-----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, Pmf1EdcfB7+oRWAe+8y1TV5JSXBGGBxLh/X3i31aqHNRHVbMB6iKIdKgOjvd6orA KWCav41iGz9Rk0gqVxlrgw== 0001047469-99-004364.txt : 19990211 0001047469-99-004364.hdr.sgml : 19990211 ACCESSION NUMBER: 0001047469-99-004364 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990210 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: 99527872 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 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ____ to __ COMMISSION FILE NO. 000-22688 MACROMEDIA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3155026 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 600 TOWNSEND STREET SAN FRANCISCO, CALIFORNIA 94103 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (415) 252-2000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO . --- --- As of January 31, 1999, there were outstanding 41,084,309 shares of the Registrant's Common Stock, par value $0.001 per share. This Report, including exhibits, consists of 17 sequentially numbered pages. The Index to Exhibits appears on sequentially numbered page 16. 1 MACROMEDIA, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION PAGE ---- ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets December 31, 1998 and March 31, 1998 3 Condensed Consolidated Statements of Operations Three and Nine Months Ended December 31, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended December 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17 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, 1998 1998 ------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 45,989 $ 10,019 Short-term investments 55,438 76,112 Accounts receivable, net 12,527 7,696 Inventory, net 522 743 Prepaid expenses and other current assets 10,535 3,819 Deferred tax assets, short-term 8,548 8,548 ------------- ------------- Total current assets 133,559 106,937 Land and building, net 19,831 20,372 Other fixed assets, net 19,388 18,528 Other long-term assets 11,025 8,347 ------------- ------------- Total assets $ 183,803 $ 154,184 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,028 $ 4,091 Accrued liabilities 29,274 19,132 Unearned revenue 7,950 1,927 ------------- ------------- Total current liabilities 39,252 25,150 Deferred tax liabilities, long term 306 306 Other long-term liabilities 112 263 ------------- ------------- Total liabilities 39,670 25,719 Stockholders' equity: Common stock, par value $0.001 per share; 80,000,000 shares authorized; 40,900,698 and 38,807,968 shares issued and outstanding as of December 31, 1998 and March 31, 1998, respectively 41 39 Treasury Stock, at cost; 1,340,000 and 510,000 shares as of December 31, 1998 and March 31, 1998, respectively (16,546) (5,139) Additional paid-in capital 156,506 142,023 Deferred compensation - (87) Accumulated other comprehensive income 109 47 Accumulated earnings (deficit) 4,023 (8,418) ------------- ------------- Total stockholders' equity 144,133 128,465 ------------- ------------- Total liabilities and stockholders' equity $ 183,803 $ 154,184 ------------- ------------- ------------- -------------
See accompanying notes to condensed consolidated financial statements. 3 MACROMEDIA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (unaudited)
Three months ended Nine months ended December 31, December 31, 1998 1997 1998 1997 --------------- ---------------- --------------- -------------- Revenues $ 38,228 $ 26,579 $ 105,789 $ 83,074 Cost of revenues 3,708 2,763 10,056 12,638 --------------- ---------------- --------------- -------------- Gross profit 34,520 23,816 95,733 70,436 Operating expenses: Sales and marketing 16,796 13,901 46,374 42,074 Research and development 8,674 7,472 25,955 24,138 General and administrative 3,104 2,944 9,690 8,311 Merger - 7,658 - 7,658 --------------- ---------------- --------------- -------------- Total operating expenses 28,574 31,975 82,019 82,181 --------------- ---------------- --------------- -------------- Operating income (loss) 5,946 (8,159) 13,714 (11,745) Other income, net 1,230 1,032 3,797 3,276 --------------- ---------------- --------------- -------------- Income (loss) before income taxes 7,176 (7,127) 17,511 (8,469) (Provision) benefit for income taxes (1,866) (124) (5,070) 292 --------------- ---------------- --------------- -------------- Net income (loss) $ 5,310 $ (7,251) $ 12,441 $ (8,177) --------------- ---------------- --------------- -------------- --------------- ---------------- --------------- -------------- Net income (loss) per share Basic $ 0.14 $ (0.19) $ 0.32 $ (0.21) Diluted $ 0.12 $ (0.19) $ 0.28 $ (0.21) --------------- ---------------- --------------- -------------- --------------- ---------------- --------------- -------------- Weighted average common shares outstanding Basic 39,044 38,307 38,867 38,085 Diluted 45,559 38,307 44,457 38,085 --------------- ---------------- --------------- -------------- --------------- ---------------- --------------- --------------
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, ---------------------------------------- 1998 1997 ------------------- ----------------- Cash flows from operating activities: Net income (loss) $ 12,441 $ (8,177) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 6,034 5,727 Deferred compensation 87 37 Changes in operating assets and liabilities: Accounts receivable, net (4,831) (1,702) Inventory, net 221 1,439 Prepaid expenses and other current assets (6,716) 736 Accounts payable (2,063) (3,923) Accrued liabilities 10,142 1,982 Unearned revenue 6,023 (608) Other long-term liabilities (151) 135 Write-off Solis merger costs - 7,658 Other, net - 501 ------------------- ----------------- Net cash provided by operating activities 21,187 3,805 ------------------- ----------------- Cash flows from investing activities: Capital expenditures (7,196) (9,927) Proceeds of sales of fixed assets 961 - Net sales and maturities of short-term available-for-sale investments 20,736 27,570 Investment in Solis - (2,500) Other long-term assets (2,796) (5,145) ------------------- ----------------- Net cash provided by investing activities 11,705 9,998 ------------------- ----------------- Cash flows from financing activities: Proceeds from issuance of common stock 14,485 2,154 Acquisition of treasury stock (11,407) (4,537) ------------------- ----------------- Net cash provided by /(used in) financing activities 3,078 (2,383) ------------------- ----------------- Increase in cash and cash equivalents 35,970 11,420 Cash and cash equivalents, beginning of period 10,019 15,397 ------------------- ----------------- Cash and cash equivalents, end of period $ 45,989 $ 26,817 ------------------- ----------------- ------------------- ----------------- Supplemental disclosure of cash flow information: Cash paid for interest $ - $ - ------------------- ----------------- ------------------- ----------------- Cash paid for income taxes $ 98 $ - ------------------- ----------------- ------------------- -----------------
See accompanying notes to condensed consolidated financial statements. 5 MACROMEDIA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PREPARATION The condensed consolidated financial statements at December 31, 1998 and for the three and nine months ended December 31, 1998 and 1997 are unaudited and reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the Company's financial position and operating results for the interim periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's annual report on Form 10-K for the fiscal year ended March 31, 1998. The results of operations for the three and nine months ended December 31, 1998 are not necessarily indicative of the results for the fiscal year ending March 31, 1999 or any other future periods. 2. EARNINGS PER SHARE "Basic" earnings per share is calculated by dividing net income or loss by the weighted average common shares outstanding during the period. "Diluted" earnings per share reflects the net incremental shares that would be issued if outstanding stock options were exercised and if the funds collected for the employee stock purchase plan were used to purchase treasury shares. In the case of a net loss, it is assumed that no incremental shares would be issued because they would be antidilutive. In addition, certain options are considered antidilutive because the options' exercise prices were above the average market price during the period. Antidilutive shares are not included in the computation of diluted earnings per share, in accordance with Statement of Financial Accounting Standards (SFAS) No. 128.
