form_10q.htm
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 May 29,
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 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o 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. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange 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 June 19, 2009 was
524,998,013.
FORM
10-Q
TABLE
OF CONTENTS
|
|
|
Page
No.
|
PART
I—FINANCIAL INFORMATION
|
|
Item 1.
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
Item 2.
|
|
25
|
Item 3.
|
|
36
|
Item 4.
|
|
36
|
|
|
PART
II—OTHER INFORMATION
|
|
Item 1.
|
|
36
|
Item 1A.
|
|
36
|
Item 2.
|
|
45
|
Item 4.
|
|
45
|
Item 5.
|
|
46
|
Item 6.
|
|
46
|
|
55
|
|
56
|
PART
I—FINANCIAL INFORMATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share data)
(Unaudited)
|
|
May
29,
2009
|
|
|
November 28,
2008
|
|
ASSETS
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,226,780 |
|
|
$ |
886,450 |
|
Short-term
investments
|
|
|
1,437,405 |
|
|
|
1,132,752 |
|
Trade
receivables, net of allowances for doubtful accounts of $6,474
and $4,128, respectively
|
|
|
262,598 |
|
|
|
467,234 |
|
Deferred
income taxes
|
|
|
76,907 |
|
|
|
110,713 |
|
Prepaid
expenses and other current assets
|
|
|
84,079 |
|
|
|
137,954 |
|
Total
current assets
|
|
|
3,087,769 |
|
|
|
2,735,103 |
|
Property
and equipment, net
|
|
|
291,720 |
|
|
|
313,037 |
|
Goodwill
|
|
|
2,134,997 |
|
|
|
2,134,730 |
|
Purchased
and other intangibles, net
|
|
|
148,507 |
|
|
|
214,960 |
|
Investment
in lease receivable
|
|
|
207,239 |
|
|
|
207,239 |
|
Other
assets
|
|
|
193,513 |
|
|
|
216,529 |
|
Total
assets
|
|
$ |
6,063,745 |
|
|
$ |
5,821,598 |
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
42,258 |
|
|
$ |
55,840 |
|
Accrued
expenses
|
|
|
363,431 |
|
|
|
399,969 |
|
Accrued
restructuring
|
|
|
11,728 |
|
|
|
35,690 |
|
Income
taxes payable
|
|
|
11,024 |
|
|
|
27,136 |
|
Deferred
revenue
|
|
|
185,191 |
|
|
|
243,964 |
|
Total
current liabilities
|
|
|
613,632 |
|
|
|
762,599 |
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Debt
|
|
|
350,000 |
|
|
|
350,000 |
|
Deferred
revenue
|
|
|
28,124 |
|
|
|
31,356 |
|
Accrued
restructuring
|
|
|
6,559 |
|
|
|
6,214 |
|
Income
taxes payable
|
|
|
137,240 |
|
|
|
123,182 |
|
Deferred
income taxes
|
|
|
104,490 |
|
|
|
117,328 |
|
Other
liabilities
|
|
|
22,659 |
|
|
|
20,565 |
|
Total
liabilities
|
|
|
1,262,704 |
|
|
|
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; 524,530 and 526,111 shares outstanding,
respectively
|
|
|
61 |
|
|
|
61 |
|
Additional
paid-in-capital
|
|
|
2,361,223 |
|
|
|
2,396,819 |
|
Retained
earnings
|
|
|
5,195,912 |
|
|
|
4,913,406 |
|
Accumulated
other comprehensive income
|
|
|
27,310 |
|
|
|
57,222 |
|
Treasury
stock, at cost (76,304 and 74,723 shares, respectively), net of
reissuances
|
|
|
(2,783,465
|
) |
|
|
(2,957,154
|
) |
Total
stockholders’ equity
|
|
|
4,801,041 |
|
|
|
4,410,354 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
6,063,745 |
|
|
$ |
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
|
|
|
Six
Months Ended
|
|
|
|
May
29,
2009
|
|
|
May
30,
2008
|
|
|
May
29,
2009
|
|
|
May
30,
2008
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
660,055 |
|
|
$ |
841,301 |
|
|
$ |
1,402,254 |
|
|
$ |
1,693,263 |
|
Services
and support
|
|
|
44,618 |
|
|
|
45,585 |
|
|
|
88,809 |
|
|
|
84,068 |
|
Total
revenue
|
|
|
704,673 |
|
|
|
886,886 |
|
|
|
1,491,063 |
|
|
|
1,777,331 |
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
55,758 |
|
|
|
58,229 |
|
|
|
114,676 |
|
|
|
118,034 |
|
Services
and support
|
|
|
16,250 |
|
|
|
24,637 |
|
|
|
34,685 |
|
|
|
47,307 |
|
Total
cost of revenue
|
|
|
72,008 |
|
|
|
82,866 |
|
|
|
149,361 |
|
|
|
165,341 |
|
Gross
profit
|
|
|
632,665 |
|
|
|
804,020 |
|
|
|
1,341,702 |
|
|
|
1,611,990 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
138,470 |
|
|
|
170,300 |
|
|
|
288,387 |
|
|
|
338,785 |
|
Sales
and marketing
|
|
|
243,209 |
|
|
|
279,365 |
|
|
|
492,700 |
|
|
|
541,960 |
|
General
and administrative
|
|
|
70,818 |
|
|
|
77,078 |
|
|
|
144,869 |
|
|
|
160,007 |
|
Restructuring
charges
|
|
|
3,531 |
|
|
|
— |
|
|
|
15,801 |
|
|
|
1,431 |
|
Amortization
of purchased intangibles
|
|
|
15,284 |
|
|
|
17,099 |
|
|
|
30,676 |
|
|
|
34,198 |
|
Total
operating expenses
|
|
|
471,312 |
|
|
|
543,842 |
|
|
|
972,433 |
|
|
|
1,076,381 |
|
Operating
income
|
|
|
161,353 |
|
|
|
260,178 |
|
|
|
369,269 |
|
|
|
535,609 |
|
Non-operating
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
4,802 |
|
|
|
12,150 |
|
|
|
18,086 |
|
|
|
25,440 |
|
Interest
expense
|
|
|
(620
|
) |
|
|
(3,828
|
) |
|
|
(1,412
|
) |
|
|
(5,637
|
) |
Investment
gains (losses), net
|
|
|
(1,805
|
) |
|
|
9,506 |
|
|
|
(19,051
|
) |
|
|
18,238 |
|
Total
non-operating income (expense), net
|
|
|
2,377 |
|
|
|
17,828 |
|
|
|
(2,377
|
) |
|
|
38,041 |
|
Income
before income taxes
|
|
|
163,730 |
|
|
|
278,006 |
|
|
|
366,892 |
|
|
|
573,650 |
|
Provision
for income taxes
|
|
|
37,659 |
|
|
|
63,096 |
|
|
|
84,386 |
|
|
|
139,361 |
|
Net
income
|
|
$ |
126,071 |
|
|
$ |
214,910 |
|
|
$ |
282,506 |
|
|
$ |
434,289 |
|
Basic
net income per share
|
|
$ |
0.24 |
|
|
$ |
0.40 |
|
|
$ |
0.54 |
|
|
$ |
0.79 |
|
Shares
used in computing basic net income per share
|
|
|
524,159 |
|
|
|
533,391 |
|
|
|
527,324 |
|
|
|
547,996 |
|
Diluted
net income per share
|
|
$ |
0.24 |
|
|
$ |
0.40 |
|
|
$ |
0.53 |
|
|
$ |
0.78 |
|
Shares
used in computing diluted net income per share
|
|
|
528,013 |
|
|
|
542,376 |
|
|
|
531,338 |
|
|
|
557,703 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six
Months Ended
|
|
|
|
May
29,
2009
|
|
|
May
30,
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
282,506 |
|
|
$ |
434,289 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation,
amortization and accretion
|
|
|
133,465 |
|
|
|
137,858 |
|
Stock-based
compensation
|
|
|
86,577 |
|
|
|
91,421 |
|
Deferred
income taxes
|
|
|
19,984 |
|
|
|
69,655 |
|
Unrealized
losses (gains) on investments
|
|
|
16,498 |
|
|
|
(8,579
|
) |
Retirements
of property and equipment
|
|
|
3,426 |
|
|
|
119 |
|
Tax
benefit from employee stock option plans
|
|
|
2,711 |
|
|
|
9,329 |
|
Provision
for losses on trade receivables
|
|
|
3,281 |
|
|
|
(390
|
) |
Other
non-cash items
|
|
|
1,066 |
|
|
|
3 |
|
Excess
tax benefits from stock-based compensation
|
|
|
(84
|
) |
|
|
(9,329
|
) |
Changes
in operating assets and liabilities, net of acquired assets and
liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
201,354 |
|
|
|
(2,615
|
) |
Prepaid
expenses and other current assets
|
|
|
13,210 |
|
|
|
(5,673
|
) |
Trade
payables
|
|
|
(13,582
|
) |
|
|
(4,271
|
) |
Accrued
expenses
|
|
|
(32,639
|
) |
|
|
(9,774
|
) |
Accrued
restructuring
|
|
|
(24,139
|
) |
|
|
(2,048
|
) |
Income
taxes payable
|
|
|
(4,357
|
) |
|
|
23,951 |
|
Deferred
revenue
|
|
|
(62,005
|
) |
|
|
7,145 |
|
Net
cash provided by operating activities
|
|
|
627,272 |
|
|
|
731,091 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of short-term investments
|
|
|
(782,362
|
) |
|
|
(466,226
|
) |
Maturities
of short-term investments
|
|
|
197,709 |
|
|
|
353,534 |
|
Proceeds
from sales of short-term investments
|
|
|
273,243 |
|
|
|
448,184 |
|
Purchases
of property and equipment
|
|
|
(26,228
|
) |
|
|
(48,671
|
) |
Purchases
of long-term investments and other assets
|
|
|
(16,580
|
) |
|
|
(36,672
|
) |
Proceeds
from sale of long-term investments
|
|
|
1,904 |
|
|
|
9,520 |
|
Other
|
|
|
3,000 |
|
|
|
— |
|
Net
cash (used for) provided by investing activities
|
|
|
(349,314
|
) |
|
|
259,669 |
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Purchases
of treasury stock
|
|
|
(13
|
) |
|
|
(1,300,183
|
) |
Proceeds
from issuance of treasury stock
|
|
|
48,819 |
|
|
|
162,467 |
|
Excess
tax benefits from stock-based compensation
|
|
|
84 |
|
|
|
9,329 |
|
Proceeds
from borrowings under credit facility
|
|
|
— |
|
|
|
450,000 |
|
Repayments
of borrowings under credit facility
|
|
|
— |
|
|
|
(100,000
|
) |
Net
cash provided by (used for) financing activities
|
|
|
48,890 |
|
|
|
(778,387
|
) |
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
|
|
13,482 |
|
|
|
3,658 |
|
Net
increase in cash and cash equivalents
|
|
|
340,330 |
|
|
|
216,031 |
|
Cash
and cash equivalents at beginning of period
|
|
|
886,450 |
|
|
|
946,422 |
|
Cash
and cash equivalents at end of period
|
|
$ |
1,226,780 |
|
|
$ |
1,162,453 |
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes, net of refunds
|
|
$ |
58,024 |
|
|
$ |
35,001 |
|
Cash
paid for interest
|
|
$ |
1,488 |
|
|
$ |
5,394 |
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 six months
ended May 29, 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 May
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events” (“SFAS
165”), which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. The provisions of SFAS 165 are
effective for interim and annual reporting periods ending after June 15, 2009
and will be effective for us beginning in the third quarter of fiscal 2009.
Since SFAS 165 only requires additional disclosures, we do not expect the
adoption to have an impact on our consolidated financial position, results of
operations or cash flows.
