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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K/A
(Amendment No. 1)
________________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 1, 2006
OR
[ ] 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 77-0019522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value per share The NASDAQ Stock Market LLC (NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X] No [ ]
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer [X]
Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the registrant’s common stock, $0.0001 par value per share, held by non-affiliates of the
registrant on June 2, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was
$14,829,198,488 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s
common stock held by each officer and director and each person who owns 5% or more of the outstanding common stock of
the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is
not necessarily a conclusive determination for other purposes. As of December 29, 2006, 588,456,485 shares of the
registrant’s common stock, $0.0001 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2007 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120
days of the end of the fiscal year ended December 1, 2006, are incorporated by reference in Part III hereof. Except with respect to
information specifically incorporated by reference in this Form 10-K/A, the Proxy Statement is not deemed to be filed as part
hereof.

Table of contents

  • Page 1
    ..., San Jose, California 95110-2704 (Address of principal executive offices and zip code) (408) 536-6000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $0.0001 par value per share Name of Each Exchange...

  • Page 2
    EXPLANATORY NOTE Adobe Systems Incorporated is filing this Amendment No. 1 to Form 10-K to amend and restate its original Form 10-K that was filed on February 5, 2007 in order to replace the original Form 10-K, which was an incorrect version of the Form 10-K that was filed due to an error by a third...

  • Page 3
    ...Officers and Corporate Governance ...Executive Compensation...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accounting Fees and Services ...65 65 66 66 66 Market...

  • Page 4
    ... operating systems, devices and media. We distribute our products through a network of distributors and dealers, value-added resellers ("VARs"), systems integrators, independent software vendors ("ISVs") and OEMs, direct to end users, and through our own Web site at www.adobe.com. We also license...

  • Page 5
    ... who use and rely on Adobe's solutions for professional publishing, Web design, professional photography, video production, animation and motion graphic production, and printing visually rich information. Our software tools are used by creative professionals to create much of the printed and on-line...

  • Page 6
    ...-based technologies. In the first quarter of fiscal 2006, we released new versions of our digital video products, including Adobe Premiere Pro version 2.0 software for video editing, Adobe After Effects version 7.0 software for adding special effects to video, Adobe Audition version 2.0 software...

  • Page 7
    ... products such as Adobe After Effects Professional, Adobe InDesign, Adobe Illustrator, Adobe Photoshop, Adobe Premiere Pro, Macromedia Dreamweaver, and Macromedia Flash. In the professional page layout market, we continued to drive market share gains during the year with our Adobe InDesign product...

  • Page 8
    ... effects processing capabilities. Adobe Creative Suite Premium Edition - an integrated software solution that creative professionals can use as a platform to modify and enhance digital images, create graphics, produce professional-quality printed publications, create and maintain dynamic Web sites...

  • Page 9
    ... used to create compelling graphic artwork for print publications and the Web. Adobe InCopy - an editorial tool for collaboration between writers, editors and copy-fitters; Adobe InCopy is a companion to Adobe InDesign. Adobe InDesign - a page-layout application for publishing professionals; based...

  • Page 10
    ... Edition, Adobe Photoshop and Adobe Premiere Pro, along with Creative Suite 2 features for timesaving workflow features such as Adobe Dynamic Link and Adobe Bridge. Adobe Soundbooth - a new application that provides video editors, designers and others who do not specialize in audio with the tools...

  • Page 11
    ... or application source type. Users can collaborate on documents with electronic comments and tailor the security of a file in order to distribute reliable Adobe PDF documents that can be viewed, printed, or interacted with utilizing the free Adobe Reader. Available in different versions which target...

  • Page 12
    ... an online Web conference from within the new Acrobat family of products, as well as through the new version (free) of Adobe Reader. Finally, as a supplement to our knowledge worker desktop products, we introduced a new hosted service that provides the ability to protect and secure PDF documents for...

  • Page 13
    ...3D data; allows users to insert and publish 3D designs from major CAD applications in Adobe PDF documents that can easily be shared with suppliers, partners, and customers using the free Adobe Reader software. Adobe Acrobat Connect (formerly Macromedia Breeze) - a rich Web-based communication system...

