Adobe Inc. is an American software company registered in the state of Delaware. It was founded in 1982 by John Warnock and Charles Geschke, the inventors of the PostScript page description language.
- - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ----------- ------------ COMMISSION FILE NUMBER: 33-6885 ADOBE SYSTEMS INCORPORATED (Exact name of registrant as specified in its charter) CALIFORNIA 77-0019522 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1585 CHARLESTON ROAD, MOUNTAIN VIEW, CALIFORNIA 94043-1225 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 961-4400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Shares Outstanding Class May 31, 1996 ----- ------------- Common stock, no par value 72,542,581 - - -------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------
TABLE OF CONTENTS Page No. PART I -- FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 31 Item 4. Submission of Matters to a Vote of Security Holders 32 Item 6. Exhibits and Reports on Form 8-K 33 Signature 36 Summary of Trademarks 37 EXHIBITS Exhibit 3.2.9 Restated Bylaws Exhibit 4.1 Shareholders Rights Plan as Amended Exhibit 10.36 Outside Directors Stock Option Plan Exhibit 10.37 Confidential Resignation Agreement Exhibit 11 Computation of Earnings per Common Share Exhibit 27 Financial Data Schedules 2
PART I -- FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated financial statements included under this item are as follows: SEQUENTIALLY NUMBERED FINANCIAL STATEMENT DESCRIPTION PAGE - - ------------------------------------------------------------- ------------ - - - Condensed Consolidated Statements of Income Quarters Ended May 31, 1996 and June 2, 1995 and Six Months Ended May 31, 1996 and June 2, 1995 4 - - - Condensed Consolidated Balance Sheets May 31, 1996 and December 1, 1995 5 - - - Condensed Consolidated Statements of Cash Flows Six Months Ended May 31, 1996 and June 2, 1995 6 - - - Notes to Condensed Consolidated Financial Statements 8 3
ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> QUARTER ENDED SIX MONTHS ENDED -------------------------- ----------------------- MAY 31 JUNE 2 MAY 31 JUNE 2 1996 1995 1996 1995 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Revenue: Licensing $ 49,287 $ 45,032 $ 96,198 $ 91,345 Application products 155,050 144,466 301,781 286,998 ----------- ----------- ----------- ----------- Total revenue 204,337 189,498 397,979 378,343 Direct costs 36,078 32,310 71,286 66,164 ----------- ----------- ----------- ----------- Gross margin 168,259 157,188 326,693 312,179 ----------- ----------- ----------- ----------- Operating expenses: Software development costs: Research and development 37,664 32,755 74,871 64,245 Amortization of capitalized software development costs 626 2,938 1,252 5,811 Sales, marketing and customer support 65,738 59,311 128,342 114,663 General and administrative 16,429 13,986 32,080 27,717 Write-off of acquired in- process research and development 14,699 -- 14,699 -- ----------- ----------- ----------- ----------- Total operating expenses 135,156 108,990 251,244 212,436 ----------- ----------- ----------- ----------- Operating income 33,103 48,198 75,449 99,743 Nonoperating income: Interest, investment and other income 6,684 7,715 18,199 13,416 ----------- ----------- ----------- ----------- Income before income taxes 39,787 55,913 93,648 113,159 Provision for income taxes 17,778 20,668 37,976 41,770 ----------- ----------- ----------- ----------- Net income $ 22,009 $ 35,245 $ 55,672 $ 71,389 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income per share $ .29 $ .47 $ .73 $ .96 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Shares used in computing net income per share 75,638 75,321 76,016 74,105 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4
ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> MAY 31 DECEMBER 1 1996 1995 ------------ ------------ ASSETS <S> <C> <C> Current assets: Cash and cash equivalents $ 77,716 $ 58,493 Short-term investments 445,602 457,547 Receivables 117,652 133,208 Inventories 8,538 7,277 Other current assets 10,657 11,924 Deferred income taxes 24,666 24,338 ------------ ------------ Total current assets 684,831 692,787 Property and equipment 59,131 51,708 Other assets 277,291 135,735 Deferred income taxes -- 4,502 ------------ ------------ $ 1,021,253 $ 884,732 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade and other payables $ 42,877 $ 25,639 Accrued expenses 98,094 94,848 Accrued restructuring costs 11,002 28,151 Income taxes payable 31,645 19,420 Deferred revenue 19,668 18,257 ------------ ------------ Total current liabilities 203,286 186,315 ------------ ------------ Deferred income taxes 34,334 -- Put warrants 29,483 -- Shareholders' equity: Preferred stock, no par value; 2,000,000 shares authorized; none issued -- -- Common stock, no par value; 200,000,000 shares authorized; 72,542,581 and 72,834,444 shares issued and outstanding as of May 31, 1996, and December 1, 1995, respectively 241,037 293,258 Unrealized gains on investments 79,381 18,831 Retained earnings 439,146 390,793 Cumulative foreign currency translation adjustments (5,414) (4,465) ------------ ------------ Total shareholders' equity 754,150 698,417 ------------ ------------ $ 1,021,253 $ 884,732 ------------ ------------ ------------ ------------ </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5
ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) <TABLE> <CAPTION> SIX MONTHS ENDED ------------------------------ MAY 31 JUNE 2 1996 1995 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net income $ 55,672 $ 71,389 Adjustments to reconcile net income to net cash provided by operating activities: Stock compensation expense 1,893 1,481 Depreciation and amortization 12,865 25,960 Deferred income taxes (7,722) (920) Provision for losses on accounts receivable (687) 954 Tax benefit from employee stock plans 3,609 16,775 Write-off of acquired in-process research and development 14,699 -- Changes in operating assets and liabilities: Receivables 17,117 3,599 Inventories (1,335) 2,708 Other current assets 2,577 (3,214) Trade and other payables 5,775 (7,884) Accrued expenses 3,588 1,675 Accrued restructuring costs (17,191) (17,381) Income taxes payable 12,492 (9,625) Deferred revenue 326 1,749 ------------ ------------ Net cash provided by operating activities 103,678 87,266 ------------ ------------ Cash flows from investing activities: Purchases of short-term investments (648,925) (1,969,541) Maturities and sales of short-term investments 656,176 1,863,190 Acquisitions of property and equipment (16,867) (18,027) Capitalization of software development costs -- (819) Additions to other assets (33,494) (54,380) Acquisition, net of cash acquired (4,527) -- ------------ ------------ Net cash used for investing activities (47,637) (179,577) ------------ ------------ (Continued) </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (CONTINUED) <TABLE> <CAPTION> SIX MONTHS ENDED ------------------------------ MAY 31 JUNE 2 1996 1995 ------------ ------------ <S> <C> <C> Cash flows from financing activities: Proceeds from issuance of common stock $ 13,092 $ 47,959 Repurchase of common stock (41,971) (13,631) Payment of dividends (7,319) (6,333) Payment of Subchapter S distributions of Mastersoft -- (1,499) ------------ ------------ Net cash provided (used) by financing activities (36,198) 26,496 ------------ ------------ Effect of foreign currency exchange rates on cash and cash equivalents (620) 1,972 ------------ ------------ Net increase/(decrease) in cash and cash equivalents 19,223 (63,843) Adjustment for change in Frame Technology Corporation's fiscal year-end -- (3,591) Cash and cash equivalents at beginning of period 58,493 204,120 ------------ ------------ Cash and cash equivalents at end of period $ 77,716 $ 136,686 ------------ ------------ ------------ ------------ Supplemental disclosures: Cash paid during the period for income taxes $ 21,278 $ 32,033 ------------ ------------ ------------ ------------ Noncash investing and financing activities: Dividends declared but not paid $ 3,632 $ 3,185 ------------ ------------ ------------ ------------ Reclassification of put warrants $ 29,483 $ 3,447 ------------ ------------ ------------ ------------ Issuance of notes for acquisition $ 9,473 $ -- ------------ ------------ ------------ ------------ </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 7
ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited condensed consolidated balance sheets and statements of income, and cash flows reflect all normal recurring adjustments which are, in the opinion of management, necessary to present a fair statement of the condensed consolidated financial position at May 31, 1996, and the condensed consolidated statements of income and cash flows for the interim periods ended May 31, 1996 and June 2, 1995. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the results of operations, the financial position, and cash flows, in conformity with generally accepted accounting principles. Adobe Systems Incorporated ("Adobe" or the "Company") filed audited consolidated financial statements which included all information and footnotes necessary for such a presentation of the results of operations, financial position and cash flows for the years ended December 1, 1995, November 25, 1994 and November 26, 1993, in the Company's 1995 Form 10-K. The results of operations for the interim periods ended May 31, 1996, are not necessarily indicative of the results to be expected for the full year. NET INCOME PER SHARE Net income per share is based upon weighted average common and dilutive common equivalent shares outstanding using the treasury stock method. Dilutive common equivalent shares include stock options and restricted stock. Fully diluted earnings per share for the quarters and six month periods ended May 31, 1996 and June 2, 1995 were not materially different from primary earnings per share. 8
ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. ACQUISITIONS POOLINGS OF INTERESTS On October 28, 1995, the Company issued approximately 8.5 million shares of its common stock in exchange for all of the common stock of Frame Technology Corporation ("Frame"). Prior to its acquisition by the Company, on July 28, 1995, Frame acquired all of the common stock of Mastersoft, Inc. ("Mastersoft"), in exchange for approximately 0.6 million equivalent shares of Adobe common stock. These business combinations have been accounted for as poolings of interests, and, accordingly, the consolidated financial statements for periods prior to the combinations have been restated to include the results of operations, financial position, and cash flows of Frame and Mastersoft. Prior to the combinations, Frame's fiscal year ended on December 31. In recording the business combination, Frame's financial statements for the 12 months ended December 1, 1995 were combined with the Company's consolidated financial statements for the same period. Frame's financial statements for the year ended December 31, 1994 were combined with the Company's consolidated financial statements for the year ended November 25, 1994. Revenue and net income of Frame for the month ended December 31, 1994 were $8.6 million and $2.3 million, respectively. Net income, Subchapter S distributions of Mastersoft, the issuance of common stock, and the net decrease in cash and cash equivalents were adjusted to eliminate the effect of including Frame's results of operations, financial position, and cash flows for the month ended December 31, 1994 in the years ended December 1, 1995 and November 25, 1994. PURCHASE In May 1996, the Company acquired Ares Software Corporation ("Ares") for approximately $15.5 million and accounted for the transaction by the purchase method. Of this amount, the Company paid approximately $4.5 million in cash, assumed $1.5 million of liabilities, and issued notes payable for $9.5 million. Approximately $14.7 million was allocated to in-process research and development, and was expensed at the time of the acquisition. The remainder of the purchase price was allocated to current assets and goodwill. The operating results of Ares have been included in the accompanying consolidated financial statements from the date of acquisition. The operating results are not considered material to the consolidated financial statements and accordingly, pro forma information has not been presented. 9
ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. RECEIVABLES Receivables consisted of the following: <TABLE> <CAPTION> MAY 31 DECEMBER 1 1996 1995 ------------ ------------ (In thousands) <S> <C> <C> Trade receivables $ 68,902 $ 91,296 Royalty receivables 36,679 34,017 Interest and other receivables 15,460 11,593 ------------ ------------ 121,041 136,906 Less allowance for doubtful accounts 3,389 3,698 ------------ ------------ $ 117,652 $ 133,208 ------------ ------------ ------------ ------------ </TABLE> NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following: <TABLE> <CAPTION> MAY 31 DECEMBER 1 1996 1995 ------------ ------------ (In thousands) <S> <C> <C> Land $ 782 $ 782 Building 4,615 4,615 Equipment 100,644 122,794 Furniture and Fixtures 13,189 18,962 Leasehold improvements 9,437 8,790 ------------ ------------ 128,667 155,943 Less accumulated depreciation and amortization 69,536 104,235 ------------ ------------ $ 59,131 $ 51,708 ------------ ------------ ------------ ------------ </TABLE> 10
ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5. OTHER ASSETS Other assets consisted of the following: <TABLE> <CAPTION> MAY 31 DECEMBER 1 1996 1995 ------------ ------------ (In thousands) <S> <C> <C> Licensing agreements $ 10,316 $ 16,319 Goodwill 13,921 13,753 Purchased technology 36,526 35,626 Software development costs 9,789 36,988 Equity investments 170,196 53,091 Restricted funds 63,142 35,634 Miscellaneous other assets 19,928 11,363 ------------ ------------ 323,818 202,774 Less accumulated amortization 46,527 67,039 ------------ ------------ $ 277,291 $ 135,735 ------------ ------------ ------------ ------------ </TABLE> Included above in gross other assets at May 31, 1996, are unrealized gains and losses on equity investments. The equity investment in Netscape Corporation was marked-to-market for an unrealized gain of approximately $117.0 million in the second quarter of 1996. NOTE 6. ACCRUED EXPENSES Accrued expenses consisted of the following: <TABLE> <CAPTION> MAY 31 DECEMBER 1 1996 1995 ------------ ------------ (In thousands) <S> <C> <C> Royalties $ 6,462 $ 7,194 Accrued compensation and benefits 25,714 26,730 Sales and marketing allowances 21,672 24,586 Other 44,246 36,338 ------------ ------------ $ 98,094 $ 94,848 ------------ ------------ ------------ ------------ </TABLE> 11
ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. ACCRUED RESTRUCTURING COSTS On October 28, 1995, the Company acquired Frame, described in "Note 2 -- Acquisitions," and initiated a plan to combine the operations of the two companies. On this date, the Company recorded a $32.5 million charge to operating expenses related to merger transaction and restructuring costs. On August 31, 1994, the Company merged with Aldus Corporation ("Aldus") and initiated a plan to combine the operations of the two companies. On this date, the Company recorded a $72.2 million charge to operating expenses related to merger transaction and restructuring costs. Merger transaction costs consist principally of transaction fees for investment bankers, attorneys, accountants, financial printing, and other related charges. Restructuring costs include the elimination of redundant equipment, the write-off of certain intangible assets, severance and outplacement of terminated employees, and cancellation of certain contractual agreements. Merger transaction and restructuring costs (in thousands) are summarized in the table below: <TABLE> <CAPTION> ACCRUED AS OF SIX MONTHS ENDED MAY 31, 1996 ACCRUED AS OF ----------------------------- DECEMBER 1 CASH MAY 31 1995 WRITE-OFFS PAYMENTS 1996 ------------- -------------- ------------ ------------- <S> <C> <C> <C> <C> FRAME: Merger transaction costs $ 5,058 $ -- $ 4,535 $ 523 Restructuring costs: Severance and outplacement 9,612 -- 9,253 359 Cancellation of facility leases and other contracts 5,402 -- 563 4,839 ------------- -------------- ------------ ------------- $ 20,072 $ -- $ 14,351 $ 5,721 ------------- -------------- ------------ ------------- ------------- -------------- ------------ ------------- ALDUS: Restructuring costs: Cancellation of facility leases and other contracts 6,983 -- 2,692 4,291 ------------- -------------- ------------ ------------- $ 6,983 $ -- $ 2,692 $ 4,291 ------------- -------------- ------------ ------------- ------------- -------------- ------------ ------------- </TABLE> 12
ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. ACCRUED RESTRUCTURING COSTS (CONTINUED) In addition, Frame undertook certain restructuring measures in 1993 due to lower than anticipated revenues. As of May 31, 1996 and December 1, 1995, $1.0 million and $1.1 million, respectively, remained accrued and represented anticipated future cash outflows related to lease payments on vacated facilities. The nature, timing, and extent of restructuring costs follow: SEVERANCE AND OUTPLACEMENT As a result of the merger, certain technical support, customer service, distribution, and administrative functions were combined and reduced. Restructuring included severance and outplacement charges related to approximately 200 terminated employees for Frame. Affected employees had received notification of their termination by November 8, 1995, and final assignments have been substantially completed as of May 31, 1996 . CANCELLATION OF FACILITY LEASES AND OTHER CONTRACTS The Company has consolidated duplicate offices in Europe, Japan, Canada, and the United States. Lease and third-party contract termination payments, resulting from the planned closure of these facilities, are expected to continue through the lease term or negotiated early termination date, if applicable. NOTE 8. COMMITMENTS AND CONTINGENCIES REAL ESTATE DEVELOPMENT AGREEMENT The Company has entered into a real estate development agreement for the construction of an office facility and in 1996 will enter into an operating lease agreement for this facility. The Company will have the option to purchase the facility at the end of the lease term. In the event the Company chooses not to exercise this option, the Company is obligated to arrange for the sale of the facility to an unrelated party and is required to pay the lessor any difference between the net sales proceeds and the lessor's net investment in the facility, in an amount not to exceed that which would preclude classification of the lease as an operating lease, approximately $52.0 million. The Company also is required, periodically during the construction period, to deposit funds with the lessor to secure the performance of its obligations under the lease. During the second quarter of 1996, the Company increased its deposits by approximately $13.7 million, and as of May 31, 1996, the Company's deposits under this agreement totaled approximately $63.1 million in United States government treasury notes and money market mutual funds. These deposits are included in "Other assets" in the Condensed Consolidated Balance Sheets. Also, the Company exercised its option under the 13
ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) development agreement to begin a second phase of development. The Company expects to enter into a financial arrangement in the third quarter of 1996 for approximately $75.0 million in order to complete the second phase development. LEGAL ACTIONS The Company is engaged in certain legal actions arising in the ordinary course of business. The Company believes it has adequate legal defenses and believes that the ultimate outcome of these actions will not have a material effect on the Company's financial position and results of operations. NOTE 9. CAPITAL STOCK PUT WARRANTS In a series of private placements during the second quarter of 1996, the Company sold put warrants entitling the holder of each warrant to sell one share of common stock to the Company at a specified price. The Company's $29.5 million potential buyback obligation, as of May 31, 1996, was removed from shareholders' equity and recorded as put warrants. STOCK OPTION REPRICING On March 22, 1996, the Company offered its employees a stock option repricing program which allowed the employees to exchange on a two for three share basis any options priced above the March 29, 1996 closing price of Adobe stock, which was $32.25. As a result, approximately 1,252,000 options were surrendered by eligible employees for approximately 834,000 repriced options. The repriced options may not be exercised for six months commencing on May 1, 1996. 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THE COMPANY'S SEC REPORTS (INCLUDING WITHOUT LIMITATION, ITS REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 1, 1995). RESULTS OF OPERATIONS OVERVIEW Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets, and supports computer software products and technologies that enable users to create, display, manage, communicate, and print electronic documents. The Company licenses its technology to major computer, printing, and publishing suppliers, and markets a line of application software products and type products for authoring and editing visually rich documents. The Company distributes its products through a network of original equipment manufacturer ("OEM") customers, distributors and dealers, and value-added resellers ("VARs") and system integrators. The Company has operations in the Americas, Europe, and the Pacific Rim. In October 1995, the Company acquired Frame Technology Corporation ("Frame"). Frame, established in 1986, developed, marketed, and supported writing and publishing software for the creation and distribution of critical business and technical documents. To effect the combination, approximately 8.5 million shares of Adobe's common stock were issued in exchange for all of the outstanding common stock of Frame. The merger was accounted for by the pooling of interests method, and accordingly, all annual and interim financial information prior to the merger has been restated to combine the results of the Company and Frame. In January 1996, the Company divested its prepress applications product business to a newly established company, Luminous Corporation ("Luminous"). Under the terms of the agreement, Luminous has acquired or licensed and will continue to develop, market, and distribute Adobe's prepress application products. Adobe will retain a minority equity interest in Luminous and will maintain ownership of certain core technologies for Adobe prepress products. Luminous will pay royalties to Adobe based on a percentage of revenue from certain products for the next two years. Revenue from prepress application products was approximately $10.4 million in fiscal year 1995. Effective March 2, 1996, the Company sold its investment in Datalogics, a business unit previously owned by Frame, to a newly established company. This business primarily involved consulting and development of high-end customized publishing software. Adobe will retain a minority equity interest in the new company. Revenue from this business unit was approximately $8.9 million in fiscal year 1995. 15
