-----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, KUGS5NXObcEoX5OpePvE1raV2NSk76bcEtkJmEliXdvXbXsyrG9vWVwRC8HnvMqi jsmeOXIcHk4071ihOG5B9w== 0001193125-05-221109.txt : 20051109 0001193125-05-221109.hdr.sgml : 20051109 20051109122426 ACCESSION NUMBER: 0001193125-05-221109 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 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: 1934 Act SEC FILE NUMBER: 000-22688 FILM NUMBER: 051188718 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 d10q.htm FORM 10-Q Form 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2005

 

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

601 Townsend Street

San Francisco, California 94103

Telephone: (415) 832-2000

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Act. Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes  ¨    No  x

 

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 79.4 million shares of Common Stock, $0.001 par value per common share, outstanding on November 4, 2005 including 1.8 million shares held in treasury.

 



Table of Contents

MACROMEDIA, INC.

 

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2005

 

INDEX

 

PART I FINANCIAL INFORMATION

    

Item 1.

   Financial Statements     
     Condensed Consolidated Balance Sheets at September 30, 2005 and March 31, 2005    3
     Condensed Consolidated Statements of Income for the Three and Six Months Ended September 30, 2005 and 2004    4
     Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2005 and 2004    5
     Notes to Condensed Consolidated Financial Statements    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    19

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    42

Item 4.

   Controls and Procedures    44

PART II OTHER INFORMATION

    

Item 1.

   Legal Proceedings    45

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    45

Item 3.

   Defaults Upon Senior Securities    45

Item 4.

   Submission of Matters to a Vote of Security Holders    46

Item 5.

   Other Information    46

Item 6.

   Exhibits    47

Signature

        48

 

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CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

    

September 30,

2005


   

March 31,

2005


 
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 134,083     $ 106,854  

Short-term investments

     307,478       271,424  

Accounts receivable, net

     76,205       57,582  

Prepaid expenses and other current assets

     31,219       23,674  
    


 


Total current assets

     548,985       459,534  

Property and equipment, net

     106,453       109,509  

Goodwill

     227,104       226,937  

Purchased and other intangible assets, net

     13,182       13,864  

Deferred income taxes

     23,891       22,272  

Other assets

     11,859       11,765  
    


 


Total assets

   $ 931,474     $ 843,881  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable

   $ 5,105     $ 5,355  

Accrued payroll and related liabilities

     26,879       25,485  

Other accrued liabilities

     37,922       35,736  

Income taxes payable

     22,080       21,849  

Accrued restructuring

     7,594       9,151  

Deferred revenues

     54,435       42,604  
    


 


Total current liabilities

     154,015       140,180  
    


 


Other liabilities, non-current:

                

Accrued restructuring

     18,695       20,171  

Deferred revenues

     9,996       9,413  

Other liabilities

     4,995       3,870  
    


 


Total liabilities

     187,701       173,634  
    


 


Commitment and contingencies

                

Stockholders’ equity:

                

Preferred stock, par value $0.001 per preferred share: 5,000 shares authorized, no shares issued and outstanding as of September 30, 2005 and March 31, 2005

     —         —    

Common stock, par value $0.001 per common share: 200,000 shares authorized, 78,469 and 76,812 shares issued as of September 30, 2005 and March 31, 2005, respectively

     77       77  

Treasury stock, at cost: 1,836 shares as of September 30, 2005 and March 31, 2005

     (33,649 )     (33,649 )

Additional paid-in capital

     992,961       958,937  

Deferred stock compensation

     (7,702 )     (8,879 )

Accumulated other comprehensive income (loss)

     408       (2,361 )

Accumulated deficit

     (208,322 )     (243,878 )
    


 


Total stockholders’ equity

     743,773       670,247  
    


 


Total liabilities and stockholders’ equity

   $ 931,474     $ 843,881  
    


 


 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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MACROMEDIA, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

    

Three Months Ended

September 30,


   

Six Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

Net revenues

   $ 127,884     $ 107,924     $ 244,705     $ 211,478  

Cost of revenues:

                                

Cost of net revenues

     9,868       7,538       17,831       15,012  

Amortization of acquired developed technology

     744       744       1,488       1,488  
    


 


 


 


Total cost of revenues

     10,612       8,282       19,319       16,500  
    


 


 


 


Gross profit

     117,272       99,642       225,386       194,978  
    


 


 


 


Operating expenses:

                                

Sales and marketing

     48,742       44,733       97,735       88,825  

Research and development

     26,120       25,100       50,296       48,818  

General and administrative

     13,433       10,812       28,814       21,961  

Amortization of intangible assets

     188       242       376       483  

Restructuring and other

     1,435       —         1,435       —    

Merger-related expenses

     3,003       —         7,254       —    
    


 


 


 


Total operating expenses

     92,921       80,887       185,910       160,087  
    


 


 


 


Operating income

     24,351       18,755       39,476       34,891  
    


 


 


 


Other income (expense):

                                

Interest income, net

     3,487       1,113       6,183       2,054  

Other, net

     327       (102 )     935       (64 )
    


 


 


 


Total other income

     3,814       1,011       7,118       1,990  
    


 


 


 


Income before income taxes

     28,165       19,766       46,594       36,881  

Provision for income taxes

     (7,830 )     (5,300 )     (11,038 )     (9,453 )
    


 


 


 


Net income

   $ 20,335     $ 14,466     $ 35,556     $ 27,428  
    


 


 


 


Net income per common share:

                                

Basic

   $ 0.27     $ 0.21     $ 0.47     $ 0.40  

Diluted

   $ 0.25     $ 0.20     $ 0.43     $ 0.37  

Weighted average common shares outstanding used in net income per common share calculation:

                                

Basic

     76,000       69,510       75,960       69,140  

Diluted

     81,960       73,480       82,340       73,790  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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MACROMEDIA, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

    

Six Months Ended

September 30,


 
     2005

    2004

 

Cash flows from operating activities:

                

Net income

   $ 35,556     $ 27,428  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation and amortization

     13,268       12,135  

Changes in operating assets and liabilities, net of business combinations:

                

Accounts receivable, net

     (18,482 )     (15,123 )

Prepaid expenses and other assets

     (3,822 )     (2,198 )

Accounts payable and other liabilities

     7,572       9,027  

Accrued restructuring

     (3,033 )     (3,872 )

Deferred revenues

     12,398       5,890  
    


 


Net cash provided by operating activities

     43,457       33,287  
    


 


Cash flows from investing activities:

                

Purchases of available-for-sale short-term investments

     (164,531 )     (111,784 )

Proceeds from sales and maturities of available-for-sale short-term investments

     127,653       84,693  

Purchases of property and equipment

     (9,401 )     (43,682 )

Decrease (increase) in restricted cash related to acquisitions and other, net

     525       (1,517 )

Other, net

     (2,963 )     (4,066 )
    


 


Net cash used in investing activities

     (48,717 )     (76,356 )
    


 


Cash flows from financing activities:

                

Proceeds from issuance of common stock

     32,489       19,914  
    


 


Net cash provided by financing activities

     32,489       19,914  
    


 


Net increase (decrease) in cash and cash equivalents

     27,229       (23,155 )

Cash and cash equivalents, beginning of period

     106,854       159,173  
    


 


Cash and cash equivalents, end of period

   $ 134,083     $ 136,018  
    


 


 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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MACROMEDIA, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Nature of Operations

 

Macromedia, Inc. (the “Company” or “Macromedia”) provides software that empowers designers, developers and business users to create and deliver effective user experiences on the Internet, fixed media and wireless and digital devices. The Company’s integrated family of technologies enables the development of a wide range of internet and mobile application solutions.

 

The Company sells its products through a worldwide network of distributors, value-added resellers (“VARs”) and its own sales force and websites. In addition, Macromedia derives revenues from software maintenance and technology licensing agreements that it has with original equipment manufacturers (“OEMs”) and end users.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation—The Condensed Consolidated Financial Statements include all domestic and foreign subsidiaries that are more than 50% owned. Macromedia is not involved with any variable interest entities as defined by Financial Accounting Standards Board (“FASB”) Interpretation No. 46 Consolidation of Variable Interest Entities. All significant intercompany transactions and balances have been eliminated. Macromedia has prepared the accompanying Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The financial information reflects all adjustments which are, in the opinion of management, necessary to fairly present in all material respects the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flows for the periods presented. Such adjustments are normal and recurring except as otherwise noted.

 

These Condensed Consolidated Financial Statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and notes normally provided in annual financial statements. As a result, these Condensed Consolidated Financial Statements should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in Macromedia’s annual report on Form 10-K for the fiscal year ended March 31, 2005. The results of operations for the three and six months ended September 30, 2005 are not necessarily indicative of the results for the fiscal year ending March 31, 2006 or any other future periods.

 

The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Software Revenue Recognition—The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. In addition, revenue is recognized in accordance with Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, and Emerging Issues Task Force (“EITF”) 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, as applicable.

 

Revenues recognized from software licenses are recognized upon shipment provided that persuasive evidence of an arrangement exists, collection of the resulting receivables is deemed probable and the payment terms are fixed or determinable and the arrangement does not involve services that are essential to the functionality of the software. The Company also

 

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maintains allowances for anticipated product returns and rebates to distributors. Revenues from consulting, training and other services are generally recognized as the services are performed. When software licenses are sold together with services, revenues are allocated to each element of the arrangement based on the relative fair values of the elements, such as software licenses, maintenance, support and training.

 

The determination of fair value is based on objective evidence that is specific to the Company, commonly referred to as vendor-specific objective evidence (“VSOE”). Fair value for the Company’s software products, maintenance, support and training is based on prices charged when the element is sold separately. In certain instances where an element has not been sold separately and the VSOE of fair value is unavailable, fair value is established by a price determined by the Company’s management if it is probable that the price, once established, will not change before the separate introduction of the element into the marketplace. If such evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement are delivered. If the only remaining undelivered element is maintenance and support, revenue for all elements would be recognized ratably over the period of maintenance and support. If in a multiple element arrangement, fair value does not exist for one or more of the delivered elements in the arrangement, but fair value does exist for all undelivered elements, then the residual method of accounting is applied. Under the residual method of accounting, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

 

The Company licenses products to OEMs and/or provides end user customers the right to use multiple copies. These arrangements generally provide for nonrefundable fixed fees. Revenues are recognized upon delivery of the product master or the first copy, provided that all significant obligations have been met, persuasive evidence of an arrangement exists, fees are fixed or determinable and collection is probable. Per-copy royalties in excess of the fixed minimum amounts are recognized as revenues when reported to us by third party licensees. If maintenance and support is included in the contract, it is unbundled from the license fee using the Company’s objective evidence of the fair value of the maintenance and support. If objective evidence of the fair value of the maintenance and support is not available, the revenues from the entire arrangement are recognized ratably over the maintenance and support term.

 

Fees from volume licenses are recognized as revenues upon shipment provided that all significant obligations have been met, persuasive evidence of an arrangement exists, fees are fixed or determinable, collection is probable and the arrangement does not involve services that are essential to the functionality of the software. Fees from licenses sold together with consulting services are generally recognized upon shipment provided that the above criteria have been met and payment for and acceptance of the licenses is not dependent upon the performance of consulting services. Revenues from maintenance and support are recognized on a straight-line basis over the term of the contract.

 

During periods of product transition when upgraded versions of existing products are being introduced and released for commercial shipment, the Company provides eligible end user customers who purchased the older product version during a specified time frame the right to receive the upgrade version of the licensed product at no additional charge. The Company also offers certain discount rights to existing users to encourage their migration to other Macromedia products. To the extent that such transactions are multiple-element arrangements, the Company defers revenue equal to the fair value of the specified upgrade or discount right, reduced by the estimated percentage of customers who will not exercise the discount right in the specified time period. Estimates of customers not exercising the discount right are based upon historical analyses. The actual percentage of customers not exercising the discount right has been materially consistent with our estimates.

 

As part of the Company’s revenue recognition practices, a sales returns reserve for stock rotation and other return-right privileges contained in agreements with resellers has been established. Product returns are recorded as a reduction of net revenues. In addition, the Company’s channel management practices over its resellers are also intended to provide reasonable assurance that product inventory levels in the distribution channel, on a product-by-product basis, reflect anticipated demand for the respective products. In assessing the appropriateness of product inventory levels held by its resellers and the impact on potential product returns, the Company may limit sales to its resellers in order to maintain inventory levels deemed by management to be appropriate. The Company generally provides a sales returns reserve to maintain channel inventory levels between four to six weeks of expected future sales by its first-tier and certain second tier resellers. At September 30, 2005, channel inventory, net of related reserves, remained within the estimated channel inventory range noted above.

 

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For desktop software products, the Company offers limited complimentary 90-day technical support to end user customers who have registered their products via e-mail or over the phone. This cost is included as part of the initial license fee charged to these customers. The Company has determined that the cost to provide this support is insignificant. In addition, no product updates are provided during this period. As a result, the Company does not defer any portion of the license fee related to this support.

 

Stock-Based Compensation. As permitted under Statement of Financial Accounting Standard (“SFAS”) No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for stock-based compensation to employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the market price of the Company’s common stock at the date of grant over the stock option exercise price. Compensation costs are amortized on a straight-line basis over the expected service period, which is generally the vesting period of the stock-based awards.

 

Pursuant to SFAS No. 123, the Company is required to disclose the pro forma effects of stock-based compensation on net income and net income per share as if the Company had elected to use the fair value approach to account for all of its employee stock-based compensation plans. Had compensation cost for the Company’s plans been determined with the fair value approach in accordance with SFAS No. 123, the Company’s pro forma net income (loss) and pro forma net income (loss) per share during the periods indicated below would have been (in thousands, except per share data):

 

    

Three Months Ended

September 30,


   

Six Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

Net income as reported

   $ 20,335     $ 14,466     $ 35,556     $ 27,428  

Stock-based compensation costs, net of $0 taxes, included in the determination of net income as reported

     654       —         1,177       —    

Stock-based compensation costs, net of taxes of $0, that would have been included in the determination of net income had the fair value-based method been applied to all awards

     (8,085 )     (11,039 )     (16,023 )     (29,856 )
    


 


 


 


Pro forma net income (loss)

   $ 12,904     $ 3,427     $ 20,710     $ (2,428 )
    


 


 


 


Basic net income (loss) per common share:

                                

As reported

   $ 0.27     $ 0.21     $ 0.47     $ 0.40  

Pro forma

   $ 0.17     $ 0.05     $ 0.27     $ (0.04 )

Diluted net income (loss) per common share:

                                

As reported

   $ 0.25     $ 0.20     $ 0.43     $ 0.37  

Pro forma

   $ 0.16     $ 0.05     $ 0.25     $ (0.04 )

 

The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.

 

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The fair value of the Company’s stock options granted under its stock-based compensation plans was estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions for grants during the three and six months ended September 30, 2005 and 2004:

 

    

Three Months Ended

September 30,


   

Six Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

Weighted average risk free rate – stock option plans

   4.11 %   3.49 %   4.02 %   3.54 %

Weighted average risk free rate – ESPP

   3.61 %   1.90 %   3.61 %   1.90 %

Expected life of employee and director stock options (years)

   3.6     4.5     3.7     4.5  

Expected life of ESPP (years)

   0.5-2.0     0.5-2.0     0.5-2.0     0.5-2.0  

Expected volatility – stock option plans

   56 %   75 %   57 %   76 %

Expected volatility – ESPP

   37 %   59 %   37 %   59 %

Expected dividend yield

   0 %   0 %   0 %   0 %

 

Using the Black-Scholes option-pricing model and the above assumptions, the weighted average fair value of Macromedia stock options granted during the three months ended September 30, 2005 and 2004 was $16.62 and $11.94, respectively. The weighted average fair value of Macromedia stock options granted during the six months ended September 30, 2005 and 2004 was $17.06 and $12.24, respectively. In periods in which employees enroll in the Company’s Employee Stock Purchase Plans (“ESPPs”), the fair value of shares to be issued under these ESPPs is also calculated. Employees are only allowed to enroll in the Company’s 2003 Employee Stock Purchase Plan in February and August. During the three months ended September 30, 2005 and 2004, the weighted average fair value of purchase rights granted under the ESPPs was $11.57 per right, respectively.

