ITEM 1. BUSINESS
OVERVIEW
Macromedia Incorporated ("Macromedia" or the "Company") develops, markets and supports software products and technologies that add life to the Web.
Macromedia's Web Publishing products enable designers and developers to create engaging, interactive Web experiences for e-commerce, entertainment, news and information. Macromedia's Learning solutions help large enterprises and educational institutions author, deliver and manage learning programs over the Web and corporate intranets. The Company's new consumer business, shockwave.com, develops and delivers products and technologies that give consumers a next-generation Web experience, and also provides leading entertainment experiences on the Web at WWW.SHOCKWAVE.COM.
Macromedia was incorporated in Delaware on February 25, 1992, and has acquired several other businesses since its incorporation. The Company's principal executive office is located at 600 Townsend Street, 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.
MARKET OPPORTUNITY
The Internet has experienced dramatic growth since the advent of the World Wide Web, a graphically rich environment made accessible to millions of consumers by the combination of advanced networking technologies, inexpensive, multimedia-capable computers and Web browser technology. In just a few years, the Web has become a powerful business software platform, allowing companies to communicate with their customers, vendors and employees using standard formats and protocols. For businesses, Web technology provides an alternative to existing mainstream computing platforms and creates new opportunities for commerce and information exchange. For consumers, the Web is quickly becoming a viable medium for communication, community and entertainment.
Multimedia technologies have been critical to the emergence of the Web. Businesses are increasingly competing to make their Web sites more engaging by adding rich graphics, animation, sound, video, and interactivity to their Web presence. In particular the growth of e-commerce applications is driving demand for interactive, personalized multimedia content that increases the effectiveness and return-on-investment of commerce Web sites. We see a large and growing market opportunity for software solutions that enable designers and developers to create engaging, interactive Web content.
PRODUCTS
- - WEB PUBLISHING SOLUTIONS
Publishing for the Web has become a complex production process, typically involving large numbers of employees in different departments of a company as well as external advertising agencies, vendors and others. Macromedia's family of Web Publishing products work together as a complete solution to streamline Web workflow from concept to design, development to production. Macromedia's software products enable businesses to dramatically reduce the time it takes to develop their Web sites. The graphic below depicts how Macromedia products are used together to publish to the Web.
[GRAPHIC]
- FIREWORKS-Registered Trademark-- The solution for professional Web graphics design and production.
- FLASH-TM-- The solution for producing high impact, vector based Web sites.
- FREEHAND-Registered Trademark-- The most powerful design tool for print and Internet graphics.
- DIRECTOR-Registered Trademark-- The standard for creating and delivering powerful multimedia.
- DREAMWEAVER-TM-- The solution for professional Web site design and production.
- GENERATOR-TM- - The solution for automated and personalized Web site graphics.
The following outline explains the elements involved in a typical Web site production process and how developers use Macromedia's Web Publishing products together to develop their sites:
DESIGN DOCUMENT AND SITE MAP Before production starts, a design document is developed with the goals, audience, functions, and content for a Web project. Printed storyboards for navigation scenarios or animations are prepared. The site map, navigation, and page layout grids are presented, revised, and approved.
SITE AND PAGE PRODUCTION Macromedia Dreamweaver-TM- is the hub of the Web workflow. This is where everything created in other Macromedia products comes together. Developers can quickly build site maps and use templates to streamline page production. Roundtrip HTML-TM- and visual editing let new developers code like experts, while powerful JavaScript and DHTML features work across Web browsers and operating systems. Dreamweaver also integrates smoothly with dynamic publishing and e-commerce solutions.
PAGE LAYOUTS, TEMPLATES, AND HTML Once the design document is complete, designers create the template pages. While the content on every page of a Web site is different, template pages speed HTML production and unify a site's design. Using graphics and animation software such as Macromedia FreeHand, Fireworks, and Flash, the artists refine the look and feel of the site. After approval, the designs are finalized and the final templates are produced.
ILLUSTRATION AND LAYOUT Designers use FreeHand to quickly lay out concepts for Web pages. Any artwork or HTML they create during this phase of a project can easily be turned into final art for the Web or print when production starts.
IMAGES AND PAGE DESIGN With Fireworks, Web designers and developers create, edit, and optimize great-looking Web images that download quickly. Tight integration between Fireworks and Dreamweaver bridges the gap between design (producing graphics) and development (producing HTML code).
FINAL PRODUCTION AND DYNAMIC MEDIA To distinguish a site from its competition, Web designers must create frequently updated and personalized content, immersive experiences such as games, and compelling animated design. Every kind of site--e-commerce, news, corporate, and entertainment--can use standard technologies like Macromedia Flash, Shockwave-TM-, and Generator-TM- to stand out.
ANIMATED INTERACTIVE DESIGN Flash is the Web standard for creating vector graphics and animations which anti-alias and scale based on the viewer's screen size, guaranteeing excellent image quality. Web designers use Flash to create striking and extremely compact interactive navigation interfaces, graphics, and animations. Flash is quickly becoming one of the only alternatives to HTML for building next generation Web experiences.
MULTIMEDIA AND ENTERTAINMENT Developers use Director Shockwave Internet Studio-TM- to produce rich, immersive multimedia experiences on the Web. At sites like www.shockrave.com, they can experience animated, interactive Shockwave games and music. Many commerce sites use Flash to enrich the shopping experience for consumers.
DATA-DRIVEN GRAPHICS Macromedia Generator instantly builds Web site graphics and interactive interface elements like headlines, ad banners, weather maps, calendars, and charts. Stock tickers, weather maps, and sports scoreboards are three typical uses. Generator makes producing a dynamic Web site easy for designers and developers by creating graphics on demand for individuals or automatically updating graphics at preset intervals from a database.
- - WEB LEARNING SOLUTIONS
A large vertical market for Macromedia's multimedia, graphics and Web publishing technologies is the market for on-line learning. Because major investments have been made in corporate network infrastructure in the last few years, particularly in intranets and the Internet, and organizations are desperate for qualified employees and a competitive edge, the market for on-line corporate training is poised for significant growth in the next decade. Macromedia's Learning solutions help enterprises to:
- - Develop effective training content faster - - Author and deliver engaging Web - - native learning content - - Transfer existing learning content to the Web - - Reduce training time and costs - - Track learning results and measure return on investment (ROI) on training to make better business decisions
Macromedia's Attain Enterprise Learning System-TM- is an integrated enterprise-wide solution for managing the online learning process from planning, producing, administering, and delivering curricula, to tracking, storing, and reporting learner progress from any browser, anywhere in the world. It includes the following key products:
- AUTHORWARE ATTAIN-TM- - Produce rich-media training and learning applications.
- DREAMWEAVER ATTAIN-TM-- Construct Web sites for Internet/intranet instruction.
- PATHWARE ATTAIN-TM-- Manage and track classes, students, and performance.
- - SHOCKWAVE.COM
Macromedia's new consumer business, shockwave.com, was officially announced in May 1999. This consumer business builds on Macromedia's investment in enabling consumers to experience the best multimedia content on the Web. The Company intends to release various products and services that form the basis of this business over the coming months.
