{"id":40217,"date":"2015-09-17T11:25:58","date_gmt":"2015-09-17T16:25:58","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/contracts\/uncategorized\/offer-to-exchange-outstanding-options-macromedia-inc.html"},"modified":"2015-09-17T11:25:58","modified_gmt":"2015-09-17T16:25:58","slug":"offer-to-exchange-outstanding-options-macromedia-inc","status":"publish","type":"corporate_contracts","link":"https:\/\/corporate.findlaw.com\/contracts\/compensation\/offer-to-exchange-outstanding-options-macromedia-inc.html","title":{"rendered":"Offer to Exchange Outstanding Options – Macromedia Inc."},"content":{"rendered":"
\n                                MACROMEDIA, INC.\n\n                      OFFER TO EXCHANGE OUTSTANDING OPTIONS\n\n   THIS OFFER EXPIRES AT 5:00 P.M. PACIFIC TIME ON JUNE 4, 2001 UNLESS IT IS\n                                    EXTENDED\n\n\n        Starting May 4, 2001, Macromedia, Inc. is offering its option holders\nthe opportunity to exchange outstanding stock options for new options granted\nmore than six months and a day from the date this offer expires, with an\nexchange price set at the then-prevailing fair market value. Any options that\nwere granted and are outstanding under the Macromedia, Inc. 1992 Equity\nIncentive Plan, the Macromedia, Inc. 1999 Stock Option Plan and the Andromedia,\nInc. 1999 Stock Plan (collectively, the \"PLANS\"), along with some non-plan\noption grants originally granted by Macromedia, are eligible for this exchange\noffer. We are making this offer subject to the terms and conditions set forth in\nthis offer to exchange and in the election form. The offer expires on June 4,\n2001, unless we extend the offer period.\n\n        If you choose to exchange any of your stock options, you MUST also\nexchange and agree to cancel any stock options granted on or after December 1,\n2000. This offer is subject to other conditions, which we describe in Sections 5\nand 6 of this offer. The number of shares of common stock covered by the new\noptions to be granted to each option holder will be equal to the number of\nshares subject to the options exchanged by that option holder and accepted for\nexchange. The new options will be granted on a date between December 5, 2001 and\nJanuary 21, 2002 (we call this the \"REPLACEMENT GRANT DATE\").\n\n        If you elect to exchange options as described in this offer and your\noffer is accepted, we will, subject to the conditions set forth in Section 5,\ngrant you a new option, pursuant to a new stock option agreement. The exercise\nprice of the new option will be equal to the last reported sale price of our\ncommon stock on the Nasdaq National Market on the date preceding the replacement\ngrant date. The new options will be nonqualified stock options and will have the\nsame vesting schedule as the options that you exchanged, except that you will\nnot be able to exercise the new options for one week following the replacement\ngrant date, to let us handle administrative matters relating to the new grant.\nThe other terms and conditions of the new options will be determined by the\nCompensation Committee.\n\n        ALTHOUGH OUR BOARD OF DIRECTORS HAS APPROVED THIS OFFER, NEITHER WE NOR\nTHE BOARD MAKES ANY RECOMMENDATION AS TO WHETHER OR NOT YOU SHOULD ELECT TO\nEXCHANGE YOUR OPTIONS. YOU MUST MAKE YOUR OWN DECISION WHETHER TO ELECT TO\nEXCHANGE YOUR OPTIONS.\n\n        Shares of our common stock are quoted on the Nasdaq National Market\nunder the symbol \"MACR.\" On May 3, 2001, the closing sale price of the common\nstock on the Nasdaq National Market was $20.60 per share. WE RECOMMEND THAT YOU\nOBTAIN CURRENT MARKET QUOTATIONS FOR OUR COMMON STOCK AND CONSULT WITH YOUR OWN\nADVISORS BEFORE DECIDING WHETHER TO ELECT TO EXCHANGE YOUR OPTIONS.\n\n        YOU SHOULD DIRECT QUESTIONS ABOUT THIS OFFER OR REQUESTS FOR ASSISTANCE\nOR FOR ADDITIONAL COPIES OF THE OFFER TO EXCHANGE OR THE ELECTION FORM TO\nDARRELL HONG, BY EMAIL AT DHONG@MACROMEDIA.COM, OR BY TELEPHONE AT (415)\n252-6860 OR TO FRANCI CLAUDON, BY EMAIL AT FCLAUDON@MACROMEDIA.COM, OR BY\nTELEPHONE AT (415) 252-4086.\n\n\n   2\n\n                                    IMPORTANT\n\n        If you wish to elect to exchange some or all of your options, you must\ncomplete and sign the election form in accordance with its instructions, and\nsend it and any other required documents to Darrell Hong or Franci Claudon by\nfax at (415) 252-2348 or by mail to Darrell Hong or Franci Claudon, Macromedia,\nInc., 600 Townsend St., San Francisco, CA 94103, no later than 5:00 p.m. Pacific\nTime on June 4, 2001.\n\n        We are not making this offer to, and we will not accept any election to\nexchange options from, option holders in any jurisdiction in which the offer or\nthe acceptance of any election to exchange would not be in compliance with the\nlaws of such jurisdiction. However, we may at our discretion take any actions\nnecessary for us to make this offer to option holders in any such jurisdiction.\n\n        WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON OUR\nBEHALF AS TO WHETHER YOU SHOULD ELECT TO EXCHANGE OR REFRAIN FROM ELECTING TO\nEXCHANGE YOUR OPTIONS PURSUANT TO THE OFFER. YOU SHOULD RELY ONLY ON THE\nINFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE\nNOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY REPRESENTATION\nIN CONNECTION WITH THIS OFFER OTHER THAN THE INFORMATION AND REPRESENTATIONS\nCONTAINED IN THIS DOCUMENT OR IN THE ELECTION FORM. IF ANYONE MAKES ANY\nRECOMMENDATION OR REPRESENTATION TO YOU OR GIVES YOU ANY INFORMATION, YOU MUST\nNOT RELY UPON THAT RECOMMENDATION, REPRESENTATION OR INFORMATION AS HAVING BEEN\nAUTHORIZED BY US.\n\n\n                                          RELEVANT DATES\n\n        COMMENCEMENT DATE:                May 4, 2001, the date of this\n                                          exchange offer\n\n        EXPIRATION DATE:                  June 4, 2001, unless extended\n\n        REPLACEMENT GRANT DATE:           Date to be determined, between\n                                          December 5, 2001 and January 21, 2002\n\n\n   3\n\n                                TABLE OF CONTENTS\n\n\n<\/pre>\n\n
\n                                                                                                                  PAGE
\n                                                                                                                
\nSUMMARY TERM SHEET……………………………………………………………………………………..1<\/p>\n
THE OFFER ……………………………………………………………………………………………10<\/p>\n
1.         NUMBER OF OPTIONS; EXPIRATION DATE…………………………………………………………….10<\/p>\n
2.         PURPOSE OF THE OFFER…………………………………………………………………………11<\/p>\n
3.         PROCEDURES FOR ELECTING TO EXCHANGE OPTIONS…………………………………………………….12<\/p>\n
4.         WITHDRAWAL RIGHTS……………………………………………………………………………13<\/p>\n
5.         ACCEPTANCE OF OPTIONS FOR EXCHANGE AND CANCELLATION AND ISSUANCE OF NEW OPTIONS…………………….14<\/p>\n
6.         CONDITIONS OF THE OFFER………………………………………………………………………15<\/p>\n
7.         PRICE RANGE OF COMMON STOCK UNDERLYING THE OPTIONS………………………………………………17<\/p>\n
8.         SOURCE AND AMOUNT OF CONSIDERATION; TERMS OF NEW OPTIONS…………………………………………18<\/p>\n
9.         INFORMATION CONCERNING MACROMEDIA……………………………………………………………..18<\/p>\n
10.        INTERESTS OF DIRECTORS AND OFFICERS; TRANSACTIONS AND ARRANGEMENTS CONCERNING THE OPTIONS……………19<\/p>\n
11.        STATUS OF OPTIONS ACQUIRED BY US IN THE OFFER; ACCOUNTING CONSEQUENCES OF THE OFFER…………………20<\/p>\n
12.        LEGAL MATTERS; REGULATORY APPROVALS……………………………………………………………21<\/p>\n
13.        MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES…………………………………………………..21<\/p>\n
14.        EXTENSION OF OFFER; TERMINATION; AMENDMENT……………………………………………………..23<\/p>\n
15.        FEES AND EXPENSES……………………………………………………………………………24<\/p>\n
16.        ADDITIONAL INFORMATION……………………………………………………………………….24<\/p>\n
17.        MISCELLANEOUS……………………………………………………………………………….25<\/p>\n
FINANCIAL INFORMATION…………………………………………………………………………………F-1<\/p>\n
SENT UNDER SEPARATE COVER:  Election form
\n<\/c><\/s><\/caption>\n<\/table>\n
   4<\/p>\n
                               SUMMARY TERM SHEET<\/p>\n
        This section answers some of the questions you may have about this
\noffer. It is only a summary, so you should read the remainder of this offer to
\nexchange and the election form carefully, because the summary is not complete
\nand additional important information is contained in the remainder of this offer
\nto exchange and the election form.<\/p>\n
                       GENERAL QUESTIONS ABOUT THE PROGRAM<\/p>\n
1.      WHAT ARE THE ELIGIBLE OPTIONS IN THIS OFFER TO EXCHANGE?<\/p>\n
        We are offering to exchange all options to purchase shares of
\nMacromedia, Inc. common stock that were granted and are outstanding under the
\nMacromedia, Inc. 1992 Equity Incentive Plan, the Macromedia, Inc. 1999 Stock
\nOption Plan and the Andromedia, Inc. 1999 Stock Plan (collectively, the
\n“PLANS”), along with some non-plan option grants that were originally granted by
\nMacromedia, for new options. Any options not listed above, including, but not
\nlimited to, those granted by Allaire Corporation and assumed by Macromedia as
\npart of our merger, are not included in this offer. See Section 1 of the Offer.<\/p>\n
2.      WHY ARE WE MAKING THE OFFER TO EXCHANGE?<\/p>\n
        Many of you have stock options that are priced significantly above our
\ncurrent stock price and the recent trading prices for our stock. These options
\nhave lost much of the incentive benefit that we originally intended them to
\nhave. By making this offer, we intend to provide you with the benefit of owning
\noptions that, over time, may have a greater potential to increase in value. We
\nbelieve the offer creates better performance incentives for employees and
\nthereby maximizes shareholder value.<\/p>\n
        This option exchange program is voluntary. You choose whether to keep
\nyour current stock options at their existing exercise price or to cancel those
\noptions in exchange for new options to be granted on a date between December 5,
\n2001 and January 21, 2002 (we call this the “REPLACEMENT GRANT DATE”). The new
\noptions would be nonqualified stock options, would cover the same number of
\nshares as the options you validly tendered for exchange, and would have an
\nexercise price equal to the last sale price of our common stock on the trading
\nday immediately preceding the replacement grant date. See Section 2 of the
\nOffer.<\/p>\n
3.      WHO IS ELIGIBLE?<\/p>\n
        Except for non-executive members of the Macromedia Board of Directors,
\nany current employee of Macromedia or any subsidiary of Macromedia who holds a
\ncurrent stock option under one or more of the Plans (along with some non-plan
\noption grants), is eligible to participate in the program. See Section 1 of the
\nOffer.<\/p>\n
4.      DOES THE OFFER TO EXCHANGE EXTEND TO ALL OUTSTANDING MACROMEDIA OPTIONS?<\/p>\n
        No. The offer to exchange extends only to the eligible options
\nidentified in question 1.<\/p>\n
                                       1
\n   5<\/p>\n
5.      WILL OVERSEAS EMPLOYEES BE ELIGIBLE TO PARTICIPATE?<\/p>\n
        Yes, subject to the applicable laws of the corresponding jurisdiction.<\/p>\n
6.      WHEN DOES THE EXCHANGE OFFER START?<\/p>\n
        May 4, 2001.<\/p>\n
7.      WHEN DOES THE OFFER END?<\/p>\n
        To participate, you must make a voluntary and valid election that is not
\nsubsequently withdrawn, no later than 5:00 p.m. Pacific Time on June 4, 2001
\n(the “EXPIRATION DATE”).<\/p>\n
8.      WHAT HAPPENS IF I ELECT TO PARTICIPATE?<\/p>\n
        If you elect to participate in the exchange offer by the expiration date
\nand we accept your election, we will cancel your outstanding stock options
\nsurrendered by you for exchange in the offer by the expiration date. In
\nexchange, subject to the conditions set forth in Section 5, you will receive a
\nnew option to purchase the same number of shares as your canceled option, to be
\nissued on the replacement grant date, with a new exercise price per share that
\nis equal to the last sale price of Macromedia’s stock on the trading day
\nimmediately preceding the replacement grant date.<\/p>\n
        Your new options granted in this program will have the same vesting
\nschedule as your canceled options. The vesting start date for the replacement
\noption will be the same vesting start date that applied to the canceled option.
\nYou will receive vesting credit for the time between the date we cancel your
\noptions, which we expect to be June 4, 2001, and the replacement grant date as
\nif the options you elect to cancel were outstanding throughout this period. See
\nquestion 36 below for an example.<\/p>\n
        If you wish to exchange any of your options, you must also agree to
\ncancel all options granted to you on or after December 1, 2000, regardless of
\ntheir exercise price.<\/p>\n
9.      WHAT DO I NEED TO DO TO PARTICIPATE IN THE OFFER TO EXCHANGE?<\/p>\n
        Complete the election form, sign it, and ensure that Darrell Hong or
\nFranci Claudon receives it no later than the expiration date and follow all
\nother applicable instructions set forth in this offer and the election form. You
\ncan return your form either by fax to (415) 252-2348, or by mail to Darrell Hong
\nor Franci Claudon, Macromedia, Inc., 600 Townsend St., San Francisco, CA 94103.
\nSee Section 3 of the Offer.<\/p>\n
10.     IS THIS A REPRICING?<\/p>\n
        This is not an option repricing in the traditional sense. Under a
\ntraditional stock option repricing, your options would be immediately replaced
\nwith new options at a lower option price. If you participate in this exchange,
\nyou surrender your option or options and wait more than six months to be granted
\na new option at the last sale price of Macromedia stock on the trading day
\nimmediately preceding the replacement grant date. Because the new options will
\nbe priced on a future date, the exercise price of the new options may be higher
\nthan the exercise price of the surrendered options. See Section 11 of the Offer.<\/p>\n
                                       2
\n   6<\/p>\n
11.     WHY CAN’T MACROMEDIA JUST REPRICE MY OPTIONS?<\/p>\n
        In 1998, the Financial Accounting Standards Board adopted unfavorable
\naccounting charge consequences for companies that reprice options. If we simply
\nrepriced options, our profitability could be in serious jeopardy, because we
\nwould be required to take a charge against earnings on any future appreciation
\nof the repriced options. These charges would continue for the entire term of the
\nrepriced options – as long as ten years. We do not believe that jeopardizing our
\nprofitability in this way is in the best interest of our employees or our
\nstockholders. This offer has been structured to avoid this variable plan
\naccounting treatment. See Section 11 of the Offer.<\/p>\n
12.     WHY CAN’T I JUST BE GRANTED ADDITIONAL OPTIONS?<\/p>\n
        Granting large numbers of new options would have a negative impact on
\nour dilution, outstanding shares and earnings per share. See Sections 2 and 11
\nof the Offer.<\/p>\n
13.     WOULDN’T IT BE EASIER TO JUST QUIT AND GET REHIRED?<\/p>\n
        This is not an available alternative because a re-hire and re-grant
\nwithin six months of the option cancellation date would be treated the same as a
\nrepricing. Again, such a repricing would cause us to incur a variable accounting
\ncharge against earnings.<\/p>\n
14.     IF I ELECT TO PARTICIPATE, WHAT WILL HAPPEN TO MY CURRENT OPTIONS?<\/p>\n
        Options that you designate to be exchanged under this program will be
\ncanceled. See Section 5 of the Offer.<\/p>\n
15.     WHAT IS THE DEADLINE TO ELECT TO EXCHANGE AND HOW DO I DO SO?<\/p>\n
        The deadline to elect to participate in this program, which we also
\nrefer to as the “EXPIRATION DATE”, is 5:00 p.m. Pacific Time on June 4, 2001,
\nunless we extend it. This means that Darrell Hong or Franci Claudon must receive
\nyour completed election form by this deadline. We may, in our discretion, extend
\nthe offer at any time, but we cannot assure you that the offer will be extended
\nor, if it is extended, for how long. If we extend the offer, we will make an
\nannouncement of the extension no later than the next business day following the
\npreviously scheduled expiration of the offer period. If we extend the offer
\nbeyond that time, you must deliver your completed election form before the
\nextended expiration of the offer.<\/p>\n
        We reserve the right to reject any or all options elected for exchange
\nthat we determine are not in appropriate form or that we determine are unlawful
\nto accept. Otherwise, we will accept properly and timely elected options that
\nare not validly withdrawn. Subject to our rights to extend, terminate, and amend
\nthe offer, we currently expect that we will accept all such properly elected
\noptions promptly after the expiration of the offer.<\/p>\n
16.     WHAT WILL HAPPEN IF I DO NOT TURN IN MY FORM BY THE DEADLINE?<\/p>\n
        If you do not turn in your election form by the deadline, you will not
\nparticipate in the option exchange, and all stock options you currently hold
\nwill remain intact at their original price and under their original terms. See
\nSection 3 of the Offer.<\/p>\n
                                       3
\n   7<\/p>\n
17.     DURING WHAT PERIOD OF TIME MAY I WITHDRAW PREVIOUSLY ELECTED OPTIONS?<\/p>\n
        You may withdraw any options that you elect to exchange up until 5:00
\np.m. Pacific Time on June 4, 2001 or any extension of that date. To withdraw
\nyour election to exchange, you must deliver a completed notice of withdrawal
\nform to Darrell Hong or Franci Claudon before the deadline. Once you have
\nwithdrawn options from the exchange offer, you may re-elect to exchange options
\nonly by again following the delivery procedures described above, but you may
\nonly do so before the deadline.<\/p>\n
        Once the offer expires, you may not make any changes to your election to
\nparticipate in the offer – any decisions you make to participate or not to
\nparticipate are irrevocable after 5:00 p.m. Pacific Time on June 4, 2001 or any
\nextension of that date.<\/p>\n
18.     AM I ELIGIBLE TO RECEIVE FUTURE GRANTS DURING THE SIX-MONTH PERIOD IF I
\n        PARTICIPATE IN THIS EXCHANGE?<\/p>\n
        Because of the unfavorable accounting charge consequences, participants
\nin this program are not eligible for any additional stock option grants until
\nafter the replacement grant date. Even if we would normally have granted you an
\noption in this time period, we will not do so if you elect to participate in the
\noffer to exchange options.<\/p>\n
        Because of this limitation, refresh grants will not be made this summer.
\nThe earliest that such grants may be made is after the replacement grant date.
\nSee Section 5 of the Offer.<\/p>\n
19.     ARE THERE ANY TAX CONSEQUENCES TO MY PARTICIPATION IN THIS EXCHANGE?<\/p>\n
        If you exchange your options for new options, you will not be required
\nunder current law to recognize income for U.S. federal income tax purposes at
\nthe time of the exchange. We believe that the exchange will be treated as a
\nnon-taxable exchange for U.S. federal income tax purposes. Further, at the date
\nof grant of the new options, you will not be required under current law to
\nrecognize income for U.S. federal income tax purposes. The grant of options does
\nnot result in recognition of taxable income. In the case of nonqualified stock
\noptions, taxable income is recognized upon exercise.<\/p>\n
        Special considerations may apply to employees located abroad. In some
\ncountries, the application of local taxation rules may have an impact upon the
\nnew grant. For employees in the UNITED KINGDOM, which has adopted new laws
\ngoverning the exercise of stock options awarded after April 5, 1999, the grant
\nof the new option will be subject to the execution of a joint election between
\nyou and Macromedia or any subsidiary of Macromedia to provide for the shifting
\nof any Secondary Class 1 National Insurance Contribution liability in connection
\nwith the EXERCISE, ASSIGNMENT, RELEASE OR CANCELLATION of the option from
\nMacromedia or any subsidiary to you. This tax is currently set at 11.9% of the
\ndifference between the strike price and the fair market value of the stock at
\nthe time of exercise. By accepting the new option, to the extent allowable by
\napplicable law, you will be consenting to and agreeing to satisfy any liability
\nthat Macromedia and\/or any subsidiary realizes with respect to Secondary Class 1
\nNational Insurance Contribution payments required to be paid by Macromedia
\nand\/or any subsidiary in connection with the EXERCISE, ASSIGNMENT, RELEASE OR
\nCANCELLATION of the option. In addition, if you accept the new option, you will
\nbe authorizing Macromedia or the subsidiary to withhold any such Secondary Class
\n1 National Insurance Contributions from the payroll AT ANY TIME or from the sale
\nof a sufficient number of shares upon EXERCISE, ASSIGNMENT, RELEASE OR
\nCANCELLATION of the option.<\/p>\n
                                       4
\n   8<\/p>\n
In the alternative, you agree to make payment on DEMAND FOR such contributions
\nto Macromedia or any subsidiary that will remit such contributions to the Inland
\nRevenue. If additional consents and\/or any elections are required to accomplish
\nthe foregoing shifting of liability, you agree to provide them promptly upon
\nrequest. If you do not enter into the joint election described above at the same
\ntime that you accept the new option, or if the joint election is revoked at any
\ntime by the Inland Revenue, Macromedia will have the right to cancel the new
\noption without further liability.<\/p>\n
        We recommend that you consult your own tax advisor with respect to the
\nforeign, federal, state and local tax consequences of participating in the
\nprogram. See Section 13 of the Offer.<\/p>\n
20.     HOW SHOULD I DECIDE WHETHER OR NOT TO PARTICIPATE?<\/p>\n
        We understand that this will be a challenging decision for many
\nemployees. The program does carry considerable risk, and there are no guarantees
\nof our future stock performance. Because we will not grant new options until at
\nleast six months and one day after the date we cancel the options accepted for
\nexchange, the new options may have a higher exercise price than some or all of
\nyour current options. So, the decision to participate must be your personal
\ndecision, and it will depend largely on your own assumptions about the future
\noverall economic environment, the performance of the overall market and
\ncompanies in our industry, and about our business and stock price. We recommend
\nthat you obtain current market quotations for our common stock and consult with
\nyour own advisors before deciding whether to elect to exchange your options.<\/p>\n
21.     WHAT DOES THE BOARD OF DIRECTORS THINK OF THE OFFER?<\/p>\n
        Although the Board has approved this offer, neither Macromedia nor the
\nBoard makes any recommendation as to whether you should elect to exchange or
\nrefrain from exchanging your options. See Section 2 of the Offer.<\/p>\n
22.     WHAT IF MY EMPLOYMENT AT MACROMEDIA ENDS BETWEEN THE DATE MY OPTIONS ARE
\n        CANCELED AND THE REPLACEMENT GRANT DATE?<\/p>\n
        The election form will not be revocable after the election deadline
\npasses. Therefore, if you leave Macromedia (or one of its subsidiaries) for any
\nreason after the deadline but before your new option is granted, you will not
\nhave a right to any stock options that were previously canceled, and you will
\nnot have a right to the new option that would have been issued on the
\nreplacement grant date if you had not left. THEREFORE, IF YOU ARE NOT AN
\nEMPLOYEE OF MACROMEDIA OR ONE OF OUR SUBSIDIARIES FROM THE DATE YOU ELECT TO
\nEXCHANGE OPTIONS THROUGH THE REPLACEMENT GRANT DATE, YOU WILL NOT RECEIVE ANY
\nNEW OPTIONS IN EXCHANGE FOR YOUR OPTIONS THAT HAVE BEEN ACCEPTED FOR EXCHANGE.
