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Adobe Systems DEF 14A 2007 UNITED STATES SCHEDULE 14A Proxy Statement
Pursuant to Section 14(a) of
Adobe
Systems Incorporated NOTICE OF
ANNUAL MEETING OF STOCKHOLDERS Dear Stockholders: You are cordially invited to attend our 2007 Annual Meeting of Stockholders to be held on April 5, 2007 at 3:00 p.m. local time at our East Tower building located at 321 Park Avenue, San Jose, California 95110. We are holding the meeting to: 1. Elect five Class II members of our Board of Directors to serve for a two-year term; 2. Approve the amendment and restatement of the Adobe Systems Incorporated 2003 Equity Incentive Plan; 3. Consider and vote on a stockholder proposal, as described in the attached proxy statement; 4. Ratify the appointment of KPMG LLP as our independent registered public accounting firm for our fiscal year ending on November 30, 2007; and 5. Transact any other business that may properly come before the meeting. If you owned our common stock at the close of business on Monday, February 12, 2007, you may attend and vote at the meeting. If you cannot attend the meeting, you may vote by telephone or by using the Internet as instructed on the enclosed proxy card or by mailing the proxy card in the enclosed postage-paid envelope. Any stockholder attending the meeting may vote in person, even if you have already returned a proxy card. A list of stockholders eligible to vote at the meeting will be available for review during our regular business hours at our headquarters in San Jose for the ten days prior to the meeting for any purpose related to the meeting. We look forward to seeing you at the meeting. Sincerely,
Karen O. Cottle March 2, 2007 As promptly as possible, please vote by telephone or by using the Internet as instructed on the enclosed proxy card or complete, sign and date the proxy card and return it in the enclosed postage-paid envelope. Proxy Statement
i Our Board of Directors is soliciting proxies for our Annual Meeting of Stockholders to be held on April 5, 2007 at 3:00 p.m. local time at our East Tower building located at 321 Park Avenue, San Jose, California 95110. This proxy statement contains important information for you to consider when deciding how to vote on the matters brought before the meeting. Please read it carefully. Voting materials, which include the proxy statement, proxy card and our 2006 Annual Report on Form 10-K, as amended, will be mailed to our stockholders on or about March 2, 2007. Our principal executive offices are located at 345 Park Avenue, San Jose, California 95110, and our telephone number is (408) 536-6000. We will bear the expense of soliciting proxies. In addition to these mailed proxy materials, our directors and employees (who will receive no compensation in addition to their regular salaries) may also solicit proxies in person, by telephone or by electronic mail. We have also hired Innisfree M&A Incorporated to help us solicit proxies from brokers, bank nominees and other institutional owners. We expect to pay Innisfree a fee of $7,500 for its services and will reimburse Innisfree for reasonable out-of-pocket expenses, estimated at about $4,000. We will reimburse banks, brokers and other custodians, nominees and fiduciaries for reasonable charges and expenses incurred in forwarding soliciting materials to their clients. Q: Who may vote at the meeting? A: Our Board of Directors set February 12, 2007, as the record date for the meeting. If you owned our common stock at the close of business on February 12, 2007, you may attend and vote at the meeting. Each stockholder is entitled to one vote for each share of common stock held on all matters to be voted on. As of February 12, 2007, there were 587,927,044 shares of our common stock outstanding and entitled to vote at the meeting. Q: What is the quorum requirement for the meeting? A: A majority of our outstanding shares as of the record date must be present at the meeting in order to hold the meeting and conduct business. This is called a quorum. Shares are counted as present at the meeting if you: · are present and entitled to vote in person at the meeting; or · have properly submitted a proxy card or voted by telephone or by the Internet. If you abstain from voting on any or all proposals, your shares are still counted as present and entitled to vote. Each proposal identifies the votes needed to approve or ratify the proposed action. 1 Q: What proposals will be voted on at the meeting? A: There are four proposals scheduled to be voted on at the meeting: · Election of the five Class II members of our Board of Directors; · Approval of the amendment and restatement of the Adobe Systems Incorporated 2003 Equity Incentive Plan; · Stockholder proposal as described in this proxy statement; and · Ratification of KPMG LLP as our independent registered public accounting firm. We will also consider any other business that properly comes before the meeting. Q: How may I vote my shares in person at the meeting? A: If your shares are registered directly in your name with our transfer agent, Computershare Investor Services LLC, you are considered, with respect to those shares, the shareowner of record, and the proxy materials, including a proxy card, are being sent directly to you. As the shareowner of record, you have the right to vote in person at the meeting. If your shares are held in a brokerage account or by another nominee or trustee, you are considered the beneficial owner of shares held in street name, and the proxy materials are being forwarded to you with a voting instruction card. As the beneficial owner, you are also invited to attend the annual meeting. Since a beneficial owner is not the shareowner of record, you may not vote these shares in person at the meeting unless you obtain a “legal proxy” from your broker, nominee, or trustee that holds your shares, giving you the right to vote the shares at the meeting. Q: How can I vote my shares without attending the meeting? A: Whether you hold shares directly as a registered shareowner of record or beneficially in street name, you may vote without attending the meeting. You may vote by granting a proxy or, for shares held in street name, by submitting voting instructions to your stockbroker, trustee or nominee. In most cases, you will be able to do this by telephone, by using the Internet or by mail. Please refer to the summary instructions included with your proxy materials and on your proxy card. For shares held in street name, the voting instruction card will be included by your stockbroker, trustee or nominee. BY TELEPHONE OR INTERNET—If you have telephone or Internet access, you may submit your proxy by following the instructions with your proxy materials and on your proxy card. BY MAIL—You may submit your proxy by mail by signing your proxy card or, for shares held in street name, by following the voting instruction card included by your stockbroker, trustee or nominee and mailing it in the enclosed, postage-paid envelope. If you provide specific voting instructions, your shares will be voted as you have instructed. Q: How can I revoke my proxy and change my vote after I return my proxy card? A: You may revoke your proxy and change your vote at any time before the final vote at the meeting. You may do this by signing and submitting a new proxy card with a later date; or voting by telephone or by using the Internet, both of which must be completed by 11:59 p.m. Eastern Time on April 4, 2007 (your latest telephone or Internet proxy is counted); or by attending the meeting and voting in person. Attending the meeting alone will not revoke your proxy unless you specifically request your proxy to be revoked. If you hold shares through a bank or brokerage firm, you must contact that bank or firm directly to revoke any prior voting instructions. Q: Where can I find the voting results of the meeting? A: The preliminary voting results will be announced at the meeting. The final results will be published in our quarterly report on Form 10-Q for the second quarter of fiscal 2007. 2 We currently have 11 members on our Board of Directors, which is divided into two classes (Class I and Class II) with alternating two-year terms. Proxy holders will vote for the five Class II nominees listed below to serve until our 2009 annual meeting of stockholders and until his or her successor has been elected and qualified, or until the director’s death, resignation or removal. The members of our Board who are Class I directors will be considered for nomination for election in 2008. Each of the nominees listed below is currently a director of Adobe. Robert K. Burgess was appointed to our Board in December 2005 pursuant to the terms of an acquisition agreement between Adobe and Macromedia. All other Class II nominees have previously been elected by our stockholders. There are no family relationships among our directors or executive officers. If any nominee is unable or declines to serve as a director, the Board may designate another nominee to fill the vacancy and the proxy will be voted for that nominee. The accompanying proxy will be voted for the nominees to serve as directors unless you indicate to the contrary on the proxy card. The five Class II nominees receiving the most “FOR” votes will be elected. Nothwithstanding the foregoing, in September 2006, our Board approved an amendment to Adobe’s Corporate Governance Guidelines to require that even if a director receives a plurality of “for” votes in an uncontested election, if a majority of the votes cast are “withheld,” the director is to tender his or her resignation to the Board, and the Board, after taking into consideration the recommendation of the Nominating and Governance Committee, will determine whether to accept the director’s resignation. The election of directors pursuant to this proposal is an uncontested election. THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR ALL” NOMINEES The following tables set forth the name and age of each nominee and each director of Adobe whose term of office continues after the meeting, the principal occupation of each during the past five years, and the year each began serving as a director of Adobe:
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6 As required by the NASDAQ Global Select Market’s (“NASDAQ”) listing standards, a majority of the members of our Board must qualify as “independent,” as affirmatively determined by our Board. Our Board consults with our legal counsel to ensure that its determinations are consistent with all relevant securities and other laws and regulations regarding the definition of “independent,” including those set forth in pertinent listing standards of NASDAQ. Consistent with these considerations, after review of all relevant transactions and relationships between each director, any of his or her family members, and Adobe, our executive officers and our independent registered public accounting firm, the Board has affirmatively determined that a majority of our Board is comprised of independent directors. Our independent directors include: Mr. Barnholt, Mr. Cannon, Mr. Daley, Dr. Geschke, Ms. Mills, Ms. Pouliot, Dr. Sedgewick, Dr. Warnock and Mr. Yocam. The Audit Committee’s role includes the oversight of our financial, accounting and reporting processes; our system of internal accounting and financial controls; and our compliance with related legal and regulatory requirements. The Audit Committee oversees the appointment, engagement, termination and oversight of our independent registered public accounting firm, including conducting a review of its independence; reviewing and approving the planned scope of our annual audit; overseeing our independent registered public accounting firm’s audit work; reviewing and pre-approving any audit and non-audit services that may be performed by it; reviewing with management and our independent registered public accounting firm the adequacy of our internal financial and disclosure controls; reviewing our critical accounting policies and the application of accounting principles; and monitoring the rotation of partners of our independent registered public accounting firm on our audit engagement team as required by law. The Audit Committee establishes procedures, as required under applicable law, for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee’s role also includes meeting to review our annual audited financial statements and quarterly financial statements with management and our independent registered public accounting firm. See “Report of the Audit Committee” contained in this proxy statement. Each member of the Audit Committee meets the independence criteria prescribed by applicable law and the rules of the Securities and Exchange Commission (“SEC”) for audit committee membership and is an “independent director” within the meaning of applicable NASDAQ listing standards. Each Audit Committee member meets the NASDAQ’s financial literacy requirements, and the Board has further determined that Messrs. Daley and Yocam (i) are “audit committee financial experts” as such term is defined in Item 401(h) of Regulation S-K promulgated by the SEC, and (ii) also meet the NASDAQ’s professional experience requirements. The Audit Committee acts pursuant to a written charter, which complies with the applicable provisions of the Sarbanes-Oxley Act of 2002 and related rules of the SEC and NASDAQ, a copy of which is attached as Appendix A to this proxy statement and also can be found on our website at www.adobe.com/aboutadobe/invrelations/corpgovern.html. The Executive Compensation Committee sets and administers the policies governing the annual compensation of our executive officers, including cash and non-cash compensation and equity compensation programs. See “Report of the Executive Compensation Committee” contained in this proxy statement. The Executive Compensation Committee also reviews and approves equity-based compensation grants to our non-officer employees and consultants, other than stock option grants to our non-officer employees, which are approved by a Management Committee appointed by the Executive Compensation 7 Committee consisting of our Chief Executive Officer and Senior Vice President, Human Resources. The Executive Compensation Committee is also responsible for oversight of our overall compensation plans and benefit programs. The members of the Executive Compensation Committee are all independent directors within the meaning of applicable NASDAQ listing standards. The Executive Compensation Committee acts pursuant to a written charter, a copy of which can be found on our website at www.adobe.com/aboutadobe/invrelations/corpgovern.html. The Nominating and Governance Committee’s primary purpose is to evaluate candidates for membership on our Board and make recommendations to our Board regarding candidates; make recommendations with respect to the composition of our Board and the Committees; make recommendations concerning Board and committee compensation; review and make recommendations regarding the functioning of our Board as an entity; recommend corporate governance principles applicable to Adobe; and assist our Board in its reviews of the performance of our Board and each committee. The Nominating and Governance Committee reviews and approves all related-party transactions between Adobe, our executive officers and directors, beneficial owners of five percent or greater of our securities, and all other related persons as specified under Item 404 of Regulation S-K promulgated by the SEC. The Nominating and Governance Committee also assists our Board in reviewing and assessing management development and succession planning for executive officers. The members of our Nominating and Governance Committee are all independent directors within the meaning of applicable NASDAQ listing