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Adobe฀Systems฀Incorporated฀2002฀Annual฀Report

Table of contents

  • Page 1
    Adobe฀Systems฀Incorporated฀2002฀Annual฀Report

  • Page 2
    ...,฀ Adobe฀software฀products฀and฀ solutions฀lie฀at฀the฀heart฀of฀ an฀equally฀innovative฀communications฀model:฀Network฀ Publishing.฀With฀Adobe฀tools฀for฀ Network฀Publishing,฀enterprises,฀ creative฀professionals,฀and฀ home฀and฀office฀users...

  • Page 3
    ...฀our฀commitment฀ to฀our฀core฀customers,฀delivering฀and฀supporting฀ the฀products฀that฀help฀creative฀professionals฀work฀ smarter฀and฀assert฀their฀visual฀voice.฀We฀also฀gave฀ home฀and฀office฀users฀the฀software฀they฀need฀to฀ express...

  • Page 4
    ...฀our฀partners-to฀create,฀ manage,฀and฀deliver฀visually฀rich฀information฀ to฀anyone,฀anywhere,฀on฀any฀device.฀For฀the฀ fourth฀consecutive฀year,฀strong฀sales฀of฀Adobe฀ Acrobat฀software฀licenses฀have฀contributed฀to฀ making฀the฀enterprise...

  • Page 5
    ...operations,฀leading฀to฀greater฀efficiencies฀ and฀reduced฀costs.฀Unusual฀among฀software฀companies,฀this฀financial฀strength฀gives฀Adobe฀a฀competitive฀ advantage฀and฀long-term฀confidence.฀With฀a฀combination฀of฀powerful฀customer-facing฀solutions...

  • Page 6
    ...฀ electronic฀documents฀to฀virtually฀any฀platform฀a฀ business฀or฀government฀agency฀may฀require. Within฀the฀design฀community,฀Adobe฀InDesign฀2.0฀ software฀gained฀more฀customers฀among฀publishers฀ and฀creative฀agencies฀worldwide.฀This฀version...

  • Page 7
    ...฀and฀delivering฀enterprise-class฀ePaper฀solutions,฀to฀provide฀ more฀value฀to฀our฀creative฀professional฀customers,฀and฀to฀extend฀our฀digital฀imaging฀ and฀video฀businesses฀to฀meet฀the฀needs฀of฀home฀and฀business฀users." Total฀Revenue...

  • Page 8
    ... 2002 312.5 Cash฀and฀Cash฀Equivalents฀at฀End฀of฀Year (in฀Millions฀of฀Dollars) 617.7 351.3 411.9 89.0 ePaper Creative฀Professional Digital฀Imaging฀&฀Video OEM฀PostScript฀&฀Other The฀numbers฀above฀reflect฀our฀new฀business฀segments,฀which฀have...

  • Page 9
    ...videos฀and฀internal฀Web฀sites- we're฀rolling฀out฀applications฀designed฀to฀help฀them฀ master฀the฀world฀of฀digital฀expression.฀In฀addition฀to฀ a฀new฀version฀of฀our฀well-received฀Adobe฀Photoshop฀ Elements฀software,฀we฀recently฀released...

  • Page 10
    ...฀eighties฀to฀Web฀Publishing฀in฀the฀ nineties,฀standard-setting฀innovations฀such฀as฀ Adobe฀PostScript฀and฀Adobe฀Photoshop฀software฀have฀helped฀put฀visually฀rich฀communications฀within฀the฀reach฀of฀millions฀of฀people฀ worldwide.฀PDF฀has...

  • Page 11
    ...Design฀Collection Digital฀Video฀Collection Document฀Server Form฀Server FrameMaker® GoLive® Graphics฀Server Illustrator® InCopy® InDesign® LiveMotion™ Output฀Server PageMaker® Photoshop® Photoshop฀Album Photoshop฀Elements PostScript®฀3™ Publishing฀Collection Type Web...

  • Page 12
    ...฀on฀Adobe฀ Acrobat฀software,฀Adobe฀PDF,฀and฀XML฀-฀ that฀drive฀efficiencies,฀help฀companies฀get฀their฀ products฀to฀market฀faster,฀and฀keep฀everyone฀ in฀the฀digital฀enterprise฀on฀the฀same฀page.฀ Adobe฀Document฀Generation฀solutions...

  • Page 13
    ...Documentum฀has฀become฀ one฀of฀Adobe's฀most฀important฀ Network฀Publishing฀partners,฀ building฀solutions฀that฀incorporate฀Adobe฀Acrobat฀technology฀ and฀Adobe฀PDF฀to฀enable฀its฀ customers฀to฀securely฀access,฀ interact฀with,฀distribute,฀and...

