<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 29, 1998
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: 0-15175
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:
<TABLE>
<CAPTION>
Shares Outstanding
Class June 26, 1998
----- -------------
<S> <C>
Common stock, $0.0001 par value 67,198,400
</TABLE>
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
PART I -- FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income
Three Months Ended May 29, 1998 and May 30, 1997
and Six Months Ended May 29, 1998 and May 30, 1997 3
Condensed Consolidated Balance Sheets
May 29, 1998 and November 28, 1997 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended May 29, 1998 and May 30, 1997 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 25
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 30
Summary of Trademarks 31
</TABLE>
EXHIBITS
Exhibit 27.1 Financial Data Schedule
Exhibit 27.2 Financial Data Schedule
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
MAY 29 MAY 30 MAY 29 MAY 30
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Licensing $ 42,456 $ 53,261 $ 84,307 $ 104,721
Application products 184,854 175,003 340,816 350,002
--------- --------- --------- ---------
Total revenue 227,310 228,264 425,123 454,723
Direct costs 27,292 32,658 57,278 66,947
--------- --------- --------- ---------
Gross margin 200,018 195,606 367,845 387,776
--------- --------- --------- ---------
Operating expenses:
Research and development 53,310 41,253 99,737 79,450
Sales and marketing 86,827 75,179 158,661 147,217
General and administrative 20,892 21,106 44,968 38,602
Acquired in-process
technology 1,180 3,157 4,998 3,157
Other non-recurring items 565 -- 565 (2,359)
--------- --------- --------- ---------
Total operating expenses 162,774 140,695 308,929 266,067
--------- --------- --------- ---------
Operating income 37,244 54,911 58,916 121,709
--------- --------- --------- ---------
Nonoperating income, net:
Investment gain (loss) (188) 34 12,274 (590)
Interest and other income 7,589 8,259 16,090 15,252
--------- --------- --------- ---------
Total nonoperating income, net 7,401 8,293 28,364 14,662
--------- --------- --------- ---------
Income before income taxes 44,645 63,204 87,280 136,371
Provision for income taxes 16,665 23,098 32,556 49,781
--------- --------- --------- ---------
Net income $ 27,980 $ 40,106 $ 54,724 $ 86,590
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic net income per share $ .42 $ .56 $ .81 $ 1.21
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing basic
net income per share 66,735 72,085 67,257 71,780
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted net income per share $ .41 $ .54 $ .79 $ 1.17
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing diluted
net income per share 68,990 74,416 69,453 74,199
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 29 NOVEMBER 28
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 115,358 $ 267,576
Short-term investments 277,246 235,380
Receivables, net of allowances of $4,544 and
$3,634, respectively 151,886 130,974
Other current assets 44,674 45,016
----------- -----------
Total current assets 589,164 678,946
Property and equipment 99,914 80,978
Other assets 191,744 163,148
Deferred income taxes 17,231 16,999
----------- -----------
$ 898,053 $ 940,071
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade and other payables $ 44,506 $ 57,857
Accrued expenses 108,759 102,741
Income taxes payable 45,965 48,343
Deferred revenue 14,585 15,706
----------- -----------
Total current liabilities 213,815 224,647
----------- -----------
Stockholders' equity:
Preferred stock, $0.0001 par value; 2,000 shares
authorized; none issued or outstanding at May 29,
1998 and November 28, 1997 -- --
Common stock, $0.0001 par value;
Authorized: 200,000 shares;
Issued: 75,350 and 73,941 shares at May 29, 1998
and November 28, 1997, respectively;
Outstanding: 67,154 and 68,765 shares at May 29,
1998 and November 28, 1997, respectively 7 7
Additional paid-in capital 338,656 291,274
Retained earnings 711,983 663,861
Unrealized gains on investments, net 481 3,590
Cumulative translation adjustment (5,273) (4,620)
Treasury stock, at cost (8,196 and 5,176 shares at
May 29, 1998 and November 28, 1997, respectively) (361,616) (238,688)
----------- -----------
Total stockholders' equity 684,238 715,424
----------- -----------
$ 898,053 $ 940,071
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
MAY 29 MAY 30
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54,724 $ 86,590
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense 1,484 3,711
Depreciation and amortization 27,969 21,649
Deferred income taxes 1,292 (2,651)
Provision for losses on accounts receivable 1,087 308
Tax benefit from employee stock plans 8,190 17,369
Equity in net loss of Adobe Ventures 703 658
Gain on sale and distribution of equity investments (12,987) --
Write-off of acquired in-process technology 4,998 3,157
Changes in operating assets and liabilities:
Receivables (21,999) (15,121)
Other current assets (1,182) (5,144)
Trade and other payables (13,351) 18,739
Accrued expenses 16,231 (2,073)
Income taxes payable (2,378) (26,832)
Deferred revenue (1,121) 4,014
--------- ---------
Net cash provided by operating activities 63,660 104,374
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (508,156) (1,748,497)
Maturities and sales of short-term investments 464,822 1,761,554
Acquisitions of property and equipment (36,527) (16,610)
Additions to other assets (40,525) (22,487)
Acquisitions, net of cash acquired -- (2,121)
--------- ---------
Net cash used for investing activities (120,386) (28,161)
--------- ---------
</TABLE>
(Continued)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
MAY 29 MAY 30
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock $ 37,708 $ 42,816
Repurchase of common stock (122,928) (36,957)
Payment of dividends (9,619) (7,249)
--------- ---------
Net cash provided (used) by financing activities (94,839) (1,390)
--------- ---------
Effect of foreign currency exchange rates on
cash and cash equivalents (653) 19
--------- ---------
Net increase (decrease) in cash and cash equivalents (152,218) 74,842
Cash and cash equivalents at beginning of period 267,576 110,745
--------- ---------
Cash and cash equivalents at end of period $ 115,358 $ 185,587
--------- ---------
--------- ---------
Supplemental disclosures:
Cash paid during the period for income taxes $ 16,794 $ 56,844
--------- ---------
--------- ---------
Noncash investing and financing activities:
Dividends declared but not paid $ 3,376 $ 3,660
--------- ---------
--------- ---------
Dividend in-kind declared but not issued $ -- $ 21,560
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements of
Adobe Systems Incorporated ("Adobe" or the "Company") have been prepared in
conformity with generally accepted accounting principles, consistent in all
material respects with those applied in the Company's Annual Report on Form 10-K
for the year ended November 28, 1997. The interim financial information is
unaudited but reflects all normal adjustments which are, in the opinion of
management, necessary to provide fair condensed consolidated balance sheets and
condensed consolidated statements of income and cash flows for the interim
periods presented. The interim financial statements should be read in
conjunction with the financial statements in the Company's Annual Report on Form
10-K for the year ended November 28, 1997.
The results of operations for the interim period ended May 29, 1998, are
not necessarily indicative of the results to be expected for the full year.
NET INCOME PER SHARE
Basic net income per share is computed using the weighted average number of
common shares outstanding for the period. Diluted net income per share is based
upon the weighted average common shares outstanding for the period plus dilutive
common equivalent shares including unvested restricted common stock, stock
options using the treasury stock method, and put warrants written by the Company
using the reverse treasury stock method.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
MAY 29 MAY 30 MAY 29 MAY 30
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $27,980 $40,106 $54,724 $86,590
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used to compute basic net
income per share (weighted
average shares outstanding
during the period) 66,735 72,085 67,257 71,780
Dilutive common equivalent
shares:
Unvested restricted stock 78 173 78 173
Stock options 2,177 2,158 2,118 2,246
--------- --------- --------- ---------
Shares used to compute diluted
net income per share 68,990 74,416 69,453 74,199
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic net income per share $ .42 $ .56 $ .81 $ 1.21
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted net income per share $ .41 $ .54 $ .79 $ 1.17
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
7
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP
97-2 establishes standards relating to the recognition of all aspects of
software revenue. Based on the Company's initial assessment of the impact SOP
97-2 may have on its consolidated results of operations, the Company intends to
modify certain aspects of its business model such that any impact will not be
significant. The Company will adopt SOP 97-2 for its fiscal year 1999.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") 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
disclosure but requires the Company to display an amount representing total
comprehensive income for the periods presented in its financial statements. The
Company will be required to implement SFAS No. 130 for its fiscal year 1999.
SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the manner in which public companies report information about operating segments
in annual and interim financial statements. The Company is currently evaluating
the operating segment information to determine whether this will have an impact
on its financial statement reporting. The Company will be required to implement
SFAS No. 131 for its fiscal year 1999.
RECLASSIFICATIONS
Certain amounts in the 1997 Condensed Consolidated Statement of Cash Flows
have been reclassified to conform to the 1998 presentation.
8
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
NOTE 2. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
MAY 29 NOVEMBER 28
1998 1997
----------- -----------
<S> <C> <C>
Equity investments $ 53,220 $ 35,689
Purchased technology and licensing
agreements 4,963 5,043
Restricted funds and security deposits 117,426 102,962
Miscellaneous other assets 36,425 45,097
----------- -----------
212,034 188,791
Less accumulated amortization 20,290 25,643
----------- -----------
$ 191,744 $ 163,148
----------- -----------
----------- -----------
</TABLE>
NOTE 3. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
MAY 29 NOVEMBER 28
1998 1997
----------- -----------
<S> <C> <C>
Accrued compensation and benefits $ 38,859 $ 37,833
Sales and marketing allowances 13,784 13,028
Other 56,116 51,880
----------- -----------
$ 108,759 $ 102,741
----------- -----------
----------- -----------
</TABLE>
NOTE 4. STOCKHOLDERS' EQUITY
STOCK REPURCHASE PROGRAMS
In September 1997, the Company's Board of Directors authorized, subject to
certain business and market conditions, the purchase of up to an additional 15.0
million shares of the Company's common stock over a two-year period. During the
fourth quarter of fiscal 1997 and the first quarter of fiscal 1998, the Company
repurchased approximately 4.7 and 3.0 million shares of its common stock,
respectively. No stock repurchases were made during the second quarter of fiscal
1998.
PUT WARRANTS AND CALL OPTIONS
To facilitate the Company's stock repurchase programs, the Company sold put
warrants to independent third parties. Each warrant entitles the holder to sell
one share of Adobe's common stock to the Company at a specified price. On May
29, 1998, put warrants to sell approximately 3.2 million shares of the Company's
common stock were outstanding that expire on various dates through November 1998
with an average exercise price of $39.26 per share. Under these put warrant
arrangements, the Company, at its option, can settle with physical delivery or
net
9
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
NOTE 4. STOCKHOLDERS' EQUITY (CONTINUED)
shares equal to the difference between the exercise price and market value at
the date of exercise; therefore the put warrants do not result in a liability on
the balance sheet.
In addition, the Company purchased call options from independent third
parties that entitle the Company to buy its common stock on certain dates at
specified prices. On May 29, 1998, call options to purchase approximately 1.0
million shares of the Company's common stock were outstanding that expire on
various dates through November 1998 with an average exercise price of $40.49 per
share.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION (PRESENTED IN MILLIONS, EXCEPT SHARE AND 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 ADDITIONAL QUARTERLY REPORTS ON FORM 10-Q TO BE FILED
BY THE COMPANY IN 1998. 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
express and use information across both print and electronic media. The
Company offers a market-leading line of application software and type
products for creating and distributing visually rich communication materials;
licenses its industry-standard technologies to major hardware manufacturers,
software developers, and service providers; and offers integrated software
solutions to businesses of all sizes. The Company distributes its products
through a network of original equipment manufacturer ("OEM") customers,
distributors and dealers, value-added resellers ("VARs"), and system
integrators and has operations in North America, Europe, Japan, and Asia,
Pacific and Latin America.
11
<PAGE>
The following table sets forth for the three and six month periods ended
May 29, 1998 and May 30, 1997, the Company's condensed consolidated statements
of income expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
MAY 29 MAY 30 MAY 29 MAY 30
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Licensing 18.7% 23.3% 19.8% 23.0%
Application products 81.3 76.7 80.2 77.0
--------- --------- --------- ---------
Total revenue 100.0 100.0 100.0 100.0
Direct costs 12.0 14.3 13.5 14.7
--------- --------- --------- ---------
Gross margin 88.0 85.7 86.5 85.3
--------- --------- --------- ---------
Operating expenses:
Research and development 23.5 18.1 23.5 17.5
Sales and marketing 38.2 32.9 37.3 32.4
General and administrative 9.2 9.2 10.6 8.5
Acquired in-process
technology 0.5 1.4 1.2 0.7
Other non-recurring items 0.2 -- 0.1 (0.6)
--------- --------- --------- ---------
Total operating expenses 71.6 61.6 72.7 58.5
--------- --------- --------- ---------
Operating income 16.4 24.1 13.8 26.8
Nonoperating income, net:
Investment gain (loss) (0.1) -- 2.9 (0.1)
Interest and other income 3.3 3.6 3.8 3.3
--------- --------- --------- ---------
Total nonoperating income, net 3.2 3.6 6.7 3.2
--------- --------- --------- ---------
Income before income taxes 19.6 27.7 20.5 30.0
Provision for income taxes 7.3 10.1 7.6 11.0
--------- --------- --------- ---------
Net income 12.3% 17.6% 12.9% 19.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
12
<PAGE>
REVENUE
<TABLE>
<CAPTION>
MAY 29 MAY 30
1998 1997 CHANGE
--------- --------- ---------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
Total revenue $227.3 $228.3 (0.4)%
Six months ended:
Total revenue $425.1 $454.7 (6.5)%
</TABLE>
For the second quarter and first six months of 1998, revenue decreased from
the same periods last year due primarily to weakness in the Japanese economy and
a decline in licensing revenue. A decrease in product unit volume (as opposed to
price) was the principal factor in the Company's revenue decline.
LICENSING REVENUE:
<TABLE>
<CAPTION>
MAY 29 MAY 30
1998 1997 CHANGE
--------- --------- ---------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
Licensing revenue $42.4 $53.3 (20.3)%
Percentage of total revenue 18.7% 23.3%
Six months ended:
Licensing revenue $84.3 $104.7 (19.5)%
Percentage of total revenue 19.8% 23.0%
</TABLE>
Licensing revenue is derived from shipments by OEM customers of products
containing Adobe PostScript and Adobe PrintGear technology. Adobe PostScript is
a software language for describing to a printer the appearance of a page,
including text, graphics, and images. Products that contain PostScript
technology include: (1) black-and-white printers; (2) color printers; (3) slide
recorders; (4) imagesetters; (5) screen displays; and (6) digital copiers. Adobe
PostScript technology includes Adobe PostScript, Adobe PostScript Level 2, and
Adobe PostScript 3, all of which serve the enterprise, graphic arts, and
production printing markets, and Adobe PostScript Extreme, a solution for
high-volume production printing. Adobe PrintGear is an architecture for printers
targeted at the small office/home office market.
Licensing revenue decreased $10.9 million or 20.3% in the second quarter of
1998 compared to the same period last year and $20.4 million or 19.5% in the
first six months of 1998 compared to the same period last year primarily due to
three factors: (1) weakness in the Japanese personal computer and printer
markets, (2) weakness in the color copier business due to product transitions,
and (3) a reduction in royalty revenue from Hewlett-Packard Company's ("HP")
desktop monochrome laser printer division which is now incorporating a non-Adobe
clone version of Adobe PostScript into its products.