 

Other Significant Accounting Policies. For all other significant accounting policies, refer to the Company’s Form 10-K for the year ended March 31, 2005.

 

3. Merger of Macromedia, Inc. with Adobe Systems Incorporated

 

On April 17, 2005, Adobe Systems Incorporated (“Adobe”) entered into a definitive Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Macromedia. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Avner Acquisition Sub, Inc., a wholly owned subsidiary of Adobe, will merge with and into Macromedia, with Macromedia as the surviving corporation of the merger (the “Merger”). As a result of the Merger: (i) Macromedia will become a wholly owned subsidiary of Adobe; and (ii) each outstanding share of the Company’s common stock will be converted into the right to receive 1.38 shares of Adobe common stock (after taking into account the two-for-one stock split in the form of a stock dividend of Adobe common stock distributed on May 23, 2005 to Adobe stockholders of record as of May 2, 2005) (the “Exchange Ratio”).

 

On August 24, 2005, Macromedia and Adobe held special meetings of their respective stockholders in connection with the Merger Agreement. At these special meetings, the stockholders of both Macromedia and Adobe approved the Merger Agreement.

 

Consummation of the Merger remains pending subject to customary closing conditions and regulatory approvals, including antitrust approvals in certain European jurisdictions. On October 13, 2005, the Merger received clearance from the U.S. Department of Justice. The Merger is expected to close in the Fall of calendar year 2005 (specifically late November or December) but may not be completed if any of the conditions are not satisfied or waived. Unless otherwise indicated, the discussions in this document relate to Macromedia as a standalone entity and do not reflect the impact of the proposed merger with Adobe.

 

For additional information regarding the Merger, please refer to Amendment No. 1 to the Form S-4 (File No. 333-126163), which contains the joint proxy statement/prospectus filed by Adobe on July 20, 2005 in connection with the Merger.

 

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The Company has incurred merger-related expenses associated with its pending merger with Adobe. Merger-related expenses totaled $3.0 million and $7.3 million in the three and six months ended September 30, 2005 and were principally comprised of legal, investment banking, filing and accounting fees.

 

4. Accounts Receivable

 

Accounts receivable consisted of the following (in thousands):

 

    

September 30,

2005


    March 31,
2005


 

Accounts receivable

   $ 62,021     $ 54,569  

Unbilled receivables

     15,605       4,115  
    


 


       77,626       58,684  

Allowance for doubtful accounts

     (1,421 )     (1,102 )
    


 


Net Accounts Receivable

   $ 76,205     $ 57,582  
    


 


 

Unbilled receivables reflect unbilled customer balances arising when criteria meeting our revenue recognition requirements are met but are not currently due under the terms of the contracts.

 

5. Purchased and Other Intangible Assets

 

At September 30, 2005 and March 31, 2005, purchased and other intangible assets consisted of the following (in thousands):

 

     September 30, 2005

   March 31, 2005

    

Gross

Amount


  

Accumulated

Amortization


    Net

  

Gross

Amount


  

Accumulated

Amortization


    Net

Acquired developed technology

   $ 12,294    $ (6,855 )   $ 5,439    $ 12,294    $ (5,367 )   $ 6,927

Purchased technology

     7,733      (3,751 )     3,982      6,958      (3,085 )     3,873

Localization

     3,365      (1,486 )     1,879      5,510      (4,527 )     983

Acquired trade names, trademarks, patents and other intangible assets

     5,892      (4,010 )     1,882      5,608      (3,527 )     2,081
    

  


 

  

  


 

     $ 29,284    $ (16,102 )   $ 13,182    $ 30,370    $ (16,506 )   $ 13,864
    

  


 

  

  


 

 

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The net book value of the Company’s purchased and other intangible assets and their estimated remaining useful lives at September 30, 2005 are (in thousands):

 

     Net Book Value

  

Weighted Average

Estimated Remaining

Useful Life


Acquired developed technology

   $ 5,439    26 months

Purchased technology

     3,982    29 months

Localization

     1,879    21 months

Acquired trade names, trademarks, patents and other intangible assets

     1,882    24 months
    

    
     $ 13,182     
    

    

 

The following table depicts the Company’s estimated future amortization charges with respect to amortizable Purchased and other intangible assets at September 30, 2005 (in thousands):

 

    

Estimated

Amortization

Expense


Six months ending March 31, 2006

   $ 3,582

Fiscal year ending March 31, 2007

     5,711

Fiscal year ending March 31, 2008

     3,587

Fiscal year ending March 31, 2009

     302
    

Total

   $ 13,182
    

 

6. Restructuring

 

Fiscal 2005 Restructuring Plan

 

In the fourth quarter of fiscal year 2005, the Company exited two facilities in Northern California in conjunction with the completion of its new corporate headquarters building in San Francisco, California which enabled the Company to consolidate employees previously located in leased facilities. As a result, the Company recorded $11.8 million in restructuring and facility related exit charges in fiscal year 2005.

 

In the second quarter of fiscal year 2006, the Company entered into an agreement with a new subtenant in one of the Company’s restructured spaces in Redwood Shores, California with terms less favorable than those previously estimated. In addition, the Company revised estimates relating to a restructured space in San Diego, California, increasing the estimated time to occupy the space. As a result, the Company recorded a charge to adjust its 2005 Restructuring Plan of approximately $1.9 million in the second quarter of fiscal year 2006.

 

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The rollforward of the accrued restructuring liability related to facility and exit charges initiated in fiscal year 2005 is presented below (in thousands):

 

    

Facility

Consolidation


   

Asset

Write-offs


    Total

 

Fiscal 2005 Restructuring reserve:

                        

Facility restructuring and other exit charges

   $ 10,149     $ 1,674     $ 11,823  

Cash payments

     (2,412 )     —         (2,412 )

Non-cash credits (charges)

     3,608       (1,674 )     1,934  
    


 


 


Accrued restructuring liabilities at March 31, 2005

     11,345       —         11,345  

Fiscal 2006 activity:

                        

Adjustments to estimated liability

     1,881       —         1,881  

Cash payments

     (1,703 )     —         (1,703 )

Accreted interest*

     226       —         226  
    


 


 


Accrued restructuring liabilities at September 30, 2005

   $ 11,749     $ —       $ 11,749  
    


 


 


 

* Accreted interest is recorded in general and administrative expenses.

 

Fiscal 2002 Restructuring Plan

 

In fiscal year 2002, the Company executed a restructuring plan to deliver cost synergies associated with its fiscal year 2001 acquisition of Allaire Corporation and to better align its cost structure with the weaker business environment. Restructuring expenses associated with facilities primarily represented estimated future costs related to approximately 22 facilities to either cancel or vacate approximately 450,000 square feet of space held under the Company’s operating leases at the time of the restructuring and, to a lesser extent, employee termination and severance costs.

 

In the fourth quarter of fiscal year 2005, an evaluation of market conditions and the Company’s actual sublease activity in its Newton, Massachusetts facility indicated that adjustments to the Company’s reserve estimates were warranted. Specifically, following lease negotiations with a new subtenant in the Company’s restructured space, the Company revised estimated, sublease income to reflect lower expected future rental rates based on an analysis of current and anticipated lease rates. As a result, the Company recorded an additional charge to its Fiscal 2002 Restructuring Plan of approximately $7.1 million in the fourth quarter of fiscal year 2005.

 

In the second quarter of fiscal year 2006, the Company revised its estimates to its Fiscal 2002 Restructuring Plan, decreasing the reserve by $0.4 million, primarily due to a reduction in estimated common area maintenance charges.

 

The rollforward of the accrued restructuring liability related to facility and exit charges initiated in fiscal year 2002 is presented below (in thousands):

 

    

Facility

Consolidation


   

Asset

Write-offs


   

Severance

and Other


    Total

 

Total Fiscal 2002 facility restructuring and other charges recorded in 2002

   $ 48,996     $ 24,303     $ 8,521     $ 81,820  

Activity through March 31, 2005:

                                

Adjustments and additional charges

     7,085       264       —         7,349  

Cash payments

     (39,288 )     —         (8,327 )     (47,615 )

Non-cash credits (charges)

     1,184       (24,567 )     (194 )     (23,577 )
    


 


 


 


Accrued restructuring liabilities at March 31, 2005

     17,977       —         —         17,977  
    


 


 


 


Fiscal 2006 activity:

                                

Adjustments to estimated liability

     (446 )     —         —         (446 )

Cash payments

     (2,991 )     —         —         (2,991 )
    


 


 


 


Accrued restructuring liabilities at September 30, 2005

   $ 14,540     $ —       $ —       $ 14,540  
    


 


 


 


 

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The Company expects to make future facility rent payments, net of sublease income, on its lease obligations for its restructured facilities under its 2002 and 2005 Restructuring Plans through the end of its lease obligation periods. These net payments will be recorded as a reduction to the Company’s restructuring accrual. As of September 30, 2005, the restructuring accrual balance of $26.3 million primarily represented the contractual lease obligations of 5 facilities as well as related estimated demise and tenant improvement costs to sublease these facilities in future periods, net of contracted and estimated sublease income. As of September 30, 2005, future minimum gross lease obligations for the Company’s restructured facilities extending through fiscal 2011 amounted to $61.8 million, which will be offset by future sublease income of $36.9 million to be received under contractual sublease arrangements.

 

7. Foreign Currency Forward Contracts

 

The Company sells its products internationally in U.S. dollars and certain foreign currencies, primarily the Euro, Japanese Yen and British Pound. The Company regularly enters into foreign exchange forward contracts to offset the impact of currency fluctuations on certain foreign currency revenues and operating expenses as well as subsequent receivables and payables. At September 30, 2005, the net notional amount of forward contracts outstanding in U.S. dollars using the spot exchange rates in effect at September 30, 2005 amounted to $68.7 million. Management’s strategy is to reduce the risk to earnings and cash flows associated with changes in foreign currency exchange rates.

 

Cash Flow Hedging. The Company designates and documents foreign exchange forward contracts related to forecasted transactions as cash flow hedges and applies hedge accounting for these contracts. The critical terms of the foreign exchange forward contracts and the forecasted underlying transactions are matched at inception and forward contract effectiveness is calculated, at least quarterly, by comparing the change in the fair value of the contracts to the change in fair value of the forecasted revenues or expenses, with the effective portion of the fair value of the hedges recorded in Accumulated other comprehensive income (“AOCI”). The Company records any ineffective portion of the hedging instruments in Other income on its Condensed Consolidated Statements of Income, which was not material during the three and six months ended September 30, 2005 and 2004. When the underlying forecasted transactions occur and impact earnings, the related gains or losses on the cash flow hedge are reclassified from AOCI to revenues or expenses. In the event it becomes probable that the forecasted transactions will not occur, the gains or losses on the related cash flow hedges would be reclassified from AOCI to Other income at that time. All values reported in AOCI at September 30, 2005 will be reclassified to operations in twelve months or less. At September 30, 2005, the outstanding cash flow hedging derivatives had maturities of twelve months or less.

 

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The following table depicts cash flow hedge accounting activity as a component of AOCI in the six months ended September 30, 2005 (in thousands):

 

AOCI at March 31, 2005 related to hedging activity

   $ (459 )

Net gain on cash flow hedges

     2,653  

Reclassifications to net revenues

     295  

Reclassifications to operating expenses

     17  
    


AOCI at September 30, 2005 related to hedging activity

   $ 2,506  
    


 

The strengthening of the U.S. Dollar as compared to the Euro, Japanese Yen and British Pound between March 31, 2005 and September 30, 2005 has resulted in net gains on forward contracts currently held to hedge forecasted revenues and operating expenses.

 

Balance Sheet Hedging. The Company manages its foreign currency risk associated with foreign currency denominated assets and liabilities using foreign exchange forward contracts. These derivative instruments are carried at fair value with changes in the fair value recorded as a component of Other income (expense) on its Condensed Consolidated Statements of Income. These derivative instruments substantially offset the remeasurement gains and losses recorded on identified foreign currency denominated assets and liabilities. At September 30, 2005, the Company’s outstanding balance sheet hedging derivatives had maturities of twelve months or less.

 

8. Comprehensive Income

 

Comprehensive income consists of net income, unrealized gains and losses on short-term investments classified as available-for-sale and unrealized gains and losses associated with the Company’s cash flow hedges. The following table sets forth the calculation of comprehensive income, net of tax (in thousands):

 

    

Three Months Ended

September 30,


   

Six Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

Net income

   $ 20,335     $ 14,466     $ 35,556     $ 27,428  

Unrealized loss on short-term investments, net of tax of $0

     (834 )     (224 )     (196 )     (925 )

Unrealized gain (loss) from cash flow hedges, net of tax of $0

     121       (697 )     2,965       (312 )
    


 


 


 


Comprehensive income

   $ 19,622     $ 13,545     $ 38,325     $ 26,191  
    


 


 


 


 

9. Net Income Per Common Share

 

Basic net income per common share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing the net income for the period by the weighted average number of common and potentially dilutive securities outstanding during the period using the treasury stock method. Potentially dilutive securities are composed of incremental common shares issuable upon the exercise of stock options and the Company’s 2003 ESPP. In August 2005, employees purchased 261,000 shares of common stock for $4.5 million under the Company’s 2003 ESPP.

 

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The following table sets forth the reconciliation of the numerator and denominator used in the computation of basic and diluted net income per common share (in thousands, except per share data):

 

    

Three Months Ended

September 30,


  

Six Months Ended

September 30,


     2005

   2004

   2005

   2004

Numerator:

                           

Net income

   $ 20,335    $ 14,466    $ 35,556    $ 27,428
    

  

  

  

Denominator:

                           

Basic weighted average number of common shares outstanding

     76,000      69,510      75,960      69,140

Effect of dilutive potential common shares resulting from stock options and ESPP and restricted shares

     5,960      3,970      6,380      4,650
    

  

  

  

Diluted weighted average number of common shares outstanding

     81,960      73,480      82,340      73,790
    

  

  

  

Basic net income per common share

   $ 0.27    $ 0.21    $ 0.47    $ 0.40
    

  

  

  

Diluted net income per common share

   $ 0.25    $ 0.20    $ 0.43    $ 0.37
    

  

  

  

 

The table below presents stock options that are excluded from the diluted net income per common share computation because the exercise prices of the options were greater than the average market price of the Company’s common stock for the following periods and, therefore, their effects would be anti-dilutive (shares in thousands):

 

    

Three Months Ended

September 30,


   Six Months Ended
September 30,


     2005

   2004

   2005

   2004

Antidilutive options – weighted average shares

     304      2,207      204      1,737

Weighted average exercise price of antidilutive options

   $ 47.05    $ 27.07    $ 50.41    $ 28.88

Average fair value of the Company’s common stock during the period

   $ 37.95    $ 19.98    $ 38.84    $ 21.07

 

At September 30, 2005, the Company had 1.8 million shares of its common stock, which were previously repurchased on the open market, classified as treasury stock. These shares are recorded at cost and are shown as a reduction of stockholders’ equity.

 

10. Commitments and Contingencies

 

Macromedia’s principal commitments at September 30, 2005 consisted of obligations under operating leases for facilities, purchase commitments and letter of credit arrangements.

 

Operating Leases. The Company leases office space and certain equipment under operating leases, some of which contain renewal and purchase options. In addition, the Company subleases certain office space that is not currently occupied by the Company. For certain of these operating leases, the Company entered into agreements to indemnify lessors against certain additional costs through the term of the lease. To date, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in its Condensed Consolidated Financial Statements with respect to these indemnification guarantees.

