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 DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to __
COMMISSION FILE NO. 0-22688
MACROMEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3155026
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 TOWNSEND STREET
SAN FRANCISCO, CALIFORNIA 94103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(415) 252-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
As of January 31, 1998, there were outstanding 38,113,070 shares of the
Registrant's Common Stock, par value $0.001 per share.
1
MACROMEDIA, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------- ----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
December 31, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
December 31, March 31,
1997 1997
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 26,817 $ 15,397
Short-term investments 59,387 87,054
Accounts receivable, net 4,033 2,315
Inventory, net 443 1,882
Prepaid expenses and other current assets 3,342 4,557
Deferred tax assets, short-term 7,537 7,537
------------ ----------
Total current assets 101,559 118,742
Property and equipment, net of accumulated
depreciation of $18,917 and $13,339 for
December 31, and March 31, 1997, respectively 38,389 34,150
Other long-term assets (Note 4) 8,322 3,035
Deferred tax assets, long-term 970 970
------------ ----------
Total assets $ 149,240 $ 156,897
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,208 $ 6,020
Accrued liabilities 19,445 16,585
Unearned revenue 1,881 2,376
------------ ----------
Total current liabilities 23,534 24,981
Long-term liabilities 435 --
------------ ----------
Total liabilities 23,969 24,981
Contingencies (Note 5)
Stockholders' equity:
Common stock, par value $0.001 per share; 80,000,000
shares authorized; 38,103,764 (net of 460,000
treasury shares) and 37,742,965 shares issued and
outstanding at December 31, and March 31, 1997,
respectively 39 38
Other stockholders' equity 125,232 131,878
------------ ----------
Total stockholders' equity 125,271 131,916
------------ ----------
Total liabilities and stockholders' equity $ 149,240 $ 156,897
------------ ----------
------------ ----------
See accompanying notes to condensed consolidated financial statements.
3
MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three months ended Nine months ended
December 31, December 31,
------------------------ ------------------------
1997 1996 1997 1996
--------- ---------- --------- ---------
Revenues $ 26,579 $ 28,104 $ 83,074 $ 94,139
Cost of revenues 2,763 5,562 12,638 15,501
--------- ---------- --------- ---------
Gross profit 23,816 22,542 70,436 78,638
Operating expenses:
Sales and marketing 13,901 16,240 42,074 40,778
Research and development 7,472 7,438 24,138 21,475
General and administrative 2,944 1,904 8,311 5,017
Merger 7,658 350 7,658 350
--------- ---------- --------- ---------
Total operating expenses 31,975 25,932 82,181 67,620
--------- ---------- --------- ---------
Operating (loss) income (8,159) (3,390) (11,745) 11,018
Other income, net 1,032 1,131 3,276 3,725
--------- ---------- --------- ---------
(Loss) income before income taxes (7,127) (2,259) (8,469) 14,743
(Provision) benefit for income taxes (124) (100) 292 (5,372)
--------- ---------- --------- ---------
Net (loss) income $ (7,251) $ (2,359) $ (8,177) $ 9,371
--------- ---------- --------- ---------
--------- ---------- --------- ---------
Net (loss) income per share (Note 2)
Basic $ (0.19) $ (0.06) $ (0.21) $ 0.25
Diluted $ (0.19) $ (0.06) $ (0.21) $ 0.23
Weighted average common shares outstanding 38,307 37,475 38,085 37,306
Incremental shares - stock options -- -- -- 3,908
- employee stock
purchase plan -- -- -- 8
--------- ---------- --------- ---------
Weighted average common shares
outstanding - assuming dilution 38,307 37,475 38,085 41,222
--------- ---------- --------- ---------
--------- ---------- --------- ---------
See accompanying notes to condensed consolidated financial statements.
