<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 27, 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:
Shares Outstanding
Class March 27, 1998
----- ------------------
Common stock, $0.0001 par value 66,623,523
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<PAGE>
TABLE OF CONTENTS
Page No.
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income
Quarter Ended February 27, 1998 and February 28, 1997 3
Condensed Consolidated Balance Sheets
February 27, 1998 and November 28, 1997 4
Condensed Consolidated Statements of Cash Flows
Quarter Ended February 27, 1998 and February 28, 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 26
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 31
Summary of Trademarks 32
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>
QUARTER ENDED
--------------------------
FEBRUARY 27 FEBRUARY 28
1998 1997
----------- -----------
<S> <C> <C>
Revenue:
Licensing $ 41,851 $ 51,460
Application products 155,962 174,999
----------- -----------
Total revenue 197,813 226,459
Direct costs 29,986 34,289
----------- -----------
Gross margin 167,827 192,170
----------- -----------
Operating expenses:
Research and development 46,427 38,197
Sales and marketing 71,834 72,038
General and administrative 24,076 17,496
Acquired in-process technology 3,818 --
Other non-recurring items -- (2,359)
----------- -----------
Total operating expenses 146,155 125,372
----------- -----------
Operating income 21,672 66,798
Nonoperating income:
Investment gain (loss) 12,462 (624)
Interest and other income 8,501 6,993
----------- -----------
Total nonoperating income 20,963 6,369
----------- -----------
Income before income taxes 42,635 73,167
Provision for income taxes 15,891 26,683
----------- -----------
Net income $ 26,744 $ 46,484
----------- -----------
----------- -----------
Basic net income per share $ .39 $ .65
----------- -----------
----------- -----------
Shares used in computing basic
net income per share 67,762 71,493
----------- -----------
----------- -----------
Diluted net income per share $ .38 $ .63
----------- -----------
----------- -----------
Shares used in computing diluted
net income per share 69,585 73,939
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 27 NOVEMBER 28
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 106,653 $ 267,576
Short-term investments 271,545 235,380
Receivables, net of allowances of $4,309 and
$3,634, respectively 115,019 130,974
Other current assets 48,765 45,016
---------- ----------
Total current assets 541,982 678,946
Property and equipment 84,539 80,978
Other assets 186,924 163,148
Deferred income taxes 16,214 16,999
---------- ----------
$ 829,659 $ 940,071
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade and other payables $ 42,929 $ 57,857
Accrued expenses 94,766 102,741
Income taxes payable 44,098 48,343
Deferred revenue 13,902 15,706
---------- ----------
Total current liabilities 195,695 224,647
---------- ----------
Stockholders' equity:
Preferred stock, $0.0001 par value; 2,000 shares
authorized; none issued -- --
Common stock, $0.0001 par value;
Authorized: 200,000 shares;
Issued: 74,637 and 73,941 shares in 1998 and 1997,
respectively;
Outstanding: 66,441 and 68,765 shares in 1998 and
1997, respectively 7 7
Additional paid-in capital 312,072 291,274
Retained earnings 687,383 663,861
Unrealized gains on investments, net 827 3,590
Cumulative translation adjustment (4,858) (4,620)
Treasury stock, at cost (8,196 and 5,176 shares in
1998 and 1997, respectively) (361,467) (238,688)
---------- ----------
Total stockholders' equity 633,964 715,424
---------- ----------
$ 829,659 $ 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>
QUARTER ENDED
--------------------------
FEBRUARY 27 FEBRUARY 28
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,744 $ 46,484
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense 875 1,171
Depreciation and amortization 15,458 11,210
Deferred income taxes (969) (725)
Provision for losses on accounts receivable 770 381
Tax benefit from employee stock plans 2,617 1,031
Equity in net loss of Adobe Ventures 525 624
Gain on sale and distribution of equity investments (12,987) --
Write-off of acquired in-process technology 3,818 --
Changes in operating assets and liabilities:
Receivables 15,185 (7,039)
Other current assets (1,994) (4,989)
Trade and other payables (14,928) (5,669)
Accrued expenses 2,281 8,237
Income taxes payable (4,245) (15,189)
Deferred revenue (1,805) (40)
----------- -----------
Net cash provided by operating activities 31,345 35,487
----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (392,262) (1,426,947)
Maturities and sales of short-term investments 354,628 1,401,942
Acquisitions of property and equipment (11,926) (6,628)
Additions to other assets (30,716) (16,033)
