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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended March 31, 1998; or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______ to _____.
COMMISSION FILE NO. 0 - 22688
MACROMEDIA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94 - 3155026
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
600 TOWNSEND STREET,
SAN FRANCISCO, CALIFORNIA 94103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 252-2000
Securities registered pursuant to Section 12(b)
of the Act: NONE
Securities registered pursuant to Section 12(g)
of the Act: COMMON STOCK, PAR VALUE
$0.001 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark 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 [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on May 29,
1998 ($15.844) as reported on the Nasdaq National Market, was approximately
$530,801,600. Shares of Common Stock held by each officer and director and by
certain persons who owned 5% or more of the Registrant's outstanding Common
Stock on that date have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of Friday, May 29, 1998 Registrant had outstanding 39,221,116 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders to be held at 1:00 PM, Thursday, July 30, 1998 at 600 Townsend St.,
Suite 310W, San Francisco, California 94103 are incorporated by reference in
Part III.
MACROMEDIA, INC.
1998 FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Item 4A. Executive Officers of the Registrant 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stock
Holder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 37
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management 38
Item 13. Certain Relationships and Related Transactions 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 39
Signatures 44
Macromedia, Inc.
1998 Form 10-K
PART I
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements such as statements of the Company's expectations,
plans, objectives and beliefs. These forward-looking statements are subject to
material risks and uncertainties discussed in this Form 10-K, including those
set forth under Factors that May Affect Future Results of Operations, contained
in Item 7 of this Part II. As a result, the Company's actual results could
differ materially from those described in the forward-looking statements.
ITEM 1. BUSINESS
GENERAL
Macromedia, Inc. ("Macromedia" or "the Company") develops and distributes
original technologies and innovative software tools, servers and services to a
range of customers including developers, consumers and large corporate accounts.
The Company's products and services are focused on maximizing opportunities in
three key areas: Web Publishing, Web Traffic, and Web Learning.
WEB PUBLISHING addresses designers and developers need to create and distribute
rich interactive animations, applications, web sites and entire environments on
the web. Using Macromedia software tools and systems, creative professionals can
quickly and cost effectively produce and deliver high-quality graphics,
entertainment, and information to consumers worldwide. Macromedia also provides
technology that allows consumers to experience engaging, interactive content
when visiting the web.
WEB TRAFFIC builds web sites that attract a large and growing audience of
customers and consumers and then sells advertising and sponsorships for those
sites. Macromedia's web sites, WWW.MACROMEDIA.COM and WWW.SHOCKRAVE.COM, attract
millions of new and repeat visitors every month.
WEB LEARNING focuses on the opportunities provided by corporate Intranets and
the web for cost-effectively training geographically diverse groups of people.
Macromedia's learning solutions provide corporate enterprises, educational
institutions, and governmental agencies with the tools to author, deliver, and
manage online training solutions for corporate and academic learning worldwide.
To further expand the Company's offerings for Web Learning, in October 1997,
Macromedia acquired Solis Design, Inc., a leader in open, online learning
management systems. The Company is now offering the Solis Pathway product line
as Macromedia Pathware.
Macromedia was incorporated in Delaware on February 25, 1992, and has acquired
several other businesses since its incorporation. The Company principal
executive office is located at 600 Townsend, San Francisco, California 94103 and
its telephone number is 415/252-2000. Macromedia's common stock is listed on the
NASDAQ National Market under the symbol MACR. The Company's World Wide Web site
can be accessed at WWW.MACROMEDIA.COM.
PRODUCTS
The Company's products are used by creative professionals, multimedia developers
and training professionals, working independently or in organizations ranging
from large corporations to small companies, as well as in educational
institutions of every size, who want to publish content for the web as well as
traditional output media such as print and CD-ROM. The Company's products
currently run on Microsoft Windows and Apple Macintosh platforms.
Page 1
Macromedia, Inc.
1998 Form 10-K
Macromedia's organization and products are structured into four business units:
Internet and Multimedia Authoring Tools (IMAT), Graphics, Web Traffic, and
Interactive Learning. Each business unit is responsible for the profit or loss
of its respective product lines.
INTERNET AND MULTIMEDIA AUTHORING TOOLS -- The IMAT business unit develops and
markets a full line of software and servers that meets the needs of web and
multimedia developers. These products include:
- Director-Registered Trademark- -- the leading multimedia authoring and
production tool for developing interactive multimedia applications for
the web and CD/DVD-ROM.
- Dreamweaver-TM- -- a visual tool for professional web site design that
offers the productivity of a visual web page layout tool, the control
of an HTML text editor, and support for Dynamic HTML.
- Flash-TM- -- a vector design tool that allows web developers to create
interactive graphics and animations for the web.
- Flash Generator-TM- -- a server-based product that allows for the
real-time, automated creation of data-driven graphics and animations.
- Shockwave-TM- -- a technology that is built into Macromedia products
to optimize interactive multimedia files for delivery on the web.
GRAPHICS -- The Graphics business unit develops and markets software that meets
the needs of graphic designers and illustrators for delivery on the web or in
print. These products include:
- FreeHand-TM- -- an illustration and page layout tool for publishing
documents and creating graphics for print and the Web.
- Fireworks-Registered Trademark- -- a web production tool for creating,
optimizing, and editing web graphics, both bitmaps and vectors.
WEB TRAFFIC -- The Web Traffic business unit provides services to Macromedia
customers and consumers by providing rich interactive multimedia content on the
Company's web sites.
- WWW.MACROMEDIA.COM, ranked as one of the top destinations on the
Internet, is a destination site for consumers who come to download the
Shockwave plug-in. The Company also provides information on Macromedia
and its products, extensive online help, technical support, and a
Company store on the site.
- WWW.SHOCKRAVE.COM is a free online entertainment service featuring
exclusive Shockwave content created by leading entertainment companies
and developers, and supported by advertising and sponsorship revenue.
The ShockRave site is an established showcase for Macromedia's
Internet technologies and tools.
INTERACTIVE LEARNING -- The Interactive Learning business unit provides content
development tools and complete systems and services for developing enterprise
solutions for corporate and academic learning that meet the needs of training
specialists, educators, and education content developers. Products include:
- Authorware-Registered Trademark- -- a visual authoring tool for
producing web and CD/DVD-ROM-based, interactive multimedia learning
applications.
- Pathware-TM- -- a complete computer-managed instruction system that
streamlines the administration of enterprise learning programs based on
the AICC (Aviation Industry Computer-based training Consortium) open
standard.
Page 2
Macromedia, Inc.
1998 Form 10-K
CORE TECHNOLOGIES
Macromedia strongly believes in the value to its customers of supplying and
developing industry standards. The Macromedia Open Architecture enables
developers to write Xtras (plug-ins) that work across the Company's product
lines.
In April, 1998 the Company announced that it is making its popular Flash file
format (.swf) available as an open Internet standard for vector graphics and
animation. The move enables platform vendors to provide a more attractive
development and playback environment to content publishers, allows web designers
to make animation a standard element in their web site designs, and enables
developers to deliver Flash-compatible authoring and editing tools. Our existing
products support standards such as HTML, DHTML, and we are members of standards
committees such as World Wide Web Consortium.
PRODUCT DEVELOPMENT
The Company's business strategy emphasizes developing products, servers, and
services which address the World Wide Web and the problems developers face as
they deliver to a new platform, with multiple standards, multiple browsers, and
different bandwidth rates.
Since the software industry is characterized by rapid technological change, a
continuous high level of expenditure is required in order to enhance existing
products and develop new products. The Company plans to continue internal
product development efforts, and from time to time, as appropriate, to acquire,
additional software and system technologies that it considers critical to
solving the needs of multimedia, graphic arts, web development professionals and
consumers.
The Company believes that its future success will depend on its ability to
enhance its existing products and to develop and introduce new products on a
timely basis. It is critical that new products and enhancements keep pace with
the constantly evolving Internet and competitive offerings. Macromedia intends
to adapt products to new hardware and software platforms, and embrace emerging
industry standards. In addition to its existing products, Macromedia has a
number of new products under development. Any delay in the introduction of
enhanced versions of existing products, or new products' availability and/or the
acceptance of these products by users could have a material adverse impact on
the results of operations.
For fiscal 1998, 1997, and 1996, the Company's research and development expenses
were $32.2 million, $30.0 million, and $20.0 million, respectively.
MARKETING
Macromedia generates awareness and demand for its products through its web
sites, WWW.MACROMEDIA.COM and WWW.SHOCKRAVE.COM, public relations activities,
customer seminars, advertising both on the web and in print, and national and
regional trade shows. The Company also uses direct mail, both e-mail and print,
to introduce new products and upgrades and to cross-sell products to current
customers. In addition, Macromedia sells its products by distributing a variety
of interactive multimedia demonstration materials directly to prospective
customers, and then follows up through outbound telemarketing.
Page 3
Macromedia, Inc.
1998 Form 10-K
SALES AND DISTRIBUTION
A substantial majority of the Company's revenues is derived from the sale of its
products worldwide through a variety of distribution channels, including
electronic commerce on the web, direct sales, mail order, traditional software
distributors, educational distributors, value-added resellers (VARs), original
equipment manufacturers (OEMs), hardware and software superstores, and retail
dealers. For certain large customers, the Company enters into licensing
agreements under which the customer has the right to reproduce and use
Macromedia software. One distributor, Ingram Micro, Inc., accounted for 28%, 24%
and 21% of revenues in fiscal 1998, 1997 and 1996, respectively.
Internationally, the Company's products are sold through distributors. With
distributors in more than 50 countries around the world, international sales
accounted for 48% of total revenues during the last fiscal year. In certain
cases, the distributor has exclusive distribution rights to certain products or
for certain platforms in its country and, in certain cases, has the
responsibility for preparing "localized" versions of Macromedia's products in
the language of the country. The Company believes that the international markets
for its products present a strategic opportunity and expects that international
sales will continue to generate a significant percentage of its total revenues.
The direct sales force at Macromedia focuses primarily on enterprise sales of
the Pathware product. The sales cycle with respect to Pathware license sales may
be lengthy and may be subject to integration and acceptance by the customer. The
Company also employs an indirect sales force that works closely with its major
distributor and reseller accounts to manage the flow of orders, inventory
levels, and sell-through into other channels.
The Company believes that electronic commerce will increasingly become an
important and cost effective form of distribution in the future and is heavily
investing in technologies and the associated infrastructure to support this form
of distribution.
CUSTOMER SUPPORT
The Company provides customer support on a complimentary basis via designers and
developers centers for each Macromedia product on WWW.MACROMEDIA.COM, where
customers can search more than 2,000 online technical documents to answer their
questions and participate in discussion forums with other customers and
Macromedia employees. The Company provides complimentary technical support to
customers via phone and fax for a period of 90 days after the first technical
support contact from a customer. Thereafter, the Company offers a technical
support plan, Priority Access(TM), that provides the customer with access to a
toll-free support line; priority in the call queue; priority response to e-mail,
mail, and fax inquiries; and 24-hour voicemail messaging. The Company also
offers high-end developer support and per-incident support.
COMPETITION
Sales of the Company's Director, FreeHand, and Authorware products have
generally represented and are expected to continue to represent a majority of
the Company's total revenues during fiscal 1999. The Company expects that its
revenues will continue for the foreseeable future to be substantially dependent
on these products. A decline in sales of any of these products, as a result of
competition, technological change, or other factors, would have a materially
adverse effect on the Company's results of operations. In the past, a majority
of the Company's revenues has been derived from its products for the Macintosh.
Although sales of the Company's products for Windows and cross-platform products
accounted for 56% of the Company's total revenues in fiscal 1998 and are
expected to become an increasingly important component of the Company's
revenues, a leveling-off
Page 4
Macromedia, Inc.
1998 Form 10-K
or decline in the sales rate of Macintosh computers or shifts in mail order
or other distribution mechanisms for Macintosh products could have a material
adverse effect on the Company's results of operations.
The Company believes that the principal competitive factors in the web
publishing tools, graphic arts, and multimedia categories are product features
and quality, price, ease-of-use, brand name recognition, access to both
electronic and physical distribution channels, reliability and quality of
support services. The Company believes that it competes favorably with respect
to each of these factors. In the event that price competition significantly
increases, competitive pressures could cause the Company to reduce the prices of
its products, which would result in reduced profit margins. Prolonged price
competition would have a material adverse effect on the Company's operating
results and financial condition. A variety of other potential actions by the
Company's competitors, including increased promotion and accelerated
introduction of new or enhanced products, could have a material adverse effect
on the results of operations.
Although the Company believes that its principal products have achieved market
acceptance, there can be no assurance that they will continue to do so. In
addition, there can be no assurance of market acceptance as the Company
introduces new products. Furthermore, there is a possibility that new personal
and network computer hardware platforms, new multimedia delivery systems, the
emergence of new standards and other technological changes may provide new
entrants with opportunities to make substantial inroads into the graphic arts,
multimedia, or web publishing tools market having a material adverse effect on
the results of operations.
