<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from______ to ______
COMMISSION FILE NO. 0-22688
MACROMEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3155026
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TOWNSEND STREET
SAN FRANCISCO, CALIFORNIA 94103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(415) 252-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
--- ---
As of July 30, 1999, there were outstanding 42,852,742 shares of the
Registrant's Common Stock, par value $0.001 per share.
This Report, including exhibits, consists of 22 sequentially numbered pages.
The Index to Exhibits appears on sequentially numbered page 21.
1
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MACROMEDIA, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
June 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 22
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $31,775 $27,104
Short-term investments 80,806 81,698
Accounts receivable, net 12,598 12,585
Inventory, net 715 559
Prepaid expenses and other current assets 11,978 13,700
Deferred tax assets, short-term 6,899 6,899
------------------ -----------------
Total current assets 144,771 142,545
Land and building, net 19,499 19,679
Other fixed assets, net 25,942 21,469
Other long-term assets 9,418 10,864
------------------ -----------------
Total assets $ 199,630 $ 194,557
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,974 $ 4,936
Accrued liabilities 28,214 26,113
Unearned revenue 5,541 6,675
------------------ -----------------
Total current liabilities 37,729 37,724
Deferred tax liabilities, long-term 37 75
Other long-term liabilities 222 222
------------------ -----------------
Total liabilities 37,988 38,021
Stockholders' equity:
Common stock, par value $0.001 per share; 80,000,000
shares authorized; 42,808,827 and 42,101,144 shares
issued and outstanding as of June 30, 1999 and
March 31, 1999, respectively. 43 42
Treasury stock, at cost; 1,817,500 and 1,620,000 shares
as of June 30, and March 31, 1999, respectively (33,649) (25,445)
Additional paid-in capital 176,385 170,532
Accumulated other comprehensive income 325 41
Retained earnings 18,538 11,366
------------------ -----------------
Total stockholders' equity 161,642 156,536
------------------ -----------------
Total liabilities and stockholders' equity $199,630 $194,557
================== =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30,
----------------------------------------------
1999 1998
--------------------- ----------------------
<S> <C> <C>
Revenues $ 48,935 $ 32,335
Cost of revenues 4,992 3,119
--------------------- ----------------------
Gross profit 43,943 29,216
Operating expenses:
Sales and marketing 19,860 14,329
Research and development 11,254 8,528
General and administrative 4,379 3,352
--------------------- ----------------------
Total operating expenses 35,493 26,209
--------------------- ----------------------
Operating income 8,450 3,007
Other income, net 1,242 1,282
--------------------- ----------------------
Income before income taxes 9,692 4,289
Provision for income taxes 2,520 1,330
--------------------- ----------------------
Net income $ 7,172 $ 2,959
===================== ======================
Net income per share
Basic $ 0.18 $ 0.08
Diluted $ 0.15 $ 0.07
===================== ======================
Shares used in calculating net income per share
Basic 40,696 38,626
===================== ======================
Diluted 47,380 43,863
===================== ======================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,172 $ 2,959
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,797 2,057
Deferred compensation - 77
Changes in operating assets and liabilities:
Accounts receivable, net (13) (1,938)
Inventory, net (156) (19)
Prepaid expenses and other current assets 1,722 (7,373)
Accounts payable (962) (2,444)
Accrued liabilities 2,101 3,274
Unearned revenue (1,134) 8,345
Other long-term liabilities (38) (38)
------------------- -----------------
Net cash provided by operating activities 11,489 4,900
------------------- -----------------
Cash flows from investing activities:
Capital expenditures (7,080) (750)
Proceeds from sale of fixed assets - 961
Purchase of short-term investments (12,389) (45,141)
Maturities and sales of short-term investments 13,565 35,845
Other long-term assets 1,436 (1,086)
------------------- -----------------
Net cash (used in) investing activities (4,468) (10,171)
------------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,854 4,125
Acquisition of treasury stock (8,204) -
------------------- -----------------
Net cash (used in) provided by financing activities (2,350) 4,125
------------------- -----------------
Increase(decrease) in cash and cash equivalents 4,671 (1,146)
Cash and cash equivalents, beginning of period 27,104 10,019
------------------- -----------------
Cash and cash equivalents, end of period $31,775 $ 8,873
=================== =================
Supplemental disclosure of cash flow information:
Interest paid $ - $ -
=================== =================
Income taxes recovered $ 88 $ -
=================== =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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MACROMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
The condensed consolidated financial statements at June 30, 1999 and for the
three months ended June 30, 1999 and 1998 are unaudited and reflect all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of the Company's
financial position and operating results for the interim periods.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 1999.
The results of operations for the three months ended June 30, 1999 are not
necessarily indicative of the results for the fiscal year ending March 31,
2000 or any other future periods.
2. EARNINGS PER SHARE
"Basic" earnings per share is calculated by dividing net income by the
weighted average common shares outstanding during the period. "Diluted"
earnings per share reflects the net incremental shares that would be issued
if outstanding stock options were exercised and if the funds collected for
the employee stock purchase plan were used to purchase treasury shares.
Certain options are considered antidilutive because the options' exercise
prices were above the average market price during the period. Antidilutive
shares not included in the computation of diluted earnings per share totaled
0.1 million and 0.3 million for the three months ended June 30, 1999 and
1998, respectively. The weighted average exercise price of these antidilutive
options approximated $44.41 and $28.86 for the three months ending June 30,
1999 and 1998, respectively.
