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UNITED STATES

FORM 10-K

(Mark One)

		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the Fiscal Year Ended March 31, 2001

OR

		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

Commission File No. 000-22688

MACROMEDIA, INC.

I.R.S. Identification No. 94-3155026

600 Townsend Street

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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    No 

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

      Aggregate market value of the voting stock held by non-affiliates of the Registrant as of May 23, 2001: $1,312 million. See definition of affiliate in Rule 12b-2 of the Exchange Act.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the documents listed below have been incorporated by reference into the indicated parts of this report, as specified in the responses to the item numbers involved.

Table of Contents

MACROMEDIA, INC. AND SUBSIDIARIES

FORM 10-K

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PART I

      Except for historical financial information contained herein, the matters discussed in this Form 10-K may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and subject to the safe harbor created by the Securities Litigation Reform Act of 1995. Such statements include declarations regarding our intent, belief or current expectations and those of our management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks, uncertainties, and other factors, some of which are beyond our control; actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to: (i) that the information is of a preliminary nature and may be subject to further adjustment, (ii) those risks and uncertainties identified under “Risk Factors that May Affect Future Results of Operations” in Item 7A, and the other risks detailed from time-to-time in our reports and registration statements filed with the Securities and Exchange Commission.

Item 1. Business

Overview

      Macromedia, Inc. (“Macromedia”) develops, markets, and supports software products, technologies, and services that enable people to define what the Web can be. Our customers, from developers to enterprises, use Macromedia solutions to help build compelling and effective Web sites and eBusiness applications. We were incorporated in Delaware on February 25, 1992, and have acquired several other businesses since our incorporation. Our principal executive office is located at 600 Townsend Street, San Francisco, California 94103 and our telephone number is (415) 252-2000. Our common stock is listed on the NASDAQ National Market under the symbol MACR. Our World Wide Web site can be accessed at www.macromedia.com. Information on our Web site should not be considered filed with the Securities and Exchange Commission.

      Throughout the majority of fiscal year 2001, we operated in two segments: the Software segment and shockwave.com, Inc. (“shockwave.com”). Our Software segment develops software that creates 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 currently operate in one primary business segment, the Software segment, as a result of the deconsolidation of our previously majority owned subsidiary, shockwave.com, during the fourth quarter of our fiscal year 2001.

      The portfolio of software products Macromedia offers to its customers today enables our customers to build, rapidly deploy, and manage relatively simple to sophisticated Web sites that provide dynamic content, personalized interaction, and secure business transactions. Our products range from stand-alone products for Web authoring and graphics creation to products that provide robust, secure, scalable foundations for building online applications that support online commerce, strengthen customer and partner relationships, and automate key business processes. Companies as varied as Macy’s, BMW Motorcycles, Cisco Systems, Compaq, Disney, Hewlett Packard, Williams-Sonoma, Kaiser Permanente, and autobytel.com have all used Macromedia products. Companies such as these use our products to design, build, and manage large-scale, content-rich, transaction-oriented Web sites and applications.

Recent Events

      In December 2000, we announced that our then majority owned subsidiary, shockwave.com, would acquire Atom Corporation (“AtomFilms”). AtomFilms was a privately held company providing Web-based entertainment focused on marketing and distributing high-quality short form entertainment to more than 100 partners. shockwave.com completed the acquisition in January 2001 and issued common stock and options of shockwave.com equal to approximately 30% of the combined company, AtomShockwave Corp. (“AtomShockwave”), on a fully-diluted basis, in exchange for all of the outstanding shares of AtomFilms. The transaction was accounted for as a purchase business combination. As a result of the acquisition, Macromedia no longer consolidates the financial statements of AtomShockwave as our ownership interest has declined

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      In March 2001, we consummated an acquisition of Allaire Corporation (“Allaire”), a publicly held company that provides Internet software products for companies building their business on the Web, by issuing cash and stock consideration and assuming all of the outstanding vested and unvested options and warrants of Allaire. For accounting purposes, the transaction was valued at approximately $428.0 million and accounted for under the purchase method of accounting. As a result of the Allaire acquisition, the following discussion will consist of the businesses of Macromedia and Allaire.

Market Opportunity

      The Internet has experienced dramatic growth over the last several years. Today, with the Internet software industry experiencing standardization and consolidation, many companies around the world with a Web presence are looking to companies such as Macromedia to provide rich, comprehensive solutions to deliver content and applications over the Web in a cost-effective manner.

      For many businesses, Web technology provides an alternative to existing mainstream computing platforms and creates new opportunities for commerce and information exchange. The Internet continues to transform business and communication within companies, between companies and their customers, and with other businesses. Web applications on intranets and extranets automate business processes and facilitate collaboration, thereby increasing productivity and efficiency, and creating new value. Internet sites provide a rich vehicle for communication and direct interaction with customers and consumers who use the Web as part of their daily routines. Businesses link to each other along the value chain, automating processes and streamlining operations. For consumers, the Web is quickly becoming a viable medium for communication, community, and entertainment. As a result, the Internet has become an integral part of how companies in every industry do business.

Macromedia Strategy

      Macromedia presents a value proposition to the market by enabling the best user experiences on the Web at an affordable price. Creating a good user experience is a simple requirement. In practice, creating the best user experience requires knowledge, clear vision, a team of Web professionals, and technology to enable them.

      Although a good user experience may vary depending on the application, there are some core characteristics that apply across applications and platforms: a good user experience must be useful, useable, and valuable, but it also must be reliable, predictable, and responsive.

      The challenge for our core customer, the Web professional, is to deliver the best user experience across the entire range of Internet, intranet, and extranet applications. Macromedia provides technologies to enable Web professionals to create a user experience with technologies that are cost-effective, integrated, and approachable.

      The long-term business strategy for Macromedia is founded on trends that are driving the expansion of our markets and the demand for new technologies within our existing markets. The first trend is that the amount of content and applications on the Internet will continue to expand as new geographies, businesses, and users come online. The second trend tracks the proliferation of additional Internet-enabled devices. As the Web-enabled personal computing platform matures, users are increasingly accessing content and applications through new devices such as wireless handsets, personal digital assistants, interactive television, and other Internet-ready appliances. While this market is still developing, this evolution of the computing paradigm represents a significant opportunity for Macromedia over the long term. In the near term, the proliferation of dynamic, data-driven applications and content is driven by the cost efficiencies of the Web-based application and content development model.

      The trend towards the proliferation of dynamic content is the underlying strategic rationale for the acquisition of Allaire. By adding Allaire server software to the Macromedia family of development software and media player software, the Macromedia product line spans the range of needs for producing dynamic

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      Macromedia makes software to help with each stage of this process: software tools to design the interaction and develop the application logic; servers to manage the delivery of that application or content to a user; and player software to enable the display of rich content. Today we have a comprehensive family of software that is designed to make the process of creating content and applications as efficient and cost-effective as possible. In the near term, Macromedia is committed to supporting both de facto and open standards. In particular, Macromedia has chosen to build its application server strategy on the Sun Java™ 2 Enterprise Edition (J2EE™) standard.

