<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): SEPTEMBER 30, 1999
MACROMEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 000-22688 94-3155026
(State of other jurisdiction (Commission File (I.R.S. Employer
or incorporation) Number) Identification No.)
600 TOWNSEND ST., SAN FRANCISCO, CA 94103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(415) 252-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
1
<PAGE>
ITEM 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
On October 15, 1999, Macromedia, Inc. ("Macromedia") filed a Form 8-K to report
its acquisition of ESI Software, Inc. ("ESI"). Pursuant to Item 7 of Form 8-K,
Macromedia indicated that it would file certain financial information no later
than the date required by Item 7 of Form 8-K. This Amendment No. 1 is filed to
provide the required financial information.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
ESI SOFTWARE, INC.
INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
June 30, 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Balance Sheet as of June 30, 1999 3
Unaudited Statements of Operations for the three months ended June 30, 1999 and
1998 4
Unaudited Statements of Cash Flows for the three months ended June 30, 1999 and
1998 5
Notes to Unaudited Condensed Financial Statements 6
</TABLE>
2
<PAGE>
ESI SOFTWARE, INC.
UNAUDITED CONDENSED BALANCE SHEET
As of June 30, 1999
(in thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 202
Short-term investments 60
Accounts receivable, net 336
Inventory, net 52
Prepaid expenses and other current assets 92
-----------------
Total current assets 742
Property and equipment, net 243
Other assets 13
-----------------
Total assets $ 998
-----------------
-----------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 978
Unearned revenue 90
-----------------
Total current liabilities 1,068
Stockholders' deficit
Preferred stock 123
Common stock 7
Additional paid-in-capital 27,620
Deferred compensation (832)
Accumulated deficit (26,988)
-----------------
Total stockholders' equity deficit (70)
-----------------
Total liabilities and stockholders' deficit $ 998
-----------------
-----------------
</TABLE>
See accompanying notes to unaudited condensed financial statements.
3
<PAGE>
ESI SOFTWARE, INC.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 1999 and 1998
(in thousands except per share data)
<TABLE>
<CAPTION>
1999 1998
--------------- -------------
<S> <C> <C>
Revenue $ 1,341 $ 93
Cost of revenue 139 39
--------------- -------------
Gross profit 1,202 54
Operating expenses:
Sales and marketing 767 947
Research and development 765 956
General and administrative 355 246
--------------- -------------
Total operating expenses 1,887 2,149
--------------- -------------
Loss from operations (685) (2,095)
Interest income, net 26 13
--------------- -------------
Net loss $ (659) $(2,082)
--------------- -------------
--------------- -------------
Net loss per share
Basic $ (0.15) $ (1.08)
Diluted $ (0.15) $ (1.08)
Weighted average common shares
outstanding
Basic 4,438 1,932
Diluted 4,438 1,932
</TABLE>
See accompanying notes to unaudited condensed financial statements.
4
<PAGE>
ESI SOFTWARE, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 1999 and 1998
(in thousands except per share data)
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (659) $(2,082)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 33 28
Amortization of deferred compensation 61 --
Changes in operating assets and liabilites:
Accounts receivable, net (63) (48)
Inventory 4 (32)
Prepaid expenses and other current assets (41) (29)
Accounts payable and accrued liabilities (89) 292
Unearned revenue 20 56
Other long-term liabilities -- --
------------ ----------
Net cash used in operating activities (734) (1,815)
------------ ----------
Cash flows from investing activities:
Capital expenditures (10) (108)
Other long-term assets 10 --
------------ ----------
Net cash used in investing activities -- (108)
------------ ----------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock 522 3,009
Net proceeds from issuance of promissory notes
subsequently converted to preferred stock -- (81)
------------ ----------
Net cash provided by financing activities 522 2,928
------------ ----------
(Decrease)/increase in cash and cash equivalents (212) 1,005
Cash and cash equivalents, beginning of period 414 2,062
------------ ----------
Cash and cash equivalents, end of period $ 202 $ 3,067
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to unaudited condensed financial statements.
5
<PAGE>
ESI SOFTWARE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
1. BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with generally accepted
accounting principles and reflect all adjustments, consisting only of
normal recurring adjustments which in the opinion of management are
necessary to fairly state the Company's financial position, results of
operations, and cash flows for the periods presented. The results of
operations for the three months ended June 30, 1999 are not necessarily
indicative of the results to be expected for any subsequent quarter or
for the entire fiscal year ended March 31, 2000.
2. NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding. The effect of outstanding
stock options, warrants, and common stock subject to repurchase is
excluded from the computation as their inclusion would be
anti-dilutive.
