Edgar Filing: ADOBE SYSTEMS INC

ADBE 10Q Q212

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 1, 2012



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-15175

ADOBE SYSTEMS INCORPORATED

(Exact name of registrant as specified in its charter)

_________________________



Delaware (State or other jurisdiction of incorporation or organization)	77-0019522 (I.R.S. Employer Identification No.)

345 Park Avenue, San Jose, California 95110-2704

(Address of principal executive offices and zip code)

(408) 536-6000

(Registrant’s telephone number, including area code)

_________________________

Indicate by 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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The number of shares outstanding of the registrant’s common stock as of June 22, 2012 was 491,762,581.

ADOBE SYSTEMS INCORPORATED

FORM 10-Q

TABLE OF CONTENTS



		Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:	3
	Condensed Consolidated Balance Sheets June 1, 2012 and December 2, 2011	3
	Condensed Consolidated Statements of Income Three and Six Months Ended June 1, 2012 and June 3, 2011	4
	Condensed Consolidated Statements of Cash Flows Six Months Ended June 1, 2012 and June 3, 2011	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.	Controls and Procedures	39

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 6.	Exhibits	51
Signature		52
Summary of Trademarks		53
Index to Exhibits		54

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)



	June 1, 2012			December 2, 2011
	(Unaudited)			(*)
ASSETS
Current assets:
Cash and cash equivalents	$	951,238		$	989,500
Short-term investments	2,046,879			1,922,192
Trade receivables, net of allowances for doubtful accounts of $14,161 and $15,080, respectively	529,391			634,373
Deferred income taxes	79,360			91,963
Prepaid expenses and other current assets	163,939			133,423
Total current assets	3,770,807			3,771,451
Property and equipment, net	573,566			527,828
Goodwill	4,122,813			3,849,217
Purchased and other intangibles, net	600,332			545,526
Investment in lease receivable	207,239			207,239
Other assets	91,075			89,922
Total assets	$	9,365,832		$	8,991,183

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables	$	69,416		$	86,660
Accrued expenses	555,024			554,941
Capital lease obligations	9,426			9,212
Accrued restructuring	18,337			80,930
Income taxes payable	58,326			42,634
Deferred revenue	535,115			476,402
Total current liabilities	1,245,644			1,250,779
Long-term liabilities:
Debt and capital lease obligations	1,500,668			1,505,096
Deferred revenue	57,663			55,303
Accrued restructuring	12,148			7,449
Income taxes payable	151,671			156,958
Deferred income taxes	250,756			181,602
Other liabilities	47,636			50,883
Total liabilities	3,266,186			3,208,070
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; 493,987 and 491,540 shares outstanding, respectively	61			61
Additional paid-in-capital	2,886,953			2,753,896
Retained earnings	6,671,230			6,528,735
Accumulated other comprehensive income	20,615			29,950
Treasury stock, at cost (106,847 and 109,294 shares, respectively), net of reissuances	(3,479,213		)	(3,529,529		)
Total stockholders’ equity	6,099,646			5,783,113
Total liabilities and stockholders’ equity	$	9,365,832		$	8,991,183

^{_________________________________________}


(*)	The Condensed Consolidated Balance Sheet as of December 2, 2011 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 1, 2012			June 3, 2011			June 1, 2012			June 3, 2011
Revenue:
Products	$	871,022		$	829,979		$	1,679,543		$	1,672,668
Subscription	159,519			109,471			305,749			215,642
Services and support	93,908			83,729			184,377			162,575
Total revenue	1,124,449			1,023,179			2,169,669			2,050,885
Cost of revenue:
Products	40,074			34,666			65,742			65,383
Subscription	54,823			47,329			103,603			95,207
Services and support	36,021			27,206			69,838			56,250
Total cost of revenue	130,918			109,201			239,183			216,840
Gross profit	993,531			913,978			1,930,486			1,834,045
Operating expenses:
Research and development	180,903			183,211			358,631			361,611
Sales and marketing	386,459			348,690			745,422			676,768
General and administrative	110,603			95,547			213,284			196,526
Restructuring charges	(2,191		)	(586		)	(5,016		)	(545		)
Amortization of purchased intangibles	12,614			10,392			24,043			20,627
Total operating expenses	688,388			637,254			1,336,364			1,254,987
Operating income	305,143			276,724			594,122			579,058
Non-operating income (expense):
Interest and other income (expense), net	(1,128		)	(839		)	(3,913		)	(1,656		)
Interest expense	(16,629		)	(16,727		)	(33,467		)	(33,747		)
Investment gains (losses), net	7,188			86			8,209			1,676
Total non-operating income (expense), net	(10,569		)	(17,480		)	(29,171		)	(33,727		)
Income before income taxes	294,574			259,244			564,951			545,331
Provision for income taxes	70,698			29,808			155,866			81,304
Net income	$	223,876		$	229,436		$	409,085		$	464,027
Basic net income per share	$	0.45		$	0.46		$	0.83		$	0.92
Shares used to compute basic net income per share	495,950			499,686			494,983			501,910
Diluted net income per share	$	0.45		$	0.45		$	0.81		$	0.91
Shares used to compute diluted net income per share	501,377			506,280			502,154			509,572

