgoodwillandpurchasedintangiblesforfiscal2002and2001primarilyrelatestotheacquisitionsofGlassbook,Inc.
("Glassbook")andGoLiveSystems,Inc.
,aDelawarecorporation,andGoLiveSystemsGmbHandCo.
KG,aGermanlimitedpartnership(together"GoLive").
AspartoftheacquisitionofAccelioinApril2002,weallocated$75.
0milliontogoodwillwhich,inaccordancewithSFASNo.
142,willnotbeamortized.
Duringthefourthquarteroffiscal2002,werevisedourestimateofcertaincostsassociatedwithouracquisitionofAccelio,resultinginanincreasetogoodwillofapproximately$2.
6million.
Theadjustmentprimarilyreflectedhigherthanestimatedtransactioncostsandcostsrelatedtoclosingredundantfacilities.
ThegoodwillassociatedwiththeacquisitionsofAccelioandGoLivewillbereviewedforimpairmentonanannualbasis.
Duringthefourthquarteroffiscal2002,werecognizeda$6.
8milliongoodwillimpairmentchargefortheremainingbookvaluerelatedtotheGlassbookacquisition.
Thisimpairmentchargeispresentedunderamortizationandimpairmentofgoodwillandpurchasedintangiblesonourconsolidatedstatementofincome.
Theimpairmentchargewasdeterminedbasedondiscountedfuturecashflows.
AsofNovember29,2002,otherintangibleassetsconsistedprimarilyofcapitalizedlocalizationcostsof$10.
0millionandotherintangibleassetsof$4.
0million.
AsofNovember30,2001,intangiblesandotherassetsconsistedprimarilyofcapitalizedlocalizationcostsof$9.
1millionandotherintangibleassetsof$1.
9million.
Amortizationexpenserelatedtogoodwill,purchasedtechnology,capitalizedlocalization,andotherintangibleassetswas$28.
8million,$26.
8million,and$14.
0millioninfiscal2002,2001,and2000,respectively.
Note6.
OtherAssetsOtherassetsconsistedofthefollowing:November29,2002November30,2001Investments.
35,617$31,703Securitydeposits.
3,1862,567Landdeposit3,3233,382$42,126$37,652WeownlimitedpartnershipinterestsinAdobeVentures.
Thelimitedpartnershipinvestmentsareaccountedforundertheequitymethod,ascontractuallythepartnershipsarecontrolledbyGraniteVentures,anindependentventurecapitalfirmandsolegeneralpartnerofAdobeVentures.
InMarch1997,aspartofourventureinvestingprogram,weestablishedaninternallimitedpartnership,AdobeIncentivePartners,L.
P.
("AIP"),whichallowedcertainofAdobe'sexecutiveofficerstoparticipateincashorstockdistributionsfromAdobe'sventureinvestments.
InNovember2002,thepartnershipwasliquidated.
Immediatelypriortotheliquidation,assetsheldbyAIPincludedAdobe'sentireinterestsinAdobeVenturesL.
P.
andAdobeVenturesII,L.
P.
andcertainequitysecuritiesofprivately-heldcompanies.
AdobewasboththegeneralpartnerandalimitedpartnerofAIP.
OtherlimitedpartnerswereexecutiveofficersandformerexecutiveofficersofAdobewhowereinvolvedinAdobe'sventureinvestingactivitiesandwhoseparticipationwasdeemedcriticaltothesuccessoftheprogram.
Infiscal2002,theparticipatingofficersreceivedcashdistributionswithanaggregatefairvalueof$0.
6million,includinga$0.
3milliondistributionrelatedtothepartnershipliquidation.
AtNovember29,2002,dueto89thepartnershipliquidation,therewasnominorityinterestheldbytheparticipatingofficers.
Theliquidationofthepartnershipdidnothaveanymaterialimpactonourfinancialstatements.
TheinvestmentsinAdobeVenturesL.
P.
;AdobeVenturesII,L.
P.
;AdobeVenturesIII,L.
P.
;andAdobeVenturesIV,L.
P.
,whichwereestablishedtoinvestinemergingtechnologycompaniesstrategictoAdobe'ssoftwarebusiness,totaled$1.
7million,$3.
1million,$7.
3million,and$22.
7million,respectively,asofNovember29,2002,andtotaled$4.
2million,$7.
8million,$12.
8million,and$11.
7million,respectively,asofNovember30,2001.
OurinvestmentsinthelimitedpartnershipsareadjustedtoreflectourequityinterestinAdobeVenturesL.
P.
;AdobeVenturesII,L.
P.
;AdobeVenturesIII,L.
P.
;andAdobeVenturesIV,L.
P.
'sinvestmentincome(loss)anddividenddistributions,whichtotaled$(15.
4)million,$(49.
2)million,and$0.
4millioninfiscalyears2002,2001,and2000,respectively.
WehavecommitmentstotheAdobeVenturelimitedpartnerships.
ThefollowingtableshowsthecapitalcommitmentsandthecapitalcontributedasofNovember29,2002:CapitalCommitmentCapitalContributedAdobeVenturesL.
P.
$40,000$40,476AdobeVenturesII,L.
P.
$40,000$37,541AdobeVenturesIII,L.
P.
$60,000$57,353AdobeVenturesIV,L.
P.
$100,000$35,418ThecapitalcommitmentistheamountthatAdobehasagreedtocontributetothePartnership.
ThecapitalcommitmentamountiscontributedoverthetermofeachPartnership,whichistenyears.
Wecancontributemorethanthecapitalcommitment,atourdiscretion.
Wecanceasefundingatanytimeaftertheearlierof:a)twoyearsaftertheeffectivedateofthePartnershiporb)thedateonwhichtheCompanyhasmadecapitalcontributionstothePartnershipinanamountinexcessof$10.
0million,$10.
0million,$20.
0million,and$33.
0millionforAdobeVenturesL.
P.
,AdobeVenturesII,L.
P.
,AdobeVenturesIII,L.
P.
,andAdobeVenturesIV,L.
P.
,respectively.
Inadditiontotheseventurepartnerships,wehavedirectinvestmentsinpublicandprivately-heldcompanies.
Intotal,asofNovember29,2002,wehaveinvested$213.
9millionthroughourventurepartnershipsanddirectinvestments.
AsofNovember29,2002,netreturnswere$348.
7million,includingstockdividendsandnetgainsinmarketvalueofinvestments.
TheinvestmentsinAdobeVenturesareaccountedforusingtheequitymethodofaccounting,andaccordingly,theinvestmentsareadjustedtoreflectourshareofAdobeVentures'investmentincome(loss)anddividenddistributions.
Underthetermsofthepartnershipagreements,thegeneralpartnerhasthesoleandexclusiverighttomanageandcontrolthepartnerships.
Adobeasthelimitedpartnerhascertainrights,includingreplacingthegeneralpartnerandapprovingacquisitionsthatexceedcertainestablishedparameters.
However,theserightsareconsideredtobeprotectiverightsanddonotsuggestanabilitytocontrolthepartnerships.
AdobeVenturescarrytheirinvestmentsinequitysecuritiesatestimatedfairmarketvalueandunrealizedgainsandlossesareincludedininvestmentincome(loss).
ThestockofanumberoftechnologyinvestmentsheldbythelimitedpartnershipsatNovember29,2002arenotpubliclytraded,and,therefore,thereisnoestablishedmarketfortheirsecurities.
Inordertodeterminethefairmarketvalueoftheseinvestments,weusethemostrecentroundoffinancinginvolvingnewnon-strategicinvestorsorestimatesmadebyGraniteVenturesbasedontheirassessmentofthecurrentmarketvalue.
ItisourpolicytoreviewthefairvalueoftheseinvestmentsheldbyAdobeVenturesonaregularbasistoevaluatethecarryingvalueoftheinvestmentsinthesecompanies.
Thispolicyincludes,butisnotlimitedto,reviewingeachcompanies'cashposition,financingneeds,earnings/revenueoutlook,operationalperformance,management/ownershipchanges,andcompetition.
Theevaluationprocessisbasedoninformationthatwerequestfromtheseprivately-heldcompanies.
ThisinformationisnotsubjecttothesamedisclosureregulationsasU.
S.
publiclytradedcompanies,andassuch,thebasisfortheseevaluationsissubjecttothetimingandtheaccuracyofthedatareceivedfromthesecompanies.
Ifwebelievethatthecarryingvalueofacompanyiscarriedatanamountinexcessoffairvalue,itisourpolicytorecordareserveinadditiontoourequitymethodofaccountingandtherelatedwritedownisrecordedasaninvestmentlossonourconsolidatedstatementsofincome.
AsofNovember29,2002andNovember30,2001,ourportfolioofinvestmentsincludedinOtherAssetshadanestimatedfairmarketvalueof$35.
6millionand$31.
7million.
90Note7.
AccruedExpensesAccruedexpensesconsistedofthefollowing:November29,2002November30,2001Accruedcompensationandbenefits54,117$44,555Salesandmarketingallowances7,3714,956Accruedrestructuring10,9759,573Other.
62,56571,297$135,028$130,381Note8.
RestructuringandOtherChargesFiscal2002restructuringprogramInthefourthquarteroffiscal2002,weincurredarestructuringchargeof$11.
1million,whichincludedseveranceandrelatedchargesandchargesrelatedtotheclosureofafacility.
Therelatedrestructuringprogrameliminated239engineering,salesandmarketing,andgeneralandadministrativepositionsworldwideinordertorealignourresourcesforourfuturebusinessplans.
TheseplansincludeaddingresourcestosupportourePaperenterprisebusinessinfiscal2003.
Therestructuringprogramisexpectedtobecompletedinfiscal2003.
Ofthe$11.
1millionincharges,$4.
7millionremainsaccruedatNovember29,2002.
Thefollowingtabledepictstheactivityforthefourthquarter2002restructuringprogramthroughNovember29,2002:AccruedBalanceatNovember30,2001TotalChargesCashPaymentsAccruedBalanceatNovember29,2002Severanceandrelatedcharges.
10,119$(6,349)$3,771Facility.
975—975$—$11,094$(6,349)$4,746Inthesecondquarteroffiscal2002,weimplementedarestructuringprogramtoeliminate39redundantsalesandmarketingpositionsheldbyAdobeemployeesworldwideasaresultoftheacquisitionofAccelio.
Therestructuringincludedseveranceandrelatedchargesassociatedwiththereductioninforceandthecostofvacatingaleasedfacility.
Totalrestructuringandotherchargeswere$1.
6millionandthemajorityofthesepaymentswerepaidinthesecondquarteroffiscal2002.
Ofthe$1.
6millionincharges,$.
05millionremainsaccruedatNovember29,2002.
Theremainingpaymentswillbepaidinthefirstquarteroffiscal2003.
Thefollowingtabledepictstheactivityforthesecondquarterfiscal2002restructuringprogramthroughNovember29,2002:AccruedBalanceatNovember30,2001TotalChargesCashPaymentsAccruedBalanceatNovember29,2002Severanceandrelatedcharges.
