<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 33-6885
ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 77-0019522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
345 PARK AVENUE, SAN JOSE, CALIFORNIA 95110-2704
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 536-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Shares Outstanding
Class August 29, 1997
----- ------------------
Common stock, $0.0001 par value 72,986,872
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TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 30
Signature 33
Summary of Trademarks 34
EXHIBITS
Exhibit 11 Computation of net income per Common Share
Exhibit 27 Financial Data Schedules
2
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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 August 29, 1997 and August 30, 1996
and Nine Months Ended August 29, 1997 and August 30, 1996 4
- - Condensed Consolidated Balance Sheets
August 29, 1997 and November 29, 1996 5
- - Condensed Consolidated Statements of Cash Flows
Nine Months Ended August 29, 1997 and August 30, 1996 6
- - Notes to Condensed Consolidated Financial Statements 8
3
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
AUGUST 29 AUGUST 30 AUGUST 29 AUGUST 30
1997 1996 1997 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
Licensing $ 45,159 $ 50,442 $ 149,880 $ 146,640
Application products 184,880 130,467 534,882 432,248
----------- ----------- ------------ -----------
Total revenue 230,039 180,909 684,762 578,888
Direct costs 32,689 33,617 99,636 104,903
----------- ----------- ------------ -----------
Gross margin 197,350 147,292 585,126 473,985
----------- ----------- ------------ -----------
Operating expenses:
Software development costs:
Research and development 43,876 36,301 123,326 111,172
Amortization of capitalized
software development costs - 626 - 1,878
Sales, marketing and
customer support 78,392 60,621 225,609 188,963
General and administrative 18,917 14,846 57,519 46,926
Write-off of acquired in-
process research and
development 2,812 - 5,969 14,699
Other non-recurring items 1,769 - (590) -
----------- ----------- ------------ -----------
Total operating expenses 145,766 112,394 411,833 363,638
----------- ----------- ------------ -----------
Operating income 51,584 34,898 173,293 110,347
Nonoperating income, net:
Investment gain 25,526 6,430 24,936 9,459
Interest and other income 8,418 7,358 23,670 22,528
----------- ----------- ------------ -----------
Total nonoperating income 33,944 13,788 48,606 31,987
----------- ----------- ------------ -----------
Income before income taxes 85,528 48,686 221,899 142,334
Provision for income taxes 32,100 18,839 81,881 56,815
----------- ----------- ------------ -----------
Net income $ 53,428 $ 29,847 $ 140,018 $ 85,519
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net income per share $ .72 $ .40 $ 1.88 $ 1.13
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Shares used in computing net
income per share 74,528 74,309 74,294 75,447
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AUGUST 29 NOVEMBER 29
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 176,911 $ 110,745
Short-term investments 510,248 453,371
Receivables, net of allowances
of $6,382 and $5,196, respectively 122,596 115,823
Other current assets 43,084 45,875
------------- ------------
Total current assets 852,839 725,814
Property and equipment 84,021 80,231
Other assets 168,700 195,348
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$ 1,105,560 $ 1,001,393
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade and other payables $ 46,989 $ 43,056
Accrued expenses 97,870 83,065
Accrued restructuring costs 8,729 10,854
Income taxes payable 63,713 67,210
Deferred revenue 16,286 15,537
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Total current liabilities 233,587 219,722
------------- ------------
Deferred income taxes - 3,809
Put warrants - 71,348
Stockholders' equity:
Preferred stock, $0.0001 par value;
2,000 shares authorized; none issued - -
Common stock, $0.0001 par value;
200,000 shares authorized;
72,987 and 71,476 shares issued
and outstanding, respectively 7 7
Additional paid-in capital 263,563 148,595
Retained earnings 621,905 529,546
Unrealized gains on investments 9,243 33,514
Cumulative translation adjustment (6,447) (5,148)
Treasury stock at cost (450 shares in 1997) (16,298) -
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Total stockholders equity 871,973 706,514
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$ 1,105,560 $ 1,001,393
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
--------------------------
AUGUST 29 AUGUST 30
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 140,018 $ 85,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense 4,021 2,583
Depreciation and amortization 34,732 21,027
Deferred income taxes (16,155) (3,504)
Tax benefit from employee stock plans 18,427 8,550
Equity in net income of Adobe Ventures 956 (6,681)
Gain on sale and dividend of equity securities (27,645) -
Write-off of acquired in-process
research and development 5,969 14,699
Changes in operating assets and liabilities:
Receivables (6,773) 25,313
Other current assets (64) 3,768
Trade and other payables 3,934 4,214
Accrued expenses 6,826 (11,693)
Accrued restructuring costs (2,125) (18,752)
Income taxes payable (3,497) 11,760
----------- -----------
Net cash provided by operating activities 158,624 136,803
----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (2,187,336) (1,238,181)
Maturities and sales of short-term investments 2,136,511 1,281,152
Acquisitions of property and equipment (25,348) (38,439)
Proceeds from (additions to) other assets 3,599 (43,435)
Acquisitions, net of cash acquired (6,121) (4,527)
----------- -----------
Net cash used for investing activities (78,695) (43,430)
----------- -----------
(Continued)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
NINE MONTHS ENDED
--------------------------
AUGUST 29 AUGUST 30
1997 1996
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock $ 58,128 $ 28,738
Repurchase of common stock (53,255) (90,871)
Payment of dividends (17,338) (10,941)
----------- -----------
Net cash provided (used) by financing activities (12,465) (73,074)
----------- -----------
Effect of foreign currency exchange rates on
cash and cash equivalents (1,298) (494)
----------- -----------
Net increase in cash and cash equivalents 66,166 19,805
Cash and cash equivalents at beginning of period 110,745 58,493
----------- -----------
Cash and cash equivalents at end of period $ 176,911 $ 78,298
----------- -----------
----------- -----------
Supplemental disclosures:
Cash paid during the period for income taxes $ 54,986 $ 23,398
----------- -----------
----------- -----------
Noncash investing and financing activities:
Dividends declared but not paid $ 3,606 $ 3,622
----------- -----------
----------- -----------
Dividend in-kind declared but not issued $ 8,728 $ -
----------- -----------
----------- -----------
Dividend in-kind distributed $ 21,593 $ -
----------- -----------
----------- -----------
Issuance of notes for acquisition $ - $ 9,473
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
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 August 29, 1997,
and the condensed consolidated statements of income and cash flows for the
interim periods ended August 29, 1997 and August 30, 1996.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and,
therefore, do not include all information and footnotes necessary for a
complete presentation of the results of operations, the financial position,
and cash flows, in conformity with generally accepted accounting principles.