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended
	June 1, 2012			June 3, 2011
Cash flows from operating activities:
Net income	$	409,085		$	464,027
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	147,035			132,906
Stock-based compensation	142,980			145,851
Deferred income taxes	58,094			28,796
Unrealized gains on investments	(7,403		)	(567		)
Other non-cash items	(13,578		)	10,714
Excess tax benefits from stock-based compensation	(5,354		)	(8,778		)
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net	134,658			(16,032		)
Prepaid expenses and other current assets	(32,956		)	(15,580		)
Trade payables	(43,203		)	8,101
Accrued expenses	(43,767		)	(72,145		)
Accrued restructuring	(56,156		)	(4,206		)
Income taxes payable	12,593			(4,004		)
Deferred revenue	60,553			52,350
Net cash provided by operating activities	762,581			721,433
Cash flows from investing activities:
Purchases of short-term investments	(910,579		)	(1,137,730		)
Maturities of short-term investments	281,911			254,706
Proceeds from sales of short-term investments	489,623			798,484
Acquisitions, net of cash acquired	(353,245		)	(36,572		)
Purchases of property and equipment	(111,855		)	(69,922		)
Purchases of long-term investments and other assets	(9,448		)	(10,672		)
Proceeds from sale of long-term investments	27,626			4,230
Other	—			(124		)
Net cash used for investing activities	(585,967		)	(197,600		)
Cash flows from financing activities:
Purchases of treasury stock	(305,000		)	(545,015		)
Proceeds from issuance of treasury stock	89,237			87,383
Excess tax benefits from stock-based compensation	5,354			8,778
Repayment of debt and capital lease obligations	(4,554		)	(3,624		)
Debt issuance costs	(2,297		)	—
Net cash used for financing activities	(217,260		)	(452,478		)
Effect of foreign currency exchange rates on cash and cash equivalents	2,384			6,229
Net (decrease) increase in cash and cash equivalents	(38,262		)	77,584
Cash and cash equivalents at beginning of period	989,500			749,891
Cash and cash equivalents at end of period	$	951,238		$	827,475
Supplemental disclosures:
Cash paid for income taxes, net of refunds	$	96,105		$	54,381
Cash paid for interest	$	34,172		$	31,972
Non-cash investing activities:
Issuance of common stock and stock awards assumed in business acquisitions	$	4,265		$	—

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We have prepared the accompanying unaudited Condensed Consolidated Financial Statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 2, 2011 on file with the SEC (our “Annual Report”).

There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.

Recent Accounting Pronouncements

There have been no new accounting pronouncements during the six months ended June 1, 2012, as compared to the recent accounting pronouncements described in our Annual Report, that are of significance, or potential significance, to us.

NOTE 2. ACQUISITIONS

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 reportable segment. The Efficient Frontier business adds cross-channel digital ad campaign forecasting, execution and optimization capabilities to our Adobe Digital Marketing Suite, along with a social marketing engagement platform and social ad buying capabilities. We have included the financial results of Efficient Frontier in our condensed consolidated financial statements beginning on the acquisition date.

Under the acquisition method of accounting, the total preliminary purchase price was allocated to Efficient Frontier’s net tangible and intangible assets based upon their estimated fair values as of January 13, 2012. In the second quarter of fiscal 2012, we made adjustments to the preliminary purchase price allocation. The total adjusted preliminary purchase price for Efficient Frontier was approximately $374.7 million of which approximately $289.5 million was allocated to goodwill, $122.7 million to identifiable intangible assets and $37.5 million to net liabilities assumed. The impact of this acquisition was not material to our condensed consolidated financial statements.