standards. The Nominating and Governance Committee operates pursuant to a written charter, a copy of which can be found on our website at www.adobe.com/aboutadobe/invrelations/corpgovern.html. In carrying out its function to nominate candidates for election to our Board, the Nominating and Governance Committee considers the mix of skills, experience, character, commitment, and diversity of background, all in the context of the requirements of our Board at that point in time. The Nominating and Governance Committee believes that each candidate should be an individual who has demonstrated integrity and ethics in such candidate’s personal and professional life, has an understanding of elements relevant to the success of a publicly-traded company and has established a record of professional accomplishment in such candidate’s chosen field. Each candidate should be prepared to participate fully in Board activities, including attendance at, and active participation in, meetings of the Board, and not have other personal or professional commitments that would, in the Nominating and Governance Committee’s judgment, interfere with or limit such candidate’s ability to do so. Each candidate should also be prepared to represent the best interests of all of our stockholders and not just one particular constituency. Additionally, in determining whether to recommend a director for re-election, the Nominating and Governance Committee also considers the director’s past attendance at Board and committee meetings and participation in and contributions to the activities of our Board. The Nominating and Governance Committee has no stated specific, minimum qualifications that must be met by a candidate for a position on our Board. The Nominating and Governance Committee does, however, believe it appropriate for at least one member of our Board to meet the criteria for an “audit committee financial expert” as defined by SEC rules, and that a majority of the members of our Board meet the definition of “independent director” within the meaning of applicable NASDAQ listing standards. The Nominating and Governance Committee’s methods for identifying candidates for election to our Board include the solicitation of ideas for possible candidates from a number of sources, including from members of our Board, our executives, individuals personally known to the members of our Board, and other research. The Nominating and Governance Committee may also from time to time retain for a fee one or more third-party search firms to identify suitable candidates. Any of our stockholders may nominate one or more persons for election as a director of Adobe at an annual meeting of stockholders if the stockholder complies with the notice, information and consent provisions contained in our bylaws. In addition, the notice must include any other information required 8 pursuant to Regulation 14A under the Securities Exchange Act of 1934. In order for the director nomination to be timely for our Annual Meeting of Stockholders to be held in 2008, a stockholder’s notice to Adobe’s Secretary must be delivered to our principal executive offices no later than November 3, 2007. Our bylaws specify additional requirements if stockholders wish to nominate directors at special meetings of stockholders. The Nominating and Governance Committee will consider all candidates identified through the processes described above, and will evaluate each candidate, including incumbents, based on the same criteria. During fiscal 2006, our Board held nine meetings, and its three standing committees—Audit Committee, Executive Compensation Committee, and Nominating and Governance Committee—collectively held 25 meetings. Each director attended at least 75% of the meetings (held during the period that such director served) of the Board and the committees on which such director served in fiscal 2006. Members of the Board are encouraged to attend our stockholder meetings. All of our Board members attended our 2006 annual stockholder meeting. The following table sets forth the three standing committees of our Board, the members of each committee, and the number of meetings held by our Board and the committees during fiscal 2006:
Any stockholder who desires to contact our Board or specific members of our Board may do so electronically by sending an email to the following address: directors@adobe.com. Alternatively, a stockholder can contact our Board or specific members of our Board by writing to: Stockholder Communications, Adobe Systems Incorporated, 345 Park Avenue, San Jose, California 95110-2704 USA. 9 PROPOSAL
2 In January and February 2007, our Board approved amendments to the Adobe Systems Incorporated 2003 Equity Incentive Plan (the “2003 Plan”) and the incorporation of such amendments into an Amended and Restated 2003 Equity Incentive Plan, subject to approval by our stockholders (the “2003 Amended Plan”). Our Board believes that the amendments included in the 2003 Amended Plan are an integral part of Adobe’s long-term compensation philosophy, and our stockholders are being asked to approve the 2003 Amended Plan. Our 2003 Plan was originally adopted by the Board in January 2003 and approved by our stockholders in April 2003 as a successor plan to our 1994 Stock Option Plan and our 1999 Equity Incentive Plan (the “Predecessor Plans”). Our Board, with stockholder approval, has subsequently amended the 2003 Plan from time to time to increase the number of authorized shares. As of February 15, 2007, an aggregate of 13,851,006 shares of our common stock remained available for future grants under the 2003 Amended Plan. Note that per share amounts included in the following description reflect a two-for-one stock split of our common stock on May 23, 2005. Our Board believes the 2003 Amended Plan is important to Adobe’s success in enhancing our ability to attract and retain talented people and inspire them to build long-term value for our stockholders. See the “Report of the Executive Compensation Committee” in this proxy statement for more information regarding our compensation strategy. In addition to updating the 2003 Plan for clarity, ease of administration, and compliance with developments in applicable laws, we have made changes to the 2003 Plan to provide for, and submit for your consideration, the following key amendments: · Increase the available share reserve by 25,000,000 shares of our common stock; · As part of our ongoing commitment to align the interests of our employees (including executive officers) and consultants more closely with those of our stockholders, implement a fungible share reserve so that the number of shares of stock available for issuance under the 2003 Amended Plan will be reduced (a) by one (1) share for each share issued pursuant to options or rights previously granted under the Predecessor Plans (consistent with the share reserve rules under such Predecessor Plans at the time of grant), (b) by one (1) share for each share issued pursuant to stock options or stock appreciation rights granted under the 2003 Amended Plan, and (c) by two and one-tenth (2.1) shares for each share issued pursuant to all other types of awards granted under the 2003 Amended Plan after April 5, 2007, subject to stockholder approval; · In connection with the implementation of the fungible reserve pool, eliminate the maximum aggregate limit of 2,000,000 shares of Adobe common stock that may be issued under the 2003 Amended Plan pursuant to the exercise or settlement of stock purchase rights, stock bonuses, performance shares and performance units; and · Add additional performance criteria that may be used in establishing performance goals for performance-based awards under the 2003 Amended Plan, which performance-based awards may be granted with the intent of complying with the “performance-based compensation” exception under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). 10 The affirmative vote of the holders of a majority of the votes cast in person or by proxy and entitled to vote at the meeting will be required to approve the 2003 Amended Plan. Neither abstentions nor broker non-votes will have any effect on the outcome of this proposal. THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THIS PROPOSAL The following summary of the 2003 Amended Plan is qualified in its entirety by the specific language of the 2003 Amended Plan, a copy of which has been filed with the SEC with this proxy statement. The summary notes the key differences between the 2003 Plan and the 2003 Amended Plan. General. The purpose of the 2003 Amended Plan is to provide an incentive program that enables us to attract and retain employees and consultants upon whose judgment, interest and contributions we depend on for our success and to provide them with an equity interest in our success in order to motivate superior performance. We provide these incentives through the grant of stock options, stock appreciation rights, stock purchase rights, stock bonuses, performance shares, performance units and restricted stock units. Shares Subject to Plan. If the stockholders approve this proposal to authorize an additional 25,000,000 shares for issuance under the 2003 Amended Plan, the cumulative aggregate share authorization under our 2003 Amended Plan will increase from 147,474,620 to 172,474,620 shares (the “Share Reserve”). However, the Share Reserve is reduced at any time (a) by one share for each share issued pursuant to options and rights granted under our terminated 1994 Stock Option Plan and 1999 Equity Incentive Plan, (b) by one share for each share issued pursuant to stock options or stock appreciation rights granted under the 2003 Amended Plan, and (c) by two and one-tenth (2.1) shares for each share issued pursuant to all other types of awards granted under the 2003 Amended Plan after April 5, 2007, subject to stockholder approval. Including the proposed 25,000,000 share increase, as of February 15, 2007, a total of 38,851,006 shares would be available under the 2003 Amended Plan. If any award granted under the 2003 Plan expires, lapses or otherwise terminates for any reason without having been exercised or settled in full, or if shares subject to forfeiture or repurchase are forfeited or repurchased by Adobe at the participant’s purchase price, any such shares subject to a terminated or reacquired award will again become available for issuance under the 2003 Plan. Under the 2003 Amended Plan, such shares would return to the reserve in proportion to the number of shares by which the reserve was reduced at the time of grant or issuance. Shares will not be treated as having been issued under the 2003 Amended Plan and will therefore not reduce the number of shares available for grant to the extent an award is settled in cash (other than cash-settled stock appreciation rights). Shares will be treated as having been issued under the 2003 Amended Plan to the extent such shares are withheld in satisfaction of tax withholding obligations. Appropriate adjustments will be made to the Share Reserve, to the other numerical limits on awards described in this proposal and to outstanding awards in the event of any change in our common stock through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or similar change in our capital structure, or if we make a distribution in a form other than common stock (excluding normal cash dividends) that has a material effect on the fair market value of our common stock. Administration. The 2003 Amended Plan is administered by two committees duly appointed by the Board, specifically the Executive Compensation Committee and the Management Committee. The Management Committee, currently consisting of our Chief Executive Officer and Senior Vice President, Human Resources, is authorized by the Board to grant stock options to eligible participants who are not 11 executive officers or consultants. The Executive Compensation Committee, which consists of at least two directors, each of whom is both a “non-employee director” within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 and an “outside director” for purposes of Section 162(m) of the Code, is authorized to grant all types of awards to all eligible participants, including to executive officers and consultants. For purposes of this summary, the term “Committee” will refer to either such duly appointed committee or the Board of Directors. Subject to the provisions of the 2003 Amended Plan and the authority delegated to it by the Board, the Committee determines, in its discretion, the persons to whom and the times at which awards are granted, the types and sizes of such awards, and all of their terms and conditions. The Committee may, subject to certain limitations required by Section 162(m) and the express language in the 2003 Amended Plan that prohibits repricing without stockholder approval, amend, modify, extend, cancel or renew any award, waive any restrictions or conditions applicable to any award, and accelerate, continue, extend or defer the vesting of any award. The 2003 Amended Plan provides, subject to certain limitations, for indemnification by Adobe of any director, officer or employee against all reasonable expenses, including attorneys’ fees, incurred in connection with any legal action arising from such person’s action or failure to act in administering the 2003 Amended Plan. The Committee may establish rules and policies for administration of the 2003 Amended Plan and adopt one or more forms of agreement to evidence awards made under the 2003 Amended Plan. The Committee interprets the 2003 Amended Plan and any agreement used under the 2003 Amended Plan, and all determinations of the Committee will be final and binding on all persons having an interest in the 2003 Amended Plan or any award issued under the 2003 Amended Plan. Repricing Prohibition. The 2003 Amended Plan expressly provides that, without the approval of a majority of the votes cast in person or by proxy at a meeting of our stockholders, the Committee may not provide for either the cancellation of outstanding options or stock appreciation rights in exchange for the grant of a new award at a lower exercise price or the amendment of outstanding options or stock appreciation rights to reduce the exercise price. Eligibility. Under the 2003 Amended Plan, we may grant awards to employees (including executive officers) and consultants of Adobe or any parent or subsidiary corporation or other affiliated entity of Adobe. While we may grant incentive stock options only to employees, we may grant nonstatutory stock options, stock appreciation rights, stock bonuses, stock purchase rights, restricted stock units, and performance awards to any eligible participant. As of February 15, 2007, we had a total of 6,082 employees, including five executive officers, who are eligible to participate in the 2003 Amended Plan. Stock Options. The Committee may grant nonstatutory stock options, incentive stock options within the meaning of Section 422 of the Code, or any combination of these. Subject to appropriate adjustment in the event of any change in our capital structure, we may not grant to any one employee in any fiscal year options which, together with Freestanding SARs (as defined below), cover in the aggregate more than 4,000,000 shares. Subject to adjustment as provided in the 2003 Amended Plan, in no event shall more than 122,474,620 shares of stock be available for issuance pursuant to the exercise of incentive stock options granted under the 2003 Amended Plan. Each option granted under the 2003 Amended Plan must be evidenced by a written agreement between us and the optionee specifying the number of shares subject to the option and the other terms and conditions of the option, consistent with the requirements of the 2003 Amended Plan. The exercise price of each option may not be less than