4
MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine months ended December 31,
------------------------------
1997 1996
------------ ----------
Cash flows from operating activities:
Net (loss) income $ (8,177) $ 9,371
Adjustments to reconcile net (loss) income to net cash
provided by/(used in) operating activities:
Depreciation and amortization 5,727 5,249
Compensation expense on stock options 37 78
Changes in operating assets and liabilities, net of effect
of mergers:
Accounts receivable, net (1,702) (1,193)
Inventory 1,439 (1,704)
Prepaid expenses and other current assets 736 (281)
Accounts payable (3,923) 87
Accrued liabilities 1,982 1,865
Unearned revenue (608) (476)
Other current liabilities -- 19
Other long-term liabilities 135 (35)
Write-off of Solis merger costs 7,658 --
Other, net 501 --
------------ ----------
Net cash provided by operating activities 3,805 12,980
------------ ----------
Cash flows from investing activities:
Capital expenditures (9,927) (20,548)
Net sales/(purchases) of available-for-sale investments 27,570 (10,058)
Investment in Solis (2,500) --
Other long-term assets (5,145) (4,163)
------------ ----------
Net cash provided by/(used in) investing activities 9,998 (34,769)
------------ ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,154 2,995
Acquisition of treasury stock (4,537) --
------------ ----------
Net cash (used in)/provided by financing activities (2,383) 2,995
------------ ----------
Increase (decrease) in cash and cash equivalents 11,420 (18,794)
Cash and cash equivalents, beginning of period 15,397 28,829
------------ ----------
Cash and cash equivalents, end of period $ 26,817 $ 10,035
------------ ----------
------------ ----------
Supplemental disclosure of cash flow information:
Interest paid during period $ -- $ --
------------ ----------
------------ ----------
Income taxes paid $ -- $ 3,935
------------ ----------
------------ ----------
See accompanying notes to condensed consolidated financial statements.
5
MACROMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The condensed consolidated financial statements at December 31, 1997 and for the
three and nine month periods ended December 31, 1997 and 1996 are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
Company's financial position and operating results for the interim periods.
The unaudited consolidated financial statements included in this Form 10-Q
should be read in conjunction with the audited consolidated financial statements
and notes thereto, together with management's discussion and analysis of
financial condition and results of operations, contained in the Company's annual
report on Form 10-K for the fiscal year ended March 31, 1997.
The results of operations for the three and nine month periods ended December
31, 1997 are not necessarily indicative of the results for the fiscal year
ending March 31, 1998 or any other future periods.
Certain amounts in the March 31, 1997 condensed consolidated balance sheet have
been reclassified in order to conform with the current year presentation.
2. EARNINGS PER SHARE
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, effective for periods
ending after December 15, 1997. The Company has adopted the new standard for
the third quarter of this fiscal year and has restated prior period amounts to
conform to the new presentation. SFAS No. 128 requires the presentation of
"basic" and "diluted" earnings per share. "Basic" earnings per share is
calculated by dividing net income or loss by the weighted average common shares
outstanding during the period. "Diluted" earnings per share reflects the net
incremental shares that would be issued if outstanding stock options were
exercised and the funds collected for the employee stock purchase plan were used
to purchase treasury shares.
In the case of a net loss, it is assumed that no incremental shares would be
issued because they would be anti-dilutive. In addition, certain options are
considered anti-dilutive because the options' exercise price was above the
average market price during the period. Anti-dilutive shares are not included
in the computation of diluted earnings per share, in accordance with SFAS No.
128. The following table reflects the total potentially diluted shares that
would be outstanding if such anti-dilutive shares were included.