During fiscal 2011, we completed six business combinations with aggregate purchase prices totaling approximately $281.0 million of which approximately $212.3 million was allocated to goodwill, $87.5 million to identifiable intangible assets and $18.8 million to net liabilities assumed. We also completed two asset acquisitions with aggregate purchase prices totaling $47.3 million. We have included the financial results of the business combinations in our consolidated results of operations beginning on the acquisition dates, however the impact of these acquisitions were not material to our condensed 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 Condensed Consolidated Balance Sheets. Gains and losses are recognized when realized in our Condensed Consolidated Statements of Income. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. Gains and losses are determined using the specific identification method.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of June 1, 2012 (in thousands):



	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Current assets:
Cash	$	295,644	$	—	$	—		$	295,644
Cash equivalents:
Corporate bonds and commercial paper	20,497		—		—			20,497
Money market mutual funds and repurchase agreements	570,920		—		—			570,920
Municipal securities	751		—		—			751
Time deposits	53,818		—		—			53,818
U.S. Treasury securities	9,609		—		(1		)	9,608
Total cash equivalents	655,595		—		(1		)	655,594
Total cash and cash equivalents	951,239		—		(1		)	951,238
Short-term fixed income securities:
Corporate bonds and commercial paper	1,013,196		8,325		(695		)	1,020,826
Foreign government securities	6,745		27		—			6,772
Municipal securities	121,011		109		(6		)	121,114
U.S. agency securities	512,004		2,139		(58		)	514,085
U.S. Treasury securities	382,899		989		(58		)	383,830
Subtotal	2,035,855		11,589		(817		)	2,046,627
Marketable equity securities	321		—		(69		)	252
Total short-term investments	2,036,176		11,589		(886		)	2,046,879
Total cash, cash equivalents and short-term investments	$	2,987,415	$	11,589	$	(887	)	$	2,998,117

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of December 2, 2011 (in thousands):



	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Current assets:
Cash	$	261,206	$	—	$	—		$	261,206
Cash equivalents:
Corporate bonds and commercial paper	15,948		—		—			15,948
Money market mutual funds and repurchase agreements	687,152		—		—			687,152
Time deposits	15,694		—		—			15,694
U.S. agency securities	2,500		—		—			2,500
U.S. Treasury securities	7,000		—		—			7,000
Total cash equivalents	728,294		—		—			728,294
Total cash and cash equivalents	989,500		—		—			989,500
Short-term fixed income securities:
Corporate bonds and commercial paper	1,109,674		6,533		(4,670		)	1,111,537
Foreign government securities	7,280		43		—			7,323
Municipal securities	106,255		104		(4		)	106,355
U.S. agency securities	374,514		1,496		(117		)	375,893
U.S. Treasury securities	307,181		1,640		(4		)	308,817
Subtotal	1,904,904		9,816		(4,795		)	1,909,925
Marketable equity securities	10,581		1,686		—			12,267
Total short-term investments	1,915,485		11,502		(4,795		)	1,922,192
Total cash, cash equivalents and short-term investments	$	2,904,985	$	11,502	$	(4,795	)	$	2,911,692

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 June 1, 2012 and December 2, 2011 (in thousands):



	2012					2011
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Corporate bonds and commercial paper	$	184,432	$	(461	)	$	408,178	$	(4,438	)
Municipal securities	26,511		(6		)	17,125		(3		)
U.S. Treasury and agency securities	125,622		(117		)	133,857		(121		)
Total	$	336,565	$	(584	)	$	559,160	$	(4,562	)

There were 112 securities and 213 securities that were in an unrealized loss position for less than twelve months at June 1, 2012 and at December 2, 2011, respectively.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in a continuous unrealized loss position for more than twelve months, as of June 1, 2012 and December 2, 2011 (in thousands):



	2012					2011
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Corporate bonds and commercial paper	$	15,583	$	(234	)	$	22,918	$	(232	)
Municipal securities	—		—			2,668		(1		)
Total	$	15,583	$	(234	)	$	25,586	$	(233	)

There were 10 securities and 13 securities that were in an unrealized loss position for more than twelve months at June 1, 2012 and at December 2, 2011, respectively.

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 June 1, 2012 (in thousands):



	Amortized Cost		Estimated Fair Value
Due within one year	$	945,166	$	946,441
Due between one and two years	499,841		504,375
Due between two and three years	447,771		450,389
Due after three years	143,077		145,422
Total	$	2,035,855	$	2,046,627

We review our debt and marketable equity securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell, the investment before recovery of the investment’s amortized cost basis. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to interest and other income, net in our Condensed Consolidated Statements of Income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Condensed Consolidated Balance Sheets. For equity securities, the write-down would be recorded to investment gains (losses), net in our Condensed Consolidated Statements of Income. During the six months ended June 1, 2012, we did not consider any of our investments to be other-than-temporarily impaired.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 six months ended June 1, 2012.