the fair market value of a share of our common stock on the date of grant (except in connection with the assumption or substitution for another option in a manner qualifying under Section 424(a) of the Code). However, any incentive stock option granted to a person who at the time of grant owns stock possessing more than 10% of the total combined voting power of all classes of our stock or of any parent or subsidiary corporation of Adobe (a “Ten Percent Stockholder”) must have an exercise 12 price equal to at least 110% of the fair market value of a share of our common stock on the date of grant. On February 15, 2007, the closing price of our common stock on NASDAQ was $39.25 per share. The 2003 Amended Plan provides that the option exercise price may be paid in cash, by check, or in cash equivalent; by means of a broker-assisted cashless exercise; by means of a “net exercise” arrangement; by tender of shares of common stock owned by the optionee having a fair market value not less than the exercise price; by such other lawful consideration as approved by the Committee, or by any combination of these. Nevertheless, the Committee may restrict the forms of payment permitted in connection with any option grant. No option may be exercised unless the optionee has made adequate provision for federal, state, local and foreign taxes, if any, relating to the exercise of the option, including, if permitted or required by us, through the optionee’s surrender of a portion of the option shares to Adobe. Options become vested and exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Committee. The maximum term of any option granted under the 2003 Amended Plan is eight years, provided that an incentive stock option granted to a Ten Percent Stockholder must have a term not exceeding five years. Subject to the term of the option, an option generally will remain exercisable for three months following the optionee’s termination of service, except that if service terminates as a result of the optionee’s normal retirement, death or disability, the option generally will remain exercisable for twelve months, or if service is terminated for cause, the option will terminate immediately. The Committee, in its discretion, may provide longer post-termination exercise periods, but in any event the option must be exercised no later than its expiration date. Stock options are not assignable or transferable by the optionee other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and as set forth in the option award agreement, an option is assignable or transferable subject to the applicable limitations described in the General Instructions to Form S-8 Registration Statement under the Securities Act of 1933 (which includes transfers to family members, family trusts or pursuant to domestic relations orders, but excludes transfers of options for consideration). Stock Appreciation Rights. The committee may grant stock appreciation rights either in tandem with a related option (a “Tandem SAR”) or independently of any option (a “Freestanding SAR”). A Tandem SAR requires the option holder to elect between the exercise of the underlying option for shares of common stock or the surrender of the option and the exercise of the related stock appreciation right. A Tandem SAR is exercisable only at the time and only to the extent that the related stock option is exercisable, while a Freestanding SAR is exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Committee. The exercise price of each SAR may not be less than the fair market value of a share of our common stock on the date of grant. Subject to appropriate adjustment in the event of any change in our capital structure, we may not grant to any one employee in any fiscal year Freestanding SARs which, together with options, cover in the aggregate more than 4,000,000 shares. Upon the exercise of any stock appreciation right, the participant is entitled to receive an amount equal to the excess of the fair market value of the underlying shares of common stock as to which the right is exercised over the aggregate exercise price for such shares. At the Committee’s discretion, we may make payment of this stock price appreciation in cash or in shares of common stock whose fair market value on the exercise date equals the payment amount. We may make payment in a lump sum or we may defer payment in accordance with the terms of the participant’s award agreement. The maximum term of any stock appreciation right granted under the 2003 Amended Plan is eight years. Stock Awards. Stock awards may be granted under the 2003 Amended Plan in the form of a stock bonus, a stock purchase right or a restricted stock unit. The purchase price for shares issuable under each stock purchase right (and, if applicable, each restricted stock unit) will be established by the Committee in 13 its discretion and may be paid in cash, by check, in cash equivalent or by such other lawful consideration as approved by the Committee. No monetary payment is required for receipt of shares pursuant to a stock bonus, the consideration for which is services rendered by the participant, except that the participant must furnish consideration in the form of cash or past services rendered having a value not less than the par value of the shares acquired. Stock awards may be granted by the Committee subject to such restrictions for such periods as determined by the Committee and set forth in a written agreement between Adobe and the participant, and neither the award nor the shares acquired pursuant to the award may be sold or otherwise transferred or pledged until the restrictions lapse or are terminated. Restrictions may lapse in full or in installments on the basis of the participant’s continued service or other factors, such as the attainment of performance goals (see discussion of permitted performance goals under “Performance Awards” below) established by the Committee. Unless otherwise provided by the Committee, a participant will forfeit any shares acquired (and any rights to acquire shares) under a stock award as to which the restrictions have not lapsed prior to the participant’s termination of service. Participants holding restricted stock will have the right to vote the shares and to receive all dividends and other distributions, except that any dividends or other distributions in shares will be subject to the same restrictions on transferability as the original award. Participants holding restricted stock units will not have the right to vote the shares until such shares have been issued and the Committee may, in its sole discretion, provide that dividend equivalents will not be paid or provide for either current or deferred payment of dividend equivalents. Subject to appropriate adjustment in the event of any change in our capital structure, we may not grant to any one employee in any fiscal year stock awards for more than 200,000 shares subject to restrictions based on the attainment of performance goals. Performance Awards. The Committee may grant performance awards subject to such conditions and the attainment of such performance goals over such periods as the Committee determines in writing and sets forth in a written agreement between Adobe and the participant. These awards may be designated as performance shares or performance units. Performance shares and performance units are unfunded bookkeeping entries generally having initial values, respectively, equal to the fair market value determined on the grant date of a share of common stock and $100 per unit. Performance awards will specify a predetermined amount of performance shares or performance units that may be earned by the participant to the extent that one or more predetermined performance goals are attained within a predetermined performance period. We may settle performance awards to the extent earned in cash, shares of our common stock (including shares of restricted stock) or any combination thereof. Subject to appropriate adjustment in the event of any change in our capital structure, for each of our full fiscal years contained within the applicable performance period, we may not grant performance shares to any one employee that could result in the employee receiving more than 200,000 shares of common stock or performance units to any one employee that could result in the employee receiving more than $2,500,000. A participant may receive only one performance award with respect to any performance period. Prior to the beginning of the applicable performance period or such later date as permitted under Section 162(m) of the Code, the Committee will establish one or more performance goals applicable to the award. These goals will be based on the attainment of specified levels with respect to one or more measures of our business or financial performance and of each parent and subsidiary corporation consolidated with our results for financial reporting purposes, or such division or business unit of ours as may be selected by the Committee. As proposed under the 2003 Amended Plan, the Committee, in its discretion, may base performance goals on one or more of the following measures: growth in revenue; growth in market price of our common stock; operating margin; gross margin; operating income; pre-tax profit; earnings before interest, taxes and depreciation; earnings before interest, taxes and depreciation and amortization; net income; total return on shares of our common stock relative to the increase in an appropriate index selected by the Committee; earnings per share; return on stockholder equity; return on net assets; expenses; return on capital; economic value added; market share; operating cash flow; cash flow, as indicated by book earnings before interest, taxes, depreciation and amortization; cash flow per 14 share; customer satisfaction; implementation or completion of projects or processes; improvement in or attainment of working capital levels; stockholders’ equity; and other measures of performance selected by the Committee. Any performance goals that are not specifically described above must relate to a goal that is objectively determinable within the meaning of Section 162(m) of the Code. The target levels with respect to these performance measures may be expressed on an absolute basis or relative to a standard specified by the Committee. At the time the Committee establishes the applicable performance goals, the degree of attainment of performance measures may, according to criteria established by the Committee, be adjusted for changes in accounting standards, restructuring charges and similar extraordinary items and certain other items as outlined in the 2003 Amended Plan. Following completion of the applicable performance period, the Committee will certify in writing the extent to which the applicable performance goals have been attained and the resulting value to be paid to the participant. The Committee retains the discretion to eliminate or reduce, but not increase, the amount that would otherwise be payable on the basis of the performance goals attained to a participant who is a “covered employee” within the meaning of Section 162(m) of the Code. However, no such reduction may increase the amount paid to any other participant. The Committee may make positive or negative adjustments to performance award payments to participants other than covered employees to reflect the participant’s individual job performance or other factors determined by the Committee. In its discretion, the Committee may provide for the payment to a participant awarded performance shares of dividend equivalents with respect to cash dividends paid on our common stock. The Committee may provide for performance award payments in lump sums or installments. If any payment is to be made on a deferred basis, the Committee may provide for the payment of dividend equivalents or interest during the deferral period. No performance award may be sold or transferred other than by will or the laws of descent and distribution prior to the end of the applicable performance period. Change in Control. The 2003 Amended Plan defines a “Change in Control” of Adobe as any of the following events (or series of related events) in which Adobe’s stockholders immediately prior to the event do not retain immediately after the event direct or indirect beneficial ownership of more than 50% of the total combined voting power of the outstanding voting Adobe securities or the entity to which Adobe’s assets were transferred: (i) the direct or indirect sale or exchange by the stockholders of all or substantially all of voting stock of Adobe; (ii) a merger or consolidation in which Adobe is a party; (iii) the sale, exchange, or transfer of all or substantially all of Adobe’s assets; or (iv) a liquidation or dissolution of Adobe. If a Change in Control occurs, the surviving, continuing, successor or purchasing entity or its parent may, without the consent of any participant, either assume all outstanding options, restricted stock units and stock appreciation rights or substitute substantially equivalent options, restricted stock units or rights for its stock. If the outstanding options, restricted stock units and stock appreciation rights are not assumed or replaced, then all unexercised and unvested portions of such outstanding awards will become immediately exercisable and vested in full. Any stock options, restricted stock units or stock appreciation rights which are not assumed in connection with a Change in Control or exercised prior to the Change in Control will terminate effective as of the time of the Change in Control. The Committee has provided and may provide in future, any stock award agreement for the acceleration of vesting of stock awards effective as of the date of the Change in Control and payment of performance awards to such extent as determined by the Committee. Some of our employees are also covered by the terms of separate severance plans we have adopted which provide for certain acceleration of equity compensation awards in the event of a change in control or termination of such employee’s employment following a change in control of Adobe. Termination or Amendment. The 2003 Amended Plan will continue in effect until the first to occur of (i) its termination by the Committee or (ii) the date on which all shares available for issuance under the 2003 Amended Plan have been issued and all restrictions on such shares under the terms of the 2003 Amended Plan and the agreements evidencing awards granted under the 2003 Amended Plan have lapsed. However, no incentive stock option may be granted under the 2003 Amended Plan after January 22, 2013. 