Macromedia's player technologies, Shockwave and Flash, are the world's most widely used players for multimedia and entertainment on the Web. Based on data from a King Brown & Partners survey, more than 75% of all people on the Web can experience Flash and/or Shockwave content on the Web, a reach of over 100 million people. The Shockwave and Flash players have always been available free of charge to consumers as part of Macromedia's strategy to make its player technology ubiquitous to drive consumer demand for multimedia content created with its software. Shockwave and Flash are also distributed with Windows 95, Windows 98, Microsoft Internet Explorer, and the Apple OS. In addition, Flash is included with every AOL client, in all Netscape browsers, in WebTV, in RealNetworks' Real Player, and it has recently been licensed by @Home for inclusion in its set-top boxes. In addition to these automatic distribution programs, successful downloads of Shockwave and Flash continued to grow strongly throughout the year, reaching a rate of over 500,000 per day by the end of the year.
shockwave.com builds on the brand equity that Macromedia has achieved with Shockwave. Shockwave is a widely recognized brand on the Web, and is associated with high quality interactive multimedia content, from games to cartoons, movie trailers, interactive music, greeting cards and other forms of entertainment.
Macromedia has been piloting entertainment on its Web site since 1998 at www.shockrave.com. shockrave.com features a variety of games, cartoons, music and other forms of entertainment that form the basis of the new
shockwave.com Web site. shockwave.com will aggregate multimedia content from multiple content providers, and will also link consumers to third-party Shockwave content anywhere on the Internet. In addition to shockwave.com, two other new components have been introduced, designed to enhance consumers' entertainment experience on the Web. First, the Shockwave Remote is a new user interface, which will be included with every copy of Shockwave starting with version 7.0.2. Shockwave Remote allows users to search, send and control Shockwave content on the Web and additionally, allows users to save up to five pieces of content locally, enabling consumers to play the content off-line. There are many benefits for both consumers and developers with this new virtual device.
Second, is a premium version of a Shockwave multimedia player called Shockmachine. To be priced at $19.95, Shockmachine offers a machine-like entertainment console to store and organize content plus the additional features of playing content in full screen mode, infinite storage, and access to exclusive content.
Together, these new consumer services are designed to enable people to enjoy a much richer entertainment experience on the Internet than ever before. As millions of people become members, many more services will be available to them and correspondingly, more e-business opportunities will be available to Macromedia.
Revenue for shockwave.com is contemplated from a variety of sources and may change substantially over time. Initially, the majority of the revenue will be from advertising and sales of Shockmachine. Over time, sales of content, microtransactions and other e-business opportunities may arise from the one-to-one relationships with millions of members of shockwave.com.
PRODUCT DEVELOPMENT
Macromedia's business strategy emphasizes developing products and services that help its customers take advantage of opportunities on the Internet. Macromedia aims to solve the problems customers face as they create and deliver content on a new medium with multiple "standards," multiple browsers, and different bandwidth rates.
Since the software industry is characterized by rapid technological change, a continuous high level of expenditure is required to enhance existing products and develop new products. Macromedia plans to continue internal product development efforts, and, as appropriate, to acquire additional software and system technologies that the Company considers critical to meeting the Internet needs of designers, developers, consumers, and the enterprise.
The Company believes that its future success depends on its ability to enhance 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 network infrastructure, Internet technology, and competitive offerings. The Company intends to adapt its products to new hardware and software platforms and to embrace emerging industry standards.
For fiscal 1997, 1998, and 1999, research and development expenses were $30.0 million, $32.2 million, and $35.6 million, respectively.
OPERATIONS AND MANUFACTURING
Macromedia 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 pressing CD-ROMs, printing manuals, and packaging and assembling finished products, all according to Macromedia's specifications and forecasts. Manufacturing is currently done at three Modus facilities worldwide: in Preston, Washington for the Americas, in Dublin, Ireland for Europe, and in Singapore for the Asia Pacific market. Macromedia performs quality assurance testing at its own facilities. Modus operates multiple facilities around the world that are capable of serving Macromedia's needs, and the Company believes alternative sources could be implemented without significant delay. To date, the Company has not experienced any significant difficulties or delays in the manufacture or assembly of its products or any significant returns due to product defects.
Macromedia continues to invest in technologies and infrastructure to support electronic software distribution and online documentation, which are becoming an increasingly important and cost-effective way to deliver its products.
MARKETING & DISTRIBUTION
Macromedia extends its brand worldwide through creative marketing communications. The Company generates awareness and demand for its products, solutions, and services through its Web sites, WWW.MACROMEDIA.COM and www.shockwave.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, to cross-sell products to current customers, and to educate and inform. In addition,
the Company distributes a variety of interactive multimedia demonstration materials directly to prospective customers, and then follows up through outbound telemarketing during business hours.
A substantial majority of Macromedia's revenues is derived from the sale of the Company's 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. Macromedia also sells directly to large corporate and educational institutions, with volume licensing programs under which the customer receives a volume discount and has the right to reproduce and use Macromedia software. One distributor, Ingram Micro, Inc., accounted for 24%, 28%, and 28% of revenues in fiscal 1997, 1998, and 1999 respectively.
Internationally, Macromedia products are sold through distributors. With distributors in more than 50 countries around the world, international sales accounted for 42% of total revenues during fiscal 1999. In certain cases, the distributor has exclusive distribution rights to certain products in its country. In spite of the recent economic difficulties in some countries in Asia and Latin America, the Company believes that international markets for its products presents a strategic opportunity, and expects that international sales will continue to generate a significant percentage of the Company's total revenues.
Macromedia's direct sales force focuses primarily on enterprise sales of the Attain Enterprise Learning System, primarily Pathware. The sales cycle for Pathware licenses may be lengthy and may be subject to integration and acceptance by the customer. The Company employs an indirect sales force that works closely with major distributors and reseller accounts to manage the flow of orders, inventory levels, and sell-through into other channels.
Macromedia 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
Macromedia provides complimentary technical support to customers by phone and fax for a period of 90 days after the first technical support contact by a customer. After the 90-day period, the Company offers a paid 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. Macromedia also offers high-end developer support and support on a per contact basis.
Millions of customers depend on Macromedia's worldwide network of value-added resellers, training centers, and developers. In addition, Macromedia User Groups located in dozens of cities throughout the world, provide customers with ways to share information, network with developers, and keep in touch with Macromedia. Macromedia provides support through marketing collateral, guest speakers, product giveaways, and more.
The Macromedia International User Conference is the world's largest forum for authors, designers, and publishers of digital media.
Macromedia's beta program enlists customers to conduct real-world tests on prerelease software, as well as provide feedback on features and software stability. The most informative beta sites receive free software.
Macromedia's Authorized Training Program is a worldwide network of professional trainers and educators who provide Macromedia customers with the highest-quality training on the company's products.
PROPRIETARY RIGHTS AND LICENSES
Macromedia relies on a combination of patent, copyright, trade secret, and trademark laws, as well as employee and third-party nondisclosure agreements, to protect its intellectual property rights and products. The Company distributes software under a shrink-wrapped license agreement that customers accept when they open physical or electronic copies of the Company's products. Like other high-technology companies, the Company generally does not obtain signed license agreements from customers. Macromedia uses a hardware lock-out device with certain versions of the Company's software that are sold internationally, but otherwise does not copy-protect its software. Policing unauthorized use of products is difficult, and while the Company cannot determine the extent to which software piracy of its products exists, it can be expected to be a persistent problem. In addition, the laws of certain countries in which 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.