The fair value of our financial assets and liabilities at June 1, 2012 was determined using the following inputs (in thousands):



	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Corporate bonds and commercial paper	$	20,497	$	—	$	20,497	$	—
Money market mutual funds and repurchase agreements	570,920		570,920		—		—
Municipal securities	751		—		751		—
Time deposits	53,818		53,818		—		—
U.S. Treasury securities	9,608		—		9,608		—
Short-term investments:
Corporate bonds and commercial paper	1,020,826		—		1,020,826		—
Foreign government securities	6,772		—		6,772		—
Marketable equity securities	252		252		—		—
Municipal securities	121,114		—		121,114		—
U.S. agency securities	514,085		—		514,085		—
U.S. Treasury securities	383,830		—		383,830		—
Prepaid expenses and other current assets:
Foreign currency derivatives	42,533		—		42,533		—
Other assets:
Deferred compensation plan assets	13,328		364		12,964		—
Total assets	$	2,758,334	$	625,354	$	2,132,980	$	—



Liabilities:
Accrued expenses:
Foreign currency derivatives	$	7,044	$	—	$	7,044	$	—
Total liabilities	$	7,044	$	—	$	7,044	$	—

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at December 2, 2011 was determined using the following inputs (in thousands):



	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Corporate bonds and commercial paper	$	15,948	$	—	$	15,948	$	—
Money market mutual funds and repurchase agreements	687,152		687,152		—		—
Time deposits	15,694		15,694		—		—
U.S. agency securities	2,500		—		2,500		—
U.S. Treasury securities	7,000		—		7,000		—
Short-term investments:
Corporate bonds and commercial paper	1,111,537		—		1,111,537		—
Foreign government securities	7,323		—		7,323		—
Marketable equity securities	12,267		12,267		—		—
Municipal securities	106,355		—		106,355		—
U.S. agency securities	375,893		—		375,893		—
U.S. Treasury securities	308,817		—		308,817		—
Prepaid expenses and other current assets:
Foreign currency derivatives	25,362		—		25,362		—
Other assets:
Deferred compensation plan assets	12,803		523		12,280		—
Total assets	$	2,688,651	$	715,636	$	1,973,015	$	—



Liabilities:
Accrued expenses:
Foreign currency derivatives	$	3,881	$	—	$	3,881	$	—
Total liabilities	$	3,881	$	—	$	3,881	$	—

See Note 3 for further information regarding the fair value of our financial instruments.

Our fixed income available-for-sale securities consist of high quality, investment grade securities from diverse issuers with a minimum credit rating of BBB and a weighted average credit rating of AA-. We value these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, we classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from pricing models that use non-binding market consensus prices that are corroborated by observable market data or quoted prices for similar instruments. 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.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We have direct investments in privately held companies accounted for under the cost method, which are periodically assessed for other-than-temporary impairment. If we determine that an other-than-temporary impairment has occurred, we write-down the investment to its fair value. We estimate fair value of our cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. For the three and six months ended June 1, 2012, we determined there were no material other-than-temporary impairments on our cost method investments.

As of June 1, 2012, the carrying value of our lease receivables approximated fair value, based on Level 2 valuation inputs which include Treasury rates, LIBOR rates and applicable credit spreads. See Note 12 for further details regarding our investment in lease receivables. The fair value of our long-term debt was approximately $1.6 billion as of June 1, 2012, based on Level 2 quoted prices in inactive markets. See Note 13 for further details regarding our debt.

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES

In countries outside the U.S., we transact business in U.S. Dollars and in various other currencies. Therefore, we are subject to exposure from movements in foreign currency rates. We may use foreign exchange option contracts or forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. The maximum original duration of any contract is twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.

We recognize derivative instruments from hedging activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income in our Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income, net in our Condensed Consolidated Statements of Income at that time.

We also hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income (expense), net in our Condensed Consolidated Statements of Income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.

We mitigate concentration of risk related to foreign currency hedges as well as interest rate hedges through a policy that establishes counterparty limits. The bank counterparties to these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum requirements as determined by 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 ongoing assessment of counterparty risk, we will adjust our exposure to various counterparties.

The aggregate fair value of derivative instruments in net asset positions as of June 1, 2012 and December 2, 2011 was $42.5 million and $25.4 million, respectively. These amounts represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by up to $7.0 million and $3.9 million, respectively, of liabilities included in master netting arrangements with those same counterparties.

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(Unaudited)

The fair value of derivative instruments on our Condensed Consolidated Balance Sheets as of June 1, 2012 and December 2, 2011 were as follows (in thousands):



	2012				2011
	Fair Value Asset Derivatives⁽¹⁾		Fair Value Liability Derivatives⁽²⁾		Fair Value Asset Derivatives⁽¹⁾		Fair Value Liability Derivatives⁽²⁾
Derivatives designated as hedging instruments:
Foreign exchange option contracts⁽³⁾	$	24,985	$	—	$	19,296	$	—
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	17,548		7,044		6,066		3,881
Total derivatives	$	42,533	$	7,044	$	25,362	$	3,881

^{_________________________________________}


⁽¹⁾	Included in prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.


