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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 DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NO. 000-22688
MACROMEDIA, INC.
(A DELAWARE CORPORATION)
I.R.S. EMPLOYER IDENTIFICATION NO. 94-3155026
600 TOWNSEND STREET
SAN FRANCISCO, CALIFORNIA 94103
(415) 252-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: $0.001 par value Common Stock;
53,338,609 number of shares outstanding on January 22, 2001.
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MACROMEDIA, INC. AND SUBSIDIARIES
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2000
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
December 31, 2000 and March 31, 2000....................................... 3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended December 31, 2000 and 1999..................... 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended December 31, 2000 and 1999............................... 5
Notes to Condensed Consolidated Financial Statements......................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................ 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................................... 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................. 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 20
ITEM 5. OTHER INFORMATION......................................................... 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................... 20
SIGNATURES........................................................................ 22
2
3
MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, March 31,
ASSETS 2000 2000
---------- ---------
Current assets:
Cash and cash equivalents ..................................... $ 119,948 $ 115,084
Short-term investments ........................................ 87,992 71,952
--------- ---------
Total cash, cash equivalents and investments ................ 207,940 187,036
Accounts receivable, net ...................................... 50,108 41,883
Deferred tax assets, short-term ............................... 9,937 7,812
Other current assets .......................................... 21,761 14,293
--------- ---------
Total current assets ....................................... 289,746 251,024
Land and building, net .......................................... 18,322 18,982
Other fixed assets, net ......................................... 73,725 41,871
Related party loans ............................................. 14,904 9,944
Restricted cash ................................................. 9,111 --
Other long-term assets .......................................... 29,472 17,538
--------- ---------
Total assets ............................................... $ 435,280 $ 339,359
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 3,118 $ 4,988
Accrued liabilities ........................................... 41,793 34,735
Accrued compensation, fringe benefits and payroll taxes ....... 19,070 19,107
Unearned revenue .............................................. 10,037 10,044
--------- ---------
Total current liabilities .................................. 74,018 68,874
Other liabilities ............................................... 943 321
--------- ---------
Total liabilities .......................................... 74,961 69,195
--------- ---------
Minority interest ............................................... 11,409 15,888
--------- ---------
Stockholders' equity:
Common stock, par value $0.001 per share; 200,000 shares
authorized; 63,884 and 50,674 shares issued as of
December 31, and March 31, 2000, respectively ............... 62 51
Treasury stock at cost; 1,818 shares as of
December 31, and March 31, 2000 .............................. (33,649) (33,649)
Additional paid-in capital .................................... 407,165 335,497
Notes receivable from stockholders ............................ (7,967) --
Deferred compensation ......................................... (27,833) (23,465)
Accumulated other comprehensive income ........................ 535 393
Retained earnings (deficit) ................................... 10,597 (24,551)
--------- ---------
Total stockholders' equity ................................. 348,910 254,276
--------- ---------
Total liabilities and stockholders' equity ................. $ 435,280 $ 339,359
========= =========
See accompanying notes to condensed consolidated financial statements.
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MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Revenues .............................................................. $ 103,338 $ 64,332 $ 300,523 $ 174,877
Cost of revenues ...................................................... 9,737 6,853 32,237 18,536
--------- --------- --------- ---------
Gross profit ........................................................ 93,601 57,479 268,286 156,341
--------- --------- --------- ---------
Operating expenses:
Sales and marketing ................................................. 39,654 26,929 117,739 75,801
Research and development ............................................ 29,940 15,653 84,223 43,980
General and administrative .......................................... 10,774 5,558 29,430 16,649
Acquisition-related expenses ........................................ -- 6,256 4,774 11,516
Non-cash compensation ............................................... 1,767 305 5,900 955
Amortization of intangibles ......................................... 634 249 1,558 758
--------- --------- --------- ---------
Total operating expenses .......................................... 82,769 54,950 243,624 149,659
--------- --------- --------- ---------
Operating income .................................................. 10,832 2,529 24,662 6,682
Other income (expense):
Interest and investment income, net ................................. 3,659 1,837 10,411 4,225
Loss on investment .................................................. (5,000) -- (5,000) --
Other ............................................................... 268 (44) 1,080 (41)
--------- --------- --------- ---------
Total other income (expense) ...................................... (1,073) 1,793 6,491 4,184
Minority interest ..................................................... 6,727 -- 15,336 --
--------- --------- --------- ---------
Income before income taxes ........................................ 16,486 4,322 46,489 10,866
Provision for income taxes ............................................ 3,657 3,050 11,341 7,642
--------- --------- --------- ---------
Net income ........................................................ 12,829 1,272 35,148 3,224
Accretion on mandatorily redeemable
convertible preferred stock ..................................... -- (1,357) -- (2,538)
--------- --------- --------- ---------
Net income (loss) applicable to common
stockholders ..................................................... $ 12,829 $ (85) $ 35,148 $ 686
========= ========= ========= =========
Net income applicable to common stockholders per share:
Basic ............................................................. $ 0.25 $ -- $ 0.70 $ 0.02
Diluted ........................................................... $ 0.23 $ -- $ 0.62 $ 0.01
Weighted average common shares outstanding used in calculating
net income applicable to common stockholders per share:
Basic ............................................................. 51,161 45,346 50,369 43,367
Diluted ........................................................... 56,452 45,346 56,625 51,565
See accompanying notes to condensed consolidated financial statements.
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MACROMEDIA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
December 31,
-----------------------
2000 1999
--------- ---------
Cash flows from operating activities:
Net income ...................................................... $ 35,148 $ 3,224
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................. 22,442 12,348
Write off of acquired in-process research and development ..... 3,100 --
Deferred income taxes ......................................... (1,426) 165
Tax benefit from employee stock plans ......................... 9,038 2,759
Minority interest ............................................. (15,336) --
Loss on impairment of investments ............................. 5,000 --
Loss on disposal of fixed assets .............................. 161 191
Change in operating assets and liabilities:
Accounts receivable, net ................................... (8,204) (15,713)
Other current assets ....................................... (7,437) 2,328
Accounts payable ........................................... (1,870) (3,192)
Accrued liabilities, accrued compensation, fringe
benefits and payroll taxes ............................... 6,925 7,391
Unearned revenue ........................................... (7) 2,502
--------- ---------
Net cash provided by operating activities ................. 47,534 12,003
Cash flows from investing activities:
Capital expenditures ............................................ (46,127) (23,118)
Proceeds from sale of fixed assets .............................. -- 625
Purchase of short-term investments .............................. (99,070) (93,714)
Maturities and sales of short-term investments .................. 83,172 96,459
Cash paid for acquisitions ...................................... (8,607) --
Related party loans ............................................. (4,960) (1,959)
Purchase of investments ......................................... (9,680) (10,000)
Purchase of other assets ........................................ (3,320) --
Additions to other long-term liabilities ........................ 622 4,794
Deposit of restricted cash ...................................... (9,111) --
--------- ---------
Net cash used in investing activities ..................... (97,081) (26,913)
Cash flows from financing activities:
Proceeds from issuance of mandatorily redeemable convertible
preferred stock ............................................... -- 15,734
Proceeds from sale of subsidiary preferred stock ................ 9,384 --
Proceeds from issuance of common stock, net ..................... 45,027 23,667
Proceeds from borrowings ........................................ -- 999
Payments on capital lease ....................................... -- (354)
Acquisition of treasury stock ................................... -- (8,204)
--------- ---------
Net cash provided by financing activities ................. 54,411 31,842
Increase in cash and cash equivalents ............................. 4,864 16,932
Adjustment to conform acquired company's year end ................. -- (3,826)
--------- ---------
Total ............................................................. 4,864 13,106
Cash and cash equivalents, beginning of period .................... 115,084 29,459
--------- ---------
Cash and cash equivalents, end of period .......................... $ 119,948 $ 42,565
========= =========
Noncash investing and financing activities:
Issuance of notes receivable upon exercise of
shockwave.com options............................................ $ 7,967 $ --
See accompanying notes to condensed consolidated financial statements.