Three months ended Nine months ended
(SHARES IN THOUSANDS) December 31, December 31,
--------------------- ---------------------
1997 1996 1997 1996
--------------------- ---------------------
Weighted average common shares outstanding 38,307 37,475 38,085 37,306
Incremental shares
- stock options 2,861 3,118 2,208 3,908
- employee stock purchase plan 25 7 10 8
--------------------- ---------------------
Diluted shares assuming net income 41,193 40,600 40,303 41,222
Options with exercise price greater than market price 1,131 697 2,043 500
--------------------- ---------------------
Total potentially diluted shares 42,324 41,297 42,346 41,722
--------------------- ---------------------
--------------------- ---------------------
6
The earnings per share amounts reported for the fiscal years ended March 31,
1997, 1996 and 1995 have been recalculated in accordance with SFAS No. 128, as
follows:
(SHARES IN THOUSANDS) Year Ended March 31,
---------------------------------
1997 1996 1995
---------------------------------
As Reported - Primary (loss) earnings per share $ (0.16) $ 0.59 $ 0.19
- Weighted average common shares outstanding 37,488 39,044 34,414
Restated for SFAS No. 128
Basic (loss) earnings per share $ (0.16) $ 0.66 $ 0.22
Diluted (loss) earnings per share $ (0.16) $ 0.59 $ 0.19
Weighted average common shares outstanding 37,488 34,899 30,362
Incremental shares - stock options - 4,145 4,046
- employee stock purchase plan - - 1
- warrants - - 6
---------------------------------
Weighted average common shares outstanding -
assuming dilution 37,488 39,044 34,415
---------------------------------
---------------------------------
As explained above, certain shares may be considered anti-dilutive and
excluded from the calculation of earnings per share. This table reflects the
total potentially diluted shares that could have been outstanding for the
past three fiscal years.
(SHARES IN THOUSANDS) Year Ended March 31,
---------------------------------
1997 1996 1995
---------------------------------
Total Potentially Diluted Shares
Weighted average common shares outstanding 37,488 34,899 30,362
Incremental shares - stock options 3,504 4,145 4,046
- employee stock purchase plan 2 - 1
- warrants - - 6
---------------------------------
Diluted shares assuming net income 40,994 39,044 34,415
Options with exercise price greater than market price 738 178 -
---------------------------------
Total potentially diluted shares 41,732 39,222 34,415
---------------------------------
---------------------------------
3. SOLIS ACQUISITION
On October 6, 1997 the Company acquired Solis Design, Inc. ("Solis"), a software
development company, for 300,000 shares of common stock, valued at $13.25 per
share, and $2.5 million of cash. The acquisition was structured as a tax-free
merger and was accounted for under the purchase method. The excess of the
consideration paid over the estimated fair value of net assets acquired of
approximately $0.2 million was recorded as goodwill and is being amortized on a
straight-line basis over 12 months. The operating results of Solis, which have
not been material in relation to those of the Company, have been included in the
consolidated statement of income beginning October 6, 1997.
As a result of the acquisition, the Company wrote off $7.7 million of purchased
in-process research and development and other costs related to the transaction.
7
4. RELATED PARTY TRANSACTIONS
During the nine months ended December 31, 1997, the Company made loans to
various officers in conjunction with their hiring and relocation. Included in
other long-term assets are full recourse loans totaling $7.5 million and
interest receivable of $0.1 million due from these officers, as of December 31,
1997. The notes bear interest at rates ranging from 5.53% to 6.80% per annum
and are secured by the personal residences of the officers. One of the notes has
a zero interest rate for the first two years of its term. The rate will revert
to 6.65% at the end of this period. The principal and accrued interest are due
in full on the maturity dates of the loans. The notes mature from 1999 to 2004
and are callable on demand if the officer terminates employment with the
Company. For the three and nine months ended December 31, 1997, interest income
on the notes totaled $0.08 and $0.15 million, respectively.
5. CONTINGENCIES
SEE PART II - Other Information, Item 1. Legal Proceedings.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES. The Company derives revenues primarily from software sales and
technology licensing to domestic and international distributors, value-added
resellers (VARs), original equipment manufacturers (OEMs), corporate accounts
and registered users. To a lesser extent, revenues are also derived from
contracts to provide maintenance to customers. The Company's principal products,
from which it derives a substantial majority of its revenues, are Director,
FreeHand, and Authorware.