\nYOU ALSO WILL NOT RECEIVE ANY OTHER CONSIDERATION FOR THE OPTIONS ELECTED TO BE
\nEXCHANGED IF YOU ARE NOT AN EMPLOYEE FROM THE DATE YOU ELECT TO EXCHANGE OPTIONS
\nTHROUGH THE REPLACEMENT GRANT DATE. Please speak to your manager if you have
\nspecific questions about your position. See Section 5 of the Offer.<\/p>\n
23.     WHAT ARE THE CONDITIONS TO THE OFFER?<\/p>\n
        The offer is subject to a number of conditions, which are described in
\nSection 6.<\/p>\n
                                       5
\n   9<\/p>\n
                  SPECIFIC QUESTIONS ABOUT THE CANCELED OPTIONS<\/p>\n
24.     WHICH OPTIONS CAN BE CANCELED?<\/p>\n
        If you elect to participate in this offer, all options that you elect to
\ncancel will be canceled, and all options granted to you on or after December 1,
\n2000 will be canceled. Please refer to the election form for a list of options
\nthat you may elect to exchange. See Section 1 of the Offer.<\/p>\n
25.     CAN I CANCEL THE REMAINING PORTION OF AN OPTION THAT I HAVE ALREADY
\n        PARTIALLY EXERCISED?<\/p>\n
        Yes, any outstanding, unexercised options can be canceled. The
\nreplacement grant will be one-for-one but only in replacement of canceled
\noptions.<\/p>\n
26.     CAN I SELECT ONE PART OF AN OPTION GRANT TO CANCEL, OR CANCEL AN OPTION
\n        GRANT ONLY AS TO CERTAIN SHARES?<\/p>\n
        No, we cannot cancel portions of outstanding option grants.<\/p>\n
27.     IF I CHOOSE TO PARTICIPATE, WHAT WILL HAPPEN TO MY OPTIONS THAT WILL BE
\n        CANCELED?<\/p>\n
        If you elect to participate in this program, then on the expiration
\ndate, we will cancel all of your outstanding options that were granted on or
\nafter December 1, 2000, plus any other options that you elected to cancel. You
\nwill not be able to receive any option grants until the replacement grant date,
\nwhen your new grant will be issued. See Section 5 of the Offer.<\/p>\n
                    SPECIFIC QUESTIONS ABOUT THE NEW OPTIONS<\/p>\n
        BECAUSE WE WILL NOT GRANT NEW OPTIONS UNTIL AT LEAST SIX MONTHS AND ONE
\nDAY AFTER THE DATE WE CANCEL THE OPTIONS ACCEPTED FOR EXCHANGE, THE NEW OPTIONS
\nMAY HAVE A HIGHER EXERCISE PRICE THAN SOME OR ALL OF YOUR CURRENT OPTIONS. WE
\nRECOMMEND THAT YOU OBTAIN CURRENT MARKET QUOTATIONS FOR OUR COMMON STOCK AND
\nCONSULT WITH YOUR OWN ADVISORS BEFORE DECIDING WHETHER TO ELECT TO EXCHANGE YOUR
\nOPTIONS.<\/p>\n
28.     WHAT WILL BE MY NEW OPTION SHARE AMOUNT?<\/p>\n
        The number of shares covered by your new option will be equal to the
\nnumber of shares canceled under your old stock option or options. Each new
\noption will be granted pursuant to a new option agreement between you and us.<\/p>\n
29.     WHAT WILL BE MY NEW OPTION EXERCISE PRICE?<\/p>\n
        The exercise price for the new options, which will be granted on the
\nreplacement grant date, will be the closing sale price of our common stock on
\nthe Nasdaq National Market on the date preceding the replacement grant date.<\/p>\n
30.     WHAT WILL MY NEW OPTION TYPE BE, AN INCENTIVE STOCK OPTION OR A
\n        NONQUALIFIED STOCK OPTION?<\/p>\n
        The new options will be nonqualified stock options.<\/p>\n
                                       6
\n   10<\/p>\n
31.     WHEN WILL I RECEIVE MY NEW OPTIONS?<\/p>\n
        We will grant the new options on the replacement grant date. If we
\ncancel options elected for exchange on the expiration date, the replacement
\ngrant date of the new options will be between December 5, 2001 and January 21,
\n2002. Note that we will require additional time to make the new options
\navailable to you and to provide you with documentation of the grant, therefore
\nyou will not be able to exercise any of your options for one week following the
\nreplacement grant date. See Section 5 of the Offer.<\/p>\n
32.     WHY WON’T I RECEIVE MY NEW OPTIONS IMMEDIATELY AFTER THE EXPIRATION DATE
\n        OF THE OFFER?<\/p>\n
        If we were to grant the new options on any date earlier than six months
\nand one day after the date we cancel the options accepted for exchange, we would
\nbe required to record a variable compensation expense against our earnings. By
\ndeferring the grant of the new options for at least six months and one day, we
\nbelieve we will not have to record such a compensation expense. Please also see
\nquestion 11 above.<\/p>\n
33.     WHEN WILL I RECEIVE MY NEW OPTION NOTICE, AND WHEN WILL I BE ABLE TO
\n        EXERCISE?<\/p>\n
        You will not be able to exercise the new options for one week following
\nthe replacement grant date. We anticipate that the notice of your new option
\nwill be sent to you within one week after the replacement grant date.<\/p>\n
34.     WHAT WILL BE THE VESTING SCHEDULE OF MY NEW OPTIONS?<\/p>\n
        Your new options granted in this program will have the same vesting
\nschedule as your canceled options. The vesting start date for the replacement
\noption will be the same vesting start date that applied to the canceled option.
\nYou will receive vesting credit for the time between the cancellation date,
\nwhich we expect to be June 4, 2001, and the replacement grant date as if the
\noptions you elect to cancel were outstanding throughout this period. See
\nquestion 36 below for an example.<\/p>\n
35.     WHAT WILL BE THE TERMS AND CONDITIONS OF MY NEW OPTIONS?<\/p>\n
        Except for the new option exercise price and the one week exercise
\nblack-out following the replacement grant date, the terms of the new options
\nwill be determined by the Compensation Committee.<\/p>\n
36.     CAN I HAVE AN EXAMPLE OF AN OFFER TO EXCHANGE?<\/p>\n
        The following is a representative example of an offer to exchange for a
\nhypothetical employee. Your situation is likely to vary in significant respects.<\/p>\n\n
\n        Assumptions:
\n                                             
\n        Original Grant Date:                     September 10, 2000
\n        Original Stock Option:                   1,000 shares
\n        Original Stock Option Price:             $60.64 per share
\n<\/c><\/s><\/caption>\n<\/table>\n
                                       7
\n   11<\/p>\n
        Original Vesting Schedule:               250 shares vest September 10,
\n                                                 2001, and 2.083% of the shares
\n                                                 vest monthly thereafter until
\n                                                 fully vested on September 10,
\n                                                 2004.
\n        HYPOTHETICAL Stock Price on
\n        Replacement Grant Date
\n        On or about December 5, 2001:            $30 per share<\/p>\n
        If you choose to participate in the exchange offer, using the above
\n        assumptions for the sake of illustration, on the replacement grant date
\n        you would have:<\/p>\n
        New Option:                              1,000 shares
\n        New Option Price:                        $30 per share<\/p>\n
        New Option Vesting:                      291 shares would be vested on
\n                                                 the replacement grant date, and
\n                                                 2.083% of the shares vest
\n                                                 monthly thereafter until fully
\n                                                 vested on September 10, 2004
\n                                                 (assuming your employment with
\n                                                 us continues throughout that
\n                                                 time).<\/p>\n
        If you do not participate in the exchange offer, on the replacement
\n        grant date you would have:<\/p>\n
        Original Stock Option:                   1,000 shares
\n        Original Stock Option Price:             $60.64 per share<\/p>\n
        Original Vesting Schedule:               291 shares would be vested on
\n                                                 the replacement grant date, and
\n                                                 2.083% of the shares vest
\n                                                 monthly thereafter until fully
\n                                                 vested on September 10, 2004
\n                                                 (assuming your employment with
\n                                                 us continues throughout that
\n                                                 time).<\/p>\n
37.     WHAT HAPPENS IF MACROMEDIA IS ACQUIRED DURING THE PERIOD AFTER MY
\n        OPTIONS ARE CANCELED BUT BEFORE I AM GRANTED NEW OPTIONS?<\/p>\n
        While we currently have no plans to enter into any such transaction, it
\nis possible that prior to the replacement grant we might enter into an agreement
\nfor a merger or other similar transaction. These types of transactions could
\nhave substantial effects on our stock price, including substantial stock price
\nappreciation. Depending on the structure of a transaction, option holders
\nparticipating in this offer might be deprived of any further price appreciation
\nin the common stock or deprived of the opportunity to participate in the option
\nexchange program.<\/p>\n
        We reserve the right, in the event of a merger or similar transaction,
\nto take any actions we deem necessary or appropriate to complete a transaction
\nthat our board of directors believes is in the best interest of our company and
\nour stockholders. This could include terminating your right to receive
\nreplacement options under this offer. If we were to terminate your right to
\nreceive replacement options under this offer in connection with such
\ntransaction, employees who tendered options for cancellation pursuant to this
\noffer would not receive options to purchase our stock, or securities of the
\nacquiror or any other consideration for their tendered options.<\/p>\n
        Having said the above, we understand that it is generally not in the
\nbest interest of the Company or its shareholders to take actions that are likely
\nto create employee ill will.<\/p>\n
                                       8
\n   12<\/p>\n
        See Section 5 of the Offer.<\/p>\n
38.     AFTER I RECEIVE MY NEW OPTION, WHAT HAPPENS IF I AGAIN END UP
\n        UNDERWATER?<\/p>\n
        We are conducting this offer only at this time, considering the unusual
\nstock market conditions that have affected many companies throughout the
\ncountry. This is therefore considered a one-time offer and we do not expect to
\noffer it again in the future. As your stock options are valid for ten years from
\nthe date of initial grant, subject to continued employment, the price of our
\ncommon stock may appreciate over the long term even if your options are
\nunderwater for some period of time after the grant date of the new options.
\nHOWEVER, WE CAN PROVIDE NO ASSURANCE AS TO THE PRICE OF OUR COMMON STOCK AT ANY
\nTIME IN THE FUTURE. See Section 2 of the Offer.<\/p>\n
39.     WHAT DO I NEED TO DO TO PARTICIPATE IN THE EXCHANGE PROGRAM?<\/p>\n
        To participate, you must complete the election form, sign it and make
\nsure that Darrell Hong or Franci Claudon receives it no later than the
\nexpiration date. You can return your form either by fax to Darrell Hong or
\nFranci Claudon at (415) 252-2348, or by mail to Darrell Hong or Franci Claudon,
\nMacromedia, Inc., 600 Townsend St., San Francisco, CA 94103. See Section 3 of
\nthe Offer.<\/p>\n
                                       9
\n   13<\/p>\n
                                    THE OFFER<\/p>\n
1.      NUMBER OF OPTIONS; EXPIRATION DATE.<\/p>\n
        Upon the terms and subject to the conditions of the exchange offer, we
\nwill grant new options to purchase common stock in exchange for all eligible
\noptions that are properly elected for exchange and not withdrawn in accordance
\nwith Section 4 before the “expiration date,” as defined below. The options that
\nare eligible for exchange (the “ELIGIBLE OPTIONS”) are any options that were
\ngranted and are outstanding under the Macromedia, Inc. 1992 Equity Incentive
\nPlan, the Macromedia, Inc. 1999 Stock Option Plan and the Andromedia, Inc. 1999
\nStock Plan (collectively, the “PLANS”), along with some non-plan option grants
\nthat were originally granted by Macromedia. If your options are properly elected
\nfor exchange and accepted for exchange, you will be entitled to receive new
\noptions to purchase the number of shares of our common stock that is equal to
\nthe number of shares subject to the options that you elected to exchange,
\nsubject to adjustments for any stock splits, stock dividends and similar events.
\nAll new options will be nonqualified stock options subject to the terms of a new
\noption agreement between you and us.<\/p>\n
        IF YOU ARE NOT AN EMPLOYEE OF MACROMEDIA OR ONE OF OUR SUBSIDIARIES FROM
\nTHE DATE YOU ELECT TO EXCHANGE OPTIONS THROUGH THE DATE WE GRANT THE NEW
\nOPTIONS, YOU WILL NOT RECEIVE ANY NEW OPTIONS IN EXCHANGE FOR YOUR ELECTED
\nOPTIONS THAT HAVE BEEN ACCEPTED FOR EXCHANGE, OR ANY OTHER CONSIDERATION FOR
\nTHOSE CANCELED OPTIONS. YOU WILL NOT BE ABLE TO EXERCISE ANY OPTIONS SURRENDERED
\nFOR EXCHANGE AFTER THEY HAVE BEEN ACCEPTED FOR EXCHANGE.<\/p>\n
        EMPLOYEES RESIDING ABROAD WHO WISH TO PARTICIPATE IN THE EXCHANGE MAY BE
\nSUBJECT TO FURTHER RESTRICTIONS AND REQUIREMENTS, INCLUDING THE REQUIRED TAX
\nELECTION DISCUSSED IN SECTION 13 BELOW.<\/p>\n
        The term “EXPIRATION DATE” means 5 p.m. Pacific Time on June 4, 2001,
\nunless, in our discretion, we have extended it to a later time and date, in
\nwhich event the term “expiration date” refers to the latest time and date at
\nwhich the offer, as so extended, expires. See Section 14 for a description of
\nour rights to extend, delay, terminate and amend the offer.<\/p>\n
        If we decide to take any of the following actions, we will notify you
\nand extend the offer for a period of ten business days after the date of such
\nnotice if the offer is scheduled to expire within that time frame:<\/p>\n
        (a)     increase or decrease the amount of consideration offered for the
\n                options; or<\/p>\n
        (b)     decrease the number of options eligible for exchange in the
\n                offer; or<\/p>\n
        (c)     increase the number of options eligible for exchange in the
\n                offer by an amount greater than 10% of the shares of common
\n                stock issuable upon exercise of the options that are subject to
\n                the offer immediately prior to the increase.<\/p>\n
                                       10
\n   14<\/p>\n
2.      PURPOSE OF THE OFFER.<\/p>\n
        We issued the eligible options to provide our employees an opportunity
\nto acquire or increase a proprietary interest in Macromedia, thereby creating a
\nstronger incentive to work hard for our growth and success and to encourage our
\nemployees to continue their employment with Macromedia.<\/p>\n
        Many of our outstanding options, whether or not they are currently
\nexercisable, have exercise prices that are significantly higher than the current
\nmarket price of our common stock. We believe these options are unlikely to be
\nexercised in the foreseeable future. By making this offer to exchange
\noutstanding options for new options that will have an exercise price equal to
\nthe market value of our common stock on the replacement grant date, we intend to
\nprovide our employees with the benefit of owning options that over time may have
\na greater potential to increase in value, create better performance incentives
\nfor employees and thereby maximize stockholder value. Merely granting additional
\noptions to option holders, with exercise prices based on our current stock
\nprice, would have an adverse effect in the form of stockholder dilution. In
\naddition, we have a limited number of options available for grant and wish to
\nconserve our available options for new hires and ongoing grants. The offer is
\ndesigned to preserve options for future grants.<\/p>\n
        CONSIDERING THE RISKS ASSOCIATED WITH A VOLATILE AND UNPREDICTABLE STOCK
\nMARKET, AND WITH OUR INDUSTRY IN PARTICULAR, THERE IS NO GUARANTEE THAT THE
\nMARKET PRICE AT THE TIME OF THE NEW OPTION (AND THUS THE EXERCISE PRICE OF YOUR
\nNEW OPTION) WILL BE LESS THAN OR EQUAL TO THE STRIKE PRICE OF YOUR EXISTING
\nOPTION, OR THAT YOUR NEW OPTION WILL INCREASE IN VALUE OVER TIME. IF YOU
\nPARTICIPATE IN THE PROGRAM YOU ARE TAKING A RISK THAT YOUR REPLACEMENT GRANT
\nWILL HAVE AN EXERCISE PRICE HIGHER THAN YOUR CURRENT OPTION. IN ADDITION, IF YOU
\nELECT TO PARTICIPATE IN THE OFFER AND THEN YOUR EMPLOYMENT TERMINATES BEFORE ANY
\nNEW OPTION IS GRANTED, YOUR CANCELED OPTION WOULD NOT BE AVAILABLE AND NO
\nREPLACEMENT WOULD BE ISSUED, SO YOU MIGHT LOSE AN OPPORTUNITY TO BUY OUR STOCK
\nAT A PRICE POTENTIALLY LOWER THAN THE MARKET PRICE.<\/p>\n
        Subject to the foregoing, and except as otherwise disclosed in this
\noffer to exchange or in our filings with the Securities and Exchange Commission,
\nwe have no current plans or proposals that relate to or would result in:<\/p>\n
        (a)     An extraordinary corporate transaction, such as a merger,
\n                reorganization or liquidation, involving us or any of our
\n                subsidiaries;<\/p>\n
        (b)     Any purchase, sale or transfer of a material amount of our
\n                assets or the assets of any of our subsidiaries;<\/p>\n
        (c)     Any material change in our present dividend rate or policy, or
\n                our indebtedness or capitalization;<\/p>\n
        (d)     Any change in our Board of Directors or management, including a
\n                change in the number or term of directors or to fill any
\n                existing Board vacancies or to change any executive officer’s
\n                material terms of employment;<\/p>\n
                                       11
\n   15<\/p>\n
        (e)     any other material change in our corporate structure or
\n                business;<\/p>\n
        (f)     our common stock not being authorized for quotation in an
\n                automated quotation system operated by a national securities
\n                association;<\/p>\n
        (g)     our common stock becoming eligible for termination of
\n                registration pursuant to Section 12(g)(4) of the Securities
\n                Exchange Act of 1934 (the “EXCHANGE ACT”) ;<\/p>\n
        (h)     the suspension of our obligation to file reports pursuant to
\n                Section 15(d) of the Exchange Act;<\/p>\n
        (i)     the acquisition by any person of any of our securities or the
\n                disposition of any of our securities; or<\/p>\n
        (j)     any change in our certificate of incorporation or bylaws, or any
\n                actions which may impede the acquisition of control of us by any
\n                person.<\/p>\n
        Neither Macromedia nor our Board makes any recommendation as to whether
\nor not you should elect to exchange your options, nor have we authorized any
\nperson to make any such recommendation. You are urged to evaluate carefully all
\nof the information in this offer to exchange and to consult your own investment
\nand tax advisors. You must make your own decision whether to elect to exchange
\nyour options.<\/p>\n
3.      PROCEDURES FOR ELECTING TO EXCHANGE OPTIONS.<\/p>\n
        Proper exchange of options. To elect to exchange your options pursuant
\nto the offer, you must, in accordance with the terms of the election form,
\nproperly complete, duly execute and deliver to us the election form, or a
\nfacsimile thereof, along with any other required documents. We must receive all
\nof the required documents by fax to Darrell Hong or Franci Claudon at (415)
\n252-2348 or by mail to Darrell Hong or Franci Claudon, Macromedia, Inc., 600
\nTownsend St., San Francisco, CA 94103, before the expiration date.<\/p>\n
        If you do not turn in your election form by the deadline, then you will
\nnot participate in the option exchange, and all stock options currently held by
\nyou will remain intact at their original price and terms.<\/p>\n
        THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING THE ELECTION FORM AND
\nANY OTHER REQUIRED DOCUMENTS, IS AT THE ELECTION AND RISK OF THE ELECTING OPTION
\nHOLDER. YOU SHOULD ALLOW SUFFICIENT TIME TO ENSURE TIMELY DELIVERY.<\/p>\n
        Determination of validity; rejection of options; waiver of defects; no
\nobligation to give notice of defects. We will determine, in our discretion, all
\nquestions as to the form of documents and the validity, form, eligibility, time
\nof receipt, and acceptance of any exchange of options. Our determination of
\nthese matters will be final and binding on all parties. We reserve the right to
\nreject any or all elections to exchange options that we determine are not in
\nappropriate form or that we determine are unlawful to accept. Otherwise, we will
\naccept properly and timely elected options that are not validly withdrawn. We
\nalso reserve the right to waive any of the conditions of the offer or any defect
\nor irregularity in any election with respect to any particular options or<\/p>\n
                                       12
\n   16<\/p>\n
any particular option holder. No election to exchange options will be valid
\nuntil all defects or irregularities have been cured by the electing option
\nholder or waived by us. Neither we nor any other person is obligated to give
\nnotice of any defects or irregularities in elections, nor will anyone incur any
\nliability for failure to give any such notice.<\/p>\n
        Our acceptance constitutes an agreement. Your election to exchange
\noptions pursuant to the procedures described above constitutes your acceptance
\nof the terms and conditions of the offer. OUR ACCEPTANCE FOR EXCHANGE OF OPTIONS
\nTHAT YOU ELECT TO EXCHANGE PURSUANT TO THIS OFFER WILL CONSTITUTE A BINDING
\nAGREEMENT BETWEEN YOU AND US, ON THE TERMS AND SUBJECT TO THE CONDITIONS OF THE
\nOFFER.<\/p>\n
        Subject to our rights to extend, terminate and amend the offer, we
\ncurrently expect that we will accept promptly after the expiration of the offer
\nall properly elected options that have not been validly withdrawn.<\/p>\n
4.      WITHDRAWAL RIGHTS.<\/p>\n
        You may only withdraw the options you have elected to cancel (“YOUR
\nELECTED OPTIONS”) in accordance with the provisions of this Section 4.<\/p>\n
        You may withdraw your elected options at any time before the expiration
\ndate. If we extend the offer beyond that time, you may withdraw your elected
\noptions at any time until the extended expiration date. In addition, unless we
\naccept your elected options for exchange before the expiration date, you may
\nwithdraw options you elected to exchange at any time after that date.<\/p>\n
        To withdraw elected options, you must deliver a completed written notice
\nof withdrawal, or a facsimile thereof, to us prior to our acceptance of your
\nelection to exchange. Except as described in the following sentence, the notice
\nof withdrawal must be executed by the option holder who elected to exchange the
\noptions to be withdrawn exactly as such option holder’s name appears on the
\noption agreement or agreements evidencing such options. If the signature is by a
\ntrustee, executor, administrator, guardian, attorney-in-fact, officer of a
\ncorporation, or another person acting in a fiduciary or representative capacity,
\nthe signer’s full title and proper evidence of the authority of such person to
\nact in such capacity must be indicated on the notice of withdrawal.<\/p>\n
        You may not rescind any withdrawal, and any options you withdraw will
\nthereafter be deemed not properly elected for exchange for purposes of the
\noffer, unless you properly re-elect those options before the expiration date by
\nfollowing the procedures described in Section 3.<\/p>\n
        Neither Macromedia nor any other person is obligated to give notice of
\nany defects or irregularities in any notice of withdrawal, nor will anyone incur
\nany liability for failure to give any such notice. We will determine, in our
\ndiscretion, all questions as to the form and validity, including time of
\nreceipt, of notices of withdrawal. Our determination of these matters will be
\nfinal and binding.<\/p>\n
                                       13
\n   17<\/p>\n
5.      ACCEPTANCE OF OPTIONS FOR EXCHANGE AND CANCELLATION AND ISSUANCE OF NEW
\n        OPTIONS.<\/p>\n
        Upon the terms and subject to the conditions of this offer and as
\npromptly as practicable following the expiration date, we will accept for
\nexchange and cancel options properly elected for exchange and not validly
\nwithdrawn before the expiration date. If your options are properly elected for
\nexchange and accepted for exchange on the effective date, you will be granted,
\nsubject to the conditions set forth in this section, new options on the
\nreplacement grant date, which will be on or after December 5, 2001. If we extend
\nthe date by which we must accept and cancel options properly elected for
\nexchange, you will be granted new options upon the approval of the Compensation
\nCommittee as of a date at least six months and one day after the extended date.<\/p>\n
        If we accept options you elect to exchange in the offer, you will be
\nineligible until after the replacement grant date for any additional stock
\noption grants for which you may have otherwise been eligible before the
\nreplacement grant date. This prevents us from incurring compensation expense
\nagainst our earnings because of accounting rules that could apply to these
\ninterim option grants as a result of the offer.<\/p>\n
        Your new options will entitle you to purchase a number of shares of our
\ncommon stock that is equal to the number of shares subject to the options you
\nelect to exchange, subject to adjustments for any stock splits, stock dividends,
\nand similar events. IF YOU ARE NOT AN EMPLOYEE OF MACROMEDIA OR ONE OF OUR
\nSUBSIDIARIES FROM THE DATE YOU ELECT TO EXCHANGE OPTIONS THROUGH THE DATE WE
\nGRANT THE NEW OPTIONS, YOU WILL NOT RECEIVE ANY NEW OPTIONS IN EXCHANGE FOR YOUR
\nELECTED OPTIONS THAT HAVE BEEN ACCEPTED FOR EXCHANGE. YOU ALSO WILL NOT RECEIVE
\nANY OTHER CONSIDERATION FOR YOUR ELECTED OPTIONS IF YOU ARE NOT AN EMPLOYEE FROM
\nTHE DATE YOU ELECT TO EXCHANGE OPTIONS THROUGH THE DATE WE GRANT THE NEW
\nOPTIONS. Therefore, if your employment with Macromedia or one of our
\nsubsidiaries terminates for any reason before your new option is granted, you
\nwill not have a right to any stock options that were previously canceled, and
\nyou will not have a right to the new option that would have been issued on the
\nreplacement grant date.<\/p>\n
        We are also reserving the right, in the event of a merger or similar
\ntransaction after the expiration date, to take any actions we deem necessary or
\nappropriate to complete a transaction that our board of directors believes is in
\nthe best interest of our company and our stockholders. This could include
\nterminating your right to receive replacement options under this offer to
\nexchange. IF WE WERE TO TERMINATE YOUR RIGHT TO RECEIVE REPLACEMENT OPTIONS
\nUNDER THIS OFFER IN CONNECTION WITH SUCH TRANSACTION, EMPLOYEES WHO TENDERED
\nOPTIONS FOR CANCELLATION PURSUANT TO THIS OFFER WOULD NOT RECEIVE OPTIONS TO
\nPURCHASE OUR STOCK, OR SECURITIES OF THE ACQUIROR, OR ANY OTHER CONSIDERATION
\nFOR THEIR TENDERED OPTIONS. We presently have no plans or proposals that relate
\nto or would result in an acquisition of Macromedia. Section 2 of this offer to
\nexchange describes our future plans.<\/p>\n
        For purposes of the offer, we will be deemed to have accepted for
\nexchange options that are validly elected for exchange and not properly
\nwithdrawn as, if and when we give oral or written notice to the option holders
\nof our acceptance for exchange of such options. Subject to <\/p>\n
                                       14
\n   18<\/p>\n
our rights to extend, terminate and amend the offer, we currently expect that we
\nwill provide your notice of your new option within one week after the
\nreplacement grant date.<\/p>\n
6.      CONDITIONS OF THE OFFER.<\/p>\n
        Notwithstanding any other provision of this exchange offer, we will not
\nbe required to accept any options elected for exchange, and we may terminate or
\namend the offer, or postpone our acceptance and cancellation of any options
\nelected for exchange, if at any time on or after the date of this offer and
\nprior to the expiration date any of the following events has occurred, or has