1,600$(1,553)$47Facility.
5—5$—$1,605$(1,553)$52Fiscal2001restructuringprogramInthefourthquarteroffiscal2001,weimplementedarestructuringplantorealignourworkforcetoourfuturestrategicgoalsandtoalignourresourceswithourlowerfiscal2002revenuetargetsduetoadverseeconomicconditionsresultinginpartfromtheeventsofSeptember11,2001.
Thisrestructuringenabledustoincreaseourinvestmentindigitalimaging,digitalvideo,andePaper-basedbusinessesinfiscal2002.
Aspartoftherestructuringprogram,weimplementedareductioninforceof247positions,affectingorganizationsthroughoutthecompany.
91ThereductionscamepredominantlyfromsalesandmarketingandinourNorthAmericanoperations,andasofNovember30,2001,themajorityoftheseterminationswerecompleted.
Therestructuringchargeinthefourthquarteroffiscal2001was$12.
1million,allofwhichrelatedtoseveranceandrelatedchargesassociatedwiththereductioninforce.
Duringthefourthquarteroffiscal2002,wepaidourremainingobligationsunderour2001restructuringprogram.
Wealsorevisedourestimateofthetotalcostsassociatedwiththerestructuringprogram,resultinginanadjustmentofapproximately$0.
6million.
Theadjustmentprimarilyreflectedlowerthanestimatedseveranceandrelatedcharges.
AsofNovember29,2002,therewasnorestructuringliabilityremainingforourfiscalyear2001restructuringprogram.
Thefollowingtabledepictstheactivityforthefiscalyear2001restructuringprogramthroughNovember29,2002:AccruedBalanceatNovember30,2001CashPaymentsAdjustmentsAccruedBalanceatNovember29,2002Severanceandrelatedcharges.
9,573$(9,022)$(551)$—Note9.
IncomeTaxesIncomebeforeincometaxesincludesnetincomefromforeignoperationsofapproximately$163.
0million,$90.
0million,and$39.
0millionfortheyearsendedNovember29,2002,November30,2001,andDecember1,2000,respectively.
Theprovisionforincometaxesconsistedofthefollowing:YearsEndedNovember29,2002November30,2001December1,2000Current:UnitedStatesfederal63,547$52,355$13,096Foreign8,34416,08711,452Stateandlocal5,0554,7535,063Totalcurrent76,94673,19529,611Deferred:UnitedStatesfederal4,984)(14,494)(1,569)Foreign259(767)3,568Stateandlocal761)(2,339)(601)Totaldeferred5,486)(17,600)1,398Chargeinlieuoftaxesattributabletoemployeestockplans.
21,83045,692124,922$93,290$101,287$155,931Totalincometaxexpensediffersfromtheexpectedtaxexpense(computedbymultiplyingtheUnitedStatesfederalstatutoryrateof35%forfiscalyear2002,2001,and2000byincomebeforeincometaxes)asaresultofthefollowing:YearsEndedNovember29,2002November30,2001December1,2000Computed"expected"taxexpense99,641$107,426$155,309Statetaxexpense,netoffederalbenefit6,4776,98312,403Nondeductiblegoodwill7,4373,178958Tax-exemptincome3,915)(4,496)(3,868)Taxcredits6,000)(8,000)(8,000)Differencesbetweenstatutoryrateandforeigneffectivetaxrate.
.
(9,487)(2,653)(571)Other,net.
863)(1,151)(300)$93,290$101,287$155,93192Thetaxeffectsofthetemporarydifferencesthatgiverisetosignificantportionsofthedeferredtaxassetsandliabilitiesasoffiscal2002and2001arepresentedbelow:November29,2002November30,2001Deferredtaxassets:Acquiredtechnology13,845$12,980Reservesanddeferredrevenue.
25,62128,738Unrealizedlossesoninvestments.
26,1591,886Credits.
1,500—Totalgrossdeferredtaxassets.
67,12543,604Deferredtaxassetvaluationallowance.
525)Totaldeferredtaxassets67,12543,079Deferredtaxliabilities:Depreciationandamortization8,264)(6,041)Other2,881)(2,718)Totaldeferredtaxliabilities.
11,145)(8,759)Netdeferredtaxassets.
55,980$34,320WeprovideUnitedStatesincometaxesontheearningsofforeignsubsidiariesunlessthesubsidiaries'earningsareconsideredpermanentlyreinvestedoutsidetheUnitedStates.
Totheextentthattheforeignearningspreviouslytreatedaspermanentlyreinvestedarerepatriated,therelatedUnitedStatestaxliabilitymaybereducedbyanyforeignincometaxespaidontheseearnings.
Forfinancialreportingpurposes,avaluationallowancehadbeenestablishedforcertaindeferredassetsrelatedtothewrite-downofinvestments.
Thevaluationallowancedecreased$0.
5millionduringtheyear.
Managementbelievesthatitismorelikelythannotthattheresultsoffutureoperationswillgeneratesufficienttaxableincometorealizethenetdeferredtaxassets.
Attheendoffiscal2002,theCompanyhadstatetaxcreditcarryforwardsofapproximately$1.
5millionthatcanbecarriedforwardindefinitely.
Belowisasummaryroll-forwardscheduleoftheincometaxpayableaccountsasofNovember29,2002andNovember30,2001:November29,2002November30,2001Beginningbalance132,228$74,768Plus:Currentyearliability.
76,94673,195Less:Paymentsandreclasses35,863)(15,735)Endingbalance173,311$132,228Note10.
BenefitPlansPretaxSavingsPlanIn1987,weadoptedanEmployeeInvestmentPlan,qualifiedunderSection401(k)oftheInternalRevenueCode,whichisapretaxsavingsplancoveringsubstantiallyallofourUnitedStatesemployees.
Undertheplan,eligibleemployeesmaycontributeupto18%oftheirpretaxsalary,subjecttotheInternalRevenueServiceannualcontributionlimits.
Infiscal2002,wematched50%ofthefirst6%oftheemployee'scontribution.
Wecontributedapproximately$6.
0million,$5.
8million,and$4.
5millioninfiscal2002,2001,and2000,respectively.
Wecanterminatematchingcontributionsatourdiscretion.
ProfitSharingPlanWehaveaprofitsharingplanthatprovidesforprofitsharingpaymentstoalleligibleemployeesfollowingeachquarterinwhichweachieveatleast80%ofourbudgetedearningsforthequarter.
Theplan,aswellastheannualoperatingbudgetonwhichtheplanisbased,isapprovedbyourBoardofDirectors.
Wecontributedapproximately$18.
8million,$11.
6million,and$21.
7milliontotheplaninfiscal2002,2001,and2000,respectively.
93AdobeIncentivePartnersInMarch1997,aspartofourventureinvestingprogram,weestablishedaninternallimitedpartnership,AdobeIncentivePartners,L.
P.
("AIP"),whichallowedcertainofAdobe'sexecutiveofficerstoparticipateincashorstockdistributionsfromAdobe'sventureinvestments.
InNovember2002,thepartnershipwasliquidated.
Immediatelypriortotheliquidation,assetsheldbyAIPincludedAdobe'sentireinterestsinAdobeVenturesL.
P.
andAdobeVenturesII,L.
P.
andcertainequitysecuritiesofprivately-heldcompanies.
AdobewasboththegeneralpartnerandalimitedpartnerofAIP.
OtherlimitedpartnerswereexecutiveofficersandformerexecutiveofficersofAdobewhowereinvolvedinAdobe'sventureinvestingactivitiesandwhoseparticipationwasdeemedcriticaltothesuccessoftheprogram.
Nolimitedpartnershipinterestsweregrantedinfiscal2002,2001,or2000.
Adobe'sClassAseniorlimitedpartnershipinterestinAIPincludedbothaliquidationpreferenceandapreferenceinrecoveryofthecostbasisofeachspecificinvestment.
Theexecutives'ClassBjuniorlimitedpartnershipinterestqualifiedforpartnershipdistributionsonlyafter(a)Adobehadfullyrecoveredthecostbasisofitsinvestmentinthespecificinvesteecompanyforwhichadistributionwasmade;and(b)theparticipatingexecutivehadvestedinhisorherdistributionrights.
Thedistributionrightsgenerallyvestedonamonthlybasisoverthreeyears,andwere25%vestedafteroneyear,50%vestedaftertwoyearsandfullyvestedattheendofthreeyears.
AsofJune30,2000,allexistingpartnershipinterestswerefullyvestedorceasedvesting.
ThelimitedpartnershipinvestmentswererestrictedtoinvestmentsinAdobeVenturesorincompaniesthatwereprivateatthetimeoftheestablishmentofAIP,orwhentheinvestmentwasmade,whicheverwaslater.
Infiscal2002,theparticipatingofficersreceivedcashdistributionswithanaggregatefairvalueof$0.
6million,includinga$0.
3milliondistributionrelatedtothepartnershipliquidation.
AtNovember29,2002,duetothepartnershipliquidation,therewasnominorityinterestheldbytheparticipatingofficers.
Note11.
EmployeeandDirectorStockPlansEquityCompensationAsofNovember29,2002,ourequitycompensationplansconsistofthe1984StockOptionPlan,asamended,theAldus1984RestatedStockOptionPlan,the1994StockOptionPlan(the"1994Plan"),andthe1999EquityIncentivePlan(the"1999Plan"),formerlycalledthe1999NonstatutoryStockOptionPlan(collectively,the"OptionPlans")foremployees.
TheOptionPlansprovideforthegrantingofstockoptionstoemployeesandofficersatthefairmarketvalueofourcommonstockonthegrantdate.
Additionally,the1999Planprovidesforawardsintheformofstockappreciationrights,stockpurchaserights,stockbonuses,performancesharesandperformanceunits,althoughnoawardsofthesetypeshavebeenmadefromthe1999Plantodate.
Currently,wegrantoptionsfromthe1994Planandthe1999Plan.
InitialoptionsandsubsequentoptionsgrantedundertheOptionPlans,exceptforthe1984RestatedStockOptionPlan,generallyvest25%afterthefirstyearandratablythereaftersuchthat50%and100%arevestedafterthesecondandthirdyear,respectively,althoughsomesubsequentoptionsgrantedundertheOptionPlansvestratablyovertheentiretermsuchthat50%and100%arevestedafterthesecondandthirdyear,respectively.
Optionsgrantedunderthe1984RestatedStockOptionPlanhaveafiveyearvestingperiodand20%vestafterthefirstyearandmonthlythereafter;allsuchoptionsarefullyvestedorhaveceasedvesting.
OutstandingoptiontermsundertheOptionPlansrangefromfivetotenyears.
Optiontermsunderthe1999Planaregenerallyeightyearsunderexistingoptions.
Alimitednumberoftheoptionsgrantedinfiscal2000underthe1999PlanhadavestingaccelerationfeaturesothattheywouldvestinfullinNovember2000ifcertainmilestonesweremetbyAdobe(themilestonesweremet).