 

Letters of Credit. The Company has obtained letters of credit from financial institutions totaling approximately $6.3 million as of September 30, 2005 and $7.8 million as of March 31, 2005, in lieu of security deposits for leased office space. No amounts have been drawn against the letters of credit.

 

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Table of Contents

Legal. On September 6, 2002, Plaintiff Fred B. Dufresne filed suit against Macromedia, Inc., Adobe, Microsoft Corporation and Trellix Corporation (“Defendants”) in the U.S. District Court, District of Massachusetts (the “Dufresne Matter”), alleging infringement of U.S. Patent No. 5,835,712 (the “712 patent”) entitled “Client-Server System Using Embedded Hypertext Tags for Application and Database Development.” The Plaintiff’s complaint asserts, among other things, that Defendants have infringed, and continue to infringe, one or more claims of the 712 patent by making, using, selling and/or offering for sale, products supporting Microsoft Active Server Pages technology. The Plaintiff seeks unspecified compensatory damages, preliminary and permanent injunctive relief, trebling of damages for willful infringement, and fees and costs. The Company believes the action has no merit and is vigorously defending against it. In accordance with the disclosures required by SFAS No. 5 Accounting for Contingencies, the Company is unable to estimate the potential financial impact this matter could have on the Company.

 

In addition, from time to time, Macromedia is involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contract law, distribution arrangements and employee relation matters. As of the time of this Quarterly Report, there were no material pending legal proceedings other than the Dufresne Matter, and other than ordinary routine litigation incidental to the Company’s business, to which the Company or any of its subsidiaries are a party or of which any of the Company’s property is subject. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome will have a material adverse effect on the Company’s consolidated financial position, although results of operations or cash flows could be affected in a particular period.

 

Intellectual Property Indemnification Obligations. The terms of the Company’s distribution agreements with its first-tier distributors, including OEMs, and its license agreements with enterprise customers, generally provide for a limited indemnification of such distributors and customers against losses, expenses and liabilities arising from third-party claims based on alleged infringement by the Company’s products of an intellectual property right of such third party. The terms of such indemnification often limit the scope of and remedies for, such indemnification obligations and generally include a right to replace an infringing product. To date, the Company has not had to reimburse any of our distributors and customers for any losses related to these indemnification provisions pertaining to third-party intellectual property infringement claims. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the terms of the corresponding agreements with the Company’s distributors and customers, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

 

Agreements to Indemnify Directors and Officers. As permitted under Delaware law, we have agreements whereby we indemnify our directors and officers for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage, if any, would be minimal.

 

Other Contingent Liabilities and Commitments. Through its normal course of business, the Company has also entered into other indemnification agreements that arise in various types of arrangements, including those with financial institutions under banking arrangements. To date, the Company has not made any significant payments under such indemnification agreements. Accordingly, no amount has been accrued in the Company’s Condensed Consolidated Financial Statements with respect to these indemnification agreements.

 

11. Segment Reporting and Significant Customers

 

At September 30, 2005, the Company operated in one business segment, the Software segment. The Company’s Software segment provides software that empowers both technical and non-technical individuals to create effective user experiences on the Internet.

 

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The Company has aligned its net product revenues into three main categories identified by the markets that they serve: Designer and Developer, Business User, and Consumer. In addition, Other is comprised of miscellaneous fees, including freight and training. The Company’s Chief Executive Officer is the chief operating decision maker who evaluates performance based on net revenues and total operating expenses of the Software segment.

 

Net revenues by market during the three and six months ended September 30, 2005 and 2004 are disclosed in the following table (in thousands):

 

    

Three Months Ended

September 30,


  

Six Months Ended

September 30,


     2005

   2004

   2005

   2004

Net Revenues:

                           

Designer and Developer

   $ 96,001    $ 86,559    $ 181,363    $ 171,551

Business User

     16,938      11,433      33,867      22,276

Consumer

     13,135      8,148      26,060      14,676

Other

     1,810      1,784      3,415      2,975
    

  

  

  

Total

   $ 127,884    $ 107,924    $ 244,705    $ 211,478
    

  

  

  

 

Distributors account for a significant portion of the Company’s net revenues and accounts receivable balance and comprise several individually large accounts. The following table sets forth the information about two of the Company’s distributors:

 

     % of Net Revenues

    % of Gross Accounts Receivable

 
    

Three Months Ended

September 30,


   

Six Months Ended

September 30,


   

September 30,

2005


   

March 31,

2005


 
     2005

    2004

    2005

    2004

     

Distributor:

                                    

Ingram Micro, Inc.

   18 %   22 %   17 %   21 %   18 %   16 %

Tech Data Corporation

   13 %   13 %   12 %   12 %   11 %   10 %

 

12. Income Taxes

 

During the second quarter of fiscal year 2006, the Company completed its evaluation of the repatriation provisions of the American Jobs Creation Act of 2004 (“AJCA”). The AJCA introduced a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. The Company made a determination for a planned repatriation of up to $65 million under this provision.

 

The Company’s income tax provision for the second quarter of fiscal year 2006 includes $4.6 million related to the planned repatriation of certain foreign earnings. The planned repatriation of certain foreign earnings is expected to occur during the last half of fiscal year 2006. The Company will invest these earnings pursuant to an approved Domestic Reinvestment Plan that conforms to the AJCA guidelines.

 

At September 30, 2005, the Company had available federal and state net operating loss carryforwards of approximately $590 million and $476 million, respectively. The Company also had unused research credit carryforwards of approximately $29 million and $30 million for federal and California tax purposes, respectively. If not utilized, federal and state net operating loss and federal research credit carryforwards will expire in fiscal year 2006 through 2026. The California research credits may be carried forward indefinitely.

 

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13. Recent Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123R (Revised 2004), Share-Based Payment: an amendment of FASB Statements No. 123 and 95, which requires the Company to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation model. The pro forma disclosures previously permitted will no longer be an alternative to financial statement recognition. In April 2005, the Securities and Exchange Commission (the “SEC”) announced that the accounting provisions of SFAS 123R are effective at the beginning of a company’s next fiscal year that begins after June 15, 2005 (the quarter ending June 30, 2006 for Macromedia, Inc.). Companies adopting the new requirements are likely to reexamine their valuation methods and the support for the assumptions that underlie their valuation of the awards. The Company believes that many companies are also likely to carefully examine their share-based-payment programs. SFAS No. 123R establishes accounting requirements for “share-based” compensation to employees, including employee-stock-purchase-plans. This standard carries forward prior guidance on accounting for awards to non-employees. Although the Company has not yet determined the transition method or whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, it is evaluating the requirements under SFAS 123R and expects the adoption to have a significant adverse impact on its consolidated statements of income and net income per share.

 

In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This Statement also 1) redefines restatement as the revising of previously issued financial statements to reflect the correction of an error and 2) requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company is evaluating the impact of adopting SFAS No. 154 and does not believe adoption will have a material impact on the Company’s financial statements.

 

In March 2004, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The guidance prescribes a three-step model for determining whether an investment is other-than-temporarily impaired and requires disclosures about unrealized losses on investments. In November 2005, the FASB issued Staff Position SFAS 115-1 and SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (“FSP 115-1 and 124-1”). FSP 115-1 and 124-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF 03-1. The Company is evaluating the impact, if any, FSP 115-1 and 124-1 will have on its financial position and results of operations.

 

In December 2004, the FASB issued Staff Position SFAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, (“FSP 109-1”) to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“AJCA”). Companies that qualify for the AJCA’s deduction for domestic production activities must account for it as a special deduction under Statement 109 and reduce their tax expense in the period or periods the amounts are deductible on the tax return, according to FSP 109-1 starting in the second quarter of fiscal year 2006, the Company adopted the accounting and disclosure requirements as outlined in FSP 109-1. The Company is following the requirements of FSP 109-1. The FASB’s guidance did not have a material impact on the Company’s financial statements.

 

In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the AJCA, which allows an enterprise time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings. The ACJA introduced a limited time 85% dividend received deduction on repatriation of certain foreign earnings. This deduction would result in an approximate federal income tax rate of 5.25% on the repatriated earnings. The Company has completed its evaluation of the repatriation provisions under the ACJA and has disclosed its impact in Note 12.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Except for historical financial information contained herein, the matters discussed in this Form 10-Q may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and subject to the safe harbor created by the Securities Litigation Reform Act of 1995. Such statements include declarations regarding our intent, belief, or current expectations and those of our management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks, uncertainties, and other factors, some of which are beyond our control; actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to: (i) that the information is of a preliminary nature and may be subject to further adjustment; (ii) those risks and uncertainties identified under “Risk Factors that May Affect Future Results of Operations;” and (iii) the other risks detailed from time-to-time in our reports and registration statements filed with the U.S. Securities and Exchange Commission (“SEC”). Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Merger of Macromedia, Inc. with Adobe Systems Incorporated

 

On April 17, 2005, Adobe Systems Incorporated (“Adobe”) entered into a definitive Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Macromedia, Inc. (“Macromedia”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Avner Acquisition Sub, Inc., a wholly owned subsidiary of Adobe, will merge with and into Macromedia, with Macromedia as the surviving corporation of the merger (the “Merger”). As a result of the Merger: (i) Macromedia will become a wholly owned subsidiary of Adobe; and (ii) each outstanding share of our common stock will be converted into the right to receive 1.38 shares of Adobe common stock (after taking into account the two-for-one stock split in the form of a stock dividend of Adobe common stock distributed on May 23, 2005 to Adobe stockholders of record as of May 2, 2005) (the “Exchange Ratio”).

 

On August 24, 2005, Macromedia and Adobe held special meetings of their respective stockholders in connection with the Merger Agreement. At these special meetings, the stockholders of both Macromedia and Adobe approved the Merger Agreement.

 

Consummation of the Merger remains pending subject to customary closing conditions and regulatory approvals, including antitrust approvals in certain European jurisdictions. On October 13, 2005, the Merger received clearance from the U.S. Department of Justice. The Merger is expected to close in the Fall of calendar year 2005 (specifically late November or December) but may not be completed if any of the conditions are not satisfied or waived. Unless otherwise indicated, the discussions in this document relate to Macromedia as a standalone entity and do not reflect the impact of the proposed merger with Adobe.

 

For additional information regarding the Merger, please refer to Amendment No. 1 to the Form S-4 (File No. 333-126163), which contains the joint proxy statement/prospectus filed by Adobe on July 20, 2005 in connection with the Merger.

 

Overview

 

We are an independent software company providing software that empowers designers, developers and business users to create and deliver effective user experiences on the Internet, fixed media and wireless and digital devices. Our integrated family of technologies enables the development of a wide range of internet and mobile application solutions. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to help the reader understand our Company’s historical results and factors which we believe could impact future results prior to the close of the proposed merger with Adobe, which is expected to occur in the Fall of calendar year 2005. MD&A is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and accompanying notes.

 

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Market Strategy

 

Macromedia’s strategic vision is to provide customers with solutions that provide great user experiences over a number of platforms. As technologies have evolved, our definition of platforms has broadened to include not only personal computing (“PC”) devices, but non-PC devices such as PDAs and mobile hand-held devices, browsers and operating environments. Our highest priority remains the pursuit of the widespread penetration and adoption of our Flash Player in both the PC and non-PC markets. In leveraging the Flash platform, we remain committed to ensuring that existing and new designers and developers are provided with the tools and server software to take advantage of the broader PC and non-PC environment.

 

Macromedia has been a leader in multimedia and web development technologies for over a decade. Through our MX family of products, including Dreamweaver, Flash and Flash Professional, Fireworks, ColdFusion and the Studio suite, we have enabled millions of professional Designers and Developers to create rich, engaging, interactive web content and applications. Our growth strategy is to leverage the assets we have built in that core business—principally our technology, our brands and our worldwide distribution channels—to grow into even larger markets serving non-technical professionals. In fiscal year 2005, we began to see sales growth in two distinct markets: Business Users, who are non-technical knowledge workers, trainers or business decisions makers who want to communicate and collaborate via the Internet, and Consumers, who increasingly expect a rich user experience on digital devices such as personal digital assistants (“PDAs”) and cellular phones. Our strategy to reach the Business User is to provide solutions that leverage the power of our technology in an integrated delivery platform. To reach the Consumer, we are licensing our Flash Player technology to leading telecommunications service providers and consumer electronics companies that are embedding it in their devices to enable multimedia functionality. As demonstrated with the growth in sales into these two markets through the second quarter of fiscal year 2006, we believe that these markets offer the potential for significant growth for the Company over the next decade. Our primary products and the markets that they serve are broken down as follows:

 

Designer/Developer


   Business User

   Consumer

Macromedia Studio*

Macromedia Flash and Flash Professional

Macromedia Dreamweaver

Macromedia Director

Macromedia RoboHelp

Macromedia FreeHand

Macromedia Fireworks

Macromedia Authorware

Macromedia Flash Player

Macromedia Shockwave Player

Macromedia Flex

Macromedia ColdFusion

Macromedia JRun

   Macromedia Breeze
Macromedia Contribute
Macromedia Captivate
Macromedia Flash Media Server
   Macromedia Flash Lite
Macromedia Flash SDK
Macromedia Flashcast

 

* The Macromedia Studio suite currently includes Dreamweaver, Flash or Flash Professional, Fireworks, Contribute and FlashPaper.

 

Highlights for the Three and Six Months Ended September 30, 2005

 

    Our net revenues for the three months ended September 30, 2005 were $127.9 million, an 18% increase from net revenues of $107.9 million from the same period last year. This increase primarily reflects the release of new versions of our MX products – Studio 8, Dreamweaver 8, Flash 8 and Fireworks 8 – as well as sales growth in our Business User and Consumer market segments. The English language version of the new MX products began shipping in mid-September 2005, with French and German language versions shipping at the end of September 2005. Beginning in October 2005, we began shipping all remaining foreign language versions of these products.

 

   

Our net income was $20.3 million for the three months ended September 30, 2005 as compared to $14.5 million in the same period last year. This 41% increase in net income was primarily driven by the increase in our net revenues as compared to the same period in fiscal year 2005. Partially offsetting the increase in net revenues was an increase in our operating expenses which included merger-related expenses of $3.0 million in the three months ended September 30, 2005 related to our pending merger with Adobe, a restructuring charge of $1.4 million resulting from

 

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a change in our estimates to sublease restructured space, and increases in sales and marketing expenses reflecting the higher sales costs associated with a larger global sales force.

 

    Cash provided by operations for the six months ended September 30, 2005 was $43.5 million. During the six months ended September 30, 2005, our cash, cash equivalent and short term investment balances increased by $63.3 million from $378.3 million at March 31, 2005 to $441.6 million at September 30, 2005. Significant non-operating uses of cash in the six months ended September 30, 2005 included net purchases of available-for-sale investments of $36.9 million and the purchase of property and equipment of $9.4 million. Cash provided by the issuance of Company common stock upon the exercise of employee stock options and the purchase of shares under our employee stock purchase plan was $32.5 million in the six months ended September 30, 2005.

 

Throughout the six month periods ended September 30, 2005 and 2004, we operated in one business segment, the Software segment.

 

Results of Operations

 

Net Revenues

 

    

Three Months Ended

September 30,


   % Change

   

Six Months Ended

September 30,


   % Change

 
(In millions, except percentages)    2005

   2004

     2005

   2004

  

Net revenues

   $ 127.9    $ 107.9    18 %   $ 244.7    $ 211.5    16 %

 

Net revenues are comprised primarily of license fees, as well as revenues from maintenance, training, technical and other support services. Maintenance, training, technical and other support services comprised less than 10% of our net revenues during the three and six months ended September 30, 2005 and 2004. Fluctuations in net revenues can be attributed to the timing of product releases and related product life cycles, changes in product and customer mix, general trends in Information Technology, or IT, spending, as well as to changes in geographic mix and the corresponding impact of changes in foreign exchange rates.

