UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
  FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 28, 2014
  or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
 
Commission File Number: 0-15175
ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
_____________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
77-0019522
(I.R.S. Employer
Identification No.)

345 Park Avenue, San Jose, California 95110-2704
(Address of principal executive offices)
(408) 536-6000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value per share
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
_____________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x   No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o   No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o   No  x
The aggregate market value of the registrant’s common stock, $0.0001 par value per share, held by non-affiliates of the registrant on May 30, 2014 , the last business day of the registrant’s most recently completed second fiscal quarter, was $24,153,080,560 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person who owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 16, 2015 , 498,314,061 shares of the registrant’s common stock, $0.0001 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant’s 2015 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of the end of the fiscal year ended November 28, 2014 , are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
 


ADOBE SYSTEMS INCORPORATED
FORM 10-K
 
TABLE OF CONTENTS
 
 
 
Page No.
PART I
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
Item 5.
Item 6
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
 
 
 


 

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Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements, including statements regarding product plans, future growth, market opportunities, strategic initiatives, industry positioning, revenue growth, customer acquisition, the amount of recurring revenue and revenue growth, each of 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 entitled “Risk Factors” in Part I, 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 U.S. Securities and Exchange Commission (“the SEC”), including our Quarterly Reports on Form 10-Q to be filed in 2015 . When used in this report, the words “will,” “expects,” “could,” “would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,” “continues” 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, except as required by law.
PART I
ITEM 1.  BUSINESS
Founded in 1982, Adobe Systems Incorporated is one of the largest and most diversified software companies in the world. We offer a line of products and services used by creative professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences across multiple operating systems, devices and media. We market and license our products and services directly to enterprise customers through our sales force and to end-users through app stores and our own website at www.adobe.com. We offer many of our products via a Software-as-a-Service (“SaaS”) model or a managed services model (both of which are referred to as a hosted or cloud-based model) as well as through term subscription and pay-per-use models. We also distribute certain products and services through a network of distributors, value-added resellers (“VARs”), systems integrators, independent software vendors (“ISVs”), retailers and original equipment manufacturers (“OEMs”). In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions. Our products run on personal and server-based computers, as well as on smartphones, tablets and other devices, depending on the product. We have operations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia-Pacific (“APAC”). See Note 18 of our Notes to Consolidated Financial Statements for further geographical information.
Adobe was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. We maintain executive offices and principal facilities at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000 and our website is www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC website at www.sec.gov. The information posted to our website is not incorporated into this Annual Report on Form 10-K.
BUSINESS OVERVIEW
 
For over 30 years, Adobe’s innovations have transformed how individuals, businesses and governments communicate and interact. Across these markets, we help our customers create and deliver the most compelling content and interactive experiences in a streamlined workflow, and optimize those experiences and marketing activities for greater return on investment. Our solutions turn ordinary interactions into valuable digital experiences, across media and devices, anywhere, anytime.
While we continue to market and license a broad portfolio of products and solutions, we focus our investments in two strategic growth areas:
Digital Media — providing tools, services and solutions that enable individuals, small and medium businesses and enterprises to create, publish and promote their content anywhere. Our customers include content creators, web designers, app developers and digital media professionals, as well as management in marketing departments and agencies, companies and publishers. This is the core of what we have delivered for over 20 years, and we have evolved our business model rapidly to provide these customers with a more complete and integrated workflow across the variety of new devices, formats and business models that continue to emerge.
Digital Marketing — providing solutions and services for creating, managing, executing, measuring and optimizing digital advertising and marketing campaigns across multiple channels. Our customers include marketers, advertisers, agencies, publishers, merchandisers, web analysts, marketing executives, information management executives, and sales and support executives. We process over twenty-five trillion data transactions a year via our SaaS products, providing our customers with analytics, social,

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targeting, media optimization, digital experience management, cross-channel campaign management, and video solutions. This complements our digital media franchise, bringing together the art of creating and managing content with the science of measuring and optimizing it, enabling our customers to achieve their optimal business outcomes.
We believe we are uniquely positioned to be a leader in both the Digital Media and Digital Marketing categories, where our mission is to change the world through digital experiences. By integrating products from each of these two areas of Adobe’s business, our customers are able to utilize a comprehensive suite of solutions and services that no other entity currently offers. In addition, our ability to deliver innovation and productivity improvements across customer workflows involving the creation, management, delivery, measurement and optimization of rich and engaging content favorably positions Adobe as our customers invest more to engage their constituents digitally.
SEGMENTS
Our business is organized into three reportable segments: Digital Marketing, Digital Media and Print and Publishing. These segments provide Adobe’s senior management with a comprehensive financial view of our key businesses. Our segments are aligned around the company’s two strategic growth opportunities described above, placing our Print and Publishing business in a third segment that contains many of our mature products and solutions.
This overview provides an explanation of our market opportunities and a discussion of our strategies to address our market opportunities in fiscal 2015 and beyond for each of our segments. See Note 18 of our Notes to Consolidated Financial Statements for further segment information.
PRODUCTS AND SERVICES OVERVIEW
Digital Media
Digital Media Opportunity
Recent trends in digital communications, including ever increasing data speeds that enable greater usage by consumers of mobile devices and tablets to access online content and services, continue to provide a significant market opportunity for Adobe in digital media. Due to the increase in rich media consumed in digital environments and the rise of online social communities, the demand for digital media tools and solutions to create engaging online experiences is higher than ever. Adobe is in a unique position to capitalize on this opportunity by delivering rapid innovation to increase our customer reach, deepen engagement with communities and accelerate long-term revenue growth by focusing on a cloud-based model where our products and solutions are licensed on a subscription basis.
The flagship of our Digital Media business is Creative Cloud—a subscription service that allows members to download and install the latest versions of our creative products such as Adobe Photoshop, Adobe Illustrator, Adobe Premiere Pro, Adobe Photoshop Lightroom and Adobe InDesign, as well as utilize other tools such as Adobe Acrobat. Creative Cloud members can also access online services to sync, store, and share files, participate in our Behance community of more than four million creative professionals, publish and deliver digital content via app stores, develop mobile apps, and create and manage websites. Adobe is redefining the creative process with Creative Cloud so that our customers can obtain everything they need to create, collaborate and deliver engaging digital content.
Creative Cloud addresses the needs of creative professionals including graphic designers, production artists, web designers and developers, user interface designers, videographers, motion graphic artists, prepress professionals, video game developers, mobile application developers, students and administrators. They rely on our solutions for publishing, web design and development, video and animation production, mobile app and gaming development and document creation and collaboration. End users of our creative tools work in businesses ranging from large publishers, media companies and global enterprises, to smaller design agencies, small and medium-sized businesses and individual freelancers. Moreover, our creative products are used to create much of the printed and online information people see, read and interact with every day, including video, animation, mobile and advertising content. Knowledge workers, educators, hobbyists and high-end consumers also use our products to create and deliver creative content.
In addition to Creative Cloud, our Digital Media business offers many of the products included in Creative Cloud on a standalone basis, including subscriptions to the Creative Cloud version of certain point products, and also offers a range of other creative tools and services, including our hobbyist products such as Adobe Photoshop Elements and Adobe Premiere Elements, Adobe Digital Publishing Suite, Adobe PhoneGap, Adobe Typekit and mobile apps such as Adobe Photoshop Mix, Adobe Photoshop Sketch and Adobe Premiere Clip that run on tablets and mobile devices. Further descriptions of our Digital Media products are included below under “Principal Products and Services”.

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Adobe’s Digital Media segment also includes our Document Services business, built around our Acrobat family of products, the Adobe Reader and a set of integrated cloud-based document services. For over two decades Adobe Acrobat has provided for the reliable creation and exchange of electronic documents, regardless of platform or application source type. Users can collaborate on documents with electronic comments and tailor the security of a file in order to distribute reliable Adobe PDF documents that can be viewed, printed or filled out utilizing our free Adobe Reader. Acrobat provides essential electronic document capabilities and services to help knowledge workers accomplish a wide range of tasks ranging from simple publications and forms to mission-critical engineering and architectural plans. With our Acrobat XI product and its innovative cloud services, we have extended the capabilities of our solution. Users can take advantage of electronic document signing with Adobe EchoSign, complete form management with Adobe FormsCentral, and utilize other features such as Adobe CreatePDF, ExportPDF and Acrobat.com.
Digital Media Strategy
Our goal is to be the leading provider of tools and services that allow individuals, small and medium businesses and enterprises to create, publish and monetize their content anywhere.
Creative Cloud, a subscription service with attractive monthly pricing, will be a catalyst for revenue growth in the coming years. The monthly subscription pricing model is attractive to users of older versions of our products who desire to use our latest releases and services, but who in the past have been unwilling to upgrade to newer versions due to price sensitivity. Similarly, we are gaining new customers and expect to continue to drive new user adoption of our creative tools business over the next several years outside of our core creative professional targeted market because of the attractive monthly subscription pricing combined with the strong brand of our creative tools and the broad value proposition provided by Creative Cloud. We anticipate that our sustained focus on a subscription model will continue to increase the amount of our recurring revenue that is ratably reported, driven by broader Creative Cloud adoption over the next several years.
To accelerate the adoption of Creative Cloud, we have focused on migrating existing users of our creative products from perpetual licenses to the subscription offering, as well as driving new customer adoption. Aspects of this strategy include: focusing future innovation by our engineering teams on delivering new cloud-based functionality, such as Creative Cloud Libraries, Adobe Shape CC and Adobe Brush CC, to enable our customers to use our creative tools and services across a variety of devices in ways that are not possible with previous desktop versions; increasing the value of Creative Cloud by delivering frequent product updates and enhancements to subscribers to address their content creation challenges; using promotions to attract customers to the offering; expanding our go-to-market reach through channel partners to reach new customers; and utilizing Creative Cloud for teams and Creative Cloud for enterprise offerings to drive broad adoption with customers who license our products in volume.
As part of our Creative Cloud strategy, we plan to utilize our digital marketing solutions to drive customer awareness of our creative products and improve conversion on our website and across other channels. Adobe.com is increasingly becoming the destination site where we engage individual and small business customers to sign up for and renew Creative Cloud subscriptions. We utilize affiliate and channel partners to target mid-size creative customers with our Creative Cloud for teams offering. Our direct sales force is focused on building relationships with our largest customers and driving adoption of our Creative Cloud for enterprise offering.
In our Document Services business, although Acrobat has achieved strong market adoption in document-intensive industries such as government, financial services, pharmaceutical, legal, aerospace, insurance and technical publishing, we believe there are tens of millions of users who still need the capabilities provided by Acrobat. We plan to continue to market the benefits of our Document Services solutions to small and medium-sized businesses, large enterprises and government institutions around the world and increase our seat penetration in these markets through the utilization of our corporate and volume licensing programs. We also intend to increase our focus on marketing and licensing Acrobat in targeted vertical markets such as education, financial services, telecommunications and government, as well as expanding into emerging markets, while simultaneously enhancing and building out the delivery of cloud-based document services to our Acrobat and Adobe Reader users. We intend to continue to promote the capabilities of our cloud-based EchoSign solution to millions of Acrobat users and hundreds of millions of Adobe Reader users. EchoSign provides a green alternative to costly paper-based solutions, and is an easier way for customers to manage their contract workflows. We believe that by growing the awareness of EchoSign in the broader contract delivery and signing market, we can help our customers migrate away from paper-based express mailing and adopt our solution, growing our revenue with this business in the process.
Digital Marketing
Digital Marketing Opportunity
Consumers today increasingly demand personalized content and experiences in their online interactions, across multiple channels and devices. As a result, businesses or any entity with an online presence must figure out how to best attract, engage, acquire and retain customers in a world where the reach and quality of experiences directly impacts success. Delivering the best

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experience to a consumer at a given moment requires the right combination of data, insights and content. Marketing executives are increasingly demanding solutions that optimize their consumers’ experiences and deliver the greatest return on their marketing spend so they can demonstrate the success of their programs using objective metrics.
We believe there is a significant opportunity to address these challenges and help customers transform their businesses. Chief Marketing Officers (“CMOs”), digital marketers, advertisers and publishers are increasingly steering their marketing and advertising budgets toward digital media. As they make this move to digital, our market opportunity is accelerating as customers look for vendors to help them navigate this transition. However, marketing in a digital world is not simply about executing campaigns in each digital channel. Marketers, and entire enterprises, also need to ensure they deliver meaningful experiences to their consumers across both digital and traditional channels and in areas such as sales, support, and product interactions where consumers expect experiences to be personalized.
Our Digital Marketing business targets this large and growing opportunity by providing comprehensive solutions that include analytics, social marketing, targeting, media optimization, digital experience management and cross-channel campaign management, as well as premium video delivery and monetization. We deliver these capabilities through our Adobe Marketing Cloud, an integrated offering enabling marketers to measure, personalize and optimize marketing campaigns and digital experiences across channels for optimal marketing performance. With its broad set of solutions, including Adobe Analytics, Adobe Target, Adobe Social, Adobe Media Optimizer, Adobe Experience Manager and Adobe Campaign, as well as real-time dashboards and a collaborative interface, customers of Adobe Marketing Cloud are able to combine data, insights and digital content to deliver a personalized brand experience to their consumers.
With the increase in the number of consumers that watch premium video content via the web on PC, tablet and mobile devices, the monetization of video delivery is an emerging opportunity within Adobe Marketing Cloud. To address this opportunity, we have worked closely with video content owners and distributors to develop and deliver Adobe Primetime, a modular platform that enables a more complete workflow to meet our customers’ needs in areas such as video publishing, advertising and analytics. We believe customers using our Primetime solution can drive greater audience engagement, resulting in increased revenue from ad sales and subscriptions, while lowering operating costs.
In addition to CMOs and digital marketers, users of our Adobe Marketing Cloud solutions include marketing professionals such as search engine marketers, media managers, media buyers and marketing research analysts. Customers also include web content editors, web analysts and web marketing managers. These customers often are involved in workflows that utilize other Adobe products, such as our Digital Media offerings and our video workflow and delivery technologies. By combining the creativity of our Digital Media business with the science of our Digital Marketing business, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop.
Our Digital Marketing segment also contains two legacy enterprise software offerings: our Adobe Connect web conferencing platform and Adobe LiveCycle, an enterprise document and forms platform. At the beginning of fiscal year 2012 we narrowed the focus of marketing and licensing of these products to financial services and government markets, driven by a subset of our enterprise sales force.
Digital Marketing Strategy
Our goal is to be the leading provider of marketing solutions and a standard for the way digital advertising and marketing is measured, managed, executed and optimized.
We believe that our success will be driven by focusing our efforts on making the Adobe Marketing Cloud the most comprehensive and integrated marketing solution available. Adobe Marketing Cloud consists of six key solutions-Adobe Analytics, Adobe Target, Adobe Social, Adobe Media Optimizer, Adobe Experience Manager and Adobe Campaign-as well as Adobe Primetime, the industry’s leading online TV delivery platform. Adobe Marketing Cloud provides marketers with key capabilities, such as the ability to:
•
Combine data across the Adobe Marketing Cloud solutions and third-party data sources, such as customer relationship management, point of sale, email, and survey, to create a single view of the consumer;
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Deliver personalized customer experiences across channels and on any device;
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Use predictive analytics to enable marketers to utilize past marketing program data and success to predict and drive their future success with digital marketing programs;
•
Access all Adobe Marketing Cloud solutions from one centralized platform and visualize, socialize, and collaborate across teams with the interface;

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•
Interact with creatives through integration with Creative Cloud, enabling content creators and marketers to collaborate and communicate in real time within a cloud-based platform;
•
Accurately forecast and continually optimize their mix of campaigns across digital media;
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Provide robust cross-channel campaign management capabilities utilizing real-time insights, rich customer data and a sophisticated automation and execution platform;
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Manage, publish, track, and monetize social programs;
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Store, assemble, and distribute digital assets to deliver high-quality brand, campaign, and content experiences;
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Easily add, alter, and deploy marketing tags on websites, resulting in consistent page performance and accurate data collection; and
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Integrate with over 200-plus partners in 20-plus countries, covering the expansive digital marketing ecosystem.
To drive growth of Adobe Marketing Cloud, we also intend to streamline how customers learn about, acquire and deploy Adobe Marketing Cloud solutions. We believe we can accelerate the growth of our business by continuing to build out more direct sales capacity, as well as continuing to enable a rich ecosystem of agencies and systems-integrators who sell and service our solutions. We believe these investments will result in continued growth in revenue in our Digital Marketing segment in fiscal 2015 and beyond.
Print and Publishing
Our Print and Publishing segment contains legacy products and services that address diverse market opportunities including eLearning solutions, technical document publishing, web application development and high-end printing. Graphics professionals and professional publishers continue to require quality, reliability and efficiency in production printing, and our Adobe PostScript and Adobe PDF printing technologies provide advanced functionality to meet the sophisticated requirements of this marketplace. As high-end printing systems evolve and transition to fully digital, composite workflows, we believe we are uniquely positioned to be a supplier of software and technology based on the PostScript and Adobe PDF standards for use by this industry.
We generate revenue by licensing our technology to OEMs that manufacture workflow software, printers and other output devices. In fiscal 2014, we maintained a consistent quarterly revenue run-rate with the mature products we market and license in our Print and Publishing business.    
PRINCIPAL PRODUCTS AND SERVICES
Digital Media Products
Creative Cloud
Creative Cloud is a subscription offering which significantly improves how creative professionals create rich and engaging content. It leverages shifts in the industry so that users can easily explore, create, publish and share their work across devices, the desktop and the web. With Creative Cloud membership, users have access to a vibrant global creative community, publishing services to deliver apps and websites, cloud storage to easily access their work, the ability to sync their files to virtually any device, collaboration capabilities with team members, and new products and exclusive updates as they are developed.

Creative Cloud members can build a Creative Profile which persists wherever they are. A user's Creative Profile moves with them via Creative Cloud services from app-to-app and device-to-device, giving them immediate access to their personal files, photos, graphics, colors, fonts, text styles, desktop setting customizations and other important assets.
New Creative Cloud services have been developed and delivered to subscribers to increase the utilization of Creative Cloud capabilities beyond the use of our desktop applications. New services include: Content, which provides users easy access to stock content; Libraries, an asset management service; and Creative Talent Search, connecting users with job opportunities and hiring managers. We believe services such as these will drive higher user interaction with Creative Cloud and create upsell opportunities as users increasingly utilize higher-tiered versions of such services.
New mobile apps which run on tablets and smartphones enable connections between essential Creative Cloud desktop tools and a new family of mobile apps that extend the capabilities of Photoshop, Illustrator, Premiere Pro and Lightroom onto mobile devices. A new category of “capture” apps was also delivered, enabling users to create designs with tablets and bring them into their creative workflows.

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We license Creative Cloud to individuals and teams of users through Adobe.com either on a monthly subscription basis or as an annual subscription. Channel partners also license Creative Cloud with annual team subscriptions to small or medium-sized businesses, or to workgroups in enterprises. With larger enterprise customers, our direct sales force utilizes enterprise term license agreements (“ETLAs”), for volume-based agreements often for multi-year terms.
Photoshop
Photoshop is the world’s most advanced digital imaging software. It is used by photographers, designers, web professionals, and video professionals, and is available to Creative Cloud subscribers. Customers can also subscribe to Photoshop CC as an individual subscription product, or through our Creative Cloud Photography Plan which is an offer targeted at photographers and photo hobbyists and includes our popular Photoshop Lightroom product as a companion tool to Photoshop. We also offer Photoshop Elements separately, which is targeted at consumers who desire the brand and power of Photoshop through an easy-to-use interface. For tablet and phone users, we offer several mobile apps including Photoshop Sketch, Photoshop Mix, Lightroom Mobile and more — all of which enable sophisticated photo editing and content creation using a touch-based interface on tablet and mobile devices.
Illustrator
Illustrator is our industry-standard vector graphics software used worldwide by designers of all types who want to create digital graphics and illustrations for all kinds of media: print, web, interactive, video, and mobile. Illustrator is available to Creative Cloud subscribers, and customers can also subscribe to use it as an individual subscription product. Users can also utilize mobile apps such as Illustrator Draw (formerly Adobe Ideas) and Illustrator Line to gain access to Illustrator capabilities on their tablets and mobile devices, and sync their work through Creative Cloud services for use with Illustrator on their desktop.
InDesign
InDesign is the leading professional page layout software for print and digital publishing. Our customers use it to design, preflight, and publish a broad range of content including newspapers and magazines for print, online, and tablet app delivery. Customers can create simple or complex layouts quickly and efficiently with precise control over typography, built-in creative tools, and an intuitive design environment. Tight integration with other Adobe software such as Photoshop, Illustrator, Acrobat, and Adobe Flash Professional enables customers to work productively in print and digital workflows. Customers can also access Adobe Digital Publishing Suite from within InDesign to create and publish engaging apps for a broad range of devices, including iOS, Android and Amazon-based devices.
InDesign is built for designers, prepress and production professionals, and print service providers who work for magazines, design firms, advertising agencies, newspapers, book publishers, and retail/catalog companies, as well as in corporate design, commercial printing, and other leading-edge publishing environments. Customers using InDesign often use Adobe InCopy, a companion product used for professional writing and editing to enable an efficient collaborative workflow between design and editorial staff. InDesign and InCopy are available to Creative Cloud subscribers, and customers can also subscribe to use InDesign as an individual subscription product.
Adobe Premiere
Adobe Premiere is our powerful, customizable, nonlinear video editing tool used by video professionals. Customers can import and combine virtually any type of media, from video shot on a phone to raw 5K and higher resolution footage, and then edit in its native format without transcoding. The user interface includes a customizable timeline and numerous editing shortcuts which enable faster, keyboard-driven editing.
With the demands of shorter production schedules and high-resolution digital media formats, real-time performance is crucial to videographers. Premiere utilizes our Mercury Playback Engine to provide the fastest performance solution in the industry. It also supports a vast majority of formats, and customers can now use multiple GPU cards to accelerate render and export times. As part of Creative Cloud, Premiere tightly integrates with other Adobe creative applications. Customers can also subscribe to use it as an individual subscription product.
To address the increase in use of video capture and sharing on mobile devices, we offer Premiere Clip, which provides users with easy-to-use features to quickly edit and enhance video. We also offer an Elements version of Premiere, which is a powerful yet easy-to-use video-editing software for home video editing. Premiere Elements provides tools for hobbyists to quickly edit and enhance video footage with fun effects and transitions and create custom DVDs for sharing video with friends and family.

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After Effects
After Effects is our industry-leading animation and creative compositing software used by a wide variety of motion graphics and visual effects artists. It offers superior control, a wealth of creative options, and integration with other post-production applications. After Effects is available to Creative Cloud subscribers, and customers can also subscribe to use it as an individual subscription product.
Dreamweaver
Adobe Dreamweaver is our professional web development software development application used by designers and developers to create and edit HTML websites and mobile apps. Dreamweaver provides a broad range of capabilities for web publishing, enabling online commerce, and providing online customer service and educational content, and includes capabilities for visually designing HTML5 pages, coding HTML5 and application logic. As part of Creative Cloud, Dreamweaver tightly integrates with other Adobe creative applications. Customers can also subscribe to use it as an individual subscription product.
Flash Professional
Adobe Flash Professional provides an advanced development environment for creating interactive content which integrates animations, motion graphics, sound, text and additional video functionality. Content built with Flash Professional is deployed via the web to browsers that run Adobe Flash Player. Flash Professional is available to Creative Cloud subscribers, and customers can also subscribe to use it as an individual subscription product.
Adobe Muse
Adobe Muse is built for designers who want to create and publish HTML websites without writing code. Muse is available to Creative Cloud subscribers, or customers can subscribe to use it as an individual subscription product.
Edge Tools & Services
Our Edge web tools and services include: Edge Animate, a web motion and interaction design tool that allows designers to create animated content for websites, using web standards like HTML5, JavaScript and CSS3; Edge Inspect, an inspection and preview tool that allows front-end web developers and designers to efficiently preview and debug HTML content on mobile devices; Edge Code, a code editor, built on the Brackets open source project, optimized for web designers and developers working with HTML, CSS and JavaScript; Edge Reflow, a web design tool to help users create responsive layouts and visual designs with CSS; Edge Web Fonts, a free web font service for using a growing library of open source fonts on websites and in apps; Typekit, a service that gives designers and developers access to a library of hosted, high-quality fonts to use on their websites; and Adobe PhoneGap Build, a service for packaging mobile apps built with HTML, CSS and JavaScript for popular mobile platforms. Our Edge tools and services are available to Creative Cloud subscribers.
Digital Publishing Suite
Adobe Digital Publishing Suite is a complete solution that enables individual designers, traditional media publishers, large brand organizations, enterprise customers and ad agencies to transform their print publications into interactive digital reading experiences for tablet devices and phones. Consisting of hosted services and viewer technology, Digital Publishing Suite tightly integrates with our Creative Cloud applications for efficient design, distribution, and monetization of a new class of innovative magazines, newspapers, brand loyalty materials, merchandising content, marketing communications, and more. A wide range of media publishers have used Digital Publishing Suite to produce well-known titles. Businesses are also using Digital Publishing Suite to produce corporate publications.
Digital Publishing Suite is offered to enterprise customers, and we also offer the Professional Edition and Single Edition to smaller organizations and individuals.
Typekit

Adobe Typekit is a subscription font service that brings thousands of fonts from foundry partners into one library for quick browsing, easy use on the web or on the user’s desktop, and endless typographic inspiration.

Behance

Behance is the leading free online platform to showcase and discover creative work. Behance ProSite is a personal portfolio site builder that stays in sync with the user’s projects on Behance and transforms a public Behance portfolio into a fully customized personal portfolio on the user’s URL.

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Creative Talent Search
Adobe Creative Talent Search is a service that connects creatives across the globe with job opportunities from top brands and companies. Creative companies and hiring managers have access to powerful new tools to discover and engage with the talent they need.
Acrobat and Document Services
Adobe’s Acrobat line of products is headlined by Adobe Acrobat Pro, which is the industry standard for PDF creation and conversion. Acrobat enables users to create secure, reliable and compact Adobe PDF documents from desktop authoring applications such as Microsoft Office software, graphics applications and more. Use of Acrobat enables automated collaborative workflows with a rich set of commenting tools and review tracking features; includes everything needed to create and distribute rich, secure electronic documents that can be viewed easily within leading web browsers or on computer desktops via the free Adobe Reader.
Acrobat Pro is available to Creative Cloud subscribers. Customers can also license Acrobat Pro or Acrobat Standard (which has a subset of Acrobat Pro features) as individual point products, either on a subscription or perpetual license, as well as other offerings from our Document Services business.
Through Acrobat.com we also offer a set of a cloud-based document and collaboration subscription services which provide simple PDF creation, centralized online file sharing and storage capabilities, and document/contract signing solutions. These services include Adobe CreatePDF, Adobe ExportPDF and Adobe EchoSign for safe electronic signatures.
All of our document service solutions utilize Adobe Reader, which is our free software for reliable viewing, searching, reviewing and printing of Adobe PDF documents on a variety of hardware and operating system platforms.
Adobe Marketing Cloud Solutions
Adobe Analytics
Adobe Analytics helps our customers create a holistic view of their business by turning consumer interactions into actionable insights. With intuitive and interactive dashboards and reports, our customers can sift, sort, and share real-time information to provide insights that can be used to identify problems and opportunities and to drive conversion and relevant consumer experiences. Adobe Analytics enables web, social, video and mobile analytics across online and offline channels to continuously improve the performance of marketing activities. It also provides the ability to perform advanced ad-hoc segmentation and to integrate data from offline and third-party sources.
Adobe Target
Adobe Target lets our customers test, target and personalize content across multiple devices. With Adobe Target, our customers have the tools they need to quickly discover what gets noticed, what increases conversion, and what keeps consumers coming back for more. Adobe Target paves a path from simple testing to targeting to true segmentation and optimization through A/B and multivariate testing, rules-based targeting and automated decision-making.
Adobe Social
Adobe Social provides marketers a comprehensive solution to build stronger connections through content guided by tangible data. Customers can create more relevant posts, monitor and respond to conversations, measure results, and connect social activities to business results. With Adobe Social, our customers can: manage social content and activities across multiple social networks and profile pages; listen and respond to consumer conversations in real time; create social campaigns; and track performance with integrated analytics.
Adobe Media Optimizer
Adobe Media Optimizer is a powerful ad management platform. Customers get a consolidated view of how their media is performing, along with tools to both accurately forecast and continually optimize their mix of paid campaigns across digital media. Media Optimizer includes cross-channel optimization capabilities, search engine marketing management, and display and social advertising management.
Adobe Experience Manager
Adobe Experience Manager helps customers organize, create, and manage the delivery of creative assets and other content across digital marketing channels, including web, mobile, email, communities and video. It enables customers to manage content

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on premise or host it in the cloud, delivering agile and rapid deployment. With this ultimate control of content and campaigns, customers are able to deliver relevant experiences to consumers that help build the customers’ brand, drive demand and extend reach. Adobe Experience Manager includes digital asset management, web content management, integrated mobile app development, enterprise-level forms management, and social capabilities, providing customers with tools enabling users to improve their market and brand perception and provide a personalized experience to their consumers.
Adobe Campaign
Adobe Campaign enables marketers to orchestrate personalized experiences determined by each consumer’s behaviors and preferences. As part of its feature set, it provides visual campaign orchestration, allowing for intuitive design and automated consumer experiences across channels, from one-off campaigns to triggered messages, with a graphically rich interface. Marketers can also integrate consumer data from across marketing channels to develop and deliver more relevant marketing experiences to their consumers. Features also included targeted segmentation, email execution, real-time interaction, and operational reporting to easily see how well campaigns are performing.
Emerging Digital Marketing Solution
Adobe Primetime
Adobe Primetime is a modular platform for video publishing, advertising, and analytics, enabling content programmers and distributors to profit from their video content by making every screen a TV — including PC, smartphone and tablet screens. Primetime consists of the following components: PayTV Pass, a universal system for validating access to pay TV content; DRM, which is digital rights management technology to protect video content from unauthorized copying or access; Ad Insertion, providing for the seamless insertion of ads into live and video-on-demand content; Ad Serving, the ability to determine which ads should be published; Video Analytics, which gives programmers and distributors the ability to measure, analyze and optimize online video delivery; and Audience Management, a data management platform that consolidates audience information to make it actionable from an ad or targeting perspective.
Other Digital Enterprise Solutions
Adobe Connect
Adobe Connect is a web conferencing platform for web meetings, eLearning, and webinars. It powers mission critical web conferencing solutions end-to-end, on virtually any device, and enables organizations from leading corporations to large governmental agencies to fundamentally improve productivity.
LiveCycle
Adobe LiveCycle Enterprise Suite is an enterprise document and form platform that helps enterprises capture and process information, deliver personalized communications, and protect and track sensitive information. Targeted at the financial services and government markets, LiveCycle extends business processes to an enterprise’s mobile workforce and clients, increasing productivity while broadening service access to any user equipped with a desktop, smartphone, or tablet.
Other Products and Solutions
We offer a broad range of other digital media products and solutions. Information about other products not referenced here can be found on our corporate website, www.adobe.com, under the “Products” tab available in the “Menu”.
COMPETITION
The markets for our products and services are characterized by intense competition, new industry standards, evolving business and distribution models, disruptive software and hardware technology developments, frequent new product introductions, short product life cycles, price cutting with resulting downward pressure on gross margins and price sensitivity on the part of consumers. Our future success will depend on our ability to enhance and better integrate our existing products, introduce new products on a timely and cost-effective basis, meet changing customer needs, provide best-in-class information security to build customer confidence and combat cyber-attacks, extend our core technology into new applications and anticipate and respond to emerging standards, business models, software delivery methods and other technological changes.
Digital Media
No single company has offerings identical to our Creative Cloud products and services, but we face collective competition from a variety of point offerings, free products and downloadable apps. Our competitors include offerings from companies such as Apple, Autodesk, Avid, Corel, Microsoft, Quark and others, as well as from many lower-end offerings available on touch-

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enabled devices via app stores, and from various open source initiatives. We believe our greatest advantage in this market is the scope of our integrated solutions, which work together as part of Creative Cloud. With Creative Cloud we also compete favorably on the basis of features and functionality, ease of use, product reliability, value and performance characteristics.
Professional digital imaging, drawing and illustration products are characterized by feature-rich competition, brand awareness and price sensitivity. Competition in this market is also emerging with drawing and illustration applications on tablet and smartphone platforms. The demand for professional web page layout and professional web content creation tools is constantly evolving and highly volatile. In this area we face direct and indirect competition from desktop software companies and various proprietary and open source web-authoring tools. Our Flash technologies face competition from alternative approaches to building rich content and web applications such as JavaFX, HTML5, native OS application programming environments and Unity.
The needs of digital imaging and video editing software users are constantly evolving due to rapid technology and hardware advancements in digital cameras, digital video cameras, printers, PCs, tablets, mobile phones and other new devices. Our imaging and video software offerings, including Photoshop, Lightroom, After Effects and Premiere, face competition from established and emerging companies offering similar products. We also continue to face competition from new and free products, including web services and mobile/tablet applications that compete directly with our Aviary offerings.
New image editing applications for mobile devices and tablets with features that compete with our professional products are also emerging as adoption of these devices grows. Our consumer digital imaging and video editing offerings are subject to intense competition, including customer price sensitivity, competitor brand awareness and competitor strength in OEM bundling and retail distribution. We face direct and indirect competition in the consumer digital imaging market from a number of companies that market software that competes with ours.
In addition, we face competition from device, hardware and camera manufacturers as they try to differentiate their offerings by bundling, for free, their own digital imaging software, or those of our competitors. Similarly, we face potential competition from operating system manufacturers as they integrate or offer hobbyist-level digital imaging and image management features with their operating systems. We also face competition from smartphone and tablet manufacturers that integrate imaging and video software into their devices to work with cameras that come as part of their smartphone and tablet offerings. In addition, new social networking platforms such as Facebook (including Instagram) and portal sites such as Google and Yahoo! are becoming a direct means to post, edit and share images, bypassing the step of using image editing and sharing software. Online storage and synchronization are becoming free and ubiquitous. Consumers in particular will be encouraged to use the image/video editing software associated with those sync/store products, thus competing with our software.
Competition is also emerging with imaging and video applications on smartphone and tablet platforms. Competitors are extending their products and feature sets to platforms such as Apple’s iPhone and iPad, and other smartphone and tablet devices. Similarly, new cloud-based offerings continue to emerge which offer image editing and video-editing capabilities, as well as social and sharing features.
As customers such as publishers and media companies increase their desire to deliver their assets to new platforms such as mobile devices and tablets, we expect new and existing companies to continue to offer solutions that address these challenges that are competitive with our Digital Publishing Suite. Many design agencies are building capabilities to offer such solutions, and companies such as Amazon, Apple and Google offer an alternative format and business model for the delivery of newspaper and magazine content to mobile devices.
The nature of traditional digital document creation, storage, and collaboration has been rapidly evolving as knowledge workers and consumers shift their behavior increasingly to non-desktop workflows. Competitors like Microsoft, Google, Box and Dropbox all offer competitive alternatives to our Acrobat business for creating and managing PDFs. In addition, other PDF creation solutions can be found at a low cost, or for free, on the web. To address these competitive threats, we are working to ensure our Adobe Acrobat applications stay at the forefront of innovation in emerging opportunities such as PDF document generation, document collaboration and document security.
As electronic signatures with EchoSign are quickly becoming a core element of digital documents, competitors have been jumping in to take advantage of the growing space. DocuSign, Citrix, and others are incorporating competitive e-signature technology into their platforms.
Digital Marketing
The markets in which our Digital Marketing business unit competes are growing rapidly and characterized by intense competition. Our Adobe Marketing Cloud solutions face competition from large companies such as Google, IBM, Oracle, salesforce.com, SAP, SAS, Teradata and others, in addition to point product solutions and focused competitors. Additionally, new competitors are constantly entering these markets. Some of these competitors provide SaaS solutions to customers, generally

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through a web browser, while others provide software that is installed by customers directly on their servers. In addition, we compete at times with our customers’ or potential customers’ internally developed applications. Of the competitors listed, no single company has products identical to our Adobe Marketing Cloud offerings. Adobe Marketing Cloud competes in a variety of areas, including: reporting and analytics; cross-channel marketing and optimization; online and social marketing; web experience management and others.
Many of the companies with which we compete offer a variety of products or services and as a result could also bundle their products or services, which may result in these companies effectively selling their products or services at or below market prices for individual products. In addition, large software, internet and database management companies have expanded their offerings in the digital marketing area, either by developing competing services or by acquiring existing competitors or strategic partners of ours. We believe competitive factors in our markets include the proven performance, security, scalability, flexibility and reliability of services; the strategic relationships and integration with third-party applications; the intuitiveness and visual appeal of user interfaces; demonstrable cost-effective benefits to customers; pricing; the flexibility of services to match changing business demands; enterprise-level customer service and training; perceived market leadership; the usability of services; real-time data and reporting; independence from portals and search engines; the ability to deploy the services globally; and success in educating customers in how to utilize services effectively. We believe we compete favorably with both the enterprise and low-cost alternatives based on many of these competitive factors including our strong feature set, the breadth of our offerings, our focus on global, multi-brand companies, our superior user experience, tools for building multi-screen, cross-channel applications, standards-based architecture, scalability and performance and leadership in industry standards efforts.
Creative and digital agencies are increasingly investing in acquiring their own digital marketing technology platforms to complement their creative services offerings. Adobe may face competition from these agencies as they come to market with best-of-breed offerings in one or more digital marketing capabilities, or if agencies attempt to create a more complete technology platform offering. We believe our creative tools heritage differentiates us from our competitors. We have worked closely with marketing and creative customers for over thirty years. We also believe we have leadership in this market, with current customers representing leading global brands. Our comprehensive solutions extend more broadly than any other company in serving the needs of marketers and addressing this market opportunity; we integrate content and data, analytics, personalization, web experience management, cross-channel campaign management and social capabilities in our Adobe Marketing Cloud, surpassing the reach of any competitor. Most importantly, we provide a vision for our digital marketing customers as we engage with them across the important aspects of their business, extending from their use of Creative Cloud, to how they manage, deliver, measure and monetize their content with our Adobe Marketing Cloud.
Print and Publishing
Our Print and Publishing product offerings face competition from large-scale electronic and web publishing systems, XML-based publishing companies as well as lower-end desktop publishing products. Depending on the product line, competition is based on a number of factors, including: the quality and features of products, ease-of-use, printer service support, the level of customization and integration with other publishing system components, the number of hardware platforms supported, service and price. We believe we can successfully compete based upon the quality and features of our products, our strong brand among users, the widespread adoption of our products among printer service bureaus, and our extensive application programming interface.
In printing technologies, we believe the principal competitive factors for OEMs in selecting a page description language or a printing technology are product capabilities, market leadership, reliability, price, support and engineering development assistance. We believe that our competitive advantages include our technology competency, OEM customer relationships and our intellectual property portfolio.
OPERATIONS  
Marketing and Sales
We market and license our products directly using our sales force and through our own website at www.adobe.com. We also market and distribute our products through sales channels, which include distributors, retailers, software developers, systems integrators, ISVs and VARs, as well as through OEM and hardware bundle customers.
We support our end users through local field offices and our worldwide distribution network, which includes locations in Australia, Austria, Belgium, Brazil, Canada, Czech Republic, Denmark, Finland, France, Germany, India, Ireland, Italy, Japan, Korea, Mexico, Moldova, the Netherlands, Norway, Poland, Portugal, Romania, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey, the United Kingdom and the United States.
We sell the majority of our products through a software subscription model where our customers purchase access to a product for a specific period of time and during which they always have rights to use the most recent version of that product. We

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also license perpetual versions of our software with maintenance and support, which includes rights to upgrades, when and if available, support, updates and enhancements.
For fiscal 2014 and 2013 , there were no customers that represented at least 10% of net revenue. For fiscal 2012, Ingram Micro accounted for 11% of net revenue. Ingram Micro is a distributor who sells products across our various segments. We have multiple non-exclusive, independently negotiated distribution agreements with Ingram Micro and its subsidiaries covering our arrangements in specified countries and regions. Each of these contracts has an independent duration, is independent of any other agreement (such as a master distribution agreement) and any termination of one agreement does not affect the status of any of the other agreements.

In fiscal 2014 and 2013 , no single customer was responsible for over 10% of our trade receivables.
Order Fulfillment Distribution
The procurement of the various components of packaged products, including DVDs and printed materials, and the assembly of packages for retail and other applications products is controlled by our product delivery operations organization. We outsource our procurement, production, inventory and fulfillment activities to third parties in the United States, EMEA and APAC.
To date, we have not experienced significant difficulties in obtaining raw materials for the manufacture of our products or in the replication of DVDs, printing and assembly of components.
Our evolution to a services and subscription-based business model has decreased the need to produce and distribute physical products. We still produce packaged products for a subset of our business, but that percentage is declining as the digital delivery of our services and subscriptions continues to grow.
Services and Support
We provide professional services, technical support and customer service across all our customer segments, including enterprises, small/medium businesses, creative professionals, and consumers. Our service and support revenue consists primarily of consulting fees, software maintenance and support fees and training fees.
Services
We have a global professional services team dedicated to designing, developing and implementing solutions for enterprise customers in key vertical markets and to transfer technical expertise to our solution partners. The professional services team uses a comprehensive, customer-focused methodology to develop high-quality solutions, which in turn deliver a competitive advantage to our enterprise customers. This methodology has been developed by capturing best practices from numerous client engagements across a diverse mix of solutions, industries, and customer preferences. Based on this methodology, our teams are able to accelerate the time to value and maximize the return our clients earn on their investment in Adobe solutions.
In addition, Adobe has also created a large and vibrant partner ecosystem that includes a mix of global System Integrators ( “ SIs ” ), regional SIs, VARs, Digital Agencies, and solution partners. Adobe invests to enable this ecosystem with the right skills and knowledge about our technologies and best practices. Consequently, this ecosystem provides our clients several different choices of partners, and a large accessible pool of skilled resources that can help deploy and manage Adobe solutions. This approach not only creates value for our customers and partners, but also creates a large and productive go-to-market channel for our sales teams.
Support
A portion of our support revenue is composed of our enterprise maintenance and support offerings. These offerings entitle customers to:
•
the right to receive technical support on the technology they have purchased from Adobe;
•
the right to receive basic “how to” help in using our products; and
•
the right to receive product upgrades and enhancements during the term of the maintenance and support period, which is typically one year.
We offer a range of support programs, from fee-based incidents to annual support contracts. Additionally, we provide extensive self-help and online technical support capabilities via the web and through social media channels allowing customers

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quick and easy access to possible solutions. As a registered owner of the current version of an Adobe desktop product, customers are eligible to receive Getting Started support on certain matters. Support for some products and in some countries may vary.
We provide product support through a combination of outsourced vendors and internal support centers, and through multiple channels including phone, chat, web, social media, and email. These support services are delivered by a global support organization that includes several regional and global support centers. These teams are responsible for providing timely, high-quality technical expertise on all our products as well as providing proactive risk mitigation services.
We also offer delivery assurance and enablement services to partners and developer organizations. The Adobe Partner Connection Program focuses on providing developers with high-quality tools, software development kits, information and services.
Training
We offer a comprehensive portfolio of training options to enable our customer and partner teams in the use of our products. Our training portfolio includes free on-line informational services on www.adobe.com and a growing series of how-to books published by Adobe Press pursuant to a joint publishing agreement with Peachpit Press. We sponsor workshops, work with professional associations and user groups, and conduct regular beta testing programs. We also provide fee-based education services to enhance our customers’ use of our solutions, including a wide range of traditional and online training and certifications delivered by our team of training professionals. Adobe’s portfolio of technical training courses covers our Digital Media, Digital Marketing and other mature products and solutions.
Investments
We make direct investments in privately held companies. We enter into these investments with the intent of securing financial returns as well as for strategic purposes as they often increase our knowledge of emerging markets and technologies, as well as expand our opportunities to provide Adobe products and services.
PRODUCT DEVELOPMENT
 
As the software industry is characterized by rapid technological change, a continuous high level of investment is required for the enhancement of existing products and services and the development of new products and services. We develop our software internally as well as acquire products or technology developed by others by purchasing the stock or assets of the business entity that owned the technology. In other instances, we have licensed or purchased the intellectual property ownership rights of programs developed by others with license or technology transfer agreements that may obligate us to pay a flat license fee or royalties, typically based on a dollar amount per unit shipped or a percentage of the revenue generated by those programs.
During fiscal 2014 , 2013 and 2012 , our research and development expenses were $844.4 million , $826.6 million and $742.8 million , respectively.
PRODUCT PROTECTION
We regard our software as proprietary and protect it under the laws of copyrights, patents, trademarks and trade secrets. We have a number of domestic and foreign patents and pending applications that relate to various aspects of our products and technology. While we believe our patents have value, no single patent is material to us or to any of our reporting segments. We protect the source code of our software programs as trade secrets and make source code available to third parties only under limited circumstances and subject to specific security and confidentiality constraints. From time to time, we secure rights to third-party intellectual property if beneficial to our business.
Our products are generally licensed to end users under one of the following two methods:
(1)
We offer products on a “right to use” basis pursuant to a license that restricts the use of the products to a designated number of devices, users or both. We also rely on copyright laws and on “shrink wrap” and electronic licenses that are not physically signed by the end user. Copyright protection may be unavailable under the laws of certain countries and the enforceability of “shrink wrap” and electronic licenses has not been conclusively determined in all jurisdictions.
(2)
We offer products under a SaaS or on-demand model, where hosted software is provided on demand to customers, generally through a web browser. The use of these products is governed by either the online terms of use or an enterprise licensing agreement associated with the product.
Policing unauthorized use of computer software is difficult and software piracy is a persistent problem for the software industry. This problem is particularly acute in international markets. We conduct piracy conversion and prevention programs

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directly and through certain external software associations. In addition, we have activation technology in certain products to guard against illegal use and will continue to do so in certain future products.
EMPLOYEES  
As of November 28, 2014 , we employed 12,499 people. We have not experienced work stoppages and believe our employee relations are good.
AVAILABLE INFORMATION  
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our Investor Relations website at www.adobe.com/adbe as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information posted on our website is not incorporated into this report.
EXECUTIVE OFFICERS  
Adobe’s executive officers as of January 16, 2015 are as follows:
Name
 
Age
 
Positions
 Shantanu Narayen
 
 
 
51
 
President and Chief Executive Officer
 
Mr. Narayen currently serves as Adobe’s President and Chief Executive Officer. Mr. Narayen joined Adobe in January 1998 as Vice President and General Manager of Adobe’s engineering technology group. In January 1999, he was promoted to Senior Vice President, Worldwide Products and in March 2001 he was promoted to Executive Vice President, Worldwide Product Marketing and Development. In January 2005, Mr. Narayen was promoted to President and Chief Operating Officer and in December 2007, he was appointed Chief Executive Officer of Adobe and joined the Adobe Board of Directors. Prior to joining Adobe, Mr. Narayen co-founded Pictra Inc., a digital photo sharing software company, in 1996. He was Director of Desktop and Collaboration products at Silicon Graphics Inc. before founding Pictra. Mr. Narayen is also a director of Pfizer Inc.
Mark Garrett
 
57
 
Executive Vice President, Chief Financial Officer
 
Mr. Garrett joined Adobe in February 2007 as Executive Vice President and Chief Financial Officer. Mr. Garrett served as Senior Vice President and Chief Financial Officer of the Software Group of EMC Corporation, a products, services and solutions provider for information management and storage, from June 2004 to January 2007, his most recent position since EMC’s acquisition of Documentum, Inc., an enterprise content management company, in December 2003. Mr. Garrett first joined Documentum as Executive Vice President and Chief Financial Officer in 1997, holding that position through October 1999 and then re-joining Documentum as Executive Vice President and Chief Financial Officer in 2002. Mr. Garrett is also a director of Informatica Corporation and Model N, Inc.
Matthew Thompson
 
56
 
Executive Vice President, Worldwide Field Operations
 
Mr. Thompson currently serves as Executive Vice President, Worldwide Field Operations. Mr. Thompson joined Adobe in January 2007 as Senior Vice President, Worldwide Field Operations. In January 2013, he was promoted to Executive Vice President, Worldwide Field Operations. Prior to joining Adobe, Mr. Thompson served as Senior Vice President of Worldwide Sales at Borland Software Corporation, a software delivery optimization solutions provider, from October 2003 to December 2006. Prior to joining Borland, Mr. Thompson was Vice President of Worldwide Sales and Field Operations for Marimba, Inc., a provider of products and services for software change and configuration management, from February 2001 to January 2003. From July 2000 to January 2001, Mr. Thompson was Vice President of Worldwide Sales for Calico Commerce, Inc., a provider of eBusiness applications. Prior to joining Calico, Mr. Thompson spent six years at Cadence Design Systems, Inc., a provider of electronic design technologies. While at Cadence, from January 1998 to June 2000, Mr. Thompson served as Senior Vice President, Worldwide Sales and Field Operations and from April 1994 to January 1998 as Vice President, Worldwide Professional Services.
 