Adobe Systems Incorporated ("Adobe" or the "Company") filed audited
consolidated financial statements which included all information and footnotes
necessary for such a presentation of the results of operations, financial
position and cash flows for the years ended November 29, 1996, December 1,
1995 and November 25, 1994, in the Company's 1996 Form 10-K.
The results of operations for the interim periods ended August 29, 1997
are not necessarily indicative of the results to be expected for the full
year.
NET INCOME PER SHARE
Net income per share is based upon weighted average common and dilutive
common equivalent shares outstanding using the treasury stock method.
Dilutive common equivalent shares include stock options. Fully diluted
earnings per share for the quarters ended August 29, 1997 and August 30, 1996
were not materially different from primary earnings per share.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No.128, "Earnings Per
Share." SFAS No. 128 establishes a different method of computing net income
per share than is currently required under the provisions of Accounting
Principles Board Opinion No. 15. Under SFAS No.128, the Company will be
required to present both basic net income per share and diluted net income
per share. Basic net income per share is expected to be higher than the
currently presented net income per share as the effect of dilutive stock
options will not be considered in computing basic net income per share.
Diluted net income per share is expected to be comparable or slightly lower
than the currently presented net income per share.
The Company plans to adopt SFAS No.128 in its fiscal quarter ending
February 27, 1998 and at that time all historical net income per share data
presented will be restated to conform to the provisions of SFAS No. 128.
8
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS
No.130, "Reporting Comprehensive Income." SFAS No.130 establishes standards
for reporting and displaying comprehensive income and its components in the
financial statements. It does not, however, require a specific format for the
statement, but requires the Company to display an amount representing total
comprehensive income for the period in that financial statement. This
statement is effective for fiscal years beginning after December 15, 1997.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No.131 establishes standards for the manner in which
public business enterprises report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. This Statement is effective for financial statements for
periods beginning after December 15, 1997.
DERIVATIVES
In June 1997, the Financial Accounting Standards Board issued rules
requiring expanded disclosure for "market risk-sensitive" financial
instruments. These rules will be fully effective for the Company's financial
statements for fiscal year end 1998. As required for this interim filing,
specific information on the Company's accounting policies with regards to
activities in derivative financial instruments is provided below.
The Company utilizes derivative financial instruments in the form of
forward contracts only for the purpose of hedging the foreign currency
exposure of underlying assets, liabilities and other obligations which exist
as a part of its ongoing business operations. The Company, as a matter of
policy, does not engage in speculative transactions.
In general, instruments used as hedges must be effective at reducing the
foreign currency risk associated with the underlying transaction being hedged
and must be designated as a hedge at the inception of the contract. All
forward foreign currency contracts currently entered into by the Company have
maturities of 60 days or less.
The Company currently uses the forward contracts only as hedges of
existing transactions. For these contracts, mark-to-market gains and losses
are recognized as other income or expense in the current period, generally
consistent with the period in which the gain or loss of the underlying
transaction is recognized.
9
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVES (CONTINUED)
In a series of private placements in 1997, the Company sold put warrants
entitling the holder of each warrant to sell one share of common stock to the
Company at a specified price. There were approximately 2.1 million put
warrants written during the first nine months of 1997. At August 29, 1997
approximately 1.1 million put warrants were outstanding and expire on various
dates through January 1998 and have exercise prices ranging from $35.57 to
$38.71 per share, with an average exercise price of $37.23 per share.
Additionally, during the first nine months of 1997, the Company purchased
call options from an independent third party that entitled the Company to buy
2.1 million shares of its Common stock. At August 29, 1997 approximately 1.1
million call options were outstanding and expire on various dates through
January 1998 and have exercise prices ranging from $35.83 to $38.96 per
share, with an average exercise price of $37.48 per share.
As part of the Company's current systematic stock repurchase program, and
the new stock repurchase program announced in September of 1997, the Company
may, from time to time, enter into additional put warrant and call option
arrangements. Under these arrangements, the Company, at its option, can
settle with physical delivery or net shares equal to the difference between
the exercise price and market value at the date of exercise. Accordingly, the
arrangements do not require the reclassification of the obligation under the
put warrants from equity. Also, in the future, the Company will consider
other methods to acquire the Company's stock including direct purchases, open
market purchases, accelerated stock purchase programs, and other potential
methods.
RECLASSIFICATIONS
Certain reclassifications have been made to the November 29, 1996 balances
to conform to the presentation at August 29, 1997.
10
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
AUGUST 29 NOVEMBER 29
1997 1996
--------- -----------
Land $ 782 $ 782
Building 4,478 4,615
Equipment 137,027 121,044
Furniture and fixtures 21,065 18,126
Leasehold improvements 19,599 13,036
--------- ---------
182,951 157,603
Less accumulated depreciation and amortization 98,930 77,372
--------- ---------
$ 84,021 $ 80,231
--------- ---------
--------- ---------
NOTE 3. OTHER ASSETS
Other assets consisted of the following:
AUGUST 29 NOVEMBER 29
1997 1996
--------- -----------
Equity investments $ 34,661 $ 97,679
Purchased technology and licensing
agreements 34,134 32,211
Restricted funds and security deposits 89,204 69,443
Miscellaneous other assets 63,330 35,470
--------- ---------
221,329 234,803
Less accumulated amortization 52,629 39,455
--------- ---------
$ 168,700 $ 195,348
--------- ---------
--------- ---------
Included above in other assets, as equity investments, at August 29,
1997, are equity securities and related unrealized gains and losses thereon.
Equity investments included an investment in Netscape Communications
Corporation ("Netscape") at November 26, 1996. However, during the second
quarter of fiscal 1997, the investment in Netscape was reclassified to
short-term investments when Adobe announced the dividend of most of the
Netscape shares.
11
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 4. ACCRUED EXPENSES
Accrued expenses consisted of the following:
AUGUST 29 NOVEMBER 29
1997 1996
--------- -----------
Accrued compensation and benefits $ 28,307 $ 24,673
Sales and marketing allowances 14,990 13,753
Other 54,573 44,639
--------- -----------
$ 97,870 $ 83,065
--------- -----------
--------- -----------
NOTE 5. ACCRUED RESTRUCTURING COSTS
In 1995 and 1994, the Company acquired Frame Technology Corporation
("Frame") and Aldus Corporation ("Aldus"), respectively, and initiated a plan
to combine the operations of the companies. In connection with these
acquisitions, in 1995 and 1994 the Company recorded charges of $31.5 million
and $72.2 million, respectively, to operating expenses related to merger
transaction and restructuring costs. In addition, Frame undertook certain
restructuring measures in 1993 due to lower than anticipated revenues.
