UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 29, 2008 | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto |
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2007
OR
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 |
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| 77-0019522 | |
345 Park Avenue, San Jose, California 95110-2704 (Address of principal executive offices and zip code) | ||
(408) 536-6000 (Registrant's telephone number, including area code) |
345 Park Avenue, San Jose, California 95110-2704
(Address of principal executive offices and zip code)
(408) 536-6000
(Registrant’s telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Act”"Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes xý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act). Large accelerated filer x Accelerated filer o Non-accelerated filer o
Large accelerated filer ý | 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 xý
The number of shares outstanding of the registrant’sregistrant's common stock as of SeptemberMarch 28, 20072008 was 573,787,932.531,823,042.
ADOBE SYSTEMS INCORPORATED 3 4 5 6 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ADOBE SYSTEMS INCORPORATED August 31, December 1, 2007 2006 ASSETS Current assets: Cash and cash equivalents $ 559,283 $ 772,500 Short-term investments 1,396,431 1,508,379 Trade receivables, net of allowances for doubtful accounts of $5,091 and $6,798, respectively 260,953 356,815 Other receivables 60,721 51,851 Deferred income taxes 168,783 155,613 Prepaid expenses and other assets 59,059 39,311 Total current assets 2,505,230 2,884,469 Property and equipment, net 278,722 227,197 Goodwill 2,153,093 2,149,494 Purchased and other intangibles, net 438,260 506,405 Investment in lease receivable 207,239 126,800 Other assets 83,917 68,183 $ 5,666,461 $ 5,962,548 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Trade and other payables $ 64,374 $ 55,031 Accrued expenses 349,263 303,550 Accrued restructuring 5,849 10,088 Income taxes payable 223,816 178,368 Deferred revenue 164,442 130,310 Total current liabilities 807,744 677,347 Long-term liabilities: Deferred revenue 27,660 32,644 Deferred income taxes 60,777 70,715 Accrued restructuring 15,887 21,984 Other liabilities 21,393 7,982 Total liabilities 933,461 810,672 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 and outstanding 61 61 Additional paid-in-capital 2,432,489 2,451,610 Retained earnings 3,819,384 3,317,785 Accumulated other comprehensive income 13,700 6,344 Treasury stock, at cost (25,153 and 13,608 shares, respectively), net of re-issuances (1,532,634 ) (623,924 ) Total stockholders’ equity 4,733,000 5,151,876 $ 5,666,461 $ 5,962,548 Three Months Ended Nine Months Ended August 31, September 1, August 31, September 1, Revenue: Products $ 813,382 $ 579,185 $ 2,147,149 $ 1,830,905 Services and support 38,304 23,006 99,521 62,220 Total revenue 851,686 602,191 2,246,670 1,893,125 Total cost of revenue: Products 69,002 53,308 193,532 165,426 Services and support 23,619 16,171 62,566 47,406 Total cost of revenue 92,621 69,479 256,098 212,832 Gross profit 759,065 532,712 1,990,572 1,680,293 Operating expenses: Research and development 163,217 130,440 450,395 401,268 Sales and marketing 251,243 217,203 702,323 641,418 General and administrative 71,132 57,311 201,004 177,324 Restructuring and other charges 555 32 555 20,251 Amortization of purchased intangibles and incomplete technology 17,893 17,693 54,542 52,111 Total operating expenses 504,040 422,679 1,408,819 1,292,372 Operating income 255,025 110,033 581,753 387,921 Non-operating income: Investment gain (loss) (694 ) (5,113 ) 9,069 (3,718 ) Interest and other income, net 22,664 18,092 65,691 47,563 Total non-operating income 21,970 12,979 74,760 43,845 Income before income taxes 276,995 123,012 656,513 431,766 Provision for income taxes 71,752 28,616 154,914 109,201 Net income $ 205,243 $ 94,396 $ 501,599 $ 322,565 Basic net income per share $ 0.35 $ 0.16 $ 0.85 $ 0.54 Shares used in computing basic net income per share 583,670 586,433 587,141 594,023 Diluted net income per share $ 0.34 $ 0.16 $ 0.83 $ 0.53 Shares used in computing diluted net income per share 597,334 600,882 602,263 612,791 See accompanying Notes to Condensed Consolidated Financial Statements. ADOBE SYSTEMS INCORPORATED Nine Months Ended August 31, September 1, Cash flows from operating activities: Net income $ 501,599 $ 322,565 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 237,274 232,546 Stock-based compensation 110,090 131,023 Tax benefit from employee stock option plans 75,878 81,587 Retirements of property and equipment 604 — Provision (recovery) for losses on receivables (1,632 ) 724 Net (gains) losses on sales and impairments of investments (10,834 ) 12,055 Deferred income taxes (20,405 ) 7,871 Excess tax benefits from stock-based compensation (54,396 ) (75,822 ) Changes in operating assets and liabilities, net of acquired assets and liabilities: Receivables 94,903 (35,403 ) Prepaid expenses and other current assets (16,135 ) 12,136 Trade and other payables 9,052 (4,516 ) Accrued expenses 34,919 (79,591 ) Accrued restructuring (10,547 ) (36,181 ) Income taxes payable 64,746 (1,612 ) Deferred revenue 25,971 41,527 Net cash provided by operating activities 1,041,087 608,909 Cash flows from investing activities: Purchases of short-term investments (1,755,079 ) (1,082,020 ) Maturities of short-term investments 335,895 275,965 Sales of short-term investments 1,531,651 733,486 Purchases of property and equipment (103,944 ) (50,169 ) Purchases of long-term investments and other assets (85,173 ) (18,595 ) Investment in lease receivable (80,439 ) — Acquisitions, net of cash (66,730 ) 471,502 Issuance costs for credit facility (838 ) — Proceeds from sale of equity securities 11,310 8,490 Net cash (used for) provided by investing activities (213,347 ) 338,659 Cash flows from financing activities: Purchases of treasury stock (1,451,525 ) (1,164,249 ) Proceeds from issuance of treasury stock 354,652 360,994 Excess tax benefits from stock-based compensation 54,396 75,822 Proceeds from issuance of common stock — 306 Net cash used for financing activities (1,042,477 ) (727,127 ) Effect of foreign currency exchange rates on cash and cash equivalents 1,520 3,495 Net (decrease) increase in cash and cash equivalents (213,217 ) 223,936 Cash and cash equivalents at beginning of period 772,500 420,818 Cash and cash equivalents at end of period $ 559,283 $ 644,754 Supplemental disclosures: Common and treasury stock issued and stock options assumed for acquisition of Macromedia $ — $ 3,436,725 Cash paid for income taxes, net of refunds $ 38,434 $ 24,138 See accompanying Notes to Condensed Consolidated Financial Statements. See accompanying Notes to Condensed Consolidated Financial Statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) (Unaudited) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the There have been no Recent Accounting Pronouncements With the exception of In March 2008, the FASB issued FASB Statement No. 161 ("SFAS 161"), "Disclosures about Derivative Instruments and Hedging Activities". SFAS 161 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 FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the impact, if any, that SFAS 161 will have on our consolidated financial statements. In June 2007, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 07-1 ("SOP 07-1"), "Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies". SOP 07-1 defines investment companies for purposes of applying the related AICPA Audit and Accounting Guide. SOP 07-1 provides guidance on whether an investment company's parent or equity-method investor should retain investment-company accounting in its financial statements. SOP 07-1 would have been effective beginning in the first quarter of fiscal 2009; however, in February 2008, the FASB issued FASB Staff Position ("FSP") SOP 07-1-1 which indefinitely delayed the effective date of SOP 07-1. ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In February 2007, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 159 In September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), "Fair Value Measurements," which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and is In July 2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Additionally, in May 2007, the FASB published FSP No. FIN 48-1 ("FSP FIN 48-1"), "Definition of Settlement in FASB Interpretation No. 48". FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. We adopted both FIN 48 and FSP FIN 48-1 on December 1, 2007. The adoption of FIN 48 resulted in an increase to both assets and liabilities in our condensed consolidated balance sheet as of the beginning of fiscal 2008.See Note 6 for additional information regarding income taxes, including the effects of adoption on our Condensed Consolidated Financial Statements. NOTE 2. We measure certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale fixed income and equity securities, other equity securities and foreign currency ADOBE SYSTEMS INCORPORATED (In thousands, except per share data) (Unaudited) NOTE 2. FINANCIAL INSTRUMENTS (Continued) derivatives. The Fixed income available-for-sale securities include United States ("U.S.") treasury securities (95% of total), corporate bonds (1% of total), obligations of foreign governments (2% of total) and bonds of other government agencies (2% of total). Included in fixed income available-for-sale securities is approximately $30.0 million of cash equivalents. Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. The remaining balance of cash equivalents consists primarily of money market funds, for The investment in limited partnership relates to our interest in Adobe Ventures IV L.P. ("Adobe Ventures") which was $33.9 million and ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 2. FINANCIAL INSTRUMENTS (Continued) Foreign currency derivatives include option and forward foreign exchange contracts primarily for the Japanese Yen and the Euro. 2006(1) Acquisitions Other 2007 Creative Solutions $ 936,393 $ 51,067 $ (19,992 ) $ 967,468 Knowledge Worker Solutions 423,048 — (11,485 ) 411,563 Enterprise and Developer Solutions 325,033 — (5,347 ) 319,686 Mobile and Device Solutions 217,542 — (4,979 ) 212,563 Other(2) 247,478 — (5,665 ) 241,813 Total $ 2,149,494 $ 51,067 $ (47,468 ) $ 2,153,093 NOTE 3. GOODWILL AND PURCHASED AND OTHER INTANGIBLES The Purchased and other intangible assets, subject to amortization were as follows as of November 30, 2007: December 1, December 1, Additions Amortization August 31, Purchased technology $ 397,098 $ 249,722 $ 59,470 $ (102,599 ) $ 206,593 Localization $ 9,060 $ 6,799 $ 35,632 $ (19,745 ) $ 22,686 Trademarks 130,925 104,068 300 (19,152 ) 85,216 Customer contracts and relationships 188,401 145,525 11,170 (33,719 ) 122,976 Other intangibles 600 291 700 (202 ) 789 Total other intangible assets $ 328,986 $ 256,683 $ 47,802 $ (72,818 ) $ 231,667 Total purchased and other intangible assets $ 726,084 $ 506,405 $ 107,272 $ (175,417 ) $ 438,260 ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 3. GOODWILL AND PURCHASED AND OTHER INTANGIBLES (Continued) Purchased and other intangible assets are amortized over their estimated useful lives up to 15 years. As of Fiscal year Purchased Other Intangible Remainder of 2007 $ 29,725 $ 27,972 2008 87,201 80,164 2009 2009 55,950 59,931 2010 2010 6,135 49,350 2011 2011 4,472 12,968 Thereafter Thereafter 23,110 1,282 Total expected amortization expense Total expected amortization expense $ 206,593 $ 231,667 Other assets consisted of the following as of 2007 2006 Investments $ 52,542 $ 46,273 Restricted cash 7,366 2,341 Prepaid royalty 6,407 3,337 Security deposits 6,292 7,510 Prepaid rent 4,692 2,765 Prepaid land lease 3,234 3,263 Unbilled receivables — 2,400 Other 3,384 294 Total other assets $ 83,917 $ 68,183 Included in investments The NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 5. TRADE AND OTHER PAYABLES AND ACCRUED EXPENSES Trade and other payables consisted of the following as of 2007 2006 Trade payables $ 33,962 $ 37,915 Sales and use tax and other payables 30,412 17,116 Total trade and other payables $ 64,374 $ 55,031 Accrued expenses consisted of the following as of Other primarily includes general corporate accruals for corporate marketing programs, local and regional expenses, charitable contributions and technical support. Other is also comprised of deferred rent related to office locations with rent escalations, accrued royalties, foreign currency derivatives and accrued interest on the credit facility. NOTE 6. INCOME TAXES We adopted both FIN 48 and FSP FIN 48-1 on December 1, 2007. The adoption of FIN 48 resulted in an increase of $3.9 million to both assets and liabilities in our condensed consolidated balance sheet as of the beginning of fiscal 2008. Upon adoption, the gross liability for unrecognized tax benefits at December 1, 2007 was $218.4 million, exclusive of interest and penalties. The total amount of gross FIN 48 liabilities includes $57.7 million that relates to certain tax attributes from acquired companies, including Macromedia. These liabilities from acquired companies are not recorded on our balance sheet because they are related to positions that have not yet been claimed on our income tax returns. If the total FIN 48 liabilities are recognized in the future, the following amounts, net of an estimated $22.2 million benefit related to deducting such payments on future tax returns, would result: $99.0 million of unrecognized tax benefits would affect the effective tax rate and $82.8 million would affect goodwill and $14.4 million would affect additional paid-in-capital. As of February 29, 2008, the gross liability for unrecognized tax benefits is $219.2 million, exclusive of interest and penalties. If the total FIN 48 liabilities are recognized in the future, the following amounts, net of an estimated $22.4 million benefit related to deducting such payments on future tax returns, would result: $102.2 million of unrecognized tax benefits would affect the effective tax rate, $80.2 million would affect goodwill and $14.4 million would affect additional paid-in-capital. We have historically presented our estimated liability for unrecognized tax benefits as a current liability. FIN 48 requires liabilities for unrecognized tax benefits to be classified based on whether a payment is expected to be made within the next 12 months. That is, amounts expected to be paid within the ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 6. INCOME TAXES (Continued) next 12 months are to be classified as a current liability and all other amounts are to be classified as a non-current liability. As a result of adopting FIN 48, we reclassified $197.7 million from current income taxes payable to long-term income taxes payable, including interest. We have historically presented our estimated state, local and interest liabilities net of the estimated benefit we expect to receive from deducting such payments on future tax returns (i.e., on a "net" basis). FIN 48 requires this estimated benefit to be classified as a deferred tax asset instead of a reduction of the overall liability (i.e., on a "gross" basis). Thus, we recognized additional deferred income tax assets of $3.9 million to present the unrecognized tax benefits as gross amounts on our condensed consolidated balance sheet. Our policy to classify interest and penalties on unrecognized tax benefits as income tax expense did not change upon the adoption of FIN 48. As of February 29, 2008 and December 1, We file income tax returns in the U.S. on a federal basis and in many U.S. state and foreign jurisdictions. We are subject to the continual examination of our income tax returns by the Internal Revenue Service ("IRS") and other domestic and foreign tax authorities. Our major tax jurisdictions are the U.S., Ireland and California. For U.S. and California, our fiscal 2001 through fiscal 2008 years are open for examination. A current examination by the IRS for our fiscal 2001, 2002 and 2003 tax returns, is primarily related to our intercompany transfer pricing. For Ireland, our fiscal 2002 through fiscal 2008 years are open for examination. The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues in the IRS and other examinations could be resolved within the next 12 months, based upon the current facts and circumstances, we cannot estimate the timing of such resolution or range of potential changes as it relates to the current unrecognized tax benefits that are recorded as part of our financial statements. NOTE 7. STOCK-BASED COMPENSATION The assumptions used to value option grants, restricted stock units and performance shares during the three months ended February 29, 2008 and March 2, 2007 are as follows: ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 7. STOCK-BASED COMPENSATION (Continued) The expected term of employee stock purchase plan ("ESPP") shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights during the three months ended February 29, 2008 and March 2, 2007 are as follows: Summary of Stock Options Information regarding the stock options outstanding at February 29, 2008 and March 2, 2007 is summarized below. Summary of Restricted Stock Units Restricted stock unit activity for the three months ended February 29, 2008 and March 2, 2007 is as follows: ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 7. STOCK-BASED COMPENSATION (Continued) Information regarding restricted stock units outstanding at February 29, 2008 and March 2, 2007 is summarized below. Summary of Performance Shares Effective January 24, 2008, the Executive Compensation Committee adopted the 2008 Performance Share Program (the "2008 Program"). The purpose of the 2008 Program is to align key management and senior leadership with stockholders' interests and to retain key employees. The measurement period for the 2008 Program is our fiscal 2008 year. All members of our executive management and other key senior leaders are participating in the 2008 Program. Awards granted under the 2008 Program were granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If pre-determined performance goals are met, shares of stock will be granted to the recipient, with 25% vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining 75% vest evenly on the following three annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe. Participants in the 2008 Program have the ability to receive up to 200% of the target number of shares originally granted. 2007 2006 Accrued compensation and benefits $ 168,208 $ 148,000 Sales and marketing allowances 19,921 20,361 Other 161,134 135,189 Total accrued expenses $ 349,263 $ 303,550 ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 7. STOCK-BASED COMPENSATION (Continued) The following table sets forth the summary of performance share activity under our 2008 Program ended February 29, 2008. In the first quarter of fiscal 2008, the Executive Compensation Committee certified the actual performance achievement of participants in the 2006 Performance Share Program (the "2006 Program") and the 2007 Performance Share Program (the "2007 Program"). Based upon the achievement of goals outlined in the 2006 Program and 2007 Program, participants had the ability to receive up to 150% and 200%, respectively, of the target number of shares originally granted. Actual performance resulted in participants achieving approximately 105% of target or 0.3 million shares for the 2006 Program and 200% of target or 0.7 million shares for the 2007 Program. Shares awarded under the 2006 Program vested 100% and were released in the first quarter of fiscal 2008. Shares under the 2007 Program vested 25% in the first quarter of fiscal 2008, and the remaining 75% vest evenly on the following three annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe. The following table sets forth the summary of performance share activity under our 2007 Program, based upon share awards actually achieved, for the three months ended February 29, 2008: Compensation Costs As of February 29, 2008, there was $161.9 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based payments granted to our employees which will be recognized over a weighted average period of 2.9 years. Additionally, as of February 29, 2008, there was $18.1 million of unamortized stock-based compensation, adjusted for estimated forfeitures, related to the assumption of Macromedia unvested options which will be recognized over a weighted average period of 1.4 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 7. STOCK-BASED COMPENSATION (Continued) Total stock-based compensation costs that have been included in our consolidated statements of income for the three months ended February 29, 2008 and March 2, 2007 are as follows: NOTE Three Months Ended Nine Months Ended 2007 2006 2007 2006 Expected life (in years) 3.58 – 3.66 3.7 3.54 – 4.82 3.7 Volatility 29.62 – 33.70 % 33.73 – 36.95 % 29.62 – 33.70 % 30.29 – 36.95 % Risk free interest rate 4.34 – 5.14 % 4.89 – 5.15 % 4.34 – 5.14 % 4.30 – 5.15 % Three Months Ended Nine Months Ended 2007 2006 2007 2006 Expected life (in years) 0.50 – 2.0 1.25 0.50 – 2.0 1.25 Volatility 30.41 – 30.64 % 31.86 – 35.02 % 30.41 – 32.75 % 30.30 – 35.02 % Risk free interest rate 4.87 – 4.93 % 5.16 – 5.26 % 4.79 – 5.11 % 4.32 – 5.26 % NOTE We completed our acquisition of NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 9. RESTRUCTURING AND OTHER CHARGES (Continued) The following table sets forth a summary of Macromedia restructuring activities as of Balance Cash Payments Adjustments Balance Total Costs Termination benefits $ 1,002 $ (370 ) $ (632 ) $ — $ 26,986 Cost of closing redundant facilities 28,934 (8,771 ) 170 20,333 19,679 Cost of contract termination 46 (8 ) (38 ) — 3,238 Other 1,444 (31 ) (10 ) 1,403 1,196 Total $ 31,426 $ (9,180 ) $ (510 ) $ 21,736 $ 51,099 foreign currency changes. Accrued restructuring charges of NOTE Stock Repurchase Program I During the The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount. During the three months ended February 29, 2008, we repurchased 6.7 million shares at an average price of $36.78 through ADOBE SYSTEMS INCORPORATED (In thousands, except per share data) (Unaudited) NOTE 10. STOCKHOLDERS' EQUITY (Continued) structured repurchase agreements which included prepayments from fiscal 2007. During the three months ended March 2, 2007, we repurchased 4.8 million shares at an average price of $38.22 through structured repurchase agreements which included prepayments from fiscal 2006. As of February 29, 2008 and November 30, 2007, the prepayments were classified as treasury stock on our balance sheet at the payment date, though only shares physically delivered to us by Stock Repurchase Program II Subsequent to February 29, 2008, we entered into additional structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with prepayments of $50.0 million. The $50.0 million will be classified as treasury stock on our balance sheet.See Note 17 for further discussion of our additional structured stock repurchase agreements. ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) The following table sets forth the components of comprehensive income Three Months Nine Months 2007 2006 2007 2006 Net income $ 205,243 $ 94,396 $ 501,599 $ 322,565 Other comprehensive income (loss): Change in unrealized gain on available-for-sale securities, net of taxes 700 2,730 5,568 2,595 Currency translation adjustments 21 20 1,746 3,495 Net gain (loss) in derivative instruments, net of taxes (3,776 ) 1,903 42 (3,414 ) Other comprehensive income (loss) (3,055 ) 4,653 7,356 2,676 Total comprehensive income, net of taxes $ 202,188 $ 99,049 $ 508,955 $ 325,241 NOTE The following table sets forth the computation of basic and diluted net income per share for the three Three Months Nine Months 2007 2006 2007 2006 Net income $ 205,243 $ 94,396 $ 501,599 $ 322,565 Shares used to compute basic net income per share 583,670 586,433 587,141 594,023 Dilutive potential common shares: Unvested restricted stock 11 35 13 35 Stock options 13,653 14,414 15,109 18,733 Shares used to compute diluted net income per share 597,334 600,882 602,263 612,791 Basic net income per share $ 0.35 $ 0.16 $ 0.85 $ 0.54 Diluted net income per share $ 0.34 $ 0.16 $ 0.83 $ 0.53 For the three NOTE Lease Commitments We occupy three office buildings in San Jose, California where our corporate headquarters are located. We reference these office buildings as the Almaden Tower and the East and West Towers. In August 2004, we extended the lease agreement for our East and West Towers for an additional five years with an option to extend for an additional five years solely at our election. In March 2007, the ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) Almaden Tower lease was extended for five years, with a renewal option for an additional five years solely at our election. As part of the lease extensions, we purchased the lease receivable from the lessor of the East and West Towers for $126.8 million and a portion of the lease receivable from the lessor of the Almaden Tower for $80.4 million, both of which are recorded as investments in lease receivables on our consolidated balance sheet. This purchase may be credited against the residual value guarantee if we purchase the properties or will be repaid from the sale proceeds if the properties are sold to third parties. Under the agreement for the East and West Towers and the agreement for the Almaden Tower, we have the option to purchase the buildings at any time during the lease term for approximately $143.2 million and $103.6 million, respectively. The residual value guarantees under the East and West Towers and the Almaden Tower obligations are $126.8 million and $89.4 million, respectively. These two leases are both subject to standard covenants including certain financial ratios that are reported to the lessors quarterly. As of Guarantees The lease agreements for our corporate headquarters provide for residual value guarantees as noted above. Under FASB Interpretation No. 45, 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. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) 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 As part of our limited partnership Legal Proceedings On October 13, 2006, a purported shareholder derivative action entitled Steven Staehr v. Bruce R. Chizen, et al was filed in the Superior Court of California for the County of Santa Clara against certain of In connection with our anti-piracy efforts, conducted both internally and through organizations such as the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other local laws. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of these counter-claims. ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 13. COMMITMENTS AND CONTINGENCIES (Continued) From time to time, in addition to those identified above, Adobe is subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with NOTE In August 2007, we entered into In February 2008, we entered into the Second Amendment to the Credit Agreement dated February 26, 2008 (the "Second Amendment"), 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. As of February 29, 2008, the outstanding and accrued interest due was approximately $1.7 million which is included in accrued expenses on our condensed consolidated balance sheet. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 15. NON-OPERATING INCOME (EXPENSE) Non-operating income (expense) for the three months ended February 29, 2008 and March 2, 2007 includes the following: We have the following segments: Creative Solutions, Knowledge Worker Solutions, Enterprise This segment contains revenue generated by Effective in the first quarter of fiscal 2008, to better align our engineering and marketing efforts, we merged our Knowledge Worker Solutions segment with our Enterprise Solutions segment (formerly "Enterprise and Developer Solutions") to form our new ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) (Unaudited) NOTE 16. INDUSTRY SEGMENTS (Continued) Enterprise and Related Information", Knowledge Worker Solutions and Enterprise Solutions are separately reportable segments. In addition, we moved responsibility for Flex Builder, Flex SDK and our ColdFusion product line to our Platform segment from our Our Chief Operating Decision Maker reviews revenue and gross margin information for each of our operating segments. Operating expenses are not reviewed on a segment Creative Knowledge Enterprise Mobile and Other* Total Three months ended Revenue $ 545,453 $ 176,764 $ 59,376 $ 12,983 $ 57,110 $ 851,686 Cost of revenue 40,114 15,969 18,897 9,521 8,120 92,621 Gross profit $ 505,339 $ 160,795 $ 40,479 $ 3,462 $ 48,990 $ 759,065 Gross profit as a percentage of revenues 93 % 91 % 68 % 27 % 86 % 89 % Three months ended September 1, 2006 Revenue $ 331,590 $ 150,573 $ 49,421 $ 9,144 $ 61,463 $ 602,191 Cost of revenue 31,409 9,297 16,918 5,610 6,245 69,479 Gross profit $ 300,181 $ 141,276 $ 32,503 $ 3,534 $ 55,218 $ 532,712 Gross profit as a percentage of revenues 91 % 94 % 66 % 39 % 90 % 88 % Creative Knowledge Enterprise Mobile and Other* Total Nine months ended August 31, 2007 Revenue $ 1,328,463 $ 536,382 $ 162,553 $ 38,999 $ 180,273 $ 2,246,670 Cost of revenue 103,023 47,473 60,377 23,206 22,019 256,098 Gross profit $ 1,225,440 $ 488,909 $ 102,176 $ 15,793 $ 158,254 $ 1,990,572 Gross profit as a percentage of revenues 92 % 91 % 63 % 40 % 88 % 89 % Nine months ended September 1, 2006 Revenue $ 1,073,841 $ 476,957 $ 137,301 $ 25,361 $ 179,665 $ 1,893,125 Cost of revenue 101,919 27,036 49,527 15,667 18,683 212,832 Gross profit $ 971,922 $ 449,921 $ 87,774 $ 9,694 $ 160,982 $ 1,680,293 Gross profit as a percentage of revenues 91 % 94 % 64 % 38 % 90 % 89 % Three Months Nine Months 2007 2006 2007 2006 Total gross profit from operating segments above $ 759,065 $ 532,712 $ 1,990,572 $ 1,680,293 Total operating expenses* 504,040 422,679 1,408,819 1,292,372 Total operating income 255,025 110,033 581,753 387,921 Non-operating income 21,970 12,979 74,760 43,845 Income before income taxes $ 276,995 $ 123,012 $ 656,513 $ 431,766 Structured Stock Repurchase Agreements ITEM 2. 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 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 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. Effective in the first quarter of fiscal 2008, to better align our engineering and marketing efforts, we merged our Knowledge Worker Solutions segment with our Enterprise Solutions segment to form our new Business Productivity Solutions business unit. However, under the requirements of SFAS 131, Knowledge Worker Solutions and Enterprise Solutions are separately reportable segments. In addition, we moved responsibility for Flex Builder, Flex SDK and our ColdFusion product line to our Platform segment from our Enterprise Solutions segment. The prior year information has been updated to reflect this product movement. During the In our Creative Solutions In our Knowledge Worker Solutions The Mobile and Device Our Platform segment performed strongly resulting in increased revenue In preparing our condensed consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that 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. As of February 29, 2008, we have $163.6 million of deferred tax assets. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations. Revenue for the Three Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Product $ 813.4 $ 579.2 40 % $ 2,147.2 $ 1,830.9 17 % Percentage of total revenues 96 % 96 % 96 % 97 % Services and support 38.3 23.0 67 % 99.5 62.2 60 % Percentage of total revenues 4 % 4 % 4 % 3 % Total revenues $ 851.7 $ 602.2 $ 2,246.7 $ 1,893.1 �� As described in Note Our services and support revenue is composed of consulting, training, and maintenance and support, primarily related to the licensing of our Segment Information Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Creative Solutions $ 545.5 $ 331.6 65 % $ 1,328.5 $ 1,073.8 24 % Percentage of total revenues 64 % 55 % 59 % 57 % Knowledge Worker Solutions 176.8 150.6 17 % 536.4 477.0 12 % Percentage of total revenues 21 % 25 % 24 % 25 % Enterprise and Developer Solutions 59.3 49.4 20 % 162.5 137.2 18 % Percentage of total revenues 7 % 8 % 7 % 7 % Mobile and Device Solutions 13.0 9.1 43 % 39.0 25.4 54 % Percentage of total revenues 1 % 2 % 2 % 1 % Other** 57.1 61.5 (7 )% 180.3 179.7 * % Percentage of total revenues 7 % 10 % 8 % 10 % Total revenues $ 851.7 $ 602.2 $ 2,246.7 $ 1,893.1 Revenue from Revenue from Revenue from Revenue from Revenue from Platform increased during the three months ended February 29, 2008 as compared to the three months ended March 2, 2007, primarily due to increased revenue from our Flash Revenue from Geographical Information Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Americas $ 400.7 $ 310.3 29 % $ 1,082.5 $ 929.9 16 % Percentage of total revenues 47 % 52 % 48 % 49 % EMEA 281.5 165.4 70 % 708.1 553.7 28 % Percentage of total revenues 33 % 27 % 32 % 29 % Asia 169.5 126.5 34 % 456.1 409.5 11 % Percentage of total revenues 20 % 21 % 20 % 22 % Total revenues $ 851.7 $ 602.2 $ 2,246.7 $ 1,893.1 Overall Revenue in the Americas increased during the three Revenue in EMEA increased during the three Revenue in Asia increased during the three Product Backlog With regard to our product backlog, Cost of Revenue for the Three Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Product $ 69.0 $ 53.3 29 % $ 193.5 $ 165.4 17 % Percentage of total revenues 8 % 9 % 9 % 9 % Services and support 23.6 16.2 46 % 62.6 47.4 32 % Percentage of total revenues 3 % 3 % 3 % 3 % Total cost of revenues $ 92.6 $ 69.5 $ 256.1 $ 212.8 Product Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization related to localization costs and acquired technologies and the costs associated with the manufacturing of our products. Cost of product revenue fluctuated due to the following: % Change % Change Increased localization costs related to our product launches 23 % 7 % Increased royalties for licensed technologies 6 5 Increased material costs due to product mix 4 1 Increased excess and obsolete inventory 2 4 Decreased amortization of purchased technology (10 ) (2 ) Various individually insignificant items 4 2 Total change 29 % 17 % Localization costs increased during the Amortization expense decreased during the Services and Support Cost of services and support revenue is Cost of services and support revenue increased during the three Operating Expenses for the Three Months Ended February 29, 2008 and March 2, 2007 Overview The increase in compensation costs for the three months ended February 29, 2008 relates to (i) higher Research and Development Three Months Percent Nine Months Percent 2007 �� 2006 Change 2007 2006 Change Research and development $ 163.2 $ 130.4 25 % 450.4 $ 401.3 12 % Percentage of total revenues 19 % 22 % 20 % 21 % 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 fluctuated due to the following: % Change % Change Increased compensation associated with higher incentive compensation and stock based compensation 15 % 5 % Increased compensation and related benefits associated with headcount growth 9 9 Increased professional and consulting fees 1 1 Decreased technology purchases (2 ) (2 ) Various individually insignificant items 2 (1 ) Total change 25 % 12 % 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. Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Sales and marketing $ 251.2 $ 217.2 16 % $ 702.3 $ 641.4 9 % Percentage of total revenues 29 % 36 % 31 % 34 % Sales and Marketing Sales and marketing expenses consist primarily Sales and marketing expenses fluctuated due to the following: % Change % Change Increased compensation associated with higher incentive compensation and stock based compensation 7 % 4 % Increased marketing spending related to product launches and overall marketing efforts to further increase revenues 5 1 Increased compensation and related benefits associated with headcount 3 3 Increased professional and consulting fees 1 2 Increased facility costs 1 1 Various individually insignificant items (1 ) (2 ) Total change 16 % 9 % General and Administrative Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change General and administrative $ 71.1 $ 57.3 24 % $ 201.0 $ 177.3 13 % Percentage of total revenues 8 % 10 % 9 % 9 % General and administrative expenses consist primarily of compensation and benefit expenses, travel expenses and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, expenses associated with computer equipment and software used in the administration of the business, charitable contributions and various forms of insurance. General and administrative expenses fluctuated due to the following: % Change % Change Increased compensation associated with higher incentive compensation and stock based compensation 15 % 7 % Increased professional and consulting fees 5 1 Increased compensation and related benefits associated with headcount growth 3 3 Increased depreciation and amortization 2 2 Various individually insignificant items (1 ) — Total change 24 % 13 % Restructuring and Other Charges Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Restructuring and other charges 0.6 — * % 0.6 $ 20.2 (97 )% Percentage of total revenues * % * % * % 1 % Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Amortization of purchased intangibles $ 17.9 $ 17.7 1 % $ 54.5 $ 52.1 5 % Percentage of total revenues. 2 % 3 % 2 % 3 % Amortization of Non-operating Income for the Three Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Investment gain (loss), net $ (0.7 ) $ (5.1 ) 86 % $ 9.1 $ (3.7 ) 346 % Percentage of total revenues * % (1 )% * % * % Interest and other income 22.7 18.1 25 % 65.7 47.5 38 % Percentage of total revenues 3 % 3 % 3 % 3 % Total non-operating income $ 22.0 $ 13.0 $ 74.8 $ 43.8 Interest and Other Income, net The largest component of interest and other income, net, is interest earned on cash, cash equivalents and short-term fixed income investments, but also includes gains and losses on the sale of fixed income investments and foreign exchange gains and losses, including those from hedging revenue transactions primarily denominated in Yen and Euro currencies. Interest and other income, net, decreased during the three months ended February 29, 2008 as compared to the three months ended March 2, 2007 primarily as a result of lower interest rates and lower average invested balances due to cash used for our share repurchase programs. Interest Expense Interest expense as of February 29, 2008, primarily represents interest associated with our outstanding balance of $450.0 million as of January 2008 on our credit facility. Interest due under the credit facility is to be paid quarterly. Investment Investment Provision for Income Taxes for the Three Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Provision for income taxes $ 71.8 $ 28.6 151 % $ 154.9 $ 109.2 42 % Percentage of total revenues 8 % 5 % 7 % 6 % Effective tax rate 26 % 23 % 24 % 25 % Our effective tax rate increased approximately August 31, December 1, Percent Cash, cash equivalents and short-term investments $ 1,955.7 $ 2,280.9 (14 )% Working capital $ 1,697.5 $ 2,207.1 (23 )% Stockholders’ equity $ 4,733.0 $ 5,151.9 (8 )% This data should be read in conjunction with the consolidated statements of cash flows. Summary of our cash flows: August 31, September 1, Percent Net cash provided by operating activities $ 1,041.1 $ 608.9 71 % Net cash (used for) provided by investing activities (213.3 ) 338.6 (163 )% Net cash used for financing activities (1,042.5 ) (727.1 ) 43 % Effect of foreign currency exchange rates on cash and cash equivalents 1.5 3.5 (57 )% Net (decrease) increase in cash and cash equivalents $ (213.2 ) $ 223.9 (195 )% 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 Cash flows from operating activities Net cash provided by operating activities of The primary working capital uses of cash were payments of trade payables, accrued expenses and accrued restructuring costs and outlays for prepaid expenses and other current Cash flows from investing activities Net cash from investing activities Net cash used for financing activities increased We expect to continue our investing activities, including short-term and long-term investments and purchases of computer systems for research and development, sales and marketing, product support and administrative staff. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase programs and strategically acquire software companies, products or technologies that are complementary to our business. The Board of Directors has approved a facilities expansion for our operations in India, which may include the purchase of land and buildings. As previously disclosed, we plan to invest $100.0 million directly in venture capital, of which, approximately Our existing cash, cash equivalents and investment balances may decline during fiscal capital purposes. Outside of the U.S., our fixed income portfolio is primarily invested in U.S. During the The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval, and the average VWAP of our stock during the interval less the agreed upon discount. The prepayments were classified as treasury stock on our balance sheet at the payment date, though only shares physically delivered to us by Refer to Part II, Item 2 in this report for share repurchases during the quarter ended February 29, 2008. Subsequent to February 29, 2008, we entered into additional structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with prepayments of $50.0 million. The $50.0 million will be classified as treasury stock on our balance sheet.See Notes 10 and 17 of our Notes to Condensed Consolidated Financial Statements for further information regarding our structured stock repurchase agreements. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations Our principal commitments as of Contractual Commitments With the exception of our adoption of FIN 48 and the borrowings under our credit facility, there have been no other significant changes in our contractual commitments during the three months ended February 29, 2008 as compared to the contractual commitments disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November 30, 2007. As of February 29, 2008, the principal outstanding under the credit facility was $450.0 million which is due in full not later than February 16, 2013. Interest associated with this facility cannot be estimated with certainty by period throughout the term since it is based on a fluctuating interest rate calculation. As of February 29, 2008, the outstanding and accrued interest due was approximately $1.7 million. As a result of adopting FIN 48, we reclassified $197.7 million from current income taxes payable to long-term income taxes payable related to unrecognized tax benefits. We cannot estimate the payments due by period because the total income tax payable and timing of tax payments depend on the resolution of current and future tax examinations which cannot be estimated with certainty. Lease Commitments Royalties We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue. Guarantees The lease agreements for our corporate headquarters provide for residual value guarantees. Under FIN 45, the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002 must be recognized as a liability on our consolidated balance sheet. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the 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 As part of our limited partnership ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We believe that there have been no significant changes in our market risk exposures for the three ITEM 4. CONTROLS AND PROCEDURES Based on their evaluation as of There were no changes in our internal 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. As previously discussed, our actual results could differ materially from our forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed below. These and many other factors described in this report could adversely affect our operations, performance and financial condition. Delays in development or shipment of new products or upgrades to existing products could cause a decline in our revenue. Any delays or failures in developing new products or new features for existing products or marketing our products may have a harmful impact on our results of operations. Our inability to extend our core technologies into new applications and new platforms and to anticipate or respond to technological changes could affect continued market acceptance of our products and our ability to develop new products. Delays in product or upgrade introductions could cause a decline in our revenue, earnings or stock price. Introduction of new products The If we fail to successfully manage transitions to new business models and markets, our results of operations could be negatively impacted. We are devoting significant resources to the development of technologies and service offerings where we have a limited operating history, including the enterprise and government markets, These new offerings and markets require a considerable investment of technical, financial and sales resources, and a If we fail to anticipate and develop new products and services in response to changes in demand for application software and software delivery, computers, printers, or other non PC-devices, our business could be harmed. Any failure to anticipate changing customer requirements and develop and deploy new products in response to changing market conditions may have a material impact on our results of operations. We plan to release numerous new product offerings We offer our Adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect our operating results. As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. For example, the direction and relative strength of the U.S. economy has recently been increasingly uncertain due to softness in the housing markets, rising oil prices, difficulties in the financial services sector and credit markets and continuing geopolitical uncertainties. If economic growth in the United States and other countries' economies is slowed, many customers may delay or reduce technology purchases. This could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. Any of these events would likely harm our business, results of operations and financial condition. Political instability in any of the major countries we do business would also likely harm our business, results of operations and financial condition. Revenue from our new businesses may be difficult to predict. As previously discussed, we are devoting significant resources to the development of product and service offerings where we have a limited operating history. This makes it difficult to predict revenue and revenue may decline quicker than anticipated. Additionally, we have a limited history of licensing products in certain markets such as the enterprise market and may experience a number of factors that will make our revenue less predictable, including longer than expected sales and implementation cycles, potential deferral of revenue due to multiple-element revenue arrangements and alternate licensing arrangements. We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third-party claims as a result of litigation or other proceedings. In connection with the enforcement of our own intellectual property rights, the acquisition of third-party intellectual property rights, or disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation are typically very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. In addition, we may incur significant costs in acquiring the necessary third party intellectual property rights for use in our products. Third party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on 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 We also devote significant resources to maintaining the security of our products from malicious hackers who develop and deploy viruses, worms, and other malicious software programs that attack our products. Nevertheless, actual or perceived security vulnerabilities in our products could harm our reputation and lead some customers to seek to return products, to reduce or delay future purchases, to use competitive products or to make claims against us. Also, with the introduction of hosted services with some of our product offerings, our customers may use such services to share confidential and sensitive information. If a breach of security occurs on these hosted systems, we could be held liable to our customers. Additionally, such breaches could lead to interruptions, delays and data loss and protection concerns as well as harm to our reputation. We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management. We have in the past and may in the future acquire additional companies, products or technologies. We may not realize the anticipated benefits of an acquisition and each acquisition has numerous risks. These risks include: Mergers and acquisitions of high technology companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the We rely on distributors to sell our products and any adverse change in our relationship with our distributors could result in a loss of revenue and harm to our business. We distribute our application 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 Website for our development, marketing, operational, support, hosted services and sales activities. A disruption or failure of these systems in the event of a major earthquake, fire, telecommunications failure, cyber-attack, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, delays in our product development and loss of critical data and could prevent us from fulfilling our Our future operating results are difficult to predict and are likely to fluctuate substantially from quarter to quarter and as a result the market price of our common stock may be volatile and our stock price could decline. As a result of a variety of factors discussed herein, our quarterly Due to the factors noted above, our future earnings and stock price may be subject to volatility, particularly on a quarterly basis. Shortfalls in revenue or earnings or delays in the release of products or upgrades compared to We are subject to risks associated with international operations which may harm our business. We generate If sales to any of our customers outside of the Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted. In addition, approximately 42% of our employees are located outside the United States. This means we have exposure to changes in foreign laws governing our relationships with our employees, including wage and hour laws and regulations, fair labor standards, unemployment tax rates, workers' compensation rates, citizenship requirements and payroll and other taxes, which likely would have a direct impact on our operating costs. We also intend to expand our international operations and international sales and marketing activities. Expansion in international markets has required, and will continue to require, significant management attention and resources. Moreover, local laws and customs in many countries differ significantly from those in the United States. We incur additional legal compliance costs associated with our international operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and regulations, which may be substantially different from those in the United States. In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by United States regulations applicable to us such as the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, including those based in or from countries where practices which violate such United States laws may be customary, will not take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have an adverse effect on our business. We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure. Our operating results are subject to fluctuations in foreign currency exchange rates. We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity and expense. We have established a hedging program to partially hedge our exposure to foreign currency exchange rate fluctuations primarily for the Japanese Changes in, or interpretations of, accounting principles could result in unfavorable accounting charges. We prepare our consolidated financial statements in We also adopted FIN 48 in the first quarter of fiscal 2008. The adoption of FIN 48 resulted in an increase to If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings. Under Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in, In addition, we are subject to the continual examination of our income tax returns by the Internal Revenue Service and other domestic and foreign tax authorities, including a current examination by the Internal Revenue Service for our fiscal 2001, 2002 and 2003 tax returns, primarily related to our intercompany transfer pricing. 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, including our Chief Executive Officer and other members of our executive team. 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 Our investment portfolio may become impaired by further deterioration of the capital markets. Our cash equivalent and short-term investment portfolio as of February 29, 2008 consisted of US treasury securities, bonds of government agencies, obligations of foreign governments, corporate bonds and taxable money market mutual funds. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes. As a result of current adverse financial market conditions, investments in some financial instruments, such as structured investment vehicles, sub-prime mortgage-backed securities and collateralized debt obligations, may pose risks arising from liquidity and credit concerns. As of February 29, 2008, we had no direct holdings in these categories of investments and our indirect exposure to these financial instruments through our holdings in money market mutual funds was immaterial. As of February 29, 2008, we had no impairment charge associated with our short-term investment portfolio. Although we believe our current investment portfolio has very little risk of impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain unimpaired. We may suffer losses from our equity investments which could harm our business. We have investments and plan to continue to make future investments in 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. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Plan/ Shares Average Maximum Number Beginning shares available to be repurchased as of June 1, 2007 174,585,660 (2) Stock Repurchase Program I June 2 – June 29, 2007 From employees(3) 222 $ 41.66 Structured repurchases 1,918,819 $ 41.06 June 30 – July 27, 2007 From employees(3) 794 $ 41.53 Structured repurchases 1,914,850 $ 39.01 July 28 – August 31, 2007 From employees(3) 53 $ 42.75 Structured repurchases 867,855 $ 38.57 Adjustments to repurchase authority for net dilution — 3,637,407 (4) Total shares repurchased 4,702,593 (4,702,593 ) Stock Repurchase Program II June 30 – July 27, 2007 Structured repurchases 3,797,152 $ 39.86 July 28 – August 31, 2007 Structured repurchases 9,136,673 $ 39.97 12,933,825 (12,933,825 ) Ending shares available to be repurchased as of August 31, 2007 160,586,649 (5) 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 form time to time. Stock Repurchase Program II In April 2007, our Board of Directors authorized Stock Repurchase Program II which is not subject to expiration. Under Stock Repurchase Program II, we are authorized to repurchase in aggregate up to 20.0 million shares of our common stock. In November 2007, the Board of Directors approved a 30.0 million share increase to Stock Repurchase Program II. This increases the authorization under this program from the original 20.0 million shares to 50.0 million shares. Exhibit Incorporated by Reference** Filed Number Exhibit Description Form Date Number Herewith 3.1 Amended and Restated Bylaws 8-K 9/23/05 3.1 3.2 Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on 5/22/01 10-Q 7/16/01 3.6 3.2.1 Certificate of Correction of Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware 10-Q 4/11/03 3.6.1 3.3 Certificate of Designation of Series A Preferred Stock of Adobe Systems Incorporated 10-Q 7/8/03 3.3 4.1 Fourth Amended and Restated Rights Agreement between the Company and Computershare Investor Services, LLC 8-K 7/3/00 1 4.1.1 Amendment No. 1 to Fourth Amended and Restated Rights Agreement between the Company 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-K/A 2/6/07 10.2 10.3 Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan* 10-Q 10/7/04 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 12/1/00 10.70 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 3/02/07 Appendix A 10.11 Forms of Stock Option and Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan* 10-Q 10/7/04 10.11 10.12 Form of Indemnity Agreement* 10-Q 5/30/97 10.25.1 10.13 Forms of Retention Agreement* 10-K 11/28/97 10.44 10.14 Second Amended and Restated Master Lease of Land and Improvements by and between SMBC Leasing and Finance, Inc. and Adobe Systems Incorporated 10-Q 10/7/04 10.14 10.15 Lease between Adobe Systems and Selco Service Corporation, dated March 26, 2007 8-K 3/28/07 10.1 10.16 Participation agreement among Adobe Systems, 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/A 2/6/07 10.20 10.20 Form of Restricted Stock Unit Agreement used in connection with the 2003 Equity Incentive Plan* 10-K/A 2/6/07 10.21 10.21 Adobe Systems Incorporated 2004 Annual Executive Incentive Plan* 8-K 1/13/05 10.1 10.22 Adobe Systems Incorporated 2005 Annual Executive Incentive Plan* 8-K 1/13/05 10.2 10.23 Description of 2005 Director Compensation* 10-K 2/2/05 10.21 10.24 Description of 2006 Director Compensation* 8-K 9/23/05 10.1 10.25 Adobe Systems Incorporated 2006 Management Team Annual Incentive Plan* 8-K 1/13/06 10.1 10.26 2007 Executive Officer Annual Incentive Plan* 8-K 1/30/07 10.5 10.27 2005 Equity Incentive Assumption Plan* 8-K 12/07/05 10.2 10.28 Form of Stock Option Agreement used in connection with the 2005 Equity Incentive Assumption Plan* 8-K 12/07/05 10.3 10.29 Allaire Corporation 1997 Stock Incentive Plan* S-8 03/27/01 4.06 10.30 Allaire Corporation 1998 Stock Incentive Plan* S-8 03/27/01 4.07 10.31 Allaire Corporation 2000 Stock Incentive Plan* S-8 03/27/01 4.08 10.32 Andromedia, Inc. 1996 Stock Option Plan* S-8 12/07/99 4.07 10.33 Andromedia, Inc. 1997 Stock Option Plan* S-8 12/07/99 4.08 10.34 Andromedia, Inc. 1999 Stock Plan* S-8 12/07/99 4.09 10.35 ESI Software, Inc. 1996 Equity Incentive Plan* S-8 10/18/99 4.08 10.36 eHelp Corporation 1999 Equity Incentive Plan* S-8 12/29/03 4.08 10.37 Blue Sky Software Corporation 1996 Stock Option Plan* S-8 12/29/03 4.07 10.38 Bright Tiger Technologies, Inc. 1996 Stock Option Plan* S-8 03/27/01 4.11 10.39 Live Software, Inc. 1999 Stock Option/Stock Issuance Plan* S-8 03/27/01 4.10 10.40 Macromedia, Inc. 1999 Stock Option Plan* S-8 08/17/00 4.07 10.41 Macromedia, Inc. 1993 Directors Stock Option Plan* 10-Q 08/03/01 10.02 10.42 Macromedia, Inc. 1992 Equity Incentive Plan* 10-Q 08/03/01 10.01 10.43 Macromedia, Inc. 2002 Equity Incentive Plan* S-8 08/10/05 4.08 10.44 Form of Macromedia, Inc. Stock Option Agreement* S-8 08/10/05 4.09 10.45 Middlesoft, Inc. 1999 Stock Option Plan* S-8 08/17/00 4.09 10.46 Form of Macromedia, Inc. Revised Non-Plan Stock Option Agreement* S-8 11/23/04 4.10 10.47 Form of Macromedia, Inc. Restricted Stock Purchase Agreement* 10-Q 2/8/05 10.01 10.48 Restricted Stock Purchase Agreement between Macromedia, Inc. and Stephen Elop, dated January 24, 2005* 10-Q 2/8/05 10.02 10.49 Restricted Stock Purchase Agreement between Macromedia, Inc. and Robert Burgess, dated January 24, 2005* 10-Q 2/8/05 10.03 10.50 Amended and Restated Employment Agreement by and between Robert K. Burgess, dated January 21, 2005* 8-K 1/21/05 10.01 10.51 Amendment to Employment Agreement by and between Adobe Systems Incorporated, Adobe Macromedia Software LLC and Robert K. Burgess, dated December 7, 2005* 8-K 12/12/05 10.2 10.52 Amended and Restated Employment Agreement between Adobe Systems Incorporated and Stephen Elop, dated May 23, 2005* S-4 6/28/05 10.1 10.53 Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 2/3/06 10.1 10.54 Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 2/3/06 10.2 10.55 Form of Maximum Award Grant Notice used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 2/3/06 10.3 10.56 Form of Performance Share Maximum Award Agreement used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 2/3/06 10.4 10.57 Adobe Systems Incorporated Deferred Compensation Plan* 8-K 9/26/06 10.1 10.58 Form of Maximum Award Grant Notice used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 2/3/06 10.5 10.59 Form of Performance Share Maximum Award Agreement used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 2/3/06 10.6 10.60 Adobe Systems Incorporated 2007 Performance Share Program pursuant to the 2003 Equity Inventive Plan* 8-K 1/30/07 10.1 10.61 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 10.62 Adobe Systems Incorporated 2007 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 1/30/07 10.3 10.63 Form of Form of Award Grant Notice and Performance Share Award Agreement used in connection with grants under the Adobe Stems Incorporated 2007 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 1/30/07 10.4 10.64 Adobe Systems Incorporated Executive Cash Bonus Plan* DEF 14A 2/24/06 Appendix B 10.65 Employment Transition Agreement between Adobe Systems Incorporated and Murray J. Demo, dated March 21, 2006* 8-K 3/22/06 10.1 10.66 Employment offer letter between Adobe Systems Incorporated and Randy Furr, dated May 16, 2006* 8-K 5/22/06 10.1 10.67 Adobe Systems Incorporated Executive Severance Plan in the Event of a Change of Control* 8-K 11/16/06 10.2 10.68 Employment offer letter between Adobe Systems Incorporated and Richard Rowley, dated October 30, 2006* 8-K 11/16/06 10.1 10.69 Confidential Resignation Agreement and General Release of Claims between Adobe Systems Incorporated and Peg Wynn, dated January 22, 2007* 10-K/A 2/6/07 10.66 10.70 Employment offer letter between Adobe Systems Incorporated and Mark Garrett dated January 5, 2007* 8-K 1/26/07 10.1 10.71 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 10.72 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 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 100.INS XBRL Instance†† X 100.SCH XBRL Taxonomy Extension Schema†† X 100.CAL XBRL Taxonomy Extension†† X 100.LAB XBRL Taxonomy Extension Labels†† X 100.PRE XBRL Taxonomy Extension†† X arrangement. 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. Date: April 4, 2008 The following trademarks of Adobe Systems Incorporated or its subsidiaries, which may be registered in Adobe All other trademarks are the property of their respective owners.
