-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F+UCFB1fPT243osxkWMx2wdCdHNScdSC0oc9w9SkgBlDXgO8Dqm/PlCIE8FLKyF5 FRDJrjOa4E/g/Ot7nRqyGw== 0000912057-96-006229.txt : 19960411 0000912057-96-006229.hdr.sgml : 19960411 ACCESSION NUMBER: 0000912057-96-006229 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960301 FILED AS OF DATE: 19960410 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADOBE SYSTEMS INC CENTRAL INDEX KEY: 0000796343 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770019522 STATE OF INCORPORATION: CA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15175 FILM NUMBER: 96545738 BUSINESS ADDRESS: STREET 1: 1585 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1225 BUSINESS PHONE: 4159614400 MAIL ADDRESS: STREET 1: P.O. BOX 7900 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94039-7900 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 March 1, 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 March 1, 1996 ----- ------------- Common stock, no par value 73,322,081 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page No. PART I -- FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 27 Item 6. Exhibits and Reports on Form 8-K 28 Signature 31 Summary of Trademarks 32 EXHIBITS 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 Quarter Ended March 1, 1996 and March 3, 1995 4 - - Condensed Consolidated Balance Sheets March 1, 1996 and December 1, 1995 5 - - Condensed Consolidated Statements of Cash Flows Quarter Ended March 1, 1996 and March 3, 1995 6 - - Notes to Condensed Consolidated Financial Statements 8 3 ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED ------------------ MARCH 1 MARCH 3 1996 1995 -------- -------- Revenue: Licensing $ 46,911 $ 46,313 Application products 146,731 142,532 -------- -------- Total revenue 193,642 188,845 Direct costs 35,208 33,854 -------- -------- Gross margin 158,434 154,991 -------- -------- Operating expenses: Software development costs: Research and development 37,207 31,490 Amortization of capitalized software development costs 626 2,873 Sales, marketing and customer support 62,604 55,352 General and administrative 15,651 13,731 -------- -------- Total operating expenses 116,088 103,446 -------- -------- Operating income 42,346 51,545 Nonoperating income: Interest, investment and other income 11,515 5,701 -------- -------- Income before income taxes 53,861 57,246 Provision for income taxes 20,198 21,102 -------- -------- Net income $ 33,663 $ 36,144 -------- -------- -------- -------- Net income per share $ .44 $ .50 -------- -------- -------- -------- Shares used in computing net income per share 76,394 72,888 -------- -------- -------- --------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 1 DECEMBER 1 1996 1995 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 86,170 $ 58,493 Short-term investments 453,662 457,547 Receivables 127,384 133,208 Inventories 11,126 7,277 Other current assets 9,372 11,924 Deferred income taxes 25,226 24,338 --------- --------- Total current assets 712,940 692,787 Property and equipment 56,071 51,708 Other assets 148,542 135,735 Deferred income taxes 9,483 4,502 --------- --------- $ 927,036 $ 884,732 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade and other payables $ 29,491 $ 25,639 Accrued expenses 89,255 94,848 Accrued restructuring costs 15,757 28,151 Income taxes payable 34,330 19,420 Deferred revenue 21,632 18,257 --------- --------- Total current liabilities 190,465 186,315 --------- --------- Shareholders' equity: Preferred stock, no par value; 2,000,000 shares authorized; none issued-- -- -- Common stock, no par value; 200,000,000 shares authorized; 73,322,081 and 72,834,444 shares issued and outstanding as of March 1, 1996, and December 1, 1995, respectively 306,432 293,258 Unrealized gains on investments 14,148 18,831 Retained earnings 420,769 390,793 Cumulative foreign currency translation adjustments (4,778) (4,465) --------- --------- Total shareholders' equity 736,571 698,417 --------- --------- $ 927,036 $ 884,732 --------- --------- --------- ---------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