      Macromedia defines its target market as the mass enterprise. The mass enterprise represents a subset of the overall Web-development tools and application server software marketplace. Understanding the mass enterprise market requires understanding what customers are building and how companies service them. Mass enterprise projects tend to have requirements for rapid time to market. They are usually content-centric, and tend to be focused on end-user and business-user productivity, rather than enterprise operations or complex backoffice processing. As mass enterprise applications scale in cost, complexity, and time of implementation, they approach the traditional “enterprise” class solutions provided by companies such as IBM and BEA Systems.

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      Mass enterprise solutions are implemented at every size of company, particularly when constraints of cost, available expertise, and time-to-market come into play.

      Vendors that service the mass enterprise market tend to have the following attributes:

	•	Products priced at $300 – $5000;
	•	Broad and efficient channels supporting millions of transactions per year;
	•	Short sales cycles (often 90 days or less); and
	•	Approachable, easy-to-implement products.

      Macromedia’s position as a mass enterprise company committed to the Java platform places Macromedia in a unique position regarding traditional enterprise software companies. Because we target a different class of customer and application, we believe we are capable of partnering with enterprise-class vendors to enhance their products and services with our development tools and rich media players. In addition, because our tools are cross-platform and cross-technology, we believe we are capable of enhancing the Microsoft .NET platform with development tools and players.

DESIGN:

	•	Macromedia Flash™ — Create animated, vector-based Web content.

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	•	Macromedia Dreamweaver™ — Allows for short work of Web site development and HTML page production.

	•	Macromedia Fireworks® — Design & optimize Web graphics for easy integration into Web sites.

	•	Macromedia FreeHand® — Create vector-based illustrations for Flash and for print.

DEVELOP:

	•	Macromedia Dreamweaver UltraDev® — Develop data-driven Web applications and content on multiple server platforms.

	•	Macromedia Director® — Create interactive, rich-media content, including 3D for the Web, CD-ROMs, DVD-ROMs and more.

	•	Macromedia Authorware — Produce rich-media training and learning applications.

	•	Macromedia HomeSite™ — Give precise layout control and total design flexibility, while delivering full access to the latest Web technologies.

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DELIVER:

	•	Macromedia ColdFusion™ — Build and deploy powerful Web applications.

	•	Macromedia JRun™ — Develop and deliver high-performance, scalable Java applications.

DISPLAY:

	•	Macromedia Flash™ Player — View high-impact Web animated content.

	•	Macromedia Shockwave™ Player — View entertaining rich-media Web content.

Product Development

      Our business strategy emphasizes developing products and services that help customers take advantage of opportunities on the Internet. We aim to solve the problems customers face as they create and deliver content on a new medium with multiple standards, multiple browsers, and different bandwidth rates.

      As the software industry is characterized by rapid technological change, a continuous high level of expenditure is required to enhance existing products and develop new products. We believe that our future success depends on our ability to enhance existing products as well as develop and introduce new products on a timely basis. It is critical that new products and enhancements keep pace with the constantly evolving network infrastructure, Internet technology, and competitive offerings. We continue to adapt our products to new hardware and software platforms and to embrace industry standards. We plan to continue our internal product development efforts and, as appropriate, acquire additional software and system technologies that we consider critical to meeting the needs of Internet developers, consumers, and the enterprise.

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      Our goals are to:

	•	Enhance, integrate and extend our design tools;
	•	Enable efficient development and support standard development technologies;
	•	Deliver approachable servers and value added Web services that enhance the major software platforms of Sun Java™ and Microsoft .NET™; and
	•	Drive ubiquity of our Flash Player and enhance the media capabilities of our Shockwave Player.

      For fiscal year 2001, 2000, and 1999, consolidated research and development expenses were $107.7 million, $65.7 million, and $41.6 million, respectively.

Competition

      We operate in a highly competitive market characterized by pressure to incorporate new features and accelerate the release of new product versions and enhanced services. These market factors represent both opportunities and competitive threats to us. A number of our competitors, including Adobe, Microsoft, and Corel currently offer products and services that compete directly or indirectly with one or more of our software products. Primary competitors in the high end market of server based products include large Web and database platform companies that offer a variety of software products, such as IBM, Oracle, and Sun Microsystems. We also compete against a number of companies that offer Web application servers, such as BEA Systems, Hewlett Packard, SilverStream Software and ATG. In addition, several of our current and potential competitors have greater financial, marketing, and technical resources than we do. As larger companies continue to operate in these markets, we may face increasing competition.

      We believe that the principal competitive factors in the markets in which we presently compete and may compete in the future are:

	•	Functionality;
	•	Ability to provide efficient solutions;
	•	Ability to timely introduce new product versions;
	•	Ability to evolve with changing technology and customer requirements;
	•	Performance of products;
	•	Ability to provide enhanced solutions and support;
	•	Ability to provide value added features;
	•	Price; and
	•	Market presence.

Operations and Manufacturing

      We are dependent on two sources, Modus Media and Compaq Software Publishing Services, to manufacture and ship our finished products. The manufacturing of our products typically consists of pressing CD-ROMs, printing manuals, and packaging and assembling finished products, all according to our specifications and forecasts. Manufacturing is currently done at three Modus facilities worldwide: in Preston, Washington for the Americas, in Apeldorn, Netherlands for Europe, and in Singapore for the Asia Pacific market. Manufacturing at Compaq is currently performed in Nashua, New Hampshire. We perform quality assurance testing at our contracted manufacturing facilities. Both Modus and Compaq operate multiple facilities around the world that are capable of serving our needs, and we believe alternative sources could be implemented without significant interruption to our business. To date, we have not experienced any significant difficulties or delays in the manufacturing or assembly of our products or any significant returns due to product defects.

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      In addition, we license and distribute our software products directly to end-users over the Internet through our Web site. We continue to invest in technologies and infrastructure to support electronic software distribution and online documentation, which are becoming an increasingly important and cost-effective way to deliver our products. Although we take precautionary measures, our Web site may become unavailable from time-to-time due to factors beyond our control. To date, our business has not experienced significant interruptions from Web site accessibility.

Marketing and Distribution

		We extend our brand worldwide through creative marketing communications, our Web site, public relations activities, customer seminars, advertising both on the Web and in print, and national and regional trade shows. We also use direct mail, both e-mail and print, to introduce new products and upgrades, to cross-sell products to current customers, and to educate and inform. In addition, we distribute a variety of interactive multimedia demonstration materials directly to

      A substantial portion of our revenue is derived from the sale of our products worldwide through a variety of distribution channels, including traditional software distributors, electronic commerce on the Web, direct sales, mail order, educational distributors, value-added resellers (“VAR”s), original equipment manufacturers (“OEM”s), hardware and software superstores, and retail dealers. We also sell directly to large corporate and educational institutions, with volume licensing programs under which the customer receives a volume discount and has the right to reproduce and use our software.

      Internationally, our products are sold both directly to end users and through distributors. International sales accounted for 43% of consolidated revenues during fiscal year 2001. In certain cases, distributors have exclusive distribution rights to certain products in their respective countries. In spite of economic difficulties in some regions, we believe that international markets for our products present a strategic opportunity and expect international sales to continue to generate a significant percentage of our total revenues. (For financial information regarding our business segments, please refer to Note 19 to our Notes to Consolidated Financial Statements on page F-42).

