<PAGE> 1
As filed with the Securities and Exchange Commission on May 10, 1996
Registration No. 33-___________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM S-8
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------
MICROGRAFX, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1952080
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1303 ARAPAHO
RICHARDSON, TEXAS 75081
(Address of principal executive offices including zip code)
------------
MICROGRAFX, INC.
EMPLOYEE STOCK PURCHASE PLAN
(Full Title of the Plan)
------------
GREGORY A. PETERS. Copies of Communications to:
Micrografx, Inc. L. STEVEN LESHIN, ESQ.
1303 Arapaho Jenkens & Gilchrist, a
Richardson, Texas 75081 Professional Corporation
(214) 234-1769 1445 Ross Avenue
Suite 3200
(Name, Address and Telephone Dallas, Texas 75202
Number, including area code of Agent for Service)
------------
CALCULATION OF REGISTRATION FEE
-------------------------------
<TABLE>
<CAPTION>
Title of Proposed Proposed
securities Amount maximum maximum Amount of
to be to be offering price aggregate offering registration
registered registered (1) per share (2) (3) price (3) fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
par value $.01 300,000 $16.25 $4,875,000 $1,682
per share
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) Pursuant to Rule 416, this registration statement is deemed to include
additional shares of Common Stock issuable under the terms of the
Micrografx, Inc. Employee Stock Purchase Plan to prevent dilution
resulting from any future stock split, stock dividend or similar
transaction.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Calculated pursuant to Rule 457 (c) and (h), and based upon the average
of the highest and lowest price per share of the Common Stock on the
National Association of Securities Dealers, Inc. Automated Quotation
System National Market System on May 8, 1996.
<PAGE> 2
PART I
INFORMATION REQUIRED IN THE SECTION 10(A) PROSPECTUS
Item 1. Plan Information*
Item 2. Registrant Information and Employee Plan Annual Information*
PART II
INFORMATION REQUIRED IN REGISTRATION STATEMENT
Micrografx, Inc. (the "Corporation") hereby incorporates by reference in
this registration statement its registration statements on Form S-8 previously
filed with the Securities and Exchange Commission (Registrations No. 33-41665,
and 33-65754), which related to the Micrografx, Inc. Employee Stock Purchase
Plan.
Item 8. Exhibits.
The exhibits filed in response to Item 601 of Regulation S-K are listed in
the Exhibit Index which follows.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
5.1 Opinion of Jenkens & Gilchrist, a Professional Corporation
23.1 Consent of Jenkens & Gilchrist, a Professional Corporation (included in
their opinion filed as Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Roth Bookstein & Zaslow
24.1 Power of Attorney (see signature page of this Registration Statement -
Page 3).
99.1 Financial Statements of Visual Software, Inc. as of June 30, 1995 and
1994 and the two years ended June 30, 1995.
99.2 Supplemental Consolidated Financial Statements of Micrografx, Inc. and
Subsidiaries as of June 30, 1995 and 1994 and the three years ended
June 30, 1995 (restated to reflect merger with Visual Software, Inc.)
</TABLE>
- -------------
* Information required by Part I to be contained in the Section 10(a)
prospectus is omitted from the Registration Statement in accordance
with Rule 428 of the Securities Act of 1933, as amended and the Note
to Part I of Form S-8.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all the requirements for filing on Form S-8 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Richardson, Texas on May 9, 1996.
MICROGRAFX, INC.
By: /s/ J. Paul Grayson
--------------------------------------
J. Paul Grayson
Chairman of the Board of Directors and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints J. Paul Grayson and Gregory A.
Peters, and each of them, each with full power to act without the other, his
true and lawful attorneys-in-fact and agents, each with full power of
substitution and to this registration statement, and to file the same with all
exhibits thereto and other documents in connection therewith, with the
Commission, granting unto each of said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person hereby ratifying and confirming that
each of said attorneys-in-fact and agents or his substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities indicated
and on the dates included:
Signature Title Date
- --------- ----- ----
/s/ J. Paul Grayson Chairman of the Board May 9, 1996
- --------------------------- of Directors and
J. Paul Grayson Chief Executive Officer
(Principal Executive Officer)
/s/ Gregory A. Peters Senior Vice President, May 9, 1996
- --------------------------- Chief Financial Officer,
Gregory A. Peters and Treasurer
(Principal Financial and
Accounting Officer)
/s/ David S. Gergacz Director May 9, 1996
- ---------------------------
David S. Gergacz
/s/ Robert Kamerschen Director May 9, 1996
- ---------------------------
Robert Kamerschen
/s/ Seymour Merrin Director May 9, 1996
- ---------------------------
Seymour Merrin
/s/ Robert S. Miller Director May 9, 1996
- ---------------------------
Robert S. Miller
/s/ Eugene P. Beard Director May 9, 1996
- ---------------------------
Eugene P. Beard
<PAGE> 4
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
------- ---------------------- ------
5.1 Opinion of Jenkens & Gilchrist, a Professional
Corporation
23.1 Consent of Jenkens & Gilchrist, a Professional
Corporation (included in their opinion filed as
Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Roth Bookstein & Zaslow
24.1 Power of Attorney (see signature page of this
Registration Statement - Page 3).
99.1 Financial Statements of Visual Software, Inc. as
of June 30, 1995 and 1994 and the two years
ended June 30, 1995.
99.2 Supplemental Consolidated Financial Statements of
Micrografx, Inc. and Subsidiaries as of June 30,
1995 and 1994 and the three years ended June 30,
1995 (restated to reflect merger with Visual
Software, Inc.)
<PAGE> 1
EXHIBIT 5.1
May 9, 1996
Micrografx, Inc.
1303 Arapaho
Richardson, Texas 75081
Re: Registration Statement on Form S-8
Gentlemen:
We have acted as counsel to Micrografx, Inc., a Texas corporation (the
"Company"), in connection with the preparation of the Registration Statement on
Form S-8 (the "Registration Statement") to be filed with the Securities and
Exchange Commission on or about May 9, 1996, under the Securities Act of
1993, as amended (the "Securities Act"), relating to 300,000 shares of the $.01
par value common stock (the "Common Stock") of the Company that may be offered
on the exercise of options (the "Options") granted or that may be granted under
the Micrografx, Inc. Employee Stock Purchase Plan, as amended (the "Plan").
You have requested the opinion of this firm with respect to certain legal
aspects of the proposed offering. In connection therewith, we have examined
and relied upon the original, or copies identified to our satisfaction, of (1)
the Articles of Incorporation and the Bylaws of the Company, as amended; (2)
minutes and records of the corporate proceedings of the Company with respect to
the establishment of the Plan, the reservation of 300,000 additional shares of
Common Stock to be issued under the Plan and to which the Registration
Statement relates, the issuance of shares of Common Stock pursuant to the Plan
and related matters; (3) the Registration Statement and exhibits thereto,
including the Plan; and (4) such other documents and instruments as we have
deemed necessary for the expression of the opinions herein contained. In
making the foregoing examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us as
certified or photostatic copies. As to various questions of fact material to
this opinion, and as to the content and form of the Articles of Incorporation,
the bylaws, minutes, records, resolutions and other documents or writings of
the Company, we have relied, to the extent we deem reasonably appropriate, upon
representations or certificates of officers or directors of the Company and
upon documents, records and instruments furnished to us by the Company, without
independent check or verification of their accuracy.
Based upon our examination and consideration of, and reliance on, the
documents and other matters described above, we are of the opinion that the
Company presently has available at least 300,000 shares of authorized but
unissued shares of Common Stock and/or treasury shares of Common Stock from
which the 300,000 shares of Common Stock proposed to be offered or to be sold
pursuant to the exercise of Options granted may be issued. Assuming that (i)
the outstanding Options were duly granted, and the Options to be granted in the
future are duly granted in accordance with the terms of the Plan and the shares
of Common Stock to be issued in the future are duly issued in accordance with
the terms of the Plan, (ii) the Company maintains an adequate number of
authorized but unissued shares and/or treasury shares of Common Stock available
for issuance to those persons who exercise Options granted under the Plan, and
(iii) the consideration for shares of Common Stock issued pursuant to the Plan
and pursuant to such Options is actually received by the Company as provided in
the Plan and exceeds the par value of such shares, then the shares of Common
Stock issued in accordance with the terms of the Plan and issued pursuant to
the exercise of the Options granted under and in accordance with the terms of
the Plan will be duly and validly issued, fully paid and nonassessable.