15 The Committee may terminate or amend the 2003 Amended Plan at any time, provided that without stockholder approval the 2003 Amended Plan cannot be amended to increase the Share Reserve, change the class of persons eligible to receive incentive stock options or effect any other change that would require stockholder approval under any applicable law. No termination or amendment may affect any outstanding award unless expressly provided by the Committee, and, in any event, may not adversely affect an outstanding award without the consent of the participant unless necessary to comply with any applicable law. Summary of Federal Income Tax Consequences of the 2003 Amended Plan The following summary is intended only as a general guide to the U.S. federal income tax consequences under current law of participation in the 2003 Amended Plan and does not attempt to describe all possible federal or other tax consequences of such participation or tax consequences based on particular circumstances. Furthermore, the tax consequences are complex and subject to change, and a taxpayer’s particular situation may be such that some variation of the described rules is applicable. Incentive Stock Options. A participant recognizes no taxable income for regular income tax purposes as a result of the grant or exercise of an incentive stock option qualifying under Section 422 of the Code. However, the exercise of an incentive stock option may increase the participant’s alternative minimum tax liability, if any. If a participant holds stock acquired through exercise of an incentive stock option for more than two years from the date on which the option was granted and more than one year after the date the option was exercised for those shares, any gain or loss on a disposition of those shares (a “qualifying disposition”) will be a long-term capital gain or loss. Upon such a qualifying disposition, we will not be entitled to any income tax deduction. Generally, if the participant disposes of the stock before the expiration of either of those holding periods (a “disqualifying disposition”), then at the time of disposition the participant will realize taxable ordinary income equal to the lesser of (i) the excess of the stock’s fair market value on the date of exercise over the exercise price, or (ii) the participant’s actual gain, if any, on the purchase and sale. The participant’s additional gain or any loss upon the disqualifying disposition will be a capital gain or loss, which will be long-term or short-term depending on whether the stock was held for more than one year. To the extent the participant recognizes ordinary income by reason of a disqualifying disposition, generally we will be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation) to a corresponding income tax deduction in the tax year in which the disqualifying disposition occurs. Nonstatutory Stock Options. Options not designated or qualifying as incentive stock options will be nonstatutory stock options having no special tax status. A participant generally recognizes no taxable income as the result of the grant of such an option. Upon exercise of a nonstatutory stock option, the participant normally recognizes ordinary income in the amount of the difference between the option exercise price and the fair market value of the shares purchased. Generally, we will be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation) to an income tax deduction in the tax year in which such ordinary income is recognized by the participant. Upon the disposition of stock acquired by the exercise of a nonstatutory stock option, any gain or loss, based on the difference between the sale price and the fair market value on the exercise date, will be taxed as capital gain or loss. Stock Appreciation Rights. A participant recognizes no taxable income upon the receipt of a stock appreciation right. Upon the exercise of a stock appreciation right, the participant will recognize ordinary income in an amount equal to the excess of the fair market value of the underlying shares of common stock 16 on the exercise date over the exercise price. If the participant is an employee, such ordinary income generally is subject to withholding of income and employment taxes. We generally should be entitled to a deduction equal to the amount of ordinary income recognized by the participant in connection with the exercise of the stock appreciation right, except to the extent such deduction is limited by applicable provisions of the Code. Stock Bonuses and Stock Purchase Rights. A participant acquiring restricted stock generally will recognize ordinary income equal to the difference between the fair market value of the shares on the “determination date” (as defined below) and their purchase price, if any. If the participant is an employee, such ordinary income generally is subject to withholding of income and employment taxes. The “determination date” is the date on which the participant acquires the shares unless they are subject to a substantial risk of forfeiture and are not transferable, in which case the determination date is the earlier of (i) the date on which the shares become transferable or (ii) the date on which the shares are no longer subject to a substantial risk of forfeiture. If the determination date is after the date on which the participant acquires the shares, the participant may elect, pursuant to Section 83(b) of the Code, to have the date of acquisition be the determination date by filing an election with the Internal Revenue Service no later than 30 days after the date the shares are acquired. Upon the sale of shares acquired pursuant to a restricted stock award, any gain or loss, based on the difference between the sale price and the fair market value on the determination date, will be taxed as capital gain or loss. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one year. We will be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation) to a corresponding income tax deduction in the year in which such ordinary income is recognized by the participant. Restricted Stock Units. No taxable income is recognized upon receipt of a restricted stock unit award. In general, the participant will recognize ordinary income in the year in which the shares subject to that unit vest and are actually issued to the participant in an amount equal to the fair market value of the shares on the date of issuance. We will be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation) to an income tax deduction equal to the amount of ordinary income recognized by the participant at the time the shares are issued. In general, the deduction will be allowed for the taxable year in which such ordinary income is recognized by the participant. Performance Awards. A participant generally will recognize no income upon the grant of a performance share or a performance unit award. Upon the settlement of such awards, participants normally will recognize ordinary income in the year of receipt in an amount equal to the cash received and the fair market value of any nonrestricted shares received. If the participant is an employee, such ordinary income generally is subject to withholding of income and employment taxes. If the participant receives shares of restricted stock, the participant generally will be taxed in the same manner as described above in the “Stock Bonuses and Stock Purchase Rights” section. Upon the sale of any shares received, any gain or loss, based on the difference between the sale price and the fair market value on the “determination date”, will be taxed as capital gain or loss. We generally should be entitled to a deduction equal to the amount of ordinary income recognized by the participant on the determination date, except to the extent such deduction is limited by applicable provisions of the Code. Potential Limitation on Deductions. Section 162(m) of the Code denies a deduction to any publicly-held corporation for compensation paid to certain “covered employees” in a taxable year to the extent that compensation to each covered employee exceeds $1 million. It is possible that compensation attributable to awards, when combined with all other types of compensation received by a covered employee from us, may cause this limitation to be exceeded in any particular year. However, certain kinds of compensation, including qualified “performance-based compensation,” are disregarded for purposes of the deduction limitation. 17 In accordance with Treasury Regulations issued under Section 162(m) of the Code, compensation attributable to stock options and stock appreciation rights will qualify as performance-based compensation if (a) such awards are granted by a compensation committee comprised solely of “outside directors,” (b) the plan contains a per-employee limitation on the number of shares for which such awards may be granted during a specified period, (c) the per-employee limitation is approved by the stockholders, and (d) the exercise or strike price of the award is no less than the fair market value of the stock on the date of grant. It is intended that options and stock appreciation rights granted under the 2003 Amended Plan qualify as performance-based compensation that is exempt from the $1 million deduction limitation. Compensation attributable to stock bonus awards, stock purchase rights, restricted stock unit awards, and performance awards will qualify as performance-based compensation, provided that: (a) the award is granted by a compensation committee comprised solely of “outside directors,” (b) the award is granted (or vests) only upon the achievement of an objective performance goal established in writing by the compensation committee while the outcome is substantially uncertain, (c) the compensation committee certifies in writing prior to the grant or vesting of the award that the performance goal has been satisfied, and (d) prior to the grant of the award, stockholders have approved the material terms of the award (including the class of employees eligible for such award, the business criteria on which the performance goal is based, and the maximum amount, or formula used to calculate the amount, payable upon attainment of the performance goal). It is intended that the Committee may grant stock bonus awards, stock purchase rights, restricted stock unit awards, and performance awards under the Plan that qualify as performance-based compensation that is exempt from the $1 million deduction limitation. We cannot currently determine the benefits or number of shares subject to awards that may be granted in the future to executive officers and employees under the 2003 Amended Plan. The following table sets forth information with respect to grants made in fiscal 2006 under the 2003 Plan to the Named Executive Officers, all current executive officers as a group, and all employees and consultants (including all current officers who are not executive officers) as a group. Since its inception, no awards have been granted under the 2003 Plan to any (i) non-employee director, (ii) nominee for election as a non-employee director, or (iii) any associate of a non-employee director, nominee or executive officer, and no other person has been granted five percent or more of the total amount of awards granted under the 2003 Plan.
(1) Amounts represent the target and maximum number of shares of our common stock which may be earned under the 2003 Plan in accordance with the terms of our 2006 Performance Share Program. Performance shares will be earned if at all following our 2007 fiscal year-end, subject to the achievement of certain performance metrics. See “Report of the Executive Compensation 18 Committee—Compensation Components” in this proxy statement for a description of the 2006 Performance Share Program. (2) Mr. Furr received a performance share grant in fiscal 2006 under our Amended 1994 Performance and Restricted Stock Plan and in accordance with the terms of our 2006 Performance Share Program. The target and maximum number of shares of our common stock which may be earned by Mr. Furr are 20,000 and 30,000, respectively. PROPOSAL 3 The AFSCME Employees Pension Plan (“AFSCME”), 1625 L Street, N.W., Washington, D.C. 20036, the owner of 2,600 shares of our common stock, has requested that we include the following proposal and supporting statement at this year’s meeting. The Board unanimously recommends a vote ‘‘against’’ this stockholder proposal below and asks you to read management’s response, which follows the stockholder proposal and supporting statement. The stockholder proposal and supporting statement are quoted verbatim below: Resolved, that stockholders of Adobe Systems, Inc. (“Adobe”) urge the Executive Compensation Committee of the Board of Directors (the “Committee”) to adopt a policy requiring that senior executives retain a significant percentage of shares acquired through equity compensation programs during their employment, and to report to stockholders regarding the policy before Adobe’s 2008 annual meeting of stockholders. The Committee should define “significant” (and provide for exceptions in extraordinary circumstances) by taking into account the needs and constraints of Adobe and its senior executives; however, the stockholders recommend that the Committee not adopt a percentage lower than 75% of net after tax shares. The policy should address the permissibility of transactions such as hedging transactions which are not sales but reduce the risk of loss to the executive. Equity-based compensation makes up a substantial portion of senior executive compensation at Adobe. In fiscal years 2000 through 2005, CEO Bruce Chizen was granted 4,275,000 stock options with a grant-date estimated value (assuming 5% stock price appreciation) of $68,057,485. Adobe claims that equity-based compensation promotes alignment between executive and stockholder interests. Unfortunately, Adobe’s generous equity compensation programs have yet to translate into meaningful levels of stock ownership. Despite exercising 2,018,547 options in fiscal years 2000 through 2005, realizing over $40 million in profits, Adobe’s most recent proxy statement disclosed that Mr. Chizen still owned no shares outright. (He is the beneficial owner of 198,526 shares held in a trust of which he is trustee.) We believe that the alignment benefits touted by Adobe are not being fully realized. Requiring senior executives to hold a significant portion of shares obtained through compensation plans would focus them on Adobe’s long-term success and would help align their interests with those of Adobe’s stockholders. A 2002 report by a commission of The Conference Board endorsed the idea of such a requirement, stating that the long-term focus promoted thereby “may help prevent companies from artificially propping up stock prices over the short-term to cash out options and making other potentially negative short-term decisions.” 19 In February 2003, Adobe implemented a recommendation, but not requirement that directors and certain executives retain 25% of the net shares after payment of taxes and option exercise price for a period of two years, until a particular ownership threshold is reached. In 2004, the board raised this percentage to 40% of net shares for Mr. Chizen, though the requirement is in effect only if he would not own 150,000 shares after selling the shares at issue, a small number relative to the number of options he has been granted. We believe this recommendation does not go far enough to ensure that equity compensation builds executive ownership, especially in light of the cashless exercise feature, which allows executives to use shares to pay the exercise price and which thus reduces the number of shares owned by the executive following exercise. We urge stockholders to vote for this proposal. Stockholder ratification of this proposal requires the affirmative vote of holders of a majority of the votes cast in person or by proxy at the meeting. Neither abstentions nor broker non-votes will have any effect on the outcome of this proposal. THE BOARD