In April 2009, the FASB issued three
related FASB Staff Positions (“FSP”): (i) FSP FAS No. 115-2 and FAS No. 124-2,
“Recognition of Presentation of Other-Than-Temporary Impairments” (“FSP FAS
115-2 and FAS 124-2”), (ii) FSP FAS No. 107-1 and Accounting Principles Board
Opinion (“APB”) No. 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” (“FSP FAS 107-1 and APB 28-1”), and (iii) FSP FAS No. 157-4,
“Determining the Fair Value When the Volume and Level of Activity for the Asset
or Liability Have Significantly Decreased and Identifying Transactions That Are
Not Orderly” (“FSP FAS 157-4), which are effective for interim and annual
reporting periods ending after June 15, 2009 and will be effective for us
beginning in the third quarter of fiscal 2009. FSP FAS 115-2 and FAS 124-2 amend
the other-than-temporary impairment guidance in U.S. GAAP for debt securities to
modify the requirement for recognizing other-than-temporary impairments, change
the existing impairment model, and modify the presentation and frequency of
related disclosures. FSP FAS 107-1 and APB 28-1 require disclosures about fair
value of financial instruments for interim reporting periods as well as in
annual financial statements. FSP FAS 157-4 provides additional guidance for
estimating fair value in accordance with SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). We are currently evaluating the impact of adopting
these Staff Positions, but we do not expect the adoption to have a material
impact on our consolidated financial position, results of operations or cash
flows.
In
September 2008, the FASB issued FSP No. 133-1 and FASB Interpretation (“FIN”)
No. 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”). FSP FAS 133-1 and FIN 45-4 amends SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” (“SFAS 133”) 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, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others, an interpretation of
SFAS No. 5, 57, and 107 and rescission of FIN No. 34” (“FIN 45”), 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, “Disclosures about Derivative
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Instruments
and Hedging Activities, an amendment of SFAS 133” (“SFAS 161”). 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.
In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). 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 beginning after December 15, 2008
and interim periods within those fiscal years. FSP 142-3 is effective for us
beginning in the first quarter of fiscal 2010. Early adoption is prohibited. As
this guidance is to be applied prospectively, on adoption, there is 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
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”) and SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
(“ARB”) No. 51” (“SFAS 160”). 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.
In
September 2006, the FASB issued SFAS 157, 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.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE
2. FINANCIAL INSTRUMENTS
We measure
certain financial assets and liabilities at fair value on a recurring basis. The
fair value of these financial assets and liabilities was determined using the
following inputs at May 29, 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)
|
|
$ |
1,171,499 |
|
|
$ |
1,171,499 |
|
|
$ |
— |
|
|
$ |
— |
|
Fixed
income available-for-sale securities(2)
|
|
|
1,432,391 |
|
|
|
— |
|
|
|
1,432,391 |
|
|
|
— |
|
Available-for-sale
equity securities(3)
|
|
|
5,014 |
|
|
|
5,014 |
|
|
|
— |
|
|
|
— |
|
Investments
of limited partnership(4)
|
|
|
33,080 |
|
|
|
— |
|
|
|
— |
|
|
|
33,080 |
|
Foreign
currency derivatives(5)
|
|
|
5,422 |
|
|
|
— |
|
|
|
5,422 |
|
|
|
— |
|
Deferred
compensation plan assets(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
|
764 |
|
|
|
764 |
|
|
|
— |
|
|
|
— |
|
Equity
and fixed income mutual funds
|
|
|
8,966 |
|
|
|
— |
|
|
|
8,966 |
|
|
|
— |
|
Subtotal
for deferred compensation plan assets
|
|
|
9,730 |
|
|
|
764 |
|
|
|
8,966 |
|
|
|
— |
|
Total
|
|
$ |
2,657,136 |
|
|
$ |
1,177,277 |
|
|
$ |
1,446,779 |
|
|
$ |
33,080 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency derivatives(6)
|
|
$ |
3,477 |
|
|
$ |
— |
|
|
$ |
3,477 |
|
|
$ |
— |
|
Total
|
|
$ |
3,477 |
|
|
$ |
— |
|
|
$ |
3,477 |
|
|
$ |
— |
|
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.
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(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 current 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 (79% of total),
corporate bonds (12% of total) and obligations of foreign governments and their
agencies (9% of total) at May 29, 2009 and U.S. treasury securities, Agency or
U.S. Government guaranteed securities (78% of total), corporate bonds (10% of
total), obligations of foreign governments and their agencies (10% of total),
and obligations of multi-lateral government agencies (2% of total) at November
28, 2008. These are all high quality, investment grade securities with a minimum
credit rating of A and a weighted average credit rating better than AA+. We
value these securities based on pricing from pricing vendors, who may use quoted
prices in active markets for identical assets (Level 1 inputs) or inputs other
than quoted prices that are observable either directly or indirectly (Level 2
inputs) in determining fair value. However, we classify all of our fixed income
available-for-sale securities as having Level 2 inputs. Our procedures include
controls to ensure that appropriate fair values are recorded such as comparing
prices obtained from multiple independent sources.
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 (Level 3) as of May 29, 2009
and November 28, 2008 was as follows (in thousands):
Balance
as of November 28, 2008
|
|
$ |
38,753 |
|
Purchases
and sales of investments, net
|
|
|
(436
|
) |
Unrealized
net investment losses included in earnings
|
|
|
(5,237
|
) |
Balance
as of May 29, 2009
|
|
$ |
33,080 |
|
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 three and six months ended May 29, 2009, we determined
that certain of our cost method investments were other-than-temporarily impaired
which resulted in a charge of $3.3 million and $13.9 million, respectively,
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.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We record
changes in the intrinsic value of these cash flow hedges in accumulated other
comprehensive income (loss) on our condensed consolidated balance sheets, 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 statements 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
statements 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 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.
The
aggregate fair value of derivative instruments in net asset positions as of May
29, 2009 was $5.4 million. This amount represents the maximum exposure to loss
at the reporting date as a result of all of the counterparties failing to
perform as contracted. This exposure could be reduced by up to $3.5 million of
liabilities included in master netting arrangements with those same
counterparties.
The fair
value of derivative instruments in our condensed consolidated balance sheets as
of May 29, 2009 were 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
(1)
|
Prepaid
expense
and
other
current
assets
|
|
$ |
3,680 |
|
Accrued
expenses
|
|
$ |
— |
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward
contracts
|
Prepaid
expense and other
current
assets
|
|
|
1,742 |
|
Accrued
expenses
|
|
|
3,477 |
|
Total
derivatives
|
|
|
$ |
5,422 |
|
|
|
$ |
3,477 |
|
_________________________________________
(1)
|
Hedging
effectiveness expected to be recognized to income within the next twelve
months.
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The effect
of derivative instruments designated as cash flow hedges and of derivative
instruments not designated as hedges on our condensed consolidated statements of
income for the three and six months ended May 29, 2009 were as follows (in
thousands):
|
|
Three
Months
|
|
|
Six
Months
|
|
|
|
Foreign
Exchange Option Contracts
|
|
|
Foreign
Exchange Forward Contracts
|
|
|
Foreign
Exchange Option Contracts
|
|
|
Foreign
Exchange Forward Contracts
|
|
Derivatives
in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain (loss) recognized in OCI (1)
|
|
$ |
(8,737 |
) |
|
$ |
— |
|
|
$ |
(14,187 |
) |
|
$ |
— |
|
Net
gain (loss) reclassified from accumulated OCI into income (2)
|
|
$ |
5,913 |
|
|
$ |
— |
|
|
$ |
26,389 |
|
|
$ |
— |
|
Net gain (loss) recognized in
income (3)
|
|
$ |
(7,416 |
) |
|
$ |
— |
|
|
$ |
(9,048 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in
income (4)
|
|
$ |
— |
|
|
$ |
(5,305 |
) |
|
$ |
— |
|
|
$ |
(8,550 |
) |
_________________________________________
(1)
|
Net
change in the fair value of the effective portion classified in other
comprehensive income (“OCI”).
|
(2)
|
Effective
portion classified as revenue.
|
(3)
|
Ineffective
portion and amount excluded from effectiveness testing classified in
interest and other income, net.
|
(4)
|
Classified
in interest and other income, net.
|
NOTE
3. GOODWILL AND PURCHASED AND OTHER INTANGIBLES
Goodwill
as of May 29, 2009 and November 28, 2008 was $2.135 billion for both
periods. During the second quarter of fiscal 2009, we completed our annual
goodwill impairment test. Based on this analysis, we determined that there was
no impairment of goodwill.
Purchased
and other intangible assets subject to amortization as of May 29, 2009 were as
follows (in thousands):
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Purchased
technology
|
|
$ |
405,829 |
|
|
$ |
(361,494 |
) |
|
$ |
44,335 |
|
Localization
|
|
$ |
26,682 |
|
|
$ |
(16,568 |
) |
|
$ |
10,114 |
|
Trademarks
|
|
|
130,925 |
|
|
|
(91,353
|
) |
|
|
39,572 |
|
Customer
contracts and relationships
|
|
|
196,597 |
|
|
|
(142,421
|
) |
|
|
54,176 |
|
Other
intangibles
|
|
|
800 |
|
|
|
(490
|
) |
|
|
310 |
|
Total
other intangible assets
|
|
$ |
355,004 |
|
|
$ |
(250,832 |
) |
|
$ |
104,172 |
|
Total
purchased and other intangible assets
|
|
$ |
760,833 |
|
|
$ |
(612,326 |
) |
|
$ |
148,507 |
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 $36.4 million and
$75.4 million for the three and six months ended May 29, 2009, respectively.
Comparatively, amortization expense was $48.1 million and $97.6 million for the
three and six months ended May 30, 2008, respectively. Of these amounts, $21.1
million and $44.7 million were included in cost of sales for the three and six
months ended May 29, 2009, respectively, and $30.9 million and $63.3 million
were included in cost of sales for the three and six months ended May 30, 2008,
respectively.
Purchased
and other intangible assets are amortized over their estimated useful lives of 1
to 13 years. As of May 29, 2009, we expect amortization expense in future
periods to be as follows (in thousands):
Fiscal year
|
|
|
|
Purchased
Technology
|
|
|
Other
Intangible
Assets
|
|
Remainder
of 2009
|
|
|
$ |
27,653 |
|
|
$ |
39,932 |
|
2010
|
|
|
|
8,301 |
|
|
|
50,136 |
|
2011
|
|
|
|
4,994 |
|
|
|
11,917 |
|
2012
|
|
|
|
3,387 |
|
|
|
1,009 |
|
2013
|
|
|
|
— |
|
|
|
789 |
|
Thereafter
|
|
|
|
— |
|
|
|
389 |
|
Total
expected amortization expense
|
|
|
$ |
44,335 |
|
|
$ |
104,172 |
|
NOTE
4. OTHER ASSETS
Other
assets as of May 29, 2009 and November 28, 2008 consisted of the following (in
thousands):
|
|
2009
|
|
|
2008
|
|
Acquired
rights to use technology
|
|
$ |
88,332 |
|
|
$ |
90,643 |
|
Investments
|
|
|
58,735 |
|
|
|
76,589 |
|
Security
and other deposits
|
|
|
16,058 |
|
|
|
16,087 |
|
Deferred
compensation plan assets
|
|
|
9,730 |
|
|
|
7,560 |
|
Prepaid
royalties
|
|
|
8,878 |
|
|
|
9,026 |
|
Restricted
cash
|
|
|
4,361 |
|
|
|
7,361 |
|
Prepaid
land lease
|
|
|
3,166 |
|
|
|
3,185 |
|
Prepaid
rent
|
|
|
1,845 |
|
|
|
2,658 |
|
Other
|
|
|
2,408 |
|
|
|
3,420 |
|
Total
other assets
|
|
$ |
193,513 |
|
|
$ |
216,529 |
|
Included
in investments are our indirect investments through our limited partnership
interest in Adobe Ventures of approximately $33.1 million and $39.0 million as
of May 29, 2009 and November 28, 2008, respectively, which is consolidated in
accordance with FIN No. 46R, a revision to FIN No. 46, “Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51.” The partnership
is controlled by Granite Ventures, an independent venture capital firm
and
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
sole
general partner of Adobe Ventures. We are the primary beneficiary of Adobe
Ventures and bear virtually all of the risks and rewards related to our
ownership. Our investment in Adobe
Ventures does not have a significant impact on our condensed consolidated
financial position, results of operations or cash flows. See Note 2 for further information
regarding Adobe Ventures.