\nbeen determined by us to have occurred, and, in our reasonable judgment in any
\nsuch case and regardless of the circumstances giving rise thereto, including any
\naction or omission to act by us, the occurrence of such event or events makes it
\ninadvisable for us to proceed with the offer or with such acceptance and
\ncancellation of options elected for exchange:<\/p>\n
        (a)     there has been threatened or instituted or is pending any action
\n                or proceeding by any government or governmental, regulatory or
\n                administrative agency, authority or tribunal or any other
\n                person, domestic or foreign, before any court, authority, agency
\n                or tribunal that directly or indirectly challenges the making of
\n                the offer, the acquisition of some or all of the options elected
\n                for exchange pursuant to the offer, the issuance of new options,
\n                or otherwise relates in any manner to the offer or that, in our
\n                reasonable judgment, could materially and adversely affect the
\n                business, condition (financial or other), income, operations or
\n                prospects of Macromedia or our subsidiaries, or otherwise
\n                materially impair in any way the contemplated future conduct of
\n                our business or the business of any of our subsidiaries or
\n                materially impair the contemplated benefits of the offer to us;<\/p>\n
        (b)     there has been any action threatened, pending or taken, or
\n                approval withheld, or any statute, rule, regulation, judgment,
\n                order or injunction threatened, proposed, sought, promulgated,
\n                enacted, entered, amended, enforced or deemed to be applicable
\n                to the offer or us or any of our subsidiaries, by any court or
\n                any authority, agency or tribunal that, in our reasonable
\n                judgment, would or might directly or indirectly:<\/p>\n
                (i)     make the acceptance for exchange of, or issuance of new
\n                        options for, some or all of the options elected for
\n                        exchange illegal or otherwise restrict or prohibit
\n                        consummation of the offer or otherwise relates in any
\n                        manner to the offer;<\/p>\n
                (ii)    delay or restrict our ability, or render us unable, to
\n                        accept for exchange, or issue new options for, some or
\n                        all of the options elected for exchange;<\/p>\n
                (iii)   materially impair the contemplated benefits of the offer
\n                        to us; or<\/p>\n
                (iv)    materially and adversely affect the business, condition
\n                        (financial or other), income, operations or prospects of
\n                        Macromedia or our subsidiaries, or otherwise materially
\n                        impair in any way the contemplated future conduct of our
\n                        business or the business of any of our subsidiaries or
\n                        materially impair the contemplated benefits of the offer
\n                        to us;<\/p>\n
                                       15
\n   19<\/p>\n
        (c)     there has occurred:<\/p>\n
                (i)     any general suspension of trading in, or limitation on
\n                        prices for, securities on any national securities
\n                        exchange or in the over-the-counter market;<\/p>\n
                (ii)    the declaration of a banking moratorium or any
\n                        suspension of payments in respect of banks in the United
\n                        States, whether or not mandatory;<\/p>\n
                (iii)   the commencement of a war, armed hostilities or other
\n                        international or national crisis directly or indirectly
\n                        involving the United States;<\/p>\n
                (iv)    any limitation, whether or not mandatory, by any
\n                        governmental, regulatory or administrative agency or
\n                        authority on, or any event that in our reasonable
\n                        judgment might affect, the extension of credit by banks
\n                        or other lending institutions in the United States;<\/p>\n
                (v)     any significant decrease in the market price of the
\n                        shares of our common stock or any change in the general
\n                        political, market, economic or financial conditions in
\n                        the United States or abroad that could, in our
\n                        reasonable judgment, have a material adverse effect on
\n                        the business, condition (financial or other), operations
\n                        or prospects of Macromedia or our subsidiaries or on the
\n                        trading in our common stock;<\/p>\n
                (vi)    any change in the general political, market, economic or
\n                        financial conditions in the United States or abroad that
\n                        could have a material adverse effect on the business,
\n                        condition (financial or other), operations or prospects
\n                        of Macromedia or our subsidiaries or that, in our
\n                        reasonable judgment, makes it inadvisable to proceed
\n                        with the offer;<\/p>\n
                (vii)   in the case of any of the foregoing existing at the time
\n                        of the commencement of the offer, a material
\n                        acceleration or worsening thereof; or<\/p>\n
                (viii)  any decline in the Dow Jones Industrial Average, the
\n                        Nasdaq National Market or the Standard and Poor’s Index
\n                        of 500 Companies by an amount in excess of 25% measured
\n                        during any time period after the close of business on
\n                        May 4, 2001;<\/p>\n
        (d)     there has occurred any change in generally accepted accounting
\n                standards that could or would require us for financial reporting
\n                purposes to record compensation expense against our earnings in
\n                connection with the offer;<\/p>\n
        (e)     a tender or exchange offer with respect to some or all of our
\n                common stock, or a merger or acquisition proposal for us, shall
\n                have been proposed, announced or made by another person or
\n                entity or shall have been publicly disclosed, or we shall have
\n                learned that:<\/p>\n
                                       16
\n   20<\/p>\n
        (i)     any person, entity or “group,” within the meaning of Section
\n                13(d)(3) of the Exchange Act, shall have acquired or proposed to
\n                acquire beneficial ownership of more than 5% of the outstanding
\n                shares of our common stock, or any new group shall have been
\n                formed that beneficially owns more than 5% of the outstanding
\n                shares of our common stock, other than any such person, entity
\n                or group that has filed a Schedule 13D or Schedule 13G with the
\n                SEC on or before the expiration date;<\/p>\n
        (ii)    any such person, entity or group that has filed a Schedule 13D
\n                or Schedule 13G with the SEC on or before the expiration date
\n                shall have acquired or proposed to acquire beneficial ownership
\n                of an additional 2% or more of the outstanding shares of our
\n                common stock; or<\/p>\n
        (iii)   any person, entity or group shall have filed a Notification and
\n                Report Form under the Hart-Scott-Rodino Antitrust Improvements
\n                Act of 1976, as amended, or made a public announcement
\n                reflecting an intent to acquire us or any of our subsidiaries or
\n                any of the assets or securities of us or any of our
\n                subsidiaries; or<\/p>\n
        (f)     any change or changes shall have occurred in the business,
\n                condition (financial or other), assets, income, operations,
\n                prospects or stock ownership of Macromedia or our subsidiaries
\n                that, in our reasonable judgment, is or may be material to
\n                Macromedia or our subsidiaries.<\/p>\n
        The conditions to the offer are for our benefit. We may assert them at
\nour discretion regardless of the circumstances giving rise to them prior to the
\nexpiration date. We may waive them, in whole or in part, at any time and from
\ntime to time prior to the expiration date, in our discretion, whether or not we
\nwaive any other condition to the offer. Our failure at any time to exercise any
\nof these rights will not be deemed a waiver of any such rights. The waiver of
\nany of these rights with respect to particular facts and circumstances will not
\nbe deemed a waiver with respect to any other facts and circumstances. Any
\ndetermination we make concerning the events described in this section will be
\nfinal and binding upon all persons.<\/p>\n
7.      PRICE RANGE OF COMMON STOCK UNDERLYING THE OPTIONS.<\/p>\n
        Our common stock has been quoted on the Nasdaq National Market System
\n(“NASDAQ”) under the symbol MACR since our initial public offering on December
\n13, 1993. Our fiscal year runs from April 1 through March 31. The following
\ntable sets forth, for the periods indicated, the high and low sale prices per
\nshare of our common stock as reported on the Nasdaq for each of our fiscal
\nquarters for the past two fiscal years:<\/p>\n\n
\n                                                       High                     Low
\n                                                   ———-                ———
\n                                                                       
\nFiscal year ended March 31, 2001
\n         Fourth Quarter                            $    64.25                $   13.88
\n         Third Quarter                                  85.25                    54.75
\n         Second Quarter                                120.88                    56.25
\n         First Quarter                                 114.75                    42.25
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
                                       17
\n   21<\/p>\n\n                                                                      
\nFiscal year ended March 31, 2000
\n         Fourth Quarter                            $   100.00                $   62.00
\n         Third Quarter                                  88.69                    39.88
\n         Second Quarter                                 49.25                    27.38
\n         First Quarter                                  53.25                    32.88
\n<\/c><\/c><\/s><\/table>\n
        WE RECOMMEND THAT YOU OBTAIN CURRENT MARKET QUOTATIONS FOR OUR COMMON
\nSTOCK BEFORE DECIDING WHETHER TO ELECT TO EXCHANGE YOUR OPTIONS.<\/p>\n
8.      SOURCE AND AMOUNT OF CONSIDERATION; TERMS OF NEW OPTIONS.<\/p>\n
        Consideration. We will issue new options to purchase common stock in
\nexchange for outstanding eligible options properly elected and accepted for
\nexchange by us. The number of shares of common stock subject to new options to
\nbe granted to each option holder will be equal to the number of shares subject
\nto the options elected by such option holder.<\/p>\n
        Terms of new options. We will issue a new option agreement to each
\noption holder who has elected to exchange options in the offer. Except for the
\nexercise price and blackout period, the terms and conditions of the new options
\nwill be determined by the Compensation Committee.<\/p>\n
        The terms and conditions of current options under the Plans are set
\nforth in the respective plan and stock option agreement you entered into in
\nconnection with the grant. The terms and conditions of the Plans are summarized
\nin the prospectuses prepared by us and previously distributed to you. You may
\nobtain copies of these prospectuses and the plans as indicated below.<\/p>\n
        IMPORTANT NOTE. THE STATEMENTS IN THIS OFFER CONCERNING THE PLANS AND
\nTHE NEW OPTIONS ARE MERELY SUMMARIES AND DO NOT PURPORT TO BE COMPLETE. THE
\nSTATEMENTS ARE SUBJECT TO, AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO,
\nALL PROVISIONS OF THE PLANS, THE FORMS OF STOCK OPTION AGREEMENT UNDER THE PLANS
\nAND ANY OTHER TERMS AND CONDITIONS OF THE NEW OPTIONS DETERMINED BY THE
\nCOMPENSATION COMMITTEE.<\/p>\n
        PLEASE CONTACT DARRELL HONG AT (415) 252-6860 OR BY EMAIL AT
\nDHONG@MACROMEDIA.COM, OR FRANCI CLAUDON AT (415) 252-4086 OR BY EMAIL AT
\nFCLAUDON@MACROMEDIA.COM, OR BY MAIL TO DARRELL HONG OR FRANCI CLAUDON,
\nMACROMEDIA, INC., 600 TOWNSEND ST., SAN FRANCISCO, CA 94103, TO RECEIVE A COPY
\nOF THE PLANS, PROSPECTUSES OR FORMS OF STOCK OPTION AGREEMENT. WE WILL PROMPTLY
\nFURNISH YOU COPIES OF THESE DOCUMENTS AT OUR EXPENSE.<\/p>\n
9.      INFORMATION CONCERNING MACROMEDIA.<\/p>\n
        Macromedia develops, markets and supports software products,
\ntechnologies and services that enable people to define what the Web can be. Its
\ncustomers, from developers to enterprises, use Macromedia solutions to help
\nbuild compelling and effective Web sites and e-business applications.<\/p>\n
                                       18
\n   22<\/p>\n
        Macromedia’s software business’ products enable rich, engaging, and
\npersonalized Web experiences. From stand-alone products for Web authoring and
\ngraphics creation to integrated solutions for mission-critical server and
\ne-business applications, Macromedia has the technology and services that enable
\ndevelopers and enterprises to create and deliver Web sites.<\/p>\n
        Macromedia is based in San Francisco, California, and has more than
\n1,700 employees worldwide working with industry partners to deliver compelling
\nand effective Web experiences.<\/p>\n
        Macromedia was incorporated in Delaware on February 25, 1992, and has
\nacquired several other businesses, including Allaire Corporation, since its
\nincorporation. Its common stock is listed on the Nasdaq National Market under
\nthe symbol MACR. Its World Wide Web site can be accessed at macromedia.com.<\/p>\n
        For financial information regarding Macromedia, please see the financial
\nstatements beginning on page F-1 of this offer. Additional information about
\nMacromedia is available from the documents described in Section 16.<\/p>\n
10.     INTERESTS OF DIRECTORS AND OFFICERS; TRANSACTIONS AND ARRANGEMENTS
\n        CONCERNING THE OPTIONS.<\/p>\n
        The current directors and executive officers of Macromedia and their
\npositions and offices are set forth in the following table:<\/p>\n
\n
\nNAME                                      POSITION
\n—-                                      ——–
\n                              
\nRobert K. Burgess                Chairman and Chief Executive Officer
\nBrian J. Allum                   Executive Vice President
\nElizabeth A. Nelson              Executive Vice President, Chief Financial Officer and Secretary
\nKevin Lynch                      Executive Vice President and President, Products
\nStephen A. Elop                  Executive Vice President, Worldwide Field Operations
\nDavid R. Mendels                 Senior Vice President, Chief Strategy Officer
\nJohn (Ian) Giffen                Director
\nMark D. Kvamme                   Director
\nDonald L. Lucas                  Director
\nAlan Ramadan                     Director
\nWilliam B. Welty                 Director
\n<\/c><\/s><\/caption>\n<\/table>\n
        The address of each director and executive officer is: c\/o Macromedia,
\nInc., 600 Townsend Street, San Francisco, CA 94103.<\/p>\n
        The following table sets forth information, as of April 16, 2001, with
\nrespect to the beneficial ownership of our common stock by each director, each
\nof our executive officers and all directors and executive officers as a group.<\/p>\n
                                       19
\n   23<\/p>\n\n
\n                                      EXERCISABLE
\n                                        WITHIN           SHARES
\n                                        60 DAYS           HELD           TOTAL
\n                                      ———–        ——         ——-
\n                                                              
\nRobert K. Burgess                       541,949          59,005         600,954
\nBrian J. Allum                          168,500           1,478         169,978
\nElizabeth A. Nelson                     132,826          25,001         157,827
\nKevin Lynch                             206,709             804         207,513
\nStephen A. Elop                          86,042           1,585          87,627
\nDavid R. Mendels                         86,533           4,946          91,479
\nJohn (Ian) Giffen                        38,194              —          38,194
\nMark D. Kvamme                           21,493              —          21,493
\nDonald L. Lucas                          43,624             297          43,921
\nAlan Ramadan                             19,792              —          19,792
\nWilliam B. Welty                          8,029              —           8,029
\n                         Totals       1,353,691          93,116       1,446,807
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
        The following table lists the stock and stock option transactions
\ninvolving our officers and directors within the 60 days prior to this offering:<\/p>\n\n
\nNAME                          TRANSACTION DATE               TRANSACTION DESCRIPTION
\n—-                          —————-               ———————–
\n                                                      
\nBurgess, Rob                  3\/19\/01                        Exercised 1,176 options held by children’s trust.
\n                                                             Exercise price $7.7810; market value on date of exercise
\n                                                             $20.9375
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
        Our executive officers are eligible to participate in this offer. Also,
\nwe anticipate that several of our directors and executive officers will purchase
\nshares of common stock under our 1993 Employee Stock Purchase Plan on August 15,
\n2001, in the ordinary course pursuant to the terms of such plan. Except as
\notherwise described above, there have been no transactions in options to
\npurchase our common stock or in our common stock which were effected during the
\npast 60 days by Macromedia, or to our knowledge, by any executive officer,
\ndirector, affiliate or subsidiary of Macromedia.<\/p>\n
11.     STATUS OF OPTIONS ACQUIRED BY US IN THE OFFER; ACCOUNTING CONSEQUENCES
\n        OF THE OFFER.<\/p>\n
        Options we acquire pursuant to the offer will be canceled and the shares
\nof common stock subject to those options will be returned to the pool of shares
\navailable for grants of new options under the Plans and for issuance upon the
\nexercise of such new options. To the extent such shares are not fully reserved
\nfor issuance upon exercise of the new options to be granted in connection with
\nthe offer, the shares will be available for future awards to employees and other
\neligible plan participants without further stockholder action, except as
\nrequired by applicable law<\/p>\n
                                       20
\n   24<\/p>\n
or the rules of the Nasdaq National Market or any other securities quotation
\nsystem or any stock exchange on which our common stock is then quoted or listed.<\/p>\n
        We believe that we will not incur any compensation expense solely as a
\nresult of the transactions contemplated by the offer because we will not grant
\nany new options until a business day that is at least six months and one day
\nafter the date that we accept and cancel options elected for exchange; and the
\nexercise price of all new options will equal the market value of the common
\nstock on the date we grant the new options.<\/p>\n
        If we were to grant any options to any option holder before the
\nscheduled replacement grant date, our grant of those options to the electing
\noption holder would be treated for financial reporting purposes as a variable
\naward to the extent that the number of shares subject to the newly granted
\noptions is equal to or less than the number of the option holder’s option shares
\nelected for exchange. In this event, we would be required to record as
\ncompensation expense the amount by which the market value of the shares subject
\nto the newly granted options exceeds the exercise price of those shares. This
\ncompensation expense would accrue as a variable accounting charge to our
\nearnings over the period when the newly granted options are outstanding. We
\nwould have to adjust this compensation expense periodically during the option
\nterm based on increases or decreases in the market value of the shares subject
\nto the newly granted options.<\/p>\n
12.     LEGAL MATTERS; REGULATORY APPROVALS.<\/p>\n
        We are not aware of any license or regulatory permit that appears to be
\nmaterial to our business that might be adversely affected by our exchange of
\noptions and issuance of new options as contemplated by the offer, or of any
\napproval or other action by any government or governmental, administrative or
\nregulatory authority or agency, domestic or foreign, that would be required for
\nthe acquisition or ownership of our options as contemplated herein. Should any
\nsuch approval or other action be required, we presently contemplate that we will
\nseek such approval or take such other action. We are unable to predict whether
\nwe may determine that we are required to delay the acceptance of options for
\nexchange pending the outcome of any such matter. We cannot assure you that any
\nsuch approval or other action, if needed, would be obtained or would be obtained
\nwithout substantial conditions or that the failure to obtain any such approval
\nor other action might not result in adverse consequences to our business. Our
\nobligation under the offer to accept options elected for exchange and to issue
\nnew options for options elected for exchange is subject to conditions, including
\nthe conditions described in Section 6.<\/p>\n
13.     MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES.<\/p>\n
        The following is a general summary of the material U.S. federal income
\ntax consequences of the exchange of options pursuant to the offer. This
\ndiscussion is based on the Internal Revenue Code, its legislative history,
\nTreasury Regulations thereunder and administrative and judicial interpretations
\nthereof as of the date of the offer, all of which are subject to change,
\npossibly on a retroactive basis. This summary does not discuss all of the tax
\nconsequences that may be relevant to you in light of your particular
\ncircumstances, nor is it intended to be applicable in all respects to all
\ncategories of option holders.<\/p>\n
                                       21
\n   25<\/p>\n
        The option holders who exchange outstanding options for new options will
\nnot be required to recognize income for U.S. federal income tax purposes at the
\ntime of the exchange. We believe that the exchange will be treated as a
\nnon-taxable exchange.<\/p>\n
        The new options that we will grant in the exchange of options pursuant
\nto the offer will be nonqualified stock options that are not intended to satisfy
\nthe requirements of Section 422 of the Internal Revenue Code. Under U.S. law, an
\noptionee recognizes no taxable income upon the grant of a nonqualified option.
\nThe optionee will, in general, recognize ordinary income in the year in which
\nthe option is exercised. The amount of ordinary income is equal to the excess of
\nthe fair market value of the purchased shares on the exercise date over the
\nexercise price paid for the shares. The optionee will be required to satisfy the
\ntax withholding requirements applicable to such income.<\/p>\n
        We will be entitled to a business expense deduction equal to the amount
\nof ordinary income recognized by the optionee with respect to the exercised
\nnonqualified option. The deduction will in general be allowed for the taxable
\nyear of Macromedia in which the ordinary income is recognized by the optionee.<\/p>\n
        Special tax considerations may apply to employees located abroad. In
\nparticular, for employees in the United Kingdom, which has adopted new laws
\ngoverning the exercise of stock options awarded after April 5, 1999, the grant
\nof the new option will be subject to the execution of a joint election between
\nyou and Macromedia or any subsidiary of Macromedia to provide for the shifting
\nof any Secondary Class 1 National Insurance Contribution liability in connection
\nwith the EXERCISE, ASSIGNMENT, RELEASE OR CANCELLATION of the option from
\nMacromedia and\/or any subsidiary to you. This tax is currently set at 11.9% of
\nthe difference between the strike price and the fair market value of the stock
\nat the time of exercise. By accepting the new option, to the extent allowable by
\napplicable law, you will be consenting to and agreeing to satisfy any liability
\nthat Macromedia and\/or any subsidiary realizes with respect to Secondary Class 1
\nNational Insurance Contribution payments required to be paid by Macromedia
\nand\/or any subsidiary in connection with the EXERCISE, ASSIGNMENT, RELEASE OR
\nCANCELLATION of the option. In addition, if you accept the new option, you will
\nbe authorizing Macromedia or the subsidiary to withhold any such Secondary Class
\n1 National Insurance Contributions from the payroll AT ANY TIME or from the sale
\nof a sufficient number of Shares upon EXERCISE, ASSIGNMENT, RELEASE OR
\nCANCELLATION of the option. In the alternative, you agree to make payment on
\ndemand for such contributions to Macromedia or any subsidiary that will remit
\nsuch contributions to the Inland Revenue. If additional consents and\/or any
\nelections are required to accomplish the foregoing shifting of liability, you
\nagree to provide them promptly upon request. If you do not enter into the joint
\nelection described above at the same time that you accept the new option, or if
\nthe joint election is revoked at any time by the Inland Revenue, Macromedia will
\nhave the right to cancel the new option without further liability.<\/p>\n
        WE RECOMMEND THAT YOU CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE
\nFOREIGN, FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN THE
\nOFFER.<\/p>\n
                                       22
\n   26<\/p>\n
14.     EXTENSION OF OFFER; TERMINATION; AMENDMENT.<\/p>\n
        We expressly reserve the right, in our discretion, at any time and from
\ntime to time, and regardless of whether or not any event set forth in Section 6
\nhas occurred or is deemed by us to have occurred, to extend the period of time
\nduring which the offer is open and thereby delay the acceptance for exchange of
\nany options by giving oral, written, or electronic notice of such extension to
\nthe option holders.<\/p>\n
        We also expressly reserve the right, in our reasonable judgment, prior
\nto the expiration date to terminate or amend the offer and to postpone our
\nacceptance and cancellation of any options elected for exchange upon the
\noccurrence of any of the conditions specified in Section 6, by giving oral,
\nwritten, or electronic notice of such termination or postponement to the option
\nholders. Notwithstanding the foregoing, we will pay the consideration offered or
\nreturn the options elected for exchange promptly after termination or withdrawal
\nof the offer to exchange.<\/p>\n
        Subject to compliance with applicable law, we further reserve the right,
\nin our discretion, and regardless of whether any event set forth in Section 6
\nhas occurred or is deemed by us to have occurred, to amend the offer in any
\nrespect, including, without limitation, by decreasing or increasing the
\nconsideration offered in the offer to option holders or by decreasing or
\nincreasing the number of options being sought in the offer.<\/p>\n
        Amendments to the offer may be made at any time and from time to time.
