ADBE 10Q Q311
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 2, 2011

 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
(State or other jurisdiction of
incorporation or organization)
77-0019522
(I.R.S. Employer
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)
 _________________________
 
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
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 x
The number of shares outstanding of the registrant’s common stock as of September 30, 2011 was 490,895,858.
 
ADOBE SYSTEMS INCORPORATED
FORM 10-Q
 
TABLE OF CONTENTS
 
 
 
Page No.

PART I—FINANCIAL INFORMATION
 
Item 1.

 

 

 

 

Item 2.

Item 3.

Item 4.
 
 
 
 

 PART II—OTHER INFORMATION
 
Item 1.

Item 1A.

Item 2.

Item 6.






 

2
Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 
September 2,
2011
 
December 3,
2010
 
(Unaudited)
 
(*)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
769,212

 
$
749,891

Short-term investments
1,950,064

 
1,718,124

Trade receivables, net of allowances for doubtful accounts of $15,269 and $15,233, respectively
559,320

 
554,328

Deferred income taxes
71,087

 
83,247

Prepaid expenses and other current assets
119,513

 
110,460

Total current assets
3,469,196

 
3,216,050

Property and equipment, net
499,059

 
448,881

Goodwill
3,740,199

 
3,641,844

Purchased and other intangibles, net
419,824

 
457,263

Investment in lease receivable
207,239

 
207,239

Other assets
157,241

 
169,871

Total assets
$
8,492,758

 
$
8,141,148

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 

 
 

Trade payables
$
65,236

 
$
52,432

Accrued expenses
450,343

 
564,275

Capital lease obligations
9,107

 
8,799

Accrued restructuring
6,663

 
8,119

Income taxes payable
61,220

 
53,715

Deferred revenue
439,690

 
380,748

Total current liabilities
1,032,259

 
1,068,088

Long-term liabilities:
 

 
 

Debt and capital lease obligations
1,507,278

 
1,513,662

Deferred revenue
44,369

 
48,929

Accrued restructuring
8,019

 
8,254

Income taxes payable
143,028

 
164,713

Deferred income taxes
151,065

 
103,098

Other liabilities
42,782

 
42,017

Total liabilities
2,928,800

 
2,948,761

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; 
     492,806 and 501,897 shares outstanding, respectively
61

 
61

Additional paid-in-capital
2,680,407

 
2,458,278

Retained earnings
6,381,530

 
5,980,914

Accumulated other comprehensive income
59,194

 
17,428

Treasury stock, at cost (108,028 and 98,937 shares, respectively), net of reissuances
(3,557,234
)
 
(3,264,294
)
Total stockholders’ equity
5,563,958

 
5,192,387

Total liabilities and stockholders’ equity
$
8,492,758

 
$
8,141,148

_________________________________________ 
(*)
The Condensed Consolidated Balance Sheet as of December 3, 2010 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying Notes to Condensed Consolidated Financial Statements.

3
Table of Contents

ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 2,
2011
 
September 3,
2010
 
September 2,
2011
 
September 3,
2010
Revenue:
 
 
 
 
 
 
 
Products
$
814,544

 
$
829,096

 
$
2,487,514

 
$
2,328,294

Subscription
111,931

 
98,632

 
327,271

 
286,418

Services and support
86,737

 
62,591

 
249,312

 
177,342

Total revenue
1,013,212

 
990,319

 
3,064,097

 
2,792,054

 
Cost of revenue:
 

 
 
 
 
 
 
Products
26,209

 
29,147

 
91,592

 
92,302

Subscription
47,492

 
50,483

 
142,699

 
146,408

Services and support
30,953

 
19,454

 
87,203

 
57,575

Total cost of revenue
104,654

 
99,084

 
321,494

 
296,285

 
Gross profit
908,558

 
891,235

 
2,742,603

 
2,495,769

 
Operating expenses:
 

 
 
 
 
 
 
Research and development
181,039

 
168,296

 
542,650

 
509,954

Sales and marketing
340,724

 
303,219

 
1,017,492

 
921,489

General and administrative
98,493

 
102,177

 
295,019

 
283,176

Restructuring charges
3,816

 
(2,090
)
 
3,271

 
21,073

Amortization of purchased intangibles
10,376

 
17,620

 
31,003

 
53,946

Total operating expenses
634,448

 
589,222

 
1,889,435

 
1,789,638

 
Operating income
274,110

 
302,013

 
853,168

 
706,131

 
Non-operating income (expense):
 

 
 
 
 
 
 
Interest and other income (expense), net
33

 
7,607

 
(1,623
)
 
1,905

Interest expense
(16,431
)
 
(16,395
)
 
(50,178
)
 
(40,166
)
Investment gains (losses), net
(993
)
 
3,527

 
683

 
(10,730
)
Total non-operating income (expense), net
(17,391
)
 
(5,261
)
 
(51,118
)
 
(48,991
)
Income before income taxes
256,719

 
296,752

 
802,050

 
657,140

Provision for income taxes
61,618

 
66,687

 
142,922

 
151,310

Net income
$
195,101

 
$
230,065

 
$
659,128

 
$
505,830

Basic net income per share
$
0.39

 
$
0.44

 
$
1.32

 
$
0.97

Shares used to compute basic net income per share
494,537

 
518,710

 
499,451

 
523,039

Diluted net income per share
$
0.39

 
$
0.44

 
$
1.30

 
$
0.95

Shares used to compute diluted net income per share
498,741

 
523,179

 
506,334

 
530,356


  See accompanying Notes to Condensed Consolidated Financial Statements.