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MACROMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Macromedia's Software business develops Web-authoring software, software
players and application server technologies that create Web site layout,
graphics and rich media content for Internet users. Additionally, the Company's
consumer business, shockwave.com, Inc. (shockwave.com), designs, develops and
markets aggregated content to provide and expand online entertainment on the
Web. Macromedia sells its products through a network of distributors,
value-added resellers (VAR's), its own sales force and Web site, and to original
equipment manufacturers (OEM's) in North America, Europe, Asia Pacific and Latin
America. In addition, Macromedia derives revenues from advertising on its Web
sites, and from software maintenance and technology licensing agreements.
shockwave.com derives the majority of its revenues from advertising and
sponsorship on its Web site. Macromedia, Inc. and its subsidiaries are
hereinafter collectively referred to as the "Company" or Macromedia.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed consolidated financial statements at December 31, 2000 and
March 31, 2000 and for the three and nine months ended December 31, 2000 and
1999 are unaudited and reflect all adjustments (consisting only of normal
recurring accruals) that are, in the opinion of management, necessary for a fair
presentation of Macromedia's financial position and operating results for the
interim periods.
In fiscal 2000, Macromedia consummated mergers with Andromedia, Inc. and
ESI Software, Inc., which have been accounted for using the pooling of interests
method. Accordingly, the consolidated financial statements for the prior periods
presented and the accompanying notes have been restated.
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 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, 2000. The results of operations for the three
and nine months ended December 31, 2000 are not necessarily indicative of the
results for the fiscal year ending March 31, 2001 or any other future periods.
3. ACQUISITIONS
On July 10, 2000, the Company acquired Middlesoft, Inc. a software
development company, for approximately $9.0 million. The acquisition was
accounted for under the purchase method. The purchase price of the transaction
was allocated to the acquired assets and liabilities based on their fair values
as of the date of the acquisition. The excess of the consideration paid over the
net assets acquired totaled $8.4 million, of which $3.1 million was expensed in
the second quarter of fiscal year 2001 as acquired in-process research and
development and $5.3 million has been recorded as goodwill and other intangible
assets, which is being amortized on a straight-line basis over three years. The
amounts allocated to in-process research and development expense were determined
through established valuation techniques in the high-technology industry and
were expensed upon acquisition because technological feasibility had not been
established and no future alternative uses existed. Research and development
costs to bring the products from the acquired companies to technological
feasibility are not expected to have a material impact on the Company's future
results of operations or financial condition.
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MACROMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
The Company holds several strategic equity investments in other
companies. These investments are included in the other long-term assets
component of the condensed consolidated balance sheets. The cost method is used
to record these investments, as the Company holds less than 20% of the voting
rights of each of these investees and does not have the ability to significantly
influence the investees. The Company determines the fair value of the investment
based on current market price, or if the investment is not publicly traded,
considers among other factors, pricing of current financing rounds.
In December 2000, the Company recognized a loss of approximately $5.0
million on its preferred stock investment in Stan Lee Media. The loss
represented a write-off of the Company's carrying amount of its investment in
Stan Lee Media and was due to the investee's significant decline in common stock
value, its inability to obtain additional private financing and suspension of
its web operations. As of December 31, 2000, carrying amounts of the Company's
remaining investments approximate fair values.
5. EARNINGS PER SHARE
Basic net income per share is computed by dividing net income applicable
to common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net income per share is computed
by dividing net income applicable to common stockholders for the period by the
weighted average number of common shares and potentially dilutive securities
outstanding during the period, to the extent such potentially dilutive
securities are dilutive. Potentially dilutive securities consist of incremental
common shares issuable upon the exercise of stock options and warrants,
restricted stock and upon conversion of Series A and B convertible preferred
stock.
The following table sets forth the reconciliations of the numerator and
denominator used in the computation of basic and diluted net income per share
(in thousands, except per share data):
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
BASIC NET INCOME (LOSS) PER SHARE
COMPUTATION
Numerator:
Net income ................................ $ 12,829 $ 1,272 $ 35,148 $ 3,224
Accretion of mandatorily
redeemable convertible preferred
stock .................................... -- (1,357) -- (2,538)
-------- -------- -------- --------
Net income (loss) applicable to
common stockholders ..................... $ 12,829 $ (85) $ 35,148 $ 686
======== ======== ======== ========
Denominator:
Weighted average number of common
shares outstanding ........................ 51,161 45,346 50,369 43,367
Basic net income (loss)
applicable to common stockholders
per share ............................. $ 0.25 $ -- $ 0.70 $ 0.02
======== ======== ======== ========
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
DILUTED NET INCOME (LOSS) PER SHARE
COMPUTATION
Numerator:
Net income ................................ $ 12,829 $ 1,272 $ 35,148 $ 3,224
Accretion of mandatorily redeemable
convertible preferred stock ............ -- (1,357) -- (2,538)
-------- -------- -------- --------
Net income (loss) applicable to
common stockholders ................... $ 12,829 $ (85) $ 35,148 $ 686
======== ======== ======== ========
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MACROMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Denominator:
Weighted average number of common
shares outstanding, basic ............... 51,161 45,346 50,369 43,367
Effect of dilutive securities ............. 5,291 -- 6,256 8,198
-------- -------- -------- --------
Weighted average number of common
shares outstanding, diluted ................. 56,452 45,346 56,625 51,565
======== ======== ======== ========
Diluted net income (loss) applicable to
common stockholders per share ............... $ 0.23 $-- $ 0.62 $ 0.01
======== ======== ======== ========
The table below presents potentially dilutive securities that are
excluded from the diluted net income per share calculation because their effects
would be antidilutive (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Preferred stock............... -- 1,838 -- --
Stock options................. 365 8,103 119 50
Stock warrants................ -- 65 -- --
Restricted stock.............. -- 23 -- --
--------- --------- --------- ---------
Total ................... 365 10,029 119 50
========= ========= ========= =========
6. COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, which establishes the
standards for the reporting of comprehensive income and its components, requires
unrealized gains and losses on the Company's available-for-sale securities to be
included in other comprehensive income. The only component of the Company's
other comprehensive income is unrealized gains on securities classified as
available-for-sale. The following table sets forth the calculation of
comprehensive income, net of tax (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net income.................... $ 12,829 $ 1,272 $ 35,148 $ 3,224
Unrealized gain (loss) on
securities................. (117) 96 142 233
----------- ---------- ---------- ----------
Comprehensive income........ $ 12,712 $ 1,368 $ 35,290 $ 3,457
========== ========== ========== ==========
7. MINORITY INTEREST
At December 31, 2000 the Company had an approximate ownership of 56.97%
in shockwave.com. Minority interest represents the preferred and common
stockholders' proportionate share of the equity of shockwave.com. The results of
our majority ownership in shockwave.com are included in Macromedia's
consolidated financial statements. The non-controlling interest of $11.4 million
is reflected in minority interest in the Condensed Consolidated Balance Sheets
and the loss attributable to the non-controlling interest in shockwave.com for
the three and nine months ended December 31, 2000 was $6.7 million and $15.3
million, respectively.
8. INCOME TAXES
The Company provides for income taxes during interim reporting periods
based upon an estimate of the annual effective tax rate. Such an estimate
reflects an effective tax rate lower than the federal statutory rate primarily
due to the utilization of research and experimentation tax credits, and foreign
operating results, which are taxed at rates lower than the U.S. statutory rate.
The effective rate used for the three and nine months ended December 31, 2000 on
operations was 22% and 24%, respectively.