----------- -----------
Net cash used for investing activities (80,276) (47,666)
----------- -----------
(Continued)
</TABLE>
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>
QUARTER ENDED
--------------------------
FEBRUARY 27 FEBRUARY 28
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock $ 17,306 $ 11,315
Repurchase of common stock (122,779) (16,134)
Payment of dividends (6,281) (3,589)
----------- -----------
Net cash used by financing activities (111,754) (8,408)
----------- -----------
Effect of foreign currency exchange rates on
cash and cash equivalents (238) (471)
----------- -----------
Net decrease in cash and cash equivalents (160,923) (21,058)
Cash and cash equivalents at beginning of period 267,576 110,745
----------- -----------
Cash and cash equivalents at end of period $ 106,653 $ 89,687
----------- -----------
----------- -----------
Supplemental disclosures:
Cash paid during the period for income taxes $ 12,182 $ 37,260
----------- -----------
----------- -----------
Noncash investing and financing activities:
Cash dividends declared but not paid $ 3,333 $ 3,589
----------- -----------
----------- -----------
Dividends in-kind distributed $ 7,197 $ --
----------- -----------
----------- -----------
</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 unaudited condensed consolidated financial statements
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 February 27, 1998, and the condensed
consolidated statements of income and cash flows for the three-month periods
ended February 27, 1998 and February 28, 1997.
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 28, 1997,
November 29, 1996 and December 1, 1995, in the Company's 1997 Annual Report
on Form 10-K.
The results of operations for the interim period ended February 27,
1998, are not necessarily indicative of the results to be expected for the
full year.
7
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," in the quarter ended February 27, 1998. All
prior period share and per share amounts have been restated to comply with
SFAS No. 128. 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>
QUARTER ENDED
--------------------------
FEBRUARY 27 FEBRUARY 28
1998 1997
----------- -----------
<S> <C> <C>
Net income $ 26,744 $ 46,484
----------- -----------
----------- -----------
Shares used to compute basic net income per share
(weighted average shares outstanding during
the period) 67,762 71,493
Dilutive common equivalent shares:
Unvested restricted stock 90 146
Stock options 1,591 2,300
Put warrants 142 --
----------- -----------
Shares used to compute diluted net income per
share 69,585 73,939
----------- -----------
----------- -----------
Basic net income per share $ .39 $ .65
----------- -----------
----------- -----------
Diluted net income per share $ .38 $ .63
----------- -----------
----------- -----------
</TABLE>
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.
8
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 period 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.
NOTE 2. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 27 NOVEMBER 28
1998 1997
---------- ----------
<S> <C> <C>
Equity investments $ 47,901 $ 35,689
Purchased technology and licensing
agreements 4,883 5,043
Restricted funds and security
deposits 115,244 102,962
Miscellaneous other assets 47,384 45,097
---------- ----------
215,412 188,791
Less accumulated amortization 28,488 25,643
---------- ----------
$ 186,924 $ 163,148
---------- ----------
---------- ----------
</TABLE>
NOTE 3. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 27 NOVEMBER 28
1998 1997
---------- ----------
<S> <C> <C>
Accrued compensation and benefits $ 27,582 $ 37,833
Sales and marketing allowances 11,653 13,028
Other 55,531 51,880
---------- ----------
$ 94,766 $ 102,741
---------- ----------
---------- ----------
</TABLE>
9
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 4. STOCKHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM
In September 1997, the Company's Board of Directors authorized, subject
to certain business and market conditions, the purchase of up to 15.0 million
shares of the Company's common stock over a two-year period. The Company
repurchased approximately 3.0 million shares of its common stock during the
first quarter of 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 February 27, 1998, put warrants to sell approximately 4.1 million
shares of the Company's common stock were outstanding that expire on various
dates through November 1998 with an average exercise price of $40.10 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 February 27, 1998, call options to purchase
approximately 1.2 million shares of the Company's common stock were
outstanding that expire on various dates through July 1998 with an average