⁽²⁾	Included in accrued expenses on our Condensed Consolidated Balance Sheets.


⁽³⁾	Hedging effectiveness expected to be recognized into income within the next twelve months.

The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges in our Condensed Consolidated Statements of Income for three and six months ended June 1, 2012 was as follows (in thousands):



	Three Months					Six Months
	Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts		Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI, net of tax⁽¹⁾	$	10,191		$	—	$	22,772		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax⁽²⁾	$	10,661		$	—	$	21,009		$	—
Net gain (loss) recognized in income⁽³⁾	$	(6,714	)	$	—	$	(14,958	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income⁽⁴⁾	$	—		$	8,423	$	—		$	16,573



	Three Months						Six Months
	Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts			Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI, net of tax⁽¹⁾	$	100		$	—		$	33		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax⁽²⁾	$	184		$	—		$	184		$	—
Net gain (loss) recognized in income⁽³⁾	$	(6,717	)	$	—		$	(15,023	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income⁽⁴⁾	$	—		$	(8,366	)	$	—		$	(18,516	)

^{_________________________________________}

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(Unaudited)


⁽¹⁾	Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).


⁽²⁾	Effective portion classified as revenue.


⁽³⁾	Ineffective portion and amount excluded from effectiveness testing classified in interest and other income (expense), net.


⁽⁴⁾	Classified in interest and other income (expense), net.

NOTE 6. GOODWILL AND PURCHASED AND OTHER INTANGIBLES

Goodwill as of June 1, 2012 and December 2, 2011 was $4.123 billion and $3.849 billion, respectively. The increase was primarily due to our acquisition of Efficient Frontier and foreign currency translation adjustments. During the second quarter of fiscal 2012, we completed our annual goodwill impairment test associated with our three reporting units - Digital Media, Digital Marketing and Print and Publishing - and determined there was no impairment of goodwill.

Purchased and other intangible assets subject to amortization as of June 1, 2012 and December 2, 2011 were as follows (in thousands):



	2012							2011
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Purchased technology	$	364,506	$	(124,215	)	$	240,291	$	314,057	$	(91,363	)	$	222,694
Customer contracts and relationships	$	313,892	$	(60,915	)	$	252,977	$	433,534	$	(229,364	)	$	204,170
Trademarks	52,950		(15,124		)	37,826		52,734		(11,217		)	41,517
Acquired rights to use technology	103,925		(50,995		)	52,930		106,865		(48,137		)	58,728
Localization	6,745		(5,058		)	1,687		9,762		(6,591		)	3,171
Other intangibles	22,416		(7,795		)	14,621		63,906		(48,660		)	15,246
Total other intangible assets	$	499,928	$	(139,887	)	$	360,041	$	666,801	$	(343,969	)	$	322,832
Purchased and other intangible assets, net	$	864,434	$	(264,102	)	$	600,332	$	980,858	$	(435,332	)	$	545,526

Amortization expense related to purchased and other intangible assets was $39.5 million and $72.6 million for the three and six months ended June 1, 2012, respectively. Comparatively, amortization expense was $33.6 million and $66.8 million for the three and six months ended June 3, 2011, respectively. Of these amounts, $27.0 million and $48.6 million were included in cost of sales for the three and six months ended June 1, 2012, respectively, and $23.3 million and $46.2 million were included in cost of sales for the three and six months ended June 3, 2011, respectively.

As of June 1, 2012, we expect amortization expense in future periods to be as follows (in thousands):



Fiscal Year	Purchased Technology		Other Intangible Assets
Remainder of 2012	$	37,382	$	31,863
2013	69,852		59,907
2014	63,808		55,762
2015	49,193		49,897
2016	11,492		44,462
Thereafter	8,564		118,150
Total expected amortization expense	$	240,291	$	360,041

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(Unaudited)

NOTE 7. ACCRUED EXPENSES

Accrued expenses as of June 1, 2012 and December 2, 2011 consisted of the following (in thousands):



	2012		2011
Accrued compensation and benefits	$	210,676	$	235,500
Sales and marketing allowances	50,368		58,156
Accrued corporate marketing	48,385		37,757
Taxes payable	24,023		26,732
Royalties payable	17,728		18,778
Accrued interest expense	20,969		21,010
Other	182,875		157,008
Accrued expenses	$	555,024	$	554,941

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

NOTE 8. STOCK-BASED COMPENSATION

The assumptions used to value option grants during the three and six months ended June 1, 2012 and June 3, 2011 were as follows:



	Three Months			Six Months
	2012		2011	2012	2011
Expected life (in years)	4.2		3.9 - 4.2	3.9 - 4.2	3.8 - 4.2
Volatility	31	%	30 - 31%	31 - 34%	30 - 35%
Risk free interest rate	0.71	%	1.34 - 1.74%	0.54 - 0.71%	1.34 - 1.74%

