-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, EY2G3Sje7OvRHHXMNMjrdYEdSZIHyCHlMZKj3VOOKap9KA5+vwDyhqqAE1asJZbz OeNjmMMtquN6uN0bA1xDqw== 0000912057-95-000843.txt : 19950602 0000912057-95-000843.hdr.sgml : 19950602 ACCESSION NUMBER: 0000912057-95-000843 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19941125 FILED AS OF DATE: 19950217 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADOBE SYSTEMS INC CENTRAL INDEX KEY: 0000796343 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 770019522 STATE OF INCORPORATION: CA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15175 FILM NUMBER: 95513672 BUSINESS ADDRESS: STREET 1: 1585 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1225 BUSINESS PHONE: 4159614400 MAIL ADDRESS: STREET 1: P.O. BOX 7900 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94039-7900 10-K 1 FORM 10-K 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 25, 1994 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ____ COMMISSION FILE NUMBER: 33-6885 ADOBE SYSTEMS INCORPORATED (Exact name of registrant as specified in its charter) California 77-0019522 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1585 Charleston Road, Mountain View, California 94043-1225 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 961-4400 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-affliates of the registrant as of December 30, 1994 was $1,829,275,497. The number of shares outstanding of the registrant's common stock as of December 30, 1994 was 61,488,252. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement dated February 28, 1995 to be delivered to shareholders in connection with the Notice of Annual Meeting of Shareholders to be held on April 5, 1995 are incorporated by reference into Part II. TABLE OF CONTENTS Page No. PART I Item 1. Business 4 Item 2. Properties 19 Item 3. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 21 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters 22 Item 6. Selected Financial Data 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 8. Financial Statements and Supplementary Data 37 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 38 PART III Item 10. Directors and Executive Officers of the Registrant 39 Item 11. Executive Compensation 41 Item 12. Security Ownership of Certain Beneficial Owners and Management 42 Item 13. Certain Relationships and Related Transactions 43 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 44 2 TABLE OF CONTENTS (CONTINUED) Page No. Signatures 53 Summary of Trademarks 55 Financial Statements 56 Financial Statement Schedule 96 Exhibits 98 3 PART I ITEM 1. BUSINESS BUSINESS OVERVIEW Adobe Systems (the "Company" or "Adobe"), established in 1982, is a California corporation that creates computer software solutions to help people throughout the world effectively communicate information and ideas. It first developed the PostScript page description language, a powerful, high-level computer language that communicates precise descriptions of computer-generated graphics, photos and text to any output device with a PostScript interpreter. Over time, the PostScript language has become an industry standard for printing electronic documents. Concurrently, independent software vendors and Adobe used the power and flexibility of the PostScript language to build a base of application products that is generally recognized for facilitating the desktop publishing revolution. More than 5,000 applications support PostScript language output. These applications are available for every major computer operating system and hardware configuration, from desktop PCs to mainframes. Adobe delivers its products and technologies through two divisions: the System Products Division (SPD), which develops technology for information distribution, and the Application Products Division (APD), which develops packaged applications for information authoring. SPD focuses on the development, marketing, sales and support of system-level software tools and technologies that are embedded within the branded products of original equipment manufacturers (OEMs). The division is organized into five product groups: prepress products, information products, display products, imaging systems products and printer products. APD provides three categories of software products: graphics and video, print publishing and consumer products. Graphics and video include digital imaging and video products, illustration products, type products and presentation products. Print publishing products include page assembly products and some accessory products. Consumer products are personal publishing and productivity software. Adobe is now leveraging its leadership position in desktop publishing to pioneer an industry transition to digital publishing. At the heart of this initiative is technology for the representation of digital documents that are independent of computer platform, application software and fonts. This technology is embodied in the Adobe Acrobat family of document communication products introduced in 1993. Version 2.0, which includes a significant number of new features and expanded capabilities, was introduced in 1994. In addition, Adobe offers an expanding suite of software tools for authoring multimedia digital information. Adobe develops, markets and supports its computer software products through various channels, including distribution through the retail channel, value-added resellers (VARs) 4 and direct OEM licenses. Additionally, Adobe supports its worldwide OEMs, distributors and end-user customers through several international subsidiaries. The European operations are headquartered in Edinburgh, with European offices in Amersfoot, London, Milan, Munich, Paris and Stockholm. Offices in Tokyo and Sydney service the Asian and Pacific Rim markets. APD also markets products through the Image Club Graphics, Incorporated ("Image Club") subsidiary, a developer and catalog marketer of content software. Image Club provides original clip art, brand name and original display fonts, stock photographic images plus a variety of third-party desktop publishing products. It has a monthly catalog circulation of more than 600,000. On August 31, 1994, Adobe completed its acquisition of Aldus Corporation following approval by shareholders of both companies and the Federal Trade Commission (FTC). The FTC approved the acquisition after Adobe agreed to the condition that the rights to the Aldus FreeHand program revert to Altsys Corporation in January 1995. The acquisition was accounted for as a pooling of interests and qualified as a tax-free reorganization. 5 SYSTEM PRODUCTS DIVISION PRINCIPAL PRODUCTS Adobe develops, markets, licenses and supports its printer software, Acrobat software, prepress software and controller and complementary technologies to systems integrators, developers and OEMs of computers, printers, imagesetters and film recorders for incorporation into their products. Core products and technologies include PostScript, Adobe Acrobat, personal printing software, a variety of prepress products, the Configurable PostScript Interpreter (CPSI) for embedded control and host-based printing, the Display PostScript system, Adobe typeface software, Adobe Type Manager software, application-specific integrated circuits (ASICs) and other related technologies. SPD is organized into five product groups: printer products, imaging systems products, display products, prepress products and information products. PRINTER PRODUCTS PostScript is a page description language, a set of instructions typically generated by a software application that describes the electronic appearance of a page for a printer or output device containing a PostScript interpreter. The description includes detailed information such as the placement of each type character, line, curve or image. In 1990, the Company introduced PostScript Level 2, which increases functionality in areas such as composite fonts, device- independent color, data compression and improved fidelity between displays and output devices. Adobe also provides PostScript Fax technology to enable printers or other output devices to receive high-quality standard fax documents on plain paper from any fax machine. PostScript Fax printers can serve as remote printers and can both send and receive documents created from any of the more than 20 million fax machines and modems installed worldwide. The Company offers a cooperative development program to license PostScript software source-code interface modules and development and testing tools to qualified OEMs. This enables them to develop product lines, shorten development cycles, and add value to their products. During 1993 and 1994, the Company expanded its cooperative development program to encompass more than a dozen of its OEMs, each with one or more active development projects. Adobe has also authorized certain third-party companies to produce products for Adobe's OEMs. In October 1994, Adobe acquired LaserTools Corporation ("LaserTools") of Emeryville, California, a provider of printing-related technologies for the PC environment. In recent years, LaserTools had licensed technologies to Adobe, including automatic printer language detection software. The acquisition added complementary technology to Adobe's PostScript software and other areas of its product line. LaserTools' retail products division was not a part of the acquisition. 6 IMAGING SYSTEMS PRODUCTS The Configurable PostScript Interpreter is a fully functional PostScript interpreter that resides on the host computer system rather than in a dedicated controller integrated into an output device. The configuration flexibility of CPSI allows OEMs and software developers to create and market a variety of PostScript products independently of controller hardware development. DISPLAY PRODUCTS The Display PostScript Level 2 system is a standard printing and imaging model for UNIX workstations. It provides application developers with a way to describe pages the same way for the display and printer for faster development of graphically sophisticated applications. It incorporates the same industry- standard imaging model and language used in PostScript output devices into products from vendors including Digital Equipment, IBM, Network Computing Devices, NeXT, Silicon Graphics and Sun Microsystems. PREPRESS PRODUCTS PressWise for Macintosh is a program used to assemble multipage PostScript language files into imposition forms for printing, folding and binding. It gives prepress professionals control over page positioning, signature design and custom printer's marks. PrePrint is a program for generating four-color separations on the Macintosh. For the Macintosh and Windows platforms, TrapWise performs professional-quality process color trapping on PostScript language files, particularly for high-throughput production. Print Central is a Macintosh-based print server and Color Central is an open prepress interface (OPI) image server for Macintosh and Windows. INFORMATION PRODUCTS Acrobat is a family of software products that allows fully formatted, electronic documents that may contain distinctive typefaces, color, graphics and photographs, to be easily distributed, accessed and reused, regardless of the hardware platform, operating system or application used to create the originals. Receivers can view, search, navigate, print and store the documents on their existing systems, enabling companies to easily create, manage and distribute visually rich information. Acrobat software describes documents in a single, universal format called the Portable Document Format (PDF). Based on the PostScript language, PDF is a device- and resolution-independent description of documents containing any combination of text, graphics and still images, in documents of any size and visual complexity. A PDF file describes the visual (printable) aspects of a document, as well as elements such as annotations (notes), hypertext links, "thumbnail" views of pages, and bookmarks. Adobe Acrobat software enables accurate communication of digital content (combined graphics/text today and multimedia "documents" in the future) across multiplatform networks. Documents can be viewed, printed, annotated and sent on to other users. Acrobat software supports interapplication communication standards, such as OLE, DDE 7 and Apple events, to integrate with key applications, such as Lotus Notes. Customers with specific needs can build on Acrobat software's open architecture to create extended functionality or to further integrate Acrobat with other systems or applications. SALES AND MARKETING The PostScript language and Acrobat software's PDF are open specifications published by Adobe. Approximately 350 software companies have introduced or announced application products that support the PostScript language. More than 5,000 application programs currently support the PostScript language on platforms that include personal computers, minicomputers, UNIX workstations and mainframes from all major manufacturers. Adobe licenses its PostScript products to more than 50 computer and printer manufacturers, which in turn distribute their products worldwide. The Company derives a significant portion of its royalties from international sales of printers and imagesetters by its OEM customers. OEMs and VARs distribute Adobe products with hardware and software products in various configurations designed to best meet specific end user needs. Adobe, to a limited extent, also markets directly to the end user. In 1993, the Company focused on the development of a separate graphic arts dealer channel of OEMs and VARs to distribute its prepress product line, which includes Adobe PressWise, Adobe PrePrint and Adobe TrapWise. In March 1994, the Company completed its acquisition of Compumation, Incorporated, adding Print Central and Color Central to the prepress product line. The primary distribution channels for Adobe Acrobat software are expected to be VARs, systems integrators, information integrators and the retail channel. COMPETITION The Adobe PostScript interpreter faces indirect competition from major computer companies that have developed or may develop a competitive page description language. However, to date those products use a proprietary printer control language that provides less functionality and flexibility than the Adobe PostScript interpreter. The Company believes that Hewlett-Packard's LaserJet product family, with its proprietary PCL page description language, has the largest installed base of any low-cost laser printer. Additionally, several companies have produced their own implementations of the PostScript language, and some have announced contracts with printer manufacturers, most of whom are not currently licensing Adobe PostScript software products. Adobe believes that the principal competitive factors for OEMs in selecting a page description language interpreter are product capabilities, reliability, support, engineering development assistance and price. The Company believes that it competes very favorably in these areas. The Company also believes that no other page description language interpreter provides equivalent functionality together with the broad support of software developers. With the Display PostScript system, the Company also competes with screen imaging 8 software incorporated in other computer systems' architectures, such as QuickDraw in the Macintosh, GDI in Windows, and GPI in OS/2. Each computer platform has its own native screen imaging software. In the Macintosh, DOS and Windows platforms, that technology is provided by the operating system vendor. In the UNIX environment, Display PostScript has been licensed by the substantial majority of UNIX hardware vendors and has become the de facto standard. Prepress products face direct and indirect competition. Print Central 3.0.4 is a Macintosh-based print server. It manages multiple clients and printers simultaneously, and competes indirectly with AppleShare from Apple Computer and directly with the non-Macintosh product Helios EtherShare. Color Central 2.1.1 is an OPI image server running on the Macintosh and Windows platforms. It manages printing and images used in page makeup, and competes with Helios EtherShare OPI and Archetype Intercep. Electronic document communication, the market for Acrobat, is still in its infancy. A number of competing products and technologies have been introduced, including Common Ground from No Hands Software, Replica from Farallon and Envoy from Novell. The Company believes that Acrobat is more functional than these competitors, although no definitive leader has emerged. The Company believes that it can leverage its expertise and market position to create a standard and provide technology that allows the transfer of electronic documents across various computer platforms. TRAINING For a fee, the Company provides training in the use of the PostScript language and the Display PostScript System to software developers, OEMs and corporate customers. The Company also has certified third-party training providers in the United States, United Kingdom, France and Germany. 9 APPLICATION PRODUCTS DIVISION PRINCIPAL PRODUCTS In application software, Adobe leverages the use of PostScript language-based authoring tools for the creation of digital content. Adobe's digital type business provides a principal raw material used to create documents, while its graphics products are recognized by the industry for creating new markets and setting the standard against which other products are measured. Adobe's vision is to build application software with extensible architectures that enable software developers to design software "plug-ins." These plug-ins will allow users to go beyond their mission-critical tasks and obtain more vertical market solutions. APD is organized into three product units: graphics and video, print publishing and consumer products. Within these units, Adobe develops, markets, licenses and supports graphics and type products and application software, utility software for graphics professionals, and software for the consumer market. GRAPHICS AND VIDEO - DIGITAL IMAGING PRODUCTS Adobe Photoshop software is essentially an electronic darkroom that provides users with professional prepress, color correction, paint and special effects editing tools for color and black-and-white photographs and illustrations. Introduced in 1990, Adobe Photoshop has become the standard tool for the prepress, publishing and graphic arts industries. The latest release, version 3.0, was introduced in 1994 for Macintosh, Power Macintosh and Windows platforms. Adobe Photoshop 2.5.2 for the UNIX environment was also introduced in 1994. GRAPHICS AND VIDEO - VIDEO PRODUCTS Adobe Premiere software allows users to edit video, audio, animation, photos and graphics to create high-quality QuickTime or Microsoft Video for Windows digital movies and videotapes. With Adobe Premiere, users can produce movies for small- or full-screen viewing, or export to tape. Adobe Premiere is available on the Macintosh, Power Macintosh and Windows platforms. After Effects is a digital post-production tool for compositing, motion graphics and special effects. Its interface design, speed and versatility give users the control, efficiency and quality output required in professional film, broadcast and video environments. After Effects is available for the Macintosh. GRAPHICS AND VIDEO - ILLUSTRATION PRODUCTS Adobe Illustrator is the leading illustration and page design tool available for the Macintosh. The program simplifies the creation, manipulation and refinement of artwork with advanced features for editing, text handling, color support and more. The latest release, version 5.5, was introduced in 1994 for the Macintosh and Power Macintosh platforms. 10 Adobe also develops utility software products that complement other programs, such as Adobe Illustrator, FreeHand and Deneba Canvas. Adobe Dimensions is a software tool for the Macintosh that is used to create 3D objects. Adobe Streamline is a tool for Macintosh and Windows platforms that converts black- and-white or color bitmapped images into PostScript language artwork for use with other programs. IntelliDraw is a "smart" drawing program for Macintosh and Windows that helps users create and refine commonly used graphics, such as schematics, maps, organizational charts, diagrams, forms and space plans. GRAPHICS AND VIDEO - TYPE PRODUCTS Adobe markets the industry's largest family of digital type products, including more than 2,000 typefaces in the Adobe Type Library. These typefaces are marketed individually, in special collections and on CD-ROM. Adobe Type Manager (ATM) is a software utility that eliminates jagged type on the computer screen and printed page. It enables Macintosh and Windows users to scale Type 1 fonts to any size and print them at the highest possible resolution on the full range of Adobe PostScript and non-PostScript printers. ATM is sold as an individual product and is also included with every Adobe Type 1 typeface package, in many other Adobe products, and is available bundled with a variety of third-party applications and printer products. It is available for Macintosh, Power Macintosh and Windows platforms. Adobe SuperATM is an enhanced version of ATM software that automatically creates "substitute fonts" to simulate typefaces missing from a computer. SuperATM enables users to view, edit and print text that has the same look and feel as that of the original document, and is compatible with all leading software applications. The program is available for the Macintosh. Type On Call is a CD-ROM that contains more than 2,000 encrypted typefaces from the Adobe Type Library. The CD contains Adobe Type Reunion and ATM software, 30 typefaces and access codes for two additional typeface packages from a preselected list. Customers can call Adobe via a toll-free, 24-hour line to buy access codes for additional typefaces. Type On Call is available for Macintosh and Windows. GRAPHICS AND VIDEO - PRESENTATION PRODUCTS Persuasion is a desktop presentation program for producing or delivering conceptual and data-intensive presentations. Users can automatically generate output for 35mm color slides, overheads and on-screen presentations, with speaker notes and audience handouts, from the information they gather and create on the desktop. The current version, Persuasion 3.0 for the Macintosh platform, began shipping in February 1994 and is also available for the Power Macintosh. Persuasion 3.0 for Windows was released in September 1994. 11 PRINT PUBLISHING - PAGE ASSEMBLY PRODUCTS PageMaker offers tools for each person in the publishing cycle who produces professional-quality materials: graphic artists and designers; writers, editors and typesetters; and production artists and prepress professionals. The program sets up the computer screen as an electronic paste-up board and gives the user a toolbox of design aids for electronic page composition, thereby reducing the time and expense associated with traditional publishing techniques. PageMaker allows the user to design, lay out and produce high-quality printed communications such as newsletters, brochures, manuals, and other more complex technical documents. PageMaker 5.0 shipped in June 1993 for the Windows platform, July 1993 for the Macintosh and May 1994 for the Power Macintosh. PRINT PUBLISHING - ACCESSORY PRODUCTS Adobe Fetch is a digital cataloging program that organizes images, graphics, publications, presentations, sounds, movies and other multimedia files into a visual on-line library. It is used to find and retrieve source files for use in other materials. Fetch is available for the Macintosh. Adobe Gallery Effects is a three-volume collection of plug-in filters for automatic image enhancement directly within the leading graphics software applications. Gallery Effects is available on the Macintosh, Power Macintosh and Windows platforms. TextureMaker is a resolution-independent, texture-design program that creates textures such as marble, wood, stone, liquid and cloud effects. The software includes more than 100 predefined textures and is available for the Macintosh and Power Macintosh. CONSUMER PRODUCTS The Company offers a line of affordable software products designed for personal use. These products include personal information managers and contact software, entry-level paint and drawing programs, automated desktop publishing software, and design software for home improvement projects. SALES AND MARKETING Application products generally are marketed through the reseller channel and a direct sales force. There are more than 9,000 authorized resellers in the United States and Canada, and more than 150 distributors throughout Europe and the Pacific Rim. Adobe Photoshop, Adobe Illustrator, Adobe Premiere and Adobe type products are also provided by hardware OEMs and software vendors who bundle Adobe software with scanners, CPUs, hardware peripherals and other software applications. COMPETITION The markets for Adobe's applications for image processing, graphics and digital video are characterized by intense competition, evolving industry standards, rapid technology developments, and frequent new product introductions. In the Macintosh and Windows 12 markets, several competitors have an established presence in the retail channel. In addition, the market for high-end graphics on the Windows platform is not as mature as that for the Macintosh. As a result, acceptance of the Company's programs on that platform will depend upon how the market evolves. Adobe's future success will depend upon 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. The Company believes that the principal competitive factors in the personal computer applications market include product features and functions, installed base, ease of use, product reliability, and price and performance characteristics. The majority of the Company's application products compete favorably in their markets on the basis of product features and reliability, ease of use, and price and performance characteristics. Adobe also believes that its application programs gain a competitive benefit from their foundation in PostScript language technology. However, Adobe faces challenges in several areas and expects to encounter continued competition both from established companies and from new companies that are now developing, or may develop, competing products. Price competition is a factor encountered by Adobe in several of its product categories. Suppliers in certain segments of the microcomputer software market have significantly reduced prices through the use of "site licenses" (which permit the copying of a program and its documentation), direct price offers, bundling, software suites and discount pricing for large-volume retail customers. The growth of high-volume retailers, which compete primarily on the basis of price, has intensified the competition between software vendors. Price competition is particularly keen in the consumer software market, and there is no assurance that current pricing levels can be maintained. Large-scale electronic publishing systems for publication and engineering departments, as well as for other groups requiring page-composition features, are offered by several companies, including Interleaf Inc. and Frame Technology. Additionally, companies that develop word-processing software are incorporating desktop publishing features into their products. Finally, numerous low-end desktop publishing packages are available from a variety of software developers, such as Serif's Page Plus and Microsoft's Publisher. As a result, Adobe expects to face increasing competition in the desktop publishing market from a number of other software developers, some of whom may have greater financing, marketing and technological resources than that of Adobe, targeting one or more of the various markets for which Adobe products are designed. In recent years, PageMaker has been subject to increasing competition. The Macintosh version of PageMaker 5.0 competes with software from a variety of independent vendors, but principally Quark, Inc.'s QuarkXPress. The Windows version of PageMaker 5.0 competes with software offered by several vendors, principally Ventura Publisher, marketed and sold by Corel Corporation, QuarkXPress for Windows, and FrameMaker by Frame Technology Corporation. Adobe Illustrator 5.5 for Macintosh and Windows competes with FreeHand, CorelDraw and Deneba Canvas. Competition for Adobe Photoshop 3.0 on the Windows platform is from Micrografx Picture Publisher and Fractal Design Painter X2. 13 Adobe Premiere 4.0 for the Macintosh and Windows platforms is a video editing program. The market for desktop video editing is young; however, the Company faces competition from products such as VideoStudio from U-Lead, Digital Video Producer from Asymetrix, MediaMerge from ATI, Razor from In:sync and VideoShop from Avid. After Effects 2.0 is a motion graphics, digital compositing and special effects program for broadcast video and film for the Macintosh. The program typically retails for approximately $1,995 and competes with software from companies that include Parallax and Discreet Logic, costing more than $25,000, and dedicated hardware from Quantel and other companies that costs more than $500,000. Competition for digital type market share is intense. Adobe's Type 1 outline font format, introduced in 1984 and published as part of the open PostScript language standard, provides digital type that can be printed at any resolution, on any type of output device. Today, more than 30 vendors have developed over 15,000 Type 1 typefaces, including Japanese and Cyrillic typefaces. Persuasion 3.0 for the Macintosh and Windows platforms, and Persuasion 2.1 for Windows are business presentations programs whose major competitors include Microsoft's PowerPoint (the only other such program to support both Macintosh and Windows), Software Publishing's Harvard Graphics for Windows, and Lotus' Freelance Graphics for Windows. The Consumer products include SuperPaint, DateBook Pro and TouchBase Pro software. Each product has numerous competitors, and price competition is quite intense in this market. SuperPaint software combines painting, drawing, and image-enhancement capabilities in a single program for general business users and graphics professionals. It competes with UltraPaint and Artworks from Deneba Software, DeskPaint/DeskDraw from Zedcor, and the combination of MacPaint and MacDraw from Claris. DateBook Pro for the Macintosh competes with Now Up-To-Date from Now Software, DayMaker from Pastel Software, and CalendarMaker from CE Software. As a Personal Information Manager (PIM) integrated with TouchBase, it competes with ACT from Symantec. TouchBase Pro for the Macintosh and TouchBase for Windows is a contact manager that competes with Now Contact from Now Software, Dynodex from Portfolio Systems, InTouch from Advanced Software, Ecco from Arabesque, and AddressBook Plus from Spinnaker. As a PIM integrated with DateBook, it competes with ACT from Symantec. TRAINING Adobe's Classroom in a Box curriculum kit is available to third-party training companies, consultants and educational institutions that teach Adobe Illustrator, Adobe Photoshop, Adobe Premiere and complementary programs. In addition, Adobe publishes a line of reference books through Adobe Press, a joint book publishing venture between the 14 Company and Macmillan Computer Publishing, which also provides training to end users. These products, as well as the Company's "Train the Trainer" classes, generate revenue and promote Adobe application products. MANUFACTURING Duplication of disks, printing and assembly of the components are performed primarily by outside parties in the United States for the United States and Pacific Rim markets. Shipment of completed products is performed by the Company. Disk duplication for European language versions of the Company's products is managed through the European headquarters. The duplicated disks of European- language versions of products are then forwarded to McQueen Holdings Limited ("McQueen"), an affiliate of the Company in Scotland, which prints and assembles the components and ships the completed product. Quality control tests are performed on all duplicated disks and finished products. 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 November 25, 1994. 15 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 25, 1994, November 26, 1993, and November 27, 1992, the Company's research and development expenses, including costs related to contract development, were $99.0 million, $86.7 million and $65.2 million, respectively. During 1994, the Company acquired LaserTools Corporation and Compumation, Incorporated, and $15.5 million was allocated to in-process research and development, and was expensed at the time of these acquisitions. In 1993, the Company acquired two software developers: AH Software, Inc. (doing business as After Hours Software) and The Company of Science & Art. Approximately $4.3 million of the total purchase price for these two companies was allocated to in-process research and development, and was expensed at the time of acquisition. In 1992, the Company acquired two related companies, OCR Systems Incorporated and Nonlinear Technologies, Incorporated, and wrote off $6.3 million of in-process research and development at the time of the acquisitions. 16 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" 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" 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, and except for its highest priced and specialized prepress products, TrapWise and PressWise. Many products, including PageMaker 5.0, 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. Network copy detection has become increasingly popular among higher priced software products. 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. 17 EMPLOYEES As of December 31, 1994, Adobe employed 1,565 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. 18 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 August 1996. The annual base rent expense for all facilities (including operating expenses, property taxes and assessments) is currently $14.8 million and is subject to annual adjustment. Approximate Square Location Footage Use - - ------------------------------ ----------- ---------------------- The Americas: Mountain View, California 290,018 Research, product development, sales, marketing and administration Seattle, Washington 185,000 Product development and customer support Santa Clara, California 127,688 Customer support and warehouse/distribution center Europe: Edinburgh, Scotland (Owned) 22,000 Sales, marketing and administration Pacific Rim: Tokyo, Japan 20,237 Sales, marketing and administration In general, all facilities are in good condition and are operating at capacities which range from 75 percent to 100 percent. 19 ITEM 3. LEGAL PROCEEDINGS Not applicable. 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of shareholders was held on August 31, 1994. A proposal to approve and adopt the Restated Agreement and Plan of Merger and Reorganizaton (the "Merger Agreement"), dated as of July 13, 1994, among Adobe, P Acquisition Corp ("Merger Sub") and Aldus Corporation ("Aldus"), and to approve the merger (the "Merger") of Merger Sub with and into Aldus pursuant to the Merger Agreement and the issuance of shares of Adobe common stock in the Merger was approved by the shareholders. This proposal received the following votes: For: 35,704,518 Against: 158,725 Abstain: 519,701 As a result of the Merger, Aldus shareholders received 1.0 share of Adobe common stock for each share of their Aldus common stock, and Aldus became a wholly owned subsidiary of Adobe. Also, a proposal to approve and adopt an amendment (the "By-Law Amendment") to Adobe's Restated By-Laws to increase the maximum authorized number of directors from seven to eight. Approval of the Merger Agreement, the Merger and the issuance of shares of Adobe common stock in the Merger is a condition to such amendment of Adobe's Restated By-Laws. This proposal received the following votes: For: 35,878,867 Against: 186,130 Abstain: 534,240 In addition, a proposal to approve Adobe's 1994 Performance and Restricted Stock Plan (the "Performance Plan"). This Performance Plan is an amendment and restatement of the 1989 Restricted Stock Plan which increases by 500,000 the number of shares reserved for issuance under the plan and provides for performance-based awards. This proposal received the following votes: For: 35,201,112 Against: 5,137,626 Abstain: 316,922 Broker non-votes are included in the determination of the number of shares present and voting for purposes of determining the presence of a quorum at the Company's annual meeting of shareholders. They are not, however, counted for purposes of determining the number of votes cast for a proposal. 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's common stock is traded on the Nasdaq National Market under the symbol "ADBE". On December 30, 1994, there were 2,211 holders of record of the Company's common stock. Because many of such shares are held by brokers and other institutions on behalf of shareholders, the Company is unable estimate the total number of shareholders 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 dividends paid per share, for the periods indicated, as adjusted for a two-for-one stock split effective July 1993.
Price Range Per Share ------------------------- High Low Dividend ---------- ----------- ----------- Fiscal 1993: First Quarter $ 22.88 $ 14.50 $ .05 Second Quarter 35.75 18.50 .05 Third Quarter 37.00 19.25 .05 Fourth Quarter 24.63 16.25 .05 Fiscal Year 37.00 14.50 .20 Fiscal 1994: First Quarter 32.00 19.75 .05 Second Quarter 34.50 21.50 .05 Third Quarter 34.50 24.50 .05 Fourth Quarter 38.50 29.75 .05 Fiscal Year 38.50 19.75 .20
The Company has paid cash dividends on its common stock each quarter since the second quarter of 1988. The declaration of future dividends is within the discretion of the Board of Directors of the Company and will depend upon business conditions, results of operations, the financial condition of the Company, and other factors. 22 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. 25 Nov. 26 Nov. 27 Nov. 29 Nov.30 1994 1993 1992 1991 1990 --------- --------- --------- --------- --------- Operations: Revenue $ 597,772 $ 520,237 $ 440,063 $ 397,183 $ 303,713 Merger transaction and restructuring costs 72,183 -- -- -- -- Income before income taxes 39,997 105,060 79,448 118,279 101,556 Net income(1) 6,309 66,545 50,389 75,444 63,831 Net income per share(1)(2) 0.10 1.11 0.82 1.23 1.09 Dividends declared per common share(2)(3) .20 .20 .16 .16 .12 Financial position: Cash and short-term investments 400,360 308,985 230,980 222,551 145,832 Working capital 363,631 318,215 247,878 251,721 163,676 Total assets 625,503 529,840 437,623 399,764 286,882 Shareholders' equity 456,771 414,102 351,743 338,079 223,590 Additional data: Worldwide employees 1,582 2,051 1,894 1,653 1,317 - - ------------------- (1) Reflects incremental costs incurred during 1994 in connection with the acquisition of Aldus and the write-off of acquired in-process research and development, totaling $72.2 million and $15.5 million, respectively. (For additional information, see Note 2 and Note 6 in the Notes to Consolidated Financial Statements.) (2) Adjusted for a two-for-one stock split, effective July 1993. (3) Amounts prior to the merger with Aldus on August 31, 1994, have not been restated to reflect the effects of the pooling of interest.
23 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. RESULTS OF OPERATIONS OVERVIEW Adobe develops, markets and supports computer software products and technologies that enable users to create, display, print and communicate electronic documents. The Company licenses its technology to major computer and publishing suppliers, and markets application software products and typeface products for authoring and editing visually rich documents, including digital and video output. The Company distributes its products through a network of original equipment manufacturer (OEM) customers, distributors and dealers, and value- added resellers (VARs) and system integrators. The Company has operations in the Americas, Europe and the Pacific Rim. In August 1994, the Company acquired Aldus Corporation ("Aldus"). Aldus began operations in 1984 and created computer software solutions that help people throughout the world effectively communicate information and ideas. Aldus focused on three lines of business: applications for the professional print publishing, graphics and prepress markets; applications for the general consumer market; and applications for the interactive publishing market. To effect the combination, approximately 14.2 million shares of Adobe's common stock were issued in exchange for all of the outstanding common stock of Aldus. The merger was accounted for by the pooling of interests method, and accordingly, all annual and interim financial information prior to the merger has been restated to combine the results of the Company and Aldus. In connection with the merger, the Company recorded $14.6 million of merger transaction costs and $57.6 million of restructuring costs in the fourth quarter of 1994. In addition, the Company incurred one-time expenses that are not included in the restructuring charge but were related to the Aldus acquisition. These charges included writing off certain capitalized software development costs, transition personnel bonuses, and relocation expenses among others, and totaled approximately $10.1 million. REVENUE
1994 Change 1993 Change 1992 -------- ------ ------ ------ ------ TOTAL REVENUE $597.8 15% $520.2 18% $440.1
In 1994, the Company's worldwide revenue grew 15 percent over the prior year, compared with revenue growth of 18 percent in 1993 over 1992. Revenue growth in 1994 and 1993 is attributable to an increase in application products revenue resulting from the release of new and enhanced products, as well as growth in the 24 Company's royalty revenue from licensing its PostScript interpreter to OEM customers. Product unit volume (as opposed to price) growth was the principal factor in the Company's revenue growth in application products revenue. The continued decline in laser printer prices was offset by increases in shipments of the Configurable PostScript Interpreter (CPSI), resulting in an increase in 1994 licensing revenues.