<TABLE>
<CAPTION>
Three months ended June 30,
(In thousands except per share data) 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC NET INCOME PER SHARE COMPUTATION
Numerator:
Net income $ 7,172 $ 2,959
------------------------------------
Denominator:
Weighted average number of common shares outstanding
during the period 40,696 38,626
Basic net income per share $ 0.18 $ 0.08
====================================
DILUTED NET INCOME PER SHARE COMPUTATION
Numerator:
Net Income $ 7,172 $ 2,959
------------------------------------
Denominator:
Weighted average number of common shares outstanding
during the period 40,696 38,626
Effect of dilutive securities:
Employee stock options 6,675 5,211
Employee stock purchase plans 9 26
------------------------------------
Total 47,380 43,863
------------------------------------
Diluted net income per share $ 0.15 $ 0.07
====================================
</TABLE>
6
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3. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," requires unrealized gains or losses on the Company's
available-for-sale securities to be included in other comprehensive income. The
following table sets forth the calculation of comprehensive income, net of tax:
<TABLE>
<CAPTION>
Three Months ended June 30,
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $7,172 $2,959
Unrealized gain (loss) on securities 283 (47)
----------------------------------
Comprehensive income $7,455 $2,912
==================================
</TABLE>
4. INCOME TAXES
The Company provides for income taxes during interim reporting periods based
upon an estimate of the annual effective tax rate. Such an estimate reflects
an effective tax rate lower than the federal statutory rate primarily because
of utilization of research and experimentation tax credits, and foreign
operating results, which are taxed at rates other than the US statutory rate.
The effective rate used for the quarter ended June 30, 1999 was 26%.
5. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Macromedia has three segments which offer different product lines: Web
Publishing, Learning, and shockwave.com, the Company's new consumer business.
The Web Publishing division develops software that creates Web site layout,
graphics and rich media content for Internet users. The Learning division
develops software and online Internet solutions that create, distribute and
manage enterprise-wide training programs for organizations. shockwave.com
designs, develops and markets aggregated content, products and services to
provide and expand online entertainment on the web. The Company evaluates
operating segment performance based on net revenues and direct operating
expenses of the segment. The accounting policies of the operating segments
are the same as those described in the summary of accounting policies in the
annual report on Form 10-K for the year ended March 31, 1999. For the three
months ended June 30, 1999 and 1998, the Learning division did not meet the
quantitative thresholds for disclosure under Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." As a result, the Learning division is
consolidated with the "Other" category in the table below. The Other category
also consists of various corporate revenues and expenses which do not qualify
as a segment. For the three months ended June 30, 1998, the Company did not
internally report shockwave.com as a separate segment. The Company does not
allocate assets to its individual operating segments.
7
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Information about reported segment income or loss is as follows:
<TABLE>
<CAPTION>
WEB
(in thousands) PUBLISHING SHOCKWAVE.COM OTHER TOTAL
Three months ended June 30,
1999
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 41,646 $ 1,249 $ 6,040 $ 48,935
Cost of revenues 3,834 470 688 4,992
-----------------------------------------------------------------
Gross margin $ 37,812 $779 $ 5,352 $ 43,943
Direct operating expenses 15,010 3,610 3,535 22,155
-----------------------------------------------------------------
Contribution margin $ 22,802 $ (2,831) $ 1,817 $ 21,788
<CAPTION>
Three months ended June 30, 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 27,039 $ - $ 5,296 $ 32,335
Cost of revenues 2,221 - 898 3,119
-----------------------------------------------------------------
Gross margin $ 24,818 $ - $ 4,398 $ 29,216
Direct operating expenses 10,328 - 4,609 14,937
-----------------------------------------------------------------
Contribution margin $ 14,490 $ - $ (211) $ 14,279
</TABLE>
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements for the three
months ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
- ----------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total contribution margin from operating segment and other category above $21,788 $14,279
Unallocated expenses 13,338 11,272
---------------------------
Total operating income $ 8,450 $ 3,007
Other income 1,242 1,282
---------------------------
Income before taxes $ 9,692 $ 4,289
===========================
</TABLE>
6. SUBSEQUENT EVENTS
AGREEMENT WITH LOTUS DEVELOPMENT CORPORATION
On July 27, 1999, the Company entered into a series of agreements with Lotus
Development Corporation, the combined effect of which will be to: (i) sell
certain tangible and intangible assets relating to the Company's Pathware
product line, a significant portion of the Company's Learning segment, to
Lotus, (ii) result in Lotus acting as a distributor of the Company's
products, and (iii) cause the Company and Lotus to cooperate with respect to
certain future development activities related to the Company's products and
Lotus' products. The Company anticipates that the transaction will close on
or before August 31, 1999. The
8
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Company is assured of receiving a minimum of $30 million in revenue over the
next three years as a result of the terms of the agreements as they related
to the sale of assets and the distribution of the Company's products.
AGREEMENT WITH ELEMENTAL SOFTWARE, INC.
On July 12, 1999, the Company entered into a definitive agreement to exchange
approximately 620,000 shares of its stock for all of the outstanding equity
of Elemental Software, Inc., the developer of Drumbeat 2000, a dynamic Web
application development solution. The transaction will be accounted for as a
pooling of interests, and is expected to close within 60 days of the
definitive agreement. Macromedia expects to take a one-time charge of
approximately $3.0 million, including expenses to be incurred in personnel
relocation, recruitment and severance and certain other one-time charges
relating to the acquisition.
