SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
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 March 3, 1995
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)
California 77-0019522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1585 Charleston Road, Mountain View, California 94043-1225
(Address of principal executive offices)
(Zip Code)
(415) 961-4400
(Registrant's telephone number, including area code)
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 March 3, 1995
----- -------------
Common stock, no par value 62,314,440
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 17
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Signature 34
Summary of Trademarks 35
Exhibits 36
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 March 3, 1995 and February 25, 1994 4
- - Condensed Consolidated Balance Sheets
March 3, 1995 and November 25, 1994 5
- - Condensed Consolidated Statements of Cash Flows
Three Months Ended March 3, 1995 and February 25, 1994 6
- - Notes to Condensed Consolidated Financial Statements 8
3
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
------------------------
March 3 February 25
1995 1994
---------- -----------
Revenue:
Licensing $ 46,314 $ 36,326
Application products 122,278 99,566
---------- -----------
Total revenue 168,592 135,892
Direct costs 32,751 26,005
---------- -----------
Gross margin 135,841 109,887
---------- -----------
Operating expenses:
Software development costs:
Research and development 26,368 21,698
Amortization of capitalized
software development costs 2,560 2,621
Sales, marketing and
customer support 46,032 45,668
General and administrative 11,574 11,988
---------- -----------
Total operating expenses 86,534 81,975
---------- -----------
Operating income 49,307 27,912
Nonoperating income:
Interest, investment and
other income 5,176 2,029
---------- -----------
Income before income taxes 54,483 29,941
Provision for income taxes 20,133 10,848
---------- -----------
Net income $ 34,350 $ 19,093
---------- -----------
---------- -----------
Net income per share $ .54 $ .31
---------- -----------
---------- -----------
Shares used in computing net
income per share 64,043 61,289
---------- -----------
---------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 3 November 25
1995 1994
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 172,357 $ 190,091
Short-term investments 250,801 210,269
Receivables 100,031 96,585
Inventories 6,778 9,619
Other current assets 6,051 7,837
Deferred income taxes 16,838 17,962
----------- -----------
Total current assets 552,856 532,363
Property and equipment 42,386 39,104
Other assets 56,365 45,561
Deferred income taxes 8,886 8,475
----------- -----------
$ 660,493 $ 625,503
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade and other payables $ 26,012 $ 30,840
Accrued expenses 82,040 79,000
Accrued restructuring costs 14,635 28,457
Income taxes payable 18,288 23,083
Deferred revenue 8,388 7,352
----------- -----------
Total current liabilities 149,363 168,732
----------- -----------
Shareholders' equity:
Preferred stock, no par value;
2,000,000 shares authorized;
none issued -- --
Common stock, no par value;
200,000,000 shares authorized;
62,314,440 and 61,150,049 shares issued
and outstanding as of March 3, 1995,
and November 25, 1994, respectively 164,498 142,207
Unrealized losses on investments (587) (1,088)
Retained earnings 350,922 319,704
Cumulative foreign currency translation
adjustments (3,703) (4,052)
----------- -----------
Total shareholders' equity 511,130 456,771
----------- -----------
$ 660,493 $ 625,503
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
-------------------------
March 3 February 25
1995 1994
----------- ------------
Cash flows from operating activities:
Net income $ 34,350 $ 19,093
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense 529 253
Depreciation and amortization 10,225 10,292
Deferred income taxes 708 (627)
Unrealized loss on investments -- 423
Provision for losses on accounts receivable 307 (147)
Tax benefit from employee stock plans 5,073 4,310
Changes in operating assets and liabilities:
Receivables (4,237) (1,847)
Inventories 2,929 547
Other current assets 887 (67)
Trade and other payables (4,353) (4,358)
Accrued expenses 2,050 (91)
Accrued restructuring costs (12,869) --
Income taxes payable (4,908) (8,576)
Deferred revenue 1,018 (1,617)
----------- ----------
Net cash provided by operating activities 31,709 17,588
----------- ----------
Cash flows from investing activities:
Purchases of short-term investments (1,455,278) (225,469)
Maturities and sales of short-term investments 1,415,247 208,933
Acquisitions of property and equipment (8,913) (6,990)
Capitalization of software development costs -- (2,502)
Additions to other assets (15,110) (1,644)
----------- -----------
Net cash used for investing activities (64,054) (27,672)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 24,453 8,388
Proceeds from sales of put warrants -- 358
Repurchase of common stock (7,765) (3,818)
Payment of dividends (3,131) (2,266)
----------- -----------
Net cash provided by (used for) financing
activities 13,557 2,662
----------- -----------
(Continued)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
Three Months Ended
-----------------------------
March 3 February 25
1995 1994
------------ ------------
Effect of foreign currency exchange rates on
cash and cash equivalents $ 1,054 $ (451)
------------ ------------
Net (decrease) in cash and cash equivalents (17,734) (7,873)
Adjustment for change in Aldus Corporation
fiscal year-end -- (3,554)
Cash and cash equivalents at beginning of period 190,091 134,039
------------ ------------
Cash and cash equivalents at end of period $ 172,357 $ 122,612
------------ ------------
------------ ------------
Supplemental disclosures:
Cash paid during the period for income taxes $ 17,412 $ 13,054
------------ ------------
------------ ------------
Noncash investing and financing activities:
Dividends declared but not paid $ 3,133 $ 2,300
------------ ------------
------------ ------------
Reclassification of put warrants $ -- $ (6,906)
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
NOTE 1.