The expected life of employee stock purchase plan (“ESPP”) shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights during the three and six months ended June 1, 2012 and June 3, 2011 were as follows:



	Three Months			Six Months
	2012		2011	2012		2011
Expected life (in years)	0.5 - 2.0		0.5 - 2.0	0.5 - 2.0		0.5 - 2.0
Volatility	36	%	32 - 34%	36	%	32 - 34%
Risk free interest rate	0.06 - 0.27%		0.19 - 0.61%	0.06 - 0.27%		0.19 - 0.61%

Summary of Stock Options

Option activity for the six months ended June 1, 2012 and the fiscal year ended December 2, 2011 was as follows (in thousands):



	2012		2011
Beginning outstanding balance	34,802		37,075
Granted	57		4,507
Exercised	(4,804	)	(4,987	)
Cancelled	(3,767	)	(2,268	)
Increase due to acquisition	1,104		475
Ending outstanding balance	27,392		34,802

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(Unaudited)

Information regarding stock options outstanding at June 1, 2012 and June 3, 2011 is summarized below:



	Number of Shares (thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2012
Options outstanding	27,392	$	31.26	3.27	$	87.0
Options vested and expected to vest	26,741	$	31.38	3.20	$	82.9
Options exercisable	21,503	$	32.82	2.63	$	47.0
2011
Options outstanding	36,110	$	31.67	3.70	$	131.1
Options vested and expected to vest	34,746	$	31.72	3.61	$	126.4
Options exercisable	25,790	$	32.55	2.92	$	83.9

^{_________________________________________}


^(*)	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 June 1, 2012 and June 3, 2011 were $29.82 and $33.27, respectively.

Summary of Employee Stock Purchase Plan Shares

Employees purchased 1.1 million shares at an average price of $23.64 and 1.4 million shares at an average price of $20.61 for the six months ended June 1, 2012 and June 3, 2011, respectively. The intrinsic value of shares purchased during the six months ended June 1, 2012 and June 3, 2011 was $5.0 million and $15.3 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

Summary of Restricted Stock Units

Restricted stock unit activity for the six months ended June 1, 2012 and the fiscal year ended December 2, 2011 was as follows (in thousands):



	2012		2011
Beginning outstanding balance	16,871		13,890
Awarded	8,129		8,180
Released	(5,059	)	(3,819	)
Forfeited	(1,381	)	(1,587	)
Increase due to acquisition	114		207
Ending outstanding balance	18,674		16,871

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(Unaudited)

Information regarding restricted stock units outstanding at June 1, 2012 and June 3, 2011 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2012
Restricted stock units outstanding	18,674	1.74	$	555.6
Restricted stock units vested and expected to vest	15,949	1.64	$	473.7
2011
Restricted stock units outstanding	17,701	1.73	$	588.9
Restricted stock units vested and expected to vest	15,128	1.62	$	502.7

^{_________________________________________}


^(*)	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 June 1, 2012 and June 3, 2011 were $29.82 and $33.27, respectively.

Summary of Performance Shares

Effective January 24, 2012, the Executive Compensation Committee adopted the 2012 Performance Share Program (the “2012 Program”). The purpose of the 2012 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 2012 Program is our fiscal 2012 year. Members of our executive management and other key senior management are participating in the 2012 Program. Awards granted under the 2012 Program are granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If pre-determined Adobe specific or market-based performance goals are met, shares of stock will be granted to the recipient, with one third vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining two thirds vesting evenly on the following two annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe. Participants in the 2012 Program generally have the ability to receive up to 150% of the target number of shares originally granted.

The following table sets forth the summary of performance share activity under our 2012 Program for the six months ended June 1, 2012 (in thousands):



	Shares Granted		Maximum Shares Eligible to Receive
Beginning outstanding balance	—		—
Awarded	1,125		1,652
Forfeited	(9	)	(13	)
Ending outstanding balance	1,116		1,639

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 performance metrics under the 2009 Performance Share Program were not achieved and therefore no shares were awarded.

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(Unaudited)

The following table sets forth the summary of performance share activity under our 2007, 2008, 2010 and 2011 programs, based upon share awards actually achieved, for the six months ended June 1, 2012 and the fiscal year ended December 2, 2011 (in thousands):



	2012		2011
Beginning outstanding balance	405		557
Achieved	492		337
Released	(461	)	(436	)
Forfeited	(2	)	(53	)
Ending outstanding balance	434		405

Information regarding performance shares outstanding at June 1, 2012 and June 3, 2011 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2012
Performance shares outstanding	434	1.03	$	12.9
Performance shares vested and expected to vest	394	1.01	$	11.7
2011
Performance shares outstanding	457	0.89	$	15.2
Performance shares vested and expected to vest	421	0.87	$	13.8

^{_________________________________________}


^(*)	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 June 1, 2012 and June 3, 2011 were $29.82 and $33.27, respectively.