ThoseoptionsexpireinSeptember2003.
AsofNovember29,2002,approximately57.
0millionshareswerereservedforissuanceuponexerciseofoutstandingoptionsundertheOptionPlansandapproximately4.
6millionshareswereavailableforgrantundertheOptionPlans.
TheCompany's1994PlanexpiresonDecember17,2003.
TheCompany's1999Planwillcontinueuntiltheearlierof(i)terminationbytheBoardor(ii)thedateonwhichallofthesharesavailableforissuanceunderthe1999Planhavebeenissuedandrestrictionsonissuedshareshavelapsed.
NeithertheNasdaqcurrentlistingstandardsnorfederallawhasrequiredstockholderapprovalofthis1999EquityIncentivePlan,andaccordinglyithasnotbeenapprovedbyourstockholders.
94AsofNovember29,2002,wehadreserved3.
3millionsharesofcommonstockforissuanceunderour1996OutsideDirectorsStockOptionPlan,asamended(the"DirectorsPlan").
TheDirectorsPlanprovidesforthegrantingofnonqualifiedstockoptionstononemployeedirectors.
Optiongrantsarelimitedto40,000sharesperpersonineachfiscalyear,exceptforanewnon-employeedirector,whoisgranted60,000sharesuponelectionasadirector.
Optionshaveaten-yeartermandareexercisableandvestoverthreeyears:25%onthedayprecedingeachofAdobe'snexttwoannualmeetingsofstockholdersand50%onthedayprecedingAdobe'sthirdannualmeetingofstockholdersafterthegrantoftheoption.
Theexercisepriceoftheoptionsthatareissuedisequaltothefairmarketvalueofourcommonstockonthedateofgrant.
Infiscal2002,wegrantedoptionsforanaggregateof240,000shareswithanexercisepriceof$39.
04toexistingdirectorsandanoptionfor60,000sharestoanewdirectorwithanexercisepriceof$33.
00.
Infiscal2001,wegrantedoptionsforanaggregateof200,000shareswithanexercisepriceof$41.
06toexistingdirectors.
Infiscal2000,wegrantedoptionsforanaggregateof160,000shareswithanexercisepriceof$61.
72toexistingdirectorsandanoptionfor60,000sharestoanewdirectorwithanexercisepriceof$78.
88.
AsofNovember29,2002,approximately0.
8millionshareswerereservedforissuanceuponexerciseofoutstandingoptionsandapproximately1.
0millionshareswereavailableforgrantundertheDirectorsPlan.
TheDirectorsPlanwillcontinueuntiltheearlierof(i)terminationbytheBoardor(ii)thedateonwhichallofthesharesavailableforissuanceundertheplanhavebeenissuedandrestrictionsonissuedshareshavelapsed.
Stockoptionactivityforfiscal2002,2001,and2000ispresentedbelow:YearsEndedNovember29,2002November30,2001December1,2000NumberofOptionsOutstandingWeightedAverageExercisePriceNumberofOptionsOutstandingWeightedAverageExercisePriceNumberofOptionsOutstandingWeightedAverageExercisePriceOutstanding,beginningofyear.
.
.
54,284,317$36.
6645,017,400$38.
2638,149,038$18.
56Granted11,973,68028.
7719,177,31528.
3819,669,37560.
90Exercised3,688,534)15.
99(4,826,823)12.
55(8,724,580)11.
17Canceled4,722,413)45.
20(5,083,575)44.
89(4,076,433)21.
15Outstanding,endofyear.
57,847,05035.
6454,284,31736.
6645,017,40038.
26Exercisable,endofyear.
26,402,23935.
6520,844,56729.
2711,478,69318.
53Weightedaveragefairvalueofoptionsgrantedduringtheyear.
13.
49$15.
20$29.
89InformationregardingthestockoptionsoutstandingatNovember29,2002issummarizedbelow:OptionsOutstandingOptionsExercisableRangeofExercisePricesNumberOutstandingWeightedAverageRemainingContractualLifeWeightedAverageExercisePriceNumberExercisableWeightedAverageExercisePrice$3.
38—$4.
6912,5540.
59years$3.
6912,514$3.
69$5.
22—$7.
75537,6811.
54years6.
89521,8816.
89$7.
91—$8.
34583,2413.
41years8.
24579,6418.
24$8.
45.
4,384,6103.
49years8.
454,345,9108.
45$9.
66—$14.
09644,5584.
37years11.
61642,10511.
61$14.
86—$22.
191,019,1816.
40years18.
31452,36618.
01$24.
11—$26.
47……….
8,948,4297.
87years26.
40199,59624.
78$26.
95…………………6,703,2506.
91years26.
95698,19626.
95$27.
00—$27.
698,190,2326.
26years27.
672,731,46727.
68$27.
94—$41.
7811,901,8455.
62years36.
207,912,30635.
58$44.
05—$65.
8113,722,5635.
56years60.
227,791,80759.
20$66.
63—$83.
191,198,9065.
87years74.
57514,45074.
5357,847,0505.
98years$26,402,239$35.
6595PerformanceandRestrictedStockThe1994PerformanceandRestrictedStockPlan("theRestrictedStockPlan")providesforthegrantingofrestrictedstockand/orperformanceawardstoofficersandkeyemployees.
AsofNovember29,2002,wehadreserved8.
0millionsharesofourcommonstockforissuanceunderthePlan.
RestrictedsharesissuedundertheRestrictedStockPlangenerallyvestannuallyovertwotothreeyearsbutareconsideredoutstandingatthetimeofgrant,asthestockholdersareentitledtodividendsandvotingrights.
AsofNovember29,2002,82,714shareswereoutstandingandnotyetvested.
Infiscal2002,2001,and2000,wegranted9,321;56,146;and453,885sharesofrestrictedstock,respectively,andtheweightedaveragefairvalueoftheshareswas$27.
88,$39.
44,and$58.
66,respectively.
Additionally,wecharged$6.
8million,$18.
0million,and$16.
5milliontoexpenseassociatedwithrestrictedstockinfiscal2002,2001,and2000,respectively.
AsofNovember29,2002,approximately2.
8millionshareswereavailableforgrantunderthisPlan.
PerformanceawardsissuedundertheRestrictedStockPlanentitletherecipienttoreceive,atourdiscretion,sharesorcashuponcompletionoftheperformanceperiodsubjecttoattainingidentifiedperformancegoals.
Performanceawardsaregenerallymeasuredoverathree-yearperiodandcliffvestattheendofthethree-yearperiod.
Weaccruetheprojectedvalueoftheseawardsandchargethisamounttoexpenseoverthethree-yearperformanceperiod.
Wedidnotgrantperformanceawardsinfiscal2002,2001or2000.
AsofNovember29,2002andNovember30,2001,therewerenoperformanceawardsoutstanding.
The1999Planalsoprovidesforthegrantingofrestrictedstockand/orperformanceawardstoemployees,althoughnoawardsofthistypehavebeenmadeunderthe1999Plantodate.
TheRestrictedStockPlanwillcontinueuntiltheearlierof(i)terminationbytheBoardor(ii)thedateonwhichallofthesharesavailableforissuanceundertheplanhavebeenissuedandrestrictionsonissuedshareshavelapsed.
EmployeeStockPurchasePlanOur1997EmployeeStockPurchasePlan(the"ESPP")allowseligibleemployeeparticipantstopurchasesharesofourcommonstockatadiscountthroughpayrolldeductions.
ForofferingscommencingbeforeSeptember2000,theESPPconsistedoftwelve-monthofferingswithtwosix-monthpurchaseperiodsineachofferingperiod;inSeptember2000,theESPPwasamendedtoincreasetheofferingperiodsforofferingscommencingafterthatdatetotwenty-four-monthofferingperiodswithfoursix-monthpurchaseperiodsineachofferingperiod.
AsofJanuary1,2001,allemployeesparticipatingintheESPPhavetwenty-four-monthofferingperiods.
Employeespurchasesharesineachpurchaseperiodat85%ofthemarketvalueofourcommonstockateitherthebeginningoftheofferingperiodortheendofthepurchaseperiod,whicheverpriceislower.
AsofNovember29,2002,wehadreserved38.
0millionsharesofourcommonstockforissuanceundertheESPP,andapproximately15.
4millionsharesremainavailableforfutureissuance.
Theweightedaveragefairvalueofthepurchaserightsgrantedinfiscal2002,2001,and2000were$11.
59,$22.
91,and$21.
34,respectively.
TheESPPwillcontinueuntiltheearlierof(i)terminationbytheBoardor(ii)thedateonwhichallofthesharesavailableforissuanceundertheplanhavebeenissued.
CashIncentiveAwardsWegrantCashIncentiveAwards("CIAs"),aformofphantomstock,todesignatedkeyemployeestorewardthembasedontheircontributionstoaproject.
ThecashvalueoftheCIAisstructuredtomirrorourRestrictedStockPlan.
TheCIAs,whichwegranttodesignatedemployees,generallyvestannuallyoverathree-yearperiod.
Uponeachvestdate,theemployeeispaidthemarketvalueofthestockonthedateofvestmultipliedbythenumberofvestedshares.
Wechargedapproximately$0.
4million,$(2.
5)million,and$12.
8milliontoCIAexpenseforsharesvestedinfiscal2002,2001and2000,respectively.
AllexistingCIAswerefullyvestedinfiscal2002,andwecurrentlydonotintendtograntCIAsinthefuture.
96StockAppreciationRightsInfiscal2000and1999,wegrantedStockAppreciationRights("SARs"),aformofphantomstock,todesignatedkeyemployeesbasedontheirperformance.
Additionally,wegrantSARstoemployeesincertaincountriesoutsideoftheU.
S.
inlieuofstockoptions,generallywithsimilarvestingschedulestoouroptionvestingschedule;theseSARsgenerallyexpireeightyearsafterthegrantdate.
The1999Planalsoprovidesforthegrantingofstockappreciationrightstoemployees,althoughnoawardsofthistypehavebeenmadeunderthe1999Plantodate.
Theperformance-basedSARsgenerallyvestfouryearsfromthedateofgrantbutcontainanaccelerationfeaturethatallowsforatwo-yearvestingperiodbasedonAdobeachievingpredeterminedperformancegoals.
Theseperformance-basedSARsexpirefiveyearsfromthedateofgrant.
UnderourSARplan,designatedemployeesareawardedrightsthatareequaltooneshareofAdobe'scommonstockforeachrightawardedwithanexercisepricebasedonthefairmarketvalueonthegrantdate.
Whentheawardvests,employeesgenerallyhavetherighttoexercisetheawardandreceivethethen-currentvalueincashoftheappreciationfromtheexercisepriceoftheexercisednumberofrightsofourcommonstock.
WedidnotawardanySARsinfiscal2002and2001.
Weawarded800rightsinfiscal2000withanexercisepriceof$50.
19.