QUARTER ENDED --------------------- MARCH 1 MARCH 3 1996 1995 --------- --------- Cash flows from operating activities: Net income $ 33,663 $ 36,144 Adjustments to reconcile net income to net cash provided by operating activities: Stock compensation expense 1,067 529 Depreciation and amortization 7,598 11,862 Deferred income taxes (6,735) 1,256 Provision for losses on accounts receivable 149 440 Tax benefit from employee stock plans 2,503 5,073 Changes in operating assets and liabilities: Receivables 5,389 (4,147) Inventories (3,898) 2,628 Other current assets 4,117 (4) Trade and other payables 2,967 (4,329) Accrued expenses (6,237) 1,780 Accrued restructuring costs (12,385) (14,741) Income taxes payable 15,294 (4,908) Deferred revenue 2,304 2,163 --------- --------- Net cash provided by operating activities 45,796 33,746 --------- --------- Cash flows from investing activities: Purchases of short-term investments (236,906) (1,465,603) Maturities and sales of short-term investments 240,257 1,424,454 Acquisitions of property and equipment (10,476) (10,362) Capitalization of software development costs -- (487) Additions to other assets (16,740) (15,095) --------- --------- Net cash used for investing activities (23,865) (67,093) --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock 9,606 25,145 Repurchase of common stock -- (7,765) Payment of dividends (3,687) (3,131) Payment of Subchapter S distributions of Mastersoft -- (744) --------- --------- Net cash provided by financing activities 5,919 13,505 --------- --------- (Continued)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (CONTINUED)
QUARTER ENDED --------------------- MARCH 1 MARCH 3 1996 1995 --------- --------- Effect of foreign currency exchange rates on cash and cash equivalents $ (173) $ 1,054 --------- --------- Net increase/(decrease) in cash and cash equivalents 27,677 (18,788) 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 $ 86,170 $181,741 --------- --------- --------- --------- Supplemental disclosures: Cash paid during the period for income taxes $ 2,876 $ 17,417 --------- --------- --------- --------- Noncash investing and financing activities: Dividends declared but not paid $ 3,687 $ 3,133 --------- --------- --------- ---------
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 statements of income, balance sheets and statements of 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 March 1, 1996, and the condensed consolidated statements of income and cash flows for the interim periods ended March 1, 1996 and March 3, 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. 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 period ended March 1, 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 ended March 1, 1996 and March 3, 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. 9 ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. RECEIVABLES Receivables consisted of the following:
MARCH 1 DECEMBER 1 1996 1995 --------- --------- (In thousands) Trade receivables $ 85,916 $ 91,296 Royalty receivables 34,886 34,017 Interest and other receivables 10,352 11,593 --------- --------- 131,154 136,906 Less allowance for doubtful accounts 3,770 3,698 --------- --------- $127,384 $133,208 --------- --------- --------- ---------
NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
MARCH 1 DECEMBER 1 1996 1995 --------- --------- (In thousands) Land $ 782 $ 782 Building 4,615 4,615 Equipment 108,404 122,794 Furniture and fixtures 15,059 18,962 Leasehold improvements 9,628 8,790 --------- --------- 138,488 155,943 Less accumulated depreciation and amortization 82,417 104,235 --------- --------- $ 56,071 $ 51,708 --------- --------- --------- ---------
10 ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5. OTHER ASSETS Other assets consisted of the following:
MARCH 1 DECEMBER 1 1996 1995 --------- --------- (In thousands) Licensing agreements $ 9,966 $ 16,319 Goodwill 13,751 13,753 Purchased technology 35,376 35,626 Software development costs 9,789 36,988 Equity investments 52,754 53,091 Restricted funds 49,452 35,634 Miscellaneous other assets 16,249 11,363 --------- --------- 187,337 202,774 Less accumulated amortization 38,794 67,039 --------- --------- $148,543 $135,735 --------- --------- --------- ---------
NOTE 6. ACCRUED EXPENSES Accrued expenses consisted of the following:
MARCH 1 DECEMBER 1 1996 1995 --------- --------- (In thousands) Royalties $ 6,311 $ 7,194 Accrued compensation and benefits 22,094 26,730 Sales and marketing allowances 20,941 24,586 Other 39,909 36,338 --------- --------- $ 89,255 $ 94,848 --------- --------- --------- ---------
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:
QUARTER ENDED MARCH 1, 1996 ACCRUED AS OF --------------------------- ACCRUED AS OF DECEMBER 1 CASH MARCH 1 1995 WRITE-OFFS PAYMENTS 1996 ------------- ---------- --------- ------------- FRAME: Merger transaction costs $ 5,058 $ -- $ 4,149 $ 909 Restructuring costs: Severance and outplacement 9,612 -- 7,666 1,946 Cancellation of facility leases and other contracts 5,402 -- 151 5,251 --------- ---------- --------- --------- $ 20,072 $ -- $ 11,966 $ 8,106 --------- ---------- --------- --------- --------- ---------- --------- --------- ALDUS: Restructuring costs: Cancellation of facility leases and other contracts 6,983 -- 406 6,577 --------- ---------- --------- --------- $ 6,983 $ -- $ 406 $ 6,577 --------- ---------- --------- --------- --------- ---------- --------- ---------
