-----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, TH/kqpDuR+S4EDGaJcf+tqL3cVtWUuoJxGMQ59sXmJTKsheHkw5wzRFv2Ny+/bSY Punt4iV63jOZQTMPbSsxzA== 0001047469-99-031862.txt : 19990816 0001047469-99-031862.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-031862 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99688337 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 JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from______ to ______ COMMISSION FILE NO. 0-22688 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 July 30, 1999, there were outstanding 42,852,742 shares of the Registrant's Common Stock, par value $0.001 per share. This Report, including exhibits, consists of 22 sequentially numbered pages. The Index to Exhibits appears on sequentially numbered page 21. 1 MACROMEDIA, INC. AND SUBSIDIARIES INDEX
Page ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets June 30, 1999 and March 31, 1999 3 Condensed Consolidated Statements of Operations Three Months Ended June 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows Three Months Ended June 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 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)
June 30, March 31, 1999 1999 ------------------ ----------------- ASSETS Current assets: Cash and cash equivalents $31,775 $27,104 Short-term investments 80,806 81,698 Accounts receivable, net 12,598 12,585 Inventory, net 715 559 Prepaid expenses and other current assets 11,978 13,700 Deferred tax assets, short-term 6,899 6,899 ------------------ ----------------- Total current assets 144,771 142,545 Land and building, net 19,499 19,679 Other fixed assets, net 25,942 21,469 Other long-term assets 9,418 10,864 ------------------ ----------------- Total assets $ 199,630 $ 194,557 ================== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,974 $ 4,936 Accrued liabilities 28,214 26,113 Unearned revenue 5,541 6,675 ------------------ ----------------- Total current liabilities 37,729 37,724 Deferred tax liabilities, long-term 37 75 Other long-term liabilities 222 222 ------------------ ----------------- Total liabilities 37,988 38,021 Stockholders' equity: Common stock, par value $0.001 per share; 80,000,000 shares authorized; 42,808,827 and 42,101,144 shares issued and outstanding as of June 30, 1999 and March 31, 1999, respectively. 43 42 Treasury stock, at cost; 1,817,500 and 1,620,000 shares as of June 30, and March 31, 1999, respectively (33,649) (25,445) Additional paid-in capital 176,385 170,532 Accumulated other comprehensive income 325 41 Retained earnings 18,538 11,366 ------------------ ----------------- Total stockholders' equity 161,642 156,536 ------------------ ----------------- Total liabilities and stockholders' equity $199,630 $194,557 ================== =================
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 June 30, ---------------------------------------------- 1999 1998 --------------------- ---------------------- Revenues $ 48,935 $ 32,335 Cost of revenues 4,992 3,119 --------------------- ---------------------- Gross profit 43,943 29,216 Operating expenses: Sales and marketing 19,860 14,329 Research and development 11,254 8,528 General and administrative 4,379 3,352 --------------------- ---------------------- Total operating expenses 35,493 26,209 --------------------- ---------------------- Operating income 8,450 3,007 Other income, net 1,242 1,282 --------------------- ---------------------- Income before income taxes 9,692 4,289 Provision for income taxes 2,520 1,330 --------------------- ---------------------- Net income $ 7,172 $ 2,959 ===================== ====================== Net income per share Basic $ 0.18 $ 0.08 Diluted $ 0.15 $ 0.07 ===================== ====================== Shares used in calculating net income per share Basic 40,696 38,626 ===================== ====================== Diluted 47,380 43,863 ===================== ======================
See accompanying notes to condensed consolidated financial statements. 4 MACROMEDIA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
Three months ended June 30, ---------------------------------------- 1999 1998 ------------------- ----------------- Cash flows from operating activities: Net income $ 7,172 $ 2,959 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,797 2,057 Deferred compensation - 77 Changes in operating assets and liabilities: Accounts receivable, net (13) (1,938) Inventory, net (156) (19) Prepaid expenses and other current assets 1,722 (7,373) Accounts payable (962) (2,444) Accrued liabilities 2,101 3,274 Unearned revenue (1,134) 8,345 Other long-term liabilities (38) (38) ------------------- ----------------- Net cash provided by operating activities 11,489 4,900 ------------------- ----------------- Cash flows from investing activities: Capital expenditures (7,080) (750) Proceeds from sale of fixed assets - 961 Purchase of short-term investments (12,389) (45,141) Maturities and sales of short-term investments 13,565 35,845 Other long-term assets 1,436 (1,086) ------------------- ----------------- Net cash (used in) investing activities (4,468) (10,171) ------------------- ----------------- Cash flows from financing activities: Proceeds from issuance of common stock 5,854 4,125 Acquisition of treasury stock (8,204) - ------------------- ----------------- Net cash (used in) provided by financing activities (2,350) 4,125 ------------------- ----------------- Increase(decrease) in cash and cash equivalents 4,671 (1,146) Cash and cash equivalents, beginning of period 27,104 10,019 ------------------- ----------------- Cash and cash equivalents, end of period $31,775 $ 8,873 =================== ================= Supplemental disclosure of cash flow information: Interest paid $ - $ - =================== ================= Income taxes recovered $ 88 $ - =================== =================