exercise price of $41.44 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 quarters ended February 27, 1998 and
February 28, 1997, the Company's condensed consolidated statements of income
expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------
FEBRUARY 27 FEBRUARY 28
1998 1997
----------- -----------
<S> <C> <C>
Revenue:
Licensing 21.2% 22.7%
Application products 78.8 77.3
----------- -----------
Total revenue 100.0 100.0
----------- -----------
Direct costs 15.2 15.1
----------- -----------
Gross margin 84.8 84.9
----------- -----------
Operating expenses:
Research and development 23.5 16.9
Sales and marketing 36.3 31.8
General and administrative 12.2 7.7
Acquired in-process technology 1.9 --
Other non-recurring items -- (1.0)
----------- -----------
Total operating expenses 73.9 55.4
----------- -----------
Operating income 10.9 29.5
Nonoperating income, net:
Investment gain (loss) 6.3 (0.3)
Interest and other income 4.3 3.1
----------- -----------
Total nonoperating income 10.6 2.8
----------- -----------
Income before income taxes 21.5 32.3
Provision for income taxes 8.0 11.8
----------- -----------
Net income 13.5% 20.5%
----------- -----------
----------- -----------
</TABLE>
12
<PAGE>
REVENUE
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
Total revenue $ 197.8 $ 226.5 (12.6)%
</TABLE>
Total revenue decreased from the same quarter last year due primarily to
continuing weak demand in Asia, deterioration in Macintosh platform revenues,
and a decline in North American revenues. A decrease in product unit volume
(as opposed to price) was the principal factor in the Company's revenue
decline in application products revenue.
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
Product group revenue -- Licensing $ 41.8 $ 51.5 (18.7)%
Percentage of total revenue 21.2% 22.7%
</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, 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 a
different architecture for printers targeted at the small office/home office
("SOHO") market.
Licensing revenue decreased $9.6 million or 18.7% in the first quarter
of 1998 compared to the same period last year primarily due to three factors:
(1) ongoing weakness in the color copier business due to product transitions
and excess copier inventory, (2) ongoing weakness in the Japanese personal
computer and printer markets, and (3) a decline 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, the uncertain timing of OEM
customer introductions of products incorporating Adobe's latest technologies,
and the anticipated full impact of loss of revenue from HP's monochrome laser
printer products in the second quarter of fiscal 1998. Based on a strategic
review of the Company's printing systems division, the Company intends to
refocus its resources on high 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.
13
<PAGE>
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
Product group revenue --
Application products $ 156.0 $ 175.0 (10.9)%
Percentage of total revenue 78.8% 77.3%
</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 decreased $19.0 million or 10.9% in the
first quarter of 1998 compared to the same period last year due to a number
of factors. First, the absence of recent major product releases or upgrades
during the quarter adversely impacted application products revenue in all
product families with the exception of Adobe FrameMaker, a new version of
which was released in the fourth quarter of 1997. By comparison, the first
quarter of 1997 benefited from revenue momentum related to two major product
releases -- Adobe Photoshop 4.0 which was released just before the quarter
began, and Adobe PageMaker 6.5 which was released during the quarter.
Secondly, application products revenue was adversely affected by
continuing weakness in the Japanese economy and a resulting decline in
end-user demand. Further, during the first quarter of 1998, the Company
worked proactively with its distributors in Japan to match lower sell-through
rates, thereby decreasing channel inventory levels in anticipation of the new
product release cycle. The Company remains cautious about the economic
conditions in Japan as well as the fluctuating economic conditions in other
Asian countries in the short term.
Additionally, although application products revenue for the Windows
platform grew 18% as compared to the first quarter of last year, Macintosh
revenue declined 36%. Total application products revenue (excluding platform
independent and UNIX revenues) for the first quarter of 1998 was split 59% on
Windows and 41% on Macintosh as compared to 44% and 56%, respectively, for
the first quarter of 1997. The Company expects this trend toward the Windows
platform to continue for the foreseeable future.