Wechargedapproximately$0.
009million,$(0.
5)million,and$23.
2milliontoexpenseinfiscal2002,2001and2000,respectively.
WecurrentlydonotintendtograntSARsinthefuture,excepttocertainemployeesoutsideoftheU.
S.
inlieuofstockoptions.
ProFormaFairValueDisclosuresWeaccountforourfixedstockoptionplansandouremployeestockpurchaseplanusingtheintrinsicvaluemethod.
ThefollowingtablesetsforththeproformaamountsofnetincomeandnetincomepersharethatwouldhaveresultedifweaccountedforouremployeestockplansunderthefairvaluerecognitionprovisionsofStatementofFinancialAccountingStandardsNo.
123,"AccountingforStock-BasedCompensation.
"YearsEndedNovember29,2002November30,2001December1,2000Netincome:Asreported.
191,399$205,644$287,808Proforma.
6,646$30,225$196,153Netincomepershare:Asreported:Basic.
0.
81$0.
86$1.
21Diluted0.
79$0.
83$1.
13Proforma:Basic0.
03$0.
13$0.
82Diluted0.
03$0.
12$0.
77Forpurposesofcomputingproformanetincome,weestimatethefairvalueofeachoptiongrant,restrictedstockgrant,andEmployeeStockPurchasePlanpurchaserightonthedateofgrantusingtheBlack-Scholesoptionpricingmodel.
Theassumptionsusedtovaluetheoptiongrantsandpurchaserightsarestatedasfollows:YearsEndedNovember29,2002November30,2001December1,2000Expectedlifeofoptions.
3years3years3yearsExpectedlifeofrestrictedstock3years3years3yearsExpectedlifeofpurchaserights1.
24years1.
23years0.
75yearsVolatility.
69%80%68%Risk-freeinterestrate.
2.
1—4.
1%2.
9—5.
3%5.
7—6.
8%Dividendyield0.
125%0.
125%0.
125%Optionsandrestrictedstockgrantsvestoverseveralyears,andnewoptionandrestrictedstockgrantsaregenerallymadeeachyear.
Becauseofthis,theproformaamountsshownabovemaynotberepresentativeoftheproformaeffectonreportednetincomeinfutureyears.
97Note12.
Stockholders'EquityStockholderRightsPlanOurStockholderRightsPlanisintendedtoprotectstockholdersfromunfairorcoercivetakeoverpractices.
Inaccordancewiththisplan,theBoardofDirectorsdeclaredadividenddistributionofonecommonstockpurchaserightoneachoutstandingshareofourcommonstockheldasofJuly24,1990andoneachshareofcommonstockissuedbyAdobethereafter.
InJuly2000,theStockholderRightsPlanwasamendedtoextenditfortenyearssothateachrightentitlestheholdertopurchaseoneunitofSeriesAPreferredStock,whichisequalto1/1000shareofSeriesAPreferredStock,parvalue$0.
0001pershare,atapriceof$700perunit.
Asadjustedforour2000stocksplitintheformofadividend,eachshareofcommonstocknowentitlestheholdertoone-halfofsuchapurchaseright.
EachwholerightstillentitlestheregisteredholdertopurchasefromAdobeaunitofpreferredstockat$700.
Therightsbecomeexercisableincertaincircumstances,includinguponanentity'sacquiringorannouncingtheintentiontoacquirebeneficialownershipof15%ormoreofourcommonstockwithouttheapprovaloftheBoardofDirectorsoruponourbeingacquiredbyanypersoninamergerorbusinesscombinationtransaction.
TherightsareredeemablebyAdobepriortoexerciseat$0.
01perrightandexpireonJuly23,2010.
StockRepurchaseProgramI–On-goingDilutionCoverageTofacilitateourstockrepurchaseprogramdesignedtominimizedilutionfromstockissuanceprimarilyfromemployeestockplans,wesoldputwarrantstoindependentthirdpartiesinfiscal2002,2001,and2000.
EachputwarrantentitlestheholdertoselloneshareofAdobe'scommonstocktoAdobeataspecifiedpriceforcashorstockatAdobe'soption.
Approximately7.
5million,5.
6million,and7.
0millionputwarrantswerewritteninfiscal2002,2001,and2000,respectively.
AtNovember29,2002,approximately1.
9millionputwarrantswereoutstandingthatexpirethroughDecember2002,withanaverageexercisepriceof$26.
71pershare,resultinginatotalpotentialcashoutlayofapproximately$50.
5millioninfiscal2003ifallputswarrantsareexercised.
Inaddition,infiscal2002,2001,and2000,wepurchasedcalloptionsfromindependentthirdpartiesthatentitledustobuy4.
9million,3.
9million,and4.
2millionshares,respectively,ofourcommonstockoncertaindatesatspecifiedprices.
AtNovember29,2002,approximately1.
2millioncalloptionswereoutstandingthatexpireonvariousdatesthroughDecember2002withanaverageexercisepriceof$28.
08pershare,resultinginatotalpotentialcashoutlayofapproximately$34.
1millioninfiscal2003ifallcallsoptionsareexercised.
Ourputandcalloptioncontractsprovidethat,atouroption,wecansettlewithphysicaldeliveryornetsharesequaltothedifferencebetweentheexercisepriceandthevalueoftheoptionasdeterminedbythecontract.
Werepurchasedapproximately8.
6million,5.
9million,and7.
2millionsharesinfiscal2002,2001,and2000,respectively,atacostof$255.
0million,$319.
9million,and$255.
5million,respectively.
SubsequenttoNovember29,2002,werepurchased1.
6millionsharesatacostof$45.
1millionthroughtheexerciseofoutstandingputwarrantsandcalloptionsunderthisplan.
AsofDecember18,2002,noputwarrantsorcalloptionsremainedoutstandingunderthisplan.
Theauthorizationtorepurchasesharestocoveron-goingdilutionisnotsubjecttoexpiration.
However,thisrepurchaseprogramislimitedtocoveringnetdilutionfromstockissuances.
AsofNovember29,2002,9.
6millionsharesremainedauthorizedforrepurchase,basedonnetstockissuanceslessrepurchasesunderthisplan.
StockRepurchaseProgramII–AdditionalAuthorizationaboveDilutionCoverageInApril1999,theBoardauthorizeda5.
0millionsharerepurchaseprogram,whichallowedustopurchasesharesintheopenmarketandenterintocontractstorepurchasesharesduringfuturequartersbysellingputwarrantsandbuyingcalloptions.
Duringfiscal2001,approximately4.
9millionputwarrantswerewrittenand3.
5millioncalloptionswerepurchasedatpricesrangingfrom$32.
60to$39.
58.
AsofNovember30,2001,therewerenoputwarrantsoroptionsoutstandinginthisprogram.
Duringfiscal2001,werepurchasedapproximately4.
7millionsharesatacostof$165.
2million.
Wedidnotrepurchaseanysharesunderthisprograminfiscal2000.
Thisprogramexpiredinfiscal2001.
98InMarch2001,subjecttocertainbusinessandmarketconditions,ourBoardofDirectorsauthorizedthepurchaseofuptoanadditional5.
0millionsharesofourcommonstockoveratwo-yearperiod.
Duringfiscalyear2002,approximately3.
1millionputwarrantswerewrittenandapproximately2.
1millioncalloptionswerepurchasedunderthis5.
0millionsharerepurchaseprogram.
AsofNovember29,2002,underourMarch20015.
0millionshareprogram,approximately3.
0millionputwarrantswereoutstandingthatexpirethroughDecember2002withanaverageexercisepriceof$25.
20pershare.
Inaddition,asofNovember29,2002,approximately2.
0millioncalloptionswereoutstandingthatexpireatvariousdatesthroughDecember2002withanaveragepriceof$27.
23pershare.
Ourputandcalloptioncontractsprovidethat,atouroption,wecansettlewithphysicaldeliveryornetsharesequaltothedifferencebetweentheexercisepriceandthevalueoftheoptionasdeterminedbythecontract.
Infiscal2002,werepurchasedapproximately2.
0millionsharesatacostof$38.
2millionunderourMarch20015.
0millionsharerepurchaseprogram.
Wedidnotmakeanyrepurchasesunderthisplaninfiscal2001.
DuringDecember2002,alloutstandingputwarrantsandcalloptionsundertheMarch20015.
0millionsharerepurchaseprogramexpiredwithoutanycosttoAdobeandasofDecember20,2002,therewerenoputwarrantsorcalloptionsoutstanding.
AsofDecember20,2002,authorizationtorepurchase3.
0millionsharesremainedundertheplanuntilitexpiresinMarch2003.
OnSeptember25,2002,subjecttocertainbusinessandmarketconditions,ourBoardofDirectorsauthorizedthepurchaseofuptoanadditional5.
0millionsharesofourcommonstockoverathree-yearperiod.
Wehavenotmadeanypurchasesunderthis5.
0millionsharerepurchaseprogram.
ThisplanwillexpireinSeptember2005.
ThetablesbelowrepresentourauthorizedstockrepurchaseplansandsummaryofstockrepurchasesasofNovember29,2002.
AuthorizedStockRepurchasePlansasofNovember29,2002BoardApprovalExpirationAuthorizedRepurchasesAuthorizationPutOptionsRemainingDateDateSharesToDateExpiredOutstandingAuthorizationDecember1997N/AOngoingdilution44,550N/A1,8909,578(1)April1999April20015,0004,687313——March2001March20035,000——2,986—September2002September20055,000———5,00099SummaryofStockRepurchasesforfiscalyears2002,2001,and2000asofNovember29,2002BoardApprovalRepurchasesDateUnderthePlan2002Average2001Average2000AverageDecember1997.
Fromemployees(2)83$35.
55733$42.
01164$60.
98Openmarket——45235.
64Optionexercises8,51729.
604,72657.
787,02034.
96April1999.
OpenmarketOptionexercises——4,68735.
24——March2001.
Openmarket1,89918.
58————Optionexercises11628.
58————September2002.
OpenmarketOptionexercisesTotalshares10,615$27.
6310,598$45.
777,184$35.
56Totalcost$293,241$485,115$255,456(1)Theremainingauthorizationfortheongoingstockrepurchaseplanisdeterminedbysubtractingrepurchasesfromallstockissuances,netofanycanceledshares,beginninginthefirstquarteroffiscal1998.
(2)Therepurchasesfromemployeesrepresentsharescanceledwhensurrenderedinlieuofcashpaymentsfortheoptionexercisepriceorwithholdingtaxesdue.
Note13.
NetIncomePerShareBasicnetincomepershareiscomputedusingtheweightedaveragenumberofcommonsharesoutstandingfortheperiod,excludingunvestedrestrictedstock.
Dilutednetincomepershareisbasedupontheweightedaveragecommonsharesoutstandingfortheperiodplusdilutivecommonequivalentshares,includingunvestedrestrictedcommonstock,stockoptionsusingthetreasurystockmethod,andputwarrantsusingthereversetreasurystockmethod.