NOTE 6. CAPITAL STOCK
SHARE REPURCHASE PROGRAM
As part of a program previously authorized by the Board of Directors, the
Company purchased 450,000 shares of common stock in the third quarter of 1997
at an aggregate cost of $16.3 million. These repurchased shares are presented
as treasury stock at cost in the equity section of the balance sheet. In
September 1997, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to 15,000,000 shares of
the Company's common stock over the next two years.
RECAPITALIZATION
In May 1997, the Company was reincorporated in the State of Delaware. As
part of this reincorporation, each outstanding share of the old California
Corporation preferred stock and common stock was converted automatically to
one share of the new Delaware Corporation $0.0001 par value preferred stock
and common stock. All prior periods presented have been restated to reflect
this change.
12
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 7. COMMITMENTS AND CONTINGENCIES
REAL ESTATE DEVELOPMENT AGREEMENT
During 1994, the Company entered into a real estate development agreement
and an operating lease agreement in connection with the construction of an
office facility in San Jose, California. In August 1996, the construction was
completed and the operating lease commenced. The Company has the option to
purchase the facility at the end of the lease term. In the event the Company
chooses not to exercise this option, the Company is obligated to arrange for
the sale of the facility to an unrelated party and is required to pay the
lessor any difference between the net sales proceeds and the lessor's net
investment in the facility, in an amount not to exceed that which would
preclude classification of the lease as an operating lease, approximately
$57.3 million. During the construction period, the Company was required to
pledge certain interest bearing financial investments to the lessor as
collateral to secure the performance of its obligations under the lease. As
of August 29, 1997, the Company's deposits under this agreement totaled
approximately $67.7 million in United States government treasury notes and
money market mutual funds. These deposits are included in "Other assets" in
the Condensed Consolidated Balance Sheets.
During the third quarter of 1996, the Company exercised its option under
the development agreement to begin a second phase of development for an
additional office facility. In August 1996, the Company entered into a
construction agreement and an operating lease agreement for this facility.
The operating lease will commence on completion of construction in 1998. The
Company will have the option to purchase the facility at the end of the lease
term. In the event the Company chooses not to exercise this option, the
Company is obligated to arrange for the sale of the facility to an unrelated
party and is required to pay the lessor any difference between the net sales
proceeds and the lessor's net investment in the facility, in an amount not to
exceed that which would preclude classification of the lease as an operating
lease, approximately $64.3 million. The Company also is required,
periodically during the construction period, to deposit funds with the lessor
as an interest bearing security deposit to secure the performance of its
obligations under the lease. During the third quarter of 1997, the Company
deposited approximately $7.9 million, and as of August 29, 1997, the
Company's deposits under this agreement totaled approximately $21.5 million.
These deposits are included in "Other assets" in the Condensed Consolidated
Balance Sheets.
LEGAL ACTIONS
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal defenses and
that the ultimate outcome of these actions will not have a material effect on
the Company's financial position and results of operations.
13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION (PRESENTED IN MILLIONS, EXCEPT PER SHARE
AMOUNTS) SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO.
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM 10-Q
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. FACTORS THAT MIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FACTORS THAT MAY AFFECT
FUTURE RESULTS OF OPERATIONS." READERS SHOULD CAREFULLY REVIEW THE RISKS
DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM
10-Q TO BE FILED BY THE COMPANY IN 1997 AND THE 1996 ANNUAL REPORT ON FORM
10-K. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS QUARTERLY
REPORT ON FORM 10-Q. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE
ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
RESULTS OF OPERATIONS
OVERVIEW
Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets,
and supports computer software products and technologies that enable users to
create, display, assemble and communicate images and documents in electronic
and printed formats. The Company licenses its technology to major computer,
printing, and publishing suppliers, and markets application software products
and type face products for authoring, editing, distributing and printing
visually rich documents. The Company distributes its products through a
network of original equipment manufacturer ("OEM") customers, distributors
and dealers, and value-added resellers ("VARs") and system integrators. The
Company has operations in North America, Europe, Japan, Asia-Pacific and
Latin America regions.
14
<PAGE>
The following table sets forth for the quarters and nine months ended
August 29, 1997 and August 30, 1996 the Company's condensed consolidated
statements of income expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
--------------------- ---------------------
AUGUST 29 AUGUST 30 AUGUST 29 AUGUST 30
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Licensing 19.6% 27.9% 21.9% 25.3%
Application products 80.4 72.1 78.1 74.7
--------- --------- --------- ---------
Total revenue 100.0 100.0 100.0 100.0
Direct costs 14.2 18.6 14.6 18.1
--------- --------- --------- ---------
Gross margin 85.8 81.4 85.4 81.9
--------- --------- --------- ---------
Operating expenses:
Software development costs:
Research and development 19.1 20.1 18.0 19.2
Amortization of capitalized
software development costs - 0.3 - 0.3
Sales, marketing and
customer support 34.1 33.5 32.9 32.7
General and administrative 8.2 8.2 8.4 8.1
Write-off of acquired in-
process research and
development 1.2 - 0.9 2.5
Other non-recurring items 0.8 - (0.1) -
--------- --------- --------- ---------
Total operating expenses 63.4 62.1 60.1 62.8
--------- --------- --------- ---------
Operating income 22.4 19.3 25.3 19.1
Nonoperating income:
Investment gain 11.1 3.6 3.6 1.6
Interest and other income 3.7 4.0 3.5 3.9
--------- --------- --------- ---------
Total nonoperating income 14.8 7.6 7.1 5.5
--------- --------- --------- ---------
Income before income taxes 37.2 26.9 32.4 24.6
Provision for income taxes 14.0 10.4 12.0 9.8
--------- --------- --------- ---------
Net income 23.2% 16.5% 20.4% 14.8%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
15
<PAGE>
REVENUE
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Total revenue $230.0 $180.9 27.2%
Nine month period:
Total revenue $684.8 $578.9 18.3%
Revenue increased significantly from last year due to continued growth
for application products partially offset by a decline in licensing revenue.
Product unit volume (as opposed to price) increase was the principal factor
in the applications revenue growth.
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Product group revenue - Licensing $45.2 $50.4 (10.5)%
Percentage of total revenue 19.6% 27.9%
Nine month period:
Product group revenue - Licensing $149.9 $146.6 2.2%
Percentage of total revenue 21.9% 25.3%
Licensing revenue is derived from shipments by OEM customers of products
containing the Adobe PostScript interpreter, Adobe PrintGear software and the
Display PostScript system. Such PostScript products include: (1) standard
roman printers as well as printers that work with Japanese, Chinese, and
Korean languages; (2) imagesetters; and (3) workstations. Licensing revenue
is also derived from shipments of products containing the Configurable
PostScript Interpreter ("CPSI") by OEM customers. CPSI is a fully functional
PostScript interpreter that resides on the host computer system rather than
in a dedicated controller integrated into an output device. The configuration
flexibility of CPSI allows OEMs and software developers to create and market
a variety of PostScript products independently of controller hardware
development. Adobe PostScript products sell to the small office/home office
("SOHO") market, as well as the corporate enterprise and high-end imagesetter
markets. PrintGear software is targeted to the SOHO and home computer market.
