<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_____________ TO______________
COMMISSION FILE NUMBER: 0-15175
ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 77-0019522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
345 PARK AVENUE, SAN JOSE, CALIFORNIA 95110-2704
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 536-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Shares Outstanding
Class September 25, 1998
----- ------------------
<S> <C>
Common stock, $0.0001 par value 65,710,336
</TABLE>
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<PAGE>
TABLE OF CONTENTS
Page No.
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income
Three Months Ended August 28, 1998 and August 29, 1997
and Nine Months Ended August 28, 1998 and August 29, 1997 3
Condensed Consolidated Balance Sheets
August 28, 1998 and November 28, 1997 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended August 28, 1998 and August 29, 1997 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 28
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 33
Summary of Trademarks 34
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
AUGUST 28 AUGUST 29 AUGUST 28 AUGUST 29
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Licensing $ 40,825 $ 45,159 $125,132 $149,880
Applications products 182,107 184,880 522,923 534,882
--------- --------- -------- --------
Total revenue 222,932 230,039 648,055 684,762
Direct costs 26,781 32,689 84,059 99,636
--------- --------- -------- --------
Gross margin 196,151 197,350 563,996 585,126
--------- --------- -------- --------
Operating expenses:
Research and development 53,598 43,876 153,335 123,326
Sales and marketing 84,126 78,392 242,787 225,609
General and administrative 24,587 18,917 69,555 57,519
Acquired in-process
technology 2,000 2,812 6,998 5,969
Restructuring and other
charges 37,940 1,769 38,505 (590)
--------- --------- -------- --------
Total operating expenses 202,251 145,766 511,180 411,833
--------- --------- -------- --------
Operating income (loss) (6,100) 51,584 52,816 173,293
--------- --------- -------- --------
Nonoperating income, net:
Investment gain 215 25,526 12,489 24,936
Interest and other income 6,127 8,418 22,217 23,670
--------- --------- -------- --------
Total nonoperating income, net 6,342 33,944 34,706 48,606
--------- --------- -------- --------
Income before income taxes 242 85,528 87,522 221,899
Provision for income taxes 90 32,100 32,646 81,881
--------- --------- -------- --------
Net income $ 152 $ 53,428 $ 54,876 $140,018
--------- --------- -------- --------
--------- --------- -------- --------
Basic net income per share $ -- $ .73 $ .82 $ 1.94
--------- --------- -------- --------
--------- --------- -------- --------
Shares used in computing basic
net income per share 67,278 72,766 67,271 72,103
--------- --------- -------- --------
--------- --------- -------- --------
Diluted net income per share $ -- $ .72 $ .80 $ 1.88
--------- --------- -------- --------
--------- --------- -------- --------
Shares used in computing diluted
net income per share 68,412 74,528 68,850 74,305
--------- --------- -------- --------
--------- --------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 28 NOVEMBER 28
1998 1997
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $183,795 $267,576
Short-term investments 259,471 235,380
Receivables, net of allowances of $5,260 and $3,634,
respectively 113,722 130,974
Other current assets 38,926 45,016
-------- --------
Total current assets 595,914 678,946
Property and equipment, net 95,244 80,978
Other assets 192,067 163,148
Deferred income taxes 19,742 16,999
-------- --------
$902,967 $940,071
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade and other payables $46,690 $57,857
Accrued expenses 96,392 94,358
Accrued restructuring charges 24,542 8,383
Income taxes payable 43,402 48,343
Deferred revenue 12,957 15,706
-------- --------
Total current liabilities 223,983 224,647
-------- --------
Stockholders' equity:
Common stock, $0.0001 par value 7 7
Additional paid-in capital 354,172 291,274
Retained earnings 708,780 663,861
Unrealized gains on investments, net 875 3,590
Cumulative translation adjustment (4,753) (4,620)
Treasury stock, at cost (380,097) (238,688)
-------- --------
Total stockholders' equity 678,984 715,424
-------- --------
$902,967 $940,071
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
AUGUST 28 AUGUST 29
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54,876 $ 140,018
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense 2,094 4,021
Depreciation and amortization 41,430 34,732
Deferred income taxes (2,811) (16,155)
Provision for losses on accounts receivable 2,010 881
Tax benefit from employee stock plans 8,955 18,427
Equity in net income of Adobe Ventures 640 956
Gain on sale and distribution of equity investments (12,967) (27,645)
Write-off of acquired in-process technology 6,998 5,969
Non-cash restructuring and other charges 9,337 --
Changes in operating assets and liabilities:
Receivables 14,394 (7,654)
Other current assets 4,041 (64)
Trade and other payables (10,452) 3,934
Accrued expenses 14,448 6,077
Accrued restructuring costs 19,329 (2,125)
Income taxes payable (4,941) (3,497)
Deferred revenue (2,682) 749
--------- -----------
Net cash provided by operating activities 144,699 $ 158,624
--------- -----------
Cash flows from investing activities:
Purchases of short-term investments (871,465) (2,187,336)
Maturities and sales of short-term investments 845,905 2,136,511
Acquisitions of property and equipment (52,713) (25,348)
Additions to other assets (47,516) 3,599
Acquisitions, net of cash acquired -- (6,121)
--------- -----------
Net cash used for investing activities (125,789) (78,695)
--------- -----------
</TABLE>
(Continued)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
AUGUST 28 AUGUST 29
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock $ 51,849 $ 58,128
Repurchase of common stock (141,409) (53,255)
Payment of dividends (12,998) (17,338)
---------- ----------
Net cash used by financing activities (102,558) (12,465)
---------- ----------
Effect of foreign currency exchange rates on
cash and cash equivalents (133) (1,298)
---------- ----------
Net increase (decrease) in cash and cash equivalents (83,781) 66,166
Cash and cash equivalents at beginning of period 267,576 110,745
---------- ----------
Cash and cash equivalents at end of period $ 183,795 $ 176,911
---------- ----------
---------- ----------
Supplemental disclosures:
Cash paid during the period for income taxes $ 19,579 $ 54,986
---------- ----------
---------- ----------
Noncash investing and financing activities:
Cash dividends declared but not paid $ 3,351 $ 3,606
---------- ----------
---------- ----------
Dividend in-kind declared but not issued $ -- $ 8,728
---------- ----------
---------- ----------
Dividend in-kind distributed $ 7,197 $ 21,593
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements of
Adobe Systems Incorporated ("Adobe" or the "Company") have been prepared in
conformity with generally accepted accounting principles, consistent in all
material respects with those applied in the Company's Annual Report on Form 10-K
for the year ended November 28, 1997. The interim financial information is
unaudited but reflects all normal adjustments which are, in the opinion of
management, necessary to provide fair condensed consolidated balance sheets and
condensed consolidated statements of income and cash flows for the interim
periods presented. The interim financial statements should be read in
conjunction with the financial statements in the Company's Annual Report on Form
10-K for the year ended November 28, 1997.
The results of operations for the interim period ended August 28, 1998, are
not necessarily indicative of the results to be expected for the full year.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP
97-2 establishes standards relating to the recognition of all aspects of
software revenue. Based on the Company's ongoing assessment of the impact SOP
97-2 may have on its consolidated results of operations, the Company is
modifying certain aspects of its business model such that any impact will not be
significant. The Company will adopt SOP 97-2 for its fiscal year 1999.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and displaying comprehensive income and its components in the
financial statements. It does not, however, require a specific format for the
disclosure but requires the Company to display an amount representing total
comprehensive income for the periods presented in its financial statements. The
Company will be required to implement SFAS No. 130 for its first quarter of
fiscal year 1999.
SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the manner in which public companies report information about operating segments
in annual and interim financial statements. The Company is currently evaluating
the operating segment information to determine whether this will have an impact
on its financial statement reporting. The Company will be required to implement
SFAS No. 131 for its fiscal year 1999.
7
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVES AND HEDGING
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
and requires the Company to recognize all derivatives as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and
losses resulting from changes in fair value would be accounted for depending on
the use of the derivative and whether it is designated and qualifies for hedge
accounting. The Company will be required to implement SFAS No. 133 for its
fiscal year 2000. The Company has not determined the impact that SFAS No. 133
will have on its financial statements and believes that such determination will
not be meaningful until closer to the date of initial adoption.
RECLASSIFICATIONS
Certain amounts in the 1997 Condensed Consolidated Statement of Cash
Flows have been reclassified to conform to the 1998 presentation.
NOTE 2. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
AUGUST 28 NOVEMBER 28
1998 1997
--------- -----------
<S> <C> <C>
Equity investments $ 49,414 $ 35,689
Purchased technology and licensing
agreements 3,463 5,043
Restricted funds and security deposits 130,260 102,962
Miscellaneous other assets 23,139 45,097
--------- -----------
206,276 188,791
Less accumulated amortization 14,209 25,643
--------- -----------
$ 192,067 $ 163,148
--------- -----------
--------- -----------
</TABLE>
8
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
NOTE 3. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
AUGUST 28 NOVEMBER 28
1998 1997
----------- -----------
<S> <C> <C>
Accrued compensation and benefits $ 26,274 $ 37,833
Sales and marketing allowances 15,096 13,028
Other 55,022 43,497
----------- -----------
$ 96,392 $ 94,358
----------- -----------
----------- -----------
</TABLE>
NOTE 4. RESTRUCTURING AND OTHER CHARGES
In the third quarter of fiscal 1998, the Company implemented a
restructuring program aimed at streamlining its underlying cost structure to
better position the Company for growth and profitability. As part of the
restructuring program, the Company implemented a reduction in force of
approximately 350 positions, for the most part in its North American operations.
The reductions came primarily from overhead areas, divested business units and
redundant marketing activities, and as of August 31, 1998, the majority of these
terminations were completed. In addition to severance and related charges
associated with the reduction in force, the restructuring program includes
charges for divesting two business units, vacating leased facilities and
canceling certain contracts. These actions and other non-recurring items
resulted in charges of $37.9 million, of which approximately $9.3 million were
non-cash charges. Of the $28.6 million in anticipated cash charges, $20.4
million remains accrued at August 28, 1998, and will be paid over the next
twelve months and financed through current working capital.
9
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
NOTE 4. RESTRUCTURING AND OTHER CHARGES (CONTINUED)
The following table depicts the restructuring and other activity through
August 28, 1998:
<TABLE>
<CAPTION>
ACCRUED ACCRUED
BALANCE AT TOTAL BALANCE AT
NOVEMBER 28 CHARGES CASH AUGUST 28
1997 (CREDITS) PAYMENTS WRITE-DOWNS 1998
----------- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Severance and
related charges $ -- $13,699 $(3,124) $ -- $ 10,575
Lease termination
costs -- 4,526 -- -- 4,526
Impairment of
leasehold
improvements at
vacated facilities -- 6,382 -- (6,382) --
Divestiture of
business units -- 5,958 -- (5,958) --
Canceled contracts -- 6,178 (1,296) -- 4,882
Other nonrecurring
charges -- 4,367 -- (3,964) 403
----------- --------- -------- ----------- ----------
-- 41,110 (4,420) (16,304) 20,386
Accrual related
to previous
restructuring 8,383 (3,170) (1,057) -- 4,156
----------- --------- -------- ----------- ----------
$8,383 $37,940 $(5,477) $ (16,304) $ 24,542
----------- --------- -------- ----------- ----------
----------- --------- -------- ----------- ----------
</TABLE>
The Company divested two business units with aggregate net assets of
approximately $6.0 million, including cash of $3.8 million, in exchange for
$2.5 million in notes receivable and future royalties. The Company fully
offset the notes receivable with an allowance for doubtful accounts due to
uncertainties in collection. The two business units generated combined annual
revenues of approximately $25 million. Operating losses associated with these
two business units were not material.
Canceled contracts relate primarily to the divestiture of the two business
units and the termination of certain corporate marketing programs.
Other non-recurring charges primarily include the write-off of fixed assets
as a result of a book-to-physical inventory adjustment and goodwill relating to
a business in Japan that is in the process of restructuring its business
function.
Approximately $8.4 million in accrued restructuring costs remained as of
November 28, 1997 in connection with the mergers with Aldus and Frame in
fiscal 1994 and fiscal 1995, respectively. During fiscal 1998 lease payments
of $1.1 million were made against the accrual and, as a result of the
renegotiation of certain facility leases and the sublease of certain
facilities in fiscal 1998, $3.2 million of the restructuring accrual related
to the Aldus and Frame acquisitions was reversed in the third quarter of
fiscal 1998. The remaining accrual of $4.2 million at August 28, 1998 relates
to lease termination costs primarily in Europe.
10
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
NOTE 5. NET INCOME PER SHARE
Basic net income per share is computed using the weighted average number of
common shares outstanding for the period. Diluted net income per share is based
upon the weighted average common shares outstanding for the period plus dilutive
common equivalent shares including unvested restricted common stock, stock
options using the treasury stock method, and put warrants using the reverse
treasury stock method.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- ------------------------
AUGUST 28 AUGUST 29 AUGUST 28 AUGUST 29
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 152 $ 53,428 $ 54,876 $ 140,018
---------- --------- --------- ---------
---------- --------- --------- ---------
Shares used to compute basic net
income per share (weighted
average shares outstanding
during the period) 67,278 72,766 67,271 72,103
Dilutive common equivalent
shares:
Unvested restricted stock 67 179 67 179
Stock options 868 1,583 1,483 2,023
Put warrants 199 -- 29 --
---------- --------- --------- ---------
Shares used to compute diluted
net income per share 68,412 74,528 68,850 74,305
---------- --------- --------- ---------
---------- --------- --------- ---------
Basic net income per share $ -- $ .73 $ .82 $ 1.94
---------- --------- --------- ---------
---------- --------- --------- ---------
Diluted net income per share $ -- $ .72 $ .80 $ 1.88
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
NOTE 6. STOCKHOLDERS' EQUITY
STOCK REPURCHASE PROGRAMS
In September 1997, the Company's Board of Directors authorized, subject to
certain business and market conditions, the purchase of up to an additional 15
million shares of the Company's common stock over a two-year period. This new
stock repurchase program was in addition to an existing program, whereby the
Company has been authorized to repurchase shares to offset issuances under
employee stock option and stock purchase plans. During the fourth quarter of
fiscal 1997 and the first nine months of fiscal 1998, the Company repurchased
approximately 4.7 and 3.7 million shares of its common stock, respectively. As
of August 28, 1998, management is authorized to repurchase an additional 7.7
million shares under the 15 million share repurchase program.
PUT WARRANTS AND CALL OPTIONS
To facilitate the Company's stock repurchase programs, the Company sold put
warrants to independent third parties. Each warrant entitles the holder to sell
one share of Adobe's common stock to the Company at a specified price. On August
28, 1998, put warrants to sell
11
<PAGE>
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(CONTINUED)
NOTE 6. STOCKHOLDERS' EQUITY (CONTINUED)
approximately 1.4 million shares of the Company's common stock were
outstanding that expire on various dates through February 1999 with an
average exercise price of $40.67 per share. Under these put warrant
arrangements, the Company, at its option, can settle with physical delivery
or net shares equal to the difference between the exercise price and market
value at the date of exercise.
In addition, the Company purchased call options from independent third
parties that entitle the Company to buy its common stock on certain dates at
specified prices. On August 28, 1998, call options to purchase approximately
128,000 shares of the Company's common stock were outstanding that expire on
various dates through February 1999 with an average exercise price of $29.79
per share.
NOTE 7. COMMITMENTS
During the third quarter of fiscal 1998, the Company engaged two
investment banking firms to assist with responding to an unsolicited
acquisition proposal. As part of the agreement, the Company is required to
pay advisory fees of approximately $13.0 million, of which approximately
$12.0 million remains to be paid over the next two years. In the event that
the Company terminates either of the firms' services, the Company is still
committed to pay advisory fees until its obligation is fulfilled.
NOTE 8. SUBSEQUENT EVENT
STOCK OPTION REPRICING
In order to address concerns regarding employee retention, on September
23, 1998, the Board of Directors approved a stock option repricing program
whereby each eligible underwater stock option was automatically amended to
have an exercise price equal to the Company's closing stock price on that
day. All other terms of the options, including expiration dates, remain
substantially the same. Approximately 5 million options were amended under
this repricing program.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION (PRESENTED IN MILLIONS, EXCEPT SHARE AND PER SHARE
AMOUNTS) SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO.
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT ON FORM
10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. FACTORS THAT MIGHT
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FACTORS THAT MAY AFFECT
FUTURE RESULTS OF OPERATIONS." READERS SHOULD CAREFULLY REVIEW THE RISKS
DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
OF THIS QUARTERLY REPORT ON FORM 10-Q. THE COMPANY UNDERTAKES NO OBLIGATION
TO PUBLICLY RELEASE ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
RESULTS OF OPERATIONS
OVERVIEW
Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets,
and supports computer software products and technologies that enable users to
express and use information across both print and electronic media. The Company
offers a market-leading line of applications software and type products for
creating and distributing visually rich communication materials; licenses its
industry-standard technologies to major hardware manufacturers, software
developers, and service providers; and offers integrated software solutions to
businesses of all sizes. The Company distributes its products through a network
of original equipment manufacturer ("OEM") customers, distributors and dealers,
value-added resellers ("VARs"), and system integrators and has operations in
North America, Europe, Japan, and Asia, Pacific and Latin America.
13
<PAGE>
The following table sets forth for the three and nine month periods
ended August 28, 1998 and August 29, 1997, the Company's condensed
consolidated statements of income expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
AUGUST 28 AUGUST 29 AUGUST 28 AUGUST 29
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Licensing 18.3% 19.6% 19.3% 21.9%
Applications products 81.7 80.4 80.7 78.1
--------- --------- --------- ---------
Total revenue 100.0 100.0 100.0 100.0
Direct costs 12.0 14.2 13.0 14.6
--------- --------- --------- ---------
Gross margin 88.0 85.8 87.0 85.4
--------- --------- --------- ---------
Operating expenses:
Research and development 24.0 19.1 23.7 18.0
Sales and marketing 37.8 34.1 37.5 32.9
General and administrative 11.0 8.2 10.7 8.4
Acquired in-process
technology 0.9 1.2 1.1 0.9
Restructuring and other
charges 17.0 0.8 5.9 (0.1)
--------- --------- --------- ---------
Total operating expenses 90.7 63.4 78.9 60.1
--------- --------- --------- ---------
Operating income (loss) (2.7) 22.4 8.1 25.3
--------- --------- --------- ---------
Nonoperating income, net:
Investment gain 0.1 11.1 1.9 3.6
Interest and other income 2.7 3.7 3.5 3.5
--------- --------- --------- ---------
Total nonoperating income, net 2.8 14.8 5.4 7.1
--------- --------- --------- ---------
Income before income taxes 0.1 37.2 13.5 32.4
Provision for income taxes -- 14.0 5.0 12.0
--------- --------- --------- ---------
Net income 0.1% 23.2% 8.5% 20.4%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
14
<PAGE>
REVENUE
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
Total revenue $222.9 $230.0 (3.1)%
Nine months ended:
Total revenue $648.1 $684.8 (5.4)%
</TABLE>
Total revenue decreased 3.1% and 5.4% in the third quarter and first nine
months of fiscal 1998, respectively, as compared to the corresponding periods in
fiscal 1997. The weakness in the Japanese economy and a decrease in licensing
revenue were the principal factors in the Company's revenue decline.