  • Page 14
    ...universal Adobe Reader and Adobe Flash Player software, which ensure reliable, secure and rich application experiences across browsers, desktops and devices. The technology platform provides developers with an RIA programming model to integrate and optimize workflows, and a server software framework...

  • Page 15
    ... offer several families of products that we market to these customers: • Adobe LiveCycle - provides process management services to automate paper-based processes, leveraging the ubiquitous Adobe Reader for viewing, printing and interaction with information provided in Adobe PDF-based documents...

  • Page 16
    ... documents, and leverage the use of our Adobe Reader software for our customers' constituents to interact with data within the document. Process management services that we currently provide include: • Process Automation - products and solutions which allow organizations to automate form-based...

  • Page 17
    ... applications; merges data with an electronic document template using a powerful processing engine to dynamically generate electronic documents such as purchase orders, invoices, statements and checks for delivery via Adobe PDF, the Web, e-mail, fax, or print; works with Adobe Output Designer, which...

  • Page 18
    ...Manager - a server-based software application which simplifies form management and increases user satisfaction by centralizing the management of all forms, regardless of file type, into a single point of access via a Web-based portal; allows administrators to manage form publication, version control...

  • Page 19
    ... directly with an SAP system to extract information which is merged with a document template that defines the layout and formatting of the document; output can be in a variety of formats, including Adobe PDF, print, fax, e-mail and the Web. Adobe Web Output Pak - a server-based software application...

  • Page 20
    ... the ubiquitous Adobe Reader and Adobe Flash Player clients. These opportunities, and the products we offer to address them, are reviewed below in the following categories: Platform, OEM PostScript, and Print and Classic Publishing. Platform Opportunities As previously discussed, central to our...

  • Page 21
    ...of Web-enabled desktop applications. Platform Products Adobe Reader ― software for reliable reviewing and printing of Adobe PDF files on a variety of hardware and operating system platforms; when used with certain Adobe PDF files created with Adobe LiveCycle Reader Extensions Server, Adobe Acrobat...

  • Page 22
    ..., technical manuals and reports; provides users a way to publish their content to multiple output formats, including print, Adobe PDF, HTML, XML and Microsoft Word. Adobe PageMaker - software used to create high-quality documents simply and reliably with robust page layout tools, templates and stock...

  • Page 23
    ... print, the Web and the Adobe Flash Player. Macromedia JRun - an application server based on the J2EE specification; integrates with our development tool offerings and is used to deploy applications for functions such as online banking and customer service. COMPETITION The markets for our products...

  • Page 24
    ... Effects, Adobe Audition, Adobe Soundbooth, Adobe Encore DVD, Adobe Premiere Elements, and Adobe Premiere Pro, face competition from companies offering similar products. We also continue to face competition from new emerging products, including online based services and those coming from the open...

  • Page 25
    ... Standard and Adobe Acrobat Professional as part of document collaboration and document process management solutions, where electronic document delivery, exchange, collaboration, security and archival needs exist, our Acrobat product family faces competition from entrenched office applications...

  • Page 26
    ... a new document format, called XPS, which competes with Adobe PDF. Windows Vista also contains a proprietary digital rights management technology which competes with Adobe LiveCycle Policy Server. In addition, Microsoft's new version of Office includes an updated version of its SharePoint product...

  • Page 27
    ...our extensive application programming interface. In desktop publishing, our Adobe PageMaker product faces competition from other software products, including Microsoft Publisher. Competition is based on the quality and features of products, ease-of-use, printer service support, and price. We believe...

  • Page 28
    ...bundle customers. We also market and license our products directly using our sales force and through our own Web site at www.adobe.com. We support our worldwide distribution network and end-user customers with international offices around the world, including locations in Australia, Austria, Belgium...

  • Page 29
    ... vendors and internal support centers. We also offer Developer Support to partners and developer organizations. The Adobe Solution Network Developer Program focuses on providing developers with high-quality tools, software development kits, information and services. As a registered owner of the...

  • Page 30
    ... our software programs as trade secrets, and make source code available to third parties only under limited circumstances and specific security and confidentiality constraints. Our products are generally licensed to end users on a "right to use" basis pursuant to a license that restricts the use of...