Also
included in investments are our direct investments in privately-held companies
of approximately $25.6 million and $37.6 million as of May 29, 2009 and November
28, 2008, respectively, 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 purchased the
property upon completion of construction of an office building shell and core,
parking structure, and site improvements. The purchase price for the property
was $44.2 million. We made an initial deposit of $7.0 million which was included
in security and other deposits. This deposit was held in escrow until closing
and then applied to the purchase price. Closing occurred on June 16, 2009
and the remaining balance was paid. See Note 16 for further
discussion of this transaction.
NOTE
5. ACCRUED EXPENSES
Accrued
expenses as of May 29, 2009 and November 28, 2008 consisted of the
following (in thousands):
|
|
2009
|
|
|
2008
|
|
Accrued
compensation and benefits
|
|
$ |
160,458 |
|
|
$ |
177,760 |
|
Taxes
payable
|
|
|
11,322 |
|
|
|
21,760 |
|
Sales
and marketing allowances
|
|
|
26,325 |
|
|
|
28,127 |
|
Other
|
|
|
165,326 |
|
|
|
172,322 |
|
Total
accrued expenses
|
|
$ |
363,431 |
|
|
$ |
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.
NOTE
6. STOCK-BASED COMPENSATION
The
assumptions used to value option grants during the three and six months ended
May 29, 2009 and May 30, 2008 were as follows:
|
|
Three Months
|
|
|
Six Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Expected
life (in years)
|
|
|
3.0
– 3.8 |
|
|
|
3.5
– 4.7 |
|
|
|
3.0
– 3.8 |
|
|
|
2.3
– 4.7 |
|
Volatility
|
|
|
48 –
55 |
% |
|
|
32 –
39 |
% |
|
|
48 –
57 |
% |
|
|
32 –
39 |
% |
Risk
free interest rate
|
|
|
1.27
– 1.61 |
% |
|
|
1.70
– 2.83 |
% |
|
|
1.16
– 1.61 |
% |
|
|
1.70
– 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 and six months ended
May 29, 2009 and May 30, 2008 were as follows:
|
|
Three Months
|
|
|
Six Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Expected
life (in years)
|
|
|
0.5
– 2.0 |
|
|
|
0.5
– 2.0 |
|
|
|
0.5
– 2.0 |
|
|
|
0.5
– 2.0 |
|
Volatility
|
|
|
49 –
57 |
% |
|
|
30 –
31 |
% |
|
|
49 –
57 |
% |
|
|
30 –
31 |
% |
Risk
free interest rate
|
|
|
0.27
– 0.88 |
% |
|
|
2.82
– 3.29 |
% |
|
|
0.27
– 0.88 |
% |
|
|
2.82
– 3.29 |
% |
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Summary
of Stock Options
Option
activity for the six months ended May 29, 2009 and the fiscal year ended
November 28, 2008 was as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
|
40,704 |
|
|
|
47,742 |
|
Granted
|
|
|
4,745 |
|
|
|
5,462 |
|
Exercised
|
|
|
(2,393
|
) |
|
|
(9,983
|
) |
Cancelled
|
|
|
(2,253
|
) |
|
|
(2,517
|
) |
Ending
balance
|
|
|
40,803 |
|
|
|
40,704 |
|
Information
regarding stock options outstanding at May 29, 2009 and May 30, 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
|
|
|
40,803 |
|
|
$ |
29.20 |
|
|
|
4.01 |
|
|
$ |
143.8 |
|
Options
vested and expected to vest
|
|
|
38,951 |
|
|
$ |
29.19 |
|
|
|
3.92 |
|
|
$ |
137.3 |
|
Options
exercisable
|
|
|
27,319 |
|
|
$ |
28.19 |
|
|
|
3.23 |
|
|
$ |
108.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding
|
|
|
45,769 |
|
|
$ |
29.47 |
|
|
|
4.31 |
|
|
$ |
668.0 |
|
Options
vested and expected to vest
|
|
|
41,257 |
|
|
$ |
28.74 |
|
|
|
4.14 |
|
|
$ |
632.1 |
|
Options
exercisable
|
|
|
28,957 |
|
|
$ |
25.49 |
|
|
|
3.41 |
|
|
$ |
537.9 |
|
_________________________________________
*
|
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
May 29, 2009 and May 30, 2008 were $28.18 and $44.06,
respectively.
|
Summary
of Employee Stock Purchase Plan Shares
The weighted average subscription date
fair value of shares under the ESPP during the six months ended May 29, 2009 and
May 30, 2008 was $5.23 and $11.83, respectively. Employees purchased 1.2 million
shares at an average price of $18.10 and 0.9 million shares at an average price
of $30.51, respectively, for the six months ended May 29, 2009 and May 30, 2008.
The intrinsic value of shares purchased during the six months ended May 29, 2009
and May 30, 2008 was $3.7 million and $10.9 million, respectively. The intrinsic
value is calculated as the difference between the market value on the date of
purchase and the purchase price of the shares.
Summary
of Restricted Stock Units
Restricted
stock unit activity for the six months ended May 29, 2009 and the fiscal year
ended November 28, 2008 was as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
|
4,261 |
|
|
|
1,701 |
|
Awarded
|
|
|
3,108 |
|
|
|
3,177 |
|
Released
|
|
|
(889
|
) |
|
|
(422
|
) |
Forfeited
|
|
|
(208
|
) |
|
|
(195
|
) |
Ending
balance
|
|
|
6,272 |
|
|
|
4,261 |
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Information
regarding restricted stock units outstanding at May 29, 2009 and May 30, 2008 is
summarized below:
|
|
Number
of
Shares
(thousands)
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
Aggregate
Intrinsic
Value*
(millions)
|
|
2009
|
|
|
|
|
|
|
|
|
|
Restricted
stock units outstanding
|
|
|
6,272 |
|
|
|
1.89 |
|
|
$ |
176.8 |
|
Restricted
stock units vested and expected to vest
|
|
|
4,805 |
|
|
|
1.72 |
|
|
$ |
135.3 |
|
Restricted
stock units vested and deferred
|
|
|
4 |
|
|
|
— |
|
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock units outstanding
|
|
|
3,891 |
|
|
|
2.10 |
|
|
$ |
171.4 |
|
Restricted
stock units vested and expected to vest
|
|
|
2,649 |
|
|
|
1.89 |
|
|
$ |
116.7 |
|
_________________________________________
*
|
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 May 29, 2009 and May 30, 2008 were $28.18 and $44.06,
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 six months ended May 29, 2009 (in thousands):
|
|
Shares
Granted
|
|
|
Maximum
Shares
Eligible
to
Receive
|
|
Beginning
balance
|
|
|
— |
|
|
|
— |
|
Awarded
|
|
|
537 |
|
|
|
618 |
|
Forfeited
|
|
|
— |
|
|
|
— |
|
Ending
balance
|
|
|
537 |
|
|
|
618 |
|
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
2008 and prior 2007 programs, based upon share awards actually achieved, for the
six months ended May 29, 2009 and the fiscal year ended November 28, 2008 (in
thousands):
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
|
383 |
|
|
|
— |
|
Achieved
|
|
|
1,022 |
|
|
|
993 |
|
Released
|
|
|
(370
|
) |
|
|
(480
|
) |
Forfeited
|
|
|
(30
|
) |
|
|
(130
|
) |
Ending
balance
|
|
|
1,005 |
|
|
|
383 |
|
Information
regarding performance shares outstanding at May 29, 2009 and May 30, 2008 is
summarized below:
|
|
Number
of
Shares
(thousands)
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
Aggregate
Intrinsic
Value*
(millions)
|
|
2009
|
|
|
|
|
|
|
|
|
|
Performance
shares outstanding
|
|
|
1,005 |
|
|
|
1.53 |
|
|
$ |
28.3 |
|
Performance
shares vested and expected to vest
|
|
|
807 |
|
|
|
1.44 |
|
|
$ |
22.7 |
|
Performance
shares vested and deferred
|
|
|
3 |
|
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
shares units outstanding
|
|
|
480 |
|
|
|
1.65 |
|
|
$ |
21.2 |
|
Performance
shares vested and expected to vest
|
|
|
312 |
|
|
|
1.55 |
|
|
$ |
13.7 |
|
Performance
shares vested and deferred
|
|
|
1 |
|
|
|
— |
|
|
$ |
— |
|
_________________________________________
*
|
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 May 29, 2009 and May 30, 2008 were $28.18 and $44.06,
respectively.
|
Compensation
Costs
As of May
29, 2009, there was $253.0 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 2.6 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 May 29, 2009 and
May 30, 2008 were as follows (in thousands):
|
|
|
2009
|
|
|
2008
|
|
Income Statement
Classifications
|
|
|
|
Option
Grants
and
Stock
Purchase
Rights *
|
|
|
Restricted
Stock
and
Performance
Share
Awards
*
|
|
|
Option
Grants
and
Stock
Purchase
Rights
|
|
|
Restricted
Stock
and
Performance
Share
Awards
|
|
Cost
of revenue—services and support
|
|
|
$ |
1,249 |
|
|
$ |
143 |
|
|
$ |
975 |
|
|
$ |
213 |
|
Research
and development
|
|
|
|
9,264 |
|
|
|
6,489 |
|
|
|
12,844 |
|
|
|
6,608 |
|
Sales
and marketing
|
|
|
|
9,714 |
|
|
|
4,598 |
|
|
|
10,218 |
|
|
|
6,647 |
|
General
and administrative
|
|
|
|
8,094 |
|
|
|
2,009 |
|
|
|
6,786 |
|
|
|
4,096 |
|
Total
|
|
|
$ |
28,321 |
|
|
$ |
13,239 |
|
|
$ |
30,823 |
|
|
$ |
17,564 |
|
_________________________________________
*
|
For
the three months ended May 29, 2009, we recorded $0.6 million associated
with cash recoveries of fringe benefit tax from employees in India. For
the three months ended May 30, 2008 there were no amounts associated with
cash recoveries of fringe benefit tax from employees in
India.
|
Total
stock-based compensation costs that have been included in our condensed
consolidated statements of income for the six months ended May 29, 2009 and May
30, 2008 were as follows (in thousands):
|
|
|
2009
|
|
|
2008
|
|
Income Statement
Classifications
|
|
|
|
Option
Grants
and
Stock
Purchase
Rights *
|
|
|
Restricted
Stock
and
Performance
Share
Awards
*
|
|
|
Option
Grants
and
Stock
Purchase
Rights
|
|
|
Restricted
Stock
and
Performance
Share
Awards
|
|
Cost
of revenue—services and support
|
|
|
$ |
1,158 |
|
|
$ |
337 |
|
|
$ |
1,779 |
|
|
$ |
253 |
|
Research
and development
|
|
|
|
23,396 |
|
|
|
14,933 |
|
|
|
27,770 |
|
|
|
10,004 |
|
Sales
and marketing
|
|
|
|
18,581 |
|
|
|
9,835 |
|
|
|
21,125 |
|
|
|
10,188 |
|
General
and administrative
|
|
|
|
14,282 |
|
|
|
4,875 |
|
|
|
12,728 |
|
|
|
7,574 |
|
Total
|
|
|
$ |
57,417 |
|
|
$ |
29,980 |
|
|
$ |
63,402 |
|
|
$ |
28,019 |
|
_________________________________________
*
|
For
the six months ended May 29, 2009, we recorded $0.8 million associated
with cash recoveries of fringe benefit tax from employees in India. For
the six months ended May 30, 2008 there were no amounts associated with
cash recoveries of fringe benefit tax from employees in
India.
|
NOTE
7. EMPLOYEE BENEFIT PLAN
Deferred
Compensation Plan
As of May
29, 2009 and November 28, 2008, the invested amounts under our Deferred
Compensation Plan totaled $9.7 million and $7.6 million, respectively, and
are recorded as other assets on our condensed consolidated balance sheets. As of
May 29, 2009 and November 28, 2008, we recorded $9.7 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
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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, “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 the fair
value of future estimated sublease income of approximately $3.9 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.