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 June 30, 1999 and for the three months ended June 30, 1999 and 1998 are unaudited and reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the Company's financial position and operating results for the interim periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's annual report on Form 10-K for the fiscal year ended March 31, 1999. The results of operations for the three months ended June 30, 1999 are not necessarily indicative of the results for the fiscal year ending March 31, 2000 or any other future periods. 2. EARNINGS PER SHARE "Basic" earnings per share is calculated by dividing net income by the weighted average common shares outstanding during the period. "Diluted" earnings per share reflects the net incremental shares that would be issued if outstanding stock options were exercised and if the funds collected for the employee stock purchase plan were used to purchase treasury shares. Certain options are considered antidilutive because the options' exercise prices were above the average market price during the period. Antidilutive shares not included in the computation of diluted earnings per share totaled 0.1 million and 0.3 million for the three months ended June 30, 1999 and 1998, respectively. The weighted average exercise price of these antidilutive options approximated $44.41 and $28.86 for the three months ending June 30, 1999 and 1998, respectively.
Three months ended June 30, (In thousands except per share data) 1999 1998 - ------------------------------------------------------------------------------------------------------- BASIC NET INCOME PER SHARE COMPUTATION Numerator: Net income $ 7,172 $ 2,959 ------------------------------------ Denominator: Weighted average number of common shares outstanding during the period 40,696 38,626 Basic net income per share $ 0.18 $ 0.08 ==================================== DILUTED NET INCOME PER SHARE COMPUTATION Numerator: Net Income $ 7,172 $ 2,959 ------------------------------------ Denominator: Weighted average number of common shares outstanding during the period 40,696 38,626 Effect of dilutive securities: Employee stock options 6,675 5,211 Employee stock purchase plans 9 26 ------------------------------------ Total 47,380 43,863 ------------------------------------ Diluted net income per share $ 0.15 $ 0.07 ====================================
6 3. 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:
Three Months ended June 30, (in thousands) 1999 1998 - ---------------------------------------------------------------------------------------------- Net income $7,172 $2,959 Unrealized gain (loss) on securities 283 (47) ---------------------------------- Comprehensive income $7,455 $2,912 ==================================
4. INCOME TAXES The Company provides for income taxes during interim reporting periods based upon an estimate of the annual effective tax rate. Such an estimate reflects an effective tax rate lower than the federal statutory rate primarily because of utilization of research and experimentation tax credits, and foreign operating results, which are taxed at rates other than the US statutory rate. The effective rate used for the quarter ended June 30, 1999 was 26%. 5. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION Macromedia has three segments which offer different product lines: Web Publishing, Learning, and shockwave.com, the Company's new consumer business. The Web Publishing division develops software that creates Web site layout, graphics and rich media content for Internet users. The Learning division develops software and online Internet solutions that create, distribute and manage enterprise-wide training programs for organizations. shockwave.com designs, develops and markets aggregated content, products and services to provide and expand online entertainment on the web. The Company evaluates operating segment performance based on net revenues and direct operating expenses of the segment. The accounting policies of the operating segments are the same as those described in the summary of accounting policies in the annual report on Form 10-K for the year ended March 31, 1999. For the three months ended June 30, 1999 and 1998, the Learning division did not meet the quantitative thresholds for disclosure under Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." As a result, the Learning division is consolidated with the "Other" category in the table below. The Other category also consists of various corporate revenues and expenses which do not qualify as a segment. For the three months ended June 30, 1998, the Company did not internally report shockwave.com as a separate segment. The Company does not allocate assets to its individual operating segments. 7 Information about reported segment income or loss is as follows:
WEB (in thousands) PUBLISHING SHOCKWAVE.COM OTHER TOTAL Three months ended June 30, 1999 - ------------------------------------------------------------------------------------------------------- Revenues $ 41,646 $ 1,249 $ 6,040 $ 48,935 Cost of revenues 3,834 470 688 4,992 ----------------------------------------------------------------- Gross margin $ 37,812 $779 $ 5,352 $ 43,943 Direct operating expenses 15,010 3,610 3,535 22,155 ----------------------------------------------------------------- Contribution margin $ 22,802 $ (2,831) $ 1,817 $ 21,788 Three months ended June 30, 1998 - ------------------------------------------------------------------------------------------------------- Revenues $ 27,039 $ - $ 5,296 $ 32,335 Cost of revenues 2,221 - 898 3,119 ----------------------------------------------------------------- Gross margin $ 24,818 $ - $ 4,398 $ 29,216 Direct operating expenses 10,328 - 4,609 14,937 ----------------------------------------------------------------- Contribution margin $ 14,490 $ - $ (211) $ 14,279
A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements for the three months ended June 30, 1999 and 1998 is as follows:
