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millions, except where indicated) should be read in conjunction with our consolidated financial statements and notes thereto. In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements, including statements regarding product plans, future growth and market opportunities which involve risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors" in Part 1, Item 1A of this report. You should carefully 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 fiscal 2009. When used in this report, the words "expects," "could," "would," "may," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," "looks for," "looks to" and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. Founded 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 creative professionals, designers, knowledge workers, high-end consumers, OEM partners, developers and enterprises for creating, managing, delivering and engaging with compelling content and experiences across multiple operating systems, devices and media. We distribute our products through a network of distributors and dealers, VARs, systems integrators, ISVs and OEMs, direct to end users and through our own Web site at www.adobe.com. We also license our technology to hardware manufacturers, software developers and service providers, and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas, EMEA and Asia. Our software runs on personal computers with Microsoft Windows, Apple OS, Linux, UNIX and various non-PC platforms, depending on the product. In preparing our consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, stock-based compensation, goodwill impairment and income taxes have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. For example, for multiple element arrangements, we must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine whether vendor-specific objective evidence ("VSOE") of fair value exists for each undelivered element; and (4) allocate the total price among the various elements we must deliver. Changes in assumptions or judgments or changes to the elements in a software arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period. In addition, we must estimate certain royalty revenue amounts due to the timing of securing information from our customers. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, our assumptions and judgments regarding future products and services as well as our estimates of royalty revenue could differ from actual events, thus materially impacting our financial position and results of operations. Product revenue is recognized when the above criteria are met. We reduce the revenue recognized for estimated future returns, price protection and rebates at the time the related revenue is recorded. In determining our estimate for returns and in accordance with our internal policy regarding global channel inventory which is used to determine the level of product held by our distributors on which we have recognized revenue, we rely upon historical data, the estimated amount of product inventory in our distribution channel, the rate at which our product sells through to the end user, product plans and other factors. Our estimated provisions for returns can vary from what actually occurs. Product returns may be more or less than what was estimated. The amount of inventory in the channel could be different than what is estimated. Our estimate of the rate of sell through for product in the channel could be different than what actually occurs. There could be a delay in the release of our products. These factors and unanticipated changes in the economic and industry environment could make our return estimates differ from actual returns, thus materially impacting our financial position and results of operations. We offer price protection to our distributors that allows for the right to a credit if we permanently reduce the price of a software product. When evaluating the adequacy of the price protection allowance, we analyze historical returns, current sell-through of distributor and retailer inventory of our products, changes in customer demand and acceptance of our products and other related factors. In addition, we monitor the volume of sales to our channel partners and their inventories. Changes to these assumptions or in the economic environment could result in higher returns or higher price protection costs in subsequent periods. In the future, actual returns and price protection may materially exceed our estimates as unsold products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing products. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, if our estimates change, our returns and price protection reserves would change, which would impact the total net revenue we report. Our consulting revenue is recognized using the proportionate performance method and is measured monthly based on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. Accordingly, our estimates of consulting revenue could differ from actual events and may materially impact our financial position and results of operations. We account for stock-based compensation in accordance with SFAS 123R. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. We currently use the Black-Scholes 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 awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate, estimated forfeitures and expected dividends. We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. We estimate the volatility of our common stock by using implied volatility in market traded options. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate on zero-coupon yields implied from U.S. Treasury issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If we use different assumptions for estimating stock-based compensation expense in future periods or if actual forfeitures differ materially from our estimated forfeitures, the change in our stock-based compensation expense could materially affect our operating income, net income and net income per share. We complete our goodwill impairment test on an annual basis, during the second quarter of our fiscal year, or more frequently, if changes in facts and circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. In order to estimate the fair value of goodwill, we typically estimate future revenue, consider market factors and estimate our future cash flows. Based on these key assumptions, judgments and estimates, we determine whether we need to record an impairment charge to reduce the value of the asset carried on our balance sheet to its estimated fair value. Assumptions, judgments and estimates about future values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy or our internal forecasts. Although we believe the assumptions, judgments and estimates we have made in the past have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our reported financial results. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. In addition, we are subject to the continual examination of our income tax returns by the IRS and other domestic and foreign tax authorities, including a current examination by the IRS for our fiscal 2005, 2006 and 2007 tax returns. These examinations are expected to focus on our intercompany transfer pricing practices as well as other matters. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of the current and any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations. During fiscal 2008, our software and technologies continued to redefine how people engage with ideas and information-anytime, anywhere and through virtually any medium. Given our solid execution during the year, we were able to deliver strong revenue and earnings growth when compared to the previous year. In our Creative Solutions segment, revenue increased by nine percent during fiscal 2008 as compared to fiscal 2007, based on continued adoption of our CS3 family of products during the first three quarters of fiscal 2008, as well as the release of our new CS4 family of products which began shipping in the fourth quarter of the year. Consisting of six Creative Suite editions and thirteen individual creative products, our CS4 family of products launch was the largest in our more than 25-year history. Although reviews and market commentary about our new CS4 family of products were overwhelmingly positive, we believe revenue from the fourth quarter launch was significantly impacted by the global financial crisis that is affecting demand in the creative professional end user market. Helping to drive the growth we achieved in our Creative Solutions business was a thirteen percent growth with our professional digital imaging products during fiscal 2008 as compared to fiscal 2007. In addition, we achieved strong growth in our Scene7 business. Revenue increased by more than twenty percent with our digital imaging and digital video hobbyist markets with the introduction of new versions of our Adobe Photoshop Elements and Adobe Premiere Elements products during the fourth quarter. Business Productivity Solutions achieved greater than fifteen percent increase in revenue during fiscal 2008 as compared to fiscal 2007. This success was driven by continued adoption of our Acrobat 8 family of products, as well as adoption of its successor, Acrobat 9, which was released in the third quarter of the fiscal year. In addition, our execution in driving our enterprise business with our LiveCycle product family resulted in more than a thirty percent increase in revenue in this business during fiscal 2008 as compared to fiscal 2007, with revenue exceeding $250 million. We also continued to grow our Acrobat Connect Pro business which provides real-time collaboration capabilities via the Web utilizing our Adobe Flash Player. Our Mobile and Device Solutions segment achieved greater than 100% growth during fiscal 2008 as compared to fiscal 2007, due to the ongoing success we have had targeting mobile operators, handset manufacturers and consumer electronic device manufactures with our Flash Lite technology. On May 1, 2008, we announced the Open Screen Project. The project aims to enable a consistent runtime environment that will remove barriers for developers and designers as they publish content and applications across desktops and consumer devices, including phones, mobile Internet devices ("MIDs") and set top boxes. As part of the project, we will be removing some restrictions on the use of some of our technology specifications and publishing several technology protocols. We will also be removing the license fees on the next major releases of Adobe Flash Player and Adobe AIR for devices. Accordingly, we expect revenue from Mobile and Device Solutions to decrease beginning in the first quarter of fiscal 2009. We would expect this decrease to be offset in time by an increased demand for tooling products, server technologies, services and applications. In our other segments, revenue increased by fifteen percent compared to fiscal 2007 due primarily to higher revenue with our Platform business and the sustaining of revenue in our legacy Print and Publishing business. 0.95 0.96 0.96 0.12 0.22 0.05 0.04 0.04 0.33 0.53 0.13 0.23 In fiscal 2008, we categorized our products into the following segments: Creative Solutions, Knowledge Worker, Enterprise, Mobile and Device Solutions, Platform and Print and Publishing products. Our Creative Solutions segment focuses on delivering a complete professional line of integrated tools for a full range of creative and developer tasks to an extended set of customers. Our Knowledge Worker segment focuses on the needs of knowledge worker customers, providing essential applications and services to help them reliably share information and collaborate effectively. This segment contains revenue generated by the Adobe Acrobat family of products. Our Enterprise segment provides server-based enterprise interaction solutions that automate people-centric processes and contains revenue generated by our LiveCycle line of products. The Mobile and Device Solutions segment provides solutions that create compelling experiences through rich content, user interfaces and data services on mobile and non-PC devices such as cellular phones, consumer devices and Internet connected hand-held devices. The Platform segment provides developer solutions and technologies, including Adobe Flash Player, Adobe AIR and Flex Builder which are used to build rich application experiences. Finally, the Print and Publishing segment addresses market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and OEM printing businesses. We will adjust our reporting segments at the beginning of fiscal 2009 to reflect changes in how we manage our business as we enter the new fiscal year. We are combining our former Mobile and Device Solutions segment with our Platform segment. These segment reporting changes reflect changes we have made internally in terms of how we manage these businesses. Our services and support revenue is composed of consulting, training and maintenance and support, primarily related to the licensing of our enterprise, developer and platform products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. Our maintenance and support offerings which entitle customers to receive product upgrades and enhancements or technical support, depending on the offering, is recognized ratably over the term of the arrangement. Revenue from our Creative Solutions segment increased $173.8 million during fiscal 2008 as compared to fiscal 2007 primarily due to ongoing adoption of our CS3 family of products, as well as the launch of our CS4 family of products in the fourth quarter of fiscal year. We also achieved solid growth in our Scene7 business and with our hobbyist products. Also contributing to the increase in fiscal 2008 as compared to fiscal 2007 was an increase in certain unit average selling prices. Units sold remained relatively stable. Revenue in our Knowledge Worker segment increased $82.4 million during fiscal 2008 as compared to fiscal 2007 primarily due to an increase in the licensing of our Acrobat 8 and new Acrobat 9 family of products. An increase in the number of units sold as well as a slight increase in certain unit average selling prices also contributed to higher revenue as compared to fiscal 2007. Revenue from our Enterprise segment increased $61.7 million during fiscal 2008 as compared to fiscal 2007 primarily due to an increased adoption of our LiveCycle family of products and a larger number of enterprise solution transactions at a higher average transaction size. Revenue from our Mobile and Device Solutions segment increased by $60.6 million during fiscal 2008 as compared to fiscal 2007 due to continued adoption of Flash Lite by mobile and non-PC device manufacturers. On May 1, 2008, we announced the Open Screen Project. The project aims to enable a consistent runtime environment that will remove barriers for developers and designers as they publish content and applications across desktops and consumer devices, including phones, MIDs and set top boxes. See Overview of 2008 for further information regarding the Open Screen Project. Platform revenue increased by $37.6 million during fiscal 2008 as compared to fiscal 2007 primarily due to increased revenue related to Flash Player and the launch of Adobe AIR which resulted in increased revenue from our developer tools. Revenue in our Print and Publishing business increased by $5.9 million during fiscal 2008 as compared to fiscal 2007, driven by ongoing adoption of our eLearning solutions as well as some of our legacy print and publishing products. Revenue from our Creative Solutions segment increased $461.0 million during fiscal 2007 as compared to fiscal 2006 primarily due to the launch of the English versions of our CS3 family of products in the second quarter of fiscal 2007 and the release of localized versions of our CS3 family of products during the third quarter of fiscal 2007. The increase in fiscal 2007 as compared to fiscal 2006 was also due to an increase in certain unit average selling prices. Increases in revenue were offset in part, by a slight decrease in the number of units sold. Revenue from our Knowledge Worker segment increased $70.7 million during fiscal 2007 as compared to fiscal 2006 primarily due to an increase in the licensing of our new Acrobat 8 family of products. The number of units sold as well as the average unit selling prices remained relatively stable during fiscal 2007 as compared to fiscal 2006. Revenue from our Enterprise segment increased $33.1 million during fiscal 2007 as compared to fiscal 2006 primarily due to continued adoption of our LiveCycle family of products. Revenue also increased due to a larger number of enterprise solution transactions offset with a decrease in the average transaction size during fiscal 2007 as compared to fiscal 2006. Revenue from our Mobile and Device Solutions segment increased $15.0 million during fiscal 2007 as compared to fiscal 2006 due to continued adoption of Flash Lite by mobile and non-PC device manufacturers, and our Flash Cast solutions by mobile operators. Revenue from our Platform segment increased $12.8 million during fiscal 2007 as compared to fiscal 2006 due primarily to increased revenue related to Flash Player. Revenue from our Print and Publishing segment decreased $10.0 million during fiscal 2007 as compared to fiscal 2006 due to lower revenue associated with some of our legacy products. 