<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 DECEMBER 31, 1998
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. 000-22688
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 January 31, 1999, there were outstanding 41,084,309 shares of the
Registrant's Common Stock, par value $0.001 per share.
This Report, including exhibits, consists of 17 sequentially numbered pages. The
Index to Exhibits appears on sequentially numbered page 16.
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MACROMEDIA, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
December 31, 1998 and March 31, 1998 3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
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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>
December 31, March 31,
1998 1998
------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 45,989 $ 10,019
Short-term investments 55,438 76,112
Accounts receivable, net 12,527 7,696
Inventory, net 522 743
Prepaid expenses and other current assets 10,535 3,819
Deferred tax assets, short-term 8,548 8,548
------------- -------------
Total current assets 133,559 106,937
Land and building, net 19,831 20,372
Other fixed assets, net 19,388 18,528
Other long-term assets 11,025 8,347
------------- -------------
Total assets $ 183,803 $ 154,184
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,028 $ 4,091
Accrued liabilities 29,274 19,132
Unearned revenue 7,950 1,927
------------- -------------
Total current liabilities 39,252 25,150
Deferred tax liabilities, long term 306 306
Other long-term liabilities 112 263
------------- -------------
Total liabilities 39,670 25,719
Stockholders' equity:
Common stock, par value $0.001 per share; 80,000,000 shares
authorized; 40,900,698 and 38,807,968 shares issued and
outstanding as of December 31, 1998 and March 31, 1998,
respectively 41 39
Treasury Stock, at cost; 1,340,000 and 510,000 shares as of
December 31, 1998 and March 31, 1998, respectively (16,546) (5,139)
Additional paid-in capital 156,506 142,023
Deferred compensation - (87)
Accumulated other comprehensive income 109 47
Accumulated earnings (deficit) 4,023 (8,418)
------------- -------------
Total stockholders' equity 144,133 128,465
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Total liabilities and stockholders' equity $ 183,803 $ 154,184
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1998 1997 1998 1997
--------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 38,228 $ 26,579 $ 105,789 $ 83,074
Cost of revenues 3,708 2,763 10,056 12,638
--------------- ---------------- --------------- --------------
Gross profit 34,520 23,816 95,733 70,436
Operating expenses:
Sales and marketing 16,796 13,901 46,374 42,074
Research and development 8,674 7,472 25,955 24,138
General and administrative 3,104 2,944 9,690 8,311
Merger - 7,658 - 7,658
--------------- ---------------- --------------- --------------
Total operating expenses 28,574 31,975 82,019 82,181
--------------- ---------------- --------------- --------------
Operating income (loss) 5,946 (8,159) 13,714 (11,745)
Other income, net 1,230 1,032 3,797 3,276
--------------- ---------------- --------------- --------------
Income (loss) before income taxes 7,176 (7,127) 17,511 (8,469)
(Provision) benefit for income taxes (1,866) (124) (5,070) 292
--------------- ---------------- --------------- --------------
Net income (loss) $ 5,310 $ (7,251) $ 12,441 $ (8,177)
--------------- ---------------- --------------- --------------
--------------- ---------------- --------------- --------------
Net income (loss) per share
Basic $ 0.14 $ (0.19) $ 0.32 $ (0.21)
Diluted $ 0.12 $ (0.19) $ 0.28 $ (0.21)
--------------- ---------------- --------------- --------------
--------------- ---------------- --------------- --------------
Weighted average common shares
outstanding
Basic 39,044 38,307 38,867 38,085
Diluted 45,559 38,307 44,457 38,085
--------------- ---------------- --------------- --------------
--------------- ---------------- --------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended December 31,
----------------------------------------
1998 1997
------------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 12,441 $ (8,177)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 6,034 5,727
Deferred compensation 87 37
Changes in operating assets and liabilities:
Accounts receivable, net (4,831) (1,702)
Inventory, net 221 1,439
Prepaid expenses and other current assets (6,716) 736
Accounts payable (2,063) (3,923)
Accrued liabilities 10,142 1,982
Unearned revenue 6,023 (608)
Other long-term liabilities (151) 135
Write-off Solis merger costs - 7,658
Other, net - 501
------------------- -----------------
Net cash provided by operating activities 21,187 3,805
------------------- -----------------
Cash flows from investing activities:
Capital expenditures (7,196) (9,927)
Proceeds of sales of fixed assets 961 -
Net sales and maturities of short-term available-for-sale
investments 20,736 27,570
Investment in Solis - (2,500)
Other long-term assets (2,796) (5,145)
------------------- -----------------
Net cash provided by investing activities 11,705 9,998
------------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 14,485 2,154
Acquisition of treasury stock (11,407) (4,537)
------------------- -----------------
Net cash provided by /(used in) financing activities 3,078 (2,383)
------------------- -----------------
Increase in cash and cash equivalents 35,970 11,420
Cash and cash equivalents, beginning of period 10,019 15,397
------------------- -----------------
Cash and cash equivalents, end of period $ 45,989 $ 26,817
------------------- -----------------
------------------- -----------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ -
------------------- -----------------
------------------- -----------------
Cash paid for income taxes $ 98 $ -
------------------- -----------------
------------------- -----------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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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 December 31, 1998 and for the
three and nine months ended December 31, 1998 and 1997 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, 1998.
