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 February 27,
2009
|
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 March 27, 2009 was
523,737,172.
FORM
10-Q
TABLE
OF CONTENTS
|
|
|
Page
No.
|
PART
I—FINANCIAL INFORMATION
|
|
Item 1.
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
Item 2.
|
|
24
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Item 3.
|
|
34
|
Item 4.
|
|
34
|
|
|
PART
II—OTHER INFORMATION
|
|
Item 1.
|
|
35
|
Item 1A.
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|
35
|
Item 2.
|
|
43
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Item 5.
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|
43
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Item 6.
|
|
44
|
|
52
|
|
53
|
PART
I—FINANCIAL INFORMATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share data)
(Unaudited)
|
|
February
27,
2009
|
|
|
November 28,
2008
|
|
ASSETS
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,148,925 |
|
|
$ |
886,450 |
|
Short-term
investments
|
|
|
1,234,769 |
|
|
|
1,132,752 |
|
Trade
receivables, net of allowances for doubtful accounts of $5,796
and $4,128, respectively
|
|
|
300,048 |
|
|
|
467,234 |
|
Deferred
income taxes
|
|
|
81,125 |
|
|
|
110,713 |
|
Prepaid
expenses and other assets
|
|
|
104,124 |
|
|
|
137,954 |
|
Total
current assets
|
|
|
2,868,991 |
|
|
|
2,735,103 |
|
Property
and equipment, net
|
|
|
300,376 |
|
|
|
313,037 |
|
Goodwill
|
|
|
2,132,375 |
|
|
|
2,134,730 |
|
Purchased
and other intangibles, net
|
|
|
181,468 |
|
|
|
214,960 |
|
Investment
in lease receivable
|
|
|
207,239 |
|
|
|
207,239 |
|
Other
assets
|
|
|
197,147 |
|
|
|
216,529 |
|
Total
assets
|
|
$ |
5,887,596 |
|
|
$ |
5,821,598 |
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
41,416 |
|
|
$ |
55,840 |
|
Accrued
expenses
|
|
|
345,677 |
|
|
|
399,969 |
|
Accrued
restructuring
|
|
|
18,352 |
|
|
|
35,690 |
|
Income
taxes payable
|
|
|
33,107 |
|
|
|
27,136 |
|
Deferred
revenue
|
|
|
198,313 |
|
|
|
243,964 |
|
Total
current liabilities
|
|
|
636,865 |
|
|
|
762,599 |
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Debt
|
|
|
350,000 |
|
|
|
350,000 |
|
Deferred
revenue
|
|
|
26,973 |
|
|
|
31,356 |
|
Accrued
restructuring
|
|
|
6,995 |
|
|
|
6,214 |
|
Income
taxes payable
|
|
|
120,289 |
|
|
|
123,182 |
|
Deferred
income taxes
|
|
|
114,603 |
|
|
|
117,328 |
|
Other
liabilities
|
|
|
20,711 |
|
|
|
20,565 |
|
Total
liabilities
|
|
|
1,276,436 |
|
|
|
1,411,244 |
|
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; 524,095 and 526,111 shares outstanding,
respectively
|
|
|
61 |
|
|
|
61 |
|
Additional
paid-in-capital
|
|
|
2,352,383 |
|
|
|
2,396,819 |
|
Retained
earnings
|
|
|
5,069,840 |
|
|
|
4,913,406 |
|
Accumulated
other comprehensive income
|
|
|
25,095 |
|
|
|
57,222 |
|
Treasury
stock, at cost (76,739 and 74,723 shares, respectively), net of
reissuances
|
|
|
(2,836,219
|
) |
|
|
(2,957,154
|
) |
Total
stockholders’ equity
|
|
|
4,611,160 |
|
|
|
4,410,354 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
5,887,596 |
|
|
$ |
5,821,598 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except per share data)
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
February
27,
2009
|
|
|
February
29,
2008
|
|
Revenue:
|
|
|
|
|
|
|
Products
|
|
$ |
742,199 |
|
|
$ |
851,962 |
|
Services
and support
|
|
|
44,191 |
|
|
|
38,483 |
|
Total
revenue
|
|
|
786,390 |
|
|
|
890,445 |
|
Total
cost of revenue:
|
|
|
|
|
|
|
|
|
Products
|
|
|
58,918 |
|
|
|
59,805 |
|
Services
and support
|
|
|
18,435 |
|
|
|
22,670 |
|
Total
cost of revenue
|
|
|
77,353 |
|
|
|
82,475 |
|
Gross
profit
|
|
|
709,037 |
|
|
|
807,970 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
149,917 |
|
|
|
168,485 |
|
Sales
and marketing
|
|
|
249,491 |
|
|
|
262,595 |
|
General
and administrative
|
|
|
74,051 |
|
|
|
82,929 |
|
Restructuring
charges
|
|
|
12,270 |
|
|
|
1,431 |
|
Amortization
of purchased intangibles
|
|
|
15,392 |
|
|
|
17,099 |
|
Total
operating expenses
|
|
|
501,121 |
|
|
|
532,539 |
|
Operating
income
|
|
|
207,916 |
|
|
|
275,431 |
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
13,284 |
|
|
|
13,290 |
|
Interest
expense
|
|
|
(792
|
) |
|
|
(1,809
|
) |
Investment
gains (losses), net
|
|
|
(17,246
|
) |
|
|
8,732 |
|
Total
non-operating income (expense), net
|
|
|
(4,754
|
) |
|
|
20,213 |
|
Income
before income taxes
|
|
|
203,162 |
|
|
|
295,644 |
|
Provision
for income taxes
|
|
|
46,727 |
|
|
|
76,265 |
|
Net
income
|
|
$ |
156,435 |
|
|
$ |
219,379 |
|
Basic
net income per share
|
|
$ |
0.30 |
|
|
$ |
0.39 |
|
Shares
used in computing basic net income per share
|
|
|
524,268 |
|
|
|
561,113 |
|
Diluted
net income per share
|
|
$ |
0.30 |
|
|
$ |
0.38 |
|
Shares
used in computing diluted net income per share
|
|
|
527,830 |
|
|
|
571,259 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
February
27,
2009
|
|
|
February
29,
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
156,435 |
|
|
$ |
219,379 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and accretion
|
|
|
68,740 |
|
|
|
69,202 |
|
Stock-based
compensation
|
|
|
45,618 |
|
|
|
43,034 |
|
Deferred
income taxes
|
|
|
26,518 |
|
|
|
35,844 |
|
Losses
(gains) on investments
|
|
|
15,784 |
|
|
|
(9,493
|
) |
Retirements
of property and equipment
|
|
|
3,157 |
|
|
|
99 |
|
Tax
benefit from employee stock option plans
|
|
|
2,711 |
|
|
|
— |
|
Provision
for losses on trade receivables
|
|
|
2,701 |
|
|
|
(224
|
) |
Other
non-cash items
|
|
|
1,567 |
|
|
|
1,716 |
|
Excess
tax benefits from stock-based compensation
|
|
|
(84
|
) |
|
|
— |
|
Changes
in operating assets and liabilities, net of acquired assets and
liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
164,484 |
|
|
|
25,103 |
|
Prepaid
expenses and other current assets
|
|
|
7,859 |
|
|
|
4,565 |
|
Trade
payables
|
|
|
(14,424
|
) |
|
|
(2,906
|
) |
Accrued
expenses
|
|
|
(53,098
|
) |
|
|
(16,733
|
) |
Accrued
restructuring
|
|
|
(16,656
|
) |
|
|
274 |
|
Income
taxes payable
|
|
|
4,465 |
|
|
|
24,090 |
|
Deferred
revenue
|
|
|
(50,034
|
) |
|
|
5,350 |
|
Net
cash provided by operating activities
|
|
|
365,743 |
|
|
|
399,300 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of short-term investments
|
|
|
(435,171
|
) |
|
|
(224,645
|
) |
Maturities
of short-term investments
|
|
|
137,900 |
|
|
|
197,379 |
|
Proceeds
from sales of short-term investments
|
|
|
189,432 |
|
|
|
389,858 |
|
Purchases
of property and equipment
|
|
|
(15,916
|
) |
|
|
(26,268
|
) |
Purchases
of long-term investments and other assets
|
|
|
(9,201
|
) |
|
|
(14,400
|
) |
Proceeds
from sale of long-term investments
|
|
|
1,394 |
|
|
|
6,847 |
|
Net
cash (used for) provided by investing activities
|
|
|
(131,562
|
) |
|
|
328,771 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Purchases
of treasury stock
|
|
|
(13
|
) |
|
|
(1,150,022
|
) |
Proceeds
from issuance of treasury stock
|
|
|
28,604 |
|
|
|
53,510 |
|
Excess
tax benefits from stock-based compensation
|
|
|
84 |
|
|
|
— |
|
Proceeds
from borrowings under credit facility
|
|
|
— |
|
|
|
450,000 |
|
Net
cash provided by (used for) financing activities
|
|
|
28,675 |
|
|
|
(646,512
|
) |
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
|
|
(381
|
) |
|
|
4,752 |
|
Net
increase in cash and cash equivalents
|
|
|
262,475 |
|
|
|
86,311 |
|
Cash
and cash equivalents at beginning of period
|
|
|
886,450 |
|
|
|
946,422 |
|
Cash
and cash equivalents at end of period
|
|
$ |
1,148,925 |
|
|
$ |
1,032,733 |
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes, net of refunds
|
|
$ |
4,631 |
|
|
$ |
12,894 |
|
Cash
paid for interest
|
|
$ |
892 |
|
|
$ |
— |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 28, 2008 on file with the
SEC.
There have
been no material changes in our significant accounting policies, as compared to
the significant accounting policies described in our Annual Report on
Form 10-K for the fiscal year ended November 28, 2008.
Recent
Accounting Pronouncements
With the
exception of those discussed below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the three months
ended February 27, 2009, as compared to the recent accounting pronouncements
described in our Annual Report on Form 10-K for the fiscal year ended
November 28, 2008, that are of significance, or potential significance, to
us.
In
December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. 140-4 and FASB Interpretation (“FIN”) FIN 46R-8 (“FSP
140-4 and FIN 46R-8”), “Disclosures by Public Entities (Enterprises) about
Transfers of Financial Assets and Interests in Variable Interest Entities.” FSP
140-4 and FIN 46R-8 require additional disclosures about transfers of financial
assets and involvement with variable interest entities. The requirements apply
to transferors, sponsors, servicers, primary beneficiaries and holders of
significant variable interests in a variable interest entity or qualifying
special purpose entity. FSP 140-4 and FIN 46R-8 was effective for us in the
first quarter of fiscal 2009. However, no additional significant disclosures
were required and the adoption did not impact our consolidated financial
position, results of operations or cash flows.
In
September 2008, the FASB issued 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 Financial Accounting Standard (“SFAS”) No. 133 and FIN No. 45;
and Clarification of the Effective Date of SFAS No. 161.” FSP FAS
133-1 and FIN 45-4 amends SFAS 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 FIN 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 SFAS No. 161 (“SFAS
161”), “Disclosures about Derivative Instruments and Hedging Activities.” We
adopted the disclosures required by SFAS 161 in the first quarter of fiscal
2009. Since FSP FAS 133-1 and FIN 45-4 only required additional disclosures, the
adoption did not impact our consolidated financial position, results of
operations or cash flows.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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 SFAS 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. FSP 142-3 is effective for us beginning in the second quarter
of fiscal 2009. 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. We adopted SFAS 161 in the
first quarter of fiscal 2009. Since SFAS 161 only required additional
disclosure, the adoption did not impact our consolidated financial position,
results of operations or cash flows.