4
Table of Contents

ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
September 2,
2011
 
September 3,
2010
Cash flows from operating activities:
 
 
 
Net income
$
659,128

 
$
505,830

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 
Depreciation, amortization and accretion
196,915

 
216,641

Stock-based compensation
210,969

 
174,245

Deferred income taxes
50,716

 
(176,882
)
Unrealized losses on investments
1,462

 
8,766

Tax benefit from employee stock option plans
11,322

 
37,987

Other non-cash items
5,787

 
2,054

Excess tax benefits from stock-based compensation
(9,096
)
 
(10,172
)
Changes in operating assets and liabilities, net of acquired assets and
        assumed liabilities:
 
 
 
Trade receivables, net
(8,322
)
 
(74,722
)
Prepaid expenses and other current assets
(4,100
)
 
(11,953
)
Trade payables
12,347

 
(2,439
)
Accrued expenses
(119,185
)
 
52,110

Accrued restructuring
(1,859
)
 
(26,294
)
Income taxes payable
(13,233
)
 
3,445

Deferred revenue
53,710

 
103,758

Net cash provided by operating activities
1,046,561

 
802,374

Cash flows from investing activities:
 

 
 

Purchases of short-term investments
(1,620,985
)
 
(1,999,341
)
Maturities of short-term investments
345,701

 
512,534

Proceeds from sales of short-term investments
1,029,581

 
629,673

Acquisitions, net of cash acquired
(107,121
)
 
—

Purchases of property and equipment
(135,397
)
 
(114,215
)
Proceeds from sale of property and equipment
—

 
32,151

Purchases of long-term investments and other assets
(13,914
)
 
(22,876
)
Proceeds from sale of long-term investments
4,554

 
3,586

Other
(141
)
 
2,198

Net cash used for investing activities
(497,722
)
 
(956,290
)
Cash flows from financing activities:
 

 
 

Purchases of treasury stock
(695,015
)
 
(650,020
)
Proceeds from issuance of treasury stock
143,563

 
129,640

Excess tax benefits from stock-based compensation
9,096

 
10,172

Proceeds from debt
—

 
1,493,439

Repayment of debt and capital lease obligations
(7,803
)
 
(1,001,569
)
Debt issuance costs
—

 
(10,662
)
Net cash used for financing activities
(550,159
)
 
(29,000
)
Effect of foreign currency exchange rates on cash and cash equivalents
20,641

 
(2,422
)
Net increase (decrease) in cash and cash equivalents
19,321

 
(185,338
)
Cash and cash equivalents at beginning of period
749,891

 
999,487

Cash and cash equivalents at end of period
$
769,212

 
$
814,149

Supplemental disclosures:
 

 
 
Cash paid for income taxes, net of refunds
$
97,255

 
$
286,271

Cash paid for interest
$
63,588

 
$
34,135

Non-cash investing activities:
 
 
 
Property and equipment acquired under capital leases
$
—

 
$
32,151


See accompanying Notes to Condensed Consolidated Financial Statements.

5
Table of Contents

ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

NOTE 1.  BASIS OF PRESENTATION AND 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 “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 in the United States of America (“GAAP”). In management’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. Certain immaterial prior year amounts have been reclassified to conform to the current year presentation in the Condensed Consolidated Statements of Cash Flows. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 3, 2010 on file with the SEC. The nine months ended September 3, 2010 financial results benefited from an extra week in the first quarter of fiscal 2010 due to our 52/53 week financial calendar whereby fiscal 2010 was a 53-week year compared with fiscal 2011 which is a 52-week year.
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 3, 2010.
Recent Accounting Pronouncements 
There have been no new accounting pronouncements during the nine months ended September 2, 2011, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 3, 2010, that are of significance, or potential significance, to us.
NOTE 2.  ACQUISITIONS
EchoSign
On July 15, 2011, we completed our acquisition of privately held EchoSign, a leading Web-based provider of electronic signatures and signature automation. This acquisition was not material to our consolidated balance sheets and results of operations.
Demdex
On January 18, 2011, we completed our acquisition of privately held Demdex, a data management platform company. The impact of this acquisition was not material to our consolidated balance sheets or results of operations.
Day Software Holding AG
On October 28, 2010, we completed our acquisition of Day Software Holding AG (“Day”), a provider of Web content management solutions that many leading global enterprises rely on for Web 2.0 content application and content infrastructure. Day is based in Basel, Switzerland and Boston, Massachusetts. We believe that our acquisition of Day has enabled us to provide comprehensive solutions to create, manage, deliver and optimize Web content. Following the closing, we integrated Day as a product line within our Enterprise segment for financial reporting purposes. We have included the financial results of Day in our Condensed Consolidated Financial Statements beginning on the acquisition date.
Under the acquisition method of accounting, the total preliminary purchase price was allocated to Day’s net tangible and intangible assets based upon their estimated fair values as of October 28, 2010. During the first six months of fiscal 2011, we finalized our purchase accounting after adjustments were made to the preliminary purchase price allocation. The total final purchase price for Day was approximately $248.3 million of which approximately $157.0 million was allocated to goodwill, $79.2 million to substantially all of the identifiable intangible assets and $9.0 million to net tangible assets. The impact of this acquisition was not material to our condensed consolidated balance sheets or results of operations.
See Note 18 for further information regarding our acquisitions.