In the
second quarter of fiscal 2009, we accrued an additional $3.0 million under this
program for termination benefits related to the elimination of approximately 48
of the remaining 57 full-time positions expected to be terminated.
The
following table sets forth a summary of Adobe restructuring activities during
the six months ended May 29, 2009 (in thousands):
|
|
November
28,
2008
|
|
|
Costs
Incurred
|
|
|
Cash
Payments
|
|
|
Other
Adjustments
|
|
|
May
29,
2009
|
|
|
Total
Costs
Incurred
to
Date
|
|
|
Total
Costs
Expected
to
be
Incurred
|
|
Termination
benefits
|
|
$ |
28,759 |
|
|
$ |
6,358 |
|
|
$ |
(32,592 |
) |
|
$ |
479 |
|
|
$ |
3,004 |
|
|
$ |
36,044 |
|
|
$ |
36,543 |
|
Cost
of closing redundant facilities
|
|
|
— |
|
|
|
8,514 |
|
|
|
(3,760
|
) |
|
|
589 |
|
|
|
5,343 |
|
|
|
9,103 |
|
|
|
9,612 |
|
Total
|
|
$ |
28,759 |
|
|
$ |
14,872 |
|
|
$ |
(36,352 |
) |
|
$ |
1,068 |
|
|
$ |
8,347 |
|
|
$ |
45,147 |
|
|
$ |
46,155 |
|
Accrued
restructuring charges of approximately $8.3 million at May 29, 2009 include $5.7
million recorded in accrued restructuring, current and $2.6 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 are foreign currency translation adjustments of
$0.5 million and small changes 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 six months ended May 29, 2009 (in thousands):
|
|
November
28,
2008
|
|
|
Cash
Payments
|
|
|
Other
Adjustments
|
|
|
May
29,
2009
|
|
|
Total
Costs
Incurred
to
Date
|
|
|
Total
Costs
Expected
to
be
Incurred
|
|
Cost
of closing redundant facilities
|
|
$ |
12,168 |
|
|
$ |
(3,570 |
) |
|
$ |
383 |
|
|
$ |
8,981 |
|
|
$ |
42,698 |
|
|
$ |
42,698 |
|
Other
|
|
|
977 |
|
|
|
(18
|
) |
|
|
— |
|
|
|
959 |
|
|
|
2,357 |
|
|
|
2,357 |
|
Total
|
|
$ |
13,145 |
|
|
$ |
(3,588 |
) |
|
$ |
383 |
|
|
$ |
9,940 |
|
|
$ |
45,055 |
|
|
$ |
45,055 |
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accrued
restructuring charges of approximately $9.9 million at May 29, 2009 related to
facilities obligations include $6.0 million recorded in accrued restructuring,
current and $3.9 million 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 related to long-term facilities
obligations included $6.9 million recorded in accrued restructuring,
current and $6.2 million 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.
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 six months ended
May 29, 2009. During the six months ended May 30, 2008, we entered into several
structured repurchase agreements with large financial institutions, whereupon we
provided the financial institutions with prepayments of $250.0 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 six months ended May 29, 2009, we repurchased approximately 5.9
million shares at an average price of $22.70 through structured repurchase
agreements, which included prepayments from fiscal 2008. During the six months
ended May 30, 2008, we repurchased 16.6 million shares at an average price
of $36.58 through structured repurchase agreements, which included prepayments
from fiscal 2007.
No
prepayments were remaining as of May 29, 2009. As of November 28, 2008,
prepayments were classified as treasury stock on our condensed consolidated
balance sheet at the payment date, though only shares physically delivered to us
by the financial statement date are excluded from the denominator in the
computation of earnings per share. As of May 30, 2008, approximately
$66.1 million of up-front payments remained under the
agreements.
Subsequent
to May 29, 2009, as part of Stock Repurchase Program I, we entered into
structured stock repurchase agreements with large financial institutions
whereupon we provided the financial institutions with prepayments of
$350.0 million. This amount will be classified as treasury stock on our
balance sheet. See
Note 16 for further discussion of our stock repurchase
programs.
Stock
Repurchase Program II
Under this
stock repurchase program, we had authorization to repurchase 50.0 million
shares of our common stock. 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
six months ended May 30, 2008, we provided prepayments of $1.05 billion and
repurchased 31.9 million shares through structured share repurchase agreements
at an average price of $37.15. As of May 30, 2008, there were no up-front
payments remaining under these agreements.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE
10. COMPREHENSIVE INCOME (LOSS)
The
following table sets forth the activity for each component of other
comprehensive income (loss), net of related taxes, for the three and six months
ended May 29, 2009 and May 30, 2008 (in thousands):
|
|
Three Months
|
|
|
Six Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
126,071 |
|
|
$ |
214,910 |
|
|
$ |
282,506 |
|
|
$ |
434,289 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(losses) gains on derivative instruments
|
|
|
(8,737
|
) |
|
|
313 |
|
|
|
(14,187
|
) |
|
|
282 |
|
Reclassification
adjustment for (gains) losses on derivative instruments recognized during
the period
|
|
|
(5,913
|
) |
|
|
— |
|
|
|
(26,389
|
) |
|
|
— |
|
Unrealized
gains (losses) on available-for-sale securities
|
|
|
3,547 |
|
|
|
(6,097
|
) |
|
|
1,578 |
|
|
|
(9,176
|
) |
Reclassification
adjustment for (gains) losses on available-for-sale securities recognized
during the period
|
|
|
(1,267
|
) |
|
|
173 |
|
|
|
(2,577 |
) |
|
|
173 |
|
Foreign
currency translation adjustments
|
|
|
14,585 |
|
|
|
696 |
|
|
|
11,663 |
|
|
|
2,074 |
|
Other
comprehensive income (loss)
|
|
|
2,215 |
|
|
|
(4,915
|
) |
|
|
(29,912
|
) |
|
|
(6,647
|
) |
Total
other comprehensive income, net of taxes
|
|
$ |
128,286 |
|
|
$ |
209,995 |
|
|
$ |
252,594 |
|
|
$ |
427,642 |
|
The following table sets forth the
components of accumulated other comprehensive income, net of related taxes, as
of May 29, 2009 and November 28, 2008 (in thousands):
|
|
2009
|
|
|
2008
|
|
Net
unrealized gains on derivative instruments
|
|
$ |
1,174 |
|
|
$ |
41,750 |
|
Net
unrealized gains on available-for-sale securities
|
|
|
14,908 |
|
|
|
15,907 |
|
Cumulative
foreign currency translation adjustments
|
|
|
11,228 |
|
|
|
(435
|
) |
Total
accumulated other comprehensive income, net of taxes
|
|
$ |
27,310 |
|
|
$ |
57,222 |
|
NOTE
11. NET INCOME PER SHARE
The
following table sets forth the computation of basic and diluted net income per
share for the three and six months ended May 29, 2009 and May 30, 2008 (in
thousands, except per share data):
|
|
Three Months
|
|
|
Six Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
126,071 |
|
|
$ |
214,910 |
|
|
$ |
282,506 |
|
|
$ |
434,289 |
|
Shares
used to compute basic net income per share
|
|
|
524,159 |
|
|
|
533,391 |
|
|
|
527,324 |
|
|
|
547,996 |
|
Dilutive
potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
restricted stock and performance share awards
|
|
|
1,054 |
|
|
|
361 |
|
|
|
1,166 |
|
|
|
682 |
|
Stock
options
|
|
|
2,800 |
|
|
|
8,624 |
|
|
|
2,848 |
|
|
|
9,025 |
|
Shares
used to compute diluted net income per share
|
|
|
528,013 |
|
|
|
542,376 |
|
|
|
531,338 |
|
|
|
557,703 |
|
Basic
net income per share
|
|
$ |
0.24 |
|
|
$ |
0.40 |
|
|
$ |
0.54 |
|
|
$ |
0.79 |
|
Diluted
net income per share
|
|
$ |
0.24 |
|
|
$ |
0.40 |
|
|
$ |
0.53 |
|
|
$ |
0.78 |
|
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the
three and six months ended May 29, 2009, options to purchase approximately 31.6
million and 30.8 million shares, respectively, of common stock with exercise
prices greater than the average fair market value of our stock of $23.38 and
$22.20, respectively, were not included in the calculation because the effect
would have been anti-dilutive. Comparatively, for the three and six months ended
May 30, 2008, options to purchase approximately 17.9 million and 16.7 million
shares, respectively, of common stock with exercise prices greater than the
average fair market value of our stock of $37.29 and $37.75, respectively, 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 June 2009, we submitted notice to the lessor that we
intend to exercise our
option to renew this agreement for an additional five years effective
August, 2009. 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 May 29, 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 May 29, 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 $1.8 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.
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Indemnifications
In the
normal course of business, we provide indemnifications of varying scope to
customers against claims of intellectual property infringement made by
third-parties arising from the use of our products. Historically, costs related
to these indemnification provisions have not been significant and we are unable
to estimate the maximum potential impact of these indemnification provisions on
our future results of operations.
To the
extent permitted under Delaware law, we have agreements whereby we indemnify our
directors and officers for certain events or occurrences while the director or
officer is, or was serving, at our request in such capacity. The indemnification
period covers all pertinent events and occurrences during the director’s or
officer’s lifetime. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is unlimited; however,
we have director and officer insurance coverage that reduces our exposure and
enables us to recover a portion of any future amounts paid. We believe the
estimated fair value of these indemnification agreements in excess of applicable
insurance coverage is minimal.
As part of
our limited partnership interest in Adobe Ventures, we have provided a general
indemnification to Granite Ventures, an independent venture capital firm and
sole general partner of Adobe Ventures, for certain events or occurrences while
Granite Ventures is, or was serving, at our request in such capacity provided
that Granite Ventures acts in good faith on behalf of the partnership. We are
unable to develop an estimate of the maximum potential amount of future payments
that could potentially result from any hypothetical future claim, but believe
the risk of having to make any payments under this general indemnification to be
remote.
Legal
Proceedings
In
connection with our anti-piracy efforts, conducted both internally and through
organizations such as the Business Software Alliance, from time to time we
undertake litigation against alleged copyright infringers. Such lawsuits may
lead to counter-claims alleging improper use of litigation or violation of other
local laws. We believe we have valid defenses with respect to such
counter-claims; however, it is possible that our condensed 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 condensed 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 May 29, 2009
and
ADOBE
SYSTEMS INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 May 29, 2009, we were in compliance with all of the
covenants.