Three months ended June 30, - ---------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 - ---------------------------------------------------------------------------------------------------------- Total contribution margin from operating segment and other category above $21,788 $14,279 Unallocated expenses 13,338 11,272 --------------------------- Total operating income $ 8,450 $ 3,007 Other income 1,242 1,282 --------------------------- Income before taxes $ 9,692 $ 4,289 ===========================
6. SUBSEQUENT EVENTS AGREEMENT WITH LOTUS DEVELOPMENT CORPORATION On July 27, 1999, the Company entered into a series of agreements with Lotus Development Corporation, the combined effect of which will be to: (i) sell certain tangible and intangible assets relating to the Company's Pathware product line, a significant portion of the Company's Learning segment, 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 products and Lotus' products. The Company anticipates that the transaction will close on or before August 31, 1999. The 8 Company is assured of receiving a minimum of $30 million in revenue over the next three years as a result of the terms of the agreements as they related to the sale of assets and the distribution of the Company's products. AGREEMENT WITH ELEMENTAL SOFTWARE, INC. On July 12, 1999, the Company entered into a definitive agreement to exchange approximately 620,000 shares of its stock for all of the outstanding equity of Elemental Software, Inc., the developer of Drumbeat 2000, a dynamic Web application development solution. The transaction will be accounted for as a pooling of interests, and is expected to close within 60 days of the definitive agreement. Macromedia expects to take a one-time charge of approximately $3.0 million, including expenses to be incurred in personnel relocation, recruitment and severance and certain other one-time charges relating to the acquisition. AGREEMENT WITH STARBASE CORPORATION In July 1999, the Company acquired technology rights and other related software intangibles from Starbase Corporation for $2.8 million. The Company intends to undertake a development program with the assets acquired and to release a product at a future date. The cost to acquire the intangibles will be expensed as in-process research and development in the second quarter fiscal year 2000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS REVENUES. Macromedia develops, markets and supports software and services for Web publishing and Web learning. Additionally, 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. The Company sells its products through a network of distributors, value-added resellers (VARs), its own sales force and Web site, and to original equipment manufacturers (OEMs) in North America, Europe, Asia Pacific and Latin America. In addition, the Company derives revenues from advertising on its Web sites, and from software maintenance and technology licensing agreements. Revenues increased $16.6 million or 51% in the first quarter of fiscal year 2000 as compared to the same period in fiscal year 1999. Revenues generated by the Web Publishing segment grew by $14.6 million to $41.6 million from $27.0 million for the first quarter in fiscal year 1999. The majority of the increase is attributable to increased sales of Dreamweaver, Fireworks, Flash, and sales of a new product, Generator, slightly offset by a decrease in Freehand sales due to product cycle timing. Additional revenue growth was achieved through web advertising and miscellaneous corporate revenues. North American revenues increased $9.9 million to $28.2 million in the first quarter of fiscal 2000 from $18.3 million in the first quarter of fiscal 1999. International revenues increased $6.7 million from the first quarter fiscal year 1999 to the first quarter fiscal 2000 to $20.7 million. The increase was a result of stronger sales in Europe and certain regions of Asia Pacific. Revenues from Japan were approximately equivalent in the quarters ended June 30, 1999 and June 30, 1998. See Factors That May Affect Future Results of Operations - Risks of International Operations for additional information. The table below summarizes revenue by geography: 9
(In millions) Three months ended June 30, ----------------------------------------------------- 1999 1998 % change North America $ 28.2 $ 18.3 54% % of total revenues 58% 57% International 20.7 14.0 48% % of total revenues 42% 43% Total revenues $ 48.9 $ 32.3
GROSS MARGIN. Gross margin for the three months ended June 30, 1999 and 1998 was 90%, or $43.9 million and $29.2 million, respectively. The increase in absolute dollars was primarily due to increased sales volume, partially offset by increased product cost and increased commission expense associated with advertising revenues. Gross margins may be adversely affected from time to 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 44% in the first quarter of fiscal 1999 to 41% in the first quarter of fiscal 2000, but increased in absolute dollars from $14.3 million to $19.9 million. The increase in absolute dollars was the result of increased costs associated with additional sales headcount to support growth in revenue, amortization of capitalized costs arising from distribution agreements, and increased seminar and tradeshow activity. RESEARCH AND DEVELOPMENT. Research and development expenses increased $2.7 million from $8.5 million in the first quarter of fiscal 1999 to $11.3 million in the first quarter of fiscal 2000, but decreased as a percentage of revenues from 26% to 23%. Research and development expenses increased in absolute dollars due to additional compensation costs required to support continued product development activity and amortization of certain infrastructure costs that support development. In addition, during the three months ended June 30, 1999, the Company incurred costs for acquisition and development of entertainment content for its new business, shockwave.com. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by $1.0 million, from $3.4 million in the first quarter of fiscal 1999 to $4.4 million in the first quarter of fiscal 2000. Expenses increased in the first quarter of fiscal 2000 primarily due to increased expenses for the Company's annual report and due to increases in headcount to support the growth of the Company. As a percentage of revenues, general and administrative costs decreased from 10% in the first quarter of fiscal 1999 to 9% in the first quarter of fiscal 2000. OTHER INCOME. Other income remained constant during the first quarter of fiscal year 1999 as compared to the same period in the prior year. The majority of other income for both periods is investment and interest income. PROVISION/BENEFIT FOR INCOME TAXES. The Company's provision for income taxes for the first three months of fiscal 2000 was $2.5 million as compared to $1.3 million for the first three months of fiscal 1999. The effective tax rate for the quarterly provision was 26% and 31% during the first quarter of the fiscal years 2000 and 1999, respectively. The decrease in the effective tax rate reflects 10 the utilization of research and experimentation tax credits and foreign operating results that were taxed at rates lower than the U.S. statutory rate. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999, the Company had cash, cash equivalents and short-term investments of $112.6 million. For the three months ended June 30, 1999, cash provided by operating activities of $11.5 million was primarily attributable to net income for the period and increased depreciation and amortization. Cash used in investing activities of $4.5 million was used primarily to purchase and develop equipment and software for infrastructure growth, including for shockwave.com. Cash used in financing activities of $2.4 million was the result of purchases of $8.2 million of common stock under the Company's stock buyback program, offset by $5.9 million in proceeds from the exercise of common stock options. Collectively, the above activity resulted in a net increase of $4.7 million from the March 31, 1999 balances of cash and cash equivalents. Working capital increased by $2.2 million from the March 31, 1999 balance of $104.8 million, to $107.0 million at June 30, 1999. The Company anticipates future capital expenditures of approximately $24 million for the remainder of fiscal 2000. During the first three months of fiscal year 2000, the Company made investments in property and equipment of $7.1 million. This amount includes $5.1 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 $.5 million. Amortization will continue over a three-year period, and will increase as additional phases of the project are ready for use. In addition to cash, cash equivalents, and short-term investments, the Company had $15.0 million available under an unsecured revolving line of credit. The line of credit expired on July 15, 1999. As of June 30, 1999, the Company had no borrowings outstanding. The Company believes that existing cash and investments, together with cash generated from operations, will be sufficient to meet the Company's operating requirements through at least March 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. These companies include Adobe Systems Inc. (Adobe), Asymetrix Corporation, Corel Corporation (Corel), and Microsoft Corporation (Microsoft). As the Company competes with larger competitors such as Adobe and Microsoft across a broader 11 range of product lines and different platforms, the Company may face increasing competition from such companies. In addition, the Company's consumer business competes and partners with a number of other Internet community, gaming and entertainment sites. Many of these businesses are much larger than the Company's consumer business, and they have more resources devoted to these business efforts. It is anticipated that the Company's consumer business will face competition from these other sites both for consumers and for advertising and other future revenue sources on which the future success of the consumer business is dependent. RAPIDLY CHANGING TECHNOLOGY. The developing digital media, Internet and online services markets, and the personal computer industry are characterized by rapidly changing technology, resulting in short product life cycles and rapid price declines. The Company must continuously update its existing products, services and content to keep them current with changing technology and consumer tastes and must develop new products, services and content to take advantage of new technologies and consumer preferences that could render the Company's existing products obsolete. The Company's future prospects are highly dependent on its ability to increase functionality of existing products in a timely manner and to develop new products that address new technologies and achieve market acceptance. New products and enhancements must keep pace with competitive offerings, adapt to new platforms and emerging industry standards, and provide additional functionality. There can be no assurance that the Company will be successful in these efforts. FLUCTUATIONS OF OPERATING RESULTS; PRODUCT INTRODUCTION DELAYS. The Company's quarterly operating results may vary significantly depending on the timing of new product introductions and enhancements by the Company. A substantial portion of the Company's revenues is derived from its Web Publishing products. The Company has in the past experienced delays in the development of new products and enhancement of existing products, and such delays may occur in the future. If the Company was unable, due to resource constraints or technological or other reasons, to develop and introduce such products in a timely manner, this inability could have a material adverse effect on the Company's results of operations. If the Company does not ship new versions of its products as planned, sales of existing versions decline, or new products do not receive market acceptance, the Company's results of operations in a given quarter could be materially adversely affected as they were during the fourth quarter of fiscal 1997 when the Company delayed shipment of a new version of Director to the following quarter. The Company's quarterly results of operations also may vary significantly depending on the impact of any of the following: the timing of product