\nIn the case of an extension, the amendment must be issued no later than 5 p.m.
\nPacific Time, on the next business day after the last previously scheduled or
\nannounced expiration date. Any amendment of the offer will be disseminated
\npromptly to option holders in a manner reasonably designated to inform option
\nholders of such change. Without limiting the manner in which we may choose to
\ndisseminate any amendment of this offer, except as required by law, we have no
\nobligation to publish, advertise, or otherwise communicate any such
\ndissemination.<\/p>\n
        If we materially change the terms of the offer or the information
\nconcerning the offer, or if we waive a material condition of the offer, we will
\nextend the offer. Except for a change in price or a change in percentage of
\nsecurities sought, the amount of time by which we will extend the offer
\nfollowing a material change in the term of the offer or information concerning
\nthe offer will depend on the facts and circumstances, including the relative
\nmateriality of such terms or information. If we decide to take any of the
\nfollowing actions, we will notify you of such action and extend the offer for a
\nperiod of ten business days after the date of such notice:<\/p>\n
        (a)     (i)     we increase or decrease the amount of consideration
\n                        offered for the options;<\/p>\n
                (i)     we decrease the number of options eligible to be elected
\n                        for exchange in the offer; or<\/p>\n
                (ii)    we increase the number of options eligible to be elected
\n                        for exchange in the offer by an amount that exceeds 10%
\n                        of the shares of common stock issuable upon exercise of
\n                        the options that are subject to the offer immediately
\n                        prior to the increase; and<\/p>\n
                                       23
\n   27<\/p>\n
        (b)     the offer is scheduled to expire at any time earlier than the
\n                expiration of a period ending on the tenth business day from,
\n                and including, the date that notice of such increase or decrease
\n                is first given.<\/p>\n
15.     FEES AND EXPENSES.<\/p>\n
        We will not pay any fees or commissions to any broker, dealer or other
\nperson for soliciting elections to exchange options pursuant to this offer to
\nexchange.<\/p>\n
16.     ADDITIONAL INFORMATION.<\/p>\n
        For financial information regarding Macromedia, please see the financial
\nstatements beginning on page F-1 of this offer.<\/p>\n
        We recommend that, in addition to this offer to exchange and election
\nform, you review the following materials, which we have filed with the SEC,
\nbefore making a decision on whether to elect to exchange your options:<\/p>\n
        (a)     our annual report on Form 10-K for our fiscal year ended March
\n                31, 2000, filed with the SEC on June 27, 2000;<\/p>\n
        (b)     our quarterly reports on Form 10-Q for the quarters ended June
\n                30, September 30, and December 31, 2000, filed with the SEC on
\n                August 14, 2000, November 13, 2000 and February 2, 2001,
\n                respectively;<\/p>\n
        (c)     our definitive proxy statement for our 2000 annual meeting of
\n                stockholders, filed with the SEC on June 30, 2000;<\/p>\n
        (d)     our registration statement on Form S-4 filed with the SEC on
\n                February 2, 2001, and amended on February 14, 2001;<\/p>\n
        (e)     our registration statements on Form S-8 (registering shares to
\n                be issued under the Plans) filed with the SEC on August 17, 2000
\n                and December 7, 1999;<\/p>\n
        (f)     our current reports on Form 8-K and 8-K\/A filed with the SEC on
\n                January 24, January 26, January 30, March 7, March 28 and April
\n                4, 2001; and<\/p>\n
        (g)     the description of our common stock included in our registration
\n                statement on Form 8-A, which was filed with the SEC on October
\n                22, 1993, as amended on Form 8-A\/A filed with the SEC on October
\n                5, 1995, including any amendments or reports we file for the
\n                purpose of updating that description.<\/p>\n
        The SEC file number for these filings, other than the registration
\nstatements, is 000-22688. The file number for the registration statement on Form
\nS-4 filed with the SEC on February 2, 2001 is 333-54930. The file numbers for
\nthe registration statements on Form S-8 filed with the SEC on August 17, 2000
\nand December 7, 1999 are 333-44016 and 333-92233, respectively. These filings,
\nour other annual, quarterly and current reports, our proxy statements<\/p>\n
                                       24
\n   28<\/p>\n
and our other SEC filings may be examined, and copies may be obtained, at the
\nfollowing SEC public reference rooms:<\/p>\n\n                                                                                  
\nJudiciary Plaza                           Citicorp Center                               Seven World Trade Center
\nRoom 1024                                 500 West Madison Street                       13th Floor
\n450 Fifth Street, N.W.                    Suite 1400                                    New York, New York 10048
\nWashington, D.C. 20549                    Chicago, Illinois 60661
\n<\/c><\/c><\/s><\/table>\n
        You may obtain information on the operation of the public reference
\nrooms by calling the SEC at 1-800-732-0330.<\/p>\n
        Our SEC filings are also available to the public on the SEC’s website at
\nhttp:\/\/www.sec.gov.<\/p>\n
        Our common stock is quoted on the Nasdaq National Market under the
\nsymbol “MACR,” and our SEC filings can be read at the following Nasdaq address:<\/p>\n
        Nasdaq Operations
\n        1735 K Street, N.W.
\n        Washington, D.C. 20006<\/p>\n
        We will also provide without charge to each person to whom a copy of
\nthis offer to exchange is delivered, upon the written or oral request of any
\nsuch person, a copy of any or all of the documents to which we have referred
\nyou, other than exhibits to such documents (unless such exhibits are
\nspecifically incorporated by reference into such documents). Requests should be
\ndirected to:<\/p>\n
        Darrell Hong or Franci Claudon
\n        Macromedia, Inc.
\n        600 Townsend St.
\n        San Francisco, CA 94103<\/p>\n
or by telephoning Darrell Hong at (415) 252-6860 or Franci Claudon at (415)
\n252-4086 between the hours of 9:00 a.m. and 5:00 p.m., Pacific Time, Monday
\nthrough Friday.<\/p>\n
        As you read the foregoing documents, you may find some inconsistencies
\nin information from one document to another. If you find inconsistencies between
\nthe documents, or between a document and this offer to exchange, you should rely
\non the statements made in the most recent document.<\/p>\n
        The information about us contained in this offer to exchange should be
\nread together with the information contained in the documents to which we have
\nreferred you.<\/p>\n
17.     MISCELLANEOUS.<\/p>\n
        This offer to exchange and our SEC reports referred to above include
\n“forward-looking statements” within the meaning of Section 27A of the Securities
\nAct and Section 21E of the Securities Exchange Act. When used in this offer to
\nexchange, the words “anticipate,” “believe,” “estimate,” “expect,” “intend”<\/p>\n
                                       25
\n   29
\nand “plan” as they relate to Macromedia, Inc. or our management are intended to
\nidentify these forward-looking statements. All statements by us regarding our
\nexpected future financial position and operating results, our business strategy,
\nour financing plans and expected capital requirements, forecasted trends
\nrelating to our services or the markets in which we operate and similar matters
\nare forward-looking statements. The documents filed by us with the SEC,
\nincluding our annual report on Form 10-K filed on June 27, 2000, discuss some of
\nthe risks that could cause our actual results to differ from those contained or
\nimplied in the forward-looking statements. These risks include risks related to
\nfuture growth and rapid expansion and variable revenues and operating results.
\nOther important risks include delays or difficulties in development, deployment,
\nand implementation of our products, pricing and market-share competition,
\ninternational uncertainties, adverse regulatory or legislative changes, and
\nother factors beyond our control. We undertake no obligation to update or revise
\npublicly any forward-looking statements, whether as a result of new information,
\nfuture events or otherwise.<\/p>\n
        We are not aware of any jurisdiction where the making of the offer
\nviolates applicable law. If we become aware of any jurisdiction where the making
\nof the offer violates applicable law, we will make a good faith effort to comply
\nwith such law. If, after such good faith effort, we cannot comply with such law,
\nthe offer will not be made to, nor will elections to exchange options be
\naccepted from or on behalf of, the option holders residing in such jurisdiction.<\/p>\n
        WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON OUR
\nBEHALF AS TO WHETHER YOU SHOULD ELECT TO EXCHANGE OR REFRAIN FROM EXCHANGING
\nYOUR OPTIONS PURSUANT TO THE OFFER. YOU SHOULD RELY ONLY ON THE INFORMATION
\nCONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT
\nAUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN
\nCONNECTION WITH THE OFFER OTHER THAN THE INFORMATION AND REPRESENTATIONS
\nCONTAINED IN THIS DOCUMENT OR IN THE ELECTION FORM. IF ANYONE MAKES ANY
\nRECOMMENDATION OR REPRESENTATION TO YOU OR GIVES YOU ANY INFORMATION, YOU MUST
\nNOT RELY UPON THAT RECOMMENDATION, REPRESENTATION OR INFORMATION AS HAVING BEEN
\nAUTHORIZED BY US.<\/p>\n
Macromedia, Inc.                                                   May 4, 2001<\/p>\n
                                       26
\n   30<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                         INDEX TO FINANCIAL INFORMATION<\/p>\n
\n                                                                                                                
\n1.      Macromedia audited financial statements and related notes included in Macromedia’s Annual Report on
\n        Form 10-K for the fiscal year ended March 31, 2000, filed with the SEC on June 27, 2000<\/p>\n
            Independent Auditors’ Report…………………………………………………………………F-1<\/p>\n
            Consolidated Balance Sheets for the years ended March 31, 2000 and 1999…………………………..F-2<\/p>\n
            Consolidated Statements of Operations for the years ended March 31, 2000, 1999 and 1998…………….F-3<\/p>\n
            Consolidated Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998…………….F-4<\/p>\n
            Consolidated Statements of Stockholder’s Equity for the years ended March 31, 2000, 1999 and 1998……F-5<\/p>\n
            Notes to Consolidated Financial Statements for the years ended March 31, 2000, 1999 and 1998………..F-6<\/p>\n
            Schedule II – Valuation And Qualifying Accounts………………………………………………..F-28<\/p>\n
2.      Macromedia unaudited financial statements included in Macromedia’s Quarterly Report on Form 10-Q for
\n        the fiscal quarter ended December 31, 2000, filed with the SEC on February 2, 2001<\/p>\n
            Consolidated Balance Sheets for the quarter ended December 31, 2000………………………………F-29<\/p>\n
            Consolidated Statements of Operations for the quarter ended December 31, 2000……………………..F-30<\/p>\n
            Consolidated Statements of Cash Flows for the quarter ended December 31, 2000……………………..F-31<\/p>\n
3.         Book value per share for the quarter ended December 31, 2000……………………………………..F-32
\n<\/c><\/s><\/table>\n
   31<\/p>\n
1.      MACROMEDIA AUDITED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED IN
\n        MACROMEDIA’S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH
\n        31, 2000, FILED WITH THE SEC ON JUNE 27, 2000<\/p>\n
                          INDEPENDENT AUDITORS’ REPORT<\/p>\n
The Board of Directors
\nMacromedia, Inc. and Subsidiaries:<\/p>\n
We have audited the accompanying consolidated balance sheets of Macromedia, Inc.
\nand subsidiaries as of March 31, 2000 and 1999, and the related consolidated
\nstatements of operations, stockholders’ equity, and cash flows for each of the
\nyears in the three-year period ended March 31, 2000. In connection with our
\naudits of the consolidated financial statements, we also have audited the
\nfinancial statement schedule as listed in the accompanying index in Item 14(a)2
\nherein. These consolidated financial statements and financial statement schedule
\nare the responsibility of the Company’s management. Our responsibility is to
\nexpress an opinion on these consolidated financial statements and financial
\nstatement schedule based on our audits.<\/p>\n
We conducted our audits in accordance with auditing standards generally accepted
\nin the United States of America. Those standards require that we plan and
\nperform the audit to obtain reasonable assurance about whether the financial
\nstatements are free of material misstatement. An audit includes examining, on a
\ntest basis, evidence supporting the amounts and disclosures in the financial
\nstatements. An audit also includes assessing the accounting principles used and
\nsignificant estimates made by management, as well as evaluating the overall
\nfinancial statement presentation. We believe that our audits provide a
\nreasonable basis for our opinion.<\/p>\n
In our opinion, the consolidated financial statements referred to above present
\nfairly, in all material respects, the financial position of Macromedia, Inc. and
\nsubsidiaries as of March 31, 2000 and 1999, and the results of their operations
\nand their cash flows for each of the years in the three-year period ended March
\n31, 2000, in conformity with accounting principles generally accepted in the
\nUnited States of America. Also in our opinion, the related financial statement
\nschedules, when considered in relation to the basic consolidated financial
\nstatements taken as a whole, presents fairly, in all material respects, the
\ninformation set forth therein.<\/p>\n
\/s\/ KPMG LLP<\/p>\n
San Francisco, California
\nApril 24, 2000<\/p>\n
                                      F-1
\n   32<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES
\n                           CONSOLIDATED BALANCE SHEETS
\n                      (IN THOUSANDS, EXCEPT PER SHARE DATA)<\/p>\n
\n
\n                                                                                            MARCH 31,
\n                                                                                    ————————–
\n                                                                                      2000             1999
\n                                                                                    ———        ———
\n                                                                                               
\nASSETS
\n  Current assets
\n    Cash, cash equivalents, and short-term investments ………………….       $ 187,036        $ 111,157
\n    Accounts receivable, less allowance for returns and doubtful
\n      accounts of $10,880 and $9,599, respectively ……………………..          41,883           13,971
\n    Inventory, net ………………………………………………….           1,349              615
\n    Prepaid expenses and other current assets ………………………….          12,944           13,911
\n    Deferred tax assets, short-term …………………………………..           7,812            6,899
\n                                                                                    ———        ———
\n       Total current assets ………………………………………….         251,024          146,553
\n    Land and building, net …………………………………………..          18,982           19,945
\n    Other fixed assets, net ………………………………………….          41,871           22,868
\n    Related party loans ……………………………………………..           9,944           10,099
\n    Other long-term assets …………………………………………..          17,538            3,030
\n                                                                                    ———        ———
\n       Total assets …………………………………………………       $ 339,359        $ 202,495
\n                                                                                    =========        =========<\/p>\n
LIABILITIES AND STOCKHOLDERS’ EQUITY
\n  Current liabilities
\n    Accounts payable ………………………………………………..       $   4,988        $   5,995
\n    Accrued liabilities ……………………………………………..          53,842           27,701
\n    Unearned revenue ………………………………………………..          10,044            7,490
\n                                                                                    ———        ———
\n       Total current liabilities ……………………………………..          68,874           41,186
\n                                                                                    ———        ———
\n  Other long-term liabilities ………………………………………..             321              381
\n  Deferred tax liabilities, long-term …………………………………              —              306
\n                                                                                    ———        ———
\n       Total liabilities …………………………………………….          69,195           41,873
\n                                                                                    ———        ———
\n  Minority interest …………………………………………………          15,888               —
\n  Mandatorily redeemable convertible preferred stock, par value
\n       $0.001 per share: 0 and 2,310 shares authorized; 0 and 1,216
\n       issued and outstanding (aggregate liquidation preference of
\n       $0 and $27,014 at March 31, 2000 and 1999, respectively) ………….              —           13,591<\/p>\n
  Stockholders’ equity:
\n    Common stock, par value $0.001 per share: 80,000 shares
\n       authorized, 50,674 and 43,590 shares issued and
\n       outstanding as of March 31, 2000 and 1999, respectively …………..              51               43
\n    Treasury stock, at cost; 1,818 and 1,620 shares as of March 31, 2000
\n       and 1999, respectively ………………………………………..         (33,649)         (25,445)
\n    Additional paid-in capital ……………………………………….         335,497          203,431
\n    Deferred compensation ……………………………………………         (23,465)          (1,544)
\n    Accumulated other comprehensive income …………………………….             393               38
\n    Accumulated deficit ……………………………………………..         (24,551)         (29,492)
\n                                                                                    ———        ———
\n       Total stockholders’ equity …………………………………….         254,276          147,031
\n                                                                                    ———        ———
\n       Total liabilities and stockholders’ equity ………………………       $ 339,359        $ 202,495
\n                                                                                    =========        =========
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
          See accompanying notes to consolidated financial statements.<\/p>\n
                                      F-2
\n   33<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES
\n                      CONSOLIDATED STATEMENTS OF OPERATIONS
\n                      (IN THOUSANDS, EXCEPT PER SHARE DATA)<\/p>\n\n
\n                                                                                  YEARS ENDED MARCH 31,
\n                                                                      ——————————————-
\n                                                                        2000             1999             1998
\n                                                                      ———        ———        ———
\n                                                                                               
\nRevenues ………………………………………………       $ 264,159        $ 153,243        $ 113,803
\nCost of revenues ……………………………………….          28,829           15,625           15,107
\n                                                                      ———        ———        ———
\n        Gross profit ……………………………………         235,330          137,618           98,696
\n                                                                      ———        ———        ———
\nOperating expenses:
\n      Sales and marketing ……………………………….         113,005           73,153           60,379
\n      Research and development …………………………..          65,739           41,551           36,829
\n      General and administrative …………………………          24,610           16,740           13,231
\n      Acquisition related expenses ……………………….          11,516              454            7,658
\n      Non-cash compensation ……………………………..          11,071              287               49
\n      Amortization of intangibles ………………………..           1,013              248               —
\n                                                                      ———        ———        ———
\n         Total operating expenses ………………………..         226,954          132,433          118,146
\n                                                                      ———        ———        ———
\n         Operating income (loss) …………………………           8,376            5,185          (19,450)<\/p>\n
Other income (expense):
\n      Interest and investment income, net …………………           6,626            1,215            4,687
\n      Foreign exchange (loss) gain ……………………….            (321)            (110)             243
\n      Other ……………………………………………            (118)           3,932             (293)
\n                                                                      ———        ———        ———
\n         Total other income ……………………………..           6,187            5,037            4,637
\nMinority interest ………………………………………           6,179               —               —
\n                                                                      ———        ———        ———
\n         Income (loss) before taxes ………………………          20,742           10,222          (14,813)
\nProvision for income taxes ………………………………          11,975            7,612              828
\n                                                                      ———        ———        ———
\n         Net income (loss) ………………………………           8,767            2,610          (15,641)
\nAccretion on mandatorily redeemable convertible preferred
\n         stock………………………………………….          (2,538)            (104)              —
\n                                                                      ———        ———        ———
\nNet income (loss) applicable to common stockholders ………..       $   6,229        $   2,506        $ (15,641)
\n                                                                      =========        =========        =========<\/p>\n
Net income (loss) applicable to common stockholders per share
\n    Basic ……………………………………………..       $    0.14        $    0.06        $   (0.40)
\n    Diluted ……………………………………………       $    0.12        $    0.05        $   (0.40)<\/p>\n
Weighted average common share outstanding
\n    Basic ……………………………………………..          44,601           40,045           38,988
\n    Diluted ……………………………………………          52,270           47,242           38,988
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
          See accompanying notes to consolidated financial statements.<\/p>\n
                                      F-3
\n   34<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES
\n                      CONSOLIDATED STATEMENTS OF CASH FLOWS
\n                                 (IN THOUSANDS)<\/p>\n\n
\n                                                                                  YEARS ENDED MARCH 31,
\n                                                                        ——————————————-
\n                                                                          2000             1999              1998
\n                                                                        ———        ———        ———
\n                                                                                                 
\nCASH FLOWS FROM OPERATING ACTIVITIES:
\nNet income (loss) ………………………………………..       $   8,767        $   2,610        $ (15,641)
\n   Adjustments to reconcile net income (loss) to net cash
\n     provided by (used in) operating activities:
\n      Depreciation and amortization ………………………..          16,477            8,797            7,085
\n      Write off of fixed assets related to merger ……………             191               —               —
\n      Deferred income taxes ……………………………….          (1,583)           1,955              (41)
\n      Tax benefit from employee stock plans …………………           8,714            4,439              240
\n      Minority interest …………………………………..          (6,179)              —               —
\n      Non-cash compensation ……………………………….           9,719              607               —
\n      Deferred compensation amortization ……………………           1,957              288               49
\n      Changes in operating assets and liabilities,
\n        net of effect of mergers:
\n         Accounts receivable, net ………………………….         (27,912)          (6,014)          (5,565)
\n         Inventory, net …………………………………..            (734)             128            1,139
\n         Prepaid expenses and other current assets …………..             967           (9,889)             617
\n         Other long-term assets ……………………………          (2,387)          (2,471)           2,559
\n         Accounts payable …………………………………          (1,007)           1,211           (2,359)
\n         Accrued liabilities ………………………………          26,363            7,557            2,919
\n         Unearned revenue …………………………………           2,554            5,418             (455)
\n         Other long-term liabilities ……………………….              —             (478)             523
\n                                                                        ———        ———        ———
\n      Net cash provided by (used in) operating activities …….          35,907           14,158           (8,930)<\/p>\n
CASH FLOWS FROM INVESTING ACTIVITIES:
\nProceeds from sale of fixed assets …………………………             625              961               —
\nPurchases of short-term investments ………………………..        (117,457)        (133,549)        (444,824)
\nMaturities of short-term investments ……………………….         127,558          128,005          455,465
\nAcquisition of property and equipment ………………………         (33,934)         (12,655)         (12,622)
\nPurchases of third party investments ……………………….         (13,300)              —           (2,500)
\nAcquisition of intangible assets …………………………..             (80)              —               —
\nLoan receivable ………………………………………….             155           (2,659)          (4,943)
\n                                                                        ———        ———        ———
\n      Net cash used in investing activities …………………         (36,433)         (19,897)          (9,424)<\/p>\n
CASH FLOWS FROM FINANCING ACTIVITIES:
\nProceeds from issuance of mandatorily redeemable
\n  convertible preferred stock ……………………………..              —            9,937            3,548
\nProceeds from issuance of preferred stock …………………..          59,029            3,407            8,702
\nProceeds from issuance of common stock ……………………..          39,434           26,777            8,011
\nBorrowings on capital lease ……………………………….             999            1,355              201
\nPayments on capital lease …………………………………          (1,281)            (833)             (67)
\nAcquisition of treasury stock ……………………………..          (8,204)         (20,306)          (5,139)
\n                                                                        ———        ———        ———
\n      Net cash provided by financing activities ……………..          89,977           20,337           15,256
\nNet increase (decrease) in cash and cash equivalents …………          89,451           14,598           (3,098)
\nAdjustment to conform acquired companies’ year end …………..          (3,826)           2,084               —
\n                                                                        ———        ———        ———
\nTotal …………………………………………………..          85,625           16,682           (3,098)
\nCash and cash equivalents, beginning of year ………………..          29,459           12,777           15,875
\n                                                                        ———        ———        ———
\nCash and cash equivalents, end of year ……………………..       $ 115,084        $  29,459        $  12,777
\n                                                                        =========        =========        =========
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
          See accompanying notes to consolidated financial statements.<\/p>\n
                                      F-4
\n   35<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES
\n                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
\n                                 (IN THOUSANDS)<\/p>\n\n
\n
                                                          COMMON STOCK                      TREASURY STOCK              ADDITIONAL
\n                                                    ————————–        ————————–         PAID-IN
\n                                                     SHARES            AMOUNT           SHARES           AMOUNT          CAPITAL
\n                                                    ———        ———        ———        ———        ———-
\n                                                                                                        
\nBALANCES AS OF MARCH 31, 1997 ……………          38,751        $      39               —        $      —        $ 149,626
\nComprehensive loss:
\n   Net loss ……………………………
\n   Unrealized loss on available-for-sale
\n     securities, net of tax ……………..
\nTotal comprehensive loss ………………..
\nCommon stock issued by acquired company …..                                                                                  46
\nPreferred Shares issued by acquired
\n     companies …………………………                                                                               8,656
\nExercise of stock options ……………….             573                1                                              2,384
\nIssuance of warrants to purchase common
\n     stock by acquired company …………..                                                                                 182
\nCommon stock issued under ESPP …………..             195               —                                              1,469
\nTax benefit from stock plans …………….                                                                                 240
\nCommon stock issued under purchase of
\n     Solis …………………………….             300               —                                              3,975
\nPurchase of treasury stock ………………                                              (510)          (5,139)
\nNon-cash compensation …………………..                                                                                 (13)
\n                                                    ———        ———        ———        ———        ———<\/p>\n
BALANCES AS OF MARCH 31, 1998 ……………          39,819               40             (510)          (5,139)         166,565
\nComprehensive income:
\n   Net income ………………………….
\n   Unrealized loss on available-for-sale
\n     securities, net of tax ……………..