NOTE
14. NON-OPERATING INCOME (EXPENSE)
Non-operating
income (expense) for the three and six months ended May 29, 2009 and May 30,
2008 included the following (in thousands):
|
|
Three Months
|
|
|
Six Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
and other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
9,923 |
|
|
$ |
13,192 |
|
|
$ |
21,039 |
|
|
$ |
30,703 |
|
Foreign
exchange losses
|
|
|
(6,710
|
) |
|
|
(1,234
|
) |
|
|
(6,076
|
) |
|
|
(5,934
|
) |
Realized
gains (losses) on fixed income investment
|
|
|
1,265 |
|
|
|
(200
|
) |
|
|
2,578 |
|
|
|
(200
|
) |
Other,
net
|
|
|
324 |
|
|
|
392 |
|
|
|
545 |
|
|
|
871 |
|
Interest
and other income, net
|
|
$ |
4,802 |
|
|
$ |
12,150 |
|
|
$ |
18,086 |
|
|
$ |
25,440 |
|
Interest
expense
|
|
$ |
(620 |
) |
|
$ |
(3,828 |
) |
|
$ |
(1,412 |
) |
|
$ |
(5,637 |
) |
Investment
gains (losses), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
investment gains
|
|
$ |
52 |
|
|
$ |
10,040 |
|
|
$ |
52 |
|
|
$ |
15,437 |
|
Unrealized
investment gains
|
|
|
2,186 |
|
|
|
1,044 |
|
|
|
1,377 |
|
|
|
4,958 |
|
Realized
investment losses
|
|
|
(793
|
) |
|
|
(254
|
) |
|
|
(1,985
|
) |
|
|
(637
|
) |
Unrealized
investment losses
|
|
|
(3,250
|
) |
|
|
(1,324
|
) |
|
|
(18,495
|
) |
|
|
(1,520
|
) |
Investment
gains (losses), net
|
|
$ |
(1,805 |
) |
|
$ |
9,506 |
|
|
$ |
(19,051 |
) |
|
$ |
18,238 |
|
Total
non-operating income (expense), net
|
|
$ |
2,377 |
|
|
$ |
17,828 |
|
|
$ |
(2,377 |
) |
|
$ |
38,041 |
|
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 is now 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 May 29, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
411,749 |
|
|
$ |
156,023 |
|
|
$ |
53,696 |
|
|
$ |
36,819 |
|
|
$ |
46,386 |
|
|
$ |
704,673 |
|
Cost
of revenue
|
|
|
39,572 |
|
|
|
10,297 |
|
|
|
11,877 |
|
|
|
5,418 |
|
|
|
4,844 |
|
|
|
72,008 |
|
Gross
profit
|
|
$ |
372,177 |
|
|
$ |
145,726 |
|
|
$ |
41,819 |
|
|
$ |
31,401 |
|
|
$ |
41,542 |
|
|
$ |
632,665 |
|
Gross
profit as a percentage of revenue
|
|
|
90 |
% |
|
|
93 |
% |
|
|
78 |
% |
|
|
85 |
% |
|
|
90 |
% |
|
|
90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended May 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
527,244 |
|
|
$ |
198,402 |
|
|
$ |
54,356 |
|
|
$ |
52,616 |
|
|
$ |
54,268 |
|
|
$ |
886,886 |
|
Cost
of revenue
|
|
|
34,260 |
|
|
|
12,032 |
|
|
|
18,590 |
|
|
|
11,246 |
|
|
|
6,738 |
|
|
|
82,866 |
|
Gross
profit
|
|
$ |
492,984 |
|
|
$ |
186,370 |
|
|
$ |
35,766 |
|
|
$ |
41,370 |
|
|
$ |
47,530 |
|
|
$ |
804,020 |
|
Gross
profit as a percentage of revenue
|
|
|
94 |
% |
|
|
94 |
% |
|
|
66 |
% |
|
|
79 |
% |
|
|
88 |
% |
|
|
91 |
% |
_________________________________________
*
|
Platform
revenue includes revenue related to our Mobile client products of $8.4
million and $22.2 million for the three months ended May 29, 2009 and May
30, 2008, respectively, or 23% and 42% of Platform revenues,
respectively.
|
(in
thousands)
|
|
Creative
Solutions
|
|
|
Knowledge
Worker
|
|
|
Enterprise
|
|
|
Platform*
|
|
|
Print
and
Publishing
|
|
|
Total
|
|
Six
months ended May 29, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
872,476 |
|
|
$ |
319,153 |
|
|
$ |
117,551 |
|
|
$ |
89,118 |
|
|
$ |
92,765 |
|
|
$ |
1,491,063 |
|
Cost
of revenue
|
|
|
82,322 |
|
|
|
20,218 |
|
|
|
25,218 |
|
|
|
11,474 |
|
|
|
10,129 |
|
|
|
149,361 |
|
Gross
profit
|
|
$ |
790,154 |
|
|
$ |
298,935 |
|
|
$ |
92,333 |
|
|
$ |
77,644 |
|
|
$ |
82,636 |
|
|
$ |
1,341,702 |
|
Gross
profit as a percentage of revenue
|
|
|
91 |
% |
|
|
94 |
% |
|
|
79 |
% |
|
|
87 |
% |
|
|
89 |
% |
|
|
90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended May 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,070,719 |
|
|
$ |
393,937 |
|
|
$ |
108,520 |
|
|
$ |
95,960 |
|
|
$ |
108,195 |
|
|
$ |
1,777,331 |
|
Cost
of revenue
|
|
|
70,308 |
|
|
|
23,713 |
|
|
|
35,581 |
|
|
|
21,210 |
|
|
|
14,529 |
|
|
|
165,341 |
|
Gross
profit
|
|
$ |
1,000,411 |
|
|
$ |
370,224 |
|
|
$ |
72,939 |
|
|
$ |
74,750 |
|
|
$ |
93,666 |
|
|
$ |
1,611,990 |
|
Gross
profit as a percentage of revenue
|
|
|
93 |
% |
|
|
94 |
% |
|
|
67 |
% |
|
|
78 |
% |
|
|
87 |
% |
|
|
91 |
% |
_________________________________________
*
|
Platform
revenue includes revenue related to our Mobile client products of $34.5
million and $37.4 million for the six months ended May 29, 2009 and May
30, 2008, respectively, or 39% of Platform revenues for both
periods.
|
NOTE
16. SUBSEQUENT EVENTS
Stock
Repurchase Programs
Subsequent
to May 29, 2009, as part of Stock Repurchase Program I, we entered into
structured stock repurchase agreements with large financial institutions
whereupon we provided the financial institutions with prepayments of
$350.0 million. This amount will be classified as treasury stock on our
balance sheet. See Note 9
for further discussion of our stock repurchase programs.
Purchase
of Real Property
Subsequent
to May 29, 2009, we completed the purchase of real property located in Waltham,
Massachusetts. The purchase price for the property was $44.2 million. We made an
initial deposit of $7.0 million which was included in security and other
deposits as of May 29, 2009. This deposit was held in escrow until closing and
then applied to the purchase price. Closing occurred on June 16, 2009 and
the remaining balance was paid. See Note 4 for further
discussion of this transaction.
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 Securities and Exchange Commission (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, consumers, original equipment manufacturers (“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, is now reported as part of the Platform
segment. Prior year information has been updated to reflect the integration of
these business units.
During the
second quarter of fiscal 2009, our worldwide business continued to be impacted
by the generally weak macro-economic environment. Although we believe
our business in the United States (“U.S.”) has stabilized since our first fiscal
quarter of this year, overall end-user demand for most of our products,
particularly our Adobe Creative Suite family of products and our Adobe Acrobat
family of products, remains weaker than comparable periods during fiscal 2008.
Despite this impact on our overall revenue achievement, we continued to
proactively control our costs 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 continues to
fall behind the revenue achieved for the equivalent CS3 products for the
comparable period of time. We attribute this weakness to the economic conditions
affecting the business of our creative professional customers. Based
on economic predictions and market trends such as marketing and ad spending, we
do not expect the market environment for creative products to improve materially
in the near term.
Our
Knowledge Worker segment also continued to be affected by a slow-down in demand,
resulting in a year-over-year revenue decline. We attribute this
weakness to reduced corporate spending. We do not expect the market
environment to improve materially in the near term.
In our
Enterprise segment, second quarter fiscal 2009 revenue declined sequentially
from the revenue achieved in the first quarter of fiscal 2009 and second quarter
fiscal 2009 revenue was essentially flat on a year-over-year basis. The segment
performed better than our overall business.
Our
Platform segment revenue declined sequentially and on a year-over-year basis
primarily due to lower revenue from licensing of our Flash Lite client
technologies by mobile handset OEM and consumer electronic device manufacturers.
We have stated we expect the May 1, 2008 announcement of the Open Screen Project
to substantially reduce our mobile and device revenue this fiscal year due to
the removal of licensing fees for Open Screen Project members on the next major
releases of our Adobe Flash Platform technologies. Partially
offsetting this revenue decline within our Platform segment is the build out of
OEM relationships with companies in which we offer their applications as part of
the download 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. 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
accounting principles generally accepted in the United States of America
(“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 six months ended May 29, 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 and Six Months Ended May 29, 2009 and May 30, 2008 (in
millions)
|
|
Three Months
|
|
|
Percent
|
|
Six Months
|
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
2009
|
|
|
2008
|
|
|
Change
|
Product
|
|
$ |
660.1 |
|
|
$ |
841.3 |
|
|
|
(22
|
)% |
|
$ |
1,402.3 |
|
|
$ |
1,693.2 |
|
|
|
(17
|
)% |
Percentage
of total revenue
|
|
|
94
|
% |
|
|
95
|
% |
|
|
|
|
|
|
94
|
% |
|
|
95
|
% |
|
|
|
|
Services
and support
|
|
|
44.6 |
|
|
|
45.6 |
|
|
|
(2
|
)% |
|
|
88.8 |
|
|
|
84.1 |
|
|
|
6
|
% |
Percentage
of total revenue
|
|
|
6
|
% |
|
|
5
|
% |
|
|
|
|
|
|
6
|
% |
|
|
5
|
% |
|
|
|
|
Total
revenue
|
|
$ |
704.7 |
|
|
$ |
886.9 |
|
|
|
(21
|
)% |
|
$ |
1,491.1 |
|
|
$ |
1,777.3 |
|
|
|
(16
|
)% |
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)
|
|
Three Months
|
|
|
Percent
|
|
Six Months
|
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
2009
|
|
|
2008
|
|
|
Change
|
Creative
Solutions
|
|
$ |
411.7 |
|
|
$ |
527.2 |
|
|
|
(22
|
)% |
|
$ |
872.5 |
|
|
$ |
1,070.7 |
|
|
|
(19
|
)% |
Percentage
of total revenue
|
|
|
58
|
% |
|
|
59
|
% |
|
|
|
|
|
|
59
|
% |
|
|
60
|
% |
|
|
|
|
Knowledge
Worker
|
|
|
156.0 |
|
|
|
198.4 |
|
|
|
(21
|
)% |
|
|
319.1 |
|
|
|
393.9 |
|
|
|
(19
|
)% |
Percentage
of total revenue
|
|
|
22
|
% |
|
|
23
|
% |
|
|
|
|
|
|
21
|
% |
|
|
22
|
% |
|
|
|
|
Enterprise
|
|
|
53.7 |
|
|
|
54.4 |
|
|
|
(1
|
)% |
|
|
117.6 |
|
|
|
108.5 |
|
|
|
8
|
% |
Percentage
of total revenue
|
|
|
8
|
% |
|
|
6
|
% |
|
|
|
|
|
|
8
|
% |
|
|
6
|
% |
|
|
|
|
Platform
|
|
|
36.8 |
|
|
|
52.6 |
|
|
|
(30
|
)% |
|
|
89.1 |
|
|
|
96.0 |
|
|
|
(7
|
)% |
Percentage
of total revenue
|
|
|
5
|
% |
|
|
6
|
% |
|
|
|
|
|
|
6
|
% |
|
|
5
|
% |
|
|
|
|
Print
and Publishing
|
|
|
46.5 |
|
|
|
54.3 |
|
|
|
(15
|
)% |
|
|
92.8 |
|
|
|
108.2 |
|
|
|
(14
|
)% |
Percentage
of total revenue
|
|
|
7
|
% |
|
|
6
|
% |
|
|
|
|
|
|
6
|
% |
|
|
7
|
% |
|
|
|
|
Total
revenue
|
|
$ |
704.7 |
|
|
$ |
886.9 |
|
|
|
(21
|
)% |
|
$ |
1,491.1 |
|
|
$ |
1,777.3 |
|
|
|
(16
|
)% |
Revenue
from Creative Solutions decreased $115.5 million and $198.2 million during the
three and six months ended May 29, 2009, respectively, as compared to the three
and six months ended May 30, 2008. This decrease during the three and six months
ended May 29, 2009 as compared to the three and six months ended May 30, 2008
was driven largely by a 18% and 16% decline in Creative Suites related revenue
and a decline of 32% and 26% in Photoshop point product revenue, respectively.