  • Page 14
    ...XML,฀these฀solutions฀work฀ together฀with฀standard฀content฀management฀and฀ enterprise฀applications฀to฀create฀customized,฀ visually฀rich฀documents฀that฀can฀be฀quickly฀and฀ securely฀delivered฀in฀a฀number฀of฀formats฀-฀ including฀Adobe฀PDF...

  • Page 15
    ...enrollment฀applications฀and฀quarterly฀ account฀systems-in฀Adobe฀PDF.฀ Client฀information฀captured฀from฀ these฀documents฀is฀automatically฀ merged฀with฀templates฀to฀create฀ "Acrobat฀and฀Adobe฀PDF฀win฀ customized,฀visually฀rich฀docuhigh฀praise...

  • Page 16
    ...฀Adobe฀enterprise฀ solution.฀Volume฀software฀licensing฀enables฀costconscious฀implementation฀across฀even฀the฀largest฀ organizations.฀Additionally,฀Adobe฀enterprise฀ customers฀gain฀access฀to฀a฀worldwide฀network฀of฀ professionals฀who฀support...

  • Page 17
    ...฀ to฀information,฀the฀company฀ turned฀to฀Adobe฀solutions.฀By฀ delivering฀payroll฀statements฀ as฀secure฀Adobe฀PDF฀files฀to฀ Hitachi฀employees฀worldwide,฀ the฀company฀has฀eliminated฀the฀ delivery฀of฀paper฀statements.฀ The฀savings฀in...

  • Page 18
    ...year.฀When฀it฀came฀ time฀to฀upgrade฀the฀creative฀ department's฀design฀software,฀ the฀company฀evaluated฀several฀ options฀before฀choosing฀an฀ integrated฀Adobe฀Network฀Publishing฀solution.฀Using฀Adobe฀ InDesign฀as฀the฀cornerstone฀of฀ the...

  • Page 19
    ...'s฀native฀language.฀ Everywhere฀you฀look฀-฀f rom฀the฀printed฀page฀to฀ the฀World฀Wide฀Web฀to฀the฀silver฀screen฀-฀the฀ compelling฀work฀of฀creative฀professionals฀ entertains,฀informs,฀and฀inspires฀people฀to฀make฀ critical฀investment...

  • Page 20
    ...many฀creative฀professionals฀are฀adopting฀Adobe฀InDesign฀software฀for฀making฀visuals฀ and฀words฀work฀together.฀They're฀standardizing฀ on฀Adobe฀PDF฀as฀the฀format฀of฀choice฀for฀client฀ review,฀internal฀routing,฀and฀final฀printing.฀And...

  • Page 21
    ... reduce฀costs.฀By฀implementing฀ Adobe฀InDesign฀2.0฀software,฀ this฀large-scale฀publisher฀was฀ able฀to฀establish฀an฀integrated,฀ digital฀Network฀Publishing฀ workflow฀that฀was฀quickly฀embraced฀by฀contributing฀artists,฀ designers,฀and฀editors...

  • Page 22
    Digital Imaging฀&฀Video 20

  • Page 23
    ...฀imaging฀is฀not฀limited฀to฀the฀home฀ user.฀In฀the฀workplace,฀salespeople,฀marketing฀ personnel,฀and฀educators฀are฀using฀digital฀ photography฀and฀video฀to฀enhance฀company฀ intranets,฀create฀trade฀show฀and฀training฀ videos,฀and฀add...

  • Page 24
    ...Adobe฀PDF฀albums฀and฀slide฀ shows.฀And฀when฀it฀comes฀to฀digital฀video,฀both฀ corporate฀professionals฀and฀home฀enthusiasts฀ can฀edit฀and฀produce฀everything฀from฀training฀ videos฀to฀personal฀documentaries฀using฀Adobe฀ Premiere฀software...

  • Page 25
    ... Everything฀needed฀to฀ master฀the฀fundamentals฀ of฀digital฀imaging Adobe Premiere "Especially฀when฀combined฀into฀ a฀seamless฀workflow฀with฀Adobe฀ Photoshop฀and฀After฀Effects,฀ Adobe฀Premiere฀is฀an฀invaluable฀ tool฀in฀our฀arsenal.฀The...

  • Page 26
    ....฀ Combining฀Adobe฀publishing฀and฀imaging฀ software฀with฀content฀management฀systems฀ and฀secure฀network฀delivery,฀today's฀Network฀ Publishing฀solutions฀rest฀squarely฀on฀the฀foundation฀of฀Adobe฀PDF.฀Originally฀envisioned฀ as฀a฀container...

  • Page 27
    Enterprise Creative฀Pro Digital฀Imaging฀&฀Video 25

  • Page 28
    ...Baldwin Independent฀Consultant James฀Heeger Senior฀Vice฀President฀of฀the฀ Creative฀Professional฀Business฀Unit James฀E.฀Daley Executive฀Vice฀President฀of฀Client฀Solutions,฀Global฀Sales฀and฀ Marketing,฀Electronic฀Data฀Systems฀Corporation Ivan฀Koon...