6
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
INDEX TO AUDITED FINANCIAL STATEMENTS
March 31, 1999
<TABLE>
<CAPTION>
Page
------
<S> <C>
Independent Auditors' Report 8
Balance Sheet 9
Statement of Operations 10
Statement of Stockholders' Equity 11
Statement of Cash Flows 12
Notes to Financial Statements 13
</TABLE>
7
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ESI Software, Inc.:
We have audited the accompanying balance sheet of ESI Software, Inc. dba
Elemental Software as of March 31, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ESI Software, Inc. dba
Elemental Software as of March 31, 1999, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 6 to the
financial statements, the Company has suffered recurring losses from operations
and negative cash flows and has a lack of available financing that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 6. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
July 30, 1999
San Diego, California
8
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
BALANCE SHEET
As of March 31, 1999
(In thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 414
Cash equivalents - restricted 60
Accounts receivable, net 273
Inventory 56
Prepaid expenses and other current assets 51
----------------
Total current assets 854
----------------
Property and equipment, net 266
Other assets 23
----------------
Total assets $ 1,143
----------------
----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,067
Unearned revenue 70
----------------
Total current liabilities 1,137
----------------
Commitments
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 122,860
Series D Convertible preferred stock:
Authorized shares - 33,850
Issued and outstanding shares - 29,448;
liquidation preference of $6,960 29
Series C Convertible preferred stock:
Authorized shares - 73,173
Issued and outstanding shares - 73,173;
liquidation preference of $8,647 73
Series B Convertible preferred stock:
Authorized shares - 2,745
Issued and outstanding shares - 2,745;
liquidation preference of $2,000 3
Series A Convertible preferred stock:
Authorized shares - 13,092
Issued and outstanding shares - 13,092;
liquidation preference of $800 13
Common stock, $.001 par value:
Authorized shares - 220,000
Issued and outstanding shares - 6,525;
unrestricted - 4,284; restricted - 2,241 7
Additional paid-in capital 27,103
Unearned compensation (893)
Accumulated deficit (26,329)
----------------
Total stockholders' equity 6
----------------
Total liabilities and stockholders' equity $ 1,143
----------------
----------------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
STATEMENT OF OPERATIONS
For the year ended March 31, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
<S> <C>
Revenue $ 1,388
Cost of revenue 325
----------
Gross profit 1,063
----------
Operating expenses:
Sales and marketing 3,438
Research and development 3,570
General and administrative 1,199
----------
Total operating expenses 8,207
----------
Loss from operations (7,144)
Other expense, principally interest expense, net 474
----------
Net loss $(7,618)
----------
----------
Net loss per share:
Basic $ (2.23)
Diluted $ (2.23)
Weighted average common shares outstanding:
Basic 3,416
Diluted 3,416
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
STATEMENT OF STOCKHOLDERS' EQUITY
Year ended March 31, 1999
(In thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK
SERIES D SERIES C SERIES B SERIES A
------------------ ------------------ ---------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
March 31, 1998 -- $ -- 45,363 $45 2,745 $3 13,092 $13
Issuance of Series C
preferred stock for cash,
net of issuance costs of $58 -- -- 22,420 23 -- -- -- --
Issuance of Series C
preferred stock for
conversion of
promissory notes,
net of issuance
costs of $14 -- -- 5,390 5 -- -- -- --
Issuance of Series D
preferred stock for cash,
net of issuance costs of $38 14,991 15 -- -- -- -- -- --
Issuance of Series D
preferred stock for
conversion of
promissory notes,
net of issuance
costs of $36 14,457 14 -- -- -- -- -- --
Issuance of warrants to
purchase common stock in
connection with issuance of
promissory notes -- -- -- -- -- -- -- --
Issuance of stock options -- -- -- -- -- -- -- --
Amortization of unearned compensation -- -- -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at
March 31, 1999 29,448 $29 73,173 $73 2,745 $3 13,092 $13
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN UNEARNED ACCUMULATED TOTAL
-------------
CAPITAL COMPENSATION DEFICIT EQUITY
SHARES AMOUNT ----------- ------------ ---------- -----------
-----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
March 31, 1998 6,427 $ 7 19,245 -- (18,711) 602
Issuance of Series C
preferred stock for cash,
net of issuance costs of $58 -- -- 2,419 -- -- 2,442
Issuance of Series C
preferred stock for
conversion of
promissory notes,
net of issuance
costs of $14 -- -- 562 -- -- 567
Issuance of Series D
preferred stock for cash,
net of issuance costs of $38 -- -- 1,719 -- -- 1,734
Issuance of Series D
preferred stock for
conversion of
promissory notes,
net of issuance
costs of $36 -- -- 1,658 -- -- 1,672
Issuance of warrants to
purchase common stock in
connection w/ issuance of
promissory notes -- -- 522 -- -- 522
Issuance of stock options -- -- 977 (977) -- --
Amortization of unearned
compensation -- -- -- 84 -- 84
Exercise of stock options 98 -- 1 -- -- 1
Net loss -- -- -- -- (7,618) (7,618)
-------- -------- -------- -------- -------- --------
Balance at
March 31, 1999 6,525 $7 27,103 (893) (26,329) 6
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
STATEMENT OF CASH FLOWS
For the year ended March 31, 1999
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss $(7,618)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 132
Warrants issued in connection with promissory notes 522
Compensatory charge for issuance of stock options 84
Changes in operating assets and liabilities:
Accounts receivable, net (270)
Inventory (57)
Other assets (4)
Accounts payable and accrued liabilities 411
Unearned revenue 51
------------
Net cash used in operating activities (6,749)
------------
Cash flows from investing activities:
Capital expenditures (169)
Cash equivalents - restricted (60)
------------
Net cash used in investing activities (229)
------------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock and issuance of
promissory notes subsequently converted to preferred stock 6,334
Proceeds from exercise of stock options 1
------------
Net cash provided by financing activities 6,335
------------
Net decrease in cash and cash equivalents (643)
Cash and cash equivalents, beginning of year 1,057
------------
Cash and cash equivalents, end of year $ 414
------------
------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 2
------------
------------
Cash paid during the year for income taxes $ 1
------------
------------
Supplemental disclosure of noncash financing activities - conversion
of promissory notes outstanding at March 31, 1998 to Series C
preferred stock in fiscal 1999 $ 81
------------
------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. ESI Software, Inc. dba Elemental Software (the Company),
based in Carlsbad, California, develops and markets packaged software
that enables users to build advanced, interactive web sites. The
Company's products compete in the market for internet application
development tools.