6
Table of Contents

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


NOTE 3.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. We classify all of our cash equivalents and short-term investments as “available-for-sale.” In general, these investments are free of trading restrictions. We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Condensed Consolidated Balance Sheets. Gains and losses are recognized when realized in our Condensed Consolidated Statements of Income. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. Gains and losses are determined using the specific identification method.
Cash, cash equivalents and short-term investments consisted of the following as of September 2, 2011 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
246,996

 
$
—

 
$
—

 
$
246,996

Cash equivalents:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
12,499

 
—

 
—

 
12,499

Money market mutual funds and repurchase agreements
469,120

 
—

 
—

 
469,120

Time deposits
40,597

 
—

 
—

 
40,597

Total cash equivalents
522,216

 
—

 
—

 
522,216

Total cash and cash equivalents
769,212

 
—

 
—

 
769,212

Short-term fixed income securities:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,154,108

 
8,492

 
(1,973
)
 
1,160,627

Foreign government securities
12,627

 
78

 
—

 
12,705

Municipal securities
120,717

 
153

 
(11
)
 
120,859

U.S. agency securities
298,356

 
1,891

 
(3
)
 
300,244

U.S. Treasury securities
342,856

 
2,202

 
—

 
345,058

Subtotal
1,928,664

 
12,816

 
(1,987
)
 
1,939,493

Marketable equity securities
10,801

 
—

 
(230
)
 
10,571

Total short-term investments
1,939,465

 
12,816

 
(2,217
)
 
1,950,064

Total cash, cash equivalents and short-term investments
$
2,708,677

 
$
12,816

 
$
(2,217
)
 
$
2,719,276



7
Table of Contents

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of December 3, 2010 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
98,691

 
$
—

 
$
—

 
$
98,691

Cash equivalents:
 

 
 
 
 
 
 

Commercial paper
41,389

 
—

 
—

 
41,389

Money market mutual funds and repurchase agreements
477,259

 
—

 
—

 
477,259

Municipal securities
350

 
—

 
—

 
350

Time deposits
64,006

 
—

 
—

 
64,006

U.S. Treasury securities
68,195

 
1

 
—

 
68,196

Total cash equivalents
651,199

 
1

 
—

 
651,200

Total cash and cash equivalents
749,890

 
1

 
—

 
749,891

Short-term fixed income securities:
 
 
 
 
 
 
 

Corporate bonds and commercial paper
977,889

 
8,079

 
(1,450
)
 
984,518

Foreign government securities
33,079

 
309

 
(2
)
 
33,386

Municipal securities
119,608

 
29

 
(32
)
 
119,605

U.S. agency securities
229,772

 
778

 
(179
)
 
230,371

U.S. Treasury securities
336,441

 
2,828

 
(209
)
 
339,060

Subtotal
1,696,789

 
12,023

 
(1,872
)
 
1,706,940

Marketable equity securities
11,196

 
1,122

 
(1,134
)
 
11,184

Total short-term investments
1,707,985

 
13,145

 
(3,006
)
 
1,718,124

Total cash, cash equivalents and short-term investments
$
2,457,875

 
$
13,146

 
$
(3,006
)
 
$
2,468,015


See Note 4 for further information regarding the fair value of our financial instruments.
The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in a continuous unrealized loss position for less than twelve months, as of September 2, 2011 and December 3, 2010 (in thousands):
 
2011
 
2010
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Fair 
Value
 
Gross
Unrealized
Losses
Corporate bonds and commercial paper
$
321,761

 
$
(1,973
)
 
$
257,615

 
$
(1,450
)
Foreign government securities
—

 
—

 
4,531

 
(2
)
Marketable equity securities
—

 
—

 
9,380

 
(1,134
)
Municipal securities
30,910

 
(11
)
 
43,028

 
(32
)
U.S. Treasury and agency securities
9,198

 
(3
)
 
192,702

 
(388
)
Total
$
361,869

 
$
(1,987
)
 
$
507,256

 
$
(3,006
)
 
As of September 2, 2011 and December 3, 2010, there were no securities in a continuous unrealized loss position for more than twelve months. There were 156 securities and 168 securities that were in an unrealized loss position at September 2, 2011 and at December 3, 2010, respectively.

8
Table of Contents

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated effective maturities as of September 2, 2011 (in thousands):
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
800,077

 
$
801,686

Due between one and two years
664,344

 
668,280

Due between two and three years
361,337

 
365,318

Due after three years
102,906

 
104,209

Total
$
1,928,664

 
$
1,939,493

We review our debt and marketable equity securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell, the investment before recovery of the investment's amortized cost basis. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to interest and other income, net in our Condensed Consolidated Statements of Income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Condensed Consolidated Balance Sheets. For equity securities, the write-down would be recorded to investment gains (losses), net in our Condensed Consolidated Statements of Income. During the nine months ended September 2, 2011, we did not record any other-than-temporary impairment losses associated with our debt and marketable equity securities.

