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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 27, 1998
OR
9TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file Number: 0-15175
ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 77-0019522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
345 Park Avenue, San Jose, California 95110-2704
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (408) 536-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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 (NO 9
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K. 9
The aggregate market value of the common stock held by non-affiliates of the registrant as of December 31,
1998 was $2,796,898,365.
The number of shares outstanding of the registrant’s common stock as of December 31, 1998 was
61,297,428.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Notice of
Annual Meeting of Stockholders to be held on April 15, 1999 are incorporated by reference into Part III.

Table of contents

  • Page 1
    ... period from to Commission file Number: 0-15175 ADOBE SYSTEMS INCORPORATED (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 345 Park Avenue, San Jose, California (Address of principal executive offices) 77-0019522...

  • Page 2
    ...Item 13. Directors and Executive Officers of the Registrant ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management ...Certain Relationships and Related Transactions ...PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K ...33 35 37 38...

  • Page 3
    ... tools; assemble illustrations, images, and text into fully formatted documents; output documents directly to any kind of printing device; and distribute documents on paper, video, compact disc, the Internet, an e-mail system, or a corporate network. Moreover, Adobe software enables users to perform...

  • Page 4
    ...Web pages without requiring user knowledge of hypertext mark-up language (HTML), and employs easy drag-and-drop techniques to simplify operation, from creating or importing text and images to adding audio, video, and animation. Adobe PhotoDeluxe-software that allows consumers and small businesses to...

  • Page 5
    ... new level, providing an optimized printing environment connected to corporate networks, the Internet, and digital document distribution systems. Adobe PostScript Extreme-the innovative new production printing architecture that integrates Adobe PostScript and the Portable Document Format (PDF). This...

  • Page 6
    ... includes Adobe Systems Kabushhiki Kaisha in Japan as well as operations in Asia Pacific and Latin America, including Australia, Brazil, Hong Kong, Korea, China, Singapore, India, and Mexico. Adobe licenses its Adobe PostScript software and other printing systems technology to computer and printer...

  • Page 7
    ..., Adobe prepares and authorizes independent trainers to teach Adobe software classes in person or increasingly via computer-based and internet-based training programs, sponsors workshops led by its own graphics staff, interacts with independent user groups, and conducts regular beta-testing programs...

  • Page 8
    ...software internally. The Company sometimes acquires products developed by others by purchasing the stock or assets of the business entity that held ownership rights to the technology. In other instances, Adobe has licensed or purchased the intellectual property ownership rights of programs developed...

  • Page 9
    ...usage problems over a given network. Adobe believes that, because computer software technology changes and develops rapidly, patent, trade secret, and copyright protection are less significant than factors such as the knowledge, ability, and experience of its personnel, name recognition, contractual...

  • Page 10
    ... and Chief Executive Officer Chairman of the Board and President Executive Vice President, Worldwide Products and Marketing Executive Vice President, Worldwide Field Operations Senior Vice President and Chief Financial Officer Senior Vice President and General Manager, Adobe Systems Europe Senior...

  • Page 11
    ..., Washington USA Europe: Five Mid New Cultins Edinburgh EH11 4DU Scotland, United Kingdom (Owned) Japan: Yebisu Garden Place Tower 4-20-3 Ebisu, Shibuya-ku Tokyo 150 Japan Asia Pacific and Latin America: 18-20 Orion Road Lane Cove, NSW 2066 Australia 360,000 Research, product development, sales...

  • Page 12
    ... 1998, Adobe filed a petition for review of the Court of Appeals' refusal to grant the writ with the Supreme Court of California, which was denied in September 1998. The Company intends to continue vigorously defending the action. On February 6, 1996, a securities class action complaint was filed...

  • Page 13
    ...July 31, 1997. An equivalent cash dividend was paid for holdings of less than 2,500 Adobe shares and for fractional Netscape shares. Also, on December 1, 1997, the Company dividended one share of Siebel Systems, Incorporated (''Siebel'') common stock for each 300 shares of Adobe common stock held by...