<PAGE> 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to references to our firm included in or made a part
of the Registration Statement. In giving this consent, we do not admit that we
come within the category of person whose consent is required under Section 7 of
the Securities Act or the Rules and Regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
JENKENS & GILCHRIST, a Professional Corporation
/s/ L. Steven Leshin
-----------------------------------
L. Steven Leshin
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated April 2, 1996 included in this registration statement of
Micrografx, Inc. on Form S-8.
/s/ Arthur Andersen LLP
Dallas, Texas
May 6, 1996
<PAGE> 1
EXHIBIT 23.3
[RBZ LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
on the financial statements of Visual Software and subsidiaries dated March 18,
1996 incorporated by reference in this Registration Statement on Form S-8 of
Micrografx, Inc. It should be noted that we have audited the financial
statements of Visual Software and subsidiaries for the years ended June 30,
1995 and 1994. We have not audited any financial statements subsequent to
June 30, 1995 or performed any audit procedures subsequent to the date of our
report.
/s/ ROTH BOOKSTEIN & ZASLOW
Los Angeles, California
May 6, 1996
<PAGE> 1
[RBZ LOGO]
ROTH BOOKSTEIN & ZASLOW
Certified Public Accountants
A Partnership of Professional Corporation
11755 Wilshire Boulevard, Ninth Floor
Los Angeles, CA 90025-1586
Phone 310/478-4148
Fax 310/312-0358
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
VISUAL SOFTWARE
Woodland Hills, California
We have audited the accompanying consolidated balance sheets of Visual Software
and subsidiaries as of June 30, 1994 and 1995, and the related consolidated
statements of operations, changes in stockholders' equity (deficiency) and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
did not audit the financial statements of Visual Software Exports Limited
("VSEL"), a wholly owned foreign subsidiary, and its wholly owned subsidiary,
Visual Software U.K. Sales Limited ("VS U.K."). The separate statements of VSEL
reflect total assets of $155,827 and $927,913 as of June 30, 1994 and 1995,
respectively, and total revenues of $124,917 from September 1993 (inception) to
June 30, 1994, and $387,347 for the year ended June 30, 1995. The separate
statements of VS U.K. reflect total assets of $222,880 as of June 30, 1995, and
total revenues of $237,030 from October 1994 (inception) to June 30, 1995.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for VSEL and its subsidiary, VS U.K., is based solely on the reports of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Visual Software and
subsidiaries as of June 30, 1994 and 1995, and the consolidated results of
their operations, changes in stockholders' equity (deficiency) and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
<PAGE> 2
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements and as described in Note 2, the Company incurred a net
loss of $952,169 and $1,083,843 for the years ended June 30, 1994 and 1995,
respectively, had an accumulate deficit of $2,615,007 and $3,698,850, and a
negative working capital of $1,201,052 and $697,063 as of June 30, 1994 and
1995, respectively. Subsequent to year end, the Company signed an agreement to
merge with a publicly traded company in a business combination to be accounted
as a pooling of interests. Unless this merger is consummated, the conditions
referred to above raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ ROTH BOOKSTEIN & ZASLOW
March 18, 1996
<PAGE> 3
VISUAL SOFTWARE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1994 AND 1995
<TABLE>
<CAPTION>
ASSETS
1994 1995
------------ ------------
<S> <C> <C>
Current Assets
Cash $ 49,180 $ 148,616
Accounts receivable, net of allowance for
returns and doubtful accounts of $0 in 1994 and
$50,685 in 1995 28,258 446,562
Note receivable 30,642 22,380
Other receivables - 49,530
Inventory 28,917 103,833
Prepaid expenses and other current assets 26,657 81,716
----------- ------------
Total current assets 163,654 852,637
----------- ------------
Property and Equipment
Furniture and fixtures 28,917 67,807
Computers 258,884 419,687
Leasehold improvements - 1,091
----------- ------------
287,801 488,585
Less accumulated depreciation and amortization (142,066) (231,972)
----------- ------------
145,735 256,613
----------- ------------
Other Assets
Capitalized software development costs, net of
accumulated amortization of $126,705 in 1994
and $423,612 in 1995 - Note 3 81,672 142,606
Other 2,703 20,059
----------- ------------
84,375 162,665
----------- ------------
Total assets $ 393,764 $ 1,271,915
=========== ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
1994 1995
------------ ------------
<S> <C> <C>
Current Liabilities
Note payable, bank - Note 5 $ - $ 700,000
Note payable and equipment lease - Note 7 243,108 -
Accounts payable 237,462 672,928
Accrued expenses 41,136 86,397
Due to directors - 17,050
Due to stockholders - Note 4 843,000 73,325
------------ ------------
Total current liabilities 1,364,706 1,549,700
------------ ------------
Minority interest in VSEL 11,348 -
------------ ------------
Commitments - Notes 2 , 6, and 9
Stockholders' Equity (Deficiency)
Common stock, no par value, 1,000,000 shares
authorized, 2,550 in 1994 and 5,429 in 1995
shares issued and outstanding - Note 10 1,632,717 3,421,065
Accumulated deficit (2,615,007) (3,698,850)
------------ ------------
Total stockholders' equity (deficiency) (982,290) (277,785)
------------ ------------
Total liabilities and stockholders'
equity (deficiency) $ 393,764 $ 1,271,915
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
VISUAL SOFTWARE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
--------------- ---------------
<S> <C> <C>
Net sales - Note 6 $ 773,115 $ 3,901,448
Cost of goods sold 229,557 1,049,505
--------------- ---------------
Gross profit 543,558 2,851,943
--------------- ---------------
Operating expenses
Selling 226,433 896,022
Marketing 237,624 1,661,822
Research and development 505,400 764,376
General and administrative 508,098 609,285
--------------- ---------------
1,477,555 3,931,505
--------------- ---------------
Loss from operations (933,997) (1,079,562)
--------------- ---------------
Other credits and (charges)
Gain from remeasurement - 21,165
Interest expense (10,297) (17,134)
Miscellaneous expense (727) (9,179)
--------------- ---------------
(11,024) (5,148)
--------------- ---------------
Loss before provision for income taxes and minority interest (945,021) (1,084,710)
Provision for income taxes - all current - Note 8 800 800
--------------- ---------------
Net loss before minority interest (945,821) (1,085,510)
Minority interest in net (income) loss of subsidiary (6,348) 1,667
--------------- ---------------
Net loss $ (952,169) $ (1,083,843)
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
VISUAL SOFTWARE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED JUNE 30, 1994 AND 1995
<TABLE>
<CAPTION>
Common Stock Total
Shares Stockholders'
------------------------- Accumulated Equity
To Be Issued Issued Amount Deficit (Deficiency)
--------------- -------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance, June 30, 1993 241 2,001 $ 1,405,997 $ (1,662,838) $ (256,841)
Issuance of common stock - 549 226,720 - 226,720
Net loss - - - (952,169) (952,169)
-------- -------- ------------- ------------- --------------
Balance, June 30, 1994 241 2,550 1,632,717 (2,615,007) (982,290)
Issuance of common stock (241) 2,879 1,788,348 - 1,788,348
Net loss - - - (1,083,843) (1,083,843)
-------- -------- ------------- ------------- --------------
Balance, June 30, 1995 - 5,429 $ 3,421,065 $ (3,698,850) $ (277,785)
======== ======== ============= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
VISUAL SOFTWARE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (952,169) $ (1,083,843)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 56,534 89,906
Amortization of capitalized software development costs 193,776 296,907
Capitalized software development costs (74,769) (357,841)
Exchange of software license in settlement of note payable and
equipment lease - (146,108)
Provision for returns and doubtful accounts - 50,685
Minority interest in net (income) loss of subsidiaries 6,348 (1,667)
Performance Compensation - 86,000
Change in assets and liabilities net of effects from the purchase of
the assets of VSEL
(Increase) decrease in operating assets:
Accounts receivable 8,559 (468,989)
Note receivable 7,620 8,262
Other receivables 9,065 (47,863)
Inventory (28,917) (74,916)
Prepaid expenses and other current assets (26,657) (55,059)
Increase (decrease) in operating liabilities:
Accounts payable 53,650 435,466
Accrued expenses (30,080) 44,925
---------------- ---------------
Net cash used in operating activities (777,040) (1,224,135)
---------------- ---------------
Cash flows from investing activities
Purchase of fixed assets (111,268) (200,784)
Other assets (2,703) (17,356)
---------------- ----------------
Net cash used in investing activities (113,971) (218,140)
---------------- ----------------
Cash flows from financing activities
Decrease in bank overdraft (3,895) -
Payments on note payable and equipment lease (16,000) (97,000)
Proceeds from note payable, bank - 700,000
Increase in due to directors - 17,050
Increase in due to stockholders 831,000 921,325
Decrease in due to officers/stockholders (92,920) -
Minority interest in VSEL 5,000 -
Issuance of common stock 217,006 -
--------------- ---------------
Net cash provided by financing activities 940,191 1,541,375
--------------- --------------
Effect of exchange rates on cash - 336
--------------- ---------------
Net increase in cash 49,180 99,436
Cash, beginning of year - 49,180
--------------- ---------------
Cash, end of year $ 49,180 $ 148,616
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
VISUAL SOFTWARE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL INFORMATION
FOR THE YEARS ENDED JUNE 30, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
--------------- ---------------
<S> <C> <C>
Cash paid during the year for:
Interest $ 10,297 $ 17,134
=============== ===============
Taxes $ 800 $ 1,600
=============== ===============
Non-cash investing and financing activities:
Cancellation of debt in exchange for common stock $ - $ 1,581,000
Conversion of debt to paid-in capital of VSEL - 110,000
--------------- ---------------
Purchase of software in exchange for common stock 9,714 -
--------------- ---------------
$ 9,714 $ 1,691,000
=============== ===============
Acquisition of assets of VSEL:
Due from Visual Software $ - $ 120,647
Cash - 13,993
Accounts receivable - 10,463
Property and equipment, net - 5,647
Prepaid expenses - 4,837
Inventory - 240
Note payable, bank - (100,000)
Accrued expenses - (44,479)
--------------- ---------------
Issuance of common stock in exchange for purchase of VSEL $ - $ 11,348
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
VISUAL SOFTWARE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
Visual Software is a California corporation engaged in the design
and marketing of software products in which the user is able to
render picture-perfect computer images of non-existent objects
for use in advertising, architecture or other design industries.