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated statements of income,
balance sheets and statements of cash flows reflect all adjustments which
are, in the opinion of management, necessary to present a fair statement of
the condensed consolidated financial position at March 3, 1995, and the
condensed consolidated statements of income and cash flows for the interim
periods ended March 3, 1995 and February 25, 1994.
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.
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 25, 1994, November 26, 1993 and November 27, 1992, in the Company's
1994 Form 10-K.
The results of operations for the interim period ended March 3, 1995, are not
necessarily indicative of the results to be expected for the full year.
8
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 2.
MERGER WITH ALDUS CORPORATION
On August 31, 1994, the Company issued approximately 14.2 million shares of
its common stock in exchange for all of the common stock of Aldus Corporation
("Aldus"). This business combination has been accounted for as a pooling of
interests, and accordingly, the condensed consolidated financial statements
have been restated to include the results of operations, the financial
position and cash flows of Aldus.
Prior to the combination, Aldus' fiscal year ended on December 31. In
recording the business combination, Aldus' financial statements for the
quarter ended February 25, 1994 were combined with the Company's for the same
period. Aldus' financial statements for the year ended December 31, 1993 were
combined with the Company's for the year ended November 26, 1993. Revenue and
net income for Aldus for the month ended December 31, 1993 were $26.1 million
and $4.4 million, respectively. Net income, the foreign currency translation
adjustment, the issuance of common stock and the net increase in cash and
cash equivalents were adjusted to eliminate the effect of including Aldus'
results of operations, financial position and cash flows for the month ended
December 31, 1993 in the quarter ended February 25, 1994 and the year ended
November 26, 1993.
9
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 3.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Certain cash equivalents and all investments have been classified as
available-for-sale securities, and consisted of the following:
As of March 3, 1995
--------------------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------- ---------- ---------- ----------
Money market
mutual funds and
time deposits $ 24,627 $ -- $ -- $ 24,627
Put bonds and
weekly floaters 23,310 -- -- 23,310
Tax-exempt
commercial paper
and agency discount
notes 89,665 -- -- 89,665
United States
government
treasury notes 38,592 12 (418) 38,186
State and municipal
bonds and notes 146,754 262 (560) 146,456
Corporate notes 506 -- (3) 503
Auction-rate securities 59,410 -- (10) 59,400
Asset-backed
securities 6,554 -- (298) 6,256
-------- ---------- ---------- ----------
$389,418 $ 274 $ (1,289) $ 388,403
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
10
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 3.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (CONTINUED)
As of November 25, 1994
--------------------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------- ---------- ---------- ----------
Money market
mutual funds and
time deposits $ 7,812 $ 4 $ -- $ 7,816
Tax-exempt
commercial paper
and agency discount
notes 144,514 -- (4) 144,510
United States
government
treasury notes 30,647 -- (629) 30,018
State and municipal
bonds and notes 92,931 -- (927) 92,004
Corporate notes 511 -- (6) 505
Auction-rate securities 80,865 -- -- 80,865
Asset-backed
securities 7,199 -- (322) 6,877
-------- ---------- ---------- ----------
$364,479 $ 4 $ (1,888) $ 362,595
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
Unrealized losses are reported as a separate component of shareholders'
equity net of taxes of $0.5 million and $0.8 million at March 3, 1995 and
November 25, 1994, respectively. Net realized gains or losses are included in
interest, investment and other income. Net realized losses were insignificant
for the quarters ended March 3, 1995 and February 25, 1994.
The Company's investments are classified as follows:
March 3 November 25
1995 1994
-------- -----------
Cash equivalents $132,108 $150,071
Short-term investments 250,801 210,269
Other assets -- restricted funds 5,494 2,255
-------- --------
$388,403 $362,595
-------- --------
-------- --------
11
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 3.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (CONTINUED)
The cost and estimated fair value of available-for-sale securities by
contractual maturity consisted of the following:
March 3, 1995 November 25, 1994
-------------------- --------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
-------- ---------- -------- ----------
One year or less $180,745 $180,738 $229,435 $228,725
One to three years 140,581 139,947 46,981 46,128
Three to five years 2,128 2,062 -- --
Auction-rate
securities 59,410 59,400 80,865 80,865
-------- -------- -------- --------
382,864 382,147 357,281 355,718
-------- -------- -------- --------
Asset-backed
securities 6,554 6,256 7,198 6,877
-------- -------- -------- --------
$389,418 $388,403 $364,479 $362,595
-------- -------- -------- --------
-------- -------- -------- --------
Included in auction-rate securities are Select Auction Variable Rate
Securities (SAVRS) whose stated maturities exceed ten years; however, the
Company had the option of adjusting the respective interest rates or
liquidating these investments at auction on stated auction dates every 35
days.