As part of the Company's restructuring program announced and implemented in
the third quarter of fiscal 1998, two business units were divested which
generated combined annual revenues of approximately $25 million. The Company has
targeted annual revenue growth from its ongoing businesses of approximately 15%
as compared to fiscal 1998 reported revenue.
LICENSING REVENUE:
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
Licensing revenue $40.8 $45.2 (9.6)%
Percentage of total revenue 18.3% 19.6%
Nine months ended:
Licensing revenue $125.1 $149.9 (16.5)%
Percentage of total revenue 19.3% 21.9%
</TABLE>
Licensing revenue is derived from shipments by OEM customers of products
containing Adobe PostScript technology. Adobe PostScript is a software
language for describing to a printer the appearance of a page, including
text, graphics, and images. Products that contain PostScript technology
include: (1) black-and-white printers; (2) color printers; (3) slide
recorders; (4) imagesetters; (5) screen displays; and (6) digital copiers.
Adobe PostScript technology includes Adobe PostScript, Adobe PostScript Level
2, Adobe PostScript 3, and Adobe PostScript Extreme, all of which serve the
enterprise, graphic arts, production printing, small office/home office
markets, and high-volume production printing markets.
Licensing revenue decreased $4.4 million or 9.6% in the third
quarter of fiscal 1998 compared to the same quarter last year and $24.8
million or 16.5% in the first nine months of fiscal 1998 compared to the same
period in 1997 primarily due to weakness in the Japanese personal computer
and printer markets and a reduction in royalty revenue from Hewlett-Packard
Company's ("HP") desktop monochrome laser printer division which is now
incorporating a non-Adobe clone version of Adobe PostScript into some of its
products.
15
<PAGE>
The Company continues to be cautious about licensing revenue in the
short term due to weak Japanese market conditions and uncertain timing of OEM
customer introductions of products incorporating Adobe's latest technologies.
Based on a strategic review of the Company's printing systems business, the
Company is now focusing its resources on high growth revenue opportunities in
digital color, color inkjet, short-run on-demand digital printing, and
digital copiers. This strategic focus is intended to increase licensing
revenue growth in the long term, although the Company anticipates that its
licensing revenue in the remainder of fiscal 1998 will continue to be below
fiscal 1997 levels.
APPLICATIONS PRODUCTS REVENUE:
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
Applications products revenue $182.1 $184.9 (1.5)%
Percentage of total revenue 81.7% 80.4%
Nine months ended:
Applications products revenue $522.9 $534.9 (2.2)%
Percentage of total revenue 80.7% 78.1%
</TABLE>
Applications products revenue is derived predominantly from shipments of
application software programs marketed through distribution channels, with the
exception of Adobe PhotoDeluxe, which is primarily distributed through OEM
bundling agreements with digital camera, scanner, and personal computer
manufacturers.
Applications products revenue decreased $2.8 million or 1.5% in the
third quarter of fiscal 1998 compared to the same period last year due to a
decline in Adobe Illustrator and PageMaker revenues as the market
anticipates new releases of these products and due to ongoing weakness in the
Japanese economy. The decline in revenue was partially offset by increased
sales of Photoshop and revenue growth from the Company's video products,
Acrobat products, and ImageReady, the Company's new product for designing
images on the Internet.
For the first nine months of fiscal 1998, applications products revenue
decreased $12.0 million or 2.2% compared to the same period last year
primarily due to weakness in the Japanese economy and a continuing decline in
applications product revenue from the Macintosh platform.
DIRECT COSTS
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
Direct costs $26.8 $32.7 (18.1)%
Percentage of total revenue 12.0% 14.2%
Nine months ended:
Direct costs $84.1 $99.6 (15.6)%
Percentage of total revenue 13.0% 14.6%
</TABLE>
16
<PAGE>
Direct costs include product packaging, third party royalties, amortization
of localization costs and acquired technologies, and reserves for excess and
obsolete inventory. Direct costs were lower in the third quarter and first nine
months of fiscal 1998 compared with the same periods last year due to lower
royalty expenses and less product inventory requiring reserves for obsolescence.
Gross margin (expressed as a percentage of revenue), in general, is
affected by the mix of licensing revenue versus applications products revenue as
well as the product mix within application products and the mix of full and
upgrade products sold.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT:
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
Research and development $53.6 $43.9 22.2%
Percentage of total revenue 24.0% 19.1%
Nine months ended:
Research and development $153.3 $123.3 24.3%
Percentage of total revenue 23.7% 18.0%
</TABLE>
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 expenses increased in the third quarter and first
nine months of fiscal 1998 compared with the same periods last year due to
increased investment 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.
The Company continues to make significant investments in development of its
software products, including those targeted for the growing Internet market.
Research and development expenses in the fourth quarter of fiscal 1998
are expected to decrease in absolute dollars from the third quarter of fiscal
1998 as a result of the Company's restructuring program. Research and
development expenses beyond the fourth quarter of fiscal 1998 are expected to
increase in absolute dollars as the Company believes that continued
investments in research and development, including the recruiting and hiring
of software developers, are necessary to remain competitive in the
marketplace and are directly related to continued, timely development of new
and enhanced products.
17
<PAGE>
SALES AND MARKETING:
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
Sales and marketing $84.1 $78.4 7.3%
Percentage of total revenue 37.8% 34.1%
Nine months ended:
Sales and marketing $242.8 $225.6 7.6%
Percentage of total revenue 37.5% 32.9%
</TABLE>
Sales and marketing expenses include salaries and benefits, sales
commissions, travel expenses, and related facility costs for the Company's
sales, marketing, customer support, and distribution personnel. Sales and
marketing expenses also include the costs of programs aimed at increasing
revenue, such as advertising, trade shows and other market development programs.
Sales and marketing expenses increased in the third quarter of fiscal 1998
compared to the same period last year due to higher employee costs, trade show
expenses and customer support costs.
For the first nine months of fiscal 1998 compared with the same period last
year, sales and marketing expenses increased due to advertising and promotional
expenditures in connection with new product releases and sales and marketing
staff to support a growing number of products and customers.
Sales and marketing expenses in the fourth quarter of fiscal 1998 are
expected to decrease in absolute dollars from the third quarter of fiscal 1998
as a result of the Company's restructuring program. Sales and marketing expenses
beyond the fourth quarter of fiscal 1998 are expected to increase in absolute
dollars to support future revenue growth.
GENERAL AND ADMINISTRATIVE:
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
General and administrative $24.6 $18.9 30.0%
Percentage of total revenue 11.0% 8.2%
Nine months ended:
General and administrative $69.6 $57.5 20.9%
Percentage of total revenue 10.7% 8.4%
</TABLE>
General and administrative expenses consist principally of salaries and
benefits, travel expenses, and related facility expenses for 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.
18
<PAGE>
General and administrative expenses increased $5.7 million or 30% for the
third quarter of fiscal 1998 compared with the same period last year due to
increased expenses for outside legal and investment banking services in
connection with responding to an unsolicited acquisition proposal, increased
employee costs, and higher depreciation and building expenses associated with
increased staff and a more comprehensive administrative infrastructure. In
addition, the provision for losses on accounts receivable increased to reserve
for accounts receivable from certain customers which were deemed potentially
uncollectible.
For the first nine months of fiscal 1998 compared to the same period
last year, general and administrative expenses increased due to higher legal
and investment banking expenses, employee expenses and related depreciation
and building expenses associated with increased staff. Additionally, general
and administrative expenses in the first nine months of fiscal 1998 include
the write-off of $2.4 million of goodwill associated with an acquisition that
took place in fiscal 1997. These increased expenses were partially offset by
the reversal of an executive incentive bonus program accrual that was based
on various revenue and operating margin targets that were not attained.
General and administrative expenses in the fourth quarter of fiscal 1998
are expected to decrease in absolute dollars from the third quarter of fiscal
1998 as a result of the Company's restructuring program. General and
administrative expenses beyond the fourth quarter of fiscal 1998 are expected to
increase in absolute dollars to support future infrastructure needs and also due
to continuing commitments resulting from the Company's response to an
unsolicited acquisition proposal during the third quarter of fiscal 1998.
ACQUIRED IN-PROCESS TECHNOLOGY:
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
Acquired in-process technology $2.0 $2.8 (28.9)%
Percentage of total revenue 0.9% 1.2%
Nine months ended:
Acquired in-process technology $7.0 $6.0 17.2%
Percentage of total revenue 1.1% 0.9%
</TABLE>
For the third quarter and first nine months of fiscal 1998, acquired
in-process technology includes several acquired technologies associated with
Adobe products that have yet to reach technological feasibility as defined
within SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed," and for which no alternative uses have
been established by the Company.
The Company acquired two software companies during the first nine months
of fiscal 1997 and accounted for the transactions using the purchase method.
The aggregate purchase price of the companies was principally allocated to
in-process research and development, and was therefore expensed at the time
of the acquisitions.
19
<PAGE>
RESTRUCTURING AND OTHER CHARGES:
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
Restructuring and other charges $37.9 $1.8 2044.7%
Percentage of total revenue 17.0% 0.8%
Nine months ended:
Restructuring and other charges $38.5 $(0.6) --
Percentage of total revenue 5.9% (0.1)%
</TABLE>
In the third quarter of fiscal 1998, the Company implemented a
restructuring program aimed at streamlining its underlying cost structure to
better position the Company for growth and profitability. As part of the
restructuring program, the Company implemented a reduction in force of
approximately 350 positions, for the most part in its North American operations.
The reductions came primarily from overhead areas, divested business units and
redundant marketing activities, and as of August 31, 1998, the majority of these
terminations were completed. In addition to severance and related charges
associated with the reduction in force, the restructuring program includes
charges for divesting two business units, vacating leased facilities and
canceling certain contracts. These actions and other non-recurring items
resulted in charges of $37.9 million, of which approximately $9.3 million were
non-cash charges. For further information regarding the Company's restructuring
program, see Note 4 of the Notes to Condensed Consolidated Financial Statements
(Unaudited) included in Part I of this Quarterly Report. In the third quarter of
fiscal 1997, restructuring and other charges included a charge related to the
acquisition of intellectual property.
In addition to the aforementioned items, included in restructuring and
other charges for the first nine months of fiscal 1998 are expenses
associated with the reduction in force in the Company's Printing and Systems
business as part of the Company's initiative to refocus resources on
high-growth opportunities in the printing and digital copier markets. The
first nine months of fiscal 1997 also include a net gain on the divestiture
of a product line.
The Company currently does not anticipate further restructuring charges
during the remainder of fiscal 1998 as it completes its restructuring
program. As a result of the restructuring program, the Company's expense base
was reduced by approximately $60 million on an annualized basis. The majority
of cost savings are expected to be realized as a result of lower headcount,
reduced facility costs and terminated marketing programs. Beyond the fourth
quarter of fiscal 1998, these cost savings are expected to be offset by
increased operating expenses to support future revenue growth.
20
<PAGE>
NONOPERATING INCOME, NET
INVESTMENT GAIN :
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
Investment gain $ 0.2 $25.5 (99.2)%
Percentage of total revenue 0.1% 11.1%
Nine months ended:
Investment gain $12.5 $24.9 (49.9)%
Percentage of total revenue 1.9% 3.6%
</TABLE>
Investment gain consists principally of realized gains or losses from
direct investments as well as mark-to-market valuation adjustments for Adobe
Ventures L.P. investments.
During the third quarter of fiscal 1998, gains and losses resulting from
investment activity were minimal. In the third quarter of fiscal 1997,
investment gain included a $20.3 million gain for the distribution to
stockholders of 554,553 shares of Netscape Communications Corporation
("Netscape") stock as a stock dividend, and a gain of $7.3 million for the sale
of 200,000 shares of Netscape stock, both of which were partially offset by
losses from direct investments.
For the first nine months of fiscal 1998, the investment gain consists
principally of two transactions. McQueen International Limited ("McQueen"), a
former investee of the Company, was acquired by Sykes Enterprises, Incorporated
("Sykes"), a publicly traded company. In connection with the acquisition, the
Company exchanged its shares of McQueen for approximately 487,000 shares of
Sykes' restricted common stock and recorded a gain on the exchange of $6.7
million. In the third quarter of 1998, these shares were sold and an additional
minimal gain was recorded. In addition, the Company liquidated its investment in
Siebel Systems, Incorporated ("Siebel") through the distribution to its
stockholders of approximately 165,000 shares of Siebel as a dividend-in-kind and
the sale of its remaining Siebel shares. A gain was recognized on the
transaction of approximately $5.7 million.
INTEREST AND OTHER INCOME:
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
Interest and other income $6.1 $8.4 (27.2)%
Percentage of total revenue 2.7% 3.7%
Nine months ended:
Interest and other income $22.2 $23.7 (6.1)%
Percentage of total revenue 3.5% 3.5%
</TABLE>
Interest and other income consists principally of interest earned on
cash, cash equivalents, and short-term investments.
21
<PAGE>
The decrease in interest and other income in the third quarter and the
first nine months of fiscal 1998 compared with the same periods last year is
due to lower average cash and short-term investment balances in 1998,
primarily as a result of stock repurchases in the fourth quarter of fiscal
1997 and the first nine months of fiscal 1998.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
AUGUST 28 AUGUST 29
1998 1997 CHANGE
--------- --------- ------
(Dollars in millions)
<S> <C> <C> <C>
Three months ended:
Provision for income taxes $0.1 $32.1 (99.7)%
Percentage of total revenue 0.0% 14.0%
Effective tax rate 37.3% 37.5%
Nine months ended:
Provision for income taxes $32.6 $81.9 (60.1)%
Percentage of total revenue 5.0% 12.0%
Effective tax rate 37.3% 36.9%
</TABLE>
The Company's effective tax rate for the third quarter of fiscal 1998
was lower than the same period in fiscal 1997 primarily as a result of the
non-deductible in-process research and development charges incurred in the
third quarter of fiscal 1997.
In the first nine months of fiscal 1998, the Company's effective tax rate
increased primarily due to the non-deductible write-off of goodwill relating
to a fiscal 1997 acquisition, a decrease in research and experimentation tax
credits (the federal credit expired on June 30, 1998), and lower tax-exempt
interest income.
The Company expects that the effective tax rate for the remainder of
fiscal 1998 will be between 37% and 38% due to lower tax-exempt interest
income as a result of cash requirements for the Company's stock repurchase
programs and due to the expiration of the federal research and
experimentation tax credit on June 30, 1998.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that in the future its results of operations could
be affected by various factors, such as delays in shipment of the Company's
new products and major new versions of existing products, lack of market
acceptance of new products and upgrades, weakness in demand for Macintosh
application software and Macintosh-related printers, renegotiation of royalty
arrangements, growth in worldwide personal computer and printer sales and
sales price adjustments, consolidation in the OEM printer business, ongoing
weakness in the color copier business due to product transitions, industry
transitions to new business and information delivery models, ongoing weakness
in the Japanese and other Asian economies, "Year 2000" issues, and adverse
changes in general economic conditions in any of the countries in which the
Company does business.
The Company has stated that in fiscal 1999 its annual revenue growth
target is 15% and its operating margin target is 25% of total revenue. These
targets are used to assist the Company's management in making decisions about
the allocation of resources and investments, not as predictions of future
results. The targets reflect a number of assumptions, including assumptions
22
<PAGE>
about the Company's pricing, manufacturing costs and volumes, and the mix of
application products and licensing revenue, full and upgrade products,
distribution channels and geographic distribution. These and many other
factors described herein affect the Company's financial performance and may
cause the Company's future results, including results for the current
quarter, to vary materially from these targets.
The Company's ability to develop and market products, including upgrades
of current products that successfully adapt to changing customer needs, may
also have an impact on the results of operations. The Company's ability to
extend its core technologies into new applications and to anticipate or
respond to technological changes could affect its ability to develop these
products. A portion of the Company's future revenue will come from these new
applications. Delays in product or upgrade introductions, whether by the
Company or its OEM customers, could have an adverse effect on the Company's
revenue, earnings, or stock price. The Company cannot determine the ultimate
effect that these new products or upgrades will have on its revenue or
results of operations.
The market for the Company's graphics applications, particularly the
consumer products, is intensely and increasingly competitive and is
significantly affected by product introductions and market activities of
industry competitors. Additionally, Microsoft Corporation has stated its
intention to increase its presence in the digital imaging/graphics market by
mid-1999; the Company believes that, due to Microsoft's market dominance, any
new Microsoft digital imaging products will be highly competitive with the
Company's products. If competing new products achieve widespread acceptance,
it would have a significant adverse impact on the Company's operating results.
Although the Company generally offers its application products on
Macintosh, Windows, and UNIX platforms, a majority of the overall revenue
from these products prior to fiscal 1997 has been from the Macintosh
platform, particularly for the higher end Macintosh computers. In fiscal
1997, Windows-based application revenue exceeded that from the Macintosh
platform for the first time, and for the past several quarters, Macintosh
platform sales of application products have continued to decline year over
year while Windows platform sales have continued to rise. If there is a
continuing slowdown of customer purchases in the higher end Macintosh market,
or if the Company is unable to continue to increase its revenue from Windows
customers commensurate with such a slowdown, the Company's operating results
could be materially adversely affected. In addition, to the extent that there
is a slowdown of customer purchases of personal computers in general, the
Company's operating results could be materially adversely affected. Also, as
the Company seeks to further broaden its customer base to achieve greater
penetration in the corporate business and consumer markets, the Company may
not successfully adapt its application software distribution channels, which
could materially adversely affect the Company's operating results. The
Company could experience decreases in average selling prices and some
transitions in its distribution channels that could materially adversely
affect its operating results.
