-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, KjOIdfKDxfeYMDHvhUiGFZ6LFQGh9gfUn4T006vKuM4q0o5ZV1SObsgoJQVoR5fq d32+sqP2by4JEf0wQdQExg== 0000912057-95-005420.txt : 199507180000912057-95-005420.hdr.sgml : 19950718 ACCESSION NUMBER: 0000912057-95-005420 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950602 FILED AS OF DATE: 19950717 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADOBE SYSTEMS INC CENTRAL INDEX KEY: 0000796343 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770019522 STATE OF INCORPORATION: CA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07033 FILM NUMBER: 95554230 BUSINESS ADDRESS: STREET 1: 1585 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1225 BUSINESS PHONE: 4159614400 MAIL ADDRESS: STREET 1: P.O. BOX 7900 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94039-7900 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 2, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ----------- Commission File Number: 33-6885 ADOBE SYSTEMS INCORPORATED (Exact name of registrant as specified in its charter) California 77-0019522 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1585 Charleston Road, Mountain View, California 94043-1225 (Address of principal executive offices) (Zip Code) (415) 961-4400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: SHARES OUTSTANDING CLASS JUNE 2, 1995 ----- ------------ Common stock, no par value 63,344,298 TABLE OF CONTENTS Page No. PART I -- FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 28 Item 6. Exhibits and Reports on Form 8-K 29 Signature 36 Summary of Trademarks 37 EXHIBITS Exhibit 10.33 Sale of Rights under Software Development and Acquisition Agreement By and Between Adobe Systems Incorporated and Thomas Knoll and John Knoll (confidential treatment granted) Exhibit 11 Computation of Earnings per Common Share Exhibit 27 Financial Data Schedules 2 PART I -- FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated financial statements included under this item are as follows: Sequentially Numbered Financial Statement Description Page - ------------------------------------------------------------------- ------------ - - Condensed Consolidated Statements of Income Quarters Ended June 2, 1995 and May 27, 1994 and Six Months Ended June 2, 1995 and May 27, 1994 4 - - Condensed Consolidated Balance Sheets June 2, 1995 and November 25, 1994 5 - - Condensed Consolidated Statements of Cash Flows Six Months Ended June 2, 1995 and May 27, 1994 6 - - Notes to Condensed Consolidated Financial Statements 8 3 ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarters Ended Six Months Ended ------------------------------- -------------------------- June 2 May 27 June 2 May 27 1995 1994 1995 1994 ------------ ----------- ----------- ----------- Revenue: Licensing $ 45,081 $ 40,257 $ 91,395 $ 76,583 Application products 122,911 109,536 245,189 209,102 ------------ ----------- ----------- ----------- Total revenue 167,992 149,793 336,584 285,685 Direct costs 30,804 27,894 63,555 53,899 ------------ ----------- ----------- ----------- Gross margin 137,188 121,899 273,029 231,786 ------------ ----------- ----------- ----------- Operating expenses: Software development costs: Research and development 26,494 23,486 52,862 45,184 Amortization of capitalized software development costs 2,595 4,152 5,155 6,773 Sales, marketing and customer support 49,256 51,450 95,288 97,118 General and administrative 12,092 14,152 23,666 26,140 Write-off of acquired in- process research and development -- 3,045 -- 3,045 ------------ ----------- ----------- ----------- Total operating expenses 90,437 96,285 176,971 178,260 ------------ ----------- ----------- ----------- Operating income 46,751 25,614 96,058 53,526 Nonoperating income: Interest, investment and other income 7,098 1,839 12,274 3,868 ------------ ----------- ----------- ----------- Income before income taxes 53,849 27,453 108,332 57,394 Provision for income taxes 19,947 10,147 40,080 20,995 ------------ ----------- ----------- ----------- Net income $ 33,902 $ 17,306 $ 68,252 $ 36,399 ------------ ----------- ----------- ----------- ------------ ----------- ----------- ----------- Net income per share $ .51 $ .28 $ 1.04 $ .59 ------------ ----------- ----------- ----------- ------------ ----------- ----------- ----------- Shares used in computing net income per share 66,324 61,768 65,343 61,529 ------------ ----------- ----------- ----------- ------------ ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
June 2 November 25 1995 1994 ---------- ----------- ASSETS Current assets: Cash and cash equivalents $ 129,339 $ 190,091 Short-term investments 314,025 210,269 Receivables 91,523 96,585 Inventories 6,339 9,619 Other current assets 9,547 7,837 Deferred income taxes 18,472 17,962 ---------- ---------- Total current assets 569,245 532,363 Property and equipment 44,119 39,104 Other assets 86,782 45,561 Deferred income taxes 10,226 8,475 ---------- ---------- $ 710,372 $ 625,503 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade and other payables $ 21,721 $ 30,840 Accrued expenses 82,549 79,000 Accrued restructuring costs 11,834 28,457 Income taxes payable 13,611 23,083 Deferred revenue 7,738 7,352 ---------- ---------- Total current liabilities 137,453 168,732 ---------- ---------- Put warrants 3,447 -- Shareholders' equity: Preferred stock, no par value; 2,000,000 shares authorized; none issued -- -- Common stock, no par value; 200,000,000 shares authorized; 63,344,298 and 61,150,049 shares issued and outstanding as of June 2, 1995, and November 25, 1994, respectively 189,650 142,207 Unrealized gains (losses) on investments 1,480 (1,088) Retained earnings 381,620 319,704 Cumulative foreign currency translation adjustments (3,278) (4,052) ---------- ---------- Total shareholders' equity 569,472 456,771 ---------- ---------- $ 710,372 $ 625,503 ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Six Months Ended ------------------------- June 2 May 27 1995 1994 ---------- ---------- Cash flows from operating activities: Net income $ 68,252 $ 36,399 Adjustments to reconcile net income to net cash provided by operating activities: Stock compensation expense 1,481 509 Depreciation and amortization 23,472 24,217 Deferred income taxes (2,252) (3,521) Provision for losses on accounts receivable 817 437 Tax benefit from employee stock plans 16,775 5,192 Write-off of acquired in-process research and development -- 3,045 Changes in operating assets and liabilities: Receivables 3,833 (16,288) Inventories 3,294 (119) Other current assets (2,437) (2,900) Trade and other payables (9,056) 442 Accrued expenses 1,779 8,963 Accrued restructuring costs (14,793) -- Income taxes payable (9,625) 1,298 Deferred revenue 312 (587) ---------- ---------- Net cash provided by operating activities 81,852 57,087 ---------- ---------- Cash flows from investing activities: Purchases of short-term investments (1,943,670) (643,221) Maturities and sales of short-term investments 1,842,482 630,731 Acquisitions of property and equipment (15,151) (14,222) Capitalization of software development costs -- (7,271) Additions to other assets (54,538) (1,870) Acquisitions, net of cash acquired -- (6,297) ---------- ---------- Net cash used for investing activities (170,877) (42,150) ---------- ---------- (Continued)
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (CONTINUED)
Six Months Ended ------------------------- June 2 May 27 1995 1994 ---------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock $ 46,265 $ 15,688 Proceeds from sales of put warrants -- 718 Repurchase of common stock (13,631) (6,630) Payment of dividends (6,333) (4,561) ---------- ---------- Net cash provided by financing activities 26,301 5,215 ---------- ---------- Effect of foreign currency exchange rates on cash and cash equivalents 1,972 179 ---------- ---------- Net increase (decrease) in cash and cash equivalents (60,752) 20,331 Adjustment for change in Aldus Corporation fiscal year-end -- (3,554) Cash and cash equivalents at beginning of period 190,091 134,039 ---------- ---------- Cash and cash equivalents at end of period $ 129,339 $ 150,816 ---------- ---------- ---------- ---------- Supplemental disclosures: Cash paid during the period for income taxes $ 32,023 $ 14,945 ---------- ---------- ---------- ---------- Noncash investing and financing activities: Dividends declared but not paid $ 3,185 $ 2,302 ---------- ---------- ---------- ---------- Reclassification of put warrants $ 3,447 $ 3,581 ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 7 ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited condensed consolidated statements of income, balance sheets and statements of cash flows reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the condensed consolidated financial position at June 2, 1995, and the condensed consolidated statements of income and cash flows for the interim periods ended June 2, 1995 and May 27, 1994. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the results of operations, the financial position, and cash flows, in conformity with generally accepted accounting principles. The Company filed audited consolidated financial statements which included all information and footnotes necessary for such a presentation of the results of operations, financial position, and cash flows for the years ended November 25, 1994, November 26, 1993 and November 27, 1992, in the Company's 1994 Annual Report on Form 10-K. The results of operations for the interim period ended June 2, 1995, are not necessarily indicative of the results to be expected for the full year. 8 ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED) NOTE 2. MERGER WITH ALDUS CORPORATION On August 31, 1994, the Company issued approximately 14.2 million shares of its common stock in exchange for all of the common stock of Aldus Corporation ("Aldus"). This business combination has been accounted for as a pooling of interests, and accordingly, the condensed consolidated financial statements for the periods prior to the merger have been restated to include the results of operations, the financial position and cash flows of Aldus. Prior to the combination, Aldus' fiscal year ended on December 31. In recording the business combination, Aldus' financial statements for the interim periods ended May 27, 1994 were combined with the Company's for the same periods. Aldus' financial statements for the year ended December 31, 1993 were combined with the Company's for the year ended November 26, 1993. Revenue and net income for Aldus for the month ended December 31, 1993 were $26.1 million and $4.4 million, respectively. Net income, the foreign currency translation adjustment, the issuance of common stock and the net increase in cash and cash equivalents were adjusted to eliminate the effect of including Aldus' results of operations, financial position and cash flows for the month ended December 31, 1993 in the interim periods ended May 27, 1994 and the year ended November 26, 1993. 9 ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED) NOTE 3. RECEIVABLES Receivables consisted of the following:
June 2 November 25 1995 1994 ---------- ----------- Trade receivables $ 56,638 $ 69,628 Royalty receivables 30,394 26,800 Interest and other receivables 8,334 3,410 ---------- ----------- 95,366 99,838 Less allowance for doubtful accounts 3,843 3,253 ---------- ----------- $ 91,523 $ 96,585 ---------- ----------- ---------- -----------
NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