12
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 4.
RECEIVABLES
Receivables consisted of the following:
March 3 November 25
1995 1994
-------- -----------
Trade receivables $ 68,750 $ 69,628
Royalty receivables 30,915 26,800
Interest and other receivables 4,059 3,410
-------- -----------
103,724 99,838
Less allowance for doubtful accounts 3,693 3,253
-------- -----------
$100,031 $ 96,585
-------- -----------
-------- -----------
NOTE 5.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 3 November 25
1995 1994
-------- -----------
Land $ 782 $ 782
Building 4,615 4,615
Equipment 90,465 88,285
Furniture and fixtures 17,664 15,487
Leasehold improvements 7,270 4,146
-------- -----------
120,796 113,315
Less accumulated depreciation and amortization 78,410 74,211
-------- -----------
$ 42,386 $ 39,104
-------- -----------
-------- -----------
13
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 6.
OTHER ASSETS
Other assets consisted of the following:
March 3 November 25
1995 1994
------- -----------
Licensing agreements $15,608 $ 15,565
Goodwill 22,034 22,034
Purchased technology 8,715 325
Software development costs 27,199 27,199
Miscellaneous other assets 23,588 16,123
------- -----------
97,144 81,246
Less accumulated amortization 40,779 35,685
------- -----------
$56,365 $ 45,561
------- -----------
------- -----------
Unamortized software development costs were $6.2 million and $9.1 million at
March 3, 1995 and November 25, 1994, respectively. Amortization of software
development costs was $2.6 million and $2.6 million for the quarters ended
March 3, 1995 and February 25, 1994, respectively.
NOTE 7.
ACCRUED EXPENSES
Accrued expenses consisted of the following:
March 3 November 25
1995 1994
------- -----------
Royalties $13,821 $ 10,824
Accrued compensation and benefits 17,995 17,039
Sales and marketing allowances 23,649 19,445
Miscellaneous accrued expenses 26,575 31,692
------- -----------
$82,040 $ 79,000
------- -----------
------- -----------
14
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 8.
ACCRUED RESTRUCTURING COSTS
On August 31, 1994, the Company merged with Aldus, described in "Note 2 --
Merger with Aldus Corporation," and initiated a plan to combine the
operations of the two companies. On this date, the Company recorded a $72.2
million charge to operating expenses related to the merger transaction and
restructuring costs.
Merger transaction costs consist principally of transaction fees for
investment bankers, attorneys, accountants, financial printing and other
related charges. Restructuring costs include the elimination of redundant
information systems and equipment, severance and outplacement of terminated
employees, the write-off of certain assets related to product lines to be
divested or eliminated, and cancellation of certain contractual agreements.
Activity in accrued restructuring costs is as follows:
Accrued as of Quarter Ended March 3, 1995 Accrued as of
November 25 Cash March 3
1994 Write-offs Payments 1995
------------- ---------- ---------- -------------
Merger transaction
costs $ 5,863 $ -- $ 5,175 $ 688
Restructuring costs:
Severance and
outplacement 11,548 -- 6,436 5,112
Impaired assets and
cancellation of
facility leases 11,046 1,548 663 8,835
----------- -------- --------- ------------
$ 28,457 $ 1,548 $ 12,274 $ 14,635
----------- -------- --------- ------------
----------- -------- --------- ------------
The nature, timing and extent of restructuring costs follows:
SEVERANCE AND OUTPLACEMENT
As a result of the merger, certain technical support, customer service,
distribution and administrative functions were combined and reduced.
Restructuring included severance and outplacement charges related to
approximately 500 terminated employees. Affected employees had received
notification of their termination by September 9, 1994.
15
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 8.
ACCRUED RESTRUCTURING COSTS (CONTINUED)
IMPAIRED ASSETS AND CANCELLATION OF FACILITY LEASES
The Company plans to consolidate duplicate offices in Europe, Japan, Canada
and the United States. Lease payments resulting from the planned closure of
these facilities are expected to continue through the lease term or negotiated
early termination date, if applicable.
NOTE 9.
SUBSEQUENT EVENT
On March 31, 1995, the Company entered into an agreement with the developers
of the technology underlying its Adobe Photoshop product under which the
Company will obtain all rights to the technology for a lump sum payment of
$34.5 million. This transaction will be recorded in the second quarter of
1995. Prior to this agreement, the Company paid the developers a royalty on
each copy of Adobe Photoshop sold by the Company.
16
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 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.
RESULTS OF OPERATIONS
OVERVIEW
Adobe develops, markets and supports computer software products and
technologies that enable users to create, display, print and communicate
electronic documents. The Company licenses its technology to major computer,
printing and publishing suppliers, and markets a line of application software
and typeface products for authoring visually rich documents. Additionally,
the Company markets a line of powerful, but easy to use, products for home
and small business users. The Company has subsidiaries in Europe and the
Pacific Rim serving a worldwide network of dealers and distributors.