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Name
 
Age
 
Positions
Michael Dillon

 
56
 
Senior Vice President, General Counsel and Corporate Secretary

Mr. Dillon joined Adobe in August 2012 as Senior Vice President, General Counsel and Corporate Secretary. Prior to joining Adobe, Mr. Dillon served as General Counsel and Corporate Secretary of Silver Spring Networks, a networking solutions provider, from November 2010 to August 2012. Before joining Silver Spring Networks, Mr. Dillon served in various capacities at Sun Microsystems, a diversified computer networking company, prior to its acquisition by Oracle Corporation. While at Sun Microsystems, from April 2006 to January 2010, Mr. Dillon served as Executive Vice President, General Counsel and Secretary, from April 2004 to April 2006, as Senior Vice President, General Counsel and Corporate Secretary, and from July 2002 to March 2004 as Vice President, Products Law Group. From October 1999 until June 2002, Mr. Dillon served as Vice President, General Counsel and Corporate Secretary of ONI Systems Corp, an optical networking company.
 
Naresh Gupta

 
48
 
Senior Vice President, Print and Publishing Business Unit and Managing Director, Adobe India

Dr. Gupta currently serves as Senior Vice President of Print and Publishing and Managing Director of Adobe India. Dr. Gupta joined Adobe in 1996 as a member of the Corporate Research group. He was promoted to Managing Director of Adobe Noida in 1998. In 2003 he was promoted to Vice President of Engineering and Managing Director.  In April 2005, Dr. Gupta was promoted to Senior Vice President of Emerging Business and, subsequently, in 2005, he was promoted to Senior Vice President of Print and Publishing and Managing Director of Adobe India. Prior to joining Adobe, he served as a Principal Scientist and Director of the Applied Artificial Intelligence (AI) group at LNK Corp.

Bryan Lamkin
 
54
 
Senior Vice President, Technology and Corporate Development

Mr. Lamkin rejoined Adobe in February 2013 as Senior Vice President, Technology and Corporate Development. From June 2011 to May 2012, Mr. Lamkin served as President and Chief Executive Officer of Clover, a mobile payments platform.  Prior to Clover, Mr. Lamkin co-founded and served as the Chief Executive Officer of Bagcheck, a sharing and discovery platform, from June 2010 to May 2011. From April 2009 to June 2010, Mr. Lamkin served as Senior Vice President of Consumer Products and Applications at Yahoo!, a global technology company providing online search, content and communication tools. From May 2008 to April 2009 Mr. Lamkin served as Executive in Residence at Sutter Hill Ventures. Mr. Lamkin previously was with Adobe from 1992 to 2006 and held various senior management positions including Senior Vice President, Creative Solutions Business Unit.
Ann Lewnes

 
53
 
Senior Vice President and Chief Marketing Officer 

Ms. Lewnes joined Adobe in November 2006 as Senior Vice President and Chief Marketing Officer. Prior to joining Adobe, Ms. Lewnes spent 20 years at Intel Corporation, where she was Vice President of Sales and Marketing. Ms. Lewnes has been elected to the board of directors of Mattel, Inc., effective February 1, 2015.
Donna Morris

 
47
 
Senior Vice President, People and Places

Ms. Morris currently serves as Senior Vice President of Adobe’s Global People and Places organization. Ms. Morris joined Adobe as Senior Director of Global Talent Management in April 2002 through the acquisition of Accelio Corporation, a Canadian software company, where she served as Vice President of Human Resources and Learning. In December 2005 Ms. Morris was promoted to Vice President Global Human Resources Operations and subsequently to Senior Vice President Human Resources in March 2007.
Bradley Rencher

 
41
 
Senior Vice President and General Manager, Digital Marketing

Mr. Rencher serves as Senior Vice President and General Manager of Adobe’s Digital Marketing business unit. Mr. Rencher joined Omniture, Inc. in January 2008 as Vice President of Corporate Development and was promoted to Senior Vice President of Business Operations prior to Adobe’s acquisition of Omniture in 2009. Following the acquisition he joined Adobe as Vice President of Business Operations. Mr. Rencher was promoted to Vice President and General Manager, Omniture business unit in 2010 and subsequently to Senior Vice President in 2011. Prior to joining Omniture, Mr. Rencher was a member of the technology investment banking team at Morgan Stanley from 2005 to 2008 and a member of the investment banking team at RBC Capital Markets from 1998 to 2004.

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Name
 
Age
 
Positions
David Wadhwani
 
43
 
Senior Vice President and General Manager, Digital Media
 
Mr. Wadhwani serves as Senior Vice President and General Manager of Adobe’s Digital Media business unit. Prior to June 2010, Mr. Wadhwani was Vice President and General Manager of Adobe’s Platform business unit. He joined Adobe in 2005 through the acquisition of Macromedia. Prior to his time at Macromedia, Mr. Wadhwani founded and was VP of Engineering at iHarvest, a content management company that was acquired by Interwoven and worked at Oracle in their database tools division.
 
 Richard T. Rowley
 
58
 
Vice President, Corporate Controller and Chief Accounting Officer
 
Mr. Rowley joined Adobe in November 2006 as Vice President, Corporate Controller and Principal Accounting Officer. Prior to joining Adobe, Mr. Rowley served as Vice President, Corporate Controller, Treasurer and Principal Accounting Officer at Synopsys, Inc., a semiconductor design software company, from December 2002 to September 2005 and from 1999 to December 2002, Mr. Rowley served as Vice President, Corporate Controller and Principal Accounting Officer. From 1994 to 1999, Mr. Rowley served in several finance-related positions at Synopsys. Mr. Rowley is a certified public accountant.
ITEM 1A.  RISK FACTORS
As previously discussed, our actual results could differ materially from our forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed below. These and many other factors described in this report could adversely affect our operations, performance and financial condition.
If we cannot continue to develop, market and offer new products and services or enhancements to existing products and services that meet customer requirements, our operating results could suffer.
The process of developing new high technology products and services and enhancing existing products and services is complex, costly and uncertain. If we fail to anticipate customers’ changing needs and emerging technological trends, our market share and results of operations could suffer. We must make long-term investments, develop or obtain appropriate intellectual property and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our products and services. If we are unable to extend our core technologies into new applications and new platforms and to anticipate or respond to technological changes, the market’s acceptance of our products and services could decline and our results would suffer. Additionally, any delay in the development, production, marketing or offering of a new product or service or enhancement to an existing product or service could result in customer attrition or impede our ability to attract new customers, causing a decline in our revenues, earnings or stock price and weakening our competitive position. We maintain strategic relationships with third parties to market certain of our products and support certain product functionality. If we are unsuccessful in establishing or maintaining our strategic relationships with these third parties, our ability to compete in the marketplace, to reach new customers and geographies or to grow our revenues would be impaired and our operating results would suffer.
We offer our products on a variety of PC, tablet and mobile devices. Recent trends have shown a technological shift from personal computers to tablet and mobile devices. If we cannot continue to adapt our products to tablet and mobile devices our business could be harmed. To the extent that consumer purchases of these devices slow down, or to the extent that significant demand arises for our products or competitive products on other platforms before we offer our products on those platforms, our business could be harmed. Releases of new devices or operating systems may make it more difficult for our products to perform or may require significant costs in order for us to adapt our solutions to such devices or operating systems. These potential costs and delays could harm our business.
Introduction of new products, services and business models by existing and new competitors could harm our competitive position and results of operations.
The markets for our products and services are characterized by intense competition, evolving industry standards, emerging business and distribution models, disruptive technology developments, short product and service life cycles, price sensitivity on the part of customers, and frequent new product introductions, including alternatives with limited functionality available at lower costs or free of charge. Any of these factors could create downward pressure on pricing and gross margins and could adversely affect our renewal and upgrade rates, as well as our ability to attract new customers. Our future success will depend on our ability to enhance our existing products and services, introduce new products and services on a timely and cost-effective basis, meet changing customer needs, extend our core technology into new applications, and anticipate and respond to emerging standards, business models, software delivery methods and other technological developments, such as the evolution and emergence of digital application marketplaces as a direct sales and software delivery environment. These digital application marketplaces often have

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exclusive distribution for certain platforms, which may make it more difficult for us to compete in these markets. If any competing products, services or operating systems (that don’t support our solutions) achieve widespread acceptance, our operating results could suffer. In addition, consolidation has occurred among some of the competitors in the markets in which we compete. Further consolidations in these markets may subject us to increased competitive pressures and may therefore harm our results of operations.
For additional information regarding our competition and the risks arising out of the competitive environment in which we operate, see the section entitled “Competition” contained in Item 1 of this report.
If we fail to successfully manage transitions to new business models and markets, our results of operations could suffer.
We often release new offerings and employ new software and services delivery methods in connection with our diversification into new business models and markets. It is uncertain whether these strategies will prove successful or whether we will be able to develop the necessary infrastructure and business models more quickly than our competitors. Market acceptance of new product and service offerings will be dependent on our ability (1) to include functionality and usability that address certain customer requirements where our operating history is less extensive, and (2) to optimally price our products in light of marketplace conditions, our costs and customer demand. New product and service offerings could subject us to increased risk of liability related to the provision of services as well as cause us to incur significant technical, legal or other costs. For example, with our cloud-based services and subscription-based licensing models, such as Creative Cloud, we have entered markets that may not be fully accustomed to cloud-based subscription offerings. Market acceptance of such services is affected by a variety of factors, including information security, reliability, performance, social/community engagement, local government regulations regarding online services and user-generated content, the sufficiency of technological infrastructure to support our products in certain geographies, customer concerns with entrusting a third party to store and manage their data, public concerns regarding data privacy and the enactment of laws or regulations that restrict our ability to provide such services to customers in the U.S. or internationally. If we are unable to respond to these threats, our business could be harmed.
From time to time we open-source certain of our technology initiatives, provide broader open access to our technology, license certain of our technology on a royalty-free basis, and release selected technology for industry standardization. Additionally, customer requirements for open standards or open-source products could impact adoption or use of some of our products or services. To the extent we incorrectly predict customer requirements for such products or services, or if there is a delay in market acceptance of such products or services, our business could be harmed.
We also devote significant resources to the development of technologies and service offerings in markets where our operating history is less extensive. These new offerings and markets may require a considerable investment of technical, financial, compliance and sales resources, and a scalable organization. Some of our competitors may have advantages over us due to their larger presence, larger developer network, deeper market experience and larger sales, consulting and marketing resources. If we are unable to successfully establish new offerings in light of the competitive environment, our results of operations could suffer.
The increased emphasis on a cloud strategy may give rise to risks that could harm our business.
Over the past several years, our business has shifted away from pre-packaged creative software to focus on a subscription model that prices and delivers our products in a way that differs from the historical pricing and delivery methods of our creative tools. These changes reflect a significant shift from perpetual license sales and distribution of our software in favor of providing our customers the right to access certain of our software in a hosted environment or use downloaded software for a specified subscription period. This cloud strategy requires continued investment in product development and cloud operations, and may give rise to a number of risks, including the following:
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if customers desire only perpetual licenses or to purchase or renew only point product subscriptions rather than acquire the entire Creative Cloud offering, our subscription sales may lag behind our expectations;
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our cloud strategy may raise concerns among our customer base, including concerns regarding changes to pricing over time, service availability, information security of a cloud solution and access to files while offline or once a subscription has expired;

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small businesses and hobbyists may turn to competitive or open-source offerings;

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we may be unsuccessful in maintaining our target pricing, new seat adoption and projected renewal rates; we may select a target price that is not optimal and could negatively affect our sales or earnings; or we may have to rely heavily on promotional rates to achieve target seat adoption, which could reduce average revenue per user;

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the removal of general availability of Creative Suite 6 on a perpetual licensing basis from legacy shrinkwrap and volume licensing channels, which we announced during our second quarter of fiscal 2014, could further reduce our revenues in the short term as our business shifts to subscription revenue that is recognized ratably; and
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we may incur costs at a higher than forecasted rate as we expand our cloud operations.
Subscription offerings and ETLAs create risks related to the timing of revenue recognition.
Although the subscription model is designed to increase the number of customers who purchase our products and services and create a recurring revenue stream that is more predictable, it creates certain risks related to the timing of revenue recognition and potential reductions in cash flows.
A portion of the subscription-based revenue we report each quarter results from the recognition of deferred revenue relating to subscription agreements entered into during previous quarters. A decline in new or renewed subscriptions in any period may not be immediately reflected in our reported financial results for that period, but may result in a decline in our revenue in future quarters. If we were to experience significant downturns in subscription sales and renewal rates, our reported financial results might not reflect such downturns until future periods. Our subscription model could also make it difficult for us to rapidly increase our revenues from subscription-based or hosted services through additional sales in any period, as revenue from new customers will be recognized over the applicable subscription term. Further, any increases in sales under our subscription sales model could result in decreased revenues over the short term if they are offset by a decline in sales from perpetual license customers.
Additionally, in connection with our sales efforts to enterprise customers and our use of ETLAs, a number of factors could affect our revenues, including longer than expected sales and implementation cycles, potential deferral of revenue due to multiple-element revenue arrangements and alternate licensing arrangements. If any of our assumptions about revenue from our new businesses or our addition of a subscription-based model prove incorrect, our actual results may vary materially from those anticipated, estimated or projected.
We may be unable to predict subscription renewal rates and the impact these rates may have on our future revenue and operating results.
The hosted business model we utilize in our Adobe Marketing Cloud offerings typically involves selling services on a subscription basis pursuant to service agreements that are generally one to three years in length. Our individual Creative Cloud subscription agreements are generally month-to-month or one year in length, ETLAs for our Digital Media products and services are generally three years in length, and subscription agreements for other products and services may provide for shorter or longer terms. Although many of our service and subscription agreements contain automatic renewal terms, our customers have no obligation to renew their subscriptions for our services after the expiration of their initial subscription period, and some customers elect not to renew. We cannot provide assurance that these subscriptions will be renewed at the same or higher level of service, for the same number of seats/licenses or for the same duration of time, if at all. Moreover, under certain circumstances, some of our customers have the right to cancel their service agreements prior to the expiration of the terms of their agreements. We cannot be assured that we will be able to accurately predict future customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services, the reliability (including uptime) of our subscription services, the prices of our services, the perceived information security of our systems and services, the prices of services offered by our competitors, mergers and acquisitions affecting our customer base, reductions in our customers’ spending levels, or declines in customer activity as a result of economic downturns or uncertainty in financial markets. If our customers do not renew their subscriptions for our services or if they renew on less favorable terms to us, our revenues may decline.
Our future growth is also affected by our ability to sell additional features and services to our current customers, which depends on a number of factors, including customers’ satisfaction with our products and services, the prices of our offerings and general economic conditions. If our efforts to cross-sell and upsell to our customers are unsuccessful, the rate at which our business grows might decline.
Security vulnerabilities in our products and systems could lead to reduced revenues or to liability claims.
Maintaining the security of our products, computers and networks is a critical issue for us and our customers. Security researchers, criminal hackers and other third parties regularly develop new techniques to penetrate computer and network security measures and, as we have previously disclosed, certain parties have in the past managed to breach certain of our data-security systems and misused certain of our systems and software in order to access our end users’ authentication and payment information. In addition, cyber-attackers also develop and deploy viruses, worms and other malicious software programs, some of which may be specifically designed to attack our products, systems, computers or networks. Sophisticated hardware and operating system applications that we produce or procure from third parties may contain defects in design or manufacture, including bugs and other problems that could unexpectedly compromise the security of the system. The costs to eliminate or alleviate cyber or other security

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problems, bugs, viruses, worms, malicious software programs and security vulnerabilities are significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions, as well as potential liability to the company.
Outside parties have in the past and may in the future attempt to fraudulently induce our employees or users of our services to disclose sensitive information via illegal electronic spamming, phishing or other tactics. Unauthorized parties may also attempt to gain physical access to one of our facilities in order to infiltrate our information systems. These actual and potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary information or sensitive, personal or confidential data about us, our employees or our customers, including the potential loss or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our employees, our customers or the individuals affected to a risk of loss or misuse of this information. This may result in litigation and potential liability or fines for us, or governmental inquiry and oversight, any of which could damage our brand and reputation, possibly impeding our present and future success in retaining and attracting new customers and thereby requiring time and resources to repair our brand image.
These problems affect our products and services in particular because cyber-attackers tend to focus their efforts on the most popular offerings (such as those with large bases of users), and we expect them to continue to do so. Critical vulnerabilities may be identified in certain of our applications. These vulnerabilities could cause such applications to crash and could allow an attacker to take control of the affected system, which could result in liability to us or limit our ability to conduct our business and deliver our products and services to customers. We devote significant resources to address security vulnerabilities through engineering more secure products, enhancing security and reliability features in our products and systems, code hardening, conducting rigorous penetration tests, deploying security updates to address security vulnerabilities and improving our incident response time, but these security vulnerabilities cannot be totally eliminated. The cost of these steps could reduce our operating margins, and we may be unable to implement these measures quickly enough to prevent cyber-attackers from gaining unauthorized access into our systems and products. Despite our preventative efforts, actual or perceived security vulnerabilities in our products and systems may harm our reputation or lead to claims against us (and have in the past lead to such claims), and could lead some customers to seek to return products, to stop using certain services, to reduce or delay future purchases of products or services, or to use competing products or services. If we do not make the appropriate level of investment in our technology systems or if our systems become out-of-date or obsolete and we are not able to deliver the quality of data security customers require, our business could be adversely affected. Customers may also increase their expenditures on security measures designed to protect their existing computer systems from attack, which could delay adoption of new technologies. Further, if we or our customers are subject to a future attack, or our technology is utilized in a third-party attack, it may be necessary for us to take additional extraordinary measures and make additional expenditures to take appropriate responsive and preventative steps. Any of these events could adversely affect our revenues or margins. Moreover, delayed sales, lower margins or lost customers resulting from the disruptions of cyber-attacks or preventative measures could adversely affect our financial results, stock price and reputation.
Some of our lines of business rely on us or our third-party service providers to host and deliver services and data, and any interruptions or delays in these hosted services, security or privacy breaches, or failures in data collection could expose us to liability and harm our business and reputation.
Some of our lines of business and services, including our online store at adobe.com, Creative Cloud, other hosted Digital Media offerings and our Adobe Marketing Cloud solutions, rely on hardware and services hosted and controlled directly by us or by our third-party service providers. We do not have redundancy for all of our systems, many of our critical applications reside in only one of our data centers, and our disaster recovery planning may not account for all eventualities. If our business relationship with a third-party provider of hosting or content delivery services is negatively affected, or if one of our content delivery suppliers were to terminate their agreement with us, we might not be able to deliver the corresponding hosted offerings to our customers, which could subject us to reputational harm and cause us to lose customers and future business, reducing our revenues.
We hold large amounts of customer data, some of which is hosted in third-party facilities. A security incident at those facilities or ours may compromise the confidentiality, integrity or availability of customer data. Unauthorized access to customer data stored on our computers or networks may be obtained through break-ins, breach of our secure network by an unauthorized party, employee theft or misuse, or other misconduct. It is also possible that unauthorized access to customer data may be obtained through inadequate use of security controls by customers. While our products and services provide and support strong password controls, IP restriction and account controls, their use is controlled by the customer. Accounts created with weak passwords could allow cyber-attackers to gain access to customer data. Additionally, failure by customers to remove accounts of their own employees, or granting of accounts by the customer in an uncontrolled manner, may allow for access by former or unauthorized customer representatives. If there were an inadvertent disclosure of personal information, or if a third party were to gain unauthorized access to the personal information we possess on behalf of our customers, our operations could be disrupted, our reputation could be damaged and we could be subject to claims or other liabilities. In addition, such perceived or actual unauthorized disclosure of

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the information we collect or breach of our security could damage our reputation, result in the loss of customers and harm our business.
Because of the large amount of data that we collect and manage on behalf of our customers, it is possible that hardware or software failures or errors in our systems (or those of our third-party service providers) could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant. Furthermore, our ability to collect and report data may be delayed or interrupted by a number of factors, including access to the internet, the failure of our network or software systems, security breaches or significant variability in visitor traffic on customer websites. In addition, computer viruses may harm our systems causing us to lose data, and the transmission of computer viruses could expose us to litigation. We may also find, on occasion, that we cannot deliver data and reports to our customers in near real time because of a number of factors, including significant spikes in customer activity on their websites or failures of our network or software. If we supply inaccurate information or experience interruptions in our ability to capture, store and supply information in near real time or at all, our reputation could be harmed and we could lose customers, or we could be found liable for damages or incur other losses.
Uncertainty about current and future economic conditions and other adverse changes in general political conditions in any of the major countries in which we do business could adversely affect our operating results.
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in economic and political conditions, both domestically and globally. Uncertainty about current and future economic and political conditions on us, our customers, suppliers and partners, makes it difficult for us to forecast operating results and to make decisions about future investments. If economic growth in countries where we do business slows, customers may delay or reduce technology purchases, advertising spending or marketing spending. This could result in reductions in sales of our products and services, longer sales cycles, slower adoption of new technologies and increased price competition. Our customers include government entities, including the U.S. federal government, and if spending cuts impede the government’s ability to purchase our products and solutions, our revenues could decline. Deterioration in economic conditions in any of the countries in which we do business could also cause slower or impaired collections on accounts receivable, which may adversely impact our liquidity and financial condition.
There could be a number of effects from a financial institution credit crisis on our business, which could include impaired credit availability and financial stability of our customers, including our distribution partners and channels. A disruption in the financial markets may also have an effect on our derivative counterparties and could also impair our banking partners on which we rely for operating cash management. Any of these events would likely harm our business, results of operations and financial condition.
Political instability in or around any of the major countries in which we do business would also likely harm our business, results of operations and financial condition.
We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management.
We may not realize the anticipated benefits of an acquisition of a company, division, product or technology, each of which involves numerous risks. These risks include:
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difficulty in integrating the operations and personnel of the acquired company;
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difficulty in effectively integrating the acquired technologies, products or services with our current technologies, products or services;
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difficulty in maintaining controls, procedures and policies during the transition and integration;
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entry into markets in which we have minimal prior experience and where competitors in such markets have stronger market positions;
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disruption of our ongoing business and distraction of our management and other employees from other opportunities and challenges;
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inability to retain personnel of the acquired business;
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inability to retain key customers, distributors, vendors and other business partners of the acquired business;
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inability to achieve the financial and strategic goals for the acquired and combined businesses;
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inability to take advantage of anticipated tax benefits as a result of unforeseen difficulties in our integration activities;

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incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;
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potential additional exposure to fluctuations in currency exchange rates;
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potential additional costs of bringing acquired companies into compliance with laws and regulations applicable to us as a multi-national corporation;
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potential impairment of our relationships with employees, customers, partners, distributors or third-party providers of our technologies, products or services;
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potential failure of the due diligence processes to identify significant problems, liabilities or other challenges of an acquired company or technology, including but not limited to, issues with the acquired company’s intellectual property, product quality or product architecture, data back-up and security (including security from cyber-attacks), privacy practices, revenue recognition or other accounting practices, employee, customer or partner issues or legal and financial contingencies;
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exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, including but not limited to claims from terminated employees, customers, former stockholders or other third parties;
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incurring significant exit charges if products or services acquired in business combinations are unsuccessful;
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potential inability to assert that internal controls over financial reporting are effective;
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potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions;
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potential delay in customer and distributor purchasing decisions due to uncertainty about the direction of our product and service offerings; and
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potential incompatibility of business cultures.
Mergers and acquisitions of high technology companies are inherently risky. If we do not complete an announced acquisition transaction or integrate an acquired business successfully and in a timely manner, we may not realize the benefits of the acquisition to the extent anticipated, and in certain circumstances an acquisition could harm our financial position.
We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third-party claims as a result of litigation or other proceedings.
In connection with the enforcement of our own intellectual property rights, the acquisition of third-party intellectual property rights, or disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation are typically costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved many past lawsuits and other disputes, we may not prevail in the future. Third-party intellectual property disputes, including those initiated by patent assertion entities, could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers, including contractual provisions under various license arrangements and service agreements. In addition, we may incur significant costs in acquiring the necessary third-party intellectual property rights for use in our products, in some cases to fulfill contractual obligations with our customers. Any of these occurrences could significantly harm our business.
We may not be able to protect our intellectual property rights, including our source code, from third-party infringers or unauthorized copying, use or disclosure.
Although we vigorously defend our intellectual property rights and attempt to combat unlicensed copying, access and use of software and intellectual property through a variety of techniques, preventing unauthorized use or infringement of our rights is inherently difficult. We actively combat software piracy as we enforce our intellectual property rights, but we nonetheless lose significant revenue due to illegal use of our software. If piracy activities continue at historical levels or increase, they may further harm our business.

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Additionally, we take significant measures to protect the secrecy of our confidential information and trade secrets, including our source code. Despite these measures, as we have previously disclosed, hackers have managed to access certain of our source code and may obtain access in the future. If unauthorized disclosure of our source code occurs through security breach, cyber-attack or otherwise, we could potentially lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third parties to compete with our products by copying functionality, which could cause us to lose customers and could adversely affect our revenue and operating margins. We also seek to protect our confidential information and trade secrets through the use of non-disclosure agreements with our customers, contractors, vendors and partners. However, there is a risk that our confidential information and trade secrets may be disclosed or published without our authorization, and in these situations enforcing our rights may be difficult or costly.
Increasing regulatory focus on privacy issues and expanding laws and regulations could impact our new business models and expose us to increased liability.
Our industry is highly regulated, including for privacy and data security. We are also expanding our business in countries that have more stringent data protection laws than those in the U.S. Privacy laws globally are changing and evolving. Governments, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use, store, share or transmit personal data. New laws and industry self-regulatory codes have been enacted and more are being considered that may affect our ability to reach current and prospective customers, to understand how our products and services are being used, to respond to customer requests allowed under the laws, and to implement our new business models effectively. These new laws and regulations would similarly affect our competitors as well as our customers. Any perception of our practices or products as an invasion of privacy, whether or not consistent with current regulations and industry practices, may subject us to public criticism, class action lawsuits, reputational harm or claims by regulators, industry groups or other third parties, all of which could disrupt our business and expose us to increased liability. Additionally, both laws regulating privacy, as well as third-party products addressing perceived privacy concerns, could affect the functionality of and demand for our products, thereby harming our revenues.
On behalf of certain customers, we collect and store anonymous and personal information derived from the activities of end users with various channels, including traditional websites, mobile websites and applications, email interactions, direct mail, point of sale, text messaging and call centers (collectively, “channels”). This enables us to provide such customers with reports on aggregated anonymous or personal information from and about end-user interactions with various channels in the manner specifically directed by each such individual customer. Federal, state and foreign governments and agencies have adopted or are considering adopting laws regarding the collection, use and disclosure of this information. Our compliance with privacy laws and regulations and our reputation among the public body of end users depend in part on such customers’ adherence to privacy laws and regulations and their use of our services in ways consistent with such end users’ expectations. We also rely on representations made to us by customers that their own use of our services and the information they provide to us via our services do not violate any applicable privacy laws, rules and regulations or their own privacy policies. We ask customers to represent to us that they provide their end users the opportunity to “opt-out” of the information collection associated with our services, as applicable. We do not formally audit such customers to confirm compliance with these representations. If these representations are false or if such customers do not otherwise comply with applicable privacy laws, we could face adverse publicity and possible legal or other regulatory action. In addition, some countries are considering enacting laws that would expand the scope of privacy-related obligations required of service providers, such as Adobe, that would require additional compliance expense and increased liability.
If we fail to process transactions effectively or fail to adequately protect against disputed or potential fraudulent activities, our revenue and earnings may be harmed.
We process a significant volume of transactions on a daily basis in both our Digital Marketing and Digital Media businesses. Due to the size and volume of transactions that we handle, effective processing systems and controls are essential; but even the most sophisticated systems and processes may not be effective in preventing all errors. The systems supporting our business are comprised of multiple technology platforms that may be difficult to scale. If we are unable to effectively manage these systems and processes, we may be unable to process customer data in an accurate, reliable and timely manner, which may harm our customer relationships or results of operations.
Failure to manage our sales and distribution channels and third-party customer service and technical support providers effectively could result in a loss of revenue and harm to our business.
We contract with a number of software distributors, none of which is individually responsible for a material amount of our total net revenue for any recent period. If any single agreement with one of our distributors were terminated, we believe we could make arrangements with new or existing distributors to distribute our products without a substantial disruption to our business; however, any prolonged delay in securing a replacement distributor could have a negative short-term impact on our results of operations.


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Successfully managing our indirect channel efforts to reach various customer segments for our products and services is a complex process across the broad range of geographies where we do business or plan to do business. Our distributors and other channel partners are independent businesses that we do not control. Notwithstanding the independence of our channel partners, we face potential legal risk and reputational harm from the activities of these third parties including, but not limited to, export control violations, workplace conditions, corruption and anti-competitive behavior. Although we have undertaken efforts to reduce these third-party risks, they remain present. We cannot be certain that our distribution channel will continue to market or sell our products effectively. If our distribution channel is not successful, we may lose sales opportunities, customers and revenues.
Our distributors also sell our competitors’ products, and if they favor our competitors’ products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective sales, which would cause our results to suffer. We also distribute some products through our OEM channel, and if our OEMs decide not to bundle our applications on their devices, our results could suffer.
In addition, the financial health of our distributors and our continuing relationships with them are important to our success. Some of these distributors may be adversely impacted by changes to our business model or unable to withstand adverse changes in current economic conditions, which could result in insolvency and/or the inability of such distributors to obtain credit to finance purchases of our products. In addition, weakness in the end-user market could negatively affect the cash flows of our distributors who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure. Our business could be harmed if the financial condition of some of these distributors substantially weakened and we were unable to timely secure replacement distributors.
We also sell certain of our products and services through our direct sales force. Risks associated with this sales channel include longer sales and collection cycles associated with direct sales efforts, challenges related to hiring, retaining and motivating our direct sales force, and substantial amounts of training for sales representatives, including regular updates to cover new and upgraded systems, products and services. Moreover, recent hires may not become as productive as we would like, as in most cases it takes a significant period of time before they achieve full productivity. Our business could be seriously harmed if these expansion efforts do not generate a corresponding significant increase in revenues and we are unable to achieve the efficiencies we anticipate. In addition, the loss of key sales employees could impact our customer relationships and future ability to sell to certain accounts covered by such employees.
We also provide products and services, directly and indirectly, to a variety of governmental entities, both domestically and internationally. Risks associated with licensing and selling products and services to governmental entities include longer sales cycles, varying governmental budgeting processes and adherence to complex procurement regulations and other government-specific contractual requirements. Ineffectively managing these risks could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, payment of fines, and suspension or debarment from future government business, as well as harm to our reputation.
We outsource a substantial portion of our customer service and technical support activities to third-party service providers. We rely heavily on these third-party customer service and technical support representatives working on our behalf, and we expect to continue to rely heavily on third parties in the future. This strategy provides us with lower operating costs and greater flexibility, but also presents risks to our business due to the fact that we may not be able to influence the quality of support as directly as we would be able to do if our own employees performed these activities. Our customers may react negatively to providing information to, and receiving support from, third-party organizations, especially if based overseas. If we encounter problems with our third-party customer service and technical support providers, our reputation may be harmed and we could lose customers and associated revenues.
Certain of our enterprise offerings have long and complex sales cycles.
Sales cycles for some of our enterprise offerings, including our Adobe Marketing Cloud Solutions and ETLAs in our Digital Media business, are long and complex. The complexity in these sales cycles is due to a number of factors, including:
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the need for our sales representatives to educate customers about the use and benefit of our large-scale deployments of our products and services, including technical capabilities, security features, potential cost savings and return on investment;
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the desire of large and medium size organizations to undertake significant evaluation processes to determine their technology requirements prior to making information technology expenditures;
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the need for our representatives to spend a significant amount of time assisting potential customers in their testing and evaluation of our products and services;

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the negotiation of large, complex, enterprise-wide contracts, as often required by our and our customers’ business and legal representatives;
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the need for our customers to obtain requisition approvals from various decision makers within their organizations; and
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customer budget constraints, economic conditions and unplanned administrative delays.
We spend substantial time and expense on our sales efforts without any assurance that potential customers will ultimately purchase our solutions.  As we target our sales efforts at larger enterprise customers, these trends are expected to continue.  Additionally, our enterprise sales pattern has historically been uneven, where a higher percentage of a quarter’s total sales occur during the final weeks of each quarter, which is common in our industry.  Our long sales cycle for these products makes it difficult to predict when a given sales cycle will close.
Catastrophic events may disrupt our business.
We are a highly automated business and rely on our network infrastructure and enterprise applications, internal technology systems and our website for our development, marketing, operational, support, hosted services and sales activities. In addition, some of our businesses rely on third-party hosted services, and we do not control the operation of third-party data center facilities serving our customers from around the world, which increases our vulnerability. A disruption, infiltration or failure of these systems or third-party hosted services in the event of a major earthquake, fire, flood, power loss, telecommunications failure, software or hardware malfunctions, cyber-attack, war, terrorist attack or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and loss of critical data. Any of these events could prevent us from fulfilling our customers’ orders. Our corporate headquarters, a significant portion of our research and development activities, certain of our data centers and certain other critical business operations are located in the San Francisco Bay Area, and additional facilities where we conduct significant operations are located in the Salt Lake Valley Area, both of which are near major earthquake faults. We have developed certain disaster recovery plans and backup systems to reduce the potentially adverse effect of such events, but a catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected.
Net revenue, margin or earnings shortfalls or the volatility of the market generally may cause the market price of our stock to decline.
The market price for our common stock has in the past experienced significant fluctuations and may fluctuate significantly in the future. A number of factors may affect the market price for our common stock, including:
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shortfalls in our revenue, margins, earnings, the number of paid Creative Cloud subscribers, ARR, bookings within our Adobe Marketing Cloud business or other key performance metrics;
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changes in estimates or recommendations by securities analysts;
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the announcement of new products, product enhancements or service introductions by us or our competitors;
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the loss of a large customer or our inability to increase sales to existing customers or attract new customers;
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variations in our or our competitors’ results of operations, changes in the competitive landscape generally and developments in our industry; and
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unusual events such as significant acquisitions, divestitures, litigation, general socio-economic, regulatory, political or market conditions and other factors, including factors unrelated to our operating performance.
We are subject to risks associated with compliance with laws and regulations globally which may harm our business.
We are a global company subject to varied and complex laws, regulations and customs domestically and internationally. These laws and regulations relate to a number of aspects of our business, including trade protection, import and export control, data and transaction processing security, payment card industry data security standards, records management, user-generated content hosted on websites we operate, privacy practices, corporate governance, employee and third-party complaints, gift policies, conflicts of interest, employment and labor relations laws, securities regulations and other regulatory requirements affecting trade and investment. The application of these laws and regulations to our business is often unclear and may at times conflict. Compliance with these laws and regulations may involve significant costs or require changes in our business practices that result in reduced revenue and profitability. Non-compliance could also result in fines, damages, criminal sanctions against us, our officers or our

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employees, prohibitions on the conduct of our business, and damage to our reputation. We incur additional legal compliance costs associated with our global operations and could become subject to legal penalties if we fail to comply with local laws and regulations in U.S. jurisdictions or in foreign countries, which laws and regulations may be substantially different from those in the U.S. In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable to us, including the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, including those based in or from countries where practices that violate such U.S. laws may be customary, will not take actions in violation of our internal policies. Any such violation, even if prohibited by our internal policies, could have an adverse effect on our business.
As a global business that generates approximately 44% of our total revenue from sales to customers outside of the Americas, we are subject to a number of risks, including:
•
foreign currency fluctuations;
•
changes in government preferences for software procurement;
•
international economic, political and labor conditions;
•
tax laws (including U.S. taxes on foreign subsidiaries);
•
increased financial accounting and reporting burdens and complexities;
•
unexpected changes in, or impositions of, legislative or regulatory requirements;
•
changes in laws governing the free flow of data across international borders;
•
failure of laws to protect our intellectual property rights adequately;
•
inadequate local infrastructure and difficulties in managing and staffing international operations;
•
delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers;
•
the imposition of governmental economic sanctions on countries in which we do business or where we plan to expand our business;
•
transportation delays;
•
operating in locations with a higher incidence of corruption and fraudulent business practices; and
•
other factors beyond our control, including terrorism, war, natural disasters and pandemics.
If sales to any of our customers outside of the Americas are delayed or canceled because of any of the above factors, our revenues may decline.
In addition, approximately 52% of our employees are located outside the U.S. Accordingly, we are exposed to changes in laws governing our employee relationships in various U.S. and foreign jurisdictions, including laws and regulations regarding wage and hour requirements, fair labor standards, employee data privacy, unemployment tax rates, workers’ compensation rates, citizenship requirements and payroll and other taxes, which likely would have a direct impact on our operating costs. We may continue to expand our international operations and international sales and marketing activities. Expansion in international markets has required, and will continue to require, significant management attention and resources. We may be unable to scale our infrastructure effectively or as quickly as our competitors in these markets, and our revenues may not increase to offset these expected increases in costs and operating expenses, which would cause our results to suffer.
We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.
Our operating results are subject to fluctuations in foreign currency exchange rates. We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity and expense. We have established a hedging program to partially hedge our exposure to foreign currency exchange rate fluctuations for various currencies. We regularly review our hedging program and make adjustments as necessary based on the factors discussed above. Our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates, which could adversely affect our financial condition or results of operations.

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We have issued $1.5 billion of notes in a debt offering and may incur other debt in the future, which may adversely affect our financial condition and future financial results.
We have $1.5 billion in senior unsecured notes outstanding. We also have a $1.0 billion revolving credit facility, which is currently undrawn. This debt may adversely affect our financial condition and future financial results by, among other things:
•
requiring the dedication of a portion of our expected cash from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions; and
•
limiting our flexibility in planning for, or reacting to, changes in our business and our industry.
Our senior unsecured notes and revolving credit facility impose restrictions on us and require us to maintain compliance with specified covenants. Our ability to comply with these covenants may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from the lenders or noteholders, then, subject to applicable cure periods, any outstanding indebtedness may be declared immediately due and payable.
In addition, changes by any rating agency to our credit rating may negatively impact the value and liquidity of both our debt and equity securities, as well as the potential costs associated with a refinancing of our debt. Under certain circumstances, if our credit ratings are downgraded or other negative action is taken, the interest rate payable by us under our revolving credit facility could increase. Downgrades in our credit ratings could also restrict our ability to obtain additional financing in the future and could affect the terms of any such financing.
Changes in, or interpretations of, accounting principles could have a significant impact on our financial position and results of operations.
We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls.
For example, the U.S.-based Financial Accounting Standards Board (“FASB”) is currently working together with the International Accounting Standards Board (“IASB”) on several projects to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow GAAP under SEC regulations and those who are required to follow International Financial Reporting Standards outside of the U.S. These efforts by the FASB and IASB may result in different accounting principles under GAAP that may result in materially different financial results for us in areas including, but not limited to, principles for recognizing revenue and lease accounting. Additionally, significant changes to GAAP resulting from the FASB's and IASB's efforts may require that we change how we process, analyze and report financial information and that we change financial reporting controls.
If our goodwill or amortizable intangible assets become impaired we could be required to record a significant charge to earnings.
Under GAAP, we review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. GAAP requires us to test for goodwill impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include declines in stock price, market capitalization or cash flows and slower growth rates in our industry. We could be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets were determined, negatively impacting our results of operations.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.
We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S. income taxes on earnings from the United States, we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the United States. While we do not anticipate changing our intention regarding permanently reinvested earnings, if certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
Our income tax expense has differed from the tax computed at the U.S. federal statutory income tax rate due primarily to discrete items and to earnings considered as permanently reinvested in foreign operations. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in the tax rates

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in jurisdictions where our income is earned, by changes in, or our interpretation of, tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes in the valuation of our deferred tax assets and liabilities. The United States, countries in the European Union and other countries where we do business have been considering changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals such as Adobe. These potential changes could adversely affect our effective tax rates or result in other costs to us.
In addition, we are subject to the continual examination of our income tax returns by the U.S. Internal Revenue Service (“IRS”) and other domestic and foreign tax authorities, including a current examination by the IRS of our fiscal 2010, 2011 and 2012 tax returns. These tax examinations are expected to focus on our intercompany transfer pricing practices as well as other matters. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examinations. There can be no assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.
If we are unable to recruit and retain key personnel our business may be harmed.
Much of our future success depends on the continued service and availability of our senior management. These individuals have acquired specialized knowledge and skills with respect to Adobe. The loss of any of these individuals could harm our business, especially in the event that we have not been successful in developing adequate succession plans. Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled personnel across all levels of our organization. Experienced personnel in the information technology industry are in high demand and competition for their talents is intense in many areas where our employees are located. If we are unable to continue to successfully attract and retain key personnel, our business may be harmed. Effective succession planning is also a key factor for our long-term success. Our failure to enable the effective transfer of knowledge and facilitate smooth transitions of our key employees could adversely affect our long-term strategic planning and execution.
We believe that a critical contributor to our success to date has been our corporate culture, which we have built to foster innovation, teamwork and employee satisfaction. As we grow, including from the integration of employees and businesses acquired in connection with previous or future acquisitions, we may find it difficult to maintain important aspects of our corporate culture, which could negatively affect our ability to retain and recruit personnel who are essential to our future success.
Our investment portfolio may become impaired by deterioration of the capital markets.
Our cash equivalent and short-term investment portfolio as of November 28, 2014 consisted of corporate bonds and commercial paper, U.S. agency securities and U.S. Treasury securities, money market mutual funds, municipal securities, time deposits and foreign government securities. We follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.
Should financial market conditions worsen in the future, investments in some financial instruments may pose risks arising from market liquidity and credit concerns. In addition, any deterioration of the capital markets could cause our other income and expense to vary from expectations. As of November 28, 2014 , we had no material impairment charges associated with our short-term investment portfolio, and although we believe our current investment portfolio has little risk of material impairment, we cannot predict future market conditions or market liquidity, or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.
ITEM 1B.  UNRESOLVED STAFF COMMENTS
None.

