SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d)15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 3,June 2, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d)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,SHARES OUTSTANDING
CLASS JUNE 2, 1995
----- -------------------------
Common stock, no par value 62,314,44063,344,298
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 1715
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 2729
Signature 3436
Summary of Trademarks 35
Exhibits 3637
EXHIBITS
Exhibit 10.33 Sale of Rights under Software Development and
Acquisition Agreement By and Between Adobe
Systems Incorporated and Thomas Knoll and John
Knoll (confidential treatment granted)
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 March 3,June 2, 1995 and February 25,May 27, 1994
and Six Months Ended June 2, 1995 and May 27, 1994 4
- - Condensed Consolidated Balance Sheets
March 3,June 2, 1995 and November 25, 1994 5
- - Condensed Consolidated Statements of Cash Flows
ThreeSix Months Ended March 3,June 2, 1995 and February 25,May 27, 1994 6
- - Notes to Condensed Consolidated Financial Statements 8
3
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ThreeQuarters Ended Six Months Ended
------------------------
March 3 February 25------------------------------- --------------------------
June 2 May 27 June 2 May 27
1995 1994 ----------1995 1994
------------ ----------- ----------- -----------
Revenue:
Licensing $ 46,31445,081 $ 36,32640,257 $ 91,395 $ 76,583
Application products 122,278 99,566
----------122,911 109,536 245,189 209,102
------------ ----------- ----------- -----------
Total revenue 168,592 135,892167,992 149,793 336,584 285,685
Direct costs 32,751 26,005
----------30,804 27,894 63,555 53,899
------------ ----------- ----------- -----------
Gross margin 135,841 109,887
----------137,188 121,899 273,029 231,786
------------ ----------- ----------- -----------
Operating expenses:
Software development costs:
Research and development 26,368 21,69826,494 23,486 52,862 45,184
Amortization of capitalized
software development
costs 2,560 2,6212,595 4,152 5,155 6,773
Sales, marketing and
customer support 46,032 45,66849,256 51,450 95,288 97,118
General and administrative 11,574 11,988
----------12,092 14,152 23,666 26,140
Write-off of acquired in-
process research and
development -- 3,045 -- 3,045
------------ ----------- ----------- -----------
Total operating expenses 86,534 81,975
----------90,437 96,285 176,971 178,260
------------ ----------- ----------- -----------
Operating income 49,307 27,91246,751 25,614 96,058 53,526
Nonoperating income:
Interest, investment and
other income 5,176 2,029
----------7,098 1,839 12,274 3,868
------------ ----------- ----------- -----------
Income before income taxes 54,483 29,94153,849 27,453 108,332 57,394
Provision for income taxes 20,133 10,848
----------19,947 10,147 40,080 20,995
------------ ----------- ----------- -----------
Net income $ 34,35033,902 $ 19,093
----------17,306 $ 68,252 $ 36,399
------------ ----------- --------------------- -----------
------------ ----------- ----------- -----------
Net income per share $ .54.51 $ .31
----------.28 $ 1.04 $ .59
------------ ----------- --------------------- -----------
------------ ----------- ----------- -----------
Shares used in computing net
income per share 64,043 61,289
----------66,324 61,768 65,343 61,529
------------ ----------- --------------------- -----------
------------ ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
March 3June 2 November 25
1995 1994
--------------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 172,357129,339 $ 190,091
Short-term investments 250,801314,025 210,269
Receivables 100,03191,523 96,585
Inventories 6,7786,339 9,619
Other current assets 6,0519,547 7,837
Deferred income taxes 16,83818,472 17,962
----------- --------------------- ----------
Total current assets 552,856569,245 532,363
Property and equipment 42,38644,119 39,104
Other assets 56,36586,782 45,561
Deferred income taxes 8,88610,226 8,475
----------- --------------------- ----------
$ 660,493710,372 $ 625,503
----------- -----------
----------- --------------------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade and other payables $ 26,01221,721 $ 30,840
Accrued expenses 82,04082,549 79,000
Accrued restructuring costs 14,63511,834 28,457
Income taxes payable 18,28813,611 23,083
Deferred revenue 8,3887,738 7,352