The Company continues to expand into third-party distribution channels,
including value-added resellers and systems integrators, in its effort to
further broaden its customer base. As a result, the financial health of
these third parties, and the Company's continuing relationships with them,
are becoming more important to the Company's success. Some of these companies
are thinly capitalized and may be unable to withstand changes in business
conditions. The Company's financial results could be adversely affected if
the financial condition of certain of these third parties substantially
weakens or if the Company's relationships with them deteriorate.
The Company's OEM customers on occasion seek to renegotiate their
royalty arrangements. The Company evaluates these requests on a case-by-case
basis. If an agreement is not reached, a customer may decide to pursue other
options, which could result in lower licensing revenue for
23
<PAGE>
the Company. In the fall of fiscal 1997, HP began to ship non-Adobe
PostScript clone software in some printers, resulting in lower licensing
revenue to the Company in fiscal 1998, even though the Company continues to
work with HP printer operations to incorporate Adobe PostScript and other
technologies in other HP products. The Company expects lower licensing
revenue from HP during the remainder of fiscal 1998.
During late fiscal 1997 and the first nine months of fiscal 1998, the
Company experienced a decline in both application and licensing revenue from
the Japanese market due to a weak Japanese computer market and general
economic conditions in Japan. In addition, at the end of fiscal 1997,
inventory levels for applications products at the Company's Japanese
distributors remained higher than what the Company considers normal. During
fiscal 1998, the Company worked with its major distributors in Japan to
reduce channel inventory to what the Company considers a reasonable level.
The Company expects these adverse economic conditions to continue in the
short term, and they may continue to adversely affect the Company's revenue
and earnings. Although there are also adverse conditions in other Asian
economies, the countries affected represent a much smaller portion of the
Company's revenue and thus have less impact on the Company's operational
results.
The Company has recently implemented a restructuring of its business and
reduced its workforce by more than ten percent. However, the Company plans to
continue to invest in certain areas, which will require it to hire additional
employees. Competition for high quality personnel, especially highly skilled
engineers, is extremely intense. The Company's ability to effectively manage
its growth will require it to continue to improve its operational and
financial controls and information management systems, and to attract,
retain, motivate, and manage employees effectively. The failure of the
Company to effectively manage growth and transition in multiple areas of its
business could have a material adverse effect on its results of operations.
The Internet market is rapidly evolving and is characterized by an
increasing number of market entrants that have introduced or developed
products addressing authoring and communications over the Internet. As is
typical in the case of a new and evolving industry, demand and market
acceptance for recently introduced products and services are subject to a
high level of uncertainty. The software industry addressing authoring and
communications over the Internet is young and has few proven products. In
addition, new models for licensing software will be needed to accommodate new
information delivery practices. Moreover, critical issues concerning the
commercial use of the Internet (including security, reliability, ease of use
and access, cost, and quality of service) remain unresolved and may affect
the growth of Internet use, together with the software standards and
electronic media employed in such markets.
The Company derives a significant portion of its revenue and operating
income from its subsidiaries located in Europe, Japan, and Asia, Pacific, and
Latin America. The Company generally experiences lower revenue from its
European operations in the third quarter because many customers reduce their
purchasing activities in the summer months. Additionally, the Company is
uncertain whether the recent weakness experienced in the Japan and Asia,
Pacific and Latin America markets will continue in the foreseeable future due
to extreme currency devaluation and liquidity problems in these regions.
While most of the revenue of the European subsidiaries is denominated in U.S.
dollars, the majority of revenue derived from Japan is denominated in yen and
the majority of all subsidiaries' operating expenses are denominated in their
local currencies. As a result, the Company's operating results are subject to
fluctuations in foreign currency exchange rates. To date, the accounting
impact of such fluctuations has been insignificant. The Company's hedging
policy attempts to mitigate some of these risks, based on management's best
judgment of the appropriate trade-offs among risk, opportunity, and expense.
The Company has established a hedging program to hedge its exposure to
foreign currency
24
<PAGE>
exchange rate fluctuations, primarily of the Japanese yen. The Company's
hedging program is not comprehensive, and there can be no assurance that the
program will offset more than a portion of the adverse financial impact
resulting from unfavorable movement in foreign currency exchange rates.
On January 1, 1999, eleven of the fifteen member countries of the
European Union are scheduled to adopt the euro as their common legal currency
and to establish fixed conversion rates between their existing sovereign
currencies and the euro. The euro will then trade on currency exchanges and
be available for non-cash transactions. Based on its preliminary assessment,
the Company does not believe the conversion will have a material impact on
the competitiveness of its products in Europe, where there already exists
substantial price transparency, or increase the likelihood of contract
cancellations. Further, the Company expects that modifications to comply with
euro requirements will be made to its business operations and systems on a
timely basis and does not believe that the cost of such modifications will
have a material adverse impact on the Company's results of operations or
financial condition. There can be no assurance, however, that the Company
will be able to complete such modifications on a timely basis; any failure to
do so could have a material adverse effect on the Company's results of
operations or financial condition. In addition, the Company faces risks to
the extent that suppliers, manufacturers, distributors and other vendors upon
whom the Company relies and their suppliers are unable to make appropriate
modifications to support euro transactions. The inability of such third
parties to support euro transactions could have a material adverse effect on
the Company's results of operations or financial condition.
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, and has had in the past, an immediate and
significant adverse effect on the trading price of the Company's common stock
in any given period. Additionally, the Company may not learn of such
shortfalls until late in the fiscal quarter, which could result in an even
more immediate and adverse effect on the trading price of the Company's
common stock. Finally, the Company participates in a highly dynamic industry.
In addition to factors specific to the Company, changes in analysts' earnings
estimates for the Company or its industry and factors affecting the corporate
environment, the Company's industry or the securities markets in general will
often result in significant volatility of the Company's common stock price.
"YEAR 2000" ISSUES
The Company is aware of and is addressing a broad range of issues
associated with the programming code in existing computer systems as the year
2000 approaches. The "Year 2000" problem is complex, as many computer systems
will be affected in some way by the rollover of the two-digit year value to
00. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The "Year 2000" issue creates risk
for the Company from unforeseen problems in its own computer and embedded
systems and from third parties with whom the Company deals on financial and
other transactions worldwide. Failure of the Company's and/or third parties'
computer systems could have a material impact on the Company's ability to
conduct its business.
The Company's financial information systems include an SAP system
recently implemented in the United States, Japan and Asia, Pacific and Latin
America, and an Oracle system in Europe which was upgraded to the most recent
version in fiscal 1998. These systems are believed to be "Year 2000"
compliant. The Company has substantially completed inventorying and analyzing
its remaining centralized computer and embedded systems to identify any
potential Year 2000 issues and will take appropriate corrective action based
on the results of such analysis. The Company has a number of projects
underway to replace or upgrade hardware and software that
25
<PAGE>
are known to be Year 2000 non-compliant. For the Year 2000 non-compliance
issues identified to date, the cost of remediation is currently not expected
to be material to the Company's operating results. The Company currently
expects to substantially complete remediation and validation of its internal
systems, as well as to develop contingency plans for certain internal
systems, by mid-1999. However, if implementation of replacement upgraded
systems or software is delayed, if significant new non-compliance issues are
identified, or if contingency plans fail, the Company's results of operations
or financial condition could be materially adversely affected.
The Company is also in the process of contacting its critical suppliers,
manufacturers, distributors, and other vendors to determine if their
operations and the products and services that they provide to the Company are
Year 2000 compliant. Where practicable, the Company will attempt to mitigate
its risks with respect to the failure of third parties to be Year 2000 ready,
including developing contingency plans where practicable. However, such
failures, including failures of any contingency plans, remain a possibility and
could have a materially adverse impact on the Company's results of operations or
financial condition.
In addition, the "Year 2000" issue could affect the products that the
Company sells. The Company believes that the current versions of its products
are "Year 2000" compliant. However there can be no assurance that the Company's
current products do not contain undetected errors or defects associated with
Year 2000 that may result in material costs to the Company. Some commentators
have stated that a significant amount of litigation will arise out of Year 2000
compliance issues, and the Company is aware of a growing number of lawsuits
against other software vendors. Because of the unprecedented nature of such
litigation, it is uncertain whether and to what extent the Company may be
affected by it.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP
97-2 establishes standards relating to the recognition of all aspects of
software revenue. Based on the Company's ongoing assessment of the impact SOP
97-2 may have on its consolidated results of operations, the Company is
modifying certain aspects of its business model such that any impact will not be
significant. The Company intends to adopt SOP 97-2 for its fiscal year 1999.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. It does
not, however, require a specific format for the disclosure, but requires the
Company to display an amount representing total comprehensive income for the
periods presented in its financial statements. The Company will be required to
implement SFAS No. 130 for its fiscal year 1999.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. The Company is
currently evaluating the operating segment information to determine whether this
will have an impact on its financial statement reporting. The Company will be
required to implement SFAS No. 131 for its fiscal year 1999.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and for hedging
activities and requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet and measure them at fair value.
Gains and losses resulting from changes in fair value would be accounted for
depending on the
26
<PAGE>
use of the derivative and whether it is designated and qualifies for hedge
accounting. The Company will be required to implement SFAS No. 133 for its
fiscal year 2000. The Company has not determined the impact that SFAS No. 133
will have on its financial statements and believes that such determination
will not be meaningful until closer to the date of initial adoption.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
AUGUST 28 NOVEMBER 28
1998 1997 CHANGE
--------- ----------- --------
(Dollars in millions)
<S> <C> <C> <C>
Cash, cash equivalents and
short-term investments $443.3 $503.0 (11.9)%
Working capital $371.9 $454.3 (18.1)%
Stockholders' equity $679.0 $715.4 (5.1)%
</TABLE>
The Company's cash, cash equivalents and short-term investments,
consisting principally of municipal bonds, auction rate securities, and
United States government and government agency securities, decreased $59.7
million or 11.9% during the first nine months of fiscal 1998. All of the
Company's short-term investments are classified as available-for-sale under
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
securities are carried at fair value with the unrealized gains and losses,
net of tax, reported as a separate component of stockholders' equity.
Major sources of cash during the first nine months of fiscal 1998
included cash generated from operations of $144.7 million and proceeds from
the issuance of common stock primarily related to the exercise of stock
options and sale of stock under the Employee Stock Purchase Program of $51.8
million. Major uses of cash during the period included $138.2 million to
repurchase Adobe common stock (net of put premiums received), net purchases
of short-term investments of $25.6 million, additions to other assets of
$47.5 million, capital expenditures totaling $52.7 million, and the payment
of dividends of $13.0 million.
During the third quarter of fiscal 1998, the Company engaged two
investment banking firms to assist with responding to an unsolicited
acquisition proposal. As part of these agreements, the Company is required to
pay advisory fees of approximately $13.0 million, of which $12.0 million
remains to be paid over the next two years. In the event that the Company
terminates either of the firms' services, the Company is still committed to
pay advisory fees until its obligation is fulfilled.
In September 1997, the Company's Board of Directors authorized, subject to
certain business and market conditions, the purchase of up to an additional 15
million shares of the Company's common stock over a two-year period. This new
stock repurchase program was in addition to an existing program, whereby the
Company has been authorized to repurchase shares to offset issuances under
employee stock option and stock purchase plans. During the fourth quarter of
fiscal 1997 and the first nine months of fiscal 1998, the Company repurchased
approximately 4.7 and 3.7 million shares of its common stock, respectively. As
of August 28, 1998, management is authorized to repurchase an additional 7.7
million shares under the 15 million share repurchase program. These stock
repurchase programs are intended to enhance
27
<PAGE>
stockholder value by reducing the number of outstanding shares net of
offsetting increases due to employee stock purchases and stock option
exercises. The timing and size of any future stock repurchases are subject to
market conditions, stock prices and Adobe's cash position and other cash
requirements going forward.
To facilitate the Company's stock repurchase programs, the Company sold put
warrants to independent third parties. Each warrant entitles the holder to sell
one share of Adobe's common stock to the Company at a specified price. On August
28, 1998, put warrants to sell approximately 1.4 million shares of the Company's
common stock were outstanding that expire on various dates through February 1999
with an average exercise price of $40.67 per share. Under these put warrant
arrangements, the Company, at its option, can settle with physical delivery or
net shares equal to the difference between the exercise price and market value
at the date of exercise.
In addition, the Company purchased call options from independent third
parties that entitle the Company to buy its common stock on certain dates at
specified prices. On August 28, 1998, call options to purchase approximately
128,000 shares of the Company's common stock were outstanding that expire on
various dates through February 1999 with an average exercise price of $29.79 per
share.
The Board of Directors of the Company declared three cash dividends on the
Company's common stock of $.05 per common share, one for each of the first,
second and third quarters of 1998. Also, on December 1, 1997, the Company
dividended one share of Siebel Systems, Incorporated ("Siebel") common stock for
each 300 shares of Adobe common stock held by stockholders of record on October
31, 1997. An equivalent cash dividend was paid for holdings of less than 7,500
Adobe shares and for odd-lot and fractional Siebel shares. 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.
Expenditures for property and equipment are expected to continue as staff
increases and as the Company continues the construction of a facility in Europe.
Furthermore, additional cash may be used to acquire software products or
technologies complementary to the Company's business.
In addition to commitments related to an unsolicited acquisition proposal,
the Company's principal commitments as of August 28, 1998 consisted of
obligations under operating leases, venture investing activities, real estate
development agreements, and various service agreements. These arrangements are
discussed in more detail in the Company's Annual Report on Form 10-K for the
year ended November 28, 1997.
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, including planned capital expenditure programs, working
capital requirements, the potential put warrant obligation, the dividend
program, and obligations under the restructuring program announced and
implemented during the third quarter of fiscal 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in Item 7a of its Annual
Report on Form 10-K for the year ended November 28, 1997 have not changed
significantly.
28
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 17, 1997, a derivative action was filed in the Superior Court
of the State of California, County of Santa Clara, against the current
members of Adobe's Board of Directors and Paul Brainerd, a former member of
the Board. The suit was filed by a stockholder purporting to assert on behalf
of the Company claims for alleged breach of the Directors' fiduciary duty and
mismanagement related to the Company's acquisition of Frame in October 1995.
The Court granted Adobe's demurrer to the suit, with leave to amend for the
plaintiff. In January 1998, the plaintiff filed an amended complaint making
substantially the same claims but not including Mr. Brainerd. In March 1998,
Adobe filed a demurrer to the amended complaint, which was overruled by the
trial court in May 1998. In June 1998, Adobe filed a writ petition with the
California Court of Appeals for review of the trial court's decision, which
was denied. In July 1998, Adobe filed a petition for review of the Court of
Appeals' refusal to grant the writ with the Supreme Court of California,
which was denied in September 1998. The Company intends to continue
vigorously defending the action.
Quantel Limited, a U.K. corporation, filed and served on the Company in
January 1996 a complaint alleging that the Adobe Photoshop program infringed
five U.S. patents held by Quantel. The complaint was filed in the United
States District Court for the District of Delaware. In September 1997, a jury
in federal court in Delaware found in favor of Adobe, finding that Adobe
Photoshop did not infringe the five patents held by Quantel Limited, and that
the five patents are invalid. The judge thereafter entered a decision in
favor of Adobe on the infringement and invalidity issues, but determined that
Quantel had not committed inequitable conduct in dealing with the U.S. Patent
Office. In mid-1998, both parties filed notices of appeal as to various
aspects of the trial court's decision. In August 1998, both parties decided
not to continue their appeals and in September 1998, the court entered an
order accepting the parties' resolution of the case. Neither party has paid
any money in connection with the resolution of the case.
Management believes that the ultimate resolution of these matters and
other matters discussed in the Company's Annual Report on Form 10-K for the
year ended November 28, 1997, and the Company's Quarterly Reports on Form
10-Q since then, will not have a material impact on the Company's financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 3, 1998, the Company's Board of Directors approved certain
amendments to the Company's Amended and Restated Bylaws related to (i) the
advance notice requirements for stockholder proposals to be brought before
meetings of stockholders, (ii) the requirements for stockholder nominations
of persons for election as directors and (iii) fixing record dates.
29
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY REFERENCE FILED
-------------------------------
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
-------- --------------------------- ---- ---- ----- --------
<S> <C> <C> <C> <C> <C>
3.1 The Registrant's (as suc- 10-Q 05/30/97 3.1
cessor in-interest to Adobe
Systems (Delaware)
Incorporated by
virtue of a reincorporation
effective 5/30/97) Certif-
icate of Incorporation, as
filed with the Secretary of
State of the State of
Delaware on 5/9/97.
3.2.10 Amended and Restated 8-K 9/3/98 3.2
Bylaws as currently
in effect.
3.3 Certificate of Designation 10-K 11/28/97 3.3
of the Series A Preferred
Stock
3.4 Agreement and Plan of 10-Q 05/30/97 2.1
Merger effective 5/30/97
(by virtue of a reincorp-
oration), by and between
Adobe Systems Incorpor-
ated, a California corp-
oration and Adobe Systems
(Delaware) Incorporated,
a Delaware corporation.
