form_10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_________________________
FORM
10-Q
_________________________
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
|
|
For
the quarterly period ended August 29,
2008
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
|
For
the transition period from to
Commission
File Number: 0-15175
ADOBE
SYSTEMS INCORPORATED
(Exact
name of registrant as specified in its charter)
_________________________
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
77-0019522
(I.R.S.
Employer
Identification
No.)
|
|
345
Park Avenue, San Jose, California
95110-2704
|
|
(Address
of principal executive offices and zip
code)
|
|
(Registrant’s
telephone number, including area
code)
|
_________________________
Indicate
by checkmark 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 (the “Act”) 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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company (as
defined in Rule 12b-2 of the Act).
Large
accelerated filer x
|
Accelerated
filer o
|
Non-accelerated
filer o
(Do
not check if a smaller
reporting
company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes o No x
The number
of shares outstanding of the registrant’s common stock as of September 26, 2008
was 530,956,085.
ADOBE SYSTEMS INCORPORATED
FORM
10-Q
TABLE
OF CONTENTS
|
|
|
Page
No.
|
|
PART
I—FINANCIAL INFORMATION
|
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|
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Item 1.
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3 |
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3 |
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4 |
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5 |
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6 |
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Item 2.
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23 |
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Item 3.
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35 |
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Item 4.
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35 |
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PART
II—OTHER INFORMATION
|
|
|
|
|
Item 1.
|
|
|
|
35 |
|
Item 1A.
|
|
|
|
35 |
|
Item 2.
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43 |
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Item 5.
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44 |
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Item 6.
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44 |
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51 |
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52 |
|
PART
I—FINANCIAL INFORMATION
ITEM
1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
ADOBE SYSTEMS INCORPORATED
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share data)
(Unaudited)
|
|
August
29,
2008
|
|
|
November 30,
2007
|
|
ASSETS
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,134,263 |
|
|
$ |
946,422 |
|
Short-term
investments
|
|
|
866,641 |
|
|
|
1,047,432 |
|
Trade
receivables, net of allowances for doubtful accounts of $6,264
and $4,398, respectively
|
|
|
327,970 |
|
|
|
318,145 |
|
Other
receivables
|
|
|
33,687 |
|
|
|
44,666 |
|
Deferred
income taxes
|
|
|
94,500 |
|
|
|
171,472 |
|
Prepaid
expenses and other assets
|
|
|
60,059 |
|
|
|
44,714 |
|
Total
current assets
|
|
|
2,517,120 |
|
|
|
2,572,851 |
|
Property
and equipment, net
|
|
|
317,071 |
|
|
|
289,758 |
|
Goodwill
|
|
|
2,134,032 |
|
|
|
2,148,102 |
|
Purchased
and other intangibles, net
|
|
|
246,401 |
|
|
|
367,644 |
|
Investment
in lease receivable
|
|
|
207,239 |
|
|
|
207,239 |
|
Other
assets
|
|
|
216,887 |
|
|
|
128,085 |
|
Total
assets
|
|
$ |
5,638,750 |
|
|
$ |
5,713,679 |
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Trade
and other payables
|
|
$ |
56,254 |
|
|
$ |
66,867 |
|
Accrued
expenses
|
|
|
356,408 |
|
|
|
383,436 |
|
Accrued
restructuring
|
|
|
6,862 |
|
|
|
3,731 |
|
Income
taxes payable
|
|
|
37,546 |
|
|
|
215,058 |
|
Deferred
revenue
|
|
|
204,593 |
|
|
|
183,318 |
|
Total
current liabilities
|
|
|
661,663 |
|
|
|
852,410 |
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Debt
|
|
|
350,000 |
|
|
|
— |
|
Deferred
revenue
|
|
|
27,838 |
|
|
|
25,950 |
|
Accrued
restructuring
|
|
|
8,096 |
|
|
|
13,987 |
|
Income
taxes payable
|
|
|
99,636 |
|
|
|
— |
|
Deferred
income taxes
|
|
|
96,827 |
|
|
|
148,943 |
|
Other
liabilities
|
|
|
23,248 |
|
|
|
22,407 |
|
Total
liabilities
|
|
|
1,267,308 |
|
|
|
1,063,697 |
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value; 2,000 shares authorized, none
issued
|
|
|
— |
|
|
|
— |
|
Common
stock, $0.0001 par value; 900,000 shares authorized; 600,834
shares issued; 531,475 and 571,409 shares outstanding,
respectively
|
|
|
61 |
|
|
|
61 |
|
Additional
paid-in-capital
|
|
|
2,369,689 |
|
|
|
2,340,969 |
|
Retained
earnings
|
|
|
4,667,489 |
|
|
|
4,041,592 |
|
Accumulated
other comprehensive income
|
|
|
23,439 |
|
|
|
27,948 |
|
Treasury
stock, at cost (69,359 and 29,425 shares, respectively), net of
reissuances
|
|
|
(2,689,236
|
) |
|
|
(1,760,588
|
) |
Total
stockholders’ equity
|
|
|
4,371,442 |
|
|
|
4,649,982 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
5,638,750 |
|
|
$ |
5,713,679 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
ADOBE SYSTEMS INCORPORATED
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except per share data)
(Unaudited)
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
August
29,
2008
|
|
|
August
31,
2007
|
|
|
August
29,
2008
|
|
|
August
31,
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
838,813 |
|
|
$ |
813,382 |
|
|
$ |
2,532,076 |
|
|
$ |
2,147,149 |
|
Services
and support
|
|
|
48,444 |
|
|
|
38,304 |
|
|
|
132,512 |
|
|
|
99,521 |
|
Total
revenue
|
|
|
887,257 |
|
|
|
851,686 |
|
|
|
2,664,588 |
|
|
|
2,246,670 |
|
Total
cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
84,623 |
|
|
|
69,002 |
|
|
|
202,657 |
|
|
|
193,532 |
|
Services
and support
|
|
|
26,228 |
|
|
|
23,619 |
|
|
|
73,535 |
|
|
|
62,566 |
|
Total
cost of revenue
|
|
|
110,851 |
|
|
|
92,621 |
|
|
|
276,192 |
|
|
|
256,098 |
|
Gross
profit
|
|
|
776,406 |
|
|
|
759,065 |
|
|
|
2,388,396 |
|
|
|
1,990,572 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
170,124 |
|
|
|
163,217 |
|
|
|
508,909 |
|
|
|
450,395 |
|
Sales
and marketing
|
|
|
271,439 |
|
|
|
251,243 |
|
|
|
813,399 |
|
|
|
702,323 |
|
General
and administrative
|
|
|
97,156 |
|
|
|
71,132 |
|
|
|
257,163 |
|
|
|
201,004 |
|
Restructuring
and other charges
|
|
|
1,194 |
|
|
|
555 |
|
|
|
2,625 |
|
|
|
555 |
|
Amortization
of purchased intangibles and incomplete technology
|
|
|
17,024 |
|
|
|
17,893 |
|
|
|
51,222 |
|
|
|
54,542 |
|
Total
operating expenses
|
|
|
556,937 |
|
|
|
504,040 |
|
|
|
1,633,318 |
|
|
|
1,408,819 |
|
Operating
income
|
|
|
219,469 |
|
|
|
255,025 |
|
|
|
755,078 |
|
|
|
581,753 |
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
9,338 |
|
|
|
22,733 |
|
|
|
34,778 |
|
|
|
65,866 |
|
Interest
expense
|
|
|
(2,390
|
) |
|
|
(69 |
) |
|
|
(8,027
|
) |
|
|
(175
|
) |
Investment
gains (loss)
|
|
|
2,097 |
|
|
|
(694 |
) |
|
|
20,335 |
|
|
|
9,069 |
|
Total
non-operating income, net
|
|
|
9,045 |
|
|
|
21,970 |
|
|
|
47,086 |
|
|
|
74,760 |
|
Income
before income taxes
|
|
|
228,514 |
|
|
|
276,995 |
|
|
|
802,164 |
|
|
|
656,513 |
|
Provision
for income taxes
|
|
|
36,906 |
|
|
|
71,752 |
|
|
|
176,267 |
|
|
|
154,914 |
|
Net
income
|
|
$ |
191,608 |
|
|
$ |
205,243 |
|
|
$ |
625,897 |
|
|
$ |
501,599 |
|
Basic
net income per share
|
|
$ |
0.36 |
|
|
$ |
0.35 |
|
|
$ |
1.15 |
|
|
$ |
0.85 |
|
Shares
used in computing basic net income per share
|
|
|
531,060 |
|
|
|
583,670 |
|
|
|
542,624 |
|
|
|
587,141 |
|
Diluted
net income per share
|
|
$ |
0.35 |
|
|
$ |
0.34 |
|
|
$ |
1.13 |
|
|
$ |
0.
83 |
|
Shares
used in computing diluted net income per share
|
|
|
541,311 |
|
|
|
597,334 |
|
|
|
552,739 |
|
|
|
602,263 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
ADOBE SYSTEMS INCORPORATED
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
August
29,
2008
|
|
|
August
31,
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
625,897 |
|
|
$ |
501,599 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and accretion
|
|
|
200,537 |
|
|
|
237,274 |
|
Stock-based
compensation
|
|
|
137,613 |
|
|
|
110,196 |
|
Provision
for estimated returns
|
|
|
93,683 |
|
|
|
132,871 |
|
Tax
benefit from employee stock option plans
|
|
|
83,740 |
|
|
|
75,878 |
|
Deferred
income taxes
|
|
|
34,336 |
|
|
|
(20,405
|
) |
Other
non-cash items
|
|
|
6,764 |
|
|
|
(1,028
|
) |
Gains
on sales of investments, net of impairments
|
|
|
(9,690
|
) |
|
|
(10,834
|
) |
Excess
tax benefits from stock-based compensation
|
|
|
(23,635
|
) |
|
|
(54,396
|
) |
Changes
in operating assets and liabilities, net of acquired assets and
liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(96,399
|
) |
|
|
(37,968
|
) |
Prepaid
expenses and other current assets
|
|
|
(6,202
|
) |
|
|
(16,135
|
) |
Trade
and other payables
|
|
|
(10,613
|
) |
|
|
9,052 |
|
Accrued
expenses
|
|
|
(36,957
|
) |
|
|
34,919 |
|
Accrued
restructuring
|
|
|
(5,418
|
) |
|
|
(10,547
|
) |
Income
taxes payable
|
|
|
(73,957
|
) |
|
|
64,746 |
|
Deferred
revenue
|
|
|
23,163 |
|
|
|
25,971 |
|
Net
cash provided by operating activities
|
|
|
942,862 |
|
|
|
1,041,193 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of short-term investments
|
|
|
(840,782
|
) |
|
|
(1,755,079
|
) |
Maturities
of short-term investments
|
|
|
520,784 |
|
|
|
335,895 |
|
Sales
of short-term investments
|
|
|
486,904 |
|
|
|
1,531,651 |
|
Purchases
of property and equipment
|
|
|
(88,481
|
) |
|
|
(103,944
|
) |
Purchases
of long-term investments and other assets
|
|
|
(102,029
|
) |
|
|
(85,173
|
) |
Investment
in lease receivable
|
|
|
— |
|
|
|
(80,439
|
) |
Cash
received from acquisitions
|
|
|
— |
|
|
|
1,507 |
|
Cash
paid for acquisitions
|
|
|
— |
|
|
|
(68,237
|
) |
Issuance
costs for credit facility
|
|
|
— |
|
|
|
(838
|
) |
Proceeds
from sale of equity securities
|
|
|
18,085 |
|
|
|
11,310 |
|
Net
cash used for investing activities
|
|
|
(5,519
|
) |
|
|
(213,347
|
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Purchases
of treasury stock
|
|
|
(1,422,735
|
) |
|
|
(1,451,525
|
) |
Proceeds
from issuance of treasury stock
|
|
|
301,454 |
|
|
|
354,546 |
|
Excess
tax benefits from stock-based compensation
|
|
|
23,635 |
|
|
|
54,396 |
|
Proceeds
from borrowings under credit facility
|
|
|
450,000 |
|
|
|
— |
|
Repayments
of borrowings under credit facility
|
|
|
(100,000
|
) |
|
|
— |
|
Net
cash used for financing activities
|
|
|
(747,646
|
) |
|
|
(1,042,583
|
) |
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
|
|
(1,856
|
) |
|
|
1,520 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
187,841 |
|
|
|
(213,217
|
) |
Cash
and cash equivalents at beginning of period
|
|
|
946,422 |
|
|
|
772,500 |
|
Cash
and cash equivalents at end of period
|
|
$ |
1,134,263 |
|
|
$ |
559,283 |
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes, net of refunds
|
|
$ |
129,320 |
|
|
$ |
38,434 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
ADOBE SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share data)
(Unaudited)
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have
prepared the accompanying unaudited condensed consolidated financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”). Pursuant to these rules and regulations, we have condensed or
omitted certain information and footnote disclosures we normally include in our
annual consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). In
management’s opinion, we have made all adjustments (consisting only of normal,
recurring adjustments, except as otherwise indicated) necessary to fairly
present our financial position, results of operations and cash flows. Our
interim period operating results do not necessarily indicate the results that
may be expected for any other interim period or for the full fiscal year. These
financial statements and accompanying notes should be read in conjunction with
the consolidated financial statements and notes thereto in our Annual Report on
Form 10-K for the fiscal year ended November 30, 2007 on file with the
SEC.
There have
been no material changes in our significant accounting policies, except for the
adoption of the Financial Accounting Standards Board (“FASB”) Financial
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109”, on December 1,
2007 as compared to the significant accounting policies described in our Annual
Report on Form 10-K for the fiscal year ended November 30,
2007.
Reclassification
Certain
prior year amounts have been reclassified to conform to current year
presentation in the condensed consolidated balance sheets. Specifically, there
was a reclassification totaling $35.0 million from purchased intangibles to
long-term and short-term other assets. See Notes 3 and 4 for additional
information regarding this reclassification.
Recent
Accounting Pronouncements
With the
exception of those discussed below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the nine months
ended August 29, 2008, as compared to the recent accounting pronouncements
described in our Annual Report on Form 10-K for the fiscal year ended
November 30, 2007, that are of significance, or potential significance, to
us.
In
September 2008, the FASB issued FASB Staff Position (“FSP”) No. 133-1 and FIN
45-4 (“FSP FAS 133-1 and FIN 45-4”), “Disclosures about Credit Derivatives and
Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement
No. 161”. FSP FAS 133-1 and FIN 45-4 amends FASB Statement No. 133
(“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities”, to
require disclosures by sellers of credit derivatives, including credit
derivatives embedded in hybrid instruments. FSP FAS 133-1 and FIN
45-4 also amend FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others”, to require additional disclosure about the current
status of the payment/performance risk of a guarantee. The provisions
of the FSP that amend SFAS 133 and FIN 45 are effective for reporting periods
ending after November 15, 2008. FSP FAS 133-1 and FIN 45-4 also clarifies the
effective date in FASB Statement No. 161 (“SFAS 161”), “Disclosures about
Derivative Instruments and Hedging Activities”. Disclosures required by SFAS 161
are effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Because FSP FAS 133-1 and FIN 45-4
only require additional disclosures, the adoption will not impact our
consolidated financial position, results of operations or cash
flows.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
In April
2008, the FASB issued FSP No. 142-3 (“FSP 142-3”), “Determination of the Useful
Life of Intangible Assets”. FSP 142-3 amends the factors an entity
should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under FASB Statement
No. 142, “Goodwill and Other Intangible Assets”. This new guidance
applies prospectively to intangible assets that are acquired individually or
with a group of other assets in business combinations and asset acquisitions.
FSP 142-3 is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008. Early adoption is
prohibited. Since this guidance will be applied prospectively, on
adoption, there will be no impact to our current consolidated financial
statements.
In March
2008, the FASB issued SFAS 161 which requires companies with derivative
instruments to disclose information that should enable financial-statement users
to understand how and why a company uses derivative instruments, how derivative
instruments and related hedged items are accounted for under SFAS 133, and
how derivative instruments and related hedged items affect a company’s financial
position, financial performance and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Because SFAS 161 only requires additional disclosure,
the adoption will not impact our consolidated financial position, results of
operations or cash flows.
In June 2007, the American Institute of
Certified Public Accountants (“AICPA”) issued Statement of Position 07-1
(“SOP 07-1”), “Clarification of the Scope of the Audit and Accounting Guide
Investment Companies and Accounting by Parent Companies and Equity Method
Investors for Investments in Investment Companies”. SOP 07-1 defines
investment companies for purposes of applying the related AICPA Audit and
Accounting Guide. SOP 07-1 provides guidance on whether an investment
company’s parent or equity-method investor should retain investment-company
accounting in its financial statements. SOP 07-1 would have been effective
beginning in the first quarter of fiscal 2009; however, in February 2008, the
FASB issued FSP SOP 07-1-1 which indefinitely delayed the effective date of
SOP 07-1.
In
February 2007, the FASB issued FASB Statement No. 159 (“SFAS 159”),
“The Fair Value Option for Financial Assets and Financial Liabilities”. Under
SFAS 159, companies may elect to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized gains
and losses on items for which the fair value option has been elected be reported
in earnings and disclosed. SFAS 159 was effective for us beginning in the
first quarter of fiscal 2008. We currently do not have any instruments for which
we have elected the fair value option under SFAS 159. Therefore, the adoption of
SFAS 159 has not impacted our consolidated financial position, results of
operations or cash flows.
In
September 2006, the FASB issued FASB Statement No. 157 (“SFAS 157”),
“Fair Value Measurements”, which defines fair value, establishes guidelines for
measuring fair value and expands disclosures regarding fair value measurements.
SFAS 157 does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior accounting
pronouncements and is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which
delays the effective date of SFAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually),
until fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years. These nonfinancial items include assets and
liabilities such as reporting units measured at fair value in a goodwill
impairment test and nonfinancial assets acquired and liabilities assumed in a
business combination. Effective December 1, 2007, we adopted SFAS 157
for financial assets and liabilities recognized at fair value on a recurring
basis. The partial adoption of SFAS 157 for financial assets and
liabilities did not have a material impact on our consolidated financial
position, results of operations or cash flows. See Note 2 for information and
related disclosures regarding our fair value measurements.
In July
2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty
in income taxes by prescribing the recognition threshold a tax position is
required to meet before being recognized in the financial statements. It also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Additionally, in May
2007, the FASB published FSP No. FIN 48-1 (“FSP FIN 48-1”),
“Definition of Settlement in FASB Interpretation No. 48”. FSP FIN 48-1
is an amendment to FIN 48. It clarifies how an enterprise should determine
whether a tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. We adopted both FIN 48 and FSP
FIN 48-1 on December 1, 2007. The adoption of FIN 48 and FSP FIN
48-1 resulted in an increase to both assets and liabilities in our condensed
consolidated balance sheet as of the beginning of fiscal 2008. See Note 6 for additional
information regarding income taxes, including the effects of adoption of FIN 48
and FSP FIN 48-1 on our condensed consolidated financial
statements.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
NOTE
2. FINANCIAL INSTRUMENTS
We measure
certain financial assets and liabilities at fair value on a recurring basis,
including cash equivalents, available-for-sale fixed income and equity
securities, other equity securities and foreign currency derivatives. The fair
value of these financial assets and liabilities was determined using the
following inputs at August 29, 2008:
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds and overnight deposits(1)
|
|
$ |
939,329 |
|
|
$ |
939,329 |
|
|
$ |
— |
|
|
$ |
— |
|
Fixed
income available-for-sale securities(2)
|
|
|
902,996 |
|
|
|
— |
|
|
|
902,996 |
|
|
|
— |
|
Equity
available-for-sale securities(3)
|
|
|
7,163 |
|
|
|
7,163 |
|
|
|
— |
|
|
|
— |
|
Investments
of limited partnership(4)
|
|
|
37,934 |
|
|
|
503 |
|
|
|
— |
|
|
|
37,431 |
|
Foreign
currency derivatives(5)
|
|
|
22,639 |
|
|
|
— |
|
|
|
22,639 |
|
|
|
— |
|
Total
|
|
$ |
1,910,061 |
|
|
$ |
946,995 |
|
|
$ |
925,635 |
|
|
$ |
37,431 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency derivatives(6)
|
|
|
1,124 |
|
|
|
— |
|
|
|
1,124 |
|
|
|
— |
|
Total
|
|
$ |
1,124 |
|
|
$ |
— |
|
|
$ |
1,124 |
|
|
$ |
— |
|
_________________________________________
(1) Included
in cash and cash equivalents on our condensed consolidated balance
sheet.
