Adobe 2007 Annual Report Download - page 98

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Guarantees
The lease agreements for our corporate headquarters provide for residual value guarantees as noted above. Under FIN
45, the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002, must be recognized
as a liability on our consolidated balance sheet. As such, we recognized $5.2 million and $3.0 million in liabilities, related to
the 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 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 $4.2 million.
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. Royalty expense, which
was recorded under our cost of products revenue on our consolidated statements of income, was approximately $37.4 million,
$19.1 million and $17.8 million in fiscal 2007, 2006 and 2005, respectively.
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 officers and directors for
certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The
indemnification period covers all pertinent events and occurrences during the officer’ s or director’ s lifetime. The maximum
potential amount of future payments we could be required to make under these indemnification agreements is unlimited;
however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of
any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable
insurance coverage is minimal.
As part of our limited partnership interests in Adobe Ventures, we have provided a general indemnification to Granite
Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences
while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on
behalf of the partnership. We are unable to develop an estimate of the maximum potential amount of future payments that
could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this
general indemnification to be remote.
Legal Proceedings
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 our 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. On 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 the Court's order
sustaining the demurrer without leave to amend which is scheduled to be heard on January 29, 2008.
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.