Compensation Costs

As of June 1, 2012, there was $540.6 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.6 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 Condensed Consolidated Statements of Income for the three months ended June 1, 2012 and June 3, 2011 were as follows (in thousands):



	2012				2011
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards
Cost of revenue—subscription	$	701	$	714	$	232	$	367
Cost of revenue—services and support	702		2,373		1,264		2,299
Research and development	4,217		20,288		7,024		19,444
Sales and marketing	6,387		19,373		8,334		20,616
General and administrative	3,990		12,654		5,255		10,024
Total	$	15,997	$	55,402	$	22,109	$	52,750

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the six months ended June 1, 2012 and June 3, 2011 were as follows (in thousands):



	2012				2011
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards
Cost of revenue—subscription	$	1,443	$	1,317	$	424	$	688
Cost of revenue—services and support	1,818		4,443		2,359		4,374
Research and development	11,416		38,369		13,778		40,022
Sales and marketing	15,167		36,289		15,884		37,032
General and administrative	8,490		24,228		11,205		20,085
Total	$	38,334	$	104,646	$	43,650	$	102,201

NOTE 9. RESTRUCTURING CHARGES

Fiscal 2011 Restructuring Plan

In the fourth quarter of fiscal 2011, we initiated a restructuring plan consisting of reductions in workforce and the consolidation of facilities in order to better align our resources around our Digital Media and Digital Marketing strategies.

During the six months ended June 1, 2012, we continued to implement restructuring activities under this plan. We vacated approximately 66,000 square feet of sales and/or research and development facilities in Canada, the Czech Republic, Germany, Ireland, Israel and the United Kingdom. We accrued $11.1 million for the fair value of our future contractual obligations under those operating leases as of the dates we ceased to use the leased properties using our estimated credit-adjusted risk-free interest rates ranging from approximately 1% to 4%. This amount is net of the fair value of future estimated sublease income of approximately $4.3 million. Total costs incurred for termination benefits through the second quarter of fiscal 2012 was $56.8 million which includes favorable adjustments of $21.8 million arising from revisions to severance cost estimates that were made in connection with the fourth quarter fiscal 2011 restructuring plan. Total costs incurred to date and expected to be incurred for closing redundant facilities are $13.9 million as all facilities under this plan have been exited as of June 1, 2012.

Other Restructuring Plans

Other restructuring plans include other Adobe plans and other plans associated with certain of our acquisitions that are substantially complete. We continue to make cash outlays to settle obligations under these plans, however the current impact to our condensed consolidated financial statements is not significant. Our other restructuring plans consist of the following:

•

Fiscal 2009 Restructuring Plan—In the fourth quarter of fiscal 2009, in order to appropriately align our costs in connection with our fiscal 2010 operating plan, we initiated a restructuring plan consisting of reductions in workforce and the consolidation of facilities. The restructuring activities related to this program affected only those employees and facilities that were associated with Adobe prior to the acquisition of Omniture, Inc. ("Omniture") on October 23, 2009. As of June 1, 2012, the remaining balance under our Fiscal 2009 Plan for termination benefits and closing redundant facilities was $0.9 million and $8.5 million, respectively.

•

Omniture Restructuring Plan—We completed our acquisition of Omniture on October 23, 2009. In the fourth quarter of fiscal 2009, we initiated a plan to restructure the pre-merger operations of Omniture to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. As of June 1, 2012, the remaining balance under our Omniture Plan for termination benefits and closing redundant facilities was $0.5 million and $1.2 million, respectively.


•	Fiscal 2008 Restructuring Plan—In the fourth quarter of fiscal 2008, we initiated a restructuring program consisting of reductions in workforce and the consolidation of facilities, in order to reduce our operating costs and focus our resources on key strategic priorities. As of June 1, 2012, the remaining balance under our Fiscal 2008 Plan for

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

closing redundant facilities was $1.6 million. Restructuring activities for termination benefits were completed during fiscal 2011.


•	Other —As of June 1, 2012, the aggregate remaining balance for other restructuring plans for termination benefits and closing redundant facilities was $0.5 million and $0.6 million, respectively.