2072800000 1899000000 1438000000 0.58 0.6 0.56 0.09 0.32 810900000 728500000 657800000 0.23 0.23 0.26 0.11 0.11 253000000 191300000 158200000 0.07 0.06 0.06 0.32 0.21 113100000 52500000 37500000 0.03 0.02 0.01 1.15 0.4 118500000 80900000 68100000 0.03 0.03 0.03 0.46 0.19 211600000 205700000 215700000 0.06 0.06 0.08 0.03 -0.05 Overall revenue in each of the geographic segments for fiscal 2008 increased compared to fiscal 2007 primarily due to the ongoing adoption of our CS3 family of products during the first half of the year, the launch of our CS4 family of products in the fourth quarter of the year, the launch of our Acrobat 9 family of products in the third quarter of the year and strong growth in our enterprise business. Included in the overall increase in revenue were impacts associated with foreign currency. Revenue in EMEA measured in U.S. dollars was favorably impacted by approximately $69.3 million during fiscal 2008 as compared to fiscal 2007 primarily due to the strength of the Euro against the U.S. dollar. Additionally, during fiscal 2008 we had a hedging gain of $13.2 million. Revenue in Asia was favorably impacted by approximately $39.6 million during fiscal 2008 as compared to fiscal 2007 primarily due to the strength of the Yen against the U.S. dollar. 1632800000 1508900000 1266700000 0.46 0.48 0.49 0.08 0.19 1229200000 1026400000 770100000 0.34 0.32 0.3 0.2 0.33 717900000 622600000 538500000 0.2 0.2 0.21 0.15 0.16 Overall revenue in each of the geographic segments for fiscal 2007 increased compared to fiscal 2006 primarily due to the launch of the English versions of our CS3 family of products in the second quarter of fiscal 2007, the release of the localized versions of our CS3 family of products during the third quarter of fiscal 2007 and success with our Acrobat 8 family of products. Revenue in the Americas increased during fiscal 2007 as compared to fiscal 2006 primarily due to the launch of the English versions of our CS3 family of products during the second quarter of fiscal 2007 and increased revenue from the Acrobat 8 family of products. Revenue in EMEA increased during fiscal 2007 as compared to fiscal 2006 due to the release of localized versions of our CS3 family of products and increases in revenue from the Acrobat Pro products. Additionally, revenue in EMEA increased approximately $65.9 million due to the strength of the Euro against the U.S. dollar. Revenue in Asia increased during fiscal 2007 as compared to fiscal 2006 due to the release of localized versions of our CS3 family of products. Changes in the Yen over the U.S. dollar did not have a significant impact to revenue in Asia during fiscal 2007 as compared to fiscal 2006. See Item 7A, Quantitative and Qualitative Disclosures About Market Risk regarding foreign currency risks. With regard to our product backlog, the actual amount of backlog at any particular time may not be a meaningful indicator of future business prospects. Backlog is comprised of unfulfilled orders, excluding those associated with new product releases, those pending credit review and those not shipped due to the application of our global inventory policy. We had minimal backlog at the end of the third and fourth quarters of fiscal 2008. The comparable backlog at the end of the fourth quarter of fiscal 2007 was approximately 7% of fourth quarter fiscal 2007 revenue. Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization related to localization costs and acquired rights to use technology and the costs associated with the manufacturing of our products. Cost of product revenue increased (decreased) due to the following: Amortization of acquired rights to use technology increased primarily due to the fact that we entered into certain technology licensing arrangements totaling $100.4 million and $60.0 million during fiscal 2008 and fiscal 2007, respectively. Of this cost, an estimated $56.4 million and $44.8 million during fiscal 2008 and fiscal 2007, respectively, was related to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives up to fifteen years. Of the remaining costs, we estimated that approximately $27.2 million and $15.2 million was related to historical use of licensing rights which was expensed as cost of sales and the residual of $16.8 million for fiscal 2008 was expensed as general and administrative costs. In connection with these licensing arrangements, we have the ability to acquire additional rights to use technology in the future. Royalty costs increased during fiscal 2007 as compared to fiscal 2006 primarily due to an increase in the number of licensed technology agreements during the year coupled with royalty costs associated with a legal settlement in the fourth quarter of fiscal 2007. Localization costs which are amortized over the product life cycle, decreased during fiscal 2008 as compared to fiscal 2007 and increased during fiscal 2007 as compared to fiscal 2006 primarily due to increased costs during fiscal 2007 associated with the release of the localized versions of our CS3 family of products and the Acrobat 8 family of products. Amortization of purchased technology decreased during fiscal 2008 as compared to fiscal 2007 and decreased during fiscal 2007 as compared to fiscal 2006, due to a decrease in amortization primarily associated with intangible assets purchased through the Macromedia acquisition at the beginning of fiscal 2006. Cost of services and support revenue is primarily comprised of employee-related costs and associated costs incurred to provide consulting services, training and product support. Cost of services and support revenue increased during fiscal 2008 as compared to fiscal 2007, primarily due to increases in compensation and related benefits driven by increases in headcount related to product support and utilization by customers of our consulting services. Cost of services and support revenue increased during fiscal 2007 as compared to fiscal 2006, primarily due to increases in compensation and related benefits primarily as a result of headcount increases and increases in costs to support consulting engagements and product releases. 0.07 0.09 0.09 -0.02 0.2 0.03 0.03 0.03 0.15 0.27 0.02 0.21 0.06 0.08 0.03 0.07 -0.01 0.1 -0.01 0.03 -0.1 -0.11 0.01 0.03 -0.02 0.2 Research and Development, Sales and Marketing and General and Administrative Expenses Included in compensation costs for fiscal 2008, 2007 and 2006 are compensation and related benefits, including stock-based compensation costs as a result of adopting SFAS 123R at the beginning of fiscal 2006. The increase in compensation costs during fiscal 2008 as compared to fiscal 2007 related to increases in headcount and stock-based compensation offset by decreases in profit sharing and employee bonuses based on company performance. Additionally, the increase in compensation for fiscal 2007 as compared to fiscal 2006 related to higher expense for profit sharing and employee bonuses based on company performance. Research and development expenses consist primarily of salary and benefit expenses for software developers, contracted development efforts, related facilities costs and expenses associated with computer equipment used in software development. Research and development expenses increased due to the following: We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remaining competitive in the marketplace and are directly related to continued timely development of new and enhanced products. We will continue to focus on long-term opportunities available in our end markets and make significant investments in the development of our desktop application and server-based software products. 0.18 0.19 0.21 0.08 0.14 0.07 0.09 0 0.05 0.01 0 0.08 0.14 Sales and marketing expenses consist primarily of salary and benefit expenses, sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. Sales and marketing expenses increased due to the following: 0.11 0.14 0.3 0.31 0.34 0.05 0.03 0.04 0.02 0.01 0.06 0.01 0.03 0.11 0.14 General and administrative expenses consist primarily of compensation and benefit expenses, travel expenses and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, expenses associated with computer equipment and software used in the administration of the business, charitable contributions and various forms of insurance. General and administrative expenses increased due to the following: Allocation of costs associated with acquired rights to use technology increased primarily due to the fact that we entered into certain technology licensing arrangements totaling $100.4 million and $60.0 million during fiscal 2008 and fiscal 2007, respectively. Of this cost, an estimated $56.4 million and $44.8 million during fiscal 2008 and fiscal 2007, respectively, was related to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives up to fifteen years. Of the remaining costs, we estimated that approximately $27.2 million and $15.2 million during fiscal 2008 and fiscal 2007, respectively, was related to historical use of licensing rights which was expensed as cost of sales and the residual of $16.8 million for fiscal 2008 was expensed as general and administrative costs. In connection with these licensing arrangements, we have the ability to acquire additional rights to use technology in the future. Charitable contributions represent funding of the Adobe Foundation which is a private foundation created to leverage human, technological and financial resources to drive social change and improve the communities in which we live and work. 0.23 0.17 0.09 0.09 0.09 0.06 0 0.04 0.03 0.04 0 0.02 0.08 0.02 0.02 0.02 0 0.01 0.02 0.02 0.02 0.23 0.17 In the fourth quarter of fiscal 2008, we initiated a restructuring program in order to reduce our operating costs and focus our resources on key strategic priorities impacting a total of approximately 560 full-time positions globally. In connection with this restructuring plan, we recorded restructuring charges totaling $29.2 million related to termination benefits for the elimination of approximately 460 of these full-time positions globally. As of November 28, 2008, $0.4 million was paid. The remaining accrual associated with these termination benefits is expected to be substantially paid during fiscal 2009. In fiscal 2009, we expect to record approximately $10.0 million to $13.0 million primarily related to the consolidation of leased facilities and approximately $6.0 million to $7.0 million related to employee severance arrangements for the elimination of approximately 100 of the remaining full-time positions globally. We expect to pay this facility related liability through fiscal 2013. Charges associated with these ongoing termination benefits were recorded in accordance with SFAS No. 112, "Employers' Accounting for Postemployment Benefits," and expected charges associated with the consolidation of leased facilities will be recorded in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Macromedia Restructuring Charges We acquired Macromedia on December 3, 2005 and in the first quarter of fiscal 2006, pursuant to Board of Directors' approval, implemented a restructuring plan to eliminate approximately 313 positions held by Adobe employees worldwide, which impacted all functional areas. The reduction in force was completed in fiscal 2006. The restructuring plan also included costs related to the world-wide consolidation of facilities, the cancellation of certain contracts and the write-off of fixed assets located at facilities that have been vacated. During fiscal 2008, we recorded charges of $2.9 million related to changes in estimates related to Macromedia facilities restructuring charges due to changes in sub-lease income estimates. Additionally, we have a $13.1 million liability for restructuring as of November 28, 2008 primarily associated with the Macromedia restructured facilities. We expect to pay this liability through fiscal 2011. See Note 9 of our Notes to Consolidated Financial Statements for further information regarding our restructuring charges. 0 -0.97 0.01 0 0.01 As a result of our acquisition of Macromedia in fiscal 2006, we acquired purchased intangibles which are amortized over their estimated useful lives of two to four years. In addition, during fiscal 2008 we completed one business combination and during fiscal 2007, we completed two business combinations and one asset acquisition. We acquired purchased intangibles through these acquisitions which are amortized over their estimated useful lives. Amortization expense decreased during fiscal 2008 as compared to fiscal 2007, due to a decrease in amortization expense associated with intangible assets purchased through the Macromedia acquisition. Additionally, included in the amortization of purchased intangibles and incomplete technology for fiscal 2007 was $1.5 million related to the write-off of in-process research and development from an acquisition that occurred during the second quarter of fiscal 2007. -0.06 0.04 0.02 0.02 0.03 Interest and other income, net, included interest earned on cash, cash equivalents and short-term fixed income investments as well as foreign exchange gains and losses, including those from hedging revenue transactions primarily denominated in Euro and Japanese Yen currencies. Interest and other income, net, decreased during fiscal 2008 as compared to fiscal 2007 primarily as a result of lower average invested balances due to cash used for our share repurchase programs, lower interest rates and increased hedging costs. Additionally, during fiscal 2008, interest and other income, net included losses on fixed income investments associated with a write-down for an other-than-temporary impairment totaling approximately $1.3 million during the second quarter of fiscal 2008. Interest and other income, net increased during fiscal 2007 as compared to fiscal 2006 primarily as a result of higher rates of return on invested cash and short-term investments. -0.47 0.23 0.01 0.03 0.03 Interest expense for fiscal 2008, primarily represents interest associated with our credit facility. The outstanding balance as of November 28, 2008 was $350.0 million. Interest due under the credit facility is paid upon expiration of the London interbank offered rate ("LIBOR") contract or at a minimum, quarterly. 0 1 0 0 0 Investment gains and (losses), net consist principally of realized gains or losses from the sale of marketable equity investments, other-than-temporary declines in the value of marketable and non-marketable equity securities and gains and losses associated with our interests in Adobe Ventures. Investment gains and (losses), net fluctuated due to the following: During fiscal 2008, investment gains and (losses), net increased as compared to fiscal 2007 due primarily to investment gains from our direct and Adobe Ventures investments. Additionally, during fiscal 2008, we received cash and recognized a gain resulting from the expiration of the escrow period related to the sale of our investment in Atom Entertainment, Inc. that occurred during the fourth quarter of fiscal 2006. Investment gains and (losses) net, increased in fiscal 2006 when compared to fiscal 2007 due to the sale of our investment in Atom Entertainment, Inc. 1.31 -0.88 0 0 0.02 -0.44 -0.3 15900000 6900000 -6500000 5400000 200000 67900000 -4900000 0 0 0 0 -200000 Our effective tax rate decreased approximately five percentage points during fiscal 2008 as compared to fiscal 2007. The decrease was primarily related to the completion in the third quarter of fiscal 2008 of a U.S. income tax examination covering our fiscal years 2001 through 2004, a refund of foreign taxes from our fiscal years 2000 through 2002 following a foreign tax court judgment and stronger international profits for fiscal 2008 offset in part by an increase due to the tax benefit for the reinstatement of the research and development credit relating to fiscal 2006 in the first quarter of fiscal 2007. Our effective tax rate decreased approximately two percentage points during fiscal 2007 as compared to fiscal 2006. The decrease is primarily due to the reinstatement of the federal research and development tax credit in December 2006. The reinstatement of the credit was retroactive to January 1, 2006. A $12.3 million cumulative tax benefit for the credit relating to fiscal 2006 was reflected in its entirety in the first quarter of fiscal 2007. -0.07 0.28 0.06 0.07 0.07 0.19 0.24 0.26 2019200000 1993900000 1972500000 1720400000 This data should be read in conjunction with the consolidated statements of cash flows. Our primary source of cash is receipts from revenue. The primary uses of cash are payroll related expenses; general operating expenses including marketing, travel and office rent; and cost of product revenue. Another source of cash is proceeds from the exercise of employee options and participation in the employee stock purchase plan and another use of cash is our stock repurchase program, which is detailed below. Net cash provided by operating activities of $1.3 billion for fiscal 2008, was primarily comprised of net income plus the net effect of non-cash expenses. The primary working capital sources of cash were increases in net income, deferred revenue and trade payables. Increases in deferred revenue related to maintenance and support and free