 

Net Revenues by Market

 

    

Three Months Ended

September 30,


    % Change

   

Six Months Ended

September 30,


    % Change

 
     2005

    2004

      2005

    2004

   
(In millions, except percentages)    $

   %

    $

   %

      $

   %

    $

   %

   

Designers and Developers

   $ 96.0    75 %   $ 86.6    80 %   11 %   $ 181.4    74 %   $ 171.6    81 %   6 %

Business Users

     16.9    13       11.4    11     48       33.9    14       22.3    11     52  

Consumers

     13.1    10       8.1    8     61       26.1    11       14.7    7     78  

Other

     1.8    1       1.8    2     1       3.4    1       3.0    1     15  
    

  

 

  

       

  

 

  

     

Net Revenues

   $ 127.9    100 %   $ 107.9    100 %   18     $ 244.7    100 %   $ 211.5    100 %   16  
    

  

 

  

       

  

 

  

     

 

Note: Percentages and totals may not calculate due to rounding.

 

Net revenues increased 18% during the three months ended September 30, 2005 from the same period of last year. The increase in net revenues reflects the following:

 

   

Net revenues from the Designer/Developer market increased 11%, or $9.4 million, during the three months ended September 30, 2005 as compared to the same period in the prior fiscal year reflecting the increase in sales of our MX products following our Studio 8 launch, which included Studio 8, Dreamweaver 8, Flash 8 and Fireworks 8. The English language version of these new products began shipping in mid-September 2005, with French and German language versions shipping at the end of the quarter. Beginning in October 2005, we began shipping all remaining foreign language versions. Sales of our server solutions, ColdFusion and Flex, also

 

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increased in the quarter ended September 30, 2005 compared to the same quarter last year, as did fees associated with the distribution of our Flash and Shockwave Player technologies.

 

    Net revenues from the Business User market increased 48%, or $5.5 million, during the three months ended September 30, 2005 as compared to the same period in the prior fiscal year, primarily driven by the success of our direct sales teams in selling Breeze to corporate, education and government customers combined with the launch of Breeze 5.0 in the preceding quarter.

 

    Net revenues from the Consumer market increased 61%, or $5.0 million, during the three months ended September 30, 2005 as compared to the same period in the prior fiscal year, reflecting new licensing arrangements with several mobile handset and consumer device manufacturers, primarily in Asia Pacific, as well as continuing royalties and support revenues from existing licensees.

 

Net revenues increased 16% during the six months ended September 30, 2005 from the same period of last year. The increase in net revenues reflects the following:

 

    Net revenues from the Business User market increased 52%, or $11.6 million, during the six months ended September 30, 2005 as compared to the same period in the prior fiscal year, primarily driven by the success of our direct sales teams in selling Breeze to corporate customers combined with the launch of Breeze 5.0 in the three months ended June 30, 2005.

 

    Net revenues from the Consumer market increased 78%, or $11.4 million, during the six months ended September 30, 2005 as compared to the same period in the prior fiscal year, reflecting new licensing arrangements with several mobile handset and consumer device manufacturers in North America and Asia Pacific, as well as continuing royalties and support revenues from existing licensees.

 

    Net revenues from the Designer/Developer market increased 6%, or $9.8 million, during the six months ended September 30, 2005 as compared to the same period in the prior fiscal year. This increase was primarily due to fees associated with the distribution of our Shockwave and Flash Player technologies, sales of our server products, Flex and ColdFusion, and the launch of our MX product version upgrades during the quarter ended September 30, 2005.

 

We have a history of introducing new or enhanced product offerings that affect our reported net revenues. Delays in the introduction of planned future product releases, or failure to achieve significant customer acceptance for these new products, may have a material adverse effect on our net revenues and consolidated results of operations in future periods. (See “Risk Factors That May Affect Future results of Operations” for additional information.)

 

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Net Revenues by Geography:

 

    

Three Months Ended

September 30,


         

Six Months Ended

September 30,


       
     2005

    2004

      2005

    2004

   
     (In millions, except percentages)  
     $

   %

    $

   %

    % Change

    $

   %

    $

   %

    % Change

 

North America

   $ 74.0    58 %   $ 62.0    57 %   19 %   $ 137.7    56 %   $ 119.6    57 %   15 %
    

  

 

  

 

 

  

 

  

 

International:

                                                                

Europe

     25.1    20 %     22.9    21 %   10 %     55.1    23 %     48.2    23 %   14 %

Asia Pacific and Other

     28.8    22 %     23.0    22 %   25 %     51.9    21 %     43.7    20 %   19 %
    

  

 

  

       

  

 

  

     

Total International

     53.9    42 %     45.9    43 %   17 %     107.0    44 %     91.9    43 %   16 %
    

  

 

  

       

  

 

  

     

Net revenue

   $ 127.9    100 %   $ 107.9    100 %   18 %   $ 244.7    100 %   $ 211.5    100 %   16 %
    

  

 

  

       

  

 

  

     

 

North American net revenues increased by 19% and 15% during the three and six months ended September 30, 2005, respectively, compared to the same periods of last year. Net revenue growth for the three months ended September 30, 2005 as compared to the same period last year primarily reflects the increase in net revenues in our Designer/Developer market which included the Studio 8 launch of our MX products combined with an increase in fees from our Shockwave and Flash Player and an increase in the sales of our ColdFusion and Flex products. An increase in net revenues from the Business User and Consumer markets further contributed to the growth in net revenues in North America. Net revenue growth for the six months ended September 30, 2005 as compared to the same period last year primarily reflects an increase in the sales of products marketed to Business Users and Consumers combined with an increase in the sales to Designers and Developers as noted above.

 

The 17% and 16% increases in international revenues during the three and six months ended September 30, 2005, respectively, as compared to the same periods last year, is primarily due to the increase in net revenues from our Consumer market reflecting new licensing arrangements with several mobile handset and consumer device manufacturers in Asia Pacific and Europe, as well as continuing royalties and support revenues from existing licensees. The launch of Studio 8 products in German and French further contributed to the increase in net revenues in Europe as did an increase in sales of our Business User products.

 

Fluctuations in foreign currencies relative to the U.S. dollar had a minimal impact on our international results. Changes in the value of the U.S. dollar may have a significant impact on net revenues and operating expenses in future periods. To minimize the impact of currency fluctuations on certain foreign currency net revenues and expenses, primarily denominated in the Euro, Japanese Yen and British Pound, we utilize foreign exchange forward contracts to provide greater predictability of net revenues and operating expenses of certain forecasted transactions in these currencies in future periods. (See “Risk Factors That May Affect Future Results of Operations—Risks Associated With Our International Operations” for additional information.)

 

Cost of Revenues

 

    

Three Months Ended

September 30,


    % Change

   

Six Months Ended

September 30,


    % Change

 
     2005

    2004

      2005

    2004

   
     (In millions, except percentages)  

Cost of net revenues

   $ 9.9     $ 7.6     31 %   $ 17.8     $ 15.0     19  %

Amortization of acquired developed technology

     0.7       0.7     —         1.5       1.5     —    
    


 


       


 


     

Total cost of revenues

   $ 10.6     $ 8.3     28     $ 19.3     $ 16.5     17  
    


 


       


 


     

Cost of net revenues as a % of total net revenue

     8 %     7 %           7 %     7 %      

 

Cost of net revenues includes costs incurred in providing training, technical support and consulting services to customers and to business partners, product assembly and distribution costs, cost of materials, royalties paid to third-parties for the

 

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licensing of developed technology, the amortization of purchased technology and costs to translate our software into various foreign languages. The amortization of acquired developed technology is separately presented as a cost of revenues.

 

Cost of net revenues for the three and six months ended September 30, 2005 were 8% and 7% of net revenues, respectively, as compared to 7% of net revenues during the three and six months ended September 30, 2004. The increase in cost of net revenues as a percentage of net revenues during the three months ended September 30, 2005 as compared to the same period last year resulted primarily from an increase in training and consulting costs which have lower gross margins than our license revenues.

 

At September 30, 2005, the remaining unamortized balance of acquired developed technology was $5.4 million and had a weighted average estimated remaining useful life of 26 months.

 

In the future, cost of revenues as a percentage of net revenues may be impacted by the mix of product sales, royalty rates for licensed technology and the geographic distribution of sales.

 

Operating Expenses

 

    

Three Months Ended

September 30,


   % Change

   

Six Months Ended

September 30,


   % Change

 
     2005

   2004

     2005

   2004

  
     (In millions, except percentages)  

Sales and marketing

   $ 48.7    $ 44.7    9 %   $ 97.7    $ 88.8    10 %

Research and development

     26.1      25.1    4       50.3      48.8    3  

General and administrative

     13.4      10.8    24       28.8      22.0    31  

Amortization of intangible assets

     0.2      0.2    —         0.4      0.5    (22 )

Restructuring and other

     1.4      —      n/m       1.4      —      n/m  

Merger-related expenses

     3.0      —      n/m       7.3      —      n/m  
    

  

        

  

      

Total operating expenses

   $ 92.9    $ 80.9    15     $ 185.9    $ 160.1    16  
    

  

        

  

      

 

n/m: not meaningful

Note: Percentages and totals may not calculate due to rounding.

 

Selected Operating Expense Categories as a Percent of Net Revenues

 

    

Three Months Ended

September 30,


   

Six Months Ended

September 30,


 
     2005

    2004

    2005

    2004

 

Sales and marketing

   38 %   41 %   40 %   42 %

Research and development

   20     23     21     23  

General and administrative

   11     10     12     10  

 

Sales and Marketing. Sales and marketing expenses consist primarily of the following: compensation and benefits, marketing and advertising expenses, activities which support product launches and direct sales efforts, including travel, and allocated expenses for our facilities and IT infrastructure to support marketing activities.

 

Sales and marketing expenses increased to $48.7 million during the three months ended September 30, 2005, as compared to $44.7 million for the same period last year, but decreased 3% as a percentage of revenues from 41% to 38%. The increased spending primarily resulted from an increase in compensation and other employee-related expense which increased by $1.9 million in the three months ended September 30, 2005 as compared to the same period in fiscal year 2005, due to an increase in the number of sales employees combined with higher variable compensation expense related to increased net revenues. In addition, advertising and marketing expenses increased $1.0 million in the three months ended September 30, 2005 as compared to the same period last year, primarily related to our Studio 8 launch efforts. We believe the investment in our direct sales force has contributed to the overall increase in our net revenues, which have grown at a faster rate than our sales and marketing spending as demonstrated by the decrease in sales and marketing expense as a percentage of revenues.

 

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Sales and marketing expenses increased to $97.7 million during the six months ended September 30, 2005, as compared to $88.8 million for the same period last year, but decreased 2% as a percentage of revenues from 42% to 40%. The increased spending primarily resulted from an increase in compensation and other employee-related expenses which increased by $6.8 million in the six months ended September 30, 2005 as compared to the same period in fiscal year 2005, due to an increase in the number of sales employees combined with higher variable compensation related to increased net revenues.

 

We expect to continue investing in sales and marketing as we continue to launch and sell our products, develop market opportunities and promote our competitive position. Accordingly, we expect sales and marketing expenses to continue to constitute a significant portion of our overall spending.

 

Research and Development. Research and development expenses consist primarily of compensation and benefits as well as allocated expenses for our facilities and IT infrastructure to support product development.

 

Research and development expenses increased to $26.1 million during the three months ended September 30, 2005 as compared to $25.1 million for the same period last year, but decreased 3% as a percentage of net revenues from 23% to 20%, reflecting the increase in net revenues, which grew at a rate faster than costs in the quarter ended September 30, 2005 as compared to the same period last year. Compensation, other employee-related expenses and contractor fees increased by $1.4 million in the three months ended September 30, 2005 as compared to the same period last year due to increased product development efforts, including the Studio 8 launch of our MX products.

 

Research and development expenses increased to $50.3 million during the six months ended September 30, 2005 as compared to $48.8 million for the same period last year, but decreased 2% as a percentage of net revenues from 23% to 21%, reflecting the increase in net revenues which grew at a rate faster than costs in the six months ended September 30, 2005 as compared to the same period last year. Compensation and other employee-related expenses increased by $1.4 million in the six months ended September 30, 2005 as compared to the same period last year due to higher headcount in the current period.

 

We anticipate continuing to invest significant resources into research and development activities in order to develop new products and technologies and to enhance the technology in our existing products.

 

General and Administrative. General and administrative expenses consist primarily of compensation and benefits, fees for professional services and allocated expenses for our facilities and IT infrastructure to support general and administrative activities.

 

General and administrative expenses increased to $13.4 million during the three months ended September 30, 2005 as compared to $10.8 million for the same period last year. The increase was primarily attributed to compensation and other employee-related expenses, including amortization of deferred compensation, which increased $1.4 million in the three months ended September 30, 2005 as compared to the same period last year, primarily resulting from an increase in headcount to strengthen our infrastructure to support our business growth.

 

General and administrative expenses increased to $28.8 million during the six months ended September 30, 2005 as compared to $22.0 million for the same period last year. Compensation and other employee-related expenses increased $3.8 million in the six months ended September 30, 2005 as compared to the same period last year resulting from an increase in headcount to strengthen our infrastructure to support our business growth. Professional fees, which include external legal and accounting advisory services, increased by $1.5 million in the six months ended September 30, 2005 as compared to the same period last year primarily due to the ongoing cost of regulatory compliance, including compliance with the Sarbanes-Oxley Act of 2002.

 

General and administrative expenses in the future will continue to include costs to comply with proposed and enacted rules and regulations promulgated by the SEC and the NASDAQ stock market, including costs to hire additional personnel and using additional external accounting and advisory services.

 

Amortization of Intangible Assets. We amortize intangible assets with estimated useful lives. Amortization of intangible assets remained relatively flat during the three and six months ended September 30, 2005 as compared to the same periods last year.

 

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Restructuring and Other. In the three months ended September 30, 2005, we recorded $1.4 million in net restructuring and facility related exit charges related to our Fiscal 2005 and Fiscal 2002 Restructuring Plans. These charges reflect an increase of $1.9 million to our Fiscal 2005 Restructuring Plan. This adjustment is comprised of a $1.4 million increase following the finalization of a lease agreement with a tenant in our Redwood Shores, California facility during the three months ended September 30, 2005 which necessitated an increase to our initial estimates, and a $0.5 million adjustment related to increasing the estimated time to sublease our restructured space in our San Diego, California facility. Partially offsetting the adjustments to our Fiscal 2005 Restructuring Plan was a $0.4 million reduction in our Fiscal 2002 Restructuring Plan, primarily related to a reduction in estimated common area maintenance charges.

 

Merger-Related. Merger-related expenses associated with our pending merger with Adobe were $3.0 million and $7.3 million in the three and six months ended September 30, 2005, respectively. Merger-related expenses were principally comprised of legal, investment banking, accounting and filing fees.

 

Other Income (Expense)

 

    

Three Months Ended

September 30,


   

Six Months Ended

September 30,


 
     2005

   2004

    2005

   2004

 
     (In millions)  

Interest income, net

   $ 3.5    $ 1.1     $ 6.2    $ 2.1  

Other, net

     0.3      (0.1 )     0.9      (0.1 )
    

  


 

  


Total other income

   $ 3.8    $ 1.0     $ 7.1    $ 2.0  
    

  


 

  


 

Interest Income, net. Interest income, net consists primarily of interest earned on interest-bearing cash, cash equivalents and available-for-sale short-term investments.