UNANIMOUSLY RECOMMENDS A VOTE “AGAINST” Substantially similar stockholder proposals by AFSCME on stock ownership guidelines for our executive officers were considered at our 2005, 2004 and 2003 annual stockholder meetings and were overwhelmingly rejected in each of these years by our stockholders. The Board continues to believe that our past and current equity compensation policies for our executive officers and directors have been successful in enhancing our ability to attract and retain talented people and in motivating them to build long-term value for our stockholders. We have long believed that option grants help to align our executives’ interests with yours because executives benefit from these grants only after (i) their options have vested, and (ii) our stock price has appreciated from the time the executive was granted the options. We spend a significant amount of time and effort researching, developing and adopting strategically designed equity compensation programs, including development of our own Stock Ownership Guidelines. In developing our Stock Ownership Guidelines, we used extensive benchmarking, modeling, and consultation with independent third-party compensation experts. Based on this extensive benchmarking and modeling, we believe that the retention ratio we have chosen closely approximates benchmarked guidelines in effect for other equivalently-sized companies. Additionally, we are aware of only a small minority of companies with stock ownership guidelines comparable to those in this stockholder proposal, and such companies are huge, multinational companies with sophisticated executive compensation programs, including multimillion-dollar salaries and bonuses, generous equity compensation packages, including the issuance of restricted stock, deferred compensation and retirement programs that collectively make the high 75% ratio achievable. Our executives’ overall compensation packages are modest in comparison, and we expect our executives to realize a significant portion of their ongoing compensation through any value gained from the options we grant to them. We believe that the ratio levels suggested by the stockholder proposal would seriously distort our carefully-designed compensation policies for our executives, making us unable to attract and retain the talented executives we need to continue building stockholder value. 20 As part of our overall corporate governance and compensation practices, we adopted Stock Ownership Guidelines for our directors and executive officers in 2003. As part of the Board’s annual review process, in September 2006, our Board reevaluated the Stock Ownership Guidelines and determined that they were appropriate. Our current Stock Ownership Guidelines are as follows: The Board believes that: · Each director should hold 25% of the net shares acquired (after deducting shares sold to cover the exercise price and withheld taxes) from Adobe for two years unless, following the sale of such shares, the total number of Adobe shares held by such director equals or exceeds 5,000 shares. · The Chief Executive Officer should hold 25% of the net shares acquired (after deducting shares sold to cover the exercise price and withheld taxes; excludes shares acquired through Adobe’s Employee Stock Purchase Plan) from Adobe for two years unless, following sale of such shares, the total number of Adobe shares held by the Chief Executive Officer equals or exceeds 150,000 shares. · Each President, Executive Vice President and the Chief Financial Officer should hold 25% of the net shares acquired (after deducting shares sold to cover the exercise price and withheld taxes; excludes shares acquired through Adobe’s Employee Stock Purchase Plan) from Adobe for two years unless, following the sale of such shares, the total number of Adobe shares held by such Executive Vice President or the Chief Financial Officer equals or exceeds 50,000 shares. · Each Senior Vice President (and Vice President, if a Section 16 officer) should hold 25% of the net shares acquired (after deducting shares sold to cover the exercise price and withheld taxes; excludes shares acquired through Adobe’s Employee Stock Purchase Plan) from Adobe for two years unless, following the sale of such shares, the total number of Adobe shares held by such Senior Vice President (and Vice President, if a Section 16 officer) equals or exceeds 25,000 shares. In addition, since 2004, our Board has placed additional requirements on options granted to Mr. Chizen, our Chief Executive Officer. Mr. Chizen is required to hold 40% of the net shares acquired from the options granted by Adobe (after deducting shares sold to cover the exercise price and taxes, and excluding shares acquired through Adobe’s Employee Stock Purchase Plan) for two years unless, following sale of such shares, the total number of Adobe shares held by him equals or exceeds 150,000 shares. All of our executive officers and directors complied with these Stock Ownership Guidelines in fiscal 2006. As of February 14, 2007, Mr. Chizen held in trust 199,404 shares of our stock, representing over $7.6 million in value as of that date. This reflects an amount in excess of eight times Mr. Chizen’s 2006 base salary. Mr. Chizen has accumulated such shares in accordance with the guidelines described above. Contrary to the stockholder’s statement, we believe this represents a significant level of stock ownership, is confirmation that Mr. Chizen’s interests are aligned with the long-term interests of our stockholders, and that our current Stock Ownership Guidelines are effective and sufficient. We have struck what we believe to be the right balance between allowing our executives to realize value from their options and ensuring that they have a significant equity stake in our future. We believe that our past and current equity compensation policies for our executive officers and directors have been responsibly implemented and that the stock ownership guidelines we have in place further align the interests of our executive officers and directors with your long-term interests, while still allowing us to use equity as an incentive rather than a hindrance to our recruiting and retention efforts. If the Stock Ownership Guidelines suggested by the stockholder proposal were adopted, we believe that we would be unable to recruit and retain talented executives, which would ultimately be detrimental to the long-term interests of Adobe and our stockholders. 21 PROPOSAL 4 The Audit Committee selected KPMG LLP as our independent registered public accounting firm for fiscal 2007, and urges you to vote for ratification of KPMG’s appointment. KPMG has audited our financial statements since fiscal 1983. Although we are not required to seek your approval of this appointment, we believe it is good corporate practice to do so. No determination has been made as to what action our Audit Committee and our Board would take if you fail to ratify the appointment. Even if the appointment is ratified, the Audit Committee retains discretion to appoint a new independent audit firm if the Audit Committee concludes such a change would be in the best interests of Adobe and our stockholders. We expect representatives of KPMG to be present at the annual meeting and available to respond to appropriate questions by stockholders. Additionally, the representatives of KPMG will have the opportunity to make a statement if they so desire. Stockholder ratification of KPMG as our independent registered public accounting firm requires the affirmative vote of holders of a majority of the votes cast in person or by proxy at the meeting. Neither abstentions nor broker non-votes will have any effect on the outcome of this proposal. THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THIS PROPOSAL During fiscal 2006 and 2005, we retained KPMG to provide services in the following categories and amounts:
Audit fees include the audit of Adobe’s annual financial statements, review of financial statements included in each of our Quarterly Reports on Form 10-Q, and services that are normally provided by KPMG in connection with statutory and regulatory filings or engagements for those fiscal years. The increase in audit fees for fiscal 2006 was primarily related to our acquisition of Macromedia. Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements. The audit-related fees in fiscal 2005 were related to KPMG’s review of our registration statement on Form S-4 in connection with our acquisition of Macromedia. Tax fees consist of fees for professional services for tax compliance, tax advice and tax planning. This category includes fees related to the preparation and review of federal, state and international tax returns and assistance with tax audits. All other fees for fiscal 2006 and 2005 were primarily for information testing services undertaken in both years. 22 The Audit Committee determined that the rendering of non-audit services by KPMG is compatible with maintaining the independence of KPMG. Audit Committee Pre-Approval of Services Performed by Our Independent Registered Public Accountants It is the policy of our Audit Committee to pre-approve all audit and permissible non-audit services to be performed by KPMG during the fiscal year. Our Audit Committee pre-approves services by authorizing specific projects within the categories outlined above, subject to the budget for each category. Our Audit Committee’s charter delegates to any subcommittee when appropriate, or to one or more members of the Audit Committee, the authority to address any requests for pre-approval of services between Audit Committee meetings, and the subcommittee or such member or members must report any pre-approval decisions to our Audit Committee at its next scheduled meeting. All services related to audit fees, audit-related fees, tax fees and all other fees provided by KPMG during fiscal 2006 and 2005 were pre-approved by the Audit Committee in accordance with the pre-approval policy described above. For more information on KPMG, please see the “Report of the Audit Committee” below. 23 The Audit Committee’s role includes the oversight of our financial, accounting and reporting processes; our system of internal accounting and financial controls; and our compliance with related legal and regulatory requirements. The Audit Committee oversees the appointment, engagement, termination and oversight of our independent registered public accounting firm, including conducting a review of its independence; reviewing and approving the planned scope of our annual audit; overseeing our independent registered public accounting firm’s audit work; reviewing and pre-approving any audit and non-audit services that may be performed by it; reviewing with management and our independent registered public accounting firm the adequacy of our internal financial and disclosure controls; reviewing our critical accounting policies and the application of accounting principles; and monitoring the rotation of partners of our independent registered public accounting firm on our audit engagement team as required by law. The Audit Committee establishes procedures, as required under applicable law, for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee’s role also includes meeting to review our annual audited financial statements and quarterly financial statements with management and our independent registered public accounting firm. The Audit Committee held 13 meetings during fiscal 2006. Each member of the Audit Committee meets the independence criteria prescribed by applicable law and the rules of the SEC for audit committee membership and is an “independent director” within the meaning of applicable NASDAQ listing standards. Each Audit Committee member meets the NASDAQ’s financial literacy requirements, and the Board has further determined that Messrs. Daley and Yocam (i) are “audit committee financial experts” as such term is defined in Item 401(h) of Regulation S-K promulgated by the SEC, and (ii) also meet the NASDAQ’s professional experience requirements. The Audit Committee acts pursuant to a written charter, which complies with the applicable provisions of the Sarbanes-Oxley Act of 2002 and related rules of the SEC and NASDAQ, a copy of which is attached as Appendix A to this proxy statement and can also be found on our website at www.adobe.com/aboutadobe/invrelations/corpgovern.html. We have reviewed and discussed with management and KPMG our audited financial statements. We discussed with KPMG and Adobe’s internal auditors the overall scope and plans of their audits. We met with KPMG, with and without management present, to discuss results of their examinations, their evaluation of Adobe’s internal controls, and the overall quality of Adobe’s financial reporting. We have reviewed and discussed with KPMG matters required to be discussed pursuant to Statement on Auditing Standards No. 61, as amended (Communication with Audit Committees). We have received from KPMG a formal written statement describing the relationships between KPMG and Adobe that might bear on KPMG’s independence consistent with Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). We have discussed with KPMG matters relating to its independence, including a review of both audit and non-audit fees, and considered the compatibility of non-audit services with KPMG’s independence. * The material in this report is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of Adobe under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. 24 Based on the reviews and discussions referred to above and our review of Adobe’s audited financial statements for fiscal 2006, we recommended to our Board that our audited financial statements be included in our Annual Report on Form 10-K, as amended, for the fiscal year ended December 1, 2006, for filing with the SEC. Respectfully submitted, AUDIT COMMITTEE James
E. Daley, Chairperson We believe in sound corporate governance practices and have adopted formal Corporate Governance Guidelines to enhance our effectiveness. Our Board adopted these Corporate Governance Guidelines in order to ensure that it has the necessary authority and practices in place to review and evaluate our business operations as needed and to make decisions that are independent of our management. The Corporate Governance Guidelines are also intended to align the interests of directors and management with those of our stockholders. The Corporate Governance Guidelines set forth the practices our Board will follow with respect to board and committee composition and selection, board meetings and involvement of senior management, Chief Executive Officer performance evaluation and succession planning, and board committees and compensation. A copy of our Corporate Governance Guidelines is available on our website at www.adobe.com/aboutadobe/invrelations/corpgovern.html. We adopted a Code of Ethics applicable to our Chief Executive Officer, Chief Financial Officer, Corporate Controller, Treasurer and certain other finance executives, which is a “code of ethics” as defined by applicable SEC rules. This Code is publicly available on our website at www.adobe.com/aboutadobe/invrelations/corpgovern.html. If we make any amendments to the Code of Ethics other than technical, administrative, or other non-substantive amendments, or grant any waivers, including implicit waivers, from a provision of this Code of Ethics to our Chief Executive Officer, Chief Financial Officer, Corporate Controller, Treasurer or certain other finance executives, we will disclose the nature of the amendment or waiver, its effective date, and to whom it applies, on our website at www.adobe.com/aboutadobe/invrelations/corpgovern.html or in a Current Report on Form 8-K filed with the SEC. There were no waivers of the Code of Ethics during fiscal 2006. We have also adopted a Code of Business Conduct applicable to all officers, directors and employees of Adobe as required by applicable NASDAQ listing standards. The Code of Business Conduct includes an enforcement mechanism, and any waivers for directors or executive officers must be approved by our Board and disclosed in a Form 8-K within four days. This Code of Business Conduct is publicly available on our website at www.adobe.com/aboutadobe/invrelations/corpgovern.html. There were no waivers of the Code of Business Conduct for any of our directors or officers during fiscal 2006. 25 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial ownership of our common stock as of February 15, 2007 by each entity or person who is known to beneficially own 5% or more of our common stock, each of our directors, each Named Executive Officer identified in the section “Executive Compensation—Summary Compensation Table” in this proxy statement, and all of our current directors and executive officers of the company as a group.