The Company continues to be cautious about licensing revenue in the short
term because of Japanese market conditions and because of uncertain timing of
OEM customer introductions of products incorporating Adobe's latest
technologies. Based on a strategic review of the Company's printing systems
division, the Company is now refocusing its resources on high
13
<PAGE>
growth revenue opportunities in digital color, color inkjet, short-run on-demand
digital printing, and digital copiers. This strategic refocusing is intended to
increase licensing revenue growth in the long term, although the Company
anticipates that its licensing revenue in the remainder of fiscal 1998 will be
below fiscal 1997 levels.
<TABLE>
<CAPTION>
APPLICATIONS PRODUCTS REVENUE:
MAY 29 MAY 30
1998 1997 CHANGE
---------- ---------- ----------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
Application products revenue $184.9 $175.0 5.6%
Percentage of total revenue 81.3% 76.7%
Six months ended:
Application products revenue $340.8 $350.0 (2.6)%
Percentage of total revenue 80.2% 77.0%
</TABLE>
Application products revenue is derived predominantly from shipments of
application software programs marketed through distribution channels, with the
exception of Adobe FrameMaker and Adobe Acrobat products which are 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.
Application products revenue increased $9.9 million or 5.6% in the second
quarter of 1998 compared to the same period last year primarily due to the
release of three new products, Photoshop 5.0, which began shipping in English,
French and German just prior to quarter end, Premiere 5.0, and PhotoDeluxe
Business Edition. Also, revenue from Acrobat 3.0 increased compared to the same
quarter last year due to more widespread acceptance of the portable document
format. The increased revenue generated by these newly released products and
Acrobat 3.0 in 1998 was partially offset by a decline in Japanese revenues due
to poor economic conditions, a decline in Macintosh platform revenues and a
decline in Illustrator 7.0 revenues in anticipation of the release of a new
version later in fiscal 1998.
For the first six months of 1998, application products revenue decreased
$9.2 million or 2.6% compared to the same period last year due mainly to the
absence of recent major product releases or upgrades until late in the second
quarter of 1998, weakness in the Japanese economy, and a continuing decline in
applications product revenue for the Macintosh platform. By comparison, the
first half of 1997 benefited from several product releases as well as
continuing strength of a major product release in the last quarter of fiscal
1996.
14
<PAGE>
DIRECT COSTS
<TABLE>
<CAPTION>
MAY 29 MAY 30
1998 1997 CHANGE
---------- ---------- ----------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
Direct costs $27.3 $32.7 (16.4)%
Percentage of total revenue 12.0% 14.3%
Six months ended:
Direct costs $57.3 $66.9 (14.4)%
Percentage of total revenue 13.5% 14.7%
</TABLE>
Direct costs include product, packaging, and shipping costs, as well as
royalties and amortization of localization costs and acquired technologies.
Direct costs were lower in the second quarter and first six months of 1998
compared with the same periods last year due to lower royalty payments and less
product inventory subject to obsolescence.
Gross margin (expressed as a percentage of revenue), in general, is
affected by the mix of licensing revenue versus application products revenue as
well as the product mix within application products and the mix of full and
upgrade products sold.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
<TABLE>
<CAPTION>
MAY 29 MAY 30
1998 1997 CHANGE
---------- ---------- ----------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
Research and development $53.3 $41.3 29.2%
Percentage of total revenue 23.5% 18.1%
Six months ended:
Research and development $99.7 $79.5 25.5%
Percentage of total revenue 23.5% 17.5%
</TABLE>
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 expenses increased in the second quarter and
first six months of 1998 compared with the same periods last year due to
increased investment 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 its software products, including those targeted for the
growing Internet market.
15
<PAGE>
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 software developers. Research
and development expenses are expected to increase in absolute dollars, however
at a slower rate than revenue growth.
SALES AND MARKETING:
<TABLE>
<CAPTION>
MAY 29 MAY 30
1998 1997 CHANGE
---------- ---------- ----------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
Sales and marketing $86.8 $75.2 15.5%
Percentage of total revenue 38.2% 32.9%
Six months ended:
Sales and marketing $158.7 $147.2 7.8%
Percentage of total revenue 37.3% 32.4%
</TABLE>
Sales and marketing expenses include salaries and benefits, sales
commissions, travel expenses, and related facility costs for the Company's
sales, marketing, customer support, and distribution personnel. Sales and
marketing expenses also include the costs of programs aimed at increasing
revenue, such as advertising, trade shows and other market development programs.
Sales and marketing expenses increased in the second quarter and first six
months of 1998 compared with the same periods last year due to increased
advertising and promotional expenditures in connection with the commencement of
the Company's new product release cycle and brand advertising campaign as well
as increased sales and marketing staff to support a growing base of customers.
Sales and marketing expenses are expected to increase in absolute dollars
for the remainder of 1998, however at a slower rate than revenue growth.
GENERAL AND ADMINISTRATIVE:
<TABLE>
<CAPTION>
MAY 29 MAY 30
1998 1997 CHANGE
---------- ---------- ----------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
General and administrative $20.9 $21.1 (1.0)%
Percentage of total revenue 9.2% 9.2%
Six months ended:
General and administrative $45.0 $38.6 16.5%
Percentage of total revenue 10.6% 8.5%
</TABLE>
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.
16
<PAGE>
General and administrative expenses decreased in absolute dollars for the
second quarter of 1998 compared with the same period last year primarily due to
the reversal of an incentive bonus program accrual in the second quarter of 1998
that was based on various revenue and operating margin targets that have not
been attained as of May 29, 1998. The decrease was partially offset by increased
employee costs and depreciation and building expenses associated with increased
staff and a more comprehensive administrative infrastructure. For the first six
months of 1998, general and administrative costs increased in absolute dollars
and as a percentage of revenue due to increased employee costs and depreciation
and building expenses primarily associated with increased staff and a more
comprehensive administrative infrastructure. Additionally, general and
administrative expenses in the first six months of 1998 include the write-off of
$2.4 million of goodwill associated with an acquisition that took place in 1997.
The Company expects general and administrative spending in 1998 to increase
in absolute dollars, however at a slower rate than revenue growth.
ACQUIRED IN-PROCESS TECHNOLOGY:
<TABLE>
<CAPTION>
MAY 29 MAY 30
1998 1997 CHANGE
---------- ---------- ----------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
Acquired in-process technology $1.2 $3.2 (62.6)%
Percentage of total revenue 0.5% 1.4%
Six months ended:
Acquired in-process technology $5.0 $3.2 58.3%
Percentage of total revenue 1.2% 0.7%
</TABLE>
For the second quarter and first six months of 1998, acquired in-process
technology includes several acquired technologies associated with Adobe products
that have yet to reach technological feasibility as defined within SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," and for which no alternative uses have been established by the
Company.
During the second quarter of 1997, the Company acquired two software
companies and accounted for the transactions using the purchase method. The
aggregate purchase price was principally allocated to in-process research and
development and, accordingly, $3.2 million was expensed at the time of the
acquisitions.
OTHER NON-RECURRING ITEMS:
<TABLE>
<CAPTION>
MAY 29 MAY 30
1998 1997 CHANGE
---------- ---------- ----------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
Other non-recurring items $0.6 $-- --
Percentage of total revenue 0.2% --
Six months ended:
Other non-recurring items $ 0.6 $(2.4) 124%
Percentage of total revenue 0.1% (0.6)%
</TABLE>
17
<PAGE>
During the second quarter of 1998, the Company recognized a restructuring
charge associated with a reduction in force in the Company's Printing Systems
Division as part of a strategic initiative to refocus resources on high-growth
opportunities in the printing and digital copier markets.
The non-recurring item which occurred during the first quarter of 1997
represents proceeds on the divestiture of a product line.