  • Page 14
    ... and Results of Operations. Nov. 27 1998 Nov. 28 1997 Years Ended Nov. 29 1996 Dec. 1 1995 Nov. 25 1994 Operations: Revenue ...Income before income taxes ...Net income(1) ...Net income per share(1) Basic ...Diluted ...Cash dividends declared per common share(2) ...Financial position: Cash and short...

  • Page 15
    ...who ship products containing Adobe's PostScript technology, including Adobe PostScript, Adobe PostScript 3, Adobe PrintGear, and PostScript Extreme. Adobe PostScript is a software language for describing to a printer the appearance of a page, including text, graphics, and images. Products containing...

  • Page 16
    ... 1998 compared to fiscal 1997, due primarily to the release of two major professional publishing products, Adobe Photoshop 5.0 and Adobe Illustrator 8.0; increased revenue from Acrobat 3.0, as the Portable Document Format (''PDF'') upon which Acrobat is based continued to gain acceptance worldwide...

  • Page 17
    ... 1996, due to major product releases and upgrades, which included Adobe PageMaker, Adobe Illustrator, and Adobe FrameMaker. In addition, increased demand for Adobe Photoshop, the Adobe Acrobat family of products, and Adobe PhotoDeluxe contributed to the increase. Overall, revenue from the Company...

  • Page 18
    ..., such as advertising, trade shows, and other market development programs. Sales and marketing expenses increased $13.4 million, or 4%, in fiscal 1998 compared to fiscal 1997, due to higher employee costs related to increased staffing, increased customer support costs to support new products and...

  • Page 19
    ... a management-led buyout group. During fiscal 1996, the Company acquired Ares Software for approximately $15.5 million. The acquisition was accounted for using the purchase method of accounting and approximately $15.3 million of the purchase price was allocated to in-process research and development...

  • Page 20
    ...traded company. In addition, the Company liquidated its investment in Siebel Systems, Incorporated (''Siebel'') through the distribution to its stockholders of approximately 165,000 shares of Siebel common stock as a dividend-in-kind and the sale of its remaining Siebel shares. A gain was recognized...

  • Page 21
    ... average cash balances resulting from stock repurchases conducted in fiscal 1998. Further, the Company's cash balances could also be reduced in fiscal 1999 due to the purchase of software companies, products, or technologies complementary to the Company's business. Income tax provision: 1998 Change...

  • Page 22
    ... the Company does business. The Company has stated that in fiscal 1999 its annual revenue growth target is 15% and its operating margin target is 25% of total revenue. These targets are used to assist the Company's management in making decisions about the allocation of resources and investments, not...

  • Page 23
    ...'s financial results could be adversely affected. In addition, in the fall of fiscal 1997, HP began to ship a clone version of Adobe PostScript in some printers, resulting in lower licensing revenue to the Company in fiscal 1998, even though the Company continues to work with HP printer operations...

  • Page 24
    ... Accounting policies affecting many other aspects of the Company's business, including rules relating to software revenue recognition, purchase and pooling-of-interests accounting for business combinations, the valuation of in-process research and development, employee stock purchase plans and stock...

  • Page 25
    ... the Y2K Program is approximately $3.0 million, which is expected to be funded from operating cash flows. If the Company encounters significant unforeseen Year 2000 problems, either in its products or internal business systems or in relation to third party vendors, manufacturers or suppliers, actual...

  • Page 26
    ... annual and interim financial statements. The Company is currently evaluating the operating segment information that it will be required to report. The Company will be required to implement SFAS No. 131 for its fiscal year 1999. In October 1997, the American Institute of Certified Public Accountants...

  • Page 27
    ... to enhance stockholder value by reducing the number of outstanding shares, absolutely, and, for the previously existing program, to net offsetting increases due to employee stock purchases and stock option exercises. As of November 27, 1998, management is authorized to repurchase an additional...