AGREEMENT WITH STARBASE CORPORATION
In July 1999, the Company acquired technology rights and other related
software intangibles from Starbase Corporation for $2.8 million. The Company
intends to undertake a development program with the assets acquired and to
release a product at a future date. The cost to acquire the intangibles will
be expensed as in-process research and development in the second quarter
fiscal year 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES. Macromedia develops, markets and supports software and services for
Web publishing and Web learning. Additionally, the Company's new consumer
business, shockwave.com, designs, develops and markets aggregated content,
products and services to provide and expand online entertainment on the Web.
The Company sells its products through a network of distributors, value-added
resellers (VARs), its own sales force and Web site, and to original equipment
manufacturers (OEMs) in North America, Europe, Asia Pacific and Latin
America. In addition, the Company derives revenues from advertising on its
Web sites, and from software maintenance and technology licensing agreements.
Revenues increased $16.6 million or 51% in the first quarter of fiscal year
2000 as compared to the same period in fiscal year 1999. Revenues generated
by the Web Publishing segment grew by $14.6 million to $41.6 million from
$27.0 million for the first quarter in fiscal year 1999. The majority of the
increase is attributable to increased sales of Dreamweaver, Fireworks, Flash,
and sales of a new product, Generator, slightly offset by a decrease in
Freehand sales due to product cycle timing. Additional revenue growth was
achieved through web advertising and miscellaneous corporate revenues.
North American revenues increased $9.9 million to $28.2 million in the first
quarter of fiscal 2000 from $18.3 million in the first quarter of fiscal
1999. International revenues increased $6.7 million from the first quarter
fiscal year 1999 to the first quarter fiscal 2000 to $20.7 million. The
increase was a result of stronger sales in Europe and certain regions of Asia
Pacific. Revenues from Japan were approximately equivalent in the quarters
ended June 30, 1999 and June 30, 1998. See Factors That May Affect Future
Results of Operations - Risks of International Operations for additional
information. The table below summarizes revenue by geography:
9
<PAGE>
<TABLE>
<CAPTION>
(In millions) Three months ended
June 30,
-----------------------------------------------------
1999 1998 % change
<S> <C> <C> <C>
North America $ 28.2 $ 18.3 54%
% of total revenues 58% 57%
International 20.7 14.0 48%
% of total revenues 42% 43%
Total revenues $ 48.9 $ 32.3
</TABLE>
GROSS MARGIN. Gross margin for the three months ended June 30, 1999 and 1998
was 90%, or $43.9 million and $29.2 million, respectively. The increase in
absolute dollars was primarily due to increased sales volume, partially
offset by increased product cost and increased commission expense associated
with advertising revenues. Gross margins may be adversely affected from time
to time by the mix of distribution channels used by the Company, the mix of
products sold and the mix of international versus domestic revenues.
SALES AND MARKETING. Sales and marketing expenses decreased as a percentage
of revenues from 44% in the first quarter of fiscal 1999 to 41% in the first
quarter of fiscal 2000, but increased in absolute dollars from $14.3 million
to $19.9 million. The increase in absolute dollars was the result of
increased costs associated with additional sales headcount to support growth
in revenue, amortization of capitalized costs arising from distribution
agreements, and increased seminar and tradeshow activity.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $2.7
million from $8.5 million in the first quarter of fiscal 1999 to $11.3
million in the first quarter of fiscal 2000, but decreased as a percentage of
revenues from 26% to 23%. Research and development expenses increased in
absolute dollars due to additional compensation costs required to support
continued product development activity and amortization of certain
infrastructure costs that support development. In addition, during the three
months ended June 30, 1999, the Company incurred costs for acquisition and
development of entertainment content for its new business, shockwave.com.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$1.0 million, from $3.4 million in the first quarter of fiscal 1999 to $4.4
million in the first quarter of fiscal 2000. Expenses increased in the first
quarter of fiscal 2000 primarily due to increased expenses for the Company's
annual report and due to increases in headcount to support the growth of the
Company. As a percentage of revenues, general and administrative costs
decreased from 10% in the first quarter of fiscal 1999 to 9% in the first
quarter of fiscal 2000.
OTHER INCOME. Other income remained constant during the first quarter of
fiscal year 1999 as compared to the same period in the prior year. The
majority of other income for both periods is investment and interest income.
PROVISION/BENEFIT FOR INCOME TAXES. The Company's provision for income taxes
for the first three months of fiscal 2000 was $2.5 million as compared to
$1.3 million for the first three months of fiscal 1999. The effective tax
rate for the quarterly provision was 26% and 31% during the first quarter of
the fiscal years 2000 and 1999, respectively. The decrease in the effective
tax rate reflects
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the utilization of research and experimentation tax credits and foreign
operating results that were taxed at rates lower than the U.S. statutory rate.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash, cash equivalents and short-term
investments of $112.6 million. For the three months ended June 30, 1999, cash
provided by operating activities of $11.5 million was primarily attributable
to net income for the period and increased depreciation and amortization.