* Less than 1%. (1) The address of each person named in the table, unless otherwise indicated, is c/o Adobe Systems Incorporated, 345 Park Avenue, San Jose, California 95110. (2) This table is based upon information supplied by officers, directors and principal stockholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, each of the stockholders named in this table has sole voting and investment power with 26 respect to the shares indicated as beneficially owned. Applicable percentages are based on 588,001,907 shares outstanding on February 15, 2007, adjusted as required by rules promulgated by the SEC. (3) Based on information reported on a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2007 by PRIMECAP Management Company, and as reported on a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2007 by Vanguard Chester Funds-Vanguard PRIMECAP Fund. Includes 44,442,226 shares beneficially held by PRIMECAP Management Company, with sole dispositive power as to all shares and sole voting power as to 5,801,816 shares. Of those shares beneficially held by PRIMECAP Management Company, 33,800,000 shares are beneficially held by Vanguard Chester Funds-Vanguard PRIMECAP Fund for which it possesses sole voting power. (4) Based on information reported on a Schedule 13G filed with the Securities and Exchange Commission on February 9, 2007 by Prudential Financial, Inc., and as reported on a Schedule 13G filed with the Securities and Exchange Commission on February 13, 2007 by Jennison Associates LLC, a subsidiary of Prudential Financial, Inc. Includes 30,638,405 shares beneficially held by Prudential Financial, Inc., 2,249,996 shares for which it possesses sole voting and dispositive power, 20,838,296 shares for which it possesses shared voting power, and 28,388,409 shares for which it possesses shared dispositive power. Of those shares beneficially held by Prudential, 29,639,633 shares are beneficially held by its subsidiary Jennison Associates LLC, 22,089,520 shares for which Jennison possesses sole voting power and 29,639,633 shares for which Jennison possesses shared dispositive power. (5) Based solely on information reported on a Schedule 13G filed with the Securities and Exchange Commission on February 14, 2007 by Wellington Management Company, LLC. Includes 41,410,556 shares beneficially held by Wellington Management Company, LLC, 29,445,228 shares for which it possesses shared voting power and 41,410,566 shares for which it possesses shared dispositive power. (6) Consists of 199,404 shares held by the Chizen Trust, of which Mr. Chizen is a trustee; and 4,145,023 shares issuable upon exercise of outstanding options held by Mr. Chizen exercisable within 60 days of the date of this table. (7) Consists of 102,357 shares held by the Narayen Family Trust, of which Mr. Narayen is a trustee, and 1,059,766 shares issuable upon exercise of outstanding options held by Mr. Narayen exercisable within 60 days of the date of this table. (8) Includes 97,916 shares issuable upon exercise of outstanding options held by Ms. Cottle exercisable within 60 days of the date of this table. (9) Mr. Demo resigned as our Executive Vice President and Chief Financial Officer effective May 30, 2006, but remained an employee of Adobe through December 2006. (10) Mr. Elop resigned as President of Worldwide Field Operations effective December 5, 2006. (11) Mr. Furr resigned as our Executive Vice President and Chief Financial Officer effective November 7, 2006, but will remain employed at Adobe through June 30, 2007. (12) On January 23, 2007, Ms. Wynn announced her intention to resign as Senior Vice President, Worldwide Human Resources, effective March 2, 2007. Includes 40,624 shares which Ms. Wynn has the right to acquire through exercisable options as of March 2, 2007, the date of her intended resignation. (13) Includes 25,000 shares issuable upon exercise of outstanding options held by Mr. Barnholt exercisable within 60 days of the date of this table. 27 (14) Consists of 136,850 shares held by the Burgess Family Trust, of which Mr. Burgess is a trustee; 1,620 shares, for which Mr. Burgess has shared voting and dispositive power held in trust for the benefit of his children; and 360,067 shares issuable upon exercise of outstanding options held by Mr. Burgess exercisable within 60 days of the date of this table. (15) Includes 131,250 shares issuable upon exercise of outstanding options held by Mr. Cannon exercisable within 60 days of the date of this table. (16) Includes 141,250 shares issuable upon exercise of outstanding options held by Mr. Daley exercisable within 60 days of the date of this table. (17) Consists of 435,064 shares held by the Geschke Family Trust, of which Dr. Geschke is a trustee; 25,000 shares held in a grantor retained annuity trust of which Dr. Geschke is a trustee; 25,000 shares held in a grantor retained annuity trust of which Dr. Geschke’s spouse is a trustee; 208,144 shares held in a foundation, of which Dr. Geschke is president and Dr. Geschke’s spouse is secretary, and as to which Dr. Geschke disclaims any beneficial ownership; and 401,250 shares issuable upon exercise of outstanding options held by Dr. Geschke exercisable within 60 days of the date of this table. (18) Includes 101,250 shares issuable upon exercise of outstanding options held by Ms. Mills exercisable within 60 days of the date of this table. (19) Consists of 20,000 shares held by the Pouliot Family Trust, of which Ms. Pouliot is a trustee; and 120,711 shares issuable upon exercise of outstanding options held by Ms. Pouliot exercisable within 60 days of the date of this table. (20) Includes 1,200 shares held by Dr. Sedgewick’s minor child, as to all of which Dr. Sedgewick disclaims beneficial ownership; and 241,250 shares issuable upon exercise of outstanding options held by Dr. Sedgewick exercisable within 60 days of the date of this table. (21) Includes 22,400 shares held in trust for the benefit of Dr. Warnock’s child, over which he shares voting and investment power with his spouse and Dr. Geschke; and 321,250 shares issuable upon exercise of outstanding options held by Dr. Warnock exercisable within 60 days of the date of this table. (22) Includes 96,250 shares issuable upon exercise of outstanding options held by Mr. Yocam exercisable within 60 days of the date of this table. (23) Includes 7,242,233 shares issuable upon exercise of outstanding options held by our directors and current executive officers exercisable within 60 days of the date of this table. See also Notes 6-8 and 13-22. 28 The following table provides information about the compensation for our last three fiscal years (2006, 2005, and 2004) of our Chief Executive Officer, plus our four other most highly compensated executive officers as of the end of fiscal 2006, plus two additional individuals who would have been among the four most highly compensated executive officers of the company had they been serving in that capacity at the end of fiscal 2006. This group is referred to in this proxy statement as the Named Executive Officers.
(1) Consists of payments made pursuant to our corporate profit sharing plan and our 2006 annual incentive plan (see “Report of the Executive Compensation Committee—Compensation Components” for a description of these plans). In addition, Mr. Furr’s total includes a $100,000 sign-on bonus. (2) Amounts set forth in this column represent the value of performance shares granted to each Named Executive Officer pursuant to our 2003 Equity Incentive Plan or our Amended 1994 Performance and Restricted Stock Plan during fiscal 2006 based on the maximum number of performance shares that will be earned, if at all, and the market value of our common stock as of the date of grant as reported on NASDAQ. The performance shares are subject to the terms of our 2006 Performance Share Program, and will be earned, if at all, following our 2007 fiscal year-end, subject to the achievement of certain performance metrics. See “Report of the Executive Compensation Committee—Compensation Components” for a description of the 2006 Performance Share Program. 29 The following table sets forth the performance share target payout and the maximum payout approved for each of the Named Executive Officers in 2006.
* Based on the participant’s termination date or expected termination date, such participant is not, or will not be, eligible to earn such performance shares. As of December 1, 2006, Mr. Elop held an additional 74,750 shares of restricted stock, which was originally awarded to him by Macromedia while he was serving as its Chief Executive Officer, and which were converted to shares of Adobe restricted stock on December 5, 2005, in connection with the acquisition by Adobe of Macromedia. The market value for the restricted stock, based on the closing price of our common stock on December 1, 2006 ($39.35 per share) as reported on NASDAQ, was $2,941,413. In accordance with Mr. Elop’s employment agreement, as amended, between Adobe and Mr. Elop, all shares of restricted stock vested in full on his resignation date, December 5, 2006. (3) The amounts disclosed in this column include life insurance premiums, contributions by us under our 401(k) Retirement Savings Plan, physical exams, and severance payments, as follows:
* In connection with his resignation, Mr. Elop received a retention bonus payment in the amount of $1,000,000 and a lump sum payment in the amount of $875,000. For additional information, see the section below entitled “Severance and Change-in-Control Arrangements.” (4) Mr. Chizen also served as our acting Chief Financial Officer from November 7, 2006 to February 7, 2007. (5) Effective December 5, 2005, Mr. Elop, former Chief Executive Officer and a director of Macromedia, became our President of Worldwide Field Operations. Effective December 5, 2006, Mr. Elop resigned as our President of Worldwide Field Operations. 30 (6) Consists of reimbursement for expenses incurred (plus related tax gross-up payments by Adobe) by Mr. Elop in connection with his commercial air travel between our headquarters in San Jose, California and his personal residence in Canada. (7) Effective January 9, 2006, Ms. Wynn became our Senior Vice President Worldwide Human Resources. On January 23, 2007, she announced her intention to resign as Senior Vice President, Worldwide Human Resources, effective March 2, 2007. (8) Effective May 30, 2006, Mr. Furr became our Executive Vice President and Chief Financial Officer. On November 7, 2006, Mr. Furr resigned as our Executive Vice President and Chief Financial Officer, but will remain employed at Adobe through June 30, 2007. (9) On May 30, 2006 Mr. Demo resigned as our Executive Vice President and Chief Financial Officer. Pursuant to an employment transition agreement, he remained a full-time employee through June 16, 2006 and a part-time employee from June 17 through December 1, 2006. The following table sets forth information regarding stock options granted in fiscal 2006 to our Named Executive Officers, each under our 2003 Equity Incentive Plan. All options were granted with an exercise price equal to the closing price of our common stock on the date of grant as reported on NASDAQ. Potential realizable values are net of exercise price, but before taxes associated with exercise. These amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the option term of seven years. The assumed 5% and 10% rates of stock price appreciation are provided for purposes of illustration only and do not represent our estimate or projection of the future price of our common stock.
