Adobe 2006 Annual Report Download - page 80

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amount of $26.6 million in accordance with the implementation guidance in SAB 108. The total
cumulative impact is as follows:
Retained Earnings ................................................................................................................ $ (26,584)
Deferred Income Taxes........................................................................................................ 838
Additional Paid in Capital.................................................................................................... 27,422
The impact on retained earnings is comprised of the following amounts:
Retained Earnings 1998-2001 2002 2003 2004 2005 Total
Stock compensation
expense ..................................... $ (10,324) $ (11,476) $ (10,420) $ (2,959) $ (230) $ (35,409)
Tax effect………………... 2,628 2,856 2,558 726 57 8,825
Total, net of tax…………... $ (7,696) $ (8,620) $ (7,862) $ (2,233) $ (173) $ (26,584)
Income before taxes……… $ 1,292,791 $ 284,689 $ 380,492 $ 608,645 $ 765,776
Percent of income before
taxes………………………. (1%) (4%) (3%) 0% 0%
Note 2. Acquisitions
On December 3, 2005, we completed the acquisition of Macromedia, a provider of software
technologies that enable the development of a wide range of internet and mobile application solutions, for
approximately $3.5 billion. Acquiring Macromedia accelerates our strategy of delivering an industry-
defining technology platform that provides more powerful solutions for engaging people with digital
information. The transaction was accounted for using the purchase method of accounting in accordance
with Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.” The
results of operations of Macromedia have been included in the Consolidated Statements of Income
beginning on December 3, 2005.
Assets acquired and liabilities assumed were recorded at their fair values as of December 3, 2005. The
total $3.5 billion purchase price is comprised of the following:
Value of Adobe stock issued ..................................................................... $ 3,209,121
Fair value of stock options assumed.......................................................... 227,604
Direct transaction costs.............................................................................. 29,060
Restructuring costs..................................................................................... 72,728
Total estimated purchase price .................................................................. $ 3,538,513
As a result of the acquisition, we issued approximately 109.0 million shares of Adobe common stock
based on an exchange ratio of 1.38 shares of Adobe common stock for each outstanding share of
Macromedia common stock as of December 3, 2005. This fixed exchange ratio gives effect to the two-for-
one stock split in the form of a stock dividend paid on May 23, 2005 to the stockholders of Adobe. The
average market price per share of Adobe common stock of $29.43 used to determine the fair value the stock
issued was based on the average of the closing prices for a range of trading days (April 14, 2005 through
April 20, 2005) around the announcement date (April 18, 2005) of the proposed transaction.
Under the terms of the merger agreement, each Macromedia stock option that was outstanding and
unexercised was converted into an option to purchase Adobe common stock and we assumed that stock
option in accordance with the terms of the applicable Macromedia stock option plan and terms of the stock
option agreement relating to that Macromedia stock option. Based on Macromedia’s stock options
outstanding at December 3, 2005, we converted options to purchase approximately 11.0 million shares of
Macromedia common stock into options to purchase approximately 15.1 million shares of Adobe common
stock. The fair value of options assumed of $227.6 million was determined using the Black Scholes
valuation model. The stock price used in the valuation was $29.43, which was the average of closing prices