----------- --------------------- ----------
Total current liabilities 149,363137,453 168,732
----------- --------------------- ----------
Put warrants 3,447 --
Shareholders' equity:
Preferred stock, no par value;
2,000,000 shares authorized; none issued -- --
Common stock, no par value;
200,000,000 shares authorized;
62,314,44063,344,298 and 61,150,049 shares issued
and outstanding as of March 3,June 2, 1995,
and November 25, 1994, respectively 164,498189,650 142,207
Unrealized lossesgains (losses) on investments (587)1,480 (1,088)
Retained earnings 350,922381,620 319,704
Cumulative foreign currency translation adjustments (3,703)(3,278) (4,052)
----------- --------------------- ----------
Total shareholders' equity 511,130569,472 456,771
----------- --------------------- ----------
$ 660,493710,372 $ 625,503
----------- -----------
----------- --------------------- ----------
---------- ----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
ThreeSix Months Ended
-------------------------
March 3 February 25June 2 May 27
1995 1994
----------- ---------------------- ----------
Cash flows from operating activities:
Net income $ 34,35068,252 $ 19,09336,399
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense 529 2531,481 509
Depreciation and amortization 10,225 10,29223,472 24,217
Deferred income taxes 708 (627)
Unrealized loss on investments -- 423(2,252) (3,521)
Provision for losses on accounts receivable 307 (147)817 437
Tax benefit from employee stock plans 5,073 4,31016,775 5,192
Write-off of acquired in-process research
and development -- 3,045
Changes in operating assets and liabilities:
Receivables (4,237) (1,847)3,833 (16,288)
Inventories 2,929 5473,294 (119)
Other current assets 887 (67)(2,437) (2,900)
Trade and other payables (4,353) (4,358)(9,056) 442
Accrued expenses 2,050 (91)1,779 8,963
Accrued restructuring costs (12,869)(14,793) --
Income taxes payable (4,908) (8,576)(9,625) 1,298
Deferred revenue 1,018 (1,617)
-----------312 (587)
---------- ----------
Net cash provided by operating activities 31,709 17,588
-----------81,852 57,087
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments (1,455,278) (225,469)(1,943,670) (643,221)
Maturities and sales of short-term investments 1,415,247 208,9331,842,482 630,731
Acquisitions of property and equipment (8,913) (6,990)(15,151) (14,222)
Capitalization of software development costs -- (2,502)(7,271)
Additions to other assets (15,110) (1,644)
----------- -----------(54,538) (1,870)
Acquisitions, net of cash acquired -- (6,297)
---------- ----------
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
----------- -----------(170,877) (42,150)
---------- ----------
(Continued)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
ThreeSix Months Ended
-----------------------------
March 3 February 25-------------------------
June 2 May 27
1995 1994
------------ ---------------------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock $ 46,265 $ 15,688
Proceeds from sales of put warrants -- 718
Repurchase of common stock (13,631) (6,630)
Payment of dividends (6,333) (4,561)
---------- ----------
Net cash provided by financing activities 26,301 5,215
---------- ----------
Effect of foreign currency exchange rates on
cash and cash equivalents $ 1,054 $ (451)
------------ ------------1,972 179
---------- ----------
Net increase (decrease) in cash and cash equivalents (17,734) (7,873)(60,752) 20,331
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 $ 172,357129,339 $ 122,612
------------ ------------
------------ ------------150,816
---------- ----------
---------- ----------
Supplemental disclosures:
Cash paid during the period for income taxes $ 17,41232,023 $ 13,054
------------ ------------
------------ ------------14,945
---------- ----------
---------- ----------
Noncash investing and financing activities:
Dividends declared but not paid $ 3,1333,185 $ 2,300
------------ ------------
------------ ------------2,302
---------- ----------
---------- ----------
Reclassification of put warrants $ --3,447 $ (6,906)
------------ ------------
------------ ------------3,581
---------- ----------
---------- ----------
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,June 2, 1995, and the condensed consolidated
statements of income and cash flows for the interim periods ended March 3,June 2, 1995
and February 25,May 27, 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 Annual Report on
Form 10-K.