Lastly, application products revenue was adversely affected by a
quarter-to-quarter revenue decline in North America, not only affected by the
product cycle and Macintosh platform issues, but also by a reduction in
channel inventory of approximately $7.5 million and sales management
challenges from the absence of permanent sales leadership. During the
quarter, the Company completed searches for a new senior sales management
team, recruiting three key new executives who have already joined the
Company.
14
<PAGE>
DIRECT COSTS
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
Direct costs $ 30.0 $ 34.3 (12.5)%
Percentage of total revenue 15.2% 15.1%
Gross margin 84.8% 84.9%
</TABLE>
Direct costs include direct product, packaging, and shipping costs, as
well as royalties and amortization of localization costs and acquired
technologies.
Gross margin (expressed as a percentage of revenue), in general, is
affected by the mix of licensing revenue versus application products revenue,
the product mix within application products, and the mix of full and upgrade
products sold. The decrease in gross margin versus a year ago is due
primarily to inventory write-downs for various products as the Company
approaches a new cycle of product upgrade releases offset by lower royalty
payments.
The Company anticipates that gross margin in the latter part of 1998
will improve slightly due to relative decreases in inventory write-downs
partially offset by increased localization costs associated with the
translation of new product user interfaces into local languages.
OPERATING EXPENSES
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
Research and development $ 46.4 $ 38.2 21.5%
Percentage of total revenue 23.5% 16.9%
</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 absolute dollars and as a
percentage of revenue 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 these efforts. The Company continues to
make significant investments in the development of Adobe PostScript and
application software products, including those targeted for the growing
Internet market.
The Company believes that investments in research and development are
necessary to remain competitive in the marketplace and are directly related
to continued timely development of new and enhanced products. Accordingly,
the Company intends to continue recruiting and hiring experienced software
developers. While the Company expects that research and development
expenditures for the remainder of 1998 will increase in absolute dollars
compared to fiscal 1997 levels, such expenditures are expected to decrease as
a percentage of revenue compared to the first quarter of 1998.
15
<PAGE>
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
Sales and marketing $ 71.8 $ 72.0 (0.3)%
Percentage of total revenue 36.3% 31.8%
</TABLE>
Sales and marketing 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 and marketing expenses also include the costs of programs aimed at
increasing revenue, such as advertising, trade shows, and other market
development programs.
The slight decrease in absolute dollars for sales and marketing expenses
for the first quarter of 1998 compared with the same period last year is due
to decreased sales commissions and bonuses associated with the decline in
revenue partially offset by increased headcount.
Sales and marketing expenses are expected to increase in absolute
dollars, but remain flat or slightly decrease as a percentage of revenue
compared to the first quarter of 1998, as the Company invests in marketing
programs for new products and upgrades scheduled to be released later in
fiscal 1998.
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
General and administrative $ 24.1 $ 17.5 37.6%
Percentage of total revenue 12.2% 7.7%
</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 executive and administrative
personnel of the Company. General and administrative expenses also include
outside legal and accounting fees, provision for bad debts, and expenses
associated with computer equipment and software used in the administration of
the business.
General and administrative expenses increased in absolute dollars and as
a percentage of revenue for the first quarter of 1998 compared with the same
period last year due to increased employee costs primarily associated with
increased headcount and a more comprehensive administrative infrastructure.
Additionally, general and administrative expenses in the first quarter 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
continue to be higher than 1997 levels in absolute dollars as the Company
continues to invest in an expanded and more comprehensive executive and
administrative infrastructure. General and administrative expenses are
expected to decrease as a percentage of revenue as compared to the first
quarter of 1998.
16
<PAGE>
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
Acquired in-process technology $ 3.8 ----- 100%
Percentage of total revenue 1.9% -----
</TABLE>
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.
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
Other non-recurring items ----- $ (2.4) (100)%
Percentage of total revenue ----- (1.0)%
</TABLE>
The non-recurring item which occurred during the first quarter of 1997
represents proceeds on the divestiture of a product line.
NONOPERATING INCOME
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
Investment gain (loss) $ 12.5 $ (0.6) 2,097.1%
Percentage of total revenue 6.3% (0.3)%
</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.
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.