Also contributing to the decrease during the three months ended May 29, 2009 as
compared to the three months ended May 30, 2008 was an overall decline in both
unit average selling prices and the number of units licensed. During the six
months ended May 29, 2009 as compared to the six months ended May 30, 2008 we
also experienced a decline in the number of units licensed.
Revenue
from Knowledge Worker decreased $42.4 million and $74.8 million during the three
and six months ended May 29, 2009, respectively, as compared to the three and
six months ended May 30, 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 sold through our shrink-wrap distribution
channel. Also contributing to the decrease was an overall decline in the number
of units licensed during the three and six months ended May 29, 2009. Average
unit selling prices have remained relatively consistent.
Revenue
from Enterprise was relatively consistent during the three months ended May 29,
2009, as compared to the three months ended May 30, 2008. Revenue from
Enterprise increased $9.1 million during the six months ended May 29, 2009, as
compared to the six months ended May 30, 2008 primarily due to strong
performance in our first quarter of fiscal 2009.
Revenue
from Platform decreased $15.8 million and $6.9 million during the three and six
months ended May 29, 2009, respectively, compared to the three and six months
ended May 30, 2008. The decrease was primarily due to lower mobile revenue from
OEM partners who license our Flash Lite product.
Revenue
from Print and Publishing decreased $7.8 million and $15.4 million during the
three and six months ended May 29, 2009, respectively, compared to the three and
six months ended May 30, 2008. The decrease resulted principally from a slight
decline in revenue associated with our PostScript products.
Geographical
Information (in millions)
|
|
Three Months
|
|
|
Percent
|
|
Six Months
|
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
2009
|
|
|
2008
|
|
|
Change
|
Americas
|
|
$ |
317.8 |
|
|
$ |
383.8 |
|
|
|
(17
|
)% |
|
$ |
643.9 |
|
|
$ |
780.7 |
|
|
|
(18
|
)% |
Percentage
of total revenue
|
|
|
45
|
% |
|
|
43
|
% |
|
|
|
|
|
|
43
|
% |
|
|
44
|
% |
|
|
|
|
EMEA
|
|
|
215.2 |
|
|
|
294.6 |
|
|
|
(27
|
)% |
|
|
492.7 |
|
|
|
618.5 |
|
|
|
(20
|
)% |
Percentage
of total revenue
|
|
|
31
|
% |
|
|
33
|
% |
|
|
|
|
|
|
33
|
% |
|
|
35
|
% |
|
|
|
|
Asia
|
|
|
171.7 |
|
|
|
208.5 |
|
|
|
(18
|
)% |
|
|
354.5 |
|
|
|
378.1 |
|
|
|
(6
|
)% |
Percentage
of total revenue
|
|
|
24
|
% |
|
|
24
|
% |
|
|
|
|
|
|
24
|
% |
|
|
21
|
% |
|
|
|
|
Total
revenue
|
|
$ |
704.7 |
|
|
$ |
886.9 |
|
|
|
(21
|
)% |
|
$ |
1,491.1 |
|
|
$ |
1,777.3 |
|
|
|
(16
|
)% |
Overall
revenue for the three and six months ended May 29, 2009 decreased when compared
to the three and six months ended May 30, 2008 primarily due to a reduction in
the adoption and licensing of our Creative Suite and Acrobat
families
of products. Success with our LiveCycle business, which is part of our
Enterprise segment, offset part of the decline in the other
businesses.
Revenue in
the Americas decreased $66.0 million and $136.8 million during the three and six
months ended May 29, 2009, respectively, compared to the three and six months
ended May 30, 2008, primarily due to economic conditions resulting in weaker
demand for our creative and knowledge worker products. Continued success with
our LiveCycle enterprise business helped to offset some of this
weakness.
Revenue in
EMEA decreased $79.4 million and $125.8 million during the three and six months
ended May 29, 2009, respectively, compared to the three and six months ended May
30, 2008, primarily due to weaker demand with our creative and knowledge worker
products, similar to the impact noted in the Americas.
Revenue in
Asia decreased $36.8 million and $23.6 million during the three and six months
ended May 29, 2009, respectively, compared to the three and six months ended May
30, 2008, primarily due economic conditions resulting in weaker demand and
normal seasonal declines.
Included
in the overall decrease in revenue were impacts associated with foreign
currency. Revenue in EMEA measured in U.S. dollars decreased approximately $25.1
million and $48.0 million, due to the strength of the U.S. dollar against the
Euro, during the three and six months ended May 29, 2009, respectively, over the
same reporting period last year. Although the U.S. dollar strengthened
significantly against the Euro year-over-year, during the three and six months
ended May 29, 2009, we were able to mitigate all but $19.9 million and $22.4
million, respectively, of this impact to our reported revenue with our currency
hedging program which resulted in hedging gains of $5.2 million and $25.6
million, respectively. Revenue in Asia measured in U.S. dollars was favorably
impacted by approximately $3.6 million and $18.5 million due to the
strength of the Yen against the U.S. dollar during the three and six months
ended May 29, 2009, respectively, 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. As of May 29, 2009, our backlog was approximately 4% of second
quarter fiscal 2009 revenue. We had minimal backlog at the end of the first
quarter of fiscal 2009.
Cost
of Revenue for the Three and Six Months Ended May 29, 2009 and May 30, 2008 (in
millions)
|
|
Three Months
|
|
|
Percent
|
|
Six Months
|
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
2009
|
|
|
2008
|
|
|
Change
|
Product
|
|
$ |
55.8 |
|
|
$ |
58.3 |
|
|
|
(4
|
)% |
|
$ |
114.7 |
|
|
$ |
118.0 |
|
|
|
(3
|
)% |
Percentage
of total revenue
|
|
|
8
|
% |
|
|
7
|
% |
|
|
|
|
|
|
8
|
% |
|
|
7
|
% |
|
|
|
|
Services
and support
|
|
|
16.2 |
|
|
|
24.6 |
|
|
|
(34
|
)% |
|
|
34.7 |
|
|
|
47.3 |
|
|
|
(27
|
)% |
Percentage
of total revenue
|
|
|
2
|
% |
|
|
3
|
% |
|
|
|
|
|
|
2
|
% |
|
|
3
|
% |
|
|
|
|
Total
cost of revenue
|
|
$ |
72.0 |
|
|
$ |
82.9 |
|
|
|
(13
|
)% |
|
$ |
149.4 |
|
|
$ |
165.3 |
|
|
|
(10
|
)% |
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
|
|
|
Percent Change
2008 to 2009
YTD
|
|
Hosted
services
|
|
|
6
|
% |
|
|
6
|
% |
Royalty
cost
|
|
|
8 |
|
|
|
5 |
|
Excess
and obsolete inventory
|
|
|
1 |
|
|
|
3 |
|
Amortization
of acquired rights to use technology
|
|
|
3 |
|
|
|
3 |
|
Localization
costs related to our product launches
|
|
|
(4
|
) |
|
|
(3
|
) |
Amortization
of purchased intangibles
|
|
|
(13
|
) |
|
|
(13
|
) |
Various
individually insignificant items
|
|
|
(5
|
) |
|
|
(4
|
) |
Total
change
|
|
|
(4
|
)% |
|
|
(3
|
)% |
The
increase in hosted service costs was primarily related to the amortization of
capitalized infrastructure costs for the three and six months ended May 29, 2009
as compared to the three and six months ended May 30, 2008.
The
increase in royalty cost was due to additional costs for the use of third-party
technology.
The
decrease in localization costs was primarily due to a reduction in third-party
localization performed for various products during the three and six months
ended May 29, 2009 as compared to the three and six months ended May 30,
2008.
Amortization
expense decreased during the three and six months ended May 29, 2009 as compared
to the three and six months ended May 30, 2008, due to a decrease in
amortization expense primarily associated with intangible assets purchased
through the Macromedia acquisition, which are expected to be fully amortized at
the end of fiscal 2009.
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 and six months ended May
29, 2009 as compared to the three and six months ended May 30, 2008, primarily
due to decreases in compensation and related benefits driven by headcount
reductions.
Operating
Expenses for the Three and Six Months Ended May 29, 2009 and May 30, 2008 (in
millions)
Research
and Development, Sales and Marketing, and General and Administrative
Expenses
Compensation
costs decreased for the three and six months ended May 29, 2009 primarily due to
lower profit sharing and employee bonuses based on company performance to date,
when compared to the three and six months ended May 30, 2008.
Research
and Development
|
|
Three Months
|
|
Percent
|
|
Six Months
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
Change
|
|
2009
|
|
|
2008
|
|
Change
|
Expenses
|
|
$ |
138.5 |
|
|
$ |
170.3 |
|
|
|
(19
|
)% |
|
$ |
288.4 |
|
|
$ |
338.8 |
|
|
|
(15
|
)% |
Percentage
of total revenue
|
|
|
20
|
% |
|
|
19
|
% |
|
|
|
|
|
|
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
|
|
|
Percent Change
2008 to 2009
YTD
|
|
Compensation
associated with incentive compensation and stock-based
compensation
|
|
|
(17
|
)% |
|
|
(11
|
)% |
Various
individually insignificant items
|
|
|
(2
|
) |
|
|
(4
|
) |
Total
change
|
|
|
(19
|
)% |
|
|
(15
|
)% |
We believe
that investments in research and development, including the recruiting and
hiring of software developers, are critical to remain competitive in the
marketplace and are directly related to continued timely development of new and
enhanced products. We will continue to focus on long-term opportunities
available in our end markets and make significant investments in the development
of our desktop application and server-based software products.
Sales
and Marketing
|
|
Three Months
|
|
Percent
|
|
Six Months
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
Change
|
|
2009
|
|
|
2008
|
|
Change
|
Expenses
|
|
$ |
243.2 |
|
|
$ |
279.4 |
|
|
|
(13
|
)% |
|
$ |
492.7 |
|
|
$ |
542.0 |
|
|
|
(9
|
)% |
Percentage
of total revenue
|
|
|
35
|
% |
|
|
32
|
% |
|
|
|
|
|
|
33
|
% |
|
|
30
|
% |
|
|
|
|
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
|
|
|
Percent Change
2008 to 2009
YTD
|
|
Marketing
spending related to product launches and overall marketing efforts to
further increase revenue
|
|
|
(1
|
)% |
|
|
1
|
% |
Compensation
associated with incentive compensation and stock-based
compensation
|
|
|
(8
|
) |
|
|
(7
|
) |
Various
individually insignificant items
|
|
|
(4
|
) |
|
|
(3
|
) |
Total
change
|
|
|
(13
|
)% |
|
|
(9
|
)% |
General
and Administrative
|
|
Three Months
|
|
Percent
|
|
Six Months
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
Change
|
|
2009
|
|
|
2008
|
|
Change
|
Expenses
|
|
$ |
70.8 |
|
|
$ |
77.1 |
|
|
|
(8
|
)% |
|
$ |
144.9 |
|
|
$ |
160.0 |
|
|
|
(9
|
)% |
Percentage
of total revenue
|
|
|
10
|
% |
|
|
9
|
% |
|
|
|
|
|
|
10
|
% |
|
|
9
|
% |
|
|
|
|
General
and administrative expenses consist primarily of compensation and benefit
expenses, travel expenses and related facilities costs for our finance,
facilities, human resources, legal, information services and executive
personnel. General and administrative expenses also include outside legal and
accounting fees, provision for bad debts, expenses associated with computer
equipment and software used in the administration of the business, charitable
contributions and various forms of insurance.