The results of operations for the three and nine months ended December 31, 1998
are not necessarily indicative of the results for the fiscal year ending March
31, 1999 or any other future periods.
2. EARNINGS PER SHARE
"Basic" earnings per share is calculated by dividing net income or loss 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.
In the case of a net loss, it is assumed that no incremental shares would be
issued because they would be antidilutive. In addition, certain options are
considered antidilutive because the options' exercise prices were above the
average market price during the period. Antidilutive shares are not included in
the computation of diluted earnings per share, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128.
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
(In thousands, except per share data) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER SHARE COMPUTATION
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 5,310 $ (7,251) $ 12,441 $ (8,177)
---------------------------------- -------------------------------
Denominator:
Weighted average number of common shares outstanding
during the period 39,044 38,307 38,867 38,085
Basic net income (loss) per share $ 0.14 $ (0.19) 0.32 $ (0.21)
---------------------------------- -------------------------------
---------------------------------- -------------------------------
DILUTED NET INCOME (LOSS) PER SHARE COMPUTATION
Numerator:
Net Income (loss) $ 5,310 $ (7,251) 12,441 $ (8,177)
---------------------------------- -------------------------------
Denominator:
Weighted average number of common shares outstanding
during the period 39,044 38,307 38,867 38,085
Effect of dilutive securities:
Employee stock options 6,494 - 5,577 -
Employee stock purchase plans 21 - 13 -
---------------------------------- -------------------------------
Total 45,559 38,307 44,457 38,085
---------------------------------- -------------------------------
Diluted net income (loss) per share $ 0.12 $ (0.19) $ 0.28 $ (0.21)
---------------------------------- -------------------------------
---------------------------------- -------------------------------
</TABLE>
6
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Options to purchase 0.2 million shares were outstanding for the three and
nine month periods ended December 31, 1998 but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive. The weighted average exercise
price of the antidilutive shares approximates $31 per share for the three and
nine months ended December 31, 1998. The effect on earnings per share if
these antidilutive shares were included would be immaterial.
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards of
reporting and displaying comprehensive income and its components of net
income and "other comprehensive income" in a full set of general-purpose
financial statements. "Other comprehensive income" refers to revenues,
expenses, gains and losses that are not included in net income but rather are
recorded directly in stockholders' equity. SFAS No. 130 is effective for
annual and interim periods beginning after December 15, 1997 and for periods
ended before that date when presented for comparative purposes. The
components of comprehensive income (loss), net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months ended Nine months ended
December 31, December 31,
(In thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 5,310 $ (7,251) $ 12,441 $ (8,177)
Unrealized gain (loss) on securities 49 (204) 62 (97)
-----------------------------------------------------------
Comprehensive income $ 5,359 $ (7,455) $ 12,503 $ (8,274)
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
The primary components of other comprehensive income at December 31, 1998 and
March 31, 1998 were unrealized gains and losses on the Company's
available-for-sale investments.
4. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the manner in which public companies report
information about operating segments in annual and interim financial
statements. The Company is currently evaluating the operating segment
information that it will be required to report. The Company is required to
adopt the new standard for its year ending March 31, 1999.
In March 1998, the American Institute of Certified Public Accountants
released Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on capitalization of certain costs incurred in the development of
software for internal use. SOP 98-1 is effective for financial statements
issued for fiscal years beginning after December 15, 1998. In accordance with
SOP 98-1, the Company capitalizes costs of consulting services, hardware, and
payroll related costs incurred during internal-use software development. The
Company expenses costs incurred during preliminary project assessment,
research and development, re-engineering, training and application
maintenance.
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The Company is currently evaluating the impact of the
new rule on the Company's consolidated financial statements. The Company is
required to adopt the new standard in the first quarter of fiscal year 2001.