The Company's third quarter fiscal 1998 revenues of $26.6 million decreased 5%
from revenues of $28.1 million for the same period in fiscal 1997. This decrease
was due to several factors including: the fact that FreeHand, which shipped an
upgrade that accounted for approximately half of the revenues in the third
quarter of fiscal 1997 will not ship an upgrade until the planned fourth quarter
release in fiscal 1998, and a reduction in the number of standalone products
sold; partially offset by an increase in Authorware, Director and new product
revenues. For the nine-month period ended December 31, 1997, revenues were $83.1
million compared to $94.1 million in the nine-month period a year ago. The
decline in revenues was due largely to the FreeHand product cycle discussed
above plus the additional timing impact of version releases year over year,
product mix, reduced service revenue, increased reserves for anticipated future
returns, and a reduction in the number of standalone products sold, partially
offset by new product revenues.
Revenues by geographic region may vary quarter to quarter depending on
product cycles and the timing of the release of localized versions of
products. The table below summarizes revenue by geography:
Three months ended Nine months ended
December 31, December 31,
---------------------------------- ------------------------------------
($ IN MILLIONS) 1997 1996 % change 1997 1996 % change
North America $ 11.6 $ 15.9 (27%) $ 40.8 $ 50.0 (18%)
% OF TOTAL REVENUES 44% 57% 49% 53%
International $ 15.0 $ 12.2 23% $ 42.3 $ 44.1 (4%)
% OF TOTAL REVENUES 56% 43% 51% 47%
Total revenues $ 26.6 $ 28.1 $ 83.1 $ 94.1
Revenues by platform mix will continue to vary quarter to quarter depending
on product release cycles and Macintosh market demand. Macintosh-related
product revenues declined during the three and nine-month periods ended
December 31, 1997 when compared to the prior year primarily as a result of
the timing of releases and resulting revenues from Freehand which are more
heavily weighted toward the Macintosh platform. The table below summarizes
revenue by platform:
Three months ended Nine months ended
December 31, December 31,
---------------------------------- ------------------------------------
($ IN MILLIONS) 1997 1996 % change 1997 1996 % change
Macintosh $ 11.1 $ 16.9 (34%) $ 36.7 $ 52.1 (30%)
% OF TOTAL REVENUES 42% 60% 44% 55%
Windows and cross-platform $ 15.5 $ 11.2 38% $ 46.4 $ 42.0 10%
% OF TOTAL REVENUES 58% 40% 56% 45%
Total revenues $ 26.6 $ 28.1 $ 83.1 $ 94.1
9
GROSS MARGIN. Gross margin for the three and nine months ended December 31, 1997
was 90% and 85%, respectively, compared with 80% and 84% for the same respective
periods in fiscal 1997. Gross margin increased primarily due to the results of
cost reduction programs over the past year, including a move to just-in-time
manufacturing, and lower write-offs for inventory obsolescence in the current
quarter.
SALES AND MARKETING. Sales and marketing expenses decreased from $16.2 million
in the third quarter of fiscal 1997 to $13.9 million in the third quarter of
fiscal 1998, and decreased as a percentage of revenues from 58% to 52%,
respectively. These expenses declined due to the timing of discretionary
marketing expenses such as product launch and trade show costs. For the nine
month period ended December 31, 1997, sales and marketing expenses increased to
$42.1 million, or 51% of total revenue, compared with $40.8 million, or 43% of
total revenue, in the same period a year ago. These expenses increased in terms
of absolute dollars in fiscal 1998 due to increased costs associated with
building the infrastructure to support future growth and the timing of
discretionary marketing expenses such as product launch and trade show costs.
Expenses increased as a percentage of revenues due to lower sales levels.