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of copyright, trade secret, and trademark
laws, and employee and third-party nondisclosure agreements, to protect its
intellectual property rights and products. The Company distributes its software
under a "shrink-wrap" and/or "click-wrap" license agreement and generally does
not obtain signed license agreements from its end users. The Company uses a
hardware lock-out device with respect to certain versions of its software that
are sold internationally but otherwise does not copy-protect its software. It
may be possible for unauthorized third parties to copy the Company's products or
to reverse engineer or obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which software piracy
of its products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of certain countries in which the Company's
products are or may be distributed do not protect the Company's products and
intellectual rights to the same extent as the laws of the United States.
The Company believes that its products, intellectual property, and other
proprietary rights do not infringe on the proprietary rights of third parties.
From time to time, however, the Company has received communications from third
parties asserting that features or content of certain of its products may
infringe intellectual property rights of such parties. To date, no such claim
has resulted in litigation or in the payment of any claims, and the Company
believes that the impact of any such known claims will be immaterial. However,
as the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that its
software increasingly will become the subject of claims that such software
infringes the rights of others. There can be no assurance that third parties
will not assert infringement claims against the Company in the future or that
any such assertion will not result in costly litigation or require the Company
to obtain a license to intellectual property rights of third parties. There can
be no assurance that such licenses will be available on reasonable terms or at
all. The Company licenses certain software products from other companies to
create suites of multimedia products. There can be no assurance that upon the
expiration of these licenses, such licenses will be available on reasonable
terms or at all, or that similar products could be obtained to substitute into
the suites.
Page 5
Macromedia, Inc.
1998 Form 10-K
MANUFACTURING AND SHIPPING
The Company is dependent on a sole source, Modus Media ("Modus"), for the
manufacture and shipment of its finished products. The manufacture of the
Company's products typically consists of duplicating diskettes, pressing
CD-ROMs, printing manuals, and packaging and assembling finished products, all
of which are in accordance with the Company's specifications and forecasts. The
Company currently performs quality assurance testing at its own facilities.
Modus operates multiple facilities that are capable of serving the Company's
needs, and the Company believes any alternative sources could be implemented
without undue delay. To date, the Company has not experienced any material
difficulties or delays in the manufacture or assembly of its products or
material returns due to product defects.
The Company believes that electronic software distribution and online
documentation will increasingly become an important and cost effective form of
manufacturing in the future and is investing in technologies and infrastructure
to support this form of distribution.
EMPLOYEES
As of March 31, 1998, the Company had 491 full-time employees, including 59 in
North American sales; 38 in international sales; 100 in marketing; 215 in
development, quality assurance, and documentation; and 79 in finance and
administration. The employees and the Company are not parties to any collective
bargaining agreements, and the Company believes that its relations with its
employees are good.
ITEM 2. PROPERTIES
The Company's primary facility consists of approximately 125,000 square feet
located in a multi-story building in San Francisco, California. This space
houses a majority of the Company's United States operations. The facility is
leased pursuant to an agreement that expires August 31, 2005. Macromedia has two
options to renew for successive five-year terms at 95 percent of the then
current fair market value of the space. The Company also holds a right of first
refusal to additional space when it becomes available. Approximately 25,000
square feet of this facility is not currently occupied by the Company and has
been sub-leased. The Company owns a four- story 100,000 square foot facility,
located on land purchased in Redwood City, California. The Company is occupying
50,000 square feet and is leasing the remaining 50,000 square feet. The Company
occupied the building on May 5, 1997 by transferring its employees from its San
Mateo locations where the Company was leasing 29,665 square feet. The Company
entered into sub-lease agreements to cover the remaining lease periods at the
former San Mateo locations. In addition, the Company currently leases
approximately 20,000 square feet in Richardson, Texas. The Company also leases
space in North America for field sales offices, in Berkshire, England, for its
European operations, Victoria, Australia, for its Asia Pacific operations and in
Tokyo, Japan, for its Japanese operations. The Company believes its 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.
Page 6
Macromedia, Inc.
1998 Form 10-K
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 or current officers
and directors engaged in securities fraud in violation of California
Corporations Code Sections 25400 and 25500 by seeking to inflate the value of
Macromedia stock by issuing statements that were allegedly false or misleading
(or omitted material facts necessary to make any statements made not false or
misleading) regarding the Company's financial results and prospects. Plaintiffs
seek to represent a class of all persons who purchased Macromedia common stock
from April 18, 1996 through January 9, 1997. Four similar complaints by persons
seeking to represent the same class of purchasers subsequently have been filed
in San Francisco Superior Court, and consolidated for pre-trial purposes with
Rosen. Defendants filed demurrers to the complaint and other motions which were
argued on December 19, 1997 and January 5, 1998. Before the demurrers could be
heard, one defendant, Richard Wood, died in an automobile accident. The Court
sustained in part and overruled in part the demurrers by order dated March 6,
1998. Claims against Susan Bird were dismissed with leave to amend and the Court
overruled the demurrers as to Macromedia, John Colligan, James Von Ehr, II, and
Kevin Crowder. The Plaintiffs did not file an amended complaint. Discovery is
now proceeding. By agreement of the parties, the rulings apply to the other
state court actions, and separate answers to the remaining complaints need not
be filed.
On September 25, 1997, a complaint entitled City Nominees v. Macromedia, Inc.
et al., (Case No. C-97-3521-SC) was filed in the United States District Court
for the Northern District of California. The complaint alleges that
Macromedia and five of its former or current officers and directors engaged
in securities fraud in violation of Sections 10 and 20(a) of the Securities
and Exchange Act of 1934 by seeking to inflate the value of Macromedia stock
by issuing statements that were allegedly false or misleading (or omitted
material facts necessary to make any statements made not false or misleading)
regarding the Company's financial results and prospects. Plaintiffs seek to
represent a class of all persons who purchased Macromedia common stock from
April 18, 1996 through January 9, 1997. Three similar complaints by persons
seeking to represent the same class of purchasers subsequently have been
filed in United States District Court for the Northern District of
California. All of these cases have been consolidated. Lead plaintiffs and
lead counsel have been appointed under the provisions of the Private
Securities Law Reform Act by the District Court pursuant to an Order of
January 23, 1998. A consolidated complaint was filed on February 13, 1998.
Defendants promptly moved to dismiss, which motion was granted by order filed
May 18, 1998, on the grounds that plaintiffs' claims were barred by the
applicable statute of limitations. Discovery has been stayed by operation of
statute and local rule.
All complaints seek damages in unspecified amounts, as well as other forms of
relief. The Company believes the complaints are without merit and intends to
vigorously defend the actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Page 7
Macromedia, Inc.
1998 Form 10-K
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the Company's
current executive officers as of May 29, 1998:
NAME AGE POSITION
---- --- --------
Robert K. Burgess 40 Chief Executive Officer, President and Director
Brian J. Allum 40 Senior Vice President, Worldwide Field Operations
Joseph D. Dunn 41 Senior Vice President, Products and Technology
Norman K. Meyrowitz 38 President, Macromedia Products
Elizabeth A. Nelson 37 Senior Vice President, Chief Financial Officer and Secretary
Mr. Burgess has been Chief Executive Officer, President, and a director of the
Company since November 1996. Prior to joining the Company, Mr. Burgess was
Senior Vice President of Silicon Graphics, Inc., responsible for the Silicon
Interactive Strategic Business Unit. Prior to this position, he was President of
Alias/Wavefront, a wholly-owned independent software subsidiary of Silicon
Graphics, created from the 1995 merger of Alias Research, Inc. and Wavefront
Technologies, Inc. From 1992 to 1995, he was President, CEO, COO and Director of
Alias Research. Prior to joining Alias Research, Mr. Burgess held a number of
senior management positions at Silicon Graphics, including Vice President of
Marketing, Applications and Business Development (1991), Vice President of
Applications (1990) and President of Silicon Graphics Canada, Inc., (1984-90).
Mr. Burgess earned a B.S. degree in Commerce from McMaster University.
Mr. Allum has been Senior Vice President of Worldwide Field Operations since
July 1997 and has responsibility for all sales, field marketing, customer
service and support functions at Macromedia. From May 1996 until he joined
Macromedia, Mr. Allum was President of Alias/Wavefront, a wholly-owned
independent software subsidiary of Silicon Graphics, created from the 1995
merger of Alias Research, Inc. and Wavefront Technologies, Inc., and Vice
President/General Manager of Silicon Graphics. Prior to this position, he was
Vice President of Field Operations of Alias/Wavefront. From 1991 to 1995, he was
Vice President of Field Operations of Alias Research. Prior to joining Alias
Research, Mr. Allum held a variety of senior management and sales positions at
Silicon Graphics Canada (1985-1991) and Digital Equipment Corporation
(1981-1985). Mr. Allum graduated from Queens University with a B.S. degree in
Commerce.
Mr. Dunn has been Senior Vice President of Products and Technology since
February 1998. Previous to this position, Mr. Dunn was Vice President of
Corporate Development and has performed various senior roles at Macromedia since
1991 including Vice President of Engineering from 1992 to 1995 and Vice
President of Product Management from 1995 to 1996. Prior to joining Macromedia,
Mr. Dunn was the Director of Software Development at Frame Technology in Santa
Clara, CA. From 1981 to 1987, Mr. Dunn held a variety of technical and
management positions at Acorn Computers, in the development of system software
for personal computers. He graduated with a B.S. degree in Computer Science from
Cambridge in 1980.
Mr. Meyrowitz has been President, Macromedia Products, since April 1998 and is
responsible for overall management of business units which design, develop, and
market Macromedia products. Prior to that he was Chief Technology Officer
commencing February 1996, and Senior Vice President and General Manager of the
Company's Internet and Multimedia Authoring Business from January 1997. From
October 1994 to February 1996, he was Vice President of Product Development, and
from October 1993 to October 1994, he was Director of Strategic Technology. From
May 1991 to October 1993, he served as Director of System/User Software at GO
Corporation. From October 1981 to May 1991, he served in various positions at
Brown University; in his last position, he was Co-Director of the university's
Institute for Research in Information and Scholarship (IRIS) where he managed
and was the principal architect of IRIS's Intermedia system. Mr. Meyrowitz
graduated from Brown in 1981 with a B.S. degree in Computer Science. He is a
member of the ACM and the IEEE Computer Society.
Page 8
Macromedia, Inc.
1998 Form 10-K
Ms. Nelson has been Senior Vice President, Chief Financial Officer and Secretary
of the Company since February 1998. Ms. Nelson joined Macromedia in July 1996 as
Vice President, Corporate Development, where she was responsible for managing
mergers and acquisitions and strategic planning. From 1986 to July 1996, Ms.
Nelson worked at Hewlett-Packard, where she held positions in both Corporate
Development and Financial Reporting and Analysis. From 1982 to 1986, she was a
consultant with Robert Nathan Associates, an economic consulting firm, in
Washington, D.C. Ms. Nelson holds an M.B.A. in Finance with Distinction from the
Wharton School at the University of Pennsylvania and a B.S. degree from
Georgetown University.
Page 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the NASDAQ National Market under the
symbol MACR. The following table sets forth, for the periods indicated, the high
and low closing prices for the Company's common stock as reported by NASDAQ.
FISCAL 1998 HIGH LOW
---- ---- ---
4th Quarter $15.00 $7.90
3rd Quarter 14.34 7.13
2nd Quarter 13.50 7.63
1st Quarter 10.50 6.50
FISCAL 1997 HIGH LOW
---- ---- ---
4th Quarter $18.25 $ 7.50
3rd Quarter 22.00 15.75
2nd Quarter 25.63 14.13
1st Quarter 48.63 21.25
The Company has not paid cash dividends and has no present plans to do so. There
were 483 stockholders of record as of May 29, 1998, excluding stockholders whose
stock is held in nominee or street name by brokers.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FIVE-YEAR FINANCIAL DATA
Years ended March 31,
-----------------------------------------------------------------------
(in thousands, except per share data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenues $ 113,086 $ 107,365 $ 116,691 $ 55,892 $ 37,542
Cost of revenues 14,997 23,246 19,600 9,618 6,478
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 98,089 84,119 97,091 46,274 31,064
- -----------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Sales and marketing 56,842 59,627 41,387 20,181 14,597
Research and development 32,231 30,013 20,033 12,360 10,106
General and administrative 11,452 8,135 5,466 3,491 3,009
Merger, relocation, and reorganization 7,658 350 2,525 3,025 (476)
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 108,183 98,125 69,411 39,057 27,236
- -----------------------------------------------------------------------------------------------------------------------------
Operating (loss) income (10,094) (14,006) 27,680 7,217 3,828
- -----------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (6,186) $ (5,920) $ 23,002 $ 6,538 $ 3,475
------------------------------------------------------------------------
------------------------------------------------------------------------
Net (loss) income per share
Basic $ (0.16) $ (0.16) $ 0.66 $ 0.22 $ 0.13
Diluted $ (0.16) $ (0.16) $ 0.59 $ 0.19 $ 0.12
Page 10
All income per share amounts reflect a two-for-one stock split which became
effective October 16, 1995 and have been restated to reflect the adoption of
SFAS 128 in December 1997.