9
Table of Contents

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 4.  FAIR VALUE MEASUREMENTS
 
We measure certain financial assets and liabilities at fair value on a recurring basis. There have been no transfers between fair value measurement levels during the nine months ended September 2, 2011.
The fair value of our financial assets and liabilities at September 2, 2011 was determined using the following inputs (in thousands):
 
  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:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
$
12,499

 
$
—

 
$
12,499

 
$
—

Money market mutual funds and repurchase
    agreements
463,836

 
463,836

 
—

 
—

Time deposits
40,597

 
40,597

 
—

 
—

Short-term investments:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,160,627

 
—

 
1,160,627

 
—

Foreign government securities
12,705

 
—

 
12,705

 
—

Marketable equity securities
10,571

 
10,571

 
—

 
—

Municipal securities
120,859

 
—

 
120,859

 
—

U.S. agency securities
300,244

 
—

 
300,244

 
—

U.S. Treasury securities
345,058

 
—

 
345,058

 
—

Prepaid expenses and other current assets:
 
 
 

 
 

 
 

Foreign currency derivatives
12,933

 
—

 
12,933

 
—

Other assets:
 
 
 

 
 

 
 

Deferred compensation plan assets
12,277

 
523

 
11,754

 
—

Total assets
$
2,492,206

 
$
515,527

 
$
1,976,679

 
$
—

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
2,257

 
$
—

 
$
2,257

 
$
—

Total liabilities
$
2,257

 
$
—

 
$
2,257

 
$
—



10
Table of Contents

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at December 3, 2010 was determined using the following inputs (in thousands): 
 
  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:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
41,389

 
$
—

 
$
41,389

 
$
—

Money market mutual funds and repurchase
    agreements
477,259

 
477,259

 
—

 
—

Municipal securities
350

 
—

 
350

 
—

Time deposits
64,006

 
64,006

 
—

 
—

U.S. Treasury securities
68,196

 
—

 
68,196

 
—

Short-term investments:
 

 


 


 


Corporate bonds and commercial paper
984,518

 
—

 
984,518

 
—

Foreign government securities
33,386

 
—

 
33,386

 
—

Marketable equity securities
11,184

 
11,184

 
—

 
—

Municipal securities
119,605

 
—

 
119,605

 
—

U.S. agency securities
230,371

 
—

 
230,371

 
—

U.S. Treasury securities 
339,060

 
—

 
339,060

 
—

Prepaid expenses and other current assets:
 

 
 

 
 

 
 

Foreign currency derivatives
18,821

 
—

 
18,821

 
—

Other assets:
 

 
 

 
 

 
 

Deferred compensation plan assets
11,071

 
617

 
10,454

 
—

Total assets
$
2,399,216

 
$
553,066

 
$
1,846,150

 
$
—

Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
1,945

 
$
—

 
$
1,945

 
$
—

Total liabilities
$
1,945

 
$
—

 
$
1,945

 
$
—


See Note 3 for further information regarding the fair value of our financial instruments. 
Our fixed income available-for-sale securities consist of high quality, investment grade securities from diverse issuers with a minimum credit rating of BBB and a weighted average credit rating of AA. We value these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, we classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. Our procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources. 
We also have direct investments in privately held companies accounted for under the cost method, which are periodically assessed for other-than-temporary impairment. If we determine that an other-than-temporary impairment has occurred, we write-down the investment to its fair value. We estimate fair value of our cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

performance and any other readily available market data. For the three and nine months ended September 2, 2011, we determined there were no other-than-temporary impairments on our cost method investments. See Note 7 for further information regarding our cost method investments.

NOTE 5.  DERIVATIVES AND HEDGING ACTIVITIES
 
In countries outside the U.S., we transact business in U.S. Dollars and in various other currencies. Therefore, we are subject to exposure from movements in foreign currency rates. We may use foreign exchange option contracts or forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. The maximum original duration of any contract is twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.
We recognize derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income in our Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income, net in our Condensed Consolidated Statements of Income at that time.
We also hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income (expense), net in our Condensed Consolidated Statements of Income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.
We mitigate concentration of risk related to foreign currency hedges as well as interest rate hedges through a policy that establishes counterparty limits. The bank counterparties to these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum requirements under our counterparty risk assessment process. In addition, our hedging policy establishes maximum limits for each counterparty. We monitor ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our on-going assessment of counterparty risk, we will adjust our exposure to various counterparties.
The aggregate fair value of derivative instruments in net asset positions as of September 2, 2011 and December 3, 2010 was $12.9 million and $18.8 million, respectively. These amounts represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by up to $2.3 million and $1.9 million, respectively, of liabilities included in master netting arrangements with those same counterparties.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of September 2, 2011 and December 3, 2010 were as follows (in thousands):
 
2011
 
2010
 
Fair Value
Asset
Derivatives(1)
 
Fair Value
Liability
Derivatives(2)
 
Fair Value
Asset
Derivatives(1)
 
Fair Value
Liability
Derivatives(2)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange option contracts(3) 
$
8,991

 
$
—

 
$
6,092

 
$
—

Derivatives not designated as hedging instruments:


 


 


 


 Foreign exchange forward contracts
3,942

 
2,257

 
12,729

 
1,945

Total derivatives
$
12,933

 
$
2,257

 
$
18,821

 
$
1,945

_________________________________________ 
(1) 
Included in prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.
(2) 
Included in accrued expenses on our Condensed Consolidated Balance Sheets.
(3) 
Hedging effectiveness expected to be recognized to income within the next twelve months.
 