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5. INCOME TAXES
In the third quarter of fiscal year 1999, the Company revised its estimated
annual effective tax rate from 31% to 26% to reflect the utilization of
research and experimentation tax credits and foreign operating results which
were taxed at rates other than the US statutory rate.
6. RELATED PARTY TRANSACTIONS
During the nine months ended December 31, 1998, the Company made loans
totaling $2.5 million to two officers in conjunction with their hiring and
relocations. The loans are full recourse and are included in other long-term
assets. The notes bear interest at 5.56% and 5.51% per annum and are secured
by the personal residences of the officers. The notes mature in 2001 and are
callable on demand if the officers terminate employment with the Company. For
the three and nine months ended December 31, 1998, interest income on the
notes was immaterial.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained in this Form 10-Q, 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.
RESULTS OF OPERATIONS
REVENUES. Macromedia develops, markets and supports software tools, servers,
and services for web publishing, web learning, and web traffic. 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, Japan, Asia Pacific, and Latin
America. In addition, the Company derives revenues from advertising,
maintenance and technology licensing contracts.
Revenues increased $11.6 million or 44% to $38.2 million in the third quarter
of fiscal 1999 as compared to the same period in fiscal 1998. Revenues from
two of the Company's newest web publishing products, Dreamweaver and
Fireworks, comprised the majority of the increase. Similarly, comparing the
first nine months of fiscal year 1999 to the same period last year, revenues
increased by $22.7 million or 27% due to the release of Dreamweaver,
Fireworks, a new version of Flash, and increased revenue from advertising on
Macromedia's websites. These increases offset a decline in the sales of
Director due to the timing of product cycles. Revenues from windows and
hybrid products represented 58% of total product revenue for the third
quarter of fiscal 1999, while Macintosh related revenue was 42%, with growth
on both platforms over the same period last year.
North American revenues reached $22.5 million in the third quarter of fiscal
1999, an increase of $10.9 million or 94% over the third quarter of fiscal
year 1998. For the first nine months of the current year, North American
sales increased $20.8 million or 51% over the same period last year mainly
due to the shipment of new products. International revenues increased 5% from
the third quarter of fiscal 1998 to $15.7 million in the third quarter of
fiscal 1999. The increase was a result of stronger sales in Europe, Asia
Pacific and Latin America, offset by a decline in Japan. Revenues by
geographic region vary quarter to quarter depending on product cycles and the
timing of the release of localized versions of products, and the economic
condition of the region. The table below summarizes revenue by geography:
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<TABLE>
<CAPTION>
(In millions) Three months ended December 31, Nine months ended December 31,
---------------------------------------------- -------------------------------------------
1998 1997 % change 1998 1997 % change
<S> <C> <C> <C> <C> <C> <C>
North America $ 22.5 $ 11.6 94% $61.6 $40.8 51%
% of total revenues 59% 44% 58% 49%
International $ 15.7 $ 15.0 5% $44.2 $42.3 5%
% of total revenues 41% 56% 42% 51%
Total revenues $ 38.2 $ 26.6 $105.8 $83.1
</TABLE>
GROSS MARGIN. Gross margin for the three and nine months ended December 31,
1998 was 90% and 91%, respectively, compared with 90% and 85% for the
comparable periods last year. The improvement in the nine month comparison
was due to the results of cost control programs implemented last year,
including a move to just-in-time manufacturing which resulted in lower
inventory obsolescence and lower inventory levels, and improved inventory
review procedures. The Company believes these business process changes will
result in sustained margin performance. However, gross margins may be
affected from time to time by the mix of distribution channels used, mix of
products sold, and the mix of international versus domestic revenues.
SALES AND MARKETING. Sales and marketing expenses for the three and nine
months ended December 31, 1998 increased $2.9 million and $4.3 million,
respectively, when compared to the same periods last year. The increase in
the third quarter of fiscal year 1999 relative to the same period in fiscal
1998 was due to increased web and print advertising associated with new
product launches and the amortization of capitalized costs arising from
licensing and distribution agreements. The growth in expenses for the nine
month period ended December 31, 1998 over the same period last year was due
to increases in compensation and benefits and direct marketing promotions. As
a percentage of revenues, sales and marketing expenses decreased to 44% for
both the three and nine month periods ending December 31, 1998, compared with
52% and 51% for the same periods in the preceding year. The improvement was
due to the higher sales volume in the current year.