The results of operations for the interim period ended March 3,June 2, 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 for
the periods prior to the merger 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 quarterinterim periods
ended February 25,May 27, 1994 were combined with the Company's for the same period.periods. 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
quarterinterim periods ended February 25,May 27, 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, andRECEIVABLES
Receivables consisted of the following:
As of March 3,June 2 November 25
1995 --------------------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------1994
---------- ---------- ---------------------
Trade receivables $ 56,638 $ 69,628
Royalty receivables 30,394 26,800
Interest and other receivables 8,334 3,410
---------- -----------
95,366 99,838
Less allowance for doubtful accounts 3,843 3,253
---------- -----------
$ 91,523 $ 96,585
---------- -----------
---------- -----------
NOTE 4.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
June 2 November 25
1995 1994
---------- -----------
Money market
mutual fundsLand $ 782 $ 782
Building 4,615 4,615
Equipment 96,257 88,285
Furniture 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
--------fixtures 17,738 15,487
Leasehold improvements 7,902 4,146
---------- ----------
----------
$389,418 $ 274 $ (1,289) $ 388,403
--------127,294 113,315
Less accumulated depreciation and amortization 83,175 74,211
---------- ----------
$ 44,119 $ 39,104
----------
-------- ----------
---------- ----------
10
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 3.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (CONTINUED)5.
OTHER ASSETS
Other assets consisted of the following:
As ofJune 2 November 25
1995 1994
--------------------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------- ---------- ---------- ---------------------
Money market
mutual funds and
time depositsLicensing agreements $ 7,81215,608 $ 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
--------15,565
Goodwill 22,034 22,034
Purchased technology 34,726 325
Software development costs 27,199 27,199
Miscellaneous other assets 36,528 16,123
---------- ----------
----------
$364,479 $ 4 $ (1,888) $ 362,595
--------136,095 81,246
Less accumulated amortization 49,313 35,685
---------- ----------
$ 86,782 $ 45,561
----------
-------- ----------
---------- ----------
Unrealized losses are reported as a separate component of shareholders'
equity net of taxes of $0.5Unamortized software development costs were $4.3 million and $0.8$9.1 million at
March 3,June 2, 1995 and November 25, 1994, respectively. Net realized gains or losses are included in
interest, investmentAmortization of software
development costs was $2.6 million and other income. Net realized losses were insignificant$4.2 million for the quarters ended March 3,June
2, 1995 and February 25, 1994.
The Company's investments are classified as follows:May 27, 1994, respectively, and $5.2 million and $6.8 million for
the six months ended June 2, 1995 and May 27, 1994, respectively.
NOTE 6.
ACCRUED EXPENSES
Accrued expenses consisted of the following:
March 3June 2 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
-------- --------
-------- --------Royalties $ 5,612 $ 10,824
Accrued compensation and benefits 20,558 17,039
Sales and marketing allowances 20,705 19,445
Miscellaneous accrued expenses 35,674 31,692
---------- -----------
$ 82,549 $ 79,000
---------- -----------
---------- -----------
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:
Six Months Ended June 2, 1995
Accrued as of Quarter Ended March 3, 1995----------------------------- Accrued as of
November 25 Cash March 3June 2
1994 Write-offs Payments 1995
------------- ---------- ------------------------ ------------- --------------
Merger transaction
costs $ 5,863 $ --168 $ 5,1755,455 $ 688240
Restructuring costs:
Severance and
outplacement 11,548 -- 6,436 5,1127,320 4,228
Impaired assets and
cancellation of
facility leases 11,046 1,548 663 8,835
----------- -------- --------- ------------1,662 2,018 7,366
------------- ------------- ------------- --------------
$ 28,457 $ 1,5481,830 $ 12,27414,793 $ 14,635
----------- -------- --------- ------------
----------- -------- --------- ------------11,834
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
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.
1512
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 8.7.
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 EVENT8.
ACQUISITION OF ADOBE PHOTOSHOP-TM- TECHNOLOGY
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 obtainobtained all rights to the technology for a lump sum payment of $34.5 million.
This transaction will behas been recorded on the balance sheet in the second quarterother assets as part
of 1995.purchased technology. The purchased technology is being amortized over 36
months. Prior to this agreement, the Company paid the developers a royalty onfor
each copy of Adobe Photoshop sold by the Company.
16NOTE 9.
SUBSEQUENT EVENT
On June 22, 1995, the Company and Frame Technology Corporation ("Frame")
announced a definitive agreement under which the Company will acquire Frame
through an exchange of common stock of the two companies. Frame, a California
corporation established in 1986, provides document creation, management and
distribution software for individuals and workgroups.
13
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 9.
SUBSEQUENT EVENT (CONTINUED)
Under the agreement, which has been approved by the Board of Directors of both
companies, the Company will exchange .52 shares of its common stock for each
share of Frame common stock. The acquisition is intended to qualify as a tax-
free reorganization and a pooling of interests for accounting purposes. This
transaction is subject to conditions customary for acquisitions of publicly-held
companies, including expiration or termination of the applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Securities and
Exchange Commission approval and approval by Frame's shareholders.