The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges in our Condensed Consolidated Statements of Income for three and nine months ended September 2, 2011 was as follows (in thousands):
 
Three Months
 
Nine Months
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI, net of tax(1) 
$
1,624

 
$
—

 
$
1,657

 
$
—

Net gain (loss) reclassified from accumulated
OCI into income, net of tax(2)
$
—

 
$
—

 
$
184

 
$
—

Net gain (loss) recognized in income(3) 
$
(4,741
)
 
$
—

 
$
(19,764
)
 
$
—

Derivatives not designated as hedging relationships:


 


 
 
 
 
Net gain (loss) recognized in income(4) 
$
—

 
$
11,112

 
$
—

 
$
(7,403
)

The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges in our Condensed Consolidated Statements of Income for three and nine months ended September 3, 2010 was as follows (in thousands):
 
Three Months
 
Nine Months
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI, net of tax(1) 
$
15,208

 
$
—

 
$
23,580

 
$
—

Net gain (loss) reclassified from accumulated
OCI into income, net of tax(2)
$
13,223

 
$
—

 
$
19,428

 
$
—

Net gain (loss) recognized in income(3) 
$
(8,383
)
 
$
—

 
$
(18,149
)
 
$
—

Derivatives not designated as hedging relationships:
 
 
 
 
 
 
 
Net gain (loss) recognized in income(4) 
$
—

 
$
(5,627
)
 
$
—

 
$
16,174

_________________________________________ 

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(1) 
Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).
(2) 
Effective portion classified as revenue.
(3) 
Ineffective portion and amount excluded from effectiveness testing classified in interest and other income (expense), net.
(4) 
Classified in interest and other income (expense), net.

NOTE 6.  GOODWILL AND PURCHASED AND OTHER INTANGIBLES
 
Goodwill as of September 2, 2011 and December 3, 2010 was $3.740 billion and $3.642 billion, respectively. The increase was primarily due to our acquisitions of Demdex and EchoSign and foreign currency translation adjustments.
Purchased and other intangible assets subject to amortization as of September 2, 2011 and December 3, 2010 were as follows (in thousands): 
 
2011
 
2010
 
Cost
 
Accumulated Amortization
 
Net
 
Cost
 
Accumulated Amortization
 
Net
Purchased technology
$
270,380

 
$
(78,290
)
 
$
192,090

 
$
260,198

 
$
(61,987
)
 
$
198,211

Customer contracts and relationships
$
405,080

 
$
(220,790
)
 
$
184,290

 
$
398,421

 
$
(197,459
)
 
$
200,962

Trademarks
43,054

 
(9,739
)
 
33,315

 
172,019

 
(136,480
)
 
35,539

Localization
10,864

 
(7,958
)
 
2,906

 
14,768

 
(9,355
)
 
5,413

Other intangibles
52,364

 
(45,141
)
 
7,223

 
51,265

 
(34,127
)
 
17,138

Total other intangible assets
$
511,362

 
$
(283,628
)
 
$
227,734

 
$
636,473

 
$
(377,421
)
 
$
259,052

Purchased and other intangible
    assets, net
$
781,742

 
$
(361,918
)
 
$
419,824

 
$
896,671

 
$
(439,408
)
 
$
457,263

 
Purchased and other intangible assets from prior acquisitions, primarily Macromedia, were removed from the balance sheet as they were fully amortized at the end of fiscal 2010. Amortization expense related to purchased and other intangible assets was $27.0 million and $87.4 million for the three and nine months ended September 2, 2011, respectively. Comparatively, amortization expense was $38.5 million and $117.6 million for the three and nine months ended September 3, 2010, respectively. Of these amounts, $16.5 million and $56.4 million were included in cost of sales for the three and nine months ended September 2, 2011, respectively, and $21.0 million and $63.6 million were included in cost of sales for the three and nine months ended September 3, 2010, respectively.
As of September 2, 2011, we expect amortization expense in future periods to be as follows (in thousands):
Fiscal Year
 
Purchased
Technology
 
Other Intangible
Assets
Remainder of 2011
$
11,859

 
$
15,332

2012
47,379

 
32,340

2013
43,334

 
28,619

2014
40,274

 
27,494

2015
37,574

 
27,053

Thereafter
11,670

 
96,896

Total expected amortization expense
$
192,090

 
$
227,734


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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 7.  OTHER ASSETS
 
Other assets as of September 2, 2011 and December 3, 2010 consisted of the following (in thousands):
 
2011
 
2010
Acquired rights to use technology
$
61,849

 
$
71,521

Investments
23,971

 
25,018

Deferred compensation plan assets
12,277

 
11,071

Prepaid land lease
13,097

 
13,215

Security and other deposits
10,862

 
11,266

Debt issuance costs
8,611

 
9,574

Prepaid royalties
5,438

 
7,726

Restricted cash
2,639

 
2,499

Prepaid rent
344

 
787

Other(*)
18,153

 
17,194

Other assets
$
157,241

 
$
169,871

_________________________________________ 
(*) 
Fiscal 2011 and 2010 includes a tax asset of approximately $11 million related to an acquired entity.
Investments represent our direct investments in privately held companies which are accounted for based on the cost method. We assess these investments for impairment in value as circumstances dictate.