In
September 2006, the FASB issued SFAS 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. Effective November 29, 2008, we adopted SFAS 157 for all
nonfinancial assets and nonfinancial liabilities measured at fair value on a
non-recurring basis. Examples include goodwill, intangibles, and other
long-lived assets. The adoption of SFAS 157 did not have a material impact on
our consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS 141R”),
“Business Combinations” and SFAS No. 160 (“SFAS 160”), “Noncontrolling Interests
in Consolidated Financial Statements, an amendment of Accounting Research
Bulletin No. 51.” SFAS 141R will change how business acquisitions are accounted
for and will impact financial statements both on the acquisition date and in
subsequent periods. SFAS 160 will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity. SFAS 141R and SFAS 160 are
effective for us beginning in the first quarter of fiscal 2010. Early adoption
is not permitted. We are currently evaluating the impact that SFAS 141R and SFAS
160 will have on our consolidated financial statements.
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 February 27, 2009 (in thousands):
|
|
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)
|
|
$ |
1,025,810 |
|
|
$ |
1,025,810 |
|
|
$ |
— |
|
|
$ |
— |
|
Fixed
income available-for-sale securities(2)
|
|
|
1,263,366 |
|
|
|
— |
|
|
|
1,263,366 |
|
|
|
— |
|
Available-for-sale
equity securities(3)
|
|
|
3,399 |
|
|
|
3,399 |
|
|
|
— |
|
|
|
— |
|
Investments
of limited partnership(4)
|
|
|
33,192 |
|
|
|
279 |
|
|
|
— |
|
|
|
32,913 |
|
Foreign
currency derivatives(5)
|
|
|
29,009 |
|
|
|
— |
|
|
|
29,009 |
|
|
|
— |
|
Deferred
compensation plan assets(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
|
772 |
|
|
|
772 |
|
|
|
— |
|
|
|
— |
|
Equity
and fixed income mutual funds
|
|
|
7,281 |
|
|
|
— |
|
|
|
7,281 |
|
|
|
— |
|
Subtotal
for deferred compensation plan assets
|
|
|
8,053 |
|
|
|
772 |
|
|
|
7,281 |
|
|
|
— |
|
Total
|
|
$ |
2,362,829 |
|
|
$ |
1,030,260 |
|
|
$ |
1,299,656 |
|
|
$ |
32,913 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency derivatives(6)
|
|
|
965 |
|
|
|
— |
|
|
|
965 |
|
|
|
— |
|
Total
|
|
$ |
965 |
|
|
$ |
— |
|
|
$ |
965 |
|
|
$ |
— |
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The fair value of these financial
assets and liabilities was determined using the following inputs at November 28,
2008 (in thousands):
|
|
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)
|
|
$ |
722,742 |
|
|
$ |
722,742 |
|
|
$ |
— |
|
|
$ |
— |
|
Fixed
income available-for-sale securities(2)
|
|
|
1,175,732 |
|
|
|
— |
|
|
|
1,175,732 |
|
|
|
— |
|
Available-for-sale
equity securities(3)
|
|
|
3,047 |
|
|
|
3,047 |
|
|
|
— |
|
|
|
— |
|
Investments
of limited partnership(4)
|
|
|
39,004 |
|
|
|
251 |
|
|
|
— |
|
|
|
38,753 |
|
Foreign
currency derivatives(5)
|
|
|
49,848 |
|
|
|
— |
|
|
|
49,848 |
|
|
|
— |
|
Deferred
compensation plan assets(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
|
704 |
|
|
|
704 |
|
|
|
— |
|
|
|
— |
|
Equity
and fixed income mutual funds
|
|
|
6,856 |
|
|
|
— |
|
|
|
6,856 |
|
|
|
— |
|
Subtotal
for deferred compensation plan assets
|
|
|
7,560 |
|
|
|
704 |
|
|
|
6,856 |
|
|
|
— |
|
Total
|
|
$ |
1,997,933 |
|
|
$ |
726,744 |
|
|
$ |
1,232,436 |
|
|
$ |
38,753 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency derivatives(6)
|
|
|
1,739 |
|
|
|
— |
|
|
|
1,739 |
|
|
|
— |
|
Total
|
|
$ |
1,739 |
|
|
$ |
— |
|
|
$ |
1,739 |
|
|
$ |
— |
|
_________________________________________
(1)
|
Included
in cash and cash equivalents on our condensed consolidated balance
sheets.
|
(2)
|
Included
in either cash and cash equivalents or short-term investments on our
condensed consolidated balance
sheets.
|
(3)
|
Included
in short-term investments on our condensed consolidated balance
sheets.
|
(4)
|
Included
in other assets on our condensed consolidated balance
sheets.
|
(5)
|
Included
in prepaid expenses and other assets on our condensed consolidated balance
sheets.
|
(6)
|
Included
in accrued expenses on our condensed consolidated balance
sheets.
|
Fixed
income available-for-sale securities include United States (“U.S.”) treasury
securities, Agency or U.S. Government guaranteed securities (86% of total),
corporate bonds (9% of total) and obligations of foreign governments and their
agencies (5% of total).
The
investments of limited partnership relate to our interest in Adobe Ventures IV
L.P. (“Adobe Ventures”), which are consolidated in our condensed consolidated
financial statements. 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. These investments are remeasured at
fair value each period with any gains or losses recognized in investment gains
(losses), net in our condensed consolidated statements of income. We estimated
fair value of the Level 3 investments by considering available information such
as pricing in recent rounds of financing, current cash positions, earnings and
cash flow forecasts, recent operational performance and any other readily
available market data.
A
reconciliation of the beginning and ending balances for investments of limited
partnership using significant unobservable inputs as of February 27, 2009 and
November 28, 2008 was as follows (in thousands):
Balance
as of November 28, 2008
|
|
$ |
38,753 |
|
Purchases
and sales of investments, net
|
|
|
(603
|
) |
Unrealized
net investment losses included in earnings
|
|
|
(5,237
|
) |
Balance
as of February 27, 2009
|
|
$ |
32,913 |
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Investment
gains and losses of our limited partnership are included in our condensed
consolidated statements of income as a component of investment gain (loss).
See Note 4 for further
information regarding our limited partnership interest in Adobe
Ventures.
We also
have direct investments in privately-held companies accounted for under the cost
method, which are periodically assessed for other-than-temporary
impairment. If we determine that an other-than-temporary impairment has
occurred, we write-down the investment to its fair value. We estimated fair
value of our cost method investments considering available information such as
pricing in recent rounds of financing, current cash positions, earnings and cash
flow forecasts, recent operational performance and any other readily available
market data. During the first quarter of 2009, we determined that certain of our
cost method investments were other-than-temporarily impaired which resulted in a
charge of $10.6 million included in investment gains (losses), net in the
condensed consolidated statements of income. The fair value of cost method
investments that were impaired was estimated using Level 3 inputs.
In
countries outside the U.S., we transact business in U.S. dollars and in various
other currencies. In Europe and Japan, transactions that are denominated in Euro
and Yen are subject to exposure from movements in exchange rates. We may use
foreign exchange option contracts or forward contracts to hedge operational
(“cash flow”) exposures resulting from changes in these foreign currency
exchange rates. These foreign exchange contracts, carried at fair value, may
have maturities between one and twelve months. We enter into these foreign
exchange contracts to hedge a portion of our forecasted foreign currency
denominated revenue in the normal course of business and accordingly, they are
not speculative in nature.
We record
changes in the intrinsic value of these cash flow hedges in accumulated other
comprehensive income (loss), until the forecasted transaction occurs. When the
forecasted transaction occurs, we reclassify the related gain or loss on the
cash flow hedge to revenue. In the event the underlying forecasted transaction
does not occur, or it becomes probable that it will not occur, we reclassify the
gain or loss on the related cash flow hedge from accumulated other comprehensive
income (loss) to interest and other income, net on our condensed consolidated
statement of income at that time.
We also
hedge our net recognized foreign currency assets and liabilities with foreign
exchange forward contracts to reduce the risk that our earnings and cash flows
will be adversely affected by changes in exchange rates. These
derivative instruments hedge assets and liabilities that are denominated in
foreign currencies and are carried at fair value with changes in the fair value
recorded to interest and other income, net on our condensed consolidated
statement of income. These derivative instruments do not subject us to material
balance sheet risk due to exchange rate movements because gains and losses on
these derivatives are intended to offset gains and losses on the assets and
liabilities being hedged.
We
mitigate concentration of risk related to foreign currency hedges as well as
interest rate hedges through a policy that establishes counterparty limits. The
bank counterparties in these contracts expose us to credit-related losses in the
event of their nonperformance. However, to mitigate that risk, we only contract
with counterparties who meet our minimum requirements under our counterparty
risk assessment process. In addition, our hedging policy establishes maximum
limits for each counterparty. We monitor ratings, credit spreads and potential
downgrades on at least a quarterly basis. Based on our on-going assessment of
counterparty risk, we will adjust our exposure to various
counterparties.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The fair value of derivative
instruments in our condensed consolidated balance sheets as of February 27, 2009
was as follows (in thousands):
|
Fair
Values of Derivative Instruments
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Derivatives
designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign
exchange option contracts
|
Prepaid
expense and
other assets
|
|
$ |
25,213 |
|
Accrued
expenses
|
|
$ |
— |
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward
contracts
|
Prepaid
expense and other assets
|
|
|
3,796 |
|
Accrued
expenses
|
|
|
(965
|
) |
Total
derivatives
|
|
|
$ |
29,009 |
|
|
|
$ |
(965 |
) |
The effect
of derivative instruments designated as cash flow hedges on our condensed
consolidated statement of income for the three months ended February 27, 2009
was as follows (in thousands):
Derivatives in Cash Flow Hedging
Relationships
|
|
Gain
(Loss) Recognized (1)
|
|
|
Gain
(Loss) Reclassified (2)
|
|
|
Gain
(Loss) Recognized (3)
|
|
Foreign
exchange option contracts
|
|
$ |
(5,450 |
) |
|
$ |
20,476 |
|
|
$ |
(1,632 |
) |
_________________________________________
(1)
|
Amount
recognized in OCI (effective
portion).
|
(2)
|
Amount
of gain (loss) reclassified from accumulated OCI into income (effective
portion) located in revenue.
|
(3)
|
Amount
of gain (loss) recognized in income on derivative (ineffective portion and
amount excluded from effectiveness testing) located in interest and other
income, net.
|
The effect of derivative instruments
not designated as hedges on our condensed consolidated statement of income for
the three months ended February 27, 2009 was as follows (in
thousands):
Derivatives Not Designated as Hedging
Instruments
|
|
Gain
(Loss) Recognized (*)
|
|
|
|
|
|
Foreign
exchange forward
contracts
|
|
$ |
(3,245 |
) |
_________________________________________
(*)
|
Amount
of gain (loss) recognized in income located in interest and other income,
net.