YearsEndedNovember29,2002November30,2001December1,2000(inthousandsexceptpersharedata)Netincome.
191,399$205,644$287,808Sharesusedtocomputebasicnetincomepershare(weightedaveragesharesoutstandingduringtheperiod,excludingunvestedrestrictedstock)236,834238,461238,292Dilutivecommonequivalentshares:Unvestedrestrictedstock83318930Stockoptions.
6,13210,36616,539Putwarrants.
70—13Sharesusedtocomputedilutednetincomepershare243,119249,145255,774Basicnetincomepershare0.
81$0.
86$1.
21Dilutednetincomepershare.
0.
79$0.
83$1.
13FortheyearsendedNovember29,2002,November30,2001,andDecember1,2000,optionstopurchaseapproximately26.
5million,17.
7million,and12.
1millionshares,respectively,ofcommonstockwithexercisepricesgreaterthantheaveragefairmarketvalueofourstockfortheperiodof$30.
44,$39.
57,and$56.
63,respectively,werenotincludedinthecalculationbecausetheeffectwouldhavebeenantidilutive.
100Note14.
CommitmentsandContingenciesLeaseCommitmentsWeleasecertainofourfacilitiesandsomeofourequipmentundernoncancelableoperatingleasearrangementsthatexpireatvariousdatesthrough2091.
Rentexpense,netofsubleaseincome,fortheseleasesaggregated$26.
6million,$22.
0million,and$25.
6millionduringfiscal2002,2001,and2000,respectively.
AsofNovember29,2002,futureminimumleasepaymentsundernoncancelableoperatingleases,netofsubleaseincome,andfutureminimumsubleaseincomeundernoncancelablesubleasesareasfollows:YearFutureminimumleasepaymentsFutureminimumsubleaseincome(inmillions)(inmillions)2003$19.
5$6.
82004$17.
4$6.
92005$12.
9$6.
82006$10.
9$5.
52007$7.
9$3.
12008andafter$34.
7$3.
4InSeptember2001,weenteredintoarealestatedevelopmentagreementfortheconstructionofanadditionalofficebuildingforourcorporateheadquartersindowntownSanJose,California.
Undertheagreement,thelessorwillfinanceupto$117.
0millionoveratwo-yearperiod,towardtheconstructionandassociatedcostsofthebuilding.
Aspartoftheagreement,weenteredintoafive-yearleasebeginninguponcompletionofthebuilding.
Wehavetheoptiontopurchasethebuildingatanytimeduringthetermforanamountequaltotheleasebalance.
Theagreementandleasearesubjecttostandardcovenantsincludingliquidity,leverageandprofitabilityratiosthatarereportedtothelessorquarterly.
AsofNovember29,2002,wewereincompliancewithallcovenants.
Inthecaseofadefault,thelessormayterminateallremainingcommitments(ifanyremain)andtheymaydemandwepurchasethebuildingforanamountequaltothecurrentleasebalance,orrequirethatweremarketorrelinquishthebuilding.
TheagreementqualifiesforoperatingleaseaccountingtreatmentunderStatementofFinancialAccountingStandardsNo.
13("SFASNo.
13"),"AccountingforLeases,"and,assuch,thebuildingandtherelatedobligationarenotincludedonourbalancesheet,buttheleasepaymentsarereflectedinthescheduleoffutureminimumleasepayments.
Attheendoftheleaseterm,wecaneitherpurchasethebuildingfortheleasebalance,whichwillbeapproximately$117.
0million,remarket,orrelinquishthebuilding.
Ifwechoosetoremarketorarerequiredtodosouponrelinquishingthebuilding,weareboundtoarrangethesaleofthebuildingtoanunrelatedpartyandwillberequiredtopaythelessoranyshortfallbetweenthenetremarketingproceedsandtheleasebalance,uptothemaximumrecourseamountof$103.
0million.
InAugust1999,Adobeenteredintoafive-yearleaseagreementforourcorporateheadquartersofficebuildingsinSanJose,California.
Undertheagreement,wehavetheoptiontopurchasethebuildingsatanytimeduringtheleasetermfortheleasebalance,whichisapproximately$142.
5million.
Theleaseissubjecttostandardcovenantsincludingliquidity,leverageandprofitabilityratiosthatarereportedtothelessorquarterly.
AsofNovember29,2002,wewereincompliancewithallcovenants.
Inthecaseofadefaultthelessormaydemandwepurchasethebuildingforanamountequaltotheleasebalance,orrequirethatweremarketorrelinquishthebuilding.
TheagreementqualifiesforoperatingleaseaccountingtreatmentunderSFASNo.
13,and,assuch,thebuildingandtherelatedobligationarenotincludedonourbalancesheet,buttheleasepaymentsarereflectedinthescheduleoffutureminimumleasepayments.
Attheendoftheleaseterm,wecaneitherpurchasethebuildingfortheleasebalance,remarket,orrelinquishthebuilding.
Ifwechoosetoremarketorarerequiredtodosouponrelinquishingthebuilding,weareboundtoarrangethesaleofthebuildingtoanunrelatedpartyandwillberequiredtopaythelessoranyshortfallbetweenthenetremarketingproceedsandtheleasebalance,uptothemaximumrecourseamountof$132.
6million.
101LineofCreditInAugust1999,Adobeenteredintoanunsecuredrevolvingcreditfacilityof$100.
0millionwithagroupofbanks,forgeneralcorporatepurposes,subjecttocertainfinancialcovenants.
ThefacilityexpiredinAugust2002andweelectednottorenewthefacility.
RoyaltiesWehavecertainroyaltycommitmentsassociatedwiththeshipmentandlicensingofcertainproducts.
Royaltyexpenseisgenerallybasedonadollaramountperunitshippedorapercentageoftheunderlyingrevenue.
Royaltyexpense,whichwasrecordedunderourcostofproductsrevenueonourconsolidatedstatementsofincome,wasapproximately$14.
4million,$14.
1million,and$20.
8millioninfiscal2002,2001,and2000,respectively.
AdobeVenturesWehavecommitmentstotheAdobeVenturelimitedpartnerships.
ThefollowingtableshowsthecapitalcommitmentsandthecapitalcontributedasofNovember29,2002:CapitalCommitmentCapitalContributedAdobeVenturesL.
P.
$40,000$40,476AdobeVenturesII,L.
P.
$40,000$37,541AdobeVenturesIII,L.
P.
$60,000$57,353AdobeVenturesIV,L.
P.
$100,000$35,418ThecapitalcommitmentistheamountthatAdobehasagreedtocontributetothePartnership.
ThecapitalcommitmentamountiscontributedoverthetermofeachPartnership,whichistenyears.
Wecancontributemorethanthecapitalcommitment,atourdiscretion.
Wecanceasefundingatanytimeaftertheearlierof:a)twoyearsaftertheeffectivedateofthePartnershiporb)thedateonwhichtheCompanyhasmadecapitalcontributionstothePartnershipinanamountinexcessof$10.
0million,$10.
0million,$20.
0million,and$33.
0millionforAdobeVenturesL.
P.
,AdobeVenturesII,L.
P.
,AdobeVenturesIII,L.
P.
,andAdobeVenturesIV,L.
P.
,respectively.
Inadditiontotheseventurepartnerships,wehavedirectinvestmentsinpublicandprivately-heldcompanies.
Intotal,asofNovember29,2002,wehaveinvested$213.
9millionthroughourventurepartnershipsanddirectinvestments.
AndasofNovember29,2002,netreturnswere$348.
7million,includingstockdividendstostockholdersandnetgainsinmarketvalueofinvestments.
LegalActionsOnSeptember3,2002,AdobefiledsuitintheU.
S.
DistrictCourt,NorthernDistrictofCalifornia("theCaliforniaAction"),againstInternationalTypefaceCorporation("ITC")andAgfaMonotypeCorporation("AMT"),companieswhichhavecommonownershipandmanagement,seekingadeclarationthat(a)Adobe'sdistributionoffontsoftware,whichgeneratesITCtypefaces,didnotbreachitscontractpursuanttowhichAdobelicensedcertainrightswithrespecttoITCtypefaces,and(b)AdobedidnotviolatetheDigitalMillenniumCopyrightAct("DMCA")withrespectto,orinduceorcontributetotheinfringementofcopyrightsin,ITC'sandAMT'sTrueTypefontsoftware.
AMThadpreviouslyassertedthatAdobehadcommittedsuchbreachofcontractandviolationoftheDMCA.
OnSeptember4,2002,AdobeinitiatedarbitrationproceedingsinLondon,England("theLondonArbitration")againstAMT,seekingadeclarationthatAdobe'sdistributionoffontsoftwarethatgeneratesAMTtypefacesdidnotbreachitscontractpursuanttowhichitlicensedcertainrightswithrespecttoAMTtypefaces.
AMThasmadeabreachofcontractclaiminresponsetoAdobe'sarbitrationdemandintheLondonArbitration,assertingthatAdobewrongfullygrantedand/orallowedthirdpartiesgreaterrightstodistributeandembedAMTfontsthanAdobewaslicensedtograntand/orallow.
IfAMTprevailsonitsbreachofcontractclaims,AMTmayhavetherighttoterminateAdobe'srighttodistributeanyofitsproductsthatthenstillcontainfontsoftwarethatgeneratesAMTtypefaces.
Adobeassertsthatitnegotiatedforandobtainedexpress,writtenlicensesfrombothAMTandITCapproximatelytenyearsagopermittingAdobetoallowenduserstoembedAMTandITCfontsinelectronicdocumentsfor"printandview"anddisputestheotherbreachofcontractclaims.
AdobealsoassertsthatAdobeAcrobat5.
0,whichAMTandITC102correctlyacknowledgehasbeensupercededbyversion5.
05,neitherviolatestheDMCAnorinducesorcontributestotheinfringementofcopyrightsinITC'sandAMT'sTrueTypefontsoftware.
OnSeptember5,2002,AMTandITCfiledsuitagainstAdobeintheU.
S.
DistrictCourt,EasternDistrictofIllinois("theIllinoisAction")againstAdobe,assertingonlythatAdobe'sdistributionofthesuperceded5.
0versionofAdobeAcrobatviolatedtheDMCA,asdescribedabove.
TheIllinoisActionseeksstatutorydamagesof$200-$2,500foreachcopyofAcrobat5.
0foundtoviolatetheDMCA,aclaimthatAdobedisputesasamatteroflawandfact.
TheIllinoisActionalsoseeksinjunctivereliefwithrespecttoAcrobat5.
0,althoughitspecificallyalleges,correctly,thatAdobenolongerdistributesAcrobat5.
0.
OnNovember13,2002,ITCfiledanothersuitagainstAdobeintheUnitedStatesDistrictCourtfortheEasternDistrictofIllinois("theSecondIllinoisAction"),thistimeassertingthatAdobebreacheditscontractwithITCandthatITC,andnotAdobe,ownsthecopyrightsinfontsoftwarecreatedbyAdobewhichgeneratesITCtypefaces.