\nTotal comprehensive income ………………
\nPreferred Shares issued by acquired
\n     companies …………………………                                                                               6,416
\nIssuance of common stock upon acquisition of
\n     LikeMinds, Inc. by Andromedia, Inc. ….             458               —                                              2,608
\nExercise of stock options ……………….           3,168                3                                             22,546
\nCommon stock issued under ESPP …………..             145               —                                              1,618
\nPurchase of treasury stock ………………                                            (1,110)         (20,306)
\nPreferred stock accretion ……………….                                                                                (104)
\nTax benefit from stock plans …………….                                                                               4,439
\nNon-cash compensation …………………..                                                                               2,352
\nAdjustment to conform acquired company’s
\n     year end (Note 4) ………………….                                                                              (3,009)
\n                                                    ———        ———        ———        ———        ———
\nBALANCES AS OF MARCH 31, 1999 ……………          43,590               43           (1,620)         (25,445)         203,431
\nComprehensive income:
\n   Net income ………………………….
\n   Unrealized gain on available-for-sale
\n     securities, net of tax ……………..<\/p>\n
Total comprehensive income ………………<\/p>\n
Preferred Shares issued by acquired
\n     companies …………………………                                                                                 520
\nExercise of stock options ……………….           3,725                4                                             36,842
\nCommon stock issued under ESPP …………..              84               —                                              2,445
\nCommon stock exchanged for preferred stock
\n     of pooled entities …………………           3,231                4                                             31,403
\nPurchase of treasury stock ………………                                              (198)          (8,204)
\nPreferred stock accretion ……………….                                                                              (2,538)
\nTax benefit from stock plans …………….                                                                               8,714
\nNon-cash compensation …………………..                                                                              33,251
\nGain on sale of subsidiary stock …………                                                                              21,109
\nAdjustment to conform acquired company’s
\n     year end  (Note 4) …………………              44               —                                                320
\n                                                    ———        ———        ———        ———        ———
\nBALANCES AS OF MARCH 31, 2000 ……………          50,674        $      51           (1,818)       $ (33,649)       $ 335,497
\n                                                    =========        =========        =========        =========        =========
\n<\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n\n
\n
                                                                  ACCUMULATED                       (ACCUMULATED
\n                                                                     OTHER                            DEFICIT)          TOTAL
\n                                                   DEFERRED      COMPREHENSIVE    COMPREHENSIVE       RETAINED       STOCKHOLDERS’
\n                                                 COMPENSATION    INCOME (LOSS)    INCOME (LOSS)       EARNINGS          EQUITY
\n                                                 ————    ————-    ————-     ————     ————-
\n                                                                                                      
\nBALANCES AS OF MARCH 31, 1997 ……………     $    (149)       $     297                         $ (18,545)       $ 131,268
\nComprehensive loss:
\n   Net loss ……………………………                                       $ (15,641)         (15,641)         (15,641)
\n   Unrealized loss on available-for-sale
\n     securities, net of tax ……………..                           (250)            (250)                             (250)
\n                                                                                    ———
\nTotal comprehensive loss ………………..                                       $ (15,891)
\n                                                                                    ———
\nCommon stock issued by acquired company …..                                                                                46
\nPreferred Shares issued by acquired
\n     companies …………………………                                                                             8,656
\nExercise of stock options ……………….                                                                             2,385
\nIssuance of warrants to purchase common stock
\n     by acquired company ………………..                                                                               182
\nCommon stock issued under ESPP …………..                                                                             1,469
\nTax benefit from stock plans …………….                                                                               240
\nCommon stock issued under purchase of
\n     Solis …………………………….                                                                             3,975
\nPurchase of treasury stock ………………                                                                            (5,139)
\nNon-cash compensation …………………..            62                                                                  49
\n                                                  ———        ———        ———        ———        ———<\/p>\n
BALANCES AS OF MARCH 31, 1998 ……………           (87)              47                           (34,186)         127,240
\nComprehensive income:
\n   Net income ………………………….                                       $   2,610            2,610            2,610
\n   Unrealized loss on available-for-sale
\n     securities, net of tax ……………..                             (9)              (9)                               (9)
\n                                                                                    ———
\nTotal comprehensive income ………………                                       $   2,601
\n                                                                                    ———
\nPreferred Shares issued by acquired
\n     companies …………………………                                                                             6,416
\nIssuance of common stock upon acquisition of
\n     LikeMinds, Inc. by Andromedia, Inc. ….                                                                             2,608
\nExercise of stock options ……………….                                                                            22,549
\nCommon stock issued under ESPP …………..                                                                             1,618
\nPurchase of treasury stock ………………                                                                           (20,306)
\nPreferred stock accretion ……………….                                                                              (104)
\nTax benefit from stock plans …………….                                                                             4,439
\nNon-cash compensation …………………..        (1,457)                                                                895
\nAdjustment to conform acquired company’s
\n     year end (Note 4) ………………….                                                            2,084             (925)
\n                                                  ———        ———        ———        ———        ———
\nBALANCES AS OF MARCH 31, 1999 ……………        (1,544)              38                           (29,492)         147,031
\nComprehensive income:
\n   Net income ………………………….                                       $   8,767            8,767            8,767
\n   Unrealized gain on available-for-sale
\n     securities, net of tax ……………..                            365              365                               365
\n                                                                                    ———
\nTotal comprehensive income ………………                                       $   9,132
\n                                                                                    =========
\nPreferred Shares issued by acquired
\n     companies …………………………                                                                               520
\nExercise of stock options ……………….                                                                            36,846
\nCommon stock issued under ESPP …………..                                                                             2,445
\nCommon stock exchanged for preferred stock
\n     of pooled entities …………………                                                                            31,407
\nPurchase of treasury stock ………………                                                                            (8,204)
\nPreferred stock accretion ……………….                                                                            (2,538)
\nTax benefit from stock plans …………….                                                                             8,714
\nNon-cash compensation …………………..       (21,747)                                                             11,504
\nGain on sale of subsidiary stock …………                                                                            21,109
\nAdjustment to conform acquired company’s
\n     year end (Note 4) ………………….          (174)             (10)                           (3,826)          (3,690)
\n                                                  ———        ———        ———        ———        ———
\nBALANCES AS OF MARCH 31, 2000 ……………     $ (23,465)       $     393                         $ (24,551)       $ 254,276
\n                                                  =========        =========        =========        =========        =========
\n<\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
          See accompanying notes to consolidated financial statements.<\/p>\n
                                      F-5
\n   36<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
1. NATURE OF OPERATIONS<\/p>\n
        Macromedia’s Software business develops software that creates Web site
\nlayout, graphics and rich media content for Internet users and develops
\nsolutions for analyzing Web traffic and personalizing Web sites. Additionally,
\nthe Company’s consumer business, shockwave.com, Inc. (“shockwave.com”), designs,
\ndevelops and markets aggregated content to provide and expand online
\nentertainment on the Web. Macromedia sells its products through a network of
\ndistributors, value-added resellers (“VAR”s) and its own sales force and Web
\nsite, and to original equipment manufacturers (“OEM”s) in North America, Europe,
\nAsia Pacific and Latin America. In addition, Macromedia derives revenues from
\nadvertising on its Web sites, and from software maintenance and technology
\nlicensing agreements. shockwave.com derives revenues from advertising and
\nsponsorship on its Web sites. Macromedia, Inc. and its subsidiaries are
\nhereinafter collectively referred to as the “Company” or Macromedia.<\/p>\n
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES<\/p>\n
        PRINCIPLES OF CONSOLIDATION – The consolidated financial statements
\ninclude all domestic and foreign subsidiaries that are more than 50% owned and
\ncontrolled. All significant intercompany transactions and balances have been
\neliminated.<\/p>\n
        USE OF ESTIMATES – The preparation of consolidated financial statements
\nin conformity with generally accepted accounting principles requires management
\nto make estimates and assumptions that affect the reported amounts of assets and
\nliabilities and disclosure of contingent assets and liabilities at the date of
\nthe consolidated financial statements, and the reported amounts of revenues and
\nexpenses during the reporting period. Actual results could differ materially
\nfrom those estimates.<\/p>\n
        REVENUE RECOGNITION – The Company recognizes revenue from the license of
\nsoftware products (shrinkwrap products and volume applications) to end users and
\nOEMs, service transactions, advertising and sponsorships. The Company recognizes
\nrevenue from shrinkwrap software at shipment based on the fair value of the
\nelement provided that collection of the resulting receivable is deemed probable,
\nin accordance with Statement of Position (“SOP”) 97-2, Software Revenue
\nRecognition, issued by the American Institute of Certified Public Accountants.
\nThe Company also maintains an allowance for potential credit losses and an
\nallowance for anticipated returns on products sold to distributors and direct
\ncustomers. The allowance for sales returns is estimated based on a calculation
\nof forecast sales to the end user by distributors in relation to estimated
\ncurrent channel inventory levels. Revenues from multiple element software
\narrangements are allocated to each element of the arrangement based on the
\nrelative fair values of the elements, such as software products, upgrades,
\nenhancements, post contract customer support (“PCS”), installation, or training.
\nThe determination of fair value is based on objective evidence that is specific
\nto the Company. If such evidence of fair value for each element of the
\narrangement does not exist, all revenue from the arrangement is deferred until
\nsuch time that evidence of fair value does exist or until all elements of the
\narrangement are delivered. Revenue from PCS contracts is recognized on a
\nstraight-line basis over the term of the contract, generally one year. Revenue
\nfrom consulting, training, and other services is generally recognized as the
\nservices are performed.<\/p>\n
        In December 1998, SOP 98-9 Software Revenue Recognition, with Respect to
\nCertain Arrangements was issued. SOP 98-9 requires recognition of revenue using
\nthe “residual method” in a multiple element arrangement when fair value does not
\nexist for one or more of the delivered elements in the arrangement. Under the
\n“residual method”, total fair value of the undelivered elements is deferred and
\nsubsequently recognized in accordance with SOP 97-2. The adoption of SOP 98-9
\ndid not have a material effect on the Company’s results of operations when
\nadopted on April 1, 1999.<\/p>\n
        The Company has entered into agreements whereby it licenses products to
\nOEMs or provides customers the right to multiple copies. These agreements
\ngenerally provide for nonrefundable fixed fees that are recognized at delivery
\nof the product master or the first copy. If PCS is not included, per copy
\nroyalties in excess of the fixed minimum amounts and refundable license fees are
\nrecognized as earned. If PCS is included in the contract, it is unbundled from
\nthe license fee using the Company’s objective evidence of the fair value of the
\nmaintenance and\/or services<\/p>\n
                                      F-6
\n   37<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
represented by the Company’s customary pricing for such maintenance and\/or
\nservices. If objective evidence of the fair value of the maintenance is not
\navailable, the revenues from the entire arrangement are recognized ratably over
\nthe maintenance term.<\/p>\n
        The Company has entered into end user software license agreements for
\nthe Company’s products that provide for an initial fee to use the products in
\nperpetuity up to a maximum number of users. These volume license arrangements
\nare multiple element arrangements consisting of license fees, consulting fees
\nand PCS. Some arrangements involve services that are essential to the
\nfunctionality of the software. Fees from licenses are recognized as revenue upon
\nshipment, provided all significant obligations have been met, persuasive
\nevidence of an arrangement exists, fees are fixed and determinable, collection
\nis probable and the arrangement does not involve services that are essential to
\nthe functionality of the software. Fees from licenses sold together with
\nconsulting services are generally recognized upon shipment provided that the
\nabove criteria have been met and payment of the licenses is not dependent upon
\nthe performance of the consulting services. Revenues from PCS are recognized on
\na straight-line basis over the term of the contract. In instances where the
\narrangement involves services that are essential to the functionality of the
\nsoftware, both the license and consulting fees are recognized under the
\npercentage of completion method of contact accounting in accordance with SOP
\n81-1.<\/p>\n
        Progress towards completion is generally measured based on the estimated
\nnumber of hours to complete the specific projects. In the event the costs to
\ncomplete a contract are expected to exceed anticipated revenues, a loss is
\naccrued. In certain circumstances where the Company is unable to estimate the
\namount of effort required to customize or implement the software license,
\nrevenue is recognized using the completed contract method. As of March 31, 2000,
\nno amounts have been recognized under the completed contract method.<\/p>\n
        Advertising revenues are derived from the sale of banner advertisements
\nand sponsorships on the Company’s Web sites under short and long-term contracts,
\nnet of commissions. Through March 31, 2000, the Company’s advertising contracts
\nhave been principally less than one year. Advertising revenues on banner
\ncontracts and sponsorships are recognized based on delivery in the period in
\nwhich the advertisement is displayed, provided that no significant obligations
\nremain and collection of the resulting receivable is probable. Company
\nobligations typically include the guarantee of a minimum number of “impressions”
\nor times that an advertisement appears in pages viewed by the users of the
\nCompany’s Web sites. To the extent minimum guaranteed impressions are not met,
\nthe Company defers recognition of the corresponding revenue until the remaining
\nguaranteed impression levels are achieved.<\/p>\n
        CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS – Cash equivalents consist
\nof highly liquid investments with a stated effective maturity of three months or
\nless at the time of purchase. Short-term investments consist of readily
\nmarketable securities with a maturity of more than three months from time of
\npurchase. Where the maturity is more than one year, the securities are
\nclassified as short-term as the Company’s intention is to convert them into cash
\nfor operations as needed.<\/p>\n
        Cash equivalents and all of the Company’s short-term investments are
\nclassified as “available-for-sale” under the provisions of Statement of
\nFinancial Accounting Standards (“SFAS”) No. 115, Accounting for Certain
\nInvestments in Debt and Equity Securities.<\/p>\n
        The amortized cost of available-for-sale securities is adjusted for
\namortization of premiums and accretion of discounts to maturity. Such
\namortization is included in net investment income. As required by SFAS No. 115,
\navailable-for-sale securities are recorded at fair value. Unrealized gains and
\nlosses are reported as a separate component of accumulated other comprehensive
\nincome (loss) in stockholders’ equity. Realized gains and losses, and declines
\nin value judged to be other than temporary on available-for-sale securities, are
\nincluded in other income (expense). The cost of securities sold is based on the
\nspecific identification method. Interest and dividends on securities classified
\nas available-for-sale are included in interest income, net.<\/p>\n
                                      F-7
\n   38<\/p>\n
        INVESTMENTS – The Company holds strategic investments in several
\ncompanies. When the investments do not represent a greater than 20% voting
\ninterest in the investee and the Company does not have the ability to
\nsignificantly influence the investee’s management, the investments are accounted
\nfor on the cost basis. When the Company does own greater than 20% but less than
\n50% voting interest in an investee, or has the ability to exert significant
\ninfluence over the investee’s management, the Company accounts for the
\ninvestment using the equity method of accounting. Investments to date have been
\naccounted for using the cost basis.<\/p>\n
        INVENTORY – Inventory consists primarily of software media, hardware
\nproduct components, manuals, and related packaging materials. Inventory is
\nrecorded at the lower of cost or market value, determined on a first-in,
\nfirst-out basis.<\/p>\n
        CONCENTRATIONS OF CREDIT RISK – Distributors comprise a significant
\nportion of the Company’s revenues and trade receivables. The Company controls
\ncredit risk through credit approvals, credit limits and monitoring procedures.
\nThe Company performs in-depth credit evaluations of all new customers and
\nrequires letters of credit or bank guarantees, if deemed necessary, but
\ngenerally requires no collateral. For the years ended March 31, 2000, 1999, and
\n1998, sales to one distributor, Ingram Micro, accounted for 28% of each
\nrespective years’ consolidated revenues. Accounts receivable relating to this
\ncustomer were $16.0 million and $8.0 million as of March 31, 2000 and 1999,
\nrespectively. These sales to Ingram Micro are included in the Company’s Software
\nbusiness (See Note 19). Three distributors accounted for an additional 18% of
\nrevenues for the year ended March 31, 2000.<\/p>\n
        Financial instruments that potentially subject the Company to
\nconcentrations of credit risk consist primarily of cash equivalents, short-term
\ninvestments, trade receivables and forward contracts used in hedging activities.
\nThe Company places its cash equivalents, short-term investments, and forward
\ncontracts with major financial institutions of high credit standing. The Company
\ndoes not believe there is significant risk of non-performance by these
\ninstitutions because the Company monitors their credit ratings and limits the
\nfinancial exposure to any one commercial issuer and any one type of investment.
\nThe fair value of the Company’s cash, accounts receivable, accounts payable, and
\nemployee loans approximated their carrying values due to their short maturity or
\nrate structure.<\/p>\n
        PROPERTY AND EQUIPMENT – Property and equipment are recorded at cost.
\nBuildings are depreciated over thirty years, and tenant improvements over ten
\nyears, using the straight-line method. Depreciation of equipment, furniture, and
\nfixtures is provided over estimated useful lives ranging from three to five
\nyears using the straight-line method. Leasehold improvements are amortized on a
\nstraight-line basis over the lesser of the lease term or the estimated useful
\nlife of the related assets, ranging from three to ten years.<\/p>\n
        INTANGIBLE ASSETS – Intangible assets consist of a trademark license and
\ngoodwill related to acquisitions accounted for under the purchase method of
\naccounting. Amortization of the trademark license is calculated on a
\nstraight-line basis over an estimated useful life of 7 years. Goodwill is
\namortized on a straight-line basis over an estimated useful life of
\napproximately 3 years. Accumulated amortization of intangibles was $1.7 million
\nand $300,000 at March 31, 2000 and 1999, respectively. The Company identifies
\nand records impairment losses on intangible and other assets when events and
\ncircumstances indicate that such assets might be impaired. The Company considers
\nfactors such as significant changes in the business climate and projected cash
\nflows from the respective asset. Impairment losses are measured as the amount by
\nwhich the carrying amount of the asset exceeds the fair value of the asset.<\/p>\n
        SOFTWARE COSTS – SFAS No. 86, Accounting for the Costs of Computer
\nSoftware to Be Sold, Leased, or Otherwise Marketed, provides for capitalization
\nof certain software development costs once technological feasibility is
\nestablished. The Company believes that software development costs incurred
\nsubsequent to technological feasibility have not been material, other than the
\ncosts paid to third parties to develop localized versions of its software, which
\nare capitalized and amortized to cost of sales on a straight-line basis over the
\nlesser of estimated product life or 12 months. Software costs also include
\namounts paid for<\/p>\n
                                      F-8
\n   39<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
purchased software to be sold and outside development on products that have
\nreached technological feasibility. The amounts capitalized under SFAS No. 86
\nwere immaterial.<\/p>\n
        SOFTWARE FOR INTERNAL USE – The Company capitalizes costs of software,
\nconsulting services, hardware and payroll related costs incurred to purchase or
\ndevelop internal-use software in accordance with SOP 98-1, Accounting for the
\nCosts of Computer Software Developed or Obtained for Internal Use. The Company
\nexpenses costs incurred during preliminary project assessment, research and
\ndevelopment, re-engineering, training and application maintenance. Capitalized
\nsoftware for internal use is generally amortized over three years.<\/p>\n
        FOREIGN CURRENCY TRANSLATION – The functional currency of the Company’s
\nforeign subsidiaries is the U.S. dollar. Assets and liabilities denominated in
\nforeign currencies are translated using the exchange rates at the balance sheet
\ndate. Revenues and expenses are translated using average exchange rates during
\nthe year. Translation adjustments are recorded in the consolidated statements of
\noperations.<\/p>\n
        FOREIGN EXCHANGE FORWARD CONTRACTS – The Company uses foreign exchange
\nforward contracts to hedge its net monetary asset positions in foreign
\ncurrencies. The Company’s forward contracts do not qualify as accounting hedges.
\nThe Company marks-to-market the forward contracts and includes unrealized gains
\nand losses in current period net income or loss as a component of other income
\n(expense). The Company may from time to time adjust its foreign exchange
\nposition by entering into additional contracts or by terminating or offsetting
\nexisting foreign currency forward contracts. Gains and losses on terminated or
\noffset contracts are recognized in income in the period of contract termination
\nor offset.<\/p>\n
        MINORITY INTEREST IN SUBSIDIARY – As of March 31, 2000, the Company had
\none subsidiary owned less than 100%, shockwave.com. Gains or losses from the
\nsale of subsidiary capital stock are recorded in additional paid-in-capital, net
\nof tax (See Note 11).<\/p>\n
        STOCK BASED COMPENSATION – As permitted under SFAS No. 123, Accounting
\nfor Stock-Based Compensation, the Company has elected to follow Accounting
\nPrinciples Board Opinion (“APB”) No. 25, Accounting for Stock Issued to
\nEmployees, and related interpretations in accounting for stock-based awards to
\nemployees (See Note 14). Accordingly, compensation cost for stock options is
\nmeasured as the excess, if any, of the market price of the Company’s common
\nstock at the date of grant over the stock option exercise price. Warrants issued
\nto non-employees are accounted for using the fair value method of accounting as
\nprescribed by SFAS 123, utilizing the Black-Scholes model and volatility factors
\nfor comparable public companies. Compensation costs are amortized on a
\nstraight-line basis over the vesting period of the securities.<\/p>\n
        COMPREHENSIVE INCOME (LOSS) – In fiscal year 1999, the Company adopted
\nSFAS No. 130, Reporting Comprehensive Income. SFAS 130 establishes standards of
\nreporting and displaying comprehensive income and its components of net income
\nand “other comprehensive income” in a full set of general-purpose financial
\nstatements. “Other comprehensive income” refers to revenues, expenses, gains and
\nlosses that are not included in net income but rather are recorded directly in
\nstockholders’ equity. The adoption of SFAS 130 had no impact on the Company’s
\nnet income or loss or stockholders’ equity. Prior year financial statements have
\nbeen reclassified to conform to the requirements of SFAS 130. The sole component
\nof other comprehensive income for the years ended March 31, 2000, 1999 and 1998
\nwas unrealized gains or losses from the Company’s available-for-sale securities.<\/p>\n
        MARKETING PROGRAMS – The Company reimburses certain qualified customers
\nfor a portion of the costs related to their promotion of the Company’s products.
\nThe Company’s liability for reimbursement is accrued at the time revenue is
\nrecognized as a percentage of the qualified customer’s net revenue derived from
\nthe Company’s products. The Company also subsidizes other marketing activities
\nthrough cooperative arrangements with its customers, and accrues the expense as
\nthe advertising occurs.<\/p>\n
                                      F-9
\n   40<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
        ADVERTISING COSTS – Advertising expenditures are charged to operations
\nas incurred. Advertising expense for the year ended March 31, 2000, 1999, and
\n1998 was $8.3 million, $8.2 million, and $4.7 million, respectively.<\/p>\n
        INCOME TAXES – The Company utilizes SFAS No. 109, Accounting for Income
\nTaxes. SFAS No. 109 requires the use of the asset and liability method of
\naccounting for income taxes. Under this method, deferred income taxes are
\nprovided for the temporary differences between the financial reporting basis and
\nthe tax basis of the Company’s assets and liabilities. Deferred tax assets and
\nliabilities are measured using enacted tax rates expected to apply to taxable
\nincome in the years in which those temporary differences are expected to be
\nrecovered or settled.<\/p>\n
        FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS – In June 1998, the
\nFinancial Accounting Standards Board issued SFAS No. 133, Accounting for
\nDerivative Instruments and Hedging Activities. SFAS 133, as amended by SFAS 137,
\nDeferral of Effective Date of Statement 133, is effective for all quarters of
\nfiscal years beginning after June 15, 2000. The Company has not completed an
\nassessment of the impact of SFAS 133 on the consolidated results of operations
\nand financial position. SFAS 133 requires the recognition of all derivatives on
\nthe balance sheet at fair value.<\/p>\n
        RECLASSIFICATION – Certain amounts in the accompanying fiscal year 1999
\nand fiscal year 1998 consolidated financial statements have been reclassified in
\norder to conform with the presentation of the 2000 consolidated financial
\nstatements.<\/p>\n
3. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION<\/p>\n
        Supplemental cash flow information and non-cash investing activities for
\nthe years ended March 31, 2000, 1999 and 1998 are as follows (in thousands):<\/p>\n\n
\n                                                                        2000               1999                1998
\n                                                                      ——-            ——-             ——-
\n                                                                                                    
\nSupplemental disclosure of cash flow information:
\n   Interest paid ……………………………………….       $    76            $    43             $    16
\n   Income taxes paid ……………………………………           126                 —                  —<\/p>\n
Non-cash investing and financing activities:
\n   Common stock issued in exchange for LikeMinds …………..       $    —            $ 2,600             $    —
\n   Common stock issued in exchange for Solis ………………            —                 —               3,975
\n   Unrealized gain (loss) on available-for-sale securities ….           355                 (9)               (250)
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
4. BUSINESS COMBINATIONS<\/p>\n
        POOLINGS-OF-INTEREST<\/p>\n
        ANDROMEDIA, INC. On October 6, 1999, Macromedia, Inc., Andromedia, Inc.