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 both March 1, 1996 and December 1, 1995, $1.1 million 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 are expected to be completed by mid-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 first quarter of 1996, the Company increased its deposits by approximately $13.8 million, and as of March 1, 1996, the Company's deposits under this agreement totaled approximately $49.5 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. 13 NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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. 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 and $.7 million in the first quarter of 1996 prior to the divestiture. 15 The following table sets forth for the quarters ended March 1, 1996, and March 3, 1995, the Company's condensed consolidated statements of income expressed as a percentage of total revenue:
QUARTER ENDED --------------------- MARCH 1 MARCH 3 1996 1995 --------- --------- Revenue: Licensing 24.2% 24.5% Application products 75.8 75.5 --------- --------- Total revenue 100.0 100.0 Direct costs 18.2 17.9 --------- --------- Gross margin 81.8 82.1 --------- --------- Operating expenses: Software development costs: Research and development 19.2 16.7 Amortization of capitalized software development costs 0.3 1.5 Sales, marketing and customer support 32.3 29.3 General and administrative 8.1 7.3 --------- --------- Total operating expenses 59.9 54.8 --------- --------- Operating income 21.9 27.3 Nonoperating income: Interest, investment and other income 5.9 3.0 --------- --------- Income before income taxes 27.8 30.3 Provision for income taxes 10.4 11.2 --------- --------- Net income 17.4% 19.1% --------- --------- --------- ---------
16 REVENUE 1996 1995 CHANGE ---- ---- ------ First quarter period: (Dollars in millions) Total revenue $193.6 $188.8 3% Revenue growth for the quarter was due primarily to increases in sales 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 ---- ---- ------ First quarter period: (Dollars in millions) Product group revenue -- Licensing $46.9 $ 46.3 1% Percentage of total revenue 24.2% 24.5% Licensing revenue is derived from shipments by OEM's 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 first quarter of 1996, this trend was offset by increased demand for CPSI and color capability, as well as increased penetration into the Japanese market, all of which have higher royalties per unit. 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 ---- ---- ------ First quarter period: (Dollars in millions) Product group revenue -- Application products $146.7 $142.5 3% Percentage of total revenue 75.8% 75.5% 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 are being more widely distributed through VARs and systems integrators. During the first quarter of 1996, application products revenue was slightly higher than that of the same quarter in 1995. This reflected an increase in demand for the Acrobat family of products as well as for Adobe Illustrator for Macintosh and Adobe PageMaker which had new version releases in the first quarter of 1996 and late 1995, respectively. In addition, PageMill and SiteMill which were both released in late 1995 added revenue in 1996. These increases were partially offset by decreases in Adobe Photoshop and Adobe FrameMaker revenue. DIRECT COSTS 1996 1995 CHANGE ---- ---- ------ First quarter period: (Dollars in millions) Direct costs $35.2 $33.9 4% Percentage of total revenue 18.2% 17.9% Direct costs include royalties; amortization of acquired technologies; and direct product, packaging and shipping costs. Gross margins are affected by the mix of licensing revenue versus application products revenue, as well as the product mix within application products. In the first quarter of 1996, direct costs increased slightly as a percentage of total revenue due to the greater proportion of application products revenue which typically has lower gross margins than licensing revenue. The increase was partially offset by an agreement entered into during the second quarter of 1995 whereby the developers of the technology underlying the Adobe Photoshop product were paid a lump-sum payment by the Company in lieu of future royalty obligations. To date, the amortization expense related to the purchase has been less than the per-copy royalty expense that would otherwise have been incurred. 