AMTandITCmadeamotiontodismisstheCaliforniaaction,challengingjurisdictionandvenue.
ThatmotionwasgrantedbythecourtonDecember16,2002.
Assuch,theparties'respectiveclaimswillberesolvedintheotheractionsdescribedabove.
Theresultsofanylitigationareinherentlyuncertain,andAMTandITCmayassertotherclaims.
Adobecannotassurethatitwillbeabletosuccessfullydefenditselfagainstanyoftheactionsdescribedabove.
AMTandITCseekanunspecifiedaggregatedollaramountofdamages.
AfavorableoutcomeforAMTorITCintheseactionscouldhaveamaterialadverseeffectonAdobe'sbusiness,financialconditionandoperatingresults.
WestronglybelievethatallofAMT'sandITC'sclaimsarewithoutmerit,andwillvigorouslydefendagainsttheminadditiontopursuingourownclaimsasdescribedabove.
OnSeptember6,2002,PlaintiffFredB.
DufresnefiledsuitagainstAdobe,MicrosoftCorporation,Macromedia,Inc.
,andTrellixCorporationintheU.
S.
DistrictCourt,DistrictofMassachusetts,alleginginfringementofU.
S.
PatentNo.
5,835,712,entitled"Client-ServerSystemUsingEmbeddedHypertextTagsForApplicationAndDatabaseDevelopment.
"Theplaintiff'sComplaintassertsthat"Defendantshaveinfringed,andcontinuetoinfringeoneormoreclaimsofthe'712patentbymaking,using,sellingand/orofferingforsale,interalia,productssupportingMicrosoftActiveServerPagestechnology.
"Theplaintiffseeksunspecifiedcompensatorydamages,preliminaryandpermanentinjunctiverelief,treblingofdamagesfor"willfulinfringement,"andfeesandcosts.
Adobestronglydisagreeswiththeplaintiff'sclaimsandintendstovigorouslydefendagainstthisaction.
OnNovember18,2002,PlaintiffsShell&SlateSoftwareCorporationandBenWeissfiledacivilactionintheU.
S.
DistrictCourtinLosAngelesagainsttheCompanyallegingfalsedesignationoforigin,tradesecretmisappropriation,breachofcontract,andothercausesofaction.
TheclaimderivesfromthePlaintiffs'beliefthatthe"healingbrush"techniqueofAdobePhotoshopincorporatesPlaintiffs'tradesecrets.
Plaintiffsseekpreliminaryandpermanentinjunctiverelief,compensatory,treble,andpunitivedamages,andfeesandcosts.
Webelievethattheactionhasnomeritandintendtodefendvigorouslyagainstit.
FromtimetotimeAdobeisinvolvedinlawsuits,claims,investigationsandproceedings,inadditiontothoseidentifiedabove,consistingofintellectualproperty,commercial,employmentandothermatters,whichariseintheordinarycourseofbusiness.
InaccordancewithSFASNo.
5,Adobemakesaprovisionforaliabilitywhenitisbothprobablethataliabilityhasbeenincurredandtheamountofthelosscanbereasonablyestimated.
Theseprovisionsarereviewedatleastquarterlyandadjustedtoreflecttheimpactsofnegotiations,settlements,rulings,adviceoflegalcounsel,andotherinformationandeventspertainingtoaparticularcase.
Litigationisinherentlyunpredictable.
However,Adobebelievesthatithasvaliddefenseswithrespecttothelegalmatterspendingagainstit,aswellasadequateprovisionsforanyprobableandestimablelosses.
Itispossible,nevertheless,thatcashflowsorresultsofoperationscouldbeaffectedinanyparticularperiodbytheresolutionofoneormoreofthesecontingencies.
Note15.
RelatedPartyTransactionsDuringthefiscalyearendedNovember29,2002,wehadrelatedpartytransactionswithElectronicDataSystemsCorporation("EDS").
EDSisconsideredarelatedpartybecauseoneofitsexecutiveofficersjoinedtheAdobeBoardofDirectorsinDecember2001.
Duringfiscalyear2002,Adobepaidapproximately$6.
1milliontoEDSforservicesrelatedtoinformationsystemssupport(i.
e.
"helpdesk"supportservices),including,underthetermsofthecontract,aone-timeterminationfeepaidinconnectionwithourterminationofouragreementwithEDSeffectiveAugust2002.
103Note16.
FinancialInstrumentsFairValueofFinancialInstrumentsAsofNovember29,2002,ourcashequivalents,short-terminvestments,andmarketableequitysecurities,arecarriedatfairvalue,basedonquotedmarketpricesfortheseorsimilarinvestments.
Ourtotalcashequivalents,short-terminvestments,andmarketableequitysecuritieshadacostbasisof$589.
3millionandafairmarketvalueof$595.
8million.
Ourportfolioofmarketableequitysecuritiesincludedinourshort-terminvestmentshadacostbasisof$11.
1millionandafairmarketvalueof$14.
1million.
(Forfurtherinformation,seeNote3)OurportfolioofinvestmentsincludedinOtherAssetsatNovember29,2002,whichincludesourdirectinvestments,aswellasindirectinvestmentsthroughAdobeVentures,hadanestimatedfairmarketvalueof$35.
6million.
(Forfurtherinformation,seeNote6)ForeignCurrencyHedgingInstrumentsWetransactbusinessinvariousforeigncurrencies,primarilyincertainEuropeancountriesandJapan.
Accordingly,wearesubjecttoexposurefrommovementsinforeigncurrencyexchangerates.
Thisexposureisprimarilyrelatedtorevenuefromyen-denominatedlicensesinJapanandeuro-denominatedlicensesincertainEuropeancountries.
OurJapaneseoperatingexpensesareinyen,andourEuropeanoperatingexpensesareprimarilyineuro,whichmitigatesaportionoftheexposurerelatedtoyenandeurodenominatedlicenses.
Inaddition,wehedgefirmlycommittedtransactionsusingforwardcontracts.
Thesecontractsdosubjectustoriskofaccountinggainsandlosses;however,thegainsandlossesonthesecontractstypicallyoffsetorpartiallyoffsetgainsandlossesontheassets,liabilities,andtransactionsbeinghedged.
Wealsohedgeapercentageofforecastedinternationalrevenuewithforwardandpurchasedoptioncontracts.
Ourrevenuehedgingpolicyisdesignedtoreducethenegativeimpactonourforecastedrevenueduetoforeigncurrencyexchangeratemovements.
AsofNovember29,2002,allcontractsweresettoexpireatvarioustimesthroughJune2003.
Thebankcounterpartiesinthesecontractsexposeustocredit-relatedlossesintheeventoftheirnonperformance.
However,tomitigatethatriskweonlycontractwithhighqualitycounterpartieswithspecificminimumratingrequirements.
Inaddition,ourhedgingpolicyestablishesmaximumlimitsforeachcounterparty.
EconomicHedging–HedgesofForecastedTransactionsWeuseoptionandforwardforeignexchangecontractstohedgecertainoperational("cashflow")exposuresresultingfromchangesinforeigncurrencyexchangerates.
Theseforeignexchangecontracts,carriedatfairvalue,mayhaveadurationbetweenonetotwelvemonths.
SuchcashflowexposuresresultfromportionsofourforecastedrevenuesdenominatedincurrenciesotherthantheU.
S.
dollar("USD"),primarilytheJapaneseyenandtheeuro.
Weenterintotheseforeignexchangecontractstohedgeforecastedproductlicensingrevenueinthenormalcourseofbusiness,andaccordingly,theyarenotspeculativeinnature.
Werecordchangesintheintrinsicvalueofthesecashflowhedgesinaccumulatedothercomprehensiveincome(loss),untiltheforecastedtransactionoccurs.
Thetimevalueofpurchasedderivativeinstrumentsisdeemedtobeineffectiveandisrecordedinotherincomeoverthelifeofthecontract.
Whentheforecastedtransactionoccurs,wereclassifytherelatedgainorlossonthecashflowhedgetorevenue.
Intheeventtheunderlyingforecastedtransactiondoesnotoccur,oritbecomesprobablethatitwillnotoccur,wereclassifythegainorlossontherelatedcashflowhedgefromaccumulatedothercomprehensiveincome(loss)tointerestandotherincome(loss)ontheconsolidatedstatementofincomeatthattime.
ForthefiscalyearendedNovember29,2002,therewerenosuchnetgainsorlossesrecognizedinotherincomerelatingtohedgesofforecastedtransactionsthatdidnotoccur.
Thecriticaltermsofthecashflowhedginginstrumentsarethesameastheunderlyingforecastedtransactions.
Thechangesinfairvalueofthederivativesareintendedtooffsetchangesintheexpectedcashflowsfromtheforecastedtransactions.
Werecordanyineffectiveportionofthehedginginstrumentsinotherincomeontheconsolidatedstatementofincome.
104ThefollowingtabledepictstheactivityforthefiscalyearendedNovember29,2002andNovember30,2001.
Gain(loss)onHedgesofForecastedTransactions:BalanceSheetIncomeStatementAsofYearendedYearendedNovember29,2002November29,2002November30,2001OtherComprehensiveIncome(Loss)RevenueOtherIncome(Loss)RevenueOtherIncome(Loss)Realized–ClosedTransactions:Realizednetgain(loss)reclassifiedfromothercomprehensiveincome(loss)torevenue$(463)$$7,848$Realizednetlossfromthecostofpurchasedoptionsandgainsorlossesfromanyineffectiveportionofhedges(5,251)(4,786)RecognizedbutUnrealized–OpenTransactions:Unrealizednetlossremaininginothercomprehensiveincome(loss)759)Unrealizednetlossfromtimevaluedegradationandanyineffectiveportionofhedges…(29)(730)$(759)$(463)$(5,280)$7,848$(5,516)AsofNovember29,2002,$0.
8millioninothercomprehensiveincome(loss)representsthetotalintrinsicvaluelossofouroutstandingeconomichedgesonforecastedrevenue.
DuringthefiscalyearendedNovember29,2002,a$0.
5millionlosswasrecognizedinrevenuerelatingtohedgedtransactionsthatoccurred.
Thetotallossrecognizedinotherincome(loss)was$5.
3million,whichconsistedofa$5.
3millionrealizednetlossrelatingtothecostofpurchasedoptionsandthegainsorlossesrealizedonanyineffectiveportionofhedgesofforecastedtransactions.
Additionally,werecognizeda$0.
03millionunrealizednetlossfortheineffectiveportionofhedgesofforecastedtransactions,themajorityofwhichwasrelatedtothetimevaluedegradationofoutstandingpurchasedoptionsatNovember29,2002.
DuringthefiscalyearendedNovember30,2001,$7.
8millionwasrecognizedinrevenuerelatingtohedgedtransactionsthatoccurred.
Thetotallossrecognizedinotherincome(loss)was$5.
5million,whichconsistedofa$4.