NONOPERATING INCOME, NET
INVESTMENT GAIN (LOSS):
<TABLE>
<CAPTION>
MAY 29 MAY 30
1998 1997 CHANGE
---------- ---------- ----------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
Investment gain (loss) $(0.2) $-- --
Percentage of total revenue (0.1)% --
Six months ended:
Investment gain (loss) $12.3 $(0.6) 2180.3%
Percentage of total revenue 2.9% (0.1)%
</TABLE>
Investment gain (loss) consists principally of realized gains or losses
from direct investments as well as mark-to-market valuation adjustments for
Adobe Ventures L.P. investments.
During the first quarter of 1998, McQueen International Limited
("McQueen"), a former investee of the Company, was acquired by Sykes
Enterprises, Incorporated ("Sykes"), a publicly traded company. In connection
with the acquisition, the Company exchanged its shares of McQueen for
approximately 487,000 shares of Sykes' restricted common stock and recorded a
gain on the exchange of $6.7 million.
Also, during the first quarter of 1998, the Company liquidated its
investment in Siebel Systems, Incorporated ("Siebel") through the distribution
to its stockholders of approximately 165,000 shares of Siebel as a
dividend-in-kind and the sale of its remaining Siebel shares. A gain was
recognized on the transaction of approximately $5.7 million.
INTEREST AND OTHER INCOME:
<TABLE>
<CAPTION>
MAY 29 MAY 30
1998 1997 CHANGE
---------- ---------- ----------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
Interest and other income $7.6 $8.3 (8.1)%
Percentage of total revenue 3.3% 3.6%
Six months ended:
Interest and other income $16.1 $15.3 5.5%
Percentage of total revenue 3.8% 3.3%
</TABLE>
18
<PAGE>
Interest and other income consists principally of interest earned on cash,
cash equivalents, and short-term investments.
The decrease in interest and other income in the second quarter of 1998
compared with the same quarter last year is due to lower average cash balances
in 1998. The increase in interest and other income in the first six months of
1998 compared to the same period last year is due primarily to foreign exchange
gains in Europe offset by a decline in interest income as a result of lower
average cash balances.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
MAY 29 MAY 30
1998 1997 CHANGE
---------- ---------- ----------
Three months ended: (Dollars in millions)
<S> <C> <C> <C>
Provision for income taxes $16.7 $23.1 (27.9)%
Percentage of total revenue 7.3% 10.1%
Effective tax rate 37.3% 36.5%
Six months ended:
Provision for income taxes $32.6 $49.8 (34.6)%
Percentage of total revenue 7.6% 11.0%
Effective tax rate 37.3% 36.5%
</TABLE>
The Company's effective tax rate increased in the second quarter and first
six months of 1998 primarily due to the nondeductible write-off of goodwill
relating to an acquisition which took place in 1997, a decrease in research and
experimentation tax credits (the federal credit expired on June 30, 1998), and
lower tax-exempt interest income.
The Company expects that the effective tax rate for the remainder of fiscal
1998 will be between 37% and 38% due to lower tax-exempt interest income as a
result of cash requirements for the Company's stock repurchase programs and the
expiration of the federal research and experimentation tax credit on June 30,
1998.
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, lack of market acceptance
of new products and upgrades, weakness in demand for Macintosh application
software and Macintosh-related printers, renegotiation of royalty arrangements,
growth in worldwide personal computer and printer sales and sales price
adjustments, consolidation in the OEM printer business, ongoing weakness in the
color copier business due to product transitions, industry transitions to new
business and information delivery models, ongoing weakness in the Japanese and
other Asian economies, and adverse changes in general economic conditions in any
of the countries in which the Company does business.
The Company's ability to develop and market products, including upgrades of
current products that successfully adapt to changing customer needs, may also
have an impact on the results of operations. 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
19
<PAGE>
develop these products. A portion of the Company's future revenue will come from
these new applications. Delays in product or upgrade introductions, whether by
the Company or its OEM 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 revenue or results
of operations.
The market for the Company's graphics applications, particularly the
consumer products, is intensely and increasingly competitive and is
significantly affected by product introductions and market activities of
industry competitors. Additionally, Microsoft Corporation has stated its
intention to increase its presence in the digital imaging/graphics market by
mid-1999; the Company believes that, due to Microsoft's market dominance, any
new Microsoft digital imaging products will be highly competitive with the
Company's products. If competing new products achieve widespread acceptance, it
would have a significant adverse impact on the Company's operating results.
Although the Company generally offers its application products on
Macintosh, Windows, and UNIX platforms, a majority of the overall revenue from
these products prior to 1997 has been for the Macintosh platform, particularly
for the higher end Macintosh computers. In 1997, Windows-based application
revenue exceeded that from the Macintosh platform for the first time, and for
the past several quarters, Macintosh platform sales of application products have
continued to decline year over year while Windows platform sales have continued
to rise. If there is a continuing slowdown of customer purchases in the higher
end Macintosh market, or if the Company is unable to continue to increase its
revenue from Windows customers commensurate with such a slowdown, the Company's
operating results could be materially adversely affected. Also, as the Company
seeks to further broaden its customer base to achieve greater penetration in the
corporate business and consumer markets, the Company may not successfully adapt
its application software distribution channels, which could materially adversely
affect the Company's operating results. The Company could experience decreases
in average selling prices and some transitions in its distribution channels that
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,
which could result in lower licensing revenue for the Company. In the fall of
1997, HP began to ship non-Adobe clone software in some printers, resulting in
lower licensing revenue to the Company in fiscal 1998. The Company expects
additional impact on its remaining 1998 licensing revenue, although it continues
to work with HP printer operations to incorporate Adobe PostScript and other
technologies in other HP products.
During late 1997 and the first half of 1998, the Company experienced a
decline in both application and licensing revenue from the Japanese market, due
to a weak Japanese computer market and general economic conditions in Japan. In
addition, at the end of fiscal 1997, inventory levels for application products
at the Company's Japanese distributors remained higher than what the Company
considers normal. During the first half of fiscal 1998, the Company worked with
its major distributors in Japan to reduce channel inventory to what the Company
considers a reasonable level. The Company expects these adverse economic
conditions to continue in the short term, and they may continue to adversely
affect the Company's revenue and earnings. Although there are also adverse
conditions in other Asian economies, the countries
20
<PAGE>
affected represent a much smaller portion of the Company's revenue and thus have
less impact on the Company's operational results.
The Company has experienced, and expects to continue to experience,
significant growth. Competition for high quality personnel, especially highly
skilled engineers, is extremely intense. The Company's ability to effectively
manage its growth will require it to continue to improve its operational and
financial controls and information management systems, and to attract, retain,
motivate, and manage employees effectively. The failure of the Company to
effectively manage growth and transition in multiple areas of its business could
have a material adverse effect on its results of operations.
The Internet market is rapidly evolving and is characterized by an
increasing number of market entrants that have introduced or developed products
addressing authoring and communications over the Internet. As is typical in the
case of a new and evolving industry, demand and market acceptance for recently
introduced products and services are subject to a high level of uncertainty. The
software industry addressing authoring and communications over the Internet is
young and has few proven products. In addition, new models for licensing
software will be needed to accommodate new information delivery practices.
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 affect the growth of Internet use, 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, and Asia, Pacific, and
Latin America. The Company generally experiences lower revenue from its European
operations in the third quarter because many customers reduce their purchasing
activities in the summer months. While most of the revenue of the European
subsidiaries is denominated in U.S. dollars, the majority of revenue derived
from Japan is denominated in yen and the majority of all subsidiaries' operating
expenses are denominated in their local currencies. As a result, the Company's
operating results are subject to fluctuations in foreign currency exchange
rates. To date, the accounting impact of such fluctuations has been
insignificant. The Company's hedging policy attempts to mitigate some of these
risks, based on management's best judgment of the appropriate trade-offs among
risk, opportunity, and expense. The Company has established a hedging program to
hedge its exposure to foreign currency exchange rate fluctuations, primarily of
the Japanese yen. The Company's hedging program is not comprehensive, and there
can be no assurance that the program will offset more than a portion of the
adverse financial impact resulting from unfavorable movement in foreign currency
exchange rates.
