MACROMEDIA INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File No. 000-22688

MACROMEDIA, INC.

(Exact name of registrant as specified in its charter)

Delaware

94-3155026

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer

Identification No.)

600 Townsend Street

San Francisco, California 94103

Telephone: (415) 252-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Act. Yes x No ¨

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 71.2 million shares of Common Stock, $0.001 par value per common share, outstanding on July 27, 2004, including 1.8 million shares held in treasury.

MACROMEDIA, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2004

INDEX


PART I FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets at June 30, 2004 and March 31, 2004	3

		Condensed Consolidated Statements of Income for the Three Months Ended June 30, 2004 and 2003	4

		Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2004 and 2003	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

	Item 4.	Controls and Procedures	34

PART II OTHER INFORMATION

	Item 1.	Legal Proceedings	35

	Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	35

	Item 3.	Defaults Upon Senior Securities	35

	Item 4.	Submission of Matters to a Vote of Security Holders	35

	Item 5.	Other Information	35

	Item 6.	Exhibits and Reports on Form 8-K	35

	Signatures		37

MACROMEDIA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)


	June 30, 2004			March 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	66,511		$	92,662
Short-term investments		201,886			190,029
Accounts receivable, net of allowance for doubtful accounts of $2,172 and $1,919 at June 30, 2004 and March 31, 2004, respectively		46,099			38,210
Restricted cash		8,019			16,363
Prepaid expenses and other current assets		17,614			15,581

Total current assets		340,129			352,845
Property and equipment, net		82,704			45,512
Goodwill, net		237,523			237,839
Intangible assets, net		12,224			12,950
Restricted cash, non-current		7,022			7,022
Deferred income taxes, non-current		16,521			16,062
Other assets		8,462			9,658

Total assets	$	704,585		$	681,888


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,764		$	5,311
Accrued payroll and related liabilities		16,681			17,634
Accrued liabilities		33,085			41,151
Income taxes payable		13,298			11,838
Accrued restructuring		6,360			6,934
Deferred revenues		36,559			32,215

Total current liabilities		111,747			115,083

Other liabilities, non-current:
Accrued restructuring		10,175			11,657
Deferred revenues		5,662			5,173
Other liabilities		4,986			5,024

Total liabilities		132,570			136,937

Commitment and contingencies

Stockholders’ equity:
Preferred stock, par value $0.001 per preferred share: 5,000 shares authorized, no shares issued as of June 30, 2004 and March 31, 2004		—			—
Common stock, par value $0.001 per common share: 200,000 shares authorized, 71,138 and 70,069 shares issued as of June 30, 2004 and March 31, 2004, respectively		71			70
Treasury stock, at cost: 1,818 shares as of June 30, 2004 and March 31, 2004		(33,649	)		(33,649	)
Additional paid-in capital		868,984			855,073
Accumulated other comprehensive income (loss)		(357	)		408
Accumulated deficit		(263,034	)		(276,951	)

Total stockholders’ equity		572,015			544,951

Total liabilities and stockholders’ equity	$	704,585		$	681,888

See accompanying notes to condensed consolidated financial statements.

MACROMEDIA, INC.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)


	Three Months Ended June 30,
	2004		2003
Net revenues	$	103,554	$	83,064
Cost of revenues:
Cost of net revenues		7,470		7,189
Amortization of acquired developed technology		744		319

Total cost of revenues		8,214		7,508

Gross profit		95,340		75,556

Operating expenses:
Sales and marketing		44,008		34,676
Research and development		23,615		23,300
General and administrative		11,119		9,702
Amortization of intangible assets		241		247

Total operating expenses		78,983		67,925

Operating income		16,357		7,631

Other income (expense):
Interest income, net		941		891
Gain on investments		—		65
Other, net		37		(174	)

Total other income		978		782

Income before income taxes		17,335		8,413
Provision for income taxes		3,418		1,683

Net income	$	13,917	$	6,730

Net income per common share:
Basic	$	0.20	$	0.11
Diluted	$	0.19	$	0.10
Weighted average common shares outstanding used in net income per common share calculation:
Basic		68,830		61,670
Diluted		74,180		65,480

See accompanying notes to condensed consolidated financial statements.

MACROMEDIA, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended June 30,
	2004			2003
Cash flows from operating activities:
Net income	$	13,917		$	6,730
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,595			5,025
Gain on investments		—			(65	)
Changes in operating assets and liabilities, net of business combinations:
Accounts receivable, net		(7,889	)		2,962
Prepaid expenses and other assets		(2,898	)		2,112
Accounts payable and other liabilities		3,639			990
Accrued restructuring		(2,056	)		(3,294	)
Deferred revenues		4,833			(3,484	)

Net cash provided by operating activities		14,141			10,976


Cash flows from investing activities:
Purchases of property and equipment		(38,101	)		(1,366	)
Cash used in business combinations		(11,275	)		—
Decrease in restricted cash related to acquisition and other, net		8,344			—
Purchases of available-for-sale short-term investments		(29,941	)		(83,261	)
Proceeds from sales and maturities of available-for-sale short-term investments		16,077			53,971
Other, net		820			1,250

Net cash used in investing activities		(54,076	)		(29,406	)


Cash flows from financing activities:
Proceeds from issuance of common stock		13,784			16,771

Net cash provided by financing activities		13,784			16,771

Net decrease in cash and cash equivalents		(26,151	)		(1,659	)
Cash and cash equivalents, beginning of period		92,662			96,831

Cash and cash equivalents, end of period	$	66,511		$	95,172

See accompanying notes to condensed consolidated financial statements.

MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Operations

Macromedia, Inc. (the “Company” or “Macromedia”) provides software that empowers designers, developers and business users to create and deliver effective user experiences on the Internet, fixed media and wireless and digital devices. The Company’s integrated family of technologies enables the development of a wide range of internet solutions including websites, rich media content and internet applications across multiple platforms and devices.

The Company sells its products through a worldwide network of distributors, value-added resellers (“VARs”) and its own sales force and websites. In addition, Macromedia derives revenues from software maintenance and technology licensing agreements that it has with original equipment manufacturers (“OEMs”) and end users.

2. Summary of Significant Accounting Policies

Basis of Presentation. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The interim financial information is unaudited, but reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of Macromedia’s consolidated financial position, operating results and cash flows for the interim periods. The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods.

These Condensed Consolidated Financial Statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and notes normally provided in annual financial statements. As a result, these Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in Macromedia’s annual report on Form 10-K for the fiscal year ended March 31, 2004. The results of operations for the three months ended June 30, 2004 are not necessarily indicative of the results for the fiscal year ending March 31, 2005 or any other future periods.

Certain reclassifications have been made to the Condensed Consolidated Financial Statements as of June 30, 2003 and for the three months then ended to conform to the presentation at June 30, 2004.

Software Revenue Recognition. The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.

Revenues recognized from software licenses are recognized upon shipment provided that persuasive evidence of an arrangement exists, collection of the resulting receivables is deemed probable and the payment terms are fixed and determinable. The Company also maintains allowances for anticipated product returns and rebates to distributors. Revenues from consulting, training and other services are generally recognized as the services are performed. When shrink-wrap software licenses are sold together with services, revenues are allocated to each element of the arrangement based on the relative fair values of the elements, such as software products, maintenance, support and training.

MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The determination of fair value is based on objective evidence that is specific to the Company, commonly referred to as vendor-specific objective evidence (“VSOE”). Fair value for the Company’s software products, maintenance, support and training is based on prices charged when the element is sold separately. In certain instances where an element has not been sold separately and the VSOE of fair value is unavailable, fair value is established by a price determined by the Company’s management if it is probable that the price, once established, will not change before the separate introduction of the element into the marketplace. 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. If the only remaining undelivered element is maintenance and support, revenue for all elements would be recognized ratably over the period of maintenance and support. If in a multiple element arrangement, fair value does not exist for one or more of the delivered elements in the arrangement, but fair value does exist for all undelivered elements, then the residual method of accounting is applied. Under the residual method of accounting, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

The Company licenses products to OEMs and/or provides end-user customers the right to use multiple copies. These arrangements generally provide for nonrefundable fixed fees. Revenues are recognized upon delivery of the product master or the first copy, provided that all significant obligations have been met, persuasive evidence of an arrangement exists, fees are fixed and determinable and collection is probable. Per-copy royalties in excess of the fixed minimum amounts are recognized as revenues when reported. If maintenance and support 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 support. If objective evidence of the fair value of the maintenance and support is not available, the revenues from the entire arrangement are recognized ratably over the maintenance and support term.

Fees from volume licenses are recognized as revenues upon shipment provided that all significant obligations have been met, persuasive evidence of an arrangement exists, fees are fixed and determinable, collection is probable and the arrangement does not involve services that are essential to the functionality of the software. Fees from licenses sold together with consulting services are generally recognized upon shipment provided that the above criteria have been met and payment of the licenses is not dependent upon the performance of consulting services. Revenues from maintenance and support are recognized on a straight-line basis over the term of the contract.

During periods of product transition when upgraded versions of existing products are being introduced and released for commercial shipment, we provide eligible end-user customers who purchased the older product version during a specified time frame the right to receive the upgrade version of the licensed product at no additional charge. The Company also offers certain discount rights to existing users to encourage their migration to other Macromedia products. Such transactions are multiple-element arrangements under which we defer revenue equal to the fair value of the specified upgrade or discount right, reduced by the estimated percentage of customers who will not exercise the discount right in the specified time period. Estimates of customers not exercising the discount right are based upon historical analyses. The actual percentage of customers not exercising the discount right has been materially consistent with our estimates.

For desktop software products, the Company offers complimentary 90-day technical support to end-user customers who have registered their products via e-mail or over the phone. This cost is included as part of the initial license fee charged to these customers. The Company has determined that the cost to provide this support is insignificant. In addition, no product updates are provided during this period. As a result, the Company does not defer any portion of the license fee related to this support.

MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Stock-Based Compensation. As permitted under Statement of Financial Accounting Standard (“SFAS”) No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for stock-based compensation to employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the market price of the Company’s common stock at the date of grant over the stock option exercise price. Compensation costs are amortized on a straight-line basis over the expected service period, which is generally the vesting period of the stock-based awards.

Pursuant to SFAS No. 148, the Company is required to disclose the pro forma effects of stock-based compensation on net income and net income 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 with the fair value approach in accordance with SFAS No. 123, the Company’s pro forma net loss and pro forma net loss per sha

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