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term investments $ 86,131 $ 102,451 $ 116,662 $ 33,981 $ 27,172
Working capital 81,787 93,761 119,005 33,273 28,217
Total assets 154,184 156,897 155,122 52,430 38,503
Long-term liabilities 569 - - 136 225
Total stockholders' equity 128,465 131,916 133,181 39,681 31,860
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion (presented in millions, except for share data) should
be read in conjunction with the consolidated financial statements and notes
thereto.
In addition to historical information, this Annual Report contains
forward-looking statements such as statements of the Company's expectations,
plans, objectives and beliefs. These forward-looking statements are subject to
material risks and uncertainties discussed in this Annual Report, including
those set forth under Factors that May Affect Future Results of Operations. As
a result, the Company's actual results could differ materially from those
described in the forward-looking statements.
OVERVIEW
Macromedia develops and markets software tools, servers, and services for web
publishing, multimedia, graphics and computer-based learning. The Company
distributes its products through a network of distributors, dealers, and
value-added resellers (VARs), as well as directly through its direct sales force
and from its web site. The Company sells its products worldwide and has
regional operations in North America, Europe, Japan, and Asia Pacific.
During fiscal 1998, the Company increased its focus on the web as the engine of
growth for the Company. The Company's principal products, Director, FreeHand and
Authorware, which together accounted for 84% of its fiscal 1998 revenues, were
significantly updated for the web. In addition, the Company invested heavily in
developing new products specifically for the web, such as Flash, Dreamweaver,
and Fireworks; and in October 1997, the Company acquired Solis Design, Inc.
(Solis) to add strength in managing enterprise-scale, web-based learning
solutions. During fiscal 1998, the Company stopped further development of
several smaller standalone products - xRes, E3D, SoundEdit and Backstage - and
reduced the level of training and consulting services it supplied directly to
customers, deciding instead to rely on channel partners to provide these
services to end users.
As of March 31, 1998 total cash and short-term investments totaled $86.1
million, net receivables stood at 25 days sales outstanding, and the Company
remained debt free. At March 31, 1998 the Company employed 491 full-time staff.
Additional information about Macromedia, its products, sales and marketing, and
investor information, can be found on the web at WWW.MACROMEDIA.COM.
Page 11
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods indicated
as a percentage of revenues.
1998 1997 1996
- -------------------------------------------------------------------------------
Revenues 100% 100% 100%
Cost of revenues 13 22 17
- -------------------------------------------------------------------------------
Gross margin 87 78 83
Operating expenses:
Sales and marketing 50 55 35
Research and development 28 28 17
General and administrative 10 8 5
Merger 7 - 2
- -------------------------------------------------------------------------------
Total operating expenses 95 91 59
Operating margin (8) (13) 24
Other income, net 4 4 4
Provision (benefit) for income taxes 1 (3) 8
- -------------------------------------------------------------------------------
Net margin (5%) (6%) 20%
-------------------------------------
-------------------------------------
REVENUES
Revenues were $113.1 million in fiscal 1998, a 5% growth over fiscal 1997
revenues of $107.4 million. Revenues in fiscal 1998 increased primarily from
sales of new products and an increase in Director sales, partially offset by a
decline in revenues from discontinued products, and a decline in service
revenues. During fiscal 1998, the Company introduced several new products,
including Flash, Dreamweaver, and Pathware, and has a number of new product
development efforts under way. A significant portion of future revenues is
dependent upon the timely introduction and ultimate success of these activities.
Windows and cross-platform product revenues increased 34%, while Macintosh-based
revenues declined 17%. Windows and cross-platform product revenues represented
56% of revenues for fiscal 1998 compared to 44% for fiscal 1997 and 34% for
fiscal 1996.
International revenues represented 48% of revenues in fiscal 1998 compared to
51% of revenues in fiscal 1997 and 42% of revenues in fiscal 1996. During fiscal
1998, the Company experienced a significant decline in revenue in the fourth
quarter from the Asia Pacific region, particularly the Japanese market, as a
function of both macroeconomic and industry specific trends. The Company remains
cautious about the economic conditions in the Asia Pacific region. See Factors
That May Affect Future Results of Operations - Risks of International Operations
for additional information.
Revenues in fiscal 1997 were $107.4 million, down 8% from revenues of $116.7
million in fiscal 1996 due to an increased provision for product returns, a
decline in technology licensing revenues, and modest declines in FreeHand and
Authorware revenues, which were partially offset by an increase in Director
product revenues.
COST OF REVENUES
Cost of revenues includes cost of materials, royalties paid to third parties for
licensed technology, amortization costs related to localization and acquired
technology, reserves for excess and obsolete finished goods and raw materials
inventories, and costs associated with order fulfillment. Cost of revenues was
$15.0 million in fiscal 1998, down from $23.2 million in fiscal 1997 and $19.6
million in fiscal 1996. This reduction resulted in a nine percentage point
increase in gross margin to 87% of revenues for fiscal 1998 from fiscal 1997.
The decrease in
Page 12
costs, both in absolute dollars and as a percentage of revenues, was due
primarily to the effectiveness of various cost control programs implemented over
the past year, the move to just-in-time manufacturing which resulted in lower
inventory obsolescence and lower absolute inventory levels, and improved
inventory review procedures. The Company believes these business process changes
will result in ongoing sustained margin performance, however, gross margins may
be adversely affected from time to time by the mix of distribution channels used
by the Company, the mix of products sold, and the mix of international versus
domestic revenues.
OPERATING EXPENSES
Sales and marketing expenses consist primarily of compensation and benefits,
advertising, mail order costs, trade show expenses, and other public
relations and marketing costs. Sales and marketing expenses decreased 5% in
fiscal 1998 to $56.8 million from $59.6 million in the prior year due to
lower overall spending on various sales and marketing programs as a result of
the Company's efforts to reduce expenses, offset by planned increases in
headcount. Sales and marketing expenses in fiscal 1997 increased 44% over
fiscal 1996 expenses of $41.4 million due to increased headcount, costs
associated with the restructuring of the sales distribution channel including
recruiting, severance costs and the resolution of disputed claims for market
development funds, the timing of discretionary marketing expenses, the
recording of uncollectible accounts receivable and increased travel. The
Company expects sales and marketing expenses to increase in absolute dollars
in fiscal 1999 as the Company invests in various sales and marketing
infrastructure programs, particularly in programs designed specifically for
the web and for penetrating the enterprise.
Research and development expenses consist primarily of compensation and
benefits, overhead, and professional service fees to support product
development. Research and development expenses were $32.2 million in fiscal
1998, up from $30.0 million in fiscal 1997 and $20.0 million in fiscal 1996,
reflecting the Company's investment in new product development. The Company
expects research and development expenses in fiscal 1999 to increase in absolute
dollars as the Company continues to invest heavily in new products and
technologies and the infrastructure to support such activities.
General and administrative expenses consist mainly of compensation and benefits,
fees for professional services, and overhead. General and administrative
expenses increased from $8.1 million in fiscal 1997 and $5.5 million in fiscal
1996 to $11.5 million in fiscal 1998 due primarily to increases in staffing,
higher outside services fees, and legal fees associated with the class action
suits. The Company expects general and administrative expenses in fiscal 1999 to
be higher than fiscal 1998 levels in absolute dollars as the Company continues
to invest in building the infrastructure required to support the growth of the
Company.
The Company incurred one-time merger costs of $7.7 million in the third quarter
of fiscal 1998 for the acquisition of Solis Design Inc., which included charges
for acquired in-process research and development as well as transaction fees for
financial and legal advisers. In fiscal 1997, the Company recorded one-time
merger costs of $0.4 million associated with the acquisition of FutureWave
Software, Inc., which included transaction fees for financial and legal advisers
and relocation expenses. In fiscal 1996, the Company recorded merger costs of
$2.5 million related to the acquisitions of Fauve Software, Inc., OSC, Inc., and
iband, Inc.
OTHER INCOME
Other income consists primarily of earnings on the Company's cash and short-term
investments and foreign exchange gains and losses, net of fees. Other income
was $4.7 million in fiscal 1998 compared to $4.6 million in fiscal 1997 and $4.1
million in fiscal 1996. The increase was due primarily to foreign exchange
gains from hedging activity, partially offset by lower investment and interest
income.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company recorded a tax provision of $0.8 million, or 36%, in fiscal 1998
after adjusting for nondeductible charges for the write-off of acquired
in-process research and development, compared to a tax benefit of $3.5 million,
or 37%, in fiscal 1997. The provision for income taxes in fiscal 1996 was $8.8
million. An analysis of
Page 13
the differences between the statutory and effective income tax rates is
presented in Note 7 of Notes to Consolidated Financial Statements. The Company
expects that the effective tax rate for fiscal 1999 will be approximately 36%.
This estimate is based on current tax law, the operating structure of the
Company, and estimates of the geographic mix of earnings, and is subject to
change.
NET LOSS
The net loss of $6.2 million for fiscal 1998 was due primarily to one-time
charges for the acquisition of Solis in the third quarter. Excluding one-time
acquisition charges, net income in fiscal 1998 would have been $1.5 million,
compared to a $5.6 million net loss in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash, cash equivalents and short-term
investments of $86.1 million. For fiscal 1998, operating activities provided
$5.3 million in net cash, compared with $14.0 million for fiscal 1997. Cash used
in investing activities of $9.4 million was used primarily to purchase capital
equipment, principally for management information systems and engineering
equipment, to invest in certain long-term assets, to improve facilities, and to
fund the cash portion of the Solis acquisition in October 1997. Cash used in
financing activities of $1.3 million was the result of purchases of $5.1 million
of common stock under the Company's stock buyback program, offset by $3.8
million in proceeds from the exercise of common stock options. The Company
anticipates spending approximately $8.0 million on capital purchases during
fiscal 1999.
From time to time, cash will be used to repurchase common stock under the
Company's stock buyback program. The buyback program approved by the Board of
Directors in July 1997 provided for purchases of up to 2,000,000 shares. Since
July 1997, the Company has repurchased 510,000 common shares for $5.1 million.
In addition to cash, cash equivalents, and short-term investments, the Company
has $15.0 million available under an unsecured line of credit. The line of
credit bears interest at the lender's prime rate and expires on July 15, 1998.
The Company anticipates that this line of credit will be renewed. As of and
during the fiscal year ended March 31, 1998, the Company had no borrowings
outstanding.
Management believes that existing cash and investments, together with cash
generated from operations, will be sufficient to meet the Company's operating
requirements through at least fiscal 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Except for the historical information contained in this Annual Report, the
matters discussed herein are forward-looking statements that involve risks and
uncertainties, including those detailed below, and from time to time in the
Company's other reports filed with the Securities and Exchange Commission. The
actual results that the Company achieves may differ materially from any
forward-looking statements due to such risks and uncertainties.
INTENSE COMPETITION. The markets for the Company's products are highly
competitive and characterized by pressure to reduce prices, incorporate new
features, and accelerate the release of new product versions. A number of
companies currently offer products that compete directly or indirectly with one
or more of the Company's products. These companies include Adobe Systems Inc.
(Adobe), Apple Computer, Inc., Asymetrix Corporation, Corel Corporation (Corel),
MetaCreations Corporation, and Microsoft Corporation (Microsoft). As the Company
competes with larger competitors such as Adobe, Corel and Microsoft across a
broader range of product lines and different platforms, the Company may face
increasing competition from such companies.
RAPIDLY CHANGING TECHNOLOGY. The developing digital media, Internet and online
services markets, and the personal computer industry in general, are
characterized by rapidly changing technology, resulting in short product life
cycles and rapid price declines. The Company must continuously update its
existing products to keep
Page 14
them current with changing technology and must develop new products to take
advantage of new technologies that could render the Company's existing products
obsolete. The Company's future prospects are highly dependent on its ability to
increase functionality of existing products in a timely manner and to develop
new products that address new technologies and achieve market acceptance.
Shorter product life cycles may lead to inventory obsolescence problems. New
products and enhancements must keep pace with competitive offerings, adapt to
new platforms and emerging industry standards, and provide additional
functionality. There can be no assurance that the Company will be successful in
these efforts.
FLUCTUATIONS OF OPERATING RESULTS; PRODUCT INTRODUCTION DELAYS. The Company's
quarterly operating results may vary significantly depending on the timing of
new product introductions and enhancements by the Company. A substantial portion
of the Company's revenues is derived from its three key products: Director,
FreeHand and Authorware. The Company has in the past experienced delays in the
development of new products and enhancement of existing products, and such
delays may occur in the future. If the Company was unable, due to resource
constraints or technological or other reasons, to develop and introduce such
products in a timely manner, this inability could have a material adverse effect
on the Company's results of operations. If the Company does not ship new
versions of its products as planned, sales of existing versions decline, or new
products do not receive market acceptance, the Company's results of operations
in a given quarter could be materially adversely affected as they were during
the fourth quarter of fiscal 1997 when the Company delayed shipment of a new
version of Director to the following quarter.
