-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R0iRAAqpoATHjzuFmOlvRL9xPeWRCuDBvGH+Dg9iWTZkJ+pRJMR0GBIkKCS8UPT6 eGPr/bRXWYIoVPM8/+TADA== 0000912057-00-006617.txt : 20000215 0000912057-00-006617.hdr.sgml : 20000215 ACCESSION NUMBER: 0000912057-00-006617 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MACROMEDIA INC CENTRAL INDEX KEY: 0000913949 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943155026 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22688 FILM NUMBER: 542109 BUSINESS ADDRESS: STREET 1: 600 TOWNSEND ST STREET 2: STE 310 W CITY: SAN FRANCISCO STATE: CA ZIP: 94103 BUSINESS PHONE: 4152522000 MAIL ADDRESS: STREET 1: 600 TOWNSEND ST STREET 2: STE 310W CITY: SAN FRANCISCO STATE: CA ZIP: 94103 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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. (A DELAWARE CORPORATION) DELAWARE I.R.S. EMPLOYER IDENTIFICATION NO. 94-3155026 600 TOWNSEND STREET SAN FRANCISCO, CALIFORNIA 94103 (415) 252-2000 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO . --- --- As of January 31, 2000, there were outstanding 49,315,514 shares of the Registrant's Common Stock, par value $0.001 per share. 1 MACROMEDIA, INC. AND SUBSIDIARIES INDEX
Page ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets December 31, 1999 and March 31, 1999 3 Condensed Consolidated Statements of Operations Three and Nine Months Ended December 31, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended December 31, 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 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 19 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 ITEM 5. OTHER INFORMATION 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20 SIGNATURES 22
2 PART I - FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS MACROMEDIA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (unaudited)
December 31, March 31, 1999 1999 ------------ ------------- ASSETS Current assets: Cash and cash equivalents $ 42,565 $ 29,459 Short-term investments 79,420 81,698 Accounts receivable, net 29,684 13,971 Inventory, net 957 615 Prepaid expenses and other current assets 11,241 13,911 Deferred tax assets, short-term 6,512 6,899 ----------- ----------- Total current assets 170,379 146,553 Land and building, net 19,174 19,945 Other fixed assets, net 35,934 22,868 Other long-term assets 24,005 13,129 ----------- ----------- Total assets $ 249,492 $ 202,495 =========== =========== LIABLITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,803 $ 5,995 Accrued liabilities 30,663 23,272 Unearned revenue 9,992 7,490 Accrued Income tax liability 9,008 4,139 Other current liabilities 935 290 ----------- ----------- Total current liabilities 53,401 41,186 Deferred tax liabilities, long-term - 222 Other long-term liabilities 390 465 ----------- ----------- Total liabilities $ 53,791 $ 41,873 ----------- ----------- Manditorily redeemable convertible preferred stock - 13,591 ----------- ----------- Stockholders' equity: Preferred stock, par value $0.001 per share; 5,000,000 shares authorized; 0 and 580,860 shares issued and outstanding as of December 31, 1999 and March 31, 1999 respectively - - Common stock, par value $0.001 per share; 80,000,000 shares authorized; 49,328,175 and 43,590,205 shares issued and outstanding as of December 31, 1999 and March 31, 1999 respectively 48 43 Treasury stock, at cost; 1,817,500 and 1,620,000 shares as of December 31, and March 31, 1999, respectively (33,649) (25,445) Deferred compensation (2,080) (1,544) Additional paid-in capital 260,971 203,431 Accumulated other comprehensive income 505 38 Accumulated deficit (30,094) (29,492) ----------- --------- Total stockholders' equity 195,701 147,031 ----------- --------- Total liabilities and stockholders' equity $ 249,492 $ 202,495 =========== =========
See accompanying notes to condensed consolidated financial statements. 3 MACROMEDIA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) (unaudited) Three months ended Nine months ended December 31, December 31, ------------------------ ---------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenues $ 65,504 $ 38,827 $ 177,365 $ 107,463 Cost of revenues 8,025 3,976 21,024 10,621 ----------- ---------- ---------- ---------- Gross profit 57,479 34,851 156,341 96,842 Operating expenses: Sales and marketing 26,929 19,226 75,801 52,538 Research and development 15,653 10,318 43,980 30,416 General and administrative 5,558 3,849 16,649 11,917 Acquisition related expenses 6,256 - 11,516 - Non-cash compensation 305 108 955 153 Amortization of intangibles 249 - 758 - ----------- ---------- ---------- ---------- Total operating expenses 54,950 33,501 149,659 95,024 Operating income 2,529 1,350 6,682 1,818 Other income, net 1,793 1,351 4,184 3,934 ----------- ---------- ---------- ---------- Income before income taxes 4,322 2,701 10,866 5,752 Provision for income taxes 3,050 1,867 7,642 5,072 ----------- ---------- ---------- ---------- Net income 1,272 834 3,224 680 ----------- ---------- ---------- ---------- Accretion on convertible redeemable preferred stock (1,357) (52) (2,538) (52) Net income (loss) attributable to common stockholders $ (85) $ 782 $ 686 $ 628 =========== =========== =========== =========== Net income (loss) per share Basic $ - $ 0.02 $ 0.02 $ 0.02 =========== =========== =========== =========== Diluted $ - $ 0.02 $ 0.01 $ 0.01 =========== =========== =========== =========== Shares used in calculating net income (loss) per share Basic 45,346 39,985 43,367 39,785 =========== =========== =========== =========== Diluted 45,346 47,516 51,565 46,269 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. 4 MACROMEDIA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