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, the Company's industry or the securities
markets in general will often result in significant volatility of the Company's
common stock price.
21
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP
97-2 establishes standards relating to the recognition of all aspects of
software revenue. Based on the Company's initial assessment of the impact SOP
97-2 may have on its consolidated results of operations, the Company intends to
modify certain aspects of its business model such that any impact will not be
significant. The Company intends to adopt SOP 97-2 for its fiscal year 1999.
In June 1997, the FASB 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 disclosure, but requires the
Company to display an amount representing total comprehensive income for the
periods presented in its financial statements. The Company will be required to
implement SFAS No. 130 for its fiscal year 1999.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. The Company is
currently evaluating the operating segment information to determine whether this
will have an impact on its financial statement reporting. The Company will be
required to implement SFAS No. 131 for its fiscal year 1999.
"YEAR 2000" ISSUES
The Company is aware of and addressing a broad range of issues associated
with the programming code in existing computer systems as the year 2000
approaches. The "Year 2000" problem is complex, as many computer systems will be
affected in some way by the rollover of the two-digit year value to 00. Systems
that do not properly recognize such information could generate erroneous data or
cause a system to fail. The "Year 2000" issue creates risk for the Company from
unforeseen problems in its own computer systems and from third parties with whom
the Company deals on financial and other transactions worldwide. Failures of the
Company's and/or third parties' computer systems could have a material impact on
the Company's ability to conduct its business.
The Company's financial information systems include an SAP system recently
implemented in the United States, Japan and Asia, Pacific and Latin America, and
an Oracle system in Europe that will be upgraded to the most recent version
later in fiscal 1998. These systems are believed to be "Year 2000" compliant.
The Company is analyzing its remaining computer systems to identify any
potential "Year 2000" issues and will take appropriate corrective action based
on the results of such analysis. Management has not yet determined the cost
related to achieving "Year 2000" compliance.
In addition, the "Year 2000" issue could affect the products that the
Company sells. The Company believes that the current versions of its products
are "Year 2000" compliant. The Company's products are subject to ongoing
analysis and review.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
MAY 29 NOVEMBER 28
1998 1997 CHANGE
---------- ----------- ----------
(Dollars in millions)
<S> <C> <C> <C>
Cash, cash equivalents and
short-term investments $392.6 $503.0 (21.9)%
Working capital $375.3 $454.3 (17.4)%
Stockholders' equity $684.2 $715.4 (4.4)%
</TABLE>
The Company's cash, 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,
decreased $110.4 million or 21.9% during the first six months of 1998. All of
the Company's cash equivalents and short-term investments are classified as
available-for-sale under the provisions of Statement of Financial Accounting
Standards 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 stockholders'
equity.
Major sources of cash during the first six months of 1998 included cash
generated from operations of $63.7 million and proceeds from the issuance of
common stock primarily related to the exercise of stock options of $37.7
million. Major uses of cash during the period included $122.9 million to
repurchase Adobe common stock, net purchases of short-term investments of
$43.3 million, additions to other assets of $40.5 million, capital
expenditures totaling $36.5 million for property and equipment, and the
payment of dividends of $9.6 million.
In September 1997, the Company's Board of Directors authorized, subject to
certain business and market conditions, the purchase of up to an additional 15.0
million shares of the Company's common stock over a two-year period. During the
fourth quarter of fiscal 1997 and the first quarter of fiscal 1998, the Company
repurchased approximately 4.7 and 3.0 million shares of its common stock,
respectively. These stock repurchase programs are intended to enhance
stockholder value by reducing the number of outstanding shares net of offsetting
increases due to employee stock purchases and stock option exercises. The timing
and size of any future stock repurchases are subject to market conditions, stock
prices and Adobe's cash position and other cash requirements going forward.
To facilitate the Company's stock repurchase programs, the Company sold put
warrants to independent third parties. Each warrant entitles the holder to sell
one share of Adobe's common stock to the Company at a specified price. On May
29, 1998, put warrants to sell approximately 3.2 million shares of the Company's
common stock were outstanding that expire on various dates through November 1998
with an average exercise price of $39.26 per share. Under these put warrant
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; therefore the put warrants do not result in a liability
on the balance sheet.
In addition, the Company purchased call options from independent third
parties that entitle the Company to buy its common stock on certain dates at
specified prices. On May 29, 1998, call
23
<PAGE>
options to purchase approximately 1.0 million shares of the Company's common
stock were outstanding that expire on various dates through November 1998 with
an average exercise price of $40.49 per share.
The Board of Directors of the Company declared two cash dividends on the
Company's common stock of $.05 per common share, one for each of the first and
second quarters of 1998. Also, on December 1, 1997, the Company dividended one
share of Siebel Systems, Incorporated ("Siebel") common stock for each 300
shares of Adobe common stock held by stockholders of record on October 31, 1997.
An equivalent cash dividend was paid for holdings of less than 7,500 Adobe
shares and for odd-lot and fractional Siebel shares. 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.
Expenditures for property and equipment are expected to continue as staff
increases and as the Company continues the construction of facilities both in
the United States as well as in Europe. Furthermore, additional cash may be used
to acquire software products or technologies complementary to the Company's
business.
The Company's principal commitments as of May 29, 1998 consisted of
obligations under operating leases, venture investing activities, real estate
development agreements, and various service agreements. These arrangements are
discussed in more detail in the Company's Annual Report on Form 10-K for the
year ended November 28, 1997.
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, including planned capital expenditure programs, working
capital requirements, the potential put warrant obligation and the dividend
program.
24
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in Item 7a of its Annual
Report on Form 10-K for the year ended November 28, 1997 have not changed
significantly.
25
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 stockholder 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 Court granted
Adobe's demurrer to the suit, with leave to amend for the plaintiff. In January
1998, the plaintiff filed an amended complaint making substantially the same
claims but not including Mr. Brainerd. In March 1998, Adobe filed a demurrer to
the amended complaint, which was overruled by the trial court in May 1998. In
June 1998, Adobe filed a writ petition for review of the trial court's decision.
Quantel Limited, a U.K. corporation, filed and served on the Company in
January 1996 a complaint alleging that the Adobe Photoshop program infringed
five U.S. patents held by Quantel. The complaint was filed in the United States
District Court for the District of Delaware. In September 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. In June 1998, Quantel filed a notice of appeal of the trial
court's decision. The Company intends to vigorously defend any appeal.
Management believes that the ultimate resolution of this matter and other
matters discussed in the Company's Annual Report on Form 10-K for the year ended
November 28, 1997 will not have a material impact on the Company's financial
position or results of operations.
26
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on April 8, 1998.
A proposal to elect three (3) Class I directors of the Company to serve for
a two-year term expiring at the Annual Meeting of Stockholders in 2000 was
approved by the stockholders. The nominees received the following votes:
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
Charles M. Geschke 59,208,723 785,193
William R. Hambrecht 59,298,821 695,095
Delbert W. Yocum 59,280,806 713,110
</TABLE>
In June 1998, the total number of directors was increased to eight and
Carol Mills was elected as a Class I director with a term expiring at the Annual
Meeting of Stockholders in 2000.
Incumbent Class II directors John E. Warnock, Gene P. Carter, Robert
Sedgewick and William J. Spencer are currently serving for a term expiring at
the Annual Meeting of Stockholders in 1999.