  • Page 31
    ...free of charge on our Investor Relations Web site at www.adobe.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information posted on our Web site is not incorporated into this Annual Report on Form 10-K/A. EXECUTIVE OFFICERS Adobe...

  • Page 32
    ... by product introductions and market activities of industry competitors, including Microsoft's announced introduction of its new Vista operating system which contains a new fixed document format, XPS, which will compete with Adobe PDF, and its introduction of Office 12 which offers a feature to save...

  • Page 33
    ... results of operations. As previously discussed, we plan to release numerous new product offerings and upgrade versions of our current products in connection with our transition to new business models and the acquisition of Macromedia. Market acceptance of our new product or version releases will be...

  • Page 34
    ... 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...

  • Page 35
    ...product development and loss of critical data and could prevent us from fulfilling our customers' orders. Our corporate headquarters, a significant portion of our research and development activities, our data centers, and certain other critical business operations are located in San Jose, California...

  • Page 36
    ... 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...

  • Page 37
    ... 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 had a significant adverse effect on our reported financial results...

  • Page 38
    ... 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...

  • Page 39
    ... Tags for Application and Database Development." The Plaintiff's complaint asserts that "defendants have infringed, and continue to infringe, one or more claims of the '712 patent by making, using, selling and/or offering for sale, inter alia, products supporting Microsoft Active Server Pages...

  • Page 40
    ... payment of the dividend for the first quarter of fiscal 2005. We intend to use the cash previously used to pay the quarterly dividend for our ongoing stock repurchase programs. For information on our equity compensation plans, refer to Note 11 in our Notes to Consolidated Financial Statements. 40

  • Page 41
    ...). See Note 12 of our Notes to Consolidated Financial Statements for information regarding our stock repurchase programs. Average Price Per Share Maximum Number of Shares that May Yet be Purchased Plan/Period Stock Repurchase Program I Beginning shares available to be repurchased as of September...

  • Page 42
    ... review the risks described herein and in other documents we file from time to time with the SEC, including the Quarterly Reports on Form 10-Q to be filed in 2007. When used in this report, the words "expects," "could," "would", "may," "anticipates," "intends," "plans," "believes," "seeks," "targets...

  • Page 43
    ... 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 high-end consumers, creative professionals, designers, knowledge workers, OEM partners, developers and...

  • Page 44
    ... 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...

  • Page 45
    ... reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. We are currently under examination by the Internal Revenue Service for our fiscal 2001, 2002 and 2003 tax returns, primarily related to our intercompany transfer pricing...

  • Page 46
    ... our creative business. In the fourth quarter, we introduced new versions of our Adobe Photoshop Elements and Adobe Premiere Elements hobbyist products, which target consumers who desire professional-like capabilities with an easy-to-use interface for enhancing and sharing their memories in the form...

  • Page 47
    ...which address market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and OEM printing businesses, to new strategic opportunities such as OEM revenue generated from our free software downloads, which include Adobe Reader and Adobe Flash...

  • Page 48
    ...new versions of our Adobe Creative Suite products which were released during the second quarter of fiscal 2005. Additionally, there was a 3% increase in revenues from our digital imaging software products as a result of new releases of our Adobe Photoshop Elements product as well as the new software...

  • Page 49
    ... 2005 primarily due to the acquisition of Macromedia. Revenue in the Americas and EMEA increased during fiscal 2006 as compared to fiscal 2005 due to the strength of our Creative Solutions, Enterprise Solutions, Knowledge Worker Solutions and Other segments. Revenue in Asia increased during fiscal...

  • Page 50
    ... compensation, for former Macromedia employees and stock-based compensation costs as a result of adopting SFAS 123R at the beginning of fiscal 2006. See Note 11 of our Consolidated Financial Statements for further information regarding the impact of SFAS 123R. Cost of services and support revenue...

  • Page 51
    ..., trade shows, public relations and other market development programs. Sales and marketing expenses fluctuated due to the following: % Change % Change 2006 to 2005 2005 to 2004 Increased compensation and related benefits associated with headcount growth related to the Macromedia acquisition...

  • Page 52
    ... % Change 2006 to 2005 2005 to 2004 Increased compensation and related benefits associated with headcount growth related to the Macromedia acquisition, higher incentive compensation, amortization of deferred stock compensation related to the acquisition of Macromedia and stock-based compensation...

