Adobe 2000 Annual Report Download - page 73

Our investment portfolio consists of investment-grade securities diversified among secu-
rity types, industries, and issuers. Our investments are managed by recognized financial
institutions that follow Adobe’s investment policy. Our policy limits the amount of credit
exposure to any one issue or issuer, and we believe no significant concentration of credit
risk exists with respect to these investments.
Credit risk in receivables is limited to OEM partners and to dealers and distributors of
hardware and software products to the retail market. We adopt credit policies and
standards to keep pace with the evolving software industry. Management believes that any
risk of accounting loss is significantly reduced due to the diversity of our products, end
users, and geographic sales areas. We perform ongoing credit evaluations of our
customers’ financial condition and require letters of credit or other guarantees, whenever
deemed necessary. (For discussion of significant customers as of December 1, 2000,
see Note 16.)
We distribute our application products primarily through distributors, resellers, and
retailers (collectively referred to as “distributors”). A significant amount of our revenue
for application products is from two distributors. We have revised our channel program
to reduce the overall number of our distributors worldwide and focus our channel efforts
on larger distributors. This revision of the channel program has resulted in an increase in
our dependence on a smaller number of distributors selling through a larger amount of
our products. Additionally, our goal is to increase our direct distribution of our products
to end users through our online store located on our Web site at www.adobe.com. Any
such increase in our direct revenue efforts will place us in increased competition with our
channel distributors and with newer types of distribution of our products by online,
Internet-based resellers of our products. While we anticipate that the restructuring and
streamlining of our product distribution channels and the increase in the scope of our
direct sales efforts will eventually improve our business by decreasing discounts or rebate
programs provided to distributors, decreasing product returns, and shortening inventory
cycles, these changes could instead seriously harm our business.
We derive a significant portion of our licensing revenue from a small number of OEM
partners. Our OEM partners on occasion seek to renegotiate their royalty arrangements.
We evaluate these requests on a case-by-case basis. If we do not reach an agreement, a
partner may decide to pursue other options, which could result in lower licensing revenue
for us. Also, in the fall of 1997, one of Adobe’s largest PostScript partners, Hewlett-Packard
Company, introduced a clone version of Adobe PostScript in one family of monochrome
laser printers.
NOTE 16. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
We adopted SFAS 131, “Disclosures about Segments of an Enterprise and Related
Information,” in fiscal 1999. SFAS 131 establishes standards for the manner in which pub-
lic companies report information about operating segments and related disclosures about
products, geographic information, and significant customers. The method for determining
what information to report is based on the way executive management organizes the oper-
ating segments within Adobe for making operating decisions and assessing performance.
We have four reportable segments that offer different product lines. These segments are
Web Publishing, Cross-media Publishing, ePaper Solutions, and OEM PostScript and
Other. The Web Publishing segment provides software to create Web sites with graphics,
images, videos, and animations. The Cross-media Publishing segment provides software
for professional page layout, illustration, business publishing, and printing. The ePaper
Solutions segment allows users to convert information to Adobe Portable Document
Format (“PDF”) with the original appearance preserved and allows for the distribution of
documents via the Web, intranets, e-mail, or CD-ROM for viewing and printing on any
system. The OEM PostScript and Other segment includes printing technology to create
and print simple or visually rich documents with precision. This segment also includes
revenue from divested businesses.
During and prior to fiscal 2000, we evaluated our business based on the contribution
margins of each of our four segments. Recently, our executive management team changed
the way it evaluates the performance of our business and now focuses on evaluating the
gross margins of each of our segments. Prior period disclosures have been restated for
consistent presentation to the fiscal 2000 disclosure. The accounting policies of the
operating segments are the same as those described in the summary of significant