The following table sets forth for the quarter and six months ended May 31, 1996, and June 2, 1995, the Company's condensed consolidated statements of income expressed as a percentage of total revenue: <TABLE> <CAPTION> QUARTER ENDED SIX MONTHS ENDED ------------------- ------------------- MAY 31 JUNE 2 MAY 31 JUNE 2 1996 1995 1996 1995 ------- ------- ------- ------- <S> <C> <C> <C> <C> Revenue: Licensing 24.1% 23.8% 24.2% 24.1% Application products 75.9 76.2 75.8 75.9 ------ ------ ------ ------ Total revenue 100.0 100.0 100.0 100.0 Direct costs 17.7 17.1 17.9 17.5 ------ ------ ------ ------ Gross margin 82.3 82.9 82.1 82.5 ------ ------ ------ ------ Operating expenses: Software development costs: Research and development 18.4 17.3 18.8 17.0 Amortization of capitalized software development costs 0.3 1.6 0.3 1.5 Sales, marketing and customer support 32.2 31.2 32.2 30.3 General and administrative 8.0 7.4 8.1 7.3 Write-off of acquired in- process research and development 7.2 -- 3.7 -- ------ ------ ------ ------ Total operating expenses 66.1 57.5 63.1 56.1 ------ ------ ------ ------ Operating income 16.2 25.4 19.0 26.4 Nonoperating income: Interest, investment and other income 3.3 4.1 4.5 3.5 ------ ------ ------ ------ Income before income taxes 19.5 29.5 23.5 29.9 Provision for income taxes 8.7 10.9 9.5 11.0 ------ ------ ------ ------ Net income 10.8% 18.6% 14.0% 18.9% ------ ------ ------ ------ ------ ------ ------ ------ </TABLE> 16
REVENUE 1996 1995 CHANGE ---------- --------- ----------- Second quarter period: (Dollars in millions) Total revenue $204.3 $189.5 8% Six month period: Total revenue $398.0 $378.3 5% Revenue growth for the quarter and six month periods was due to increases in both licensing activity and shipments of application products. Product unit volume (as opposed to price) growth was the principal factor in the Company's revenue growth in application product revenue. 1996 1995 CHANGE ---------- --------- ----------- Second quarter period: (Dollars in millions) Product group revenue -- Licensing $49.3 $45.0 9% Percentage of total revenue 24.1% 23.8% Six month period: Product group revenue -- Licensing $96.2 $91.3 5% Percentage of total revenue 24.2% 24.1% Licensing revenue is derived from shipments by OEMs of products containing the Adobe PostScript interpreter and the Display PostScript system. Such products include printers in both roman and Japanese languages, imagesetters and workstations. Licensing revenue is also derived from shipments of products containing the Configurable PostScript Interpreter ("CPSI") by OEM customers. CPSI is a fully functional PostScript interpreter that resides on the host computer system rather than in a dedicated controller integrated into an output device. The configuration flexibility of CPSI allows OEMs and software developers to create and market a variety of PostScript products independently of controller hardware development. The number of units shipped by OEMs remained flat on a quarterly basis. Royalty per unit is generally calculated as a percentage of the end user list price of a printer, although there are some components of licensing revenue based on a flat dollar amount per unit which typically do not change with list price changes. Some OEMs continued to reduce list prices on their lower-end printers, which resulted in lower royalties per unit on such printers. However, in the second quarter and first six months of 1996, this trend was offset by increased demand for CPSI and color capability, as well as increased products shipping into the Japanese market, all of which have higher royalties per unit. In addition, the Company has seen year-to-year increases in the number of OEM customers from which it is receiving licensing revenue. 17
1996 1995 CHANGE -------- ------ ------- Second quarter period: (Dollars in millions) Product group revenue -- Application products $155.1 $144.5 7% Percentage of total revenue 75.9% 76.2% Six month period: Product group revenue -- Application products $301.8 $287.0 5% Percentage of total revenue 75.8% 75.9% Application products revenue is derived from shipments of application software programs marketed through retail and distribution channels; however, Adobe PageMill, Adobe SiteMill, and Adobe Acrobat products are being more widely distributed through VARs and systems integrators. During the second quarter and first six months of 1996, application revenue was higher than that of the same periods in 1995. The increase from quarter to quarter resulted from increased demand for Adobe Photoshop, Adobe Illustrator, Adobe PageMaker, and Acrobat products, partially offset by a decrease in Adobe FrameMaker revenue. The increase for the first six months of 1996 compared to the same period last year resulted from increased demand for Adobe Illustrator, Adobe PageMaker, and Acrobat products, partially offset by decreases in Adobe FrameMaker and Adobe Photoshop and revenue. In addition, PageMill and SiteMill which were both released in late 1995 added revenue in both the second quarter and first six months of 1996. The Company expects 1996 to be a transition year for application products, as customers determine which computer platform to use and as the Internet market develops. In general, the Company's application products on the Windows platform have experienced greater growth than those on the Macintosh platform during the first six months of 1996. 18
DIRECT COSTS 1996 1995 CHANGE -------- ------ ------- Second quarter period: (Dollars in millions) Direct costs $36.1 $32.3 12% Percentage of total revenue 17.7% 17.1% Six month period: Direct costs $71.3 $66.2 8% Percentage of total revenue 17.9% 17.5% Direct costs include royalties; amortization of acquired technologies; and direct product, packaging and shipping costs. Gross margins, in general, are affected by the mix of licensing revenue versus application products revenue, as well as the product mix within application products. In addition, direct costs increased in the second quarter and first six months of 1996 compared to the same periods last year due to a change in geographic product mix towards higher sales in Japan which have a higher direct cost. 19
