<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 SEPTEMBER 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. 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 October 31, 1999, there were outstanding 44,489,878 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
<PAGE>
MACROMEDIA, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
September 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations
Three and Six Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended September 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 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,132 $ 27,578
Short-term investments 92,558 81,698
Accounts receivable, net 18,647 12,858
Inventory, net 1,139 615
Prepaid expenses and other current assets 8,590 13,751
Deferred tax assets, short-term 6,899 6,899
------------- ---------
Total current assets 162,965 143,399
Land and building, net 19,302 19,945
Other fixed assets, net 28,519 21,469
Other long-term assets 10,507 10,887
------------- ---------
Total assets $ 221,293 $ 195,700
------------- ---------
------------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,853 $ 5,434
Accrued liabilities 35,910 26,682
Unearned revenue 6,605 6,745
------------- ---------
Total current liabilities 46,368 38,861
Deferred tax liabilities, long-term 222 222
Other long-term liabilities - 75
------------- ---------
Total liabilities $ 46,590 $ 39,158
------------- ---------
------------- ---------
Stockholders' equity:
Preferred stock, par value $0.0001 per share; 411,818 shares
authorized; 0 and 397,064 shares issued and outstanding
as of September 30, 1999 and March 31, 1999
respectively - 1
Common stock, par value $0.001 per share; 80,000,000
shares authorized; 44,156,144 and 42,124,283 shares issued
and outstanding as of September 30, 1999 and March 31, 1999
respectively 44 42
Treasury stock, at cost; 1,817,500 and 1,620,000 shares as of
September 30, and March 31, 1999, respectively (33,649) (25,445)
Deferred compensation (771) (893)
Additional paid-in-capital 212,338 197,759
Accumulated other comprehensive income 447 41
Accumulated deficit (3,706) (14,963)
------------- ---------
Total stockholders' equity 174,703 156,542
------------- ---------
Total liabilities and stockholders' equity $ 221,293 $ 195,700
------------- ---------
------------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues $ 57,710 $ 35,550 $107,986 $ 67,979
Cost of revenues 5,490 3,253 10,620 6,411
-------- -------- -------- --------
Gross profit 52,220 32,297 97,366 61,568
Operating expenses:
Sales and marketing 22,314 16,199 42,942 31,475
Research and development 14,234 9,593 26,253 19,077
General and administrative 4,633 3,498 9,367 7,096
Acquisition related expenses (Notes 2 and 8) 5,260 5,260
-------- -------- -------- --------
Total operating expenses 46,441 29,290 83,822 57,648
Operating income 5,779 3,007 13,544 3,920
Other income, net 1,036 1,293 2,305 2,588
-------- -------- -------- --------
Income before income taxes 6,815 4,300 15,849 6,508
Provision for income taxes 2,071 1,875 4,592 3,205
-------- -------- -------- --------
Net income $ 4,744 $ 2,425 $ 11,257 $ 3,303
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share
Basic $ 0.11 $ 0.06 $ 0.27 $ 0.09
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ 0.10 $ 0.06 $ 0.23 $ 0.08
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in calculating net income
per share
Basic 41,377 38,939 41,045 38,788
-------- -------- -------- --------
-------- -------- -------- --------
Diluted 47,992 43,965 48,012 44,004
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended September 30,
------------------------------
1999 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,257 $ 3,303
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,070 4,007
Writeoff of fixed assets related to merger 191
Deferred compensation 122 87
Changes in operating assets and liabilties:
Accounts receivable, net (5,789) 857
Inventory, net (524) 239
Prepaid expenses and other current assets 5,161 (6,326)
Accounts payable (1,581) (1,762)
Accrued liabilities 9,228 6,229
Unearned revenue (140) 6,735
Other long-term liabilities (75) (113)
-------- --------
Net cash provided by operating activities $ 23,920 $ 13,256
-------- --------
Cash flows from investing activities:
Capital expenditures (12,650) (4,282)
Proceeds from sale of fixed assets 961
Purchase of short-term investments (77,880) (75,154)
Maturities and sales of short-term investments 67,426 73,392
Other long-term assets 362 (2,690)
-------- --------
Net cash used in investing activities: $(22,742) $ (7,773)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 14,580 8,731
Proceeds from issuance of convertible notes payable 919
Acquisition of treasury stock (8,204) (11,407)
-------- --------
Net cash provided by (used in) financing activities 6,376 (1,757)
-------- --------
Increase in cash and cash equivalents 7,554 3,726
Cash and cash equivalents, beginning of period 27,578 11,076
-------- --------
Cash and cash equivalents, end of period $ 35,132 $ 14,802
-------- --------
-------- --------
Supplemental disclosure of cash flow information:
Cash paid for interest - -
-------- --------
-------- --------
Cash paid for taxes - -
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
MACROMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
The condensed consolidated financial statements at September 30, 1999 and for
the three and six months ended September 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 and six months ended September 30, 1999
are not necessarily indicative of the results for the fiscal year ending March
31, 2000 or any other future periods.