Principles of Consolidation
The consolidated financial statements include the accounts of
Visual Software and subsidiaries (collectively the "Company"):
<TABLE>
<CAPTION>
Place of Percent of Stock Principal Business
Name of Company Incorporation Ownership Activity
- --------------- -------------- ----------------- ------------------------------
<S> <C> <C>
Visual Software Exports Limited (VSEL) Guernsey 100 Computer software distribution
Visual Worlds Development, Inc. (VWD) Oregon, USA 75 Computer software development
Visual Software U.K. Sales Limited a wholly-owned
(VS U.K.) Great Britain subsidiary of VSEL Computer software distribution
</TABLE>
VWD was incorporated in January 1995. The remaining 25 percent
stock of VWD is owned by the employees of VWD. Minority interest
in the consolidated subsidiary represents the minority
stockholders' proportionate share of the equity of VWD. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash Equivalents
The Company considers financial instruments with original
maturities of less than 90 days to be cash equivalents for
purposes of the consolidated statements of cash flows.
Revenue Recognition
Revenue is recognized upon the shipment of merchandise.
Advertising Costs
The Company offers distributors and retailers incentives,
approximately up to 10 percent of invoice, to promote the
Company's products. These incentives are paid as a credit
against outstanding invoices and are included in marketing
expense during the period in which revenue is recognized.
Inventory Costs
The costs incurred for duplicating the computer software,
documentation and training materials from the product masters and
for physically packaging the product for distribution are
capitalized as inventory. Inventory is stated at the lower of
cost or market on a first-in, first-out basis.
8
<PAGE> 9
VISUAL SOFTWARE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment is recorded at cost. Depreciation is
computed using accelerated methods over the estimated useful
lives of the assets (5-7 years).
Expenditures for maintenance and repairs are charged to
operations as incurred, while renewal and betterments are
capitalized.
Software Development Costs
Accounting policies regarding the capitalization and amortization
of software development costs are described in Note 3.
Income Taxes
Deferred taxes are computed based on the tax liability or benefit
in future years of the reversal of temporary differences in the
recognition of income or deduction of expenses between financial
and tax reporting purposes. The principal item resulting in the
difference is the capitalization and amortization of computer
software development costs.
Deferred tax assets and/or liabilities are classified as current
and noncurrent based on the classification of the related asset
or liability for financial reporting purposes, or based on the
expected reversal date for deferred taxes that are not related to
an asset or liability.
Foreign Currency Translation
The financial statements of VSEL and VS U.K. have been translated
into U.S. dollars in accordance with SFAS No. 52, "Foreign
Currency Translation." The assets and liabilities denominated in
United Kingdom pounds were translated into U. S. dollars at the
current rate of exchange which existed at year end. Income and
expense items were translated at the average exchange rate for
the year. The resulting translation adjustment was included in
the results from operations.
NOTE 2 - UNCERTAINTY
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As shown in the consolidated financial statements, the
Company incurred a net loss of $952,169 and $1,083,843 for the
years ended June 30, 1994 and 1995, respectively, had an
accumulated deficit of $2,615,007 and $3,698,850, and a negative
working capital of $1,201,052 and $697,063 as of June 30, 1994
and 1995, respectively. Subsequent to year end, the Company
signed an agreement to merge with a publicly traded company in a
business combination to be accounted as a pooling of interests.
Unless this merger is consummated, the conditions referred to
above raise substantial doubt about the Company's ability to
continue as a
9
<PAGE> 10
VISUAL SOFTWARE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1995
NOTE 2 - UNCERTAINTY (Continued)
going concern. The consolidated financial statements do not
include any adjustment that might result from the outcome of this
uncertainty.
NOTE 3 - CAPITALIZED SOFTWARE COSTS
The Company capitalized costs incurred for the development of its
computer software in accordance with SFAS No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Capitalization of computer software development costs
begins upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized computer software
development costs require considerable judgment by management
with respect to certain external factors including, but not
limited to, technological feasibility and obsolescence,
anticipated future gross revenues, estimated economic life,
changes in software and hardware technology, and patent and
trademark law and litigation.
Amortization of capitalized computer software development costs
is provided for on a product-by-product basis at the greater of
the amount computed using a ratio of current gross revenues for a
product to the total of current and anticipated future gross
revenues or the straight-line method over the remaining estimated
economic life of the product. An original estimated economic
life of 24 months is assigned to capitalized computer software
development costs.
NOTE 4 - DUE TO STOCKHOLDERS
As of June 30, 1994, $743,000 of the amounts due to stockholders
are non-interest bearing, unsecured and convertible to common
stock. These debts were cancelled and exchanged for common stock
during the year ended June 30, 1995. The remaining $100,000
represents a loan to VSEL that was forgiven and converted to
paid-in-capital during the year ended June 30, 1995.
As of June 30, 1995, $23,325 of the amounts due to stockholders
is non-interest bearing, unsecured and payable on demand. The
remaining $50,000 is unsecured and bears interest at 7.01 percent
per annum.
NOTE 5 - NOTE PAYABLE - BANK
VSEL maintains a $1,000,000 line of credit with a bank in
Guernsey. The line of credit is secured by a stockholder's cash
deposit for the same amount and guaranteed by the stockholder.
Interest is charged at a rate of 1 percent per annum over the
interest rate applied to the cash deposit (5.95 percent at June
30, 1995). The commitment had an initial term of six months,
through October 1995, and has been extended for another six
months through April 1996. The Company had $700,000 outstanding
under the line of credit at June 30, 1995. The bank also
guaranteed the Company's inventory supply agreement in the amount
of $64,700 at June 30, 1995.
10
<PAGE> 11
VISUAL SOFTWARE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1995
NOTE 6 - NET SALES AND COMMISSIONS
The Company entered into an exclusive sales representative
agreement covering certain retailers and distributors at a 5
percent commission rate of the net invoice price, as defined.
The agreement commenced on August 29, 1994 and is automatically
renewable yearly thereafter.
The Company also entered into a one year non-exclusive
distribution agreement in the United States and Canada at a rate
of 3 percent of invoice commencing March 23, 1995 and
automatically renewable yearly thereafter. For the year ended
June 30, 1995, sales to this distributor accounted for 43 percent
of net sales or $1,691,300. Amounts due from this distributor
included in accounts receivable at June 30, 1995 was $409,000.
For the year ended June 30, 1994, sales from one product
accounted for 67 percent of net sales or approximately $519,000.