introductions by competitors, changes in pricing, execution and volume of technology licensing agreements, the volume and timing of orders received during the quarter, which are difficult to forecast, and finally, any acquisitions of other companies or technologies. The future operating results of the Company may fluctuate as a result of these and other factors, including the Company's ability to continue to develop or acquire innovative products, its product and customer mix, and the level of competition. The Company's results of operations may also be affected by seasonal trends. A significant portion of the Company's operating expenses is relatively fixed, and planned expenditures are based primarily on sales forecasts. As a result, if revenues do not meet the Company's forecasts, operating results may be materially adversely affected. There can be no assurance that sales of the Company's existing products will either continue at historical rates or increase, or that new products introduced by the Company, whether developed internally or acquired, will achieve market acceptance. The Company's historical 12 rates of growth should not be taken as indicative of growth rates that can be expected in the future. UNPROVEN BUSINESS MODEL. The Company's consumer business model depends upon its ability to leverage its existing and future Web traffic and consumer audience to grow revenues and in the future generate multiple revenue streams. The potential profitability of this business model is unproven, and to be successful, the Company must, among other things, develop and market content that achieves broad market acceptance by its user community, Internet advertisers and commerce vendors. There can be no assurance that the consumer business will be able to effectively implement this business model, and even if the implementation is successful, there can be no assurance that the business model will prove to be able to sustain revenue growth or generate significant profits, if any. Furthermore, for the foreseeable future, the Company anticipates that the consumer business will require significant expenditures, particularly related to sales and marketing and brand promotion, and that such expenditures may or may not result in revenue growth. Given the Company's limited operating experience related to the consumer business, the prediction of future revenue growth or operating performance for the consumer business is difficult at best. The Company expects the consumer business to generate net losses for the foreseeable future. In addition to the foregoing the consumer business will depend in part on success in building strategic alliances with other Internet companies and media companies in order to be able to grow the user base and to provide compelling content to attract and maintain the user base. There can be no assurances that such alliances can be created or maintained over an extended period of time. DEPENDENCE ON DISTRIBUTORS. A substantial majority of the Company's revenues is derived from the sale of its products through a variety of distribution channels, including traditional software distributors, mail order, educational distributors, VARs, original equipment manufacturers (OEMs), hardware and software superstores, retail dealers, and direct sales. Domestically, the Company's products are sold primarily through distributors, VARs, and OEMs. In particular, one distributor, Ingram Micro, Inc., accounted for 24% of revenues in the first quarter of both fiscal year 2000 and fiscal year 1999. In addition, the next three distributors combined, two of which are international distributors, accounted for 17% of revenues in the period ending June 30, 1999. In the three month period ending June 30, 1998, three distributors, including two international distributors, accounted for 23% of total revenues. Internationally, the Company's products are sold through distributors. The Company's resellers generally offer products of several different companies, including in some cases, products that are competitive with the Company's products. There can be no assurance that the Company's resellers will continue to purchase the Company's products or provide them with adequate levels of support. In addition, the Company believes that certain distributors are reducing their inventory in the channel and returning unsold products to better manage their inventories. Distributors are increasingly seeking to return unsold product, particularly when a new version or upgrade of a product has superseded such products. If the Company's distributors were to seek to return increasing amounts of products, such returns could have a material adverse effect on the Company's revenues and results of operations. The loss of, or a significant reduction in sales volume to, a significant reseller could have a material adverse effect on the Company's results of operations. DEPENDENCE ON TECHNOLOGY PLATFORMS. In the past, a majority of the Company's revenues was derived from its products for the Macintosh computing platform. Macintosh revenues accounted for 34% of product revenues for the first three months of fiscal year 2000, compared to 42% of revenues for all of fiscal year 1999. Although the relative percentage of 13 Macintosh platform revenues will vary from quarter to quarter based on product release schedules, the Company remains heavily dependent on the sale of products for the Macintosh platform. The success of the Company's product and consumer businesses is dependent upon the existence and future growth of the Internet as a business, entertainment and communications platform. A change in the Internet or the technology used for operation of the Internet or a decline in the growth of the Internet could have a material adverse effect on the Company's results of operations. RISKS OF INTERNATIONAL OPERATIONS. For the first quarter in fiscal 2000, the Company derived approximately 42% of its revenues from international sales. The Company expects that international sales will continue to generate a significant percentage of its