2. MERGER WITH ESI SOFTWARE, INC.
On July 8, 1999, Macromedia, Inc., ESI Software, Inc., a California
corporation ("ESI"), and Dynamo Acquisition Corp., a Delaware corporation and
a wholly-owned subsidiary of Macromedia ("Sub"), entered into an Agreement
and Plan of Reorganization, under which Macromedia acquired ESI by exchanging
all of the outstanding capital stock, options and warrants of ESI for
approximately 635,000 shares of common stock, options and warrants of
Macromedia (as valued on July 8, 1999). The merger closed on September 30,
1999. As a result of the acquisition of ESI, Sub was merged with and into ESI
and ESI remains as the surviving corporation and a wholly-owned subsidiary of
Macromedia. The transaction has been accounted for as a pooling of interests.
The merger is a tax-free reorganization. ESI develops and markets software
that enables users to build advanced, interactive, business-oriented Web
applications. Macromedia intends to continue to conduct ESI's business
following the acquisition.
In conjunction with the merger, the Company incurred direct
merger-related expenses of approximately $2.5 million, including expenses for
bonuses contingent upon closing of the merger agreement, legal and other
professional fees, personnel severance and relocation of employees during the
quarter ended September 30, 1999. Another $0.5 million of expenses are
expected to be incurred in the quarter ended December 31, 1999.
Macromedia's fiscal year ends on March 31. ESI's fiscal year ends on June 30.
The financial statements of Macromedia have been restated to include the
financial position and results of operations of ESI for all periods presented.
The restated statements of operations for the three and six months ended
September 30, 1999 and 1998 include Macromedia's and ESI's results of
operations for those periods. The combined balance sheets as of September 30,
1999 and March 31, 1999 combines the assets, liabilities and stockholders'
equity of Macromedia with ESI on those dates. During the three months ended
September 30, 1999, the Company purchased product from ESI pursuant to a
distribution agreement. This transaction was eliminated upon consolidation.
For the three months ending June 30, 1999 and 1998, ESIs revenues were
$1.3 million and $0.1 million, respectively, and net loss was $0.7 million
and $2.1 million for the same periods, respectively. For the three months
ending September 30, 1998, ESI's revenues and net loss were $0.3 million
and $1.7 million, respectively.
3. 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, if the funds collected for the
employee stock purchase plan were used to purchase treasury shares, and if
the preferred stock and warrants of ESI were converted into common stock.
Restricted stock subject to repurchase provisions are also included in the
diluted earnings per share calculation.
6
<PAGE>
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 0.7 million
and 0.3 million for the three months ended September 30, 1999 and 1998,
respectively, and 0.5 million for the six months ended September 30, 1999 and
1998. The weighted average exercise price of these antidilutive options
approximated $44.57 and $21.33 for the three months ending September 30, 1999
and 1998, respectively, and $44.34 and $15.10 for the six months ended September
30, 1999 and 1998, respectively.