In August 1994, the Company merged with Aldus Corporation ("Aldus"). Aldus
began operations in 1984 and created computer software solutions that help
people throughout the world effectively communicate information and ideas.
Aldus focused on three lines of business: applications for the professional
print publishing, graphics and prepress markets; applications for the general
consumer market; and applications for the interactive publishing market. To
effect the combination, approximately 14.2 million shares of Adobe's common
stock were issued in exchange for all of the outstanding common stock of
Aldus. The merger was accounted for by the pooling of interests method, and
accordingly, all interim financial information prior to the merger has been
restated to combine the results of the Company and Aldus.
REVENUE
1995 Change 1994
------- ------- -------
First quarter period:
TOTAL REVENUE $168.6 24% $135.9
Revenue growth for the quarter was due to increases in both licensing
activity and sales of application products. The divestiture of FreeHand
effective January 1, 1995, and the discontinuance of PhotoStyler in late
1994, as further discussed below, partially offset the revenue increase.
Product unit volume (as opposed to price) growth was the principal factor in
the Company's revenue growth in application products revenue.
17
1995 Change 1994
------ ------ ------
First quarter period:
PRODUCT GROUP REVENUE -- LICENSING $46.3 27% $36.3
Percentage of total revenue 27.5% 26.7%
Licensing revenue is derived from shipments by original equipment
manufacturers ("OEM") of products containing the Adobe-TM- PostScript-TM-
interpreter and the Display PostScript-TM- system. Such products include
printers in both Roman and Japanese languages, imagesetters and 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.
The number of units shipped by OEMs continued to grow on a quarterly basis.
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. Some OEMs continued to reduce list prices on their
lower-end printers, which resulted in lower royalties per unit on such
printers. However, in the first quarter of 1995, this trend was offset by
increased demand for CPSI and color capability, as well as increased
penetration into the Japanese market, all of which have higher royalties per
unit.
The Company has seen year-to-year increases in the number of OEM customers
from which it is receiving licensing revenue, demonstrating continued
acceptance of PostScript software, as well as reflecting a diversification of
the Company's customer base across Macintosh, IBM PC and compatibles, and
multiple platform markets.
1995 Change 1994
------ ------ ------
First quarter period:
PRODUCT GROUP REVENUE --
APPLICATION PRODUCTS $122.3 23% $99.6
Percentage of total revenue 72.5% 73.3%
Application products revenue is derived from shipments of application
software programs through retail and distribution channels; however, the
information products are becoming more widely distributed through VARs and
systems integrators.
During the first quarter of 1995, application products revenue grew due to
increased demand for Adobe Illustrator-TM-, Adobe Photoshop-TM-, Adobe
Premiere-TM- and Adobe PageMaker-TM-. These products are primarily used for
image editing, line art editing, video editing and for page design and
layout, respectively. In the first quarter, the Company released Adobe
Premiere 4.0 for the Windows platform and the Adobe PageMaker Enhancement
Package Volume 2 for both Macintosh and Windows platforms. The enhancement
package is designed to update Adobe PageMaker features between major
18
releases. In addition, the Company released Japanese versions of several of
its products during the first quarter of 1995, including Adobe Premiere 4.0
and Adobe Persuasion-TM- 3.0 for the Macintosh, and Adobe Photoshop 3.0 for
the Windows platform. These releases combined with continued strong demand
for versions of Adobe Illustrator, Adobe Photoshop and Adobe Premiere for the
Macintosh platform released in the second half of fiscal 1994 all contributed
ot the increased revenue from application products. The first quarter of 1994
includes revenue from FreeHand, which was divested effective January 1, 1995,
and PhotoStyler, which was discontinued in late 1994. These two products
aggregated $14.3 million of revenue in the first quarter of 1994.
DIRECT COSTS
1995 Change 1994
------ ------- ------
First quarter period:
DIRECT COSTS $32.8 26% $26.0
Percentage of total revenue 19.4% 19.1%
Direct costs include royalties; amortization of acquired technologies; and
direct product, packaging and shipping costs. During 1994, direct costs also
included amortization of typeface production costs, which totaled $1.1
million in the first quarter of 1994.
Gross margins are affected by the mix of licensing revenue versus application
products revenue, as well as the product mix within application products. In
the first quarter of 1995, direct costs increased slightly as a percentage of
total revenue due to increased revenue from certain application products,
primarily Adobe Photoshop, which bear relatively higher royalty expense.
These higher costs were partially offset by the increased proportion of
licensing revenue which typically has higher gross margins than application
products revenue.
The Company also delivers its type library on its Type On Call-TM- CD-ROM
media, and end users wishing to license typeface designs call the Company
with a credit card number to receive the unlocking code for the desired
typeface. This method of delivery also contributes to reduced direct costs.