Customer Support and Professional Services

      We believe that providing a high level of customer service and technical support is necessary to achieve rapid product implementation that, in turn, is essential to customer satisfaction and continued license sales and revenue growth. Our customers have a broad choice of support options depending on the level of service desired. We provide access to a wide range of technical information on our Web site, as well as online forums for each of our products. For our HTML and Rich Media Products, we offer complimentary 90-day technical support for our registered users via e-mail or phone. In addition, we offer a number of paid support options, including incident-based support and annual support subscriptions.

      Internationally, we have developed relationships with third-party support providers to deliver support on behalf of Macromedia.

      We offer Web application consulting services through Macromedia Professional Services, which focuses on short-term, high-return projects. We utilize our customers’ employees throughout the life of a consulting project to allow us to meet one of our critical commitments to our partners and customers — the transfer of knowledge.

      Our customers depend on our worldwide network of value-added resellers, training centers, and developers. In addition, our user groups, located in dozens of cities throughout the world, provide customers with ways to share information, network with developers, and keep in touch with us. We provide support primarily through marketing collateral, guest speakers, and product giveaways.

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Proprietary Rights and Licenses

      We rely on a combination of patent, copyright, trade secret, and trademark laws, as well as employee and third-party nondisclosure agreements, to protect our intellectual property rights and products. We distribute software under license agreements, including shrink-wrapped license agreements that customers accept when they open physical or electronic copies of our products. Policing unauthorized use of products is difficult, and while we cannot determine the extent to which software piracy of our products exists, it can be expected to be a persistent problem. We have established dedicated resources to focus on piracy and belong to key industry groups to further these efforts. In addition, the laws of certain countries in which our products are or may be distributed do not protect our products and intellectual rights to the same extent as the laws of the United States.

Risk Factors

      See Risk Factors that May Affect Future Results of Operations in Management’s Discussion and Analysis of Financial Condition and Results of Operations on Page F-11.

Employees

      As of March 31, 2001, we had 1,761 full-time employees and 119 contractors worldwide, with the majority working in California, followed by Massachusetts, Texas, the United Kingdom, Japan, and Australia, among other international offices. None of our employees are subject to a collective bargaining agreement, and we believe that our relations with our employees are good.

Item 2. Properties

      A significant portion of our United States operations is located in various buildings in San Francisco, California. We lease approximately 320,000 square feet of space in San Francisco, 74,000 of which is not currently occupied by us and is subleased or in the process of being subleased. Most of the leases expire between April 2005 and June 2010, and we have renewal options at favorable rates for successive terms. We currently lease 350,000 square feet of space in Newton, Massachusetts, of which approximately 225,000 square feet is subleased or in the process of being subleased. The lease expires in June 2010. We also lease 55,000 square feet at a facility in Richardson, Texas as well as space in North America for field sales offices, Bracknell, England for our European operations, Kew, Australia for our Asia Pacific operations and Tokyo, Japan for our Japanese operations.

      We own a four-story 100,000 square foot facility in Redwood City, California. We occupy 43,000 square feet of this space and lease the remaining 56,000 square feet. We believe our facilities are adequate for current and near-term needs and that additional space is available to provide for anticipated growth during the life of the leases.

Item 3. 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 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 our 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’s common stock from April 18, 1996 through January 9,

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      On August 10, 2000, Adobe Systems, Inc. (“Adobe”) filed suit against us in the United States District Court for the District of Delaware (Case No. 00-743-JJF). On September 18, 2000, Adobe filed a first amended complaint in the same action. In the first amended complaint, Adobe alleges that certain Macromedia products infringe U.S. Patents Nos. 5,546,528 and 6,084,597. On September 27, 2000, Macromedia answered the first amended complaint by denying the allegations and filing counterclaims against Adobe seeking a declaration that Adobe’s patents are invalid and unenforceable, and alleging infringement of three Macromedia patents. In particular, Macromedia alleges infringement of U.S. Patent No. 5,467,443 by at least the Adobe Illustrator product and U.S. Patents Nos. 5,151,998 and 5,204,969 by the Adobe Premiere product. On October 17, 2000, Adobe filed its answer denying the allegations in Macromedia’s counterclaims. Each party is requesting monetary damages for infringement of its patents and an injunction against future infringement. Further, each party is seeking a court declaration that it is not infringing the other party’s patents, that the other parties’ patents are invalid and an award of attorneys’ fees. Discovery has begun in this matter, and trial is currently set for April 2002. Although we are not able to predict the outcome, we intend to vigorously defend the matter.

      On or after September 25, 2000, Allaire Corporation, prior to its acquisition by Macromedia, and individuals who were serving as officers or directors of Allaire Corporation during the periods covered by the complaints, were named as defendants in eleven virtually identical lawsuits filed in the United States District Court for the District of Massachusetts: (i) Krakauer v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-11972-WGY; (ii) Dargenzio v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-11973-WGY; (iii) Gordon v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-11974-WGY; (iv) Large v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-11986-WGY; (v) DiMaggio v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-11996-WGY; (vi) Knorr v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-12014-WGY; (vii) Jarvis v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-12016-WGY; (viii) Cordeiro v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-12158-WGY; (ix) Fisher v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-12182-WGY; (x) Crippin v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-12333-WGY; and (xi) Reagor v. Allaire Corporation, Joseph J. Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao, Civil Action No. 00-12377-WGY (collectively, the “initial complaints”). Each of the plaintiffs in each of the actions purport to bring their complaint on behalf of all purchasers of Allaire Corporation stock during an alleged class period (July 20, 2000 and September 18, 2000). The plaintiffs claim that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and SEC Rule 10b-5, by virtue of statements that the plaintiffs claim were materially false or misleading. Plaintiffs seek damages, interest, costs, and attorneys’ fees. On December 5, 2000, Chief Judge Young of the District of Massachusetts entered an order consolidating these initial cases as In re: Allaire Corporation Securities Litigation, Case No. 00-CV-11972(WGY). The order appointed lead plaintiffs for the class and permitted them to file a consolidated complaint, to be treated as if it were the original complaint in the consolidated actions. The consolidated complaint was filed on February 20, 2001.

      On April 11, 2001, after Allaire was merged into Macromedia, a twelfth complaint was filed, Kassin v. Allaire Corporation, Joseph J. Allaire, Jeremy D. Allaire, David A. Gerth, and David J. Orfao, Civil Action No. 01-10600-WGY (the “subsequent complaint”). This complaint, filed on behalf of the plaintiff (and not a class), contains substantially the same allegations as the initial complaints, but in addition asserts claims for common law fraud and negligent misrepresentation.

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      The defendants intend to file a motion to dismiss the consolidated initial complaints and the subsequent complaint. The litigation is in its early stages, and we are not able to predict the outcome of the litigation at this time, but we intend to defend all of these claims vigorously.

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

      No matters were submitted during the fourth quarter of fiscal year 2001 to a vote of security holders through solicitation of proxies or otherwise.

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

      The information required is set forth under “Quarterly Results and Stock Market Data” tabulations, on page F-47 of this report.