Three months ended Nine months ended December 31, December 31, (In thousands, except per share data) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- BASIC NET INCOME (LOSS) PER SHARE COMPUTATION Numerator: Net income (loss) $ 5,310 $ (7,251) $ 12,441 $ (8,177) ---------------------------------- ------------------------------- Denominator: Weighted average number of common shares outstanding during the period 39,044 38,307 38,867 38,085 Basic net income (loss) per share $ 0.14 $ (0.19) 0.32 $ (0.21) ---------------------------------- ------------------------------- ---------------------------------- ------------------------------- DILUTED NET INCOME (LOSS) PER SHARE COMPUTATION Numerator: Net Income (loss) $ 5,310 $ (7,251) 12,441 $ (8,177) ---------------------------------- ------------------------------- Denominator: Weighted average number of common shares outstanding during the period 39,044 38,307 38,867 38,085 Effect of dilutive securities: Employee stock options 6,494 - 5,577 - Employee stock purchase plans 21 - 13 - ---------------------------------- ------------------------------- Total 45,559 38,307 44,457 38,085 ---------------------------------- ------------------------------- Diluted net income (loss) per share $ 0.12 $ (0.19) $ 0.28 $ (0.21) ---------------------------------- ------------------------------- ---------------------------------- -------------------------------
6 Options to purchase 0.2 million shares were outstanding for the three and nine month periods ended December 31, 1998 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. The weighted average exercise price of the antidilutive shares approximates $31 per share for the three and nine months ended December 31, 1998. The effect on earnings per share if these antidilutive shares were included would be immaterial. 3. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards of reporting and displaying comprehensive income and its components of net income and "other comprehensive income" in a full set of general-purpose financial statements. "Other comprehensive income" refers to revenues, expenses, gains and losses that are not included in net income but rather are recorded directly in stockholders' equity. SFAS No. 130 is effective for annual and interim periods beginning after December 15, 1997 and for periods ended before that date when presented for comparative purposes. The components of comprehensive income (loss), net of tax, are as follows:
Three Months ended Nine months ended December 31, December 31, (In thousands) 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------- Net income (loss) $ 5,310 $ (7,251) $ 12,441 $ (8,177) Unrealized gain (loss) on securities 49 (204) 62 (97) ----------------------------------------------------------- Comprehensive income $ 5,359 $ (7,455) $ 12,503 $ (8,274) ----------------------------------------------------------- -----------------------------------------------------------
The primary components of other comprehensive income at December 31, 1998 and March 31, 1998 were unrealized gains and losses on the Company's available-for-sale investments. 4. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. The Company is currently evaluating the operating segment information that it will be required to report. The Company is required to adopt the new standard for its year ending March 31, 1999. In March 1998, the American Institute of Certified Public Accountants released Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on capitalization of certain costs incurred in the development of software for internal use. SOP 98-1 is effective for financial statements issued for fiscal years beginning after December 15, 1998. In accordance with SOP 98-1, the Company capitalizes costs of consulting services, hardware, and payroll related costs incurred during internal-use software development. The Company expenses costs incurred during preliminary project assessment, research and development, re-engineering, training and application maintenance. In June 1998, the Financial Accounting Standards Board issued SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. The Company is currently evaluating the impact of the new rule on the Company's consolidated financial statements. The Company is required to adopt the new standard in the first quarter of fiscal year 2001. 7 5. INCOME TAXES In the third quarter of fiscal year 1999, the Company revised its estimated annual effective tax rate from 31% to 26% to reflect the utilization of research and experimentation tax credits and foreign operating results which were taxed at rates other than the US statutory rate. 6. RELATED PARTY TRANSACTIONS During the nine months ended December 31, 1998, the Company made loans totaling $2.5 million to two officers in conjunction with their hiring and relocations. The loans are full recourse and are included in other long-term assets. The notes bear interest at 5.56% and 5.51% per annum and are secured by the personal residences of the officers. The notes mature in 2001 and are callable on demand if the officers terminate employment with the Company. For the three and nine months ended December 31, 1998, interest income on the notes was immaterial. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained in this Form 10-Q, the matters discussed herein are forward-looking statements that involve risks and uncertainties, including those detailed below, and from time to time in the Company's other reports filed with the Securities and Exchange Commission. The actual results that the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. RESULTS OF OPERATIONS REVENUES. Macromedia develops, markets and supports software tools, servers, and services for web publishing, web learning, and web traffic. The Company sells its products through a network of distributors, value-added resellers (VARs), its own sales force and web site, and to original equipment manufacturers (OEMs) in North America, Europe, Japan, Asia Pacific, and Latin America. In addition, the Company derives revenues from advertising, maintenance and technology licensing contracts. Revenues increased $11.6 million or 44% to $38.2 million in the third quarter of fiscal 1999 as compared to the same period in fiscal 1998. Revenues from two of the Company's newest web publishing products, Dreamweaver and Fireworks, comprised the majority of the increase. Similarly, comparing the first nine months of fiscal year 1999 to the same period last year, revenues increased by $22.7 million or 27% due to the release of Dreamweaver, Fireworks, a new version of Flash, and increased revenue from advertising on Macromedia's websites. These increases offset a decline in the sales of Director due to the timing of product cycles. Revenues from windows and hybrid products represented 58% of total product revenue for the third quarter of fiscal 1999, while Macintosh related revenue was 42%, with growth on both platforms over the same period last year. North American revenues reached $22.5 million in the third quarter of fiscal 1999, an increase of $10.9 million or 94% over the third quarter of fiscal year 1998. For the first nine months of the current year, North American sales increased $20.8 million or 51% over the same period last year mainly due to the shipment of new products. International revenues increased 5% from the third quarter of fiscal 1998 to $15.7 million in the third quarter of fiscal 1999. The increase was a result of stronger sales in Europe, Asia Pacific and Latin America, offset by a decline in Japan. Revenues by geographic region vary quarter to quarter depending on product cycles and the timing of the release of localized versions of products, and the economic condition of the region. The table below summarizes revenue by geography: 8
(In millions) Three months ended December 31, Nine months ended December 31, ---------------------------------------------- ------------------------------------------- 1998 1997 % change 1998 1997 % change North America $ 22.5 $ 11.6 94% $61.6 $40.8 51% % of total revenues 59% 44% 58% 49% International $ 15.7 $ 15.0 5% $44.2 $42.3 5% % of total revenues 41% 56% 42% 51% Total revenues $ 38.2 $ 26.6 $105.8 $83.1
GROSS MARGIN. Gross margin for the three and nine months ended December 31, 1998 was 90% and 91%, respectively, compared with 90% and 85% for the comparable periods last year. The improvement in the nine month comparison was due to the results of cost control programs implemented last year, including a move to just-in-time manufacturing which resulted in lower inventory obsolescence and lower inventory levels, and improved inventory review procedures. The Company believes these business process changes will result in sustained margin performance. However, gross margins may be affected from time to time by the mix of distribution channels used, mix of products sold, and the mix of international versus domestic revenues. SALES AND MARKETING. Sales and marketing expenses for the three and nine months ended December 31, 1998 increased $2.9 million and $4.3 million, respectively, when compared to the same periods last year. The increase in the third quarter of fiscal year 1999 relative to the same period in fiscal 1998 was due to increased web and print advertising associated with new product launches and the amortization of capitalized costs arising from licensing and distribution agreements. The growth in expenses for the nine month period ended December 31, 1998 over the same period last year was due to increases in compensation and benefits and direct marketing promotions. As a percentage of revenues, sales and marketing expenses decreased to 44% for both the three and nine month periods ending December 31, 1998, compared with 52% and 51% for the same periods in the preceding year. The improvement was due to the higher sales volume in the current year. RESEARCH AND DEVELOPMENT. Research and development for the three and nine months ended December 31, 1998 were $8.7 million and $26.0 million, respectively, an increase of $1.2 million and $1.8 million as compared to the same periods last year. In both periods, expenses grew as a result of additional headcount, particularly in the areas of temporary and contracted services to support new product development, and costs associated with improving the information technology infrastructure. As a percentage of revenues, research and development costs for the three and nine months ended December 31, 1998 were 23% and 25% respectively compared with 28% and 29% for the same periods last year. The improvement was due to higher sales levels in fiscal 1999. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three and nine months ended December 31, 1998 were $3.1 million and $9.7 million, respectively, an increase of $0.2 million and $1.4 million as compared to the same periods of the prior year. The increase in costs in both periods was due to higher compensation and benefit costs, and costs associated with improving the information technology infrastructure. General and administrative costs as a percentage of revenues was 8% for the three months ended December 31, 1998, compared to 11% for the same period of time last year, and 9% for the nine months ended 1998 compared to 10% for the comparable period in 1997. The increase in sales year over year contributed to the improved ratio in both periods. OTHER INCOME. Other income in the third quarter of fiscal 1999 of $1.2 million was $0.2 million higher than the third quarter of 1998. For the nine months ended December 31, 1998, other income of $3.8 million was $0.5 million higher than the same period ended December 31, 1997. In both periods the increase was due to interest income earned on higher investment balances. PROVISION/BENEFIT FOR INCOME TAXES. The Company's provision for income taxes of $1.9 million for the third quarter of fiscal 1999 was up $1.7 million over the third quarter of fiscal 1998, due to an 9 increase in net profit before tax of $14.3 million. For the first nine months of fiscal year 1999, the current year provision of $5.1 million was an increase of $5.4 million over the prior year, due to an increase in net profit before tax of $26.0 million. The effective tax rate for the third quarter of fiscal year 1999 was 26%, and the cumulative, effective tax rate for the first nine months of fiscal year 1999 was 29%, compared to a rate of 36% for the cumulative period last year. OFFSHORE, INTANGIBLE HOLDING COMPANY (IHC). The Company established Macromedia Ireland Limited as an offshore, intangible holding company, resident and registered in Barbados effective October 1, 1998. The purpose of this new corporate structure is to take advantage of certain tax provisions which allow deferral of taxes on international product sales. Due to this structure, the Company expects its tax rate will remain at or below its current rate of 26% for the remainder of the fiscal year. This estimate is based on current tax law and is subject to change. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had cash, cash equivalents and short-term investments of $101.4 million. For the nine months ended December 31, 1998, cash provided by operating activities of $21.2 million was primarily attributable to net income for the period of $12.4 million and a net increase in unearned revenue of $6.0 million associated with licensing agreements, plus the net impact of the sales and cash collection cycles. Cash provided by investing activities of $11.7 million related primarily to the sale of short term investments offset by capital expenditures. Cash provided by financing activities of $3.1 million was attributable to $14.5 million from the proceeds received from the exercise of common stock options, offset by the acquisition of treasury stock of $11.4 million. Collectively, the above activity resulted in an increase of $36.0 million from the March 31, 1998 balances of cash and cash equivalents. Working capital increased by $12.5 million from the March 31, 1998 balance of $81.8 million, to $94.3 million at December 31, 1998. The Company anticipates future capital expenditures of approximately $5.0 million for the remainder of fiscal 1999. In the third quarter of fiscal year 1999, the Company made investments in property and equipment totaling $3.1 million. This amount includes $1.5 million related to development of a new information technology infrastructure for sales and marketing, customer support, on-line product distribution, and technical support. The costs capitalized under the project are comprised primarily of hardware and consulting fees for software development. The Company expects to spend approximately $3.0 million on the project over the next two quarters, the majority of which will be capitalized. Amortization of the project is expected to begin in the fourth quarter of fiscal 1999 and will approximate $0.5 million per quarter when fully implemented. In addition to cash, cash equivalents, and short-term investments, the Company has $15.0 million available under an unsecured revolving line of credit. The line of credit bears interest at the bank's prime rate and expires on July 15, 1999. As of December 31, 1998, the Company had no borrowings outstanding. The Company believes that existing cash resources, available bank borrowings and cash generated from operations will be sufficient to meet the Company's cash and investment requirements through at least December 31, 1999. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS INTENSE COMPETITION. The markets for the Company's products are highly competitive and characterized by pressure to reduce prices, incorporate new features, and accelerate the release of new product versions. A number of companies currently offer products that compete directly or indirectly with one or more of the Company's products. These companies include Adobe Systems Inc. (Adobe), Apple Computer, Inc., Asymetrix Corporation, Corel 10 Corporation (Corel), MetaCreations Corporation, and Microsoft Corporation (Microsoft). As the Company competes with larger competitors such as Adobe, Corel and Microsoft across a broader range of product lines and different platforms, the Company may face increasing competition from such companies. FLUCTUATIONS OF OPERATING RESULTS; PRODUCT INTRODUCTION DELAYS. The Company's quarterly operating results may vary significantly depending on the timing of new product introductions and enhancements by the Company. A majority of the Company's revenues is derived from four products: Director, FreeHand, Flash and Dreamweaver. The Company has in the past experienced delays in the development of new products and enhancement of existing products, and such delays may occur in the future. If the Company is unable, due to resource constraints or technological or other reasons, to develop and introduce such products in a timely manner, this inability could have a material adverse effect on the Company's results of operations. If the Company does not ship new versions of its products as planned, sales of existing versions decline, or new products do not receive market acceptance, the Company's results of operations in a given quarter could be materially adversely affected as they were during the fourth quarter of fiscal 1997 when the Company delayed shipment of a new version of Director to the following quarter. DEPENDENCE ON DISTRIBUTORS. A substantial majority of the Company's revenues is derived from the sale of its products through a variety of distribution channels, including traditional software distributors, mail order, educational distributors, VARs, OEMs, hardware and software superstores, retail dealers, and direct sales. Domestically, the Company's products are sold primarily through distributors, VARs, and OEMs. In particular, one distributor, Ingram Micro, Inc., accounted for 28% of gross revenues for both the third quarter and first nine months of fiscal 1999. Internationally, the Company's products are sold through distributors. DEPENDENCE ON MACINTOSH PLATFORM. In the past, a majority of the Company's revenues was derived from its products for the Macintosh. Macintosh revenues accounted for 41% of product revenues for the first nine months of fiscal 1999, compared to 44% of revenues for all of fiscal 1998. Although the relative percentage of Macintosh platform revenues will vary from quarter to quarter based on product release schedules, the Company remains heavily dependent on the sale of products for the Macintosh platform. A decline in the sales rate of multimedia-capable Macintosh computers or shifts in mail order or other distribution mechanisms for Macintosh products could have a material adverse effect on the Company's results of operations. RISKS OF INTERNATIONAL OPERATIONS. For the nine months ended December 31, 1998, the Company derived approximately 42% of its revenues from international sales, compared with 48% for all of fiscal 1998. The Company expects that international sales will continue to generate a significant percentage of its revenues. The Company relies on distributors for sales of its products in foreign countries and, accordingly, is dependent on their ability to promote and support the Company's products, and in some cases, to translate them into foreign languages. International business is subject to a number of special risks, including: foreign government regulation; general geopolitical risks such as political and economic instability, hostilities with neighboring countries and changes in diplomatic and trade relationships; more prevalent software piracy; unexpected changes in, or imposition of, regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions; longer payment cycles, greater difficulty in accounts receivable collection, potentially adverse tax consequences, the burdens of complying with a variety of foreign laws; foreign currency risk; and other factors beyond the control of the Company. In addition, the Company's results may be adversely affected by worldwide economic events beyond the control of the Company, such as the prolonged economic downturn occurring in Japan. There can be no 11 assurances that Japan's economy will recover in the near term or that the Company's results or growth rates in this geographic region will return to previous levels even if the recovery occurs. The Company's revenue from Japan declined from 21% of total revenue in fiscal 1997 to 15% in fiscal 1998, and just 8% of total revenue in the first nine months of fiscal 1999. The Company enters into foreign exchange forward contracts to reduce economic exposure associated with sales and asset balances denominated in various European currencies and Japanese Yen. As of December 31, 1998, the notional principal of forward contracts outstanding amounted to $19.1 million. There can be no assurance that such contracts will adequately hedge the Company's exposure to currency fluctuations. EURO DOLLAR. On January 1, 1999, eleven of the fifteen member countries of the European Union adopted the Euro as the common legal currency and established fixed rates of conversion between their existing sovereign currencies and the Euro. The Euro will trade on currency exchanges and be available for non-cash transactions. A three year transition period is expected during which transactions can be made in the old currencies. The conversion to the Euro will eliminate currency exchange risk between the member countries. The Company does not anticipate any material impact from the Euro conversion as its financial information system can accommodate multiple currencies. In addition, the Company has confirmed with its international financial institutions