  • Page 28
    ... for each quarter of fiscal 1998. Also, on December 1, 1997, the Company dividended one share of Siebel Systems, Incorporated (''Siebel'') common stock for each 300 shares of Adobe common stock held by stockholders of record on October 31, 1997. An equivalent cash dividend was paid for holdings of...

  • Page 29
    ...provide printing, assembly, and warehousing services. Effective December 31, 1997, McQueen was acquired by Sykes Enterprises, Incorporated (''Sykes''), a publicly traded company. In connection with the acquisition, the Company exchanged its shares of McQueen for 486,676 shares of Sykes' common stock...

  • Page 30
    ...The Company does not use derivative financial instruments in its investment portfolio to manage interest rate risk. The Company does, however, limit its exposure to interest rate and credit risk by establishing and strictly monitoring clear policies and guidelines for its fixed income portfolios. At...

  • Page 31
    ..., 1998. 1998 Quarter Ended May 29 Aug. 28 Year Ended Nov. 27 Feb. 27 Nov. 27 Revenue ...Gross profit ...Income before income taxes ...Net income ...Basic net income per share ...Shares used in computing basic net income per share ...Diluted net income per share ...Shares used in computing diluted...

  • Page 32
    ... the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on April 15, 1999. Such information is incorporated herein by reference. EXECUTIVE OFFICERS Information with respect to executive officers may be found in Item 1. Business...

  • Page 33
    PART IV Item 14. Exhibits, Financial Statements Schedule, and Reports on Form 8-K (a) Documents filed as part of this report 1. Financial statements • Management's Report • Independent Auditors' Report • Consolidated Balance Sheets November 27, 1998 and November 28, 1997 • Consolidated ...

  • Page 34
    ... Between Sumitomo Bank Leasing and Finance Inc. and Adobe Systems Incorporated (Phase 2) 1997 Employee Stock Purchase Plan, as amended* 1994 Stock Option Plan, as amended* Amended and Restated Limited Partnership Agreement of Adobe Incentive Partners, L.P.* Resignation Agreement* Forms of Retention...

  • Page 35
    ... Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADOBE SYSTEMS INCORPORATED By /s/ HAROLD L. COVERT Harold L. Covert, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting...

  • Page 36
    Signature Title /s/ CAROL MILLS BALDWIN Carol Mills Baldwin Director /s/ HAROLD L. COVERT Harold L. Covert Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 36

  • Page 37
    ... in this Form 10-K: Adobe Acrobat After Effects Aldus Frame FrameMaker GoLive CyberStudio Illustrator ImageReady ImageStyler PageMaker PageMill PhotoDeluxe Photoshop PostScript Premiere PrintGear SiteMill Type Library All other brand or product names are trademarks or registered trademarks of their...

  • Page 38
    ... in this section are as follows: Financial Statement Description Page Management's Report ...Independent Auditors' Report ...Consolidated Balance Sheets November 27, 1998 and November 28, 1997 ...Consolidated Statements of Income Years Ended November 27, 1998, November 28, 1997, and November 29...

  • Page 39
    ... are executed in accordance with management's authorization, and are recorded properly to permit the preparation of consolidated financial statements in accordance with generally accepted accounting principles. In designing control procedures, management recognizes that errors or irregularities...

  • Page 40
    ..., the financial position of Adobe Systems Incorporated and subsidiaries as of November 27, 1998 and November 28, 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended November 27, 1998, in conformity with generally accepted accounting...

  • Page 41
    ADOBE SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) November 27 1998 November 28 1997 ASSETS Current assets: Cash and cash equivalents ...Short-term investments ...Receivables, net of allowances respectively ...Deferred income taxes ...Other current assets ...

  • Page 42
    ... November 28 1997 November 27 1998 November 29 1996 Revenue: Licensing ...Application products ...Total revenue ...Direct costs ...Gross profit ...Operating expenses: Research and development ...Sales and marketing ...General and administrative ...Write-off of acquired in-process research and...

