-----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, Hw8yVybWKHIOXdVj8kgEUT9ALoB9oqgVhbS6ECuLVvJOxalPenYbIZp7nVWWpQH0 3PodTjnEdWt837UOykAUWw== 0001047469-98-006671.txt : 19980218 0001047469-98-006671.hdr.sgml : 19980218 ACCESSION NUMBER: 0001047469-98-006671 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971128 FILED AS OF DATE: 19980217 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-K SEC ACT: SEC FILE NUMBER: 000-15175 FILM NUMBER: 98543521 BUSINESS ADDRESS: STREET 1: 345 PARK AVE CITY: SAN JOSE STATE: CA ZIP: 95110-2704 BUSINESS PHONE: 4159614400 MAIL ADDRESS: STREET 1: P.O. BOX 7900 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94039-7900 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 28, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________ COMMISSION FILE NUMBER: 0-15175 ADOBE SYSTEMS INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 77-0019522 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 345 PARK AVENUE, SAN JOSE, 95110-2704 CALIFORNIA (Address of principal executive (Zip Code) offices)
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 _X_ No ____ 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. [ ] The aggregate market value of the common stock held by non-affiliates of the registrant as of December 26, 1997 was $2,533,370,488. The number of shares outstanding of the registrant's common stock as of December 26, 1997 was 68,639,439. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement dated March 4, 1998 to be delivered to stockholders in connection with the Notice of Annual Meeting of Stockholders to be held on April 8, 1998 are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE NO. ------------- PART I Item 1. Business.................................................................................... 3 Item 2. Properties.................................................................................. 12 Item 3. Legal Proceedings........................................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders......................................... 14 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........................ 15 Item 6. Selected Financial Data..................................................................... 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 17 Item 7a. Quantitative and Qualitative Disclosures About Market Risk.................................. 27 Item 8. Financial Statements and Supplementary Data................................................. 30 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........ 31 PART III Item 10. Directors and Executive Officers of the Registrant.......................................... 32 Item 11. Executive Compensation...................................................................... 33 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 34 Item 13. Certain Relationships and Related Transactions.............................................. 35 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............................. 36 Signatures.............................................................................................. 38 Summary of Trademarks................................................................................... 39 Financial Statements.................................................................................... 40 Financial Statement Schedule............................................................................ 67 Exhibits................................................................................................ 69
2 FORWARD-LOOKING STATEMENTS IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS." READERS SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE COMPANY IN 1998. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT. PART I ITEM 1. BUSINESS BUSINESS OVERVIEW Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets, and supports computer software products and technologies that enable users to express and use information across all print and electronic media. The Company offers a market-leading line of application software and type products for creating and distributing visually rich communication materials; licenses its industry-standard technologies to major hardware manufacturers, software developers, and service providers; and offers integrated software solutions to businesses of all sizes. The Company's software runs on Microsoft Windows, Apple Macintosh, and UNIX platforms. The Company was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. The Company maintains its executive offices and principal facilities at 345 Park Avenue, San Jose, California 95110-2704. Its telephone number is 408-536-6000. The Company also maintains a World Wide Web site at HTTP://WWW.ADOBE.COM. PRODUCTS In 1984, Adobe developed the software that initiated desktop publishing. Today, Adobe is uniquely positioned to make a further dramatic impact not only on how society creates visually rich information, but also on how it distributes and accesses that information electronically. While other major software companies' products deal in raw words, data, and numbers, Adobe software helps people use the computer to express and share their ideas in imaginative and meaningful new ways, whether the choice of media is static or dynamic, paper or electronic. In the simplest terms, Adobe products enable people to create, send, view, and print high-impact information, helping them and their ideas stand out. Adobe software enables users to work with professional creative 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, or compact disc, over the Internet, an e-mail system, or corporate network. Moreover, Adobe software enables users to perform all of these tasks across multiple computing environments, including Microsoft Windows, Apple Macintosh, and UNIX. 3 GRAPHICS PRODUCTS Adobe Photoshop--provides photo design enhancement, production for print, the Internet, and multimedia used by graphic designers, Internet content creators, Webmasters, and digital photographers. Adobe Illustrator--an illustration and page design tool for print, the Internet, and multimedia used by professional illustrators and Internet content creators. Adobe PageMaker--a tool for creating and producing professional-quality printed and electronic pages used by designers, business people, publishers, and prepress professionals around the world. Adobe Premiere--provides non-linear digital video editing used in multimedia and video production. Adobe After Effects--provides two-dimensional (2D) animation, motion compositing, and special effects used in multimedia, broadcast, and film production. Adobe Type Library--contains over 2,400 high-quality outline typefaces used by graphics professionals and Internet content creators worldwide. ENTERPRISE PRODUCTS Adobe FrameMaker--an application for authoring and publishing long and complex documents including books, technical manuals, and reports. Adobe Acrobat--the fastest way to publish and distribute business documents of any kind on corporate e-mail and intranets, the Internet, or CD-ROM. Adobe Acrobat software includes everything needed to create and distribute rich electronic documents that can be viewed seamlessly within leading Web browsers. Adobe Acrobat Capture enables conversion of legacy paper-based documents into indexable, searchable, platform-independent electronic form for archiving and distribution purposes. HOME & OFFICE PRODUCTS Adobe PageMill--a tool used to create full-featured Web pages without requiring user knowledge of hypertext mark-up language (HTML). Employing easy drag-and-drop techniques simplifies operation, from creating or importing text and images to adding audio, video, and animation. Adobe PhotoDeluxe--software that allows consumers and small businesses to easily enhance and personalize their photos for a wide variety of applications in print and electronic media. PRINTING SYSTEMS PRODUCTS Adobe PostScript--a page description language that delivers high quality output, cross-platform compatibility, and top performance for graphically-rich printing output from corporate desktop printers to high-end publishing printers. Adobe PostScript 3--a page description language that takes digital printing to a new level, providing an optimized printing environment connected to corporate networks, the Internet, and digital document distribution systems. Adobe PrintGear--a printing architecture that redefines the standards for high-throughput, low-cost, high-quality printing for the small office/home office and small corporate workgroup environments. 4 Adobe PostScript Extreme--the innovative new production printing architecture that integrates Adobe PostScript and the Portable Document Format ("PDF"). This architecture has been endorsed by the printing industry as the new standard for high-performance print-on-demand, direct-to-press, and high-resolution imagesetter printing systems. COMPETITION The markets for Adobe products are characterized by intense competition, evolving industry standards, rapid technology developments, and frequent new product introductions. Adobe's future success will depend on its ability to enhance its existing products, introduce new products on a timely and cost-effective basis, meet changing customer needs, extend its core technology into new applications, and anticipate or respond to emerging standards and other technological changes. GRAPHICS PRODUCTS Within its Graphics Products area, Adobe markets six product families that fall into two major groupings: professional publishing (Adobe Photoshop, Adobe PageMaker, Adobe Illustrator, and Adobe Type Library) and dynamic media (Adobe Premiere and Adobe After Effects). In these groupings, the individual products compete favorably on the basis of features and functions, installed base, ease of use, product reliability, and price and performance characteristics. In addition, the products increasingly work well together, providing broader functionality and minimizing product learning issues for the individual who uses multiple applications to complete a project. A number of companies currently offer one or more products that compete directly or indirectly with one or more of Adobe's graphics products. These companies include Quark, Macromedia, Corel, MetaCreations, Avid and Linotype. With the advent of the World Wide Web, the needs of the graphics professional are rapidly changing to encompass on-line publishing as well as print-based publishing. These changing customer needs have created new opportunities for Adobe's graphics products, drive the Company's product development cycles, and introduce new potential competitors. ENTERPRISE PRODUCTS In the authoring and publishing market, the Company's Adobe FrameMaker product faces competition from large-scale electronic publishing systems developed by several companies, including Interleaf. Participants in this market compete based on the quality and features of their products, the level of customization and integration with other publishing system components, the number of hardware platforms supported, service, and price. The Company believes it can successfully compete in this market based upon the quality and features of the Adobe FrameMaker product, its extensive application programming interface, the large number of platforms supported, and other factors. In the document transmission and archive area, the Company's Adobe Acrobat family faces competition from entrenched office applications and internet content creation tools that use HTML. The Company feels it competes favorably in terms of the combined benefits of compression, visual fidelity, transmittal time and security of documents expressed using Adobe Acrobat Portable Document Format (PDF). Competitors include Microsoft and Corel. HOME & OFFICE PRODUCTS The consumer software market is characterized by intense competition, price sensitivity, brand awareness, and strength in retail distribution. Adobe faces direct and indirect competition in these markets from a number of companies, including Microsoft and Broderbund. The Company believes it competes favorably with its Adobe PhotoDeluxe product due to its strong relationships with critical original 5 equipment manufacturers ("OEMs") and market influencers and its ability to leverage core competencies from established products. The Internet market is a constantly evolving and highly volatile market, characterized by rapid technology developments and frequent new product introductions. Adobe PageMill faces significant competition from companies offering similar products and will continue to face competition from emerging technologies and products. Some of these competitors include Macromedia, Microsoft, and NetObjects. PRINTING SYSTEMS PRODUCTS Adobe believes that the principal competitive factors for OEMs in selecting a page description language or a printing technology are product capabilities, market leadership, reliability, support, engineering development assistance, and price. The Company believes that its competitive advantages include its technology competency, OEM relationships, and intellectual property portfolio. Adobe PostScript and Adobe PrintGear software face competition from Hewlett-Packard's proprietary PCL page description language, and from developers of page description languages based on the PostScript language standard, including Xionics and Harlequin. OPERATIONS MARKETING AND DISTRIBUTION Adobe markets and distributes its products directly and through multiple channels, including distributors, retailers, systems integrators, software developers, and value-added resellers ("VARs"), as well as through OEM and hardware bundle customers. Adobe supports its worldwide distribution network and end-user customers through international subsidiaries. Adobe Systems Europe Ltd. is headquartered in Edinburgh, Scotland, with subsidiaries in France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, and the United Kingdom. Adobe's Pacific Rim presence includes Adobe Systems Company Ltd. in Japan as well as operations in Asia, Pacific, and Latin America, including Australia, Hong Kong, Korea, Singapore, India, and Mexico. The Company also has operations in Canada. More than 6,000 resellers in the United States and Canada and more than 300 distributors throughout Europe, Japan, and Asia, Pacific, and Latin America offer Adobe software applications and type products. Adobe licenses its Adobe PostScript software and other printing systems technology to computer and printer manufacturers, who in turn distribute their products worldwide. The Company derives a significant portion of Adobe PostScript royalties from international sales of printers, imagesetters, and other output devices by its OEM customers. MANUFACTURING Manufacturing operations include duplication of disks, assembly of purchased parts, and final packaging for retail products. Adobe contracts a majority of its manufacturing activities to third parties, both in the United States and in Europe. Disk duplication for European language versions of the Company's products is managed through the European headquarters. The master disks of European-language versions of products are forwarded to McQueen Holdings Limited ("McQueen") which duplicates the disks, prints, and assembles the components and ships the completed product. Quality control tests are performed on all duplicate disks and finished products. At November 28, 1997, the Company held a 13% equity interest in McQueen. Effective December 31, 1997, McQueen was acquired by Sykes Enterprises, Inc. ("Sykes") and the Company exchanged its shares of McQueen for shares of Sykes common stock. The Company expects to maintain its business relationship 6 with McQueen and that McQueen will continue to provide services to the Company for the foreseeable future. To date, Adobe has not experienced significant difficulties in obtaining raw materials for the manufacture of its products or in the duplication of disks, printing, and assembly of components, although an interruption in production by a supplier could result in a delay in shipment of Adobe's products. There was no material backlog of orders as of December 26, 1997. CUSTOMER SUPPORT AND EDUCATION For Adobe's application software, a technical support and services staff responds to customer queries by phone and on-line. The Company also informs customers through its ADOBE MAGAZINE and a growing series of how-to books published by Adobe Press, a joint venture with Macmillan Computer Publishing. In addition, 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 seeding and testing programs. INVESTMENT IN NEW MARKETS The Company has invested in two venture capital limited partnerships that are chartered to invest in innovative companies strategic to Adobe's software business. Adobe Ventures L.P. and Adobe Ventures II L.P. enable the Company to join other investors in making new products and services available to computer users and in building new market opportunities. Adobe has thus invested in new markets, and intends to continue investing in new markets, both through the limited partnerships as well as by direct investments by the Company. The Company owns a minority interest in certain companies and a majority interest in Adobe Ventures L.P. and Adobe Ventures II L.P. Investments in publicly traded equity securities that are free of trading restrictions, or will become free of trading restrictions within one year, are carried at fair value based on quoted market prices. Investments in equity securities that are not publicly traded, or are restricted from trading for more than one year, are carried at the lower of cost or market. The investments in Adobe Ventures L.P. and Adobe Ventures II L.P. are accounted for using the equity method of accounting, and, accordingly, the investments are adjusted to reflect the Company's share of Adobe Ventures L.P. and Adobe Ventures II L.P.'s investment income (loss) and dividend distributions. Adobe Ventures L.P. and Adobe Ventures II L.P. carry their investments 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 28, 1997 are not publicly traded, and, therefore, there is no established market for these investments. As such, these investments are valued based on the most recent round of financing involving new non-strategic investors and estimates made by the general partner, a third party. When investments held by the limited partnerships are publicly traded, the fair value of such investments is based on quoted market prices, and mark-to-market adjustments are included in investment income. In general, as a matter of policy of the limited partnerships, the investments in the technology companies held by the limited partnerships will be distributed to the partners prior to the investee company's initial public offering. In March 1997, as part of its venture investing 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. Assets held by AIP include Adobe's entire interests in Adobe Ventures L.P. and Adobe Ventures II L.P. and equity securities of privately-held companies. Adobe is both the general partner and a limited partner. Other limited partners are executive officers of the Company who are involved in Adobe's venture investing activities and whose participation is deemed critical to the success of the program. 7 Adobe's Class A senior limited partnership interest includes both a liquidation preference and a preference in recovery of the cost basis of each specific investment. The executives' Class B junior limited partnership interest qualifies for partnership distributions only after: (a) Adobe has fully recovered the cost basis of its investment in the specific investee company for which a distribution is made; and (b) the participating executive has vested in his or her distribution rights. The distribution rights generally vest on a monthly basis over three years, such that the rights are 25% vested after one year, 50% vested after two years and fully vested at the end of three years. The limited partnership investments are restricted to investments in companies that are private at the time of the establishment of AIP or when the investment is made, whichever is later. Partnership interests may be allocated to designated officers only while the investee company is still private. Class B interests may not exceed a maximum of 20% of the venture investments included in AIP. No distributions were made to the participating officers in fiscal 1997 and expense related to AIP in fiscal 1997 was immaterial. At November 28, 1997, the minority interest held by the participating officers was immaterial and is included in accrued expenses on the balance sheet. The Company's portfolio of equity investments including those held by AIP at November 28, 1997, had a cost basis of $56.1 million and was valued at $46.9 million. Gross proceeds from the sale of equity securities during 1997 was $40.0 million. The Company's equity investments and Adobe Ventures L.P. and Adobe Ventures II L.P.'s investments in equity securities at November 28, 1997 consisted of the following companies:
PRIVATE PUBLIC ------------- ----------- ADOBE EQUITY INVESTMENTS Cascade Systems International.................................................................. X Datalogics Incorporated........................................................................ X McQueen International Ltd...................................................................... X Objectivity Incorporated....................................................................... X Pointcast Inc.................................................................................. X Siebel Systems, Inc............................................................................ X Tier Two Systems............................................................................... X Vertec Solutions, Inc.......................................................................... X ADOBE VENTURES L.P. EQUITY INVESTMENTS Cogito Learning Media, Inc..................................................................... X Crosswise Corporation.......................................................................... X Digimarc Corporation........................................................................... X Digital Think Inc.............................................................................. X Electronic Submission Publishing Systems, Inc.................................................. X Extensis Corporation........................................................................... X Filenet Corporation............................................................................ X Lantana Research............................................................................... X Managing Editor Inc............................................................................ X mFactory, Inc.................................................................................. X Salon Internet, Inc............................................................................ X ADOBE VENTURES II L.P. EQUITY INVESTMENTS Extensis Corporation........................................................................... X Tumbleweed Software Corporation................................................................ X Vignette Corporation........................................................................... X
8 PRODUCT DEVELOPMENT Since the personal computer software industry is characterized by rapid technological change, a continuous high level of expenditures is required for the enhancement of existing products and the development of new products. Adobe primarily develops its 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 by others with license or technology transfer agreements that may obligate the Company to pay royalties, typically based on a percentage of the revenues generated by those programs. During the years ended November 28, 1997, November 29, 1996, and December 1, 1995, the Company's research and development expenses, including costs related to contract development, were $170.9 million, $152.9 million, and $138.6 million, respectively. During each of the years 1997, 1996, and 1995, the Company acquired through purchase transactions one or more software companies. In each of these transactions, a portion of the purchase price was allocated to in-process research and development and expensed at the time of the acquisition. In 1997, 1996, and 1995, $6.0 million, $21.3 million, and $15.0 million was expensed, respectively. PRODUCT PROTECTION Adobe regards its software as proprietary and protects it with copyrights, patents, trademarks, trade secret laws, internal and external nondisclosure precautions, and restrictions on disclosure and transferability that are incorporated into its software license agreements. The Company protects the source code of its software programs as trade secrets, and makes source code available to OEM customers only under limited circumstances and specific security and confidentiality constraints. The Company's products are generally licensed to end users on a "right to use" basis pursuant to a license that is nontransferable and restricts the use of the products to the customer's internal purposes on a designated number of printers or computers. The Company also relies on copyright laws and on "shrink wrap" and electronic licenses that are not signed by the end user. Copyright protection may be unavailable under the laws of certain countries. The enforceability of "shrink wrap" and electronic licenses has not been conclusively determined. Adobe has obtained many patents and has registered numerous trademarks and logos in the United States and foreign countries. Policing unauthorized use of computer software is difficult, and software piracy is a persistent problem for the software industry. This problem is particularly acute in international markets. Adobe conducts vigorous anti-piracy programs. Adobe products do not contain copy protection, except on copies for international distribution in certain countries. Many products, including Adobe PageMaker, Adobe Photoshop, and Adobe Illustrator, incorporate network copy-detection features. These capabilities help encourage compliance with the Company's license agreements by alerting customers about certain concurrent 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 relationships, and ongoing product development. EMPLOYEES As of December 26, 1997, Adobe employed 2,702 people, none of whom are represented by a labor union. The Company has not experienced work stoppages and believes its employee relations are good. Competition in recruiting personnel in the software industry is intense. Adobe believes its future success will depend in part on its continued ability to recruit and retain highly skilled management, marketing, and technical personnel. 9 EXECUTIVE OFFICERS The executive officers of the Company as of February 16, 1998 are as follows:
NAME AGE POSITIONS - --------------------------------- --- ------------------------------------------------------------------------ John E. Warnock 57 Chairman of the Board and Chief Executive Officer Charles M. Geschke 58 Chairman of the Board and President P. Jackson Bell 56 Executive Vice President, Chief Financial Officer, Chief Administrative Officer, and Assistant Secretary Ross A. Bott 46 Executive Vice President, Product Divisions Robert A. Roblin 45 Executive Vice President, Marketing Frederick A. Snow 61 Executive Vice President, Worldwide Field Operations Hachiro Kimura 55 President, Adobe Systems Japan Derek J. Gray 48 Senior Vice President and General Manager, Adobe Systems Europe Colleen M. Pouliot 39 Senior Vice President, General Counsel, and Secretary Fredrick A. Schwedner 56 Senior Vice President and General Manager, Printing and Systems Division David P. Eichler 49 Vice President, Finance
A biography, including the principal occupations for the past five years of each of the executive officers, is provided below. Dr. Warnock was a founder of the Company and has been its Chairman of the Board since April 1989. Beginning September 1997, he shares the position of Chairman of the Board with Charles M. Geschke. He has been Chief Executive Officer since 1982. Dr. Warnock received a Ph.D. in electrical engineering from the University of Utah. He is a director of Evans & Sutherland Computer Corporation, Netscape Communications Corporation, and Redbrick Systems. Dr. Geschke was a founder of the Company and has been its President since April 1989. In September 1997, Dr. Geschke assumed the position of Chairman of the Board, sharing that office with Dr. Warnock. He was Chief Operating Officer from December 1986 until July 1994. Dr. Geschke received a Ph.D. in computer science from Carnegie Mellon University. Dr. Geschke is a director of Rambus Incorporated. Mr. Bell joined the Company in November 1996 as Executive Vice President, Chief Financial Officer, Chief Administrative Officer, and Assistant Secretary. From September 1993 to March 1996, Mr. Bell was Executive Vice President and Chief Financial Officer of Conner Peripherals Incorporated. From 1991 through September 1993, Mr. Bell was Senior Vice President of Planning and Senior Vice President of Strategic Programs for American Airlines Incorporated. Mr. Bott joined the Company in December 1996 as Senior Vice President and General Manager, Graphics Division. He was promoted to Executive Vice President, Product Divisions, in December 1997. From August 1996 to December 1996, he served as Senior Vice President of Enterprise Technologies at Silicon Graphics Incorporated. Prior to that time, he was Vice President and Chief Technology Officer of Pyramid Technology Corporation. 10 Mr. Roblin joined the Company in June 1996 as Senior Vice President, Corporate Marketing. In December 1997, he was promoted to Executive Vice President, Marketing. Prior to that time, Mr. Roblin served as Vice President of Marketing for IBM Corporation's Consumer Division from April 1994 until joining Adobe. Prior to IBM, Mr. Roblin was Vice President of Marketing for AT&T's EO personal communicator company as a result of AT&T's acquisition of Pensoft Corporation which he joined as Vice President of Marketing in 1992. Mr. Snow joined the Company in February 1998 as Executive Vice President, Worldwide Field Operations. Mr. Snow served as Chairman and Chief Executive Officer of Kenwood Management Group from April 1997 until he joined the Company. From November 1995 to April 1997, Mr. Snow was President and Chief Executive Officer of SoftWorld Services Corporation. Prior to that time, Mr. Snow served as Senior Vice President of Sales of Tech Data Corporation. Mr. Kimura joined the Company in November 1993 as President and General Manager of Adobe Systems Japan. In May 1996, Mr. Kimura was appointed as a corporate officer of the Company. Mr. Kimura was President of SCI Japan, the subsidiary of Systems Center Incorporated, from June 1992 until he joined the Company. Prior to that time, Mr. Kimura was Vice President of Sales and Services at Applied Materials Japan Corporation. Mr. Gray joined the Company upon the closing of the acquisition of Aldus in August 1994, at which time he was elected Senior Vice President of the Company and General Manager, Adobe Systems Europe. Prior to that time, Mr. Gray served as Managing Director of Aldus Europe Limited since 1986. Mr. Gray is a co-founder and, for the ten years prior to joining Aldus, Managing Director of McQueen International Limited, a distributor of computer hardware and software, of which the Company was a 17% stockholder by virtue of the acquisition of Aldus. Pursuant to a reorganization of the Company's Europe entity, Mr. Gray was elected General Manager of Adobe Systems Europe in April 1995. Ms. Pouliot joined the Company in July 1988 as Associate General Counsel and became the Corporate Secretary in April 1989. In December 1990, she was promoted to General Counsel. In December 1992, she was promoted to Vice President and in December 1997, to Senior Vice President. Ms. Pouliot was an associate at the law firm of Ware & Freidenrich from November 1983 until she joined the Company. Mr. Schwedner joined the Company in August 1989 as Director of Engineering, and in 1991 was promoted to Vice President of Engineering, Systems Product Division. In May 1996, he was promoted to Senior Vice President and General Manager of the Printing and Systems Division. Mr. Eichler joined the Company in December 1997 as Vice President, Finance. Mr. Eichler served as Senior Vice President, Finance and Administration, and Chief Financial Officer of Hyundai Electronics America from March 1994 until he joined the Company. From June 1993 to February 1994, Mr. Eichler was Chief Financial and Chief Administrative Officer of Trident Systems. Prior to that time, Mr. Eichler served as Assistant Corporate Treasurer of Syntex Corporation. 11 ITEM 2. PROPERTIES The following table sets forth the location, approximate square footage, and use of each of the principal properties used by the Company. Except as where indicated, all of the properties are leased or subleased by the Company. Such leases expire at various times through January 2014. The annual base rent expense for all facilities (including operating expenses, property taxes, and assessments) is currently $22.3 million and is subject to annual adjustment.
APPROXIMATE SQUARE LOCATION FOOTAGE USE - ------------------------------------------------- ------------ ------------------------------------------------- North America: 345 Park Avenue 354,000 Research, product development, sales, marketing San Jose, California and administration USA 333 West San Carlos Avenue 105,970 Sales and administration San Jose, California USA 303 Almaden Boulevard 134,627 Sales, administration, research and product San Jose, California development USA 411 First Avenue South 144,038 Product development, customer support, and Seattle, Washington administration USA (1) Europe: Five Mid New Cultins 22,000 Sales, marketing, and administration Edinburgh EH11 4DU Scotland, United Kingdom (Owned) Japan: Yebisu Garden Place Tower 20,237 Sales, marketing, and administration 4-20-3 Ebisu, Shibuya-ku Tokyo 150 Japan Asia, Pacific, and Latin America: 18-20 Orion Road 4,277 Sales, marketing, and administration Lane Cove, NSW 2066 Australia
In general, all facilities are in good condition and are operating at capacities which range from 75% to 100%. (1) The lease on this facility expires in July 1998 and is expected to be replaced by a lease on a new 253,000 square foot facility in Seattle. 12 ITEM 3. LEGAL PROCEEDINGS Quantel Limited, a U.K. corporation, filed and served on the Company in January 1996 a complaint alleging that the Adobe Photoshop program infringed five U.S. patents held by Quantel. The complaint was filed in the United States District Court for the District of Delaware. On September 19, 1997, a jury in federal court in Delaware found in favor of Adobe, finding that Adobe Photoshop did not infringe the five patents held by Quantel Limited, and that the five patents are invalid. Quantel has filed post-trial motions requesting a new trial. Adobe is vigorously opposing the motions. On February 6, 1996, a securities class action complaint was filed against Adobe, certain of its officers and directors, certain former officers of Adobe and 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. The case is currently in the discovery phase. On April 17, 1997, a derivative action was filed in the Superior Court of the State of California, County of Santa Clara, against the current members of Adobe's Board of Directors and Paul Brainerd, a former member of the Board. The suit was filed by a stockholder purporting to assert on behalf of the Company claims for alleged breach of the Directors' fiduciary duty and mismanagement related to the Company's acquisition of Frame in October 1995. The Court granted Adobe's motion for dismissal of the suit, with leave to amend for the plaintiff. In January 1998, the plaintiff filed an amended complaint making substantially the same claims. Management believes that the ultimate resolution of these matters will not have a material impact on the Company's financial position or results of operations. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on The Nasdaq National Stock Market under the symbol "ADBE." On December 26, 1997, there were 2,084 holders of record of the Company's common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders. The following table sets forth the high and low sales price per share of the Company's common stock, and the cash dividends paid per share, for the periods indicated.
PRICE RANGE CASH -------------------- DIVIDEND HIGH LOW PER SHARE --------- --------- ----------- Fiscal 1996: First Quarter......................... $ 74.25 $ 30.00 $ 0.05 Second Quarter........................ 45.13 30.75 0.05 Third Quarter......................... 37.88 28.50 0.05 Fourth Quarter........................ 44.13 31.50 0.05 Fiscal Year........................... 74.25 28.50 0.20 Fiscal 1997: First Quarter......................... $ 44.13 $ 34.63 $ 0.05 Second Quarter........................ 49.00 32.50 0.05 Third Quarter......................... 45.25 34.00 0.05 Fourth Quarter........................ 53.13 39.75 0.05 Fiscal Year........................... 53.13 32.50 0.20
The Company has paid cash dividends on its common stock each quarter since the second quarter of 1988. In March 1997, the Company established the venture stock dividend program under which the Company may, from time to time, distribute as a dividend-in-kind shares of its equity holdings in investee companies to Adobe stockholders. In 1997, the Company dividended one share of Netscape Communications Corporation ("Netscape") common stock for each 100 shares of Adobe common stock held by stockholders of record on 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 stockholders of record on October 31, 1997. An equivalent cash dividend was paid for holdings of less than 7,500 Adobe shares and for fractional Siebel shares. The declaration of future dividends, whether in cash or in-kind, is within the discretion of the Board of Directors of the Company and will depend upon business conditions, the Company's results of operations, the financial condition of the Company, and other factors. 15 ITEM 6. SELECTED FINANCIAL DATA THE FOLLOWING SELECTED CONSOLIDATED FINANCIAL DATA (PRESENTED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND EMPLOYEE DATA) ARE DERIVED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS. THIS DATA SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, AND WITH ITEM 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
YEARS ENDED ---------------------------------------------------------- NOV. 28 NOV. 29 DEC. 1 NOV. 25 NOV. 26 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Operations: Revenue............................... $ 911,894 $ 786,563 $ 762,339 $ 675,617 $ 580,103 Merger transaction and restructuring costs............................... -- 4,955 31,534 72,183 25,800 Income before income taxes............ 296,090 244,824 163,853 52,946 72,358 Net income (1)........................ 186,837 153,277 93,485 15,337 42,007 Net income per share (1).............. 2.52 2.04 1.26 0.22 0.62 Cash dividends declared per common share (2)........................... 0.20 0.20 0.20 0.20 0.20 Financial position: Cash and short-term investments....... 502,956 564,116 516,040 444,768 344,714 Working capital....................... 454,299 506,092 506,472 402,837 347,683 Total assets.......................... 940,071 1,001,393 872,827 710,000 597,696 Stockholders' equity.................. 715,424 706,514 698,417 514,315 457,216 Additional data: Worldwide employees................... 2,654 2,222 2,322 2,055 2,500
- ------------------------ (1) In 1997, includes investment gains of $34.3 million, other non-recurring gains of $0.6 million, and the write-off of $6.0 million of acquired in-process research and development. In 1996, includes investment gains of $68.9 million, the write-off of $21.3 million of acquired in-process research and development, and restructuring charges related to divested products of $5.0 million. In 1995, reflects restructuring charges of $31.5 million related to the acquisition of Frame and the write-off of $15.0 million of acquired in-process research and development. In 1994, reflects restructuring charges of $72.2 million related to the acquisition of Aldus Corporation ("Aldus") and the write-off of $15.5 million of acquired in-process research and development. In 1993, reflects restructuring charges of $25.8 million initiated by Frame and the write-off of $4.3 million of acquired in-process research and development. (2) Dividends prior to the acquisition of Frame on October 28, 1995 and Aldus on August 31, 1994 have not been restated to reflect the effects of the poolings of interest. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION (PRESENTED IN MILLIONS, EXCEPT PER SHARE AMOUNTS) SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO. IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS." READERS SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE COMPANY IN 1998. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT. RESULTS OF OPERATIONS OVERVIEW Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets, and supports computer software products and technologies that enable users to express and use information across all print and electronic media. 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 systems integrators. The Company has operations in North America, Europe, Japan, and Asia, Pacific, and Latin America. 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 continued to develop, market, and distribute Adobe's prepress application products, and Adobe maintained ownership of certain core technologies for Adobe prepress products. Revenue from the prepress application business unit was approximately $10.4 million in fiscal year 1995. In October 1996, the Company sold its remaining interest in Luminous for approximately $6.8 million, which was recorded as a realized gain. REVENUE
1997 CHANGE 1996 CHANGE 1995 --------- ------------- --------- ------------- --------- Total revenue........................... $ 911.9 16% $ 786.6 3% $ 762.3
Revenue growth in 1997 is attributable primarily to increased application products shipments resulting from the release of new and enhanced products. In 1996, revenue grew due to increases in both licensing activity related to the Company's PostScript interpreter and application products. Product unit volume (as opposed to price) growth was the principal factor in the Company's revenue growth in application products revenue in both 1997 and 1996. No customer accounted for more than 10% of the Company's total revenue in 1997, 1996, or 1995.
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ------------- --------- Product group revenue--Licensing........ $ 196.2 -- $ 196.7 7% $ 183.4 Percentage of total revenue............. 21.5% 25.0% 24.1%
17 Licensing revenue is derived from shipments by OEM customers of products containing the Adobe PostScript interpreter, Adobe PrintGear software, and the Display PostScript system. Such Adobe PostScript products include: (1) standard roman printers as well as printers that work with Japanese, Chinese, and Korean languages; (2) imagesetters; and (3) workstations. Licensing revenue is also derived from shipments of products containing the Configurable PostScript Interpreter ("CPSI") by OEM customers. CPSI is a fully functional Adobe 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 Adobe PostScript products independently of controller hardware development. Adobe PostScript products sell to the small office/home office ("SOHO") market, as well as the corporate enterprise and high-end imagesetter markets. Adobe PrintGear software is targeted to the SOHO and home computer market. Royalty per unit is generally calculated as a percentage of the end user list price of a printer, although some components of licensing revenue based on a flat dollar amount per unit typically do not change with list prices. Licensing revenue in 1997 was unchanged from 1996 licensing revenue. Increased demand for CPSI, color capability, and Adobe PrintGear products was offset by a number of factors affecting OEMs, primarily in the Japanese and Macintosh markets. These factors included, but were not limited to, continuing weakness in Macintosh-related printer sales and in Japanese personal computer and printer markets, as well as a slow pace of new Adobe PostScript 3 and Adobe PrintGear products being brought to market by OEMs. The Company has seen year-to-year increases in the number of OEM customers from which it is receiving licensing revenue and believes that such increases are attributable to the continued acceptance of Adobe PostScript software, as well as the diversification of the Company's customer base across multiple platforms. During 1997, a number of OEM customers introduced new Adobe PrintGear products that serve the SOHO market. Late in 1997, some OEM customers began to transition from Adobe PostScript Level 2 products to Adobe PostScript 3 products. This transition is expected to continue through 1998. Also in the fall of 1997, one of Adobe's largest PostScript customers, Hewlett-Packard Company ("HP"), introduced a non-Adobe clone version of PostScript in one family of monochrome laser printers. The Company continues to be cautious about licensing revenue in the short term because of the factors identified in the previous paragraph and the anticipated loss of revenue from monochrome laser printer products from HP.