The Company's quarterly results of operations also may vary significantly
depending on the impact of any of the following: the timing of product
introductions by competitors, changes in pricing, execution and volume of
technology licensing agreements, the volume and timing of orders received during
the quarter, which are difficult to forecast, and finally, any acquisitions of
other companies or technologies. The future operating results of the Company may
fluctuate as a result of these and other factors, including the Company's
ability to continue to develop or acquire innovative products, its product and
customer mix, and the level of competition. The Company's results of operations
may also be affected by seasonal trends. A significant portion of the Company's
operating expenses is relatively fixed, and planned expenditures are based
primarily on sales forecasts. As a result, if revenues do not meet the Company's
forecasts, operating results may be materially adversely affected. There can be
no assurance that sales of the Company's existing products will either continue
at historical rates or increase, or that new products introduced by the Company,
whether developed internally or acquired, will achieve market acceptance. The
Company's historical rates of growth should not be taken as indicative of growth
rates that can be expected in the future.
DEPENDENCE ON DISTRIBUTORS. A substantial majority of the Company's revenues is
derived from the sale of its products through a variety of distribution
channels, including traditional software distributors, mail order, educational
distributors, VARs, original equipment manufacturers (OEMs), hardware and
software superstores, retail dealers, and direct sales. Domestically, the
Company's products are sold primarily through distributors, VARs, and OEMs. In
particular, one distributor, Ingram Micro, Inc., accounted for 28%, 24% and 21%
of revenues in fiscal 1998, 1997 and 1996, respectively. Internationally, the
Company's products are sold through distributors. The Company's resellers
generally offer products of several different companies, including in some
cases, products that are competitive with the Company's products. There can be
no assurance that the Company's resellers will continue to purchase the
Company's products or provide them with adequate levels of support. In addition,
the Company believes that certain distributors are reducing their inventory in
the channel and returning unsold products to better manage their inventories.
Distributors are increasingly seeking to return unsold product, particularly
when a new version or upgrade of a product has superseded such products. If the
Company's distributors were to seek to return increasing amounts of products,
such returns could have a material adverse effect on the Company's revenues and
results of operations. The loss of, or a significant reduction in sales volume
to, a significant reseller could have a material adverse effect on the Company's
results of operations.
Page 15
DEPENDENCE ON MACINTOSH PLATFORM. In the past, a majority of the Company's
revenues was derived from its products for the Macintosh. Although sales of the
Company's products for Windows and cross-platform environments accounted for
approximately 56% of revenues for fiscal 1998 and are expected to become an
increasingly important component of the Company's revenues, the Company remains
heavily dependent on the sale of products for the Macintosh platform. A
continuing leveling-off or decline in the sales rate of multimedia-capable
Macintosh computers or shifts in mail order or other distribution mechanisms for
Macintosh products could have a material adverse effect on the Company's results
of operations.
RISKS OF INTERNATIONAL OPERATIONS. For fiscal 1998, the Company derived
approximately 48% of its revenues from international sales. The Company expects
that international sales will continue to generate a significant percentage of
its revenues. The Company relies on distributors for sales of its products in
foreign countries and, accordingly, is dependent on their ability to promote and
support the Company's products, and in some cases, to translate them into
foreign languages. International business is subject to a number of special
risks, including: foreign government regulation; general geopolitical risks such
as political and economic instability, hostilities with neighboring countries
and changes in diplomatic and trade relationships; more prevalent software
piracy; unexpected changes in, or imposition of, regulatory requirements,
tariffs, import and export restrictions and other barriers and restrictions;
longer payment cycles, greater difficulty in accounts receivable collection,
potentially adverse tax consequences, the burdens of complying with a variety of
foreign laws; foreign currency risk; and other factors beyond the control of the
Company.
In addition, the Company's results may be adversely affected by worldwide
economic events beyond the control of the Company, such as those presently
occurring in Asia. Approximately 20% of revenues in fiscal 1998 and 26% of
revenues in fiscal 1997 were derived from the Asia Pacific region. During fiscal
1998, the Company experienced a decline in revenue growth rates in Asia Pacific
in part due to the economic crises that occurred throughout this region. There
can be no assurances that these economies will recover in the near term or that
the Company's results or growth rates in this geographic region will return to
previous levels even if the recovery occurs.
The Company enters into foreign exchange forward contracts to reduce economic
exposure associated with sales and asset balances denominated in various
European currencies and Japanese Yen. As of March 31, 1998, notional principal
of outstanding forward contracts amounted to $5.7 million. These contracts are
of a short-term duration and the fair value of such contracts equals the market
value as of March 31, 1998. There can be no assurance that such contracts will
adequately hedge the Company's exposure to currency fluctuations.
RISKS ASSOCIATED WITH ACQUISITIONS. Macromedia has grown in part because of
combinations with other companies. In August 1995, the Company acquired Fauve
Software, Inc., a developer of image editing software. In December 1995, the
Company acquired OSC, Inc., a developer of digital audio production software. In
March 1996, the Company acquired iband, Inc., a developer of Internet web site
development tools. In December 1996, the Company acquired FutureWave Software,
Inc., a developer of Internet graphics and animation software. In October 1997,
the Company acquired Solis Design, Inc., a developer of computer managed
instruction software for enterprise-wide, web-based learning solutions. None of
the recently acquired products has accounted for a significant portion of the
Company's revenues to date. Additionally, there are integration risks associated
with merging two companies including financial, administrative and cultural
concerns.
VOLATILITY OF STOCK. Due to the factors noted above, the Company's future
earnings and stock price may be subject to significant volatility, particularly
on a quarterly basis. Any shortfall in revenue or earnings from levels expected
by securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock in any given period.
Additionally, the Company may not learn of such shortfalls until late in the
fiscal quarter, which could result in an even more immediate and adverse effect
on the trading price of the Company's common stock. Finally, the Company
participates in a highly dynamic industry. In addition to factors specific to
the Company, changes in analysts' earnings estimates for the Company or its
industry and
Page 16
factors affecting the corporate environment or the securities markets in general
will often result in significant volatility of the Company's common stock price.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The Year 2000 issue
creates risk for the Company from unforeseen problems in its own computer
systems and from third parties, including customers, vendors, and manufacturers,
with whom the Company deals on financial transactions worldwide. Failures of the
Company's and/or third parties' computer systems could have a material impact on
the Company's ability to conduct its business.
Although the Company does not believe there are any material operational issues
or costs associated with preparing its internal systems for the year 2000, there
can be no assurance that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems. The Company is assessing
the impact to its operations of addressing the Year 2000 issues.
The Company believes that its software will handle Year 2000 compliance
correctly assuming that the operating systems upon which they run have been
updated to comply. Macromedia's software products obtain date information, such
as creation dates and modification dates, directly from the computer's operating
system. Both Microsoft and Apple have stated that their operating systems will
continue to operate properly into the twenty-first century.
SUBSEQUENT EVENTS
In May 1998, the Company sold certain intellectual property rights to Apple
Computer. While the terms of the transaction have not been disclosed, the
Company expects this event to have a positive impact on net income through
reduced research and development expenses and anticipated future royalty income.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Page 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
Macromedia, Inc. and Subsidiaries
March 31,
- ----------------------------------------------------------------------------------------------------
(in thousands, except share data) 1998 1997
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,019 $ 15,397
Short-term investments 76,112 87,054
Accounts receivable, less allowance for returns and
doubtful accounts of $7,606 and $7,786, respectively 7,696 2,315
Inventory 743 1,882
Prepaid expenses and other current assets 3,819 4,557
Deferred tax assets, short-term 8,548 7,537
- ----------------------------------------------------------------------------------------------------
Total current assets 106,937 118,742
Land and building, net 20,372 14,240
Other fixed assets, net 18,528 19,910
Related party loans 7,440 2,497
Other long-term assets 907 538
Deferred tax assets, long-term - 970
- ----------------------------------------------------------------------------------------------------
Total assets $ 154,184 $ 156,897
-------------------------
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,091 $ 6,020
Accrued liabilities 19,132 16,585
Unearned revenue 1,927 2,376
- ----------------------------------------------------------------------------------------------------
Total current liabilities 25,150 24,981
Other long-term liabilities 263 -
Deferred tax liabilities, long-term 306 -
- ----------------------------------------------------------------------------------------------------
Total liabilities 25,719 24,981
- ----------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, par value $0.001 per share; 80,000,000
shares authorized; 38,807,968 and 37,742,965 shares
issued and outstanding as of 1998 and 1997, respectively 39 38
Treasury stock, at cost; 510,000 shares (5,139) -
Additional paid-in capital 142,023 133,962
Deferred compensation (87) (149)
Unrealized gain on investments 47 297
Accumulated deficit (8,418) (2,232)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 128,465 131,916
- ----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 154,184 $ 156,897
-------------------------
-------------------------
See accompanying notes to consolidated financial statements.
Page 18
CONSOLIDATED STATEMENTS OF OPERATIONS
Macromedia, Inc. and Subsidiaries
Years ended March 31,
- ----------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Revenues $ 113,086 $ 107,365 $ 116,691
Cost of revenues 14,997 23,246 19,600
- ----------------------------------------------------------------------------------------------------
Gross profit 98,089 84,119 97,091
- ----------------------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 56,842 59,627 41,387
Research and development 32,231 30,013 20,033
General and administrative 11,452 8,135 5,466
Merger, relocation, and reorganization 7,658 350 2,525
- ----------------------------------------------------------------------------------------------------
Total operating expenses 108,183 98,125 69,411
- ----------------------------------------------------------------------------------------------------
Operating (loss) income (10,094) (14,006) 27,680
- ----------------------------------------------------------------------------------------------------
Other income (expense):
Interest and investment income, net 4,687 5,353 4,307
Foreign exchange gain/(loss) 243 (639) (98)
Other (194) (105) (108)
- ----------------------------------------------------------------------------------------------------
Total other income 4,736 4,609 4,101
- ----------------------------------------------------------------------------------------------------
(Loss) income before taxes (5,358) (9,397) 31,781
Provision (benefit) for income taxes 828 (3,477) 8,779
- ----------------------------------------------------------------------------------------------------
Net (loss) income $ (6,186) $ (5,920) $ 23,002
----------------------------------------
----------------------------------------
Net (loss) income per share
Basic $ (0.16) $ (0.16) $ 0.66
----------------------------------------
----------------------------------------
Diluted $ (0.16) $ (0.16) $ 0.59
----------------------------------------
----------------------------------------
Weighted average common shares outstanding
Basic 38,114 37,488 34,899
----------------------------------------
----------------------------------------
Diluted 38,114 37,488 39,044
----------------------------------------
----------------------------------------
See accompanying notes to consolidated financial statements.