For the year ended June 30, 1995, sales from two products
accounted for 48 percent and 40 percent of net sales or
approximately $1,858,600 and $1,561,700, respectively.
NOTE 7 - NOTE PAYABLE AND EQUIPMENT LEASE
In May 1991, the Company entered into an agreement to purchase
software and software packages, to use certain licensed programs,
and to accept the assignment of development agreements for
concurrent and installment payments totaling $426,000 and to pay
royalties with respect to licensed programs, as defined. The
Company also leased certain equipment for an aggregate lease
price of $180,122 payable in thirty six months from the same
company. The Company made certain payments but was in default in
its payment of principal and interest with a balance of $243,108
as of June 30, 1994. In September 1994, the Company entered into
an agreement to discharge its indebtedness by paying $50,000,
making five equal monthly payments of $9,400 beginning December
1994, and by granting certain marketing license and limited
license to use certain source code valued at $146,108.
NOTE 8- INCOME TAXES
The Company has unused Federal and California net operating
losses available for carryforward to offset future taxable income
and tax liabilities for income tax reporting purposes which
expire as follows:
<TABLE>
<CAPTION>
Years Ending June 30, Net Operating Loss
--------------------- Federal California
---------------- ---------------
<S> <C> <C>
2006 $ 1,170,858 $ 584,629
2007 535,835 267,518
2008 740,568 369,884
2009 961,971 444,141
---------------- ---------------
$ 3,409,232 $ 1,666,172
================ ===============
</TABLE>
11
<PAGE> 12
VISUAL SOFTWARE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1995
NOTE 8 - INCOME TAXES (Continued)
No tax benefit has been recorded due to the uncertainty of
realization of the benefits.
NOTE 9 - COMMITMENTS
Lease Commitments
The Company leases certain office facilities and equipment
pursuant to operating lease agreements expiring on various dates
through March 1997. In addition to lease payments for office
facilities, the Company is also responsible for payment of
insurance, property taxes and operating costs. Lease expense for
the years ended June 30, 1994 and 1995 was $163,784 and $175,920,
respectively.
The minimum rental payments for the remaining years are as
follows:
<TABLE>
<CAPTION>
Years Ending June 30, Total
--------------------- -----------------
<S> <C>
1996 $ 168,449
1997 113,183
-----------------
$ 281,632
=================
</TABLE>
Royalty Agreement
On June 25, 1991, the Company signed a licensing agreement with
Black Cat Graphics, ("Black Cat"), an Ohio corporation, for the
exclusive right to market certain 3-D rendering software
application developed by Black Cat. Commencing March 1996, the
fourth anniversary of the first date on which software containing
Black Cat's application was commercially distributed, the Company
will be required to pay Black Cat a minimum royalty of $100,000
per six months or the agreement can be terminated by Black Cat.
The Company has the option of paying Black Cat the difference
between the minimum royalty and earned royalties. For the year
ended June 30, 1995, the Company paid $38,233 in royalties to
Black Cat. On February 14, 1996, the Company purchased the
software application for $59,777.
NOTE 10 - SUBSEQUENT EVENTS
Articles of Incorporation and Stock Split
On December 29, 1995, the Company amended and restated its
articles of incorporation. The name of the Company was changed
to Visual Software, Inc. The number of shares of common stock
authorized to be issued was increased to 5,000,000 shares and a
new class of preferred stock was authorized to be issued for
3,000,000 shares, both of which are without par value. Upon
amendment,
12
<PAGE> 13
VISUAL SOFTWARE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1995
NOTE 10 - SUBSEQUENT EVENTS (Continued)
Articles of Incorporation and Stock Split (Continued)
each outstanding share of common stock was converted into 400
shares of common stock. The consolidated financial statements
have not been adjusted to reflect these changes.
Employee Benefit Plan
On September 1, 1995, the Company adopted a qualified Internal
Revenue Code Section 401(k) plan (the "Plan") for eligible
employees, which allows these employees to make annual
contributions of up to 12 percent of their annual compensation.
Each year the Company may make a discretionary contribution to
the Plan.
Merger Negotiations
Subsequent to year end, the Company signed an agreement to merge
with a publicly traded company in a business combination to be
accounted as a pooling of interests.
Stock Incentive Plan
In 1995, the Board of Directors awarded to certain employees
non-qualified options to purchase 241,000 post-split shares of
common stock at an exercise price of $1 per share.
13
<PAGE> 1
EXHIBIT 99.2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Micrografx, Inc.:
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form S-8 of our reports dated
August 4, 1995, included in Micrografx, Inc.'s Form 10-K for the year ended
June 30, 1995 and to all references to our firm included in this registration
statement.
We have also made a similar audit of the accompanying supplemental consolidated
balance sheets of Micrografx, Inc. and subsidiaries at June 30, 1995 and 1994,
and the related supplemental consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1995. The supplemental consolidated statements give retroactive effect to the
merger with Visual Software, Inc. on April 2, 1996, which has been accounted
for as a pooling of interests described in the Notes to Supplemental
Consolidated Financial Statements. These supplemental financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these supplemental financial statements based on our
audits. We did not audit the financial statements of Visual Software, Inc. for
fiscal 1994 or 1995 included in the supplemental consolidated financial
statements of Micrografx, Inc., which statements reflect total assets and
revenues constituting 3 percent and 6 percent, respectively, in 1995 and 1
percent and 1 percent, respectively, in 1994 of the related supplemental
consolidated totals. These statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Visual Software, Inc., is
based solely upon the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audit and the report of other auditors, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Micrografx, Inc.
and subsidiaries as of June 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1995, after giving retroactive effect to the merger with Visual
Software, Inc. as described in the Notes to Supplemental Consolidated
Financial Statements, all in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas,
April 2, 1996
<PAGE> 2
MICROGRAFX, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<Caption)
JUNE 30,
1995 1994
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,329 $10,851
Short-term investments 5,312 7,247
Accounts receivable, net 9,232 5,091
Inventories 1,308 1,852
Deferred tax asset 484 920
Other current assets 1,472 1,614
------- -------
Total current assets 29,137 27,575
Property and equipment, net 4,631 5,461
Capitalized software development costs, net 3,596 3,538
Acquired product rights, net 1,302 1,497
Other assets 624 506
------- -------
Total assets $39,290 $38,577
======= =======
</TABLE>
See accompanying notes.