June 2 November 25 1995 1994 ---------- ----------- Land $ 782 $ 782 Building 4,615 4,615 Equipment 96,257 88,285 Furniture and fixtures 17,738 15,487 Leasehold improvements 7,902 4,146 ---------- ---------- 127,294 113,315 Less accumulated depreciation and amortization 83,175 74,211 ---------- ---------- $ 44,119 $ 39,104 ---------- ---------- ---------- ----------
10 ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED) NOTE 5. OTHER ASSETS Other assets consisted of the following:
June 2 November 25 1995 1994 ---------- ----------- Licensing agreements $ 15,608 $ 15,565 Goodwill 22,034 22,034 Purchased technology 34,726 325 Software development costs 27,199 27,199 Miscellaneous other assets 36,528 16,123 ---------- ---------- 136,095 81,246 Less accumulated amortization 49,313 35,685 ---------- ---------- $ 86,782 $ 45,561 ---------- ---------- ---------- ----------
Unamortized software development costs were $4.3 million and $9.1 million at June 2, 1995 and November 25, 1994, respectively. Amortization of software development costs was $2.6 million and $4.2 million for the quarters ended June 2, 1995 and May 27, 1994, respectively, and $5.2 million and $6.8 million for the six months ended June 2, 1995 and May 27, 1994, respectively. NOTE 6. ACCRUED EXPENSES Accrued expenses consisted of the following:
June 2 November 25 1995 1994 ---------- ----------- Royalties $ 5,612 $ 10,824 Accrued compensation and benefits 20,558 17,039 Sales and marketing allowances 20,705 19,445 Miscellaneous accrued expenses 35,674 31,692 ---------- ----------- $ 82,549 $ 79,000 ---------- ----------- ---------- -----------
11 ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED) NOTE 7. ACCRUED RESTRUCTURING COSTS On August 31, 1994, the Company merged with Aldus, described in "Note 2 -- Merger with Aldus Corporation," and initiated a plan to combine the operations of the two companies. On this date, the Company recorded a $72.2 million charge to operating expenses related to the merger transaction and restructuring costs. Merger transaction costs consist principally of transaction fees for investment bankers, attorneys, accountants, financial printing and other related charges. Restructuring costs include the elimination of redundant information systems and equipment, severance and outplacement of terminated employees, the write-off of certain assets related to product lines to be divested or eliminated, and cancellation of certain contractual agreements. Activity in accrued restructuring costs is as follows:
Six Months Ended June 2, 1995 Accrued as of ----------------------------- Accrued as of November 25 Cash June 2 1994 Write-offs Payments 1995 ------------- -------------- ------------- -------------- Merger transaction costs $ 5,863 $ 168 $ 5,455 $ 240 Restructuring costs: Severance and outplacement 11,548 -- 7,320 4,228 Impaired assets and cancellation of facility leases 11,046 1,662 2,018 7,366 ------------- ------------- ------------- -------------- $ 28,457 $ 1,830 $ 14,793 $ 11,834 ------------- ------------- ------------- -------------- ------------- ------------- ------------- --------------
The nature, timing and extent of restructuring costs follows: SEVERANCE AND OUTPLACEMENT As a result of the merger, certain technical support, customer service, distribution and administrative functions were combined and reduced. Restructuring included severance and outplacement charges related to approximately 500 terminated employees. Affected employees had received notification of their termination by September 9, 1994. 12 ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED) NOTE 7. ACCRUED RESTRUCTURING COSTS (CONTINUED) IMPAIRED ASSETS AND CANCELLATION OF FACILITY LEASES The Company plans to consolidate duplicate offices in Europe, Japan, Canada and the United States. Lease payments resulting from the planned closure of these facilities are expected to continue through the lease term or negotiated early termination date, if applicable. NOTE 8. ACQUISITION OF ADOBE PHOTOSHOP-TM- TECHNOLOGY On March 31, 1995, the Company entered into an agreement with the developers of the technology underlying its Adobe Photoshop product under which the Company obtained all rights to the technology for a lump sum payment of $34.5 million. This transaction has been recorded on the balance sheet in other assets as part of purchased technology. The purchased technology is being amortized over 36 months. Prior to this agreement, the Company paid the developers a royalty for each copy of Adobe Photoshop sold by the Company. NOTE 9. SUBSEQUENT EVENT On June 22, 1995, the Company and Frame Technology Corporation ("Frame") announced a definitive agreement under which the Company will acquire Frame through an exchange of common stock of the two companies. Frame, a California corporation established in 1986, provides document creation, management and distribution software for individuals and workgroups. 13 ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (CONTINUED) NOTE 9. SUBSEQUENT EVENT (CONTINUED) Under the agreement, which has been approved by the Board of Directors of both companies, the Company will exchange .52 shares of its common stock for each share of Frame common stock. The acquisition is intended to qualify as a tax- free reorganization and a pooling of interests for accounting purposes. This transaction is subject to conditions customary for acquisitions of publicly-held companies, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Securities and Exchange Commission approval and approval by Frame's shareholders. Assuming no adverse regulatory proceedings and that shareholder approval is obtained, the Company expects the acquisition to be effective in the fourth quarter of 1995. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION (PRESENTED IN MILLIONS, EXCEPT PER SHARE AMOUNTS) SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO. RESULTS OF OPERATIONS OVERVIEW Adobe develops, markets and supports computer software products and technologies that enable users to create, display, print and communicate electronic documents. The Company licenses its technology to major computer, printing and publishing suppliers, and markets a line of application software and typeface products for authoring visually rich documents. The Company has subsidiaries in Europe and the Pacific Rim serving a worldwide network of dealers and distributors. In August 1994, the Company merged with Aldus Corporation ("Aldus"). Aldus began operations in 1984 and created computer software solutions that help people throughout the world effectively communicate information and ideas. Aldus focused on three lines of business: applications for the professional print publishing, graphics and prepress markets; applications for the general consumer market; and applications for the interactive publishing market. To effect the combination, approximately 14.2 million shares of Adobe's common stock were issued in exchange for all of the outstanding common stock of Aldus. The merger was accounted for by the pooling of interests method, and accordingly, all interim financial information prior to the merger has been restated to combine the results of the Company and Aldus. REVENUE
1995 1994 Change ---------- ----------- ----------- Second quarter period: TOTAL REVENUE $168.0 $149.8 12% Six month period: TOTAL REVENUE $336.6 $285.7 18%
Revenue growth for the second quarter and six month periods was due to increases in both licensing activity and shipments of application products. The divestiture of FreeHand effective January 1, 1995, and the discontinuance of PhotoStyler in late 1994, as further discussed below, partially offset the revenue increase. Product unit volume (as opposed to price) growth was the principal factor in the Company's revenue growth in application products revenue. 15
1995 1994 Change ---------- ----------- ----------- Second quarter period: PRODUCT GROUP REVENUE -- LICENSING $45.1 $40.3 12% Percentage of total revenue 26.8% 26.9% Six month period: PRODUCT GROUP REVENUE -- LICENSING $91.4 $76.6 19% Percentage of total revenue 27.2% 26.8%
Licensing revenue is derived from shipments by original equipment manufacturers ("OEM") of products containing the Adobe-TM- PostScript-TM- interpreter and the Display PostScript-TM- system. Such products include printers in both Roman and Japanese languages, imagesetters and workstations. Licensing revenue is also derived from shipments of products containing the Configurable PostScript Interpreter ("CPSI") by OEM customers. CPSI is a fully functional PostScript interpreter that resides on the host computer system rather than in a dedicated controller integrated into an output device. The configuration flexibility of CPSI allows OEMs and software developers to create and market a variety of PostScript products independently of controller hardware development. The number of units shipped by OEMs continued to grow on a quarterly basis. Royalty per unit is generally calculated as a percentage of the end user list price of a printer, although there are some components of licensing revenue based on a flat dollar amount per unit which typically do not change with list price changes. Some OEMs continued to reduce list prices on their lower-end printers, which resulted in lower royalties per unit on such printers. However, in the second quarter and first six months of 1995, this trend was offset by increased demand for CPSI and color capability, as well as increased penetration into the Japanese market, all of which have higher royalties per unit. The Company has seen year-to-year increases in the number of OEM customers from which it is receiving licensing revenue, demonstrating continued acceptance of PostScript software, as well as reflecting a diversification of the Company's customer base across Macintosh, IBM PC and compatibles, and multiple platform markets. 16
1995 1994 Change ---------- ----------- ----------- Second quarter period: PRODUCT GROUP REVENUE -- APPLICATION PRODUCTS $122.9 $109.5 12% Percentage of total revenue 73.2% 73.1% Six month period: PRODUCT GROUP REVENUE -- APPLICATION PRODUCTS $245.2 $209.1 17% Percentage of total revenue 72.8% 73.2%
Application products revenue is derived from shipments of application software programs through retail and distribution channels; however, the information products are becoming more widely distributed through VARs and systems integrators. During the second quarter and first six months of 1995, application products revenue grew primarily due to increased demand for Adobe Photoshop-TM-, the Company's image editing product. In the first quarter of 1995, the Company released Adobe Premiere-TM- 4.0 for the Windows platform and the Adobe PageMaker-TM- Enhancement Package Volume 2 for both Macintosh and Windows platforms. The enhancement package is designed to update Adobe PageMaker features between major releases. In addition, the Company released Japanese versions of several of its products during the first quarter of 1995, including Adobe Premiere 4.0 and Adobe Persuasion-TM- 3.0 for the Macintosh, and Adobe Photoshop 3.0 for the Windows platform. Continued strong demand for these releases as well as for versions of Adobe Illustrator-TM-, Adobe Photoshop and Adobe Premiere for the Macintosh platform released in the second half of fiscal 1994 all contributed to the increased revenue from application products. The second quarter and first six months of 1994 include revenue from FreeHand, which was divested effective January 1, 1995, and PhotoStyler, which was discontinued in late 1994. These two products aggregated revenue of $16.1 million and $30.4 million in the second quarter and first six months of 1994, respectively. 17 DIRECT COSTS