Page 19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Macromedia, Inc. and Subsidiaries
Years Ended March 31,
---------------------------------------------
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (6,186) $ (5,920) $ 23,002
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization 7,728 7,766 4,013
Deferred income taxes 265 (3,832) (4,675)
Tax benefit from employee stock plans 240 - 8,827
Deferred compensation 49 104 -
Write-off of merger costs 7,658 - 1,628
Changes in operating assets and liabilities, net of
effect of mergers:
Accounts receivable, net (5,365) 12,330 (6,561)
Inventory 1,139 (279) 33
Prepaid expenses and other current assets 258 868 (2,011)
Accounts payable (2,040) 3,106 5,357
Accrued liabilities 1,669 (1,821) 5,085
Unearned revenue (562) 1,723 (1,532)
Other, net 464 - -
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,317 14,045 33,166
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of short-term investments (444,574) (922,987) (248,741)
Maturities and sales of short-term investments 455,267 924,063 184,659
Acquisition of property and equipment (12,376) (27,289) (9,537)
Other long-term assets (5,233) (2,484) (1,273)
Investment in Solis (2,500) - -
Acquisition of intangible assets - (2,788) -
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,416) (31,485) (74,892)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,860 4,008 4,479
Acquisition of treasury stock (5,139) - -
Proceeds from secondary offering, net of issuance
costs - - 55,846
- ---------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (1,279) 4,008 60,325
- ---------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,378) (13,432) 18,599
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 15,397 28,829 10,230
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,019 $ 15,397 $ 28,829
-----------------------------------------
-----------------------------------------
Supplemental disclosures of cash flow information:
Interest paid $ 5 $ - $ 3
-----------------------------------------
-----------------------------------------
Income taxes (recovered) paid $ (2,331) $ 3,935 $ 920
-----------------------------------------
-----------------------------------------
Noncash investing activities:
Common stock issued in exchange for Solis $ 3,975 $ - $ -
-----------------------------------------
-----------------------------------------
Common stock issued in exchange for FutureWave $ - $ 526 $ -
-----------------------------------------
-----------------------------------------
See accompanying notes to consolidated financial statements
Page 20
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Macromedia, Inc. and Subsidiaries
Additional
(in thousands, except share data) Common stock Treasury stock paid-in capital
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------
Balances as of March 31, 1995 31,000,608 $ 16 - - $ 58,266
Exercise of stock options 1,461,806 1 - - 3,467
Exercise of warrants 11,680 - - - -
Common stock issued under
ESPP 61,732 - - - 1,011
Tax benefit from employee
stock plans - - - - 8,827
Sale of common stock in
secondary offering, net of
issuance costs of $435
2,442,676 2 - - 55,844
Two-for-one common
stock split - 15 - - (15)
Adjustment for effect of
poolings on prior periods 1,434,709 2 - - 1,776
Deferred compensation - iband - - - - 415
Net income - - - - -
- --------------------------------------------------------------------------------------------
Balances as of March 31, 1996 36,413,211 36 - - 129,591
Exercise of stock options 595,063 1 - - 2,492
Common stock issued under
ESPP 134,691 - - - 1,515
Adjustment for effect of
poolings on prior periods 600,000 1 - - 526
Deferred compensation - iband - - - - (162)
Unrealized gain on investments - - - - -
Net loss - - - - -
- --------------------------------------------------------------------------------------------
Balances as of March 31, 1997 37,742,965 38 - - 133,962
Exercise of stock options 570,217 1 - - 2,390
Common stock issued under
ESPP 194,786 - - - 1,469
Tax benefit from employee
stock plans - - - - 240
Common stock issued for
purchase of Solis Design, Inc. 300,000 - - - 3,975
Purchase of treasury stock - - (510,000) (5,139) -
Deferred compensation - iband - - - - (13)
Unrealized loss on investments - - - - -
Net loss - - - - -
- --------------------------------------------------------------------------------------------
Balances as of March 31, 1998 38,807,968 $ 39 (510,000) $ (5,139) $142,023
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
(Accumulated
Unrealized deficit) Total
Deferred gain on retained stockholders'
compensation investments earnings equity
- ----------------------------------------------------------------------------------------------
Balances as of March 31, 1995 $ - - $ (18,601) $ 39,681
Exercise of stock options - - - 3,468
Exercise of warrants - - - -
Common stock issued under
ESPP - - - 1,011
Tax benefit from employee
stock plans - - - 8,827
Sale of common stock in
secondary offering, net of
issuance costs of $435
- - - 55,846
Two-for-one common
stock split - - - -
Adjustment for effect of
poolings on prior periods - - (432) 1,346
Deferred compensation - iband (415) - - -
Net income - - 23,002 23,002
- ----------------------------------------------------------------------------------------------
Balances as of March 31, 1996 (415) - 3,969 133,181
Exercise of stock options - - - 2,493
Common stock issued under
ESPP - - - 1,515
Adjustment for effect of
poolings on prior periods - - (281) 246
Deferred compensation - iband 266 - - 104
Unrealized gain on investments - 297 - 297
Net loss - - (5,920) (5,920)
- ----------------------------------------------------------------------------------------------
Balances as of March 31, 1997 (149) 297 (2,232) 131,916
Exercise of stock options - - - 2,391
Common stock issued under
ESPP - - - 1,469
Tax benefit from employee
stock plans - - - 240
Common stock issued for
purchase of Solis Design, Inc. - - - 3,975
Purchase of treasury stock - - - (5,139)
Deferred compensation - iband 62 - - 49
Unrealized loss on investments - (250) - (250)
Net loss - - (6,186) (6,186)
- ----------------------------------------------------------------------------------------------
Balances as of March 31, 1998 $ (87) $ 47 $ (8,418) $128,465
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Page 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Macromedia, Inc. and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. Macromedia, Inc. (the Company) is a provider of software
tools, servers, and services for web publishing, multimedia, graphics, and
computer-based learning. The Company develops, markets, and delivers software
for digital media creation and delivery for Windows, Macintosh, and the
Internet. These products are available to business, education, and government
customers.
The Company sells its products worldwide through a variety of distribution
channels, including traditional software distributors, mail order, educational
distributors, value-added resellers (VARs), original equipment manufacturers
(OEMs), hardware and software superstores, retail dealers, and direct sales.
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements
include the accounts of the Company, its wholly owned subsidiaries: Macromedia
Europe Limited, located in England; Macromedia Netherlands B.V.; Macromedia
Ireland Limited; Macromedia Japan KK; and Macromedia Canada Limited. All
significant intercompany balances and transactions have been eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION. The functional currency of the Company's foreign
subsidiaries is the U.S. dollar. Assets and liabilities denominated in foreign
currencies are translated using the exchange rates at the balance sheet date.
Translation adjustments are recorded in the consolidated statements of
operations.
Revenues and expenses are translated using average exchange rates during the
year.
USE OF ESTIMATES. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates.
CONCENTRATIONS AND CREDIT RISKS. The Company derived approximately 84% of its
1998 revenues from the sale of three product lines: Director, FreeHand, and
Authorware. The Company expects that its revenues will continue for the
foreseeable future to be substantially dependent on these products and that
competition for those products will intensify in the future. A decline in sales
of any of these products, as a result of competition, technological change, or
other factors, would have a material adverse effect on the Company's
consolidated results of operations.
For the years ended March 31, 1998, 1997, and 1996, sales to one distributor
accounted for 28%, 24%, and 21% respectively, of consolidated revenue. Accounts
receivable relating to this customer were $4.7 million and $4.0 million as of
March 31, 1998 and 1997, respectively.
Distributors comprise a significant portion of the Company's revenue and trade
receivables. The Company controls credit risk through credit approvals, credit
limits, and monitoring procedures. The Company performs in-depth credit
evaluations for all new customers and requires letters of credit, bank
guarantees and advance payments, if deemed necessary.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. Cash equivalents consist of
certificates of deposit and money market funds with stated effective maturities
of three months or less at the time of purchase.
Cash equivalents and all of the Company's short-term investments are classified
as "available-for-sale" under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities.
Page 22
The amortized cost of available-for-sale debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in net investment income. As required by SFAS No. 115,
available-for-sale debt securities are recorded at fair value. Unrealized gains
and losses are reported as a separate component of stockholders' equity.
Realized gains and losses, and declines in value judged to be other than
temporary on available-for-sale securities, are included in net investment
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest and investment income, net.
The Company's cash equivalents and short-term investments in marketable equity
securities are carried at fair value, based on quoted market prices for these or
similar investments.
INVENTORY. Inventory consists primarily of software media, hardware product
components, manuals, and related packaging materials. Inventory is recorded at
the lower of cost or market value, determined on a first-in, first-out basis.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost. Buildings
are depreciated over thirty years, and tenant improvements over ten years, using
the straight-line method. Depreciation of equipment, furniture, and fixtures is
provided over estimated useful lives ranging from three to five years using the
straight-line method. Leasehold improvements are amortized over the lesser of
the lease term (two to nine years) or the estimated useful life of the related
assets, ranging from three to nine years.
Effective January 1, 1997, the Company reduced the estimated useful life of
computer equipment from five to three years for future asset purchases.
REVENUE RECOGNITION. In accordance with Statement of Position (SOP) 91-1,
Software Revenue Recognition, the Company recognizes revenue from product sales
upon shipment provided that no significant vendor obligations remain and
collection of the resulting receivable is deemed probable. Revenue from software
maintenance contracts is recognized on a straight-line basis over the term of
the contract, generally one year. Revenue from consulting, training, and other
services is generally recognized on the percentage of completion method.
The Company has entered into agreements whereby it licenses products to OEMs or
provides customers the right to multiple copies. These agreements generally
provide for nonrefundable fixed fees which are recognized at delivery of the
product master or the first copy. If post-contract customer support (PCS) is not
included, per copy royalties in excess of the fixed minimum amounts and
refundable license fees are recognized as earned. If PCS is included in the
contract, revenue is recognized on a straight-line basis over the term of the
contract.
The Company maintains an allowance for potential credit losses and an allowance
for anticipated returns on products sold to distributors and direct customers.
The allowance for sales returns is estimated based on a calculation of forecast
sales to the end user by distributors in relation to estimated current channel
inventory levels.
SOFTWARE DEVELOPMENT COSTS. SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, governs accounting for
software development costs. This statement provides for capitalization of
certain software development costs once technological feasibility is
established. The Company believes that software development costs incurred
subsequent to technological feasibility have not been material, other than the
costs paid to third parties to develop localized versions of its software, which
are capitalized and amortized to cost of sales on a straight-line basis over the
estimated product life (usually 12 months).
Page 23
MARKETING COSTS. The Company reimburses certain qualified customers for a
portion of the advertising costs related to their promotion of the Company's
products. The Company's liability for reimbursement is accrued at the
time revenue is recognized as a percentage of the qualified customer's net
revenue derived from the Company's products. Advertising expenditures are
charged to operations as incurred.
INCOME TAXES. The Company utilizes SFAS No. 109, Accounting for Income Taxes.
SFAS No. 109 requires the use of the asset and liability method of accounting
for income taxes.
NET INCOME (LOSS) PER SHARE. The Financial Accounting Standards Board (FASB)
issued SFAS No. 128, Earnings Per Share, effective for periods ending after
December 15, 1997. The Company adopted the new standard during the third
quarter of this fiscal year and has restated prior period amounts to conform to
the new presentation. SFAS No. 128 requires the presentation of "basic" and
"diluted" earnings per share. "Basic" earnings per share is calculated by
dividing net income or loss by the weighted average common shares outstanding
during the period. "Diluted" earnings per share reflects the net incremental
shares that would be issued if outstanding stock options were exercised and the
funds collected for the employee stock purchase plan were used to purchase
treasury shares.
In the case of a net loss, it is assumed that no incremental shares would be
issued because they would be antidilutive. In addition, certain options are
considered antidilutive because the options' exercise prices were above the
average market price during the period. Antidilutive shares are not included in
the computation of diluted earnings per share, in accordance with SFAS No. 128.
The following table reflects the total potentially diluted shares that would be
outstanding if such antidilutive shares were included.
Years ended March 31,
----------------------------------------------------
(shares in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Total potentially diluted shares:
Weighted average common shares outstanding 38,114 37,488 34,899
Incremental shares:
Stock options 2,413 3,504 4,145
Employee stock purchase plan - 2 -
----------------------------------------------------
Diluted shares assuming net income 40,527 40,994 39,044
Options with exercise prices greater than
market price 1,770 738 178
----------------------------------------------------
Total potentially diluted shares 42,297 41,732 39,222
----------------------------------------------------
----------------------------------------------------
Page 24
The earnings per share amounts reported for the fiscal years ended March 31,
1997 and 1996 have been recalculated in accordance with SFAS No. 128 as follows:
Years ended March 31,
---------------------
(shares in thousands) 1997 1996
- -------------------------------------------------------------------------------
As reported:
Primary (loss) earnings per share $ (0.16) $ 0.59
Weighted average common shares outstanding 37,488 39,044
Restated for SFAS No. 128:
Basic (loss) earnings per share $ (0.16) $ 0.66
Diluted (loss) earnings per share $ (0.16) $ 0.59
Weighted average common shares outstanding 37,488 34,899
Incremental shares:
Stock options - 4,145
- -------------------------------------------------------------------------------
Weighted average common shares outstanding
assuming dilution 37,488 39,044
-------------------------
-------------------------
FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS. In March 1998, the American
Institute of Certified Public Accountants (AICPA) issued SOP 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use. The
statement provides guidance on when costs incurred for internal use computer
software are to be capitalized, and on accounting for the proceeds of computer
software originally developed or obtained for internal use subsequently marketed
and sold to the public. It identifies the characteristics of internal use
software and states that internal costs incurred for upgrades and enhancements
should be expensed during the preliminary project stage. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998. The Company believes that
adoption of this standard will not have a significant effect on its consolidated
results of operations.
In October 1997, the AICPA issued SOP 97-2, Software Revenue Recognition. SOP
97-2 establishes standards relating to the recognition of all aspects of
software revenue. SOP 97-2 is effective for transactions in fiscal
years beginning after December 15, 1997 and will require the Company to modify
certain aspects of its revenue recognition policies. The Company does not
expect the adoption of SOP 97-2 to have a material impact on the Company's
consolidated results of operations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in financial statements. It does not, however,
require a specific format for the disclosure but requires the Company to display
an amount representing total comprehensive income for the period in its
consolidated financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company is required to adopt the new
standard during its fiscal 1999 first quarter ending June 30, 1998.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the manner in which public companies report information about operating segments
in annual and interim financial statements. The Company is currently evaluating
the operating segment information that it will be required to report. The
Company is required to adopt the new standard for its year ending March 31,
1999.
Page 25
RECLASSIFICATION. Certain amounts in the accompanying 1997 and 1996 consolidated
financial statements have been reclassified in order to conform with the
presentation of the 1998 consolidated financial statements.
2. BUSINESS COMBINATIONS
1998 PURCHASE. On October 6, 1997, the Company acquired Solis Design, Inc.
(Solis), a software development company, for 300,000 shares of common stock,
valued at $13.25 per share, and $2.5 million of cash. The acquisition was
structured as a tax-free merger and was accounted for under the purchase method.
The excess of the consideration paid over the estimated fair value of net assets
acquired of approximately $0.2 million was recorded as goodwill and is being
amortized on a straight-line basis over 12 months. The operating results of
Solis, which have not been material in relation to those of the Company, have
been included in the consolidated statement of income beginning October 6, 1997.
As a result of the acquisition, the Company wrote off $7.7 million of purchased
in-process research and development and other costs related to the transaction.