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ITEM 2.  PROPERTIES
The following table sets forth the location, approximate square footage and use of each of the principal properties used by Adobe during fiscal 2014 . We lease or sublease all of these properties with the exception of our property in Noida, India where we own the building and lease the land, in Lehi where we own the building and land, in San Francisco at 601 and 625 Townsend Street where we own the building and land, and our corporate offices in San Jose where we own the land and the East and West tower buildings after exercising our option to purchase these buildings in August 2014, and lease the Almaden Tower building. All leased properties are leased under operating leases. Such leases expire at various times through 2028 , with the exception of our land lease in Noida, India that expires in 2091 . The annual base rent expense (including operating expenses, property taxes and assessments, as applicable) for all leased facilities is currently approximately $93.3 million and is subject to annual adjustments as well as changes in interest rates.
Location
 
Approximate
Square
Footage
 
 
Use
North America:
 
 
 
 
 
West Tower, 345 Park Avenue
San Jose, CA 95110, USA
 
378,000

 
 
Research, product development, sales, marketing and administration
East Tower, 321 Park Avenue
San Jose, CA 95110, USA
 
321,000

 
 
Research, product development, sales, marketing and administration
Almaden Tower, 151 Almaden Boulevard
San Jose, CA 95110, USA
 
267,000

 
 
Product development, sales and administration
601 and 625 Townsend Street
San Francisco, CA 94103, USA
 
346,000

(1)  
 
Research, product development, sales, marketing and administration
801 N. 34th Street-Waterfront
Seattle, WA 98103, USA
 
182,000

(2)  
 
Product development, sales, technical support and administration
410 Townsend Street
San Francisco, CA 94107, USA
 
47,000

 
 
Research, product development, sales, marketing and administration
3900 Adobe Way
Lehi, UT 84043, USA
 
281,000

(3)  
 
Research, product development, sales, marketing and administration
7930 Jones Branch Drive
McLean, VA 22102, USA
 
34,000

(4)  
 
Sales and marketing
1540 Broadway
New York, NY 10036, USA
 
37,000

 
 
Sales and marketing
343 Preston Street
Ottawa, Ontario K1S 5N4, Canada
 
122,000

(5)  
 
Research, product development, sales, marketing and administration
25100 NW Evergreen Rd
Hillsboro, OR 97124, USA
 
85,000

 
 
Data center
India:
 
 
 
 
 
Adobe Towers, 1-1A, Sector 25A
Noida, U.P.
 
191,000

 
 
Product development and administration
Tech Boulevard, Plot #6, Sector 127
Expressway, Noida, U.P.
 
107,000

 
 
Product development and administration
Salapuria Infinity, Ground Floor,
1st Floor, 3rd Floor
#5 and #6 Bannerghatta Road,
Bangalore
 
185,000

 
 
Research, product development and administration
Japan:
 
 
 
 
 
Gate City Osaki East Tower
1-11 Osaki
Shinagawa-ku, Tokyo
 
56,000

 
 
Product development, sales and marketing
China:
 
 
 
 
 
Block A, SP Tower, 11th, 19th,
21st & 22nd Floors
Block B, SP Tower, 19th Floor
Block D, SP Tower, 10th Floor
Tsinghua Science Park, Yard 1
Zhongguancun Donglu, Haidian District
Beijing
 
94,000

(6)  
 
Research and product development

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Location
 
Approximate
Square
Footage
 
 
Use
Romania:
 
 
 
 
 
26 Z Timisoara Blvd, Anchor Plaza
Lujerului, Sector 6
Bucharest
 
71,000

 
 
Research and product development
UK:
 
 
 
 
 
Market House Providence Place
Maidenhead, Berkshire, SL6 8AD
 
49,000

 
 
Product development, sales, marketing and administration

Germany:
 
 
 
 
 
Grosse Elbstrasse 27
Hamburg
 
36,000

 
 
Research and product development
France:
 
 
 
 
 
18 rue Roger Simon-Barboux
Arcueil, France

 
28,000

 
 
Product development, sales and administration
191 Avenue Aristide Briand
Cachan, France

 
11,000

 
 
Research and product development
_________________________________________  
(1)  
The total square footage is 346,000 , of which we occupy 272,000 square feet, or approximately 79% of this facility; 74,000 square feet is unoccupied basement space.
(2)  
The total square footage is 182,000 , of which we occupy 162,000 square feet, or approximately 89% of this facility. The remaining square footage is subleased.

(3)  
The total square footage is 281,000 , of which we occupy 257,000 square feet, or approximately 91% of this facility; 24,000 square feet is unoccupied basement space.

(4)  
The total square footage is 34,000 , of which we occupy 30,000 square feet, or approximately 88% of this facility. The remaining square footage is subleased.
(5)  
The total square footage is 122,000 , of which we occupy 59,000 square feet, or approximately 48% of this facility; 6,000 square feet is unoccupied. The remaining square footage is subleased.
(6)
In fiscal 2014, we initiated our Fiscal 2014 Restructuring Plan which included a plan to vacate our research and product development facility in China during fiscal 2015. See Note 10 of our Notes to Consolidated Financial Statements for further information regarding our restructuring plans.
In general, all facilities are in good condition, suitable for the conduct of our business and are operating at an average capacity of approximately 82% .
ITEM 3.  LEGAL PROCEEDINGS  
In connection with disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation may be very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved many past disputes, we may not prevail in any ongoing or future litigation. Third-party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements and service agreements.
Between May 4, 2011 and July 14, 2011, five putative class action lawsuits were filed in Santa Clara Superior Court and Alameda Superior Court in California. On September 12, 2011, the cases were consolidated into In Re High-Tech Employee Antitrust Litigation (“HTEAL”) pending in the United States District Court for the Northern District of California, San Jose

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Division. In the consolidated complaint, Plaintiffs alleged that Adobe, along with Apple, Google, Intel, Intuit, Lucasfilm and Pixar, agreed not to recruit each other’s employees in violation of Federal and state antitrust laws. Plaintiffs claim the alleged agreements suppressed employee compensation and deprived employees of career opportunities.  Plaintiffs seek injunctive relief, monetary damages, treble damages, costs and attorneys fees. All defendants deny the allegations and that they engaged in any wrongdoing of any kind. On October 24, 2013, the court certified a class of all persons who worked in the technical, creative, and/or research and development fields on a salaried basis in the United States for one or more of the following: (a) Apple from March 2005 through December 2009; (b) Adobe from May 2005 through December 2009; (c) Google from March 2005 through December 2009; (d) Intel from March 2005 through December 2009; (e) Intuit from June 2007 through December 2009; (f) Lucasfilm from January 2005 through December 2009; or (g) Pixar from January 2005 through December 2009, excluding retail employees, corporate officers, members of the boards of directors, and senior executives of all defendants. During the second quarter of fiscal 2014, the parties reached a settlement to resolve this lawsuit, subject to the Court’s approval. On August 8, 2014, the Court rejected the settlement agreement jointly submitted by the parties. During the first quarter of fiscal 2015, the parties reached another agreement to settle the litigation. On January 15, 2015, the agreement was submitted to the Court seeking preliminary approval of the settlement. The hearing for preliminary approval is set for March 2015. We accrued a loss contingency of $10.0 million associated with this matter during the first quarter of fiscal 2014.
In addition to intellectual property disputes and the other litigation matter described above, we are subject to legal proceedings, claims and investigations in the ordinary course of business, including claims relating to commercial, employment and other matters. Some of these disputes and legal proceedings may include speculative claims for substantial or indeterminate amounts of damages. We consider all claims on a quarterly basis in accordance with GAAP and based on known facts assess whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our financial statements. This determination is then reviewed and discussed with our Audit Committee and our independent registered public accounting firm.
We make 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. Unless otherwise specifically disclosed here or in our Notes to Consolidated Financial Statements, we have determined that no provision for liability nor disclosure is required related to any claim against us because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.
All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. 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 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 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.
ITEM 4.  MINE SAFETY DISCLOSURES
Not applicable.

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PART II
ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES  
Market Information for Common Stock
Our common stock is traded on the NASDAQ Global Select Market under the symbol “ADBE.” The following table sets forth the high and low sales price per share of our common stock for the periods indicated.
 
 
Price Range
 
 
High
 
Low
Fiscal 2014:
 
 
 
 
First Quarter
 
$
69.92

 
$
53.99

Second Quarter
 
$
68.92

 
$
58.63

Third Quarter
 
$
73.57

 
$
64.09

Fourth Quarter
 
$
73.68

 
$
60.88

Fiscal Year
 
$
73.68

 
$
53.99

Fiscal 2013:
 
 

 
 

First Quarter
 
$
39.83

 
$
34.70

Second Quarter
 
$
47.01

 
$
40.46

Third Quarter
 
$
48.39

 
$
42.72

Fourth Quarter
 
$
57.55

 
$
45.88

Fiscal Year
 
$
57.55

 
$
34.70

Stockholders
According to the records of our transfer agent, there were 1,294 holders of record of our common stock on January 16, 2015 . Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We did not declare or pay any cash dividends on our common stock during fiscal 2014 or fiscal 2013 . 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. We do not anticipate paying any cash dividends in the foreseeable future.

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Issuer Purchases of Equity Securities
Below is a summary of stock repurchases for the three months ended November 28, 2014 . See Note 13 of our Notes to Consolidated Financial Statements for information regarding our stock repurchase programs.
 
Period
 
Total Number of Shares
Repurchased
 
Average
Price
Per
Share
 
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans
 
 
Approximate
Dollar Value
that May
Yet be
Purchased
Under the
Plan (1)
 
 
      (in thousands, except average price per share)
 
Beginning repurchase authority
 
 
 
 
 
 
367,324

 
August 30—September 26, 2014
 
 
 
 
 
 
 
 
Shares repurchased
596

 
$
71.08

 
596

 
$
(42,324
)
 
September 27—October 24, 2014
 
 
 
 
 
 
 
 
Shares repurchased
643

 
$
65.86

 
643

 
$
(42,373
)
(2)  
October 25—November 28, 2014
 

 
 

 
 

 
 

 
Shares repurchased
611

 
$
69.24

 
611

 
$
(42,318
)
(2)  
Total
1,850

 
 

 
1,850

 
$
240,309

 
_________________________________________  
(1)  
We currently have authority granted by our Board of Directors to repurchase up to $ 2.0 billion in common stock.
(2)  
In September 2014, as part of our stock repurchase program, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $125.0 million . As of November 28, 2014 , approximately $40.3 million of the prepayment remained under this agreement.

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ITEM 6.  SELECTED FINANCIAL DATA  
The following selected consolidated financial data (presented in thousands, except per share amounts and employee data) is derived from our Consolidated Financial Statements. As our operating results are not necessarily indicative of future operating results, this data should be read in conjunction with the Consolidated Financial Statements and notes thereto, and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
    Fiscal Years
 
2014
 
2013
 
2012
 
2011
 
2010
Operations:
 
 
 
 
 
 
 
 
 
Revenue
$
4,147,065

 
$
4,055,240

 
$
4,403,677

 
$
4,216,258

 
$
3,800,000

Gross profit
$
3,524,985

 
$
3,468,683

 
$
3,919,895

 
$
3,778,385

 
$
3,396,498

Income before income taxes
$
361,376

 
$
356,141

 
$
1,118,794

 
$
1,035,230

 
$
943,151

Net income
$
268,395

 
$
289,985

 
$
832,775

 
$
832,847

 
$
774,680

Net income per share:
 

 
 

 
 

 
 

 
 

Basic
$
0.54

 
$
0.58

 
$
1.68

 
$
1.67

 
$
1.49

Diluted
$
0.53

 
$
0.56

 
$
1.66

 
$
1.65

 
$
1.47

Shares used to compute basic net income per share
497,867

 
501,372

 
494,731

 
497,469

 
519,045

Shares used to compute diluted net income per share
508,480

 
513,476

 
502,721

 
503,921

 
525,824

Cash dividends declared per common share
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Financial position: (1)
 

 
 

 
 

 
 

 
 

Cash, cash equivalents and short-term investments
$
3,739,491

 
$
3,173,752

 
$
3,538,353

 
$
2,911,692

 
$
2,468,015

Working capital
$
2,107,893

 
$
2,520,281

 
$
3,125,314

 
$
2,520,672

 
$
2,147,962

Total assets
$
10,785,829

 
$
10,380,298

 
$
10,040,229

 
$
8,991,183

 
$
8,141,148

Debt and capital lease obligations, non-current
$
911,086

 
$
1,499,297

 
$
1,496,938

 
$
1,505,096

 
$
1,513,662

Stockholders’ equity
$
6,775,905

 
$
6,724,634

 
$
6,665,182

 
$
5,783,113

 
$
5,192,387

Additional data:
 
 
 

 
 

 
 

 
 

Worldwide employees
12,499

 
11,847

 
11,144

 
9,925

 
9,117

_________________________________________  
(1)  
Information associated with our financial position is as of the Friday closest to November 30 for the five fiscal periods through 2014 .

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  
The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto.
ACQUISITIONS
During fiscal 2014, we completed a business acquisition which was not material to our Consolidated Financial Statements.
During fiscal 2013, we completed our acquisitions of privately held Neolane, a leader in cross-channel campaign management technology for $616.7 million and privately held Behance, an online social media platform to showcase and discover creative work for $111.1 million . During fiscal 2013, we integrated Neolane and Behance into our Digital Marketing and Digital Media reportable segments, respectively. The impact of these acquisitions was not material to our Consolidated Financial Statements.
During fiscal 2012, we completed the acquisition of privately held Efficient Frontier, a multi-channel digital ad buying and optimization company for $374.7 million . During fiscal 2012, we began integrating Efficient Frontier into our Digital Marketing segment.
See Note 2 of our Notes to Consolidated Financial Statements for further information regarding these acquisitions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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, business combinations, 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 requiring 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.
Revenue Recognition
Our revenue is derived from the licensing of perpetual, time-based and subscription software products, associated software maintenance and support plans, non-software related hosted services, consulting services, training and technical support.
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. 
We enter into multiple element revenue arrangements in which a customer may purchase a combination of software, upgrades, maintenance and support, hosted services and consulting.
For our software and software-related 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 the fair value of each undelivered element using vendor-specific objective evidence (“VSOE”), and (4) allocate the total price among the various elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements and the residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. However, if the only undelivered element is maintenance and support, the entire arrangement fee is recognized ratably over the performance period. 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.

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We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range.
We have established VSOE for our software maintenance and support services, custom software development services, con sulting services and training, when such services are sold optionally with software licenses.
For multiple-element arrangements containing our non-software services, we must: (1) determine whether and when each element has been delivered; (2) determine the fair value of each element using the selling price hierarchy of VSOE of selling price, third-party evidence (“TPE”) of selling price or best-estimated selling price (“BESP”), as applicable; and (3) allocate the total price among the various elements based on the relative selling price method.
For multiple-element arrangements that contain both software and non-software elements, we allocate revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy. We determine the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use BESP. Once revenue is allocated to software or software-related elements as a group, we recognize revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition criteria are met for each element.
We are generally unable to establish VSOE or TPE for non-software elements and as such, we use BESP. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. We determine BESP for a product or service by considering multiple factors including, but not limited to, major product groupings, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. Pricing practices taken into consideration include historic contractually stated prices, volume discounts where applicable and our price lists. 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 impacting our financial position and results of operations.
In the future, actual returns and price protection may 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.
We recognize revenues for hosted services that are based on a committed number of transactions ratably beginning on the date the customer commences use of our services and continuing through the end of the customer term. Over-usage fees, and fees billed based on the actual number of transactions from which we capture data, are billed in accordance with contract terms as these fees are incurred. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Our consulting revenue is recognized on a time and materials basis 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.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, assumed equity awards, as well as to in-process research and development based upon their estimated fair values at the acquisition

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date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, deferred revenue obligations and equity assumed. 
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
•
future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents;
•
expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed;
•
the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio; and
•
discount rates.
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the deferred revenue obligations assumed. The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The estimated costs to fulfill the obligations are based on the historical costs related to fulfilling the obligations.
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the equity awards assumed. The estimated fair value is determined utilizing a modified binomial option pricing model which assumes employees exercise their stock options when the share price exceeds the strike price by a certain dollar threshold. If the acquired company has significant historical data on their employee’s exercise behavior, then this threshold is determined based upon the acquired company’s history. Otherwise, our historical exercise experience is used to determine the exercise threshold. Zero coupon yields implied by U.S. Treasury issuances, implied volatility for our common stock and our historical forfeiture rate are other inputs to the binomial model.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwill Impairment
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 ass umptions, judgme nts 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 completed our annual impairment test in the second quarter of fiscal 2014 and determined there was no impairment. The results of our annual impairment test indicate there is no significant risk of future material goodwill impairment in any of our reporting units.
Accounting for Income Taxes
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

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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 of our fiscal 2010, 2011 and 2012 tax returns. We expect future examinations to focus on our intercompany transfer pricing practices as well as other matters. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examinations. We believe such estimates to be reasonable; however, the final determination of any of these examinations 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.
We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S. income taxes on earnings from the U.S., we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S. While we do not anticipate changing our intention regarding permanently reinvested earnings, if certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
Our income tax expense has differed from the tax computed at the U.S. federal statutory income tax rate due primarily to discrete items and to earnings considered as permanently reinvested in foreign operations. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in, or our interpretation of, tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes in the valuation of our deferred tax assets and liabilities. The United States, countries in the European Union and other countries where we do business have been considering changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals such as Adobe. These potential changes could adversely affect our effective tax rates or result in other costs to us.
Recent Accounting Pronouncements Not Yet Effective
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for us in the first quarter of fiscal 2018. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
With the exception of the new revenue standard discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our Consolidated Financial Statements.
RESULTS OF OPERATIONS
Overview of 2014
For fiscal 2014, we reported financial results consistent with the continued execution of our long-term plans for our two strategic growth areas, Digital Media and Digital Marketing, while continuing to market and license a broad portfolio of products and solutions.
In our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering for creating and publishing content and applications. Creative Cloud, first delivered in May 2012, is our next-generation offering that supersedes our historical model of licensing our creative products with perpetual licenses. Creative Cloud delivers value through more frequent product updates, storage and access to user files stored in the cloud with syncing of files across users’ machines, community-based features and services through our acquisition of Behance in December 2012, app creation capabilities and lower entry point pricing for cost-sensitive customers.
We offer Creative Cloud for individuals and for teams, and we enable larger enterprise customers to acquire Creative Cloud capabilities through Enterprise Term License Agreements (“ETLAs”). The three Creative Cloud offerings address the multiple

39

routes to market we use to license our creative software to targeted customers. Adoption of Creative Cloud has transformed our business model and we continue to expect this to drive higher long-term revenue growth through an expansion of our customer base by acquiring new users through a lower cost of entry and delivery of additional features and value, as well as keeping existing customers current on our latest release. This model drives our revenue to be more recurring and predictable as revenue is recognized ratably.
We continue to implement strategies that will accelerate awareness, consideration and purchase of subscriptions to our Creative Cloud offering. These strategies include increasing the value Creative Cloud users receive, as well as targeted promotions and offers that attract past customers and potential users to try out and ultimately subscribe to Creative Cloud. Additionally, in May 2013 we announced we would exclusively deliver new creative product innovations and features to Creative Cloud subscribers, and that Adobe Creative Suite 6 (“CS6”), which was released in May 2012, would be the last major update we provide for perpetual licensees. In the first half of fiscal 2014, we announced the removal of general availability of CS6 on a perpetual licensing basis from legacy shrinkwrap and volume licensing channels. We still offer CS6 through our Adobe.com website and in certain markets.
Because of the shift towards Creative Cloud subscriptions and ETLAs, perpetual revenue for CS6 has declined, and by the fourth quarter of fiscal 2014 revenue from perpetual licensing of our creative professional products was immaterial.
During fiscal 2014, we continued to experience strong adoption of our Creative Cloud subscription offerings which has caused our Creative Cloud subscription revenue to increase as compared to the year-ago period.
To assist with an understanding of this transition, we are using certain performance metrics to assess the health and trajectory of our overall Digital Media segment. These metrics include the total number of current paid subscriptions and Annualized Recurring Revenue (“ARR”). ARR should be viewed independently of revenue, deferred revenue and unbilled deferred revenue as ARR is a performance metric and is not intended to be combined with any of these items. We plan to adjust our reported ARR on an annual basis to reflect any material exchange rates changes.
For our Creative business, we define Creative ARR as the sum of:
•
the number of current subscriptions, multiplied by the average subscription price paid per user per month, multiplied by twelve months; plus,
•
twelve months of contract value of ETLAs where the revenue is ratably recognized over the life of the contract; plus
•
twelve months of Adobe Digital Publishing Suite contract value where the revenue is ratably recognized.
We exited fiscal 2014 with 3.454 million paid Creative Cloud subscriptions, up 140% from 1.439 million at the end of fiscal 2013 . Total Creative ARR exiting fiscal 2014 was $1.68 billion , up from $801 million at the end of fiscal 2013 .
Our Digital Media segment also includes our Document Services products and solutions, including Acrobat, Acrobat cloud services and EchoSign e-signing solution. In fiscal 2014 we continued to drive solid adoption of our Acrobat family of products primarily through license agreements with enterprise customers. We also drove strong adoption of subscription-based services including our Acrobat cloud services. Combined, adoption of Acrobat through ETLAs and our Document Services subscription offerings helped grow Document Services ARR to $271 million exiting fiscal 2014 , up from $143 million at the end of fiscal 2013 .
Total Digital Media ARR, which we define as the sum of Creative ARR and Document Services ARR, grew to $1.95 billion at the end of fiscal 2014 , up from $944 million at the end of fiscal 2013 , demonstrating the progress we have made with the transformation of our business to a more recurring, ratable and predictable revenue model. Our reported ARR results in fiscal 2014 are based on currency rates set at the start of the fiscal year and held constant throughout the year. Revaluing our ending ARR for fiscal 2014 using currency rates at the beginning of fiscal 2015, our Digital Media ARR at the end of fiscal 2014 would be $1.88 billion or approximately $72 million lower than ARR reported above.
We are a market leader in the fast-growing category addressed by our Digital Marketing segment. Our Adobe Marketing Cloud includes six solutions addressing the expanding needs of marketers, the newest of which is Adobe Campaign—a cross-channel campaign management tool that we added to our portfolio with the acquisition of Neolane during the third quarter of fiscal 2013.
Revenue from Adobe Marketing Cloud increased 15% during fiscal 2014 compared to the year-ago period. Helping to drive this performance was strong adoption across our portfolio of Adobe Marketing Cloud solutions including solid growth of our Adobe Experience Manager (“AEM”) and Adobe Campaign offerings.
AEM and Adobe Campaign have historically been licensed by our customers as on premise offerings where license revenue has been recognized at the time of the transactions. During fiscal 2014, we saw increased customer adoption of term-based licensing

40

of our AEM and Adobe Campaign solutions where revenue is booked and recognized ratably. We believe this is resulting in larger customer engagements, more predictable revenue as well as higher long-term revenue growth.
In evaluating our Adobe Marketing Cloud revenue performance, we believe it is important to understand this licensing and revenue mix shift that is occurring with AEM and Adobe Campaign. In fiscal 2013, approximately 45% of our AEM and Adobe Campaign contracts were term-based. Entering fiscal 2014, based on our goal of migrating more of these solutions to be term-based, we expected a mix of approximately 60% term-based contracts for AEM and Adobe Campaign this fiscal year. Due to strong execution and customer demand, we saw an acceleration of term-based adoption of AEM and Adobe Campaign in fiscal 2014 and these solutions achieved approximately 75% term-based contracts this year.
Financial Performance Summary for Fiscal 2014

•
Consistent with our strategy, during fiscal 2014 , our subscription revenue as a percentage of total revenue increased to 50% from 28% and 15% compared with fiscal 2013 and 2012 , respectively, as we have transitioned more of our business to a subscription-based model.

•
We exited fiscal 2014 with 3.454 million paid Creative Cloud subscriptions, up 140% from 1.439 million at the end of fiscal 2013 .

•
Total Digital Media ARR of approximately $1.95 billion as of November 28, 2014 increased by $1.00 billion , or 106% , from $944 million as of November 29, 2013 . The change in our Digital Media ARR was primarily due to increases in the number of paid Creative Cloud individual and team subscriptions and adoption of our enterprise Creative Cloud offering through our ETLAs.

•
Adobe Marketing Cloud revenue of $1.17 billion increased by $154.3 million , or 15% , during fiscal 2014 , from $1.02 billion in fiscal 2013 , and $212.3 million , or 26% , during fiscal 2013 from $803.7 million in fiscal 2012 . The increases were primarily due to strong adoption of our AEM offering and the addition of Neolane which we acquired in the third quarter of fiscal 2013.

•
Our total deferred revenue of $1.16 billion as of November 28, 2014 increased by $326.5 million , or 39% from $828.8 million as of November 29, 2013 , primarily due to increases in Creative Cloud subscriptions and ETLAs. To a lesser extent, new contracts and existing contract renewals for our Adobe Marketing Cloud services contributed to this increase as our retention rates for Adobe Marketing Cloud services have been improving slightly over time.

•
Cost of revenue of $622.1 million increased by $35.5 million , or 6% , during fiscal 2014 , from $586.6 million in fiscal 2013 , and $102.8 million , or 21% , during fiscal 2013 from $483.8 million in fiscal 2012 . These increases were primarily due to increased hosting and server costs associated with our subscription and SaaS offerings, costs associated with compensation and related benefits driven by additional headcount and royalty costs.

•
Operating expenses of $3.11 billion increased by $66.3 million , or 2% , during fiscal 2014 , from $3.05 billion in fiscal 2013 , and $306.3 million , or 11% , in fiscal 2013 from $2.74 billion in fiscal 2012 . These increases were primarily due to increased costs associated with compensation and related benefits.

•
Net income of $268.4 million decreased by $21.6 million , or 7% , during fiscal 2014 from $290.0 million in fiscal 2013 , and $542.8 million, or 65%, during fiscal 2013 from $832.8 million in fiscal 2012.

•
Net cash flow from operations of $1.29 billion during fiscal 2014 increased by $135.8 million , or 12% , from $1.15 billion during fiscal 2013 primarily due to cash inflows associated with the increases in deferred revenue and taxes payable, offset in part by lower net income. Net cash flow from operations during fiscal 2013 decreased by $347.9 million, or 23%, from $1.50 billion during fiscal 2012 primarily due to lower net income.

41

Revenue (dollars in millions)
 
 
Fiscal
2014
 
Fiscal
2013
 
Fiscal
2012
 
% Change
2014-2013
 
% Change
2013-2012
Product
 
$
1,627.8

 
$
2,470.1

 
$
3,342.8

 
(34
)%
 
(26
)%
Percentage of total revenue
 
39
%
 
61
%
 
76
%
 
 
 
 
Subscription
 
2,076.6

 
1,137.9

 
673.2

 
82
 %
 
69
 %
Percentage of total revenue
 
50
%
 
28
%
 
15
%
 
 
 
 
Services and support
 
442.7

 
447.2

 
387.7

 
(1
)%
 
15
 %
Percentage of total revenue
 
11
%
 
11
%
 
9
%
 
 
 
 
Total revenue
 
$
4,147.1

 
$
4,055.2

 
$
4,403.7

 
2
 %
 
(8
)%
Our subscription revenue is comprised primarily of fees we charge for our subscription and hosted service offerings including certain of our Adobe Marketing Cloud services and Creative Cloud. We recognize subscription revenue ratably over the term of agreements with our customers, beginning on the commencement of the service. We expect our subscription revenue will continue to increase as a result of our investments in new SaaS and subscription models. We also expect this to increase the amount of recurring revenue we generate as a percent of our total revenue.
We have the following segments—Digital Media, Digital Marketing and Print and Publishing. Subscription revenue by reportable segment for fiscal 2014 , 2013 and 2012 is as follows (dollars in millions):
 
 
Fiscal
2014
 
Fiscal
2013
 
Fiscal
2012
 
% Change
2014-2013
 
% Change
2013-2012
Digital Media
 
$
1,268.3

 
$
471.9

 
$
116.8

 
169
%
 
304
%
Digital Marketing
 
797.5

 
663.1

 
555.5

 
20
%
 
19
%
Print and Publishing
 
10.8

 
2.9

 
0.9

 
*

 
*

Total subscription revenue
 
$
2,076.6

 
$
1,137.9

 
$
673.2

 
82
%
 
69
%
_________________________________________  
(*)  
Percentage is not meaningful.
Our services and support revenue is comprised of consulting, training and maintenance and support, primarily related to the licensing of our enterprise, developer and platform products and the sale of our Adobe Marketing Cloud services. 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, are generally recognized ratably over the term of the arrangement.
Segments
In fiscal 2014 , we categorized our products into the following segments:
•
Digital Media —Our Digital Media segment provides tools and solutions that enable individuals, small and medium businesses and enterprises to create, publish, promote and monetize their digital content anywhere. Our customers include traditional content creators, web application developers and digital media professionals, as well as their management in marketing departments and agencies, companies and publishers.
•
Digital Marketing —Our Digital Marketing segment provides solutions and services for how digital advertising and marketing are created, managed, executed, measured and optimized. Our customers include digital marketers, advertisers, publishers, merchandisers, web analysts, chief marketing officers, chief information officers and chief revenue officers.
•
Print and Publishing —Our Print and Publishing segment addresses market opportunities ranging from the diverse authoring and publishing needs of technical and business publishing to our legacy type and OEM printing businesses.

42

Segment Information (dollars in millions)
 
 
Fiscal
2014
 
Fiscal
2013
 
Fiscal
2012
 
% Change
2014-2013
 
% Change
2013-2012
Digital Media
 
$
2,603.2

 
$
2,625.9

 
$
3,101.9

 
(1
)%
 
(15
)%
Percentage of total revenue
 
63
%
 
65
%
 
70
%
 
 
 
 
Digital Marketing
 
1,355.2

 
1,228.8

 
1,085.0

 
10
 %
 
13
 %
Percentage of total revenue
 
33
%
 
30
%
 
25
%
 
 
 
 
Print and Publishing
 
188.7

 
200.5

 
216.8

 
(6
)%
 
(8
)%
Percentage of total revenue
 
4
%
 
5
%
 
5
%
 
 
 
 
Total revenue
 
$
4,147.1

 
$
4,055.2

 
$
4,403.7

 
2
 %
 
(8
)%
Fiscal 2014 Revenue Compared to Fiscal 2013 Revenue
Digital Media
Revenue from Digital Media decreased slightly during fiscal 2014 as compared to fiscal 2013. The slight decrease was primarily driven by declines in revenue associated with distribution of third-party software downloads and Hobbyist products launched in fiscal 2013. With respect to the Hobbyist product revenue decline, we are actively migrating customers to our Creative Cloud Photography Plan for which revenue is recognized ratably. Largely offsetting these decreases were increases in Creative Cloud and Document Services revenue.
Revenue related to our creative professional products, which includes our Creative Cloud, Creative Suite editions and CS point products, increased during fiscal 2014 as compared to fiscal 2013 due to increases in revenue from subscriptions and ETLAs, partially offset by the decrease in revenue from CS point products and Creative Suite editions as we discontinued the general availability of our perpetually licensed CS6 products in the second quarter of 2014.
Revenue associated with our other creative products decreased during fiscal 2014 as compared to fiscal 2013 primarily due to decreases associated with distribution of third-party software downloads and Hobbyist products launched in fiscal 2013. Additionally, actively migrating customers to our Creative Cloud Photography Plan is also contributing to the year-over-year decline in revenue. These decreases were offset in part by increases in revenue associated with our Digital Publishing Suite.
For our creative offerings, the total number of perpetual units licensed decreased while the number of subscription units licensed increased during fiscal 2014 as compared to fiscal 2013 . Unit average selling prices for our perpetual units licensed decreased during fiscal 2014 as compared to fiscal 2013 .
Document Services revenue, which includes our Acrobat product family, increased during fiscal 2014 as compared with the year-ago period primarily due to increases in our Acrobat Cloud Services revenue. The increases were slightly offset by decreases due to our continued shift to ETLAs.
Within Document Services, excluding large enterprise license agreements, the number of units licensed decreased while the unit average selling prices remained stable during fiscal 2014, as compared with the year-ago period.
Digital Marketing
Revenue from Digital Marketing increased $126.3 million during fiscal 2014 as compared to fiscal 2013 due to continued revenue growth associated with our Adobe Marketing Cloud, which increased 15% during fiscal 2014 as compared with the year-ago period. Contributing to this increase was Adobe Campaign and the strong adoption of AEM.
Print and Publishing
Revenue from Print and Publishing decreased during fiscal 2014 as compared to fiscal 2013 primarily due to decreases in legacy product revenue and increased ETLAs for certain products in this group.
Fiscal 2013 Revenue Compared to Fiscal 2012 Revenue
Digital Media
Revenue from Digital Media decreased $476.0 million during fiscal 2013 as compared to fiscal 2012 , primarily due to continued strong adoption of Creative Cloud and ETLAs as we continued to transition more of our business to a subscription-based model.

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Revenue related to our creative professional products, which include our Creative Suite editions and CS point products as well as Creative Cloud, decreased during fiscal 2013 as compared to fiscal 2012 due to continued customer adoption of Creative Cloud subscription offerings, released in May 2012, for which revenue is recognized over time.
Revenue associated with our other creative products increased during fiscal 2013 as compared to fiscal 2012 , primarily due to increases associated with distribution of third-party software downloads and our Digital Publishing Suite. These increases were partially offset by decreases in revenue associated with our Hobbyist products.
For our creative offerings, the total number of perpetual units licensed decreased while the number of subscription units licensed increased during fiscal 2013 as compared to fiscal 2012 . Unit average selling prices for our perpetual units licensed decreased during the year ended fiscal 2013 as compared to fiscal 2012 .
Document Services revenue, which includes our Acrobat product family, decreased slightly during fiscal 2013 as compared to fiscal 2012 , primarily due to the continued shift to ETLAs offset by increased Acrobat Cloud Services revenue including revenue generated from our EchoSign e-signing service.
Within Document Services, excluding large enterprise license agreements, the number of units licensed decreased while the unit average selling prices increased during fiscal 2013 as compared to fiscal 2012 .
Digital Marketing
Revenue from Digital Marketing increased $143.8 million during fiscal 2013 as compared to fiscal 2012 . The increase was primarily due to continued revenue growth associated with our Adobe Marketing Cloud, which increased 26% during fiscal 2013 , as compared to the year ago period and includes Adobe Campaign revenue from our acquisition of Neolane in the third quarter of fiscal 2013. The increase noted above was partially offset by expected declines in revenue associated with our legacy products during fiscal 2013 .
Print and Publishing
Revenue from Print and Publishing decreased during fiscal 2013 as compared to fiscal 2012 , primarily due to increased ETLAs for certain products in this group.
Geographical Information (dollars in millions)
 
 
Fiscal
2014
 
Fiscal
2013
 
Fiscal
2012
 
% Change
2014-2013
 
% Change
2013-2012
Americas
 
$
2,314.4

 
$
2,134.4

 
$
2,196.4

 
8
 %
 
(3
)%
Percentage of total revenue
 
56
%
 
53
%
 
50
%
 
 
 
 
EMEA
 
1,179.9

 
1,129.2

 
1,294.6

 
4
 %
 
(13
)%
Percentage of total revenue
 
28
%
 
28
%
 
29
%
 
 
 
 
APAC
 
652.8

 
791.6

 
912.7

 
(18
)%
 
(13
)%
Percentage of total revenue
 
16
%
 
19
%
 
21
%
 
 
 
 
Total revenue
 
$
4,147.1

 
$
4,055.2

 
$
4,403.7

 
2
 %
 
(8
)%
Fiscal 2014 Revenue by Geography Compared to Fiscal 2013 Revenue by Geography
Overall revenue during fiscal 2014 as compared to fiscal 2013 increased in the Americas and EMEA. Revenue in the Americas increased during fiscal 2014 as compared to the year-ago period due to increases in Digital Media and Digital Marketing revenue. Revenue in EMEA increased during fiscal 2014 as compared to the year-ago period primarily due to increases in Digital Marketing revenue. Digital Media and Print and Publishing revenue in EMEA remained relatively stable during fiscal 2014 compared to the year-ago period. Despite the strengthening of the U.S. Dollar against the Euro and the British Pound during the latter part of 2014, the overall weakening of the U.S. Dollar against these currencies during fiscal 2014 also caused revenue in EMEA to increase as compared to the year-ago period. Within the Americas and EMEA, the fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above.
Revenue in APAC decreased during fiscal 2014 as compared to the year-ago period primarily as a result of decreases in Digital Media revenue due to slower adoption of Creative Cloud in Japan compared to other countries and the strengthening of the U.S. Dollar against the Japanese Yen and other Asian currencies during fiscal 2014 as compared to the year-ago period. Digital Marketing and Print and Publishing revenue in APAC remained relatively stable in fiscal 2014 compared to the year-ago period.

44

Fiscal 2013 Revenue by Geography Compared to Fiscal 2012 Revenue by Geography
Revenue declined across all geographies during fiscal 2013 as compared to fiscal 2012 . Revenue in the Americas and APAC decreased during fiscal 2013 due to decreases in Digital Media and Print and Publishing revenue, offset in part by increases in Digital Marketing revenue. Revenue in EMEA decreased during fiscal 2013 due to decreases in Digital Media revenue, offset in part by increases in Digital Marketing and Print and Publishing revenue. Within each geographical region, the fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above.
Included in the overall change in revenue for fiscal 2014 and fiscal 2013 were impacts associated with foreign currency as shown below. Our currency hedging program is used to mitigate a portion of the foreign currency impact to revenue.
(in millions)
Fiscal
2014
 
Fiscal
2013
Revenue impact:
 Increase/(Decrease)
EMEA:
 
 
 
Euro
$
12.3

 
$
9.1

British Pound
12.9

 
(3.9
)
Other currencies
(0.2
)
 
0.6

Total EMEA
25.0

 
5.8

Japanese Yen
(25.7
)
 
(63.6
)
Other currencies
(8.9
)
 
(5.6
)
Total revenue impact
(9.6
)
 
(63.4
)
Hedging impact:
 
 
 
EMEA
10.1

 
3.7

Japanese Yen
8.6

 
32.3

Total hedging impact
18.7

 
36.0

Total impact
$
9.1

 
$
(27.4
)

During fiscal 2014, the U.S. Dollar strengthened against the Japanese Yen and other Asian currencies causing revenue in APAC measured in U.S. Dollar equivalents to decrease compared with the year-ago period. This decrease was offset by the favorable impact to revenue measured in EMEA currencies as the U.S. Dollar weakened against the Euro and the British Pound for the majority of fiscal 2014. Our EMEA and Yen currency hedging programs resulted in hedging gains during fiscal 2014.
During fiscal 2013, the U.S. Dollar strengthened against the Japanese Yen and other Asian currencies causing revenue in APAC measured in U.S. Dollar equivalents to decrease compared with the year-ago period. This decrease was partially offset by the favorable impact to revenue measured in EMEA currencies as the U.S. Dollar generally weakened against these currencies. Our EMEA and Yen currency hedging programs resulted in hedging gains during fiscal 2013.
See Note 18 of our Notes to Consolidated Financial Statements for further geographic information.
Product Backlog
The actual amount of product backlog at any particular time may not be a meaningful indicator of future business prospects. Shippable 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 shippable backlog at the end of the fourth quarter of fiscal 2014 and fiscal 2013 . We expect that our shippable backlog will continue to be insignificant in future periods.
The deferred revenue balance on our consolidated balance sheet does not represent the total contract value of annual or multi-year, non-cancellable subscription agreements. Unbilled deferred revenue represents expected future billings which are contractually committed under our existing subscription, SaaS and managed services agreements that have not been invoiced and are not recorded in deferred revenue within our financial statements. Our presentation of unbilled deferred revenue backlog may differ from that of other companies in the industry. As of November 28, 2014 , we had unbilled deferred revenue backlog of approximately $1.7 billion of which approximately 60% to 65% is not reasonably expected to be billed during fiscal 2015. As of November 29, 2013 , we had unbilled deferred revenue backlog of approximately $1.0 billion .


45

We expect that the amount of unbilled deferred revenue backlog will change from period to period due to certain factors, including the timing and duration of large customer subscription, SaaS and managed service agreements, varying billing cycles of these agreements, the timing of customer renewals, the timing of when unbilled deferred revenue backlog is to be billed, changes in customer financial circumstances and foreign currency fluctuations. Additionally, the unbilled deferred revenue backlog for multi-year subscription agreements that are billed annually is typically higher at the beginning of the contract period, lower prior to renewal and typically increases when the agreement is renewed. Accordingly, fluctuations in unbilled deferred revenue backlog may not be a reliable indicator of future business prospects and the related revenue associated with these contractual commitments.
Cost of Revenue (dollars in millions)  
 
 
Fiscal
2014
 
Fiscal
2013
 
Fiscal
2012
 
% Change
2014-2013
 
% Change
2013-2012
Product
 
$
97.1

 
$
138.2

 
$
121.7

 
(30
)%
 
14
%
Percentage of total revenue
 
2
%
 
3
%
 
3
%
 
 
 
 
Subscription
 
335.5

 
278.1

 
219.1

 
21
 %
 
27
%
Percentage of total revenue
 
8
%
 
7
%
 
5
%
 
 
 
 
Services and support
 
189.5

 
170.3

 
143.0

 
11
 %
 
19
%
Percentage of total revenue
 
5
%
 
4
%
 
3
%
 
 
 
 
Total cost of revenue
 
$
622.1

 
$
586.6

 
$
483.8

 
6
 %
 
21
%
Product
Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization related to localization costs, purchased intangibles and acquired rights to use technology and the costs associated with the manufacturing of our products.
Fluctuations in cost of product revenue are due to the following:
 
% Change
2014-2013
 
% Change
2013-2012
Amortization of purchased intangibles and technology license arrangements
(20
)%
 
27
 %
Cost of sales
(4
)
 
(8
)
Royalty cost
(2
)
 
—

Excess and obsolete inventory
1

 
(4
)
Various individually insignificant items
(5
)
 
(1
)
Total change
(30
)%
 
14
 %
Cost of product revenue decreased during fiscal 2014 as compared to fiscal 2013 primarily due to decreases in amortization of purchased intangibles and technology license arrangements, cost of sales and royalty costs, slightly offset by an increase in excess and obsolete inventory. Amortization of purchased intangibles and technology license arrangements decreased as compared with the year-ago period as we entered into certain technology licensing arrangements for which payments of $26.5 million related to historical use of certain technology licensing arrangements were expensed as cost of product revenue during fiscal 2013. Cost of sales decreased as compared with the year-ago period due to decreases in the number of perpetual units sold and associated packaging costs as we continue to focus our development and sales efforts on Creative Cloud. Royalty cost decreased as compared to the year-ago period primarily due to decreases in revenue from our perpetual offerings. Excess and obsolete inventory increased as compared to the year-ago period as a result of changes in reserve requirements for CS6 shrink boxes as we have discontinued the general availability of CS6 on a perpetual licensing basis.
Cost of product revenue increased during fiscal 2013 as compared to fiscal 2012 primarily due to an increase in amortization of purchased intangibles and technology license arrangements offset by decreases in cost of sales and excess and obsolete inventory. Amortization of purchased intangibles and technology license arrangements increased as we entered into certain technology licensing arrangements totaling $51.8 million in the first quarter of fiscal 2013. Of this cost, an estimated $25.3 million was related to future licensing rights and was capitalized and is being amortized on a straight-line basis over the estimated useful lives ranging from five to ten years. The remaining cost of approximately $26.5 million was related to historical use of licensing rights and was expensed as cost of product revenue in fiscal 2013. In connection with certain of these licensing arrangements, we have the ability to acquire additional rights to use technology in the future. Cost of sales primarily decreased due to a decline in the number of perpetual units sold and packaging costs associated with our CS6 products as we focus our creative development efforts on our Creative Cloud offering. Excess and obsolete inventory decreased due to decreased reserve requirements for CS6 as we continue to transition to more of a subscription-based model.

46

Subscription
Cost of subscription revenue consists of third-party royalties and expenses related to operating our network infrastructure, including depreciation expenses and operating lease payments associated with computer equipment, data center costs, salaries and related expenses of network operations, implementation, account management and technical support personnel, amortization of intangible assets and allocated overhead. We enter into contracts with third-parties for the use of their data center facilities and our data center costs largely consist of the amounts we pay to these third parties for rack space, power and similar items. 
Cost of subscription revenue increased due to the following:
 
% Change
2014-2013
 
% Change
2013-2012
Data center cost
10
%
 
11
%
Compensation cost and related benefits associated with headcount
4

 
5

Depreciation expense
3

 
3

Royalty cost
3

 
4

Amortization of purchased intangibles
—

 
4

Various individually insignificant items
1

 
—

Total change
21
%
 
27
%
Cost of subscription revenue increased during fiscal 2014 as compared to fiscal 2013 primarily due to data center costs, compensation cost and related benefits, deprecation expense, and royalty cost. Data center costs increased as compared with the year-ago period primarily due to higher transaction volumes in our Adobe Marketing Cloud and Creative Cloud services. Compensation cost and related benefits increased as compared to the year-ago period primarily due to additional headcount in fiscal 2014, including from our acquisition of Neolane in the third quarter of fiscal 2013. Depreciation expense increased as compared to the year-ago period primarily due to higher capital expenditures in recent periods as we continue to invest in our network and data center infrastructure to support the growth of our business. Royalty cost increased primarily due to increases in subscriptions and downloads of our SaaS offerings.
Cost of subscription revenue increased during fiscal 2013 as compared to fiscal 2012 primarily due to increased hosted server costs and amortization of purchased intangibles. Hosted server costs increased primarily due to increases in data center costs related to higher transaction volumes in our Adobe Marketing Cloud and Creative Cloud services, depreciation expense from higher capital expenditures in prior years and compensation and related benefits driven by additional headcount. Amortization of purchased intangibles increased primarily due to increased amortization of intangible assets purchased associated with our acquisitions of Behance and Neolane in fiscal 2013.
Services and Support
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 2014 as compared to fiscal 2013 primarily due to increases in compensation and related benefits driven by additional headcount and third-party fees related to training and consulting services provided to our customers.
Cost of services and support revenue increased during fiscal 2013 as compared to fiscal 2012 primarily due to increases in third-party fees related to training and consulting services provided to our customers and compensation and related benefits driven by additional headcount, including headcount from our acquisition of Neolane in fiscal 2013.