4.1 Second Amended and 8-K 08/29/97 4
Restated Rights
Agreement between the
Company and Harris
Trust Company of
California
10.1.6 1984 Stock Option Plan, 10-Q 07/02/93 10.1.6
as amended*
10.21.3 Revised Bonus Plan* 10-Q 02/28/97 10.21.3
10.24.1 Amended 1994 Performance 10-Q 05/29/98 10.24.1
and Restricted Stock Plan*
10.25.0 Form of Indemnity 10-K 11/30/90 10.17.2
Agreement*
10.25.1 Form of Indemnity 10-Q 05/30/97 10.25.1
Agreement*
</TABLE>
(Continued)
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY REFERENCE FILED
-------------------------------
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
-------- --------------------------- ---- ---- ----- --------
<S> <C> <C> <C> <C> <C>
10.32 Sublease of the Land and 10-K 11/25/94 10.32
Lease of the Improvements
By and Between
Sumitomo Bank Leasing
and Finance Inc. and
Adobe Systems Incorporated
(Phase 1)
10.36 1996 Outside Directors 10-Q 05/31/96 10.36
Stock Option Plan*
10.37 Confidential Resignation 10-Q 05/31/96 10.37
Agreement*
10.38 Sublease of the Land and 10-Q 08/30/96 10.38
Lease of the Improvements
By and Between
Sumitomo Bank Leasing
and Finance Inc. and
Adobe Systems Incorporated
(Phase 2)
10.39 1997 Employee Stock S-8 05/30/97 10.39
Purchase Plan, as amended*
10.40 1994 Stock Option S-8 05/30/97 10.40
Plan, as amended*
10.42 Amended and Restated X
Limited Partnership
Agreement of Adobe
Incentive Partners, L.P.*
10.43 Resignation Agreement* 10-K 11/28/97 10.43
10.44 Forms of Retention 10-K 11/28/97 10.44
Agreement*
10.45 Confidential Executive
Resignation Agreement
And General Release of
Claims* X
10.46 Confidential Executive
Resignation Agreement
And General Release of
Claims* X
10.47 Confidential Executive
Resignation Agreement
And General Release of
Claims* X
</TABLE>
(Continued)
31
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED BY REFEREBCE
EXHIBIT ------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
-------- --------------------------- ---- ---- ----- --------
<S> <C> <C> <C> <C> <C>
21 Subsidiaries of the 10-K 11/28/97 21
Registrant
27.1 Financial Data Schedule X
27.2 Financial Data Schedule X
</TABLE>
--------------------------------------------
*Compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended August 28, 1998.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADOBE SYSTEMS INCORPORATED
By /s/ Harold L. Covert
--------------------------
Harold L. Covert,
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
Date: October 13, 1998
33
<PAGE>
SUMMARY OF TRADEMARKS
The following trademarks of Adobe Systems Incorporated, which may be registered
in certain jurisdictions, are referenced in this Form 10-Q:
Adobe
Acrobat
Adobe Illustrator
FrameMaker
ImageReady
PageMaker
PhotoDeluxe
Photoshop
PostScript
All other brand or product names are trademarks or registered trademarks
of their respective holders.
34
<PAGE>
THE SECURITIES EVIDENCED BY THIS PARTNERSHIP AGREEMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE 1933 ACT COVERING SUCH SECURITIES OR THE GENERAL PARTNER RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO
THE GENERAL PARTNER, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE 1933 ACT.
THE INTERESTS IN THE PARTNERSHIP OF THE CLASS B LIMITED PARTNERS ARE SUBJECT TO
AN OPTION SET FORTH IN AN AGREEMENT BETWEEN THE PARTNERSHIP AND EACH CLASS B
LIMITED PARTNER, OR THE PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT
THE PRINCIPAL OFFICE OF THIS PARTNERSHIP. ANY TRANSFER OR ATTEMPTED TRANSFER OF
ANY UNITS SUBJECT TO SUCH OPTION IS VOID WITHOUT THE PRIOR EXPRESS WRITTEN
CONSENT OF THE ISSUER OF THESE UNITS.
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
ADOBE INCENTIVE PARTNERS, L. P.
AUGUST 13, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1
CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Accounting Period. . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Adjusted Asset Value . . . . . . . . . . . . . . . . . . . . . 1
1.3 Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Capital Account . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 Capital Contribution . . . . . . . . . . . . . . . . . . . . . 2
1.6 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Deemed Gain or Deemed Loss . . . . . . . . . . . . . . . . . . 2
1.8 Excluded Investment . . . . . . . . . . . . . . . . . . . . . 3
1.9 Majority in Interest of the Class A Limited Partners . . . . . 3
1.10 Marketable; Marketable Securities; Marketability . . . . . . . 3
1.11 Nonmarketable Securities . . . . . . . . . . . . . . . . . . . 3
1.12 Profit or Loss . . . . . . . . . . . . . . . . . . . . . . . . 3
1.13 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.14 Securities Act . . . . . . . . . . . . . . . . . . . . . . . . 4
1.15 Short Term Income. . . . . . . . . . . . . . . . . . . . . . . 4
1.16 Treasury Regulations . . . . . . . . . . . . . . . . . . . . . 4
1.17 Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.18 AVI Marketable . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 2
NAME, PURPOSE AND OFFICES OF PARTNERSHIP . . . . . . . . . . . . . . . . . . 4
2.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Principal Office . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 3
TERM OF PARTNERSHIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Events Affecting a Limited Partner of the Partnership. . . . . 5
3.3 Events Affecting the General Partner of the Partnership. . . . 5
ARTICLE 4
NAME AND ADMISSION OF PARTNERS . . . . . . . . . . . . . . . . . . . . . . . 5
4.1 Name, Address and Units. . . . . . . . . . . . . . . . . . . . 5
4.2 Admission of Additional Partners . . . . . . . . . . . . . . . 6
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
ARTICLE 5
CAPITAL ACCOUNTS AND CAPITAL CONTRIBUTIONS . . . . . . . . . . . . . . . . . 6
5.1 Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . 6
5.2 Initial Capital Contributions. . . . . . . . . . . . . . . . . 6
5.3 Capital Contributions of the General Partner . . . . . . . . . 7
5.4 Additional Capital Contributions . . . . . . . . . . . . . . . 7
ARTICLE 6
PARTNERSHIP ALLOCATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.1 Allocation of Profit or Loss . . . . . . . . . . . . . . . . . 7
6.2 Other Allocations . . . . . . . . . . . . . . . . . . . . . . 8
6.3 Income Tax Allocations . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 7
PARTNERSHIP EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 8
WITHDRAWALS BY AND DISTRIBUTIONS TO THE PARTNERS. . . . . . . . . . . . . . 10
8.1 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
8.2 Withdrawals by the Partners . . . . . . . . . . . . . . . . . 10
8.3 Partners' Obligation to Repay or Restore. . . . . . . . . . . 10
8.4 Cash Distributions. . . . . . . . . . . . . . . . . . . . . . 10
8.5 In Kind Distributions . . . . . . . . . . . . . . . . . . . . 10
8.6 Withdrawal of Class B Limited Partners. . . . . . . . . . . . 11
ARTICLE 9
MANAGEMENT DUTIES & RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . 12
9.1 Management. . . . . . . . . . . . . . . . . . . . . . . . . . 12
9.2 No Control by the Limited Partners; No Withdrawal . . . . . . 12
9.3 Class A Limited Partner Approval Rights . . . . . . . . . . . 12
9.4 Investment Opportunities. . . . . . . . . . . . . . . . . . . 13
9.5 Compliance with Partnership Agreement; Detrimental Acts . . . 13
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
ARTICLE 10
INVESTMENT REPRESENTATION AND TRANSFER
OF PARTNERSHIP INTERESTS. . . . . . . . . . . . . . . . . . . . . . . . . . 14
10.1 Investment Representation of the Limited Partners . . . . . . 14
10.2 Qualifications of the Limited Partner . . . . . . . . . . . . 14
10.3 Transfer by the General Partner . . . . . . . . . . . . . . . 14
10.4 Tansfer by a Limited Partner. . . . . . . . . . . . . . . . . 14
10.5 Requirements for Transfer . . . . . . . . . . . . . . . . . . 14
10.6 Substitution as a Limited Partner . . . . . . . . . . . . . . 15
10.7 Expenses of Transfer. . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 11
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP. . . . . . . . . . . . . . . 15
11.1 Early Termination of the Partnership. . . . . . . . . . . . . 15
11.2 Winding Up Procedures . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 12
FINANCIAL ACCOUNTING,
REPORTS, MEETINGS AND VOTING. . . . . . . . . . . . . . . . . . . . . . . . 17
12.1 Financial Accounting; Fiscal Year . . . . . . . . . . . . . . 17
12.2 Supervision; Inspection of Books . . . . . . . . . . . . . . 17
12.3 Partnership Reports; Financial Statements of the Partnership. 17
12.4 Tax Returns and Tax Information . . . . . . . . . . . . . . . 17
12.5 Tax Matters Partner . . . . . . . . . . . . . . . . . . . . 18
12.6 Special Meetings . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 13
VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
13.1 Valuation . . . . . . . . . . . . . . . . . . . . . . . . . 18
iii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
ARTICLE 14
OTHER PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
14.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 19
14.2 Limitation of Liability of the Limited Partners . . . . . . 20
14.3 Exculpation . . . . . . . . . . . . . . . . . . . . . . . . . 20
14.4 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 20
14.5 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . 20
14.6 Execution and Filing of Documents . . . . . . . . . . . . . . 21
14.7 Other Instruments and Acts . . . . . . . . . . . . . . . . . 21
14.8 Binding Agreement . . . . . . . . . . . . . . . . . . . . . . 21
14.9 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 21
14.10 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . 21
14.11 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . 21
14.12 Titles; Subtitles . . . . . . . . . . . . . . . . . . . . . . 21
14.13 Partnership Name . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
iv
<PAGE>
ADOBE INCENTIVE PARTNERS, L. P.
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
THIS AGREEMENT is made and entered into as of the 13th day of August,
1998, by ADOBE SYSTEMS INCORPORATED, a Delaware corporation ("Adobe") who in its
capacity as the sole general partner and sole Class A Limited Partner is
empowered to enter into this amended and restated agreement and who hereby
amends and restates the April 8, 1998 Amended and Restated Limited Partnership
Agreement (the "Prior Agreement") of ADOBE INCENTIVE PARTNERS , L. P. (the
"Partnership"), to reflect changes in the ownership of the Partnership and
related matters, pursuant to the provisions of the California Revised Limited
Partnership Act (the "Act"), as set forth below. This Agreement shall be
effective for Securities acquired by the Partnership on or after August 13,
1998. The treatment of Securities acquired by the Partnership before August 13,
1998 shall be governed by the Prior Agreement (except that Jack Bell, Ross Bott
and Robert Roblin ceased to be a Limited Partner as of August 11, 1998 and
became entitled to receive the Securities described on Schedule 1 hereto when
such Securities can be distributed under applicable legal and contractual
restrictions; Adobe agreed to repurchase all unvested shares owned by such
parties).
ARTICLE 1
CERTAIN DEFINITIONS
1.1 ACCOUNTING PERIOD. An Accounting Period shall be (i) the Fiscal
Year if there are no changes in the Partners' respective interests in the
Profits or Losses of the Partnership during such period except on the first day
thereof, or (ii) any other period beginning on the first day of the Fiscal Year,
or any other day during the Fiscal Year upon which occurs a change in such
respective interests, and ending on the last day of the Fiscal Year, or on the
day preceding an earlier day upon which any change in such respective interest
shall occur.
1.2 ADJUSTED ASSET VALUE. The Adjusted Asset Value with respect to
any asset shall be the asset's adjusted basis for federal income tax purposes,
except as follows:
(a) The initial Adjusted Asset Value of any asset contributed
by a Partner to the Partnership shall be the lesser of (i) the gross fair market
value of such asset or (ii) the asset's adjusted basis for federal income tax
purposes at the time of contribution, as determined by the contributing Partner
and the General Partner.
(b) In the discretion of the General Partner, the Adjusted Asset
Values of all Partnership assets may be adjusted to equal their respective gross
fair market values, as determined by the General Partner, and the resulting
unrealized profit or loss allocated to the Capital Accounts of the Partners
pursuant to Article 6, as of the following times: (i) the acquisition of an
additional interest in the Partnership by any new or existing Partner in
exchange for more than a DE MINIMIS capital contribution, and (ii) the
distribution by the Partnership to a Partner of more than a DE MINIMIS amount of
Partnership
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assets, unless all Partners receive simultaneous distributions of
either undivided interests in the distributed property or identical Partnership
assets in proportion to their interests in Partnership distributions as provided
in paragraphs 8.4 and 8.5.
(c) The Adjusted Asset Values of all Partnership assets shall be
adjusted to equal their respective gross fair market values, as determined by
the General Partner, and the resulting unrealized profit or loss allocated to
the Capital Accounts of the Partners pursuant to Article 6, as of the following
times: (i) the termination of the Partnership for federal income tax purposes
pursuant to Code Section 708(b)(l)(B); and (ii) the termination of the
Partnership either by expiration of the Partnership's term or the occurrence of
an event described in paragraph 11.1.
1.3 AFFILIATE. An Affiliate of any person shall mean any person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by or is under common control with, the person specified.
1.4 CAPITAL ACCOUNT. The Capital Account of each Partner shall
consist of its original capital contribution (in kind contributions shall be
credited at their Adjusted Asset Value), (i) increased by any additional capital
contributions, its share of income or gain that is allocated to it pursuant to
this Agreement, any Capital Account shift in favor of such Partner, and (ii)
decreased by the amount of any distributions to or withdrawals by it, its share
of expense or loss that is allocated to it pursuant to this Agreement, the
amount of any Capital Account shift away from the Capital Account of such
Partner. The foregoing provision and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Treasury Regulation Section 1.704 l(b)(2)(iv), and shall, except as otherwise
expressly provided herein, be interpreted and applied in a manner consistent
with such Regulations. In the event the General Partner shall determine that it
is prudent to modify the manner in which the Capital Accounts, or any debits or
credits thereto, are computed in order to comply with such Regulations, the
General Partner may make such modification, provided that it is not likely to
have more than an insignificant effect on the total amounts distributable to any
Partner pursuant to Article VIII and Article XI.
1.5 CAPITAL CONTRIBUTION. A Partner's Capital Contribution shall mean
the amount that such Partner has contributed to the capital of the Partnership
as set forth opposite such Partner's name on Exhibit A hereto, as from time to
time amended.
1.6 CODE. The Code is the Internal Revenue Code of 1986, as amended
from time to time (or any corresponding provisions of succeeding law).
1.7 DEEMED GAIN OR DEEMED LOSS. The Deemed Gain from any in kind
distribution of Securities shall be equal to the excess, if any, of the fair
market value of the Securities distributed (valued as of the date of
distribution in accordance with paragraph 13.1), over the aggregate Adjusted
Asset Value of the Securities distributed. The Deemed Loss from any in kind
distribution of Securities shall be equal to the excess, if any, of the
aggregate Adjusted Asset Value of the Securities distributed over the fair
market value of the Securities distributed (valued as of the date of
distribution in accordance with paragraph 13.1).
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1.8 EXCLUDED INVESTMENT. Excluded Investment means a Security of the
Partnership that one or more Partners does not share in because (i) he or she is
an officer, director or five percent or greater shareholder of the issuer of the
Security or (ii) the Investment Committee of the Board of Directors of Adobe
otherwise determines that it is inappropriate for such Partner to participate in
the investment because of the Partner's involvement with the issuer of the
Security. An Excluded Investment shall be designated as such at the time of its
acquisition.
1.9 MAJORITY IN INTEREST OF THE CLASS A LIMITED PARTNERS. Majority in
Interest of the Class A Limited Partners means one or more Class A Limited
Partners who own in the aggregate a majority of the Class A Units.
1.10 MARKETABLE; MARKETABLE SECURITIES; MARKETABILITY. These terms
shall refer to Securities that are (a) traded on a national securities exchange
or over the counter or (b) currently the subject of an effective Securities Act
registration statement. Notwithstanding the foregoing, a Security shall not be
deemed to be a Marketable Security if, in the good faith judgment of the General
Partner, the market on which such Security trades is not adequate to permit an
orderly sale of all shares of such Security held by the Partnership within a
reasonable time period or if the Securities cannot be sold because of lock-up
restrictions or other contractual restrictions on transfer.
1.11 NONMARKETABLE SECURITIES. Nonmarketable Securities are all
Securities other than Marketable Securities.
1.12 PROFIT OR LOSS. Profit or Loss shall be an amount computed
separately for each Security for each Accounting Period as of the last day
thereof that is equal to the Partnership's taxable income or loss for each
Security for such Accounting Period, determined in accordance with Section
703(a) of the Code (for this purpose, all items of income, gain, loss, or
deduction required to be stated separately pursuant to Code Section 703(a)(l)
shall be included in taxable income or loss), with the following adjustments:
(a) Any income of the Partnership that is exempt from federal
income tax and not otherwise taken into account in computing Profit or Loss
pursuant to this paragraph shall be added to such taxable income or loss;
(b) Any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Treasury Regulation Section 1.704 l(b)(2)(iv)(i) and not otherwise
taken into account in computing Profit or Loss pursuant to this paragraph shall
be subtracted from such taxable income or loss;
(c) Gain or loss resulting from any disposition of a
Partnership asset with respect to which gain or loss is recognized for federal
income tax purposes shall be computed by reference to the Adjusted Asset Value
of the asset disposed of rather than its adjusted tax basis;
(d) The difference between the gross fair market value of all
Partnership assets and their respective Adjusted Asset Values shall be added to
such taxable income or loss in the circumstances described in paragraph 1.2;
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(e) Items which are specially allocated pursuant to paragraph
6.3 hereof shall not be taken into account in computing Profit or Loss;
(f) Short Term Income shall not be taken into account in
computing Profit or Loss; and
(g) Any unrecognized gain or loss respecting a Security held by
Adobe Ventures L.P., a California limited partnership ("AVI"), or Adobe Ventures
II, L.P., a California limited partnership ("AVII"), that is treated as deemed
gain or loss under the limited partnership agreements of AVI or AVII shall be
added to the Partnership's taxable income or loss.
1.13 SECURITIES. Securities shall mean securities of every kind and
nature and rights and options with respect thereto, including stock, notes,
bonds, debentures, evidences of indebtedness and other business interests of
every type, including partnerships, joint ventures, proprietorships, limited
liability companies and other business entities. Each Security held by AVI and
AVII shall be treated as a separate Security of the Partnership.
1.14 SECURITIES ACT. Securities Act is the Securities Act of 1933, as
amended.
1.15 SHORT TERM INCOME. Short Term Income shall mean gross income
realized by the Partnership from investments of funds pending their investment
or distribution, including amounts earned from investments in commercial paper,
securities of the United States government, certificates of deposit and cash
deposits in banks and other financial institutions.
1.16 TREASURY REGULATIONS. Treasury Regulations shall mean the Income
Tax Regulations promulgated under the Code, as such Regulations may be amended
from time to time (including corresponding provisions of succeeding
Regulations).
1.17 UNITS. Units means the ownership interests in the Partnership
designated as Class A Units and Class B Units and such other classes of units as
may from time to time be issued with the consent of the General Partner and a
Majority in Interest of the Class A Limited Partners.