Assuming no adverse regulatory proceedings and that shareholder approval is
obtained, the Company expects the acquisition to be effective in the fourth
quarter of 1995.
14
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 1994 Change
1994
------- ------- ----------------- ----------- -----------
FirstSecond quarter period:
TOTAL REVENUE $168.6 24% $135.9$168.0 $149.8 12%
Six month period:
TOTAL REVENUE $336.6 $285.7 18%
Revenue growth for the second quarter and six month periods was due to increases
in both licensing activity and salesshipments 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.
1715
1995 1994 Change
1994
------ ------ ---------------- ----------- -----------
FirstSecond quarter period:
PRODUCT GROUP REVENUE -- LICENSING $46.3 27% $36.3$45.1 $40.3 12%
Percentage of total revenue 27.5% 26.7%26.8% 26.9%
Six month period:
PRODUCT GROUP REVENUE -- LICENSING $91.4 $76.6 19%
Percentage of total revenue 27.2% 26.8%
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 second quarter and first quartersix months 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.
16
1995 1994 Change
1994
------ ------ ---------------- ----------- -----------
FirstSecond quarter period:
PRODUCT GROUP REVENUE --
APPLICATION PRODUCTS $122.3 23% $99.6$122.9 $109.5 12%
Percentage of total revenue 72.5% 73.3%73.2% 73.1%
Six month period:
PRODUCT GROUP REVENUE --
APPLICATION PRODUCTS $245.2 $209.1 17%
Percentage of total revenue 72.8% 73.2%
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 second quarter and first quartersix months of 1995, application products
revenue grew primarily due to increased demand for Adobe Illustrator-TM-, Adobe Photoshop-TM-, Adobe
Premiere-TM- and Adobe PageMaker-TM-. These products are primarily used forthe
Company's image editing line art editing, video editing and for page design and
layout, respectively.product. In the first quarter of 1995, the Company
released Adobe PremierePremiere-TM- 4.0 for the Windows platform and the Adobe
PageMakerPageMaker-TM- 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. TheseContinued strong demand for these
releases combined with continued strong demandas well as for versions of Adobe Illustrator,Illustrator-TM-, Adobe Photoshop and
Adobe Premiere for the Macintosh platform released in the second half of fiscal
1994 all contributed otto the increased revenue from application products. The
second quarter and first quartersix months of 1994 includesinclude revenue from FreeHand, which
was divested effective January 1, 1995, and PhotoStyler, which was discontinued
in late 1994. These two products aggregated $14.3revenue of $16.1 million of revenueand $30.4
million in the second quarter and first quartersix months of 1994.1994, respectively.
17
DIRECT COSTS
1995 1994 Change
1994
------ ------- ---------------- ----------- -----------
FirstSecond quarter period:
DIRECT COSTS $32.8 26% $26.0$30.8 $27.9 10%
Percentage of total revenue 19.4% 19.1%18.3% 18.6%
Six month period:
DIRECT COSTS $63.6 $53.9 18%
Percentage of total revenue 18.9% 18.9%
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$1.5 million
and $2.6 million in the second quarter and first quartersix months of 1994.1994,
respectively.
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
second quarter and first quarterhalf of 1995, direct costs increased slightlyremained relatively constant
as a percentage of total revenue due to increasedwhile the revenue from certainmix between licensing and
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.changed only slightly.
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 obtainobtained all rights to the technology for a lump sum payment of $34.5 million.
This transaction will behas been recorded on the balance sheet in the second quarterother assets as part
of 1995.purchased technology. The purchased technology is being amortized over 36
months. Prior to this agreement, the Company paid the developers a royalty onfor
each copy of Adobe Photoshop sold by the Company. The Company expects that the
future reduction in royalty costs achieved by obtaining the rightsamortization expense related to the Adobe Photoshoppurchased technology will be approximately offset bynot exceed the
amortization
of the acquired technology.
19per-copy royalty expense which would otherwise have been incurred.