47

Operating Expenses (dollars in millions)
 
 
Fiscal
2014
 
Fiscal
2013
 
Fiscal
2012
 
% Change
2014-2013
 
% Change
2013-2012
Research and development
 
$
844.4

 
$
826.6

 
$
742.8

 
2
 %
 
11
%
Percentage of total revenue
 
20
%
 
20
%
 
17
%
 
 
 
 
Sales and marketing
 
1,652.3

 
1,620.5

 
1,516.1

 
2
 %
 
7
%
Percentage of total revenue
 
40
%
 
40
%
 
34
%
 
 
 
 
General and administrative
 
543.3

 
520.1

 
435.0

 
4
 %
 
20
%
Percentage of total revenue
 
13
%
 
13
%
 
10
%
 
 
 
 
Restructuring and other charges
 
19.9

 
26.5

 
(2.9
)
 
(25
)%
 
*

Percentage of total revenue
 
—
%
 
1
%
 
—
%
 
 
 
 
Amortization of purchased intangibles
 
52.4

 
52.3

 
48.7

 
—
 %
 
7
%
Percentage of total revenue
 
1
%
 
1
%
 
1
%
 
 
 
 
Total operating expenses
 
$
3,112.3

 
$
3,046.0

 
$
2,739.7

 
2
 %
 
11
%
_________________________________________  
(*)  
Percentage is greater than 100%.
Research and Development, Sales and Marketing and General and Administrative Expenses
The increase in research and development and general and administrative expenses during fiscal 2014 as compared to fiscal 2013 is primarily due to increases in cash incentive and stock-based compensation. The increase in stock-based compensation was driven by a change in the vesting term for stock awards granted as part of our annual review process beginning in fiscal 2013, which decreased the term from four years to three years. The increase in sales and marketing expense during fiscal 2014 as compared to fiscal 2013 is primarily due to compensation and related benefits associated with additional headcount.
The increase in research and development, sales and marketing and general and administrative expenses during fiscal 2013 as compared to fiscal 2012 is primarily due to higher cash incentive compensation program achievement in fiscal 2013, increases in stock-based compensation expense due to higher share prices during fiscal 2013 as compared to fiscal 2012 as well as a shorter vesting term which decreased from four years to three years for stock awards granted as part of our annual review process during fiscal 2013.
Research and Development
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:
 
% Change
2014-2013
 
% Change
2013-2012
Compensation associated with cash and stock-based incentives
2
%
 
7
%
Compensation and related benefits associated with headcount
—

 
3

Various individually insignificant items
—

 
1

Total change
2
%
 
11
%
We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain 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 application, tool and service offerings.
Sales and Marketing
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 for fiscal 2014 are lower than what was reported in our December 11, 2014 earnings press release by $19.5 million reflecting an update to our sales commission expense based on information received following the date of our press release.

48

Sales and marketing expenses increased due to the following:
 
% Change
2014-2013
 
% Change
2013-2012
Compensation and related benefits associated with headcount
1
%
 
4
 %
Compensation associated with cash and stock-based incentives
—

 
4

Various individually insignificant items
1

 
(1
)
Total change
2
%
 
7
 %
General and Administrative
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:
 
% Change
2014-2013
 
% Change
2013-2012
Compensation associated with cash and stock-based incentives
3
 %
 
4
%
Compensation and related benefits associated with headcount growth
—

 
4

Loss contingency
2

 
—

Professional and consulting fees
(2
)
 
7

Charitable contributions
—

 
2

Various individually insignificant items
1

 
3

Total change
4
 %
 
20
%
See Note 15 of our Notes to the Consolidated Financial Statements for further information regarding the loss contingency.
Professional and consulting fees increased during fiscal 2013 as compared to fiscal 2012 primarily due to increased professional and legal fees including those associated with the attacks on our network discovered in September 2013. 
Restructuring and Other Charges
During the past several years, we have initiated various restructuring plans. During fiscal 2014, in connection with our recent Fiscal 2014 Restructuring Plan, we recorded $19.4 million associated with termination benefits and closing redundant facilities. In connection with our Other Restructuring Plans, we recorded insignificant charges associated with closing redundant facilities. We also recorded minor adjustments for changes in previous estimates during the fiscal year.
During fiscal 2013, management approved a plan to sell land, building and other assets located in Waltham, Massachusetts (the "Waltham property assets") with a total carrying amount of $47.4 million . As of May 31, 2013, we classified the Waltham property assets as held for sale at $23.6 million representing their fair value, net of estimated costs to sell which was the lesser of the fair value less cost to sell or carrying amount of the assets. As a result, we recorded a write-down of $23.8 million during fiscal 2013. In September 2013, we finalized the sale of the Waltham property assets for net proceeds of $24.3 million which approximated the carrying value of the assets at the time of sale.
Also during fiscal 2013, in connection with our Fiscal 2011 Restructuring Plan and Other Restructuring Plans, we recorded $6.3 million associated with termination benefits and closing redundant facilities. We also recorded $3.0 million in net favorable employee termination and facility related adjustments for changes in previous estimates during the fiscal year.
During fiscal 2012, in connection with our Fiscal 2011 Restructuring Plan and Other Restructuring Plans, we recorded $17.4 million associated with termination benefits and closing redundant facilities. We also recorded $20.3 million in net favorable employee termination and facility related adjustments for changes in previous estimates during the fiscal year.
See Note 10 of our Notes to Consolidated Financial Statements for further information regarding our restructuring plans.

49

Amortization of Purchased Intangibles
During the last several years, we have completed a number of business combinations and asset acquisitions. As a result of these acquisitions, we purchased intangible assets that are being amortized over their estimated useful lives ranging from one to fourteen years.
Amortization expense remained stable during fiscal 2014 as compared to fiscal 2013.
Amortization expense increased 7% during fiscal 2013 as compared to fiscal 2012 primarily due to amortization expense associated with intangible assets purchased through our acquisitions of Behance and Neolane in fiscal 2013.
Non-Operating Income (Expense), Net (dollars in millions)
 
 
Fiscal
2014
 
Fiscal
2013
 
Fiscal
2012
 
% Change
2014-2013
 
% Change
2013-2012
Interest and other income (expense), net
 
$
7.3

 
$
4.9

 
$
(3.4
)
 
49
 %
 
*

Percentage of total revenue
 
**

 
**

 
**

 
 
 
 
Interest expense
 
(59.7
)
 
(67.5
)
 
(67.5
)
 
(12
)%
 
—
%
Percentage of total revenue
 
(1
)%
 
(2
)%
 
(2
)%
 
 
 
 
Investment gains (losses), net
 
1.1

 
(4.0
)
 
9.5

 
*

 
*

Percentage of total revenue
 
**

 
**

 
**

 
 
 
 
Total non-operating income (expense), net
 
$
(51.3
)
 
$
(66.6
)
 
$
(61.4
)
 
(23
)%
 
8
%
_________________________________________  
(*)     Percentage is not meaningful.
(**)     Percentage is less than 1%.

Interest and Other Income (Expense), Net  
Interest and other income (expense), net consists primarily of interest earned on cash, cash equivalents and short-term fixed income investments. Interest and other income (expense), net also includes gains and losses on fixed income investments and foreign exchange gains and losses other than any gains recorded to revenue from hedging Euros, British Pounds and Yen currencies.
Interest and other income (expense), net increased in fiscal 2014 as compared to fiscal 2013 primarily due to decreased foreign currency losses and increased realized gains on fixed income investments. The increases were partially offset by decreased interest income on our investment in lease receivable due to the purchase of the East and West Towers during fiscal 2014. See Note 15 of our Notes to Consolidated Financial Statements for further details regarding our investment in lease receivables.
Interest and other income (expense), net increased in fiscal 2013 as compared to fiscal 2012 primarily due to decreased foreign exchange losses.
Interest Expense
Interest expense primarily represents interest associated with our senior notes and interest rate swaps. Interest on our senior notes is payable semi-annually, in arrears, on February 1 and August 1. Floating interest payments on the interest rate swaps are paid monthly. The fixed-rate interest receivable on the swaps is received semi-annually concurrent with the senior notes interest payments.
Interest expense decreased during fiscal 2014 as compared to fiscal 2013 due to the favorable impact of the interest rate swaps. See Notes 5 and 13 of our Notes to Consolidated Financial Statements for further details regarding our interest rate swaps.
Interest expense remained relatively stable during fiscal 2013 as compared to fiscal 2012.
Investment Gains (Losses), Net
Investment gains (losses), net consists 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 unrealized holding gains and losses associated with our deferred compensation plan assets (classified as trading securities) and gains and losses associated with our direct and indirect investments in privately held companies.

50

Investment gains (losses), net fluctuated due to the following (in millions):
 
 
Fiscal
2014
 
Fiscal
2013
 
Fiscal
2012
Net gains related to our trading securities
 
$
1.9

 
$
3.0

 
$
1.6

Net losses related to our direct and indirect investments in privately held companies
 
(0.8
)
 
—

 
(0.2
)
Write-downs due to other-than-temporary declines in value of our marketable and non-marketable equity securities
 
—

 
(7.0
)
 
(0.1
)
Gains from sale of marketable equity securities
 
—

 
—

 
8.2

Total investment gains (losses), net
 
$
1.1

 
$
(4.0
)
 
$
9.5

 
During fiscal 2014, total investment gains (losses), net increased to net gains primarily due to write-downs for other-than-temporary declines in value of our direct investments in privately held companies in fiscal 2013 that did not recur in fiscal 2014, offset in part by a decrease in net gains related to our trading securities.
During fiscal 2013, total investment gains (losses), net decreased to net losses primarily due to a decrease in net realized gains from the sale of marketable equity securities and an increase in write-downs for other-than-temporary declines in value of our direct investments in privately held companies.
Provision for Income Taxes (dollars in millions)
 
 
Fiscal
2014
 
Fiscal
2013
 
Fiscal
2012
 
% Change
2014-2013
 
% Change
2013-2012
Provision
 
$
93.0

 
$
66.2

 
$
286.0

 
40
%
 
(77
)%
Percentage of total revenue
 
2
%
 
2
%
 
6
%
 
 
 
 
Effective tax rate
 
26
%
 
19
%
 
26
%
 
 
 
 
Our effective tax rate increased by approximately seven percentage points during fiscal 2014 as compared to fiscal 2013. The increase was primarily due to the expiration of the federal research and development tax credit in December 2013 and stronger domestic profits for fiscal 2014.
Our effective tax rate decreased by approximately seven percentage points during fiscal 2013 as compared to fiscal 2012. The decrease is primarily related to the reinstatement of the U.S. research and development credit and tax benefits recognized as a result of the completion of certain income tax examinations.
In December 2014, the United States Congress passed an extension of the federal research and development tax credit through December 31, 2014. As a result, we expect that our income tax provision for the first quarter of fiscal 2015 will include a discrete tax benefit which will reduce our effective tax rate for the quarter and to a lesser extent the effective annual tax rate.

We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S. income taxes on earnings from the U.S., we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S. While we do not anticipate changing our intention regarding permanently reinvested earnings, if certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings. Currently, there are a significant amount of foreign earnings upon which U.S. income taxes have not been provided. See Note 9 of our Notes to the Consolidated Financial Statements for further information on our provision for income taxes.

Accounting for Uncertainty in Income Taxes
The gross liability for unrecognized tax benefits at November 28, 2014 was $148.8 million , exclusive of interest and penalties. If the total unrecognized tax benefits at November 28, 2014 were recognized in the future, $136.2 million of unrecognized tax benefits would decrease the effective tax rate, which is net of an estimated $12.6 million federal benefit related to deducting certain payments on future state tax returns.
As of November 28, 2014 , the combined amount of accrued interest and penalties related to tax positions taken on our tax returns was approximately $14.6 million . This amount is included in non-current income taxes payable.
The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of

51

current and non-current assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $5 million .
In July 2013 , a U.S. income tax examination covering fiscal 2008 and 2009 was completed. Our accrued tax and interest related to these years was $48.4 million and was previously reported in long-term income taxes payable. We settled the tax obligation resulting from this examination with cash and income tax assets totaling $41.2 million , and the resulting $7.2 million income tax benefit was recorded in the third quarter of fiscal 2013.
LIQUIDITY AND CAPITAL RESOURCES
This data should be read in conjunction with our Consolidated Statements of Cash Flows.
 
As of
(in millions)
November 28, 2014
 
November 29, 2013
Cash and cash equivalents
$
1,117.4

 
$
834.6

Short-term investments
$
2,622.1

 
$
2,339.2

Working capital
$
2,107.9

 
$
2,520.3

Stockholders’ equity
$
6,775.9

 
$
6,724.6

A summary of our cash flows is as follows:
(in millions)
Fiscal
2014
 
Fiscal
2013
 
Fiscal
2012
Net cash provided by operating activities
$
1,287.5

 
$
1,151.7

 
$
1,499.6

Net cash used for investing activities
(490.7
)
 
(1,177.8
)
 
(834.7
)
Net cash used for financing activities
(507.3
)
 
(559.1
)
 
(234.7
)
Effect of foreign currency exchange rates on cash and cash equivalents
(6.7
)
 
(5.2
)
 
5.4

Net increase (decrease) in cash and cash equivalents
$
282.8

 
$
(590.4
)
 
$
435.6

 
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 revenue. Other sources of cash are proceeds from the exercise of employee options and participation in the employee stock purchase plan. Other uses of cash include our stock repurchase program, which is described below, business acquisitions and purchases of property and equipment. 
Cash Flows from Operating Activities
For fiscal 2014, net cash provided by operating activities of $1.3 billion was primarily comprised of net income plus the net effect of non-cash items. The primary working capital sources of cash were net income coupled with increases in deferred revenue and accrued expenses. The increase in deferred revenue is primarily due to increased subscription and ETLA activity for our individual, team and enterprise Creative Cloud offerings and increases in Digital Marketing and Digital Publishing hosted services, offset in part by decreases in billings for our maintenance and Creative product software upgrade plans which we discontinued in January 2013. Accrued expenses increased primarily due to accruals for contract terminations and employee transition payments associated with business realignment initiatives implemented in the fourth quarter of fiscal 2014.
For fiscal 2013, net cash provided by operating activities of $1.2 billion was primarily comprised of net income plus the net effect of non-cash items. The primary working capital sources of cash were net income coupled with increases in deferred revenue and accrued expenses and decreases in trade receivables. Deferred revenue increased primarily due to increased subscription and ETLA activity for our Creative Cloud offering and increases in Digital Marketing hosted services, offset in part by decreases in billings for our maintenance and Creative product software upgrade plans which we discontinued in January 2013. Accrued expenses increased primarily due to amounts due under our fiscal 2013 annual incentive plan and sales commission accruals associated with higher achievement levels. Trade receivables declined primarily due to lower perpetual license revenue levels and improved collections compared to the fourth quarter of fiscal 2012.
The primary working capital uses of cash were decreases in taxes payable and increases in prepaid expenses and other assets. The decrease in taxes payable is largely attributed to tax payments made combined with audit settlement adjustments, offset in part by tax expense and other adjustments during fiscal 2013. Prepaid expenses and other assets increased primarily due to

52

increases in short-term income tax receivables related to the carryback of R&D and foreign tax credits in the fourth quarter of fiscal 2013.
For fiscal 2012, net cash provided by operating activities of $1.5 billion was primarily comprised of net income plus the net effect of non-cash items. The primary working capital sources of cash were net income coupled with increases in deferred revenue and decreases in trade receivables. Deferred revenue increased primarily due to an increase in activity for both upgrade plans with support and site and term licenses largely associated with our Digital Media and Digital Marketing enterprise license agreements. The decrease in trade receivables is primarily related to an increase in revenue linearity and improved collections in our Digital Marketing portfolio offset in part by higher revenue levels due to the CS6 product release which occurred late in the second quarter of fiscal 2012.
The primary working capital uses of cash were decreases in accrued restructuring and trade payables. Decreases in accrued restructuring primarily related to payments and adjustments for employee terminations and facility exit costs associated with the Fiscal 2011 Restructuring Plan, a significant portion of which were paid and adjusted in the first and second quarters of fiscal 2012. Trade payables decreased primarily due to the timing of payments as a greater number of invoices were paid prior to the fiscal year end in fiscal 2012 as compared to fiscal 2011.
Cash Flows from Investing Activities
For fiscal 2014, net cash used for investing activities of $490.7 million was primarily due to purchases of short-term investments, purchases of property and equipment and a business acquisition. These cash outflows were offset in part by sales and maturities of short-term investments.
For fiscal 2013, net cash used for investing activities of $1,177.8 million was primarily due to our acquisitions of Neolane and Behance. Other uses of cash during fiscal 2013 represented purchases of short-term investments, purchases of property and equipment associated with our construction projects in Oregon and India and purchases of long-term technology licenses. These cash outflows were offset in part by sales and maturities of short-term investments and the sale of the Waltham Property. See Note 2 of our Notes to the Consolidated Financial Statements for further information regarding our acquisitions of Neolane and Behance.
For fiscal 2012, net cash used for investing activities of $834.7 million was primarily due to our acquisition of Efficient Frontier in the first quarter of fiscal 2012. Other uses of cash during fiscal 2012 represented purchases of short-term investments and property and equipment, offset in part by sales and maturities of short-term investments. See Note 2 of our Notes to the Consolidated Financial Statements for further information regarding our acquisition of Efficient Frontier.
Cash Flows from Financing Activities
For fiscal 2014 , fiscal 2013 and fiscal 2012 , net cash used for financing activities of $507.3 million , $559.1 million and $234.7 million , respectively, was primarily due to payments for our treasury stock repurchases and costs associated with the issuance of treasury stock, offset in part by proceeds from the issuance of treasury stock and excess tax benefits from stock-based compensation. See the section titled “Stock Repurchase Program” discussed below.
We expect to continue our investing activities, including short-term and long-term investments, venture capital, facilities expansion and purchases of computer systems for research and development, sales and marketing, product support and administrative staff. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase program and to strategically acquire companies, products or technologies that are complementary to our business.
In December 2014, we entered into a definitive agreement under which we expect to acquire Fotolia for approximately $800 million in cash. We expect to finance the acquisition using existing cash, cash equivalents and short-term investment balances, newly issued debt or drawings from our existing revolving credit agreement. We believe that these resources, in addition to cash generated from operations, will be sufficient to fund the acquisition. See Note 2 of our Notes to the Consolidated Financial Statements for further information regarding our acquisition of Fotolia.

Restructuring
During the past several years, we have initiated various restructuring plans. Currently, the Fiscal 2014 Restructuring Plan is the only plan of significance to us as we consider our restructuring plans initiated in prior years to be substantially complete.
As of November 28, 2014 , we have accrued total restructuring charges of $22.3 million of which approximately $15.0 million relates to ongoing termination benefits that are expected to be paid during fiscal 2015. The remaining $7.3 million relates to the cost of closing redundant facilities and are expected to be paid under contract through fiscal 2021 of which approximately 45% will be paid through 2016. During fiscal 2014, we made payments related to our restructuring plans totaling $11.0 million

53

which consisted of $5.7 million and $5.3 million in payments related to termination benefits and contract terminations and the closing of redundant facilities, respectively.
As of November 29, 2013 , we accrued total restructuring charges of $13.9 million of which approximately $11.7 million related to cost of closing redundant facilities. The remaining accrued restructuring charges of $2.2 million related to the cost of termination benefits and contract terminations. During fiscal 2013, we made payments related to the above restructuring plans totaling $10.3 million which consisted of $1.3 million and $9.0 million in payments related to termination benefits and contract terminations and the closing of redundant facilities, respectively.
As of November 30, 2012, we accrued total restructuring charges of $21.6 million of which $2.3 million related to ongoing termination benefits and contract terminations. The remaining accrued restructuring charges of $19.3 million related to the cost of closing redundant facilities. During fiscal 2012, we made payments related to restructuring plans totaling $63.1 million which consisted of $50.5 million and $12.6 million in payments related to termination benefits and contract terminations and the closing of redundant facilities, respectively.
We believe that our existing cash and cash equivalents, short-term investments and cash generated from operations will be sufficient to meet the cash outlays for the restructuring actions described above.
See Note 10 of our Notes to Consolidated Financial Statements for additional information regarding our restructuring plans.
Other Liquidity and Capital Resources Considerations
Our existing cash, cash equivalents and investment balances may fluctuate during fiscal 2015 due to changes in our planned cash outlay, including changes in incremental costs such as direct and integration costs related to our acquisitions. Our cash and investments totaled $3.7 billion as of November 28, 2014 . Of this amount, approximately 80% was held by our foreign subsidiaries and subject to material repatriation tax effects. Our intent is to permanently reinvest a significant portion of our earnings from foreign operations, and current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event funds from foreign operations are needed to fund operations in the United States and if U.S. tax has not already been previously provided, we would provide for and pay additional U.S. taxes in connection with repatriating these funds.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part I, Item 1A titled “Risk Factors”. However, based on our current business plan and revenue prospects, we believe that our existing cash, cash equivalents and investment 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.
On March 2, 2012, we entered into a five-year $1.0 billion senior unsecured revolving credit agreement (the “Credit Agreement”), providing for loans to us and certain of our subsidiaries. On March 1, 2013, we exercised our option under the Credit Agreement to extend the maturity date of the Credit Agreement by one year to March 2, 2018. As of November 28, 2014 , there were no outstanding borrowings under this Credit Agreement and the entire $1.0 billion credit line remains available for borrowing.
As of November 28, 2014 , the amount outstanding under our senior notes was $1.5 billion , consisting of $600 million of 3.25% senior notes due February 1, 2015 (the “2015 Notes”) and $900 million of 4.75% senior notes due February 1, 2020 (the “2020 Notes”). During the first quarter of fiscal 2014, we reclassified $599.8 million as current debt on our Consolidated Balance Sheets, which represented the 2015 Notes, net of unamortized original issuance discount. We intend to refinance the current portion of our debt on or before the due date using either newly issued debt or drawings from our existing revolving credit agreement.
In anticipation of this refinancing, we entered into an interest rate lock agreement with a large financial institution subsequent to November 28, 2014 , which fixed a benchmark U.S. Treasury rate for an aggregate notional amount of $600.0 million . This derivative agreement hedges the impact on future interest payments attributable to changes in the benchmark interest rate and will be terminated upon the debt issuance.

We use professional investment management firms to manage a large portion of our invested cash. External investment firms managed, on average, 82% of our consolidated invested balances during fiscal 2014 . The fixed income portfolio is primarily invested in corporate bonds and commercial paper, foreign government securities, money market mutual funds, municipal securities, U.S. agency securities and U.S. Treasury securities.

54

Stock Repurchase Program
We are currently repurchasing common stock under our $2.0 billion authority granted by our Board of Directors in April 2012.
Subsequent to November 28, 2014 , as part of our $2.0 billion stock repurchase program, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $200.0 million . This amount will be classified as treasury stock on our Consolidated Balance Sheets. Upon completion of the $200.0 million stock repurchase agreement, there is no remaining balance under our current authority.
Subsequent to November 28, 2014 , the Board of Directors approved a new stock repurchase program granting the company authority to repurchase up to $2.0 billion in common stock through the end of fiscal 2017. The new stock repurchase program approved by our Board of Directors is similar to our previous $2.0 billion stock repurchase program.
During fiscal 2014 , 2013 and 2012 , we entered into structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $600.0 million , $1.1 billion and $405.0 million , respectively. The $600.0 million and $1.1 billion prepayments during fiscal 2014 and 2013 , respectively, were under the $2.0 billion stock repurchase authority. Of the $405.0 million of prepayments during fiscal 2012 , $100.0 million were under the $2.0 billion stock repurchase program and the remaining $305.0 million were under our previous $1.6 billion stock repurchase authority. We enter 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 2014 , we repurchased approximately 10.9 million shares at an average price of $63.48 through structured repurchase agreements entered into during fiscal 2014 . During fiscal 2013 , we repurchased approximately 21.6 million shares at an average price of $46.47 through structured repurchase agreements entered into during fiscal 2013 and fiscal 2012. During fiscal 2012 , we repurchased approximately 11.5 million shares at an average price per share of $32.29 through structured repurchase agreements entered into during fiscal 2012.
For fiscal 2014 , 2013 and 2012 , the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by November 28, 2014 , November 29, 2013 and November 30, 2012 were excluded from the computation of earnings per share. As of November 28, 2014 , $40.3 million of prepayments remained under the agreement. See Note 13 of our Notes to Consolidated Financial Statements for further discussion of our stock repurchase programs.
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, 2014 .
Summary of Stock Repurchases for Fiscal 2014 , 2013 and 2012
(in thousands, except average amounts)
Board Approval
Date
 
Repurchases
Under the Plan
 
2014
 
2013
 
2012
 
 
Shares
 
Average
 
Shares
 
Average
 
Shares
 
Average
June 2010
 
Structured repurchases (1)
 
—

 
$
—

 
—

 
$
—

 
9,482

 
$
32.17

April 2012
 
Structured repurchases (1)
 
10,852

 
$
63.48

 
21,603

 
$
46.47

 
2,038

 
$
32.87

Total shares
 
 
 
10,852

 
$
63.48

 
21,603

 
$
46.47

 
11,520

 
$
32.29

Total cost
 
 
 
$688,902
 
$1,003,794
 
$371,995
_________________________________________  
(1)  
Stock repurchase agreements executed with large financial institutions. See Stock Repurchase Program above.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Our principal commitments as of November 28, 2014 consist of obligations under operating leases, capital leases, royalty agreements and various service agreements. See Note 15 of our Notes to Consolidated Financial Statements for additional information regarding our contractual commitments .

55

Contractual Obligations
The following table summarizes our contractual obligations as of November 28, 2014 (in millions):
 
 
    Payment Due by Period
 
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
Notes
 
$
1,744.9

 
$
652.5

 
$
85.5

 
$
85.5

 
$
921.4

Operating lease obligations
 
202.6

 
42.6

 
67.4

 
46.8

 
45.8

Capital lease obligations 
 
3.3

 
3.3

 
—

 
—

 
—

Purchase obligations 
 
288.9

 
227.9

 
42.2

 
18.8

 
—

Total                                                      
 
$
2,239.7

 
$
926.3

 
$
195.1

 
$
151.1

 
$
967.2

Senior Notes
In February 2010, we issued $600.0 million of 3.25% senior notes due February 1, 2015 and $900.0 million of 4.75% senior notes due February 1, 2020 . Interest on our senior notes is payable semi-annually, in arrears on February 1 and August 1. At November 28, 2014 , our maximum commitment for interest payments under the senior notes was $244.9 million for the remaining duration of our senior notes. In June of fiscal 2014, we entered into interest rate swaps that effectively converted the fixed interest rate on our 2020 Notes to a floating interest rate based on the London Interbank Offered Rate (“LIBOR”) plus a fixed number of basis points through February 1, 2020.
Capital Lease Obligation
In January 2013, we entered into a sale-leaseback agreement to sell equipment totaling $25.7 million and leaseback the same equipment over a period of 24 months. This transaction was classified as a capital lease obligation and was recorded at fair value.
Covenants
Our credit facility contains a financial covenant requiring us not to exceed a maximum leverage ratio. Our Almaden Tower lease includes certain financial ratios as defined in the lease agreements that are reported to the lessors quarterly. As of November 28, 2014 , we were in compliance with all of our covenants. 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. Our senior notes do not contain any financial covenants.
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. We do not anticipate paying any cash dividends in the foreseeable future.
Accounting for Uncertainty in Income Taxes
The gross liability for unrecognized tax benefits at November 28, 2014 was $148.8 million , exclusive of interest and penalties. 
The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $5 million . 
Royalties
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.
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 and from time to time, we are subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not

56

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.
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All market risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Risk
Foreign Currency Exposures and Hedging Instruments
In countries outside the U.S., we transact business in U.S. Dollars and various other currencies which subject us to exposure from movements in exchange rates. We may use foreign exchange purchased options or forward contracts to hedge our foreign currency revenue denominated in Euro, British Pounds and Yen. Additionally, we hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts. We hedge these exposures to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates.
Our revenue exposures for fiscal 2014 , 2013 and 2012 were as follows (in millions, except Yen):
 
Fiscal
2014
 
Fiscal
2013
 
Fiscal
2012
Euro
€
455.5

 
€
434.7

 
€
530.7

Yen (in billions)
¥
28

 
¥
32.5

 
¥
34.8

British Pounds
£
159.1

 
£
145.3

 
£
145.1

As of November 28, 2014 , the total absolute value of all outstanding foreign exchange contracts, including options and forwards, was $672.9 million which included the notional equivalent of $359.5 million in Euros, $104.7 million in British Pounds, $159.5 million in Yen and $49.2 million in other foreign currencies. As of November 28, 2014 , all contracts were set to expire at various dates through June 2015. The bank counterparties in these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum requirements under our counterparty risk assessment process. In addition, our hedging policy establishes maximum limits for each counterparty.
A sensitivity analysis was performed on all of our foreign exchange derivatives as of November 28, 2014 . This sensitivity analysis measures the hypothetical market value resulting from a 10% shift in the value of exchange rates relative to the U.S. Dollar. For option contracts, the Black-Scholes option pricing model was used. A 10% increase in the value of the U.S. Dollar and a corresponding decrease in the value of the hedged foreign currency asset would lead to an increase in the fair value of our financial hedging instruments by $40.9 million . Conversely, a 10% decrease in the value of the U.S. Dollar would result in a decrease in the fair value of these financial instruments by $28.9 million .
As a general rule, we do not use foreign exchange contracts to hedge local currency denominated operating expenses in countries where a natural hedge exists. For example, in many countries, revenue in the local currencies substantially offsets the local currency denominated operating expenses.

We also have long-term investment exposures consisting of the capitalization and retained earnings in our non-U.S. Dollar functional currency foreign subsidiaries. As of November 28, 2014 and November 29, 2013 , this long-term investment exposure totaled a notional equivalent of $161.7 million and $355.6 million , respectively. At this time, we do not hedge these long-term investment exposures.
We do not use foreign exchange contracts for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates. We regularly review our hedging program and assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.


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Economic Hedging—Hedges of Forecasted Transactions
We may use foreign exchange purchased options or forward contracts to hedge foreign currency revenue denominated in Euros, British Pounds and Yen. We hedge these cash flow exposures to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. We enter into these foreign exchange contracts to hedge forecasted revenue in the normal course of business and accordingly, they are not speculative in nature.

We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income, net on our Consolidated Statements of Income at that time. For the fiscal year ended November 28, 2014 , net gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur were insignificant.
See Note 5 of our Notes to Consolidated Financial Statements for information regarding our hedging activities.
Balance Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities
We hedge exposures related to 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 foreign currency exchange rates. These foreign exchange contracts are carried at fair value with changes in the fair value recorded as interest and other income, net. These foreign exchange contracts do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these contracts are intended to offset gains and losses on the assets and liabilities being hedged. At November 28, 2014 , the outstanding balance sheet hedging derivatives had maturities of 180 days or less.
See Note 5 of our Notes to Consolidated Financial Statements for information regarding our hedging activities.
Interest Rate Risk
Short-Term Investments and Fixed Income Securities
At November 28, 2014 , we had debt securities classified as short-term investments of $2.6 billion . Changes in interest rates could adversely affect the market value of these investments. The following table separates these investments, based on stated maturities, to show the approximate exposure to interest rates (in millions):
Due within one year
$
607.2

Due within two years
904.9

Due within three years
834.2

Due after three years
275.3

Total
$
2,621.6

A sensitivity analysis was performed on our investment portfolio as of November 28, 2014 . The analysis is based on an estimate of the hypothetical changes in market value of the portfolio that would result from an immediate parallel shift in the yield curve of various magnitudes.
The following tables present the hypothetical fair values of our debt securities classified as short-term investments assuming immediate parallel shifts in the yield curve of 50 basis points (“BPS”), 100 BPS and 150 BPS. The analysis is shown as of November 28, 2014 and November 29, 2013 (dollars in millions):
-150 BPS
 
-100 BPS
 
-50 BPS
 
Fair Value 11/28/14
 
+50 BPS
 
+100 BPS
 
+150 BPS
2,663.3

 
2,656.3

 
2,641.9

 
2,621.6

 
2,599.8

 
2,578.0

 
2,556.2

-150 BPS
 
-100 BPS
 
-50 BPS
 
Fair Value 11/29/13
 
+50 BPS
 
+100 BPS
 
+150 BPS
2,363.7

 
2,360.9

 
2,353.8

 
2,338.5

 
2,320.5

 
2,302.5

 
2,284.5

Senior Notes
As of November 28, 2014 , the amount outstanding under our senior notes was $1.5 billion , consisting of $600 million of 3.25% senior notes due February 1, 2015 (the “2015 Notes”) and $900 million of 4.75% senior notes due February 1, 2020 (the

58
Table of Contents

“2020 Notes” and, together with the 2015 Notes, the “Notes”). In June 2014, we entered into interest rate swaps that effectively converted the fixed interest rate on our 2020 Notes to a floating interest rate based on the LIBOR plus a fixed number of basis points through February 1, 2020. Accordingly, our exposure to fluctuations in market interest rates is on the hedged fixed-rate debt of $900 million . An immediate hypothetical 50 basis points increase or decrease in market interest rates would not have a significant impact on our results of operations.
As of November 28, 2014 , the total carrying amount of the Notes was $1.5 billion and the related fair value based on inactive market prices was $1.6 billion .

Other Market Risk
Privately Held Long-Term Investments
The privately held companies in which we invest can still be considered in the start-up or development stages which are inherently risky. The technologies or products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of a substantial part of our initial investment in these companies. The evaluation of privately held companies is based on information that we request from these companies, which 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 accuracy of the data received from these companies.
Marketable Equity Securities
We have minimal exposure to equity price risk on our portfolio of marketable equity securities. As of November 28, 2014 and November 29, 2013 , our total equity holdings in publicly traded companies were insignificant.


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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
Page No.
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and Notes thereto.

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ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 
November 28,
2014
 
November 29,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,117,400

 
$
834,556

Short-term investments
2,622,091

 
2,339,196

Trade receivables, net of allowances for doubtful accounts of $7,867 and  $10,228, respectively
591,800

 
599,820

Deferred income taxes
95,279

 
102,247

Prepaid expenses and other current assets
175,758

 
170,110

Total current assets
4,602,328

 
4,045,929

Property and equipment, net
785,123

 
659,774

Goodwill
4,721,962

 
4,771,981

Purchased and other intangibles, net
469,662

 
605,254

Investment in lease receivable
80,439

 
207,239

Other assets
126,315

 
90,121

Total assets
$
10,785,829

 
$
10,380,298

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 

 
 

Trade payables
$
68,377

 
$
62,096

Accrued expenses
683,866

 
656,939

Debt and capital lease obligations
603,229

 
14,676

Accrued restructuring
17,120

 
6,171

Income taxes payable
23,920

 
10,222

Deferred revenue
1,097,923

 
775,544

Total current liabilities
2,494,435

 
1,525,648

Long-term liabilities:
 

 
 

Debt and capital lease obligations
911,086

 
1,499,297

Deferred revenue
57,401

 
53,268

Accrued restructuring
5,194

 
7,717

Income taxes payable
125,746

 
132,545

Deferred income taxes
342,315

 
375,634

Other liabilities
73,747

 
61,555

Total liabilities
4,009,924

 
3,655,664

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock, $0.0001 par value; 2,000 shares authorized; none issued
—

 
—

Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 
     497,484 and 496,261 shares outstanding, respectively
61

 
61

Additional paid-in-capital
3,778,495

 
3,392,696

Retained earnings
6,924,294

 
6,928,964

Accumulated other comprehensive income (loss)
(8,094
)
 
46,103

Treasury stock, at cost (103,350 and 104,573 shares, respectively), net of reissuances
(3,918,851
)
 
(3,643,190
)
Total stockholders’ equity
6,775,905

 
6,724,634

Total liabilities and stockholders’ equity
$
10,785,829

 
$
10,380,298

See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
 
Years Ended
 
November 28,
2014
 
November 29,
2013
 
November 30,
2012
Revenue:
 
 
 
 
 
Products
$
1,627,803

 
$
2,470,098

 
$
3,342,843

Subscription
2,076,584

 
1,137,856

 
673,206

Services and support
442,678

 
447,286

 
387,628

Total revenue
4,147,065

 
4,055,240

 
4,403,677

 
Cost of revenue:
 

 
 
 
 
Products
97,099

 
138,154

 
121,663

Subscription
335,432

 
278,077

 
219,102

Services and support
189,549

 
170,326

 
143,017

Total cost of revenue
622,080

 
586,557

 
483,782

 
Gross profit
3,524,985

 
3,468,683

 
3,919,895

 
Operating expenses:
 

 
 
 
 
Research and development
844,353

 
826,631

 
742,823

Sales and marketing
1,652,308

 
1,620,454

 
1,516,159

General and administrative
543,332

 
520,124

 
434,982

Restructuring and other charges
19,883

 
26,497

 
(2,917
)
Amortization of purchased intangibles
52,424

 
52,254

 
48,657

Total operating expenses
3,112,300

 
3,045,960

 
2,739,704

 
Operating income
412,685

 
422,723

 
1,180,191

 
Non-operating income (expense):
 

 
 
 
 
Interest and other income (expense), net
7,267

 
4,941

 
(3,414
)
Interest expense
(59,732
)
 
(67,508
)
 
(67,487
)
Investment gains (losses), net
1,156

 
(4,015
)
 
9,504

Total non-operating income (expense), net
(51,309
)
 
(66,582
)
 
(61,397
)
Income before income taxes
361,376

 
356,141

 
1,118,794

Provision for income taxes
92,981

 
66,156

 
286,019

Net income
$
268,395

 
$
289,985

 
$
832,775

Basic net income per share
$
0.54

 
$
0.58

 
$
1.68

Shares used to compute basic net income per share
497,867

 
501,372

 
494,731

Diluted net income per share
$
0.53

 
$
0.56

 
$
1.66

Shares used to compute diluted net income per share
508,480

 
513,476

 
502,721

   See accompanying Notes to Consolidated Financial Statements.


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ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
Years Ended
 
November 28,
2014
 
November 29,
2013
 
November 30,
2012
 
Increase/(Decrease)
Net income
$
268,395

 
$
289,985

 
$
832,775

Other comprehensive income, net of taxes:
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
Unrealized gains / losses on available-for-sale securities
2,315

 
(2,185
)
 
11,297

Reclassification adjustment for gains / losses on available-for-sale securities recognized
(3,928
)
 
(3,013
)
 
(2,874
)
Net increase (decrease) from available-for-sale securities
(1,613
)
 
(5,198
)
 
8,423

Derivatives designated as hedging instruments:
 
 
 
 
 
Unrealized gains / losses on derivative instruments
41,993

 
34,677

 
23,922

Reclassification adjustment for gains / losses on derivative instruments recognized
(18,705
)
 
(35,914
)
 
(30,672
)
Net increase (decrease) from derivatives designated as hedging instruments
23,288

 
(1,237
)
 
(6,750
)
Foreign currency translation adjustments
(75,872
)
 
21,826

 
(911
)
Other comprehensive income, net of taxes
(54,197
)
 
15,391

 
762

Total comprehensive income, net of taxes
$
214,198

 
$
305,376

 
$
833,537

See accompanying Notes to Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
 
 
    Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 Treasury Stock
 
 
 
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Total
Balances at December 2, 2011
 
600,834

 
$
61

 
$
2,753,896

 
$
6,528,735

 
$
29,950

 
(109,294
)
 
$
(3,529,529
)
 
$
5,783,113

Net income
 
—

 
—

 
—

 
832,775

 
—

 
—

 
—

 
832,775

Other comprehensive income,
net of taxes
 
—

 
—

 
—

 
—

 
762

 
—

 
—

 
762

Re-issuance of treasury stock under
stock compensation plans
 
—

 
—

 
—

 
(358,507
)
 
—

 
14,111

 
527,781

 
169,274

Tax detriment from
employee stock plans
 
—

 
—

 
(16,842
)
 
—

 
—

 
—

 
—

 
(16,842
)
Purchase of treasury stock
 
—

 
—

 
—

 
—

 
—

 
(11,519
)
 
(405,000
)
 
(405,000
)
Equity awards assumed for
acquisition
 
—

 
—

 
4,265

 
—

 
—

 
—

 
—

 
4,265

Stock-based compensation
 
—

 
—

 
297,346

 
—

 
—

 
—

 
—

 
297,346

Value of shares in deferred
compensation plan
 
—

 
—

 
—

 
—

 
—

 
—

 
(511
)
 
(511
)
Balances at November 30, 2012
 
600,834

 
$
61

 
$
3,038,665

 
$
7,003,003

 
$
30,712

 
(106,702
)
 
$
(3,407,259
)
 
$
6,665,182

Net income
 
—

 
—

 
—

 
289,985

 
—

 
—

 
—

 
289,985

Other comprehensive income,
net of taxes
 
—

 
—

 
—

 
—

 
15,391

 
—

 
—

 
15,391

Re-issuance of treasury stock under
stock compensation plans
 
—

 
—

 
—

 
(364,024
)
 
—

 
23,732

 
864,800

 
500,776

Tax benefit from employee stock
plans
 
—

 
—

 
25,290

 
—

 
—

 
—

 
—

 
25,290

Purchase of treasury stock
 
—

 
—

 
—

 
—

 
—

 
(21,603
)
 
(1,100,000
)
 
(1,100,000
)
Equity awards assumed for
acquisition
 
—

 
—

 
1,160

 
—

 
—

 
—

 
—

 
1,160

Stock-based compensation
 
—

 
—

 
327,581

 
—

 
—

 
—

 
—

 
327,581

Value of shares in deferred
compensation plan
 
—

 
—

 
—

 
—

 
—

 
—

 
(731
)
 
(731
)
Balances at November 29, 2013
 
600,834

 
$
61

 
$
3,392,696

 
$
6,928,964

 
$
46,103

 
(104,573
)
 
$
(3,643,190
)
 
$
6,724,634

Net income
 
—

 
—

 
—

 
268,395

 
—

 
—

 
—

 
268,395

Other comprehensive income,
net of taxes
 
—

 
—

 
—

 
—

 
(54,197
)
 
—

 
—

 
(54,197
)
Re-issuance of treasury stock under
stock compensation plans
 
—

 
—

 


 
(273,065
)
 
—

 
12,075

 
327,231

 
54,166

Tax benefit from employee stock
plans
 
—

 
—

 
53,225

 
—

 
—

 
—

 
—

 
53,225

Purchase of treasury stock
 
—

 
—

 
—

 
—

 
—

 
(10,852
)
 
(600,000
)
 
(600,000
)
Equity awards assumed for
acquisition
 
—

 
—

 
21

 
—

 
—

 
—

 
—

 
21

Stock-based compensation
 
—

 
—

 
332,553

 
—

 
—

 
—

 
—

 
332,553

Value of shares in deferred
compensation plan
 
—

 
—

 
—

 
—

 
—

 
—

 
(2,892
)
 
(2,892
)
Balances at November 28, 2014
 
600,834

 
$
61

 
$
3,778,495

 
$
6,924,294

 
$
(8,094
)
 
(103,350
)
 
$
(3,918,851
)
 
$
6,775,905

See accompanying Notes to Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Years Ended
 
November 28,
2014
 
November 29,
2013
 
November 30,
2012
Cash flows from operating activities:
 
 
 
 
 
Net income
$
268,395

 
$
289,985

 
$
832,775

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation, amortization and accretion
313,590

 
321,227

 
299,766

Stock-based compensation
333,701

 
328,987

 
298,502

Deferred income taxes
(26,089
)
 
29,704

 
89,212

Write down of assets held for sale
—

 
23,151

 
—

Unrealized (gains) losses on investments
(74
)
 
5,665

 
(8,535
)
Tax benefit (shortfall) from employee stock option plans
53,225

 
25,290

 
(16,841
)
Excess tax benefits from stock-based compensation
(53,235
)
 
(40,619
)
 
(10,003
)
Other non-cash items
1,889

 
5,654

 
4,296

Changes in operating assets and liabilities, net of acquired assets and
        assumed liabilities:
 
 
 
 
 
Trade receivables, net
7,928

 
33,649

 
45,166

Prepaid expenses and other current assets
(1,918
)
 
(55,509
)
 
4,552

Trade payables
6,211

 
7,132

 
(62,874
)
Accrued expenses
37,544

 
41,828

 
(7,770
)
Accrued restructuring
8,871

 
(6,949
)
 
(66,047
)
Income taxes payable
11,006

 
(58,875
)
 
10,041

Deferred revenue
326,438

 
201,366

 
87,340

Net cash provided by operating activities
1,287,482

 
1,151,686

 
1,499,580

Cash flows from investing activities:
 

 
 

 
 
Purchases of short-term investments
(2,014,186
)
 
(2,058,058
)
 
(1,776,485
)
Maturities of short-term investments
272,076

 
360,485

 
439,878

Proceeds from sales of short-term investments
1,443,577

 
1,449,961

 
1,126,886

Acquisitions, net of cash acquired
(29,802
)
 
(704,589
)
 
(353,195
)
Purchases of property and equipment
(148,332
)
 
(188,358
)
 
(271,076
)
Proceeds from sale of property and equipment
—

 
24,260

 
—

Purchases of long-term investments, intangibles and other assets
(17,572
)
 
(67,737
)
 
(29,701
)
Proceeds from sale of long-term investments
3,532

 
6,233

 
29,031

Net cash used for investing activities
(490,707
)
 
(1,177,803
)
 
(834,662
)
Cash flows from financing activities:
 

 
 

 
 
Purchases of treasury stock
(600,000
)
 
(1,100,000
)
 
(405,000
)
Proceeds from issuance of treasury stock
227,841

 
598,194

 
235,251

Cost of issuance of treasury stock
(173,675
)
 
(97,418
)
 
(65,977
)
Excess tax benefits from stock-based compensation
53,235

 
40,619

 
10,003

Proceeds from debt and capital lease obligations
—

 
25,703

 
3,152

Repayment of debt and capital lease obligations
(14,684
)
 
(25,879
)
 
(9,855
)
Debt issuance costs
—

 
(357
)
 
(2,297
)
Net cash used for financing activities
(507,283
)
 
(559,138
)
 
(234,723
)
Effect of foreign currency exchange rates on cash and cash equivalents
(6,648
)
 
(5,241
)
 
5,357

Net increase (decrease) in cash and cash equivalents
282,844

 
(590,496
)
 
435,552

Cash and cash equivalents at beginning of year
834,556

 
1,425,052

 
989,500

Cash and cash equivalents at end of year
$
1,117,400

 
$
834,556

 
$
1,425,052

Supplemental disclosures:
 

 
 
 
 
Cash paid for income taxes, net of refunds
$
20,140

 
$
129,701

 
$
201,125

Cash paid for interest
$
68,886

 
$
64,843

 
$
66,265

Non-cash investing activities:
 
 
 
 
 
Investment in lease receivable applied to building purchase
$
126,800

 
$
—

 
$
—

Issuance of common stock and stock awards assumed in business acquisitions
$
21

 
$
1,160

 
$
4,265

See accompanying Notes to Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 1.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Operations
Founded in 1982, Adobe Systems Incorporated is one of the largest and most diversified software companies in the world. We offer a line of products and services used by creative professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences across multiple operating systems, devices and media. We market and license our products and services directly to enterprise customers through our sales force and to end-users through app stores and our own website at www.adobe.com. We offer many of our products via a Software-as-a-Service (“SaaS”) model or a managed services model (both of which are referred to as a hosted or cloud-based model) as well as through term subscription and pay-per-use models. We also distribute certain products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers and original equipment manufacturers (“OEMs”). In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions. Our products run on personal and server-based computers, as well as on smartphones, tablets and other devices, depending on the product. We have operations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia-Pacific (“APAC”).
Basis of Presentation
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 (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”).
Use of Estimates
In preparing Consolidated Financial Statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we must make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for, but not limited to, sales allowances and programs, bad debts, stock-based compensation, determining the fair value of acquired assets and assumed liabilities, excess inventory and purchase commitments, restructuring charges, facilities lease losses, impairment of goodwill and intangible assets, litigation, income taxes and investments. Actual results may differ materially from these estimates.
Fiscal Year
Our fiscal year is a 52- or 53-week year that ends on the Friday closest to November 30. Fiscal 2014 , 2013 and 2012 were 52-week years.
Reclassification
Certain prior year amounts have been reclassified to conform to current year presentation in the Consolidated Statements of Cash Flows.
Significant Accounting Policies
Revenue Recognition
Our revenue is derived from the licensing of perpetual, time-based, and subscription software products, associated software maintenance and support plans, non-software related hosted services, consulting services, training and technical support.