1997 POOLING OF INTERESTS. In December 1996, the Company issued 600,000 shares
of its common stock in exchange for all of the common stock of FutureWave
Software, Inc., a developer of Internet graphics and animation software. The
1997 merger expenses of $0.4 million associated with this acquisition consisted
principally of transaction fees for financial and legal advisers. The
transaction was accounted for as a pooling of interests. The impact of the
pooling on all periods prior to fiscal 1997 is immaterial; therefore, the
results for those periods have not been restated. The accounts and operations of
the acquired company are included in the Company's consolidated financial
statements subsequent to its acquisition.
1996 POOLINGS OF INTERESTS. The Company completed three separate acquisitions in
fiscal 1996, as described below, which were accounted for as poolings of
interests. The impact of the poolings on all periods prior to fiscal 1996 is
immaterial both individually and in the aggregate, and, therefore, results for
those periods have not been restated. The accounts and operations of all three
of the acquired companies are included in the Company's consolidated financial
statements subsequent to their acquisition.
FAUVE. On August 30, 1995, the Company issued 580,000 shares of its common stock
in exchange for all of the common stock of Fauve Software, Inc., the developer
of xRes, a full-featured image editing and composition application for Macintosh
and Windows, and Matisse, a full-color painting program for Windows. The 1996
merger expenses of $0.4 million associated with this acquisition consisted
principally of transaction fees for financial and legal advisers, and relocation
and reorganization expenses.
OSC. On December 2, 1995, the Company acquired the business and operations of
OSC pursuant to the exchange of all of the outstanding shares of OSC for 62,001
shares of the Company's common stock. OSC is the developer of DECK II, software
for professional quality multi-track music and sound production. The 1996 merger
expenses of $0.2 million related to this acquisition consisted principally of
transaction fees for financial and legal advisers, and relocation and
reorganization expenses.
IBAND. Effective March 14, 1996, the Company merged with iband, Inc., a
developer of a family of tools used to build dynamic web sites on the Internet.
The transaction was accounted for as a pooling of interests; the Company
exchanged 860,000 shares of common stock and stock options for all outstanding
shares and stock options of iband.
The 1996 merger expenses of $1.9 million relating to costs incurred in
connection with the merger of the Company and iband included transaction fees
for financial and legal advisers and relocation and reorganization expenses,
including approximately $1.4 million relating to the issuance of an additional
40,000 shares of the Company's common stock for payment to certain entities and
individuals to settle certain iband obligations.
Page 26
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents and short-term investments have been classified as
available-for-sale securities and as of March 31, 1998 and 1997 consisted of the
following:
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
Corporate notes $ 3,009 $ 6,009
Corporate bonds 6,999 16,786
Commercial paper 27,850 24,999
U. S. government debt securities 27,069 39,260
Money market funds 1,000 1,021
Certificates of deposit 7,132 8,167
Foreign securities 3,053 -
- ------------------------------------------------------------------------------
76,112 96,242
Less cash equivalents - (9,188)
---------------------------
Short-term investments $ 76,112 $ 87,054
---------------------------
---------------------------
Available-for-sale securities consisted of the following, by contractual
maturity:
(in thousands) 1998 1997
- ---------------------------------------------------------------------------
Due in one year or less $ 72,922 $ 83,387
Due in one to three years 3,190 12,855
- ---------------------------------------------------------------------------
$ 76,112 $ 96,242
------------------------
------------------------
The Company's available-for-sale securities are carried at market value. Net
unrealized gains were $47,000 and $297,000 at March 31, 1998 and 1997
respectively, principally on U.S. government debt securities.
4. PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 1998 and 1997, consisted of the
following:
(in thousands) 1998 1997
- ---------------------------------------------------------------------------
Land and building $ 21,021 $ 7,026
Computer equipment 21,638 18,664
Computer software 3,206 2,979
Office equipment and furniture 9,380 8,249
Leasehold improvements 4,893 3,357
- ---------------------------------------------------------------------------
60,138 40,275
Less accumulated depreciation (21,238) (13,339)
- ---------------------------------------------------------------------------
38,900 26,936
Construction in progress - building - 7,214
- ---------------------------------------------------------------------------
$ 38,900 $ 34,150
------------------------
------------------------
Depreciation and amortization expense for the years ended March 31, 1998, 1997,
and 1996, was $7.7, $7.8, and $4.0 million, respectively.
Page 27
5. ACCRUED LIABILITIES
Accrued liabilities as of March 31, 1998 and 1997, consisted of the following:
(in thousands) 1998 1997
- ------------------------------------------------------------------------------
Accrued self insurance $ 437 $ 384
Accrued compensation 1,647 649
Accrued fringe benefits 1,518 1,255
Accrued marketing development 1,764 3,308
Accrued taxes 2,081 146
Other accrued expenses 11,685 10,843
- ----------------------------------------------------------------------------
Total $ 19,132 $ 16,585
-------------------------
-------------------------
6. LINE OF CREDIT
The Company has a $15.0 million unsecured line of credit with interest at the
lender's prime rate, which expires on July 15, 1998. Certain financial
covenants under the agreement become effective when borrowings commence. As of
March 31, 1998, no borrowings were outstanding on this line of credit.
7. INCOME TAXES
The components of the provision for income taxes (benefit) for the years ended
March 31, 1998, 1997, and 1996, are as follows:
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Current:
Federal $ - $ - $ 3,519
State - 13 765
Foreign 323 342 343
- ---------------------------------------------------------------------------------------------------------
Total current 323 355 4,627
- ---------------------------------------------------------------------------------------------------------
Deferred:
Federal 829 (3,091) (3,197)
State (564) (741) (1,478)
- ---------------------------------------------------------------------------------------------------------
Total deferred 265 (3,832) (4,675)
- ---------------------------------------------------------------------------------------------------------
Add charge in lieu of taxes attributable to employee stock plans 240 - 8,827
- ---------------------------------------------------------------------------------------------------------
Total $ 828 $(3,477) $ 8,779
------------------------------------
------------------------------------
The provision for income taxes differs from the expected tax expense amount
computed by applying the statutory federal income tax rate of 34% to income
before income taxes for the year ended March 31, 1998, and 35% for the years
ended March 31, 1997 and 1996, as a result of the following:
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Computed tax at statutory rate $ (1,822) $ (3,289) $ 11,123
State taxes 151 (473) 497
Nondeductible acquisition costs 2,412 - 768
Change in beginning of year valuation allowance on deferred tax - - (4,555)
Other, net 87 285 946
- ---------------------------------------------------------------------------------------------------------
Total $ 828 $ (3,477) $ 8,779
---------------------------------------
---------------------------------------
Page 28
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets (liabilities) as of March 31, 1998 and 1997, is
presented as follows:
(in thousands) 1998 1997
- --------------------------------------------------------------------------
Deferred tax assets:
Reserves, accruals, and other $ 5,444 $ 7,900
Net operating loss carryforward (federal) 13,650 11,088
Net operating loss carryforward (state) 620 299
Credit for research activities 8,073 3,225
Other credits 399 546
- ---------------------------------------------------------------------------
Total deferred tax assets 28,186 23,058
Less valuation allowance (19,638) (14,551)
- ---------------------------------------------------------------------------
Net deferred tax assets 8,548 8,507
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (306) -
- ---------------------------------------------------------------------------
Total deferred tax liabilities (306) -
- ---------------------------------------------------------------------------
Net deferred taxes $ 8,242 $ 8,507
------------------------
------------------------
As of March 31, 1998, the Company has available federal and state net operating
loss carryforwards of approximately $40.1 million and $9.8 million,
respectively. The Company also has unused research credit carryforwards of
approximately $4.7 million and $3.4 million for federal and California purposes,
respectively. If not utilized, net operating loss and research credit
carryforwards will expire in fiscal years 2002 through 2013.
Approximately $13.8 million of the valuation allowance for deferred tax assets
is attributable to employee stock plans, the benefit from which will be
allocated to paid-in capital rather than current earnings when subsequently
recognized. The Company's ability to utilize certain loss carryforwards and
certain research credit carryforwards are subject to limitations pursuant to the
ownership change rules of Internal Revenue Code, Section 382. Management
believes that it is more likely than not that the results of future operations
will generate sufficient taxable income to realize the net deferred tax assets.
8. STOCKHOLDERS' EQUITY
STOCK SPLIT. Effective October 16, 1995, the Company completed a 2-for-1 stock
split of its common stock which was effected in the form of a stock dividend. In
this report, all per share amounts and number of shares have been retroactively
restated to reflect the stock split.
PREFERRED STOCK. The Company is authorized to issue 5,000,000 shares of
convertible preferred stock with a par value of $0.001 per share. No preferred
stock has been issued or is outstanding.
TREASURY STOCK. On July 15, 1997, the Board of Directors authorized the
repurchase of up to 2,000,000 shares of the Company's common stock. During the
fiscal year ended March 31, 1998, the Company purchased 510,000 shares of its
stock on the open market at an average price of $10.08 per share. The shares
are recorded at cost and are shown as a reduction of stockholders' equity. The
Company may purchase additional stock in the future, as market conditions
warrant.
Page 29
STOCK OPTION PLANS. As of March 31, 1998, there are stock options outstanding in
connection with the following stock option plans:
(i) MacroMind 1989 Incentive and Nonstatutory Stock Option Plans
(ii) Paracomp 1989 Stock Option Plan
(iii) Authorware 1988 Stock Option Plan
(iv) 1992 Equity Incentive Plan (EIP)
(v) 1993 Employee Stock Purchase Plan (ESPP)
(vi) 1993 Directors Stock Option Plan
The options outstanding under the plans indicated at (i) through (iii) (Prior
Plans) above were assumed as a result of the Company being the successor company
resulting from merger activities.
The EIP provides for the grant of incentive and nonqualified stock options,
restricted stock, and stock bonuses. The total number of shares reserved
pursuant to the EIP as of March 31, 1998, was 11,800,000 shares. Any shares
issuable upon exercise of options granted pursuant to the Prior Plans that
expire or become unexercisable for any reason without having been exercised in
full shall no longer be available for distribution under the Prior Plans, but
shall be available for distribution under the EIP.
The 1993 Employee Stock Purchase Plan and the 1993 Directors Stock Option Plan
have reserved 800,000 and 300,000 shares of common stock, respectively, for
issuance under those plans. Under the ESPP and subject to certain limitations,
employees may purchase, through payroll deductions of 2% to 10% of compensation,
shares of common stock at a price per share that is the lesser of 85% of the
fair market value as of the beginning of the offering period or the end of the
purchase period. During the years ended March 31, 1998, 1997, and 1996, the
Company issued 194,786, 134,691, and 61,732 shares under the plan at average
prices of $7.54, $11.25, and $16.38 per share, respectively.
In connection with the iband and Solis acquisitions, all of the outstanding
options to purchase iband and Solis common stock were converted into options to
purchase the Company's common stock.
Stock options are granted at a price equal to fair market value at the time of
the grant and normally vest over four years from the date of grant. The options
expire 10 years from the date of grant and are normally canceled three months
after an employee's termination.
The following summarizes stock option activity for the years ended March 31,
1998, 1997, and 1996:
Number of Exercise price Weighted
shares per share average
exercise price
- ----------------------------------------------------------------------------------------------------
Options outstanding as of March 31, 1995 5,745,164 $ 0.20 -16.50 $ 5.508
Granted 2,426,215 0.31 - 41.31 25.194
Exercised (1,461,806) 0.20 - 36.88 2.364
Canceled (346,547) 0.34 - 40.00 14.075
- ----------------------------------------------------------------------------------------------------
Options outstanding as of March 31, 1996 6,363,026 0.20 - 41.31 13.270
Granted 5,291,715 8.44 - 44.50 15.581
Exercised (595,063) 0.20 - 40.00 4.194
Canceled (2,600,123) 0.31 - 40.00 25.530
- ----------------------------------------------------------------------------------------------------
Options outstanding as of March 31, 1997 8,459,555 0.20 - 44.50 12.200
Granted 9,374,853 7.06 - 12.88 8.170
Exercised (570,217) 0.20 - 11.50 9.980
Canceled (6,525,891) 0.31 - 44.50 13.580
- ----------------------------------------------------------------------------------------------------
Options outstanding as of March 31, 1998 10,738,300 $ 0.20 - 44.50 $ 7.960
---------------------------------------------------
---------------------------------------------------
Page 30
As of March 31, 1998, 1997, and 1996 options to purchase 3,932,773, 3,067,496,
and 1,869,848 shares of common stock, respectively, were exercisable under the
plans.
The weighted-average fair value of options granted during the years ended March
31, 1998, 1997, and 1996 was $4.703, $9.049 and $16.084, respectively. The
weighted average fair value of purchase rights granted under the ESPP during the
years ended March 31, 1998, 1997, and 1996 was $3.74, $4.81 and $10.30,
respectively.
The Company recorded deferred compensation of $415,000 for the difference
between the grant price and the deemed fair value of the common stock underlying
the options issued in connection with the iband acquisition in March 1996. This
amount is being amortized over the vesting period of the individual options,
generally four years. The remaining balance as of March 31, 1998, is $87,000.