(1) The options shown above for Ms. Cottle and Messrs. Chizen, Narayen and Furr vest over four years at a rate of 25% on the first anniversary of the grant date and 2.08% per month for the following 36 months. In accordance with Mr. Furr’s transition agreement with Adobe, as amended, he will remain an employee of Adobe through June 30, 2007, at which time his options will cease to vest. Ms. Wynn’s options vest as a rate of 25% on the first anniversary of the grant date, 2.08% per month for the following 12 months, and 4.17% per month for the remaining 12 months, until her effective resignation date of March 2, 2007, at which time her options will cease to vest. Mr. Elop no longer holds options to purchase our common stock in connection with his resignation from Adobe effective December 5, 2006. 31 Under the terms of the applicable option agreements, as modified by the terms of the applicable retention and severance agreements, as described in “Severance and Change-in-Control Arrangements” in this proxy statement, if the optionee terminates employment with Adobe, the exercise period of the option will change as follows: · if the termination is due to the optionee’s normal retirement, death or disability, the exercise period is 12 months from such date, and vesting will accelerate for an additional 12 months; provided, however, that in no event shall the vested percentage exceed 100%; or · if the termination is due to the optionee’s early retirement pursuant to an early retirement program, the exercise period is three months from the date of early retirement or such greater period as established pursuant to the early retirement program; or · if there is a change in control of Adobe in which we are not the surviving corporation, and, with the exception of Mr. Chizen, termination occurs within 24 months thereafter due to (i) constructive termination or (ii) any reason other than termination for cause, the exercise period is 12 months from the date on which the optionee’s employment terminated, and vesting will accelerate such that all option shares will vest in full. Pursuant to the terms of his retention agreement, Mr. Chizen is entitled to accelerated vesting of all his option shares such that they vest in full upon a change in control of Adobe in which we are not the surviving corporation; or · if the termination is for cause, the option shall terminate and cease to be exercisable on the date of termination; or · if the termination is for any reason other than stated above, the exercise period is three months from the date of such termination. The exercise price may be paid in cash, by check, or in cash equivalent; by means of a broker-assisted cashless exercise; to the extent legally permitted, by tender of shares of common stock owned by the optionee having a fair market value not less than the exercise price; by such other lawful consideration as approved by the Executive Compensation Committee; or by any combination of these. Nevertheless, the Executive Compensation Committee may restrict the forms of payment permitted in connection with any option grant. No option may be exercised unless the optionee has made adequate provision for federal, state, local and foreign taxes, if any, relating to the exercise of the option, including, if permitted or required by us, through the optionee’s surrender of a portion of the option shares to Adobe. (2) Based on 18,968,219 shares subject to options granted to employees and directors under our option plans during fiscal 2006. The following table shows stock options exercised by the Named Executive Officers in fiscal 2006, including the total value of gains on the date of exercise based on actual sale prices or on the closing price on the date of exercise if the shares were not sold that day, in each case less the exercise price of the stock options. In addition, the number of shares covered by both exercisable and unexercisable stock options, as of December 1, 2006, is shown. Also reported are the values for “in-the-money” options, which represents the positive spread between the exercise price of any such existing stock options and the closing price of our common stock as of December 1, 2006, which was $39.35 as reported on NASDAQ. 32 AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR
The following table shows information related to our common stock which may be issued under our existing equity compensation plans as of December 1, 2006, including our 1996 Outside Directors Stock Option Plan, 1997 Employee Stock Purchase Plan, 2003 Equity Incentive Plan, and Amended 1994 Performance and Restricted Stock Plan, plus certain non-stockholder approved equity compensation plans assumed by us in connection with our acquisition of Macromedia:
(1) Includes 20.6 million shares which are reserved for issuance under the 1997 Employee Stock Purchase Plan as of December 1, 2006. (2) On December 3, 2005, in connection with our acquisition of Macromedia, we assumed the outstanding stock awards and the shares remaining available for future issuance under various equity incentive plans maintained by Macromedia. Effective December 3, 2005, our Board adopted the Adobe Systems Incorporated 2005 Equity Incentive Assumption Plan (the “Assumption Plan”). The Assumption Plan permits the grant of non-statutory stock options, stock appreciation rights, stock purchase rights, stock bonuses, performance shares, and performance units. The Assumption Plan has not been approved by our stockholders. The terms and conditions of stock awards under the Assumption Plan are substantially similar to those under the 2003 Equity Incentive Plan. In accordance with applicable NASDAQ listing requirements, we may grant new stock awards under the Assumption Plan to our employees who were not employed by or providing services to us or any of our affiliates prior to December 3, 2005 (other than employees of Macromedia and its affiliates and subsidiaries). Under the Assumption Plan, an aggregate of 1,338,144 shares of our common stock is reserved for issuance. Such share reserve consists solely of the unused and converted share reserves and potential reversions to the share reserves as of December 1, 2006, with respect to certain Macromedia plans. 33 The share reserve is divided into Reserve A and Reserve B. Reserve A consists of 19,409 shares of our common stock which includes the unused share reserve of and potential reversions to the Andromedia, Inc. 1999 Stock Plan. Reserve B consists of 1,318,735 shares of our common stock which includes the unused share reserve of and potential reversions to the (i) Macromedia, Inc. 2002 Equity Incentive Plan, (ii) Allaire Corp. 1997 Stock Incentive Plan, (iii) Allaire Corporation 1998 Stock Incentive Plan, and (iv) Allaire Corporation 2000 Stock Incentive Plan. In the event of the forfeiture or expiration of any stock awards granted under the Macromedia plans, the shares of our common stock associated with such forfeited or expired stock awards will become available for award pursuant to the terms of Reserve A or Reserve B, as applicable. No stock awards may be made from Reserve A after August 1, 2009, and no stock awards may be made from Reserve B after November 10, 2014. The Assumption Plan limits the number of shares that may be issued in the form of stock purchase rights, stock bonuses, performance shares, or performance units to 200,000 shares of our common stock. Our Board may terminate or amend the Assumption Plan at any time subject to applicable rules. In addition to the Assumption Plan, we currently maintain 10 equity compensation plans assumed by us in connection with the Macromedia acquisition. An aggregate of 2,150,589 shares of our common stock is reserved for issuance under these plans. No awards were granted under these plans by Adobe after our assumption of the plans on December 3, 2005, and no additional awards are available for issuance under these plans. We also assumed certain non-stockholder approved grants outside of the Assumption Plan and the additional 10 equity compensation plans, which total 467,606 shares of our common stock. In the event of a sale of substantially all of our voting stock, a merger involving us, the sale of substantially all of our assets, or a liquidation or dissolution of us, stock awards may be assumed or substituted by a successor entity. In the event that a successor entity elects not to assume or substitute for such stock awards, the stock awards will become fully vested. Effective December 12, 2006, Adobe adopted a U.S. Executive Severance Plan (“Severance Plan”) which replaced our prior U.S. Executive Severance Plan adopted in December 2001. Each of our Named Executive Officers who are currently employed by Adobe, and who are not covered by an individual retention agreement, are covered by the terms of the Severance Plan, including Ms. Cottle, Mr. Furr and Ms. Wynn. Adobe has also entered into individual retention agreements with Messrs. Chizen and Narayen which provide for certain cash payments and acceleration of equity compensation awards in the event of a change in control or termination of such individuals’ employment following a change in control of Adobe. As used in the retention agreements mentioned above and the Severance Plan (collectively, the “Agreements”), a “change in control” is defined as: (i) the beneficial ownership of 30% or more of the combined voting power of our securities by any person or entity; (ii) when Incumbent Directors (as defined in the Agreements) cease to constitute a majority of the Board of Directors; (iii) a merger or consolidation involving Adobe or one of our subsidiaries and our stockholders prior to such transaction own less than 50% of the combined voting power of Adobe (or the resulting entity) after the transaction; (iv) the sale, liquidation or distribution of all or substantially all of the assets of Adobe; or (v) a “change in control” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended. If, within two years after a change in control (the “Covered Period”), the employee’s employment is involuntarily terminated (an “Involuntary Termination” as defined in the Agreements), such employee will receive a cash severance payment as follows: Earned but unpaid salary and the cash equivalent for accrued but unused personal time off through the date of termination; plus, the pro rata portion of the annual bonus for the year in which termination occurs (calculated on the basis of the officer’s target bonus and on the assumption that all 34 performance targets have been or will be achieved); plus, an amount equal to the product of (i) the sum of the officer’s Reference Salary and Reference Bonus (each as defined in the Agreements), multiplied by (ii) two plus one-twelfth for each year of completed service with Adobe (not in excess of 12 years) (the “Severance Multiple”). For Mr. Chizen, all outstanding options, performance grants and restricted stock awards will accelerate and vest 100% on the date of the change in control (except performance share unit awards, which shall continue to be governed by their current terms). For all other covered Named Executive Officers, all outstanding options, performance grants and restricted stock awards will accelerate and vest 100% on the date of his or her Involuntary Termination during the Covered Period (except performance share unit awards, which shall continue to be governed by their current terms). Also, the exercise period of all such options will be extended to 12 months from termination. In addition, pursuant to their retention agreements, Messrs. Chizen and Narayen will each receive continued medical, dental, vision and life insurance coverage for themselves and their dependents for a period of years equal to the Severance Multiple; for those individuals covered by the Severance Plan, he or she will receive COBRA premium payments up to the legal limit for such coverage, or for the period of years equal to the applicable Severance Multiple, whichever is less. If an employee covered by the Severance Plan becomes covered under another employer’s group health plan (other than a plan which imposes a pre-existing condition exclusion which applies to the executive officer) during this applicable period of COBRA continuation coverage, our COBRA premium payments will cease. On May 23, 2005, we entered into an amended and restated employment agreement with Stephen A. Elop, effective upon the closing of the acquisition of Macromedia by Adobe, pursuant to which he served as President of Worldwide Field Operations of Adobe, from December 5, 2005 until his resignation and termination of employment on December 5, 2006. Pursuant to his agreement, Mr. Elop received a lump sum payment in the amount of $875,000 and a retention bonus payment of $1,000,000 effective upon his termination. In addition, certain outstanding and assumed options and restricted stock awards granted to Mr. Elop during his employment with Macromedia became fully vested upon his termination with Adobe. His amended and restated employment agreement also provides for COBRA health care coverage premium payments for the one-year period following Mr. Elop’s termination date, or comparable coverage. On March 22, 2006, we entered into a transition agreement with Mr. Demo, our former Executive Vice President and Chief Financial Officer. Mr. Demo resigned as our Executive Vice President and Chief Financial Officer effective May 30, 2006. From May 30, 2006 to June 16, 2006, Mr. Demo continued to be a full-time employee of Adobe and received the same base salary and benefits that he received immediately prior to his resignation date. From June 17, 2006 to December 1, 2006, Mr. Demo was a part-time employee of Adobe paid on an as-worked, non-exempt basis. During his part-time employment, he was eligible for COBRA insurance coverage and received other employee benefits in accordance with Adobe’s applicable plans. Mr. Demo’s outstanding option grants continued to vest in accordance with their terms through December 1, 2006. Pursuant to his employment transition agreement, Mr. Demo received a pro-rated portion of his annual incentive plan bonus, which totaled $119,443. Effective November 7, 2006, Mr. Furr resigned as our Executive Vice President and Chief Financial Officer, but agreed to remain an employee of Adobe through December 31, 2006 to assist with transitional matters. On December 1, 2006, we entered into a transition agreement with Mr. Furr whereby he agreed to extend his employment through March 30, 2007. On February 22, 2007, we amended the transition agreement to extend his employment through June 30, 2007. Under the terms of the transition agreement, as amended, Mr. Furr will continue to receive the same base salary and benefits he was receiving prior to November 7, 2006, and his equity awards will continue to vest in accordance with their applicable terms. 35 On January 23, 2007, we entered into a resignation agreement with Peg Wynn, Adobe’s Senior Vice President of Worldwide Human Resources. Pursuant to the terms of the agreement, Ms. Wynn will resign effective as of the earlier of March 2, 2007, or the business day prior to the date on which she first commences employment with another employer, whichever is first. She will continue to receive her base salary and employee benefits, including continued vesting of her options, until her resignation date. Subsequent to her resignation, Ms. Wynn will receive a lump sum severance payment equal to $290,700, less applicable withholding. The agreement also provides for COBRA health insurance coverage premium payments through the earlier of September 2, 2007 or the date on which Ms. Wynn first obtains or is entitled to obtain other group health insurance coverage. Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and any person or entity who own more than ten percent of a registered class of our common stock or other equity securities, to file with the SEC certain reports of ownership and changes in ownership of our securities. Executive officers, directors and stockholders who hold more than ten percent of our outstanding common stock are required by the SEC to furnish us with copies of all required forms filed under Section 16(a). We prepare Section 16(a) forms on behalf of our executive officers and directors based on the information provided by them. Based solely on review of this information, we believe that, during the 2006 fiscal year, no reporting person failed to file the forms required by Section 16(a) of the Securities Exchange Act on a timely basis, except that, due to administrative errors, a Form 4 for Robert K. Burgess reporting an option grant and conversion of his holdings as a result of Adobe’s acquisition of Macromedia, Inc. was filed one day late on December 7, 2005; and three Form 4s for Stephen A. Elop reporting shares of our common stock withheld by Adobe to pay taxes on the vesting of certain shares of restricted stock released on January 24, 2006, February 24, 2006 and March 24, 2006 were not filed until April 17, 2006. 