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. 

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Multiple Element Arrangements
We enter into multiple element revenue arrangements in which a customer may purchase a combination of software, upgrades, maintenance and support, hosted services, and consulting.
For our software and software-related 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 the fair value of each undelivered element using vendor-specific objective evidence (“VSOE”), and (4) allocate the total price among the various elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements and the residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. However, if the only undelivered element is maintenance and support, the entire arrangement fee is recognized ratably over the performance period. 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.
We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range.
We have established VSOE for our software maintenance and support services, custom software development services, consulting services and training, when such services are sold optionally with software licenses.
For multiple-element arrangements containing our non-software services, we must: (1) determine whether and when each element has been delivered; (2) determine the fair value of each element using the selling price hierarchy of VSOE of selling price, third-party evidence (“TPE”) of selling price or best-estimated selling price (“BESP”), as applicable; and (3) allocate the total price among the various elements based on the relative selling price method.

For multiple-element arrangements that contain both software and non-software elements, we allocate revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy. We determine the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use BESP. Once revenue is allocated to software or software-related elements as a group, we recognize revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition criteria are met for each element.

We are generally unable to establish VSOE or TPE for non-software elements and as such, we use BESP. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. We determine BESP for a product or service by considering multiple factors including, but not limited to major product groupings, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. Pricing practices taken into consideration include historic contractually stated prices, volume discounts where applicable and our price lists. 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
We recognize our product revenue upon shipment, provided all other revenue recognition criteria have been met. Our desktop application product 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 recognize OEM licensing revenue, primarily royalties, when OEMs 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

67
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ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.
Subscription and Services and Support Revenue
We recognize revenue for hosted services that are based on a committed number of transactions, ratably beginning on the date the customer commences use of our services and continuing through the end of the customer term. Over-usage fees, and fees billed based on the actual number of transactions from which we capture data, are billed in accordance with contract terms as these fees are incurred. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenue, depending on whether all revenue recognition criteria have been met.
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 a time and materials basis and is measured monthly based on input measures, such as hours incurred to date, 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 on a when and if available basis or technical support, depending on the offering, are recognized ratably over the performance period of the arrangement.
Our software subscription offerings, which may include product upgrades and enhancements on a when and if available basis, hosted services, and online storage are generally offered to our customers over a specified period of time and we recognize revenue associated with these arrangements ratably over the subscription period.

Rights of Return, Rebates and Price Protection
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 and accounts receivable. 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, as defined by us, 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 immediately prior to the effective date of the decrease.
Although our subscription contracts are generally non-cancellable, a limited number of customers have the right to cancel their contracts by providing prior written notice to us of their intent to cancel the remainder of the contract term. In the event a customer cancels its contract, they are not entitled to a refund for prior services we have provided to them.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.
Revenue Reserve
Revenue reserve rollforward (in thousands):
 
 
2014
 
2013
 
2012
Beginning balance
 
$
28,664

 
$
57,058

 
$
60,887

Amount charged to revenue
 
45,550

 
74,031

 
170,839

Actual returns
 
(56,812
)
 
(102,425
)
 
(174,668
)
Ending balance
 
$
17,402

 
$
28,664

 
$
57,058

Deferred Revenue
 Deferred revenue consists substantially of payments received in advance of revenue recognition for our products and services described above. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables. The allowance is based on both specific and general reserves. 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.
(in thousands)
 
2014
 
2013
 
2012
Beginning balance
 
$
10,228

 
$
12,643

 
$
15,080

Increase due to acquisition
 
51

 
1,038

 
325

Charged to operating expenses
 
603

 
933

 
3,356

Deductions (1)
 
(3,015
)
 
(4,386
)
 
(6,118
)
Ending balance
 
$
7,867

 
$
10,228

 
$
12,643

________________________________________  
(1)  
Deductions related to the allowance for doubtful accounts represent amounts written off against the allowance, less recoveries.
Property and Equipment
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 1 to 5 years for computers and equipment as well as server hardware under capital leases, 1 to 6 years for furniture and fixtures, and up to 40 years for buildings. Leasehold improvements are amortized using the straight-line method over the lesser of the remaining respective lease term or estimated useful lives ranging from 1 to 15 years.
Goodwill, Purchased Intangibles and Other Long-Lived Assets
Goodwill is assigned to one or more reporting segments on the date of acquisition. 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 equal weighting of 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.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 2014 . We elected to use the Step 1 quantitative assessment for our reporting units and determined that there was no impairment of goodwill. There is no significant risk of material goodwill impairment in any of our reporting units, based upon the results of our annual goodwill impairment test.
We amortize intangible assets with finite lives over their estimated useful lives and review them for impairment whenever an impairment indicator exists. 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 any excess of the carrying amount over the fair value of the assets. We did not recognize any intangible asset impairment charges in fiscal 2014 , 2013 or 2012 .
Our intangible assets are amortized over their estimated useful lives of 1 to 14 years. Amortization is based on the pattern in which the economic benefits of the intangible asset will be consumed or on a straight-line basis when the consumption pattern is not apparent. The weighted average useful lives of our intangible assets were as follows:
 
Weighted Average
Useful Life (years )
Purchased technology
6
Customer contracts and relationships
10
Trademarks
8
Acquired rights to use technology
8
Localization
1
Other intangibles
3
 
Software Development Costs
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.
Internal Use Software
We capitalize costs associated with customized internal-use software systems that have reached the application development stage. Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related expenses for employees, who are directly associated with the development of the applications. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and is ready for its intended purpose.
Income Taxes
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.
Taxes Collected from Customers
We net taxes collected from customers against those remitted to government authorities in our financial statements. Accordingly, taxes collected from customers are not reported as revenue.

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Treasury Stock
We account for treasury stock under the cost method. When treasury stock is re-issued at a price higher than its cost, the difference is recorded as a component of additional paid-in-capital in our Consolidated Balance Sheets. When treasury stock is re-issued at a price lower than its cost, the difference is recorded as a component of additional paid-in-capital to the extent that there are previously recorded gains to offset the losses. If there are no treasury stock gains in additional paid-in-capital, the losses upon re-issuance of treasury stock are recorded as a component of retained earnings in our Consolidated Balance Sheets.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses for fiscal 2014 , 2013 and 2012 were $87.9 million , $88.5 million and $99.4 million , respectively.
Foreign Currency Translation
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.
Foreign Currency and Other Hedging Instruments
In countries outside the United States (“U.S.”), we transact business in U.S. Dollars and in various other currencies. In Europe and Japan, transactions that are denominated in Euros, Yen and British Pounds 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 use foreign exchange option and forward contracts for revenue denominated in Euros, British Pounds and Yen.
We account for our foreign currency hedging instruments 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. Contracts that do not qualify for hedge accounting are adjusted to fair value through earnings. See Note 5 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 interest and other income, net in our Consolidated Statements of Income. Foreign exchange option contracts hedging forecasted foreign currency revenue are designated as cash flow hedges under accounting for derivative instruments and hedging activities, with gains and losses recorded net of tax, as a component of other comprehensive income (“OCI”) in stockholders’ equity and reclassified into revenue at the time the forecasted transactions occur.
Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk are short-term fixed-income investments, structured repurchase transactions, contracts hedging foreign currency 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 through a policy that establishes counterparty limits. The bank counterparties in these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum requirements under our counterparty risk assessment process. In addition, our hedging policy establishes maximum limits for each counterparty. We monitor ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our on-going assessment of counterparty risk, we will adjust our exposure to various counterparties.

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The aggregate fair value of foreign currency contracts in net asset positions as of November 28, 2014 and November 29, 2013 was $33.0 million and $11.9 million , respectively. These amounts represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. These exposures could be reduced by up to $0.7 million and $1.1 million , respectively from liabilities included in master netting arrangements with those same counterparties. 
Credit risk in receivables is limited to OEMs, dealers and distributors of hardware and software products to the retail market, customers to whom we license software directly and our SaaS offerings. We are also experiencing elevated delinquency and bad debt write-offs related to our receivables assumed in business combinations. A credit review is completed for our new distributors, dealers and OEMs. 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 or provide SaaS services 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 18 for information regarding our significant customers.
We derive a significant portion of our OEM PostScript and Other licensing revenue from a small number of OEMs. Our OEMs 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.
Recent Accounting Pronouncements Not Yet Effective
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for us in the first quarter of fiscal 2018. We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
With the exception of the new revenue standard discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our Consolidated Financial Statements.
NOTE 2.  ACQUISITIONS
Fiscal 2014 Acquisition
During fiscal 2014, we completed a business acquisition which was not material to our Consolidated Financial Statements.
Subsequent to November 28, 2014 , we entered into a a definitive agreement to acquire privately-held Fotolia, a leading marketplace for royalty-free photos, images, graphics and HD video, for approximately $800 million in cash. The transaction is subject to customary regulatory approvals and closing conditions and is expected to close in the first quarter of our fiscal 2015. Following the closing, we intend to integrate Fotolia into our Digital Media reportable segment for financial reporting purposes.
Fiscal 2013 Acquisitions
Neolane
On July 22, 2013 , we completed our acquisition of privately held Neolane, a leader in cross-channel campaign management technology. During the third quarter of fiscal 2013, we began integrating Neolane into our Digital Marketing reportable segment. Neolane brings a platform for automation and execution of marketing campaigns across the web, e-mail, social, mobile, call center, direct mail, point of sale and other emerging channels which will drive consistent brand experiences and personalized campaigns for our customers.
Under the acquisition method of accounting, the total final purchase price was allocated to Neolane’s net tangible and intangible assets based upon their estimated fair values as of July 22, 2013 . The total final purchase price for Neolane was $616.7

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million of which $515.2 million was allocated to goodwill that was non-deductible for tax purposes, $115.0 million to identifiable intangible assets and $13.5 million to net liabilities assumed. The impact of this acquisition was not material to our Consolidated Financial Statements.
Behance
On December 20, 2012 , we completed our acquisition of privately held Behance, an online social media platform to showcase and discover creative work. During the first quarter of fiscal 2013, we began integrating Behance into our Digital Media reportable segment. Behance’s community and portfolio capabilities will accelerate our strategy to bring additional community features to Creative Cloud. We have included the financial results of Behance in our Consolidated Financial Statements beginning on the acquisition date.
Under the acquisition method of accounting, the total purchase price was allocated to Behance’s net tangible and intangible assets based upon their estimated fair values as of December 20, 2012 . The total final purchase price for Behance was approximately $111.1 million of which $91.4 million was allocated to goodwill, $28.5 million to identifiable intangible assets and $8.8 million to net liabilities assumed. The impact of this acquisition was not material to our Consolidated Financial Statements.
Fiscal 2012 Acquisition
Efficient Frontier
On January 13, 2012 , we completed our acquisition of privately held Efficient Frontier, a multi-channel digital ad buying and optimization company. During the first quarter of fiscal 2012, we began integrating Efficient Frontier into our Digital Marketing segment. The Efficient Frontier business adds cross-channel digital ad campaign forecasting, execution and optimization capabilities to our Adobe Marketing Cloud, along with a social marketing engagement platform and social ad buying capabilities. We have included the financial results of Efficient Frontier in our Consolidated Financial Statements beginning on the acquisition date.
Under the acquisition method of accounting, the total purchase price was allocated to Efficient Frontier’s net tangible and intangible assets based upon their estimated fair values as of January 13, 2012 . During fiscal 2012, we made adjustments to the preliminary purchase price allocation. The total final purchase price for Efficient Frontier was $374.7 million of which $291.4 million was allocated to goodwill, $122.7 million to identifiable intangible assets and $39.4 million to net liabilities assumed. The impact of this acquisition was not material to our Consolidated Financial Statements.
NOTE 3.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. We classify all of our cash equivalents and short-term investments as “available-for-sale.” In general, these investments are free of trading restrictions. We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Consolidated Balance Sheets. Gains and losses are recognized when realized in our Consolidated Statements of Income. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. Gains and losses are determined using the specific identification method.

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Cash, cash equivalents and short-term investments consisted of the following as of November 28, 2014 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
348,283

 
$
—

 
$
—

 
$
348,283

Cash equivalents:
 
 
 
 
 
 
 
Money market mutual funds
705,978

 
—

 
—

 
705,978

Time deposits
63,139

 
—

 
—

 
63,139

Total cash equivalents
769,117

 
—

 
—

 
769,117

Total cash and cash equivalents
1,117,400

 
—

 
—

 
1,117,400

Short-term fixed income securities:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,514,632

 
5,253

 
(509
)
 
1,519,376

Foreign government securities
4,499

 
12

 
—

 
4,511

Municipal securities
174,775

 
438

 
(12
)
 
175,201

U.S. agency securities
497,154

 
1,295

 
(64
)
 
498,385

U.S. Treasury securities
423,075

 
1,080

 
(28
)
 
424,127

Subtotal
2,614,135

 
8,078

 
(613
)
 
2,621,600

Marketable equity securities
153

 
338

 
—

 
491

Total short-term investments
2,614,288

 
8,416

 
(613
)
 
2,622,091

Total cash, cash equivalents and short-term investments
$
3,731,688

 
$
8,416

 
$
(613
)
 
$
3,739,491



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Cash, cash equivalents and short-term investments consisted of the following as of November 29, 2013 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
286,221

 
$
—

 
$
—

 
$
286,221

Cash equivalents:
 

 
 
 
 
 
 

Money market mutual funds
429,373

 
—

 
—

 
429,373

Time deposits
104,711

 
—

 
—

 
104,711

U.S. Treasury securities
14,251

 
—

 
—

 
14,251

Total cash equivalents
548,335

 
—

 
—

 
548,335

Total cash and cash equivalents
834,556

 
—

 
—

 
834,556

Short-term fixed income securities:
 
 
 
 
 
 
 

Corporate bonds and commercial paper
1,261,375

 
7,116

 
(631
)
 
1,267,860

Foreign government securities
11,213

 
56

 
—

 
11,269

Municipal securities
186,320

 
328

 
(24
)
 
186,624

U.S. agency securities
446,615

 
1,516

 
(186
)
 
447,945

U.S. Treasury securities
424,076

 
799

 
(97
)
 
424,778

Subtotal
2,329,599

 
9,815

 
(938
)
 
2,338,476

Marketable equity securities
177

 
543

 
—

 
720

Total short-term investments
2,329,776

 
10,358

 
(938
)
 
2,339,196

Total cash, cash equivalents and short-term investments
$
3,164,332

 
$
10,358

 
$
(938
)
 
$
3,173,752

See Note 4 for further information regarding the fair value of our financial instruments.
The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in an unrealized loss position for less than twelve months, as of November 28, 2014 and November 29, 2013 (in thousands):
 
2014
 
2013
 
Fair 
Value
 
Gross
Unrealized
Losses
 
Fair 
Value
 
Gross
Unrealized
Losses
Corporate bonds and commercial paper
$
291,890

 
$
(443
)
 
$
225,759

 
$
(631
)
Municipal securities
21,759

 
(12
)
 
13,522

 
(24
)
U.S. Treasury and agency securities
43,507

 
(64
)
 
105,278

 
(283
)
Total
$
357,156

 
$
(519
)
 
$
344,559

 
$
(938
)
 
There w e re 213 securities and 177 securities in an unrealized loss position for less than twelve months at November 28, 2014 and at November 29, 2013 , respectively.

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The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that were in a continuous unrealized loss position for more than twelve months, as of November 28, 2014 (in thousands):
 
2014
 
Fair 
Value
 
Gross
Unrealized
Losses
Corporate bonds and commercial paper
$
8,636

 
$
(66
)
U.S. Treasury and agency securities
5,884

 
(28
)
Total
$
14,520

 
$
(94
)
 
As of November 28, 2014 , there were eight securities in an unrealized loss position for more than twelve months. As of November 29, 2013 there were no securities in an unrealized loss position for more than twelve months.
The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated effective maturities as of November 28, 2014 (in thousands):
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
606,090

 
$
607,222

Due between one and two years
901,940

 
904,938

Due between two and three years
831,932

 
834,148

Due after three years
274,173

 
275,292

Total
$
2,614,135

 
$
2,621,600

We review our debt and marketable equity securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized cost basis. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to interest and other income, net in our Consolidated Statements of Income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Consolidated Balance Sheets. For equity securities, the write-down would be recorded to investment gains (losses), net in our Consolidated Statements of Income. During fiscal 2014 and 2013 , we did not consider any of our investments to be other-than-temporarily impaired. During fiscal 2012 , we recorded immaterial other-than-temporary impairment losses associated with our marketable equity securities and did not consider any of our debt securities to be other-than-temporarily impaired.


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NOTE 4.  FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis  
We measure certain financial assets and liabilities at fair value on a recurring basis. There have been no transfers between fair value measurement levels during the year ended November 28, 2014 .
The fair value of our financial assets and liabilities at November 28, 2014 was determined using the following inputs (in thousands):
 
  Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market mutual funds
705,978

 
705,978

 
—

 
—

Time deposits
63,139

 
63,139

 
—

 
—

Short-term investments:
 
 
 
 
 
 
 
Corporate bonds and commercial paper
1,519,376

 
—

 
1,519,376

 
—

Foreign government securities
4,511

 
—

 
4,511

 
—

Marketable equity securities
491

 
491

 
—

 
—

Municipal securities
175,201

 
—

 
175,201

 
—

U.S. agency securities
498,385

 
—

 
498,385

 
—

U.S. Treasury securities
424,127

 
—

 
424,127

 
—

Prepaid expenses and other current assets:
 
 
 

 
 

 
 

Foreign currency derivatives
32,991

 
—

 
32,991

 
—

Other assets:
 
 
 

 
 

 
 

Deferred compensation plan assets
25,745

 
549

 
25,196

 
—

Interest rate swap derivatives
14,268

 
—

 
14,268

 
—

Total assets
$
3,464,212

 
$
770,157

 
$
2,694,055

 
$
—

    
Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
663

 
$
—

 
$
663

 
$
—

Total liabilities
$
663

 
$
—

 
$
663

 
$
—



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The fair value of our financial assets and liabilities at November 29, 2013 was determined using the following inputs (in thousands):
 
 
  Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market mutual funds
429,373

 
429,373

 
—

 
—

Time deposits
104,711

 
104,711

 
—

 
—

U.S. Treasury securities
14,251

 
—

 
14,251

 
—

Short-term investments:
 

 
 
 
 
 
 
Corporate bonds and commercial paper
1,267,860

 
—

 
1,267,860

 
—

Foreign government securities
11,269

 
—

 
11,269

 
—

Marketable equity securities
720

 
720

 
—

 
—

Municipal securities
186,624

 
—

 
186,624

 
—

U.S. agency securities
447,945

 
—

 
447,945

 
—

U.S. Treasury securities 
424,778

 
—

 
424,778

 
—

Prepaid expenses and other current assets:
 

 
 

 
 

 
 

Foreign currency derivatives
11,891

 
—

 
11,891

 
—

Other assets:
 

 
 

 
 

 
 

Deferred compensation plan assets
19,816

 
894

 
18,922

 
—

Total assets
$
2,919,238

 
$
535,698

 
$
2,383,540

 
$
—

    
Liabilities:
 

 
 

 
 

 
 

Accrued expenses:
 

 
 

 
 

 
 

Foreign currency derivatives
$
1,067

 
$
—

 
$
1,067

 
$
—

Total liabilities
$
1,067

 
$
—

 
$
1,067

 
$
—


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

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down the investment to its fair value. We estimate fair value of our cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. During fiscal 2014 , we determined there were no other-than-temporary impairments on our cost method investments. During fiscal 2013 , we determined there were other-than-temporary impairments of $7.0 million on certain of our cost method investments which were written down to fair value.
As of November 28, 2014 , the carrying value of our lease receivables approximated fair value, based on Level 2 valuation inputs which include Treasury rates, London Interbank Offered Rates (“LIBOR”) and applicable credit spreads. See Note 15 for further details regarding our investment in lease receivables.
The fair value of our senior notes was $1.6 billion as of November 28, 2014 , based on observable market prices in less active market and categorized as Level 2. See Note 16 for further details regarding our debt.
NOTE 5.  DERIVATIVES AND HEDGING ACTIVITIES
Hedge Accounting
We recognize derivative instruments and hedging activities as either assets or liabilities in our Consolidated Balance Sheets 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.
Fair Value Hedging—Interest Rate Swap
During the third quarter of fiscal 2014, we entered into interest rate swaps designated as a fair value hedge related to our $900 million of 4.75% fixed interest rate senior notes due February 1, 2020 (the “2020 Notes”). In effect, the interest rate swaps convert the fixed interest rate on our 2020 Notes to a floating interest rate based on the LIBOR. Under the terms of the swaps, we will pay monthly interest at the one-month LIBOR rate plus a fixed number of basis points on the $900 million notional amount through February 1, 2020. In exchange, we will receive 4.75% fixed rate interest from the swap counterparties. See Note 16 for further details regarding our debt.
The interest rate swaps are accounted for as fair value hedges and substantially offset the changes in fair value of the hedged portion of the underlying debt that are attributable to the changes in market risk. Therefore, the gains and losses related to changes in the fair value of the interest rate swaps are included in interest and other income (expense), net in our Consolidated Statements of Income. The fair value of the interest rate swaps is reflected in other assets in our Consolidated Balance Sheets.
Economic Hedging—Hedges of Forecasted Transactions
In countries outside the U.S., we transact business in U.S. Dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.
We recognize these contracts as derivative instruments and they are classified as either assets or liabilities on the balance sheet and measured on a recurring basis at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the contract and whether it is designated and qualifies for hedge accounting. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income in our Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income (expense), net in our Consolidated Statements of Income at that time. If we do not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, the changes in fair market value from period to period are recorded in interest and other income (expense), net in our Consolidated Statements of Income. For fiscal 2014 and 2013, net gains or losses recognized in other income relating

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to hedges of forecasted transactions that did not occur were insignificant. For fiscal 2012, there were no such gains or losses recognized in interest and other income, net relating to hedges of forecasted transactions that did not occur.
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 interest and other income, net on our Consolidated Statements of Income. The net gain (loss) recognized in interest and other income (expense), net for cash flow hedges due to hedge ineffectiveness was insignificant for all fiscal years presented. The time value of purchased contracts is recorded in interest and other income (expense), net in our Consolidated Statements of Income.
Balance Sheet Hedging — Hedging of Foreign Currency Assets and Liabilities
We also hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income (expense), net in our Consolidated Statements of Income. These contracts 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, 2014 , total notional amounts of outstanding contracts were $235.5 million which included the notional equivalent of $137.2 million in Euros, $30.9 million in British Pounds and $67.4 million in other foreign currencies. As of November 29, 2013 , total notional amounts of outstanding contracts were $282.8 million which included the notional equivalent of $99.0 million in Euros, $33.8 million in British Pounds and $150.0 million in other foreign currencies. At November 28, 2014 and November 29, 2013 , the outstanding balance sheet hedging derivatives had maturities of 180 days or less.
The fair value of derivative instruments on our Consolidated Balance Sheets as of November 28, 2014 and November 29, 2013 were as follows (in thousands):
 
2014
 
2013
 
Fair Value
Asset
Derivatives
 
Fair Value
Liability
Derivatives
 
Fair Value
Asset
Derivatives
 
Fair Value
Liability
Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange option contracts (1)(3)  
$
31,275

 
$
—

 
$
8,913

 
$
—

Interest rate swap (2)
14,268

 
—

 
—

 
—

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 Foreign exchange forward contracts (1)
1,716

 
663

 
2,978

 
1,067

Total derivatives
$
47,259

 
$
663

 
$
11,891

 
$
1,067

_________________________________________  
(1)  
Included in prepaid expenses and other current assets and accrued expenses for asset derivatives and liability derivatives, respectively, on our Consolidated Balance Sheets.
(2)  
Included in other assets on our Consolidated Balance Sheets.
(3)  
Hedging effectiveness expected to be recognized to income within the next twelve months.
The aggregate fair value of derivative instruments in net asset positions represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by the fair value of liabilities included in master netting arrangements with those same counterparties.

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The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Consolidated Statements of Income for fiscal 2014 , 2013 and 2012 were as follows (in thousands):
 
2014
 
2013
 
2012
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
 
Foreign
Exchange
Option
Contracts
 
Foreign
Exchange
Forward
Contracts
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Net gain (loss) recognized in OCI, net of tax (1)  
$
41,993

 
$
—

 
$
34,677

 
$
—

 
$
23,922

 
$
—

Net gain (loss) reclassified from accumulated
OCI into income, net of tax (2)
$
18,705

 
$
—

 
$
35,914

 
$
—

 
$
30,672

 
$
—

Net gain (loss) recognized in income (3)  
$
(14,962
)
 
$
—

 
$
(21,098
)
 
$
—

 
$
(29,554
)
 
$
—

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

 
$
466

 
$
—

 
$
2,129

 
$
—

 
$
8,742

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

Net gains (losses) recognized in interest and other income (expense), net relating to balance sheet hedging for fiscal 2014 , 2013 and 2012 were as follows (in thousands):
 
 
2014
 
2013
 
2012
Gain (loss) on foreign currency assets and liabilities:
 
 
 
 
 
 
Net realized gain (loss) recognized in other income
 
$
(21,559
)
 
$
(4,783
)
 
$
(5,899
)
Net unrealized gain (loss) recognized in other income
 
17,217

 
2,751

 
(4,720
)
 
 
(4,342
)
 
(2,032
)
 
(10,619
)
Gain (loss) on hedges of foreign currency assets and liabilities:
 
 
 
 
 
 
Net realized gain recognized in other income
 
1,324

 
1,835

 
9,312

Net unrealized gain (loss) recognized in other income
 
(858
)
 
294

 
(570
)
 
 
466

 
2,129

 
8,742

Net gain (loss) recognized in interest and other income (expense), net
 
$
(3,876
)
 
$
97

 
$
(1,877
)

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NOTE 6.  PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following as of November 28, 2014 and November 29, 2013 (in thousands):
 
 
2014
 
2013
Computers and equipment
 
$
855,218

 
$
731,767

Furniture and fixtures
 
82,385

 
82,904

Server hardware under capital lease
 
25,703

 
61,007

Capital projects in-progress
 
68,652

 
54,593

Leasehold improvements
 
240,506

 
235,859

Land
 
106,283

 
106,283

Buildings
 
320,410

 
175,325

Total
 
1,699,157

 
1,447,738

Less accumulated depreciation and amortization
 
(914,034
)
 
(787,964
)
Property and equipment, net
 
$
785,123

 
$
659,774

Depreciation and amortization expense of property and equipment for fiscal 2014 , 2013 and 2012 was $144.2 million , $144.7 million and $134.4 million , respectively.
In August 2014, we exercised our option to purchase the East and West Towers for a total purchase price of $143.2 million . We capitalized the East and West Towers as property and equipment on our Consolidated Balance Sheets at $144.1 million , the lesser of cost or fair value, which represented the total purchase price plus other direct costs associated with the purchase. These buildings will be depreciated over their useful life of 40 years on a straight-line basis. See Note 15 for discussion of our option to purchase the East and West Towers.     
In May 2013 , management approved a plan to sell land, building and other assets located in Waltham, Massachusetts (the “Waltham property assets”) with a total carrying amount of $47.4 million . The decision to sell the Waltham property assets was largely based upon lack of operational needs for a facility of this size, in combination with recent improvements in market conditions for commercial real estate in the area. During May 2013 , we began to actively market the Waltham property assets and we expected to sell the property within one year from management’s approval of the plan and classified the Waltham property assets as held for sale at $23.6 million representing their fair value, net of estimated costs to sell which was the lesser of the fair value less cost to sell or carrying amount of the assets. The fair value, net of estimated cost to sell was measured with the assistance of third-party valuation models which used inputs such as market comparable data for similar properties to be purchased by other operating and investing entities and discounted cash flow techniques as part of the analysis. The fair value measurement was categorized as Level 3 as significant unobservable inputs were used in the valuation analysis. We ceased recognizing depreciation expense on the Waltham property assets upon reclassification. As a result, we recorded a write-down of $23.8 million during fiscal 2013. These charges are included in restructuring and other related charges in our Consolidated Statements of Income for fiscal 2013. In September 2013, we finalized the sale of the Waltham property assets for net proceeds of $24.3 million which approximated the carrying value of the assets at the time of sale.

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NOTE 7.  GOODWILL AND PURCHASED AND OTHER INTANGIBLES  
Goodwill by reportable segment and activity for the years ended November 28, 2014 and November 29, 2013 was as follows (in thousands):
 
 
2012
 
Acquisitions
 
Other (1)
 
2013
 
Acquisitions
 
Other (1)
 
2014
Digital Media
 
$
1,958,330

 
$
91,355

 
$
41

 
$
2,049,726

 
$
12,510

 
$
(4,838
)
 
$
2,057,398

Digital Marketing
 
1,916,468

 
526,739

 
20,621

 
2,463,828

 
—

 
(57,687
)
 
2,406,141

Print and Publishing
 
258,461

 
—

 
(34
)
 
258,427

 
—

 
(4
)
 
258,423

Goodwill
 
$
4,133,259

 
$
618,094

 
$
20,628

 
$
4,771,981

 
$
12,510

 
$
(62,529
)
 
$
4,721,962

_________________________________________  
(1)  
Amounts primarily consist of foreign currency translation adjustments.
Purchased and other intangible assets by reportable segment as of November 28, 2014 and November 29, 2013 were as follows (in thousands):
 
 
2014
 
2013
Digital Media
 
$
147,182

 
$
170,213

Digital Marketing
 
321,086

 
433,245

Print and Publishing
 
1,394

 
1,796

Purchased and other intangible assets, net
 
$
469,662

 
$
605,254

Purchased and other intangible assets subject to amortization as of November 28, 2014 and November 29, 2013 were as follows (in thousands): 
 
2014
 
2013
 
Cost
 
Accumulated Amortization
 
Net
 
Cost
 
Accumulated Amortization
 
Net
Purchased technology
$
405,208

 
$
(264,697
)
 
$
140,511

 
$
423,237

 
$
(220,414
)
 
$
202,823

Customer contracts and relationships
$
376,994

 
$
(143,330
)
 
$
233,664

 
$
389,800

 
$
(111,416
)
 
$
278,384

Trademarks
67,268

 
(36,516
)
 
30,752

 
67,546

 
(27,933
)
 
39,613

Acquired rights to use technology
148,836

 
(86,258
)
 
62,578

 
155,322

 
(76,740
)
 
78,582

Localization
549

 
(382
)
 
167

 
3,404

 
(2,172
)
 
1,232

Other intangibles
3,163

 
(1,173
)
 
1,990

 
16,447

 
(11,827
)
 
4,620

Total other intangible assets
$
596,810

 
$
(267,659
)
 
$
329,151

 
$
632,519

 
$
(230,088
)
 
$
402,431

Purchased and other intangible
    assets, net
$
1,002,018

 
$
(532,356
)
 
$
469,662

 
$
1,055,756

 
$
(450,502
)
 
$
605,254

 
In fiscal 2013, we acquired rights to use certain technology for $51.8 million . Of this cost, an estimated $25.3 million was related to future licensing rights and has been capitalized and is being amortized on a straight-line basis over the estimated useful lives ranging from five to ten years. We estimated that the remaining cost of $26.5 million was related to historical use of licensing rights and was expensed as cost of product revenue.
In fiscal 2014, certain purchased intangibles associated with our acquisitions of Efficient Frontier and Day Software Holding AG became fully amortized and were removed from the Consolidated Balance Sheets. Amortization expense related to purchased and other intangible assets was $152.7 million for fiscal 2014 . Excluding the expense associated with historical use of the acquired rights to use the technology discussed in the paragraph above, amortization expense was $156.9 million for fiscal 2013 . Amortization expense related to purchased and other intangible assets was $146.2 million for fiscal 2012 . Of these amounts, for fiscal 2014 , 2013 and 2012 , $100.2 million , $105.7 million and $100.8 million , respectively, were included in cost of sales.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Purchased and other intangible assets are amortized over their estimated useful lives of 1 to 14 years. As of November 28, 2014 , we expect amortization expense in future periods to be as follows (in thousands):
Fiscal Year
 
Purchased
Technology
 
Other Intangible
Assets
2015
$
64,804

 
$
69,356

2016
26,399

 
63,250

2017
19,004

 
53,442

2018
11,932

 
42,557

2019
7,428

 
40,610

Thereafter
10,944

 
59,936

Total expected amortization expense
$
140,511

 
$
329,151

NOTE 8.  ACCRUED EXPENSES  
Accrued expenses as of November 28, 2014 and November 29, 2013 consisted of the following (in thousands):
 
2014
 
2013
Accrued compensation and benefits
$
320,679

 
$
318,219

Sales and marketing allowances 
75,627

 
66,502

Accrued corporate marketing
28,369

 
22,801

Taxes payable
24,658

 
18,225

Royalties payable
15,073

 
14,778

Accrued interest expense
22,621

 
20,613

Other
196,839

 
195,801

Accrued expenses                                                                                         
$
683,866

 
$
656,939

Other primarily includes general corporate accruals for technical support and local and regional expenses, including our accrual for a loss contingency as of November 28, 2014 . Other is also comprised of deferred rent related to office locations with rent escalations and foreign currency liability derivatives. See Note 15 for further information regarding the loss contingency.
NOTE 9.  INCOME TAXES
Income before income taxes for fiscal 2014 , 2013 and 2012 consisted of the following (in thousands):
 
 
2014
 
2013
 
2012
Domestic
 
$
191,563

 
$
132,916

 
$
512,987

Foreign
 
169,813

 
223,225

 
605,807

Income before income taxes
 
$
361,376

 
$
356,141

 
$
1,118,794



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The provision for income taxes for fiscal 2014 , 2013 and 2012 consisted of the following (in thousands):
 
 
2014
 
2013
 
2012
Current:
 
 
 
 
 
 
United States federal
 
$
26,822

 
$
(53,985
)
 
$
162,574

Foreign
 
51,684

 
65,609

 
59,255

State and local
 
4,713

 
3,317

 
(2,244
)
Total current
 
83,219

 
14,941

 
219,585

Deferred:
 
 

 
 

 
 

United States federal
 
(24,090
)
 
24,139

 
69,374

Foreign
 
(12,895
)
 
(6,215
)
 
(6,082
)
State and local
 
(6,476
)
 
(7,328
)
 
3,142

Total deferred
 
(43,461
)
 
10,596

 
66,434

Tax expense attributable to employee stock plans
 
53,223

 
40,619

 
—

Provision for income taxes
 
$
92,981

 
$
66,156

 
$
286,019

Total income tax expense differs from the expected tax expense (computed by multiplying the U.S. federal statutory rate of 35% by income before income taxes) as a result of the following (in thousands):
 
 
2014
 
2013
 
2012
Computed “expected” tax expense
 
$
126,481

 
$
124,649

 
$
391,578

State tax expense, net of federal benefit
 
(4,411
)
 
(6,304
)
 
11,320

Tax credits
 
(1,166
)
 
(29,087
)
 
(1,226
)
Differences between statutory rate and foreign effective tax rate
 
(33,769
)
 
(39,678
)
 
(122,999
)
Change in deferred tax asset valuation allowance
 
—

 
514

 
(2,144
)
Stock-based compensation (net of tax deduction)
 
8,688

 
9,783

 
10,976

Resolution of income tax examinations
 
(1,896
)
 
(8,421
)
 
(26,687
)
Domestic manufacturing deduction benefit
 
(6,272
)
 
(2,929
)
 
(17,010
)
Tax charge for licensing acquired company technology to foreign subsidiaries
 
—

 
18,935

 
38,849

Other, net
 
5,326

 
(1,306
)
 
3,362

Provision for income taxes
 
$
92,981

 
$
66,156

 
$
286,019


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2014 and November 29, 2013 are presented below (in thousands):
 
 
2014
 
2013
Deferred tax assets:
 
 
 
 
Acquired technology
 
$
9,477

 
$
14,379

Reserves and accruals
 
56,109

 
67,753

Deferred revenue
 
16,311

 
10,218

Unrealized losses on investments
 
6,723

 
9,793

Stock-based compensation
 
58,501

 
64,244

Net operating loss carryforwards of acquired companies
 
9,082

 
9,222

Credit carryforwards
 
41,419

 
43,175

Capitalized expenses
 
—

 
188

Other
 
10,974

 
6,788

Total gross deferred tax assets
 
208,596

 
225,760

Deferred tax asset valuation allowance
 
(22,100
)
 
(21,493
)
Total deferred tax assets
 
186,496

 
204,267

Deferred tax liabilities:
 
 
 
 
Depreciation and amortization
 
73,295

 
89,611

Undistributed earnings of foreign subsidiaries
 
221,845

 
211,417

Acquired intangible assets
 
138,392

 
176,626

Total deferred tax liabilities
 
433,532

 
477,654

Net deferred tax liabilities
 
$
247,036

 
$
273,387

The deferred tax assets and liabilities for fiscal 2014 and 2013 include amounts related to various acquisitions. The total change in deferred tax assets and liabilities includes changes that are recorded to OCI, additional paid-in capital, goodwill, unrecognized tax benefits and retained earnings.
We provide U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S. To the extent that the foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings. As of November 28, 2014 , the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $3.3 billion . The unrecognized deferred tax liability for these earnings is approximately $0.9 billion .
As of November 28, 2014 , we have net operating loss carryforwards of approximately $22.6 million for federal and $3.4 million for foreign. We also have federal, state and foreign tax credit carryforwards of approximately $1.6 million , $26.7 million and $22.4 million , respectively. The net operating loss carryforward assets, federal tax credits and foreign tax credits will expire in various years from fiscal 2015 through 2033 . 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 $49.2 million which have not been recorded in the financial statements pursuant to accounting standards related to stock-based compensation. These amounts are no longer included in our gross or net deferred tax assets. Pursuant to these standards, the benefit of these deferred tax assets will be recorded to equity if and when they reduce taxes payable.
As of November 28, 2014 , a valuation allowance of $22.1 million has been established for certain deferred tax assets related to the impairment of investments and certain state and foreign assets. For fiscal 2014 , the total change in the valuation allowance was $0.6 million .

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Accounting for Uncertainty in Income Taxes
During fiscal 2014 and 2013 , our aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows (in thousands):
 
 
2014
 
2013
Beginning balance
 
$
136,098

 
$
160,468

Gross increases in unrecognized tax benefits – prior year tax positions
 
144

 
20,244

Gross increases in unrecognized tax benefits – current year tax positions
 
18,877

 
16,777

Settlements with taxing authorities
 
(995
)
 
(55,851
)
Lapse of statute of limitations
 
(1,630
)
 
(4,066
)
Foreign exchange gains and losses
 
(3,646
)
 
(1,474
)
Ending balance
 
$
148,848

 
$
136,098

As of November 28, 2014 , 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 $14.6 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 Ireland, California and the U.S. For Ireland, California and the U.S., the earliest fiscal years open for examination are 2008 , 2008 and 2010 , respectively. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examinations. We believe such estimates to be reasonable; however, there can be no assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.
In July 2013 , a U.S. income tax examination covering fiscal 2008 and 2009 was completed. Our accrued tax and interest related to these years was $48.4 million and was previously reported in long-term income taxes payable. We settled the tax obligation resulting from this examination with cash and income tax assets totaling $41.2 million , and the resulting $7.2 million income tax benefit was recorded in the third quarter of fiscal 2013.
The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $5 million .
NOTE 10.  RESTRUCTURING
Fiscal 2014 Restructuring Plan
In the fourth quarter of fiscal 2014, in order to better align our global resources for Digital Media and Digital Marketing, we initiated a restructuring plan to vacate our Research and Development facility in China and our Sales and Marketing facility in Russia. This plan consisted of reductions of approximately 350 full-time positions and we recorded restructuring charges of approximately $18.8 million related to ongoing termination benefits for the positions eliminated. During fiscal 2015, we intend to vacate both of these facilities. The amount accrued for the fair value of future contractual obligations under these operating leases was insignificant.
Other Restructuring Plans
During the past several years, we have implemented Other Restructuring Plans consisting of reductions in workforce and the consolidation of facilities to better align our resources around our business strategies. As of November 28, 2014 , we considered our Other Restructuring Plans to be substantially complete. We continue to make cash outlays to settle obligations under these plans, however the current impact to our Consolidated Financial Statements is not significant.

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Summary of Restructuring Plans
The following table sets forth a summary of restructuring activities related to all of our restructuring plans described above during fiscal 2014 (in thousands):
 
November 29,
2013
 
Costs
Incurred
 
Cash
Payments
 
Other
Adjustments
 
November 28,
2014
Fiscal 2014 Restructuring Plan:
 
 
 
 
 
 
 
 
 
Termination benefits
$
—

 
$
18,823

 
$
(4,382
)
 
$
20

 
$
14,461

Cost of closing redundant facilities
—

 
557

 
(57
)
 
(28
)
 
472

Other Restructuring Plans:
 
 
 
 
 
 
 
 
 
Termination benefits
2,233

 
—

 
(1,357
)
 
(339
)
 
537

Cost of closing redundant facilities
11,655

 
528

 
(5,215
)
 
(124
)
 
6,844

Total restructuring plans
$
13,888

 
$
19,908

 
$
(11,011
)
 
$
(471
)
 
$
22,314

Accrued restructuring charges of $22.3 million as of November 28, 2014 include $17.1 million recorded in accrued restructuring, current and $5.2 million related to long-term facilities obligations recorded in accrued restructuring, non-current on our Consolidated Balance Sheets. We expect to pay accrued termination benefits through fiscal 2015 and facilities-related liabilities under contract through fiscal 2021 of which approximately 45% will be paid through 2016.
NOTE 11.  BENEFIT PLANS
Retirement Savings Plan
In 1987, we adopted an Employee Investment Plan, qualified under Section 401(k) of the Internal Revenue Code, which is a retirement savings plan covering substantially all of our U.S. employees, now referred to as the Adobe 401(k) Retirement Savings Plan. Under the plan, eligible employees may contribute up to 65% of their pretax or after-tax salary, subject to the Internal Revenue Service annual contribution limits. In fiscal 2014 , we matched 50% of the first 6% of the employee’s eligible compensation. We contributed $24.8 million , $22.3 million and $19.4 million in fiscal 2014 , 2013 and 2012 , respectively. Adobe is under no obligation to continue matching future employee contributions and at the Company’s discretion may change its practices at any time.
Deferred Compensation Plan
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, 2014 and November 29, 2013 , the invested amounts under the Deferred Compensation Plan total $25.7 million and $19.8 million , respectively and were recorded as other assets on our Consolidated Balance Sheets. As of November 28, 2014 and November 29, 2013 , $31.0 million and $22.0 million , respectively, was recorded as long-term liabilities to recognize undistributed deferred compensation due to employees.