that they have the ability to process transactions in either Euros or sovereign currency. The Company is in the process of preparing Euro price lists with those of the sovereign currency to assess any competitive risk. However, there can be no assurance that all issues related to the Euro conversion have been identified, and the Company may be at risk if any of its principal suppliers are unable to deal with the impact of the Euro conversion. To date, none of the Company's international suppliers have expressed an intention to invoice in Euros. VOLATILITY OF STOCK. The Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenues or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Additionally, the Company may not learn of such shortfalls until late in the fiscal quarter, which could result in an even more immediate and adverse effect on the trading price of the Company's common stock. Finally, the Company participates in a highly dynamic industry. In addition to factors specific to the Company, changes in analysts' earnings estimates for the Company or its industry and factors affecting the corporate environment or the securities markets in general will often result in significant volatility of the Company's common stock price. YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the programming code and embedded technology in existing systems as the year 2000 approaches. The "Year 2000 Issue" arises from the potential for computers to fail or operate incorrectly because their programs incorrectly interpret the two digit date fields "00" as 1900 or some other year, rather than the year 2000. The year 2000 issue creates risk for the Company from unforeseen problems in its own computer systems and from third parties, including customers, vendors and manufacturers, with whom the Company deals on financial transactions worldwide. Failures of the Company's and/or third parties' computer systems could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity, and financial condition, though the impact is unknown at this time. To mitigate this risk, the Company has established a formal year 2000 program to oversee and coordinate the assessment, remediation, testing and reporting activities related to this issue. The Company believes that with the completion of the project as scheduled, the possibility of significant interruptions of normal operations should be reduced. 12 The Company has completed the assessment phase of its year 2000 program. As part of this assessment, the Company's application systems (e.g., financial systems, various custom-developed business applications), technology infrastructure (e.g., networks, servers, desktop equipment), facilities (e.g., security systems, fire alarm systems), vendors/partners and products were reviewed to determine their state of year 2000 compliance. This review included the collection of documentation from software and hardware manufacturers, the detailed review of programming code for custom applications, the physical testing of desktop equipment using software designed to test for year 2000 compliance, the examination of key vendors'/partners' year 2000 programs and the ongoing testing of the Company's products as part of normal quality assurance activities. This assessment revealed no significant issues with the Company's application systems, technology infrastructure, facilities or products. The assessment identified that certain of the Company's vendors/partners themselves have significant year 2000 programs, the successes of which are important to the Company. The Company established a contingency plan for each critical partner, the activation of which will be dependent on the failure of the vendor/partner to achieve key milestones in their programs. With the completion of the Company's assessment phase, and with very little remedial action necessary, the Company is now beginning the testing phase of its program. Testing of the Company's internal software will be accomplished through simulation. The Company will simulate January 1, 2000 on its network, servers and desktop equipment to ensure compliance with year 2000 readiness. It is forecast that all mission critical systems (both computer systems and systems dependent on embedded technologies) will be tested by March 31, 1999. The Company is targeting June 30, 1999 for the completion of all other testing. The Company believes that the costs associated with completing its year 2000 program will be $0.8 million. The Company reached this assessment with the assistance of outside consultants, to whom the Company paid $0.2 million. However, there can be no assurance that the Company will not experience serious unanticipated negative consequences and/or additional material costs caused by undetected errors or defects in the technology used in its internal systems, or by failures of its vendors/partners to address their year 2000 issues in a timely and effective manner. As of the end of the third quarter of fiscal year 1999, approximately 30% of the total estimated year 2000 program costs have been incurred. Of the expenditures remaining for the program, it is estimated that 25% represents costs associated with human resources performing testing, and 75% represents miscellaneous hardware and software upgrades required for the completion of the year 2000 program. The funding for the year 2000 program is being provided as a normal operating expense (except