1995 1994 Change ---------- ----------- ----------- Second quarter period: DIRECT COSTS $30.8 $27.9 10% Percentage of total revenue 18.3% 18.6% Six month period: DIRECT COSTS $63.6 $53.9 18% Percentage of total revenue 18.9% 18.9%
Direct costs include royalties; amortization of acquired technologies; and direct product, packaging and shipping costs. During 1994, direct costs also included amortization of typeface production costs, which totaled $1.5 million and $2.6 million in the second quarter and first six months of 1994, respectively. Gross margins are affected by the mix of licensing revenue versus application products revenue, as well as the product mix within application products. In the second quarter and first half of 1995, direct costs remained relatively constant as a percentage of total revenue while the revenue mix between licensing and application products changed only slightly. The Company also delivers its type library on its Type On Call-TM- CD-ROM media, and end users wishing to license typeface designs call the Company with a credit card number to receive the unlocking code for the desired typeface. This method of delivery also contributes to reduced direct costs. Other applications are also available through the Company's distributors on CD-ROM. On March 31, 1995, the Company entered into an agreement with the developers of the technology underlying its Adobe Photoshop product under which the Company obtained all rights to the technology for a lump sum payment of $34.5 million. This transaction has been recorded on the balance sheet in other assets as part of purchased technology. The purchased technology is being amortized over 36 months. Prior to this agreement, the Company paid the developers a royalty for each copy of Adobe Photoshop sold by the Company. The Company expects that the amortization expense related to the purchased technology will not exceed the per-copy royalty expense which would otherwise have been incurred. 18 OPERATING EXPENSES
1995 1994 Change ---------- ----------- ----------- Second quarter period: SOFTWARE DEVELOPMENT COSTS -- RESEARCH AND DEVELOPMENT $26.5 $23.5 13% Percentage of total revenue 15.8% 15.7% Six month period: SOFTWARE DEVELOPMENT COSTS -- RESEARCH AND DEVELOPMENT $52.9 $45.2 17% Percentage of total revenue 15.7% 15.8%
Research and development expenses consist principally of salaries and benefits for software developers, contracted development efforts, related facilities costs, and expenses associated with computer equipment used in software development. Research and development expense has increased in absolute dollars as the Company invested in new technologies, new product development and the infrastructure to support such activities. The increase reflects the expansion of the Company's engineering staff and related costs required to support its continued emphasis on developing new products and enhancing existing products. Many of these engineers are working with OEM customers to design and implement PostScript Level 2 devices. The Company continues to work with many of its OEM customers in a co-development program. This allows customers to be more self- sufficient in new device development by taking on more of the implementation task themselves rather than relying so heavily on the Company's engineers. While this mitigates certain costs, the Company continues to make significant investments in development of its PostScript and application software products. The Company believes that continued investments in research and development are necessary to remain competitive in the marketplace, and are directly related to continued, timely development of new and enhanced products. The Company intends to continue recruiting and hiring experienced software developers, but expects that research and development expenditures for all of 1995 will approximate current spending levels as a percentage of revenue. 19
1995 1994 Change ---------- ----------- ----------- Second quarter period: SOFTWARE DEVELOPMENT COSTS -- AMORTIZATION OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS $2.6 $4.2 -38% Percentage of total revenue 1.5% 2.8% Six month period: SOFTWARE DEVELOPMENT COSTS -- AMORTIZATION OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS $5.2 $6.8 -24% Percentage of total revenue 1.5% 2.4%
In the implementation of Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," software development expenditures on Adobe products, after achieving technological feasibility, were deemed to be immaterial. Certain software development expenditures on Aldus products have been capitalized and are being amortized over the lives of the respective products. In the second quarter and first six months of 1995, software development expenditures on all products, after reaching technological feasibility, were immaterial and the Company anticipates that this trend will continue in the future. Accordingly, 1995 will reflect the expense of amortizing software development costs acquired in connection with the Company's merger with Aldus in addition to the actual development expenditures (classified as research and development) made prior to achieving technological feasibility. It is expected that amortization of software development costs will decrease both in absolute dollars and as a percentage of total revenue during 1995 as these costs become fully amortized. 20
1995 1994 Change ---------- ----------- ----------- Second quarter period: SALES, MARKETING AND CUSTOMER SUPPORT $49.3 $51.5 -4% Percentage of total revenue 29.3% 34.3% Six month period: SALES, MARKETING AND CUSTOMER SUPPORT $95.3 $97.1 -2% Percentage of total revenue 28.3% 34.0%
Sales, marketing and customer support expenses generally include salaries and benefits, sales commissions, travel expenses and related facilities costs for the Company's sales, marketing, customer support and distribution personnel. Sales, marketing and customer support expenses also include the costs of programs aimed at increasing revenues, such as advertising, trade shows and other market development programs. Sales, marketing and customer support expenses decreased for the second quarter and first six months of 1995 compared with the same periods of 1994. These decreases reflect the timing of product release schedules as well as reduced costs resulting from the restructuring of the combined company following the merger with Aldus. Continuing efforts to expand markets and increase penetration into targeted software markets, as well as increasing competition in the software industry are expected to cause sales, marketing and customer support expenditures for all of 1995 to approximate 1994 spending levels in absolute dollars.
1995 1994 Change ---------- ----------- ----------- Second quarter period: GENERAL AND ADMINISTRATIVE $12.1 $14.2 -15% Percentage of total revenue 7.2% 9.4% Six month period: GENERAL AND ADMINISTRATIVE $23.7 $26.1 -9% Percentage of total revenue 7.0% 9.1%
General and administrative expenses consist principally of salaries and benefits, travel expenses, and related facility costs for the finance, human resources, legal, information services and administrative personnel of the Company. General and administrative expenses also include outside legal and accounting fees, bad debts and expenses associated with computer equipment and software used in the administration of the business. 21 In the second quarter and first six months of 1995, general and administrative expenses reflect savings related to the restructuring of the combined company after the merger with Aldus. The Company expects general and administrative spending to be a lower percentage of revenue for all of 1995 than was achieved in 1994, although the percentage is expected to increase over that of the first half of 1995. NONOPERATING INCOME
1995 1994 Change ---------- ----------- ----------- Second quarter period: INTEREST, INVESTMENT AND OTHER INCOME $ 7.1 $1.8 286% Percentage of total revenue 4.2% 1.2% Six month period: INTEREST, INVESTMENT AND OTHER INCOME $12.3 $3.9 217% Percentage of total revenue 3.6% 1.4%
The increase in interest, investment and other income is primarily due to generally higher interest rates and a larger investment base. In 1995, the Company has increased the weighted average days-to-maturity of its investments, which has generated higher rates of return, and, in addition, has placed more of its invested cash in higher-yielding taxable securities because it has become beneficial to do so on an after-tax basis. PROVISION FOR INCOME TAXES
1995 1994 Change ---------- ----------- ----------- Second quarter period: PROVISION FOR INCOME TAXES $19.9 $10.1 97% Percentage of total revenue 11.9% 6.8% Effective tax rate 37.0% 37.0% Six month period: PROVISION FOR INCOME TAXES $40.1 $21.0 91% Percentage of total revenue 11.9% 7.3% Effective tax rate 37.0% 36.6%
The Company's effective tax rate was slightly higher in the first six months of 1995 compared with 1994 due to a decrease in research and development tax credits and lower tax exempt investment earnings in the current year. 22 NET INCOME AND NET INCOME PER SHARE
1995 1994 Change ---------- ----------- ----------- Second quarter period: NET INCOME $33.9 $17.3 96% Percentage of total revenue 20.2% 11.6% NET INCOME PER SHARE $0.51 $0.28 82% Weighted shares (In thousands) 66,324 61,768 Six month period: NET INCOME $68.3 $36.4 88% Percentage of total revenue 20.3% 12.7% NET INCOME PER SHARE $1.04 $0.59 76% Weighted shares (In thousands) 65,343 61,529
Net income for the second quarter of 1995 increased 96% from the second quarter of 1994. Earnings per share were $.51, an 82% increase from the second quarter of 1994. Net income for the six months ended June 2, 1995 increased 88% over the same period in 1994 and earnings per share increased 76% for the same period. The increase in earnings per share was caused by increased revenue, lower expense levels as a percentage of revenue and a relatively constant tax rate. ANNOUNCED ACQUISITION OF FRAME TECHNOLOGY CORPORATION On June 22, 1995, the Company and Frame Technology Corporation ("Frame") announced a definitive agreement under which the Company will acquire Frame through an exchange of common stock of the two companies. Frame, a California corporation established in 1986, provides document creation, management and distribution software for individuals and workgroups. Under the agreement, which has been approved by the Board of Directors of both companies, the Company will exchange .52 shares of its common stock for each share of Frame common stock. The acquisition is intended to qualify as a tax- free reorganization and a pooling of interests for accounting purposes. This transaction is subject to conditions customary for acquisitions of publicly-held companies, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Securities and Exchange Commission approval and approval by Frame's shareholders. Assuming no adverse regulatory proceedings and that shareholder approval is obtained, the Company expects the acquisition to be effective in the fourth quarter of 1995. 