EMPLOYEES
As of March 31, 1999, Macromedia had 553 full-time employees worldwide, with the majority working in California, followed by Texas, the United Kingdom, Japan, and Australia, among other international offices. There were 112 employees in sales; 90 in marketing; 239 in product development, quality assurance, and documentation; and 112 in finance, operations, and administration. None of Macromedia's employees are subject to a collective bargaining agreement, and Macromedia believes that its relations with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's primary facility consists of approximately 136,000 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 December 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 entered into sub-lease agreements to cover the remaining lease periods at the former San Mateo locations. In fiscal year 1999, the Company relocated its Richardson, Texas office to a nearby building to allow for future expansion, and now leases 25,000 square feet at this location. 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.
ITEM 3.
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 seeking dismissal of the complaint, as well as other motions, in late 1997. Before the demurrers were heard, one defendant, Richard Wood, died in an automobile accident. In March 1998, the Court sustained in part and overruled in part the demurrers. 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. In May 1999, the Court granted the plantiffs' motion for class certification.
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 Litigation Reform Act by the District Court. A consolidated complaint was filed in February, 1998. Defendants moved to dismiss that complaint on the grounds that plaintiffs' claims were barred by the applicable statute of limitations. In May 1998, the United States District Court for the Northern District of California granted defendants' motion to dismiss with prejudice, and entered judgment in favor of defendants. Plaintiffs have appealed to the United States Court of Appeals for the Ninth Circuit, and that appeal is pending.
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 continue to vigorously defend the actions.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. MACROMEDIA'S EXECUTIVE OFFICERS
This section provides the names, ages, titles, and brief biographies of Macromedia's executive officers as of March 31, 1999:
Mr. Burgess has been Chief Executive Officer and Chairman of the Board of Macromedia since July 1998. Mr. Burgess joined Macromedia in November 1996 as President and Director of Macromedia. Prior to joining Macromedia, 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 bachelors degree in Commerce from McMaster University.
Mr. Allum has been Senior Vice President of Worldwide Field Operations since July 1997 and is responsible 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 at 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 bachelors 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. Elop has been Senior Vice President of Web since March 1998 and is responsible for the application of Web and Internet technologies to Macromedia's business practices, corporate systems and supporting technical infrastructure. Prior to joining Macromedia, Mr. Elop was Senior Vice President, Systems/CIO for Boston Chicken, Inc. from 1994 to 1998, one of the largest food retailers in the United States. Prior to this, Mr. Elop was a Director in Lotus Development Corporation's Consulting Services Group, with responsibility for Canada and the U.S. mid-west from 1992 to 1994. Mr. Elop joined Lotus as part of the acquisition of Soma, Inc., a Canadian software development and management consultancy. Mr. Elop earned a Bachelor of Computer Engineering and Management degree from McMaster University in 1986.
Mr. Meyrowitz has been President of 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 beginning in February 1996, and Senior Vice President and General Manager of Macromedia'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 the IRIS 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.
Ms. Nelson has been Senior Vice President and Chief Financial Officer of Macromedia since February 1998. Ms. Nelson joined Macromedia in July 1996 as Vice President, Corporate Development, and was responsible for managing mergers and acquisitions and strategic planning. From 1988 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 in Foreign Service from Georgetown University.
PART II
ITEM 5.
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.
The Company has not paid cash dividends and has no present plans to do so. There were 351 stockholders of record as of May 28, 1999, excluding stockholders whose stock is held in nominee or street name by brokers.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FIVE-YEAR FINANCIAL DATA
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.
ITEM 7.
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, markets and supports software and services for Web publishing and Web learning. Additionally, the Company's new consumer business, shockwave.com, designs, develops and markets aggregated content, products and services to provide and expand online entertainment on the Web. The Company sells its products through a network of distributors, value-added resellers (VARs) and its own sales force and Web site, and to original equipment manufacturers (OEMs) in North America, Europe, Asia Pacific and Latin America. In addition, the Company derives revenues from advertising on its Web sites, and from software maintenance and technology licensing agreements.
During fiscal 1999, the Company continued its focus on the Web as its engine of growth. Dreamweaver, Fireworks and Flash, new products introduced in fiscal 1998 and 1999, provided the majority of the fiscal 1999 revenue growth. The Company continued to invest in its Web Publishing and Learning products and additionally, began to significantly invest in its recently announced consumer business. As of March 31, 1999, total cash and short-term investments totaled $108.8 million, net receivables stood at 31 days sales outstanding, and the Company remained debt free. At March 31, 1999 the Company employed 553 full-time regular staff.
Additional information about Macromedia, its products, sales and marketing, and investor information, can be found on the Web at www.macromedia.com. Financial information included on the Company's Web site shall not be deemed to be a part of this filing.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of revenues for the years ended March 31, 1999, 1998, and 1997.
REVENUES
Revenues were $149.9 million in fiscal 1999, an increase of 33% over fiscal 1998 revenues of $113.1 million. The Web Publishing business segment grew by 27% in fiscal 1999 to $123.8 million, compared to $97.6 million in fiscal 1998. The increase was primarily due to sales of Dreamweaver, Fireworks and Flash. This was partially offset by a decline in sales of Director, primarily related to product lifecycle timing. The Learning segment grew by 3% in fiscal 1999 to $15.9 million compared to $15.4 million in fiscal 1998, as sales growth in the new Pathware management system more than offset a decline in Authorware. Additional growth was achieved through Web advertising and miscellaneous corporate revenues.
International revenues represented 42% of revenues in fiscal 1999 compared to 48% of revenues in fiscal 1998 and 51% of revenues in fiscal 1997. During the fourth quarter of fiscal 1998, the Company experienced a significant decline in revenue from the Asia Pacific region, particularly the Japanese market, as a function of both macroeconomic and industry specific trends. This decline continued in fiscal 1999. The Company's revenue from Japan declined from 21% of total revenue in fiscal 1997 to 15% in fiscal 1998, and to just 8% of total revenue in fiscal 1999. 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.
Windows and cross-platform product revenues increased 29%, while Macintosh-based revenues increased 16%. Windows and cross-platform product revenues represented 58% of revenues for fiscal 1999 compared to 56% for fiscal 1998 and 44% for fiscal 1997.
Revenues in fiscal 1998 were $113.1 million, up 5% from revenues of $107.4 million in fiscal 1997 due to 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.
COST OF REVENUES
Cost of revenues includes cost of materials and manufacturing, royalties paid to third parties for licensed technology, amortization costs related to localization and acquired technology, cost of commissions for Web advertising revenue, reserves for excess and obsolete finished goods and raw materials inventories, and costs associated with order fulfillment. Cost of revenues was $14.3 million in fiscal 1999, down from $15.0 million in fiscal 1998 and $23.2 million in fiscal 1997. This reduction resulted in a 3 percentage point increase in gross margin to 90% of revenues for fiscal 1999 from fiscal 1998. The decrease in costs in fiscal 1999, both in absolute dollars and as a percentage of revenues, was due primarily to the continued effectiveness of cost control programs and improved inventory review procedures resulting in lower product cost and less scrap and inventory discrepancies. 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. Going forward, shockwave.com will incur costs for producing and distributing certain entertainment content, in addition to the cost of commissions for Web advertising revenue.