Cash used in investing activities of $4.5 million was used primarily to
purchase and develop equipment and software for infrastructure growth,
including for shockwave.com. Cash used in financing activities of $2.4
million was the result of purchases of $8.2 million of common stock under the
Company's stock buyback program, offset by $5.9 million in proceeds from the
exercise of common stock options. Collectively, the above activity resulted
in a net increase of $4.7 million from the March 31, 1999 balances of cash
and cash equivalents. Working capital increased by $2.2 million from the
March 31, 1999 balance of $104.8 million, to $107.0 million at June 30, 1999.
The Company anticipates future capital expenditures of approximately $24
million for the remainder of fiscal 2000.
During the first three months of fiscal year 2000, the Company made
investments in property and equipment of $7.1 million. This amount includes
$5.1 million related to the development of a new web infrastructure for sales
and marketing, customer support, online product distribution and technical
support for the entire Company, including shockwave.com. The costs
capitalized under the project are comprised primarily of consulting fees for
software development and related hardware and purchased software.
Amortization of the first phase of the project began in the first quarter of
fiscal year 2000 and approximated $.5 million. Amortization will continue
over a three-year period, and will increase as additional phases of the
project are ready for use.
In addition to cash, cash equivalents, and short-term investments, the
Company had $15.0 million available under an unsecured revolving line of
credit. The line of credit expired on July 15, 1999. As of June 30, 1999, the
Company had no borrowings outstanding.
The Company believes that existing cash and investments, together with cash
generated from operations, will be sufficient to meet the Company's operating
requirements through at least March 31, 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Except for the historical information contained in this Quarterly Report, the
matters discussed herein are forward-looking statements that involve risks
and uncertainties, including those detailed below, and from time to time in
the Company's other reports filed with the Securities and Exchange
Commission. The actual results that the Company achieves may differ
materially from any forward-looking statements due to such risks and
uncertainties.
INTENSE COMPETITION. The markets for the Company's products are highly
competitive and characterized by pressure to reduce prices, incorporate new
features, and accelerate the release of new product versions and enhanced
services. A number of companies currently offer products and services that
compete directly or indirectly with one or more of the Company's products.
These companies include Adobe Systems Inc. (Adobe), Asymetrix Corporation,
Corel Corporation (Corel), and Microsoft Corporation (Microsoft). As the
Company competes with larger competitors such as Adobe and Microsoft across a
broader
11
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range of product lines and different platforms, the Company may face
increasing competition from such companies. In addition, the Company's
consumer business competes and partners with a number of other Internet
community, gaming and entertainment sites. Many of these businesses are much
larger than the Company's consumer business, and they have more resources
devoted to these business efforts. It is anticipated that the Company's
consumer business will face competition from these other sites both for
consumers and for advertising and other future revenue sources on which the
future success of the consumer business is dependent.
RAPIDLY CHANGING TECHNOLOGY. The developing digital media, Internet and
online services markets, and the personal computer industry are characterized
by rapidly changing technology, resulting in short product life cycles and
rapid price declines. The Company must continuously update its existing
products, services and content to keep them current with changing technology
and consumer tastes and must develop new products, services and content to
take advantage of new technologies and consumer preferences that could render
the Company's existing products obsolete. The Company's future prospects are
highly dependent on its ability to increase functionality of existing
products in a timely manner and to develop new products that address new
technologies and achieve market acceptance. New products and enhancements
must keep pace with competitive offerings, adapt to new platforms and
emerging industry standards, and provide additional functionality. There can
be no assurance that the Company will be successful in these efforts.
FLUCTUATIONS OF OPERATING RESULTS; PRODUCT INTRODUCTION DELAYS. The Company's
quarterly operating results may vary significantly depending on the timing of
new product introductions and enhancements by the Company. A substantial
portion of the Company's revenues is derived from its Web Publishing
products. The Company has in the past experienced delays in the development
of new products and enhancement of existing products, and such delays may
occur in the future. If the Company was unable, due to resource constraints
or technological or other reasons, to develop and introduce such products in
a timely manner, this inability could have a material adverse effect on the
Company's results of operations. If the Company does not ship new versions of
its products as planned, sales of existing versions decline, or new products
do not receive market acceptance, the Company's results of operations in a
given quarter could be materially adversely affected as they were during the
fourth quarter of fiscal 1997 when the Company delayed shipment of a new
version of Director to the following quarter.
The Company's quarterly results of operations also may vary significantly
depending on the impact of any of the following: the timing of product
introductions by competitors, changes in pricing, execution and volume of
technology licensing agreements, the volume and timing of orders received
during the quarter, which are difficult to forecast, and finally, any
acquisitions of other companies or technologies. The future operating results
of the Company may fluctuate as a result of these and other factors,
including the Company's ability to continue to develop or acquire innovative
products, its product and customer mix, and the level of competition. The
Company's results of operations may also be affected by seasonal trends. A
significant portion of the Company's operating expenses is relatively fixed,
and planned expenditures are based primarily on sales forecasts. As a result,
if revenues do not meet the Company's forecasts, operating results may be
materially adversely affected. There can be no assurance that sales of the
Company's existing products will either continue at historical rates or
increase, or that new products introduced by the Company, whether developed
internally or acquired, will achieve market acceptance. The Company's
historical
12
<PAGE>
rates of growth should not be taken as indicative of growth rates that can be
expected in the future.