23 FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS The Company believes that in the future its results of operations could be impacted by factors such as the ability of the Company to integrate Adobe, Aldus and Frame product lines, renegotiation of royalty arrangements, delays in shipment of the Company's new products and major new versions of existing products, market acceptance of new products and upgrades, growth in worldwide personal computer and printer sales and sales price adjustments, consolidation in the OEM printer business, and adverse changes in general economic conditions in any of the countries in which the Company does business. In connection with the acquisition of Frame, the Company intends to seek to reduce expenses by the elimination of duplicate or unnecessary facilities, employees, marketing programs and other expenses. There can be no assurance that the Company will be able to reduce expenses in this fashion, that there will not be high costs associated with such activities, that such reductions will not result in a decrease in revenue or that there will not be other material adverse effects of the Company's integration efforts. Such effects could materially reduce the earnings of the combined company. The Company will incur estimated merger transaction costs of approximately $13.5 million related to the acquisition, which will be charged to operations in the fourth quarter of 1995. In addition, the Company expects to incur a restructuring charge during the fourth quarter of 1995, currently estimated to be in the range of $15.0 million to $25.0 million, to reflect the costs associated with combining the two companies, including severance and outplacement costs and the elimination of duplicate facilities (including cancellation of leases). These amounts are preliminary estimates only and are therefore subject to change. In addition, there can be no assurance that the Company will not incur additional charges in subsequent quarters to reflect costs associated with the acquisition. In connection with the merger with Aldus, the Company has sought to reduce combined expenses by the elimination of duplicate or unnecessary facilities, employees, marketing programs and other expenses. The Company believes that the major impact of such reductions occurred in the fourth quarter of 1994 but experienced some additional impact in the first half of 1995. The Company expects that these reductions will benefit future operating results, but the reductions could adversely impact the earnings of the combined company. In addition, there can be no assurance that the integration of the product lines of the two companies will not have a material adverse effect on the results of operations. As previously stated, effective January 1, 1995, the Company no longer markets FreeHand and discontinued marketing PhotoStyler in late 1994. These two products aggregated $53.2 million of revenue and $35.4 million of gross profit in fiscal year 1994. There can be no assurance that the Company will be able to continue to replace this lost revenue or that it will be able to do so as profitably. The Company's OEM customers on occasion seek to renegotiate their royalty arrangements. The Company evaluates these requests on a case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, including licensing a PostScript language compatible interpreter from a third party, which could result in lower licensing revenue for the Company. 24 With the acquisition of Aldus, the Company derives a larger portion of its revenue from its subsidiaries located in Europe and the Pacific Rim. While most of the revenue of these subsidiaries is denominated in U.S. dollars, the majority of their expense transactions are denominated in foreign currencies. As a result, the Company's operating results are subject to fluctuations in foreign currency exchange rates. To date, the Company has not engaged in any significant activities to hedge its exposure to foreign currency exchange rate fluctuations. The Company's ability to develop and market products, including upgrades of currently shipping products, that successfully adapt to current market needs may also have an impact on the results of operations. A portion of the Company's future revenue will come from these products. Delays in such introductions could have an adverse effect on the Company's revenue, earnings or stock price. The Company cannot determine the ultimate effect that these new products or upgrades will have on its sales or results of operations. Due to the factors noted above, the Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Additionally, the Company may not learn of such shortfalls until late in the fiscal quarter, which could result in an even more immediate and adverse effect on the trading price of the Company's common stock. Finally, the Company participates in a highly dynamic industry, which often results in significant volatility of the Company's common stock price. FINANCIAL CONDITION CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
June 2 November 25 1995 1994 Change ---------- ----------- ----------- CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS $443.4 $400.4 11%
The Company's cash balances and short-term investments have increased each year due to profitable operations, partially offset by expenditures for capital outlays and other investments. Cash equivalents consist of highly liquid money market instruments. Certain cash equivalents and all of the Company's short- term investments, consisting principally of municipal bonds, commercial paper, auction rate securities, United States government and government agency securities and asset-backed securities, are classified as available-for-sale under the provisions of SFAS No. 115, "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 shareholders' equity. The Company does not invest in securities which involve a high degree of risk or complexity. 25 NONCURRENT LIABILITIES AND SHAREHOLDERS' EQUITY
June 2 November 25 1995 1994 Change ---------- ----------- ----------- NONCURRENT LIABILITIES AND SHAREHOLDERS' EQUITY $572.9 $456.8 25%
Included above are put warrants and shareholders' equity. The Company has no long-term debt. The Board of Directors of the Company declared a cash dividend on the Company's common stock of $.05 per common share on June 21, 1995, for the second quarter of 1995. The dividend will be for shareholders of record as of July 7, 1995, and will be paid on July 21, 1995. 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. Under its stock repurchase program, the Company repurchased 364,003 shares at a cost of $13.6 million in the first six months of 1995. These share repurchases are intended to fund the employee stock purchase and stock option plans. Additional repurchases of the Company's common stock in the open market to provide shares for issuance under its stock plans will continue subsequent to the completion of the announced acquisition of Frame. WORKING CAPITAL
June 2 November 25 1995 1994 Change ---------- ----------- ----------- WORKING CAPITAL $431.8 $363.6 19%
Net working capital grew to $431.8 million as of June 2, 1995, compared to $363.6 million as of November 25, 1994. Cash flow provided by operations during the first six months of 1995 was $81.9 million. Expenditures for property and equipment totaled $15.2 million. Such expenditures are expected to continue, including computer systems for development, sales and marketing, product support, and administrative staff. In the future, cash may be used to acquire technology, or to invest in companies owning key technologies, where appropriate. On March 31, 1995, the Company entered into an agreement with the developers of the technology underlying its Adobe Photoshop product to obtain that technology for a lump sum payment of $34.5 million (see Note 8--Acquisition of Adobe Photoshop Technology). Net cash provided by financing activities during the first six months of 1995 was $26.3 million; $46.3 million was provided by proceeds from issuance of common stock; $13.6 million was used to repurchase common stock; and $6.3 million was used to pay cash dividends. 26 The Company's principal commitments as of June 2, 1995, consisted of obligations under operating leases for facilities, a real estate development agreement and various service and lease guarantee agreements with a related party. The Company has entered into a real estate development agreement for the construction of an office facility and in 1996 will enter into an operating lease agreement for this facility. The Company will have the option to purchase the facility at the end of the lease term. In the event the Company chooses not to exercise this option, the Company is obligated to arrange the sale of the facility to an unrelated party and is required to pay the lessor any difference between the net sales proceeds and the lessor's net investment in the facility, in an amount not to exceed that which would preclude classification of the lease as an operating lease, approximately $52.0 million. The Company also is required, periodically during the construction period, to deposit funds with the lessor to secure the performance of its obligations under the lease and as of June 2, 1995, the Company had deposited approximately $11.7 million in time deposit securities. The Company has also entered into various agreements with McQueen Holdings Limited ("McQueen"), a European operating entity, whereby the Company has agreed to guarantee obligations under operating leases for certain European facilities utilized by McQueen, and to guarantee certain levels of business between Adobe and McQueen. The Company currently owns approximately 16 percent of the outstanding stock in McQueen. The Company believes that existing cash, cash equivalents and short-term investments, together with cash generated from operations, will provide sufficient funds for the Company to meet its operating cash requirements in the foreseeable future. 27 PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders was held on April 5, 1995. A proposal to elect four (4) Class II directors of the Company to serve for a two-year term expiring at the Annual Meeting of Shareholders in 1997 was approved by shareholders. This proposal received the following votes: For Withheld --------------- ------------- John E. Warnock 56,773,929 368,152 Robert Sedgewick 56,771,446 370,635 William J. Spencer 56,771,446 370,635 Gene P. Carter 56,774,010 368,071 Incumbent Class I directors Charles M. Geschke, William R. Hambrecht, Delbert W. Yocam and Paul Brainerd are currently serving for a term expiring at the Annual Meeting of Shareholders in 1996. Also, a proposal to amend the Company's Restricted Stock Option Plan increasing the number of shares reserved for issuance under the Plan from 250,000 to 500,000, increasing the number of shares subject to options automatically granted each year to non-employee directors and available to be granted to a consultant from 7,500 to 10,000 and increasing the number of shares subject to options automatically granted to a new non-employee director upon joining the Board from 7,500 to 15,000 was approved by shareholders. This proposal received the following votes: For: 38,647,703 Against: 16,857,197 Abstain: 376,844 In addition, shareholders ratified the appointment of KPMG Peat Marwick LLP as independent public accountants of the Company for fiscal 1995. This proposal received the following votes: For: 56,931,886 Against: 78,153 Abstain: 132,042 Broker non-votes are included in the determination of the number of shares present and voting for purposes of determining the presence of a quorum at the Company's annual meeting of shareholders. They are not, however, counted for purposes of determining the number of votes cast for a proposal. 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Index to Exhibits