Nine months ended December 31, ------------------------------ 1999 1998 ------------- ------------- Cash flows from operating activities: Net income $ 3,224 $ 680 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,090 6,308 Writeoff of fixed assets related to merger 191 - Deferred income taxes 165 - Tax benefit from employee stock plans 2,759 - Deferred compensation 1,258 (27) Changes in operating assets and liabilities: Accounts receivable, net (15,713) (5,279) Inventory, net (342) 209 Prepaid expenses and other current assets 2,670 (6,992) Accounts payable (3,192) (1,377) Accrued liabilities 7,391 4,740 Unearned revenue 2,502 6,598 Income tax liability 4,869 5,629 Other long-term liabilities (75) (151) ------------- -------------- Net cash provided by operating activities $ 16,797 $ 10,338 ------------- -------------- Cash flows from investing activities: Capital expenditures (23,118) (8,366) Proceeds from sale of fixed assets 625 961 Purchase of investments (93,714) (79,383) Maturities and sales of short-term investments 96,459 100,132 Purchase of investments (10,000) - Purchase of other long-term assets (1,959) (2,791) ------------- -------------- Net cash used in investing activities: $ (31,707) $ 10,553 ------------- -------------- Cash flows from financing activities: Proceeds from issuance of preferred stock 15,734 13,128 Proceeds from issuance of common stock 23,667 14,578 Proceeds from borrowings 999 1,096 Payments on borrowings (354) (786) Proceeds from issuance of convertible notes payable - 1,627 Acquisition of treasury stock (8,204) (11,407) ------------- -------------- Net cash provided by financing activities 31,842 18,236 ------------- -------------- Increase in cash and cash equivalents 16,932 39,127 Inclusion of Andromedia's net cash activity for the excluded three months ended March 31, 1999 (3,826) - Cash and cash equivalents, beginning of period 29,459 11,772 ------------- -------------- Cash and cash equivalents, end of period $ 42,565 $ 50,899 ------------- -------------- ------------- -------------- Supplemental disclosure of cash flow information: $ 55 $ 39 Cash paid for interest ------------- -------------- ------------- -------------- $ - $ - Cash paid for taxes ------------- -------------- ------------- --------------
See accompanying ntoes to condensed consolidated financial statements. 5 MACROMEDIA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND OPERATIONS OF THE COMPANY Macromedia's software business develops, markets and supports software and services for creating, managing and displaying Web content in addition to providing solutions for personalizing and analyzing Websites. The Company's new consumer business, shockwave.com, designs, develops and markets aggregated content, products and services to provide and expand online entertainment on the Web. Macromedia 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. 2. BASIS OF PREPARATION The condensed consolidated financial statements at December 31, 1999 and for the three and nine months ended December 31, 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 nine months ended December 31, 1999 are not necessarily indicative of the results for the fiscal year ending March 31, 2000 or any other future periods. 3. BUSINESS COMBINATIONS ANDROMEDIA, INC. On October 6, 1999, Macromedia, Inc., Andromedia, Inc., and Peak Acquisition Corp., a wholly-owned subsidiary of Macromedia ("Sub"), entered into an Agreement and Plan of Reorganization under which Macromedia acquired Andromedia by exchanging all of the outstanding capital stock, options, and warrants of Andromedia for approximately 5.2 million shares of common stock, options, and warrants of Macromedia. The merger closed on December 1, 1999. As a result of the acquisition of Andromedia, Sub was merged with and into Andromedia and Andromedia remains as the surviving corporation and wholly-owned subsidiary of Macromedia. The transaction was accounted for as a pooling of interests, and accordingly, the consolidated financial statements for periods prior to the combinations have been restated to include the accounts and results of operations for Andromedia. Andromedia develops e-marketing software that enables companies to implement an integrated solution to analyze the success of their Web marketing efforts and to personalize their e-commerce offering based on customers' needs in real-time. In conjunction with the merger, the Company incurred direct merger-related expenses of approximately $1.5 million, including investment banker fees, legal and other professional fees, and severance. The Company also incurred costs of $2.3 million relating to Andromedia's public offering process, which was terminated upon the merger with Macromedia. These costs included investment banker fees, legal and other professional fees, and printing costs. Included in the capital stock of Andromedia was 9.2 million shares of redeemable convertible preferred stock at a par value of $0.001 per share. These shares were redeemable at the higher of original issuance price or fair market value at or any time after February 1, 2004. Accordingly, the Company is increasing the carrying amount of the instruments through periodic accretions, using the interest method, so that the carrying amount will equal the mandatory redemption amount on February 1, 2004. The results of operations previously reported by the separate enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below. Revenues and net loss for Andromedia subsequent to September 30, 1999 are included with Macromedia's financial results. Revenue and net loss for ESI Software, Inc. subsequent to June 30, 1999 are included with Macromedia's financial results (see discussion below regarding ESI Software, Inc. acquisition) (in thousands). 6
Nine Months Ended December 31, Revenues: 1999 1998 ---------- ---------- (Unaudited) (Unaudited) Macromedia $ 172,149 $ 105,789 Andromedia 3,875 1,066 ESI Software 1,341 608 ---------- ---------- Combined $ 177,365 $ 107,463 ========== ========== Net Income (Loss) Attributable To Common Stock Holders: 1999 1998 ---------- ---------- (Unaudited) (Unaudited) Macromedia $ 11,831 $ 12,441 Andromedia (10,486) (6,038) ESI Software (659) (5,775) ---------- ---------- Combined $ 686 $ 628 ========== ==========