|
NOTE
3. GOODWILL AND PURCHASED AND OTHER INTANGIBLES
Goodwill
as of February 27, 2009 and November 28, 2008 was $2.132 billion and
$2.135 billion, respectively. The change includes reductions in goodwill
primarily related to the unrecognized tax benefits associated with the
acquisition of Macromedia in addition to foreign currency translation
adjustments.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Purchased
and other intangible assets subject to amortization as of February 27, 2009 were
as follows (in thousands):
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Purchased
technology
|
|
$ |
411,493 |
|
|
$ |
(352,998 |
) |
|
$ |
58,495 |
|
Localization
|
|
$ |
28,655 |
|
|
$ |
(14,851 |
) |
|
$ |
13,804 |
|
Trademarks
|
|
|
130,925 |
|
|
|
(84,767
|
) |
|
|
46,158 |
|
Customer
contracts and relationships
|
|
|
198,889 |
|
|
|
(136,255
|
) |
|
|
62,634 |
|
Other
intangibles
|
|
|
800 |
|
|
|
(423
|
) |
|
|
377 |
|
Total
other intangible assets
|
|
$ |
359,269 |
|
|
$ |
(236,296 |
) |
|
$ |
122,973 |
|
Total
purchased and other intangible assets
|
|
$ |
770,762 |
|
|
$ |
(589,294 |
) |
|
$ |
181,468 |
|
Purchased
and other intangible assets subject to amortization as of November 28, 2008 were
as follows (in thousands):
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Purchased
technology
|
|
$ |
411,408 |
|
|
$ |
(338,608 |
) |
|
$ |
72,800 |
|
Localization
|
|
$ |
23,751 |
|
|
$ |
(6,156 |
) |
|
$ |
17,595 |
|
Trademarks
|
|
|
130,925 |
|
|
|
(78,181
|
) |
|
|
52,744 |
|
Customer
contracts and relationships
|
|
|
198,891 |
|
|
|
(127,520
|
) |
|
|
71,371 |
|
Other
intangibles
|
|
|
800 |
|
|
|
(350
|
) |
|
|
450 |
|
Total
other intangible assets
|
|
$ |
354,367 |
|
|
$ |
(212,207 |
) |
|
$ |
142,160 |
|
Total
purchased and other intangible assets
|
|
$ |
765,775 |
|
|
$ |
(550,815 |
) |
|
$ |
214,960 |
|
Amortization
expense related to purchased and other intangible assets was $39.0 million and
$49.5 million for the three months ended February 27, 2009 and February 29,
2008, respectively. Of these amounts, $23.6 million and $32.4 million was
included in cost of sales for the three months ended February 27, 2009 and
February 29, 2008, respectively.
Amortization
expense decreased during the three months ended February 27, 2009 as compared to
the three months ended February 29, 2008, due to a decrease in amortization
expense associated with intangible assets purchased through the Macromedia
acquisition.
Purchased and other intangible assets
are amortized over their estimated useful lives of 1 to 13 years. As of February
27, 2009, we expect amortization expense in future periods to be as follows (in
thousands):
Fiscal year
|
|
Purchased
Technology
|
|
|
Other
Intangible
Assets
|
|
Remainder
of 2009
|
|
$ |
41,869 |
|
|
$ |
59,306 |
|
2010
|
|
|
8,273 |
|
|
|
49,564 |
|
2011
|
|
|
4,966 |
|
|
|
11,917 |
|
2012
|
|
|
3,387 |
|
|
|
1,009 |
|
2013
|
|
|
— |
|
|
|
789 |
|
Thereafter
|
|
|
— |
|
|
|
388 |
|
Total
expected amortization expense
|
|
$ |
58,495 |
|
|
$ |
122,973 |
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE
4. OTHER ASSETS
Other
assets as of February 27, 2009 and November 28, 2008 consisted of the following
(in thousands):
|
|
2009
|
|
|
2008
|
|
Acquired
rights to use technology
|
|
$ |
88,572 |
|
|
$ |
90,643 |
|
Investments
|
|
|
61,178 |
|
|
|
76,589 |
|
Security
and other deposits
|
|
|
15,779 |
|
|
|
16,087 |
|
Deferred
compensation plan assets
|
|
|
8,053 |
|
|
|
7,560 |
|
Prepaid
royalties
|
|
|
7,646 |
|
|
|
9,026 |
|
Restricted
cash
|
|
|
7,359 |
|
|
|
7,361 |
|
Prepaid
land lease
|
|
|
3,176 |
|
|
|
3,185 |
|
Prepaid
rent
|
|
|
2,251 |
|
|
|
2,658 |
|
Other
|
|
|
3,133 |
|
|
|
3,420 |
|
Total
other assets
|
|
$ |
197,147 |
|
|
$ |
216,529 |
|
Included
in investments are our indirect investments through our limited partnership
interest in Adobe Ventures, which is consolidated in accordance with FIN
No. 46R, a revision to FIN 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. See Note 2 for further information
regarding Adobe Ventures.
Also
included in investments are our direct investments in privately-held companies
which are accounted for based on the cost method. We assess these investments
for impairment in value as circumstances dictate.
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 which
is included in security and other deposits. This deposit will 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. ACCRUED EXPENSES
Accrued
expenses as of February 27, 2009 and November 28, 2008 consisted of the
following (in thousands):
|
|
2009
|
|
|
2008
|
|
Accrued
compensation and benefits
|
|
$ |
133,817 |
|
|
$ |
177,760 |
|
Taxes
payable
|
|
|
15,579 |
|
|
|
21,760 |
|
Sales
and marketing allowances
|
|
|
29,594 |
|
|
|
28,127 |
|
Other
|
|
|
166,687 |
|
|
|
172,322 |
|
Total
accrued expenses
|
|
$ |
345,677 |
|
|
$ |
399,969 |
|
Other
primarily includes general corporate accruals for corporate marketing programs,
local and regional expenses, 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.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE
6. STOCK-BASED COMPENSATION
The
assumptions used to value option grants during the three months ended February
27, 2009 and February 29, 2008 were as follows:
|
|
2009
|
|
|
2008
|
|
Expected
life (in years)
|
|
|
3.7
– 3.8 |
|
|
|
2.27
– 4.64 |
|
Volatility
|
|
|
50 –
57 |
% |
|
|
33 –
35 |
% |
Risk
free interest rate
|
|
|
1.16
– 1.40 |
% |
|
|
2.37
– 3.35 |
% |
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 months ended February
27, 2009 and February 29, 2008 were as follows:
|
|
2009
|
|
|
2008
|
|
Expected
life (in years)
|
|
|
0.5
– 2.0 |
|
|
|
0.5
– 2.0 |
|
Volatility
|
|
|
49 –
57 |
% |
|
|
30 –
31 |
% |
Risk
free interest rate
|
|
|
0.27
– 0.88 |
% |
|
|
2.82
– 3.29 |
% |
Summary
of Stock Options
Information
regarding stock options outstanding at February 27, 2009 and February 29, 2008
is summarized below:
|
|
Number
of
Shares
(thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
Aggregate
Intrinsic
Value*
(millions)
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding
|
|
|
42,773 |
|
|
$ |
28.96 |
|
|
|
4.12 |
|
|
$ |
18.8 |
|
Options
vested and expected to vest
|
|
|
40,561 |
|
|
$ |
28.90 |
|
|
|
4.00 |
|
|
$ |
18.8 |
|
Options
exercisable
|
|
|
27,635 |
|
|
$ |
27.40 |
|
|
|
3.19 |
|
|
$ |
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding
|
|
|
50,247 |
|
|
$ |
29.08 |
|
|
|
4.41 |
|
|
$ |
313.2 |
|
Options
vested and expected to vest
|
|
|
45,200 |
|
|
$ |
28.33 |
|
|
|
4.23 |
|
|
$ |
308.0 |
|
Options
exercisable
|
|
|
30,625 |
|
|
$ |
24.63 |
|
|
|
3.35 |
|
|
$ |
294.7 |
|
_________________________________________
*
|
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
February 27, 2009 and February 29, 2008 were $16.70 and $33.65,
respectively.
|
Summary
of Restricted Stock Units
Restricted
stock unit activity for the three months ended February 27, 2009 and February
29, 2008 was as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
|
4,261 |
|
|
|
1,701 |
|
Awarded
|
|
|
2,979 |
|
|
|
2,395 |
|
Released
|
|
|
(814
|
) |
|
|
(292
|
) |
Forfeited
|
|
|
(157
|
) |
|
|
(36
|
) |
Ending
balance
|
|
|
6,269 |
|
|
|
3,768 |
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Information regarding restricted
stock units outstanding at February 27, 2009 and February 29, 2008 is summarized
below:
|
|
Number
of
Shares
(thousands)
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
Aggregate
Intrinsic
Value*
(millions)
|
|
2009
|
|
|
|
|
|
|
|
|
|
Restricted
stock units outstanding
|
|
|
6,269 |
|
|
|
2.13 |
|
|
$ |
104.7 |
|
Restricted
stock units vested and expected to vest
|
|
|
4,638 |
|
|
|
1.94 |
|
|
$ |
77.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock units outstanding
|
|
|
3,768 |
|
|
|
2.31 |
|
|
$ |
126.8 |
|
Restricted
stock units vested and expected to vest
|
|
|
2,567 |
|
|
|
2.11 |
|
|
$ |
86.3 |
|
_________________________________________
*
|
The
intrinsic value is calculated as the market value as of the end of the
fiscal period. As reported by the NASDAQ Global Select Market, the market
values as of February 27, 2009 and February 29, 2008 were $16.70 and
$33.65, respectively.
|
Summary
of Performance Shares
Effective
January 26, 2009, the Executive Compensation Committee adopted the 2009
Performance Share Program (the “2009 Program”). The purpose of the 2009 Program
is to align key management and senior leadership with stockholders’ interests
and to retain key employees. The measurement period for the 2009 Program is our
fiscal 2009 year. All members of our executive management and other key
senior leaders are participating in the 2009 Program. Awards granted under the
2009 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 2009 Program have the ability to receive
up to 115% of the target number of shares originally granted.