8millionrealizednetlossrelatingtothecostofpurchasedoptionsandthegainsorlossesrealizedonanyineffectiveportionofhedgesofforecastedtransactions.
Additionally,werecognizeda$0.
7millionunrealizednetlossfortheineffectiveportionofhedgesofforecastedtransactions,themajorityofwhichwasrelatedtothetimevaluedegradationofoutstandingpurchasedoptionsatNovember30,2001.
BalanceSheetHedging-HedgingofForeignCurrencyAssetsandLiabilitiesWehedgecertainrecognizedforeigncurrencyassetsandliabilitieswithforwardforeignexchangecontractstoreducetheriskthatourearningsandcashflowswillbeadverselyaffectedbychangesinforeigncurrencyexchangerates.
Thesederivativeinstrumentshedgeassetsandliabilitiesthataredenominatedinforeigncurrenciesandarecarriedatfairvaluewithchangesinthefairvaluerecordedasotherincome(loss).
Thesederivativeinstrumentsdonotsubjectustomaterialbalancesheetriskduetoexchangeratemovementsbecausegainsandlossesonthesederivativesoffsetgainsandlossesontheassetsandliabilitiesbeinghedged.
AtNovember29,2002,theoutstandingbalancesheethedgingderivativeshadmaturitiesof90daysorless.
105NetGain(Loss)RecognizedinOtherIncomeRelatingtoBalanceSheetHedging:YearendedNovember29,2002YearendedNovember30,2001Gain(Loss)onforeigncurrencyassetsandliabilities:Realizednetgain(loss)recognizedinotherincome(loss)$6,500$(3,288)Unrealizednetgainrecognizedinotherincome(loss)2,5491099,049(3,179)Gainonhedgesofforeigncurrencyassetsandliabilities:Realizednetgain(loss)recognizedinotherincome(loss)(8,587)3,834Unrealizednetgain(loss)recognizedinotherincome(loss)444(622)(8,143)3,212Netgainrecognizedinotherincome$906$33InterestRateHedging-HedgingofInterestRateSensitiveObligationsWeenteredintointerestrateswapagreementstomanageourexposuretooperatingleaseobligationsthataretiedtoshort-terminterestrates(LIBOR).
Theswapsallowustoexchangevariableinterestratepaymentsforfixedinterestratepayments,therebysecuringafixedpaymentamountforaportionofthetotalobligationof$142.
5million.
AsofNovember29,2002,wehadenteredintointerestrateswapstohedgethefloatingcashflowpaymentsassociatedwith$121.
8millionofouroutstandingleaseobligations.
Insomecases,wehedgedaportionofourobligationwithtwoseparateswapagreements,acurrentswaptogetherwithaforwardswap.
Thesetwoswapscovertwosequentialtimeperiods.
AsofNovember29,2002,thetotalnotionalamountofinterestrateswapswas$196.
8million,whichincludes$75.
0millionofforwarddatedswaps.
Theswapsmatureatvariousdatesthroughthethirdquarterof2004,consistentwiththeexpirationoftheunderlyingfacilitylease.
Undertheswapagreements,theCompanywillreceiveavariableratebasedononemonthLIBORandpayfixedratesrangingfrom2.
80%to5.
14%.
TheseswapsaredesignatedascashflowhedgesunderSFASNo.
133becausetheyhedgeagainstchangesintheamountoffuturecashflows.
AsofNovember29,2002,a$2.
7millionunrealizedlosswasrecordedinaccumulatedothercomprehensiveincome(loss)asaresultofthedecreaseinfairmarketvalueoftheseinterestratehedges.
Therewasnorealizedgainorlossduetoineffectivenessofthehedges.
ConcentrationofRiskFinancialinstrumentsthatpotentiallysubjectustoconcentrationsofcreditriskareshort-terminvestments,primarilyfixed-incomesecurities,derivatives,hedgingforeigncurrencyandinterestraterisk,andaccountsreceivable.
Ourinvestmentportfolioconsistsofinvestment-gradesecuritiesdiversifiedamongsecuritytypes,industries,andissuers.
OurcashandinvestmentsareheldandmanagedbyrecognizedfinancialinstitutionsthatfollowAdobe'sinvestmentpolicy.
Ourpolicylimitstheamountofcreditexposuretoanyonesecurityissueorissuer,andwebelievenosignificantconcentrationofcreditriskexistswithrespecttotheseinvestments.
Wemitigateconcentrationofriskrelatedtoforeigncurrencyhedgesaswellasinterestratehedgesthroughapolicythatestablishescounterpartylimits.
Wealsohaveminimumratingrequirementsforallbankcounterparties.
CreditriskinreceivablesislimitedtoOEMpartners,dealersanddistributorsofhardwareandsoftwareproductstotheretailmarket,andtocustomerswherebywelicensesoftwaredirectly.
Managementbelievesthatanyriskoflossisreducedduetothediversityofourcustomersandgeographicsalesareas.
Acreditreviewiscompletedforournewdistributors,dealers,andOEMpartners.
Wealsoperformongoingcreditevaluationsofourcustomers'financialconditionandrequirelettersofcreditorotherguarantees,wheneverdeemednecessary.
Thecreditlimitgiventothecustomerisbasedonourriskassessmentoftheirabilitytopay,countryrisk,andotherfactorsandisnotcontingentontheresaleoftheproductoronthecollectionofpaymentsfromtheircustomers.
Ifwelicenseoursoftwaretoacustomerwherewehaveareasontobelievethecustomer'sabilitytopayisnotprobable,dueto106countryriskorcreditrisk,wewillnotrecognizetherevenue.
Wewillreverttorecognizingtherevenueonacashbasis,assumingallothercriteriaforrevenuerecognitionhasbeenmet.
FordiscussionofsignificantcustomersasofNovember29,2002,seeNote17.
Wedistributeourapplicationproductsprimarilythroughdistributors,resellers,retailers,and,increasingly,systemsintegratorsandVARs(collectivelyreferredtoas"distributors").
Asignificantamountofourrevenueforapplicationproductsisfromtwodistributors.
Inaddition,ourchannelprogramnowfocusesoureffortsonlargerdistributors,whichhasresultedinourdependenceonarelativelysmallnumberofdistributorssellingthroughalargeamountofourproducts.
Salesthroughthedistributionchannelresultinunstablepricingandsignificantproductreturns.
Ourdistributorssellourcompetitors'products;ifourdistributorsfavorourcompetiors'productsforanyreason,theymayfailtomarketourproductsaseffectivelyortodevoteresourcesnecessarytoprovideeffectivesalesandinthatcaseourresultswouldsuffer.
Additionally,oneofourgoalsistoincreaseourdirectdistributionofourproductstoendusersthroughouronlinestorelocatedonourwebsiteatwww.
adobe.
com.
Anysuchincreaseinourdirectrevenueeffortswillplaceusinincreasedcompetitionwithourchanneldistributorsandwithnewertypesofdistributionofourproductsbyonline,Internet-basedresellers.
WederiveasignificantportionofourOEMPostScriptandOtherlicensingrevenuefromasmallnumberofOEMpartners.
OurOEMpartnersonoccasionseektorenegotiatetheirroyaltyarrangements.
Weevaluatetheserequestsonacase-by-casebasis.
Ifanagreementisnotreached,acustomermaydecidetopursueotheroptions,whichcouldresultinlowerlicensingrevenueforus.
Note17.
IndustrySegment,GeographicInformation,andSignificantCustomersInthefirstquarteroffiscalyear2002,werealignedourbusinesssegmentstoreflectthewaywemanageourbusiness.
TheformerWebPublishingsegmentwasrenamedtotheGraphicssegmentandincludedourAdobeIllustratorproductinfiscal2002.
OurAdobeGoLiveandWebCollectionproducts,whichwereformerlybeingreportedintheWebPublishingsegment,werereportedintheCross-mediaPublishingsegmentinfiscal2002.
Ourfiscal2001and2000segmentdisclosureshavebeenrestatedforconsistentpresentationwithourfiscal2002disclosure.
Duringfiscal2002,2001,and2000,wehavefourreportablesegmentsthatofferdifferentproductlines:Graphics,Cross-mediaPublishing,ePaperSolutions,andOEMPostScriptandOther.
TheGraphicssegmentprovidesuserswithsoftwareforcreating,editingandenhancingdigitalimagesandphotographs,digitalvideo,animations,graphics,andillustrations.
TheCross-mediaPublishingsegmentprovidessoftwareforprofessionalpagelayout,professionalWebpagelayout,technicaldocumentpublishing,andbusinesspublishing.
TheePaperSolutionssegmentprovideselectronicdocumentdistributionsoftwarethatallowsuserstocreate,enhance,annotate,andsecurelysendAdobePDFfilesthatcanbeshared,viewed,navigated,andprintedexactlyasintendedbyanyoneonabroadrangeofhardwareandsoftwareplatforms.
Inaddition,therecentlyacquiredAcceliobusinessfocusingonelectronicformsolutionsisincludedinourePapersegment.
TheOEMPostScriptandOthersegmentincludesprintingtechnologytocreateandprintsimpleorvisuallyrichdocumentswithprecision.
Duringandpriortofiscal2000,weevaluatedourbusinessbasedonthecontributionmarginsofeachofourfoursegments.
Duringfiscalyear2001,ourexecutivemanagementteamchangedthewayitevaluatestheperformanceofourbusinessandrevisedtheirfocusonevaluatingthegrossmarginsofeachofoursegments.
Ourfiscal2000segmentdisclosureshavebeenrevisedheretoreflectthatchange.
Theaccountingpoliciesoftheoperatingsegmentsarethesameasthosedescribedinthesummaryofsignificantaccountingpolicies.
Wedonotidentifyorallocateourassetsbyoperatingsegments.
Assuch,segmentassetinformationisnotdisclosed.
107Thefollowingresultsarebrokenoutbyouroldoperatingsegmentsforfiscalyears2002,2001,and2000:GraphicsCross-mediaPublishingePaperSolutionsOEMPostScriptandOtherTotalFiscal2002Revenue.
503,000$260,197$312,544$89,047$1,164,788Costofrevenue36,67837,15524,6835,772104,288Grossprofit466,322$223,042$287,861$83,275$1,060,500Grossmargin.
93%86%92%94%91%Fiscal2001Revenue.
543,419$289,624$291,886$104,791$1,229,720Costofrevenue33,36627,02415,8355,22681,451Grossprofit510,053$262,600$276,051$99,565$1,148,269Grossmargin.
94%91%95%95%93%Fiscal2000Revenue.
602,101$325,162$207,628$131,487$1,266,378Costofrevenue36,40029,53912,4458,87187,255Grossprofit565,701$295,623$195,183$122,616$1,179,123Grossmargin.