  • Page 29
    ...฀following฀contact฀ information: Investor฀Relations฀Department Adobe฀Systems฀Incorporated 345฀Park฀Avenue San฀Jose,฀CA฀95110-2704฀USA Tel:฀408-536-4416 Fax:฀408-537-4034 [email protected] To฀report฀a฀change฀of฀address฀or฀lost฀stock฀certificates,฀ please...

  • Page 30
    ...฀statements฀or฀reflect฀events฀or฀circumstances฀ after฀the฀date฀of฀this฀document. Colophon This฀Annual฀Report฀was฀electronically฀produced฀with฀Adobe฀ software,฀including฀Adobe฀Acrobat,฀Adobe฀Illustrator,฀Adobe฀ InDesign,฀Adobe฀Photoshop...

  • Page 31
    ...Adobe฀logo,฀Acrobat,฀Acrobat฀Capture,฀ Acrobat฀Reader,฀Adobe฀Premiere,฀After฀Effects,฀ Atmosphere,฀Distiller,฀ePaper,฀FrameMaker,฀GoLive,฀ Illustrator,฀InCopy,฀InDesign,฀LiveMotion,฀Minion,฀ Myriad,฀PageMaker,฀Photoshop,฀PostScript,฀the฀ PostScript...

  • Page 32
    ... Commission file number: 0-15175 ADOBE SYSTEMS INCORPORATED (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 77-0019522 (I.R.S. Employer Identification No.) 345 Park Avenue, San Jose, California 95110-2704 (Address of...

  • Page 33
    ... Officers of the Registrant...Executive Compensation...Security Ownership of Certain Beneficial Owners and Management...Certain Relationships and Related Transactions ...Controls and Procedures ... 59 59 59 59 59 Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 60 SIGNATURES...

  • Page 34
    ... at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000. We maintain a World Wide Web site at www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC website at www.sec.gov. BUSINESS OVERVIEW In...

  • Page 35
    ... Web designers, technical writers, videographers, photographers, and prepress professionals use and rely on Adobe's solutions for professional publishing, Web design, business document publishing, and printing visually rich information. Our software tools are used by creative professionals to create...

  • Page 36
    ... Acrobat, Adobe GoLive, Adobe InDesign, Adobe Illustrator, Adobe Photoshop, and Adobe Premiere. Adobe Design Collection-suite of four award-winning application products that allows creative professionals to create and produce high-quality images, illustrations, and layouts, and to publish documents...

  • Page 37
    ... page layout tools, templates, and stock art. Adobe Publishing Collection-suite of four award-winning application products that allows business users to create professional-quality business communications; includes Adobe Acrobat, Adobe Illustrator, Adobe PageMaker, and Adobe Photoshop. Adobe Type...

  • Page 38
    ...(business and home users). We have announced plans to introduce new products targeting home user digital image management and professional DVD authoring in fiscal 2003. We plan to leverage the rich media content qualities of Adobe PDF and the vast installed base of Adobe Acrobat Readers to let users...

  • Page 39
    ...most basic level enables users to create PDF files - the worldwide standard for secure and reliable electronic document distribution. With more than 500 million distributed copies of our Acrobat Reader - the free multi-platform Adobe PDF viewing software - Adobe has created a ubiquitous platform for...

  • Page 40
    ...-based solution software called Adobe Document Server for Reader Extensions. This new server product allows publishers of Adobe PDF-based forms and documents to embed usage rights in them that enable features in the free Acrobat Reader that normally are not available, such as form fill-in and save...

  • Page 41
    ... business documents using corporate e-mail and intranets, the Internet, or CD-ROM; enables users to easily convert files from almost any application to Adobe PDF, a compact cross-platform electronic format that generally preserves layout, fonts, colors, and images; helps users complete timely...

  • Page 42
    ...-server-based software which allows enterprises and government agencies to assign additional rights to an Adobe PDF document, enabling users of the free Adobe Acrobat Reader to save and submit electronic form data, add digital signatures, and attach comments, thereby lowering processing costs...

  • Page 43
    ... system to extract information which is merged with a document template that defines the layout and formatting of the document; output can be in a variety of formats, including Adobe PDF, print, fax, e-mail, and the Web, to multiple devices. Adobe Output Pak for Oracle E-Business Suite-server-based...

  • Page 44
    ... the creative professional customer include the Adobe Design Collection, the Adobe Publishing Collection, and the Adobe Web Collection. The approach of providing packages with multiple Adobe products allows us to market them as complete solutions for specific market needs. Drawing and illustration...