1994 Change 1993 Change 1992 ------ ------ ------ ------ ----- PRODUCT GROUP REVENUE -- LICENSING $156.7 7% $146.2 -4% $152.7 Percentage of total revenue 26.2% 28.1% 34.7%
Licensing revenue is derived from shipments by OEM customers of products containing the PostScript interpreter and the Display PostScript system. Such products include printers in both Roman and Japanese languages, imagesetters and workstations. Licensing revenue is also derived from shipments of products containing CPSI by OEM customers. CPSI is a fully functional PostScript interpreter that resides on the host computer system rather than in a dedicated controller integrated into an output device. The configuration flexibility of CPSI allows OEMs and software developers to create and market a variety of PostScript products independently of controller hardware development. The number of units shipped by OEMs continued to grow on an annual basis in 1994 and 1993. Royalty per unit is generally calculated as a percentage of the end user list price of a printer. During 1993, several of the Company's OEMs introduced lower end printers, resulting in a shift in product mix to a lower average list price, and accordingly a decline in licensing revenue compared to 1992. While the product mix shift continued in 1994, shipments of products containing the PostScript interpreter were supplemented by increased shipments of several new products containing CPSI, producing increased licensing revenue in 1994 over 1993. The Company has seen year-to-year increases in the number of OEM customers from which it is receiving licensing revenue, demonstrating continued acceptance of PostScript software, as well as reflecting a diversification of the Company's customer base across Macintosh, IBM PC and compatibles, and multiple platform markets. No OEM customer accounted for more than 10 percent of the Company's total revenue in 1994.
1994 Change 1993 Change 1992 ------ ------ ------ ------ ------ PRODUCT GROUP REVENUE -- APPLICATION PRODUCTS $441.1 18% $374.0 30% $287.4 Percentage of total revenue 73.8% 71.9% 65.3%
Application products revenue is derived from shipments of application software programs marketed through retail and distribution channels; however, the information products are becoming more widely distributed through VARs and systems integrators. Application products revenue grew in 1994 and 1993 due to increased demand for Adobe 25 Illustrator, Adobe Photoshop and PageMaker for both the Macintosh and Windows platforms. In addition, the release of new versions of Adobe Illustrator, for the Macintosh, and Adobe Photoshop and PageMaker, for the Macintosh and Windows platforms, contributed to the revenue growth in 1994 and 1993. The Macintosh versions include new features and native support for the Power Macintosh computers. The release of Aldus FreeHand 4.0 (divested by the Company in January 1995) for Windows and the Power Macintosh platforms also contributed to 1994 revenue growth. Localized versions for the Japanese market of Adobe Photoshop, Adobe Illustrator and PageMaker for the Macintosh platform also contributed to revenue growth from application products, while reduced sales for individual typeface packages offset a portion of the revenue growth in 1994. In addition, increasing sales for Adobe Premiere, a video editing and sequencing tool; After Effects, a video post-production special effects tool; and Fetch, a digital media cataloging and retrieval tool, contributed to the increase in application products revenue growth. Adobe Illustrator and Adobe Photoshop were also shipped for selected UNIX platforms in 1994, contributing to product revenue increases.
DIRECT COSTS 1994 Change 1993 Change 1992 ------ ------ ----- ------ ----- DIRECT COSTS $111.8 16% $96.7 10% $87.9 Percentage of total revenue 18.7% 18.6% 20.0%
Direct costs include royalties; amortization of typeface production costs; amortization of acquired technologies; and direct product, packaging and shipping costs. Typeface production costs were fully amortized in 1994. Licensing revenue typically has higher gross margins than application products revenue; therefore, revenue mix will affect overall gross margins. During 1994, the revenue mix of application products as a percentage of total revenue increased to 73.8 percent, compared to 71.9 percent during 1993, while direct costs as a percentage of total revenue were 18.7 percent, compared to 18.6 percent in 1993. The increase in direct costs, in absolute dollars, has been mitigated by actions taken by the Company to reduce direct costs. In 1993, the Company achieved lower per unit manufacturing costs for certain products, reduced royalty agreement rates, and reduced typeface production costs amortization, all of which contributed to minimal growth of 1994 direct costs as a percentage of total revenue. The Company also delivers its type library on its Type On Call CD-ROM media, and end users wishing to license typeface designs call the Company with a credit card number to receive the unlocking code for the desired typeface. This method of delivery also contributes to reduced direct costs. Other applications are also available through the Company's distributors on CD-ROM. 26 OPERATING EXPENSES
1994 Change 1993 Change 1992 ------ ------- ------ ------ ------ SOFTWARE DEVELOPMENT COSTS -- RESEARCH AND DEVELOPMENT $99.0 14% $86.7 33% $65.2 Percentage of total revenue 16.6% 16.7% 14.8%
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 significantly over the last three years as the Company invested in new technologies, new product development, and the infrastructure to support such activities. The increase reflects the expansion of the Company's engineering staff and related costs required to support its continued emphasis on developing new products and enhancing existing products. Many of these engineers are working with OEM customers to design and implement PostScript Level 2 devices. The Company has begun working with many of its OEM customers in a co-development program. This allows customers to be more self-sufficient in new device development by taking on more of the implementation task themselves rather than relying so heavily on the Company's engineers. While this mitigates certain costs, the Company continues to make significant investments in development of its PostScript and application software products. The Company believes that continued investments in research and development are necessary to remain competitive in the marketplace, and are directly related to continued, timely development of new and enhanced products. The Company intends to continue recruiting and hiring experienced software developers but expects that research and development expenditures in 1995 will approximate current spending levels as a percentage of revenue.
1994 Change 1993 Change 1992 ------ ------- ------ ------ ------ SOFTWARE DEVELOPMENT COSTS -- AMORTIZATION OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS $13.3 30% $10.2 1% $10.1 Percentage of total revenue 2.2% 2.0% 2.3%
In the implementation of Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," software development expenditures on Adobe products, after achieving technological feasibility, were deemed to be immaterial. Certain software development expenditures on Aldus products have been capitalized and are being amortized over the 27 lives of the respective products. In the fourth quarter of 1994, software development expenditures on Aldus products, after reaching technological feasibility, were immaterial and the Company anticipates this trend to continue in the future. Accordingly, the fourth quarter of 1994 did, and all of 1995 will, reflect the additional expense of amortizing capitalized software development costs acquired with Aldus, in addition to the actual development expenditures (classified as research and development) made prior to achieving technological feasibility. Amortization of capitalized software development costs increased in 1994 due to the amortization of PageMaker 5.0 released in the second half of 1993, and the release of other new application products.
1994 Change 1993 Change 1992 ------ ------ ------ ------ ------ SALES, MARKETING AND CUSTOMER SUPPORT $201.0 18% $170.9 17% $145.7 Percentage of total revenue 33.6% 32.9% 33.1%
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 expense also includes 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 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. Continuing efforts to expand markets and increase penetration into targeted software markets, and increasing competition in the software industry, are expected to cause 1995 sales, marketing and customer support expenditures to approximate the same spending levels as a percentage of revenue.
1994 Change 1993 Change 1992 ------ ------ ------ ------ ------ GENERAL AND ADMINISTRATIVE $54.0 -9% $59.2 17% $50.4 Percentage of total revenue 9.0% 11.4% 11.5%
General and administrative expenses consist principally of salaries and benefits, travel expenses, and related facility costs for the finance, human resources, legal, information services and administrative personnel of the Company. General and administrative expenses also include outside legal and accounting fees, bad debts, and expenses associated with computer equipment and software used in the administration of the business. During 1993, the growth in spending on general and administrative expenses was 28 attributable to the growth in the systems, processes and people necessary to support overall increases in the scope of the Company's operations, as well as additional costs incurred for legal defenses and settlement of an Aldus class- action securities lawsuit. General and administrative spending decreased as a percentage of revenue in 1994 from 1993 due to a reduction of salary and depreciation expense resulting from restructuring activities, as well as reduced legal expenditures. The Company expects general and administrative spending to be a lower percentage of revenue in 1995 than was achieved in 1994.
1994 Change 1993 Change 1992 ------ ------ ------ ------ ------ WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT $15.5 260% $4.3 -32% $6.3 Percentage of total revenue 2.6% 0.8% 1.4%
During 1994, the Company acquired LaserTools Corporation and Compumation, Incorporated for an aggregate purchase price of $17.0 million, of which $15.5 million was allocated to in-process research and development, and was expensed at the time of these acquisitions. During 1993, the Company acquired two software developers -- AH Software, Inc. (doing business as After Hours Software) and The Company of Science & Art. Approximately $4.3 million of the total purchase price for these two companies was allocated to in-process research and development, and was expensed at the time of acquisition. During 1992, the Company acquired OCR Systems Incorporated and Nonlinear Technologies, Incorporated for an aggregate purchase price of $6.8 million, of which $6.3 million was allocated to in-process research and development, and was expensed at the time of these acquisitions.
1994 Change 1993 Change 1992 ------ ------ ------ ------ ------ MERGER TRANSACTION AND RESTRUCTURING COSTS $72.2 -- -- -- -- Percentage of total revenue 12.1% -- --
During the fourth quarter of 1994, the Company recorded merger transaction and restructuring costs associated with the acquisition of Aldus of $14.6 million and $57.6 million, respectively. The restructuring costs included $46.5 million related to cash expenditures and noncash items of $25.7 million, consisting primarily of write-offs of redundant information systems and equipment, and duplicate product lines. As of November 25, 1994, the balance of $28.4 million in accrued restructuring costs represents expected future cash expenditures, most of which will be spent in 1995. 29 To execute the merger, the Company incurred transaction costs consisting principally of transaction fees for investment bankers, attorneys, accountants, financial printing and other related charges to negotiate the merger, conduct financial and technical due diligence, file appropriate regulatory documents and solicit shareholder votes. As a result of the merger, certain technical support, customer service, distribution and administration functions have been or will be combined and/or reduced. Such restructuring costs include severance and outplacement charges of $20.8 million related to approximately 500 terminated employees. Affected employees received notification of their termination by September 9, 1994, and final assignments are expected to be completed by the first quarter of 1995. As a condition to the merger, effective January 1995, the Company will no longer sell and distribute FreeHand, the illustration program previously sold and distributed by Aldus. In addition, PhotoStyler, an image and video editing software tool, was discontinued in the fourth quarter of 1994, as the product competed with certain existing products of the Company. The respective inventories and capitalized software development costs and technologies of these duplicate product lines were written off in the fourth quarter of 1994, resulting in a $15.0 million charge to restructuring costs. To facilitate the operations of the Company, the combined organization migrated to common management information systems, which resulted in a write-off of the book value of the abandoned systems and equipment. The write-off of abandoned systems included in restructuring costs was $10.8 million. In addition, redundant offices in Europe, Japan, Canada and the United States will be consolidated. Lease and third-party contract termination payments totaling $11.0 million, resulting from the planned closure of 10 facilities, are accrued as part of the restructuring costs. The Company is unable to determine the effects that the merger and restructuring actions will have on future operating results and the financial condition of the organization. In addition to the acquisition-related expenses recognized in the restructuring charge, the Company incurred approximately $10.1 million of certain one-time charges that were recognized in operating expenses. These charges included writing off certain capitalized software development costs, transition personnel bonuses, relocation expenses and expenses incurred for integrating the two companies' benefit plans. NONOPERATING INCOME
1994 Change 1993 Change 1992 ------ ------- ------ ------- ----- INTEREST, INVESTMENT AND OTHER INCOME $9.0 -30% $12.8 16% $11.0 Percentage of total revenue 1.5% 2.5% 2.5%
Interest, investment and other income decreased by $3.8 million in 1994 from 1993 and increased by $1.8 million in 1993 over 1992. Interest and other income was adversely impacted by $1.5 million in 1994, as the Company sold several securities (acquired in the Aldus acquisition) for losses in principal created by increases in interest rates during 1994, and for the write-off of an investment in a privately held enterprise. Interest, 30 investment and other income in 1993 included a gain of $3.9 million on the sale of common stock held as an investment and a $1.0 million write-off of an investment in a privately held enterprise. While the Company's cash balances and short-term investments have increased each year due to profitable operations and modest expenditures for capital outlays and other investments, 1994 interest, investment and other income would have increased approximately $0.6 million absent the 1993 net gain on the sales of common stock and the losses experienced in 1994. Such increase is attributable to increased levels of cash invested and a slight increase in interest earned on the Company's investments as driven by slight increases in prevailing interest rates.
1994 Change 1993 Change 1992 ------ ------- ------ ------- ----- LOSS ON REAL ESTATE PARTNERSHIP -- -- -- -- $6.0 Percentage of total revenue -- -- 1.4%
The Company incurred a $6.0 million loss on a real estate partnership in 1992, as it withdrew from this partnership, due to complications that affected the developer's ability to finance the project and to meet specific development timetables. PROVISION FOR INCOME TAXES
1994 Change 1993 Change 1992 ------ ------- ------ ------- ----- PROVISION FOR INCOME TAXES $33.7 -12% $38.5 32% $29.1 Percentage of total revenue 5.6% 7.4% 6.6% Effective tax rate 84.2% 36.6% 36.5%
The Company's effective tax rate in 1994 increased significantly over the effective tax rates of 1993 and 1992, due primarily to one-time, nondeductible merger transaction and restructuring costs. An analysis of the differences between the statutory and effective income tax rates is provided in Note 9 to the accompanying Consolidated Financial Statements. In 1995, the Company expects its effective tax rate to approximate that of 1993 and 1992. 31
NET INCOME AND NET INCOME PER SHARE 1994 Change 1993 Change 1992 ------ ------- ------ ------ ----- NET INCOME $6.3 -91% $66.5 32% $50.4 Percentage of total revenue 1.1% 12.8% 11.5% NET INCOME PER SHARE $0.10 -91% $1.11 35% $0.82 Weighted shares (in thousands) 61,620 2% 60,144 -2% 61,193
Net income for 1994 represents a 91 percent decrease from 1993 net income of $66.5 million. Results of operations in 1994 included several one-time charges 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 1994, follows.
Income Before Income Net Income Tax Net Income Taxes Provision Income Per Share ---------- ---------- --------- --------- Reported results of operations $ 39,997 $ 33,688 $ 6,309 $ .10 Write-off of acquired in-process research and development: Compumation, Incorporated 3,045 -- 3,045 .05 LaserTools Corporation 12,424 -- 12,424 .20 Acquisition of Aldus: Merger transaction costs 14,618 -- 14,618 .23 Restructuring costs 57,565 19,922 37,643 .61 Other one-time expenses resulting from the acquisition 10,092 3,734 6,358 .10 ---------- --------- --------- -------- Results of operations excluding one-time charges $ 137,741 $ 57,344 $ 80,397 $ 1.29 ---------- --------- --------- -------- ---------- --------- --------- --------
Furthermore, the future effective tax rate is expected to be approximately 37 percent. Had this been in effect in 1994, the net income per share, excluding the above one-time charges, would have been $1.39 per share. Net income for 1993 increased 32 percent, including a $3.9 million gain on the sale of an investment. Earnings per share were $1.11, a 35 percent increase from 1992. The one-time gain on the sale of an investment resulted in an increase in earnings per share of $.04. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS The Company believes that in the future its results of operations could be impacted by factors such as the ability of the Company to integrate Adobe and Aldus product lines, 32 renegotiation of royalty arrangements, delays in shipment of the Company's new products and major new versions of existing products, market acceptance of new products and upgrades, growth in worldwide personal computer and printer sales and sales price adjustments, consolidation in the OEM printer business, and adverse changes in general economic conditions in any of the countries in which the Company does business. In connection with the merger with Aldus, the Company has sought to reduce combined expenses by the elimination of duplicate or unnecessary facilities, employees, marketing programs and other expenses. The Company believes that the major impact of such reductions occurred in the fourth quarter of 1994 but expects some additional impact in the first quarter of 1995. The Company expects that these reductions will benefit future operating results, but the reductions could adversely impact the earnings of the combined company. In addition, there can be no assurance that the integration of the product lines of the two companies will not have a material adverse effect on the results of operations. As previously stated, the Company will no longer market FreeHand after January 1, 1995 and has made the decision to discontinue the marketing of PhotoStyler. These two products aggregated $53.2 million of revenue and $35.4 million of gross profit in 1994. There can be no assurance that the Company will be able to replace this lost revenue or that it will be able to do so as profitably. The Company's OEM customers on occasion seek to renegotiate their royalty arrangements. The Company evaluates these requests on a case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, including licensing a PostScript language compatible interpreter from a third party, which could result in lower licensing revenue for the Company. With the acquisition of Aldus, the Company will derive a larger portion of its revenues from its subsidiaries located in Europe and the Pacific Rim. Certain transactions by these subsidiaries are denominated in foreign currencies. As a result, the Company's operating results are subject to fluctuations in foreign currency exchange rates. The Company's ability to develop and market products, including upgrades of currently shipping products, that successfully adapt to current market needs may also have an impact on the results of operations. A portion of the Company's future revenue will come from these products. Delays in such 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 sales or results of operations. Due to the factors noted above, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Additionally, the Company may not learn of such shortfalls until late in the fiscal quarter, which could result in an even more immediate and adverse effect on the trading price of the Company's common stock. Finally, the Company participates in a highly dynamic industry, which often results in significant volatility of the Company's common stock price. 33 FINANCIAL CONDITION
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 1994 Change 1993 Change 1992 ------ ------ ------ ------ ------ CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS $400.4 30% $309.0 34% $231.0
Cash, cash equivalents and short-term investments totaled $400.4 million as of November 25, 1994, compared to $309.0 million as of November 26, 1993, representing 64 percent and 58 percent of total assets, respectively. Cash equivalents consist of highly liquid money market instruments. In 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of adopting SFAS No. 115 was not material to the Company's financial position and results of operations. Certain cash equivalents and all of the Company's short-term investments, consisting principally of municipal bonds, commercial paper, auction rate securities, United States government and government agency securities, and asset-backed securities, are classified as available-for-sale under the provisions of 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 shareholders' equity. The Company's cash balances and short-term investments have increased each year due to profitable operations, but have been offset partially by modest expenditures for capital outlays and other investments. In 1994, growth in cash balances and short-term investments was reduced by increased corporate merger and acquisition activity. NONCURRENT LIABILITIES AND SHAREHOLDERS' EQUITY
1994 Change 1993 Change 1992 ------ ------ ------ ------ ------ NONCURRENT LIABILITIES AND SHAREHOLDERS' EQUITY $456.8 9% $421.0 20% $351.7
Included above are put warrants and shareholders' equity. The Company has no long-term debt. Shareholders' equity as of November 25, 1994 was $456.8 million, compared to $414.1 million as of November 26, 1993. The Company has paid cash dividends on its common stock each quarter since the second quarter of 1988. During 1994, the Company paid cash dividends of $.20 per common share. The Board of Directors of the Company approved a two-for-one stock split on July 9, 1993, payable in the form of a stock dividend for shareholders of record as of July 27, 1993, with a distribution date of August 10, 1993. All share and per share data has been restated to reflect this stock split. The declaration of future dividends is within the discretion of the Board of Directors of the Company and will depend upon business conditions, results of operations, the financial condition of the Company and other factors. 34 Under its stock repurchase program, the Company expects to continue to repurchase shares from time to time in 1995. These share repurchases are intended to fund the employee stock purchase and stock option plans. Until the merger with Aldus, the Company had engaged in a regular share repurchase program. In 1995, the Company plans to continue that regular repurchase program.
WORKING CAPITAL 1994 Change 1993 Change 1992 ------ ------ ------ ------ ------ WORKING CAPITAL $363.6 14% $318.2 28% $247.9
Net working capital grew to $363.6 million as of November 25, 1994, compared to $318.2 million as of November 26, 1993. Cash flows provided by operations during 1994 was $142.5 million. Cash generated from operations has been sufficient to fund the Company's investment in research and development, and sales and marketing activities. Expenditures for property and equipment totaled $28.5 million. Such expenditures are expected to continue, including computer systems for development, sales and marketing, product support, and administrative staff. In addition, in 1994 the Company paid approximately $14.8 million, net of cash acquired, to acquire LaserTools Corporation, Compumation, Incorporated, Image Club Graphics, Incorporated, and the remaining 20 percent interest in Aldus K.K. In the future, additional cash may be used to acquire software products or technologies complementary to the Company's business. Net cash provided by financing activities during 1994 was $25.0 million, primarily resulting from the issuance of common stock under employee stock plans. The Company's principal commitments as of November 25, 1994 consisted of obligations under operating leases, a real estate development agreement, and various service and lease guarantee agreements with a related party. In 1994, the Company entered into a real estate development agreement for the construction of an office facility and in 1996 will enter into an operating lease agreement for this facility. The Company will have the option to purchase the facility at the end of the lease term. In the event the Company chooses not to exercise this option, the Company is obligated to arrange the sale of the facility to an unrelated party and is required to pay the lessor any difference between the net sales proceeds and the lessor's net investment in the facility, in an amount not to exceed that which would preclude classification of the lease as an operating lease, approximately $52.0 million. The Company also is required, periodically during the construction period, to deposit funds with the lessor to secure the performance of its obligations under the lease and as of November 25, 1994, the Company had deposited approximately $2.3 million in securities. Also during 1994, the Company entered into various agreements with McQueen Holdings Limited ("McQueen") whereby the Company has agreed to guarantee obligations under operating leases for certain facilities utilized by McQueen, and to guarantee certain levels of business between Adobe and McQueen. The Company currently owns 10 percent of the outstanding stock in McQueen as a result of the merger with Aldus. 35 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. 36 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 25, 1994. and reflect the results of the Company as restated to reflect the merger of the Company and Aldus Corporation in 1994, which was accounted for as a pooling of interests. Share and per share amounts have been adjusted for a two-for-one stock split, effective July 1993.
1994 --------------------------------------------------------------------- Unaudited Quarter Ended Audited ------------------------------------------------------ Year Feb. 25 May 27 Aug. 26 Nov. 25 Ended 1994 1994 1994 1994 Nov. 25 --------- --------- --------- --------- --------- Revenue $ 135,892 $ 149,793 $ 146,637 $ 165,450 $ 597,772 Gross margin 109,887 121,899 120,475 133,701 485,962 Merger transaction and restructuring costs -- -- -- 72,183 72,183 Income (loss) before income taxes 29,941 27,453 28,752 (46,149) 39,997 Net income (loss) 19,093 17,306 18,061 (48,151) 6,309 Net income (loss) per share .31 .28 .29 (.79) .10 Shares used in computing net income (loss) per share 61,289 61,768 62,566 60,856 61,620
1993 ---------------------------------------------------------------------- Unaudited Quarter Ended Audited ------------------------------------------------------- Year Feb. 26 May 28 Aug. 27 Nov. 26 Ended 1993 1993 1993 1993 Nov. 26 ---------- ---------- --------- ---------- ---------- Revenue $ 110,113 $ 125,254 $ 140,942 $ 143,928 $ 520,237 Gross margin 89,760 102,463 115,547 115,829 423,599 Income before income taxes 25,633 23,983 24,941 30,503 105,060 Net income 15,824 14,672 15,623 20,426 66,545 Net income per share .27 .24 .26 .34 1.11 Shares used in computing net income per share 59,530 60,003 60,758 60,231 60,144