2
<PAGE> 3
MICROGRAFX, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
June 30,
1995 1994
--------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER`S' EQUITY
Current liabilities:
Accounts payable $ 6,158 $ 5,255
Accrued compensation and benefits 1,399 2,151
Other accrued liabilities 3,354 3,889
Income taxes payable 710 -
Current portion of long-term debt 700 1,576
Due to related parties 90 843
--------- ---------
Total current liabilities 12,411 13,714
Long-term debt - 111
Noncurrent deferred income taxes and other 903 1,041
Shareholders' equity:
Preferred stock, voting, $.10 par value,
10,000 shares authorized, none
issued and outstanding - -
Common stock, $.01 par value,
20,000 shares authorized; 10,132 and 9,521 shares
issued; 9,630 and 9,164 shares outstanding 101 95
Additional capital 24,747 22,137
Retained earnings 3,574 2,879
Cumulative translation adjustment (279) (66)
Less - treasury stock (502 and 357 shares), at cost (2,167) (1,334)
--------- ---------
Total shareholders' equity 25,976 23,711
--------- ---------
Total liabilities and shareholders' equity $ 39,290 $ 38,577
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
MICROGRAFX, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net revenues $ 64,345 $ 61,505 $ 56,477
Cost of revenues 16,148 15,026 14,255
-------- -------- --------
Gross profit 48,197 46,479 42,222
Operating expenses:
Sales and marketing 34,703 33,089 32,157
General and administrative 7,607 9,147 8,071
Research and development 5,358 6,785 4,925
Restructuring and unusual charges - 3,813 1,396
-------- -------- --------
Total operating expenses 47,668 52,834 46,549
-------- -------- --------
Income (loss) from operations 529 (6,355) (4,327)
Interest income (734) (559) (614)
Interest expense 83 147 255
Other (income) expense, net (277) 963 565
-------- -------- --------
Total non operating (income) expense (928) 551 206
-------- -------- --------
Income (loss) before income taxes 1,457 (6,906) (4,533)
Income taxes 762 (1,138) (1,061)
-------- -------- --------
Net income (loss) $ 695 $ (5,768) $ (3,472)
-------- -------- --------
Income (loss) per share $ 0.07 $ (0.64) $ (0.40)
-------- -------- --------
Shares used in computing
income (loss) per share $ 9,480 $ 8,986 $ 8,754
======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
MICROGRAFX, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<Caption
COMMON STOCK CUMULATIVE
-------------- ADDITIONAL RETAINED TRANSLATION TREASURY
SHARES AMOUNT CAPITAL EARNING ADJUSTMENT STOCK TOTAL
------ ------ -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1992 8,587 $ 86 $ 17,625 $ 12,119 $ (25) $ (608) $ 29,197
Common stock issued under stock option plan 153 1 619 - - - 620
Common stock issued under stock purchase plan 111 1 657 - - - 658
Common stock issued by Visual 183 2 715 - - - 717
Tax benefit of stock options exercised - - 315 - - - 315
Repurchase of restricted stock (45 shares) - - - - - (370) (370)
Translation of foreign currency financial statements - - - - (350) - (350)
Net loss - - - (3,472) - - (3,472)
------ ------ -------- -------- ------- ----------- --------
BALANCE, JUNE 30, 1993 9,034 90 19,931 8,647 (375) (978) 27,315
Common stock issued under stock option plan 265 3 947 - - - 950
Common stock issued under stock purchase plan 142 1 629 - - - 630
Common stock issued by Visual 80 1 227 - - - 228
Tax benefit of stock options exercised - - 519 - - - 519
Stock warrants issued - - 23 - - - 23
Issuance of restricted stock (45 shares) - - (139) - - 370 231
Treasury stock acquired (107 shares) - - - - - (726) (726)
Translation of foreign currency financial statements - - - - 309 - 309
Net loss - - - (5,768) - - (5,768)
------ ------ -------- -------- ------- ----------- --------
BALANCE, JUNE 30, 1994 9,521 95 22,137 2,879 (66) (1,334) 23,711
Common stock issued under stock option plan 65 1 246 - - - 247
Common stock issued under stock purchase plan 125 1 532 - - - 533
Common stock issued by Visual 421 4 1,783 - - - 1,787
Tax benefit of stock options exercised - - 49 - - - 49
Treasury stock acquired (145 shares) - - - - - (833) (833)
Translation of foreign currency financial statements - - - - (213) - (213)
Net income - - - 695 - - 695
------ ------ -------- -------- ------- ----------- --------
BALANCE, JUNE 30, 1995 10,132 $ 101 $ 24,747 $ 3,574 $ (279) $ (2,167) $ 25,976
====== ====== ======== ======== ======= =========== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
MICROGRAFX, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 695 $ (5,768) $ (3,472)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 8,113 8,611 5,303
Restructuring charge - 3,813 1,396
Deferred income taxes and other 234 (1,793) 1,232
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (4,141) 3,354 4,011
(Increase) decrease in inventories 544 (363) 1,087
Increase in income taxes payable 751 - -
Decrease in other current assets 93 820 459
Increase (decrease) in payables and accruals (342) 1,793 (2,947)
-------- -------- --------
Total adjustments 5,252 16,235 10,541
-------- -------- --------
Net cash provided by operating activities 5,947 10,467 7,069
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of short-term investments 7,441 7,959 6,524
Purchases of short-term investments (5,507) (8,311) (900)
Capitalization of software development costs
and purchases of acquired product rights (5,324) (4,215) (6,184)
Purchases of property and equipment, net (1,820) (2,627) (2,123)
Other (322) 199 (508)
-------- -------- --------
Net cash used in investing activities (5,532) (6,995) (3,191)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable 700 - 6,256
Payments of notes payable (1,570) (1,964) (7,243)
Increase in due to related parties 938 738 (241)
Proceeds from employee stock programs 779 1,603 1,277
Proceeds from issuance of common stock - 217 717
Tax benefits realized from stock transactions 49 519 315
Treasury stock acquired, net (833) (495) (370)
-------- -------- --------
Net cash provided by financing activities 63 618 711
-------- -------- --------
Net increase in cash and cash equivalents 478 4,090 4,589
Cash and cash equivalents, beginning of year 10,851 6,761 2,172
-------- -------- --------
Cash and cash equivalents, end of year $ 11,329 $ 10,851 $ 6,761
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid for --
Interest 66 114 217
Income taxes 9 31 140
</TABLE>
See accompanying notes.
6
<PAGE> 7
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION OF SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
On April 2, 1996, Micrografx, Inc. ("Micrografx" or "the Company"),
acquired all of the issued and outstanding capital stock and options of
Visual Software, Inc., a California corporation ("Visual"). The
acquisition has been accounted for as a pooling of interests. Accordingly,
these supplemental consolidated financial statements of Micrografx, Inc.
and subsidiaries have been restated to retroactively include the accounts
and operations of Visual Software, Inc. for all periods presented. See
"Acquisition of Visual Software, Inc." included herein.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Micrografx, Inc. was founded in 1982 and incorporated in 1984 in the state
of Texas. Micrografx develops and markets graphics software to meet the
creative needs of everyone who uses a personal computer.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
At June 30, 1995, the Company's wholly owned subsidiaries include
Micrografx, Ltd. (United Kingdom); Micrografx France, SARL; Micrografx
Germany, GmbH; Micrografx Japan, KK; Micrografx Italia S.r.l.; Micrografx
Canada, Inc.; Micrografx Australia Pty. Limited; Micrografx B.V. (the
Netherlands); Micrografx Technology N.V. (Netherlands Antilles); Visual
Software, Inc.; Visual Software Exports Limited ("VSEL"); Visual Software
U.K. Sales Limited ("VSUK"); and Visual Worlds Development, Inc. (80% owned
at June 30, 1995).
Change in Fiscal Year
On May 10, 1994, the board of directors approved the changing of the
Company's fiscal year end to periods ending June 30. This change became
effective for the period ending June 30, 1994 and the Company filed a
transition report on Form 10-Q for the three month transition period ended
June 30, 1994. This change in year end better reflects the current nature
of the Company's business. The accompanying financial statements have been
restated to conform to the June 30 year end.
ACQUISITION OF VISUAL SOFTWARE, INC.
On April 2, 1996, Micrografx, Inc. ("Micrografx" or "the Company"),
acquired all of the issued and outstanding capital stock and options of
Visual Software, Inc., a California corporation ("Visual"). In connection
with the acquisition, Micrografx also agreed to exchange shares of its
common stock for the 20% outstanding minority interest in Visual Worlds
Development Corporation ("VWD") owned by persons other than Visual. VWD
was an 80% owned subsidiary of Visual prior to the acquisition. Visual
and its subsidiaries are engaged in the development and marketing of 3-D
graphics software and Micrografx intends to continue the business of
Visual. Micrografx issued approximately 0.36547 shares of common stock for
each outstanding share of common stock of Visual, approximately .2930
shares of its common stock for each outstanding option, net of the option
exercise price, and an aggregate of 3,655 shares of its common stock for
the 20% interest in VWD owned by the minority stockholders of VWD. As a
result, a total of approximately 882,536 shares of the common stock of
Micrografx were issued in connection with these transactions.
7
<PAGE> 8
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Separate results for the periods prior to the acquisition are presented
below. The summary below is not necessarily indicative of results that may
be obtained in the future.
<TABLE>
<CAPTION>
Net Income Earnings
Net Revenues (Loss) Per Share
------------ ----------- ---------
<S> <C> <C> <C>
Year ended June 30, 1993
Micrografx $ 55,865 $ (2,792) $ (0.33)
Visual 612 (680) (0.85)
---------- --------- ---------
Combined $ 56,477 $ (3,472) $ (0.40)
========== ========= =========
Year ended June 30, 1994
Micrografx $ 60,732 $ (4,816) $ (0.56)
Visual 773 (952) (2.83)
---------- --------- ---------
Combined $ 61,505 $ (5,768) $ (0.64)
========== ========= =========
Year ended June 30, 1995
Micrografx $ 60,444 $ 1,778 $ 0.20
Visual 3,901 (1,083) (1.66)
---------- --------- ---------
Combined $ 64,345 $ 695 $ 0.07
========== ========= =========
</TABLE>
Inventories
Inventories are stated at the lower of cost or market using a
weighted-average method which approximates the first- in, first-out (FIFO)
method. Finished goods inventories include costs of material, labor and
overhead. Major classes of inventory include the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------
1995 1994
------- -------
<S> <C> <C>
Raw materials $ 814 $ 874
Finished goods 494 978
------- -------
$ 1,308 $ 1,852
======= =======
</TABLE>
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided for using the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
Computers and equipment 2-5 Years
Software 2-5 Years
Furniture and fixtures 5-7 Years
Leasehold improvements Term of Lease
</TABLE>
8
<PAGE> 9
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Capitalized Software Development Costs and Acquired Product Rights
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software," the Company capitalizes
certain software development costs incurred after technological
feasibility is achieved and also capitalizes costs of acquiring certain
product rights in connection with the development of its computer software
products. Capitalized costs are reported at the lower of unamortized cost
or net realizable value. Capitalized software development costs and
acquired product rights are amortized straight-line over the estimated
economic life of the products that ranges from 12 to 24 months, which
approximates amortization based on the ratio of current net sales over
future estimated net sales. The Company begins amortization when the
products are available for general release to customers. All other
research and development expenditures are charged to research and
development expense in the period incurred.