RESEARCH AND DEVELOPMENT. Research and development expenses were essentially
flat year over year at $7.5 million in the third quarter of fiscal 1998 compared
with $7.4 million in the third quarter of fiscal 1997. As a percentage of
revenues, research and development expenses were 28% and 26% in the respective
third quarters of fiscal 1998 and 1997. For the nine-month period ended December
31, 1997, research and development expenses were $24.1 million, a 12% increase
over the first nine months of fiscal 1997. As a percentage of total revenues,
expenses for the nine months ended December 31, 1997 and 1996 were 29% and 23%,
respectively. These expenses increased in absolute dollars as the Company
continues to invest in new product development. Expenses increased as a
percentage of revenues due to lower sales levels.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from
$1.9 million in the third quarter of fiscal 1997 to $2.9 million in the third
quarter of fiscal 1998, and increased as a percentage of revenues from 7% to
11%. For the nine months ended December 31, 1997 and 1996, general and
administrative expenses were $8.3 million and $5.0 million, respectively. These
expenses increased in absolute dollars in fiscal 1998 primarily due to increased
compensation costs, increased legal costs arising primarily from defense of the
class-action lawsuits, increased facilities costs, and costs associated with
building the infrastructure to support future growth.
MERGER. The Company recorded charges of $7.7 million in the third quarter of
fiscal 1998 to expense in-process research and development and other costs
related to the acquisition of Solis. In fiscal 1997, a charge to earnings of
$0.4 million was recorded for the costs associated with the December 1996
acquisition of FutureWave Software. The FutureWave acquisition was accounted for
as a pooling of interests. The Company's financial statements were not restated
to reflect this acquisition due to immateriality.
OTHER INCOME, NET. Other income, consisting primarily of interest income on
cash, cash equivalents, and short-term investments, was down slightly to $1.0
million but essentially comparable to the $1.1 million in the third quarter of
fiscal 1997.
BENEFIT (PROVISION) FOR INCOME TAXES. The Company's provision for income taxes
for the first nine months of fiscal 1998 was a benefit of $0.3 million as
compared with a provision of $5.4 million, after using available net operating
loss carryforwards, for the first nine months of fiscal 1997. The Company's
cumulative effective tax rate was 36% for the first nine months of fiscal 1998.
The writeoff of acquisition-related costs associated with Solis had no tax
benefit.
10
NET (LOSS) INCOME. The Company reported a net loss for the third quarter of
fiscal 1998 of $7.3 million, or $0.19 per diluted share, compared to a net loss
of $2.4 million, or $0.06 per diluted share, for the same quarter a year ago.
The reported loss for the current quarter was caused by one-time charges
associated with the acquisition of Solis. Without the Solis acquisition, the
Company would have reported net income of $0.4 million, or $0.01 per diluted
share for the quarter, despite the reduced absolute sales levels year-over-year,
because of improved gross margins and reduced expenses, as discussed above. For
the nine-month period ended December 31, 1997, the Company reported a net loss
of $8.2 million compared to net income of $9.4 million in the prior year. The
Company would have reported a net loss of $0.5 million on a year-to-date basis
without the Solis acquisition compared to net income of $9.4 million in the
prior year. The principal cause of this decrease is reduced revenue compared to
the same nine-month period in the prior year plus the impact of additional
spending on research and development and investment in new infrastructure for
the Company, as discussed above.
CHANGES IN FINANCIAL CONDITION AND LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash, cash equivalents, and short-term
investments of $86.2 million. For the nine months ended December 31, 1997, cash
provided by operating activities of $3.8 million was primarily attributable to
income from operations, which excludes the effect of non-cash expenses for the
Solis merger costs and depreciation. Cash provided by investing activities of
$10.0 million resulted primarily from the sale of $27.6 million in
available-for-sale short-term investments, offset in part by $5.8 million for
completion of construction of a building in Redwood Shores, California, $4.1
million for capital equipment, $2.5 million for the cash portion of the purchase
of Solis, and a $5.2 million increase in other long-term assets. Cash used in
financing activities of $2.4 million was attributable primarily to the
repurchase of common stock for treasury shares of $4.5 million, partially offset
by proceeds of $2.2 million received from the issuance of common stock upon
exercise of stock options. This resulted in a net decrease of $16.2 million from
the March 31, 1997 cash, cash equivalents, and short-term investments balances.
Working capital decreased by $15.8 million from the March 31, 1997 balance of
$93.8 million, to $78.0 million at December 31, 1997.
