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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 30,AUGUST 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________________ TO _________________________
COMMISSION FILE NUMBER: 33-6885
ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 77-0019522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
345 PARK AVENUE, SAN JOSE, CALIFORNIA 95110-2704
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 536-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Shares Outstanding
Class May 30,August 29, 1997
----- ------------------------------
Common stock, $0.0001 par value 72,881,49072,986,872
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TABLE OF CONTENTS
Page No.
PART I --- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1314
PART II --- OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 3230
Signature 3633
Summary of Trademarks 3734
EXHIBITS
Exhibit 2.1 Agreement and Plan of Merger
Exhibit 3.1 Certificate of Incorporation
Exhibit 3.2.10 Bylaws
Exhibit 10.25.1 Form of Idemnity Agreement
Exhibit 10.41 Amended and Restated Limited Partnership Agreement of Adobe
Incentive Partners, L.P.
Exhibit 11 Computation of Earningsnet income per Common Share
Exhibit 27 Financial Data Schedules
2
PART I --- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included under this item
are as follows:
SEQUENTIALLY
NUMBERED
FINANCIAL STATEMENT DESCRIPTION PAGE
- ------------------------------------------------------------ ----------------------------------------------------------------------------- ------------
- - Condensed Consolidated Statements of Income
Quarters Ended May 30,August 29, 1997 and May 31,August 30, 1996
and SixNine Months Ended May 30,August 29, 1997 and May 31,August 30, 1996 4
- - Condensed Consolidated Balance Sheets
May 30,August 29, 1997 and November 29, 1996 5
- - Condensed Consolidated Statements of Cash Flows
SixNine Months Ended May 30,August 29, 1997 and May 31,August 30, 1996 6
- - Notes to Condensed Consolidated Financial Statements 8
3
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTERS ENDED SIXNINE MONTHS ENDED
------------------------- -------------------------
MAY-------------------------- --------------------------
AUGUST 29 AUGUST 30 MAY 31 MAYAUGUST 29 AUGUST 30 MAY 31
1997 1996 1997 1996
---------- ---------- --------------------- ----------- ------------ -----------
Revenue:
Licensing $ 53,26145,159 $ 49,28750,442 $ 104,721149,880 $ 96,198146,640
Application products 175,003 155,050 350,002 301,781
---------- ---------- ----------184,880 130,467 534,882 432,248
----------- ----------- ------------ -----------
Total revenue 228,264 204,337 454,723 397,979230,039 180,909 684,762 578,888
Direct costs 32,658 36,078 66,947 71,286
---------- ---------- ----------32,689 33,617 99,636 104,903
----------- ----------- ------------ -----------
Gross margin 195,606 168,259 387,776 326,693
---------- ---------- ----------197,350 147,292 585,126 473,985
----------- ----------- ------------ -----------
Operating expenses:
Software development costs:
Research and development 41,253 37,664 79,450 74,87143,876 36,301 123,326 111,172
Amortization of capitalized
software development costs --- 626 -- 1,252- 1,878
Sales, marketing and
customer support 75,179 65,738 147,217 128,34278,392 60,621 225,609 188,963
General and administrative 21,106 16,429 38,602 32,08018,917 14,846 57,519 46,926
Write-off of acquired in-
process research and
development 3,157 14,699 3,1572,812 - 5,969 14,699
Other non-recurring items -- -- (2,359) --
---------- ---------- ----------1,769 - (590) -
----------- ----------- ------------ -----------
Total operating expenses 140,695 135,156 266,067 251,244
---------- ---------- ----------145,766 112,394 411,833 363,638
----------- ----------- ------------ -----------
Operating income 54,911 33,103 121,709 75,44951,584 34,898 173,293 110,347
Nonoperating income, net:
Investment gain/(loss) 34 297 (590) 3,029gain 25,526 6,430 24,936 9,459
Interest and other income 8,259 6,387 15,252 15,170
---------- ---------- ----------8,418 7,358 23,670 22,528
----------- ----------- ------------ -----------
Total nonoperating income 8,293 6,684 14,662 18,199
---------- ---------- ----------33,944 13,788 48,606 31,987
----------- ----------- ------------ -----------
Income before income taxes 63,204 39,787 136,371 93,64885,528 48,686 221,899 142,334
Provision for income taxes 23,098 17,778 49,781 37,976
---------- ---------- ----------32,100 18,839 81,881 56,815
----------- ----------- ------------ -----------
Net income $ 40,10653,428 $ 22,00929,847 $ 86,590140,018 $ 55,672
---------- ---------- ----------85,519
----------- ---------- ---------- --------------------- ------------ -----------
----------- ----------- ------------ -----------
Net income per share $ .54.72 $ .29.40 $ 1.171.88 $ . 73
---------- ---------- ----------1.13
----------- ---------- ---------- --------------------- ------------ -----------
----------- ----------- ------------ -----------
Shares used in computing net
income per share 74,416 75,638 74,178 76,016
---------- ---------- ----------74,528 74,309 74,294 75,447
----------- ---------- ---------- --------------------- ------------ -----------
----------- ----------- ------------ -----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MAY 30 NOVEMBER 29
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 185,587 $ 110,745
Short-term investments 461,874 453,371
Receivables, net of allowances
of $4,825 and $5,196, respectively 130,984 115,823
Other current assets 49,232 45,875
----------- -----------
Total current assets 827,677 725,814
Property and equipment 82,917 80,231
Other assets 169,785 195,348
----------- -----------
$ 1,080,379 $ 1,001,393
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade and other payables $ 61,601 $ 43,056
Accrued expenses 102,296 83,065
Accrued restructuring costs 8,931 10,854
Income taxes payable 40,454 67,210
Deferred revenue 19,964 15,537
----------- -----------
Total current liabilities 233,246 219,722
----------- -----------
Deferred income taxes -- 3,809
Put warrants -- 71,348
Stockholders' equity:
Preferred stock, $0.0001 par value;
2,000 shares authorized; none issued -- --
Common stock, $0.0001 par value;
200,000 shares authorized;
72,881 and 71,476 shares issued
and outstanding, respectively 7 7
Additional paid-in capital 246,882 148,595
Retained earnings 587,310 529,546
Unrealized gains on investments 18,306 33,514
Cumulative translation adjustment (5,372) (5,148)
----------- -----------
Total stockholders' equity 847,133 706,514
----------- -----------
$ 1,080,379 $ 1,001,393
----------- -----------
----------- -----------
AUGUST 29 NOVEMBER 29
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 176,911 $ 110,745
Short-term investments 510,248 453,371
Receivables, net of allowances
of $6,382 and $5,196, respectively 122,596 115,823
Other current assets 43,084 45,875
------------- ------------
Total current assets 852,839 725,814
Property and equipment 84,021 80,231
Other assets 168,700 195,348
------------- ------------
$ 1,105,560 $ 1,001,393
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade and other payables $ 46,989 $ 43,056
Accrued expenses 97,870 83,065
Accrued restructuring costs 8,729 10,854
Income taxes payable 63,713 67,210
Deferred revenue 16,286 15,537
------------- ------------
Total current liabilities 233,587 219,722
------------- ------------
Deferred income taxes - 3,809
Put warrants - 71,348
Stockholders' equity:
Preferred stock, $0.0001 par value;
2,000 shares authorized; none issued - -
Common stock, $0.0001 par value;
200,000 shares authorized;
72,987 and 71,476 shares issued
and outstanding, respectively 7 7
Additional paid-in capital 263,563 148,595
Retained earnings 621,905 529,546
Unrealized gains on investments 9,243 33,514
Cumulative translation adjustment (6,447) (5,148)
Treasury stock at cost (450 shares in 1997) (16,298) -
------------- ------------
Total stockholders equity 871,973 706,514
------------- ------------
$ 1,105,560 $ 1,001,393
------------- ------------
------------- ------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIXNINE MONTHS ENDED
-----------------------
MAY--------------------------
AUGUST 29 AUGUST 30 MAY 31
1997 1996
---------- --------------------- -----------
Cash flows from operating activities:
Net income $ 86,590140,018 $ 55,67285,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense 3,711 5,5024,021 2,583
Depreciation and amortization 21,649 12,86534,732 21,027
Deferred income taxes (2,651) (7,722)
Provision for losses on accounts receivable 308 (687)(16,155) (3,504)
Tax benefit from employee stock plans 18,427 8,550
Equity in net income of Adobe Ventures 658 --956 (6,681)
Gain on sale and dividend of equity securities (27,645) -
Write-off of acquired in-process
research and development 3,1575,969 14,699
Changes in operating assets and liabilities:
Receivables (15,121) 17,117(6,773) 25,313
Other current assets (5,144) 1,242(64) 3,768
Trade and other payables 18,739 5,7753,934 4,214
Accrued expenses (247) 3,5886,826 (11,693)
Accrued restructuring costs (1,826) (17,191)(2,125) (18,752)
Income taxes payable (26,832) 12,492
Deferred revenue 4,014 326
---------- ----------(3,497) 11,760
----------- -----------
Net cash provided by operating activities 87,005 103,678
---------- ----------158,624 136,803
----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (1,748,497) (648,925)(2,187,336) (1,238,181)
Maturities and sales of short-term investments 1,761,554 656,1762,136,511 1,281,152
Acquisitions of property and equipment (16,610) (16,867)
Additions to(25,348) (38,439)
Proceeds from (additions to) other assets (22,487) (33,494)3,599 (43,435)
Acquisitions, net of cash acquired (2,121)(6,121) (4,527)
---------- --------------------- -----------
Net cash used for investing activities (28,161) (47,637)
---------- ----------(78,695) (43,430)
----------- -----------
(Continued)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
SIXNINE MONTHS ENDED
-------------------------
MAY--------------------------
AUGUST 29 AUGUST 30 MAY 31
1997 1996