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ------------- --------- Product group revenue--Application products.............................. $ 715.7 21% $ 589.9 2% $ 578.9 Percentage of total revenue............. 78.5% 75.0% 75.9%
Application products revenue is derived from shipments of application software programs marketed primarily through retail and distribution channels; however, Adobe PageMill, Adobe SiteMill, Adobe FrameMaker, and Adobe Acrobat products are becoming more widely distributed through VARs and systems integrators. Adobe PhotoDeluxe is primarily distributed through OEM bundling agreements with digital camera, scanner, and personal computer manufacturers. Application products revenue growth in 1997 was primarily due to increased demand for Adobe Photoshop, the Adobe Acrobat family of products, Adobe PhotoDeluxe, Adobe Illustrator, and Adobe PageMaker. A new version of Adobe Photoshop was released in late fiscal 1996, and new versions of Adobe PageMaker and Adobe Illustrator were released in the first and second quarters of fiscal 1997, respectively. In addition, during the second half of 1997, a new version of Adobe FrameMaker across multiple platforms and in multiple languages, the Windows version of Adobe PhotoDeluxe 2.0, and various other products in localized international versions were released. The 1996 revenue growth in this area resulted from increased demand for Adobe Photoshop, Adobe PageMill, Adobe SiteMill, Adobe Illustrator, and the Adobe Acrobat family of products, as well as demand for new products. The increase was partially offset by decreased demand for Adobe FrameMaker and Adobe PageMaker products. The 18 Company released Adobe Photoshop 4.0 for both the Macintosh and Windows platforms, and Adobe Acrobat 3.0 near the end of the fourth quarter of 1996. In addition, Adobe PageMill and Adobe SiteMill, which were both released in late 1995, added revenue in 1996. Overall, revenue from the Company's application products on the Windows platform increased by 64% in 1997 over 1996, while application products revenue from the Macintosh platform increased 1%. In 1997, the Windows and Macintosh platforms accounted for 50.6% and 49.4%, respectively, of application products revenue, excluding platform-independent and UNIX products, compared to 38.6% and 61.4%, respectively, in 1996. The Company expects this trend toward the Windows platform to continue for the foreseeable future. At the end of 1997, the Company experienced a decline in revenue from the Japanese market, due to reductions in sell-through rates by the Company's Japanese distributors and corresponding higher inventory levels. The Company remains cautious about the economic conditions in Japan as well as the fluctuating economic conditions in other Asian countries in the short term. DIRECT COSTS
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ------------- --------- Direct costs............................ $ 126.3 (11)% $ 141.1 8% $ 130.3 Percentage of total revenue............. 13.8% 17.9% 17.1%
Direct costs include direct product, packaging, and shipping costs, as well as royalties, localization costs, and amortization of acquired technologies. Gross margin (expressed as a percentage of revenue), in general, is affected by the mix of licensing revenue versus application products revenue, as well as the product mix within application products. Direct costs for application products decreased during 1997 as the Company transitioned from distribution of its products on disk to distribution on CD-ROM media, which has a lower cost per unit. In addition, certain acquired technologies became fully amortized during 1997, and localization costs were lower in 1997 than in 1996. Localization costs will vary from year-to-year depending on the timing of the release of new versions of products. Direct costs were slightly higher in 1996 compared to 1995 as a percentage of revenue due to higher localization costs. Also, there was a general decline in 1996 in Adobe FrameMaker revenue and associated gross margins. Gross margin in 1998 is expected to be approximately the same as in 1997 as the cost savings from the continued shift to CD-ROM media is offset by higher localization costs. OPERATING EXPENSES
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ------------- --------- Software development costs--Research and development........................... $ 170.9 12% $ 152.9 10% $ 138.6 Percentage of total revenue............. 18.7% 19.4% 18.2%
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 over the last three years as the Company has invested in new technologies, new product development, and the infrastructure to support such activities. The increase reflects the expansion of the Company's engineering staff and related costs required to support these efforts. The Company continues to make significant investments in the development of its 19 Adobe PostScript and application software products, including those targeted for the growing Internet market. The Company believes that investments in research and development are necessary to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced products. Accordingly, the Company intends to continue recruiting and hiring experienced software developers. While the Company expects that research and development expenditures in 1998 will increase in absolute dollars, such expenditures are expected to remain approximately the same as a percentage of revenue.
1997 CHANGE 1996 CHANGE 1995 ----- ----------- --------- ----------- --------- Software development costs--Amortization of capitalized software development costs................................. -- (100)% $ 2.5 (77 )% $ 11.1 Percentage of total revenue............. -- 0.3% 1.5%
During 1997, software development expenditures on all products, after reaching technological feasibility, were immaterial and therefore were expensed as incurred. Certain software development expenditures on products developed by Frame Technology Corporation ("Frame") and Aldus Corporation ("Aldus") prior to their acquisition by Adobe were capitalized and were amortized over the lives of the respective products. Amortization of capitalized software development costs decreased in 1997 and 1996 as a result of achieving full amortization of all Frame products by the end of 1996 and all Aldus products by the end of 1995. The Company expects that software development expenditures on all products, after achieving technological feasibility, will continue to be immaterial in the future and therefore will be expensed as incurred.
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ------------- --------- Sales, marketing, and customer support............................... $ 303.3 19% $ 255.0 5% $ 242.7 Percentage of total revenue............. 33.3% 32.4% 31.8%
Sales, marketing, and customer support expenses generally include salaries and benefits, sales commissions, travel expenses, and related facility costs for the Company's sales, marketing, customer support, and distribution personnel. Sales, marketing, and customer support expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, and other market development programs. Increases in sales, marketing, and customer support expenses in both 1997 and 1996 are due to increased advertising and promotional expenditures for upgrades of existing products and further development of customer and technical support services to support a growing installed base of customers. In addition, a portion of the 1997 increase relates to new product releases, increased investment in the Windows market, and programs related to furthering worldwide recognition of the Adobe brand. For fiscal 1998, sales, marketing, and customer support expenditures are expected to increase in absolute dollars and may increase as a percentage of revenue.
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ------------- --------- General and administrative.............. $ 75.4 21% $ 62.0 6% $ 58.5 Percentage of total revenue............. 8.3% 7.9% 7.7%
General and administrative expenses consist principally of salaries and benefits, travel expenses, and related facility costs for the finance, human resources, legal, information services, and executive and administrative personnel of the Company. General and administrative expenses also include outside legal 20 and accounting fees, provision for bad debts, and expenses associated with computer equipment and software used in the administration of the business. General and administrative expenses increased from 1997 compared to 1996 due to higher information system costs, legal costs, and employee costs primarily associated with a more comprehensive administrative infrastructure. The 1996 increase over 1995 resulted primarily from Frame integration costs in the first quarter of 1996 and a higher headcount entering fiscal 1996. In addition, the increase was driven by salary increases as well as higher systems and legal costs in 1996. The Company expects general and administrative spending in 1998 to be slightly higher than 1997 levels in absolute dollars as the Company continues to invest in an expanded and more comprehensive executive and administrative infrastructure.
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ------------- --------- Write-off of acquired in-process research and development.............. $ 6.0 (72)% $ 21.3 42% $ 15.0 Percentage of total revenue............. 0.7% 2.7% 2.0%
During 1997, 1996, and 1995, the Company acquired seven software companies, in separate transactions, and accounted for them using the purchase method. In each of these transactions, a portion of the purchase price was allocated to in-process research and development and was expensed at the time of the acquisitions.
1997 CHANGE 1996 CHANGE 1995 ----- ----------- --------- ----------- --------- Merger transaction and restructuring costs................................. -- (100)% $ 5.0 (84 )% $ 31.5 Percentage of total revenue............. -- 0.6% 4.1%
Merger transaction and restructuring costs for 1996 were $5.0 million. This represents charges of $5.7 million less the reversal of $0.7 million of excess reserves related to restructuring costs recorded in prior years. The 1996 charges were recorded in connection with the disposition of two business units previously owned by Frame. During the fourth quarter of 1995, the Company recorded merger transaction and restructuring costs primarily associated with the acquisition of Frame of $32.5 million and reversed approximately $1.0 million of excess restructuring reserves related to the acquisition of Aldus in 1994 as well as the remaining accrued restructuring costs related to a 1993 restructuring implemented by Frame. At November 28, 1997, the remaining accrued restructuring balance of $8.4 million, included in other accrued expenses on the balance sheet, related to lease and third-party contract termination payments, resulting from the planned closure of duplicate offices in Europe and the United States. These payments are expected to continue through the lease terms or negotiated early termination date, if applicable.
1997 CHANGE 1996 CHANGE 1995 --------- ------------- ----- ------------- ----- Other nonrecurring items................ $ (0.6) -- -- -- -- Percentage of total revenue............. (0.1)% -- --
Nonrecurring items in 1997 included a gain of $2.4 million related to the divestiture of a product line partially offset by a $1.8 million charge related to the acquisition of an intellectual property. NONOPERATING INCOME
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ----------- --------- Investment gain (loss).................. $ 34.3 (50)% $ 68.9 9,223% $ (0.8) Percentage of total revenue............. 3.8% 8.8% (0.1)%
21 Investment gain (loss) consists principally of realized gains or losses from direct investments as well as mark-to-market valuation adjustments for Adobe Ventures L.P. investments. In 1997, the investment gain relates primarily to the Company's liquidation of its investment in Netscape Communications Corporation ("Netscape") through the distribution to its stockholders of 554,660 shares of Netscape as a dividend-in-kind and the sale of its remaining Netscape shares. The 1996 gain arose primarily as a result of realized gains of approximately $43.6 million and approximately $6.8 million for the sale of a portion of the Company's investment in Netscape and its entire investment in Luminous Corporation, respectively. Also, a portion of one of the equity investments included in the Adobe Ventures L.P. portfolio was sold for a gain of $13.9 million during 1996 and at November 29, 1996, the remaining portion of this investment was marked-to-market for an unrealized gain of approximately $3.7 million. These and other gains were partially offset by write-downs on certain other investments.
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ----------- --------- Interest and other income............... $ 31.0 6% $ 29.2 (3)% $ 30.0 Percentage of total revenue............. 3.4% 3.7% 3.9%
Interest and other income consists principally of interest earned on cash, cash equivalents, and short-term investments as well as foreign exchange transaction gains and losses. The increase in interest and other income in 1997 from 1996 is primarily due to higher interest income in 1997 on higher average cash balances. The slight decrease in 1996 from 1995 is primarily due to foreign exchange gains in 1995 compared to foreign exchange losses in 1996. INCOME TAX PROVISION
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ----------- --------- Income tax provision.................... $ 109.3 19% $ 91.5 30% $ 70.4 Percentage of total revenue............. 12.0% 11.6% 9.2% Effective tax rate...................... 36.9% 37.4% 42.9%
The Company's effective tax rate decreased in 1997 from 1996 primarily due to lower nondeductible charges for the write-off of acquired in-process research and development and higher tax-exempt income. The 1996 tax rate decreased significantly from 1995 primarily as a result of lower nondeductible charges, including merger costs, goodwill, and the write-off of acquired in-process research and development. An analysis of the differences between the statutory and effective income tax rates is provided in Note 7 of Notes to Consolidated Financial Statements. The Company expects that the effective tax rate for fiscal 1998 will be between 37% and 38% due to lower tax-exempt interest income as a result of cash requirements for the Company's stock repurchase programs. NET INCOME AND NET INCOME PER SHARE
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ----------- --------- Net income.............................. $ 186.8 22% $ 153.3 64% $ 93.5 Percentage of total revenue............. 20.5% 19.5% 12.3% Net income per share.................... $ 2.52 24% $ 2.04 62% $ 1.26 Weighted average shares (in thousands)............................ 74,132 (1)% 75,064 1% 74,253
22 Net income in each of the three years included several one-time charges, and in 1997 and 1996, significant investment gains that would not normally be included in the Company's operating results. A reconciliation of the reported results of operations to the results of operations excluding these one-time charges for each of the years follows:
1997 ----------------------------------------------- INCOME BEFORE INCOME NET INCOME TAX NET INCOME TAXES PROVISION INCOME PER SHARE ---------- ---------- ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Reported results of operations.................................... $ 296,090 $ 109,253 $ 186,837 $ 2.52 Write-off of acquired in-process research and development costs... 5,969 -- 5,969 0.08 Other nonrecurring items.......................................... (590) (218) (372) -- Net investment gain............................................... (34,290) (11,255) (23,035) (0.31) ---------- ---------- ---------- ----------- Results of operations excluding one-time charges (gains).......... $ 267,179 $ 97,780 $ 169,399 $ 2.29 ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
1996 ----------------------------------------------- INCOME BEFORE INCOME NET INCOME TAX NET INCOME TAXES PROVISION INCOME PER SHARE ---------- ---------- ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Reported results of operations.................................... $ 244,824 $ 91,547 $ 153,277 $ 2.04 Write-off of acquired in-process research and development costs... 21,251 1,837 19,414 0.26 Restructuring costs............................................... 4,955 1,505 3,450 0.05 Other one-time charges............................................ 2,917 886 2,031 0.03 Net investment gain............................................... (68,875) (18,873) (50,002) (0.67) ---------- ---------- ---------- ----------- Results of operations excluding one-time charges (gains).......... $ 205,072 $ 76,902 $ 128,170 $ 1.71 ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
1995 ------------------------------------------------ INCOME BEFORE INCOME NET INCOME TAX NET INCOME TAXES PROVISION INCOME PER SHARE ---------- ----------- ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Reported results of operations..................................... $ 163,853 $ 70,368 $ 93,485 $ 1.26 Write-off of acquired in-process research and development.......... 14,983 -- 14,983 0.20 Acquisition of Frame: Merger transaction costs......................................... 11,399 -- 11,399 0.15 Restructuring costs.............................................. 20,135 6,086 14,049 0.19 Other one-time charges............................................. 3,160 1,484 1,676 0.02 Effect of fourth quarter antidilutive common stock equivalents..... -- -- -- (0.02) ---------- ----------- ---------- ----------- Results of operations excluding one-time charges................... $ 213,530 $ 77,938 $ 135,592 $ 1.80 ---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS The Company believes that in the future its results of operations could be affected by various factors, such as delays in shipment of the Company's new products and major new versions of existing products, 23 market acceptance of new products and upgrades, continuing weakness in demand for Macintosh application software and Macintosh-related printers, renegotiation of royalty arrangements, growth in worldwide personal computer and printer sales and sales price adjustments, consolidation in the OEM printer business, industry transitions to new business and information delivery models, ongoing weakness in the Japanese and other Asian economies, and adverse changes in general economic conditions in any of the countries in which the Company does business. The Company's ability to develop and market products, including upgrades of current products that successfully adapt to changing customer needs, may also have an impact on the results of operations. The Company's ability to extend its core technologies into new applications and to anticipate or respond to technological changes could affect its ability to develop these products. A portion of the Company's future revenue will come from these products. Delays in product introductions could have an adverse effect on the Company's revenue, earnings, or stock price. The Company cannot determine the ultimate effect that these new products or upgrades will have on its revenue or results of operations. Although the Company generally offers its application products on Macintosh, Windows, and UNIX platforms, a majority of the overall revenue from these products prior to 1997 has been for the Macintosh platform, particularly for the higher end Macintosh computers. In 1997, Windows-based application revenue exceeded that for the Macintosh platform for the first time. If there is a continuing slowdown of customer purchases in the higher end Macintosh market, or if the Company is unable to increase its sales to Windows customers, the Company's operating results could be materially adversely affected. Also, if the Company broadens its customer base to achieve greater penetration in the corporate business and consumer markets, the Company may need to adapt its application software distribution channels. The Company could experience decreases in average selling prices and some transitions in its distribution channel which could materially adversely affect its operating results. In addition, to the extent that there is a slowdown of customer purchases of personal computers in general, the Company's operating results could be materially adversely affected. The Company's OEM customers on occasion seek to renegotiate their royalty arrangements. The Company evaluates these requests on a case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, which could result in lower licensing revenue for the Company. In the fall of 1997, HP began to ship non-Adobe clone software in some HP LaserJet printers, resulting in somewhat lower licensing revenue to the Company, although the impact was minimal. The Company expects a more significant impact on its 1998 licensing revenue, although it continues to work with HP printer operations to incorporate Adobe PostScript and other technologies in other HP products. During late 1997, the Company experienced a decline in both application and licensing revenue from the Japanese market, due to a weak Japanese computer market and general economic conditions in Japan. In addition, at the end of fiscal 1997, inventory levels for application products at the Company's Japanese distributors remained higher than what the Company considers normal. The Company expects these adverse economic conditions to continue in the short term, and they may adversely affect the Company's revenue and earnings. Although there are also adverse conditions in other Asian economies, the countries affected represent a much smaller portion of the Company's revenue and thus have less impact on the Company's operational results. Through its acquisitions, the Company has experienced significant growth. The Company's ability to effectively manage its growth will require it to continue to improve its operational and financial controls and information management systems, and to attract, retain, motivate, and manage employees effectively. The failure of the Company to effectively manage growth and transition in multiple areas of its business could have a material adverse effect on its results of operations. The Internet market is rapidly evolving and is characterized by an increasing number of market entrants that have introduced or developed products addressing authoring and communications over the Internet. As is typical in the case of a new and evolving industry, demand and market acceptance for 24 recently introduced products and services are subject to a high level of uncertainty. The software industry addressing the authoring for and communications over the Internet is young and has few proven products. In addition, new models for licensing software will be needed to accommodate new information delivery practices. Moreover, critical issues concerning the commercial use of the Internet (including security, reliability, ease of use and access, cost, and quality of service) remain unresolved and may affect the growth of Internet use, together with the software standards and electronic media employed in such markets. The Company derives a significant portion of its revenue and operating income from its subsidiaries located in Europe, Japan, and Asia, Pacific, and Latin America. The Company generally experiences lower revenue from its European operations in the third quarter because many customers reduce their business activities in the summer months. While most of the revenue of the European subsidiaries is denominated in U.S. dollars, the majority of revenue derived from Japan is denominated in yen and the majority of all subsidiaries' operating expenses are denominated in their local currencies. As a result, the Company's operating results are subject to fluctuations in foreign currency exchange rates. To date, the accounting impact of such fluctuations has been insignificant. The Company's hedging policy attempts to mitigate some of these risks, based on management's best judgment of the appropriate trade-offs among risk, opportunity, and expense. The Company has established a hedging program as described below in "Derivatives and Financial Instruments." The program is used to hedge its exposure to foreign currency exchange rate fluctuations, primarily of the Japanese yen. The Company's hedging program is not comprehensive, and there can be no assurance that the program will offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates. Due to the factors noted above, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Additionally, the Company may not learn of such shortfalls until late in the fiscal quarter, which could result in an even more immediate and adverse effect on the trading price of the Company's common stock. Finally, the Company participates in a highly dynamic industry. In addition to factors specific to the Company, changes in analysts' earnings estimates for the Company or its industry and factors affecting the corporate environment or the securities markets in general will often result in significant volatility of the Company's common stock price. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 establishes a different method of computing net income per share than is currently required under the provisions of Accounting Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be required to present both basic net income per share and diluted net income per share. Basic net income per share is expected to be higher than the currently presented net income per share, as the effect of dilutive stock options will not be considered in computing basic net income per share. Diluted net income per share is expected to be comparable to the currently presented net income per share. The Company plans to adopt SFAS No. 128 in its fiscal quarter ending February 27, 1998, and at that time, all historical net income per share data presented will be restated to conform to the provisions of SFAS No. 128. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It does not, however, require a specific format for the disclosure, but requires the Company to display an amount representing total comprehensive income for the period in its financial statements. The Company will be required to implement SFAS No. 130 for its fiscal year 1999. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the manner in which public companies 25 report information about operating segments in 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 issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 establishes standards relating to the recognition of all aspects of software revenue. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997 and will require the Company to modify certain aspects of its revenue recognition policies. The Company does not expect the adoption of SOP 97-2 to have a material impact on the Company's consolidated results of operations. "YEAR 2000" ISSUES The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The "Year 2000" problem is pervasive and complex, as many computer systems will be affected in some way by the rollover of the two-digit year value to 00. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The "Year 2000" issue creates risk for the Company from unforeseen problems in its own computer systems and from third parties with whom the Company deals on financial transactions worldwide. Failures of the Company's and/or third parties' computer systems could have a material impact on the Company's ability to conduct its business. The Company's financial information systems include an SAP system recently implemented in the United States and Japan and an Oracle system in Europe that will be upgraded to the most recent version in the first quarter of fiscal 1998. These systems are believed to be "Year 2000" compliant. The Company is analyzing its remaining computer systems to identify any potential "Year 2000" issues and will take appropriate corrective action based on the results of such analysis. Management has not yet determined the cost related to achieving "Year 2000" compliance. In addition, the "Year 2000" issue could affect the products that the Company sells. The Company believes that the current versions of its products are "Year 2000" compliant. The Company's products are subject to ongoing analysis and review. FINANCIAL CONDITION CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ----------- --------- Cash, cash equivalents, and short-term investments........................... $ 503.0 (11)% $ 564.1 9% $ 516.0
The Company's cash, cash equivalents, and short-term investments decreased in 1997 from 1996 primarily as a result of cash expended for the Company's stock repurchase program. These expenditures were partially offset by cash generated from operations. Cash equivalents consist of highly liquid money market instruments. All of the Company's cash equivalents and short-term investments, consisting principally of municipal bonds, auction rate certificate securities, United States government and government agency securities, and asset-backed securities, are classified as available-for-sale under the provisions of SFAS No. 115. The securities are carried at fair value with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. NONCURRENT LIABILITIES AND STOCKHOLDERS' EQUITY
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ----------- --------- Noncurrent liabilities and stockholders' equity................................ $ 715.4 (8)% $ 781.7 12% $ 698.4
26 Included above is stockholders' equity, and at November 29, 1996, deferred income taxes of $3.8 million related to unrealized gains and losses on equity investments, and obligations for put warrants of $71.3 million. The Company has no long-term debt. Stockholders' equity as of November 28, 1997 was $715.4 million, compared to $706.5 million as of November 29, 1996 and $698.4 million as of December 1, 1995. The year-to-year increases in stockholders' equity include issuances of common stock under the Company's stock option and employee stock purchase plans and, in 1997, the reclassification of the put warrant obligation back to stockholders' equity. In 1997 and 1996, the increase in stockholders' equity was substantially offset by the repurchase of stock. In September 1997, the Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 15,000,000 shares of the Company's stock over the next two years. Under this program, as well as under previously authorized programs, the Company repurchased 6,150,656 shares and 3,321,500 shares in 1997 and 1996, respectively. The Company may continue to directly repurchase common shares and arrange options to purchase common shares, depending on market conditions and the Company's cash requirements. The Company has paid cash dividends on its common stock each quarter since the second quarter of 1988. During 1997, the Company paid cash dividends of $0.20 per common share. In addition, during 1997, the Company distributed its holdings in Netscape Communications Corporation and Siebel Systems, Inc. to the Company's stockholders as a dividend-in-kind. The declaration of future dividends, whether in cash or in-kind, is within the discretion of the Company's Board of Directors and will depend upon business conditions, the Company's results of operations and financial condition, and other factors. WORKING CAPITAL
1997 CHANGE 1996 CHANGE 1995 --------- ----------- --------- ----------- --------- Working capital......................... $ 454.3 (10)% $ 506.1 -- $ 506.5
The decrease in working capital in fiscal 1997 from 1996 is primarily due to lower cash and short-term investment balances as a result of the Company's stock repurchase program. Cash flow provided by operations during fiscal 1997 was $208.6 million compared to $198.1 million in fiscal 1996. Expenditures for property and equipment in 1997 totaled $33.9 million. Such expenditures are expected to continue, including expenditures for computer systems for research and 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 1997 was $219.2 million, or $117.7 million greater than in fiscal 1996, primarily resulting from the repurchase of common stock and payment of cash dividends partially offset by issuance of common stock under employee stock plans. 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. DERIVATIVES AND FINANCIAL INSTRUMENTS (ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK) FOREIGN CURRENCY HEDGING INSTRUMENTS The Company transacts business in various foreign currencies, primarily in certain European countries and Japan. Accordingly, the Company is subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to yen denominated sales in Japan and local currency denominated operating expenses in Europe, where the Company sells primarily in U.S. dollars. 27 The Company's Japanese operating expenses are in yen, which mitigates the exposure related to yen denominated sales in Japan. In addition, the Company hedges firmly committed transactions using primarily forward contracts with maturities of less than three months. At November 28, 1997, the Company held $1.9 million of aggregate foreign currency forward exchange contracts for the sale of Japanese yen, all of which expire at various times through February 25, 1998. The unrealized gains and losses associated with these contracts are not material. The Company's accounting policies for these instruments are based on the Company's designation of such instruments as hedging transactions. Gains and losses associated with the mark-to-market of outstanding foreign exchange forward contracts that are designated and effective as hedges of existing transactions, for which a firm commitment has been attained, are recognized in income in the current period. Corresponding gains and losses on the foreign currency denominated transactions being hedged are recognized in income in that same period. In this manner, the gains and losses on foreign currency denominated transactions will be offset by the gains and losses on the foreign currency contracts. The Company does not anticipate any material adverse effect on its consolidated financial position, results of operations, or cash flows as a result of these instruments. The Company does not use derivative financial instruments for speculative trading purposes, nor does the Company hedge its foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates. The Company currently does not use financial instruments to hedge local currency denominated operating expenses in Europe. Instead, the Company believes that a natural hedge exists, in that local currency revenue from product upgrades substantially offsets the local currency denominated operating expenses. The Company assesses the need to utilize financial instruments to hedge European currency exposure on an ongoing basis. The Company regularly reviews its hedging program and may as part of this review determine at any time to change its hedging program. FIXED INCOME INVESTMENTS At November 28, 1997, the Company had an investment portfolio of fixed income securities, including those classified as cash equivalents, of $523.9 million. These securities are subject to interest rate fluctuations. An increase in interest rates could affect the market value of the Company's fixed income securities. A sensitivity analysis was performed on the Company's investment portfolio as of November 28, 1997. This sensitivity analysis is based on a modeling technique that measures the hypothetical market value changes that would result from a parallel shift in the yield curve of plus 50, plus 100, or plus 150 basis points over a 12-month time horizon. The market value changes for a 50, 100, or 150 basis point increase in short-term treasury security yields were not material due to the limited duration of the Company's portfolio. 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 the present time, the maximum duration of all portfolios is limited to 2.3 years. The guidelines also establish credit quality standards, limits on exposure to one issue, issuer, as well as the type of instrument. Due to the limited duration and credit risk criteria established in the Company's guidelines, the exposure to market and credit risk is not expected to be material. PUT WARRANTS AND CALL OPTIONS To facilitate the Company's stock repurchase program, the Company sold put warrants in a series of private placements in 1997 and 1996. Each warrant entitled the holder to sell one share of Adobe's 28 common stock to the Company at a specified price. Approximately 4.6 million and 4.5 million put warrants were written in 1997 and 1996, respectively. At November 28, 1997, approximately 2.9 million put warrants were outstanding that expire on various dates through May 1998 that have exercise prices ranging from $37.07 to $47.98 per share, with an average exercise price of $43.09 per share. In addition, in 1997 and 1996, the Company purchased call options from an independent third party that entitled the Company to buy 2.3 million and 4.5 million shares, respectively, of its common stock. At November 28, 1997, approximately 0.5 million call options were outstanding that expire on various dates through April 1998 and have exercise prices ranging from $37.32 to $46.86 per share, with an average exercise price of $41.32 per share. Under these arrangements, the Company, at its option, can settle with physical delivery or net shares equal to the difference between the exercise price and the market value at the date of exercise. COMMITMENTS The Company's principal commitments as of November 28, 1997 consisted of obligations under operating leases, a real estate development agreement, and various service agreements with a related party. During 1994, the Company entered into a real estate development agreement and an operating lease agreement in connection with the construction of an office facility. In August 1996, the construction was completed and the operating lease commenced. The Company will have the option to purchase the facility at the end of the lease term, in October 2001. 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 $57.3 million. During the construction period, the Company was required to pledge certain interest-bearing instruments to the lessor as collateral to secure the performance of its obligations under the lease. As of November 28, 1997, the Company's deposits under this agreement totaled approximately $66.7 million in United States government treasury notes and money market mutual funds. These deposits are included in "Other assets" in the Consolidated Balance Sheets. In 1996, the Company exercised its option under the development agreement to begin a second phase of development for an additional office facility. In August 1996, the Company entered into a construction agreement and an operating lease agreement for this facility. The operating lease will commence on completion of construction in 1998. The Company will have the option to purchase the facility at the end of the lease term (five years after occupancy). 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 $64.3 million. The Company also is required, periodically during the construction period, to deposit funds with the lessor as an interest-bearing security deposit to secure the performance of its obligations under the lease. During 1997, the Company deposited approximately $33.0 million and as of November 28, 1997, the Company's deposits under this agreement totaled approximately $36.3 million. These deposits are included in "Other assets" in the Consolidated Balance Sheets. At November 28, 1997, the Company held a 13% equity interest in McQueen International Limited ("McQueen") and accounted for the investment using the cost method. During 1994, the Company entered into various agreements with McQueen, whereby the Company contracted with McQueen to perform product localization 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 for 486,676 shares of Sykes' restricted common stock and will record a gain on the exchange of $6.7 million in fiscal 1998. The Company's equity interest in Sykes is less than 2%. The Company expects that McQueen will continue to provide services to the Company for the foreseeable future. 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENTS The Company's financial statements required by this item are submitted as a separate section of this Form 10-K. See Item 14.(a)1. for a listing of financial statements provided in the section titled "FINANCIAL STATEMENTS". SUPPLEMENTARY DATA THE FOLLOWING TABLES (PRESENTED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SET FORTH QUARTERLY SUPPLEMENTARY DATA FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED NOVEMBER 28, 1997.
1997 ---------------------------------------------------------- QUARTER ENDED YEAR ---------------------------------------------- ENDED FEB. 28 MAY 30 AUG. 29 NOV. 28 NOV. 28 ---------- ---------- ---------- ---------- ---------- Revenue.............................................. $ 226,459 $ 228,264 $ 230,039 $ 227,132 $ 911,894 Gross profit......................................... 192,170 195,606 197,350 200,497 785,623 Income before income taxes........................... 73,167 63,204 85,528 74,191 296,090 Net income........................................... 46,484 40,106 53,428 46,819 186,837 Net income per share................................. 0.63 0.54 0.72 0.64 2.52 Shares used in computing net income per share.......................................... 73,939 74,416 74,528 73,646 74,132
1996 ---------------------------------------------------------- QUARTER ENDED YEAR ---------------------------------------------- ENDED MAR. 1 MAY 31 AUG. 30 NOV. 29 NOV. 29 ---------- ---------- ---------- ---------- ---------- Revenue.............................................. $ 193,642 $ 204,337 $ 180,909 $ 207,675 $ 786,563 Gross profit......................................... 158,434 168,259 147,292 171,431 645,416 Income before income taxes........................... 53,861 39,787 48,686 102,490 244,824 Net income........................................... 33,663 22,009 29,847 67,758 153,277 Net income per share................................. 0.44 0.29 0.40 0.92 2.04 Shares used in computing net income per share.......................................... 76,394 75,638 74,309 73,913 75,064
30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements on any matter of accounting principles, financial statement disclosure, or auditing scope or procedure to be reported under this item. 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS Information with respect to Directors may be found in the section captioned "Election of Directors" appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on April 8, 1998. Such information is incorporated herein by reference. EXECUTIVE OFFICERS Information with respect to executive officers may be found in Item 1. Business. 32 ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item may be found in the section captioned "Executive Compensation" appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on April 8, 1998. Such information is incorporated herein by reference. 33 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item may be found in the section captioned "Security Ownership of Certain Beneficial Owners and Management" appearing in the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held April 8, 1998. Such information is incorporated herein by reference. 34 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 35 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 28, 1997 and November 29, 1996 - Consolidated Statements of Income Years Ended November 28, 1997, November 29, 1996, and December 1, 1995 - Consolidated Statements of Stockholders' Equity Years Ended November 28, 1997, November 29, 1996, and December 1, 1995 - Consolidated Statements of Cash Flows Years Ended November 28, 1997, November 29, 1996, and December 1, 1995 - Notes to Consolidated Financial Statements 2. Financial statement schedule - Schedule II--Valuation and Qualifying Accounts 3. Exhibits
(a) Index to Exhibits
INCORPORATED BY REFERENCE EXHIBIT ------------------------------- FILED NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH - --------- ---------------------------------------------------------- --------- --------- --------- --------- 2.1 Agreement and Plan of Merger effective 5/30/97 (by virtue 10-Q 05/30/97 2.1 of a reincorporation), by and between Adobe Systems Incorporated, a California Corporation and Adobe Systems (Delaware) Incorporated, a Delaware corporation. 3.1 The Registrant's (as successor in-interest to Adobe 10-Q 05/30/97 3.1 Systems (Delaware) Incorporated by virtue of a reincorporation effective 5/30/97) Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on 5/9/97. 3.2.10 Amended and Restated Bylaws as currently in effect. X 3.3 Certificate of Designation of the Series A Preferred Stock X 4.1 Second Amended and Restated Rights Agreement between the 8-K 08/29/97 4 Company and Harris Trust Company of California 10.1.6 1984 Stock Option Plan, as amended* 10-Q 07/02/93 10.1.6 10.1.7 1994 Stock Option Plan* 10-Q 05/27/94 10.1.7
36
INCORPORATED BY REFERENCE EXHIBIT ------------------------------- FILED NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH - --------- ---------------------------------------------------------- --------- --------- --------- --------- 10.17.1 License Agreement Restatement between the Company and 10-K 11/30/88 10.17.1 Apple Computer, Inc., dated April 1, 1987 (confidential treatment granted) 10.17.2 Amendment No. 1 to the License Agreement Restatement 10-K 11/30/90 10.17.2 between the Company and Apple Computer, Inc., dated November 27, 1990 (confidential treatment granted) 10.21.3 Revised Bonus Plan* 10-Q 02/28/97 10.21.3 10.24.1 1994 Performance and Restricted Stock Plan* S-8 07/27/94 10.1 10.25.0 Form of Indemnity Agreement* 10-K 11/30/90 10.17.2 10.25.1 Form of Indemnity Agreement* 10-Q 05/30/97 10.25.1 10.32 Sublease of the Land and Lease of the Improvements By and 10-K 11/25/94 10.32 Between Sumitomo Bank Leasing and Finance Inc. and Adobe Systems Incorporated (Phase 1) 10.36 1996 Outside Directors Stock Option Plan* 10-Q 05/31/96 10.36 10.37 Confidential Resignation Agreement* 10-Q 05/31/96 10.37 10.38 Sublease of the Land and Lease of the Improvements By and 10-Q 08/30/96 10.38 Between Sumitomo Bank Leasing and Finance Inc. and Adobe Systems Incorporated (Phase 2) 10.39 1997 Employee Stock Purchase Plan, as amended* S-8 05/30/97 10.39 10.40 1994 Stock Option Plan Amendment, as amended* S-8 05/30/97 10.40 10.41 Amended and Restated Limited Partnership Agreement of 10-Q 05/30/97 10.41 Adobe Incentive Partners, L.P.* 10.42 Amended and Restated Limited Partnership Agreement of X Adobe Incentive Partners, L.P.* 10.43 Resignation Agreement* X 10.44 Forms of Retention Agreement* X 11 Computation of Earnings Per Common Share X 21 Subsidiaries of the Registrant X 23 Consent of Independent Auditors X 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 November 28, 1997. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADOBE SYSTEMS INCORPORATED By /s/ P. JACKSON BELL ----------------------------------------- P. Jackson Bell, Executive Vice President, Chief Financial Officer, Chief Administrative Officer, and Assistant Secretary (Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 17th day of February, 1998.