NOTE 8.  ACCRUED EXPENSES
 
Accrued expenses as of September 2, 2011 and December 3, 2010 consisted of the following (in thousands):
 
2011
 
2010
Accrued compensation and benefits
$
182,011

 
$
290,366

Sales and marketing allowances 
44,057

 
38,706

Accrued corporate marketing
38,976

 
26,190

Taxes payable
22,846

 
21,800

Royalties payable
17,088

 
31,007

Accrued interest expense
5,449

 
21,203

Other
139,916

 
135,003

Accrued expenses                                                                                         
$
450,343

 
$
564,275


Other primarily includes general corporate accruals for local and regional expenses and technical support. Other is also comprised of deferred rent related to office locations with rent escalations and foreign currency liability derivatives.

NOTE 9.  INCOME TAXES
 
The gross liability for unrecognized tax benefits at September 2, 2011 was $141.0 million, exclusive of interest and penalties. If the total unrecognized tax benefits at September 2, 2011 were recognized in the future, $125.1 million of unrecognized tax benefits would decrease the effective tax rate, which is net of an estimated $15.9 million federal benefit related to deducting certain payments on future state tax returns.
As of September 2, 2011, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns was approximately $9.8 million. This amount is included in non-current income taxes payable.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In August 2011, a Canadian income tax examination covering our fiscal years 2005 through 2008 was completed. Our accrued tax and interest related to these years was approximately $35 million and was previously reported in long-term income taxes payable. We reclassified approximately $17 million to short-term income taxes payable and decreased deferred tax assets by approximately $18 million in conjunction with the aforementioned resolution. The $17 million balance in short-term income taxes payable is partially secured by a letter of credit and is expected to be paid by the first quarter of fiscal 2012.
The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $25 million. These amounts would decrease income tax expense.

NOTE 10.  STOCK-BASED COMPENSATION
 
The assumptions used to value option grants during the three and nine months ended September 2, 2011 and September 3, 2010 were as follows: 
 
Three Months
 
Nine Months
 
2011
 
2010
 
2011
 
2010
Expected life (in years)
3.9

 
3.8 - 4.1

 
3.8 - 4.2
 
3.8 - 5.1
Volatility
33
%
 
35
%
 
30 - 35%
 
29 - 36%
Risk free interest rate
1.08
%
 
1.04 - 1.30%

 
1.08 - 1.92%
 
1.04 - 2.66%

The expected life 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 and nine months ended September 2, 2011 and September 3, 2010 were as follows:
 
Three Months
 
Nine Months
 
2011
 
2010
 
2011
 
2010
Expected life (in years)
0.5 - 2.0
 
0.5 - 2.0
 
0.5 - 2.0
 
0.5 - 2.0
Volatility
30 - 31%
 
37 - 40%
 
30 - 34%
 
32 - 40%
Risk free interest rate
0.10 - 0.50%
 
0.22 - 0.63%
 
0.10 - 0.61%
 
0.18 - 1.09%
 
Summary of Stock Options 
Option activity for the nine months ended September 2, 2011 and the fiscal year ended December 3, 2010 was as follows (in thousands):
 
2011
 
2010
Beginning outstanding balance
37,075

 
41,251

Granted
4,302

 
3,198

Exercised
(4,633
)
 
(5,196
)
Cancelled
(1,327
)
 
(2,908
)
Increase due to acquisition
275

 
730

Ending outstanding balance
35,692

 
37,075

 

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Information regarding stock options outstanding at September 2, 2011 and September 3, 2010 is summarized below:
 
 
Number of
Shares
(thousands)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2011
 
 
 
 
 
 
 
Options outstanding
35,692

 
$
31.61

 
3.44
 
$
46.0

Options vested and expected to vest
34,565

 
$
31.65

 
3.36
 
$
44.3

Options exercisable
26,536

 
$
32.42

 
2.73
 
$
27.9

2010
 

 
 

 
 
 
 

Options outstanding
37,486

 
$
30.63

 
3.83
 
$
112.5

Options vested and expected to vest
36,184

 
$
30.69

 
3.77
 
$
107.4

Options exercisable
27,280

 
$
31.06

 
3.21
 
$
74.7

_________________________________________ 
(*) 
The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of September 2, 2011 and September 3, 2010 were $24.15 and $29.49, respectively.
Summary of Employee Stock Purchase Plan Shares
Employees purchased 3.7 million shares at an average price of $23.48 and 3.3 million shares at an average price of $20.19 for the nine months ended September 2, 2011 and September 3, 2010, respectively. The intrinsic value of shares purchased during the nine months ended September 2, 2011 and September 3, 2010 was $28.9 million and $33.9 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.
Summary of Restricted Stock Units
Restricted stock unit activity for the nine months ended September 2, 2011 and the fiscal year ended December 3, 2010 was as follows (in thousands):
 
2011
 
2010
Beginning outstanding balance
13,890

 
10,433

Awarded
7,751

 
7,340

Released
(3,257
)
 
(2,589
)
Forfeited
(1,090
)
 
(1,294
)
Increase due to acquisition
59

 
—

Ending outstanding balance
17,353

 
13,890

 

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Information regarding restricted stock units outstanding at September 2, 2011 and September 3, 2010 is summarized below:
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2011
 