  • Page 45
    ..., and digital imaging and digital video equipped hardware devices and personal computers. Our tools in this market, including Adobe Photoshop, Adobe Photoshop Elements, Adobe After Effects, and Adobe Premiere software, face significant competition from companies offering similar products and will...

  • Page 46
    ...Tagged Information File Format ("TIFF"), and various XML-based formats for electronic document distribution provide alternate solutions to customers, and indirectly compete with Adobe's ePaper products and the use of Adobe PDF. For Document Generation solutions - specifically, the desktop and server...

  • Page 47
    ... of consulting fees, software maintenance and support fees, and training fees. Services Adobe has a global Professional Services team dedicated to developing and implementing solutions for enterprise customers in key vertical markets and to transfer technical expertise to our Solution Partners. The...

  • Page 48
    ... Ventures on a regular basis to evaluate the carrying value of the investments in these companies. This policy includes, but is not limited to, reviewing each companies' cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes, and competition...

  • Page 49
    ... of fair value, it is our policy to record a reserve in addition to our equity method of accounting. In March 1997, as part of our venture investing program, we established an internal limited partnership, Adobe Incentive Partners, L.P. ("AIP"), which allowed certain of Adobe's executive officers to...

  • Page 50
    ... our software internally. We occasionally acquire products developed by others by purchasing the stock or assets of the business entity that held ownership rights to the technology. In other instances, we have licensed or purchased the intellectual property ownership rights of programs developed...

  • Page 51
    ... Content Server products. We released new products that contained the purchased technology in April 2001, with Acrobat eBook Reader 2.1 and Adobe Content Server 2.0. PRODUCT PROTECTION We regard our software as proprietary and protect it under the laws of copyrights, patents, trademarks, and trade...

  • Page 52
    ... President, Worldwide Product Marketing and Development in March 2001. Prior to joining Adobe, Mr. Narayen co-founded Pictra Inc., a software internet company, in 1996. He was Director of Desktop and Collaboration products at Silicon Graphics Inc. and held various senior manager positions at Apple...

  • Page 53
    ... Electronics. Mr. Stephens joined Adobe in February 1990 and held various senior management positions in sales and marketing for Adobe's Printing Systems Division before being promoted in November 1997 to Vice President of Change Management. In June 1998, he was promoted to Vice President, Investor...

  • Page 54
    ... rates. Approximate Square Footage Location Use North America: 345 Park Avenue San Jose, California, USA 321 Park Avenue San Jose, California, USA 801 N. 34th Street-Waterfront Seattle, WA 98103-88 560 Rochester St. Ottawa, Ontario Canada K1S 5K2 Japan Gate City Ohsaki East Tower 1-11-2 Ohsaki...

  • Page 55
    ... embed AMT and ITC fonts in electronic documents for "print and view" and disputes the other breach of contract claims. Adobe also asserts that Adobe Acrobat 5.0, which AMT and ITC correctly acknowledge has been superceded by version 5.05, neither violates the DMCA nor induces or contributes to the...

  • Page 56
    ... upon business conditions, our results of operations, our financial condition, and other factors. For information on our equity compensation plans refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section titled "Employee Stock Options...

  • Page 57
    ... Operations: Revenue ...Income before income taxes ...Net income(1) ...Net income per share(1) Basic...Diluted ...Cash dividends declared per common share ...Financial position: Cash and short-term investments ...Working capital ...Total assets ...Stockholders' equity ...Additional data: Worldwide...

  • Page 58
    ...provides software for professional page layout, professional Web page layout, technical document publishing, and business publishing. The ePaper Solutions segment provides electronic document distribution software that allows users to create, enhance, annotate, and securely send Adobe PDF files that...

  • Page 59
    ... revenue in our professional layout publishing products, which includes revenue from our InDesign, Adobe Design Collection, and Adobe Creative Suites products. We attribute this revenue increase to increased marketing activities and growing customer demand. Revenue from our OEM PostScript and Other...

  • Page 60
    ..., such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. Our professional services revenue depends in large part on our software license revenue from the products that we acquired...

  • Page 61
    ... the Adobe Design Team service in the third quarter of fiscal 2002. Cost of products revenue decreased in absolute dollars and as a percentage of revenue in fiscal 2001 compared to fiscal 2000, primarily due to an 8% decrease in third-party royalties, mainly associated with our PostScript and Type...

  • Page 62
    ... costs for our sales, marketing, customer support, order management, and order fulfillment personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations, and other market development programs. Sales...

  • Page 63
    ... marketing, and general and administrative positions worldwide in order to realign our resources for our future business plans. These plans include adding resources to support our ePaper enterprise business in fiscal 2003. The restructuring program is expected to be completed in fiscal 2003. Of the...

  • Page 64
    ... and the Glassbook Content Server products. We released new products that contained the purchased technology in April 2001, with Acrobat eBook Reader 2.1 and Adobe Content Server 2.0. Amortization and Impairment of Goodwill and Purchased Intangibles 2002 Change 2001 Change 2000 Amortization and...