37 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. 38 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 shareholders in connection with the Annual Meeting of Shareholders to be held on April 5, 1995. Such information is incorporated herein by reference. EXECUTIVE OFFICERS The executive officers of the Company as of February 13, 1995 are as follows: Name Age Positions - - ---------------------- -------- ---------------------------- John E. Warnock 54 Chairman of the Board and Chief Executive Officer Charles M. Geschke 55 President, Chief Operating Officer and Director Derek J. Gray 45 Senior Vice President and General Manager, Adobe Europe Stephen A. MacDonald 49 Senior Vice President and General Manager, Systems Products Division M. Bruce Nakao 51 Senior Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Assistant Secretary David B. Pratt 55 Senior Vice President and General Manager, Application Products Division Colleen M. Pouliot 36 Vice President, General Counsel and Secretary A biography of 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. He has been a director and Chief Executive Officer since 1982 and was its President from December 1982 through March 1989. From April 1978 until founding the Company, Dr. Warnock was Principal Scientist of the Imaging Sciences Laboratory at Xerox Corporation s Palo Alto Research Center. Dr. Warnock received a Ph.D. in electrical engineering from the University of Utah. Dr. Geschke was a founder of the Company and has been its President since April 1989. 39 He has been a director since 1982, Chief Operating Officer since December 1986, and was Executive Vice President from December 1982 through March 1989. Dr. Geschke also served as the Company's Secretary from December 1982 until September 1987. From October 1972 until founding the Company, Dr. Geschke was the Manager of the Imaging Sciences Laboratory at Xerox Corporation's Palo Alto Research Center. Dr. Geschke received a Ph.D. in computer science from Carnegie- Mellon University. Mr. Gray joined the Company upon the closing of the acquisition of Aldus in August 1994. 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 Holdings Limited, a distributor of computer hardware and software, of which the Company is a 10 percent shareholder by virtue of the acquisition of Aldus. Mr. MacDonald joined the Company in May 1983 as Vice President. In August 1989, he was promoted to Senior Vice President. From February 1972 until he joined the Company, Mr. MacDonald was a Marketing Manager for Hewlett-Packard Company. Mr. Nakao joined the Company in May 1986 and was elected Vice President, Chief Financial Officer, Treasurer and Assistant Secretary in June 1986. In December 1992, he was promoted to Senior Vice President. From February 1982 to May 1986, Mr. Nakao was Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of Ross Systems, Inc. From January 1980 to February 1982, Mr. Nakao was Vice President, Chief Financial Officer and Treasurer of Dividend Industries, Inc. Mr. Pratt joined the Company in May 1988 as General Manager of the Application Products Division. In August 1989, he was promoted to Vice President. In September 1992, he was promoted to Senior Vice President. From October 1987 to April 1988, Mr. Pratt was Executive Vice President and Chief Operating Officer of Logitech Corporation. From May 1986 to June 1987, Mr. Pratt was Senior Vice President and Chief Operating Officer of Quantum Corporation. From March 1982 through January 1986, Mr. Pratt was President and Chief Executive Officer of Boschert Incorporated. 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. Ms. Pouliot was an associate at the law firm of Ware & Freidenrich from November 1983 until she joined the Company. 40 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 shareholders in connection with the Annual Meeting of Shareholders to be held on April 5, 1995. Such information is incorporated herein by reference. 41 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 shareholders in connection with the Annual Meeting of Shareholders to be held April 5, 1995. Such information is incorporated herein by reference. 42 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item may be found in the section captioned "Certain Transactions" appearing in the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 5, 1995. Such information is incorporated herein by reference. 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report 1. Financial statements Sequentially Numbered Financial Statement Description Page ---------------------------------------- ------------ * Management's Report 57 * Independent Auditors' Report 58 * Consolidated Balance Sheets 59 November 25, 1994 and November 26, 1993 * Consolidated Statements of Income 61 Years Ended November 25, 1994, November 26, 1993, and November 27, 1992 * Consolidated Statements of Shareholders' Equity 62 Years Ended November 25 1994, November 26, 1993, and November 27, 1992 * Consolidated Statements of Cash Flows 65 Years Ended November 25, 1994, November 26, 1993, and November 27, 1992 * Notes to Consolidated Financial Statements 68 * Report of Ernst & Young LLP, Independent Auditors 95 44 2. Financial statement schedule Sequentially Schedule Numbered Number Financial Statement Schedule Description Page --------- ---------------------------------------- ------------ Schedule II Valuation and Qualifying Accounts 97 Other financial statement schedules have been omitted since they are either not required, not applicable, or the required information is shown in the consolidated financial statements or notes thereto. 45 3.Exhibits Sequentially Incorporated By Reference Exhibit Numbered ---------------------------- Number Exhibit Description Page Form Date Number - - ------ -------------------------- ---------- -------- --------- ------- 3.1 Articles of Incorporation, N/A S-1 07/01/86 3.1 as amended 3.1.1 Amended and Restated N/A 10-K 11/30/88 3.1.1 Articles of Incorporation 3.1.2 Certificate of Amend- N/A 10-K 11/30/88 3.1.2 ment of Articles of Incorporation 3.1.3 Certificate of Amend- N/A 10-K 11/29/91 3.1.3 ment of Articles of Incorporation 3.1.4 Certificate of Amend- N/A 10-K 11/26/93 3.1.4 ment of Articles of Incorporation 3.2 Bylaws as amended N/A S-1 07/01/86 3.2 3.2.1 Bylaws as amended N/A 10-K 11/30/88 3.2.1 3.2.2 Bylaws as amended N/A 10-K 11/30/90 3.2.2 3.2.3 Restated Bylaws N/A 10-K 11/29/91 3.2.3 3.2.4 Restated Bylaws N/A 10-K 11/27/93 3.2.4 3.2.5 Restated Bylaws N/A 10-K 11/26/93 3.2.5 3.2.6 Restated Bylaws 99 N/A N/A N/A 10.1 1984 Stock Option Plan N/A S-1 07/01/86 10.1 10.1.1 1984 Stock Option Plan, N/A 10-K 11/30/87 10.1.1 as amended 10.1.2 1984 Stock Option Plan, N/A 10-K 11/30/88 10.1.2 as amended 10.1.3 1984 Stock Option Plan, N/A 10-K 11/30/89 10.1.3 as amended 10.1.4 1984 Stock Option Plan, N/A 10-K 11/30/90 10.1.4 as amended 10.1.5 1984 Stock Option Plan, N/A 10-K 11/27/92 10.1.5 as amended 10.1.6 1984 Stock Option Plan, N/A 10-Q 07/02/93 10.1.6 as amended 10.1.7 1994 Stock Option Plan N/A 10-Q 05/27/94 10.1.7 (Continued) 46 3. Exhibits (Continued) Sequentially Incorporated By Reference Exhibit Numbered ---------------------------- Number Exhibit Description Page Form Date Number - - ------ -------------------------- ---------- -------- --------- ------- 10.2 Common Stock Purchase N/A S-1 07/01/86 10.2 Agreement of John E. Warnock dated December 29, 1982, and, as amended November 30, 1983 10.3 Common Stock Purchase N/A S-1 07/01/86 10.3 Agreement of Charles M. Geschke dated December 29, 1982, and, as amended November 30, 1983 10.4 Common Stock Purchase N/A S-1 07/01/86 10.4 Agreement of Q.T. Wiles dated December 29, 1982 10.5 Common Stock Purchase N/A S-1 07/01/86 10.5 Agreement of David Evans dated December 29, 1982 10.6 Common Stock Purchase N/A S-1 07/01/86 10.6 Agreement of William Hambrecht dated December 29, 1982 10.7 Exchange Agreement N/A S-1 07/01/86 10.7 dated December 29, 1983, for John E. Warnock 10.8 Exchange Agreement N/A S-1 07/01/86 10.8 dated December 29, 1983, for Charles M. Geschke 10.9 Form of Shareholders N/A S-1 07/01/86 10.9 Exchange Agreement used in connection with the exchange of shares of Old Adobe for shares of the Company (Continued) 47 3. Exhibits (Continued) Sequentially Incorporated By Reference Exhibit Numbered ---------------------------- Number Exhibit Description Page Form Date Number - - ------ -------------------------- ---------- -------- --------- ------- 10.10 Form of Agreement for N/A S-1 07/01/86 10.10 Assignment of Limited Partnership Interest used in connection with exchange of limited partnership interests in Adobe Systems Limited, a California limited partnership, for shares of the Series B Preferred Stock of the Company 10.11 Registration Rights N/A S-1 07/01/86 10.11 Agreement dated December 29, 1983 10.12 Old Adobe's 1983 Stock N/A S-1 07/01/86 10.12 Purchase Plan and the Company's 1984 Stock Purchase Plan with standard form of Stock Purchase Agreement 10.12.1 1988 Employee Stock N/A 10-Q 07/06/94 10.12.1 Purchase Plan, as amended 10.13 Form of Employee N/A S-1 07/01/86 10.13 Common Stock Purchase Agreement dated July 23, 1984 10.14 Warrant to Purchase Series N/A S-1 07/01/86 10.14 C Preferred Stock to Apple Computer, Inc., dated November 26, 1984, with executed subscription form dated November 28, 1984 10.15 Warrant to Purchase N/A S-1 07/01/86 10.15 Series C Preferred Stock to Evans & Sutherland Computer Corporation dated April 25, 1984, with executed subscription form dated June 19, 1986 (Continued) 48 3. Exhibits (Continued) Sequentially Incorporated By Reference Exhibit Numbered ---------------------------- Number Exhibit Description Page Form Date Number - - ------ -------------------------- ---------- -------- --------- ------- 10.16 License Agreement N/A S-1 07/01/86 10.16 between the Company and Evans & Sutherland Computer Corporation dated April 25, 1984 10.17 License Agreement N/A S-1 07/01/86 10.17 between the Company and Apple Computer, Inc., dated November 12, 1985 (confidential treatment granted) 10.17.1 License Agreement N/A 10-K 11/30/88 10.17.1 Restatement between the Company and Apple Computer, Inc., dated April 1, 1987 (confidential treatment granted) 10.17.2 Amendment No. 1 to the N/A 10-K 11/30/90 10.17.2 License Agreement Restatement between the Company and Apple Computer, Inc., dated November 27, 1990 (confidential treatment granted). 10.18 Lease Agreement dated N/A S-1 07/01/86 10.18 November 11, 1983, between Mozart Family Trust and Epson America Inc. 10.19 Assignment of Lease N/A S-1 07/01/86 10.19 dated November 11, 1983, between Epson America Inc. and the Company dated February 1, 1986 10.20 Lease Agreement N/A S-1 07/01/86 10.20 between Mozart Family Trust and the Company dated November 30, 1983 (Continued) 49 3. Exhibits (Continued) Sequentially Incorporated By Reference Exhibit Numbered ---------------------------- Number Exhibit Description Page Form Date Number - - ------ -------------------------- ---------- -------- --------- ------- 10.21 Bonus Plans N/A S-1 07/01/86 10.21 10.21.1 Revised Bonus Plan N/A 10-K 11/27/92 10.21.1 10.21.2 Revised Bonus Plan N/A 10-K 11/26/93 10.21.2 10.22 Restricted Stock Option N/A 10-K 11/30/87 10.22 Plan 10.22.1 Restricted Stock Option N/A 10-K 11/30/89 10.22.1 Plan, as amended 10.22.2 Restricted Stock Option N/A 10-K 11/30/90 10.22.2 Plan as, amended 10.22.3 Restricted Stock Option N/A 10-K 11/29/91 10.22.3 Plan as, amended 10.22.4 Restricted Stock Option N/A 10-Q 07/06/94 10.22.4 Plan as, amended 10.23 Amended and Restated N/A 10-K 11/30/88 10.23 Software License Agree- ment between the Company and QMS, Inc., dated May 15, 1987 (confidential treatment granted) 10.24 1989 Restricted Stock Plan N/A 10-K 11/30/88 10.24 10.24.1 1994 Performance and N/A S-4 07/27/94 10.1 Restricted Stock Plan 10.25 Form of Indemnity Agree- N/A 10-K 11/30/88 10.25 ment 10.26 Lease Agreement by and N/A 10-K 11/30/88 10.26 between Charleston Place Associates and Adobe Systems Incorporated dated April 14, 1987 10.26.1 Amendment One to Lease N/A 10-K 11/30/88 10.26.1 Agreement dated March 1, 1988 10.26.2 Amendment Two to Lease N/A 10-K 11/30/88 10.26.2 Agreement dated September 1, 1988 (Continued) 50 3. Exhibits (Continued) Sequentially Incorporated By Reference Exhibit Numbered ---------------------------- Number Exhibit Description Page Form Date Number - - ------ -------------------------- ---------- -------- --------- ------- 10.27 Lease Agreement by and N/A 10-K 11/30/88 10.27 between John Mozart and Adobe Systems Incorporated dated July 20, 1988 10.28 Limited Partnership N/A 10-K 11/29/91 10.28 Agreement of University Circle Building I, Ltd., dated May 22, 1991 10.29 University Centre N/A 10-K 11/29/91 10.29 Building I Lease Agree- ment dated May 22, 1991 10.30 University Circle N/A 10-K 11/27/92 10.30 Termination and Security Agreement and Mutual Release dated January 7, 1993 10.31 Restated Agreement and N/A S-4 07/13/94 10.31 and Plan of Merger and Reorganization By and Among Adobe Systems Incorporated, P Acquisition Corp and Aldus Corporation 10.32 Sublease of the Land and 126 N/A N/A N/A Lease of the Improvements By and Between Sumitomo Bank Leasing and Finance Inc. and Adobe Systems Incorporated 11 Computation of Earnings 193 N/A N/A N/A Per Common Share 21 Subsidiaries of the 194 N/A N/A N/A Registrant 23 Consent of Independent 195 N/A N/A N/A Auditors 23.1 Consent of Ernst & 196 N/A N/A N/A Young LLP, Independent Auditors 27 Financial Data Schedule 197 N/A N/A N/A 51 (b) Reports on Form 8-K One report on Form 8-K dated August 31, 1994 was filed by the Company describing the completion of the acquisition of Aldus Corporation. 52 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Mountain View, California, on the 13th day of February, 1995. ADOBE SYSTEMS INCORPORATED By /s/ M. Bruce Nakao ------------------------------------- M. Bruce Nakao, Senior Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer) (Continued) 53 SIGNATURES (CONTINUED) 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 13th day of February 1995. Signature Title - - --------------------------------- ----------------------------------- /s/ John E. Warnock Chairman of the Board of Directors - - --------------------------------- and Chief Executive Officer John E. Warnock (Principal Executive Officer) /s/ Charles M. Geschke President, Chief Operating Officer - - --------------------------------- and Director Charles M. Geschke (Principal Operating Officer) /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/ Paul Brainerd Director - - --------------------------------- Paul Brainerd /s/ Gene P. Carter Director - - --------------------------------- Gene P. Carter /s/ M. Bruce Nakao Senior Vice President, Finance and - - --------------------------------- Administration, Chief Financial Officer, M. Bruce Nakao Treasurer and Assistant Secretary (Principal Financial and Accounting Officer) 54 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: Acrobat Adobe Adobe Dimensions Adobe Home Publisher Adobe Illustrator Adobe Photoshop Adobe Premiere Adobe Streamline Adobe Type Manager After Effects Aldus Color Central DateBook Display PostScript Fetch Gallary Effects IntelliDraw PageMaker Persuasion Photostyler PostScript PrePrint PressWise Print Central SuperPaint TouchBase TrapWise SuperATM All other brand or product names are trademarks or registered trademarks of their respective holders. 55 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: Sequentially Numbered Financial Statement Description Page - - ------------------------------------------------------------- -------------- * Management's Report 57 * Independent Auditors' Report 58 * Consolidated Balance Sheets 59 November 25, 1994 and November 26, 1993 * Consolidated Statements of Income 61 Years Ended November 25, 1994, November 26, 1993, and November 27, 1992 * Consolidated Statements of Shareholders' Equity 62 Years Ended November 25, 1994, November 26, 1993, and November 27, 1992 * Consolidated Statements of Cash Flows 65 Years Ended November 25, 1994, November 26, 1993, and November 27, 1992 * Notes to Consolidated Financial Statements 68 * Report of Ernst & Young LLP, Independent Auditors 95 56 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 control. 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. M. Bruce Nakao Senior Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Assistant Secretary December 20, 1994 57 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Adobe Systems Incorporated: We have audited the accompanying consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of November 25, 1994, and November 26, 1993 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended November 25, 1994. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. 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 did not audit the financial statements of Aldus Corporation, a company acquired by the Company in a business combination accounted for as a pooling of interests, as described in Note 2 to the consolidated financial statements, which statements reflect total assets constituting 33 percent as of November 26, 1993, and total revenues constituting 40 percent in both fiscal 1993 and 1992, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Aldus Corporation, is based solely upon the report of the other auditors. 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, based on our audits and the report of the other auditors, 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 25, 1994, and November 26, 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended November 25, 1994, 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 20, 1994 58 ADOBE SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
November 25 November 26 1994 1993 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 190,091 $ 134,039 Short-term investments 210,269 174,946 Receivables 96,585 84,864 Inventories 9,619 10,779 Other current assets 7,837 9,821 Deferred income taxes 17,962 12,598 ----------- ----------- Total current assets 532,363 427,047 Property and equipment 39,104 49,135 Other assets 45,561 53,124 Deferred income taxes 8,475 534 ----------- ----------- $ 625,503 $ 529,840 ----------- ----------- ----------- -----------
(Continued) SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 59 ADOBE SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (CONTINUED)
November 25 November 26 1994 1993 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade and other payables $ 30,840 $ 20,925 Accrued expenses 79,000 59,114 Accrued restructuring costs 28,457 -- Income taxes payable 23,083 21,189 Deferred revenue 7,352 7,604 ----------- ----------- Total current liabilities 168,732 108,832 ----------- ----------- Put warrants -- 6,906 Shareholders' equity: Preferred stock, no par value; 2,000,000 shares authorized; none issued -- -- Common stock, no par value; 200,000,000 shares authorized; 61,150,049 and 58,651,027 shares issued and outstanding as of November 25, 1994 and November 26, 1993, respectively 142,207 90,199 Unrealized losses on investments (1,088) -- Retained earnings 319,704 328,207 Cumulative foreign currency translation adjustments (4,052) (4,304) ----------- ----------- Total shareholders' equity 456,771 414,102 ----------- ----------- $ 625,503 $ 529,840 ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 60 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended ------------------------------------------ November 25 November 26 November 27 1994 1993 1992 ----------- ----------- ---------- Revenue: Licensing $ 156,652 $ 146,176 $ 152,701 Application products 441,120 374,061 287,362 ----------- ----------- ---------- Total revenue 597,772 520,237 440,063 Direct costs 111,810 96,638 87,871 ----------- ----------- ---------- Gross margin 485,962 423,599 352,192 ----------- ----------- ---------- Operating expenses: Software development costs: Research and development 98,995 86,727 65,181 Amortization of capitalized software development costs 13,316 10,208 10,128 Sales, marketing and customer support 200,993 170,945 145,748 General and administrative 54,021 59,203 50,344 Write-off of acquired in-process research and development 15,469 4,285 6,325 Merger transaction and restructuring costs 72,183 -- -- ----------- ----------- ---------- Total operating expenses 454,977 331,368 277,726 ----------- ----------- ---------- Operating income 30,985 92,231 74,466 Nonoperating income (expense): Interest, investment and other income 9,012 12,829 10,982 Loss on real estate partnership -- -- (6,000) ----------- ----------- ---------- Income before income taxes 39,997 105,060 79,448 Income tax provision 33,688 38,515 29,059 ----------- ----------- ---------- Net income $ 6,309 $ 66,545 $ 50,389 ----------- ----------- ---------- ----------- ----------- ---------- Net income per share $ 0.10 $ 1.11 $ 0.82 ----------- ----------- ---------- ----------- ----------- ---------- Shares used in computing net income per share 61,620 60,144 61,193 ----------- ----------- ---------- ----------- ----------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 61 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
Cumulative Foreign Commom Stock Unrealized Currency -------------------------- Losses on Retained Translation Shares Amount Investments Earnings Adjustments Total ---------- ---------- ----------- ---------- ----------- ---------- Balances as of November 29, 1991 59,049,328 $ 108,713 $ -- $ 227,486 $ 1,880 $ 338,079 Issuance of common stock under Stock Option Plans 977,271 9,406 -- -- -- 9,406 Issuance of common stock under Employee Stock Purchase Plan 420,154 5,721 -- -- -- 5,721 Issuance of common stock under Restricted Stock Plans 68,360 -- -- -- -- -- Tax benefit from employee stock plans -- 6,545 -- -- -- 6,545 Restricted stock compensation expense -- 2,278 -- -- -- 2,278 Dividends declared -- -- -- (7,208) -- (7,208) Repurchase of common stock (2,776,670) (47,744) -- -- -- (47,744) Foreign currency translation adjustment -- -- -- -- (5,723) (5,723) Net income -- -- -- 50,389 -- 50,389 ---------- ---------- ---------- ---------- ---------- ---------- Balances as of November 27, 1992 57,738,443 84,919 -- 270,667 (3,843) 351,743
(Continued) SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 62 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) (CONTINUED)
Cumulative Foreign Commom Stock Unrealized Currency -------------------------- Losses on Retained Translation Shares Amount Investments Earnings Adjustments Total ---------- ---------- ----------- ---------- ----------- ---------- Balances as of November 27, 1992 57,738,443 $ 84,919 $ -- $ 270,667 $ (3,843) $ 351,743 Issuance of common stock under Stock Option Plans 1,371,387 15,715 -- -- -- 15,715 Issuance of common stock under Employee Stock Purchase Plan 510,461 6,980 -- -- -- 6,980 Issuance of common stock under Restricted Stock Plans 50,300 -- -- -- -- -- Tax benefit from employee stock plans -- 10,134 -- -- -- 10,134 Restricted stock compensation expense -- 1,651 -- -- -- 1,651 Dividends declared -- -- -- (9,005) -- (9,005) Acquisition of The Company of Science & Art 105,049 2,545 -- -- -- 2,545 Repurchase of common stock (1,124,613) (25,533) -- -- -- (25,533) Proceeds from sales of put warrants -- 694 -- -- -- 694 Reclassification of put warrant obligations -- (6,906) -- -- -- (6,906) Foreign currency translation adjustment -- -- -- -- (461) (461) Net income -- -- -- 66,545 -- 66,545 ---------- ---------- ---------- ---------- ---------- ---------- Balances as of November 26, 1993 58,651,027 90,199 -- 328,207 (4,304) 414,102
(Continued) SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 63 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) (CONTINUED)
Cumulative Foreign Commom Stock Unrealized Currency -------------------------- Losses on Retained Translation Shares Amount Investments Earnings Adjustments Total ---------- ---------- ----------- ---------- ----------- ---------- Balances as of November 26, 1993 58,651,027 $ 90,199 $ -- $ 328,207 $ (4,304) $ 414,102 Issuance of common stock under Stock Option Plans 2,331,438 34,962 -- -- -- 34,962 Issuance of common stock under Employee Stock Purchase Plan 629,992 9,487 -- -- -- 9,487 Issuance of common stock under Restricted Stock Plans 53,500 -- -- -- -- -- Tax benefit from employee stock plans -- 12,418 -- -- -- 12,418 Restricted stock compensation expense -- 1,064 -- -- -- 1,064 Adjustment for change in Aldus Corporation fiscal year-end (130,534) (3,265) -- (4,394) 487 (7,172) Dividends declared -- -- -- (10,418) -- (10,418) Repurchase of common stock (385,374) (10,283) -- -- -- (10,283) Proceeds from sales of put warrants -- 719 -- -- -- 719 Reclassification of put warrant obligations -- 6,906 -- -- -- 6,906 Unrealized losses on investments -- -- (1,088) -- -- (1,088) Foreign currency translation adjustment -- -- -- -- (235) (235) Net income -- -- -- 6,309 -- 6,309 ---------- ---------- ----------- ----------- ----------- ----------- Balances as of November 25, 1994 61,150,049 $ 142,207 $ (1,088) $ 319,704 $ (4,052) $ 456,771 ---------- ---------- ----------- ----------- ----------- ----------- ---------- ---------- ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 64 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Years Ended ----------------------------------------- November 25 November 26 November 27 1994 1993 1992 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 6,309 $ 66,545 $ 50,389 Adjustments to reconcile net income to net cash provided by operating activities: Restricted stock compensation expense 1,064 1,651 2,278 Depreciation and amortization 53,207 45,566 37,130 Deferred income taxes (12,505) (1,178) (11,539) Unrealized loss on investments -- (113) (509) Provision for losses on accounts receivable 1,518 1,842 862 Tax benefit from employee stock plans 12,418 10,134 6,545 Write-off of acquired in-process research and development 15,469 4,285 6,325 Loss on real estate partnership -- -- 6,000 Non-cash restructuring costs 25,735 -- -- Changes in operating assets and liabilities: Receivables (14,965) (15,631) (10,134) Inventories 1,004 (85) (190) Other current assets 669 (1,143) (132) Trade and other payables 11,720 7,866 6,397 Accrued expenses 10,915 10,277 6,698 Accrued restructuring costs 28,457 -- -- Income taxes payable 1,495 11,134 16,821 Deferred revenue -- 590 2,896 ----------- ----------- ----------- Net cash provided by operating activities 142,510 141,740 119,837 ----------- ----------- -----------
(Continued) SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 65 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (CONTINUED)
Years Ended -------------------------------------------- November 25 November 26 November 27 1994 1993 1992 -------------- ----------- ----------- Cash flows from investing activities: Purchases of short-term investments $ (1,734,357) $ (698,334) $ (739,082) Maturities and sales of short-term investments 1,697,993 671,064 723,277 Acquisitions of property and equipment (28,526) (22,984) (29,022) Capitalization of software development costs (9,133) (11,573) (9,821) Additions to other assets (17,813) (4,904) (11,340) Acquisitions, net of cash acquired (14,750) (4,554) (12,271) -------------- ----------- ----------- Net cash used for investing activities (106,586) (71,285) (78,259) -------------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock 44,449 14,045 9,516 Proceeds from sales of put warrants 719 694 -- Repurchase of common stock (10,283) (25,533) (47,744) Payment of dividends (9,906) (8,523) (7,212) -------------- ----------- ----------- Net cash provided by (used for) financing activities 24,979 (19,317) (45,440) Effect of foreign currency exchange rates on cash and cash equivalents (1,297) (516) (4,023) -------------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 59,606 50,622 (7,885) Adjustment for change in Aldus Corporation fiscal year-end (3,554) -- -- Cash and cash equivalents at beginning of year 134,039 83,417 91,302 -------------- ----------- ----------- Cash and cash equivalents at end of year $ 190,091 $ 134,039 $ 83,417 -------------- ----------- ----------- -------------- ----------- -----------
(Continued) SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 66 ADOBE SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (CONTINUED)
Years Ended November 25 November 26 November 27 ----------------------------------------- 1994 1993 1992 ----------- ----------- ----------- Supplemental disclosures: Cash paid during the year for income taxes $ 25,945 $ 21,999 $ 16,525 ----------- ----------- ----------- ----------- ----------- ----------- Noncash investing and financing activities: Dividends declared but not paid $ 2,778 $ 2,262 $ 1,780 ----------- ----------- ----------- ----------- ----------- ----------- Reclassification of put warrants $ (6,906) $ 6,906 $ -- ----------- ----------- ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 67 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 create, display, print and communicate electronic documents. The Company licenses its technology to major computer and publishing suppliers, and markets application software products and typeface products for authoring and editing visually rich documents, including digital and video output. The Company distributes its products through a network of original equipment manufacturer (OEM) customers, distributors and dealers, and value added resellers (VARs) and system integrators. The Company has operations in the Americas, Europe and Pacific Rim regions. In August 1994, Adobe acquired Aldus Corporation ("Aldus"), a developer of software applications for the professional publishing, graphics and prepress markets; interactive publishing; and the general consumer market through a pooling of interests. Accordingly, the Company's financial statements have been restated, for all periods prior to the merger, to include the results of operations, financial position and cash flows of Aldus. FISCAL YEAR The Company's fiscal year is a 52-/53- week year ending on the last Friday of November. BASIS OF CONSOLIDATION The accompanying consolidated financial statements include those of Adobe and its wholly owned subsidiaries, after elimination of all significant intercompany accounts and transactions. 68 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents consist of instruments with maturities of three months or less at the time of purchase. In 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of adopting SFAS No. 115 was not material to the Company's financial position and results of operations. Certain cash equivalents and all of the Company's short- term and noncurrent investments, consisting principally of United States government and government agency securities, municipal bonds, commercial paper, auction rate preferred stocks, 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 taxes, reported as a separate component of shareholders' equity. The amortized cost of available-for-sale debt securities are adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses, and declines in value judged to be other than temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest, investment and other income. The Company owns a minority interest in certain technology companies and a majority interest in a limited partnership, established to invest in technology companies, and accounts for such investments under the cost method. FOREIGN CURRENCY TRANSLATION Assets and liabilities of certain foreign subsidiaries whose functional currency is the local currency are translated from their respective functional currencies to United States dollars 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 shareholders' equity. Certain other transaction gains or losses, which have not been material, are reported in results of operations. 69 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES Inventories are stated at the lower of cost (first-in, first-out basis) or market (net realizable value). PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of a building in Edinburgh, Scotland is calculated using the straight-line method over 35 years. Depreciation of equipment, and furniture and fixtures, is calculated using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the related assets, generally five to nine years. OTHER ASSETS Acquired technology, goodwill and licensing agreements 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 years for technology, five to ten years for goodwill, and three to six years for licensing agreements. The Company periodically reviews the net realizable value of its intangible assets and adjusts the carrying amount accordingly. Research and development costs are charged to expense when incurred. Costs incurred in the research and development of new software products and enhancements to existing software products are also expensed as incurred until the technological feasibility of the product has been established. After technological feasibility has been established, any additional costs are capitalized in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," and are included in other assets on the accompanying consolidated balance sheets. 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 of the software's estimated economic life, generally 9 to 24 months. 70 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OTHER ASSETS (CONTINUED) Typeface production costs comprise direct and indirect costs associated with the production of typefaces to be used with the PostScript interpreter, or to be distributed in shrink-wrapped packages to end users through the retail channel or directly from the Company. Amortization is provided on the straight-line method over the estimated useful lives of the respective assets, which is generally three years. REVENUE RECOGNITION Licensing revenue is recognized when the Company's OEM customers ship their products incorporating Adobe's software to their end user customers. The Company also enters into contracts with OEMs to provide research and development to adapt the Company's software products to the OEMs' hardware products. Revenue on such contracts is recognized based on the percentage-of-completion method and is included in licensing revenue. Deferred revenue comprises payments received in advance of revenue recognized on the aforementioned contracts. Revenue relating to OEM licenses stipulating fixed future payment streams in excess of 12 months is recognized as income on a straight-line basis over the term of the licenses. 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 reserves for estimated future returns, exchanges and price protection. The costs associated with other obligations, consisting principally of the customer's right to use the Company's technical hotline, have been immaterial during all periods presented. DIRECT COSTS Direct costs include royalties, amortization of typeface production costs, amortization of acquired technologies, and direct product, packaging and shipping costs. 71 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company accounts for its income taxes under SFAS No. 109, "Accounting for Income Taxes." Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. The Company does not provide deferred income taxes for unremitted earnings of foreign subsidiaries, as it is management's intent to reinvest these earnings indefinitely. CONCENTRATION OF CREDIT 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 believes no significant concentration of credit risk exists with respect to these investments. Credit risk in receivables is limited to OEMs, 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 on-going credit evaluations of its customers' financial condition and requires letters of credit or other guarantees, whenever deemed necessary. NET INCOME PER SHARE Net income per share is based upon weighted average common and dilutive equivalent shares outstanding using the treasury stock method. Dilutive common equivalent shares include stock options and restricted stock. Fully diluted earnings per share for 1994, 1993 and 1992 were not materially different from primary earnings per share. 72 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS Certain reclassifications were made to the 1993 and 1992 consolidated financial statements to conform to the 1994 presentation. 73 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 2. MERGER WITH ALDUS CORPORATION On August 31, 1994, the Company issued approximately 14.2 million shares of its common stock in exchange for all of the common stock of Aldus. This business combination has been accounted for as a pooling of interests, and accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the results of operations, financial position and cash flows of Aldus. The results of operations for the separate enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below.