FORM 10-QPage No. Management’sManagement's Discussion and Analysis of Financial
Condition and Results of Operations2325 3537 3537 3638 3638 4446 4547 Exhibits 4647 5253 5354 2
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)(Unaudited)See accompanying Notes to Condensed Consolidated Financial Statements.3ADOBE SYSTEMS INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data)
(Unaudited)
2007
2006
2007
2006 February 29, 2008 November 30, 2007 ASSETS Current assets: Cash and cash equivalents $ 1,032,733 $ 946,422 Short-term investments 682,511 1,047,432 Trade receivables, net of allowances for doubtful accounts of $4,271 and $4,398, respectively 293,266 318,145 Other receivables 38,839 44,666 Deferred income taxes 132,892 171,472 Prepaid expenses and other assets 46,031 44,840 Total current assets 2,226,272 2,572,977 Property and equipment, net 297,522 289,758 Goodwill 2,144,368 2,148,102 Purchased and other intangibles, net 357,221 402,619 Investment in lease receivable 207,239 207,239 Other assets 108,279 92,984 $ 5,340,901 $ 5,713,679 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade and other payables $ 62,019 $ 66,867 Accrued expenses 368,978 383,436 Accrued restructuring 5,956 3,731 Income taxes payable 40,931 215,058 Deferred revenue 191,662 183,318 Total current liabilities 669,546 852,410 Long-term liabilities: Debt 450,000 — Accrued restructuring 12,069 13,987 Income taxes payable 197,741 — Deferred income taxes 146,344 148,943 Deferred revenue 22,956 25,950 Other liabilities 28,095 22,407 Total liabilities 1,526,751 1,063,697 Stockholders' equity: Preferred stock, $0.0001 par value; 2,000 shares authorized, none issued — — Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 540,871 and 571,409 shares outstanding, respectively 61 61 Additional paid-in-capital 2,317,582 2,340,969 Retained earnings 4,260,970 4,041,592 Accumulated other comprehensive income 26,215 27,948 Treasury stock, at cost (59,963 and 29,425 shares, respectively), net of re-issuances (2,790,678 ) (1,760,588 ) Total stockholders' equity 3,814,150 4,649,982 $ 5,340,901 $ 5,713,679 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSINCOME
(In thousands)thousands, except per share data)
(Unaudited)
2007
2006 Three Months Ended February 29,
2008 March 2,
2007 Revenue: Products $ 851,962 $ 620,298 Services and support 38,483 29,109 Total revenue 890,445 649,407 Total cost of revenue: Products 59,805 53,815 Services and support 22,670 18,448 Total cost of revenue 82,475 72,263 Gross profit 807,970 577,144
Operating expenses:
Research and development 168,485 137,129 Sales and marketing 262,595 214,678 General and administrative 82,929 61,275 Restructuring and other charges 1,431 — Amortization of purchased intangibles 17,099 17,725 Total operating expenses 532,539 430,807 Operating income 275,431 146,337
Non-operating income (expense):
Interest and other income, net 13,290 22,515 Interest expense (1,809 ) (51 ) Investment gains, net 8,732 5,601 Total non-operating income 20,213 28,065 Income before income taxes 295,644 174,402 Provision for income taxes 76,265 30,551 Net income $ 219,379 $ 143,851 Basic net income per share $ 0.39 $ 0.24 Shares used in computing basic net income per share 561,113 587,969 Diluted net income per share $ 0.38 $ 0.24 Shares used in computing diluted net income per share 571,259 604,249 5
ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Three Months Ended February 29,
2008 March 2,
2007 Cash flows from operating activities: Net income $ 219,379 $ 143,851 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 69,202 68,498 Stock-based compensation 43,034 31,852 Deferred income taxes 35,844 904 Provision for estimated returns 19,587 27,133 Other non-cash items 3,147 54 Retirements of property and equipment 99 163 Recovery of losses on receivables (224 ) (163 ) Net gains on sales and impairments of investments (9,493 ) (5,835 ) Tax benefit from employee stock option plans — 15,935 Excess tax benefits from stock-based compensation — (1,556 ) Changes in operating assets and liabilities, net of acquired assets and liabilities:. Receivables 11,343 26,351 Prepaid expenses and other current assets (1,262 ) (2,066 ) Trade and other payables (4,848 ) (8,455 ) Accrued expenses (14,791 ) (29,104 ) Accrued restructuring (1,157 ) (5,097 ) Income taxes payable 24,090 1,070 Deferred revenue 5,350 7,585 Net cash provided by operating activities 399,300 271,120 Cash flows from investing activities: Purchases of short-term investments (224,645 ) (586,305 ) Maturities of short-term investments 197,379 129,765 Sales of short-term investments 389,858 207,000 Purchases of property and equipment (26,268 ) (48,300 ) Purchases of long-term investments and other assets (14,400 ) (8,915 ) Cash paid for acquisitions — (3,094 ) Issuance costs for credit facility — (602 ) Proceeds from sale of equity securities 6,847 — Net cash provided by (used for) investing activities 328,771 (310,451 ) Cash flows from financing activities: Purchases of treasury stock (1,150,022 ) (301,468 ) Proceeds from issuance of treasury stock 53,510 94,033 Excess tax benefits from stock-based compensation — 1,556 Proceeds from borrowings under line of credit 450,000 — Net cash used for financing activities (646,512 ) (205,879 ) Effect of foreign currency exchange rates on cash and cash equivalents 4,752 (1,260 ) Net increase (decrease) in cash and cash equivalents 86,311 (246,470 ) Cash and cash equivalents at beginning of period 946,422 772,500 Cash and cash equivalents at end of period $ 1,032,733 $ 526,030 Supplemental disclosures: Cash paid for income taxes, net of refunds $ 12,894 $ 11,858 “SEC”"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 accounting principles (“GAAP”in the United States of America ("GAAP"). In management’smanagement'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 Adobe’sour Annual Report on Form 10-K/A10-K for the fiscal year ended December 1, 2006November 30, 2007 on file with the SEC.significantmaterial changes in our significant accounting policies, except for the adoption of the Financial Accounting Standards Board ("FASB") Financial Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109", during the three and nine months ended August 31, 2007February 29, 2008 as compared to the significant accounting policies described in our Annual Report on Form 10-K/A10-K for the fiscal year ended December 1, 2006.ReclassificationCertain amounts for the nine months ended September 1, 2006 as reported in the Consolidated Statements of Cash Flows have been revised. Specifically, there were revisions and reclassifications totaling $9.7 million to operating activities, ($3.9) million to investing activities and ($5.8) million to financing activities. These revisions and reclassifications related to the following:November 30, 2007.· Changes in prepaid expenses related to the Macromedia acquisition have been reclassified from Net Cash Provided by Operating Activities to Net Cash Provided by Investing Activities.· The amortization of premium on available for sale securities have been reclassified from Net Cash Provided by Investing Activities to Net Cash Provided by Operating Activities.· Excess tax benefits from stock-based compensation have been reclassified from Net Cash Provided by Operating Activities to Net Cash Used for Financing Activities.the Financial Accounting Standards Board (the “FASB”) statements definedthose discussed below, there have been no significantrecent accounting pronouncements or changes in recent accounting pronouncements during the ninethree months ended August 31, 2007February 29, 2008, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K/A10-K for the fiscal year ended December 1, 2006.November 30, 2007, that are of significance, or potential significance, to us.“The("SFAS 159"), "The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”)Liabilities". Under SFAS 159, permits companies to choosemay elect to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for the company beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS 159 will have on our consolidated financial statements.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)In June 2007, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 07-1, “Clarification of the Scope of the Audit and Accounting Guide-Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 defines investment companies for purposes of applying the related AICPA Audit and Accounting Guide. SOP 07-1 provides guidance on whether an investment company’s parent or equity-method investor should retain investment-company accounting in its financial statements. SOP 07-1 iswas effective for us beginning in the first quarter of fiscal year 2009, although earlier2008. We currently do not have any instruments eligible for election of the fair value option. Therefore, the adoption of SFAS 159 in the first quarter of fiscal 2008 did not impact our consolidated financial position, results of operations or cash flows.permitted. Weeffective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are currently evaluatingrecognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. Effective December 1, 2007, we adopted SFAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact if any, that SOP 07-1 will have on our consolidated financial statements.position, results of operations or cash flows.See Note 2 for information and related disclosures regarding our fair value measurements.ACQUISITIONSFINANCIAL INSTRUMENTSOn December 3, 2005, we completed the acquisition of Macromedia, a provider of software technologies that enables the development of a wide range of internet and mobile application solutions.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) acquisition of Macromedia accelerated our strategy of delivering an industry-defining technology platform that provided more powerful solutions for engaging people with digital information.The total purchase price was allocated to Macromedia’s net tangible and identifiable intangible assets based upon their estimated fair values as of December 3, 2005. The total purchase price for Macromedia was approximately $3.5 billion, which consisted of 109.0 million shares of Adobe common stock valued at $3.2 billion issued in exchange for 100% of Macromedia outstanding common stock, $227.6 million for the fair value of Macromedia options assumed, $29.1these certain financial assets and liabilities was determined using the following inputs at February 29, 2008: Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total (Level 1) (Level 2) (Level 3) Assets Fixed income available-for-sale securities(1) $ 699,553 $ — $ 699,553 $ — Equity available-for-sale securities(2) 12,928 12,928 — — Investment in limited partnership(3) 33,906 438 — 33,468 Foreign currency derivatives(4) 4,323 — 4,323 — Total $ 750,710 $ 13,366 $ 703,876 $ 33,468 Liabilities Foreign currency derivatives(5) 9,246 — 9,246 — Total $ 9,246 $ — $ 9,246 $ — transaction costs,which the carrying amount is a reasonable estimate of fair value.$72.7$30.6 million for restructuring costs. In allocatingas of February 29, 2008 and November 30, 2007, respectively. The change in this asset balance relates primarily to investment gains included in earnings during the purchase price based on fair values, we recorded $713.2 million in net tangible assets, $680.5 million in identifiable intangible assets, $146.2 million in stock-based compensation, and $2.0 billion in goodwill.During the ninethree months ended August 31, 2007, we completed two acquisitionsFebruary 29, 2008. All other activity during the quarter was insignificant both individually and in the aggregate.See Note 4 for cash consideration of approximately $70.0 million. These acquisitions were not material to our consolidated balance sheetfurther information regarding Adobe Ventures and results of operations.related accounting policies.NOTE 3. GOODWILL AND PURCHASED AND OTHER INTANGIBLESBelow is our goodwill reported by segment as of December 1, 2006 and August 31, 2007:(1) The 2006 balances have been revised to correct insignificant errors in the original allocation of Macromedia goodwill to the various segments. The correction resulted in a reduction in goodwillADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited) (Continued)allocated to Knowledge Worker, Enterprise & Developer Solutions Goodwill as of February 29, 2008 and Mobile & Devices of $6.0 million, $57.9 millionNovember 30, 2007 was $2.144 billion and $103.8 million, respectively, and an increase in goodwill allocated to Creative Solutions and Other of $153.7 million and $14.0 million,$2.148 billion, respectively. This correction did not impact the total balance of goodwill in our financial statements. This reallocation also had no impact on our annual impairment analysis which occurred in the second quarter of fiscal 2007.(2) Changes in goodwill in “Other” relate primarily to our Print and Classic Publishing segment.column “Other” abovechange includes net reductions in goodwill of (i) $21.4$4.2 million related to pre-acquisition research and development creditsthe tax reserve for Macromedia, including a $5.7 million adjustmentoffset in the third quarter of fiscal 2007, (ii) $16.9 million for insignificant revisions to the valuation of Macromedia assumed options, net of tax impact, (iii) $4.1 million for the realization of tax benefits for deductions resulting from the exercise of stock options and disqualifying dispositions of vested options assumed and (iv) other individually insignificant tax related items.part by foreign currency changes.Amortization expense related to purchased and other intangible assets was $61.7 million and $175.4 million for the three and nine months ended August 31, 2007, respectively. Comparatively, amortization expense was $54.6 million and $166.6 million for the three and nine months ended September 1, 2006, respectively. Of these amounts, $43.8 million and $122.4 million are included in cost of sales for the three and nine months ended August 31, 2007, respectively and $36.9 million and $114.5 million are included in cost of sales for the three and nine months September 1, 2006, respectively. Purchased and other intangible assets, subject to amortization were as follows as of August 31,February 29, 2008: Cost Accumulated
Amortization Net Purchased technology $ 466,966 $ (294,196 ) $ 172,770 Localization $ 40,171 $ (29,688 ) $ 10,483 Trademarks 131,225 (58,990 ) 72,235 Customer contracts and relationships 197,220 (96,027 ) 101,193 Other intangibles 800 (260 ) 540 Total other intangible assets $ 369,416 $ (184,965 ) $ 184,451 Total purchased and other intangible assets $ 836,382 $ (479,161 ) $ 357,221
2006
Cost
2006
Net
Expense
2007
Net Cost Accumulated Amortization Net $ 464,639 $ (271,275 ) $ 193,364 $ 45,854 $ (27,676 ) $ 18,178 131,225 (52,443 ) 78,782 197,220 (85,529 ) 111,691 800 (196 ) 604 $ 375,099 $ (165,844 ) $ 209,255 $ 839,738 $ (437,119 ) $ 402,619 During the nine months of fiscal 2007, we entered into certain technology licensing arrangements for approximately $46.5 million. An estimated $29.8 million of this cost isAmortization expense related to future licensing rightspurchased and has been capitalizedother intangible assets was $50.4 million and recorded as purchased technology. The remainder of$48.7 million for the cost was charged tothree months ended February 29, 2008 and March 2, 2007, respectively. Of these amounts, $33.3 million and $31.0 million are included in cost of sales for $16.7 million in the secondthree months ended February 29, 2008 and third quarters of fiscal 2007.March 2, 2007, respectively.August 31, 2007,February 29, 2008, we expect amortization expense in future periods to be as shown below:
Technology
Assets Purchased Technology Other Intangible Assets Remainder of 2008 $ 91,435 $ 78,440 39,994 60,068 10,687 41,927 7,338 2,137 2012 5,152 899 18,164 980 $ 172,770 $ 184,451 August 31, 2007February 29, 2008 and December 1, 2006:November 30, 2007: 2008 2007 Investments $ 59,542 $ 52,830 Prepaid royalty Prepaid royalty 16,990 13,289 Deferred compensation plan assets Deferred compensation plan assets 8,029 3,145 Restricted cash 7,365 7,367 Security deposits 7,213 6,650 Prepaid rent 3,878 4,285 Prepaid land lease 3,214 3,224 Other 2,048 2,194 Total other assets $ 108,279 $ 92,984 areis our limited partnership interestsinterest in Adobe Ventures which areis consolidated in accordance with FASB Interpretation No. 46R, a revision to FASB Interpretation No. 46, “Consolidation"Consolidation of Variable Interest Entities.”Entities". Our evaluation of fair value includes, but is not limited to, reviewing each company's cash position, financing needs, earnings and revenue outlook, operational performance, management and ownership changes and competition.partnerships arepartnership is controlled by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures. Investments also include our direct investments which are accounted for under the cost method.August 31, 2007February 29, 2008 and December 1, 2006:November 30, 2007: 2008 2007 Trade payables $ 38,818 $ 41,724 Sales and use tax and other payables 23,201 25,143 Total trade and other payables $ 62,019 $ 66,867 ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 5. TRADE AND OTHER PAYABLES AND ACCRUED EXPENSES (Continued)August 31,February 29, 2008 and November 30, 2007: 2008 2007 Accrued compensation and benefits $ 166,623 $ 205,018 Sales and marketing allowances 19,109 21,231 Other 183,246 157,187 Total accrued expenses $ 368,978 $ 383,436 2006:2007, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $43.0 million and $42.8 million, respectively.2008 2007 Expected life (in years) 2.27 - 4.64 3.54 - 3.66 Volatility 33.37 - 35.34 % 31.58 - 32.71 % Risk free interest rate 2.37 - 3.35 % 4.47 - 4.83 % 2008 2007 Expected life (in years) 0.50 - 2.0 0.5 - 2.0 Volatility 29.97 - 31.35 % 31.46 - 32.75 % Risk free interest rate 2.82 - 3.29 % 4.79 - 5.11 % Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value* (millions) 2008 Shares outstanding 50,247 $ 29.08 4.41 years $ 313.2 Shares vested and expected to vest 45,200 $ 28.33 4.23 years $ 308.0 Shares exercisable 30,625 $ 24.63 3.35 years $ 294.7 2007 Shares outstanding 64,465 $ 26.14 4.52 years $ 817.8 Shares vested and expected to vest 60,633 $ 25.59 3.93 years $ 801.2 Shares exercisable 39,016 $ 21.34 3.34 years $ 676.6 2008 2007 Beginning balance 1,701 — Awarded 2,395 1,271 Released (292 ) — Forfeited (36 ) (3 ) Ending balance 3,768 1,268 Number of Shares Weighted Average Remaining Contractual Life Aggregate Intrinsic Value* (millions) 2008 Shares outstanding 3,768 2.31 years $ 126.8 Shares vested and expected to vest 2,567 2.11 years $ 86.3 Shares exercisable 891 — $ 30.0 2007 Shares outstanding 1,268 2.44 years $ 49.0 Shares vested and expected to vest 964 2.27 years $ 37.3 Shares exercisable — — $ — Shares Granted Maximum Shares Eligible to Receive Beginning balance — — Awarded 909 1,818 Forfeited (35 ) (70 ) Ending balance 874 1,748 Shares Shares achieved 717 Released (189 ) Forfeited (24 ) Ending balance 504 2008 2007 Income Statement Classifications Option Grants and Stock Purchase Rights Restricted Stock and Performance Share Awards Option Grants and Stock Purchase Rights Restricted Stock and Performance Share Awards Cost of revenue—services and support $ 804 $ 40 $ 1,170 $ 34 Research and development 14,926 3,396 12,737 1,150 Sales and marketing 10,907 3,541 10,117 862 General and administrative 5,942 3,478 5,663 119 Total $ 32,579 $ 10,455 $ 29,687 $ 2,165 6.8. EMPLOYEE BENEFIT PLANSPLANStock OptionsOur stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. Currently, we grant options from the (i) 2003 Equity Incentive Plan (the “2003 Plan”), under which options can be granted to all employees, including executive officers, and outside consultants and (ii) the 1996 Outside Directors Stock Option Plan, as amended, under which options are granted automatically under a pre-determined formula to non-employee directors. In addition, our stock option program includes the 2005 Equity Incentive Assumption Plan, from which we currently do not grant options, but may do so. The plans listed above are collectively referred to in the following discussion as “the Plans.” Option vesting periods are generally three to four years for all of the Plans. At the end of the third quarter of fiscal 2007, the number of shares outstanding was 54.8 million.The total intrinsic value of options exercised during the nine months ended August 31, 2007 was $304.3 million. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.Employee Stock Purchase PlanOur 1997 Employee Stock Purchase Plan (“ESPP”) allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of a twenty-four month offering period with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower.Restricted StockWe grant restricted stock awards and units and performance awards to officers and key employees under our Amended 1994 Performance and Restricted Stock Plan (the “Restricted Stock Plan”). Restricted stock issued under the Restricted Stock Plan generally vests annually over four years.