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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 MAY 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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)
Registrant's telephone number, including area code: (415) 961-4400
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 31, 1996
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Common stock, no par value 72,542,581
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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 15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 33
Signature 36
Summary of Trademarks 37
EXHIBITS
Exhibit 3.2.9 Restated Bylaws
Exhibit 4.1 Shareholders Rights Plan as Amended
Exhibit 10.36 Outside Directors Stock Option Plan
Exhibit 10.37 Confidential Resignation Agreement
Exhibit 11 Computation of Earnings 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 31, 1996 and June 2, 1995
and Six Months Ended May 31, 1996 and June 2, 1995 4
- - - Condensed Consolidated Balance Sheets
May 31, 1996 and December 1, 1995 5
- - - Condensed Consolidated Statements of Cash Flows
Six Months Ended May 31, 1996 and June 2, 1995 6
- - - Notes to Condensed Consolidated Financial Statements 8
3
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED SIX MONTHS ENDED
-------------------------- -----------------------
MAY 31 JUNE 2 MAY 31 JUNE 2
1996 1995 1996 1995
----------- ----------- ----------- -----------
Revenue:
Licensing $ 49,287 $ 45,032 $ 96,198 $ 91,345
Application products 155,050 144,466 301,781 286,998
----------- ----------- ----------- -----------
Total revenue 204,337 189,498 397,979 378,343
Direct costs 36,078 32,310 71,286 66,164
----------- ----------- ----------- -----------
Gross margin 168,259 157,188 326,693 312,179
----------- ----------- ----------- -----------
Operating expenses:
Software development costs:
Research and development 37,664 32,755 74,871 64,245
Amortization of capitalized
software development
costs 626 2,938 1,252 5,811
Sales, marketing and
customer support 65,738 59,311 128,342 114,663
General and administrative 16,429 13,986 32,080 27,717
Write-off of acquired in-
process research and
development 14,699 -- 14,699 --
----------- ----------- ----------- -----------
Total operating expenses 135,156 108,990 251,244 212,436
----------- ----------- ----------- -----------
Operating income 33,103 48,198 75,449 99,743
Nonoperating income:
Interest, investment and
other income 6,684 7,715 18,199 13,416
----------- ----------- ----------- -----------
Income before income taxes 39,787 55,913 93,648 113,159
Provision for income taxes 17,778 20,668 37,976 41,770
----------- ----------- ----------- -----------
Net income $ 22,009 $ 35,245 $ 55,672 $ 71,389
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share $ .29 $ .47 $ .73 $ .96
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in computing net
income per share 75,638 75,321 76,016 74,105
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MAY 31 DECEMBER 1
1996 1995
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ASSETS
Current assets:
Cash and cash equivalents $ 77,716 $ 58,493
Short-term investments 445,602 457,547
Receivables 117,652 133,208
Inventories 8,538 7,277
Other current assets 10,657 11,924
Deferred income taxes 24,666 24,338
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Total current assets 684,831 692,787
Property and equipment 59,131 51,708
Other assets 277,291 135,735
Deferred income taxes -- 4,502
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$ 1,021,253 $ 884,732
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade and other payables $ 42,877 $ 25,639
Accrued expenses 98,094 94,848
Accrued restructuring costs 11,002 28,151
Income taxes payable 31,645 19,420
Deferred revenue 19,668 18,257
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Total current liabilities 203,286 186,315
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Deferred income taxes 34,334 --
Put warrants 29,483 --
Shareholders' equity:
Preferred stock, no par value;
2,000,000 shares authorized;
none issued -- --
Common stock, no par value;
200,000,000 shares authorized;
72,542,581 and 72,834,444 shares issued
and outstanding as of May 31, 1996,
and December 1, 1995, respectively 241,037 293,258
Unrealized gains on investments 79,381 18,831
Retained earnings 439,146 390,793
Cumulative foreign currency translation adjustments (5,414) (4,465)
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Total shareholders' equity 754,150 698,417
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$ 1,021,253 $ 884,732
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
------------------------------
MAY 31 JUNE 2
1996 1995
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Cash flows from operating activities:
Net income $ 55,672 $ 71,389
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense 1,893 1,481
Depreciation and amortization 12,865 25,960
Deferred income taxes (7,722) (920)
Provision for losses on accounts receivable (687) 954
Tax benefit from employee stock plans 3,609 16,775
Write-off of acquired in-process
research and development 14,699 --
Changes in operating assets and liabilities:
Receivables 17,117 3,599
Inventories (1,335) 2,708
Other current assets 2,577 (3,214)
Trade and other payables 5,775 (7,884)
Accrued expenses 3,588 1,675
Accrued restructuring costs (17,191) (17,381)
Income taxes payable 12,492 (9,625)
Deferred revenue 326 1,749
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Net cash provided by operating activities 103,678 87,266
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Cash flows from investing activities:
Purchases of short-term investments (648,925) (1,969,541)
Maturities and sales of short-term investments 656,176 1,863,190
Acquisitions of property and equipment (16,867) (18,027)
Capitalization of software development costs -- (819)
Additions to other assets (33,494) (54,380)
Acquisition, net of cash acquired (4,527) --
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Net cash used for investing activities (47,637) (179,577)
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(Continued)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
SIX MONTHS ENDED
------------------------------
MAY 31 JUNE 2