\n(“Andromedia”), and Peak Acquisition Corp., a wholly-owned subsidiary of
\nMacromedia (“Peak Acquisition”), entered into an Agreement and Plan of
\nReorganization under which Macromedia acquired Andromedia by exchanging all of
\nthe outstanding capital stock, options, and warrants of Andromedia for
\napproximately 5.2 million shares of common stock, options, and warrants of
\nMacromedia. The merger closed on December 1, 1999. As a result of the
\nacquisition of Andromedia, Peak Acquisition was merged with and into Andromedia
\nand Andromedia remains as the surviving corporation and wholly-owned subsidiary
\nof Macromedia. The transaction was accounted for as a pooling-of-interests, and
\naccordingly, the consolidated financial statements for periods prior to the
\ncombination have been restated to include the accounts and results of operations
\nfor Andromedia. Andromedia develops e-marketing software that enables companies
\nto implement an integrated solution to analyze the success of their Web
\nmarketing efforts and to personalize their e-commerce offering based on
\ncustomers’ needs in real-time.<\/p>\n
        In conjunction with the merger, the Company incurred direct
\nmerger-related expenses of approximately $1.5 million, including investment
\nbanker fees, legal and other professional fees, and severance. The<\/p>\n
                                      F-10
\n   41
\n                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
Company also incurred costs of $2.3 million relating to Andromedia’s public
\noffering process, which was terminated upon the merger with Macromedia. These
\ncosts included investment banker fees, legal and other professional fees, and
\nprinting costs. At March 31, 2000, approximately $1.5 million of these costs
\nremained in accrued liabilities for acquisition related expenses.<\/p>\n
        Prior to the combination, Andromedia’s fiscal year ended on December 31.
\nIn restating the financial statements for the pooling-of-interests combination,
\nAndromedia’s financial statements for the twelve months ended March 31, 2000,
\nDecember 31, 1998 and December 31, 1997 were combined with Macromedia’s
\nfinancial statements for the years ended March 31, 2000, 1999 and 1998,
\nrespectively. The combined balance sheet as of March 31, 1999 combines the
\nassets, liabilities and stockholders’ equity of Macromedia on that date with
\nAndromedia’s balance sheet as of December 31, 1998. An adjustment has been made
\nto the consolidated statements of stockholders’ equity and cash flows to include
\nAndromedia’s results of operations for the three months ended March 31, 1999
\nwhich were not included in the period ended March 31, 2000. Andromedia’s revenue
\nand net loss for the three months ended March 31, 1999 was $1.1 million and $3.8
\nmillion, respectively. There were no conforming accounting adjustments for
\nAndromedia and there were no intercompany transactions between the entities
\nprior to the combination.<\/p>\n
        ESI SOFTWARE, INC. On July 8, 1999, Macromedia, Inc., ESI Software,
\nInc., a California corporation (“ESI”), and Dynamo Acquisition Corp., a Delaware
\ncorporation and a wholly-owned subsidiary of Macromedia (“Dynamo”), entered into
\nan Agreement and Plan of Reorganization, under which Macromedia acquired ESI by
\nexchanging all of the outstanding capital stock, options and warrants of ESI for
\napproximately 635,000 shares of common stock, options and warrants of Macromedia
\n(as valued on July 8, 1999). The merger closed on September 30, 1999. As a
\nresult of the acquisition of ESI, Dynamo was merged with and into ESI and ESI
\nremains as the surviving corporation and a wholly-owned subsidiary of
\nMacromedia. The transaction has been accounted for as a pooling-of-interests and
\nis a tax-free reorganization. ESI develops and markets software that enables
\nusers to build advanced, interactive, business-oriented Web applications.<\/p>\n
        In conjunction with the merger, the Company incurred direct
\nmerger-related expenses of approximately $3.1 million, including expenses for
\nbonuses contingent upon closing of the merger agreement, legal and other
\nprofessional fees, personnel severance and relocation of employees, during the
\nyear ended March 31, 2000.<\/p>\n
        Prior to the combination, ESI’s fiscal year ended on June 30. The
\nfinancial statements of Macromedia have been restated to include the financial
\nposition and results of operations of ESI for all periods presented. The
\nrestated statements of operations for the years ended March 31, 2000 and 1999
\ninclude Macromedia’s and ESI’s results of operations for those periods. The
\nrestated statement of operations for the year ended March 31, 1998 combines
\nMacromedia’s year ended March 31, 1998 with ESI’s year ended June 30, 1998. For
\nthe three months ended June 30, 1998, ESI had revenues and a net loss of $93,000
\nand $2.1 million, respectively. The combined balance sheets as of March 31, 2000
\nand 1999 combines the assets, liabilities and stockholders’ equity of Macromedia
\nwith ESI on those dates. An adjustment has been made to the consolidated
\nstatements of stockholder’s equity and cash flows to exclude ESI’s results of
\noperations for the three months ended June 30, 1998 which were included in the
\nperiod ended March 31, 1999. During the year ended March 31, 2000, the Company
\npurchased product from ESI pursuant to a distribution agreement. This
\ntransaction was eliminated upon consolidation. There were no conforming
\naccounting adjustments for ESI upon acquisition.<\/p>\n
                                      F-11
\n   42<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
        The results of operations previously reported by the separate
\nenterprises and the combined amounts presented in the accompanying consolidated
\nfinancial statements are summarized below. Revenues and net loss for Andromedia
\nsubsequent to December 1, 1999 are included with Macromedia’s financial results.
\nRevenue and net loss for ESI subsequent to September 30, 1999 are included with
\nMacromedia’s financial results (in thousands).<\/p>\n\n
\n                                                         FOR THE YEARS ENDED MARCH 31,
\n                                              ————————————————
\nREVENUES:                                       2000                1999                1998
\n                                              ——–            ——–            ——–
\n                                                                             
\n            Macromedia ………..            $257,289            $149,886            $113,086
\n            Andromedia ………..               4,611               1,969                 449
\n            ESI Software ………               2,259               1,388                 268
\n                                              ——–            ——–            ——–
\n              Combined ………..            $264,159            $153,243            $113,803
\n                                              ========            ========            ========<\/p>\n
NET INCOME (LOSS) APPLICABLE TO
\n  COMMON STOCKHOLDERS:
\n            Macromedia ………..            $ 23,864            $ 19,784            $ (6,187)
\n            Andromedia ………..             (15,555)             (9,660)             (3,350)
\n            ESI Software ………              (2,080)             (7,618)             (6,104)
\n                                              ——–            ——–            ——–
\n              Combined ………..            $  6,229            $  2,506            $(15,641)
\n                                              ========            ========            ========
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
        TECHNOLOGY PURCHASE TRANSACTIONS<\/p>\n
        STARBASE CORPORATION   In July 1999, the Company acquired certain
\ntechnology rights and other related software products from Starbase Corporation
\nfor $2.8 million. The Company intends to utilize these assets in the research
\nand development of a single future research and development project. As a result
\nof the acquisition, the Company wrote off the entire $2.8 million to acquisition
\nrelated expenses in the year ended March 31, 2000 as the Company determined that
\nthe technology did not have any alternative future uses.<\/p>\n
        TIME4.COM   On December 22, 1999, the Company acquired certain
\ntechnology rights of Time4.com, Inc. (“Time4”), a software development company
\nlocated in Minnesota, for $1.9 million in cash. The acquisition was accounted
\nfor under the purchase method; accordingly, the results of operations of Time4
\nhave been included in the Company’s consolidated financial statements from the
\ndate of acquisition. As a result of the acquisition, the Company wrote off
\napproximately $1.8 million of rights relating to Time4’s preliminary technology
\nas the Company determined that the technology does not have any alternative
\nfuture uses. The Company has capitalized approximately $100,000 associated with
\nthe workforce in place and non-compete agreements for Time4’s principal
\nemployees and is amortizing these intangible assets on a straight-line method
\nover a period of 3.5 years.<\/p>\n
5. AGREEMENT WITH LOTUS DEVELOPMENT CORPORATION<\/p>\n
        In fiscal year 2000, the Company closed a series of agreements with
\nLotus Development Corporation (“Lotus”), the combined effect of which was to:
\n(i) sell certain tangible and intangible assets relating to the Company’s
\nPathware product line to Lotus, (ii) result in Lotus acting as a distributor of
\nthe Company’s products, and (iii) cause the Company and Lotus to cooperate with
\nrespect to certain future development activities related to the Company’s and
\nLotus’ products. The Company is to receive a minimum of $30.0 million in revenue
\nover the next three years as a result of the terms of the agreements.<\/p>\n
                                      F-12
\n   43<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
6. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS<\/p>\n
        The following is a summary of cash, cash-equivalents and short-term
\ninvestments at March 31, 2000 and 1999 (in thousands):<\/p>\n\n
\n                                                                             2000               1999
\n                                                                          ——–            ——–
\n                                                                                        
\n            Cash and cash equivalents:
\n               Cash ……………………………………            $ 27,732            $ 22,538
\n               Money market funds ……………………….               8,729               1,629
\n               Commercial paper …………………………              64,674               5,032
\n               Certificates of deposit …………………..               1,999                 260
\n               Government securities …………………….              11,950                  —
\n                                                                          ——–            ——–
\n                 Total cash and cash equivalents ………….             115,084              29,459
\n                                                                          ——–            ——–
\n            Short-term investments:
\n               Corporate equity securities ……………….            $    982            $  3,020
\n               Corporate notes ………………………….                  —                 501
\n               Corporate bonds ………………………….              27,378                  —
\n               Commercial paper …………………………               3,976              35,349
\n               U.S. government debt securities ……………              33,128              42,828
\n               Certificate of deposit ……………………               6,488                  —
\n                                                                          ——–            ——–
\n                 Total short-term investments …………….              71,952              81,698
\n                                                                          ——–            ——–
\n            Total cash, cash equivalents, and short-term
\n            investments ………………………………..            $187,036            $111,157
\n                                                                          ========            ========
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
        Short-term investments consisted of the following, by contractual
\nmaturity as of March 31, 2000 and 1999 (in thousands):<\/p>\n\n
\n                                                                            2000                1999
\n                                                                          ——–            ——–
\n                                                                                        
\n            Due in one year or less ……………………..            $ 28,449            $ 61,750
\n            Due in one to three years ……………………              43,503              19,948
\n                                                                          ——–            ——–
\n                                                                          $ 71,952            $ 81,698
\n                                                                          ========            ========
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
        The Company’s available-for-sale securities are carried at market value.
\nUnrealized gains were $355,000 and losses were $9,000, net of tax, at March 31,
\n2000 and 1999, respectively.<\/p>\n
7. PROPERTY AND EQUIPMENT<\/p>\n
        Property and equipment as of March 31, 2000 and 1999, consisted of the
\nfollowing (in thousands):<\/p>\n\n
\n                                                                            2000                1999
\n                                                                          ——–            ——–
\n                                                                                        
\n            Land and building …………………………..            $ 21,280            $ 21,270
\n            Computer equipment ………………………….              40,259              26,292
\n            Computer software …………………………..              20,535               9,051
\n            Office equipment and furniture ……………….              15,463              10,522
\n            Leasehold improvements ………………………               7,847               5,447
\n                                                                          ——–            ——–
\n                                                                           105,384              72,582
\n            Less accumulated depreciation and amortization …             (44,531)            (29,769)
\n                                                                          ——–            ——–
\n                                                                          $ 60,853            $ 42,813
\n                                                                          ========            ========
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
        Depreciation and amortization expense for the years ended March 31,
\n2000, 1999, and 1998 was $14.8 million, $8.4 million, and $7.8 million,
\nrespectively.<\/p>\n
        Included in computer software is approximately $15.6 million related to
\nthe continuing development of an internal use information technology
\ninfrastructure for sales and marketing, customer support, on-line product
\ndistribution, and technical support. At March 31, 2000 accumulated amortization
\nof this software was approximately $3.4 million.<\/p>\n
                                      F-13
\n   44<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
8. INVESTMENTS<\/p>\n
        In fiscal year 2000, the Company made strategic preferred stock
\ninvestments in several companies, including Stan Lee Media, Inc., Mondo Media
\nProductions, Inc., Spiderdance, Inc., iHarvest Corporation and Context Media,
\nInc. These investments are included in the other assets component of the
\nconsolidated balance sheets. The cost method is used to record these
\ninvestments, as the Company holds less than 20% of the voting rights of each of
\nthese investees and does not have the ability to significantly influence the
\ninvestees. The Company determines the fair value of the investment based on
\ncurrent market price, or if the investment is not publicly traded, considers
\namong other factors, pricing of current financing rounds. As of March 31, 2000,
\nthe investment costs approximated their fair values.<\/p>\n
9. ACCRUED LIABILITIES<\/p>\n
        Accrued liabilities as of March 31, 2000 and 1999, consisted of the
\nfollowing (in thousands):<\/p>\n\n
\n                                                                            2000                1999
\n                                                                          ——–            ——–
\n                                                                                        
\n            Accrued compensation ………………………..            $  5,172            $  1,756
\n            Accrued marketing development ………………..               2,789               2,078
\n            Accrued fringe benefits ……………………..               4,822               2,670
\n            Accrued payroll taxes ……………………….               9,113               2,939
\n            Accrued income taxes ………………………..               8,782               4,139
\n            Other accrued expenses ………………………              23,164              14,119
\n                                                                          ——–            ——–
\n                Total accrued liabilities ………………..            $ 53,842            $ 27,701
\n                                                                          ========            ========
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
10. INCOME TAXES<\/p>\n
        The components of the provision for income taxes for the years ended
\nMarch 31, 2000, 1999 and 1998, are as follows (in thousands):<\/p>\n\n
\n                                                                  2000               1999                1998
\n                                                                ——-            ——-             ——-
\n                                                                                              
\n            Current
\n              Federal …………………………            $    —            $    —             $    —
\n              State …………………………..                 —                 —                  —
\n              Foreign …………………………              2,651              2,331                 323
\n                                                                ——-            ——-             ——-
\n               Total Current …………………..              2,651              2,331                 323
\n            Deferred:
\n              Federal …………………………                416                949                 829
\n              State …………………………..                194               (107)               (564)
\n                                                                ——-            ——-             ——-
\n               Total Deferred ………………….                610                842                 265
\n            Charge in lieu of taxes
\n            attributable to employee stock plans …              8,714              4,439                 240
\n                                                                ——-            ——-             ——-
\n                  Total ……………………….            $11,975            $ 7,612             $   828
\n                                                                =======            =======             =======
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
                                      F-14
\n   45<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
        The provision for income taxes differs from the expected tax expense
\namount computed by applying the statutory federal income tax rate of 35% to
\nincome before income taxes for the years ended March 31, 2000 and 1999, and 34%
\nfor the year ended March 31, 1998, as a result of the following (in thousands):<\/p>\n\n
\n                                                                 2000               1999                1998
\n                                                                ——-            ——-             ——-
\n                                                                                              
\n            Computed tax (benefit) at statutory
\n            rate ……………………………..            $ 7,213            $ 9,590             $(1,822)
\n            State taxes (net) ………………….                602                387                 151
\n            Nondeductible pooling and
\n            acquisition costs and goodwill ………             10,442                 32               2,412
\n            Foreign benefits provided for at
\n            rates other than U.S. statutory rates ..             (4,286)              (725)                 —
\n            Research and other tax credits ………             (2,413)            (1,543)                 —
\n            Other, net ………………………..                417               (129)                 87
\n                                                                ——-            ——-             ——-
\n            Total …………………………….            $11,975            $ 7,612             $   828
\n                                                                =======            =======             =======
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
        The tax effect of temporary differences that give rise to deferred tax
\nassets (liabilities) as of March 31, 2000 and 1999, is as follows (in
\nthousands):<\/p>\n\n
\n                                                                             2000               1999
\n                                                                          ——–            ——–
\n                                                                                        
\n            Deferred tax assets:
\n               Reserves, accruals and other ………………            $  9,333            $  6,899
\n               Net operating loss
\n               carryforwards (federal) …………………..              79,857              25,197
\n               Net operating loss
\n               carryforwards (state) …………………….              21,797               2,983
\n               Credit for research activities …………….              16,330              13,207
\n               Other credits ……………………………               3,339                 588
\n                                                                          ——–            ——–
\n                 Total deferred tax assets ……………….             130,656              48,874
\n               Less valuation allowance ………………….            (122,844)            (41,975)
\n                                                                          ——–            ——–
\n               Net deferred tax assets …………………..               7,812               6,899<\/p>\n
            Deferred tax liabilities:
\n               Depreciation …………………………….                  —                (306)
\n                                                                          ——–            ——–
\n                 Total deferred …………………………                  —                (306)
\n                                                                          ——–            ——–
\n            Net deferred tax asset ………………………            $  7,812            $  6,593
\n                                                                          ========            ========
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
        As of March 31, 2000, the Company had available federal and state net
\noperating loss carryforwards of approximately $255.0 million and $111.0 million,
\nrespectively. The Company also had unused research credit carryforwards of
\napproximately $10.1 million and $6.2 million for federal and California tax
\npurposes, respectively. If not utilized, net operating loss and federal research
\ncredit carryforwards will expire in fiscal years 2002 through 2020. The
\nCalifornia research credits may be carried forward indefinitely.<\/p>\n
        Approximately $102.0 million of the valuation allowance for deferred tax
\nassets is attributable to employee stock option deductions, the benefit from
\nwhich will be allocated to paid-in capital rather than current earnings when
\nsubsequently recognized. Approximately $16.3 million of the valuation allowance
\nfor deferred tax assets relates to research and experimentation credits, of
\nwhich approximately $10.6 million will be allocated to paid-in capital rather
\nthan current earnings when subsequently recognized.<\/p>\n
        Cumulative undistributed earnings of international subsidiaries amounted
\nto $24.0 million as of March 31, 2000, which are intended to be permanently
\nreinvested. The amount of income tax liability that would result had such
\nearnings been repatriated is estimated to be approximately $8.8 million.<\/p>\n
        The utilization of research and experimentation credits is limited by
\ncurrent tax regulations. These research and experimentation credits will be
\nutilized in future periods if sufficient income is generated. The<\/p>\n
                                      F-15
\n   46<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
Company’s ability to utilize certain loss carryforwards and certain research
\ncredit carryforwards are subject to limitations pursuant to the ownership change
\nrules of Internal Revenue Code Section 382.<\/p>\n
        The Company believes it is more likely than not that future operations
\nwill generate sufficient taxable income to realize the net deferred tax assets
\nrecognized by the Company.<\/p>\n
11. MINORITY INTEREST IN SUBSIDIARY<\/p>\n
        During fiscal year 2000, the Company’s consolidated subsidiary,
\nshockwave.com, issued 18.2 million shares of Preferred Series B stock to parties
\nother than Macromedia for cash consideration of $2.50 per share. This
\nrepresented 34.6% of shockwave.com’s preferred stock at March 31, 2000. Prior to
\nthe transaction, the Company held 100% of the equity of shockwave.com in the
\nform of Preferred Series A stock. Preferred Series A and B stock both have
\nidentical rights and privileges. The proportionate value offered to the third
\nparties in the Series B offering was in excess of the Company’s average carrying
\namount. As a result of the transaction, the Company recorded $21.1 million in
\nits consolidated statement of stockholders’ equity in order to adjust its
\ninvestment in shockwave.com stock to reflect its share of the net assets of
\nshockwave.com. In addition, the Company considers shockwave.com a start up, and
\nas such, no gain was recognized by the Company.<\/p>\n
        shockwave.com is authorized to issue 107.2 million shares of convertible
\npreferred stock. Of this, 69.2 million shares are Series A Convertible Preferred
\nStock and 38.0 million shares are Series B Convertible preferred stock, both
\nwith a par value of $0.001 per share. The rights and privileges of Preferred
\nSeries A and B entitle the holder of each share to receive non-cumulative
\ndividends when and if declared by the Company and also allow for liquidation
\npreferences for an amount per share equal to the original issue price for each
\nseries of preferred stock, plus any declared but unpaid dividends. The shares
\nare convertible either at the option of the holder, or upon a public offering of
\nshockwave.com common stock. Upon conversion, each preferred share is convertible
\ninto shockwave.com common shares based on a price determined at the conversion
\ndate.<\/p>\n
12. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK<\/p>\n
        At the consummation of the merger between the Company and Andromedia,
\nAndromedia had 2.3 million shares of mandatorily redeemable convertible
\npreferred stock outstanding. These shares were redeemable at the higher of
\noriginal issuance price plus declared but unpaid dividends or fair market value
\nat or any time after February 1, 2004. Accordingly, the Company increased the
\ncarrying amount of the instruments through periodic accretions, so that the
\ncarrying amount would equal the mandatory redemption amount at February 1, 2004.
\nMandatorily redeemable preferred stock consisted of the following (in
\nthousands):<\/p>\n\n
\n                                                                           SHARES
\n                                                                         OUTSTANDING           AMOUNT
\n                                                                         ———–          ——–
\n                                                                                       
\n            Issuance of Series C Preferred Stock ………….                 401            $  3,548
\n                                                                          ——–            ——–
\n            Balance as of March 31, 1998 …………………                 401               3,548
\n            Issuance of Series D Preferred Stock ………….                 815               9,927
\n            Issuance of Series D Preferred Stock Warrants ….                  —                  12
\n            Preferred Stock accretion ……………………                  —                 104
\n                                                                          ——–            ——–
\n            Balance as of March 31, 1999 …………………               1,216              13,591
\n            Issuance of Series E Preferred Stock ………….               1,055              14,914
\n            Issuance of Series C and E Preferred Stock Warrants                 —                 360
\n            Preferred Stock accretion ……………………                  —               2,538
\n            Conversion into Macromedia Common Stock ……….              (2,271)            (31,403)
\n                                                                          ——–            ——–
\n            Balance as of March 31, 2000 …………………                  —            $     —
\n                                                                          ========            ========
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
        On December 1, 1999, Macromedia completed its merger with Andromedia
\nupon which all outstanding<\/p>\n
                                      F-16
\n   47<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
mandatorily redeemable preferred shares of Andromedia automatically converted
\ninto Macromedia common stock.<\/p>\n
        The holders of Mandatorily Redeemable Convertible Preferred Stock had
\nthe following rights and preferences as follows:<\/p>\n
        REDEMPTION – Upon written notice of at least a majority of the holders
\nof Series C, Series D or Series E Convertible Preferred Stock, at any time
\nsubsequent to February 1, 2004, the Company must have redeemed a specified
\npercentage of Series C, D and E Convertible Preferred Stock at a price equal to
\nthe greater of (i) $8.92 (Series C), $12.28 (Series D) and $14.32 (Series E) per
\nshare, respectively, plus all declared but unpaid dividends on such shares or
\n(ii) the per share fair market value as determined by mutual agreement between a
\nmajority of the holders of the applicable series of redeemable preferred and a
\nmajority of the Board of Directors.<\/p>\n
        DIVIDENDS – Holders of Series C, D and E Convertible Preferred Stock
\nwere entitled to receive non-cumulative dividends at the per annum rate of
\n$0.45, $0.61 and $0.73 per share, respectively, when and if declared by the
\nBoard of Directors. The holders of Series C, D and E Convertible Preferred Stock
\nwere also entitled to participate in dividends on Common Stock, when and if
\ndeclared by the Board of Directors, based on the number of shares of Common
\nStock held on an as-if converted basis. No dividends were declared by the Board
\nfrom inception through December 1, 1999.<\/p>\n
13. STOCKHOLDERS’ EQUITY<\/p>\n
        As a result of the Company’s poolings-of-interests, various issuances of
\nstock of the acquired entities were issued and outstanding during fiscal year
\n2000, 1999 and 1998. For presentation purposes, the Company has shown the
\nactivity and outstanding preferred share balances of the acquired entities as a
\ncomponent of additional paid-in-capital in the Company’s statements of
\nstockholders’ equity. The following table summarizes the activity and shares
\noutstanding of Andromedia and ESI as of March 31, 2000, 1999 and 1998. All
\nAndromedia and ESI preferred shares are shown as if converted into the Company’s
\ncommon stock and have a par value of $0.001 (in thousands):<\/p>\n\n
\n                                   Preferred     Preferred     Preferred    Preferred     Preferred     Preferred
\n                                    Stock          Stock         Stock        Stock         Stock         Stock
\n                                  Andromedia    Andromedia        ESI          ESI           ESI           ESI        Additional
\n                                   Series A      Series B      Series A      Series B     Series C       Series D      Paid in
\n                                    Shares        Shares        Shares        Shares        Shares        Shares       Capital
\n                                  ———-    ———-     ———    ———     ———      ——–     ———-
\n                                                                                                 
\nBalance as of
\n March 31, 1997 …………..           61            90            44             9            —            —      $  7,046
\nIssuance of
\n preferred stock ………….           —            33            —            —           245            —         8,656
\n                                   ——–      ——–      ——–      ——–      ——–      ——–      ——–<\/p>\n
Balance as of
\n March 31, 1998 …………..           61           123            44             9           245            —        15,702
\n                                   ——–      ——–      ——–      ——–      ——–      ——–      ——–
\nElimination of ESI
\n activity for the
\n duplicated three
\n months ended
\n June 30, 1998 ……………           —            —            —            —           (93)           —        (3,009)
\nIssuance of
\n preferred stock ………….           —            —            —            —            93            99         6,416
\n                                   ——–      ——–      ——–      ——–      ——–      ——–      ——–<\/p>\n
Balance as of
\n March 31, 1999 …………..           61           123            44             9           245            99        19,109
\n                                   ——–      ——–      ——–      ——–      ——–      ——–      ——–
\nIssuance of
\n preferred stock ………….           —            —            —            —            —            15           520
\nConversion of
\n preferred stock to common
\n upon acquisition …………          (61)         (123)          (44)           (9)         (245)         (114)           —
\n                                   ——–      ——–      ——–      ——–      ——–      ——–      ——–<\/p>\n
Balance as of
\n March 31, 2000 …………..           —            —            —            —            —            —      $ 19,629
\n                                   ========      ========      ========      ========      ========      ========      ========
\n<\/c><\/c><\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
                                      F-17
\n   48<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
        All equity activity other than the share amounts above is included in
\nthe accompanying consolidated statements of stockholders’ equity.<\/p>\n
        PREFERRED STOCK. Macromedia is authorized to issue 5.0 million shares of
\nconvertible preferred stock with a par value of $0.001 per share. Holders of
\nSeries A and B Convertible Preferred Stock under Andromedia were entitled to
\nreceive non-cumulative dividends at the per annum rate of $0.97 and $0.41.