36 REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE* The Executive Compensation Committee sets and administers the policies governing annual compensation of our executive officers, including cash, non-cash compensation and equity compensation programs. The Executive Compensation Committee is also responsible for oversight of our compensation plans and benefit programs. The Executive Compensation Committee reviews and approves equity-based compensation grants to our non-officer employees and consultants, other than stock option grants to our non-officer employees, which are approved by a Management Committee appointed by the Executive Compensation Committee consisting of our Chief Executive Officer and Senior Vice President, Human Resources. In fiscal 2006, the Executive Compensation Committee consisted of three directors, each of whom was an independent director within the meaning of applicable NASDAQ listing standards. The Executive Compensation Committee acts pursuant to a written charter, a copy of which can be found on our website at www.adobe.com/aboutadobe/invrelations/corpgovern.html. We operate in the competitive and rapidly changing high technology environment. The goals of our executive compensation program are to inspire executives to achieve our business objectives in this environment, to reward them for their achievement, to foster teamwork, and to attract and retain executive officers who contribute to our long-term success. During fiscal 2006, we used salary, bonus, stock option, and performance based restricted stock units to meet these goals. Our philosophy and guiding principle is to provide compensation levels that are comparable to those offered by other leading high technology companies. We aim to align the interests of our executive officers with the long-term interests of our stockholders through stock-based compensation and stock ownership guidelines. For example, in fiscal 2006, we awarded options to purchase shares under our 2003 Equity Incentive Plan to our executive officers that contain vesting terms over a four-year period. In addition, we granted performance shares to our executive officers that will be earned, if at all, following Adobe’s 2007 fiscal year upon achievement of certain performance thresholds, as described below. Additionally, starting in fiscal 2003 as part of our overall corporate governance and compensation practices, we adopted stock ownership guidelines for our executive officers, as described below. We also believe that a substantial portion of each of our executive’s compensation should be in the form of an incentive bonus. Receipt of this bonus is contingent upon our achievement of certain revenue and operating profit levels and individual goal achievement. In fiscal 2006, our executive officers also participated with all of Adobe’s regular employees in our corporate profit sharing plan. Beginning in fiscal 2007, our executive officers will no longer be eligible to participate in Adobe’s corporate profit sharing plan. Rather, the profit sharing bonus target percentage has been integrated into each executive officer’s incentive bonus target for the incentive bonus program. See the full descriptions of the profit sharing plan and the incentive bonus program set forth below. We have considered the potential impact of Section 162(m) of the Internal Revenue Code of 1986, as amended. This law disallows a tax deduction for any publicly-held corporation for individual compensation exceeding $1 million in any taxable year paid to Named Executive Officers, unless compensation is performance-based. Generally, options and performance awards as well as certain restricted stock awards granted under our equity compensation plans will qualify as exempt performance-based compensation. Mr. Chizen’s cash compensation and Mr. Elop’s cash compensation and compensation earned from certain time-based restricted stock awards in fiscal 2006 exceeded the $1 million threshold, which limited the tax deduction available to us. In fiscal 2006, we submitted and received approval from our stockholders for our * The material in this report is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of Adobe under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. 37 Executive Cash Performance Bonus Plan and the Amended 1994 Performance and Restricted Stock Plan to ensure that for future years we qualify to the maximum extent possible our executives’ performance-based compensation for deductibility under applicable tax laws. Annual Compensation Salary. We determine the salary portion of our executive officers’ compensation annually, including that of our Chief Executive Officer, in part by reference to multiple compensation surveys and proxy data of high technology companies we view as our peers. For each comparative survey, we correlate each of our executive officers to the position described in the survey that most accurately represents the executive officer’s position with Adobe by content, organizational level and revenue. Taking into account the executive officer’s levels of responsibility and our past performance, we target a percentile above the median as stated by the survey in determining the base salary initially established for each executive officer. As executive officers mature in their respective positions, we target a higher percentile competitive base salary. We also prepare tally sheets summarizing each executive officer’s compensation components to identify gaps and make recommendations that ensure our pay program is aligned with Adobe’s business strategy and compensation philosophy. Incentive Bonus. A substantial portion of the annual compensation for our executive officers is paid in the form of an incentive bonus pursuant to an annual incentive plan. The incentive plan’s objectives are to: drive revenue and operating margin accountability, drive execution of operating plan and strategic objectives, and motivate and inspire our executives to contribute at peak performance. The incentive bonus typically comprises a greater portion of an executive officer’s potential total compensation as the executive’s level of responsibility increases. 2006 Incentive Plan. Our fiscal 2006 incentive plan required Adobe to achieve a 90% revenue to plan and 90% operating profit to plan minimum threshold for the executive officers to be eligible for an incentive bonus. The incentive bonus target was computed as a percentage of base salary, which we established for each executive officer. The target incentive bonuses for our executive officers ranged between 50% and 90% of base salary. The percentage target of each bonus contained corporate targets specifically tied to achieving corporate revenue and operating profit thresholds (together the “2006 Corporate Results”), individual goal achievement, and revenue achievement. The bonus target was weighted 50% on 2006 Corporate Results and individual goal achievement, and 50% on corporate revenue achievement. The fiscal 2006 incentive plan allowed for the alteration of payout based on such factors as achievement of publicly announced targets, product milestones, strategic goals, cross-functional teamwork and collaboration, and unforeseen changes in the economy and/or geopolitical climate. Overall, incentive bonuses for fiscal 2006 paid out at an average of 71% based on achievement of the thresholds described above. 2007 Incentive Plan. Our fiscal 2007 incentive plan requires Adobe to achieve 90% of its revenue target for fiscal 2007 as an initial threshold before any executive officers are eligible for an incentive bonus. If the initial threshold is achieved, the maximum incentive bonus per participant that can be earned is 300% of target bonus. The target incentive bonuses for our executive officers range between 50% and 125% of base salary. Once the initial threshold is achieved, Adobe must then achieve greater than 95% revenue attainment (including shippable backlog) to plan, and greater than 95% operating margin (together the “2007 Corporate Results”) threshold for any payout to occur. If the 2007 Corporate Results are above 95% (up to 100% of target), the incentive bonus is calculated by multiplying (1) the executive’s target bonus, by (2) a percentage based on the 2007 Corporate Results, which may range from a minimum of 36% to a maximum of 100%, by (3) an individual results percentage (cannot exceed 150%) based on the achievement of three to five individual goals by the executive in the applicable categories as follows: 38 revenue, product revenue, strategic objectives, people management and expense management (“Individual Results”). If the 2007 Corporate Results are above 100% of target (up to 200% of target), the incentive bonus is calculated by multiplying (1) the executive’s target bonus, by (2) a unit multiplier (which is derived from aggregating the target bonus of all participants multiplied by the Corporate Results achievement percentage (the “Funding Level”) and allocating a portion of such Funding Level to each business or functional unit of Adobe based on that unit’s relative contribution to Adobe’s success, and dividing such allocated Funding Level by the aggregate target bonuses within each such unit), by (3) the executive’s Individual Results. The incentive bonus cannot exceed $5 million per participant per year. The terms of our fiscal 2007 incentive plan ensure that we qualify to the maximum extent possible our executives’ compensation for deductibility under applicable tax laws in accordance with the terms of our stockholder-approved Executive Cash Performance Bonus Plan. Annual Bonus Pool. Additionally, starting in 2002, we authorized an annual bonus pool of $60,000 that may be awarded by the Chief Executive Officer to other executive officers as special recognition bonuses. No bonuses were awarded in fiscal 2006 out of this bonus pool. Profit Sharing Plan. Our executive officers also participated with all of Adobe’s employees in Adobe’s corporate profit sharing plan, under which a bonus of up to 10% of each employee’s base salary, payable quarterly, is awarded on the basis of operating profit. In fiscal 2006, profit sharing was paid at the following rate: first quarter—10%; second quarter—8%; third quarter—7.5%; and fourth quarter—8.5%. Beginning in fiscal 2007, our executive officers will no longer be eligible to participate in Adobe’s corporate profit sharing plan. Rather, the profit sharing bonus target percentage has been integrated into each executive officer’s incentive bonus target for the incentive plan as described above. Long-term Incentive Compensation Annual Option Grants. We use stock options to inspire and retain executive officers for the long-term and have also awarded restricted stock in certain circumstances. We believe that these incentives closely align the executive officers’ interests with those of stockholders in building share value. As part of our overall corporate governance and compensation practices, the Board adopted the following stock ownership guidelines for our executive officers that we believe further align the executive officers’ interests with the stockholders’ long-term interests: the Chief Executive Officer should hold 25% of the net shares acquired from Adobe for two years unless, following sale of such shares, the total number of Adobe shares held by the Chief Executive Officer equals or exceeds 150,000 shares; each President, Executive Vice President and the Chief Financial Officer should hold 25% of the net shares acquired from Adobe for two years unless, following the sale of such shares, the total number of Adobe shares held by such President, Executive Vice President or the Chief Financial Officer equals or exceeds 50,000 shares; and each Senior Vice President should hold 25% of the net shares acquired from Adobe for two years unless, following the sale of such shares, the total number of Adobe shares held by such Senior Vice President equals or exceeds 25,000 shares. In addition, since 2004, our Board has placed additional requirements on options granted to Mr. Chizen, our Chief Executive Officer, who is required to hold 40% of the net shares acquired from the options granted by Adobe (after deducting shares sold to cover the exercise price and taxes, and excluding shares acquired through Adobe’s Employee Stock Purchase Plan) for two years unless, following sale of such shares, the total number of Adobe shares held by him equals or exceeds 150,000 shares. For purposes of this section, an “acquired share” includes shares of vested restricted stock and shares issued from the exercise of vested options. “Net shares acquired” means shares remaining after deducting shares sold to cover the exercise price and withheld taxes. Shares that count toward the minimum share ownership include shares owned outright or beneficially owned and shares issued from the exercise of vested options. Options are typically granted annually, although supplemental options are granted occasionally. All options granted in fiscal 2006 were subject to a four-year vesting provision. We award executive officers stock options based upon each executive officer’s relative position, responsibilities and performance over 39 the previous fiscal year and the executive officer’s anticipated future performance, potential and responsibilities. We also review prior option grants to each executive officer and to other members of senior management, including the number of shares that continue to be subject to vesting under their respective outstanding options, in setting the size of options to be granted to the executive officers. In addition, we use data compiled by an independent compensation consulting firm on stock options granted by comparable companies based on industry and revenue and target a slightly higher percentile than the median. We grant stock options with an exercise price per share equal to the market price of our common stock on the date of grant as reported on NASDAQ. 2006 Performance Share Program. Beginning in fiscal 2006, we adopted the 2006 Performance Share Program (the “2006 Program”). We established the 2006 Program to align Adobe’s new leadership team to achieve key integration milestones and create stockholder value and to retain key executives. Adobe’s executive officers were granted awards under the 2006 Program in the form of “Performance Shares” pursuant to the terms of the 2003 Equity Incentive Plan or the 1994 Performance and Restricted Stock Plan. Performance Shares will be earned, if at all, following the 2007 fiscal year, subject to the achievement of certain performance metrics as described below, and will be settled in fully-vested shares of Adobe common stock. The 2006 Program requires that Adobe achieve at least 90% of the Board approved operating income targets for the combined fiscal 2006 and 2007 year as a minimum threshold before the executive officers will earn any Performance Shares under the 2006 Program. If this threshold is achieved, the number of Performance Shares potentially earned under the 2006 Program will be 150% of the target payout, and the actual number of Performance Shares earned under the 2006 Program will be based on the achievement of eight specific integration-related metrics, including both revenue and non-revenue metrics. Each metric will be weighted equally. We may alter the payout for the achievement of non-revenue metrics based on such factors as market reception, revenue, commitment of strategic partners and quality of product shipped, and the payout for revenue metrics will correlate to the percent of such metric achievement. The executive officers may receive less than their Performance Share target amounts under the 2006 Program, and in no event may the actual payout exceed 150% of target amounts. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