CASH AND CASH EQUIVALENTS. The Company considers all investments with an
original maturity of less than three months to be cash and cash
equivalents. The Company evaluates the financial strength of institutions
at which significant investments are made and believes the related credit
risk is limited to an acceptable level.
CASH EQUIVALENTS - RESTRICTED. Cash equivalents - restricted consists of
funds which are restricted for use as a prerequisite for the Company to
process credit card transactions over the internet.
CONCENTRATION OF CREDIT RISK. Credit is extended based on an evaluation
of a customer's financial condition and generally collateral is not
required. To date, credit losses have been minimal and such losses have
been within management's expectations.
Sales to the Company's primary distributor represented 20% of total
revenues in fiscal 1999. Trade receivables from the Company's primary
distributor represented 77% of total trade receivables at March 31, 1999.
As a result, the Company has significant dependence on this distributor.
A change in distributors could cause a possible loss of sales and decline
in gross margins, which would adversely affect operating results.
INVENTORY. Inventory, which consists primarily of technical manuals and
diskettes, is stated at the lower cost (determined on a first-in,
first-out basis) or market.
COMPUTER SOFTWARE COSTS. In accordance with Statement of Financial
Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, costs incurred in the
research and development of new software products and significant
enhancements to existing software products are charged against operations
as incurred until the technological feasibility of the products has been
established. To date, the Company's software development has been
completed concurrent with the establishment of technological feasibility
and, accordingly, no costs have been capitalized.
13
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
LONG-LIVED ASSETS. The Company accounts for long-lived assets in
accordance with the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and
are depreciated over the shorter of the estimated useful life
(generally 2 to 3 years) of the related asset or the term of the lease
and consist of the following at March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Computer equipment $ 954
Software 123
Furniture and fixtures 286
Leasehold improvements 103
----------
1,466
Less accumulated depreciation (1,200)
----------
$ 266
----------
----------
</TABLE>
REVENUE RECOGNITION. Revenue is derived from licensing software and
software maintenance services and is accounted for under the provisions
of Statement of Position (SOP) 97-2, SOFTWARE REVENUE RECOGNITION.
Revenue from software licenses sold to end users is recognized on
product shipments or download if the software is ordered over the
internet. Revenue from software licenses sold to distributors is
recognized upon product shipments from the distributors to the end
users. Product shipments to the distributors are recorded as deferred
revenue. Maintenance service contract revenue and subscription revenue
are deferred and recognized ratably over the contract period.
14
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
STOCK-BASED COMPENSATION. The Company applies the intrinsic value-based
method of accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations, in accounting for its fixed plan stock options. As
such, compensation expense would be recorded for options granted to
employees on the date of grant only if the current market price of the
underlying stock exceeded the exercise price.
INCOME TAXES. Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS PER SHARE. The Company computes basic and diluted earnings per
share in accordance with SFAS No. 128, Earnings per Share (EPS). Basic
EPS excludes the dilutive effects of options, warrants and other
convertible securities. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of the Company. For the
year ended March 31, 1999, options, warrants and convertible preferred
stock representing 197,598,351 shares were excluded from the
computation of diluted net loss per share as their effect was
antidilutive. The Company additionally issued 4,401,776 shares of
Series D Convertible preferred stock subsequent to March 31, 1999 (note
8).
USE OF ESTIMATES. Management of the company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
2. LEASE COMMITMENTS
The Company leases its administrative offices and certain equipment
under noncancelable lease agreements. Annual minimum lease payments for
all leases with initial or remaining terms of one year or more are as
follows at March 31, 1999:
15
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
<TABLE>
<CAPTION>
Year ending March 31, (in thousands)
<S> <C>
2000 $ 75
2001 34
2002 15
----------
Total minimum lease payments $ 124
----------
----------
</TABLE>
Total rent expense was $307,572 for the year ended March 31, 1999.
3. STOCK OPTION PLAN
In October 1996, the Company's 1990 Stock Option Plan was replaced with
the 1996 Equity Incentive Plan. In connection with the adoption of the
1996 Equity Incentive Plan, all outstanding options under the 1990
Stock Option Plan were canceled and 375,134 options, with exercise
prices at $0.0038 per share, were issued to various employees who held
options under the 1990 Stock Option Plan.
Under the 1996 Equity Incentive Plan (the 1996 Plan), as amended, the
Company is authorized to issue up to 43,997,143 common shares to
officers, employees, directors, and certain other individuals providing
services to the Company. Options granted under the 1996 Plan generally
vest over four years and are exercisable for a period of up to ten
years from the date of grant. Incentive stock options are granted at
prices that approximate the fair value of the common shares at the date
of grant as determined by the Board of Directors. The following table
summarizes stock option activity:
For the year ended March 31, 1999, compensation expense was recorded in
the amount of $84,194 for options granted to employees for which the
current market price of the underlying stock on the date of grant
exceeded the exercise price, based on the options' vesting period of
4 years.