Prior to the combination, Andromedia's fiscal year ended on December 31. In recording the pooling of interests combination, Andromedia's financial statements for the nine months ended December 31, 1999 were combined with Macromedia's financial statements for the same period and Andromedia's financial statements for the nine months ended September 30, 1998 were combined with Macromedia's financial statements for the nine months ended December 31, 1998. The combined balance sheet as of December 31, 1999 combines the assets, liabilities and stockholders' equity of Macromedia with Andromedia on that date, whereas the combined balance sheet as of March 31, 1999 combines the assets, liabilities and stockholders' equity of Macromedia on that date with Andromedia's balance sheet as of December 31, 1998. An adjustment has been made to the consolidated condensed statements of stockholders' equity and cash flows to include Andromedia's results of operations for the three months ended March 31, 1999. Andromedia's revenue and net loss for the three months ended March 31, 1999 was $1.1 million and $3.8 million, respectively. TIME4.COM On December 22, 1999, the Company acquired certain technology rights of Time4.com, Inc. (Time4), a software development company located in Minnesota, for $1.9 million in cash. The acquisition was accounted for under the purchase method; accordingly, the results of operations of Time4 have been included in the Company's consolidated financial statements from the date of acquisition. As a result of the acquisition, the Company wrote off approximately $1.8 million of rights relating to Time4's preliminary technology as the Company determined that the technology does not have any alternative future uses. The Company has capitalized approximately $0.1 million associated with the value of non-compete agreements for Time4's principal employees. The amount will be amortized on a straight-line method over a period of 3.5 years. 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 and is a tax-free reorganization. ESI developed and marketed software that enabled users to build advanced, interactive, business-oriented Web applications. Macromedia is continuing to conduct ESI's business following the acquisition. 7 In conjunction with the merger, the Company incurred direct merger-related expenses of approximately $0.6 million and $3.1 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 three and nine months ended December 31, 1999, respectively. Prior to the combination, ESI's fiscal year ended 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 nine months ended December 31, 1999 and 1998 include Macromedia's and ESI's results of operations for those periods. The combined balance sheets as of December 31, 1999 and March 31, 1999 combines the assets, liabilities and stockholders' equity of Macromedia with ESI on those dates. During the nine months ended December 31, 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, ESI's 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. 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 acquisition related expense in the quarter ended September 30, 1999. 4. EARNINGS PER SHARE "Basic" earnings per share is calculated by dividing net income available to common stockholders by the weighted average common shares outstanding during the period. "Diluted" earnings per share reflects the net incremental shares that would be issued if dilutive outstanding stock options were exercised, the funds collected for the employee stock purchase plan were used to purchase treasury shares and if the preferred stock and warrants of ESI and Andromedia were converted into common stock. Restricted stock subject to repurchase provisions are also included in the diluted earnings per share calculation. 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):
Three months ended Nine months ended December 31, December 31, -------------------------- ---------------------------- 1999 1998 1999 1998 Shares used in basic net income per share computation 45,346 39,985 43,367 39,785 Effect of dilutive potential common shares - 7,531 8,198 6,484 ----------------------------------------------------------------- Shares used in diluted net income per share computation 45,346 47,516 51,565 46,269 =================================================================
8 The table below presents common stock equivalents that are excluded from the diluted net income (loss) per share calculation because their effects would be antidilutive (in thousands):
Three months ending Nine months ending December 31, December 31, 1999 1998 1999 1998 ------------- ------------ ------------- ------------ Preferred stock 1,838 - - - Options 8,103 31 50 71 Warrants 65 - - - Restricted stock 23 - - - ------------- ------------ ------------- ------------ 10,029 31 50 71 ============= ============ ============= ============
The preferred stock from the Andromedia acquisition is included in basic earnings per share on a weighted-average basis throughout the quarter ended December 31, 1999. The weighted average exercise price of the antidilutive options approximated $81.82 and $34.90 for the three months ending December 31, 1999 and 1998, respectively, and $64.61 and $35.55 for the nine months ended December 31, 1999 and 1998, respectively. 5. 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 (in thousands):
Three months ended Nine months ended December 31, December 31, 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Net income $1,272 $834 $3,224 $680 Unrealized gain on securities 96 61 233 75 -------------------------------------------------------------------- Comprehensive income $1,368 $895 $3,457 $755 ====================================================================
6. 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 U.S. statutory rate. The effective rate used for the three and nine months ended December 31, 1999 on normalized operations was 26%, excluding the effect of the pre-merger net losses of Andromedia, Inc. and ESI Software, Inc. which effect was a rate of increase of an additional 44%, resulting in an overall effective rate of 71%. 7. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION Macromedia has two segments which offer different product lines: Software and shockwave.com, the Company's new consumer business. The Software division develops software that creates Web site layout, graphics and rich media content for Internet users and solutions for analyzing Web traffic and personalizing Web sites. Shockwave.com designs, develops and markets aggregated content, products and services to provide 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 nine months ended December 31, 1998, the Company did not internally report shockwave.com as a separate segment. 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 (see Note 7). Revenue and expenses related to products remaining in the Learning division after the transaction were realigned and are currently evaluated as part 9 of the Software segment. Prior periods presented below have been restated to include the Learning division in Software, resulting in one segment for the three and nine months ending December 31, 1998. Information about reported segment income or loss in the three and nine months ended December 31, 1999 is as follows (in thousands):