In addition to cash, cash equivalents, and short-term investments, the Company
has $15.0 million available under an unsecured revolving line of credit. The
line of credit bears interest at the bank's prime rate and expires on July 15,
1998. As of December 31, 1997, the Company had no borrowings outstanding.
The Company believes that existing cash resources, available bank borrowings,
and cash generated from operations, if any, will be sufficient to meet the
Company's cash and investment requirements for at least the next 12 months.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed in
this Form 10-Q are forward-looking statements that involve risks and
uncertainties, including those related to management of growth, quarterly
fluctuations of operating results, sales of Windows and Macintosh products,
impact of competition, the developing multimedia, internet and online services
markets, and the other risks detailed below, and, from time to time, in the
Company's other reports filed with the Securities and Exchange Commission. The
actual results that the Company achieves may differ materially from any
forward-looking statements due to such risks and uncertainties.
The Company's quarterly operating results may vary significantly depending on
the timing of new product introductions and enhancements by the Company. For
example, the Company's results for the first quarter of fiscal 1998 were
significantly affected due to the shipments of new versions of Director and
Authorware
11
late in the quarter. The Company has in the past experienced delays in the
development of new products and enhancements of existing products, and such
delays may occur in the future. If the Company were unable, due to resource
constraints or technological or other reasons, to develop and introduce such
products in a timely manner, this inability could have a material adverse effect
on the Company's results of operations.
The Company's quarterly results of operations also may vary significantly
depending on the timing of product introductions by competitors, changes in
pricing, execution of technology licensing agreements, and the volume and timing
of orders received during the quarter, which are difficult to forecast as well
as acquisitions of other companies or technologies. The future operating results
of the Company may fluctuate as a result of these and other factors, including
the Company's ability to continue to develop or acquire innovative products, its
product and customer mix and the level of competition. The Company's results of
operations may also be affected by seasonal trends. A significant portion of the
Company's operating expenses is relatively fixed, and planned expenditures are
based primarily on sales forecasts. As a result, if revenues do not meet the
Company's forecasts, operating results may be materially adversely affected.
In the past, a majority of the Company's revenues have been derived from its
products for the Macintosh. Although sales of the Company's Windows and
cross-platform products accounted for approximately 56% of total revenues for
the first nine months of fiscal 1998 and are expected to become an increasingly
important component of the Company's revenues, the Company remains heavily
dependent on the sale of products for the Macintosh platform. A continuing
leveling-off or decline in the sales rate of multimedia-capable Macintosh
computers or shifts in mail-order or other distribution mechanisms for Macintosh
products could have a material adverse effect on the Company's results of
operations.
A substantial majority of the Company's revenues is derived from the sale of its
products through a variety of distribution channels, including traditional
software distributors, educational distributors, VARs, OEMs, hardware and
software superstores, retail dealers, mail order, and direct sales.
Domestically, the Company's products are sold primarily through distributors,
VARs, and OEMs. Internationally, the Company's products are sold through
distributors. The Company's resellers generally offer products of several
different companies, including in some cases products that are competitive with
the Company's products. There can be no assurance that the Company's resellers
will continue to purchase the Company's products or provide them with adequate
levels of support. In addition, the Company believes that certain distributors
are reducing their inventory in the channel and returning unsold products to
better manage their inventories. From time to time, distributors seek the right
to return unsold product, particularly when such products have been superseded
by a new version or upgrade of a product. If the Company's distributors were to
seek to return increasing amounts of products, such returns could have a
material adverse effect on the Company's revenues and results of operations. The
loss of, or a significant reduction in sales volume to, a significant reseller
could have a material adverse effect on the Company's results of operations.
Macromedia has grown in substantial part from combinations with other companies.