1996 1995
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Cash flows from financing activities:
Proceeds from issuance of common stock $ 13,092 $ 47,959
Repurchase of common stock (41,971) (13,631)
Payment of dividends (7,319) (6,333)
Payment of Subchapter S distributions of Mastersoft -- (1,499)
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Net cash provided (used) by financing activities (36,198) 26,496
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Effect of foreign currency exchange rates on
cash and cash equivalents (620) 1,972
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Net increase/(decrease) in cash and cash equivalents 19,223 (63,843)
Adjustment for change in Frame Technology
Corporation's fiscal year-end -- (3,591)
Cash and cash equivalents at beginning of period 58,493 204,120
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Cash and cash equivalents at end of period $ 77,716 $ 136,686
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Supplemental disclosures:
Cash paid during the period for income taxes $ 21,278 $ 32,033
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Noncash investing and financing activities:
Dividends declared but not paid $ 3,632 $ 3,185
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Reclassification of put warrants $ 29,483 $ 3,447
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Issuance of notes for acquisition $ 9,473 $ --
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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 31, 1996, and the
condensed consolidated statements of income and cash flows for the interim
periods ended May 31, 1996 and June 2, 1995.
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 December 1, 1995, November 25, 1994 and November 26,
1993, in the Company's 1995 Form 10-K.
The results of operations for the interim periods ended May 31, 1996, 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 and restricted stock. Fully
diluted earnings per share for the quarters and six month periods ended May 31,
1996 and June 2, 1995 were not materially different from primary earnings per
share.
8
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. ACQUISITIONS
POOLINGS OF INTERESTS
On October 28, 1995, the Company issued approximately 8.5 million shares of
its common stock in exchange for all of the common stock of Frame Technology
Corporation ("Frame"). Prior to its acquisition by the Company, on July 28,
1995, Frame acquired all of the common stock of Mastersoft, Inc. ("Mastersoft"),
in exchange for approximately 0.6 million equivalent shares of Adobe common
stock. These business combinations have been accounted for as poolings of
interests, and, accordingly, the consolidated financial statements for periods
prior to the combinations have been restated to include the results of
operations, financial position, and cash flows of Frame and Mastersoft.
Prior to the combinations, Frame's fiscal year ended on December 31. In
recording the business combination, Frame's financial statements for the 12
months ended December 1, 1995 were combined with the Company's consolidated
financial statements for the same period. Frame's financial statements for the
year ended December 31, 1994 were combined with the Company's consolidated
financial statements for the year ended November 25, 1994. Revenue and net
income of Frame for the month ended December 31, 1994 were $8.6 million and $2.3
million, respectively. Net income, Subchapter S distributions of Mastersoft, the
issuance of common stock, and the net decrease in cash and cash equivalents were
adjusted to eliminate the effect of including Frame's results of operations,
financial position, and cash flows for the month ended December 31, 1994 in the
years ended December 1, 1995 and November 25, 1994.
PURCHASE
In May 1996, the Company acquired Ares Software Corporation ("Ares") for
approximately $15.5 million and accounted for the transaction by 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. The operating
results of Ares have been included in the accompanying consolidated financial
statements from the date of acquisition. The operating results are not
considered material to the consolidated financial statements and accordingly,
pro forma information has not been presented.
9
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. RECEIVABLES
Receivables consisted of the following:
MAY 31 DECEMBER 1
1996 1995
------------ ------------
(In thousands)
Trade receivables $ 68,902 $ 91,296
Royalty receivables 36,679 34,017
Interest and other receivables 15,460 11,593
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121,041 136,906
Less allowance for doubtful accounts 3,389 3,698
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$ 117,652 $ 133,208
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NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
MAY 31 DECEMBER 1
1996 1995
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(In thousands)
Land $ 782 $ 782
Building 4,615 4,615
Equipment 100,644 122,794
Furniture and Fixtures 13,189 18,962
Leasehold improvements 9,437 8,790
------------ ------------
128,667 155,943
Less accumulated depreciation and amortization 69,536 104,235
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$ 59,131 $ 51,708
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10
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5. OTHER ASSETS
Other assets consisted of the following:
MAY 31 DECEMBER 1
1996 1995
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(In thousands)
Licensing agreements $ 10,316 $ 16,319
Goodwill 13,921 13,753
Purchased technology 36,526 35,626
Software development costs 9,789 36,988
Equity investments 170,196 53,091
Restricted funds 63,142 35,634
Miscellaneous other assets 19,928 11,363
------------ ------------
323,818 202,774
Less accumulated amortization 46,527 67,039
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$ 277,291 $ 135,735
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------------ ------------
Included above in gross other assets at May 31, 1996, are unrealized gains
and losses on equity investments. The equity investment in Netscape Corporation
was marked-to-market for an unrealized gain of approximately $117.0 million in
the second quarter of 1996.