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MACROMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Macromedia has two operating segments: Software and shockwave.com. The
Software segment develops Web-authoring software, software players and
application server technologies that create Web site layout, graphics and rich
media content for Internet users. shockwave.com designs, develops and markets
aggregated content to provide online entertainment on the Web. The Company
evaluates operating segment performance based on net revenues and total
operating expenses of the segment. The operating segments' accounting policies
are the same as those described in the summary of significant accounting
policies in the Company's annual report on Form 10-K for the year ended March
31, 2000. The Company had intersegment transactions of $905,000 and $2.2 million
for the three and nine months ended December 31, 2000, respectively, which
represent royalty revenues paid by shockwave.com. These revenues are eliminated
in the Company's consolidation process. The Company did not have any material
intersegment transactions for the three or nine months ended December 31, 1999.
At December 31, 1999 the Company did not allocate assets to shockwave.com and
currently considers it impracticable to do so. Information about reported
segment income or loss for the three and nine months ended December 31, 2000 and
1999 is as follows (in thousands):
shockwave-
Three Months Ended December 31, 2000 Software .com TOTAL
- ------------------------------------ -------- -------- --------
Revenues ............................ $ 98,995 $ 4,343 $103,338
Cost of revenues .................... 9,102 635 9,737
-------- -------- --------
Gross profit ....................... 89,893 3,708 93,601
-------- -------- --------
Direct operating expenses ........... 68,715 11,653 80,368
Acquisition related expenses and
certain non-cash charges .......... 710 1,691 2,401
-------- -------- --------
Total operating income (loss) ..... $ 20,468 $ (9,636) $ 10,832
======== ======== ========
Total assets ........................ $402,038 $ 33,242 $435,280
======== ======== ========
shockwave-
Three Months Ended December 31, 1999 Software .com TOTAL
- ------------------------------------ -------- -------- --------
Revenues ............................ $ 61,626 $ 2,706 $ 64,332
Cost of revenues .................... 6,678 175 6,853
-------- -------- --------
Gross profit ....................... 54,948 2,531 57,479
-------- -------- --------
Direct operating expenses ........... 41,259 6,881 48,140
Acquisition-related expenses and
certain non-cash charges .......... 6,810 -- 6,810
-------- -------- --------
Total operating income (loss) ..... $ 6,879 $ (4,350) $ 2,529
======== ======== ========
shockwave-
Nine Months Ended December 31, 2000 Software .com TOTAL
- ----------------------------------- -------- -------- --------
Revenues ............................ $287,357 $ 13,166 $300,523
Cost of revenues .................... 30,519 1,718 32,237
-------- -------- --------
Gross profit ....................... 256,838 11,448 268,286
-------- -------- --------
Direct operating expenses ........... 195,251 36,141 231,392
Acquisition-related expenses and
certain non-cash charges .......... 6,652 5,580 12,232
-------- -------- --------
Total operating income (loss) ..... $ 54,935 $(30,273) $ 24,662
======== ======== ========
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shockwave-
Nine Months Ended December 31, 1999 Software .com TOTAL
- ----------------------------------- -------- -------- --------
Revenues ............................ $169,538 $ 5,339 $174,877
Cost of revenues .................... 17,732 804 18,536
-------- -------- --------
Gross profit ....................... 151,806 4,535 156,341
-------- -------- --------
Direct operating expenses ........... 120,732 15,698 136,430
Acquisition related expenses and
certain non-cash charges .......... 13,229 -- 13,229
-------- -------- --------
Total operating income (loss) .... $ 17,845 $(11,163) $ 6,682
======== ======== ========
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MACROMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the totals reported for the combined operating
segments to the applicable line items in the consolidated financial statements
for the three and nine months ended December 31, 2000 and 1999 is as follows (in
thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- ----------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
Total operating income from
operating segments............... $ 10,832 $ 2,529 $ 24,662 $ 6,682
Loss on investment............... (5,000) -- (5,000) --
Other income..................... 3,927 1,793 11,491 4,184
Minority interest................ 6,727 -- 15,336 --
---------- ---------- ---------- ----------
Income before taxes.............. $ 16,486 $ 4,322 $ 46,489 $ 10,866
========== ========== ========== ==========
10. COMMITMENTS AND CONTINGENCIES
Restricted Cash
We have non-current cash of approximately $9.1 million that is
restricted as to its use. The restrictions on these funds concern security
deposits on a lease of real property located in San Francisco that is currently
under construction. These funds cannot be withdrawn without the written consent
of the landlord or until such time that the amount of security deposit is
reduced pursuant to the terms of the contract. The Company is committed to a
significant portion of the construction costs surrounding this project.
Legal
On July 31, 1997, a complaint entitled Rosen et al. v. Macromedia, Inc.
et al., (Case No. 988526) was filed in the Superior Court for San Francisco,
California. The complaint alleges that Macromedia and five of its former or
current officers and directors engaged in securities fraud in violation of
California Corporations Code Sections 25400 and 25500 by seeking to inflate the
value of Macromedia stock by issuing statements that were allegedly false or
misleading (or omitted material facts necessary to make any statements made not
false or misleading) regarding the Company's financial results and prospects.
Four similar complaints by persons seeking to represent the same class of
purchasers subsequently have been filed in San Francisco Superior Court, and
have been consolidated for pre-trial purposes with Rosen. Defendants filed
demurrers to the complaint and other motions, which were argued on December 9,
1997 and January 5, 1998. Before the demurrers could be heard, one defendant,
Richard Wood, died in an automobile accident. In March 1998, the Court sustained
the demurrers as to claims against Susan Bird and overruled the demurrers as to
Macromedia, John Colligan, James Von Ehr, II, and Kevin Crowder. In May 1999,
the Court granted plaintiffs' motion for certification of a class of all persons
who purchased Macromedia common stock from April 18, 1996 through January 9,
1997. Trial has been set for November 2001.
The consolidated complaint seeks damages in unspecified amounts, as well
as other forms of relief. We believe the complaint is without merit and intend
to vigorously defend the action.
On August 10, 2000, a complaint entitled Adobe Systems, Inc. v.
Macromedia, Inc. (Case No. 00-743-JJF) was filed in the United States District
Court for the District of Delaware and on September 18, 2000, Adobe filed a
first amended complaint in the same action. In the first amended complaint,
Adobe alleges infringement of U.S. Patent No. 5,546,528 by tabbed palette
features of certain Macromedia products and infringement of U.S. Patent No.
6,084,597 by image rendering features of Macromedia Dreamweaver and Macromedia
Flash products. On September 27, 2000, Macromedia answered the first amended
complaint by denying the allegations and filing counterclaims against Adobe for
infringement of three Macromedia patents. In particular, Macromedia alleges
infringement of U.S. Patent No. 5,467,443 by changing blended elements and
automatic re-blending of elements features of Adobe Illustrator product and U.S.
Patents Nos. 5,151,998 and 5,204,969 by visually displaying and editing sound
waveforms features of Adobe Premiere product. On October 17, 2000, Adobe filed
its answer denying the allegations in Macromedia's counterclaims. Each party is
seeking to enforce its patents and to receive monetary damages for infringement
of its patents. Further, each party is seeking a court declaration that it is
not infringing the other party's patents and an award of attorneys fees.
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MACROMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS
On January 14, 2001, the Company's consolidated subsidiary,
shockwave.com, consummated its merger with AtomFilms, a privately held company,
in a stock-for-stock transaction that was accounted for as a purchase business
combination. Under the terms of the transaction, AtomFilms' shareholders
received shares equal to 30% of shockwave.com's fully diluted equity at the
closing. As a result of the transaction, the Company's ownership percentage in
shockwave.com was approximately 34%. Immediately subsequent to the transaction,
the Company no longer consolidated shockwave.com in its consolidated financial
statements, but began accounting for its investment in shockwave.com and its
proportionate ownership share of shockwave.com's results of operations using the
equity method of accounting.