Other applications are also available through the Company's distributors on
CD-ROM.
On March 31, 1995, the Company entered into an agreement with the developers
of the technology underlying its Adobe Photoshop product under which the
Company will obtain all rights to the technology for a lump sum payment of
$34.5 million. This transaction will be recorded in the second quarter of
1995. Prior to this agreement, the Company paid the developers a royalty on
each copy of Adobe Photoshop sold by the Company. The Company expects that
the future reduction in royalty costs achieved by obtaining the rights to the
Adobe Photoshop technology will be approximately offset by the amortization
of the acquired technology.
19
OPERATING EXPENSES
1995 Change 1994
------ ------ ------
First quarter period:
SOFTWARE DEVELOPMENT COSTS --
RESEARCH AND DEVELOPMENT $26.4 22% $21.7
Percentage of total revenue 15.6% 16.0%
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 has 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. Many of these engineers are working with OEM customers to
design and implement Adobe PostScript Level 2 devices. The Company continues
to work with many of its OEM customers in a co-development program. This
allows customers to be more self-sufficient in new device development by
taking on more of the implementation task themselves rather than relying so
heavily on the Company's engineers. While this mitigates certain costs, the
Company continues to make significant investments in development of its
PostScript and application software products.
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. The
Company intends to continue recruiting and hiring experienced software
developers, but expects that research and development expenditures for all of
1995 will approximate 1994 spending levels as a percentage of revenue.
1995 Change 1994
------ ------ ------
First quarter period:
SOFTWARE DEVELOPMENT COSTS --
AMORTIZATION OF CAPITALIZED
SOFTWARE DEVELOPMENT COSTS $2.6 -2% $2.6
Percentage of total revenue 1.5% 1.9%
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 Aldus products have been
capitalized and are being amortized over the lives of the respective
products. In the first quarter of 1995, software development expenditures on
all products, after reaching technological feasibility, were immaterial and
the Company anticipates that this trend will continue in the future.
Accordingly, 1995
20
will reflect the expense of amortizing software development costs acquired in
connection with the Company's merger with Aldus in addition to the actual
development expenditures (classified as research and development) made prior
to achieving technological feasibility.
It is expected that amortization of software development costs will decrease
both in absolute dollars and as a percentage of total revenue during 1995 as
these costs become fully amortized.
1995 Change 1994
------ ------ ------
First quarter period:
SALES, MARKETING AND
CUSTOMER SUPPORT $46.0 1% $45.7
Percentage of total revenue 27.3% 33.6%
Sales, marketing and customer support expenses generally include salaries and
benefits, sales commissions, travel expenses and related facilities 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 slightly in the
first quarter of 1995 compared with the first quarter of 1994. Historically,
these expenses are lowest in the first quarter as travel and trade show
expenses usually are lowest in the first quarter. In the first quarter of
1995, advertising costs were also low.
Continuing efforts to expand markets and increase penetration into targeted
software markets, as well as increasing competition in the software industry
are expected to cause sales, marketing and customer support expenditures for
all of 1995 to approximate 1994 spending levels.
1995 Change 1994
------ ------ ------
First quarter period:
GENERAL AND ADMINISTRATIVE $11.6 -3% $12.0
Percentage of total revenue 6.9% 8.8%
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 associated with computer equipment
and software used in the administration of the business.
21
In the first quarter of 1995, general and administrative expenses reflect
savings related to the restructuring of the combined company after the merger
with Aldus. The Company expects general and administrative spending to be a
lower percentage of revenue for all of 1995 than was achieved in 1994,
although the percentage is expected to increase over that of the first
quarter of 1995.
NONOPERATING INCOME
1995 Change 1994
------ ------ ------
First quarter period:
INTEREST, INVESTMENT AND
OTHER INCOME $5.2 155% $2.0
Percentage of total revenue 3.1% 1.5%
The increase in interest, investment and other income is primarily due to
generally higher interest rates and a larger investment base. In addition,
the Company has placed more of its invested cash in higher-yielding taxable
securities because it has become beneficial to do so on an after-tax basis.
PROVISION FOR INCOME TAXES
1995 Change 1994
------ ------ ------
First quarter period:
PROVISION FOR INCOME TAXES $20.1 86% $10.8
Percentage of total revenue 11.9% 8.0%
Effective tax rate 37.0% 36.2%
The effective tax rate for the first quarter of 1995 was slightly higher
than the same quarter of 1994 due to a decrease in research and development
tax credits and lower tax exempt investment earnings.
NET INCOME AND NET INCOME PER SHARE
1995 Change 1994
------ ------ ------
First quarter period:
NET INCOME $34.4 80% $19.1
Percentage of total revenue 20.4% 14.1%
NET INCOME PER SHARE $0.54 74% $0.31
Weighted shares (In thousands) 64,043 61,289
Net income for the first quarter of 1995 increased 80 percent from the first
quarter of 1994. Earnings per share were $.54, a 74 percent increase from the
first quarter of 1994.