(2) Included
in either cash and cash equivalents or short-term investments on our condensed
consolidated balance sheet.
(3) Included
in short-term investments on our condensed consolidated balance
sheet.
(4) Included
in other assets on our condensed consolidated balance sheet.
(5) Included
in prepaid expenses and other assets on our condensed consolidated balance
sheet.
(6) Included
in accrued expenses on our condensed consolidated balance sheet.
Fixed
income available-for-sale securities include United States treasury securities
(81% of total), corporate bonds (4% of total) and obligations of foreign
governments and their agencies (15% of total).
The
investments of limited partnership relate to our interest in Adobe Ventures
IV L.P. (“Adobe Ventures”) which was $37.9 million and $30.6 million
as of August 29, 2008 and November 30, 2007, respectively. The level 1
investments of limited partnership relate to investments in publicly-traded
companies and the level 3 investments relate to investments in privately-held
companies. Our estimation of fair value for our level 3 investments includes,
but is not limited to, reviewing each company’s cash position, financing needs,
earnings and revenue outlook, operational performance, management and ownership
changes and competition. The change in this asset balance relates primarily to
investment gains included in earnings during the three and nine months ended
August 29, 2008. All other activity during the quarter was insignificant both
individually and in the aggregate. See Note 4 for further
information regarding Adobe Ventures and related accounting
policies.
Foreign
currency derivatives include option and forward foreign exchange contracts
primarily for the Japanese Yen and the Euro.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
NOTE
3. GOODWILL AND PURCHASED AND OTHER INTANGIBLES
Goodwill
as of August 29, 2008 and November 30, 2007 was $2.134 billion and
$2.148 billion, respectively. The change includes net reductions in
goodwill of $9.6 million related to deferred tax assets associated with our
acquisition of Scene7 and $4.2 million related to the tax reserve
associated with the acquisition of Macromedia, offset in part by foreign
currency changes.
Certain
amounts as of November 30, 2007 have been reclassified to conform to current
year presentation in the condensed consolidated balance sheets. Specifically, we
reclassified $55.5 million of cost and $20.5 million of accumulated amortization
($35.0 million, net) from purchased intangibles to long-term and short-term
other assets associated with certain technology license
arrangements.
Purchased
and other intangible assets subject to amortization were as follows as of August
29, 2008:
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Purchased
technology
|
|
$ |
411,408 |
|
|
$ |
(316,637 |
) |
|
$ |
94,771 |
|
Localization
|
|
$ |
18,342 |
|
|
$ |
(6,536 |
) |
|
$ |
11,806 |
|
Trademarks
|
|
|
130,925 |
|
|
|
(71,709
|
) |
|
|
59,216 |
|
Customer
contracts and relationships
|
|
|
197,220 |
|
|
|
(117,022
|
) |
|
|
80,198 |
|
Other
intangibles
|
|
|
800 |
|
|
|
(390
|
) |
|
|
410 |
|
Total
other intangible assets
|
|
$ |
347,287 |
|
|
$ |
(195,657 |
) |
|
$ |
151,630 |
|
Total
purchased and other intangible assets
|
|
$ |
758,695 |
|
|
$ |
(512,294 |
) |
|
$ |
246,401 |
|
Purchased
and other intangible assets subject to amortization were as follows as of
November 30, 2007:
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Purchased
technology
|
|
$ |
409,110 |
|
|
$ |
(250,721 |
) |
|
$ |
158,389 |
|
Localization
|
|
$ |
45,854 |
|
|
$ |
(27,676 |
) |
|
$ |
18,178 |
|
Trademarks
|
|
|
131,225 |
|
|
|
(52,443
|
) |
|
|
78,782 |
|
Customer
contracts and relationships
|
|
|
197,220 |
|
|
|
(85,529
|
) |
|
|
111,691 |
|
Other
intangibles
|
|
|
800 |
|
|
|
(196
|
) |
|
|
604 |
|
Total
other intangible assets
|
|
$ |
375,099 |
|
|
$ |
(165,844 |
) |
|
$ |
209,255 |
|
Total
purchased and other intangible assets
|
|
$ |
784,209 |
|
|
$ |
(416,565 |
) |
|
$ |
367,644 |
|
Amortization
expense related to purchased and other intangible assets was $43.2 million and
$140.7 million for the three and nine months ended August 29, 2008,
respectively. Comparatively, amortization expense was $60.5 million and $157.7
million for the three and nine months ended August 31, 2007, respectively. Of
these amounts, $26.2 million and $89.5 million were included in cost of sales
for the three and nine months ended August 29, 2008, respectively, and $42.6
million and $104.6 million were included in cost of sales for the three and nine
months August 31, 2007, respectively.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
Purchased
and other intangible assets are amortized over their estimated useful lives of 1
to 13 years. As of August 29, 2008, we expect amortization expense in future
periods as follows:
Fiscal year
|
|
Purchased
Technology
|
|
|
Other
Intangible
Assets
|
|
Remainder
of 2008
|
|
$ |
22,133 |
|
|
$ |
21,282 |
|
2009
|
|
|
56,328 |
|
|
|
67,633 |
|
2010
|
|
|
8,244 |
|
|
|
48,611 |
|
2011
|
|
|
4,679 |
|
|
|
11,917 |
|
2012
|
|
|
3,387 |
|
|
|
1,009 |
|
Thereafter
|
|
|
— |
|
|
|
1,178 |
|
Total
expected amortization expense
|
|
$ |
94,771 |
|
|
$ |
151,630 |
|
NOTE
4. OTHER ASSETS
Other
assets consisted of the following as of August 29, 2008 and November 30,
2007:
|
|
2008
|
|
|
2007
|
|
Acquired
rights to use technology
|
|
$ |
93,527 |
|
|
$ |
41,642 |
|
Investments
|
|
|
70,469 |
|
|
|
52,830 |
|
Security
and other deposits
|
|
|
15,478 |
|
|
|
6,650 |
|
Prepaid
royalties
|
|
|
12,216 |
|
|
|
6,748 |
|
Deferred
compensation plan assets
|
|
|
9,209 |
|
|
|
3,145 |
|
Restricted
cash
|
|
|
7,364 |
|
|
|
7,367 |
|
Prepaid
land lease
|
|
|
3,195 |
|
|
|
3,224 |
|
Prepaid
rent
|
|
|
3,065 |
|
|
|
4,285 |
|
Other
|
|
|
2,364 |
|
|
|
2,194 |
|
Total
other assets
|
|
$ |
216,887 |
|
|
$ |
128,085 |
|
Acquired
rights to use technology includes $100.0 million associated with certain
technology licensing arrangements entered into during the third quarter of
fiscal 2008. An estimated $56.0 million of this cost is related to future
licensing rights and has been capitalized and will be amortized on a
straight-line basis over the estimated useful lives up to nine years. Of the
remaining costs, we estimated that approximately $27.2 million was related to
historical use of licensing rights which was expensed as cost of sales, and the
residual of $16.8 million was expensed as general and administrative
costs. In connection with these licensing arrangements, we have the
ability to acquire additional rights to use technology in the future.
See Note 13 for further
information regarding our contractual commitments.
In
general, acquired rights to use technology are amortized over their estimated
useful lives of 3 to 15 years.
Certain
prior year amounts have been reclassified to conform to current year
presentation in the condensed consolidated balance sheets. Specifically, there
was a reclassification associated with certain technology licensing arrangements
totaling $35.0 million, net from purchased intangibles of which $28.7 million
and $4.7 million were reclassified to acquired rights to use technology and
long-term prepaid royalties, respectively. The remaining amount was reclassified
to short-term prepaid royalty.
Included
in investments is our limited partnership interest in Adobe Ventures which is
consolidated in accordance with FASB Interpretation No. 46R, a revision to
FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”.
The partnership is controlled by Granite Ventures, an independent venture
capital firm and sole general partner of Adobe Ventures. Investments also
included our direct investments which were accounted for under the cost
method.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
The
increase in security and other deposits relates primarily to the purchase of
real property in Massachusetts. We entered into a Purchase and Sale Agreement,
effective May 12, 2008, for the acquisition of real property located in
Waltham, Massachusetts. We will purchase the property subject to completion of
construction of an office building shell and core, parking structure and site
improvements. The purchase price for the property will be $44.7 million. We made
an initial deposit of $7.0 million to be held in escrow until closing and then
applied to the purchase price. Closing is expected to occur in May 2009 and
the remaining balance is due at such time.
NOTE
5. TRADE AND OTHER PAYABLES AND ACCRUED EXPENSES
Trade and
other payables consisted of the following as of August 29, 2008 and
November 30, 2007:
|
|
2008
|
|
|
2007
|
|
Trade
payables
|
|
$ |
38,150 |
|
|
$ |
41,724 |
|
Sales
and use tax and other payables
|
|
|
18,104 |
|
|
|
25,143 |
|
Total
trade and other payables
|
|
$ |
56,254 |
|
|
$ |
66,867 |
|
Accrued
expenses consisted of the following as of August 29, 2008 and November 30,
2007:
|
|
2008
|
|
|
2007
|
|
Accrued
compensation and benefits
|
|
$ |
173,199 |
|
|
$ |
205,018 |
|
Sales
and marketing allowances
|
|
|
23,707 |
|
|
|
21,231 |
|
Other
|
|
|
159,502 |
|
|
|
157,187 |
|
Total
accrued expenses
|
|
$ |
356,408 |
|
|
$ |
383,436 |
|
Other
primarily includes general corporate accruals for corporate marketing programs,
local and regional expenses, charitable contributions and technical support.
Other is also comprised of deferred rent related to office locations with rent
escalations, accrued royalties, foreign currency derivatives and accrued
interest on the credit facility.
NOTE
6. INCOME TAXES
We adopted
both FIN 48 and FSP FIN 48-1 on December 1, 2007. The adoption of
FIN 48 resulted in an increase of $3.9 million to both assets and
liabilities in our condensed consolidated balance sheet as of the beginning of
fiscal 2008. Upon adoption, the gross liability for unrecognized tax benefits at
December 1, 2007 was $218.4 million, exclusive of interest and
penalties. The total amount of gross FIN 48 liabilities includes
$57.7 million that relates to certain tax attributes from acquired
companies, including Macromedia. These liabilities from acquired companies are
not recorded on our balance sheet because they are related to positions that
have not yet been claimed on our income tax returns. If the total FIN 48
gross liability for unrecognized tax benefits at December 1, 2007 were
recognized in the future, the following amounts, net of an estimated
$22.2 million benefit related to deducting such payments on future tax
returns, would result: $99.0 million of unrecognized tax benefits would
decrease the effective tax rate, $82.8 million would decrease goodwill and
$14.4 million would increase additional paid-in-capital.
We have
historically presented our estimated liability for unrecognized tax benefits as
a current liability. FIN 48 requires liabilities for unrecognized tax
benefits to be classified based on whether a payment is expected to be made
within the next 12 months. That is, amounts expected to be paid within the
next 12 months are to be classified as a current liability and all other
amounts are to be classified as a non-current liability. As a result of adopting
FIN 48 in the first quarter of fiscal 2008, we reclassified
$197.7 million from current income taxes payable to long-term income taxes
payable, including accrued interest on the balance.
We have
historically presented our estimated state, local and interest liabilities net
of the estimated benefit we expect to receive from deducting such payments on
future tax returns (i.e., on a “net” basis). FIN 48 requires this
estimated benefit to be classified as a deferred tax asset instead of a
reduction of the overall liability (i.e., on a “gross” basis). Thus, we
recognized additional deferred income tax assets of $3.9 million to present
the unrecognized tax benefits as gross amounts on our condensed consolidated
balance sheet.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
Our policy
to classify interest and penalties on unrecognized tax benefits as income tax
expense did not change upon the adoption of FIN 48. As of December 1,
2007, the combined amount of accrued interest and penalties related to tax
positions taken on our tax returns and included in non-current income taxes
payable was approximately $42.8 million.
We file
income tax returns in the U.S. on a federal basis and in many U.S. state and
foreign jurisdictions. We are subject to the continual examination of our income
tax returns by the Internal Revenue Service (“IRS”) and other domestic and
foreign tax authorities. Our major tax jurisdictions are the U.S., Ireland and
California. For California, Ireland and the U.S., the earliest fiscal years open
for examination are 2001, 2002 and 2005, respectively.
During the
nine months ended August 29, 2008, the gross liability for unrecognized tax
benefits significantly changed from the balance at November, 30,
2007. In August 2008, a U.S. income tax examination covering our
fiscal years 2001 through 2004 was completed. Our accrued tax and
interest related to these years was $100.0 million and was previously reported
in long-term income taxes payable. In conjunction with this
resolution, we requested and received approval from the IRS to repatriate
certain foreign earnings in a tax-free manner, which resulted in a reduction of
our long-term deferred income tax liability of $57.8
million. Together, these liabilities on our balance sheet decreased
by $157.8 million. Also in August 2008, we paid $80.0 million in
conjunction with the aforementioned resolution, credited additional
paid-in-capital for $41.3 million due to our use of certain tax attributes
related to stock option deductions, including a portion of certain deferred tax
assets not recorded in our financial statements pursuant to SFAS 123R, and made
other individually immaterial adjustments to our tax balances totaling $15.8
million. A net income statement tax benefit in the third quarter of
fiscal 2008 of $20.7 million resulted. All other movements in
the deferred tax asset and liability accounts are the result of our normal 2008
tax provision.
The gross
liability for unrecognized tax benefits at August 29, 2008 was
$155.8 million, exclusive of interest and penalties. If the total
FIN 48 gross liability for unrecognized tax benefits at August 29, 2008
were recognized in the future, the following amounts, net of an estimated
$18.1 million benefit related to deducting such payments on future tax
returns, would result: $54.7 million of unrecognized tax benefits would
decrease the effective tax rate and $83.0 million would decrease
goodwill.
As of
August 29, 2008, the combined amount of accrued interest and penalties related
to tax positions taken on our tax returns and included in non-current income
taxes payable was approximately $14.3 million.
The timing
of the resolution of income tax examinations is highly uncertain, and the
amounts ultimately paid, if any, upon resolution of the issues raised by the
taxing authorities may differ materially from the amounts accrued for each year.
While it is reasonably possible that some issues in the IRS and other
examinations could be resolved within the next 12 months, based upon the
current facts and circumstances, we cannot estimate the timing of such
resolution or range of potential changes as it relates to the unrecognized tax
benefits that are recorded as part of our financial statements.
NOTE
7. STOCK-BASED COMPENSATION
The
assumptions used to value option grants, restricted stock units and performance
shares during the three and nine months ended August 29, 2008 and August 31,
2007 are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Expected
life (in years)
|
|
|
3.5
– 3.6 |
|
|
|
3.6
– 3.7 |
|
|
|
2.3
– 4.7 |
|
|
|
3.5
– 4.8 |
|
Volatility
|
|
|
34 –
37 |
% |
|
|
30 –
34 |
% |
|
|
32 –
39 |
% |
|
|
30 –
34 |
% |
Risk
free interest rate
|
|
|
2.79
– 3.50 |
% |
|
|
4.34
– 5.14 |
% |
|
|
1.70
– 3.50 |
% |
|
|
4.34
– 5.14 |
% |
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
The
expected term of employee stock purchase plan (“ESPP”) shares is the average of
the remaining purchase periods under each offering period. The assumptions used
to value employee stock purchase rights during the three and nine months ended
August 29, 2008 and August 31, 2007 are as follows:
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Expected
life (in years)
|
|
|
0.5
– 2.0 |
|
|
|
0.5
– 2.0 |
|
|
|
0.5
– 2.0 |
|
|
|
0.5
– 2.0 |
|
Volatility
|
|
|
34 –
36 |
% |
|
|
30 –
31 |
% |
|
|
30 –
36 |
% |
|
|
30 –
33 |
% |
Risk
free interest rate
|
|
|
2.12
– 2.66 |
% |
|
|
4.87
– 4.93 |
% |
|
|
2.12
– 3.29 |
% |
|
|
4.79
– 5.11 |
% |
Summary
of Stock Options
Information
regarding stock options outstanding at August 29, 2008 and August 31, 2007 is
summarized below.
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value*
(millions)
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding
|
|
|
42,070 |
|
|
$ |
29.67 |
|
4.16 years
|
|
$ |
554.5 |
|
Options
vested and expected to vest
|
|
|
39,936 |
|
|
$ |
29.29 |
|
4.07 years
|
|
$ |
541.2 |
|
Options
exercisable
|
|
|
27,252 |
|
|
$ |
25.94 |
|
3.35 years
|
|
$ |
460.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding
|
|
|
54,744 |
|
|
$ |
27.59 |
|
3.93 years
|
|
$ |
830.1 |
|
Options
vested and expected to vest
|
|
|
51,832 |
|
|
$ |
27.10 |
|
3.84 years
|
|
$ |
811.4 |
|
Options
exercisable
|
|
|
34,252 |
|
|
$ |
22.95 |
|
3.06
years
|
|
$ |
678.1 |
|
_________________________________________
*
|
The
intrinsic value is calculated as the difference between the market value
as of the end of the fiscal period and the exercise price of the shares.
As reported by the NASDAQ Global Select Market, the market values as of
August 29, 2008 and August 31, 2007 were $42.83 and $42.75,
respectively.
|
Summary
of Restricted Stock Units
Restricted
stock unit activity for the nine months ended August 29, 2008 and August 31,
2007 is as follows:
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
|
1,701 |
|
|
|
— |
|
Awarded
|
|
|
2,823 |
|
|
|
1,458 |
|
Released
|
|
|
(353
|
) |
|
|
— |
|
Forfeited
|
|
|
(146
|
) |
|
|
(47
|
) |
Ending
balance
|
|
|
4,025 |
|
|
|
1,411 |
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
Information
regarding restricted stock units outstanding at August 29, 2008 and August 31,
2007 is summarized below.
|
|
Number
of
Shares
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value*
(millions)
|
|
2008
|
|
|
|
|
|
|
|
Restricted
stock units outstanding
|
|
|
4,025 |
|
1.91 years
|
|
$ |
172.4 |
|
Restricted
stock units expected to vest
|
|
|
3,083 |
|
1.69 years
|
|
$ |
132.0 |
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Restricted
stock units outstanding
|
|
|
1,411 |
|
2.02 years
|
|
$ |
60.3 |
|
Restricted
stock units expected to vest
|
|
|
981 |
|
1.79 years
|
|
$ |
42.0 |
|
_________________________________________
*
|
The
intrinsic value is calculated as the difference between the market value
as of the end of the fiscal period and the exercise price of the shares.
As reported by the NASDAQ Global Select Market, the market values as of
August 29, 2008 and August 31, 2007 were $42.83 and $42.75,
respectively.
|
Summary
of Performance Shares
Effective
January 24, 2008, the Executive Compensation Committee adopted the 2008
Performance Share Program (the “2008 Program”). The purpose of the 2008 Program
is to align key management and senior leadership with stockholders’ interests
and to retain key employees. The measurement period for the 2008 Program is our
fiscal 2008 year. All members of our executive management and other key
senior leaders are participating in the 2008 Program. Awards granted under the
2008 Program were granted in the form of performance shares pursuant to the
terms of our 2003 Equity Incentive Plan. If pre-determined performance goals are
met, shares of stock will be granted to the recipient, with 25% vesting on the
later of the date of certification of achievement or the first anniversary date
of the grant, and the remaining 75% vesting evenly on the following three annual
anniversary dates of the grant, contingent upon the recipient’s continued
service to Adobe. Participants in the 2008 Program have the ability to receive
up to 200% of the target number of shares originally granted.
