Adobe 1998 Annual Report Download - page 19

responding to an unsolicited acquisition proposal, as well as increased employee costs and related
depreciation and building expenses associated with increased staff. Additionally, the provision for uncol-
lectible accounts increased to reserve for accounts receivable from certain customers that were deemed
potentially uncollectible. These increased expenses were partially offset by cost reduction initiatives related
to the restructuring program implemented in the third quarter of fiscal 1998 that included a reduction in
general office and other administrative expenses (see Management’s Discussion and Analysis of Restruc-
turing and other charges).
General and administrative expenses increased in fiscal 1997 compared to fiscal 1996 due primarily to
higher information system costs, legal costs, and employee costs primarily associated with a more
comprehensive administrative infrastructure.
The Company expects general and administrative spending in fiscal 1999 to increase in absolute
dollars over fiscal 1998 to support future administrative infrastructure needs. However, on a percentage of
revenue basis, general and administrative expenses are not expected to be materially different than fiscal
1998.
1998 Change 1997 Change 1996
Write off of acquired in-process research and development ..... — (100)% $6.0 (72)% $21.3
Percentage of total revenue ............................ — 0.7% 2.7%
During fiscal 1997, the Company acquired three software companies, in separate transactions, for an
aggregate consideration of approximately $8.5 million. These acquisitions were accounted for using the
purchase method of accounting, and approximately $6.0 million of the purchase price was allocated to
in-process research and development and expensed at the time of the acquisitions. One of the in-process
technologies acquired for $2.5 million was discontinued in fiscal 1998. The project associated with an
additional $2.8 million of the purchased in-process technology was canceled as part of the restructuring in
the third quarter of fiscal 1998 and subsequently sold to a management-led buyout group.
During fiscal 1996, the Company acquired Ares Software for approximately $15.5 million. The
acquisition was accounted for using the purchase method of accounting and approximately $15.3 million of
the purchase price was allocated to in-process research and development and expensed at the time of the
acquisition. The value assigned to purchased in-process technology was based on a valuation prepared by
an independent third party, estimating both the cost of developing and incorporating the in-process
technology into future versions of PostScript and the future cash flows from the enhanced PostScript
product, using a discount factor which takes into consideration the uncertainty surrounding the successful
development of the purchased in-process technology. The in-process technology was completed in fiscal
1997 and incorporated into PostScript 3. Actual revenues, in aggregate, to date, together with revised
forcasted revenues, are expected to exceed the original estimate of revenues used to value the in-process
technology.
In November 1996, the Company also acquired in-process research and development from Swell
Software for approximately $6.0 million. The research project was discontinued prior to reaching techno-
logical feasibility in early fiscal 1997.
The Company reclassified $3.4 million and $3.5 million of in-process research and development
recognized during the first half of fiscal 1998 to research and development and general and administrative
expenses, respectively, for the fiscal year ending November 27, 1998 financial statements.
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