During the third quarter of 1997, 113 new PostScript products were released
to OEMs, including 26 that were PostScript 3.
Royalty per unit is generally calculated as a percentage of the end user
list price of a printer, although there are some components of licensing
revenue based on a flat dollar amount per unit which typically do not change
with list price changes. Licensing revenue decreased in the third quarter of
1997 compared to the same quarter in 1996 due to a number of factors
affecting OEMs, primarily in the Japanese market, including, but not limited
to: (1) an increase in the Japanese consumption tax on April 1, 1997 which
led to an increase in sales reported by OEMs in the second quarter of 1997
and a related decrease in the third quarter of 1997 as demand stabilized; (2)
delayed release of the
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Company's high resolution fonts; and (3) general weakness in the Japanese
printer market as experienced by some OEMs. Licensing revenue for the first
nine months of 1997 increased slightly over the comparable period last year
due to increased demand for CPSI and by increased demand for color
capability, shipments of PrintGear products, as well as greater penetration
in the first and second quarters of 1997 into the Japanese market.
The Company has seen year-to-year increases in the number of OEM
customers from which it is receiving licensing revenue and believes that such
increases are attributable to the continued acceptance of PostScript
software, as well as the diversification of the Company's customer base
across multiple platforms. During the remainder of 1997, Adobe expects
additional OEM customers to introduce new PrintGear products that will serve
the SOHO market and that some OEM customers will transition from PostScript
products to PostScript 3 products. Also in 1997, one of Adobe's largest
PostScript customers, Hewlett-Packard Company ("HP"), announced plans to
introduce monochrome laser printer products that will not contain Adobe
PostScript software. These products are expected to contain a non-Adobe clone
version of PostScript and are expected to reach the market in the fall of
1997. While the Company expects overall licensing revenue growth to continue
over the long term, the anticipated loss of such revenue from HP will impact
the Company's revenue growth during the short term.
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Product group revenue -
Application products $184.9 $130.5 41.7%
Percentage of total revenue 80.4% 72.1%
Nine month period:
Product group revenue -
Application products $534.9 $432.2 23.7%
Percentage of total revenue 78.1% 74.7%
Application products revenue is derived predominantly from shipments of
application software programs marketed through retail distribution channels;
however, Adobe PageMill, Adobe SiteMill, Adobe FrameMaker, and Adobe Acrobat
products are becoming more widely distributed through VARs and systems
integrators. Adobe PhotoDeluxe is primarily distributed through OEM bundling
agreements with digital camera, scanner, and personal computer manufacturers.
During the third quarter and first nine months of 1997, application
products revenue was significantly higher than that of the same periods in
1996. This increase reflected continued demand for Adobe Photoshop 4.0, Adobe
PageMaker 6.5, Adobe Illustrator 7.0, Acrobat 3.0, and PhotoDeluxe 2.0. Also
during the third quarter of 1997, the Company began shipping the following
products: PhotoDeluxe 2.0 for Windows; FrameMaker 5.5 for Windows 95, Windows
NT, Macintosh, and five UNIX versions in English and Japanese; FrameMaker
SGML; Illustrator 7.0 in Latin American Spanish; PageMaker 6.5 in Japanese
and Portuguese; Photoshop 4.0 in Korean and Chinese; and Adobe AfterEffects
3.1 in Japanese, all of which added revenue to the third quarter.
17
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In general, the Company's application products on the Windows platform
have experienced greater growth than those on the Macintosh platform during
the third quarter and first nine months of 1997, although Macintosh platform
revenue increased in the third quarter of 1997 compared to the third quarter
of 1996. As a result, revenue from Windows-based application products was
approximately equal to that from Macintosh-based products.
DIRECT COSTS
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Direct costs $32.7 $33.6 (2.8)%
Percentage of total revenue 14.2% 18.6%
Nine month period:
Direct costs $99.6 $104.9 (5.0)%
Percentage of total revenue 14.6% 18.1%
Direct costs include royalties; amortization of acquired technologies;
and direct product, localization, packaging and shipping costs.
Gross margins, in general, are affected by the mix of licensing revenue
versus application products revenue as well as the product mix within
application products. Direct costs were lower in the third quarter and first
nine months of 1997 compared with the same periods last year due to the
distribution of more application products via CD-ROM media and lower royalty
payments on licensing related to products being shipped.
Gross margins for application products are expected to increase in the
fourth quarter due to a large royalty payment obligation ceasing during the
quarter.
OPERATING EXPENSES
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Software development costs -
Research and development $43.9 $36.3 20.9%
Percentage of total revenue 19.1% 20.1%
Nine month period:
Software development costs -
Research and development $123.3 $111.2 10.9%
Percentage of total revenue 18.0% 19.2%
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Research and development expenses consist principally of salaries and
benefits for software developers, contracted development efforts, related
facilities costs, and expenses associated with computer equipment used in
software development.
Research and development expense increased in absolute dollars as the
Company invested in new technologies, new product development, and the
infrastructure to support such activities. The increase reflects the
expansion of the Company's engineering staff and related costs required to
support its continued emphasis on developing new products and enhancing
existing products. The Company continues to make significant investments in
development of all of its software products, including those targeted for the
Internet and professional and personal publishing markets.
The Company believes that continued investments in research and
development are necessary to remain competitive in the marketplace, and are
directly related to continued, timely development of new and enhanced
products. Accordingly, the Company intends to continue recruiting and hiring
experienced software developers.
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Software development costs -
Amortization of capitalized
software development costs $ - $0.6 -
Percentage of total revenue - 0.3%
Nine month period:
Software development costs -
Amortization of capitalized
software development costs $ - $1.9 -
Percentage of total revenue - 0.3%
In the implementation of Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed," software development expenditures on Adobe
products, after achieving technological feasibility, were deemed to be
immaterial. Certain software development expenditures on Frame products had
been capitalized and were being amortized over the lives of the respective
products. Full amortization of all Frame products was achieved by the end of
1996. In the third quarter and first nine months of 1997, software development
expenditures on all products, after reaching technological feasibility, were
immaterial and the Company expects this trend to continue in the future.