The reduction in cost of revenues from fiscal 1997 to 1998 was due primarily to the effectiveness of cost control programs implemented during fiscal 1998, the move to just in time manufacturing and improved inventory review procedures.
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 increased 13% in fiscal 1999 to $64.5 million from $56.8 million in the prior year due to increased advertising and promotional costs and the costs associated with additional sales headcount to support increased revenue levels. As a percent of revenue, sales and marketing expenses decreased from 50% in fiscal 1998 to 43% in fiscal 1999. Sales and marketing expenses in fiscal 1998 decreased 5% over fiscal 1997 expenses of $59.6 million 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. The Company expects sales and marketing expenses to increase in absolute dollars in fiscal 2000 as the Company continues to invest in various sales and marketing infrastructure programs, in particular in support of shockwave.com and future revenue growth in the Web Publishing and Learning businesses.
Research and development expenses consist primarily of compensation and benefits, overhead, and professional service fees to support product development. Research and development expenses were $35.6 million in fiscal 1999, up from $32.2 million in fiscal 1998 and $30.0 million in fiscal 1997, reflecting the Company's continued investment in product development and the infrastructure to support it. The Company expects research and development expenses in fiscal 2000 to increase in absolute dollars as the Company continues to invest in its Web Publishing and Learning businesses as well as shockwave.com.
General and administrative expenses consist mainly of compensation and benefits, fees for professional services, and overhead. General and administrative expenses increased from $11.5 million in fiscal 1998 and $8.1 million in fiscal 1997 to $13.1 million in fiscal 1999 due primarily to increases in staffing and infrastructure. The Company expects general and administrative expenses in fiscal 2000 to be higher than fiscal 1999 levels in absolute dollars.
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.
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 $5.0 million in fiscal 1999 compared to $4.7 million in fiscal 1998 and $4.6 million in fiscal 1997. The increase was due primarily to miscellaneous income and greater investment and interest income, partially offset by foreign exchange losses from hedging activities.
PROVISION (BENEFIT) FOR INCOME TAXES
The Company recorded a tax provision of $7.6 million, or 28%, in fiscal 1999 compared to a tax provision of $0.8 million, or 36%, in fiscal 1998. The decrease in the effective tax rate in 1999 as compared to 1998 reflects the utilization of research and experimentation tax credits and foreign operating results, which were taxed at rates other than the U.S. statutory rate. The tax benefit in fiscal 1997 was $3.5 million. An analysis of the differences between the statutory and effective income tax rates is presented in Note 7 of Notes to Consolidated Financial Statements.
NET INCOME/LOSS
Net income was $19.8 million for fiscal 1999, compared to a net loss of $6.2 million for fiscal 1998. The net loss for fiscal 1998 was due primarily to one-time charges associated with the acquisition of Solis in the third quarter. Excluding one-time acquisition charges, net income in fiscal 1998 would have been $1.5 million.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash, cash equivalents and short-term investments of $108.8 million. For fiscal 1999, operating activities provided $31.7 million in net cash, compared with $5.3 million for fiscal 1998. Cash used in investing activities of $18.5 million was used primarily to purchase and develop management information systems and engineering equipment and software, to invest in certain long-term assets and facilities required to support growth. Cash provided by financing activities of $3.9 million was the result of purchases of $20.3 million of common stock under the Company's stock buyback program, offset by $24.1 million in proceeds from the exercise of common stock options. The Company anticipates spending approximately $20.0 million on capital purchases during fiscal 2000 in support of growth in the Web Publishing and Learning businesses as well as shockwave.com.
In fiscal 1999, the Company made investments in property and equipment totaling $11.2 million. This amount includes $5.8 million related to development of a new web infrastructure for sales and marketing, customer support, on-line product distribution, and technical support. The costs capitalized under the project are comprised primarily of consulting fees for software development and related hardware. Amortization of the project over a three year period is expected to begin in the first quarter of fiscal 2000. Additionally, in fiscal 2000, the Company expects to invest a significant amount on information technology infrastructure, and content licensing fees, for the new consumer business.
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. The Board of Directors approved an additional 2,000,000 share repurchase in October 1998, bringing the total approved for repurchase to 4,000,000 shares. During fiscal 1999 the Company repurchased 1,110,000 common shares for $20.3 million, compared to 510,000 common shares for $5.1 million for the period of July 1997 through March 31, 1998.
In addition to cash, cash equivalents, and short-term investments, the Company has $15.0 million available under an unsecured revolving line of credit. The line of credit bears interest at the bank's prime rate and expires on July 15, 1999. The Company anticipates that this line of credit will be renewed. As of and during the fiscal year ended March 31, 1999, 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 2000.
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 and enhanced services. A number of companies currently offer products and services 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), Microsoft Corporation (Microsoft) and Real Networks, Inc. As the Company competes with larger competitors such as Adobe and Microsoft across a broader range of product lines and different platforms, the Company may face increasing competition from such companies. In addition, the Company's consumer business competes and partners with a number of other Internet community, gaming and entertainment sites. Many of these businesses are much larger than the Company's consumer business, and they have more resources devoted to these business efforts. It is anticipated that the Company's consumer business will face competition from these other sites both for consumers and for advertising and other future revenue sources on which the future success of the consumer business is dependent.
RAPIDLY CHANGING TECHNOLOGY. The developing digital media, Internet and online services markets, and the personal computer industry are characterized by rapidly changing technology, resulting in short product life cycles and rapid price declines. The Company must continuously update its existing products, services and content to keep them current with changing technology and consumer tastes and must develop new products, services and content to take advantage of new technologies and consumer preferences that could render the Company's existing products obsolete. The Company's future prospects are highly dependent on its ability to increase functionality of existing products in a timely manner and to develop new products that address new technologies and achieve market acceptance. New products and enhancements must keep pace with competitive offerings, adapt to new platforms and emerging industry standards, and provide additional functionality. There can be no assurance that the Company will be successful in these efforts.
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 Web Publishing products. 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.
UNPROVEN BUSINESS MODEL. The Company's consumer business model depends upon its ability to leverage its existing and future Web traffic and consumer audience to grow revenues and in the future generate multiple revenue streams. The potential profitability of this business model is unproven, and to be successful, the Company must, among other things, develop and market content that achieves broad market acceptance by its user community, Internet advertisers and commerce vendors. There can be no assurance that the consumer business will be able to effectively implement this business model, and even if the implementation is successful, there can be no assurance that the business model will prove to be able to sustain revenue growth or generate significant profits, if any. Furthermore, for the foreseeable future, the Company anticipates that the consumer business will require significant expenditures, particularly related to sales and marketing and brand promotion, and that such expenditures may or may not result in revenue growth. Given the Company's limited operating experience related to the consumer business, the prediction of future revenue growth or operating performance for the consumer business is difficult at best. The Company expects the consumer business to generate net losses for the foreseeable future. In addition to the foregoing the consumer business will depend in part on success in building strategic alliances with other Internet companies and media companies in order to be able to grow the user base and to provide compelling content to attract and maintain the user base. There can be no assurances that such alliances can be created or maintained over an extended period of time.
