Adobe 2007 Annual Report Download - page 76

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76
Net tangible assets—Macromedia’ s tangible assets and liabilities were reviewed and adjusted to their fair value as
necessary, including an increase to market value of $18.4 million related to owned land and a building, $11.5 million related
to an investment and $21.5 million for receivables related to future payments from existing customers. We also acquired
$488.4 million in cash and cash equivalents and $109.8 million in property, plant and equipment, and assumed $103.2
million in accrued expenses and $186.9 million in deferred tax liabilities.
Deferred revenue—Macromedia’ s deferred revenue was derived from licenses, maintenance and support, hosting and
consulting contracts. We recorded an adjustment to reduce Macromedia’ s carrying value of deferred revenue by $49.1
million to $14.9 million, which represents our estimate of the fair value of the contractual obligations assumed. This estimate
of the fair value of deferred revenue is included in net tangible assets.
Identifiable intangible assets—Acquired product rights include developed and core technology and patents. Developed
technology relates to Macromedia products across all of their product lines that have reached technological feasibility. Core
technology and patents represent a combination of Macromedia’ s processes, patents and trade secrets developed through
years of experience in design and development of its products. We amortize the acquired product rights based on the pattern
in which the economic benefits of the intangible asset is being consumed.
Customer contracts and relationships represent existing contracts and the underlying customer relationships. We
amortize these assets based on the pattern in which the economic benefits of the intangible asset is being consumed.
Trademarks primarily relate to the Flash trade name and other product names and is amortized based on the pattern in
which the economic benefits of the intangible asset is being consumed.
In-process research and development—As of the acquisition date, no amounts were allocated to in-process research and
development. In-process research and development is dependent on the status of new projects on the date the acquisition is
consummated. Prior to the acquisition date, Macromedia had released new versions of its software products. Accordingly,
there were no substantive research and development projects in process on the date the acquisition was consummated.
Goodwill—Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net
tangible and intangible assets. The factors that contributed to the recognition of goodwill included securing buyer-specific
synergies that increase revenue and profits and are not otherwise available to a marketplace participant, acquiring a talented
workforce, and significant cost savings opportunities.
Taxes—As part of our accounting for the Macromedia acquisition, a portion of the overall purchase price was allocated
to goodwill and acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible
for tax purposes. Thus, approximately $186.9 million, included in the net tangible assets, was established as a deferred tax
liability for the future amortization of the intangible assets. In accordance with SFAS No. 109, “Accounting for Income
Taxes,” the valuation allowance on Macromedia’ s financial statements as of December 3, 2005 was reduced by $237.8
million to $16.1 million, to the extent the deferred tax assets are more likely than not realizable.
Any impairment charges made in the future associated with goodwill will not be tax deductible and will result in an
increased effective income tax rate in the quarter the impairment is recorded.
Stock-based compensation—Stock-based compensation represents the estimated fair value, measured as of December 3,
2005, of unvested Macromedia stock options and restricted stock assumed. The fair value of unvested options assumed was
$146.2 million using the Black Scholes valuation model. The fair value of the unvested restricted stock of $4.8 million was
based on the fair value of the underlying shares on the acquisition date. The stock-based compensation is being amortized to
expense over the remaining vesting periods of the underlying options or restricted stock. See Note 11 for information
regarding amortization of stock-based compensation.