OPERATING EXPENSES 1996 1995 CHANGE -------- ------ ------- Second quarter period: (Dollars in millions) Software development costs -- Research and development $37.7 $32.8 15% Percentage of total revenue 18.4% 17.3% Six month period: Software development costs -- Research and development $74.9 $64.2 17% Percentage of total revenue 18.8% 17.0% Research and development expenses consist principally of salaries and benefits for software developers, contracted development efforts, related facilities costs, and expenses associated with computer equipment used in software development. Research and development expense has increased as the Company invested in new technologies, new product development, and the infrastructure to support such activities. The increase reflects the expansion of the Company's engineering staff and related costs required to support its continued emphasis on developing new products and enhancing existing products. Many of these engineers are working with OEM customers to design and implement PostScript Level 2 devices. The Company continued working with many of its OEM customers in a co-development program. This allows customers to be more self-sufficient in new device development by taking on more of the implementation tasks themselves rather than relying so heavily on the Company's engineers. While this mitigates certain costs, the Company continues to make significant investments in development of its PostScript and application software products, including those targeted for the emerging internet market. The Company believes that continued investments in research and development are necessary to remain competitive in the marketplace, and are directly related to continued, timely development of new and enhanced products. Accordingly, the Company intends to continue recruiting and hiring experienced software developers. While the Company expects that research and development expenditures in 1996 will continue to increase in absolute dollars, such expenditures for the remainder of 1996 will approximate current spending levels as a percentage of revenue. 20
1996 1995 CHANGE ------- ------ ------- Second quarter period: (Dollars in millions) Software development costs -- Amortization of capitalized software development costs $0.6 $2.9 (79)% Percentage of total revenue 0.3% 1.6% Six month period: Software development costs -- Amortization of capitalized software development costs $1.3 $5.8 (78)% Percentage of total revenue 0.3% 1.5% In the implementation of Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," software development expenditures on Adobe products, after achieving technological feasibility, were deemed to be immaterial. Certain software development expenditures on Frame and Aldus products have been capitalized and are being amortized over the lives of the respective products. In the second quarter and first six months of 1996, software development expenditures on all products, after reaching technological feasibility, were immaterial and the Company expects this trend to continue in the future. Amortization of capitalized software development costs decreased in the second quarter and first six months of 1996 as a result of achieving full amortization of all Aldus products by the end of 1995. Amortization of software development costs are expected to remain relatively constant during the remainder of 1996 as the software products acquired with Frame become fully amortized. 21
1996 1995 CHANGE ------- ------ ------- Second quarter period: (Dollars in millions) Sales, marketing and customer support $65.7 $59.3 11% Percentage of total revenue 32.2% 31.3% Six month period: Sales, marketing and customer support $128.3 $114.7 12% Percentage of total revenue 32.2% 30.3% Sales, marketing and customer support expenses generally include salaries and benefits, sales commissions, travel expenses and related facilities costs for the Company's sales, marketing, customer support and distribution personnel. Sales, marketing and customer support expenses also include the costs of programs aimed at increasing revenues, such as advertising, trade shows and other market development programs. Sales, marketing and customer support expenses increased in the second quarter and first six months of 1996 compared with the same periods of 1995. The increase resulted primarily from Frame integration costs in the first quarter of 1996 and a higher headcount entering fiscal 1996, focal compensation increases, and higher rent expense. In addition, more trade show and product launch activity, particularly in Japan and Europe, increased expenditures during the second quarter of 1996. Costs related to continuing efforts to expand markets and increase penetration into targeted software markets, as well as responding to increased competition in the software industry, will be partially offset by decreased costs expected to result from the restructuring of the combined company after the acquisition of Frame. As a result, for all of 1996, sales, marketing, and customer support expenditures are expected to increase in absolute dollars and increase slightly from 1995 spending levels as a percentage of revenue. 22
1996 1995 CHANGE ------- ------ ------- Second quarter period: (Dollars in millions) General and administrative $16.4 $14.0 17% Percentage of total revenue 8.0% 7.4% Six month period: General and administrative $32.1 $27.7 16% Percentage of total revenue 8.1% 7.3% General and administrative expenses consist principally of salaries and benefits, travel expenses, and related facility costs for the finance, human resources, legal, information services and administrative personnel of the Company. General and administrative expenses also include outside legal and accounting fees, bad debts and expenses associated with computer equipment and software used in the administration of the business. In the second quarter and first six months of 1996, general and administrative expenses increased compared with the same periods of 1995. The increase resulted primarily from Frame integration costs in the first quarter of 1996 and a higher headcount entering fiscal 1996 as well as higher systems and legal costs. While the Company expects that general and administrative expenditures in 1996 will continue to increase in absolute dollars, such expenditures are expected to remain approximately the same as 1995 as a percentage of revenue. 1996 1995 CHANGE ------- ------ ------- Second quarter period: (Dollars in millions) Write-off of acquired in- process research and development $14.7 $-- 100% Percentage of total revenue 7.2% -- Six month period: Write-off of acquired in- process research and development $14.7 $-- 100% Percentage of total revenue 3.7% -- In May 1996, the Company acquired Ares Software Corporation ("Ares") for approximately $15.5 million and accounted for the transaction by the purchase method. Of this amount, the Company paid approximately $4.5 million in cash, assumed $1.5 million of liabilities, and issued notes payable for $9.5 million. Approximately $14.7 million was allocated to in-process research and development, and was expensed at the time of the acquisition. The remainder of the purchase price was allocated to current assets and goodwill. 23