The
following table sets forth the summary of performance share activity under our
2008 Program for the nine months ended August 29, 2008.
|
|
Shares
Granted
|
|
|
Maximum
Shares
Eligible
to
Receive
|
|
Beginning
balance
|
|
|
— |
|
|
|
— |
|
Awarded
|
|
|
931 |
|
|
|
1,863 |
|
Forfeited
|
|
|
(74
|
) |
|
|
(149
|
) |
Ending
balance
|
|
|
857 |
|
|
|
1,714 |
|
In the
first quarter of fiscal 2008, the Executive Compensation Committee certified the
actual performance achievement of participants in the 2006 Performance Share
Program (the “2006 Program”) and the 2007 Performance Share Program (the “2007
Program”). Based upon the achievement of goals outlined in the 2006 Program and
2007 Program, participants had the ability to receive up to 150% and 200%,
respectively, of the target number of shares originally granted. Actual
performance resulted in participants achieving approximately 105% of target or
0.3 million shares for the 2006 Program and 200% of target or
0.7 million shares for the 2007 Program. Shares awarded under the 2006
Program vested 100% and were released in the first quarter of fiscal 2008.
Shares under the 2007 Program vested 25% in the first quarter of fiscal 2008,
and the remaining 75% vest evenly on the following three annual anniversary
dates of the grant, contingent upon the recipient’s continued service to
Adobe.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
The
following table sets forth the summary of performance share activity under our
2007 Program, based upon share awards actually achieved, for the nine months
ended August 29, 2008:
|
|
Shares
|
|
Shares
achieved
|
|
|
718 |
|
Released
|
|
|
(205
|
) |
Forfeited
|
|
|
(59
|
) |
Ending
balance
|
|
|
454 |
|
Compensation
Costs
As of
August 29, 2008, there was $301.8 million of unrecognized compensation
cost, adjusted for estimated forfeitures, related to non-vested stock-based
awards which will be recognized over a weighted average period of
2.7 years. Total unrecognized compensation cost will be adjusted for future
changes in estimated forfeitures.
Total
stock-based compensation costs that have been included in our consolidated
statements of income for the three months ended August 29, 2008 and August 31,
2007 are as follows:
|
|
2008
|
|
|
2007
|
|
Income Statement
Classifications
|
|
Option
Grants
and
Stock
Purchase
Rights *
|
|
|
Restricted
Stock
and
Performance
Share
Awards
*
|
|
|
Option
Grants
and
Stock
Purchase
Rights
|
|
|
Restricted
Stock
and
Performance
Share
Awards
|
|
Cost
of revenue—services and support
|
|
$ |
1,189 |
|
|
$ |
230 |
|
|
$ |
1,443 |
|
|
$ |
98 |
|
Research
and development
|
|
|
15,612 |
|
|
|
6,377 |
|
|
|
16,664 |
|
|
|
2,230 |
|
Sales
and marketing
|
|
|
10,576 |
|
|
|
5,370 |
|
|
|
10,414 |
|
|
|
1,330 |
|
General
and administrative
|
|
|
6,113 |
|
|
|
2,793 |
|
|
|
5,857 |
|
|
|
671 |
|
Total
|
|
$ |
33,490 |
|
|
$ |
14,770 |
|
|
$ |
34,378 |
|
|
$ |
4,329 |
|
_________________________________________
*
|
For
the three months ended August 29, 2008, we recorded $2.1 million
associated with cash recoveries of fringe benefit tax from employees in
India.
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
Total
stock-based compensation costs that have been included in our consolidated
statements of income for the nine months ended August 29, 2008 and August 31,
2007 are as follows:
|
|
2008
|
|
|
2007
|
|
Income Statement
Classifications
|
|
Option
Grants
and
Stock
Purchase
Rights *
|
|
|
Restricted
Stock
and
Performance
Share
Awards
*
|
|
|
Option
Grants
and
Stock
Purchase
Rights
|
|
|
Restricted
Stock
and
Performance
Share
Awards
|
|
Cost
of revenue—services and support
|
|
$ |
2,968 |
|
|
$ |
483 |
|
|
$ |
4,059 |
|
|
$ |
225 |
|
Research
and development
|
|
|
43,382 |
|
|
|
16,380 |
|
|
|
44,192 |
|
|
|
5,965 |
|
Sales
and marketing
|
|
|
31,701 |
|
|
|
15,558 |
|
|
|
31,071 |
|
|
|
3,954 |
|
General
and administrative
|
|
|
18,841 |
|
|
|
10,368 |
|
|
|
18,966 |
|
|
|
1,764 |
|
Total
|
|
$ |
96,892 |
|
|
$ |
42,789 |
|
|
$ |
98,288 |
|
|
$ |
11,908 |
|
_________________________________________
*
|
For
the nine months ended August 29, 2008, we recorded $2.1 million associated
with cash recoveries of fringe benefit tax from employees in
India.
|
NOTE
8. EMPLOYEE BENEFIT PLAN
Deferred
Compensation Plan
As of
August 29, 2008 and November 30, 2007, the invested amounts under our
Deferred Compensation Plan totaled $9.2 million and $3.1 million,
respectively, and are recorded as long-term other assets on our balance sheet.
As of August 29, 2008 and November 30, 2007, we recorded $9.2 million and
$3.1 million, respectively, as a long-term liability to recognize
undistributed deferred compensation due to employees.
NOTE
9. RESTRUCTURING AND OTHER CHARGES
Macromedia
Merger Restructuring Charges
We
completed our acquisition of Macromedia on December 3, 2005. We recognized
costs related to the cancellation of certain contracts associated with the
wind-down of subsidiaries and other service contracts held by
Macromedia.
The
following table sets forth a summary of Macromedia restructuring activities
during the nine months ended August 29, 2008:
|
|
November
30, 2007
|
|
|
Cash
Payments
|
|
|
Adjustments
|
|
|
August
29,
2008
|
|
|
Total
Costs
Incurred
To
Date
|
|
|
Total
Costs
Expected
to
be
Incurred
|
|
Termination
benefits
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
26,976 |
|
|
$ |
26,976 |
|
Cost
of closing redundant facilities
|
|
|
16,283 |
|
|
|
(5,287
|
) |
|
|
2,969 |
|
|
|
13,965 |
|
|
|
28,248 |
|
|
|
42,213 |
|
Cost
of contract termination
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,238 |
|
|
|
3,238 |
|
Other
|
|
|
1,435 |
|
|
|
(131
|
) |
|
|
(311
|
) |
|
|
993 |
|
|
|
1,363 |
|
|
|
2,356 |
|
Total
|
|
$ |
17,718 |
|
|
$ |
(5,418 |
) |
|
$ |
2,658 |
|
|
$ |
14,958 |
|
|
$ |
59,825 |
|
|
$ |
74,783 |
|
Included
in the adjustments column is a change to previous estimates of sublease income
of $2.6 million associated with closing redundant facilities as well as the
effect of foreign currency changes. The change to previous estimates of sublease
income was included in net income for the nine months ended August 29, 2008.
Accrued restructuring charges of $15.0 million at August 29, 2008 included $6.9
million recorded in accrued restructuring, current and $8.1 million related to
long-term facilities obligations recorded in accrued restructuring, non-current
in the accompanying condensed consolidated balance sheets. We expect to pay
these liabilities through fiscal 2011. At November 30, 2007, accrued
restructuring charges
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
of
$17.7 million included $3.7 million recorded in accrued restructuring,
current and $14.0 million related to long-term facilities obligations
recorded in accrued restructuring, non-current in the accompanying condensed
consolidated balance sheets.
NOTE
10. STOCKHOLDERS’ EQUITY
Stock
Repurchase Program I
To
facilitate our stock repurchase program, designed to return value to our
stockholders and minimize dilution from stock issuances, we repurchase shares in
the open market and also enter into structured repurchases with third
parties.
During the
nine months ended August 29, 2008 and August 31, 2007, we entered into several
structured repurchase agreements with large financial institutions, whereupon we
provided the financial institutions with prepayments of $325.0 million and
$600.0 million, respectively. We entered into these agreements in order to
take advantage of repurchasing shares at a guaranteed discount to the Volume
Weighted Average Price (“VWAP”) of our common stock over a specified period of
time. We only enter into such transactions when the discount that we receive is
higher than the foregone return on our cash prepayments to the financial
institutions. There were no explicit commissions or fees on these structured
repurchases. Under the terms of the agreements, there is no requirement for the
financial institutions to return any portion of the prepayment to
us.
The
financial institutions agree to deliver shares to us at monthly intervals during
the contract term. The parameters used to calculate the number of shares
deliverable are: the total notional amount of the contract, the number of
trading days in the contract, the number of trading days in the interval and the
average VWAP of our stock during the interval less the agreed upon discount.
During the nine months ended August 29, 2008, we repurchased 19.0 million
shares at an average price of $37.12 through structured repurchase agreements
which included prepayments from fiscal 2007. During the nine months ended August
31, 2007, we repurchased 15.4 million shares at an average price of $39.23
through structured repurchase agreements which included prepayments from fiscal
2006.
During the
nine months ended August 29, 2008, we also repurchased 0.75 million shares at an
average price of $39.19 in open market transactions.
As of
August 29, 2008 and November 30, 2007, the prepayments were classified as
treasury stock on our balance sheet at the payment date, though only shares
physically delivered to us by August 29, 2008 and November 30, 2007 are
excluded from the denominator in the computation of earnings per share. All
outstanding structured repurchase agreements as of August 29, 2008 under this
program expired on or before September 19, 2008. As of August 29, 2008 and
August 31, 2007, approximately $41.0 million and $200.0 million,
respectively, of up-front payments remained under the agreements.
Subsequent
to August 29, 2008, we entered into additional structured stock repurchase
agreements with large financial institutions whereupon we provided the financial
institutions with prepayments of $200.0 million. This amount will be
classified as treasury stock on our balance sheet.
Stock
Repurchase Program II
Under this
stock repurchase program, we had authorization to repurchase 50.0 million
shares of our common stock. During the third quarter of fiscal 2008, the
remaining authorized number of shares were repurchased. From the inception of
the 50.0 million share authorization under this program, we provided prepayments
of $1.9 billion under structured share repurchase agreements to large
financial institutions. During the nine months ended August 29, 2008, we
provided prepayments of $1.0 billion and repurchased 31.9 million shares under
these structured agreements at an average price of $37.15. As of August 31,
2007, we had provided prepayments of $850.0 million and repurchased 12.9 million
shares through structured share repurchase agreements at an average price of
$39.94. Approximately $333.4 million of up-front payments remained as of August
31, 2007.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
During the
nine months ended August 29, 2008, we also repurchased 0.5 million shares at an
average price of $39.79 in open market transactions.
NOTE
11. COMPREHENSIVE INCOME
The
following table sets forth the components of comprehensive income for the three
and nine months ended August 29, 2008 and August 31, 2007:
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
191,608 |
|
|
$ |
205,243 |
|
|
$ |
625,897 |
|
|
$ |
501,599 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized gain (loss) on available-for-sale securities, net of
taxes
|
|
|
(1,998
|
) |
|
|
700 |
|
|
|
(11,001
|
) |
|
|
5,568 |
|
Currency
translation adjustments
|
|
|
(6,358
|
) |
|
|
21 |
|
|
|
(4,284
|
) |
|
|
1,746 |
|
Net
gain (loss) in derivative instruments, net of taxes
|
|
|
10,494 |
|
|
|
(3,776 |
) |
|
|
10,776 |
|
|
|
42 |
|
Other
comprehensive income (loss)
|
|
|
2,138 |
|
|
|
(3,055 |
) |
|
|
(4,509
|
) |
|
|
7,356 |
|
Total
comprehensive income, net of taxes
|
|
$ |
193,746 |
|
|
$ |
202,188 |
|
|
$ |
621,388 |
|
|
$ |
508,955 |
|
NOTE
12. NET INCOME PER SHARE
The following table sets forth the
computation of basic and diluted net income per share for the three and nine
months ended August 29, 2008 and August 31, 2007:
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
191,608 |
|
|
$ |
205,243 |
|
|
$ |
625,897 |
|
|
$ |
501,599 |
|
Shares
used to compute basic net income per share
|
|
|
531,060 |
|
|
|
583,670 |
|
|
|
542,624 |
|
|
|
587,141 |
|
Dilutive
potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
restricted stock and performance share awards
|
|
|
1,063 |
|
|
|
11 |
|
|
|
991 |
|
|
|
13 |
|
Stock
options
|
|
|
9,188 |
|
|
|
13,653 |
|
|
|
9,124 |
|
|
|
15,109 |
|
Shares
used to compute diluted net income per share
|
|
|
541,311 |
|
|
|
597,334 |
|
|
|
552,739 |
|
|
|
602,263 |
|
Basic
net income per share
|
|
$ |
0.36 |
|
|
$ |
0.35 |
|
|
$ |
1.15 |
|
|
$ |
0.85 |
|
Diluted
net income per share
|
|
$ |
0.35 |
|
|
$ |
0.34 |
|
|
$ |
1.13 |
|
|
$ |
0.83 |
|
For the three and nine months ended
August 29, 2008, options to purchase approximately 14.4 million and 15.4 million
shares, respectively, of common stock with exercise prices greater than the
average fair market value of our stock of $42.06 and
$39.21, respectively, were not included in the calculation because the effect would have been anti-dilutive.
Comparatively, for the three and nine months ended August 31, 2007, options to
purchase approximately 11.9 million and 11.0 million shares, respectively, of
common stock with exercise prices greater than the average fair market value of
our stock of $41.26 and $40.93, respectively, were not included in the
calculation because the effect would have been anti-dilutive.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Lease
Commitments
We occupy
three office buildings in San Jose, California where our corporate headquarters
are located. We reference these office buildings as the Almaden Tower and the
East and West Towers.
In August
2004, we extended the lease agreement for our East and West Towers for an
additional five years with an option to extend for an additional five years
solely at our election. In March 2007, the Almaden Tower lease was extended for
five years, with a renewal option for an additional five years solely at our
election. As part of the lease extensions, we
purchased
the lease receivable from the lessor of the East and West Towers for
$126.8 million and a portion of the lease receivable from the lessor of the
Almaden Tower for $80.4 million, both of which are recorded as investments
in lease receivables on our consolidated balance sheet. This purchase may be
credited against the residual value guarantee if we purchase the properties or
will be repaid from the sale proceeds if the properties are sold to third
parties. Under the agreement for the East and West Towers and the agreement for
the Almaden Tower, we have the option to purchase the buildings at any time
during the lease term for approximately $143.2 million and
$103.6 million, respectively. The residual value guarantees under the East
and West Towers and the Almaden Tower obligations are $126.8 million and
$89.4 million, respectively.
These two
leases are both subject to standard covenants including certain financial ratios
that are reported to the lessors quarterly. As of August 29, 2008, we were in
compliance with all covenants. In the case of a default, the lessor may demand
we purchase the buildings for an amount equal to the lease balance, or require
that we remarket or relinquish the buildings. Both leases qualify for operating
lease accounting treatment under SFAS No. 13, “Accounting for Leases”, and,
as such, the buildings and the related obligations are not included on our
consolidated balance sheet. We utilized this type of financing in order to
access bank-provided funding at the most favorable rates and to provide the
lowest total cost of occupancy for the headquarter buildings. At the end of the
lease term, we can extend the lease for an additional five year term, purchase
the buildings for the lease balance, remarket or relinquish the buildings. If we
choose to remarket or are required to do so upon relinquishing the buildings, we
are bound to arrange the sale of the buildings to an unrelated party and will be
required to pay the lessor any shortfall between the net remarketing proceeds
and the lease balance, up to the residual value guarantee amount.
Contractual
Commitments
As
discussed in Note 4, during the third quarter of fiscal 2008, we entered into an
agreement to license certain technology. This agreement also provides us the
ability to acquire rights to intellectual property in the future. Minimum fees
associated with this arrangement range between approximately $1.0 million and
$1.5 million per year through May 2028 for minimum fees in the aggregate, of
approximately $25.0 million.
Guarantees
The lease
agreements for our corporate headquarters provide for residual value guarantees
as noted above. Under FIN 45, the fair value of a residual value guarantee
in lease agreements entered into after December 31, 2002 must be recognized
as a liability on our consolidated balance sheet. As such, we recognized
$5.2 million and $3.0 million in liabilities, related to the East and
West Towers and Almaden Tower leases, respectively. These liabilities are
recorded in other long-term liabilities with the offsetting entry recorded as
prepaid rent in other assets. The balance will be amortized to the income
statement over the life of the leases. As of August 29, 2008 and
November 30, 2007, the unamortized portion of the fair value of the
residual value guarantees, for both leases, remaining in other long-term
liabilities and prepaid rent was $3.0 million and $4.2 million,
respectively.
Royalties
We have
certain royalty commitments associated with the shipment and licensing of
certain products. Royalty expense is generally based on a dollar amount per unit
shipped or a percentage of the underlying revenue.
Indemnifications
In the normal course of business, we
provide indemnifications of varying scope to customers against claims of
intellectual property infringement made by third parties arising from the use of
our products. Historically, costs related to these indemnification provisions
have not been significant and we are unable to estimate the maximum potential
impact of these indemnification provisions on our future results of
operations.
To the
extent permitted under Delaware law, we have agreements whereby we indemnify our
directors and officers for certain events or occurrences while the director or
officer is, or was serving, at our request in such capacity. The indemnification
period covers all pertinent events and occurrences during the director’s or
officer’s lifetime. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is
unlimited;
however,
we have director and officer insurance coverage that reduces our exposure and
enables us to recover a portion of any future amounts paid. We believe the
estimated fair value of these indemnification agreements in excess of applicable
insurance coverage is minimal.
As part of
our limited partnership interest in Adobe Ventures, we have provided a general
indemnification to Granite Ventures, an independent venture capital firm and
sole general partner of Adobe Ventures, for certain events or occurrences while
Granite Ventures is, or was serving, at our request in such capacity provided
that Granite Ventures acts in good faith on behalf of the partnership. We are
unable to develop an estimate of the maximum potential amount of future payments
that could potentially result from any hypothetical future claim, but believe
the risk of having to make any payments under this general indemnification to be
remote.
Legal
Proceedings
In
connection with our anti-piracy efforts, conducted both internally and through
organizations such as the Business Software Alliance, from time to time we
undertake litigation against alleged copyright infringers. Such lawsuits may
lead to counter-claims alleging improper use of litigation or violation of other
local laws. We believe we have valid defenses with respect to such
counter-claims; however, it is possible that our consolidated financial
position, cash flows or results of operations could be affected in any
particular period by the resolution of one or more of these
counter-claims.
From time
to time, Adobe is subject to legal proceedings, claims and investigations in the
ordinary course of business, including claims of alleged infringement of
third-party patents and other intellectual property rights, commercial,
employment and other matters. In accordance with GAAP, Adobe makes a provision
for a liability when it is both probable that a liability has been incurred and
the amount of the loss can be reasonably estimated. These provisions are
reviewed at least quarterly and adjusted to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel, and other information and events
pertaining to a particular case. Litigation is inherently unpredictable.
However, we believe that we have valid defenses with respect to the legal
matters pending against Adobe. It is possible, nevertheless, that our
consolidated financial position, cash flows or results of operations could be
negatively affected by an unfavorable resolution of one or more of such
proceedings, claims or investigations.