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the
Company is required to disclose the pro forma effects on net income (loss)
and net income (loss) per share as if the Company had elected to use the fair
value approach to account for all of its employee stock-based compensation
plans. Had compensation cost for the Company's plans been determined
consistently with the fair value approach enumerated in SFAS No. 123, the
Company's pro forma net loss and pro forma net loss per share for the years
ended March 31, 1998 and 1997, and the pro forma net income and pro forma net
income per share for the year ended March 31, 1996, would have been changed
as indicated below:
(in thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------
Pro forma net (loss) income
As reported $ (6,186) $ (5,920) $ 23,002
Adjusted pro forma (18,370) (13,838) 20,602
Pro forma net (loss) income per share:
As reported - Basic $ (0.16) $ (0.16) $ 0.66
Adjusted pro forma - Basic (0.48) (0.37) 0.59
As reported - Diluted $ (0.16) $ (0.16) $ 0.59
Adjusted pro forma - Diluted (0.48) (0.37) 0.53
The fair value of options and purchase rights granted was estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1998, 1997, and 1996:
Stock Option Plans Employee Stock Purchase Plan
--------------------------------------- ----------------------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average risk free rate 6.28% 6.27% 5.77% 5.35% 5.21% 5.34%
Expected life (years) 3.28 3.00 3.00 0.50 0.50 0.50
Volatility 80.00% 83.00% 83.00% 80.00% 83.00% 83.00%
Dividend yield - - - - - -
Page 31
The following table summarizes information about fixed stock options outstanding
as of March 31, 1998:
Options outstanding Options exercisable
------------------------------------------------ ----------------------------
Number of Weighted Weighted Number of Weighted
options average average options average
remaining exercise price exercise price
contractual life
- -----------------------------------------------------------------------------------------------------------------------
From $0.20 to $0.96 450,156 5.48 $ 0.591 446,606 $ 0.593
From $1.44 to $3.00 346,968 6.32 2.876 346,968 2.876
From $3.50 to $5.25 509,571 7.11 4.705 468,391 4.657
From $6.00 to $9.00 7,538,526 10.18 7.740 2,184,496 7.604
From $9.31 to $13.00 1,655,243 9.88 11.012 354,477 11.280
From $14.69 to $22.00 155,336 8.71 15.410 88,574 15.044
From $22.38 to $32.75 52,500 8.87 32.018 27,480 31.970
From $34.00 to $44.50 30,000 8.88 39.829 15,781 39.784
------------------------------------------------------------------------------
From $0.20 to $44.50 10,738,300 9.63 $ 7.960 3,932,773 $ 6.838
------------------------------------------------------------------------------
------------------------------------------------------------------------------
On May 6, 1997, the Company's Board of Directors approved a repricing of
approximately 4,900,000 outstanding stock options held by existing employees to
the current fair market value of the Company's stock.
During fiscal 1997, the Company granted non-plan options to its President at the
time of hire, to acquire 1,000,000 shares of common stock at an exercise price
of $15.00 per share, representing the fair market value of the stock at the time
of grant. The shares were subsequently repriced to $7.781 per share on July 15,
1997.
9. COMMITMENTS AND CONTINGENCIES
ROYALTIES. The Company has entered into agreements with third parties that
provide for royalty payments based on a per unit wholesale price of certain
products or other agreed-upon terms.
LEASES. The Company leases office space and certain equipment under operating
leases, certain of which contain renewal and purchase options. In addition, the
Company subleases certain office space that is not occupied currently.
Future minimum payments under operating leases with an initial term of more than
one year and future minimum sublease income are summarized as follows:
(in thousands) Payments Income
- ------------------------------------------------------------------
1999 $3,648 $1,481
2000 3,195 1,408
2001 2,493 218
2002 2,539 -
2003 2,732 -
Thereafter 7,969 -
- ------------------------------------------------------------------
Total minimum lease payments $22,576 $3,107
--------------------------
--------------------------
Rent expense was $3.2, $3.0, and $1.8 million for the years ended March 31,
1998, 1997, and 1996, respectively. For the year ended March 31, 1998, rent
expense was net of sublease income of $1.2 million.
Page 32
LITIGATION. On July 31, 1997, a complaint entitled Rosen et al. V. Macromedia,
Inc., et al., (Case No. 988526) was filed in the Superior Court for San
Francisco, California. The complaint alleges that Macromedia and five of its
former or current officers and directors engaged in securities fraud in
violation of California Corporations Code Sections 25400 and 25500 by seeking to
inflate the value of Macromedia stock by issuing statements that were allegedly
false or misleading (or omitted material facts necessary to make any statements
made not false or misleading) regarding the Company's financial results and
prospects. Plaintiffs seek to represent a class of all persons who purchased
Macromedia common stock from April 18, 1996 through January 9, 1997. Four
similar complaints by persons seeking to represent the same class of purchasers
subsequently have been filed in San Francisco Superior Court, and consolidated
for pre-trial purposes with Rosen. Defendants filed demurrers to the complaint
and other motions which were argued on December 19, 1997 and January 5, 1998.
Before the demurrers could be heard, one defendant, Richard Wood, died in an
automobile accident. The Court sustained in part and overruled in part the
demurrers by order dated March 6, 1998. Claims against Susan Bird were
dismissed with leave to amend and the Court overruled the demurrers as to
Macromedia, John Colligan, James Von Ehr, II, and Kevin Crowder. The Plaintiffs
did not file an amended complaint. Discovery is now proceeding. By agreement
of the parties, the rulings apply to the other state court actions, and separate
answers to the remaining complaints need not be filed.
On September 25, 1997, a complaint entitled City Nominees v. Macromedia, Inc. et
al., (Case No. C-97-3521-SC) was filed in the United States District Court for
the Northern District of California. The complaint alleges that Macromedia and
five of its former or current officers and directors engaged in securities fraud
in violation of Sections 10 and 20(a) of the Securities and Exchange Act of 1934
by seeking to inflate the value of Macromedia stock by issuing statements that
were allegedly false or misleading (or omitted material facts necessary to make
any statements made not false or misleading) regarding the Company's financial
results and prospects. Plaintiffs seek to represent a class of all persons who
purchased Macromedia common stock from April 18, 1996 through January 9, 1997.
Three similar complaints by persons seeking to represent the same class of
purchasers subsequently have been filed in United States District Court for the
Northern District of California. All of these cases have been consolidated.
Lead plaintiffs and lead counsel have been appointed under the provisions of the
Private Securities Law Reform Act by the District Court pursuant to an Order of
January 23, 1998. A consolidated complaint was filed on February 13, 1998.
Defendants promptly moved to dismiss, which motion was granted by order filed
May 18, 1998, on the grounds that plaintiffs' claims were barred by the
applicable statute of limitations. Discovery has been stayed by operation of
statute and local rule.
All complaints seek damages in unspecified amounts, as well as other forms of
relief. The Company believes the complaints are without merit and intends to
vigorously defend the actions.
10. FOREIGN CURRENCY FORWARD CONTRACTS
The Company attempts to reduce its exposure to foreign exchange risk by entering
into foreign exchange forward contracts denominated in various European
currencies and Japanese Yen. Upon receipt of foreign currencies these amounts
are collected into a multi-currency facility and used to settle obligations
under the forward contracts.
As a result of this activity, the Company had various forward contracts
outstanding as of March 31, 1998. The future value of these contracts is
subject to market risk resulting from foreign exchange rate volatility. The
Company has marked these contracts to market with the resulting gain (loss)
recorded in the consolidated statement of operations.
Page 33
Contract
(in thousands) Fair value amount
-----------------------------------------------------
Forward contracts:
Sell currency $ 5,742 $ 5,742
All contracts mature on June 30, 1998.
Current market rates at the consolidated balance sheet date were used to
estimate the fair value of foreign currency forward contracts.
11. EMPLOYEE BENEFITS
The Company maintains a profit sharing salary deferral 401(k) defined
contribution benefit plan that covers all employees who have attained 21 years
of age and completed at least 1,000 hours of service. This plan allows employees
to defer up to 15% of their pretax salary in certain investments at the
discretion of the employee. Employer contributions are made at the discretion of
the Company's Board of Directors. Employer contributions made to the plan during
the years ended March 31, 1998, 1997, and 1996, were $359,000, $447,000, and
$291,000, respectively.
12. RELATED PARTY TRANSACTIONS
During the fiscal year ended March 31, 1998, the Company made loans to various
officers in conjunction with their hiring and relocation. Related party loans
is comprised of full recourse loans totaling $7.3 million and interest
receivable of $0.1 million due from these officers at March 31, 1998. The notes
bear interest at rates ranging from 5.53% to 6.80% per annum and are secured by
the personal residences of the officers. One of the notes has a zero interest
rate for the first two years of its term. The rate will revert to 6.65% at the
end of this period. The principal and accrued interest are due in full on the
maturity dates of the loans. The notes mature from 1999 to 2004 and are callable
on demand if the officer terminates employment with the Company.
When the Company acquired Altsys Corporation (Altsys) in January 1995, the
Company assumed a lease from Altsys entered into with Renner Plaza Properties,
Inc. (RPP) with respect to its use of the office space occupied by it located in
Richardson, Texas. RPP is wholly owned by Mr. Von Ehr, a director of the
Company, and his wife Gayla J. Von Ehr. For the fiscal year ended March 31,
1998, the Company paid $0.3 million in lease payments.
13. INFORMATION BY GEOGRAPHIC AREA
The Company's operations outside the United States consist of sales offices of
wholly-owned subsidiaries in Japan, the United Kingdom, the Netherlands, the
Republic of Ireland, Canada, and international branches. Domestic operations are
responsible for the design and development of all products, as well as shipping
to meet worldwide customer commitments. The foreign sales offices receive a
commission on sales within the territory. Accordingly, for financial statement
purposes, it is not meaningful to segregate operating profit (loss) for the
foreign sales offices.
Page 34
The distribution of net revenues and identifiable assets by geographic areas for
the years ended March 31, 1998, 1997, and 1996, follows:
(in thousands) 1998 1997 1996
-------------------------------------------------------------------------
Net revenues:
North America $ 58,793 $ 52,534 $ 67,560
Europe 29,304 24,721 28,089
All other 24,989 30,110 21,042
-------------------------------------------------------------------------
Total net revenues $ 113,086 $ 107,365 $ 116,691
-------------------------------------
-------------------------------------
Identifiable assets:
North America $ 124,213 $ 153,615 $ 154,166
Europe 28,785 5,255 470
All other 1,483 2,256 1,479
Eliminations (297) (4,229) (993)
-------------------------------------------------------------------------
Total identifiable assets $ 154,184 $ 156,897 $ 155,122
-------------------------------------
-------------------------------------
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Macromedia, Inc. and Subsidiaries
Summarized quarterly financial information for fiscal years 1998 and 1997 is as
follows:
Quarter ended
-------------------------------------------------------
Fiscal year Fiscal year
(in thousands, except per share June 30 September 30 December 31 March 31 totals
data)
- -------------------------------------------------------------------------------------------------------------------------
1998
Total revenues $ 27,329 $ 29,166 $ 26,579 $ 30,012 $ 113,086
Gross profit 22,761 23,859 23,816 27,653 98,089
Operating (loss) income (2,890) (697) (8,159) 1,652 (10,094)
Net (loss) income (1,239) 313 (7,251) 1,991 (6,186)
Net (loss) income per share - basic $ (0.03) $ 0.01 $ (0.19) $ 0.05 $ (0.16)
Net (loss) income per share - diluted $ (0.03) $ 0.01 $ (0.19) $ 0.05 $ (0.16)
- -------------------------------------------------------------------------------------------------------------------------
1997
Total revenues $ 35,010 $ 31,025 $ 28,104 $ 13,226 $ 107,365
Gross profit 29,576 26,520 22,542 5,481 84,119
Operating income (loss) 8,953 5,455 (3,390) (25,024) (14,006)
Net income (loss) 7,120 4,610 (2,359) (15,291) (5,920)
Net income (loss) per share - basic $ 0.19 $ 0.13 $ (0.06) $ (0.41) $ (0.16)
Net income (loss) per share - diluted $ 0.18 $ 0.12 $ (0.06) $ (0.41) $ (0.16)
See Note 1 of notes to consolidated financial statements for an explanation of
the determination of the number of shares used in computing net income (loss)
per share.
Page 35
Macromedia, Inc.
1998 Form 10-K
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Macromedia, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Macromedia, Inc.
and subsidiaries as of March 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1998. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1998, in conformity with generally accepted accounting principles. 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.
KPMG Peat Marwick LLP
Mountain View, California
May 6, 1998
Page 36
Macromedia, Inc.
1998 Form 10-K
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
Page 37
Macromedia, Inc.
1998 Form 10-K
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the section in the Company's Proxy Statement
entitled "Proposal No. 1 - Election of Directors."
The information concerning the Company's executive officers required by this
Item is incorporated by reference to Part I, Item 4A, entitled "Executive
Officers of the Registrant" on page 8 of this report.
The information concerning compliance with Section 16 of the Securities Exchange
Act of 1934 is incorporated by reference to the section in the Company's proxy
statement entitled "Section 16 (a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections in the Company's Proxy Statement entitled "Executive Compensation,"
"Compensation of Directors," "Employment Agreements," and "Compensation
Committee Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the Company's directors required by this Item is
incorporated by reference to the section in the Company's Proxy Statement
entitled "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section in the Company's Proxy Statement entitled "Certain Transactions."