The following is a reconciliation of the number of shares used in the basic and
diluted earnings per share computation for the period presented (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Shares used in basic net income per
share computation 41,377 38,939 41,045 38,788
Effect of dilutive potential common
shares 6,615 5,026 6,967 5,216
----------------------------------------------------
Shares used in diluted net income per
share computation 47,992 43,965 48,012 44,004
----------------------------------------------------
----------------------------------------------------
</TABLE>
4. 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 Six months ended
September 30, September 30,
------------------ ------------------
(in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 4,744 $ 2,425 $11,257 $ 3,303
Unrealized gain on securities 122 60 405 13
-------------------------------------------------
Comprehensive income $ 4,866 $ 2,485 $11,662 $ 3,316
-------------------------------------------------
-------------------------------------------------
</TABLE>
5. 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 three and six months ended September 30, 1999
was 26%, excluding the effect of the pooled losses of ESI Software, Inc.
which effect was a combined rate of 30%.
7
<PAGE>
6. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Macromedia has two segments which offer different product lines: Web
Publishing 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. 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 and six months
ended September 30, 1998, the Company did not internally report shockwave.com
as a separate segment nor is financial data for shockwave.com for these
periods available. The Company does not allocate assets to its individual
operating segments.
During the quarter ended September 30, 1999, the Company sold certain assets
relating to the Company's Pathware product line, which comprised a majority of
the Learning division (Note 7). Revenue and expenses related to products
remaining in the Learning division after the transaction were realigned and are
currently evaluated as part of the Web Publishing segment. Prior periods
presented below have been restated to include the Learning division in Web
Publishing, resulting in one segment for the three and six months ending
September 30, 1998.
Information about reported segment income or loss for fiscal year 2000 is as
follows:
<TABLE>
<CAPTION>
WEB
(in thousands) PUBLISHING shockwave.com TOTAL
Three months ended
September 30, 1999
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 55,843 $ 1,867 $ 57,710
Cost of revenues 4,848 642 5,490
---------------------------------------------
Gross margin $ 50,995 $ 1,225 $ 52,220
Direct operating expenses 21,965 5,207 27,172
Acquisition related expenses 5,260 5,260
---------------------------------------------
Contribution margin $ 23,770 $ (3,982) $ 19,788
Six months ended
September 30, 1999
- -----------------------------------------------------------------------------------
Revenues $104,870 $ 3,116 $107,986
Cost of revenues 9,508 1,112 10,620
---------------------------------------------
Gross margin $ 95,362 $ 2,004 $ 97,366
---------------------------------------------
Direct operating expenses 42,043 8,817 50,860
Acquisition related expenses 5,260 - 5,260
---------------------------------------------
Contribution margin $ 48,059 $ (6,813) $ 41,246
</TABLE>
Information about reported segment income or loss for fiscal year 1999 is as
follows:
<TABLE>
<CAPTION>
(in thousands)
WEB
PUBLISHING
Three months ended
September 30, 1998
- ---------------------------------------------
<S> <C>
Revenues $35,550
Cost of revenues 3,253
-------
Gross margin $32,297
Direct operating expenses 17,655
-------
Contribution margin $14,642
Six months ended
September 30, 1998
- ---------------------------------------------
Revenues $67,979
Cost of revenues 6,411
-------
Gross margin $61,568
Direct operating expenses 34,496
-------
Contribution margin $27,072
</TABLE>
8
<PAGE>
A reconciliation of the totals reported for the combined operating segments
to the applicable line items in the consolidated financial statements for the
three and six months ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended September 30,
- -------------------------------------------------------------------------------------
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Total contribution margin from operating segment(s) $19,788 $14,642
Unallocated expenses 14,009 11,635
------------------------
Total operating income $ 5,779 $ 3,007
Other income 1,036 1,293
------------------------
Income before taxes $ 6,815 $ 4,300
------------------------
------------------------
<CAPTION>
Six months ended September 30,
- -------------------------------------------------------------------------------------
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Total contribution margin from operating segment $41,246 $27,072
Unallocated expenses 27,702 23,152
------------------------
Total operating income $13,544 $ 3,920
Other income 2,305 2,588
------------------------
Income before taxes $15,849 $ 6,508
------------------------
------------------------
</TABLE>
7. AGREEMENT WITH LOTUS DEVELOPMENT CORPORATION
On August 31, 1999, the Company closed a series of agreements with Lotus
Development Corporation, the combined effect of which was to: (i) sell certain
tangible and intangible assets relating to the Company's Pathware product line,
a significant portion of the Company's Learning division, 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 and Lotus' products. The Company is
to receive a minimum of $30 million in revenue over the next three
years as a result of the terms of the agreements.