1.18 AVI MARKETABLE SECURITIES. AVI Marketable Securities means the
Securities of AVI designated as AVI Marketable Securities on Exhibit A-l hereto.
ARTICLE 2
NAME, PURPOSE AND OFFICES OF PARTNERSHIP
2.1 NAME. The name of the Partnership is ADOBE INCENTIVE PARTNERS,
L. P. The affairs of the Partnership shall be conducted under the Partnership
name.
2.2 PURPOSE. The primary purpose of the Partnership is to (i) invest
in, and receive and hold capital contributions of, Securities of private
companies (either directly or indirectly through AVI) which either (a) operate
or are expected to operate in any industry related to the business operations of
Adobe, including companies which possess or may possess technologies, sales and
services capabilities,
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operations or content related to any Adobe product, or (b) have been
identified by Adobe as candidates for a strategic relationship with Adobe and
(ii) invest as a limited partner in AVII and any successor Adobe Ventures
investment fund. The general purposes of the Partnership are to buy, sell,
hold, and otherwise invest in securities of such companies of every kind and
nature and rights and options with respect thereto, including, without
limitation, stock, notes, bonds, debentures, partnership interests, interests
in limited liability companies and evidences of indebtedness; to exercise all
rights, powers, privileges, and other incidents of ownership or possession
with respect to Securities held or owned by the Partnership; to enter into,
make, and perform all contracts and other undertakings; and to engage in all
activities and transactions as may be necessary, advisable, or desirable to
carry out the foregoing.
2.3 PRINCIPAL OFFICE. The principal office of the Partnership shall
be at 345 Park Avenue, San Jose, California 95110-2704, or such other place or
places in California as the General Partner may from time to time designate.
ARTICLE 3
TERM OF PARTNERSHIP
3.1 TERM. The term of the Partnership commenced upon March 17, 1997
(the "Formation Date") and shall continue until the fifteenth anniversary of the
Formation Date unless extended by consent of the General Partner and a Majority
in Interest of the Class A Limited Partners or sooner dissolved as provided in
paragraph 11.1 below.
3.2 EVENTS AFFECTING A LIMITED PARTNER OF THE PARTNERSHIP. The death,
temporary or permanent incapacity, insanity, incompetency, bankruptcy,
liquidation, dissolution, reorganization, merger, sale of all or substantially
all the equity interests or assets of, or other change in the ownership or
nature of a Limited Partner shall not dissolve the Partnership.
3.3 EVENTS AFFECTING THE GENERAL PARTNER OF THE PARTNERSHIP. Except
as specifically provided in paragraph 11.1, the bankruptcy, liquidation,
dissolution, reorganization, merger, sale of all or substantially all the equity
interests or assets of, or other change in the ownership or nature of the
General Partner shall not dissolve the Partnership.
ARTICLE 4
NAME AND ADMISSION OF PARTNERS
4.1 NAME, ADDRESS AND UNITS. The name and address of the General
Partner and each Limited Partner (hereinafter the General Partner and Limited
Partners shall be referred to collectively as the "Partners" and individually as
a "Partner") and the amount of such Partner's Capital Contribution (and a
description of such Capital Contribution if other than cash) to and number of
Units in the Partnership are set forth on Exhibit A hereto. The Partnership
shall initially have two classes of limited partnership interests which are
designated Class A Units and Class B Units and shall have the rights,
preferences and privileges set forth in this Agreement. Each Limited Partner
owning Class A Units is sometimes referred to herein as a Class A Limited
Partner and each Limited Partner owning Class B Units is sometimes
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referred to herein as a Class B Limited Partner. The Class A Limited
Partners and Class B Limited Partners are collectively referred to as the
Limited Partners. The ownership of the Class A Units and Class B Units is
set forth on Exhibit A hereto. The General Partner shall cause Exhibit A to
be amended from time to time to reflect the admission of any new Partner, the
withdrawal or substitution of any Partner, receipt by the Partnership of
notice of any change of address of a Partner, or the change in any Partner's
Capital Contribution or Units. An amended Exhibit A shall supersede any
prior Exhibit A and become a part of this Agreement. A copy of the most
recent amended Exhibit A shall be kept on file at the principal office of the
Partnership. Exhibit A to the Prior Agreement shall govern the treatment of
Securities acquired prior to August 13, 1998.
4.2 ADMISSION OF ADDITIONAL PARTNERS.
(a) Except as provided in paragraph 10.6, an additional person
may be admitted as a Partner only with the consent of, and on such terms as are
approved by, the General Partner and a Majority in Interest of the Class A
Limited Partners. At the time an additional person is admitted as a Limited
Partner, the General Partner shall determine whether such person shall
participate in investments made prior to the date of admission. Limited Partners
who were admitted to the Partnership on the effective date of this Agreement
shall not participate in investments made prior to August 13, 1998.
(b) Each additional person admitted as a Partner shall execute
and deliver to the Partnership a counterpart of this Agreement or otherwise
become bound by the terms of this Agreement.
ARTICLE 5
CAPITAL ACCOUNTS AND CAPITAL CONTRIBUTIONS
5.1 CAPITAL ACCOUNTS. An individual Capital Account shall be
maintained for each Partner and shall be divided into subaccounts for each
Security owned by the Partnership. Whenever an additional Capital Contribution
of the Class A Limited Partner to the Partnership is invested in Securities,
there shall be a deemed Capital Account shift from the Class A Limited Partner
in favor of the Class B Limited Partners. The total amount of Capital Account
shift shall be the product of the "Shift Percentage" times the amount of the
Capital Contributions of the Class A Limited Partner so invested (with in kind
contributions valued at their Adjusted Asset Value as of the date of
contribution) times a fraction, the numerator of which is the number of Class B
Units then outstanding and the denominator of which is the total number of Class
A Units and Class B Units outstanding. The Shift Percentage shall be ten
percent (10%) unless the General Partner determines another percentage is more
appropriate.
5.2 INITIAL CAPITAL CONTRIBUTIONS. The initial Capital Contributions
of the Partners is set forth on Exhibit A. Securities contributed by the Class A
Limited Partner are shown at their agreed fair market values on Exhibit A. No
Capital Contribution shall be required of any Class B Limited Partner.
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5.3 CAPITAL CONTRIBUTIONS OF THE GENERAL PARTNER. The General Partner
shall contribute capital to the Partnership in cash in an amount equal to the
greater of: (i) one percent (1%) of the amount contributed by the Limited
Partners and the General Partner on each date on which a Limited Partner makes a
contribution or (ii) the amount of Partnership expenses required to be borne by
the General Partner under paragraph 7.1.
5.4 ADDITIONAL CAPITAL CONTRIBUTIONS. A Partner may make additional
Capital Contributions only with the consent of the General Partner and a
Majority in Interest of the Class A Limited Partners. No Partner shall be
required to make any additional Capital Contributions to the Partnership except
as provided in paragraph 5.3.
ARTICLE 6
PARTNERSHIP ALLOCATIONS
6.1 ALLOCATION OF PROFIT OR LOSS. Except as hereinafter provided in
this Article 6:
(a) Profit of the Partnership for each Security for each
Accounting Period shall be separately allocated among the Partners as follows:
(i) First, to the General Partner to and to the extent
of Loss allocations respecting such Security previously made to it pursuant to
paragraph 6.1(b)(iv);
(ii) Second, to the Class A Limited Partner and General
Partner pro rata in proportion to and to the extent of Loss allocation
respecting such Security previously allocated to them pursuant to paragraph 6.
l(b)(iii);
(iii) Third, to the Class B Limited Partners and General
Partner pro rata in proportion to and to the extent of Loss allocations
respecting such Security previously made to them pursuant to paragraph 6.
l(b)(ii); and
(iv) Then, 99% to the Limited Partners (pro rata among
them in accordance with their respective number of Units) and 1% to the General
Partner.
(b) Loss of the Partnership for each Accounting Period shall be
allocated as follows:
(i) First, to the Partners pro rata in proportion to and
to the extent of income allocations previously made to them pursuant to
paragraph 6. l(a)(iv);
(ii) Second, 99% to the Class B Limited Partners (pro
rata among them in accordance with their respective number of Units) until their
Capital Accounts are reduced to zero and 1% to the General Partner;
(iii) Then, 1% to the General Partner and 99% to the Class
A Limited Partner until their Capital Accounts are reduced to zero; and
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(iv) Then, to the General Partner.
(c) Short Term Income shall be allocated to the Partners (other
than the Class B Limited Partners) pro rata in proportion to their respective
Capital Contributions.
(d) Notwithstanding the foregoing, Profit and Loss from each
AVI Marketable Security shall be allocated exclusively to the Class A Limited
Partner.
6.2 OTHER ALLOCATIONS. Notwithstanding the foregoing, the allocations
provided in this Article 6 shall be subject to the following exceptions:
(a) (i) Any loss or expense otherwise allocable to a Limited
Partner that exceeds the balance in such Limited Partner's Capital Account
subaccount for a Security shall instead be allocated first to all Partners who
have positive balances in their Capital Accounts subaccounts for such Security
in proportion to such positive balances, and when all Partners' Capital Accounts
subaccounts for such Security have been reduced to zero (0), then to the General
Partner.
(ii) In the event the Limited Partner unexpectedly
receives any adjustments, allocations, or distributions described in Treasury
Regulation Section 1.704 l(b)(2)(ii)(d)(4) through (d)(6), that causes the
balance in such Partner's Capital Account to be reduced below zero (0), items of
Partnership income and gain shall be specially allocated to such Limited Partner
in an amount and manner sufficient to eliminate the deficit balance in its
Capital Account created by such adjustments, allocations, or distributions as
quickly as possible.
(iii) For purposes of this subparagraph (a), the balance
in a Partner's Capital Account shall take into account the adjustments provided
in Treasury Regulation Section 1.704 l(b)(2)(ii)(d)(4)through (d)(6).
(iv) Any special allocations of items of profit, income,
gain, loss or expense pursuant to this subparagraph (a) shall be taken into
account in computing subsequent allocations, so that the net amount of any items
so allocated and the profit, gain, loss, income, expense, and all other items
allocated to each Partner shall, to the extent possible, be equal to the net
amount that would have been allocated to each such Partner if such special
allocations pursuant to this subparagraph (a) had not occurred.
(b) To the extent the Partnership has taxable interest income
or expense with respect to any promissory note between any Partner and the
Partnership as holder and maker or maker and holder pursuant to Section 483,
Sections 1271 through 1288, or Section 7872 of the Code, such interest income or
expense shall be specially allocated to the Partner to whom such promissory note
relates, and such Partner's Capital Account adjusted if appropriate.
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(c) No Partner shall be allocated Profit or Loss of a Security
(i) which is designated an Excluded Investment with respect to that Partner or
(ii) which was acquired by the Partnership prior to such Partner's admission to
the Partnership, unless otherwise agreed by the Partnership and such Partner at
the time of such Partner's admission.
6.3 INCOME TAX ALLOCATIONS.
(a) Except as otherwise provided in this paragraph or as
otherwise required by the Code and the rules and Treasury Regulations
promulgated thereunder, a Partner's distributive share of Partnership income,
gain, loss, deduction, or credit for income tax purposes shall be the same as is
entered in the Partner's Capital Account pursuant to this Agreement.
(b) In accordance with Code Section 704(c) and the Treasury
Regulations thereunder, income, gain, loss and deduction with respect to any
asset contributed to the capital of the Partnership shall, solely for tax
purposes, be allocated among the Partners so as to take account of any variation
between the adjusted basis of such property to the Partnership for federal
income tax purposes and its initial Adjusted Asset Value.
(c) In the event the Adjusted Asset Value of any Partnership
asset is adjusted pursuant to the terms of this Agreement, subsequent
allocations of income, gain, loss and deduction with respect to such asset shall
take account of any variation between the adjusted basis of such asset for
federal income tax purposes and its Adjusted Asset Value in the same manner as
under Code Section 704(c) and the Treasury Regulations thereunder.
ARTICLE 7
PARTNERSHIP EXPENSES
7.1 EXPENSES. The General Partner shall bear (i) all normal operating
expenses incurred in the investigation of investment opportunities and the
monitoring and management of investments; (ii) all costs and expenses incurred
in the holding, purchase, sale or exchange of Securities (whether or not
ultimately consummated), including, but not by way of limitation, private
placement fees, finder's fees, interest, taxes, brokerage fees, legal fees,
audit and accounting fees, consulting fees, and all expenses incurred in
connection with the registration of the Partnership's Securities under
applicable securities laws or regulations; (iii) all expenses incurred by the
General Partner in serving as the tax matters partner, the cost of liability and
other insurance premiums, all out-of-pocket expenses of preparing and
distributing reports to Partners, all legal and accounting fees relating to the
Partnership and its activities, all costs and expenses arising out of the
Partnership's indemnification obligation pursuant to this Agreement and all
other operating expenses of the Partnership; (iv) all organizational and
syndication costs, fees, and expenses incurred by or on behalf of the General
Partner or the Partnership in connection with the formation and organization of
the Partnership, including legal and accounting fees and expenses incident
thereto with respect to the formation and organization of the Partnership; and
(v) all liquidation costs, fees, and expenses incurred by the General Partner
(or its designee) or the Partnership in connection with the liquidation of the
Partnership at the end of the Partnership's term, specifically including but not
limited to legal and accounting fees and expenses.
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ARTICLE 8
WITHDRAWALS BY AND DISTRIBUTIONS TO THE PARTNERS
8.1 INTEREST. No interest shall be paid to any-Partner on account of
its interest in the capital of or on account of its investment in the
Partnership.
8.2 WITHDRAWALS BY THE PARTNERS. No Partner may withdraw any amount
from its Capital Account unless such withdrawal is made pursuant to this Article
8, Article 11 or, in the case of the Class B Limited Partners, the Restricted
Units Agreement between such Partner and the Partnership.
8.3 PARTNERS' OBLIGATION TO REPAY OR RESTORE. Except as required by
law or the terms of this Agreement, no Partner shall be obligated at any time to
repay or restore to the Partnership all or any part of any distribution made to
it from the Partnership in accordance with the terms of this Article 8.
8.4 CASH DISTRIBUTIONS. Subject to the following mandatory
distribution provisions, the General Partner may, but shall not be obligated to,
distribute cash as it may from time to time deem advisable.
(a) TAX DISTRIBUTIONS. Within 90 days following the end of
each fiscal year, the General Partner shall distribute to each Partner cash in
an amount equal to 50% of the Partnership's taxable income allocated to such
Partner for such year. The General Partner shall have the discretion to adjust
the rate of distribution provided for in this paragraph 8.4(a) to reflect any
increases made to the rates of taxation of ordinary income or capital gains, or
both, under the Code or California law.
(b) DISTRIBUTIONS OF DISTRIBUTABLE CASH. The Partnership shall
distribute cash in excess of $200,000 arising from the disposition of portfolio
company investments as soon as reasonably practicable. Such cash distributions
shall be made one percent (1%) to the General Partner and ninety-nine percent
(99%) to the Limited Partners as follows (provided, no Partner shall receive
distributions from the disposition of a Security which is an Excluded Investment
with respect to such Partner):
(i) first, to the extent of the Limited Partners'
unreturned capital investment respecting the Security disposed of, among the
Limited Partners in proportion to their respective unreturned capital investment
respecting such Security (unreturned capital investment shall take account of
any Capital Account shifts under paragraph 5.1); and
(ii) then, to the extent of previously undistributed
Profit respecting such Security, among the Partners in proportion to the
allocation of such Profit pursuant to Article 6.
8.5 IN KIND DISTRIBUTIONS. The General Partner may, but shall not be
obligated to (except as provided in subparagraph 8.5(a) and paragraph 8.6
below), distribute Securities as it may from time to time deem advisable,
PROVIDED, HOWEVER, that except with the consent of a Majority in Interest of the
Class A Limited Partners, the General Partner shall not distribute Securities
which are not Marketable Securities, other than distributions pursuant to the
dissolution and winding up of the Partnership.
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(a) TIMING.
(i) Marketable Securities acquired by the Partnership in
exchange for the transfer of Nonmarketable Securities shall be distributed
within 90 days of the date on which such Securities become Marketable
Securities.
(ii) Nonmarketable Securities which become Marketable
Securities as a result of a public offering or otherwise shall be distributed
within 90 days after the date on which such Securities become Marketable
Securities.
(b) APPORTIONMENT.
(i) Distributions of Securities shall be made among the
Partners in accordance with paragraph 8.4(b).
(c) Immediately prior to any distribution in kind, the Deemed
Gain or Deemed Loss of any Securities distributed shall be allocated to the
Capital Accounts of the Partners as a Profit or Loss pursuant to Article 6.
(d) Securities distributed in kind shall be subject to such
conditions and restrictions as the General Partner determines are legally or
contractually required. Whenever classes of Securities are distributed in kind,
each Partner shall receive its ratable portion of each class of Securities
distributed in kind.
8.6 WITHDRAWAL OF CLASS B LIMITED PARTNERS.
(a) DEFINITIONS.
(i) WITHDRAWAL. For purposes of this Agreement, a Class
B Limited Partner shall be deemed to have withdrawn from the Partnership (a
"Withdrawal") if such Class B Limited Partner dies, retires, withdraws or
becomes bankrupt, incompetent, insane or permanently incapacitated.
(ii) BANKRUPT. A person shall be deemed bankrupt if (i)
any proceeding is commenced against such person for any relief under bankruptcy
or insolvency laws, or laws relating to the relief of debtors, reorganizations,
arrangements, compositions, or extensions and is not dismissed within ninety
(90) days after such proceedings have been commenced, or (ii) if such person
commences any proceeding for relief under bankruptcy or insolvency laws or law
relating to the relief of debtors, reorganizations, arrangements, compositions,
or extensions.
(iii) INCOMPETENT. A person shall be deemed incompetent
if such person shall be adjudged incompetent by a decree of a court of competent
jurisdiction or if a conservator is appointed for such person.
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(iv) INSANE. A person shall be deemed insane if such
person shall be adjudged insane by a decree of a court of competent
jurisdiction.
(v) PERMANENTLY INCAPACITATED. A person shall be deemed
permanently incapacitated whenever such person is determined by competent
medical authority selected by the General Partner to be permanently incapable of
carrying out his functions as a Class B Limited Partner hereunder.