  • Page 53
    ... estimated useful lives of two to four years. See Note 2 of Notes to Consolidated Financial Statements for further information regarding these purchased intangibles. Non-operating Income Fiscal 2006 % Change 2006 to 2005 Fiscal 2005 % Change 2005 to 2004 Fiscal 2004 Investment gain (loss) ...$ 61...

  • Page 54
    ...and benefits), general operating expenses (marketing, travel, office rent) and cost of product revenue. Another source of cash is proceeds from the exercise of employee options and another use of cash is our stock repurchase program, which is detailed below. Cash provided by operating activities for...

  • Page 55
    ... 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...

  • Page 56
    ... not limited to the risks detailed in Item 1A, "Risk Factors." Stock Repurchase Program - On-going Dilution Coverage 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 from...

  • Page 57
    ...,075 (2) The repurchases from employees represent shares canceled when surrendered in lieu of cash payments for the option exercise price or withholding taxes due. Stock repurchase agreements executed with large financial institutions. See "Stock Repurchase Program I - On-going Dilution Coverage...

  • Page 58
    ... and losses on the assets, liabilities and transactions being hedged. We also hedge a percentage of forecasted international revenue with forward and purchased option contracts. Our revenue hedging policy is intended to neutralize the impact on our forecasted revenue due to foreign currency exchange...

  • Page 59
    ... these foreign exchange option contracts to hedge forecasted product licensing revenue in the normal course of business, and accordingly, they are not speculative in nature. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss), until the...

  • Page 60
    ... not limited to, reviewing each company's cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership. If we believe that an other-than-temporary decline in value exists in one of our marketable equity securities, it is our policy to...

  • Page 61
    ...policy includes, but is not limited to, reviewing each of the companies' cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes and competition. The evaluation process is based on information that we request from these privately-held companies...

  • Page 62
    ... for Form 10-K. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only...

  • Page 63
    ... internal control over financial reporting is effective based on these criteria. Our independent registered public accounting firm, KPMG LLP, have issued an audit report on our assessment of our internal control over financial reporting, which is included herein. (c) Changes in Internal Control over...

  • Page 64
    ...express an opinion on management's assessment and an opinion on the effectiveness of the internal control over financial reporting of Adobe Systems Incorporated based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States...

  • Page 65
    ... of the Securities and Exchange Commission with respect to our Quarterly Report on Form 10-Q filed for the quarterly period ended September 1, 2006. The Staff noted our disclosure related to stock-based compensation errors found as a result of our review of employee option grant practices and the...

  • Page 66
    ... MATTERS You will find this information in the section captioned "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in the Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on...

  • Page 67
    ...IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES Page (a) Documents filed as part of this report 1. Financial statements • • Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets December 1, 2006 and December 2, 2005 Consolidated Statements of Income Years Ended...

  • Page 68
    ...in the Current Year Financial Statements. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Adobe Systems Incorporated's internal control over financial reporting as of December 1, 2006, based on the criteria...

  • Page 69
    ADOBE SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) December 1, 2006 ASSETS Current assets: Cash and cash equivalents ...Short-term investments...Trade receivables, net of allowances for doubtful accounts of $6,798 and $5,376, respectively ...Other ...

  • Page 70
    ... except per share data) Years Ended December 2, 2005 December 1, 2006 Revenue: Products...Services and support...Total revenue ...Costs of revenue: Products...Services and support...Total cost of revenue...Gross profit ...Operating expenses: Research and development ...Sales and marketing...General...

  • Page 71
    ...Issuance of common stock and reissuance of treasury stock under stock compensation plans ...Tax benefit from employee stock Purchase of treasury stock...Stock-based compensation...Issuance of common stock, re-issuance of treasury stock and stock options assumed for acquisition...Balances at December...

  • Page 72
    ...Tax benefit from employee stock option plans ...Excess tax benefits from stock-based compensation ...Retirements of property and equipment...Net (gains) losses on sales and impairments of investments...Changes in operating assets and liabilities, net of acquired assets and assumed liabilities: Trade...