  • Page 65
    ... and our long-term investments included investments in Adobe Ventures and other cost method investments of $35.6 million. These securities are inherently risky and we may experience further deterioration in fair value in the future. During fiscal 2001, investment losses consisted of other-than...

  • Page 66
    ..., including the enterprise, government, corporate business and consumer markets inability to attract and retain key personnel lack of market acceptance of new products and upgrades weakness in demand for application software, computers, and printers downward sales price adjustments intellectual...

  • Page 67
    ..., electronic document distribution, eBook and related functionality like that in Adobe Acrobat and our server-based ePaper software, including announcing a new electronic forms tool that is planned to ship in mid-2003. We believe that, due to Microsoft's market dominance, any new Microsoft products...

  • Page 68
    ...of our products to end users through our online store located on our website 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...

  • Page 69
    ...affect the reporting of transactions completed before a change is announced. Our accounting policies that recently have been or may be affected by changes in the accounting rules are as follows software revenue recognition stock option grants and accounting for stock options accounting for business...

  • Page 70
    ... cost of free technical phone support upon shipment of software. We also license software in multiple element arrangements in which a customer purchases a combination of software, post-contract customer support ("PCS"), and/or professional services. PCS, or maintenance, includes rights to upgrades...

  • Page 71
    ... value of the investments in these companies. This policy includes, but is not limited to, reviewing each companies' cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes, and competition. The evaluation process is based on information...

  • Page 72
    ... our reported results of operations. We recognize realized gains and losses upon sale or maturity of these investments using the specific identification method. For further information on our long-term investments, please refer to Note 1 of our Notes to Consolidated Financial Statements. Accounting...

  • Page 73
    ... For additional information about our employee stock option plan activity for the years 2000 through 2002, and pro forma earnings presentation as if we had accounted for our grant of employee stock options using the fair value method of accounting under Statement of Financial Accounting Standards No...

  • Page 74
    ..., to our Named Executive Officers, each under the 1994 Stock Option Plan, as amended. All options were granted with an exercise price equal to the closing price of our common stock on the date of grant. Potential realizable values are net of exercise price, but before taxes associated with exercise...

  • Page 75
    ... granted to employees under our option plans during fiscal 2002. Stock Option Exercises and Option Holdings The following table shows stock options exercised by the Named Executive Officers in fiscal 2002, including the total value of gains on the date of exercise based on actual sale prices or...

  • Page 76
    ... reveal our ongoing operating results. However, we urge investors to carefully review the GAAP financial information included as part of our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K that are filed with the SEC, as well as our quarterly earnings releases, and compare the...

  • Page 77
    ...154,542 285,246 $ $ Pro Forma Fair Value Disclosures on Employee Stock Plans We account for our fixed stock option plans and our employee stock purchase plan using the intrinsic value method. Please see our Note 11 of the Notes to Consolidated Financial Statements for the pro forma amounts of net...

  • Page 78
    ...our financial position or results of operations. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with...

  • Page 79
    ...-term investments are classified as available-for-sale under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The securities are carried at fair market value with the unrealized gains and losses, net of tax...

  • Page 80
    ... to continue our investing activities, including expenditures for computer systems for research and development, sales and marketing, product support, and administrative staff. Furthermore, cash reserves may be used to purchase treasury stock and acquire software companies, products, or technologies...

  • Page 81
    ... will depend on business conditions, our results of operations and financial condition, and other factors. Stock Repurchase Program I - On-going Dilution Coverage To facilitate our stock repurchase program designed to minimize dilution from stock issuance primarily from employee stock plans, we sold...

  • Page 82
    ...subject to certain business and market conditions, our Board of Directors authorized the purchase of up to an additional 5.0 million shares of our common stock over a three-year period. We have not made any purchases under this 5.0 million share repurchase program. This plan will expire in September...

  • Page 83
    ... our corporate headquarters in downtown San Jose, California. Under the agreement, the lessor will finance up to $117.0 million over a two-year period, toward the construction and associated costs of the building. As part of the agreement, we entered into a five-year lease beginning upon completion...

  • Page 84
    ... our cost of products revenue on our consolidated statements of income, was approximately $14.4 million, $14.1 million, and $20.8 million in fiscal 2002, 2001, and 2000, respectively. Adobe Ventures We have commitments to the Adobe Venture limited partnerships. The following table shows the capital...

  • Page 85
    ...asserts that Adobe Acrobat 5.0, which AMT and ITC correctly acknowledge has been superceded by version 5.05, neither violates the DMCA nor induces or contributes to the infringement of copyrights in ITC's and AMT's TrueType font software. On September 5, 2002, AMT and ITC filed suit against Adobe in...