SOFTWARE SHOCKWAVE.COM TOTAL Three months ended December 31, 1999 - ------------------------------------------------------------------------------------------------ Revenues $ 61,993 $ 3,511 $ 65,504 Cost of revenues 7,046 979 8,025 ------------------------------------------------------------ Gross margin $ 54,947 $ 2,532 $ 57,479 Direct operating expenses 41,259 6,881 48,140 Acquisition related expenses and certain non cash charges 6,810 - 6,810 ------------------------------------------------------------ Total operating margin $ 6,878 $ (4,349) $ 2,529 Nine months ended December 31, 1999 - ------------------------------------------------------------------------------------------------ Revenues $ 170,738 $ 6,627 $ 177,365 Cost of revenues 18,933 2,091 21,024 ------------------------------------------------------------ Gross margin $ 151,805 $ 4,536 $ 156,341 Direct operating expenses 120,732 15,698 136,430 Acquisition related expenses and certain non cash charges 13,229 - 13,229 ------------------------------------------------------------ Total operating margin $ 17,844 $ (11,162) $ 6,682
Information about reported segment income or loss for the three and nine months ended December 31, 1998 is as follows (in thousands):
SOFTWARE Three months ended December 31, 1998 - ------------------------------------------------------------- Revenues $ 38,827 Cost of revenues 3,976 ---------------------- Gross margin $ 34,851 Direct operating expenses 33,501 ---------------------- Contribution margin $ 1,350 Nine months ended December 31, 1998 - ------------------------------------------------------------- Revenues $ 107,463 Cost of revenues 10,621 ---------------------- Gross margin $ 96,842 Direct operating expenses 95,024 ---------------------- Contribution margin $ 1,818
10 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 nine months ended December 31, 1999 and 1998 is as follows (in thousands):
Three months ended December 31, - --------------------------------------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Total operating margin from operating segment(s) $2,529 $1,350 ------------------------------------------- Other income 1,793 1,351 ------------------------------------------- Income before taxes $4,322 $2,701 =========================================== Nine months ended December 31, - --------------------------------------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Total operating margin from operating segment(s) $6,682 $1,818 Other income 4,184 3,934 ------------------------------------------- Income before taxes $10,866 $5,752 ===========================================
8. 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. 9. INVESTMENTS During the quarter ended December 31, 1999, on behalf of shockwave.com, Macromedia made strategic preferred stock investments in two companies, Stan Lee Media, a publicly held company traded on NASDAQ, and Mondo Media Productions, Inc. a venture-backed company. Both companies will provide Web content to shockwave.com. Both investments are being accounted for under the cost method. 10. SUBSEQUENT EVENT On December 1, 1999, the Company's wholly owned subsidiary, shockwave.com, entered into an agreement to issue Series B Preferred Stock in exchange for approximately $44 million, net of issuance costs. On January 18, 2000, the transaction closed and the Company received the funding from various venture partners and issued 9.1 million preferred shares at a par value of $.001 per share. The Series B Preferred Stock will be presented in future periods as a minority interest in the subsidiary. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements such as statements of the Company's expectations, plans, objectives and beliefs. These forward-looking statements are subject to material risks and uncertainties discussed in this Form 10-Q, including those set forth under Factors that May Affect Future Results of Operations, contained in Management's Discussion and Analysis of Financial Condition and Results of Operations. As a result, the Company's actual results could differ materially from those described in the forward-looking statements. RESULTS OF OPERATIONS Macromedia operates in two segments: software and shockwave.com. Macromedia's software business develops, markets and supports software and services for creating, managing and displaying Web content in addition to providing solutions for personalizing and analyzing Web sites. The Company's new consumer business, shockwave.com, designs, develops and markets aggregated content, products and services to provide and expand online entertainment on the Web. Shockwave.com is a start-up business and requires heavy investment to support its operations. For the three months ended December 31, 1999, the software business' operating margin before acquisition related charges and certain non-cash charges approximated $13.7 million, or 22%, whereas shockwave.com's operating loss approximated $4.3 million or 124%. REVENUES. Macromedia 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 $26.7 million or 69% in the third quarter of fiscal year 2000 as compared to the same period in fiscal year 1999. Revenues generated by the software segment grew by $23.2 million to $62.0 million from $38.8 million for the third quarter in fiscal year 1999. The majority of the increase in third quarter revenue from fiscal year 1999 to fiscal year 2000 is attributable to