Introduced was a proposal to approve the Company's Amended 1994 Performance
and Restricted Stock Plan (the "Performance Plan"), including an increase of
500,000 in the number of shares reserved for issuance under the Performance Plan
and increases in the per-participant annual limits from 50,000 shares to 200,000
shares and from $2,500,000 to $10,000,000. This proposal received the following
votes:
<TABLE>
<CAPTION>
<S> <C>
For: 31,470,000
Against: 28,280,885
Withheld: 243,031
</TABLE>
In addition, stockholders ratified the appointment of KPMG Peat Marwick LLP
as independent public accountants of the Company for the fiscal year ending
November 27, 1998. This proposal received the following votes:
<TABLE>
<CAPTION>
<S> <C>
For: 59,433,105
Against: 59,064
Withheld: 501,747
</TABLE>
Abstentions and broker non-votes were each included in the determination of
the number of shares represented at the meeting for purposes of determining the
presence of a quorum at the Company's Annual Meeting of Stockholders. Each was
tabulated separately. Abstentions and broker non-votes were not counted for
purposes of determining the number of votes cast for a proposal.
27
<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
---------- ------------------------------ ------- --------- -------- ----------
<C> <S> <C> <C> <C> <C>
3.1 The Registrant's (as suc- 10-Q 05/30/97 3.1
cessor in-interest to Adobe
Systems (Delaware)
Incorporated 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 Amended and Restated 10-K 11/28/97 3.2.10
Bylaws as currently
in effect.
3.3 Certificate of Designation 10-K 11/28/97 3.3
of the Series A Preferred
Stock
3.4 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.
4.1 Second Amended and 8-K 08/29/97 4
Restated Rights
Agreement between the
Company and Harris
Trust Company of
California
10.1.6 1984 Stock Option Plan, 10-Q 07/02/93 10.1.6
as amended*
10.21.3 Revised Bonus Plan* 10-Q 02/28/97 10.21.3
10.24.1 Amended 1994 Performance X
and 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*
</TABLE>
(Continued)
28
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT ---------------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
------------- ------------------------------- ------ -------- -------- --------
<C> <S> <C> <C> <C> <C>
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)
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, as amended*
10.40 1994 Stock Option S-8 05/30/97 10.40
Plan, as amended*
10.42 Amended and Restated 10-K 11/28/97 10.42
Limited Partnership
Agreement of Adobe
Incentive Partners, L.P.*
10.43 Resignation Agreement* 10-K 11/28/97 10.43
10.44 Forms of Retention 10-K 11/28/97 10.44
Agreement*
21 Subsidiaries of the 10-K 11/28/97 21
Registrant
27.1 Financial Data Schedule X
27.2 Financial Data Schedule X
</TABLE>
---------------------------------------
*Compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May 29, 1998.
29
<PAGE>
SIGNATURES
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
By /s/ P. Jackson Bell
------------------------------
P. Jackson Bell,
Executive Vice President,
Chief Financial Officer,
Chief Administrative Officer,
and Assistant Secretary
(Principal Financial Officer)
By /s/ Harold L. Covert
------------------------------
Harold L. Covert
Vice President, Finance and
Operations
(Principal Accounting Officer)
Date: July 9, 1998
30
<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:
Adobe
Acrobat
FrameMaker
Illustrator
PhotoDeluxe
Photoshop
PostScript
Premiere
PrintGear
All other brand or product names are trademarks or registered trademarks of
their respective holders.
31
<PAGE>
EXHIBIT 10.24.1
ADOBE SYSTEMS INCORPORATED
AMENDED 1994 PERFORMANCE AND RESTRICTED STOCK PLAN
1. ESTABLISHMENT AND PURPOSE.
(a) ESTABLISHMENT. The Adobe Systems Incorporated 1989 Restricted
Stock Plan was initially adopted on February 9, 1989 (the "INITIAL PLAN"). The
Initial Plan was amended and restated in its entirety as the "1994 Performance
and Restricted Stock Plan" (the "PLAN") effective as of August 31, 1994, the
date it was approved by the stockholders of the Company. This amendment is
effective as of the date it is approved by the stockholders of the Company.
(b) PURPOSE. The purpose of the Plan is to attract, retain and
reward key employees of Adobe Systems Incorporated and any successor corporation
thereto (collectively referred to as the "COMPANY"), and any present or future
parent and/or subsidiary corporations of the Company (all of whom along with the
Company being individually referred to as a "PARTICIPATING COMPANY" and
collectively referred to as the "PARTICIPATING COMPANY GROUP"), and to motivate
such persons to contribute to the financial success and progress of the
Participating Company Group. For purposes of the Plan, a parent corporation and
a subsidiary corporation shall be as defined in sections 424(e) and 424(f) of
the Internal Revenue Code of 1986, as amended (the "CODE").
2. ADMINISTRATION.
(a) ADMINISTRATION BY COMMITTEE. The Plan shall be administered by
one or more duly appointed committees (individually, a "COMMITTEE") of the Board
of Directors of the Company (the "BOARD"); provided, however, that with respect
to the participation of individuals who are subject to the provisions of Section
16 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or
who are divisional officers of the Participating Company Group, the Plan shall
be administered by a Committee consisting of not less than two directors each of
whom is both (i) a "Non-Employee Director " within the meaning of Rule 16b-3
under the Exchange Act or any successor rule ("RULE 16b-3") and (ii) an "outside
director" for purposes of Section 162(m) of the Code and the regulations
promulgated thereunder. The Committee shall have all of the powers vested in it
by the terms of the Plan, subject to the limitations described herein, including
the full and final authority in its sole discretion to:
(i) select the eligible persons to whom (a "PARTICIPANT"), and
the time at which, awards shall be granted under the Plan;
(ii) determine type of award granted and the number of shares of
stock, units or other consideration subject to awards (which need not be
identical);
1
<PAGE>
(iii) determine the terms and conditions of each award granted,
including, without limitation, the terms of vesting, if any, the effect of a
Participant's termination of employment with the Participating Company Group,
the method for satisfaction of any tax withholding obligation arising in
connection with any award, and all other terms and conditions of the award not
inconsistent with the terms of the Plan;
(iv) determine the performance goals and other conditions, if
any, for the settlement of any award and whether such goals and conditions have
been satisfied;
(v) determine whether an award shall be paid in cash, in
shares of stock or in any combination thereof;
(vi) determine whether payment of an award should be reduced or
eliminated;
(vii) modify or amend any award, or waive any restrictions or
conditions applicable to any award;
(viii) accelerate, continue, extend or defer the payment or
vesting of any award, including with respect to the period following a
Participant's termination of employment with the Participating Company Group;
(ix) determine the fair market value of the common stock of the
Company;
(x) authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an award;
(xi) prescribe, amend or rescind rules, regulations and
policies relating to the Plan;
(xii) approve one or more forms of agreement for use under the
Plan;
(xiii) construe and interpret the Plan and any agreement used
under the Plan and define the terms employed herein and therein;
(xiv) make all other determinations and take such other action
with respect to the Plan and any award granted hereunder as the Committee may
deem advisable, to the extent permitted by applicable law.
All decisions, determinations and interpretations of the Committee shall be
final and binding upon all persons having an interest in the Plan or any award
granted under the Plan.
(b) AUTHORITY OF OFFICERS. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, or
2
<PAGE>
election which is the responsibility of or which is allocated to the Company
herein, provided the officer has apparent authority with respect to such matter,
right, obligation, or election.
3. ELIGIBILITY. Key employees of the Participating Company Group are
eligible to participate in the Plan. The Committee shall, in the Committee's
sole discretion, determine which individuals shall be granted awards under the
Plan.
4. SHARES SUBJECT TO PLAN. Shares issued pursuant to the Plan shall be
authorized but unissued shares of the common stock of the Company (the "STOCK").
Subject to adjustment as provided in Section 5, the maximum number of shares of
Stock that may be issued under the Plan is 2,000,000. In the event that any
award granted under the Plan denominated in shares for any reason expires or is
canceled, terminated or paid in cash, or shares of Stock subject to forfeiture
are forfeited to the Company, the shares allocable to such award or such
forfeited shares shall again be available for issuance under the Plan.