8. AGREEMENT WITH STARBASE CORPORATION
In July 1999, the Company acquired certain technology rights and other
related software products from Starbase Corporation for $2.8 million. The
Company intends to utilize these assets in the research and development of a
single future product. As the Company has determined that these assets do not
have an alternative future use outside of the research being performed for
the future product, the Company has charged the entire $2.8 million to
research and development expense in the quarter ended September 30, 1999.
9. SUBSEQUENT EVENT
On October 6, 1999, the Company entered into a definitive agreement to merge
with Andromedia, Inc., a developer of e-marketing software that enables
companies to implement an integrated solution to analyze the success of their
Web marketing efforts and to personalize offerings based on customers' needs
in real-time. Under the terms of the agreement, each outstanding share of
Andromedia common stock and convertible preferred stock will be exchanged for
newly issued shares of common stock of the Company. This will result in the
issuance of approximately 5 million additional shares of the Company's common
stock. In addition, all outstanding stock options of Andromedia will be
converted into the right to acquire the Company's common stock at the same
9
<PAGE>
exchange ratio, with a corresponding adjustment to the exercise price. The
transaction is expected to be accounted for as a pooling of interests, and is
anticipated to close during the quarter ended December 31, 1999. Macromedia
expects to incur merger related expenses of approximately $5.0 million,
including expenses related to professional fees, recruitment, severance, and
certain other one-time charges relating to the acquisition. The closing of
the transaction is subject to a number of conditions, including approval by
the stockholders of Andromedia.
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. Additionally, the Company's 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 $22.2 million or 62% in the second quarter of fiscal year
2000 as compared to the same period in fiscal year 1999. Revenues generated
by the Web Publishing segment grew by $20.3 million to $55.8 million from
$35.6 million for the second quarter in fiscal year 1999. The majority of the
increase is attributable to increased sales of Flash, Dreamweaver, Director
and Fireworks, offset by a decrease in Freehand sales due to product cycle
timing. Additional revenue growth was achieved through web advertising.
Comparing the first six months of fiscal year 2000 over the same period last
year, revenues increased $40.0 million or 59% due to increased sales of
Dreamweaver, Flash, Fireworks and Director, offset by a decrease in Freehand
sales.
North American revenues increased $14.0 million to $35.1 million in the
second quarter of fiscal year 2000 from $21.1 million in the second quarter
of fiscal year 1999. For the first six months of the current year, North
American sales increased $25.1 million or 64% over the same period last year.
International revenues increased $8.1 million to $22.6 million from the
second quarter fiscal year 1999 to the second quarter fiscal 2000. The
increase was a result of stronger sales in Japan, Asia Pacific and Europe.
See Factors That May Affect Future Results of Operations - Risks of
International Operations for additional information. The table below
summarizes revenue by geography:
<TABLE>
<CAPTION>
(In millions) Three months ended Six months ended
September 30, September 30,
--------------------------------- -------------------------------
1999 1998 % change 1999 1998 % change
<S> <C> <C> <C> <C> <C> <C>
North America $ 35.1 $ 21.1 66% $ 64.6 $ 39.5 64%
% of total revenues 61% 59% 60% 58%
International 22.6 14.5 56% 43.4 28.5 52%
% of total revenues 39% 41% 40% 42%
Total revenues $ 57.7 $ 35.6 $ 108.0 $ 68.0
</TABLE>
GROSS MARGIN. Gross margin as a percentage of revenue for the three and six
months ended September 30, 1999 were consistent with the respective periods
of the prior year. Gross profit of $52.2 million for the second quarter of
fiscal year 2000 in absolute dollars was up 62% over prior year, consistent
with revenue growth. Gross margins may be adversely affected from time to
10
<PAGE>
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 46% in the second quarter of fiscal year 1999 to 39% in the
second quarter of fiscal year 2000, but increased in absolute dollars by 38%
to $22.3 million. The increase in absolute dollars was primarily due to
expenses related to sales and marketing headcount growth and advertising,
marketing and infrastructure costs, in support of increased revenue. For the
six months ended September 30, 1999 sales and marketing expenses decreased as
a percentage of revenues from 46% in fiscal year 1999 to 40% in fiscal year
2000, but increased in absolute dollars from $31.5 million to $42.9 million,