In January 1995, Macromedia acquired Altsys Corporation, which developed the
FreeHand graphic design and illustration product. Before Macromedia's
acquisition of Altsys, the revenues of Altsys consisted primarily of royalties
from Aldus Corporation, which had marketed FreeHand until January 1995, and
revenues from Fontographer, software for creating and modifying fonts. In August
1995, the Company acquired Fauve Software, Inc., a developer of image editing
software. In December 1995, the Company acquired OSC, a developer of digital
audio production software. In March 1996, the Company acquired iband, Inc., a
developer of internet web site development tools. In December 1996, the Company
acquired FutureWave Software, a developer of Internet animation software. In
October 1997, the Company acquired Solis, a developer of Computer Managed
Instruction software for enterprise-wide training and skills management. Except
for FreeHand, none of the acquired products has accounted for a significant
portion of the Company's revenues to date. There can be no assurance that sales
of the Company's existing products will either continue at historical rates or
increase, or that new products or technologies introduced by the
12
Company, whether developed internally or acquired, will achieve market
acceptance. The Company's historical rates of growth should not be taken as
indicative of growth rates that can be expected in the future.
The markets for the Company's products are highly competitive and characterized
by pressure to reduce prices, incorporate new features, and accelerate the
release of new product versions. A number of companies currently offer products
that compete directly or indirectly with one or more of the Company's products.
These companies include Adobe Systems Incorporated ("Adobe"), Apple Computer,
Inc., Asymetrix Corporation, Corel Corporation ("Corel"), MetaCreations
Corporation, and Microsoft Corporation ("Microsoft"). As the Company competes
with larger competitors, such as Adobe, Corel, and Microsoft, across a broader
range of product lines and different platforms, the Company may face increasing
competition from such companies.
The developing digital media, internet, and online services markets, and the
personal computer industry in general are characterized by rapidly changing
technology, resulting in short product life cycles and rapid price declines. The
Company must continuously update its existing products and technologies to keep
them current with the changing technology landscape and must develop new
products and technologies to take advantage of emerging trends that could render
the Company's existing products obsolete. The Company's future prospects are
highly dependent on its ability to increase functionality of existing products
in a timely manner and to develop new products that address new technologies and
achieve market acceptance. New products and enhancements must keep pace with
competitive offerings, adapt to new platforms and emerging industry standards
and provide additional functionality. There can be no assurance that the Company
will be successful in these efforts.
For the nine months ended December 31, 1997, the Company derived approximately
51% of its total revenues from international sales. The Company expects that
international sales will continue to generate a significant percentage of its
total revenues. The Company relies on distributors for sales of its products in
foreign countries and, accordingly, is dependent on their ability to promote and
support the Company's products, and in some cases, to translate them into
foreign languages. International business is subject to a number of special
risks, including foreign government regulation; general geopolitical risks such
as political instability; hostilities with neighboring countries and changes in
diplomatic and trade relationships; more prevalent software piracy; unexpected
changes in, or imposition of, regulatory requirements, tariffs, import and
export restrictions, and other barriers and restrictions; longer payment cycles;
greater difficulty in accounts receivable collection; potentially adverse tax
consequences; the burdens of complying with a variety of foreign laws; foreign
currency risk; and other factors beyond the control of the Company.
In addition, the Company's results may be adversely affected by worldwide
economic events beyond the control of the Company, such as those presently
occurring in Asia. Approximately 28% of the Company's revenues in fiscal 1997
were derived from the Asia Pacific region. During the third quarter of fiscal
1998, the Company experienced a decline in revenue growth rates in Asia Pacific
in part due to the economic crises that occurred throughout this region. There
can be no assurances that these aforementioned economies will recover in the
near term or that the Company's results or growth rates in this geographic
region will return to previous levels even if the recovery occurs.
Revenues generated through international sales in certain countries are
denominated in the currency of the country in which the sale occurs, while
expenses continue to be denominated in the local currency of the countries in
which the Company has offices. As a result of the fact that sales and expenses
are not entirely matched, the Company has entered into foreign currency
contracts to manage risk against unfavorable fluctuations in foreign currency
exchange rates associated with anticipated sales. Because these contracts do
not qualify as hedges for financial reporting purposes, these contracts are
marked to market with gains and losses included in the statement of
operations. These contracts are of a short-term duration and as of December
31, 1997, there were no significant gains or losses.