  • Page 43
    ... Net income ...- Balances as of November 28, 1997 . 73,941 Tax benefit from employee stock option plans ...- Stock compensation expense ...- Dividends declared ...- Purchase of treasury stock ...- Reissuance of treasury stock under employee stock and stock option plans ...- Proceeds from sale of put...

  • Page 44
    ...net (income) loss of Adobe Ventures I and II ...Gains on sales of equity securities ...Tax benefit from employee stock option plans ...Stock compensation expense ...Write-off of acquired in-process research and development ...Noncash restructuring and other charges ...Changes in operating assets and...

  • Page 45
    ... for home and small business users. The Company distributes its products through a network of original equipment manufacturer (''OEM'') customers, distributors and dealers, and value-added resellers (''VARs'') and systems integrators. The Company has operations in North America, Europe, Japan, and...

  • Page 46
    ... of the acquired operation. The amount of enterprise-level goodwill impairment, if any, is measured based on projected discounted future results using a discount rate reflecting the Company's average cost of funds. Employee stock plans The Company accounts for its employee stock plans, which consist...

  • Page 47
    ... inventory. Income taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying...

  • Page 48
    ... in a liability on the balance sheet. Net income per share In fiscal 1998, the Company adopted Statement of Financial Accounting Standards (''SFAS'') No. 128, ''Earnings per Share.'' Basic earnings per share is computed using the weighted average number of common shares outstanding during the period...

  • Page 49
    ...a management-led buyout group. During fiscal 1996, the Company acquired Ares Software for approximately $15.5 million. The acquisition was accounted for using the purchase method of accounting, and approximately $15.3 million of the purchase price was allocated to in-process research and development...

  • Page 50
    ... share data) (Continued) NOTE 3. CASH EQUIVALENTS AND INVESTMENTS All cash equivalents, short-term investments, and certain noncurrent investments consisted of the following: As of November 27, 1998 Unrealized Unrealized Gains Losses Estimated Fair Value Cost Classified as current assets: Money...

  • Page 51
    ...in equity securities at an estimated fair market value, and unrealized gains and losses are included in investment income (loss). Substantially all of the technology companies held by the limited partnerships at November 27, 1998 are not publicly traded, and therefore, there is no established market...

  • Page 52
    ... in McQueen International Limited (''McQueen'') and accounted for the investment using the cost method. Effective December 31, 1997, McQueen was acquired by Sykes Enterprises, Incorporated (''Sykes''), a publicly traded company. In connection with the acquisition, the Company exchanged its shares of...

  • Page 53
    ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) (Continued) NOTE 7. RESTRUCTURING AND OTHER CHARGES (CONTINUED) divesting two business units, vacating leased facilities, and canceling certain contracts. These actions and other ...

  • Page 54
    ... Japanese operation. The accounting for the write-off was in accordance with SFAS 121. As of November 27, 1998, the remaining $0.3 million accrual balance related to legal fees associated with the divestiture of the two business units and employee terminations as part of the severance program...

  • Page 55
    ... to the Aldus and Frame acquisitions was reversed in the second half of fiscal 1998. The remaining accrual of $2.7 million at November 27, 1998 relates to lease termination costs primarily in Europe. NOTE 8. INCOME TAXES Income before income taxes includes net income from foreign operations of...

  • Page 56
    ...28 1997 November 29 1996 Computed ''expected'' tax expense ...State tax expense, net of federal benefit ...Nondeductible write-off of acquired in-process research and development ...Nondeductible goodwill ...Tax-exempt income ...Tax credits ...Foreign tax rate differential ...Other, net ... ... $58...

  • Page 57
    ... program, the Company established an internal limited partnership, Adobe Incentive Partners, L.P. (''AIP''), which allows certain of the Company's executive officers to participate in cash or stock distributions from Adobe's venture investments. Adobe is both the general partner and a limited...