  • Page 86
    ... into these foreign exchange contracts to hedge forecasted product licensing revenue in the normal course of business, and accordingly, they are not speculative in nature. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss), until the...

  • Page 87
    ... term. It is our policy to review our equity holdings on a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing each of the companies' cash position, earnings/revenue outlook, stock...

  • Page 88
    ...viability of these companies. This policy includes, but is not limited to, reviewing each of the companies' cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes, and competition. The evaluation process is based on information that we request...

  • Page 89
    ... includes investment loss of $5.9 million, restructuring and other charges of $12.1 million, and amortization of goodwill and purchased intangibles of $3.6 million. The numbers presented above are pretax amounts. (2) Item 9. Changes in and Disagreements With Accountants on Accounting and Financial...

  • Page 90
    ..., we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended, within the 90 day period prior to the filing date of this report. Based on this...

  • Page 91
    ...IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as part of this report 1. Financial statements Independent Auditors' Report Consolidated Balance Sheets November 29, 2002 and November 30, 2001 Consolidated Statements of Income Years Ended November 29...

  • Page 92
    ... Adobe Systems (Delaware) Incorporated, a Delaware corporation Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on 5/22/01 Fourth Amended and Restated Rights Agreement between the Company and Computershare Investor Services, LLC 1984 Stock Option...

  • Page 93
    ... Incorporated by reference Form Date Number Filed Herewith 10.43 10.44 10.45 10.53 10.54 10.56 10.66 10.67 10.68 10.69 10.77 10.78 10.79 10.80 10.81 21 23 Amendment to Limited Partnership Agreement of Adobe Incentive Partners, L.P.* Adobe Incentive Partners, L.P. Consent to Dissolve...

  • Page 94
    ... by reference Form Date Number Filed Herewith 99.1 Certification of Chief Executive Officer 99.2 Certification of Chief Financial Officer _____ * Compensatory plan or arrangement X X (c) Reports on Form 8-K Date of Report October 15, 2002 Filing Date October 15, 2002 Item Reported 5 On October...

  • Page 95
    ... included here. You must specifically request the exhibit you would like to receive and pay our reasonable expenses in furnishing it to you. You should call or write: Investor Relations Department 345 Park Avenue San Jose, CA 95110-2704 408-536-4416 Fax 408-537-4034 E-mail: [email protected] Many of the...

  • Page 96
    ..., thereunto duly authorized. ADOBE SYSTEMS INCORPORATED By: /s/ Murray J. Demo Murray J. Demo, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below...

  • Page 97
    ... Officer of the registrant, certify that: 1. I have reviewed this annual report on Form 10-K of Adobe Systems Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements...

  • Page 98
    ... Officer of the registrant, certify that: 1. I have reviewed this annual report on Form 10-K of Adobe Systems Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements...

  • Page 99
    ... Acrobat eBook Reader Acrobat Reader Acrobat Messenger Adobe Font Folio Adobe PhotoDeluxe Adobe Premiere Adobe Studio Adobe Type Manager After Effects AlterCast Atmosphere Distiller ePaper Extreme FrameMaker GoLive Illustrator InCopy InDesign LiveMotion PageMaker PDF Transit Photoshop PostScript...

  • Page 100
    ...8. Financial Statements and Supplementary Data, Adobe's consolidated financial statements are provided in this separate section. The consolidated financial statements included in this section are as follows: Page • • • • • • Independent Auditors' Report...Consolidated Balance Sheets...

  • Page 101
    ... of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards...

  • Page 102
    ADOBE SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) November 29, 2002 November 30, 2001 ASSETS Current assets: Cash and cash equivalents...Short-term investments ...Trade receivables, net of allowances for doubtful accounts of $7,531 and $8,549, respectively...

  • Page 103
    ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) November 29, 2002 Years Ended November 30, 2001 December 1, 2000 Revenue: Products ...Services and support ...Total revenue ...Cost of revenue: Products ...Services and support ...Total cost of ...

  • Page 104
    ...loss on investments ...Reclassification adjustment...Tax provision on above ...Foreign currency translation adjustments...Net gain on derivative instruments (cash flow hedges), net of taxes...Other comprehensive income...Comprehensive income, net of tax...Tax benefit from employee stock option plans...

  • Page 105
    ...- adjustments...Net loss on derivative instruments (cash flow - - hedges), net of taxes ...Other comprehensive loss...- - Comprehensive income, net of tax ...- - Tax benefit from employee - - stock option plans ...Issuance of compensatory stock . - - Dividends declared...- - - - Purchase of treasury...

  • Page 106
    ...losses on receivables ...Tax benefit from employee stock option plans ...Acquired in-process research and development...Impairment of property, plant, and equipment and goodwill...Equity method (gains) losses of Adobe Ventures and cost method investments...Gains on sales of equity securities ...Loss...