Item 6. Selected Financial Data

      The information required is set forth under “Selected Consolidated Financial Data”, on page F-2 of this report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The information required is set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, on page F-3 of this report.

      The information required is set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, on page F-3 of this report.

      The information required is set forth under “Independent Auditors’ Report,” “Consolidated Balance Sheets,” “Consolidated Statements of Earnings,” “Consolidated Statements of Stockholders’ Equity,” “Consolidated Statements of Cash Flows,” and “Notes to Consolidated Financial Statements,” on pages F-17 to F-47 of this report.

      Not applicable.

      The information concerning our directors required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Proposal No. 1 — Election of Directors.”

      The information concerning our executive officers required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Executive Officers.”

      The information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the section in our Proxy Statement entitled “Section 16(a) Beneficial Ownership Reporting Compliance.”

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      The information concerning executive compensation required by this Item is incorporated by reference to the sections in our Proxy Statement entitled “Executive Compensation”, “Compensation of Directors”, “Employment Agreements”, and “Compensation Committee Interlocks and Insider Participation.”

      The information concerning executive compensation required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management.”

      The information concerning certain relationships and related transactions required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Certain Transactions.”

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PART IV

(A)  The following documents are filed as part of this Report:

      1. Financial Statements. The following Consolidated Financial Statements of Macromedia, Inc. and Subsidiaries are incorporated by reference to Part II, Item 8 of this Form 10-K:

     Independent Auditors’ Report

      2. Financial Statement Schedule. The following financial statement schedule of Macromedia, Inc. and Subsidiaries for the fiscal years ended March 31, 2001, 2000 and 1999 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Macromedia, Inc. and Subsidiaries.

           Schedule II: Valuation and Qualifying Accounts

      Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.

      3. Exhibits

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(l)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
(m)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.
(n)	Incorporated by reference to the Registrant’s Registration Statement on Form  S-8 filed on August 17, 2000 (Registration Statement No. 333-44016).
(o)	Incorporated by reference to the Registrant’s Registration Statement on Form  S-8 filed on September 24, 1998 (Registration Statement No. 333-64141).
(p)	Incorporated by reference to the Registrant’s Registration Statement on Form  S-8 filed on March 27, 2001 (Registration Statement No. 333-57708).
(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 Annual Report on Form 10-K for the fiscal year ended March 31, 1996.

(*)	Filed herewith.
(**)	Confidential treatment has been granted with respect to certain portions of this agreement. Such portions have been redacted and marked with a double asterisk. The non-redacted version of this agreement was sent to the Securities and Exchange Commission pursuant to an application for confidential treatment.
(***)	Represents a management contract or compensatory plan or arrangement.

(B)	Reports on Form 8-K:

1.	A Current Report on Form 8-K was filed by the Company on January 24, 2001. In this report, under Item 5 of Form 8-K, the Company announced that it had entered into a definitive agreement to merge with Allaire Corporation.
2.	A Current Report on Form 8-K was filed by the Company on January 27, 2001. In this report, pursuant to the requirements of Items 2 and 7 of Form 8-K the Company announced the acquisition by its then wholly owned subsidiary, shockwave.com, of AtomFilms. The Company indicated that the financial information required under Item 7 of Form 8-K would be provided no later than 60 days after January 27, 2001.
3.	An amended Current Report on Form 8-K/ A was filed by the Company on January  30, 2001. In this amended report, the Company revised the announcement of shockwave.com’s acquisition of AtomFilms pursuant to the requirements of Items 2 and 7 of Form 8-K. The Company indicated that the financial information required under Item 7 of Form 8-K would be provided no later than 60 days after January 27, 2001.
4.	A Current Report on Form 8-K was filed by the Company on March 7, 2001. In this report, under Item 5 of Form 8-K, the Company announced that it had been granted early termination of the waiting period under the Hart-Scott-Rodino Anti-trust improvement act for its acquisition of Allaire Corporation.
5.	An amended Current Report on Form 8-K/ A, was filed by the Company on March  28, 2001. In this amended report, pursuant to the requirements of Item 7 of Form 8-K. The Company filed AtomFilms’ audited fiscal year 2000 financial statements, and the pro forma financial information resulting from the acquisition.

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      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: June 8, 2001

	MACROMEDIA, INC.

	By:	/s/ ROBERT K. BURGESS

	Robert K. Burgess
	Chairman and Chief Executive Officer

POWER OF ATTORNEY

      KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert K. Burgess and Elizabeth A. Nelson, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.

      Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and dates indicated.

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MACROMEDIA, INC. AND SUBSIDIARIES

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MACROMEDIA, INC. AND SUBSIDIARIES

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MACROMEDIA, INC. AND SUBSIDIARIES

Overview

      Throughout the majority of fiscal year 2001, we operated in two segments: the Software segment and shockwave.com Inc. (“shockwave.com”). Our Software segment develops software that creates 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.

      In fiscal year 2001 we experienced a significant growth in our business. This is reflected in our Software segment revenues of $376.4 million, a $120.5 million increase from fiscal year 2000 revenues of $255.9 million. Our Software segment provided approximately 97% of our total consolidated revenues of $389.6 million.

      Our Software segment revenues grew approximately 47% over fiscal year 2000, even with a reduction in demand for our software products during our fourth quarter of fiscal year 2001. This reduction is attributable to lowered Internet technology spending and to the overall weakening economy. In response to this tighter economic environment and in order to realize certain cost synergies resulting from the Allaire acquisition, we will be restructuring the organization during the first quarter of fiscal year 2002. This restructuring will involve layoffs of employees, the termination of facility leases, and other cost containment strategies. The total expected restructuring expense is estimated to be in excess of $15.0 million and will be incurred in the first quarter of fiscal year 2002.

      We continue to sell our software through a network of distributors, value-added resellers and our own sales force and Web site, and to original equipment manufacturers in North America, Europe, Asia Pacific, and Latin America. We derive additional revenues from advertising on our Web site and from software maintenance and technology licensing agreements.

      On March 20, 2001 we completed the acquisition of Allaire Corporation (“Allaire”), which we accounted for under the purchase method. Allaire’s results for the period from acquisition to March 31, 2001 are included in our overall results for the year then ended. Beginning in the first quarter of fiscal year 2002, our consolidated financial statements will reflect the full impact of Allaire’s results. We added Allaire’s products including JRun, ColdFusion, and HomeSite to our existing product lines. However, we do not expect to continue the development of the Spectra and Kawa products as these products were no longer being developed by Allaire and do not fall within our product strategy. As a result, we are planning to re-align our products into new product lines: HTML Products, including Dreamweaver, UltraDev, Fireworks and HomeSite; Rich Media Products, including Flash, Director, FreeHand, Authorware, Flash Player and Shockwave Player; and Server Products, including ColdFusion, JRun, and Generator. Additionally, due to the addition of Allaire’s server products to our product lines, we expect training, technical support, and consulting revenues to increase in fiscal year 2002.