revenues. The Company relies on distributors for sales of its products in foreign countries and, accordingly, is dependent on their ability to promote and support the Company's products, and in some cases, to translate them into foreign languages. International business is subject to a number of special risks, including: foreign government regulation; general geopolitical risks such as political and economic instability, hostilities with neighboring countries and changes in diplomatic and trade relationships; more prevalent software piracy; unexpected changes in, or imposition of, regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions; longer payment cycles, greater difficulty in accounts receivable collection, potentially adverse tax consequences, the burdens of complying with a variety of foreign laws; foreign currency risk; and other factors beyond the control of the Company. In addition, the Company's results may be adversely affected by worldwide economic events beyond the control of the Company, such as the prolonged economic downturn occurring in Japan. There can be no assurances that Japan's economy will recover in the near term or that the Company's results or growth rates in this geographic region will return to previous levels even if the recovery occurs. The Company's revenue from Japan declined from 21% of total revenue in fiscal 1997 to 15% in fiscal 1998, and to just 8% of total revenue in fiscal 1999. Revenues from Japan decreased to 7% of total revenue for the first quarter 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 June 30, 1999, notional principal of forward contracts outstanding amounted to $11.8 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 counties. The Company does not anticipate any material impact from the Euro conversion as its financial information system can accommodate multiple currencies. In addition, the company has confirmed with its international financial institutions that they have the ability to process transactions in either Euros or sovereign currency. However, there can be no assurance that all issues related to the Euro conversion have been identified, and the Company may be at 14 risk if any of its principal suppliers are unable to deal with the impact of the Euro conversion. To date, none of the Company's international suppliers have expressed an intention to invoice in Euros. RISKS ASSOCIATED WITH ACQUISITIONS. Macromedia has grown in part because of combinations with other companies. The Company recently accounced its intent to acquire Elemental Software, Inc., expected to be accounted for under the pooling-of-interests method. The Company also recently announced an intent to dispose of certain assets from its Learning segment. There are integration risks associated with merging two companies including financial, administrative and cultural concerns. The Company will face these risks as well as risks associated with the acceptance of the merged companies products and services. The failure to properly manage these risks may result in a material adverse effect on the Company's results of operations. VOLATILITY OF STOCK. The Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Additionally, the Company may not learn of such shortfalls until late in the fiscal quarter, which could result in an even more immediate and adverse effect on the trading price of the Company's common stock. Finally, the Company participates in a highly dynamic industry. In addition to factors specific to the Company, changes in analysts' earnings estimates for the Company or its industry and factors affecting the corporate environment or the securities markets in general will often result in significant volatility of the Company's common stock price. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. The Company prepares its financial statements in conformity with generally accepted accounting principles ("GAAP"). GAAP are subject to interpretation by the American Institute of Certified Public Accountants (the "AICPA"), the Securities and Exchange Commission (the "SEC"), and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on the Company's reported results, and may even affect the reporting of transactions completed prior to the announcement of a change. YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the programming code and embedded technology in existing systems as the year 2000 approaches. The "Year 2000 Issue" arises from the potential for computers to fail or operate incorrectly because their programs incorrectly interpret the two digit date fields "00" as 1900 or some other year, rather than the year 2000. The year 2000 issue creates risk for the Company from unforeseen problems in its own computer systems and from third parties, including customers, vendors and manufacturers, with whom the Company deals worldwide. Failures of the Company's and/or third parties' computer systems could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity, and financial condition, though the Company is unable to assess that potential impact at this time. To mitigate this risk, the Company 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 provided it is able to complete the project as scheduled, the possibility of significant interruptions of normal operations should be reduced. As previously reported, the Company completed the assessment phase of its year 2000 program. As part of this assessment, the Company's application systems (e.g., financial 15 systems, various custom-developed business applications), technology infrastructure (e.g., networks, servers, desktop equipment), facilities (e.g., security systems, fire alarm systems), vendors, partners and products were reviewed to determine their state of year 2000 compliance. This review included the collection of documentation from software and hardware manufacturers, the detailed review of programming code for custom applications, the physical testing of desktop equipment using software designed to test for year 2000 compliance, the examination of key vendors'/partners' year 2000 