The increase in earnings per share was caused by significantly increased
revenues, lower expense levels as a percentage of revenues and a relatively
constant tax rate.
22
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that in the future its results of operations could be
impacted by factors such as the ability of the Company to integrate Adobe and
Aldus product lines, renegotiation of royalty arrangements, delays in
shipment of the Company's new products and major new versions of existing
products, market acceptance of new products and upgrades, growth in worldwide
personal computer and printer sales and sales price adjustments,
consolidation in the OEM printer business, and adverse changes in general
economic conditions in any of the countries in which the Company does
business.
In connection with the merger with Aldus, the Company has sought to reduce
combined expenses by the elimination of duplicate or unnecessary facilities,
employees, marketing programs and other expenses. The Company believes that
the major impact of such reductions occurred in the fourth quarter of 1994
but experienced some additional impact in the first quarter of 1995. The
Company expects that these reductions will benefit future operating results,
but the reductions could adversely impact the earnings of the combined
company. In addition, there can be no assurance that the integration of the
product lines of the two companies will not have a material adverse effect on
the results of operations.
As previously stated, effective January 1, 1995, the Company no longer
markets FreeHand and discontinued marketing PhotoStyler in late 1994. These
two products aggregated $53.2 million of revenue and $35.4 million of gross
profit in 1994. There can be no assurance that the Company will be able to
replace this lost revenue or that it will be able to do so as profitably.
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 result in lower licensing revenue for the
Company.
As a result of the merger with Aldus, the Company will derive a larger
portion of its revenue from its subsidiaries located in Europe and the
Pacific Rim. 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. As a result, the Company's operating results are
subject to fluctuations in foreign currency exchange rates. To date, the
Company has not engaged in any significant activities to hedge its exposure
to foreign currency exchange rate fluctuations.
The Company's ability to develop and market products, including upgrades
of currently shipping products, that successfully adapt to current market
needs may also have an impact on the results of operations. A portion of the
Company's future revenue will come from these products. Delays in such
introductions 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.
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
23
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 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, which often results in significant volatility of the Company's
common stock price.
FINANCIAL CONDITION
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
March 3 November 25
1995 Change 1994
------- ------ -----------
CASH, CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS $423.2 6% $400.4
The Company's cash balances and short-term investments have increased
each year due to profitable operations, partially offset by modest
expenditures for capital outlays and other investments. Cash equivalents
consist of highly liquid money market instruments. Certain cash equivalents
and all of the Company's short-term investments, consisting principally of
municipal bonds, commercial paper, auction rate securities, United States
government and government agency securities and asset-backed securities, are
classified as available-for-sale under the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
securities are carried at fair value with the unrealized gains and losses,
net of tax, reported as a separate component of shareholders' equity. The
Company does not invest in securities which involve a high degree of risk or
complexity.
SHAREHOLDERS' EQUITY
March 3 November 25
1995 Change 1994
------- ------ -----------
SHAREHOLDERS' EQUITY $511.1 12% $456.8
The Company has no long-term debt or other noncurrent liabilities.
The Board of Directors of the Company declared a cash dividend on the
Company's common stock of $.05 per common share on March 20, 1995, for the
first quarter of 1995. The dividend will be for shareholders of record as of
April 6, 1995, and will be paid on April 20, 1995. 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.
Under its stock repurchase program, the Company repurchased 244,003
shares at a cost of $7.8 million in the first quarter of 1995. These share
repurchases are intended to fund the employee stock purchase and stock option
plans. The Company plans to continue a
24
regular repurchase program during 1995 to continue to fund employee stock
plans.
WORKING CAPITAL
March 3 November 25
1995 Change 1994
------- ------ -----------
WORKING CAPITAL $403.5 11% $363.6
Net working capital grew to $403.5 million as of March 3, 1995, compared
to $363.6 million as of November 26, 1994. Cash flow provided by operations
during the first three months of 1995 was $31.7 million. Expenditures for
property and equipment totaled $8.9 million. Such expenditures are expected
to continue, including computer systems for development, sales and marketing,
product support, and administrative staff.
In the future, cash may be used to acquire technology, or to invest in
companies owning key technologies, where appropriate. No significant
acquisitions or investments were made in the first quarter of 1995. However,
on March 31, 1995, the Company entered into an agreement with the developers
of the technology underlying its Adobe Photoshop product to obtain that
technology for a lump sum payment of $34.5 million.
Net cash provided by financing activities during the first three months
of 1995 was $13.6 million; $24.5 million was provided by proceeds from
issuance of common stock; $7.8 million was used to repurchase common stock;
and $3.1 million was used to pay cash dividends.
The Company's principal commitments as of March 3, 1995, consisted of
obligations under operating leases for facilities, a real estate development
agreement and various service and lease guarantee agreements with a related
party. The Company has entered into a real estate development agreement for
the construction of an office facility and in 1996 will enter into an
operating lease agreement for this facility. 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 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
$52.0 million. The Company also is required, periodically during the
construction period, to deposit funds with the lessor to secure the
performance of its obligations under the lease and as of March 3, 1995, the
Company had deposited approximately $5.5 million in time deposit securities.
