Adobe 2006 Annual Report Download - page 56

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56
Adobe uses professional investment management firms to manage most of our invested cash. External
investment firms managed, on average, 77% of Adobe’s invested balances during fiscal 2006. Within the U.S.,
the fixed income portfolio is primarily invested in municipal bonds. Outside of the U.S., our fixed income
portfolio is primarily invested in U.S. Treasury 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 December 1, 2006, $182.3 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. All investments are made according to policies
approved by the Board of Directors.
Our existing cash, cash equivalents and investment balances may decline during fiscal 2007 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 will be sufficient to meet our working capital and operating resource expenditure requirements for the
next twelve months. In addition, we have received Board approval to execute a $500 million credit facility which
is expected to be finalized in the first quarter of fiscal 2007. This credit facility will provide backup liquidity for
general corporate purposes for a period of up to 5 years. Cash from operations could be affected by various risks
and uncertainties, including, but 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 time to time 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 5(c)
in this Annual Report for share repurchases during the quarter ended December 1, 2006.
As part of this program, on April 17, 2005, the Board of Directors approved the use of an additional $1.0
billion for stock repurchase commencing upon the close of the Macromedia acquisition. This additional $1.0
billion in stock repurchases was completed by the third quarter of fiscal 2006.
During fiscal 2006 and 2005, we entered into several structured repurchase agreements with large financial
institutions, whereupon we provided the financial institutions with prepayments of $1.3 billion and $600 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 of our common stock. We only enter into such transactions when
the discount that we receive is higher than the foregone return on our cash prepayments to the financial
institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the
agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.
The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The
parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the
number of trading days in the contract, the number of trading days in the interval, and the average VWAP of our
stock during the interval less the agreed upon discount.
For fiscal 2006, the $1.3 billion prepayment was classified as treasury stock on our balance sheet at the
payment date, though only shares physically delivered to us by December 1, 2006 are excluded from the
denominator in the computation of earnings per share. All outstanding structured repurchase agreements as of
December 1, 2006 will expire on or before July 19, 2007. As of December 1, 2006 approximately $204.0 million
of up-front payments remained under the agreements.
At the beginning of fiscal 2007, we entered into an additional structured repurchase agreement with a large
financial institution, whereupon we provided the financial institution with a prepayment of $300.0 million which
will be classified as treasury stock on our balance sheet.