\nHolders of Series A, B, C and D Convertible Preferred Stock under ESI were
\nentitled to receive non-cumulative dividends at a per annum rate ranging from
\n$0.90 to $2.82.<\/p>\n
        TREASURY STOCK. In July 1997, the Board of Directors authorized the
\nrepurchase of up to 2.0 million shares of the Company’s common stock. In October
\n1998, the Board of Directors authorized the repurchase of an additional 2.0
\nmillion shares of the Company’s common stock. During the years ended March 31,
\n2000 and 1999, the Company purchased 198,000 and 1.1 million shares,
\nrespectively, of its common stock on the open market at an average price of
\n$41.43 and $18.29 per share, respectively. The shares are recorded at cost and
\nare shown as a reduction of stockholders’ equity. In connection with the
\nacquisition of ESI Software, Inc. (See Note 4), the Company rescinded the
\nrepurchase program.<\/p>\n
        STOCK BASED COMPENSATION PLANS<\/p>\n
        MACROMEDIA, INC. STOCK OPTION PLANS. As of March 31, 2000, there are
\nstock options outstanding in connection with the following stock option and
\npurchase plans (the “Macromedia Plans”):<\/p>\n
                (i)     Authorware 1988 Stock Option Plan<\/p>\n
                (ii)    1992 Equity Incentive Plan (“EIP”)<\/p>\n
                (iii)   1993 Employee Stock Purchase Plan (“ESPP”)<\/p>\n
                (iv)    1993 Directors Stock Option Plan<\/p>\n
                (v)     ESI 1996 Equity Incentive Plan<\/p>\n
                (vi)    Andromedia 1996 Stock Option Plan<\/p>\n
                (vii)   Andromedia 1997 Stock Option Plan<\/p>\n
                (viii)  Andromedia 1999 Stock Option Plan<\/p>\n
                (ix)    Macromedia 1999 Stock Option Plan<\/p>\n
        The options outstanding under the plans indicated at (i), (v), (vi),
\n(vii) and (viii) (the “Prior Plans”) above were assumed by the Company as a
\nresult of merger activities. The Company assumed certain options granted to
\nformer employees of the acquired companies (the “Acquired Options”) under these
\nplans. All of the Acquired Options have been adjusted to give effect to the
\nrespective conversion terms between the Company and companies acquired. Of the
\nPrior Plans, the Company continues to grant options only from the Andromedia
\n1999 Stock Option Plan.<\/p>\n
        The EIP and Andromedia 1999 Stock Plan provide for the grant of several
\ntypes of stock based awards including, incentive and nonqualified stock options,
\nrestricted stock, and stock bonuses and purchase rights. The total number of
\nshares reserved pursuant to these plans as of March 31, 2000, was 15.9 million.
\nAny options granted pursuant to the Authorware 1988 Stock Option Plan that
\nexpire or become unexercisable for any reason without having been exercised in
\nfull shall no longer be available for distribution under the plan, but shall be
\navailable for distribution under the EIP. Similarly, any option or purchase
\nright under the Andromedia 1999 Stock Option Plan that becomes unexercisable
\nwithout having been exercised in full, shall become available for future grant
\nor sale.<\/p>\n
        Under the ESPP, 800,000 shares of common stock, are reserved for
\nissuance. Under the ESPP, and subject to certain limitations, employees may
\npurchase, through payroll deductions of 2% to 10% of compensation, shares of
\ncommon stock at a price per share that is the lesser of 85% of the fair market
\nvalue as of the beginning of the offering period or the end of the purchase
\nperiod. During the years ended March 31, 2000, 1999, and 1998, the Company
\nissued 84,358, 145,826, and 194,786, shares under the plan at average prices of
\n$28.98, $11.10, and $7.54, per share, respectively.<\/p>\n
                                      F-18
\n   49<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
        Under the 1993 Directors Stock Option Plan and Macromedia 1999 Stock
\nOption Plan, 700,000 and 1.6 million shares of common stock, respectively, are
\nreserved for grant as non-qualified stock options.<\/p>\n
        In fiscal year 2000, the Company granted non-plan options to Company
\nexecutives to purchase shares of the Company’s common stock. The options were
\ngranted with an exercise price equal to fair market value on the grant date and
\nhave terms similar to the Company’s stock option plans.<\/p>\n
        Stock options under the Macromedia Plans are generally granted at a
\nprice equal to fair market value at the time of the grant and normally vest over
\nfour years from the date of grant. The options expire 10 years from the date of
\ngrant and are normally canceled three months after an employee’s termination.<\/p>\n
        The following summarizes the stock option activity for the years ended
\nMarch 31, 2000, 1999 and 1998 (in thousands, except per share amounts):<\/p>\n\n
\n                                                                                              WEIGHTED
\n                                                                                              AVERAGE
\n                                                                                              EXERCISE
\n                                                                           SHARES              PRICE
\n                                                                          ——–            ——–
\n                                                                                       
\n            Options outstanding as of March 31, 1997 ………               8,551            $  12.00
\n                Granted ………………………………..               9,633                7.99
\n                Exercised ………………………………                (573)               4.18
\n                Cancelled ………………………………              (6,509)              14.03
\n                                                                          ——–
\n            Options outstanding as of March 31, 1998 ………              11,102                7.73
\n                Granted ………………………………..               3,636               16.21
\n                Exercised ………………………………              (3,168)               7.04
\n                Cancelled ………………………………              (1,390)               9.02
\n                                                                          ——–
\n            Options outstanding as of March 31, 1999 ………              10,180               10.81
\n                Granted ………………………………..               7,231               49.46
\n                Exercised ………………………………              (3,725)               9.85
\n                Cancelled ………………………………              (2,138)              29.25
\n                                                                          ——–
\n            Options outstanding as of March 31, 2000 ………              11,548            $  31.92
\n                                                                          ========
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
        On May 6, 1997, the Board of Directors approved a repricing of
\napproximately 4.9 million outstanding stock options held by existing employees
\nto the current fair market value of the Company’s stock.<\/p>\n
        SHOCKWAVE.COM, INC. STOCK OPTION PLAN. On December 1, 1999,
\nshockwave.com adopted the shockwave 1999 Equity Incentive Plan. Under the terms
\nof the plan, shockwave.com is eligible to grant a total of 17.4 million options
\nof shockwave.com stock as incentive stock options, non-qualified stock options
\nor restricted stock options.<\/p>\n
        Stock options for shockwave.com granted during fiscal year 2000 were
\npriced at $0.50 per share and vest over four years from the date of grant. The
\noptions expire 10 years from the date of grant and are normally canceled three
\nmonths after an employee’s termination.<\/p>\n
        The following summarizes the stock option activity for the year ended
\nMarch 31, 2000 (in thousands, except per share amounts):<\/p>\n\n
\n                                                                                              WEIGHTED
\n                                                                                              AVERAGE
\n                                                                                              EXERCISE
\n                                                                           SHARES              PRICE
\n                                                                          ——–            ——–
\n                                                                                       
\n            Options outstanding as of March 31, 1999 ………                  —            $     —
\n                Granted ………………………………..              14,903                0.50
\n                Exercised ………………………………                  —                  —
\n                Cancelled ………………………………                (189)               0.50
\n                                                                          ——–
\n            Options outstanding as of March 31, 2000 ………              14,714            $   0.50
\n                                                                          ========
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
                                      F-19<\/p>\n
   50<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
14. STOCK COMPENSATION<\/p>\n
        The Company has recorded deferred compensation or compensation expense
\nfor options issued under the Andromedia, ESI and shockwave.com stock option
\nplans that were issued with an exercise price less than fair value of the
\nunderlying stock at the date of grant. The fair value of the underlying common
\nstock of shockwave.com has been determined by the Company based on factors
\nincluding, but not limited to, preferred stock sales, comparisons to competitive
\npublic companies, and general market conditions. Fair value for Macromedia stock
\nis based on the price of the Company’s common stock as traded on NASDAQ. The
\nCompany recorded approximately $5.1 million, $300,000 and $100,000 in fiscal
\nyear 2000, 1999 and 1998, respectively, of compensation expense related to stock
\noption grants by shockwave.com, Andromedia and ESI.<\/p>\n
        In connection with certain content development agreements entered into
\nin fiscal year 2000, warrants for approximately 2.8 million shares of
\nshockwave.com common stock were issued to non-employees. Each warrant entitles
\nthe holder to purchase one share of shockwave.com common stock at $0.50 per
\nshare. The warrants are immediately exercisable and expire 10 years from the
\ndate of issuance. Under the terms of the agreements, vesting of the warrants is
\nnot contingent upon any future obligations. Furthermore, the warrant agreements
\ndo not contain any vesting clauses. The Company recorded compensation expense of
\napproximately $6.0 million in connection with the issuance of the shockwave.com
\nwarrants. The fair value of the warrants was estimated using the Black-Scholes
\noption pricing model with an expected volatility of 85%, risk-free interest rate
\nof 5.7% and contractual life of 10 years.<\/p>\n
        Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the
\nCompany is required to disclose the pro forma effects on net income (loss) and
\nnet income (loss) per share as if the Company had elected to use the fair value
\napproach to account for all of its employee stock-based compensation plans. Had
\ncompensation cost for the Company’s plans been determined consistently with the
\nfair value approach enumerated in SFAS No. 123, the Company’s pro forma net
\nincome (loss) and pro forma net income (loss) per share for the years ended
\nMarch 31, 2000, 1999 and 1998, would have been changed as indicated below (in
\nthousands, except per share amounts):<\/p>\n\n
\n                                                                  2000               1999               1998
\n                                                                ——-            ——-             ——–
\n                                                                                              
\n            Net income (loss) applicable
\n               to common stockholders:
\n                 As reported …………………..            $ 6,229            $ 2,506             $(15,641)
\n                 Pro-forma …………………….            $  (702)           $(1,877)            $(27,790)<\/p>\n
            Net income (loss) applicable to
\n              common stockholders per share:
\n               Basic:
\n                 As reported …………………..            $  0.14            $  0.06             $ (0.40)
\n                 Pro-forma …………………….            $ (0.02)             (0.05)            $ (0.71)<\/p>\n
               Diluted:
\n                 As reported …………………..            $  0.12            $  0.05             $ (0.40)
\n                 Pro-forma …………………….            $ (0.02)           $ (0.05)            $ (0.71)
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
        The effects of applying SFAS 123 in this pro-forma disclosure are not
\nindicative of future amounts.<\/p>\n
        The weighted-average fair value of Macromedia options granted during the
\nyears ended March 31, 2000, 1999, and 1998 were $26.79, $10.11, and $4.70,
\nrespectively. The weighted average fair value of purchase rights granted under
\nthe ESPP during the years ended March 31, 2000, 1999, and 1998, was $17.92,
\n$7.53, and $3.74 per right, respectively.<\/p>\n
                                      F-20
\n   51
\n                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
        The fair value of Macromedia options and purchase rights granted was
\nestimated on the date of grant using the Black-Scholes option-pricing model
\nusing the following weighted average assumptions used for grants in 2000, 1999,
\nand 1998:<\/p>\n\n
\n                                              STOCK OPTION PLAN                  EMPLOYEE STOCK PURCHASE PLAN
\n                                         ——————————         ——————————
\n                                         2000         1999         1998         2000         1999         1998
\n                                         —-         —-         —-         —-         —-         —-
\n                                                                                        
\nWeighted average risk free rate .        6.07%        5.11%        6.28%        5.49%        5.08%        5.35%
\nExpected life (Years) ………..        3.50         3.50         3.28         0.50         0.50         0.50
\nExpected volatility ………….          70%          73%          80%          70%          73%          80%
\n<\/c><\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
        The following table summarizes information about the Macromedia’s stock
\noptions outstanding as of March 31, 2000 (in thousands, except per share
\namounts):<\/p>\n\n
\n                                              OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
\n                                ————————————————       ——————————-
\n                                                    WEIGHTED
\n                                                    AVERAGE
\n                                                    REMAINING         WEIGHTED                            WEIGHTED
\n                               NUMBER OF           CONTRACTUAL        AVERAGE          NUMBER OF           AVERAGE
\nRANGE OF EXERCISE PRICES        OPTIONS                LIFE       EXERCISE PRICE       OPTIONS          EXERCISE PRICE
\n————————       ———           ———–    ————–       ———        ————–
\n                                                                                         
\n$0.34–$3.00 …….                106                5.33          $    1.33              75             $    1.13
\n$3.50–$9.00 …….              2,800                6.61               7.54           1,768                  7.45
\n$9.09–$24.50 ……              2,482                8.12              13.34             924                 12.95
\n$24.81–$45.31 …..              3,389                9.26              33.05             449                 30.09
\n$51.97–$86.38 …..              2,771                9.70              73.00              45                 67.11
\n                                 ——                                                 ——
\n   Total ………..             11,548                8.44          $   31.93           3,261             $   12.80
\n                                 ======                                                 ======
\n<\/c><\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
        The weighted-average fair value of shockwave.com options granted during
\nthe year ended March 31, 2000 was $1.96.<\/p>\n
        The fair value of shockwave.com options granted was estimated on the
\ndate of grant using the Black-Scholes option-pricing model using the following
\nweighted average assumptions for grants in 2000:<\/p>\n\n
\n                                                               2000
\n                                                               —-
\n                                                            
\n               Weighted average risk free rate                 6.63%
\n               Expected life (Years) ………                 4.0
\n               Expected volatility ………..                 85%
\n<\/c><\/s><\/caption>\n<\/table>\n
        As of March 31, 2000 all shockwave.com options outstanding had weighted
\naverage exercise prices of $0.50 with a weighted average life of 9.88 years. At
\nMarch 31, 2000, 10.9 million options are outstanding under the plan, however,
\n10.4 million are unvested and subject to repurchase restrictions upon exercise.<\/p>\n
15. EARNINGS PER SHARE<\/p>\n
        The Company computes earnings per share in accordance with SFAS 128,
\nEarnings Per Share. Under the provisions of SFAS 128, basic net income (loss)
\nper share is computed by dividing the net income (loss) available to common
\nstockholders for the period by the weighted average number of common shares
\noutstanding during the period. Diluted net income (loss) per share is computed
\nby dividing the net income (loss) applicable to common stockholders for the
\nperiod by the weighted average number of common and potentially dilutive
\nsecurities outstanding during the period, to the extent such potentially
\ndilutive securities are dilutive. Potentially dilutive securities are composed
\nof incremental common shares issuable upon the exercise of stock options and
\nwarrants and upon conversion of Series A, B, C, D and E convertible preferred
\nstock.<\/p>\n
                                      F-21
\n   52<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
        The following table sets forth the reconciliations of the numerator and
\ndenominator used in the computation of basic and diluted net income (loss) per
\nshare (in thousands, except per share data):<\/p>\n\n
\n                                                                                           YEAR ENDED MARCH 31,
\n                                                                                 —————————————-
\n                                                                                   2000            1999            1998
\n                                                                                 ——–        ——–        ——–
\n                                                                                                       
\n            BASIC NET INCOME (LOSS) PER SHARE COMPUTATION
\n            Numerator:
\n               Net income (loss) …………………………………..       $  8,767        $  2,610        $(15,641)
\n               Accretion of Series C, D and E mandatorily
\n               redeemable convertible preferred stock ………………..         (2,538)           (104)             —
\n                                                                                 ——–        ——–        ——–
\n                  Net income (loss) applicable to common
\n                  stockholders …………………………………….       $  6,229        $  2,506        $(15,641)
\n                                                                                 ========        ========        ========<\/p>\n
                  Denominator:
\n                     Weighted average number of common shares
\n                     outstanding during the period …………………..         44,601          40,045          38,988
\n                          Basic net income (loss) applicable to common
\n                          stockholders per share …………………….       $   0.14        $   0.06        $  (0.40)
\n                                                                                 ========        ========        ========
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n\n
\n                                                                                             YEAR ENDED MARCH 31,
\n                                                                                 —————————————-
\n                                                                                   2000             1999           1998
\n                                                                                 ——–        ——–        ——–
\n                                                                                                        
\n            DILUTED NET INCOME (LOSS) PER SHARE COMPUTATION
\n            Numerator:
\n               Net income (loss) …………………………………..       $  8,767        $  2,610        $(15,641)
\n               Accretion of Series C, D and E mandatorily
\n               redeemable convertible preferred stock ………………..         (2,538)           (104)             —
\n                                                                                 ——–        ——–        ——–
\n                  Net income (loss) applicable to common
\n                  stockholders …………………………………….       $  6,229        $  2,506        $(15,641)
\n                                                                                 ========        ========        ========<\/p>\n
            Denominator:
\n               Weighted average number of common shares
\n               outstanding during the period ………………………..         44,601          40,045          38,988<\/p>\n
               Effect of dilutive securities:
\n                  Convertible preferred stock and stock warrants ………            532             823              —
\n                  Stock options and restricted stock …………………          7,137           6,374              —
\n                                                                                 ——–        ——–        ——–<\/p>\n
            Total ………………………………………………..         52,270          47,242          38,988
\n                                                                                 ========        ========        ========
\n            Diluted net income (loss) applicable to common
\n            stockholders per share …………………………………       $   0.12        $    0.0        $  (0.40)
\n                                                                                 ========        ========        ========
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
        The following table presents potentially dilutive securities that are
\nexcluded from the diluted net income (loss) per share calculation because their
\neffects would be antidilutive (in thousands):<\/p>\n\n
\n                                                                                           YEAR ENDED MARCH 31,
\n                                                                                 —————————————-
\n                                                                                   2000            1999            1998
\n                                                                                 ——–        ——–        ——–
\n                                                                                                          
\n            Preferred stock ……………………………………….          1,593           1,046             840
\n            Stock options …………………………………………            118              94           2,461
\n            Warrants ……………………………………………..             —              —               8
\n            Restricted stock ………………………………………             —              —             135
\n                                                                                 ——–        ——–        ——–
\n               Total ……………………………………………..          1,711           1,140           3,444
\n                                                                                 ========        ========        ========
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
                                      F-22
\n   53
\n                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
16. EMPLOYEE BENEFITS<\/p>\n
        The Company maintains a 401(k) defined contribution benefit plan that
\ncovers all employees who have attained 18 years of age and provide at least 20
\nhours of service per week. This plan allows employees to defer up to 15% of
\ntheir pretax salary in certain investments at the discretion of the employee.
\nEmployer contributions are made at the discretion of the Company’s Board of
\nDirectors. Employer contributions made to the plan during the years ended March
\n31, 2000, 1999, and 1998, were $812,000, $465,000, and $359,000, respectively.<\/p>\n
17. FOREIGN CURRENCY FORWARD CONTRACTS<\/p>\n
        The Company enters into forward contracts to reduce its exposure to
\nforeign currency fluctuations involving probable anticipated, but not firmly
\ncommitted, transactions and transactions with firm foreign currency commitments
\noccurring within a 90-day period. The Company does not enter into derivative
\nfinancial instruments for trading purposes.<\/p>\n
        As a result of this activity, the Company had outstanding forward
\ncontracts in various European currencies and Japanese Yen outstanding as of
\nMarch 31, 2000. The forward contracts are accounted for on a mark-to-market
\nbasis, with gains or losses recognized in the consolidated statements of
\noperations. As of March 31, 2000 and 1999, the contract amount of the forward
\ncontracts amounted to $21.6 million and $10.2 million, respectively. The future
\nvalue of these contracts is subject to market risk resulting from foreign
\nexchange rate volatility. Current market rates at the consolidated balance sheet
\ndates were used to estimate the fair value of foreign currency forward
\ncontracts.<\/p>\n
        The table below provides information about the Company’s outstanding
\nforward contracts as of March 31, 2000. The information is provided in US dollar
\nequivalents, in thousands. The table presents the notional amount of the
\nrespective contracts and their fair value (at rates in effect as of March 31,
\n2000):<\/p>\n\n
\n                                                                           NOTIONAL
\n                                                                            AMOUNT           FAIR VALUE
\n                                                                          ——–           ———-
\n                                                                                        
\n            British Pounds ……………………………..            $  1,479            $  1,434
\n            Euro ………………………………………               1,961               1,931
\n            Japanese Yen ……………………………….              18,127              18,541
\n                                                                          ——–            ——–
\n                Total ………………………………….            $ 21,567            $ 21,906
\n                                                                          ========            ========
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
        The Company is exposed to credit loss in the event of nonperformance by
\ncounterparties but the Company does not anticipate nonperformance by these
\ncounterparties.<\/p>\n
18. RELATED PARTY TRANSACTIONS<\/p>\n
        During fiscal year 2000, the Company made loans totaling $4.1 million to
\ncertain officers and other key employees in conjunction with their hiring and
\nrelocation. The notes bear interest ranging from 5.54% to 6.21% per annum and
\nmature in 2003 and 2005.<\/p>\n
        During fiscal year 1999 and 1998, the company made loans to officers of
\n$8.2 million in conjunction with their hiring and relocation. These loans bear
\ninterest at rates ranging from 5.51% to 6.8% per annum and mature between fiscal
\nyear 2002 and 2005. One of the notes has a zero interest rate for the first two
\nyears of its term. The rate converted to 6.65% in fiscal year 2000.<\/p>\n
        The total loan amount outstanding as of March 31, 2000 approximated $9.9
\nmillion, which reflects payments from certain officers and key employees. As of
\nMarch 31, 2000, the stated loan amounts approximated fair value.<\/p>\n
                                      F-23
\n   54
\n                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
        All loans outstanding are included in current assets and other long-term
\nassets. Of the total amount of loans outstanding as of March 31, 2000, $9.3
\nmillion are full recourse and secured by the personal properties of the related
\nparties. These loans are due after termination of the officer or key employee if
\ntermination comes prior to the maturity date of the loan. The principal and
\naccrued interest are due in full on the maturity dates of these loans. Interest
\nreceivable of $500,000 was due to the Company as of March 31, 2000.<\/p>\n
        The remaining balance is composed of approximately $100,000 in unsecured
\nloans to certain key employees. These agreements are entered into as part of the
\nCompany’s recruiting efforts. Should employment with the Company cease before
\nthe 3-year service term specified by the loans, the outstanding balance must be
\nrepaid on a pro-rata basis. However, should the employee complete the 3-year
\nservice term, the loan balance is deemed forgiven by the Company.<\/p>\n
19. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION<\/p>\n
        Macromedia has two segments that offer different product lines: Software
\nand shockwave.com. The Software segment develops software that creates Web site
\nlayout, graphics and rich media content for Internet users and develops
\nsolutions for analyzing Web traffic and personalizing Web sites. shockwave.com
\ndesigns, develops and markets aggregated content to provide online entertainment
\non the Web. The Company evaluates operating segment performance based on net
\nrevenues and total operating expenses of the segment. The operating segments’
\naccounting policies are substantially the same as those described in the summary
\nof accounting policies (See Note 2). The Company did not have any material
\nintersegment transactions in fiscal year 2000.<\/p>\n
        Prior to fiscal year 2000, the Company evaluated its business according
\nto the following two segments: Web Publishing and Learning. As a result of the
\nsale of the Company’s Pathware product (See Note 5), revenues and expenses
\nrelated to products remaining in the Learning division after the transaction,
\nwere realigned and are currently evaluated as part of the Software segment.