NOTE
14. CREDIT AGREEMENT
In August
2007, we entered into an Amendment to our Credit Agreement dated February 2007
(the “Amendment”), which increased the total senior unsecured revolving facility
from $500.0 million to $1.0 billion. The Amendment also permits us to
request one-year extensions effective on each anniversary of the closing date of
the original agreement, subject to the majority consent of the lenders. We also
retain an option to request an additional $500.0 million in commitments,
for a maximum aggregate facility of $1.5 billion.
In
February 2008, we entered into a Second Amendment to the Credit Agreement dated
February 26, 2008, which extended the maturity date of the facility by one
year to February 16, 2013. The facility would terminate at this date if no
additional extensions have been requested and granted. All other terms and
conditions remain the same.
The
facility contains a financial covenant requiring us not to exceed a certain
maximum leverage ratio. At the Company’s option, borrowings under the facility
accrue interest based on either the London interbank offered rate (“LIBOR”) for
one, two, three or six months, or longer periods with bank consent, plus a
margin according to a pricing grid tied to this financial covenant, or a base
rate. The margin is set at rates between 0.20% and 0.475%. Commitment fees are
payable on the facility at rates between 0.05% and 0.15% per year based on the
same pricing grid. The facility is available to provide loans to us and certain
of our subsidiaries for general corporate purposes. During the nine months ended
August 29, 2008, we borrowed $450.0 million and made repayments of $100.0
million under this facility. As of August 29, 2008 and November 30, 2007,
the amount outstanding under the credit facility was $350.0 million and
zero, respectively, which is included in long-term liabilities on our condensed
consolidated balance sheet. As of August 29, 2008, we were in compliance with
all of the covenants.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
NOTE
15. NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense) for the
three and nine months ended August 29, 2008 and August 31, 2007 includes the
following:
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
Interest
and other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
14,407 |
|
|
$ |
22,780 |
|
|
$ |
45,110 |
|
|
$ |
71,268 |
|
Foreign
exchange gains (losses)
|
|
|
(5,967
|
) |
|
|
99 |
|
|
|
(11,901
|
) |
|
|
(4,172 |
) |
Fixed
income investment gains (losses)
|
|
|
44 |
|
|
|
(249
|
) |
|
|
(156
|
) |
|
|
(2,636 |
) |
Other
|
|
|
854 |
|
|
|
103 |
|
|
|
1,725 |
|
|
|
1,406 |
|
Interest
and other income, net
|
|
$ |
9,338 |
|
|
$ |
22,733 |
|
|
$ |
34,778 |
|
|
$ |
65,866 |
|
Interest
expense
|
|
$ |
(2,390 |
) |
|
$ |
(69 |
) |
|
$ |
(8,027 |
) |
|
$ |
(175 |
) |
Investment
gains (losses), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
investment gains
|
|
$ |
2,861 |
|
|
$ |
198 |
|
|
$ |
18,298 |
|
|
$ |
9,308 |
|
Unrealized
investment gains
|
|
|
2,882 |
|
|
|
— |
|
|
|
7,840 |
|
|
|
5,091 |
|
Realized
investment losses
|
|
|
(353
|
) |
|
|
(624
|
) |
|
|
(989
|
) |
|
|
(1,784 |
) |
Unrealized
investment losses
|
|
|
(3,293
|
) |
|
|
(268
|
) |
|
|
(4,814
|
) |
|
|
(3,546 |
) |
Investment
gains (losses), net
|
|
$ |
2,097 |
|
|
$ |
(694 |
) |
|
$ |
20,335 |
|
|
$ |
9,069 |
|
Total
non-operating income, net
|
|
$ |
9,045 |
|
|
$ |
21,970 |
|
|
$ |
47,086 |
|
|
$ |
74,760 |
|
NOTE
16. INDUSTRY SEGMENTS
We have
the following segments: Creative Solutions, Knowledge Worker Solutions,
Enterprise Solutions, Mobile and Device Solutions, Platform and Print
Publishing. Our Creative Solutions segment focuses on delivering a complete
professional line of integrated tools for a full range of creative and developer
tasks to an extended set of customers. The Knowledge Worker Solutions segment
focuses on the needs of knowledge worker customers, providing essential
applications and services to help them share information and collaborate. This
segment contains revenue generated by Acrobat Connect and our Acrobat family of
products. Our Enterprise Solutions segment provides server-based enterprise
interaction solutions that automate people-centric processes and contains
revenue generated by our LiveCycle line of products. The Mobile and Device
Solutions segment provides solutions that deliver compelling experiences through
rich content, user interfaces and data services on mobile and non-PC devices
such as cellular phones, consumer devices and Internet connected hand-held
devices. The Platform segment provides developer solutions and technologies,
including Adobe Flash Player, Adobe AIR and Flex Builder which are used to build
rich application experiences. Finally, the Print Publishing segment addresses
market opportunities ranging from the diverse publishing needs of technical and
business publishing, to our legacy type and original equipment manufacturer
(“OEM”) printing businesses.
Effective
in the first quarter of fiscal 2008, to better align our engineering and
marketing efforts, we merged our Knowledge Worker Solutions segment with our
Enterprise Solutions segment (formerly “Enterprise and Developer Solutions”) to
form our new Business Productivity Solutions business unit. However, under the
requirements of SFAS No. 131, (“SFAS 131”), “Disclosures about
Segments of an Enterprise and Related Information”, Knowledge Worker Solutions
and Enterprise Solutions are separate reportable segments. In addition, we moved
responsibility for Flex Builder, Flex SDK and our ColdFusion product line to our
Platform segment from our Enterprise Solutions segment. The prior year
information in the table below has also been updated to reflect this product
movement.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In
thousands, except share and per share data)
(Unaudited)
Our chief
operating decision maker reviews revenue and gross margin information for each
of our operating segments. Operating expenses are not reviewed on a segment by
segment basis. In addition, with the exception of goodwill and intangible
assets, we do not identify or allocate our assets by the operating
segments.
|
|
Creative
Solutions
|
|
|
Knowledge
Worker
Solutions
|
|
|
Enterprise
Solutions
|
|
|
Mobile
and
Device
Solutions
|
|
|
Platform
|
|
|
Print
Publishing
|
|
|
Total
|
|
Three
months ended August 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
493,615 |
|
|
$ |
217,988 |
|
|
$ |
65,491 |
|
|
$ |
27,495 |
|
|
$ |
31,582 |
|
|
$ |
51,086 |
|
|
$ |
887,257 |
|
Cost
of revenue
|
|
|
53,716 |
|
|
|
15,762 |
|
|
|
20,727 |
|
|
|
6,744 |
|
|
|
7,393 |
|
|
|
6,509 |
|
|
|
110,851 |
|
Gross
profit
|
|
$ |
439,899 |
|
|
$ |
202,226 |
|
|
$ |
44,764 |
|
|
$ |
20,751 |
|
|
$ |
24,189 |
|
|
$ |
44,577 |
|
|
$ |
776,406 |
|
Gross
profit as a percentage of revenue
|
|
|
89 |
% |
|
|
93 |
% |
|
|
68 |
% |
|
|
75 |
% |
|
|
77 |
% |
|
|
87 |
% |
|
|
88 |
% |
Three
months ended August 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
545,453 |
|
|
$ |
176,764 |
|
|
$ |
50,628 |
|
|
$ |
12,983 |
|
|
$ |
18,693 |
|
|
$ |
47,165 |
|
|
$ |
851,686 |
|
Cost
of revenue
|
|
|
40,114 |
|
|
|
15,969 |
|
|
|
18,238 |
|
|
|
9,521 |
|
|
|
3,240 |
|
|
|
5,539 |
|
|
|
92,621 |
|
Gross
profit
|
|
$ |
505,339 |
|
|
$ |
160,795 |
|
|
$ |
32,390 |
|
|
$ |
3,462 |
|
|
$ |
15,453 |
|
|
$ |
41,626 |
|
|
$ |
759,065 |
|
Gross
profit as a percentage of revenue
|
|
|
93 |
% |
|
|
91 |
% |
|
|
64 |
% |
|
|
27 |
% |
|
|
83 |
% |
|
|
88 |
% |
|
|
89 |
% |
|
|
Creative
Solutions
|
|
|
Knowledge
Worker
Solutions
|
|
|
Enterprise
Solutions
|
|
|
Mobile
and
Device
Solutions
|
|
|
Platform
|
|
|
Print
Publishing
|
|
|
Total
|
|
Nine
months ended August 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,564,335 |
|
|
$ |
611,925 |
|
|
$ |
174,011 |
|
|
$ |
64,919 |
|
|
$ |
90,117 |
|
|
$ |
159,281 |
|
|
$ |
2,664,588 |
|
Cost
of revenue
|
|
|
124,024 |
|
|
|
39,476 |
|
|
|
56,308 |
|
|
|
19,525 |
|
|
|
15,821 |
|
|
|
21,038 |
|
|
|
276,192 |
|
Gross
profit
|
|
$ |
1,440,311 |
|
|
$ |
572,449 |
|
|
$ |
117,703 |
|
|
$ |
45,394 |
|
|
$ |
74,296 |
|
|
$ |
138,243 |
|
|
$ |
2,388,396 |
|
Gross
profit as a percentage of revenue
|
|
|
92 |
% |
|
|
94 |
% |
|
|
68 |
% |
|
|
70 |
% |
|
|
82 |
% |
|
|
87 |
% |
|
|
90 |
% |
Nine
months ended August 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,328,463 |
|
|
$ |
536,382 |
|
|
$ |
137,044 |
|
|
$ |
38,999 |
|
|
$ |
53,359 |
|
|
$ |
152,423 |
|
|
$ |
2,246,670 |
|
Cost
of revenue
|
|
|
103,023 |
|
|
|
47,473 |
|
|
|
53,237 |
|
|
|
23,206 |
|
|
|
9,846 |
|
|
|
19,313 |
|
|
|
256,098 |
|
Gross
profit
|
|
$ |
1,225,440 |
|
|
$ |
488,909 |
|
|
$ |
83,807 |
|
|
$ |
15,793 |
|
|
$ |
43,513 |
|
|
$ |
133,110 |
|
|
$ |
1,990,572 |
|
Gross
profit as a percentage of revenue
|
|
|
92 |
% |
|
|
91 |
% |
|
|
61 |
% |
|
|
40 |
% |
|
|
82 |
% |
|
|
87 |
% |
|
|
89 |
% |
NOTE
17. SUBSEQUENT EVENTS
Stock
Repurchase Programs
Subsequent
to August 29, 2008, as part of Stock Repurchase Program I, we entered into
additional structured stock repurchase agreements with large financial
institutions whereupon we provided the financial institutions with prepayments
of $200.0 million. This amount will be classified as treasury stock on our
balance sheet. See
Note 10 for further discussion of our stock repurchase
programs.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion (unaudited and presented in millions, except share and per
share amounts) should be read in conjunction with the condensed consolidated
financial statements and notes thereto.
In
addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements, including statements regarding product
plans, future growth and market opportunities, which involve risks and
uncertainties that could cause actual results to differ materially from these
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in the section
entitled “Risk Factors” in Part II, Item 1A. You should carefully
review the risks described herein and in other documents we file from time to
time with the SEC, including the Annual Report on Form 10-K for fiscal 2007
and the other Quarterly Reports on Form 10-Q filed by us in fiscal 2008.
When used in this report, the words “expects”, “could”, “would”, “may”,
“anticipates”, “intends”, “plans”, “believes”, “seeks”, “targets”,
“estimates”, “looks for”, “looks to” and similar expressions, as well as
statements regarding our focus for the future, are generally intended to
identify forward-looking statements. You should not place undue reliance on
these forward-looking statements, which speak only as of the date of this
Quarterly Report on Form 10-Q. We undertake no obligation to publicly
release any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document.
BUSINESS
OVERVIEW
Founded in
1982, Adobe Systems Incorporated is one of the largest and most diversified
software companies in the world. We offer a line of creative, business and
mobile software and services used by creative professionals, designers,
knowledge workers, high-end consumers, OEM partners, developers and enterprises
for creating, managing, delivering and engaging with compelling content and
experiences across multiple operating systems, devices and media. We distribute
our products through a network of distributors and dealers, value-added
resellers (“VARs”), systems integrators, independent software vendors (“ISVs”)
and OEMs, direct to end users and through our Web site at www.adobe.com. We also
license our technology to hardware manufacturers, software developers and
service providers, and we offer integrated software solutions to businesses of
all sizes. We have operations in the Americas, Europe, the Middle East and
Africa (“EMEA”) and Asia. Our software runs on personal computers with Microsoft
Windows, Apple OS, Linux, UNIX and various non-PC platforms, depending on the
product.
We
maintain executive offices and principal facilities at 345 Park Avenue, San
Jose, California 95110-2704. Our telephone number is 408-536-6000. We maintain a
Web site at www.adobe.com. Investors can obtain copies of our SEC filings from
this site free of charge, as well as from the SEC Web site at
www.sec.gov.
OPERATIONS
OVERVIEW
Effective
in the first quarter of fiscal 2008, to better align our engineering and
marketing efforts, we merged our Knowledge Worker Solutions segment with our
Enterprise Solutions segment to form our new Business Productivity Solutions
business unit. However, under the requirements of SFAS 131, Knowledge
Worker Solutions and Enterprise Solutions are separate reportable segments. In
addition, we moved responsibility for Flex Builder, Flex SDK and our ColdFusion
product line to our Platform segment from our Enterprise Solutions segment. The
prior year information has been updated to reflect this product
movement.
During the
third quarter of fiscal 2008, we continued to focus on driving revenue growth
and increasing market share of our products through the continued delivery of
comprehensive software and technology solutions that meet the evolving needs of
our customers.
In our
Knowledge Worker Solutions segment, we achieved a fourth consecutive quarter of
record revenue with our Acrobat family of products in the third quarter of
fiscal 2008. Helping drive this achievement was the successful launch of version
9 of our Acrobat family of products in major languages across the
world.
In our
Enterprise Solutions segment, we also achieved record revenue and 29%
year-over-year growth as we continued to focus on delivering innovative products
and solutions for our enterprise customers.
In our
Creative Solutions segment, revenue declined year-over-year due to the timing of
the release of new product versions. In the third quarter of fiscal
2007, we completed the release of many new versions of our Creative Suite 3
(“CS3”)
family of
products. In the third quarter of fiscal 2008, we began preparing for
the next launch of our creative professional products, including the pre-release
of newer versions of some of these products. We achieved solid
results with our hobbyist
products,
Photoshop Elements and Premiere Elements, and we also had strong results with
our Scene7 business in the third quarter of fiscal 2008.
Our Mobile
and Device Solutions segment achieved record revenue in the third quarter of
fiscal 2008 due to the success we have had targeting mobile operators, handset
manufacturers and consumer electronic device manufactures with our Flash Lite
and Flash Cast technologies. On May 1, 2008, we announced the Open
Screen Project. The project aims to enable a consistent runtime
environment that will remove barriers for developers and designers as they
publish content and applications across desktops and consumer devices, including
phones, mobile internet devices (“MIDs”) and set top boxes. As part of the
project, we will be removing some restrictions on the use of some of our
technology specifications and publishing several technology protocols. We
will also be removing the license fees on the next major releases of Adobe Flash
Player and Adobe AIR for devices. Accordingly, we expect revenue from
Mobile and Device Solutions to decrease in the fourth quarter of fiscal 2008 as
well as to continue to decrease following the next major release of these
products scheduled for fiscal 2009. We would expect this decrease to
be offset in time by an increased demand for tooling products, server
technologies, hosted services and applications.
Our
Platform business performed strongly, resulting in significant year-over-year
revenue growth and our Print Publishing business segment also achieved modest
year-over-year revenue growth.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
In
preparing our condensed consolidated financial statements in accordance with
GAAP and pursuant to the rules and regulations of the SEC, we make assumptions,
judgments and estimates that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosures of contingent assets and
liabilities. We base our assumptions, judgments and estimates on historical
experience and various other factors that we believe to be reasonable under the
circumstances. Actual results could differ materially from these estimates under
different assumptions or conditions. On a regular basis, we evaluate our
assumptions, judgments and estimates. We also discuss our critical accounting
policies and estimates with the Audit Committee of the Board of
Directors.
We believe
that the assumptions, judgments and estimates involved in the accounting for
revenue recognition, stock-based compensation, goodwill impairment and income
taxes have the greatest potential impact on our condensed consolidated financial
statements. These areas are key components of our results of operations and are
based on complex rules which require us to make judgments and estimates, so we
consider these to be our critical accounting policies. Historically, our
assumptions, judgments and estimates relative to our critical accounting
policies have not differed materially from actual results.
With the
exception of our adoption of FIN 48, there have been no other significant
changes in our critical accounting policies and estimates during the nine months
ended August 29, 2008 as compared to the critical accounting policies and
estimates disclosed in Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended November 30, 2007.
Revenue
for the Three and Nine Months Ended August 29, 2008 and August 31,
2007
|
|
Three Months
|
|
|
Percent
|
|
|
Nine Months
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Product
|
|
$ |
838.9 |
|
|
$ |
813.4 |
|
|
|
3
|
% |
|
$ |
2,532.1 |
|
|
$ |
2,147.2 |
|
|
|
18
|
% |
Percentage
of total revenue
|
|
|
95
|
% |
|
|
96
|
% |
|
|
|
|
|
|
95
|
% |
|
|
96
|
% |
|
|
|
|
Services
and support
|
|
|
48.4 |
|
|
|
38.3 |
|
|
|
26
|
% |
|
|
132.5 |
|
|
|
99.5 |
|
|
|
33
|
% |
Percentage
of total revenue
|
|
|
5
|
% |
|
|
4
|
% |
|
|
|
|
|
|
5
|
% |
|
|
4
|
% |
|
|
|
|
Total
revenue
|
|
$ |
887.3 |
|
|
$ |
851.7 |
|
|
|
4
|
% |
|
$ |
2,664.6 |
|
|
$ |
2,246.7 |
|
|
|
19
|
% |
As
described in Note 16 of our Notes to Condensed Consolidated Financial
Statements, we have the following segments: Creative Solutions, Knowledge Worker
Solutions, Enterprise Solutions, Mobile and Device Solutions, Platform and Print
Publishing products.
Our
services and support revenue is comprised of consulting, training, and
maintenance and support, primarily related to the licensing of our enterprise,
developer and platform products. Our support revenue also includes technical
support and developer support to partners and developer organizations related to
our desktop products. Our maintenance and support offerings which entitle
customers to receive product upgrades and enhancements or technical support,
depending on the offering, are recognized ratably over the term of the
arrangement.