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NOTE 12.  STOCK-BASED COMPENSATION
Our stock-based compensation programs are long-term retention programs that are intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. We have the following stock-based compensation plans and programs:
Restricted Stock Unit Plans
We grant restricted stock units to all eligible employees under our 2003 Equity Incentive Plan, as amended ( “ 2003 Plan ” ), and our 2005 Equity Incentive Assumption Plan (“2005 Assumption Plan”). Restricted stock units granted under these plans as part of our annual review process vest annually over three years. Other restricted stock units granted under these plans generally vest over four years, the majority of which vest 25% annually. Certain grants have other vesting periods approved by our Board of Directors or an authorized committee of the Board of Directors.
We grant performance awards to officers and key employees under our 2003 Plan. Performance awards granted under these plans from fiscal 2009 to fiscal 2012 vest annually over three years, and performance awards granted in fiscal 2013 and 2014 cliff-vest after three years. Performance awards granted prior to fiscal 2009 vest annually over four years.
As of November 28, 2014 , we had reserved 163.2 million and 5.7 million shares of common stock for issuance under our 2003 Plan and 2005 Assumption Plan, respectively, and had 45.7 million and 28.6 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, 2014 , we had reserved 93.0 million shares of our common stock for issuance under the ESPP and approximately 12.9 million shares remain available for future issuance.
Stock Option Plans
The 2003 Plan and the 2005 Assumption Plan allows us to grant options to all employees, including executive officers, outside consultants and non-employee directors. These 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 four years for all of these plans. Options granted under these plans generally expire seven years from the effective date of grant.
The Executive Compensation Committee of Adobe’s Board of Directors eliminated the use of stock option grants for all employees in fiscal 2012. Stock option grants to non-employee directors were minimal in fiscal 2013, and in December 2013 the Board of Directors eliminated the use of options for directors going forward.
Performance Share Programs
On January 24, 2014, our Executive Compensation Committee approved the 2014 Performance Share Program, including the award calculation methodology, under the terms of our 2003 Equity Incentive Plan. Under our 2014 Performance Share Program (“2014 Program”), shares may be earned based on the achievement of an objective relative total stockholder return measured over a three-year performance period. The purpose of the 2014 Program is to help focus key employees on building stockholder value, provide significant award potential for achieving outstanding company performance and enhance the ability of Adobe to attract and retain highly talented and competent individuals. Performance share awards will be awarded and fully vest upon the Executive Compensation Committee’s certification of the level of achievement following the three-year anniversary of the grant date on January 24, 2017. Participants in the 2014 Program generally have the ability to receive up to 200% of the target number of shares originally granted.

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Issuance of Shares
Upon exercise of stock options, vesting of restricted stock and performance shares, and purchases of shares under the ESPP, 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 13 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 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.
We eliminated the use of stock option grants for all employees effective fiscal 2012, and for all of the non-employee directors effective fiscal 2014. The assumptions used to value our option grants prior to fiscal 2014 were as follows:
 
Fiscal Years
 
2013
 
2012
Expected life (in years)
3.2

 
3.9 - 4.2
Volatility
27
%
 
31 - 34%
Risk free interest rate
0.36
%
 
0.54 - 0.71%
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:
 
Fiscal Years
 
2014
 
2013
 
2012
Expected life (in years)
0.5 - 2.0
 
0.5 - 2.0
 
0.5 - 2.0
Volatility
26 - 28%
 
26 - 30%
 
30 - 36%
Risk free interest rate
0.06 - 0.47%
 
0.09 - 0.34%
 
0.06 - 0.30%
 
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.

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We recognize the estimated compensation cost of performance shares, net of estimated forfeitures. The fiscal 2014 and 2013 awards are earned upon achievement of an objective total stockholder return measure at the end of the three-year performance period, as described above. The fair value of the awards was fixed at grant date and will be amortized over the longer of the remaining performance or service period. In previous years , the awards were earned upon attainment of identified performance goals, some of which contained discretionary metrics. As such, these awards were measured based on our traded stock price at the end of each reporting period until achieved. The fair value of the awards were based on the achievement date and amortized over the longer of the remaining performance or service period.
Summary of Restricted Stock Units
Restricted stock unit activity for fiscal 2014 , 2013 and 2012 was as follows (in thousands):
 
2014
 
2013
 
2012
Beginning outstanding balance
17,948

 
18,415

 
16,871

Awarded
4,413

 
7,236

 
9,431

Released
(7,502
)
 
(6,224
)
 
(5,854
)
Forfeited
(1,295
)
 
(1,479
)
 
(2,147
)
Increase due to acquisition
—

 
—

 
114

Ending outstanding balance
13,564

 
17,948

 
18,415

 
The weighted average grant date fair values of restricted stock units granted during fiscal 2014 , 2013 and 2012 were $61.16 , $39.87 and $31.36 , respectively. The total fair value of restricted stock units vested during fiscal 2014 , 2013 and 2012 was $457.3 million , $249.5 million and $180.1 million , respectively.

Information regarding restricted stock units outstanding at November 28, 2014 , November 29, 2013 and November 30, 2012 is summarized below:
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value (*)
(millions)
2014
 
 
 
 
 
Restricted stock units outstanding
13,564

 
0.94
 
$
999.4

Restricted stock units vested and expected to vest
12,352

 
0.87
 
$
903.1

2013
 

 
 
 
 

Restricted stock units outstanding
17,948

 
1.09
 
$
1,019.1

Restricted stock units vested and expected to vest
16,265

 
1.02
 
$
920.5

2012
 
 
 
 
 
Restricted stock units outstanding
18,415

 
1.37
 
$
637.3

Restricted stock units vested and expected to vest
16,289

 
1.26
 
$
562.8

_________________________________________  
(*)  
The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of November 28, 2014 , November 29, 2013 and November 30, 2012 were $73.68 , $56.78 and $34.61 , respectively. 

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Summary of Performance Shares  
As of November 28, 2014 , the shares awarded under our 2013 and 2014 Performance Share Programs are yet to be achieved.The following table sets forth the summary of performance share activity under our 2013 and 2014 Performance Share Programs for the fiscal year ended November 28, 2014 (in thousands): 
 
2014
 
2013
 
Shares
Granted
 
Maximum
Shares Eligible
to Receive
 
Shares
Granted
 
Maximum
Shares Eligible
to Receive
Beginning outstanding balance
854

 
1,707

 
—

 
—

Awarded
709

 
1,417

 
946

 
1,891

Forfeited
(46
)
 
(90
)
 
(92
)
 
(184
)
Ending outstanding balance
1,517

 
3,034

 
854

 
1,707


In the first quarter of fiscal 2013, the Executive Compensation Committee certified the actual performance achievement of participants in the 2012 Performance Share Program (the “2012 Program”). Based upon the achievement of specific and/or market-based performance goals outlined in the 2012 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 116% of target or approximately 1.3 million shares for the 2012 Program. One third of the shares under the 2012 Program vested in the first quarter of fiscal 2013 and the remaining two thirds vest evenly on the following two anniversaries of the grant, contingent upon the recipient’s continued service to Adobe.
In the first quarter of fiscal 2012, the Executive Compensation Committee certified the actual performance achievement of participants in the 2011 Performance Share Program (the “2011 Program”). Based upon the achievement of goals outlined in the 2011 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 130% of target or approximately 0.5 million shares for the 2011 Program. One-third of the shares under the 2011 Program vested in the first quarter of fiscal 2012 and the remaining two-thirds vest evenly on the following two annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe.
The following table sets forth the summary of performance share activity under our 2010, 2011 and 2012 programs, based upon share awards actually achieved, for the fiscal years ended November 28, 2014 , November 29, 2013 and November 30, 2012 (in thousands):
 
2014
 
2013
 
2012
Beginning outstanding balance
861

 
388

 
405

Achieved
—

 
1,279

 
492

Released
(486
)
 
(665
)
 
(464
)
Forfeited
(21
)
 
(141
)
 
(45
)
Ending outstanding balance
354

 
861

 
388

 
The total fair value of performance awards vested during fiscal 2014 , 2013 and 2012 was $28.7 million , $25.4 million and $14.4 million , respectively.


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Information regarding performance shares outstanding at November 28, 2014 , November 29, 2013 and November 30, 2012 is summarized below: 
 
Number of
Shares
(thousands)
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value (*)
(millions)
2014
 
 
 
 
 
Performance shares outstanding
354

 
0.16
 
$
26.1

Performance shares vested and expected to vest
348

 
0.16
 
$
25.5

2013
 

 
 
 
 

Performance shares units outstanding
861

 
0.58
 
$
48.9

Performance shares vested and expected to vest
817

 
0.56
 
$
46.3

2012
 
 
 
 
 
Performance shares units outstanding
388

 
0.54
 
$
13.4

Performance shares vested and expected to vest
369

 
0.51
 
$
12.7

_________________________________________  
(*)  
The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of November 28, 2014 , November 29, 2013 and November 30, 2012 were $73.68 , $56.78 and $34.61 , respectively.       
Summary of Employee Stock Purchase Plan Shares
The weighted average subscription date fair value of shares under the ESPP during fiscal 2014 , 2013 and 2012 were $17.02 , $11.40 and $9.09 , respectively. Employees purchased 2.9 million shares at an average price of $34.76 , 3.4 million shares at an average price of $25.71 , and 3.2 million shares at an average price of $23.81 , respectively, for fiscal 2014 , 2013 and 2012 . The intrinsic value of shares purchased during fiscal 2014 , 2013 and 2012 was $93.4 million , $58.5 million and $22.8 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.

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Summary of Stock Options 
There were no stock option grants during fiscal 2014 . Stock option activity under our stock option program for fiscal 2014 , 2013 and 2012 was as follows (shares in thousands):
 
Outstanding Options
 
Number of
Shares
 
Weighted
Average
Exercise
Price
December 2, 2011
34,802

 
$
31.47

Granted
57

 
$
32.19

Exercised
(6,754
)
 
$
23.61

Cancelled
(4,692
)
 
$
33.07

Increase due to acquisition
1,104

 
$
3.23

November 30, 2012
24,517

 
$
32.09

Granted
25

 
$
45.03

Exercised
(15,872
)
 
$
32.15

Cancelled
(1,584
)
 
$
37.37

Increase due to acquisition
273

 
$
6.82

November 29, 2013
7,359

 
$
29.93

Granted
—

 
$
—

Exercised
(4,055
)
 
$
30.88

Cancelled
(153
)
 
$
25.37

Increase due to acquisition
22

 
$
29.44

November 28, 2014
3,173

 
$
28.92

 
The weighted average fair values of options granted during fiscal 2013 and 2012 were $8.64 and $8.50 , respectively.
The total intrinsic value of options exercised during fiscal 2014 , 2013 and 2012 was $141.3 million , $181.8 million and $62.6 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.

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Information regarding stock options outstanding at November 28, 2014 , November 29, 2013 and November 30, 2012 is summarized below:
 
Number of
Shares
(thousands)
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(years)
 
Aggregate
Intrinsic
Value (*)
(millions)
2014
 
 
 
 
 
 
 
Options outstanding
3,173

 
$
28.92

 
3.19
 
$
142.0

Options vested and expected to vest
3,153

 
$
29.00

 
3.17
 
$
140.9

Options exercisable
2,786

 
$
30.24

 
2.85
 
$
121.0

2013
 

 
 

 
 
 
 

Options outstanding
7,359

 
$
29.93

 
3.22
 
$
197.6

Options vested and expected to vest
7,242

 
$
30.05

 
3.18
 
$
193.6

Options exercisable
5,752

 
$
31.28

 
2.65
 
$
146.7

2012
 
 
 
 
 
 
 
Options outstanding
24,517

 
$
32.09

 
2.74
 
$
103.3

Options vested and expected to vest
24,158

 
$
32.15

 
2.70
 
$
100.9

Options exercisable
20,668

 
$
33.06

 
2.27
 
$
73.6

_________________________________________  
(*)  
The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of November 28, 2014 , November 29, 2013 and November 30, 2012 were $73.68 , $56.78 and $34.61 , respectively.
All equity awards 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.
Grants to Non-Employee Directors  
The 2003 Plan (and prior to fiscal 2008, the Directors Plan) provides for the granting of non-qualified stock options and restricted stock units to non-employee directors. The initial equity grant to a new non-employee director is a restricted stock unit award having an aggregate value of $0.5 million based on the average stock price over the 30 calendar days ending on the day before the date of grant. The initial equity award vests annually over 2 years. Non-employee directors receiving initial equity grants will not be eligible to receive annual equity grants until the second annual meeting after joining the Board of Directors.
Annual equity grants to non-employee directors shall have an aggregate value of $0.3 million as based on the average stock price over the 30 calendar days ending on the day before the date of grant and vest 100% on the day preceding the next annual meeting. Starting in fiscal 2014, we eliminated the use of non-qualified stock options for our non-employee directors and restricted stock units became the primary form of their annual equity grants. Prior to fiscal 2014, a non-employee director could elect to receive the annual equity grant as either 100% options, 100% restricted stock units or 50% of each. The target grant value converted to stock options was based on a 1 : 3 conversion of restricted stock units to stock options.
Restricted stock units granted to directors for fiscal 2014 , 2013 and 2012 were as follows (in thousands):
 
2014
 
2013
 
2012
Restricted stock units granted to existing directors
48

 
36

 
42

Restricted stock units granted to new directors
—

 
14

 
41


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Non-employee director options granted in fiscal 2013 and 2012 as part of the annual equity awards process vested 100% on the day preceding the fiscal 2014 and fiscal 2013 annual meeting, respectively, and had a seven -year term. The exercise price of the options issued were equal to the fair market value of our common stock on the date of grant. Options granted to directors for fiscal 2013 and 2012 were as follows (shares in thousands):
 
2013
 
2012
Options granted to existing directors
25

 
43

Exercise price
$
45.03

 
$
33.18

 
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 tranche of the award.
As of November 28, 2014 , there was $414.5 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 1.6 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 for fiscal 2014 , 2013 and 2012 were as follows (in thousands):
 
    Income Statement Classifications
 
Cost of
Revenue–
Subscription
 
Cost of
Revenue–
Services and Support
 
Research and Development
 
Sales and
Marketing
 
General and Administrative
 
 
Total (1)
Option Grants and Stock
Purchase Rights
 
 
 
 
 
 
 
 
 
 
 
2014
$
1,855

 
$
4,000

 
$
15,125

 
$
17,706

 
$
6,476

 
$
45,162

2013
$
2,059

 
$
3,413

 
$
18,188

 
$
21,283

 
$
8,410

 
$
53,353

2012
$
2,840

 
$
4,130

 
$
24,823

 
$
31,379

 
$
15,455

 
$
78,627

Restricted Stock and Performance
Share Awards
 

 
 

 
 

 
 

 
 

 
 

2014
$
5,878

 
$
6,619

 
$
107,029

 
$
102,909

 
$
66,104

 
$
288,539

2013
$
5,052

 
$
6,961

 
$
102,464

 
$
101,423

 
$
59,734

 
$
275,634

2012
$
3,100

 
$
9,461

 
$
83,349

 
$
76,359

 
$
47,606

 
$
219,875

_________________________________________  
(1)  
During fiscal 2014 , 2013 and 2012 , we recorded tax benefits of $72.4 million , $70.7 million and $61.5 million , respectively.

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NOTE 13.  STOCKHOLDERS’ EQUITY
Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) and activity, net of related taxes, for fiscal 2014 were as follows (in thousands):
 
November 29,
2013
 
Increase / Decrease
 
Reclassification Adjustments
 
November 28,
2014
Net unrealized gains on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains on available-for-sale securities
$
10,178

 
$
2,084

 
$
(4,025
)
 
$
8,237

Unrealized losses on available-for-sale securities
(937
)
 
231

 
97

 
(609
)
Total net unrealized gains on available-for-sale securities
9,241

 
2,315

 
(3,928
)
(1  
)  
7,628

Net unrealized gains on derivative instruments designated as
hedging instruments
5,367

 
41,993

 
(18,705
)
(2  
)  
28,655

Cumulative foreign currency translation adjustments
31,495

 
(75,872
)
 
—

 
(44,377
)
Total accumulated other comprehensive income (loss),
net of taxes
$
46,103

 
$
(31,564
)
 
$
(22,633
)
 
$
(8,094
)
_________________________________________  
(1)  
Classified in interest and other income (expense), net.
(2)  
Classified as revenue.

The following table sets forth the taxes related to each component of other comprehensive income for fiscal 2014 , 2013 and 2012 (in thousands):
 
 
2014
 
2013
 
2012
Available-for-sale securities:
 
 
 
 
 
 
Unrealized gains / losses
 
$
1

 
$
169

 
$
(686
)
Reclassification adjustments
 
(8
)
 
(2
)
 
(1
)
Subtotal available-for-sale securities
 
(7
)
 
167

 
(687
)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Unrealized gains on derivative instruments*
 
—

 
—

 
—

Reclassification adjustments*
 
—

 
—

 
—

Subtotal derivatives designated as hedging instruments
 
—

 
—

 
—

Foreign currency translation adjustments
 
(1,868
)
 
2,789

 
(1,314
)
Total taxes, other comprehensive income (loss)
 
$
(1,875
)
 
$
2,956

 
$
(2,001
)
_________________________________________  
(*)  
Taxes related to derivative instruments were zero for all fiscal years based on the tax jurisdiction where the derivative instruments were executed.
Stock Repurchase Program  
We are currently repurchasing common stock under our $2.0 billion authority granted by our Board of Directors in April 2012.
Subsequent to November 28, 2014 , as part of our $2.0 billion stock repurchase program, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $200.0 million . This amount will be classified as treasury stock on our Consolidated Balance Sheets. Upon completion of the $200.0 million stock repurchase agreement, there is no remaining balance under our current authority.

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Subsequent to November 28, 2014 , the Board of Directors approved a new stock repurchase program granting the company authority to repurchase up to $2.0 billion in common stock through the end of fiscal 2017. The new stock repurchase program approved by our Board of Directors is similar to our previous $2.0 billion stock repurchase program.
During fiscal 2014 , 2013 and 2012 , we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $600.0 million , $1.1 billion and $405.0 million , respectively. The $600.0 million and $1.1 billion prepayments during fiscal 2014 and 2013 were under the $2.0 billion stock repurchase authority. Of the $405.0 million of prepayments during fiscal 2012 , $100.0 million were under the $2.0 billion stock repurchase program and the remaining $305.0 million were under our previous $1.6 billion stock repurchase authority. We enter 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 2014 , we repurchased approximately 10.9 million shares at an average price of $63.48 through structured repurchase agreements entered into during fiscal 2014 and fiscal 2013 . During fiscal 2013 , we repurchased approximately 21.6 million shares at an average price of $46.47 through structured repurchase agreements entered into during fiscal 2013 and fiscal 2012 . During fiscal 2012 , we repurchased approximately 11.5 million shares at an average price per share of $32.29 through structured repurchase agreements entered into during fiscal 2012 .
For fiscal 2014 , 2013 and 2012 , the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by November 28, 2014 , November 29, 2013 and November 30, 2012 were excluded from the computation of earnings per share. As of November 28, 2014 , $40.3 million of prepayments remained under the agreement.

NOTE 14.  NET INCOME PER SHARE
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 2014 , 2013 and 2012 (in thousands, except per share data):
 
 
2014
 
2013
 
2012
Net income
 
$
268,395

 
$
289,985

 
$
832,775

Shares used to compute basic net income per share
 
497,867

 
501,372

 
494,731

Dilutive potential common shares:
 
 
 
 
 
 
Unvested restricted stock and performance share awards
 
8,586

 
8,736

 
7,624

Stock options
 
2,027

 
3,368

 
366

Shares used to compute diluted net income per share
 
508,480

 
513,476

 
502,721

Basic net income per share
 
$
0.54

 
$
0.58

 
$
1.68

Diluted net income per share
 
$
0.53

 
$
0.56

 
$
1.66

For fiscal 2014 and 2013 , options to purchase shares of common stock with exercise prices greater than the average fair market value of our stock of $65.93 and $45.08 , respectively, were not included in the calculation because the effect would have been anti-dilutive. The number of shares of common stock under these options was immaterial. For fiscal 2012 , options to purchase approximately 19.4 million shares of common stock with exercise prices greater than the annual average fair market value of our stock of $31.98 were not included in the calculation because the effect would have been anti-dilutive.

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NOTE 15.  COMMITMENTS AND CONTINGENCIES
  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 2014 , 2013 and 2012 were as follows (in thousands):
 
 
2014
 
2013
 
2012
Rent expense
 
$
111,149

 
$
118,976

 
$
105,809

Less: sublease income
 
1,412

 
3,057

 
2,330

Net rent expense                                                                        
 
$
109,737

 
$
115,919

 
$
103,479

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 2014, we exercised our option to purchase the East and West Towers for a total purchase price of $143.2 million . Upon purchase, our investment in the lease receivable of $126.8 million was credited against the total purchase price and we were no longer required to maintain a standby letter of credit as stipulated in the East and West Towers lease agreement. We capitalized the East and West Towers as property and equipment on our Consolidated Balance Sheets at $144.1 million , the lesser of cost or fair value, which represented the total purchase price plus other direct costs associated with the purchase. See Note 6 for discussion of our East and West Towers purchase.
The lease agreement for the Almaden Tower is effective through March 2017. We are the investors in the lease receivable related to the Almaden Tower lease in the amount of $80.4 million , which is recorded as investment in lease receivable on our Consolidated Balance Sheets. As of November 28, 2014 , the carrying value of the lease receivable related to the Almaden Tower approximated fair value. Under the agreement for the Almaden Tower, we have the option to purchase the building at any time during the lease term for $103.6 million . If we purchase the building, the investment in the lease receivable may be credited against the purchase price. The residual value guarantee under the Almaden Tower obligation is $89.4 million .
The Almaden Tower lease is subject to standard covenants including certain financial ratios that are reported to the lessor quarterly. As of November 28, 2014 , we were in compliance with all of the covenants. In the case of a default, the lessor may demand we purchase the building for an amount equal to the lease balance, or require that we remarket or relinquish the building. If we choose to remarket or are required to do so upon relinquishing the building, we are bound to arrange the sale of the building 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 less our investment in lease receivable. The Almaden Tower lease qualifies for operating lease accounting treatment and, as such, the building and the related obligation are not included in our Consolidated Balance Sheets.  See Note 16 for discussion of our capital lease obligation.
Unconditional Purchase Obligations
Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business.

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The following table summarizes our non-cancellable unconditional purchase obligations,   operating leases and capital leases for each of the next five years and thereafter as of November 28, 2014 (in thousands):
 
 
 
 
 
  Operating Leases
 
Capital Leases
Fiscal Year
 
 
Purchase
Obligations
 
Future
Minimum
Lease
Payments
 
Future
Minimum
Sublease
Income
 
Future
Minimum
Lease
Payments
2015
 
$
227,910

 
$
44,769

 
$
2,140

 
$
3,280

2016
 
28,588

 
40,676

 
2,102

 
—

2017
 
13,641

 
30,943

 
2,068

 
—

2018
 
14,285

 
26,547

 
1,705

 
—

2019
 
4,492

 
23,774

 
1,776

 
—

Thereafter
 
—

 
48,644

 
2,966

 
—

Total
 
$
288,916

 
$
215,353

 
$
12,757

 
$
3,280

Less: interest
 
 

 
 

 
 

 
(11
)
Total
 
 

 
 

 
 

 
$
3,269

 
The table above includes operating lease commitments related to our restructured facilities. See Note 10 for information regarding our restructuring charges.
Guarantees
The Almaden Tower lease provides for a residual value guarantee as noted above. 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 Sheets. As such, we recognized $3.0 million in liabilities, related to the extended Almaden Tower lease. This liability was recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance was amortized to our Consolidated Statements of Income over the life of the original lease. As of November 28, 2014 there was no remaining balance of the unamortized portion of the fair value of the residual value guarantee remaining on our Consolidated Balance Sheets.
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 revenue on our Consolidated Statements of Income, was approximately $45.2 million , $40.2 million and $29.6 million in fiscal 2014 , 2013 and 2012 , respectively.
Indemnifications
In the ordinary 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 and from time to time, we are subject to claims by our customers under these indemnification provisions. 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.

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Legal Proceedings
In connection with disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation may be very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. Third-party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements and service agreements.
Between May 4, 2011 and July 14, 2011, five putative class action lawsuits were filed in Santa Clara Superior Court and Alameda Superior Court in California. On September 12, 2011, the cases were consolidated into In Re High-Tech Employee Antitrust Litigation (“HTEAL”) pending in the United States District Court for the Northern District of California, San Jose Division. In the consolidated complaint, Plaintiffs alleged that Adobe, along with Apple, Google, Intel, Intuit, Lucasfilm and Pixar, agreed not to recruit each other’s employees in violation of Federal and state antitrust laws. Plaintiffs claim the alleged agreements suppressed employee compensation and deprived employees of career opportunities.  Plaintiffs seek injunctive relief, monetary damages, treble damages, costs and attorneys fees. All defendants deny the allegations and that they engaged in any wrongdoing of any kind. On October 24, 2013, the court certified a class of all persons who worked in the technical, creative, and/or research and development fields on a salaried basis in the United States for one or more of the following: (a) Apple from March 2005 through December 2009; (b) Adobe from May 2005 through December 2009; (c) Google from March 2005 through December 2009; (d) Intel from March 2005 through December 2009; (e) Intuit from June 2007 through December 2009; (f) Lucasfilm from January 2005 through December 2009; or (g) Pixar from January 2005 through December 2009, excluding retail employees, corporate officers, members of the boards of directors, and senior executives of all defendants. During the second quarter of fiscal 2014, the parties reached a settlement to resolve this lawsuit, subject to the Court’s approval. On August 8, 2014, the Court rejected the settlement agreement jointly submitted by the parties. During the first quarter of fiscal 2015, the parties reached another agreement to settle the litigation. On January 15, 2015, the agreement was submitted to the Court seeking preliminary approval of the settlement. The hearing for preliminary approval is set for March 2015. We accrued a loss contingency of $10.0 million associated with this matter during the first quarter of fiscal 2014.
In addition to intellectual property disputes and the other litigation matter described above, we are subject to legal proceedings, claims and investigations in the ordinary course of business, including claims relating to commercial, employment and other matters. Some of these disputes and legal proceedings may include speculative claims for substantial or indeterminate amounts of damages. We consider all claims on a quarterly basis in accordance with GAAP and based on known facts assess whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our financial statements. This determination is then reviewed and discussed with our Audit Committee and our independent registered public accounting firm.
We make 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. Unless otherwise specifically disclosed here or in our Notes to Consolidated Financial Statements, we have determined that no provision for liability nor disclosure is required related to any claim against us because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.
All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. 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 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 laws. We believe we have valid defenses with respect to such counter-

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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.
NOTE 16.  DEBT
Our debt as of November 28, 2014 and November 29, 2013 consisted of the following (in thousands):
 
2014
 
2013
Notes
$
1,496,778

 
$
1,496,028

Fair value of interest rate swap
14,268

 
—

Adjusted carrying value of Notes
1,511,046

 
1,496,028

Capital lease obligations
3,269

 
17,945

Total debt and capital lease obligations
1,514,315

 
1,513,973

Less: current portion
603,229

 
14,676

Debt and capital lease obligations
$
911,086

 
$
1,499,297

  Notes
In February 2010, we issued $600 million of 3.25% senior notes due February 1, 2015 (the “2015 Notes”) and $900 million of 4.75% senior notes due February 1, 2020 (the “2020 Notes” and, together with the 2015 Notes, the “Notes”). Our proceeds were $1.5 billion and were net of an issuance discount of $6.6 million . The Notes rank equally with our other unsecured and unsubordinated indebtedness. In addition, we incurred issuance costs of $10.7 million . Both the discount and issuance costs are being amortized to interest expense over the respective terms of the Notes using the effective interest method.
The effective interest rate including the discount and issuance costs is 3.45% for the 2015 Notes and 4.92% for the 2020 Notes. Interest is payable semi-annually, in arrears, on February 1 and August 1, commencing on August 1, 2010 . During fiscal 2014 , we made both semi-annual interest payments on our Notes totaling $62.2 million . In June 2014, we entered into interest rate swaps with a total notional amount of $900 million designated as a fair value hedge related to our 2020 Notes. The effect of such interest rate swaps is to effectively convert the fixed interest rate on our 2020 Notes to a floating interest rate based on the LIBOR plus a fixed number of basis points. Under the terms of the swap, we will pay monthly interest at the one-month LIBOR floating interest plus a spread of a fixed number of basis points on the $900 million notional amount. In exchange, we will receive 4.75% fixed rate interest from the swap counterparties. See Note 5 for further details regarding our interest rate swap derivatives.
The gains and losses related to changes in the fair value of the interest rate swaps are included in interest and other income (expense), net in our Consolidated Statement of Income and substantially offset the changes in the fair value of the hedged portion of the underlying debt that are attributable to the changes in market risk. The fair value of the interest rate swaps is reflected in other assets in our Consolidated Balance Sheets. The carrying value of the 2020 Notes was adjusted by an amount that is equal and offsetting to the fair value of the swaps. The interest receivable from the swaps based on the fixed interest rate and the interest payable based on the effective interest rates are recorded at gross in the prepaid expenses and other current assets account and accrued expenses account, respectively, in our Consolidated Balance Sheets.
Based on quoted prices in inactive markets, the fair value of the Notes was $1.6 billion as of November 28, 2014 . The total fair value of $1.6 billion excludes the effect of fair value hedge of the 2020 Notes for which we entered into interest rate swaps for the total notional amount $900 million .
We may redeem the Notes at any time, subject to a make whole premium. In addition, upon the occurrence of certain change of control triggering events, we may be required to repurchase the Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The Notes also include covenants that limit our ability to grant liens on assets and to enter into sale and leaseback transactions, subject to significant allowances. As of November 28, 2014 , we were in compliance with all of the covenants.
During the first quarter of fiscal 2014, we reclassified $599.8 million as current debt on our Consolidated Balance Sheets, which represented the 2015 Notes, net of unamortized original issuance discount. We intend to refinance the current portion of our debt on or before the due date using either newly issued debt or drawings from our existing revolving credit agreement.

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Credit Agreement
On March 2, 2012, we entered into a five-year $1.0 billion senior unsecured revolving credit agreement (the “Credit Agreement”), providing for loans to us and certain of our subsidiaries. Pursuant to the terms of the Credit Agreement, we may, subject to the agreement of the applicable lenders, request up to an additional $500.0 million in commitments, for a maximum aggregate commitment of $1.5 billion . Loans under the Credit Agreement will bear interest at either (i) LIBOR plus a margin, based on our debt ratings, ranging from 0.795% and 1.30% or (ii) the base rate, which is defined as the highest of (a) the agent’s prime rate, (b) the federal funds effective rate plus 0.50% or (c) LIBOR plus 1.00% plus a margin, based on our debt ratings, ranging from 0.00% to 0.30% . Commitment fees are payable quarterly at rates between 0.08% and 0.20% per year also based on our public debt ratings. Subject to certain conditions stated in the Credit Agreement, we and any of our subsidiaries designated as additional borrowers may borrow, prepay and re-borrow amounts under the revolving credit facility at any time during the term of the Credit Agreement.
The Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and indebtedness, certain merger and acquisition transactions, dispositions and other matters, all subject to certain exceptions. The financial covenant, based on a quarterly financial test, requires us not to exceed a maximum leverage ratio.
On March 1, 2013, we exercised an option under the Credit Agreement to extend the maturity date of the Credit Agreement by one year to March 2, 2018. The facility will terminate and all amounts owing thereunder will be due and payable on the maturity date unless (a) the commitments are terminated earlier upon the occurrence of certain events, including an event of default, or (b) the maturity date is further extended upon our request, subject to the agreement of the lenders.
As of November 28, 2014 , there were no outstanding borrowings under this Credit Agreement and we were in compliance with all covenants.
Capital Lease Obligation
In fiscal 2013, we entered into a sale-leaseback agreement totaling $25.7 million over a period of 24 months. This transaction was classified as a capital lease obligation and was recorded at fair value. As of November 28, 2014 , our capital lease obligations of $3.3 million are presented as current debt in our Consolidated Balance Sheets.

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NOTE 17.  NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense) for fiscal 2014 , 2013 and 2012 included the following (in thousands):
 
 
2014
 
2013
 
2012
Interest and other income (expense), net:
 
 
 
 
 
 
Interest income
 
$
21,355

 
$
21,887

 
$
24,549

Foreign exchange gains (losses)
 
(18,840
)
 
(21,001
)
 
(31,431
)
Realized gains on fixed income investment
 
4,024

 
4,090

 
3,152

Realized losses on fixed income investment
 
(97
)
 
(1,077
)
 
(278
)
Other
 
825

 
1,042

 
594

Interest and other income (expense), net
 
$
7,267

 
$
4,941

 
$
(3,414
)
Interest expense
 
$
(59,732
)
 
$
(67,508
)
 
$
(67,487
)
Investment gains (losses), net:
 
 

 
 
 
 
Realized investment gains
 
$
1,298

 
$
1,783

 
$
8,918

Unrealized investment gains
 
912

 
1,251

 
940

Realized investment losses
 
(1,054
)
 
(7,049
)
 
(104
)
Unrealized investment losses
 
—

 
—

 
(250
)
Investment gains (losses), net
 
$
1,156

 
$
(4,015
)
 
$
9,504

Non-operating income (expense), net
 
$
(51,309
)
 
$
(66,582
)
 
$
(61,397
)

NOTE 18.  INDUSTRY SEGMENT, GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments.
Our CEO, the chief operating decision maker, reviews revenue and gross margin information for each of our reportable segments, but does not review operating expenses on a segment by segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments. 
We have the following reportable segments:

•
Digital Media— Our Digital Media segment provides tools and solutions that enable individuals, small and medium businesses and enterprises to create, publish, promote and monetize their digital content anywhere. Our customers include traditional content creators, web application developers and digital media professionals, as well as their management in marketing departments and agencies, companies and publishers.
•
Digital Marketing— Our Digital Marketing segment provides solutions and services for how digital advertising and marketing are created, managed, executed, measured and optimized. Our customers include digital marketers, advertisers, publishers, merchandisers, web analysts, chief marketing officers, chief information officer and chief revenue officers.
•
Print and Publishing— Our Print and Publishing segment addresses market opportunities ranging from the diverse authoring and publishing needs of technical and business publishing to our legacy type and OEM printing businesses.

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Our segment results for fiscal 2014 , 2013 and 2012 were as follows (dollars in thousands):
 
Digital Media
 
Digital
Marketing
 
Print and Publishing
 
Total
Fiscal 2014
 

 
 
 
 

 
 

Revenue
$
2,603,179

 
$
1,355,216

 
$
188,670

 
$
4,147,065

Cost of revenue
148,958

 
463,772

 
9,350

 
622,080

Gross profit
$
2,454,221

 
$
891,444

 
$
179,320

 
$
3,524,985

Gross profit as a percentage of revenue
94
%
 
66
%
 
95
%
 
85
%
Fiscal 2013
 

 
 
 
 

 
 

Revenue
$
2,625,913

 
$
1,228,868

 
$
200,459

 
$
4,055,240

Cost of revenue
170,788

 
404,804

 
10,965

 
586,557

Gross profit
$
2,455,125

 
$
824,064

 
$
189,494

 
$
3,468,683

Gross profit as a percentage of revenue
93
%
 
67
%
 
95
%
 
86
%
Fiscal 2012
 

 
 
 
 

 
 

Revenue
$
3,101,864

 
$
1,085,042

 
$
216,771

 
$
4,403,677

Cost of revenue
130,178

 
342,764

 
10,840

 
483,782

Gross profit
$
2,971,686

 
$
742,278

 
$
205,931

 
$
3,919,895

Gross profit as a percentage of revenue
96
%
 
68
%
 
95
%
 
89
%
The tables below list our revenue and property and equipment, net, by geographic area for fiscal 2014 , 2013 and 2012 (in thousands). With the exception of property and equipment, we do not identify or allocate our assets (including long-lived assets) by geographic area.
Revenue
 
 
2014
 
2013
 
2012
Americas:
 
 
 
 
 
 
United States
 
$
2,115,148

 
$
1,935,429

 
$
1,969,924

Other
 
199,221

 
198,953

 
226,430

Total Americas
 
2,314,369

 
2,134,382

 
2,196,354

EMEA
 
1,179,864

 
1,129,180

 
1,294,566

APAC:
 
 
 
 
 
 
Japan
 
365,570

 
472,110

 
531,028

Other
 
287,262

 
319,568

 
381,729

Total APAC
 
652,832

 
791,678

 
912,757

Revenue
 
$
4,147,065

 
$
4,055,240

 
$
4,403,677



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Property and Equipment
 
 
2014
 
2013
Americas:
 
 
 
 
United States
 
$
651,281

 
$
534,115

Other
 
656

 
947

Total Americas
 
651,937

 
535,062

EMEA
 
46,380

 
52,018

APAC:
 
 
 
 
India
 
76,428

 
58,013

Other
 
10,378

 
14,681

Total APAC                                                                                            
 
86,806

 
72,694

Property and equipment, net                                                                                                 
 
$
785,123

 
$
659,774

  Significant Customers
For fiscal 2014 and 2013 , there were no customers that represented at least 10% of net revenue. For fiscal 2012, Ingram Micro accounted for 11% of net revenue.
 
In fiscal 2014 and 2013 , no single customer was responsible for over 10% of our trade receivables.
NOTE 19.  SELECTED QUARTERLY FINANCIAL DATA (unaudited)
 
 
2014
(in thousands, except per share data)
 
  Quarter Ended
 
 
February 28
 
May 30
 
August 29
 
November 28
Revenue
 
$
1,000,120

 
$
1,068,208

 
$
1,005,409

 
$
1,073,328

Gross profit
 
$
851,611

 
$
913,304

 
$
847,685

 
$
912,385

Income before income taxes
 
$
64,892

 
$
121,271

 
$
62,938

 
$
112,275

Net income
 
$
47,046

 
$
88,527

 
$
44,686

 
$
88,136

Basic net income per share
 
$
0.09

 
$
0.18

 
$
0.09

 
$
0.18

Diluted net income per share
 
$
0.09

 
$
0.17

 
$
0.09

 
$
0.17

 
 
2013
(in thousands, except per share data)
 
  Quarter Ended
 
 
March 1
 
May 31
 
August 30
 
November 29
Revenue
 
$
1,007,873

 
$
1,010,549

 
$
995,119

 
$
1,041,699

Gross profit
 
$
851,189

 
$
875,268

 
$
848,043

 
$
894,183

Income before income taxes
 
$
83,484

 
$
91,127

 
$
93,260

 
$
88,270

Net income
 
$
65,117

 
$
76,546

 
$
83,002

 
$
65,320

Basic net income per share
 
$
0.13

 
$
0.15

 
$
0.16

 
$
0.13

Diluted net income per share
 
$
0.13

 
$
0.15

 
$
0.16

 
$
0.13

Our fiscal year is a 52- or 53-week year that ends on the Friday closest to November 30. Each of the fiscal quarters presented were comprised of 13 weeks.

106
Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Adobe Systems Incorporated:
We have audited the accompanying consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of November 28, 2014 and November 29, 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended November 28, 2014. We also have audited Adobe Systems Incorporated’s internal control over financial reporting as of November 28, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Adobe Systems Incorporated’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adobe Systems Incorporated and subsidiaries as of November 28, 2014 and November 29, 2013, and the results of its operations and its cash flows for each of the years in the three-year period ended November 28, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Adobe Systems Incorporated maintained, in all material respects, effective internal control over financial reporting as of November 28, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by COSO.
(signed) KPMG LLP
Santa Clara, California
January 20, 2015

107

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.  CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of November 28, 2014 . Based on their evaluation as of November 28, 2014 , our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Adobe have been detected.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of November 28, 2014 . In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (1992) . Our management has concluded that, as of November 28, 2014 , our internal control over financial reporting is effective based on these criteria.
KPMG LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended November 28, 2014 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
ITEM 9B.  OTHER INFORMATION
On January 14, 2015, Adobe issued a press release announcing that its Board of Directors has approved a new stock repurchase program granting the Company authority to repurchase up to $2.0 billion in common stock through the end of fiscal 2017.

Under our new stock repurchase program, which is 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 repurchase agreements with third parties. The new stock repurchase program approved by our Board of Directors is substantially similar to our previous program authorizing the repurchase of up to $2.0 billion in common stock through fiscal 2015, which authority has been exhausted.
PART III
ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 of Form 10-K that is found in our 2015 Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for the Company’s 2015 Annual Meeting of Stockholders (“ 2015 Proxy Statement”) is incorporated herein by reference to our 2015 Proxy Statement. The 2015 Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year to which this report relates. For information with respect to our executive officers, see “Executive Officers” at the end of Part I, Item 1 of this report.

108
Table of Contents

ITEM 11.  EXECUTIVE COMPENSATION
The information required by this Item 11 of Form 10-K is incorporated herein by reference to our 2015 Proxy Statement.
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 of Form 10-K is incorporated herein by reference to our 2015 Proxy Statement.
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item13 of Form 10-K is incorporated herein by reference to our 2015 Proxy Statement.
ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 of Form 10-K is incorporated herein by reference to our 2015 Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1.
Financial Statements. See Index to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
2.
Exhibits. The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Form 10-K.

109
Table of Contents

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
ADOBE SYSTEMS INCORPORATED
 
 
 
By:
/s/ MARK GARRETT
 
 
Mark Garrett
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)
Date: January 20, 2015


POWER OF ATTORNEY  
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Shantanu Narayen and Mark Garrett, and each or any one of them, his or her lawful attorneys-in-fact and agents, for such person in any and all capacities, to sign any and all amendments to this report and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact and agent, or substitute or substitutes, may do or cause to be done by virtue hereof. 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
 
Title
 
Date
 
 
 
 
 
/s/ JOHN E. WARNOCK
 
 
 
January 20, 2015
John E. Warnock
 
Chairman of the Board of Directors
 
 
 
 
 
 
 
/s/ CHARLES M. GESCHKE
 
 
 
January 20, 2015
Charles M. Geschke
 
Chairman of the Board of Directors
 
 
 
 
 
 
 
/s/ SHANTANU NARAYEN
 
 
 
January 20, 2015
Shantanu Narayen
 
 
Director, President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ MARK GARRETT
 
 
 
January 20, 2015
Mark Garrett
 
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
 
 
 
 
 
 
 
/s/ RICHARD T. ROWLEY
 
 
 
January 20, 2015
Richard T. Rowley
 
Vice President, Corporate Controller and Chief Accounting Officer
 
 
 
 
 
 
 
/s/ AMY BANSE
 
 
 
January 20, 2015
Amy Banse
 
Director
 
 
 
 
 
 
 
/s/ KELLY BARLOW
 
 
 
January 20, 2015
Kelly Barlow
 
Director
 
 

110
Table of Contents

Signature
 
Title
 
Date
 
 
 
 
 
/s/ EDWARD W. BARNHOLT
 
 
 
January 20, 2015
Edward W. Barnholt
 
Director
 
 
 
 
 
 
 
/s/ ROBERT K. BURGESS
 
 
 
January 20, 2015
Robert K. Burgess
 
Director
 
 
 
 
 
 
 
/s/ FRANK CALDERONI
 
 
 
January 20, 2015
Frank Calderoni
 
Director
 
 
 
 
 
 
 
/s/ MICHAEL R. CANNON
 
 
 
January 20, 2015
Michael R. Cannon
 
Director
 
 
 
 
 
 
 
/s/ JAMES E. DALEY
 
 
 
January 20, 2015
James E. Daley
 
Director
 
 
 
 
 
 
 
/s/ LAURA DESMOND
 
 
 
January 20, 2015
Laura Desmond
 
Director
 
 
 
 
 
 
 
/s/ DANIEL L. ROSENSWEIG
 
 
 
January 20, 2015
Daniel L. Rosensweig
 
Director
 
 
 
 
 
 
 
/s/ ROBERT SEDGEWICK
 
 
 
January 20, 2015
Robert Sedgewick
 
Director
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



111
Table of Contents

SUMMARY OF TRADEMARKS  
 The following trademarks of Adobe Systems Incorporated or its subsidiaries, which may be registered in the United States and/or other countries, are referenced in this Form 10-K:
Acrobat
Adobe
Adobe Connect
Adobe Muse
Adobe Premiere
After Effects
Behance
Creative Cloud
Creative Suite
Dreamweaver
EchoSign
Flash
Illustrator
InCopy
InDesign
Lightroom
LiveCycle
PhoneGap
PhoneGap Build
Photoshop
PostScript
Reader
Typekit

All other trademarks are the property of their respective owners.