Page 38
Macromedia, Inc.
1998 Form 10-K
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(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 from Part II, Item 8 of this Form 10-K:
Consolidated Balance Sheets - March 31, 1998 and 1997
Consolidated Statements of Operations - Years Ended March 31,
1998, 1997, and 1996
Consolidated Statements of Cash Flows - Years Ended March 31,
1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity - Years Ended
March 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedule. The following financial statement
schedule of Macromedia, Inc. and Subsidiaries for the fiscal years
ended March 31, 1998, 1997 and 1996 is filed as part of this Report
and should be read in conjunction with the Consolidated Financial
Statements of Macromedia, Inc.
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
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
2.01 Agreement and Plan of Reorganization by and among the
Registrant, Authorware, Inc. and MacroMind/Paracomp,
Inc., dated as of February 28, 1992, and certain
exhibits thereto. (Incorporated herein by reference to
exhibit 2.01 to the Registrant's registration statement
on Form S-1 (File number 33-70624) declared effective by
the Commission on December 10, 1993 (The "Form S-1")).
2.02 Agreement and Plan of Reorganization among MacroMind,
Inc., Paracomp, Inc. and Certain Shareholders of
Paracomp, Inc. dated August 21, 1991, as amended October
11, 1991 and certain exhibits thereto. (Incorporated
herein by reference to exhibit 2.02 to the Form S-1).
2.03 Agreement and Plan of Reorganization dated October 26,
1994 between the Registrant and Altsys Corporation.
(Incorporated herein by reference to exhibit 2.03 to the
Registrant's registration statement on Form S-4 (File
number 33-87264) declared effective by the Commission on
December 14, 1994 (The "Altsys S-4")).
2.04 Agreement of Merger and Articles of Merger dated
January 20, 1995 entered into by the Registrant and
Altsys Corporation. (Incorporated herein by reference to
exhibit 2.04 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1994 (the
"December 31, 1994 10-Q")).
2.05 Agreement and Plan of Reorganization dated as of August
30, 1995, by and between Macromedia and Fauve and
related documents. (Incorporated herein by reference to
exhibit 2.01 to the Registrant's Current Report on Form
8-K dated August 31, 1995 (the "Fauve 8-K")).
2.06 Agreement of Merger dated as of August 30, 1995, by
and between Macromedia and Fauve. (Incorporated herein
by reference to exhibit 2.02 to the Fauve 8-K.)
Page 39
Macromedia, Inc.
1998 Form 10-K
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
3.01 Registrant's Certificate of Incorporation, as amended.
(Incorporated herein by reference to exhibit 4.01 to the
Registrant's registration statement on Form S-8 (File
number 33-89092) declared effective by the Commission on
February 3, 1995 (The "February 1995 S-8")).
3.02 Certificate of Amendment of Registrant's Amended and
Restated Certificate of Incorporation. (Incorporated
herein by reference to exhibit 3.02 to the Registrant's
Amendment No. 1 to registration statement on Form 8-A
filed on October 5, 1995 (the "First 8-A Amendment")).
3.03 Registrant's Bylaws. (Incorporated herein by reference
to exhibit 3.02 to the Form S-1).
3.04 Amendment to Registrant's Bylaws effective October 15,
1993. (Incorporated herein by reference to exhibit 3.03
to the Form S-1).
4.01 Investor Rights Agreement, dated as of March 31, 1992,
as amended April 1, 1992, between the Registrant and
various investors. (Incorporated herein by reference to
exhibit 4.01 to the Form S-1).
4.02 Amendment Number 2 to the Investor Rights Agreement
effective January 20, 1995. (Incorporated herein by
reference to exhibit 4.02 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31,
1995 (the "March 31, 1995 10-K")).
4.03 Amendment Number Three to Investor Rights Agreement
effective July 12, 1995. (Incorporated herein by
reference to exhibit 4.03 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995
(the "June 30, 1995 10-Q")).
4.04 Amendment Number Four to Investor Rights Agreement
effective August 31, 1995. (Incorporated herein by
reference to exhibit 4.04 to the First 8-A Amendment.)
4.05 Amendment Number Five to the Investor Rights Agreement
(Incorporated herein by reference to exhibit 4.06 to
Form S-3 (File number 333-644), declared effective
February 8, 1996).
4.06 Amendment Number Six to Investor Rights Agreement,
effective March 14, 1996 (Incorporated herein by
reference to exhibit 4.06 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March
31, 1996 (the "March 31, 1996 10-K")).
4.07 Amendment Number Seven to Investor Rights Agreement,
effective December 31, 1996. (Incorporated herein by
reference to exhibit 4.07 to the March 31, 1997
Form 10-K)
10.01* 1989 Paracomp Stock Option Plan. (Incorporated herein
by reference to exhibit 10.01 to the Form S-1).
10.02* 1989 MacroMind Incentive Stock Option Plan and 1989
Nonstatutory Stock Option Plan as amended March 1992.
(Incorporated herein by reference to exhibit 10.02 to
the Form S-1).
10.03* 1988 Authorware Stock Option Plan as amended and
restated February 1992. (Incorporated herein by
reference to exhibit 10.03 to the Form S-1).
10.04* 1992 Equity Incentive Plan and related documents, as
amended to date. (Incorporated herein by reference to
exhibit 4.05 to the Form S-8 filed October 31, 1997
(File No.333-39285)(The 1997 Form S-8))
10.05* 1993 Directors Stock Option Plan and related documents,
as amended to date. (Incorporated herein by reference to
exhibit 10.05 to the June 30, 1995 10-Q).
10.06* 1993 Employee Stock Purchase Plan. (Incorporated herein
by reference to exhibit 4.06 to the 1997 Form S-8).
10.07* Form of Indemnification Agreement entered into by
Registrant with each of its directors and executive
officers. (Incorporated herein by reference to
exhibit 10.08 to the Form S-1).
10.08* Employment Agreement between the Registrant and
John C. Colligan dated December 9, 1988. (Incorporated
herein by reference to exhibit 10.09 to the Form S-1).
Page 40
Macromedia, Inc.
1998 Form 10-K
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
10.09* Employment and Noncompetition Agreement with Kevin F.
Crowder. (Incorporated herein by reference to
exhibit 10.12 to the December 31, 1994 10-Q).
10.10* Employment and Noncompetition Agreement with James R.
Von Ehr II. (Incorporated herein by reference to
exhibit 10.13 to the December 31, 1994 10-Q).
10.11 Lease Agreement by and between Registrant and Toda
Development, Inc. dated June 27, 1991 as amended.
(Incorporated herein by reference to exhibit 10.07 to
the Form S-1).
10.12 Third amendment to Lease Agreement by and between
Registrant and Toda Development, Inc. dated November 7,
1994 and fourth amendment to Lease Agreement by and
between Registrant and Toda Development, Inc. dated
April 6, 1995. (Incorporated herein by reference to
exhibit 10.14 to the March 31, 1995 10-K).
10.13 Fifth Amendment to Lease Agreement by and between
Registrant and Toda Development, Inc. dated August 31,
1995 and sixth amendment to Lease Agreement by and
between Registrant and Toda Development, Inc. dated
October 31, 1995. (Incorporated herein by reference to
exhibit 10.18 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1995).
10.14 Seventh Amendment to Lease Agreement by and between
Registrant and Toda Development, Inc. dated December 15,
1995 and Eighth Amendment to Lease Agreement by and
between Registrant and Toda Development, Inc. dated
January 25, 1996 and Ninth Amendment to Lease Agreement
by and between Registrant and Toda Development, Inc.
dated February 21, 1996 and Tenth Amendment to Lease
Agreement by and between Registrant and Toda
Development, Inc. dated April 30, 1996 and Eleventh
Amendment to Lease Agreement by and between Registrant
and Toda Development, Inc. dated June 13, 1996.
(Incorporated herein by reference to exhibit 10.15 to
the March 31, 1996 10-K).
10.15 Twelfth Amendment to Lease Agreement by and between
Registrant and Toda Development, Inc. dated November 26,
1996 and Thirteenth Amendment to Lease Agreement by and
between Registrant and Toda Development, Inc. dated
February 25, 1997 and Fourteenth Amendment to Lease
Agreement by and between Registrant and Toda
Development, Inc. dated February 25, 1997. (Incorporated
herein by reference to exhibit 10.15 to the
March 31, 1997 Form 10-K)
10.16 Termination and License Agreement by and between Altsys
Corporation and Aldus Corporation, dated October 24,
1994 (Incorporated herein by reference to exhibit 10.11
to the Altsys S-4).
10.17 Line of Credit Agreement by and between Registrant and
Imperial Bank dated August 2, 1995. (Incorporated herein
by reference to exhibit 10.17 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
10.18** Distribution Agreement by and between the Registrant and
Ingram Micro, Inc. dated March 28, 1996. (Incorporated
herein by reference to exhibit 10.19 to the March 31,
1996 10-K).
10.19* Employment Agreement between the Registrant and
Robert K. Burgess dated August 25, 1996. (Incorporated
herein by reference to exhibit 10.20 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996).
10.20* Employment Agreement between the Registrant and James
White dated January 1, 1997. (Incorporated herein by
reference to exhibit 10.21 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31,
1997 (the "March 31, 1997 10-K").
10.21* Employment Agreement between the Registrant and John C.
Parsons, Jr. dated February 17, 1997. (Incorporated
herein by reference to exhibit 10.22 to the March 31,
1997 10-K).
10.22* Loan Agreement between Macromedia, Inc. and Brian and
Sharon Allum, dated July 15, 1997. (Incorporated herein
by reference to exhibit 10.01 to the Registrant's
Quarterly Report on Form 10Q for the quarter ended
September 30, 1997).
Page 41
Macromedia, Inc.
1998 Form 10-K
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
10.23* Solis Design, Inc. 1997 Equity Incentive Plan and Form
Agreements (Incorporated herein by reference to
exhibit 4.07 of the 1997 Form S-8).
10.24* Solis Design, Inc. Non Plan Form Agreements (Incorporated
herein by reference to exhibit 4.08 of the 1997 Form S-8).
21.01 List of Registrant's subsidiaries.
23.01 Consent of KPMG Peat Marwick LLP, Independent Auditors.
24.01 Power of Attorney (see page 44 of this Form 10-K).
27.01 Financial Data Schedule.
* Represents a management contract or compensatory plan or arrangement
** 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.
(b) Reports on Form 8-K: No reports on Form 8-K were required to be filed for
the quarter ended March 31, 1998. With the exception of the information
incorporated by reference to the Proxy Statement in Items 10, 11, 12 and 13
of Part III, the Proxy Statement is not deemed to be filed as part of this
Report.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
Page 42
Macromedia, Inc.
1998 Form 10-K
SIGNATURES
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.
MACROMEDIA, INC.
By: /s/ Robert K. Burgess
------------------------------------
Robert K. Burgess
Chief Executive Officer, President
and Director
Dated: June 29, 1998
Page 43
Macromedia, Inc.
1998 Form 10-K
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.
SIGNATURE TITLE DATE
--------- ----- ----
PRINCIPAL EXECUTIVE OFFICER:
/s/ Robert K. Burgess Chief Executive Officer, President and Director June 29, 1998
- ----------------------------
Robert K. Burgess
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ Elizabeth A. Nelson Senior Vice President, June 29, 1998
- ---------------------------- Chief Financial Officer and Secretary
Elizabeth A. Nelson
ADDITIONAL DIRECTORS:
/s/ John C. Colligan Chairman of the Board of Directors June 29, 1998
- ----------------------------
John C. Colligan
Director June 29, 1998
- ----------------------------
L. John Doerr
/s/ John (Ian) Giffen Director
- ----------------------------
John (Ian) Giffen
/s/ C. Richard Kramlich Director June 29, 1998
- ----------------------------
C. Richard Kramlich
/s/ Donald L. Lucas Director June 29, 1998
- ----------------------------
Donald L. Lucas
/s/ William B. Welty Director June 29, 1998
- ----------------------------
William B. Welty
/s/ James R. Von Ehr II Director June 29, 1998
- ----------------------------
James R. Von Ehr II
Page 44
Macromedia, Inc.
1998 Form 10-K
MACROMEDIA, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTION OF PERIOD
----------- ---------- ---------- --------- ---------
Allowance for Doubtful Accounts
Year ended March 31, 1998 $972 $1,363 $1,260 $1,075
Year ended March 31, 1997 935 1,385 1,348 972
Year ended March 31, 1996 399 740 204 935
Allowance for Returns
Year ended March 31, 1998 $6,814 $6,983 $7,266 $6,531
Year ended March 31, 1997 3,442 16,009 12,637 6,814
Year ended March 31, 1996 1,088 8,923 6,569 3,442
Allowance for Obsolete Inventory
Year ended March 31, 1998 $3,909 $1,398 $4,164 $1,143
Year ended March 31, 1997 754 3,830 675 3,909
Year ended March 31, 1996 533 805 584 754
Page 45