      Beginning in the fourth quarter of fiscal year 2001, we deconsolidated shockwave.com from our results due to an acquisition of Atom Corporation (“AtomFilms”) by shockwave.com. Under the terms of the transaction, AtomFilms’ stockholders received common stock in the surviving company, AtomShockwave Corp. (“AtomShockwave”), equal to approximately 30% of the fully diluted equity outstanding. Prior to the transaction, we invested $15.0 million in the form of convertible promissory notes which converted into Series D Preferred Stock upon the closing of AtomShockwave’s preferred Series D financing round on March 15, 2001. After the acquisition, we began accounting for our investment in AtomShockwave under the equity method of accounting. Although our investment in AtomShockwave is accounted for under the equity method, we are recording our portion of AtomShockwave’s results on a 90-day lag basis due to AtomShockwave’s inability to prepare timely financial statements. Therefore, our statements of income for fiscal year 2001 do not reflect results from AtomShockwave for the three months ended March 31, 2001.

      During fiscal year 2001 and 2000, our shockwave.com segment contributed $13.2 million and $8.2 million in revenue, respectively, and $34.3 million and $28.0 million in net loss, respectively, to the consolidated

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      Additional information about Macromedia, our products, sales and marketing, and investor information can be found on our Web site at www.macromedia.com. Financial information included on our Web site shall not be deemed to be a part of this filing.

Results of Operations

      Presented below is management’s discussion of our operating results and our consolidated subsidiaries for the periods therein. Operating results of Allaire from the date of consummation of the acquisition through March 31, 2001 did not have a material impact on our consolidated statements of income.

Revenues

		Consolidated revenues were $389.6 million in fiscal year 2001, an increase of 47% over fiscal year 2000 revenues of $264.2 million. Consolidated revenues increased $110.9 million from fiscal year 1999 to 2000, primarily due to increased sales of Dreamweaver, Fireworks, and Flash.      Revenues from the Software segment were $376.4 million in fiscal year 2001, an increase of 47% over fiscal year 2000 revenues of $255.9  million. This increase was primarily due to increased sales of Flash and Dreamweaver, new versions of which were released in the second and third quarter of fiscal year 2001, respectively. Also contributing to the revenue growth was the increased revenue for Dreamweaver UltraDev, a new product introduced by Macromedia in the first quarter of fiscal year 2001.

      International revenues represented 45% of the Software segment revenues in fiscal year 2001 as compared to 42% in fiscal year 2000. In absolute dollars, Europe contributed to the majority of the international revenue growth; however, Asia Pacific, Latin America, and Japan had stronger growth as a percentage of revenue. The stronger growth throughout these regions is the result of increased sales force and distribution.

      Revenues from the shockwave.com segment were $13.2 million in fiscal year 2001 during the period that shockwave.com was consolidated and $8.2 million during fiscal year 2000. Due to our deconsolidation of shockwave.com from Macromedia during the fourth quarter fiscal year 2001, going forward our revenues will no longer reflect revenues earned by AtomShockwave.

Cost of Revenues

      Consolidated cost of revenues were $42.4 million in fiscal year 2001, an increase of 47% over fiscal year 2000 cost of revenues of $28.8 million. Consolidated cost of revenues increased $13.2 million from fiscal year 1999 to 2000 while gross margins decreased from 90% to 89%, primarily due to increased consulting and training expenses.

      Gross margins for the Software segment remained relatively consistent at 89% for both fiscal year 2001 and 2000, however, cost of revenues increased in absolute dollars from $27.7 million in fiscal year 2000 to

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      Cost of revenues from the shockwave.com segment were $1.7 million in fiscal year 2001 during the period that shockwave.com was consolidated and $1.1 million during fiscal year 2000. Cost of revenues for shockwave.com includes revenue sharing paid to content developers and commissions expense for the sale of Web advertising space.

Sales and Marketing

      Consolidated sales and marketing expenses were $155.5 million in fiscal year 2001, an increase of 38% over fiscal year 2000 sales and marketing expenses of $113.0 million. Consolidated sales and marketing expenses increased $39.9 million to $113.0 million from fiscal year 1999 to fiscal year 2000, primarily due to increased compensation and benefits year over year.

      Sales and marketing expenses for the Software segment during fiscal year 2001 were $143.7 million, which accounted for an increase of $42.7 million from fiscal year 2000 to fiscal year 2001, but decreased slightly as a percentage of Software revenue from 39% to 38%. Sales and marketing expenses for the Software segment consist primarily of compensation and benefits, allocated costs for depreciation, facilities, and our information technology infrastructure, advertising, co-marketing development costs, mail order advertising, tradeshow and seminar expenses, and other marketing costs. The increase in sales and marketing expenses in absolute dollars is primarily due to the hiring of additional sales and marketing personnel at the beginning of the year to support the growth of the business. Additionally, we incurred greater compensation costs towards the end of the fourth quarter with the addition of new headcount from the Allaire acquisition. Also contributing to the increase in sales and marketing is the increase in facility costs. Sales and marketing expenses are expected to increase in absolute dollars in fiscal year 2002 in order to support the expanded organization resulting from the Allaire acquisition.

      Sales and marketing expenses from the shockwave.com segment were $11.7 million in fiscal year 2001 during the period that shockwave.com was consolidated and $12.0 million during fiscal year 2000. Sales and marketing expenses for shockwave.com consist primarily of compensation and benefits and costs to support the business’ infrastructure.

Research and Development

      Consolidated research and development expenses were $107.7 million in fiscal year 2001, an increase of 64% over fiscal year 2000 research and development expenses of $65.7 million. Consolidated research and development expenses increased $24.2 million to $65.7 million from fiscal year 1999 to fiscal year 2000, due to additional headcount and supporting infrastructure.

      Research and development expenses for the Software segment were $88.6 million for fiscal year 2001, which accounted for an increase of $35.1 million from fiscal year 2000 to fiscal year 2001, and increased as a percentage of Software revenue from 21% to 24%. Research and development expenses for the Software segment consist primarily of compensation and benefits, and infrastructure and overhead costs to support our continued investment in product development. The increase in the absolute dollar amount of research and development expenses was primarily attributable to costs of additional personnel as we continue to invest in product development. Also contributing to the increase in research and development is the allocation of increased facility and information technology infrastructure costs to support the growth of the business. We

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      Research and development expenses for the shockwave.com segment were $19.0 million in fiscal year 2001 during the period that shockwave.com was consolidated and $12.2 million during fiscal year 2000. The increase was primarily due to increased headcount resulting in greater compensation and benefits expense.

General and Administrative

      Consolidated general and administrative expenses were $39.0 million in fiscal year 2001, an increase of 58% over fiscal year 2000 general and administrative expenses of $24.6 million. Consolidated general and administrative costs increased $7.9 million to $24.6 million from fiscal year 1999 to 2000, due to increased headcount and infrastructure expenses to support the growth of the business.

      General and administrative expenses for the Software segment were $33.6 million for fiscal year 2001, which accounted for an increase of $10.7 million from fiscal year 2000 to fiscal year 2001, and remained relatively flat as a percentage of Software revenue at 9%. General and administrative expenses for both the Software segment and shockwave.com consist mainly of compensation and benefits, allocations of overhead and infrastructure costs, and fees for professional services. The increase in the absolute dollar amount of general and administrative expenses was primarily due to increased staffing and associated infrastructure expenses necessary to manage and support our increased scale of operations. We believe that general and administrative expenses will continue to increase in absolute dollar amount as a result of the growth in operations from the acquisition of Allaire.