---------- --------------------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock $ 60,18558,128 $ 13,09228,738
Repurchase of common stock (36,957) (41,971)(53,255) (90,871)
Payment of dividends (7,249) (7,319)
---------- ----------(17,338) (10,941)
----------- -----------
Net cash provided (used) by financing activities 15,979 (36,198)
---------- ----------(12,465) (73,074)
----------- -----------
Effect of foreign currency exchange rates on
cash and cash equivalents 19 (620)
---------- ----------(1,298) (494)
----------- -----------
Net increase in cash and cash equivalents 74,842 19,22366,166 19,805
Cash and cash equivalents at beginning of period 110,745 58,493
---------- ----------
---------- --------------------- -----------
Cash and cash equivalents at end of period $ 185,587176,911 $ 77,716
---------- ----------
---------- ----------78,298
----------- -----------
----------- -----------
Supplemental disclosures:
Cash paid during the period for income taxes $ 56,84454,986 $ 21,278
---------- ----------
---------- ----------23,398
----------- -----------
----------- -----------
Noncash investing and financing activities:
Dividends declared but not paid $ 3,6603,606 $ 3,632
---------- ----------
---------- ----------3,622
----------- -----------
----------- -----------
Dividend in-kind declared but not issued $ 21,5608,728 $ --
---------- ----------
---------- ----------
Put warrants written-
----------- -----------
----------- -----------
Dividend in-kind distributed $ 43,76721,593 $ 29,483
---------- ----------
---------- -----------
----------- -----------
----------- -----------
Issuance of notes for acquisition $ --- $ 9,473
---------- ----------
---------- --------------------- -----------
----------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated balance sheets and
statements of income and cash flows reflect all normal recurring adjustments
which are, in the opinion of management, necessary to present a fair
statement of the condensed consolidated financial position at May 30,August 29, 1997,
and the condensed consolidated statements of income and cash flows for the
interim periods ended May 30,August 29, 1997 and May 31,August 30, 1996.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and,
therefore, do not include all information and footnotes necessary for a
complete presentation of the results of operations, the financial position,
and cash flows, in conformity with generally accepted accounting principles.
Adobe Systems Incorporated ("Adobe" or the "Company") filed audited
consolidated financial statements which included all information and footnotes
necessary for such a presentation of the results of operations, financial
position and cash flows for the years ended November 29, 1996, December 1,
1995 and November 25, 1994, in the Company's 1996 Form 10-K.
The results of operations for the interim periods ended May 30,August 29, 1997
are not necessarily indicative of the results to be expected for the full
year.
NET INCOME PER SHARE
Net income per share is based upon weighted average common and dilutive
common equivalent shares outstanding using the treasury stock method.
Dilutive common equivalent shares include stock options. Fully diluted
earnings per share for the quarters ended May 30,August 29, 1997 and May 31,August 30, 1996
were not materially different from primary earnings per share.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No.128, "Earnings Per
Share." SFAS No.128No. 128 establishes a different method of computing net income
per share than is currently required under the provisions of Accounting
Principles Board Opinion No. 15. Under SFAS No.128, the Company will be
required to present both basic net income per share and diluted net income
per share. Basic net income per share is expected to be higher than the
currently presented net income per share as the effect of dilutive stock
options will not be considered in computing basic net income per share.
Diluted net income per share is expected to be comparable or slightly lower
than the currently presented net income per share.
8
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE (CONTINUED)
The Company plans to adopt SFAS No.128 in its fiscal quarter ending
February 27, 1998 and at that time all historical net income per share data
presented will be restated to conform to the provisions of SFAS No.128.No. 128.
8
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS
No.130, "Reporting Comprehensive Income." SFAS No.130 establishes standards
for reporting and displaying comprehensive income and its components in the
financial statements. It does not, however, require a specific format for the
statement, but requires the Company to display an amount representing total
comprehensive income for the period in that financial statement. This
statement is effective for fiscal years beginning after December 15, 1997.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No.131 establishes standards for the manner in which
public business enterprises report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. This Statement is effective for financial statements for
periods beginning after December 15, 1997.
DERIVATIVES
In June 1997, the Financial Accounting Standards Board issued rules
requiring expanded disclosure for "market risk-sensitive" financial
instruments. These rules will be fully effective for the Company's financial
statements for fiscal year end 1998. As required for this interim filing,
specific information on the Company's accounting policies with regards to
activities in derivative financial instruments is provided below.
The Company utilizes derivative financial instruments in the form of
forward contracts only for the purpose of hedging the foreign currency
exposure of underlying assets, liabilities and other obligations which exist
as a part of its ongoing business operations. The Company, as a matter of
policy, does not engage in speculative transactions.
In general, instruments used as hedges must be effective at reducing the
foreign currency risk associated with the underlying transaction being hedged
and must be designated as a hedge at the inception of the contract. All
forward foreign currency contracts currently entered into by the Company have
maturities of 60 days or less.
The Company currently uses the forward contracts only as hedges of
existing transactions. For these contracts, mark-to-market gains and losses
are recognized as other income or expense in the current period, generally
consistent with the period in which the gain or loss of the underlying
transaction is recognized.
9
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVES (CONTINUED)
In a series of private placements in 1997, the Company sold put warrants
entitling the holder of each warrant to sell one share of common stock to the
Company at a specified price. There were approximately 2.1 million put
warrants written during the first nine months of 1997. At August 29, 1997
approximately 1.1 million put warrants were outstanding and expire on various
dates through January 1998 and have exercise prices ranging from $35.57 to
$38.71 per share, with an average exercise price of $37.23 per share.
Additionally, during the first nine months of 1997, the Company purchased
call options from an independent third party that entitled the Company to buy
2.1 million shares of its Common stock. At August 29, 1997 approximately 1.1
million call options were outstanding and expire on various dates through
January 1998 and have exercise prices ranging from $35.83 to $38.96 per
share, with an average exercise price of $37.48 per share.
As part of the Company's current systematic stock repurchase program, and
the new stock repurchase program announced in September of 1997, the Company
may, from time to time, enter into additional put warrant and call option
arrangements. Under these arrangements, the Company, at its option, can
settle with physical delivery or net shares equal to the difference between
the exercise price and market value at the date of exercise. Accordingly, the
arrangements do not require the reclassification of the obligation under the
put warrants from equity. Also, in the future, the Company will consider
other methods to acquire the Company's stock including direct purchases, open
market purchases, accelerated stock purchase programs, and other potential
methods.
RECLASSIFICATIONS
Certain reclassifications have been made to the November 29, 1996 balances
to conform to the presentation at May 30,August 29, 1997.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
MAY 30 NOVEMBER 29
1997 1996
--------- ---------
Land $ 782 $ 782
Building 4,478 4,615
Equipment 128,675 121,044
Furniture and Fixtures 20,520 18,126
Leasehold improvements 19,641 13,036
--------- ---------
174,096 157,603
Less accumulated depreciation and amortization 91,179 77,372
--------- ---------
$ 82,917 $ 80,231
--------- ---------
--------- ---------
910
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
AUGUST 29 NOVEMBER 29
1997 1996
--------- -----------
Land $ 782 $ 782
Building 4,478 4,615
Equipment 137,027 121,044
Furniture and fixtures 21,065 18,126
Leasehold improvements 19,599 13,036
--------- ---------
182,951 157,603
Less accumulated depreciation and amortization 98,930 77,372
--------- ---------
$ 84,021 $ 80,231
--------- ---------
--------- ---------
NOTE 3. OTHER ASSETS
Other assets consisted of the following:
MAY 30AUGUST 29 NOVEMBER 29
1997 1996
-------------------- -----------
Equity investments $ 52,25434,661 $ 97,679
Purchased technology and licensing
agreements 32,63634,134 32,211
Restricted funds and security deposits 81,77589,204 69,443
Miscellaneous other assets 48,99663,330 35,470
----------- -----------
207,066--------- ---------
221,329 234,803
Less accumulated amortization 45,87652,629 39,455
----------- -------------------- ---------
$ 169,785168,700 $ 195,348
----------- -----------
----------- -------------------- ---------
--------- ---------
Included above in other assets, as equity investments, at May 30,August 29,
1997, are equity securities and related unrealized gains and losses thereon.