 

Interest income was $3.5 million and $6.2 million during the three and six months ended September 30, 2005 as compared to $1.1 million and $2.1 million during the same periods last year, respectively. The increase in our interest income during the three and six months ended September 30, 2005 is primarily due to higher average balances of cash, cash equivalents and short-term investments combined with higher average yields in the three and six months ended September 30, 2005 as compared with the same periods last year.

 

Other, net. Other, net, consists primarily of foreign currency transaction gains and losses, investment management fees, gain on investments and other non-operating transactions not separately disclosed. Realized gains and losses from our fixed income available-for-sale investments are included in Other, net and have not been significant to date.

 

Provision for Income Taxes

 

We recorded provisions for income taxes of $7.8 million and $5.3 million for the three months ended September 30, 2005 and 2004, respectively, and $11.0 million and $9.5 million for the six months ended September 30, 2005 and 2004, respectively. Our effective tax rates during the three months ended September 30, 2005 and 2004 were 28% and 27%, respectively. Our effective tax rate increased 1% in the three months ended September 30, 2005 as compared to the three months ended September 30, 2004 due to a planned repatriation of certain foreign earnings offset by a decrease in the valuation allowance.

 

At September 30, 2005, we had available federal and state net operating loss carryforwards of approximately $590 million and $476 million, respectively. We also had unused research credit carryforwards of approximately $29 million and $30 million for federal and California tax purposes, respectively. If not utilized, federal and state net operating loss and federal

 

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research credit carryforwards will expire in fiscal years 2006 through 2026. The California research credits may be carried forward indefinitely.

 

During the second quarter of fiscal year 2006, we completed our evaluation of the repatriation provisions of the American Jobs Creation Act of 2004 (“AJCA”). The AJCA introduced a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. We made a determination for a planned repatriation of up to $65 million under this provision.

 

In the second quarter of fiscal year 2006, we recorded an estimated tax provision of $4.6 million for the planned repatriation of up to $65 million of foreign earnings. The planned repatriation of certain foreign earnings is expected to occur during the last half of fiscal year 2006. We will invest these earnings pursuant to an approved Domestic Reinvestment Plan that conforms to the AJCA guidelines.

 

Liquidity and Capital Resources

 

At September 30, 2005, we had cash, cash equivalents, and short-term investments of $441.6 million, a 17% increase from the March 31, 2005 balance of $378.3 million. Working capital was $395.0 million at September 30, 2005, a 24% increase from the March 31, 2005 balance of $319.4 million. The following table summarizes our cash flow activities for the periods indicated:

 

    

Six Months Ended

September 30,


 
     2005

    2004

 
     (In millions)  

Net cash flows provided by (used in):

                

Operating activities

   $ 43.5     $ 33.3  

Investing activities

     (48.7 )     (76.4 )

Financing activities

     32.5       19.9  
    


 


Net increase (decrease) in cash and cash equivalents

   $ 27.2     $ (23.2 )
    


 


 

Note: Totals may not calculate due to rounding.

 

Cash provided by operating activities during the six months ended September 30, 2005 was $43.5 million, as compared to cash provided by operating activities of $33.3 million for the same period last year. During the six months ended September 30, 2005, cash provided by operating activities resulted primarily from adjusting our net income of $35.6 million for non-cash depreciation and amortization expense of $13.3 million, and from an increase in deferred revenues balance of $12.4 million partially offset by an increase in our net accounts receivable of $18.5 million. Cash provided by operating activities during the six months ended September 30, 2004 resulted primarily from adjusting our net income of $27.4 million for non-cash depreciation and amortization expense of $12.1 million and from an increase in our accounts payable and accrued liabilities of $9.0 million, partially offset by increases in net accounts receivable of $15.1 million.

 

Cash used in investing activities for the six months ended September 30, 2005 was $48.7 million, as compared to cash used in investing activities of $76.4 million during the same period last year. During the six months ended September 30, 2005, cash used in investing activities was primarily due to the purchases of available-for-sale securities of $164.5 million, which was offset by proceeds of $127.7 million from the sales and maturities of short-term investments. Cash used in investing activities for the six months ended September 30, 2004 was $76.4 million, primarily due to purchases of available-for-sale short-term investments of $111.8 million and property and equipment of $43.7 million, which was offset by net proceeds of $84.7 million from the sales and maturities of short-term investments. In April 2004, we completed the purchase of our current corporate headquarters with a final payment of $37.7 million. Following the close of this purchase, we received a $3.5 million termination fee from an existing tenant.

 

Cash provided by financing activities during the six months ended September 30, 2005 was $32.5 million, as compared to $19.9 million during the same period last year. Cash provided by financing activities was due to proceeds received from the exercise of common stock options and the issuance of shares of our common stock under our employee stock purchase plans.

 

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Our liquidity and capital resources in any period could be impacted by cash proceeds upon exercise of stock options and securities reserved for future issuance under our stock option plans, as well as the issuance of shares of our common stock under our employee stock purchase plans.

 

We expect that for the foreseeable future our operating expenses will constitute a significant use of our cash balances, but that our cash from operations and existing cash, cash equivalents, and available-for-sale short-term investments will be sufficient to meet our operating requirements through at least September 30, 2006. Cash from operations could be affected by various risks and uncertainties, including, without limitation, those related to: customer acceptance of new products and services and new versions of existing products; the risk of integrating newly acquired technologies and products; the impact of competition; the risk of delay in product development and release dates; the economic conditions in the domestic and significant international markets where we market and sell our products; quarterly fluctuations of operating results; risks of product returns; risks associated with investment in international sales operations; our ability to successfully contain our costs; and the other risks detailed in the section “Risk Factors That May Affect Future Results of Operations.”

 

From time to time, we may require additional liquid capital resources and may seek to raise these additional funds through public or private debt and/or equity financings. There can be no assurance that this additional financing will be available, or if available, will be on reasonable terms and not dilutive to our stockholders. If additional funds are required at a future date and are not available on acceptable terms, our business and operating results could be materially and adversely affected.

 

We enter into foreign exchange forward contracts to reduce economic exposure associated with sales and asset balances denominated in the Euro, Japanese Yen and British Pound. At September 30, 2005, the net notional amount of forward contracts outstanding amounted to $68.7 million (see “Item 3—Quantitative and Qualitative Disclosures About Market Risk” for additional information).

 

Other Matters Affecting Liquidity and Capital Resources

 

Contractual Obligations

 

We have summarized our significant financial contractual obligations as of March 31, 2005 in our Annual Report on Form 10-K for the year ended March 31, 2005. There have been no subsequent material changes outside the ordinary course of business to our contractual obligations from that date.

 

Other Commitments

 

Letters of Credit— We obtained letters of credit from financial institutions totaling $6.3 million as of September 30, 2005, in lieu of security deposits for certain of our leased office space. No amounts have been drawn against the letters of credit.

 

Off-Balance-Sheet Arrangements

 

We do not have off-balance-sheet arrangements with unconsolidated entities or with related parties, nor do we use other forms of off-balance-sheet arrangements such as research and development arrangements. As of September 30, 2005, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

Stock-Based Compensation Plans

 

Common Stock to Be Issued. At September 30, 2005, the Company had the following common shares available for future issuance upon the exercise of options under the Company’s stock option plans (“Macromedia Plans”) (including both outstanding option grants as well as options available for future grants), under previous non-plan stock option grants and under the Company’s 2003 Employee Stock Purchase Plan (“ESPP”) (in thousands):

 

    

Common

Shares

Available


Employee and director stock options under Macromedia Plans

   12,032

Non-plan employee stock options

   1,061

ESPP

   1,218
    
     14,311
    

 

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The following table summarizes the stock option activity during the six months ended September 30, 2005 (shares in thousands):

 

    

Number

of Options


   

Weighted

Average

Exercise Price


Options outstanding as of March 31, 2005

   13,182     $ 19.02

Granted

   1,357       37.06

Exercised

   (1,695 )     16.50

Cancelled

   (366 )     19.92
    

     

Options outstanding as of September 30, 2005

   12,478     $ 21.30
    

     

 

The following table summarizes information about Macromedia’s stock options outstanding as of September 30, 2005 (shares in thousands):

 

     Options Outstanding

   Options Exercisable

Range of Exercise Prices


  

Number

of Options


  

Weighted

Average

Remaining

Contractual

Life (Years)


  

Weighted

Average

Exercise Price


  

Number

of Options


  

Weighted

Average

Exercise Price


$ 0.77 – $ 9.56

   777    6.41      7.87    367      7.85

$10.54 – $13.91

   2,338    6.74      12.81    1,581      12.96

$14.20 – $16.66

   2,565    4.56      15.86    2,525      15.87

$17.19 – $20.90

   2,548    7.94      19.06    1,019      19.15

$21.41 – $29.99

   1,727    6.71      27.52    919      26.87

$30.56 – $45.31

   2,468    9.33      35.96    170      33.73

$49.94 – $99.98

   55    4.83      76.71    51      74.89
    
              
      
     12,478    7.01    $ 21.30    6,632    $ 17.67
    
              
      

 

Employee Stock Purchase Plan. In July 2003, we adopted the 2003 Employee Stock Purchase Plan (the “2003 ESPP”). In August 2005, employees purchased 261,000 shares of our common stock for $4.5 million under the 2003 ESPP.

 

Critical Accounting Estimates

 

Our Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the application of GAAP requires management to make estimates that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In many instances, we could have reasonably used different accounting estimates. In other instances, changes in the accounting estimates from period to period are reasonably likely to occur. Accordingly, actual results could differ significantly from the estimates made by management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation of our financial condition or results of operations may be affected.

 

On an on-going basis, we evaluate our accounting estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for

 

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making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We refer to accounting estimates of this type as “critical accounting estimates.” We have identified the following accounting processes which require the application of critical accounting estimates: sales returns reserve; allowance for doubtful accounts; restructuring accruals; income taxes; and stock-based compensation, each of which are discussed in more detail in the paragraphs below.

 

Sales Returns Reserve. The primary sales channels through which we sell our boxed and volume-license products throughout the world are comprised of a network of distributors and value added resellers (collectively referred to as “resellers”). Product returns from our resellers represent a substantial portion of our products returns. Product returns are recorded as a reduction of net revenues. Agreements for boxed products sold to our resellers contain specific product return privileges for stock rotation and obsolete products that are generally limited to contractual amounts. Current product returns for stock rotation from resellers are generally limited to 10% of their prior quarter’s purchases, provided they order new products for an amount equal to or exceeding the amount of the requested return. Resellers may, and typically do, return 100% of their inventory balance of obsolete products within a limited time after the release of a new version of that software product. Under the terms of our distribution agreements, authorized returns of obsolete products require a new order from such reseller at an amount not less than the amount of the requested return. Product returns for stock rotation and obsolete products from our resellers are also impacted by actual product returns they receive directly from lower tiers of distribution for which we receive limited inventory and sell-through information. Sales of our volume-licensed products generally do not contain return privileges. Products purchased directly from us by end users, including sales from our online stores, generally have 30-day return rights.

 

As part of our revenue recognition practices, we have established a sales returns reserve based upon estimated and known returns related to the activities identified in the above paragraph. Known returns consist of approved and authorized product returns prior to receiving the returned goods. The estimated component of our sales returns reserve for stock rotation and obsolete product is determined upon the evaluation of the following factors:

 

    historical product returns and inventory levels on a product-by-product basis for each of our primary sales regions;

 

    current inventory levels and sell-through data on a product-by-product basis as reported to us by our resellers worldwide on a weekly or monthly basis;

 

    our demand forecast by product in each of our principal geographic markets, which may be impacted by several factors, including, but not limited to, our product release schedule, seasonal trends, analyses developed by our internal sales and marketing organizations and analysis of third-party market data;

 

    general economic conditions, specifically in the markets we serve; and

 

    trends in our accounts receivable.

 

In addition to monitoring expected returns under stock rotation agreements, our channel management practices over our resellers are also intended to provide reasonable assurance that product inventory levels in the distribution channel, on a product-by-product basis, reflect anticipated demand for the respective products. In assessing the appropriateness of product inventory levels held by our resellers and the impact on potential product returns, we may limit sales to our resellers in order to maintain inventory levels deemed by management to be appropriate. We generally provide a sales returns reserve to maintain channel inventory levels between four to six weeks of expected future sales by our first-tier and certain second tier resellers based on the criteria noted above. We make this estimate primarily based on channel inventory and sell-through information that we obtain principally from our first-tier resellers. At September 30, 2005, our channel inventory, net of related reserves, remained within the estimated channel inventory range noted above.

 

During the three months ended September 30, 2005, product returns, consisting principally of stock rotation for obsolete products, totaled $2.5 million or 2% of net revenues, compared to the three months ended September 30, 2004 in which product returns, totaled $1.8 million or 2% of net revenues. This increase in the level of product returns in the current period was primarily due to the launch of our Studio 8 and related MX products during the quarter ended September 30, 2005. At

 

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September 30, 2005, our allowance for sales returns totaled $8.8 million and included estimated reserves to maintain channel inventory levels at or below six weeks of expected future sales, allowances for requested and authorized returns by distributors and reserves for estimated returns of obsolete product in the sales channel eligible for stock rotation.

 

In general, we would expect our sales returns reserve to increase following the announcement of new or upgraded versions of our products or in anticipation of such product announcements, due to anticipated increases in stock rotation for obsolete products. Similarly, we would expect that that our sales returns reserve would decrease following the successful introduction of new or upgraded products and completion of the associated stock rotation to replace obsolete product in our distribution channel. Actual product returns in future periods may differ from our estimates and may have a material adverse effect on our net revenues and consolidated results of operations due to factors including, but not limited to, market conditions and product release cycles.

 

Allowance for Doubtful Accounts. We make judgments as to our ability to collect outstanding accounts receivable and provide an allowance for a portion of our accounts receivable when collection becomes doubtful.

 

We also make judgments about the creditworthiness of customers based on ongoing credit evaluations and the aging profile of customer accounts receivable and assess current economic trends that might impact the level of credit losses in the future. Historically, our allowance for doubtful accounts has been sufficient to cover our actual credit losses. However, since we cannot predict changes in the financial stability of our customers, we cannot guarantee that our allowance will continue to be sufficient. If actual credit losses are significantly greater than the allowance that we have established, this would increase our operating expenses and reduce our reported net income. Our allowance for doubtful accounts amounted to $1.4 million, or 2% of gross accounts receivable, at September 30, 2005 and $1.1 million, or 2% of gross accounts receivable, at March 31, 2005.

 

Distributors account for a significant portion of our net revenues and accounts receivable balances and comprise several individually large accounts. One of these distributors, Ingram Micro, Inc represented 17% and 21% of consolidated net revenues during the six months ended September 30, 2005 and 2004, respectively, and 18% and 16% of our gross accounts receivable balances at September 30, 2005 and March 31, 2005, respectively. A second distributor, Tech Data Corporation, represented 12% of our consolidated net revenues during both the six months ended September 30, 2005 and 2004, respectively, and represented 11% and 10% of our gross accounts receivable at September 30, 2005 and March 31, 2005, respectively. If the credit exposure associated with a large distributor increased, affecting its ability to make payments, an additional provision for doubtful accounts may be required. Historically, we have not experienced significant losses on trade receivables related to any particular industry or geographic region.

 

Restructuring Accruals. In fiscal year 2005, we exited two facilities in Northern California in conjunction with the completion of our new corporate headquarters building in San Francisco, California, which enabled us to consolidate employees previously housed in leased facilities. We recorded $11.8 million in restructuring and related exit charges in connection with these activities, referred to as our “Fiscal 2005 Restructuring Plan,” in the fourth quarter of fiscal year 2005. In the three months ended September 30, 2005, we recorded an increase of $1.9 million to our Fiscal 2005 Restructuring Plan comprised of a $1.4 million charge following the finalization of a lease agreement with a tenant in our Redwood Shores, California facility which necessitated an increase to our initial estimates, and a $0.5 million adjustment related to increasing the estimated time to sublease our San Diego, California facility.