The
following table sets forth the summary of performance share activity under our
2009 Program for the three months ended February 27, 2009 (in
thousands):
|
|
Shares
Granted
|
|
|
Maximum
Shares
Eligible
to
Receive
|
|
Beginning
balance
|
|
|
— |
|
|
|
— |
|
Awarded
|
|
|
533 |
|
|
|
613 |
|
Forfeited
|
|
|
— |
|
|
|
— |
|
Ending
balance
|
|
|
533 |
|
|
|
613 |
|
In the
first quarter of fiscal 2009, the Executive Compensation Committee certified the
actual performance achievement of participants in the 2008 Performance Share
Program (the “2008 Program”). Based upon the achievement of goals outlined in
the 2008 Program, participants had the ability to receive up to 200% of the
target number of shares originally granted. Actual performance resulted in
participants achieving approximately 124% of target or approximately 1.0 million
shares for the 2008 Program. Shares under the 2008 Program vested 25% in the
first quarter of fiscal 2009, 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)
(Unaudited)
The
following table sets forth the summary of performance share activity under our
2007 and 2008 programs, based upon share awards actually achieved, for the three
months ended February 27, 2009 and February 29, 2008 (in
thousands):
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
|
383 |
|
|
|
— |
|
Achieved
|
|
|
1,022 |
|
|
|
717 |
|
Released
|
|
|
(354
|
) |
|
|
(189
|
) |
Forfeited
|
|
|
(6
|
) |
|
|
(24
|
) |
Ending
balance
|
|
|
1,045 |
|
|
|
504 |
|
Information
regarding performance shares outstanding at February 27, 2009 and February 29,
2008 is summarized below:
|
|
Number
of
Shares
(thousands)
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
Aggregate
Intrinsic
Value*
(millions)
|
|
2009
|
|
|
|
|
|
|
|
|
|
Performance
shares outstanding
|
|
|
1,045 |
|
|
|
1.76 |
|
|
$ |
17.5 |
|
Performance
shares vested and expected to vest
|
|
|
811 |
|
|
|
1.67 |
|
|
$ |
13.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
shares units outstanding
|
|
|
504 |
|
|
|
1.88 |
|
|
$ |
17.0 |
|
Performance
shares vested and expected to vest
|
|
|
330 |
|
|
|
1.77 |
|
|
$ |
11.0 |
|
_________________________________________
*
|
The
intrinsic value is calculated as the market value as of the end of the
fiscal period. As reported by the NASDAQ Global Select Market, the market
values as of February 27, 2009 and February 29, 2008 were $16.70 and
$33.65, respectively.
|
Compensation
Costs
As of
February 27, 2009, there was $296.3 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
2.8 years. Total unrecognized compensation cost will be adjusted for future
changes in estimated forfeitures.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Total
stock-based compensation costs that have been included in our condensed
consolidated statements of income for the three months ended February 27, 2009
and February 29, 2008 were as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
Income Statement
Classifications
|
|
Option
Grants
and
Stock
Purchase
Rights (1)
|
|
|
Restricted
Stock
and
Performance
Share
Awards
(1)
(2)
|
|
|
Option
Grants
and
Stock
Purchase
Rights
|
|
|
Restricted
Stock
and
Performance
Share
Awards
|
|
Cost
of revenue—services and support
|
|
$ |
(91 |
) |
|
$ |
194 |
|
|
$ |
804 |
|
|
$ |
40 |
|
Research
and development
|
|
|
14,132 |
|
|
|
8,444 |
|
|
|
14,926 |
|
|
|
3,396 |
|
Sales
and marketing
|
|
|
8,867 |
|
|
|
5,237 |
|
|
|
10,907 |
|
|
|
3,541 |
|
General
and administrative
|
|
|
6,188 |
|
|
|
2,866 |
|
|
|
5,942 |
|
|
|
3,478 |
|
Total
|
|
$ |
29,096 |
|
|
$ |
16,741 |
|
|
$ |
32,579 |
|
|
$ |
10,455 |
|
_________________________________________
(1)
|
For
the three months ended February 27, 2009, we recorded $0.2 million
associated with cash recoveries of fringe benefit tax from employees in
India. For the three months ended February 29, 2008 there were no amounts
associated with cash recoveries of fringe benefit tax from employees in
India.
|
(2)
|
For
the three months ended February 27, 2009, we recorded $0.4 million
associated with the performance shares awarded under the 2009 Program.
These shares are liability–classified for financial statement purposes
until the metrics under the program have been
achieved.
|
NOTE
7. EMPLOYEE BENEFIT PLAN
Deferred
Compensation Plan
As of
February 27, 2009 and November 28, 2008, the invested amounts under our
Deferred Compensation Plan totaled $8.1 million and $7.6 million,
respectively, and are recorded as long-term other assets on our condensed
consolidated balance sheets. As of February 27, 2009 and November 28, 2008,
we recorded $8.1 million and $7.6 million, respectively, as a long-term
liability to recognize undistributed deferred compensation due to
employees.
NOTE
8. RESTRUCTURING CHARGES
Fiscal
2008 Restructuring Charges
In the
fourth quarter of fiscal 2008, we initiated a restructuring program, consisting
of reductions in workforce of approximately 560 full-time positions globally and
the consolidation of facilities, in order to reduce our operating costs and
focus our resources on key strategic priorities. In connection with this
restructuring program, we recorded restructuring charges in the fourth quarter
of fiscal 2008 totaling $29.2 million related to termination benefits for the
elimination of approximately 460 of the 560 full-time positions globally.
Charges associated with these ongoing termination benefits were recorded in
accordance with SFAS No. 112, “Employers’ Accounting for Postemployment
Benefits,” As of November 28, 2008, $0.4 million was paid.
In the
first quarter of fiscal 2009, we continued to implement restructuring activities
under this program. We vacated approximately 89,000 square feet of research and
development and sales facilities in the U.S., the United Kingdom and
Canada. In accordance with SFAS No. 146 (“SFAS 146”), “Accounting for
Costs Associated with Exit or Disposal Activities,” we accrued $8.5 million for
the fair value of our future contractual obligations under the operating lease
using our credit-adjusted risk-free interest rate, estimated at approximately 6%
as of the date we ceased to use the leased property. This amount is net of
estimated sublease income. We also recorded charges of $3.4 million for
termination benefits for the elimination of approximately 43 of the remaining
100 full-time positions expected to be terminated.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The
following table sets forth a summary of Adobe restructuring activities during
the three months ended February 27, 2009 (in thousands):
|
|
November
28,
2008
|
|
|
Costs
Incurred
|
|
|
Cash
Payments
|
|
|
Other
Adjustments
|
|
|
February
27,
2009
|
|
|
Total
Costs
Incurred
to
Date
|
|
|
Total
Costs
Expected
to
be
Incurred
|
|
Termination
benefits
|
|
$ |
28,759 |
|
|
$ |
3,394 |
|
|
$ |
(24,481 |
) |
|
$ |
102 |
|
|
$ |
7,774 |
|
|
$ |
24,928 |
|
|
$ |
32,702 |
|
Cost
of closing redundant facilities
|
|
|
— |
|
|
|
8,514 |
|
|
|
(2,684
|
) |
|
|
8 |
|
|
|
5,838 |
|
|
|
2,684 |
|
|
|
8,522 |
|
Total
|
|
$ |
28,759 |
|
|
$ |
11,908 |
|
|
$ |
(27,165 |
) |
|
$ |
110 |
|
|
$ |
13,612 |
|
|
$ |
27,612 |
|
|
$ |
41,224 |
|
Accrued
restructuring charges of $13.6 million at February 27, 2009 include $11.1
million recorded in accrued restructuring, current and $2.5 million related to
long-term facilities obligations recorded in accrued restructuring, non-current
in the accompanying condensed consolidated balance sheets. We expect to pay
substantially all of the accrued termination benefits during the remainder of
fiscal 2009. We expect to pay facilities-related liabilities through fiscal
2013.
Included
in the other adjustments column is a foreign currency translation adjustment of
$0.1 million offset by a small change to previous estimates.
Macromedia
Merger Restructuring Charges
We
completed our acquisition of Macromedia on December 3, 2005. In connection
with this acquisition, we initiated plans to restructure both the pre-merger
operations of Adobe and Macromedia to eliminate certain duplicative activities,
focus our resources on future growth opportunities and reduce our cost
structure. In connection with the worldwide restructuring plan, we recognized
costs related to termination benefits for employee positions that were
eliminated and for the closure of duplicative facilities. We also recognized
costs related to the cancellation of certain contracts associated with the
wind-down of subsidiaries and other service contracts held by
Macromedia. Costs for termination benefits and contract terminations
were completed during fiscal 2007. Total costs incurred were $27.0
million and $3.2 million, respectively.
The
following table sets forth a summary of Macromedia restructuring activities
during the three months ended February 27, 2009 (in thousands):
|
|
November
28,
2008
|
|
|
Cash
Payments
|
|
|
Other
Adjustments
|
|
|
February
27,
2009
|
|
|
Total
Costs
Incurred
to
Date
|
|
|
Total
Costs
Expected
to
be
Incurred
|
|
Cost
of closing redundant facilities
|
|
$ |
12,168 |
|
|
$ |
(1,753 |
) |
|
$ |
351 |
|
|
$ |
10,766 |
|
|
$ |
31,901 |
|
|
$ |
42,667 |
|
Other
|
|
|
977 |
|
|
|
(8
|
) |
|
|
— |
|
|
|
969 |
|
|
|
1,387 |
|
|
|
2,356 |
|
Total
|
|
$ |
13,145 |
|
|
$ |
(1,761 |
) |
|
$ |
351 |
|
|
$ |
11,735 |
|
|
$ |
33,288 |
|
|
$ |
45,023 |
|
Accrued
restructuring charges of $11.7 million at February 27, 2009 include $7.2 million
recorded in accrued restructuring, current and $4.5 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 28, 2008, accrued
restructuring charges of $13.1 million included $6.9 million recorded
in accrued restructuring, current and $6.2 million related to long-term
facilities obligations recorded in accrued restructuring, non-current in the
accompanying condensed consolidated balance sheets.
Included
in the other adjustments column is a change to previous estimates of $0.4
million offset by a small foreign currency translation
adjustment.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE
9. 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.
We did not
enter into any new structured repurchase agreements during the three months
ended February 27, 2009. During the three months ended February 29, 2008, we
entered into several structured repurchase agreements with large financial
institutions, whereupon we provided the financial institutions with prepayments
of $150.0 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.
During the three months ended February 27, 2009, we repurchased approximately
5.0 million shares at an average price of $22.79 through structured repurchase
agreements entered into during fiscal 2008. During the three months ended
February 29, 2008, we repurchased 6.7 million shares at an average price of
$36.78 through structured repurchase agreements which included prepayments from
fiscal 2007.
As of
February 27, 2009 and November 28, 2008, the prepayments were classified as
treasury stock on our balance sheets at the payment date, though only shares
physically delivered to us by February 27, 2009 are excluded from the
denominator in the computation of earnings per share. As of February 27, 2009
and February 29, 2008, approximately $19.7 million and $325.8 million,
respectively, of up-front payments remained under the agreements. All
outstanding structured repurchase agreements as of February 27, 2009 under this
program expired on March 19, 2009.
Stock
Repurchase Program II
Under this
stock repurchase program, we had authorization to repurchase 50.0 million
shares of our common stock. 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 third quarter of fiscal 2008, the remaining authorized number of
shares were repurchased.
During the
first quarter of fiscal 2008, we provided prepayments of $1.0 billion and
repurchased 26.6 million shares through structured share repurchase agreements
at an average price of $37.56. As of February 29, 2008, approximately $133.3
million of up-front payments remained under these agreements and were utilized
during the remainder of fiscal 2008.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE
10. OTHER COMPREHENSIVE INCOME (LOSS)
The
following table sets forth the components of other comprehensive income (loss)
for the three months ended February 27, 2009 and February 29, 2008 (in
thousands):
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
156,435 |
|
|
$ |
219,379 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized
(losses) on derivative instruments
|
|
|
(5,450
|
) |
|
|
(31
|
) |
Reclassification
adjustment for gains (losses) on derivative instruments recognized during
the period
|
|
|
(20,476
|
) |
|
|
— |
|
Unrealized
(losses) on available-for-sale securities, net of taxes
|
|
|
(1,969
|
) |
|
|
(3,079
|
) |
Reclassification
adjustment for gains on available-for-sale securities recognized during
the period
|
|
|
(1,310
|
) |
|
|
— |
|
Foreign
currency translation adjustments
|
|
|
(2,922
|
) |
|
|
1,378 |
|
Other
comprehensive loss
|
|
|
(32,127
|
) |
|
|
(1,732
|
) |
Total
other comprehensive income, net of taxes
|
|
$ |
124,308 |
|
|
$ |
217,647 |
|
NOTE
11. NET INCOME PER SHARE
The
following table sets forth the computation of basic and diluted net income per
share for the three months ended February 27, 2009 and February 29, 2008 (in
thousands, except per share data):
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
156,435 |
|
|
$ |
219,379 |
|
Shares
used to compute basic net income per share
|
|
|
524,268 |
|
|
|
561,113 |
|
Dilutive
potential common shares:
|
|
|
|
|
|
|
|
|
Unvested
restricted stock and performance share awards
|
|
|
854 |
|
|
|
680 |
|
Stock
options
|
|
|
2,708 |
|
|
|
9,466 |
|
Shares
used to compute diluted net income per share
|
|
|
527,830 |
|
|
|
571,259 |
|
Basic
net income per share
|
|
$ |
0.30 |
|
|
$ |
0.39 |
|
Diluted
net income per share
|
|
$ |
0.30 |
|
|
$ |
0.38 |
|
For the
three months ended February 27, 2009, options to purchase approximately 32.2
million shares of common stock with exercise prices greater than the average
fair market value of our stock of $20.98 were not included in
the calculation because the effect would have been
anti-dilutive. Comparatively, for the three months ended February 29, 2008,
options to purchase approximately 15.5 million shares of common stock with
exercise prices greater than the average fair market value of our stock of
$38.22 were not included in the calculation because the effect would have been
anti-dilutive.