SIGNATURE TITLE - ------------------------------ -------------------------- /s/ JOHN E. WARNOCK Chairman of the Board of - ------------------------------ Directors John E. Warnock and Chief Executive Officer (Principal Executive Officer) /s/ CHARLES M. GESCHKE Chairman of the Board of - ------------------------------ Directors Charles M. Geschke and President /s/ WILLIAM R. HAMBRECHT Director - ------------------------------ William R. Hambrecht /s/ ROBERT SEDGEWICK Director - ------------------------------ Robert Sedgewick /s/ DELBERT W. YOCAM Director - ------------------------------ Delbert W. Yocam /s/ WILLIAM J. SPENCER Director - ------------------------------ William J. Spencer /s/ GENE P. CARTER Director - ------------------------------ Gene P. Carter /s/ P. JACKSON BELL Executive Vice President, - ------------------------------ Chief Financial Officer, P. Jackson Bell Chief Administrative Officer, and Assistant Secretary (Principal Financial Officer) /s/ DAVID P. EICHLER Vice President, Finance - ------------------------------ (Principal Accounting David P. Eichler Officer)
38 SUMMARY OF TRADEMARKS The following trademarks of Adobe Systems Incorporated or its subsidiaries, which may be registered in certain jurisdictions, are referenced in this Form 10-K: Adobe Acrobat After Effects Aldus Frame FrameMaker Illustrator PageMaker PageMill PhotoDeluxe Photoshop PostScript Premiere PrintGear SiteMill Type Library All other brand or product names are trademarks or registered trademarks of their respective holders. 39 FINANCIAL STATEMENTS As required under Item 8. Financial Statements and Supplementary Data, the consolidated financial statements of the Company are provided in this separate section. The consolidated financial statements included in this section are as follows:
FINANCIAL STATEMENT DESCRIPTION PAGE - ------------------------------------------------------------------------------------------------------------------ ----- - Management's Report.................................................................................... 41 - Independent Auditors' Report........................................................................... 42 - Consolidated Balance Sheets November 28, 1997 and November 29, 1996.............................................................. 43 - Consolidated Statements of Income Years Ended November 28, 1997, November 29, 1996, and December 1, 1995............................... 44 - Consolidated Statements of Stockholders' Equity Years Ended November 28, 1997, November 29, 1996, and December 1, 1995............................... 45 - Consolidated Statements of Cash Flows Years Ended November 28, 1997, November 29, 1996, and December 1, 1995............................... 48 - Notes to Consolidated Financial Statements............................................................. 49
40 MANAGEMENT'S REPORT Management is responsible for all the information and representations contained in the consolidated financial statements and other sections of this FORM 10-K. Management believes that the consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances to reflect in all material respects the substance of events and transactions that should be included, and that the other information in this FORM 10-K is consistent with those statements. In preparing the consolidated financial statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being accounted for. In meeting its responsibility for the reliability of the consolidated financial statements, management depends on the Company's system of internal accounting controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions 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 may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. Management believes that the Company's accounting controls provide reasonable assurance that errors or irregularities that could be material to the consolidated financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions. The Board of Directors pursues its oversight role for these consolidated financial statements through the Audit Committee, which is comprised solely of Directors who are not officers or employees of the Company. The Audit Committee meets with management periodically to review their work and to monitor the discharge of each of their responsibilities. The Audit Committee also meets periodically with KPMG Peat Marwick LLP, the independent auditors, who have free access to the Audit Committee or the Board of Directors, without management present, to discuss internal accounting control, auditing, and financial reporting matters. KPMG Peat Marwick LLP is engaged to express an opinion on our consolidated financial statements. Their opinion is based on procedures believed by them to be sufficient to provide reasonable assurance that the consolidated financial statements are not materially misleading and do not contain material errors. By: /s/ P. JACKSON BELL ----------------------------------------- P. Jackson Bell Executive Vice President, Chief Financial Officer, Chief Administrative Officer, and Assistant Secretary (Principal Financial Officer)
December 16, 1997 41 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Adobe Systems Incorporated: We have audited the accompanying consolidated financial statements of Adobe Systems Incorporated and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adobe Systems Incorporated and subsidiaries as of November 28, 1997 and November 29, 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended November 28, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP San Jose, California December 16, 1997 42 ADOBE SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
NOVEMBER 28 NOVEMBER 29 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents........................................................... $ 267,576 $ 110,745 Short-term investments.............................................................. 235,380 453,371 Receivables, net of allowances for doubtful accounts of $3,634 and $5,196, respectively...................................................................... 130,974 115,823 Other current assets................................................................ 45,016 45,875 ------------ ------------ Total current assets.............................................................. 678,946 725,814 Property and equipment................................................................ 80,978 80,231 Deferred income taxes................................................................. 16,999 -- Other assets.......................................................................... 163,148 195,348 ------------ ------------ $ 940,071 $1,001,393 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade and other payables............................................................ $ 57,857 $ 43,056 Accrued expenses.................................................................... 102,741 93,919 Income taxes payable................................................................ 48,343 67,210 Deferred revenue.................................................................... 15,706 15,537 ------------ ------------ Total current liabilities......................................................... 224,647 219,722 ------------ ------------ Deferred income taxes................................................................. -- 3,809 Put warrants.......................................................................... -- 71,348 Stockholders' equity: Preferred stock, $0.0001 par value; 2,000 shares authorized; none issued............ -- -- Common stock, $0.0001 par value; Authorized: 200,000 shares; Issued: 73,941 and 71,476 shares in 1997 and 1996, respectively; Outstanding: 68,765 and 71,476 shares in 1997 and 1996, respectively.............. 7 7 Additional paid-in capital.......................................................... 291,274 148,595 Retained earnings................................................................... 663,861 529,546 Unrealized gains on investments, net................................................ 3,590 33,514 Cumulative translation adjustment................................................... (4,620) (5,148) Treasury stock, at cost (5,176 shares in 1997)...................................... (238,688) -- ------------ ------------ Total stockholders' equity........................................................ 715,424 706,514 ------------ ------------ $ 940,071 $1,001,393 ------------ ------------ ------------ ------------
See accompanying Notes to Consolidated Financial Statements. 43 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED --------------------------------------- NOVEMBER 28 NOVEMBER 29 DECEMBER 1 1997 1996 1995 ------------ ------------ ----------- Revenue: Licensing............................................................. $ 196,230 $ 196,693 $ 183,437 Application products.................................................. 715,664 589,870 578,902 ------------ ------------ ----------- Total revenue........................................................... 911,894 786,563 762,339 Direct costs............................................................ 126,271 141,147 130,301 ------------ ------------ ----------- Gross profit............................................................ 785,623 645,416 632,038 ------------ ------------ ----------- Operating expenses: Software development costs: Research and development............................................ 170,862 152,914 138,616 Amortization of capitalized software development costs.............. -- 2,504 11,095 Sales, marketing, and customer support................................ 303,268 254,972 242,713 General and administrative............................................ 75,358 62,034 58,526 Write-off of acquired in-process research and development............. 5,969 21,251 14,983 Merger transaction and restructuring costs............................ -- 4,955 31,534 Other nonrecurring items.............................................. (590) -- -- ------------ ------------ ----------- Total operating expenses................................................ 554,867 498,630 497,467 ------------ ------------ ----------- Operating income........................................................ 230,756 146,786 134,571 Nonoperating income: Investment gain (loss)................................................ 34,290 68,875 (755) Interest and other income............................................. 31,044 29,163 30,037 ------------ ------------ ----------- Total nonoperating income............................................... 65,334 98,038 29,282 ------------ ------------ ----------- Income before income taxes.............................................. 296,090 244,824 163,853 Income tax provision.................................................... 109,253 91,547 70,368 ------------ ------------ ----------- Net income.............................................................. $ 186,837 $ 153,277 $ 93,485 ------------ ------------ ----------- ------------ ------------ ----------- Net income per share.................................................... $ 2.52 $ 2.04 $ 1.26 ------------ ------------ ----------- ------------ ------------ ----------- Shares used in computing net income per share........................... 74,132 75,064 74,253 ------------ ------------ ----------- ------------ ------------ -----------
See accompanying Notes to Consolidated Financial Statements. 44 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
UNREALIZED COMMON STOCK ADDITIONAL GAINS ON CUMULATIVE TREASURY STOCK -------------- PAID-IN RETAINED INVESTMENTS, TRANSLATION --------------- SHARES AMOUNT CAPITAL EARNINGS NET ADJUSTMENT SHARES AMOUNT TOTAL ------ ------ ---------- -------- ------------ ---------- ------ ------ -------- Balances as of November 25, 1994...... 69,390 $ 7 $204,026 $315,611 $(1,277) $(4,052) -- $-- $514,315 Stock issued under employee stock and stock option plans..... 3,914 -- 70,367 -- -- -- -- -- 70,367 Tax benefit from employee stock option plans..... -- -- 32,445 -- -- -- -- -- 32,445 Stock compensation expense................ -- -- 4,433 -- -- -- -- -- 4,433 Adjustment for change in Frame Technology Corporation fiscal year-end............... (10) -- (171) (1,784) -- -- -- -- (1,955) Dividends declared....... -- -- -- (13,177) -- -- -- -- (13,177) Subchapter S distributions of Mastersoft............. -- -- -- (3,342) -- -- -- -- (3,342) Repurchase of common stock.................. (460) -- (17,849) -- -- -- -- -- (17,849) Unrealized gains on investments, net....... -- -- -- -- 20,108 -- -- -- 20,108 Cumulative translation adjustment............. -- -- -- -- -- (413) -- -- (413) Net income............... -- -- -- 93,485 -- -- -- -- 93,485 ------ ------ ---------- -------- ------------ ---------- ------ ------ -------- Balances as of December 1, 1995....... 72,834 $ 7 $293,251 $390,793 $18,831 $(4,465) -- $-- $698,417 ------ ------ ---------- -------- ------------ ---------- ------ ------ -------- (Continued)
See accompanying Notes to Consolidated Financial Statements 45 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) (IN THOUSANDS)
UNREALIZED COMMON STOCK ADDITIONAL GAINS ON CUMULATIVE TREASURY STOCK -------------- PAID-IN RETAINED INVESTMENTS, TRANSLATION --------------- SHARES AMOUNT CAPITAL EARNINGS NET ADJUSTMENT SHARES AMOUNT TOTAL ------ ------ ---------- -------- ------------ ---------- ------ ------ -------- Balances as of December 1, 1995..... 72,834 $ 7 $293,251 $390,793 $18,831 $(4,465) -- $-- $698,417 Stock issued under employee stock and stock option plans... 2,032 -- 39,870 -- -- -- -- -- 39,870 Tax benefit from employee stock option plans................ -- -- 10,828 -- -- -- -- -- 10,828 Stock compensation expense.............. -- -- 2,772 -- -- -- -- -- 2,772 Dividends declared..... -- -- -- (14,524) -- -- -- -- (14,524) Repurchase of common stock................ (3,390) -- (126,778) -- -- -- -- -- (126,778) Reclassification of put warrant obligations.......... -- -- (71,348) -- -- -- -- -- (71,348) Unrealized gains on investments, net..... -- -- -- -- 14,683 -- -- -- 14,683 Cumulative translation adjustment........... -- -- -- -- -- (683) -- -- (683) Net income............. -- -- -- 153,277 -- -- -- -- 153,277 ------ ------ ---------- -------- ------------ ---------- ------ ------ -------- Balances as of November 29, 1996.... 71,476 $ 7 $148,595 $529,546 $33,514 $(5,148) -- $-- $706,514 ------ ------ ---------- -------- ------------ ---------- ------ ------ -------- (Continued)
See accompanying Notes to Consolidated Financial Statements. 46 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) (IN THOUSANDS)
UNREALIZED COMMON STOCK ADDITIONAL GAINS ON CUMULATIVE TREASURY STOCK -------------- PAID-IN RETAINED INVESTMENTS, TRANSLATION ----------------- SHARES AMOUNT CAPITAL EARNINGS NET ADJUSTMENT SHARES AMOUNT TOTAL ------ ------ ---------- -------- ------------ ---------- ------ --------- -------- Balances as of November 29, 1996............... 71,476 $ 7 $148,595 $529,546 $ 33,514 $(5,148) -- $ -- $706,514 Stock issued under employee stock and stock option plans.............. 3,631 -- 70,995 -- -- -- -- -- 70,995 Tax benefit from employee stock option plans....... -- -- 29,607 -- -- -- -- -- 29,607 Stock compensation expense............ -- -- 1,329 -- -- -- -- -- 1,329 Dividends declared... -- -- -- (52,522) -- -- -- -- (52,522) Repurchase of common stock.............. (1,166) -- (36,956) -- -- -- (5,176) (238,688) (275,644) Proceeds from sale of put warrants....... -- -- 6,356 -- -- -- -- -- 6,356 Reclassification of expired put warrant obligations........ -- -- 71,348 -- -- -- -- -- 71,348 Unrealized gains on investments, net... -- -- -- -- (29,924) -- -- -- (29,924) Cumulative translation adjustment......... -- -- -- -- -- 528 -- -- 528 Net income........... -- -- -- 186,837 -- -- -- -- 186,837 ------ ------ ---------- -------- ------------ ---------- ------ --------- -------- Balances as of November 28, 1997............... 73,941 $ 7 $291,274 $663,861 $ 3,590 $(4,620) (5,176) $(238,688) $715,424 ------ ------ ---------- -------- ------------ ---------- ------ --------- -------- ------ ------ ---------- -------- ------------ ---------- ------ --------- --------
See accompanying Notes to Consolidated Financial Statements 47 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED ---------------------------------------- NOVEMBER 28 NOVEMBER 29 DECEMBER 1 1997 1996 1995 ------------ ------------ ------------ Cash flows from operating activities: Net income......................................................................... $ 186,837 $ 153,277 $ 93,485 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................................... 59,384 55,621 60,435 Deferred income taxes............................................................ (4,172) (9,420) (7,167) Equity in net (income) loss of Adobe Ventures.................................... 1,326 (19,001) 755 Gains on sales of equity securities.............................................. (35,616) (53,216) -- Tax benefit from employee stock option plans..................................... 29,607 10,828 32,445 Stock compensation expense....................................................... 1,329 2,772 4,433 Write-off of acquired in-process research and development........................ 5,969 21,251 14,983 Noncash restructuring costs...................................................... -- 2,525 4,714 Changes in operating assets and liabilities: Receivables.................................................................... (15,151) 8,556 (24,548) Other current assets........................................................... (2,351) (1,173) 628 Trade and other payables....................................................... 14,802 8,534 (7,032) Accrued expenses............................................................... (1,192) (27,427) 4,996 Income taxes payable........................................................... (32,294) 48,768 (4,845) Deferred revenue............................................................... 169 (3,781) 4,474 ------------ ------------ ------------ Net cash provided by operating activities............................................ 208,647 198,114 177,756 ------------ ------------ ------------ Cash flows from investing activities: Purchases of short-term investments................................................ (2,657,302) (2,363,993) (2,614,349) Maturities and sales of short-term investments..................................... 2,875,294 2,363,793 2,403,631 Acquisitions of property and equipment............................................. (33,882) (45,869) (34,071) Additions to other assets.......................................................... (42,122) (65,399) (96,721) Acquisitions, net of cash acquired................................................. (6,121) (8,027) (15,158) Proceeds from sales of equity securities........................................... 30,993 72,630 -- ------------ ------------ ------------ Net cash provided by (used for) investing activities................................. 166,860 (46,865) (356,668) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of common stock and put warrants............................ 77,351 39,870 70,367 Repurchase of common stock......................................................... (275,644) (126,778) (17,849) Payment of dividends............................................................... (20,911) (14,586) (12,310) Payment of Subchapter S distributions of Mastersoft................................ -- -- (3,342) ------------ ------------ ------------ Net cash provided by (used for) financing activities................................. (219,204) (101,494) 36,866 Effect of foreign currency exchange rates on cash and cash equivalents............... 528 2,497 10 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents................................. 156,831 52,252 (142,036) Adjustment for change in acquired company's fiscal year-end.......................... -- -- (3,591) Cash and cash equivalents at beginning of year....................................... 110,745 58,493 204,120 ------------ ------------ ------------ Cash and cash equivalents at end of year............................................. $ 267,576 $ 110,745 $ 58,493 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental disclosures: Cash paid during the year for income taxes......................................... $ 85,062 $ 30,463 $ 44,470 ------------ ------------ ------------ ------------ ------------ ------------ Noncash investing and financing activities: Cash dividends declared but not paid............................................. $ 3,558 $ 3,582 $ 3,645 ------------ ------------ ------------ ------------ ------------ ------------ Dividends in-kind declared but not distributed................................... $ 10,032 $ -- $ -- ------------ ------------ ------------ ------------ ------------ ------------ Dividends in-kind distributed.................................................... $ 21,603 $ -- $ -- ------------ ------------ ------------ ------------ ------------ ------------ Issuance of notes for acquisition................................................ $ -- $ 9,473 $ -- ------------ ------------ ------------ ------------ ------------ ------------
See accompanying Notes to Consolidated Financial Statements. 48 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES OPERATIONS Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets, and supports computer software products and technologies that enable users to express and use information across all print and electronic media. 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. Additionally, the Company markets a line of powerful, easy-to-use products 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 Asia, Pacific, and Latin America. FISCAL YEAR The Company's fiscal year is a 52/53 week year ending on the Friday closest to November 30. BASIS OF CONSOLIDATION The accompanying consolidated financial statements include those of Adobe and its subsidiaries, after elimination of all significant intercompany accounts and transactions. RECAPITALIZATION In May 1997, the Company was reincorporated in the State of Delaware. As part of this reincorporation, each outstanding share of the predecessor California Corporation preferred stock and common stock was converted automatically to one share of the new Delaware Corporation $0.0001 par value preferred stock and common stock. All prior periods presented have been restated to reflect this change. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities, at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents consist of instruments with maturities of three months or less at the time of purchase. All of the Company's cash equivalents and short-term investments, and certain noncurrent investments in equity securities, free of trading restrictions or to become free of trading restrictions within one year, are classified as "available-for-sale." These investments are carried at fair value, based on quoted market prices, and unrealized gains and losses, net of taxes, are reported as a separate component of stockholders' equity. Realized gains and losses upon sale or maturity of these investments are determined using the specific identification method. 49 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN CURRENCY TRANSLATION Assets and liabilities of certain foreign subsidiaries, whose functional currency is the local currency, are translated at year-end exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the year. The adjustment resulting from translating the financial statements of such foreign subsidiaries is reflected as a separate component of stockholders' equity. Certain other transaction gains or losses, which have not been material, are reported in results of operations. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives (thirty-five years for the building; two to seven years for furniture and equipment) or lease terms (five to nine years for leasehold improvements) of the respective assets. OTHER ASSETS Purchased technology, goodwill, and certain other intangible assets are stated at cost less accumulated amortization. Amortization is provided on the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Capitalization of computer software development costs, when material, begins upon the establishment of technological feasibility. Such costs are amortized using the greater of the ratio of current product revenue to the total current and anticipated product revenue or the straight-line method over the software's estimated economic life, generally 9 to 36 months. The Company periodically reviews the net realizable value of its intangible assets and adjusts the carrying amount accordingly. The Company owns a minority interest in certain technology companies. Such investments are accounted for under the cost method, as the Company does not have significant influence or control over the investee companies. The Company owns a majority interest in two limited partnerships that were established to invest in technology companies. The limited partnership investments are accounted for under the equity method because contractually the partnerships are controlled by the general partner, a third party. LONG-LIVED ASSETS The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property and equipment is measured by comparison of its carrying amount to future net cash flows the property and equipment are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property and equipment exceeds its fair market value, as determined by discounted cash flows. The Company assesses the recoverability of enterprise-level goodwill by determining whether the unamortized goodwill balance can be recovered through undiscounted future results 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. 50 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EMPLOYEE STOCK PLANS The Company accounts for its employee stock plans, which consist of fixed stock option plans, an employee stock purchase plan, and a performance and restricted stock plan, using the intrinsic value method. REVENUE RECOGNITION Application products revenue is recognized upon shipment. Revenue from distributors is subject to agreements allowing limited rights of return and price protection. The Company provides for estimated future returns at the time the related revenue is recorded. Licensing revenue is recognized when the Company's OEM customers ship their products incorporating Adobe's software. Revenue associated with adapting the Company's software products to an OEM customer's hardware products is recognized based on the percentage-of-completion method and is included in licensing revenue. Deferred revenue includes customer advances under OEM licensing agreements. Additionally, maintenance revenue for application products is deferred and recognized ratably over the term of the contract, generally 12 months. DIRECT COSTS Direct costs include direct product, packaging, and shipping costs, as well as royalties, localization costs, and amortization of acquired technologies. ADVERTISING COSTS Advertising costs are expensed as incurred. 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 amounts and the tax basis of existing assets and liabilities. A valuation allowance is recorded to reduce tax assets to an amount whose realization is more likely than not. FOREIGN CURRENCY HEDGING INSTRUMENTS The Company enters into foreign exchange contracts to hedge its foreign currency risks. Such contracts must be effective at reducing the foreign currency risk associated with the underlying transaction being hedged and must be designated as a hedge at the inception of the contract. The Company, as a matter of policy, does not engage in speculative transactions. The Company currently uses forward contracts as hedges of firmly committed transactions. For these contracts, mark-to-market gains and losses are recognized as other income or expense in the current period, generally consistent with the period in which the gain or loss of the underlying transaction is 51 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) recognized. All forward foreign currency contracts currently entered into by the Company have maturities of 90 days or less. PUT WARRANTS AND CALL OPTIONS The Company utilizes put warrants and call option arrangements to facilitate the repurchase of its common stock. In 1997, the Company can settle, at its option, all outstanding puts and calls with physical delivery or net shares equal to the difference between the exercise price and the market value at the date of exercise. Accordingly, the potential repurchase obligation under these arrangements is included in stockholders' equity. In 1996, the arrangements required physical delivery, and accordingly, the potential buyback obligation was removed from stockholders' equity and recorded as put warrants. Proceeds from the sale of put warrants are recorded in stockholders' equity. 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. The difference between primary and fully diluted net income per share is not significant in all periods presented. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 establishes a different method of computing net income per share than is currently required under the provisions of Accounting Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be required to present both basic net income per share and diluted net income per share. Basic net income per share is expected to be higher than the currently presented net income per share, as the effect of dilutive stock options will not be considered in computing basic net income per share. Diluted net income per share is expected to be comparable to the currently presented net income per share. The Company plans to adopt SFAS No. 128 in its fiscal quarter ending February 27, 1998, and at that time, all historical net income per share data presented will be restated to conform to the provisions of SFAS No. 128. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It does not, however, require a specific format for the disclosure but requires the Company to display an amount representing total comprehensive income for the period in its financial statements. The Company will be required to implement SFAS No. 130 for its fiscal year 1999. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. The Company is currently evaluating the operating segment information that it will be required to report. The Company will be required to implement SFAS No. 131 for its fiscal year 1999. 52 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 establishes standards relating to the recognition of all aspects of software revenue. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997 and will require the Company to modify certain aspects of its revenue recognition policies. The Company does not expect the adoption of SOP 97-2 to have a material impact on the Company's consolidated results of operations. RECLASSIFICATIONS Certain reclassifications were made to the 1996 and 1995 consolidated financial statements to conform to the 1997 presentation. NOTE 2. ACQUISITIONS During 1997, 1996, and 1995, the Company acquired seven software companies, in separate transactions, for an aggregate consideration of approximately $45.8 million in cash, notes payable, and the assumption of certain liabilities. These acquisitions were accounted for using the purchase method of accounting and resulted in the write-off of acquired in-process research and development of $6.0 million, $21.3 million, and $15.0 million during fiscal 1997, 1996, and 1995, respectively. The operating results of the acquired companies have been included in the accompanying consolidated financial statements from their dates of acquisition. The operating results of each company acquired are not considered material to the consolidated financial statements of Adobe and, accordingly, pro forma information has not been presented. NOTE 3. CASH EQUIVALENTS AND INVESTMENTS All cash equivalents, short-term investments, and certain noncurrent investments consisted of the following:
AS OF NOVEMBER 28, 1997 ---------------------------------------------- UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE -------- ---------- ---------- ---------- Classified as current assets: Money market mutual funds...................................... $ 53,051 $ -- $-- $ 53,051 State and municipal bonds and notes............................ 394,295 757 (36) 395,016 Corporate and bank notes....................................... 6,400 -- -- 6,400 Auction-rate securities........................................ 2,800 -- -- 2,800 Equity securities.............................................. 4,082 5,292 -- 9,374 -------- ---------- ----- ---------- Total current.................................................. 460,628 6,049 (36) 466,641 -------- ---------- ----- ---------- Classified as noncurrent assets: Money market mutual funds...................................... 46 -- -- 46 United States government treasury notes........................ 66,607 9 (9) 66,607 -------- ---------- ----- ---------- Total noncurrent............................................... 66,653 9 (9) 66,653 -------- ---------- ----- ---------- Total securities............................................... $527,281 $ 6,058 $ (45) $ 533,294 -------- ---------- ----- ---------- -------- ---------- ----- ----------
53 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 3. CASH EQUIVALENTS AND INVESTMENTS (CONTINUED)
AS OF NOVEMBER 29, 1996 ---------------------------------------------- UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE -------- ---------- ---------- ---------- Classified as current assets: Money market mutual funds...................................... $ 39,381 $ -- $-- $ 39,381 United States government treasury notes and agency discount notes........................................................ 90,617 424 (247) 90,794 State and municipal bonds and notes............................ 358,612 1,894 (36) 360,470 Corporate and bank notes....................................... 38,598 405 (33) 38,970 Auction-rate securities........................................ 10,000 -- -- 10,000 Asset-backed securities........................................ 11,740 91 (110) 11,721 -------- ---------- ----- ---------- Total current.................................................. 548,948 2,814 (426) 551,336 -------- ---------- ----- ---------- Classified as noncurrent assets: Money market mutual funds...................................... 15,977 -- -- 15,977 United States government treasury notes........................ 50,327 -- (183) 50,144 Equity securities.............................................. 3,882 54,216 (19) 58,079 -------- ---------- ----- ---------- Total noncurrent............................................... 70,186 54,216 (202) 124,200 -------- ---------- ----- ---------- Total securities............................................... $619,134 $57,030 $(628) $ 675,536 -------- ---------- ----- ---------- -------- ---------- ----- ----------
Approximately $231.2 million and $97.9 million in investments are classified as cash equivalents as of November 28, 1997 and November 29, 1996, respectively, and all noncurrent investments are included in other assets. Unrealized gains (losses) on all securities are reported as a separate component of stockholders' equity, net of taxes of $2.4 million and $23.0 million as of November 28, 1997 and November 29, 1996, respectively. Net realized gains for the years ended November 28, 1997 and November 29, 1996 of $38.4 million and $48.4 million, respectively, are included in nonoperating income. As of November 28, 1997, the cost, which approximated fair value, of current debt securities and money market mutual funds with a maturity of one year or less was $257.0 million, and the cost and estimated fair value of current debt securities with maturities ranging from one to five years was $196.7 million and $197.4 million, respectively. Other debt securities include auction-rate securities of $2.8 million. Included in auction-rate securities are Auction Rate Certificate Securities whose stated maturities exceed ten years. However, the Company has the option of adjusting the respective interest rates or liquidating these investments at auction on stated auction dates every 35 days. 54 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
NOVEMBER 28 NOVEMBER 29 1997 1996 ----------- ----------- Land.............................................................. $ 782 $ 782 Building.......................................................... 4,477 4,615 Equipment......................................................... 141,067 121,044 Furniture and fixtures............................................ 21,243 18,126 Leasehold improvements............................................ 19,916 13,036 ----------- ----------- 187,485 157,603 Less accumulated depreciation and amortization.................... 106,507 77,372 ----------- ----------- $ 80,978 $ 80,231 ----------- ----------- ----------- -----------
NOTE 5. OTHER ASSETS Other assets consisted of the following:
NOVEMBER 28 NOVEMBER 29 1997 1996 ------------ ------------ Equity investments................................................ $ 35,689 $ 97,679 Purchased technology and licensing agreements..................... 5,043 32,211 Restricted funds and security deposits............................ 102,962 69,443 Intangibles and other assets...................................... 45,097 35,470 ------------ ------------ 188,791 234,803 Less accumulated amortization..................................... 25,643 39,455 ------------ ------------ $ 163,148 $ 195,348 ------------ ------------ ------------ ------------
Included above in equity investments at November 29, 1996, are unrealized gains and losses. The equity investment in Netscape Communications Corporation ("Netscape") was marked-to-market for an unrealized gain of $47.7 million in 1996. In 1997, the Company recorded realized gains of $32.8 million related to the disposal of its holdings in Netscape through the distribution of 554,660 Netscape shares to the Company's stockholders as a dividend-in-kind and the sale of its remaining Netscape shares. The Company recorded additional realized gains in 1997 of $4.5 million related to the sale of other equity investments. During 1996, the Company recorded realized gains of approximately $43.6 million and approximately $6.8 million for the sale of a portion of its investment in Netscape and its entire investment in Luminous, respectively. Amortization expense related to purchased technology and other intangibles was $26.2 million and $42.8 million in fiscal 1997 and fiscal 1996, respectively. 55 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 6. ACCRUED EXPENSES Accrued expenses consisted of the following:
NOVEMBER 28 NOVEMBER 29 1997 1996 ------------ ------------ Accrued compensation and benefits................................. $ 37,833 $ 24,673 Sales and marketing allowances.................................... 13,028 13,753 Other............................................................. 51,880 55,493 ------------ ------------ $ 102,741 $ 93,919 ------------ ------------ ------------ ------------
NOTE 7. INCOME TAXES Income before income taxes includes net income from foreign operations of approximately $59.3 million, $25.4 million, and $19.2 million for the years ended November 28, 1997, November 29, 1996, and December 1, 1995, respectively. The provision for income taxes consisted of the following:
YEARS ENDED --------------------------------------- NOVEMBER 28 NOVEMBER 29 DECEMBER 1 1997 1996 1995 ------------ ------------ ----------- Current: United States federal................................................. $ 42,238 $ 65,118 $ 21,466 Foreign............................................................... 29,260 12,290 18,418 State and local....................................................... 12,320 12,731 5,206 ------------ ------------ ----------- Total current........................................................... 83,818 90,139 45,090 ------------ ------------ ----------- Deferred: United States federal................................................. (1,721) (6,825) (6,305) Foreign............................................................... (2,071) (780) (986) State and local....................................................... (380) (1,815) 124 ------------ ------------ ----------- Total deferred.......................................................... (4,172) (9,420) (7,167) ------------ ------------ ----------- Charge in lieu of taxes attributable to employee stock plans............ 29,607 10,828 32,445 ------------ ------------ ----------- $ 109,253 $ 91,547 $ 70,368 ------------ ------------ ----------- ------------ ------------ -----------
56 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 7. INCOME TAXES (CONTINUED) Total income tax expense differs from the expected tax expense (computed by multiplying the United States federal statutory rate of approximately 35 percent for 1997, 1996, and 1995 by income before income taxes) as a result of the following:
YEARS ENDED --------------------------------------- NOVEMBER 28 NOVEMBER 29 DECEMBER 1 1997 1996 1995 ------------ ------------ ----------- Computed "expected" tax expense......................................... $ 103,632 $ 85,689 $ 57,349 State tax expense, net of federal benefit............................... 10,301 9,819 6,442 Nondeductible merger costs.............................................. -- -- 4,078 Nondeductible write-off of acquired in-process research and development........................................................... 1,791 5,310 5,244 Nondeductible goodwill.................................................. 825 772 3,689 Tax-exempt income....................................................... (5,559) (3,304) (3,532) Tax credits............................................................. (4,604) (4,912) (3,904) Foreign losses, not benefited........................................... -- -- 2,706 Foreign tax rate differential........................................... 1,864 (4,003) 1,130 Other, net.............................................................. 1,003 2,176 (2,834) ------------ ------------ ----------- $ 109,253 $ 91,547 $ 70,368 ------------ ------------ ----------- ------------ ------------ -----------
The tax effects of the temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of 1997 and 1996 are presented below:
NOVEMBER 28 NOVEMBER 29 1997 1996 ------------ ------------ Deferred tax assets: Acquired technology................................................................. $ 12,720 $ 12,037 Reserves and deferred revenue....................................................... 25,511 24,615 Depreciation and amortization....................................................... 3,558 7,662 Net operating loss carryforwards.................................................... 3,260 4,278 Tax credits and other carryforwards................................................. -- 1,614 Other............................................................................... 5,652 5,800 ------------ ------------ Total gross deferred tax assets................................................... 50,701 56,006 Deferred tax asset valuation allowance............................................ (3,643) (5,950) ------------ ------------ Total deferred tax assets......................................................... 47,058 50,056 ------------ ------------ Deferred tax liabilities: Investments......................................................................... (2,423) (22,888) Other............................................................................... (1,812) (1,943) ------------ ------------ Total deferred tax liabilities.................................................... (4,235) (24,831) ------------ ------------ Net deferred tax assets............................................................... $ 42,823 $ 25,225 ------------ ------------ ------------ ------------