Foreign Currency Translation
For the majority of the Company's foreign subsidiaries, the functional
currency is the local currency of the country. Accordingly, assets and
liabilities of the foreign subsidiaries are translated to U.S. dollars at
year end exchange rates. Income and expense items are translated at the
average rates of exchange prevailing during the year. The adjustments
resulting from translating the financial statements of foreign subsidiaries
are reflected as cumulative translation adjustments, a reduction of
shareholders' equity. The effect of exchange rate changes on cash and cash
equivalents was not material for the years presented.
Derivative Instruments
The Company periodically enters into derivative financial transactions to
hedge existing or projected exposures to changing foreign exchange rates.
The Company does not enter into derivative transactions for speculative
purposes. Foreign currency hedges are carried at fair value with the
resulting gains and losses reflected in other (income) expense.
Revenue Recognition
Revenues on applications software product sales are recognized when the
related products are shipped to customers, net of discounts and allowances
for estimated future returns. The Company offers "stock balancing" (the
ability to return slow-moving or obsolete products) to distributors and
dealers which make up the majority of the Company's revenues. Products may
be exchanged for credit against future purchases of other Company products
on a minimum of a dollar-for-dollar basis. Defective products may be
returned for credit or exchange. Returns in excess of the allowance could
occur if a significant amount of the Company's products proved to be
defective. Revenues are recognized on any systems software development
contracts in accordance with the percentage of completion method.
The Company periodically offers rebates to distributors, the amounts of
which are primarily based on sales volume. The Company also offers
distributors and resellers incentives and co-op funds, generally 2-10% of
amounts invoiced, that are used to promote the Company's products. These
funds are generally paid as a credit against outstanding invoices and are
included in sales and marketing expense during the period in which revenue
is recognized.
In fiscal 1993, the Company adopted Statement of Position 91-1, "Software
Revenue Recognition" ("SOP 91-1"), issued by the American Institute of
Certified Public Accountants. SOP 91-1 requires, among other things, that
the sales value of post contract customer support must be deferred and
amortized over an initial warranty period. The effect of adopting SOP 91-1
was not material.
Reclassifications
Certain previously reported amounts have been reclassified to conform with
current year presentation.
9
<PAGE> 10
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. Short-term investments are
recorded at the lower of cost or fair market value. Cash and cash
equivalents and short-term investments consist of the following (in
thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash and cash equivalents:
Cash $ 5,151 $ 4,545
U.S. Treasury securities 395 -
Government backed issues - 3,481
Money market funds 3,120 687
Commercial paper 2,663 2,138
-------- ---------
Total cash and cash equivalents 11,329 10,851
Short-term investments:
U.S. Treasury securities 3,866 4,632
Government backed issues 1,303 1,495
Money market funds 143 120
Commercial paper - 1,000
-------- ---------
Total short-term investments 5,312 7,247
-------- ---------
Total cash and short-term $ 16,641 $ 18,098
======== =========
</TABLE>
Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). In accordance with SFAS 115, prior
period financial statements have not been restated to reflect the change in
accounting principle. The cumulative effect of adopting SFAS 115 was not
material to the Company's financial position and results of operations.
Under SFAS 115, the appropriate classification of securities is determined
at the time of purchase and reevaluated as of each balance sheet date. The
Company has classified its short-term investments as held-to-maturity under
the provisions of SFAS 115, which requires that the Company have the intent
and ability to hold these securities to full maturity. These
held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums and discounts, and the cost of
securities sold is based on the specific identification method.
The Company's investments, which are classified as held-to-maturity,
consist of the following at June 30, 1995 (in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Fair
Cost Gains Value
---------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities $ 3,866 $ 16 $ 3,882
Government backed issues 1,303 5 1,308
Money market funds 143 - 143
---------------------------------------
$ 5,312 $ 21 $ 5,333
</TABLE>
The fair value of investments is based on quoted market prices, where
available, or quotes from external pricing sources such as brokers for
those or similar investments and issues. All short-term investments have
maturities within one year of the balance sheet date.
10
<PAGE> 11
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------------
1995 1994
--------- --------
<S> <C> <C>
Trade Receivables $ 11,211 $ 9,547
Allowances (1,979) (4,456)
--------- --------
Accounts receivable, net $ 9,232 $ 5,091
========= ========
</TABLE>
Allowances consist of reserves for returns, reserves for bad debt and
accrued co-op and incentive programs. Allowances at June 30, 1994 included
reserves for excess channel inventory related to the launch of the Crayola
products.
At June 30, 1995 and 1994, approximately 60% and 51%, respectively, of
trade receivables represented amounts due from ten customers. At June 30,
1995, the Company had two customers with receivable balances of 16% and 14%
of trade receivables. At June 30, 1994, the Company had two customers with
receivable balances of 16% and 11% of trade receivables. The credit risk
in the Company's trade accounts receivable is substantially mitigated by
the Company's credit evaluation process, credit insurance policies,
reasonably short collection terms and the geographical diversification of
revenues.
Accrued returns, co-op and incentives are included in accounts receivable,
net and vary depending on the timing of receipt of product returns and
actual expenditures received from distributors and resellers.
The Company distributes its products domestically through independent,
non-exclusive distributors, authorized dealers, and its corporate sales
representatives located in 7 cities throughout the United States. The
Company distributes its products internationally through 77 independent,
non-exclusive distributors located in 31 countries. In fiscal 1995, the
Company had two customers whose sales accounted for 15% and 11% of net
revenues; in fiscal 1994, two customers' sales each accounted for 10% of
net revenues; and in fiscal 1993, two customers' sales accounted for 13%
and 10% of net revenues.
PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Computers and equipment $11,522 $10,287
Furniture and fixtures 1,826 1,788
Leasehold improvements 488 430
------- -------
13,836 12,505
Less -- accumulated depreciation (9,205) (7,044)
------- -------
Property and equipment, net $4,631 $5,461
======= =======
</TABLE>
11
<PAGE> 12
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
Capitalized software development costs and acquired product rights consist
of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Capitalized software development costs $7,306 $6,882
Less -- accumulated amortization (3,710) (3,344)
------- -------
Capitalized software development $3,596 $3,538
======= =======
Acquired product rights $2,440 $3,143
Less -- accumulated amortization (1,138) (1,646)
------- -------
Acquired product rights, net $1,302 $1,497
======= =======
</TABLE>
During the years ended June 30, 1995, 1994 and 1993, the Company
capitalized $5,324,000, $4,215,000 and $6,202,000, respectively, of
software development costs and acquired product rights. Amounts amortized
and charged to cost of revenues for capitalized software development costs
and acquired product rights during the years ended June 30, 1995, 1994 and
1993 were $5,455,000, $6,015,000 and $3,196,000, respectively.
Additionally, the Company wrote down certain software costs to net
realizable value resulting in charges to expense of approximately $93,000,
$170,000 and $56,000 in fiscal 1995, 1994 and 1993, respectively.
DEBT
Notes Payable
The Company's $6 million line of credit expires December 31, 1995, which
was renewed effective January 1, 1996 and expires on January 5, 1997. The
line of credit is secured by certain receivables and fixed assets and
contains certain financial covenants, including limitations on minimum
tangible net worth, net liquid assets and quick ratio, as defined. The
revolving line of credit is due on demand or December 31, 1995 and bears
interest at the bank's prime rate (9.0% at June 30, 1995). Commitment fees
related to the line of credit are .25% of the unused line of credit per
year. At June 30, 1995 and 1994, no borrowings on the line were
outstanding.