programs and the ongoing testing of the Company's products as part of normal quality assurance activities. This assessment revealed no significant issues with the Company's application systems, technology infrastructure, facilities or products. With the completion of the Company's assessment phase, and with very little remedial action necessary, the Company embarked into its testing phase. At this time, all production systems (both computer systems and systems dependent on embedded technology) have been individually tested and validated for year 2000 compliance, with no significant issues identified. On an ongoing basis, any new systems will be tested prior to their introduction into the production environment. All current versions of the Company's products have been tested for year 2000 compliance. In general, the products are believed to be compliant, assuming that the operating systems upon which they run have been updated to comply. Both Microsoft and Apple have stated that their operating systems will continue to operate properly into the twenty-first century. Details about older, non-shipping versions of the Company's products can be found on the Company's Web site. A year 2000 issue was identified with Shockwave V6.0.1. The corrective action for this issue is for customers to upgrade to version 7.0.0 or later, or to downgrade to version 6.0.0. The Company currently offers Shockwave at no cost as a downloadable run-time technology on its Web site. Both of these upgrades are available at no charge from the Company's Web site. The Company also sells distribution rights to Shockwave which include maintenance. These customers will receive the upgrade in accordance with their maintenance agreements. The Company intends to assess the proper response to any future noted product issues as and when any such issues arise. Several of the Company's distribution, manufacturing and support partners themselves have significant year 2000 programs underway, some of which involve the upgrade and/or replacement of systems which are important to the day-to-day operations of the partners' business. For each of these partners, the Company has established contingency plans that contemplate the failure of the partners to complete their year 2000 programs. It should also be noted that the Company cannot complete its final testing until the partners' year 2000 programs have been completed, due to the electronic communication that takes place between the Company's and the partners' systems. The Company believes that the total estimated cost of its year 2000 program will be approximately $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 its own products, the technology used in its internal systems, or by failures of its vendors/partners to address their year 2000 issues in a timely and effective manner. 16 As of the end of the first quarter of fiscal year 2000, approximately 90% of the total estimated year 2000 program costs have been incurred. Of the expenditures remaining for the program, it is estimated that most of this represents costs associated with 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). While the Company's programs are intended to minimize the possibility of such effects, should miscalculations or other operational errors occur as a result of the Year 2000 issue, the Company or the parties on which it depends may be unable to produce reliable information or to process routine transactions. Furthermore, in the worst case, the Company or the parties on which it depends may, for an extended period of time, be incapable of conducting critical business activities which include, but are not limited to, providing services, manufacturing and shipping products, invoicing customers and paying vendors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. As stated in its policy, the Company is adverse to principal loss and ensures the safety and preservation of its invested funds by limiting default and market risks. The Company places its investments with high credit-quality issuers, and the portfolio includes only high quality marketable securities with active secondary or resale markets to ensure portfolio liquidity. The Company does not use derivative financial instruments in its investment portfolio. All investments have a fixed 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.
Fair Value - ------------------------------------------------------------------------------------------------------------------ (in thousands) 2000 2001 2002 2003 2004 and Total June 30, Thereafter 1999 - ------------------------------------------------------------------------------------------------------------------ Cash equivalents $ 5,601 - - - - $ 5,601 $ 5,601 Average interest - - - - rate 4.61% 4.61% Short-term investments $ 57,343 $ 18,732 $ 3,242 $ 1,164 - $ 80,481 $ 80,347 Average interest - rate 4.15% 3.98% 3.56% 3.51% 4.11% -------------------------------------------------------------------------------------- Total investment securities $ 62,944 $ 18,732 $ 3,242 $ 1,164 - $ 86,082 $ 85,948 ======================================================================================
17 The Company also has loans outstanding from related parties totaling $8.3 million as of June 30, 1999. The stated loan amounts approximate fair value. FOREIGN CURRENCY RISK The Company's functional currency is the US dollar. 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 guarantee or lock in 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. The forward contracts are marked-to-market and unrealized gains and losses are included in current period net income. 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 June 30, 1999. The information is provided in US dollar equivalents, as presented in the Company's financial statements. The table presents the fair value (at the contract exchange rates) and the weighted average contractual foreign currency exchange rates. All instruments mature September 30, 1999. As of June 30, 1999, the gross unrealized gains and losses on the forward contracts were not significant.