Nine Years Ended Months Ended ------------------------- August 26 November 26 November 27 1994 1993 1992 ------------ ------------ ------------ Revenue: Adobe Systems Incorporated $ 260,112 $ 313,457 $ 265,931 Aldus Corporation 172,210 206,780 174,132 ------------ ------------ ------------ Combined $ 432,322 $ 520,237 $ 440,063 ------------ ------------ ------------ ------------ ------------ ------------ Net Income: Adobe Systems Incorporated $ 49,329 $ 57,030 $ 43,610 Aldus Corporation 5,131 9,515 6,779 ------------ ------------ ------------ Combined $ 54,460 $ 66,545 $ 50,389 ------------ ------------ ------------ ------------ ------------ ------------
Prior to the combination, Aldus' fiscal year ended on December 31. In recording the business combination, Aldus' financial statements for the 12 months ended November 25, 1994 were combined with the Company's financial statements for the same period. Aldus' financial statements for the years ended December 31, 1993 and 1992 were combined with the Company's financial statements for the years ended November 26, 1993 and November 27, 1992, respectively. Revenue and net income of Aldus for the month ended December 31, 1993 were $26.1 million and $4.4 million, respectively. Net income, the foreign currency translation adjustment, the issuance of common stock, and the net increase in cash and cash equivalents were adjusted to eliminate the effect of including Aldus' results of operations, financial position and cash flows for the month ended December 31, 1993 in the years ended November 25, 1994 and November 26, 1993. 74 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 2. MERGER WITH ALDUS CORPORATION (CONTINUED) There were no significant transactions between the Company and Aldus prior to the combination, which required elimination, and no adjustments were required to conform accounting policies. However, certain reclassifications were made to the 1993 and 1992 financial statements to conform to the 1994 presentation. NOTE 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS As discussed in "Note 1 -- Significant Accounting Policies," in 1994 the Company adopted the provisions of SFAS No. 115. Certain cash equivalents and all investments have been classified as available-for-sale securities, and as of November 25, 1994 consisted of the following:
Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------------ ------------ ----------- ------------ Tax-exempt commercial paper and agency discount notes $ 152,326 $ 4 $ (4) $ 152,326 United States government treasury notes 30,647 -- (629) 30,018 State and municipal bonds and notes 92,931 -- (927) 92,004 Corporate notes 511 -- (6) 505 Auction-rate securities 80,865 -- -- 80,865 Asset-backed securities 7,199 -- (322) 6,877 ------------ ------------ ----------- ------------ $ 364,479 $ 4 $ (1,888) $ 362,595 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------
Unrealized losses are reported as a separate component of shareholders' equity net of taxes of $0.8 million. Net realized gains for the year ended November 25, 1994 of $0.2 million are included in interest, investment and other income. 75 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (CONTINUED) The Company's investments are classified as follows:
November 25 1994 ------------ Cash equivalents $ 152,326 Short-term investments 210,269 ------------ $ 362,595 ------------ ------------
The cost and estimated fair value of available-for-sale securities as of November 25, 1994, by contractual maturity, consisted of the following:
Estimated Cost Fair Value ------------ ------------ Due in one year or less $ 229,435 $ 228,725 Due in one to three years 46,981 46,128 Auction-rate securities 80,865 80,865 ------------ ------------ 357,281 355,718 Asset-backed securities 7,199 6,877 ------------ ------------ $ 364,480 $ 362,595 ------------ ------------ ------------ ------------
Included in auction-rate securities are Select Auction Variable Rate Securities (SAVRS) whose stated maturities exceed ten years, however, the Company had the option of adjusting the respective interest rates or liquidating these investments at auction on stated auction dates every 35 days. 76 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 4. RECEIVABLES Receivables consisted of the following:
November 25 November 26 1994 1993 ------------ ------------ Trade receivables $ 69,628 $ 58,555 Royalty receivables 26,800 22,532 Interest and other receivables 3,410 6,098 ------------ ------------ 99,838 87,185 Less allowance for doubtful accounts 3,253 2,321 ------------ ------------ $ 96,585 $ 84,864 ------------ ------------ ------------ ------------
NOTE 5. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
November 25 November 26 1994 1993 ------------ ------------ Land $ 782 $ 740 Building 4,615 4,370 Equipment 88,285 82,079 Furniture and fixtures 15,487 29,522 Leasehold improvements 4,146 3,822 ------------ ------------ 113,315 120,533 Less accumulated depreciation and amortization 74,211 71,398 ------------ ------------ $ 39,104 $ 49,135 ------------ ------------ ------------ ------------
77 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 6. OTHER ASSETS Other assets consisted of the following:
November 25 November 26 1994 1993 ------------ ------------ Licensing agreements $ 15,565 $ 16,057 Goodwill 22,359 21,806 Software development costs 27,199 35,427 Typeface production costs -- 4,841 Miscellaneous other assets 16,123 7,437 ------------ ------------ 81,246 85,568 Less accumulated amortization 35,685 32,444 ------------ ------------ $ 45,561 $ 53,124 ------------ ------------ ------------ ------------
The following significant transactions and activities are included in other assets: ACQUISITIONS AND GOODWILL During 1994, the Company acquired LaserTools Corporation and Compumation, Incorporated for an aggregate purchase price of $17.0 million. Approximately $15.5 million was allocated to in-process research and development, and was expensed at the time of these acquisitions. The Company plans to integrate the acquired technologies into future products. In addition, Image Club Graphics, Incorporated ("Image Club"), a mail order catalog marketer, was acquired for an aggregate purchase price of $3.4 million in cash, which was primarily allocated to goodwill. Also during 1994, the Company acquired the remaining 20 percent interest of Aldus Kabushiki Kaisha ("Aldus K.K."), a Tokyo-based company, from Something Good, Inc., a Japanese software company for an aggregate purchase price of $2.0 million, which was primarily allocated to goodwill. Aldus K.K. develops and markets Japanese-language versions of the Company's products. Operating results of Aldus K.K. have been included in the consolidated statements from the date of acquisition. During 1993, the Company acquired AH Software, Inc. (doing business as After Hours Software) and The Company of Science & Art, for an aggregate purchase price of $4.6 million in cash and $2.5 million in restricted stock. Of the purchase price, $4.3 million was allocated to in-process research and development, and was expensed at the time of these acquisitions. 78 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 6. OTHER ASSETS (CONTINUED) During 1992, the Company acquired OCR Systems Incorporated, Nonlinear Technologies, Incorporated, and 80 percent of Aldus K.K. for an aggregate purchase price of $13.8 million, of which $6.3 million was allocated to in-process research and development, and was expensed at the time of these acquisitions. SOFTWARE DEVELOPMENT COSTS Unamortized software development costs were $9.1 million and $17.1 million as of November 25, 1994 and November 26, 1993, respectively. Amortization of software development costs was $8.7 million, $10.2 million and $10.1 million for the years ended November 25, 1994, November 26, 1993, and November 27, 1992, respectively. TYPEFACE PRODUCTION COSTS Amortization of typeface production costs charged to direct costs was $4.8 million, $4.6 million and $4.1 million for the years ended November 25, 1994, November 26, 1993, and November 27, 1992, respectively. MISCELLANEOUS OTHER ASSETS Included in miscellaneous other assets are investments in a venture capital limited partnership, minority interests held in other technology companies and other intangible assets. During 1991, the Company invested $6.0 million in a real estate partnership to acquire land and develop office space for its own use. During 1992, the Company chose to abandon its efforts to pursue the development of land and buildings under this partnership. The Company entered into an agreement with the general partner that dissolved the partnership without recourse to the Company. Accordingly, the investment was written off in 1992. 79 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 7. ACCRUED EXPENSES Accrued expenses consisted of the following: November 25 November 26 1994 1993 ------------ ------------ Royalties $ 10,824 $ 10,388 Accrued compensation and benefits 17,039 17,005 Sales and marketing allowances 19,445 12,466 Miscellaneous accrued expenses 31,692 19,255 ------------ ------------ $ 79,000 $ 59,114 ------------ ------------ ------------ ------------ 80 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 8. ACCRUED RESTRUCTURING COSTS On August 31, 1994, the Company merged with Aldus, described in "Note 2 -- Merger with Aldus Corporation," and initiated a plan to combine the operations of the two companies. On this date, the Company recorded a $72.2 million charge to operating expenses related to the merger transaction and restructuring costs. Merger transaction costs consist principally of transaction fees for investment bankers, attorneys, accountants, financial printing and other related charges. Restructuring costs include the elimination of redundant information systems and equipment, severance and outplacement of terminated employees, the write-off of certain assets related to product lines to be divested or eliminated, and cancellation of certain contractual agreements. The merger transaction and restructuring costs are summarized below:
Provision Period from Acquisition Recorded at to November 25, 1994 Accrued as of Acquisition Cash November 25 Date Write-offs Payments 1994 ------------ ------------ ------------ ------------ Merger transaction costs $ 14,618 $ -- $ 8,755 $ 5,863 Restructuring costs: Severance and outplacement 20,784 -- 9,236 11,548 Redundant information systems and equipment 10,778 10,778 -- -- Assets associated with duplicate product lines 14,957 14,957 -- -- Cancellation of facility leases and other contracts 11,046 -- -- 11,046 ------------ ------------ ------------ ------------ $ 72,183 $ 25,735 $ 17,991 $ 28,457 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
81 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 8. ACCRUED RESTRUCTURING COSTS (CONTINUED) The nature, timing and extent of restructuring costs follows: SEVERANCE AND OUTPLACEMENT As a result of the merger, certain technical support, customer service, distribution and administrative functions were combined and reduced. Restructuring included severance and outplacement charges related to approximately 500 terminated employees. Affected employees had received notification of their termination by September 9, 1994, and final assignments are expected to be completed during the first quarter of 1995. REDUNDANT INFORMATION SYSTEMS AND EQUIPMENT To facilitate the operations of the Company, the combined organization migrated to a common management information system, which resulted in the write-off of the book value of the abandoned systems. The sale or disposal of duplicate information systems and equipment was completed in the fourth quarter of 1994. ASSETS ASSOCIATED WITH DUPLICATE PRODUCT LINES As a condition of the merger, the Company will no longer (after January 1995) sell and distribute FreeHand, the illustration program previously sold and distributed by Aldus. In addition, PhotoStyler, an image and video editing software tool, was discontinued in the fourth quarter of 1994, as the product competed with certain existing products of the Company. The respective inventories and capitalized software development costs and technologies of these duplicate product lines were written off in the fourth quarter of 1994. CANCELLATION OF FACILITY LEASES AND OTHER CONTRACTS The Company plans to consolidate duplicate offices in Europe, Japan, Canada and the United States. Lease and third-party contract termination payments, resulting from the planned closure of these facilities, are expected to continue through the lease term or negotiated early termination date, if applicable. 82 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 9. INCOME TAXES Income before income taxes includes net income (loss) from foreign operations of approximately $(10.5) million, $13.5 million and $3.5 million for the years ended November 25, 1994, November 26, 1993, and November 27, 1992, respectively. The provision for income taxes consisted of the following:
Years Ended --------------------------------------- November 25 November 26 November 27 1994 1993 1992 ------------ ------------ ------------ Current: United States federal $ 21,776 $ 14,400 $ 18,667 Foreign 7,579 8,714 7,248 State and local 7,120 6,445 6,138 ------------ ------------ ------------ Total current 36,475 29,559 32,053 ------------ ------------ ------------ Deferred: United States federal (11,525) (1,926) (7,954) Foreign (1,785) 964 18 State and local (1,895) (216) (1,603) ------------ ------------ ------------ Total deferred (15,205) (1,178) (9,539) ------------ ------------ ------------ Charge in lieu of taxes attributable to employee stock plans 12,418 10,134 6,545 ------------ ------------ ------------ $ 33,688 $ 38,515 $ 29,059 ------------ ------------ ------------ ------------ ------------ ------------
83 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 9. 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 1994 and 1993, and 34 percent for 1992, to income before income taxes) as a result of the following:
Years Ended ------------------------------------------------ November 25 November 26 November 27 1994 1993 1992 ------------ ------------ ------------ Computed "expected" tax expense $ 13,999 $ 36,804 $ 27,012 State tax expense, net of federal benefit 3,396 5,154 3,826 Nondeductible merger costs 5,209 -- -- Nondeductible write-off of acquired in-process research and development 7,216 489 245 Tax credits (1,755) (3,433) (3,344) Foreign losses, not benefited 3,550 676 462 Foreign tax rate differential 2,018 -- -- Other, net 55 (1,175) 858 ------------ ------------ ------------ $ 33,688 $ 38,515 $ 29,059 ------------ ------------ ------------ ------------ ------------ ------------
84 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 9. INCOME TAXES (CONTINUED) The tax effects of the temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of 1994 and 1993 are presented below:
November 25 November 26 1994 1993 ------------ ------------ Deferred tax assets: Acquired technology $ 3,306 $ 1,428 Reserves and deferred revenue 17,515 10,599 Depreciation 2,438 1,982 Foreign operating loss carryforwards 5,130 2,678 Tax credits and other carryforwards 4,088 3,777 Other 1,285 3,657 ------------ ------------ Total gross deferred tax assets 33,762 24,121 Deferred tax asset valuation allowance (5,130) (2,678) ------------ ------------ Total deferred tax assets 28,632 21,443 ------------ ------------ Deferred tax liabilities: Basis difference of acquired assets (694) (35) Capitalized costs (1,297) (7,270) Other (204) (1,006) ------------ ------------ Total deferred tax liabilities (2,195) (8,311) ------------ ------------ Net deferred tax assets $ 26,437 $ 13,132 ------------ ------------ ------------ ------------
As of November 25, 1994, the Company had United States tax credit carryforwards of approximately $4 million, which expire in years 1997 through 2008. The carryforwards are attributable to the premerger years of Aldus and are subject to certain limitations on usage. The Company also has foreign operating loss carryovers in various jurisdictions of approximately $13.5 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. The increase in the valuation allowance in 1994 resulted from foreign losses for which no tax benefit has been recognized. 85 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 10. EMPLOYEE BENEFIT PLANS STOCK OPTION PLAN As of November 25, 1994, the Company had reserved 20,000,000 shares of common stock for issuance under its Stock Option Plan. Each option assumed by Adobe under the Merger Agreement will continue to have, and be subject to, the same terms and conditions set forth in the relevant Stock Option Plan. The Aldus plan provided for the granting of stock options to employees and officers at the fair market value at the grant date. Options vest at 20 percent after the first year and ratably each month for the next four years. The Adobe 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 over three years: 25 percent after the first year, and the remainder ratably each month for the next two years so that the options are 50 percent vested after the second year and fully vested after the third year. All options have a five-, seven-, or ten-year term. Stock option activity for 1992, 1993 and 1994 is presented on the following page. 86 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 10. EMPLOYEE BENEFIT PLANS (CONTINUED) STOCK OPTION PLAN (CONTINUED)
Options Outstanding Options ------------------------------ Available Number Price for Grant of Shares per Share ------------ ------------ ------------ Balances as of November 29, 1991 5,093,694 8,396,826 $0.02-49.00 Options granted (4,813,516) 4,813,516 10.25-33.88 Options exercised -- (972,271) 0.02-24.75 Options cancelled 3,117,067 (3,117,067) 0.58-49.00 ------------ ------------ ------------ Balances as of November 27, 1992 3,397,245 9,121,004 0.02-47.25 Additional shares reserved 4,500,000 -- -- Options granted (3,278,018) 3,278,018 2.17-33.75 Options exercised -- (1,366,387) 0.02-27.25 Options cancelled 741,861 (741,861) 0.58-37.87 ------------ ------------ ------------ Balances as of November 26, 1993 5,361,088 10,290,774 0.06-47.25 Options granted (2,246,430) 2,246,430 17.25-36.38 Options exercised -- (2,331,438) 0.06-33.75 Options cancelled 788,482 (788,482) 0.58-33.75 Adjustment for change in Aldus Corporation fiscal year-end 142,314 (51,421) -- Aldus options retired (968,713) -- -- ------------ ------------ ------------ Balances as of November 25, 1994 3,076,741 9,365,863 $ 0.25-47.25 ------------ ------------ ------------ ------------ ------------ ------------
Of the options outstanding, 5,570,349 were exercisable as of November 25, 1994. 87 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 10. EMPLOYEE BENEFIT PLANS (CONTINUED) RESTRICTED STOCK OPTION PLAN The Company's Restricted Stock Option Plan provides for the granting of nonqualified stock options to nonemployee directors and consultants. Option grants are limited to 7,500 shares per person in each fiscal year and are immediately exercisable within a ten-year term. Options generally vest over three years: 25 percent in each of the first two years and 50 percent in the third year. Stock option activity for 1992, 1993 and 1994 is as follows:
Options Outstanding Options ------------------------------ Available Number Price for Grant of Shares per Share ------------ ------------ ------------ Balances as of November 29, 1991 82,500 95,000 $ 4.13-27.00 Options granted (50,000) 50,000 14.06-21.56 Options exercised -- (5,000) 11.13 ------------ ------------ ------------ Balances as of November 27, 1992 32,500 140,000 4.13-27.00 Options granted (40,000) 40,000 23.94 Options exercised -- (5,000) 11.13 Options cancelled 20,000 (20,000) 21.56-27.00 ------------ ------------ ------------ Balances as of November 26, 1993 12,500 155,000 4.13-27.00 Additional shares reserved 50,000 -- -- Options granted (45,000) 45,000 21.88-31.75 ------------ ------------ ------------ Balances as of November 25, 1994 17,500 200,000 $ 4.13-31.75 ------------ ------------ ------------ ------------ ------------ ------------
All options outstanding were exercisable as of November 25, 1994 under the Restricted Stock Option Plan. In addition, 95,375 outstanding options under the Aldus Restricted Stock Option Plan were assumed by Adobe, of which all shares are outstanding and exercisable as of November 25, 1994, at prices ranging from $13.75 to $47.25 per share. 88 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 10. EMPLOYEE BENEFIT PLANS (CONTINUED) PERFORMANCE AND RESTRICTED STOCK PLAN The Company's Performance and Restricted Stock Plan is an amendment and restatement of the Restricted Stock Plan. In August 1994, shareholders approved an amendment to increase the number of shares authorized for issuance from 1,000,000 to 1,500,000. The Performance and Restricted Stock Plan provides for the granting of restricted stock and/or performance units to officers and key employees. Shares issued under this plan vest annually over three years but are considered outstanding at the time of grant, as the shareholders are entitled to dividends and voting rights. Performance units issued under this plan would entitle the recipient to receive shares upon completion of the performance period subject to attaining identified performance goals. As of November 25, 1994, 702,192 shares were outstanding under this plan, of which 101,787 were not yet vested. As of November 25, 1994, no performance units had been issued. EMPLOYEE STOCK PURCHASE PLAN Under the terms of the Company's Employee Stock Purchase Plan, eligible employee participants may purchase shares of the Company's common stock semiannually at 85 percent of the market price, on either the purchase date or the offering date, whichever price is lower. In April 1994, shareholders approved an amendment to increase the number of shares authorized for issuance under the plan from 2,000,000 to 4,000,000. 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 percent of their pretax salary, subject to certain limitations. There were 841 employees under the plan in 1994 and 720 employees under the plan in 1993. Commencing in 1992, the Company matched a portion of employee contributions. Company matching contributions, which can be terminated at the Company's discretion, were $0.7 million and $0.6 million in 1994 and 1993, respectively. No matching contributions were made to the plan in 1992. 89 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 11. CAPITAL STOCK SHAREHOLDER RIGHTS PLAN The Company's Shareholder Rights Plan is intended to protect shareholders 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. Each right entitles the registered holder to purchase from the Company a share of common stock at $230. The rights become exercisable in the following circumstances: * The rights become exercisable ten days after a public announcement by another entity that it has acquired beneficial ownership of 20 percent or more of the shares (and that is without the approval of the Board of Directors) or, if earlier, a public announcement of another entity's intention to commence a tender offer to acquire beneficial ownership of 20 percent or more of the shares. * The rights become exercisable if another entity engages in certain self-dealing transactions with the Company or becomes the beneficial owner of 20 percent or more of the shares. * The rights become exercisable if the Company is acquired by any person in a merger or business combination transaction, or if 50 percent or more of the Company's assets or earnings powers are being sold to another entity. The rights are redeemable by the Company prior to exercise at $0.01 per right and expire on July 24, 2000. PUT WARRANTS In a series of private placements in 1994 and 1993, the Company sold put warrants entitling the holder of each warrant to sell one share of common stock to the Company at a specified price. The Company received $719,000 and $694,000 for the sale of put warrants in 1994 and 1993, respectively. The Company's $6.9 million potential buyback obligation, as of November 26, 1993, was removed from shareholders' equity and recorded as put warrants. At the prevailing market prices for the Company's common stock, there was no dilutive effect on earnings per share in 1993. No put warrants were outstanding as of November 25, 1994. 90 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 11. CAPITAL STOCK (CONTINUED) STOCK SPLIT On July 9, 1993, the Board of Directors of the Company approved a two-for-one split of the Company's common stock, payable in the form of a stock dividend. The shares were distributed on August 10, 1993, to shareholders of record on July 27, 1993. The share and per share amounts in the consolidated financial statements and notes thereto have been retroactively adjusted to reflect the effects of this split for all periods presented. NOTE 12. 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 2001. Rent expense for these leases aggregated $14.8 million, $17.0 million and $13.1 million during 1994, 1993 and 1992, respectively. As of November 25, 1994, future minimum lease payments under noncancellable operating leases are as follows: 1995 -- $15.0 million; 1996 -- $11.5 million; 1997 -- $3.7 million; 1998 -- $1.3 million; 1999 -- $0.9 million; and $4.8 million thereafter. REAL ESTATE DEVELOPMENT AGREEMENT In 1994, the Company entered into a real estate development agreement for the construction of an office facility and in 1996 will enter into an operating lease agreement for this facility. The Company will have the option to purchase the facility at the end of the lease term. In the event the Company chooses not to exercise this option, the Company is obligated to arrange 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, which is approximately $52.0 million. The Company also is required, periodically during the construction period, to deposit funds with the lessor to secure the performance of its obligations under the lease, and as of November 25, 1994, the Company had deposited approximately $2.3 million in securities. 91 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 $63.00, certain royalties are based on a percentage, ranging from 0.2 percent to 20 percent, of the underlying revenue. Royalty expense was approximately $34.8 million, $32.4 million and $32.5 million for the years ended November 25, 1994, November 26, 1993, and November 27, 1992, 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 believes that the ultimate outcome of these actions will not have a material effect on the Company's financial position and results of operations. NOTE 13. TRANSACTIONS WITH AFFILIATES The Company holds a 10 percent equity interest in McQueen Holdings Limited ("McQueen") and accounts for the investment at cost. During 1994, the Company entered into various agreements with McQueen, whereby the Company has contracted with McQueen to perform printing, assembly and warehousing services, and has agreed to guarantee obligations under operating leases for certain facilities utilized by McQueen and to guarantee a certain level of business between the Company and McQueen. The remaining aggregate contingent liability for nonpayment of rent, through September 1999, for facilities occupied by McQueen was approximately $2.3 million, and minimum monthly payments Adobe will make to McQueen for certain services, over the next three years, are approximately $15.8 million. Purchases from McQueen amounted to $13.0 million, $12.6 million and $11.0 million during 1994, 1993 and 1992, respectively. 92 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's cash equivalents and short-term investments are carried at fair value, based on quoted market prices for these or similar investments. For other investments, included in miscellaneous other assets, the estimated fair value is determined using available market information or other appropriate valuation methodologies, and the carrying amount of these investments approximates fair value. Put warrants outstanding as of November 26, 1993 are carried at the maximum amount required to settle the potential obligations under the terms of the put warrants. The fair value of the put warrants is not practically determinable, because it fluctuates based on the Company's stock price and at any point in time could be less than the carrying amount. NOTE 15. INDUSTRY SEGMENT REPORTING AND FOREIGN OPERATIONS Adobe and its subsidiaries operate in one dominant industry segment. The Company is engaged principally in the design, development, manufacture and licensing of computer software. No customer accounted for more than 10 percent of the Company's total revenue in 1994, 1993 or 1992. The Americas operations include revenue and results of operations in North America, South America, Mexico and Latin America, as well as licensing revenue recognized on a worldwide basis. Licensing revenue is not available on a geographic basis, because the source of licensing revenue is known only by the OEMs' headquarters, and not necessarily by the geographic region providing the revenue stream to the OEMs. Accordingly, all licensing revenue is included in The Americas. European operations primarily include subsidiaries in the Netherlands, the United Kingdom, France, Germany and Sweden, while Pacific Rim operations include subsidiaries in Japan and Australia. Transfers between subsidiaries are accounted for at amounts that are generally above cost and consistent with rules and regulations of governing tax authorities. Such transfers are eliminated in the consolidated financial statements. Identifiable assets are those assets that can be directly associated with a particular geographic area and subsidiary. Geographic information for each of the years in the three-year period ended November 25, 1994 is presented on the following page. 93 ADOBE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (CONTINUED) NOTE 15. INDUSTRY SEGMENT REPORTING AND FOREIGN OPERATIONS (CONTINUED)
YEARS ENDED -------------------------------------- November 25 November 26 November 27 1994 1993 1992 ------------ ---------- ------------ Revenue: The Americas $ 430,770 $ 386,156 $ 350,486 Europe 108,903 107,582 92,147 Pacific Rim 72,036 51,495 30,557 Eliminations (13,937) (24,996) (33,127) ------------ ---------- ------------ $ 597,772 $ 520,237 $ 440,063 ------------ ---------- ------------ ------------ ---------- ------------ Operating income: The Americas $ (1,847) $ 64,719 $ 70,345 Europe 53 22,361 16,539 Pacific Rim 32,745 21,645 11,010 Eliminations 34 (16,494) (23,428) ------------ ---------- ------------ $ 30,985 $ 92,231 $ 74,466 ------------ ---------- ------------ ------------ ---------- ------------ Identifiable assets: The Americas $ 591,625 $ 608,636 $ 417,800 Europe 53,944 46,205 51,885 Pacific Rim 18,633 9,885 8,067 Eliminations (38,699) (134,886) (40,129) ------------ ---------- ------------ $ 625,503 $ 529,840 $ 437,623 ------------ ---------- ------------ ------------ ---------- ------------
94 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Shareholders Adobe Systems Incorporated We have audited the balance sheet of Aldus Corporation as of December 31, 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1993 (not presented separately herein). These financial statements are the responsibility of Aldus' management. Our responsibility is to express an opinion on these financial statements 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 financial statments referred to above present fairly, in all material respects, the consolidated financial position of Aldus Corporation at December 31, 1993, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Ernst & Young LLP Seattle, Washington January 28, 1994 95 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: Sequentially Schedule Numbered Number Financial Statement Schedule Description Page - - ------------- -------------------------------------------- ------------ Schedule II Valuation and Qualifying Accounts 97 96 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 Deductions of Period ---------- ---------- ---------- ---------- ------------ Allowance for doubtful accounts: Year Ended: November 25, 1994 $ 2,321 $ 1,518 $ -- $ 586 $ 3,253 November 26, 1993 1,916 1,842 -- 1,437 2,321 November 27, 1992 1,963 862 -- 909 1,916
Deductions related to the allowance for doubtful accounts, represent amounts written off against the allowance. SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT. 97 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: Sequentially Exhibit Numbered Number Exhibit Description Page - - ----------- -------------------------------------------------- ------------ 3.2.6 Restated Bylaws 99 10.32 Sublease of the Land and Lease of the Improvements 126 By and Between Sumitomo Bank Leasing and Finance Inc. and Adobe Systems Incorporated 11 Computation of Earnings per Common Share 193 21 Subsidiaries of the Registrant 194 23 Consent of Independent Auditors 195 23.1 Consent of Ernst & Young LLP, Independent Auditors 196 27 Financial Data Schedule 197 98 EX-3.2 2 EXHIBIT 3.2.6 Ex-3.2.6 ADOBE SYSTEMS INCORPORATED EXHIBIT 3.2.6 RESTATED BYLAWS 99 RESTATED BY-LAWS OF ADOBE SYSTEMS INCORPORATED 100 INDEX SECTION PAGE ARTICLE I OFFICES 1.1 Principal Executive Office........................................ 1 1.2 Other Offices..................................................... 1 ARTICLE II MEETING OF SHAREHOLDERS 2.1 Place of Meetings................................................ 1 2.2 Annual Meetings.................................................. 1 2.3 Special Meetings................................................. 2 2.4 Notice of Meetings or Reports.................................... 2 2.5 Adjourned Meetings and Notice Thereof............................ 3 2.6 Voting........................................................... 3 2.7 Quorum........................................................... 3 2.8 Consent of Absentees............................................. 4 2.9 Action Without Meeting........................................... 4 2.10 Proxies.......................................................... 5 2.11 Regulation of Conduct of Shareholder Meetings.................... 5 2.12 Advance Notice of Shareholder Proposals and Directors Nominations...................................................... 6 ARTICLE III DIRECTORS 3.1 Powers........................................................... 7 3.2 Number of Directors.............................................. 7 3.3 Election, Term of Office and Vacancies........................... 7 3.4 Resignation...................................................... 8 3.5 Removal.......................................................... 8 101 3.6 Organization Meeting............................................. 8 3.7 Other Regular Meetings........................................... 9 3.8 Called Meetings.................................................. 9 3.9 Place of Meetings................................................ 9 3.10 Telephonic Meetings.............................................. 9 3.11 Notice of Special Meetings....................................... 9 3.12 Waiver of Notice................................................. 10 3.13 Action Without Meeting........................................... 10 3.14 Quorum........................................................... 10 3.15 Adjournment...................................................... 10 3.16 Inspection Rights................................................ 11 3.17 Fees and Compensation............................................ 11 ARTICLE IV EXECUTIVE COMMITTEE AND OTHER COMMITTEES 4.1 Executive Committee.............................................. 11 4.2 Other Committees................................................. 11 4.3 Minutes and Reports.............................................. 12 4.4 Meetings......................................................... 12 4.5 Term of Office of Committee Members.............................. 12 ARTICLE V OFFICERS 5.1 Officers......................................................... 12 5.2 Election......................................................... 13 5.3 Subordinate Officers, etc........................................ 13 5.4 Removal and Resignation.......................................... 13 5.5 Vacancies........................................................ 13 5.6 Chairman of the Board............................................ 13 5.7 President........................................................ 14 5.8 Vice President................................................... 14 5.9 Secretary........................................................ 14 102 5.10 Treasurer and Chief Financial Officer............................ 15 5.11 Assistant Secretary.............................................. 15 5.12 Compensation..................................................... 15 ARTICLE VI MISCELLANEOUS 6.1 Record Date...................................................... 15 6.2 Inspection of Corporate Records.................................. 16 6.3 Execution of Corporate Instruments............................... 16 6.4 Ratification by Shareholders..................................... 17 6.5 Annual Report.................................................... 17 6.6 Representation of Shares of Other Corporations................... 17 6.7 Inspection of By-Laws............................................ 18 ARTICLE VII SHARES OF STOCK 7.1 Form of Certificates............................................. 18 7.2 Transfer of Shares............................................... 18 7.3 Lost Certificates................................................ 18 7.4 Employee Stock Purchase Plan..................................... 19 ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS 8.1 Indemnification by Corporation................................... 19 8.2 Advancing Expenses............................................... 19 8.3 Non-Exclusivity of Rights........................................ 19 8.4 Indemnification Contracts........................................ 20 8.5 Insurance........................................................ 20 8.6 Effect of Amendment.............................................. 20 103 ARTICLE IX AMENDMENTS 9.1 Power of Shareholders............................................ 20 9.2 Power of Directors............................................... 20 104 BY-LAWS OF ADOBE SYSTEMS INCORPORATED ARTICLE 1 OFFICES SECTION 1.1 PRINCIPAL EXECUTIVE OFFICE. The principal executive office for the transaction of business of the corporation is hereby fixed and located at 1585 Charleston Road, Mountain View, County of Santa Clara, State of California. The Board of Directors is hereby granted full power and authority to change said principal office from one location to another. SECTION 1.2 OTHER OFFICES. Branch or subordinate offices may at any time be established by the Board of Directors at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 2.1 PLACE OF MEETINGS. All meetings of shareholders shall be held either at the principal executive office or at any other place within or without the State of California which may be designated either by the Board of Directors or by the written consent of a majority of the shareholders entitled to vote thereat as determined pursuant to Section 6.1 of these By-Laws given either before or after the meeting. SECTION 2.2 ANNUAL MEETINGS. The annual meetings of shareholders shall be held on such day and at such hour as may be fixed by the Board of Directors. At such meeting, Directors shall be elected, and any other proper business may be transacted. 105 SECTION 2.3 SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by the Board of Directors, the Chairman of the Board, the President, or by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting. Notice of such special meeting shall be given in the same manner as for the annual meeting of shareholders. Notices of any special meetings shall specify in addition to the place, date and hour of such meeting, the general nature of the business to be transacted thereat. SECTION 2.4 NOTICE OF MEETINGS OR REPORTS. Written notice of each meeting of shareholders shall be given not less than ten (10) days nor more than sixty (60) days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall be given either personally or by mail or other means of written communication, addressed or delivered to each shareholder entitled to vote at such meeting at the address of such shareholder appearing on the books of the corporation or given by him to the corporation for the purpose of such notice. If no such address appears or is given, notice shall be given either personally or by mail or other means of written communication addressed to the shareholder at the place where the principal executive office of the corporation is located, or by publication at least once in a newspaper of general circulation in the county in which said office is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. The same procedure for the giving of notice shall apply to the giving of any report to shareholders. All such notices shall state the place, the date and the hour of such meeting, and shall state such matters, if any, as may be expressly required by the California Corporations Code. Upon request by any person or persons entitled to call a special meeting, the Chairman of the Board, President, Vice President or Secretary shall within twenty (20) days after receipt of the request cause notice to be given to the shareholders entitled to vote that a special meeting will be held at a time requested by the person or persons calling the meeting, but not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. All other notices shall be sent by the Secretary or an Assistant Secretary, or if there be no such officer, or in the case of his neglect or refusal to act, by any other officer, or by persons calling the meeting. 106 SECTION 2.5 ADJOURNED MEETINGS AND NOTICE THEREOF. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, represented either in person or by proxy, but in the absence of a quorum, no other business may be transacted at such meeting, except as provided in Section 2.7 of these By-Laws. When a shareholders' meeting is adjourned to another time or place, notice of the adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken; except that if the adjournment is for more than forty-five (45) days or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each shareholder of record entitled to vote thereat. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. SECTION 2.6 VOTING. Except as provided below or as otherwise provided by the Articles of Incorporation or By-Laws, a shareholder shall be entitled to one vote for each share held of record on the record date fixed for the determination of the shareholders entitled to vote at a meeting or, if no such date is fixed, the date determined in accordance with law. Upon the demand of any shareholder made at a meeting before the voting begins, the election of directors shall be by ballot. No shareholder will be permitted to cumulate votes at any election of directors. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it shall be conclusively presumed that the shareholder's approving vote is with respect to all shares said shareholder is entitled to vote. SECTION 2.7 QUORUM. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. If a quorum is present, the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless otherwise required by the Articles of Incorporation. 107 The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. SECTION 2.8 CONSENT OF ABSENTEES. The transactions of any meeting of shareholders, if not duly called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the shareholders entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when a person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened; provided, that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by law or these By- Laws to be included in the notice but not so included if such objection is expressly made at the meeting. SECTION 2.9 ACTION WITHOUT MEETING. Any action which may be taken at any meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the actions so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, that except to fill a vacancy as provided in Section 3.6 of these By-Laws, Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of Directors. Unless the consents of all shareholders entitled to vote have been solicited in writing, notice of the following actions approved by shareholders without a meeting by less than unanimous written consent shall be given to those shareholders entitled to vote who have not consented in writing at least ten (10) days before the consummation of the action authorized by such approval: 108 1. Approval of a contract or other transaction between the corporation and one or more of its Directors, or between the corporation and any corporation, firm or association in which one or more of its Directors has a material financial interest. 2. Approval of any indemnification to be made by the corporation of a person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that such person was or is an agent of the corporation. 3. Approval of the principal terms of a reorganization. 4. Approval of a plan of distribution of the shares, obligations or securities of any other corporation, or assets other than money, which is not in accordance with the liquidation rights of the preferred shares as specified in the Articles of Incorporation or a Certificate of Determination. Unless the consents of all shareholders entitled to vote have been solicited in writing, prompt notice of the taking of any corporate action not listed above which is approved by shareholders without a meeting by less than unanimous written consent, shall be given to those shareholders entitled to vote who have not consented in writing. Such notice shall be given as provided in Section 2.4 of these By-Laws. SECTION 2.10 PROXIES. Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. SECTION 2.11 REGULATION OF CONDUCT OF SHAREHOLDERS MEETINGS At every meeting of the shareholders, the Chairman, if there is such an officer, or if not, the President of the Corporation, or in his absence any Vice President designated by the President or the Secretary, or in the absence of the President or any Vice President or the Secretary a Chairman chosen by the majority of the voting shares represented in person or by proxy, shall act as Chairman. The Secretary of the Corporation or a person designated by the Chairman shall act as Secretary of the meeting. Unless otherwise approved by the Chairman, attendance at the Shareholders' Meeting is restricted to shareholders of record, persons authorized in accordance with Article II of these By-Laws to act by proxy, and officers of the corporation. 109 The Chairman shall call the meeting to order, establish the agenda and conduct the business of the meeting in accordance therewith or, at the Chairman's discretion, it may be conducted otherwise in accordance with the wishes of the shareholders in attendance. The Chairman shall also conduct the meeting in an orderly manner, rule on the precedence of, and procedure on, motions and other procedural matters, and exercise discretion with respect to such procedural matters with fairness and good faith toward all those entitled to take part. The Chairman may impose reasonable limits on the amount of time taken up at the meeting on discussion in general or on remarks by any one shareholder. Should any person in attendance become unruly or obstruct the meeting proceedings, the Chairman shall have the power to have such person removed from participation. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 2.11. The Chairman of a meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 2.11, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. SECTION 2.12 ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND DIRECTORS NOMINATIONS At an annual or special meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a 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) properly brought before the meeting by or at the direction of the Board of Directors, (c) properly brought before an annual meeting by a shareholder, or (d) properly brought before a special meeting by a shareholder, but if, and only if, the notice of a special meeting provides for business to be brought before the meeting by shareholders. For business to be properly brought before a meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder proposal to be presented at an annual meeting shall be received at the Corporation's principal executive offices not less than 120 calendar days in advance of the date that the Corporation's (or the Corporation's predecessor's) proxy statement was released to shareholders in connection with the previous year's annual meeting of shareholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar 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 shareholder to be timely must be received not later than the close of 110 business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual or special meeting (a) a brief description of the business desired to be brought before the annual or special meeting and the reasons for conducting such business at the annual or special meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. ARTICLE III DIRECTORS SECTION 3.1 POWERS. Subject to the limitations stated in the Articles of Incorporation, these By-Laws, and the California Corporations Code as to actions which shall be approved by the shareholders or by the affirmative vote of a majority of the outstanding shares entitled to vote, and subject to the duties of Directors as prescribed by the California Corporations Code, all corporate powers shall be exercised by, or under the direction of, and the business and affairs of the corporation shall be managed by, the Board of Directors. SECTION 3.2 NUMBER OF DIRECTORS. The authorized number of Directors of the corporation shall not be less than four (4) nor more than eight (8) and the exact number of Directors authorized shall be eight (8). The exact number of Directors may be fixed within the limits specified in this Section 3.2 by a By-Law duly adopted by the shareholders or by resolution of the Board of Directors. The minimum or maximum number of Directors provided in this Section 3.2 may be changed or a definite number fixed without provision for an indefinite number, by a By-Law duly adopted by the affirmative vote of a majority of the outstanding shares entitled to vote. SECTION 3.3 ELECTION, TERM OF OFFICE AND VACANCIES. The directors shall be divided into two classes, designated Class I and Class II, as nearly equal in number as reasonably possible, with any overage allocated in the discretion of the Board of Directors. The initial term of office of the Class I directors will expire at the 1992 annual meeting of shareholders and the initial term of office of the Class II directors will expire at the 1993 annual 111 meeting of shareholders. At the 1992 annual meeting of shareholders and at each annual meeting of shareholders thereafter, directors shall be elected, to succeed directors of the class whose term expires, for a term of office to expire at the second succeeding annual meeting after their election. All directors, including directors elected to fill vacancies, shall hold office until the expiration of the term for which elected and until their successors are elected and qualified, except in the case of death, resignation or removal of any director. The Board of Directors may declare vacant the office of a director who has been declared to be of unsound mind by court order or convicted of a felony. Vacancies on the Board of Directors not caused by removal may be filled by a majority of the directors then in office, regardless of whether they constitute a quorum, or by the sole remaining director. The shareholders may elect a director at any time to fill any vacancy not filled, or which cannot be filled, by the Board of Directors. SECTION 3.4 RESIGNATION. Any Director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. SECTION 3.5 REMOVAL. Except as described below, any or all of the directors may be removed without cause if such removal is approved by the affirmative vote of the majority of the outstanding shares entitled to vote. No director may be removed if the votes cast against removal, or not consenting in writing to removal, would be sufficient to elect a director if voted cumulatively at an election at which (i) the same total number of votes were cast (or, if removal is sought through action by written consent, all shares entitled to vote were voted) and (ii) either the number of directors elected at the most recent annual meeting of shareholders, or if greater, the number of directors for whom removal is being sought, were then being elected. SECTION 3.6 ORGANIZATION MEETING. Immediately after each annual meeting of shareholders, the Board of Directors shall hold a regular meeting for the purpose of organization, the election of officers and the transaction of other business. No notice of such meeting need be given. 112 SECTION 3.7 OTHER REGULAR MEETINGS. The Board of Directors may provide by resolution the time and place for the holding of regular meetings of the Board; provided, however, that if the date so designated falls upon a legal holiday, then the meeting shall be held at the same time and place on the next succeeding day which is not a legal holiday. No notice of such regular meetings of the Board need be given. SECTION 3.8 CALLING MEETINGS. Meetings of the Board of Directors for any purpose or purposes shall be held whenever called by the Chairman of the Board, the President or the Secretary or any two Directors of the corporation. SECTION 3.9 PLACE OF MEETINGS. Meetings of the Board of Directors shall be held at any place within or without the State of California which may be designated in the notice of the meeting, or, if not stated in the notice or there is no notice, designated by resolution of the Board. In the absence of such designation, meetings of the Board of Directors shall be held at the principal executive office of the corporation. SECTION 3.10 TELEPHONIC MEETINGS. Members of the Board may participate in a regular or special meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting pursuant to this Section 3.10 constitutes presence in person at such meeting. SECTION 3.11 NOTICE OF SPECIAL MEETINGS. Written notice of the time and place of special meetings of the Board of Directors shall be delivered personally to each Director, or sent to each Director by mail, telephone, telegraph or electronic transmission. In case such notice is sent by mail, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally, or by telephone, telegraph or electronic transmission, it shall be so delivered at least twenty-four (24) hours prior to the time of the holding of the meeting. Such notice may be given by the Secretary of the corporation or by the persons who called said meeting. Such notice need not specify the purpose of the meeting, and 113 notice shall not be necessary if appropriate waivers, consents and/or approvals are filed in accordance with Section 3.12 of these By-Laws. SECTION 3.12 WAIVER OF NOTICE. Notice of a meeting need not be given to any Director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such Director. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the Directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. SECTION 3.13 ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such Directors. SECTION 3.14 QUORUM. A majority of the authorized number of Directors shall constitute a quorum for the transaction of business. Every act or decision done or made by a majority of the Directors present at a meeting duly held at which a quorum is present shall be the act of the Board of Directors, unless the Articles of Incorporation, or the California Corporations Code, specifically requires a greater number. In the absence of a quorum at any meeting of the Board of Directors, a majority of the Directors present may adjourn the meeting as provided in Section 3.15 of these By-Laws. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of enough Directors to leave less than a quorum, if any action taken is approved by at least a majority of the required quorum for such meeting. SECTION 3.15 ADJOURNMENT. Any meeting of the Board of Directors, whether or not a quorum is present, may be adjourned to another time and place by the vote of a majority of 114 the Directors present. Notice of the time and place of the adjourned meeting need not be given to absent Directors if said time and place are fixed at the meeting adjourned. SECTION 3.16 INSPECTION RIGHTS. Every Director shall have the absolute right at any time to inspect, copy and make extra copies of, in person or by agent or attorney, all books, records and documents of every kind and to inspect the physical properties of the corporation. SECTION 3.17 FEES AND COMPENSATION. Directors shall not receive any stated salary for their services as Directors; however, by resolution of the Board, non-employee Directors may receive a fixed annual retainer for their services as Directors, as well as a fixed fee, with or without expenses of attendance, for attendance at each Board meeting, and each Board Committee meeting. 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. ARTICLE IV EXECUTIVE COMMITTEE AND OTHER COMMITTEES SECTION 4.1 EXECUTIVE COMMITTEE. The Board of Directors may, by resolution adopted by a majority of the authorized number of Directors, appoint an executive committee, consisting of two or more Directors. The Board may designate one or more Directors as an alternate member of such committee, who may replace any absent member of any meeting of the committee. The executive committee, subject to any limitations imposed by the California Corporations Code, or by resolution adopted by the affirmative vote of a majority of the authorized number of Directors, or imposed by the Articles of Incorporation or by these By-Laws, shall have and may exercise all of the powers of the Board of Directors. SECTION 4.2 OTHER COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the authorized number of Directors, designate such other committees, each consisting of two or more Directors, as it may from time to time deem advisable to perform such general or special duties as may from time to time be delegated 115 to any such committee by the Board of Directors, subject to the limitations contained in the California Corporations Code, or imposed by the Articles of Incorporation or by these By-Laws. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. SECTION 4.3 MINUTES AND REPORTS. Each committee shall keep regular minutes of its proceedings, which shall be filed with the Secretary. All action by any committee shall be reported to the Board of Directors at the next meeting thereof, and, insofar as rights of third parties shall not be affected thereby, shall be subject to revision and alteration by the Board of Directors. SECTION 4.4 MEETINGS. Except as otherwise provided in these By-Laws or by resolution of the Board of Directors, each committee shall adopt its own rules governing the time and place of holding and the method of calling its meetings and the conduct of its proceedings and shall meet as provided by such rules, and it shall also meet at the call of any member of the committee. Unless otherwise provided by such rules or by resolution of the Board of Directors, committee meetings shall be governed by Sections 3.11, 3.12 and 3.13 of these By-Laws. SECTION 4.5 TERM OF OFFICE OF COMMITTEE MEMBERS. The term of office of any committee member shall be as provided in the resolution of the Board of Directors designating him but shall not exceed his term as a Director. Any member of a committee may be removed at any time by resolution adopted by Directors holding a majority of the directorships, either present at a meeting of the Board or by written approval thereof. ARTICLE V OFFICERS SECTION 5.1 OFFICERS. The officers of the corporation shall be a President, a Vice President, a Secretary, and a Treasurer, who shall be the Chief Financial Officer of the corporation. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more additional Vice Presidents, one or more Assistant Treasurers, and such other officers as may be appointed in 116 accordance with the provisions of Section 5.3. One person may hold two or more offices. SECTION 5.2 ELECTION. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 and 5.5, shall be chosen annually by the Board of Directors and each shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. SECTION 5.3 SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these By-Laws or as the Board of Directors may from time to time determine. SECTION 5.4 REMOVAL AND RESIGNATION. Any officer may be removed, either with or without cause, by a majority of the Directors at the time in office, at any regular or special meeting of the Board, or, except in case of an officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 5.5 VACANCIES. A vacancy in the office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these By-Laws for regular appointments to such office. SECTION 5.6 CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors as prescribed by these By-Laws. 117 SECTION 5.7 PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President 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 shall preside at all meetings of the shareholders. He shall be ex officio a member of all the standing committees, including the executive committee, if any, and shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have other powers and duties as may be prescribed by the Board of Directors or by these By-Laws. SECTION 5.8 VICE PRESIDENT. 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 from time to time may be prescribed for them respectively by the Board of Directors or these By-Laws. SECTION 5.9 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 shareholders. 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 By-Laws or the California Corporations Code. 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 shareholders, giving the name and addresses of all shareholders 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 shareholders and of the Board of Directors required by these By-Laws 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 or these By-Laws. 118 SECTION 5.10 TREASURER AND CHIEF FINANCIAL OFFICER. The Treasurer and 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 Treasurer and Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. He shall disburse all funds of the corporation as may be ordered by the Board of Directors, shall render to the President and Directors, whenever they request it, an account of all of his transactions as Treasurer and Chief Financial Officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these By-Laws. SECTION 5.11 ASSISTANT SECRETARY. The Assistant Secretary shall have all the powers, and perform all the duties of, the Secretary in the absence or inability of the Secretary to act. SECTION 5.12 COMPENSATION. The compensation of the officers shall be fixed from time to time by the Board of Directors, and no officer shall be prevented from receiving such compensation by reason of the fact that he is also a Director of the corporation. ARTICLE VI MISCELLANEOUS SECTION 6.1 RECORD DATE. The Board of Directors may fix, in advance, a time in the future as the record date for the determination of shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action. Shareholders on the record date are entitled to notice and to vote or receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares in the books of the corporation after the record date, except as otherwise provided 119 by law. Said record date shall not be more than sixty (60) or less than ten (10) days prior to the date of any such meeting, nor more than sixty (60) days prior to any other action. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. If no record date is fixed by the Board of Directors, the record date shall be fixed pursuant to the California Corporations Code. SECTION 6.2 INSPECTION OF CORPORATE RECORDS. The accounting books and records, and minutes of proceedings of the shareholders and the Board of Directors and committees of the Board shall be open to inspection upon written demand made upon the corporation by any shareholder or the holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to his interest as a shareholder, or as the holder of such voting trust certificate. The record of shareholders shall also be open to inspection by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. Such inspection may be made in person or by an agent or attorney, and shall include the right to copy and to make extracts. SECTION 6.3 EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the statutory officer or officers, or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the corporation. Unless otherwise specifically determined by the Board of Directors, formal contracts of the corporation, promissory notes, mortgages, evidences of indebtedness, share certificates, conveyances or other instruments in writing, and any assignment or endorsement thereof, executed or entered into between the corporation and any person, shall be signed by the Chairman of the Board, the President or any Vice President and the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer of the corporation. 120 SECTION 6.4 RATIFICATION BY SHAREHOLDERS. The Board of Directors may, subject to applicable notice requirements, in its discretion, submit any contract or act for approval or ratification of the shareholders at any annual meeting of shareholders, or at any special meeting of shareholders called for that purpose; and any contract or act which shall be approved or ratified by the affirmative vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of shareholders, shall be as valid and binding upon the corporation and upon the shareholders thereof as though approved or ratified by each and every shareholder of the corporation, unless a greater vote is required by law for such purpose. SECTION 6.5 ANNUAL REPORT. For so long as the corporation has less than 100 holders of record of its shares, the mandatory requirement of an annual report is hereby expressly waived. The Board of Directors may, in its discretion, cause an annual report to be sent to the shareholders. Such reports shall contain at least a balance sheet as of the close of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, and shall be accompanied by any report thereon of independent accountants, or if there is no such report, the certificate of an unauthorized officer of the corporation that such statements were prepared without audit in the books and records of the corporation. A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement and/or a balance sheet of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more that thirty (30) days prior to the date of the request, and such statement shall be delivered or mailed to the person making the request within thirty (30) days thereafter. Such statements shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificates of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. SECTION 6.6 REPRESENTATIONS OF SHARES OF OTHER CORPORATIONS. The President and Vice President of this corporation are authorized to vote, represent and exercise on behalf of the corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation 121 and any other corporation or corporations may be exercised either by such officers in person or by any person authorized so to do by proxy or power of attorney and duly executed by said officers. SECTION 6.7 INSPECTION OF BY-LAWS. The corporation shall keep in its principal executive office in this State the original or a copy of the By-Laws as amended or otherwise altered to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. ARTICLE VII SHARES OF STOCK SECTION 7.1 FORM OF CERTIFICATES. Certificates for shares of stock of the corporation shall be in such form and design as the Board of Directors shall determine and shall be signed in the name of the corporation by the Chairman of the Board, or the President or Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or any Assistant Secretary. Each certificate shall state the certificate number, the date of issuance, the number, class or series and the name of the record holder of the shares represented thereby, the name of the corporation, and, if the shares of the corporation are classified or if any class of shares has two or more series, there shall appear the statement required by the California Corporations Code. SECTION 7.2 TRANSFER OF SHARES. Shares of stock may be transferred in any manner permitted or provided by law. Before any transfer of stock is entered upon the books of the corporation, or any new certificate issued therefor, the older certificate, properly endorsed, shall be surrendered and cancelled, except when a certificate has been lost, stolen or destroyed. SECTION 7.3 LOST CERTIFICATES. The Board of Directors may order a new certificate for shares of stock to be issued in the place of any certificate alleged to have been lost, stolen or destroyed, but in every such case, the owner or the legal representative of the owner of the lost, stolen or destroyed certificates may be required to give the corporation a bond (or other adequate security) in such form and amount as the Board may deem sufficient to indemnify it against any claim that may be made against the corporation (including any expense or liability) on account of the 122 alleged loss, theft or destruction of any such certificate or issuance of such new certificate. SECTION 7.4 EMPLOYEE STOCK PURCHASE PLAN. The Board of Directors shall have the authority, in its discretion, to adopt and carry out an employee stock purchase plan or agreement, containing such terms and conditions as the Board may prescribe, for the issue and sale of unissued shares of the corporation, or of its issued shares acquired or to be acquired, to the employees of the corporation or to the employees of its subsidiary corporations or to a trustee on their behalf, and for the payment of such shares in installments or at one time, and for such consideration as may be fixed by the Board, and may provide for aiding any such employees in paying for such shares by compensation for services rendered, promissory notes or otherwise. ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 8.1 INDEMNIFICATION BY CORPORATION. The corporation shall indemnify any Director, officer, employee or other agent of the corporation against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in a proceeding (including a derivative action on behalf of the corporation) to which that person was or is threatened to be made a party by reason of the fact that he was or is an agent of the corporation, to the maximum extent permissible under the California Corporations Code. SECTION 8.2 ADVANCING EXPENSES. The corporation shall advance to each Director or officer the expenses incurred in defending any proceeding referred to in SECTION 8.1 of these By-Laws prior to the final disposition of such proceeding as provided in the California Corporations Code. SECTION 8.3 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person in SECTIONS 8.1 and 8.2 shall not be exclusive of any other right which such persons may have or hereafter acquire under any statute, provision of the Articles of Incorporation, By-Law, agreement, vote of shareholders or disinterested Directors or otherwise. 123 SECTION 8.4 INDEMNIFICATION CONTRACTS. The Board of Directors is authorized to enter into a contract with any Director, officer, employee or agent of the corporation, or any person serving at the request of the corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article VIII. SECTION 8.5 INSURANCE. The corporation shall maintain insurance to the extent reasonably available, at its expense, to protect itself and any such Director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the California Corporations Code. SECTION 8.6 EFFECT OF AMENDMENT. Any amendment, repeal or modification of any provision of this Article VIII by the shareholders and the Directors of the corporation shall not adversely affect any right or protection of a Director or officer of the corporation existing at the time of such amendment, repeal or modification. ARTICLE IX AMENDMENTS SECTION 9.1 POWER OF SHAREHOLDERS. New By-Laws may be adopted or these By-Laws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote or by the written consent thereof, except as otherwise provided by law or by the Articles of Incorporation. SECTION 9.2 POWER OF DIRECTORS. Subject to the right of shareholders as provided in Section 9.1 of these By-Laws, By-Laws other than a By-Law or amendment thereof specifying or changing the authorized number of Directors, or the minimum or maximum number of a variable Board of Directors, or changing from a fixed to a variable 124 Board of Directors or vice versa, may be adopted, amended or repealed by the approval of the Board of Directors. 125 EX-10.32 3 EXHIBIT 10.32 ADOBE SYSTEMS INCORPORATED EXHIBIT 10.32 SUBLEASE OF THE LAND AND LEASE OF THE IMPROVEMENTS BY AND BETWEEN SUMITOMO BANK LEASING AND FINANCE INC. AND ADOBE SYSTEMS INCORPORATED 126 SUBLEASE OF THE LAND AND LEASE OF THE IMPROVEMENTS By and Between SUMITOMO BANK LEASING AND FINANCE, INC. a Delaware corporation as Landlord and ADOBE SYSTEMS INCORPORATED a California corporation as Tenant for Premises located in San Jose, California THIS LEASE IS NOT INTENDED TO CONSTITUTE A TRUE LEASE FOR INCOME TAX PURPOSES. SEE SECTION 22.2 127 TABLE OF CONTENTS Page ARTICLE I BASIC LEASE PROVISIONS 1.1 Date of Lease.......................................... 1 1.2 Landlord............................................... 1 1.3 Tenant................................................. 1 1.4 Land................................................... 1 1.5 Ground Lessor.......................................... 1 1.6 Premises............................................... 2 1.7 Term................................................... 2 1.8 Interim Period......................................... 2 1.9 Rent Commencement Date................................. 2 1.10 Base Rent.............................................. 3 1.11 Ground Rent............................................ 3 1.12 Addresses for Notices.................................. 3 1.13 Wire Transfer Instructions............................. 3 ARTICLE 2 DEFINITIONS 2.1 Additional Rent........................................ 4 2.2 Advance................................................ 4 2.3 After Tax Basis........................................ 4 2.4 Base Rent.............................................. 5 2.5 Building............................................... 5 2.6 Calculation Period..................................... 5 2.7 Capitalized Amount..................................... 5 2.8 Capitalized Funding Costs.............................. 5 2.9 City................................................... 6 2.10 Collateral............................................. 6 2.11 Commitment Amount...................................... 6 2.12 Commitment Component................................... 6 2.13 Construction Management Agreement...................... 6 2.14 Contractor............................................. 6 2.15 Default Rate........................................... 6 2.16 Entity................................................. 6 2.17 Event of Default....................................... 7 2.18 Guaranteed Residual Value.............................. 7 2.19 Improvements........................................... 7 2.20 Improvements Commencement Date......................... 7 2.21 Initial Advance........................................ 7 2.22 Interim Period......................................... 7 2.23 Land................................................... 7 2.24 Landlord Affiliate..................................... 7 2.25 Lease Inception Date................................... 7 2.26 Lease Investment Balance............................... 7 2.27 Legal Requirements..................................... 8 2.28 LIBOR Rate............................................. 8 2.29 Notice................................................. 8 2.30 Official Records....................................... 9 2.31 Permitted Title Exceptions............................. 9 128 2.32 Pledge Agreement....................................... 9 2.33 Premises............................................... 9 2.34 Real Estate Taxes...................................... 9 2.35 Rent Commencement Date................................. 9 2.36 Rent Payment Date...................................... 9 2.37 Required Permits....................................... 9 2.38 SBLF Deed of Trust..................................... 9 2.39 SBNYTC................................................. 9 2.40 Taking................................................. 9 2.41 Term................................................... 10 2.42 Terminology............................................ 10 ARTICLE 3 DEMISE 3.1 Premises............................................... 10 ARTICLE 4 TERM 4.1 Term................................................... 10 4.2 Option to Extend....................................... 10 4.3 Holding Over........................................... 10 ARTICLE 5 CONSTRUCTION OF IMPROVEMENTS 5.1 Tenant's Rights to Construct Improvements.............. 11 5.2 Title to and Nature of Improvements.................... 11 ARTICLE 6 FUNDING 6.1 Request for Construction Funding: Landlord's Obligation to Fund....................... 11 6.2 Exhibit Reflecting Rent Commencement Date.............. 11 ARTICLE 7 RENT 7.1 Base Rent.............................................. 11 7.2 Proration.............................................. 12 7.3 No Abatement of Rent................................... 12 7.4 Delinquent Rent........................................ 12 7.5 Additional Rent........................................ 12 ARTICLE 8 TAXES 8.1 Real Estate Taxes....................................... 12 8.2 Personal Property Taxes................................. 13 8.3 Right to Contest........................................ 13 8.4 Additional Charges...................................... 14 ARTICLE 9 INSURANCE 9.1 Liability Insurance..................................... 15 9.2 Builders' Risk Insurance................................ 15 9.3 All-Risk Insurance...................................... 15 9.4 General Requirements.................................... 16 129 9.5 Waiver of Subrogation.................................. 16 9.6 Indemnity.............................................. 17 ARTICLE 10 USE 10.1 Use.................................................... 17 10.2 Contest of Legal Requirements.......................... 19 ARTICLE 11 UTILITIES AND SERVICES 11.1 Services to the Premises............................... 19 ARTICLE 12 MAINTENANCE AND REPAIRS; SURRENDER OF THE PREMISES 12.1 Tenant Obligations..................................... 19 12.2 Surrender of the Premises.............................. 20 ARTICLE 13 LIENS 13.1 ....................................................... 20 ARTICLE 14 ASSIGNMENT BY LANDLORD 14.1 Further Mortgages or Encumbrances by Landlord.......... 20 14.2 Landlord's Right to Sell............................... 20 14.3 Transfer of Funds and Property......................... 21 ARTICLE 15 ASSIGNMENT AND SUBLEASING 15.1 Right to Assign........................................ 21 15.2 Right to Sublet........................................ 22 15.3 Mortgage by Tenant..................................... 22 ARTICLE 16 EMINENT DOMAIN 16.1 Total or Substantial Taking............................ 22 16.2 Partial Taking......................................... 22 16.3 Temporary Taking....................................... 23 16.4 Damages................................................ 23 16.5 Notice and Execution................................... 23 16.6 Terms of Ground Lease.................................. 23 ARTICLE 17 DAMAGE OR DESTRUCTION 17.1 Casualty............................................... 24 17.2 Termination of Lease................................... 24 17.3 Insurance Proceeds..................................... 24 17.4 Terms of Ground Lease.................................. 26 ARTICLE 18 DEFAULT 18.1 Default................................................ 26 18.2 Contest by Tenant...................................... 28 18.3 Remedies............................................... 28 130 18.4 No Waiver.............................................. 29 18.5 Effect of Assignment................................... 29 18.6 Landlord Cure Right.................................... 30 18.7 Landlord's Default..................................... 30 ARTICLE 19 QUIET ENJOYMENT 19.1 Quiet Enjoyment........................................ 31 ARTICLE 20 TENANT'S OPTION TO PURCHASE OR TERMINATE 20.1 Option To Purchase Premises............................ 31 20.2 Termination Option..................................... 33 ARTICLE 21 COVENANTS OF LANDLORD 21.1 Title.................................................. 34 21.2 Land Use............................................... 34 21.3 Transfer of Property Interests......................... 35 ARTICLE 22 MISCELLANEOUS 22.1 Relationship.......................................... 35 22.2 Form of Transaction: Certain Tax Matters.............. 35 22.3 Notices............................................... 36 22.4 Severability of Provisions............................ 36 22.5 Entire Agreement: Amendment........................... 36 22.6 Memorandum of Sublease of the Land and Lease of the Improvements.......................................... 37 22.7 Successors and Assigns................................ 37 22.8 Commissions........................................... 37 22.9 Attorneys' Fees....................................... 37 22.10 Governing Law......................................... 37 22.11 Counterparts.......................................... 37 22.12 Time Is of the Essence................................ 38 22.13 No Third Party Beneficiaries.......................... 38 22.14 Limitations on Recourse............................... 38 22.15 Estoppel Certificates................................. 38 22.16 Collateral............................................ 38 22.17 As-Is Lease........................................... 38 22.18 Net Lease............................................. 38 22.19 Representations and Warranties........................ 39 22.20 Financial Reporting................................... 39 22.21 Nondiscrimination..................................... 39 ARTICLE 23 INDEMNIFICATION 23.1 Tax Indemnity......................................... 40 23.2 Environmental Indemnity............................... 41 23.3 Construction Indemnification.......................... 41 23.4 General Indemnity..................................... 42 131 SUBLEASE OF THE LAND AND LEASE OF THE IMPROVEMENTS THIS SUBLEASE OF THE LAND AND LEASE OF THE IMPROVEMENTS ("Lease") by and between SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation ("Landlord"), and ADOBE SYSTEMS INCORPORATED, a California corporation ("Tenant"), is entered into as of the date set forth in Article 1 and shall be effective and binding upon the parties hereto as of such date. Capitalized terms used in this Lease shall have the definitions set forth in Article 2 or in the text of this Lease. In consideration of the Base Rent reserved herein, and the terms, covenants and conditions set forth below, Landlord and Tenant hereby agree as follows: ARTICLE 1 BASIC LEASE PROVISIONS 1.1 Date of Lease: October 12, 1994. 