  • Page 107
    ... at end of year ...Supplemental disclosures: Cash paid during the year for income taxes ...Noncash investing and financing activities: Cash dividends declared but not paid ...Unrealized gains (losses) on available-for-sale securities, net of taxes ...Common stock issued for acquisition ... (293,241...

  • Page 108
    ...STATEMENTS (In thousands, except share and per share data) Note 1. Significant Accounting Policies Operations Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company") offers a line of software for consumers, businesses, and creative professional customers. Our products enable customers...

  • Page 109
    ... and is a release candidate. To date, software development costs incurred between completion of a working prototype and general availability of the related product have not been material. Other Assets Other assets include long-term investments and security deposits. Our long-term investments include...

  • Page 110
    ... value of the investments in these companies. This policy includes, but is not limited to, reviewing each companies' cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes, and competition. The evaluation process is based on information...

  • Page 111
    ... cost of free technical phone support upon shipment of software. We also license software in multiple element arrangements in which a customer purchases a combination of software, post-contract customer support ("PCS"), and/or professional services. PCS, or maintenance, includes rights to upgrades...

  • Page 112
    ... and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. The adoption of this accounting standard did not have a material impact on our financial position or results of operations. Put...

  • Page 113
    ...our financial position or results of operations. In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with...

  • Page 114
    ...of Web-enabled solutions that help customers manage business processes driven by electronic forms. The acquisition of Accelio enhances Adobe's ability to broaden our ePaper solution business by combining Accelio's electronic forms solutions with Adobe Acrobat and Adobe Portable Document Format ("PDF...

  • Page 115
    ... with a worldwide reduction in force of Accelio employees, transaction costs, costs related to closing redundant facilities and terminating contracts, and other exit costs associated with the acquisition. As of November 29, 2002, the majority of the restructuring transactions were completed. Total...

  • Page 116
    ...in accordance with Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations." Substantially all of Fotiva's assets were intellectual property. Fotiva was a development stage software company that created solutions to help consumers manage, store, enrich, and share...

  • Page 117
    ... Content Server products. We released new products that contained the purchased technology in April 2001, with Acrobat eBook Reader 2.1 and Adobe Content Server 2.0. During the fourth quarter of fiscal 2002, we recognized a $6.8 million goodwill impairment charge for the remaining book value related...

  • Page 118
    ... pre-tax impairment charge for capitalized Adobe Design Team (formerly Adobe Studio) hosted server development costs. The impairment charge was recorded on our consolidated statement of income under cost of products revenue. The impairment charge was determined based on discounted future cash flows...

  • Page 119
    ... venture capital firm and sole general partner of Adobe Ventures. In March 1997, as part of our venture investing program, we established an internal limited partnership, Adobe Incentive Partners, L.P. ("AIP"), which allowed certain of Adobe's executive officers to participate in cash or stock...

  • Page 120
    ... value of the investments in these companies. This policy includes, but is not limited to, reviewing each companies' cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes, and competition. The evaluation process is based on information...

  • Page 121
    ... enabled us to increase our investment in digital imaging, digital video, and ePaper-based businesses in fiscal 2002. As part of the restructuring program, we implemented a reduction in force of 247 positions, affecting organizations throughout the company. Accrued Balance at Cash November...

  • Page 122
    ... at Cash November 29, Payments Adjustments 2002 $ (9,022 ) $ (551) $ - Current: United States federal ...$ Foreign ...State and local ...Total current ...Deferred: United States federal ...Foreign ...State and local ...Total deferred ...Charge in lieu of taxes attributable to employee stock plans...

  • Page 123
    ...roll-forward schedule of the income tax payable accounts as of November 29, 2002 and November 30, 2001: November 29, 2002 November 30, 2001 Beginning balance ...Plus: Current year liability...Less: Payments and reclasses ...Ending balance ...Note 10. Benefit Plans Pretax Savings Plan $ $ 132,228...

  • Page 124
    ... Option Plan (collectively, the "Option Plans") for employees. The Option Plans provide for the granting of stock options to employees and officers at the fair market value of our common stock on the grant date. Additionally, the 1999 Plan provides for awards in the form of stock appreciation rights...

  • Page 125
    ... Directors Plan provides for the granting of nonqualified stock options to nonemployee directors. Option grants are limited to 40,000 shares per person in each fiscal year, except for a new non-employee director, who is granted 60,000 shares upon election as a director. Options have a ten-year term...

  • Page 126
    ... or (ii) the date on which all of the shares available for issuance under the plan have been issued. Cash Incentive Awards We grant Cash Incentive Awards ("CIAs"), a form of phantom stock, to designated key employees to reward them based on their contributions to a project. The cash value of the CIA...

  • Page 127
    ...from the date of grant. Under our SAR plan, designated employees are awarded rights that are equal to one share of Adobe's common stock for each right awarded with an exercise price based on the fair market value on the grant date. When the award vests, employees generally have the right to exercise...