      General and administrative expenses for the shockwave.com segment were $5.4 million in fiscal year 2001 during the period that shockwave.com was consolidated and $1.7 million during fiscal year 2000. The increase primarily relates to increased legal and accounting costs and other general administrative functions that the segment did not perform in fiscal year 2000.

Acquisition Related Expenses and In-Process Research and Development

      We incurred consolidated acquisition related expenses of $1.7 million in fiscal year 2001 related to the acquisition of Bitcraft, Inc., $11.5 million during fiscal year 2000 related to the acquisitions of Andromedia, Inc., ESI Software, Inc. and Time4.com, and approximately $454,000 during fiscal 1999. These acquisition related expenses include investment banker fees, legal and other professional fees, severance and personnel relocation costs. Acquisition costs during fiscal year 2000 also include expenses related to a technology purchase from Starbase Corporation. As of March 31, 2000, approximately $1.6 million of acquisition related expenses were accrued and subsequently paid out in fiscal year 2001.

      We recorded charges of $21.1 million for in-process research and development resulting primarily from the acquisition of Allaire in the fourth quarter of fiscal year 2001 and Middlesoft, Inc. (“Middlesoft”) in the second quarter of fiscal year 2001.

      Approximately $18.0 million of the fiscal year 2001 charges were attributable to certain technology being developed by Allaire and was expensed during the fourth quarter as it had not reached technological feasibility at the time of the acquisition and had no alternative future uses. The in-process technology related to projects for ColdFusion Server 5.0 and JRun 4.0, which were aimed at building various application services on the Java 2 Enterprise Edition platform. At the date of acquisition, it was estimated that approximately 75% of the development effort was complete and that the remaining 25% would be completed sometime in mid to late calendar year 2001 at an approximate cost of $2.1 million. The remaining efforts included finalizing coding and completion testing of the products and were determined by analyzing efforts incurred on development up to the point of acquisition. The value of the acquired in-process research and development resulted from discounting the estimated future net cash flows upon successful completion of the acquired technology.

      In developing the cash flow projections, revenues were forecasted based on aggregate revenue growth rates for the business as a whole, the characteristics and growth rate of the potential market for the technology, and the anticipated life of the underlying technology. Projected annual revenues for the technologies in

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      The total purchase price for the Middlesoft acquisition was $9.0 million, of which $3.1 million was determined to be in-process research and development for certain intellectual property related to Embedded Flash technologies. We purchased these technologies to increase the functionality of existing Flash technologies in order to allow them to run on multiple hardware devices. At the date of acquisition, it was estimated that approximately 50% of the development effort on the technologies was completed with the remaining 50% expected by October 2000 for an estimated cost of $500,000. The completion percentage was determined by comparing the time and manpower incurred up to the point of acquisition with the estimated resources and efforts needed to complete the development. The valuation of the purchased in-process research and development was based upon the present value of the operating cash flows to be generated by the current technology after considering the cost to realize the revenue and the relative risk of the technology.

      The cash flow projections consider the characteristics of the potential market for the technology and the anticipated life of the technology. Projected annual revenue for the in-process technology was expected to be 90% of the forecasted revenues of the business as a whole within six months of introduction of the project to market. The projected revenue as a percentage of the whole business was expected to decrease to 80% in 2003 due to the release of future development projects. Estimated operating expenses, income taxes, and contributing asset charges were deducted from revenue to arrive at an after tax cash flow for the in-process development project. Operating expenses were estimated as a percentage of revenue and included marketing and administrative expenses, depreciation on fixed assets, and development costs to maintain the technology once it has achieved technological feasibility. Operating expenses were forecasted to decrease significantly after the release of the projects due to the expected deployment of engineer efforts on future research and development products. These cash flows were discounted to their net present value using a discount factor of approximately 22%, which reflects the uncertainty surrounding the successful development of the project.

Non-Cash Compensation

      Consolidated non-cash compensation expenses were $6.0 million in fiscal year 2001, a decrease of 46% over fiscal year 2000 non-cash compensation expenses of $11.1 million. Non-cash compensation expense is primarily comprised of amortization of deferred compensation associated with the issuance of shockwave.com stock options. During fiscal year 2000, shockwave.com issued stock 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. The amortization of these options continued through December 31, 2000, at which time shockwave.com was no longer consolidated with Macromedia. The decrease in expense year over year is directly attributable to this deconsolidation of shockwave.com in the fourth quarter. The decrease was slightly offset by amortization of deferred compensation incurred as a result of the acquisition of Middlesoft, Inc. during the year. We incurred additional deferred compensation as a result of the acquisition of Allaire in the fourth quarter of fiscal year 2001. Although deferred compensation will decrease in fiscal year 2002 due to the deconsolidation of shockwave.com, the decrease will be slightly offset by increases in amortization from Allaire stock options assumed in the acquisition.

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      Consolidated non-cash compensation expenses increased $10.8 million from fiscal year 1999 to $11.1 million during fiscal year 2000, primarily due to compensation expenses incurred with the issuance of shockwave.com warrants and options.

Impairment and Amortization of Intangibles

      Consolidated impairment and amortization of intangibles expenses were $9.9 million in fiscal year 2001, an increase of 875% over fiscal year 2000 expenses of $1.0 million. A significant portion of the increase was due to the impairment and write-off of goodwill acquired in the Middlesoft acquisition, resulting in a charge of $4.3 million in the fourth quarter of fiscal year 2001. We acquired the technologies associated with Middlesoft in the second quarter of fiscal year 2001. During the third quarter of fiscal year 2001, we had indications that the markets we expected would develop were not receptive to our planned strategy. By the end of the fourth quarter of fiscal year 2001, the actual results of the operations surrounding the technology were considerably below our expectations and as a result, management performed an impairment analysis, which considered several factors including revenue and cash flow projections and the realignment of the business strategy into different product agendas. We also evaluated possible strategies surrounding the operating contributions of the technology, and after doing so, determined that they would be prohibitive. As a result, we abandoned the technology, terminated or reassigned key employees associated with the original product plan, and recorded the impairment charge.

      We also incurred amortization expense associated with the purchased intangibles resulting from the Allaire acquisition. A total of approximately $364.9 million of the purchase consideration was allocated to intangible assets, including goodwill of $283.9 million, developed technology of $34.0 million, assembled workforce of $24.0 million, trade name of $5.0 million, and in-process research and development of $18.0 million. Amortization of these intangibles is provided on a straight-line basis over the estimated useful lives of three years. Total amortization expense for Allaire intangibles for the year ended March 31, 2001 was $3.4 million, excluding $18.0 million of in-process research and development, which was expensed in the fourth quarter of fiscal year 2001.

      The remaining impairment and amortization expense incurred in fiscal year 2001 consists of regular amortization of the goodwill and intangibles arising from acquisitions in fiscal year 2000. Amortization of intangibles in fiscal year 2000 was primarily attributable to goodwill and other intangible amortization from prior acquisitions.