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Balance at March 31, 1998 26,503,969 $ 0.0162
Granted 19,537,555 0.0120
Exercised (97,798) 0.0180
Canceled (3,319,525) 0.0211
---------------- ----------------
Balance at March 31, 1999 42,624,201 $ 0.0139
---------------- ----------------
Balance exercisable at March 31, 1999 18,333,031 $ 0.0134
---------------- ----------------
---------------- ----------------
</TABLE>
The weighted-average remaining contractual life of the outstanding
options at March 31, 1999 approximated 9.19 years. Exercise prices of
options outstanding at March 31, 1999 ranged from $.0038 to $.09 per
share.
16
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
In applying SFAS No. 123, pro forma information regarding net loss has
been determined as if the Company has accounted for its employee stock
options under the fair value method of that Statement. The fair value
of the options was estimated at the date of grant, using the
Black-Scholes option pricing model with the following weighted-average
assumptions for options granted in fiscal 1999: risk-free interest rate
of 4.95%; dividend yield of zero; expected volatility of zero; and
expected life of options of 5.5 years. The estimated fair value of the
options is amortized to expense over the options' vesting period of
4 years. The weighted-average fair value of the options granted in
fiscal 1999 was $0.10.
Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the
Company's net loss for the year ended March 31, 1999 would have been
increased to the pro forma amounts indicated below (in thousands
except per share data):
<TABLE>
<CAPTION>
<S> <C> <C>
Net loss As reported $(7,618)
Pro Forma $(7,621)
Net loss per share As reported $ (2.23)
Pro Forma $ (2.23)
</TABLE>
4. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK. In January and February 1999, the Company
issued an aggregate of 29,448,036 shares of Series D Convertible
preferred stock at $0.118169 per share for cash and conversion of
promissory notes. Net proceeds of $3.4 million were received from the
issuance of Series D Convertible preferred stock. In connection with
the issuance of Series D Convertible preferred stock, the Company
amended its Articles of Incorporation to increase the authorized shares
of common stock and preferred stock to 220,000,000 and 122,859,991,
respectively.
In April 1999, the Company issued 4,401,776 shares of Series D
Convertible preferred stock at $0.118169 per share for cash. Net
proceeds of $520,154 were received from the issuance of the shares of
Series D Convertible preferred stock.
In December 1997 and June 1998, the Company issued an aggregate of
73,173,239 shares of Series C preferred stock at $0.118169 per share
for cash and conversion of promissory notes. Net proceeds of $8.5
million were received from the issuance of Series C preferred stock.
Series A and Series B Convertible preferred stock were amended under
the Second Amended and Restated Articles of Incorporation to be
nonredeemable.
In August 1996, in connection with a rights offering to raise $500,000
in the form of convertible secured promissory notes, every outstanding
share of Series A and Series B preferred stock of the Company was
converted into one share of common stock. In conjunction with the
preferred stock conversion, the Company filed an Amended and Restated
Article of Incorporation which effected a 1-for-10 reverse split of the
common stock and created two new classes of preferred stock. In
December 1996, investors converted $500,000 of convertible secured
promissory notes into 13,092,109 Convertible shares of the newly
created Series A preferred stock.
17
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
In December 1996, the Company issued 2,744,818 shares of new Series B
Convertible preferred stock for net proceeds of $2,419,905 through the
conversion of demand convertible promissory notes issued in September
and October 1996.
The holders of the Series A, B, C and D Convertible preferred stock are
entitled to receive dividends at the rate of $0.003032 per share,
$0.073043 per share, $0.0094535 per share, and $0.0094535 per share,
per annum, respectively. Preferred stock dividends are payable if and
when the dividends are declared by the Board of Directors. The right to
such dividends is not cumulative.
Each share of Series A, B, C and D Convertible preferred stock is
convertible into 1.62, 3.38, 1 and 1 share of common stock,
respectively, at the option of the holder, subject to certain
antidilutive adjustments. Each share is automatically converted into
common stock, at the then applicable conversion rate, upon the earlier
of the effective date of a firm commitment, underwritten public
offering of the Company's common stock in which the net proceeds are at
least $10.0 million with the per share price not less than $0.50 per
share (IPO), or the date specified by election of the holders of a
majority of the then outstanding shares of Series A, B, C and D
Convertible preferred stock taken together as a single class. Each
holder of Series A, B, C and D Convertible preferred stock is entitled
to one vote for each share of common stock into which such Convertible
preferred share would convert.
The holders of Series D Convertible preferred stock are entitled to
receive liquidation preferences at the rate of $0.236338 per share,
prior and in preference to any distribution of assets to the holders of
the Series A, B and C Convertible preferred stock.
The holders of Series C Convertible preferred stock are entitled to
receive liquidation preferences at the rate of $0.118169 per share,
prior and in preference to any distribution of assets to the holders of
Series A and B Convertible preferred stock. The Series A and B
Convertible preferred stock have a liquidation preference of $0.0611055
and $0.728646, respectively, with the holders of Series B Convertible
preferred stockholders having preference over Series A Convertible
preferred stockholders in the event of liquidation of the Company's
assets.
In connection with the Series B Convertible preferred stock financing,
the Company issued 5,825,297 shares of restricted common stock at
$0.0038 per share to common stockholders for cash. Under the restricted
stock purchase agreement, in the event a holder of restricted stock
ceases to be employed by or provide services to the Company, the
Company has the right to purchase the restricted stock from the holder
within 90 days after the holder ceases to be an employee or provide
services to the Company at $0.0038 per share. The restricted
18
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
stock vests at 6.25% each quarter beginning November 20, 1996. At
March 31, 1999, 2,240,531 shares were subject to restriction.