  • Page 128
    ... Stock, par value $0.0001 per share, at a price of $700 per unit. As adjusted for our 2000 stock split in the form of a dividend, each share of common stock now entitles the holder to one-half of such a purchase right. Each whole right still entitles the registered holder to purchase from Adobe...

  • Page 129
    ... the exercise price and the value of the option as determined by the contract. In fiscal 2002, we repurchased approximately 2.0 million shares at a cost of $38.2 million under our March 2001 5.0 million share repurchase program. We did not make any repurchases under this plan in fiscal 2001. During...

  • Page 130
    ... plan is determined by subtracting repurchases from all stock issuances, net of any canceled shares, beginning in the first quarter of fiscal 1998. The repurchases from employees represent shares canceled when surrendered in lieu of cash payments for the option exercise price or withholding taxes...

  • Page 131
    ... our corporate headquarters in downtown San Jose, California. Under the agreement, the lessor will finance up to $117.0 million over a two-year period, toward the construction and associated costs of the building. As part of the agreement, we entered into a five-year lease beginning upon completion...

  • Page 132
    ... our cost of products revenue on our consolidated statements of income, was approximately $14.4 million, $14.1 million, and $20.8 million in fiscal 2002, 2001, and 2000, respectively. Adobe Ventures We have commitments to the Adobe Venture limited partnerships. The following table shows the capital...

  • Page 133
    ... and/or offering for sale, inter alia, products supporting Microsoft Active Server Pages technology." The plaintiff seeks unspecified compensatory damages, preliminary and permanent injunctive relief, trebling of damages for "willful infringement," and fees and costs. Adobe strongly disagrees with...

  • Page 134
    ... into these foreign exchange contracts to hedge forecasted product licensing revenue in the normal course of business, and accordingly, they are not speculative in nature. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss), until the...

  • Page 135
    ... foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in...

  • Page 136
    ... is limited to OEM partners, dealers and distributors of hardware and software products to the retail market, and to customers whereby we license software directly. Management believes that any risk of loss is reduced due to the diversity of our customers and geographic sales areas. A credit review...

  • Page 137
    ...provides software for professional page layout, professional Web page layout, technical document publishing, and business publishing. The ePaper Solutions segment provides electronic document distribution software that allows users to create, enhance, annotate, and securely send Adobe PDF files that...

  • Page 138
    ... Publishing ePaper Solutions OEM PostScript and Other Graphics Total Fiscal 2002 Revenue...$ Cost of revenue ...Gross profit ...$ Gross margin ...Fiscal 2001 Revenue...$ Cost of revenue ...Gross profit ...$ Gross margin ...Fiscal 2000 Revenue...$ Cost of revenue ...Gross profit ...$ Gross margin...

  • Page 139
    ... former Cross-media Publishing segment has been renamed the Creative Professional segment and includes two products that were formerly included in our Graphics segment, Adobe Illustrator and Adobe Graphics Server (formerly AlterCast). There were no changes to our ePaper and OEM Postscript and Other...

  • Page 140
    ... 2001 December 1, 2000 Americas: United States ...$ Canada ...Other ...Total Americas ...EMEA...Asia: Japan ...India...Other ...Total Asia ......licenses of application products to Ingram Micro, Inc. ("Ingram") and Tech Data Corporation ("Tech Data"), including their respective affiliates, accounted...

  • Page 141
    ... Statements and Supplementary Data, Adobe's financial statement schedule is provided in this separate section. The financial statement schedule included in this section is as follows: Schedule Number Financial Statement Schedule Description Schedule II Valuation and Qualifying Accounts 110

  • Page 142
    ..., and credit insurance) in Asia, and improved collections of our royalty accounts. In fiscal 2000, the charge to operating expenses related primarily to two separate bankruptcy filings, one involving a U.S. and the other a European distributor; an insolvent royalty customer; and higher potential...

  • Page 143
    ... Amended and Restated Bylaws as currently in effect 1999 Equity Incentive Plan, as amended Adobe Incentive Partners, L.P. Consent to Dissolve and Terminate Partnership Amendment No.1 to Lease Agreement between Adobe and Selco Services Corporation Subsidiaries of the Registrant Consent of KPMG...

  • Page 144
    ... Norway Australia Japan Japan India Korea Singapore Australia All subsidiaries of the registrant are wholly owned, directly or indirectly by Adobe, and do business under their legal names (although Adobe Systems Benelux BV and Adobe Systems Software Ireland Limited also do business as Adobe Direct...

  • Page 145
    ... of our report dated December 10, 2002, relating to the consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of November 29, 2002 and November 30, 2001, and the related consolidated statements of income, stockholders' equity and other comprehensive income, and cash flows for...

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