General
and administrative expenses increased (decreased) due to the
following:
|
|
Percent Change
2008 to 2009
QTD
|
|
|
Percent Change
2008 to 2009
YTD
|
|
Provision
for bad debts
|
|
|
1
|
% |
|
|
2
|
% |
Facilities
and telecommunication
|
|
|
(4
|
) |
|
|
(2
|
) |
Professional
and consulting fees
|
|
|
1 |
|
|
|
2 |
|
Compensation
associated with incentive compensation and stock-based
compensation
|
|
|
(9
|
) |
|
|
(8
|
) |
Charitable
contributions
|
|
|
(1
|
) |
|
|
(7
|
) |
Various
individually insignificant items
|
|
|
4 |
|
|
|
4 |
|
Total
change
|
|
|
(8
|
)% |
|
|
(9
|
)% |
The
decrease in charitable contributions during the six months ended May 30, 2008
reflects a change in the timing of contributions to the Adobe Foundation during
the first quarter of 2009.
Restructuring
Charges
|
|
Three Months
|
|
Percent
|
|
Six Months
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
Change
|
|
2009
|
|
|
2008
|
|
Change
|
Expenses
|
|
$ |
3.5 |
|
|
$ |
—
|
|
|
|
* |
|
|
$ |
15.8 |
|
|
$ |
1.4 |
|
|
|
* |
|
Percentage
of total revenue
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
1 |
% |
|
|
* |
|
|
|
|
|
_________________________________________
*
|
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 the
560 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 No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities” (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 $3.9 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.
In the
second quarter of fiscal 2009, we accrued an additional $3.0 million under this
program for termination benefits related to the elimination of approximately 48
of the remaining 57 full-time positions expected to be terminated.
As of May
29, 2009, accrued restructuring charges related to the 2008 restructuring
program and the Macromedia acquisition totaled approximately $8.3 million and
$9.9 million, respectively. We expect to pay these liabilities through fiscal
2013 and fiscal 2012, respectively.
Amortization
of Purchased Intangibles
|
|
Three Months
|
|
Percent
|
|
Six Months
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
Change
|
|
2009
|
|
|
2008
|
|
Change
|
Expenses
|
|
$ |
15.3 |
|
|
$ |
17.1 |
|
|
|
(11
|
)% |
|
$ |
30.7 |
|
|
$ |
34.2 |
|
|
|
(10
|
)% |
Percentage
of total revenue
|
|
|
2
|
% |
|
|
2
|
% |
|
|
|
|
|
|
2
|
% |
|
|
2
|
% |
|
|
|
|
Amortization
expense decreased during the three and six months ended May 29, 2009 as compared
to the three and six months ended May 30, 2008, due to a decrease in
amortization expense associated with intangible assets purchased through the
Macromedia acquisition.
Non-Operating
Income (Expense) for the Three and Six Months Ended May 29, 2009 and May 30,
2008 (in millions)
|
|
Three Months
|
|
|
Percent
|
|
Six Months
|
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
2009
|
|
|
2008
|
|
|
Change
|
Interest
and other income, net
|
|
$ |
4.8 |
|
|
$ |
12.1 |
|
|
|
(60
|
)% |
|
$ |
18.1 |
|
|
$ |
25.4 |
|
|
|
(29
|
)% |
Percentage
of total revenue
|
|
|
1
|
% |
|
|
1
|
% |
|
|
|
|
|
|
1
|
% |
|
|
1
|
% |
|
|
|
|
Interest
expense
|
|
|
(0.6
|
) |
|
|
(3.8
|
) |
|
|
(84
|
)% |
|
|
(1.4
|
) |
|
|
(5.6
|
) |
|
|
(75
|
)% |
Percentage
of total revenue
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
* |
|
|
|
* |
|
|
|
|
|
Investment
gains (losses), net
|
|
|
(1.8
|
) |
|
|
9.5 |
|
|
|
(119
|
)% |
|
|
(19.1
|
) |
|
|
18.2 |
|
|
|
(205
|
)% |
Percentage
of total revenue
|
|
|
* |
|
|
|
1
|
% |
|
|
|
|
|
|
(1
|
)% |
|
|
1
|
% |
|
|
|
|
Total non-operating income
(expense), net
|
|
$ |
2.4 |
|
|
$ |
17.8 |
|
|
|
(87
|
)% |
|
$ |
(2.4 |
) |
|
$ |
38.0 |
|
|
|
(106
|
)% |
_________________________________________
*
|
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, decreased during the three and six months ended May 29,
2009 as compared to the three and six months ended May 30, 2008. The decrease
during the three months ended May 29, 2009 as compared to the three months ended
May 30, 2008 is primarily due to increased foreign exchange losses and lower
interest rates. The decrease during the six months ended May 29, 2009 as
compared to the six months ended May 30, 2008 is primarily due to lower interest
rates.
Interest
Expense
Interest
expense for the three and six months ended May 29, 2009, primarily represents
interest associated with our credit facility. The outstanding balance as of May
29, 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
Gains (Losses), net
Investment
gains (losses), 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 and six months ended May 29, 2009 were primarily
due to unrealized losses related to our Adobe Ventures and direct investments as
compared to the three and six months ended May 30, 2008.
Provision
for Income Taxes for the Three and Six Months Ended May 29, 2009 and May 30,
2008 (in millions)
|
|
Three Months
|
|
Percent
|
|
Six Months
|
|
Percent
|
|
|
2009
|
|
|
2008
|
|
Change
|
|
2009
|
|
|
2008
|
|
Change
|
Provision
|
|
$ |
37.7 |
|
|
$ |
63.1 |
|
|
|
(40
|
)% |
|
$ |
84.4 |
|
|
$ |
139.4 |
|
|
|
(39
|
)% |
Percentage of total
revenue
|
|
|
5
|
% |
|
|
7
|
% |
|
|
|
|
|
|
6
|
% |
|
|
8
|
% |
|
|
|
|
Effective tax
rate
|
|
|
23
|
% |
|
|
23
|
% |
|
|
|
|
|
|
23
|
% |
|
|
24
|
% |
|
|
|
|
Our
effective tax rate was unchanged during the three months ended May 29, 2009 and
May 30, 2008. Our effective tax rate decreased approximately one
percentage point during the six months ended May 29, 2009 as compared to the six
months ended May 30, 2008. The decrease was primarily related to the
availability of the U.S. research and development credit during fiscal 2009,
which was not in effect during fiscal 2008 until our 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 unrecognized tax benefits at May 29, 2009 were
$155.7 million, exclusive of interest and penalties. If the total
unrecognized tax benefits at May 29, 2009 were recognized in the future, the
following amounts, net of an estimated $13.1 million federal benefit
related to deducting certain payments on future tax returns, would result:
$64.1 million of unrecognized tax benefits would decrease the effective tax
rate and $78.5 million would decrease goodwill.
As of May
29, 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 $16.2 million.
The
accounting treatment related to certain unrecognized tax benefits from acquired
companies, including Macromedia, will change when SFAS No. 141 (revised 2007),
“Business Combinations” (“SFAS 141R”) becomes
effective. SFAS 141R will be effective in the first quarter of our fiscal 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 twelve 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)
|
|
May
29,
2009
|
|
|
November 28,
2008
|
|
Cash,
cash equivalents and short-term investments
|
|
$ |
2,664.2 |
|
|
$ |
2,019.2 |
|
Working
capital
|
|
$ |
2,474.1 |
|
|
$ |
1,972.5 |
|
Stockholders’
equity
|
|
$ |
4,801.0 |
|
|
$ |
4,410.4 |
|
Summary of
our cash flows (in millions):
|
|
May
29,
2009
|
|
|
May
30,
2008
|
|
Net
cash provided by operating activities
|
|
$ |
627.3 |
|
|
$ |
731.1 |
|
Net
cash (used for) provided by investing activities
|
|
|
(349.3
|
) |
|
|
259.7 |
|
Net
cash provided by (used for) financing activities
|
|
|
48.9 |
|
|
|
(778.4
|
) |
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
|
|
13.4 |
|
|
|
3.6 |
|
Net
increase in cash and cash equivalents
|
|
$ |
340.3 |
|
|
$ |
216.0 |
|
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 $627.3 million for the six months ended
May 29, 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. 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, in addition to lower overall gross revenue and
improved collections.
The
primary working capital uses of cash were decreases in deferred revenue, accrued
expenses, accrued restructuring and trade payables. Decreases in deferred
revenue related primarily to deferred revenue that was recognized in the first
quarter of fiscal 2009 associated with our free of charge upgrades for CS4 and
Adobe Photoshop Lightroom products as well as
declines in maintenance and support orders. Accrued expenses decreased primarily
due to payments for employee bonuses and commissions related to fiscal 2008.
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 six months ended
May 30, 2008 of $259.7 million to cash used for the six months ended May 29,
2009 of $349.3 million primarily due to increases in purchases of short-term
investments, offset in part by maturities and sales of short-term investments.
The proceeds from the short-term investments during the six months ended May 30,
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. The
use of cash for investing activities during the six months ended May 29, 2009 as
compared to the six months ended May 30, 2008 was also offset by our continued
focus on cost control efforts. This is reflected in the decrease in cash used
for purchases of property and equipment, long-term investments and other
assets.
Cash
Flows from Financing Activities
Net cash
from financing activities changed from cash used for the six months ended May
30, 2008 of $778.4 million to cash provided for the six months ended May 29,
2009 of $48.9 million primarily due to minimal activity for treasury stock
purchases during the six months ended May 29, 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.
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, 56% of our
consolidated invested balances during the second 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
six months ended May 29, 2009, we repurchased approximately 5.9 million shares
at an average price per share of $22.70 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.
Subsequent
to May 29, 2009, we entered into structured stock repurchase agreements with
large financial institutions whereupon we provided the financial institutions
with prepayments of $350.0 million. The $350.0 million will be
classified as treasury stock on our balance sheet. See Notes 9 and 16 of our Notes
to Condensed Consolidated Financial Statements for further discussion of our
stock repurchase programs.
Stock
Repurchase Program II
Under this
stock repurchase program, we had authorization to repurchase 50.0 million
shares of our common stock. 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 May 29, 2009.
Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations
Our
principal commitments as of May 29, 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
Our credit
facility contains a financial covenant requiring us not to exceed a certain
maximum leverage ratio. Our leases for the East and West Towers and the Almaden
Tower are both subject to standard covenants including certain financial ratios
as defined in the lease agreements, that are reported to the lessors quarterly.
As of May 29, 2009, we were in compliance with all of our financial covenants.
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 No. 45, “Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
interpretation of SFAS No. 5, 57, and 107 and rescission of FIN No. 34,” 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 May 29, 2009, the unamortized portion of the fair
value of the residual value guarantees remaining in other long-term liabilities
and prepaid rent was $1.8 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 and six months ended May 29, 2009.
Based on
their evaluation as of May 29, 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 May 29, 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 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 U.S. 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 and services. 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 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 and
services 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, competes with Adobe PDF creation. 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.