18
OPERATING EXPENSES
1995 1994 Change
1994
------ ------ ---------------- ----------- -----------
FirstSecond quarter period:
SOFTWARE DEVELOPMENT COSTS --
RESEARCH AND DEVELOPMENT $26.4 22% $21.7$26.5 $23.5 13%
Percentage of total revenue 15.6% 16.0%15.8% 15.7%
Six month period:
SOFTWARE DEVELOPMENT COSTS --
RESEARCH AND DEVELOPMENT $52.9 $45.2 17%
Percentage of total revenue 15.7% 15.8%
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-sufficientself-
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
1994current spending levels as a percentage of revenue.
19
1995 1994 Change
1994
------ ------ ---------------- ----------- -----------
FirstSecond quarter period:
SOFTWARE DEVELOPMENT COSTS --
AMORTIZATION OF CAPITALIZED
SOFTWARE DEVELOPMENT COSTS $2.6 -2% $2.6$4.2 -38%
Percentage of total revenue 1.5% 1.9%2.8%
Six month period:
SOFTWARE DEVELOPMENT COSTS --
AMORTIZATION OF CAPITALIZED
SOFTWARE DEVELOPMENT COSTS $5.2 $6.8 -24%
Percentage of total revenue 1.5% 2.4%
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 second
quarter and first quartersix months 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.
20
1995 1994 Change
1994
------ ------ ---------------- ----------- -----------
FirstSecond quarter period:
SALES, MARKETING AND
CUSTOMER SUPPORT $46.0 1% $45.7$49.3 $51.5 -4%
Percentage of total revenue 27.3% 33.6%29.3% 34.3%
Six month period:
SALES, MARKETING AND
CUSTOMER SUPPORT $95.3 $97.1 -2%
Percentage of total revenue 28.3% 34.0%
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,revenues, such as advertising, trade shows and
other market development programs.
Sales, marketing and customer support expenses increased slightly indecreased for the second quarter
and first quartersix months of 1995 compared with the first quartersame periods of 1994. Historically,
these expenses are lowest inThese
decreases reflect the first quartertiming of product release schedules as travel and trade show
expenses usually are lowest inwell as reduced
costs resulting from the first quarter. Inrestructuring of the first quarter of
1995, advertising costs were also low.combined company following the
merger with Aldus.
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.levels in absolute dollars.
1995 1994 Change
1994
------ ------ ---------------- ----------- -----------
FirstSecond quarter period:
GENERAL AND ADMINISTRATIVE $11.6 -3% $12.0$12.1 $14.2 -15%
Percentage of total revenue 6.9% 8.8%7.2% 9.4%
Six month period:
GENERAL AND ADMINISTRATIVE $23.7 $26.1 -9%
Percentage of total revenue 7.0% 9.1%
General and administrative expenses consist principally of salaries and
benefits, travel expenses, and related facility costs for the finance, human
resources, legal, information services and administrative personnel of the
Company. General and administrative expenses also include outside legal and
accounting fees, bad debts and expenses associated with computer equipment and
software used in the administration of the business.
21
In the second quarter and first quartersix months 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
quarterhalf of 1995.
NONOPERATING INCOME
1995 1994 Change
1994
------ ------ ---------------- ----------- -----------
FirstSecond quarter period:
INTEREST, INVESTMENT AND
OTHER INCOME $5.2 155% $2.0$ 7.1 $1.8 286%
Percentage of total revenue 3.1% 1.5%4.2% 1.2%
Six month period:
INTEREST, INVESTMENT AND
OTHER INCOME $12.3 $3.9 217%
Percentage of total revenue 3.6% 1.4%
The increase in interest, investment and other income is primarily due to
generally higher interest rates and a larger investment base. In addition,1995, the
Company has increased the weighted average days-to-maturity of its investments,
which has generated higher rates of return, and, in addition, 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 1994 Change
1994
------ ------ ---------------- ----------- -----------
FirstSecond quarter period:
PROVISION FOR INCOME TAXES $20.1 86% $10.8$19.9 $10.1 97%
Percentage of total revenue 11.9% 8.0%6.8%
Effective tax rate 37.0% 36.2%37.0%
Six month period:
PROVISION FOR INCOME TAXES $40.1 $21.0 91%
Percentage of total revenue 11.9% 7.3%
Effective tax rate 37.0% 36.6%
The Company's effective tax rate for the first quarter of 1995 was slightly higher thanin the same quarterfirst six months of
1995 compared with 1994 due to a decrease in research and development tax
credits and lower tax exempt investment earnings.earnings in the current year.