      Consolidated impairment and amortization of intangibles expenses increased approximately $765,000 from fiscal year 1999 to 2000, and primarily consist of amortization of goodwill and other intangibles arising from purchase transactions.

Interest and Investment Income

      Consolidated interest and investment income consists primarily of earnings on our cash and short-term investments, and increased $6.8 million in fiscal year 2001 as compared to fiscal year 2000. The increase is primarily due to higher yields throughout the first nine months of fiscal year 2001 as well as higher average cash and investment balances year over year. Interest and investment income may decline as market yields continue to decrease.

      Consolidated interest and investment income increased approximately $5.4 million from fiscal year 1999 to 2000, primarily due to increased cash, cash equivalent, and short-term investment balances.

Loss on Investments

      During fiscal year 2001, we recognized consolidated losses totaling approximating $13.8 million on various strategic investments held at cost. The losses represented write-offs or write-downs of the carrying amount of these investments and were due to, among other factors, an investee’s significant decline in common stock value, the inability for an investee to obtain additional private financing, the suspension of an investee’s current operations, and uncertain financial conditions of the investees. We have evaluated our

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Foreign Exchange (Loss) Gain

      Consolidated foreign exchange gains reflect the net gain and losses on foreign exchange forward contracts (net of fees), translation gains and losses from our foreign operations, and gains and losses from foreign currency transactions. We enter into foreign exchange forward contracts to reduce economic exposure associated with sales and asset balances denominated in various foreign currencies. Due to the relative strength of the dollar against foreign currencies throughout the first nine months of fiscal year 2001, our forward contracts resulted in a gain of $5.3 million for fiscal year 2001, offset by currency transaction losses of $3.2 million.

      Foreign exchange losses during fiscal years 2000 and 1999 remained relatively consistent at approximately $321,000 and $110,000, respectively.

Other

      Other expense increased $1.3 million in fiscal year 2001, as compared to fiscal year 2000. During fiscal years 2000 and 1999, other expense was approximately $118,000 and other income was approximately $3.9 million, respectively. Other income and expense primarily consists of bank fees, investment management fees, and other miscellaneous non-operating income and expense items.

Provision for income taxes

      We recorded a tax provision of $8.7 million in fiscal year 2001, compared to a tax provision of $12.0 million in fiscal year 2000 and $7.6 million in fiscal year 1999. The overall effective tax rate for the provision as of March 31, 2001 was approximately 40%. The effective tax rate on normalized operations was 23% for the year ended March 31, 2001. The effective tax rate on normalized operations excludes shockwave.com losses, in-process research and development from acquisitions, impairment of venture investments, and impairment and amortization of intangibles. The effective tax rates on normalized operations for the years ended March 31, 2000 and 1999 were 26% and 28%, respectively. The decrease in the effective tax rate reflects foreign operating results that were taxed at rates lower than the U.S. statutory rate, the utilization of research and experimentation tax credits, and net operating loss carryforwards.

Liquidity and Capital Resources

      The following table summarizes our cash flow activities for the periods indicated (in thousands):

      Operating activities for fiscal year 2001 provided $66.7 million, a 74% increase from 2000, primarily due to the increase in net income, adjusted for in-process research and development, depreciation and amortization, impairment of investments, and other non-cash charges. These were partially offset by adjustments to net income for minority interest, and changes in our operating assets and liabilities. For the year ended March 31, 2001, cash used in investing activities was $118.2 million, representing an increase of 204% compared to the same period in fiscal year 2000. Cash from investing activities was primarily used to purchase and develop

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      In fiscal year 2001, we made investments in property and equipment totaling $65.3 million. This was primarily related to the build out of facilities and the continued expansion of information technology infrastructure to support the overall growth of the business. In fiscal year 2002, we anticipate spending approximately $35.0 million on capital expenditures, primarily relating to information technology infrastructure, equipment, and the build out of facilities.

      As of March 31, 2001, cash, cash equivalents, and short-term investments were $178.0 million and working capital was $139.5 million. As of March 31, 2001, cash, cash equivalents, and short-term investments decreased by $9.1 million and working capital decreased by $42.7 million as compared to March 31, 2000.

      The treasury stock program approved by the Board of Directors in July 1997 and October 1998 provided for repurchases of up to 4.0 million shares of our common stock. During fiscal year 2000, we repurchased 198,000 common shares for $8.2 million. In connection with the acquisition of ESI Software, Inc., the Board of Directors rescinded the repurchase program.

      We continue to evaluate current and forecasted cash flow as a basis for financing operating requirements and capital expenditures. We believe that we will have sufficient liquidity from cash flow from operations, access to capital markets, and working capital to finance anticipated capital expenditures and to fund working capital requirements for the next twelve months.

Subsequent Events

      Restructuring. In April 2001, we began executing a restructuring and cost containment plan delivering cost synergies associated with the Allaire acquisition and aligning our cost structure with the weaker business environment. In connection with the restructuring, we terminated approximately 200 employees, primarily in the sales and marketing and general and administrative functions, and as a result, incurred employee termination costs such as severance benefits. In addition, we will incur additional charges associated with vacating certain facilities and potential asset write-offs. We expect to record these charges beginning in the first quarter of fiscal year 2002. The total expected restructuring charge is estimated to be in excess of $15.0 million.

      Option Exchange. On May 4, 2001, we announced an offer for existing stock option holders to exchange outstanding stock options for new options to be granted in excess of six months and one day from the date the offer expires, which is June 4, 2001 (the “Option Exchange”). Under the terms of the Option Exchange, option holders will receive an equal number of options for those they elected to exchange sometime between December 5, 2001 and January 21, 2002 with exercise prices at the then fair market value. Options that were granted and are outstanding under the Macromedia, Inc. 1992 Equity Incentive Plan, the Macromedia, Inc. 1999 Stock Option Plan and the Andromedia, Inc. 1999 Stock Plan, along with some non-plan option grants that were originally granted by Macromedia, are eligible under the Option Exchange. In addition, the vesting period of options exchanged in connection with the Option Exchange will remain the same as the original grant, with time between the cancel date and the replacement grant date under the Option Exchange included in the vesting term. We will not incur any financial statement impact as a result of the initial cancellation upon acceptance of the Option Exchange, but may incur potential dilution of income per share upon the subsequent issuance of options in the December 2001 and January 2002 time frame.

      Amendments to Macromedia’s Bylaws. In May 2001, our board of directors adopted amendments to our bylaws to limit the manner in which a special meeting of the stockholders may be called, to require an advance notice to the board of directors of any such special meeting of the stockholders, and to limit the scope of business that may be brought forth in such meeting. In addition, the bylaws were further amended to clarify that any reduction in the number of authorized directorships would not decrease the remaining terms of then incumbent directors, to clarify the manner in which the date of each board meeting may be set, and to grant

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      AtomShockwave Restructuring — During the fourth quarter of fiscal year 2001 we evaluated all of our strategic investments for impairment, primarily due to the current economic conditions that existed, as well as known events which transpired during the fourth quarter of fiscal year 2001. Included in this evaluation was the assessment of our investment in AtomShockwave. As of March 31, 2001, we determined that the carrying value of $31.3 million recorded on our balance sheet was not impaired. Subsequent to this assessment, AtomShockwave announced on June 1, 2001 that it would be terminating a significant portion of its workforce and closing several offices in conjunction with a planned restructuring. As a result, we are currently preparing an impairment analysis on our investment in AtomShockwave.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

      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. Our primary competitors include, among others, Adobe, Microsoft, and Corel. In addition, we may be deemed to compete with large Web and database platform companies that offer a variety of software products, such as IBM, Oracle, and Sun Microsystems, as well as a number of companies that offer Web application servers, such as BEA Systems, Hewlett Packard, SilverStream Software and ATG. Several of our current and potential competitors have greater financial, marketing, and technical resources than we do. As we compete with larger competitors across a broader range of product lines and different platforms, we may face increasing competition from such companies or from other companies.