RESEARCH AND DEVELOPMENT. Research and development for the three and nine
months ended December 31, 1998 were $8.7 million and $26.0 million,
respectively, an increase of $1.2 million and $1.8 million as compared to the
same periods last year. In both periods, expenses grew as a result of
additional headcount, particularly in the areas of temporary and contracted
services to support new product development, and costs associated with
improving the information technology infrastructure. As a percentage of
revenues, research and development costs for the three and nine months ended
December 31, 1998 were 23% and 25% respectively compared with 28% and 29% for
the same periods last year. The improvement was due to higher sales levels in
fiscal 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three
and nine months ended December 31, 1998 were $3.1 million and $9.7 million,
respectively, an increase of $0.2 million and $1.4 million as compared to the
same periods of the prior year. The increase in costs in both periods was due
to higher compensation and benefit costs, and costs associated with improving
the information technology infrastructure. General and administrative costs
as a percentage of revenues was 8% for the three months ended December 31,
1998, compared to 11% for the same period of time last year, and 9% for the
nine months ended 1998 compared to 10% for the comparable period in 1997. The
increase in sales year over year contributed to the improved ratio in both
periods.
OTHER INCOME. Other income in the third quarter of fiscal 1999 of $1.2
million was $0.2 million higher than the third quarter of 1998. For the nine
months ended December 31, 1998, other income of $3.8 million was $0.5 million
higher than the same period ended December 31, 1997. In both periods the
increase was due to interest income earned on higher investment balances.
PROVISION/BENEFIT FOR INCOME TAXES. The Company's provision for income taxes
of $1.9 million for the third quarter of fiscal 1999 was up $1.7 million over
the third quarter of fiscal 1998, due to an
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increase in net profit before tax of $14.3 million. For the first nine months
of fiscal year 1999, the current year provision of $5.1 million was an
increase of $5.4 million over the prior year, due to an increase in net
profit before tax of $26.0 million. The effective tax rate for the third
quarter of fiscal year 1999 was 26%, and the cumulative, effective tax rate
for the first nine months of fiscal year 1999 was 29%, compared to a rate of
36% for the cumulative period last year.
OFFSHORE, INTANGIBLE HOLDING COMPANY (IHC). The Company established
Macromedia Ireland Limited as an offshore, intangible holding company,
resident and registered in Barbados effective October 1, 1998. The purpose of
this new corporate structure is to take advantage of certain tax provisions
which allow deferral of taxes on international product sales. Due to this
structure, the Company expects its tax rate will remain at or below its
current rate of 26% for the remainder of the fiscal year. This estimate is
based on current tax law and is subject to change.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash, cash equivalents and short-term
investments of $101.4 million. For the nine months ended December 31, 1998,
cash provided by operating activities of $21.2 million was primarily
attributable to net income for the period of $12.4 million and a net increase
in unearned revenue of $6.0 million associated with licensing agreements,
plus the net impact of the sales and cash collection cycles. Cash provided by
investing activities of $11.7 million related primarily to the sale of short
term investments offset by capital expenditures. Cash provided by financing
activities of $3.1 million was attributable to $14.5 million from the
proceeds received from the exercise of common stock options, offset by the
acquisition of treasury stock of $11.4 million. Collectively, the above
activity resulted in an increase of $36.0 million from the March 31, 1998
balances of cash and cash equivalents. Working capital increased by $12.5
million from the March 31, 1998 balance of $81.8 million, to $94.3 million at
December 31, 1998. The Company anticipates future capital expenditures of
approximately $5.0 million for the remainder of fiscal 1999.
In the third quarter of fiscal year 1999, the Company made investments in
property and equipment totaling $3.1 million. This amount includes $1.5
million related to development of a new information technology infrastructure
for sales and marketing, customer support, on-line product distribution, and
technical support. The costs capitalized under the project are comprised
primarily of hardware and consulting fees for software development. The
Company expects to spend approximately $3.0 million on the project over the
next two quarters, the majority of which will be capitalized. Amortization of
the project is expected to begin in the fourth quarter of fiscal 1999 and
will approximate $0.5 million per quarter when fully implemented.
In addition to cash, cash equivalents, and short-term investments, the
Company has $15.0 million available under an unsecured revolving line of
credit. The line of credit bears interest at the bank's prime rate and
expires on July 15, 1999. As of December 31, 1998, the Company had no
borrowings outstanding.
The Company believes that existing cash resources, available bank borrowings
and cash generated from operations will be sufficient to meet the Company's
cash and investment requirements through at least December 31, 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
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. A number of
companies currently offer products that compete directly or indirectly with
one or more of the Company's products. These companies include Adobe Systems
Inc. (Adobe), Apple Computer, Inc., Asymetrix Corporation, Corel
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Corporation (Corel), MetaCreations Corporation, and Microsoft Corporation
(Microsoft). As the Company competes with larger competitors such as Adobe,
Corel and Microsoft across a broader range of product lines and different
platforms, the Company may face increasing competition from such companies.