of charge upgrade plan purchases which offset in part, decreases in deferred revenue related to royalties. The primary working capital uses of cash were increases in trade receivables and prepaid expenses and other current assets coupled with decreases in income taxes payable, accrued expenses and accrued restructuring costs. Trade receivables increased primarily as a result of high sales of our CS4 family of products at the end of fiscal 2008. Income taxes payable decreased primarily due to payments made as the result of the completion of a U.S. income tax examination covering our fiscal years 2001 through 2004. Accrued expenses decreased primarily due to payments for employee bonuses and profit sharing offset in part by increases in royalty accruals and charitable contributions. Accrued restructuring costs increased due to the restructuring program initiated in the fourth quarter of fiscal 2008 offset in part by payments of facility costs during fiscal 2008 associated with the Macromedia acquisition. See Note 9 of our Notes to Consolidated Financial Statements for information regarding our restructuring charges. Net cash provided by operating activities of $1.4 billion for fiscal 2007, was primarily comprised of net income, net of non-cash related expenses. The primary working capital sources of cash were increases in net income, accrued expenses, income taxes payable, deferred revenue and trade payables coupled with decreases in trade receivables and prepaid expenses and other current assets. Net changes in accrued expenses was primarily attributable to increases in accrued bonuses and accrued localization costs related to the localization of our CS3 family of products during fiscal 2007. Income taxes payable increased due to overall increased taxable income. Increases to deferred revenue related primarily to deferred maintenance and service revenue due to strong upgrade plan sales in the fourth quarter of fiscal 2007 for our CS3 family of products and related individual creative products. The decrease in trade receivables was due to collections in the first quarter of fiscal 2007 related to high Acrobat 8 sales at the end of fiscal 2006 and strong collections during the third quarter of fiscal 2007 resulting from shipments of our CS3 family of products. The primary working capital use of cash was a decrease in accrued restructuring costs which was primarily due to payments for facility and severance costs for fiscal 2007. Net cash provided by operating activities of $900.0 million for fiscal 2006, was primarily comprised of net income, net of non-cash related expenses. The primary working capital sources of cash were increases in deferred revenue, income taxes payable and trade payables. Deferred revenue increased primarily due to increased maintenance and support obligations. Income taxes payable increased primarily due to higher current tax liabilities related to overall increased taxable income. Working capital uses of cash included increases in trade receivables and prepaid expenses and other current assets coupled with decreases in accrued restructuring costs and accrued expenses. Trade receivables increased due to increased revenue. Accrued restructuring decreased due to payments made during fiscal 2006. Net changes to accrued expenses was attributable primarily to decreases in compensation related costs and other expenses. Net cash from investing activities changed from cash provided for fiscal 2007 of $81.5 million to cash used in fiscal 2008 of $304.7 million primarily due to purchases of short-term investments offset in part by maturities and sales of short-term investments. Other uses of cash during fiscal 2008 represented purchases of property and equipment, long-term investments and other assets and one business combination offset in part by proceeds from the sale of other investments in equity securities. The uses associated with the purchase of long-term investments and other assets related primarily to cash paid for future licensing rights acquired through certain technology licensing arrangements totaling $56.0 million in fiscal 2008. As part of our lease extension for the Almaden Tower lease completed during the second quarter of fiscal 2007, we purchased a portion of the lease receivable totaling $80.4 million. Other uses of cash during fiscal 2007 included the completion of two business combinations and one asset acquisition. Net cash from investing activities decreased from net cash provided for fiscal 2006 of $195.2 million to net cash provided for fiscal 2007 of $81.5 million. In fiscal 2006, net cash acquired with the Macromedia acquisition amounted to $488.4 million and the sale of our minority equity investment in Atom Entertainment, Inc. amounted to $82.3 million. No similar transactions of this magnitude occurred during fiscal 2007. The primary sources of cash during fiscal 2007 were sales and maturities of short-term investments offset in part by purchases of short-term investments. The proceeds from the sales of short-term investments were primarily used for stock repurchases. Uses of cash during fiscal 2007 included purchases of property and equipment, purchases of long-term investments and other assets which related primarily to the technology licensing arrangements that occurred during the second quarter of fiscal 2007, three acquisitions completed in fiscal 2007 and the purchase of the lease receivable associated with the Almaden tower lease. See Note 15 of our Notes to Consolidated Financial Statements for further information regarding this lease extension. Net cash used for financing activities decreased $328.8 million for a total of $1.0 billion in fiscal 2008 as compared to cash used for the same period last year, primarily due to net borrowings under our credit agreement of $350.0 million. Additionally, we had lower purchases of treasury stock when compared to the prior year (see sections entitled "Stock Repurchase Program I" and "Stock Repurchase Program II" discussed below), offset in part by lower proceeds related to the issuance of treasury stock. Net cash used for financing activities increased $603.0 million for a total of $1.4 billion during fiscal 2007 as compared to cash used of $747.4 million during fiscal 2006. Increases were primarily due to additional purchases of treasury stock when compared to the prior year. Cash used for stock repurchases increased due to a higher average cost per share, a greater number of shares being repurchased and remaining prepayments related to stock repurchase agreements. (See the following sections titled "Stock Repurchase Program I and Stock Repurchase Program II" discussed below). We expect to continue our investing activities, including short-term and long-term investments and purchases of computer systems for research and development, sales and marketing, product support and administrative staff. Furthermore, cash may be used to repurchase stock under our stock repurchase programs and strategically acquire software companies, products or technologies that are complementary to our business. The Board of Directors has approved a facilities expansion for our operations in India, which may include the purchase of land and buildings. As previously disclosed, we plan to invest $100.0 million directly in venture capital, of which, approximately $33.5 million has already been invested. We expect the remaining balance to be invested over the next three to five years. In the fourth quarter of fiscal 2008, we initiated a restructuring program in order to reduce our operating costs and focus our resources on key strategic priorities impacting a total of approximately 560 full-time positions globally. In connection with this restructuring plan, we recorded restructuring charges totaling $29.2 million related to termination benefits for the elimination of approximately 460 of these full-time positions globally. As of November 28, 2008, $0.4 million was paid. The remaining accrual associated with these termination benefits is expected to be substantially paid during fiscal 2009. In fiscal 2009, we expect to record approximately $10.0 million to $13.0 million primarily related to the consolidation of leased facilities and approximately $6.0 million to $7.0 million related to employee severance arrangements for the elimination of approximately 100 of the remaining full-time positions globally. We expect to pay this facility related liability through fiscal 2013. Our existing cash, cash equivalents and investment balances may decline during fiscal 2009 in the event of a further 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, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months. During the third quarter of fiscal 2007, we also increased our existing $500.0 million credit facility to $1.0 billion. The purpose of the credit facility is to provide backup liquidity for general corporate purposes including stock repurchases. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part I, Item 1A titled "Risk Factors." See Note 16 of our Notes to Consolidated Financial Statements for further information regarding our credit agreement. We use professional investment management firms to manage a large portion of our invested cash. External investment firms managed, on average, 65% of our consolidated invested balances during the fourth quarter of fiscal 2008. Within the U.S., the portfolio is invested primarily in money market funds for working capital purposes. Outside of the U.S., our fixed income portfolio is primarily invested in U.S. Treasury securities. 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 repurchases 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 2008 and 2007, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $525.0 million and $1.1 billion, respectively. We entered into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price ("VWAP") of our common stock over a specified period of time. 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. During fiscal 2008, we repurchased 22.4 million shares at an average price of $36.26 through structured repurchase agreements which included prepayments from fiscal 2007. During fiscal 2007, we repurchased 22.0 million shares at an average price of $40.04 through structured repurchase agreements which included prepayments from fiscal 2006. During fiscal 2008, we also repurchased 3.6 million shares at an average price of $36.41 in open market transactions. For fiscal 2008 and 2007, the prepayments were classified as treasury stock on our balance sheet at the payment date, though only shares physically delivered to us by November 28, 2008 and November 30, 2007 were excluded from the denominator in the computation of earnings per share. All outstanding structured repurchase agreements as of November 28, 2008 under this program will expire on or before March 19, 2009. As of November 28, 2008 and November 30, 2007, approximately $134.7 million and $422.6 million, respectively, of up-front payments remained under the agreements. See Item 5, Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, for share repurchases during the quarter ended November 28, 2008. Stock Repurchase Program II Under this stock repurchase program, we had authorization to repurchase an aggregate of 50.0 million shares of our common stock. During the third quarter of fiscal 2008, the remaining authorized number of shares were repurchased. From the inception of the 50.0 million share authorization under this program, we provided prepayments of $1.9 billion under structured share repurchase agreements to large financial institutions. During fiscal 2008, we repurchased 31.9 million shares under these structured agreements at an average price of $37.15. During fiscal 2007, we repurchased 17.7 million shares under these structured agreements at an average price of $40.50 and approximately $133.7 million of up-front payments remained under these agreements as of November 30, 2007. During fiscal 2008, we also repurchased 0.5 million shares at an average price of $39.79 in open market transactions. 5000 39000 134000 34.89 39.24 37.1 3554000 0 1650000 36.41 0 36.04 22418000 22012000 36792000 36.26 40.04 34 31859000 17684000 0 37.15 40.5 0 456000 0 0 39.79 0 0 58292000 39735000 38576000 36.79 40.25 34.1 2144400000 1599214000 1315317000 Our principal commitments as of November 28, 2008, consist of obligations under operating leases, royalty agreements and various service agreements. See Note 15 of our Notes to Consolidated Financial Statements for additional information regarding our contractual commitments. The following table summarizes our contractual commitments as of November 28, 2008: As of November 28, 2008, the principal outstanding under the credit agreement was $350.0 million which is due in full no later than February 16, 2013. Interest associated with this agreement cannot be estimated with certainty by period throughout the term since it is based on a fluctuating interest rate calculation. As a result of adopting FIN 48, we reclassified $197.7 million from current income taxes payable to long-term income taxes payable related to unrecognized tax benefits. The gross liability for unrecognized tax benefits at November 28, 2008 was $139.5 million, exclusive of interest and penalties. The timing of the resolution of income tax examinations is highly uncertain and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues with the IRS and other examinations could be resolved within the next 12 months, based upon the current facts and circumstances, we cannot estimate the timing of such resolution or range of potential changes as it relates to the unrecognized tax benefits that are recorded as part of our financial statements. We do not expect any material settlements in fiscal 2009 but it is inherently uncertain to determine. Two of our lease agreements and our credit agreement are subject to financial covenants. As of November 28, 2008, we were in compliance with all of our financial covenants and we expect to remain in compliance during the next 12 months. We believe these covenants will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan. Under the terms of our credit agreement and lease agreements, we are not prohibited from paying cash dividends unless payment would trigger an event of default or one currently exists. 229200000 49200000 60900000 34700000 84400000 145900000 111100000 15700000 4600000 14500000 350000000 0 0 350000000 0 725100000 160300000 76600000 389300000 98900000 We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue. The lease agreements for our corporate headquarters provide for residual value guarantees. Under Financial Accounting Standards Board ("FASB") Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002, must be recognized as a liability on our consolidated balance sheet. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the extended East and West Towers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the leases. As of November 28, 2008, the unamortized portion of the fair value of the residual value guarantees remaining in other long-term liabilities and prepaid rent was $2.6 million. In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations. To the extent permitted under Delaware law, we have agreements whereby we indemnify our directors and officers for certain events or occurrences while the director or officer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director's or officer's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal. As part of our limited partnership interests in Adobe Ventures, we have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnership. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote. Recent Accounting Pronouncements See Note 1 of our Notes to Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our financial statements. Founded 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 creative professionals, designers, knowledge workers, high-end consumers, OEM partners, developers and enterprises for creating, managing, delivering and engaging with compelling content and experiences across multiple operating systems, devices and media. We distribute our products through a network of distributors and dealers, VARs, systems integrators, ISVs and OEMs, direct to end users and through our own Web site at www.adobe.com. We also license our technology to hardware manufacturers, software developers and service providers, and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas, EMEA and Asia. Our software runs on personal computers with Microsoft Windows, Apple OS, Linux, UNIX and various non-PC platforms, depending on the product. The accompanying consolidated financial statements include those of Adobe and its subsidiaries, after elimination of all intercompany accounts and transactions. We have prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC. In the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC, we must make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Our fiscal year is a 52- or 53-week year that ends on the Friday closest to November 30. Certain prior year amounts have been reclassified to conform to current year presentation in the consolidated balance sheets. Specifically, there was a reclassification totaling $35.0 million from purchased intangibles to long-term and short-term other assets. See Notes 5 and 6 for additional information regarding this reclassification. We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables. We regularly review our trade receivables allowances by considering such factors as historical experience, credit-worthiness, the age of the trade receivable balances and current economic conditions that may affect a customer's ability to pay and we specifically reserve for those deemed uncollectible. 