 
 
 
 
Restricted stock units outstanding
17,353

 
1.53
 
$
419.1

Restricted stock units vested and expected to vest
15,107

 
1.42
 
$
364.4

2010
 

 
 
 
 

Restricted stock units outstanding
13,965

 
1.72
 
$
411.8

Restricted stock units vested and expected to vest
10,959

 
1.55
 
$
322.9

_________________________________________ 
(*) 
The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of September 2, 2011 and September 3, 2010 were $24.15 and $29.49, respectively. 
Summary of Performance Shares 
Effective January 24, 2011, the Executive Compensation Committee adopted the 2011 Performance Share Program (the "2011 Program"). The purpose of the 2011 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 2011 Program is our fiscal 2011 year. All members of our executive management and other key senior management are participating in the 2011 Program. Awards granted under the 2011 Program are 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 one third vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining two thirds vesting evenly on the following two annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe. Participants in the 2011 Program have the ability to receive up to 150% of the target number of shares originally granted.
The following table sets forth the summary of performance share activity under our 2011 Program for the nine months ended September 2, 2011 (in thousands): 
 
Shares
Granted
 
Maximum
Shares Eligible
to Receive
Beginning outstanding balance
—

 
—

Awarded
425

 
638

Forfeited
(26
)
 
(39
)
Ending outstanding balance
399

 
599


In the first quarter of fiscal 2011, the Executive Compensation Committee certified the actual performance achievement of participants in the 2010 Performance Share Program (the "2010 Program"). Based upon the achievement of goals outlined in the 2010 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 135% of target or approximately 0.3 million shares for the 2010 Program. One third of the shares under the 2010 Program vested in the first quarter of fiscal 2011 and the remaining two thirds vest evenly on the following two annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe.
The performance metrics under the 2009 Performance Share Program were not achieved and therefore no shares were awarded.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table sets forth the summary of performance share activity under our 2007, 2008 and 2010 programs, based upon share awards actually achieved, for the nine months ended September 2, 2011 and the fiscal year ended December 3, 2010 (in thousands):
 
2011
 
2010
Beginning outstanding balance
557

 
950

Achieved
337

 
—

Released
(436
)
 
(350
)
Forfeited
(31
)
 
(43
)
Ending outstanding balance
427

 
557

 
Information regarding performance shares outstanding at September 2, 2011 and September 3, 2010 is summarized below: 
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value(*)
(millions)
2011
 
 
 
 
 
Performance shares outstanding
427

 
0.66
 
$
10.3

Performance shares vested and expected to vest
402

 
0.64
 
$
9.5

2010
 

 
 
 
 

Performance shares units outstanding
572

 
0.84
 
$
16.9

Performance shares vested and expected to vest
508

 
0.79
 
$
14.8

_________________________________________ 
(*) 
The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of September 2, 2011 and September 3, 2010 were $24.15 and $29.49, respectively.     
 
Compensation Costs
As of September 2, 2011, there was $483.5 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.5 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the three months ended September 2, 2011 and September 3, 2010 were as follows (in thousands):
 
 
2011
 
2010
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—subscription
$
235

 
$
355

 
$
264

 
$
384

Cost of revenue—services and support
1,215

 
2,115

 
147

 
278

Research and development
7,143

 
16,732

 
6,792

 
11,224

Sales and marketing
7,916

 
16,628

 
7,820

 
13,189

General and administrative
4,376

 
8,403

 
4,134

 
5,436

Total
$
20,885

 
$
44,233

 
$
19,157

 
$
30,511



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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the nine months ended September 2, 2011 and September 3, 2010 were as follows (in thousands):
 
 
2011
 
2010
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—subscription
$
659

 
$
1,043

 
$
944

 
$
988

Cost of revenue—services and support
3,574

 
6,489

 
832

 
876

Research and development
20,921

 
56,754

 
29,717

 
38,574

Sales and marketing
23,800

 
53,660

 
31,340

 
38,346

General and administrative
15,581

 
28,488

 
15,380

 
17,248

Total
$
64,535

 
$
146,434

 
$
78,213

 
$
96,032


NOTE 11.  RESTRUCTURING CHARGES
 
Fiscal 2009 Restructuring Plan
In the fourth quarter of fiscal 2009, in order to appropriately align our costs in connection with our fiscal 2010 operating plan, we initiated a restructuring plan consisting of reductions in workforce and the consolidation of facilities. The restructuring activities related to this program affected only those employees and facilities that were associated with Adobe prior to the acquisition of Omniture on October 23, 2009.
During the third quarter of fiscal 2011, we continued to implement restructuring activities under this plan. We vacated approximately 22,000 square feet of sales facilities in the United Kingdom and accrued $3.1 million for the fair value of our future contractual obligations under those operating leases. Total costs incurred for termination benefits through the third quarter of fiscal 2011 was $40.1 million. Total costs incurred to date and expected to be incurred for closing redundant facilities are $11.3 million and $13.5 million, respectively.