UNPROVEN BUSINESS MODEL. The Company's consumer business model depends upon
its ability to leverage its existing and future Web traffic and consumer
audience to grow revenues and in the future generate multiple revenue
streams. The potential profitability of this business model is unproven, and
to be successful, the Company must, among other things, develop and market
content that achieves broad market acceptance by its user community, Internet
advertisers and commerce vendors. There can be no assurance that the consumer
business will be able to effectively implement this business model, and even
if the implementation is successful, there can be no assurance that the
business model will prove to be able to sustain revenue growth or generate
significant profits, if any. Furthermore, for the foreseeable future, the
Company anticipates that the consumer business will require significant
expenditures, particularly related to sales and marketing and brand
promotion, and that such expenditures may or may not result in revenue
growth. Given the Company's limited operating experience related to the
consumer business, the prediction of future revenue growth or operating
performance for the consumer business is difficult at best. The Company
expects the consumer business to generate net losses for the foreseeable
future. In addition to the foregoing the consumer business will depend in
part on success in building strategic alliances with other Internet companies
and media companies in order to be able to grow the user base and to provide
compelling content to attract and maintain the user base. There can be no
assurances that such alliances can be created or maintained over an extended
period of time.
DEPENDENCE ON DISTRIBUTORS. A substantial majority of the Company's revenues
is derived from the sale of its products through a variety of distribution
channels, including traditional software distributors, mail order,
educational distributors, VARs, original equipment manufacturers (OEMs),
hardware and software superstores, retail dealers, and direct sales.
Domestically, the Company's products are sold primarily through distributors,
VARs, and OEMs. In particular, one distributor, Ingram Micro, Inc., accounted
for 24% of revenues in the first quarter of both fiscal year 2000 and fiscal
year 1999. In addition, the next three distributors combined, two of which
are international distributors, accounted for 17% of revenues in the period
ending June 30, 1999. In the three month period ending June 30, 1998, three
distributors, including two international distributors, accounted for 23% of
total revenues. Internationally, the Company's products are sold through
distributors. The Company's resellers generally offer products of several
different companies, including in some cases, products that are competitive
with the Company's products. There can be no assurance that the Company's
resellers will continue to purchase the Company's products or provide them
with adequate levels of support. In addition, the Company believes that
certain distributors are reducing their inventory in the channel and
returning unsold products to better manage their inventories. Distributors
are increasingly seeking to return unsold product, particularly when a new
version or upgrade of a product has superseded such products. If the
Company's distributors were to seek to return increasing amounts of products,
such returns could have a material adverse effect on the Company's revenues
and results of operations. The loss of, or a significant reduction in sales
volume to, a significant reseller could have a material adverse effect on the
Company's results of operations.
DEPENDENCE ON TECHNOLOGY PLATFORMS. In the past, a majority of the Company's
revenues was derived from its products for the Macintosh computing platform.
Macintosh revenues accounted for 34% of product revenues for the first three
months of fiscal year 2000, compared to 42% of revenues for all of fiscal
year 1999. Although the relative percentage of
13
<PAGE>
Macintosh platform revenues will vary from quarter to quarter based on
product release schedules, the Company remains heavily dependent on the sale
of products for the Macintosh platform.
The success of the Company's product and consumer businesses is dependent
upon the existence and future growth of the Internet as a business,
entertainment and communications platform. A change in the Internet or the
technology used for operation of the Internet or a decline in the growth of
the Internet could have a material adverse effect on the Company's results of
operations.
RISKS OF INTERNATIONAL OPERATIONS. For the first quarter in fiscal 2000, the
Company derived approximately 42% of its revenues from international sales.
The Company expects that international sales will continue to generate a
significant percentage of its revenues. The Company relies on distributors
for sales of its products in foreign countries and, accordingly, is dependent
on their ability to promote and support the Company's products, and in some
cases, to translate them into foreign languages. International business is
subject to a number of special risks, including: foreign government
regulation; general geopolitical risks such as political and economic
instability, hostilities with neighboring countries and changes in diplomatic
and trade relationships; more prevalent software piracy; unexpected changes
in, or imposition of, regulatory requirements, tariffs, import and export
restrictions and other barriers and restrictions; longer payment cycles,
greater difficulty in accounts receivable collection, potentially adverse tax
consequences, the burdens of complying with a variety of foreign laws;
foreign currency risk; and other factors beyond the control of the Company.
In addition, the Company's results may be adversely affected by worldwide
economic events beyond the control of the Company, such as the prolonged
economic downturn occurring in Japan. There can be no assurances that Japan's
economy will recover in the near term or that the Company's results or growth
rates in this geographic region will return to previous levels even if the
recovery occurs. The Company's revenue from Japan declined from 21% of total
revenue in fiscal 1997 to 15% in fiscal 1998, and to just 8% of total revenue
in fiscal 1999. Revenues from Japan decreased to 7% of total revenue for the
first quarter of fiscal year 2000.
The Company enters into foreign exchange forward contracts to reduce economic
exposure associated with sales and asset balances denominated in various
European currencies and Japanese Yen. As of June 30, 1999, notional principal
of forward contracts outstanding amounted to $11.8 million. There can be no
assurance that such contracts will adequately hedge the Company's exposure to
currency fluctuations.