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1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Sales, marketing and
customer support $78.4 $60.6 29.3%
Percentage of total revenue 34.1% 33.5%
Nine month period:
Sales, marketing and
customer support $225.6 $189.0 19.4%
Percentage of total revenue 32.9% 32.7%
Sales, marketing, and customer support expenses generally include
salaries and benefits, sales commissions, travel expenses, and related
facility costs for the Company's sales, marketing, customer support, and
distribution personnel. Sales, marketing, and customer support expenses also
include the costs of programs aimed at increasing revenue, such as
advertising, trade shows, and other market development programs.
Sales, marketing, and customer support expenses increased in the third
quarter and first nine months of 1997 compared with the same periods of 1996.
The increases are due to increased advertising and promotional expenditures
for upgrades of existing products and further development of customer and
technical support services to support a growing base of customers.
For the near future, the Company expects sales, marketing, and customer
support expenses to increase in absolute dollars from 1996 spending levels
while remaining level as a percentage of revenue. The increase in absolute
dollars is due to increased investment in the Windows market and programs
related to furthering worldwide recognition of the Adobe brand.
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
General and administrative $18.9 $14.8 27.4%
Percentage of total revenue 8.2% 8.2%
Nine month period:
General and administrative $57.5 $46.9 22.6%
Percentage of total revenue 8.4% 8.1%
General and administrative expenses consist principally of salaries and
benefits, travel expenses, and related facility costs for the finance, human
resources, legal, information services, and administrative personnel of the
Company. General and administrative expenses also include outside legal and
accounting fees, bad debts, and expenses associated with computer equipment
and software used in the administration of the business.
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General and administrative expenses increased in absolute dollars for the
third quarter and first nine months of 1997 compared with the same periods
last year. The increase resulted primarily from higher information systems
costs, legal costs, employee benefits costs, and costs associated with the
implementation of a more comprehensive administrative infrastructure.
Because of the investments the Company is making in product development,
marketing and sales efforts and in infrastructure development, operating
expenses are expected to increase in absolute terms and may increase as a
percentage of revenues, depending on the revenue levels achieved in any
particular quarter.
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Write-off of acquired in-
process research and
development $2.8 $ - -
Percentage of total revenue 1.2% -
Nine month period:
Write-off of acquired in-
process research and
development $6.0 $14.7 (59.4)%
Percentage of total revenue 0.9% 2.5%
During the third quarter of 1997, the Company acquired DigiDox, Inc., a
privately-held company that develops electronic catalogs and authoring tools
based upon Acrobat software and the Adobe Portable Document Format (PDF). The
Company paid $5.3 million and accounted for the transaction under the
purchase method. Approximately $2.8 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, which will be amortized over three years.
In May 1996, the Company acquired Ares Software Corporation ("Ares") for
approximately $15.5 million and accounted for the transaction under 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.
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1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Other non-recurring items $1.8 $ - -
Percentage of total revenue 0.8% -
Nine month period:
Other non-recurring items $(0.6) $ - -
Percentage of total revenue (0.1)% -
The non-recurring item which occurred in the third quarter of 1997
represents a charge related to an acquisition of intellectual property.
NONOPERATING INCOME
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Investment gain $25.5 $6.4 297.0%
Percentage of total revenue 11.1% 3.6%
Nine month period:
Investment gain $24.9 $9.5 163.6%
Percentage of total revenue 3.6% 1.6%
Investment gain consists principally of realized gains or losses from
direct investments as well as mark-to-market valuation adjustments for Adobe
Ventures L.P. and investments. During the third quarter of 1997, the Company
distributed to stockholders 554,553 shares of Netscape Communications
Corporation ("Netscape") stock as a stock dividend which triggered the
recognition of a $20.3 million gain and sold 200,000 shares of Netscape stock
which resulted in a gain of $7.3 million.
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Interest and other income $8.4 $7.4 14.4%
Percentage of total revenue 3.7% 4.0%
Nine month period:
Interest and other income $23.7 $22.5 5.1%
Percentage of total revenue 3.5% 3.9%
Interest and other income consists principally of interest earned on
cash, cash equivalents, and short-term investments.
In the third quarter of 1997, interest and other income was higher than
the third quarter of 1996 as a result of a significantly higher cash and
short-term investments base.
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<PAGE>
Interest and other income for the first nine months of 1997 was more
consistent with the same period of 1996 primarily as a result of a gain
realized in the first quarter of 1996 on the disposition of a part of the
Company's short-term portfolio.
PROVISION FOR INCOME TAXES
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Provision for income taxes $32.1 $18.8 70.4%
Percentage of total revenue 14.0% 10.4%
Effective tax rate 37.5% 38.7%
Nine month period:
Provision for income taxes $81.9 $56.8 44.1%
Percentage of total revenue 12.0% 9.8%
Effective tax rate 36.9% 39.9%
The effective tax rate for the third quarter and first nine months of
1997 was lower than the same periods in 1996 as a result of the absence of
significant non-deductible one-time charges in 1997, and due to the extension
of the federal research and experimentation tax credit. During 1996, the
federal research credit was only available for five months of the year.
NET INCOME AND NET INCOME PER SHARE
1997 1996 CHANGE
-------- -------- ------
Third quarter period: (Dollars in millions)
Net income $53.4 $29.8 79.0%
Percentage of total revenue 23.2% 16.5%
Net income per share $0.72 $0.40 80.0%
Weighted shares (In thousands) 74,528 74,309 -
Nine month period:
Net income $140.0 $85.5 63.7%
Percentage of total revenue 20.4% 14.8%
Net income per share $1.88 $1.13 66.4%
Weighted shares (In thousands) 74,294 75,447 (1.5)%
Net income for the third quarter of 1997 increased 79.0 percent from the
third quarter of 1996. Earnings per share were $.72, an 80.0 percent increase
from the third quarter of 1996. Net income for the nine months ended August
29, 1997 increased 63.7 percent from the same period in 1996 and earnings per
share increased 66.4 percent for the same period. The increase was caused
primarily by higher revenues, improved gross margin, investment gains, and a
lower effective tax rate.
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FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that in the future its results of operations could
be affected by various factors, such as: delays in shipment of the Company's
new products and major new versions of existing products; market acceptance
of new products and upgrades; renegotiation of royalty arrangements; growth
in worldwide personal computer and printer sales and sales price adjustments;
consolidation in the OEM printer business; industry transitions to new
business and information delivery models; adverse changes in general economic
conditions in any of the countries in which the Company does business; the
introduction of new competitive products; and the prices of existing
competitive products.
The markets for the Company's products are characterized by rapidly
changing technology and customer needs, evolving industry standards and
frequent new product introductions. The Company's success will depend upon
its ability to develop and market products, including upgrades of currently
shipping products, that successfully adapt to changing customer needs. The
Company's ability to extend its core technologies into new applications and
to anticipate or respond to technological changes could affect its ability to
develop these products. A portion of the Company's future revenue will come
from these products. Delays in product introductions, including delays in
providing localized products for international customers, could have an
adverse effect on the Company's revenue, earnings, or stock price. The
Company cannot determine the ultimate effect that these new products or
upgrades will have on its sales or results of operations.