      Dependence on the Growth of the Internet and the Viability of Web-based Customers — Our success and the demand for our products depends largely on the continued viability of our Web-based customers and the continued growth in the use of the Internet. Many of these 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 is 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. Further, 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. Accordingly, our continued growth depends in part on the adoption of the Internet internationally as well as domestically.

      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 March 20, 2001, we consummated an acquisition of Allaire Corporation. 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, the acquisition may 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

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      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 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. In addition, the demand for certain of our products, including Macromedia JRun application, could be harmed if the Java programming language loses market acceptance. While a number of companies have introduced Web applications based on Java, the demand for Java-based applications could decrease, and support of the Java programming language could decline as alternative programming languages are introduced. A continued decline in the growth of the Internet or the Java programming language or any inability by us to adapt to changes in the Internet or the technology used for operation of the Internet, including Java, could have a material adverse effect on our results of operations.

      Fluctuations of Operating Results; Product Introduction Delays; Product Defects — Our operating results, especially quarterly 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. In the past we have experienced delays in the development of new products and enhancement of existing products, and such delays may occur in the future. If we are unable, due to resource constraints or technological 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, 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 our 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.

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      In addition, our business could be adversely affected if any new products or new version of existing products fail to perform properly. Software products may contain undetected errors or “bugs”, which may result in product failures or security breaches or otherwise fail to perform in accordance with customer expectations. The occurrence of errors could result in loss of or delay in revenue, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation, or damage to our efforts to build brand awareness, any of which could have a material adverse effect on our business, operating results, and financial condition.

      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 Web site. Domestically, our products are sold primarily through distributors, VARs, and OEMs. In particular, Ingram Micro accounted for 28% of revenues for the years ending March 31, 2001 and 2000. 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 year ended March 31, 2001 we derived approximately 43% of our consolidated 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 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 foreign economies will continue in the foreseeable future due to, among other things, 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 March 31, 2001, the notional amount of forward contracts outstanding amounted to $10.8 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 countries.

      There can be no assurance that all issues related to the Euro conversion have been identified, and we may be at risk if we, or 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 53% 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

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      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 reporting period, 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 patent, copyright, trade secret, 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 patent, copyright, trade secret, and trademark protection may not be available in every country in which our products are distributed.

      Further, 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.

      Venture and Equity Investments — We have invested 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.

      California’s Energy Crisis — California is currently experiencing an energy crisis and has recently experienced significant power shortages. As a result, energy costs in California have risen and may continue to rise significantly over the next year. Because our principal operating facilities are located in California, our operating expenses may increase significantly if this trend continues. In addition, California has been initiating and may continue to initiate rolling blackouts through the state. If blackouts interrupt our power supply, we may be temporarily unable to operate at full capacity. Moreover, the energy crisis could cause or contribute to a slowdown in the national economy, which could cause a reduction in demand for our products, and could in turn, materially and adversely affect our business.

      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.

Interest Rate Risk

      Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. As stated in our policy, we are adverse to principal loss and ensure the safety and preservation of our invested funds by limiting default and market risks. We place our investments with high credit-quality issuers, and the

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      The table below represents cost and carrying amounts and the related weighted average effective interest rates by year of maturity for our investment portfolio as of March 31, 2001. The table does not include cash and marketable equity securities as of March 31, 2001 (in thousands).

      We also have loans outstanding to related parties totaling $14.5 million as of March 31, 2001. The stated loan amounts approximate fair value.

Foreign Currency Risk

      We enter into forward contracts to reduce our exposure to foreign currency fluctuations involving probable anticipated, but not firmly committed, transactions with firm foreign currency commitments occurring within one year. We do not enter into derivative financial instruments for trading purposes.

      As a result of this activity, we had outstanding forward contracts in Euro and Japanese Yen as of March 31, 2001. The forward contracts are accounted for on a marked-to-market basis, with realized gains or losses recognized in the consolidated statements of income. As of March 31, 2001 and 2000, the contract amount of the forward contracts amounted to $10.8 million and $21.6 million, respectively. The future value of these contracts is subject to market risk resulting from foreign exchange rate volatility. Current market rates at the consolidated balance sheet date were used to estimate the fair value of foreign currency forward contracts.

      The table below provides information about our outstanding forward contracts as of March 31, 2001. The information is provided in U.S. dollar equivalents, in thousands. The table presents the notional amount of the respective contracts and their fair value (at rates in effect as of March 31, 2001):

      We are exposed to credit loss in the event of nonperformance by counter-parties, although we do not anticipate nonperformance by these counter-parties.

Disclosure of limitations of the tabular presentation

      As the tables above incorporate only those exposures that exist as of March 31, 2001, we do not consider those exposures or positions that could arise after that date. Also, because the foreign currency denominated financial assets, and anticipated transactions are not presented in the table above, the information presented has limited predictive value. As a result, our ultimate realized gain or loss with respect to foreign currency fluctuations will depend on the exposures that arise during the period, our hedging strategies at the time, and foreign currency rates.

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Market Price Risk

      We are exposed to market risk from changes in the price of our equity securities held available-for-sale, which were recorded at a fair market value of approximately $560,000 at March 31, 2001. The equity investments held by us have exposure to price risk, which is estimated as the potential loss in fair market value due to a hypothetical change of 10% in quoted market prices. This hypothetical change would reduce our investments as well as any unrealized gains, which are included as a component of stockholders’ equity. This hypothetical change would not have a material effect on the recorded value of our investments. We have a policy of evaluating the viability of our investments on a regular basis, primarily by reviewing the companies’ stock price activity, as the securities are traded on a public exchange.

      In addition, we have investments in several privately held companies. These investments are risky due to the investee’s start-up technologies, which may never materialize. Accordingly, we evaluate the viability of these investments by reviewing, among other things, an investee’s cash position, subsequent financing rounds, historical financial activity, and future operating forecasts. If we believe that there is an other-than-temporary impairment in value, it is our policy to write down the investment to its fair value.

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors

      We have audited the accompanying consolidated balance sheets of Macromedia, Inc. and subsidiaries as of March 31, 2001 and 2000, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2001. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index in Item 14(a)2 herein. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Macromedia, Inc. and subsidiaries as of March 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

	/s/ KPMG LLP

Mountain View, California

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MACROMEDIA, INC. AND SUBSIDIARIES

ASSETS

See accompanying notes to consolidated financial statements.

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MACROMEDIA, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

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MACROMEDIA, INC. AND SUBSIDIARIES