increased sales of Dreamweaver, Flash, and Fireworks, offset by a decrease in Freehand and Director sales due to product cycle timing. Shockwave.com revenues contributed approximately $3.5 million to total revenues during the quarter ended December 31, 1999. Comparing the first nine months of fiscal year 2000 over the same period last year, revenues increased $69.9 million or 65% due to increased sales of Dreamweaver, Flash, Fireworks and Director, offset by a decrease in Freehand sales. North American revenues increased $17.3 million to $40.4 million in the third quarter of fiscal year 2000 from $23.1 million in the third quarter of fiscal year 1999. For the first nine months of the current year, North American sales increased $45.3 million or 72% over the same period last year. International revenues increased $9.4 million to $25.1 million from the third quarter fiscal year 1999 to the third quarter fiscal year 2000. The increase was a result of stronger sales in Europe and Asia Pacific (See Factors That May Affect Future Results of Operations - Risks of International Operations for additional information.) The table below summarizes revenue by geography:
Three months ended December 31, Nine months ended December 31, (in millions) 1999 1998 % change 1999 1998 % change -------- -------- --------- --------- --------- --------- North Amercia $ 40.4 $ 23.1 75% $ 108.6 $ 63.2 72% % OF TOTAL REVENUES 62% 60% 61% 59% International 25.1 15.7 60% 68.8 44.3 55% % OF TOTAL REVENUES 38% 40% 39% 41% TOTAL REVENUES $ 65.5 $ 38.8 69% $ 177.4 $ 107.5 65%
GROSS MARGIN. Gross margin as a percentage of revenue for the software business for the three months ended December 31, 1999 declined slightly from 90% in the same period in the prior year to 89% in the current year, primarily due to higher training and consulting expense. Gross margins as a percentage of revenues for shockwave.com for the three months ended December 31, 1999 approximated 71%. Gross margins for shockwave.com are primarily affected by commissions expense associated with advertising for shockwave.com. Gross profit for the total Company increased 65% over the prior year to $57.5 million in the third quarter fiscal year 2000, consistent with revenue growth. Gross margins may be adversely affected from time to 12 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 50% in the third quarter of fiscal year 1999 to 41% in the third quarter of fiscal year 2000, but increased in absolute dollars by $7.7 million to $26.9 million. The increase in absolute dollars was primarily due to expenses related to headcount growth and infrastructure costs in support of increased revenue, and direct marketing related to third quarter product launches. For the nine months ended December 31, 1999 sales and marketing expenses decreased as a percentage of revenues from 49% in fiscal year 1999 to 43% in fiscal year 2000, but increased in absolute dollars from $52.5 million to $75.8 million, in support of increased revenue. RESEARCH AND DEVELOPMENT. Research and development expenses increased $5.4 million from $10.3 million in the third quarter of fiscal year 1999 to $15.7 million in the third quarter of fiscal year 2000, but decreased as a percentage of revenues from 27% to 24%. 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 nine months ended December 31, 1999, research and development expenses increased $13.6 million to $44.0 million but decreased as a percentage of revenue from 28% to 25%. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by $1.8 million, from $3.8 million in the third quarter of fiscal 1999 to $5.6 million in the third quarter of fiscal year 2000. Expenses increased in the third 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 remained the same at 9% in the third quarter of fiscal year 2000 and 1999. For the nine months ended December 31, 1999, general and administrative costs increased $4.7 million to $16.6 million, also primarily due to headcount growth and related increased expenses. ACQUISITION RELATED EXPENSES. The Company incurred acquisition related expenses during the three and nine months ended December 31, 1999 of $4.4 million and $6.9 million, due to the pooling of interests acquisition of Andromedia, Inc. and ESI Software, Inc. (Notes to Condensed Consolidated Financial Statements, see Note 2.) The Company recorded acquisition related expenses of $6.3 million and $11.5 million for the three and nine months ended December 31, 1999. Additionally, the Company charged $4.6 million to expense for the write off of acquired technology rights and other related software products from Time4.com and Starbase Corporation (Notes to Condensed Consolidated Financial Statements, see Note 2.) NON CASH COMPENSATION. Both Andromedia, Inc. and ESI Software, Inc. granted certain stock options to officers and employees at prices deemed to be below fair value of the underlying stock at the date of grant. The cumulative differential between the fair value of the underlying stock at the date the options were granted and the exercise price of the granted options was $3.6 million. This amount is being amortized over the four year vesting period of the options, which will continue through 2003. AMORTIZATION OF INTANGIBLES. Amortization of acquired intangible assets consists primarily of intangible assets acquired as a part of Andromedia's LikeMinds acquisition in October 1998. These intangible assets are being amortized over their estimated weighted average remaining economic life of 1.25 years. OTHER INCOME. Other income increased from $1.4 million to $1.8 million in the third quarter of fiscal year 2000. For the nine months ended December 31, 1999, other income increased $0.3 million to $4.2 million. The majority of other income for both periods was investment gains and interest income. PROVISION FOR INCOME TAXES. The Company's provision for income taxes for the third quarter of fiscal year 2000 increased $1.2 million. The effective tax rate on normalized operations for the quarterly provision was 26% excluding the effect of the pre-merger net losses of Andromedia, Inc. and ESI Software, Inc. which effect was an increase of 45%, resulting in an overall effective rate of 71% for the quarter. 