13
YEAR 2000 COMPLIANCE
All Macromedia software will handle Year 2000 compliance correctly assuming that
the operating systems upon which they run have been updated to comply.
Macromedia's software products obtain date information, such as creation dates
and modification dates, directly from the computer's operating system. Thus, the
current versions of Macromedia's products are as "compliant" as the operating
systems upon which they run. Both Microsoft and Apple have stated that their
products will continue to operate properly into the twenty-first century.
Although the Company does not believe there are any material operational issues
or costs associated with preparing its internal systems for the year 2000, there
can be no assurances that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
On July 31, 1997, a complaint entitled Rosen et al. v. Macromedia, Inc., et al.,
(Case No. 988526) was filed in the Superior Court for San Francisco, California.
The complaint alleges that Macromedia and five of its former or current officers
and directors engaged in securities fraud in violation of California
Corporations Code Sections 25400 and 25500 by seeking to inflate the value of
Macromedia stock by issuing statements that were allegedly false or misleading
(or omitted material facts necessary to make any statements made not false or
misleading) regarding the Company's financial results and prospects. Plaintiffs
seek to represent a class of all persons who purchased Macromedia common stock
from April 18, 1996 through January 9, 1997. Defendants have filed demurrers to
the complaint and other motions which were argued on December 19, 1997 and
January 5, 1998. The Court has not ruled on the pending motions. Four similar
complaints by persons seeking to represent the same class of purchasers
subsequently have been filed in San Francisco Superior Court. Discovery has been
stayed pending resolution of the demurrers and other motions.
On September 25, 1997, a complaint entitled City Nominees v. Macromedia, Inc. et
al., Case No. C-97-3521-SC was filed in the United States District Court for the
Northern District of California. The complaint alleges that Macromedia and five
of its former or current officers and directors engaged in securities fraud in
violation of Sections 10 and 20(a) of the Securities and Exchange Act of 1934 by
seeking to inflate the value of Macromedia stock by issuing statements that were
allegedly false or misleading (or omitted material facts necessary to make any
statements made not false or misleading) regarding the Company's financial
results and prospects. Plaintiffs seek to represent a class of all persons who
purchased Macromedia common stock from April 18, 1996 through January 9, 1997.
Defendants have filed motions to dismiss the complaint. Three similar
complaints by persons seeking to represent the same class of purchasers
subsequently have been filed in United States District Court for the Northern
District of California. All of these cases have been consolidated. Lead
plaintiffs and lead counsel have been appointed under the provisions of the
Private Securities Law Reform Act by the District Court pursuant to an Order of
January 24, 1998. Lead plaintiffs have stated their intention to file a
consolidated amended complaint. Discovery has been stayed by operation of
statute and local rule.
All complaints seek damages in unspecified amounts, as well as other forms of
relief. The Company believes the complaints are without merit and intends to
vigorously defend the actions.
ITEM 2. CHANGES IN SECURITIES
On October 6, 1997, the Company entered into an Agreement and Plan of
Reorganization with Solis Design, Inc. ("Solis"), pursuant to which the Company
issued 300,000 shares of its Common Stock and paid certain cash consideration to
the ten shareholders of Solis in exchange for all of the capital stock of Solis.
The issuance of shares of the Company's Common Stock to the shareholders of
Solis was exempt from registration under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance on Rules 505 and 506 promulgated under the
Securities Act. The Common Stock was issued to a limited number of people with
no general solicitation or advertising. The Solis shareholders were represented
by a purchaser representative and received an information statement in
connection with the issuance of the Company's Common Stock.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith:
Exhibit
Number Exhibit Title
- ------- -------------
11.01 Statement regarding computation of per share earnings
27.01 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the period ended
December 31, 1997.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MACROMEDIA, INC.
(Registrant)
Date: February 19, 1998 /s/ Robert K. Burgess
----------------------------------------
Robert K. Burgess
President and Chief Executive Officer
Date: February 19, 1998 /s/ Elizabeth A. Nelson
----------------------------------------
Elizabeth A. Nelson
Chief Financial Officer
17