 

In addition, we revised estimates for our restructuring plan executed in fiscal year 2002, referred to as our “Fiscal 2002 Restructuring Plan”, recording additional expense in fiscal year 2005 of $7.4 million. In the three months ended September 30, 2005, we decreased our reserve by $0.4 million, primarily due to a reduction in estimated common area maintenance charges. In fiscal year 2002, we executed a restructuring plan to deliver cost synergies associated with our fiscal year 2001 acquisition of Allaire Corporation and to better align our cost structure with the weaker business environment which resulted in restructuring expenses totaling $81.8 million. Restructuring expenses related to our 2002 Plan primarily represented estimated future costs related to 22 facilities to either cancel or vacate approximately 450,000 square feet of facility space held under our operating leases as a result of staff reductions and demise and tenant improvement costs to sublease the facilities, net of deferred rent recorded for the facilities and, to a lesser extent, employee termination and severance costs.

 

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Our restructuring expenses and accruals involve significant estimates made by management using the best information available at the time that the estimates are made. These estimates include: facility exit costs such as demise and lease termination costs; timing of future sublease occupancy; estimated sublease income based on expected future market conditions; and, any fees associated with our restructuring expenses, such as brokerage fees. In addition, in accounting for new restructuring and exit activities under SFAS No. 146, the determination of fair market value is subject to an additional level of judgment in determining appropriate discount rates to apply when calculating the discounted fair value of net future obligations.

 

On a regular basis we evaluate a number of factors to determine the appropriateness and reasonableness of our restructuring accruals. Such factors include, but are not limited to, available market data, information from third parties, such as real estate appraisers, and ongoing negotiations in order to estimate the likelihood, timing, lease terms and rates to be realized from potential subleases of restructured facilities held under operating leases. We also estimate costs associated with terminating certain leases on excess facilities. These estimates involve a number of risks and uncertainties, some of which may be beyond our control and include, among other things, future real estate conditions and our ability to market and sublease excess facilities on terms acceptable to us, particularly in Newton, Massachusetts and Northern California. In addition, our restructuring estimates for facilities could be materially and adversely impacted by the financial condition of sub-lessees and their ability to meet the financial obligations throughout the term of any sublease agreement. The impact of these estimated proceeds and costs are significant factors in determining the appropriateness of our restructuring accrual balance on our Condensed Consolidated Balance Sheet at September 30, 2005. Our actual costs may differ significantly from our estimates and as such, may require adjustments to our restructuring accrual, which will impact our operating results in future periods.

 

As of September 30, 2005, the restructuring accrual balance of $26.3 million primarily represented the contractual lease obligations of 5 facilities as well as related estimated demise and tenant improvement costs to sublease these facilities in future periods, net of contracted and estimated sublease income. As of September 30, 2005, future minimum gross lease obligations for our restructured facilities extending through fiscal 2011 amounted to $61.8 million, which will be offset by future sublease income of $36.9 million to be received under contractual sublease arrangements. As the restructuring accrual reflects the net present value of future cash obligations net of estimated sublease income related to one of the facilities exited in fiscal year 2005 of $10.9 million rather than the related net gross lease obligation for this facility, our contractual gross lease obligations are greater than our restructuring reserve as of September 30, 2005 which also includes estimates for future sublease income which reduces our estimated liability. The restructuring reserve also reflects net estimated common area maintenance and tax charges related to all restructured properties.

 

Estimated sublease income may be impacted by fluctuations in demand in the commercial real estate markets where we have significant operating lease obligations, notably the Newton, Massachusetts commercial real estate markets. Accrued restructuring costs related to the Newton lease represented 48% of our total restructuring accrual balance at September 30, 2005. Our Newton office space covers approximately 348,000 square feet held under operating leases through June 2010, of which restructured facilities covers approximately 268,000 square feet. At September 30, 2005, all 268,000 square feet designated restructured space was subleased. Existing subleases covering 54,000 square feet in Newton, Massachusetts will expire prior to our lease obligation date at various dates commencing in January of 2007. If market conditions deteriorate in the Newton, Massachusetts commercial real estate markets, we may be unable to find acceptable tenants at the rates or timing consistent with what we used in estimating our restructuring accrual.

 

Income Taxes. In preparing our Condensed Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process also involves estimating the impact of additional taxes resulting from tax examinations, primarily in foreign jurisdictions. These examinations are often complex and can require several years to resolve. Accruals for tax contingencies require management to estimate the actual outcome of any such audits. Actual results could vary from these estimates.

 

Our provision for income taxes is also dependent upon our estimation of a deferred tax asset valuation allowance and the change in our net deferred tax asset balance at each balance sheet date. Significant judgment is used to determine the likelihood that we will realize our deferred tax assets in the future, and includes our ability to forecast future taxable income. An increase in the valuation allowance could have a material adverse impact on our income tax provision and net income in the period in which such determination is made.

 

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Stock-Based Compensation. We have elected to continue to account for our employee stock-based compensation plans using the intrinsic value method, as prescribed by Accounting Principles Board (“APB”) No. 25 Accounting for Stock Issued to Employees and interpretations thereof (collectively “APB 25”) versus the fair value method allowed by SFAS No. 123 Accounting for Stock-Based Compensation.

 

As described further below under “Recent Accounting Standards,” the FASB issued SFAS No. 123R (Revised 2004) Share-Based Payment: Amendment of FASB Statement No. 123 in December 2004. SFAS No. 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock, restricted stock units, and stock appreciation rights. Effective for the quarter ending June 30, 2006, we will be required to expense the fair value of these awards as compensation expense. The pro forma disclosures previously permitted will no longer be an alternative to financial statement recognition. In determining the fair value of our share based payment awards, which include employee stock purchase plan and stock options, we use the Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and a change in our assumptions could materially affect the fair value estimate, and thus the total calculated costs associated with the grant of stock options or issuance of stock under employee stock purchase plans. As a result, pro forma disclosures may not necessarily be representative of future, expected results. Although we have not yet determined the transition method or whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and expect the adoption to have a significant adverse impact on our consolidated statements of income and net income per share.

 

Recent Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123R (Revised 2004), Share-Based Payment: an amendment of FASB Statements No. 123 and 95, which requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation model. The pro forma disclosures previously permitted will no longer be an alternative to financial statement recognition. In April 2005, the Securities and Exchange Commission (the “SEC”) announced that the accounting provisions of SFAS 123R are effective at the beginning of a company’s next fiscal year that begins after June 15, 2005 (the quarter ending June 30, 2006 for Macromedia, Inc.). Companies adopting the new requirements are likely to reexamine their valuation methods and the support for the assumptions that underlie their valuation of the awards. We believe that many companies are also likely to carefully examine their share-based-payment programs. SFAS No. 123R establishes accounting requirements for “share-based” compensation to employees, including employee-stock-purchase-plans. This standard carries forward prior guidance on accounting for awards to non-employees. Although we have not yet determined the transition method or whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and expect the adoption to have a significant adverse impact on our consolidated statements of income and net income per share.

 

In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. SFAS No. 154 also 1) redefines restatement as the revising of previously issued financial statements to reflect the correction of an error and 2) requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We are evaluating the impact of adopting SFAS No. 154 and do not believe adoption will have a material impact on our financial statements.

 

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In March 2004, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The guidance prescribes a three-step model for determining whether an investment is other-than-temporarily impaired and requires disclosures about unrealized losses on investments. In November 2005, the FASB issued Staff Position SFAS 115-1 and SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (“FSP 115-1 and 124-1”). FSP 115-1 and 124-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF 03-1. We are evaluating the impact, if any, FSP 115-1 and 124-1 will have on our financial position and results of operations.

 

In December 2004, the FASB issued Staff Position SFAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, (“FSP 109-1”) to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“AJCA”). Companies that qualify for the AJCA’s deduction for domestic production activities must account for it as a special deduction under Statement 109 and reduce their tax expense in the period or periods the amounts are deductible on the tax return, according to FSP 109-1 starting in the second quarter of fiscal year 2006, we adopted the accounting and disclosure requirements as outlined in FSP 109-1. We are following the requirements of FSP 109-1. The FASB’s guidance did not have a material impact on our financial statements.

 

In December 2004, the FASB issued FASB Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the AJCA, which allows an enterprise time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings. The ACJA introduced a limited time 85% dividend received deduction on repatriation of certain foreign earnings. This deduction would result in an approximate federal income tax rate of 5.25% on our repatriated earnings. We have completed our evaluation of the repatriation provisions under the ACJA and have disclosed its impact in the Notes to our Condensed Consolidated Financial Statements (see Note 12).

 

RISK 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 our other reports filed with the SEC. The actual results that we achieve may differ significantly from any forward-looking statements due to such risks and uncertainties.

 

Failure to complete, or delays in completing, the merger with Adobe could materially and adversely affect our results of operations and our stock price. On April 17, 2005, we entered into a definitive merger agreement with Adobe. Consummation of the merger is subject to customary closing conditions, including various regulatory approvals. We cannot assure you that the necessary approvals will be obtained, that approvals will be obtained in the projected closing time-frame, that approvals will not subject us to obligations or commitments required by regulators, or that we will be able to successfully consummate the merger as currently contemplated under the merger agreement or at all. Risks related to the proposed merger include, but are not limited to, the following:

 

    We may not realize any or all of the potential benefits of the merger, including any synergies that could result from combining the financial and proprietary resources of Macromedia and Adobe;

 

    We will remain liable for significant transaction costs, including legal, accounting, financial advisory and other costs relating to the merger;

 

    Under some circumstances, we may have to pay a termination fee to Adobe in the amount of $103.2 million;

 

    The attention of our management and our employees may be diverted from day-to-day operations;

 

    The customer sales process may be disrupted by customer and salesperson uncertainty over when or if the merger will be consummated;

 

    Our customers may seek to modify or terminate existing agreements, or prospective customers may delay entering into new agreements or purchasing our products as a result of the announcement of the merger;

 

    Our ability to retain our existing employees has been and may continue to be harmed by uncertainties associated with the merger; and

 

    Our ability to attract new employees may be harmed by uncertainties associated with the merger.

 

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The occurrence of any of these events individually or in combination could have a material adverse affect on our results of operations and our stock price.

 

Since the merger agreement contemplates a fixed exchange ratio, changes in the market price of Adobe common stock could adversely affect the value of Adobe common stock to be received by our stockholders in the merger—Under the merger agreement, each outstanding share of our common stock will be converted into the right to receive 1.38 shares of Adobe common stock (after taking into account the two-for-one stock split in the form of a stock dividend of Adobe common stock paid on May 23, 2005 to Adobe stockholders of record as of May 2, 2005). Because the merger agreement contemplates a fixed exchange ratio, changes in the stock price of Adobe common stock in the period leading up to the time the merger is consummated could adversely affect the value of the Adobe common stock to be received by our stockholders upon consummation of the merger.

 

In connection with the merger, we filed a joint proxy statement/prospectus with the SEC announcing the special meeting of stockholders held August 24, 2005. At that meeting, our shareholders voted to adopt the merger agreement. On August 24, 2005, Adobe’s shareholders also voted to adopt the Merger Agreement. The joint proxy statement/prospectus contains important information about Macromedia, Adobe, the merger, risks relating to the merger and the combined company, and related matters. We strongly encourage our stockholders to read this joint proxy statement/prospectus.

 

Our future operating results are difficult to predict and our future operating results and our stock price are subject to volatility—Our operating results for a particular period are extremely difficult to predict. Our net revenues depend significantly on general domestic and global economic conditions and the demand for software products in the markets in which we compete. Uncertainty about future economic conditions makes it difficult to forecast operating results and any delays or reductions in information technology spending could result in a material and adverse effect on our operations. Our revenues may grow at a slower rate than experienced in previous periods and, in particular periods, may decline. We have also experienced variability in revenue trends during past quarters, noting an increase in sales bookings in the last month of each quarter resulting from increased direct sales activities. Our efforts to manage our operating expenses may hinder our ability to achieve growth in our business and revenues. Any shortfall in revenues or results of operations from levels expected by securities analysts, general declines in economic conditions, or significant reductions in spending by our customers, could have an immediate and materially adverse effect on the trading price of our common stock in any given period. In addition to factors specific to us, changes in analysts’ earnings estimates for us or our industry and factors affecting the corporate environment, our industry, or the securities markets in general may result in significant volatility in the trading price of our common stock.

 

If our product and version releases are not successful, our results of operations could be materially and adversely affected—A substantial portion of our revenues is derived from license sales of new software products and new versions of existing software products. The success of new products and new versions of existing products, including the recent release of our next generation MX products, Studio 8, in September 2005, depends on the timing, market acceptance and performance of new products or new versions of existing products. In the past we have experienced delays in the development of new products and enhancement of existing products and such delays may occur in the future. If we are unable, due to resource constraints or technological reasons, to develop and introduce products in a timely manner, our results of operations could be materially and adversely affected, including, in particular, our quarterly results. In addition, market acceptance of our new product or version releases will be dependent on our ability to include functionality and usability in such releases that address the requirements of customer demographics with which we may have limited prior experience. We must continue to update our existing products and services to keep them current with changing technology, competitive offerings and consumer preferences and must continue to develop new products and services to take advantage of new technologies that could otherwise render our existing products, or existing versions of such products, obsolete. Furthermore, our new product or version releases may contain undetected errors or “bugs,” which may result in product failures or security breaches or otherwise fail to perform in accordance with customer expectations. In addition, such releases may not effectively guard against harmful or disruptive codes, including “virus” codes, new versions of which appear periodically, which may target files or programs created using our products. The occurrence of errors or harmful codes could result in loss of market share, diversion of development resources, injury to our reputation and the reputation of our products, or damage to our efforts to build positive brand awareness, any of which could have a material adverse effect on our business, operating results and financial condition. If new

 

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product or version releases, such as Studio 8, do not achieve adequate market acceptance, if these new products or version releases fail to perform properly, if we are unsuccessful in further penetrating our Business User and Consumer markets, or if we do not ship other new products or new versions of our existing products as planned, our results of operations could be materially and adversely affected.

 

Product returns could exceed our estimates and harm our net revenues—The primary sales channels into which we sell our products throughout the world are a network of distributors and VARs. Agreements with our distributors and VARs contain specific product return privileges for stock rotation and obsolete products that are generally limited to contractual amounts. In general, we expect sales returns to increase following the announcement of new or upgraded versions of our products or in anticipation of such product announcements, as our distributors and resellers seek to reduce their inventory levels of the prior version of a product in advance of receiving the new version. Similarly, we expect that product inventory held by our distributors and resellers would increase following the successful introduction of new or upgraded products, as these resellers stock the new version in anticipation of end user demand, which would result in a decrease in our allowance for sales returns. As part of our revenue recognition practices, we have established a reserve for estimated sales returns. The reserve is based on a number of factors, including historic product returns and inventory levels on a product-by-product basis for each of our primary sites regions and the timing of new product introductions. Actual product returns in excess of our reserve estimates would have an adverse effect on our net revenues and our results of operations.

 

We face intense competition—We operate in a highly competitive market characterized by market and customer expectations to incorporate new features and to accelerate the release of new products. These market factors represent both opportunities and competitive threats to us. With respect to competitive threats:

 

    Our designer and developer tools compete directly and indirectly with products from vendors including Microsoft, IBM, Adobe, and other companies.

 

    Our server software products compete in a highly competitive and rapidly changing market for application server technologies. With respect to these products, we compete directly with products offered by Microsoft, IBM, BEA, Sun and various other open-source or free technologies.

 

    Our products marketed to Business Users, such as Breeze and Contribute, compete directly and indirectly with products offered by IBM, Microsoft, WebEx Communications, Inc. and other companies.