The Company generally offers its application products on Windows,
Macintosh, and, for some products, Unix platforms. In the third quarter of
fiscal 1997, Windows-based application revenue was approximately equal to
that for the Macintosh platform. In the prior quarter, Macintosh-based
application revenue had declined. If there is a slowdown of Macintosh
applications revenue, and if the Company is unable to continue to increase
its revenue from Windows customers, the Company's operating results could be
materially adversely affected. Also, as the Company broadens its customer
base to achieve greater penetration in the corporate business, SOHO, consumer
or personal publishing markets, the Company may need to adapt its application
software distribution channels, and spend additional funds on marketing and
advertising to generate additional demand. The Company could experience
decreases in average selling prices, increased costs, and some loss of
revenues in its distribution channel which could materially adversely affect
its operating results. In addition, to the extent that there is a slowdown of
customer purchases of personal computers in general, the Company's operating
results could be materially adversely affected.
The Company's OEM customers on occasion seek to renegotiate their royalty
arrangements. The Company evaluates these requests on a case-by-case basis.
If an agreement is not reached, a customer may decide to pursue other
options, including licensing a PostScript language compatible interpreter
from a third party, which could result in lower licensing revenue for the
Company. Beginning in the late fall of 1997, Hewlett-Packard plans not to
incorporate Adobe PostScript software in some of its LaserJet printers. The
Company estimates the revenue impact of this action will be approximately
$6.0 million per quarter, although somewhat less in the fourth quarter of
1997. The Company expects to continue working with Hewlett-Packard printer
operations to incorporate Adobe PostScript and other technologies in other
Hewlett-Packard products. If the Company cannot increase its licensing
revenue from other sources to offset the impact of Hewlett-Packard's change
the loss of the of Hewlett-Packard revenue from monochrome laser printers
would adversely affect the Company's
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<PAGE>
licensing revenue. In addition, if general economic conditions in Japan do
not improve, the Company's licensing revenue from OEMs distributing Japanese
printers and applications revenue could be adversely affected in late 1997
and early 1998.
Prior to 1996, the Company experienced significant revenue and headcount
growth. During the first nine months of 1997, the Company's revenue increased
18.3 percent over the same period last year. The Company's ability to
effectively manage its revenue and headcount growth will require it to
continue to plan and manage its operational and financial controls and
management information systems, and to attract, retain, motivate and manage
employees effectively. The Company is investing significantly in upgrading its
management information systems worldwide. The failure of the Company to
effectively manage growth could have a material adverse effect on its results
of operations.
The Internet and Intranet markets are rapidly evolving and are
characterized by an increasing number of market entrants who have introduced
or developed products addressing authoring and communication over the
Internet and Intranet. As is typical in the case of a new and evolving
industry, demand and market acceptance for recently introduced products and
services are subject to a high level of uncertainty. The software industry
addressing the authoring and electronic publishing requirements of the
Internet is young and has few proven products. In addition, new models for
licensing software to accommodate new information delivery practices will be
needed. Moreover, critical issues concerning the commercial use of the
Internet (including security, reliability, ease of use and access, cost, and
quality of service) remain unresolved and may impact this market, together
with the software standards and electronic media employed in such markets.
The Company derives a significant portion of its revenue and operating
income from its subsidiaries located in Europe, Japan, Asia-Pacific and Latin
America. While most of the revenue of these subsidiaries is denominated in
U.S. dollars, the majority of their expense transactions are denominated in
foreign currencies, including the Japanese yen and most major European
currencies. As a result, the Company's operating results are subject to
fluctuations in foreign currency exchange rates. A foreign currency
management program has been put in place to mitigate any significant exposure.
Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock in any given period.
Additionally, the Company may not learn of such shortfalls until late in the
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.
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FINANCIAL CONDITION
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
AUGUST 29 NOVEMBER 29
1997 1996 CHANGE
--------- ----------- ------
(Dollars in millions)
Cash, cash equivalents and
short-term investments $687.2 $564.1 21.8%
The Company's cash balances and short-term investments have increased due
to the transfer of marketable securities from long-term to short-term assets
and profitable operations, partially offset by expenditures for the repurchase
of stock, capital outlays, other investments, and deposits required under
real estate development agreements.
Cash equivalents consist of highly liquid money market instruments. All
of the Company's cash equivalents and short-term investments, consisting
principally of municipal bonds, auction rate certificate securities, United
States government and government agency securities, and asset-backed
securities, are classified as available-for-sale under the provisions of SFAS
No. 115, "Accounting for Certain Investments in Debt and Securities." The
securities are carried at fair value with the unrealized gains and losses,
net of tax, reported as a separate component of stockholders' equity.
OTHER ASSETS
AUGUST 29 NOVEMBER 29
1997 1996 CHANGE
--------- ----------- ------
(Dollars in millions)
Other assets $168.7 $195.3 (13.6)%
Included above in other assets at August 29, 1997 are purchased
technology and licensing agreements, restricted funds and security deposits,
equity securities and unrealized gains and losses thereon. The decline in
other assets is primarily due to the dividend distribution and sale of the
Netscape common stock investment and the transfer of other marketable
securities from long-term to short-term assets. The decline was partially
offset by an increase in the security deposit under a real estate agreement.
NONCURRENT LIABILITIES AND STOCKHOLDERS' EQUITY
AUGUST 29 NOVEMBER 29
1997 1996 CHANGE
--------- ----------- ------
(Dollars in millions)
Noncurrent liabilities and
stockholders' equity $872.0 $781.7 11.6%
At November 29, 1996, deferred income taxes related to unrealized gains
and losses on equity investments and obligations for put warrants are
included in noncurrent liabilities and stockholders' equity. The Company has
no long-term debt. The increase
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<PAGE>
from November 29, 1996 to August 29, 1997 results from net income and the
issuances of common stock under the Company's stock option and employee stock
purchase plans partially offset by the absence of the unrealized gain on the
equity investment in Netscape and the repurchase of stock. Also, as a result
of changes made during the second quarter of 1997 to settlement terms in
option contracts, the Company no longer reclassifies the potential obligations
for put warrants as a reduction of stockholders' equity.
As part of a program previously authorized by the Board of Directors, the
Company repurchased 3,321,500 shares at a cost of $124.5 million in 1996.