NOTE
12. 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 condensed consolidated balance sheets. 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 February 27, 2009, 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
condensed consolidated balance sheets. 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.
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 condensed consolidated balance sheets. 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 February 27, 2009 and
November 28, 2008, 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 $2.2 million and $2.6 million,
respectively.
Royalties
We have
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.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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. We believe that we have valid defenses with
respect to the legal matters pending against Adobe; however, litigation is
inherently unpredictable and it is possible 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
13. 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. As of both February 27, 2009
and November 28, 2008, the amount outstanding under the credit facility was
$350.0 million, which is included in long-term liabilities on our condensed
consolidated balance sheets. As of February 27, 2009, we were in compliance with
all of the covenants.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE
14. NON-OPERATING INCOME (EXPENSE)
Non-operating
income (expense) for the three months ended February 27, 2009 and February 29,
2008 included the following (in thousands):
|
|
2009
|
|
|
2008
|
|
Interest
and other income, net:
|
|
|
|
|
|
|
Interest
income
|
|
$ |
11,118 |
|
|
$ |
17,511 |
|
Foreign
exchange gains (losses)
|
|
|
634 |
|
|
|
(4,700
|
) |
Realized
gains on fixed income investment
|
|
|
1,311 |
|
|
|
— |
|
Other,
net
|
|
|
221 |
|
|
|
479 |
|
Interest
and other income, net
|
|
$ |
13,284 |
|
|
$ |
13,290 |
|
Interest
expense
|
|
$ |
(792 |
) |
|
$ |
(1,809 |
) |
Investment
gains (losses), net:
|
|
|
|
|
|
|
|
|
Realized
investment gains
|
|
$ |
103 |
|
|
$ |
5,397 |
|
Unrealized
investment gains
|
|
|
124 |
|
|
|
3,914 |
|
Realized
investment losses
|
|
|
(1,295
|
) |
|
|
(383
|
) |
Unrealized
investment losses
|
|
|
(16,178
|
) |
|
|
(196
|
) |
Investment
(losses) gains, net
|
|
$ |
(17,246 |
) |
|
$ |
8,732 |
|
Total
non-operating income (expense), net
|
|
$ |
(4,754 |
) |
|
$ |
20,213 |
|
NOTE
15. SEGMENTS
We have
the following reportable segments: Creative Solutions, Knowledge Worker,
Enterprise, Platform and Print and 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 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 segment provides server-based
enterprise interaction solutions that automate people-centric processes and
contains revenue generated by our LiveCycle line of products. The Platform
segment includes client and developer technologies, such as Adobe Flash Player,
Adobe Flash Lite, Adobe AIR, Adobe Flex and Adobe Flex Builder, and also
encompasses products and technologies created and managed in other Adobe
segments. Finally, the Print and 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 2009, our former Mobile and Devices Solutions
segment, was integrated into our Platform business unit to better align our
engineering and marketing efforts and will be reported as part of the Platform
segment. Prior year information in the table below has been
reclassified to reflect the integration of these business units.
We report
segment information based on the “management” approach. The management approach
designates the internal reporting used by management for making decisions and
assessing performance as the source of our reportable segments.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Our chief
operating decision maker reviews revenue and gross margin information for each
of our reportable 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 reportable
segments.
(in
thousands)
|
|
Creative
Solutions
|
|
|
Knowledge
Worker
|
|
|
Enterprise
|
|
|
Platform*
|
|
|
Print
and
Publishing
|
|
|
Total
|
|
Three
months ended February 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
460,728 |
|
|
$ |
163,130 |
|
|
$ |
63,855 |
|
|
$ |
52,299 |
|
|
$ |
46,378 |
|
|
$ |
786,390 |
|
Cost
of revenue
|
|
|
42,750 |
|
|
|
9,921 |
|
|
|
13,341 |
|
|
|
6,056 |
|
|
|
5,285 |
|
|
|
77,353 |
|
Gross
profit
|
|
$ |
417,978 |
|
|
$ |
153,209 |
|
|
$ |
50,514 |
|
|
$ |
46,243 |
|
|
$ |
41,093 |
|
|
$ |
709,037 |
|
Gross
profit as a percentage of revenue
|
|
|
91 |
% |
|
|
94 |
% |
|
|
79 |
% |
|
|
88 |
% |
|
|
89 |
% |
|
|
90 |
% |
Three
months ended February 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
543,475 |
|
|
$ |
195,535 |
|
|
$ |
54,164 |
|
|
$ |
43,344 |
|
|
$ |
53,927 |
|
|
$ |
890,445 |
|
Cost
of revenue
|
|
|
36,048 |
|
|
|
11,681 |
|
|
|
16,991 |
|
|
|
9,964 |
|
|
|
7,791 |
|
|
|
82,475 |
|
Gross
profit
|
|
$ |
507,427 |
|
|
$ |
183,854 |
|
|
$ |
37,173 |
|
|
$ |
33,380 |
|
|
$ |
46,136 |
|
|
$ |
807,970 |
|
Gross
profit as a percentage of revenue
|
|
|
93 |
% |
|
|
94 |
% |
|
|
69 |
% |
|
|
77 |
% |
|
|
86 |
% |
|
|
91 |
% |
_________________________________________
*
|
Platform
revenue includes revenue related to our Mobile client products of $26.1
million and $15.2 million for the three months ended February 27, 2009 and
February 29, 2008, respectively, or 50% and 35% of Platform revenues,
respectively.
|
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 of this report. 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 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 2009, our former Mobile and Devices Solutions
segment, which was integrated into our Platform business unit to better align
our engineering and marketing efforts, will be reported as part of the Platform
segment. Prior year information has been updated to reflect the integration of
these business units.
During the
first quarter of fiscal 2009, our worldwide business continued to be impacted by
the global financial crisis and the general macro economic
environment. End-user demand for most of our products, including our
Adobe Creative Suite family of products and our Adobe Acrobat family of
products, was weaker than expected in the quarter and contributed to revenue
results that were below our expectations for the quarter. Despite the
revenue weakness, we were able to proactively manage our expenses to deliver
earnings per share and profit margin results within the target ranges we
publicly provided at the outset of the quarter.
In our
Creative Solutions segment, revenue for our CS4 family of products, which began
shipping in our fourth quarter of fiscal 2008, lags the revenue achieved for the
equivalent CS3 products for the comparable period of time by more than 20%. We
attribute this weakness to the economic conditions affecting the business of our
creative professional customers, as well as job losses in the creative
marketplace. Based on economic predictions and market trends such as
ad spending, we do not expect the market environment for creative products to
improve in the near term.
Our
Knowledge Worker segment experienced a slow down in demand year-over-year,
resulting in revenue below our expectations in the first quarter. We
attribute this weakness to a slow down in corporate spending, as well as job
losses in the markets we target with our Acrobat family of products, and we do
not expect the market environment to improve in the near term.
In our
Enterprise segment, despite the slow down in corporate spending, we achieved 18%
year-over-year growth. We attribute this success to our focus on
delivering innovative products and solutions for our enterprise customers that
helps them reduce costs and improve customer service. Currently, we do not
anticipate any significant deterioration associated with corporate spending that
may affect this segment.
Our
Platform segment revenue achieved 21% year-over-year growth due to increased
revenue for licensing of our Flash Lite client technologies by mobile handset
OEMs and consumer electronic device manufacturers. We expect the May 1, 2008
announcement of the Open Screen Project (“OSP”) to substantially reduce our
mobile and device revenue this fiscal year due to the removal of licensing fees
on the next major releases of our Adobe Flash Platform technologies. We
negotiated new contracts with a few OEMs during the first quarter of fiscal 2009
to help bridge their distribution abilities for existing solutions until newer,
free versions based on the OSP are available for them to ship towards the end of
the fiscal year. Platform segment revenue also grew year-over-year
due to an increase in revenue generated through OEM relationships with
companies in which we include their technologies as part of the
download offerings of our client technologies such as Adobe Reader, Adobe Flash
Player and Adobe Shockwave Player.
Product
revenues reported in our Print and Publishing business segment were also
affected by end-user demand weakness because of economic conditions, and
declined by 14% year-over-year. We expect end-user demand weakness to continue
in the near term.
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.
There have
been no significant changes in our critical accounting policies and estimates
during the three months ended February 27, 2009 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 28, 2008.
RESULTS
OF OPERATIONS
Revenue
for the Three Months Ended February 27, 2009 and February 29, 2008 (in
millions)
|
|
2009
|
|
|
2008
|
|
Product
|
|
$ |
742.2 |
|
|
$ |
852.0 |
|
Percentage
of total revenue
|
|
|
94
|
% |
|
|
96
|
% |
Services
and support
|
|
|
44.2 |
|
|
|
38.4 |
|
Percentage
of total revenue
|
|
|
6
|
% |
|
|
4
|
% |
Total
revenue
|
|
$ |
786.4 |
|
|
$ |
890.4 |
|
As
described in Note 15 of our Notes to Condensed Consolidated Financial
Statements, we have the following segments: Creative Solutions, Knowledge
Worker, Enterprise, Platform and Print and Publishing.
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 (in millions)
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Creative
Solutions
|
|
$ |
460.7 |
|
|
$ |
543.5 |
|
|
|
(15
|
)% |
Percentage
of total revenue
|
|
|
59
|
% |
|
|
61
|
% |
|
|
|
|
Knowledge
Worker
|
|
|
163.1 |
|
|
|
195.5 |
|
|
|
(17
|
)% |
Percentage
of total revenue
|
|
|
21
|
% |
|
|
22
|
% |
|
|
|
|
Enterprise
|
|
|
63.9 |
|
|
|
54.2 |
|
|
|
18
|
% |
Percentage
of total revenue
|
|
|
8
|
% |
|
|
6
|
% |
|
|
|
|
Platform
|
|
|
52.3 |
|
|
|
43.3 |
|
|
|
21
|
% |
Percentage
of total revenue
|
|
|
7
|
% |
|
|
5
|
% |
|
|
|
|
Print
and Publishing
|
|
|
46.4 |
|
|
|
53.9 |
|
|
|
(14
|
)% |
Percentage
of total revenue
|
|
|
5
|
% |
|
|
6
|
% |
|
|
|
|
Total
revenue
|
|
$ |
786.4 |
|
|
$ |
890.4 |
|
|
|
(12
|
)% |
Revenue
from Creative Solutions decreased $82.8 million during the three months ended
February 27, 2009 as compared to the three months ended February 29,
2008. This year-over-year decrease was driven largely by a 17%
decline in Creative Suites related revenue and a decline of 12% in Photoshop
revenue. Also contributing to the decrease was an overall decline in the number
of units licensed. Unit average selling prices remained relatively
stable.