18 OPERATING EXPENSES 1996 1995 CHANGE ---- ---- ------ First quarter period: (Dollars in millions) Software development costs -- Research and development $37.2 $31.5 18% Percentage of total revenue 19.2% 16.7% 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. 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 are expected to remain approximately the same as 1995 as a percentage of revenue. 19 1996 1995 CHANGE ---- ---- ------ First quarter period: (Dollars in millions) Software development costs -- Amortization of capitalized software development costs $0.6 $2.9 (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 first quarter 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 first quarter 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. 1996 1995 CHANGE ---- ---- ------ First quarter period: (Dollars in millions) Sales, marketing and customer support $62.6 $55.4 13% Percentage of total revenue 32.3% 29.3% 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 first quarter of 1996 compared with the same quarter of 1995. The increase resulted primarily from Frame integration costs and a higher headcount entering the first quarter of 1996, 1995 focal increases, and higher rent expense. 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. 20 1996 1995 CHANGE ---- ---- ------ First quarter period: (Dollars in millions) General and administrative $15.7 $13.7 14% 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 first quarter of 1996, general and administrative expenses increased compared with the same quarter of 1995. The increase resulted primarily from Frame integration costs and a higher headcount entering the first quarter of 1996. 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. NONOPERATING INCOME 1996 1995 CHANGE ---- ---- ------ First quarter period: (Dollars in millions) Interest, investment and other income $11.5 $5.7 102% Percentage of total revenue 5.9% 3.0% The increase in interest, investment and other income 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. In addition, the Company has increased the weighted average days-to-maturity of its investments during the first quarter of 1996 compared to the same period in 1995, which has generated higher rates of return. 21 PROVISION FOR INCOME TAXES 1996 1995 CHANGE ---- ---- ------ First quarter period: (Dollars in millions) Provision for income taxes $20.2 $21.1 (4)% Percentage of total revenue 10.4% 11.2% Effective tax rate 37.5% 36.9% The effective tax rate for first quarter of 1996 was higher than the same quarter of 1995 due to the fact that the Company was not able to utilize the federal research and experimentation tax credit which expired on June 30, 1995. It remains unclear whether the research and experimentation credit will be renewed. Nonrenewal would continue to adversely impact the Company's 1996 effective tax rate. NET INCOME AND NET INCOME PER SHARE 1996 1995 CHANGE ---- ---- ------ First quarter period: (Dollars in millions) Net income $33.7 $36.1 (7)% Percentage of total revenue 17.4% 19.1% Net income per share $.44 $.50 (12)% Weighted shares (In thousands) 76,394 72,888 5% Net income for the first quarter of 1996 decreased 7% from the first quarter of 1995. Earnings per share were $.44, a 12% decrease from the first quarter of 1995. The decrease was caused primarily by the increase in operating expenses and increased shares outstanding. 22 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 will occur in the first and second quarters of 1996 but expects some additional impact in later quarters 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, there was a change in part of the Company's business relationship with Hewlett-Packard Company. Beginning in the second half of 1997, Hewlett-Packard plans not to incorporate PostScript software in some Hewlett-Packard LaserJet printers. Royalty revenue from all LaserJet products accounted for approximately five percent of 1995 total revenue. 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 effect on the Company's revenue, earnings, or stock price. The Company cannot 23 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, 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, cost, ease of use and access, 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. 