WARRANTS. In fiscal 1999, in connection with the issuance of promissory
notes converted to Series D Convertible preferred stock, warrants to
purchase 7,228,534 shares of the Company common stock at $0.118169 per
share were issued. These warrants are exercisable upon issuance and
expire at the earlier of an IPO or on December 1, 2003. The fair value
of the warrants of $521,932 was recorded as interest expense in 1999.
The fair value of the warrants was estimated using Black-Scholes
options pricing model with the following weighted-average
assumptions: risk-free interest rate of 4.4%; dividend yield of
zero; expected volatility of 60%, and expected life of 4.5 years.
In fiscal 1998, in connection with the issuance of promissory notes
converted into Series C Convertible preferred stock, warrants to
purchase 9,084,963 shares of the Company's common stock at $0.09 per
share were issued. These warrants are exercisable upon issuance and
expire at the earlier of an IPO or November 13, 2002.
In connection with the Series B Convertible preferred stock financing,
the Company issued warrants to purchase 2,672,974 shares of common
stock at $0.0378708 per share. The warrants are immediately exercisable
and expire on October 7, 1991.
In connection with certain equipment leasing agreements entered into
during 1990 and 1991, warrants for approximately 500,000 shares of
common stock were issued of which 425,216 are still outstanding. Each
warrant entitles the holder to purchase one share of the Company's
common stock at prices ranging from $0.379 to $0.50 per share. The
number of warrants and purchase price are subject to adjustment in
accordance with certain antidilution provisions. The warrants are
exercisable for a period of ten years from the date of grant or five
years from the effective date of the Company's initial public offering,
but in no case longer than ten years.
19
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
SHARES RESERVED FOR FUTURE ISSUANCE. The following shares of common
stock, excluding approximately 500,000 warrants for shares of common
stock issued in connection with certain equipment leasing agreements
during 1990 and 1991, were reserved for issuance at March 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Preferred stock 137,570,375
Options 43,997,143
Warrants 19,411,771
---------------
200,979,289
---------------
---------------
</TABLE>
5. INCOME TAXES
Significant components of the Company's deferred tax assets as of March
31, 1999 are shown below. A valuation allowance of $10,090,000, has
been recognized as an offset to the deferred tax assets as it is not
more likely than not that these assets will be realized.
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets (in thousands):
Net operating loss and credit carryforwards $ 10,373
Accrued vacation 56
Deferred revenue 27
Other - net 4
---------------
Total deferred tax assets 10,460
Valuation allowance for deferred tax assets (10,460)
---------------
Net deferred tax assets $ --
---------------
---------------
</TABLE>
As of March 31, 1999, the Company had net operating loss carryforwards
for federal and California income tax purposes of approximately
$25,000,000 and $10,900,000, respectively. The difference between the
federal and California tax net operating loss carryforwards is
primarily attributable to capitalization of research and development
costs for California purposes and the fifty percent limitation on
California loss carryforwards. The federal tax loss carryforwards will
begin expiring in 2006, unless previously utilized.
20
<PAGE>
ESI SOFTWARE, INC.
dba ELEMENTAL SOFTWARE
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
6. LIQUIDITY
Due to the Company's recurring losses, negative cash flows and lack of
available financing, significant doubt exists about whether the Company
will be able to meet its current obligations and finance ongoing
operations. Management has entered into an agreement with Macromedia,
Inc. (Macromedia) to be acquired in the third quarter of calendar 1999
(Note 8).
7. EMPLOYEE BENEFIT PLAN
The Company's 401(k) plan is for the benefit of substantially all
employees. Contributions to the plan by the Company are at the
discretion of the Board of Directors and are subject to certain
limitations described in the plan. There were no contributions made by
the Company to the plan during the year ended March 31, 1999.
8. SUBSEQUENT EVENTS
ACQUISITION. On July 8, 1999, the Company entered into an Agreement and
Plan of Reorganization with Macromedia whereby the Company will merge
into Dynamo Acquisition Corp., a wholly owned subsidiary of Macromedia,
in a stock-for-stock transaction. The actual share exchange rate is to
be determined at the closing and is predicated upon the actual number
of employees of the company who become employees of Macromedia. The
closing of the transaction is subject to the approval of the
stockholders of the Company as well as the State of California. The
Company estimates that it has incurred legal costs of approximately
$180,000 and accounting costs of approximately $65,000 with respect to
the acquisition. The Company has agreed to pay a finders fee of
$450,000 and bonuses of $425,000 to a director at the completion of the
acquisition and to employees for retention bonuses, respectively. All
severance, relocation and exit costs associated with the Company's
employees shall be the responsibility of Macromedia.
PREFERRED STOCK. In April 1999, the Company issued 4,401,776 shares of
Series D Convertible preferred stock at $0.118169 per share for cash.
Net proceeds of $520,154 were received from the issuance of the shares
of Series D Convertible preferred stock.
21
<PAGE>
(b) PRO FORMA FINANCIAL INFORMATION
Pro Forma Combined Condensed Financial Information (Unaudited)
The following unaudited Pro Forma Combined Condensed Financial
Statements assume a business combination between Macromedia and ESI accounted
for on a pooling of interests basis. The Pro Forma Combined Condensed Financial
Statements are based on the historical financial statements and the notes
thereto of Macromedia included in the annual report on Form 10-K for the years
ended March 31, 1999, 1998, and 1997 the quarterly report on form 10-Q for the
quarter ended June 30, 1999, and the historical financial statements and the
notes thereto of Elemental included herein.