Equity investments included an investment in Netscape Communications
Corporation ("Netscape") at November 26, 1996. However, during the second
quarter of fiscal 1997, the investment in Netscape was reclassified to
short-term investments when Adobe announced the dividend of most of the
Netscape shares.
NOTE 4. ACCRUED EXPENSES
Accrued expenses consisted of the following:
MAY 30 NOVEMBER 29
1997 1996
---------- ----------
Accrued compensation and benefits $ 32,340 $ 24,673
Sales and marketing allowances 13,582 13,753
Other 56,374 44,639
---------- ----------
$ 102,296 $ 83,065
---------- ----------
---------- ----------
1011
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 4. ACCRUED EXPENSES
Accrued expenses consisted of the following:
AUGUST 29 NOVEMBER 29
1997 1996
--------- -----------
Accrued compensation and benefits $ 28,307 $ 24,673
Sales and marketing allowances 14,990 13,753
Other 54,573 44,639
--------- -----------
$ 97,870 $ 83,065
--------- -----------
--------- -----------
NOTE 5. ACCRUED RESTRUCTURING COSTS
In 1995 and 1994, the Company acquired Frame Technology Corporation
("Frame") and Aldus Corporation ("Aldus"), respectively, and initiated a plan
to combine the operations of the companies. In connection with these
acqusitions,acquisitions, in 1995 and 1994 the Company recorded charges of $31.5 million
and $72.2 million, respectively, to operating expenses related to merger
transaction and restructuring costs. In addition, Frame undertook certain
restructuring measures in 1993 due to lower than anticipated revenues.
As of May 30, 1997 and November 29, 1996, $8.9 million and $10.9 million,
respectively, remained accrued and primarily relates to lease and third-party
contract termination payments, resulting from the planned closure of duplicate
offices in Europe and the United States. These payments are expected to continue
through the contract terms or negotiated early termination date, if applicable.
NOTE 6. CAPITAL STOCK
SHARE REPURCHASE PROGRAM
As part of a program previously authorized by the Board of Directors, the
Company purchased 450,000 shares of common stock in the third quarter of 1997
at an aggregate cost of $16.3 million. These repurchased shares are presented
as treasury stock at cost in the equity section of the balance sheet. In
September 1997, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to 15,000,000 shares of
the Company's common stock over the next two years.
RECAPITALIZATION
In May 1997, the Company was reincorporated in the State of Delaware. As
part of this reincorporation, each outstanding share of the old California
Corporation preferred stock and common stock was converted automatically to
one share of the new Delaware Corporation $0.0001 par value preferred stock
and common stock. This change resulted in a transfer from the common stock account
to the additional paid-in capital account totaling $246.9 million in the period
ending May 30, 1997. All prior periods presented have been restated to reflect
this change.
12
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 7. COMMITMENTS AND CONTINGENCIES
REAL ESTATE DEVELOPMENT AGREEMENT
During 1994, the Company entered into a real estate development agreement
and an operating lease agreement in connection with the construction of an
office facility in San Jose, California. In August 1996, the construction was
completed and the operating lease commenced. The Company has the option to
purchase the facility at the end of the lease term. In the event the Company
chooses not to exercise this option, the Company is obligated to arrange for
the sale of the facility to an unrelated party and is required to pay the
lessor 11
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
REAL ESTATE DEVELOPMENT AGREEMENT (CONTINUED)
any difference between the net sales proceeds and the lessor's net
investment in the facility, in an amount not to exceed that which would
preclude classification of the lease as an operating lease, approximately
$57.3 million. During the construction period, the Company was required to
pledge certain interest bearing financial investments to the lessor as
collateral to secure the performance of its obligations under the lease. As
of May 30,August 29, 1997, the Company's deposits under this agreement totaled
approximately $68.2$67.7 million in United States government treasury notes and
money market mutual funds. These deposits are included in "Other assets" in
the Condensed Consolidated Balance Sheets.
During the third quarter of 1996, the Company exercised its option under
the development agreement to begin a second phase of development for an
additional office facility. In August 1996, the Company entered into a
construction agreement and an operating lease agreement for this facility.
The operating lease will commence on completion of construction in 1998. The
Company will have the option to purchase the facility at the end of the lease
term. In the event the Company chooses not to exercise this option, the
Company is obligated to arrange for the sale of the facility to an unrelated
party and is required to pay the lessor any difference between the net sales
proceeds and the lessor's net investment in the facility, in an amount not to
exceed that which would preclude classification of the lease as an operating
lease, approximately $64.3 million. The Company also is required,
periodically during the construction period, to deposit funds with the lessor
as an interest bearing security deposit to secure the performance of its
obligations under the lease. During the secondthird quarter of 1997, the Company
deposited approximately $5.2$7.9 million, and as of May 30,August 29, 1997, the
Company's deposits under this agreement totaled approximately $13.6$21.5 million.
These deposits are included in "Other assets" in the Condensed Consolidated
Balance Sheets.
LEGAL ACTIONS
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
that the ultimate outcome of these actions will not have a material effect on
the Company's financial position and results of operations.
1213
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION (PRESENTED IN MILLIONS, EXCEPT PER SHARE
AMOUNTS) SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO.
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10-Q
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. FACTORS THAT MIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FACTORS THAT MAY AFFECT
FUTURE RESULTS OF OPERATIONS." READERS SHOULD CAREFULLY REVIEW THE RISKS
DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM
10-Q TO BE FILED BY THE COMPANY IN 1997AND1997 AND THE 1996 ANNUAL REPORT ON FORM
10-K .10-K. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS QUARTERLY
REPORT ON FORM 10-Q. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE
ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
RESULTS OF OPERATIONS
OVERVIEW
Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets,
and supports computer software products and technologies that enable users to
create, display, assemble and communicate images and documents in electronic
and printed formats. The Company licenses its technology to major computer,
printing, and publishing suppliers, and markets application software products
and type face products for authoring, editing, distributing and printing
visually rich documents. The Company distributes its products through a
network of original equipment manufacturer ("OEM") customers, distributors
and dealers, and value-added resellers ("VARs") and system integrators. The
Company has operations in North America, Europe, Japan, Asia-Pacific and
Latin America regions.
1314
The following table sets forth for the quarters and sixnine months ended
May
30,August 29, 1997 and May 31,August 30, 1996 the Company's condensed consolidated
statements of income expressed as a percentage of total revenue:
QUARTERS ENDED NINE MONTHS ENDED
------------------------- -------------------------
MAY--------------------- ---------------------
AUGUST 29 AUGUST 30 MAY 31 MAYAUGUST 29 AUGUST 30 MAY 31
1997 1996 1997 1996
---------- ---------- ---------- ------------------- --------- --------- ---------
Revenue:
Licensing 23.3% 24.1% 23.0% 24.2%19.6% 27.9% 21.9% 25.3%
Application products 76.7 75.9 77.0 75.8
---------- ---------- ---------- ----------80.4 72.1 78.1 74.7
--------- --------- --------- ---------
Total revenue 100.0 100.0 100.0 100.0
Direct costs 14.3 17.7 14.7 17.9
---------- ---------- ---------- ----------14.2 18.6 14.6 18.1
--------- --------- --------- ---------
Gross margin 85.7 82.3 85.3 82.1
---------- ---------- ---------- ----------85.8 81.4 85.4 81.9
--------- --------- --------- ---------
Operating expenses:
Software development costs:
Research and development 18.1 18.4 17.5 18.819.1 20.1 18.0 19.2
Amortization of capitalized
software development costs --- 0.3 --- 0.3
Sales, marketing and
customer support 34.1 33.5 32.9 32.2 32.4 32.232.7
General and administrative 9.2 8.0 8.58.2 8.2 8.4 8.1
Write-off of acquired in-
process research and
development 1.4 7.2 0.7 3.71.2 - 0.9 2.5
Other non-recurring items -- -- (0.5) --
---------- ---------- ---------- ----------0.8 - (0.1) -
--------- --------- --------- ---------
Total operating expenses 61.6 66.1 58.5 63.1
---------- ---------- ---------- ----------63.4 62.1 60.1 62.8
--------- --------- --------- ---------
Operating income 24.1 16.2 26.8 19.022.4 19.3 25.3 19.1
Nonoperating income:
Investment gain (loss) -- 0.2 (0.1) 0.711.1 3.6 3.6 1.6
Interest and other income 3.6 3.1 3.4 3.8
---------- ---------- ---------- ----------3.7 4.0 3.5 3.9
--------- --------- --------- ---------
Total nonoperating income 3.6 3.3 3.2 4.5
---------- ---------- ---------- ----------14.8 7.6 7.1 5.5
--------- --------- --------- ---------
Income before income taxes 27.7 19.5 30.0 23.537.2 26.9 32.4 24.6
Provision for income taxes 10.1 8.7 10.9 9.5
---------- ---------- ---------- ----------14.0 10.4 12.0 9.8
--------- --------- --------- ---------
Net income 17.6% 10.8% 19.0% 14.0%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------23.2% 16.5% 20.4% 14.8%
--------- --------- --------- ---------
--------- --------- --------- ---------
1415
REVENUE
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Total revenue $228.3 $204.3 11.7%
Six$230.0 $180.9 27.2%
Nine month period:
Total revenue $454.7 $398.0 14.3%$684.8 $578.9 18.3%
Revenue increased significantly from last year due to the release of new
products.continued growth
for application products partially offset by a decline in licensing revenue.