Summary of Restructuring Plans

The following table sets forth a summary of restructuring activities related to all of our restructuring plans described above during the six months ended June 1, 2012 (in thousands):



	December 2, 2011		Costs Incurred		Cash Payments			Other Adjustments^*			June 1, 2012
Fiscal 2011 Restructuring Plan:
Termination benefits	$	72,817	$	—	$	(44,903	)	$	(22,052	)	$	5,862
Cost of closing redundant facilities	2,995		11,097		(2,809		)	(434		)	10,849
Other Restructuring Plans:
Termination benefits	1,548		810		(302		)	(165		)	1,891
Cost of closing redundant facilities	11,019		2,465		(3,126		)	1,525			11,883
Total restructuring plans	$	88,379	$	14,372	$	(51,140	)	$	(21,126	)	$	30,485

^{_________________________________________}


^(*)	Included in Other Adjustments are foreign currency translation adjustments of $1.7 million.

Accrued restructuring charges of approximately $30.4 million as of June 1, 2012 includes $18.3 million recorded in accrued restructuring, current and $12.1 million related to long-term facilities obligations recorded in accrued restructuring, non-current on our Condensed Consolidated Balance Sheets. We expect to pay accrued termination benefits through the remainder of fiscal 2012 and facilities-related liabilities under contract through fiscal 2021.

NOTE 10. STOCKHOLDERS’ EQUITY

Retained Earnings

The changes in retained earnings for the six months ended June 1, 2012 were as follows (in thousands):



Balance as of December 2, 2011	$	6,528,735
Net income	409,085
Re-issuance of treasury stock	(266,590		)
Balance as of June 1, 2012	$	6,671,230

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Comprehensive Income

The following table sets forth the activity for each component of comprehensive income, net of related taxes, for the three and six months ended June 1, 2012 and June 3, 2011 (in thousands):



	Three Months						Six Months
	2012			2011			2012			2011
	Increase/(Decrease)						Increase/(Decrease)
Net income	$	223,876		$	229,436		$	409,085		$	464,027
Other comprehensive income:
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities	(7,297		)	5,898			5,568			5,845
Reclassification adjustment for gains on available-for-sale securities recognized during the period	(413		)	(630		)	(911		)	(1,174		)
Subtotal available-for-sale securities	(7,710		)	5,268			4,657			4,671
Derivatives designated as hedging instruments:
Unrealized gains on derivative instruments	10,191			100			22,772			33
Reclassification adjustment for gains on derivative instruments recognized during the period	(10,661		)	(184		)	(21,009		)	(184		)
Subtotal derivatives designated as hedging instruments	(470		)	(84		)	1,763			(151		)
Foreign currency translation adjustments	(17,952		)	20,463			(15,755		)	32,394
Other comprehensive income	(26,132		)	25,647			(9,335		)	36,914
Total comprehensive income, net of taxes	$	197,744		$	255,083		$	399,750		$	500,941

The following table sets forth the components of accumulated other comprehensive income, net of related taxes, as of June 1, 2012 and December 2, 2011 (in thousands):



	2012			2011
Net unrealized gains on available-for-sale securities:
Unrealized gains on available-for-sale securities	$	11,559		$	10,810
Unrealized losses on available-for-sale securities	(885		)	(4,794		)
Total net unrealized gains on available-for-sale securities	10,674			6,016
Net unrealized gains on derivative instruments designated as hedging instruments	15,115			13,354
Cumulative foreign currency translation adjustments	(5,174		)	10,580
Total accumulated other comprehensive income, net of taxes	$	20,615		$	29,950

Stock Repurchase Program

To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we repurchase shares in the open market and also enter into structured repurchase agreements with third parties.

During the six months ended June 1, 2012 and June 3, 2011, we entered into structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments of $305.0 million and $545.0 million, respectively. With these structured stock repurchase agreements entered into during the six months ended June 1, 2012, we have exhausted our $1.6 billion authority granted by our Board of Directors in fiscal 2010. 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.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 the six months ended June 1, 2012, we repurchased approximately 7.1 million shares at an average price of $32.38 through structured repurchase agreements entered into during the six months ended June 1, 2012. During the six months ended June 3, 2011, we repurchased approximately 16.3 million shares at an average price of $33.53 through structured repurchase agreements entered into during the six months ended June 3, 2011.

As of June 1, 2012 and December 2, 2011, the prepayments were classified as treasury stock on our Condensed Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by the financial statement date were excluded from the computation of earnings per share. As of June 1, 2012, approximately $76.1 million in prepayments remained under these agreements. As of December 2, 2011, no prepayments remained under these agreements.

In April 2012, 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 2015. The new stock repurchase program approved by our Board of Directors is similar to our previous $1.6 billion stock repurchase program. As of June 1, 2012, we have not entered into any stock repurchase agreements under the new authority.

NOTE 11. NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share for the three and six months ended June 1, 2012 and June 3, 2011 (in thousands, except per share data):