NOTE 6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
MAY 31 DECEMBER 1
1996 1995
------------ ------------
(In thousands)
Royalties $ 6,462 $ 7,194
Accrued compensation and benefits 25,714 26,730
Sales and marketing allowances 21,672 24,586
Other 44,246 36,338
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$ 98,094 $ 94,848
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11
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7. ACCRUED RESTRUCTURING COSTS
On October 28, 1995, the Company acquired Frame, described in "Note 2 --
Acquisitions," and initiated a plan to combine the operations of the two
companies. On this date, the Company recorded a $32.5 million charge to
operating expenses related to merger transaction and restructuring costs. On
August 31, 1994, the Company merged with Aldus Corporation ("Aldus") 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
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
equipment, the write-off of certain intangible assets, severance and
outplacement of terminated employees, and cancellation of certain contractual
agreements.
Merger transaction and restructuring costs (in thousands) are summarized in
the table below:
ACCRUED AS OF SIX MONTHS ENDED MAY 31, 1996 ACCRUED AS OF
-----------------------------
DECEMBER 1 CASH MAY 31
1995 WRITE-OFFS PAYMENTS 1996
------------- -------------- ------------ -------------
FRAME:
Merger transaction
costs $ 5,058 $ -- $ 4,535 $ 523
Restructuring costs:
Severance and
outplacement 9,612 -- 9,253 359
Cancellation of
facility leases
and other
contracts 5,402 -- 563 4,839
------------- -------------- ------------ -------------
$ 20,072 $ -- $ 14,351 $ 5,721
------------- -------------- ------------ -------------
------------- -------------- ------------ -------------
ALDUS:
Restructuring costs:
Cancellation of
facility leases
and other
contracts 6,983 -- 2,692 4,291
------------- -------------- ------------ -------------
$ 6,983 $ -- $ 2,692 $ 4,291
------------- -------------- ------------ -------------
------------- -------------- ------------ -------------
12
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7. ACCRUED RESTRUCTURING COSTS (CONTINUED)
In addition, Frame undertook certain restructuring measures in 1993
due to lower than anticipated revenues. As of May 31, 1996 and December 1,
1995, $1.0 million and $1.1 million, respectively, remained accrued and
represented anticipated future cash outflows related to lease payments on
vacated facilities.
The nature, timing, and extent of restructuring costs follow:
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 200 terminated employees for Frame. Affected employees had
received notification of their termination by November 8, 1995, and final
assignments have been substantially completed as of May 31, 1996 .
CANCELLATION OF FACILITY LEASES AND OTHER CONTRACTS
The Company has consolidated duplicate offices in Europe, Japan, Canada,
and the United States. Lease and third-party contract termination 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 8. COMMITMENTS AND CONTINGENCIES
REAL ESTATE DEVELOPMENT AGREEMENT
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 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 $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. During the
second quarter of 1996, the Company increased its deposits by approximately
$13.7 million, and as of May 31, 1996, the Company's deposits under this
agreement totaled approximately $63.1 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. Also, the Company
exercised its option under the
13
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
development agreement to begin a second phase of development. The Company
expects to enter into a financial arrangement in the third quarter of 1996 for
approximately $75.0 million in order to complete the second phase development.
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
believes that the ultimate outcome of these actions will not have a material
effect on the Company's financial position and results of operations.
NOTE 9. CAPITAL STOCK
PUT WARRANTS
In a series of private placements during the second quarter of 1996, 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. The Company's $29.5
million potential buyback obligation, as of May 31, 1996, was removed from
shareholders' equity and recorded as put warrants.
STOCK OPTION REPRICING
On March 22, 1996, the Company offered its employees a stock option
repricing program which allowed the employees to exchange on a two for three
share basis any options priced above the March 29, 1996 closing price of Adobe
stock, which was $32.25. As a result, approximately 1,252,000 options were
surrendered by eligible employees for approximately 834,000 repriced options.
The repriced options may not be exercised for six months commencing on May 1,
1996.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT ON FORM
10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S SEC REPORTS
(INCLUDING WITHOUT LIMITATION, ITS REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 1, 1995).