Macromedia and ESI will incur direct transaction costs of approximately
$2.8 million associated with the Merger, approximately $2.3 million of which
will be charged to operations during the quarter ended September 30, 1999, with
the remainder charged in the following quarter. There can be no assurance that
Macromedia will not incur additional charges in subsequent quarters to reflect
costs associated with the Merger or that management will be successful in its
efforts to integrate the operations of the two companies.
These Pro Forma Combined Condensed Financial Statements should be read
in conjunction with the historical condensed financial statements and the
related notes thereto of Macromedia and the financial statements and the notes
thereto of Elemental included or incorporated by reference.
22
<PAGE>
MACROMEDIA, INC.
INDEX TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Balance Sheet as of June 30, 1999 24
Statement of Operations for the three months ended June 30, 1999 25
Statement of Operations for the year ended March 31, 1999 26
Statement of Operations for the year ended March 31, 1998 27
Statement of Operations for the year ended March 31, 1998 28
Notes to Financial Statements 29
</TABLE>
23
<PAGE>
MACROMEDIA, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of June 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
----------------------
Macromedia ESI Adjustments Combined
------------ --------- ------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,775 $ 262 -- $ 32,037
Short-term investments 80,806 -- -- 80,806
Accounts receivable, net 12,598 336 -- 12,934
Inventory, net 715 52 -- 767
Prepaid expenses and other
current assets 11,978 92 -- 12,070
Deferred tax assets, short-term 6,899 -- -- 6,899
------------ --------- ------------- ----------
Total current assets 144,771 742 -- 145,513
Land and building, net 19,499 -- -- 19,499
Other fixed assets, net 25,942 243 -- 26,185
Other long-term assets 9,418 13 -- 9,431
------------ --------- ------------- ----------
Total assets $ 199,630 $ 998 $ -- $ 200,628
------------ --------- ------------- ----------
------------ --------- ------------- ----------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable $ 3,974 $ 429 -- $ 4,403
Accrued liabilities 28,214 549 2,777 31,540
Unearned revenue 5,541 90 -- 5,631
------------ --------- ------------- ----------
Total current liabilities 37,729 1,068 2,777 41,574
Deferred tax liabilities, long-term 37 -- -- 37
Other long-term liabilities 222 -- -- 222
------------ --------- ------------- ----------
Total liabilities 37,988 1,068 2,777 41,833
Stockholders' equity:
Preferred stock -- 123 (123) --
Common stock 43 7 (7) 43
Treasury stock, at cost (33,649) -- -- (33,649)
Additional paid-in-capital 176,385 27,620 130 204,135
Unearned compensation -- (832) -- (832)
Accumulated other comprehensive
income 325 -- -- 325
Retained earnings 18,538 (26,988) (2,777) (11,227)
------------ --------- ------------- ----------
Total stockholders' equity 161,642 (70) (2,777) 158,795
------------ --------- ------------- ----------
Total liabilities and
stockholders' equity $ 199,630 $ 998 $ -- $ 200,628
------------ --------- ------------- ----------
------------ --------- ------------- ----------
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
24
<PAGE>
MACROMEDIA, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
----------------------
Macromedia ESI Adjustments Combined
------------- ----------
<S> <C> <C> <C> <C>
Revenue $48,935 $ 1,341 -- $50,276
Cost of revenues 4,992 139 -- 5,131
--------- --------- ------------- ---------
Gross profit 43,943 1,202 -- 45,145
Operating expenses:
Sales and marketing 19,860 767 -- 20,627
Research and development 11,254 765 -- 12,019
General and administrative 4,379 355 -- 4,734
--------- --------- ------------- ---------
Total operating expenses 35,493 1,887 -- 37,380
--------- --------- ------------- ---------
Operating income (loss) 8,450 (685) -- 7,765
Interest and investment income, net 1,242 26 -- 1,268
--------- --------- ------------- ---------
Income (loss) before taxes 9,692 (659) -- 9,033
Provision for income taxes 2,520 -- -- 2,520
--------- --------- ------------- ---------
Net income (loss) $ 7,172 $ (659) -- $ 6,513
--------- --------- ------------- ---------
--------- --------- ------------- ---------
Net income (loss) per share
Basic $ 0.18 $ (0.15) -- $ 0.16
Diluted $ 0.15 $ (0.15) -- $ 0.14
Weighted average common share
outstanding
Basic 40,696 4,438 -- 40,711
Diluted 47,380 4,438 -- 47,395
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
25
<PAGE>
MACROMEDIA, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the year ended March 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical
----------------------
Pro Forma Pro Forma
Macromedia ESI Adjustments Combined
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue $ 149,886 $ 1,388 - $ 151,274
Cost of revenues 14,286 325 - 14,611
---------- --------- ----------- ----------
Gross profit 135,600 1,063 - 136,663
Operating expenses:
Sales and marketing 64,515 3,438 - 67,953
Research and development 35,644 3,570 - 39,214
General and administrative 13,068 1,199 - 14,267
---------- --------- ----------- ----------
Merger, relocation, and reorganization
Total operating expenses 113,227 8,207 - 121,434
---------- --------- ----------- ----------
Operating income (loss) 22,373 (7,144) - 15,229
Other income (expenses):
Interest and investment income
(expense), net 4,961 (474) - 4,487
Foreign exchange loss (306) -- - (306)
Other 366 -- - 366
---------- --------- ----------- ----------
Total other income 5,021 (474) - 4,547
---------- --------- ----------- ----------