 

    Our products offered to mobile operators and device manufacturers for use in consumer devices compete directly and indirectly with various technologies and products from both established and emerging vendors.

 

Introduction of new products, or introduction of new functionality in current products, by us or by other companies may intensify our current competitive pressures. Some of our current and potential competitors have greater financial, marketing, technical and intellectual property resources than we do.

 

Furthermore, we have a number of strategic alliances with large and complex organizations, some of which may compete with us in certain markets. These arrangements are generally limited to specific projects, the goal of which is generally to achieve product compatibility, promote product adoption, or facilitate product distribution. If successful, these relationships may be mutually beneficial. However, these alliances carry an element of risk because, in most cases, we must compete in some business areas with a company with which we also have a strategic alliance and, at the same time, cooperate with that company in other business areas. If these companies fail to perform or if these relationships fail to materialize as expected, we could suffer delays in product development, encounter barriers to product adoption and distribution or fail to realize the anticipated economic benefit of the strategic alliance.

 

We may not be able to attract or retain key personnel—Our future growth and success depend, in part, on the continued service of our highly skilled employees, including, but not limited to, our management team and sales personnel. Our ability to attract and retain employees is dependent on a number of factors, including our continued ability to provide broad-based stock incentive awards, competitive cash compensation and cash bonuses. The loss of key employees or an inability to effectively recruit new employees, as needed, could have a material adverse affect on our business and our ability to grow in the future.

 

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The pending merger with Adobe increases this risk. See risk factor above titled “Failure to complete, or delays in completing, the merger with Adobe could materially and adversely affect our results of operations and our stock price.”

 

Revenues from our Consumer market may be difficult to predict—Our future revenue growth is increasingly dependent upon our ability to continue to increase net revenues obtained from licensing our Consumer products for use in mobile phones, set-top boxes, game devices, personal digital assistants (“PDAs”), hand-held computers and other consumer electronic devices. We have a limited history of licensing products in our Consumer market and believe these transactions present considerably greater risks than we have historically experienced with sales of products licensed to designers and developers. Specific risks related to our ability to predict revenues in our Consumer market include, but are not limited to, the following:

 

    Sales cycles are long and complex as customers typically consider a number of factors before agreeing to license our technology, including, among other things, the time and cost to embed our technology into their devices. As a result, it may be difficult to predict when and if license arrangements will become effective.

 

    Because our technology is integrated into devices offered by our customers, we could be adversely impacted if our products are not successfully integrated with those of the customer or if their products are not successfully marketed or sold to consumers.

 

    We may be required to defer revenue recognition for our Consumer license arrangements for a significant period of time after initially entering into such license agreements for a variety of reasons, including, but not limited to, instances where there are certain acceptance criteria and/or integration services necessary to determine whether our technology functions properly with the product offerings of the customer.

 

    Many of our licensing arrangements require licensees to pay per-unit royalties, requiring us to rely on the accuracy and timeliness of licensee royalty reports generated by our customers in recognizing royalty revenues.

 

    Consumer markets are extremely competitive and are influenced by rapidly changing industry standards and consumer preferences. Changes in such standards or preferences could have a significant impact on demand for specific technologies, including our technology.

 

We face risks associated with international operations—Net revenues outside of North America accounted for approximately 42% and 43% of our consolidated net revenues during the three months ended September 30, 2005 and 2004, respectively. We expect that international sales will continue to represent a significant percentage of our revenues. We rely primarily on third parties, including distributors, for sales and support of our software products in foreign countries and, accordingly, are dependent on their ability to promote and support our software products and in some cases, to translate them into foreign languages. We have and may continue to, outsource specific development and quality assurance testing activities for certain of our software products to various foreign, independent third-party contractors. In addition, we also are expanding our own research, development, and quality assurance capabilities through the Company’s subsidiary in India. International business and operations are subject to a number of unique risks, including, but not limited to:

 

    foreign currency risk;

 

    foreign government regulation;

 

    reduced and/or less predictable intellectual property protections;

 

    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;

 

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    longer payment cycles and greater difficulty in collecting accounts receivables;

 

    potentially adverse tax consequences;

 

    the burdens of complying with a variety of foreign laws; and

 

    difficulties in staffing and managing foreign operations.

 

We enter into foreign exchange forward contracts to reduce economic exposure associated with sales and asset balances denominated in the Euro, Japanese Yen and British Pound. At September 30, 2005, the net notional amount of forward contracts outstanding in U.S. dollars using the spot exchange rates in effect at September 30, 2005 was $68.7 million. However, there can be no assurance that such contracts will adequately manage our exposure to currency fluctuations in the long-term, as the average maturity of these foreign exchange forward contracts is less than twelve months.

 

We may not be able to successfully defend or enforce our intellectual property rights—Because we are a software company, our business is dependent on our ability to protect our intellectual property rights. We rely on a combination of patent, copyright, trade secret and trademark laws, as well as employee and third-party nondisclosure agreements and license agreements, to protect our intellectual property rights and products. Policing unauthorized use of products and fully protecting our proprietary rights are difficult and we cannot guarantee that the steps we have taken to protect our proprietary rights will be successful. In addition, effective patent, copyright, trade secret and trademark protection may not be available in every country in which our products are distributed or used. In particular, while we are unable to determine the exact extent of piracy of our software products, software piracy may depress our revenues. While this would also adversely affect domestic revenue, revenue loss from piracy of our software products is believed to be even more significant outside of the United States, particularly in countries where laws provide less protection of intellectual property rights. Protection of our intellectual property rights also is difficult in situations where the Company has taken certain actions to promote broader adoption of our technology. For instance, in an effort to promote broader adoption of our technology, in particular the Macromedia Flash Player and the Macromedia Shockwave Player, we publish and grant industry standard-setting organizations, user groups and third parties the right to use certain Macromedia product specifications, file formats, application programming interfaces (“APIs”), and other information. These specifications, file formats, APIs and other information could be used to produce products that compete with and reduce demand for Macromedia’s own products. In addition, our intellectual property enforcement rights may be diminished because of our decision to publish or license certain intellectual property in an effort to promote its adoption.

 

We may be subject to intellectual property litigation—From time to time, we are involved in legal disputes relating to the validity or alleged infringement of our, or of a third party’s, intellectual property rights. Intellectual property litigation is typically extremely costly, unpredictable and can be disruptive to our business operations by diverting the attention and energies of our management and key technical personnel. In addition, any adverse decisions, including injunctions or damage awards entered against us, could subject us to significant liabilities, require us to seek licenses from others, prevent us from distributing or licensing certain of our products, or cause severe disruptions to our operations or the markets in which we compete, any one of which could adversely impact our business and results of operations.

 

Our business is subject to changing regulation of corporate governance and public disclosure that has increased both our costs and the risk of noncompliance—We are subject to rules and regulations of federal, state and financial market exchange entities responsible for protecting investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and NASDAQ, have recently issued new requirements and regulations and continue to develop additional regulations and requirements in response to recent laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. Our efforts to comply with these new regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

 

In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that

 

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assessment has required, and continues to require, the commitment of significant financial and managerial resources. Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by on-going revisions to our disclosure and governance practices.

 

Failure to maintain an effective system of internal controls could harm our business—Designing and maintaining effective internal controls over financial reporting is expensive and requires considerable attention from management, employees, and expert outside advisers. Internal controls, however well-designed and operated, cannot provide any absolute assurance that the objectives of the controls will be met. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we and our independent registered public accounting firm periodically certify the adequacy of our internal controls over financial reporting. This requirement became applicable to the Company on March 31, 2005. At March 31, 2005, we identified a material weakness in our internal controls over income taxes as part of the Section 404 certification process. This deficiency, for which we have taken remediation measures, or any actual failure of our internal controls, could harm the financial position of our business, reduce investor confidence in the Company, cause a decline in the market price for our common stock, and subject the Company to costly litigation.

 

We face risks associated with acquisitions—We have entered into business combinations with other companies in the past, including our acquisition of eHelp in December 2003 and smaller acquisitions in the second and third quarters of fiscal year 2006, and may make additional acquisitions in the future. Acquisitions generally involve significant risks, including, among other things, difficulties in the assimilation of the operations, business strategy, services, technologies and corporate culture of the acquired companies, diversion of management’s attention from other business concerns, overvaluation of the acquired companies and the acceptance of the acquired companies’ products and services by our customers. In addition, future acquisitions would likely result in dilution to existing stockholders, if stock or stock options are issued, or the assumption of debt and contingent liabilities, which could have a material adverse effect on our financial condition, results of operations and liquidity. Accordingly, past acquisitions and any future acquisitions could result in a material adverse effect on our results of operations.

 

Changing our pricing and business model could adversely affect our business—We periodically make changes to our product pricing or offer alternative methods of licensing our product, based on market conditions, customer demands, or in connection with marketing activities. Increases in the pricing of our products may cause our customers to seek lower-priced alternatives, decrease the aggregate demand for such products and have an adverse effect on our results of operations. In addition, competition in our various markets may require us to reduce prices on certain products in such markets. In the event that we are required to reduce the pricing of our products, we may not be able to offset the lower unit price with increased demand for the corresponding products. Furthermore, any changes in pricing of products in general may result in delays in transactions as our customers and our sales force adapt to such price changes and may have an adverse effect on our results of operations. Moreover, customer demand and competition in the market may require us to offer alternative methods of licensing our products. In the event that we offer alternative methods of licensing our products, the revenues generated from licenses based on such alternative methods may not offset the loss of revenues from our existing method of licensing our products in any given period and may have an adverse effect on our results of operations.

 

Our operating results are dependent, in part, on our distribution channels—A substantial portion of our net revenues are derived from the sale of our software products through a variety of distribution channels, including traditional software distributors, educational distributors, VARs, hardware and software superstores, retail dealers and OEMs. Although historically we have not experienced any material problems with our distribution channels, computer software dealers and distributors are typically not highly capitalized and have experienced difficulties during times of economic contraction and may do so in the future. Our ability to effectively distribute products depends in part upon the financial and business conditions of our distribution channels. Two distributors represented over 10% of the net revenues and gross account receivables in the periods presented in the table below:

 

     % of Net Revenues

    % of Gross Accounts Receivable

 
    

Three Months Ended

September 30,


   

Six Months Ended

September 30,


    September 30,

    March 31,

 
     2005

    2004

    2005

    2004

    2005

    2005

 

Distributor:

                                    

Ingram Micro, Inc.

   18 %   22 %   17 %   21 %   18 %   16 %

Tech Data Corporation

   13 %   13 %   12 %   12 %   11 %   10 %

 

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The loss of, or a significant reduction in, business with any one of our major distributors could have a material adverse effect on our business and consolidated results of operations in future periods. Furthermore, the terms of the arrangement with a distributor, OEM or reseller may result in us deferring recognition of revenue from such arrangement due to various factors, including future delivery and other obligations that we may have under such arrangement or failure by such party to comply with the reporting and payment obligations under such arrangement. Our revenues generated through our OEM channels may also be impacted by the marketability and success of the corresponding OEM products offered by these third parties.

 

While our products are marketed and sold through different levels of distribution channels, we maintain direct contractual relationships primarily with the first-tier distributors, generally relying on such distributors to manage the relationship with second-tier distributors and resellers with respect to the distribution, marketing and promotion of our licenses. Although we receive periodic reports from most of the distributors and resellers of our products, our reliance on our first-tier distributors to assist us in managing the lower level distribution channels limits our ability to:

 

    anticipate and respond to excess inventory levels of, or change in demand for, our products by lower-tier distributors or resellers;

 

    directly manage the marketing or promotion of our products by such lower-tier distributors or resellers; and

 

    monitor the adequacy of training received with respect to our products by employees of such lower-tier distributors or resellers.

 

As a result, if our first-tier distributors are unable to continue to effectively assist us in marketing and selling our products to the lower-tier distribution channels, the demand for and reputation of our products may decrease and our operations and our financial results may be materially and adversely effected.

 

Changes in tax laws and regulations may increase our expenses and the cost of our products—In October 1998, the federal Internet Tax Freedom Act (“ITFA”) was enacted. The ITFA imposed a three-year moratorium on state and local taxes related to internet access and discriminatory taxes on electronic commerce that expired on October 20, 2001. The moratorium was extended in November 2001 and November 2003. Under current law, the moratorium is set to expire on November 1, 2007. The Senate introduced a bill (S. 849) on April 19, 2005 to make permanent the moratorium. The bill has been referred to the Committee on Commerce, Science and Transportation. If the ITFA is not extended or permanently enacted, state and local jurisdictions may seek to impose taxes on internet access or electronic commerce within their jurisdictions. These taxes would increase our operating expenses and the sales price of our products.

 

Changes or disruptions in services provided by third parties could disrupt our business—We rely primarily on a single independent third party to produce and distribute our box products and on a second independent third party to fulfill volume licenses. If there is a temporary or permanent disruption of our supply from such manufacturers, we may not be able to replace the supply in sufficient time to meet the demand for our products. Any such failure to meet the demand for our products would adversely affect our revenues and might cause some users to purchase licenses to our competitors’ products to meet their requirements.

 

We rely on a limited number of independent third parties to provide support services to our customers. If any of these third-party service providers terminates its relationship with us or ceases to be able to continue to maintain such relationship with us, we may not have sufficient notice or time to avoid serious disruption to our business. Furthermore, if any such third-

 

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party service providers fail to provide adequate or satisfactory support for our products, our reputation as well as the success of our products may be adversely affected.

 

Moreover, we have and may continue to outsource specific development and quality assurance activities for certain of our products. If such third-party developers are not able to complete the development activities on time, the release of the corresponding new product or a new version may be delayed. In addition, since we are unable to control the development activities outsourced by us to third parties, the portions of our product developed by such third parties may contain significant errors or “bugs.”

 

Termination of licenses for technologies from third parties could cause delays, increased costs or reduced functionality that may result in a material reduction in our net revenues and higher costs—We license and distribute third-party technologies that are bundled with or embedded in our products. If any of these licenses from third parties were terminated or were not renewed, or the third-party technology was to become subject to an intellectual property dispute, we might not be able to ship our products in which these technologies are bundled or embedded. We would then have to seek an alternative to such third party technology to the extent that such an alternative exists. This could result in delays in releasing and/or shipping our products, increased costs or reduced functionality of our products and material reduction in our net revenues.

 

Adverse economic conditions in the commercial real estate market may affect our ability to sublease vacated portions of properties held under sublease—Our restructuring expenses and accruals involve significant estimates made by management using the best information available at the time that the estimates were made, including market data obtained from real estate brokers in the local markets. These estimates include evaluating the timing and market conditions of rental payments and sublease income. Changes in our current operations could result in us vacating additional portions of properties held under operating leases prior to the expiration of the corresponding lease agreements and could result in additional changes. The general adverse economic conditions in the areas where we have significant leased properties have resulted in a surplus of business facilities making it difficult to sublease properties. There can be no assurance that market conditions will improve during the terms of our lease periods. If market conditions deteriorate, we may be unable to sublease our excess leased properties at all or on terms acceptable to us, or we may not meet our expected estimated levels of sublease income and our results of operations could be adversely affected.

 

Legislative actions may cause our operating expenses to increase—The Sarbanes-Oxley Act of 2002 and newly proposed or enacted rules and regulations of the SEC and the NASDAQ stock market impose new duties on us and our executives, directors, attorneys and independent auditors. In order to comply with the Sarbanes-Oxley Act and any new rules promulgated by the SEC or NASDAQ stock market, we have hired additional personnel and are utilizing additional outside legal, accounting and other advisory services. Should the actual cost of compliance materially exceed amounts currently estimated by management, such additional costs could materially increase our operating expenses and adversely affect our results of operations.