in support of increased revenue.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $4.6
million from $9.6 million in the second quarter of fiscal year 1999 to $14.2
million in the second quarter of fiscal year 2000, but decreased as a
percentage of revenues from 27% to 25%. Research and development expenses
increased in absolute dollars primarily due to headcount growth and the
resulting increases in compensation and benefits and infrastructure costs. In
addition, the Company incurred costs for acquisition and development of
entertainment content for its consumer business, shockwave.com. For the six
months ended September 30, 1999, research and development expenses increased
$7.2 million to $26.3 million but decreased as a percentage of revenue from
28% to 24%.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$1.1 million, from $3.5 million in the second quarter of fiscal year 1999 to
$4.6 million in the second quarter of fiscal year 2000. Expenses increased in
the second quarter of fiscal year 2000 primarily due to headcount growth and
the resulting increases in compensation and benefits and infrastructure
costs. As a percentage of revenues, general and administrative costs
decreased as a percentage of revenues from 10% in the second quarter of
fiscal year 1999 to 8% in the second quarter of fiscal year 2000. For the six
months ended September 30, 1999, general and administrative costs increased
$2.3 million to $9.4 million, primarily due to headcount growth and increased
expenses for the Company's annual report and expenses related to the sale of
assets to Lotus Development Corp.(see Part I, Item 1, Notes to Condensed
Consolidated Financial Statements, Note 7).
ACQUISITION RELATED EXPENSES. Writeoff of acquired technology expense of $2.8
million is for the acquisition of technology rights and other related software
products from Starbase Corporation, as described in Part I, Item 1, Notes to
Condensed Consolidated Financial Statements, Note 8.
Merger related expenses of $2.5 million relates to the pooling of interests
acquisition of ESI Software, Inc., as described in Part I, Item 1, Notes
to Condensed Consolidated Financial Statements, Note 2.
OTHER INCOME. Other income decreased from $1.3 million to $1.0 million in the
second quarter of fiscal year 2000. For the six months ended September 30,
1999, other income decreased $0.3 million to $2.3 million. 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 second quarter of fiscal year 2000 increased $0.2 million. The
effective tax rate for the quarterly provision was 26% excluding the effect
of the pooled losses of ESI Software, Inc. which effect was a combined rate
of 30%. The effective tax rate for the quarterly provision for the quarter
ended September 30, 1998 was 31%, excluding the effect of the pooled losses
of ESI. The decrease in the effective tax rate reflects 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 September 30, 1999, the Company had cash, cash equivalents and short-term
investments of $127.7 million. For the six months ended September 30, 1999,
cash provided by operating activities of $23.9 million was primarily
attributable to net income, depreciation and amortization, accrued
liabilities and decreased stock option receivable; partially offset by an
increase in accounts receivable. Cash used in investing activities of $22.7
million was
11
<PAGE>
used primarily to purchase and develop equipment and software for
infrastructure growth, including for shockwave.com and for the purchase of
short term investments. Cash provided by financing activities of $6.4 million
is from the exercise of common stock options, offset by the acquisition of
Treasury stock. Collectively, the above activity resulted in a net increase
of $7.6 million from the March 31, 1999 balances of cash and cash
equivalents. Working capital increased by $12.1 million from the March 31,
1999 balance of $104.5 million, to $116.6 million at September 30, 1999. The
Company anticipates future capital expenditures of approximately $12.0
million for the remainder of fiscal year 2000.
During the first six months of fiscal year 2000, the Company made investments
in property and equipment of $12.7 million. This amount includes $3.9 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 $0.8 million in the second fiscal quarter.
Amortization will continue over a three-year period, and will increase as
additional phases of the project are ready for use.
As of September 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 September 30, 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), Microsoft Corporation
(Microsoft), Asymetrix Corporation, and Corel Corporation (Corel). As the
Company competes with larger competitors such as Adobe and Microsoft across a
broader 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
12
<PAGE>
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 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.