4398000 5376000 0 0 2105000 4414000 -1367000 1107000 -2000000 -2684000 -1033000 -1790000 4128000 6798000 43532000 55526000 25204000 153129000 156761000 97566000 -145718000 -168755000 -67244000 50943000 We translate assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, at exchange rates in effect at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates. We include accumulated net translation adjustments in stockholders' equity as a component of accumulated other comprehensive income. We record property and equipment at cost less accumulated depreciation and amortization. Property and equipment are depreciated using the straight line method over their estimated useful lives ranging from 2 to 7 years and up to 35 years for buildings. Leasehold improvements are amortized using the straight-line method over the lesser of the remaining respective lease term or useful lives. We capitalize certain costs for internal-use software incurred during the application development stage, in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In accordance with SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," we review our goodwill for impairment annually, or more frequently, if facts and circumstances warrant a review. We completed our annual impairment test in the second quarter of fiscal 2008 and determined that there was no impairment. We evaluate goodwill for impairment by comparing the fair value of each of our reporting segments to its carrying value, including the associated goodwill. To determine the fair values, we use the market approach based on comparable publicly traded companies in similar lines of businesses and the income approach based on estimated discounted future cash flows. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors. We evaluate long-lived assets, excluding goodwill, for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 142 also requires that intangible assets with finite lives be amortized over their estimated useful lives and reviewed for impairment whenever an impairment indicator exists under SFAS No. 144. We continually monitor events and changes in circumstances that could indicate carrying amounts of our long-lived assets, including our intangible assets may not be recoverable. When such events or changes in circumstances occur, we assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. We did not recognize intangible asset impairment charges in fiscal 2008, 2007 or 2006. Our intangible assets are amortized over their estimated useful lives of 1 to 13 years as shown in the table below. Amortization is based on the pattern in which the economic benefits of the intangible asset will be consumed. Capitalization of software development costs for software to be sold, leased, or otherwise marketed begins upon the establishment of technological feasibility, which is generally the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. To date, software development costs incurred between completion of a working prototype and general availability of the related product have not been material. Our revenue is derived from the licensing of software products, consulting and maintenance and support. Primarily, we recognize revenue pursuant to the requirements of AICPA Statement of Position 97-2, "Software Revenue Recognition" and any applicable amendments, when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable. We enter into multiple element revenue arrangements in which a customer may purchase a combination of software, upgrades, maintenance and support, and consulting (multiple-element arrangements). When VSOE of fair value does not exist for all delivered elements, we allocate and defer revenue for the undelivered items based on VSOE of fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as license revenue. VSOE of fair value for each element is based on the price for which the element is sold separately. We determine the VSOE of fair value of each element based on historical evidence of our stand-alone sales of these elements to third parties or from the stated renewal rate for the elements contained in the initial software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the earlier of the point at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only undelivered element is maintenance and support or other services, then the entire arrangement fee is recognized ratably over the performance period. We recognize our product revenue upon shipment, provided all other revenue recognition criteria have been met. Our desktop application products' revenue from distributors is subject to agreements allowing limited rights of return, rebates and price protection. Our direct sales and OEM sales are also subject to limited rights of return. Accordingly, we reduce revenue recognized for estimated future returns, price protection and rebates at the time the related revenue is recorded. The estimates for returns are adjusted periodically 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 recognize OEM licensing revenue, primarily royalties, when OEM partners ship products incorporating our software, provided collection of such revenue is deemed probable. For certain OEM customers, we must estimate royalty revenue due to the timing of securing customer information. This estimate is based on a combination of our generated forecasts and actual historical reporting by our OEM customers. To substantiate our ability to estimate revenue, we review license royalty revenue reports ultimately received from our significant OEM customers in comparison to the amounts estimated in the prior period. Our product-related deferred revenue includes maintenance upgrade revenue and customer advances under OEM license agreements. Our maintenance upgrade revenue for our desktop application products is included in our product revenue line item as the maintenance primarily entitles customers to receive product upgrades. In cases where we provide a specified free upgrade to an existing product, we defer the fair value for the specified upgrade right until the future obligation is fulfilled or when the right to the specified free upgrade expires. Our services and support revenue is composed of consulting, training and maintenance and support, primarily related to the licensing of our Enterprise and Mobile and Device Solutions products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. Our consulting revenue is recognized using the proportionate performance method and is measured monthly based on input measures, such as hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones when applicable. Our maintenance and support offerings, which entitle customers to receive product upgrades and enhancements or technical support, depending on the offering, are recognized ratably over the performance period of the arrangement. As discussed above, we offer limited rights of return, rebates and price protection of our products under various policies and programs with our distributors, resellers and/or end user customers. We estimate and record reserves for these programs as an offset to revenue. Below is a summary of each of the general provisions in our contracts: . Distributors are allowed limited rights of return of products purchased during the previous quarter. In addition, distributors are allowed to return products that have reached the end of their lives and products that are being replaced by new versions. . We offer rebates to our distributors, resellers and/or end user customers. The amount of revenue that is reduced for distributor and reseller rebates is based on actual performance against objectives set forth by us for a particular reporting period (volume, timely reporting, etc.). If mail-in or other promotional rebates are offered, the amount of revenue reduced is based on the dollar amount of the rebate, taking into consideration an estimated redemption rate calculated using historical trends. . From time to time, we may offer price protection to our distributors that allow for the right to a credit if we permanently reduce the price of a software product. The amount of revenue that is reduced for price protection is calculated as the difference between the old and new price of a software product on inventory held by the distributor prior to the effective date of the decrease. On a quarterly basis, the amount of revenue that is reserved for future returns is calculated based on our historical trends and data specific to each reporting period. We review the actual returns evidenced in prior quarters as a percent of revenue to determine a historical returns rate. We then apply the historical rate to the current period revenue as a basis for estimating future returns. When necessary, we also provide a specific returns reserve for product in the distribution channel in excess of estimated requirements. This estimate can be affected by the amount of a particular product in the channel, the rate of sell-through, product plans and other factors. Pursuant to Emerging Issues Task Force ("EITF") Issue No. 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement," we elected to net taxes collected from customers against those remitted to government authorities in our financial statements consistent with our historical presentation of this information. Advertising costs are expensed as incurred. Advertising expenses for fiscal 2008, 2007 and 2006 were $67.1 million, $45.3 million and $27.8 million, respectively. In countries outside the U.S., we transact business in U.S. dollars and in various other currencies. In Europe and Japan, transactions that are denominated in Euro and Yen are subject to exposure from movements in exchange rates. We 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. We have foreign exchange option and forward contracts for Yen- and Euro-denominated revenue. We account for our derivative instruments as either assets or liabilities on the balance sheet and measure them at fair value. Derivatives that are not defined as hedges in SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," must be adjusted to fair value through earnings. 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. See Note 17 for information regarding our hedging activities. Gains and losses from foreign exchange forward contracts which hedge certain balance sheet positions, primarily non-functional currency denominated assets and liabilities (e.g., trade receivables and accounts payable) are recorded each period as a component of other income in the consolidated statements of operations. Foreign exchange forward and option contracts hedging forecasted non-functional currency product licensing revenue, are designated as cash flow hedges under SFAS 133, with gains and losses recorded net of tax, as a component of other comprehensive income in stockholders' equity and reclassified into revenue at the time the forecasted transactions occur. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. In December 2008, the FASB issued FASB Staff Position ("FSP") No. 140-4 and FIN 46R-8 ("FSP 140-4 and FIN 46R-8"), "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities." FSP 140-4 and FIN 46R-8 require additional disclosures about transfers of financial assets and involvement with variable interest entities. The requirements apply to transferors, sponsors, servicers, primary beneficiaries and holders of significant variable interests in a variable interest entity or qualifying special purpose entity. Disclosures required by FSP 140-4 and FIN 46R-8 are effective for us in the first quarter of fiscal 2009. Because FSP 140-4 and FIN 46R-8 only require additional disclosures, the adoption will not impact our consolidated financial position, results of operations or cash flows. In September 2008, the FASB issued FASB Staff Position No. 133-1 and FIN 45-4 ("FSP FAS 133-1 and FIN 45-4"), "Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161." FSP FAS 133-1 and FIN 45-4 amends FASB Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. FSP FAS 133-1 and FIN 45-4 also amend FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," to require additional disclosure about the current status of the payment/performance risk of a guarantee. The provisions of the FSP that amend SFAS 133 and FIN 45 are effective for reporting periods ending after November 15, 2008. FSP FAS 133-1 and FIN 45-4 also clarifies the effective date in FASB Statement No. 161 ("SFAS 161"), "Disclosures about Derivative Instruments and Hedging Activities." Disclosures required by SFAS 161 are effective for us in the first quarter of fiscal 2009. Because FSP FAS 133-1 and FIN 45-4 only require additional disclosures, the adoption will not impact our consolidated financial position, results of operations or cash flows. In April 2008, the FASB issued FSP No. 142-3 ("FSP 142-3"), "Determination of the Useful Life of Intangible Assets." FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, "Goodwill and Other Intangible Assets." This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. Since this guidance will be applied prospectively, on adoption, there will be no impact to our current consolidated financial statements. In March 2008, the FASB issued SFAS 161 which requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for us in the first quarter of fiscal 2009. Because SFAS 161 only requires additional disclosure, the adoption will not impact our consolidated financial position, results of operations or cash flows. In June 2007, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 07-1 ("SOP 07-1"), "Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies." SOP 07-1 defines investment companies for purposes of applying the related AICPA Audit and Accounting Guide. SOP 07-1 provides guidance on whether an investment company's parent or equity-method investor should retain investment-company accounting in its financial statements. SOP 07-1 would have been effective beginning in the first quarter of fiscal 2009; however, in February 2008, the FASB issued FSP SOP 07-1-1 which indefinitely delayed the effective date of SOP 07-1. In September 2006, the FASB issued FASB Statement No. 157 ("SFAS 157"), "Fair Value Measurements," which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. Effective December 1, 2007, we adopted SFAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows. Effective November 29, 2008, we adopted SFAS 157 for all nonfinancial assets and nonfinancial liabilities. Since the adoption of SFAS 157 for nonfinancial assets and liabilities will be applied prospectively, there will not be a material impact on our consolidated financial position, results of operations or cash flows upon adoption. In October 2008, the FASB issued FSP 157-3 ("FSP 157-3"), "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not active and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3 is effective for all periods presented in accordance with SFAS No. 157. The guidance in FSP 157-3 is effective immediately and did not have an impact on the Company upon adoption. See Note 17 for information and related disclosures regarding our fair value measurements. In December 2007, the FASB issued SFAS No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations" and SFAS No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51." SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141R and SFAS 160 are effective for us beginning in the first quarter of fiscal 2010. Early adoption is not permitted. We are currently evaluating the impact that SFAS 141R and SFAS 160 will have on our consolidated financial statements. In September 2006, the FASB issued SFAS No. 158 ("SFAS 158"), "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-An Amendment of FASB No. 87, 88, 106 and 132(R)." SFAS 158 requires that the funded status of defined benefit postretirement plans be recognized on the company's balance sheet and changes in the funded status be reflected in comprehensive income. In fiscal 2007, we adopted the recognition and disclosure elements of SFAS 158 which did not have a material effect on our consolidated financial position, results of operations or cash flows. In addition, we will adopt the measurement elements of SFAS 158 in fiscal 2009. We do not expect the adoption of the measurement elements to have a material impact on our consolidated financial position, results of operations or cash flows. During fiscal 2008, we completed one business combination for cash consideration of approximately $4.3 million. This acquisition was not material to our consolidated balance sheet and results of operations. During fiscal 2007, we completed two business combinations and one asset acquisition for cash consideration of $77.0 million. Both individually and in the aggregate, these acquisitions were not material to our consolidated balance sheet and results of operations. Related to the acquisition that occurred during the second quarter of fiscal 2007, $1.5 million of in-process research and development was included in our amortization of purchased intangibles on our consolidated statements of income. See Note 5 for information regarding goodwill and purchased and other intangibles. During fiscal 2006, we completed the acquisition of Macromedia, a provider of software technologies that enables the development of a wide range of Internet and mobile application solutions. The acquisition of Macromedia accelerated our strategy of delivering an industry-defining technology platform that provided more powerful solutions for engaging people with digital information. The transaction was accounted for using the purchase method of accounting in accordance with SFAS No. 141, "Business Combinations." The results of operations of Macromedia have been included in the Consolidated Statements of Income beginning on December 3, 2005. Assets acquired and liabilities assumed were recorded at their fair values as of December 3, 2005. The total $3.5 billion purchase price is comprised of the following: In addition to the acquisition of Macromedia, during fiscal 2006, we completed three business combinations and five asset acquisitions for cash consideration of approximately $63.0 million. The impact of these acquisitions was considered immaterial to our consolidated financial statements. The table below represents the allocation of the purchase price to the acquired net assets of Macromedia based on their estimated fair values as of December 3, 2005 and the associated estimated useful lives at that date. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions of management. See Note 5 for information regarding subsequent adjustments to the purchase price allocation for goodwill associated with Macromedia. Macromedia's tangible assets and liabilities were reviewed and adjusted to their fair value as necessary, including an increase to market value of $18.4 million related to owned land and a building, $11.5 million related to an investment and $21.5 million for receivables related to future payments from existing customers. We also acquired $488.4 million in cash and cash equivalents and $109.8 million in property, plant and equipment, and assumed $103.2 million in accrued expenses and $186.9 million in deferred tax liabilities. 3209121000 227604000 29060000 -72728000 3538513000 713164000 365500000 4 183800000 6 500000 2 130700000 5 1993898000 150951000 2.18 Macromedia's deferred revenue was derived from licenses, maintenance and support, hosting and consulting contracts. We recorded an adjustment to reduce Macromedia's carrying value of deferred revenue by $49.1 million to $14.9 million, which represents our estimate of the fair value of the contractual obligations assumed. This estimate of the fair value of deferred revenue is included in net tangible assets. Acquired product rights include developed and core technology and patents. Developed technology relates to Macromedia products across all of their product lines that have reached technological feasibility. Core technology and patents represent a combination of Macromedia's processes, patents and trade secrets developed through years of experience in design and development of its products. We amortize the acquired product rights based on the pattern in which the economic benefits of the intangible asset is being consumed. Customer contracts and relationships represent existing contracts and the underlying customer relationships. We amortize these assets based on the pattern in which the economic benefits of the intangible asset is being consumed. Trademarks primarily relate to the Flash trade name and other product names and is amortized based on the pattern in which the economic benefits of the intangible asset is being consumed. As of the acquisition date, no amounts were allocated to in-process research and development. In-process research and development is dependent on the status of new projects on the date the acquisition is consummated. Prior to the acquisition date, Macromedia had released new versions of its software products. Accordingly, there were no substantive research and development projects in process on the date the acquisition was consummated. Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. The factors that contributed to the recognition of goodwill included securing buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace participant, acquiring a talented workforce and significant cost savings opportunities. As part of our accounting for the Macromedia acquisition, a portion of the overall purchase price was allocated to goodwill and acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Thus, approximately $186.9 million, included in the net tangible assets, was established as a deferred tax liability for the future amortization of the intangible assets. In accordance with SFAS No. 109, "Accounting for Income Taxes," the valuation allowance on Macromedia's financial statements as of December 3, 2005 was reduced by $237.8 million to $16.1 million, to the extent the deferred tax assets are more likely than not realizable. Any impairment charges made in the future associated with goodwill will not be tax deductible and will result in an increased effective income tax rate in the quarter the impairment is recorded. Stock-based compensation represents the estimated fair value, measured as of December 3, 2005, of unvested Macromedia stock options and restricted stock assumed. The fair value of unvested options assumed was $146.2 million using the Black Scholes valuation model. The fair value of the unvested restricted stock of $4.8 million was based on the fair value of the underlying shares on the acquisition date. The stock-based compensation is being amortized to expense over the remaining vesting periods of the underlying options or restricted stock. See Note 11 for information regarding amortization of stock-based compensation. 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." These investments are free of trading restrictions or become free of trading restrictions within one year. 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. Gains are recognized when realized in our consolidated statements of income. Losses are recognized as realized or when we have determined that an other-than-temporary decline in fair value has occurred. Gains and losses are determined using the specific identification method. Cash, cash equivalents and short-term investments consisted of the following as of November 28, 2008: Cash, cash equivalents and short-term investments consisted of the following as of November 30, 2007: Interest income for fiscal 2008, 2007 and 2006 was $57.6 million, $92.7 million and $74.9 million, respectively. The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at November 28, 2008: The following table summarizes the cost and estimated fair value of debt securities classified as short-term investments based on stated maturities. 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 and ability to retain our investment in the issuer for a period of sufficient time to allow for recovery in market value. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. We record the related write-down as investment gains and losses on our consolidated statements of income for equity securities and as interest and other income for debt securities. See Note 6 and Note 17 for information regarding gains and losses on our long-term investments. Property and equipment consisted of the following as of November 28, 2008 and November 30, 2007: Depreciation and amortization expense of capital assets for fiscal 2008, 2007 and 2006 was $83.3 million, $73.2 million and $67.7 million, respectively. Below is our goodwill reported by business segment, as of November 28, 2008: The column "Other" above includes net reductions in goodwill of $9.6 million related to deferred tax assets associated with our acquisition of Scene7 and $4.2 million related to the tax reserve associated with the acquisition of Macromedia, offset in part by foreign currency changes and other individually insignificant tax related items. See Note 2 for further information regarding our acquisitions. Below are our purchased and other intangible assets, net reported by business segment for fiscal 2008 and 2007: Purchased and other intangible assets subject to amortization were as follows as of November 28, 2008: Purchased and other intangible assets subject to amortization were as follows as of November 30, 2007: Certain amounts as of November 30, 2007 have been reclassified to conform to current year presentation in the consolidated balance sheets. Specifically, we reclassified $55.5 million of cost and $20.5 million of accumulated amortization ($35.0 million, net) from purchased intangibles to long-term and short-term other assets associated with certain technology license arrangements. Amortization expense related to identifiable intangible assets was $184.4 million, $216.3 million and $219.3 million for fiscal 2008, 2007 and 2006, respectively. Of the total amortization expense for fiscal 2008, 2007 and 2006, $116.1, $145.4 and $149.9 million, respectively, was charged to cost of sales. Purchased and other intangible assets are amortized over their estimated useful lives of 1 to 13 years. Amortization expense for each of the next five years and thereafter is as follows: Other assets consisted of the following as of November 28, 2008 and November 30, 2007: Acquired rights to use technology purchased during fiscal 2008 and fiscal 2007 was $100.4 million and $60.0 million, respectively. Of this cost, an estimated $56.4 million and $44.8 million during fiscal 2008 and fiscal 2007, respectively, was related to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives up to fifteen years. Of the remaining costs, we estimated that approximately $27.2 million and $15.2 million during fiscal 2008 and fiscal 2007, respectively, was related to historical use of licensing rights which was expensed as cost of sales and the residual of $16.8 million for fiscal 2008 was expensed as general and administrative costs. In connection with these licensing arrangements, we have the ability to acquire additional rights to use technology in the future. See Note 15 for further information regarding our contractual commitments. In general, acquired rights to use technology are amortized over their estimated useful lives of 5 to 15 years. Certain prior year amounts have been reclassified to conform to current year presentation in the consolidated balance sheets. Specifically, there was a reclassification associated with certain technology licensing arrangements totaling $35.0 million, net from purchased intangibles of which $28.7 million and $4.7 million were reclassified to acquired rights to use technology and long-term prepaid royalties, respectively. The remaining amount was reclassified to short-term prepaid royalties. Included in investments are our indirect investments through our limited partnership interest in Adobe Ventures, which is consolidated in accordance with FASB Interpretation No. 46R, a revision to FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." The partnership is controlled by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures. Adobe Ventures carries its investments in equity securities at estimated fair value and investment gains and losses are included in our consolidated statements of income. The investments held by Adobe Ventures at November 28, 2008 and November 30, 2007 are not publicly traded and, therefore, there is no established market for these securities. In order to determine the fair value of these investments, we use the most recent round of financing involving new non strategic investors or estimates of current market value made by Granite Ventures. It is our policy to evaluate the fair value of these investments held by Adobe Ventures, as well as our direct investments, on a regular basis. This evaluation includes, but is not limited to, reviewing each company's cash position, financing needs, earnings and revenue outlook, operational performance, management and ownership changes and competition. In the case of privately-held companies, this evaluation is based on information that we request from these companies. This information is not subject to the same disclosure regulations as U.S. publicly traded companies and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies. See Note 17 for further information regarding Adobe Ventures. Also included in investments are our direct investments in privately-held companies accounted for based on the cost method which are assessed for other-than-temporary impairment in value. The increase in security and other deposits relates primarily to the purchase of real property in Massachusetts. We entered into a Purchase and Sale Agreement, effective May 12, 2008, for the acquisition of real property located in Waltham, Massachusetts. We will purchase the property subject to completion of construction of an office building shell and core, parking structure and site improvements. The purchase price for the property will be $44.7 million. We made an initial deposit of $7.0 million to be held in escrow until closing and then applied to the purchase price. Closing is expected to occur in May 2009 and the remaining balance is due at such time. Other assets include the fair value, at inception, of the residual value guarantee associated with our leases on the buildings we occupy as part of our corporate headquarters, in accordance with FIN 45. The lease agreements for our corporate headquarters provide for residual value guarantees. Under FIN 45, the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002, must be recognized as a liability on our consolidated balance sheet. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the extended East and West Towers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the leases. As of November 28, 2008, the unamortized portion of the fair value of the residual value guarantees remaining in other long-term liabilities and prepaid rent was $2.6 million. Accrued expenses consisted of the following as of November 28, 2008 and November 30, 2007: Other primarily includes general corporate accruals for corporate marketing programs, local and regional expenses, charitable contributions and technical support. Other is also comprised of deferred rent related to office locations with rent escalations, accrued royalties, foreign currency derivatives and accrued interest on the credit facility. Income before income taxes includes income from foreign operations of $740.3 million, $453.2 million and $293.7 million for fiscal 2008, 2007 and 2006, respectively. The provision for income taxes consisted of the following for fiscal 2008, 2007 and 2006: Certain employee stock plan benefits in fiscal 2008, 2007 and 2006 associated with the acquisition of Macromedia reduced goodwill. See Note 5 for further information regarding our goodwill. Total income tax expense differs from the expected tax expense (computed by multiplying the United States federal statutory rate of 35% by income before income taxes) as a result of the following: Deferred Tax Assets and Liabilities The tax effects of the temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of November 28, 2008 and November 30, 2007 are presented below: The deferred tax assets and liabilities for fiscal 2008 and fiscal 2007 include amounts related to various acquisitions. The total change in deferred tax assets and liabilities in fiscal 2008 includes changes that are recorded to other comprehensive income, goodwill and retained earnings. We provide United States income taxes on the earnings of foreign subsidiaries unless the subsidiaries' earnings are considered permanently reinvested outside the United States. To the extent that the foreign earnings previously treated as permanently reinvested are repatriated, the related United States tax liability may be reduced by any foreign income taxes paid on these earnings. As of November 28, 2008, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $1.1 billion. The unrecognized deferred tax liability for these earnings is approximately $342.0 million. As of November 28, 2008, we have net operating loss carryforward assets of approximately $19.0 million for federal, $7.7 million for state and $1.3 million related to foreign net operating losses. We also have federal, state and foreign tax credit carryforwards of approximately $8.6 million, $10.9 million and $3.5 million, respectively. The net operating loss carryforward assets, federal tax credits and foreign tax credits will expire in various years from fiscal 2014 through 2029. The state tax credit carryforwards can be carried forward indefinitely. The net operating loss carryforward assets and certain credits are subject to an annual limitation under Internal Revenue Code Section 382, but are expected to be fully realized. In addition, we have been tracking certain deferred tax attributes of $49.0 million which have not been recorded in the financial statements pursuant to SFAS 123R. These amounts are no longer included in our gross or net deferred tax assets. Pursuant to SFAS 123R, footnote 82, the benefit of these deferred tax assets will be recorded to equity when they reduce taxes payable. A valuation allowance has been established for certain deferred tax assets related to the impairment of