NONOPERATING INCOME 1996 1995 CHANGE ------- ------ ------- Second quarter period: (Dollars in millions) Interest, investment and other income $6.7 $7.7 (13)% Percentage of total revenue 3.3% 4.1% Six month period: Interest, investment and other income $18.2 $13.4 36% Percentage of total revenue 4.5% 3.5% In the second quarter of 1996, interest, investment and other income decreased compared with the same quarter of 1995. The decrease is primarily the result of a foreign exchange gain realized in the second quarter of 1995. In addition, the Company made a significant shift into tax exempt municipal bonds during the second quarter of 1996 which have lower interest rates. In the first six months of 1996, interest, investment and other income increased compared with the same period of 1995. The increase is primarily due to a significantly larger investment base and a realized gain of approximately $2.8 million on the sale of an equity investment which was recognized in the first quarter of 1996. PROVISION FOR INCOME TAXES 1996 1995 CHANGE ------- ------ ------- Second quarter period: (Dollars in millions) Provision for income taxes $17.8 $20.7 (14)% Percentage of total revenue 8.7% 10.9% Effective tax rate 44.7% 37.0% Six month period: Provision for income taxes $38.0 $41.8 (9)% Percentage of total revenue 9.5% 11.0% Effective tax rate 40.6% 36.9% The effective tax rate for the second quarter and first six months of 1996 was higher than the same periods in 1995 as a result of the nondeductible write- off of acquired in-process research and development associated with the acquisition of Ares in the second quarter of 1996. In addition, the Company was not able to utilize the federal research and experimentation tax credit in 1996. It remains unclear whether the research and experimentation credit will be renewed. Non-renewal would continue to adversely impact the Company's 1996 effective tax rate. 24
NET INCOME AND NET INCOME PER SHARE 1996 1995 CHANGE ------- ------ ------- Second quarter period: (Dollars in millions) Net income $22.0 $35.2 (38)% Percentage of total revenue 10.8% 18.6% Net income per share $.29 $.47 (38)% Weighted shares (In thousands) 75,638 75,321 ---- Six month period: Net income $55.7 $71.4 (22)% Percentage of total revenue 14.0% 18.9% Net income per share $.73 $.96 (24)% Weighted shares (In thousands) 76,016 74,105 3% Net income for the second quarter of 1996 decreased 38% from the second quarter of 1995. Earnings per share were $.29, an 38% decrease from the second quarter of 1995. Net income for the six months ended May 31, 1996 decreased 22% from the same period in 1995 and earnings per share decreased 24% for the same period. The decrease was caused primarily by the write-off of in-process research and development costs associated with the acquisition of Ares and increased operating expenses. 25
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS The Company believes that in the future its results of operations could be affected by various factors such as the ability of the Company to integrate Adobe and Frame product lines; renegotiation of royalty arrangements; delays in shipment of the Company's new products and major new versions of existing products; market acceptance of new products and upgrades; growth in worldwide personal computer and printer sales and sales price adjustments; consolidation in the OEM printer business; industry transitions to new business and information delivery models; and adverse changes in general economic conditions in any of the countries in which the Company does business. In connection with the merger with Frame, the Company has sought to reduce combined expenses by the elimination of duplicate or unnecessary facilities, employees, marketing programs, and other expenses. The Company believes that the major impact of such reductions has occurred in the first six months of 1996. The Company expects that these reductions will benefit future operating results, but the reductions could adversely impact the earnings of the combined company. In addition, the integration of the product lines of the two companies could have a material adverse effect on the results of operations, including the potential for charges for certain discontinued business components. The Company's OEM customers on occasion seek to renegotiate their royalty arrangements. The Company evaluates these requests on a case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, including licensing a PostScript language compatible interpreter from a third party, which could result in lower licensing revenue for the Company. During the first quarter of 1996, there was a change in part of the Company's business relationship with Hewlett-Packard Company (Hewlett-Packard). Beginning in the second half of 1997, Hewlett-Packard plans not to incorporate PostScript software in some Hewlett-Packard LaserJet printers. The Company expects to continue working with Hewlett-Packard printer operations to incorporate PostScript and other technologies in other Hewlett-Packard products. The Company derives a significant portion of its revenue and operating income from its subsidiaries located in Europe and the Pacific Rim. While most of the revenue of these subsidiaries is denominated in U.S. dollars, the majority of their expense transactions are denominated in foreign currencies, including the Japanese yen and most major European currencies. As a result, the Company's operating results are subject to fluctuations in foreign currency exchange rates. To date the impact of such fluctuations has been insignificant and the Company has not engaged in any significant activities to hedge its exposure to foreign currency exchange rate fluctuations. In addition, the Company generally experiences lower revenue from its European operations in the third quarter because many customers reduce their business activities in the summer months. The Company's ability to develop and market products, including upgrades of currently shipping products, that successfully adapt to current market needs may also have an impact on the results of operations. A portion of the Company's future revenue will come from these products. Delays in product introductions could have an adverse 26
effect on the Company's revenue, earnings, or stock price. The Company cannot determine the ultimate effect that these new products or upgrades will have on its sales or results of operations. Although the Company generally offers its application products on Macintosh, Windows, and UNIX platforms, a majority of the overall sales of these products to date has been for the Macintosh platform, particularly for the higher end Macintosh computers. To the extent that there is a slowdown of customer purchases in the higher end Macintosh market or if other operating systems, such as Windows 95 or NT, become more prevalent among the Company's customers, the Company's operating results could be materially adversely affected. In addition, to the extent that there is a slowdown of customer purchases of personal computers in general, the Company's operating results could be materially adversely affected. During 1995, the Company entered the Internet market, which has only recently begun to develop. The Internet market is rapidly evolving and is characterized by an increasing number of market entrants who have introduced or developed products addressing authoring and communication over the Internet. As is typical in the case of a new and evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty. The software industry addressing the authoring and electronic publishing requirements of the Internet is young and has few proven products. Moreover, critical issues concerning the commercial use of the Internet (including security, reliability, ease of use and access, cost, and quality of service) remain unresolved and may impact the growth of Internet use, together with the software standards and electronic media employed in such markets. Through its acquisitions in 1994 and 1995, the Company has experienced significant growth. The Company's ability to manage its growth and the industry transition to the Internet effectively will require it to continue to improve its operational and financial controls and information management systems, to develop new models for licensing its software to accommodate new information delivery practices, and to attract, retain, motivate and manage employees effectively. The failure of the Company to manage effectively growth and transition in multiple areas of its business could have a material adverse effect on its results of operations. Due to the factors noted above, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Additionally, the Company may not learn of such shortfalls until late in the fiscal quarter, which could result in an even more immediate and adverse effect on the trading price of the Company's common stock. Finally, the Company participates in a highly dynamic industry. In addition to factors specific to the Company, changes in analysts' earnings estimates for the Company or its industry and factors affecting the corporate environment or the securities markets in general will often result in significant volatility of the Company's common stock price. 27