Product unit volume (as opposed to price) increase was the principal factor
in the Company'sapplications revenue growth.
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Product group revenue --- Licensing $53.3 $49.3 8.1%$45.2 $50.4 (10.5)%
Percentage of total revenue 23.3% 24.1%
Six19.6% 27.9%
Nine month period:
Product group revenue --- Licensing $104.7 $96.2 8.9%$149.9 $146.6 2.2%
Percentage of total revenue 23.0% 24.2%21.9% 25.3%
Licensing revenue is derived from shipments by OEM customers of products
containing the Adobe PostScript interpreter, Adobe PrintGear software and the
Display PostScript system. Such PostScript products include: (1) standard
roman printers as well as printers that work with Japanese, Chinese, and
Korean languages; (2) imagesetters; and (3) workstations. Licensing revenue
is also derived from shipments of products containing the Configurable
PostScript Interpreter ("CPSI") by OEM customers. CPSI is a fully functional
PostScript interpreter that resides on the host computer system rather than
in a dedicated controller integrated into an output device. The configuration
flexibility of CPSI allows OEMs and software developers to create and market
a variety of PostScript products independently of controller hardware
development. Adobe PostScript products sell to the small office/home office
("SOHO") market, as well as the corporate enterprise and high-end imagesetter
markets. PrintGear software is targeted to the SOHO and home computer market.
The numberDuring the third quarter of units shipped by1997, 113 new PostScript products were released
to OEMs, continued to grow on a quarterly basis.including 26 that were PostScript 3.
Royalty per unit is generally calculated as a percentage of the end user
list price of a printer, although there are some components of licensing
revenue based on a flat dollar amount per unit which typically do not change
with list price changes. InLicensing revenue decreased in the third quarter of
1997 compared to the same quarter in 1996 due to a number of factors
affecting OEMs, primarily in the Japanese market, including, but not limited
to: (1) an increase in the Japanese consumption tax on April 1, 1997 which
led to an increase in sales reported by OEMs in the second quarters and six month periodsquarter of 1997
and 1996,
licensinga related decrease in the third quarter of 1997 as demand stabilized; (2)
delayed release of the
16
Company's high resolution fonts; and (3) general weakness in the Japanese
printer market as experienced by some OEMs. Licensing revenue was driven byfor the first
nine months of 1997 increased slightly over the comparable period last year
due to increased demand for CPSI and by increased demand for color
capability, shipments of PrintGear products, as well as greater penetration
in the first and second quarters of 1997 into the Japanese market.
15
The Company has seen year-to-year increases in the number of OEM
customers from which it is receiving licensing revenue and believes that such
increases are attributable to the continued acceptance of PostScript
software, as well as to the diversification of the Company's customer base
across multiple platforms. InDuring the remainder of 1997, Adobe expects
additional OEM customers to introduce new PrintGear products that will serve
the SOHO market.market and that some OEM customers will transition from PostScript
products to PostScript 3 products. Also in 1997, one of Adobe's largest
PostScript customers, Hewlett-Packard Company ("HP"), announced plans to
introduce monochrome laser printer products that will not contain Adobe
PostScript software. These products are expected to contain a non-Adobe clone
version of PostScript and are expected to reach the market in the fall of
1997. While the Company expects overall licensing revenue growth to continue
over the longerlong term, the anticipated loss of such revenue from HP will impact
the Company's revenue growth during the short term.
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Product group revenue ---
Application products $175.0 $155.1 12.9%$184.9 $130.5 41.7%
Percentage of total revenue 76.7% 75.9%
Six80.4% 72.1%
Nine month period:
Product group revenue ---
Application products $350.0 $301.8 16.0%$534.9 $432.2 23.7%
Percentage of total revenue 77.0% 75.8%78.1% 74.7%
Application products revenue is derived predominantly from shipments of
application software programs marketed through retail distribution channels;
however, Adobe PageMill, Adobe SiteMill, Adobe FrameMaker, and Adobe Acrobat
products are becoming more widely distributed through VARs and systems
integrators. Adobe PhotoDeluxe is primarily distributed through OEM bundling
agreements with digital camera, scanner, and personal computer manufacturers.
During the secondthird quarter and first sixnine months of 1997, application
products revenue was significantly higher than that of the same periods in
1996. This increase reflected continued demand for Adobe Photoshop 4.0, Adobe
PageMaker 6.5, Adobe Illustrator 7.0, Acrobat 3.0, and PhotoDeluxe which were all released in the second half of 1996. In addition,
the Company released Adobe Illustrator 7.0 in multiple languages on both the
Macintosh and Windows platforms late in the second quarter of 1997.2.0. Also
during the secondthird quarter of 1997, the Company began shipping new versions of Adobe
Type Manager Deluxe 4.0the following
products: PhotoDeluxe 2.0 for Windows; FrameMaker 5.5 for Windows 95, Windows
NT, Macintosh, and five UNIX versions in English and Japanese; FrameMaker
SGML; Illustrator 7.0 in Latin American Spanish; PageMaker 6.5 in Japanese
and Portuguese; Photoshop 4.0 in Korean and Chinese; and Adobe Dimensions 3.0, Adobe Streamline
4.0, and Acrobat Capture 2.0 for Windows. These increases were partially offset
by decreasedAfterEffects
3.1 in Japanese, all of which added revenue for Adobe PageMaker, FrameMaker, Adobe Premiere, SiteMill
and PageMill.to the third quarter.
17
In general, the Company's application products on the Windows platform
have experienced greater growth than those on the Macintosh platform during
the second
16
third quarter and first sixnine months of 1997. During1997, although Macintosh platform
revenue increased in the secondthird quarter of 1997 compared to the third quarter
of 1996. As a result, revenue from Windows-based application products exceededwas
approximately equal to that from Macintosh-based products for the first time. Total Macintosh applications revenue decreased
12 percent year over year, all of which was related to new unit sales as
opposed to sale of upgrades.products.
DIRECT COSTS
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Direct costs $32.7 $36.1 (9.5)$33.6 (2.8)%
Percentage of total revenue 14.3% 17.7%
Six14.2% 18.6%
Nine month period:
Direct costs $66.9 $71.3 (6.1)$99.6 $104.9 (5.0)%
Percentage of total revenue 14.7% 17.9%14.6% 18.1%
Direct costs include royalties; amortization of acquired technologies;
and direct product, localization, packaging and shipping costs.
Gross margins, in general, are affected by the mix of licensing revenue
versus application products revenue as well as the product mix within
application products. Direct costs were lower in the secondthird quarter and first
sixnine months of 1997 compared with the same periods last year due to the
distribution of more application products via CD-ROM media and lower royalty
payments on licensing related to products being shipped.
Gross margins for application products are expected to vary forincrease in the
remainder of 1997 depending on the product mix soldfourth quarter due to a large royalty payment obligation ceasing during the
period.quarter.