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
Interest and other income $ 8.5 $ 7.0 21.6%
Percentage of total revenue 4.3% 3.1%
</TABLE>
Interest and other income consists principally of interest earned on
cash, cash equivalents, and short term investments as well as foreign
exchange transaction gains and losses.
17
<PAGE>
The increase in interest and other income in the first quarter of 1998
compared to the same period last year is due primarily to foreign exchange
gains in Europe offset by a decrease in interest income as a result of lower
average cash balances.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1998 1997 CHANGE
---------- ---------- ------------
<S> <C> <C> <C>
First quarter: (Dollars in millions)
Provision for income taxes $ 15.9 $ 26.7 (40.4)%
Percentage of total revenue 8.0% 11.8%
Effective tax rate 37.3% 36.5%
</TABLE>
The Company's effective tax rate increased in the first quarter 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 is set to expire 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.
18
<PAGE>
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 and excess
copier inventory, 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 develop these
products. A portion of the Company's future revenue will come from these new
applications. Delays in product or upgrade introductions could have an
adverse effect on the Company's revenue, earnings, or stock price. The
Company cannot determine the ultimate effect that these new products or
upgrades will have on its 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 participants. Additionally, Microsoft Corp. has stated its intention
to increase its presence in the digital imaging market in 1998; 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. If there is a continuing slowdown of customer purchases in the higher
end Macintosh market, or if the Company is unable 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 will
need to adapt its application software distribution channels. The Company
could experience decreases in average selling prices and some transitions 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, 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 somewhat lower licensing revenue to the Company, although the
impact to date has been minimal. The Company
19
<PAGE>
expects a more significant 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, 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 quarter of fiscal 1998, the Company worked
with its major distributors in Japan to reduce channel inventory by
approximately $11 million. The Company expects these adverse economic
conditions to continue in the short term, and they may adversely affect the
Company's revenue and earnings. Although there are also adverse conditions in
other Asian economies, the countries 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 the authoring for
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
20
<PAGE>
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.
RECENT ACCOUNTING PRONOUNCEMENTS
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
period 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.
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.
"YEAR 2000" ISSUES
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The "Year 2000"
problem is pervasive and 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 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 and Japan 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
21
<PAGE>
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>
FINANCIAL CONDITION
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
FEBRUARY 27 NOVEMBER 28
1998 1997 CHANGE
----------- ----------- ------------
<S> <C> <C> <C>
(Dollars in millions)
Cash, cash equivalents and
short-term investments $378.2 $503.0 (24.8)%
</TABLE>
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
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.
The Company's cash, cash equivalents and short-term investments
decreased $124.8 million or 24.8% primarily due to cash used during the
quarter to repurchase Adobe common stock partially offset by cash provided by
operations. 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.
OTHER ASSETS
<TABLE>
<CAPTION>
FEBRUARY 27 NOVEMBER 28
1998 1997 CHANGE
----------- ----------- ------------
<S> <C> <C> <C>
(Dollars in millions)
Other assets $186.9 $163.1 14.6%
</TABLE>
Other assets include restricted investments, equity investments,
licensing agreements, purchased technology, goodwill and capitalized
localization costs. 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 and a corresponding increase to the
investment. Also contributing to the increase in other assets during the
quarter were additional investments made in the Company's venture investment
program and an increase in restricted investments in connection with the
Company's real estate development agreements.
23
<PAGE>
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FEBRUARY 27 NOVEMBER 28
1998 1997 CHANGE
----------- ----------- ------------
<S> <C> <C> <C>
(Dollars in millions)
Stockholders' equity $634.0 $715.4 (11.4)%
</TABLE>
Stockholders' equity decreased $81.5 million during the first quarter of
1998 as a result of the repurchase of approximately 3.0 million shares of
Adobe common stock at an aggregate cost of $122.8 million under stock
repurchase programs previously authorized by the Board of Directors. 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.
The Board of Directors of the Company declared a cash dividend on the
Company's common stock of $.05 per common share on March 23, 1998, for the
first quarter of 1998. The dividend will be for stockholders of record as of
April 3, 1998, and will be paid on April 17, 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.