Additionally, HTML 5 specifies scripting applications programming interfaces
which if broadly implemented in browsers
could
compete with Adobe Flash. 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:
|
·
|
difficulty
in assimilating the operations and personnel of the acquired
company;
|
|
·
|
difficulty
in effectively integrating the acquired technologies or products with our
current products and technologies;
|
|
·
|
difficulty
in maintaining controls, procedures and policies during the transition and
integration;
|
|
·
|
disruption
of our ongoing business and distraction of our management and employees
from other opportunities and
challenges;
|
|
·
|
difficulty
integrating the acquired company’s accounting, management information,
human resources and other administrative
systems;
|
|
·
|
inability
to retain key technical and managerial personnel of the acquired
business;
|
|
·
|
inability
to retain key customers, distributors, vendors and other business partners
of the acquired business;
|
|
·
|
inability
to achieve the financial and strategic goals for the acquired and combined
businesses;
|
|
·
|
inability
to take advantage of anticipated tax benefits as a result of unforeseen
difficulties in our integration
activities;
|
|
·
|
incurring
acquisition-related costs or amortization costs for acquired intangible
assets that could impact our operating
results;
|
|
·
|
potential
additional exposure to fluctuations in currency exchange
rates;
|
|
·
|
potential
impairment of our relationships with employees, customers, partners,
distributors or third-party providers of technology or
products;
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
incurring
significant exit charges if products acquired in business combinations are
unsuccessful;
|
|
·
|
potential
inability to assert that internal controls over financial reporting are
effective;
|
|
·
|
potential
inability to obtain, or obtain in a timely manner, approvals from
governmental authorities, which could delay or prevent such acquisitions;
and
|
|
·
|
potential
delay in customer and distributor purchasing decisions due to uncertainty
about the direction of our product
offerings.
|
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
13% and 8% of our net revenue for the second 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 second 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:
|
·
|
foreign
currency fluctuations;
|
|
·
|
changes
in government preferences for software
procurement;
|
|
·
|
international
economic, political and labor
conditions;
|
|
·
|
tax
laws (including U.S. taxes on foreign
subsidiaries);
|
|
·
|
unexpected
changes in, or impositions of, international legislative or regulatory
requirements;
|
|
·
|
failure
of foreign laws to protect our intellectual property rights
adequately;
|
|
·
|
inadequate
local infrastructure;
|
|
·
|
delays
resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and
restrictions;
|
|
·
|
the
burdens of complying with a variety of foreign laws, including consumer
and data protection laws; and
|
|
·
|
other
factors beyond our control, including terrorism, war, natural disasters
and diseases.
|
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 45% of our employees are located outside the U.S. 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 continue expansion of 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 U.S. 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 U.S. In many foreign countries, particularly in those with developing
economies, it is common to engage in business practices that are prohibited by
U.S. 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 U.S. laws may be customary, will not take actions in violation of
our internal policies. Any such violation, even if prohibited by our internal
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:
|
·
|
software
revenue recognition;
|
|
·
|
accounting
for stock-based compensation;
|
|
·
|
accounting
for income taxes; and
|
|
·
|
accounting
for business combinations and related
goodwill.
|
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. Revenue from this segment has begun to decrease. 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 May 29, 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 May 29, 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 May 29, 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 February 27,
2009
|
|
|
|
|
|
|
128,950,039 |
|
(3) |
February
28—March 27, 2009
|
|
|
|
|
|
|
|
|
|
From
employees(4)
|
|
|
— |
|
|
$ |
— |
|
|
|
|
Structured
repurchases
|
|
|
887,193 |
|
|
$ |
22.20 |
|
|
|
|
March
28—April 24, 2009
|
|
|
|
|
|
|
|
|
|
|
|
From
employees(4)
|
|
|
— |
|
|
$ |
— |
|
|
|
|
Structured
repurchases
|
|
|
— |
|
|
$ |
— |
|
|
|
|
April
25—May 29, 2009
|
|
|
|
|
|
|
|
|
|
|
|
From
employees(4)
|
|
|
36 |
|
|
$ |
26.69 |
|
|
|
|
Structured
repurchases
|
|
|
— |
|
|
$ |
— |
|
|
|
|
Adjustments
to repurchase authority for net dilution
|
|
|
— |
|
|
|
|
|
1,614,737 |
|
(5) |
Total
shares repurchased
|
|
|
887,229 |
|
|
|
|
|
(887,229
|
) |
|
Ending
shares available to be repurchased under Program I as of May 29,
2009
|
|
|
|
|
|
|
|
|
129,677,547 |
|
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
_________________________________________
(1)
|
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.
|
At our
Annual Meeting of Stockholders, held on April 1, 2009, our stockholders
voted on the following proposals:
1. Elect
five Class II members of the Board of Directors to serve for a two-year
term:
Name |
|
|
|
Votes
For
|
|
|
Votes
Against
|
|
|
Votes
Abstained
|
|
Robert
K. Burgess
|
|
|
|
439,973,284 |
|
|
|
12,731,474 |
|
|
|
704,604 |
|
Carol
Mills
|
|
|
|
439,716,679 |
|
|
|
12,975,743 |
|
|
|
716,940 |
|
Daniel
Rosensweig
|
|
|
|
446,394,210 |
|
|
|
6,434,992 |
|
|
|
580,160 |
|
Robert
Sedgewick
|
|
|
|
440,412,606 |
|
|
|
12,263,011 |
|
|
|
733,744 |
|
John
E. Warnock
|
|
|
|
439,977,398 |
|
|
|
12,793,335 |
|
|
|
638,629 |
|
2. Approve
the amendment of the 2003 Equity Incentive Plan.
For
|
|
|
305,817,775 |
|
Against
|
|
|
78,784,369 |
|
Abstain
|
|
|
857,447 |
|
Broker
non-votes
|
|
|
67,949,771 |
|
3. Ratify
the appointment of KPMG LLP as our independent registered public accounting firm
for our fiscal year ending on November 27, 2009.
For
|
|
|
443,892,604 |
|
Against
|
|
|
9,038,643 |
|
Abstain
|
|
|
477,115 |
|
On June
25, 2009, our Board of Directors approved a new form of indemnification
agreement (the “Revised Indemnification Agreement”), which will replace Adobe’s
existing indemnification agreements. The Revised Indemnification Agreement
clarifies certain language in the existing indemnification agreements and is
designed to provide members of our Board of Directors, executive officers and
other selected officers of Adobe (collectively the “Covered Parties”), the
maximum protection available under applicable law in connection with their
services to Adobe and our affiliates. In addition, unless otherwise approved by
our Board of Directors prior to a change of control of Adobe, we are required to
maintain directors’ and officers’ insurance with respect to the Covered Parties.
We intend to enter into the Revised Indemnification Agreement with current and
future Covered Parties.
The
foregoing description of the Revised Indemnification Agreement is qualified in
its entirety by reference to the form of Revised Indemnification Agreement, a
copy of which is attached hereto as Exhibit 10.12, and incorporated herein by
reference.
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
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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*
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
10.13
|
|
Forms
of Retention Agreement*
|
|
10-K
|
|
11/28/97
|
|
10.44
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
10.14
|
|
Second
Amended and Restated Master Lease of Land and Improvements by and between
SMBC Leasing and Finance, Inc. and Adobe Systems
Incorporated
|
|
10-Q
|
|
10/07/04
|
|
10.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.15
|
|
Lease
between Adobe Systems Incorporated and Selco Service Corporation, dated
March 26, 2007
|
|
8-K
|
|
3/28/07
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Participation
Agreement among Adobe Systems Incorporated, Selco Service Corporation, et
al. dated March 26, 2007
|
|
8-K
|
|
3/28/07
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Lease
Agreement by and between Allaire Corporation and EOP Riverside
Project LLC dated November 23, 1999
|
|
10-K
|
|
3/30/00
|
|
10.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.18
|
|
First
Amendment to Lease Agreement by and between Allaire Corporation and EOP
Riverside Project LLC dated May 31, 2000
|
|
10-Q
|
|
8/14/00
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.19
|
|
Form
of Restricted Stock Unit Agreement used in connection with the Amended
1994 Performance and Restricted Stock Plan*
|
|
10-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
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
Form
of Stock Option Agreement used in connection with the 2005 Equity
Incentive Assumption Plan*
|
|
10-Q
|
|
4/4/08
|
|
10.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.25
|
|
Allaire
Corporation 1997 Stock Incentive Plan*
|
|
S-8
|
|
03/27/01
|
|
4.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.26
|
|
Allaire
Corporation 1998 Stock Incentive Plan*
|
|
S-8
|
|
03/27/01
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.27
|
|
Allaire
Corporation 2000 Stock Incentive Plan*
|
|
S-8
|
|
03/27/01
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.28
|
|
Andromedia, Inc.
1996 Stock Option Plan*
|
|
S-8
|
|
12/07/99
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.29
|
|
Andromedia, Inc.
1997 Stock Option Plan*
|
|
S-8
|
|
12/07/99
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.30
|
|
Andromedia, Inc.
1999 Stock Plan*
|
|
S-8
|
|
12/07/99
|
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.31
|
|
ESI
Software, Inc. 1996 Equity Incentive Plan*
|
|
S-8
|
|
10/18/99
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.32
|
|
eHelp
Corporation 1999 Equity Incentive Plan*
|
|
S-8
|
|
12/29/03
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.33
|
|
Blue
Sky Software Corporation 1996 Stock Option Plan*
|
|
S-8
|
|
12/29/03
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.34
|
|
Bright
Tiger Technologies, Inc. 1996 Stock Option Plan*
|
|
S-8
|
|
03/27/01
|
|
4.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.35
|
|
Live
Software, Inc. 1999 Stock Option/Stock Issuance Plan*
|
|
S-8
|
|
03/27/01
|
|
4.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.36
|
|
Macromedia, Inc.
1999 Stock Option Plan*
|
|
S-8
|
|
08/17/00
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.37
|
|
Macromedia, Inc.
1992 Equity Incentive Plan*
|
|
10-Q
|
|
08/03/01
|
|
10.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.38
|
|
Macromedia, Inc.
2002 Equity Incentive Plan*
|
|
S-8
|
|
08/10/05
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.39
|
|
Form
of Macromedia, Inc. Stock Option Agreement*
|
|
S-8
|
|
08/10/05
|
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.40
|
|
Middlesoft, Inc.
1999 Stock Option Plan*
|
|
S-8
|
|
08/17/00
|
|
4.09
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
10.41
|
|
Form
of Macromedia, Inc. Revised Non-Plan Stock Option
Agreement*
|
|
S-8
|
|
11/23/04
|
|
4.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.42
|
|
Form
of Macromedia, Inc. Restricted Stock Purchase
Agreement*
|
|
10-Q
|
|
2/08/05
|
|
10.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.43
|
|
Adobe
Systems Incorporated Form of Performance Share Program pursuant to the
2003 Equity Incentive Plan*
|
|
8-K
|
|
1/30/08
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.44
|
|
Form
of Award Grant Notice and Performance Share Award Agreement used in
connection with grants under the Adobe Systems Incorporated 2008
Performance Share Program pursuant to the 2003 Equity Incentive
Plan*
|
|
8-K
|
|
1/30/08
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.45
|
|
2008
Award Calculation Methodology Exhibit A to the 2008 Performance Share
Program pursuant to the 2003 Equity Incentive Plan*
|
|
8-K
|
|
1/30/08
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.46
|
|
Adobe
Systems Incorporated Deferred Compensation Plan*
|
|
10-K
|
|
1/24/08
|
|
10.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.47
|
|
Adobe
Systems Incorporated 2007 Performance Share Program pursuant to the 2003
Equity Incentive Plan*
|
|
8-K
|
|
1/30/07
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.48
|
|
Form
of Award Grant Notice and Performance Share Award Agreement used in
connection with grants under the Adobe Systems Incorporated 2007
Performance Share Program pursuant to the 2003 Equity Incentive
Plan*
|
|
8-K
|
|
1/30/07
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.49
|
|
Adobe
Systems Incorporated 2007 Performance Share Program pursuant to the
Amended 1994 Performance and Restricted Stock Plan*
|
|
8-K
|
|
1/30/07
|
|
10.3
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
101.INS
|
|
XBRL
Instance††
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema††
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation††
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Labels††
|
|
|
|
|
|
|
|
X
|
Exhibit
|
|
|
|
Incorporated
by Reference**
|
|
Filed
|
Number
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation††
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
101.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
|
|
|
|
|
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By
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Mark
Garrett
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Executive
Vice President and
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Chief
Financial Officer
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(Principal
Financial Officer)
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Date: June
26, 2009
The
following trademarks of Adobe Systems Incorporated or its subsidiaries, which
may be registered in the U.S. and/or other countries, are referenced in this
Form 10-Q:
Adobe
Adobe
AIR
Acrobat
Acrobat
Connect
Creative
Suite
Flash
Flash
Lite
Flex
Flex
Builder
LiveCycle
Macromedia
Photoshop
PostScript
Reader
Shockwave
All
other trademarks are the property of their respective owners.