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 majority of the
Company's revenues is derived from four products: Director, FreeHand, Flash
and Dreamweaver. 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 is 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.
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, 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 28% of gross revenues for both
the third quarter and first nine months of fiscal 1999. Internationally, the
Company's products are sold through distributors.
DEPENDENCE ON MACINTOSH PLATFORM. In the past, a majority of the Company's
revenues was derived from its products for the Macintosh. Macintosh revenues
accounted for 41% of product revenues for the first nine months of fiscal
1999, compared to 44% of revenues for all of fiscal 1998. Although the
relative percentage of 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. A decline in
the sales rate of multimedia-capable Macintosh computers or shifts in mail
order or other distribution mechanisms for Macintosh products could have a
material adverse effect on the Company's results of operations.
RISKS OF INTERNATIONAL OPERATIONS. For the nine months ended December 31,
1998, the Company derived approximately 42% of its revenues from
international sales, compared with 48% for all of fiscal 1998. 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
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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
just 8% of total revenue in the first nine months of fiscal 1999.
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 December 31, 1998, the notional
principal of forward contracts outstanding amounted to $19.1 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 countries.
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. The Company is in the process of preparing Euro
price lists with those of the sovereign currency to assess any competitive
risk. However, there can be no assurance that all issues related to the Euro
conversion have been identified, and the Company may be at 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.
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 revenues 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.
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 on financial transactions
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 impact is unknown 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 with the
completion of the project as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
12
<PAGE>
The Company has completed the assessment phase of its year 2000 program. As
part of this assessment, the Company's application systems (e.g., financial
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. The assessment
identified that certain of the Company's vendors/partners themselves have
significant year 2000 programs, the successes of which are important to the
Company. The Company established a contingency plan for each critical
partner, the activation of which will be dependent on the failure of the
vendor/partner to achieve key milestones in their programs.
With the completion of the Company's assessment phase, and with very little
remedial action necessary, the Company is now beginning the testing phase of
its program. Testing of the Company's internal software will be accomplished
through simulation. The Company will simulate January 1, 2000 on its network,
servers and desktop equipment to ensure compliance with year 2000 readiness.
It is forecast that all mission critical systems (both computer systems and
systems dependent on embedded technologies) will be tested by March 31, 1999.
The Company is targeting June 30, 1999 for the completion of all other
testing.
The Company believes that the costs associated with completing its year 2000
program will be $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 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.
As of the end of the third quarter of fiscal year 1999, approximately 30% of
the total estimated year 2000 program costs have been incurred. Of the
expenditures remaining for the program, it is estimated that 25% represents
costs associated with human resources performing testing, and 75% represents
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).
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,
manufacturing and shipping products, invoicing customers and paying vendors.
The Company is currently evaluating its software products for Year 2000
compliance. The Company believes that the changes and improvements it is
making to its software will handle Year 2000 compliance correctly, assuming
that the operating systems upon which they will run have been updated to
comply. Macromedia's software products obtain date information, such as
creation dates and modification dates, directly from the computers' operating
system. Both Microsoft and Apple have stated that their operating systems
will continue to operate properly into the twenty-first century.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
14
<PAGE>
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. Plaintiffs seek to represent a class of all persons who purchased
Macromedia common stock from April 18, 1996 through January 9, 1997. 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. The Court sustained in part and
overruled in part the demurrers by order dated March 6, 1998. Claims against
Susan Bird were dismissed with leave to amend and the Court overruled the
demurrers as to Macromedia, John Colligan, James Von Ehr, II, and Kevin
Crowder. The Plaintiffs did not file an amended complaint, and defendants
have answered. Discovery is now proceeding.
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 pursuant to an Order of
January 23, 1998. A consolidated complaint was filed on February 13, 1998.
Defendants promptly moved to dismiss, which motion was granted by order filed
May 18, 1998, on the grounds that plaintiffs' claims were barred by the
applicable statute of limitations. Plaintiffs have filed a notice of appeal
of the dismissal. Briefing on the appeal is underway.
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.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith:
Exhibit
Number Exhibit Title
- ------- -------------
27.01 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the period ended December
31, 1998.
16
<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: February 10, 1999 /s/ Robert K. Burgess
-------------------------------------
Robert K. Burgess
President and Chief Executive Officer
Date: February 10, 1999 /s/ Elizabeth A. Nelson
-------------------------------------
Elizabeth A. Nelson
Senior Vice President and Chief
Financial Officer
17
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