On December 15, 2000, the Company invested approximately $5 million in
AtomFilms in the form of a convertible promissory note, which has been included
in other assets in the accompanying condensed balance sheet. Subsequent to
December 31, 2000, the Company invested an additional $10 million in the form of
convertible promissory notes. The notes convert into equity upon the completion
of shockwave.com's next round of financing. In addition, the Company has agreed
with certain shockwave.com Series B shareholders that it will convert certain of
its shockwave.com Series A preferred shares into common stock and transfer those
shares to Series B shareholders, provided such Series B shareholders invest a
specified amount in the next round of financing of shockwave.com, such that
these Series B shareholders will have a percentage ownership in shockwave.com
approximately equal to their percentage holdings in shockwave.com prior to the
merger. AtomFilms markets and distributes high-quality short-form entertainment,
with significant presence on major Internet sites, broadband servers,
television, airlines, home-entertainment companies and handheld and wireless
devices.
On January 16, 2001, the Company announced a definitive merger agreement
to acquire all of the outstanding common stock, options and warrants of Allaire
Corporation. If the Company's share price is greater than or equal to $15.00 per
share two days prior to the Allaire shareholder special meeting, each Allaire
Shareholder will receive 0.2 shares of the Company's Common Stock and $3.00 in
cash for each Allaire share. If the Company's share price is less than $15.00
per share on that date, each Allaire shareholder will receive cash equal to
$3.00 plus 0.2 of that closing price. As of January 12, 2001, Allaire had
27,604,931 shares of common stock outstanding and 11,664,087 shares of common
stock subject to issuance under outstanding stock options. The transaction is to
be accounted for as a purchase business combination and is subject to certain
closing conditions, including regulatory approvals and the approval of the
Allaire Corporation shareholders. Allaire Corporation is a leading provider of
software for companies building their business on the Web. Allaire Corporation
software includes Web application server, content management, profiling and
personalization, and Java and wireless application development software.
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MACROMEDIA, INC. AND SUBSIDIARIES
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 quarterly report 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. Therefore, 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,
those risks and uncertainties identified under "Risk Factors that May Affect
Future Results of Operations" and the other risks detailed from time to time in
our reports and registration statements filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
OVERVIEW
Macromedia has two operating segments: Software and shockwave.com. The
Software segment develops web-authoring software, software players and
application server technologies that create Web site layout, graphics and rich
media content for Internet users. shockwave.com designs, develops and markets
aggregated content to provide online entertainment on the Web. We evaluate
operating segment performance based on net revenues and total operating expenses
of the segment. The operating segments' accounting policies are the same as
those described in the summary of accounting policies in the annual report on
Form 10-K for the year ended March 31, 2000. For the three months ended December
31, 2000, the Software business' operating income before certain non-cash
charges approximates $21.2 million, or 21% of revenues, whereas shockwave.com's
operating losses before loss on investments and certain non-cash charges
approximates $7.9 million or 183% of revenues. On January 14, 2001, the
Company's consolidated subsidiary, shockwave.com, consummated its merger with
AtomFilms. As a result of the transaction, the Company's ownership percentage in
shockwave.com was approximately 34%. Immediately subsequent to the transaction,
the Company will no longer consolidate shockwave.com in its consolidated
financial statements or report shockwave.com as a separate operating segment.
The following table sets forth certain financial data as a percentage of
revenues for the three months ended December 31, 2000 and 1999:
Consolidated Software shockwave.com
--------------- -------------- ----------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Revenues ........................... 100% 100% 100% 100% 100% 100%
Cost of revenues ................... 9 11 9 11 15 6
---- ---- ---- ---- ---- ----
Gross profit .............. 91 89 91 89 85 94
Operating expenses:
Sales and marketing ........... 38 42 37 38 74 125
Research and development ...... 29 24 24 20 148 118
General and administrative .... 10 8 9 9 47 12
Acquisition-related expenses .. -- 10 -- 10 -- --
Non-cash compensation ......... 2 1 -- -- 38 --
Amortization of intangibles ... 1 -- 1 1 1 --
---- ---- ---- ---- ---- ----
Total operating expenses .. 80 85 70 78 307 254
Operating income (loss) ............ 11 4 21 11 (222) (161)
Other income, net .................. 4 3 4 3 2 --
Loss on investment ................. (5) -- -- -- (115) --
Minority interest .................. 6 -- 7 -- -- --
---- ---- ---- ---- ---- ----
Income before income taxes ......... 16 7 31 14 (335) (161)
Provision (benefit) for income taxes 4 5 4 7 -- (42)
Net income (loss) ........ 12 2 27 7 (335) (119)
==== ==== ==== ==== ==== ====
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REVENUES. We sell our products through a network of distributors, value-added
resellers (VAR's), our own sales force and Web site, and to original equipment
manufacturers (OEM's) in North America, Europe, Asia Pacific and Latin America.
In addition, we derive revenues from advertising and sponsorships on our Web
sites, and from software maintenance and technology licensing agreements.
Consolidated revenues have increased by $39.0 million or 61% to $103.3
million for the three months ended December 31, 2000 from $64.3 million for the
three months ended December 31, 1999. Revenues generated by the Software segment
have grown by $37.4 million, to $99.0 million for the current quarter from $61.6
million in the third quarter of fiscal year 2000. The majority of the increase
is attributable to an increase in sales of the Macromedia Flash, Macromedia
Dreamweaver, Macromedia Dreamweaver UltraDev and Macromedia Fireworks products.
Revenue for shockwave.com increased by $1.6 million to $4.3 million in the third
quarter of fiscal year 2001 from $2.7 million in the same period a year ago. The
increase in shockwave.com revenues is due to an increase in advertising and
sponsorship revenue resulting from a higher volume of advertising traffic and
new revenue streams, mainly sponsorship revenues. For the nine months ended
December 31, 2000 compared to December 31, 1999, consolidated revenues increased
by $125.6 million or 72%, to $300.5 million from $174.9 million primarily due to
increased sales from the Macromedia Flash, Macromedia Dreamweaver, Macromedia
Dreamweaver UltraDev and Macromedia Fireworks products.
North American revenues have increased by $17.7 million to $56.9 million in
the third quarter of fiscal year 2001 from $39.2 million in the third quarter of
fiscal year 2000. International revenues increased by $21.3 million to $46.4
million when comparing the same time periods. The increase in international
revenue is primarily due to growth in our Asia Pacific and Latin America regions
and to product life-cycle timing. (See Risk Factors That May Affect Future
Results of Operations -- Risks of International Operations for additional
information.) The following table summarizes revenue by geography (in millions,
except percentages):
Three Months Ended December 31, Nine Months Ended December 31,
---------------------------------- ----------------------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
---- ---- -------- ---- ---- --------
North America ........ $ 56.9 $ 39.2 45% $173.7 $106.1 64%
% of total revenues 55% 61% 58% 61%
International ........ $ 46.4 25.1 85% 126.8 68.8 84%
% of total revenues 45% 39% 42% 39%
------ ------ ------ ------
Total revenues... $103.3 $ 64.3 61% $300.5 $174.9 72%
====== ====== ====== ======
GROSS PROFIT. Gross profit on a consolidated basis increased by $36.1 million
to $93.6 million during the three months ended December 31, 2000, from $57.5
million in the same period in fiscal year 2000, primarily due to increased
revenues from our Software segment. Gross profit as a percentage of revenue for
the Software segment for the three months ended December 31, 2000 increased to
91% compared to a gross margin of 89% for the three months ended December 31,
1999. The increase is primarily due to declining consulting expenses associated
with a re-classification of personnel from providing consulting services to
focusing on sales and marketing efforts. Gross profit as a percentage of
revenues for shockwave.com was 85% for the three months ended December 31, 2000
compared to 94% for the same three months in fiscal year 2000. The decrease in
the shockwave.com gross profit is primarily due to increased revenue sharing
with content developers as well as inventory and order fulfillment charges
associated with the opening of an on-line store. When comparing the nine months
ended December 31, 2000 to December 31, 1999, gross profit on a consolidated
basis increased $111.9 million or 72% to $268.3 million, consistent with revenue
growth.