WORKING CAPITAL
<TABLE>
<CAPTION>
FEBRUARY 27 NOVEMBER 28
1998 1997 CHANGE
----------- ----------- ------------
<S> <C> <C> <C>
(Dollars in millions)
Working capital $346.3 $454.3 (23.8)%
</TABLE>
Net working capital decreased $108.0 million or 23.8% during the first
quarter of 1998 due primarily to a decrease in cash, cash equivalents and
short-term investments of $124.8 million. Cash flows provided from operating
acitivites were $31.3 million for the first quarter of 1998.
Expenditures for property and equipment totaled $11.9 million in the
first quarter of 1998. 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 quarter of 1998 was
$111.8 million primarily resulting from the repurchase of stock and payment
of dividends, partially offset by the issuance of common stock under
employee stock plans.
24
<PAGE>
The Company's principal commitments as of February 27, 1998 consisted of
obligations under operating leases, venture investing activities, real estate
development agreements, and various service and lease guarantee agreements
with a related party. These arrangements are discussed in more detail in the
Company's 1997 Annual Report filed on Form 10-K.
25
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company's market risk disclosures set forth in its 1997 Annual
Report filed on Form 10-K have not changed significantly.
26
<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. In March 1998, Adobe filed a demurrer to the
amended complaint.
Management believes that the ultimate resolution of this matter and
other matters discussed in the Company's 1997 Annual Report on Form 10-K will
not have a material impact on the Company's financial position or results of
operations.
27
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY REFERENCE FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- ------- --------------------------- ---- ---- ------ --------
<S> <C> <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*
10.17.1 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)
(Continued)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY REFERENCE FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- ------- --------------------------- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C>
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-8 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)
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*
(Continued)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY REFERENCE FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- ------- --------------------------- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C>
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 in the quarter ended February 27, 1998.
30
<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 Oficer,
and Assistant Secretary
(Principal Financial Oficer)
By /s/ David P. Eichler
----------------------------
David P. Eichler
Vice President, Finance
(Principal Accounting Officer)
Date: April 9, 1998
31
<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
PageMaker
PhotoDeluxe
Photoshop
PostScript
PrintGear
All other brand or product names are trademarks or registered trademarks
of their respective holders.
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT FEBRUARY 27, 1998, AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE QUARTER ENDED FEBRUARY 27, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-27-1998
<PERIOD-START> NOV-29-1997
<PERIOD-END> FEB-27-1998
<CASH> 106,653
<SECURITIES> 271,545
<RECEIVABLES> 119,328
<ALLOWANCES> 4,309
<INVENTORY> 8,593
<CURRENT-ASSETS> 541,982
<PP&E> 198,803
<DEPRECIATION> 114,264
<TOTAL-ASSETS> 829,659
<CURRENT-LIABILITIES> 195,695
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 633,957
<TOTAL-LIABILITY-AND-EQUITY> 829,659
<SALES> 41,851
<TOTAL-REVENUES> 197,813
<CGS> 29,986
<TOTAL-COSTS> 29,986
<OTHER-EXPENSES> 145,385
<LOSS-PROVISION> 770
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 42,635
<INCOME-TAX> 15,891
<INCOME-CONTINUING> 26,744
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,744
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.38
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-28-1997
<PERIOD-START> NOV-30-1996
<PERIOD-END> FEB-28-1997
<CASH> 89,687
<SECURITIES> 478,376
<RECEIVABLES> 127,623
<ALLOWANCES> 4,886
<INVENTORY> 8,327
<CURRENT-ASSETS> 738,196
<PP&E> 163,874
<DEPRECIATION> 83,576
<TOTAL-ASSETS> 1,005,111
<CURRENT-LIABILITIES> 204,016
<BONDS> 0
0
0
<COMMON> 155,222
<OTHER-SE> 583,762
<TOTAL-LIABILITY-AND-EQUITY> 1,005,111
<SALES> 51,460
<TOTAL-REVENUES> 226,459
<CGS> 34,289
<TOTAL-COSTS> 34,289
<OTHER-EXPENSES> 124,948
<LOSS-PROVISION> 424
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 73,167
<INCOME-TAX> 26,683
<INCOME-CONTINUING> 46,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,484
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.63
</TABLE>