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%, 28% and 24% of revenues in fiscal 1999, 1998 and 1997, respectively. In addition, the next three distributors combined, two of which are international distributors, accounted for 21% of revenues in fiscal 1999. 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.
DEPENDENCE ON TECHNOLOGY PLATFORMS. In the past, a majority of the Company's revenues was derived from its products for the Macintosh computing platform. Macintosh revenues accounted for 42% of product revenues for fiscal 1999, compared to 44% of revenues for fiscal 1998. Although the relative percentage of Macintosh platform revenues will vary from quarter to quarter based on product release schedules, the Company remains heavily dependent on the sale of products for the Macintosh platform.
The success of the Company's product and consumer businesses is dependent upon the existence and future growth of the Internet as a business, entertainment and communications platform. A change in the Internet or the technology used for operation of the Internet or a decline in the growth of the Internet could have a material adverse effect on the Company's results of operations.
RISKS OF INTERNATIONAL OPERATIONS. For fiscal 1999, the Company derived approximately 42% 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 the prolonged economic downturn occurring in Japan. There can be no assurances that Japan's economy 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's revenue from Japan declined from 21% of total revenue in fiscal 1997 to 15% in fiscal 1998, and to just 8% of total revenue in fiscal 1999.
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, 1999, notional principal of forward contracts outstanding amounted to $10.2 million. There can be no assurance that such contracts will adequately hedge the Company's exposure to currency fluctuations.
EURO DOLLAR. On January 1, 1999, eleven of the fifteen member countries of the European Union adopted the Euro as the common legal currency and established fixed rates of conversion between their existing sovereign currencies and the Euro. The Euro will trade on currency exchanges and be available for non-cash transactions. A three-year transition period is expected during which transactions can be made in the old currencies. The conversion to the Euro will eliminate currency exchange risk between the member counties.
The Company does not anticipate any material impact from the Euro conversion as its financial information system can accommodate multiple currencies. In addition, the company has confirmed with its international financial institutions that they have the ability to process transactions in either Euros or sovereign currency. However, there can be no assurance that all issues related to the Euro conversion have been identified, and the Company may be at risk if any of its principal suppliers are unable to deal with the impact of the Euro conversion. To date, none of the Company's international suppliers have expressed an intention to invoice in Euros.
RISKS ASSOCIATED WITH ACQUISITIONS. Macromedia has grown in part because of combinations with other companies. In October 1997, the Company acquired Solis Design, Inc., a developer of computer managed instruction software for enterprise-wide, Web-based learning solutions. The acquisition was structured as a tax-free merger and was accounted for under the purchase method. The appraisal of the acquired research and development was based upon the present value of the operating cash flows generated by the current technology after taking into account the cost to realize the revenue, the relative risk of the products and an appropriate discount rate to reflect the time value of invested capital. 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. The purchased in-process research and development expense related to completion of Solis' corporate training software. At the time of the acquisition, Solis had a preliminary technology. There were significant uncertainties as to the viability of the technology to provide a complete corporate solution and improvement of the stability of the technology. The Company also concluded that the acquired technology had no alternative future use. In January 1998, the Company released a first Java implementation of the technology, with a more complete Internet solution shipping in March 1999. Additionally, there are integration risks associated with merging two companies including financial, administrative and cultural concerns.
VOLATILITY OF STOCK. 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 factors affecting the corporate environment or the securities markets in general will often result in significant volatility of the Company's common stock price.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. The Company prepares its financial statements in conformity with generally accepted accounting principles ("GAAP"). GAAP are subject to interpretation by the American Institute of Certified Public Accountants (the "AICPA"), the Securities and Exchange Commission (the "SEC"), and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on the Company's reported results, and may even affect the reporting of transactions completed prior to the announcement of a change.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code and embedded technology in existing systems as the year 2000 approaches. The "Year 2000 Issue" arises from the potential for computers to fail or operate incorrectly because their programs incorrectly interpret the two digit date fields "00" as 1900 or some other year, rather than the year 2000. 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 worldwide. Failures of the Company's and/or third parties' computer systems could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity, and financial condition, though the Company is unable to assess that potential impact at this time.
To mitigate this risk, the Company has established a formal year 2000 program to oversee and coordinate the assessment, remediation, testing and reporting activities related to this issue. The Company believes that provided it is able to complete the project as scheduled, the possibility of significant interruptions of normal operations should be reduced.
As previously reported, the Company completed the assessment phase of its year 2000 program. As part of this assessment, the Company's application systems (e.g., financial systems, various custom-developed business applications), technology infrastructure (e.g., networks, servers, desktop equipment), facilities (e.g., security systems, fire alarm systems), vendors, partners and products were reviewed to determine their state of year 2000 compliance. This review included the collection of documentation from software and hardware manufacturers, the detailed review of programming code for custom applications, the physical testing of desktop equipment using software designed to test for year 2000 compliance, the examination of key vendors'/partners' year 2000 programs and the ongoing testing of the Company's products as part of normal quality assurance activities. This assessment revealed no significant issues with the Company's application systems, technology infrastructure, facilities or products.
With the completion of the Company's assessment phase, and with very little remedial action necessary, the Company embarked into its testing phase. At this time, all important systems (both computer systems and systems dependent on embedded technology) have been individually tested and validated for year 2000 compliance, with no significant issues identified. The Company is targeting June 30, 1999 for the completion of all other testing.
All current versions of the Company's products have been tested for year 2000 compliance. In general, the products are believed to be compliant, assuming that the operating systems upon which they run have been updated to comply. Both Microsoft and Apple have stated that their operating systems will continue to operate properly into the twenty-first century. Details about older, non-shipping versions of the Company's products can be found on the Company's Web site.
A year 2000 issue was identified with Shockwave V6.0.1. The corrective action for this issue is for customers to upgrade to version 7.0.0 or later, or to downgrade to version 6.0.0. The Company currently offers Shockwave at no cost as a downloadable run-time technology on their Web site. Both of these upgrades are available at no charge from the Company's Web site. The Company also sells distribution rights to Shockwave which include maintenance. These customers will receive the upgrade in accordance with their maintenance agreements. The Company intends to assess the proper response to any future noted product issues as and when any such issues arise.
Several of the Company's distribution, manufacturing and support partners themselves have significant year 2000 programs underway, some of which involve the upgrade and/or replacement of systems which are important to the day-to-day operations of the partners' business. For each of these partners, the Company has established contingency plans that contemplate the failure of the partners to complete their year 2000 programs. It should also be noted that the Company cannot complete its final testing until the partners' year 2000 programs have been completed, due to the electronic communication that takes place between the Company's and the partners' systems.
The Company believes that the costs associated with completing its year 2000 program will be approximately $0.8 million. The Company reached this assessment with the assistance of outside consultants to whom the Company paid $0.2 million. However, there can be no assurance that the Company will not experience serious unanticipated negative consequences and/or additional material costs caused by undetected errors or defects in its own products, the technology used in its internal systems, or by failures of its vendors/partners to address their year 2000 issues in a timely and effective manner.