SALES AND MARKETING. Sales and marketing expenses on a consolidated basis
have increased by $12.7 million to $39.7 million for the three months ended
December 31, 2000. The Software segment's sales and marketing expenses increased
by $12.9 million to $36.4 million whereas shockwave.com's sales and marketing
expenses slightly declined year over year. The increase from the third quarter
of fiscal year 2000 for the Software segment is primarily due to expenses
related to headcount growth, increased advertising and promotional costs,
information technology infrastructure costs, facilities charges due to the need
for increased physical space to accommodate the headcount growth, business taxes
based on increased headcount and is partially offset by a decrease in
compensation expense due to a reduction in paid absence obligations for our
holiday shutdown period.
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Sales and marketing expenses for shockwave.com slightly declined in both
absolute dollars and as a percentage of revenues when comparing the three months
ended December 31, 2000 to the three months ended December 31, 1999. The
decrease in absolute dollars is due to less advertising and promotional costs
year over year. For the nine months ended December 31, 2000, consolidated sales
and marketing expenses increased $41.9 million to $117.7 million primarily due
to costs associated with headcount growth and increased facilities and
information technology infrastructure costs.
RESEARCH AND DEVELOPMENT. Research and development expenses on a consolidated
basis have increased by $14.2 million from $15.7 million in the third quarter of
fiscal year 2000 to $29.9 million in the third quarter of fiscal year 2001.
Research and development expenses for the Software segment have increased by
$11.1 million during this time period to $23.5 million. The increase is
attributable to headcount growth, increased information technology
infrastructure costs, and increases in facilities charges to accommodate the
headcount growth and is partially offset by a decrease in compensation expense
due to a reduction in paid absence obligations for our holiday shutdown period.
shockwave.com's research and development expenses have increased by $3.2 million
to $6.4 million for the three months ended December 31, 2000. Research and
development expenses for the shockwave.com segment have increased due to
headcount growth and the resulting increases in compensation, and increased
costs for the development of entertainment content. For the same reasons,
research and development expenses have increased by $40.2 million to $84.2
million when comparing the consolidated results for the nine months ended
December 31, 2000 to those for the nine months ended December 31, 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses on a
consolidated basis have increased by $5.2 million to $10.8 million for the three
months ended December 31, 2000, from $5.6 million for the third quarter of
fiscal 2000. General and administrative expenses for the Software segment have
increased $3.5 million to $8.7 million when comparing the quarter ended December
31, 2000 to the quarter ended December 31, 1999. The increase is due primarily
to headcount growth, information technology, increased charges for facilities,
increased legal charges and is partially offset by a decrease in compensation
expense due to a reduction in paid absence obligations for our holiday shutdown
period. shockwave.com incurred $2.0 million in general and administrative
expenses in the third quarter of fiscal year 2001 resulting from increased legal
and accounting costs and other general administrative functions that the segment
did not perform in fiscal year 2000. Comparing consolidated results for the nine
months ended December 31, 2000 to the same time frame for fiscal year 2000,
general and administrative expenses increased by $12.8 million to $29.4 million
and remained consistent as a percentage of revenue year over year.
ACQUISITION-RELATED EXPENSES. During the quarter ended December 31, 2000, we
incurred no acquisition related expenses. In the same period a year ago, we
recorded $6.3 million in acquisition related expenses primarily due to expenses
incurred in the acquisition of Andromedia, Inc. and the acquisition of certain
technology rights from Time4, Inc. During the nine months ended December 31,
2000, we recorded acquisition expenses of $4.8 million, primarily comprised of
expensed in-process research and development from the acquisition of Middlesoft,
Inc. For the nine months ended December 31, 1999, we incurred expenses related
to our Andromedia, Inc. and ESI Software, Inc. acquisitions, as well as expenses
related to the acquisition of certain technology rights.
NON-CASH COMPENSATION. We recorded non-cash compensation charges of $1.8
million for the three months ended December 31, 2000, a $1.5 million increase
from the same period in the prior year. The increase is primarily due to the
continued amortization of the deferred compensation associated with granted
shockwave.com options. shockwave.com issued options to employees that had, for
accounting purposes, an exercise price less than the fair value of the
underlying common stock at the date of grant. Additionally, shockwave.com issued
warrants in connection with certain content development agreements entered into
with non-employees.
AMORTIZATION OF INTANGIBLES. Amortization of intangible assets increased by
$385,000 and by $800,000 when comparing the three and nine months ended December
31, 2000 to the same periods in 1999. Amortization of intangible assets consists
primarily of goodwill and other intangibles resulting from purchase business
combinations, as well as trademarks.
INTEREST AND INVESTMENT INCOME. Interest and investment income on a
consolidated basis has increased $1.8 million to $3.7 million when comparing the
third quarter of fiscal year 2001 to the same period in fiscal year 2000. Income
has increased primarily due to higher returns realized as well as larger
invested balances in fiscal year 2001.
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LOSS ON INVESTMENT. During the third quarter ending December 31, 2000,
shockwave.com recognized a loss of approximately $5.0 million on its investment
in Stan Lee Media, a publicly traded company. The realized loss represented a
write-off of the Company's carrying amount of its preferred stock investment in
Stan Lee Media and was due to the investee's significant decline in common stock
value, its inability to obtain additional private financing and suspension of
its web operations. As of December 31, 2000, carrying amount of the Company's
remaining investments approximate fair values.
PROVISION FOR INCOME TAXES. The provision for income taxes for the third
quarter of fiscal year 2001 increased $607,000 when compared to the third fiscal
quarter of 2000. The effective tax rate on operations for the current quarter's
provision is 22%. The decrease in the effective tax rate for the current quarter
reflects the impact of the utilization of research and experimentation tax
credits and foreign operating results that were taxed at rates lower than the
U.S. statutory rate for the third quarter of fiscal year 2001.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had cash, cash equivalents and short-term
investments of $207.9 million. For the nine months ended December 31, 2000, cash
provided by operating activities of $47.5 million was primarily attributable to
net income. This was partially offset by a minority interest in shockwave.com
and a change in current assets and current liabilities. Cash used in investing
activities of $97.1 million was used primarily for the net increase in our
short-term investments, infrastructure growth, and for the acquisition of
Middlesoft, Inc. Cash provided by financing activities of $54.4 million is
primarily from the exercise of common stock options and issuance of
shockwave.com preferred stock. Collectively, the above activity contributed to a
net increase of $4.9 million from the March 31, 2000 cash and cash equivalents
balances. Working capital increased by $33.5 million from the March 31, 2000
balance of $182.2 million, to $215.7 million at December 31, 2000. During the
first nine months of fiscal year 2001, we made investments in property and
equipment of $46.1 million. We anticipate future capital expenditures of
approximately $20.0 million for the remainder of fiscal year 2001.
We have non-current cash of approximately $9.1 million that is restricted as
to its use. The restrictions on these funds concern security deposits on a lease
of real property. These funds cannot be withdrawn without the written consent of
the landlord or until such time that the amount of security deposit is reduced
pursuant to the terms of the lease.
We believe that existing cash, cash equivalents and investments, together
with cash generated from operations, will be sufficient to meet our operating
requirements through at least December 31, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 133. In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes accounting and reporting standards for
derivative financial instruments and hedging activities and requires Macromedia
to recognize all derivatives as either assets or liabilities on the balance
sheet and measure them at fair value. Gains and losses resulting from changes in
the fair value of these instruments would be accounted for depending on the use
of the derivative and whether it is designated and qualifies as an effective
hedge under hedge accounting rules. In June 1999 the FASB issued SFAS 137, which
defers the implementation of SFAS 133 and is effective for all quarters of
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS
138, which amends SFAS 133 with regards to specific hedging risks,
foreign-currency-denominated assets and liabilities, and intercompany
derivatives. Macromedia has not completed a detailed assessment of the impact,
if any, of SFAS 133 on the consolidated results of operations and financial
position.