Omniture Restructuring Plan
We completed our acquisition of Omniture on October 23, 2009. In the fourth quarter of fiscal 2009, we initiated a plan to restructure the pre-merger operations of Omniture to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with this restructuring plan, we accrued a total of approximately $12.2 million through the third quarter of fiscal 2011 for costs related to termination benefits, the closure of duplicative facilities and cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Omniture. Substantially all of these costs were recorded as a part of the purchase price allocation.    
Fiscal 2008 Restructuring Plan
In the fourth quarter of fiscal 2008, we initiated a restructuring program consisting of reductions in workforce and the consolidation of facilities, in order to reduce our operating costs and focus our resources on key strategic priorities. In connection with the restructuring plan, we recognized costs related to termination benefits for employee positions that were eliminated and for the closure of duplicative facilities. Total costs incurred to date for termination benefits was $35.2 million and was completed during the first quarter of fiscal 2011. Total costs incurred to date and expected to be incurred for closing redundant facilities were both approximately $9.0 million. 
Macromedia Restructuring Plan
We completed our acquisition of Macromedia on December 3, 2005. In connection with this acquisition, 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

facilities. 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. Total costs incurred for termination benefits and contract terminations were $27.0 million and $3.2 million, respectively, and those actions were completed during fiscal 2007.
Summary of Restructuring Plans
The following table sets forth a summary of restructuring activities related to all of our restructuring plans described above during the nine months ended September 2, 2011 (in thousands):
 
December 3,
2010
 
Costs
Incurred
 
Cash
Payments
 
Other
Adjustments
 
September 2,
2011
Fiscal 2009 Plan:
 
 
 
 
 
 
 
 
 
Termination benefits
$
1,573

 
$
—

 
$
(387
)
 
$
(9
)
 
$
1,177

Cost of closing redundant facilities
7,302

 
3,673

 
(1,558
)
 
(1,038
)
 
8,379

Omniture Plan:
 
 
 

 
 

 
 

 
 

Termination benefits
486

 
—

 
(4
)
 
29

 
511

Cost of closing redundant facilities
2,720

 
—

 
(954
)
 
367

 
2,133

Contract termination
179

 
—

 
(179
)
 
—

 
—

Fiscal 2008 Plan:
 
 
 

 
 

 
 

 
 

Termination benefits
300

 
—

 
(164
)
 
(136
)
 
—

Cost of closing redundant facilities
2,149

 
—

 
(635
)
 
553

 
2,067

Macromedia Plan:
 
 
 

 
 

 
 

 
 

Cost of closing redundant facilities
1,658

 
—

 
(1,243
)
 
—

 
415

Other
6

 
—

 
(6
)
 
—

 
—

Total restructuring plans
$
16,373

 
$
3,673

 
$
(5,130
)
 
$
(234
)
 
$
14,682

 
Accrued restructuring charges of approximately $14.7 million at September 2, 2011 includes $6.7 million recorded in accrued restructuring, current and $8.0 million related to long-term facilities obligations recorded in accrued restructuring, non-current on our Condensed Consolidated Balance Sheets. We expect to pay accrued termination benefits through the remainder of fiscal 2011 and facilities-related liabilities under contract through fiscal 2021.

NOTE 12.  STOCKHOLDERS’ EQUITY
 
Retained Earnings
The changes in retained earnings for the nine months ended September 2, 2011 were as follows (in thousands): 
Balance as of December 3, 2010
$
5,980,914

Net income
659,128

Re-issuance of treasury stock
(258,512
)
Balance as of September 2, 2011
$
6,381,530

We account for treasury stock under the cost method. When treasury stock is re-issued at a price higher than its cost, the difference is recorded as a component of additional paid-in-capital in our Condensed Consolidated Balance Sheets. When treasury stock is re-issued at a price lower than its cost, the difference is recorded as a component of additional paid-in-capital to the extent that there are gains to offset the losses. If there are no treasury stock gains in additional paid-in-capital, the losses upon re-issuance of treasury stock are recorded as a component of retained earnings in our Condensed Consolidated Balance Sheets.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Comprehensive Income
The following table sets forth the activity for each component of comprehensive income, net of related taxes, for the three and nine months ended September 2, 2011 and September 3, 2010 (in thousands):
 
Three Months
 
Nine Months
 
2011
 
2010
 
2011
 
2010
 
Increase/(Decrease)
 
Increase/(Decrease)
Net income
$
195,101

 
$
230,065

 
$
659,128

 
$
505,830

Other comprehensive income:
 

 
 
 
 
 
 
Available-for-sale securities:
 

 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities
(3,256
)
 
3,263

 
2,589

 
2,717

Reclassification adjustment for gains on available-for-sale
    securities recognized during the period
(428
)
 
(605
)
 
(1,602
)
 
(1,308
)
Subtotal available-for-sale securities
(3,684
)
 
2,658

 
987

 
1,409

Derivatives designated as hedging instruments:
 

 
 
 
 
 
 
Unrealized gains on derivative instruments
1,624

 
(15,208
)
 
1,657

 
23,580

Reclassification adjustment for gains on derivative
    instruments recognized during the period
—

 
(13,223
)
 
(184
)
 
(19,428
)
Subtotal derivatives designated as hedging
     instruments
1,624

 
(28,431
)
 
1,473

 
4,152

Foreign currency translation adjustments
6,912

 
7,349

 
39,306

 
(8,436
)
Other comprehensive income (loss)
4,852

 
(18,424
)
 
41,766

 
(2,875
)
Total comprehensive income, net of taxes
$
199,953

 
$
211,641

 
$
700,894