13
<PAGE>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 29% of revenues in the second quarter of fiscal year 2000 and 24% in
fiscal year 1999. In addition, the next three distributors combined, two of
which are international distributors, accounted for 19% of revenues in the
period ending September 30, 1999. In the six month period ending September
30, 1998, in addition to Ingram Micro, Inc., 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 30% of product revenues for the first six
months of fiscal year 2000, compared to 42% of revenues for all of fiscal year
1999. 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.
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 six months in fiscal 2000, the
Company derived approximately 40% 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 remained at 8% of total revenue for the first
six months of fiscal year 2000.
14
<PAGE>
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 September 30, 1999, there were no
forward contracts outstanding; the Company, however, entered into additional
forward contracts in October 1999. There can be no assurance that such
contracts will adequately hedge the Company's exposure to currency
fluctuations.
EURO CURRENCY. 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
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 announced its intent
to acquire Andromedia, Inc. and closed its acquisition of ESI Software, Inc.
The Company also recently closed an agreement 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 the 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
<PAGE>
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 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 the possibility
of significant interruptions of normal operations should be reduced as a
result of the project.
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 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.
16
<PAGE>
The total cost of the year 2000 program approximated $0.8 million. As of the end
of the second quarter of fiscal year 2000, approximately 100% of the total
estimated year 2000 program costs have been incurred. The funding for the year
2000 program was provided as a normal operating expense (except in the case of
any new capital hardware, which is being funded from standard capital budgets).
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.
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 or
floating 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 as of September 30, 1999.
<TABLE>
<CAPTION>
(in thousands) 2000 2001 2002 2003 and Total Fair
Thereafter Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash equivalents $ 11,285 $ 11,285 $ 11,285
Average interest rate 5.13% 5.13%
Short-term investments $ 41,958 $ 34,953 $ 15,200 $ 92,111 $ 92,004
Average interest rate 5.13% 5.23% 5.80% 5.26%
Total investment securities $ 53,243 $ 34,953 $ 15,200 $ 103,396 $ 103,289
</TABLE>
The Company also has loans outstanding to related parties totaling $8.0
million as of September 30, 1999. The stated loan amounts approximate fair
value.
FOREIGN CURRENCY RISK
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
17
<PAGE>
foreign-currency-denominated financial assets, and probable anticipated, but
not firmly committed, transactions. The goal of this hedging program is to
economically manage 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. Because
the Company's functional currency is the U.S. dollar, all foreign currency
gains and losses, including unrealized gains and losses resulting from the
mark-to-market of forward contracts, are included in current period net
income in accordance with FAS 52. The Company does not use foreign currency
forward exchange contracts for trading purposes.
As of September 30, 1999, all of the Company's forward contracts were settled.
On October 1, 1999, the Company entered into additional forward contracts for
various foreign currencies. As of September 30, 1999, the gross gains and losses
from the settled contracts were not significant.
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 $0.6 million at September 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.
18
<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. 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
19
<PAGE>
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 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 2. Changes in Securities and Use of Proceeds
On September 30, 1999, the Company closed its acquisition of ESI Software,
Inc. In exchange for all of the capital stock, options and warrants of ESI,
the Company issued 635,000 shares of common stock, options and warrants to
the securityholders of ESI. The shares, options and warrants of the Company
were issued in reliance on the exemption from registration set forth in
Section 3(a)(10) of the Securities Act of 1933. No underwriters were involved
in the transaction.
20
<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 September
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: November 12, 1999 /s/ Robert K. Burgess
Robert K. Burgess
President and Chief Executive Officer
Date: November 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> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 35,132
<SECURITIES> 92,558
<RECEIVABLES> 25,449
<ALLOWANCES> 6,802
<INVENTORY> 1,139
<CURRENT-ASSETS> 162,965
<PP&E> 83,394
<DEPRECIATION> 35,573
<TOTAL-ASSETS> 221,293
<CURRENT-LIABILITIES> 46,386
<BONDS> 0
0
0
<COMMON> 44
<OTHER-SE> 174,659
<TOTAL-LIABILITY-AND-EQUITY> 221,293
<SALES> 57,710
<TOTAL-REVENUES> 57,710
<CGS> 5,490
<TOTAL-COSTS> 5,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,815
<INCOME-TAX> 2,071
<INCOME-CONTINUING> 2,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,071
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.10
</TABLE>