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. 13 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company had cash, cash equivalents and short-term investments of $122.0 million. For the nine months ended December 31, 1999, cash provided by operating activities of $16.8 million was primarily attributable to, depreciation and amortization, increased accrued liabilities, increased income tax liability and net income; partially offset by an increase in accounts receivable. Cash used in investing activities of $31.7 million was used primarily to purchase and develop equipment and software for infrastructure growth, including for shockwave.com, and for the purchase of investments. Cash provided by financing activities of $31.8 million is from the exercise of common stock options and issuance of preferred stock, offset by the acquisition of Treasury stock. Collectively, the above activity resulted in a net increase of $16.9 million from the March 31, 1999 balances of cash and cash equivalents. Working capital increased by $11.6 million from the March 31, 1999 balance of $105.4 million, to $117 million at December 31, 1999. The Company anticipates future capital expenditures of approximately $7.0 million for the remainder of fiscal year 2000. During the first nine months of fiscal year 2000, the Company made investments in property and equipment of $23.1 million. This amount includes $4.7 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 $0.7 million in the third fiscal quarter. Amortization will continue over a three-year period, and will increase as additional phases of the project are ready for use. In conjunction with the combination with Andromedia, Inc., the Company assumed a $2.0 million accounts receivable revolving line of credit with a financial institution. There are currently no borrowings outstanding under this line, and the Company intends to close the line. The Company was also assigned a $1.0 million equipment line of credit and an outstanding term loan, both with the same financial institution. As of December 31, 1999, outstanding debt approximated $1.2 million on these loans, which were fully paid by the Company subsequent to December 31, 1999. 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 December 31, 2000. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS Except for the historical information contained in this Quarterly Report, the matters discussed herein are forward-looking statements that involve risks and uncertainties, including those detailed below, and from time to time in the Company's other reports filed with the Securities and Exchange Commission. The actual results that the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. INTENSE COMPETITION. The markets for the Company's products are highly competitive and characterized by pressure to reduce prices, incorporate new features, and accelerate the release of new product versions and enhanced services. A number of companies currently offer products and services that compete directly or indirectly with one or more of the Company's products. With respect to the Company's software segment, competitors include Adobe Systems Inc., Microsoft Corporation, Corel Corporation. Accrue Software, Inc. and Net Perceptions, Inc. 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 shockwave.com subsidiary competes with a number of other Internet community, gaming and entertainment sites including Disney, Warner Brothers, Gamesville, Digital Entertainment Network, America On Line and Yahoo. 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 Web 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 14 the Company's existing products obsolete. The Company's future prospects are highly dependent on its ability to increase functionality of existing products and services in a timely manner and to develop new products and services 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 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. In addition, the Company has only recently entered the eMarketing Software products market through its acquisition of Andromedia in December, 1999 and has not released new versions or enhancement of these products to date. If the Company was unable, due to resource constraints or technological or other reasons, to develop and introduce 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 year 1997 when the Company delayed shipment of a new version of Director to the following quarter. Furthermore, the Company's success depends upon its ability to attract and retain a larger number of consumers on its shockwave.com Web site by delivering original and compelling content and services. If the Company is unable to do so, advertising revenue will decline and there will be less merchandise and downloadable product sold. The Company's quarterly results of operations also may vary significantly depending on the impact of any of the following: the timing of product and service introductions by competitors, changes in pricing, execution and volume of technology licensing agreements, the volume and timing of orders received during the quarter for software products, which are difficult to forecast, expenses related to the expansion of shockwave.com 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 and services, its product service, 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 shockwave.com business models depend 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 shockwave.com 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 shockwave.com business, the prediction of future revenue growth or operating performance for the consumer business is difficult at best. The Company expects the shockwave.com business to generate net losses for the foreseeable future. In addition to the foregoing the shockwave.com business will depend in part on success in building strategic alliances with other Internet companies and media companies in order to be able to grow the user base and to provide compelling content to attract and maintain the user base. There can be no assurances that such alliances can be created or maintained over an extended period of