  • Page 73
    ... share and per share data) Note 1. Significant Accounting Policies Operations Founded in 1982, Adobe Systems Incorporated offers a line of creative, business and mobile software and services used by high-end consumers, creative professionals, designers, knowledge workers, OEM partners, developers...

  • Page 74
    ... or not any security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing the cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership of each company we invest in...

  • Page 75
    ... cash flows are converted to their present value equivalent using an appropriate rate of return. The Market Approach utilizes a market comparable method whereby similar publicly traded companies are valued using Market Value of Invested Capital ("MVIC") multiples (i.e., MVIC to revenue, MVIC...

  • Page 76
    ...based upon historical rates of returns, inventory levels in the distribution channel and other related factors. We record the estimated costs of providing free technical phone support to customers for our software products. We record OEM licensing revenue, primarily royalties, when OEM partners ship...

  • Page 77
    ... purchase a combination of software, upgrades, maintenance and support, and consulting (multiple-element arrangements). When vendorspecific objective evidence ("VSOE") of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements...

  • Page 78
    ... income (expense) in the consolidated statements of operations. Foreign exchange forward contracts hedging forecasted non-functional currency denominated forecasted product licensing revenue, are designated as cash flow hedges under SFAS 133, with gains and losses recorded net of tax, as a component...

  • Page 79
    ... as a result, is effective for Adobe in the first quarter of fiscal 2008. We are currently evaluating the impact of FIN 48 on our consolidated financial position, results of operations, and cash flows. In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 ("SFAS 155...

  • Page 80
    ... exchange ratio gives effect to the two-forone stock split in the form of a stock dividend paid on May 23, 2005 to the stockholders of Adobe. The average market price per share of Adobe common stock of $29.43 used to determine the fair value the stock issued was based on the average of the closing...

  • Page 81
    ... term remaining and the contractual term of the option, as illustrated in the Securities and Exchange Commission's Staff Accounting Bulletin No. 107 ("SAB 107"). The implied volatility of Adobe traded stock options was used for volatility. Direct transaction costs of $29.1 million include investment...

  • Page 82
    ... fair value of unvested options assumed was $117.3 million using the Black Scholes valuation model. The stock price used in the valuation is $34.97, which was the closing price of Adobe shares on December 2, 2005, the last trading day before the close of the acquisition. The risk-free interest rate...

  • Page 83
    ...the fair value of the underlying shares on the acquisition date. The assumptions used to value unvested Macromedia stock options are as follows: 2006 Expected term (in years) ...0.17 - 6.67 Volatility...32.9 - 35.2% Risk free interest rate ...3.97 - 4.48% Total deferred stock-based compensation, of...

  • Page 84
    ...Intelligent Document platform. During fiscal 2004, we acquired Q-Link Technologies, Inc, a privately-held company, which provided Java-based workflow technology that was integrated with our enterprise server products to enable customers to integrate document process management with core applications...

  • Page 85
    ... In accordance with FASB Staff Position ("FSP") FAS115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," the following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category...

  • Page 86
    ... constituted other-than-temporary impairment. See Note 1 for our policy on recording other-than-temporary declines in our marketable equity securities. We recognize realized gains and losses upon sale of investments using the specific identification method. See Note 6 for net realized gains from...

  • Page 87
    ... OKYZ, GoLive Systems, Inc and GoLive Systems GmbH and Co. KG (together "GoLive") and, Serious Magic, Interakt, and Inscriber Technology Corporation. Below is our goodwill reported by business segment, as of December 1, 2006: 2006 Creative Solutions ...$ 782,717 Knowledge Worker Solutions ...429,036...

  • Page 88
    ... 2005 to fiscal 2006 is primarily due to our acquisition of Macromedia. Amortization expense, as of December 1, 2006, is expected to be as follows: Fiscal Year 2007 ...2008 ...2009 ...2010 ...2011 ...Thereafter ...Total expected amortization expense...Purchased Technology $ 114,180 81,592 50,310 649...

  • Page 89
    ...-downs due to other-than-temporary declines in value of our marketable equity securities ...- Gains from sale of short-term investments ...- Gains (losses) on stock warrants ...(226) Other investment gains...67,962 Total investment gain (loss) ...$ 61,249 2005 2004 $ (1,021) $ (81) (558) 104...