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, manage, communicate, and print electronic documents. The
Company licenses its technology to major computer, printing, and publishing
suppliers, and markets a line of application software products and type products
for authoring and editing 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 the Americas, Europe, and the Pacific
Rim.
In October 1995, the Company acquired Frame Technology Corporation
("Frame"). Frame, established in 1986, developed, marketed, and supported
writing and publishing software for the creation and distribution of critical
business and technical documents. To effect the combination, approximately 8.5
million shares of Adobe's common stock were issued in exchange for all of the
outstanding common stock of Frame. The merger was accounted for by the pooling
of interests method, and accordingly, all annual and interim financial
information prior to the merger has been restated to combine the results of the
Company and Frame.
In January 1996, the Company divested its prepress applications product
business to a newly established company, Luminous Corporation ("Luminous").
Under the terms of the agreement, Luminous has acquired or licensed and will
continue to develop, market, and distribute Adobe's prepress application
products. Adobe will retain a minority equity interest in Luminous and will
maintain ownership of certain core technologies for Adobe prepress products.
Luminous will pay royalties to Adobe based on a percentage of revenue from
certain products for the next two years. Revenue from prepress application
products was approximately $10.4 million in fiscal year 1995.
Effective March 2, 1996, the Company sold its investment in Datalogics, a
business unit previously owned by Frame, to a newly established company. This
business primarily involved consulting and development of high-end customized
publishing software. Adobe will retain a minority equity interest in the new
company. Revenue from this business unit was approximately $8.9 million in
fiscal year 1995.
15
The following table sets forth for the quarter and six months ended May 31,
1996, and June 2, 1995, the Company's condensed consolidated statements of
income expressed as a percentage of total revenue:
QUARTER ENDED SIX MONTHS ENDED
------------------- -------------------
MAY 31 JUNE 2 MAY 31 JUNE 2
1996 1995 1996 1995
------- ------- ------- -------
Revenue:
Licensing 24.1% 23.8% 24.2% 24.1%
Application products 75.9 76.2 75.8 75.9
------ ------ ------ ------
Total revenue 100.0 100.0 100.0 100.0
Direct costs 17.7 17.1 17.9 17.5
------ ------ ------ ------
Gross margin 82.3 82.9 82.1 82.5
------ ------ ------ ------
Operating expenses:
Software development costs:
Research and development 18.4 17.3 18.8 17.0
Amortization of capitalized
software development
costs 0.3 1.6 0.3 1.5
Sales, marketing and
customer support 32.2 31.2 32.2 30.3
General and administrative 8.0 7.4 8.1 7.3
Write-off of acquired in-
process research and
development 7.2 -- 3.7 --
------ ------ ------ ------
Total operating expenses 66.1 57.5 63.1 56.1
------ ------ ------ ------
Operating income 16.2 25.4 19.0 26.4
Nonoperating income:
Interest, investment and
other income 3.3 4.1 4.5 3.5
------ ------ ------ ------
Income before income taxes 19.5 29.5 23.5 29.9
Provision for income taxes 8.7 10.9 9.5 11.0
------ ------ ------ ------
Net income 10.8% 18.6% 14.0% 18.9%
------ ------ ------ ------
------ ------ ------ ------
16
REVENUE
1996 1995 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)
Total revenue $204.3 $189.5 8%
Six month period:
Total revenue $398.0 $378.3 5%
Revenue growth for the quarter and six month periods was due to increases
in both licensing activity and shipments of application products. Product unit
volume (as opposed to price) growth was the principal factor in the Company's
revenue growth in application product revenue.
1996 1995 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)
Product group revenue -- Licensing $49.3 $45.0 9%
Percentage of total revenue 24.1% 23.8%
Six month period:
Product group revenue -- Licensing $96.2 $91.3 5%
Percentage of total revenue 24.2% 24.1%
Licensing revenue is derived from shipments by OEMs of products containing
the Adobe PostScript interpreter and the Display PostScript 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 remained flat 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 second quarter and first six months of 1996, this trend was offset by
increased demand for CPSI and color capability, as well as increased products
shipping into the Japanese market, all of which have higher royalties per unit.
In addition, the Company has seen year-to-year increases in the number of OEM
customers from which it is receiving licensing revenue.
17
1996 1995 CHANGE
-------- ------ -------
Second quarter period: (Dollars in millions)
Product group revenue --
Application products $155.1 $144.5 7%
Percentage of total revenue 75.9% 76.2%
Six month period:
Product group revenue --
Application products $301.8 $287.0 5%
Percentage of total revenue 75.8% 75.9%
Application products revenue is derived from shipments of application
software programs marketed through retail and distribution channels; however,
Adobe PageMill, Adobe SiteMill, and Adobe Acrobat products are being more widely
distributed through VARs and systems integrators.