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)Restricted stock awards are considered outstanding at the time of grant, as the stock award holders are entitled to dividends and voting rights. At the end of the third quarter of fiscal 2007, the number of shares granted but still unvested was less than 0.1 million.Restricted stock units are not considered outstanding at the time of grant, as the holders of these units are not entitled to dividends and voting rights. At the end of the third quarter of fiscal 2007, the number of shares granted, but unreleased was 1.4 million.Neither unvested restricted stock awards nor restricted stock units are considered outstanding in the computation of basic earnings per share.Performance SharesEffective February 2, 2006, the Executive Compensation Committee adopted the 2006 Performance Share Program (the “2006 Program”). The Executive Compensation Committee established the 2006 Program to align the new leadership team to achieve key integration milestones, create stockholder value and to retain key executives. All members of Adobe’s executive management team and other key members of senior management are participating in the 2006 Program which runs through the end of our fiscal 2007. Awards under the 2006 Program were granted in the form of performance shares pursuant to the terms of our 2003 Plan or Restricted Stock Plan. Performance shares will vest 100% at the end of fiscal 2007 if performance goals are met. Participants in the 2006 Program have the ability to receive up to 150% of the shares originally granted. At the end of the third quarter of fiscal 2007, the number of shares granted was 0.3 million and the maximum number of shares eligible to be received is 0.4 million.Effective January 24, 2007, the Executive Compensation Committee adopted the 2007 Performance Share Program (the “2007 Program”). Similar to the 2006 Program, the 2007 program’s purpose is to align key management and senior leadership with stockholder’s interest and to retain key employees. The measurement period for the program is our fiscal 2007 year. All members of Adobe’s executive management and other key senior leaders are participating in the 2007 Program. Awards granted under the 2007 Program were granted in the form of performance shares pursuant to the terms of Restricted Stock Plan. If pre-determined attainment goals are met, shares of stock will be granted to the recipient, with 25% vesting upon achievement of the attainment goals, 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 2007 Program have the ability to receive up to 200% of the shares originally granted. At the end of the third quarter of fiscal year 2007, the number of shares granted was 0.4 million and the maximum number of shares eligible to be received is 0.7 million.Stock-Based CompensationWe currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expectedADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and any expected dividends.We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. We estimate the volatility of our common stock by using implied volatility in market traded options in accordance with Staff Accounting Bulletin No. 107, “Share-Based Payment”. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate that we use in the option valuation model on zero-coupon yields implied by U.S. Treasury issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.The assumptions used to value option grants for the three and nine months ended August 31, 2007 and September 1, 2006 are as follows:The expected term of employee stock purchase plan shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights for the three and nine months ended August 31, 2007 and September 1, 2006 are as follows:As of August 31, 2007, there was $158.1 million of unrecognized compensation cost, which will be recognized over a weighted average period of 2.8 years adjusted for estimated forfeitures, related to non-vested stock-based payments granted to Adobe employees. Additionally, as of August 31, 2007, there was $42.9 million of unamortized stock-based compensation related to the assumption of Macromedia unvested options, which will be recognized over a weighted average period of 1.8 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.12ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)On September 21, 2006, the Board of Directors approved the Adobe Systems Incorporated Deferred Compensation Plan, effective December 2, 2006 (the “Deferred Compensation Plan”). The Deferred Compensation Plan is an unfunded, non-qualified, deferred compensation arrangement under which certain executives and members of the Board of Directors are able to defer a portion of their annual compensation. Participants may elect to contribute up to 75% of their base salary and 100% of other specified compensation, including commissions, bonuses, performance shares, restricted stock units and directors’ fees. Participants will be able to elect the payment of benefits to begin on a specified date at least three years after the end of the plan year in which the election is made in the form of a lump sum or annual installments over five to fifteen years. Upon termination of a participant’s employment with Adobe, such participant will receive a distribution in the form of a lump sum payment. All distributions will be made in cash, except that deferred performance share units will be settled in stock. As of August 31,February 29, 2008 and November 30, 2007, the invested amounts under the Deferred Compensation Plan total $2.1$8.0 million and $3.1 million, respectively, and are recorded as long-term other assets on our balance sheet. As of August 31,February 29, 2008 and November 30, 2007, we recorded $2.1$8.0 million and $3.1 million, respectively, as a long-term liability to recognize undistributed deferred compensation due to employees.7.9. RESTRUCTURING AND OTHER CHARGESIn the first quarterMacromedia Merger Restructuring Chargesfiscal 2006, pursuant to Board of Directors’ approval, 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.December 3, 2005. 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.Macromedia Merger Restructuring ChargesADOBE SYSTEMS INCORPORATEDDecember 1, 2006November 30, 2007 and August 31, 2007:February 29, 2008:
2006
2007
Incurred To
Date November 30, 2007 Cash
Payments Adjustments February 29,
2008 Total Costs
Incurred To
Date Total
Costs
Expected
to be
Incurred $ — $ — $ — $ — $ 26,986 $ 26,986 16,283 (1,136 ) 1,768 16,915 24,096 41,011 — — — — 3,238 3,238 1,435 (21 ) (304 ) 1,110 1,244 2,354 $ 17,718 $ (1,157 ) $ 1,464 $ 18,025 $ 55,564 $ 73,589 We completed our acquisitionIncluded in the adjustments column is a change to previous estimates, recorded as a current period expense, associated with closing redundant facilities as a result of Macromedia on December 3, 2005. Pursuant to Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase BusinessADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 7. RESTRUCTURING AND OTHER CHARGES (Continued)Combination,” all restructuring charges related to the Macromedia acquisition are recognizedtotaling $1.4 million as a partwell as the effect of the purchase price allocation.$21.7$18.0 million at August 31, 2007February 29, 2008 includes $5.8$6.0 million recorded in accrued restructuring, current and $15.9$12.0 million, related to long-term facilities obligations, recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets.condensed consolidated balance sheets. We expect to pay these liabilities through fiscal 2011. At December 1, 2006,November 30, 2007, accrued restructuring charges of $31.4$17.7 million includes $9.8$3.7 million recorded in accrued restructuring, current and $21.6$14.0 million, related to long-term facilities obligations, recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets. We expect to pay these liabilities through fiscal 2011.condensed consolidated balance sheets.Adobe Restructuring ChargesIn connection with the worldwide restructuring plan, we recognized costs related to (i) termination benefits for former Adobe employees whose positions were eliminated, (ii) the closure of Adobe facilities and (iii) the cancellation of certain contracts held by Adobe.Accrued restructuring charges as of August 31, 2007 are zero in the accompanying Condensed Consolidated Balance Sheets as compared to $0.6 million as of December 1, 2006. Accrued restructuring charges as of December 1, 2006 include $0.3 million recorded in accrued restructuring, current and $0.3 million, related to long-term facilities obligations, recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets.8. STOCKHOLDERS’10. STOCKHOLDERS' EQUITYTo 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 enter into structured stock repurchase agreements with third parties.Authorization to repurchase shares to cover on-going dilution 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.ninethree months of fiscalended February 29, 2008 and March 2, 2007, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $600.0 million.$150.0 and $300.0 million, respectively. We entered into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”("VWAP") of our common stock.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.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 8. STOCKHOLDERS’ EQUITY (Continued)TheNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)August 31,February 29, 2008 and November 30, 2007 are excluded from the denominator in the computation of earnings per share. All outstanding structured repurchase agreements as of August 31, 2007February 29, 2008 under this program will expire on or before December 21, 2007.June 19, 2008. As of August 31,February 29, 2008 and March 2, 2007, approximately $200.0$325.8 million and $319.3 million, respectively, of up-front payments remained under the agreements. During the nine months of fiscal 2007, we repurchased 15.4 million shares at an average price of $39.23 through structured repurchase agreements which included prepayments from fiscal 2006.In September 2007, Subsequent to February 29, 2008, we entered into additional structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with prepayments of $500.0$100.0 million. The $500.0$100.0 million will be classified as treasury stock on our balance sheet.See Note 17 for further discussion of our additional structured stock repurchase agreements.In April 2007, we announced that our Board of Directors authorized a new Under this stock repurchase program. Under the new program, which is not subject to expiration, we are authorized to repurchase in aggregate up to 20.050.0 million shares of our common stock. ThisFrom the inception of this program, is in addition to our existing stock repurchase program to offset dilution from employee stock programs. As of August 31, 2007, we hadhave repurchased 44.3 million shares and provided prepayments of $850.0 million$1.85 billion under structured share repurchase agreements to large financial institutions under this program. Asinstitutions. During the first quarter of August 31, 2007,fiscal 2008, we provided prepayments of $1.0 billion and repurchased 12.926.6 million shares throughunder these structured share repurchase agreements at an average price of $39.94 and$37.56. As of February 29, 2008, approximately $333.4$133.3 million of up-front payments remained under these agreements. All outstanding structured repurchase agreements as of August 31, 2007February 29, 2008 under this program will expire on or before April 24, 2008. There were no prepayments under this program as of March 18, 2008.2, 2007.FASB Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Items of other comprehensive income that we currently report are unrealized gains and losses on marketable securities categorized as available-for-sale and foreign currency translation adjustments. We also report unrealized gains and losses on derivative instruments qualifying as cash flow hedges.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 9.11. COMPREHENSIVE INCOME (Continued)net of income tax expense, for the three and nine months ended August 31, 2007February 29, 2008 and September 1, 2006:March 2, 2007: 2008 2007 Net income $ 219,379 $ 143,851 Other comprehensive income (loss): Change in unrealized gain (loss) on available-for-sale securities, net of taxes (3,079 ) 1,893 Currency translation adjustments 1,378 (1,260 ) Net gain (loss) in derivative instruments, net of taxes of zero (31 ) 126 Other comprehensive income (loss), net of taxes (1,732 ) 759 Total comprehensive income, net of taxes $ 217,647 $ 144,610 10.12. NET INCOME PER SHAREBasic net income per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested restricted stock. Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive potential common shares, including unvested restricted common stock and stock options using the treasury stock method.and nine months ended August 31, 2007February 29, 2008 and September 1, 2006:March 2, 2007: 2008 2007 Net income Net income $ 219,379 $ 143,851 Shares used to compute basic net income per share Shares used to compute basic net income per share 561,113 587,969 Dilutive potential common shares: Dilutive potential common shares: Unvested restricted stock 680 14 Stock options 9,466 16,266 Shares used to compute diluted net income per share 571,259 604,249 Basic net income per share $ 0.39 $ 0.24 Diluted net income per share $ 0.38 $ 0.24 and nine months ended August 31,February 29, 2008 and March 2, 2007, options to purchase approximately 11.915.5 million and 11.08.6 million shares, respectively, of common stock with exercise prices greater than the annual average fair market value of our stock of $41.26$38.22 and $40.93,$39.70, respectively, were not included in the calculation because the effect would have been anti-dilutive. Comparatively, for the three and nine months ended September 1, 2006, options to purchase approximately 27.7 million and 16.7 million shares, respectively, of common stock with exercise prices greater than the average fair market value of our stock of $30.21 and $34.38, respectively, were not included in the calculation because the effect would have been anti-dilutive.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)11.13. COMMITMENTS AND CONTINGENCIESAugust 31, 2007,February 29, 2008, we were in compliance with all covenants. In the case of a default, the lessor may demand we purchase the buildings for an amount equal to the lease balance, or require that we remarket or relinquish the buildings. Both leases qualify for operating lease accounting treatment under FASB Statement of Financial Accounting StandardsSFAS No. 13, “Accounting"Accounting for Leases,”" and, as such, the buildings and the related obligations are not included on our consolidated balance sheet. We utilized this type of financing in order to access bank-provided funding at the most favorable rates and to provide the lowest total cost of occupancy for the headquarter buildings. At the end of the lease term, we can extend the lease for an additional five year term, purchase the buildings for the lease balance, remarket or relinquish the buildings. If we choose to remarket or are required to do so upon relinquishing the buildings, we are bound to arrange the sale of the buildings to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the residual value guarantee amount.“Guarantor’s("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”)Others", the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002 must be recognized as a liability on our consolidated balance sheet. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the extended 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 ofADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)August 31, February 29, 2008 and November 30, 2007, the unamortized portion of the fair value of the residual value guarantees, for both leases, remaining in other long-term liabilities and prepaid rent was $4.6 million.$3.8 million and $4.2 million, respectively.IndemnificationsADOBE SYSTEMS INCORPORATEDofficersdirectors and directorsofficers for certain events or occurrences while the officerdirector or directorofficer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’sdirector's or director’sofficer'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.interestsinterest 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 partnerships.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.the Company’sour current and former officers and directors, and against Adobe as a nominal defendant. The complaint asserts that stock option grants to executives were priced retroactively by Adobe and were improperly accounted for and alleges various causes of action based on that assertion. The complaint seeks payment by the defendants to Adobe of damages allegedly suffered by it and disgorgement of profits, as well as injunctive relief. AsOn November 27, 2007 the Court granted defendants' demurrer to the second amended complaint and dismissed it without leave to amend. On December 11, 2007, plaintiff filed a motion for reconsideration of August 31, 2007, we do not believethe Court's order sustaining the demurrer without leave to amend, but that motion was denied by the Court on January 29, 2008. The Court is expected to issue a loss is probable or estimable.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)final judgment dismissing the complaint shortly.NOTE 11. COMMITMENTS AND CONTINGENCIESU.S. generally accepted accounting principles,GAAP, Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be affected by the resolution of one or more of such contingencies.12.14. CREDIT FACILITYAGREEMENTanthe Amendment to our Credit Agreement dated February 2007 (the “Amendment”"Amendment"), which increased the total senior unsecured revolving facility from $500.0 million to $1.0 billion. The Amendment also permits Adobeus 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. Also, weWe also retain an option to request an additional $500.0 million in commitments, for a maximum aggregate facility of $1.5 billion.BorrowingsAt 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.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 terminates on February 16, 2012 if no extensions have been requested and is available to provide loans to us and certain of our subsidiaries for general corporate purposes. As of August 31,February 29, 2008 and November 30, 2007, we had nothe amount outstanding borrowings under thisthe credit facility was $450.0 million and zero, respectively, which is included in long-term liabilities on our condensed consolidated balance sheet. As of February 29, 2008, we were in compliance with all of the covenants. 2008 2007 Interest and other income, net: Interest income $ 17,511 $ 23,470 Foreign exchange (losses) (4,700 ) (1,507 ) Fixed income investment (losses) — (262 ) Other 479 814 Interest and other income, net $ 13,290 $ 22,515 Interest expense $ (1,809 ) $ (51 ) Investment gains, net: Realized investment gains $ 5,397 $ 8,820 Unrealized investment gains 3,914 209 Realized investment (losses) (383 ) (558 ) Unrealized investment (losses) (196 ) (2,870 ) Investment gains, net $ 8,732 $ 5,601 Total non-operating income $ 20,213 $ 28,065 and Developer Solutions, Mobile and Device Solutions, Platform and Other, which includes the Print and Classic Publishing and Platform segments.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. This segment combines the products of our Creative Professional and Digital Imaging and Video businesses. The Knowledge Worker Solutions segment focuses on the needs of knowledge worker customers, providing essential applications and services to help them share information and collaborate.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 13. INDUSTRY SEGMENTS (Continued) Adobe Acrobat Connect and our Acrobat family of products. Our Enterprise and Developer Solutions segment provides server-based enterprise interaction solutions that automate people-centric processes. The segmentprocesses and contains revenue generated by our LiveCycle ColdFusion and Flex linesline of products. The Mobile and Device Solutions segment provides solutions that create compelling experiences through rich content, user interfaces and data services on mobile and non-PC devices such as cellular phones, consumer devices and internetInternet connected hand-held devices. The Platform segment provides developer solutions and technologies, including Adobe Flash Player and Adobe AIR which are used to build rich application experiences. Finally, Other contains several of our products and services which addressthe Print Publishing segment addresses market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and OEMoriginal equipment manufacturer ("OEM") printing businesses,businesses.strategic opportunities such as OEM revenue generatedBusiness Productivity Solutions business unit. However, under the requirements of SFAS No. 131, ("SFAS 131"), "Disclosures about Segments of andesktop technology platformEnterprise Solutions segment. The prior year information in the table below has also been updated to reflect this product movement.which includes Adobe Reader and Adobe Flash Player applications.Withby segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by operating segments. See Note 3 for the allocation of goodwill to our reportable segments.