Segment
Information
|
|
Three Months
|
|
|
Percent
|
|
|
Nine Months
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Creative
Solutions
|
|
$ |
493.6 |
|
|
$ |
545.5 |
|
|
|
(10
|
)% |
|
$ |
1,564.3 |
|
|
$ |
1,328.5 |
|
|
|
18
|
% |
Percentage
of total revenue
|
|
|
56
|
% |
|
|
64
|
% |
|
|
|
|
|
|
59
|
% |
|
|
59
|
% |
|
|
|
|
Knowledge
Worker Solutions
|
|
|
218.0 |
|
|
|
176.8 |
|
|
|
23
|
% |
|
|
611.9 |
|
|
|
536.4 |
|
|
|
14
|
% |
Percentage
of total revenue
|
|
|
25
|
% |
|
|
21
|
% |
|
|
|
|
|
|
23
|
% |
|
|
24
|
% |
|
|
|
|
Enterprise
Solutions
|
|
|
65.5 |
|
|
|
50.6 |
|
|
|
29
|
% |
|
|
174.1 |
|
|
|
137.1 |
|
|
|
27
|
% |
Percentage
of total revenue
|
|
|
7
|
% |
|
|
6
|
% |
|
|
|
|
|
|
7
|
% |
|
|
6
|
% |
|
|
|
|
Mobile
and Device Solutions
|
|
|
27.5 |
|
|
|
13.0 |
|
|
|
112
|
% |
|
|
64.9 |
|
|
|
39.0 |
|
|
|
66
|
% |
Percentage
of total revenue
|
|
|
3
|
% |
|
|
1
|
% |
|
|
|
|
|
|
2
|
% |
|
|
2
|
% |
|
|
|
|
Platform
|
|
|
31.6 |
|
|
|
18.7 |
|
|
|
69
|
% |
|
|
90.1 |
|
|
|
53.4 |
|
|
|
69
|
% |
Percentage
of total revenue
|
|
|
3
|
% |
|
|
2
|
% |
|
|
|
|
|
|
3
|
% |
|
|
2
|
% |
|
|
|
|
Print
Publishing
|
|
|
51.1 |
|
|
|
47.1 |
|
|
|
8
|
% |
|
|
159.3 |
|
|
|
152.3 |
|
|
|
5
|
% |
Percentage
of total revenue
|
|
|
6
|
% |
|
|
6
|
% |
|
|
|
|
|
|
6
|
% |
|
|
7
|
% |
|
|
|
|
Total
revenue
|
|
$ |
887.3 |
|
|
$ |
851.7 |
|
|
|
4
|
% |
|
$ |
2,664.6 |
|
|
$ |
2,246.7 |
|
|
|
19
|
% |
Revenue from Creative Solutions
decreased $51.9 million during the three months ended August 29, 2008 as
compared to the three months ended August 31, 2007. This
decrease was driven largely by a 15% decline in Creative Suites related revenue,
offset in part by an increase of approximately 10% in Photoshop revenue. Revenue
from Creative Solutions increased $235.8 million during the nine months ended
August 29, 2008 as compared to the nine months ended August 31,
2007. This increase resulted from a 15% increase in Creative Suites
revenue and a 23% increase in Photoshop revenue.
The
year-over-year decrease in Creative Solutions revenue in the third quarter of
fiscal 2008 was due primarily to the timing of the release of new product
versions. The year-over-year increase in Creative Solutions revenue
during the first three quarters of fiscal 2008 was due to an increase in certain
unit average selling prices offset by a slight decrease in the number of units
sold as compared to the first three quarters of fiscal 2007.
Revenue
from Knowledge Worker Solutions increased $41.2 million and $75.5 million during
the three and nine months ended August 29, 2008, respectively, compared to the
three and nine months ended August 31, 2007, primarily due to the successful
launch of our Acrobat 9 family of products in the third quarter of fiscal
2008. Additionally, revenue increased due to an increase in volume
licensing by enterprise customers as well as increases in certain unit average
selling prices and in the number of units sold for the three and nine months
ended August 29, 2008 as compared to the three and nine months ended August 31,
2007.
Revenue
from Enterprise Solutions increased $14.9 million and $37.0 million during the
three and nine months ended August 29, 2008, respectively, compared to the three
and nine months ended August 31, 2007. The increase was primarily due to a
larger number of enterprise solution transactions at a higher average
transaction size during both the three and nine months ended August 29, 2008
compared with the corresponding periods is in the prior fiscal
year.
Revenue
from Mobile and Device Solutions increased $14.5 million and $25.9 million
during the three and nine months ended August 29, 2008, respectively, compared
to the three and nine months ended August 31, 2007. The increase was primarily
due to increased revenue from Flash Lite OEM licensing due to continued strong
adoption of Flash enabled devices. On May 1, 2008, we announced the Open
Screen Project. The project aims to enable a consistent runtime
environment that will remove barriers for developers and designers as they
publish content and applications across desktops and consumer devices, including
phones, MIDs and set top boxes. As part of the project, we will be
removing some restrictions on the use of some of our technology specifications
and publishing several technology protocols. We will also be removing the
license fees on the next major releases of Adobe Flash Player and Adobe AIR for
devices. Accordingly, we expect revenue from Mobile and Device Solutions
to decrease in the fourth quarter of fiscal 2008 as well as to continue to
decrease following the next major release of these products scheduled for fiscal
2009. We would expect this decrease to be offset in time by an increased
demand for tooling products, server technologies, services and
applications.
Revenue
from Platform increased $12.9 million and $36.7 million during the three and
nine months ended August 29, 2008, respectively, compared to the three and nine
months ended August 31, 2007. The increase was primarily due to increased
revenue from our Flex Builder, Flash Player and ColdFusion
products.
Revenue
from Print Publishing increased $4.0 million and $7.0 million during the three
and nine months ended August 29, 2008, respectively, compared to the three and
nine months ended August 31, 2007. The increase resulted principally from a
slight increase in revenue associated with our legacy products.
Geographical
Information
|
|
Three Months
|
|
|
Percent
|
|
|
Nine Months
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Americas
|
|
$ |
429.6 |
|
|
$ |
400.7 |
|
|
|
7
|
% |
|
$ |
1,210.3 |
|
|
$ |
1,082.5 |
|
|
|
12
|
% |
Percentage
of total revenue
|
|
|
49
|
% |
|
|
47
|
% |
|
|
|
|
|
|
46
|
% |
|
|
48
|
% |
|
|
|
|
EMEA
|
|
|
296.0 |
|
|
|
281.5 |
|
|
|
5
|
% |
|
|
914.5 |
|
|
|
708.1 |
|
|
|
29
|
% |
Percentage
of total revenue
|
|
|
33
|
% |
|
|
33
|
% |
|
|
|
|
|
|
34
|
% |
|
|
32
|
% |
|
|
|
|
Asia
|
|
|
161.7 |
|
|
|
169.5 |
|
|
|
(5
|
)% |
|
|
539.8 |
|
|
|
456.1 |
|
|
|
18
|
% |
Percentage
of total revenue
|
|
|
18
|
% |
|
|
20
|
% |
|
|
|
|
|
|
20
|
% |
|
|
20
|
% |
|
|
|
|
Total
revenue
|
|
$ |
887.3 |
|
|
$ |
851.7 |
|
|
|
4
|
% |
|
$ |
2,664.6 |
|
|
$ |
2,246.7 |
|
|
|
19
|
% |
Overall
revenue for the three and nine months ended August 29, 2008 increased when
compared to the three and nine months ended August 31, 2007 primarily due to
continued adoption of our CS3 and LiveCycle families of products and continued
licensing of our Acrobat family of products – including the launch of our new
Acrobat 9 products in the third quarter of fiscal 2008. Licensing of our Mobile
and Device products and Platform products also contributed to the
increase.
Revenue in
the Americas increased $28.9 million and $127.8 million during the three and
nine months ended August 29, 2008, compared to the three months and nine months
ended August 31, 2007, due to solid demand, as well as strong licensing of our
products in the education market and the Acrobat 9 product launch in the third
quarter of fiscal 2008.
Revenue in
EMEA increased $14.5 million and $206.4 million during the three and nine months
ended August 29, 2008, respectively, compared to the three and nine months ended
August 31, 2007. Additionally, revenue in EMEA measured in U.S. dollars
increased approximately $28.7 million and $83.2 million during the three and
nine months ended August 29, 2008, respectively, over the same reporting periods
last year. Fluctuations
in EMEA revenue during the three and nine months ended August 29, 2008 as
compared to the same periods in fiscal 2007, were primarily attributable to
favorable foreign exchange, a decline in CS revenue due primarily to the timing
of the release of new product versions with our CS family of products and normal
seasonal weakness in Europe during the third quarter of fiscal
2008.
Revenue in
Asia decreased $7.8 million during the three months ended August 29, 2008
compared to the three months ended August 31, 2007, due primarily to the timing
of the release of new product versions with our CS family of products and, to a
lesser extent, normal seasonal weakness in Asia during the third quarter of
fiscal 2008. Revenue in Asia increased $83.7 million during the nine
months ended August 29, 2008 compared to the nine months ended August 31,
2007. The increase primarily resulted from licensing of our CS family
of products, our LiveCycle products, and our Platform products. Additionally,
revenue in Asia measured in U.S. dollars increased approximately
$10.1 million and $32.0 million during the three and nine months ended
August 29, 2008, respectively, over the same reporting periods last
year.
Product
Backlog
With
regard to our product backlog, the actual amount of backlog at any particular
time may not be a meaningful indicator of future business prospects. Backlog is
comprised of unfulfilled orders, excluding those associated with new product
releases, those pending credit review and those not shipped due to the
application of our global inventory policy. We had minimal backlog at
the end of the third quarter of fiscal 2008. The comparable backlog at the end
of the second quarter of fiscal 2008 was approximately 4% of second quarter
fiscal 2008 revenue.
Cost
of Revenue for the Three and Nine Months Ended August 29, 2008 and August 31,
2007
|
|
Three Months
|
|
|
Percent
|
|
|
Nine Months
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Product
|
|
$ |
84.7 |
|
|
$ |
69.0 |
|
|
|
23
|
% |
|
$ |
202.7 |
|
|
$ |
193.5 |
|
|
|
5
|
% |
Percentage
of total revenue
|
|
|
10
|
% |
|
|
8
|
% |
|
|
|
|
|
|
8
|
% |
|
|
9
|
% |
|
|
|
|
Services
and support
|
|
|
26.2 |
|
|
|
23.6 |
|
|
|
11
|
% |
|
|
73.5 |
|
|
|
62.6 |
|
|
|
17
|
% |
Percentage
of total revenue
|
|
|
3
|
% |
|
|
3
|
% |
|
|
|
|
|
|
3
|
% |
|
|
3
|
% |
|
|
|
|
Total
cost of revenue
|
|
$ |
110.9 |
|
|
$ |
92.6 |
|
|
|
20
|
% |
|
$ |
276.2 |
|
|
$ |
256.1 |
|
|
|
8
|
% |
Product
Cost of
product revenue includes product packaging, third-party royalties, excess and
obsolete inventory, amortization related to localization costs and acquired
rights to use technology and the costs associated with the manufacturing of our
products.
Cost of
product revenue increased (decreased) due to the
following:
|
|
% Change
2007 to 2008
QTD
|
|
% Change
2007 to 2008
YTD
|
Amortization
of acquired rights to use technology
|
|
|
42
|
%
|
|
|
8
|
%
|
Royalties
for licensed technologies
|
|
|
2
|
|
|
|
4
|
|
Amortization
of purchased intangibles
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Localization
costs related to our product launches
|
|
|
(14
|
)
|
|
|
2
|
|
Various
individually insignificant items
|
|
|
3
|
|
|
|
1
|
|
Total
change
|
|
|
23
|
%
|
|
|
5
|
%
|
Amortization
of acquired rights to use technology increased primarily due to the fact that we
entered into certain technology licensing arrangements totaling $100.0 million
during the third quarter of fiscal 2008. An estimated $56.0 million of this cost
is related to future licensing rights and has been capitalized and will be
amortized on a straight-line basis over the estimated useful lives up to nine
years. Of the remaining costs, we estimated that approximately $27.2 million was
related to historical use of licensing rights which was expensed as cost of
sales, and the residual of $16.8 million was expensed as general and
administrative costs. In connection with these licensing arrangements, we
have the ability to acquire additional rights to use technology in the
future. See Note 13 of
our Notes to Condensed Consolidated Financial Statements for further information
regarding our contractual commitments.
Amortization
expense decreased during the three and nine months ended August 29, 2008 as
compared to the three and nine months ended August 31, 2007, due to a decrease
in amortization expense primarily associated with intangible assets purchased
through the Macromedia acquisition.
Localization
costs which are amortized over the product life cycle, decreased during the
three months ended August 29, 2008 as compared to the three months ended August
31, 2007, primarily due to increased localization costs in the third quarter of
fiscal 2007 associated with the release of the localized versions of our CS3
family of products.
Services
and Support
Cost of
services and support revenue is primarily comprised of employee-related costs
and associated costs incurred to provide consulting services, training and
product support.
Cost of
services and support revenue increased during the three and nine months ended
August 29, 2008 as compared to the three and nine months ended August 31, 2007,
primarily due to increases in compensation and related benefits driven by
increases in headcount related to product support and utilization by customers
of our consulting services.
Operating
Expenses for the Three and Nine Months Ended August 29, 2008 and August 31,
2007
Research
and Development, Sales and Marketing and General and Administrative
Expenses
The
increase in compensation costs for the three months ended August 29, 2008 is due
to increased headcount in all functions. This increase is offset in part by a
decrease in profit sharing and employee bonuses based on company performance to
date, when compared to the three months ended August 31, 2007.
The
increase in compensation costs for the nine months ended August 29, 2008 related
to increases in headcount and stock-based compensation offset by decreases in
profit sharing and employee bonuses based on company performance to date, when
compared to the nine months ended August 31, 2007.
Research
and Development
|
|
Three Months
|
|
Percent
|
|
Nine Months
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
Change
|
|
2008
|
|
|
2007
|
|
Change
|
Expenses
|
|
$ |
170.1 |
|
|
$ |
163.2 |
|
|
|
4
|
% |
|
$ |
508.9 |
|
|
$ |
450.4 |
|
|
|
13
|
% |
Percentage
of total revenue
|
|
|
19
|
% |
|
|
19
|
% |
|
|
|
|
|
|
19
|
% |
|
|
20
|
% |
|
|
|
|
Research
and development expenses consist primarily of salary and benefit expenses for
software developers, contracted development efforts, related facilities costs
and expenses associated with computer equipment used in software
development.
Research
and development expenses increased (decreased) due to the
following:
|
% Change
2007 to 2008
QTD
|
|
% Change
2007 to 2008
YTD
|
Compensation
and related benefits associated with headcount growth
|
6
|
% |
|
|
8
|
%
|
Compensation
associated with incentive compensation and stock-based
compensation
|
(2
|
)
|
|
|
4
|
|
Various
individually insignificant items
|
—
|
|
|
|
1
|
|
Total
change
|
4
|
% |
|
|
13
|
%
|
We believe that investments in research
and development, including the recruiting and hiring of software developers, are
critical to remain competitive in the marketplace and are directly related to
continued timely development of new and enhanced products. We will continue to
focus on long-term opportunities available in our end markets and make
significant investments in the development of our desktop application and
server-based software products.
Sales
and Marketing
|
|
Three Months
|
|
Percent
|
|
Nine Months
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
Change
|
|
2008
|
|
|
2007
|
|
Change
|
Expenses
|
|
$ |
271.4 |
|
|
$ |
251.2 |
|
|
|
8
|
% |
|
$ |
813.4 |
|
|
$ |
702.3 |
|
|
|
16
|
% |
Percentage
of total revenue
|
|
|
31
|
% |
|
|
29
|
% |
|
|
|
|
|
|
31
|
% |
|
|
31
|
% |
|
|
|
|
Sales and
marketing expenses consist primarily of salary and benefit expenses, sales
commissions, travel expenses and related facilities costs for our sales,
marketing, order management and global supply chain management personnel. Sales
and marketing expenses also include the costs of programs aimed at increasing
revenue, such as advertising, trade shows, public relations and other market
development programs.
Sales and
marketing expenses increased (decreased) due to the
following:
|
% Change
2007 to 2008
QTD
|
|
% Change
2007 to 2008
YTD
|
Compensation
and related benefits associated with headcount growth
|
5
|
% |
|
|
5
|
%
|
Marketing
spending related to product launches and overall marketing efforts to
further increase revenue
|
3
|
|
|
|
5
|
|
Compensation
associated with incentive compensation and stock-based
compensation
|
(1
|
)
|
|
|
5
|
|
Various
individually insignificant items
|
1
|
|
|
|
1
|
|
Total
change
|
8
|
% |
|
|
16
|
%
|
General
and Administrative
|
|
Three Months
|
|
Percent
|
|
Nine Months
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
Change
|
|
2008
|
|
|
2007
|
|
Change
|
Expenses
|
|
$ |
97.2 |
|
|
$ |
71.1 |
|
|
|
37
|
% |
|
$ |
257.2 |
|
|
$ |
201.0 |
|
|
|
28
|
% |
Percentage
of total revenue
|
|
|
11
|
% |
|
|
8
|
% |
|
|
|
|
|
|
10
|
% |
|
|
9
|
% |
|
|
|
|
General
and administrative expenses consist primarily of compensation and benefit
expenses, travel expenses and related facilities costs for our finance,
facilities, human resources, legal, information services and executive
personnel. General and administrative expenses also include outside legal and
accounting fees, provision for bad debts, expenses associated with computer
equipment and software used in the administration of the business, charitable
contributions and various forms of insurance.
General
and administrative expenses increased (decreased) due to the
following:
|
% Change
2007 to 2008
QTD
|
|
% Change
2007 to 2008
YTD
|
Allocation
of costs associated with acquired rights to use technology
|
24
|
% |
|
|
8
|
%
|
Compensation
and related benefits associated with headcount growth
|
5
|
|
|
|
5
|
|
Professional
and consulting fees
|
4
|
|
|
|
2
|
|
Compensation
associated with incentive compensation and stock-based
compensation
|
(1
|
)
|
|
|
6
|
|
Various
individually insignificant items
|
5
|
|
|
|
7
|
|
Total
change
|
37
|
% |
|
|
28
|
%
|
Allocation
of costs associated with acquired rights to use technology increased primarily
due to the fact that we entered into certain technology licensing arrangements
totaling $100.0 million during the third quarter of fiscal 2008. An estimated
$56.0 million of this cost is related to future licensing rights and has been
capitalized and will be amortized on a straight-line basis over the estimated
useful lives up to nine years. Of the remaining costs, we estimated that
approximately $27.2 million was related to historical use of licensing rights
which was expensed as cost of sales, and the residual of $16.8 million was
expensed as general and administrative costs. In connection with these
licensing arrangements, we have the ability to acquire additional rights to use
technology in the future. See Note 13 of our Notes to
Condensed Consolidated Financial Statements for further information regarding
our contractual commitments.
Restructuring
and Other Charges
|
|
Three Months
|
|
Percent
|
|
Nine Months
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
Change
|
|
2008
|
|
|
2007
|
|
Change
|
Expenses
|
|
$ |
1.2 |
|
|
$ |
0.6 |
|
|
|
100
|
% |
|
$ |
2.6 |
|
|
$ |
0.6 |
|
|
|
333
|
% |
Percentage
of total revenue
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
* |
|
|
|
* |
|
|
|
|
|
_________________________________________
*
|
Percentage
is not meaningful.
|
During the
nine months ended August 29, 2008, there was an adjustment to previous estimates
associated with closing redundant Macromedia facilities that were acquired
through the acquisition. As of August 29, 2008, accrued restructuring charges
related to the Macromedia acquisition totaled $15.0 million. We expect to pay
this liability through fiscal 2011.
Amortization
of Purchased Intangibles and Incomplete Technology
|
|
Three Months
|
|
Percent
|
|
Nine Months
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
Change
|
|
2008
|
|
|
2007
|
|
Change
|
Expenses
|
|
$ |
17.0 |
|
|
$ |
17.9 |
|
|
|
(5
|
)% |
|
$ |
51.2 |
|
|
$ |
54.5 |
|
|
|
(6
|
)% |
Percentage
of total revenue
|
|
|
2
|
% |
|
|
2
|
% |
|
|
|
|
|
|
2
|
% |
|
|
2
|
% |
|
|
|
|
Amortization
expense decreased during the three and nine months ended August 29, 2008 as
compared to the three and nine months ended August 31, 2007, due to a decrease
in amortization expense associated with intangible assets purchased through the
Macromedia acquisition. Additionally, included in the amortization of
purchased intangibles and incomplete technology for the nine months ended August
31, 2007 was $1.5 million related to the write-off of in-process research and
development from an acquisition that occurred during the second quarter of
fiscal 2007.