The Company provides United States income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are considered permanently reinvested outside the United States. As of November 28, 1997, the cumulative amount of earnings upon which United States income taxes have not been 57 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 7. INCOME TAXES (CONTINUED) provided are approximately $32.7 million. The unrecognized deferred tax liability for these earnings is approximately $4.0 million. As of November 28, 1997, the Company has foreign operating loss carryovers in various jurisdictions of approximately $3.1 million with various expiration dates. For financial reporting purposes, a valuation allowance has been established to fully offset the deferred tax assets related to foreign operating losses due to uncertainties in utilizing these losses. A valuation allowance has also been established for certain deductions related to investments. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. The Company's federal tax returns have been examined by the Internal Revenue Service for all years through 1993. The Internal Revenue Service has proposed assessments that the Company is contesting in Tax Court. Management believes that any related adjustments that might be required will not have a material effect on the Company's financial position or results of operations. NOTE 8. BENEFIT PLANS PRETAX SAVINGS PLAN In 1987, the Company adopted an Employee Investment Plan, qualified under Section 401(k) of the Internal Revenue Code, which is a pretax savings plan covering substantially all of the Company's United States employees. Under the plan, eligible employees may contribute up to 18% of their pretax salary, subject to certain limitations. The Company matches approximately 25% of employee contributions and contributed approximately $1.8 million, $1.6 million, and $1.2 million in 1997, 1996, and 1995, respectively. Matching contributions can be terminated at the Company's discretion. ADOBE INCENTIVE PARTNERS In March 1997, as part of its venture investing 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 partner. Other limited partners are executive officers of the Company who are involved in Adobe's venture investing activities and whose participation is deemed critical to the success of the program. Adobe's Class A senior limited partnership interest includes both a liquidation preference and a preference in recovery of the cost basis of each specific investment. The executives' Class B junior limited partnership interest qualifies for partnership distributions only after: (a) Adobe has fully recovered the cost basis of its investment in the specific investee company for which a distribution is made; and (b) the participating executive has vested in his or her distribution rights. The distribution rights generally vest on a monthly basis over three years, such that the rights are 25% vested after one year, 50% vested after two years, and fully vested at the end of three years. The limited partnership investments are restricted to investments in companies that are private at the time of the establishment of AIP or when the investment is made, whichever is later. Partnership interests may be allocated to designated officers only while the investee company is still private. Class B interests may not exceed a maximum of 20% of the venture investments included in AIP. Assets held by AIP include Adobe's entire interests in Adobe Ventures L.P. and Adobe Ventures II L.P. and equity securities of privately held companies. At November 28, 1997, the cost basis of all 58 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 8. BENEFIT PLANS (CONTINUED) investments included in AIP was approximately $34.8 million. No distributions were made to the participating officers in fiscal 1997, and expense related to AIP in fiscal 1997 was immaterial. At November 28, 1997, the minority interest held by the participating officers was immaterial and is included in accrued expenses on the balance sheet. NOTE 9. EMPLOYEE STOCK PLANS STOCK OPTION PLANS As of November 28, 1997, the Company has reserved 29,200,000 shares of common stock for issuance under its employee stock option plan. The employee stock option plan provides for the granting of stock options to employees and officers at the fair market value of the Company's common stock at the grant date. Options generally vest 25% after the first year and ratably thereafter such that 50% and 100% are vested after the second and third year, respectively. The option terms range from five to ten years. The Company has reserved, as of November 28, 1997, 500,000 shares of common stock for issuance under its Outside Directors Stock Option Plan, which provides for the granting of nonqualified stock options to nonemployee directors. Option grants are limited to 10,000 shares per person in each fiscal year, except for a new nonemployee director, who may be granted 15,000 shares upon election as a director. All options are immediately exercisable within a ten-year term. Any exercised, unvested option shares are subject to repurchase by the Company at the original purchase price upon termination of the director's service. Options generally vest over three years: 25% in each of the first two years and 50% in the third year. On March 22, 1996, the Company offered its employees a stock option repricing program that 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 were not exercisable until November 1, 1996. Stock option activity for 1997, 1996, and 1995 is presented below:
YEARS ENDED ------------------------------------------------------------------------------ NOVEMBER 28 NOVEMBER 29 DECEMBER 1 1997 1996 1995 ------------------------ ------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE ----------- ----------- ------------ ----------- ------------ ----------- Outstanding, beginning of year.................. 9,297,188 $ 25.68 10,125,792 $ 26.30 11,173,336 $ 19.61 Granted......................................... 2,452,117 $ 40.85 2,670,673 $ 33.53 2,391,568 $ 47.72 Exercised....................................... (3,063,778) $ 20.29 (1,470,762) $ 17.37 (3,008,917) $ 19.04 Canceled........................................ (539,292) $ 33.75 (2,028,515) $ 45.15 (430,195) $ 26.57 ----------- ------------ ------------ Outstanding, end of year........................ 8,146,235 $ 31.74 9,297,188 $ 25.68 10,125,792 $ 26.30 ----------- ------------ ------------ ----------- ------------ ------------ Exercisable, end of year........................ 4,562,954 $ 26.50 6,057,500 $ 21.63 5,783,226 $ 18.71 ----------- ------------ ------------ ----------- ------------ ------------ Weighted-average fair value of options granted during the year............................... $ 15.68 $ 12.91
59 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 9. EMPLOYEE STOCK PLANS (CONTINUED) Information regarding the stock options outstanding at November 28, 1997 is summarized below.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- ----------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE SHARES CONTRACTUAL EXERCISE SHARES EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ---------------------------------------------------- ----------- ----------- ----------- ---------- ----------- $ 3.45--$ 9.45...................................... 480,163 1.67 years $ 8.64 477,979 $ 8.67 $10.13--$19.63...................................... 538,026 4.38 years $ 14.79 536,576 $ 14.78 $20.00--$29.88...................................... 1,927,381 5.18 years $ 25.15 1,883,067 $ 25.13 $30.00--$39.88...................................... 3,131,671 8.13 years $ 34.21 1,145,311 $ 32.97 $40.38--$49.81...................................... 1,724,524 8.72 years $ 42.44 313,080 $ 42.15 $50.75--$67.00...................................... 344,470 7.57 years $ 51.20 206,941 $ 51.14 ----------- ---------- $ 3.45--$67.00...................................... 8,146,235 6.91 years $ 31.74 4,562,954 $ 26.50 ----------- ---------- ----------- ----------
PERFORMANCE AND RESTRICTED STOCK PLAN The Performance and Restricted Stock Plan ("the Plan") provides for the granting of restricted stock and/or performance units to officers and key employees. As of November 28, 1997, the Company had reserved 1,500,000 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 grant, as the stockholders are entitled to dividends and voting rights. As of November 28, 1997, 110,511 shares were outstanding and not yet vested. In fiscal 1997, the Company granted 129,550 shares of restricted stock with a weighted-average fair value of $39.04, and in fiscal 1996, the Company granted 26,750 shares of restricted stock with a weighted-average fair value of $37.71. Performance units issued under this plan entitle the recipient to receive, at the discretion of the Company, shares or cash upon completion of the performance period subject to attaining identified performance goals. Performance units are generally earned over a three-year period, and shares earned are issued at the end of the three-year period. The ultimate value of the performance units is dependent upon the Company's revenue and operating margin growth (as defined by the Plan) during the three-year performance period adjusted by a factor determined in 1997 by comparing the Company's return on equity to the return on equity of a group of comparable companies. In 1996 and 1995, the factor was determined by comparing the growth in the Company's stock price to an index of comparable stocks. The projected value of these units is accrued by the Company and charged to expense over the three-year performance period. As of November 28, 1997, November 29, 1996, and December 1, 1995, performance units for 170,874; 94,745; and 75,420 shares were outstanding, respectively, and $(2.1) million, $(0.2) million and $2.5 million was charged (credited) to expense in 1997, 1996, and 1995, respectively. In fiscal 1997 and 1996, performance units were granted for 156,500 and 48,965 shares, respectively, and the weighted-average fair value of the shares were $39.04 and $64.03, respectively. EMPLOYEE STOCK PURCHASE PLAN The Company's Employee Stock Purchase Plan allows eligible employee participants to purchase shares of the Company's common stock at a discount through payroll deductions. The plan consists of two- 60 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 9. EMPLOYEE STOCK PLANS (CONTINUED) year offering periods with four six-month purchase periods in each offering period. Employees purchase shares at 85% of the market value at either the beginning of the offering period or the end of the purchase period, whichever price is lower. As of November 28, 1997, the Company had reserved 7,000,000 shares of its common stock for issuance under this plan and 3,383,780 shares remain available for future issuance. The weighted-average fair value of the purchase rights granted in fiscal 1997 and 1996 was $16.36 and $14.01, respectively. PRO FORMA FAIR VALUE DISCLOSURES The Company accounts for its employee stock plans, consisting of fixed stock option plans, an employee stock purchase plan, and a performance and restricted stock plan, using the intrinsic value method. The table below sets forth the pro forma amounts of net income and net income per share that would have resulted if the Company accounted for its employee stock plans under the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
YEARS ENDED -------------------------- NOVEMBER 28 NOVEMBER 29 1997 1996 ------------ ------------ Net income: As reported..................................................... $ 186,837 $ 153,277 Pro forma....................................................... $ 161,790 $ 144,368 Net income per share: As reported..................................................... $ 2.52 $ 2.04 Pro forma....................................................... $ 2.21 $ 1.92
For purposes of computing pro forma net income, the fair value of each option grant, restricted stock grant, and Employee Stock Purchase Plan purchase right is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used to value the option grants and purchase rights are stated below:
YEARS ENDED ------------------------------ NOVEMBER 28 NOVEMBER 29 1997 1996 -------------- -------------- Expected life of options..................................... 3 years 3 years Expected life of restricted stock............................ 3 years 3 years Expected life of purchase rights............................. 1.25 years 1.25 years Volatility................................................... 50% 50% Risk-free interest rate...................................... 5.01--6.60% 5.54--6.66% Dividend yield............................................... 0.5% 0.5%
Options and restricted stock grants vest over several years, and new option and restricted stock grants are generally made each year. Because of this and because the provisions of SFAS No. 123 are effective only for fiscal years 1996 and 1997, the pro forma amounts shown above may not be representative of the pro forma effect on reported net income in future years. 61 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 10. STOCKHOLDERS' EQUITY STOCKHOLDER RIGHTS PLAN The Company's Stockholder Rights Plan is intended to protect stockholders from unfair or coercive takeover practices. In accordance with this plan, the Board of Directors declared a dividend distribution of one common stock purchase right on each outstanding share of its common stock held as of July 24, 1990, and on each share of common stock issued by the Company thereafter. Each right entitles the registered holder to purchase from the Company a share of common stock at $115. The rights become exercisable in certain circumstances including upon an entity acquiring or announcing the intention to acquire beneficial ownership of 20 percent or more of the Company's common stock without the approval of the Board of Directors or upon the Company being acquired by any person in a merger or business combination transaction. The rights are redeemable by the Company prior to exercise at $0.01 per right and expire on July 24, 2000. STOCK REPURCHASE PROGRAM In September 1997, the Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 15,000,000 shares of the Company's stock over the next two years. The Company purchased 6,342,395 shares and 3,390,240 shares of its common stock in 1997 and 1996, respectively, at a cost of $275.6 million and $126.8 million, respectively, under its stock repurchase programs as well as through employee stock option exercise transactions. Prior to the Company's reincorporation in the State of Delaware in May 1997, the shares purchased were returned to the status of authorized and unissued as required by California law. The 5,175,851 shares purchased 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 sheet. PUT WARRANTS To facilitate the Company's stock repurchase programs, the Company sold put warrants in a series of private placements in 1997 and 1996. Each warrant entitled the holder to sell one share of Adobe's common stock to the Company at a specified price. Approximately 4.6 million and 4.5 million put warrants were written in 1997 and 1996, respectively. At November 28, 1997, approximately 2.9 million put warrants were outstanding that expire on various dates through May 1998 and have exercise prices ranging from $37.07 to $47.98 per share, with an average exercise price of $43.09 per share. In addition, in 1997 and 1996, the Company purchased call options from an independent third party that entitled the Company to buy 2.3 million and 4.5 million shares, respectively, of its common stock. At November 28, 1997, approximately 0.5 million call options were outstanding that expire on various dates through April 1998 and have exercise prices ranging from $37.32 to $46.86 per share, with an average exercise price of $41.32 per share. As part of the Company's current stock repurchase programs, the Company may, from time to time, enter into additional put warrant and call option arrangements. Under these arrangements, the Company, at its option, can settle with physical delivery or net shares equal to the difference between the exercise price and market value at the date of exercise. Accordingly, the arrangements do not require the reclassification of the obligation under put warrants from equity, and no such reclassification of the Company's obligation at November 28, 1997 has been made. Such arrangements were not in place at November 29, 1996, and therefore, the Company's potential buyback obligation of $71.3 million as of 62 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 10. STOCKHOLDERS' EQUITY (CONTINUED) November 29, 1996 was removed from stockholders' equity and recorded as put warrants. In the future, the Company may consider other methods to acquire the Company's stock including direct purchases, open market purchases, accelerated stock purchase programs, and other potential methods. VENTURE STOCK DIVIDEND PROGRAM In March 1997, the Company established the venture stock dividend program under which the Company may, from time to time, distribute as a dividend-in-kind shares of its equity holdings in investee companies to Adobe stockholders. In 1997, the Company dividended one share of Netscape common stock for each 100 shares of Adobe common stock held by stockholders of record on 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 common stock for each 300 shares of Adobe common stock held by stockholders of record on October 31, 1997. An equivalent cash dividend was paid for holdings of less than 7,500 Adobe shares and for fractional Siebel shares. The declaration of future dividends under this program is within the discretion of the Board of Directors of the Company and will depend upon business conditions, the Company's results of operations and financial condition, and other factors. NOTE 11. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company has operating leases for its corporate headquarters, field sales offices, and certain office equipment that expire at various dates through 2015. Rent expense for these leases aggregated $17.8 million, $18.3 million, and $21.0 million during 1997, 1996, and 1995, respectively. As of November 28, 1997, future minimum lease payments under noncancelable operating leases are as follows: 1998 - $17.9 million; 1999 -$12.8 million; 2000--$9.3 million; 2001--$7.8 million; 2002--$3.0 million and $13.2 million, thereafter. 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 an office facility. In August 1996, the construction was completed, and the operating lease commenced. The Company will have the option to purchase the facility at the end of the lease term in October 2001. 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 $57.3 million. During the construction period, the Company was required to pledge certain interest-bearing instruments to the lessor as collateral to secure the performance of its obligations under the lease. As of November 28, 1997, the Company's deposits under this agreement totaled approximately $66.7 million in United States government treasury notes and money market mutual funds. These deposits are included in "Other assets" in the Consolidated Balance Sheets. In 1996, the Company exercised its option under the development agreement to begin a second phase of development for an additional office facility. In August 1996, the Company entered into a construction 63 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) agreement and an operating lease agreement for this facility. The operating lease will commence on completion of construction in 1998. The Company will have the option to purchase the facility at the end of the lease term (five years after occupancy). 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 $64.3 million. The Company also is required, periodically during the construction period, to deposit funds with the lessor as an interest-bearing security deposit to secure the performance of its obligations under the lease. During 1997, the Company deposited approximately $33.0 million, and as of November 28, 1997, the Company's deposits under this agreement totaled approximately $36.3 million. These deposits are included in "Other assets" in the Consolidated Balance Sheets. ROYALTIES The Company has certain royalty commitments associated with the shipment and licensing of certain products. While royalty expense is generally based on a dollar amount per unit shipped, ranging from $0.25 to $312, certain royalties are based on a percentage, ranging from 0.03% to 12%, of the underlying revenue. Royalty expense was approximately $25.0 million, $19.8 million, and $23.1 million in 1997, 1996, and 1995, respectively. 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 that the ultimate outcome of these actions will not have a material effect on the Company's financial position and results of operations. NOTE 12. TRANSACTIONS WITH AFFILIATE At November 28, 1997, the Company held a 13% equity interest in McQueen International Limited ("McQueen") and accounts for the investment using the cost method. During 1994, the Company entered into various agreements with McQueen, whereby the Company contracted with McQueen to perform product localization and technical support functions and to provide printing, assembly, and warehousing services. Adobe makes minimum annual payments to McQueen for certain services which amounted to $5.2 million and $4.8 million in 1997 and 1996, respectively, and will be approximately $1.4 million in 1998. Purchases from McQueen amounted to $35.0 million, $34.3 million, and $23.6 million during 1997, 1996, and 1995, respectively. 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' restricted common stock and will record a gain on the exchange of $6.7 million in fiscal 1998. The Company's equity interest in Sykes is less than 2%. 64 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 13. FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's cash equivalents, short-term investments, restricted funds, and marketable equity securities are carried at fair value, based on quoted market prices for these or similar investments. (See Note 3.) The Company's majority interest in Adobe Ventures L.P. and Adobe Ventures II L.P. is carried at a combined value of $25.7 million which is believed to approximate the fair value of underlying investments in technology companies. Substantially all of the technology companies held by the limited partnerships at November 28, 1997 are not publicly traded, and therefore there is no established market for these investments. As such, these investments are valued based on the most recent round of financing involving new non-strategic investors and estimates made by the general partner, a third party. When investments held by the limited partnerships are publicly traded, the fair value of such investments is based on quoted market prices, and mark-to-market adjustments are included in investment income. In general, as a matter of policy of the limited partnerships, the investments in the technology companies held by the limited partnerships will be distributed to the partners prior to the investee company's initial public offering. FOREIGN CURRENCY HEDGING INSTRUMENTS The Company enters into forward exchange contracts to hedge foreign currency exposures on a continuing basis for periods consistent with its committed exposures. These transactions generally do not subject the Company to risk of accounting loss because gains and losses on these contracts offset losses and gains on the assets, liabilities, and transactions being hedged. However, the Company is exposed to credit-related losses in the event of nonperformance by the counterparties in these contracts. These contracts have maturities of less than three months, and the amounts of unrealized gains and losses are immaterial. The Company held $1.9 million of aggregate foreign currency forward exchange contracts for the sale of the Japanese yen outstanding at the end of fiscal year 1997. There were no foreign currency forward exchange contracts outstanding at the end of fiscal 1996. CONCENTRATION OF RISK Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, short-term investments, and accounts receivable. The Company's investment portfolio consists of investment-grade securities diversified among security types, industries, and issuers. The Company's investments are managed by recognized financial institutions that follow the Company's investment policy. The Company's policy limits the amount of credit exposure in any one issue, and the Company believes no significant concentration of credit risk exists with respect to these investments. Credit risk in receivables is limited to OEM customers, and to dealers and distributors of hardware and software products to the retail market. The Company adopts credit policies and standards to keep pace with the evolving software industry. Management believes that any risk of accounting loss is significantly reduced due to the diversity of its products, end users, and geographic sales areas. The Company performs ongoing credit evaluations of its customers' financial condition and requires letters of credit or other guarantees, whenever deemed necessary. 65 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 13. FINANCIAL INSTRUMENTS (CONTINUED) A significant portion of the Company's licensing revenue is derived from a small number of OEM customers. The Company's OEM customers on occasion seek to renegotiate their royalty arrangements. The Company evaluates these requests on a case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, which could result in lower licensing revenue for the Company. Also, in the fall of 1997, one of Adobe's largest PostScript customers, Hewlett-Packard Company ("HP"), introduced a non-Adobe clone version of PostScript in one family of monochrome laser printers. INDUSTRY SEGMENT Adobe and its subsidiaries operate in one dominant industry segment, as defined 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. No customer accounted for more than 10% of the Company's total revenue in 1997, 1996, or 1995. NOTE 14. FOREIGN OPERATIONS Geographic information for each of the years in the three-year period ended November 28, 1997, is presented below:
YEARS ENDED --------------------------------------- NOVEMBER 28 NOVEMBER 29 DECEMBER 1 1997 1996 1995 ------------ ------------ ----------- Revenue: North America....................................................... $ 606,633 $ 526,251 $ 533,332 Europe.............................................................. 226,557 134,879 133,982 Japan and Asia, Pacific, and Latin America.......................... 222,911 176,490 107,357 Eliminations........................................................ (144,207) (51,057) (12,332) ------------ ------------ ----------- $ 911,894 $ 786,563 $ 762,339 ------------ ------------ ----------- ------------ ------------ ----------- Operating income: North America....................................................... $ 87,035 $ 31,186 $ 26,446 Europe.............................................................. 69,371 16,408 37,319 Japan and Asia, Pacific, and Latin America.......................... 135,657 103,002 70,416 Eliminations........................................................ (61,307) (3,810) 390 ------------ ------------ ----------- $ 230,756 $ 146,786 $ 134,571 ------------ ------------ ----------- ------------ ------------ ----------- Identifiable assets: North America....................................................... $ 923,704 $1,015,065 $ 934,705 Europe.............................................................. 79,291 67,506 62,993 Japan and Asia, Pacific, and Latin America.......................... 32,161 22,102 13,946 Eliminations........................................................ (95,085) (103,280) (138,817) ------------ ------------ ----------- $ 940,071 $1,001,393 $ 872,827 ------------ ------------ ----------- ------------ ------------ -----------
66 FINANCIAL STATEMENT SCHEDULE As required under Item 8, Financial 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
67 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
ADDITIONS -------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OPERATING OTHER END OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS OF PERIOD ----------- ----------- ------------- ----------- ----------- Allowance for doubtful accounts: Year Ended: November 28, 1997............................. $ 5,196 $ (440) $ -- $ 1,122 $ 3,634 November 29, 1996............................. $ 3,698 $ 1,927 $ -- $ 429 $ 5,196 December 1, 1995.............................. $ 3,893 $ 2,038 $ (423) $ 1,810 $ 3,698
Deductions related to the allowance for doubtful accounts represent amounts written off against the allowance. - ------------------------ (1) The $423 reduction in 1995 reflects the effect of including Frame allowance activity for the month ended December 31, 1994 in the years ended November 25, 1994 and December 1, 1995. See accompanying Independent Auditors' Report. 68 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 - ----------- --------------------------------------------------------------------------------------------------------- 3.2.10 Amended and Restated Bylaws as currently in effect 3.3 Certificate of Designation of the Series A Preferred Stock 10.42 Amended and Restated Limited Partnership Agreement of Adobe Incentive Partners, L.P. 10.43 Resignation Agreement 10.44 Forms of Retention Agreement 11 Computation of Earnings per Common Share 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule
69 EX-3.2-10 2 EXHIBIT 3.2.10 EXHIBIT 3.2.10 AMENDED AND RESTATED BYLAWS OF ADOBE SYSTEMS INCORPORATED DATED SEPTEMBER 19, 1997 TABLE OF CONTENTS PAGE ---- ARTICLE I OFFICES . . . . . . . . . . . . . . . 1 Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . 1 Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II CORPORATE SEAL . . . . . . . . . . . . . 1 Section 3. Corporate Seal . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE III STOCKHOLDERS' MEETINGS . . . . . . . . . . . 1 Section 4. Place of Meetings. . . . . . . . . . . . . . . . . . . . 1 Section 5. Annual Meeting . . . . . . . . . . . . . . . . . . . . . 2 Section 6. Special Meetings . . . . . . . . . . . . . . . . . . . . 4 Section 7. Notice of Meetings . . . . . . . . . . . . . . . . . . . 4 Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 9. Adjournment and Notice of Adjourned Meetings . . . . . . 5 Section 10. Voting Rights. . . . . . . . . . . . . . . . . . . . . . 5 Section 11. Joint Owners of Stock. . . . . . . . . . . . . . . . . . 6 Section 12. List of Stockholders . . . . . . . . . . . . . . . . . . 6 Section 13. Action Without Meeting . . . . . . . . . . . . . . . . . 6 Section 14. Organization . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE IV DIRECTORS. . . . . . . . . . . . . . . 7 Section 15. Number and Term of Office. . . . . . . . . . . . . . . . 7 Section 16. Powers . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 17. Classes of Directors.. . . . . . . . . . . . . . . . . . 7 Section 18. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . 8 Section 19. Resignation. . . . . . . . . . . . . . . . . . . . . . . 8 Section 20. Removal. . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 21. Meetings . . . . . . . . . . . . . . . . . . . . . . . . 9 (a) Annual Meetings . . . . . . . . . . . . . . . . . . 9 (b) Regular Meetings. . . . . . . . . . . . . . . . . . 9 (c) Special Meetings. . . . . . . . . . . . . . . . . . 9 (d) Telephone Meetings. . . . . . . . . . . . . . . . . 9 TABLE OF CONTENTS (CONTINUED) PAGE ---- (e) Notice of Meetings. . . . . . . . . . . . . . . . . 9 (f) Waiver of Notice. . . . . . . . . . . . . . . . . . 9 Section 22. Quorum and Voting. . . . . . . . . . . . . . . . . . . . 10 Section 23. Action Without Meeting . . . . . . . . . . . . . . . . . 10 Section 24. Fees and Compensation. . . . . . . . . . . . . . . . . . 10 Section 25. Committees . . . . . . . . . . . . . . . . . . . . . . . 10 (a) Executive Committee . . . . . . . . . . . . . . . . 10 (b) Other Committees. . . . . . . . . . . . . . . . . . 11 (c) Term. . . . . . . . . . . . . . . . . . . . . . . . 11 (d) Meetings. . . . . . . . . . . . . . . . . . . . . . 11 Section 26. Organization . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE V OFFICERS. . . . . . . . . . . . . . . 12 Section 27. Officers Designated. . . . . . . . . . . . . . . . . . . 12 Section 28. Tenure and Duties of Officers. . . . . . . . . . . . . . 13 (a) General . . . . . . . . . . . . . . . . . . . . . . 12 (b) Duties of Chairman of the Board of Directors. . . . 13 (c) Duties of Chief Executive Officer . . . . . . . . . 13 (d) Duties of President . . . . . . . . . . . . . . . . 13 (e) Duties of Vice Presidents . . . . . . . . . . . . . 13 (f) Duties of Secretary . . . . . . . . . . . . . . . . 14 (g) Duties of Chief Financial Officer . . . . . . . . . 14 Section 29. Delegation of Authority. . . . . . . . . . . . . . . . . 14 Section 30. Resignations . . . . . . . . . . . . . . . . . . . . . . 14 Section 31. Removal. . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION . . . . . . . 15 Section 32. Execution of Corporate Instruments . . . . . . . . . . . 15 Section 33. Voting of Securities Owned by the Corporation. . . . . . 15 TABLE OF CONTENTS (CONTINUED) PAGE ---- ARTICLE VII SHARES OF STOCK . . . . . . . . . . . . . 16 Section 34. Form and Execution of Certificates . . . . . . . . . . . 16 Section 35. Lost Certificates. . . . . . . . . . . . . . . . . . . . 16 Section 36. Transfers. . . . . . . . . . . . . . . . . . . . . . . . 17 Section 37. Fixing Record Dates. . . . . . . . . . . . . . . . . . . 17 Section 38. Registered Stockholders. . . . . . . . . . . . . . . . . 17 ARTICLE VIII OTHER SECURITIES OF THE CORPORATION . . . . . . . . 18 Section 39. Execution of Other Securities. . . . . . . . . . . . . . 18 ARTICLE IX DIVIDENDS. . . . . . . . . . . . . . . 18 Section 40. Declaration of Dividends . . . . . . . . . . . . . . . . 18 Section 41. Dividend Reserve . . . . . . . . . . . . . . . . . . . . 18 ARTICLE X FISCAL YEAR . . . . . . . . . . . . . . 19 Section 42. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE XI INDEMNIFICATION . . . . . . . . . . . . . 19 Section 43. Indemnification of Directors, Executive Officers, Other Officers, Employees and Other Agents . . . . . . . . . . 19 (a) Directors and Executive Officers. . . . . . . . . . 19 (b) Other Officers, Employees and Other Agents. . . . . 19 (c) Expenses. . . . . . . . . . . . . . . . . . . . . . 19 (d) Enforcement . . . . . . . . . . . . . . . . . . . . 20 (e) Non-Exclusivity of Rights . . . . . . . . . . . . . 21 (f) Survival of Rights. . . . . . . . . . . . . . . . . 21 (g) Insurance . . . . . . . . . . . . . . . . . . . . . 21 TABLE OF CONTENTS (CONTINUED) PAGE ---- (h) Amendments. . . . . . . . . . . . . . . . . . . . . 21 (i) Saving Clause . . . . . . . . . . . . . . . . . . . 21 (j) Certain Definitions . . . . . . . . . . . . . . . . 21 ARTICLE XII NOTICES . . . . . . . . . . . . . . . 23 Section 44. Notices. . . . . . . . . . . . . . . . . . . . . . . . . 23 (a) Notice to Stockholders. . . . . . . . . . . . . . . 23 (b) Notice to Directors . . . . . . . . . . . . . . . . 23 (c) Affidavit of Mailing. . . . . . . . . . . . . . . . 23 (d) Time Notices Deemed Given . . . . . . . . . . . . . 23 (e) Methods of Notice . . . . . . . . . . . . . . . . . 23 (f) Failure to Receive Notice . . . . . . . . . . . . . 23 (g) Notice to Person with Whom Communication Is Unlawful. . . . . . . . . . . . . . . . . . . . . 23 (h) Notice to Person with Undeliverable Address . . . . 24 ARTICLE XIII AMENDMENTS . . . . . . . . . . . . . . 24 Section 45. Amendments . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE XIV LOANS TO OFFICERS. . . . . . . . . . . . . 25 Section 46. Loans to Officers. . . . . . . . . . . . . . . . . . . . 25 ARTICLE XV MISCELLANEOUS. . . . . . . . . . . . . . 25 Section 47. Annual Report. . . . . . . . . . . . . . . . . . . . . . 25 AMENDED AND RESTATED BYLAWS OF ADOBE SYSTEMS INCORPORATED ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle. SECTION 2. OTHER OFFICES. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II CORPORATE SEAL SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE III STOCKHOLDERS' MEETINGS SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. SECTION 5. ANNUAL MEETING. (a) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder proposal to be presented an annual meeting shall be received at the corporation's principal executive offices not less than one hundred twenty (120) calendar days in advance of the date that the corporation's (or the corporation's predecessor's) proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders; PROVIDED, HOWEVER, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, or in the event of a special meeting, notice by the stockholder to be timely must be so received not earlier than the close of business on the tenth (10th) day following the day on which a notice of the date of the meeting was mailed or a public announcement thereof was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. 2 (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 5. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 5. At the request of the Board of Directors, any person nominated by a stockholder for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. (d) For purposes of this Section 5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press, Business Wire or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. 3 SECTION 6. SPECIAL MEETINGS. (a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the President, (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) or (iv) by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as the Board of Directors, shall fix. (b) If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the Chief Executive Officer, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. If the notice is not given within sixty (60) days after the receipt of the request, the person or persons requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) days nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. SECTION 8. QUORUM. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in 4 person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the vote cast, excluding abstentions, at any meeting at which a quorum is present shall be valid and binding upon the corporation; PROVIDED, HOWEVER, that directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of the votes cast, including abstentions, by the holders of shares of such class or classes or series shall be the act of such class or classes or series. SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes, excluding abstentions. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business, which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 10. VOTING RIGHTS. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. 5 SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his or her act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the General Corporation Law of Delaware, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest. SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present. SECTION 13. ACTION WITHOUT MEETING. No action shall be taken by the stockholders except at an annual or special meeting of stockholders called in accordance with these Bylaws, and no action shall be taken by the stockholders by written consent. SECTION 14. ORGANIZATION. (a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the Chief Executive Officer, or if the Chief Executive has not been appointed or is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his or her absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, 6 regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. ARTICLE IV DIRECTORS SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. SECTION 16. POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into two classes designated as Class I and Class II, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following November 30, 1997, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of two years. At the second annual meeting of stockholders following November 30, 1997, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of two years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of two years to succeed the directors of the class whose terms expire at such annual meeting. 7 Notwithstanding the foregoing provisions of this Section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any director. SECTION 19. RESIGNATION. Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. SECTION 20. REMOVAL. Subject to the rights of the holders of any series of Preferred Stock, the Board of Directors or any individual director may be removed from office at any time with or without cause by the affirmative vote of the holders of a majority of the voting power of all the then-outstanding shares of voting stock of the corporation, entitled to vote at an election of directors (the "Voting Stock"). 8 SECTION 21. MEETINGS. (a) ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be held immediately before or after the annual meeting of stockholders and may be at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) REGULAR MEETINGS. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 2 hereof. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolution of the Board of Directors or the written consent of all directors. (c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the President or any two of the directors. (d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (e) NOTICE OF MEETINGS. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, facsimile, electronic mail, telegraph or telex, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting, or sent in writing to each director by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (f) WAIVER OF NOTICE. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting. 9 SECTION 22. QUORUM AND VOTING. (a) Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 43 hereof, for which a quorum shall be one-third of the exact number of directors fixed from time to time in accordance with the Certificate of Incorporation, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; PROVIDED, HOWEVER, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. SECTION 25. COMMITTEES. (a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution passed by a majority of the whole Board of Directors appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, including without limitation the power or authority to declare a dividend, to authorize the issuance of stock and to adopt a certificate of ownership and merger, 10 and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation. (b) OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall such committee have the powers denied to the Executive Committee in these Bylaws. (c) TERM. Each member of a committee of the Board of Directors shall serve at the pleasure of the Board of Directors and until his or her successors shall have been duly elected, unless sooner removed. The Board of Directors, subject to the provisions of subsections (a) or (b) of this Bylaw may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) MEETINGS. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such 11 committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. SECTION 26. ORGANIZATION. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the Chief Executive Officer, or if the Chief Executive Officer is absent, the President, or if the President is absent, the most senior Vice President, or, in the absence of any such officer, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his or her absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. ARTICLE V OFFICERS SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairmen of the Board of Directors (such officers to comprise the Office of the Chairman of the Board of Directors), the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary and the Chief Financial Officer, all of whom shall be appointed at the annual meeting of the Board of Directors. Effective September 19, 1997, the Office of the Chairman of the Board of Directors shall be held jointly by the Chief Executive Officer and the President of the Corporation. The Board of Directors (or if so empowered in accordance with this Section 27) may also appoint other officers and agents with such powers and duties as it shall deem necessary. Notwithstanding the foregoing, the Board of Directors may empower the Chief Executive Officer of the corporation to appoint such officers, other than Chairmen of the Board, President, Secretary or Chief Financial Officer, as the business of the corporation may require. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be 12 fixed by or in the manner designated by the Board of Directors or a designated committee of the Board of Directors. SECTION 28. TENURE AND DUTIES OF OFFICERS. (a) GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (b) DUTIES OF THE CHAIRMEN OF THE BOARD OF DIRECTORS. Either of the officers comprising the Office of the Chairman of the Board, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairmen of the Board of Directors shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. If either position of Chief Executive Officer or President is vacant, then the remaining officer shall serve as the Chairman of the Board of Directors and shall have the powers and duties prescribed in this paragraph 28(b). (c) DUTIES OF CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there by such an officer, the Chief Executive Officer shall be the general manager and chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and officers of the corporation. He or she shall preside at all meetings of the stockholders and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation, and shall have other powers and duties as may be prescribed by the Board of Directors. (d) DUTIES OF PRESIDENT. In the absence or disability of the Chief Executive Officer, the President shall perform the duties of the Chief Executive Officer and, when so acting, shall have all the powers of, and be subject to all of the restrictions upon, the Chief Executive Officer. The President shall have such other powers and perform such other duties as from time to time may be prescribed for the President by the Board of Directors or the Chief Executive Officer. (e) DUTIES OF VICE PRESIDENTS. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as 13 from time to time may be prescribed for them respectively by the Board of Directors, the Chief Executive Officer or the President. (f) DUTIES OF SECRETARY. The Secretary shall keep, or cause to be kept, a book of minutes in written form of the proceedings of the Board of Directors, committees of the Board, and stockholders. Such minutes shall include all waivers of notice, consents to the holding of meetings, or approvals of the minutes of meetings executed pursuant to these Bylaws or the Delaware General Corporation Law. The Secretary shall keep, or cause to be kept at the principal executive office or at the office of the corporation's transfer agent or registrar, a record of its stockholders, giving the name and addresses of all stockholders and the number and class of shares held by each. The Secretary shall give or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required by these Bylaws or by law to be given, and shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors, the Chief Executive Officer or the President. (g) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account in written form or any other form capable of being converted into written form. The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse all funds of the corporation as may be ordered by the Board of Directors, shall render to the President, Chief Executive Officer and Directors, whenever they request it, an account of all of his or her transactions as Chief Financial Officer and of the financial condition of the corporation, shall perform other duties commonly incident to his or her office and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors, the Chief Executive Officer or the President. The Chief Executive Officer or President may direct the Vice President Finance to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and the Vice President Finance shall perform other duties commonly incident to his or her office and shall also perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer, the President or the Chief Financial Officer shall designate from time to time. SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be 14 necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. SECTION 31. REMOVAL. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, the Chief Executive Officer, or the President, Chief Financial Officer or any Vice President. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in 15 any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President. ARTICLE VII SHARES OF STOCK SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, the Chief Executive Officer, or the President or any Vice President and by the or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participatng, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical. SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or 16 destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. SECTION 36. TRANSFERS. (a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. SECTION 37. FIXING RECORD DATES. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 17 ARTICLE VIII OTHER SECURITIES OF THE CORPORATION SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the Chief Executive Officer, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; PROVIDED, HOWEVER, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Chief Financial Officer, Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE IX DIVIDENDS SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property 18 of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X FISCAL YEAR SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. ARTICLE XI INDEMNIFICATION SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. (a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify its directors and executive officers (for the purposes of this Article XI, "executive officers shall have the meaning defined in Rule 3b-7 promulgated under the 1934 Act) to the fullest extent not prohibited by the Delaware General Corporation Law; PROVIDED, HOWEVER, that the corporation may modify the extent of such indemnification by individual contracts with its directors and executive officers; and, PROVIDED, FURTHER, that the corporation shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law or (iv) such indemnification is required to be made under subsection (d). (b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall have power to indemnify its other officers, employees and other agents as set forth in the Delaware General Corporation Law. (c) EXPENSES. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director or executive officer of the corporation, or is or was serving at the request of the corporation as a director or executive officer of another corporation, partnership, 19 joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Bylaw, no advance shall be made by the corporation to an executive officer of the corporation (except by reason of the fact that such executive officer is or was a director of the corporation in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. (d) ENFORCEMENT. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and executive officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or executive officer. Any right to indemnification or advances granted by this Bylaw to a director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an executive officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such executive officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation 20 (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or executive officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or executive officer is not entitled to be indemnified, or to such advancement of expenses, under this Article XI or otherwise shall be on the corporation. (e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law. (f) SURVIVAL OF RIGHTS. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) INSURANCE. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw. (h) AMENDMENTS. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and executive officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. (j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the following definitions shall apply: (i) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or 21 completed action, suit or proceeding, whether civil, criminal, administrative or investigative. (ii) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (iii) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (iv) References to a "director," "executive officer," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (v) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Bylaw. 22 ARTICLE XII NOTICES SECTION 44. NOTICES. (a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. (b) NOTICE TO DIRECTORS. Any notice required to be given to any director may be given by the method stated in subsection (a), or by facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director. (c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained. (d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission. (e) METHODS OF NOTICE. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (f) FAILURE TO RECEIVE NOTICE. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such director to receive such notice. (g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or 23 Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. (h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. ARTICLE XIII AMENDMENTS SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of a majority of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power to adopt, amend, or repeal the Bylaws. 24 ARTICLE XIV LOANS TO OFFICERS SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. ARTICLE XV MISCELLANEOUS SECTION 47. ANNUAL REPORT. (a) Subject to the provisions of paragraph (b) of this Bylaw, the Board of Directors shall cause an annual report to be sent to each stockholder of the corporation not later than one hundred twenty (120) days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants, or if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. When there are more than one hundred (100) stockholders of record of the corporation's shares, as determined by Section 605 of the California Corporations Code, additional information as required by Section 1501(b) of the California Corporations Code shall also be contained in such report, provided that if the corporation has a class of securities registered under Section 12 of the 1934 Act, that Act shall take precedence. Such report shall be sent to stockholders at least fifteen (15) days prior to the next annual meeting of stockholders after the end of the fiscal year to which it relates. (b) If and so long as there are fewer than 100 holders of record of the corporation's shares, the requirement of sending of an annual report to the stockholders of the corporation is hereby expressly waived. 25 EX-3.3 3 EXHIBIT 3.3 Exhibit 3.3 CERTIFICATE OF DESIGNATION OF THE VOTING POWERS, DESIGNATION, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF THE SERIES A PREFERRED STOCK Pursuant to Section 151 of the General Corporation Law of the State of Delaware I, John E. Warnock, Chairman of the Board and Chief Executive Officer of Adobe Systems Incorporated, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "CORPORATION"), DO HEREBY CERTIFY: that, pursuant to authority conferred upon the Board of Directors of the Corporation by its Certificate of Incorporation (the "CERTIFICATE"), and, pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, said Board of Directors, at a duly called meeting held on July 30, 1997, at which a quorum was present and acted throughout, adopted the following resolutions, which resolutions remain in full force and effect on the date hereof creating a series of 100,000 shares of Preferred Stock having a par value of $.0001 per share, designated as Series A Preferred Stock (the "SERIES A PREFERRED STOCK") out of the class of 2,000,000 shares of preferred stock of the par value of $.0001 per share (the "PREFERRED STOCK"): RESOLVED, that pursuant to the authority vested in the Board of Directors in accordance with the provisions of the Certificate, the Board of Directors does hereby create, authorize and provide for the issuance of the Series A Preferred Stock having the voting powers, designation, relative, participating, optional and other special rights, preferences, and qualifications, limitations and restrictions thereof that are set forth as follows: Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Preferred Stock" and the number of shares constituting such series shall be 100,000. Section 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior and superior rights of the holders of any shares of any other series of Preferred Stock or any other shares of preferred stock of the Corporation ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, each holder of one one- thousandth (1/1,000) of a share (a "UNIT") of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for that purpose, (i) quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly Dividend Payment Date after the first issuance of such Unit of Series A Preferred Stock, in an amount per Unit (rounded to the nearest cent) equal to the greater of (a) $.01 or (b) subject to the provision for adjustment hereinafter set forth, the aggregate per share amount of all cash dividends declared on shares of the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of a Unit of Series A Preferred Stock, and (ii) subject to the provision for adjustment hereinafter set forth, quarterly distributions (payable in kind) on each Quarterly Dividend Payment Date in an amount per Unit equal to the aggregate per share amount of all non-cash dividends or other distributions (other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock, by reclassification or otherwise) declared on shares of Common Stock since the immediately preceding Quarterly Dividend Payment Date, or with respect to the first Quarterly Dividend Payment Date, since the first issuance of a Unit of Series A Preferred Stock. In the event that the Corporation shall at any time after July 11, 1990 (the "RIGHTS DECLARATION DATE") (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii) combine outstanding shares of Common Stock into a smaller number of shares, then in each such case the amount to which the holder of a Unit of Series A Preferred Stock was entitled immediately prior to such event pursuant to the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on Units of Series A Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the shares of Common Stock (other than a dividend payable in shares of Common Stock); PROVIDED, HOWEVER, that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $.01 per Unit on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. 2 (C) Dividends shall begin to accrue and shall be cumulative on each outstanding Unit of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issuance of such Unit of Series A Preferred Stock, unless the date of issuance of such Unit is prior to the record date for the first Quarterly Dividend Payment Date, in which case, dividends on such Unit shall begin to accrue from the date of issuance of such Unit, or unless the date of issuance is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Units of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on Units of Series A Preferred Stock in an amount less than the aggregate amount of all such dividends at the time accrued and payable on such Units shall be allocated pro rata on a unit-by-unit basis among all Units of Series A Preferred Stock at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Units of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. VOTING RIGHTS. The holders of Units of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each Unit of Series A Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the number of votes per Unit to which holders of Units of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of Units of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. 3 (C) (i) If at any time dividends on any Units of Series A Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, then during the period (a "DEFAULT PERIOD") from the occurrence of such event until such time as all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all Units of Series A Preferred Stock then outstanding shall have been declared and paid or set apart for payment, all holders of Units of Series A Preferred Stock, voting separately as a class, shall have the right to elect two Directors. (ii) During any default period, such voting rights of the holders of Units of Series A Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting rights nor any right of the holders of Units of Series A Preferred Stock to increase, in certain cases, the authorized number of Directors may be exercised at any meeting unless one-third of the outstanding Units of Preferred Stock shall be present at such meeting in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Units of Series A Preferred Stock of such rights. At any meeting at which the holders of Units of Series A Preferred Stock shall exercise such voting rights initially during an existing default period, they shall have the right, voting separately as a class, to elect Directors to fill up to two vacancies in the Board of Directors, if any such vacancies may then exist, or, if such right is exercised at an annual meeting, to elect two Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Series A Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of Units of Series A Preferred Stock shall have exercised their right to elect Directors during any default period, the number of Directors shall not be increased or decreased except as approved by a vote of the holders of Units of Series A Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to the Series A Preferred Stock. (iii) Unless the holders of Series A Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than 25% of the total number of the Units of Series A Preferred Stock outstanding may request, the calling of a special meeting of the holders of Units of Series A Preferred Stock, which meeting shall thereupon be called by the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Units of Series A Preferred Stock are entitled to vote pursuant to this paragraph (C)(iii) 4 shall be given to each holder of record of Units of Series A Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later then 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than 25% of the total number of outstanding Units of Series A Preferred Stock. Notwithstanding the provisions of this paragraph (C)(iii), no such special meeting shall be called during the 60 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) During any default period, the holders of shares of Common Stock and Units of Series A Preferred Stock, and other classes or series of stock of the Corporation, if applicable, shall continue to be entitled to elect all the Directors until holders of the Units of Series A Preferred Stock shall have exercised their right to elect two Directors voting as a separate class, after the exercise of which right (x) the Directors so elected by the holders of Units of Series A Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of capital stock which elected the Director whose office shall have become vacant. References in this paragraph (C) to Directors elected by the holders of a particular class of capital stock shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Units of Series A Preferred Stock as a separate class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Units of Series A Preferred Stock as a separate class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the Certificate or by-laws irrespective of any increase made pursuant to the provisions of paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the Certificate or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (vi) The provisions of this paragraph (C) shall govern the election of Directors by holders of Units of Preferred Stock during any default period notwithstanding any provisions of the Certificate to the contrary, including, without limitation, the 5 provisions of Article V of the Certificate. (D) Except as set forth herein, holders of Units of Series A Preferred Stock shall have no special voting rights and their consents shall not be required (except to the extent they are entitled to vote with holders of shares of Common Stock as set forth herein) for taking any corporate action. Section 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on Units of Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on outstanding Units of Series A Preferred Stock shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of junior stock; (ii) declare or pay dividends on or make any other distributions on any shares of parity stock, except dividends paid ratably on Units of Series A Preferred Stock and shares of all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of such Units and all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any parity stock, PROVIDED, HOWEVER, that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any junior stock; (iv) purchase or otherwise acquire for consideration any Units of Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such Units. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. REACQUIRED SHARES. Any Units of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be 6 retired and cancelled promptly after the acquisition thereof. All such Units shall, upon their cancellation, become authorized but unissued Units of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of junior stock unless the holders of Units of Series A Preferred Stock shall have received, subject to adjustment as hereinafter provided in paragraph (B), the greater of either (a) $.01 per Unit plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not earned or declared, to the date of such payment, or (b) the amount equal to the aggregate per share amount to be distributed to holders of shares of Common Stock, or (ii) to the holders of shares of parity stock, unless simultaneously therewith distributions are made ratably on Units of Series A Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of Units of Series A Preferred Stock are entitled under clause (i)(a) of this sentence and to which the holders of shares of such parity stock are entitled, in each case upon such liquidation, dissolution or winding up. (B) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, then in each such case the aggregate amount to which holders of Units of Series A Preferred Stock were entitled immediately prior to such event pursuant to clause (i)(b) of paragraph (A) of this Section 6 shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of common stock are exchanged for or converted into other stock or securities, cash and/or any other property, then in any such case Units of Series A Preferred Stock shall at the same time be similarly exchanged for or converted into an amount per Unit (subject to the provision for adjustment hereinafter set forth) equal to the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the 7 case may be, into which or for which each share of Common Stock is converted or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock, or (iii) combine outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the immediately preceding sentence with respect to the exchange or conversion of Units of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. REDEMPTION. The Units of Series A Preferred Stock shall not be redeemable. Section 9. RANKING. The Units of Series A Preferred Stock shall rank junior to all other series of the Preferred Stock and to any other class of preferred stock that hereafter may be issued by the Corporation as to the payment of dividends and the distribution of assets, unless the terms of any such series or class shall provide otherwise. Section 10. AMENDMENT. The Certificate, including, without limitation, this resolution, shall not hereafter be amended, either directly or indirectly, or through merger or consolidation with another corporations in any manner that would alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding Units of Series A Preferred Stock, voting separately as a class. Section 11. FRACTIONAL SHARES. The Series A Preferred Stock may be issued in Units or other fractions of a share, which Units or fractions shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. Section 12. CERTAIN DEFINITIONS. As used herein with respect to the Series A Preferred Stock, the following terms shall have the following meanings: (A) The term "COMMON STOCK" shall mean the class of stock designated as the common stock, par value $.0001 per share, of the Corporation at the date hereof or any other class of stock resulting from successive changes or reclassification of such 8 common stock. (B) The term "JUNIOR STOCK" (i) as used in Section 4, shall mean the Common Stock and any other class or series of capital stock of the Corporation hereafter authorized or issued over which the Series A Preferred Stock has preference or priority as to the payment of dividends and (ii) as used in Section 6, shall mean the Common Stock and any other class or series of capital stock of the Corporation over which the Series A Preferred Stock has preference or priority in the distribution of assets on any liquidation, dissolution or winding up of the Corporation. (C) The term "PARITY STOCK" (i) as used in Section 4, shall mean any class or series of stock of the Corporation hereafter authorized or issued ranking PARI PASSU with the Series A Preferred Stock as to the payment of dividends and (ii) as used in Section 6, shall mean any class or series of capital stock ranking PARI PASSU with the Series A Preferred Stock in the distribution of assets on any liquidation, dissolution or winding up of the Corporation. 9 IN WITNESS WHEREOF, Adobe Systems Incorporated has caused this Certificate to be signed by its Chairman of the Board and Chief Executive Officer and attested by its Secretary this 29th day of August, 1997. ADOBE SYSTEMS INCORPORATED By: /s/ John E. Warnock ------------------------------------ Name: John E. Warnock Title: Chairman of the Board and Chief Executive Officer Attest: /s/ Colleen M. Pouliot - ------------------------------ EX-10.42 4 EXHIBIT 10.42 EXHIBIT 10.42 THE SECURITIES EVIDENCED BY THIS PARTNERSHIP AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT COVERING SUCH SECURITIES OR THE GENERAL PARTNER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE GENERAL PARTNER, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933 ACT. THE INTERESTS IN THE PARTNERSHIP OF THE CLASS B LIMITED PARTNERS ARE SUBJECT TO AN OPTION SET FORTH IN AN AGREEMENT BETWEEN THE PARTNERSHIP AND EACH CLASS B LIMITED PARTNER, OR THE PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS PARTNERSHIP. ANY TRANSFER OR ATTEMPTED TRANSFER OF ANY UNITS SUBJECT TO SUCH OPTION IS VOID WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT OF THE ISSUER OF THESE UNITS. AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT ADOBE INCENTIVE PARTNERS, L.P. OCTOBER 31, 1997 TABLE OF CONTENTS PAGE ARTICLE 1 CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Accounting Period. . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Adjusted Asset Value . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Capital Account. . . . . . . . . . . . . . . . . . . . . . . . . 2 1.5 Capital Contribution.. . . . . . . . . . . . . . . . . . . . . . 2 1.6 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.7 Deemed Gain or Deemed Loss . . . . . . . . . . . . . . . . . . . 2 1.8 Excluded Investment. . . . . . . . . . . . . . . . . . . . . . . 3 1.9 Majority in Interest of the Class A Limited Partners.. . . . . . 3 1.10 Marketable; Marketable Securities; Marketability . . . . . . . . 3 1.11 Nonmarketable Securities . . . . . . . . . . . . . . . . . . . . 3 1.12 Profit or Loss . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.13 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.14 Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.15 Short Term Income. . . . . . . . . . . . . . . . . . . . . . . . 4 1.16 Treasury Regulations . . . . . . . . . . . . . . . . . . . . . . 4 1.17 Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.18 AVI Marketable Securities. . . . . . . . . . . . . . . . . . . . 4 ARTICLE 2 NAME, PURPOSE AND OFFICES OF PARTNERSHIP . . . . . . . . . . . . . . . . . . 5 2.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.2 Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.3 Principal Office . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 3 TERM OF PARTNERSHIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.2 Events Affecting a Limited Partner of the Partnership. . . . . . 5 3.3 Events Affecting the General Partner of the Partnership. . . . . 5 ARTICLE 4 NAME AND ADMISSION OF PARTNERS . . . . . . . . . . . . . . . . . . . . . . . 6 4.1 Name, Address and Units. . . . . . . . . . . . . . . . . . . . . 6 TABLE OF CONTENTS (CONTINUED) PAGE 4.2 Admission of Additional Partners . . . . . . . . . . . . . . . . 6 ARTICLE 5 CAPITAL ACCOUNTS AND CAPITAL CONTRIBUTIONS . . . . . . . . . . . . . . . . . 6 5.1 Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . . 6 5.2 Initial Capital Contributions. . . . . . . . . . . . . . . . . . 7 5.3 Capital Contributions of the General Partner . . . . . . . . . . 7 5.4 Additional Capital Contributions.. . . . . . . . . . . . . . . . 7 ARTICLE 6 PARTNERSHIP ALLOCATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6.1 Allocation of Profit or Loss . . . . . . . . . . . . . . . . . . 7 6.2 Other Allocations. . . . . . . . . . . . . . . . . . . . . . . . 8 6.3 Income Tax Allocations . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 7 PARTNERSHIP EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 8 WITHDRAWALS BY AND DISTRIBUTIONS TO THE PARTNERS . . . . . . . . . . . . . . 10 8.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8.2 Withdrawals by the Partners. . . . . . . . . . . . . . . . . . . 10 8.3 Partners' Obligation to Repay or Restore . . . . . . . . . . . . 10 8.4 Cash Distributions . . . . . . . . . . . . . . . . . . . . . . . 10 8.5 In Kind Distributions. . . . . . . . . . . . . . . . . . . . . . 11 8.6 Withdrawal of Class B Limited Partners.. . . . . . . . . . . . . 12 ARTICLE 9 MANAGEMENT DUTIES AND RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . 13 9.1 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9.2 No Control by the Limited Partners; No Withdrawal. . . . . . . . 13 TABLE OF CONTENTS (CONTINUED) PAGE 9.3 Class A Limited Partner Approval Rights. . . . . . . . . . . . . 13 9.4 Investment Opportunities . . . . . . . . . . . . . . . . . . . . 14 9.5 Compliance with Partnership Agreement; Detrimental Acts. . . . . 14 ARTICLE 10 INVESTMENT REPRESENTATION AND TRANSFER OF PARTNERSHIP INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . 14 10.1 Investment Representation of the Limited Partners. . . . . . . . 14 10.2 Qualifications of the Limited Partner. . . . . . . . . . . . . . 15 10.3 Transfer by the General Partner. . . . . . . . . . . . . . . . . 15 10.4 Transfer by a Limited Partner. . . . . . . . . . . . . . . . . . 15 10.5 Requirements for Transfer. . . . . . . . . . . . . . . . . . . . 15 10.6 Substitution as a Limited Partner. . . . . . . . . . . . . . . . 16 10.7 Expenses of Transfer . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 11 DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP . . . . . . . . . . . . . . . 16 11.1 Early Termination of the Partnership . . . . . . . . . . . . . . 16 11.2 Winding Up Procedures. . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE 12 FINANCIAL ACCOUNTING, REPORTS, MEETINGS AND VOTING . . . . . . . . . . . . . . . . . . . . . . . . 18 12.1 Financial Accounting; Fiscal Year. . . . . . . . . . . . . . . . 18 12.2 Supervision; Inspection of Books . . . . . . . . . . . . . . . . 18 12.3 Partnership Reports; Financial Statements of the Partnership. . . . . . . . . . . . . . . . . . . . . . . . . . . 18 12.4 Tax Returns and Tax Information. . . . . . . . . . . . . . . . . 19 12.5 Tax Matters Partner. . . . . . . . . . . . . . . . . . . . . . . 19 12.6 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE 13 VALUATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 13.1 Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 TABLE OF CONTENTS (CONTINUED) PAGE ARTICLE 14 OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 14.1 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . 21 14.2 Limitation of Liability of the Limited Partners. . . . . . . . . 21 14.3 Exculpation. . . . . . . . . . . . . . . . . . . . . . . . . . . 21 14.4 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 21 14.5 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 14.6 Execution and Filing of Documents. . . . . . . . . . . . . . . . 22 14.7 Other Instruments and Acts . . . . . . . . . . . . . . . . . . . 22 14.8 Binding Agreement. . . . . . . . . . . . . . . . . . . . . . . . 22 14.9 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 14.10 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . 22 14.11 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . 22 14.12 Titles; Subtitles. . . . . . . . . . . . . . . . . . . . . . . . 23 14.13 Partnership Name . . . . . . . . . . . . . . . . . . . . . . . . 23 ADOBE INCENTIVE PARTNERS, L.P. AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT THIS AGREEMENT is made and entered into as of the 31st day of October, 1997, by ADOBE SYSTEMS INCORPORATED, a Delaware corporation ("Adobe") who in its capacity as the sole general partner and sole Class A Limited Partner is empowered to enter into this amended and restated agreement and who hereby amends and restates the June 16, 1997 Amended and Restated Limited Partnership Agreement of ADOBE INCENTIVE PARTNERS, L.P. (the "Partnership"), to reflect the contribution to the Partnership by Adobe in its capacity as the Class A Limited Partner of its interest in Adobe Ventures, L.P., a California limited partnership ("AVI") and related matters, pursuant to the provisions of the California Revised Limited Partnership Act (the "Act"), as follows: ARTICLE 1 CERTAIN DEFINITIONS 1.1 ACCOUNTING PERIOD. An Accounting Period shall be (i) the Fiscal Year if there are no changes in the Partners' respective interests in the Profits or Losses of the Partnership during such period except on the first day thereof, or (ii) any other period beginning on the first day of the Fiscal Year, or any other day during the Fiscal Year upon which occurs a change in such respective interests, and ending on the last day of the Fiscal Year, or on the day preceding an earlier day upon which any change in such respective interest shall occur. 1.2 ADJUSTED ASSET VALUE. The Adjusted Asset Value with respect to any asset shall be the asset's adjusted basis for federal income tax purposes, except as follows: (a) The initial Adjusted Asset Value of any asset contributed by a Partner to the Partnership shall be the lesser of (i) the gross fair market value of such asset or (ii) the asset's adjusted basis for federal income tax purposes at the time of contribution, as determined by the contributing Partner and the General Partner. (b) In the discretion of the General Partner, the Adjusted Asset Values of all Partnership assets may be adjusted to equal their respective gross fair market values, as determined by the General Partner, and the resulting unrealized profit or loss allocated to the Capital Accounts of the Partners pursuant to Article 6, as of the following times: (i) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a DE MINIMIS capital contribution, and (ii) the distribution by the Partnership to a Partner of more than a DE MINIMIS amount of Partnership assets, unless all Partners receive simultaneous distributions of either undivided interests in the distributed property or identical Partnership assets in proportion to their interests in Partnership distributions as provided in paragraphs 8.4 and 8.5. (c) The Adjusted Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the General Partner, and the resulting unrealized profit or loss allocated to the Capital Accounts of the Partners pursuant to Article 6, as of the following times: (i) the termination of the Partnership for federal income tax purposes pursuant to 1. Code Section 708(b)(1)(B); and (ii) the termination of the Partnership either by expiration of the Partnership's term or the occurrence of an event described in paragraph 11.1. 1.3 AFFILIATE. An Affiliate of any person shall mean any person that directly, or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with the person specified. 1.4 CAPITAL ACCOUNT. The Capital Account of each Partner shall consist of its original capital contribution (in kind contributions shall be credited at their Adjusted Asset Value), (i) increased by any additional capital contributions, its share of income or gain that is allocated to it pursuant to this Agreement, any Capital Account shift in favor of such Partner, and (ii) decreased by the amount of any distributions to or withdrawals by it, its share of expense or loss that is allocated to it pursuant to this Agreement, the amount of any Capital Account shift away from the Capital Account of such Partner. The foregoing provision and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation Section 1.704 1(b)(2)(iv), and shall, except as otherwise expressly provided herein, be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with such Regulations, the General Partner may make such modification, provided that it is not likely to have more than an insignificant effect on the total amounts distributable to any Partner pursuant to Article VIII and Article XI. 1.5 CAPITAL CONTRIBUTION. A Partner's Capital Contribution shall mean the amount that such Partner has contributed to the capital of the Partnership as set forth opposite such Partner's name on Exhibit A hereto, as from time to time amended. 1.6 CODE. The Code is the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law). 1.7 DEEMED GAIN OR DEEMED LOSS. The Deemed Gain from any in kind distribution of Securities shall be equal to the excess, if any, of the fair market value of the Securities distributed (valued as of the date of distribution in accordance with paragraph 13.1), over the aggregate Adjusted Asset Value of the Securities distributed. The Deemed Loss from any in kind distribution of Securities shall be equal to the excess, if any, of the aggregate Adjusted Asset Value of the Securities distributed over the fair market value of the Securities distributed (valued as of the date of distribution in accordance with paragraph 13.1). 1.8 EXCLUDED INVESTMENT. Excluded Investment means a Security of the Partnership that one or more Partners does not share in because (i) he or she is an officer, director or five percent or greater shareholder of the issuer of the Security or (ii) the Investment Committee of the Board of Directors of Adobe otherwise determines that it is inappropriate for such Partner to participate in the investment because of the Partner's involvement with the issuer of the Security. An Excluded Investment shall be designated as such at the time of its acquisition. 1.9 MAJORITY IN INTEREST OF THE CLASS A LIMITED PARTNERS. Majority in Interest of the Class A Limited Partners means one or more Class A Limited Partners who own in the aggregate a majority of the Class A Units. 1.10 MARKETABLE; MARKETABLE SECURITIES; MARKETABILITY. These terms shall refer to 2. Securities that are (a) traded on a national securities exchange or over the counter or (b) currently the subject of an effective Securities Act registration statement. Notwithstanding the foregoing, a Security shall not be deemed to be a Marketable Security if, in the good faith judgment of the General Partner, the market on which such Security trades is not adequate to permit an orderly sale of all shares of such Security held by the Partnership within a reasonable time period or if the Securities cannot be sold because of lock-up restrictions or other contractual restrictions on transfer. 1.11 NONMARKETABLE SECURITIES. Nonmarketable Securities are all Securities other than Marketable Securities. 1.12 PROFIT OR LOSS. Profit or Loss shall be an amount computed separately for each Security for each Accounting Period as of the last day thereof that is equal to the Partnership's taxable income or loss for each Security for such Accounting Period, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (a) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profit or Loss pursuant to this paragraph shall be added to such taxable income or loss; (b) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury Regulation Section 1.704 1(b)(2)(iv)(i) and not otherwise taken into account in computing Profit or Loss pursuant to this paragraph shall be subtracted from such taxable income or loss; (c) Gain or loss resulting from any disposition of a Partnership asset with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Adjusted Asset Value of the asset disposed of rather than its adjusted tax basis; (d) The difference between the gross fair market value of all Partnership assets and their respective Adjusted Asset Values shall be added to such taxable income or loss in the circumstances described in paragraph 1.2; (e) Items which are specially allocated pursuant to paragraph 6.3 hereof shall not be taken into account in computing Profit or Loss; and (f) Short Term Income shall not be taken into account in computing Profit or Loss; and (g) any unrecognized gain or loss respecting a Security held by AVI or AVII that is treated as deemed gain or loss under the limited partnership agreements of AVI or AVII shall be added to the Partnership's taxable income or loss. 1.13 SECURITIES. Securities shall mean securities of every kind and nature and rights and options with respect thereto, including stock, notes, bonds, debentures, evidences of indebtedness and other business interests of every type, including partnerships, joint ventures, proprietorships, limited liability companies and other business entities. Each Security held by AVI and AVII shall be treated as a separate Security of the Partnership. 3. 1.14 SECURITIES ACT. Securities Act is the Securities Act of 1933, as amended. 1.15 SHORT TERM INCOME. Short Term Income shall mean gross income realized by the Partnership from investments of funds pending their investment or distribution, including amounts earned from investments in commercial paper, securities of the United States government, certificates of deposit and cash deposits in banks and other financial institutions. 1.16 TREASURY REGULATIONS. Treasury Regulations shall mean the Income Tax Regulations promulgated under the Code, as such Regulations may be amended from time to time (including corresponding provisions of succeeding Regulations). 1.17 UNITS. Units means the ownership interests in the Partnership designated as Class A Units and Class B Units and such other classes of units as may from time to time be issued with the consent of the General Partner and a Majority in Interest of the Class A Limited Partners. 1.18 AVI MARKETABLE SECURITIES. AVI Marketable Securities means the Securities of AVI designated as AVI Marketable Securities on Exhibit A-1 hereto. ARTICLE 2 NAME, PURPOSE AND OFFICES OF PARTNERSHIP 2.1 NAME. The name of the Partnership is ADOBE INCENTIVE PARTNERS, L.P. The affairs of the Partnership shall be conducted under the Partnership name. 2.2 PURPOSE. The primary purpose of the Partnership is to (i) invest in, and receive and hold capital contributions of, Securities of private companies (either directly or indirectly through AVI) which either (a) operate or are expected to operate in any industry related to the business operations of Adobe, including companies which possess or may possess technologies, sales and services capabilities, operations or content related to any Adobe product, or (b) have been identified by Adobe as candidates for a strategic relationship with Adobe and (ii) invest as a limited partner in Adobe Ventures II, L.P., a California limited partnership ("AVII") and any successor Adobe Ventures investment fund. The general purposes of the Partnership are to buy, sell, hold, and otherwise invest in securities of such companies of every kind and nature and rights and options with respect thereto, including, without limitation, stock, notes, bonds, debentures, partnership interests, interests in limited liability companies and evidences of indebtedness; to exercise all rights, powers, privileges, and other incidents of ownership or possession with respect to Securities held or owned by the Partnership; to enter into, make, and perform all contracts and other undertakings; and to engage in all activities and transactions as may be necessary, advisable, or desirable to carry out the foregoing. 2.3 PRINCIPAL OFFICE. The principal office of the Partnership shall be at 345 Park Avenue, San Jose, California 95110-2704, or such other place or places in California as the General Partner may from time to time designate. 4. ARTICLE 3 TERM OF PARTNERSHIP 3.1 TERM. The term of the Partnership commenced upon March 17, 1997 (the "Formation Date") and shall continue until the fifteenth anniversary of the Formation Date unless extended by consent of the General Partner and a Majority in Interest of the Class A Limited Partners or sooner dissolved as provided in paragraph 11.1 below. 3.2 EVENTS AFFECTING A LIMITED PARTNER OF THE PARTNERSHIP. The death, temporary or permanent incapacity, insanity, incompetency, bankruptcy, liquidation, dissolution, reorganization, merger, sale of all or substantially all the equity interests or assets of, or other change in the ownership or nature of a Limited Partner shall not dissolve the Partnership. 