Solutions
Worker
Solutions
and
Developer
Solutions
Device
Solutions
August 31, 2007ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 13. INDUSTRY SEGMENTS (Continued)
Solutions
Worker
Solutions
and
Developer
Solutions
Device
Solutions* Other includes revenue related to the Print and Classic Publishing segment of $47.0 million and $152.0 million for the three and nine months ended August 31, 2007, respectively, or 6% and 7%, respectively, of revenues. For the three and nine months ended September 1, 2006, Other includes revenue related to the Print and Classic Publishing segment of $52.5 million and $152.7 million, respectively, or 9% and 8%, respectively, of revenues. Also included in Other segment revenue, in fiscal 2007 and 2006, is revenue related to our Platform segment. Costs of revenue related to our Print and Classic Publishing segment are $8.1 million and $21.8 million for the three and nine months ended August 31, 2007 and $6.4 million and $18.9 million for the three and nine months ended September 1, 2006. Gross margins for our Print and Classic Publishing segment are $39.0 million and $130.1 million for the three and nine months ended August 31, 2007, respectively, or 83% and 86%, respectively, of revenues. Gross margins for our Print and Classic Publishing segment are $46.1 million and $133.8 million for the three and nine months ended September 1, 2006, respectively, or 88% of revenues.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 13. INDUSTRY SEGMENTS (Continued)A reconciliation of the totals reported for the operating segments to the applicable line items in the condensed consolidated financial statements for the three and nine month periods ended August 31, 2007 and September 1, 2006 is as follows:segments.* Total operating expenses include research and development, sales and marketing, general and administrative, restructuring and other charges, and amortization of purchased intangibles. Creative
Solutions Knowledge
Worker
Solutions Enterprise
Solutions Mobile and
Device
Solutions Platform Print
Publishing Total Three months ended February 29, 2008 Revenue $ 543,475 $ 195,535 $ 54,164 $ 15,212 $ 28,132 $ 53,927 $ 890,445 Cost of revenue 36,048 11,681 16,991 5,991 3,973 7,791 82,475 Gross profit $ 507,427 $ 183,854 $ 37,173 $ 9,221 $ 24,159 $ 46,136 $ 807,970 Gross profit as a percentage of revenue 93 % 94 % 69 % 61 % 86 % 86 % 91 % Three months ended March 2, 2007 Revenue $ 346,391 $ 174,828 $ 42,465 $ 13,733 $ 15,782 $ 56,208 $ 649,407 Cost of revenue 30,100 10,674 13,953 6,880 2,901 7,755 72,263 Gross profit $ 316,291 $ 164,154 $ 28,512 $ 6,853 $ 12,881 $ 48,453 $ 577,144 Gross profit as a percentage of revenue 91 % 94 % 67 % 50 % 82 % 86 % 89 % As Subsequent to February 29, 2008, as part of the stock repurchase programStock Repurchase Programs I and II, we entered into additional structured stock repurchase agreements in September 2007 with large financial institutions whereupon we provided the financial institutions with prepayments of $500.0approximately $150.0 million. The $500.0 millionThis amount will be classified as treasury stock on our balance sheet.See Note 810 for further information regarding our structured stock repurchase agreements.22MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONStitled “Risk Factors”entitled "Risk Factors" in Part II, Item 1A. You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission,SEC, including the Annual Report on Form 10-K/A10-K for fiscal 20062007 and the other Quarterly Reports on Form 10-Q to be filed by us in fiscal 2007.2008. When used in this report, the words “expects,” “could,” “would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks"expects," "could," "would," "may," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," "looks for,” “looks to,”" "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.consumers, creative professionals, designers, knowledge workers, original equipment manufacturer (“OEM”)high-end consumers, OEM partners, developers and enterprises for creating, managing, delivering and engaging with compelling content and experiences across multiple operating systems, devices and media. We distribute our products through a network of distributors and dealers, value-added resellers (“VARs”("VARs"), systems integrators, independent software vendors (“ISVs”("ISVs") and OEMs;OEMs, direct to end users;users and through our own Web site at www.adobe.com. We also license our technology to major hardware manufacturers, software developers and service providers, and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas;Americas, Europe, Middle East and Africa (“EMEA”("EMEA"); and Asia. Our software runs on personal computers with Microsoft Windows, Apple OS, Linux, UNIX and various non-personal computernon-PC platforms, depending on the product.nine monthsfirst quarter of fiscal 2007,2008, we continued to focus on driving revenue growth and increasing market share of our products through the continued delivery of comprehensive software and technology solutions that meet the evolving needs of our customers.business,segment, we experienced strongcontinued to experience solid demand in the thirdfirst quarter of fiscal 20072008 for our new Creative Suite 3 (“CS3”("CS3") family of products, resulting in record revenue in this segment. Shipments of our English versions of these new products began in April, and localized versions began shipping in bulk at the beginning of our third quarter of fiscal 2007. Reviews and industry commentary for our new CS3 products have been positive, helping to stimulate demand.products.business,segment, we achieved solidrecord revenue results with our Acrobat family of products in the thirdfirst quarter of fiscal 2007.2008. Helping drive this success was continued strong volume licensing of Acrobat products due to ongoing adoption by users in enterprises, governments and vertical markets such as architecture, engineering and construction.Our In our Enterprise and Developer Solutions businesssegment, we achieved quarterly sequential andstrong year-over-year revenue growth as we continued to focus on delivering innovative products and solutions for our customers. OurbusinessSolutions segment also achieved strong year-over-year revenue growth due to the ongoing success we have had targeting mobile operators, handset manufacturers and consumer electronic device manufactures with our Flash Lite and Flash Cast technologies. Otherdecreased year-over-year, and sequentially, primarily due to lifecycle timing of some of our legacy productsoffset in part by a year-over-year decline in our Print and Classic Publishing business.segment revenue.can have a significant impact onaffect the reported amounts reported in our consolidated financial statements.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 and make changes accordingly.estimates. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors.There With the exception of our adoption of FIN 48, there have been no other significant changes in our critical accounting estimates during the three and nine months ended August 31, 2007February 29, 2008 as compared to the critical accounting estimates disclosed in Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K/A10-K for the year ended December 1, 2006.November 30, 2007. Our critical accounting estimate for accounting for income taxes is described as follows:24 As of February 29, 2008, the gross liability for unrecognized tax benefits is $219.2 million. If the total FIN 48 liabilities are recognized in the future, the following amounts, net of an estimated $22.4 million benefit related to deducting such payments on future tax returns, would result: $102.2 million of unrecognized tax benefits would affect the effective tax rate, $80.2 million would affect goodwill and $14.4 million would affect additional paid-in-capital. Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of current and any future tax audits could significantly impact the amounts provided for income taxes in our condensed consolidated financial statements.and Nine Months Ended August 31,February 29, 2008 and March 2, 2007 and September 1, 2006 2008 2007 Percent
Change Product $ 852.0 $ 620.3 37 % Percentage of total revenue 96 % 96 % Services and support 38.4 29.1 32 % Percentage of total revenue 4 % 4 % Total revenue $ 890.4 $ 649.4 1316 of our Notes to Condensed Consolidated Financial Statements, we have the following segments: Creative Solutions, Knowledge Worker Solutions, Enterprise and Developer Solutions, Mobile and Device Solutions, Platform and Other, which includes the Print and Classic Publishing and Platform segments.products.Enterpriseenterprise, developer and Developer Solutions and Mobile and Device Solutionsplatform products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. Our consulting revenue is recognized using the proportionate performance method and is measured monthly based on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. 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. 2008 2007 Percent
Change Creative Solutions $ 543.5 $ 346.4 57 % Percentage of total revenue 61 % 53 % Knowledge Worker Solutions 195.5 174.8 12 % Percentage of total revenue 22 % 27 % Enterprise Solutions 54.2 42.5 28 % Percentage of total revenue 6 % 7 % Mobile and Device Solutions 15.2 13.7 11 % Percentage of total revenue 2 % 2 % Platform 28.1 15.8 78 % Percentage of total revenue 3 % 2 % Print Publishing 53.9 56.2 (4 )% Percentage of total revenue 6 % 9 % Total Revenue $ 890.4 $ 649.4 * Percentage is not meaningful.** Other includes revenue related to the Print and Classic Publishing segment of $47.0 million and $152.0 million for the three and nine months ended August 31, 2007, respectively, or 6% and 7%, respectively, of revenues. For the three and nine months ended September 1, 2006, Other includes revenue related to the Print and Classic Publishing segment of $52.5 million and $152.7 million, respectively, or 9% and 8% of revenues. Also included in Other segment revenue, in fiscal 2007 and 2006, is revenue related to our Platform segment.our Creative Solutions segment increased during the three and nine months ended August 31, 2007February 29, 2008 as compared to the three and nine months ended September 1, 2006March 2, 2007 primarily due to the launch of the English versionsongoing success of our CS3 family of products which first shipped in the second quarter of fiscal 2007 and the release of localized versions of our CS3 family of products during the third quarter of fiscal 2007. our Knowledge Worker Solutions segment increased during the three and nine months ended August 31, 2007February 29, 2008 as compared to the three and nine months ended September 1, 2006March 2, 2007 primarily due to an increase in the licensing of our new Acrobat 8 family of products.our Enterprise and Developer Solutions segment increased during the three and nine months ended August 31, 2007February 29, 2008 as compared to the three and nine months ended September 1, 2006March 2, 2007 primarily due to continued adoption of our LiveCycle family of products. our Mobile and Device Solutions segment increased during the three and nine months ended August 31, 2007February 29, 2008 as compared to the three and nine months ended September 1, 2006,March 2, 2007, primarily due to strong shipments of hand-held units and continued adoption of our Flash Lite by mobile and non-PC device manufacturers, andmanufacturers.Cast solutions by mobile operators.Player, Reader and ColdFusion products.our Other segmentPrint Publishing decreased during the three months ended August 31, 2007 and was relatively stable for the nine months ended August 31, 2007February 29, 2008 as compared to the three and nine months ended September 1, 2006. The decrease wasMarch 2, 2007, primarily due to lower revenue with some of our legacysustaining products, offset in part by increases in our Print and Classic Publishing segment due to the timing of the release of new product versions.Technical Communications Suite. 2008 2007 Percent Change Americas $ 396.9 $ 298.3 33 % Percentage of total revenue 45 % 46 % EMEA 323.9 215.7 50 % Percentage of total revenue 36 % 33 % Asia 169.6 135.4 25 % Percentage of total revenue 19 % 21 % Total revenue $ 890.4 $ 649.4 revenues in each of the geographic segmentsrevenue for the three and nine months ended August 31, 2007February 29, 2008 increased when compared to the three and nine months ended September 1, 2006March 2, 2007 primarily due to the launch of the English versionscontinued adoption of our CS3 family of products, in the second quarterstrong adoption of fiscal 2007, the release of the localized versions of our CS3 family of products during the third quarter of fiscal 2007Acrobat, LiveCycle and success with our Acrobat 8 family ofmobile products.and nine months ended August 31, 2007February 29, 2008 compared to the three and nine months ended September 1, 2006March 2, 2007 primarily due to the launch of the English versionsongoing success of our CS3 family of products during the second quarter of fiscal 2007 and increased revenue from the Acrobat 8 familyfamilies of products. Revenue in the Americas also increased in the Knowledge Worker Solutions, Mobile and Device Solutions and Platform products, due to higher sales volumes.and nine months ended August 31, 2007February 29, 2008 compared to the three and nine months ended September 1, 2006March 2, 2007 due to the release of localized versions ofsolid demand in all our CS3 family of products and increases inmajor product categories. Additionally, revenue from the Acrobat Pro products. Additionally, revenues in EMEA measured in U.S. dollars increased approximately $13.8 million and $42.5$25.4 million during the three and nine months ended August 31, 2007, respectively,February 29, 2008 over the same reporting periodsperiod last year due to the strength of the euroEuro over the U.S. dollar.and nine months ended August 31, 2007February 29, 2008 compared to the three and nine months ended September 1, 2006March 2, 2007 due to the release of localized version of our CS3 family of products.solid demand. Additionally, revenuesrevenue in Asia measured in U.S. dollars decreasedincreased approximately $2.7 million and $2.6$6.5 million during the three and nine months ended August 31, 2007, respectively,February 29, 2008 over the same reporting periodsperiod last year due to the strength of the U.S. dollarYen over the yen.U.S. dollar.Inventory InformationAt the end of the third quarter of fiscal 2007 our distributor inventory position was within our global inventory policy which allows up to an estimated 4.5 weeks of anticipated product supply at our distributors. our experience is that the actual amount of backlog at any particular time may not be a meaningful indicator of future business prospects. For example, prior to the finalization and release of new products, we may have significant levels of orders for new product releases. Our backlog of unfulfilled orders at the end of the thirdfirst quarter of fiscal 2007,2008, other than those associated with new product releases, those pending credit review and those not shipped due to the application of our global inventory policy, was approximately 6%5% of thirdfirst quarter fiscal 20072008 revenue. The comparable backlog at the end of the secondfourth quarter of fiscal 2007 was approximately 1%7% of the secondfourth quarter of fiscal 2007 revenue.and Nine Months Ended August 31,February 29, 2008 and March 2, 2007 and September 1, 2006 2008 2007 Percent Change Product $ 59.8 $ 53.8 11 % Percentage of total revenue 7 % 8 % Services and support 22.7 18.5 23 % Percentage of total revenue 3 % 3 % Total cost of revenue $ 82.5 $ 72.3
2006 to 2007
QTD
2006 to 2007
YTD% Change
2007 to 2008
QTDIncreased localization costs related to our product launches 15 % Increased royalties for licensed technologies 4 Increased excess and obsolete inventory 2 Decreased material costs due to product mix (2 ) Decreased amortization of purchased technology (11 ) Various individually insignificant items 3 Total change 11 % thirdfirst quarter of fiscal 20072008 as compared to the thirdfirst quarter of fiscal 2006,2007, primarily due to the release of the localized versions of our CS3 family of products.products beginning in the second quarter of fiscal 2007.thirdfirst quarter of fiscal 2008 as compared to the first quarter of fiscal 2007, as compared to the third quarter of fiscal 2006, due to thea decrease in the Macromedia purchased technology amortization.amortization expense associated with Macromedia.composed primarily comprised of employee-related costs and associated costs incurred to provide consulting services, training and product support.and nine months ended August 31, 2007February 29, 2008 as compared to the three and nine months ended September 1, 2006,March 2, 2007, due to increases in compensation and related benefits primarily as a result of headcount increases.headcount to support our product launches and increases in incentive compensation related toexpense for profit sharing and employee bonuses based on company performance to date.Operating Expenses fordate, when compared to the Three and Nine Months Ended August 31,three months ended March 2, 2007 and September 1, 2006(ii) increased headcount in all functions. 2008 2007 Percent
Change Expenses $ 168.5 $ 137.1 23 % Percentage of total revenue 19 % 21 %
2006 to 2007
QTD
2006 to 2007
YTD% Change
2007 to 2008
QTDIncreased compensation and related benefits associated with headcount growth 10 % Increased compensation associated with higher incentive compensation and stock-based compensation 8 Increased depreciation and amortization 1 Increased facility costs 1 Various individually insignificant items 3 Total change 23 % The increase in the higher incentive compensation for the three months ended August 31, 2007 relates to higher expense for profit sharing and employee bonuses based on company performance to date. 2008 2007 Percent
Change Expenses $ 262.6 $ 214.7 22 % Percentage of total revenue 29 % 33 % includeof 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.