Notwithstanding the foregoing, any such shares shall be made subject to a new
award only if the grant of such new award and the issuance of such shares
pursuant to such new award would not cause the Plan or any award granted under
the Plan to contravene Rule 16b-3.
5. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. Appropriate adjustments
shall be made in the number and class of shares of Stock subject to the Plan, in
the maximum number of shares set forth in Section 7(d), and to any awards
outstanding under the Plan, other than Performance Units (as defined below), in
the event of a stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification or like change in the capital
structure of the Company. In the event a majority of the shares which are of
the same class as the shares that are subject to outstanding awards under the
Plan are exchanged for, converted into, or otherwise become shares of another
corporation (the "NEW SHARES"), the Company may unilaterally amend outstanding
awards to provide that such awards may be settled in New Shares. In the event
of any such amendment, the number of shares shall be adjusted in a fair and
equitable manner. Any and all new, substituted or additional shares or
Performance Shares (as defined below) received by a Participant pursuant to this
Section 5 will be subject to the applicable restrictions set forth in the
agreement evidencing an award as if such shares or Performance Shares were part
of the original award.
6. TERM OF PLAN. The Plan shall continue in effect until terminated by
the Board or Committee or until all of the shares of Stock available for
issuance under the Plan have been issued and all restrictions on such shares
under the terms of the Plan and the agreements evidencing such awards have
lapsed.
7. PERFORMANCE AWARDS.
(a) TYPES OF PERFORMANCE AWARDS. The Committee may from time to time
grant awards under this Section 7 ("PERFORMANCE AWARDS") which are
Performance-Based Restricted Stock, Performance Shares, or Performance Units.
Performance Awards shall be evidenced by written agreements, in such form as the
Committee shall from time to time establish, specifying the number of shares of
Stock or the dollar amount covered thereby, the performance goals established by
the Committee, the period in which such goals are to be met
3
<PAGE>
and the other terms, conditions and restrictions of the award, and which
agreements may incorporate all or any of the terms of the Plan by reference.
The Committee shall not require a Participant to make any monetary payment
(other than applicable tax withholding) as a condition of receiving a
Performance Award.
(i) "PERFORMANCE-BASED RESTRICTED STOCK" shall mean shares of
Stock awarded to a Participant which, in accordance with rules established by
the Committee prior to the grant of such award, are subject to forfeiture in
full or in part or with respect to which additional shares of Stock may be
granted on the basis of the degree of attainment of Performance Goals (as
defined below) within a Performance Period (as defined below). Shares of
Performance-Based Restricted Stock shall be evidenced in such manner as the
Committee may deem appropriate, including by book-entry registration or issuance
of one or more stock certificates. Any certificate issued in respect of shares
of Performance-Based Restricted Stock shall be registered in the name of the
Participant and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such award. The Committee may
require that such certificates be held in the custody of the Company or other
escrow agent until the restrictions thereon lapse.
(ii) "PERFORMANCE SHARES" shall mean bookkeeping units,
denominated in shares of Stock, awarded to a Participant which, in accordance
with rules established by the Committee prior to the grant of such award, are
subject to forfeiture in full or in part or with respect to which additional
shares of Stock may be granted on the basis of the degree of attainment of
Performance Goals (as defined below) within a Performance Period (as defined
below).
(iii) "PERFORMANCE UNITS" shall mean bookkeeping units,
denominated in dollar amounts, awarded to a Participant which, in accordance
with rules established by the Committee prior to the grant of such award, are
subject to forfeiture in full or in part or with respect to which additional
such units may be granted on the basis of the degree of attainment of
Performance Goals (as defined below) within a Performance Period (as defined
below).
(b) PERFORMANCE GOALS AND PERFORMANCE PERIOD. Prior to the grant of
a Performance Award, the Committee shall establish with respect to one or more
of the Performance Factors set forth below the target levels of attainment of
such Performance Factors (collectively, "PERFORMANCE GOALS") which, when
measured at the end of the Performance Period (as defined below), shall
determine the number of shares of Stock, if any, which shall become
nonforfeitable and/or issuable with respect to such Performance Award or the
dollar amount, if any, payable with respect to such Performance Award. The
agreement evidencing a Performance Award shall set forth the applicable
Performance Goals and the number of shares of Stock or dollar amount, as the
case may be, which may be earned by the Participant upon the attainment of the
Performance Goals at the end of the Performance Period.
(i) "PERFORMANCE FACTORS" shall mean, with respect to the
Company and each parent and subsidiary corporation consolidated therewith for
financial reporting purposes or such division or other business unit thereof as
may be selected by the Committee:
4
<PAGE>
(A) growth in revenue,
(B) operating margin,
(C) total return on shares of Stock relative to the
increase in the Hambrecht & Quist Technology Index or such other appropriate
index as may be selected by the Committee,
(D) earnings per share,
(E) return on stockholder equity,
(F) return on assets, and
(G) cash flow, as indicated by book earnings before
interest, taxes, depreciation and amortization.
For purposes of the Plan, Performance Factors shall be measured before the
effect of accounting changes, restructuring charges and similar extraordinary
items, determined according to criteria established by the Committee.
(ii) "PERFORMANCE PERIOD" shall mean a period of three (3)
consecutive fiscal years of the Company, at the end of which the degree of
attainment of the Performance Goals is measured. Performance Periods for
different Performance Awards, including Performance Awards made to the same
Participant, need not be consecutive.
(c) SETTLEMENT OF PERFORMANCE AWARDS. As soon as practicable
following the completion of the Performance Period, the Committee shall certify
in writing the degree of attainment of the Performance Goals and the number of
shares of Stock, if any, which shall be nonforfeitable and/or issued, or the
dollar amount, if any, earned upon settlement of a Performance Award in
accordance with the terms of such award. The Committee, in its sole discretion,
may elect to pay earned Performance Shares or Performance Units in shares of
Stock, cash or any combination thereof. Payment of Performance Shares in cash
or payment of Performance Units in shares of Stock shall be based on the fair
market value of a share of Stock on the date of payment. The Company shall
promptly notify the Participant of the determination of the Committee and
deliver to the Participant the appropriate cash payment and/or shares of Stock,
free of the restrictions imposed by this Section 7, subject to satisfaction of
the Company's tax withholding obligations, if any, as provided in Section 12.
The Committee shall have no discretion to increase the number of shares of Stock
nonforfeitable and/or issuable or the dollar amount payable upon settlement of a
Performance Award in excess of the amount called for by the terms of such award
with respect to the degree of attainment of the Performance Goals certified by
the Committee.
(d) MAXIMUM PERFORMANCE AWARD. Subject to adjustment as provided in
Section 5, no Participant may be granted a Performance Award in the form of
Performance-Based Restricted Stock or Performance Shares which could result in
such Participant receiving
5
<PAGE>
more than 200,000 shares of Stock free of the restrictions imposed by this
Section 7 with respect to any Performance Period or a Performance Award in the
form of Performance Units which could result in such Participant receiving more
than $10,000,000 with respect to any Performance Period. No Participant may be
granted more than one (1) Performance Award for the same Performance Period.
(e) DISCRETION TO REDUCE PERFORMANCE AWARDS. Notwithstanding the
attainment of any Performance Goal, the Committee shall have the discretion to
reduce some or all of a Performance Award that would otherwise be paid.