  • Page 90
    ...trade and other payables ...$ 37,915 17,116 55,031 $ $ 2005 27,467 13,575 41,042 Accrued expenses consisted of the following as of December 1, 2006 and December 2, 2005: 2006 Accrued compensation and benefits ...$ 148,000 Sales and marketing... taxes attributable to employee stock plans...$ 12,419 34...

  • Page 91
    Certain employee stock plan benefits in 2006 associated with the acquisition of Macromedia reduced goodwill. See Note 5 for further...technology ...$ Reserves ...Deferred revenue ...Unrealized losses on investments ...FAS 123R stock compensation...Net operating loss of acquired companies ...Credits ......

  • Page 92
    ... 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...

  • Page 93
    ... Condensed Consolidated Balance Sheets. We expect to pay these liabilities through the third quarter of fiscal 2007. Adobe Restructuring Charges In connection with the worldwide restructuring plan, we recognized costs related to termination benefits for former Adobe employees whose positions were...

  • Page 94
    ...and $42.6 million to the plan in fiscal 2006, 2005 and 2004, respectively. Note 11. Stock-based Compensation Stock Options Our 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...

  • Page 95
    The following table sets forth the summary of option activity under our stock option program for fiscal years 2006, 2005 and 2004: Outstanding Options Weighted Average Exercise Number of Price Shares 84,939 20,760 (26,587) (2,578) ― ― 76,534 11,418 (20,495) (2,206) ― 65,251 12,017 (25,873) (4,...

  • Page 96
    ... Executive Compensation Committee are independent directors, as defined in the rules applicable to issuers traded on the Nasdaq Global Select Market. The Directors Plan provides for the granting of nonqualified stock options to non-employee directors. Option grants are limited to 25,000 shares per...

  • Page 97
    ... periods 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. As of December 1, 2006...

  • Page 98
    ... 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...

  • Page 99
    ... Purchase Rights Shares $ 2,499 45,635 34,309 19,913 $ 102,356 $ - 1,678 1,500 1,313 $ 4,491 Macromedia Deferred Stock-Based Compensation 5,681 18,315 32,483 7,208 $ 63,687 $ Income Statement Classifications Cost of revenue - services and support...Research and development ...Sales and marketing...

  • Page 100
    ... net income per share, for fiscal 2005 and 2004, that would have resulted if we had accounted for our employee stock plans under the fair value recognition provisions of SFAS 123: 2005 2004 Net income: As reported...$ 602,839 $ 450,398 Add: Stock-based compensation expense for employees included in...

  • Page 101
    ... Adobe prior to exercise at $0.01 per right and expire on July 23, 2010. Stock Repurchase Program - On-going Dilution Coverage 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...

  • Page 102
    ... 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...

  • Page 103
    ... for operating lease accounting treatment under Statement of Financial Accounting Standards No. 13, "Accounting for Leases," and, as such, the buildings and the related obligations are not included on our consolidated balance sheet. We utilized this type of financing in order to access bank-provided...

  • Page 104
    ... 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...

  • Page 105
    ... Tags for Application and Database Development." The Plaintiff's complaint asserts that "defendants have infringed, and continue to infringe, one or more claims of the '712 patent by making, using, selling and/or offering for sale, inter alia, products supporting Microsoft Active Server Pages...

  • Page 106
    ... - Hedges of Forecasted Transactions We use foreign exchange option contracts to hedge certain operational ("cash flow") exposures resulting from changes in foreign currency exchange rates. Such cash flow exposures result from portions of our forecasted revenues denominated in currencies other than...

  • Page 107
    ... realized loss from the cost of purchased options ...Gain (loss) on open hedge transactions: Net unrealized gain (loss) from time value degradation on open cash flow hedge transactions ...$ Years Ended December 2, 2005 December 3, 2004 Other Other Income Income Revenue (Loss) Revenue (Loss) 5,035...

  • Page 108
    ... is limited to OEM partners, dealers and distributors of hardware and software products to the retail market, and to customers whereby we license software directly. Management believes that any risk of loss is reduced due to the diversity of our customers and geographic sales areas. A credit review...