2006 to 2007
QTD
2006 to 2007
YTD
growth% Change
2007 to 2008
QTDIncreased compensation associated with higher incentive compensation and stock- based compensation 9 % Increased marketing spending related to product launches and overall marketing efforts to further increase revenue 6 Increased compensation and related benefits associated with headcount growth 5 Increased facility costs 2 Total change 22 % 2008 2007 Percent
Change Expenses $ 82.9 $ 61.3 35 % Percentage of total revenue 9 % 9 %
2006 to 2007
QTD
2006 to 2007
YTD% Change
2007 to 2008
QTDIncreased compensation associated with higher incentive compensation and stock- based compensation 14 % Increased charitable contributions 12 Increased compensation and related benefits associated with headcount growth 4 Increased professional and consulting fees 2 Increased depreciation and amortization 1 Various individually insignificant items 2 Total change 35 % 2008 2007 Percent
ChangeExpenses $ 1.4 $ — * Percentage of total revenue * * The increase in the higher incentive compensation forDuring the three months ended August 31, 2007 relatesFebruary 29, 2008, there was an adjustment to higher expense for profit sharing and employee bonuses based on company performance to date.* Percentage is not meaningful.29In the first quarter of fiscal 2006, pursuant to Board of Directors’ approval, we implemented a restructuring plan to eliminate 313 positions held by Adobe employees worldwide and which impacted all functional areas. The reduction in force was completed in fiscal 2006. The restructuring plan also includes costs related to the world-wide consolidation ofprevious estimates associated with closing redundant facilities the cancellation of certain contracts and the write-off of fixed assets located at facilities that will be vacated.Asas a result of acquiringthe Macromedia we acquired purchased intangibles which will be amortized over their estimated useful livesacquisition. We have an $18.0 million liability for restructuring as of twoFebruary 29, 2008 associated with the Macromedia restructured facilities. We expect to four years. In addition, during the second quarterpay this liability through fiscal 2011.fiscal 2007, we acquired $12.9 million of purchased intangibles which will be amortized over their estimated useful lives.Purchased Intangibles 2008 2007 Percent
Change Expenses $ 17.1 $ 17.7 (3 )% Percentage of total revenue. 2 % 3 % Included in the amortization of purchased intangibles for the nine months ended August 31, 2007, is $1.5 million related to in process research and development from the acquisition that occurred during the second quarter of fiscal 2007.and Nine Months Ended August 31,February 29, 2008 and March 2, 2007 and September 1, 2006 2008 2007 Percent
Change Interest and other income, net $ 13.3 $ 22.5 (41 )% Percentage of total revenue 1 % 3 % Interest expense (1.8 ) — * Percentage of total revenue * * Investment gains, net 8.7 5.6 55 % Percentage of total revenue 1 % 1 % Total non-operating income $ 20.2 $ 28.1 Gain (Loss),Gains, netgain (loss),gains, net, consists principally of realized gains or losses from the sale of marketable equity investments, other-than-temporary declines in the value of marketable and non-marketable equity securities and gains and losses of Adobe Ventures. In the three months ended August 31, 2007,February 29, 2008, investment loss,gains, net, decreasedincreased as compared to the three months ended September 1, 2006March 2, 2007 due to a decline in the level of investment impairments recorded in the thirdfirst quarter of fiscal 2006. In2007 that did not recur in the nine months ended August 31, 2007, investment gain, net increased due to the gain on salefirst quarter of a marketable equity investment.Interest and Other IncomeThe largest component of interest and other income is interest earned on cash, cash equivalents and short-term fixed income investments, but also includes gains and losses on the sale of fixed income investments, foreign exchange transaction and hedging gains and losses, and interest expense.Interest and other income increased during the three months ended August 31, 2007 as compared to the three months ended September 1, 2006 due to higher rates of return. For the nine months ended August 31, 2007 as compared to the nine months ended September 1, 2006, interest and other income increased as a result of increased levels of invested cash balances and higher rates of return.fiscal 2008.and Nine Months Ended August 31,February 29, 2008 and March 2, 2007 and September 1, 2006 Three Months Percent
Change 2008 2007 Provision $ 76.3 $ 30.6 149 % Percentage of total revenue 9 % 5 % Effective tax rate 25.8 % 17.5 % 3% in8% during the three months ended August 31, 2007 asfirst quarter of fiscal 2008 compared to the three months ended September 1, 2006. Thefirst quarter of fiscal 2007. There was an increase is primarily dueof approximately 6% related to the incomea one time tax effects associated with reductions in estimated tax exempt interest income, changes in estimated taxable income in the U.S., and a fiscal 2006 revision of estimates of certain tax credits that we were entitled to claim on our income tax returns.Our effective tax rate decreased approximately 1% during the nine months ended August 31, 2007 as compared to the nine months ended September 1, 2006. The decrease is primarily due tobenefit for the reinstatement of the federalU.S. research and development tax credit in December 2006. The reinstatement of the credit was retroactive to January 1, 2006. A $12.3 million cumulative tax benefit for the credit relating to fiscal 2006that was reflected in its entirety in the first quarter of fiscal 2007.2007, an increase of approximately 1% related to the expiration of the U.S. research and development tax credit on December 31, 2007 and an increase of approximately 1% due to reductions in estimated tax exempt interest income for fiscal 2008.
LIQUIDITY AND CAPITAL RESOURCES
2007
2006
Change February 29,
2008 November 30,
2007Cash, cash equivalents and short-term investments $ 1,715.2 $ 1,993.9 Working capital $ 1,556.7 $ 1,720.6 Stockholders' equity $ 3,814.2 $ 4,650.0
2007
2006
Change February 29,
2008 March 2,
2007 $ 399.3 $ 271.1 Net cash provided by (used for) investing activities 328.8 (310.4 ) (646.5 ) (205.9 ) 4.7 (1.3 ) Net increase (decrease) in cash and cash equivalents $ 86.3 $ (246.5 ) employee stock purchase planESPP and another use of cash is our stock repurchase program, which is detailed below.$1.0 billion$399.3 million for the ninethree months ended August 31, 2007,February 29, 2008, was primarily comprised of net income, plus the net effect of non-cash related expenses. The primary working capital sources of cash were increases in net income, decreases in trade receivables and increases in deferred revenue, income taxes payable trade payables and accrued expenses.deferred revenue. The decrease in accounts receivable was due to strong collections in the first quarter of fiscal 2007 that were related2008. Our days sales outstanding in trade receivables was 30 days for the first quarter of fiscal 2008. The increase in income taxes payable relates primarily to the high Acrobat 8 sales athigher income tax provision in the endfirst quarter of fiscal 2006. In addition, during2008 compared to the thirdfirst quarter of fiscal 2007 there were strong collectionsand the net effect of accounts receivable resulting from shipments of our CS3 family of products. Our days sales outstanding intrade receivables (“DSO”) was 28 days for the third quarter of fiscal 2007. Net changes in accrued expenses is attributable primarily to increases in accrued bonuses. Increases to deferred revenue relaterelated to the Lightroom products and maintenance and support, on Enterprise license transactions, whereoffset in part by decreases in deferred revenue is being recognized on a ratable basis in addition to other increases related to royalty revenue.for our Education products and Adobe Photoshop Lightroom.assetsassets. Accrued expenses decreased primarily due to payments for employee bonuses and commissions and a reduction in the employee stock purchase accrual because of the January 2008 ESPP purchase, offset in part by an increase in charitable contributions to the Adobe Foundation. Accrued restructuring decreased primarily due to payments of accrued restructuring costs.for facility costs for the three months ended February 29, 2008. Outlays for prepaid expenses and other current assets were primarily for payments made for tradeshows and prepaid payroll expenses offset in part by restricted cash proceeds and normal amortization for insurance premiums. Accrued restructuring decreased primarily due to payments for facility and severance costs for the nine months ended August 31, 2007.which include employee benefits.decreasedincreased from cash used for the three months ended March 2, 2007 of $310.4 million to cash provided for the ninethree months ended September 1, 2006February 29, 2008 of $338.6 million to cash used for the nine months ended August 31, 2007 of $213.3$328.8 million. In the first nine months ended September 1, 2006, net cash acquired with the Macromedia acquisition amounted to $488.4 million for which no similar transaction of this magnitude occurred during the first nine months ended August 31, 2007. UsesSources of cash during the first ninethree months ended August 31, 2007 include purchasesFebruary 29, 2008 primarily represented maturities and sales of property and equipment, purchases of long-termshort-term investments and other assets which relate primarily to a lesser extent, proceeds from the technology licensing arrangements that occurred during the second quartersale of fiscal 2007 and two acquisitions completed in 2007. Usesequity securities. Sources of cash for purchases of short-term investments were offset in part by maturities and salespurchases of short-term investments. Additionally, as part of our lease extension for the Almaden Tower lease completed during the second fiscal quarter of 2007, we purchased a portion of the lease receivable totaling $80.4 million. investments, property and equipment and long-term investments and other assets.See Note 11 of our Notes to Condensed Consolidated Financial Statements for further information regarding this lease extension.Cash flows from financing activities$315.4$440.6 million for a total of approximately $1.0 billion$646.5 million in the ninethree months ended August 31, 2007February 29, 2008 as compared to cash used for the same period last year, primarily due to increased purchases of treasury stock when compared to the prior year.(See sections titled “Stockentitled "Stock Repurchase Program II" and Stock"Stock Repurchase Program II”)II" discussed below). Cash used during the ninethree months ended August 31,February 29, 2008 was partially offset by $450.0 million of proceeds from borrowings under our credit facility and the issuance of the treasury stock. Cash used during the three months ended March 2, 2007 and 2006 werewas partially offset by the proceeds related to the issuance of the treasury stock.$15.0$19.7 million has already been spent. The remaining balance will be invested over the next three to five years.20072008 in the event of a weakening of the economy or changes in our planned cash outlay. However, based on our current business plan and revenue prospects, we believe that our existing balances, together with our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part II, Item 1A titled “Risk Factors.”"Risk Factors". During the third quarter of fiscal 2007, we also increased our existing $500.0 million credit facility to $1.0 billion. ThisThe purpose of the credit facility will be usedis to provide backup liquidity for general corporate purposes. Also,purposes including stock repurchases. In January 2008, we believe thatdrew down $450.0 million under this facility, of which the total amount is outstanding as of February 29, 2008 and is included in long-term liabilities on our banking relationships and good credit should afford us the opportunity to raise additional capital in the bank or public market, if required.condensed consolidated balance sheet.Adobe uses We use professional investment management firms to manage most of our invested cash. External investment firms managed, on average, 73%53% of Adobe’sour consolidated invested balances during the thirdfirst quarter of fiscal 2007.2008. Within the U.S., the fixed income portfolio is invested primarily invested in municipal bonds.money market funds for workingTreasury notes and highly rated corporate notes. The balance of the fixed income portfolio is managed internally and invested primarily in money market and enhanced money market funds for working capital purposes. As of August 31, 2007, $340.7 million of the securities now classified as short-term investments have structural features that allow us to sell the securities at par within 90 days and thus retain similar liquidity characteristics as cash equivalents.treasury securities. All investments are made according to policies approved by the Board of Directors.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 enter into structured stock repurchase agreements with third parties.Authorization to repurchase shares to cover on-going dilution 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. Refer to Part II, Item 2(c) in this report for share repurchases during the quarter ended August 31, 2007.ninethree months of fiscal 2007ended February 29, 2008, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $600.0$150.0 million. We entered into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”("VWAP") of our common stock.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.August 31, 2007February 29, 2008 are excluded from the denominator in the computation of earnings per share. All outstanding structured repurchase agreements as of August 31, 2007February 29, 2008 under this program will expire on or before December 21, 2007.June 19, 2008. As of August 31, 2007February 29, 2008 approximately $200.0$325.8 million of up-front payments remained under the agreements. During the ninethree months of fiscal 2007,ended February 29, 2008, we repurchased 15.46.7 million shares at an average price per share of $39.23$36.78 through structured repurchase agreements which included prepayments from fiscal 2006.2007.In September 2007, Subsequent to February 29, 2008, we entered into additional structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with prepayments of $500.0$100.0 million. The $500.0$100.0 million will be classified as treasury stock on our balance sheet.See Note 8Notes 10 and Note 1417 of our Notes to Condensed Consolidated Financial Statements for further information regarding our structured stock repurchase agreements.In April 2007, we announced that our Board of Directors authorized a new Under this stock repurchase program. Under the new program, which is not subject to expiration, we are authorized to repurchase in aggregate up to 20.050.0 million shares of our common stock. ThisFrom the inception of this program, is in addition to our existing stock repurchase program to offset dilution from employee stock programs. As of August 31, 2007, we hadhave repurchased 44.3 million shares and provided prepayments of $850.0 million$1.85 billion under structured share repurchase agreements to large financial institutionsunder this program. Asinstitutions. During the first quarter of August 31, 2007,fiscal 2008, we provided prepayments of $1.0 billion and repurchased 12.926.6 million shares throughunder these structured share repurchase agreements at an average price per share of $39.94 and$37.56. As of February 29, 2008, approximately $333.4$133.3 million of up-front payments remained under these agreements. All outstanding structured repurchase agreements as of August 31, 2007February 29, 2008 under this program will expire on or before April 24, 2008. There were no prepayments under this program as of March 18, 2008.2, 2007.August 31, 2007February 29, 2008 consist of obligations under operating leases, royalty agreements and various service agreements.See Note 1113 of our Notes to Condensed Consolidated Financial Statements for more detailed information.The two Two of our lease agreements discussed in Note 1113 of our Notes to Condensed Consolidated Financial Statements are subject to standard financial covenants. As of August 31, 2007,February 29, 2008, we were in compliance with all of our financial covenants. Wecovenants and we expect to remain in compliance during the next 12 months. We are comfortable withbelieve these limitations and believe they will not impact our cashcredit or creditcash in the coming fiscal year or restrict our ability to execute our business plan.extended East and West Towers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the leases. As of August 31, 2007,February 29, 2008, the unamortized portion of the fair value of the residual value guarantees remaining in other long-term liabilities and prepaid rent was $4.6$3.8 million.officersdirectors and directorsofficers for certain events or occurrences while the officerdirector or directorofficer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’sdirector's or director’sofficer'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.interestsinterest 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 partnerships.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.and nine months ended August 31, 2007.February 29, 2008.August 31, 2007,February 29, 2008, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC's rules and Form 10-Q,regulations, and were also effective to ensure that information required to be disclosed by us in this quarterly report on Form 10-Q was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.controlscontrol over financial reporting during the quarter ended August 31, 2007February 29, 2008 that have materially affected, or are reasonably likely to materially affect our internal controlscontrol over financial reporting.On October 13, 2006, a purported shareholder derivative action entitled Steven Staehr v. Bruce R. Chizen, et al was filed in the Superior Court of California for the County of Santa Clara against certain of the Company’s current and former officers and directors, and against Adobe as a nominal defendant. The complaint asserts that stock option grants to executives were priced retroactively by Adobe and were improperly accounted for, and alleges various causes of action based on that assertion. The complaint seeks payment by the defendants to Adobe of damages allegedly suffered by it and disgorgement of profits, as well as injunctive relief. As of August 31, 2007, we do not believe that a loss is probable or estimable.In connection withSee Note 13 "Commitments and Contingencies" of our anti-piracy efforts, conducted both internally and through organizations such as the Business Software Alliance, from timeNotes 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 thatCondensed Consolidated Financial Statements regarding our consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of these counter-claims.From time to time, in addition to those identified above, Adobe is subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with U.S. generally accepted accounting principles, Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be affected by the resolution of one or more of such contingencies.proceedings. We cannot determine the ultimate effect these delays or the introductionor upgrades will have on our revenue or results of operations.Introduction of new productsand business models by existing and new competitors could harm our competitive position and results of operations. end markets for our software products are intenselycharacterized by intense competition, evolving industry standards and increasingly competitive,business models, rapid software and are significantly affected byhardware technology developments and frequent new product introductionsintroductions. Our future success will depend on our ability to enhance our existing products, introduce new products on a timely and market activities of industry competitors, including Microsoft’scost-effective basis, meet changing customer needs, extend our core technology into new applications, and anticipate and respond to emerging standards, business models and other technological changes. For example, Microsoft Windows Vista operating system which contains a new fixed document format, XPS, which competes with Adobe PDF, and its introduction ofMicrosoft Office 122007, which offers a feature to save Microsoft Office documents as PDF files through a freely distributed plug-in, which competes with Adobe PDF creation. Microsoft also has an Expression line ofStudio competes with our Adobe Creative Suite products targeted at designers and recently introducedMicrosoft Silverlight, a web development tool for rich internet applications, which competes with Adobe Flash and Adobe Flex. In addition, competitors,companies, such as Google and Microsoft, may introduce competing software offerings for free to support advertising models, or “open source”"open source" vendors may introduce competitive products. For example, Microsoft recently made available Microsoft Expression Studio free of charge to students. If these competing products achieve widespread acceptance, our operating results could suffer. In addition, consolidation has occurred among some of the competitors in our markets. Any further consolidations among our competitors may result in stronger competitors and may therefore harm our results of operations. For additional information regarding our competition and the risks arising out of the competitive environment in which we operate, see the section entitled “Competition”"Competition" contained in Item 1 of our Annual Report on Form 10-K/A10-K for fiscal 2006.2007.and the mobile and device markets.markets and software as service offerings. In the enterprise and government markets, we intend to increase our focus on vertical markets such as education, financial services, manufacturing, and the architecture, engineering and construction markets. With our