112
Table of Contents

INDEX TO EXHIBITS
 
 
 
 
Incorporated by Reference**
 
 
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
Filing Date
 
Exhibit Number
 
SEC File No.
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1

 
Restated Certificate of Incorporation of Adobe Systems Incorporated
 
8-K
 
4/26/11
 
3.3

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2

 
Amended and Restated Bylaws
 
8-K
 
10/30/12
 
3.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1

 
Specimen Common Stock Certificate
 
10-Q
 
6/25/14
 
4.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.2

 
Form of Indenture
 
S-3
 
1/15/10
 
4.1

 
333-164378
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.3

 
Forms of Global Note for Adobe Systems Incorporated’s 3.250% Notes due 2015 and 4.750% Notes due 2020, together with Form of Officer’s Certificate setting forth the terms of the Notes
 
8-K
 
1/26/10
 
4.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1A

 
Amended 1994 Performance and Restricted Stock Plan*
 
10-Q
 
4/9/10
 
10.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1B

 
Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan*
 
10-K
 
1/23/09
 
10.3

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1C

 
Form of Restricted Stock Unit Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan*
 
10-K
 
1/26/12
 
10.13

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2A

 
1996 Outside Directors Stock Option Plan, as amended*
 
10-Q
 
4/12/06
 
10.6

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2B

 
Forms of Stock Option Agreements used in connection with the 1996 Outside Directors Stock Option Plan*
 
S-8
 
6/16/00
 
4.8

 
333-39524
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3

 
1997 Employee Stock Purchase Plan, as amended*
 
8-K
 
4/26/11
 
10.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4A

 
2003 Equity Incentive Plan, as amended*
 
8-K
 
4/14/14
 
10.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4B

 
Form of Stock Option Agreement used in connection with the 2003 Equity Incentive Plan*
 
8-K
 
12/20/10
 
99.4

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4C

 
Form of RSU Grant Notice and Award Agreement pursuant to the 2003 Equity Incentive Plan*
 
8-K
 
1/28/13
 
10.6

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4D

 
Form of Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan*
 
10-Q
 
10/7/04
 
10.11

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

113
Table of Contents

 
 
 
 
Incorporated by Reference**
 
 
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
Filing Date
 
Exhibit Number
 
SEC File No.
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4E

 
Form of Performance Share Program pursuant to the 2003 Equity Incentive Plan (applicable to the 2011 Performance Share Program)*
 
8-K
 
1/29/10
 
10.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4F

 
Award Calculation Methodology to the 2011 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
 
8-K
 
1/28/11
 
10.3

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4G

 
Form of Award Grant Notice and Performance Share Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2011 Performance Share Program)*
 
8-K
 
12/20/10
 
99.5

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4H

 
Form of Performance Share Program pursuant to the 2003 Equity Incentive Plan (applicable to the 2012 Performance Share Program)*
 
8-K
 
1/26/12
 
10.2

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4I

 
Award Calculation Methodology to the 2012 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
 
8-K
 
1/26/12
 
10.3

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4J

 
Form of Performance Share Award Grant Notice and Performance Share Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2012 Performance Share Program)*
 
10-K
 
1/26/12
 
10.61

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4K

 
2013 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
 
8-K
 
1/28/13
 
10.2

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4L

 
Form of Performance Share Award Grant Notice and Performance Share Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2013 Performance Share Program)*
 
8-K
 
1/28/13
 
10.3

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4M

 
2014 Performance Share Program pursuant to the 2003 Equity Incentive Plan*
 
8-K
 
1/29/14
 
10.2

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4N

 
Form of Performance Share Award Grant Notice and Performance Share Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2014 Performance Share Program)*
 
8-K
 
1/29/14
 
10.3

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4O

 
Form of Director Initial Grant Restricted Stock Unit Award Agreement used in connection with the 2003 Equity Incentive Plan*
 
8-K
 
12/20/10
 
99.6

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

114
Table of Contents

 
 
 
 
Incorporated by Reference**
 
 
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
Filing Date
 
Exhibit Number
 
SEC File No.
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4P

 
Form of Director Annual Grant Restricted Stock Unit Award Agreement used in connection with the 2003 Equity Incentive Plan*
 
8-K
 
12/20/10
 
99.7

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4Q

 
Form of Director Annual Grant Stock Option Agreement used in connection with the 2003 Equity Incentive Plan*
 
8-K
 
12/20/10
 
99.8

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5A

 
2005 Equity Incentive Assumption Plan, as amended and restated*
 
10-Q
 
6/28/13
 
10.17

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5B

 
Form of Stock Option Agreement used in connection with the 2005 Equity Incentive Assumption Plan*
 
8-K
 
12/20/10
 
99.10

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5C

 
Form of RSU Grant Notice and Award Agreement pursuant to the 2005 Equity Incentive Assumption Plan*
 
8-K
 
1/28/13
 
10.7

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.6

 
Allaire Corp. 1997 Stock Incentive Plan*
 
S-8
 
3/27/01
 
4.06

 
333-57708
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.7

 
Allaire Corporation 1998 Stock Incentive Plan, as amended*
 
S-8
 
3/27/01
 
4.07

 
333-57708
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.8

 
Allaire Corporation 2000 Stock Incentive Plan*
 
S-8
 
3/27/01
 
4.08

 
333-57708
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.9

 
Andromedia, Inc. 1999 Stock Plan*
 
S-8
 
12/7/99
 
4.09

 
333-92233
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.10

 
Macromedia, Inc. 1999 Stock Option Plan*
 
S-8
 
8/17/00
 
4.07

 
333-44016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.11

 
Macromedia, Inc. 2002 Equity Incentive Plan, as amended*
 
S-8
 
8/10/05
 
4.08

 
333-127392
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.12

 
Form of Macromedia, Inc. Stock Option Agreement*
 
S-8
 
8/10/05
 
4.09

 
333-127392
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.13

 
Form of Macromedia, Inc. Revised Non-Plan Stock Option Agreement*
 
S-8
 
11/23/04
 
4.10

 
333-120712
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.14

 
Form of Macromedia, Inc. Restricted Stock Purchase Agreement*
 
10-Q
 
2/8/05
 
10.01

 
000-22688
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.15A

 
Forms of Retention Agreement*
 
10-K
 
2/17/98
 
10.44

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.15B

 
Second Amendment to Retention Agreement between Adobe Systems Incorporated and Shantanu Narayen, effective as of December 17, 2010*
 
10-K
 
1/27/11
 
10.40

 
000-15175
 
 

115
Table of Contents

 
 
 
 
Incorporated by Reference**
 
 
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
Filing Date
 
Exhibit Number
 
SEC File No.
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
10.15C

 
Retention Agreement between Adobe Systems Incorporated and Shantanu Narayen, effective December 5, 2014
 
8-K
 
12/11/14
 
10.20

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.16

 
Form of Indemnity Agreement*
 
10-Q
 
6/26/09
 
10.12

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.17

 
Second Amended and Restated Master Lease of Land and Improvements by and between SMBC Leasing and Finance, Inc. and Adobe Systems Incorporated
 
10-Q
 
10/7/04
 
10.14

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.18A

 
Lease between Adobe Systems Incorporated and Selco Service Corporation, dated March 26, 2007
 
8-K
 
3/28/07
 
10.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.18B

 
Participation Agreement among Adobe Systems Incorporated, Selco Service Corporation, et al. dated March 26, 2007
 
8-K
 
3/28/07
 
10.2

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.18C

 
Master Amendment No. 2 among Adobe Systems Incorporated, Selco Service Corporation and KeyBank National Association dated October 31, 2011
 
10-K
 
1/22/13
 
10.13

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.19

 
Adobe Systems Incorporated Deferred Compensation Plan, as Amended and Restated*
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.20

 
Employment offer letter between Adobe Systems Incorporated and Richard Rowley, dated October 30, 2006*
 
8-K
 
11/16/06
 
10.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.21

 
Employment offer letter between Adobe Systems Incorporated and Mark Garrett dated January 5, 2007*
 
8-K
 
1/26/07
 
10.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.22

 
Credit Agreement, dated as of March 2, 2012, among Adobe Systems Incorporated and certain subsidiaries as Borrowers, The Royal Bank of Scotland PLC and U.S. Bank National Association as Co-Documentation Agents, JPMorgan Chase Bank, N.A., as Syndication Agent, Bank of America, N.A. as Administrative Agent and Swing Line Lender, and the Other Lenders Party Thereto
 
8-K
 
3/7/12
 
10.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.23

 
Purchase and Sale Agreement, by and between NP Normandy Overlook, LLC, as Seller and Adobe Systems Incorporated as Buyer, effective as of May 12, 2008
 
8-K
 
5/15/08
 
10.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.24A

 
Omniture, Inc. 1999 Equity Incentive Plan, as amended (the “Omniture 1999 Plan”)*
 
S-1
 
4/4/06
 
10.2A

 
333-132987
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

116
Table of Contents

 
 
 
 
Incorporated by Reference**
 
 
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
Filing Date
 
Exhibit Number
 
SEC File No.
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
10.24B

 
Forms of Stock Option Agreement under the Omniture 1999 Plan*
 
S-1
 
4/4/06
 
10.2B

 
333-132987
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.24C

 
Form of Stock Option Agreement under the Omniture 1999 Plan used for Named Executive Officers and Non-Employee Directors*
 
S-1
 
6/9/06
 
10.2C

 
333-132987
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.25

 
Omniture, Inc. 2006 Equity Incentive Plan and related forms*
 
10-Q
 
8/6/09
 
10.3

 
000-52076
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.26

 
Omniture, Inc. 2007 Equity Incentive Plan and related forms*
 
10-K
 
2/27/09
 
10.9

 
000-52076
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.27

 
Omniture, Inc. 2008 Equity Incentive Plan and related forms*
 
10-K
 
2/27/09
 
10.10

 
000-52076
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.28A

 
Visual Sciences, Inc. (formerly, WebSideStory, Inc.) 2004 Equity Incentive Award Plan (the “VS 2004 Plan”) and Form of Option Grant Agreement*
 
10-K
 
2/29/08
 
10.6

 
000-52076
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.28B

 
Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement under the VS 2004 Plan*
 
10-K
 
2/29/08
 
10.6A

 
000-52076
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.29

 
Visual Sciences, Inc. (formerly, WebSideStory, Inc.) 2006 Employment Commencement Equity Incentive Award Plan and Form of Option Grant Agreement*
 
10-K
 
2/29/08
 
10.8

 
000-52076
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.30

 
Day Software Holding AG International Stock Option/Stock Issuance Plan*
 
S-8
 
11/1/10
 
99.1

 
333-170254
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.31

 
Day Interactive Holding AG U.S. Stock Option/ Stock Issuance Plan*
 
S-8
 
11/1/10
 
99.2

 
333-170254
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.32

 
Demdex, Inc. 2008 Stock Plan, as amended*
 
S-8
 
1/27/11
 
99.1

 
333-171902
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.33

 
2011 Executive Cash Performance Bonus Plan*
 
8-K
 
1/28/11
 
10.4

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.34

 
2011 Executive Annual Incentive Plan*
 
8-K
 
1/28/11
 
10.5

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.35

 
EchoSign, Inc. 2005 Stock Plan, as amended*
 
S-8
 
7/29/11
 
99.1

 
333-175910
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.36

 
TypeKit, Inc. 2009 Equity Incentive Plan, as amended*
 
S-8

 
10/7/11

 
99.1

 
333-177229
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.37

 
Auditude, Inc. 2009 Equity Incentive Plan, as amended*
 
S-8

 
11/18/11

 
99.1

 
333-178065
 
 

117
Table of Contents

 
 
 
 
Incorporated by Reference**
 
 
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
Filing Date
 
Exhibit Number
 
SEC File No.
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
10.38

 
Auditude, Inc. Employee Stock Option Plan, as amended*
 
S-8

 
11/18/11

 
99.2

 
333-178065
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.39

 
Description of 2012 Director Compensation*
 
10-K
 
1/26/12
 
10.76

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.40

 
Adobe Systems Incorporated 2011 Executive Severance Plan in the Event of a Change of Control for Prior Participants *
 
8-K
 
12/15/11
 
10.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.41

 
Adobe Systems Incorporated 2011 Executive Severance Plan in the Event of a Change of Control*
 
8-K
 
12/15/11
 
10.2

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.42

 
2012 Executive Annual Incentive Plan*
 
8-K
 
1/26/12
 
10.4

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.43

 
Efficient Frontier, Inc. 2003 Stock Option/Stock Issuance Plan, as Amended and Restated*
 
S-8

 
1/27/12
 
99.1

 
333-179221
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.44

 
Efficient Frontier, Inc. Form of Non-Plan Stock Option Agreement*
 
S-8
 
1/27/12
 
99.2

 
333-179221
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.45

 
Nomination and Standstill Agreement between the Company and the ValueAct Group dated December 4, 2012
 
8-K

 
12/5/12

 
99.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.46A

 
Behance, Inc. 2012 Equity Incentive Plan*
 
S-8
 
1/23/13
 
99.1

 
333-186143
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.46B

 
Amendment No. 1 to the Behance, Inc. 2012 Equity Incentive Plan*
 
S-8
 
1/23/13
 
99.2

 
333-186143
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.47

 
2013 Executive Annual Incentive Plan*
 
8-K
 
1/28/13
 
10.5

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.48

 
Neolane 2008 Stock Option Plan*
 
S-8
 
8/27/13
 
99.1

 
333-190846
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.49

 
2012 Neolane Stock Option Plan for The United States*
 
S-8
 
8/27/13
 
99.2

 
333-190846
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.50

 
Description of 2013 Director Compensation*
 
10-K
 
1/21/14
 
10.80

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.51

 
Description of 2014 Director Compensation*
 
10-K
 
1/21/14
 
10.81

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.52

 
Description of 2015 Director Compensation*
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.53

 
2014 Executive Annual Incentive Plan*
 
8-K
 
1/29/14
 
10.5

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.54A

 
Aviary, Inc. 2008 Stock Plan, as amended
 
S-8
 
9/26/14
 
99.1

 
333-198973
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

118
Table of Contents

 
 
 
 
Incorporated by Reference**
 
 
 
 
Exhibit
Number
 
Exhibit Description
 
Form
 
Filing Date
 
Exhibit Number
 
SEC File No.
 
Filed
Herewith
 
 
 
 
 
 
 
 
 
 
 
 
 
10.54B

 
Form of Stock Option Grant Notice and Award Agreement pursuant to the Aviary, Inc. 2008 Stock Plan (Installment Vesting)
 
S-8
 
9/26/14
 
99.2

 
333-198973
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.54C

 
Form of Stock Option Grant Notice and Award Agreement pursuant to the Aviary, Inc. 2008 Stock Plan (Installment Vesting, Non-U.S.)
 
S-8
 
9/26/14
 
99.3

 
333-198973
 
 
10.55

 
Adobe Systems Incorporated 2014 Executive Severance Plan in the Event of a Change of Control
 
8-K
 
12/11/14
 
10.1

 
000-15175
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12.1

 
Ratio of Earnings to Fixed Charges
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
21

 
Subsidiaries of the Registrant
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
23.1

 
Consent of Independent Registered Public Accounting Firm, KPMG LLP
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
24.1

 
Power of Attorney (set forth on the signature page to this Annual Report on Form 10-K)
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1

 
Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
 
 
 

 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
31.2

 
Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
 
 
 

 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1

 
Certification of Chief Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
32.2

 
Certification of Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition
 
 
 
 
 
 
 
 
 
X
___________________________

119
Table of Contents

*
 
Compensatory plan or arrangement. 
 
 
 
**
 
References to Exhibits 10.6 through 10.14 are to filings made by Macromedia, Inc. References to Exhibits 10.24A through 10.29 are to filings made by Omniture, Inc.
 
 
 
†
 
The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Adobe Systems Incorporated under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.

 


120



EXHIBIT 10.19
Adobe Systems Incorporated
Deferred Compensation Plan

Originally Effective December 2, 2006
Amended and Restated Effective November 13, 2014



TABLE OF CONTENTS
 
 
Page
Article 1 Definitions
1
Article 2 Selection, Enrollment, Eligibility
7
 
2.1      Selection by Committee
7
 
2.2      Enrollment and Eligibility Requirements; Commencement of Participation
7
 
2.3      Termination of a Participant’s Eligibility
8
Article 3 Deferral Commitments/Company Contribution Amounts/ Company Restoration Matching Amounts/Vesting/Crediting/Taxes
9
 
3.1      Minimum Deferrals
9
 
3.2      Maximum Deferral
10
 
3.3      Election to Defer; Effect of Election Form
10
 
3.4      Withholding and Crediting of Annual Deferral Amounts
11
 
3.5      Company Contribution Amount
11
 
3.6      Company Restoration Matching Amount
12
 
3.7      Crediting of Amounts after Benefit Distribution
12
 
3.8      Vesting
13
 
3.9      Crediting/Debiting of Account Balances
13
 
3.10      FICA and Other Taxes
15
Article 4 Scheduled Distribution; Unforeseeable Financial Emergencies
15
 
4.1      Scheduled Distribution
15
 
4.2      Changes to Scheduled Distributions
16
 
4.3      Unforeseeable Emergencies
17
Article 5 Change in Control Benefit
17
 
5.1      Change in Control Benefit
17
 
5.2      Payment of Change in Control Benefit
18
Article 6 Termination Benefit     
18
 
6.1      Termination Benefit
18
 
6.2      Payment of Termination Benefit
18
 
6.3      Small Account Balances
19
Article 7 Disability Benefit
19
 
7.1      Disability Benefit
19
 
7.2      Payment of Disability Benefit     
19
Article 8 Death Benefit
20
 
8.1      Death Benefit
20

- i -

TABLE OF CONTENTS
(Continued)

Page


 
8.2      Payment of Death Benefit
20
Article 9 Beneficiary Designation
20
 
9.1      Beneficiary
20
 
9.2      Beneficiary Designation; Change; Spousal Consent
20
 
9.3      Acknowledgment
21
 
9.4      No Beneficiary Designation
21
 
9.5      Doubt as to Beneficiary
21
 
9.6      Discharge of Obligations
21
Article 10 Leave of Absence
21
 
10.1      Paid Leave of Absence
21
 
10.2      Unpaid Leave of Absence
21
 
10.3      Leaves Resulting in Separation from Service
22
Article 11 Termination of Plan, Amendment or Modification
22
 
11.1      Termination of Plan
22
 
11.2      Amendment
23
 
11.3      Plan Agreement
23
 
11.4      Effect of Payment
23
Article 12 Administration
23
 
12.1      Committee Duties
23
 
12.2      Administration Upon Change in Control
24
 
12.3      Agents
24
 
12.4      Binding Effect of Decisions
24
 
12.5      Indemnity of Committee
24
 
12.6      Employer Information     
25
Article 13 Other Benefits and Agreements
25
 
13.1      Coordination with Other Benefits
25
Article 14 Claims Procedures
25
 
14.1      Presentation of Claim
25
 
14.2      Notification of Decision
25
 
14.3      Review of a Denied Claim
27
 
14.4      Arbitration/Interest on Unpaid Amounts/Controlling Law
28
 
14.5      Exhaustion of Plan’s Claims and Review Procedures Required
29
Article 15 Trust
29
 
15.1      Establishment of the Trust
29

- ii -

TABLE OF CONTENTS
(Continued)

Page


 
15.2      Interrelationship of the Plan and the Trust
29
 
15.3      Distributions From the Trust
30
Article 16 Miscellaneous
30
 
16.1      Unfunded Status of Plan
30
 
16.2      Unsecured General Creditor
30
 
16.3      Designated Payment Date
30
 
16.4      Employer’s Liability
30
 
16.5      No Guarantees Regarding Tax Treatment
31
 
16.6      Nonassignability
31
 
16.7      Not a Contract of Employment
31
 
16.8      Furnishing Information
31
 
16.9      Terms
31
 
16.10      Captions
31
 
16.11      Governing Law
32
 
16.12      Notice
32
 
16.13      Successors
32
 
16.14      Spouse’s Interest
32
 
16.15      Validity
32
 
16.16      Incompetent
32
 
16.17      Court Order
33
 
16.18      Distribution in the Event of Income Inclusion Under 409A
33
 
16.19      Deduction Limitation on Benefit Payments
33
 
16.20      Errors in Deferrals or Distributions
34
 
16.21      Apportionment of Costs and Duties
34
 
16.22      Insurance
34


- iii -



ADOBE SYSTEMS INCORPORATED
DEFERRED COMPENSATION PLAN
Originally Effective December 2, 2006
Amended and Restated Effective November 13, 2014
Introduction and Purpose
Adobe Systems Incorporated, a Delaware corporation (the “Company”), having established the Adobe Systems Incorporated Deferred Compensation Plan (the “Plan”) effective December 2, 2006 and having last amended and restated the Plan effective October 31, 2007, hereby again amends and restates the Plan effective November 13, 2014 (the “Restatement Date”). All Account Balances as of the Restatement Date shall, to the extent required to comply with Code Section 409A and related Treasury guidance and Regulations, be payable under the terms and conditions of the Plan as in effect prior to the Restatement Date.
The purpose of this Plan is to provide specified benefits to selected Directors and a select group of management or highly compensated Employees who contribute materially to the continued growth, development and future business success of the Company, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.
ARTICLE 1
Definitions
For the purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:
1.1      “Account Balance” shall mean, with respect to a Participant, an entry on the records of the Employer equal to the sum of the Participant’s Annual Accounts. The Account Balance shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.
1.2      “Annual Account” shall mean, with respect to a Participant, an entry on the records of the Employer equal to the following amount: (i) the sum of the Participant’s Annual Deferral Amount, Company Contribution Amount and Company Restoration Matching Amount for any one Plan Year, plus (ii) Deemed Earnings thereon, less (ii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Annual Account for such Plan Year. The Annual Account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.
1.3      “Annual Deferral Amount” shall mean that portion of a Participant’s Base Salary, Bonus, Commissions, Performance Shares, Restricted Stock Units, and Director Fees that a Participant defers in accordance with Article 3 for any one Plan Year, without regard to whether





such amounts are withheld and credited during such Plan Year. In the event of a Participant’s Termination, Disability, or death prior to the end of a Plan Year, such year’s Annual Deferral Amount shall be the actual amount withheld prior to the occurrence of such event.
1.4      “Annual Installment Method” shall be an annual installment payment over the number of years selected by the Participant in accordance with this Plan, calculated as follows: (i) in the case of a Termination Benefit, (A) for the first annual installment, the vested portion of each Annual Account or applicable portion(s) thereof shall be calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as determined by the Committee, and (B) for remaining annual installments, the vested portion of each applicable Annual Account or applicable portion(s) thereof shall be calculated on every anniversary of such calculation date, as applicable; and (ii) in the case of an Applicable Scheduled Distribution (as defined in Section 4.1), (A) for the first annual installment, the Cash Deferral Portion (as defined in Section 4.1), plus Deemed Earnings thereon, shall be calculated as of the close of business on or around the Scheduled Distribution Date (as defined in Section 4.1), as determined by the Committee, and (B) for remaining annual installments, the Cash Deferral Portion, plus Deemed Earnings thereon, shall be calculated on every anniversary of such calculation date, as applicable. Each annual installment shall be calculated by multiplying the applicable balance by a fraction, the numerator of which is one and the denominator of which is the remaining number of annual installment payments due to the Participant. By way of example, if the Participant elects a 10-year Annual Installment Method as the form of Termination Benefit for an Annual Account or applicable portion thereof, the first payment shall be 1/10 of the vested balance of such Annual Account or applicable portion thereof, calculated as described in this definition. The following year, the payment shall be 1/9 of the vested balance of such Annual Account or applicable portion thereof, calculated as described in this definition.
1.5      “Base Salary” shall mean the annual cash compensation from an Employer relating to services performed during any calendar year. It shall be limited to base pay earned during any calendar year and shall exclude: Commissions; distributions from nonqualified deferred compensation plans; bonuses; overtime; fringe benefits; stock options; employee stock purchase plan benefits; lump sum cash payout of paid time off in the case of Participants incurring a separation from service on account of Termination, Disability or death; relocation expenses; incentive payments; non-monetary awards; Director Fees and other fees; and automobile and other allowances paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee’s gross income). Base Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant and not otherwise included in the Participant’s income because of Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that had there been no such plan, the amount would have been payable in cash to the Employee. Base Salary shall be reduced by Participant contributions under this Plan.

- 2 -





1.6      “Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant.
1.7      “Beneficiary Designation Form” shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries.
1.8      “Benefit Distribution Date” shall mean a date that triggers distribution of a Participant’s vested benefits. A Benefit Distribution Date for a Participant shall be determined upon the occurrence of any one of the following:
(a)      If the Participant Terminates, the Benefit Distribution Date for his or her vested Account Balance or applicable portion thereof shall be (i) the last day of the six-month period immediately following the date on which the Participant Terminates if the Participant is a Key Employee, and (ii) for all other Participants, the date on which the Participant Terminates; provided, however, in the event the Participant changes the Termination Benefit election for one or more Annual Account(s) or applicable portion(s) thereof in accordance with Section 6.2(b), the Benefit Distribution Date for such Annual Account(s) or applicable portion(s) thereof shall be postponed in accordance with such Section 6.2(b); or
(b)      If the Participant dies prior to the complete distribution of his or her vested Account Balance, the Participant’s Benefit Distribution Date shall be the date of the Participant’s death; or
(c)      If the Participant becomes Disabled, the Participant’s Benefit Distribution Date shall be the date on which the Participant has become Disabled; or
(d)      If (i) a Change in Control occurs with respect to a Participant prior to the Participant’s Termination, death or Disability, and (ii) the Participant has elected to receive a Change in Control Benefit as set forth in Article 5, the Participant’s Benefit Distribution Date shall be the date on which the Change in Control occurs.
1.9      “Board” shall mean the board of directors of the Company.
1.10      “Bonus” shall mean any compensation, in addition to Base Salary and Commissions from an Employer, earned by a Participant for services rendered during an Employer’s fiscal year or such other period provided under any Employer’s Annual Incentive Plan (the “Annual Incentive Plan”), Profit Sharing Plan, or any other cash incentive arrangement designated by the Committee, as further described on an Election Form approved by the Committee in its sole discretion. Bonuses shall be calculated before reduction for compensation voluntarily deferred or contributed by the

- 3 -





Participant and not otherwise included in the Participant’s income because of Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer.
1.11      “Change in Control” shall mean any “change in control event” as defined in accordance with Treasury guidance and Regulations related to Code Section 409A; provided, however, that “Change in Control” shall not include a “change in control event” with respect to an entity other than the Company, nor shall it include any “change in the effective control of a corporation” under Treasury Regulations Section 1.409A-3(i)(5)(vi)(A)(i) in which a person or group acquires less than fifty percent (50%) of the voting power of the stock of the Company.
1.12      “Change in Control Benefit” shall have the meaning set forth in Article 5.
1.13      “Claimant” shall have the meaning set forth in Section 14.1.
1.14      “Code” shall mean the Internal Revenue Code of 1986, as it may be amended from time to time.
1.15      “Commissions” shall mean the cash commissions otherwise payable to a Participant under an Employer sales incentive plan absent a deferral under this Plan (as determined by the Committee in compliance with Code Section 409A and related Treasury guidance and Regulations). Commissions shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant and not otherwise included in the Participant’s income because of Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer.
1.16      “Committee” shall mean the committee described in Article 12.
1.17      “Company” shall mean Adobe Systems Incorporated, a Delaware corporation, and any successor to all or substantially all of the Company’s assets or business.
1.18      “Company Contribution Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.5.
1.19      “Company Restoration Matching Amount” shall mean, for any one Plan Year, the amount determined in accordance with Section 3.6.
1.20      “Death Benefit” shall mean the benefit set forth in Article 8.
1.21      “Deemed Earnings” shall mean the amounts credited or debited on Account Balances pursuant to Section 3.9.
1.22      “Director” shall mean any member of the Board.

- 4 -





1.23      “Director Fees” shall mean the annual fees earned by a Director, including retainer fees and meeting fees, as compensation for serving on the Board.
1.24      “Disability” or “Disabled” shall mean that a Participant is (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident or health plan covering employees of the Participant’s Employer. The Committee will determine whether or not a Participant is Disabled based on such evidence as the Committee deems necessary or advisable.
1.25      “Disability Benefit” shall mean the benefit set forth in Article 7.
1.26      “Election Form” shall mean the form, which may be in electronic format, established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan.
1.27      “Employee” shall mean a person who is an employee of any Employer.
1.28      “Employer(s)” shall mean the Company and/or any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor.
1.29      “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.
1.30      “401(k) Plan” shall mean, with respect to an Employer, a plan qualified under Code Section 401(a) that contains a cash or deferred arrangement described in Code Section 401(k), adopted by the Employer, as it may be amended from time to time, or any successor thereto.
1.31      “Key Employee” shall mean any Participant who is a “key employee” (as defined in Code Section 416(i) without regard to paragraph (5) thereof) of any Employer which is a corporation whose stock is publicly traded on an established securities market or otherwise, as determined by the Committee in accordance with Code Section 409A and related Treasury guidance and Regulations.
1.32      “Participant” shall mean any Employee or Director (i) who is selected to participate in the Plan, (ii) who submits an executed Plan Agreement, Election Form and Beneficiary Designation Form, which are accepted by the Committee, and (iii) whose Plan Agreement has not terminated.

- 5 -





1.33      “Performance Shares” shall mean the restricted stock units awarded to selected Participants designed to vest based on one or more performance criteria, which units shall be settled by the delivery of Company stock unless deferral of payout is made pursuant to this Plan.
1.34      “Plan” shall mean the Adobe Systems Incorporated Deferred Compensation Plan, which shall be evidenced by this instrument and by each Plan Agreement, as they may be amended from time to time.
1.35      “Plan Agreement” shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant’s Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Employer shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan; provided, however, that any such additional benefits or benefit limitations must be agreed to by the Employer, the Participant, and the Company.
1.36      “Plan Year” shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year.
1.37      “Restricted Stock Units” shall mean the restricted stock units awarded to selected Participants designed to vest based on the passage of time, which units shall be settled by the delivery of Company stock unless deferral of payout is made pursuant to this Plan.
1.38      “Scheduled Distribution” shall mean the distribution set forth in Section 4.1.
1.39      “Spouse” shall mean an individual who is legally married to a Participant and who is treated as the Participant’s spouse under the Code.
1.40      “Terminate the Plan” or “Termination of the Plan” shall mean a determination that (i) all Participants (or all Participants of one or more Employers) shall no longer be eligible to participate in the Plan, (ii) all deferral elections for such Participants shall terminate, and (iii) such Participants shall no longer be eligible to receive Employer contributions under this Plan.
1.41      “Termination” or “Terminates” shall mean (i) with respect to an Employee who is not then a Director, separation from service with all Employers and other subsidiaries of the Company for any reason other than a leave of absence, death or Disability, and (ii) with respect to a Director who is not then an Employee, separation from service as a Director, as determined in each case in accordance with Code Section 409A and related Treasury guidance and Regulations. With

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respect to a Participant who serves as both an Employee and Director, or who may change status between the two, whether there has been a separation from service shall be determined under the applicable Treasury guidance and Regulations under Code Section 409A.
1.42      “Termination Benefit” shall mean the benefit set forth in Article 6.
1.43      “Trust” shall mean one or more trusts established by the Company in accordance with Article 15.
1.44      “Unforeseeable Emergency” shall mean a severe financial hardship as defined in Treasury Regulations Section 1.409A-3(i)(3)(ii). Accordingly, without further limiting the definition, an unforeseeable emergency shall include a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s Spouse, the Participant’s Beneficiary, or the Participant’s dependent (as defined in Code Section 152, without regard to Code Section 152(b)(1), (b)(2), and (d)(1)(B)); loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance, for example, not as a result of a natural disaster); or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. For example, the imminent foreclosure of or eviction from the Participant’s primary residence may constitute an Unforeseeable Emergency. In addition, the need to pay for medical expenses, including non-refundable deductibles, as well as for the costs of prescription drug medication, may constitute an Unforeseeable Emergency. Finally, the need to pay for the funeral expenses of a Spouse, a Beneficiary, or a dependent (as defined in Code Section 152, without regard to Code Section 152(b)(1), (b)(2), and (d)(1)(B)) may also constitute an Unforeseeable Emergency. The determination of whether an “Unforeseeable Emergency” exists shall be determined in the sole discretion of the Committee.
ARTICLE 2
Selection, Enrollment, Eligibility
2.1      Selection by Committee .  Participation in the Plan shall be limited to Directors and, as determined by the Committee in its sole discretion, a select group of management or highly compensated Employees. From that group, the Committee shall select, in its sole discretion, those individuals who may actually participate in this Plan.
2.2      Enrollment and Eligibility Requirements; Commencement of Participation . 
(a)      As a condition to participation, each selected Director or selected Employee who is eligible to participate in the Plan effective as of the first day of a Plan Year shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, prior to the first day of such Plan Year, or such other earlier deadline (such as

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prior to the first day of the Company’s fiscal year) as may be established by the Committee in its sole discretion. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines, in its sole discretion, are necessary.
(b)      A selected Director or selected Employee who first becomes eligible to participate in this Plan after the first day of a Plan Year must complete these requirements within 30 days after he or she first becomes eligible to participate in the Plan, or within such other earlier deadline as may be established by the Committee, in its sole discretion, in order to participate for that Plan Year. In such event, such person’s participation in this Plan shall not commence earlier than the date determined by the Committee pursuant to Section 2.2(c) and such person shall not be permitted to defer under this Plan any portion of his or her eligible compensation that is paid with respect to services performed prior to his or her participation commencement date, except to the extent permissible under Code Section 409A and related Treasury guidance or Regulations.
(c)      Each selected Director or selected Employee who is eligible to participate in the Plan shall commence participation in the Plan on the date that the Committee determines, in its sole discretion, that the Director or Employee has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period. Notwithstanding the foregoing, the Committee shall process such Participant’s deferral election as soon as administratively practicable after such deferral election is submitted to and accepted by the Committee.
(d)      If a Director or an Employee fails to meet all requirements contained in this Section 2.2 within the period required, that Director or Employee shall not be eligible to participate in the Plan during such Plan Year.
(e)      If, pursuant to Section 3.3(c), the Committee determines that an election may be made to defer the payment of performance-based compensation no later than six months before the end of the performance service period, the Committee may adjust the deadline for the submission of enrollment forms to reflect its determination.
2.3      Termination of a Participant’s Eligibility .  If the Committee determines that an Employee Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, or that the inclusion of Directors in this Plan could jeopardize the status of this Plan as a plan intended to be “unfunded” and “maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1), the Committee shall have the right, in its sole discretion, to (i) prevent the Participant from making future deferral elections, and/or (ii) take further action that the Committee deems appropriate. Notwithstanding the foregoing, in the event of a Termination of the Plan, the

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termination of the affected Participant’s eligibility for participation in the Plan shall not be governed by this Section 2.3, but rather shall be governed by Section 11.1. In the event that a Participant is no longer eligible to defer compensation under this Plan, the Participant’s Account Balance shall continue to be governed by the terms of this Plan until such time as the Participant’s Account Balance is paid in accordance with the terms of this Plan.
ARTICLE 3
Deferral Commitments/Company Contribution Amounts/
Company Restoration Matching Amounts/Vesting/Crediting/Taxes
3.1      Minimum Deferrals . 
(a)      Annual Deferral Amount . For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Salary, Commissions, Bonus, Performance Shares, Restricted Stock Units, and/or Director Fees, in the following minimum percentages for each deferral elected (each, the “Minimum Permissible Percentage”):
Deferral
Minimum Permissible Percentage
Base Salary
5%
Commissions
5%
Bonus
5%
Performance Shares
100% per vesting tranche
Restricted Stock Units
100% per vesting tranche
Director Fees
5%
Notwithstanding the foregoing, the Committee, in its sole discretion, may establish such other Minimum Permissible Percentage of Base Salary, Commissions, Bonus, Performance Shares, Restricted Stock Units, and/or Director Fees that may be elected to be deferred by one or more classes of Participants for any Plan Year.
In addition to the Minimum Permissible Percentage amounts set forth above, the Committee may determine in its discretion that elections to defer Base Salary, Commissions, Performance Shares, Restricted Stock Units, Bonuses or Director Fees shall only be effective to the extent that a specified minimum dollar amount of Base Salary, Commissions, Performance Shares, Restricted Stock Units, Bonuses or Directors Fees is expected to be deferred; for example, the Committee may determine that an election to defer a portion of a Participant’s Bonus under the Annual Incentive Plan shall only be effective if a minimum dollar amount, such as $2,000, is expected to be deferred. If the Committee determines, in its sole discretion, prior to the beginning of a Plan Year that a Participant has made an election for less than the stated minimum amounts, or in an otherwise impermissible amount, or if no election is made, the amount deferred shall be zero.

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(b)      Participation After Commencement of Plan Year . Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, unless the Committee establishes different proration rules, any minimum Annual Deferral Amount shall be an amount equal to any minimum established by the Plan or the Committee multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12.
3.2      Maximum Deferrals . 
(a)      Annual Deferral Amount . For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Salary, Commissions, Bonus, Performance Shares, Restricted Stock Units, and/or Director Fees, up to the following maximum percentages for each deferral elected (each, the “Maximum Permissible Percentage”), provided that, if necessary for the purpose of allowing enough remaining undeferred compensation to fund any necessary withholdings for taxes or benefits, the Committee may, in its sole discretion, establish lesser amounts for one or more classes of Participants:
Deferral
Maximum Permissible Percentage
Base Salary
75%
Commissions
100%
Bonus
100%
Performance Shares
100% per vesting tranche
Restricted Stock Units
100% per vesting tranche
Director Fees
100%
Notwithstanding the foregoing, the Committee, in its sole discretion, may establish such other Maximum Permissible Percentage of Base Salary, Commissions, Bonus, Performance Shares, Restricted Stock Units, and/or Director Fees that may be elected to be deferred by one or more classes of Participants for any Plan Year.
(b)      Short Plan Year . Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, the maximum Annual Deferral Amount shall be limited to the amount of eligible compensation not yet earned by the Participant as of the date the Participant submits a Plan Agreement and Election Form to the Committee for acceptance, except to the extent permissible under Code Section 409A and related Treasury guidance or Regulations.
3.3      Election to Defer; Effect of Election Form . 
(a)      First Plan Year . In connection with a Participant’s commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the

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Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee.
(b)      Subsequent Plan Years . For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering a new Election Form to the Committee, in accordance with its rules and procedures, before the end of the Company’s fiscal year preceding the Plan Year for which the election is made, or before such other deadline established by the Committee to the extent such other deadline complies with the requirements of Code Section 409A and related Treasury guidance or Regulations. If no such Election Form is timely delivered for a Plan Year, the Annual Deferral Amount shall be zero for that Plan Year.
(c)      Performance-Based Compensation . Notwithstanding the foregoing, the Committee may, in its sole discretion, determine that an irrevocable deferral election pertaining to performance-based compensation may be made by the Participant’s timely delivering an Election Form to the Committee, in accordance with its rules and procedures, no later than six 6 months before the end of the performance service period. “Performance-based compensation” shall mean Compensation that qualifies as performance-based compensation under Treasury Regulations Section 1.409A-1(e), as determined by the Committee.
3.4      Withholding and Crediting of Annual Deferral Amounts . 
(a)      For each Plan Year, the Base Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Salary payment in equal amounts, as adjusted from time to time for increases and decreases in Base Salary. The Bonus, Commission, Performance Shares, Restricted Stock Units, and/or Director Fees portion of the Annual Deferral Amount shall be withheld at the time these amounts are or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself. Annual Deferral Amounts shall be credited to the Participant’s Annual Account for such Plan Year at the time such amounts would otherwise have been paid to the Participant.
(b)      Any paydays relating to periods of service that cross-over the calendar year end shall be covered by the Participant’s deferral election in effect for the later year, consistent with the default rules under Treasury Regulations Section1.409A-2(a)(13).
3.5      Company Contribution Amount . 
(a)      An Employer is not generally required to make Employer Contributions to this Plan. Employer Contributions may be made, however, as provided under the following subsections of this Section and Section 3.6.

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(b)      For each Plan Year, an Employer may be required to credit amounts to a Participant’s Annual Account in accordance with employment or other agreements entered into between the Participant and the Employer, which amounts shall be part of the Participant’s Company Contribution Amount for that Plan Year. Such amounts shall be credited to the Participant’s Annual Account for the applicable Plan Year on the date or dates prescribed by such agreements.
(c)      For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it decides, in its discretion, to contribute to any Participant’s Annual Account under this Plan, which amount shall be part of the Participant’s Company Contribution Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive a Company Contribution Amount for that Plan Year. The Company Contribution Amount described in this Section 3.5(c), if any, shall be credited to the Participant’s Annual Account for the applicable Plan Year on a date or dates to be determined by the Committee, in its sole discretion.
3.6      Company Restoration Matching Amount .  A Participant’s Company Restoration Matching Amount for any Plan Year shall be an amount, which is determined by the Committee to make up for a reduction in the Participant’s match in the 401(k) Plan for the Plan Year, if any, due to the Participant’s deferral of Base Salary, Commissions, and Bonus into this Plan for the Plan Year. In order to be eligible for a Company Restoration Matching Amount, a Participant must contribute the maximum amount that he or she is eligible to contribute to the 401(k) Plan year that corresponds to the Plan Year of this Plan. The amount of the Company Restoration Matching Amount shall be computed by determining the increase in the Participant’s eligible compensation (the “Increase”) under the 401(k) Plan for the Plan Year that would have occurred, absent the Participant’s election to participate in this Plan; the Company Restoration Matching Amount equals the additional matching contribution to the 401(k) Plan that would have occurred if the Participant’s eligible compensation had been increased by the Increase and the Participant had deferred that portion of the Increase into the 401(k) Plan that would have resulted in the maximum matching contribution by the Company with respect to the Increase. For example, if (a) the maximum eligible compensation under the 401(k) Plan for a Plan Year is $260,000, (b) the Company matches 50% of the first 6% of eligible compensation contributed by a Participant under the 401(k) Plan, and (c) eligible compensation under the 401(k) Plan is reduced to $220,000 because of the Participant’s deferral election under this Plan, the Company Restoration Matching Amount would be $1,200 (or 50% of 6% of $40,000). The Participant’s Company Restoration Matching Amount, if any, shall be credited to the Participant’s Annual Account for the applicable Plan Year on a date or dates to be determined by the Committee, in its sole discretion.
3.7      Crediting of Amounts after Benefit Distribution .  Notwithstanding any provision in this Plan to the contrary, should the complete distribution of a Participant’s vested Account Balance occur prior to the date on which any portion of (i) the Annual Deferral Amount that a

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Participant has elected to defer in accordance with Section 3.3, (ii) the Company Contribution Amount, or (iii) the Company Restoration Matching Amount, would otherwise be credited to the Participant’s Account Balance, such amounts shall not be credited to the Participant’s Account Balance, but shall be paid to the Participant in a manner determined by the Committee, in its sole discretion.
3.8      Vesting . 
(a)      A Participant shall at all times be 100% vested in his or her deferrals of Base Salary, Commissions, Performance Shares, Restricted Stock Units, Bonus and Director Fees, as applicable, plus Deemed Earnings thereon.
(b)      A Participant shall be vested in the portion of his or her Account Balance attributable to any Company Contribution Amounts, plus Deemed Earnings thereon, in accordance with the vesting schedule(s) set forth in his or her Plan Agreement, employment agreement or any other agreement entered into between the Participant and his or her Employer. If not addressed in such agreements, a Participant shall vest in the portion of his or her Account Balance attributable to any Company Contribution Amounts, plus Deemed Earnings thereon, in accordance with the vesting schedule declared by the Committee in its sole discretion.
(c)      A Participant shall be vested in the portion of his or her Account Balance attributable to any Company Restoration Matching Amounts, plus Deemed Earnings thereon, only to the extent that the Participant would be vested in such amounts under the provisions of the 401(k) Plan, as determined by the Committee in its sole discretion.
3.9      Crediting/Debiting of Account Balances .  In accordance with, and subject to, the rules and procedures that are established from time to time by the Committee, in its sole discretion, amounts shall be credited or debited to a Participant’s Account Balance in accordance with the following rules:
(a)      Measurement Funds . The Committee shall select from time to time certain mutual funds, insurance company separate accounts, indexed rates or other methods (the “Measurement Funds”) for purposes of crediting or debiting additional amounts to Participants’ Account Balances. The Committee may discontinue, substitute or add a Measurement Fund, provided however, that any decision to retain, discontinue or substitute a Measurement Fund shall be made in good faith. Any discontinuance of a Measurement Fund will take effect not earlier than the first day of the first calendar quarter that begins at least 30 days after the day on which the Committee gives Participants advance written notice of such change, unless such advance notice cannot be given due to reasons beyond the control of the Company or the Committee, in which case notice of the change shall be given as soon as administratively practical.

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(b)      Company Stock Fund . With respect to the deferral of Performance Shares and Restricted Stock Units, unless otherwise specifically provided by the Committee, such deferrals may be only credited to a Measurement Fund denominated in units of common stock of the Company, and distributions from such fund shall only be made in shares of such stock.
(c)      Election of Measurement Funds . A Participant, in connection with his or her initial deferral election in accordance with Section 3.3 above, shall elect, on the Election Form, one or more Measurement Fund(s) (as described in Section 3.9(a) above) to be used to determine the amounts to be credited or debited to his or her Account Balance. If a Participant does not elect any of the Measurement Funds as described in the previous sentence, the Participant’s Account Balance shall automatically be allocated into a default Measurement Fund which is selected by the Committee and identified prior to such allocation in Plan communication materials. A Participant may (but is not required to) elect, by submitting an Election Form to the Committee that is accepted by the Committee or by any other procedure approved by the Committee, to add or delete one or more Measurement Fund(s) to be used to determine the amounts to be credited or debited to the Participant’s Account Balance, or to change the portion of the Participant’s Account Balance allocated to each previously or newly elected Measurement Fund. If an election is made in accordance with the previous sentence, it shall apply as of the first business day deemed reasonably practicable by the Committee, in its sole discretion, and shall continue thereafter for each subsequent day in which the Participant participates in the Plan, unless changed in accordance with the previous sentence.
(d)      Proportionate Allocation . In making any election described in Section 3.9(c) above, the Participant shall specify on the Election Form, in increments of one percent (1%), the percentage of his or her Account Balance or Measurement Fund, as applicable, to be allocated/reallocated.
(e)      Crediting or Debiting Method . The performance of each Measurement Fund (either positive or negative) will be determined on a daily basis based on the manner in which such Participant’s Account Balance has been hypothetically allocated among the Measurement Funds by the Participant.
(f)      No Actual Investment . Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and Participants’ elections of any such Measurement Fund, the allocations of their Account Balances thereto, and the calculation of additional amounts and the crediting or debiting of such amounts to the Account Balances, shall not be considered or construed in any manner as an actual investment of their Account Balances in any such Measurement Fund. In the event that the Company (or any other Employer) or the trustee of the Trust, in its own discretion, decides to invest funds in any or all of the investments on which the Measurement Funds are based, no Participant shall have any rights in or to such investments themselves. Without limiting the foregoing, a Participant’s

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Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by the Company or the Trust; all Participants shall at all times remain general unsecured creditors of the Company or any other Employer.
3.10      FICA and Other Taxes . 
(a)      Annual Deferral Amounts . For each Plan Year in which an Annual Deferral Amount is being withheld from a Participant, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Salary and/or Bonus Amounts that is not being deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.10.
(b)      Company Restoration Matching Amounts and Company Contribution Amounts . When a Participant becomes vested in a portion of his or her Account Balance attributable to any Company Restoration Matching Amounts and/or Company Contribution Amounts, the Participant’s Employer(s) shall withhold from that portion of the Participant’s Base Salary and/or Bonus that is not deferred, in a manner determined by the Employer(s), the Participant’s share of FICA and other employment taxes (or other required withholdings) on such amounts. If necessary, the Committee may reduce the vested portion of the Participant’s Company Restoration Matching Amount or Company Contribution Amount, as applicable, in order to comply with this Section 3.10.
(c)      Distributions . The Participant’s Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust.
ARTICLE 4
Scheduled Distribution; Unforeseeable Financial Emergencies
4.1      Scheduled Distribution .  In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a Scheduled Distribution with respect to (i) all or a portion of the Annual Deferral Amount not relating to Performance Shares or Restricted Stock Units (the “Cash Deferral Portion”), either in (A) a lump sum payment equal to the Cash Deferral Portion, plus Deemed Earnings thereon, calculated as of the close of business on or around the Scheduled Distribution Date (as defined below), as determined by the Committee, or (B) pursuant to an Annual Installment Method of 5 years, in accordance with the Participant’s election; and/or (ii) all or a portion of the Annual Deferral Amount relating to Performance Shares or Restricted Stock Units (the “Equity Deferral Portion”), in a lump sum payment equal to the Equity Deferral Portion, plus Deemed Earnings thereon, calculated as of the close of business on or around

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the Scheduled Distribution Date, as determined by the Committee. If the Participant does not make an election with respect to the form of payment for a Scheduled Distribution with respect to any Cash Deferral Portion (the “Applicable Scheduled Distribution”), then the Participant shall be deemed to have elected to receive such distribution as a lump sum payment. Subject to the other terms and conditions of this Plan, (a) an Applicable Scheduled Distribution shall be paid or begin to be paid out (as applicable) during the 60 day period commencing immediately after the first day of any month of the Plan Year designated by the Participant, and (b) a Scheduled Distribution with respect to any Equity Deferral Portion shall be paid out at the time determined by the Committee during the Plan Year designated by the Participant (in either case, the “Scheduled Distribution Date”). In any event, the Plan Year designated by the Participant with respect to any Cash Deferral Portion must be at least three Plan Years after the end of the Plan Year to which the Participant’s deferral election described in Section 3.3 relates, and the Plan Year designated by the Participant with respect to any Equity Deferral Portion must be at least three Plan Years after the end of the Plan Year in which the applicable equity compensation is scheduled to vest, as set forth in the related Election Form.
4.2      Changes to Scheduled Distributions .  A Participant may elect to postpone a Scheduled Distribution described in Section 4.1 above and/or change the form of payment of an Applicable Scheduled Distribution by submitting a new Scheduled Distribution Election Form to the Committee in accordance with the following criteria:
(a)      Such Scheduled Distribution Election Form must be submitted to and accepted by the Committee in its sole discretion at least 12 months prior to the Participant’s previously designated Scheduled Distribution Date;
(b)      The Participant must select a new Scheduled Distribution Date that is the first day of a Plan Year and is at least five years after the previously designated Scheduled Distribution Date; and
(c)      The election of the new Scheduled Distribution Date shall have no effect until at least 12 months after the date on which the election is made.
For purposes of applying the requirements above, the right to receive installment payments shall be treated as the entitlement to a single payment. The Committee shall interpret all provisions relating to an election described in this Section 4.2 in a manner that is consistent with Code Section 409A and related Treasury guidance or Regulations. The Scheduled Distribution Election Form most recently accepted by the Committee in accordance with the criteria set forth above shall govern the related Scheduled Distribution.