1.2 Landlord: Sumitomo Bank Leasing and Finance, Inc., a Delaware corporation 1.3 Tenant: Adobe Systems Incorporated, a California corporation. 1.4 Land: A leasehold interest in that certain tract of land located in the City of San Jose, Santa Clara County, California, as more particularly described on Exhibit A attached hereto, arising under that certain Ground Lease of even date herewith between the Redevelopment Agency of the City of San Jose, as Ground Lessor, and Landlord, as Ground Lessee (the "Ground Lease"), together with all easements, rights of way, appurtenances and other rights and benefits belonging or pertaining to such land. Landlord makes no representations as to the accuracy of the description of the Land or the leasehold interest. 1.5 Ground Lessor: Redevelopment Agency of the City of San Jose, 50 West San Fernando Street, San Jose, California 95113. 1.6 Premises: The Land and the Improvements which Tenant may construct, as agent for Landlord, on the Land pursuant to the terms of that certain Construction Management Agreement of even date herewith between Landlord and Tenant. 1.7 Term: The initial term of this Lease ("Initial Term") shall commence (i) with respect to the Land on the Date of Lease set forth in Section 1.1 above, and (ii) with respect to the Improvements, on the Improvements 132 Commencement Date; and the Term of this Lease shall expire on October 15, 2001. The term of this Lease may be extended for one additional five (5) year period (the "Extension Term") in accordance with the terms of Section 4.2 below. The Initial Term and (if so extended) the Extension Term shall be referred to herein as the "Term." The Term shall cease upon, and shall not refer to any period of time after, termination of this Lease (whether pursuant to the terms of the Lease, by operation of law, or otherwise). 1.8 Interim Period: Interim Period shall be the period commencing on the Date of Lease and ending on the day before the Improvements Commencement Date as defined in Section 2.20 below. 1.9 Rent Commencement Date: The rent commencement date ("Rent Commencement Date") shall be the fifteenth (15th) day of the second full calendar month which commences immediately following the earlier to occur of the following: (1) Thirty (30) months following the Date of Lease; or (2) The forty-fifth (45th) day following the date upon which all of the following have occurred: (i) the Building and all other Improvements that Tenant intends to cause to be constructed with Advances made by Landlord pursuant to the Construction Management Agreement have been substantially completed; (ii) valid notices of completion have been recorded with respect thereto; and (iii) all necessary governmental approvals (including permanent certificates of occupancy) have been issued as may be necessary to occupy all portions of the Building for the conduct of Tenant's business therein. 1.10 Base Rent: As described in Section 2.4. 1.11 Ground Rent: Any payment made to Ground Lessor under the Ground Lease. 1.12 Addresses for Notices: LANDLORD: 133 TENANT: Sumitomo Bank Leasing and Finance, Inc. One World Trade Center, Suite 8545 New York, NY 10048 Attention: Chief Credit Officer 134 Adobe Systems Incorporated 1625 Charleston Road (zip 94043) Post Office Box 7900 Mountain View, CA 94039-7900 Attention: Director of Real Estate With a copy to: With a copy to: Landels, Ripley & Diamond Hills Plaza 350 Steuart Street San Francisco, CA 94105-1250 Attention: Bruce W. Hyman, Esq. 135 Adobe Systems Incorporated 1625 Charleston Road (zip 94043) Post Office Box 7900 Mountain View, CA 94039-7900 Attention: General Counsel and 136 and Sumitomo Bank of New York Trust Company One World Trade Center, Suite 8505 New York, NY 10048 Attention: Corporate Trust Department 137 Shartsis, Friese & Ginsburg One Maritime Plaza, 18th Floor San Francisco, CA 94111 Attention: David H. Kremer, Esq. 1.13 Wire Transfer Instructions: Morgan Guaranty Trust Company of New York ABA#021000238 For credit to The Sumitomo Bank, LimitedA/C #631-28-256 Further credit to Sumitomo Bank Leasing and Finance, Inc. A/C No.283572 This Article 1 is intended to supplement and/or summarize the provisions set forth in the balance of this Lease. If there is any conflict between any provisions contained in this Article 1 and the balance of this Lease, the balance of this Lease shall control. ARTICLE 2 DEFINITIONS For purposes of this Lease, the following defined terms shall have the meanings set forth in this Article 2. 2.1 Additional Rent. "Additional Rent" shall mean any amounts other than Base Rent payable by Tenant to Landlord or to other Entities on Landlord's behalf as required under this Lease, including, without limitation, interest accrued on past due Base Rent and on other past due Additional Rent amounts owing to Landlord hereunder at the Default Rate (to be compounded annually), costs and expenses to be paid or reimbursed by Tenant hereunder (including any amounts which Tenant owes to Landlord pursuant to the terms of Section 18.6), break-funding costs of Landlord related to the Lease Investment Balance (as defined below) arising out of unscheduled payments or exercise of the Purchase Option pursuant to Section 20.1 below other than on Rent Payment Days, amounts due pursuant to Tenant's indemnity obligations hereunder, Real Estate Taxes, Tenant's obligation to pay condemnation proceeds to Landlord pursuant to Section 16.4, Tenant's obligation to pay insurance proceeds to Landlord pursuant to Section 17.3, and failure of Tenant to pay to Landlord the Lease Investment Balance at the end of the Term or upon an Event of Default, unless Tenant has elected its option to purchase or terminate under Article 20 below and is not in default in its obligations thereunder. 2.2 Advance. "Advance" shall mean any payment by Landlord for (i) any costs relating to construction of the Improvements, whether funded under the Construction Management Agreement or paid directly by Landlord, including, without limitation, transaction costs (including title charges and professional fees and expenses), construction costs, architectural, engineering and other professional fees, arrangement fees, appraisal fees, inspection, testing and permitting fees, fees and costs for review of plans and any changes thereto, travel expense for inspections, insurance and any other soft costs relating to the Improvements; (ii) the items and/or amounts described in Exhibit B; (iii) Real Estate 138 Taxes and any other amounts, if any, that are paid by Landlord as lessee under the Ground Lease during the Interim Period; and (iv) all reasonable and customary fees of Landlord during the Interim Period relating to the construction of the Improvements and the processing of Draw Requests (including an annual servicing fee of $2000 to SBNYTC), custodian fees related to the Collateral and any other payment described herein or in the Construction Management Agreement as an Advance. 2.3 After Tax Basis. "After Tax Basis" means, with respect to any payment to be received, the amount of such payment increased so that, after deduction of the amount of all taxes required to be paid by the recipient (less any tax savings realized and the present value of any tax savings projected to be realized by the recipient as a result of the payment of the indemnified amount) with respect to the receipt by the recipient of such amounts, such increased payment (as so reduced) is equal to the payment otherwise required to be made. 2.4 Base Rent. "Base Rent" shall mean, as of a Rent Payment Date, that annual amount equal to the product obtained by multiplying the Lease Investment Balance (at the time of the relevant calculation) by the sum of the LIBOR Rate plus 25 basis points, which annual amount is then prorated for the monthly rental period in question on the basis of a 360 day year and the actual number of days elapsed. 2.5 Building. "Building" shall mean the building and related improvements to be constructed on the Land that shall become part of the Improvements, which shall be an office complex. 2.6 Calculation Period. "Calculation Period" shall mean the period from and including the 15th day of each month during the Interim Period through the 14th day of the following month; provided that the first Calculation Period shall be the period from the Date of Lease through the 14th day of the following month and the last Calculation Period shall be the period from and including the 15th day of the month prior to the month in which the Improvements Commencement Date occurs through the day immediately preceding the Improvements Commencement Date. 2.7 Capitalized Amount. "Capitalized Amount" shall mean that amount, determined as of the close of each Calculation Period during the Interim Period and added to the Lease Investment Balance as of such date, equal to the sum of the Capitalized Funding Costs plus the Commitment Component accrued for the Calculation Period in question. Landlord shall notify Tenant of the Capitalized Amount for each Calculation Period and the basis for the determination thereof; and if Tenant fails to object to such determination within five (5) business days of Landlord's notice thereof, Tenant shall be deemed to have approved such determination. 2.8 Capitalized Funding Costs. "Capitalized Funding Costs" shall mean, for each Calculation Period during the Interim Period, that annual amount equal to the product obtained by multiplying the Lease Investment Balance outstanding from time to time during the Calculation Period in question by the sum of the LIBOR Rate plus 25 basis points, which annual amount is then prorated for the Calculation Period in question on the 139 basis of a 360 day year and the actual number of days in such Calculation Period. The LIBOR Rate to be used with respect to the determination of Capitalized Funding Costs shall be the 1, 2, 3, 6, 9 or 12 month LIBOR Rate, as specified by Tenant at least two (2) business days prior to the start of each Calculation Period with respect to the Lease Investment Balance outstanding as of such Calculation Period; provided that, if Tenant fails to so specify a LIBOR Rate prior to the start of a Calculation Period, the one (1) month LIBOR Rate shall be deemed to have been designated by Tenant. 2.9 City. "City" shall mean the City of San Jose, California. 2.10 Collateral. "Collateral" shall have the meaning set forth in Section 22.16. 2.11 Commitment Amount. "Commitment Amount" shall mean SIXTY SIX MILLION and no/100 Dollars ($66,000,000.00). 2.12 Commitment Component. "Commitment Component" shall mean, for each Calculation Period during the Interim Period, that annual amount equal to the product obtained by multiplying the unused Commitment Amount outstanding from time to time during the Calculation Period in question by .25%, which annual amount is then prorated for the Calculation Period in question on the basis of a 360 day year and the actual number of days in such Calculation Period. Portions of the Commitment Amount shall be deemed to be used (i) as of the date of each Advance by Landlord during the Interim Period, on which date each such Advance shall be added to and become part of the Lease Investment Balance, and (ii) as of the date at the close of each Calculation Period on which the Capitalized Amount for such Calculation Period is added to and becomes part of the Lease Investment Balance. For purposes of calculating the Lease Investment Balance and any other obligations under this Lease, the Commitment Component shall only accrue during the Interim Period and shall cease to accrue following the Improvements Commencement Date. 2.13 Construction Management Agreement. "Construction Management Agreement" shall mean that certain Construction Management Agreement of even date herewith between Landlord and Tenant regarding the construction of the Improvements. 2.14 Contractor. "Contractor" shall mean any general contractor hired to construct any portion of the Improvements, which contractor shall be selected by Tenant in Tenant's capacity as agent for Landlord under the Construction Management Agreement, and shall be subject to Landlord's approval, which shall not be unreasonably withheld or delayed. 2.15 Default Rate. "Default Rate" means with respect to the Lease Investment Balance, the one (1) month LIBOR Rate plus 225 basis points. Notwithstanding the foregoing, in the event that the foregoing Default Rate shall be in violation of any usury or similar law, then the Default Rate shall be reduced to the extent necessary to cause the Default Rate to comply with any usury or similar law. 2.16 Entity. "Entity" shall mean any person, corporation, partnership (general 140 or limited), joint venture, association, joint stock company, trust or other business entity or organization. 2.17 Event of Default. "Event of Default" shall have the meaning set forth in Section 18.1. 2.18 Guaranteed Residual Value. "Guaranteed Residual Value" shall mean the maximum amount, the present value of which, when added to the present value of the Tenant's other minimum lease payments under this Lease, both discounted to the Improvements Commencement Date using the appropriate discount rate, creates a sum which equals approximately eighty-nine and nine-tenths percent (89.9%) of the Lease Investment Balance at such date. These calculations will be performed in accordance with the provisions of Statement of Financial Accounting Standards Number 13. 2.19 Improvements. "Improvements" shall mean any and all improvements which Tenant shall, as construction agent for Landlord, erect, construct or situate upon the Land or any part thereof during the Term under and pursuant to the terms of, and using funding provided by or through Landlord pursuant to the Construction Management Agreement. 2.20 Improvements Commencement Date. "Improvements Commencement Date" shall mean the fifteenth (15th) day of the month immediately preceding the month in which the Rent Commencement Date occurs. 2.21 Initial Advance. Initial Advance shall mean the amounts described in Exhibit B pertaining to execution of the Ground Lease and this Lease. 2.22 Interim Period. "Interim Period" shall have the meaning set forth in the Basic Lease Provisions. 2.23 Land. "Land" shall have the meaning set forth in the Basic Lease Provisions. 2.24 Landlord Affiliate. "Landlord Affiliate" shall mean any Entity which controls, is controlled by or is under the common control of Landlord. 2.25 Lease Inception Date. "Lease Inception Date" shall mean the Date of Lease. 2.26 Lease Investment Balance. "Lease Investment Balance" shall mean, at the time in question, the aggregate amount of all Advances made by Landlord plus any outstanding Capitalized Amount not yet added to the Lease Investment Balance (as described in Section 2.7 above), reduced by the following: (1) the aggregate of all amounts received by Landlord pursuant to the provisions of Article 16 (Eminent Domain), Article 17 (Damage or Destruction), Section 18.3(b) and 18.3(c), and/or Article 20 (Tenant's Option to Purchase or Terminate); and (2) the aggregate of all amounts received by Landlord in respect of this Lease or any related agreement (including, without limitation, the Pledge Agreement) that are not otherwise applied to reduce the Lease Investment Balance and which constitute a repayment or reduction of the amounts placed at risk by the Landlord (whether through realization upon the Collateral or otherwise) 141 (excluding for purposes of this clause amounts paid as rent, reimbursement for expenses payable by Tenant, fees payable by Tenant and similar items). 2.27 Legal Requirements. "Legal Requirements" shall mean all statutes, codes, laws, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all federal, state, county, municipal and other governments, departments, commissions, boards, courts, authorities, officials and officers, which now or at any time hereafter are applicable to this Lease or applicable to and enforceable against the Premises, the Improvements or any part thereof, as applicable. 2.28 LIBOR Rate. "LIBOR Rate" shall mean, for each Borrowing Period as defined below, the annualized rate determined by The Sumitomo Bank, Limited as the rate that would be offered to The Sumitomo Bank, Limited's San Francisco or New York office for U.S. dollar deposits in the London Interbank Market as quoted for the mid-morning average LIBOR Rate published by Reuters Monitoring Systems for the particular Borrowing Period (rounded upwards, if necessary, to the next higher 1/16th of 1%) for deposits by The Sumitomo Bank, Limited of immediately available dollars in the London Interbank Market on the day two (2) Business Days preceding the first day of the term of that Borrowing Period. In the event the Reuters quote is not available, the British Banker's Association's Interest Settlement Rate should be used. "Borrowing Period" shall mean 1, 2, 3, 6, 9, or 12 months (i) as selected by Tenant during the Interim Period as provided in Section 2.8 above, and (ii) as selected by Tenant from time to time during the balance of the Term at least two (2) business days prior to the end of the then current Borrowing Period (provided that, if Tenant fails to so select a Borrowing Period prior to the end of the then current Borrowing Period, a Borrowing Period of one (1) month shall be deemed to have been selected by Tenant); provided, however, that (X) during the Interim Period there shall not be more than three (3) LIBOR Rates in effect at any time, and (Y) from and after the Improvements Commencement Date, there shall not be more than five (5) LIBOR Rates in effect at any time. Landlord and Tenant acknowledge that more than one LIBOR Rate may be in effect at any time during the Term with respect to portions of the outstanding Lease Investment Balance as designated by Tenant at the time that a particular Borrowing Period is designated, and the calculation of monthly Capitalized Funding Costs or Base Rent, as the case may be, shall be based upon the LIBOR Rates applicable to the portions of the Lease Investment Balance so designated. 2.29 Notice. "Notice" shall mean a written advice, request, demand or notification required or permitted by this Lease, as more particularly provided in Section 22.3. 2.30 Official Records. "Official Records" shall mean the official records of Santa Clara County, California. 2.31 Permitted Title Exceptions. "Permitted Title Exceptions" shall mean the following: (1) the exceptions set forth in Exhibit C; (2) any exceptions created or caused by Tenant or to which Tenant consents in writing; (3) taxes and assessments not yet due and payable; (4) the SBLF Deed of Trust; (5) all title defects, liens, encumbrances, deeds of trust, mortgages, rights-of-way, and restrictive covenants and conditions affecting the 142 Land unless any of the foregoing arise as a result of Landlord's actions or with Landlord's written consent (unless such actions taken or consent given by Landlord are requested in writing by Tenant); and (6) this Lease. 2.32 Pledge Agreement. "Pledge Agreement" shall mean that certain Pledge Agreement of even date herewith executed by and between Tenant and Landlord. 2.33 Premises. "Premises" shall have the meaning set forth in the Basic Lease Provisions. 2.34 Real Estate Taxes. "Real Estate Taxes" shall have the meaning set forth in Section 8.1(b). 2.35 Rent Commencement Date. "Rent Commencement Date" shall have the meaning set forth in the Basic Lease Provisions. 2.36 Rent Payment Date. "Rent Payment Date" shall have the meaning set forth in Section 7.1. 2.37 Required Permits. "Required Permits" shall mean each and every building and development permit including, without limitation, demolition permits, site permits and addenda thereto (including, without limitation, foundation permits and structural permits), temporary and final occupancy permits and any other governmental or quasi-governmental approvals which must be issued by any governmental authority, department, commission, board, official or officer as a condition precedent to construction and occupancy of any Improvements. 2.38 SBLF Deed of Trust. "SBLF Deed of Trust" shall mean that certain deed of trust of even date herewith in favor of Landlord which is executed by Tenant. 2.39 SBNYTC. "SBNYTC" shall mean Sumitomo Bank of New York Trust Company. 2.40 Taking. "Taking" shall have the meaning set forth in Section 16.1. 2.41 Term. "Term" shall have the meaning set forth in the Basic Lease Provisions. 2.42 Terminology. All personal pronouns used in this Lease shall include all other genders. The singular shall include the plural and the plural shall include the singular. Titles of Articles, Sections and Subsections in this Lease are for convenience only and neither limit nor amplify the provisions of this Lease, and all references in this Lease to Articles, Sections or Subsections shall refer to the corresponding Article, Section or Subsection of this Lease unless specific reference is made to the articles, sections or other subdivisions of another document or instrument. The word "days" as used herein shall mean business days (i.e., excluding holidays when banks in California, New York and London (with respect to payment of Advances, payment of Basic Rent and the determination of the LIBOR Rate) are generally closed for business and weekends) unless otherwise expressly stated. Unless otherwise specified herein, all accounting terms used 143 herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the most recent audited consolidated financial statements of the Tenant and its consolidated subsidiaries delivered to Landlord. ARTICLE 3 DEMISE 3.1 Premises. Subject to the terms, covenants and conditions contained herein, Landlord hereby subleases the Land and leases the Improvements to Tenant, and Tenant hereby leases from Landlord, the Land and Improvements, together with all rights, privileges, easements and appurtenances relating to the Land and Improvements. Tenant agrees that it shall use the Premises in accordance with all of the terms and conditions of the Ground Lease and shall comply with all terms and conditions of the Ground Lease applicable to Tenant. ARTICLE 4 TERM 4.1 Term. The Term of this Lease is specified in Article 1. 4.2 Option to Extend. If no Event of Default exists hereunder or would exist except for the passage of time or giving of notice, Landlord hereby grants to Tenant at the end of the Initial Term upon not less than six (6) months prior written notice the option to extend the Term for one (1) five (5) year period. The Base Rent and Additional Rent shall be calculated during the Extension Term in the same manner as in the Initial Term. 4.3 Holding Over. If Tenant remains in possession of the Premises after the expiration of the Term without executing a new lease, such holding over shall be construed as a tenancy from month-to-month, subject to all terms, covenants and conditions herein contained, and the Base Rent shall be calculated based upon the Default Rate and shall be required to be paid by Tenant during such holding over in the same manner as during the Term. ARTICLE 5 CONSTRUCTION OF IMPROVEMENTS 5.1 Tenant's Rights to Construct Improvements. As of the Date of Lease, no improvements exist on the Land. Tenant shall have the right, in accordance with the terms of the Construction Management Agreement, to require Landlord to pay for the construction of the Improvements. 5.2 Title to and Nature of Improvements. Subject to the provisions of Sections 12.2 and 22.2, Tenant agrees that any and all Improvements of whatever nature at any time constructed, placed or maintained upon any part of the Land shall be and remain the Property of Landlord, subject to Tenant's rights under Article 16, Article 17 and Article 20 and elsewhere in this Lease. ARTICLE T 144 FUNDING 6.1 Request for Construction Funding: Landlord's Obligation to Fund. During the Interim Period, Tenant shall request Landlord to provide Advances for the construction of Improvements in accordance with the Construction Management Agreement. Each such request shall be in writing and shall generally describe the nature of the Advance. Landlord shall fund Advances requested by Tenant in accordance with the terms of the Construction Management Agreement. Landlord shall have no obligation to make any further Advances following the Improvements Commencement Date. 6.2 Exhibit Reflecting Rent Commencement Date. Within thirty (30) days after the Rent Commencement Date, Landlord and Tenant shall execute the "Rent Commencement Date Memorandum" in the form attached hereto as Exhibit D. ARTICLE 7 RENT 7.1 Base Rent. Commencing upon the Rent Commencement Date and continuing thereafter throughout the Term, Tenant shall pay Base Rent to Landlord, or at such other place as Landlord may from time to time instruct. Tenant shall pay Base Rent by wire transfer. Landlord shall supply Tenant with such bank account information as Tenant shall require to enable payment by wire transfer of Federal funds to the account described in Section 1.14. Rental payments shall be payable monthly in arrears on the fifteenth (15th) day of each successive month, except that the last installment of Base Rent shall be payable on the last day of the Term (each such date shall be a "Rent Payment Date"). No sooner than thirty (30) days or later than ten (10) days prior to the due date for any installment of Base Rent hereunder, Landlord shall deliver to Tenant a Notice indicating the exact dollar amount of the Base Rent that is due on such due date ("Invoice"). If Landlord fails to send the Invoice, Tenant shall pay the amount shown on the previous month's Invoice. 7.2 Proration. If the Term expires or is otherwise terminated on other than the fifteen (15th) day of a calendar month, then Base Rent shall be prorated for the period from the immediately preceding Rent Payment Date until the termination date on the basis of actual days elapsed on the basis of a three hundred sixty (360) day year. 7.3 No Abatement of Rent. Except as a consequence of a reduction in the Lease Investment Balance or the terms of Sections 16.1 and 16.2 (Taking) Tenant shall not be entitled to any abatement, diminution, reduction, setoff or postponement of Base Rent as a consequence of any inconvenience to, interruption of, cessation of or loss of Tenant's use or enjoyment of the Premises or as a result of any reason whatsoever. 7.4 Delinquent Rent. Any Base Rent not paid on the due date shall accrue interest at the Default Rate from the date such Base Rent was originally due until the date such Base Rent is paid. All interest accrued on past due Base Rent shall be due and payable to Landlord at the time the Base Rent is paid, or upon demand by Landlord, if earlier. 145 7.5 Additional Rent. Tenant agrees to pay all Additional Rent when it becomes due and payable under this Lease. ARTICLE 8 TAXES 8.1 Real Estate Taxes. (a) From and after the Improvements Commencement Date, Tenant shall pay directly to the appropriate taxing authority all Real Estate Taxes. If the Improvements Commencement Date occurs or the Term expires or otherwise terminates at any time other than the beginning or end of a taxable year, Tenant's obligation to pay Real Estate Taxes shall be prorated on the basis of a 365-day year, so as to include only that portion of the taxable year which is a part of the Term. Unless a termination of the Lease results from the purchase of the Premises pursuant to Article 20 below, any Real Estate Taxes levied against the Premises which accrue during the Term of this Lease but which would not be due and payable to the appropriate taxing authority until after the expiration of the Term of this Lease (as the same may be extended) shall be paid by Tenant to Landlord upon such termination. Landlord shall pay such amounts to the appropriate taxing authority on a timely basis. Landlord shall pay any Real Estate Taxes accruing during the Interim Period to the extent such Real Estate Taxes are payable by the ground lessee under the terms of the Ground Lease during such period. (b) Except to the extent that Real Estate Tax bills and statements are sent directly to Tenant by the taxing authority, upon receipt by Landlord of the tax bills or statements, Landlord will use reasonable efforts to promptly advise Tenant in writing of all Real Estate Taxes and shall deliver copies of all applicable tax bills or statements to Tenant. Tenant shall pay directly to the taxing authority all Real Estate Taxes prior to the later of (i) thirty (30) days after receipt by Tenant from Landlord of a copy of such bills and statements referred to above, or (ii) five (5) days prior to delinquency. As used herein, the term "Real Estate Taxes" shall mean any and all taxes, governmental fees and similar charges or assessments levied or assessed against the Improvements and/or the Land including, without limitation, ad valorem taxes and special assessments applicable to real property, as well as any taxes (as defined in Section 402.1 of the Ground Lease) and other amounts payable under Section 402 of the Ground Lease; provided, however, that Real Estate Taxes shall not include any Landlord Income Taxes. Real Estate Taxes shall also include any and all documentary, transfer, sales, mortgage, recording or similar taxes imposed on Landlord or Tenant in connection with (i) the original acquisition of the Premises by Landlord, (ii) any transfer of the Premises to Tenant pursuant to the terms of this Lease, or (iii) any sale of the Premises to a third party pursuant to the terms of this Lease. As used herein, the term "Landlord Income Taxes" shall mean any and all income, franchise, gains, gift, succession, excess profits, gross receipts, revenue, estate, rental, or similar taxes or taxes in lieu thereof imposed upon Landlord or any party other than Tenant (or an affiliate thereof) and any withholding tax imposed as a collection device for, in lieu of, or otherwise related to any of the foregoing without regard to whether such tax 146 is required to be collected by Tenant and without regard to whether Tenant would be liable for such withholding tax in the event it failed to so withhold. For purposes of the foregoing, an income tax shall include, without limitation, any tax imposed under the United States Internal Revenue Code or the California Bank and Corporation Tax Law as well as any tax which could qualify as an "income tax" under United States Treasury Regulation Section 1.901-2 (except to the extent any such statute or regulation is subsequently modified to include a tax or other governmental charge of a materially different type and nature from the taxes currently described therein) and any income tax which may be payable under the laws of any jurisdiction either now or in the future. Real Estate Taxes for any given tax year shall exclude assessment installments that are not due and payable during such tax year. 8.2 Personal Property Taxes. Tenant shall pay directly to the appropriate taxing authorities prior to delinquency any and all taxes and assessments levied or assessed during the Term upon or against Tenant's furniture, equipment, trade fixtures and any other personal property in the Premises. 8.3 Right to Contest. Tenant shall not be required to pay any Real Estate Taxes or any other taxes for which Tenant is liable hereunder (including, without limitation, any taxes for which Tenant is required to indemnify Landlord under Section 23.1) (including penalties and interest), so long as (i) Tenant shall contest the same or the validity thereof by appropriate legal proceedings in such a manner to prevent the tax sale of any portion of the Premises and (ii) the position to be taken by Tenant pursuant to such contest would have a realistic possibility of success if litigated. For purposes of this Lease, Tenant may conclusively establish that a position to be taken in a contest would have a realistic possibility of success if litigated by providing to Landlord a letter from counsel stating an opinion to such effect. In the event of any such contest, Tenant shall, within thirty (30) days after the final determination thereof, pay and discharge the amounts determined to be due in accordance therewith and with the provisions of this Lease, together with any penalties, fines, interest, costs and expenses that may have accrued thereon or that may have resulted from Tenant's contest. Tenant also shall have a right to contest any taxes for which it is liable hereunder, but with regard to which the position to be taken pursuant to such contest would not have a realistic possibility of success if litigated, provided that Tenant pays such taxes on or prior to the date upon which such taxes are asserted to be due by the relevant governmental authority. Notwithstanding the foregoing provisions of this Section 8.3, Tenant shall have an unconditional right to contest (without prior payment) any taxes imposed by law upon Tenant rather than upon Landlord. Tenant's decision to pay any taxes prior to contesting its or another party's underlying liability therefore shall not be deemed to imply or suggest that the position to be taken in such contest would not have a realistic possibility of success if litigated. Landlord shall cooperate fully with Tenant in connection with the exercise of Tenant's right of contest contained herein, and in the event that applicable law shall require that Landlord, rather than Tenant, pursue legal proceedings for such contest, Landlord will initiate and pursue such contest upon Tenant's request and in accordance with Tenant's instructions 147 (including, without limitation, Tenant's instructions as to the selection of legal counsel and matters of strategy or settlement); provided, however, that Landlord shall not be subject to any liability for the payment of any costs or expenses in connection with any such contest or proceedings, and Tenant will indemnify and save harmless Landlord from any such costs and expenses (including, without limitation, reasonable attorneys' fees, costs of court and appraisal costs), reimbursing Landlord therefor upon demand (or paying such costs and expenses directly when due, all as directed by Landlord). Tenant shall be entitled to any refund of any taxes and penalties or interest from any governmental authority to the extent the refund represents monies paid to the governmental authority by Tenant or paid by Landlord and reimbursed by Tenant. 8.4 Additional Charges. All payments made by Tenant under this Lease shall be made free and clear of, and without reduction or withholding for or on account of, any present or future taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed pursuant to any Legal Requirement, excluding, however, any Landlord Income Taxes (all such nonexcluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Additional Charges"). Tenant shall be responsible for the payment of any such Additional Charges; and if any such Additional Charges are required to be withheld from any amounts payable to Landlord hereunder, then the amounts so payable to Landlord shall be increased by an amount ("Additional Amount") necessary to yield to Landlord (after payment of all Additional Charges) the Base Rent and other amounts payable hereunder at the rates or in the amounts specified in this Lease. Whenever any Additional Charges are required to be withheld by Tenant, such Additional Charges shall be deducted or withheld by Tenant, and shall be paid by Tenant to the appropriate governmental authority in accordance with applicable Legal Requirements. As promptly as possible thereafter, Tenant shall send to Landlord for its own account a copy of an original official receipt (or other evidence of payment) received by Tenant showing payment thereof. If Tenant is required to pay Landlord any Additional Amount, Landlord shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change its jurisdiction if the making of such a change would avoid the need for, or reduce to the greatest extent possible the amount of, any such Additional Amount which may thereafter accrue and would not, in the reasonable judgment of Landlord be otherwise disadvantageous to Landlord. If Landlord subsequently receives a refund of any Additional Amounts, or if such Additional Amounts result in a net benefit to Landlord, the amount of such refund or net benefit shall be paid to Tenant within 30 days of the receipt of such refund or net benefit; provided, however, that the payment to Tenant shall not exceed the Additional Amount to which the refund or net benefit relates. The agreements in this Section 8.4 shall survive the termination of this Lease with respect to any Additional Charges that become due during the Term. ARTICLE 9 INSURANCE 9.1 Liability Insurance. At all times during the Term, Tenant shall obtain 148 at Tenant's sole cost and expense a policy or policies of comprehensive general liability insurance on an "occurrence" basis against claims for "personal injury" liability, including bodily injury, death or property damage liability. The liability insurance policy shall contain coverage limits no less than the following: (1) Three Million Dollars ($3,000,000) per person; (2) Five Million Dollars ($5,000,000) per incident; and (3) One Million Dollars ($1,000,000) for property damage. 9.2 Builders' Risk Insurance. With respect to any Improvements which may be under construction and not yet covered by insurance under the terms of Section 9.3, Tenant shall maintain or cause to be maintained a policy or policies of builders' risk insurance in an amount equal to the value upon completion of the work (exclusive of land, foundation, excavation, grading, landscaping, architectural and development fees and other items customarily excluded from such coverage), insuring against the risks customarily insured against under such insurance, including fire, vandalism, malicious mischief, sprinkler leakage, lightning, and windstorm. 9.3 All-Risk Insurance. With respect to any completed Improvements, prior to the termination of the builders' risk insurance required by Section 9.2, and at all times thereafter, Tenant shall, at Tenant's sole cost and expense, obtain and maintain, or cause to be obtained and maintained, (a) a policy or policies of all-risk insurance covering the Improvements, providing coverage against loss or damage by fire, vandalism, malicious mischief, sprinkler leakage, lightning, windstorm, and other insurable perils, as, under good insurance practice, from time to time are insured against under all-risk coverage for properties of similar character, age and location in an amount or amounts not less than one hundred percent (100%) of the then actual replacement cost (exclusive of land, foundation, excavations, grading, landscaping, architectural and development fees and other items customarily excluded from such coverage and without any deduction for depreciation); (b) standard earthquake coverage, with a deductible not to exceed ten percent (10%) of the insured amount; and (c) standard flood coverage. Provided, however Tenant may elect not to obtain earthquake insurance, in which case Tenant shall covenant to pay the cost of repairing damage to the Improvements caused by an earthquake. 9.4 General Requirements. The insurance required under this Article 9 may be furnished under a "primary" policy and an "umbrella" policy or policies. Landlord shall be named as an additional insured under Tenant's policy of insurance required under Section 9.1; and such policies shall contain an endorsement for cross-liability coverage. Tenant shall furnish Landlord with certificates from Tenant's insurers with respect to the insurance required to be carried hereunder on or before the date such insurance is required to be carried. The certificates shall state that such insurance is in full force and effect and that coverage will not be reduced in any amount or otherwise limited or cancelled without thirty (30) days' prior written notice to Landlord. Renewal certificates shall be furnished 149 to Landlord not less than thirty (30) days prior to the expiration of each such policy. Any blanket insurance policy or policies that insure Tenant against the risks and for the amounts herein specified shall be deemed to satisfy the obligation of Tenant hereunder, provided that any such policy of blanket insurance shall specify the amount of the total insurance allocated to the risks required to be insured hereunder and such allocated amount meets the requirements of this Article 9. All insurance required by this Article 9 shall be with an insurance company licensed to do business in the State of California with a general policyholder's rating, as rated by the most current available "Bests" Insurance Reports, and no less than A/III and non-contributing. 9.5 Waiver of Subrogation. Notwithstanding anything to the contrary contained herein, to the extent permitted by law and so long as any insurance coverage maintained by Tenant is not diminished by reason thereof, Tenant hereby (a) releases and waives any rights it may have against Landlord and its officers, agents and employees on account of any loss or damages occasioned to Tenant, its property or the Premises, and arising from any risk covered by any fire and extended coverage insurance maintained by Tenant, whether or not due to the negligence of Landlord, its agents, employees, contractors, licensees, invitees or other persons, and (b) waives on behalf of any insurer providing such insurance to Tenant any right of subrogation that any such insurer may have or acquire against Landlord or such persons by virtue of payment of any loss under such insurance. Tenant shall use its commercially reasonable efforts to cause its insurance policies to contain a waiver of subrogation clauses in accordance with the foregoing. 