The Company has entered into various agreements with McQueen Holdings Limited
("McQueen"), a European operating entity, whereby the Company has agreed to
guarantee obligations under operating leases for certain European facilities
utilized by McQueen, and to guarantee certain levels of business between
Adobe and McQueen. The Company currently owns approximately 16 percent of the
outstanding stock in McQueen.
25
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.
26
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Sequentially
Numbered Incorporated by Reference
Exhibit -------------------------------
Number Exhibit Description Page Form Date Number
--------- -------------------------- ----------- ------ --------- --------
10.1 1984 Stock Option Plan N/A S-1 07/01/86 10.1
10.1.1 1984 Stock Option Plan, N/A 10-K 11/30/87 10.1.1
as amended
10.1.2 1984 Stock Option Plan, N/A 10-K 11/30/88 10.1.2
as amended
10.1.3 1984 Stock Option Plan, N/A 10-K 11/30/89 10.1.3
as amended
10.1.4 1984 Stock Option Plan, N/A 10-K 11/30/90 10.1.4
as amended
10.1.5 1984 Stock Option Plan, N/A 10-K 11/27/92 10.1.5
as amended
10.1.6 1984 Stock Option Plan, N/A 10-Q 07/02/93 10.1.6
as amended
10.1.7 1994 Stock Option Plan N/A 10-Q 07/06/94 10.1.7
10.2 Common Stock Purchase N/A S-1 07/01/86 10.2
Agreement of John E.
Warnock dated December
29, 1982, and, as amended
November 30, 1983
10.3 Common Stock Purchase N/A S-1 07/01/86 10.3
Agreement of Charles M.
Geschke dated December
29, 1982, and, as amended
November 30, 1983
10.4 Common Stock Purchase N/A S-1 07/01/86 10.4
Agreement of Q.T. Wiles
dated December 29, 1982
10.5 Common Stock Purchase N/A S-1 07/01/86 10.5
Agreement of David Evans
dated December 29, 1982
(Continued)
27
a) Index to Exhibits (Continued)
Sequentially Incorporated by Reference
Exhibit Numbered ------------------------------
Number Exhibit Description Page Form Date Number
--------- -------------------------- ----------- ------ --------- --------
10.6 Common Stock Purchase N/A S-1 07/01/86 10.6
Agreement of William
Hambrecht dated December
29, 1982
10.7 Exchange Agreement N/A S-1 07/01/86 10.7
dated December 29,
1983, for John E.
Warnock
10.8 Exchange Agreement N/A S-1 07/01/86 10.8
dated December 29,
1983, for Charles M.
Geschke
10.9 Form of Shareholders N/A S-1 07/01/86 10.9
Exchange Agreement used
in connection with the
exchange of shares of Old
Adobe for shares of the
Company
10.10 Form of Agreement for N/A S-1 07/01/86 10.10
Assignment of Limited
Partnership Interest used
in connection with exchange
of limited partnership
interests in Adobe Systems
Limited, a California limited
partnership, for shares of the
Series B Preferred Stock of
the Company
10.11 Registration Rights N/A S-1 07/01/86 10.11
Agreement dated December
29, 1983
10.12 Old Adobe's 1983 Stock N/A S-1 07/01/86 10.12
Purchase Plan and the
Company's 1984 Stock
Purchase Plan with standard
form of Stock Purchase
Agreement
10.12.1 1988 Employee Stock N/A 10-Q 07/06/94 10.12.1
Purchase Plan, as amended
(Continued)
28
a) Index to Exhibits (Continued)
Sequentially Incorporated by Reference
Exhibit Numbered -------------------------------
Number Exhibit Description Page Form Date Number
--------- -------------------------- ----------- ------ --------- --------
10.13 Form of Employee N/A S-1 07/01/86 10.13
Common Stock Purchase
Agreement dated July 23,
1984
10.14 Warrant to Purchase Series N/A S-1 07/01/86 10.14
C Preferred Stock to Apple
Computer, Inc., dated
November 26, 1984, with
executed subscription form
dated November 28, 1984
10.15 Warrant to Purchase N/A S-1 07/01/86 10.15
Series C Preferred Stock
to Evans & Sutherland
Computer Corporation
dated April 25, 1984,
with executed subscription
form dated June 19, 1986
10.16 License Agreement N/A S-1 07/01/86 10.16
between the Company
and Evans & Sutherland
Computer Corporation
dated April 25, 1984
10.17 License Agreement N/A S-1 07/01/86 10.17
between the Company and
Apple Computer, Inc., dated
November 12, 1985
(confidential treatment
granted)
10.17.1 License Agreement N/A 10-K 11/30/88 10.17.1
Restatement between the
Company and Apple
Computer, Inc., dated April
1, 1987 (confidential
treatment granted)
(Continued)
29
(a) Index to Exhibits (Continued)
Sequentially Incorporated by Reference
Exhibit Numbered ------------------------------
Number Exhibit Description Page Form Date Number
--------- -------------------------- ----------- ------ --------- --------
10.17.2 Amendment No. 1 to the N/A 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).
10.18 Lease Agreement dated N/A S-1 07/01/86 10.18
November 11, 1983,
between Mozart Family
Trust and Epson America
Inc.