Revenue
from Knowledge Worker decreased $32.4 million during the three months ended
February 27, 2009, compared to the three months ended February 29, 2008,
primarily due to a decrease in revenue from our Acrobat family of products. We
attribute the decline in revenue to lower volume licensing through our licensing
programs by our enterprise customers, as well as a decrease in the number of
units licensed through our shrinkwrap distribution channel. This lower demand
was offset in part by an increase in overall unit average selling prices for the
three months ended February 27, 2009 as compared to the three months ended
February 29, 2008.
Revenue
from Enterprise increased $9.7 million during the three months ended February
27, 2009, compared to the three months ended February 29, 2008. The increase was
primarily due to an increase in average transaction size, offset in part by a
decrease in the number of enterprise solution transactions during the three
months ended February 27, 2009 compared with the corresponding period in the
prior fiscal year.
Revenue
from Platform increased $9.0 million during the three months ended February 27,
2009, compared to the three months ended February 29, 2008. The increase was
primarily due to increased revenue from our Mobile Client products.
Revenue
from Print and Publishing decreased $7.5 million during the three months ended
February 27, 2009, compared to the three months ended February 29, 2008. The
decrease resulted principally from a slight decline in revenue associated with
our legacy products.
Geographical
Information (in millions)
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Americas
|
|
$ |
326.1 |
|
|
$ |
396.9 |
|
|
|
(18
|
)% |
Percentage
of total revenue
|
|
|
41
|
% |
|
|
45
|
% |
|
|
|
|
EMEA
|
|
|
277.5 |
|
|
|
323.9 |
|
|
|
(14
|
)% |
Percentage
of total revenue
|
|
|
35
|
% |
|
|
36
|
% |
|
|
|
|
Asia
|
|
|
182.8 |
|
|
|
169.6 |
|
|
|
8
|
% |
Percentage
of total revenue
|
|
|
24
|
% |
|
|
19
|
% |
|
|
|
|
Total
revenue
|
|
$ |
786.4 |
|
|
$ |
890.4 |
|
|
|
(12
|
)% |
Overall
revenue for the three months ended February 27, 2009 decreased when compared to
the three months ended February 29, 2008 primarily due to a reduction in the
adoption and licensing of our CS4 and Acrobat families of products.
Success
with our LiveCycle business and a year-over-year increase in OEM licensing of
our Mobile Client products offset part of the decline in the other
businesses.
Revenue in
the Americas decreased $70.8 million during the three months ended February 27,
2009, compared to the three months ended February 29, 2008, due primarily to
weaker demand with our creative and knowledge worker
products. Continued success with our LiveCycle enterprise business
helped to offset some of this weakness.
Revenue in
EMEA decreased $46.4 million during the three months ended February 27, 2009,
compared to the three months ended February 29, 2008, due primarily to weaker
demand with our creative and knowledge worker products, similar to the impact
noted in the Americas.
Revenue in
Asia increased $13.2 million during the three months ended February 27, 2009
compared to the three months ended February 29, 2008, due primarily to the
timing of the release of new product versions of our CS4 family of
products.
Included
in the overall decrease in revenue were impacts associated with foreign
currency. Revenue in EMEA measured in U.S. dollars decreased approximately $22.9
million, due to the strength of the U.S. dollar against the Euro, during the
three months ended February 27, 2009, over the same reporting period last year.
Although the U.S. dollar strengthened significantly against the Euro
year-over-year, during the three months ended February 27, 2009, we were able to
mitigate all but $2.5 million of this impact to our reported revenue with our
currency hedging program which resulted in hedging gains of $20.4 million.
Revenue in Asia measured in U.S. dollars was favorably impacted by approximately
$14.9 million due to the strength of the Yen against the U.S. dollar during
the three months ended February 27, 2009, over the same reporting period last
year.
Product
Backlog
The actual
amount of product 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 both the first
quarter of fiscal 2009 and the fourth quarter of fiscal 2008.
Cost
of Revenue for the Three Months Ended February 27, 2009 and February 29, 2008
(in millions)
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Product
|
|
$ |
58.9 |
|
|
$ |
59.8 |
|
|
|
(2
|
)% |
Percentage
of total revenue
|
|
|
7
|
% |
|
|
7
|
% |
|
|
|
|
Services
and support
|
|
|
18.5 |
|
|
|
22.7 |
|
|
|
(19
|
)% |
Percentage
of total revenue
|
|
|
2
|
% |
|
|
3
|
% |
|
|
|
|
Total
cost of revenue
|
|
$ |
77.4 |
|
|
$ |
82.5 |
|
|
|
(6
|
)% |
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:
|
|
Percent
Change
2008 to 2009
QTD
|
|
Hosted
services
|
|
|
6
|
% |
Excess
and obsolete inventory
|
|
|
5 |
|
Amortization
of acquired rights to use technology
|
|
|
3 |
|
Localization
costs related to our product launches
|
|
|
(2
|
) |
Amortization
of purchased intangibles
|
|
|
(13
|
) |
Various
individually insignificant items
|
|
|
(1
|
) |
Total
change
|
|
|
(2
|
)% |
The
increase in hosted service costs was primarily related to the amortization of
capitalized infrastructure costs for the three months ended February 27, 2009 as
compared to the three months ended February 29, 2008.
The
increase in excess and obsolete inventory was primarily related to certain
localized languages of our CS3 products, which became obsolete and were disposed
of.
Amortization
expense decreased during the three months ended February 27, 2009 as compared to
the three months ended February 29, 2008, due to a decrease in amortization
expense primarily associated with intangible assets purchased through the
Macromedia acquisition.
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 decreased during the three months ended February
27, 2009 as compared to the three months ended February 29, 2008, primarily due
to decreases in compensation and related benefits driven by reduced
headcount.
Operating
Expenses for the Three Months Ended February 27, 2009 and February 29,
2008
Research
and Development, Sales and Marketing and General and Administrative
Expenses
Compensation
costs decreased for the three months ended February 27, 2009 primarily due to
lower profit sharing and employee bonuses based on company performance to date,
when compared to the three months ended February 29, 2008.
Research
and Development (in millions)
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Expenses
|
|
$ |
149.9 |
|
|
$ |
168.5 |
|
|
|
(11
|
)% |
Percentage
of total revenue
|
|
|
19
|
% |
|
|
19
|
% |
|
|
|
|
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 decreased due to the following:
|
|
Percent Change
2008 to 2009
QTD
|
|
Compensation
associated with incentive compensation and stock-based
compensation
|
|
|
(6
|
)% |
Various
individually insignificant items
|
|
|
(5
|
) |
Total
change
|
|
|
(11
|
)% |
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 (in millions)
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Expenses
|
|
$ |
249.5 |
|
|
$ |
262.6 |
|
|
|
(5
|
)% |
Percentage
of total revenue
|
|
|
32
|
% |
|
|
29
|
% |
|
|
|
|
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:
|
|
Percent Change
2008 to 2009
QTD
|
|
Marketing
spending related to product launches and overall marketing efforts to
further increase revenue
|
|
|
3
|
% |
Compensation
associated with incentive compensation and stock-based
compensation
|
|
|
(6
|
) |
Various
individually insignificant items
|
|
|
(2
|
) |
Total
change
|
|
|
(5
|
)% |
General
and Administrative (in millions)
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Expenses
|
|
$ |
74.1 |
|
|
$ |
82.9 |
|
|
|
(11
|
)% |
Percentage
of total revenue
|
|
|
9
|
% |
|
|
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:
|
|
Percent Change
2008 to 2009
QTD
|
|
Provision
for bad debts
|
|
|
4
|
% |
Professional
and consulting fees
|
|
|
3 |
|
Compensation
associated with incentive compensation and stock-based
compensation
|
|
|
(8
|
) |
Charitable
contributions
|
|
|
(12
|
) |
Various
individually insignificant items
|
|
|
2 |
|
Total
change
|
|
|
(11
|
)% |
The
decrease in charitable contributions reflects a change in the timing of
contributions to the Adobe Foundation.
Restructuring
Charges (in millions)
|
|
2009
|
|
|
2008
|
|
Percent
Change
|
Expenses
|
$
|
12.3
|
|
$
|
1.4
|
|
|
*
|
|
Percentage
of total revenue
|
|
2
|
%
|
|
*
|
|
|
|
|
_________________________________________
*
|
Percentage is not
meaningful.
|
In the
fourth quarter of fiscal 2008, we initiated a restructuring program, consisting
of reductions in workforce of approximately 560 full-time positions globally and
the consolidation of facilities, in order to reduce our operating costs and
focus our resources on key strategic priorities. In connection with this
restructuring program, we recorded restructuring charges totaling $29.2 million
related to termination benefits for the elimination of approximately 460 of
these full-time positions globally. As of November 28, 2008, $0.4 million was
paid.
In the
first quarter of fiscal 2009, we continued to implement restructuring activities
under this program. We vacated approximately 89,000 square feet of research and
development and sales facilities in the U.S., the United Kingdom and
Canada. In accordance with SFAS 146, we accrued $8.5 million for the
fair value of our future contractual obligations under the operating lease using
our credit-adjusted risk-free interest rate, estimated at approximately 6% as of
the date we ceased to use the leased property. This amount is net of the fair
value of future estimated sublease income of approximately $2.6
million.
We also recorded charges of $3.4 million for termination benefits for the
elimination of approximately 43 of the remaining 100 full-time positions
expected to be terminated.
As of
February 27, 2009, accrued restructuring charges related to the 2008
restructuring program and the Macromedia acquisition totaled $13.6 million and
$11.7 million, respectively. We expect to pay these liabilities through fiscal
2013 and fiscal 2011, respectively.
Amortization
of Purchased Intangibles (in millions)
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Expenses
|
|
$ |
15.4 |
|
|
$ |
17.1 |
|
|
|
(10
|
)% |
Percentage
of total revenue
|
|
|
2
|
% |
|
|
2
|
% |
|
|
|
|
Amortization
expense decreased during the three months ended February 27, 2009 as compared to
the three months ended February 29, 2008, due to a decrease in amortization
expense associated with intangible assets purchased through the Macromedia
acquisition.
Non-Operating
Income (Expense) for the Three Months Ended February 27, 2009 and February 29,
2008 (in millions)
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Interest
and other income, net
|
|
$ |
13.3 |
|
|
$ |
13.3 |
|
|
|
—
|
% |
Percentage
of total revenue
|
|
|
2
|
% |
|
|
1
|
% |
|
|
|
|
Interest
expense
|
|
|
(0.8
|
) |
|
|
(1.8
|
) |
|
|
56
|
% |
Percentage
of total revenue
|
|
|
* |
|
|
|
* |
|
|
|
|
|
Investment
gain (loss), net
|
|
|
(17.3
|
) |
|
|
8.7 |
|
|
|
(299
|
)% |
Percentage
of total revenue
|
|
|
(2
|
)% |
|
|
1
|
% |
|
|
|
|
Total non-operating income
(expense), net
|
|
$ |
(4.8 |
) |
|
$ |
20.2 |
|
|
|
(124
|
)% |
_________________________________________
*
|
Percentage
is not meaningful.
|
Interest
and Other Income, net
Interest
and other income, net, consists primarily of interest earned on cash, cash
equivalents and short-term fixed income investments. Interest and other income,
net also includes foreign exchange gains and losses, including those from
hedging revenue transactions primarily denominated in Japanese Yen and Euro
currencies.