time. DEPENDENCE ON DISTRIBUTORS. A substantial majority of the Company's revenues is derived from the sale of its software products through a variety of distribution channels, including traditional software distributors, mail 15 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 28% of revenues in the third 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 17% of revenues in the three month period ending December 31, 1999. In the nine month period ending December 31, 1998, in addition to Ingram Micro, Inc., three distributors, including two international distributors, accounted for 43% of total revenues. Internationally, the Company's products are sold through distributors. The Company's software 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 32% of product revenues for the first nine 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 software product and shockwave.com 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 nine months in fiscal year 2000, the Company derived approximately 38.8% 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 software products in foreign countries and, accordingly, is dependent on their ability to promote and support the Company's software 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 year 1998, and to just 8% of total revenue in fiscal year 1999. Revenues from Japan remained at 7% of total revenue for the first nine months of fiscal year 2000. The Company enters into foreign exchange forward contracts to reduce economic exposure associated with sales and asset balances denominated in various European currencies and Japanese Yen. As of December 31, 1999, the notional principal of forward contracts outstanding amounted to $38.4 million. 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. 16 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 business combinations with other companies. The Company recently closed its acquisition of Andromedia, Inc. and 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. Furthermore, the Company's recent acquisitions have been related to the eBusiness market which represents a new direction for the Company. 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. MANAGEMENT OF GROWTH. The Company's shockwave.com business experienced and may continue to experience rapid growth, which has placed, and could continue to place, a significant strain on the Company's managerial, financial and operational resources. As of March 31, 1999 shockwave.com had 30 employees and, as of December 31, 1999, had 83 employees, representing a growth rate of more than 100%. The Company expects that the number of its employees, including management-level employees, will continue to increase for the foreseeable future. Shockwave.com continues to depend on Macromedia for its administrative, financial, marketing and human resources functions, and may not be able to perform these functions independently in a timely fashion. Shockwave.com must continue to improve its operational and financial systems and managerial controls and procedures, and will need to continue to expand, train and manage its workforce. Shockwave.com's systems, procedures or controls may not be adequate to support its operations or the Company may not be able to manage growth of shockwave.com effectively. For example, the Company expects that the variety of shockwave.com's revenue generating lines of business will expand, increasing demands on the Company's billing and collection systems and requiring additional resources to properly determine pricing and discounting structures. If the Company does not manage growth effectively, the business would be harmed. 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 As of February 14, 2000, the Company has not experienced any Year 2000 related disruptions in the operations of its systems. Although most Year 2000 problems should have become evident on January 1, 2000, additional Year 2000 related 17 problems may become evident only after that date. For example, some software programs may have difficulty resolving the so-called "century leap year" algorithm which will also occur during the Year 2000. 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 December 31, 1999 (in thousands).
- ---------------------------------------------------------------------------------------------- 2000 2001 2002 2003 and Total Fair Thereafter Value - ---------------------------------------------------------------------------------------------- Cash equivalents $ 14,390 - - $ 14,390 $ 14,390 Average interest rate 5.74% 5.74% Short-term investments $ 29,945 $ 32,939 $ 15,995 $ 78,879 $ 78,421 Average interest rate 5.58% 6.26% 5.88% 5.90% Total investment securities $ 44,335 $ 32,939 $ 15,995 $ 93,269 $ 92,811
The Company also has loans outstanding to related parties totaling $9.8 million as of December 31, 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 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. The table below provides information about the Company's outstanding forward contracts as of December 31, 1999. The table presents the notional amounts (at contract exchange rates), the weighted average contractual foreign currency exchanges rates amd fair value. Notional weighted average exchange rates are quoted using market conventions where the currency is expressed in currency units per U.S. dollar, except for UK. Fair value represents the difference in value of the contracts at the spot rate at December 31, 1999 and the forward rate. All of these forward contracts mature in 180 days or less as of December 31, 1999. 18
(in thousands, except average contract rate) Foreign currency forward Notional Weighted exchange contracts: Notional Amount Average Exchange Rate Fair Value - ----------------------------- --------------------- ----------------------------- --------------------- Great British Pound $8,141 1.6497 $115 Deutsche Marks $8,154 1.8103 395 Swedish Krona $2,118 8.05 92 French Francs $3,703 6.073 170 Italian Lira $1,624 1,851.51 75 Spanish Peseta $1,447 154.1 65 Japanese Yen $13,184 103.06 (157) ------- ----- $38,371 $755 ------- ----- ------- -----