24 FINANCIAL CONDITION CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS MARCH 1 DECEMBER 1 1996 1995 CHANGE ---- ---- ------ (Dollars in millions) Cash, cash equivalents and short-term investments $539.8 $516.0 5% The Company's cash balances and short term investments have increased due to profitable operations, partially offset by 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. NONCURRENT LIABILITIES AND SHAREHOLDERS' EQUITY MARCH 1 DECEMBER 1 1996 1995 CHANGE ---- ---- ------ (Dollars in millions) Shareholders' equity $736.6 $698.4 5% The Company has no long-term debt or other noncurrent liabilities. A portion of the increase in shareholders' equity is attributable to issuance of common stock under the Company's stock option and employee stock purchase plans. The Board of Directors of the Company declared a cash dividend on the Company's common stock of $.05 per common share on March 18, 1996, for the first quarter of 1996. The dividend will be for shareholders of record as of April 4, 1996, and will be paid on April 18, 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. 25 WORKING CAPITAL MARCH 1 DECEMBER 1 1996 1995 CHANGE ---- ---- ------ (Dollars in millions) Working capital $522.5 $506.5 3% Net working capital grew to $522.5 million as of March 1, 1996, compared to $506.5 million as of December 1, 1995. Cash flow provided by operations during the quarter ended March 1, 1996 was $45.8 million. Expenditures for property and equipment totaled $10.5 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 provided by financing activities during the quarter ended March 1, 1996 was $5.9 million primarily resulting from the issuance of common stock under employee stock plans, partially offset by the payment of dividends. The Company's principal commitments as of March 1, 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 first quarter of 1996, the Company increased its deposits by approximately $13.8 million, and as of March 1, 1996, the Company's deposits under this agreement totaled approximately $49.5 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. 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. 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. 26 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. Since the complaint arrived without prior notice from Quantel, the Company is unable at this time to determine whether the complaint has any merit. The Company is actively investigating the allegations. The complaint seeks a permanent injunction and unspecified damages. On February 6, 1996, a securities class action complaint was filed against Adobe, certain of its officers and directors, certain former officers of Frame Technology Corporation ("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. 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Index to Exhibits EXHIBIT INCORPORATED BY REFERENCE FILED ------------------------- NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH ------- ----------------------- ---- ---- ------ -------- 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) 28 3. Exhibits (Continued) EXHIBIT INCORPORATED BY REFERENCE 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) 29 3. Exhibits (Continued) EXHIBIT INCORPORATED BY REFERENCE 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 * 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 March 1, 1996. 30 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: April 9, 1996 By /s/ M. Bruce Nakao --------------------- M. Bruce Nakao, Senior Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer) 31 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 Display PostScript PostScript SiteMill All other brand or product names are trademarks or registered trademarks of their respective holders. 32 EX-11 2 EXHIBIT 11 ADOBE SYSTEMS INCORPORATED EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED ------------------- MARCH 1 MARCH 3 1996 1995 -------- -------- Net income $33,663 $36,144 -------- -------- -------- -------- Primary shares outstanding: Weighted average shares outstanding during the period 73,108 69,859 Common stock equivalent shares 3,286 3,029 -------- -------- 76,394 72,888 -------- -------- -------- -------- Fully diluted shares outstanding: Weighted average shares outstanding during the period 73,108 69,859 Common stock equivalent shares 3,286 3,478 -------- -------- 76,394 73,337 -------- -------- -------- -------- Primary net income per common stock and common stock equivalent share $ .44 $ .50 -------- -------- -------- -------- Fully diluted net income per common stock and common stock equivalent share $ .44 $ .49 -------- -------- -------- --------
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT MARCH 1, 1996, AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 1, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS NOV-29-1996 DEC-02-1995 MAR-01-1996 86,170 453,662 131,154 3,770 11,126 712,940 138,488 82,417 927,036 190,465 0 0 0 306,432 430,139 927,036 46,911 193,642 35,208 35,208 115,798 290 0 53,861 20,198 33,663 0 0 0 33,663 0.44 0.44
-----END PRIVACY-ENHANCED MESSAGE-----