Non-Operating
Income for the Three and Nine Months Ended August 29, 2008 and August 31,
2007
|
|
Three Months
|
|
|
Percent
|
|
|
Nine Months
|
|
|
Percent
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Interest
and other income, net
|
|
$ |
9.3 |
|
|
$ |
22.7 |
|
|
|
(59
|
)% |
|
$ |
34.8 |
|
|
$ |
65.9 |
|
|
|
(47
|
)% |
Percentage
of total revenue
|
|
|
1
|
% |
|
|
3
|
% |
|
|
|
|
|
|
1
|
% |
|
|
3
|
% |
|
|
|
|
Interest
expense
|
|
|
(2.4
|
) |
|
|
— |
|
|
|
* |
|
|
|
(8.0
|
) |
|
|
(0.2
|
) |
|
|
* |
|
Percentage
of total revenue
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
* |
|
|
|
* |
|
|
|
|
|
Investment
gains, net
|
|
|
2.1 |
|
|
|
(0.7 |
) |
|
|
(400
|
)% |
|
|
20.3 |
|
|
|
9.1 |
|
|
|
123
|
% |
Percentage
of total revenue
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
1
|
% |
|
|
* |
|
|
|
|
|
Total non-operating
income
|
|
$ |
9.0 |
|
|
$ |
22.0 |
|
|
|
(59
|
)% |
|
$ |
47.1 |
|
|
$ |
74.8 |
|
|
|
(37
|
)% |
_________________________________________
*
|
Percentage
is not meaningful.
|
Interest
and Other Income, net
The
largest component of interest and other income, net, was interest earned on
cash, cash equivalents and short-term fixed income investments. Interest and
other income, net also included foreign exchange gains and losses, including
those from hedging revenue transactions primarily denominated in Japanese Yen
and Euro currencies.
Interest
and other income, net, decreased during the three and nine months ended August
29, 2008 as compared to the three and nine months ended August 31, 2007
primarily as a result of lower average invested balances due to cash used for
our share repurchase programs and lower interest rates. Additionally,
during the nine months ended August 29, 2008, interest and other income, net
included gains and losses on the sale or write-down for other-than-temporary
impairment of fixed income investments.
Interest
Expense
Interest
expense for the three and nine months ended August 29, 2008, primarily
represents interest associated with our credit facility. The outstanding balance
as of August 29, 2008 was $350.0 million. Interest due under the credit facility
is paid upon expiration of the LIBOR contract or at a minimum,
quarterly.
Investment
Gains, net
Investment
gains, net, consist principally of realized gains or losses from the sale of
marketable equity investments, other-than-temporary declines in the value of
marketable and non-marketable equity securities and gains and losses of Adobe
Ventures. In the three and nine months ended August 29, 2008, investment gains,
net, increased as compared to the three and nine months ended August 31, 2007
due primarily to gains from a direct investment. Additionally, during
the nine months ended August 29, 2008, we received cash and recognized a gain
resulting from the expiration of the escrow period related to the sale of our
investment in Atom Entertainment, Inc. that occurred during the fourth quarter
of fiscal 2006.
Provision
for Income Taxes for the Three and Nine Months Ended August 29, 2008 and August
31, 2007
|
|
Three Months
|
|
Percent
|
|
Nine Months
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
Change
|
|
2008
|
|
|
2007
|
|
Change
|
Provision
|
|
$ |
36.9 |
|
|
$ |
71.8 |
|
|
|
(49
|
)% |
|
$ |
176.3 |
|
|
$ |
154.9 |
|
|
|
14
|
% |
Percentage of total
revenue
|
|
|
4
|
% |
|
|
8
|
% |
|
|
|
|
|
|
7
|
% |
|
|
7
|
% |
|
|
|
|
Effective tax
rate
|
|
|
16
|
% |
|
|
26
|
% |
|
|
|
|
|
|
22
|
% |
|
|
24
|
% |
|
|
|
|
Our
effective tax rate decreased approximately 10% and 2% during the three and nine
months, respectively, ended August 29, 2008 as compared to the three and nine
months ended August 31, 2007. The decrease was primarily related to
the completion in the third quarter of fiscal 2008 of a U.S. income tax
examination covering our fiscal years 2001 through 2004, and to a lesser extent,
stronger forecasted international profits for fiscal 2008 and lower foreign
taxes on those forecasted profits.
LIQUIDITY
AND CAPITAL RESOURCES
This data
should be read in conjunction with the consolidated statements of cash
flows.
|
|
August
29,
2008
|
|
|
November 30,
2007
|
|
Cash,
cash equivalents and short-term investments
|
|
$ |
2,000.9 |
|
|
$ |
1,993.9 |
|
Working
capital
|
|
$ |
1,855.5 |
|
|
$ |
1,720.4 |
|
Stockholders’
equity
|
|
$ |
4,371.4 |
|
|
$ |
4,650.0 |
|
Summary of
our cash flows:
|
|
August
29,
2008
|
|
|
August
31,
2007
|
|
Net
cash provided by operating activities
|
|
$ |
942.9 |
|
|
$ |
1,041.2 |
|
Net
cash used for investing activities
|
|
|
(5.5
|
) |
|
|
(213.3
|
) |
Net
cash used for financing activities
|
|
|
(747.7
|
) |
|
|
(1,042.6
|
) |
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
|
|
(1.9
|
) |
|
|
1.5 |
|
Net
increase in cash and cash equivalents
|
|
$ |
187.8 |
|
|
$ |
(213.2 |
) |
Our
primary source of cash is receipts from revenue. The primary uses of cash are
payroll related expenses; general operating expenses including marketing, travel
and office rent; and cost of product revenue. Another source of cash is proceeds
from the exercise of employee options and participation in the ESPP and another
use of cash is our stock repurchase program, which is detailed
below.
Cash
Flows from Operating Activities
Net cash
provided by operating activities of $942.9 million for the nine months
ended August 29, 2008, was primarily comprised of net income plus the net effect
of non-cash expenses. The primary working capital sources of cash were increases
in net income and deferred revenue. Increases in deferred revenue related to
maintenance and support from increased upgrade plans purchased were offset in
part by decreases in deferred revenue related to royalties.
The
primary working capital uses of cash were increases in receivables, prepaid
expenses and other current assets coupled with decreases in income taxes
payable, accrued expenses, trade payables and accrued restructuring costs.
Accounts receivable increased primarily as a result of the timing of shipments
during the third quarter of fiscal 2008 compared to the same reporting period in
fiscal 2007. Income taxes payable decreased primarily due to payments
made as the result of the completion of a U.S. income tax examination covering
our fiscal years 2001 through 2004. Accrued expenses decreased primarily due to
payments for employee bonuses, profit sharing and an increase in employee stock
purchases offset in part by increases in royalty accruals. Accrued restructuring
costs decreased primarily due to payments of facility costs during the nine
months ended August 29, 2008.
Cash
Flows from Investing Activities
Net cash
used for investing activities decreased from cash used for the nine months ended
August 31, 2007 of $213.3 million to cash used in the nine months ended August
29, 2008 of $5.5 million. Uses of cash during the nine months ended August 29,
2008 primarily represented purchases of short-term investments, property and
equipment and long-term investments and other assets. The uses associated with
the purchase of long-term investments and other assets related primarily to cash
paid for future licensing rights acquired through certain technology licensing
arrangements totaling $56.0 million. As part of our lease extension for the
Almaden Tower lease completed during the second quarter of fiscal 2007, we
purchased a portion of the lease receivable totaling $80.4 million. We also
completed two acquisitions for cash consideration of approximately $70.0 million
during fiscal 2007.
These uses
of cash were offset in part by maturities and sales of short-term investments
and to a lesser extent, proceeds from the sale of equity
securities.
Cash
Flows from Financing Activities
Net cash
used for financing activities decreased $294.9 million for a total of
$747.7 million in the nine months ended August 29, 2008 as compared to cash
used for the same period last year, primarily due to lower purchases of treasury
stock when compared to the prior year (see sections entitled “Stock
Repurchase Program I” and “Stock Repurchase Program II” discussed below),
offset in part by proceeds related to the issuance of the treasury stock.
Sources of cash during the nine months ended August 29, 2008 also included
$450.0 million of proceeds from borrowings under our credit facility offset
in part by repayments of $100.0 million on this credit facility.
We expect
to continue our investing activities, including short-term and long-term
investments and purchases of computer systems for research and development,
sales and marketing, product support and administrative staff. Furthermore, cash
reserves may be used to repurchase stock under our stock repurchase programs and
to strategically acquire software companies, products or technologies that are
complementary to our business. The Board of Directors has approved a facilities
expansion for our operations in India, which may include the purchase of land
and buildings. As previously disclosed, we plan to invest $100.0 million
directly in venture capital, of which, approximately $27.5 million has
already been spent. The remaining balance will be invested over the next three
to five years.
Our
existing cash, cash equivalents and investment balances may decline during the
fourth quarter of fiscal 2008 and into fiscal 2009 in the event of a further
weakening of the economy or changes in our planned cash outlay. However, based
on our current business plan and revenue prospects, we believe that our existing
balances, our anticipated cash flows from operations and our available credit
facility will be sufficient to meet our working capital and operating resource
expenditure requirements for the next twelve months. Cash from operations could
be affected by various risks and uncertainties, including, but not limited to
the risks detailed in Part II, Item 1A titled “Risk Factors”. During
the third quarter of fiscal 2007, we also increased our existing
$500.0 million credit facility to $1.0 billion. The purpose of the
credit facility is to provide backup liquidity for general corporate purposes
including stock repurchases. In January 2008, we drew down $450.0 million
under this facility, of which $350.0 million was outstanding as of August 29,
2008 and is included in long-term liabilities on our condensed consolidated
balance sheet.
We use
professional investment management firms to manage a large portion of our
invested cash. External investment firms managed, on average, 43% of our
consolidated invested balances during the third quarter of fiscal 2008. Within
the U.S., the portfolio is invested primarily in money market funds for working
capital purposes. Outside of the U.S., our fixed income portfolio is primarily
invested in U.S. Treasury securities. All investments are made according to
policies approved by the Board of Directors.
Stock
Repurchase Program I
To
facilitate our stock repurchase program, designed to return value to our
stockholders and minimize dilution from stock issuances, we repurchase shares in
the open market and also enter into structured repurchases with third
parties.
During the
nine months ended August 29, 2008, we entered into several structured repurchase
agreements with large financial institutions, whereupon we provided the
financial institutions with prepayments of $325.0 million. We entered into
these agreements in order to take advantage of repurchasing shares at a
guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common
stock over a specified period of time. We only enter into such transactions when
the discount that we receive is higher than the foregone return on our cash
prepayments to the financial institutions. There
were no
explicit commissions or fees on these structured repurchases. Under the terms of
the agreements, there is no requirement for the financial institutions to return
any portion of the prepayment to us.
The
financial institutions agree to deliver shares to us at monthly intervals during
the contract term. The parameters used to calculate the number of shares
deliverable are: the total notional amount of the contract, the number of
trading days in the contract, the number of trading days in the interval, and
the average VWAP of our stock during the interval less the agreed upon
discount.
The
prepayments were classified as treasury stock on our balance sheet at the
payment date, though only shares physically delivered to us by August 29, 2008
are excluded from the denominator in the computation of earnings per share. All
outstanding structured repurchase agreements as of August 29, 2008 under this
program will expire on or before September 19, 2008. As of August 29, 2008
approximately $41.0 million of up-front payments remained under the agreements.
During the nine months ended August 29, 2008, we repurchased 19.0 million shares
at an average price per share of $37.12 through structured repurchase agreements
which included prepayments from fiscal 2007.
During the
nine months ended August 29, 2008, we also repurchased 0.75 million shares at an
average price of $39.19 in open market transactions.
Subsequent
to August 29, 2008, we entered into additional structured stock repurchase
agreements with large financial institutions whereupon we provided the financial
institutions with prepayments of $200.0 million. This amount will be
classified as treasury stock on our balance sheet. See Notes 10 and 17 of our
Notes to Condensed Consolidated Financial Statements for further discussion of
our stock repurchase programs.
Stock
Repurchase Program II
Under this
stock repurchase program, we had authorization to repurchase 50.0 million
shares of our common stock. During the third quarter of fiscal 2008, the
remaining authorized number of shares were repurchased. From the inception of
the 50.0 million share authorization under this program, we provided prepayments
of $1.9 billion under structured share repurchase agreements to large
financial institutions. During the nine months ended August 29, 2008, we
provided prepayments of $1.0 billion and repurchased 31.9 million shares under
these structured agreements at an average price of $37.15. As of August 31,
2007, we had provided prepayments of $850.0 million and repurchased 12.9 million
shares through structured share repurchase agreements at the average price of
$39.94. Approximately $333.4 million of up-front payments remained as of August
31, 2007.
During the
nine months ended August 29, 2008, we also repurchased 0.5 million shares at an
average price of $39.79 in open market transactions.
Refer
to Part II, Item 2 in this report for share repurchases during the
quarter ended August 29, 2008.
Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations
Our
principal commitments as of August 29, 2008 consist of obligations under
operating leases, royalty agreements and various service agreements. See Note 13 of our Notes to
Condensed Consolidated Financial Statements for more detailed
information.
Contractual
Commitments
With the
exception of our adoption of FIN 48, borrowings under our credit facility
and entering into a certain technology license arrangement, there have been no
other significant changes in our contractual commitments during the nine months
ended August 29, 2008 as compared to the contractual commitments disclosed in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the year ended
November 30, 2007.
As of
August 29, 2008, the principal outstanding under the credit facility was
$350.0 million which is due in full no later than February 16, 2013.
Interest associated with this facility cannot be estimated with certainty by
period throughout the term since it is based on a fluctuating interest rate
calculation.
As a
result of adopting FIN 48, we reclassified $197.7 million from current
income taxes payable to long-term income taxes payable related to unrecognized
tax benefits.
The gross
liability for unrecognized tax benefits at August 29, 2008 was
$155.8 million, exclusive of interest and penalties. The timing
of the resolution of income tax examinations is highly uncertain, and the
amounts ultimately paid, if any, upon resolution of the issues raised by the
taxing authorities may differ materially from the amounts accrued for each year.
While it is reasonably possible that some issues with the IRS and other
examinations could be resolved within the next 12 months, based upon the
current facts and circumstances, we cannot estimate the timing of such
resolution or range of potential changes as it relates to the unrecognized tax
benefits that are recorded as part of our financial statements.
As
discussed in Note 4 of our Notes to Condensed Consolidated Financial Statements,
during the third quarter of fiscal 2008, we entered into an agreement to license
certain technology. This agreement also provides us the ability to acquire
rights to intellectual property in the future. Minimum fees associated with this
arrangement range between approximately $1.0 million and $1.5 million per year
through May 2028 for minimum fees in the aggregate, of approximately $25.0
million.
Lease
Commitments
Two of our
lease agreements discussed in Note 13 of our Notes to Condensed
Consolidated Financial Statements are subject to standard financial covenants.
As of August 29, 2008, we were in compliance with all of our financial covenants
and we expect to remain in compliance during the next 12 months. We believe
these limitations will not impact our credit or cash in the coming fiscal year
or restrict our ability to execute our business plan.
Royalties
We have
certain royalty commitments associated with the shipment and licensing of
certain products. Royalty expense is generally based on a dollar amount per unit
shipped or a percentage of the underlying revenue.
Guarantees
The lease
agreements for our corporate headquarters provide for residual value guarantees.
Under FIN 45, the fair value of a residual value guarantee in lease
agreements entered into after December 31, 2002 must be recognized as a
liability on our consolidated balance sheet. As such, we recognized
$5.2 million and $3.0 million in liabilities, related to the East and
West Towers and Almaden Tower leases, respectively. These liabilities are
recorded in other long-term liabilities with the offsetting entry recorded as
prepaid rent in other assets. The balance will be amortized to the income
statement over the life of the leases. As of August 29, 2008, the unamortized
portion of the fair value of the residual value guarantees remaining in other
long-term liabilities and prepaid rent was $3.0 million.
Indemnifications
In the
normal course of business, we provide indemnifications of varying scope to
customers against claims of intellectual property infringement made by third
parties arising from the use of our products. Historically, costs related to
these indemnification provisions have not been significant and we are unable to
estimate the maximum potential impact of these indemnification provisions on our
future results of operations.
To the
extent permitted under Delaware law, we have agreements whereby we indemnify our
directors and officers for certain events or occurrences while the director or
officer is, or was serving, at our request in such capacity. The indemnification
period covers all pertinent events and occurrences during the director’s or
officer’s lifetime. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is unlimited; however,
we have director and officer insurance coverage that limits our exposure and
enables us to recover a portion of any future amounts paid. We believe the
estimated fair value of these indemnification agreements in excess of applicable
insurance coverage is minimal.
As part of
our limited partnership interest in Adobe Ventures, we have provided a general
indemnification to Granite Ventures, an independent venture capital firm and
sole general partner of Adobe Ventures, for certain events or occurrences while
Granite Ventures is, or was serving, at our request in such capacity provided
that Granite Ventures acts in good faith on behalf of the partnership. We are
unable to develop an estimate of the maximum potential amount of future payments
that could potentially result from any hypothetical future claim, but believe
the risk of having to make any payments under this general indemnification to be
remote.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We believe
that there have been no significant changes in our market risk exposures for the
three and nine months ended August 29, 2008.
Based on
their evaluation as of August 29, 2008, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) were effective at the reasonable assurance level to ensure
that the information required to be disclosed by us in this quarterly report on
Form 10-Q was (i) recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and regulations and (ii) accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required
disclosure.
There were
no changes in our internal control over financial reporting during the quarter
ended August 29, 2008 that have materially affected, or are reasonably likely to
materially affect our internal control over financial reporting.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls over financial reporting will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within Adobe have been
detected.
PART
II—OTHER INFORMATION
See Note 13 “Commitments and Contingencies”
of our Notes to Condensed Consolidated Financial Statements regarding our legal
proceedings.
As
previously discussed, our actual results could differ materially from our
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed below. These and
many other factors described in this report could adversely affect our
operations, performance and financial condition.
Delays
in development or shipment of new products or upgrades to existing products
could cause a decline in our revenue.
Any delays
or failures in developing new products or new features for existing products or
marketing our products may have a harmful impact on our results of operations.
Our inability to extend our core technologies into new applications and new
platforms and to anticipate or respond to technological changes could affect
continued market acceptance of our products and our ability to develop new
products. Delays in product or upgrade introductions could cause a decline in
our revenue, earnings or stock price.
Introduction
of new products and business models by existing and new competitors could harm
our competitive position and results of operations.
The
markets for our products are characterized by intense competition, evolving
industry standards and business models, rapid software and hardware technology
developments and frequent new product introductions. Our future success will
depend on our ability to enhance our existing products, introduce new products
on a timely and cost-effective basis, meet changing customer needs, extend our
core technology into new applications, and anticipate and respond to emerging
standards, business models and other technological changes. For example,
Microsoft Windows Vista operating system which contains a fixed document format,
XPS, competes with Adobe PDF. Additionally, Microsoft Office 2007, which offers
a feature to save Microsoft Office documents as PDF files through a freely
distributed plug-in, competes with Adobe PDF creation (Microsoft has announced
that it will add support for PDF directly in its Office products beginning in
2009. Microsoft Expression Studio competes with our Adobe Creative Suite
products and Microsoft Silverlight and Visual Studio,
web
development tools for rich internet applications, compete with Adobe Flash and
Adobe Flex. Google’s new web browser, Google Chrome, may end up including
technologies that compete with Adobe Flash and Adobe AIR. In addition,
companies, such as Google, Sun, Apple and Microsoft, may introduce competing
software offerings for free or “open source” vendors may introduce competitive
products. For example, Microsoft made available Microsoft Expression Studio free
of charge to students. If these competing products achieve widespread
acceptance, our operating results could suffer. In addition, consolidation has
occurred among some of the competitors in our markets. Any further
consolidations among our competitors may result in stronger competitors and may
therefore harm our results of operations. For additional information regarding
our competition and the risks arising out of the competitive environment in
which we operate, see the section entitled “Competition” contained in
Item 1 of our Annual Report on Form 10-K for fiscal 2007.
If
we fail to successfully manage transitions to new business models and markets,
our results of operations could be negatively impacted.