OPERATING EXPENSES
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Software development costs ---
Research and development $41.3 $37.7 9.5%$43.9 $36.3 20.9%
Percentage of total revenue 18.1% 18.4%
Six19.1% 20.1%
Nine month period:
Software development costs ---
Research and development $79.5 $74.9 6.1%$123.3 $111.2 10.9%
Percentage of total revenue 17.5% 18.8%
1718.0% 19.2%
18
Research and development expenses consist principally of salaries and
benefits for software developers, contracted development efforts, related
facilities costs, and expenses associated with computer equipment used in
software development.
Research and development expense increased in absolute dollars as the
Company invested in new technologies, new product development, and the
infrastructure to support such activities. The increase reflects the
expansion of the Company's engineering staff and related costs required to
support its continued emphasis on developing new products and enhancing
existing products. The Company continues to make significant investments in
development of all of its software products, including those targeted for the
Internet and professional and personal publishing markets.
The Company believes that continued investments in research and
development are necessary to remain competitive in the marketplace, and are
directly related to continued, timely development of new and enhanced
products. Accordingly, the Company intends to continue recruiting and hiring
experienced software developers.
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Software development costs ---
Amortization of capitalized
software development costs $ --- $0.6 ---
Percentage of total revenue --- 0.3%
SixNine month period:
Software development costs ---
Amortization of capitalized
software development costs $ -- $1.3 --- $1.9 -
Percentage of total revenue --- 0.3%
In the implementation of Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed," software development expenditures on Adobe
products, after achieving technological feasibility, were deemed to be
immaterial. Certain software development expenditures on Frame products had
been capitalized and were being amortized over the lives of the respective
products. Full amortization of all Frame products was achieved by the end of
1996. In the secondthird quarter and first sixnine months of 1997, software development
expenditures on all products, after reaching technological feasibility, were
immaterial and the Company expects this trend to continue in the future.
1819
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Sales, marketing and
customer support $75.2 $65.7 14.4%$78.4 $60.6 29.3%
Percentage of total revenue 32.9% 32.2%
Six34.1% 33.5%
Nine month period:
Sales, marketing and
customer support $147.2 $128.3 14.7%$225.6 $189.0 19.4%
Percentage of total revenue 32.4% 32.2%32.9% 32.7%
Sales, marketing, and customer support expenses generally include
salaries and benefits, sales commissions, travel expenses, and related
facility costs for the Company's sales, marketing, customer support, and
distribution personnel. Sales, marketing, and customer support expenses also
include the costs of programs aimed at increasing revenue, such as
advertising, trade shows, and other market development programs.
Sales, marketing, and customer support expenses increased in the secondthird
quarter and first sixnine months of 1997 compared with the same periods of 1996.
The increases are due to increased advertising and promotional expenditures
for upgrades of existing products and further development of customer and
technical support services to support a growing base of customers.
For the near future, the Company expects sales, marketing, and customer
support expenses to increase in absolute dollars from 1996 spending levels
while remaining level as a percentage of revenue. The increase in absolute
dollars for the remainder of 1997 will beis due to
new product releases, increased investment in the Windows market and programs
related to furthering worldwide recognition of the Adobe brand.
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
General and administrative $21.1 $16.4 28.5%$18.9 $14.8 27.4%
Percentage of total revenue 9.2% 8.0%
Six8.2% 8.2%
Nine month period:
General and administrative $38.6 $32.1 20.3%$57.5 $46.9 22.6%
Percentage of total revenue 8.5%8.4% 8.1%
General and administrative expenses consist principally of salaries and
benefits, travel expenses, and related facility costs for the finance, human
resources, legal, information services, and administrative personnel of the
Company. General and administrative expenses also include outside legal and
accounting fees, bad debts, and expenses 19
associated with computer equipment
and software used in the administration of the business.
20
General and administrative expenses increased in absolute dollars for the
secondthird quarter and first sixnine months of 1997 compared with the same periods
last year. The increase resulted primarily from higher information systems
costs, legal costs, employee benefits costs, and costs associated with the
implementaionimplementation of a more comprehensive administrative infrastructure.
Because of the investments the Company is making in product development,
marketing and sales efforts and in infrastructure development, operating
expenses are expected to increase in absolute terms and may increase as a
percentage of revenues, depending on the revenue levels achieved in any
particular quarter.
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Write-off of acquired in-
process research and
development $3.2 $14.7 (78.5)%$2.8 $ - -
Percentage of total revenue 1.4% 7.2%
Six1.2% -
Nine month period:
Write-off of acquired in-
process research and
development $3.2$6.0 $14.7 (78.5)(59.4)%
Percentage of total revenue 0.7% 3.7%0.9% 2.5%
During the secondthird quarter of 1997, the Company acquired twoDigiDox, Inc., a
privately-held company that develops electronic catalogs and authoring tools
based upon Acrobat software companiesand the Adobe Portable Document Format (PDF). The
Company paid $5.3 million and accounted for the transactions bytransaction under the
purchase method. The
aggregate purchase priceApproximately $2.8 million was principally allocated to in-process
research and development and accordingly, $3.2 million was expensed at the time of the acquisitions.acquisition.
The remainder of the purchase price was allocated to current assets and
goodwill, which will be amortized over three years.
In May 1996, the Company acquired Ares Software Corporation ("Ares") for
approximately $15.5 million and accounted for the transaction byunder the
purchase method. Of this amount, the Company paid approximately $4.5 million
in cash, assumed $1.5 million of liabilities, and issued notes payable for
$9.5 million. Approximately $14.7 million was allocated to in-process
research and development, and was expensed at the time of the acquisition.
The remainder of the purchase price was allocated to current assets and
goodwill.
2021
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Other non-recurring items $1.8 $ -- $ -- --- -
Percentage of total revenue -- --
Six0.8% -
Nine month period:
Other non-recurring items $(2.4)$(0.6) $ -- --- -
Percentage of total revenue (0.5)(0.1)% ---
The non-recurring item which occurred duringin the firstthird quarter of 1997
represents proceeds on the divestiturea charge related to an acquisition of a product line.intellectual property.
NONOPERATING INCOME
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Investment gain/(loss) $ -- $0.3 --gain $25.5 $6.4 297.0%
Percentage of total revenue -- 0.2%
Six11.1% 3.6%
Nine month periodperiod:
Investment gain/(loss) $(0.6) $3.0 (119.5)%gain $24.9 $9.5 163.6%
Percentage of total revenue (0.1)% 0.8%3.6% 1.6%
Investment gain (loss) consists principally of realized gains or losses from
direct investments as well as mark-to-market valuation adjustments for Adobe
Ventures L.P. and investments. During the third quarter of 1997, the Company
distributed to stockholders 554,553 shares of Netscape Communications
Corporation ("Netscape") stock as a stock dividend which triggered the
recognition of a $20.3 million gain and sold 200,000 shares of Netscape stock
which resulted in a gain of $7.3 million.
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Interest and other income $8.3 $6.4 29.3%$8.4 $7.4 14.4%
Percentage of total revenue 3.6% 3.1%
Six3.7% 4.0%
Nine month periodperiod:
Interest and other income $15.3 $15.2 0.5%$23.7 $22.5 5.1%
Percentage of total revenue 3.4% 3.8%3.5% 3.9%
Interest and other income consists principally of interest earned on
cash, cash equivalents, and short-term investments.
In the secondthird quarter of 1997, interest and other income was higher than
the second
21
third quarter of 1996 as a result of a significantly higher cash and
short termshort-term investments base.
22
Interest and other income for the first sixnine months of 1997 was more
consistent with the same period of 1996 primarily as a result of a gain
realized in the first quarter of 1996 on the disposition of a part of the
Company's short-term portfolio.
PROVISION FOR INCOME TAXES
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Provision for income taxes $23.1 $17.8 29.9%$32.1 $18.8 70.4%
Percentage of total revenue 10.1% 8.7%14.0% 10.4%
Effective tax rate 36.5% 44.7%
Six37.5% 38.7%
Nine month period:
Provision for income taxes $49.8 $38.0 31.1%$81.9 $56.8 44.1%
Percentage of total revenue 10.9% 9.5%12.0% 9.8%
Effective tax rate 36.5% 40.6%36.9% 39.9%
The effective tax rate for the secondthird quarter and first sixnine months of
1997 was lower than the same periods in 1996 as a result of the absence of
significant non-deductible one-time charges in 1997.1997, and due to the extension
of the federal research and experimentation tax credit. During 1996, the
federal research credit was only available for five months of the year.