  • Page 58
    ... STOCK PLANS Stock option plans As of November 27, 1998, the Company has reserved 29,200,000 shares of common stock for issuance under its 1994 Stock Option Plan (the ''Option Plan'') for employees which provides for the granting of stock options to employees and officers at the fair market value...

  • Page 59
    ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) (Continued) NOTE 10. EMPLOYEE STOCK PLANS (CONTINUED) On September 23, 1998, the Board of Directors approved a stock option repricing program whereby each eligible stock option was ...

  • Page 60
    .../or performance awards to officers and key employees. As of November 27, 1998, the Company had reserved 2,000,000 shares of its common stock for issuance under this plan. Restricted shares issued under this plan generally vest annually over three years but are considered outstanding at the time of...

  • Page 61
    ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) (Continued) NOTE 10. EMPLOYEE STOCK PLANS (CONTINUED) Employee Stock Purchase Plan The Company's Employee Stock Purchase Plan allows eligible employee participants to purchase ...

  • Page 62
    ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) (Continued) NOTE 10. EMPLOYEE STOCK PLANS (CONTINUED) Scholes option pricing model. The assumptions used to value the option grants and purchase rights are stated as follows: ...

  • Page 63
    ... purchased were returned to the status of authorized and unissued as required by California law. The 5,175,851 shares purchased in fiscal 1997 at a cost of $238.7 million subsequent to the Company's reincorporation are presented as treasury stock in the Stockholders' Equity section of the balance...

  • Page 64
    ... income per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested restricted stock. Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive common equivalent shares including...

  • Page 65
    ... in accrued restructuring costs at November 27, 1998. Real estate development agreement During 1994, the Company entered into a real estate development agreement and an operating lease agreement in connection with the construction of a headquarters office facility. In August 1996, the construction...

  • Page 66
    ... and technical support functions and to provide printing, assembly, and warehousing services. Effective December 31, 1997, McQueen was acquired by Sykes Enterprises, Incorporated (''Sykes''), a publicly traded company. In connection with the acquisition, the Company exchanged its shares of McQueen...

  • Page 67
    ... by SFAS No. 14, ''Financial Reporting for Segments of a Business Enterprise.'' The Company is engaged principally in the design, development, manufacture, and licensing of computer software. In fiscal 1998, sales of application products to a major distributor accounted for 13.5% of the Company...

  • Page 68
    ... of the years in the three-year period ended November 27, 1998, is presented below: November 27 1998 Years Ended November 28 1997 November 29 1996 Revenue: North America ...Europe ...Japan and Asia Pacific and Latin Eliminations ... ...America ... ... $ 667,566 249,407 192,145 (214,327) $ 894,791...

  • Page 69
    ... Statements and Supplementary Data, the financial statement schedule of the Company is provided in this separate section. The financial statement schedule included in this section is as follows: Schedule Number Financial Statement Schedule Description Schedule II Valuation and Qualifying Accounts...

  • Page 70
    ADOBE SYSTEMS INCORPORATED SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (In thousands) Valuation and Qualifying Accounts which are Deducted in the Balance Sheet from the Assets to which They Apply Balance at Beginning of Period Charged to Operating Expenses Balance at End of Period Deductions ...

  • Page 71
    EXHIBITS As required under Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K, the exhibits filed as part of this report are provided in this separate section. The exhibits included in this section are as follows: Exhibit Number Exhibit Description 10.48 21 23 27.1 27.2 27.3 ...

  • Page 72
    ...International Limited Japan: Adobe Systems Company Ltd. Adobe Systems Japan, Inc. Asia Pacific and Latin America: Adobe Systems Pty. Ltd. Adobe Systems India Pvt. Ltd. Adobe Systems Korea Ltd. Adobe Systems Pte. Pty. Adobe Systems Brasil Limitada Territory of Guam Delaware California United Kingdom...

  • Page 73
    ...on Form S-8 of Adobe Systems Incorporated of our report dated December 14, 1998, relating to the consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of November 27, 1998 and November 28, 1997, and the related consolidated statements of income, stockholders' equity, and cash...

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