\nPrior periods have been restated to reflect this realignment, however, for the
\nyears ended March 31, 1999 and 1998, the Company did not internally report
\nshockwave.com as a separate segment and restating these periods is currently
\nimpracticable. As a result, for the years ended March 31, 1999 and 1998, there
\nis only one operating segment, Software. Segment data for the years ended March
\n31, 2000, 1999 and 1998 are shown in the following (in thousands):<\/p>\n\n
\n                                                                                                SHOCKWAVE-
\n            YEAR ENDED MARCH 31,                                                 SOFTWARE          .COM           TOTAL
\n            ——————–                                                 ——–       ———–      ——–
\n                                                                                                       
\n            2000
\n            Revenues ……………………………………………..       $255,941        $  8,218        $264,159
\n            Cost of revenues ………………………………………         27,725           1,104          28,829
\n                                                                                 ——–        ——–        ——–
\n              Gross margin ………………………………………..       $228,216        $  7,114        $235,330
\n                                                                                 ——–        ——–        ——–
\n            Direct operating expenses ………………………………        177,498          25,856         203,354
\n            Acquisition related expenses and certain non-cash charges ….         13,882           9,718          23,600
\n                                                                                 ——–        ——–        ——–
\n               Total operating income ………………………………       $ 36,836        $(28,460)       $  8,376
\n                                                                                 ========        ========        ========
\n            Total assets ………………………………………….       $285,701        $ 53,658        $339,359
\n                                                                                 ——–        ——–        ——–<\/p>\n
            1999
\n            Revenues ……………………………………………..       $153,243              —        $153,243
\n            Cost of revenues ………………………………………         15,625              —          15,625
\n                                                                                 ——–        ——–        ——–
\n              Gross margin ………………………………………..       $137,618              —        $137,618
\n                                                                                 ——–        ——–        ——–
\n            Direct operating expenses ………………………………        131,444                         131,444
\n            Acquisition related expenses and certain non-cash charges ….            989              —             989
\n                                                                                 ——–        ——–        ——–
\n               Total operating income ………………………………       $  5,185        $     —        $  5,185
\n                                                                                 ========        ========        ========
\n            Total assets ………………………………………….       $202,495        $     —        $202,495
\n                                                                                 ——–        ——–        ——–
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
                                      F-24
\n   55<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n\n                                                                                                       
\n1998
\n            Revenues ……………………………………………..       $113,803        $     —        $113,803
\n            Cost of revenues ………………………………………         15,107              —          15,107
\n                                                                                 ——–        ——–        ——–
\n              Gross margin ………………………………………..       $ 98,696        $     —        $ 98,696
\n                                                                                 ——–        ——–        ——–
\n            Direct operating expenses ………………………………        110,439              —         110,439
\n            Acquisition related expenses and certain non-cash charges ….          7,707              —           7,707
\n                                                                                 ——–        ——–        ——–
\n               Total operating loss ………………………………..       $(19,450)       $     —        $(19,450)
\n                                                                                 ========        ========        ========<\/p>\n
            Total assets ………………………………………….       $158,126        $     —        $158,126
\n                                                                                 ——–        ——–        ——–
\n<\/c><\/c><\/c><\/s><\/table>\n
        Operating income (loss) for the periods shown is reconciled to the
\nconsolidated net income before taxes as follows (in thousands):<\/p>\n
\n
\n                                                                                          YEAR ENDED MARCH 31,
\n                                                                                 —————————————-
\n                                                                                     2000            1999            1998
\n                                                                                 ——–        ——–        ——–
\n                                                                                                        
\n            Total operating income (loss) …………………………..       $  8,376        $  5,185        $(19,450)
\n            Other income ………………………………………….          6,187           5,037           4,637
\n            Minority interest ……………………………………..          6,179              —              —
\n                                                                                 ——–        ——–        ——–
\n            Income (loss) before taxes ……………………………..       $ 20,742        $ 10,222        $(14,813)
\n                                                                                 ——–        ——–        ——–
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
        The Company’s operations outside the United States consist of sales
\noffices in Japan, the United Kingdom, the Netherlands, the Republic of Ireland,
\nand Canada that are wholly-owned subsidiaries and a branch in Australia.
\nDomestic operations are responsible for the design and development of all
\nproducts, as well as shipping to meet worldwide customer commitments. The
\nforeign sales offices receive a commission on sales within the territory.
\nAccordingly, for financial statement purposes, it is not meaningful to segregate
\noperating profit (loss) for the foreign sales offices. Revenues are attributed
\nto region based on the location of the customer. In 1998, revenue in Japan
\naccounted for a significant portion of the Company’s total revenues. Outside of
\nthe United States, no other individual country contributed more than 10% of
\ntotal revenues for the years ended March 31, 2000, 1999, and 1998. Additionally,
\nother than the United States, no individual country’s assets comprised more than
\n10% of total assets as of March 31, 2000, 1999, and 1998.<\/p>\n
        The distribution of net revenues and identifiable assets by geographic
\nareas for the years ended March 31, 2000, 1999, 1998 are as follows (in
\nthousands):<\/p>\n\n
\n                                                                                   2000            1999            1998
\n                                                                                 ——–        ——–        ——–
\n                                                                                                       
\n            Net Revenues:
\n               North America ………………………………………       $156,494        $ 89,500        $ 59,510
\n               Europe …………………………………………….         71,324          43,243          29,300
\n               Japan ……………………………………………..         19,540          11,824          17,177
\n               All Other ………………………………………….         16,801           8,676           7,816
\n                                                                                 ——–        ——–        ——–
\n            Total Revenues ………………………………………..       $264,159        $153,243        $113,803
\n                                                                                 ========        ========        ========<\/p>\n
            Identifiable Assets:
\n               North America ………………………………………       $315,484        $188,668        $128,155
\n               Europe …………………………………………….         80,100          31,350          28,958
\n               All Other ………………………………………….          3,123           1,622           1,185
\n               Eliminations ……………………………………….        (59,348)        (19,145)           (172)
\n                                                                                 ——–        ——–        ——–
\n            Total ………………………………………………..       $339,359        $202,495        $158,126
\n                                                                                 ========        ========        ========<\/p>\n
            Long-lived assets:
\n               United States ………………………………………       $ 77,302          45,065        $ 39,594
\n               International ………………………………………          1,089             775             866
\n                                                                                 ——–        ——–        ——–
\n            Total ………………………………………………..       $ 78,391        $ 45,840        $ 40,460
\n                                                                                 ========        ========        ========
\n<\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
                                      F-25
\n   56<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
20. COMMITMENTS AND CONTINGENCIES<\/p>\n
        ROYALTIES. The Company has entered into agreements with third parties
\nthat provide for royalty payments based on a per unit wholesale price of certain
\nproducts or other agreed-upon terms. Future minimum royalty payments for the
\nyears ending March 31, 2001, 2002, 2003 and thereafter are $860,000, $360,000,
\n$156,000 and $0, respectively.<\/p>\n
        LEASES. The Company leases office space and certain equipment under
\noperating leases, certain of which contain renewal and purchase options. In
\naddition, the Company subleases certain office space that is not currently
\noccupied by the Company.<\/p>\n
        Future minimum payments under operating leases with an initial term of
\nmore than one year and future minimum sublease income are summarized as follows
\n(in thousands):<\/p>\n\n
\n            YEAR ENDED MARCH 31,                    PAYMENTS       INCOME
\n            ——————–                    ——–      ——-
\n                                                            
\n            2001 ……………………….       $10,099       $  (742)
\n            2002 ……………………….         9,750           (48)
\n            2003 ……………………….         9,820            —
\n            2004 ……………………….         9,549            —
\n            2005 ……………………….         8,544            —
\n            Thereafter ………………….        19,656            —
\n                                                    ——-       ——-
\n                 Total minimum lease payments       $67,418       $  (790)
\n                                                    =======       =======
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
        Rent expense was $7.4 million, $4.5 million, and $4.1 million for the
\nyears ended March 31, 2000, 1999, and 1998, respectively. For the years ended
\nMarch 31, 2000, 1999 and 1998, sublease income was $3.0 million, $2.9 million
\nand $1.9 million, respectively.<\/p>\n
        LEGAL. On July 31, 1997, a complaint entitled Rosen et al. v.
\nMacromedia, Inc. et al., (Case No. 988526) was filed in the Superior Court for
\nSan Francisco, California. The complaint alleges that Macromedia and five of its
\nformer or current officers and directors engaged in securities fraud in
\nviolation of California Corporations Code Sections 25400 and 25500 by seeking to
\ninflate the value of Macromedia stock by issuing statements that were allegedly
\nfalse or misleading (or omitted material facts necessary to make any statements
\nmade not false or misleading) regarding the Company’s financial results and
\nprospects. Four similar complaints by persons seeking to represent the same
\nclass of purchasers subsequently have been filed in San Francisco Superior
\nCourt, and consolidated for pre-trial purposes with Rosen. Defendants filed
\ndemurrers to the complaint and other motions, which were argued on December 9,
\n1997 and January 5, 1998. Before the demurrers could be heard, one defendant,
\nRichard Wood, died in an automobile accident. In March 1998, the Courts
\nsustained in part and overruled in part the demurrers. Claims against Susan Bird
\nwere dismissed and the Court overruled the demurrers as to Macromedia, John
\nColligan, James Von Her, II, and Kevin Crowder. In May 1999, the Court granted
\nplaintiffs’ motion for certification of a class of all persons who purchased
\nMacromedia common stock from April 18, 1996 through January 9, 1997. Trial has
\nbeen set for March 12, 2001. On April 20, 2000, the parties proposed that the
\nCourt continue the trial date to September 10, 2001.<\/p>\n
        On September 25, 1997, a complaint entitled City Nominees v. Macromedia,
\nInc et al., (Case No. C-97-3521-SC) was filed in the United States District
\nCourt for the Northern District of California. The complaint alleges that
\nMacromedia and five of its former or current officers and directors engaged in
\nsecurities fraud in violation of Sections 10 and 20(a) of the Securities and
\nExchange Act of 1934 by seeking to inflate the value of Macromedia stock by
\nissuing statements that were allegedly false or misleading (or omitted material
\nfacts necessary to make any statements made not false or misleading) regarding
\nthe Company’s financial results and prospects. Plaintiffs seek to represent a
\nclass of all persons who purchased Macromedia common stock from April 18, 1996
\nthrough January 9, 1997. Three similar complaints by persons seeking to
\nrepresent the same class of purchasers subsequently have been filed in United
\nStates District Court for the Northern District of California. All of these
\ncases have been consolidated. Lead plaintiffs and lead counsel have been
\nappointed under the provisions of the Private<\/p>\n
                                      F-26
\n   57<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
\n                                 MARCH 31, 2000<\/p>\n
Securities Law Reform Act by the District Court. A consolidated complaint was
\nfiled in February 1998. Defendants moved to dismiss that complaint on the
\ngrounds that plaintiffs’ claims were barred by the applicable statute of
\nlimitations. In May 1998, the United States District Court for the Northern
\nDistrict of California granted defendants’ motion to dismiss with prejudice, and
\nentered judgment in favor of defendants. Plaintiffs have appealed to the United
\nStates Court of Appeals for the Ninth Circuit, which reversed on April 21, 2000
\nand remanded the action to the District Court for further proceedings.<\/p>\n
        All complaints seek damages in unspecified amounts, as well as other
\nforms of relief. We believe the complaints are without merit and intend to
\nvigorously defend the actions.<\/p>\n
                                      F-27
\n   58<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                 SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
\n                                 (IN THOUSANDS)<\/p>\n\n
\n                                                       BALANCE AT        CHARGE TO
\n                                                     BEGINNING OF        COSTS AND                           BALANCE AT END
\n           DESCRIPTION                                  PERIOD            EXPENSES          DEDUCTION          OF PERIOD
\n           ———–                               ————        ———          ———        ————–
\n                                                                                                    
\nAllowance for Doubtful Accounts
\n      Year ended March 31, 2000 ………..            $ 1,122            $   801            $   264            $ 1,659
\n      Year ended March 31, 1999 ………..              1,075                125                 78              1,122
\n      Year ended March 31, 1998 ………..                972              1,363              1,260              1,075<\/p>\n
Allowance for Returns
\n      Year ended March 31, 2000 ………..            $ 8,477            $13,641            $12,897            $ 9,221
\n      Year ended March 31, 1999 ………..              6,531             11,958             10,012              8,477
\n      Year ended March 31, 1998 ………..              6,814              6,983              7,266              6,531<\/p>\n
Allowance for Excess and Obsolete Inventory
\n      Year ended March 31, 2000 ………..            $   942            $ 1,551            $ 1,629            $   864
\n      Year ended March 31, 1999 ………..              1,143                573                774                942
\n      Year ended March 31, 1998 ………..              3,909              1,398              4,164              1,143
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
                                      F-28
\n   59<\/p>\n
2.      MACROMEDIA UNAUDITED FINANCIAL STATEMENTS INCLUDED IN MACROMEDIA’S
\n        QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED DECEMBER 31,
\n        2000, FILED WITH THE SEC ON FEBRUARY 2, 2001<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                      CONDENSED CONSOLIDATED BALANCE SHEETS
\n                      (In thousands, except per share data)<\/p>\n\n
\n                                                                            DECEMBER 31,      MARCH 31,
\n                                                                                2000             2000
\n                                                                            ————      ———
\n                                                                                        
\n                                     ASSETS
\nCurrent assets:
\n   Cash and cash equivalents …………………………………..       $ 119,948        $ 115,084
\n   Short-term investments ……………………………………..          87,992           71,952
\n                                                                             ———        ———
\n       Total cash, cash equivalents and investments ………………         207,940          187,036
\n   Accounts receivable, net ……………………………………          50,108           41,883
\n   Deferred tax assets, short-term ……………………………..           9,937            7,812
\n   Other current assets ……………………………………….          21,761           14,293
\n                                                                             ———        ———
\n       Total current assets ……………………………………         289,746          251,024
\nLand and building, net ………………………………………..          18,322           18,982
\nOther fixed assets, net ……………………………………….          73,725           41,871
\nRelated party loans …………………………………………..          14,904            9,944
\nRestricted cash ………………………………………………           9,111               —
\nOther long-term assets ………………………………………..          29,472           17,538
\n                                                                             ———        ———
\n       Total assets …………………………………………..       $ 435,280        $ 339,359
\n                                                                             =========        =========<\/p>\n
                      LIABILITIES AND STOCKHOLDERS’ EQUITY<\/p>\n
Current liabilities:
\n   Accounts payable …………………………………………..       $   3,118        $   4,988
\n   Accrued liabilities ………………………………………..          41,793           34,735
\n   Accrued compensation, fringe benefits and payroll taxes ………..          19,070           19,107
\n   Unearned revenue …………………………………………..          10,037           10,044
\n                                                                             ———        ———
\n       Total current liabilities ……………………………….          74,018           68,874
\nOther liabilities …………………………………………….             943              321
\n                                                                             ———        ———
\n       Total liabilities ………………………………………          74,961           69,195
\n                                                                             ———        ———<\/p>\n
Minority interest …………………………………………….          11,409           15,888
\n                                                                             ———        ———
\nStockholders’ equity:
\n   Common stock, par value $0.001 per share; 200,000 shares
\n     authorized; 63,884 and 50,674 shares issued as of
\n     December 31, and March 31, 2000, respectively ……………….              62               51
\n   Treasury stock at cost; 1,818 shares as of
\n    December 31, and March 31, 2000 …………………………….         (33,649)         (33,649)
\n   Additional paid-in capital ………………………………….         407,165          335,497
\n   Notes receivable from stockholders …………………………..          (7,967)              —
\n   Deferred compensation ………………………………………         (27,833)         (23,465)
\n   Accumulated other comprehensive income ……………………….             535              393
\n   Retained earnings (deficit) …………………………………          10,597          (24,551)
\n                                                                             ———        ———
\n       Total stockholders’ equity ………………………………         348,910          254,276
\n                                                                             ———        ———
\n       Total liabilities and stockholders’ equity ………………..       $ 435,280        $ 339,359
\n                                                                             =========        =========
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
                                      F-29
\n   60<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
\n                      (In thousands, except per share data)<\/p>\n\n
\n                                                                      THREE MONTHS ENDED                NINE MONTHS ENDED
\n                                                                         DECEMBER 31,                      DECEMBER 31,
\n                                                                 ————————–        ————————–
\n                                                                   2000              1999             2000             1999
\n                                                                 ———        ———        ———        ———
\n                                                                                                        
\nRevenues ………………………………………….       $ 103,338        $  64,332        $ 300,523        $ 174,877
\nCost of revenues …………………………………..           9,737            6,853           32,237           18,536
\n                                                                 ———        ———        ———        ———
\n   Gross profit ……………………………………          93,601           57,479          268,286          156,341
\n                                                                 ———        ———        ———        ———
\nOperating expenses:
\n   Sales and marketing ……………………………..          39,654           26,929          117,739           75,801
\n   Research and development …………………………          29,940           15,653           84,223           43,980
\n   General and administrative ……………………….          10,774            5,558           29,430           16,649
\n   Acquisition-related expenses ……………………..              —            6,256            4,774           11,516
\n   Non-cash compensation ……………………………           1,767              305            5,900              955
\n   Amortization of intangibles ………………………             634              249            1,558              758
\n                                                                 ———        ———        ———        ———
\n     Total operating expenses ……………………….          82,769           54,950          243,624          149,659
\n                                                                 ———        ———        ———        ———
\n     Operating income ………………………………          10,832            2,529           24,662            6,682<\/p>\n
Other income (expense):
\n   Interest and investment income, net ……………….           3,659            1,837           10,411            4,225
\n   Loss on investment ………………………………          (5,000)              —           (5,000)              —
\n   Other ………………………………………….             268              (44)           1,080              (41)
\n                                                                 ———        ———        ———        ———
\n     Total other income (expense) ……………………          (1,073)           1,793            6,491            4,184
\nMinority interest ………………………………….           6,727               —           15,336               —
\n                                                                 ———        ———        ———        ———
\n     Income before income taxes ……………………..          16,486            4,322           46,489           10,866
\nProvision for income taxes ………………………….           3,657            3,050           11,341            7,642
\n                                                                 ———        ———        ———        ———
\n     Net income ……………………………………          12,829            1,272           35,148            3,224
\n       Accretion on mandatorily redeemable
\n        convertible preferred stock ………………….              —           (1,357)              —           (2,538)
\n                                                                 ———        ———        ———        ———
\n       Net income (loss) applicable to common stockholders       $  12,829        $     (85)       $  35,148        $     686
\n                                                                 =========        =========        =========        =========<\/p>\n
   Net income applicable to common stockholders per share:
\n     Basic ………………………………………..       $    0.25        $      —        $    0.70        $    0.02
\n     Diluted ………………………………………       $    0.23        $      —        $    0.62        $    0.01
\n    Weighted average common shares outstanding used in
\n      calculating net income applicable to common
\n      stockholders per share:
\n     Basic ………………………………………..          51,161           45,346           50,369           43,367
\n     Diluted ………………………………………          56,452           45,346           56,625           51,565
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n
                                      F-30
\n   61<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
\n                                 (In thousands)<\/p>\n\n
\n                                                                                                 NINE MONTHS ENDED
\n                                                                                            —————————-
\n                                                                                                            DECEMBER 31,
\n                                                                                               2000            1999
\n                                                                                            ———       ————
\n                                                                                                       
\nCash flows from operating activities:
\n  Net income ………………………………………………………………….   $  35,148        $   3,224
\n   Adjustments to reconcile net income to net cash provided
\n    by operating activities:
\n     Depreciation and amortization ………………………………………………      22,442           12,348
\n     Write off of acquired in-process research and development ……………………..       3,100               —
\n     Deferred income taxes ……………………………………………………..      (1,426)             165
\n     Tax benefit from employee stock plans ……………………………………….       9,038            2,759
\n     Minority interest …………………………………………………………     (15,336)              —
\n     Loss on impairment of investments …………………………………………..       5,000               —
\n     Loss on disposal of fixed assets ……………………………………………         161              191<\/p>\n
     Change in operating assets and liabilities:
\n         Accounts receivable, net ……………………………………………….      (8,204)         (15,713)
\n         Other current assets …………………………………………………..      (7,437)           2,328
\n         Accounts payable ………………………………………………………      (1,870)          (3,192)
\n         Accrued liabilities, accrued compensation, fringe benefits and payroll taxes …        6,925            7,391
\n         Unearned revenue ………………………………………………………          (7)           2,502
\n                                                                                            ———        ———
\n           Net cash provided by operating activities ………………………………      47,534           12,003<\/p>\n
Cash flows from investing activities:
\n   Capital expenditures ………………………………………………………..     (46,127)         (23,118)
\n   Proceeds from sale of fixed assets ……………………………………………          —              625
\n   Purchase of short-term investments ……………………………………………     (99,070)         (93,714)
\n   Maturities and sales of short-term investments …………………………………      83,172           96,459
\n   Cash paid for acquisitions …………………………………………………..      (8,607)              —
\n   Related party loans …………………………………………………………      (4,960)          (1,959)
\n   Purchase of investments ……………………………………………………..      (9,680)         (10,000)
\n   Purchase of other assets …………………………………………………….      (3,320)              —
\n   Additions to other long-term liabilities ………………………………………         622            4,794
\n   Deposit of restricted cash …………………………………………………..      (9,111)              —
\n                                                                                            ———        ———
\n           Net cash used in investing activities ………………………………….    (97,081)         (26,913)<\/p>\n
Cash flows from financing activities:
\n   Proceeds from issuance of mandatorily redeemable convertible preferred stock ………          —           15,734
\n   Proceeds from sale of subsidiary preferred stock ……………………………….       9,384               —
\n   Proceeds from issuance of common stock, net ……………………………………      45,027           23,667
\n   Proceeds from borrowings …………………………………………………….          —              999
\n   Payments on capital lease ……………………………………………………          —             (354)
\n   Acquisition of treasury stock ………………………………………………..          —           (8,204)
\n                                                                                            ———        ———
\n           Net cash provided by financing activities ………………………………      54,411           31,842
\nIncrease in cash and cash equivalents ……………………………………………       4,864           16,932
\n  Adjustment to conform acquired company’s year-end ……………………………….          —           (3,826)
\n                                                                                            ———        ———
\nTotal ………………………………………………………………………..       4,864           13,106
\nCash and cash equivalents, beginning of period ……………………………………     115,084           29,459
\n                                                                                            ———        ———
\nCash and cash equivalents, end of period …………………………………………   $ 119,948        $  42,565
\n                                                                                            =========        =========
\nNoncash investing and financing activities:
\n   Issuance of notes receivable upon exercise of shockwave.com options ………………   $   7,967        $      —
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n
                                      F-31
\n   62<\/p>\n
3.      BOOK VALUE PER SHARE FOR THE QUARTER ENDED DECEMBER 31, 2000<\/p>\n
                        MACROMEDIA, INC. AND SUBSIDIARIES<\/p>\n
                          BOOK VALUE PER SHARE FOR THE
\n                         QUARTER ENDED DECEMBER 31, 2000<\/p>\n\n
\n         Macromedia, Inc. Book Value Per Share
\n         ————————————-
\n                                                                 
\nBook Value Per Share(1)………………………………..       $   5.46
\n<\/c><\/s><\/caption>\n<\/table>\n
        (1) Book value per common share is computed by dividing total
\nstockholders’ equity by the number of shares of common stock outstanding at
\nDecember 31, 2000.<\/p>\n
                                      F-32<\/p>\n","protected":false},"template":"","meta":{"_acf_changed":false,"_stopmodifiedupdate":true,"_modified_date":"","_cloudinary_featured_overwrite":false},"corporate_contracts_companies":[8105],"corporate_contracts_industries":[9513],"corporate_contracts_types":[9539,9545],"class_list":["post-40217","corporate_contracts","type-corporate_contracts","status-publish","hentry","corporate_contracts_companies-macromedia-inc","corporate_contracts_industries-technology__software","corporate_contracts_types-compensation","corporate_contracts_types-compensation__esp"],"acf":[],"_links":{"self":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts\/40217","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts"}],"about":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/types\/corporate_contracts"}],"wp:attachment":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/media?parent=40217"}],"wp:term":[{"taxonomy":"corporate_contracts_companies","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_companies?post=40217"},{"taxonomy":"corporate_contracts_industries","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_industries?post=40217"},{"taxonomy":"corporate_contracts_types","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_types?post=40217"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}