EURO DOLLAR. On January 1, 1999, eleven of the fifteen member countries of
the European Union adopted the Euro as the common legal currency and
established fixed rates of conversion between their existing sovereign
currencies and the Euro. The Euro will trade on currency exchanges and be
available for non-cash transactions. A three-year transition period is
expected during which transactions can be made in the old currencies. The
conversion to the Euro will eliminate currency exchange risk between the
member counties.
The Company does not anticipate any material impact from the Euro conversion
as its financial information system can accommodate multiple currencies. In
addition, the company has confirmed with its international financial
institutions that they have the ability to process transactions in either
Euros or sovereign currency. However, there can be no assurance that all
issues related to the Euro conversion have been identified, and the Company
may be at
14
<PAGE>
risk if any of its principal suppliers are unable to deal with the impact of
the Euro conversion. To date, none of the Company's international suppliers
have expressed an intention to invoice in Euros.
RISKS ASSOCIATED WITH ACQUISITIONS. Macromedia has grown in part because of
combinations with other companies. The Company recently accounced its intent
to acquire Elemental Software, Inc., expected to be accounted for under the
pooling-of-interests method. The Company also recently announced an intent to
dispose of certain assets from its Learning segment. There are integration
risks associated with merging two companies including financial,
administrative and cultural concerns. The Company will face these risks as
well as risks associated with the acceptance of the merged companies products
and services. The failure to properly manage these risks may result in a
material adverse effect on the Company's results of operations.
VOLATILITY OF STOCK. The Company's future earnings and stock price may be
subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price
of the Company's common stock in any given period. Additionally, the Company
may not learn of such shortfalls until late in the fiscal quarter, which
could result in an even more immediate and adverse effect on the trading
price of the Company's common stock. Finally, the Company participates in a
highly dynamic industry. In addition to factors specific to the Company,
changes in analysts' earnings estimates for the Company or its industry and
factors affecting the corporate environment or the securities markets in
general will often result in significant volatility of the Company's common
stock price.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. The Company prepares its financial
statements in conformity with generally accepted accounting principles
("GAAP"). GAAP are subject to interpretation by the American Institute of
Certified Public Accountants (the "AICPA"), the Securities and Exchange
Commission (the "SEC"), and various bodies formed to interpret and create
appropriate accounting policies. A change in these policies can have a
significant effect on the Company's reported results, and may even affect the
reporting of transactions completed prior to the announcement of a change.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code and
embedded technology in existing systems as the year 2000 approaches. The
"Year 2000 Issue" arises from the potential for computers to fail or operate
incorrectly because their programs incorrectly interpret the two digit date
fields "00" as 1900 or some other year, rather than the year 2000. The year
2000 issue creates risk for the Company from unforeseen problems in its own
computer systems and from third parties, including customers, vendors and
manufacturers, with whom the Company deals worldwide. Failures of the
Company's and/or third parties' computer systems could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and financial condition, though the Company
is unable to assess that potential impact at this time.
To mitigate this risk, the Company has established a formal year 2000 program
to oversee and coordinate the assessment, remediation, testing and reporting
activities related to this issue. The Company believes that provided it is
able to complete the project as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
As previously reported, the Company completed the assessment phase of its
year 2000 program. As part of this assessment, the Company's application
systems (e.g., financial
15
<PAGE>
systems, various custom-developed business applications), technology
infrastructure (e.g., networks, servers, desktop equipment), facilities
(e.g., security systems, fire alarm systems), vendors, partners and products
were reviewed to determine their state of year 2000 compliance. This review
included the collection of documentation from software and hardware
manufacturers, the detailed review of programming code for custom
applications, the physical testing of desktop equipment using software
designed to test for year 2000 compliance, the examination of key
vendors'/partners' year 2000 programs and the ongoing testing of the
Company's products as part of normal quality assurance activities. This
assessment revealed no significant issues with the Company's application
systems, technology infrastructure, facilities or products.
With the completion of the Company's assessment phase, and with very little
remedial action necessary, the Company embarked into its testing phase. At
this time, all production systems (both computer systems and systems
dependent on embedded technology) have been individually tested and validated
for year 2000 compliance, with no significant issues identified. On an
ongoing basis, any new systems will be tested prior to their introduction
into the production environment.
All current versions of the Company's products have been tested for year 2000
compliance. In general, the products are believed to be compliant, assuming
that the operating systems upon which they run have been updated to comply.
Both Microsoft and Apple have stated that their operating systems will
continue to operate properly into the twenty-first century. Details about
older, non-shipping versions of the Company's products can be found on the
Company's Web site.
A year 2000 issue was identified with Shockwave V6.0.1. The corrective action
for this issue is for customers to upgrade to version 7.0.0 or later, or to
downgrade to version 6.0.0. The Company currently offers Shockwave at no cost
as a downloadable run-time technology on its Web site. Both of these upgrades
are available at no charge from the Company's Web site. The Company also
sells distribution rights to Shockwave which include maintenance. These
customers will receive the upgrade in accordance with their maintenance
agreements. The Company intends to assess the proper response to any future
noted product issues as and when any such issues arise.
Several of the Company's distribution, manufacturing and support partners
themselves have significant year 2000 programs underway, some of which
involve the upgrade and/or replacement of systems which are important to the
day-to-day operations of the partners' business. For each of these partners,
the Company has established contingency plans that contemplate the failure of
the partners to complete their year 2000 programs. It should also be noted
that the Company cannot complete its final testing until the partners' year
2000 programs have been completed, due to the electronic communication that
takes place between the Company's and the partners' systems.