8. RESTRICTED STOCK. The Committee may from time to time grant shares of
Stock under this Section 8 ("RESTRICTED STOCK"). Restricted Stock awards shall
be evidenced by written agreements, in such form as the Committee shall from
time to time establish, specifying the number of shares of Stock covered thereby
and the terms, conditions and restrictions of the award, and which agreements
may incorporate all or any of the terms of the Plan by reference. The number of
shares of Restricted Stock which a Participant may receive under the Plan shall
be determined by the Committee in its sole discretion. Shares of Restricted
Stock shall be evidenced in such manner as the Committee may deem appropriate,
including by book-entry registration or issuance of one or more stock
certificates. Any certificate issued in respect of shares of Restricted Stock
shall be registered in the name of the Participant and shall bear an appropriate
legend referring to the terms, conditions, and restrictions applicable to such
award. The Committee may require that such certificates be held in the custody
of the Company or other escrow agent until the restrictions thereon lapse. The
Committee shall not require a Participant to make any monetary payment (other
than applicable tax withholding) as a condition of receiving Restricted Stock.
9. VOTING RIGHTS. A Participant issued shares of Stock pursuant to an
award of Performance-Based Restricted Stock or Restricted Stock shall be
entitled to vote such shares. A Participant awarded Performance Shares shall
not be entitled to vote any shares of Stock represented by such Performance
Shares until the date of issuance of shares of Stock upon settlement of such
award.
10. DIVIDENDS AND OTHER DISTRIBUTIONS. Except as provided in this Section
10 or in Section 5, no Participant shall be entitled to dividends or other
distributions (collectively, "DIVIDENDS") with respect to shares of Stock
subject to an award under the Plan for which the record date is prior to the
later of the date such shares are issued to the Participant or the date on which
such shares become nonforfeitable under the terms of the agreement evidencing
such award.
(a) PERFORMANCE-BASED RESTRICTED STOCK AND RESTRICTED STOCK. With
respect to shares of Stock issued pursuant to the award of Performance-Based
Restricted Stock or Restricted Stock, the Committee may, in its sole discretion,
provide either for the current payment of Dividends or the accumulation and
payment of Dividends to the extent that such shares become nonforfeitable.
6
<PAGE>
(b) PERFORMANCE SHARES. With respect to Performance Shares, the
Committee may, in its sole discretion, provide that dividend equivalents shall
not be paid or provide either for the current payment of dividend equivalents or
the accumulation and payment of dividend equivalents to the extent that the
Performance shares become nonforfeitable.
(c) PERFORMANCE UNITS. Dividend equivalents shall not be paid with
respect to Performance Units.
11. CHANGE OF CONTROL.
(a) DEFINITION. A "CHANGE OF CONTROL" shall be deemed to have
occurred in the event any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange by the
stockholders of the Company of all or substantially all of the stock of the
Company where the stockholders of the Company before such sale or exchange do
not retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Company after such sale or exchange;
(ii) a merger or consolidation in which the Company is not the
surviving corporation;
(iii) a merger or consolidation in which the Company is the
surviving corporation where the stockholders of the Company before such merger
or consolidation do not retain, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Company after such merger or
consolidation;
(iv) the sale, exchange, or transfer of all or substantially
all of the assets of the Company (other than a sale, exchange, or transfer to
one (1) or more subsidiary corporations of the Company); or
(v) A liquidation or dissolution of the Company.
(b) EFFECT ON PERFORMANCE AWARDS. Notwithstanding any other
provision of the Plan to the contrary, each Participant granted a Performance
Award for a Performance Period that will not be completed as of the date of a
Change of Control shall be deemed to have earned and shall receive immediately
prior to the Change of Control, free of the restrictions imposed by Section 7,
award consideration as provided in Section 7(c) equal to the product of (i) the
target amount that may be earned under the Performance Award in accordance with
the terms of the agreement evidencing such award and (ii) a fraction, the
numerator of which is the number of full and partial months that have elapsed
since the beginning of such Performance Period to the date on which the Change
of Control occurs, and the denominator of which is the total number of months in
such Performance Period.
(c) EFFECT ON RESTRICTED STOCK. Notwithstanding any other provision
of the Plan to the contrary, all forfeiture conditions and restrictions imposed
under outstanding
7
<PAGE>
agreements evidencing Restricted Stock shall automatically lapse immediately
prior to a Change of Control.
12. TAX WITHHOLDING. The Company shall have the right to deduct from the
payment of any award hereunder any federal, state, local or foreign taxes
required by law to be withheld with respect to such payment. Alternatively, in
its sole discretion, the Company shall have the right to require the
Participant, through payroll withholding or otherwise, to make adequate
provision for any such tax withholding obligations of the Company arising in
connection with such award. The Company shall have no obligation to deliver
cash and/or shares of Stock in payment of an award unless the Company's tax
withholding obligations have been satisfied.
13. PROVISION OF INFORMATION. Each Participant shall be given access to
information concerning the Company equivalent to that information generally made
available to the Company's common stockholders.
14. NONTRANSFERABILITY OF AWARDS. Prior to the payment of, and lapse of
all restrictions with respect to, an award under the Plan, no award or any
rights or interests therein may be assigned or transferred in any manner except
by will or by the laws of descent and distribution.
15. TERMINATION OR AMENDMENT OF PLAN AND AWARDS. The Committee or the
Board may terminate or amend the Plan or any award under the Plan at any time;
provided, however, that no such termination or amendment may adversely affect
any outstanding award without the consent of the Participant, unless such
termination or amendment is necessary to comply with any applicable law or
government regulation. An award shall be considered as outstanding as of the
effective date of the grant of such award as determined by the Committee.
Notwithstanding the foregoing, the approval of the Company's stockholders shall
be sought for any amendment to the Plan or an award for which the Committee
deems stockholder approval necessary in order to comply with Rule 16b-3.
16. CONTINUATION OF INITIAL PLAN AS TO OUTSTANDING AWARDS.
Notwithstanding any other provision of the Plan to the contrary, the terms of
the Initial Plan shall remain in effect and apply to awards granted pursuant to
the Initial Plan.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing Adobe Systems Incorporated Amended 1994 Performance and Restricted
Stock Plan was duly adopted by the Board of Directors of the Company on the 18th
day of February, 1998.
By /s/ Colleen M. Pouliot
------------------------------
Secretary
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MAY 29, 1998, AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE SIX MONTHS ENDED MAY 29, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-27-1998
<PERIOD-START> NOV-29-1997
<PERIOD-END> MAY-29-1998
<CASH> 115,358
<SECURITIES> 277,246
<RECEIVABLES> 156,430
<ALLOWANCES> 4,544
<INVENTORY> 5,702
<CURRENT-ASSETS> 589,164
<PP&E> 222,817
<DEPRECIATION> 122,903
<TOTAL-ASSETS> 898,053
<CURRENT-LIABILITIES> 213,815
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 684,231
<TOTAL-LIABILITY-AND-EQUITY> 898,053
<SALES> 84,307
<TOTAL-REVENUES> 425,123
<CGS> 57,278
<TOTAL-COSTS> 57,278
<OTHER-EXPENSES> 307,842
<LOSS-PROVISION> 1,087
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 87,280
<INCOME-TAX> 32,556
<INCOME-CONTINUING> 54,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,724
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.79
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MAY 30, 1997, AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE SIX MONTHS ENDED MAY 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-28-1997
<PERIOD-START> NOV-30-1996
<PERIOD-END> MAY-30-1997
<CASH> 185,587
<SECURITIES> 461,874
<RECEIVABLES> 135,809
<ALLOWANCES> 4,825
<INVENTORY> 9,155
<CURRENT-ASSETS> 827,677
<PP&E> 174,096
<DEPRECIATION> 91,179
<TOTAL-ASSETS> 1,080,379
<CURRENT-LIABILITIES> 233,246
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 847,126
<TOTAL-LIABILITY-AND-EQUITY> 1,080,379
<SALES> 104,721
<TOTAL-REVENUES> 454,723
<CGS> 66,947
<TOTAL-COSTS> 66,947
<OTHER-EXPENSES> 265,643
<LOSS-PROVISION> 424
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 136,371
<INCOME-TAX> 49,781
<INCOME-CONTINUING> 86,590
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,590
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.17
</TABLE>