Sequentially Incorporated by Reference Exhibit Numbered ----------------------------- Number Exhibit Description Page Form Date Number -------- ------------------------------ ------------ ------- --------- --------- 10.1 1984 Stock Option Plan N/A S-1 07/01/86 10.1 10.1.1 1984 Stock Option Plan, N/A 10-K 11/30/87 10.1.1 as amended 10.1.2 1984 Stock Option Plan, N/A 10-K 11/30/88 10.1.2 as amended 10.1.3 1984 Stock Option Plan, N/A 10-K 11/30/89 10.1.3 as amended 10.1.4 1984 Stock Option Plan, N/A 10-K 11/30/90 10.1.4 as amended 10.1.5 1984 Stock Option Plan, N/A 10-K 11/27/92 10.1.5 as amended 10.1.6 1984 Stock Option Plan, N/A 10-Q 07/02/93 10.1.6 as amended 10.1.7 1994 Stock Option Plan N/A 10-Q 07/06/94 10.1.7 10.2 Common Stock Purchase N/A S-1 07/01/86 10.2 Agreement of John E. Warnock dated December 29, 1982, and, as amended November 30, 1983 10.3 Common Stock Purchase N/A S-1 07/01/86 10.3 Agreement of Charles M. Geschke dated December 29, 1982, and, as amended November 30, 1983 10.4 Common Stock Purchase N/A S-1 07/01/86 10.4 Agreement of Q.T. Wiles dated December 29, 1982 10.5 Common Stock Purchase N/A S-1 07/01/86 10.5 Agreement of David Evans dated December 29, 1982
(Continued) 29 a) Index to Exhibits (Continued)
Sequentially Incorporated by Reference Exhibit Numbered ----------------------------- Number Exhibit Description Page Form Date Number -------- ------------------------------ ------------ ------- --------- --------- 10.6 Common Stock Purchase N/A S-1 07/01/86 10.6 Agreement of William Hambrecht dated December 29, 1982 10.7 Exchange Agreement N/A S-1 07/01/86 10.7 dated December 29, 1983, for John E. Warnock 10.8 Exchange Agreement N/A S-1 07/01/86 10.8 dated December 29, 1983, for Charles M. Geschke 10.9 Form of Shareholders N/A S-1 07/01/86 10.9 Exchange Agreement used in connection with the exchange of shares of Old Adobe for shares of the Company 10.10 Form of Agreement for N/A S-1 07/01/86 10.10 Assignment of Limited Partnership Interest used in connection with exchange of limited partnership interests in Adobe Systems Limited, a California limited partnership, for shares of the Series B Preferred Stock of the Company 10.11 Registration Rights N/A S-1 07/01/86 10.11 Agreement dated December 29, 1983 10.12 Old Adobe's 1983 Stock N/A S-1 07/01/86 10.12 Purchase Plan and the Company's 1984 Stock Purchase Plan with standard form of Stock Purchase Agreement 10.12.1 1988 Employee Stock N/A 10-Q 07/06/94 10.12.1 Purchase Plan, as amended
(Continued) 30 a) Index to Exhibits (Continued)
Sequentially Incorporated by Reference Exhibit Numbered ----------------------------- Number Exhibit Description Page Form Date Number -------- ------------------------------ ------------ ------- --------- --------- 10.13 Form of Employee N/A S-1 07/01/86 10.13 Common Stock Purchase Agreement dated July 23, 1984 10.14 Warrant to Purchase Series N/A S-1 07/01/86 10.14 C Preferred Stock to Apple Computer, Inc., dated November 26, 1984, with executed subscription form dated November 28, 1984 10.15 Warrant to Purchase N/A S-1 07/01/86 10.15 Series C Preferred Stock to Evans & Sutherland Computer Corporation dated April 25, 1984, with executed subscription form dated June 19, 1986 10.16 License Agreement N/A S-1 07/01/86 10.16 between the Company and Evans & Sutherland Computer Corporation dated April 25, 1984 10.17 License Agreement N/A S-1 07/01/86 10.17 between the Company and Apple Computer, Inc., dated November 12, 1985 (confidential treatment granted) 10.17.1 License Agreement N/A 10-K 11/30/88 10.17.1 Restatement between the Company and Apple Computer, Inc., dated April 1, 1987 (confidential treatment granted)
(Continued) 31 (a) Index to Exhibits (Continued)
Sequentially Incorporated by Reference Exhibit Numbered ----------------------------- Number Exhibit Description Page Form Date Number -------- ------------------------------ ------------ ------- --------- --------- 10.17.2 Amendment No. 1 to the N/A 10-K 11/30/90 10.17.2 License Agreement Restatement between the Company and Apple Computer, Inc., dated November 27, 1990 (confidential treatment granted). 10.18 Lease Agreement dated N/A S-1 07/01/86 10.18 November 11, 1983, between Mozart Family Trust and Epson America Inc. 10.19 Assignment of Lease N/A S-1 07/01/86 10.19 dated November 11, 1983, between Epson America Inc. and the Company dated February 1, 1986 10.20 Lease Agreement N/A S-1 07/01/86 10.20 between Mozart Family Trust and the Company dated November 30, 1983 10.21 Bonus Plans N/A S-1 07/01/86 10.21 10.21.1 Revised Bonus Plan N/A 10-K 11/27/92 10.21.1 10.21.2 Revised Bonus Plan N/A 10-K 11/26/93 10.21.2 10.22 Restricted Stock Option N/A 10-K 11/30/87 10.22 Plan 10.22.1 Restricted Stock Option N/A 10-K 11/30/89 10.22.1 Plan, as amended 10.22.2 Restricted Stock Option N/A 10-K 11/30/90 10.22.2 Plan, as amended 10.22.3 Restricted Stock Option N/A 10-K 11/29/91 10.22.3 Plan, as amended 10.22.4 Restricted Stock Option N/A 10-Q 07/06/94 10.22.4 Plan, as amended
(Continued) 32 (a) Index to Exhibits (Continued)
Sequentially Incorporated by Reference Exhibit Numbered ----------------------------- Number Exhibit Description Page Form Date Number -------- ------------------------------ ------------ ------- --------- --------- 10.23 Amended and Restated N/A 10-K 11/30/88 10.23 Software License Agree- ment between the Company and QMS, Inc., dated May 15, 1987 (confidential treatment granted) 10.24 1989 Restricted Stock Plan N/A 10-K 11/30/88 10.24 10.24.1 1994 Performance and N/A S-4 07/27/94 10.1 Restricted Stock Plan 10.25 Form of Indemnity Agree- N/A 10-K 11/30/88 10.25 ment 10.26 Lease Agreement by and N/A 10-K 11/30/88 10.26 between Charleston Place Associates and Adobe Systems Incorporated dated April 14, 1987 10.26.1 Amendment One to Lease N/A 10-K 11/30/88 10.26.1 Agreement dated March 1, 1988 10.26.2 Amendment Two to Lease N/A 10-K 11/30/88 10.26.2 Agreement dated September 1, 1988 10.27 Lease Agreement by and N/A 10-K 11/30/88 10.27 between John Mozart and Adobe Systems Incorporated dated July 20, 1988 10.28 Limited Partnership N/A 10-K 11/29/91 10.28 Agreement of University Circle Building I, Ltd., dated May 22, 1991 10.29 University Centre N/A 10-K 11/29/91 10.29 Building I Lease Agree- ment dated May 22, 1991 10.30 University Circle N/A 10-K 11/27/92 10.30 Termination and Security Agreement and Mutual Release dated January 7, 1993
(Continued) 33 (a) Index to Exhibits (Continued)
Sequentially Incorporated by Reference Exhibit Numbered ----------------------------- Number Exhibit Description Page Form Date Number -------- ------------------------------ ------------ ------- --------- --------- 10.31 Restated Agreement and N/A S-4 07/13/94 10.31 and Plan of Merger and Reorganization By and Among Adobe Systems Incorporated, P Acquisition Corp and Aldus Corporation 10.32 Sublease of the Land and N/A 10-K 11/25/94 10.32 Lease of the Improvements By and Between Sumitomo Bank Leasing and Finance Inc. and Adobe Systems Incorporated 10.33 Sale of Rights under N/A N/A N/A N/A Software Development and Acquisition Agreement By and Between Adobe Systems Incorporated and Thomas Knoll and John Knoll (confidential treatment granted) 11 Computation of Earnings N/A N/A N/A N/A Per Common Share 27 Financial Data Schedule N/A N/A N/A N/A
34 (b) Reports on Form 8-K No reports on Form 8-K were filed in the quarter ended June 2, 1995. 35 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ADOBE SYSTEMS INCORPORATED Date: July 14, 1995 By /s/ M. Bruce Nakao ---------------------------------- M. Bruce Nakao, Senior Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial Officer) 36 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 Adobe Illustrator Adobe PageMaker Adobe Persuasion Adobe Photoshop Adobe Premiere Display PostScript PostScript Type On Call All other brand or product names are trademarks or registered trademarks of their respective holders. 37 EX-10.33 2 EX-10.33 *Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. EXHIBIT 10.33 SALE OF RIGHTS UNDER SOFTWARE DEVELOPMENT AND ACQUISITION AGREEMENT The parties to this agreement (the "Agreement") are Adobe Systems Incorporated, a California corporation having a place of business at 1585 Charleston Road, Mountain View, California 94039-7900 and its subsidiaries ("Adobe"), and Thomas Knoll, a resident of Ann Arbor, Michigan ("Knoll") and John Knoll, a resident of San Rafael, California. Knoll and John Knoll shall together be referred to as the "Developers." RECITALS: A. The parties to this Agreement are parties to a Software Development and Acquisition Agreement effective as of April 18, 1989 and as amended by three amendments (the "1989 Agreement"). B. Pursuant to the 1989 Agreement, Knoll and John Knoll assigned to Adobe all of their rights in a certain software program referred to as the "Work" (as defined in the 1989 Agreement.) C. Knoll is the inventor of the Work. D. Pursuant to the 1989 Agreement, a patentable invention that had been actually reduced to practice within the meaning of the U.S. patent laws, 35 U.S.C. Section 102(g), and was also considered a trade secret, was assigned to Adobe. E. A U.S. Patent was issued to Knoll, Patent No. 5,146,346, and such Patent was assigned to Adobe. F. The Developers also agreed to assign to Adobe any patent or patents they might obtain for any existing and future versions, derivations, modifications, and enhancements of the Work developed by the Developers or by or for Adobe, whether in the U.S. or abroad. G. Pursuant to the 1989 Agreement, the Developers have been paid certain [ * ] [ * ] H. The parties now wish to further amend the 1989 Agreement to provide for a [ * ] and to make other revisions to reflect their current business relationship. THEREFORE, for valuable consideration, the parties agree as follows: AGREEMENT: 1. DEFINITIONS. Capitalized terms used in this Agreement have the same definitions set forth in the 1989 Agreement. 2. PROJECT ASSIGNMENT. Section 3.2 of the 1989 Agreement is deleted. 3. DEVELOPMENT OBLIGATIONS. Paragraph 3.4(b) and 3.4(c) of the 1989 Agreement are deleted and the Developers have no outstanding obligations under those provisions Paragraph 3.4(d) is renumbered paragraph 3.4(b). * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 2 4. ROYALTIES. Adobe shall [ * ] the Developers [ * ] for copies of the Work accrued during or payable with respect to Adobe's fourth fiscal quarter of 1994 or any subsequent period. Section 4 of the 1989 Agreement ("Payments"), and all subsections thereof (4.1-4.6) are deleted in their entirety and replaced by the following: "4. PAYMENTS. 4.1 INSTALLMENT PAYMENTS. Adobe shall pay the Developers the following payments on the date specified: Payment Date Knoll John Knoll ------------ ------------ -------------- [ * ] [ * ] [ * ] 5. FUTURE PRODUCTS. Section 6 of the 1989 Agreement ("Future Products"), including all subsections thereof (6.1-6.5), is deleted in its entirety. 6. INFRINGEMENT INDEMNITY. Section 8 of the 1989 Agreement ("Infringement Indemnity"), including all subsections thereof (8.1 and 8.2), is deleted in its entirety and replaced with the following: "8.1 INDEMNITY. Adobe agrees to defend and otherwise hold the Developers harmless from and against any claims by third parties pertaining to the infringement of the Work or any version thereof of any third party's intellectual property rights, provided that: (a) Adobe is notified immediately in * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 3 writing of any notice of threatened claim of actual suit; and (b) Adobe is given the sole control of, and the Developers' full cooperation (at Adobe's expense) in, the investigation, preparation, defense and settlement of such claim or suit; and (c) Adobe shall not be responsible for any compromise made without its consent. 