The Company believes that the total estimated cost of its year 2000 program
will be approximately $0.8 million. The Company reached this assessment with
the assistance of outside consultants to whom the Company paid $0.2 million.
However, there can be no assurance that the Company will not experience
serious unanticipated negative consequences and/or additional material costs
caused by undetected errors or defects in its own products, the technology
used in its internal systems, or by failures of its vendors/partners to
address their year 2000 issues in a timely and effective manner.
16
<PAGE>
As of the end of the first quarter of fiscal year 2000, approximately 90% of
the total estimated year 2000 program costs have been incurred. Of the
expenditures remaining for the program, it is estimated that most of this
represents costs associated with miscellaneous hardware and software upgrades
required for the completion of the year 2000 program. The funding for the
year 2000 program is being provided as a normal operating expense (except in
the case of any new capital hardware, which is being funded from standard
capital budgets).
While the Company's programs are intended to minimize the possibility of such
effects, should miscalculations or other operational errors occur as a result
of the Year 2000 issue, the Company or the parties on which it depends may be
unable to produce reliable information or to process routine transactions.
Furthermore, in the worst case, the Company or the parties on which it
depends may, for an extended period of time, be incapable of conducting
critical business activities which include, but are not limited to, providing
services, manufacturing and shipping products, invoicing customers and paying
vendors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. As stated in its policy, the
Company is adverse to principal loss and ensures the safety and preservation
of its invested funds by limiting default and market risks. The Company
places its investments with high credit-quality issuers, and the portfolio
includes only high quality marketable securities with active secondary or
resale markets to ensure portfolio liquidity. The Company does not use
derivative financial instruments in its investment portfolio. All investments
have a fixed interest rate and are carried at market value, which
approximates cost.
The table below represents carrying amounts, fair value and related weighted
average effective interest rates by year of maturity for the Company's
investment portfolio.
<TABLE>
<CAPTION>
Fair Value
- ------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 2001 2002 2003 2004 and Total June 30,
Thereafter 1999
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents $ 5,601 - - - - $ 5,601 $ 5,601
Average interest - - - -
rate 4.61% 4.61%
Short-term investments $ 57,343 $ 18,732 $ 3,242 $ 1,164 - $ 80,481 $ 80,347
Average interest -
rate 4.15% 3.98% 3.56% 3.51% 4.11%
--------------------------------------------------------------------------------------
Total investment
securities $ 62,944 $ 18,732 $ 3,242 $ 1,164 - $ 86,082 $ 85,948
======================================================================================
</TABLE>
17
<PAGE>
The Company also has loans outstanding from related parties totaling $8.3
million as of June 30, 1999. The stated loan amounts approximate fair value.
FOREIGN CURRENCY RISK
The Company's functional currency is the US dollar. The Company transacts
business in various foreign currencies, primarily in Japan and certain
European countries. The Company has established a foreign currency hedging
program using foreign currency exchange contracts to hedge
foreign-currency-denominated financial assets, and probable anticipated, but
not firmly committed, transactions. The goal of this hedging program is to
economically guarantee or lock in the exchange rates on the Company's foreign
currency exposures that principally arise from the transactions denominated
in Japanese Yen and various European currencies. Under this program,
increases or decreases in the Company's foreign currency denominated
financial assets are partially offset by gains or losses of the hedging
instruments. The forward contracts are marked-to-market and unrealized gains
and losses are included in current period net income. The Company does not
use foreign currency forward exchange contracts for trading purposes.
The table below provides information about the Company's outstanding forward
contracts as of June 30, 1999. The information is provided in US dollar
equivalents, as presented in the Company's financial statements. The table
presents the fair value (at the contract exchange rates) and the weighted
average contractual foreign currency exchange rates. All instruments mature
September 30, 1999. As of June 30, 1999, the gross unrealized gains and
losses on the forward contracts were not significant.
<TABLE>
<CAPTION>
(In thousands, except Notional Average
average contract rate) Amount Contract Rate
- ----------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency to be sold under
forward contracts:
British Pounds $4,914 0.63
Deutsche Marks 3,519 1.89
French Francs 1,000 6.34
Italian Lira 744 1870.79
Japanese Yen 709 120.93
Swedish Kronas 507 8.44
Spanish Peseta 370 160.76
-------------
$ 11,763
=============
</TABLE>
As the tables above incorporate only those exposures that exist as of June
30, 1999, they do not consider those exposures or positions that could arise
after that date. Exposures to the Company include changes in short-term US
prime interest rates and changes in foreign currency rates. Also, because the
foreign currency risk table above does not present the foreign currency
denominated financial assets and probable anticipated transactions underlying
the forward contracts, the information presented has limited predictive
value. The Company's ultimate realized gain or loss with respect to foreign
currency fluctuations will depend on the exposures that arise during the
period, the Company's hedging strategies at the time, and foreign currency
rates.