FINANCIAL CONDITION CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS MAY 31 DECEMBER 1 1996 1995 CHANGE ------ ---------- ------ (Dollars in millions) Cash, cash equivalents and short-term investments $523.3 $516.0 1% The Company's cash balances and short term investments have increased due to profitable operations, partially offset by the repurchase of stock, capital outlays, other investments and deposits required under a real estate development agreement. Cash equivalents consist of highly liquid money market instruments. All of the Company's cash equivalents and short-term investments, consisting principally of municipal bonds, commercial paper, auction rate securities, United States government and government agency securities, and asset-backed securities, are classified as available-for-sale under the provisions of Statement of Financial Accounting Standards No. 115. The securities are carried at fair value with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. OTHER ASSETS MAY 31 DECEMBER 1 1996 1995 CHANGE ------ ---------- ------- (Dollars in millions) Other assets (gross) $323.8 $202.8 60% Included above at May 31, 1996 are unrealized gains and losses on equity investments. The Company's equity investment in Netscape Corporation was marked-to-market for an unrealized gain of approximately $117.0 million in the second quarter of 1996. 28
NONCURRENT LIABILITIES AND SHAREHOLDERS' EQUITY MAY 31 DECEMBER 1 1996 1995 CHANGE ------ ---------- ------ (Dollars in millions) Noncurrent liabilities and shareholders' equity $818.0 $698.4 17% Included above is shareholders' equity and at May 31,1996, deferred income taxes related to unrealized gains and losses on equity investments and obligations for put warrants. The Company has no long-term debt. A significant portion of the increase in shareholders' equity is attributable to the unrealized gain on the equity investment in Netscape Corporation. The Board of Directors of the Company declared a cash dividend on the Company's common stock of $.05 per common share on June 24, 1996, for the second quarter of 1996. The dividend will be for shareholders of record as of July 8, 1996, and will be paid on July 22, 1996. The declaration of future dividends is within the discretion of the Board of Directors of the Company and will depend upon business conditions, results of operations, the financial condition of the Company and other factors. Under its stock repurchase program, the Company repurchased approximately 1,000,000 shares at a cost of $42.0 million in the second quarter of 1996. These share repurchases are intended to fund the Companys' employee stock purchase and stock option plans. WORKING CAPITAL MAY 31 DECEMBER 1 1996 1995 CHANGE ----- ---------- ------ (Dollars in millions) Working capital $481.5 $506.5 (5)% Net working capital decreased to $481.5 million as of May 31, 1996, compared to $506.5 million as of December 1, 1995. The decline was due to a decrease in accounts receivable and an increase in trade and other payables. Cash flow provided by operations during the first six months of 1996 was $103.7 million. This was offset by cash used for investing and financing activities. Expenditures during the first six months of 1996 for property and equipment totaled $16.9 million. Such expenditures are expected to continue, including computer systems for development, sales and marketing, product support, and administrative staff. In the future, additional cash may be used to acquire software products or technologies complementary to the Company's business. Net cash used by financing activities during the first six months of 1996 was $36.2 million primarily resulting from the repurchase of common stock and payment of dividends partially offset by issuance of common stock under employee stock plans. 29
The Company's principal commitments as of May 31, 1996 consisted of obligations under operating leases, a real estate development agreement, and various service and lease guarantee agreements with a related party. The Company has entered into a real estate development agreement for the construction of an office facility and in 1996 will enter into an operating lease agreement for this facility. The Company will have the option to purchase the facility at the end of the lease term. In the event the Company chooses not to exercise this option, the Company is obligated to arrange for the sale of the facility to an unrelated party and is required to pay the lessor any difference between the net sales proceeds and the lessor's net investment in the facility, in an amount not to exceed that which would preclude classification of the lease as an operating lease, approximately $52.0 million. The Company also is required, periodically during the construction period, to deposit funds with the lessor to secure the performance of its obligations under the lease. During the second quarter of 1996, the Company increased its deposits by approximately $13.7 million, and as of May 31, 1996, the Company's deposits under this agreement totaled approximately $63.1 million in United States government treasury notes and money market mutual funds. These deposits are included in "Other assets" in the Condensed Consolidated Balance Sheets. Also, the Company exercised its option under the development agreement to begin a second phase of development. The Company expects to enter into a financial arrangement in the third quarter of 1996 for approximately $75.0 million in order to complete the second phase development. The Company has also entered into various agreements with McQueen Holdings Limited ("McQueen"), a European operating entity, whereby the Company has agreed to guarantee obligations under operating leases for certain European facilities utilized by McQueen, and to guarantee certain levels of business between Adobe and McQueen. The Company owns 16% of the outstanding stock in McQueen. During the second quarter of 1996, the Company repurchased approximately 1,000,000 shares of its common stock. In addition, the Company arranged options to purchase an additional 740,000 shares in the third quarter of 1996, which represented the remaining shares authorized for repurchase. In June of 1996, the Board of Directors authorized the Company to repurchase up to 5,000,000 more shares of stock in order to fund shares needed for issuance under its employee stock plans. The Company intends to continue to directly repurchase common shares and to arrange options to purchase common shares. The Company believes that existing cash, cash equivalents, and short-term investments, together with cash generated from operations, will provide sufficient funds for the Company to meet its operating cash requirements in the foreseeable future. 30
PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Quantel Limited, a U.K. corporation, has filed and served on the Company a complaint alleging that the Adobe Photoshop program infringes five U.S. patents held by Quantel. The complaint was filed in the United States District Court for the District of Delaware. The complaint seeks a permanent injunction and unspecified damages. The Company has analyzed the patents and believes it has adequate legal defenses to the major causes of action and intends to vigorously defend the lawsuit. On February 6, 1996, a securities class action complaint was filed against Adobe, certain of its officers and directors, certain former officers of Frame, Hambrecht & Quist, LLP ("H&Q"), investment banker for Frame, and certain H&Q employees, in connection with the drop in the price of Adobe stock following its announcement of financial results for the quarter ended December 1, 1995. The complaint was filed in the Superior Court of the State of California, County of Santa Clara. The complaint alleges that the defendants misrepresented material adverse information regarding Adobe and Frame and engaged in a scheme to defraud investors. The complaint seeks unspecified damages for alleged violations of California law. Adobe believes that the allegations against it and its officers and directors are without merit and intends to vigorously defend the lawsuit. Adobe has filed a demurrer in the Superior Court seeking to dismiss the complaint in its entirety. 31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders was held on April 10, 1996. A proposal to elect three (3) Class I directors of the Company to serve for a two-year term expiring at the Annual Meeting of Shareholders in 1998 was approved by shareholders. This proposal received the following votes: For Withheld ---------- --------- Charles M. Geschke 65,019,548 1,655,188 William R Hambrecht 65,023,056 1,651,680 Delbert W. Yocam 65,020,098 1,654,638 Incumbent Class II directors John E. Warnock, Robert Sedgewick, William J. Spencer, and Gene P. Carter are currently serving for a term expiring at the Annual Meeting of Shareholders in 1997. Introduced was a proposal to approve an increase in the Company's share reserve under the Company's 1994 Stock Option Plan by 3,600,000 to a total of 23,600,000. This proposal received the following votes: For: 37,892,253 Against: 26,928,065 Abstain: 420,546 Also, there was a proposal to approve the new stock option plan for the Company's Outside Directors, to be known as the 1996 Outside Directors Option Plan. This proposal received the following votes: For: 46,943,987 Against: 17,705,525 Abstain: 591,352 In addition, shareholders ratified the appointment of KPMG Peat Marwick LLP as independent public accountants of the Company for fiscal 1996. This proposal received the following votes: For: 66,297,956 Against: 53,959 Abstain: 313,321 Broker non-votes are included in the determination of the number of shares present and voting for purposes of determining the presence of a quorum at the Company's annual meeting of shareholders. They are not, however, counted for purposes of determining the number of votes cast for a proposal. 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Index to Exhibits Incorporated by Reference Exhibit ------------------------- Filed Number Exhibit Description Form Date Number Herewith - - -------- ----------------------- ---- -------- ------ -------- 3.2.9 Restated Bylaws X 4.1 Shareholders Rights X Plan, as amended* 10.1.6 1984 Stock Option Plan, 10-Q 07/02/93 10.1.6 as amended* 10.1.7 1994 Stock Option Plan* 10-Q 05/27/94 10.1.7 10.12.1 1988 Employee Stock 10-Q 07/06/94 10.12.1 Purchase Plan, as amended* 10.17.1 License Agreement 10-K 11/30/88 10.17.1 Restatement between the Company and Apple Computer, Inc., dated April 1, 1987 (confidential treatment granted) 10.17.2 Amendment No. 1 to the 10-K 11/30/90 10.17.2 License Agreement Restatement between the Company and Apple Computer, Inc., dated November 27, 1990 (confidential treatment granted) 10.18 Lease Agreement dated S-1 07/01/86 10.18 November 11, 1983, between Mozart Family Trust and Epson America Inc. 10.19 Assignment of Lease S-1 07/01/86 10.19 dated November 11, 1983, between Epson America Inc. and the Company dated February 1, 1986 (Continued) 33
3. Index to Exhibits (Continued) Incorporated by Reference Exhibit ------------------------- Filed Number Exhibit Description Form Date Number Herewith - - -------- ----------------------- ---- -------- ------ -------- 10.20 Lease Agreement between S-1 07/01/86 10.20 Mozart Family Trust and the Company dated November 30, 1983 10.21.2 Revised Bonus Plan* 10-K 11/26/93 10.21.2 10.22.4 Restricted Stock Option 10-Q 07/06/94 10.22.4 Plan, as amended* 10.24.1 1994 Performance and S-4 07/27/94 10.1 Restricted Stock Plan* 10.25 Form of Indemnity 10-K 11/30/88 10.25 Agreement* 10.26 Lease Agreement by 10-K 11/30/88 10.26 and between Charleston Place Associates and Adobe Systems Incorporated dated April 14, 1987 10.26.1 Amendment One to Lease 10-K 11/30/88 10.26.1 Agreement dated March 1, 1988 10.26.2 Amendment Two to Lease 10-K 11/30/88 10.26.2 Agreement dated September 1, 1988 10.27 Lease Agreement by and 10-K 11/30/88 10.27 between John Mozart and Adobe Systems Incorporated dated July 20, 1988 10.31 Restated Agreement and S-4 07/13/94 10.31 Plan of Merger and Reorganization By and Among Adobe Systems Incorporated, P Acquisition Corp and Aldus Corporation (Continued) 34
3. Index to Exhibits (Continued) Incorporated by Reference Exhibit ------------------------- Filed Number Exhibit Description Form Date Number Herewith - - -------- ----------------------- ---- -------- ------ -------- 10.32 Sublease of the Land and 10-K 11/25/94 10.32 Lease of the Improvements By and Between Sumitomo Bank Leasing and Finance Inc. and Adobe Systems Incorporated 10.33 Sale of Rights under 10-Q 06/02/95 10.33 Software Development and Acquisition Agreement By and Between Adobe Systems Incorporated and Thomas Knoll and John Knoll (confidential treatment granted) 10.34 Agreement and Plan of S-4 08/18/95 2.1 Merger and Reorganization By and Among Adobe Systems Incorporated, J Acquisition Corporation and Frame Technology Corporation 10.35 Form of Executive 10-K 12/01/95 10.35 Severance and Change of Control Agreement* 10.36 1996 Outside Directors X Stock Option plan* 10.37 Confidential Resignation X Agreement* 11 Computation of Earnings X Per Common Share 27 Financial Data Schedule X - - -------------------------------------- *Compensatory plan or arrangement (b) Reports on Form 8-K No reports on Form 8-K were filed in the quarter ended May 31, 1996. 35
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADOBE SYSTEMS INCORPORATED Date: July 11, 1996 By /s/ M. Bruce Nakao -------------------------- M. Bruce Nakao, Senior Vice President, Finance and Administration, Chief Financial Officer, and Assistant Secretary (Principal Financial Officer) 36
SUMMARY OF TRADEMARKS The following trademarks of Adobe Systems Incorporated, which may be registered in certain jurisdictions, are referenced in this Form 10-Q: Acrobat Adobe Display PostScript Illustrator FrameMaker PageMaker PageMill Photoshop PostScript SiteMill All other brand or product names are trademarks or registered trademarks of their respective holders. 37