3.3 EVENTS AFFECTING THE GENERAL PARTNER OF THE PARTNERSHIP. Except as specifically provided in paragraph 11.1, the bankruptcy, liquidation, dissolution, reorganization, merger, sale of all or substantially all the equity interests or assets of, or other change in the ownership or nature of the General Partner shall not dissolve the Partnership. ARTICLE 4 NAME AND ADMISSION OF PARTNERS 4.1 NAME, ADDRESS AND UNITS. The name and address of the General Partner and each Limited Partner (hereinafter the General Partner and Limited Partners shall be referred to collectively as the "Partners" and individually as a "Partner") and the amount of such Partner's Capital Contribution (and a description of such Capital Contribution if other than cash) to and number of Units in the Partnership are set forth on Exhibit A hereto. The Partnership shall initially have two classes of limited partnership interests which are designated Class A Units and Class B Units and shall have the rights, preferences and privileges set forth in this Agreement. Each Limited Partner owning Class A Units is sometimes referred to herein as a Class A Limited Partner and each Limited Partner owning Class B Units is sometimes referred to herein as a Class B Limited Partner. The Class A Limited Partners and Class B Limited Partners are collectively referred to as the Limited Partners. The ownership of the Class A Units and Class B Units is set forth on Exhibit A hereto. The General Partner shall cause Exhibit A to be amended from time to time to reflect the admission of any new Partner, the withdrawal or substitution of any Partner, receipt by the Partnership of notice of any change of address of a Partner, or the change in any Partner's Capital Contribution or Units. An amended Exhibit A shall supersede any prior Exhibit A and become a part of this Agreement. A copy of the most recent amended Exhibit A shall be kept on file at the principal office of the Partnership. 4.2 ADMISSION OF ADDITIONAL PARTNERS. (a) Except as provided in paragraph 10.6, an additional person may be admitted as a Partner only with the consent of, and on such terms as are approved by, the General Partner and a Majority in Interest of the Class A Limited Partners. At the time an additional person is admitted as a Limited Partner, the General Partner shall determine whether such person shall participate in investments made prior to the date of admission. 5. (b) Each additional person admitted as a Partner shall execute and deliver to the Partnership a counterpart of this Agreement or otherwise become bound by the terms of this Agreement. ARTICLE 5 CAPITAL ACCOUNTS AND CAPITAL CONTRIBUTIONS 5.1 CAPITAL ACCOUNTS. An individual Capital Account shall be maintained for each Partner and shall be divided into subaccounts for each Security owned by the Partnership. At the time each Class B Limited Partner is admitted to the Partnership, and thereafter whenever an additional Capital Contribution of the Class A Limited Partner to the Partnership is invested in Securities, there shall be a deemed Capital Account shift from the Class A Limited Partner in favor of the Class B Limited Partners. The total amount of Capital Account shift shall be the product of the "Shift Percentage" times the amount of the Capital Contributions of the Class A Limited Partner so invested, excluding the AVI Marketable Securities, (with in kind contributions valued at their Adjusted Asset Value as of the date of contribution except for Securities held by AVI which shall be valued as of June 16, 1997) times a fraction, the numerator of which is the number of Class B Units then outstanding and the denominator of which is the total number of Class A Units and Class B Units outstanding. The Shift Percentage shall be ten percent (10%) unless the General Partner determines another percentage is more appropriate. 5.2 INITIAL CAPITAL CONTRIBUTIONS. The initial Capital Contributions of the Partners is set forth on Exhibit A. Securities contributed by the Class A Limited Partner are shown at their agreed fair market values on Exhibit A. No Capital Contribution shall be required of any Class B Limited Partner. 5.3 CAPITAL CONTRIBUTIONS OF THE GENERAL PARTNER. The General Partner shall contribute capital to the Partnership in cash in an amount equal to the greater of: (i) one percent (1%) of the amount contributed by the Limited Partners and the General Partner on each date on which a Limited Partner makes a contribution or (ii) the amount of Partnership expenses required to be borne by the General Partner under paragraph 7.1. 5.4 ADDITIONAL CAPITAL CONTRIBUTIONS. A Partner may make additional Capital Contributions only with the consent of the General Partner and a Majority in Interest of the Class A Limited Partners. No Partner shall be required to make any additional Capital Contributions to the Partnership except as provided in paragraph 5.3. ARTICLE 6 PARTNERSHIP ALLOCATIONS 6.1 ALLOCATION OF PROFIT OR LOSS. Except as hereinafter provided in this Article 6: (a) Profit of the Partnership for each Security for each Accounting Period shall be separately allocated among the Partners as follows: (i) First, to the General Partner to and to the extent of Loss allocations 6. respecting such Security previously made to it pursuant to paragraph 6.1(b)(iv); (ii) Second, to the Class A Limited Partner and General Partner pro rata in proportion to and to the extent of Loss allocation respecting such Security previously allocated to them pursuant to paragraph 6.1(b)(iii); (iii) Third, to the Class B Limited Partners and General Partner pro rata in proportion to and to the extent of Loss allocations respecting such Security previously made to them pursuant to paragraph 6.1(b)(ii); and (iv) Then, 99% to the Limited Partners (pro rata among them in accordance with their respective number of Units) and 1% to the General Partner. (b) Loss of the Partnership for each Accounting Period shall be allocated as follows: (i) First, to the Partners pro rata in proportion to and to the extent of income allocations previously made to them pursuant to paragraph 6.1(a)(iv); (ii) Second, 99% to the Class B Limited Partners (pro rata among them in accordance with their respective number of Units) until their Capital Accounts are reduced to zero and 1% to the General Partner; (iii) Then, 1% to the General Partner and 99% to the Class A Limited Partner until their Capital Accounts are reduced to zero; and (iv) Then, to the General Partner. (c) Short Term Income shall be allocated to the Partners (other than the Class B Limited Partners) pro rata in proportion to their respective Capital Contributions. (d) Notwithstanding the foregoing, Profit and Loss from each AVI Marketable Security shall be allocated exclusively to the Class A Limited Partner. 6.2 OTHER ALLOCATIONS. Notwithstanding the foregoing, the allocations provided in this Article 6 shall be subject to the following exceptions: (a) (i) Any loss or expense otherwise allocable to a Limited Partner that exceeds the balance in such Limited Partner's Capital Account subaccount for a Security shall instead be allocated first to all Partners who have positive balances in their Capital Accounts subaccounts for such Security in proportion to such positive balances, and when all Partners' Capital Accounts subaccounts for such Security have been reduced to zero (0), then to the General Partner. (ii) In the event the Limited Partner unexpectedly receives any adjustments, allocations, or distributions described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4) through (d)(6), that causes the balance in such Partner's Capital Account to be reduced below zero (0), items of Partnership income and gain shall be specially allocated to such Limited Partner in an amount and manner sufficient to eliminate the deficit balance in its Capital Account created by such adjustments, allocations, or distributions as quickly as possible. 7. (iii) For purposes of this subparagraph (a), the balance in a Partner's Capital Account shall take into account the adjustments provided in Treasury Regulation Section 1.704 1(b)(2)(ii)(d)(4) through (d)(6). (iv) Any special allocations of items of profit, income, gain, loss or expense pursuant to this subparagraph (a) shall be taken into account in computing subsequent allocations, so that the net amount of any items so allocated and the profit, gain, loss, income, expense, and all other items allocated to each Partner shall, to the extent possible, be equal to the net amount that would have been allocated to each such Partner if such special allocations pursuant to this subparagraph (a) had not occurred. (b) To the extent the Partnership has taxable interest income or expense with respect to any promissory note between any Partner and the Partnership as holder and maker or maker and holder pursuant to Section 483, Sections 1271 through 1288, or Section 7872 of the Code, such interest income or expense shall be specially allocated to the Partner to whom such promissory note relates, and such Partner's Capital Account adjusted if appropriate. (c) No Partner shall be allocated Profit or Loss of a Security (i) which is designated an Excluded Investment with respect to that Partner or (ii) which was acquired by the Partnership prior to such Partner's admission to the Partnership, unless otherwise agreed by the Partnership and such Partner at the time of such Partner's admission.. 6.3 INCOME TAX ALLOCATIONS. (a) Except as otherwise provided in this paragraph or as otherwise required by the Code and the rules and Treasury Regulations promulgated thereunder, a Partner's distributive share of Partnership income, gain, loss, deduction, or credit for income tax purposes shall be the same as is entered in the Partner's Capital Account pursuant to this Agreement. (b) In accordance with Code Section 704(c) and the Treasury Regulations thereunder, income, gain, loss and deduction with respect to any asset contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Adjusted Asset Value. (c) In the event the Adjusted Asset Value of any Partnership asset is adjusted pursuant to the terms of this Agreement, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Adjusted Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations thereunder. 8. ARTICLE 7 PARTNERSHIP EXPENSES 7.1 EXPENSES. The General Partner shall bear (i) all normal operating expenses incurred in the investigation of investment opportunities and the monitoring and management of investments; (ii) all costs and expenses incurred in the holding, purchase, sale or exchange of Securities (whether or not ultimately consummated), including, but not by way of limitation, private placement fees, finder's fees, interest, taxes, brokerage fees, legal fees, audit and accounting fees, consulting fees, and all expenses incurred in connection with the registration of the Partnership's Securities under applicable securities laws or regulations; (iii) all expenses incurred by the General Partner in serving as the tax matters partner, the cost of liability and other insurance premiums, all out-of-pocket expenses of preparing and distributing reports to Partners, all legal and accounting fees relating to the Partnership and its activities, all costs and expenses arising out of the Partnership's indemnification obligation pursuant to this Agreement and all other operating expenses of the Partnership; (iv) all organizational and syndication costs, fees, and expenses incurred by or on behalf of the General Partner or the Partnership in connection with the formation and organization of the Partnership, including legal and accounting fees and expenses incident thereto with respect to the formation and organization of the Partnership; and (v) all liquidation costs, fees, and expenses incurred by the General Partner (or its designee) or the Partnership in connection with the liquidation of the Partnership at the end of the Partnership's term, specifically including but not limited to legal and accounting fees and expenses. ARTICLE 8 WITHDRAWALS BY AND DISTRIBUTIONS TO THE PARTNERS 8.1 INTEREST. No interest shall be paid to any Partner on account of its interest in the capital of or on account of its investment in the Partnership. 8.2 WITHDRAWALS BY THE PARTNERS. No Partner may withdraw any amount from its Capital Account unless such withdrawal is made pursuant to this Article 8, Article 11 or, in the case of the Class B Limited Partners, the Restricted Units Agreement between such Partner and the Partnership. 8.3 PARTNERS' OBLIGATION TO REPAY OR RESTORE. Except as required by law or the terms of this Agreement, no Partner shall be obligated at any time to repay or restore to the Partnership all or any part of any distribution made to it from the Partnership in accordance with the terms of this Article 8. 8.4 CASH DISTRIBUTIONS. Subject to the following mandatory distribution provisions, the General Partner may, but shall not be obligated to, distribute cash as it may from time to time deem advisable. (a) TAX DISTRIBUTIONS. Within 90 days following the end of each fiscal year, the General Partner shall distribute to each Partner cash in an amount equal to 50% of the Partnership's taxable income allocated to such Partner for such year. The General Partner shall have the discretion 9. to adjust the rate of distribution provided for in this paragraph 8.4(a) to reflect any increases made to the rates of taxation of ordinary income or capital gains, or both, under the Code or California law. (b) DISTRIBUTIONS OF DISTRIBUTABLE CASH. The Partnership shall distribute cash in excess of $200,000 arising from the disposition of portfolio company investments as soon as reasonably practicable. Such cash distributions shall be made one percent (1%) to the General Partner and ninety-nine percent (99%) to the Limited Partners as follows (provided, no Partner shall receive distributions from the disposition of a Security which is an Excluded Investment with respect to such Partner): (i) first, to the extent of the Limited Partners' unreturned capital investment respecting the Security disposed of, among the Limited Partners in proportion to their respective unreturned capital investment respecting such Security (unreturned capital investment shall take account of any Capital Account shifts under paragraph 5.1); and (ii) then, to the extent of previously undistributed Profit respecting such Security, among the Partners in proportion to the allocation of such Profit pursuant to Article 6. 8.5 IN KIND DISTRIBUTIONS. The General Partner may, but shall not be obligated to (except as provided in subparagraph 8.5(a) and paragraph 8.6 below), distribute Securities as it may from time to time deem advisable, PROVIDED, HOWEVER, that except with the consent of a Majority in Interest of the Class A Limited Partners, the General Partner shall not distribute Securities which are not Marketable Securities, other than distributions pursuant to the dissolution and winding up of the Partnership. (a) TIMING. (i) Marketable Securities acquired by the Partnership in exchange for the transfer of Nonmarketable Securities shall be distributed within 90 days of the date on which such Securities become Marketable Securities. (ii) Nonmarketable Securities which become Marketable Securities as a result of a public offering or otherwise shall be distributed within 90 days after the date on which such Securities become Marketable Securities. (b) APPORTIONMENT. (i) Distributions of Securities shall be made among the Partners in accordance with paragraph 8.4(b). (c) Immediately prior to any distribution in kind, the Deemed Gain or Deemed Loss of any Securities distributed shall be allocated to the Capital Accounts of the Partners as a Profit or Loss pursuant to Article 6. (d) Securities distributed in kind shall be subject to such conditions and restrictions as the General Partner determines are legally or contractually required. Whenever classes of Securities are distributed in kind, each Partner shall receive its ratable portion of each class of Securities distributed in kind. 10. 8.6 WITHDRAWAL OF CLASS B LIMITED PARTNERS. (a) DEFINITIONS. (i) WITHDRAWAL. For purposes of this Agreement, a Class B Limited Partner shall be deemed to have withdrawn from the Partnership (a "Withdrawal") if such Class B Limited Partner dies, retires, withdraws or becomes bankrupt, incompetent, insane or permanently incapacitated. (ii) BANKRUPT. A person shall be deemed bankrupt if (i) any proceeding is commenced against such person for any relief under bankruptcy or insolvency laws, or laws relating to the relief of debtors, reorganizations, arrangements, compositions, or extensions and is not dismissed within ninety (90) days after such proceedings have been commenced, or (ii) if such person commences any proceeding for relief under bankruptcy or insolvency laws or law relating to the relief of debtors, reorganizations, arrangements, compositions, or extensions. (iii) INCOMPETENT. A person shall be deemed incompetent if such person shall be adjudged incompetent by a decree of a court of competent jurisdiction or if a conservator is appointed for such person. (iv) INSANE. A person shall be deemed insane if such person shall be adjudged insane by a decree of a court of competent jurisdiction. (v) PERMANENTLY INCAPACITATED. A person shall be deemed permanently incapacitated whenever such person is determined by competent medical authority selected by the General Partner to be permanently incapable of carrying out his functions as a Class A Limited Partner hereunder. (vi) FORMER PARTNER. Any Class B Limited Partner who withdraws from the Partnership, or the estate or legal representative of any such Member shall be deemed a "Former Partner" on the date of such withdrawal. (b) EFFECT OF WITHDRAWAL OF A CLASS B LIMITED PARTNER. In the event of the Withdrawal of a Class B Limited Partner, the interest of such Former Partner in the Partnership shall terminate and the Former Member, or his or her personal representative, shall be entitled only to the payments and distributions provided for in such Former Partner's Restricted Units Agreement, all on the terms and conditions set forth in such agreement. Any reduction in the Units of a Class B Limited Partner caused by his or her Withdrawal shall increase, pro tanto, the Class A Units of the Class A Limited Partner. ARTICLE 9 MANAGEMENT DUTIES AND RESTRICTIONS 9.1 MANAGEMENT. Except as otherwise provided in this Agreement, the General Partner shall have the sole and exclusive right to manage, control, and conduct the affairs of the Partnership and to do any and all acts on behalf of the Partnership. 11. 9.2 NO CONTROL BY THE LIMITED PARTNERS; NO WITHDRAWAL. The Limited Partners shall take no part in the control or management of the affairs of the Partnership nor shall the Limited Partners have any authority to act for or on behalf of the Partnership or to vote on any matter relative to the Partnership and its affairs except as is specifically permitted by this Agreement. Except as specifically set forth in this Agreement or in the Restricted Units Agreements between the Partnership and each Class B Limited Partner, no Limited Partner shall withdraw or be required to withdraw from the Partnership. 9.3 CLASS A LIMITED PARTNER APPROVAL RIGHTS. Notwithstanding paragraph 9.2, the prior written approval of a Majority in Interest of the Class A Limited Partners shall be required for the General Partner or the Partnership to carry out any of the following activities: (a) Elect or admit a new General Partner; (b) Dissolve, wind up or liquidate the Partnership, other than in accordance with the terms of this Agreement; (c) Amend this Agreement, except as otherwise provided herein; (d) Invest in or acquire Securities of any one company in an amount in excess of $3,000,000; (e) Acquire more than fifty percent (50%) of the outstanding voting Securities of any one company; (f) Borrow funds, or pledge, encumber or hypothecate any assets of the Partnership as security for a loan; (g) Commence or defend any litigation pertaining to the Partnership or its assets, prosecute, settle or compromise claims against third parties, settle or compromise claims against the Partnership, other than with respect to any litigation pertaining to the obligations of the Limited Partners under this Agreement, and (h) Make or revoke any election pursuant to the Code, including an election pursuant to Section 754 of the Code, or any comparable federal or state law regarding taxation. 9.4 INVESTMENT OPPORTUNITIES. (a) Each Limited Partner acknowledges that the General Partner may make venture capital investments other than through the Partnership. Each Limited Partner hereby consents and agrees to such activities and investments and further consents and agrees that neither the Partnership nor any of its Partners shall have, pursuant to this Agreement, any rights in or to such activities or investments or any profits derived therefrom. (b) Each Limited Partner hereby agrees that the General Partner may offer the right to participate in investment opportunities of the Partnership to other private investors, groups, partnerships, or corporations whenever the General Partner, in its discretion, so determines. (c) During the term of this Agreement, each Limited Partner may engage in any 12. activity whatsoever for its own profit or advantage, whether or not such activity may be in direct or indirect competition with the Partnership, subject to any restrictions imposed on such Limited Partner outside this Agreement. (d) Any investment by the Partnership shall first be approved by the Investment Committee of the Board of Directors of Adobe. 9.5 COMPLIANCE WITH PARTNERSHIP AGREEMENT; DETRIMENTAL ACTS. No Partner shall do any act in contravention of this Agreement or that would be detrimental to the best interests of this Partnership, or that would make it impossible to carry on the affairs of the Partnership. ARTICLE 10 INVESTMENT REPRESENTATION AND TRANSFER OF PARTNERSHIP INTERESTS 10.1 INVESTMENT REPRESENTATION OF THE LIMITED PARTNERS. This Agreement is made with each Limited Partner in reliance upon the Limited Partner's representation to the Partnership, which by executing this Agreement the Limited Partner hereby confirms, that its interest in the Partnership is to be acquired for investment, and not with a view to the sale or distribution of any part thereof, and that it has no present intention of selling, granting participation in, or otherwise distributing the same, and the Limited Partner understands that its interest in the Partnership has not been registered under the Securities Act and that any transfer or other disposition of the interest may not be made without registration under the Securities Act or pursuant to an applicable exemption therefrom. Each Limited Partner further represents that it does not have any contract, undertaking, agreement, or arrangement with any person to sell, transfer, or grant participations to such person, or to any third person, with respect to its interest in the Partnership. 10.2 QUALIFICATIONS OF THE LIMITED PARTNERS. Each Limited Partner represents that it is an "accredited investor" within the meaning of that term as defined in Regulation D promulgated under the Securities Act as set forth below or elsewhere in Regulation D as amended from time to time: (a) An individual who has a net worth or joint net worth with that person's spouse exceeding $1,000,000 at the time of becoming a Limited Partner; or (b) An individual who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and who reasonably expects reaching the same income level in the current year. The term "net worth" means the excess of total assets over total liabilities. In computing net worth for the purposes of paragraph 10.2(a) above, the principal residence of the investor must be valued at cost, including cost of improvements, or at a recently appraised value by an institutional lender making a secured loan, net of encumbrances. 10.3 TRANSFER BY THE GENERAL PARTNER. The General Partner may not sell, assign, pledge, mortgage or otherwise dispose of its interest in the Partnership or in its capital assets or property without the prior written approval of a Majority in Interest of the Class A Limited Partners. 13. 10.4 TRANSFER BY A LIMITED PARTNER. No Limited Partner may sell, assign, pledge, mortgage, or otherwise dispose of or transfer its interest in the Partnership without the prior written approval of the General Partner. 10.5 REQUIREMENTS FOR TRANSFER. No transfer or other disposition of the interest of a Limited Partner shall be permitted until the General Partner is reasonably satisfied that the effect of such transfer or disposition would not: (a) result in the termination of the Partnership's tax year under Section 708(b)(1)(B) of the Code; (b) result in violation of the Securities Act or any comparable state law; (c) require the Partnership to register as an investment company under the Investment Company Act of 1940, as amended; (d) require the Partnership or the General Partner to register as an investment adviser under the Investment Advisers Act of 1940, as amended; (e) result in a termination of the Partnership's status as a partnership for federal income tax purposes; (f) result in a violation of any law, rule, or regulation by a Limited Partner, the Partnership or the General Partner; or (g) cause the Partnership to be deemed to be a "publicly traded partnership" as such term is defined in Section 7704(b) of the Code. 10.6 SUBSTITUTION AS A LIMITED PARTNER. A transferee of a Limited Partner's interest pursuant to this Article 10 shall become a substituted Limited Partner only with the consent of the General Partner (which consent may be withheld by the General Partner for any reason or for no reason) and only if such transferee (a) elects to become a substituted Limited Partner and (b) executes, acknowledges and delivers to the Partnership such other instruments as the General Partner may deem necessary or advisable to effect the admission of such transferee as a substituted Limited Partner, including, without limitation, the written acceptance and adoption by such transferee of the provisions of this Agreement. 10.7 EXPENSES OF TRANSFER. Any costs or expenses (including but not limited to reasonable attorneys fees) incurred by the Partnership in connection with the transfer of a Partnership interest hereunder shall be borne by the transferring Partner. 14. ARTICLE 11 DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP 11.1 EARLY TERMINATION OF THE PARTNERSHIP. (a) The Partnership shall dissolve, and the affairs of the Partnership shall be wound up prior to the expiration of its term set forth in paragraph 3.1 upon the occurrence of any of the following events: (i) One hundred eighty (180) days after the withdrawal, bankruptcy, or dissolution of the General Partner of the Partnership, unless within ninety (90) days of such event, a Majority in Interest of the Class A Limited Partners elect to continue the business of the Partnership and to the appointment, effective as of the date of such withdrawal, bankruptcy or dissolution, of a new general partner. In the event that a new general partner is elected pursuant to the foregoing sentence, the interest of the General Partner shall be determined in accordance with paragraph 11.1(c) below; (ii) Sale or other transfer of substantially all of the assets of the Partnership; or (iii) Mutual consent of the General Partner and a Majority in Interest of the Class A Limited Partners. (b) In the event that the Partnership is dissolved pursuant to the provisions of this paragraph, the General Partner (or, if the dissolution occurs because of an event described in paragraph 11.1(a)(i), a Majority in Interest of the Class A Limited Partners) shall elect one or more liquidators to manage the liquidation of the Partnership in the manner described in this Article 11. (c) If the Limited Partners elect to continue the Partnership pursuant to its right under paragraph 11.1(a), the former General Partner=s interest in the Partnership shall become a limited partner interest and such former General Partner shall have no powers of a General Partner under this Agreement or the Act. The former General Partner=s interest in Short Term Income shall remain unchanged. The former General Partner=s interest in Profit and Loss shall limited to those allocations arising from assets acquired by the Partnership (i) prior to the date on which the former General Partner ceased to serve as General Partner (the ACessation Date@) or (ii) by use of the uninvested portion of the General Partner=s capital contributions made prior to the Cessation Date. The former General Partner shall have no obligation to make additional capital contributions pursuant to Article 4 after the Cessation Date. To the extent reasonably practicable, distributions of amounts allocable to the former General Partner shall be made in a manner consistent with the foregoing. 15. 11.2 WINDING UP PROCEDURES. (a) Promptly upon dissolution of the Partnership (unless the Partnership is continued in accordance with this Agreement or the provisions of the Act), the affairs of the Partnership shall be wound up and the Partnership liquidated. The closing Capital Accounts and subaccounts of all the Partners shall be computed as of the date of dissolution as if the date of dissolution were the last day of an Accounting Period in accordance with Article 6, and then adjusted in the following manner: (i) All assets and liabilities of the Partnership shall be valued as of the date of dissolution. (ii) The Partnership's assets as of the date of dissolution shall be deemed to have been sold at their fair market values and the resulting Profit or Loss shall be allocated to the Partners' Capital Accounts in accordance with the provisions of Article 6. The result for each Partner shall be its closing Capital Account. (b) Distributions during the winding up period may be made in cash or in kind or partly in cash and partly in kind. The General Partner or the liquidator shall use its best judgment as to the most advantageous time for the Partnership to sell Securities or to make distributions in kind. All cash and each Security distributed in kind after the date of dissolution of the Partnership shall be distributed ratably in accordance with the distribution provisions of Article 8. Each Security so distributed shall be subject to reasonable conditions and restrictions necessary or advisable in order to preserve the value of such Security or for legal reasons. ARTICLE 12 FINANCIAL ACCOUNTING, REPORTS, MEETINGS AND VOTING 12.1 FINANCIAL ACCOUNTING; FISCAL YEAR. The books and records of the Partnership shall be kept in accordance with the provisions of this Agreement and otherwise in accordance with generally accepted accounting principles consistently applied, and shall be reviewed at the end of each fiscal year by an independent public accountant of recognized national standing selected by the General Partner. The Partnership's fiscal year shall be a fifty-two/fifty-three week period ending on the Friday closest to November 30 of each year (the AFiscal Year@). 12.2 SUPERVISION; INSPECTION OF BOOKS. Proper and complete books of account of the Partnership, copies of the Partnership's federal, state and local tax returns for each fiscal year, the Schedule of Partners set forth in Exhibit A, this Agreement and the Partnership's Certificate of Limited Partnership shall be kept under the supervision of the General Partner at the principal office of the Partnership. Such books and records shall be open to inspection by the Limited Partner, or their accredited representatives, at any reasonable time during normal business hours after reasonable advance notice. 12.3 PARTNERSHIP REPORTS; FINANCIAL STATEMENTS OF THE PARTNERSHIP. The General 16. Partner shall deliver to the Limited Partners the following: (a) Within 120 days after the close of the Partnership's Fiscal Year, audited financial statements of the Partnership prepared in accordance with the terms of this Agreement and otherwise in accordance with generally accepted accounting principles, including an income statement for the year then ended and balance sheet as of the end of such year, a statement of changes in the Partners' Capital Accounts, and a list of investments then held. (b) Within 60 days after the close of each fiscal quarter, unaudited financial statements. (c) Within 10 days after the end of each fiscal quarter, a report from the General Partner which shall include a status report on cash reserves, investments then held, a summary of acquisitions and dispositions of investments made by the Partnership during the preceding period and a valuation of each such investment. 12.4 TAX RETURNS AND TAX INFORMATION. The Partnership shall use the method of accounting for tax purposes that is selected by the General Partner after consultation with the Partnership's independent public accountants. The General Partner shall cause the Partnership's federal, state and local tax returns and IRS Form 1065, Schedule K 1, to be prepared and delivered to the Limited Partners within sixty (60) days after the close of the Partnership's fiscal year. During such period, the General Partner shall also cause the Partnership to furnish to any Limited Partner any other tax information reasonably requested by such Limited Partner. 12.5 TAX MATTERS PARTNER. The General Partner shall be the Partnership's tax matters partner under the Code and under any comparable provision of state law. The General Partner shall have the right to resign as tax matters partner by giving thirty (30) days' written notice to each Partner. Upon such resignation a successor tax matters partner shall be elected by a Majority In Interest of the Class A Limited Partners. The tax matters partner shall employ experienced tax counsel to represent the Partnership in connection with any audit or investigation of the Partnership by the Internal Revenue Service and in connection with all subsequent administrative and judicial proceedings arising out of such audit. If the tax matters partner is required by law or regulation to incur fees and expenses in connection with tax matters not affecting all the Partners, then the Partnership shall be entitled to reimbursement from those Partners on whose behalf such fees and expenses were incurred. The tax matters partner shall keep the Partners informed of all administrative and judicial proceedings, as required by Section 6223(g) of the Code, and shall furnish to each Partner, if such Partner so requests in writing, a copy of each notice or other communication received by the tax matters partner from the Internal Revenue Service, except such notices or communications as are sent directly to such requesting Partner by the Internal Revenue Service. The relationship of the tax matters partner to the Limited Partners is that of a fiduciary, and the tax matters partner has fiduciary obligations to perform its duties as tax matters partner in such manner as will serve the best interests of the Partnership and all of the Partnership's Partners. To the fullest extent permitted by law, but subject to the limitations and exclusions of paragraph 14.4 below, the Partnership agrees to indemnify the tax matters partner and its agents and save and hold them harmless, from and in respect to all (i) fees, costs and expenses in connection with or resulting from any laim, action, or demand against the tax matters partner, the General Partner or the Partnership that arise out of or in any way relate to the tax matters partner's status as tax matters partner for the Partnership, and (ii) all such claims, actions, and demands and any losses or damages therefrom, including amounts paid in settlement or compromise of any such claim, action, or demand. 17. 12.6 SPECIAL MEETINGS. Subject to the provisions of the Act, each Partner may call a special meeting of the Partnership at any reasonable time on not less than ten (10), nor more than sixty (60), days= written notice. ARTICLE 13 VALUATION 13.1 VALUATION. Subject to the specific standards set forth below, the valuation of Securities and other assets and liabilities under this Agreement shall be at fair market value. Except as may be required under applicable Treasury Regulations, no value shall be placed on the goodwill or the name of the Partnership in determining the value of the interest of any Partner or in any accounting among the Partners. (a) The following criteria shall be used for determining the fair market value of Securities: (i) Securities not subject to investment letter or other similar restrictions on free Marketability: (1) If traded on one or more securities exchanges or the Nasdaq National Market, the value shall be deemed to be the Securities' highest closing price on such exchange(s) on the valuation date. (2) If actively traded over the counter (other than on the Nasdaq National Market), the value shall be deemed to be the average of the closing bid and ask prices of such Securities on the valuation date. (3) If there is no active public market, the value shall be the fair market value thereof, as determined by the General Partner, taking into consideration the purchase price of the Securities, developments concerning the investee company subsequent to the acquisition of the Securities, any financial data and projections of the investee company provided to the General Partner, and such other factor or factors as the General Partner may deem relevant. If a Majority in Interest of the Class A Limited Partners objects to the valuation of any Nonmarketable Security within fifteen (15) days of receipt of the valuation, the fair market value of such Security shall be determined by an appraiser selected by the senior ranking officer of the Western Association of Venture Capitalists (or any successor organization) who is not associated with any of the Partners. The Partnership shall bear the expense of any such appraisal. (ii) Securities subject to investment letter or other restrictions on free Marketability shall be valued by making an appropriate adjustment from the value determined under (1), (2), or (3) above to reflect the effect of the restrictions on transfer. (iii) The valuation of the Partnership's interest in AVII shall be based on the valuation of the securities owned by AVII determined in accordance with AVII's limited partnership agreement. 18. (b) If the General Partner in good faith determines that, because of special circumstances, the valuation methods set forth in this paragraph do not fairly determine the value of a Security, the General Partner shall make such adjustments or use such alternative valuation method as it deems appropriate. ARTICLE 14 OTHER PROVISIONS 14.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among the residents of such state made and to be performed entirely within such state. 14.2 LIMITATION OF LIABILITY OF THE LIMITED PARTNERS. Except as required by law, no Limited Partner shall be bound by, nor be personally liable for, the expenses, liabilities, or obligations of the Partnership in excess of its capital commitment to the Partnership. 14.3 EXCULPATION. Neither the General Partner, nor its members or Affiliates shall be liable to any Limited Partner or the Partnership for honest mistakes of judgment, or for action or inaction, taken in good faith for a purpose that was reasonably believed to be in the best interests of the Partnership, or for losses due to such mistakes, action, or inaction, or to the negligence, dishonesty, or bad faith of any employee, broker, or other agent of the Partnership, provided that such employee, broker, or agent was selected, engaged, or retained with reasonable care. The General Partner and such persons may consult with counsel and accountants in respect of Partnership affairs and be fully protected and justified in any action or inaction that is taken in accordance with the advice or opinion of such counsel or accountants, provided that they shall have been selected with reasonable care. Notwithstanding any of the foregoing to the contrary, the provisions of this paragraph and the immediately following paragraph shall not be construed so as to relieve (or attempt to relieve) any person of any liability by reason of fraud, willful misconduct or gross negligence or to the extent (but only to the extent) that such liability may not be waived, modified, or limited under applicable law, but shall be construed so as to effectuate the provisions of such paragraphs to the fullest extent permitted by law. 14.4 INDEMNIFICATION. The Partnership agrees to indemnify, out of the assets of the Partnership only, the General Partner and its members and their agents (the "Indemnified Parties") to the fullest extent permitted by law and to save and hold them harmless from and in respect of all (a) reasonable fees, costs, and expenses, including legal fees, paid in connection with or resulting from any claim, action, or demand against any Indemnified Party that arises out of or in any way relate to the Partnership, its properties, business, or affairs and (b) such claims, actions, and demands and any losses or damages resulting from such claims, actions, and demands, including amounts paid in settlement or compromise (if recommended by attorneys for the Partnership) of any such claim, action or demand; provided, however, that this indemnity shall not extend to conduct not undertaken in good faith to promote the best interests of the Partnership or the portfolio companies of the Partnership, nor to any conduct which constitutes fraud, willful misconduct or gross negligence. Expenses incurred by any Indemnified Party in defending a claim or proceeding covered by this paragraph shall be paid by the Partnership in advance of the final disposition of such claim or proceeding provided the indemnified person undertakes to repay such amount if it is ultimately determined that such person was not entitled to be indemnified. The provisions of this paragraph 14.4 shall remain in effect as to each Indemnified 19. Party whether or not such Indemnified Party continues to serve in the capacity that entitled such person to be indemnified. 14.5 ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, except with respect to the valuation of Partnership assets, shall be settled by arbitration in San Jose, California in accordance with the rules, then obtaining, of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. 14.6 EXECUTION AND FILING OF DOCUMENTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 14.7 OTHER INSTRUMENTS AND ACTS. The Partners agree to execute any other instruments or perform any other acts that are or may be reasonably necessary to effectuate and carry on the partnership created by this Agreement. 14.8 BINDING AGREEMENT. This Agreement shall be binding upon the transferees, successors, assigns, and legal representatives of the Partners. 14.9 NOTICES. Any notice or other communication that one Partner desires to give to another Partner shall be in writing, and shall be deemed effectively given upon personal delivery or three (3) days after deposit in any United States mail box, by registered or certified mail, postage prepaid, upon confirmed transmission by facsimile, or upon confirmed delivery by overnight commercial courier service, addressed to the other Partner at the address shown on Exhibit A or at such other address as a Partner may designate by ten (10) days' advance written notice to the other Partners; provided, however, that any notice to a Partner with an address outside the United States shall be deemed effectively given only upon personal delivery or upon transmission by facsimile with a confirmation copy sent by air mail, or upon confirmed delivery by international commercial courier service. 14.10 AMENDMENT. This Agreement may be amended only with the written consent of the General Partner and a Majority in Interest of the Class A Limited Partners. 14.11 ENTIRE AGREEMENT. This Agreement constitutes the full, complete, and final agreement of the Partners and supersedes all prior written or oral agreements between the Partners with respect to the Partnership. 14.12 TITLES; SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and shall not be considered in the interpretation of this Agreement. 14.13 PARTNERSHIP NAME. The Partnership shall have the exclusive right to use the Partnership name as long as the Partnership continues. Upon termination of the Partnership, the Partnership shall assign whatever rights it may have in such name to the General Partner. No value shall be placed upon the name or the goodwill attached to it for the purpose of determining the value of any Partner's Capital Account or interest in the Partnership. IN WITNESS WHEREOF, the Partners have executed this Agreement as of the date first written above. 20. GENERAL PARTNER: CLASS A LIMITED PARTNER: ADOBE SYSTEMS INCORPORATED ADOBE SYSTEMS INCORPORATED By: Ross Bott By: Ross Bott 21. EXHIBIT A SCHEDULE OF PARTNERS