During the second quarter and first six months of 1996, application revenue
was higher than that of the same periods in 1995. The increase from quarter to
quarter resulted from increased demand for Adobe Photoshop, Adobe Illustrator,
Adobe PageMaker, and Acrobat products, partially offset by a decrease in Adobe
FrameMaker revenue. The increase for the first six months of 1996 compared to
the same period last year resulted from increased demand for Adobe Illustrator,
Adobe PageMaker, and Acrobat products, partially offset by decreases in Adobe
FrameMaker and Adobe Photoshop and revenue. In addition, PageMill and SiteMill
which were both released in late 1995 added revenue in both the second quarter
and first six months of 1996.
The Company expects 1996 to be a transition year for application products,
as customers determine which computer platform to use and as the Internet market
develops. In general, the Company's application products on the Windows
platform have experienced greater growth than those on the Macintosh platform
during the first six months of 1996.
18
DIRECT COSTS
1996 1995 CHANGE
-------- ------ -------
Second quarter period: (Dollars in millions)
Direct costs $36.1 $32.3 12%
Percentage of total revenue 17.7% 17.1%
Six month period:
Direct costs $71.3 $66.2 8%
Percentage of total revenue 17.9% 17.5%
Direct costs include royalties; amortization of acquired technologies; and
direct product, 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. In addition, direct costs increased in the second quarter
and first six months of 1996 compared to the same periods last year due to a
change in geographic product mix towards higher sales in Japan which have a
higher direct cost.
19
OPERATING EXPENSES
1996 1995 CHANGE
-------- ------ -------
Second quarter period: (Dollars in millions)
Software development costs --
Research and development $37.7 $32.8 15%
Percentage of total revenue 18.4% 17.3%
Six month period:
Software development costs --
Research and development $74.9 $64.2 17%
Percentage of total revenue 18.8% 17.0%
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 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 PostScript
Level 2 devices. The Company continued working 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 tasks 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, including those
targeted for the emerging internet market.
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. While the Company expects that research and development expenditures
in 1996 will continue to increase in absolute dollars, such expenditures for the
remainder of 1996 will approximate current spending levels as a percentage of
revenue.
20
1996 1995 CHANGE
------- ------ -------
Second quarter period: (Dollars in millions)
Software development costs --
Amortization of capitalized
software development costs $0.6 $2.9 (79)%
Percentage of total revenue 0.3% 1.6%
Six month period:
Software development costs --
Amortization of capitalized
software development costs $1.3 $5.8 (78)%
Percentage of total revenue 0.3% 1.5%
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 and Aldus
products have been capitalized and are being amortized over the lives of the
respective products. In the second quarter and first six months of 1996,
software development expenditures on all products, after reaching technological
feasibility, were immaterial and the Company expects this trend to continue in
the future.
Amortization of capitalized software development costs decreased in the
second quarter and first six months of 1996 as a result of achieving full
amortization of all Aldus products by the end of 1995. Amortization of software
development costs are expected to remain relatively constant during the
remainder of 1996 as the software products acquired with Frame become fully
amortized.
21
1996 1995 CHANGE
------- ------ -------
Second quarter period: (Dollars in millions)
Sales, marketing and
customer support $65.7 $59.3 11%
Percentage of total revenue 32.2% 31.3%
Six month period:
Sales, marketing and
customer support $128.3 $114.7 12%
Percentage of total revenue 32.2% 30.3%
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 revenues, such as advertising, trade shows and
other market development programs.
Sales, marketing and customer support expenses increased in the second
quarter and first six months of 1996 compared with the same periods of 1995.
The increase resulted primarily from Frame integration costs in the first
quarter of 1996 and a higher headcount entering fiscal 1996, focal compensation
increases, and higher rent expense. In addition, more trade show and product
launch activity, particularly in Japan and Europe, increased expenditures during
the second quarter of 1996. Costs related to continuing efforts to expand
markets and increase penetration into targeted software markets, as well as
responding to increased competition in the software industry, will be partially
offset by decreased costs expected to result from the restructuring of the
combined company after the acquisition of Frame. As a result, for all of 1996,
sales, marketing, and customer support expenditures are expected to increase in
absolute dollars and increase slightly from 1995 spending levels as a percentage
of revenue.
22
1996 1995 CHANGE
------- ------ -------
Second quarter period: (Dollars in millions)
General and administrative $16.4 $14.0 17%
Percentage of total revenue 8.0% 7.4%
Six month period:
General and administrative $32.1 $27.7 16%
Percentage of total revenue 8.1% 7.3%
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.