94%91%94%93%93%Areconciliationofthetotalsreportedfortheoperatingsegmentstotheapplicablelineitemsintheconsolidatedfinancialstatementsforthefiscalyears2002,2001,and2000isasfollows:YearsEndedNovember29,2002November30,2001December1,2000Totalgrossprofitfromoperatingsegmentsabove1,060,500$1,148,269$1,179,123Totaloperatingexpenses(a)773,473769,812771,040Totaloperatingincome.
287,027378,457408,083Nonoperatingincome(loss)2,338)(71,526)35,656Incomebeforetaxes.
284,689$306,931$443,739(a)Totaloperatingexpensesincluderesearchanddevelopment,salesandmarketing,generalandadministrative,restructuringandothercharges,amortizationandimpairmentofgoodwillandpurchasedintangibles,andacquiredin-processresearchanddevelopmentexpenses.
108Beginninginthefirstquarteroffiscalyear2003,werealignedourbusinesssegmentstoreflecttherecentchangeinthewaywenowmanageourbusiness.
TheformerGraphicssegmenthasbeenrenamedtheDigitalImagingandVideosegment.
TheformerCross-mediaPublishingsegmenthasbeenrenamedtheCreativeProfessionalsegmentandincludestwoproductsthatwereformerlyincludedinourGraphicssegment,AdobeIllustratorandAdobeGraphicsServer(formerlyAlterCast).
TherewerenochangestoourePaperandOEMPostscriptandOthersegments.
Formoreinformationonournewsegments,pleaseseeItem1ofourbusinesssection.
Thefollowingresultsarebrokenoutbyournewoperatingsegmentsforfiscalyears2002,2001,and2000.
NewSegmentsDigitalImagingandVideoCreativeProfessionalePaperOEMPostScriptandOtherTotalFiscal2002Revenue.
411,929$351,268$312,544$89,047$1,164,788Costofrevenue30,07343,76124,6825,772104,288Grossprofit381,856$307,507$287,862$83,275$1,060,500Grossmargin.
93%88%92%94%91%Fiscal2001Revenue.
439,734$393,309$291,886$104,791$1,229,720Costofrevenue26,56333,82715,8355,22681,451Grossprofit413,171$359,482$276,051$99,565$1,148,269Grossmargin.
94%91%95%95%93%Fiscal2000Revenue.
476,713$450,550$207,628$131,487$1,266,378Costofrevenue27,73838,20112,4458,87187,255Grossprofit448,975$412,349$195,183$122,616$1,179,123Grossmargin.
94%92%94%93%93%Wecategorizeourgeographicinformationintothreemajormarketregions:theAmericas,EMEA,andAsia.
TheAmericasregionincludestheU.
S.
,Canada,andLatinAmerica.
TheEMEAregionincludesEurope,MiddleEast,andAfrica.
TheAsiaregionincludesJapanandtheAsianPacificcountries.
Revenueandlong-livedassetinformationbygeographicareasforeachoftheyearsinthethree-yearperiodendedNovember29,2002ispresentedbelow:RevenueYearsEndedNovember29,2002November30,2001December1,2000Americas:UnitedStates541,578$547,630$616,733Other42,17643,87842,334TotalAmericas.
583,754591,508659,067EMEA.
317,638326,499323,037Asia:Japan195,457228,744224,326Other67,93982,96959,948TotalAsia263,396311,713284,274Totalrevenue$1,164,788$1,229,720$1,266,378109Long-LivedAssetsYearsEndedNovember29,2002November30,2001December1,2000Americas:UnitedStates.
52,648$67,303$56,894Canada3,837Other5TotalAmericas56,49067,30356,894EMEA.
6,5836,4703,182Asia:Japan.
9641,7962,868India.
6,6851,446876Other.
368596448TotalAsia8,0173,8384,192Totallong-livedassets$71,090$77,611$64,268Infiscal2002,licensesofapplicationproductstoIngramMicro,Inc.
("Ingram")andTechDataCorporation("TechData"),includingtheirrespectiveaffiliates,accountedfor27%and14%,respectively,ofourtotalrevenue.
Infiscal2001,licensesofapplicationproductstoIngramandTechDataaccountedfor24%and15%,respectively,ofourtotalrevenue,andinfiscal2000,licensesofapplicationproductstoIngramandTechDataaccountedfor30%and14%,respectively,ofourtotalrevenue.
ReceivablesfromIngramandTechDataaccountedfor22%and12%,respectively,ofourtotalreceivablesatNovember29,2002.
AsofNovember30,2001,receivablesfromIngramandTechDataaccountedfor31%and21%,respectively,ofourtotalreceivables,andinfiscal2000receivablesfromIngramandTechDataaccountedfor32%and18%ofourtotalreceivables.
110FINANCIALSTATEMENTSCHEDULEAsrequiredunderItem8,FinancialStatementsandSupplementaryData,Adobe'sfinancialstatementscheduleisprovidedinthisseparatesection.
Thefinancialstatementscheduleincludedinthissectionisasfollows:ScheduleNumberFinancialStatementScheduleDescriptionScheduleIIValuationandQualifyingAccounts111ADOBESYSTEMSINCORPORATEDSCHEDULEIIVALUATIONANDQUALIFYINGACCOUNTS(Inthousands)ValuationandQualifyingAccountswhichareDeductedintheBalanceSheetfromtheAssetstowhichTheyApplyBalanceatBeginningofPeriodCharged/CreditedtoOperatingExpensesDeductions*BalanceatEndofPeriodAllowancefordoubtfulaccounts:YearEnded:November29,20028,549$357$(1,375)$7,531November30,20018,788$(115)$(124)$8,549December1,2000.
5,170$7,140$(3,522)$8,788*Deductionsrelatedtotheallowancefordoubtfulaccountsrepresentamountswrittenoffagainsttheallowance.
Infiscal2002,theincreaseindeductionsinfiscal2002ascomparedtofiscal2001wasprimarilyduetothewrite-offofreceivablesfromthreeinsolventroyaltycustomers.
Infiscal2001,thedecreasedchargetooperatingexpensesinfiscal2001ascomparedtothechargeinfiscal2000reflectstheresultsofenhancedglobalcreditevaluation,on-goingriskmitigationefforts(suchaslettersofcredit,guarantees,andcreditinsurance)inAsia,andimprovedcollectionsofourroyaltyaccounts.
Infiscal2000,thechargetooperatingexpensesrelatedprimarilytotwoseparatebankruptcyfilings,oneinvolvingaU.
S.
andtheotheraEuropeandistributor;aninsolventroyaltycustomer;andhigherpotentialbaddebtexpenseasaresultofhigheraccountsreceivablebalancesattheendoffiscal2000.
Thedeductionsrepresentamountswrittenoffagainsttheallowance.
112EXHIBITSAsrequiredunderItem15.
Exhibits,FinancialStatementSchedulesandReportsonForm8-K,theexhibitsfiledaspartofthisreportareprovidedinthisseparatesection.
Theexhibitsincludedinthissectionareasfollows:ExhibitNumberDescription3.
2AmendedandRestatedBylawsascurrentlyineffect10.
371999EquityIncentivePlan,asamended10.
44AdobeIncentivePartners,L.
P.
ConsenttoDissolveandTerminatePartnership10.
81AmendmentNo.
1toLeaseAgreementbetweenAdobeandSelcoServicesCorporation21SubsidiariesoftheRegistrant23ConsentofKPMGLLP99.
1CertificationofChiefExecutiveOfficer99.
2CertificationofChiefFinancialOfficer113ADOBESYSTEMSINCORPORATEDEXHIBIT21SUBSIDIARIESOFTHEREGISTRANTSubsidiaryLegalNameJurisdictionofIncorporation/FormationTheAmericas:AdobeInternational,Inc.
DelawareAdobeSystemsBrasilLimitadaBrazilAdobeSystemsFSC,Inc.
TerritoryofGuamGlassbook,Inc.
DelawareFotiva,Inc.
DelawareProactiveSystemsInc.
CaliforniaEclipseCorporationGeorgiaAccelioCorporationDelawareAdobeSystemsCanadaInc.
CanadaEurope:AccelioABSwedenAccelioFranceSAFranceAccelioIrelandLtd.
IrelandAccelioUKLtd.
UnitedKingdomAdobeSystemsBeneluxBVTheNetherlandsAdobeSystemsDanmarkApSDenmarkAdobeSystemsDirectLtd.
ScotlandAdobeSystemsEngineeringGmbHGermanyAdobeSystemsEuropeLtd.
ScotlandAdobeSystemsFranceSARLFranceAdobeSystemsGmbHGermanyAdobeSystems(Schweiz)GmbHFederalRepublicofSwitzerlandAdobeSystemsIbericaSLSpainAdobeSystemsItaliaSRLItalyAdobeSystemsNordicABSwedenAdobeSystemsNorgeASNorwayAdobeSoftwareTradingCompanyLimitedIrelandAdobeSystemsSoftwareIrelandLimitedIrelandFrameTechnologyInternationalLimitedIrelandOilecca(Ireland)Ltd.
IrelandJetformBVNetherlandsJetformNorgeNorwayAsia:JFA'AsiaPty.
Ltd.
AustraliaAccelioJapanLtd.
JapanAdobeSystemsCompanyLtd.
JapanAdobeSystemsIndiaPvt.
Ltd.
IndiaAdobeSystemsKoreaLtd.
KoreaAdobeSystemsPte.
Ltd.
SingaporeAdobeSystemsPty.
Ltd.
AustraliaAllsubsidiariesoftheregistrantarewhollyowned,directlyorindirectlybyAdobe,anddobusinessundertheirlegalnames(althoughAdobeSystemsBeneluxBVandAdobeSystemsSoftwareIrelandLimitedalsodobusinessasAdobeDirect).
114ADOBESYSTEMSINCORPORATEDEXHIBIT23CONSENTOFKPMGLLPTotheBoardofDirectorsofAdobeSystemsIncorporated:WeconsenttotheincorporationbyreferenceintheRegistrationStatements(No.
33-10753,No.
33-18986,No.
33-23171,No.
33-30976,No.
33-36501,No.
33-38387,No.
33-48210,No.
33-63518,No.
33-78506,No.
33-83030,No.
33-83502,No.
33-83504,No.
33-84396,No.
33-86482,No.
33-59335,No.
33-63849,No.
33-63851,No.
333-28195,No.
333-28203,No.
333-28207,No.
333-57589,No.
333-81191,No.
333-87165,No.
333-39524,No.
333-52214,No.
333-57074,No.
333-72424,andNo.
333-90518)onFormS-8ofAdobeSystemsIncorporatedofourreportdatedDecember10,2002,relatingtotheconsolidatedbalancesheetsofAdobeSystemsIncorporatedandsubsidiariesasofNovember29,2002andNovember30,2001,andtherelatedconsolidatedstatementsofincome,stockholders'equityandothercomprehensiveincome,andcashflowsforeachoftheyearsinthethree-yearperiodendedNovember29,2002,andrelatedschedule,appearingelsewhereinthisForm10-K.
KPMGLLPMountainView,CaliforniaFebruary24,2003115116