NET INCOME AND NET INCOME PER SHARE
1997 1996 CHANGE
---------- --------- -----------
Second-------- -------- ------
Third quarter period: (Dollars in millions)
Net income $40.1 $22.0 82.2%$53.4 $29.8 79.0%
Percentage of total revenue 17.6% 10.8%23.2% 16.5%
Net income per share $0.54 $0.29 86.2%$0.72 $0.40 80.0%
Weighted shares (In thousands) 74,416 75,638 (1.6)%
Six74,528 74,309 -
Nine month period:
Net income $86.6 $55.7 55.5%$140.0 $85.5 63.7%
Percentage of total revenue 19.0% 14.0%20.4% 14.8%
Net income per share $1.17 $0.73 60.3%$1.88 $1.13 66.4%
Weighted shares (In thousands) 74,178 76,016 (2.4)74,294 75,447 (1.5)%
Net income for the secondthird quarter of 1997 increased 82.279.0 percent from the
secondthird quarter of 1996. Earnings per share were $.54, a 86.2$.72, an 80.0 percent increase
from the second
22
third quarter of 1996. Net income for the sixnine months ended May 30,August
29, 1997 increased 55.563.7 percent from the same period in 1996 and earnings per
share increased 60.366.4 percent for the same period. The increase was caused
primarily by higher revenues, improved gross margin, investment gains, and improved operating margins.a
lower effective tax rate.
23
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that in the future its results of operations could
be affected by various factors, such as: delays in shipment of the Company's
new products and major new versions of existing products; market acceptance
of new products and upgrades; renegotiation of royalty arrangements; growth
in worldwide personal computer and printer sales and sales price adjustments;
consolidation in the OEM printer business; industry transitions to new
business and information delivery models; adverse changes in general economic
conditions in any of the countries in which the Company does business; the
introduction of new competitive products; and the prices of new or existing
competitive products.
The markets for the Company's products are characterized by rapidly
changing technology and customer needs, evolving industry standards and
frequent new product introductions. The Company's success will depend upon
its ability to develop and market products, including upgrades of currently
shipping products, that successfully adapt to changing customer needs. The
Company's ability to extend its core technologies into new applications and
to anticipate or respond to technological changes could affect its ability to
develop these products. A portion of the Company's future revenue will come
from these products. Delays in product introductions, including delays in
providing localized products for international customers, could have an
adverse effect on the Company's revenue, earnings, or stock price. The
Company cannot determine the ultimate effect that these new products or
upgrades will have on its sales or results of operations.
The Company generally offers its application products on Windows,
Macintosh, and, for some products, Unix platforms. In the secondthird quarter of
fiscal 1997, Windows-based application revenue exceededwas approximately equal to
that for the Macintosh platform forplatform. In the first time. Totalprior quarter, Macintosh-based
applicationsapplication revenue decreased 12 percent year over year, all of which occurred in new
unit sales. Upgrade revenue on the Macintosh platform increased 34% year over
year.had declined. If there is a continued or accelerated slowdown of Macintosh
applications revenue, and if the Company is unable to continue to increase
its revenue from Windows customers, the Company's operating results could be
materially adversely affected. Also, as the Company broadens its customer
base to achieve greater penetration in the corporate business, SOHO, consumer
or personal publishing markets, the Company may need to adapt its application
software distribution channels.channels, and spend additional funds on marketing and
advertising to generate additional demand. The Company could experience
decreases in average selling prices, increased costs, and some loss of
revenues in its distribution channel which could materially adversely affect
its operating results. In addition, to the extent that there is a slowdown of
customer purchases of personal computers in general, the Company's operating
results could be materially adversely affected.
The Company's OEM customers on occasion seek to renegotiate their royalty
arrangements. The Company evaluates these requests on a case-by-case basis.
If an agreement is not reached, a customer may decide to pursue other
options, including licensing a PostScript language compatible interpreter
from a third party, which could 23
result in lower licensing revenue for the
Company. During the first quarter
of 1996, there was a change in part of the Company's business relationship
with Hewlett-Packard Company ("Hewlett-Packard"). Beginning in the late fall of 1997, Hewlett-Packard plans not to
incorporate Adobe PostScript software in some of its Hewlett-Packard LaserJet printers. The
Company estimates the revenue impact of this action will be approximately
$6.0 million per quarter.quarter, although somewhat less in the fourth quarter of
1997. The Company expects to continue working with Hewlett-Packard printer
operations to incorporate Adobe PostScript and other technologies in other
Hewlett-Packard products. TheIf the Company expects tocannot increase its overall
licensing
revenue infrom other sources to offset the second halfimpact of 1997, but if it is unsuccessful,Hewlett-Packard's change
the loss of the HPof Hewlett-Packard revenue from monochrome laser printers
would adversely affect itsthe Company's
24
licensing revenue. In addition, if general economic conditions in Japan do
not improve, the Company's licensing revenue from OEMs distributing Japanese
printers and applications revenue could be adversely affected in late 1997
and early 1998.
Prior to 1996, the Company experienced significant revenue and headcount
growth. During the first nine months of 1997, the Company's revenue increased
18.3 percent over the same period last year. The Company's ability to
effectively manage its revenue and headcount growth will require it to
continue to plan and manage its operational and financial controls and
management information systems, and to attract, retain, motivate and manage
employees effectively. The Company is investing significantly in upgrading its
management information systems worldwide. The failure of the Company to
effectively manage growth could have a material adverse effect on its results
of operations.
The internetInternet and intranetIntranet markets are rapidly evolving and are
characterized by an increasing number of market entrants who have introduced
or developed products addressing authoring and communication over the
internetInternet and intranet.Intranet. As is typical in the case of a new and evolving
industry, demand and market acceptance for recently introduced products and
services are subject to a high level of uncertainty. The software industry
addressing the authoring and electronic publishing requirements of the
Internet is young and has few proven products. In addition, new models for
licensing software to accommodate new information delivery practices will be
needed. Moreover, critical issues concerning the commercial use of the
internetInternet (including security, reliability, ease of use and access, cost, and
quality of service) remain unresolved and may impact this market, together
with the software standards and electronic media employed in such markets.
The Company derives a significant portion of its revenue and operating
income from its subsidiaries located in Europe, Japan, Asia-Pacific and Latin
America. While most of the revenue of these subsidiaries is denominated in
U.S. dollars, the majority of their expense transactions are denominated in
foreign currencies, including the Japanese yen and most major European
currencies. As a result, the Company's operating results are subject to
fluctuations in foreign currency exchange rates. To date, the impact of such fluctuationsA foreign currency
management program has been insignificant and the Company has not engagedput in place to mitigate any significant activities to
hedge its exposure to foreign currency exchange rate fluctuations. In addition,
the Company generally experiences lower revenue from its European operations in
the third quarter because many customers reduce their business activities in the
summer months.exposure.
Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock in any given period.
Additionally, the Company may not learn of such shortfalls until late in the
24
fiscal quarter, which could result in an even more immediate and adverse
effect on the trading price of the Company's common stock. Finally, the
Company participates in a highly dynamic industry. In addition to factors
specific to the Company, changes in analysts' earnings estimates for the
Company or its industry and factors affecting the corporate environment or
the securities markets in general will often result in significant volatility
of the Company's common stock price.
25
FINANCIAL CONDITION
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
MAY 30AUGUST 29 NOVEMBER 29
1997 1996 CHANGE
--------------- ----------- ------
(Dollars in millions)
Cash, cash equivalents and
short-term investments $647.5$687.2 $564.1 14.8%21.8%
The Company's cash balances and short termshort-term investments have increased due
to the transfer of marketable securities from long-term to short-term assets
and profitable operations, partially offset by expenditures for the repurchase
of stock, capital outlays, other investments, and deposits required under
real estate development agreements. Short-term investments
also increased due to a $20.7 million reclassification, from other assets, of
a significant portion of the Company's investment in Netscape Communications
Corporation ("Netscape"). This amount was reclassified because, during the
second quarter of fiscal 1997, the Company announced the dividend of a
portion of its investment in Netscape under the Company's venture stock
dividend program. The Company plans to dividend one share of Netscape common
stock on August 27, 1997, for every one hundred shares of Adobe common stock
held by stockholders' of record on July 31, 1997.
Cash equivalents consist of highly liquid money market instruments. All
of the Company's cash equivalents and short-term investments, consisting
principally of municipal bonds, auction rate certificate securities, United
States government and government agency securities, and asset-backed
securities, are classified as available-for-sale under the provisions of Statement of Financial Accounting StandardsSFAS
No. 115, "Accounting for Certain Investments in Debt and Securities." The
securities are carried at fair value with the unrealized gains and losses,
net of tax, reported as a separate component of stockholders' equity.