10.19 Assignment of Lease N/A S-1 07/01/86 10.19
dated November 11, 1983,
between Epson America
Inc. and the Company
dated February 1, 1986
10.20 Lease Agreement N/A S-1 07/01/86 10.20
between Mozart Family
Trust and the Company
dated November 30, 1983
10.21 Bonus Plans N/A S-1 07/01/86 10.21
10.21.1 Revised Bonus Plan N/A 10-K 11/27/92 10.21.1
10.21.2 Revised Bonus Plan N/A 10-K 11/26/93 10.21.2
10.22 Restricted Stock Option N/A 10-K 11/30/87 10.22
Plan
10.22.1 Restricted Stock Option N/A 10-K 11/30/89 10.22.1
Plan, as amended
10.22.2 Restricted Stock Option N/A 10-K 11/30/90 10.22.2
Plan, as amended
10.22.3 Restricted Stock Option N/A 10-K 11/29/91 10.22.3
Plan, as amended
10.22.4 Restricted Stock Option N/A 10-Q 07/06/94 10.22.4
Plan, as amended
(Continued)
30
(a) Index to Exhibits (Continued)
Sequentially Incorporated by Reference
Exhibit Numbered ------------------------------
Number Exhibit Description Page Form Date Number
--------- -------------------------- ----------- ------ --------- --------
10.23 Amended and Restated N/A 10-K 11/30/88 10.23
Software License Agree-
ment between the Company
and QMS, Inc., dated May
15, 1987 (confidential
treatment granted)
10.24 1989 Restricted Stock Plan N/A 10-K 11/30/88 10.24
10.24.1 1994 Performance and N/A S-4 07/27/94 10.1
Restricted Stock Plan
10.25 Form of Indemnity Agree- N/A 10-K 11/30/88 10.25
ment
10.26 Lease Agreement by and N/A 10-K 11/30/88 10.26
between Charleston Place
Associates and Adobe
Systems Incorporated dated
April 14, 1987
10.26.1 Amendment One to Lease N/A 10-K 11/30/88 10.26.1
Agreement dated March 1,
1988
10.26.2 Amendment Two to Lease N/A 10-K 11/30/88 10.26.2
Agreement dated
September 1, 1988
10.27 Lease Agreement by and N/A 10-K 11/30/88 10.27
between John Mozart and
Adobe Systems
Incorporated dated July
20, 1988
10.28 Limited Partnership N/A 10-K 11/29/91 10.28
Agreement of University
Circle Building I, Ltd.,
dated May 22, 1991
10.29 University Centre N/A 10-K 11/29/91 10.29
Building I Lease Agree-
ment dated May 22, 1991
10.30 University Circle N/A 10-K 11/27/92 10.30
Termination and Security
Agreement and Mutual
Release dated January 7,
1993
(Continued)
31
(a) Index to Exhibits (Continued)
Sequentially Incorporated by Reference
Exhibit Numbered ------------------------------
Number Exhibit Description Page Form Date Number
--------- -------------------------- ----------- ------ --------- --------
10.31 Restated Agreement and N/A S-4 07/13/94 10.31
and Plan of Merger and
Reorganization By and
Among Adobe Systems
Incorporated, P Acquisition
Corp and Aldus
Corporation
10.32 Sublease of the Land and N/A 10-K 11/25/94 10.32
Lease of the Improvements
By and Between Sumitomo
Bank Leasing and Finance
Inc. and Adobe Systems
Incorporated
11 Computation of Earnings 37 N/A N/A N/A
Per Common Share
27 Financial Data Schedule 38 N/A N/A N/A
32
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended March 3, 1995.
33
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: April 14, 1995
By /s/ M. Bruce Nakao
----------------------------
M. Bruce Nakao,
Senior Vice President, Finance and
Administration, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial Officer)
34
SUMMARY OF TRADEMARKS
The following trademarks of Adobe Systems Incorporated, which may be
registered in certain jurisdictions, are referenced in this Form 10-Q:
Adobe
Adobe Illustrator
Adobe PageMaker
Adobe Persuasion
Adobe Photoshop
Adobe Premiere
Display PostScript
PostScript
Type On Call
All other brand or product names are trademarks or registered trademarks of
their respective holders.
35
EXHIBITS
The exhibits filed as part of this report are provided in this separate
section. The exhibits included in this section are as follows:
Sequentially
Exhibit Numbered
Number Exhibit Description Page
- ---------- ------------------------------------ -------------
11 Computation of Earnings per Common
Share 37
27 Financial Data Schedule 38
36