(vi) FORMER PARTNER. Any Class B Limited Partner who
withdraws from the Partnership, or the estate or legal representative of any
such Member shall be deemed a "Former Partner" on the date of such withdrawal.
(b) EFFECT OF WITHDRAWAL OF A CLASS B LIMITED PARTNER. In the
event of the Withdrawal of a Class B Limited Partner, the interest of such
Former Partner in the Partnership shall terminate and the Former Partner, or his
or her personal representative, shall be entitled only to the payments and
distributions provided for in such Former Partner's Restricted Units Agreement,
all on the terms and conditions set forth in such agreement. Any reduction in
the Units of a Class B Limited Partner caused by his or her Withdrawal shall
increase, pro tanto, the Class A Units of the Class A Limited Partner.
ARTICLE 9
MANAGEMENT DUTIES AND RESTRICTIONS
9.1 MANAGEMENT. Except as otherwise provided in this Agreement, the
General Partner shall have the sole and exclusive right to manage, control, and
conduct the affairs of the Partnership and to do any and all acts on behalf of
the Partnership.
9.2 NO CONTROL BY THE LIMITED PARTNERS; NO WITHDRAWAL. The Limited
Partners shall take no part in the control or management of the affairs of the
Partnership nor shall the Limited Partners have any authority to act for or on
behalf of the Partnership or to vote on any matter relative to the Partnership
and its affairs except as is specifically permitted by this Agreement. Except
as specifically set forth in this Agreement or in the Restricted Units
Agreements between the Partnership and each Class B Limited Partner, no Limited
Partner shall withdraw or be required to withdraw from the Partnership.
9.3 CLASS A LIMITED PARTNER APPROVAL RIGHTS. Notwithstanding
paragraph 9.2, the prior written approval of a Majority in Interest of the Class
A Limited Partners shall be required for the General Partner or the Partnership
to carry out any of the following activities:
(a) Elect or admit a new General Partner;
(b) Dissolve, wind up or liquidate the Partnership, other than
in accordance with the terms of this Agreement;
(c) Amend this Agreement, except as otherwise provided herein;
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(d) Invest in or acquire Securities of any one company in an
amount in excess of $3,000,000;
(e) Acquire more than fifty percent (50%) of the outstanding
voting Securities of any one company;
(f) Borrow funds, or pledge, encumber or hypothecate any assets
of the Partnership as security for a loan;
(g) Commence or defend any litigation pertaining to the
Partnership or its assets, prosecute, settle or compromise claims against third
parties, settle or compromise claims against the Partnership, other than with
respect to any litigation pertaining to the obligations of the Limited Partners
under this Agreement, and
(h) Make or revoke any election pursuant to the Code, including
an election pursuant to Section 754 of the Code, or any comparable federal or
state law regarding taxation.
9.4 INVESTMENT OPPORTUNITIES.
(a) Each Limited Partner acknowledges that the General Partner
may make venture capital investments other than through the Partnership. Each
Limited Partner hereby consents and agrees to such activities and investments
and further consents and agrees that neither the Partnership nor any of its
Partners shall have, pursuant to this Agreement, any rights in or to such
activities or investments or any profits derived therefrom.
(b) Each Limited Partner hereby agrees that the General Partner
may offer the right to participate in investment opportunities of the
Partnership to other private investors, groups, partnerships, or corporations
whenever the General Partner, in its discretion, so determines.
(c) During the term of this Agreement, each Limited Partner may
engage in any activity whatsoever for its own profit or advantage, whether or
not such activity may be in direct or indirect competition with the Partnership,
subject to any restrictions imposed on such Limited Partner outside this
Agreement.
(d) Any investment by the Partnership shall first be approved
by the Investment Committee of the Board of Directors of Adobe.
9.5 COMPLIANCE WITH PARTNERSHIP AGREEMENT; DETRIMENTAL ACTS. No
Partner shall do any act in contravention of this Agreement or that would be
detrimental to the best interests of this Partnership, or that would make it
impossible to carry on the affairs of the Partnership.
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ARTICLE 10
INVESTMENT REPRESENTATION AND TRANSFER
OF PARTNERSHIP INTERESTS
10.1 INVESTMENT REPRESENTATION OF THE LIMITED PARTNERS. This Agreement
is made with each Limited Partner in reliance upon the Limited Partner's
representation to the Partnership, which by executing this Agreement the Limited
Partner hereby confirms, that its interest in the Partnership is to be acquired
for investment, and not with a view to the sale or distribution of any part
thereof, and that it has no present intention of selling, granting participation
in, or otherwise distributing the same, and the Limited Partner understands that
its interest in the Partnership has not been registered under the Securities Act
and that any transfer or other disposition of the interest may not be made
without registration under the Securities Act or pursuant to an applicable
exemption therefrom. Each Limited Partner further represents that it does not
have any contract, undertaking, agreement, or arrangement with any person to
sell, transfer, or grant participations to such person, or to any third person,
with respect to its interest in the Partnership.
10.2 QUALIFICATIONS OF THE LIMITED PARTNERS. Each Limited Partner
represents that it is an "accredited investor" within the meaning of that term
as defined in Regulation D promulgated under the Securities Act as set forth
below or elsewhere in Regulation D as amended from time to time:
(a) An individual who has a net worth or joint net worth with
that person's spouse exceeding $l,000,000 at the time of becoming a Limited
Partner; or
(b) An individual who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and who reasonably expects
reaching the same income level in the current year.
The term "net worth" means the excess of total assets over total liabilities.
In computing net worth for the purposes of paragraph 10.2(a) above, the
principal residence of the investor must be valued at cost, including cost of
improvements, or at a recently appraised value by an institutional lender making
a secured loan, net of encumbrances.
10.3 TRANSFER BY THE GENERAL PARTNER. The General Partner may not
sell, assign, pledge, mortgage or otherwise dispose of its interest in the
Partnership or in its capital assets or property without the prior written
approval of a Majority in Interest of the Class A Limited Partners.
10.4 TRANSFER BY A LIMITED PARTNER. No Limited Partner may sell,
assign, pledge, mortgage, or otherwise dispose of or transfer its interest in
the Partnership without the prior written approval of the General Partner.
10.5 REQUIREMENTS FOR TRANSFER. No transfer or other disposition of
the interest of a Limited Partner shall be permitted until the General Partner
is reasonably satisfied that the effect of such transfer or disposition would
not:
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(a) result in the termination of the Partnership's tax year
under Section 708(b)(l)(B)of the Code;
(b) result in violation of the Securities Act or any comparable
state law;
(c) require the Partnership to register as an investment
company under the Investment Company Act of 1940, as amended;
(d) require the Partnership or the General Partner to register
as an investment adviser under the Investment Advisers Act of 1940, as amended;
(e) result in a termination of the Partnership's status as a
partnership for federal income tax purposes;
(f) result in a violation of any law, rule, or regulation by a
Limited Partner, the Partnership or the General Partner; or
(g) cause the Partnership to be deemed to be a "publicly traded
partnership" as such term is defined in Section 7704(b)of the Code.
10.6 SUBSTITUTION AS A LIMITED PARTNER. A transferee of a Limited
Partner's interest pursuant to this Article 10 shall become a substituted
Limited Partner only with the consent of the General Partner (which consent may
be withheld by the General Partner for any reason or for no reason) and only if
such transferee (a) elects to become a substituted Limited Partner and (b)
executes, acknowledges and delivers to the Partnership such other instruments as
the General Partner may deem necessary or advisable to effect the admission of
such transferee as a substituted Limited Partner, including, without limitation,
the written acceptance and adoption by such transferee of the provisions of this
Agreement.
10.7 EXPENSES OF TRANSFER. Any costs or expenses (including but not
limited to reasonable attorneys fees) incurred by the Partnership in connection
with the transfer of a Partnership interest hereunder shall be borne by the
transferring Partner.
ARTICLE 11
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
11.1 EARLY TERMINATION OF THE PARTNERSHIP.
(a) The Partnership shall dissolve, and the affairs of the
Partnership shall be wound up prior to the expiration of its term set forth in
paragraph 3.1 upon the occurrence of any of the following events:
(i) One hundred eighty (180) days after the withdrawal,
bankruptcy, or dissolution of the General Partner of the Partnership, unless
within ninety (90) days of such event, a Majority in Interest of the Class A
Limited Partners elect to continue the business of the Partnership and
15
<PAGE>
to the appointment, effective as of the date of such withdrawal, bankruptcy
or dissolution, of a new general partner. In the event that a new general
partner is elected pursuant to the foregoing sentence, the interest of the
General Partner shall be determined in accordance with paragraph 11.1(c)
below;
(ii) Sale or other transfer of substantially all of the
assets of the Partnership; or
(iii) Mutual consent of the General Partner and a Majority
in Interest of the Class A Limited Partners.
(b) In the event that the Partnership is dissolved pursuant to
the provisions of this paragraph, the General Partner (or, if the dissolution
occurs because of an event described in paragraph 11.1(a)(i), a Majority in
Interest of the Class A Limited Partners) shall elect one or more liquidators to
manage the liquidation of the Partnership in the manner described in this
Article 11.
(c) If the Limited Partners elect to continue the Partnership
pursuant to its right under paragraph 11.1(a), the former General Partner's
interest in the Partnership shall become a limited partner interest and such
former General Partner shall have no powers of a General Partner under this
Agreement or the Act. The former General Partner's interest in Short Term
Income shall remain unchanged. The former General Partner's interest in Profit
and Loss shall be limited to those allocations arising from assets acquired by
the Partnership (i) prior to the date on which the former General Partner ceased
to serve as General Partner (the "Cessation Date") or (ii) by use of the
uninvested portion of the General Partner's capital contributions made prior to
the Cessation Date. The former General Partner shall have no obligation to make
additional capital contributions pursuant to Article 4 after the Cessation Date.
To the extent reasonably practicable, distributions of amounts allocable to the
former General Partner shall be made in a manner consistent with the foregoing.
11.2 WINDING UP PROCEDURES.
(a) Promptly upon dissolution of the Partnership (unless the
Partnership is continued in accordance with this Agreement or the provisions of
the Act), the affairs of the Partnership shall be wound up and the Partnership
liquidated. The closing Capital Accounts and subaccounts of all the Partners
shall be computed as of the date of dissolution as if the date of dissolution
were the last day of an Accounting Period in accordance with Article 6, and then
adjusted in the following manner:
(i) All assets and liabilities of the Partnership shall
be valued as of the date of dissolution.
(ii) The Partnership's assets as of the date of
dissolution shall be deemed to have been sold at their fair market values and
the resulting Profit or Loss shall be allocated to the Partners' Capital
Accounts in accordance with the provisions of Article 6.
The result for each Partner shall be its closing Capital Account.
(b) Distributions during the winding up period may be made in
cash or in kind or partly in cash and partly in kind. The General Partner or
the liquidator shall use its best judgment as to the most
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<PAGE>
advantageous time for the Partnership to sell Securities or to make
distributions in kind. All cash and each Security distributed in kind after
the date of dissolution of the Partnership shall be distributed ratably in
accordance with the distribution provisions of Article 8. Each Security so
distributed shall be subject to reasonable conditions and restrictions
necessary or advisable in order to preserve the value of such Security or for
legal reasons.
ARTICLE 12
FINANCIAL ACCOUNTING,
REPORTS, MEETINGS AND VOTING
12.1 FINANCIAL ACCOUNTING; FISCAL YEAR. The books and records of the
Partnership shall be kept in accordance with the provisions of this Agreement
and otherwise in accordance with generally accepted accounting principles
consistently applied, and shall be reviewed at the end of each fiscal year by an
independent public accountant of recognized national standing selected by the
General Partner. The Partnership's fiscal year shall be a fifty-two/fifty-three
week period ending on the Friday closest to November 30 of each year (the
"Fiscal Year").
12.2 SUPERVISION; INSPECTION OF BOOKS. Proper and complete books of
account of the Partnership, copies of the Partnership's federal, state and local
tax returns for each fiscal year, the Schedule of Partners set forth in Exhibit
A, this Agreement and the Partnership's Certificate of Limited Partnership shall
be kept under the supervision of the General Partner at the principal office of
the Partnership. Such books and records shall be open to inspection by the
Limited Partner, or their accredited representatives, at any reasonable time
during normal business hours after reasonable advance notice.
12.3 PARTNERSHIP REPORTS; FINANCIAL STATEMENTS OF THE PARTNERSHIP. The
General Partner shall deliver to the Limited Partners the following:
(a) Within 120 days after the close of the Partnership's Fiscal
Year, audited financial statements of the Partnership prepared in accordance
with the terms of this Agreement and otherwise in accordance with generally
accepted accounting principles, including an income statement for the year then
ended and balance sheet as of the end of such year, a statement of changes in
the Partners' Capital Accounts, and a list of investments then held.
(b) Within 60 days after the close of each fiscal quarter,
unaudited financial statements.
(c) Within 10 days after the end of each fiscal quarter, a
report from the General Partner which shall include a status report on cash
reserves, investments then held, a summary of acquisitions and dispositions of
investments made by the Partnership during the preceding period and a valuation
of each such investment.
12.4 TAX RETURNS AND TAX INFORMATION. The Partnership shall use the
method of accounting for tax purposes that is selected by the General Partner
after consultation with the Partnership's independent public accountants. The
General Partner shall cause the Partnership's federal, state and local
17
<PAGE>
tax returns and IRS Form 1065, Schedule K 1, to be prepared and delivered to
the Limited Partners within sixty (60) days after the close of the
Partnership's fiscal year. During such period, the General Partner shall
also cause the Partnership to furnish to any Limited Partner any other tax
information reasonably requested by such Limited Partner.
12.5 TAX MATTERS PARTNER. The General Partner shall be the
Partnership's tax matters partner under the Code and under any comparable
provision of state law. The General Partner shall have the right to resign as
tax matters partner by giving thirty (30) days' written notice to each Partner.
Upon such resignation a successor tax matters partner shall be elected by a
Majority In Interest of the Class A Limited Partners. The tax matters partner
shall employ experienced tax counsel to represent the Partnership in connection
with any audit or investigation of the Partnership by the Internal Revenue
Service and in connection with all subsequent administrative and judicial
proceedings arising out of such audit. If the tax matters partner is required
by law or regulation to incur fees and expenses in connection with tax matters
not affecting all the Partners, then the Partnership shall be entitled to
reimbursement from those Partners on whose behalf such fees and expenses were
incurred. The tax matters partner shall keep the Partners informed of all
administrative and judicial proceedings, as required by Section 6223(g)of the
Code, and shall furnish to each Partner, if such Partner so requests in writing,
a copy of each notice or other communication received by the tax matters partner
from the Internal Revenue Service, except such notices or communications as are
sent directly to such requesting Partner by the Internal Revenue Service. The
relationship of the tax matters partner to the Limited Partners is that of a
fiduciary, and the tax matters partner has fiduciary obligations to perform its
duties as tax matters partner in such manner as will serve the best interests of
the Partnership and all of the Partnership's Partners. To the fullest extent
permitted by law, but subject to the limitations and exclusions of paragraph
14.4 below, the Partnership agrees to indemnify the tax matters partner and its
agents and save and hold them harmless, from and in respect to all (i) fees,
costs and expenses in connection with or resulting from any laim, action, or
demand against the tax matters partner, the General Partner or the Partnership
that arise out of or in any way relate to the tax matters partner's status as
tax matters partner for the Partnership, and (ii) all such claims, actions, and
demands and any losses or damages therefrom, including amounts paid in
settlement or compromise of any such claim, action, or demand.
12.6 SPECIAL MEETINGS. Subject to the provisions of the Act, each
Partner may call a special meeting of the Partnership at any reasonable time on
not less than ten (10), nor more than sixty (60), days' written notice.
ARTICLE 13
VALUATION
13.1 VALUATION. Subject to the specific standards set forth below, the
valuation of Securities and other assets and liabilities under this Agreement
shall be at fair market value. Except as may be required under applicable
Treasury Regulations, no value shall be placed on the goodwill or the name of
the Partnership in determining the value of the interest of any Partner or in
any accounting among the Partners.
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(a) The following criteria shall be used for determining the
fair market value of Securities:
(i) Securities not subject to investment letter or other
similar restrictions on free Marketability:
(1) If traded on one or more securities exchanges
or the Nasdaq National Market, the value shall be deemed to be the Securities'
highest closing price on such exchange(s) on the valuation date.
(2) If actively traded over the counter (other
than on the Nasdaq National Market), the value shall be deemed to be the average
of the closing bid and ask prices of such Securities on the valuation date.
(3) If there is no active public market, the
value shall be the fair market value thereof, as determined by the General
Partner, taking into consideration the purchase price of the Securities,
developments concerning the investee company subsequent to the acquisition of
the Securities, any financial data and projections of the investee company
provided to the General Partner; and such other factor or factors as the General
Partner may deem relevant. If a Majority in Interest of the Class A Limited
Partners objects to the valuation of any Nonmarketable Security within fifteen
(15) days of receipt of the valuation, the fair market value of such Security
shall be determined by an appraiser selected by the senior ranking officer of
the Western Association of Venture Capitalists (or any successor organization)
who is not associated with any of the Partners. The Partnership shall bear the
expense of any such appraisal.
(ii) Securities subject to investment letter or other
restrictions on free Marketability shall be valued by making an appropriate
adjustment from the value determined under (1), (2), or (3) above to reflect the
effect of the restrictions on transfer.
(iii) The valuation of the Partnership's interest in AVII
shall be based on the valuation of the securities owned by AVII determined in
accordance with AVII's limited partnership agreement.
(b) If the General Partner in good faith determines that,
because of special circumstances, the valuation methods set forth in this
paragraph do not fairly determine the value of a Security, the General Partner
shall make such adjustments or use such alternative valuation method as it deems
appropriate.
ARTICLE 14
OTHER PROVISIONS
14.1 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among the
residents of such state made and to be performed entirely within such state.
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14.2 LIMITATION OF LIABILITY OF THE LIMITED PARTNERS. Except as
required by law, no Limited Partner shall be bound by, nor be personally liable
for, the expenses, liabilities, or obligations of the Partnership in excess of
its capital commitment to the Partnership.