DISCLOSURE OF LIMITATIONS OF THE TABULAR PRESENTATION As the tables above incorporate only those exposures that exist as of December 31, 1999, it does not consider those exposures or positions that could arise after that date. Also, because the foreign currency denominated financial assets, and anticipated transactions are not presented in the table above, the information presented has limited predictive value. As a result, the Company's ultimate realized gain or loss with respect to foreign currency fluctuations will depend on the exposures that arise during the period, the Company's hedging strategies at the time, and foreign currency rates. 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 $11.0 million at December 31, 1999. The equity investments held by the Company have exposure to price risk, which is estimated as the potential loss in fair value due to a hypothetical change of 10% in quoted market prices. This hypothetical change would reduce the Company's investments as well as unrealized gains on investment securities available for sale which are included as a component of stockholders' equity. This hypothetical change would have an immaterial effect on the recorded value of the Company's investment securities available for sale. PART II - OTHER INFORMATION Item 1. Legal Proceedings On July 31, 1997, a complaint entitled Rosen et al. V. Macromedia, Inc., et al., (Case No. 988526) was filed in the Superior Court for San Francisco, California. The complaint alleges that Macromedia and five of its former or current officers and directors engaged in securities fraud in violation of California Corporations Code Sections 25400 and 25500 by seeking to inflate the value of Macromedia stock by issuing statements that were allegedly false or misleading (or omitted material facts necessary to make any statements made not false or misleading) regarding the Company's financial results and prospects. Four similar complaints by persons seeking to represent the same class of purchasers subsequently have been filed in San Francisco Superior Court, and consolidated for pre-trial purposes with Rosen. Defendants filed demurrers to the complaint and other motions which were argued on December 19, 1997 and January 5, 1998. Before the demurrers could be heard, one defendant, Richard Wood, died in an automobile accident. In March 1998, the Court sustained in part and overruled in part the demurrers. Claims against Susan Bird were dismissed and the Court overruled the demurrers as to Macromedia, John Colligan, James Von Ehr, II, and Kevin Crowder. In May 1999, the Court granted plaintiffs' motion for certification of a class of all persons who purchased Macromedia common stock from April 18, 1996 through January 9, 1997. Trial has been set for March 12, 2001. 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 19 by issuing statements that were allegedly false or misleading (or omitted material facts necessary to make any statements made not false or misleading) regarding the Company's financial results and prospects. Plaintiffs seek to represent a class of all persons who purchased Macromedia common stock from April 18, 1996 through January 9, 1997. Three similar complaints by persons seeking to represent the same class of purchasers subsequently have been filed in United States District Court for the Northern District of California. All of these cases have been consolidated. Lead plaintiffs and lead counsel have been appointed under the provisions of the Private Securities Law Reform Act by the District Court. A consolidated complaint was filed in February, 1998. Defendants moved to dismiss that complaint on the grounds that plaintiffs' claims were barred by the applicable statute of 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 December 1, 1999, the Company closed its acquisition of Andromedia, Inc. In exchange for all of the capital stock, options and warrants of Andromedia, the Company issued 5.2 million shares of common stock, options and warrants to the securityholders of Andromedia. 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. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Matters None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed herewith:
Exhibit Number Exhibit Title - ------ ------------- 2.01 - Agreement and Plan of Reorganization between Macromedia, Inc and ESI Software, Inc. dated July 8, 1999, as amended August 30, 1999. Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules have been omitted but will be furnished supplementally to the Securities and Exchange Commission at their request. (Incorporated herein by reference to Exhibit 2.01 to the Current Report on Form 8-K filed by the Company on October 15, 1999). 2.02 - Agreement and Plan of Reorganization by and among Macromedia, Inc., Andromedia, Inc. and Peak Acquisition Corp. dated October 6, 1999, as amended November 23, 1999. Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules have been omitted but will be furnished supplementally to the Securities and Exchange Commission at their request. (Incorporated by 20 reference to Exhibit 2.01 to the Current Report on Form 8-K filed by the Company on December 15, 1999). 27.01 - Financial Data Schedule
(b) Reports on Form 8-K 1. Current report dated October 15, 1999 and filed on October 26, 1999 Item 2 - Acquisition of assets, ESI Software Inc. Item 7 - Financial statements, Pro Forma financial information and Exhibits. 2. Current report dated December 15, 1999 and filed on February 14, 2000 Item 2 - Acquisition of assets, Andromedia, Inc. Item 7 - Financial statement Pro Forma financial information and exhibits. 21 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MACROMEDIA, INC. (Registrant) Date: February 14, 2000 /s/ Robert K. Burgess ----------------------------------- Robert K. Burgess President and Chief Executive Officer Date: February 14, 2000 /s/ Elizabeth A. Nelson ----------------------------------- Elizabeth A. Nelson Senior Vice President and Chief Financial Officer 22 EX-27.1 2 EXHIBIT 27.1
5 3-MOS DEC-31-1999 DEC-31-1999 42,565 79,420 39,386 1,670 957 170,379 94,567 39,459 249,492 53,401 0 0 0 48 195,653 249,492 66,504 66,504 8,025 8,025 0 0 55 4,322 3,050 1,272 0 0 0 (85) 0 0
-----END PRIVACY-ENHANCED MESSAGE-----