VSEL maintains a $1,000,000 line of credit with a bank in Guernsey. The
line of credit is secured by a stockholder's cash deposit for the same
amount and guaranteed by the stockholder. Interest is charged at a rate of
1 percent per annum over the interest rate applied to cash deposits (5.95
percent at June 30, 1995). The commitment had an initial term of six
months, through October 1995, and has been extended for another six months
through April 1996. The Company had $700,000 outstanding under the line of
credit at June 30, 1995. The bank also guaranteed the Company's inventory
supply agreement in the amount of $64,700 at June 30, 1995.
Due to Related Parties
As of June 30, 1994, $743,000 of the amounts due to related parties were
owed to Visual shareholders and were non-interest bearing, unsecured and
convertible to common stock. These debts were canceled and exchanged for
common stock during the year ended June 30, 1995. The remaining $100,000
represents a loan to VSEL that was forgiven and converted to
paid-in-capital during the year ended June 30, 1995.
12
<PAGE> 13
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1995, $23,000 of the amounts due to related parties is
non-interest bearing, unsecured and payable on demand. The remaining
$50,000 is unsecured and bears interest at 7.01 percent per annum.
On April 2, 1996 all amounts owed to the bank in Guernsey and related
parties were paid in connection with the merger.
Long-Term Debt
Long-term debt at June 30, 1994 consisted of $1,444,000 remaining on a $3
million term note with a weighted average interest rate of 5.11%, which was
payable in equal monthly installments of principal and interest through
June 30, 1995. The term note was secured by certain financial covenants,
including, among other restrictions, limitations on minimum tangible net
worth, net liquid assets and quick ratio, as defined. At June 30, 1995,
there were no borrowings outstanding.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of existing differences between financial reporting and
tax reporting basis of assets and liabilities. Current and noncurrent
deferred income taxes payable are classified on the balance sheet based on
the classification of the assets and liabilities giving rise to these
differences. Deferred tax assets and liabilities that are not related to
an asset or liability for financial reporting are classified according to
the expected reversal of the temporary difference.
Components of the provision (benefit) for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------
1995 1994 1993
-------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 143 $ (555) $ (2,733)
State and local 6 27 229
Foreign 440 67 92
-------- --------- ----------
Total current provision (benefit) 589 (461) (2,412)
Deferred federal provision (benefit) 173 (677) 1,351
-------- ---------- ----------
Total income tax provision (benefit) $ 762 $ (1,138) $ (1,061)
======== ========== ==========
</TABLE>
13
<PAGE> 14
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes is reconciled with the federal statutory
rate as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
1995 1994 1993
--------- ------------ ----------
<S> <C> <C> <C>
Provision (benefit) computed at $ 495 $ (2,348) $ (1,541)
federal statutory rate
Utilization of current research - - (55)
development tax credits
State and local taxes, net of - 31 95
federal tax benefit
Foreign tax rate differential 67 43 18
Change in valuation allowance 80 1,897 347
Research and development credit
and AMT carryforward - (689) (116)
Other 120 (72) 191
-------- ----------- ---------
Tax provision (benefit) $ 762 $ (1,138) $ (1,061)
======== =========== =========
</TABLE>
Components of the net deferred income tax liability are as follows
(in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------------
Deferred Tax Assets 1995 1994
-------------------------
<S> <C> <C>
Tax credit carryforwards $ 1,940 $ 1,940
Net operating loss carryforward 2,005 1,523
Reserves and other accrued expenses not
currently deductible for tax purposes 1,055 1,785
-------------------------
Total deferred tax assets 5,000 5,248
Deferred Tax Liabilities
Capitalized software development costs
currently deductible for tax purposes (1,617) (1,684)
Depreciation (8) (198)
Undistributed earnings in foreign subsidiaries (788) (678)
Other (291) (262)
-------------------------
Total deferred tax liabilities (2,704) (2,822)
Total net deferred tax assets 2,296 2,426
Valuation allowance (2,679) (2,636)
-------------------------
Net deferred tax liabilities, net of valuation $ (383) $ (210)
=========================
</TABLE>
The Company has research and development tax credit carryforwards of
$1,690,000, which expire between 2006 and 2009. In addition, the Company
has alternative minimum tax credit carryforwards of $250,000 that may be
carried forward indefinitely as a credit against the Company's current tax
liability. The Company also has net operating loss carryforwards of
$2,139,000 exclusive of Visual's losses that expire in 2009. Visual had
net operating loss carryforwards of $3,409,000 for federal tax purposes and
$1,666,000 for California state tax purposes, which expire between
2006-2009. The annual utilization of these carryforwards will be limited.
14
<PAGE> 15
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
As required by SFAS 109, the Company has recognized a deferred tax asset
for these tax carryforwards. Pursuant to the requirements of SFAS 109, a
valuation allowance must be provided when it is more likely than not that
the deferred tax asset will not be realized. The Company has recognized
the benefit of non credit-related deferred tax assets to the extent there
are deferred tax liabilities that will offset such assets in the future.
Visual's net operating losses have also been fully reserved due to the
uncertainty of realization. The Company has provided a valuation allowance
with respect to a portion of the remaining assets as the Company does not
deem the full recovery of such amounts at this time to be more likely than
not. In fiscal 1995, the valuation allowance was increased slightly to
fully reserve Visual's current year operating losses, which was offset
somewhat to reflect the likely realization of a portion of the previously
reserved tax credits. Management's assessment is based upon current and
anticipated operations, current tax laws, and other factors. In subsequent
periods, the Company may adjust the valuation allowance, to the extent that
utilization of the deferred tax assets is more likely than not, as defined
by SFAS 109.
SHAREHOLDERS' EQUITY
Common Stock Repurchase
On May 10, 1994, the board of directors authorized the purchase of up to
one million shares of Micrografx common stock on the open market over a
five year period as market conditions warrant. The purpose of the program
is to fund existing employee stock benefit programs and will be funded by
normal working capital. As of June 30, 1995, the Company had repurchased
235,100 shares at an average price of $6.13 per share.
EMPLOYEE BENEFIT PROGRAMS
Stock Option Plan
The Company has reserved 3,000,000 shares of its Common Stock for issuance
in connection with its stock option plan for employees and non-employees,
which is administered by the Company's Stock Option Committee.
Each option issued under the plan terminates at the time designated by the
Board of Directors, not to exceed 10 years. The exercise price and vesting
schedule for each option is determined by the Company's Stock Option
Committee, based on the fair market value of the Company's stock at the
grant date, and is payable when the option is exercised. Options that
terminate under the provisions of the plan subsequently become available
for reissuances.
Outstanding options are summarized as follows:
<TABLE>
<CAPTION>
Shares Exercise Price
---------- -------------------
<S> <C> <C>
Balance, June 30, 1992 893,596 $ 0.013 - $ 16.750
Granted 442,943 4.750 - 11.125
Exercised (153,302) (0.013) - (8.000)
Canceled (326,797) (3.000) - (16.750)
---------- --------------------
Balance, June 30, 1993 856,440 $ 0.013 - $ 11.125
Granted 1,270,499 5.750 - 9.375
Exercised (265,120) (0.417) - (8.000)
Canceled (374,593) (3.000) - (11.250)
---------- --------------------
Balance, June 30, 1994 1,487,226 $ 0.013 - $ 11.125
Granted 471,338 5.375 - 7.625
Exercised (65,276) (2.707) - (8.000)
Canceled (764,544) (0.013) - (11.125)
---------- --------------------
Balance, June 30, 1995 1,128,744 $ 4.750 - $ 8.250
========== ====================
</TABLE>
15
<PAGE> 16
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
In July 1995, Visual's Board of Directors issued options to purchase
241,000 shares of Visual's common stock at $1 per share. These options
were to vest ratably over four years and immediately vest in the event of a
merger. As part of the merger with Micrografx, such options were exchanged
for Micrografx common stock based on their relative fair value.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan allows eligible employees to
authorize the Company to withhold from 1% to 10% of gross earnings. Shares
are purchased by participants at the lower of 85% of the fair market value
per share at the beginning or ending of each offering period. As of June
30, 1995, 500,000 shares were authorized for the plan, approximately
405,000 shares were issued, and approximately $52,000 had been withheld for
the purchase of shares for the November 1995 offering period.