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4.3      Unforeseeable Emergencies . 
(a)      Notwithstanding any contrary Plan provision, if a Participant experiences an Unforeseeable Emergency, the Participant may petition the Committee to receive a partial or full payout under the Plan, subject to the provisions set forth below.
(b)      The payout, if any, under the Plan shall not exceed the lesser of (i) the vested portion of the Participant’s unpaid Account Balance, calculated as of the close of business on or around the date on which the amount becomes payable, as determined by the Committee, or (ii) the amount necessary to satisfy the Unforeseeable Emergency, plus amounts necessary to pay Federal, state, or local income taxes or penalties reasonably anticipated as a result of the distribution. Notwithstanding the foregoing, a Participant may not receive a payout under the Plan to the extent that the Unforeseeable Emergency is or may be relieved (A) through reimbursement or compensation by insurance or otherwise, (B) by liquidation of the Participant’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship or (C) by cessation of deferrals under this Plan.
(c)      If the Committee, in its sole discretion, approves a Participant’s petition for payout under the Plan, the Participant shall receive the payout within 60 days of the date of such approval, and the Participant’s deferral election for that year under the Plan shall be terminated as of the date of such approval.
(d)      In addition, a Participant’s deferral elections under this Plan shall be terminated to the extent the Committee determines, in its sole discretion, that termination of such Participant’s deferral elections is required pursuant to Treasury Regulations Section1.401(k)-1(d)(3) for the Participant to obtain a hardship distribution from an Employer’s 401(k) Plan. If the Committee determines, in its sole discretion, that a termination of the Participant’s deferrals is required in accordance with the preceding sentence, the Participant’s deferrals shall be terminated as soon as administratively practicable following the date on which such determination is made.
(e)      Notwithstanding the foregoing, the Committee shall interpret all provisions relating to a payout and/or termination of deferrals under this Section 4.3 in a manner that is consistent with Code Section 409A and related Treasury guidance and Regulations.
ARTICLE 5
Change in Control Benefit
5.1      Change in Control Benefit .  A Participant, in connection with his or her commencement of participation in the Plan, shall irrevocably elect on an Election Form whether to (i) receive a Change in Control Benefit upon the occurrence of a Change in Control, which shall be equal to the Participant’s vested Account Balance, calculated as of the close of business on or around

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the Participant’s Benefit Distribution Date, as determined by the Committee, or (ii) to have his or her Account Balance remain in the Plan upon the occurrence of a Change in Control and to have his or her Account Balance remain subject to the terms and conditions of the Plan. If a Participant does not make any election with respect to the payment of the Change in Control Benefit, then such Participant’s Account Balance shall remain in the Plan upon a Change in Control and shall be subject to the terms and conditions of the Plan.
5.2      Payment of Change in Control Benefit .  Notwithstanding any contrary Plan provision, including, but not limited to, Article 4, the Change in Control Benefit, if any, shall be paid to the Participant in a lump sum no later than 60 days after the Participant’s Benefit Distribution Date. The Committee shall interpret all provisions in this Plan relating to a Change in Control Benefit in a manner that is consistent with Code Section 409A and related Treasury guidance and Regulations.
ARTICLE 6
Termination Benefit
6.1      Termination Benefit .  Notwithstanding any contrary Plan provision, including, but not limited to, Article 4, and subject to Section 6.3, a Participant who incurs a Termination (a “Terminated Participant”) shall receive, as a Termination Benefit, the vested portion of his or her Account Balance that is not then in pay status, calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as determined by the Committee.
6.2      Payment of Termination Benefit . 
(a)      In connection with a Participant’s election to defer an Annual Deferral Amount, the Participant shall elect the form in which his or her Annual Account or applicable portion(s) thereof for such Plan Year (each, an “Applicable Annual Account”) will be paid, as set forth on the related Election Form. The Participant may elect to receive an Applicable Annual Account in the form of a lump sum or pursuant to an Annual Installment Method of 5, 10 or 15 years; provided, however, that any Applicable Annual Account relating to Performance Shares or Restricted Stock Units shall be payable only in the form of a lump sum. If a Participant does not make any election with respect to the payment of an Applicable Annual Account, then the Participant shall be deemed to have elected to receive such payment in the form of a lump sum.
(b)      A Participant may change the form of payment for an Applicable Annual Account not relating to Performance Shares or Restricted Stock Units by submitting a new Election Form to the Committee in accordance with the following criteria:
(i)      The new Election Form shall have no effect until at least twelve (12) months after the date on which it is accepted by the Committee; and

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(ii)      Each payment related to the Applicable Annual Account shall be delayed at least five years from the previously scheduled Benefit Distribution Date for such account.
For purposes of applying the requirements above, the right to receive installment payments shall be treated as the entitlement to a single payment. The Committee shall interpret all provisions relating to an election described in this Section 6.2 in a manner that is consistent with Code Section 409A and related Treasury guidance or Regulations. The Election Form most recently accepted by the Committee in accordance with the criteria set forth above shall govern the payout of the Applicable Annual Account.
(c)      The lump sum payment shall be made, or installment payments shall commence, as applicable, no later than 60 days after the Benefit Distribution Date. Remaining installments, if any, shall continue in accordance with the Participant’s election for each Applicable Annual Account and shall be paid no later than 60 days after each anniversary of the Benefit Distribution Date.
6.3      Small Account Balances .  Notwithstanding any contrary Plan provision, if the value of a Terminated Participant’s vested Account Balance as of his or her Benefit Distribution Date (as defined in Section 1.8(a)) is less than or equal to the applicable limit under Code Section 402(g) that is in effect at such time, payment of such vested Account Balance (including any amounts already in pay status) automatically shall be made in the form of a lump sum no later than 60 days after the Benefit Distribution Date, provided, that such payment results in the termination and liquidation of the Participant’s interest under the Plan (and under any other arrangements with which the Plan must be aggregated pursuant to Treasury Regulations Section 1.409A-1(c)(2)). The Committee shall interpret all provisions relating to a cashout under this Section 6.3 in a manner that is consistent with Code Section 409A and related Treasury guidance or Regulations.
ARTICLE 7
Disability Benefit
7.1      Disability Benefit .  Notwithstanding any contrary Plan provision, including, but not limited to, Article 4, a Participant who incurs a Disability shall receive, as a Disability Benefit, the vested portion of his or her Account Balance that is not then in pay status, calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as determined by the Committee.
7.2      Payment of Disability Benefit . 
(a)      The Participant’s Disability Benefit shall be paid in the form in which the Participant elected or was deemed to have elected to receive his or her Termination Benefit for each Applicable Annual Account in accordance with Section 6.2(a); provided, however, that any

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Applicable Annual Account relating to Performance Shares or Restricted Stock Units shall be payable only in the form of a lump sum.
(b)      The lump sum payment shall be made, or installment payments shall commence, as applicable, no later than 60 days after the Benefit Distribution Date. Remaining installments, if any, shall continue in accordance with the Participant’s election for each Applicable Annual Account and shall be paid no later than 60 days after each anniversary of the Benefit Distribution Date.
ARTICLE 8
Death Benefit
8.1      Death Benefit .  Notwithstanding any contrary Plan provision, including, but not limited to, Article 4, a Participant’s Beneficiary(ies) shall receive a Death Benefit upon the Participant’s death which will be equal to the Participant’s vested Account Balance, calculated as of the close of business on or around the Participant’s Benefit Distribution Date, as determined by the Committee. A copy of the related death notice or other sufficient documentation must be filed with and approved by the Committee.
8.2      Payment of Death Benefit .  The Death Benefit shall be paid to the Participant’s Beneficiary(ies) in a lump sum payment no later than 90 days after the Participant’s Benefit Distribution Date.
ARTICLE 9
Beneficiary Designation
9.1      Beneficiary .  Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates.
9.2      Beneficiary Designation; Change; Spousal Consent .  A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee’s rules and procedures, as in effect from time to time. If the Participant names someone other than his or her Spouse as a Beneficiary, spousal consent is required and shall be provided in a form designated by the Committee, executed by such Participant’s Spouse and returned to the Committee. Any spousal consent required under the Plan shall be valid only with respect to the Spouse who signed the spousal consent. Upon the acceptance by the Committee of a

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new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death.
9.3      Acknowledgment .  No designation or change in designation of a Beneficiary shall be effective until received and acknowledged in writing by the Committee or its designated agent.
9.4      No Beneficiary Designation .  If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant’s benefits, then the Participant’s designated Beneficiary shall be deemed to be his or her surviving Spouse. If the Participant has no surviving Spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant’s estate (on behalf of the estate).
9.5      Doubt as to Beneficiary .  If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant’s Employer to withhold such payments until this matter is resolved to the Committee’s satisfaction.
9.6      Discharge of Obligations .  The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant’s Plan Agreement shall terminate upon such full payment of benefits.
ARTICLE 10
Leave of Absence
10.1      Paid Leave of Absence .  If a Participant is authorized by the Participant’s Employer to take a paid leave of absence from the employment of the Employer, and such leave of absence does not constitute a separation from service, as determined by the Committee in accordance with Code Section 409A and related Treasury guidance and Regulations, (i) the Participant shall continue to be considered eligible for the benefits provided in Articles 4, 5, 6, 7, or 8 in accordance with the provisions of those Articles, and (ii) the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.3.
10.2      Unpaid Leave of Absence .  If a Participant is authorized by the Participant’s Employer to take an unpaid leave of absence from the employment of the Employer for any reason, and such leave of absence does not constitute a separation from service, as determined by the Committee in accordance with Code Section 409A and related Treasury guidance and Regulations, such Participant shall continue to be eligible for the benefits provided in Articles 4, 5, 6, 7, or 8 in accordance with the provisions of those Articles. However, the Participant shall be excused from

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fulfilling his or her Annual Deferral Amount commitment that would otherwise have been withheld during the period during which the unpaid leave of absence is taken. If a Participant returns from the leave of absence during the Plan Year in which leave of absence began, the Participant’s deferral election shall be immediately reinstated for the remainder of the year with respect to eligible compensation earned subsequent to the return from the leave of absence. In addition, if the Participant returns to employment, the Participant may elect to defer an Annual Deferral Amount for the Plan Year following his or her return to employment and for every Plan Year thereafter while a Participant in the Plan, provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above.
10.3      Leaves Resulting in Separation from Service .  In the event that a Participant’s leave of absence from his or her Employer constitutes a separation from service, as determined by the Committee in accordance with Code Section 409A and related Treasury guidance and Regulations, the Participant’s vested Account Balance shall be distributable to the Participant in accordance with Article 6 of this Plan.
ARTICLE 11
Termination of Plan, Amendment or Modification
11.1      Termination of Plan .  Although the Company anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that the Company will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, the Company reserves the right to Terminate the Plan, either entirely or with respect to one or more Employers participating in the Plan. Such action shall be taken by the Board or its delegate. In the event of a Termination of the Plan, the Measurement Funds available to Participants following the Termination of the Plan shall be comparable in number and type to those Measurement Funds available to Participants in the Plan Year preceding the Plan Year in which the Termination of the Plan is effective. Following a Termination of the Plan, Participant Account Balances shall remain in the Plan until the Participant becomes eligible for the benefits provided in Articles 4, 5, 6, 7, or 8 in accordance with the provisions of those Articles. The Termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination. Notwithstanding the foregoing, to the extent permissible under Code Section 409A and related Treasury guidance or Regulations, during the 30 days preceding or within 12 months following a Change in Control, the Company shall be permitted to (i) terminate the Plan, and (ii) distribute the vested Account Balances to Participants in a lump sum no later than 12 months after the Change in Control, provided that all other substantially similar arrangements sponsored by such Company are also terminated and all balances in such arrangements are distributed within 12 months of the termination of such arrangements.

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11.2      Amendment . 
(a)      The Company, acting through the Board or a delegate of the Board, may, at any time, amend or modify the Plan in whole or in part with respect to the Company or a particular Employer. Notwithstanding the foregoing, (i) no amendment or modification shall be effective to decrease the value of a Participant’s vested Account Balance in existence at the time the amendment or modification is made, and (ii) no amendment or modification of this Section 11.2 or Section 12.2 of the Plan shall be effective.
(b)      Notwithstanding any provision of the Plan to the contrary, in the event that the Company determines that any provision of the Plan may cause amounts deferred under the Plan to become immediately taxable to any Participant under Code Section 409A and related Treasury guidance or Regulations, the Company may (i) adopt such amendments to the Plan and appropriate policies and procedures, including amendments and policies with retroactive effect, that the Company determines necessary or appropriate to preserve the intended tax treatment of the Plan benefits provided by the Plan and/or (ii) take such other actions as the Company determines necessary or appropriate to comply with the requirements of Code Section 409A and related Treasury guidance or Regulations.
11.3      Plan Agreement .  Despite the provisions of Sections 11.1 and 11.2 above, if a Participant’s Plan Agreement contains benefits or limitations that are not in this Plan document, the Company may only amend or terminate such provisions with the written consent of the Participant.
11.4      Effect of Payment .  The full payment of the Participant’s vested Account Balance under Articles 4, 5, 6, 7, or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan, and the Participant’s Plan Agreement shall terminate.
ARTICLE 12
Administration
12.1      Committee Duties .  Except as otherwise provided in this Article 12, this Plan shall be administered by a Committee, which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan, and (ii) decide or resolve any and all questions, including benefit entitlement determinations and interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company.

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12.2      Administration Upon Change in Control .  Within 120 days following a Change in Control, an independent third party administrator (the “Administrator”) may be selected by the individual who, immediately prior to the Change in Control, was the Company’s Chief Executive Officer (the “Ex-CEO”). The Committee, as constituted prior to the Change in Control, shall continue to be the Administrator until the earlier of (i) the date on which such independent third party is selected and approved, or (ii) the expiration of the 120 day period following the Change in Control. If an independent third party is not selected within 120 days of such Change in Control, the Committee, as described in Section 12.1 above, shall be the Administrator. The Administrator shall have the discretionary power to determine all questions arising in connection with the administration of the Plan and the interpretation of the Plan, including, but not limited to, benefit entitlement determinations; provided, however, upon and after the occurrence of a Change in Control, the Administrator shall have no power to direct the investment of Plan assets or select any investment manager or custodial firm for the Plan. Upon and after the occurrence of a Change in Control, the Company must: (1) pay all reasonable administrative expenses and fees of the Administrator; (2) indemnify the Administrator against any costs, expenses and liabilities including, without limitation, attorney’s fees and expenses arising in connection with the performance of the Administrator hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the Administrator or its employees or agents; and (3) supply full and timely information to the Administrator on all matters relating to the Plan, the Participants and their Beneficiaries, the Account Balances of the Participants, the date and circumstances of the Termination, Disability, or death of the Participants, and such other pertinent information as the Administrator may reasonably require. Upon and after a Change in Control, the Administrator may be terminated (and a replacement appointed) by the Ex-CEO. Upon and after a Change in Control, the Administrator may not be terminated by the Company.
12.3      Agents .  In the administration of this Plan, the Committee or the Administrator, as applicable, may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel.
12.4      Binding Effect of Decisions .  Any decision or action of the Committee or Administrator, as applicable, with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder, shall be final and conclusive and binding upon all persons or entities having any interest in the Plan, and shall be given the maximum possible deference permitted by law.
12.5      Indemnity of Committee .  All Employers shall indemnify and hold harmless the members of the Committee, any Employee to whom the duties of the Committee may be delegated, and the Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee or the Administrator.

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12.6      Employer Information .  To enable the Committee and/or Administrator to perform its functions, the Company and each Employer shall supply full and timely information to the Committee and/or Administrator, as the case may be, on all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the compensation of its Participants, the date and circumstances of the Termination, Disability, or death of its Participants, and such other pertinent information as the Committee or Administrator may reasonably require.
ARTICLE 13
Other Benefits and Agreements
13.1      Coordination with Other Benefits .  The benefits provided for a Participant and Participant’s Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant’s Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.
ARTICLE 14
Claims Procedures
14.1      Presentation of Claim .  Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a “Claimant”), or his or her representative who is duly authorized in writing by the Claimant to act on his or her behalf (an “Authorized Representative”), may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant under the Plan. The claim must state with particularity the determination desired by the Claimant.
14.2      Notification of Decision . 
(a)      General . If a Claimant’s written claim for benefits (other than benefits due to a Disability (a “Disability Claim”)) under the Plan is denied in whole or in part, the Committee will provide written notice of such denial to the Claimant within a reasonable period of time, but no later than 90 calendar days after the Committee’s receipt of the claim, unless the Committee, in its discretion, determines that special circumstances necessitate an extension of up to 90 additional calendar days to review the claim, in which case the Claimant will be notified in writing of the extension before the end of the initial 90-day period, the special circumstances necessitating the extension and the date by which the Committee expects to render its decision on the claim.
(b)      Disability Claim . If a Claimant’s Disability Claim under the Plan is denied in whole or in part, the Committee will provide written notice of such denial to the Claimant within a reasonable period of time, but no later than 45 calendar days after the Committee’s receipt of the

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Disability Claim, unless the Committee, in its discretion, determines that matters beyond its control necessitate an extension of up to 30 additional calendar days to review the Disability Claim, in which case the Claimant will be notified in writing of the extension before the end of the initial 45-day period. If the Committee determines that a decision on the Disability Claim cannot be made within the first 30-day extension period due to matters beyond its control, the time period for making the decision may be further extended for an additional 30 calendar days. If such an additional extension is necessary, the Committee shall notify the Claimant before the end of the initial 30-day extension period. Any notice of extension shall indicate the circumstances necessitating the extension of time, the date by which the Committee expects to render a decision on the Disability Claim, the specific standards on which such entitlement to a benefit is based, any unresolved issues that prevent a decision on the Disability Claim and any additional information needed to resolve those issues. The Claimant will be provided a minimum of 45 calendar days to submit any such additional information to the Committee. In the event that a 30-day extension is necessary due to the Claimant’s failure to submit information necessary to decide the Disability Claim, the period for furnishing a notice of decision shall be tolled from the date on which the notice of the extension is sent to the Claimant until the earlier of the date the Claimant responds to the request for additional information or the response deadline
(c)      Contents of Notice of Denial . If a Claimant’s claim for benefits under the Plan is denied, the notice of denial shall contain the following information:
(i)      The specific reason or reasons for the denial in plain language;
(ii)      A specific reference to the pertinent Plan provisions on which the denial was based;
(iii)      A description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary;
(iv)      An explanation of the claims review procedures set forth in Sections 14.3 and 14.4, as applicable, and the time limits applicable to such procedures; and
(v)      A statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse determination upon review.
(vi)      In the case of a denial of a Disability Claim, the notice also shall include a statement that the Committee will provide to the Claimant, upon request and free of charge, a copy of any internal rule, guideline, protocol or other similar criterion that was relied upon in denying the Disability Claim.


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14.3      Review of a Denied Claim . 
(a)      General . A Claimant whose claim for benefits (other than a Disability Claim) under the Plan has been wholly or partially denied, or his or her Authorized Representative, may appeal the denial by filing an appeal in writing to the Committee within 60 calendar days after the Claimant’s receipt of the notice of denial. A Claimant who timely appeals a claim denial will have the opportunity, upon request and free of charge, to have reasonable access to and copies of all documents, records and other information relevant to the Claimant’s claim, as determined by the Committee. The Claimant may submit written comments, documents, records and other information relating to his or her claim with the appeal. The Committee will review all comments, documents, records and other information submitted by the Claimant relating to the claim, regardless of whether such information was submitted or considered in the initial claim determination. The Committee shall make a decision on the Claimant’s appeal within a reasonable period of time, but no later than 60 calendar days after receiving the appeal, unless the Committee, in its discretion, determines that special circumstances necessitate an extension of up to 60 additional calendar days to review the appeal, in which case the Claimant will be notified in writing of the extension before the end of the initial 60-day period, the special circumstances necessitating the extension and the date by which the Committee expects to render its decision on the appeal.
(b)      Disability Claim . A Claimant whose Disability Claim under the Plan has been wholly or partially denied, or his or her Authorized Representative, may appeal the denial by filing an appeal in writing to the Committee within 180 calendar days after the Claimant’s receipt of the notice of denial. A Claimant who timely appeals a Disability Claim denial will have the opportunity, upon request and free of charge, to have reasonable access to and copies of all documents, records and other information relevant to the Claimant’s Disability Claim, as determined by the Committee. The Claimant may submit written comments, documents, records and other information relating to his or her Disability Claim with the appeal. The Committee will review all comments, documents, records and other information submitted by the Claimant relating to the Disability Claim, regardless of whether such information was submitted or considered in the initial claim determination. The review of the appeal shall be conducted by the Committee (exclusive of the person who made the initial adverse decision or such person’s subordinate). In reviewing the appeal, the Committee shall: (i) not afford deference to the initial denial of the Disability Claim, (ii) consult a health care professional who has appropriate training and experience in the field of medicine relating to the Claimant’s Disability and who was neither consulted as part of the initial denial nor is the subordinate of such individual, and (iii) identify any medical or vocational experts whose advice was obtained with respect to the initial benefit denial, without regard to whether the advice was relied upon in making the decision. The Committee shall make a decision on the Claimant’s appeal within a reasonable period of time, but no later than 45 calendar days after receiving the appeal, unless the Committee, in its discretion, determines that special circumstances necessitate an extension of up to

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45 additional calendar days to review the appeal, in which case the Claimant will be notified in writing of the extension before the end of the initial 45-day period, the special circumstances necessitating the extension and the date by which the Committee expects to render its decision on the appeal.
(c)      Contents of Notice . If the Claimant’s appeal is denied in whole or part, the Committee shall provide written notice to the Claimant of such denial. The written notice shall include the following information:
(i)      The specific reason or reasons for the denial;
(ii)      A specific reference to the pertinent Plan provisions on which the denial was based;
(iii)      A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant to the Claimant’s claim, as determined by the Committee; and
(iv)      A statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA.
(v)      In the case of a denial of an appealed Disability Claim, the notice also will include a statement that the Committee will provide to the Claimant, upon request and free of charge, a copy of any internal rule, guideline, protocol or other similar criterion relied upon in making the decision.
14.4      Arbitration/Interest on Unpaid Amounts/Controlling Law . 
(a)      A Claimant whose claim for benefits (other than a Disability Claim) under the Plan has been denied on appeal (as described in Section 14.3), or his or her Authorized Representative, may submit the controversy to final and binding arbitration pursuant to the then most applicable Rules of the American Arbitration Association (“AAA”); provided, however, that unless the parties otherwise agree, the arbitration shall be before a single arbitrator selected either by mutual agreement or, failing agreement, from a list of seven arbitrators provided by AAA, (1) four of whom shall be retired judges of the Superior or Appellate Courts of California who are residents of Santa Clara, counties adjoining to Santa Clara County, or San Francisco County, and, if such list exists at the time of the dispute, who are members of the Independent List of Retired Judges, and (2) three of whom shall be members of the National Academy of Arbitrators, resident in Santa Clara, counties adjoining to Santa Clara County, or San Francisco County. In the event the parties are unable to agree upon such an arbitrator from such list of seven, each party shall strike one name in turn with the first to strike being chosen by lot. When only one name remains, that person shall be

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the parties’ arbitrator. Notwithstanding any contrary Plan provision, the parties hereto expressly waive their rights, if any, to have such matters heard by a jury or a judge, whether in state or federal court. The cost of the arbitration, including, but not limited to, any reasonable legal fees or other expenses incident thereto incurred in connection with such arbitration, shall be borne by the Employer unless the arbitrators(s) determines that the Claimant’s claim is frivolous, in which case the Claimant shall bear his own legal fees. In the arbitration the Committee’s decision on appeal shall be upheld unless the arbitrator(s) determine that the decision constitutes an abuse of discretion.
(b)      The Employer agrees to pay interest on any amounts payable to a Participant or Beneficiary under this Plan which are not paid within 30 days after the date when due and on any money judgment which is awarded to the Participant or Beneficiary following a proceeding to enforce any portion of this Plan from the date that payments should have been made under this Plan. Such interest shall be calculated at the prime rate offered by a bank designated by the Committee, or its successor, from the date that payments should have been made under this Plan to the time of actual payment.
14.5      Exhaustion of Plan’s Claims and Review Procedures Required . No Claimant or any representative thereof may institute any action or proceeding in any state or federal court of law or equity with respect to any claim for benefits under the Plan unless and until he or she has first exhausted the Plan’s claims and review procedures described in Sections 14.1 through 14.3 for every issue that he or she deems relevant with respect to such claim. Any such action must be brought no later than nine (9) months after the Committee’s denial of the claim on appeal, regardless of any state or federal statues establishing provisions relating to limitations on actions.
ARTICLE 15
Trust
15.1      Establishment of the Trust .  In order to provide assets from which to fulfill its obligations to the Participants and their Beneficiaries under the Plan, the Company may, in its sole discretion, establish a grantor trust (within the meaning of subpart E, part I, subchapter J, chapter I, subtitle A of the Code) by a trust agreement with a third party, the trustee, to which each Employer may, in its discretion, contribute cash or other property, including securities issued by the Company, to provide for the benefit payments under the Plan.
15.2      Interrelationship of the Plan and the Trust .  The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan.

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15.3      Distributions From the Trust .  Each Employer’s obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer’s obligations under this Plan.
ARTICLE 16
Miscellaneous
16.1      Unfunded Status of Plan .  The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that “is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Plan shall be administered and interpreted (i) to the extent possible in a manner consistent with the intent described in the preceding sentence, and (ii) in accordance with Code Section 409A and related Treasury guidance and Regulations. The foregoing notwithstanding, the Company makes no representation that the benefits provided under the Plan will comply with Code Section 409A and makes no undertaking to prevent Code Section 409A from applying to the benefits provided under the Plan or to mitigate its effects on any deferrals or payments made under the Plan.
16.2      Unsecured General Creditor .  Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer’s assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.
16.3      Designated Payment Date .  Notwithstanding any contrary Plan provision, any payment that is scheduled to be made to a Participant under the Plan on a date specified under the Plan (the “Designated Payment Date”) will be treated as made on the Designated Payment Date if such payment is made either (a) on that date or a later date that is no later than (i) the end of the Participant’s taxable year that includes the Designated Payment Date, or (ii) if later, the fifteenth (15 th ) calendar day of the third (3 rd ) calendar month immediately following the Designated Payment Date; or (b) no earlier than thirty (30) calendar days before the Designated Payment Date. In no event will the Participant be permitted, directly or indirectly, to designate the taxable year of such payment. For this purpose, if the date specified is only a designated taxable year of the Participant or a period of time during such taxable year, the date specified under the Plan is treated as the first day of such taxable year or the first day of the period of time during such taxable year, as applicable.
16.4      Employer’s Liability .  An Employer’s liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement.

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16.5      No Guarantees Regarding Tax Treatment .  Participants (or their Beneficiaries) will be responsible for all taxes with respect to any benefits under the Plan. The Board, the Committee, the Company and any other Employer make no guarantees regarding the tax treatment to any person of any deferrals or payments made under the Plan. Participants (or their Beneficiaries) shall be responsible for all taxes with respect to any benefits under the Plan and should consult with their own qualified tax advisors.
16.6      Nonassignability .  Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency or be transferable to a Spouse as a result of a property settlement or otherwise.
16.7      Not a Contract of Employment .  The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an “at will” employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. The Participant’s participation in the Plan shall not create a right to further employment with any Employer and shall not interfere with any ability of any Employer to terminate the Participant’s employment relationship at any time with or without cause.
16.8      Furnishing Information .  A Participant or his or her Beneficiary shall cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary.
16.9      Terms .  Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.
16.10      Captions .  The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.

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16.11      Governing Law .  The Plan is intended to comply with the provisions of Code Section 409A and related Treasury guidance and Regulations. Notwithstanding any contrary Plan provision, the Plan will be construed, administered and enforced in a manner that is consistent with such intent. The provisions of the Plan also will be construed, administered and enforced in accordance with the applicable provisions of ERISA, and to the extent not preempted by ERISA, with the applicable laws of the State of California (other than its conflict of laws provisions).
16.12      Notice .  Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:
Adobe Systems Incorporated
Attn: Senior Director of Compensation and Benefits
345 Park Avenue
San Jose, CA 95110-2704
A second copy shall also be sent to the General Counsel for the Company, at the same address listed above. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.
Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.
16.13      Successors .  The provisions of this Plan shall bind and inure to the benefit of the Participant’s Employer and its successors and assigns and the Participant and the Participant’s designated Beneficiaries.
16.14      Spouse’s Interest .  The interest in the benefits hereunder of a Spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such Spouse in any manner, including but not limited to such Spouse’s will, nor shall such interest pass under the laws of intestate succession.
16.15      Validity .  In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.
16.16      Incompetent .  If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person’s property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or

- 32 -





incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.
16.17      Court Order .  Notwithstanding any contrary Plan provision, the Committee is authorized to comply with any court order in any action in which the Plan or the Committee has been named as a party, including any action involving a determination of the rights or interests in a Participant’s benefits under the Plan. Notwithstanding the foregoing, the Committee shall interpret this provision in a manner that is consistent with Code Section 409A and other applicable tax law. In addition, if necessary to comply with a domestic relations order, as defined in Code Section 414(p)(1)(B), pursuant to which a court has determined that a Spouse or former Spouse of a Participant has an interest in the Participant’s benefits under the Plan, the Committee, in its sole discretion, shall have the right to immediately distribute the Spouse’s or former Spouse’s interest in the Participant’s benefits under the Plan to such Spouse or former Spouse, as provided in Treasury Regulations Section 1.409A-3(j)(4)(ii).
16.18      Distribution in the Event of Income Inclusion Under 409A .  If any portion of a Participant’s Account Balance under this Plan is required to be included in income by the Participant prior to receipt due to a failure of this Plan to meet the requirement of Code Section 409A and related Treasury guidance or Regulations, the Participant may petition the Committee or Administrator, as applicable, for a distribution of that portion of his or her Account Balance that is required to be included in his or her income. Upon the grant of such a petition, which grant shall not be unreasonably withheld, the Participant’s Employer shall distribute to the Participant immediately-available funds in an amount equal to the portion of his or her Account Balance required to be included in income as a result of the failure of the Plan to meet the requirements of Code Section 409A and related Treasury guidance or Regulations, which amount shall not exceed the Participant’s unpaid vested Account Balance under the Plan. If the petition is granted, such distribution shall be made within 90 days of the date when the Participant’s petition is granted. Such a distribution shall affect and reduce the Participant’s benefits to be paid under this Plan. Notwithstanding the preceding sentences of this Section, if the Committee determines that Code Section 409A requires that distribution of Account Balances be automatic in order to comply with Code Section 409A, the portion of a Participant’s Account Balance that fails to comply with the requirements of Code Section 409A shall be automatically distributed.
16.19      Deduction Limitation on Benefit Payments .  If an Employer reasonably anticipates that the Employer’s deduction with respect to any distribution from this Plan would be limited or eliminated by application of Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution from this Plan is deductible, the Employer may delay payment of any amount that would otherwise be distributed from this Plan.

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Any amounts for which distribution is delayed pursuant to this Section shall continue to be credited/debited with Deemed Earnings in accordance with Section 3.9 above. The delayed amounts (and any amounts credited thereon) shall be distributed to the Participant (or his or her Beneficiary in the event of the Participant’s death) at the earliest date the Employer reasonably anticipates that the deduction of the payment of the amount will not be limited or eliminated by application of Code Section 162(m).
16.20      Errors in Deferrals or Distributions . In the event of an operational error, including, but not limited to, an error involving deferral amounts, overpayments or underpayments, such operational error shall be corrected in a manner consistent with and as permitted by any correction procedures established under Code Section 409A or related Treasury guidance or Regulations.
16.21      Apportionment of Costs and Duties .  All acts required of the Employers under the Plan may be performed by the Company for itself and the other Employers, and the costs of the Plan will be equitably apportioned by the Committee among the Company and the other Employers. Whenever an Employer is permitted or required under the terms of the Plan to do or perform any act, matter or thing, it will be done and performed by any officer or employee of the Employer who is thereunto duly authorized by the board of directors of the Employer.
16.22      Insurance .  The Employers, on their own behalf or on behalf of the trustee of the Trust, and, in their sole discretion, may apply for and procure insurance on the life of a Participant, in such amounts and in such forms as the Trust may choose. The Employers or the trustee of the Trust, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies. Any application and procurement of insurance shall comply with Section 101(j) of the Code, including the requirements requiring proper notification to and consent by Participants. A Participant who has elected to be insured shall supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance.
IN WITNESS WHEREOF , the Company, by its duly authorized officer, has signed this restated Plan document on the date specified below.
Dated: November ___, 2014            Adobe Systems Incorporated
By: ____________________________
Title: VP, ERC & Rewards

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EXHIBIT 10.52

ADOBE SYSTEMS INCORPORATED
FY ‘15 NON-EMPLOYEE DIRECTOR COMPENSATION POLICY

(Effective First Day of FY 2015)
Cash Compensation
Board Member Annual Retainer
•
$60,000 annual fee
Board Chair Annual Retainer
•
$50,000 annual fee for each Chair
Committee Member Annual Retainers
• Audit Committee – $20,000 annual fee
• Executive Compensation Committee – $15,000 annual fee
• Nominating and Governance Committee – $7,500 annual fee

Committee Chair Retainers
• Audit Committee – $40,000 annual fee
• Executive Compensation Committee – $30,000 annual fee
• Nominating and Governance Committee – $15,000 annual fee

The annual retainers described above for Board Chair, Committee Member and Committee Chair service are in addition to the base $60,000 Board Member annual retainer. A Committee Chair receives the Chair retainer for the applicable Committee, but does not also receive the Committee Member Annual Retainer. All cash compensation is earned on a fiscal year basis, paid at the end of each quarter. Directors who commence service mid-quarter or who terminate service mid-quarter will receive pro-rated retainers to be paid at the end of the applicable quarter.
Each Director may elect to defer 5% to 100% of cash compensation in the Adobe Deferred Compensation Plan by timely submitting an election to the company.
Equity Compensation
New Director Restricted Stock Unit Award
A restricted stock unit award will be granted to each new Director on the date that the new Director is appointed to the Board of Directors based on the following conditions:
    
•
The award will be based upon a maximum target grant value of $260,000
•
The actual target grant value will be calculating by pro-rating the $260,000 maximum target grant value based on the number of calendar days remaining before (1) the next



Annual Meeting of Shareholders, if scheduled, or (2) the date of the first anniversary of our last Annual Meeting of Shareholders, if the next Annual Meeting of Shareholders is not yet scheduled
•
The actual target grant value (as calculated directly above) shall be converted into the number of shares underlying the award based on the average closing stock price over the 30 calendar days ending on the day before the date of grant (rounded down to the next whole share)
•
The award will vest 100% on the day immediately preceding the date of our next Annual Meeting of Stockholders
•
If the pro-rated actual target grant value of the award is less than $10,000, no equity grant shall be made to the new Director

Annual Restricted Stock Unit Award
An annual restricted stock unit award will be granted to each Director on the business day immediately following the date of our Annual Meeting of Stockholders based on the following conditions:

•
The award shall have a target grant value of $260,000
•
The target grant value shall be converted into the number of shares underlying the award based on the average closing stock price of Adobe common stock over the 30 calendar days ending on the day before the date of grant (rounded down to the next whole share)
•
The award will vest 100% on the day immediately preceding the date of our next Annual Meeting of Stockholders

Each Director may elect to defer either 0% or 100% (per vesting tranche) of restricted stock unit awards in the Adobe Deferred Compensation Plan by timely submitting an election.
All equity grants are subject to our Stock Ownership Guidelines.
This policy will be reviewed annually.



EXHIBIT 12.1

ADOBE SYSTEMS INCORPORATED
Consolidated Ratio of Earnings to Fixed Charges and
Consolidated Ratio of Earnings to Fixed Charges and Preferred Stock Dividends


(in thousands, except ratios)
Year Ended
 
November 28,
2014
 
November 29,
2013
 
November 30,
2012
 
December 2,
2011
 
December 3,
2010
Earnings:
 
 
 
 
 
 
 
 
 
Income before provision for
     income taxes
$
361,376

 
$
356,141

 
$
1,118,794

 
$
1,035,230

 
$
943,151

Add: fix charges
87,720

 
94,794

 
94,721

 
94,511

 
82,953

Total earnings
$
449,096

 
$
450,935

 
$
1,213,515

 
$
1,129,741

 
$
1,026,104

 
 
 
 
 
 
 
 
 
 
Total fixed charges (*)
87,720

 
94,794

 
94,721

 
94,511

 
82,953

Ratio of earnings to fixed
     charges
5.1

 
4.8

 
12.8

 
12.0

 
12.4

_________________________________________  
(*)  
Fixed charges consist of interest charges, the amortization of debt issuance costs and an estimate of interest as a component of rental expense.
Currently, we have no shares of preferred stock outstanding and we have not paid any dividends on preferred stock in the periods presented. Therefore, the ratios of earnings to combined fixed charges and preferred stock dividends are not different from the ratios of earnings to fixed charges.







EXHIBIT 21

ADOBE SYSTEMS INCORPORATED
SUBSIDIARIES OF THE REGISTRANT (*)  
Subsidiary Legal Name
 
Jurisdiction of Incorporation/Formation
The Americas:
 
 
Adobe Colombia SAS
 
Colombia
Adobe Labs, Inc.
 
Delaware
Adobe Offermatica LLC
 
Delaware
Adobe Systems Brasil Limitada
 
Brazil
Adobe Systems Canada Inc.
 
Canada
Adobe Systems Federal LLC
 
Delaware
Adobe Systems Software Chile Limitada
 
Chile
Adobe Visual Sciences LLC
 
Delaware
Aviary, Inc.
 
Delaware
Behance, Inc.
 
Delaware
Efficient Frontier, Inc.
 
Delaware
Omniture LLC
 
Delaware
Visual Sciences Technologies, LLC
 
Delaware
Europe:
 
 
Adobe Research (Schweiz) AG
 
Switzerland
Adobe Software Trading Company Limited
 
Ireland
Adobe Systems Holding Company Limited
 
Ireland
Adobe Systems (Schweiz) GmbH
 
Switzerland
Adobe Systems Belgium BVBA
 
Belgium
Adobe Systems Benelux BV
 
The Netherlands
Adobe Systems Danmark ApS
 
Denmark
Adobe Systems Engineering GmbH
 
Federal Republic of Germany
Adobe Systems Europe Limited
 
United Kingdom
Adobe Systems France SAS
 
France
Adobe Systems GmbH
 
Federal Republic of Germany
Adobe Systems Iberica SL
 
Spain
Adobe Systems Istanbul Yazilim Ticaret Limited Sirketi
 
Turkey
Adobe Systems Italia SRL
 
Italy
Adobe Systems Nordic AB
 
Sweden
Adobe Systems Norge AS
 
Norway
Adobe Systems Romania SRL
 
Romania
Adobe Systems s.r.o.
 
Czech Republic
Adobe Systems Software Ireland Limited
 
Ireland
ICS “Adobe Systems” S.R.L
 
Republic of Moldova
Limited Liability Company Adobe Systems
 
Russia
Limited Liability Company “Adobe Systems Ukraine”
 
Ukraine
Neolane Limited
 
United Kingdom
Neolane SAS
 
France
YaWah ApS
 
Denmark




Subsidiary Legal Name
 
Jurisdiction of Incorporation/Formation
Africa:
 
 
Adobe Systems South Africa Proprietary Limited
 
South Africa
Asia:
 
 
Adobe Systems Co. Ltd.
 
Japan
Adobe Systems Hong Kong Limited
 
Hong Kong
Adobe Systems India Private Limited
 
India
Adobe Systems Korea Ltd.
 
Korea
Adobe Systems New Zealand Limited
 
New Zealand
Adobe Systems Pte. Ltd.
 
Singapore
Adobe Systems Pty. Ltd.
 
Australia
Adobe Systems Software (Beijing) Co. Ltd.
 
China
Business Catalyst Systems Pty Ltd.
 
Australia
Efficient Frontier Technology India Private Limited
 
India
Neolane Pte. Ltd.
 
Singapore
Middle East:
 
 
Adobe Systems Israel Ltd.
 
Israel
_________________________________________  
(*)  
As of January 5, 2015

All subsidiaries of the registrant are wholly owned, directly or indirectly, by Adobe and do business under their legal names.







EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Adobe Systems Incorporated:
We consent to the incorporation by reference in the registration statements (Nos. 33‑10753, 33-18986, 33-23171, 33-30976, 33-36501, 33-38387, 33-48210, 33-63518, 33-78506, 33-83030, 33-83502, 33-83504, 33-84396, 33-86482, 33-59335, 33-63849, 33-63851, 333-28195, 333-28203, 333-28207, 333-57589, 333-81191, 333-87165, 333-39524, 333-52214, 333-57074, 333-72424, 333-90518, 333-108014, 333-130104, 333-130185, 333-144676, 333-153657, 333-158404, 333-162779, 333-167968, 333-170254, 333-171902, 333-174588, 333-175910, 333-177229, 333-178065, 333-179221, 333-180730, 333-186143, 333-189646, 333-190846, 333-197048 and 333-198973) on Form S-8 and registration statements (Nos. 333-164378 and 333-186144) on Form S-3 of Adobe Systems Incorporated of our report dated January 20, 2015, with respect to the consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of November 28, 2014 and November 29, 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended November 28, 2014, and the effectiveness of internal control over financial reporting as of November 28, 2014, which report appears in the November 28, 2014 annual report on Form 10‑K of Adobe Systems Incorporated.

(signed) KPMG LLP
Santa Clara, California
January 20, 2015







EXHIBIT 31.1
 
CERTIFICATIONS
 
I, Shantanu Narayen, certify that:

1.
I have reviewed this report on Form 10-K of Adobe Systems Incorporated;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
  
Dated: January 20, 2015
/s/ SHANTANU NARAYEN
 
Shantanu Narayen
 
President and Chief Executive Officer

 





EXHIBIT 31.2
 
CERTIFICATIONS
 
I, Mark Garrett, certify that:

1.
I have reviewed this report on Form 10-K of Adobe Systems Incorporated;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
  
 
Dated: January 20, 2015
/s/ MARK GARRETT
 
Mark Garrett
 
Executive Vice President and
 
Chief Financial Officer






EXHIBIT 32.1
 
CERTIFICATIONS PURSUANT TO
RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350
 
In connection with the Annual Report of Adobe Systems Incorporated (the “Registrant”) on Form 10-K for the annual period ended November 28, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Shantanu Narayen, certify, in accordance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge:

(1)
The Report, to which this certification is attached as Exhibit 32.1, fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 
Dated: January 20, 2015
/s/ SHANTANU NARAYEN
 
Shantanu Narayen
 
President and Chief Executive Officer
 
A signed original of this written statement required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
 
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.







EXHIBIT 32.2
 
CERTIFICATIONS PURSUANT TO
RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350
 
In connection with the Annual Report of Adobe Systems Incorporated (the “Registrant”) on Form 10-K for the annual period ended November 28, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark Garrett, certify, in accordance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge:

(1)
The Report, to which this certification is attached as Exhibit 32.2, fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
  
Dated: January 20, 2015
/s/ MARK GARRETT
 
Mark Garrett
 
Executive Vice President and
 
Chief Financial Officer
 
A signed original of this written statement required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.
 
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.