Adobe Acrobat Connect product line, we intend to increase awareness in targetedmarkets and horizontal markets such as training and marketing.scaleablescalable organization. Many of our competitors may have advantages over us due to their larger presence, larger developer network, deeper experience in the enterprise and government markets and the mobile and device markets, and greater sales and marketing resources. In the mobile and device markets, our intent is to license our technology topersuade device makers, manufacturers and telecommunications carriers thatto embed our technology on their platforms, and in the enterprise and government market our intent is to form strategic alliances with leading enterprise and government solutions and service providers to provide additional resources to further enable penetration of such markets. If we are unable to successfully enter into strategic alliances with device makers, manufacturers, telecommunication carriers and leading enterprise and government solutions and service providers, or if they are not as productive as we anticipate, our market penetration may not proceed as rapidly as we anticipate and our results of operations could be negatively impacted. Another development is the software-as-a-servicesoftware as a service business model, by which companies provide applications, data and related services over the Internet. Providers use primarily advertising or subscription-based revenue models. Recent advances in computing and communications technologies have made this model viable and could enable the rapid growth of some of our competitors. We are exploring the deployment of our own software-as-a-servicesoftware as a service strategies, but may not be able to develop the infrastructure and business models as quickly as our competitors. It is uncertain whether these strategies will prove successful. Additionally, customer requirements for “open standards” or “open source” products could impact adoption or use with respectfrom time to sometime we "open source" certain of our products.Adversetechnology initiatives and release selected technology for industry standardization. These changes in general economic or political conditions in any of the major countries in whichmay make it easier for our competitors to produce products similar to ours, and if we doare unable to respond to these competitive threats, our business could adversely affect our operating results.be harmed.If the economy worsens in any geographic areas where we do business, it would likely cause our future results to vary materially from our targets. A slower economy also may adversely affect our ability to grow.Political instability in any of the major countries in which we do business also may adversely affect our business.Revenues 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 revenues and revenue may decline quicker than anticipated. Additionally, we intend to expand the use of our Mobile and Device Solutions by licensing our products for use in mobile phones, set-top boxes, game devices, personal digital assistants, hand-held computers and other consumer electronic devices. We have a limited history of licensing products in these markets and in the enterprise market and may experience a number of factors that will make our revenue less predictable, including longer than expected sales and implementation cycles, potential deferral of revenue due to multiple-element revenue arrangements and alternate licensing arrangements.and upgrade versions of our current products in connection with our transition to new business models. Market acceptance of ourthese new product or version releasesand service offerings will be dependent on our ability to include functionality and usability in such releases that address the requirements of customer demographics with which we have limited prior experience. To the extent we incorrectly estimate customer requirements for such products and version releasesor services or if there is a delay in market acceptance of such products and version releases,or services, our business could be harmed. Additionally, customer requirements for "open standards" or "open source" products could impact adoption or use with respect to some of our products.Creative Solutions and Knowledge Worker Solutionsdesktop application-based products primarily on Windows and Macintosh platforms and on some UNIX platforms. We generally offer our server-based products, but not desktop application products on the Linux platform as well as the Windows and UNIX platforms. To the extent that there is a slowdown of customer purchases of personal computers on either the Windows or Macintosh platform or in general, or to the extent that significant demand arises for our products or competitive products on the Linux desktop platform before we choose and are able to offer our products on this platform, our business could be harmed. Additionally, to the extent that we have difficulty transitioning product or version releases to new Windows and Macintosh operating systems, or to the extent new releases of operating systems or other third party products make it more difficult for our products to perform, our business could be harmed.less favorableunfavorable terms, prevent us from manufacturing or licensing certain of our products, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements any onearrangements. Any of whichthese could seriously harm our business.code (the “detailed program commands for our software programs”).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.·····company’scompany's accounting, management information, human resources and other administrative systems;······withincluding but not limited to, product quality, architecture and development, or legal and financial contingencies, among other things;·contingencies;···offeringsofferings.anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition or results of operations. primarily through distributors, resellers, retailers and increasingly systems integrators, ISVs and VARs (collectively referred to as “distributors”"distributors"). A significant amount of our revenue for application products is from two distributors, Ingram Micro, Inc. and Tech Data Corporation.Corporation which represented 18% and 9% of our net revenue for the first quarter of fiscal 2008, respectively. In addition, our channel program focuses our efforts on larger distributors, which has resulted in our dependence on a relatively small number of distributors licensing a large amount of our products. Our distributors also sell our competitors’competitors' products, and if they favor our competitors’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. In addition, the financial health of these distributors and our continuing relationships with them are important to our success. Some of these distributors may be unable to withstand adverse changes in business conditions. Our business could be seriously harmed if the financial condition of some of these distributors substantially weakens.customers’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.revenuesrevenue and operating results for a particular period are difficult to predict. Our revenuesrevenue may grow at a slower rate than experienced in previous periods and, in particular periods, may decline. Additionally, we periodically provide operating model targets. These targets reflect a number of assumptions, including assumptions about product pricing and demand, economic and seasonal trends, competitive factors, manufacturing costs and volumes, the mix of shrink-wrap and licensing revenue, full and upgrade products, distribution channels and geographic markets. If one or more of these assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated or projected.analysts’analysts' or investors’investors' expectations have caused, and could cause in the future, an immediate and significant decline in the trading price of our common stock. Additionally, we may not learn of such shortfalls or delays until late in, or after the end of, the fiscal quarter, which could result in an even more immediate and greater decline in the trading price of our common stock. Finally, we participate in a highly dynamic industry. In addition to factors specific to us, changes in analysts’analysts' earnings estimates for us or our industry, and factors affecting the corporate environment, our industry, or the securities markets in general, have resulted, and may in the future result, in volatility of our common stock price.approximatelyover 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 (i) including:fluctuations, (ii) fluctuations;procurement, (iii) procurement;conditions, (iv) conditions;requirements, (v) requirements;infrastructure, (vi) infrastructure;restrictions, (vii) restrictions;delays, (viii) delays;laws,laws; andyenYen and the euro.Euro. We regularly review our hedging program and will make adjustments as necessary based on the judgment factors discussed above. Our hedging activities may not offset more than a portion of the adverseadverse financial impact resulting from unfavorable movement in foreign currency exchange rates, which could adversely affect our financial condition or results of operations.conformityaccordance with U.S. generally accepted accounting principles.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:····goodwillgoodwill.In particular, For example, in the first quarter of fiscal 2006, we adopted StatementStatements of Financial Accounting Standards ("SFAS") No. 123—revised 2004 (“123 (revised 2004) ("SFAS 123R”123R"), “Share-Based Payment”"Share-Based Payment" which requires the measurement of all stock-based compensation to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. The adoption of SFAS 123R has had, and will continue to have, a significant adverse effect on our reported financial results. It will continuesignificantly adversely affectboth assets and liabilities in our reported financialcondensed consolidated balance sheet as of the beginning of fiscal 2008 and may have an adverse effect on our future operating results and may impact the way in which we conduct our business.financial position.generally accepted accounting principles,GAAP, we review our 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. In particular,For example, our Mobile and Device Solutions segment, which primarily consists of assets acquired in the Macromedia acquisition, is in an emerging market with high growth potential. Revenues areRevenue is based on the introduction of new products and future royalties. If future revenuesrevenue or revenue forecasts for this segment do not meet our expectations, we will be required to record a charge to earnings reflecting an impairment of this recorded goodwill or intangible assets.tax laws or the interpretation of, tax laws,rules and regulations, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes in the valuation of our deferred tax assets and liabilities.the majoritymany of our employees are located. We have relied on our ability to grant equity compensation as one mechanism for recruiting and retaining such highly skilled personnel. Recently enacted accounting regulations requiring the expensing of equity compensation may impair our ability to provide these incentives without incurring significant compensation costs. If we are unable to continue to successfully attract and retain key personnel, our business may be harmed.privately heldprivately-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.43(c) Below is a summary of stock repurchases for the quarter ended August 31, 2007. February 29, 2008.See Note 8Notes 10 and 17 of our Notes to Condensed Consolidated Financial Statements for information regarding our stock repurchase programs.Plan/Period(1) Shares
Repurchased(2) Average
Price Per
Share Maximum Number
of Shares that May
Yet Be Purchased
Under the Plan Stock Repurchase Program I
Beginning shares available to be repurchased as of November 30, 2007
153,555,036
(3)
December 1—December 28, 2007
Structured repurchases
2,167,119
$
41.09
December 29, 2007—January 25, 2008
From employees(4)
560
$
37.90
Structured repurchases
1,434,033
$
38.28
January 26—February 29, 2008
From employees(4)
31
$
35.09
Structured repurchases
3,110,197
$
33.09
Adjustments to repurchase authority for net dilution
—
(196,016)
(5)
Total shares repurchased
6,711,940
(6,711,940
)
Ending shares available to be repurchased under Program I as of February 29, 2008
146,647,080
(6)
Stock Repurchase Program II
Beginning shares available to be repurchased as of November 30, 2007
32,315,623
December 1—December 28, 2007
Structured repurchases
820,560
$
40.62
December 29, 2007—January 25, 2008
Structured repurchases
12,992,044
$
39.54
January 26—February 29, 2008
Structured repurchases
12,825,242
$
35.35
Total shares repurchased
26,637,846
(26,637,846
)
Ending shares available to be repurchased under Program II as of February 29, 2008
5,677,777
Period
Repurchased (1)
Price Per
Share
of Shares that May
Yet Be Purchased
Under the Plan(1)(2)(2)(3)(3)(4)(4)(5)(5)(6)Attached as Exhibit 100 to this Quarterly Report on Form 10-Q are the following materials, formatted in Extensible Business Reporting Language (“XBRL”): the information contained in Item 1 of Part I, (i) the Consolidated Balance Sheets at August 31, 2007 and December 1, 2006, (ii) the Consolidated Statements of Income for the three and nine months ended August 31, 2007 and September 1, 2006 and (iii) the Consolidated Statements of Cash Flows for the nine months ended August 31, 2007 and September 1, 2006 and information contained in Item 2 of Part I. The financial information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of the Registrant. The purpose of submitting these XBRL documents is to test the related format and technology and, as a result, investors should continue to rely on the official filed version of the furnished documents and not rely on this information in making investment decisions. None.The information in Exhibit 100 attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of any general incorporation language in such filing.45 Incorporated by Reference** Exhibit
Number Filed
Herewith Exhibit Description Form Date Number 3.1 Amended and Restated Bylaws 8-K 1/15/08 3.1
3.2
Restated Certificate of Incorporation of Adobe Systems Incorporated
10-Q
7/16/01
3.6
3.2.1
Certificate of Correction of Restated Certificate of Incorporation of Adobe Systems Incorporated
10-Q
4/11/03
3.6.1
3.3
Certificate of Designation of Series A Preferred Stock of Adobe Systems Incorporated
10-Q
7/08/03
3.3
4.1
Fourth Amended and Restated Rights Agreement between Adobe Systems Incorporated and Computershare Investor Services, LLC
8-K
7/03/00
1
4.1.1
Amendment No. 1 to Fourth Amended and Restated Rights Agreement between Adobe Systems Incorporated and Computershare Investor Services, LLC
8-A/2G/A
5/23/03
7
10.1
1984 Stock Option Plan, as amended*
10-Q
7/02/93
10.1.6
10.2
Amended 1994 Performance and Restricted Stock Plan*
X
10.3
Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan*
10-Q
10/07/04
10.3
10.4
1994 Stock Option Plan, as amended*
S-8
5/30/97
10.40
10.5
1997 Employee Stock Purchase Plan, as amended*
10-K
1/24/08
10.5
10.6
1996 Outside Directors Stock Option Plan, as amended*
10-Q
4/12/06
10.6
10.7
Forms of Stock Option Agreements used in connection with the 1996 Outside Directors Stock Option Plan*
S-8
6/16/00
4.8
10.8
1999 Nonstatutory Stock Option Plan, as amended*
S-8
10/29/01
4.6
10.9
1999 Equity Incentive Plan, as amended*
10-K
2/26/03
10.37
10.10
2003 Equity Incentive Plan, as amended and restated*
DEF 14A
2/27/08
Appendix A
10.11
Form of Stock Option Agreement used in connection with the 2003 Equity Incentive Plan*
X
10.12
Form of Indemnity Agreement*
10-Q
5/30/97
10.25.1
10.13
Forms of Retention Agreement*
10-K
11/28/97
10.44
10.14
Second Amended and Restated Master Lease of Land and Improvements by and between SMBC Leasing and Finance, Inc. and Adobe Systems Incorporated
10-Q
10/07/04
10.14
10.15
Lease between Adobe Systems Incorporated and Selco Service Corporation, dated March 26, 2007
8-K
3/28/07
10.1
10.16
Participation Agreement among Adobe Systems Incorporated, Selco Service Corporation, et al. dated March 26, 2007
8-K
3/28/07
10.2
10.17
Lease Agreement by and between Allaire Corporation and EOP Riverside Project LLC dated November 23, 1999
10-K
3/30/00
10.23
10.18
First Amendment to Lease Agreement by and between Allaire Corporation and EOP Riverside Project LLC dated May 31, 2000
10-Q
8/14/00
10.3
10.19
Form of Restricted Stock Unit Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan*
X
10.20
Form of Restricted Stock Unit Agreement used in connection with the 2003 Equity Incentive Plan*
X
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*
X
10.24
Form of Stock Option Agreement used in connection with the 2005 Equity Incentive Assumption Plan*
X
10.25
Allaire Corporation 1997 Stock Incentive Plan*
S-8
03/27/01
4.06
10.26
Allaire Corporation 1998 Stock Incentive Plan*
S-8
03/27/01
4.07
10.27
Allaire Corporation 2000 Stock Incentive Plan*
S-8
03/27/01
4.08
10.28
Andromedia, Inc. 1996 Stock Option Plan*
S-8
12/07/99
4.07
10.29
Andromedia, Inc. 1997 Stock Option Plan*
S-8
12/07/99
4.08
10.30
Andromedia, Inc. 1999 Stock Plan*
S-8
12/07/99
4.09
10.31
ESI Software, Inc. 1996 Equity Incentive Plan*
S-8
10/18/99
4.08
10.32
eHelp Corporation 1999 Equity Incentive Plan*
S-8
12/29/03
4.08
10.33
Blue Sky Software Corporation 1996 Stock Option Plan*
S-8
12/29/03
4.07
10.34
Bright Tiger Technologies, Inc. 1996 Stock Option Plan*
S-8
03/27/01
4.11
10.35
Live Software, Inc. 1999 Stock Option/Stock Issuance Plan*
S-8
03/27/01
4.10
10.36
Macromedia, Inc. 1999 Stock Option Plan*
S-8
08/17/00
4.07
10.37
Macromedia, Inc. 1992 Equity Incentive Plan*
10-Q
08/03/01
10.01
10.38
Macromedia, Inc. 2002 Equity Incentive Plan*
S-8
08/10/05
4.08
10.39
Form of Macromedia, Inc. Stock Option Agreement*
S-8
08/10/05
4.09
10.40
Middlesoft, Inc. 1999 Stock Option Plan*
S-8
08/17/00
4.09
10.41
Form of Macromedia, Inc. Revised Non-Plan Stock Option Agreement*
S-8
11/23/04
4.10
10.42
Form of Macromedia, Inc. Restricted Stock Purchase Agreement*
10-Q
2/08/05
10.01
10.43
Adobe Systems Incorporated Form of Performance Share Program pursuant to the 2003 Equity Incentive Plan*
8-K
1/30/08
10.1
10.44
Form of Award Grant Notice and Performance Share Award used in connection with grants under the Adobe Systems Incorporated 2008 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
8-K
1/30/08
10.2
10.45
2008 Award Calculation Methodology Exhibit A to the 2008 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
8-K
1/30/08
10.3
10.46
Adobe Systems Incorporated Deferred Compensation Plan*
10-K
1/24/08
10.52
10.47
Adobe Systems Incorporated 2007 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
8-K
1/30/07
10.1
10.48
Form of Award Grant Notice and Performance Share Award Agreement used in connection with grants under the Adobe Systems Incorporated 2007 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
8-K
1/30/07
10.2
10.49
Adobe Systems Incorporated 2007 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan*
8-K
1/30/07
10.3
10.50
Form of Award Grant Notice and Performance Share Award Agreement used in connection with grants under the Adobe Systems Incorporated 2007 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan*
8-K
1/30/07
10.4
10.51
Adobe Systems Incorporated Executive Cash Bonus Plan*
DEF 14A
2/24/06
Appendix B
10.52
First Amendment to Retention Agreement between Adobe Systems Incorporated and Shantanu Narayen, effective as of February 11, 2008*
8-K
2/13/08
10.1
10.53
Adobe Systems Incorporated Executive Severance Plan in the Event of a Change of Control*
8-K
2/13/08
10.2
10.54
Employment offer letter between Adobe Systems Incorporated and Richard Rowley, dated October 30, 2006*
8-K
11/16/06
10.1
10.55
Employment offer letter between Adobe Systems Incorporated and Mark Garrett dated January 5, 2007*
8-K
1/26/07
10.1
10.56
Credit Agreement, dated as of February 16, 2007, among Adobe Systems Incorporated and Certain Subsidiaries as Borrowers; BNP Paribas, Keybank National Association, and UBS Loan Finance LLC as Co-Documentation Agents; JPMorgan Chase Bank, N.A. as Syndication Agent; Bank of America, N.A. as Administrative Agent and Swing Line Lender; the Other Lenders Party Thereto; and Banc of America Securities LLC and J.P. Morgan Securities Inc. as Joint Lead Arrangers and Joint Book Managers
8-K
8/16/07
10.1
10.57
Amendment to Credit Agreement, dated as of August 13, 2007, among Adobe Systems Incorporated, as Borrower; each Lender from time to time party to the Credit Agreement; and Bank of America, N.A. as Administrative Agent
8-K
8/16/07
10.2
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
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
100.INS
XBRL Instance††
X
100.SCH
XBRL Taxonomy Extension Schema††
X
100.CAL
XBRL Taxonomy Extension††
X
100.LAB
XBRL Taxonomy Extension Labels††
X
100.PRE
XBRL Taxonomy Extension††
Xarrangement10.1810.17 and 10.1910.18 are to filings made by the Allaire Corporation. References to Exhibits 10.2910.25 through 10.5010.42 are to filings made by Macromedia, Inc.filed as stated in Part II, Item 5.filed.51Adobe Systems IncorporatedADOBE SYSTEMS INCORPORATED By
By
/s/ MARK GARRETT
Mark Garrett
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)Date: October 2, 200752certain jurisdictions,the United States and/or other countries, are referenced in this Form 10-Q:AdobeAcrobatAcrobat ConnectColdFusionCreative SuiteFlashFlash CastFlash LiteFlexLightroomLiveCycleReader
Acrobat
Acrobat Connect
ColdFusion
Creative Suite
Flash
Flash Cast
Flash Lite
Flex
Flex Builder
Lightroom
LiveCycle
Macromedia
Reader53
ADOBE SYSTEMS INCORPORATED FORM 10-Q TABLE OF CONTENTS
ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) (Unaudited)
ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)
ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
BUSINESS OVERVIEW
OPERATIONS OVERVIEW
CRITICAL ACCOUNTING ESTIMATES
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
PART II—OTHER INFORMATIONITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
SIGNATURE
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
SUMMARY OF TRADEMARKS