SAB 101. In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of
implementation of SAB No. 101 until the fourth quarter of fiscal 2001.
Macromedia does not expect the adoption of SAB 101 to have a material effect on
its financial position or results of operations.
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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 Securities and Exchange Commission. The actual
results that we achieve may differ materially from any forward-looking
statements due to such risks and uncertainties.
INTENSE COMPETITION -- The markets for our products are highly competitive
and characterized by pressure to reduce prices, incorporate new features, and
accelerate the release of new product versions and enhanced services. A number
of companies currently offer products and services that compete directly or
indirectly with one or more of our products. With respect to our Software
business, competitors include, among others, Adobe Systems, Inc., Corel
Corporation, and Microsoft Inc. As we compete with larger competitors such as
Adobe across a broader range of product lines and different platforms, we may
face increasing competition from such companies. In addition, shockwave.com
competes with a number of other Internet community, gaming and entertainment
sites.
DEPENDENCE ON THE GROWTH OF THE INTERNET AND THE VIABILITY OF WEB-BASED
CUSTOMERS -- Our success and the demand for our products depend in large part on
continued growth in the use of the Internet and the continued viability of our
Web-based customers. Many of such Web-based companies who purchase licenses to
our software products incur net losses from their operations and rely primarily
on outside financing to fund their continued operations. The availability of
such financing for non-profitable Web-based companies will be subject to factors
beyond our control, including, but not limited to, the perceived viability of
the business plan of such companies, the potential for such companies to realize
profits in the foreseeable future, and the cost of capital. In the event that
Web-based companies who purchase licenses to our software products are unable to
secure the financing necessary to meet their operational and capital
requirements, such customers may cease operations or materially reduce the
purchases of our products. In addition, issues concerning the commercial use of
the Internet, including security, reliability, cost, ease of access, quality of
service and necessary increases in bandwidth availability, remain outstanding
and are likely to affect the development of the market for our products.
Furthermore, our continued growth depends in part on the adoption of the
Internet internationally as well as domestically. However, the rate of
development and adoption of the Internet has been slower outside of the United
States and the cost of bandwidth has been higher. Consequently, the continued
growth of the market for our products is dependent on the continued viability of
our Web-based customers and the improvements being made to the entire Internet
infrastructure.
RISK ASSOCIATED WITH ACQUISITIONS -- We have grown in part because of
business combinations with other companies and we may make further acquisitions
in the future. On January 16, 2001, we announced a definitive merger agreement
with Allaire Corporation, which merger remains subject to stockholder and
regulatory approvals. Because of the maturity and the size of Allaire
Corporation's operations, the location of its headquarters, the material
differences in the customer base and functionality of Allaire Corporation's and
our products, in the event that the merger with Allaire Corporation is
consummated, such merger would present a materially higher product, marketing,
research and development, facilities, information systems, accounting, personnel
and other integration challenges than those we have faced in connection with our
prior acquisitions and may delay or jeopardize the complete integration of
certain businesses we have acquired recently. Furthermore, during the second
quarter of fiscal year 2001, Macromedia acquired Middlesoft, Inc. In connection
with the acquisition of Middlesoft, Inc., we acquired technology that we must
transition from development stages to commercial products with sales and profit
levels that are consistent with our overall financial goals. There can be no
assurance that we will be able to effectuate such transition. In the fiscal year
2000, Macromedia also acquired Andromedia, Inc. and ESI Software, Inc.
Acquisitions generally involve significant risks, including difficulties in the
assimilation of the operations, 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, including the pending merger, would likely result in the
incurrence of dilution, if stock is issued, or debt and contingent liabilities
and an increase in amortization expenses related to goodwill and other
intangible assets, which could have a material adverse effect on our financial
condition, results of operations and liquidity. For all these reasons, any
future acquisitions or failure to effectively integrate acquired companies could
result in a material adverse effect on our results of operations.
RAPIDLY CHANGING TECHNOLOGY -- The developing digital media, Internet and
online services markets, and the personal computer industry are characterized by
rapidly changing technology, resulting in short product life cycles and rapid
price declines. We must continuously update our existing products, services and
content to keep them
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current with changing technology and consumer tastes and must develop new
products, services and content to take advantage of new technologies and
consumer preferences that could render our existing products obsolete. Our
future prospects are highly dependent on our ability to increase functionality
of existing products and services in a timely manner and to develop new products
and services that address new technologies and achieve market acceptance. New
products and enhancements must keep pace with competitive offerings, adapt to
new platforms and emerging industry standards, and provide additional
functionality. There can be no assurance that we will be successful in these
efforts.
The success of our business is especially dependent upon the existence and
future growth of the Internet as a business, entertainment and communications
platform. Many critical issues concerning the commercial use of the Internet,
such as security, remain unresolved and may affect the growth of Internet use,
together with the software standards employed in such markets. A decline in the
growth of the Internet or any inability by us to adapt to changes in the
Internet or the technology used for operation of the Internet could have a
material adverse effect on our results of operations.
FLUCTUATIONS OF OPERATING RESULTS; PRODUCT INTRODUCTION DELAYS -- Our
quarterly operating results may vary significantly depending on the timing of
new product introductions and enhancements. A substantial portion of our revenue
is derived from the introduction of new products or enhancements to existing
products. We have in the past experienced delays in the development of new
products and enhancement of existing products, and such delays may occur in the
future. If we are unable, due to resource constraints or technological or other
reasons, to develop and introduce products in a timely manner, this inability
could have a material adverse effect on our results of operations. If we do not
ship new versions of our products as planned, or if new products do not receive
market acceptance, our results of operations could be materially adversely
affected.
Our results of operations also may vary significantly depending on the impact
of any of the following: the timing of product and service introductions by
competitors, changes in pricing, execution and volume of technology licensing
agreements, the volume and timing of orders received during the quarter for
software products, expenses related to the expansion of shockwave.com, and
finally, any acquisitions of other companies or technologies. Our future
operating results may fluctuate as a result of these and other factors,
including our ability to continue to develop or acquire innovative products and
services, our product, service, and customer mix, and the level of competition.
Our results of operations may also be affected by seasonal trends. A significant
portion of our operating expenses is relatively fixed, and planned expenditures
are based primarily on sales forecasts. As a result, if revenues do not meet our
forecasts, operating results may be materially adversely affected. There can be
no assurance that sales of our existing products will either continue at
historical rates or increase, or that new products introduced by us, whether
developed internally or acquired, will achieve market acceptance. Our historical
rates of growth should not be taken as being indicative of growth rates that can
be expected in the future.
DEPENDENCE ON DISTRIBUTORS -- A substantial majority of our revenue is
derived from the sale of our software products through a variety of distribution
channels, including traditional software distributors, mail order, educational
distributors, VARs, OEMs, hardware and software superstores, retail dealers, and
our direct sales force and Website. Domestically, our products are sold
primarily through distributors, VARs, and OEMs. In particular, one distributor
accounted for 29% and 28% of revenues for the three months ending December 31,
2000 and 1999, respectively. In addition, we believe that certain distributors
are reducing their inventory in the channel and returning unsold products to
better manage their inventories. Distributors are increasingly seeking to return
unsold product, particularly when a new version or upgrade of a product has
superseded such products. If our distributors seek to return increasing amounts
of products, such returns could have a material adverse effect on our 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 our
results of operations.
RISKS OF INTERNATIONAL OPERATIONS -- For the three months ended December 31,
2000 we derived approximately 45% of our revenues from international sales. We
expect that international sales will continue to represent a significant
percentage of our revenues. We rely primarily on distributors for sales 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. International business is subject to a
number of special risks, including: foreign government regulation; general
geopolitical risks such as political and economic instability, hostilities with
neighboring countries and changes in diplomatic and trade relationships; more
prevalent software piracy; unexpected changes in, or imposition of, regulatory
requirements, tariffs, import and export restrictions and
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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 our control. Additionally, we are uncertain whether the
recent weaknesses experienced in the economies in Japan, Europe, Asia Pacific,
and Latin America will continue in the foreseeable future due to possible
currency devaluation and liquidity problems in these regions.