Interest
and other income, net, was consistent during the three months ended February 27,
2009 as compared to the three months ended February 29, 2008.
Interest
Expense
Interest
expense for the three months ended February 27, 2009, primarily represents
interest associated with our credit facility. The outstanding balance as of
February 27, 2009 was $350.0 million. Interest due under the credit facility is
paid upon expiration of the LIBOR contract or at a minimum, quarterly. The
decline in interest expense was primarily due to lower interest
rates.
Investment
Gain (Loss), net
Investment
gain (loss), 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, unrealized holding gains and
losses associated with our deferred compensation plan assets (classified as
trading securities), and gains and losses of Adobe Ventures. Our investment
losses for the three months ended February 27, 2009 were primarily due to
unrealized losses related to our Adobe Ventures and direct investments as
compared to the three months ended February 29, 2008.
Provision
for Income Taxes for the Three Months Ended February 27, 2009 and February 29,
2008 (in millions)
|
|
2009
|
|
|
2008
|
|
|
Percent
Change
|
|
Provision
|
|
$ |
46.7 |
|
|
$ |
76.3 |
|
|
|
(39
|
)% |
Percentage of total
revenue
|
|
|
6
|
% |
|
|
9
|
% |
|
|
|
|
Effective tax
rate
|
|
|
23
|
% |
|
|
26
|
% |
|
|
|
|
Our
effective tax rate decreased approximately three percentage points during the
three months ended February 27, 2009 as compared to the three months ended
February 29, 2008. The decrease was primarily related to the
availability of the U.S. research and development credit during fiscal year
2009, which was not in effect during fiscal year 2008 until Adobe's fourth
quarter, and stronger forecasted international profits for fiscal
2009.
Summary
of FIN 48
Under FIN
No. 48 “Accounting for Uncertainty in Income Taxes an Interpretation of SFAS No.
109” (“FIN 48”), the gross liability for unrecognized tax benefits at February
27, 2009 was $140.8 million, exclusive of interest and penalties. If the
total unrecognized tax benefits at February 27, 2009 were recognized in the
future, the following amounts, net of an estimated $13.0 million federal
benefit related to deducting certain payments on future tax returns, would
result: $57.4 million of unrecognized tax benefits would decrease the
effective tax rate and $70.3 million would decrease goodwill.
As of
February 27, 2009, 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 $15.1 million.
The
accounting treatment related to certain unrecognized tax benefits from acquired
companies, including Macromedia, will change when SFAS 141R becomes effective.
SFAS 141R will be effective in the first quarter of our fiscal year 2010. At
such time, any changes to the recognition or measurement of these unrecognized
tax benefits will be recorded through income tax expense, where currently the
accounting treatment would require any adjustment to be recognized through the
purchase price as an adjustment to goodwill.
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. We do not expect any material
settlements in the next twelve months but it is inherently uncertain to
determine.
LIQUIDITY
AND CAPITAL RESOURCES
This data
should be read in conjunction with our condensed consolidated statements of cash
flows.
(in
millions)
|
|
February
27,
2009
|
|
|
November 28,
2008
|
|
Cash,
cash equivalents and short-term investments
|
|
$ |
2,383.7 |
|
|
$ |
2,019.2 |
|
Working
capital
|
|
$ |
2,232.1 |
|
|
$ |
1,972.5 |
|
Stockholders’
equity
|
|
$ |
4,611.2 |
|
|
$ |
4,410.4 |
|
Summary of
our cash flows (in millions):
|
|
February
27,
2009
|
|
|
February
29,
2008
|
|
Net
cash provided by operating activities
|
|
$ |
365.7 |
|
|
$ |
399.3 |
|
Net
cash (used for) provided by investing activities
|
|
|
(131.5
|
) |
|
|
328.8 |
|
Net
cash provided by (used for) financing activities
|
|
|
28.7 |
|
|
|
(646.5
|
) |
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
|
|
(0.4
|
) |
|
|
4.7 |
|
Net
increase in cash and cash equivalents
|
|
$ |
262.5 |
|
|
$ |
86.3 |
|
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.
Cash
Flows from Operating Activities
Net cash
provided by operating activities of $365.7 million for the three months
ended February 27, 2009, was primarily comprised of net income plus the net
effect of non-cash expenses. The primary working capital sources of cash were
net income coupled with decreases in trade receivables, prepaid expenses and
other current assets, and an increase in income taxes payable. Trade receivables
decreased primarily from CS4 revenue that was shipped in the latter half of the
fourth quarter of fiscal 2008 and collected during the first quarter of fiscal
2009.
The
primary working capital uses of cash were decreases in accrued expenses,
deferred revenue, accrued restructuring and trade payables. Accrued expenses
decreased primarily due to payments for employee bonuses and commissions related
to fiscal 2008 and a reduction in the employee stock purchase accrual resulting
from the December 2008 ESPP purchase, offset in part by increases in accrued
payroll taxes. Decreases in deferred revenue related primarily to deferred
revenue that was recognized in the first quarter of fiscal 2009 related to our
free of charge upgrades for CS4 and Adobe Photoshop Lightroom products as well
as declines in maintenance and support orders. Accrued restructuring decreased
primarily due to payments related to the 2008 restructuring program that was
initiated in the fourth quarter of fiscal 2008, offset in part by new
charges.
Cash
Flows from Investing Activities
Net cash
from investing activities changed from cash provided for the three months ended
February 29, 2008 of $328.8 million to cash used for the three months ended
February 27, 2009 of $131.5 million primarily due to increases in purchases of
short-term investments, offset in part by decreases in maturities and sales of
short-term investments. The proceeds from the short-term investments during the
three months ended February 29, 2008 were greater than those in the
corresponding period of fiscal 2009 as we liquidated certain investments in the
first quarter of fiscal 2008 to fund the repurchase of our stock under our
structured repurchase program.
Other uses
of cash during the three months ended February 27, 2009 represented purchases of
property and equipment and long-term investments and other assets, offset in
part by proceeds from the sale of equity securities.
Cash
Flows from Financing Activities
Net cash
from financing activities changed from cash used for the three months ended
February 29, 2008 of $646.5 million to cash provided for the three months ended
February 27, 2009 of $28.7 million primarily due to minimal activity for
treasury stock purchases during the three months ended February 27, 2009. (See the sections titled “Stock
Repurchase Program I” and “Stock Repurchase Program II” discussed
below).
We expect
to continue our investing activities, including short-term and long-term
investments, venture capital, facilities expansion 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.
In the
fourth quarter of fiscal 2008, we initiated a restructuring program consisting
of reductions in workforce of approximately 560 full-time positions globally and
the consolidation of facilities, in order to reduce our operating costs and
focus our resources on key strategic priorities. In connection with this
restructuring program, we recorded restructuring charges totaling $29.2 million
related to termination benefits for the elimination of approximately 460 of
these full-time positions globally. As of November 28, 2008, $0.4 million was
paid.
In the
first quarter of fiscal 2009, we continued to implement restructuring activities
under this restructuring program. We vacated approximately 89,000 square feet of
research and development and sales facilities in the U.S., the United Kingdom
and Canada. In accordance with SFAS 146, we accrued $8.5 million for
the fair value of our future contractual obligations under the operating lease
using our credit-adjusted risk-free interest rate, estimated at approximately 6%
as of the date we ceased to use the leased property. This amount is net of
estimated sublease income. We also recorded charges of $3.4 million for
termination benefits for the elimination of approximately 43 of the remaining
100 full-time positions expected to be terminated. We expect to pay
substantially all of the accrued termination benefits during the remainder of
fiscal 2009 and the facilities-related liabilities through fiscal
2013.
Our existing cash,
cash equivalents and investment balances may decline in fiscal 2009 in the event
of a further weakening of the economy or changes in our planned cash outlay.
Cash from operations could also be affected by various risks and uncertainties,
including, but not limited to the risks detailed in Part II, Item 1A
titled “Risk Factors”. 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. Our existing credit facility is currently $1.0 billion of
which we have borrowed $350.0 million. The purpose of the credit facility is to
provide backup liquidity for general corporate purposes including stock
repurchases.
We use
professional investment management firms to manage a large portion of our
invested cash. External investment firms managed, on average, 59% of our
consolidated invested balances during the first quarter of fiscal 2009. 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.
Stock
Repurchase Program I
During the
three months ended February 27, 2009, we repurchased approximately 5.0 million
shares at an average price per share of $22.79 through structured repurchase
agreements entered into during fiscal 2008. 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.
Stock
Repurchase Program II
Under this
stock repurchase program, we had authorization to repurchase 50.0 million
shares of our common stock. 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 third quarter of fiscal 2008, the remaining authorized number of
shares were repurchased.
Refer
to Part II, Item 2 in this report for share repurchases during the
quarter ended February 27, 2009.
Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations
Our
principal commitments as of February 27, 2009 consist of obligations under
operating leases, royalty agreements and various service agreements. See Note 12 of our Notes to
Condensed Consolidated Financial Statements for more detailed
information.
Financial
Covenants
Two of our
lease agreements and our credit agreement are subject to financial covenants. As
of February 27, 2009, 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 covenants 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 condensed consolidated balance sheets. 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 February 27, 2009, the unamortized
portion of the fair value of the residual value guarantees remaining in other
long-term liabilities and prepaid rent was $2.2 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.
We believe
that there have been no significant changes in our market risk exposures for the
three months ended February 27, 2009.
Based on
their evaluation as of February 27, 2009, 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 February 27, 2009 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 12 “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.
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.
Uncertainty about future economic and political conditions makes it difficult
for us to forecast operating results and to make decisions about future
investments. For example, the direction and relative strength of the global
economy has recently been increasingly uncertain due to softness in the
residential real estate and mortgage markets, volatility in fuel and other
energy costs, difficulties in the financial services sector and credit markets,
continuing geopolitical uncertainties and other macroeconomic factors affecting
spending behavior. 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.
The
current global financial crisis affecting the banking system and
financial markets and the possibility that financial institutions may
consolidate or go out of business have resulted in a tightening in the
credit markets, a low level of liquidity in many financial markets,
and extreme volatility in fixed income, credit, currency and equity
markets. There could be a number of follow-on effects from the credit
crisis on our business, including insolvency of certain of our key
distributors, resellers, OEMs, retailers and systems integrators, ISVs and VARs
(collectively referred to as “distributors”), which could impair our
distribution channels, inability of customers, including our distributors, to
obtain credit to finance purchases of our products, and failure of
derivative counterparties and other financial institutions, which could
negatively impact our treasury operations. Other income and expense could
also vary from expectations depending on gains or losses realized on the
sale or exchange of financial instruments, impairment charges related to
investment securities as well as equity and other investments, interest
rates, cash balances, and changes in fair value of derivative instruments.
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 in would also likely
harm our business, results of operations and financial condition.
If
we cannot continue to develop, market and distribute new products or upgrades to
existing products that meet customer requirements, our operating results could
suffer.