NAME AND ADDRESS CAPITAL CONTRIBUTION CLASS A UNITS CLASS B UNITS GENERAL PARTNER: Adobe Systems Incorporated 345 Park Avenue San Jose, CA 95110-2704 (1) 0 0 CLASS A LIMITED PARTNER: Adobe Systems Incorporated 345 Park Avenue San Jose, CA 95110-2704 (1) 800,000 30,000 CLASS B LIMITED PARTNERS: John Warnock(3) $0.00 0 50,000 Charles Geschke(3) $0.00 0 50,000 David Pratt(3) $0.00 0 30,000 P. Jackson Bell(3) $0.00 0 30,000 Colleen Pouliot(2) $0.00 0 10,000 Totals 800,000 200,000
- --------------------------------------------------------------------------- - --------------- (1) cash and securities described on Schedule A-1 to this Exhibit A with an agreed value as set forth on Schedule A-1. (2) c/o Adobe Systems Incorporated, 345 Park Avenue, San Jose, CA 95110-2704 EX-10.43 5 EXHIBIT 10.43 Exhibit 10.43 [ADOBE SYSTEMS INCORPORATED LETTERHEAD] October 9, 1997 Mr. David B. Pratt 12324 Melody Lane Los Altos Hills, California 94022 RESIGNATION AGREEMENT Dear Mr. Pratt: This will reflect our mutual agreement concerning your resignation from your position as an officer of Adobe Systems Incorporated (the "COMPANY") and of each of the subsidiaries of the Company (collectively, the "COMPANIES") and the Company's retention of you as an employee following such resignation, in accordance with the terms and conditions set forth below. Your acceptance of and agreement with the provisions of this letter (hereinafter, the "RESIGNATION AGREEMENT") will be signified by applying your signature to the end of this letter by a date no later than 21 days after the letter date. 1. YOUR RESIGNATION AS AN OFFICER. By signing this Resignation Agreement, you hereby agree that your resignation from all positions you hold as an officer of the Companies shall become effective as of November 30, 1997 (the "RESIGNATION DATE"). 2. TRANSITIONAL EMPLOYMENT ARRANGEMENT. You further agree that as of the Resignation Date and continuing through January 15, 1998 (the "SEVERANCE DATE") you shall remain employed by the Company and you shall devote substantially all of your business time, attention and abilities to the business of the Company (including its subsidiaries or affiliates, when so required) and faithfully serve the Company and use your best efforts to promote and develop the interests of the Company. During the period beginning on the Resignation Date and ending on the Severance Date (hereinafter, the "TRANSITIONAL PERIOD"), your responsibilities and duties as an employee of the Company will be to provide advice to the President and Co- Chairman of the Board of Directors of the Company regarding all matters relating to the transitional management activities associated with the Pathfinder project. 3. TERMINATION OF EMPLOYMENT. On the Severance Date, you will cease to be employed in any capacity by the Company. 4. PAYMENTS AND BENEFITS IN CONNECTION WITH YOUR RESIGNATION AND TRANSITIONAL EMPLOYMENT. In connection with your resignation and transitional employment, subject to Section 8, the Company agrees to provide you with the compensation and benefits described below. (a) SALARY CONTINUATION PAYMENTS. In consideration of your agreement to continue your employment with the Company during the Transitional Period, the Company shall continue to pay you your base salary, at the annual rate currently in effect as of the Resignation Date, payable in accordance with the Company's normal payroll procedures. (b) BENEFIT CONTINUATION DURING THE TRANSITIONAL PERIOD. During the Transitional Period, you shall continue to participate in all Company welfare benefit plans, including, without limitation, health, medical and disability insurance plans, in which you participate as of the Resignation Date (the "Welfare Benefit Plans"), in accordance with the terms and conditions applicable to you which are currently in effect as of such date. (c) BENEFIT CONTINUATION AFTER THE SEVERANCE DATE. For a period of two years and nine months following the Severance Date, you and your eligible dependents shall continue to participate in the Welfare Benefit Plans on the same terms (including contribution levels) as are in effect on the Resignation Date. Your participation in the Welfare Benefit Plans will terminate at the time you become eligible to receive benefits under the welfare benefit plans of a subsequent employer. You hereby acknowledge and agree that you have an affirmative obligation to notify the Company of any subsequent employment that offers you such welfare benefits. (d) BONUS. As soon as practicable following the Severance Date, the Company will pay you your bonus for fiscal year ending 1997, subject to the terms and conditions of the bonus plan and arrangements applicable to you. You will not however, receive a bonus for any portion of fiscal year ending 1998. (e) SPECIAL SEVERANCE PAYMENT. As soon as practicable following the Severance Date, the Company will make a one-time lump sum cash severance payment (the "Severance Payment") to you of $1,496,000, representing (i) two and nine-twelfths multiplied by (ii) the sum of your annual salary and target bonus which are currently in effect. If within six monthe of the Severance Date, you breach any of the provisions of Section 8 below, you shall either (i) forfeit 30% of the Severance Payment as described this Section 4(e) (the "Forfeited Amount") if you have not received such Severance Payment at the time of the breach or (ii) if you have received the Severance Payment at the time of such breach, you shall immediately incur the binding and enforceable obligation to the Company to repay the Forfeited Amount within thirty days from the date the Company provides you written notice of such breach. 5. OPTIONS. All stock option awards of the Adobe Stock Option Plan of 1984 and the Adobe Stock Option Plan of 1994, granted to you under the Company's stock option plans, will vest and become exercisable as of the Severance Date. The exercisable options will remain exercisable for a period of 90 days from the Severance Date, after which all options will be canceled and become void. 6. PERFORMANCE UNITS. You will earn performance units for the Adobe Long Term Incentive Plan period 1995 through 1997 in accordance with the terms of the plan. You will earn a pro rata share of the performance units for the periods 1996 through 1998 and 1997 through 1999 as follows: (i) on December 24, 1997, you will receive 4,600 vested performance units for the period 1996 through 1998 according to the terms of the plan, (ii) on December 24, 1997 you will receive 6,667 vested performance units for the period 1997 through 1999 according to the terms of the plan. 7. PARTNERSHIP UNITS. On the Severance Date 7,500 of your partnership units in Adobe Incentive Partners, L.P. shall vest for the 12-month period ending December 31, 1997. No partnership units will vest for the partial month January 1998 during which your employment with the Company will terminate. 8. PROTECTING THE INTERESTS OF THE COMPANY. (a) RESTRICTIVE COVENANTS. You acknowledge and agree that following the Severance Date, you shall continue to remain subject to and bound to comply with the Employee Inventions and Proprietary Rights Assignment Agreement between you and the Company dated May 16, 1988. (b) COOPERATION IN LITIGATION. In consideration of the payments hereunder, you agree to reasonably cooperate with and assist the Company and its counsel, following the Severance Date, (i) in the preparation and assertion of any claim or defense in connection with any action, suit or proceeding brought by or against any of the Companies and (ii) in any investigations (including internal investigations) and audits of the Companies' current and past conduct and business and accounting practices, provided that you possess relevant knowledge and/or expertise in the matter. Subject to documentation and itemization to the Company's reasonable satisfaction, the Company agrees to pay all travel expenses, attorneys' fees and other out-of-pocket expenses, actually, necessarily and reasonably incurred by you in connection with the activities described in the preceding sentence. (c) NO SOLICITATION. You agree that for a period of 24 months after the Severance Date, you shall not, either directly or indirectly, solicit or encourage any employee of the Companies to terminate his or her employment with the Companies. (d) PRESS RELEASES. During the Transitional Period, you and the Company shall agree upon the form of any statements to that are released to the press with respect to the subject matter of this Resignation Agreement and you agree not to make any remarks or comments concerning your termination of employment with the Company that are inconsistent with any such press releases. (e) CONFIDENTIALITY OF THE RESIGNATION AGREEMENT. Subject to any legal requirements to divulge such information, you and the Company mutually agree to keep the contents and terms of this Resignation Agreement confidential for a period of six months following the Severance Date. (f) PUBLIC COMMENT. You agree to refrain from making now or at any time in the future any derogatory or disparaging comment concerning any of the Companies or any current or former directors, officers or employees of any of the Companies to the press, any employees of any of the Companies or any individual or entity with whom you or any of the Companies has a business relationship. The Company agrees to refrain from making now or at any time in the future any derogatory or disparaging comment concerning you to the press or to any person with whom you or any of the Companies has a business relationship. (g) INJUNCTIVE RELIEF. Without intending to limit the remedies available to the Company, you acknowledge that a breach of any of the covenants contained in this Section 8 may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining you from engaging in activities prohibited by this Section 8, or such other relief as may be required to specifically enforce any of the covenants in this Section 8. 9. RELEASE. (a) In recognition of the consideration cited above, you hereby release and discharge on behalf of each of the Releasing Parties (as defined below) each of the Released Parties (as defined below) from any and all claims, actions and causes of action that the Releasing Parties may have or in the future may possess with respect to the Released Parties, including, but not limited to, any claims arising under Title VII of the Civil Rights Act of 1964 as amended, the Rehabilitation Act of 1973 as amended, the Americans with Disabilities Act of 1990 as amended, the Civil Rights Act of 1866 as amended, the Civil Rights Act of 1991 as amended, the Employee Retirement Income Security Act of 1974 as amended, the Older Workers Benefit Protection Act as amended, the Family Medical Leave Act of 1993 as amended, or any other federal or state or local law, whether such claim arises under statute or common law and whether or not you are presently aware of the existence of such claim, damage, action or cause of action, suit or demand. You also forever release, discharge and waive any right the Releasing Parties may have to recover in any proceeding brought by any federal, state or local agency against the Released Parties to enforce any laws. You agree that the value received as described in this Resignation Agreement shall be in full satisfaction of any and all claims, actions or causes of action for payment or other benefits of any kind that the Releasing Parties may have against the Released Parties. "RELEASING PARTIES" means you, your family members, your estate, your beneficiaries, your heirs and your assigns and the estate, beneficiaries, heirs and assigns of each of the foregoing. "RELEASED PARTIES" means the Companies and their present, former and future shareholders, directors, officers, employees, agents, attorneys, heirs and assigns. (b) In further recognition of the consideration cited above, you hereby release and forever discharge on behalf of each of the Releasing Parties each of the Released Parties from any and all claims, actions and causes of action that you may have as of the date you sign and deliver to the Company this Resignation Agreement arising under the federal Age Discrimination in Employment Act of 1967, as amended, and the applicable rules and regulations promulgated thereunder ("ADEA") which may be based in whole or in part on age discrimination. (c) You acknowledge that you have read Section 1542 of the Civil Code of the State of California, which states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." You waive any rights that you have or may have under Section 1542 of the Civil Code to the full extent that you may lawfully waive such rights with respect to this general release of all claims. 10. TERMINATION OF PRIOR AGREEMENTS AND UNDERSTANDINGS. With the exception of the terms and conditions outlined in the Amended and Restated Partnership Agreement of the Adobe Incentive Partners, L.P. and the Restricted Units Agreement and the vesting of your partnership units outlined herein, This Resignation Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior negotiations and agreements, whether written or oral. This Resignation Agreement may not be modified or amended except by a document signed by you and an authorized officer of the Company. 11. ARBITRATION. Any controversy or claim arising out of or relating to this Resignation Agreement, including, but not limited to, any claim relating to the validity, interpretation, enforceability or breach of this Resignation Agreement, which is not settled by agreement between you and the Company (collectively, the "PARTIES") shall be settled by arbitration in San Jose, California, before a panel of three arbitrators, one to be selected by the Company, one by you and the other by the two persons so selected, all in accordance with the rules of the American Arbitration Association then in effect; PROVIDED, HOWEVER, that the Company shall nevertheless be entitled to seek relief under Section 8 above in accordance with Section 8(g) thereof. In consideration of the Parties' agreement to submit to arbitration disputes with regard to this Resignation Agreement and with regard to any alleged tort, contract or other claim arising out of the employment relationship, and in consideration of the anticipated expedition and minimization of expense of this arbitration remedy, each Party agrees that the arbitration provisions of this Resignation Agreement shall provide it with the exclusive remedy, except as provided in the preceding sentence, and each Party expressly waives any right it might have to seek redress in any other form except as provided herein. The Parties further agree that the arbitrators acting hereunder shall be empowered to assess no remedy other than payment of compensatory damages or an order (including temporary, preliminary or permanent injunctive relief) enforcing the provisions of Section 8 above. Any decision or order of the majority of arbitrators shall be binding upon the Parties hereto and judgment thereon may be entered in the Santa Clara County Superior Court or any other court having jurisdiction. The prevailing party shall be entitled to recover from the losing party its attorneys' fees and costs incurred in any lawsuit or other action brought to enforce any right arising out of this Resignation Agreement. 12. ACKNOWLEDGMENT. By signing this Resignation Agreement, you hereby acknowledge and confirm the following: (a) You were advised by the Company in connection with your resignation to consult with an attorney of your choice prior to signing this Resignation Agreement and to have such attorney explain to you the terms of this Resignation Agreement including, without limitation, the terms relating to your release of claims arising out of ADEA. (b) You were given not less than 21 days to consider the terms of this Resignation Agreement and to consult with an attorney of your choosing with respect thereto, and that for a period of seven days following your acceptance hereof, you have the option to revoke such acceptance in accordance with the terms set forth below. 13. REVOCATION. You shall have the right to revoke this Resignation Agreement during the seven-day period (the "REVOCATION PERIOD ") commencing immediately following the date you sign and deliver this Resignation Agreement to the Company. The Revocation Period shall expire at 5:00 p.m. (California time) on the last day of the Revocation Period; PROVIDED, HOWEVER, that if such seventh day is not a business day, the Revocation Period shall extend to 5:00 p.m. on the next succeeding business day. In the event of any such revocation by you, all obligations of any of the Companies under this Resignation Agreement shall terminate and be of no further force and effect as of the date of such revocation. No such revocation by you shall be effective unless it is in writing and signed by you and received by the Company prior to the expiration of the Revocation Period Your signature on the line below constitutes your agreement with each provision contained herein. Very truly yours, Adobe Systems Incorporated By: Charles M. Geschke -------------------------------- Title: President I UNDERSTAND AND AGREE WITH THE ABOVE: /s/ David B. Pratt - ---------------------------- David B. Pratt Dated: October 13, 1997 - ---------------------------- EX-10.44 6 EXHIBIT 10.44 EXHIBIT 10.44 ADOBE SYSTEMS INCORPORATED [GOLD VERSION A] ________ ___, 1997 [Name] [Address] RETENTION AGREEMENT Dear _______: Adobe Systems Incorporated, a Delaware corporation (the "COMPANY"), considers it essential to the best interests of its stockholders to take reasonable steps to retain key management personnel. Further, the Board of Directors of the Company (the "BOARD") recognizes that the uncertainty and questions which might arise among management in the context of a change in control of the Company could result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined, therefore, that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the management of the Company and its subsidiaries, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from any possible change in control of the Company. In order to induce you to remain in the employ of the Company, the Company has determined to enter into this letter agreement (this "AGREEMENT") which addresses the terms and conditions of your employment in the event of a change in control of the Company. Capitalized words which are not otherwise defined herein shall have the meanings assigned to such words in Section 7 of this Agreement. 1. TERM OF EMPLOYMENT UNDER THE AGREEMENT. The term of your employment under this Agreement shall commence on the Change in Control Date and shall continue until the second anniversary of the Change in Control Date (the "TERM"). 2. EMPLOYMENT DURING THE TERM. During the Term, the following terms and conditions shall apply to your employment with the Company: 2 (a) TITLES; REPORTING AND DUTIES. Your position, titles, nature and status of responsibilities and reporting obligations shall be no less favorable to you than those that you enjoyed immediately prior to the Change in Control Date. (b) SALARY AND BONUS. Your base salary and annual bonus opportunity may not be reduced, and your base salary shall be periodically reviewed and increased in the manner commensurate with increases awarded to other similarly situated executives of the Company. (c) INCENTIVE COMPENSATION. You shall be eligible to participate in each long-term incentive plan or arrangement established by the Company for its executive employees at your level of seniority (excluding the Investment Partnership, except to the extent you hold Restricted Units) in accordance with the terms and provisions of such plan or arrangement and at a level consistent with the Company's practices applicable to you prior to the Change in Control Date. (d) BENEFITS. You shall be eligible to participate in all pension, welfare and fringe benefit plans and arrangements that the Company provides to its executive employees in accordance with the terms of such plans and arrangements, which shall be no less favorable to you, in the aggregate, than the terms and provisions available to other executive employees of the Company. (e) LOCATION. You will continue to be employed at a business location in the same metropolitan area in which you were employed prior to the Change in Control Date and the amount of time that you are required to travel for business purposes will not be increased in any significant respect from the amount of business travel required of you prior to the Change in Control Date. 3. INVOLUNTARY TERMINATION DURING THE TERM. (a) CASH SEVERANCE PAYMENT. In the event of your Involuntary Termination during the Term, the Company shall pay you within five (5) days of the date of such Involuntary Termination the full amount of any earned but unpaid base salary through the Date of Termination at the rate in effect at the time of the Notice of Termination, plus a cash payment (calculated on the basis of your Reference Salary) for all unused vacation time which you may have accrued as of the Date of Termination. The Company shall also pay you within five (5) days of the Date of Termination a pro rata portion of the annual bonus for the year in which your Involuntary Termination occurs, calculated on the basis of your target bonus for that year and on the assumption that all performance targets have been or will be achieved. In addition, the Company shall pay you in a cash lump sum, within eight (8) days following the date of your execution of the release described in the last sentence of this Section 3(a) (or on 3 the Date of Termination, if later), an amount (the "SEVERANCE PAYMENT") equal to the product of (i) the sum of your Reference Salary and your Reference Bonus, multiplied by (ii) two (2) plus one twelfth (1/12th) for each of your completed years of service with the Company (not in excess of twelve (12)) (the number determined in accordance with the clause (ii) being hereinafter referred to as the "SEVERANCE MULTIPLE"). The Severance Payment shall be in lieu of any other cash severance payments which you are entitled to receive under any other severance pay plan or arrangement sponsored by the Company and its subsidiaries. (b) VESTING AND EXERCISE OF EQUITY AWARDS AND RESTRICTED UNITS. Notwithstanding anything to the contrary contained in an applicable Equity Award or Restricted Unit agreement, all Equity Awards granted to you under the Equity Plans (except performance share unit awards, which shall continue to be governed by their current terms) shall vest in full and become exercisable, and all Restricted Units granted to you under the Investment Partnership shall vest in full, upon your Involuntary Termination during the Term. Anything in this Agreement to the contrary notwithstanding, in no event shall the vesting and exercisability provisions applicable to you under the terms of your Equity Awards or Restricted Units be less favorable to you than the terms and provisions of such awards in effect on the date hereof. (c) BENEFITS CONTINUATION. In the event of your Involuntary Termination during the Term, you and your eligible dependents shall continue to be eligible to participate during the Benefit Continuation Period (as hereinafter defined) in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to you immediately prior to your Involuntary Termination on the same terms and conditions (including the level of your contributions) in effect for you and your dependents immediately prior to such Involuntary Termination. For purposes of the previous sentence, "BENEFIT CONTINUATION PERIOD" means the period beginning on the Date of Termination and continuing for a number of years (and fractions of years) equal to the Severance Multiple. (d) DATE AND NOTICE OF TERMINATION. Any termination of your employment by the Company or by you during the Term shall be communicated by a notice of termination to the other party hereto (the "NOTICE OF TERMINATION"). The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. The date of your termination of employment with the Company and its subsidiaries (the "DATE OF TERMINATION") shall be determined as follows: (i) if your employment is terminated for Disability, thirty (30) days after a Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), (ii) if your employment is terminated by the Company in an Involuntary Termination, five (5) days after the date the Notice of Termination is received by you and (iii) if your employment is terminated by the Company for Cause, the 4 later of the date specified in the Notice of Termination or ten (10) days following the date such notice is received by you. If the basis of your Involuntary Termination is your resignation for Good Reason, the Date of Termination shall be ten (10) days after the date your Notice of Termination is received by the Company. The Date of Termination for a resignation of employment other than for Good Reason shall be the date set forth in the applicable notice, which shall be no earlier than ten (10) days after the date such notice is received by the Company. (e) NO MITIGATION OR OFFSET. You shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by you as the result of employment by another employer or by pension benefits paid by the Company or another employer after the Date of Termination or otherwise. 4. LIMITATION ON PAYMENTS. In the event that it is determined by the Accounting Firm that any amount payable to you under this Agreement, alone or when aggregated with any other amount payable or benefit provided to you pursuant to any other plan or arrangement of the Company, would constitute an "excess parachute payment" within the meaning of Section 280G of the Code, then the aggregate present value of all such payments and benefits shall be reduced to the amount, expressed as a present value, which, as determined by the Accounting Firm, maximizes the aggregate present value of the payments without causing any payment to be nondeductible by the Company under Section 280G of the Code. 5. LEGAL FEES AND EXPENSES. The Company shall pay or reimburse you for all costs and expenses (including, without limitation, court costs and reasonable legal fees and expenses which reflect common practice with respect to the matters involved) incurred by you as a result of any claim, action or proceeding (i) arising out of your termination of employment during the Term, (ii) contesting, disputing or enforcing any right, benefits or obligations under this Agreement or (iii) arising out of or challenging the validity, advisability or enforceability of this Agreement or any provision thereof. The payments or reimbursements provided for herein shall be paid by the Company promptly (but in no event more than five (5) business days) following receipt of a written request for payment or reimbursement, as the case may be. 6. SUCCESSORS; BINDING AGREEMENT. (a) ASSUMPTION BY SUCCESSOR. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be 5 required to perform it if no such succession had taken place; PROVIDED, HOWEVER, that no such assumption shall relieve the Company of its obligations hereunder. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (b) ENFORCEABILITY; BENEFICIARIES. This Agreement shall be binding upon and inure to the benefit of you (and your personal representatives and heirs) and the Company and any organization which succeeds to substantially all of the business or assets of the Company, whether by means of merger, consolidation, acquisition of all or substantially all of the assets of the Company or otherwise, including, without limitation, as a result of a Change in Control or by operation of law. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 7. DEFINITIONS. For purposes of this Agreement, the following capitalized words shall have the meanings set forth below: "ACCOUNTING FIRM" shall mean KPMG Peat Marwick LLP or, if such firm is unable or unwilling to perform such calculations, such other national accounting firm as shall be designated by agreement between you and the Company. "CAUSE" shall mean a termination of your employment during the Term which is a result of (i) your felony conviction, (ii) your willful disclosure of material trade secrets or other material confidential information related to the business of the Company and its subsidiaries or (iii) your willful and continued failure substantially to perform your same duties with the Company as in existence prior to the Change in Control (other than any such failure resulting from your incapacity due to physical or mental illness or any actual or anticipated failure resulting from a resignation by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand identifies the specific actions which the Board believes constitute willful and continued failure substantially to perform your duties, and which performance is not substantially corrected by you within ten (10) days of receipt of such demand. For purposes of the previous sentence, no act or failure to act on your part shall be deemed "willful" unless done, or omitted to be done, by you with willful malfeasance or gross negligence and without reasonable belief that your action or omission was not materially adverse to the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of 6 not less than three-fourths (3/4ths) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clause (i), (ii) or (iii) of the first sentence of this section and specifying the particulars thereof in detail. "CHANGE IN CONTROL" shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement; PROVIDED, HOWEVER, that, anything in this Agreement to the contrary notwithstanding, a Change in Control shall be deemed to have occurred if: (i) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act, is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities entitled to vote in the election of directors of the Company; (ii) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constituted the Board and any new directors, whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (the "INCUMBENT DIRECTORS"), cease for any reason to constitute a majority thereof; (iii) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company or a subsidiary of the Company (a "TRANSACTION"), in each case with respect to which the stockholders of the Company immediately prior to such Transaction do not, immediately after the Transaction, own securities representing more than 50% of the combined voting power of the Company, a parent of the Company or other corporation resulting from such Transaction (counting, for this purpose, only those securities held by the Company's stockholders immediately after the Transaction that were received in exchange for, or represent their continuing ownership of, securities of the Company held by them immediately prior to the Transaction); 7 (iv) all or substantially all of the assets of the Company are sold, liquidated or distributed; or (v) there is a "change in control" or a "change in the effective control" of the Company within the meaning of Section 280G of the Code and the Regulations. "CHANGE IN CONTROL DATE" shall mean the date on which the Change in Control occurs. Notwithstanding the first sentence of this definition, if your employment with the Company terminates prior to the Change in Control Date and it is reasonably demonstrated that your termination of employment (i) was at the request of the third party who has taken steps reasonably calculated to effect the Change in Control or (ii) otherwise arose in connection with or in anticipation of the Change in Control, then "Change in Control Date" shall mean the date immediately prior to the date of your termination of employment. "CODE" shall mean the Internal Revenue Code of 1986, as amended, and any successor provisions thereto. "COMMON STOCK" shall mean the common stock of the Company. "DISABILITY" shall mean (i) your incapacity due to physical or mental illness which causes you to be absent from the full-time performance of your duties with the Company for six (6) consecutive months and (ii) your failure to return to full-time performance of your duties for the Company within thirty (30) days after written Notice of Termination due to Disability is given to you. Any question as to the existence of your Disability upon which you and the Company cannot agree shall be determined by a qualified independent physician selected by you (or, if you are unable to make such selection, such selection shall be made by any adult member of your immediate family), and approved by the Company. The determination of such physician made in writing to the Company and to you shall be final and conclusive for all purposes of this Agreement. "EQUITY AWARDS" shall mean options, restricted stock, bonus stock or other grants or awards which consist of, or relate to, equity securities of the Company and which have been granted to you under the Equity Plans. For purposes of this Agreement, Equity Awards shall also include any securities acquired upon the exercise of an option, warrant or similar right that constitutes an Equity Award. "EQUITY PLANS" shall mean the Adobe Systems Incorporated 1994 Stock Option Plan, the Adobe Systems Incorporated 1994 Performance and Restricted Stock Plan and any other equity-based incentive plan or arrangement adopted by the Company, but shall not include the Adobe Systems Incorporated 1997 Employee Stock Purchase Plan. 8 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and any successor provisions thereto. "GOOD REASON" shall mean a resignation of your employment during the Term as a result of any of the following: (i) A meaningful and detrimental alteration in your position, your titles, or the nature or status of your responsibilities (including your reporting responsibilities) from those in effect immediately prior to the Change in Control Date. For purposes of this clause (i), a meaningful and detrimental alteration shall exist if, on or after the Change in Control Date, without limitation, any of the following occurs: (A) at any time you do not hold the position of the [INSERT TITLE/DUTIES] of the Company (or the surviving entity resulting from the merger or consolidation (through one or more related transactions) of the Company with another entity (the "SURVIVING ENTITY")); (B) at any time you do not hold the position of the [INSERT TITLE/DUTIES] of any entity that beneficially owns a majority of the voting stock of the Company (or the Surviving Entity) or that has the power to elect a majority of the Board (or the board of directors of the Surviving Entity) (the "CONTROLLING ENTITY"); (C) at any time you do not report directly to the [chief executive officer] of the Company (or the Surviving Entity) and to the [chief executive officer] of any Controlling Entity; (D) at any time you do not have regular direct access to the [chief executive officer] of the Company (or the Surviving Entity) and to the [chief executive officer] of any Controlling Entity or (E) any similar adverse change on or after the Change in Control Date in your title, position or reporting responsibilities; (ii) A reduction by the Company in your annual base salary as in effect immediately prior to the Change in Control Date or as the same may be increased from time to time thereafter; a failure by the Company to increase your salary at a rate commensurate with that of other key executives of the Company; or a reduction in the target incentive opportunity percentage used to determine your Target Annual Bonus below the percentage in effect for you prior to the Change in Control Date; (iii) The relocation of the office of the Company where you are employed immediately prior to the Change in Control Date (the "CIC LOCATION") to a location which is more than thirty five (35) miles away from the CIC Location or the Company's requiring you to be based more than thirty five (35) miles away from the CIC Location (except for required travel on the Company's business to an extent substantially consistent with your customary business travel obligations in the ordinary course of business prior to the Change in Control Date); 9 (iv) The failure by the Company to continue in effect any compensation plan in which you participated prior to the Change in Control Date or made available to you after the Change in Control Date, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the Change in Control, or the failure by the Company to continue your participation therein on at least as favorable a basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed on the Change in Control Date; (v) The failure by the Company to continue to provide you with benefits at least as favorable in the aggregate to those enjoyed by you under the Company's pension, savings, life insurance, medical, health and accident, disability, and fringe benefit plans and programs in which you were participating immediately prior to the Change in Control Date; or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the Change in Control; (vi) The failure by the Company to pay or provide you any material item of compensation or benefits promptly when due; (vii) The failure of the Company to obtain an agreement reasonably satisfactory to you from any successor to assume and agree to perform this Agreement, as contemplated in Section 6(a) hereof or, if the business for which your services are principally performed is sold at any time after a Change in Control, the failure of the Company to obtain such an agreement from the purchaser of such business; (viii) Any termination of your employment which is not effected pursuant to the terms of this Agreement; or (ix) A material breach by the Company of the provisions of this Agreement; PROVIDED, HOWEVER, that an event described above in clause (i), (ii), (iv), (v), (vi) or (ix) shall not constitute Good Reason unless it is communicated by you to the Company in writing and is not corrected by the Company in a manner which is reasonably satisfactory to you (including full retroactive correction with respect to any monetary matter) within 10 days of the Company's receipt of such written notice from you. "INVESTMENT PARTNERSHIP" shall mean Adobe Incentive Partners, L.P. 10 "INVOLUNTARY TERMINATION" shall mean (i) your termination of employment by the Company and its subsidiaries during the Term other than for Cause, (ii) your resignation of employment with the Company and its subsidiaries during the Term for Good Reason or (iii) the termination of your employment by reason of Disability. "REFERENCE BONUS" shall mean the greater of (i) the Target Annual Bonus applicable to you for the year in which your Involuntary Termination occurs and (ii) the highest Target Annual Bonus applicable to you in any of the three years ending prior to the Change in Control Date. "REFERENCE SALARY" shall mean the greater of (i) the annual rate of your base salary from the Company and its subsidiaries in effect immediately prior to the date of your Involuntary Termination and (ii) the annual rate of your base salary from the Company in effect at any point during the three-year period ending on the Change in Control Date. "REGULATIONS" shall mean the proposed, temporary and final regulations under Section 280G of the Code or any successor provision thereto. "RESTRICTED UNITS" shall mean restricted Class B Units of limited partnership interests in the Investment Partnership granted pursuant to a Restricted Units Agreement. "TARGET ANNUAL BONUS" shall mean an amount equal to your base salary times your target incentive opportunity percentage under the Company's MBO Bonus and Profit Sharing Plans (or any successor plans, if any, then in effect). 8. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Board of Directors, Adobe Systems Incorporated, 345 Park Avenue, San Jose, California 95110 - 2704, with a copy to the General Counsel of the Company, or to you at the address set forth on the first page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. MISCELLANEOUS. 11 (a) AMENDMENTS, WAIVERS, ETC. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, with respect to the subject matter hereof, including, without limitation, the prior Severance and Change of Control Agreement between you and the Company; PROVIDED, HOWEVER, that, except as expressly set forth herein, this Agreement shall not supersede the terms of Equity Awards or Restricted Units previously granted to you. (b) VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (c) COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (d) NO CONTRACT OF EMPLOYMENT. Nothing in this Agreement shall be construed as giving you any right to be retained in the employ of the Company or shall affect the terms and conditions of your employment with the Company prior to the commencement of the Term hereof. (e) WITHHOLDING. Amounts paid to you hereunder shall be subject to all applicable federal, state and local withholding taxes. (f) SOURCE OF PAYMENTS. All payments provided under this Agreement, other than payments made pursuant to a plan which provides otherwise, shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets made, to assure payment. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company. (g) HEADINGS. The headings contained in this Agreement are intended solely for convenience of reference and shall not affect the rights of the parties to this Agreement. 12 (h) AMENDMENT. This Agreement may not be amended, modified or terminated except pursuant to a written instrument executed by both parties hereto. (i) GOVERNING LAW. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of California applicable to contracts entered into and performed in such State. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, ADOBE SYSTEMS INCORPORATED By: --------------------------------- Name: Title: Agreed to as of this day of , 1997 --- ------- - -------------------------------- [NAME] [GOLD VERSION B] ________ ___, 1997 [Name] [Address] RETENTION AGREEMENT Dear _______: Adobe Systems Incorporated, a Delaware corporation (the "COMPANY"), considers it essential to the best interests of its stockholders to take reasonable steps to retain key management personnel. Further, the Board of Directors of the Company (the "BOARD") recognizes that the uncertainty and questions which might arise among management in the context of a change in control of the Company could result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined, therefore, that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the management of the Company and its subsidiaries, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from any possible change in control of the Company. In order to induce you to remain in the employ of the Company, the Company has determined to enter into this letter agreement (this "AGREEMENT") which addresses the terms and conditions of your employment in the event of a change in control of the Company. Capitalized words which are not otherwise defined herein shall have the meanings assigned to such words in Section 7 of this Agreement. 1. TERM OF EMPLOYMENT UNDER THE AGREEMENT. The term of your employment under this Agreement shall commence on the Change in Control Date and shall continue until the second anniversary of the Change in Control Date (the "TERM"). 