We are
devoting significant resources to the development of technologies and service
offerings where we have a limited operating history, including the enterprise
and government markets, the mobile and device markets and software as service
offerings. In the enterprise and government markets, we intend to increase our
focus on vertical markets such as education, financial services, manufacturing,
and the architecture, engineering and construction markets and horizontal
markets such as training and marketing. These new offerings and markets require
a considerable investment of technical, financial and sales resources, and a
scalable organization. Many of our competitors may have advantages over us due
to their larger presence, larger developer network, deeper experience in the
enterprise and government markets and the mobile and device markets, and greater
sales and marketing resources. In the mobile and device markets, our intent is
to partner device makers, manufacturers and telecommunications carriers to embed
our technology on their platforms, and in the enterprise and government market
our intent is to form strategic alliances with leading enterprise and government
solutions and service providers to provide additional resources to further
enable penetration of such markets. If we are unable to successfully enter into
strategic alliances with device makers, manufacturers, telecommunication
carriers and leading enterprise and government solutions and service providers,
or if they are not as productive as we anticipate, our market penetration may
not proceed as rapidly as we anticipate and our results of operations could be
negatively impacted. Another development is the software as a service business
model, by which companies provide applications, data and related services over
the Internet. Providers use primarily advertising or subscription-based revenue
models. Recent advances in computing and communications technologies have made
this model viable and could enable the rapid growth of some of our competitors.
We are exploring the deployment of our own software as a service strategies, but
may not be able to develop the infrastructure and business models as quickly as
our competitors. It is uncertain whether these strategies will prove successful.
Additionally, from time to time we “open source” certain of our technology
initiatives, provide broader open access to certain of our technology, such as
our recently announced Open Screen Project and release selected technology for
industry standardization. These changes may have negative revenue implications
and make it easier for our competitors to produce products similar to ours, and
if we are unable to respond to these competitive threats, our business could be
harmed.
If
we fail to anticipate and develop new products and services in response to
changes in demand for application software and software delivery, computers,
printers, or other non PC-devices, our business could be harmed.
Any
failure to anticipate changing customer requirements and develop and deploy new
products in response to changing market conditions may have a material impact on
our results of operations. We plan to release numerous new product offerings and
employ new software delivery methods in connection with our transition to new
business models. Market acceptance of these new product and service offerings
will be dependent on our ability to include functionality and usability in such
releases that address certain customer requirements with which we have limited
prior experience. To the extent we incorrectly estimate customer requirements
for such products or services or if there is a delay in market acceptance of
such products or services, our business could be harmed. Additionally, customer
requirements for “open standards” or “open source” products could impact
adoption or use with respect to some of our products.
We offer
our desktop application-based products primarily on Windows and Macintosh
platforms. We generally offer our server-based products on the Linux platform as
well as the Windows and UNIX platforms. To the extent that there is a slowdown
of customer purchases of personal computers on either the Windows or Macintosh
platform or in general, or to the extent that significant demand arises for our
products or competitive products on the Linux desktop platform before we choose
and are able to offer our products on this platform, our business could be
harmed. Additionally, to the extent that we have difficulty transitioning
product or version releases to new Windows and Macintosh operating systems, or
to the extent new releases of operating systems or other third party products
make it more difficult for our products to perform, our business could be
harmed.
Adverse
changes in general economic or political conditions in any of the major
countries in which we do business could adversely affect our operating
results.
As our
business has grown, we have become increasingly subject to the risks arising
from adverse changes in domestic and global economic and political conditions.
For example, the direction and relative strength of the U.S. economy has
recently been increasingly uncertain due to softness in the housing markets,
rising oil prices, difficulties in the financial services sector and credit
markets and continuing geopolitical uncertainties. If economic growth in the
United States and other countries’ economies is slowed, many customers may delay
or reduce technology purchases or marketing spending. This could result in
reductions in sales of our products, longer sales cycles, slower adoption of new
technologies and increased price competition. Any of these events would likely
harm our business, results of operations and financial condition. Political
instability in any of the major countries we do business would also likely harm
our business, results of operations and financial condition.
Revenue
from our new businesses may be difficult to predict.
As
previously discussed, we are devoting significant resources to the development
of product and service offerings where we have a limited operating history. This
makes it difficult to predict revenue and revenue may decline quicker than
anticipated. Additionally, we have a limited history of licensing products in
certain markets such as the enterprise market and may experience a number of
factors that will make our revenue less predictable, including longer than
expected sales and implementation cycles, potential deferral of revenue due to
multiple-element revenue arrangements and alternate licensing
arrangements.
We
may incur substantial costs enforcing or acquiring intellectual property rights
and defending against third-party claims as a result of litigation or other
proceedings.
In
connection with the enforcement of our own intellectual property rights, the
acquisition of third-party intellectual property rights, or disputes relating to
the validity or alleged infringement of third-party intellectual property
rights, including patent rights, we have been, are currently and may in the
future be subject to claims, negotiations or complex, protracted litigation.
Intellectual property disputes and litigation are typically very costly and can
be disruptive to our business operations by diverting the attention and energies
of management and key technical personnel. Although we have successfully
defended or resolved past litigation and disputes, we may not prevail in any
ongoing or future litigation and disputes. In addition, we may incur significant
costs in acquiring the necessary third party intellectual property rights for
use in our products. Third party intellectual property disputes could subject us
to significant liabilities, require us to enter into royalty and licensing
arrangements on unfavorable terms, prevent us from manufacturing or licensing
certain of our products, cause severe disruptions to our operations or the
markets in which we compete, or require us to satisfy indemnification
commitments with our customers including contractual provisions under various
license arrangements. Any of these could seriously harm our
business.
We
may not be able to protect our intellectual property rights, including our
source code, from third-party infringers, or unauthorized copying, use,
disclosure or malicious attack.
Although
we defend our intellectual property rights and combat unlicensed copying and use
of software and intellectual property rights through a variety of techniques,
preventing unauthorized use or infringement of our rights is inherently
difficult. We actively pursue software pirates as part of our enforcement of our
intellectual property rights, but we nonetheless lose significant revenue due to
illegal use of our software. If piracy activities increase, it may further harm
our business.
Additionally,
we take significant measures to protect the secrecy of our confidential
information and trade secrets, including our source code. If unauthorized
disclosure of our source code occurs, we could potentially lose future trade
secret protection for that source code. The loss of future trade secret
protection could make it easier for third parties to compete with our products
by copying functionality, which could adversely affect our revenue and operating
margins. We also seek to protect our confidential information and trade secrets
through the use of non-disclosure agreements with our customers, contractors,
vendors, and partners. However there is a risk that our confidential information
and trade secrets may be disclosed or published without our authorization, and
in these situations it may be difficult and or costly for us to enforce our
rights.
We also
devote significant resources to maintaining the security of our products from
malicious hackers who develop and deploy viruses, worms, and other malicious
software programs that attack our products. Nevertheless, actual or perceived
security vulnerabilities in our products could harm our reputation and lead some
customers to seek to return
products,
to reduce or delay future purchases, to use competitive products or to make
claims against us. Also, with the introduction of hosted services with some of
our product offerings, our customers may use such services to share confidential
and sensitive information. If a breach of security occurs on these hosted
systems, we could be held liable to our customers. Additionally, such breaches
could lead to interruptions, delays and data loss and protection concerns as
well as harm to our reputation.
We
may not realize the anticipated benefits of past or future acquisitions, and
integration of these acquisitions may disrupt our business and
management.
We have in
the past and may in the future acquire additional companies, products or
technologies. We may not realize the anticipated benefits of an acquisition and
each acquisition has numerous risks. These risks include:
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difficulty
in assimilating the operations and personnel of the acquired
company;
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difficulty
in effectively integrating the acquired technologies or products with our
current products and technologies;
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difficulty
in maintaining controls, procedures and policies during the transition and
integration;
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disruption
of our ongoing business and distraction of our management and employees
from other opportunities and challenges due to integration
issues;
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difficulty
integrating the acquired company’s accounting, management information,
human resources and other administrative
systems;
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inability
to retain key technical and managerial personnel of the acquired
business;
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inability
to retain key customers, distributors, vendors and other business partners
of the acquired business;
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inability
to achieve the financial and strategic goals for the acquired and combined
businesses;
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incurring
acquisition-related costs or amortization costs for acquired intangible
assets that could impact our operating
results;
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potential
impairment of our relationships with employees, customers, partners,
distributors or third-party providers of technology or
products;
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potential
failure of the due diligence processes to identify significant issues,
including but not limited to, product quality, architecture and
development, or legal and financial
contingencies;
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incurring
significant exit charges if products acquired in business combinations are
unsuccessful;
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potential
inability to assert that internal controls over financial reporting are
effective;
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potential
inability to obtain, or obtain in a timely manner, approvals from
governmental authorities, which could delay or prevent such acquisitions;
and
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potential
delay in customer and distributor purchasing decisions due to uncertainty
about the direction of our product
offerings.
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Mergers
and acquisitions of high technology companies are inherently risky, and
ultimately, if we do not complete the integration of acquired businesses
successfully and in a timely manner, we may not realize the benefits of the
acquisitions to the extent anticipated, which could adversely affect our
business, financial condition or results of operations.
Failure
to manage our sales and distribution channels effectively could result in a loss
of revenue and harm to our business.
We distribute our application products
through distributors, resellers, OEMs, retailers and increasingly systems
integrators, ISVs and VARs (collectively referred to as “distributors”). A
significant amount of our revenue for application products is from two
distributors, Ingram Micro, Inc. and Tech Data Corporation which represented 20%
and 9% of our net revenue for the third quarter of fiscal 2008, respectively. We
have multiple non-exclusive, independently negotiated distribution agreements
with Ingram Micro and Tech Data and their subsidiaries covering our arrangements
in specified countries and regions. Each of these contracts has an independent
duration, is independent of any other agreement (such as a master distribution
agreement) and any termination of one agreement does not affect the status of
any of the other agreements. In the third quarter of fiscal 2008, no single
agreement with these distributors was responsible for over 10% of our total net
revenue. If any one of our agreements with these distributors were terminated,
we believe we could make
arrangements
with new or existing distributors to distribute our products without a
substantial disruption to our business; however, any prolonged delay in securing
a replacement distributor could have a negative short-term impact on our results
of operations.
Our distributors also sell our
competitors’ products, and if they favor our competitors’ products for any
reason, they may fail to market our products as effectively or to devote
resources necessary to provide effective sales, which would cause our results to
suffer. We also distribute some products through our OEM channel, and if our OEM
partners decide not to bundle our applications on their devices, our results
could suffer. In addition, the financial health of our distributors and our
continuing relationships with them are important to our success. Some of these
distributors may be unable to withstand adverse changes in business conditions.
Our business could be harmed if the financial condition of some of these
distributors substantially weakens and we were unable to timely secure a
replacement distributor.
We also sell certain of our products
through our direct sales force. Risks associated with this sales channel include
a longer sales cycle associated with direct sales efforts, difficulty in hiring,
retaining and motivating our direct sales force, and substantial amounts of
training for sales representatives, including regular updates to cover new and
upgraded products.
Catastrophic
events may disrupt our business.
We are a
highly automated business and rely on our network infrastructure and enterprise
applications, internal technology systems and our Web site for our development,
marketing, operational, support, hosted services and sales activities. A
disruption or failure of these systems in the event of a major earthquake, fire,
telecommunications failure, cyber-attack, terrorist attack, or other
catastrophic event could cause system interruptions, reputational harm, delays
in our product development and loss of critical data and could prevent us from
fulfilling our customers’ orders. Our corporate headquarters, a significant
portion of our research and development activities, our data centers, and
certain other critical business operations are located in San Jose, California,
which is near major earthquake faults. We have developed certain disaster
recovery plans and certain backup systems to reduce the potentially adverse
effect of such events, but a catastrophic event that results in the destruction
or disruption of any of our data centers or our critical business or information
technology systems could severely affect our ability to conduct normal business
operations and, as a result, our future operating results could be adversely
affected.
Our
future operating results are difficult to predict and are likely to fluctuate
substantially from quarter to quarter and as a result the market price of our
common stock may be volatile and our stock price could decline.
As a
result of a variety of factors discussed herein, our quarterly revenue and
operating results for a particular period are difficult to predict. Our revenue
may grow at a slower rate than experienced in previous periods and, in
particular periods, may decline. Additionally, we periodically provide operating
model targets. These targets reflect a number of assumptions, including
assumptions about product pricing and demand, economic and seasonal trends,
competitive factors, the mix of shrink-wrap and licensing revenue, full and
upgrade products, distribution channels and geographic markets. If one or more
of these assumptions prove incorrect, our actual results may vary materially
from those anticipated, estimated or projected.
Due to the
factors noted above, our future earnings and stock price may be subject to
volatility, particularly on a quarterly basis. Shortfalls in revenue or earnings
or delays in the release of products or upgrades compared to analysts’ or
investors’ expectations have caused, and could cause in the future, an immediate
and significant decline in the trading price of our common stock. Additionally,
we may not learn of such shortfalls or delays until late in, or after the end
of, the fiscal quarter, which could result in an even more immediate and greater
decline in the trading price of our common stock. Finally, we participate in a
highly dynamic industry. In addition to factors specific to us, changes in
analysts’ earnings estimates for us or our industry, and factors affecting the
corporate environment, our industry, or the securities markets in general, have
resulted, and may in the future result, in volatility of our common stock
price.
We
are subject to risks associated with international operations which may harm our
business.
We
generate over 50% of our total revenue from sales to customers outside of the
Americas. Sales to these customers subject us to a number of risks,
including:
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foreign
currency fluctuations;
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changes
in government preferences for software
procurement;
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international
economic and political conditions;
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unexpected
changes in, or impositions of, international legislative or regulatory
requirements;
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failure
of foreign laws to protect our intellectual property rights
adequately;
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inadequate
local infrastructure;
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delays
resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and
restrictions;
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the
burdens of complying with a variety of foreign laws, including consumer
and data protection laws; and
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other
factors beyond our control, including terrorism, war, natural disasters
and diseases.
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If sales
to any of our customers outside of the Americas are delayed or cancelled because
of any of the above factors, our revenue may be negatively
impacted.
In
addition, approximately 42% of our employees are located outside the United
States. This means we have exposure to changes in foreign laws governing our
relationships with our employees, including wage and hour laws and regulations,
fair labor standards, unemployment tax rates, workers’ compensation rates,
citizenship requirements and payroll and other taxes, which likely would have a
direct impact on our operating costs. We also intend to expand our international
operations and international sales and marketing activities. Expansion in
international markets has required, and will continue to require, significant
management attention and resources. Moreover, local laws and customs in many
countries differ significantly from those in the United States. We incur
additional legal compliance costs associated with our international operations
and could become subject to legal penalties in foreign countries if we do not
comply with local laws and regulations, which may be substantially different
from those in the United States. In many foreign countries, particularly in
those with developing economies, it is common to engage in business practices
that are prohibited by United States regulations applicable to us such as the
Foreign Corrupt Practices Act. Although we implement policies and procedures
designed to ensure compliance with these laws, there can be no assurance that
all of our employees, contractors and agents, as well as those companies to
which we outsource certain of our business operations, including those based in
or from countries where practices which violate such United States laws may be
customary, will not take actions in violation of our policies. Any such
violation, even if prohibited by our policies, could have an adverse effect on
our business.
We
may incur losses associated with currency fluctuations and may not be able to
effectively hedge our exposure.
Our
operating results are subject to fluctuations in foreign currency exchange
rates. We attempt to mitigate a portion of these risks through foreign currency
hedging, based on our judgment of the appropriate trade-offs among risk,
opportunity and expense. We have established a hedging program to partially
hedge our exposure to foreign currency exchange rate fluctuations primarily for
the Japanese Yen and the Euro. We regularly review our hedging program and make
adjustments as necessary based on the judgment factors discussed above. Our
hedging activities may not offset more than a portion of the adverse financial
impact resulting from unfavorable movement in foreign currency exchange rates,
which could adversely affect our financial condition or results of
operations.
Changes
in, or interpretations of, accounting principles could result in unfavorable
accounting charges.
We prepare
our consolidated financial statements in accordance with GAAP. These principles
are subject to interpretation by the SEC and various bodies formed to interpret
and create appropriate accounting principles. A change in these principles can
have a significant effect on our reported results and may even retroactively
affect previously reported transactions. Our accounting principles that recently
have been or may be affected by changes in the accounting principles are as
follows:
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software
revenue recognition;
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accounting
for stock-based compensation;
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accounting
for income taxes; and
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accounting
for business combinations and related
goodwill.
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For
example, in the first quarter of fiscal 2006, we adopted SFAS No. 123
(revised 2004) (“SFAS 123R”), “Share-Based Payment” which requires the
measurement of all stock-based compensation to employees, including grants of
employee stock options, using a fair-value-based method and the recording of
such expense in our consolidated statements of income. The adoption of
SFAS 123R has had, and will continue to have, a significant adverse effect
on our reported financial results.
We also
adopted FIN 48 in the first quarter of fiscal 2008. The adoption of
FIN 48 resulted in an increase to both assets and liabilities in our
condensed consolidated balance sheet as of the beginning of fiscal 2008 and may
have an adverse effect on our future operating results and financial
position.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), (“SFAS 141R”), “Business Combinations”,
which changes the accounting for business combinations including the measurement
of acquirer shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting for pre-acquisition gain
and loss contingencies, the recognition of capitalized in-process research and
development, the accounting for acquisition related restructuring liabilities,
the treatment of acquisition related transaction costs and the recognition of
changes in the acquirer’s income tax valuation allowance. SFAS 141R is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. We are in the process of evaluating the impact of the
pending adoption of Statement 141R. We currently believe that the adoption of
Statement 141R will result in the recognition of certain types of expenses in
our results of operations that we currently capitalize pursuant to existing
accounting standards and may also impact our financial statements in other
ways.
If
our goodwill or amortizable intangible assets become impaired we may be required
to record a significant charge to earnings.
Under
GAAP, we review our goodwill and amortizable intangible assets for impairment
when events or changes in circumstances indicate the carrying value may not be
recoverable. Goodwill is required to be tested for impairment at least annually.
Factors that may be considered a change in circumstances indicating that the
carrying value of our goodwill or amortizable intangible assets may not be
recoverable include a decline in stock price and market capitalization, future
cash flows, and slower growth rates in our industry. We may be required to
record a significant charge to earnings in our financial statements during the
period in which any impairment of our goodwill or amortizable intangible assets
is determined, resulting in an impact on our results of operations. For example,
our Mobile and Device Solutions segment, which primarily consists of assets
acquired in the Macromedia acquisition, is in an emerging market with high
growth potential. We recently announced the Open Screen Project. As part of the
project, we will be removing the license fees on the next major releases of
Adobe Flash Player and Adobe AIR for devices. Accordingly, we would expect
revenue from this segment to decrease following the next major release of these
products scheduled for fiscal 2009. Although we would expect this decrease to be
offset in time by an increased demand for tooling products, server technologies,
hosted services and applications, if future revenue or revenue forecasts for
this segment do not meet our expectations, we may be required to record a charge
to earnings reflecting an impairment of this recorded goodwill or intangible
assets.
Changes
in, or interpretations of, tax rules and regulations may adversely affect our
effective tax rates.
Unanticipated
changes in our tax rates could affect our future results of operations. Our
future effective tax rates could be unfavorably affected by changes in, or
interpretation of, tax rules and regulations, by unanticipated decreases in the
amount of revenue or earnings in countries with low statutory tax rates, by
lapses of the availability of the U.S. research and development tax credit, or
by changes in the valuation of our deferred tax assets and
liabilities.
In
addition, we are subject to the continual examination of our income tax returns
by the IRS and other domestic and foreign tax authorities. We regularly assess
the likelihood of outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes and have reserved for potential
adjustments that may result from the current examination. We believe such
estimates to be reasonable; however, there can be no assurance that the final
determination of any of these examinations will not have an adverse effect on
our operating results and financial position.