8.2 EXCEPTION. Notwithstanding the foregoing, Adobe will have no liability to Developers under this Section 7 if any alleged infringement or claim thereof is based on a Developer's knowing, willful misappropriation of a third party's intellectual property." 7. TERM AND TERMINATION. Section 12 of the 1989 Agreement ("Term and Termination"), including all subsections thereof (12.1-12.4), is deleted in its entirety and replaced with the following: "12.1 TERM AND TERMINATION. This Agreement will be effective from the effective date, and shall terminate on [ * .] 12.2 SURVIVAL OF OBLIGATIONS UPON TERMINATION. Section 8, including all subsections thereof (8.1-8.2), Section 7, Section 2.2 and Section 10 and Section 11, including all subsections thereof * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 4 (11.1-11.2) shall survive any termination of the Agreement." 8. GOVERNING LAW; MODIFICATIONS. Section 13.3 of the 1989 Agreement shall be deleted in its entirety and replaced with the following: "13.3 GOVERNING LAW; MODIFICATION. This Agreement (a) shall be governed by and construed in accordance with the laws of the State of Michigan, without giving effect to principles of conflict of laws, and (b) may be modified or amended only by a written agreement executed by an authorized representative of Adobe and the Developers." 9. CONFIDENTIALITY OF AGREEMENT AND AMENDMENTS. The following section shall be added to the 1989 Agreement after Section 13.12: "13.13 CONFIDENTIALITY OF AGREEMENT AND AMENDMENTS. The terms, but not the existence, of this Agreement, and all amendments thereto, shall be maintained in confidence by the parties, and may not be disclosed to any third party except (a) to the attorneys and accountants of the parties and (b) by Adobe as required to comply with the securities and other laws of the United States and other jurisdictions." 10. EXECUTION OF RIGHTS ASSIGNMENT. Concurrently with the execution of this Agreement, the Developers shall each execute the Assignment of Rights attached hereto as Exhibit A. Developers' obligations under Section 2.2 of the 1989 Agreement * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 5 shall pertain to the rights granted Adobe under such Assignment of Rights. This Section 10 and Section 2.3 shall survive termination of the 1989 Agreement for any reason. 11. EFFECT, SIGNATURES. All other terms and conditions of the 1989 Agreement, as amended by Amendment Nos. 1, 2 and 3, will remain in full force and effect. This Agreement and the Assignment of Rights may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. The parties have executed this Agreement effective as of March 31, 1995. ADOBE: DEVELOPERS: ADOBE SYSTEMS, INCORPORATED /s/ David B. Pratt /s/ Thomas Knoll - ----------------------------- ----------------------------- Authorized Signature Thomas Knoll David B. Pratt 3/27/95 - ----------------------------- ----------------------------- Printed Name Date Sr. V.P. - ----------------------------- Title 3-31-95 /s/ John Knoll - ----------------------------- ----------------------------- Date John Knoll 3/28/95 ----------------------------- Date * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 6 EXHIBIT A ASSIGNMENT OF RIGHTS For good and valuable consideration which has been received, each of the undersigned sells, assigns and transfers to Adobe Systems Incorporated ("Adobe"), a California corporation, and its successors and assigns, all the right, title and interest of the undersigned, vested and contingent, including, without limitation, patents, copyrights, trade secrets and any other intellectual property rights, in and to the following works (the "Works"), which were or will be created by Thomas Knoll and/or John Knoll (the "Developers"): 1. The [ * ] [ * ] as well as all existing and future versions, derivatives, modifications and enhancements of [ * ] and all associated documentation. 2. Any designs, artwork, software programs, brochures, manuals, products, procedures, drawings, notes, documents, information, materials, discoveries and inventions made, conceived or developed pursuant to that certain Software Development and Acquisition Agreement dated April 18, 1989, between Adobe and the Developers, as amended, (the "Agreement"), or pursuant to any Project Assignments occurring under the Agreement, or pursuant to any past or future Project Assignment, including without limitation, 1995-96 Project Assignments, 1996-97 Project Assignments, or additional Project Assignments as such terms are defined in that certain Consulting Agreement by and between Thomas Knoll and Adobe dated March 31, 1995. In addition, the Developers hereby irrevocably transfer and assign to Adobe any and all Moral Rights (as defined below) the Developers may have in or with respect to the Works or any version thereof. To the extent the Developers cannot assign such rights, the Developers hereby waive and agree never to assert such rights against Adobe or any of Adobe's licensees. "Moral Rights" means any right to (i) divulge such Work or any version to the public; (ii) retract such Work or version from the public; (iii) claim authorship of such Work or version; (iv) object to any distortion, mutilation or other modification of such Work or version, and (v) any and all similar rights, existing under judicial or statutory law or any country or jurisdiction in the world, or under any treaty regardless of whether or not such right is called or generally referred to as a "moral right." Executed this 31st day of March, 1995. /s/ Thomas Knoll ----------------------------------- Thomas Knoll /s/ John Knoll ----------------------------------- John Knoll * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. CONSULTING AGREEMENT The parties to this agreement (the "Agreement") are Adobe Systems, Incorporated, a California corporation having a place of business at 1585 Charleston Road, Mountain View, California 94039-7900 and its subsidiaries ("Adobe") and Thomas Knoll, a resident of Ann Arbor, Michigan ("Knoll"). RECITALS: A. Adobe wishes to continue to engage the services of Knoll as a consultant, and Knoll is willing to continue to provide consulting services to Adobe. THEREFORE, for valuable consideration, the parties agree as follows: AGREEMENT: 1. PROJECT ASSIGNMENTS. Attached to this Agreement as Exhibit A is a list of Project Assignments to be completed by Knoll on or before March 31, 1996 (the "1995-96 Project Assignments"). Knoll and Adobe shall agree, on or before April 1, 1996, on additional Project Assignments to be completed by Knoll between April 1, 1996 through March 31, 1997 (the "1996-97 Project Assignments"). In addition, Adobe may, but is not required to, propose additional Project Assignments to Knoll to be completed by Knoll on or after April 1, 1997 ("Additional Project Assignments"). If Adobe proposes Additional Project Assignments, Knoll, in his * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. sole and absolute discretion, shall choose whether to accept or reject such Additional Project Assignments. 2. PAYMENTS. 2.1. FIRST PROJECT ASSIGNMENT PAYMENT. Adobe shall pay Knoll [ * ] on or before [ * ] if Knoll has timely and satisfactorily completed the 1995-96 Project Assignments. 2.2. SECOND PROJECT ASSIGNMENT PAYMENTS. Adobe shall pay Knoll [ * ] on or before [ * ] if Knoll has timely and satisfactorily completed the 1996-97 Project Assignments. 2.3. ADDITIONAL PROJECT ASSIGNMENT PAYMENT. Adobe shall pay Knoll [ * ] [ * ] on or before [ * ] [ * ] in which Adobe has proposed, and Knoll has accepted, Additional Project Assignments and Knoll has timely and satisfactorily completed all such Additional Project Assignments. 3. INVENTIONS. All designs, artwork, software programs, brochures, manuals, products, procedures, drawings, notes, documents, information, materials, discoveries and inventions (hereafter "Designs and Inventions") made, conceived or developed by Knoll alone or with others which result from or * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 2 relate to any Project Assignment, or which Knoll may receive from Adobe while performing the Project Assignments, shall be the sole property of Adobe. Knoll hereby assigns and agrees to assign all his rights, title and interest to all such Designs and Inventions. Knoll agrees (i) to disclose promptly in writing to Adobe all such Designs and Inventions, (ii) that Adobe has a power of attorney to apply for in Knoll's name, and to execute any applications and/or assignments reasonably necessary to obtain any patent, copyright, trademark or other statutory protection for such Designs and Inventions in Adobe's name as Adobe deems appropriate. These obligations to disclose, assist, and execute shall survive termination of this Agreement. 4. PROPRIETARY INFORMATION; NONDISCLOSURE (a) CONFIDENTIAL INFORMATION DEFINED. Knoll acknowledges that, in the course of his performance under this Agreement, he shall obtain certain information relating to Adobe's business which is confidential and proprietary information of Adobe and is not generally known to the public, including without limitation technical and business information relating to Adobe's technology, products, research and development, production, manufacturing and engineering processes, computer software, business plans, finances, customers and employees ("Confidential Information"). Knoll agrees that he will not use any Confidential Information of Adobe except in accordance with the provisions of this * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 3 Agreement and will not disclose any such Confidential Information to any third party. This Section 4 shall survive any termination of this Agreement. (b) EXCEPTION. Notwithstanding the other provisions of this Agreement, information shall not be deemed Confidential Information, and Knoll shall have no confidentiality obligation with respect to any information, other than [ * ] or Designs and Inventions created for Adobe by Knoll under Project Assignments or otherwise, and any associated documentation, which (a) was in Knoll's possession or was known by Knoll prior to his receipt from Adobe, (b) is or becomes publicly known through no act or omission of Knoll, (c) is received by Knoll without restriction on disclosure from a third party who disclosed the information without violating any confidentiality restriction, (d) is independently developed by Knoll without reference to the Confidential Information and without violation of any confidentiality restriction or covenant not to compete, or (e) is divulged by Knoll pursuant to statute, regulation, or the order of a court of competent jurisdiction, provided Knoll previously notifies Adobe to take appropriate protective measures. 5. SOURCE CODE LICENSE (a) LIMITED LICENSE TO USE ADOBE SOURCE CODE. Adobe hereby grants to Knoll a [ * ] license, during the term of this Agreement and subject to his compliance with Section (b) below and other terms of this * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 4 Agreement, to use the source code of [ * ] in Knoll's possession or any other source code owned by Adobe or provided by Adobe to Knoll, (the "Source") at the facilities listed in EXHIBIT B ("Development Site") for the sole purpose of performing Project Assignments under this Agreement. (b) SECURITY. Knoll agrees that he will not (i) disclose the Source, any portion of the Source, or any source code containing any portion of the Source to third parties, (ii) reproduce the Source, or any portion of the Source in any form or medium, except as necessary for the purpose specified in Section (a) above and for archival storage, or (iii) use the Source for any purpose not specifically authorized by this Agreement. Knoll agrees to keep the Source on secure computer(s) with password access only by Knoll. Knoll acknowledges that the Source shall be and remain the property of Adobe and shall be considered Adobe's Confidential Information under Section 4 of this Agreement. Knoll shall return or destroy all copies of any Source in his possession promptly upon the earlier of Adobe's request or upon termination of this Agreement, and shall, upon Adobe's request, certify to Adobe the fact of such return or destruction. 