As of the end of fiscal year 1999, approximately 50% of the total estimated year 2000 program costs have been incurred. Of the expenditures remaining for the program, it is estimated that 25% of this represents costs associated with human resources performing testing, and 75% represents miscellaneous hardware and software upgrades required for the completion of the year 2000 program. The funding for the year 2000 program is being provided as a normal operating expense (except in the case of any new capital hardware, which is being funded from standard capital budgets).
While the Company's programs are intended to minimize the possibility of such effects, should miscalculations or other operational errors occur as a result of the Year 2000 issue, the Company or the parties on which it depends may be unable to produce reliable information or to process routine transactions. Furthermore, in the worst case, the Company or the parties on which it depends may, for an extended period of time, be incapable of conducting critical business activities which include, but are not limited to, providing services, manufacturing and shipping products, invoicing customers and paying vendors.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high credit quality issuers. As stated in its policy, the Company is averse to principal loss and ensures the safety and preservation of its invested funds by limiting default and market risks. The Company mitigates default risk by investing in only the safest and highest credit quality securities. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. All investments have a fixed interest rate and are carried at market value, which approximates cost.
The table below represents principal (or notional) amounts and related weighted average interest rates by year of maturity for the Company's investment portfolio. All investments mature, by policy, in three years or less.
The Company's functional currency is the US dollar. The Company transacts business in various foreign currencies, primarily in Japan and certain European countries. The Company has established a foreign currency hedging program using foreign currency exchange contracts to hedge foreign-currency-denominated financial assets, and probable anticipated, but not firmly committed, transactions. The goal of this hedging program is to economically guarantee or lock in the exchange rates on the Company's foreign currency exposures that principally arise from the transactions denominated in Japanese Yen and various European currencies. Under this program, increases or decreases in the Company's foreign currency denominated financial assets are partially offset by gains or losses of the hedging instruments. The forward contracts are marked-to-market and unrealized gains and losses are included in current period net income. The Company does not use foreign currency forward exchange contracts for trading purposes.
The table below provides information about the Company's outstanding forward contracts as of March 31, 1999. The information is provided in US dollar equivalents, as presented in the Company's financial statements. The table presents the fair value (at the contract exchange rates) and the weighted average contractual foreign currency exchange rates. All instruments mature June 30, 1999. As of March 31, 1999, the notional amount of the contracts approximate fair value.
As the tables above incorporate only those exposures that exist as of March 31, 1999, they do not consider those exposures or positions that could arise after that date. Exposures to the Company include changes in short-term US prime interest rates and changes in foreign currency rates. Also, because the foreign currency risk table above does not present the foreign currency denominated financial assets and probable anticipated transactions underlying the forward contracts, the information presented has limited predictive value. The Company's ultimate realized gain or loss with respect to foreign currency fluctuations will depend on the exposures that arise during the period, the Company's hedging strategies at the time, and foreign currency rates.
The Company also has loans outstanding from related parties totaling $9.7 million as of March 31, 1999. The stated loan amounts approximate fair value as of March 31 1999.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See accompanying notes to consolidated financial statements
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MACROMEDIA, INC. AND SUBSIDIARIES
1. Summary of Significant Accounting Policies
NATURE OF OPERATIONS. Macromedia develops, markets and supports software and services for Web publishing and Web learning. Additionally, the Company's new consumer business designs, develops and markets aggregated content, products and services to provide and expand online entertainment on the Web. The Company sells its products through a network of distributors, value-added resellers (VARs) and its own sales force and Web site, and to original equipment manufacturers (OEMs) in North America, Europe, Asia Pacific and Latin America. In addition, the Company derives revenues from advertising on its Web sites, and from software maintenance and technology licensing agreements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after eliminations.
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. Revenues and expenses are translated using average exchange rates during the year. Translation adjustments are recorded in the consolidated statements of operations.
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 OF CREDIT RISK. 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 of all new customers and requires letters of credit or bank guarantees, if deemed necessary, but generally requires no collateral. For the years ended March 31, 1999, 1998, and 1997, sales to one distributor, Ingram Micro, accounted for 28%, 28%, and 24% respectively, of consolidated revenue. Accounts receivable relating to this customer were $8.0 million and $4.7 million as of March 31, 1999 and 1998, respectively. Three distributors accounted for an additional 21% of revenues for the year ended March 31, 1999.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade receivables and forward contracts used in hedging activities.
The Company places its cash equivalents, short-term investments, and forward contracts with major financial institutions of high credit standing. The Company does not believe there is significant risk of non-performance by these institutions because the Company monitors their credit ratings and limits the financial exposure to any one commercial issuer and any one type of investment.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. Cash equivalents consist of highly liquid investments with a stated effective maturity of 90 days or less at the time of purchase. Short-term investments consist of readily marketable securities with a maturity of more than 90 days from time of purchase. Where the maturity is more than one year, the securities are classified as short-term as the company's intention is to convert them into cash for operations as needed.
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.
The amortized cost of available-for-sale 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 securities are recorded at fair value. Unrealized gains and losses are reported as a separate component of accumulated other comprehensive income in 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 or the estimated useful life of the related assets, ranging from three to ten years.
Effective January 1, 1997, the Company reduced the estimated useful life of computer equipment from five to three years for future asset purchases.
SOFTWARE 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 lesser of estimated product life or 12 months.
Software costs also include amounts paid for purchased software to be sold and outside development on products which have reached technological feasibility. Purchased software costs are amortized on a straight-line method over the lesser of the estimated economic life of the product or one year. Purchased software approximated $0.2 million as of March 31, 1999. Amortization of software costs will commence in fiscal year 2000.
SOFTWARE FOR INTERNAL USE. The Company capitalizes costs of software, consulting services, hardware and payroll related costs incurred to purchase or develop internal-use software in accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The Company expenses costs incurred during preliminary project assessment, research and development, re-engineering, training and application maintenance.
LONG-LIVED ASSETS. The Company evaluates long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property and equipment exceeds its
fair market value. Property and equipment to be disposed of are reported as the lower of the carrying amount or fair value less costs to sell.
STOCK BASED COMPENSATION. As permitted under SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, in accounting for stock-based awards to employees (see Note 8).
REVENUE RECOGNITION. The Company recognizes revenue from product sales at shipment based on the fair value of the element provided that collection of the resulting receivable is deemed probable, in accordance with SOP 97-2, Software Revenue Recognition. Revenue from multiple element software arrangements are allocated to each element of the arrangement based on the relative fair values of the elements, such as software products, upgrades, enhancements, post contract customer support, installation, or training. The determination of fair value is based on objective evidence which is specific to the Company. If such evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement are delivered. 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 as the services are performed.
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, it is unbundled from the license fee using the Company's objective evidence of the fair value of the maintenance and/or services represented by the Company's customary pricing for such maintenance and/or services. If objective evidence of the fair value of the maintenance is not available, the revenues are recognized ratably over the maintenance term.
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.
In February 1998, the Accounting Standards Executive Committee ("AcSEC") of the AICPA issued SOP 98-4, Deferral of the Effective Date of SOP 97-2. The SOP defers the effective date for applying the provisions regarding vendor-specific objective evidence ("VSOE") of fair value until the AcSEC can reconsider what constitutes such VSOE. There was no material change to the Company's accounting for revenues as a result of the adoption of SOP 98-4.