If
we are unable to recruit and retain key personnel our business may be
harmed.
Much of
our future success depends on the continued service and availability of our
senior management. These individuals have acquired specialized knowledge and
skills with respect to Adobe. The loss of any of these individuals could harm
our business. Our business is also dependent on our ability to retain, hire and
motivate talented, highly skilled personnel. Experienced personnel in the
information technology industry are in high demand and competition for their
talents is intense, especially in the Bay Area, where many of our employees are
located. We have relied on our ability to grant equity
compensation
as one mechanism for recruiting and retaining such highly skilled personnel.
Recently enacted accounting regulations requiring the expensing of equity
compensation may impair our ability to provide these incentives without
incurring significant compensation costs. If we are unable to continue to
successfully attract and retain key personnel, our business may be
harmed.
Our
investment portfolio may become impaired by further deterioration of the capital
markets.
Our cash
equivalent and short-term investment portfolio as of August 29, 2008 consisted
of US treasury securities, bonds of government agencies, obligations of foreign
governments, corporate bonds and taxable money market mutual funds. We follow an
established investment policy and set of guidelines to monitor, manage and limit
our exposure to interest rate and credit risk. The policy sets forth credit
quality standards and limits our exposure to any one issuer, as well as our
maximum exposure to various asset classes.
As a
result of current adverse financial market conditions, investments in some
financial instruments, such as structured investment vehicles, sub-prime
mortgage-backed securities and collateralized debt obligations, may pose risks
arising from liquidity and credit concerns. As of August 29, 2008, we had no
direct holdings in these categories of investments and our indirect exposure to
these financial instruments through our holdings in money market mutual funds
was immaterial. As of August 29, 2008, we had no impairment charge associated
with our short-term investment portfolio relating to such adverse financial
market conditions. Although we believe our current investment portfolio has very
little risk of impairment, we cannot predict future market conditions or market
liquidity and can provide no assurance that our investment portfolio will remain
unimpaired.
We
may suffer losses from our equity investments which could harm our
business.
We have
investments and plan to continue to make future investments in privately-held
companies, many of which are considered in the start-up or development stages.
These investments are inherently risky, as the market for the technologies or
products these companies have under development is typically in the early stages
and may never materialize. Our investment activities can impact our net income.
Future price fluctuations in these securities and any significant long-term
declines in value of any of our investments could reduce our net income in
future periods.
We
rely on turnkey assemblers and any adverse change in our relationship with our
turnkey assemblers could result in a loss of revenue and harm our
business.
We
currently rely on six turnkey assemblers of our products, with at least two
turnkeys located in each major region we serve. If any significant turnkey
assembler terminates its relationship with us, or if our supply from any
significant turnkey assembler is interrupted or terminated for any other reason,
we may not have enough time or be able to replace the supply of products
replicated by that turnkey assembler to avoid serious harm to our
business.
Below is a summary of stock repurchases
for the quarter ended August 29, 2008. See Notes 10 and 17 of our
Notes to Condensed Consolidated Financial Statements for information regarding
our stock repurchase programs.
Plan/Period(1)
|
|
Shares
Repurchased(2)
|
|
|
Average
Price
Per
Share
|
|
Maximum
Number
of
Shares that May
Yet
Be Purchased
Under
the Plan
|
|
|
Stock
Repurchase Program I
|
|
|
|
|
|
|
|
|
|
Beginning
shares available to be repurchased as of May 30,
2008
|
|
|
|
|
|
|
140,020,904 |
|
(3) |
May
31—June 27, 2008
|
|
|
|
|
|
|
|
|
|
From
employees(4)
|
|
|
7 |
|
|
$ |
42.71 |
|
|
|
|
Structured
repurchases
|
|
|
401,563 |
|
|
$ |
41.02 |
|
|
|
|
June
28—July 25, 2008
|
|
|
|
|
|
|
|
|
|
|
|
From
employees(4)
|
|
|
27 |
|
|
$ |
39.80 |
|
|
|
|
Structured
repurchases
|
|
|
1,065,131 |
|
|
$ |
39.13 |
|
|
|
|
Open
market
repurchases
|
|
|
750,000 |
|
|
$ |
39.19 |
|
|
|
|
July
26—August 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Structured
repurchases
|
|
|
989,539 |
|
|
$ |
42.40 |
|
|
|
|
Adjustments
to repurchase authority for net dilution
|
|
|
— |
|
|
|
|
|
6,208,888 |
|
(5) |
Total
shares repurchased
|
|
|
3,206,267 |
|
|
|
|
|
(3,206,267
|
) |
|
Ending
shares available to be repurchased under Program I as of August 29,
2008
|
|
|
|
|
|
|
|
|
143,023,525 |
|
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Repurchase Program II
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
shares available to be repurchased as of May 30,
2008
|
|
|
|
|
|
|
|
|
456,361 |
|
|
June
28—July 25, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Open
market repurchases
|
|
|
456,361 |
|
|
$ |
39.79 |
|
|
|
|
Total
shares repurchased
|
|
|
456,361 |
|
|
|
|
|
(456,361
|
) |
|
Ending
shares available to be repurchased under Program II as of
August 29, 2008
|
|
|
|
|
|
|
|
|
0 |
|
|
_________________________________________
(1)
|
Stock
Repurchase Program I
|
In
December 1997, our Board of Directors authorized Stock Repurchase Program I
which is not subject to expiration. However, this repurchase program is limited
to covering net dilution from stock issuances and is subject to business
conditions and cash flow requirements as determined by our Board of Directors
from time to time.
Stock
Repurchase Program II
In April
2007, our Board of Directors authorized Stock Repurchase Program II which was
not subject to expiration. Under Stock Repurchase Program II, we had
authorization to repurchase in aggregate up to 20.0 million shares of our
common stock. In November 2007, the Board of Directors approved a
30.0 million share increase to Stock Repurchase Program II. This increased
the authorization under this program from the original 20.0 million shares
to 50.0 million shares. During the third quarter of fiscal 2008, the
remaining authorized number of shares were repurchased.
(2)
|
All
shares were purchased as part of publicly announced
plans.
|
(3)
|
Additional
109.0 million shares were issued for the acquisition of Macromedia
which accounted for the majority of the repurchase
authorization.
|
(4)
|
The
repurchases from employees represent shares cancelled when surrendered in
lieu of cash payments for withholding taxes
due.
|
(5)
|
Adjustment
of authority to reflect changes in the dilution from outstanding shares
and options.
|
(6)
|
The
remaining authorization for the ongoing stock repurchase program is
determined by combining all stock issuances, net of any cancelled,
surrendered or exchanged shares less all stock repurchases under the
ongoing plan, beginning in the first quarter of fiscal
1998.
|
None.
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Amended
and Restated Bylaws
|
|
8-K
|
|
1/15/08
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Restated
Certificate of Incorporation of Adobe Systems Incorporated
|
|
10-Q
|
|
7/16/01
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2.1
|
|
Certificate
of Correction of Restated Certificate of Incorporation of Adobe Systems
Incorporated
|
|
10-Q
|
|
4/11/03
|
|
3.6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Certificate
of Designation of Series A Preferred Stock of Adobe Systems
Incorporated
|
|
10-Q
|
|
7/08/03
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Fourth
Amended and Restated Rights Agreement between Adobe Systems Incorporated
and Computershare Investor Services, LLC
|
|
8-K
|
|
7/03/00
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1.1
|
|
Amendment
No. 1 to Fourth Amended and Restated Rights Agreement between Adobe
Systems Incorporated and Computershare Investor
Services, LLC
|
|
8-A/2G/A
|
|
5/23/03
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
1984
Stock Option Plan, as amended*
|
|
10-Q
|
|
7/02/93
|
|
10.1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Amended
1994 Performance and Restricted Stock Plan*
|
|
10-Q
|
|
4/4/08
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.3
|
|
Form
of Restricted Stock Agreement used in connection with the Amended 1994
Performance and Restricted Stock Plan*
|
|
10-Q
|
|
7/3/08
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4
|
|
1994
Stock Option Plan, as amended*
|
|
S-8
|
|
5/30/97
|
|
10.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
1997
Employee Stock Purchase Plan, as amended*
|
|
10-K
|
|
1/24/08
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
1996
Outside Directors Stock Option Plan, as amended*
|
|
10-Q
|
|
4/12/06
|
|
10.6
|
|
|
10.7
|
|
Forms
of Stock Option Agreements used in connection with the 1996 Outside
Directors Stock Option Plan*
|
|
S-8
|
|
6/16/00
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
1999
Nonstatutory Stock Option Plan, as amended*
|
|
S-8
|
|
10/29/01
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9
|
|
1999
Equity Incentive Plan, as amended*
|
|
10-K
|
|
2/26/03
|
|
10.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
2003
Equity Incentive Plan, as amended and restated*
|
|
DEF 14A
|
|
2/27/08
|
|
Appendix A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.11
|
|
Form
of Stock Option Agreement used in connection with the 2003 Equity
Incentive Plan*
|
|
10-Q
|
|
4/4/08
|
|
10.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12
|
|
Form
of Indemnity Agreement*
|
|
10-Q
|
|
5/30/97
|
|
10.25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.13
|
|
Forms
of Retention Agreement*
|
|
10-K
|
|
11/28/97
|
|
10.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.14
|
|
Second
Amended and Restated Master Lease of Land and Improvements by and between
SMBC Leasing and Finance, Inc. and Adobe Systems
Incorporated
|
|
10-Q
|
|
10/07/04
|
|
10.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.15
|
|
Lease
between Adobe Systems Incorporated and Selco Service Corporation, dated
March 26, 2007
|
|
8-K
|
|
3/28/07
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Participation
Agreement among Adobe Systems Incorporated, Selco Service Corporation, et
al. dated March 26, 2007
|
|
8-K
|
|
3/28/07
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Lease
Agreement by and between Allaire Corporation and EOP Riverside
Project LLC dated November 23, 1999
|
|
10-K
|
|
3/30/00
|
|
10.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.18
|
|
First
Amendment to Lease Agreement by and between Allaire Corporation and EOP
Riverside Project LLC dated May 31, 2000
|
|
10-Q
|
|
8/14/00
|
|
10.3
|
|
|
10.19
|
|
Form
of Restricted Stock Unit Agreement used in connection with the Amended
1994 Performance and Restricted Stock Plan*
|
|
10-Q
|
|
4/4/08
|
|
10.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Form
of Restricted Stock Unit Agreement used in connection with the 2003 Equity
Incentive Plan*
|
|
10-Q
|
|
4/4/08
|
|
10.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.21
|
|
Form
of Restricted Stock Agreement used in connection with the 2003 Equity
Incentive Plan*
|
|
10-Q
|
|
10/07/04
|
|
10.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.22
|
|
2008
Executive Officer Annual Incentive Plan*
|
|
8-K
|
|
1/30/08
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
|
2005
Equity Incentive Assumption Plan, as amended*
|
|
10-Q
|
|
4/4/08
|
|
10.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
Form
of Stock Option Agreement used in connection with the 2005 Equity
Incentive Assumption Plan*
|
|
10-Q
|
|
4/4/08
|
|
10.24
|
|
|
10.25
|
|
Allaire
Corporation 1997 Stock Incentive Plan*
|
|
S-8
|
|
03/27/01
|
|
4.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.26
|
|
Allaire
Corporation 1998 Stock Incentive Plan*
|
|
S-8
|
|
03/27/01
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.27
|
|
Allaire
Corporation 2000 Stock Incentive Plan*
|
|
S-8
|
|
03/27/01
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.28
|
|
Andromedia, Inc.
1996 Stock Option Plan*
|
|
S-8
|
|
12/07/99
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.29
|
|
Andromedia, Inc.
1997 Stock Option Plan*
|
|
S-8
|
|
12/07/99
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.30
|
|
Andromedia, Inc.
1999 Stock Plan*
|
|
S-8
|
|
12/07/99
|
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.31
|
|
ESI
Software, Inc. 1996 Equity Incentive Plan*
|
|
S-8
|
|
10/18/99
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.32
|
|
eHelp
Corporation 1999 Equity Incentive Plan*
|
|
S-8
|
|
12/29/03
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.33
|
|
Blue
Sky Software Corporation 1996 Stock Option Plan*
|
|
S-8
|
|
12/29/03
|
|
4.07
|
|
|
10.34
|
|
Bright
Tiger Technologies, Inc. 1996 Stock Option Plan*
|
|
S-8
|
|
03/27/01
|
|
4.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.35
|
|
Live
Software, Inc. 1999 Stock Option/Stock Issuance Plan*
|
|
S-8
|
|
03/27/01
|
|
4.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.36
|
|
Macromedia, Inc.
1999 Stock Option Plan*
|
|
S-8
|
|
08/17/00
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.37
|
|
Macromedia, Inc.
1992 Equity Incentive Plan*
|
|
10-Q
|
|
08/03/01
|
|
10.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.38
|
|
Macromedia, Inc.
2002 Equity Incentive Plan*
|
|
S-8
|
|
08/10/05
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.39
|
|
Form
of Macromedia, Inc. Stock Option Agreement*
|
|
S-8
|
|
08/10/05
|
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.40
|
|
Middlesoft, Inc.
1999 Stock Option Plan*
|
|
S-8
|
|
08/17/00
|
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.41
|
|
Form
of Macromedia, Inc. Revised Non-Plan Stock Option
Agreement*
|
|
S-8
|
|
11/23/04
|
|
4.10
|
|
|
10.42
|
|
Form
of Macromedia, Inc. Restricted Stock Purchase
Agreement*
|
|
10-Q
|
|
2/08/05
|
|
10.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.43
|
|
Adobe
Systems Incorporated Form of Performance Share Program pursuant to the
2003 Equity Incentive Plan*
|
|
8-K
|
|
1/30/08
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.44
|
|
Form
of Award Grant Notice and Performance Share Award Agreement used in
connection with grants under the Adobe Systems Incorporated 2008
Performance Share Program pursuant to the 2003 Equity Incentive
Plan*
|
|
8-K
|
|
1/30/08
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.45
|
|
2008
Award Calculation Methodology Exhibit A to the 2008 Performance Share
Program pursuant to the 2003 Equity Incentive Plan*
|
|
8-K
|
|
1/30/08
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.46
|
|
Adobe
Systems Incorporated Deferred Compensation Plan*
|
|
10-K
|
|
1/24/08
|
|
10.52
|
|
|
10.47
|
|
Adobe
Systems Incorporated 2007 Performance Share Program pursuant to the 2003
Equity Incentive Plan*
|
|
8-K
|
|
1/30/07
|
|
10.1
|
|
|
10.48
|
|
Form
of Award Grant Notice and Performance Share Award Agreement used in
connection with grants under the Adobe Systems Incorporated 2007
Performance Share Program pursuant to the 2003 Equity Incentive
Plan*
|
|
8-K
|
|
1/30/07
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.49
|
|
Adobe
Systems Incorporated 2007 Performance Share Program pursuant to the
Amended 1994 Performance and Restricted Stock Plan*
|
|
8-K
|
|
1/30/07
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.50
|
|
Form
of Award Grant Notice and Performance Share Award Agreement used in
connection with grants under the Adobe Systems Incorporated 2007
Performance Share Program pursuant to the Amended 1994 Performance and
Restricted Stock Plan*
|
|
8-K
|
|
1/30/07
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.51
|
|
Adobe
Systems Incorporated Executive Cash Bonus Plan*
|
|
DEF 14A
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2/24/06
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Appendix B
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10.52
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First
Amendment to Retention Agreement between Adobe Systems Incorporated and
Shantanu Narayen, effective as of February 11, 2008*
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8-K
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2/13/08
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10.1
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10.53
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Adobe
Systems Incorporated Executive Severance Plan in the Event of a Change of
Control*
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8-K
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2/13/08
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10.2
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10.54
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Employment
offer letter between Adobe Systems Incorporated and Richard Rowley, dated
October 30, 2006*
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8-K
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11/16/06
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10.1
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10.55
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Employment
offer letter between Adobe Systems Incorporated and Mark Garrett dated
January 5, 2007*
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8-K
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1/26/07
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10.1
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10.56
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Credit
Agreement, dated as of February 16, 2007, among Adobe Systems
Incorporated and Certain Subsidiaries as Borrowers; BNP Paribas, Keybank
National Association, and UBS Loan Finance LLC as Co-Documentation
Agents; JPMorgan Chase Bank, N.A. as Syndication Agent; Bank of America,
N.A. as Administrative Agent and Swing Line Lender; the Other Lenders
Party Thereto; and Banc of America Securities LLC and J.P. Morgan
Securities Inc. as Joint Lead Arrangers and Joint Book
Managers
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8-K
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8/16/07
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10.1
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10.57
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Amendment
to Credit Agreement, dated as of August 13, 2007, among Adobe Systems
Incorporated, as Borrower; each Lender from time to time party to the
Credit Agreement; and Bank of America, N.A. as Administrative
Agent
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8-K
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8/16/07
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10.2
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10.58
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Second
Amendment to Credit Agreement, dated as of February 26, 2008, among
Adobe Systems Incorporated, as Borrower; each Lender from time to time
party to the Credit Agreement; and Bank of America, N.A. as Administrative
Agent
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8-K
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2/29/08
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10.1
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10.59
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Purchase
and Sale Agreement, by and between NP Normandy Overlook, LLC, as Seller
and Adobe Systems Incorporated as Buyer, effective as of May 12,
2008
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8-K
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5/15/08
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10.1
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10.60
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Form
of Director Stock Option Agreement used in connection with the 2003 Equity
Incentive Plan*
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10-Q
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7/3/08
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10.60
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10.61
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Form
of Director Restricted Stock Unit Agreement in connection with the 2003
Equity Incentive Plan*
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10-Q
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7/3/08
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10.61
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31.1
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Certification
of Chief Executive Officer, as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934
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X
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31.2
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Certification
of Chief Financial Officer, as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934
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X
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32.1
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Certification
of Chief Executive Officer, as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934†
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X
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32.2
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|
Certification
of Chief Financial Officer, as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934†
|
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X
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100.INS
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XBRL
Instance††
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X
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100.SCH
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XBRL
Taxonomy Extension Schema††
|
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X
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100.CAL
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|
XBRL
Taxonomy Extension Calculation††
|
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X
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100.LAB
|
|
XBRL
Taxonomy Extension Labels††
|
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X
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100.PRE
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|
XBRL
Taxonomy Extension Presentation††
|
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X
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100.DEF
|
|
XBRL
Taxonomy Extension Definition††
|
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X
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_________________________________________
*
|
Compensatory
plan or arrangement.
|
**
|
References
to Exhibits 10.17 and 10.18 are to filings made by the Allaire
Corporation. References to Exhibits 10.25 through 10.42 are to
filings made by
Macromedia, Inc.
|
†
|
The
certifications attached as Exhibits 32.1 and 32.2 that accompany this
Quarterly Report on Form 10-Q, are not deemed filed with the
Securities and Exchange Commission and are not to be incorporated by
reference into any filing of Adobe Systems Incorporated under the
Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended, whether made before or after the date of this
Form 10-Q, irrespective of any general incorporation language
contained in such filing.
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
ADOBE
SYSTEMS INCORPORATED
|
|
|
|
|
|
By
|
|
|
|
Mark
Garrett
|
|
|
Executive
Vice President and
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
|
Date:
October 2, 2008
The
following trademarks of Adobe Systems Incorporated or its subsidiaries, which
may be registered in the United States and/or other countries, are referenced in
this Form 10-Q:
Adobe
Adobe
AIR
Acrobat
Acrobat
Connect
ColdFusion
Creative
Suite
Flash
Flash
Cast
Flash
Lite
Flex
Flex
Builder
LiveCycle
Macromedia
Photoshop
Scene7
All other trademarks are the property
of their respective owners.