14.3 EXCULPATION. Neither the General Partner, nor its members or
Affiliates shall be liable to any Limited Partner or the Partnership for honest
mistakes of judgment, or for action or inaction, taken in good faith for a
purpose that was reasonably believed to be in the best interests of the
Partnership, or for losses due to such mistakes, action, or inaction, or to the
negligence, dishonesty; or bad faith of any employee, broker, or other agent of
the Partnership, provided that such employee, broker, or agent was selected,
engaged, or retained with reasonable care. The General Partner and such persons
may consult with counsel and accountants in respect of Partnership affairs and
be fully protected and justified in any action or inaction that is taken in
accordance with the advice or opinion of such counsel or accountants, provided
that they shall have been selected with reasonable care. Notwithstanding any of
the foregoing to the contrary, the provisions of this paragraph and the
immediately following paragraph shall not be construed so as to relieve (or
attempt to relieve) any person of any liability by reason of fraud, willful
misconduct or gross negligence or to the extent (but only to THE extent) that
such liability may not be waived, modified, or limited under applicable law, but
shall be construed so as to effectuate the provisions of such paragraphs to the
fullest extent permitted by law.
14.4 INDEMNIFICATION. The Partnership agrees to indemnify, out of the
assets of the Partnership only, the General Partner and its members and their
agents (the "Indemnified Parties") to the fullest extent permitted by law and to
save and hold them harmless from and in respect of all (a) reasonable fees,
costs, and expenses, including legal fees, paid in connection with or resulting
from any claim, action, or demand against any Indemnified Party that arises out
of or in any way relate to the Partnership, its properties, business, or affairs
and (b) such claims, actions, and demands and any losses or damages resulting
from such claims, actions, and demands, including amounts paid in settlement or
compromise (if recommended by attorneys for the Partnership) of any such claim,
action or demand; provided, however, that this indemnity shall not extend to
conduct not undertaken in good faith to promote the best interests of the
Partnership or the portfolio companies of the Partnership, nor to any conduct
which constitutes fraud, willful misconduct or gross negligence. Expenses
incurred by any Indemnified Party in defending a claim or proceeding covered by
this paragraph shall be paid by the Partnership in advance of the final
disposition of such claim or proceeding provided the indemnified person
undertakes to repay such amount if it is ultimately determined that such person
was not entitled to be indemnified. The provisions of this paragraph 14.4 shall
remain in effect as to each Indemnified Party whether or not such Indemnified
Party continues to serve in the capacity that entitled such person to be
indemnified.
14.5 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, except with respect to the valuation
of Partnership assets, shall be settled by arbitration in San Jose, California
in accordance with the rules, then obtaining, of the American Arbitration
Association, and judgment upon the award rendered may be entered in any court
having jurisdiction thereof.
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14.6 EXECUTION AND FILING OF DOCUMENTS. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
14.7 OTHER INSTRUMENTS AND ACTS. The Partners agree to execute any
other instruments or perform any other acts that are or may be reasonably
necessary to effectuate and carry on the partnership created by this Agreement.
14.8 BINDING AGREEMENT. This Agreement shall be binding upon the
transferees, successors, assigns, and legal representatives of the Partners.
14.9 NOTICES. Any notice or other communication that one Partner
desires to give to another Partner shall be in writing, and shall be deemed
effectively given upon personal delivery or three (3) days after deposit in any
United States mail box, by registered or certified mail, postage prepaid, upon
confirmed transmission by facsimile, or upon confirmed delivery by overnight
commercial courier service, addressed to the other Partner at the address shown
on Exhibit A or at such other address as a Partner may designate by ten (10)
days' advance written notice to the other Partners; provided, however, that any
notice to a Partner with an address outside the United States shall be deemed
effectively given only upon personal delivery or upon transmission by facsimile
with a confirmation copy sent by air mail, or upon confirmed delivery by
international commercial courier service.
14.10 AMENDMENT. This Agreement may be amended only with the written
consent of the General Partner and a Majority in Interest of the Class A Limited
Partners.
14.11 ENTIRE AGREEMENT. This Agreement constitutes the full, complete,
and final agreement of the Partners and supersedes all prior written or oral
agreements between the Partners with respect to the Partnership.
14.12 TITLES; SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and shall not be considered in the interpretation
of this Agreement.
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14.13 PARTNERSHIP NAME. The Partnership shall have the exclusive right
to use the Partnership name as long as the Partnership continues. Upon
termination of the Partnership, the Partnership shall assign whatever rights it
may have in such name to the General Partner. No value shall be placed upon the
name or the goodwill attached to it for the purpose of determining the value of
any Partner's Capital Account or interest in the Partnership.
IN WITNESS WHEREOF, the Partners have executed this Agreement as of the
date first written above.
GENERAL PARTNER: CLASS A LIMITED PARTNER:
ADOBE SYSTEMS INCORPORATED ADOBE SYSTEMS INCORPORATED
By: /s/ Colleen M. Pouliot By: /s/ Colleen M. Pouliot
--------------------------- -------------------------
CLASS B LIMITED PARTNERS:
/s/ Harold Covert
- ----------------------- --------------------------
John Warnock Harold Covert
/s/ Bruce L. Chizen
- ----------------------- --------------------------
Charles Geschke Bruce Chizen
- -----------------------
Colleen Pouliot
- -----------------------
Frederick Snow
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EXHIBIT A
SCHEDULE OF PARTNERS (1)
<TABLE>
<CAPTION>
Name and Address Capital Contribution Class A Units Class B Units
---------------- -------------------- ------------- -------------
<S> <C> <C> <C>
GENERAL PARTNER: (2) 0 0
Adobe Systems Incorporated
345 Park Avenue
San Jose, CA 95110-2704
CLASS A LIMITED PARTNER: (3) 800,000 100,000
Adobe Systems Incorporated
345 Park Avenue
San Jose, CA 95110-2704
CLASS B LIMITED PARTNERS:
John Warnock (4) $0.00 0 30,000
Charles Geschke (4) $0.00 0 30,000
Colleen Pouliot (4) $0.00 0 10,000
Fred Snow (4) $0.00 0 10,000
Harold Covert (4) $0.00 0 10,000
Bruce Chizen (4) $0.00 0 10,000
Totals 800,000 200,000
</TABLE>
- ---------------------------
(1) This Exhibit A applies to Securities purchased on or after August 13,
1998. See Exhibit A to the Prior Agreement for Securities purchased
before August 13, 1998 (except with respect to any Former Partner).
(2) 1% of total capital contributions (in cash)
(3) cash and securities described on Schedule A-1 to this Exhibit A with an
agreed value as set forth on Schedule A-1
(4) c/o Adobe Systems Incorporated, 345 Park Avenue, San Jose, CA 95110-2704
<PAGE>
CONFIDENTIAL EXECUTIVE RESIGNATION AGREEMENT
AND GENERAL RELEASE OF CLAIMS
1. Robert A. Roblin ("Executive") was employed by Adobe Systems
Incorporated (the "Company") on or about June 28, 1996. Executive has now
decided to resign from his employment with the Company. It is the Company's
desire to provide Executive with certain benefits that he would not otherwise
be entitled to receive upon his resignation and to resolve any claims that
Executive has or may have against the Company. Accordingly, Executive and
the Company agree as set forth below. This Agreement shall become effective
on the eighth day after it is signed by Executive, but only if Executive has
not previously revoked his acceptance of this Agreement.
2. Executive hereby resigns voluntarily from (a) his employment with the
Company and any of its subsidiaries and (b) any positions that he holds as an
officer of the Company and/or any of its subsidiaries (including, but not
limited to, his position as an Executive Vice President, Marketing, of the
Company), with all such resignations effective as of August 11, 1998 (the
"Resignation Date").
3. The Company will provide Executive with the following payments and
benefits when this Agreement becomes effective:
(a) a lump sum severance payment of $660,000.00, less applicable
withholding (provided that if such payment and/or any other benefits that
Executive receives under this Agreement constitute an "excess parachute
payment" with the meaning of Section 280G of the Internal Revenue Code, then
such payment and/or benefits shall be reduced to the amount that has the
maximum value to Executive without causing any such payment to be
nondeductible by the Company under Section 280G); this severance payment will
be made to Executive within five business days following the date on which
this Agreement becomes effective;
(b) Executive and his eligible dependents will receive continued
group health insurance coverage in accordance with federal law (COBRA) at the
Company's expense for the period starting on the Resignation Date and ending
on the earlier of (i) October 12, 1999, or (ii) the date on which Executive
first becomes eligible to obtain other group health insurance coverage
through another employer; thereafter, Executive and his eligible dependents
may elect to continue such coverage in accordance with COBRA at their own
expense;
(c) the Company hereby assigns to Executive all right, title and
interest in and to that certain IBM Thinkpad 600 personal computer that was
provided to Executive by Company, and the Company also assigns to Executive
any Adobe software that is on such computer; by signing this Agreement,
Executive agrees that his use of such software shall be solely in accordance
with the terms of the Company's end user license agreements that apply to
such software, which license agreements are hereby incorporated by reference
into this Agreement; Executive shall allow the Company to remove all
non-Adobe software from such computer before Executive takes possession of
it; and
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(d) the Company agrees to provide Executive with a mutually agreed
upon letter of reference in the form attached hereto.
Executive will be (or has been) paid all wages and accrued, unused vacation
that he earns through the Resignation Date, and he will receive all of his
vested benefits under the Company's 401(k) and employee stock purchase plans
in accordance with the terms of those plans. Executive's rights with respect
to any equity awards (such as stock options, performance share unit awards
and restricted units in Adobe Incentive Partners, L.P.) shall be determined
in accordance with the terms of the applicable equity award plans and/or
agreements, which are not modified in any way by this Agreement. Executive
understands and acknowledges that he shall not be entitled to any payments or
benefits (including, but not limited to, any bonus for the second half of the
Company's 1998 fiscal year) from the Company other than those expressly set
forth in this paragraph 3.
4. Executive and his successors release the Company, its subsidiaries and
their respective shareholders, investors, directors, officers, employees,
agents, attorneys, insurers, legal successors and assigns of and from any and
all claims, actions and causes of action, whether now known or unknown, which
Executive now has, or at any other time had, or shall or may have against the
released parties based upon or arising out of any matter, cause, fact, thing,
act or omission whatsoever occurring or existing at any time up to and
including the date on which this Agreement becomes effective, including, but
not limited to, any claims of breach of contract, wrongful termination,
retaliation, fraud, defamation, infliction of emotional distress or national
origin, race, age, sex, sexual orientation, disability or other
discrimination or harassment under the Civil Rights Act of 1964, the Age
Discrimination In Employment Act of 1967, the Americans With Disabilities
Act, the Fair Employment and Housing Act or any other applicable law. The
parties agree that this release of claims shall not affect Executive's right
to be indemnified by the Company in accordance with the terms of their
Indemnity Agreement of on or about May 30, 1997.
5. Executive acknowledges that he has read section 1542 of the Civil Code
of the State of California, which states in full:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
Executive waives any rights that he has or may have under section 1542 to the
full extent that he may lawfully waive such rights pertaining to this general
release of claims, and affirms that he is releasing all known and unknown
claims that he has or may have against the parties listed above.
6. Executive acknowledges and agrees that he shall continue to be bound by
and comply with the terms of the Employee Inventions and Proprietary Rights
Assignment Agreement that Executive signed in connection with his employment
by the Company on or about June 21, 1996.
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<PAGE>
7. Prior to the Resignation Date, the Company will provide Executive with
a form of press release announcing the termination of their employment
relationship. The Company will consider any reasonable revisions that
Executive may propose to the press release, but the Company will determine,
in its sole discretion, whether any such revisions are made to the press
release. The press release will be issued by the Company no later than
August 11, 1998.
8. Executive agrees that he shall not:
(a) for a period of six months following the Resignation Date,
directly or indirectly disclose any of the terms of this Agreement to anyone
other than his immediate family or counsel, except as such disclosure may be
required for accounting or tax reporting purposes or as otherwise may be
required by law;
(b) make any critical or disparaging statements at any time about the
Company, or any of its products or employees, unless such statements are made
truthfully in response to a subpoena or other legal process; or
(c) make any comments at any time concerning the termination of
Executive's employment relationship with the Company that are inconsistent
with the press release described in paragraph 7.
9. The Company agrees that it will not, through any of its officers or
directors:
(a) for a period of six months following the Resignation Date,
disclose any of the terms of this Agreement to anyone other than the
Company's legal counsel and accountants, except as such disclosure may be
required for tax or securities reporting purposes or by law;
(b) make any critical or disparaging statements about Executive at
any time, unless such statements are made truthfully in response to a
subpoena or other legal process; or
(c) make any comments at any time concerning the termination of
Executive's employment relationship with the Company that are inconsistent
with the press release described in paragraph 7.
10. Executive agrees that in the event of his breach of any of the
provisions of paragraph 8, it will be impractical and extremely difficult to
determine the actual damages suffered by the Company as a result of that
breach. Accordingly, Executive agrees that if he breaches any provision of
paragraph 8, he shall repay the Company 30% of the net sum (that is, after
deducting all taxes and other withholdings) that he receives pursuant to
paragraph 3(a) as liquidated damages. If the Company breaches any of the
provisions of paragraph 9, then the corresponding provision(s) of paragraph 8
shall be cancelled and of no further force or effect. In addition to the
remedies described above, either party shall be entitled to obtain injunctive
relief to prevent the other party from committing any breach of its
respective obligations under Paragraph 8 or 9.
3
<PAGE>
11. Following the Resignation Date, Executive agrees to provide
reasonable assistance to the Company in connection with any litigation to
which the Company is or may become a party and with respect to which
Executive possesses any relevant knowledge or expertise. Executive's
assistance will be provided at mutually convenient times, and the Company
will reimburse Executive for any reasonable expenses incurred by him in
providing such assistance.
12. In the event of any legal action relating to or arising out of this
Agreement, the prevailing party shall be entitled to recover from the losing
party its attorneys' fees and costs incurred in that action.
13. This Agreement shall be governed by and construed in accordance with
the laws of the State of California. To the extent that any provision of
this Agreement is held to be invalid or unenforceable for any reason, such
provision shall be deemed stricken from this Agreement, and the remainder of
this Agreement shall continue to be in full force and effect.
14. This Agreement, along with any other agreements referenced herein,
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all prior negotiations and agreements
between the parties (including the parties' Retention Agreement of on or
about September 22, 1997, which is of no further force or effect). This
Agreement may not be modified or amended except by a document signed by an
authorized officer of the Company and Executive.
EXECUTIVE UNDERSTANDS THAT HE SHOULD CONSULT WITH AN ATTORNEY PRIOR TO
SIGNING THIS AGREEMENT AND THAT HE IS GIVING UP ANY LEGAL CLAIMS HE HAS
AGAINST THE PARTIES RELEASED ABOVE BY SIGNING THIS AGREEMENT. EXECUTIVE
FURTHER UNDERSTANDS THAT HE MAY HAVE UP TO 45 DAYS TO CONSIDER THIS
AGREEMENT, THAT HE MAY REVOKE IT AT ANY TIME DURING THE 7 DAYS AFTER HE SIGNS
IT, AND THAT IT SHALL NOT BECOME EFFECTIVE UNTIL THAT 7-DAY PERIOD HAS
PASSED. EXECUTIVE ACKNOWLEDGES THAT HE IS SIGNING THIS AGREEMENT KNOWINGLY,
WILLINGLY AND VOLUNTARILY IN EXCHANGE FOR THE COMPENSATION AND BENEFITS
DESCRIBED IN PARAGRAPH 3.
Dated: July 11.1998 /s/ Robert A. Roblin
--------------- ---------------------------------
Robert A. Roblin
Dated: August 20.1998 Adobe Systems Incorporated
-----------------
By: /s/ John E. Warnock
------------------------------
4
<PAGE>
CONFIDENTIAL EXECUTIVE RESIGNATION AGREEMENT
AND GENERAL RELEASE OF CLAIMS
1. Ross A. Bott ("Executive") was employed by Adobe Systems Incorporated
(the "Company") on or about December 26, 1996. Executive and the Company
have now agreed to terminate his employment relationship with the Company.
It is the Company's desire to provide Executive with certain benefits that he
would not otherwise be entitled to receive upon his termination and to
resolve any claims that Executive has or may have against the Company.
Accordingly, Executive and the Company agree as set forth below. This
Agreement shall become effective on the eighth day after it is signed by
Executive, but only if Executive has not previously revoked his acceptance of
this Agreement.
2. Executive hereby resigns voluntarily from any positions that he holds
as an officer of the Company and/or any of its subsidiaries (including, but
not limited to, his position as Executive Vice President, Product Divisions),
with all such resignations effective as of August 11, 1998 (the "Resignation
Date"). Executive and the Company agree that his employment with the Company
and any of its subsidiaries will terminate effective as of October 19, 1998
(the "Termination Date"). During the period between the Resignation Date and
the Termination Date: (a) Executive will provide transition assistance as
requested by the Company, and will take paid time off in accordance with the
Company's paid time off policies; and (b) the Company will continue to
provide Executive with the same base salary and employee benefits that he was
receiving immediately prior to the Resignation Date.
3. The Company will provide Executive with the following payments and
benefits when this Agreement becomes effective:
(a) a lump sum severance payment of $800,000.00, less applicable
withholding (provided that if such payment and/or any other benefits that
Executive receives under this Agreement constitute an "excess parachute
payment" within the meaning of Section 280G of the Internal Revenue Code,
then such payment and/or benefits shall be reduced to the amount that has the
maximum value to Executive without causing any such payment to be
nondeductible by the Company under Section 280G); this severance payment will
be made to Executive on the eighth day following his re-execution of this
Agreement as described in paragraph 4 below;
(b) Executive and his eligible dependents will receive continued
group health insurance coverage in accordance with federal law (COBRA) at the
Company's expense for the period starting on the Resignation Date and ending
on the earlier of (i) November 19, 1999, or (ii) the date on which Executive
first becomes eligible to obtain other group health insurance coverage
through another employer;
(c) as soon as practicable following the Termination Date, the
Company will amend Executive's Company stock option grants so as to allow
Executive to exercise his right to purchase any stock options that have
become vested as of the Termination Date at any time up to and including
June 15, 1999; except as modified by this subparagraph (c), Executive's
rights with
1
<PAGE>
respect to any stock options granted to him by the Company shall continue to
be determined in accordance with the terms of the applicable stock option
plans and/or agreements;
(d) the Company hereby assigns to Executive all right, title and
interest in and to the laptop computer and desktop computer that were
provided to Executive by the Company, and the Company also assigns to
Executive any Adobe software that is on such computers; by signing this
Agreement, Executive agrees that his use of such software shall be solely in
accordance with the terms of the Company's end user license agreements that
apply to such software, which license agreements are hereby incorporated by
reference into this Agreement; Executive shall allow the Company to remove
all non-Adobe software from such computers before Executive takes possession
of them;
(e) the Company agrees to provide Executive with a mutually agreed
upon letter of reference; and
(f) the Company agrees that it will not contest any claim for
unemployment benefits that may be filed by Executive after the Termination
Date.