9.6 Indemnity. Tenant shall protect, defend, indemnify, hold and save Landlord harmless from and against any and all losses, costs, liabilities or damages (including reasonable attorneys' fees and disbursements and court costs) arising by reason of: (i) any and all injury or death of persons or damage to property against which Tenant is obligated to maintain insurance for the benefit of Landlord pursuant to this Article 9; (ii) the failure to obtain the waiver of subrogation clause required by Section 9.5 hereof where such clause could have been obtained through the exercise of Tenant's commercially reasonable efforts; or (iii) the invalidation of such insurance policy required to be obtained by Tenant hereunder by Tenant's insurer. Tenant's duty to indemnify Landlord under this Section 9.6 shall survive the expiration or earlier termination of this Lease with respect to events occurring during the Term. ARTICLE 10 USE 10.1 Use. (a) Permitted. Tenant may use the Premises for any purpose permitted under the Ground Lease. (b) Environmental Compliance. 1) Defined Terms. The term "Applicable Environmental Laws" 150 shall mean any applicable laws, regulations or ordinances pertaining to health or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 or otherwise (as amended, hereinafter called "CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, the Hazardous and Solid Waste Amendments of 1984 or otherwise (as amended, hereinafter called "RCRA"), and California Health & Safety Code Section 25501(j). The terms "hazardous substance" and "release" as used in this Lease shall have the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") shall have the meanings specified in RCRA; provided, in the event either CERCLA or RCRA is amended or superseded by other laws so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment or other laws: and, provided further, to the extent that the laws of the State of California establish a meaning for "hazardous substance", "release", "solid waste", or "disposal" which is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply. 2) Tenant's Covenants. Tenant will not cause or permit the Premises to be in violation of, or do anything or permit anything to be done which subjects Landlord, Tenant or the Premises to any remedial obligations under or which creates a claim or cause of action under, any Applicable Environmental Laws, including, without limitation, CERCLA, RCRA, and the California Health and Safety Code 25501(j), assuming disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances, if any, pertaining to the Premises and Tenant will promptly notify Landlord in writing of any existing, pending or threatened investigation, claim or inquiry of which Tenant has knowledge by any governmental authority in connection with any Applicable Environmental Laws. Tenant shall obtain any permits, licenses or similar authorizations to construct, occupy, operate or use any Improvements, fixtures and equipment at any time located on the Premises by reason of any Applicable Environmental Laws. Tenant will not use the Premises in a manner which will result in the unlawful disposal or other unlawful release of any hazardous substance or solid waste on or to the Premises and covenants and agrees to keep or cause the Premises to be kept free of any unlawful hazardous substance, unlawful solid waste or unlawful environmental contaminants (including, without limitation, friable asbestos and any substance containing asbestos deemed hazardous and unlawful by any Applicable Environmental Law) and to remove the unlawful amounts of the same (or if removal is prohibited by law, to take whatever action is required by law) promptly upon discovery at Tenant's sole expense. Tenant shall promptly notify Landlord in writing of any unlawful disposal or other unlawful release of any hazardous substance, environmental contaminants or solid wastes on or to the Premises or the Improvements. In the event Tenant fails to comply with or perform any of the foregoing covenants and obligations, after thirty (30) days' prior written Notice to Tenant, Landlord may, but shall be under no obligation to, cause the 151 Premises to be freed from the unlawful hazardous substance, unlawful solid waste or unlawful environmental contaminants (or if removal is prohibited by law, to take whatever action is required by law) and the reasonable cost of the removal or such other action shall be a demand obligation owing by Tenant to Landlord pursuant to this Lease. Notwithstanding the foregoing, Landlord shall have no right to cause the removal of such materials so long as Tenant both: (1) is diligently and in good faith proceeding to comply with Tenant's obligation to remove the unlawful amounts of such materials; and (2) has the financial ability to so comply. Subject to the foregoing, Tenant grants to Landlord and Landlord's agents and employees access to the Premises, and the license to remove the unlawful hazardous substance, unlawful solid waste or unlawful environmental contaminants (or if removal is prohibited by law, to take whatever action is required by law) and agrees to indemnify and save Landlord harmless from all reasonable costs and expenses involved and from all claims (including consequential damages) asserted or proven against Landlord by any party in connection therewith. Upon Landlord's reasonable request for "good cause" (defined below), at any time and from time to time during the Term, Tenant will provide at Tenant's sole expense an inspection or audit of the Premises from an engineering or consulting firm approved by Landlord, indicating the presence or absence of any hazardous substance, solid waste or environmental contaminants located on the Premises. If Tenant fails to provide same after sixty (60) days' notice, Landlord may order same, and Tenant grants to Landlord and Landlord's employees and agents access to the Premises and a license to undertake any testing reasonably required to obtain such inspection or audit. The reasonable cost of obtaining such inspection or audit and any expenses incurred by Landlord in connection therewith, shall be a demand obligation owing by Tenant to Landlord pursuant to this Lease. For purposes of this Section 10.1(b)(2), "good cause" shall mean that Landlord shall have reasonable grounds to believe that an unlawful release or unlawful disposal of hazardous substances or solid wastes has occurred on the Premises. (c) Compliance With Legal Requirements. Tenant shall at all-times comply with all material Legal Requirements applicable to the Land or the Improvements and/or the use thereof. 10.2 Contest of Legal Requirements. Tenant shall have the right at its sole cost and expense to contest the validity of any Legal Requirements applicable to the Premises by appropriate proceedings diligently conducted in good faith; and upon the request of Tenant and at Tenant's sole cost and expense, Landlord will join and cooperate with Tenant in such proceedings. Subject to Section 8.3, any other provision of this Lease to the contrary notwithstanding, Tenant's right to contest Legal Requirements must be exercised in such a manner as to avoid any exposure of the Premises or any part thereof to foreclosure or execution sale or exposure of Landlord to civil or criminal penalties arising from Tenant's non-compliance with such Legal Requirements. Tenant shall defend and indemnify Landlord against, and hold Landlord harmless from, any and all liability, loss, cost, damage, injury or expense (including, without limitation, attorneys' fees and costs) which Landlord may sustain or suffer by reason of Tenant's failure or delay in complying with, or Tenant's contest of, any such Legal Requirements (or Landlord's 152 contest, if requested in writing by Tenant), and Tenant's duty to indemnify Landlord under this Section 10.2 shall survive the expiration or earlier termination of this Lease. ARTICLE 11 UTILITIES AND SERVICES 11.1 Services to the Premises. At Tenant's sole cost and expense, Tenant shall make its own arrangements for the provision of all utilities and services to be provided to or consumed on the Premises, including, without limitation, air conditioning, ventilation, heating, electric power, telephone, water (both domestic and fire protection), sanitary sewer, storm drain, natural gas and janitorial services, including for the installation, maintenance and repair of service lines and meters to measure Tenant's consumption of such utilities. ARTICLE 12 MAINTENANCE AND REPAIRS; SURRENDER OF THE PREMISES 12.1 Tenant Obligations. Except as otherwise provided in this Lease, Tenant shall maintain the Premises and the Improvements in good repair, normal wear and tear and casualty excepted. All maintenance that Tenant is obligated to perform under this Section 12.1 shall be at the sole expense of Tenant. 12.2 Surrender of the Premises. Except as provided in Article 20, upon the expiration or earlier termination of the Term, Tenant shall surrender the Premises to Landlord in its then "AS-IS" condition, including, without limitation, any condition resulting from: (i) wear and tear; (ii) obsolescence and damage by fire or other casualty, act of God or the elements (subject to the terms of Article 17); (iii) damage that is caused by Landlord, its agents, employees or contractors; and (iv) any improvements, alterations, additions, repairs, replacements, or decorations in, to or of the Premises or on the Land which are not Improvements but which Tenant may elect to remain on the Land or the Premises. Title to all improvements, furniture, furnishings, fixtures, trade fixtures and personal property of Tenant which have not been funded by Landlord pursuant to the terms of Article 6 and located in or upon the Premises or the Land, whether or not affixed to the realty, shall be and remain in Tenant throughout the Term, and at any time during the Term of this Lease, the same may be removed by Tenant, or, at Tenant's election, surrendered with the Premises, in which event title to such surrendered property shall, if Landlord so elects in Landlord's sole discretion, be deemed transferred to Landlord. Any of such property that is not removed from the Premises or the Improvements on or prior to the expiration or earlier termination of this Lease shall be considered abandoned and Landlord may deal with it as Landlord elects. ARTICLE 13 LIENS 13.1 Except for claims that Tenant or Devcon, with Tenant's approval, is contesting in good faith in such manner as to avoid any exposure of the Premises or any part thereof to foreclosure or execution sale, Tenant shall promptly pay and discharge all claims for work or labor done, supplies furnished or services rendered to the Premises, and shall keep the Premises free and clear of all mechanics' and materialmen's liens in connection therewith. 153 ARTICLE 14 ASSIGNMENT BY LANDLORD 14.1 Further Mortgages or Encumbrances by Landlord. Except for the SBLF Deed of Trust (which is hereby approved by Tenant) and as specifically permitted in Article 21 and in the Construction Management Agreement, Landlord shall not cause or create any mortgages, deeds of trust, or encumbrances to exist with respect to the Premises at any time. Landlord agrees that it will not materially modify the SBLF Deed of Trust nor will it cause any new bonds or assessments to encumber the Premises without Tenant's approval which may be withheld in Tenant's sole discretion. 14.2 Landlord's Right to Sell. Subject to Tenant's Purchase Option, Landlord may not transfer all or any portion of its right, title and interest in the Premises; provided, however that nothing contained in this Lease shall be deemed in any way to limit, restrict or otherwise affect the right of Landlord at any time and from time to time to sell or transfer all or any portion of its right, title and estate in the Premises to: (1) a Landlord Affiliate; (2) another financial institution or trust established by such an institution; or (3) if an Event of Default has occurred and is continuing at the time of such sale or transfer, to any Entity. Any sale or transfer by Landlord whatsoever shall by its express terms recognize and confirm the right of possession of Tenant to the Premises and Tenant's other rights arising out of this Lease shall not be affected or disturbed in any way by any such sale, transfer, assignment or conveyance (except for any disturbance resulting from a foreclosure sale conducted pursuant to the laws of the State of California at which independent third party bids were permitted, pursuant to the SBLF Deed of Trust, all subject to the terms of Section 21.3) 14.3 Transfer of Funds and Property. At each time Landlord sells, assigns, transfers or conveys the entire right, title and estate of Landlord in the Premises and in this Lease, Landlord shall turn over to the transferee any funds or other property then held by Landlord under this Lease and thereupon all the liabilities and obligations on the part of the Landlord under this Lease arising after the effective date of such sale, assignment, transfer or conveyance shall terminate as to the transferor and be binding upon the transferee. ARTICLE 15 ASSIGNMENT AND SUBLEASING 15.1 Right to Assign. (a) Tenant's Right. Tenant shall have the right, at any time and from time to time during the Term, to assign all or any portion of its right, title and estate in the Premises and in this Lease without approval by Landlord. Any such assignee, immediate or remote, shall have the same right of assignment. Any such assignment shall be evidenced by a written instrument, properly executed and acknowledged by all parties thereto and, at Tenant's election, duly recorded in the Official Records, wherein and whereby the assignee assumes all of the obligations of Tenant under this Lease. Notwithstanding any such assignment and assumption or any sublease permitted under Section 15.2 hereof, Tenant shall remain primarily liable for all obligations and liabilities on the part of Tenant theretofore or thereafter arising under this Lease. 154 (b) Notice. Tenant shall, promptly after execution of each assignment, notify Landlord of the name and mailing address of the assignee and shall, on demand, permit Landlord to examine and copy the assignment agreement. 15.2 Right to Sublet. (a) Tenant's Right. Tenant shall have the right, at any time and from time to time during the Term, to sublet all or any portion of the Premises and to extend, modify or renew any sublease without the approval of Landlord. (b) Notice. Tenant shall, promptly after execution of each sublease, notify Landlord of the name and mailing address of the subtenant and shall, on demand, permit Landlord to examine and copy the sublease. (c) Non-Disturbance Agreement. Upon Tenant's request, Landlord shall enter into a "landlord agreement" with any subtenant of Tenant. Such agreement shall provide that Landlord shall recognize the sublease and not disturb the subtenant's possession thereunder so long as such subtenant shall not be in default under its sublease, and an Event of Default is not then in existence and continuing under this Lease. Tenant shall immediately reimburse Landlord on demand for all reasonable out-of-pocket costs and expenses incurred by Landlord in complying with Landlord's obligations under this Section 15.2(c). 15.3 Mortgage by Tenant. Tenant shall not have the right to mortgage, pledge or otherwise encumber all or any portion of the right, title and estate of Tenant in the Premises or in this Lease, without the consent of Landlord. ARTICLE 16 EMINENT DOMAIN 16.1 Total or Substantial Taking. If title or access is taken for any public or quasi-public use, or under any statute or by right of condemnation or eminent domain, or by sale in lieu thereof (a "Taking") with respect to all of the Premises, or if title to so much of the Premises or access thereto is Taken, or if the Premises or access thereto is damaged, blocked or impaired by the Taking, so that, in Tenant's sole discretion, the Premises or access thereto, even after a reasonable amount of reconstruction thereof, will no longer be suitable for Tenant's (and/or Tenant's subtenants') continued occupancy for the conduct of Tenant's (and/or Tenant's subtenants') business in a manner consistent with the conduct of such business prior to such Taking, then in any such event, this Lease shall terminate on the date of such Taking. 16.2 Partial Taking. If any part of the Premises, or access thereto, shall be Taken, and the Premises or the remaining part thereof and access thereto will be, in Tenant's sole discretion, suitable for Tenant's (and/or Tenant's subtenants') continued occupancy for the conduct of Tenant's (and/or Tenant's subtenants') business in a manner consistent with the conduct of such business prior to such Taking, all of the terms, covenants and conditions of this Lease shall continue, except that Base Rent shall be adjusted to reflect the decreased Lease Investment Balance remaining after application thereto of the award made to Landlord for such Taking. 155 16.3 Temporary Taking. If the whole or any part of the Premises is Taken for temporary use or occupancy, this Lease shall not terminate by reason thereof and Tenant shall continue to pay, in the manner and at the times herein specified, the full amount of the Base Rent payable by Tenant hereunder, and, except only to the extent that Tenant may be prevented from so doing by reason of such Taking, Tenant shall continue to perform and observe all of the other terms, covenants and conditions hereof on the part of Tenant to be performed and observed, as though the Taking had not occurred. In the event of any such temporary Taking, Tenant shall be entitled to receive the entire amount of the award made for the Taking, whether paid by way of damages, rent or otherwise. If the temporary Taking is for a term in excess of thirty (30) days, then the Taking shall be treated as a permanent Taking and be governed by Sections 16.1 or 16.2, as applicable. 16.4 Damages. The compensation attributable to the Premises (in each case the compensation or value shall be determined as of the date of the Taking) awarded or paid upon any Taking (other than a temporary Taking, which shall be governed by Section 16.3), whether awarded to Landlord, Tenant, or both of them, shall be held by the Escrow Agent described in Section 17.3(b), and distributed in the same manner as insurance proceeds pursuant to Section 17.3. For purposes of this Section 16.4, references to the term "casualty" or similar terms in Section 17.3 shall be deemed to refer to "Taking." 16.5 Notice and Execution. Immediately upon service of process upon Landlord or Tenant in connection with any Taking relating to the Premises or any portion thereof or access thereto, each party shall give the other Notice thereof. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions of this Article 16. Tenant reserves the right to appear in and to contest any proceedings in connection with any such Taking. Tenant shall immediately reimburse Landlord on demand for all reasonable out-of-pocket costs and expenses incurred by Landlord in complying with Landlord's obligations under this Section 16.5. 16.6 Terms of Ground Lease. Notwithstanding any of the foregoing provisions of this Article 16, Landlord and Tenant acknowledge that in the event of any inconsistency between the foregoing terms of this Article 16 and Article XI of the Ground Lease, the terms of Article XI of the Ground Lease shall control; and Tenant shall have no right to terminate this Lease as a consequence of a Taking unless Landlord shall also have the right to terminate the Ground Lease as a consequence thereof (provided that Tenant may exercise the Purchase Option under Section 20.1 at any time); Landlord shall not exercise any right to terminate the Ground Lease without Tenant's prior approval, in Tenant's sole discretion; Tenant shall restore the Premises to the extent provided in the Ground Lease in the event this Lease and the Ground Lease are not terminated; and the provisions of Section 16.4 above shall be applicable only to the compensation allocated to the ground lessee under the terms of the Ground Lease in the event of a Taking. ARTICLE 17 DAMAGE OR DESTRUCTION 156 17.1 Casualty. If the Improvements are damaged or destroyed by fire or other casualty, except as provided to the contrary in Section 17.2, this Lease shall continue in full force and effect without any abatement or reduction in Base Rent, and Tenant, at Tenant's election, shall either (a) restore the Improvements substantially to their condition prior to the damage or destruction, or such other condition as Tenant shall elect, subject to Landlord's approval in accordance with the terms of Section 12 of the Construction Management Agreement, which shall not be unreasonably withheld, or (b) not restore the Improvements, but perform, or cause to be performed, at Tenant's sole cost and expense, any work or service required by any Legal Requirement for the protection of persons or property from any risk, or for the abatement of any nuisance, created by or arising from the casualty or the damage or destruction caused thereby. 17.2 Termination of Lease. In the case of: (a) any damage or casualty of the Building, which in the good faith judgment of Tenant's Board of Directors would render the Building either unsuitable or uneconomic for restoration or continued use by Tenant; (b) the damage or destruction of all or substantially all (as determined in good faith by Tenant's Board of Directors) of the Building; or (c) the damage or destruction of the Building where restoration cannot (as determined in good faith by Tenant's Board of Directors) reasonably be completed either within 365 days or prior to the expiration of the Term, then Tenant may elect to terminate this Lease. In the event Tenant terminates the Lease pursuant to the preceding sentence, Tenant shall purchase Landlord's interest in the Premises for a purchase price equal to the Purchase Price for the Premises as such Purchase Price is defined in Section 20. 1. The purchase of Landlord's interest in the Premises shall be pursuant to the terms of Section 20.1, as applicable to the Premises. Upon the completion of such purchase, this Lease and all obligations hereunder in respect of the Premises shall terminate. 17.3 Insurance Proceeds. In the event of any fire or other casualty, the proceeds of any insurance policies maintained by Tenant pursuant to Section 9.2 or 9.3 shall be held, applied and dealt with as follows: (a) Any proceeds (per occurrence) of such policies attributable to the Improvements below the amount of Two Hundred Fifty Thousand Dollars ($250,000) or any proceeds directly attributable to improvements constructed on the Property by Tenant solely with its own funds shall be paid directly to Tenant and applied and used as Tenant may direct in its sole discretion for any construction, restoration or reconstruction purposes in connection with any improvements located on the Land which were destroyed, damaged or affected by such casualty. Any portion of such proceeds which Tenant does not want to use (subject to the terms of Section 17.3(c)) for any construction, restoration or reconstruction shall be paid as follows (the order of payment as set forth below shall be the "Distribution Formula"): (1) to Landlord (but only to the extent of the then-existing Lease Investment Balance); and (2) with any remaining excess to be paid to Tenant. (b) Any proceeds (per occurrence) of such policies attributable to the Improvements greater than Two Hundred Fifty Thousand Dollars ($250,000) shall be paid 157 to an escrow agent ("Escrow Agent") mutually agreeable to the parties (but such escrow agent shall not be a party which is related to or affiliated with either of the parties to this Lease, but shall be bound by the terms of this Article 17). Such proceeds shall be invested by the Escrow Agent as Tenant may direct (provided, however, that such proceeds may not be invested in any securities or any debt obligations issued by Tenant). Such proceeds shall be paid by the Escrow Agent to Tenant (or to third parties as Tenant may direct), as Tenant may direct from time to time as restoration, construction or rebuilding progresses to pay the cost of any restoration, construction or rebuilding which Tenant elects to take place on the Land or any Improvements located upon the Land, so long as Landlord reasonably determines that the following conditions are satisfied at the time of such request for payment by Tenant: (i) the sum requested has been paid or is then due and payable or will become due and payable within thirty (30) days; (ii) Tenant has the financial ability (taking into account the insurance proceeds held by the Escrow Agent) to complete the restoration, construction or rebuilding which Tenant has elected to perform; (iii) Landlord has approved the plans, if any, relating to the restoration of Improvements; and (iv) in Landlord's reasonable judgment, such restoration work which Tenant desires to perform in connection with the Improvements can be completed prior to the expiration of the Term. Landlord shall promptly upon request instruct the Escrow Agent to make the payments requested by Tenant unless one of the four (4) conditions described above is not satisfied at the time of such request. Any excess insurance proceeds existing after either Tenant's completion of the restoration, construction or rebuilding which Tenant elects to perform or Tenant's failure to comply with the funding condition described in subitems (ii), (iii) and (iv) immediately above in this Section 17.3(b), shall be paid pursuant to the Distribution Formula. If Tenant elects to terminate this Lease, Tenant may use any insurance proceeds to pay the Purchase Price described in Section 17.2, and all rights of Landlord in insurance proceeds not used to pay the Purchase Price shall be assigned to Tenant by Landlord at the time Tenant purchases Landlord's interest in the Premises. (c) If either: (1) Tenant has not delivered written notice to Landlord within ninety (90) days after reaching final written settlement with all insurance companies regarding the amount of proceeds to be paid for the casualty in question, pursuant to which notice Tenant elects to either exercise some or all of its termination rights under Section 17.2 and/or to fully or partially repair or restore pursuant to Section 17. 1; or (2) Landlord reasonably believes that Tenant has abandoned reconstruction or restoration work which Tenant may have elected to perform (and Tenant shall have failed to diligently recommence reconstruction or restoration work which Tenant is then able to perform within thirty (30) days after Tenant's receipt from Landlord of a Notice of Landlord's belief of Tenant's abandonment of the reconstruction or restoration work); then, in either case, the proceeds attributable to the Improvements shall be paid pursuant to the Distribution Formula. (d) Any insurance proceeds paid to Landlord under this Article 17 shall reduce the Lease Investment Balance by a like amount. 17.4 Terms of Ground Lease. Notwithstanding any of the foregoing 158 provisions of this Article 17, Landlord and Tenant acknowledge that in the event of any inconsistency between the foregoing terms of this Article 17 and Section 8.02 of the Ground Lease, the terms of Section 8.02 of the Ground Lease shall control; and Tenant shall have no right to terminate this Lease as a consequence of any damage or destruction unless Landlord shall also have the right to terminate the Ground Lease as a consequence thereof (provided that Tenant may exercise the Purchase Option under Section 20.1 at any time); Landlord shall not exercise any right to terminate the Ground Lease without Tenant's prior approval, in Tenant's sole discretion; Tenant shall restore or rebuild the Premises in the manner and subject to the terms of the Ground Lease in the event this Lease and the Ground Lease are not terminated; and the provisions regarding the application of insurance proceeds provided for in Section 17.3 above shall be subject to the terms of Section 8.02 of the Ground Lease and the allocation of insurance proceeds between the ground lessor and ground lessee provided for therein. ARTICLE 18 DEFAULT 18.1 Default. Each of the following events shall constitute an event of default ("Event of Default") by Tenant: (a) Failure to Pay Base Rent. Tenant's failure to pay any Base Rent within ten (10) days after the due date. (b) Failure to Pay Additional Rent. Tenant's failure to pay any Additional Rent which is due to Landlord within ten (10) days after the due date under this Lease (which due date shall be the date of Tenant's receipt of Notice from Landlord that such Additional Rent is due). (c) Failure to Carry Insurance. Tenant's failure to carry any policy of insurance required by Article 9. (d) Insolvency. Subject to Section 18.2, the occurrence of: (i) an assignment by Tenant for the benefit of creditors generally; or (ii) the filing of a voluntary or involuntary petition by or against Tenant under any present or future applicable federal, state or other statute or law having for its purpose the adjudication of Tenant as a bankrupt; (iii) the appointment of a receiver, liquidator or trustee for all or a substantial portion of the Premises by reason of the insolvency or alleged insolvency of Tenant; or (iv) the taking of possession by any department of city, county, state or federal government, or any officer thereof duly authorized, of all or a substantial portion of the Premises by reason of the insolvency or alleged insolvency of Tenant; and Tenant's failure to timely give any Notice it is permitted to give pursuant to Section 18.2 (or, in the event Tenant gives timely Notice and pursues a contest under Section 18.2, Tenant's failure to finally prevail in the contest). (e) Failure to Replenish Under Pledge Agreement. Tenant's failure to replenish the collateral under the Pledge Agreement (as defined in Section 2.3 1) after the notice and cure periods provided in the Pledge Agreement. 159 (f) Default Under A Credit Facility. A payment default, which has not been waived and is continuing (after expiration of applicable notice and cure periods) under any credit facility of Tenant of One Million Dollars ($1,000,000) or more. (g) Financial Covenants. The occurrence of any of the following: 1) Tenant's "Total Debt" (as defined herein) divided by Consolidated Tangible Net Worth (as defined below) (with both determined in accordance with generally accepted accounting principles consistently applied) exceeds 2:1. As used herein the term "Total Debt" shall mean, the total of all items of indebtedness, obligation or liability as shown on Tenant's consolidated financial statements. 2) Tenant fails to maintain a debt service coverage ratio of at least 1:1 times for each fiscal quarter on an annualized basis. The ratio will be defined as net income plus interest, taxes, and rent expense divided by the sum of taxes, interest, rent expense and CPLTD (current portion of long-term debt). 3) Tenant's "Consolidated Tangible Net Worth" as defined herein shall fall below Two Hundred Twenty Million Dollars ($220,000,000.00). As used herein, the term "Consolidated Tangible Net Worth" means the excess of total assets over total liabilities of Tenant and its Subsidiaries determined in accordance with generally accepted accounting principles on a consolidated basis, excluding, however, from the determination of total assets (i) all assets which would be classified as intangible assets under generally accepted accounting principles, including, without limitation, goodwill (whether representing the excess cost over book value of assets acquired or otherwise), patents, trademarks, trade names, copyrights, franchises and deferred charges (including, without limitation, unamortized debt discount and expense, organization costs and research and product development costs), and (ii) to the extent not already deducted from total assets, reserves for depreciation, depletion, obsolescence and/or amortization of properties and all other reserves or appropriation of retained earnings which, in accordance with generally accepted accounting principles, should be established in connection with the business conducted. (h) Construction Management Agreement. A material breach by Tenant of its obligations under the Construction Management Agreement. (i) Termination Option. If Tenant exercises the Termination Option pursuant to Section 20.2 below, Tenant's failure to sell the Premises at the end of the Term as provided in Section 20.2. 18.2 Contest by Tenant. If upon the filing of any involuntary petition of the type described in Section 18.1(d) or upon the appointment of a receiver, other than a receiver appointed in any voluntary proceeding referred to in Section 18.1(d), or the taking of possession of all or a substantial portion of the Premises by any department of the city, county, state or federal government, or any officer thereof duly authorized, by reason of the alleged insolvency of Tenant without the consent or over the objection of Tenant, should Tenant desire to contest the same in good faith, Tenant shall, within ninety (90) 160 days after the filing of the petition or after the appointment or taking of possession, give Notice to Landlord that Tenant proposes to make the contest, and the same shall not constitute an Event of Default so long as Tenant shall prosecute the proceedings with due diligence and no part of the Premises shall be exposed to sale by reason of the continuance of the contest. 18.3 Remedies. Landlord shall have the remedies specified below: (a) Continue Lease. In connection with an Event of Default, Landlord shall have the right to enforce, by suit or otherwise, all other covenants and conditions hereof to be performed or complied with by Tenant and to exercise all other remedies permitted by Section 1951.4 of the California Civil Code, or any amendments thereof. Landlord has the remedy described in California Civil Code Section 1951.4 (Landlord may continue the Lease in effect after Tenant's breach and abandonment and recover Base Rent as it becomes due, if Tenant has right to sublet or assign, subject only to reasonable limitation). Upon application by Landlord, a receiver may be appointed to take possession of the Premises and exercise all rights granted to Landlord as set forth in this Section 18.3. (b) Terminate Lease. In connection with an Event of Default, Landlord may terminate this Lease, by giving Tenant Notice thereof, at any time after the occurrence of such Event of Default and whether or not Landlord has also exercised any right under Section 18.2. In such event Tenant shall be obligated to purchase the Premises for an amount equal to the Purchase Price described in the Purchase Option contained in Section 20.1 below (that is, all accrued Base Rent, Additional Rent and the Lease Investment Balance). Landlord shall also have its other remedies at law (including its rights under the SBLF Deed of Trust), provided, however, that Tenant's right to purchase the Premises pursuant to Section 20.1 shall survive any termination of this Lease up through the date of foreclosure sale under the SBLF Deed of Trust. (c) Landlord's Continuing Obligation to Sell. Except in the case of a foreclosure under the SBLF Deed of Trust, in the event Landlord obtains possession of the Premises pursuant to the terms of this Lease (because of Tenant's default, lease expiration, or otherwise), Landlord shall be under a continuing obligation to use its commercially reasonable efforts to sell the Premises to one or more unrelated third parties; provided, however, that Landlord shall not be required to sell or attempt to sell any portion of the Premises (i) in a manner, or under circumstances, that could materially impair Landlord's ability to enforce any of its rights or remedies under this Lease (as determined in Landlord's sole discretion) or (ii) at a time when market conditions render it inadvisable to sell or attempt to sell the Premises (as determined in Landlord's sole discretion). Upon the occurrence of any such sale Landlord shall be obligated to pay to Tenant any excess of the amount realized by Landlord in connection with such sale over the Purchase Price as defined in Section 20.1 below. For purposes of the preceding sentence, the amount realized by Landlord upon a sale of the Premises shall be net of Landlord's sale expenses and other expenses incurred by Landlord but required to be paid by Tenant pursuant to Section 20.1(c)(iv). Landlord's obligation to pay such excess to Tenant shall survive any termination of this Lease. 161 18.4 No Waiver. No failure by Landlord or Tenant to insist upon the strict performance of any term, covenant or condition of this Lease or to exercise any right or remedy consequent upon a breach thereof and no acceptance of full or partial Rent during the continuance of any breach shall constitute a waiver of any such breach or of the term, covenant, or condition. No term, covenant or condition of this Lease to be performed or complied with by Tenant or Landlord, and no breach thereof, shall be waived, terminated, altered or modified except by a written instrument executed by Landlord and Tenant. No waiver of any breach shall affect or alter this Lease, but each and every term, covenant, and condition of this Lease shall continue in full force and effect with respect to any other then existing subsequent breach thereof. 18.5 Effect of Assignment. Notwithstanding an Entity's prior assignment or transfer of its interest as Tenant under this Lease, so long as Landlord has been given Notice of such assignment pursuant to Sections 15.1 and 22.3, Landlord shall give such Entity copies of all Notices required by this Article 18 in connection with any Event of Default, and such Entity shall have the period granted hereunder to Tenant to cure such Event of Default, unless such Entity shall have been released from all obligations arising under this Lease. Landlord may not assert any rights against such Entity in the absence of such Notice and opportunity to cure, so long as Landlord has been given Notice of such assignment pursuant to Sections 15.1 and 22.3. 18.6 Landlord Cure Right. If Tenant fails to perform any covenant or agreement to be performed by Tenant under this Lease, and if the failure or default continues for thirty (30) days after Notice to Tenant (except for emergencies and except for payment of any lien or encumbrance threatening the imminent sale of the Premises or any portion thereof, in which case payment or cure may be made as soon as necessary to minimize the damage to person or property caused by such emergency or to prevent any such sale), Landlord may, but shall have no obligation to, pay the same and cure such default on behalf of and at the expense of Tenant and do all reasonably necessary work and make all reasonably necessary payments in connection therewith including, but not limited to, the payment of reasonable attorneys' fees and disbursements incurred by Landlord. Notwithstanding the foregoing, Landlord shall have no right to cure any such failure to perform by Tenant so long as Tenant: (1) is diligently and in good faith attempting to cure such matter and prosecuting such cure to completion; (2) has the financial ability to so comply; and (3) commenced cure of such matter within thirty (30) days after Tenant's receipt of Notice thereof from Landlord. Failure by Tenant to comply with the above shall allow Landlord to commence in a reasonable and customary manner and in good faith to attempt to cure such matter. Upon demand, Tenant shall reimburse Landlord for the reasonable amount so paid, together with interest at the Default Rate from the date incurred until the date repaid. 