We enter into foreign exchange forward contracts to reduce economic exposure
associated with sales and asset balances denominated in various European
currencies and Japanese Yen. As of December 31, 2000, the notional principal of
forward contracts outstanding amounted to $28.9 million. There can be no
assurance that such contracts will adequately hedge our exposure to currency
fluctuations.
EURO CURRENCY -- On January 1, 1999, eleven of the fifteen member countries
of the European Union adopted the Euro as the common legal currency and
established fixed rates of conversion between their existing sovereign
currencies and the Euro. The Euro trades on currency exchanges and is available
for non-cash transactions. A three-year transition period is underway during
which transactions can be made in the existing sovereign currencies. The
conversion to the Euro has alleviated currency exchange risk between the member
counties.
There can be no assurance that all issues related to the Euro conversion have
been identified, and we may be at risk if any of our principal suppliers are
unable to deal with the impact of the Euro conversion. To date, none of our
international suppliers have expressed an intention to invoice in Euros.
MANAGEMENT OF GROWTH -- We have experienced and may continue to experience
rapid growth, which has placed, and could continue to place, a significant
strain on our managerial, financial and operational resources. Our workforce has
grown more than 58% over the past year. We anticipate that we will need to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the ongoing improvement of our accounting and
other internal management systems. We also will need to continue to expand,
train, manage, retain and motivate our workforce. All of these endeavors will
require substantial management effort and resources. In the future, we
anticipate that we will need to continue the expansion of our facilities or
relocate some or all of our employees or operations from time to time to support
our growth. These relocations could result in temporary disruptions of our
operations or a diversion of management's attention and resources. If we are
unable to effectively manage expanded operations, our business, financial
condition and results of operations could be materially and adversely affected.
VOLATILITY OF STOCK -- Our future earnings and stock price may be subject to
significant volatility. Any shortfall in revenue or earnings from levels
expected by securities analysts, general decline in economic conditions, or
material reductions in spending by our customers, could have an immediate and
significant adverse effect on the trading price of our common stock in any given
period. Additionally, we may not learn of such shortfalls until late in the
fiscal quarter, which could result in an even more immediate and adverse effect
on the trading price of our common stock. Finally, we participate in a highly
dynamic industry. 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 will often
result in significant volatility of our common stock price.
INTELLECTUAL PROPERTY RIGHTS -- We rely on a combination of patents,
copyrights, trade secrets, and trademark laws, as well as employee and
third-party nondisclosure 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 adequate. In addition,
effective copyright, trademark, trade secret and patent protection may not be
available in every country in which our products are distributed.
Furthermore, we are currently, and may in the future, be 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 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 could subject us to significant
liabilities, require us to seek licenses from others, prevent us from
manufacturing 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
dramatically impact our business and results of operations.
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MACROMEDIA INVESTMENTS -- Through Macromedia Ventures, we invest a
substantial amount of capital and time on finding, funding, and helping to
develop certain privately held companies, many of which can be considered in the
start-up or development stages. These investments are inherently risky as the
market for the technologies or products they have under development are
typically in the early stages and may never materialize. Therefore, we could
lose our entire investment, or a substantial portion thereof, in one or more of
these companies.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- We prepare our financial
statements in conformity with generally accepted accounting principles (GAAP).
GAAP are subject to interpretation by the American Institute of Certified Public
Accountants, the Securities and Exchange Commission, and various bodies formed
to interpret and create appropriate accounting policies. A change in these
policies can have a significant effect on our reported results, and may affect
the reporting of transactions completed prior to the announcement of a change.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please refer to our market risk disclosures set forth in our 2000 Annual
Report filed on Form 10-K for a more detailed discussion of quantitative and
qualitative disclosures about market risk. Our market risk exposure has not
changed significantly since the time we included the disclosures in our 2000
Annual Report on Form 10-K.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 31, 1997, a complaint entitled Rosen et al. v. Macromedia, Inc. et
al., (Case No. 988526) was filed in the Superior Court for San Francisco,
California. The complaint alleges that Macromedia and five of its former or
current officers and directors engaged in securities fraud in violation of
California Corporations Code Sections 25400 and 25500 by seeking to inflate the
value of Macromedia stock by issuing statements that were allegedly false or
misleading (or omitted material facts necessary to make any statements made not
false or misleading) regarding the Company's financial results and prospects.
Four similar complaints by persons seeking to represent the same class of
purchasers subsequently have been filed in San Francisco Superior Court, and
have been consolidated for pre-trial purposes with Rosen. Defendants filed
demurrers to the complaint and other motions, which were argued on December 9,
1997 and January 5, 1998. Before the demurrers could be heard, one defendant,
Richard Wood, died in an automobile accident. In March 1998, the Court sustained
the demurrers as to claims against Susan Bird and overruled the demurrers as to
Macromedia, John Colligan, James Von Ehr, II, and Kevin Crowder. In May 1999,
the Court granted plaintiffs' motion for certification of a class of all persons
who purchased Macromedia common stock from April 18, 1996 through January 9,
1997. Trial has been set for November 2001.
The consolidated complaint seeks damages in unspecified amounts, as well as
other forms of relief. We believe the complaint is without merit and intend to
vigorously defend the action.
On August 10, 2000, a complaint entitled Adobe Systems, Inc. v. Macromedia,
Inc. (Case No. 00-743-JJF) was filed in the United States District Court for the
District of Delaware and on September 18, 2000, Adobe filed a first amended
complaint in the same action. In the first amended complaint, Adobe alleges
infringement of U.S. Patent No. 5,546,528 by tabbed palette features of certain
Macromedia products and infringement of U.S. Patent No. 6,084,597 by image
rendering features of Macromedia Dreamweaver and Macromedia Flash products. On
September 27, 2000, Macromedia answered the first amended complaint by denying
the allegations and filing counterclaims against Adobe for infringement of three
Macromedia patents. In particular, Macromedia alleges infringement of U.S.
Patent No. 5,467,443 by changing blended elements and automatic re-blending of
elements features of Adobe Illustrator product and U.S. Patents Nos. 5,151,998
and 5,204,969 by visually displaying and editing sound waveforms features of
Adobe Premiere product. On October 17, 2000, Adobe filed its answer denying the
allegations in Macromedia's counterclaims. Each party is seeking to enforce its
patents and to receive monetary damages for infringement of its patents.
Further, each party is seeking a court declaration that it is not infringing the
other party's patents and an award of attorneys fees.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE
-------------- -------------
2.01 Amended and Restated Agreement and Plan of Reorganization by and
among Registrant, ESI Software, Inc. and Dynamo Acquisition
Corp. dated July 8, 1999 as amended August 30, 1999. (a)
2.02 Amended and Restated Agreement and Plan of Reorganization by and
among Registrant, Andromedia, Inc. and Peak Acquisition Corp.