Executive will be paid all wages and accrued, unused vacation that he earns
through the Termination Date, and he will receive all of his vested benefits
under the Company's 401(k) and employee stock purchase plans in accordance
with the terms of those plans. Executive will be reimbursed by the Company
for any reasonable business expenses incurred by Executive in the course of
his employment with the Company, pursuant to the Company's applicable
business expense reimbursement policies (except that the Company shall not
deny the reimbursement of any such expenses under those policies on the
ground that they were not timely submitted by Executive). Executive's rights
with respect to any equity awards (such as stock options, performance share
unit awards and restricted units in Adobe Incentive Partners, L.P.) shall be
determined in accordance with the terms of the applicable equity award plans
and/or agreements, which are not modified in any way by this Agreement
(except as set forth in subparagraph (c)). Executive understands and
acknowledges that he shall not be entitled to any payments or benefits
(including, but not limited to, any bonus for the second half of the
Company's 1998 fiscal year) from the Company other than those expressly set
forth in this paragraph 3.
4. Executive and his successors release the Company, its subsidiaries and
their respective shareholders, investors, directors, officers, employees,
agents, attorneys, insurers, legal successors and assigns of and from any and
all claims, actions and causes of action, whether now known or unknown, which
Executive now has, or at any other time had, or shall or may have against the
released parties based upon or arising out of any matter, cause, fact, thing,
act or omission whatsoever occurring or existing at any time up to and
including the Termination Date, including, but not limited to, any claims of
breach of contract, wrongful termination, retaliation, fraud, defamation,
infliction of emotional distress or national origin, race, age, sex, sexual
orientation, disability or other discrimination or harassment under the Civil
Rights Act of 1964, the Age Discrimination In Employment Act of 1967, the
Americans With Disabilities Act, the Fair Employment and Housing Act or any
other applicable law. As additional consideration for the severance payment
described in paragraph 3(a), Executive agrees that he will reaffirm this
release
2
<PAGE>
of claims by re-signing this Agreement in the space provided at the end of
the Agreement on or after the Termination Date. The parties agree that the
releases of claims contained in this Agreement shall not affect Executive's
right to be indemnified by the Company in accordance with the terms of their
Indemnity Agreement of on or about May 30, 1997.
5. Executive acknowledges that he has read section 1542 of the Civil Code
of the State of California, which states in full:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor.
Executive waives any rights that he has or may have under section 1542 to the
full extent that he may lawfully waive such rights pertaining to this general
release of claims, and affirms that he is releasing all known and unknown
claims that he has or may have against the parties listed above.
6. Executive acknowledges and agrees that he shall continue to be bound by
and comply with the terms of the Employee Inventions and Proprietary Rights
Assignment Agreement that Executive signed in connection with his employment
by the Company.
7. Prior to the Resignation Date, the Company will provide Executive with
a form of press release announcing the termination of their employment
relationship. The Company will consider any reasonable revisions that
Executive may propose to the press release, but the Company will determine,
in its sole discretion, whether any such revisions are made to the press
release. The press release will be issued by the Company no later than
August 11, 1998.
8. Executive agrees that he shall not:
(a) for a period of six months following the Resignation Date,
directly or indirectly disclose any of the terms of this Agreement to anyone
other than his immediate family, his counsel, his financial advisors, or the
Employment Development Department, except as such disclosure may be required
for accounting or tax reporting purposes or as otherwise may be required by
law;
(b) make any critical or disparaging statements at any time about the
Company, or any of its products or employees, unless such statements are made
truthfully in response to a subpoena or other legal process; or
(c) make any comments at any time concerning the termination of
Executive's employment relationship with the Company that are inconsistent
with the press release described in paragraph 7.
9. The Company agrees that it will not, through any of its officers or
directors:
3
<PAGE>
(a) for a period of six months following the Resignation Date,
disclose any of the terms of this Agreement to anyone other than the
Company's legal counsel and accountants, except as such disclosure may be
required for tax or securities reporting purposes or by law;
(b) make any critical or disparaging statements about Executive at
any time, unless such statements are made truthfully in response to a
subpoena or other legal process; or
(c) make any comments at any time concerning the termination of
Executive's employment relationship with the Company that are inconsistent
with the press release described in paragraph 7.
10. Executive agrees that in the event of his breach of any of the
provisions of paragraph 8, it will be impractical and extremely difficult to
determine the actual damages suffered by the Company as a result of that
breach. Accordingly, Executive agrees that if he breaches any provision of
paragraph 8, he shall repay the Company 30% of the net sum (that is, after
deducting all taxes and other withholdings) that he receives pursuant to
paragraph 3(a) as liquidated damages. If the Company breaches any of the
provisions of paragraph 9, then the corresponding provision(s) of paragraph 8
shall be cancelled and of no further force or effect.
11. Following the Termination Date, Executive agrees to provide
reasonable assistance to the Company in connection with any litigation to
which the Company is or may become a party and with respect to which
Executive possesses any relevant knowledge or expertise. Executive's
assistance will be provided at mutually convenient times, and the Company
will reimburse Executive for any reasonable expenses incurred by him in
providing such assistance.
12. In the event of any legal action relating to or arising out of this
Agreement, the prevailing party shall be entitled to recover from the losing
party its attorneys' fees and costs incurred in that action.
13. This Agreement shall be governed by and construed in accordance with
the laws of the State of California. To the extent that any provision of
this Agreement is held to be invalid or unenforceable for any reason, such
provision shall be deemed stricken from this Agreement, and the remainder of
this Agreement shall continue to be in full force and effect.
14. This Agreement, along with any other agreements referenced herein,
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all prior negotiations and agreements
between the parties (including the parties' Retention Agreement of on or
about September 12, 1997, which is of no further force or effect). This
Agreement may not be modified or amended except by a document signed by an
authorized officer of the Company and Executive.
EXECUTIVE UNDERSTANDS THAT HE SHOULD CONSULT WITH AN ATTORNEY PRIOR TO
SIGNING THIS AGREEMENT AND THAT HE IS GIVING UP ANY LEGAL CLAIMS HE HAS
AGAINST THE PARTIES RELEASED ABOVE BY SIGNING THIS AGREEMENT. EXECUTIVE
FURTHER UNDERSTANDS THAT HE MAY HAVE UP TO 45
4
<PAGE>
DAYS TO CONSIDER THIS AGREEMENT, THAT HE MAY REVOKE IT AT ANY TIME DURING THE
7 DAYS AFTER HE SIGNS IT, AND THAT IT SHALL NOT BECOME EFFECTIVE UNTIL THAT
7-DAY PERIOD HAS PASSED. EXECUTIVE ACKNOWLEDGES THAT HE IS SIGNING THIS
AGREEMENT KNOWINGLY, WILLINGLY AND VOLUNTARILY IN EXCHANGE FOR THE
COMPENSATION AND BENEFITS DESCRIBED IN PARAGRAPH 3.
Dated: August 19, 1998 /s/ Ross Bott
--------------- ------------------------------
Ross A. Bott
Dated: August 20, 1998 Adobe Systems Incorporated
---------------
By: /s/ John E. Warnock
---------------------------
By re-signing this Agreement on or after the Termination Date, I hereby
reaffirm the release of all known and unknown claims set forth in paragraphs
4 and 5 above. I understand that I may revoke this Agreement at any time
during the 7 days after I re-sign it.
Dated: October __, 1998 ------------------------------
Ross A. Bott
5
<PAGE>
CONFIDENTIAL EXECUTIVE RESIGNATION AGREEMENT
AND GENERAL RELEASE OF CLAIMS
1. P. Jackson Bell ("Executive") was employed by Adobe Systems
Incorporated (the "Company") on or about November 11, 1996. Executive has
now decided to resign from his employment with the Company. It is the
Company's desire to provide Executive with certain benefits that he would not
otherwise be entitled to receive upon his resignation and to resolve any
claims that Executive has or may have against the Company. Accordingly,
Executive and the Company agree as set forth below. This Agreement shall
become effective on the eighth day after it is signed by Executive, but only
if Executive has not previously revoked his acceptance of this Agreement.
2. Executive hereby resigns from (a) his employment with the Company and
any of its subsidiaries, and (b) any positions that he holds as an officer of
the Company and/or any of its subsidiaries (including, but not limited to,
his positions as Executive Vice President, Chief Administrative Officer,
Chief Financial Officer and Assistant Secretary of the Company), with all
such resignations effective as of August 11, 1998 (the "Resignation Date").
3. The Company will provide Executive with the following payments and
benefits when this Agreement becomes effective:
(a) a lump sum severance payment of $750,000.00, less applicable
withholding (provided that if such payment and/or any other benefits that
Executive receives under this Agreement constitute an "excess parachute
payment" within the meaning of Section 280G of the Internal Revenue Code,
then such payment and/or benefits shall be reduced to the amount that has the
maximum value to Executive without causing any such payment to be
nondeductible by the Company under Section 280G); this severance payment will
be made to Executive within five business days following the date on which
this Agreement becomes effective; and
(b) Executive and his eligible dependents will receive continued
group health insurance coverage in accordance with federal law (COBRA) at the
Company's expense for the period starting on the Resignation Date and ending
on the earlier of (i) February 11, 2000, or (ii) the date on which Executive
first becomes eligible to obtain other group health insurance coverage
through another employer.
Executive will be (or has been) paid all wages and accrued, unused vacation
that he earns through the Resignation Date, and he will receive all of his
vested benefits under the Company's 401(k) and employee stock purchase plans
in accordance with the terms of those plans. Executive's rights with respect
to any equity awards (such as stock options, performance share unit awards
and restricted units in Adobe Incentive Partners, L.P.) shall be determined
in accordance with the terms of the applicable equity award plans and/or
agreements, which are not modified in any way by this Agreement. Executive
understands and acknowledges that he shall not be entitled to any payments or
benefits (including, but not limited to, any bonus for the second half of the
Company's 1998 fiscal year) from the Company other than those expressly set
forth in this paragraph 3.
1
<PAGE>
4. Executive and his successors release the Company, its subsidiaries and
their respective shareholders, investors, directors, officers, employees,
agents, attorneys, insurers, legal successors and assigns of and from any and
all claims, actions and causes of action, whether now known or unknown, which
Executive now has, or at any other time had, or shall or may have against the
released parties based upon or arising out of any matter, cause, fact, thing,
act or omission whatsoever occurring or existing at any time up to and
including the date on which this Agreement becomes effective, including, but
not limited to, any claims of breach of contract, wrongful termination,
retaliation, fraud, defamation, infliction of emotional distress or national
origin, race, age, sex, sexual orientation, disability or other
discrimination or harassment under the Civil Rights Act of 1964, the Age
Discrimination In Employment Act of 1967, the Americans With Disabilities
Act, the Fair Employment and Housing Act or any other applicable law. The
parties agree that this release of claims shall not affect Executive's right
to be indemnified by the Company in accordance with the terms of their
Indemnity Agreement of May 30, 1997.
5. Executive acknowledges that he has read section 1542 of the Civil Code
of the State of California, which states in full:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
Executive waives any rights that he has or may have under section 1542 to the
full extent that he may lawfully waive such rights pertaining to this general
release of claims, and affirms that he is releasing all known and unknown
claims that he has or may have against the parties listed above.
6. Executive acknowledges and agrees that he shall continue to be bound by
and comply with the terms of the Employee Inventions and Proprietary Rights
Assignment Agreement that Executive signed in connection with his employment
by the Company.
7. Prior to the Resignation Date, the Company will provide Executive with
a form of press release announcing the termination of their employment
relationship. The Company will consider any reasonable revisions that
Executive may propose to the press release, but the Company will determine,
in its sole discretion, whether any such revisions are made to the press
release. The press release will be issued by the Company no later than
August 11, 1998.
8. Executive agrees that he shall not:
(a) for a period of six months following the Resignation Date,
directly or indirectly disclose any of the terms of this Agreement to anyone
other than his immediate family or counsel, except as such disclosure may be
required for accounting or tax reporting purposes or as otherwise may be
required by law;
2
<PAGE>
(b) make any critical or disparaging statements at any time about the
Company, or any of its products or employees, unless such statements are made
truthfully in response to a subpoena or other legal process; or
(c) make any comments at any time concerning the termination of
Executive's employment relationship with the Company that are inconsistent
with the press release described in paragraph 7.
9. The Company agrees that it will not, through any of its officers or
directors:
(a) for a period of six months following the Resignation Date,
disclose any of the terms of this Agreement to anyone other than the
Company's legal counsel and accountants, except as such disclosure may be
required for tax or securities reporting purposes or by law;
(b) make any critical or disparaging statements about Executive at
any time, unless such statements are made truthfully in response to a
subpoena or other legal process; or
(c) make any comments at any time concerning the termination of
Executive's employment relationship with the Company that are inconsistent
with the press release described in paragraph 7.
10. Executive agrees that in the event of his breach of any of the
provisions of paragraph 8, it will be impractical and extremely difficult to
determine the actual damages suffered by the Company as a result of that
breach. Accordingly, Executive agrees that if he breaches any provision of
paragraph 8, he shall repay the Company 30% of the net sum (that is, after
deducting all taxes and other withholdings) that he receives pursuant to
paragraph 3(a) as liquidated damages. If the Company breaches any of the
provisions of paragraph 9, then the corresponding provision(s) of paragraph 8
shall be cancelled and of no further force or effect.
11. Following the Resignation Date, Executive agrees to provide
reasonable assistance to the Company in connection with any litigation to
which the Company is or may become a party and with respect to which
Executive possesses any relevant knowledge or expertise. Executive's
assistance will be provided at mutually convenient times, and the Company
will reimburse Executive for any reasonable expenses incurred by him in
providing such assistance.
12. In the event of any legal action relating to or arising out of this
Agreement, the prevailing party shall be entitled to recover from the losing
party its attorneys' fees and costs incurred in that action.
13. This Agreement shall be governed by and construed in accordance with
the laws of the State of California. To the extent that any provision of
this Agreement is held to be invalid or unenforceable for any reason, such
provision shall be deemed stricken from this Agreement, and the remainder of
this Agreement shall continue to be in full force and effect.
3
<PAGE>
14. This Agreement, along with any other agreements referenced herein,
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all prior negotiations and agreements
between the parties (including the parties' Retention Agreement of on or
about September 12, 1997, which is of no further force or effect). This
Agreement may not be modified or amended except by a document signed by an
authorized officer of the Company and Executive.
EXECUTIVE UNDERSTANDS THAT HE SHOULD CONSULT WITH AN ATTORNEY PRIOR TO
SIGNING THIS AGREEMENT AND THAT HE IS GIVING UP ANY LEGAL CLAIMS HE HAS
AGAINST THE PARTIES RELEASED ABOVE BY SIGNING THIS AGREEMENT. EXECUTIVE
FURTHER UNDERSTANDS THAT HE MAY HAVE UP TO 45 DAYS TO CONSIDER THIS
AGREEMENT, THAT HE MAY REVOKE IT AT ANY TIME DURING THE 7 DAYS AFTER HE SIGNS
IT, AND THAT IT SHALL NOT BECOME EFFECTIVE UNTIL THAT 7-DAY PERIOD HAS
PASSED. EXECUTIVE ACKNOWLEDGES THAT HE IS SIGNING THIS AGREEMENT KNOWINGLY,
WILLINGLY AND VOLUNTARILY IN EXCHANGE FOR THE COMPENSATION AND BENEFITS
DESCRIBED IN PARAGRAPH 3.
Dated: August 10, 1998 /s/ P. Jackson Bell
--------------- ------------------------------------
P. Jackson Bell
Dated: August 20, 1998 Adobe Systems Incorporated
---------------
By: /s/ John Warnock
---------------------------------
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT AUGUST 28, 1998, AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE NINE MONTHS ENDED AUGUST 28, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-27-1998
<PERIOD-START> NOV-29-1997
<PERIOD-END> AUG-28-1998
<CASH> 183,795
<SECURITIES> 259,471
<RECEIVABLES> 118,982
<ALLOWANCES> 5,260
<INVENTORY> 2,612
<CURRENT-ASSETS> 595,914
<PP&E> 217,701
<DEPRECIATION> 122,457
<TOTAL-ASSETS> 902,967
<CURRENT-LIABILITIES> 223,983
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 678,977
<TOTAL-LIABILITY-AND-EQUITY> 902,967
<SALES> 125,132
<TOTAL-REVENUES> 648,055
<CGS> 84,059
<TOTAL-COSTS> 84,059
<OTHER-EXPENSES> 509,170
<LOSS-PROVISION> 2,010
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 87,522
<INCOME-TAX> 32,646
<INCOME-CONTINUING> 54,876
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,876
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.80
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT AUGUST 29, 1997, AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE NINE MONTHS ENDED AUGUST 29, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-28-1997
<PERIOD-START> NOV-30-1996
<PERIOD-END> AUG-29-1997
<CASH> 176,911
<SECURITIES> 510,248
<RECEIVABLES> 128,978
<ALLOWANCES> 6,382
<INVENTORY> 13,273
<CURRENT-ASSETS> 852,839
<PP&E> 182,951
<DEPRECIATION> 98,930
<TOTAL-ASSETS> 1,105,560
<CURRENT-LIABILITIES> 233,587
<BONDS> 0
0
0
<COMMON> 263,570
<OTHER-SE> 608,403
<TOTAL-LIABILITY-AND-EQUITY> 1,105,560
<SALES> 149,880
<TOTAL-REVENUES> 684,762
<CGS> 99,636
<TOTAL-COSTS> 99,636
<OTHER-EXPENSES> 410,952
<LOSS-PROVISION> 881
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 221,899
<INCOME-TAX> 81,881
<INCOME-CONTINUING> 140,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 140,018
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.88
</TABLE>