6. RELATIONSHIP OF THE PARTIES. Each party will perform its obligations as an independent contractor and will be solely responsible for its own financial obligations. This Agreement will not create a joint venture, partnership, or principal and agent relationship between the parties. Neither * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 5 party will have the authority or will represent that it has the authority or will represent that it has the authority to assume or create any obligation, express or implied, on behalf of the other, except as expressly provided herein. 7. GOVERNING LAW; MODIFICATION; NON-ASSIGNABLE. This Agreement (a) shall be governed by and construed in accordance with the laws of the State of Michigan, without giving effect to the principles of conflict of laws, (b) may be modified or amended only by a written agreement executed by an authorized representative of Adobe and Knoll, and (c) may not be assigned by either party without the prior written consent of the other party, except that Adobe may assign its rights or obligations under this Agreement in connection with a merger, sale of all or substantially all of its assets, or other corporate reorganization, or in connection with the sale or substantially exclusive licensing of [ * ] Derived Products. 8. INJUNCTIVE RELIEF. It is understood and agreed that notwithstanding any other provisions of this Agreement, a breach by Knoll of Section 4 or 5 of this Agreement will cause Adobe irreparable damage for which recovery of money damages would be inadequate, and that Adobe shall therefore be entitled to obtain timely injunctive reflect to protect Adobe's rights under this Agreement in addition to any and all remedies available at Law. 9. MISCELLANEOUS. * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 6 (a) WAIVER. The failure of either party to require performance by the other party of any provision hereof shall not affect the full right to require such performance at any time thereafter; nor shall the waiver by either party of a breach of any provision hereof be taken or held to be a waiver of the provision itself. (b) SEVERABILITY. In the event that any provision of this Agreement shall be unenforceable or invalid under any applicable law or be so held by applicable court decision, such unenforceability or invalidity shall not render this Agreement unenforceable, or invalid as a whole, and, in such event, any such provisions shall be changed and interpreted so as to best accomplish the objectives of such unenforceable or intended provision within the limits of applicable law or applicable court decisions. (c) ATTORNEYS' FEES. In the event any proceeding or lawsuit is brought by Adobe or Knoll in connection with this Agreement, the prevailing party in such proceeding shall be entitled to receive its costs, expert witness fees, and reasonable attorneys fees, including costs and fees on appeal. (d) HEADINGS. The section headings appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or extent of such section or in any way affect such section. * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 7 (e) ENTIRE AGREEMENT. This Agreement completely and exclusively states the agreement of all parties regarding its subject matter. It supersedes, and its terms govern, all prior proposals, agreements or other communications between the parties, oral or written, regarding such subject matter. This Agreement shall not be modified except by a subsequently dated written amendment or appendix signed on behalf of Adobe and Knoll by their duly authorized representative. (f) CONFIDENTIALITY OF AGREEMENT. Neither party will disclose any terms of this Agreement except pursuant to a mutually agreeable press release or as otherwise required by law. (g) COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which will be considered an original, but all of which together will constitute one and the same instrument. The parties have executed this Agreement effective as of March 31, 1995. ADOBE SYSTEMS, INCORPORATED /s/ David B. Pratt /s/ Thomas Knoll - ----------------------------------- ----------------------------------- Authorized Signature Thomas Knoll David B. Pratt 3/27/95 - ----------------------------------- ----------------------------------- Printed Name Date Sr. V.P. - ----------------------------------- Title 3/31/95 - ----------------------------------- Date * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 8 EXHIBIT A 1995-96 LIST OF PROJECT ASSIGNMENTS Thomas Knoll will work on a full-time basis on features for the next revision of [ * ] The exact set of features that Thomas Knoll will work on will be determined by Adobe engineering management. The first feature assigned to Thomas Knoll is to design and implement, with the assistance of Douglas Olson [ * ] [ * ], and implement a sufficient number of [ * ] functions to test the architecture and verify its completeness and performance. * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. EXHIBIT B DEVELOPMENT SITES 1. 415 Columbus Drive Ann Arbor, Michigan 48103 2. 495 Woodgrove Ann Arbor, Michigan 48103 3. 390 Meadow Creek Ann Arbor, Michigan 48105 COVENANT NOT TO COMPETE The parties to this agreement (the "Agreement") are Adobe Systems, Incorporated, a California corporation having a place of business at 1585 Charleston Road, Mountain View, California 94039-7900 and its subsidiaries ("Adobe") and Thomas Knoll, a resident of Ann Arbor, Michigan ("Knoll"). RECITALS: A. The parties have entered into an Agreement to Sell Rights Under Software Development and Acquisition Agreement and a separate Consulting Agreement. B. Adobe wishes to restrict the ability of Knoll to compete with respect to the subject matter described in this Agreement. THEREFORE, for valuable consideration, the parties agree as follows: AGREEMENT: 1. COVENANT NOT TO COMPETE. 1.1 NO DEVELOPMENT OF PRODUCTS WHICH COMPETE WITH [ * ] RELATED PRODUCTS. From the effective date of this Agreement until [ * ] Knoll may not, whether for himself or a third party, develop or participate in the development of any software product which competes with [ * ] * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. [ * ] as it exists on or before the termination of this Agreement or any version of [ * ] proposed or planned as of the termination of this Agreement, or which competes with any Adobe product which exists, is proposed, or planned on or before the termination of this Agreement and which is or will be derived in whole or in part from [ * ] or any [ * ] technology or software ([ * ] Related Products"). 1.2 NO DEVELOPMENT OF [ * ] SOFTWARE. From the effective date of this Agreement until [ * ] Knoll may not, whether for himself or a third party, develop or participate in the development of any image processing software. Knoll may request from time to time that Adobe waive the restrictions set forth in this Section 1.2 with respect to a specific image processing software product, and Adobe agrees that it will discuss such request with Knoll, but it shall be at Adobe's sole and absolute discretion as to whether it shall grant such request. 1.3 NO DEVELOPMENT OF PRODUCTS WHICH COMPETE WITH ADOBE PRODUCTS. From the effective date of this Agreement until April 1, 2002, Knoll may not, whether for himself or a third party, develop or * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 2 participate in the development of any software product which competes with any Adobe product which exists on or before the termination of this Agreement other than [ * ] or [ * ]- Related Products (which are separately addressed above in Section 1.1) or any Adobe product proposed or planned as of the termination of this Agreement. 1.4 NON-COMPETING PRODUCTS. Adobe acknowledges that during and after the term of this Agreement, Knoll may independently develop software products other than those described in Sections 1.1, 1.2 and 1.3. 1.5 SALE OF BUSINESS. Knoll acknowledges and agrees that he has entered into this Covenant Not To Compete in conjunction with the Agreement to Sell Rights Under Software Development and Acquisition Agreement and that the payments to him under that agreement represent payments for the sale of his software development business related to [ * ] 2. PAYMENTS. Adobe will pay Knoll the following amount on the date specified: * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 3 Payment Date Amount ------------ ------ [ * ] [ * ] 3. TERM. This Agreement shall terminate on April 1, 2007. 4. GOVERNING LAW; MODIFICATION; NON-ASSIGNABLE. This Agreement (a) shall be governed by and construed in accordance with the laws of the State of Michigan, without giving effect to the principles of conflict of laws, (b) may be modified or amended only by a written agreement executed by an authorized representative of Adobe and Knoll, and (c) may not be assigned by either party without the prior written consent of the other party, except that Adobe may assign its rights or obligations under this Agreement in connection with a merger, sale of all or substantially all of its assets, or other corporate reorganization, or in connection with the sale or substantially exclusive licensing of [ * ] or [ * ] Derived Products. 5. MISCELLANEOUS. (a) WAIVER. The failure of either party to require performance by the other party of any provision hereof shall not affect the full right to require such performance at any time thereafter; nor shall the waiver by either party of a breach of any provision hereof be taken or held to be a waiver of the provision itself. * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 4 (b) SEVERABILITY. In the event that any provision of this Agreement shall be unenforceable or invalid under any applicable law or be so held by applicable court decision, such unenforceability or invalidity shall not render this Agreement unenforceable, or invalid as a whole and, in such event, any such provision shall be changed and interpreted so as to best accomplish the objectives of such unenforceable or intended provision within the limits of applicable law or applicable court decisions. (c) INJUNCTIVE RELIEF. It is understood and agreed that notwithstanding any other provisions of this Agreement, a breach by Knoll of this Agreement will cause Adobe irreparable damage for which recovery of money damages would be inadequate, and that Adobe shall therefore be entitled to obtain timely injunctive reflect to protect Adobe's rights under this Agreement in addition to any and all remedies available at law. (d) ATTORNEYS' FEES. In the event any proceeding or lawsuit is brought by Adobe or Knoll in connection with this Agreement, the prevailing party in such proceeding shall be entitled to receive its costs, expert witness fees, and reasonable attorneys fees, including costs and fees on appeal. (e) HEADINGS. The section headings appearing in this Agreement are inserted only as a matter of convenience and * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 5 in no way define, limit, construe or describe the scope or extent of such section or in any way affect such section. (f) ENTIRE