18
<PAGE>
Market Price Risk
The Company is exposed to market risk from changes in the price of its equity
securities available-for-sale, which were recorded at a fair value of
approximately $0.5 million at June 30, 1999. The equity investments held by
the Company has exposure to price risk, which is estimated as the potential
loss in fair value due to a hypothetical change of 10% in quoted market
prices. This hypothetical change would reduce the Company's investments as
well as unrealized gains on investment securities available for sale which
are included as a component of stockholders' equity. This hypothetical change
would have an immaterial effect on the recorded value of the Company's
investment securities available for sale.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 31, 1997, a complaint entitled Rosen et al. V. Macromedia, Inc., et
al., (Case No. 988526) was filed in the Superior Court for San Francisco,
California. The complaint alleges that Macromedia and five of its former or
current officers and directors engaged in securities fraud in violation of
California Corporations Code Sections 25400 and 25500 by seeking to inflate
the value of Macromedia stock by issuing statements that were allegedly false
or misleading (or omitted material facts necessary to make any statements
made not false or misleading) regarding the Company's financial results and
prospects. Four similar complaints by persons seeking to represent the same
class of purchasers subsequently have been filed in San Francisco Superior
Court, and consolidated for pre-trial purposes with Rosen. Defendants filed
demurrers to the complaint and other motions which were argued on December
19, 1997 and January 5, 1998. Before the demurrers could be heard, one
defendant, Richard Wood, died in an automobile accident. In March 1998, the
Court sustained in part and overruled in part the demurrers. Claims against
Susan Bird were dismissed and the Court overruled the demurrers as to
Macromedia, John Colligan, James Von Ehr, II, and Kevin Crowder. In May 1999,
the Court granted plaintiffs' motion for certification of a class of all
persons who purchased Macromedia common stock from April 18, 1996 through
January 9, 1997.
On September 25, 1997, a complaint entitled City Nominees v. Macromedia, Inc.
et al., (Case No. C-97-3521-SC) was filed in the United States District Court
for the Northern District of California. The complaint alleges that
Macromedia and five of its former or current officers and directors engaged
in securities fraud in violation of Sections 10 and 20(a) of the Securities
and Exchange Act of 1934 by seeking to inflate the value of Macromedia stock
by issuing statements that were allegedly false or misleading (or omitted
material facts necessary to make any statements made not false or misleading)
regarding the Company's financial results and prospects. Plaintiffs seek to
represent a class of all persons who purchased Macromedia common stock from
April 18, 1996 through January 9, 1997. Three similar complaints by persons
seeking to represent the same class of purchasers subsequently have been
filed in United States District Court for the Northern District of
California. All of these cases have been consolidated. Lead plaintiffs and
lead counsel have been appointed under the provisions of the Private
Securities Law Reform Act by the District Court. A consolidated complaint was
filed in February, 1998. Defendants moved to dismiss that complaint on the
grounds that plaintiffs' claims were barred by the applicable statute of
19
<PAGE>
limitations. In May 1998, the United States District Court for the Northern
District of California granted defendants' motion to dismiss with prejudice,
and entered judgment in favor of defendants. Plaintiffs have appealed to the
United States Court of Appeals for the Ninth Circuit, and that appeal is
pending.
All complaints seek damages in unspecified amounts, as well as other forms of
relief. The Company believes the complaints are without merit and intends to
vigorously defend the actions.
Item 4. Submission of Matters to a Vote of Security Holders
On July 26, 1999, the Company held its annual meeting of stockholders. The
stockholders passed the following proposals by the votes indicated.
<TABLE>
<CAPTION>
Matter Votes For Withheld
<S> <C> <C>
1. Election of Directors
Stewart Alsop 35,715,481 103,821
Robert K. Burgess 35,704,301 126,181
John (Ian) Giffen 35,719,050 96,683
Mark D. Kvamme 35,718,531 97,721
Donald L. Lucas 35,715,080 104,623
Roger S. Siboni 35,719,593 95,597
William B. Welty 35,719,590 95,603
</TABLE>
<TABLE>
<CAPTION>
Votes Votes Broker
Matter Votes For Against Abstained Non Votes
<S> <C> <C> <C> <C>
Amendment of the 1992
plan to increase the number
of shares reserved for
issuance thereunder by
2,100,000 shares from
13,300,000 shares to
15,400,000 shares 22,472,438 13,200,090 6,722,699 0
Ratify selection of KPMG
LLP as independent
auditors for the
Company for the
current fiscal year 35,718,016 11,676 6,665,535 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------ -------------
<S> <C>
27.01 - Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
20
<PAGE>
The Company did not file a report on Form 8-K during the period ended June 30,
1999.
21
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MACROMEDIA, INC.
(Registrant)
Date: August 12, 1999 /s/ Robert K. Burgess
-------------------------------------------------
Robert K. Burgess
President and Chief Executive Officer
Date: August 12, 1999 /s/ Elizabeth A. Nelson
-------------------------------------------------
Elizabeth A. Nelson
Senior Vice President and Chief Financial Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 31,775
<SECURITIES> 80,806
<RECEIVABLES> 12,598
<ALLOWANCES> 8,354
<INVENTORY> 715
<CURRENT-ASSETS> 144,771
<PP&E> 76,355
<DEPRECIATION> 30,914
<TOTAL-ASSETS> 199,630
<CURRENT-LIABILITIES> 37,729
<BONDS> 0
0
0
<COMMON> 43
<OTHER-SE> 161,599
<TOTAL-LIABILITY-AND-EQUITY> 199,630
<SALES> 48,935
<TOTAL-REVENUES> 48,935
<CGS> 4,992
<TOTAL-COSTS> 4,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,692
<INCOME-TAX> 2,520
<INCOME-CONTINUING> 7,172
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,172
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.15
</TABLE>