Income (loss) before taxes 27,394 (7,618) - 19,776
Provision for income taxes 7,610 -- - 7,610
---------- --------- ----------- ----------
Net income (loss) $ 19,784 $ (7,618) - $ 12,166
---------- --------- ----------- ----------
---------- --------- ----------- ----------
Net income (loss) per share
Basic $ 0.51 $ (2.23) - $ 0.31
Diluted $ 0.44 $ (2.23) - $ 0.27
Weighted average common share
oustanding
Basic 39,139 3,416 - 39,150
Diluted 45,360 3,416 - 45,371
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
26
<PAGE>
MACROMEDIA, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the year ended March 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical
---------------------
Pro Forma Pro Forma
Macromedia ESI Adjustments Combined
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 113,086 $ 268 - $ 113,354
Cost of revenues 14,997 67 - 15,064
----------- ----------- ----------
Gross profit 98,089 201 - 98,290
Operating Expenses:
Sales and marketing 56,842 2,003 - 58,845
Research and development 32,231 3,176 - 35,407
General and administrative 11,452 884 - 12,336
Merger, relocation, and reorganization 7,658 0 - 7,658
----------- ----------- ----------
Total operating expenses 108,183 6,063 - 114,246
----------- ----------- ----------
Operating income (loss) (10,094) (5,862) - (15,956)
Other income (expenses):
Interest and investment income (expense), net 4,687 (180) - 4,507
Foreign exchange gain 243 -- - 243
Other (194) -- - (194)
----------- ----------- ----------
Total other income 4,736 (180) - 4,556
----------- ----------- ----------
Loss before taxes (5,358) (6,042) - (11,400)
Provision for income taxes 828 -- - 828
----------- ----------- ----------
Net loss $ (6,186) $ (6,042) - $ (12,228)
----------- ----------- ----------
----------- ----------- ----------
Net loss per share
Basic $ (0.16) $ (2.63) - $ (0.32)
Diluted $ (0.16) $ (2.63) - $ (0.32)
Weighted average common share outstanding
Basic 38,114 2,301 - 38,122
Diluted 38,114 2,301 - 38,122
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
27
<PAGE>
MACROMEDIA, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the year ended March 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical
----------------------
Pro Forma Pro Forma
Macromedia ESI Adjustments Combined
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue $ 107,365 $ 1,589 -- $ 108,954
Cost of revenues 23,246 839 -- 24,085
---------- --------- ----------- ---------
Gross profit 84,119 750 -- 84,869
Operating Expenses:
Sales and marketing 59,627 1,187 -- 60,814
Research and development 30,013 2,146 -- 32,159
General and administrative 8,135 979 -- 9,114
Merger, relocation, and reorganization 350 -- -- 350
---------- --------- ----------- ---------
Total operating expenses 98,125 4,312 -- 102,437
---------- --------- ----------- ---------
Operating loss (14,006) (3,562) -- (17,568)
Other income (expenses):
Interest and investment income (expense), net 5,353 (23) -- 5,330
Foreign exchange loss (639) -- -- (639)
Other (105) 714 -- 609
---------- --------- ----------- ---------
Total other income 4,609 691 -- 5,300
---------- --------- ----------- ---------
Income (loss) before taxes (9,397) (2,871) -- 12,268
Benefit for income taxes 3,477 -- -- 3,477
---------- --------- ----------- ---------
Net loss $ (5,920) $ (2,871) -- $ (8,791)
---------- --------- ----------- ---------
---------- --------- ----------- ---------
Net loss per share
Basic $ (0.16) $ (3.18) -- $ (0.23)
Diluted $ (0.16) $ (3.18) -- $ (0.23)
Weighted average common share outstanding
Basic 37,488 903 -- 37,491
Diluted 37,488 903 -- 37,491
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
28
<PAGE>
MACROMEDIA, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. PERIODS COMBINED
Macromedia, Inc.'s ("Macromedia") fiscal year ends on March 31. ESI's
fiscal year ends on June 30. The accompanying unaudited pro forma
combined statement of operations information gives effect to the merger
of Macromedia and ESI as if such merger occurred as of the beginning of
the earliest year presented. The pro forma combined statement of
operations for the year ended March 31, 1999 reflects the results of
operations of Macromedia for the fiscal year ended March 31, 1999
combined with the results of operations of ESI for the twelve months
ended March 31, 1999. The pro forma combined statements of operations
for the year ended March 31, 1998 and 1997 reflects the results of
operations of Macromedia for the fiscal years ended March 31, 1998 and
1997 with the results of operations of ESI for the twelve months ended
June 30, 1998 and 1997. The pro forma combined statement of operations
for the three-months ended June 30, 1999 reflect the results of
operations of Macromedia combined with the results of ESI for the
three-months ended June 30, 1999. The financial information of
Macromedia has been derived from Macromedia's audited consolidated
financial statements for the years ended March 31, 1999, 1998 and 1997,
and Macromedia's unaudited consolidated financial statements for the
three-month period ended June 30, 1999 which are included elsewhere
herein and should be read in conjunction with such consolidated
financial statements and the notes thereto. The financial information
for ESI has been derived from ESI's audited financial statements for
the year ended March 31, 1999 and unaudited financial statements for
the three-month period ended June 30, 1999, which are included herein
and should be read in conjunction with such financial statements and
notes thereto, and ESI's unaudited financial statements for the twelve
months ended June 30, 1998 and 1997 which are included herein.