18.7 Landlord's Default. If Landlord fails to perform any covenant or agreement to be performed by Landlord under Article 6, Section 14.1, Section 16.4, Article 20, Article 21, or Section 22.8 of this Lease (including, but not limited to, Landlord's failure to keep the Premises free of any and all liens created by or through Landlord except as approved by Tenant in writing), and if the failure or default continues for thirty (30) days after Notice to Landlord (except for emergencies and except for 162 payment of any lien or encumbrance threatening the imminent sale of the Premises or any portion thereof, in which case payment or cure may be made as soon as necessary to minimize the damage to person or property caused by such emergency or to prevent any such sale), Tenant may, but shall have no obligation to, pay the same and cure such default on behalf of and, so long as such failure to perform arises due to Landlord's gross negligence, willful misconduct, or willful breach of this Lease, at the expense of Landlord and do all reasonably necessary work and make all reasonably necessary payments in connection therewith including, but not limited to, the payment of reasonable attorneys' fees and disbursements incurred by Tenant. Notwithstanding the foregoing, Tenant shall have no right to cure any such failure to perform by Landlord so long as Landlord is diligently and in good faith attempting to cure such matter. Notwithstanding anything to the contrary, Landlord's liability under this Lease shall in all events be limited as provided in Section 22.14 below. ARTICLE s QUIET ENJOYMENT 19.1 Quiet Enjoyment. Landlord covenants to secure to Tenant the quiet possession of the Premises for the full Term against all persons claiming the same, by, through or in the right of Landlord, subject to Landlord's rights and remedies under Section 18 upon an Event of Default by Tenant. The existence of any Permitted Title Exceptions shall not be deemed to constitute a breach of Landlord's obligations hereunder. Tenant shall, immediately upon demand, reimburse Landlord for all reasonable costs, expenses and damages incurred or paid by Landlord in the performance of Landlord's obligations under this Article 19 (except for any costs, expenses or damages arising from Landlord's willful breach of this Lease). Landlord agrees that, so long as no Event of Default has occurred and is continuing, Landlord shall not exercise the right to terminate the Ground Lease specified in Section 1204 of the Ground Lease. ARTICLE 20 TENANT'S OPTION TO PURCHASE OR TERMINATE 20.1 Option To Purchase Premises. (a) Purchase Option. At any time during the Term, Tenant shall have the option ("Purchase Option") to purchase all of the then-existing Premises. The purchase price ("Purchase Price") for the Premises shall be the sum of accrued and unpaid Base Rent, any accrued and unpaid Additional Rent, plus the Lease Investment Balance. (b) Purchase Option Exercise Notice. If Tenant desires to exercise the Purchase Option, Tenant shall deliver to Landlord thirty (30) days prior written notice ("Purchase Option Exercise Notice") of Tenant's election. (c) Transfer. If Tenant exercises the Purchase Option, the purchase and sale of the Premises shall be consummated as follows: (i) Landlord shall grant and convey the Premises to Tenant, its authorized agent or assignee, pursuant to a duly executed and acknowledged assignment 163 and assumption of leasehold interest (as to the Land) and a grant deed as to the Improvements (collectively herein the "Deed"), free and clear of all title defects, liens, encumbrances, deeds of trust, mortgages, rights-of-way and restrictive covenants or conditions, of record, placed against the Premises by Landlord except for the Permitted Title Exceptions (excluding the SBLF Deed of Trust), and any UCC-1 filed or recorded which evidence security interests encumbering the Premises or any part thereof in favor of SBLF, which security interests SBLF shall cause to be released so that they no longer affect the Premises). (ii) The Purchase Price shall be paid upon delivery of the Deed and any other documents reasonably requested by Tenant to evidence the transfer of the Premises subject to the Permitted Title Exceptions (excluding the SBLF Deed of Trust, and any UCC-1 filed or recorded which evidence security interests encumbering the Premises or any part thereof in favor of SBLF, which security interests SBLF shall cause to be released so that they no longer affect the Premises) ("Additional Documents"). In the event that Tenant elects to assign the Purchase Option pursuant to Section 20.1 (d) below, and Tenant's assignee pays an amount less than the Purchase Price for the Premises, Tenant shall pay to Landlord any excess of the Purchase Price over the amount paid by such assignee. Landlord shall deliver the Deed and the Additional Documents to Tenant on the date for closing specified by Tenant in the Purchase Option Exercise Notice. The closing shall take place at the location and in the manner reasonably set forth by Tenant in the Purchase Option Exercise Notice. Landlord and Tenant agree to cooperate to establish a concurrent closing and release of the security interests so that the Collateral may be used to pay the Purchase Price, if required. (iii) If Landlord shall fail to cause title to be in the condition required in Section 20.1(c)(i) above within the time herein prescribed for the delivery of the Deed, then Tenant shall have the right (in addition to all other rights provided by law) by a written notice to Landlord: (1) to extend the time in which Landlord shall clear title and deliver the Deed and Additional Documents, during which extension this Lease shall remain in full force and effect, except Tenant shall be released from its obligation to pay Base Rent during the extension; (2) to accept delivery of the Deed and Additional Documents subject to such title defects, liens, encumbrances, deeds of trust, mortgages, rights-of-way and restrictive covenants or conditions specified and set forth in the Deed and not cleared by Landlord; (3) to rescind, by notice to Landlord and without any penalty or liability therefor, any and all obligations Tenant may have under and by virtue of the Purchase Option or the exercise thereof, whereupon this Lease shall remain in full force and effect; (4) if the title exception is curable by the payment of money, Tenant may make such payment and such payment shall be a credit against the Purchase Price in favor of Tenant. (iv) Base Rent shall be prorated and paid and all Additional Rent which is then due and payable shall be paid as of the date title to the Premises is vested of record in Tenant. Tenant shall pay the escrow fees; the recorder's fee for recording the Deed; the premium for the title insurance policy; all documentary transfer taxes; Tenant's attorneys' fees; Landlord's reasonable attorneys' fees; all other costs and expenses incurred by Tenant in consummating the transfer of the Premises; and all reasonable expenses (except as specified in the next sentence) incurred by Landlord in consummating the transfer of the Premises pursuant to this Section 20.1. Landlord shall pay the costs and expenses of clearing title as required by Section 20. 1 (c)(i). 164 (d) Assignment. Tenant shall have the right, without Landlord's consent, to assign this purchase option, in whole, to any Entity at any time, whether or not Tenant also assigns its interest in the Lease. 20.2 Termination Option. (a) Notice. Provided that no Event of Default has occurred and is continuing, no later than six (6) months prior to the expiration of the Term, Tenant may notify Landlord in writing of its election to exercise an option ("Termination Option") to sell the Premises; provided, however that at any time Tenant can rescind its election to exercise its Termination Option if it then exercises its Purchase Option pursuant to Section 20.1 above. The six (6) month period is referred to herein as the "Sales Period". (b) Termination Option. After giving the notice set forth in section (a) above Tenant shall then use its best efforts to sell the Premises for cash to a third party purchaser (who is not an affiliate of Tenant within the meaning of Rule 405 under the Securities Act of 1933) and, if the Premises are not conveyed to such purchaser prior to the expiration of the Term, Tenant shall have no further right to sell the Premises, the Lease shall terminate, Tenant shall immediately vacate the Premises, and quitclaim all interest of Tenant, if any, therein to Landlord. (c) Termination Option Procedures. In the event that Tenant elects the Termination Option, Tenant shall use its best efforts throughout the Sales Period to obtain a purchaser (who is not an affiliate of Tenant as described above) for the Premises. Tenant shall have the exclusive right to market the Premises during the first four (4) months of the Sales Period (the "Exclusive Period"). Landlord may direct Tenant to hire and pay for no more than one (1) commission sales agent after the expiration of the Exclusive Period. Except as otherwise provided below, any sale by Tenant shall be for the highest cash bid submitted to Tenant, including any cash bid submitted by Landlord. The determination of the highest bid shall be made by Landlord prior to the end of the Sales Period. After the end of the Exclusive Period, Landlord may accept any bid solicited by Landlord, Tenant or its agent, in which case Tenant's sales effort may be suspended until the earlier of the closing of such sale on the last day of the Term or revocation or rejection of such cash bid. Notwithstanding the above provisions, Tenant may (i) accept during the Exclusive Period any cash bid (net of expenses of sale) which exceeds the Lease Investment Balance, and (ii) rescind the Termination Option at any time so long as it is exercising its Purchase Option, which shall be prior and superior to an accepted offer from a third party. If Landlord undertakes any sales efforts, Tenant shall promptly reimburse Landlord for any reasonable charges, costs and expenses incurred in such effort, including any commissions, allocated time charges, costs and expenses of internal counsel, external counsel or other attorneys' fees. (d) Payments under Termination Option. If Tenant elects the Termination Option, Tenant shall pay to Landlord on the last day of the Term in immediately available funds any Base Rent or Additional Rent due and owing under the Lease. Except as provided in Section 20.2(e), the proceeds (the "Proceeds") of any sale of the Premises pursuant to the Termination Option shall be paid to Landlord upon any such sale without 165 deductions, and not later than the expiration of the Lease Term. (e) Procedures Upon Sale under the Termination Option. Any sale pursuant to the Termination Option shall be consummated on the last day of the Term. To the extent the Proceeds exceed the Lease Investment Balance, such excess shall be paid out of escrow to Tenant. Upon payment to Landlord of all amounts due it under this Lease, Landlord shall execute and deliver to the purchaser of the Premises a grant deed in the same manner and subject to the same conditions and obligations as are set forth in Section 20.1(c) above and have the same obligation to deliver title and remove exceptions as set forth in said Section. Except as provided in the second sentence of this subparagraph, the Proceeds shall be applied first to the Lease Investment Balance, Tenant shall reimburse Landlord for the difference between the Lease Investment Balance (calculated immediately prior to receipt of the Proceeds) and the Proceeds, up to the amount of the Guaranteed Residual Value, and Landlord shall have no claim whatsoever to the Proceeds in excess of such amount upon receipt of such Proceeds. ARTICLE 21 COVENANTS OF LANDLORD 21.1 Title. In the event Tenant so requests in writing (and so long as either Tenant agrees to indemnify Landlord from any liabilities or obligations in connection therewith, or Landlord does not incur any liabilities or obligations in connection therewith), Landlord shall execute all documents, instruments and agreements reasonably requested by Tenant in order to accomplish any of the following in the manner reasonably requested by Tenant and within the time parameters reasonably requested by Tenant: (1) remove exceptions to title to or affecting the Premises; (2) create exceptions to title (including, without limitation, easements and rights of way) to or affecting the Premises; or (3) modify any then-existing exception to title. Tenant shall promptly reimburse Landlord for, or at Landlord's request, pay directly in advance, all reasonable costs, expenses and other amounts incurred or required to be expended by Landlord in order to comply with Tenant's requests made in accordance with the preceding sentence, and the failure of Tenant to reimburse or pay any such amounts shall result in the suspension of Landlord's obligations under such sentence with respect to that particular request until the amounts required to be paid by Tenant under this sentence have been paid. 21.2 Land Use. Except where requested by Tenant pursuant to this Section 21.2, Landlord shall not cause or give its written consent to any land use or zoning change affecting the Premises or any changes of street grade. In the event Tenant so requests in writing (and so long as either Tenant agrees to indemnify Landlord from any liabilities or obligations in connection therewith, or Landlord does not incur any liabilities or obligations in connection therewith), Landlord shall execute all documents, instruments and agreements reasonably requested by Tenant in order to accomplish any of the following in the manner reasonably requested by Tenant and within the time parameters reasonably requested by Tenant: (1) cause a change in any land use restriction or law affecting the Premises; (2) cause a change in the zoning affecting the Premises; or (3) 166 cause a change in the street grade with respect to any street in the vicinity of the Premises. Tenant shall promptly reimburse Landlord for, or at Landlord's request, pay directly in advance, all reasonable costs, expenses and other amounts incurred or required to be expended by Landlord in order to comply with Tenant's requests made in accordance with the preceding sentence, and the failure of Tenant to reimburse or pay any such amounts shall result in the suspension of Landlord's obligations under such sentence with respect to that particular request until the amounts required to be paid by Tenant under this sentence have been paid. 21.3 Transfer of Property Interests. Except as requested by Tenant pursuant to this Lease, Landlord shall not transfer to any third party any rights inuring to or benefits associated with the Premises (including, without limitation, zoning rights, development rights, air space rights, mineral, oil, gas or water rights). Nothing in this Section shall limit Landlord's rights pursuant to Section 14.2; provided that any purchaser of Landlord's interest in the Premises shall be bound by the terms of this Lease, including without limitation the terms of this Section 21.3). ARTICLE 22 MISCELLANEOUS 22.1 Relationship. Neither this Lease nor any agreements or transactions contemplated hereby shall in any respect be interpreted, deemed or construed as constituting Landlord and Tenant as partners or joint venturers, one with the other, or as creating any partnership, joint venture, association or, except as set forth in Section 22.2 below, any other relationship other than that of landlord and tenant: and, except as set forth in Section 22.2 below, both Landlord and Tenant agree not to make any contrary assertion, contention, claim or counterclaim in any action, suit or other legal proceeding involving either Landlord or Tenant or the subject matter of this Lease. 22.2 Form of Transaction: Certain Tax Matters. (a) Landlord and Tenant hereby agree and declare that the transactions contemplated by this Lease are intended to constitute, both as to matters of form and substance: (i) an operating lease for financial accounting purposes, and (ii) a financing arrangement (and not a "true lease") for purposes of Federal, state and local income, property or other forms of tax. Accordingly, and notwithstanding any other provision of this Lease to the contrary, Landlord and Tenant agree and declare that (A) the transactions contemplated hereby are intended to have a dual, rather than single, form and (B) all references in this Lease to the "Lease" of the Premises which fail to reference such dual form do so as a matter of convenience only and do not reflect the intent of Landlord and Tenant as to the true form of such arrangements. (b) Landlord and Tenant agree that, in accordance with their intentions and the substance of the transactions contemplated hereby, Tenant (and not Landlord) shall 167 be treated as the owner of the Premises for Federal, state, local income and property tax purposes and this Lease shall be treated as a financing arrangement. Tenant shall be entitled to take any deduction, credit allowance or other reporting, filing or other tax position consistent with such characterizations. Landlord shall not file any Federal, state or local income tax returns, reports or other statements in a manner which is inconsistent with the foregoing provisions of this Section 22.2. (c) Tenant acknowledges that it has retained accounting, tax and legal advisors to assist it in structuring this Lease and Tenant is not relying on any representations of Landlord regarding the proper treatment of this transaction for accounting, income tax or any other Purpose. 22.3 Notices. Each Notice shall be in writing and shall be sent by personal delivery, overnight courier (charges prepaid or billed to the sender) or by the deposit of such with the United States Postal Service, or any official successor thereto, designated as registered or certified mail, return receipt requested, bearing adequate postage and in each case addressed as provided in the Basic Lease Provisions. Each Notice shall be effective upon being personally delivered or actually received. The time period in which a response to any such Notice must be given or any action taken with respect thereto shall commence to run from the date of personal delivery or receipt of the Notice by the addressee thereof, as reflected on the return receipt of the Notice. Rejection or other refusal to accept shall be deemed to be receipt of the Notice sent. By giving to the other party at least thirty (30) days' prior Notice thereof, either party to this Lease shall have the right from time to time during the Term of this Lease to change the address(es) thereof and to specify as the address(es) thereof any other address(es) within the continental United States of America. 22.4 Severability of Provisions. If any term, covenant or condition of this Lease, or the application thereof to any Entity or circumstance, shall be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to Entities or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby. 22.5 Entire Agreement: Amendment. This Lease constitutes the entire agreement of Landlord and Tenant with respect to the subject matter hereof. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 22.6 Memorandum of Sublease of the Land and Lease of the Improvements. Neither party shall record this Lease. However, concurrently with the execution of this Lease, Landlord and Tenant have executed a Memorandum of Sublease of the Land and Lease of the Improvements ("Memorandum of Lease") in the form attached hereto as Exhibit E and by this reference made a part hereof, which Memorandum of Lease shall be promptly recorded in the Official Records. 22.7 Successors and Assigns. Subject to Articles 14 and 15, this Lease shall inure to the benefit of and be binding upon Landlord and Tenant and their respective heirs, 168 executors, legal representatives, successors and assigns. Whenever in this Lease a reference to any Entity is made, such reference shall be deemed to include a reference to the heirs, executors, legal representatives, successors and assigns of such Entity. 22.8 Commissions. Landlord and Tenant each represent and warrant that except as provided below, neither has dealt with any broker in connection with this transaction and that no real estate broker, salesperson or finder has the right to claim a real estate brokerage, salesperson's commission or finder's fee by reason of contact between the parties brought about by such broker, salesperson or finder. Each party shall hold and save the other harmless of and from any and all loss, cost, damage, injury or expense arising out of or in any way related to claims for real estate broker's or salesperson's commissions or fees based upon allegations made by the claimant that it is entitled to such a fee from the indemnified party arising out of contact with the indemnifying party or alleged introductions of the indemnifying party to the indemnified party. Landlord acknowledges that it is responsible for the payment of a commission to Pacific Union Financial Services in connection with this Lease, which amount shall not be reimbursable to Landlord by Tenant or otherwise added to the Lease Investment Balance. 22.9 Attorneys' Fees. In the event any action is brought by Landlord or Tenant against the other to enforce or for the breach of any of the terms, covenants or conditions contained in this Lease, the prevailing party shall be entitled to recover reasonable attorneys' fees to be fixed by the court, together with costs of suit therein incurred. Tenant shall pay the reasonable attorneys' fees incurred by Landlord for the review and negotiation of this Lease. 22.10 Governing Law. This Lease and the obligations of the parties hereunder shall be governed by and interpreted, construed and enforced in accordance with the laws of the State of California. 22.11 Counterparts. This Lease may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument. 22.12 Time Is of the Essence. Time is of the essence of this Lease, and of each provision hereof. 22.13 No Third Party Beneficiaries. This Lease is entered into by Landlord and Tenant for the sole benefit of Landlord and Tenant. There are no third party beneficiaries to this Lease. 22.14 Limitations on Recourse. The obligations of Tenant and Landlord under this Lease shall be without recourse to any partner, officer, trustee, beneficiary, shareholder, director or employee of Tenant or Landlord. Except for the gross negligence or willful misconduct of Landlord, or for breach of Landlord's obligation to fund pursuant to Article 6 above, Landlord's liability to Tenant for any default by Landlord under this Lease: (1) shall be limited to Landlord's equity in the Premises; and (2) shall extend to any actual damages of Tenant, but shall not extend to any foreseeable and unforeseeable consequential damages. 22.15 Estoppel Certificates. Within thirty (30) days after request therefor by 169 either party, the non-requesting party shall deliver, in recordable form, a certificate to any proposed mortgagee, purchaser, sublessee or assignee and to the requesting party, certifying (if such be the case) that this Lease is in full force and effect, the date of Tenant's most recent payment of Rent, that, to the best of its knowledge, the non-requesting party has no defenses or offsets outstanding, or stating those claimed, and any other information reasonably requested. Failure to deliver said statement in time shall be conclusive upon the non-requesting party that: (a) this Lease is in full force and effect, without modification except as may be represented by the requesting party; (b) there are no uncured defaults in the requesting party's performance and the non-requesting party has no right of offset, counterclaim or deduction against the non-requesting party's obligations hereunder; (c) no more than one month's Base Rent has been paid in advance; and (d) any other matters reasonably requested in such certificate. 22.16 Collateral. The parties acknowledge that Tenant has pledged certain collateral ("Collateral") to Landlord to secure Tenant's obligations pursuant to the Pledge Agreement. If Landlord applies any of the Collateral to satisfy an obligation hereunder, such application shall be deemed to reduce the Lease Investment Balance under this Lease on a dollar-for-dollar basis. Tenant shall have no claims, rights or causes of action against Landlord arising from any application of the Collateral to satisfy any obligation under the Lease. 22.17 As-Is Lease. Landlord makes no representations or warranties concerning the condition, suitability or any other matters relating to the Premises, and Tenant hereby acknowledges that Tenant leases the Premises from Landlord on an "as is" basis. 22.18 Net Lease. Except as otherwise provided in this Lease, Tenant agrees that this Lease is an absolute net Lease, and the Base Rent called for hereunder shall be paid as required net of all expenses associated with the Premises, including without limitation, Real Estate Taxes and insurance premiums for the insurance required to be carried hereunder, and all other reasonable and customary costs and expenses incurred by Landlord in connection with the Premises or this Lease, all of which shall be paid or reimbursed by Tenant unless otherwise specifically provided herein. Tenant agrees to reimburse Landlord, within five (5) business days following receipt of any written demand therefor, for all reasonable and customary fees (including fees to SBNYTC), late charges, title endorsement, custodian fees related to the Collateral and other costs and expenses charged to Landlord which accrue during any period unless such expenses are capitalized and added to the Lease Investment Balance. 22.19 Representations and Warranties. Tenant and Landlord each hereby represents and warrants to the other that: (i) such party is duly organized and existing under the laws of the jurisdiction in which it is formed, and is qualified to do business in the State of California; (ii) such party has the full right and authority to enter into this 170 Lease, consummate the sale, transfers and assignments contemplated herein and otherwise perform its obligations under this Lease; (iii) the person or persons signatory to this Lease and any document executed pursuant hereto on behalf of such party have full power and authority to bind such party; and (iv) the execution and delivery of this Lease and the performance of such party's obligations hereunder do not and shall not result in the violation of its organizational documents or any material contract or agreement to which such party may be a party. 22.20 Financial Reporting. Tenant shall provide to Landlord: (1) annually, within one hundred (100) days after the end of each of Tenant's fiscal years during the Term, an annual report on Form 10-K for such fiscal years as filed with the Securities and Exchange Commission; (2) quarterly, within sixty (60) days after the end of each of Tenant's fiscal quarters during the Term, quarterly reports on Form 10-Q as filed with the Securities and Exchange Commission; (3) within thirty (30) days after filing with the Securities and Exchange Commission, any other nonconfidential reports, final proxy statements or registration statements on form S-3 or S-4 (after being declared effective) filed during the Term with the Securities and Exchange Commission; and (4) an officer's certificate stating that no Event of Default has occurred under the Lease in the form attached as Exhibit F, with the delivery of the Form 10(k) provided for in clause (1) above. 22.21 Nondiscrimination. Tenant herein covenants by and for itself, its heirs, executors, administrators and assigns, and all persons claiming under or through it, and this Lease is made and accepted upon and subject to the following conditions: That there shall be no discrimination against or segregation of any person or group of persons on account of race, color, creed, religion, sex, age, handicap, marital status, ancestry or national origin in the leasing, subleasing, transferring, use, occupancy, tenure or enjoyment of the premises herein leased, nor shall Tenant itself, or any person claiming under or through it, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, lessees, subtenants, sublessees or vendees in the premises herein leased. ARTICLE 23 INDEMNIFICATION 23.1 Tax Indemnity. Notwithstanding anything in Article 8 to the contrary, Tenant shall protect and defend Landlord from and against all criminal prosecution regarding and shall indemnify and hold Landlord harmless from and against any and all loses, costs, liabilities or damages (including reasonable attorneys' fees and disbursements and court costs) arising by reason of: (a) Any and all U.S. Federal, state or local income taxes imposed upon Landlord in consequence of Landlord being treated as the owner or lessor of the Premises (or any part thereof) for such tax purposes (provided that Landlord has fully complied with its obligations under Section 22.2(b)); 171 (b) Any and all taxes imposed upon Tenant (except to the extent that such taxes are imposed upon Tenant as a result of Landlord's failure to comply with its obligations under this Lease); (c) Any and all taxes required to be withheld from payments made by Tenant to a third party not related to or affiliated with Landlord; (d) Any and all Real Estate Taxes; (e) Any and all taxes owed by Landlord as a result of payment made by Tenant to Landlord pursuant to Tenant's indemnity obligations under this Section 23.1; and (f) Any and all costs, liabilities or damages (including reasonable attorneys' fees) incurred by Landlord in obtaining indemnification payments from Tenant under the provisions of this Section 23. 1. Tenant's obligation to reimburse or indemnify Landlord for any taxes, governmental fees, penalties, interest or other supplemental tax charges under this Lease shall be reduced by the value of any related or offsetting tax benefits derived or realized by Landlord. Tenant's duty to indemnify Landlord under this Section 23.1 shall apply only to taxes arising during the Term (whether or not due and payable at the conclusion of the Term), but shall otherwise survive the expiration or earlier termination of this Lease. 23.2 Environmental Indemnity. Tenant agrees to indemnify and hold Landlord harmless from and against, and to reimburse Landlord with respect to, any and all claims, demands, causes of action, losses, damages, liabilities, costs and expenses (including attorneys' fees and court costs), fines and/or penalties of any and every kind or character, known or unknown, fixed or contingent, asserted or potentially asserted against or incurred by Landlord at any time and from time to time by reason of, in connection with or arising out of (A) the failure of Tenant to perform any obligation herein required to be performed by Tenant regarding Applicable Environmental Laws, (B) any violation of any Applicable Environmental Law by Tenant or with respect to the Premises or any disposal or other release by Tenant or with respect to the Premises of any hazardous substance, environmental contaminants or solid waste on or to the Premises, whether or not resulting in a violation of any Applicable Environmental Law, (C) any act, omission, event or circumstance by Tenant or with respect to the Premises which constitutes or has constituted violation of any Applicable Environmental Law with respect to the Premises, regardless of whether the act, omission, event or circumstance constituted a violation of any Applicable Environmental Law at the time of its existence or occurrence, and (D) any and all claims or proceedings (whether brought by private party or governmental agencies) for bodily injury, property damage, abatement or remediation, environmental damage or impairment or any other injury or damage resulting from or relating to any hazardous or toxic substance or contaminated material located upon or migrating into, from or through the Premises or the Improvements (whether or not the release of such materials was caused by Tenant, a subtenant, a prior owner of the Premises 172 or any other Entity) which Landlord may incur. Tenant's duty to indemnify Landlord under this Section 23.2 shall survive the expiration or earlier termination of the Lease with respect to events occurring during or prior to the Term or after the Term while Landlord has record title to and Tenant is occupying the Premises. 23.3 Construction Indemnification. Tenant will defend, protect, indemnify and save harmless Landlord from and against all liabilities, obligations, claims, damages, causes of action, costs and expenses, imposed upon or incurred by Landlord by reason of the occurrence or existence of any of the following during the Term, except to the extent caused by the willful misconduct, gross negligence, or willful breach of contract of Landlord or its agents: (1) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Premises or Improvements; (2) performance of any labor or services or the furnishing of any materials or other property in respect of the Premises or the Improvements; (3) the negligence or willful misconduct on the part of Tenant or any of its agents, invitees, employees or contractors or any other persons entering onto the Premises or the Improvements at the request, behest or with the permission of Tenant; (4) the use or occupancy of the Improvements; (5) the use of the Land; or (6) any breach by the "Owner" under the contracts entered into by Tenant as Landlord's agent pursuant to the terms of the Construction Management Agreement if such breach is caused by Tenant's actions or omissions or because of Tenant's failure to discharge its duties under the Construction Management Agreement. Tenant's duty to indemnify Landlord under this Section 23.3 shall survive the expiration or earlier termination of this Lease with respect to events occurring during the Term or after the Term while Landlord has record title to and Tenant is occupying the Premises. 23.4 General Indemnity. Tenant shall defend, indemnify, and hold Landlord harmless from and against any and all losses, costs, expenses, liabilities, claims, causes of action and damages of all kinds that may result to Landlord, including reasonable attorneys' fees and disbursements incurred by Landlord, arising because of any failure by Tenant to perform any of its obligations under this Lease. Tenant's duty to indemnify Landlord under this Lease shall survive the expiration or earlier termination of this Lease. IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of the day and year first above written. TENANT: 173 ADOBE SYSTEMS INCORPORATED, a California Corporation By Name Its LANDLORD: 174 SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation By Name Its By Name Its 175 Exhibit A DESCRIPTION OF THE LAND [To be completed] 176 Exhibit B CLOSING COSTS AND FEES TO BE INCLUDED IN INITIAL ADVANCE The following items shall be included in the definition of the Initial Advance under Section 2.21 of the Lease: 1. Arrangement fee (SBL&F) 177 $150,0002.Fees of Landels, Ripley & Diamond 178 $ 37,5003.Title Insurance premiums paid by Landlord at the closing of this transaction 179 $ 18,8104.Cushman & Wakefield (appraisal) 180 $ 9,5005.Fee of SBNYTC (set up fee) 181 $ 2,500 182 Exhibit C PERMITTED TITLE EXCEPTIONS [To be attached] 183 Exhibit D RENT COMMENCEMENT DATE MEMORANDUM THIS RENT COMMENCEMENT DATE MEMORANDUM ("Memorandum") is entered into this ____ day of__________, 199_, by and between SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation ("Landlord"), and ADOBE SYSTEMS INCORPORATED, a California corporation ("Tenant") concerning that certain Lease ("Lease") between Landlord and Tenant dated _____________ _____, 1994. Any capitalized terms not defined in this Memorandum shall have their meaning as defined in the Lease. 1. Pursuant to Section 6.2 of the Lease, Landlord and Tenant are required to enter into this Memorandum within thirty (30) days after the Rent Commencement Date for the Premises. 2. Landlord and Tenant agree the that Rent Commencement Date for the Premises is ____________________, 199__. 3. The dollar value of the Guaranteed Residual Value (defined in Section 2.18 of the Lease) for the Premises is $_________________________. IN WITNESS WHEREOF, the parties have executed this Memorandum as of the date and year first above written. TENANT: 184 ADOBE SYSTEMS INCORPORATED, a California Corporation By Name Its LANDLORD: 185 SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation By Name Its By Name Its 186 Exhibit E (MEMORANDUM OF SUBLEASE OF THE LAND AND LEASE OF THE IMPROVEMENTS) RECORDING REQUESTED BY, AND WHEN RECORDED, RETURN TO: _____________________________ _____________________________ _____________________________ Attention: __________________________________, Esq. MEMORANDUM OF SUBLEASE OF THE LAND AND LEASE OF THE IMPROVEMENTS THIS MEMORANDUM OF SUBLEASE OF THE LAND AND LEASE OF THE IMPROVEMENTS ("Memorandum of Lease") is executed as of October 12,1994, by and between SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation ("Landlord"), and ADOBE SYSTEMS INCORPORATED, a California corporation ("Tenant"). RECITALS WHEREAS, Landlord and Tenant have executed that certain lease ("Lease") dated as of October 12, 1994, covering a leasehold interest in certain land located on the real property located in the City of San Jose, Santa Clara County, California as more particularly described in Schedule I attached hereto and incorporated herein by this reference ("Land") and the Improvements which may come to be located on said Land (the Land and Improvements are referred to herein as the "Premises"); and WHEREAS, Landlord and Tenant desire to record notice of the Lease in the real estate records of Santa Clara County, California: NOW, THEREFORE, in consideration of the foregoing, Landlord and Tenant hereby declare as follows: 1. Demise. Landlord hereby leases the Premises to Tenant and Tenant hereby leases the Premises from Landlord, subject to the terms, covenants and conditions contained in the Lease. 2. Expiration Date. The term of the Lease ("Term") shall commence with respect to the Land on the date hereof and with respect to the Improvements as provided for in the Lease, and shall expire on October 15, 2001, subject to Tenant's right to extend the Term for one additional five (5) year period pursuant to the terms of this Lease. 3. Option to Purchase. Tenant has an option to purchase the Premises, as more particularly described in the Lease, at any time during the Term (including any 187 extension thereof). 4. Restrictions on Encumbrances. Landlord is prohibited from recording against the Premises liens (including, without limitation, deeds of trust), encumbrances, and other matters that would constitute exceptions to title, and from amending or modifying any of the foregoing that may exist now or during the Term, as more particularly described in the Lease. 5. Restrictions on Transfers by Landlord. Subject to certain exceptions, Landlord may transfer its interest in the Premises to a third party subject to the restrictions which are set forth with more particularity in the Lease. 6. Counterparts. This Memorandum of Lease may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument. IN WITNESS WHEREOF, Landlord and Tenant have executed this Memorandum of Lease as of the date and year first written above. TENANT: 188 ADOBE SYSTEMS INCORPORATED, a California Corporation By Name Its LANDLORD: 189 SUMITOMO BANK LEASING AND FINANCE, INC., a Delaware corporation By Name Its By Name Its 190 Schedule 1 to Exhibit E [To be inserted] 191 Exhibit F FORM OF OFFICER'S CERTIFICATE The undersigned, __________________________________ of Adobe Systems Incorporated, a California corporation hereby certifies that, as to the best of his/her knowledge, as of the date hereof the lease dated____________ __, 1994 by and between Sumitomo Bank Leasing and Finance, Inc. as Landlord and Adobe Systems Incorporated as Tenant is in full force and effect, and Tenant is not in default thereunder. Date:___________________________ ____________________________ 192 EX-11 4 EXHIBIT 11 ADOBE SYSTEMS INCORPORATED EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE (In thousands, except per share data)
Years Ended ----------------------------------------- November 25 November 26 November 27 1994 1993 1992 ----------- ---------- ---------- Net income $ 6,309 $ 66,545 $ 50,389 ----------- ---------- ---------- ----------- ---------- ---------- Primary shares outstanding: Weighted average shares outstanding during the year 59,756 58,141 59,190 Common stock equivalent shares 1,864 2,003 2,003 ----------- ---------- ---------- 61,620 60,144 61,193 ----------- ---------- ---------- ----------- ---------- ---------- Fully diluted shares outstanding: Weighted average shares outstanding during the year 59,756 58,141 59,190 Common stock equivalent shares 2,063 2,047 2,003 ----------- ----------- ---------- 61,819 60,188 61,193 ----------- ----------- ---------- ----------- ---------- ---------- Primary net income (loss) per common stock and common stock equivalent share $ .10 $ 1.11 $ 0.82 ----------- ---------- ---------- ----------- ---------- ---------- Fully diluted net income (loss) per common stock and common stock equivalent share $ .10 $ 1.11 $ 0.82 ----------- ---------- ---------- ----------- ---------- ----------
193 EX-21 5 EXHIBIT 21 ADOBE SYSTEMS INCORPORATED EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Subsidiary Legal Name Jurisdiction of Incorporation - - --------------------------- --------------------------------------- The Americas: Adobe Systems Incorporated California Adobe Systems FSC, Inc. Territory of Guam Aldus Corporation Washington Image Club Graphics, Inc. Canada LTC OEM Corporation California Aldus International, Inc. Washington Aldus Trading, Ltd. Bermuda Compumation, Inc. Pennsylvania OCR Systems, Inc. Pennsylvania Europe: Adobe Systems Europe Ltd. United Kingdom Adobe Systems Direct Ltd. United Kingdom Adobe Systems Holding BV The Netherlands Adobe Systems Nordic AB Sweden Adobe Systems Benelux BV The Netherlands Aldus Software GmbH Federal Republic of Germany Aldus Manutius Software AG Switzerland Adobe Systems France SARL France Adobe Systems Italia SRL Italy Adobe Informatica Spain Adobe Systems SARL France Adobe Systems U.K., Ltd. United Kingdom Adobe Systems GmbH Federal Republic of Germany Aldus Ireland Ireland Aldus Sverige AB Sweden Greenfield Investments, Ltd. Ireland Pacific Rim: Adobe Systems Company Ltd. Japan Adobe Systems Japan California Adobe Australia Pty. Australia All subsidiaries of the registrant are wholly owned and do business under their legal names. 194 EX-23 6 EXHIBIT 23 ADOBE SYSTEMS INCORPORATED EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders 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 and No. 33-86482) on FORM S-8 of Adobe Systems Incorporated of our reports dated December 20, 1994, relating to the consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of November 25, 1994 and November 26, 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended November 25, 1994, appearing on page 58 of this FORM 10-K. As indicated in our report, we did not audit the consolidated financial statements of Aldus Corporation and subsidiaries, a company acquired by Adobe Systems Incorporated in a business combination accounted for as a pooling-of-interests. Those statements were auditied by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Aldus Corporation, is based solely on the reports of the other auditors. KPMG Peat Marwick LLP San Jose, California February 13, 1995 195 EX-23.1 7 EXHIBIT 23.1 ADOBE SYSTEMS INCORPORATED EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 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 and No. 33-86482) on FORM S-8 of Adobe Systems Incorporated of our report dated January 28, 1994, relating to the consolidated balance sheet of Aldus Corporation as of December 31, 1993 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1993, appearing on page 95 of this FORM 10-K. Ernst & Young LLP Seattle, Washington February 13, 1995 EX-27 8 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT NOVEMBER 25, 1994 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED NOVEMBER 25, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS NOV-25-1994 NOV-27-1993 NOV-25-1994 190,091 210,269 99,838 3,253 9,619 532,363 113,315 74,211 625,503 168,732 0 142,207 0 0 314,564 625,503 156,652 597,772 111,810 111,810 453,459 1,518 0 39,997 33,688 6,309 0 0 0 6,309 0.10 0.10
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