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100
grant to be deemed final as of the reported grant date. In other instances, the Special Committee found that adjustments were
made to some employee grants after the grant date without a corresponding change to the measurement date. These errors
resulted in an understatement of stock-based compensation in 1998 through 2005.
Historically, we have evaluated uncorrected differences utilizing the rollover approach. We believe the impact of
these stock-based compensation errors were immaterial to prior fiscal years under the rollover method. However, under SAB
No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current
Year Financial Statements,” which we were required to adopt for the year ended December 1, 2006, we must assess
materiality using both the rollover method and the iron-curtain method. Under the iron-curtain method, the cumulative stock
option errors are material to our fiscal 2006 financial statements and, therefore, we recorded an adjustment to our opening
fiscal 2006 retained earnings balance in the amount of $26.6 million in accordance with the implementation guidance in SAB
108. The total cumulative impact is as follows:
Retained Earnings ..................................
$
(26,584
)
Deferred Income Taxes .............................
838
Additional Paid in Capital ...........................
$
27,422
The impact on retained earnings is comprised of the following amounts:
Retained Earnings
1998-2002
2003
2004
2005
Total
Stock compensation expense ...
$
(21,800
)
$
(10,420
)
$
(2,959
)
$
(230
)
$
(35,409
)
Tax effect ..................
5,484
2,558
726
57
8,825
Total, net of tax .............
$
(16,316
)
$
(7,862
)
$
(2,233
)
$
(173
)
$
(26,584
)
Income before taxes ..........
$
1,577,480
$
380,492
$
608,645
$
765,776
Percent of income before taxes .
(1
)%
(3
)%
0
%
0
%
Stockholder Rights Plan
Our Stockholder Rights Plan is intended to protect stockholders from unfair or coercive takeover practices. In
accordance with this plan, the Board of Directors declared a dividend distribution of one common stock purchase right on
each outstanding share of our common stock held as of July 24, 1990 and on each share of common stock issued by Adobe
thereafter. In July 2000, the Stockholder Rights Plan was amended to extend it for ten years so that each right entitles the
holder to purchase one unit of Series A Preferred Stock, which is equal to 1/1000 share of Series A Preferred Stock, par value
$0.0001 per share, at a price of $700 per unit. As adjusted for our 2000 and 2005 stock splits each in the form of a dividend,
each share of common stock now entitles the holder to one-quarter of such a purchase right. Each whole right still entitles the
registered holder to purchase from Adobe a unit of preferred stock at $700. The rights become exercisable in certain
circumstances, including upon an entity’ s acquiring or announcing the intention to acquire beneficial ownership of 15% or
more of our common stock without the approval of the Board of Directors or upon our being acquired by any person in a
merger or business combination transaction. The rights are redeemable by Adobe prior to exercise at $0.01 per right and
expire on July 23, 2010.
Stock Repurchase Program I
To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from
stock issuances, we repurchase shares in the open market and also enter into structured repurchases with third parties.
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.
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.