dated October 6, 1999 as amended November 23, 1999. (b)
2.03 Agreement and Plan of Reorganization dated December 14, 2000, by
and among shockwave.com, Inc., a Delaware Corporation and Atom
Corporation, a Washington Corporation. (r)
3.01 Registrant's Amended and Restated Certificate of Incorporation.
(c)
3.02 Certificate of Amendment of Registrant's Amended and Restated
Certificate of Incorporation. (d)
3.03 Certificate of Amendment of Registrant's Amended and Restated
Certificate of Incorporation. (q)
3.04 Registrant's Bylaws. (e)
3.05 Amendment to Registrant's Bylaws effective October 15, 1993. (e)
10.01 1992 Equity Incentive Plan and related documents, as amended to
date. (p)
10.02 1993 Directors Stock Option Plan and related documents, as
amended to date. (f)
10.03 Non-Plan Form Agreements. (j)
10.04 Registrant's Form of Non-Plan Stock Option Grant. (l)
10.05 ESI Software, Inc. 1996 Equity Incentive Plan. (l)
10.06 Registrant's 1999 Stock Option Plan. (p)
10.07 Andromedia, Inc. 1996 Stock Option Plan. (m)
10.08 Andromedia, Inc. 1997 Stock Option Plan. (m)
10.09 Andromedia, Inc. 1999 Stock Option Plan. (m)
10.10 Middlesoft, Inc. 1999 Stock Option Plan. (p)
10.11 Form of Indemnification Agreement entered into by Registrant
with its directors and executive officers. (e)
10.12 Twelfth Amendment to Lease Agreement by and between Registrant
and Toda Development, Inc. dated November 26, 1996 and
Thirteenth Amendment to Lease Agreement by and between
Registrant and Toda Development, Inc. dated February 25, 1997
and Fourteenth Amendment to Lease Agreement by and between
Registrant and Toda Development, Inc. dated February 25, 1997.
(g)
10.13 Employment Agreement between the Registrant and Robert K.
Burgess dated August 25, 1996. (h)
10.14 Loan Agreement between Registrant and Brian and Sharon Allum,
dated July 15, 1997. (i)
10.15 Loan Agreement between Registrant and Steven A. and Nancy M.
Elop, dated April 24, 1998. (k)
10.16 Lease Agreement by and between Registrant and Zoro LLC, dated
April 15, 1999. (n)
10.17 First Amendment to Lease agreement by and between Registrant and
Zoro LLC, dated July 1, 1999. (n)
10.18 Lease Agreement by and between Registrant and Oelsner Commercial
Properties, dated February 28, 2000. (n)
20
22
EXHIBIT NUMBER EXHIBIT TITLE
-------------- -------------
10.19 Employment Agreement between the Registrant and Brian Allum
dated July 22, 1997. (n)
10.20 Built-to-suit lease, dated April 20, 2000 between the
Registrant, Kaufman Family Partnership, Ronald H. Kaufman and
Barbara Kaufman. (o)
(a) Incorporated by reference to the Registrant's Current Report on Form
8-K/A filed on October 26, 1999.
(b) Incorporated by reference to the Registrant's Current Report on Form
8-K/A filed February 14, 2000.
(c) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration Statement No. 33-89092).
(d) Incorporated by reference to the Registrant's Amendment No. 1 to
Registration Statement on Form 8-A filed on October 5, 1995.
(e) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration Statement No. 33-70624).
(f) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on September 24, 1998 (Registration Statement No.
333-64141).
(g) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1997.
(h) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1996.
(i) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1997.
(j) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on October 31, 1997 (Registration Statement No.
333-39285).
(k) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998.
(l) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on October 18, 1999 (Registration Statement No.
333-89247).
(m) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on December 07, 1999 (Registration Statement No.
333-92233).
(n) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 2000.
(o) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 2000.
(p) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on August 17, 2000 (Registration Statement No.
333-44016).
(q) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 2000.
(r) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on January 26, 2001.
(b) Reports on Form 8-K:
None.
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23
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.
Date: February 1, 2001 By: /s/ Elizabeth A. Nelson
-------------------------------------
Elizabeth A. Nelson
Executive Vice President and
Chief Financial Officer, and
Secretary
(Principal Accounting Officer and
Duly Authorized Officer)
22
24
EXHIBIT NUMBER EXHIBIT INDEX
-------------- -------------
2.01 Amended and Restated Agreement and Plan of Reorganization by and
among Registrant, ESI Software, Inc. and Dynamo Acquisition
Corp. dated July 8, 1999 as amended August 30, 1999. (a)
2.02 Amended and Restated Agreement and Plan of Reorganization by and
among Registrant, Andromedia, Inc. and Peak Acquisition Corp.
dated October 6, 1999 as amended November 23, 1999. (b)
2.03 Agreement and Plan of Reorganization dated December 14, 2000, by
and among shockwave.com, Inc., a Delaware Corporation and Atom
Corporation, a Washington Corporation. (r)
3.01 Registrant's Amended and Restated Certificate of Incorporation.
(c)
3.02 Certificate of Amendment of Registrant's Amended and Restated
Certificate of Incorporation. (d)
3.03 Certificate of Amendment of Registrant's Amended and Restated
Certificate of Incorporation. (q)
3.04 Registrant's Bylaws. (e)
3.05 Amendment to Registrant's Bylaws effective October 15, 1993. (e)
10.01 1992 Equity Incentive Plan and related documents, as amended to
date. (p)
10.02 1993 Directors Stock Option Plan and related documents, as
amended to date. (f)
10.03 Non-Plan Form Agreements. (j)
10.04 Registrant's Form of Non-Plan Stock Option Grant. (l)
10.05 ESI Software, Inc. 1996 Equity Incentive Plan. (l)
10.06 Registrant's 1999 Stock Option Plan. (p)
10.07 Andromedia, Inc. 1996 Stock Option Plan. (m)
10.08 Andromedia, Inc. 1997 Stock Option Plan. (m)
10.09 Andromedia, Inc. 1999 Stock Option Plan. (m)
10.10 Middlesoft, Inc. 1999 Stock Option Plan. (p)
10.11 Form of Indemnification Agreement entered into by Registrant
with its directors and executive officers. (e)
10.12 Twelfth Amendment to Lease Agreement by and between Registrant
and Toda Development, Inc. dated November 26, 1996 and
Thirteenth Amendment to Lease Agreement by and between
Registrant and Toda Development, Inc. dated February 25, 1997
and Fourteenth Amendment to Lease Agreement by and between
Registrant and Toda Development, Inc. dated February 25, 1997.
(g)
10.13 Employment Agreement between the Registrant and Robert K.
Burgess dated August 25, 1996. (h)
10.14 Loan Agreement between Registrant and Brian and Sharon Allum,
dated July 15, 1997. (i)
10.15 Loan Agreement between Registrant and Steven A. and Nancy M.
Elop, dated April 24, 1998. (k)
10.16 Lease Agreement by and between Registrant and Zoro LLC, dated
April 15, 1999. (n)
10.17 First Amendment to Lease agreement by and between Registrant and
Zoro LLC, dated July 1, 1999. (n)
10.18 Lease Agreement by and between Registrant and Oelsner Commercial
Properties, dated February 28, 2000. (n)
25
EXHIBIT NUMBER EXHIBIT INDEX
-------------- -------------
10.19 Employment Agreement between the Registrant and Brian Allum
dated July 22, 1997. (n)
10.20 Built-to-suit lease, dated April 20, 2000 between the
Registrant, Kaufman Family Partnership, Ronald H. Kaufman and
Barbara Kaufman. (o)
(a) Incorporated by reference to the Registrant's Current Report on Form
8-K/A filed on October 26, 1999.
(b) Incorporated by reference to the Registrant's Current Report on Form
8-K/A filed February 14, 2000.
(c) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration Statement No. 33-89092).
(d) Incorporated by reference to the Registrant's Amendment No. 1 to
Registration Statement on Form 8-A filed on October 5, 1995.
(e) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration Statement No. 33-70624).
(f) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on September 24, 1998 (Registration Statement No.
333-64141).
(g) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1997.
(h) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1996.
(i) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1997.
(j) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on October 31, 1997 (Registration Statement No.
333-39285).
(k) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998.
(l) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on October 18, 1999 (Registration Statement No.
333-89247).
(m) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on December 07, 1999 (Registration Statement No.
333-92233).
(n) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 2000.
(o) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 2000.
(p) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed on August 17, 2000 (Registration Statement No.
333-44016).
(q) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 2000.
(r) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on January 26, 2001.