in the case of any new capital hardware, which is being funded from standard capital budgets). Should miscalculations or other operational errors occur as a result of the Year 2000 issue, the Company or the parties on which it depends may be unable to produce reliable information or to process routine transactions. Furthermore, in the worst case, the Company or the parties on which it depends may, for an extended period of time, be incapable of conducting critical business activities which include, but are not limited to, manufacturing and shipping products, invoicing customers and paying vendors. The Company is currently evaluating its software products for Year 2000 compliance. The Company believes that the changes and improvements it is making to its software will handle Year 2000 compliance correctly, assuming that the operating systems upon which they will run have been updated to comply. Macromedia's software products obtain date information, such as creation dates and modification dates, directly from the computers' operating system. Both Microsoft and Apple have stated that their operating systems will continue to operate properly into the twenty-first century. 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 31, 1997, a complaint entitled Rosen et al. V. Macromedia, Inc., et al., (Case No. 988526) was filed in the Superior Court for San Francisco, California. The complaint alleges that Macromedia and five of its former or current officers and directors engaged in securities fraud in violation of California Corporations Code Sections 25400 and 25500 by seeking to inflate the value of Macromedia stock by issuing statements that were allegedly false or misleading (or omitted material facts necessary to make any statements made not false or misleading) regarding the Company's financial results and prospects. Plaintiffs seek to represent a class of all persons who purchased Macromedia common stock from April 18, 1996 through January 9, 1997. Four similar complaints by persons seeking to represent the same class of purchasers subsequently have been filed in San Francisco Superior Court, and consolidated for pre-trial purposes with Rosen. Defendants filed demurrers to the complaint and other motions which were argued on December 19, 1997 and January 5, 1998. Before the demurrers could be heard, one defendant, Richard Wood, died in an automobile accident. The Court sustained in part and overruled in part the demurrers by order dated March 6, 1998. Claims against Susan Bird were dismissed with leave to amend and the Court overruled the demurrers as to Macromedia, John Colligan, James Von Ehr, II, and Kevin Crowder. The Plaintiffs did not file an amended complaint, and defendants have answered. Discovery is now proceeding. On September 25, 1997, a complaint entitled City Nominees v. Macromedia, Inc. et al., (Case No. C-97-3521-SC) was filed in the United States District Court for the Northern District of California. The complaint alleges that Macromedia and five of its former or current officers and directors engaged in securities fraud in violation of Sections 10 and 20(a) of the Securities and Exchange Act of 1934 by seeking to inflate the value of Macromedia stock by issuing statements that were allegedly false or misleading (or omitted material facts necessary to make any statements made not false or misleading) regarding the Company's financial results and prospects. Plaintiffs seek to represent a class of all persons who purchased Macromedia common stock from April 18, 1996 through January 9, 1997. Three similar complaints by persons seeking to represent the same class of purchasers subsequently have been filed in United States District Court for the Northern District of California. All of these cases have been consolidated. Lead plaintiffs and lead counsel have been appointed under the provisions of the Private Securities Law Reform Act by the District Court pursuant to an Order of January 23, 1998. A consolidated complaint was filed on February 13, 1998. Defendants promptly moved to dismiss, which motion was granted by order filed May 18, 1998, on the grounds that plaintiffs' claims were barred by the applicable statute of limitations. Plaintiffs have filed a notice of appeal of the dismissal. Briefing on the appeal is underway. All complaints seek damages in unspecified amounts, as well as other forms of relief. The Company believes the complaints are without merit and intends to vigorously defend the actions. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed herewith: Exhibit Number Exhibit Title - ------- ------------- 27.01 - Financial Data Schedule (b) Reports on Form 8-K The Company did not file a report on Form 8-K during the period ended December 31, 1998. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MACROMEDIA, INC. (Registrant) Date: February 10, 1999 /s/ Robert K. Burgess ------------------------------------- Robert K. Burgess President and Chief Executive Officer Date: February 10, 1999 /s/ Elizabeth A. Nelson ------------------------------------- Elizabeth A. Nelson Senior Vice President and Chief Financial Officer 17 EX-27.1 2 EXHIBIT 27.1
5 1,000 9-MOS MAR-31-1999 APR-01-1998 DEC-31-1998 45,989 55,438 22,073 9,546 522 133,559 65,245 26,026 183,803 39,252 0 0 0 41 144,092 183,803 105,789 105,789 10,056 82,019 0 0 0 17,511 5,070 12,441 0 0 0 12,441 .32 .28
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