AGREEMENT. This Agreement completely and exclusively states the agreement of all parties regarding its subject matter. It supersedes, and its terms govern, all prior proposals, agreements or other communications between the parties, oral or written, regarding such subject matter. This Agreement shall not be modified except by a subsequently dated written amendment or appendix signed on behalf of Adobe and Knoll by their duly authorized representative. (g) CONFIDENTIALITY OF AGREEMENT. Neither party will disclose any terms of this Agreement except pursuant to a mutually agreeable press release or as otherwise required by law. (h) COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which will be considered an original, but all of which together will constitute one and the same instrument. * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 6 The parties have entered into this Agreement effective as of March 31, 1995. ADOBE SYSTEMS, INCORPORATED /s/ David B. Pratt /s/ Thomas Knoll - ----------------------------------- ----------------------------------- Authorized Signature Thomas Knoll David B. Pratt 3/27/95 - ----------------------------------- ----------------------------------- Printed Name Date Sr. V.P. - ----------------------------------- Title 3/31/95 - ----------------------------------- Date * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. COVENANT NOT TO COMPETE The parties to this agreement (the "Agreement") are Adobe Systems, Incorporated, a California corporation having a place of business at 1585 Charleston Road, Mountain View, California 94039-7900 and its subsidiaries ("Adobe") and John Knoll, a resident of San Rafael, California ("Knoll"). RECITALS: A. The parties have entered into an Agreement to Sell Rights Under Software Development and Acquisition Agreement. B. Adobe wishes to restrict the ability of Knoll to compete with respect to the subject matter described in this Agreement. THEREFORE, for valuable consideration, the parties agree as follows: AGREEMENT: 1. COVENANT NOT TO COMPETE. 1.1 NO DEVELOPMENT OF PRODUCTS WHICH COMPETE WITH [ * ] RELATED PRODUCTS. From the effective date of this Agreement until [ * ] Knoll may not, whether for himself or a third party, develop or participate in the development of any software product which competes with [ * ] * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. [ * ] as it exists on or before April 1, 1995 or any version of [ * ] proposed or planned as of April 1, 1995, or which competes with any Adobe product which exists, is proposed, or planned on or before April 1, 1995 and which is or will be derived in whole or in part from [ * ] or any [ * ] technology or software [ * ]-Related Products"). 1.2 NO DEVELOPMENT OF PRODUCTS WHICH COMPETE WITH ADOBE PRODUCTS. From the effective date of this Agreement until April 1, 2002, Knoll may not, whether for himself or a third party, develop or participate in the development of any software product which competes with any Adobe product which exists on or before April 1, 1995 other than [ * ] or [ * ]-Related Products (which are separately addressed above in Section 1.1) or any Adobe product proposed or planned as of April 1, 1995. 1.3 NON-COMPETING PRODUCTS. Adobe acknowledges that during and after the term of this Agreement, Knoll may independently develop software products other than those described in Sections 1.1 and 1.2. * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 2 1.4 SALE OF BUSINESS. Knoll acknowledges and agrees that he has entered into this Covenant Not To Compete in conjunction with the Agreement to Sell Rights Under Software Development and Acquisition Agreement and that the payments to him under that agreement represent payments for the sale of his software development business related to [ * ] 2. PAYMENTS. Adobe will pay Knoll the following amount on the date specified: Payment Date Amount ------------ ------ [ * ] [ * ] 3. PROPRIETARY INFORMATION; NONDISCLOSURE. (a) CONFIDENTIAL INFORMATION DEFINED. Knoll acknowledges that from time to time, he may obtain certain information relating to Adobe's business which is confidential and proprietary information of Adobe and is not generally known to the public, including without limitation technical and business information relating to Adobe's technology, products, research and development, production, manufacturing and engineering processes, computer software, business plans, finances, customers and employees ("Confidential Information"). Knoll agrees that he will not use any Confidential Information of Adobe for any purpose and will not * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 3 disclose any such Confidential Information to any third party. This Section 3 shall survive any termination of this Agreement. (b) EXCEPTION. Notwithstanding the other provisions of this Agreement, information shall not be deemed Confidential Information, and Knoll shall have no confidentiality obligation with respect to any information, other than [ * ] or inventions, technology, materials, or information previously created for Adobe by Knoll which (a) was in Knoll's possession or was known by Knoll prior to his receipt from Adobe, (b) is or becomes publicly known through no act or omission of Knoll, (c) is received by Knoll without restriction on disclosure from a third party who disclosed the information without violating any confidentiality restriction, (d) is independently developed by Knoll without reference to the Confidential Information and without violation of any confidentiality restriction or covenant not to compete; or (e) is divulged by Knoll pursuant to statute, regulation, or the order of a court of competent jurisdiction, provided Knoll previously notifies Adobe to take appropriate protective measures. 4. TERM. This Agreement shall terminate on April 1, 2007. 5. GOVERNING LAW; MODIFICATION; NON-ASSIGNABLE. This Agreement (a) shall be governed by and construed in accordance with the laws of the State of California, without giving effect to the principles of conflict of laws, (b) may be * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 4 modified or amended only by a written agreement executed by an authorized representative of Adobe and Knoll, and (c) may not be assigned by either party without the prior written consent of the other party, except that Adobe may assign its rights or obligations under this Agreement in connection with a merger, sale of all or substantially all of its assets, or other corporate reorganization, or in connection with the sale or substantially exclusive licensing of [ * ] or [ * ] Derived Products. 6. MISCELLANEOUS. (a) WAIVER. The failure of either party to require performance by the other party of any provision hereof shall not affect the full right to require such performance at any time thereafter; nor shall the waiver by either party of a breach of any provision hereof be taken or held to be a waiver of the provision itself. (b) SEVERABILITY. In the event that any provision of this Agreement shall be unenforceable or invalid under any applicable law or be so held by applicable court decision, such unenforceability or invalidity shall not render this Agreement unenforceable, or invalid as a whole, and, in such event, any such provision shall be changed and interpreted so as to best accomplish the objectives of such unenforceable or intended provision within the limits of applicable law or applicable court decisions. * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 5 (c) INJUNCTIVE RELIEF. It is understood and agreed that notwithstanding any other provisions of this Agreement, a breach by Knoll of this Agreement will cause Adobe irreparable damage for which recovery or money damages would be inadequate, and that Adobe shall therefore be entitled to obtain timely injunctive reflect to protect Adobe's rights under this Agreement in addition to any and all remedies available at law. (d) ATTORNEYS' FEES. In the event any proceeding or lawsuit is brought by Adobe or Knoll in connection with this Agreement, the prevailing party in such proceeding shall be entitled to receive its costs, expert witness fees, and reasonable attorneys fees, including costs and fees on appeal. (e) HEADINGS. The section headings appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or extent of such section or in any way affect such section. (f) ENTIRE AGREEMENT. This Agreement completely and exclusively states the agreement of all parties regarding its subject matter. It supersedes, and its terms govern, all prior proposals, agreements or other communications between the parties, oral or written, regarding such subject matter. This Agreement shall not be modified except by a subsequently dated written amendment or appendix signed on behalf of Adobe and Knoll by their duly authorized representative. * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act of 1934, as amended. 6 (g) CONFIDENTIALITY OF AGREEMENT. Neither party will disclose any terms of this Agreement except pursuant to a mutually agreeable press release or as otherwise required by law. (h) COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which will be considered an original, but all of which together will constitute one and the same instrument. The parties have entered into this Agreement effective as of March 31, 1995. ADOBE SYSTEMS, INCORPORATED /s/ David B. Pratt /s/ John Knoll - ----------------------------------- ----------------------------------- Authorized Signature John Knoll David B. Pratt 3/28/95 - ----------------------------------- ----------------------------------- Printed Name Date Sr. V.P. - ----------------------------------- Title 3/31/95 - ----------------------------------- Date SEG. 3486 * Certain confidential material contained in this document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of th EX-11 3 EX-11 ADOBE SYSTEMS INCORPORATED EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarters Ended Six Months Ended ------------------------------- -------------------------- June 2 May 27 June 2 May 27 1995 1994 1995 1994 ----------- ----------- ----------- ----------- Net income $ 33,902 $ 17,306 $ 68,252 $ 36,399 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Primary shares outstanding: Weighted average shares outstanding during the period 62,981 59,411 62,246 59,128 Common stock equivalent shares 3,343 2,357 3,097 2,401 ----------- ----------- ------------ ----------- 66,324 61,768 65,343 61,529 ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Fully diluted shares outstanding: Weighted average shares outstanding during the period 62,981 59,411 62,246 59,128 Common stock equivalent shares 3,464 2,432 3,756 2,640 ----------- ----------- ------------ ----------- 66,445 61,843 66,002 61,768 ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Primary net income per common stock and common stock equivalent share $ .51 $ .28 $ 1.04 $ .59 ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Fully diluted net income per common stock and common stock equivalent share $ .51 $ .28 $ 1.03 $ .59 ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
1 EX-27 4 EX-27
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet at June 2, 1995, and the Consolidated Statement of Income for the six months ended June 2, 1995, and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-01-1995 NOV-26-1994 JUN-02-1995 129,339 314,025 95,366 3,843 6,339 569,245 127,294 83,175 710,372 137,453 0 189,650 0 0 379,822 710,372 91,395 336,584 63,555 63,555 176,143 828 0 108,332 40,080 68,252 0 0 0 68,252 1.04 1.03
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