During the third quarter and first nine months of 1997, the Company
repurchased 450,000 shares at a cost of $16.3 million and 1,427,000 shares at
a cost of $53.2 million, respectively. The shares repurchased in the third
quarter of 1997 are presented as treasury stock in the equity section of the
balance sheet. In September 1997, the Board of Directors authorized, subject
to certain business and market conditions, the purchase of up to 15,000,000
shares of the Company's common stock over the next two years.
The Board of Directors of the Company declared a cash dividend on the
Company's common stock of $.05 per common share on September 17, 1997 for the
third quarter of 1997. The dividend will be for stockholders of record as of
October 1, 1997, and will be paid on October 15, 1997. The declaration of
future dividends is within the discretion of the Board of Directors of the
Company and will depend upon business conditions, results of operations, the
financial condition of the Company and other factors. In addition, on July
31, 1997, the Company announced the second dividend of venture investment
stock under the venture stock dividend program announced in March 1997. Adobe
plans to dividend one share of Siebel Systems Incorporated ("Siebel") common
stock on December 1, 1997 for every three hundred shares of Adobe common
stock held by stockholders of record on October 31, 1997. Adobe stockholders
of record holding less than seventy-five hundred shares will receive a cash
payment proportional to the closing price of Siebel stock on October 31,
1997. In addition, cash will be distributed in lieu of fractional shares of
Siebel stock on the same proportional basis.
WORKING CAPITAL
AUGUST 29 NOVEMBER 29
1997 1996 CHANGE
--------- ----------- ------
(Dollars in millions)
Working capital $619.3 $506.1 22.4%
Net working capital grew to $619.3 million as of August 29, 1997,
compared to $506.1 million as of November 29, 1996. Cash flow provided by
operations during the first nine months of 1997 was $158.6 million.
Expenditures during the first nine months of 1997 for property and
equipment totaled $25.3 million. Such expenditures are expected to continue,
including computer systems for development, sales and marketing, product
support, and administrative staff. In the future, additional cash may be used
to acquire software products or technologies complementary to the Company's
business. Net cash used by financing activities during the first nine months
of 1997 was $12.5 million primarily resulting from the repurchase of common
stock and payment of dividends partially offset by issuance of common stock
under employee stock plans. In September 1997, the Board of Directors
authorized, subject to certain business and market conditions, the purchase
of up to 15,000,000 shares of the Company's common stock over the next two
years. Since this amount represents approximately twenty percent of the
Company's current outstanding stock, a significant
27
<PAGE>
portion of the Company's cash, cash equivalents and short-term investments
may be used to repurchase these shares.
The Company's principal commitments as of August 29, 1997 consisted of
obligations under operating leases, venture investing activities, put
warrants, real estate development agreements, and various service and lease
guarantee agreements with a related party.
REAL ESTATE DEVELOPMENT
During 1994, the Company entered into a real estate development agreement
and an operating lease agreement in connection with the construction of an
office facility. In August 1996, the construction was completed and the
operating lease commenced. The Company has the option to purchase the
facility at the end of the lease term. In the event the Company chooses not
to exercise this option, the Company is obligated to arrange for the sale of
the facility to an unrelated party and is required to pay the lessor any
difference between the net sales proceeds and the lessor's net investment in
the facility, in an amount not to exceed that which would preclude
classification of the lease as an operating lease, approximately $57.3
million. During the construction period, the Company was required to pledge
certain interest bearing financial investments to the lessor as collateral to
secure the performance of its obligations under the lease. As of August 29,
1997, the Company's deposits under this agreement totaled approximately $67.7
million in United States government treasury notes and money market mutual
funds. These deposits are included in "Other assets" in the Condensed
Consolidated Balance Sheets.
During the third quarter of 1996, the Company exercised its option under
the development agreement to begin a second phase of development for an
additional office facility. In August 1996, the Company entered into a
construction agreement and an operating lease agreement for this facility.
The operating lease will commence on completion of construction in 1998. The
Company will have the option to purchase the facility at the end of the lease
term. In the event the Company chooses not to exercise this option, the
Company is obligated to arrange for the sale of the facility to an unrelated
party and is required to pay the lessor any difference between the net sales
proceeds and the lessor's net investment in the facility, in an amount not to
exceed that which would preclude classification of the lease as an operating
lease, approximately $64.3 million. The Company also is required,
periodically during the construction period, to deposit funds with the lessor
as an interest bearing security deposit to secure the performance of its
obligations under the lease. During the third quarter of 1997, the Company
deposited approximately $7.9 million, and as of August 29, 1997, the
Company's deposits under this agreement totaled approximately $21.5 million.
These deposits are included in "Other assets" in the Condensed Consolidated
Balance Sheets.
SERVICE AND LEASE GUARANTEES
The Company holds a 14 percent equity interest in McQueen Holdings
Limited ("McQueen"), a U.K. Company, and accounts for the investment at cost.
During 1994, the Company entered into various agreements with McQueen,
whereby the Company contracted with McQueen to perform product localization
and technical support functions and to provide printing, assembly, and
warehousing services.
The Company believes that existing cash, cash equivalents, and short-term
investments, together with cash generated from operations, will provide
sufficient funds for the Company to meet its operating cash requirements in
the foreseeable future.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Quantel Limited ("Quantel"), a U.K. corporation, filed and served on the
Company in January 1996 a complaint alleging that the Adobe Photoshop program
infringes five U.S. patents held by Quantel. The complaint was filed in the
United States District Court for the District of Delaware. On September 19,
1997, a jury in federal court in Delaware found in favor of Adobe, finding
that Adobe Photoshop did not infringe the five patents held by Quantel
Limited, and that the five patents are invalid.
On February 6, 1996, a securities class action complaint was filed
against Adobe, certain of its officers and directors, certain former officers
of Adobe and Frame, Hambrecht & Quist, LLP ("H&Q"), investment banker for
Frame, and certain H&Q employees, in connection with the drop in the price of
Adobe stock following its announcement of financial results for the quarter
ended December 1, 1995. The complaint was filed in the Superior Court of the
State of California, County of Santa Clara. The complaint alleges that the
defendants misrepresented material adverse information regarding Adobe and
Frame and engaged in a scheme to defraud investors. The complaint seeks
unspecified damages for alleged violations of California law. Adobe believes
that the allegations against it and its officers and directors are without
merit and intends to vigorously defend the lawsuit. The case is currently in
the discovery phase.
On April 17, 1997, a derivative action was filed in the Superior Court of
the State of California, County of Santa Clara, against the current members
of Adobe's Board of Directors and Paul Brainerd, a former member of the
Board. The suit was filed by a shareholder purporting to assert on behalf of
the Company claims for alleged breach of the Directors' fiduciary duty and
mismanagement related to the Company's acquisition of Frame in October 1995.