  • Page 109
    ...knowledge worker customers, providing essential applications and services to help them share information and collaborate. This segment contains revenue generated by Adobe Acrobat Connect and our Acrobat family of products. Our Enterprise segment provides server-based enterprise interaction solutions...

  • Page 110
    ...reported by operating units below: Knowledge Worker Solutions Enterprise and Mobile and Developer Device Solutions Solutions Creative Solutions Fiscal 2006 Revenue ...Cost of revenue ...Gross profit...Gross profit as a percentage of revenues ...Fiscal 2005 Revenue ...Cost of revenue ...Gross profit...

  • Page 111
    ... each of our reporting segments. The amounts listed below are a percentage of our net revenues. 2006 Ingram Micro...Tech Data ...2005 2004 24% 10% 26% 11% 23% 13% The amounts listed below are receivables, from our significant customers, as a percentage of our gross trade receivables for fiscal...

  • Page 112
    ... its affiliates to acquire land and a building in downtown San Jose for $36.5 million. The building and certain parking areas were used by the San Jose Water Company and will be leased back to San Jose Water Corporation until mid 2008. Execution of Credit Facility We have received Board approval to...

  • Page 113
    ... 5, 2007. ADOBE SYSTEMS INCORPORATED By: /s/ Bruce R. Chizen Bruce R. Chizen, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by...

  • Page 114
    ... in this Form 10-K/A: Adobe Acrobat Acrobat Capture Acrobat Connect Acrobat Messenger Action Script Adobe Audition Adobe Encore Adobe LiveCycle Adobe Premiere Adobe Type Manager After Effects Authorware Breeze Captivate ColdFusion Contribute Creative Suite Director Distiller Dreamweaver DV Rack...

  • Page 115
    ... Option Plan, as amended* 1997 Employee Stock Purchase Plan, as amended* 1996 Outside Directors Stock Option Plan, as amended* Forms of Stock Option Agreements used in connection with the 1996 Outside Directors Stock Option Plan* 1999 Nonstatutory Stock Option Plan, as amended* 1999 Equity Incentive...

  • Page 116
    ... 2005 Annual Executive Incentive Plan* Description of 2005 Director Compensation* Description of 2006 Director Compensation* Adobe Systems Incorporated 2006 Management Team Annual Incentive Plan * 2005 Equity Incentive Assumption Plan* Form of Stock Option Agreement used in connection with the...

  • Page 117
    ... Stock Plan* 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* Form of Performance Share Maximum Award Agreement used in connection with grants under the Adobe Systems...

  • Page 118
    ... Stock Plan* 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* 10.60 Adobe Systems Incorporated Executive Cash Bonus Plan...

  • Page 119
    The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K/A, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Adobe Systems Incorporated under the Securities Act of 1933, as ...

  • Page 120
    ... GmbH Adobe Systems Iberica SL Adobe Systems Italia SRL Adobe Systems Nordic AB Adobe Systems Norge AS Adobe Systems Romania SRL Adobe Systems s.r.o. Adobe Software Trading Company Limited Adobe Systems Software Ireland Limited Frame Technology International Limited Iteration::Two Limited Macromedia...

  • Page 121
    ...Form 10-K/A. Our report on the consolidated financial statements refers Adobe Systems Incorporated' s adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, and Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects...

  • Page 122
    EXHIBIT 31.1 CERTIFICATION I, Bruce R. Chizen, Chief Executive Officer of the registrant, certify that: 1. I have reviewed this annual report on Form 10-K/A of Adobe Systems Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state ...

  • Page 123
    EXHIBIT 31.2 CERTIFICATION I, Bruce R. Chizen, Chief Financial Officer of the registrant, certify that: 1. I have reviewed this annual report on Form 10-K/A of Adobe Systems Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state ...

  • Page 124
    ... SECTION 1350 In connection with the Annual Report of Adobe Systems Incorporated (the "Registrant") on Form 10-K/A for the annual period ended December 1, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bruce R. Chizen, Chief Executive Officer of the...

  • Page 125
    ...32.2 CERTIFICATION PURSUANT TO RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350 In connection with the Annual Report of Adobe Systems Incorporated (the "Registrant") on Form 10-K/A for the annual period ended December 1, 2006 as filed with the Securities and Exchange...