25
OTHER ASSETS
MAY 30AUGUST 29 NOVEMBER 29
1997 1996 CHANGE
--------------- ----------- ------
(Dollars in millions)
Other assets $169.8$168.7 $195.3 (13.1)(13.6)%
Included above in other assets at May 30,August 29, 1997 are purchased
technology and licensing agreements, restricted funds and security deposits,
equity securities and unrealized gains and losses thereon. The decline in
other assets is primarily due to the reclassificationdividend distribution and sale of the
Netscape common stock investment and the transfer of other marketable
securities from long-term to short-term investments.assets. The decline was partially
offset by an increase in the security deposit under a real estate agreement.
NONCURRENT LIABILITIES AND STOCKHOLDERS' EQUITY
MAY 30AUGUST 29 NOVEMBER 29
1997 1996 CHANGE
--------------- ----------- ------
(Dollars in millions)
Noncurrent liabilities and
stockholders' equity $847.1$872.0 $781.7 8.4%11.6%
At November 29, 1996, deferred income taxes related to unrealized gains
and losses on equity investments and obligations for put warrants are
included in noncurrent liabilities and stockholders' equity. The Company has
no long-term debt. The increase
26
from November 29, 1996 to May 30,August 29, 1997 results from net income and the
issuances of common stock under the Company's stock option and employee stock
purchase plans partially offset by a decrease
inthe absence of the unrealized gain on the
equity investment in Netscape and the repurchase of stock. Also, as a result
of changes made during the second quarter of 1997 to settlement terms in
option contracts, the Company no longer reclassifies the potential obligations
for put warrants as a reduction of stockholders' equity.
Under its stock repurchaseAs part of a program previously authorized by the Board of Directors, the
Company repurchased 3,321,500 shares at a cost of $124.5 million in 1996.
During the secondthird quarter and first sixnine months of 1997, the Company
repurchased 500,000450,000 shares at a cost of $20.8$16.3 million and 977,0001,427,000 shares at
a cost of $36.9$53.2 million, respectively. The Company intendsshares repurchased in the third
quarter of 1997 are presented as treasury stock in the equity section of the
balance sheet. In September 1997, the Board of Directors authorized, subject
to continuecertain business and market conditions, the purchase of up to directly repurchase common15,000,000
shares and
arrange options to purchase common shares to partially offset the effects of the Company's employeecommon stock purchase and stock option plans.over the next two years.
The Board of Directors of the Company declared a cash dividend on the
Company's common stock of $.05 per common share on June 16,September 17, 1997 for the
secondthird quarter of 1997. The dividend will be for stockholders of record as of
July 7,October 1, 1997, and will be paid on July 21,October 15, 1997. The declaration of
future dividends is within the discretion of the Board of Directors of the
Company and will depend upon business conditions, results of operations, the
financial condition of the Company and other factors. In addition, on April
24,July
31, 1997, the Company announced the firstsecond dividend of venture investment
stock under the venture stock dividend program.program announced in March 1997. Adobe
plans to dividend one share of Netscape
26
Siebel Systems Incorporated ("Siebel") common
stock on August 27,December 1, 1997 for each oneevery three hundred shares of Adobe common
stock held by stockholders of record on JulyOctober 31, 1997; an equivalent1997. Adobe stockholders
of record holding less than seventy-five hundred shares will receive a cash
dividendpayment proportional to the closing price of Siebel stock on October 31,
1997. In addition, cash will be paid for holdingsdistributed in lieu of less than twenty-five hundred Adobefractional shares and for odd lots less than one hundred Adobe shares, basedof
Siebel stock on the Netscape closing price on July 31, 1997.same proportional basis.
WORKING CAPITAL
MAY 30AUGUST 29 NOVEMBER 29
1997 1996 CHANGE
--------------- ----------- ------
(Dollars in millions)
Working capital $594.2$619.3 $506.1 17.4%22.4%
Net working capital grew to $594.2$619.3 million as of May 30,August 29, 1997,
compared to $506.1 million as of November 29, 1996. Cash flow provided by
operations during the first sixnine months of 1997 was $87.0$158.6 million.
Expenditures during the first sixnine months of 1997 for property and
equipment totaled $16.6$25.3 million. Such expenditures are expected to continue,
including computer systems for development, sales and marketing, product
support, and administrative staff. In the future, additional cash may be used
to acquire software products or technologies complementary to the Company's
business. Net cash used by financing activities during the first sixnine months
of 1997 was $16.0$12.5 million primarily resulting from the repurchase of common
stock and payment of dividends partially offset by issuance of common stock
under employee stock plans partially offset by repurchaseplans. In September 1997, the Board of Directors
authorized, subject to certain business and market conditions, the purchase
of up to 15,000,000 shares of the Company's common stock over the next two
years. Since this amount represents approximately twenty percent of the
Company's current outstanding stock, a significant
27
portion of the Company's cash, cash equivalents and payment of dividends.short-term investments
may be used to repurchase these shares.
The Company's principal commitments as of May 30,August 29, 1997 consisted of
obligations under operating leases, venture investing activities, put
warrants, real estate development agreements, and various service and lease
guarantee agreements with a related party.
REAL ESTATE DEVELOPMENT
During 1994, the Company entered into a real estate development agreement
and an operating lease agreement in connection with the construction of an
office facility. In August 1996, the construction was completed and the
operating lease commenced. The Company has the option to purchase the
facility at the end of the lease term. In the event the Company chooses not
to exercise this option, the Company is obligated to arrange for the sale of
the facility to an unrelated party and is required to pay the lessor any
difference between the net sales proceeds and the lessor's net investment in
the facility, in an amount not to exceed that which would preclude
classification of the lease as an operating lease, approximately $57.3
million. During the construction period, the Company was required to pledge
certain interest bearing intrumentsfinancial investments to the lessor as collateral to
secure the performance of its obligations under the lease. As of May 30,August 29,
1997, the Company's deposits under this agreement totaled approximately $68.2$67.7
million in United States government treasury notes and money market mutual
funds. These deposits are included in "Other assets" in the Condensed
Consolidated Balance Sheets.
During the third quarter of 1996, the Company exercised its option under
the development agreement to begin a second phase of development for an
additional office facility. In August 1996, the Company entered into a
construction agreement and an
27
operating lease agreement for this facility.
The operating lease will commence on completion of construction in 1998. The
Company will have the option to purchase the facility at the end of the lease
term. In the event the Company chooses not to exercise this option, the
Company is obligated to arrange for the sale of the facility to an unrelated
party and is required to pay the lessor any difference between the net sales
proceeds and the lessor's net investment in the facility, in an amount not to
exceed that which would preclude classification of the lease as an operating
lease, approximately $64.3 million. The Company also is required,
periodically during the construction period, to deposit funds with the lessor
as an interest bearing security deposit to secure the performance of its
obligations under the lease. During the secondthird quarter of 1997, the Company
deposited approximately $5.2$7.9 million, and as of May 30,August 29, 1997, the
Company's deposits under this agreement totaled approximately $13.6$21.5 million.
These deposits are included in "Other assets" in the Condensed Consolidated
Balance Sheets.
SERVICE AND LEASE GUARANTEES
The Company holds a 14 percent equity interest in McQueen Holdings
Limited ("McQueen"), a U.K. Company, and accounts for the investment at cost.
During 1994, the Company entered into various agreements with McQueen,
whereby the Company contracted with McQueen to perform product localization
and technical support functions and to provide printing, assembly, and
warehousing services.
The Company believes that existing cash, cash equivalents, and short-term
investments, together with cash generated from operations, will provide
sufficient funds for the Company to meet its operating cash requirements in
the foreseeable future.
28
PART II --- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Quantel Limited ("Quantel"), a U.K. corporation, filed and served on the
Company in January 1996 a complaint alleging that the Adobe Photoshop program
infringes five U.S. patents held by Quantel. The complaint was filed in the
United States District Court for the District of Delaware. The complaint seeksOn September 19,
1997, a permanent injunctionjury in federal court in Delaware found in favor of Adobe, finding
that Adobe Photoshop did not infringe the five patents held by Quantel
Limited, and unspecified damages. The Company has analyzedthat the five patents and believes it has adequate legal defenses to the major causes of
action and intends to vigorously defend the lawsuit. The case is currently in
the discovery phase.are invalid.
On February 6, 1996, a securities class action complaint was filed
against Adobe, certain of its officers and directors, certain former officers
of Adobe and Frame, Hambrecht & Quist, LLP ("H&Q"), investment banker for
Frame, and certain H&Q employees, in connection with the drop in the price of
Adobe stock following its announcement of financial results for the quarter
ended December 1, 1995. The complaint was filed in the Superior Court of the
State of California, County of Santa Clara. The complaint alleges that the
defendants misrepresented material adverse information regarding Adobe and
Frame and engaged in a scheme to defraud investors. The complaint seeks
unspecified damages for alleged violations of California law. Adobe believes
that the allegations against it and its officers and directors are without
merit and intends to vigorously defend the lawsuit. The case is currently in
the discovery phase.