22
NET INCOME AND NET INCOME PER SHARE
1995 1994 Change
1994
------ ------ ---------------- ----------- -----------
FirstSecond quarter period:
NET INCOME $34.4 80% $19.1$33.9 $17.3 96%
Percentage of total revenue 20.4% 14.1%20.2% 11.6%
NET INCOME PER SHARE $0.54 74% $0.31$0.51 $0.28 82%
Weighted shares (In thousands) 64,043 61,28966,324 61,768
Six month period:
NET INCOME $68.3 $36.4 88%
Percentage of total revenue 20.3% 12.7%
NET INCOME PER SHARE $1.04 $0.59 76%
Weighted shares (In thousands) 65,343 61,529
Net income for the firstsecond quarter of 1995 increased 80 percent96% from the firstsecond quarter
of 1994. Earnings per share were $.54, a 74 percent$.51, an 82% increase from the firstsecond quarter
of 1994. Net income for the six months ended June 2, 1995 increased 88% over the
same period in 1994 and earnings per share increased 76% for the same period.
The increase in earnings per share was caused by significantly increased revenues,revenue, lower
expense levels as a percentage of revenuesrevenue and a relatively constant tax rate.
ANNOUNCED ACQUISITION OF FRAME TECHNOLOGY CORPORATION
On June 22, 1995, the Company and Frame Technology Corporation ("Frame")
announced a definitive agreement under which the Company will acquire Frame
through an exchange of common stock of the two companies. Frame, a California
corporation established in 1986, provides document creation, management and
distribution software for individuals and workgroups.
Under the agreement, which has been approved by the Board of Directors of both
companies, the Company will exchange .52 shares of its common stock for each
share of Frame common stock. The acquisition is intended to qualify as a tax-
free reorganization and a pooling of interests for accounting purposes. This
transaction is subject to conditions customary for acquisitions of publicly-held
companies, including expiration or termination of the applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Securities and
Exchange Commission approval and approval by Frame's shareholders.
Assuming no adverse regulatory proceedings and that shareholder approval is
obtained, the Company expects the acquisition to be effective in the fourth
quarter of 1995.
23
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, Aldus
and AldusFrame 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 acquisition of Frame, the Company intends to seek to
reduce expenses by the elimination of duplicate or unnecessary facilities,
employees, marketing programs and other expenses. There can be no assurance that
the Company will be able to reduce expenses in this fashion, that there will not
be high costs associated with such activities, that such reductions will not
result in a decrease in revenue or that there will not be other material adverse
effects of the Company's integration efforts. Such effects could materially
reduce the earnings of the combined company. The Company will incur estimated
merger transaction costs of approximately $13.5 million related to the
acquisition, which will be charged to operations in the fourth quarter of 1995.
In addition, the Company expects to incur a restructuring charge during the
fourth quarter of 1995, currently estimated to be in the range of $15.0 million
to $25.0 million, to reflect the costs associated with combining the two
companies, including severance and outplacement costs and the elimination of
duplicate facilities (including cancellation of leases). These amounts are
preliminary estimates only and are therefore subject to change. In addition,
there can be no assurance that the Company will not incur additional charges in
subsequent quarters to reflect costs associated with the acquisition.
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 quarterhalf 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 fiscal
year 1994. There can be no assurance that the Company will be able to continue
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 result24
With the acquisition of the merger with Aldus, the Company will derivederives 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 3June 2 November 25
1995 1994 Change
1994
------- ---------------- ----------- -----------
CASH, CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS $423.2 6%$443.4 $400.4 11%
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-termshort-
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.
25
NONCURRENT LIABILITIES AND SHAREHOLDERS' EQUITY
March 3June 2 November 25
1995 1994 Change
1994
------- ---------------- ----------- -----------
NONCURRENT LIABILITIES AND
SHAREHOLDERS' EQUITY $511.1 12%$572.9 $456.8 25%
Included above are put warrants and shareholders' equity. The Company has no
long-term debt or other noncurrent liabilities.debt.
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,June 21, 1995, for the firstsecond quarter
of 1995. The dividend will be for shareholders of record as of April 6,July 7, 1995, and
will be paid on April 20,July 21, 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 244,003364,003 shares at a
cost of $7.8$13.6 million in the first quartersix months of 1995. These share repurchases
are intended to fund the employee stock purchase and stock option plans.
The CompanyAdditional repurchases of the Company's common stock in the open market to
provide shares for issuance under its stock plans will continue subsequent to
continue a
24
regular repurchase program during 1995 to continue to fund employee stock
plans.the completion of the announced acquisition of Frame.