The pro forma combined balance sheet as of June 30, 1999, combines the
assets, liabilities and stockholders' equity of Macromedia with those
of ESI as if ESI had been acquired on June 30, 1999. The pro forma
information is not necessarily indicative of the operating results or
financial position that would have occurred had the Merger been
consummated at the beginning of the period presented, nor is it
necessarily indicative of future operating results or financial
position.
The operating results of ESI for the three months ending June 30, 1998
(revenue and net loss of $.1 million and $2.1 million, respectively)
are included in the unaudited pro forma statements of operations for
both fiscal years 1999 and 1998.
2. BASIS OF PRESENTATION
PRO FORMA BASIS OF PRESENTATION. The unaudited pro forma combined
condensed financial statements reflect the issuance of .00335193 of a
share of Macromedia common stock in exchange for each share of ESI
common stock. In addition, Macromedia will issue options to
29
<PAGE>
purchase .00335193 of a share of Macromedia common stock in exchange
for each outstanding ESI option. The actual number of shares of
Macromedia common stock and stock options to be issued in the Merger
was determined at the effective time based on the exchange ratio and
the number of shares of ESI common stock and ESI options then
outstanding.
As of September 30, 1999, after conversion of the preferred shares to
common shares, ESI had outstanding common stock of 147.9 million
shares, and outstanding warrants and options to purchase 18.9 and 22.4
million shares, respectively, of ESI common stock. Based on the
exchange ratio as described above, as of September 30, 1999, Macromedia
issued approximately 496,000 shares of Macromedia common stock in
exchange for all outstanding shares of ESI common stock. At this time,
Macromedia also issued warrants and options to purchase approximately
64,000 and 75,000 shares, respectively, of Macromedia common stock in
exchange for all outstanding ESI warrants and options.
MERGER TRANSACTION COSTS. Macromedia and ESI will incur direct
transaction costs of approximately $2.8 million associated with the
merger, including expenses for personnel severance and salaries during
the transition period, recruiting expenses for ESI employees, bonuses
contingent upon closing of the merger agreement, legal and other
professional fees, and relocation expenses of employees. Approximately
$2.3 million of these merger costs will be charged to operations during
the quarter ending September 30, 1999. The charge is a preliminary
estimate only and is subject to change. It is expected that following
the Merger, the Combined Company will incur additional costs associated
with integrating the two companies. These costs have not been reflected
on the pro forma statement of operations.
30
<PAGE>
3. PRO FORMA LOSS PER SHARE
The following table reconciles the number of shares used in the pro
forma earnings per share computations to the numbers set forth in
Macromedia's historical statements of operations (in thousands, except
the Exchange Ratio and per share amounts):
<TABLE>
<CAPTION>
Three months Year Ended Year Ended Year ended
ended June 30, March 31, March 31, March 31,
1999 1999 1998 1997
------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Shares used in basic per share computation:
Historical ESI
Weighted average
shares of common
stock outstanding 4,438 3,416 2,301 903
Exchange ratio 0.0033519 0.0033519 0.0033519 0.00335193
------------- ---------- ---------- -----------
15 11 8 3
Historical Macromedia 40,696 39,139 38,114 37,488
------------- ---------- ---------- -----------
Pro forma combined 40,711 39,150 38,122 37,491
------------- ---------- ---------- -----------
------------- ---------- ---------- -----------
Shares used in diluted per share computation:
Historical ESI
Weighted average
shares of common
stock outstanding 4,438 3,416 2,301 903
Exchange ratio 0.0033159 0.0033519 0.0033519 0.00335193
------------- ---------- ---------- -----------
15 11 8 3
Historical Macromedia 47,380 45,360 38,114 37,488
------------- ---------- ---------- -----------
Pro forma combined 47,395 45,371 38,122 37,491
------------- ---------- ---------- -----------
------------- ---------- ---------- -----------
</TABLE>
4. CONFORMING AND PRO FORMA ADJUSTMENTS
There were no adjustments required to conform the accounting policies
of Macromedia and ESI. Certain amounts for ESI have been reclassified
to conform with Macromedia's financial statement presentation.
There have been no other significant intercompany transactions.
31
<PAGE>
(c) EXHIBITS
The following exhibits are filed herewith:
2.01 Agreement and Plan of Reorganization by and among Macromedia,
Inc. and ESI Software, Inc. dated July 8, 1999 as amended
August 30, 1999 (previously filed with the Form 8-K filed on
October 15, 1999).
23.01 Consent of KPMG LLP, Independent Auditors
32
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, Registrant has duly caused this amendment to report to be signed on its
behalf by the undersigned thereunto duly authorized.
MACROMEDIA, INC.
DATE: October 26, 1999 By:
/s/ Elizabeth Nelson
-----------------------------------
Elizabeth Nelson
Senior Vice President and Chief
Financial Officer
33
<PAGE>
Exhibit 23.01
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
ESI Software, Inc.:
We consent to the incorporation by reference in the registration statements
(Numbers 333-08435, 333-24713, 333-39285, and 333-64141) on Form S-8 of
Macromedia, Inc. of our report dated July 30, 1999, with respect to the
balance sheet of ESI Software, Inc. dba Elemental Software as of March 31,
1999, and the related statements of operations, stockholders' equity, and
cash flows for the year then ended, which report appears in the Form 8-K/A of
Macromedia, Inc. dated October 26, 1999.
KPMG LLP
San Diego, California
October 26, 1999
34