The
process of developing new high technology products and enhancing existing
products is complex, costly and uncertain, and any failure by us to anticipate
customers’ changing needs and emerging technological trends accurately could
significantly harm our market share and results of operations. We must make
long-term investments, develop or obtain appropriate intellectual property and
commit significant resources before knowing whether our predictions will
accurately reflect customer demand for our products. Our inability to extend our
core technologies into new applications and new platforms, including the mobile
and embedded devices market, and to anticipate or respond to technological
changes could affect continued market acceptance of our products and our ability
to develop new products. Additionally, any delay in the development, production,
marketing or distribution of a new product or upgrade to an existing product
could cause a decline in our revenue, earnings or stock price and could harm our
competitive position.
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 or other platforms before
we choose and are able to offer our products on these platforms 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.
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, disruptive software and hardware
technology developments, frequent new product introductions, short product life
cycles, price cutting, with resulting downward pressure on gross margins, and
price sensitivity on the part of consumers. 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, software delivery methods 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 via SP2 for Office 2007). Microsoft Expression Studio
competes with our Adobe Creative Suite family of products and Microsoft
Silverlight and Visual Studio, Web development tools for RIAs, compete with
Adobe Flash, Adobe Flex and Adobe AIR. Google Gears and Sun’s JavaFX,
alternative approaches to deploying RIAs compete with Adobe Flash and Adobe AIR.
Companies, such as Google, Sun, Apple and Microsoft, may introduce competing
software offerings for free or open source vendors may introduce competitive
products. In addition, recent advances in computing and communications
technologies have made the software as a service (“SaaS”) business model viable.
SaaS allows companies to provide applications, data and related services over
the Internet. Providers use primarily advertising or subscription-based revenue
models. We are exploring the deployment of our own SaaS strategies, but may not
be able to develop the infrastructure and business models as quickly as our
competitors. If any of these competing products or services 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 2008.
If
we fail to successfully manage transitions to new business models and markets,
our results of operations could be negatively impacted.
We plan to
release numerous new product and service offerings and employ new software
delivery methods in connection with our transition to new business models. It is
uncertain whether these strategies will prove successful or that we will be able
to develop the infrastructure and business models as quickly as our competitors.
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 and operating history. Some of these new product and service
offerings could subject us to increased risk of legal liability related to the
provision of services as well as cause us to incur significant technical, legal
or other costs. Additionally, customer requirements for open standards or open
source products could impact adoption or use with respect to some of our
products. 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.
From time
to time we open source certain of our technology initiatives, provide broader
open access to certain of our technology, such as our 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. If we are unable to respond to these competitive
threats, our business could be harmed.
We are
also devoting significant resources to the development of technologies and
service offerings in markets where we have a limited operating history,
including the enterprise, government and mobile and device markets. 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, government and mobile and device markets, and greater sales and
marketing resources. In the mobile and device markets, our intent is to partner
with 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.
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 government and enterprise market and may experience
a number of factors that will make our revenue less predictable, including
longer than expected sales and implementation cycles, decision to open source
certain of our technology initiatives, potential deferral of revenue due to
multiple-element revenue arrangements and alternate licensing arrangements. If
any of our assumptions about revenue from our new businesses prove incorrect,
our actual results may vary materially from those anticipated, estimated or
projected.
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. 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, subject us to injunctions
restricting our sale of 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. In addition, we may incur significant costs in acquiring
the necessary third party intellectual property rights for use in our products.
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 or be subject to governmental complaints. 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;
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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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inability
to take advantage of anticipated tax benefits as a result of unforeseen
difficulties in our integration
activities;
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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
additional exposure to fluctuations in currency exchange
rates;
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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 problems,
liabilities or other shortcomings or challenges of an acquired company or
technology, including but not limited to, issues with the acquired
company’s intellectual property, product quality or product architecture,
revenue recognition or other accounting practices, employee, customer or
partner issues or legal and financial
contingencies;
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exposure
to litigation or other claims in connection with, or inheritance of claims
or litigation risk as a result of, an acquisition, including but not
limited to, claims from terminated employees, customers, former
stockholders or other third
parties;
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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 an announced acquisition transaction or
integrate an acquired business successfully and in a timely manner, we may not
realize the benefits of the acquisition to the extent anticipated.
Failure
to manage our sales and distribution channels effectively could result in a loss
of revenue and harm to our business.
A
significant amount of our revenue for application products is from two
distributors, Ingram Micro, Inc. and Tech Data Corporation, which represented
12% and 8% of our net revenue for the first quarter of fiscal 2009,
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 first quarter
of fiscal 2009, 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 current economic conditions, which
could result in insolvency of certain of our distributors and/or the inability
of our distributors to obtain credit to finance purchases of our products.
In addition, weakness in the end-user market could further negatively affect the
cash flow of our distributors who could, in turn, delay paying their obligations
to us, which would increase our credit risk exposure. Our business could be
harmed if the financial condition of some of these distributors substantially
weakens and we were unable to timely secure replacement
distributors.
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, war, terrorist attack, or other
catastrophic event could cause system interruptions, reputational harm, delays
in our product development, breaches of data security 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.
Net
revenue, margin or earnings shortfalls or the volatility of the market generally
may cause the market price of our stock to decline.
The market
price for our common stock has experienced significant fluctuations and may
continue to fluctuate significantly. The market price for our common stock may
be affected by a number of factors, including shortfalls in our net revenue,
margins, earnings or key performance metrics, changes in estimates or
recommendations by securities analysts, the announcement of new products or
product enhancements by us or our competitors, quarterly variations in our or
our competitors’ results of operations, developments in our industry; unusual
events such as significant acquisitions, divestitures and litigation, general
socio-economic, political or market conditions and other factors, including
factors unrelated to our operating performance.
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, political and labor
conditions;
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tax
laws (including U.S. taxes on foreign
subsidiaries);
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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 44% 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. We may be unable to scale our infrastructure
effectively, or as quickly as our competitors, in these markets, which would
cause our results to suffer. 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 condensed consolidated financial statements in accordance 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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In
December 2007, the FASB issued SFAS 141R 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 business, which is now reported as part of our
Platform segment in fiscal 2009, 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 beginning in 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 our Platform segment do not meet our
expectations, we may be required to record a charge to earnings reflecting an
impairment of recorded goodwill or intangible assets.
Changes
in, or interpretations of, tax rules and regulations may adversely affect our
effective tax rates.
We are a
U.S. based multinational company subject to tax in multiple U.S. and foreign tax
jurisdictions. 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 in the
jurisdictions in which we do business, 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, including a current
examination by the IRS for our fiscal 2005, 2006 and 2007 tax returns. These
examinations are expected to focus on our intercompany transfer pricing
practices as well as other matters. 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. Additionally, the recent significant adverse volatility in
our stock price has resulted in many employees’ stock option exercise prices
exceeding the underlying stock’s market value as well as deterioration in the
value of employees’ restricted stock units granted, thus lessening the
effectiveness of retaining employees through stock-based awards. 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 deterioration of the capital
markets.
Our cash
equivalent and short-term investment portfolio as of February 27, 2009 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 and help mitigate
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 may pose risks arising from recent market liquidity and
credit concerns. As of February 27, 2009, we had no material impairment charges
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 material impairment, we cannot predict future
market conditions or market liquidity and can provide no assurance that our
investment portfolio will remain materially 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 three months ended February 27, 2009. See Note 9 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 November 28,
2008
|
|
|
|
|
|
|
|
|
133,499,231 |
(3) |
|
|
|
November
29—December 26, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
employees(4)
|
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
Structured
repurchases
|
|
|
3,487,860 |
|
|
$ |
23.83 |
|
|
|
|
|
|
|
|
December
27—January 23, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
employees(4)
|
|
|
534 |
|
|
$ |
23.76 |
|
|
|
|
|
|
|
|
Structured
repurchases
|
|
|
745,863 |
|
|
$ |
21.34 |
|
|
|
|
|
|
|
|
January
24—February 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
employees(4)
|
|
|
25 |
|
|
$ |
19.31 |
|
|
|
|
|
|
|
|
Structured
repurchases
|
|
|
813,749 |
|
|
$ |
19.63 |
|
|
|
|
|
|
|
|
Adjustments
to repurchase authority for net dilution
|
|
|
— |
|
|
|
|
|
|
|
498,839 |
(5) |
|
|
|
Total
shares repurchased
|
|
|
5,048,031 |
|
|
|
|
|
|
|
(5,048,031
|
) |
|
|
|
Ending
shares available to be repurchased under Program I as of February 27,
2009
|
|
|
|
|
|
|
|
|
|
|
128,950,039 |
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_________________________________________
(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.
(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
|
|
1/13/09
|
|
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-K
|
|
1/23/09
|
|
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
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
2/20/09
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
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-K
|
|
1/23/09
|
|
10.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Form
of Restricted Stock Unit Agreement used in connection with the 2003 Equity
Incentive Plan*
|
|
10-K
|
|
1/23/09
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
2/24/06
|
|
Appendix B
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
10.52
|
|
First
Amendment to Retention Agreement between Adobe Systems Incorporated and
Shantanu Narayen, effective as of February 11, 2008*
|
|
8-K
|
|
2/13/08
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.53
|
|
Adobe
Systems Incorporated Executive Severance Plan in the Event of a Change of
Control*
|
|
8-K
|
|
2/13/08
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.54
|
|
Employment
offer letter between Adobe Systems Incorporated and Richard Rowley, dated
October 30, 2006*
|
|
8-K
|
|
11/16/06
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.55
|
|
Employment
offer letter between Adobe Systems Incorporated and Mark Garrett dated
January 5, 2007*
|
|
8-K
|
|
1/26/07
|
|
10.1
|
|
|
10.56
|
|
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
|
|
8-K
|
|
8/16/07
|
|
10.1
|
|
|
10.57
|
|
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
|
|
8-K
|
|
8/16/07
|
|
10.2
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
10.58
|
|
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
|
|
8-K
|
|
2/29/08
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.59
|
|
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
|
|
8-K
|
|
5/15/08
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.60
|
|
Form
of Director Annual Grant Stock Option Agreement used in connection with
the 2003 Equity Incentive Plan*
|
|
10-K
|
|
1/23/09
|
|
10.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.61
|
|
Form
of Director Initial Grant Restricted Stock Unit Agreement in connection
with the 2003 Equity Incentive Plan*
|
|
10-K
|
|
1/23/09
|
|
10.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.62
|
|
Form
of Director Annual Grant Restricted Stock Unit Agreement in connection
with the 2003 Equity Incentive Plan*
|
|
10-K
|
|
1/23/09
|
|
10.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.63
|
|
Description
of 2009 Director Compensation*
|
|
10-K
|
|
1/23/09
|
|
10.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.64
|
|
2009
Performance Share Program Award Calculation Methodology*
|
|
8-K
|
|
1/29/09
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.65
|
|
2009
Executive Annual Incentive Plan*
|
|
8-K
|
|
1/29/09
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer, as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934
|
|
|
|
|
|
|
|
X
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer, as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer, as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934†
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer, as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934†
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
100.INS
|
|
XBRL
Instance††
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
100.SCH
|
|
XBRL
Taxonomy Extension Schema††
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
100.CAL
|
|
XBRL
Taxonomy Extension Calculation††
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
100.LAB
|
|
XBRL
Taxonomy Extension Labels††
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
100.PRE
|
|
XBRL
Taxonomy Extension Presentation††
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
100.DEF
|
|
XBRL
Taxonomy Extension Definition††
|
|
|
|
|
|
|
|
X
|
_________________________________________
*
|
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:
April 2,
2009
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.