In December 1998, AcSEC issued SOP 98-9 Software Revenue Recognition, with Respect to Certain Arrangements, which requires recognition of revenue using the "residual method" in a multiple element arrangement when fair value does not exist for one or more of the delivered elements in the arrangement. Under the "residual method", total fair value of the undelivered elements is deferred and subsequently recognized in accordance with SOP 97-2. The Company does not expect a material change to its accounting for revenues as a result of the provisions of SOP 98-9.
MARKETING PROGRAMS. The Company reimburses certain qualified customers for a portion of the 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. The Company also subsidizes other marketing activities through cooperative arrangements with its customers, and accrues the expense as the advertising occurs.
ADVERTISING COSTS. Advertising expenditures are charged to operations as incurred. Advertising expense for the year ended March 31, 1999, 1998, and 1997 was $6.0 million, $3.7 million, and $6.6 million, respectively.
FOREIGN EXCHANGE FORWARD CONTRACTS. The Company uses foreign exchange forward contracts to hedge its net monetary asset positions in foreign currencies. The Company's forward contracts do not qualify as accounting hedges. The Company marks-to-market the forward contracts and includes unrealized gains and losses in current period net income or loss as a component of other income (expense). The Company may from time to time adjust its foreign exchange position by entering into additional contracts or by terminating or offsetting existing foreign currency forward contracts. Gains and losses on terminated or offset contracts are recognized in income in the period of contract termination or offset. Premium and discounts are amortized over the life of the contract and included in operations.
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. Under this method, deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
NET INCOME (LOSS) 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 from the exercises as well as 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, Earnings Per Share.
Incremental common shares attributable to the exercise of outstanding options that were not included in the diluted per share computations because the effect would have been antidilutive totaled 195,402, 1,770,000, and 738,000 in 1999, 1998, and 1997, respectively. The weighted average exercise price of these antidilutive options approximated $32.97, $14.55, and $26.98 as of March 31, 1999, 1998, and 1997, respectively.
COMPREHENSIVE INCOME (LOSS). In 1999, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS 130 establishes standards of reporting and displaying comprehensive income and its components of net income and "other comprehensive income" in a full set of general-purpose financial statements. "Other comprehensive income" refers to revenues, expenses, gains and losses that are not included in net income but rather are recorded directly in stockholders' equity. The adoption of this Statement had no impact on the Company's net income or loss or stockholders' equity. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. The only component of other comprehensive income for the years ended March 31, 1999, 1998 and 1997 was unrealized gains or losses from the Company's available-for-sale securities. The tax effect of other comprehensive income or loss is immaterial for the years ended March 31, 1999, 1998, and 1997
FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 is effective for all quarters of fiscal years beginning after June 15, 1999. The Company has not completed an assessment of the impact of SFAS 133 on the consolidated results of operations and financial position. SFAS 133 requires the recognition of all derivatives on the balance sheet at fair value. The Company is required to adopt the new standard in the first quarter of fiscal year 2002.
RECLASSIFICATION. Certain amounts in the accompanying 1998 and 1997 consolidated financial statements have been reclassified in order to conform with the presentation of the 1999 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 was amortized on a straight-line basis over 12 months. The operating results of Solis, which were not 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. The appraisal of the acquired research and development was based upon the present value of the operating cash flows to be generated by the current technology after taking into account the cost to realize the revenue, the relative risk of the products and an appropriate discount rate to reflect the time value of invested capital. The purchased in-process research and development expense related to
completion of Solis' corporate training software. At the time of the acquisition, Solis had a preliminary technology. There were significant uncertainties as to the stability of the technology and the viability of the technology to provide a complete corporate solution. In January 1998, the Company released a first Java implementation of the technology, with a more complete Internet solution shipping in March 1999.
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.
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of cash, cash-equivalents and short-term investments at March 31, 1999 and 1998:
Short-term investments consisted of the following, by contractual maturity as of March 31, 1999:
The Company's available-for-sale securities are carried at market value. Net unrealized gains were $41,000 and $47,000 at March 31, 1999 and 1998, respectively, principally on U.S. government debt securities.
4. PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 1999 and 1998, consisted of the following:
Depreciation and amortization expense for the years ended March 31, 1999, and 1998, was $8.0 million, and $7.7 million, respectively.
Included in computer software is approximately $5.8 million related to development of a new information technology infrastructure for sales and marketing, customer support, on-line product distribution, and technical support. The costs capitalized under the project are comprised primarily of hardware and consulting fees for software development. Amortization of the project is expected to begin in the first quarter of fiscal 2000.
5. ACCRUED LIABILITIES
Accrued liabilities as of March 31, 1999 and 1998, consisted of the following:
6. LINE OF CREDIT
In fiscal year 1999, the Company renewed its $15.0 million unsecured line of credit with interest at the lender's prime rate (7.75% at March 31, 1999), which expires on July 15, 1999. Certain financial covenants under the agreement become effective when borrowings commence. As of March 31, 1999, 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, 1999, 1998, and 1997, are as follows:
The provision for income taxes differs from the expected tax expense amount computed by applying the statutory federal income tax rate of 35% to income before income taxes for the year ended March 31, 1999 and 1997, and 34% for the year ended March 31, 1998, as a result of the following:
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) as of March 31, 1999 and 1998, is presented as follows:
As of March 31, 1999, the Company has available federal and state net operating loss carryforwards of approximately $72.0 million and $31.5 million, respectively. The Company also has unused research credit carryforwards of approximately $7.8 million and $5.4 million for federal and California purposes, respectively. If not utilized, net operating loss and federal research credit carryforwards will expire generally in fiscal years 2002 through 2019. The California research credits may be carried forward indefinitely.
Approximately $36.9 million of the valuation allowance for deferred tax assets is attributable to employee stock option deductions, the benefit from which will be allocated to paid-in capital rather than current earnings when subsequently recognized and approximately $5.0 million relates to research and experimentation credits, the utilization of which is limited by current tax regulations. These research and experimentation credits will be utilized in future periods if sufficient income is generated. 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.
8. STOCKHOLDERS' EQUITY
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. In July, 1997, the Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company's common stock. In October 1998, the Board of Directors authorized the repurchase of an additional 2,000,000 shares of the Company's stock. During the fiscal year ended March 31, 1999 and 1998, the Company purchased 1,110,000 and 510,000 shares respectively of its stock on the open market at an average price of $18.29 and $10.08 per share respectively. 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.
STOCK OPTION PLANS. As of March 31, 1999, there are stock options outstanding in connection with the following stock option plans:
(i) MacroMind 1989 Incentive and Nonstatutory Stock Option Plans
(ii) Authorware 1988 Stock Option Plan
(iii) 1992 Equity Incentive Plan (EIP)
(iv) 1993 Employee Stock Purchase Plan (ESPP)
(v) 1993 Directors Stock Option Plan
The options outstanding under the plans indicated at (i) and (ii) (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, 1999, was 13,300,000 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 700,000 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, 1999, 1998, and 1997, the Company issued 145,826, 194,786, and 134,691, shares under the plan at average prices of $11.10, $7.54, and $11.25, per share, respectively.