(In thousands, except Notional Average average contract rate) Amount Contract Rate - ---------------------------------------------------------------------------------- Foreign currency to be sold under forward contracts: British Pounds $4,914 0.63 Deutsche Marks 3,519 1.89 French Francs 1,000 6.34 Italian Lira 744 1870.79 Japanese Yen 709 120.93 Swedish Kronas 507 8.44 Spanish Peseta 370 160.76 ------------- $ 11,763 =============
As the tables above incorporate only those exposures that exist as of June 30, 1999, they do not consider those exposures or positions that could arise after that date. Exposures to the Company include changes in short-term US prime interest rates and changes in foreign currency rates. Also, because the foreign currency risk table above does not present the foreign currency denominated financial assets and probable anticipated transactions underlying the forward contracts, the information presented has limited predictive value. 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. 18 Market Price Risk The Company is exposed to market risk from changes in the price of its equity securities available-for-sale, which were recorded at a fair value of approximately $0.5 million at June 30, 1999. The equity investments held by the Company has exposure to price risk, which is estimated as the potential loss in fair value due to a hypothetical change of 10% in quoted market prices. This hypothetical change would reduce the Company's investments as well as unrealized gains on investment securities available for sale which are included as a component of stockholders' equity. This hypothetical change would have an immaterial effect on the recorded value of the Company's investment securities available for sale. PART II - OTHER INFORMATION Item 1. Legal Proceedings On July 31, 1997, a complaint entitled Rosen et al. V. Macromedia, Inc., et al., (Case No. 988526) was filed in the Superior Court for San Francisco, California. The complaint alleges that Macromedia and five of its former or current officers and directors engaged in securities fraud in violation of California Corporations Code Sections 25400 and 25500 by seeking to inflate the value of Macromedia stock by issuing statements that were allegedly false or misleading (or omitted material facts necessary to make any statements made not false or misleading) regarding the Company's financial results and prospects. Four similar complaints by persons seeking to represent the same class of purchasers subsequently have been filed in San Francisco Superior Court, and consolidated for pre-trial purposes with Rosen. Defendants filed demurrers to the complaint and other motions which were argued on December 19, 1997 and January 5, 1998. Before the demurrers could be heard, one defendant, Richard Wood, died in an automobile accident. In March 1998, the Court sustained in part and overruled in part the demurrers. Claims against Susan Bird were dismissed and the Court overruled the demurrers as to Macromedia, John Colligan, James Von Ehr, II, and Kevin Crowder. In May 1999, the Court granted plaintiffs' motion for certification of a class of all persons who purchased Macromedia common stock from April 18, 1996 through January 9, 1997. On September 25, 1997, a complaint entitled City Nominees v. Macromedia, Inc. et al., (Case No. C-97-3521-SC) was filed in the United States District Court for the Northern District of California. The complaint alleges that Macromedia and five of its former or current officers and directors engaged in securities fraud in violation of Sections 10 and 20(a) of the Securities and Exchange Act of 1934 by seeking to inflate the value of Macromedia stock by issuing statements that were allegedly false or misleading (or omitted material facts necessary to make any statements made not false or misleading) regarding the Company's financial 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 19 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 4. Submission of Matters to a Vote of Security Holders On July 26, 1999, the Company held its annual meeting of stockholders. The stockholders passed the following proposals by the votes indicated.
Matter Votes For Withheld 1. Election of Directors Stewart Alsop 35,715,481 103,821 Robert K. Burgess 35,704,301 126,181 John (Ian) Giffen 35,719,050 96,683 Mark D. Kvamme 35,718,531 97,721 Donald L. Lucas 35,715,080 104,623 Roger S. Siboni 35,719,593 95,597 William B. Welty 35,719,590 95,603
Votes Votes Broker Matter Votes For Against Abstained Non Votes Amendment of the 1992 plan to increase the number of shares reserved for issuance thereunder by 2,100,000 shares from 13,300,000 shares to 15,400,000 shares 22,472,438 13,200,090 6,722,699 0 Ratify selection of KPMG LLP as independent auditors for the Company for the current fiscal year 35,718,016 11,676 6,665,535 0
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 20 The Company did not file a report on Form 8-K during the period ended June 30, 1999. 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: August 12, 1999 /s/ Robert K. Burgess ------------------------------------------------- Robert K. Burgess President and Chief Executive Officer Date: August 12, 1999 /s/ Elizabeth A. Nelson ------------------------------------------------- Elizabeth A. Nelson Senior Vice President and Chief Financial Officer 22 EX-27 2 EXHIBIT 27
5 1,000 3-MOS MAR-31-2000 APR-01-1999 JUN-30-1999 31,775 80,806 12,598 8,354 715 144,771 76,355 30,914 199,630 37,729 0 0 0 43 161,599 199,630 48,935 48,935 4,992 4,992 0 0 0 9,692 2,520 7,172 0 0 0 7,172 0.18 0.15
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