WORKING CAPITAL
March 3June 2 November 25
1995 1994 Change
1994
------- ---------------- ----------- -----------
WORKING CAPITAL $403.5 11%$431.8 $363.6 19%
Net working capital grew to $403.5$431.8 million as of March 3,June 2, 1995, compared to
$363.6 million as of November 26,25, 1994. Cash flow provided by operations during
the first threesix months of 1995 was $31.7$81.9 million. Expenditures for property and
equipment totaled $8.9$15.2 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,
onOn 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.million (see Note 8--Acquisition of Adobe Photoshop Technology).
Net cash provided by financing activities during the first threesix months of 1995
was $13.6$26.3 million; $24.5$46.3 million was provided by proceeds from issuance of
common stock; $7.8$13.6 million was used to repurchase common stock; and $3.1$6.3
million was used to pay cash dividends.
26
The Company's principal commitments as of March 3,June 2, 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,June 2,
1995, the Company had deposited approximately $5.5$11.7 million in time deposit
securities. 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 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.
2627
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on April 5, 1995.
A proposal to elect four (4) Class II directors of the Company to serve for a
two-year term expiring at the Annual Meeting of Shareholders in 1997 was
approved by shareholders. This proposal received the following votes:
For Withheld
--------------- -------------
John E. Warnock 56,773,929 368,152
Robert Sedgewick 56,771,446 370,635
William J. Spencer 56,771,446 370,635
Gene P. Carter 56,774,010 368,071
Incumbent Class I directors Charles M. Geschke, William R. Hambrecht, Delbert W.
Yocam and Paul Brainerd are currently serving for a term expiring at the Annual
Meeting of Shareholders in 1996.
Also, a proposal to amend the Company's Restricted Stock Option Plan increasing
the number of shares reserved for issuance under the Plan from 250,000 to
500,000, increasing the number of shares subject to options automatically
granted each year to non-employee directors and available to be granted to a
consultant from 7,500 to 10,000 and increasing the number of shares subject to
options automatically granted to a new non-employee director upon joining the
Board from 7,500 to 15,000 was approved by shareholders. This proposal received
the following votes:
For: 38,647,703
Against: 16,857,197
Abstain: 376,844
In addition, shareholders ratified the appointment of KPMG Peat Marwick LLP as
independent public accountants of the Company for fiscal 1995. This proposal
received the following votes:
For: 56,931,886
Against: 78,153
Abstain: 132,042
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.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Sequentially Numbered Incorporated by Reference
Exhibit -------------------------------Numbered -----------------------------
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
10.310.4 Common Stock Purchase N/A S-1 07/01/86 10.310.4
Agreement of Charles M.
GeschkeQ.T. Wiles
dated December 29, 1982
and, as amended
November 30, 1983
10.410.5 Common Stock Purchase N/A S-1 07/01/86 10.410.5
Agreement of Q.T. Wiles
dated December 29, 1982
10.5David Evans
dated December 29, 1982
(Continued)
29
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 10.510.6
Agreement of David EvansWilliam
Hambrecht dated December
29, 1982
(Continued)
2710.7 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)
30
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
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)
31
(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 12, 198527, 1990
(confidential treatment
granted)
10.17.1 License.
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 11/30/88 10.17.1
Restatement between the
Company and Apple
Computer, Inc., dated April
1, 1987 (confidential
treatment granted)
(Continued)
2987 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)
32
(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 10.2610.27
between Charleston Place
AssociatesJohn Mozart 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 10.28
Agreement of University
Circle10.29
Building I Ltd.,Lease Agree-
ment dated May 22, 1991
10.2910.30 University CentreCircle N/A 10-K 11/29/91 10.29
Building I Lease Agree-
ment27/92 10.30
Termination and Security
Agreement and Mutual
Release 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)
31January 7,
1993
(Continued)
33
(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
10.33 Sale of Rights under N/A N/A N/A N/A
Software Development
and Acquisition Agreement
By and Between Adobe
Systems Incorporated and
Thomas Knoll and John
Knoll (confidential
treatment granted)
11 Computation of Earnings 37N/A N/A N/A N/A
Per Common Share
27 Financial Data Schedule 38N/A N/A N/A N/A
3234
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended March 3,June 2, 1995.
3335
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: AprilJuly 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)
3436
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