 

System failures or system unavailability could harm our business—We rely on our network infrastructure, internal technology systems and our websites for our development, marketing, operational, support and sales activities. The hardware and software systems related to such activities are subject to damage from earthquakes, floods, fires, power loss, telecommunication failures and other similar events. They are also subject to acts such as computer viruses, physical or electronic vandalism or other similar disruptions that could also cause system interruptions, delays and loss of critical data and could prevent us from fulfilling our customers’ orders. We have developed disaster recovery plans and backup systems to reduce the potentially adverse effect of such events, as they could impact our sales and damage our reputation and the reputation of our products. We may, however, have inadequate insurance coverage or insurance limits to compensate us for losses from a major interruption. Any event that causes failures or interruption in our hardware or software systems could result in disruption in our business operations, loss of revenues or damage to our reputation.

 

Future impairment assessments on intangible assets may result in additional impairment charges—In fiscal year 2003, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. As a result, our goodwill and other intangible assets that have an indefinite useful life are no longer amortized, but instead, reviewed at least annually for impairment. Significant changes in demand for our products or changes in market conditions in the principal markets in which we sell our products,

 

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could adversely impact the carrying value of these intangible assets. In particular, if there is (i) a significant and other than temporary decline in the market value of our common stock; (ii) a decrease in the market value of a particular asset; or (iii) operating or cash flow losses combined with forecasted future losses, we could be required to record impairment charges related to goodwill and other intangible assets, which could adversely affect our financial results. In addition, should we develop and manage our business using discrete financial information for reporting units in the future, we may be required to allocate our goodwill balance to those reporting units, which may result in an impairment of part or all of our recorded goodwill.

 

Changes in the interpretation of generally accepted accounting principles in the United States of America (“GAAP”) may affect our reported results—We prepare our financial statements in conformity with GAAP. GAAP is subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting policies. Of particular significance are GAAP relating to the accounting treatment of employee stock options and the recognition of revenue in software licensing transactions. A change in these principles, and in particular the changes in GAAP to require the future expensing of the fair value calculated for stock options promulgated by SFAS No. 123R, could have a significant effect on our reported results and may affect the reporting of transactions completed prior to the announcement of a change.

 

Changes in our income taxes could affect our future results—As a multinational corporation, we are subject to income taxes in both the United States and various foreign jurisdictions. Our domestic and international tax liabilities are impacted by the allocation of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Our future effective tax rates could be favorably or unfavorably affected by various factors including changes in the mix of earnings in countries with differing statutory tax rates, the impact of re-measurement of net tax liabilities due to changes in foreign exchange rates and by changes in the valuation of our deferred tax assets and liabilities. Additionally, the amount of income taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. From time to time, we are subject to income tax audits. While we believe we have complied with all applicable income tax laws, there can be no assurance that a governing tax authority will not have a different interpretation of the law and assess us with additional taxes. Should we be assessed with additional taxes, there could be a material adverse affect on our results of operations or financial condition.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk

 

We invest our cash, cash equivalents and short-term investments in a variety of financial instruments, consisting primarily of U.S. Dollar-denominated U.S. treasury securities, U.S. government agency securities, commercial paper, highly liquid corporate debt securities, money market funds and interest-bearing accounts with financial institutions. Cash balances in foreign currencies are primarily invested in money market funds and interest-bearing bank accounts with financial institutions.

 

We account for our short-term investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Cash equivalents and all of our short-term investments are recorded as “available-for-sale” and accordingly are classified as current assets on our balance sheets. Securities with original maturities less than three months are classified as cash equivalents.

 

Cash equivalents and short-term investments include primarily fixed-rate and floating-rate interest earning instruments, which carry a degree of interest rate risk. Fixed-rate securities may have their market value adversely impacted due to a rise in interest rates, while floating-rate securities may produce less income than expected if interest rates decline. We mitigate interest rate volatility by investing in instruments with short maturities. We ensure the safety and preservation of our invested funds by placing these investments with high credit-quality issuers. We maintain portfolio liquidity by ensuring that underlying investments have active secondary or resale markets.

 

Foreign Currency Risk

 

Our international operations are subject to risks typical of an international business, including, among other factors: differing economic conditions; changes in political climate; differing tax structures; other regulations and restrictions; and

 

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foreign exchange volatility. As a result, our future results could be materially and adversely impacted by changes in these or other factors.

 

We sell our products internationally in U.S. Dollars and certain foreign currencies, primarily the Euro, Japanese Yen and British Pound. We regularly enter into foreign exchange forward contracts to offset the impact of currency fluctuations on certain foreign currency revenues and operating expenses as well as subsequent receivables and payables. Our management’s present strategy is to reduce the risk to earnings and cash flows associated with changes in foreign currency exchange rates over our fiscal year. We account for derivative instruments and hedging activities in accordance with SFAS No. 133. SFAS No. 133 requires that all derivatives be recorded on the balance sheet at fair value.

 

Our exposure to foreign exchange rate fluctuations results from the sale of products internationally in foreign currencies and from expenses in foreign currencies to support those sales. We have a risk management program to reduce the effect of foreign exchange transaction gains and losses from recorded foreign currency-denominated assets and liabilities. This program involves the use of foreign exchange forward contracts in certain currencies, primarily the Euro, Japanese Yen and British Pound. A foreign exchange forward contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates. Under this program, increases or decreases in our foreign currency transactions are partially offset by gains and losses on the foreign exchange forward contracts, so as to mitigate the income statement impact of significant foreign currency exchange rate movements. We do not use foreign exchange forward contracts for speculative or trading purposes.

 

Cash Flow Hedging. We designate and document foreign exchange forward contracts related to forecasted transactions as cash flow hedges and as a result, we apply hedge accounting for these contracts. The critical terms of the foreign exchange forward contracts and the forecasted underlying transactions are matched at inception and forward contract effectiveness is calculated, at least quarterly, by comparing the change in the fair value of the contracts to the change in the fair value of the forecasted revenues or expenses, with the effective portion of the fair value of the hedges recorded in Accumulated other comprehensive income (loss) (“AOCI”). We record any ineffective portion of the hedging instruments, which was not material during the three or six months ended September 30, 2005 and 2004, in Other income (expense) on our Condensed Consolidated Statements of Income. When the underlying forecasted transactions occur and impact earnings, the related gain or loss on the cash flow hedge is reclassified to net revenues or expenses. In the event it becomes probable that the forecasted transactions will not occur, the gain or loss on the related cash flow hedges would be reclassified from AOCI to Other income (expense) at that time. All values reported in AOCI at September 30, 2005 will be reclassified to earnings in twelve months or less. At September 30, 2005, the outstanding cash flow hedging derivatives had maturities of twelve months or less.

 

Balance Sheet Hedging. We manage our foreign currency risk associated with foreign currency denominated assets and liabilities using foreign exchange forward contracts. These derivative instruments are carried at fair value with changes in the fair value recorded in other income (expense). These derivative instruments substantially offset the remeasurement gains and losses recorded on identified foreign currency denominated assets and liabilities. At September 30, 2005, our outstanding balance sheet hedging derivatives had maturities of twelve months or less.

 

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Our outstanding net foreign exchange forward contracts at September 30, 2005 are presented in the table below. This table presents the net notional amount in U.S. Dollars using the spot exchange rates in effect at September 30, 2005 and the weighted average forward rates. Weighted average forward rates are quoted using market conventions. All of these forward contracts mature in twelve months or less.

 

     Net Notional
Amount in US Dollars


   Weighted
Average
Forward Rates


     (In millions)     

Cash Flow Hedges:

           

Euro (“EUR”) (contracts to receive U.S. Dollar/pay EUR)

   $ 24.3    1.31

Japanese Yen (“YEN”) (contracts to receive U.S. Dollar/pay YEN)

     8.4    102.10

British Pound (“GBP”) (contracts to receive U.S. Dollar /pay GBP)

     5.7    1.86

Balance Sheet Hedges:

           

Euro (“EUR”) (contracts to receive U.S. Dollar/pay EUR)

   $ 11.4    1.24

Japanese Yen (“YEN”) (contracts to receive U.S. Dollar/pay YEN)

     10.8    107.40

British Pound (“GBP”) (contracts to receive U.S. Dollar /pay GBP)

     8.1    1.82

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.

 

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. Based upon this evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures are effective as of September 30, 2005.

 

Remediation of Material Weakness

 

As discussed in our Annual Report on Form 10-K for the year ended March 31, 2005, management identified a material weakness in our internal control over financial reporting with respect to the Company’s policies and procedures applicable to management’s oversight and review of the Company’s accounting for income taxes. This lack of adequate management oversight and review resulted in errors in the Company’s income tax expense and the corresponding deferred tax assets and liabilities in the Company’s preliminary fiscal 2005 consolidated financial statements. These errors were corrected in the March 31, 2005 consolidated financial statements prior to being filed with the SEC. Since management’s identification of the material weakness at March 31, 2005, we have taken the following steps to improve our internal controls over financial reporting related to income taxes:

 

    Enhanced our internal tax department resources by adding qualified tax professionals to assist in the preparation and review of our quarterly income tax provision;

 

    Engaged Ernst & Young LLP, a global professional services firm, to supplement the level of review over the quarterly income tax provision; and

 

    Continued to formalize and enhance existing processes, procedures and documentation standards relating to our income tax provisions.

 

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We believe we have taken steps necessary to effectively remediate the material weakness relating to the adequacy of management oversight and review of the Company’s accounting for income taxes. However, certain of the corrective processes and procedures relate to annual controls that cannot be tested until the preparation of our fiscal year 2006 annual income tax provision. Accordingly, we will continue to monitor the effectiveness of our internal controls over financial reporting relating to the accounting for income taxes and may make further changes from time to time as deemed appropriate by management.

 

Changes in Internal Control Over Financial Reporting

 

Other than the remediations discussed above, there have been no further changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On September 6, 2002, Plaintiff Fred B. Dufresne filed suit against Macromedia, Adobe, Microsoft and Trellix Corporation (“Defendant”) in the U.S. District Court, District of Massachusetts (the “Dufresne Matter”), alleging infringement of U.S. Patent No. 5,835,712 (the “712 patent”) entitled “Client-Server System Using Embedded Hypertext Tags for Application and Database Development.” The Plaintiff’s complaint asserts, among other things, that Defendants have infringed, and continue to infringe, one or more claims of the 712 patent by making, using, selling and/or offering for sale, products supporting Microsoft Active Server Pages technology. The Plaintiff seeks unspecified compensatory damages, preliminary and permanent injunctive relief, trebling of damages for willful infringement, and fees and costs. We believe the action has no merit and are vigorously defending against it.

 

From time to time, in addition to the Dufresne Matter, Macromedia is involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contract law, distribution arrangements and employee relation matters. As of the time of this Quarterly Report, there were no material pending legal proceedings other than the Dufresne Matter, and other than ordinary routine litigation incidental to our business, to which we or any of our subsidiaries are a party or of which any of our property is subject.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

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Table of Contents
Item 4. Submission of Matters to a Vote of Security Holders

 

The following proposals were submitted to a vote of, and adopted by, stockholders at the Annual Meeting of Stockholders held on July 18, 2005:

 

1. Proposal to elect ten directors for one-year terms. The vote tabulations were as follows:

 

Director


  Vote

   Withheld

Robert K. Burgess   60,268,741    1,651,751
Charles M. Boesenberg   61,142,135    778,357
Stephen A. Elop   60,290,817    1,629,675
John (Ian) Giffen   58,501,611    3,418,881
Steven Gomo   61,203,410    717,082
William H. Harris, Jr.   60,608,999    1,311,493
Donald L. Lucas   58,216,081    3,704,411
Elizabeth A. Nelson   58,548,041    3,372,451
Timothy O’Reilly   60,596,987    1,323,505
William B. Welty   60,162,037    1,758,455

 

2. Proposal to amend the Company’s 2002 Equity Incentive Plan to increase the number of shares of Common Stock reserved for issuance under the plan by 1,500,000 shares and to make certain other amendments to the terms of the plan by a vote of 39,006,044 for and 10,468,706 against with 74,339 abstentions and 12,371,403 broker non-votes.

 

3. Proposal to ratify the selection of KPMG LLP as the Company’s independent registered public accounting firm to perform the audit of Macromedia’s financial statements for fiscal year 2006 by a vote of 61,030,165 for and 821,019 against with 69,308 abstentions and no broker non-votes.

 

On August 24, 2005, at a Special Meeting of Macromedia Stockholders, a proposal to approve the adoption of the Agreement and Plan of Merger and Reorganization, dated as of April 17, 2005, by and among Adobe Systems Incorporated, Avner Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Adobe, and Macromedia was approved by our stockholders by a vote of 55,464,640 for and 75,804 against with 48,203 abstentions.

 

Item 5. Other Information

 

Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934 as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for listing the non-audit services approved each quarter of fiscal year 2005 by our Audit Committee to be performed by KPMG LLP, our external auditor. During the quarter ended September 30, 2005, the Audit Committee approved the following non-audit services anticipated to be performed by KPMG LLP: international executive tax assistance, tax compliance and tax consulting services.

 

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Table of Contents
Item 6. Exhibits

 

          Incorporated by Reference

    
Exhibit
Number


  

Exhibit Description


   Form

   Date Filed

   Filed
Herewith


10.1    Macromedia, Inc. FY 2006 Executive Incentive Plan    8-K    May 26, 2005     
31.1    Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.              X
31.2    Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.              X
32.1    Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              X
32.2    Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              X

 

47


Table of Contents

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.

 

Dated: November 8, 2005      

MACROMEDIA, INC.

            By:  

/s/ ELIZABETH A. NELSON

                Elizabeth A. Nelson
                Executive Vice President,
Chief Financial Officer and Corporate Secretary

 

48

EX-31.1 2 dex311.htm CERTIFICATION OF CEO Certification of CEO

Exhibit 31.1

 

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-15(e) and 15d-15(e)

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Stephen A. Elop, Chief Executive Officer of the registrant, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Macromedia, Inc.;

 

  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

  3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

  (d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: November 8, 2005

      /s/ Stephen A. Elop
        Stephen A. Elop
        Chief Executive Officer
EX-31.2 3 dex312.htm CERTIFICATION OF CFO Certification of CFO

Exhibit 31.2

 

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-15(e) and 15d-15(e)

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Elizabeth A. Nelson, Chief Financial Officer of the registrant, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Macromedia, Inc.;

 

  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

  3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

  (d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: November 8, 2005

      /s/ Elizabeth A. Nelson
        Elizabeth A. Nelson
        Executive Vice President,
        Chief Financial Officer and Corporate Secretary
EX-32.1 4 dex321.htm CERTIFICATION OF CEO Certification of CEO

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Macromedia, Inc. (the “Registrant”) on Form 10-Q for the quarterly period ended September 30, 2005 as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen A. Elop, Chief Executive Officer of the Registrant, certify, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

 

  (1) the Report, to which this certification is attached as an exhibit, fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

 

  (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Dated: November 8, 2005

      /s/ Stephen A. Elop
        Stephen A. Elop
        Chief Executive Officer

 

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Macromedia, Inc. and will be retained by Macromedia, Inc. and furnished to the U.S. Securities and Exchange Commission or its staff upon request. This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Macromedia, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

EX-32.2 5 dex322.htm CERTIFICATION OF CFO Certification of CFO

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Macromedia, Inc. (the “Registrant”) on Form 10-Q for the quarterly period ended September 30, 2005 as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), I, Elizabeth A. Nelson, Executive Vice President, Chief Financial Officer and Secretary of the Registrant, certify, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

 

  (1) the Report, to which this certification is attached as an exhibit, fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

 

  (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Dated: November 8, 2005

      /s/ Elizabeth A. Nelson
        Elizabeth A. Nelson
        Executive Vice President,
        Chief Financial Officer and Secretary

 

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Macromedia, Inc. and will be retained by Macromedia, Inc. and furnished to the U.S. Securities and Exchange Commission or its staff upon request. This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Macromedia, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

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