2. EMPLOYMENT DURING THE TERM. During the Term, the following terms and conditions shall apply to your employment with the Company: (a) TITLES; REPORTING AND DUTIES. Your position, titles, nature and status of responsibilities and reporting obligations shall be no less favorable to you than those that you enjoyed immediately prior to the Change in Control Date. (b) SALARY AND BONUS. Your base salary and annual bonus opportunity may not be reduced, and your base salary shall be periodically reviewed and increased in the manner commensurate with increases awarded to other similarly situated executives of the Company. (c) INCENTIVE COMPENSATION. You shall be eligible to participate in each long-term incentive plan or arrangement established by the Company for its executive employees at your level of seniority (excluding the Investment Partnership, except to the extent you hold Restricted Units) in accordance with the terms and provisions of such plan or arrangement and at a level consistent with the Company's practices applicable to you prior to the Change in Control Date. (d) BENEFITS. You shall be eligible to participate in all pension, welfare and fringe benefit plans and arrangements that the Company provides to its executive employees in accordance with the terms of such plans and arrangements, which shall be no less favorable to you, in the aggregate, than the terms and provisions available to other executive employees of the Company. (e) LOCATION. You will continue to be employed at a business location in the same metropolitan area in which you were employed prior to the Change in Control Date and the amount of time that you are required to travel for business purposes will not be increased in any significant respect from the amount of business travel required of you prior to the Change in Control Date. 3. INVOLUNTARY TERMINATION DURING THE TERM. (a) CASH SEVERANCE PAYMENT. In the event of your Involuntary Termination during the Term, the Company shall pay you within five (5) days of the date of such Involuntary Termination the full amount of any earned but unpaid base salary through the Date of Termination at the rate in effect at the time of the Notice of Termination, plus a cash payment (calculated on the basis of your Reference Salary) for all unused vacation time which you may have accrued as of the Date of Termination. The Company shall also pay you within five (5) days of the Date of Termination a pro rata portion of the annual bonus for the year in which your Involuntary Termination occurs, calculated on the basis of your target bonus for that year and on the assumption that all performance targets have been or will be achieved. In addition, the Company shall pay you in a cash lump sum, within eight (8) days following the date of your execution of the release described in the last sentence of this Section 3(a) (or on the Date of Termination, if later), an amount (the "SEVERANCE PAYMENT") equal to the product of (i) the sum of your Reference Salary and your Reference Bonus, multiplied by (ii) two (2) plus one twelfth (1/12th) for each of your completed years of service with the Company (not in excess of twelve (12)) (the number determined in accordance with the clause (ii) being hereinafter referred to as the "SEVERANCE MULTIPLE"). The Severance Payment shall be in lieu of any other cash severance payments which you are entitled to receive under any other severance pay plan or arrangement sponsored by the Company and its subsidiaries. (b) VESTING AND EXERCISE OF EQUITY AWARDS AND RESTRICTED UNITS. Notwithstanding anything to the contrary contained in an applicable Equity Award or Restricted Unit agreement, all Equity Awards granted to you under the Equity Plans (except performance share unit awards, which shall continue to be governed by their current terms) shall vest in full and become exercisable, and all Restricted Units granted to you under the Investment Partnership shall vest in full, upon your Involuntary Termination during the Term. Anything in this Agreement to the contrary notwithstanding, in no event shall the vesting and exercisability provisions applicable to you under the terms of your Equity Awards or Restricted Units be less favorable to you than the terms and provisions of such awards in effect on the date hereof. (c) BENEFITS CONTINUATION. In the event of your Involuntary Termination during the Term, you and your eligible dependents shall continue to be eligible to participate during the Benefit Continuation Period (as hereinafter defined) in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to you immediately prior to your Involuntary Termination on the same terms and conditions (including the level of your contributions) in effect for you and your dependents immediately prior to such Involuntary Termination. For purposes of the previous sentence, "BENEFIT CONTINUATION PERIOD" means the period beginning on the Date of Termination and continuing for a number of years (and fractions of years) equal to the Severance Multiple. (d) DATE AND NOTICE OF TERMINATION. Any termination of your employment by the Company or by you during the Term shall be communicated by a notice of termination to the other party hereto (the "NOTICE OF TERMINATION"). The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. The date of your termination of employment with the Company and its subsidiaries (the "DATE OF TERMINATION") shall be determined as follows: (i) if your employment is terminated for Disability, thirty (30) days after a Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), (ii) if your employment is terminated by the Company in an Involuntary Termination, five (5) days after the date the Notice of Termination is received by you and (iii) if your employment is terminated by the Company for Cause, the later of the date specified in the Notice of Termination or ten (10) days following the date such notice is received by you. If the basis of your Involuntary Termination is your resignation for Good Reason, the Date of Termination shall be ten (10) days after the date your Notice of Termination is received by the Company. The Date of Termination for a resignation of employment other than for Good Reason shall be the date set forth in the applicable notice, which shall be no earlier than ten (10) days after the date such notice is received by the Company. (e) NO MITIGATION OR OFFSET. You shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by you as the result of employment by another employer or by pension benefits paid by the Company or another employer after the Date of Termination or otherwise. 4. LIMITATION ON PAYMENTS. In the event that it is determined by the Accounting Firm that any amount payable to you under this Agreement, alone or when aggregated with any other amount payable or benefit provided to you pursuant to any other plan or arrangement of the Company, would constitute an "excess parachute payment" within the meaning of Section 280G of the Code, then the aggregate present value of all such payments and benefits shall be reduced to the amount, expressed as a present value, which, as determined by the Accounting Firm, maximizes the aggregate present value of the payments without causing any payment to be nondeductible by the Company under Section 280G of the Code. 5. LEGAL FEES AND EXPENSES. The Company shall pay or reimburse you for all costs and expenses (including, without limitation, court costs and reasonable legal fees and expenses which reflect common practice with respect to the matters involved) incurred by you as a result of any claim, action or proceeding (i) arising out of your termination of employment during the Term, (ii) contesting, disputing or enforcing any right, benefits or obligations under this Agreement or (iii) arising out of or challenging the validity, advisability or enforceability of this Agreement or any provision thereof. The payments or reimbursements provided for herein shall be paid by the Company promptly (but in no event more than five (5) business days) following receipt of a written request for payment or reimbursement, as the case may be. 6. SUCCESSORS; BINDING AGREEMENT. (a) ASSUMPTION BY SUCCESSOR. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; PROVIDED, HOWEVER, that no such assumption shall relieve the Company of its obligations hereunder. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (b) ENFORCEABILITY; BENEFICIARIES. This Agreement shall be binding upon and inure to the benefit of you (and your personal representatives and heirs) and the Company and any organization which succeeds to substantially all of the business or assets of the Company, whether by means of merger, consolidation, acquisition of all or substantially all of the assets of the Company or otherwise, including, without limitation, as a result of a Change in Control or by operation of law. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 7. DEFINITIONS. For purposes of this Agreement, the following capitalized words shall have the meanings set forth below: "ACCOUNTING FIRM" shall mean KPMG Peat Marwick LLP or, if such firm is unable or unwilling to perform such calculations, such other national accounting firm as shall be designated by agreement between you and the Company. "CAUSE" shall mean a termination of your employment during the Term which is a result of (i) your felony conviction, (ii) your willful disclosure of material trade secrets or other material confidential information related to the business of the Company and its subsidiaries or (iii) your willful and continued failure substantially to perform your same duties with the Company as in existence prior to the Change in Control (other than any such failure resulting from your incapacity due to physical or mental illness or any actual or anticipated failure resulting from a resignation by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand identifies the specific actions which the Board believes constitute willful and continued failure substantially to perform your duties, and which performance is not substantially corrected by you within ten (10) days of receipt of such demand. For purposes of the previous sentence, no act or failure to act on your part shall be deemed "willful" unless done, or omitted to be done, by you with willful malfeasance or gross negligence and without reasonable belief that your action or omission was not materially adverse to the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4ths) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clause (i), (ii) or (iii) of the first sentence of this section and specifying the particulars thereof in detail. "CHANGE IN CONTROL" shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement; PROVIDED, HOWEVER, that, anything in this Agreement to the contrary notwithstanding, a Change in Control shall be deemed to have occurred if: (i) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act, is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities entitled to vote in the election of directors of the Company; (ii) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constituted the Board and any new directors, whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (the "INCUMBENT DIRECTORS"), cease for any reason to constitute a majority thereof; (iii) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company or a subsidiary of the Company (a "TRANSACTION"), in each case with respect to which the stockholders of the Company immediately prior to such Transaction do not, immediately after the Transaction, own securities representing more than 50% of the combined voting power of the Company, a parent of the Company or other corporation resulting from such Transaction (counting, for this purpose, only those securities held by the Company's stockholders immediately after the Transaction that were received in exchange for, or represent their continuing ownership of, securities of the Company held by them immediately prior to the Transaction); (iv) all or substantially all of the assets of the Company are sold, liquidated or distributed; or (v) there is a "change in control" or a "change in the effective control" of the Company within the meaning of Section 280G of the Code and the Regulations. "CHANGE IN CONTROL DATE" shall mean the date on which the Change in Control occurs. Notwithstanding the first sentence of this definition, if your employment with the Company terminates prior to the Change in Control Date and it is reasonably demonstrated that your termination of employment (i) was at the request of the third party who has taken steps reasonably calculated to effect the Change in Control or (ii) otherwise arose in connection with or in anticipation of the Change in Control, then "Change in Control Date" shall mean the date immediately prior to the date of your termination of employment. "CODE" shall mean the Internal Revenue Code of 1986, as amended, and any successor provisions thereto. "COMMON STOCK" shall mean the common stock of the Company. "DISABILITY" shall mean (i) your incapacity due to physical or mental illness which causes you to be absent from the full-time performance of your duties with the Company for six (6) consecutive months and (ii) your failure to return to full-time performance of your duties for the Company within thirty (30) days after written Notice of Termination due to Disability is given to you. Any question as to the existence of your Disability upon which you and the Company cannot agree shall be determined by a qualified independent physician selected by you (or, if you are unable to make such selection, such selection shall be made by any adult member of your immediate family), and approved by the Company. The determination of such physician made in writing to the Company and to you shall be final and conclusive for all purposes of this Agreement. "EQUITY AWARDS" shall mean options, restricted stock, bonus stock or other grants or awards which consist of, or relate to, equity securities of the Company and which have been granted to you under the Equity Plans. For purposes of this Agreement, Equity Awards shall also include any securities acquired upon the exercise of an option, warrant or similar right that constitutes an Equity Award. "EQUITY PLANS" shall mean the Adobe Systems Incorporated 1994 Stock Option Plan, the Adobe Systems Incorporated 1994 Performance and Restricted Stock Plan and any other equity-based incentive plan or arrangement adopted by the Company, but shall not include the Adobe Systems Incorporated 1997 Employee Stock Purchase Plan. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and any successor provisions thereto. "GOOD REASON" shall mean a resignation of your employment during the Term as a result of any of the following: (i) A meaningful and detrimental alteration in your position, your titles, or the nature or status of your responsibilities (including your reporting responsibilities) from those in effect immediately prior to the Change in Control Date. (ii) A reduction by the Company in your annual base salary as in effect immediately prior to the Change in Control Date or as the same may be increased from time to time thereafter; a failure by the Company to increase your salary at a rate commensurate with that of other key executives of the Company; or a reduction in the target incentive opportunity percentage used to determine your Target Annual Bonus below the percentage in effect for you prior to the Change in Control Date; (iii) The relocation of the office of the Company where you are employed immediately prior to the Change in Control Date (the "CIC LOCATION") to a location which is more than thirty five (35) miles away from the CIC Location or the Company's requiring you to be based more than thirty five (35) miles away from the CIC Location (except for required travel on the Company's business to an extent substantially consistent with your customary business travel obligations in the ordinary course of business prior to the Change in Control Date); (iv) The failure by the Company to continue in effect any compensation plan in which you participated prior to the Change in Control Date or made available to you after the Change in Control Date, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the Change in Control, or the failure by the Company to continue your participation therein on at least as favorable a basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed on the Change in Control Date; (v) The failure by the Company to continue to provide you with benefits at least as favorable in the aggregate to those enjoyed by you under the Company's pension, savings, life insurance, medical, health and accident, disability, and fringe benefit plans and programs in which you were participating immediately prior to the Change in Control Date; or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the Change in Control; (vi) The failure by the Company to pay or provide you any material item of compensation or benefits promptly when due; (vii) The failure of the Company to obtain an agreement reasonably satisfactory to you from any successor to assume and agree to perform this Agreement, as contemplated in Section 6(a) hereof or, if the business for which your services are principally performed is sold at any time after a Change in Control, the failure of the Company to obtain such an agreement from the purchaser of such business; (viii) Any termination of your employment which is not effected pursuant to the terms of this Agreement; or (ix) A material breach by the Company of the provisions of this Agreement; PROVIDED, HOWEVER, that an event described above in clause (i), (ii), (iv), (v), (vi) or (ix) shall not constitute Good Reason unless it is communicated by you to the Company in writing and is not corrected by the Company in a manner which is reasonably satisfactory to you (including full retroactive correction with respect to any monetary matter) within 10 days of the Company's receipt of such written notice from you. "INVESTMENT PARTNERSHIP" shall mean Adobe Incentive Partners, L.P. "INVOLUNTARY TERMINATION" shall mean (i) your termination of employment by the Company and its subsidiaries during the Term other than for Cause, (ii) your resignation of employment with the Company and its subsidiaries during the Term for Good Reason or (iii) the termination of your employment by reason of Disability. "REFERENCE BONUS" shall mean the greater of (i) the Target Annual Bonus applicable to you for the year in which your Involuntary Termination occurs and (ii) the highest Target Annual Bonus applicable to you in any of the three years ending prior to the Change in Control Date. "REFERENCE SALARY" shall mean the greater of (i) the annual rate of your base salary from the Company and its subsidiaries in effect immediately prior to the date of your Involuntary Termination and (ii) the annual rate of your base salary from the Company in effect at any point during the three-year period ending on the Change in Control Date. "REGULATIONS" shall mean the proposed, temporary and final regulations under Section 280G of the Code or any successor provision thereto. "RESTRICTED UNITS" shall mean restricted Class B Units of limited partnership interests in the Investment Partnership granted pursuant to a Restricted Units Agreement. "TARGET ANNUAL BONUS" shall mean an amount equal to your base salary times your target incentive opportunity percentage under the Company's MBO Bonus and Profit Sharing Plans (or any successor plans, if any, then in effect). 8. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Board of Directors, Adobe Systems Incorporated, 345 Park Avenue, San Jose, California 95110 - 2704, with a copy to the General Counsel of the Company, or to you at the address set forth on the first page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. MISCELLANEOUS. (a) AMENDMENTS, WAIVERS, ETC. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, with respect to the subject matter hereof, including, without limitation, the prior Severance and Change of Control Agreement between you and the Company; PROVIDED, HOWEVER, that, except as expressly set forth herein, this Agreement shall not supersede the terms of Equity Awards or Restricted Units previously granted to you. (b) VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (c) COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (d) NO CONTRACT OF EMPLOYMENT. Nothing in this Agreement shall be construed as giving you any right to be retained in the employ of the Company or shall affect the terms and conditions of your employment with the Company prior to the commencement of the Term hereof. (e) WITHHOLDING. Amounts paid to you hereunder shall be subject to all applicable federal, state and local withholding taxes. (f) SOURCE OF PAYMENTS. All payments provided under this Agreement, other than payments made pursuant to a plan which provides otherwise, shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets made, to assure payment. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company. (g) HEADINGS. The headings contained in this Agreement are intended solely for convenience of reference and shall not affect the rights of the parties to this Agreement. (h) AMENDMENT. This Agreement may not be amended, modified or terminated except pursuant to a written instrument executed by both parties hereto. (i) GOVERNING LAW. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of California applicable to contracts entered into and performed in such State. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, ADOBE SYSTEMS INCORPORATED By: Name: Title: Agreed to as of this day of , 1997 --- ------- - --------------------------------- [NAME] ADOBE SYSTEMS INCORPORATED [PLATINUM VERSION] ________ ___, 1997 [Name] [Address] RETENTION AGREEMENT Dear _______: Adobe Systems Incorporated, a Delaware corporation (the "COMPANY"), considers it essential to the best interests of its stockholders to take reasonable steps to retain key management personnel. Further, the Board of Directors of the Company (the "BOARD") recognizes that the uncertainty and questions which might arise among management in the context of a change in control of the Company could result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined, therefore, that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the management of the Company and its subsidiaries, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from any possible change in control of the Company. In order to induce you to remain in the employ of the Company, the Company has determined to enter into this letter agreement (this "AGREEMENT") which addresses the terms and conditions of your employment in the event of a change in control of the Company. Capitalized words which are not otherwise defined herein shall have the meanings assigned to such words in Section 7 of this Agreement. 1. TERM OF EMPLOYMENT UNDER THE AGREEMENT. The term of your employment under this Agreement shall commence on the Change in Control Date and shall continue until the second anniversary of the Change in Control Date (the "TERM"). 2. EMPLOYMENT DURING THE TERM. During the Term, the following terms and conditions shall apply to your employment with the Company: 2 (a) TITLES; REPORTING AND DUTIES. Your position, titles, nature and status of responsibilities and reporting obligations shall be no less favorable to you than those that you enjoyed immediately prior to the Change in Control Date. (b) SALARY AND BONUS. Your base salary and annual bonus opportunity may not be reduced, and your base salary shall be periodically reviewed and increased in the manner commensurate with increases awarded to other similarly situated executives of the Company. (c) INCENTIVE COMPENSATION. You shall be eligible to participate in each long-term incentive plan or arrangement established by the Company for its executive employees at your level of seniority in accordance with the terms and provisions of such plan or arrangement and at a level consistent with the Company's practices applicable to you prior to the Change in Control Date. (d) BENEFITS. You shall be eligible to participate in all pension, welfare and fringe benefit plans and arrangements that the Company provides to its executive employees in accordance with the terms of such plans and arrangements, which shall be no less favorable to you, in the aggregate, than the terms and provisions available to other executive employees of the Company. (e) LOCATION. You will continue to be employed at a business location in the same metropolitan area in which you were employed prior to the Change in Control Date and the amount of time that you are required to travel for business purposes will not be increased in any significant respect from the amount of business travel required of you prior to the Change in Control Date. 3. INVOLUNTARY TERMINATION DURING THE TERM. (a) CASH SEVERANCE PAYMENT. In the event of your Involuntary Termination during the Term, the Company shall pay you within five (5) days of the date of such Involuntary Termination the full amount of any earned but unpaid base salary through the Date of Termination at the rate in effect at the time of the Notice of Termination, plus a cash payment (calculated on the basis of your Reference Salary) for all unused vacation time which you may have accrued as of the Date of Termination. The Company shall also pay you within five (5) days of the Date of Termination a pro rata portion of the annual bonus for the year in which your Involuntary Termination occurs, calculated on the basis of your target bonus for that year and on the assumption that all performance targets have been or will be achieved. In addition, the Company shall pay you in a cash lump sum, within eight (8) days following the date of your execution of the release described in the last sentence of this Section 3(a) (or on the Date of Termination, if later), an amount (the "SEVERANCE PAYMENT") equal to the product 3 of (i) the sum of your Reference Salary and your Reference Bonus, multiplied by (ii) two (2) plus one twelfth (1/12th) for each of your completed years of service with the Company (not in excess of twelve (12)) (the number determined in accordance with this clause (ii) being hereinafter referred to as the "SEVERANCE MULTIPLE"). The Severance Payment shall be in lieu of any other cash severance payments which you are entitled to receive under any other severance pay plan or arrangement sponsored by the Company and its subsidiaries. (b) VESTING AND EXERCISE OF EQUITY AWARDS AND RESTRICTED UNITS. Notwithstanding anything to the contrary contained in an applicable Equity Award or Restricted Unit agreement, all Equity Awards granted to you under the Equity Plans (except performance share unit awards, which shall continue to be governed by their current terms) shall vest in full and become exercisable, and all Restricted Units granted to you under the Investment Partnership shall vest in full, on the Change in Control Date. Anything in this Agreement to the contrary notwithstanding, in no event shall the vesting and exercisability provisions applicable to you under the terms of your Equity Awards or Restricted Units be less favorable to you than the terms and provisions of such awards in effect on the date hereof. (c) BENEFITS CONTINUATION. In the event of your Involuntary Termination during the Term, you and your eligible dependents shall continue to be eligible to participate during the Benefit Continuation Period (as hereinafter defined) in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to you immediately prior to your Involuntary Termination on the same terms and conditions (including the level of your contributions) in effect for you and your dependents immediately prior to such Involuntary Termination. For purposes of the previous sentence, "BENEFIT CONTINUATION PERIOD" means the period beginning on the Date of Termination and continuing for a number of years (and fractions of years) equal to the Severance Multiple. (d) DATE AND NOTICE OF TERMINATION. Any termination of your employment by the Company or by you during the Term shall be communicated by a notice of termination to the other party hereto (the "NOTICE OF TERMINATION"). The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. The date of your termination of employment with the Company and its subsidiaries (the "DATE OF TERMINATION") shall be determined as follows: (i) if your employment is terminated for Disability, thirty (30) days after a Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), (ii) if your employment is terminated by the Company in an Involuntary Termination, five (5) days after the date the Notice of Termination is received by you and (iii) if your employment is terminated by the Company for Cause, the later of the date specified in the Notice of Termination or ten (10) days following the date such notice is received by you. The Date of Termination for a resignation of employment shall be 4 the date set forth in the applicable notice, which shall be no earlier than ten (10) days after the date such notice is received by the Company. (e) NO MITIGATION OR OFFSET. You shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by you as the result of employment by another employer or by pension benefits paid by the Company or another employer after the Date of Termination or otherwise. 4. LIMITATION ON PAYMENTS. In the event that it is determined by the Accounting Firm that any amount payable to you under this Agreement, alone or when aggregated with any other amount payable or benefit provided to you pursuant to any other plan or arrangement of the Company, would constitute an "excess parachute payment" within the meaning of Section 280G of the Code, then the aggregate present value of all such payments and benefits shall be reduced to the amount, expressed as a present value, which, as determined by the Accounting Firm, maximizes the aggregate present value of the payments without causing any payment to be nondeductible by the Company under Section 280G of the Code. 5. LEGAL FEES AND EXPENSES. The Company shall pay or reimburse you for all costs and expenses (including, without limitation, court costs and reasonable legal fees and expenses which reflect common practice with respect to the matters involved) incurred by you as a result of any claim, action or proceeding (i) arising out of your termination of employment during the Term, (ii) contesting, disputing or enforcing any right, benefits or obligations under this Agreement or (iii) arising out of or challenging the validity, advisability or enforceability of this Agreement or any provision thereof. The payments or reimbursements provided for herein shall be paid by the Company promptly (but in no event more than five (5) business days) following receipt of a written request for payment or reimbursement, as the case may be. 6. SUCCESSORS; BINDING AGREEMENT. (a) ASSUMPTION BY SUCCESSOR. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; PROVIDED, HOWEVER, that no such assumption shall relieve the Company of its obligations hereunder. As used in this Agreement, the "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 5 (b) ENFORCEABILITY; BENEFICIARIES. This Agreement shall be binding upon and inure to the benefit of you (and your personal representatives and heirs) and the Company and any organization which succeeds to substantially all of the business or assets of the Company, whether by means of merger, consolidation, acquisition of all or substantially all of the assets of the Company or otherwise, including, without limitation, as a result of a Change in Control or by operation of law. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 7. DEFINITIONS. For purposes of this Agreement, the following capitalized words shall have the meanings set forth below: "ACCOUNTING FIRM" shall mean KPMG Peat Marwick LLP or, if such firm is unable or unwilling to perform such calculations, such other national accounting firm as shall be designated by agreement between you and the Company. "CAUSE" shall mean a termination of your employment during the Term which is a result of (i) your felony conviction, (ii) your willful disclosure of material trade secrets or other material confidential information related to the business of the Company and its subsidiaries or (iii) your willful and continued failure substantially to perform your same duties with the Company as in existence prior to the Change in Control (other than any such failure resulting from your incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to you by the Board, which demand identifies the specific actions which the Board believes constitute willful and continued failure substantially to perform your duties, and which performance is not substantially corrected by you within ten (10) days of receipt of such demand. For purposes of the previous sentence, no act or failure to act on your part shall be deemed "willful" unless done, or omitted to be done, by you with willful malfeasance or gross negligence and without reasonable belief that your action or omission was not materially adverse to the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths (3/4ths) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clause (i), (ii) or (iii) of the first sentence of this section and specifying the particulars thereof in detail. 6 "CHANGE IN CONTROL" shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement; PROVIDED, HOWEVER, that, anything in this Agreement to the contrary notwithstanding, a Change in Control shall be deemed to have occurred if: (i) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act, is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities entitled to vote in the election of directors of the Company; (ii) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constituted the Board and any new directors, whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (the "INCUMBENT DIRECTORS"), cease for any reason to constitute a majority thereof; (iii) there occurs a reorganization, merger, consolidation or other corporate transaction involving the Company or a subsidiary of the Company (a "TRANSACTION"), in each case with respect to which the stockholders of the Company immediately prior to such Transaction do not, immediately after the Transaction, own securities representing more than 50% of the combined voting power of the Company, a parent of the Company or other corporation resulting from such Transaction (counting, for this purpose, only those securities held by the Company's stockholders immediately after the Transaction that were received in exchange for, or represent their continuing ownership of, securities of the Company held by them immediately prior to the Transaction); (iv) all or substantially all of the assets of the Company are sold, liquidated or distributed; or (v) there is a "change in control" or a "change in the effective control" of the Company within the meaning of Section 280G of the Code and the Regulations. 7 "CHANGE IN CONTROL DATE" shall mean the date on which the Change in Control occurs. Notwithstanding the first sentence of this definition, if your employment with the Company terminates prior to the Change in Control Date and it is reasonably demonstrated that your termination of employment (i) was at the request of the third party who has taken steps reasonably calculated to effect the Change in Control or (ii) otherwise arose in connection with or in anticipation of the Change in Control, then "Change in Control Date" shall mean the date immediately prior to the date of your termination of employment. "CODE" shall mean the Internal Revenue Code of 1986, as amended, and any successor provisions thereto. "COMMON STOCK" shall mean the common stock of the Company. "DISABILITY" shall mean (i) your incapacity due to physical or mental illness which causes you to be absent from the full-time performance of your duties with the Company for six (6) consecutive months and (ii) your failure to return to full-time performance of your duties for the Company within thirty (30) days after written Notice of Termination due to Disability is given to you. Any question as to the existence of your Disability upon which you and the Company cannot agree shall be determined by a qualified independent physician selected by you (or, if you are unable to make such selection, such selection shall be made by any adult member of your immediate family), and approved by the Company. The determination of such physician made in writing to the Company and to you shall be final and conclusive for all purposes of this Agreement. "EQUITY AWARDS" shall mean options, restricted stock, bonus stock or other grants or awards which consist of, or relate to, equity securities of the Company and which have been granted to you under the Equity Plans. For purposes of this Agreement, Equity Awards shall also include any securities acquired upon the exercise of an option, warrant or similar right that constitutes an Equity Award. "EQUITY PLANS" shall mean the Adobe Systems Incorporated 1994 Stock Option Plan, the Adobe Systems Incorporated 1994 Performance and Restricted Stock Plan and any other equity-based incentive plan or arrangement adopted by the Company, but shall not include the Adobe Systems Incorporated 1997 Employee Stock Purchase Plan. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and any successor provisions thereto. "INVESTMENT PARTNERSHIP" shall mean Adobe Incentive Partners, L.P. 8 "INVOLUNTARY TERMINATION" shall mean (i) your termination of employment by the Company and its subsidiaries during the Term other than for Cause, (ii) your resignation of employment with the Company and its subsidiaries during the Term for any reason or no reason or (iii) the termination of your employment by reason of Disability. "REFERENCE BONUS" shall mean the greater of (i) the Target Annual Bonus applicable to you for the year in which your Involuntary Termination occurs and (ii) the highest Target Annual Bonus applicable to you in any of the three years ending prior to the Change in Control Date. "REFERENCE SALARY" shall mean the greater of (i) the annual rate of your base salary from the Company and its subsidiaries in effect immediately prior to the date of your Involuntary Termination and (ii) the annual rate of your base salary from the Company in effect at any point during the three-year period ending on the Change in Control Date. "REGULATIONS" shall mean the proposed, temporary and final regulations under Section 280G of the Code or any successor provision thereto. "RESTRICTED UNITS" shall mean restricted Class B Units of limited partnership interests in the Investment Partnership granted pursuant to a Restricted Units Agreement. "TARGET ANNUAL BONUS" shall mean an amount equal to your base salary times your target incentive opportunity percentage under the Company's MBO Bonus and Profit Sharing Plans (or any successor plans, if any, then in effect). 8. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the Board of Directors, Adobe Systems Incorporated, 345 Park Avenue, San Jose, California 95110 - 2704, with a copy to the General Counsel of the Company, or to you at the address set forth on the first page of this Agreement or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. MISCELLANEOUS. 9 (a) AMENDMENTS, WAIVERS, ETC. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement and this Agreement shall supersede all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, with respect to the subject matter hereof, including, without limitation, the prior Severance and Change of Control Agreement between you and the Company; PROVIDED, HOWEVER, that, except as expressly set forth herein, this Agreement shall not supersede the terms of Equity Awards or Restricted Units previously granted to you. (b) VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. (c) COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. (d) NO CONTRACT OF EMPLOYMENT. Nothing in this Agreement shall be construed as giving you any right to be retained in the employ of the Company or shall affect the terms and conditions of your employment with the Company prior to the commencement of the Term hereof. (e) WITHHOLDING. Amounts paid to you hereunder shall be subject to all applicable federal, state and local withholding taxes. (f) SOURCE OF PAYMENTS. All payments provided under this Agreement, other than payments made pursuant to a plan which provides otherwise, shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets made, to assure payment. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company. (g) HEADINGS. The headings contained in this Agreement are intended solely for convenience of reference and shall not affect the rights of the parties to this Agreement. 10 (h) AMENDMENT. This Agreement may not be amended, modified or terminated except pursuant to a written instrument executed by both parties hereto. (i) GOVERNING LAW. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of California applicable to contracts entered into and performed in such State. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, ADOBE SYSTEMS INCORPORATED By: --------------------------------- Name: Title: Agreed to as of this day of , 1997 --- ------- - ----------------------------- [NAME] EX-11 7 EXHIBIT 11 ADOBE SYSTEMS INCORPORATED EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED --------------------------------------- NOVEMBER 28 NOVEMBER 29 DECEMBER 1 1997 1996 1995 ------------ ------------ ----------- Net income.............................................................. $ 186,837 $ 153,277 $ 93,485 ------------ ------------ ----------- ------------ ------------ ----------- Primary shares outstanding: Weighted average shares outstanding during the year................... 72,077 72,557 71,456 Common stock equivalent shares........................................ 2,055 2,507 2,797 ------------ ------------ ----------- 74,132 75,064 74,253 ------------ ------------ ----------- ------------ ------------ ----------- Fully diluted shares outstanding: Weighted average shares outstanding during the year................... 72,077 72,557 71,456 Common stock equivalent shares........................................ 2,166 2,670 2,958 ------------ ------------ ----------- 74,243 75,227 74,414 ------------ ------------ ----------- ------------ ------------ ----------- Primary net income per common stock and common stock equivalent share... $ 2.52 $ 2.04 $ 1.26 ------------ ------------ ----------- ------------ ------------ ----------- Fully diluted net income per common stock and common stock equivalent share................................................................. $ 2.52 $ 2.04 $ 1.26 ------------ ------------ ----------- ------------ ------------ -----------
70 EX-21 8 EXHIBIT 21 ADOBE SYSTEMS INCORPORATED EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY LEGAL NAME JURISDICTION OF INCORPORATION - -------------------------------------------------------- -------------------------------------------------------- The Americas: Adobe Systems FSC, Inc................................ Territory of Guam Adobe Enterprise Publishing Services, Inc............. Michigan OCR Systems, Inc...................................... Pennsylvania Frame International, Inc.............................. Delaware Frame Canada Limited.................................. Canada Mastersoft Corporation................................ Arizona Sandcastle, Inc....................................... California Visualware Incorporated............................... California Europe: Adobe Systems Europe Ltd.............................. United Kingdom Adobe Systems Direct Ltd.............................. United Kingdom Adobe Systems Nordic AB............................... Sweden Adobe Systems Benelux BV.............................. The Netherlands Adobe Systems GmbH.................................... Federal Republic of Germany Adobe Systems Software AG............................. Switzerland Adobe Systems France SARL............................. France Adobe Systems Italia SRL.............................. Italy Adobe Systems Informatica............................. Spain Adobe Systems U.K., Ltd............................... United Kingdom Aldus Ireland......................................... Ireland Frame International Limited........................... Ireland Frame International Limited........................... United Kingdom Frame Technology GmbH................................. Federal Republic of Germany Japan: Adobe Systems Company Ltd............................. Japan Adobe Systems Japan, Inc.............................. California Asia, Pacific, and Latin America: Adobe Australia Pty. Ltd.............................. Australia Adobe Systems India Pvt. Ltd.......................... India Adobe Systems Korea Ltd............................... Korea Adobe Systems Pte. Pty................................ Singapore
All subsidiaries of the registrant are wholly owned and do business under their legal names. EX-23 9 EXHIBIT 23 ADOBE SYSTEMS INCORPORATED EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Adobe Systems Incorporated: We consent to the incorporation by reference in the Registration Statements (No. 33-10753, No. 33-18986, No. 33-23171, No. 33-30976, No. 33-36501, No. 33-38387, No. 33-48210, No. 33-63518, No. 33-78506, No. 33-83030, No. 33-83502, No. 33-83504, No. 33-84396, No. 33-86482, No. 33-59335, No. 33-63849, No. 33-63851, No. 333-28195, No. 333-28203, and No. 333-28207) on FORM S-8 of Adobe Systems Incorporated of our report dated December 16, 1997, relating to the consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of November 28, 1997 and November 29, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended November 28, 1997, and related schedule appearing on page 42 of this FORM 10-K. KPMG Peat Marwick LLP San Jose, California February 17, 1998 EX-27 10 EX 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT NOVEMBER 28, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED NOVEMBER 28, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR NOV-28-1997 NOV-30-1996 NOV-28-1997 267,576 235,380 134,608 (3,634) 0 678,946 187,485 (106,507) 940,071 224,647 0 0 0 7 715,417 940,071 196,230 911,894 126,271 126,271 555,307 (440) 0 296,090 109,253 186,837 0 0 0 186,837 2.52 2.52
-----END PRIVACY-ENHANCED MESSAGE-----