On April 17, 1997, a derivative action was filed in the Superior Court of
the State of California, County of Santa Clara, against the current members
of Adobe's Board of Directors and Paul Brainerd, a former member of the
Board. The suit was filed by a shareholder purporting to assert on behalf of
the Company claims for alleged breach of the Directors' fiduciary duty and
mismanagement related to the Company's acquisition of Frame in October 1995.
The Company has moved for dismissal of the suit on the ground that the
shareholder was required to make a demand on the Board to bring this
litigation before the shareholder proceeded with his own lawsuit on behalf of
Adobe, and he failed to make such a demand.
Management believes that the ultimate resolution of these matters will
not have a material impact on the Company's financial position or results of
operations.
29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on April 9, 1997.
A proposal to elect four (4) Class II directors of the Company to serve
for a two-year term expiring at the Annual Meeting of Stockholders in 1999
was approved by the shareholders. This proposal received the following votes:
For Withheld
---------- ---------
John E. Warnock 64,105,752 2,314,499
Gene P. Carter 64,460,643 1,959,608
Robert Sedgewick 64,460,643 1,959,608
William J. Spencer 64,459,783 1,960,468
Incumbent Class I directors Charles M. Geschke, William R. Hambrecht,
and Delbert W. Yocam are currently serving for a term expiring at the Annual
Meeting of Stockholders in 1998.
Introduced was a proposal to approve the reincorporation of the Company
in the State of Delaware and related changes to the rights of stockholders.
This proposal received the following votes:
For: 36,866,839
Against: 15,737,065
Abstain: 952,533
Introduced was a proposal to approve an increase in the Company's share
reserve under the 1994 Stock Option Plan by 5,600,000 shares to a total of
29,200,000 shares and a decrease in the option term period to eight years
from ten years for all options granted after approval of this proposal. This
proposal received the following votes:
For: 37,479,997
Against: 15,520,571
Abstain: 555,868
Also, there was a proposal to approve the 1997 Employee Stock Purchase
Plan. This proposal received the following votes:
For: 44,117,138
Against: 10,533,352
Abstain: 217,905
(Continued)
30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(Continued)
In addition, shareholders ratified the appointment of KPMG Peat Marwick
LLP as independent public accountants of the Company for fiscal 1997. This
proposal received the following votes:
For: 66,262,620
Against: 77,150
Abstain: 80,481
Abstentions and broker non-votes were each included in the determination
of the number of shares present and voting for purposes of determining the
presence of a quorum at the Company's annual meeting of stockholders. Each
was tabulated separately. Abstentions were included in tabulations of the
votes cast for purposes of determining whether a proposal had been approved.
Broker non-votes however, were not counted for purposes of determining the
number of votes cast for a proposal.
31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
INCORPORATED BY REFERENCE
EXHIBIT ------------------------------------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
------- ------------------- ---- ------------ --------------------------- ----- -------- ------ --------
2.1 Agreement and Plan of X10-Q 05/30/97 2.1
Merger effective 5/30/97
(by virtue of a reincorp-
oration), by and between
Adobe Systems Incorpor-
ated, a California Corp-
oration and Adobe Systems
(Delaware) Incorporated,
a Delaware corporation.
3.1 The Registrant's (as successor- Xsucc- 10-Q 05/30/97 3.1
essor in-interest to Adobe
Systems Incorporation by
virtue of a reincorporation
effective 5/30/97), Certificate of Certif-
icate of Incorporation, as
filed with the Secretary of
State of the State of
Delaware on 5/9/97.
3.2.10 The Registrant's (as X
(successor-in-interest10-Q 05/30/97 3.2.10
successor-in-interest
to Adobe Systems
(Delaware) Incorporated
by virtue of a
reincorporation) Bylaws as
currently in effect.
4.1 Shareholders Rights 10-Q 05/31/96 4.1
Plan, as amendedamended*
10.1.6 1984 Stock Option Plan, 10-Q 07/02/93 10.1.6
as amended*
10.1.7 1994 Stock Option Plan* 10-Q 05/27/94 10.1.7
10.1.8 1994 Stock Option Plan, S-8 05/30/04/09/97 10.1.8
as amended*
10.1.9 1997 Employee Stock S-8 04/09/97 10.1.9
Purchase Plan*
10.12.1 1988 Employee Stock 10-Q 07/06/94 10.12.1
Purchase Plan, as
amended*
(Continued)
3230
3.(a). Index to Exhibits (Continued)
INCORPORATED BY REFERENCE
EXHIBIT ----------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
------- ------------------- ---- -------- ---------------------------------- ----- -------- ------ --------
10.17.1 License Agreement 10-K 11/30/88 10.17.1
Restatement between the
Company and Apple
Computer, Inc., dated
April 1, 1987
(confidential treatment
granted)
10.17.2 Amendment No. 1 to the 10-K 11/30/90 10.17.2
License Agreement
Restatement between the
Company and Apple
Computer, Inc., dated
November 27, 1990
(confidential treatment
granted)
10.21.3 Revised Bonus Plan* 10-Q 02/28/97 10.21.3
10.24.1 1994 Performance and S-4 07/27/94 10.1
Restricted Stock Plan*
10.25.0 Form of Indemnity 10-K 11/30/90 10.17.2
Agreement*
10.25.1 Form of Indemnity X10-Q 05/30/97 10.25.1
Agreement*
10.32 Sublease of the Land and 10-K 11/25/94 10.32
Lease of the Improvements
By and Between
Sumitomo Bank Leasing
and Finance Inc. and
Adobe Systems Incorporated
(Phase 1)
(Continued)
3331
3.(a). Index to Exhibits (Continued)
INCORPORATED BY REFERENCE
EXHIBIT ----------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
------- ------------------- ---- -------- ---------------------------------- ----- -------- ------ --------
10.33 Sale of Rights under 10-Q 06/02/95 10.33
Software Development
and Acquisition Agreement
By and Between Adobe
Systems Incorporated and
Thomas Knoll and John
Knoll (confidential
treatment granted)
10.34 Agreement and Plan of S-4 08/18/95 2.1
Merger and Reorganization
By and Among Adobe
Systems Incorporated, J
Acquisition Corporation
and Frame Technology
Corporation
10.35 Form of Executive 10-K 12/01/95 10.35
Severance and Change
of Control Agreement*
10.36 1996 Outside Directors 10-Q 05/31/96 10.36
Stock Option plan*
10.37 Confidential Resignation 10-Q 05/31/96 10.37
Agreement*
10.38 Sublease of the Land and 10-Q 08/30/96 10.38
Lease of the Improvements
By and Between
Sumitomo Bank Leasing
and Finance Inc. and
Adobe Systems Incorporated
(Phase 2)
10.39 1997 Employee Stock Purchase S-8 05/30/97 10.39
Purchase Plan*
10.40 Employee Stock Option S-8 05/30/97 10.40
Plan 10.40Amendment*
10.41 Amended and Restated 10-Q 05/30/97 10.41
Limited Partnership
Agreement of Adobe
Incentive Partners, L.P.
11 Computation of Net Income X
Limited Partnership
Agreement of Adobe
Incentive Partners, L.P.Per Common Share
27 Financial Data Schedule X
(Continued)
34
3. Index to Exhibits (Continued)
INCORPORATED BY REFERENCE
EXHIBIT ----------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
------- ------------------- ---- -------- ------- --------
11 Computation of Net Income X
Per Common Share
27 Financial Data Schedule X
------------------------------------------
*Compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended May 30,- -----------------
*Compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended August 29, 1997.
3532
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADOBE SYSTEMS INCORPORATED
Date: July 14,October 10, 1997
By /s/ P. JACKSON BELL
----------------------------------------------------------------
P. Jackson Bell,
Executive Vice President,
Chief Financial Officer,
Chief Administrative Officer,
and Assistant Secretary
(Principal Financial Officer)
3633
SUMMARY OF TRADEMARKS
The following trademarks of Adobe Systems Incorporated, which may be
registered in certain jurisdictions, are referenced in this Form 10-Q:
Acrobat
Adobe
Capture
DimensionsAfterEffects
Illustrator
FrameMaker
PageMaker
PageMill
PhotoDeluxe
Photoshop
PostScript
Premiere
PrintGear
SiteMill
Streamline
Type Manager
All other brand or product names are trademarks or registered trademarks
of their respective holders.
3734