The Company has moved for dismissal of the suit on the ground that the
shareholder was required to make a demand on the Board to bring this
litigation before the shareholder proceeded with his own lawsuit on behalf of
Adobe, and he failed to make such a demand.
Management believes that the ultimate resolution of these matters will
not have a material impact on the Company's financial position or results of
operations.
29
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT ----------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
-------- --------------------------- ----- -------- ------ --------
<S> <C> <C> <C> <C> <C>
2.1 Agreement and Plan of 10-Q 05/30/97 2.1
Merger effective 5/30/97
(by virtue of a reincorp-
oration), by and between
Adobe Systems Incorpor-
ated, a California Corp-
oration and Adobe Systems
(Delaware) Incorporated,
a Delaware corporation.
3.1 The Registrant's (as succ- 10-Q 05/30/97 3.1
essor in-interest to Adobe
Systems Incorporation by
virtue of a reincorporation
effective 5/30/97) Certif-
icate of Incorporation, as
filed with the Secretary of
State of the State of
Delaware on 5/9/97.
3.2.10 The Registrant's (as 10-Q 05/30/97 3.2.10
successor-in-interest
to Adobe Systems
(Delaware) Incorporated
by virtue of a
reincorporation) Bylaws as
currently in effect.
4.1 Shareholders Rights 10-Q 05/31/96 4.1
Plan, as 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
10.1.8 1994 Stock Option Plan, S-8 04/09/97 10.1.8
as amended*
10.1.9 1997 Employee Stock S-8 04/09/97 10.1.9
Purchase Plan*
10.12.1 1988 Employee Stock 10-Q 07/06/94 10.12.1
Purchase Plan, as
amended*
</TABLE>
(Continued)
30
<PAGE>
(a). Index to Exhibits (Continued)
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT ----------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
-------- --------------------------- ----- -------- ------ --------
<S> <C> <C> <C> <C> <C>
10.17.1 License Agreement 10-K 11/30/88 10.17.1
Restatement between the
Company and Apple
Computer, Inc., dated
April 1, 1987
(confidential treatment
granted)
10.17.2 Amendment No. 1 to the 10-K 11/30/90 10.17.2
License Agreement
Restatement between the
Company and Apple
Computer, Inc., dated
November 27, 1990
(confidential treatment
granted)
10.21.3 Revised Bonus Plan* 10-Q 02/28/97 10.21.3
10.24.1 1994 Performance and S-4 07/27/94 10.1
Restricted Stock Plan*
10.25.0 Form of Indemnity 10-K 11/30/90 10.17.2
Agreement*
10.25.1 Form of Indemnity 10-Q 05/30/97 10.25.1
Agreement*
10.32 Sublease of the Land and 10-K 11/25/94 10.32
Lease of the Improvements
By and Between
Sumitomo Bank Leasing
and Finance Inc. and
Adobe Systems Incorporated
(Phase 1)
</TABLE>
(Continued)
31
<PAGE>
(a). Index to Exhibits (Continued)
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT ----------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
-------- --------------------------- ----- -------- ------ --------
<S> <C> <C> <C> <C> <C>
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)
10.35 Form of Executive 10-K 12/01/95 10.35
Severance and Change
of Control Agreement*
10.36 1996 Outside Directors 10-Q 05/31/96 10.36
Stock Option plan*
10.37 Confidential Resignation 10-Q 05/31/96 10.37
Agreement*
10.38 Sublease of the Land and 10-Q 08/30/96 10.38
Lease of the Improvements
By and Between
Sumitomo Bank Leasing
and Finance Inc. and
Adobe Systems Incorporated
(Phase 2)
10.39 1997 Employee Stock S-8 05/30/97 10.39
Purchase Plan*
10.40 Employee Stock Option S-8 05/30/97 10.40
Plan Amendment*
10.41 Amended and Restated 10-Q 05/30/97 10.41
Limited Partnership
Agreement of Adobe
Incentive Partners, L.P.
11 Computation of Net Income X
Per Common Share
27 Financial Data Schedule X
</TABLE>
- -----------------
*Compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended August 29, 1997.
32
<PAGE>
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: October 10, 1997
By /s/ P. JACKSON BELL
----------------------------------
P. Jackson Bell,
Executive Vice President,
Chief Financial Officer,
Chief Administrative Officer,
and Assistant Secretary
(Principal Financial Officer)
33
<PAGE>
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
AfterEffects
Illustrator
FrameMaker
PageMaker
PhotoDeluxe
Photoshop
PostScript
PrintGear
All other brand or product names are trademarks or registered trademarks
of their respective holders.
34
<PAGE>
ADOBE SYSTEMS INCORPORATED
EXHIBIT 11
COMPUTATION OF NET INCOME PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
------------------------- ------------------------
AUGUST 29 AUGUST 30 AUGUST 29 AUGUST 30
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 53,428 $ 29,847 $ 140,018 $ 85,519
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary shares outstanding:
Weighted average shares
outstanding during the
period 72,946 72,222 72,110 72,882
Common stock equivalent
shares 1,582 2,087 2,184 2,565
--------- --------- --------- ---------
74,528 74,309 74,294 75,447
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted shares outstanding:
Weighted average shares
outstanding during the
period 72,946 72,222 72,110 72,882
Common stock equivalent
shares 1,618 2,171 2,251 2,603
--------- --------- --------- ---------
74,564 74,393 74,361 75,485
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary net income per
common stock and
common stock equivalent
share $ .72 $ .40 $ 1.88 $ 1.13
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted net income per
common stock and common
stock equivalent share $ .72 $ .40 $ 1.88 $ 1.13
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT AUGUST 29, 1997, AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE NINE MONTHS ENDED AUGUST 29, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-01-1997
<PERIOD-START> NOV-30-1996
<PERIOD-END> JAN-01-1997
<CASH> 176,911
<SECURITIES> 510,248
<RECEIVABLES> 128,978
<ALLOWANCES> 6,382
<INVENTORY> 13,273
<CURRENT-ASSETS> 852,839
<PP&E> 182,951
<DEPRECIATION> 98,930
<TOTAL-ASSETS> 1,105,560
<CURRENT-LIABILITIES> 233,587
<BONDS> 0
0
0
<COMMON> 263,570
<OTHER-SE> 608,403
<TOTAL-LIABILITY-AND-EQUITY> 1,105,560
<SALES> 149,880
<TOTAL-REVENUES> 684,762
<CGS> 99,636
<TOTAL-COSTS> 99,636
<OTHER-EXPENSES> 410,990
<LOSS-PROVISION> 843
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 221,899
<INCOME-TAX> 81,881
<INCOME-CONTINUING> 140,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 140,018
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.88
</TABLE>