In the second quarter and first six months of 1996, general and
administrative expenses increased compared with the same periods of 1995. The
increase resulted primarily from Frame integration costs in the first quarter of
1996 and a higher headcount entering fiscal 1996 as well as higher systems and
legal costs. While the Company expects that general and administrative
expenditures in 1996 will continue to increase in absolute dollars, such
expenditures are expected to remain approximately the same as 1995 as a
percentage of revenue.
1996 1995 CHANGE
------- ------ -------
Second quarter period: (Dollars in millions)
Write-off of acquired in-
process research and
development $14.7 $-- 100%
Percentage of total revenue 7.2% --
Six month period:
Write-off of acquired in-
process research and
development $14.7 $-- 100%
Percentage of total revenue 3.7% --
In May 1996, the Company acquired Ares Software Corporation ("Ares") for
approximately $15.5 million and accounted for the transaction by 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.
23
NONOPERATING INCOME
1996 1995 CHANGE
------- ------ -------
Second quarter period: (Dollars in millions)
Interest, investment and
other income $6.7 $7.7 (13)%
Percentage of total revenue 3.3% 4.1%
Six month period:
Interest, investment and
other income $18.2 $13.4 36%
Percentage of total revenue 4.5% 3.5%
In the second quarter of 1996, interest, investment and other income
decreased compared with the same quarter of 1995. The decrease is primarily the
result of a foreign exchange gain realized in the second quarter of 1995. In
addition, the Company made a significant shift into tax exempt municipal bonds
during the second quarter of 1996 which have lower interest rates. In the first
six months of 1996, interest, investment and other income increased compared
with the same period of 1995. The increase is primarily due to a significantly
larger investment base and a realized gain of approximately $2.8 million on the
sale of an equity investment which was recognized in the first quarter of 1996.
PROVISION FOR INCOME TAXES
1996 1995 CHANGE
------- ------ -------
Second quarter period: (Dollars in millions)
Provision for income taxes $17.8 $20.7 (14)%
Percentage of total revenue 8.7% 10.9%
Effective tax rate 44.7% 37.0%
Six month period:
Provision for income taxes $38.0 $41.8 (9)%
Percentage of total revenue 9.5% 11.0%
Effective tax rate 40.6% 36.9%
The effective tax rate for the second quarter and first six months of 1996
was higher than the same periods in 1995 as a result of the nondeductible write-
off of acquired in-process research and development associated with the
acquisition of Ares in the second quarter of 1996. In addition, the Company was
not able to utilize the federal research and experimentation tax credit in 1996.
It remains unclear whether the research and experimentation credit will be
renewed. Non-renewal would continue to adversely impact the Company's 1996
effective tax rate.
24
NET INCOME AND NET INCOME PER SHARE
1996 1995 CHANGE
------- ------ -------
Second quarter period: (Dollars in millions)
Net income $22.0 $35.2 (38)%
Percentage of total revenue 10.8% 18.6%
Net income per share $.29 $.47 (38)%
Weighted shares (In thousands) 75,638 75,321 ----
Six month period:
Net income $55.7 $71.4 (22)%
Percentage of total revenue 14.0% 18.9%
Net income per share $.73 $.96 (24)%
Weighted shares (In thousands) 76,016 74,105 3%
Net income for the second quarter of 1996 decreased 38% from the second
quarter of 1995. Earnings per share were $.29, an 38% decrease from the second
quarter of 1995. Net income for the six months ended May 31, 1996 decreased 22%
from the same period in 1995 and earnings per share decreased 24% for the same
period. The decrease was caused primarily by the write-off of in-process
research and development costs associated with the acquisition of Ares and
increased operating expenses.
25
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 the ability of the Company to integrate
Adobe and Frame 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; industry transitions to new business and
information delivery models; and adverse changes in general economic conditions
in any of the countries in which the Company does business.
In connection with the merger with Frame, 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 has occurred in the first six months of 1996.
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, the integration of the product lines of the two companies could
have a material adverse effect on the results of operations, including the
potential for charges for certain discontinued business components.
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. 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
second half of 1997, Hewlett-Packard plans not to incorporate PostScript
software in some Hewlett-Packard LaserJet printers. The Company expects to
continue working with Hewlett-Packard printer operations to incorporate
PostScript and other technologies in other Hewlett-Packard products.
The Company derives a significant portion of its revenue and operating
income 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,
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 fluctuations has been insignificant
and the Company has not engaged in 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.
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 product introductions
could have an adverse
26
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.
Although the Company generally offers its application products on
Macintosh, Windows, and UNIX platforms, a majority of the overall sales of these
products to date has been for the Macintosh platform, particularly for the
higher end Macintosh computers. To the extent that there is a slowdown of
customer purchases in the higher end Macintosh market or if other operating
systems, such as Windows 95 or NT, become more prevalent among the Company's
customers, the Company's operating results could be materially adversely
affected. 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.