investments. At the end of fiscal 2008, our valuation allowance was $1.5 million. Adoption of FIN 48 We adopted both FIN 48 and FSP FIN 48-1 on December 1, 2007. The adoption of FIN 48 resulted in an increase of $3.9 million to both assets and unrecognized tax benefits in our consolidated balance sheet as of the beginning of fiscal 2008. Upon adoption, the gross liability for unrecognized tax benefits at December 1, 2007 was $218.4 million, exclusive of interest and penalties. The total amount of gross FIN 48 liabilities included $57.7 million that relates to certain tax attributes from acquired companies, including Macromedia. These liabilities from acquired companies are not recorded on our balance sheet because they are related to positions that have not yet been claimed on our income tax returns. We have historically presented our estimated liability for unrecognized tax benefits as a current liability. FIN 48 requires liabilities for unrecognized tax benefits to be classified based on whether a payment is expected to be made within the next 12 months. That is, amounts expected to be paid within the next 12 months are to be classified as a current liability and all other amounts are to be classified as a non-current liability. As a result of adopting FIN 48, we reclassified $197.7 million from current income taxes payable to long-term income taxes payable, including accrued interest on the balance. We have historically presented our estimated state, local and interest liabilities net of the estimated benefit we expect to receive from deducting such payments on future tax returns (i.e., on a "net" basis). FIN 48 requires this estimated benefit to be classified as a deferred tax asset instead of a reduction of the overall liability (i.e., on a "gross" basis). Thus, we recognized additional deferred income tax assets of $3.9 million to present the unrecognized tax benefits as gross amounts on our consolidated balance sheet. Our policy to classify interest and penalties on unrecognized tax benefits as income tax expense did not change upon the adoption of FIN 48. As of December 1, 2007, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $42.8 million. Summary FIN 48 Changes During fiscal 2008, our aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows: The gross liability for unrecognized tax benefits at November 28, 2008 of $139.5 million is exclusive of interest and penalties. If the total FIN 48 gross liability for unrecognized tax benefits at November 28, 2008 were recognized in the future, the following amounts, net of an estimated $12.9 million benefit related to deducting such payments on future tax returns, would result: $57.7 million of unrecognized tax benefits would decrease the effective tax rate and $68.9 million would decrease goodwill. As of November 28, 2008, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $15.3 million. We file income tax returns in the U.S. on a federal basis and in many U.S. state and foreign jurisdictions. We are subject to the continual examination of our income tax returns by the IRS and other domestic and foreign tax authorities. Our major tax jurisdictions are the U.S., Ireland and California. For California, Ireland and the U.S., the earliest fiscal years open for examination are 2001, 2002 and 2005, respectively. In August 2008, a U.S. income tax examination covering our fiscal years 2001 through 2004 was completed. Our accrued tax and interest related to these years was $100.0 million and was previously reported in long-term income taxes payable. In conjunction with this resolution, we requested and received approval from the IRS to repatriate certain foreign earnings in a tax-free manner, which resulted in a reduction of our long-term deferred income tax liability of $57.8 million. Together, these liabilities on our balance sheet decreased by $157.8 million. Also in August 2008, we paid $80.0 million in conjunction with the aforementioned resolution, credited additional paid-in-capital for $41.3 million due to our use of certain tax attributes related to stock option deductions, including a portion of certain deferred tax assets not recorded in our financial statements pursuant to SFAS 123R and made other individually immaterial adjustments to our tax balances totaling $15.8 million. A net income statement tax benefit in the third quarter of fiscal 2008 of $20.7 million resulted. The accounting treatment related to certain unrecognized tax benefits from acquired companies, including Macromedia, will change when SFAS 141R becomes effective. SFAS 141R will be effective in the first quarter of our fiscal year 2010. At such time, any changes to the recognition or measurement of these unrecognized tax benefits will be recorded through income tax expense, where currently the accounting treatment would require any adjustment to be recognized through the purchase price as an adjustment to goodwill. The timing of the resolution of income tax examinations is highly uncertain and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues in the IRS and other examinations could be resolved within the next 12 months, based upon the current facts and circumstances, we cannot estimate the timing of such resolution or range of potential changes as it relates to the unrecognized tax benefits that are recorded as part of our financial statements. We do not expect any material settlements in fiscal 2009 but it is inherently uncertain to determine. In fiscal 2008, we recorded restructuring charges totaling $32.1 million of which $29.2 related to fiscal 2008 restructuring charges and $2.9 million related to changes in estimates associated with pre-existing facilities accruals for the Macromedia acquisition. These restructuring charges are included in our consolidated statements of income. Fiscal 2008 Restructuring Charges In the fourth quarter of fiscal 2008, we initiated a restructuring program in order to reduce our operating costs and focus our resources on key strategic priorities impacting a total of approximately 560 full-time positions globally. In connection with this restructuring plan, we recorded restructuring charges totaling $29.2 million related to termination benefits for the elimination of approximately 460 of the 560 full-time positions globally. As of November 28, 2008, $0.4 million was paid. The remaining accrual for these restructuring charges is expected to be substantially paid during fiscal 2009. Charges associated with these ongoing termination benefits were recorded in accordance with SFAS No. 112, "Employers' Accounting for Postemployment Benefits." Macromedia Acquisition In the first quarter of fiscal 2006, pursuant to the Board of Directors' approval, 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 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. Pursuant to EITF Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination," all restructuring charges related to the Macromedia acquisition are recognized as a part of the purchase price allocation. See Note 2 for information regarding the Macromedia acquisition. Macromedia Merger Restructuring Charges-The following table sets forth a summary of Macromedia restructuring activity, including any costs incurred during fiscal 2007 and 2008 and the cumulative costs incurred through November 28, 2008 for each major type of cost associated with the restructuring plan: Included in the adjustments column is a change to previous estimates, recorded as a current period expense, associated with closing redundant facilities as a result of the Macromedia acquisition as well as the net effect of foreign currency changes. Accrued restructuring charges of $13.1 million at November 28, 2008 includes $6.9 million recorded in accrued restructuring, current and $6.2 million, related to long-term facilities obligations, recorded in accrued restructuring, non-current in the accompanying consolidated balance sheets. We expect to pay these liabilities through fiscal 2011. The following table sets forth a summary of Macromedia restructuring activity, including any costs incurred during fiscal 2006 and 2007 for each major type of cost associated with the restructuring plan: Accrued restructuring charges of $17.7 million at November 30, 2007 included $3.7 million recorded in accrued restructuring, current and $14.0 million, related to long-term facilities obligations, recorded in accrued restructuring, non-current in the accompanying consolidated balance sheets. The following table sets forth a summary of Macromedia restructuring activity for the fiscal year ended December 1, 2006: At December 1, 2006, accrued restructuring charges of $31.4 million included $9.8 million recorded in accrued restructuring, current and $21.6 million, related to long-term facilities obligations, recorded in accrued restructuring, non-current in the accompanying consolidated balance sheets. Adobe Restructuring Charges-In connection with the worldwide restructuring plan, we recognized costs related to (i) termination benefits for former Adobe employees whose positions were eliminated, (ii) the closure of Adobe facilities and (iii) the cancellation of certain contracts held by Adobe. The following table sets forth a summary of the Adobe restructuring activity for the fiscal year ended November 30, 2007: As of November 30, 2007, we had no remaining accrued restructuring charges associated with Adobe restructuring activity recorded in the accompanying consolidated balance sheets. Total costs under the plan incurred and expected to be incurred were $19.5 million and $19.0 million, respectively. The world wide consolidation of facilities was completed in fiscal 2007. The following table sets forth a summary of the Adobe restructuring activity for the fiscal year ended December 1, 2006: Accrued restructuring charges as of December 1, 2006 included $0.3 million recorded in accrued restructuring, current and $0.3 million, related to long-term facilities obligations recorded in accrued restructuring, non-current in the accompanying consolidated balance sheets. 0 0 0 0 26976000 26976000 12168000 16283000 -7187000 3072000 30148000 42316000 0 0 0 0 3238000 3238000 977000 1435000 -147000 -311000 1379000 2356000 13145000 17718000 -7334000 2761000 61741000 74886000 1002000 -370000 -632000 853000 -26459000 26608000 28934000 -12052000 -599000 7398000 -10547000 32083000 46000 -8000 -38000 -699000 -3224000 3969000 1444000 1000 -10000 16000 -1072000 2500000 31426000 -12429000 -1279000 7568000 -41302000 65160000 179000 -37000 -142000 467000 -387000 -80000 646000 -424000 -222000 -103000 -18597000 18879000 946000 -479000 0 -94000 -11000 105000 749000 -19087000 18984000 In 1987, we adopted an Employee Investment Plan, qualified under Section 401(k) of the Internal Revenue Code, which is a pretax savings plan covering substantially all of our United States employees. Under the plan, eligible employees may contribute up to 65% of their pretax salary, subject to the Internal Revenue Service annual contribution limits. In fiscal 2008, we matched 50% of the first 6% of the employee's contribution. We contributed $16.6 million, $14.5 million and $11.2 million in fiscal 2008, 2007 and 2006, respectively. We can terminate matching contributions at our discretion. We have a profit sharing plan that provides for profit sharing payments to all eligible employees following each quarter in which we achieve at least 80% of our budgeted earnings for the quarter. The plan, as well as the annual operating budget on which the plan is based, is approved by our Board of Directors. We contributed $73.8 million, $67.6 million and $51.9 million to the plan in fiscal 2008, 2007 and 2006, respectively. On September 21, 2006, the Board of Directors approved the Adobe Systems Incorporated Deferred Compensation Plan, effective December 2, 2006 (the "Deferred Compensation Plan"). The Deferred Compensation Plan is an unfunded, non-qualified, deferred compensation arrangement under which certain executives and members of the Board of Directors are able to defer a portion of their annual compensation. Participants may elect to contribute up to 75% of their base salary and 100% of other specified compensation, including commissions, bonuses, performance-based and time-based restricted stock units, and directors' fees. Participants are able to elect the payment of benefits to begin on a specified date at least three years after the end of the plan year in which the election is made in the form of a lump sum or annual installments over five, ten or fifteen years. Upon termination of a participant's employment with Adobe, such participant will receive a distribution in the form of a lump sum payment. All distributions will be made in cash, except for deferred performance-based and time-based restricted stock units which will be settled in stock. As of November 28, 2008 and November 30, 2007, the invested amounts under the Deferred Compensation Plan total $7.6 million and $3.1 million, respectively and were recorded as long-term other assets on our balance sheet. As of November 28, 2008 and November 30, 2007, we recorded $7.6 million and $3.1 million, respectively, as long-term liabilities to recognize undistributed deferred compensation due to employees. We have the following stock-based compensation plans and programs as described below. Stock Option Plans 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 stockholder and employee interests. Currently, we grant options from the (i) 2003 Equity Incentive Plan, as amended ("2003 Plan"), and the 2005 Equity Incentive Assumption Plan ("2005 Assumption Plan"). These plans are collectively referred to in the following discussion as "the Plans." Under the Plans, options can be granted to all employees, including executive officers, outside consultants and non-employee directors. The Plans will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued and restrictions on issued shares have lapsed. Option vesting periods are generally three to four years for all of the Plans. Options granted under the Plans generally expire seven years from the effective date of grant for employees and outside consultants and ten years from the effective date of grant for non-employee directors. As of November 28, 2008, we had reserved 94.7 million and 1.8 million shares of common stock for issuance under our 2003 Plan and 2005 Assumption Plan, respectively. As of November 28, 2008, we had 42.7 million and 1.6 million shares available for grant under our 2003 Plan and 2005 Assumption Plan, respectively. Employee Stock Purchase Plan Our 1997 Employee Stock Purchase Plan ("ESPP") allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of a twenty-four month offering period 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. The ESPP will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued. As of November 28, 2008, we had reserved 76.0 million shares of our common stock for issuance under the ESPP and approximately 15.6 million shares remain available for future issuance. Restricted Stock Plan We grant restricted stock awards and performance awards to officers and key employees under our Amended 1994 Performance and Restricted Stock Plan ("Restricted Stock Plan"). We can also grant restricted stock units to all eligible employees under the Restricted Stock Plan. Restricted stock issued under the Restricted Stock Plan generally vests annually over four years. As of November 28, 2008, we had reserved 16.0 million shares of our common stock for issuance under the Restricted Stock Plan and approximately 0.5 million shares were available for grant. Performance Share Programs Effective January 24, 2008, the Executive Compensation Committee adopted the 2008 Performance Share Program ("2008 Program"). The purpose of the 2008 Program is to align key management and senior leadership with stockholders' interests and to retain key employees. The measurement period for the 2008 Program is our fiscal 2008 year. All members of our executive management and other key senior leaders are participating in the 2008 Program. Awards granted under the 2008 Program were granted in the form of performance shares pursuant to the terms of our 2003 Plan. If pre-determined performance goals are met, shares of stock will be granted to the recipient, with 25% vesting on the later of the date of certification of achievement or the first anniversary date of the grant and the remaining 75% vest evenly on the following three annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe. Participants in the 2008 Program have the ability to receive up to 200% of the target number of shares originally granted. Issuance of Shares Upon exercise of stock options or vesting of restricted stock and performance shares, we will issue treasury stock. If treasury stock is not available, common stock will be issued. In order to minimize the impact of on-going dilution from exercises of stock options and vesting of restricted stock and performance shares, we instituted a stock repurchase program. See Note 12 for information regarding our stock repurchase programs. Valuation of Stock-Based Compensation Stock-based compensation cost is measured at the grant date based on the fair value of the award. We currently use the Black-Scholes option pricing model to determine the fair value of stock options and ESPP 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 of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and any expected dividends. We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. We estimate the volatility of our common stock by using implied volatility in market traded options. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate that we use in the option valuation model on zero-coupon yields implied by U.S. Treasury issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. The assumptions used to value our option grants were as follows: The expected term of ESPP shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights were as follows: We recognize the estimated compensation cost of restricted stock awards and restricted stock units, net of estimated forfeitures, over the vesting term. The estimated compensation cost is based on the fair value of our common stock on the date of grant. We recognize the estimated compensation cost of performance shares, net of estimated forfeitures. The awards are earned upon attainment of identified performance goals, some of which contain discretionary metrics. As such, these awards are re-valued based on our traded stock price at the end of each reporting period. If the discretion is removed, the award will be classified as a fixed equity award. The fair value of the awards will be based on the measurement date, which is the date the award becomes fixed. The awards will be subsequently amortized over the remaining performance period. Effective April 1, 2007, the government of India implemented a new fringe benefit tax that applies to equity awards granted to our employees in India. We incur a fringe benefit tax liability at the time the award is exercised or released. In accordance with the laws in India, we have elected to recover, from the employee, the fringe benefit tax paid in connection with the applicable award. Recovery of the fringe benefit tax from the employee is treated as a component of the exercise price and as such, impacts the fair value of the awards and the related stock-based compensation. We have elected to use a binomial option pricing model that incorporates the Black-Scholes option pricing model to calculate the fair value of stock-based awards issued in India under amended equity award agreements. The assumptions used in the valuation of equity awards in India are the same as those used for all of our equity awards as noted above. The recovery of fringe benefit tax is recorded as stock-based compensation cost in our consolidated statements of income. Summary of Stock Options The following table sets forth the summary of option activity under our stock option program for fiscal years 2008, 2007 and 2006: The weighted average fair values of options granted during fiscal 2008, 2007 and 2006 were $10.32, $12.37 and $10.79, respectively. The total intrinsic value of options exercised during fiscal 2008, 2007 and 2006 was $142.4 million, $463.6 million and $440.0 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares. Information regarding the stock options outstanding at November 28, 2008, November 30, 2007 and December 1, 2006 is summarized below. All stock options granted to current executive officers are made after a review by and with the approval of the Executive Compensation Committee of the Board of Directors. The Directors Plan (and starting in fiscal 2008, the 2003 Plan) provides for the granting of nonqualified stock options to non-employee directors. Option grants are limited to 25,000 shares per person in each fiscal year, except for a new non-employee director to whom 50,000 shares are granted upon election as a director. Options granted under the Directors Plan have a ten-year term. Options granted prior to March 28, 2006 are exercisable and vest over three years: 25% on the day preceding each of our next two annual meetings of stockholders and 50% on the day preceding our third annual meeting of stockholders after the grant of the option. Options granted on or after March 28, 2006 vest over four years: 25% on the day preceding each of our next four annual meetings. The exercise price of the options that are issued is equal to the fair market value of our common stock on the date of grant. Options granted to directors for fiscal 2008, 2007 and 2006 are as follows: Summary of Employee Stock Purchase Shares The weighted average fair value of employee stock purchase shares granted during fiscal 2008, 2007 and 2006 was $9.56, $12.03 and $8.09, respectively. Employees purchased 2.4 million shares, 2.6 million shares and 2.1 million shares, respectively, for fiscal 2008, 2007 and 2006. The intrinsic value of shares purchased during fiscal 2008, 2007 and 2006 was $25.0 million, $39.8 million and $18.6 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 Restricted stock award activity for fiscal 2008, 2007 and 2006 is as follows: The total fair value of restricted stock awards vested during fiscal 2008, 2007 and 2006 was $0.5 million, $0.7 million and $0.3 million, respectively. Restricted stock awards are considered outstanding at the time of grant, as the stock award holders are entitled to dividends and voting rights. Unvested restricted stock awards are not considered outstanding in the computation of basic earnings per share. Restricted stock unit activity for fiscal 2008 and 2007 is as follows: We did not grant restricted stock units in fiscal 2006. The total fair value of restricted stock units vested during fiscal 2008 was $14.4 million. Information regarding restricted stock units outstanding at the end of fiscal 2008 and 2007 is summarized below. Summary of Performance Shares The following table sets forth the summary of performance share activity under our 2008 Program for fiscal 2008. The actual performance achievement of participants in the 2008 Program will be approved by the Executive Compensation Committee in the first quarter of fiscal 2009. In the first quarter of fiscal 2008, the Executive Compensation Committee certified the actual performance achievement of participants in the 2006 Performance Share Program ("2006 Program") and the 2007 Performance Share Program ("2007 Program"). Based upon the achievement of goals outlined in the 2006 Program and 2007 Program, participants had the ability to receive up to 150% and 200%, respectively, of the target number of shares originally granted. Actual performance resulted in participants achieving approximately 105% of target or 0.3 million shares for the 2006 Program and 200% of target or 0.7 million shares for the 2007 Program. Shares awarded under the 2006 Program vested 100% and were released in the first quarter of fiscal 2008. Shares under the 2007 Program vested 25% in the first quarter of fiscal 2008 and the remaining 75% vest evenly on the following three annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe. The following table sets forth the summary of performance share activity under our programs, based upon share awards actually achieved, during fiscal 2008: The total fair value of performance awards vested during fiscal 2008 was $16.7 million. Information regarding performance awards achieved and outstanding at November 28, 2008 is as follows: Compensation Costs With the exception of performance shares, stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the entire award, which is generally the vesting period. For performance shares, expense is recognized on a straight-line basis over the requisite service period for each vesting portion of the award. As of November 28, 2008, there was $259.5 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 consolidated statements of income are as follows: 65251000 61731000 47742000 40704000 21.76 24.19 28.47 29.67 28.71 40.36 35.08 17.73 21.18 25.45 25.33 33.18 35.34 936800 654200 76100 58713000 43067000 38975000 23.82 27.68 29.36 912.7 623.8 76.1 38944000 29387000 28034000 20.58 23.77 26.61 731000 539800 76100 0 1701000 4261000 71700 98700 1309000 3351000 55200 77600 383000 8900 323000 7400 0 825000 0 1651000 0 383000 428000 501000 21000 4000 6.68 9.17 36.41 39.31 39.47 40.03 0 22.03 29.32 34.94 25.53 4.77 39.95 35.95 42.61 37.09 35.25 0 0 2.3 3.5 0 4.7 4.8 3.7 0.32 0.3 0.3 0.6 0.39 0.37 0.017 0.036 0.043 0.035 0.051 0.052 0.5 0.5 0 2 2 1.3 0.3 0.3 0.3 0.36 0.33 0.35 0.0212 0.0479 0.0432 0.0329 0.0511 0.0526 5462000 10084000 12017000 -9983000 -21368000 -25873000 -2517000 -2705000 -4807000 15143000 4 4.36 4.44 3.87 4.19 3.8 3.28 3.38 3.39 1.73 1.88 1.52 1.65 1.2 1.1 3728000 5152000 8180000 55653000 58579000 63950000 41326000 41801000 66792000 24521000 24467000 27121000 125228000 129999000 166043000 570000 346000 0 20835000 9518000 1678000 17928000 6084000 1500000 10810000 4040000 1313000 50143000 19988000 4491000 250000 250000 200000 0 0 50000 3177000 1771000 -422000 0 -195000 -70000 941000 -116000 1883000 -232000 993000 -480000 -130000 0 5000 9000 -15000 -92000 -302000 -2000 -393000 -48000 0 0 414000 22.35 In the second quarter of fiscal 2006, we concluded a voluntary review of our executive officer grants from 1997 to 2006 and uncovered no improper grants to executive officers. In the fourth quarter of fiscal 2006, we concluded a second voluntary review, focused principally on grants to non-executive employees from 1997 to 2006. Preliminary results of this internal review suggested that certain annual grants may have had improper grant dates. The Board of Directors formed a Special Committee of outside Directors to undertake a broader review of these annual non-executive employee option grants. The Special Committee enlisted the assistance of independent legal counsel and an independent accounting firm. The Special Committee uncovered no fraud or intentional wrongdoing. The Special Committee did find certain instances relating to grants made to employees where the list of employees and/or shares allocated to them was not sufficiently definitive for the 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: The impact on retained earnings is comprised of the following amounts: -21800000 -10420000 -2959000 -230000 -35409000 5484000 2558000 726000 57000 8825000 -16316000 -7862000 -2233000 -173000 -26584000 1577480000 380492000 608645000 765776000 -0.01 -0.03 0 0 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. During fiscal 2008 and 2007, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $525.0 million and $1.1 billion, respectively. We entered into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price ("VWAP") of our common stock over a specified period of time. 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. During fiscal 2008, we repurchased 22.4 million shares at an average price of $36.26 through structured repurchase agreements which included prepayments from fiscal 2007. During fiscal 2007, we repurchased 22.0 million shares at an average price of $40.04 through structured repurchase agreements which included prepayments from fiscal 2006. During fiscal 2008, we also repurchased 3.6 million shares at an average price of $36.41 in open market transactions. For fiscal 2008 and 2007, the prepayments were classified as treasury stock on our balance sheet at the payment date, though only shares physically delivered to us by November 28, 2008 and November 30, 2007 were excluded from the denominator in the computation of earnings per share. All outstanding structured repurchase agreements as of November 28, 2008 under this program will expire on or before March 19, 2009. As of November 28, 2008 and November 30, 2007, approximately $134.7 million and $422.6 million, respectively, of up-front payments remained under the agreements. Stock Repurchase Program II Under this stock repurchase program, we had authorization to repurchase an aggregate of 50.0 million shares of our common stock. During the third quarter of fiscal 2008, the remaining authorized number of shares were repurchased. From the inception of the 50.0 million share authorization under this program, we provided prepayments of $1.9 billion under structured share repurchase agreements to large financial institutions. During fiscal 2008, we provided prepayments of $1.0 billion and repurchased 31.9 million shares under these structured agreements at an average price of $37.15. During fiscal 2007, we provided prepayments of $850.0 million under structured share repurchase agreements to large financial institutions. During fiscal 2007, we repurchased 17.7 million shares under these structured agreements at an average price of $40.50 and approximately $133.7 million of up-front payments remained under these agreements as of November 30, 2007. During fiscal 2008, we also repurchased 0.5 million shares at an average price of $39.79 in open market transactions. The following table sets forth the activity for each component of other comprehensive income (loss) for fiscal 2008, 2007 and 2006: Taxes related to unrealized gains and losses on available-for-sale securities for fiscal 2008, 2007 and 2006 were $1.0 million, $2.4 million and $2.6 million, respectively. Taxes related to derivative instruments were zero for all fiscal years. The following table sets forth the components of foreign currency translation adjustments for fiscal 2008, 2007 and 2006: Basic net income per share is computed using the weighted average 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 stock and stock options using the treasury stock method. The following table sets forth the computation of basic and diluted net income per share for fiscal 2008, 2007 and 2006: For fiscal 2008, 2007 and 2006, options to purchase approximately 16.5 million, 10.4 million and 17.7 million shares, respectively, of common stock with exercise prices greater than the annual average fair market value of our stock of $37.07, $41.77 and $35.32, respectively, were not included in the calculation because the effect would have been anti-dilutive. Lease Commitments We lease certain of our facilities and some of our equipment under non-cancellable operating lease arrangements that expire at various dates through 2028. We also have one land lease that expires in 2091. Rent expense includes base contractual rent and variable costs such as building expenses, utilities, taxes, insurance and equipment rental. Rent expense and sublease income for these leases for fiscal 2006 through fiscal 2008 were as follows: We occupy three office buildings in San Jose, California where our corporate headquarters are located. We reference these office buildings as the Almaden Tower and the East and West Towers. In August 2004, we extended the lease agreement for our East and West Towers for an additional five years with an option to extend for an additional five years solely at our election. In March 2007, the Almaden Tower lease was extended for five years, with a renewal option for an additional five years solely at our election. As part of the lease extensions, we purchased the lease receivable from the lessor of the East and West Towers for $126.8 million and a portion of the lease receivable from the lessor of the Almaden Tower for $80.4 million, both of which are recorded as investments in lease receivables on our consolidated balance sheet. This purchase may be credited against the residual value guarantee if we purchase the properties or will be repaid from the sale proceeds if the properties are sold to third parties. Under the agreement for the East and West Towers and the agreement for the Almaden Tower, we have the option to purchase the buildings at anytime during the lease term for approximately $143.2 million and $103.6 million, respectively. The residual value guarantees under the East and West Towers and the Almaden Tower obligations are $126.8 million and $89.4 million, respectively. These two leases are both subject to standard covenants including certain financial ratios that are reported to the lessors quarterly. As of November 28, 2008, we were in compliance with all covenants. In the case of a default, the lessor may demand we purchase the buildings for an amount equal to the lease balance, or require that we remarket or relinquish the buildings. Both leases qualify for operating lease accounting treatment under SFAS 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 funding at the most favorable rates and to provide the lowest total cost of occupancy for the headquarter buildings. At the end of the lease term, we can extend the lease for an additional five year term, purchase the buildings for the lease balance, remarket or relinquish the buildings. If we choose to remarket or are required to do so upon relinquishing the buildings, we are bound to arrange the sale of the buildings to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the residual value guarantee amount. Following is a table for future minimum lease payments under non-cancellable operating leases and future minimum sublease income under non-cancellable subleases for each of the next five years and thereafter. The table includes commitments related to our restructured facilities. See Note 9 for information regarding our restructuring charges. Guarantees The lease agreements for our corporate headquarters provide for residual value guarantees as noted above. Under FIN 45, the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002, must be recognized as a liability on our consolidated balance sheet. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the extended East and West Towers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the leases. As of November 28, 2008, the unamortized portion of the fair value of the residual value guarantees, for both leases, remaining in other long-term liabilities and prepaid rent was $2.6 million. Royalties We have royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue. Royalty expense, which was recorded under our cost of products revenue on our consolidated statements of income, was approximately $47.8 million, $37.4 million and $19.1 million in fiscal 2008, 2007 and 2006, respectively. Indemnifications In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations. To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal. As part of our limited partnership interests in Adobe Ventures, we have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnership. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote. Legal Proceedings In connection with our anti-piracy efforts, conducted both internally and through organizations such as the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other local laws. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of these counter-claims. From time to time, Adobe is subject to legal proceedings, claims and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations. In August 2007, we entered into the Amendment to our Credit Agreement dated February 2007 (the "Amendment"), which increased the total senior unsecured revolving facility from $500.0 million to $1.0 billion. The Amendment also permits us to request one-year extensions effective on each anniversary of the closing date of the original agreement, subject to the majority consent of the lenders. We also retain an option to request an additional $500.0 million in commitments, for a maximum aggregate facility of $1.5 billion. In February 2008, we entered into the Second Amendment to the Credit Agreement dated February 26, 2008, which extended the maturity date of the facility by one year to February 16, 2013. The facility would terminate at this date if no additional extensions have been requested and granted. All other terms and conditions remain the same. The facility contains a financial covenant requiring us not to exceed a certain maximum leverage ratio. At the Company's option, borrowings under the facility accrue interest based on either the LIBOR for one, two, three or six months, or longer periods with bank consent, plus a margin according to a pricing grid tied to this financial covenant, or a base rate. The margin is set at rates between 0.20% and 0.475%. Commitment fees are payable on the facility at rates between 0.05% and 0.15% per year based on the same pricing grid. The facility is available to provide loans to us and certain of our subsidiaries for general corporate purposes. As of November 28, 2008 and November 30, 2007, the amount outstanding under this credit facility was $350.0 million and zero, respectively, which is included in long-term liabilities on our consolidated balance sheet. As of November 28, 2008, we were in compliance with all of the covenants. We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, available-for-sale fixed income and equity securities, other equity securities and foreign currency derivatives. The fair value of these financial assets and liabilities was determined using the following inputs at November 28, 2008: Fixed income available-for-sale securities include United States treasury securities (78% of total), corporate bonds (10% of total), obligations of foreign governments (10% of total) and obligations of multi-lateral government agencies (2% of total). The Level 1 investments of limited partnership relate to investments in publicly-traded companies and the Level 3 investments relate to investments in privately-held companies. The investments of limited partnership relate to our interest in Adobe Ventures which was $39.0 million and $30.6 million as of November 28, 2008 and November 30, 2007, respectively. The change in this asset balance relates primarily to investment gains included in earnings during the fiscal year ended November 28, 2008. All other activity during the quarter was insignificant both individually and in the aggregate. The following table summarizes the net realized and unrealized gains and losses from our investments for fiscal 2008, 2007 and 2006. During fiscal 2008, investment gains increased as compared to fiscal 2007 due primarily to realized and unrealized gains from our direct and Adobe Ventures investments of $9.8 million and $6.0 million, respectively. Additionally, during fiscal 2008, we received cash and recognized a gain resulting from the expiration of the escrow period related to the sale of our investment in Atom Entertainment, Inc. that occurred during the fourth quarter of fiscal 2006. Investment gains were higher in fiscal 2006 when compared to fiscal 2007 due to this sale of our investment in Atom Entertainment, Inc. As a result of the sale, we received $82.3 million in cash. Our carrying value was $13.2 million at the date of sale. See Note 6 for further information regarding our long-term investments and Adobe Ventures. Foreign currency derivatives include option and forward foreign exchange contracts primarily for the Japanese Yen and the Euro. 13248000 5510000 5035000 -13593000 -12875000 -8873000 -2051000 765000 -3913000 13248000 5510000 5035000 -15644000 -12110000 -12786000 -7738000 13388000 11046000 5223000 -4035000 4721000 -2515000 9353000 15767000 -3255000 -8394000 -4179000 3920000 1887000 -6879000 665000 -6507000 -11058000 -1850000 2846000 4709000 704000 704000 6856000 6856000 7560000 704000 6856000 Hedge Accounting In accordance with SFAS 133, we recognize derivative instruments and 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. Economic Hedging-Hedges of Forecasted Transactions 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. Such cash flow exposures result from portions of our forecasted revenue denominated in currencies other than the U.S. dollar, primarily the Japanese Yen and the Euro. 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 forecasted product licensing revenue in the normal course of business and accordingly, they are not speculative in nature. 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 until the forecasted transaction occurs. The following is a summary of the existing gains that are currently included in accumulated other comprehensive income. These amounts represent the fair value of our cash flow hedge contracts that were still open as of the periods below. 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, the related hedge gains and losses on the cash flow hedge are reclassified from accumulated other comprehensive income (loss) to interest and other income (loss) on the consolidated statement of income at that time. For fiscal 2008, 2007 and 2006 there were no such gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur. Pursuant to SFAS 133, we evaluate hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and record any ineffective portion of the hedging instruments in other income on the consolidated income statement. The net gain (loss) recognized in other income for cash flow hedges due to hedge ineffectiveness was insignificant for fiscal 2008, 2007 and 2006. The time value of purchased derivative instruments is recorded in other income. A summary of the amounts included on the consolidated income statement due to occurrence of the hedged transaction and or time value degradation on open hedge transactions is as follows: Balance Sheet Hedging - Hedging of Foreign Currency Assets and Liabilities We hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency 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 as other 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. As of November 28, 2008, total notional amounts of outstanding contracts were $216.7 million which included the notional equivalent of $134.7 million in Euro, $38.1 million in Yen and $43.9 million in other foreign currencies. At November 28, 2008, the outstanding balance sheet hedging derivatives had maturities of 90 days or less. Net gains (losses) recognized in other income relating to balance sheet hedging for fiscal 2008, 2007 and 2006 were as follows: Financial instruments that potentially subject us to concentrations of credit risk are short term investments, primarily fixed-income securities, structured repurchase transactions, derivatives, hedging foreign currency and interest rate risk and trade receivables. Our investment portfolio consists of investment grade securities diversified among security types, industries and issuers. Our cash and investments are held and managed by recognized financial institutions that follow our investment policy. Our policy limits the amount of credit exposure to any one security issue or issuer and we believe no significant concentration of credit risk exists with respect to these investments. We mitigate concentration of risk related to foreign currency hedges as well as interest rate hedges through a policy that establishes counterparty limits. We also have minimum rating requirements for all bank counterparties. 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. Credit risk in receivables 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. A credit review is completed for our new distributors, dealers and OEM partners. We also perform ongoing credit evaluations of our customers' financial condition and require letters of credit or other guarantees, whenever deemed necessary. The credit limit given to the customer is based on our risk assessment of their ability to pay, country risk and other factors and is not contingent on the resale of the product or on the collection of payments from their customers. We also purchase credit insurance to mitigate credit risk in some foreign markets where we believe it is warranted. If we license our software to a customer where we have a reason to believe the customer's ability to pay is not probable, due to country risk or credit risk, we will not recognize the revenue. We will revert to recognizing the revenue on a cash basis, assuming all other criteria for revenue recognition has been met. See Note 19 for information regarding our significant customers. We derive a significant portion of our OEM PostScript and Other licensing revenue from a small number of OEM partners. Our OEM partners on occasion seek to renegotiate their royalty arrangements. We evaluate these requests on a case by case basis. If an agreement is not reached, a customer may decide to pursue other options, which could result in lower licensing revenue for us. Non-operating income (expense) for fiscal 2008, 2007 and 2006 includes the following: We have the following segments: Creative Solutions, Knowledge Worker, Enterprise, Mobile and Device Solutions, Platform and Print and Publishing. Our Creative Solutions segment focuses on delivering a complete professional line of integrated tools for a full range of creative and developer tasks to an extended set of customers. The Knowledge Worker segment focuses on the needs of knowledge worker customers, providing essential applications and services to help them share information and collaborate. This segment contains revenue generated by Acrobat Connect and our Acrobat family of products. Our Enterprise segment provides server-based enterprise interaction solutions that automate people centric processes and contains revenue generated by our LiveCycle line of products. The Mobile and Device Solutions segment provides solutions that deliver compelling experiences through rich content, user interfaces and data services on mobile and non-PC devices such as cellular phones, consumer devices and Internet connected hand-held devices. The Platform segment provides developer solutions and technologies, including Adobe Flash Player, Adobe AIR and Flex Builder which are used to build rich application experiences. Finally, the Print and Publishing segment addresses market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and OEM printing businesses. Effective in the first quarter of fiscal 2008, to better align our engineering and marketing efforts, we merged our Knowledge Worker segment with our Enterprise segment (formerly "Enterprise and Developer Solutions") to form our new Business Productivity Solutions. However, under the requirements of SFAS No. 131, ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information," Knowledge Worker and Enterprise are separate reportable segments. In addition, we moved responsibility for Flex Builder, Flex SDK and our ColdFusion product line to our Platform segment from our Enterprise segment. The prior year information in the table below has also been updated to reflect this product movement. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. With the exception of goodwill and intangible assets, we do not identify or allocate our assets by the operating segments. With the exception of goodwill and intangible assets, we do not identify or allocate our assets by the operating segments. Our segment results for fiscal 2008, 2007 and 2006 are as follows: The table below lists our revenue and property and equipment, net of accumulated depreciation, by geographic area for fiscal 2008, 2007 and 2006. With the exception of property and equipment, we do not identify or allocate our assets by geographic area. The table below lists our significant customers, as a percentage of net revenue for fiscal 2006 through 2008. As listed, our significant customers are distributors who sell products across our various segments. Receivables from our significant customers, as a percentage of gross trade receivables for fiscal 2008 and 2007 are as follows: 160560000 147161000 138437000 1912275000 1751763000 1299471000 53282000 57683000 36992000 757601000 670845000 620821000 75539000 68932000 53933000 177437000 122385000 104237000 24069000 31274000 22185000 89002000 21236000 15320000 20275000 12813000 14029000 98212000 68057000 54101000 28905000 36831000 26881000 182732000 168901000 188893000 1473319000 1379028000 1157708000 159507000 129776000 109068000 1632826000 1508804000 1266776000 1229161000 1026455000 770060000 450799000 407344000 354029000 267103000 215278000 184435000 717902000 622622000 538464000 0.18 0.21 0.24 0.09 0.1 0.1 890445000 886886000 887257000 915301000 807970000 804020000 776406000 828863000 295644000 278006000 228514000 276344000 219379000 214910000 191608000 245917000 0.39 0.4 0.36 0.47 0.38 0.4 0.35 0.46 649407000 745577000 851686000 911211000 577144000 654363000 759065000 812615000 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2000000 865000 -1543000 16570000 8075000 13248000 5510000 -5035000 41719000 -536000 -4750000 -10902000 5570000 3933000 968000 -19461000 9269000 3933000 8559000 -3699000 0 -431000 10471000 4901000 4 1 5 6 3 10-K false None 2008-11-28 Adobe Systems Incorporated 0000796343 --11-28 Yes No Yes Large Accelerated Filer 20399247689 524035626 The intrinsic value is calculated as the difference between the market value as of end of the fiscal year and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of November 28, 2008, November 30, 2007 and December 1, 2006 were $23.16, $42.14 and $39.35, respectively. The intrinsic value is calculated as the difference between the market value as of end of the fiscal year and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of November 28, 2008, November 30, 2007 and December 1, 2006 were $23.16, $42.14 and $39.35, respectively. The intrinsic value is calculated as the difference between the market value as of end of the fiscal year and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of November 28, 2008, November 30, 2007 and December 1, 2006 were $23.16, $42.14 and $39.35, respectively. The intrinsic value is calculated as the market value as of end of the fiscal year. As reported by the NASDAQ Global Select Market, the market values as of November 28, 2008 and November 30, 2007 were $23.16 and $42.14, respectively. The intrinsic value is calculated as the market value as of end of the fiscal year. As reported by the NASDAQ Global Select Market, the market value as of November 28, 2008 was $23.16. The repurchases from employees represent shares cancelled when surendered in lieu of cash payments for the option exercise price or withholding taxes due. The repurchases from employees represent shares cancelled when surendered in lieu of cash payments for the option exercise price or withholding taxes due. The repurchases from employees represent shares cancelled when surendered 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" and "Stock Repurchase Program II" above. Stock repurchase agreements executed with large financial institutions. See "Stock Repurchase Program I" and "Stock Repurchase Program II" above. Stock repurchase agreements executed with large financial institutions. See "Stock Repurchase Program I" and "Stock Repurchase Program II" above. Stock repurchase agreements executed with large financial institutions. See "Stock Repurchase Program I" and "Stock Repurchase Program II" above. Stock repurchase agreements executed with large financial institutions. See "Stock Repurchase Program I" and "Stock Repurchase Program II" above. Stock repurchase agreements executed with large financial institutions. See "Stock Repurchase Program I" and "Stock Repurchase Program II" above.