In connection with the Solis acquisition, all of the outstanding options to purchase 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, 1999, 1998, and 1997:
As of March 31, 1999, 1998, and 1997 options to purchase 3,426,321, 3,932,773, and 3,067,496 shares of common stock, respectively, were exercisable under the plans.
The weighted-average fair value of options granted during the years ended March 31, 1999, 1998, and 1997 was $10.11, $4.70, and $9.05 respectively. The weighted average fair value of purchase rights granted under the ESPP during the years ended March 31, 1999, 1998, and 1997, was $7.53, $3.74, and $4.81 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, of $87,000 was fully amortized in fiscal year 1999.
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 income (loss) and pro forma net income (loss) per share for the years ended March 31, 1999, 1998 and 1997, would have been changed as indicated below:
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 1999, 1998, and 1997:
The following table summarizes information about fixed stock options outstanding as of March 31, 1999:
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:
Rent expense was $4.5 million, $4.4 million, and $3.0 million for the years ended March 31, 1999, 1998, and 1997, respectively. For the year ended March 31, 1999 and 1998, sublease income was $2.9 million and $1.2 million, respectively. The Company received no sublease income in 1997.
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 seeking dismissal of the complaint, as well as other motions, in late 1997. Before the demurrers were heard, one defendant, Richard Wood, died in an automobile accident. In March 1998, the Court sustained in part and overruled in part the demurrers. 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. Defendants answered the complaint. In May 1999, the Court granted the plaintiff's motion for class certification.
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 Litigation Reform Act by the District Court. A consolidated complaint was filed in February, 1998. Defendants moved to dismiss that complaint on the grounds that plaintiffs' claims were barred by the applicable statute of limitations. In May 1998, the United States District Court for the Northern District of California granted defendants' motion to dismiss with prejudice, and entered judgment in favor of defendants. Plaintiffs have appealed to the United States Court of Appeals for the Ninth Circuit, and that appeal is pending.
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 continue to vigorously defend the actions.
10. FOREIGN CURRENCY FORWARD CONTRACTS
The Company enters into forward contracts to reduce its exposure to foreign currency fluctuations involving probable anticipated, but not firmly committed, transactions and transactions with firm foreign currency commitments occurring within a 90-day period. The Company does not enter into derivative financial instruments for trading purposes.
As a result of this activity, the Company had outstanding forward contracts in various European currencies and Japanese Yen outstanding as of March 31, 1999. The forward contracts are accounted for on a mark-to-market basis, with realized gains or losses recognized in the consolidated statement of operations. As of March 31, 1999 and 1998, the fair value and contract amount of the forward contracts amounted to $10.2 million and $5.7 million, respectively. The future value of these contracts is subject to market risk resulting from foreign exchange rate volatility. Current market rates at the consolidated balance sheet date were used to estimate the fair value of foreign currency forward contracts. All contracts mature on June 30, 1999.
The table below provides information about the Company's outstanding forward contracts as of March 31, 1999. The information is provided in US dollar equivalents, as presented in the Company's financial statements. The table presents the fair value (at the contract exchange rates) and the weighted average contractual foreign currency exchange rates. All instruments mature June 30, 1999. As of March 31, 1999, the gross unrealized gains and losses on the forward contracts were not significant.
The Company is exposed to credit loss in the event of nonperformance by counterparties but the Company does not anticipate nonperformance by these counterparties. The Company does not enter into derivative financial instruments for trading purposes.
11. EMPLOYEE BENEFITS
The Company maintains a profit sharing salary deferral 401(k) defined contribution benefit plan that covers all employees who have attained 18 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, 1999, 1998, and 1997, were $465,000, $359,000, and $447,000, respectively.
12. RELATED PARTY TRANSACTIONS
During fiscal year 1999, the Company made loans totaling $2.5 million to two officers in conjunction with their hiring and relocation. The notes bear interest at 5.56% and 5.51% per annum and mature in 2001.
During fiscal year 1998 and 1997, the Company made loans to officers totaling $8.0 million, also in conjunction with their hiring and relocation. These loans bear interest at rates ranging from 5.53% to 6.8% per annum and mature from 1999 to 2004. 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.
All loans outstanding are full recourse and are included in other long term receivables. The loans are secured by the personal residences of the officers and due after termination of the officer if before maturity date of the loan. The principal and accrued interest are due in full on the maturity dates of the loans. Interest receivable of $0.4 million was due to the Company as of March 31, 1999. The total loan amount outstanding as of March 31, 1999 approximated $9.7 million, which reflects payments from certain officers. As of March 31, 1999, the stated loan amounts approximate fair value.
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. Due to space limitations, the Company terminated the lease in September 1998 and relocated to another office in Texas. For the fiscal year ended March 31, 1999, the Company paid $110,000 in lease payments to RPP.
13. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance.
Macromedia has two reportable segments which offer different product lines: Web Publishing and Learning. The Web Publishing division develops software that creates Web site layout, graphics and rich media content for Internet users. The Learning division develops software and online Internet solutions that create, distribute and manage enterprise-wide training programs for organizations. The Company evaluates operating segment performance based on net revenues and direct operating expenses of the segment. The accounting policies of the operating segments are the same as those described in the summary of accounting policies. No segments have been aggregated. The Company does not allocate assets to its individual operating segments. For the year ended March 31, 1997, the Company did not provide to its Chief Operating Decision Maker operating results by segment. Segment information is not available for fiscal year 1997.
Information about reported segment income or loss is as follows:
For the year ended March 31, 1999 and 1998, the "Other" category consists of various corporate revenues and expenses which do not qualify as a segment under FAS 131.
A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements for the years ended March 31, 1999 and 1998 is as follows:
14. GEOGRAPHIC INFORMATION
The Company's operations outside the United States consist of sales offices in Japan, the United Kingdom, the Netherlands, the Republic of Ireland, and Canada that are wholly owned subsidiaries and a branch in Australia. 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. Revenues are attributed to region based on the location of the customer. In 1998 and 1997,
revenue in Japan accounted for a significant portion of the Company's total revenues. No other individual country contributed more than 10% of total revenues for the years ended March 31, 1999, 1998, and 1997. No individual country's assets comprised more than 10% of total assets as of March 31, 1999, 1998, and 1997.
The distribution of net revenues and identifiable assets by geographic areas for the years ended March 31, 1999, 1998, 1997 are as follows:
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Macromedia, Inc. and Subsidiaries
Summarized quarterly financial information for fiscal years 1999 and 1998 is as follows:
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.
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, 1999 and 1998, 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, 1999. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying Index in Item 14 herein. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1999, 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 LLP
San Francisco, California April 30, 1999
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10.
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 9 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.
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.
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.
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."
PART IV
ITEM 14.
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, 1999 and 1998 Consolidated Statements of Operations - Years Ended March 31, 1999, 1998, and 1997 Consolidated Statements of Cash Flows - Years Ended March 31, 1999, 1998, and 1997 Consolidated Statements of Stockholders' Equity - Years Ended March 31, 1999, 1998 and 1997 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, 1999, 1998 and 1997 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
* 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.
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 15, 1999
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.
MACROMEDIA, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1999, 1998 AND 1997 (IN THOUSANDS)