During 1995, the Company entered the Internet market, which has only
recently begun to develop. The Internet market is rapidly evolving and is
characterized by an increasing number of market entrants who have introduced or
developed products addressing authoring and communication over the Internet. 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. Moreover, critical issues concerning the commercial use of the
Internet (including security, reliability, ease of use and access, cost, and
quality of service) remain unresolved and may impact the growth of Internet use,
together with the software standards and electronic media employed in such
markets.
Through its acquisitions in 1994 and 1995, the Company has experienced
significant growth. The Company's ability to manage its growth and the industry
transition to the Internet effectively will require it to continue to improve
its operational and financial controls and information management systems, to
develop new models for licensing its software to accommodate new information
delivery practices, and to attract, retain, motivate and manage employees
effectively. The failure of the Company to manage effectively growth and
transition in multiple areas of its business could have a material adverse
effect on its 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 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. 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.
27
FINANCIAL CONDITION
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
MAY 31 DECEMBER 1
1996 1995 CHANGE
------ ---------- ------
(Dollars in millions)
Cash, cash equivalents and
short-term investments $523.3 $516.0 1%
The Company's cash balances and short term investments have increased due
to profitable operations, partially offset by the repurchase of stock, capital
outlays, other investments and deposits required under a real estate development
agreement.
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, 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
Statement of Financial Accounting Standards No. 115. The securities are carried
at fair value with the unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity.
OTHER ASSETS
MAY 31 DECEMBER 1
1996 1995 CHANGE
------ ---------- -------
(Dollars in millions)
Other assets (gross) $323.8 $202.8 60%
Included above at May 31, 1996 are unrealized gains and losses on equity
investments. The Company's equity investment in Netscape Corporation was
marked-to-market for an unrealized gain of approximately $117.0 million in the
second quarter of 1996.
28
NONCURRENT LIABILITIES AND SHAREHOLDERS' EQUITY
MAY 31 DECEMBER 1
1996 1995 CHANGE
------ ---------- ------
(Dollars in millions)
Noncurrent liabilities and
shareholders' equity $818.0 $698.4 17%
Included above is shareholders' equity and at May 31,1996, deferred income
taxes related to unrealized gains and losses on equity investments and
obligations for put warrants. The Company has no long-term debt. A significant
portion of the increase in shareholders' equity is attributable to the
unrealized gain on the equity investment in Netscape Corporation.
The Board of Directors of the Company declared a cash dividend on the
Company's common stock of $.05 per common share on June 24, 1996, for the second
quarter of 1996. The dividend will be for shareholders of record as of July 8,
1996, and will be paid on July 22, 1996. 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 approximately
1,000,000 shares at a cost of $42.0 million in the second quarter of 1996.
These share repurchases are intended to fund the Companys' employee stock
purchase and stock option plans.
WORKING CAPITAL
MAY 31 DECEMBER 1
1996 1995 CHANGE
----- ---------- ------
(Dollars in millions)
Working capital $481.5 $506.5 (5)%
Net working capital decreased to $481.5 million as of May 31, 1996,
compared to $506.5 million as of December 1, 1995. The decline was due to a
decrease in accounts receivable and an increase in trade and other payables.
Cash flow provided by operations during the first six months of 1996 was $103.7
million. This was offset by cash used for investing and financing activities.
Expenditures during the first six months of 1996 for property and equipment
totaled $16.9 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 six months of 1996 was $36.2
million primarily resulting from the repurchase of common stock and payment of
dividends partially offset by issuance of common stock under employee stock
plans.
29
The Company's principal commitments as of May 31, 1996 consisted of
obligations under operating leases, 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 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 $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. During the
second quarter of 1996, the Company increased its deposits by approximately
$13.7 million, and as of May 31, 1996, the Company's deposits under this
agreement totaled approximately $63.1 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. Also, the Company
exercised its option under the development agreement to begin a second phase of
development. The Company expects to enter into a financial arrangement in the
third quarter of 1996 for approximately $75.0 million in order to complete the
second phase development.
The Company has also 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 owns 16% of the outstanding stock in McQueen.
During the second quarter of 1996, the Company repurchased approximately
1,000,000 shares of its common stock. In addition, the Company arranged options
to purchase an additional 740,000 shares in the third quarter of 1996, which
represented the remaining shares authorized for repurchase. In June of 1996, the
Board of Directors authorized the Company to repurchase up to 5,000,000 more
shares of stock in order to fund shares needed for issuance under its employee
stock plans. The Company intends to continue to directly repurchase common
shares and to arrange options to purchase common shares.
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.
30
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Quantel Limited, a U.K. corporation, has filed and served on the Company 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 seeks a permanent injunction and
unspecified damages. The Company has analyzed the patents and believes it has
adequate legal defenses to the major causes of action and intends to vigorously
defend the lawsuit.
On February 6, 1996, a securities class action complaint was filed against
Adobe, certain of its officers and directors, certain former officers of 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.
Adobe has filed a demurrer in the Superior Court seeking to dismiss the
complaint in its entirety.
31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on April 10, 1996.
A proposal to elect three (3) Class I directors of the Company to serve for
a two-year term expiring at the Annual Meeting of Shareholders in 1998 was
approved by shareholders. This proposal received the following votes:
For Withheld
---------- ---------
Charles M. Geschke 65,019,548 1,655,188
William R Hambrecht 65,023,056 1,651,680
Delbert W. Yocam 65,020,098 1,654,638
Incumbent Class II directors John E. Warnock, Robert Sedgewick, William J.
Spencer, and Gene P. Carter are currently serving for a term expiring at the
Annual Meeting of Shareholders in 1997.
Introduced was a proposal to approve an increase in the Company's share
reserve under the Company's 1994 Stock Option Plan by 3,600,000 to a total of
23,600,000. This proposal received the following votes:
For: 37,892,253
Against: 26,928,065
Abstain: 420,546
Also, there was a proposal to approve the new stock option plan for the
Company's Outside Directors, to be known as the 1996 Outside Directors Option
Plan. This proposal received the following votes:
For: 46,943,987
Against: 17,705,525
Abstain: 591,352
In addition, shareholders ratified the appointment of KPMG Peat Marwick LLP
as independent public accountants of the Company for fiscal 1996. This proposal
received the following votes:
For: 66,297,956
Against: 53,959
Abstain: 313,321
Broker non-votes are 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 shareholders. They are not, however, counted for
purposes of determining the number of votes cast for a proposal.
32
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
- - -------- ----------------------- ---- -------- ------ --------
3.2.9 Restated Bylaws X
4.1 Shareholders Rights X
Plan, as amended*
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
10.12.1 1988 Employee Stock 10-Q 07/06/94 10.12.1
Purchase Plan, as
amended*
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)
10.18 Lease Agreement dated S-1 07/01/86 10.18
November 11, 1983,
between Mozart Family
Trust and Epson
America Inc.
10.19 Assignment of Lease S-1 07/01/86 10.19
dated November 11,
1983, between Epson
America Inc. and the
Company dated February
1, 1986
(Continued)
33
3. Index to Exhibits (Continued)
Incorporated by Reference
Exhibit ------------------------- Filed
Number Exhibit Description Form Date Number Herewith
- - -------- ----------------------- ---- -------- ------ --------
10.20 Lease Agreement between S-1 07/01/86 10.20
Mozart Family Trust and
the Company dated
November 30, 1983
10.21.2 Revised Bonus Plan* 10-K 11/26/93 10.21.2
10.22.4 Restricted Stock Option 10-Q 07/06/94 10.22.4
Plan, as amended*
10.24.1 1994 Performance and S-4 07/27/94 10.1
Restricted Stock Plan*
10.25 Form of Indemnity 10-K 11/30/88 10.25
Agreement*
10.26 Lease Agreement by 10-K 11/30/88 10.26
and between Charleston
Place Associates and
Adobe Systems Incorporated
dated April 14, 1987
10.26.1 Amendment One to Lease 10-K 11/30/88 10.26.1
Agreement dated March
1, 1988
10.26.2 Amendment Two to Lease 10-K 11/30/88 10.26.2
Agreement dated
September 1, 1988
10.27 Lease Agreement by and 10-K 11/30/88 10.27
between John Mozart and
Adobe Systems Incorporated
dated July 20, 1988
10.31 Restated Agreement and S-4 07/13/94 10.31
Plan of Merger and
Reorganization By and
Among Adobe Systems
Incorporated, P
Acquisition Corp and
Aldus Corporation
(Continued)
34
3. Index to Exhibits (Continued)
Incorporated by Reference
Exhibit ------------------------- Filed
Number Exhibit Description Form Date Number Herewith
- - -------- ----------------------- ---- -------- ------ --------
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
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 X
Stock Option plan*
10.37 Confidential Resignation X
Agreement*
11 Computation of Earnings 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 31, 1996.
35
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 11, 1996
By /s/ M. Bruce Nakao
--------------------------
M. Bruce Nakao,
Senior Vice President, Finance and
Administration, Chief Financial Officer,
and Assistant Secretary
(Principal Financial Officer)
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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
Display PostScript
Illustrator
FrameMaker
PageMaker
PageMill
Photoshop
PostScript
SiteMill
All other brand or product names are trademarks or registered trademarks of
their respective holders.
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