Savings Plan
The Micrografx, Inc. 401(k) Savings Plan allows eligible employees to elect
to reduce their current compensation by up to 15%, subject to certain
maximum dollar limitations prescribed by the Internal Revenue Code ($9,240
in fiscal 1995), and have the amount contributed to the plan as salary
deferral contributions. The Company may make employer contributions to the
plan at the discretion of the Board of Directors. During fiscal 1995, 1994
and 1993, the Company contributed approximately $85,626, $116,000 and
$56,000 to the plan, respectively. At June 30, 1995, there were
approximately 99 participants in the plan.
Related Parties
On May 31, 1994, the Company's former President and Chief Executive Officer
("the Borrower"), became indebted to the Company for the principal sum of
$325,000. Such indebtedness was incurred by the Borrower in connection
with his purchase of a primary residence. The promissory note underlying
this loan is secured by a second mortgage on the Borrower's primary
residence. Interest on the promissory note is payable annually as it
accrues at a per annum rate of 4.85%. The outstanding principal balance of
the promissory note is payable in full in one lump sum payment no later
than June 1, 2002, provided, that upon the occurrence of an event of
default, which includes the Borrower's acceptance of an offer of employment
extended by a third party, the entire unpaid balance of principal and
accrued interest under the promissory note shall immediately become due and
payable. Subsequent to year end, the Borrower repaid the principal sum of
$325,000 and interest of $19,000. See "Debt" included herein.
16
<PAGE> 17
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its office and warehouse space and certain equipment
under non cancelable operating lease agreements. Rent expense for these
operating leases of $1,146,000, $1,284,000 and $1,092,000 was recorded for
the years ended June 30, 1995, 1994 and 1993, respectively. Future minimum
lease payments for operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending June 30,
-------------------------------
<S> <C>
1996 $ 1,097
1997 533
1998 306
1999 278
2000 274
------------
$ 2,488
============
</TABLE>
Forward Contracts
The Company enters into foreign exchange contracts to hedge against certain
exposure to changes in foreign currency exchange rates. This exposure
results from the Company's foreign operations that are denominated in
currencies other than the U.S. dollar. The Company revalues foreign
exchange contracts at each balance sheet date, which approximates fair
value, and records the exchange difference as an unrealized gain or loss,
which is included in other (income) expense, net. During fiscal 1995, 1994
and 1993, the Company recognized approximately $167,000, $179,000 and
$319,000, respectively, in exchange losses associated with foreign exchange
contracts. As of June 30, 1995, the Company had no forward exchange
contracts outstanding.
Litigation
The Company's product offerings in fiscal 1995 included Crayola Amazing Art
Adventure and Crayola Art Studio, which embody copyrights, trademarks,
trade names and other proprietary designs and characters that are the
property (the "Licensed Intellectual Property") of Binney & Smith
Properties, Inc. (the "Licensor") pursuant to a license agreement between
the Company and the Licensor (the "License Agreement"). The License
Agreement expired on December 31, 1995, and the Company was required to
cease using the Licensed Intellectual Property in connection with these
products by March 31, 1996.
In August 1995, the Company released Crayola Art, a new product
specifically designed for original equipment manufacturers, and in October
1995, the Company released another product, Crayola Art Studio 2. The
Company believes that it is entitled to a license agreement from the
Licensor for these new products. As a result, the Company initiated
litigation in February 1996 against Hallmark Cards, Inc. and Binney & Smith
asserting various claims of relief, including monetary damages and a
declaration that the Company is entitled to a license to sell Crayola Art
and Crayola Art Studio 2. The Company settled the contractual dispute with
Binney & Smith Properties, Inc., on February 23, 1996. The settlement
clarifies the license agreement between Micrografx and Binney & Smith and
extends to Micrografx the right to sell and market Crayola(TM) Art and
Crayola(TM) Art Studio(TM) 2 through March 31, 1997.
The Company is party to various legal proceedings arising from the normal
course of business activities, none of which, in management's opinion, is
expected to have a material adverse impact on the Company's results of
operations or its financial position.
17
<PAGE> 18
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
RESTRUCTURING AND UNUSUAL CHARGES
In September 1993, the Company hired a new President and Chief Executive
Officer. In connection with this change and his influence on management
and direction, the Company initiated several actions that required
accounting consideration in the quarter ended December 31, 1993. These
changes include the closing of the Company's Scandinavian subsidiaries, the
consolidation of corporate headquarters personnel into one building, and
the ceasing of marketing activities associated with certain of the
Company's products. These actions resulted in excess lease space,
severance and asset write-downs of approximately $3,813,000, of which
$1,500,000 was non-cash.
As a result of the Scandinavian office closure and the consolidation of
international operations, 22 associates were laid off. In the U.S., eight
positions were eliminated in connection with the streamlining of operations
and outsourcing of certain functions, and the decision to eliminate members
from executive management.
The fiscal 1994 restructuring charge consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Accrued Actual
-----------------------
<S> <C> <C>
Office consolidation costs $ 1,788 $ 1,493
Product-related write-downs:
Inventory and accounts receivable 364 364
Acquired product rights 800 800
Severance and other 861 1,129
-----------------------
Total restructuring charges $ 3,813 $ 3,786
=======================
</TABLE>
As of June 30, 1995, no restructuring accruals remained.
During fiscal 1993, the Company realigned its worldwide operations in
response to changes in software purchasing trends and the costs of
marketing products and services globally. This realignment resulted in
severance costs of $675,000 and a $221,000 write-down of assets resulting
from the Company's reassessment of near-term business strategy. Unusual
charges also include $500,000 associated with a mismanagement of corporate
funds in the Japanese subsidiary.
INCOME (LOSS) PER SHARE
Income per share for fiscal 1995 is based on the weighted average common
and dilutive equivalent shares outstanding using the treasury stock method.
For fiscal 1995, there were approximately 9,455,000 weighted average shares
outstanding and 25,000 common stock equivalents from the Company's employee
stock plans.
For purposes of calculating the loss per share in fiscal 1994 and 1993,
only weighted average shares outstanding of 8,986,000 and 8,754,000 were
used, respectively, as inclusion of common stock equivalents would be
anti-dilutive.
Fully diluted income per share was not materially different from primary
earnings per share for all years presented.
18
<PAGE> 19
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT INFORMATION
The Company operates in a single industry segment: the development,
marketing and support of personal computer applications and systems
software products. Virtually all products sold in Europe are manufactured
in the Netherlands. Substantially all other products are manufactured in
Richardson, Texas. Net revenues for each segment include only sales to
unaffiliated customers; there were no intra-segment revenues for the
periods presented. Income (loss) from operations is net revenues less cost
of goods sold and operating expenses for each geographical region. In
fiscal 1995, 1994 and 1993, cost of revenues include direct costs incurred
by each segment and an allocation of amortization of capitalized software
development costs and acquired product rights.
Summary information regarding the Company's geographical regions is
presented below (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
Net revenues 1995 1994 1993
--------------------------------
<S> <C> <C> <C>
U.S. $ 27,845 $ 26,094 $ 25,358
Germany 12,833 16,069 14,971
France 5,101 3,966 5,132
Japan 6,849 3,233 1,562
Rest of World 11,717 12,143 9,454
-------- --------- ---------
Total $ 64,345 $ 61,505 $ 56,477
<CAPTION>
Income from operations 1995 1994 1993
--------------------------------
<S> <C> <C> <C>
U.S. $ (837) $ (4,199) $ (3,683)
Germany (80) 1,554 3,468
France (34) (1,617) (342)
Japan 906 (112) (1,044)
Rest of World 574 (1,981) (2,726)
-------- --------- ---------
Total $ 529 $ (6,355) $ (4,327)
<CAPTION>
Depreciation 1995 1994 1993
--------------------------------
<S> <C> <C> <C>
U.S. $ 2,020 $ 2,018 $ 1,706
Germany 232 188 163
France 121 175 105
Japan 54 18 21
Rest of World 278 175 172
-------- --------- ---------
Total $ 2,705 $ 2,574 $ 2,167
</TABLE>
19
<PAGE> 20
MICROGRAFX, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended June 30,
Identifiable assets 1995 1994 1993
------------------------------
<S> <C> <C> <C>
U.S. $ 26,061 $ 27,159 $ 29,178
Germany 1,443 1,830 5,097
France 839 623 2,835
Japan 3,057 2,676 709
Rest of World 7,890 6,289 2,822
-------- -------- --------
Total $ 39,290 $ 38,577 $ 40,641
<CAPTION>
Capital expenditures 1995 1994 1993
------------------------------
<S> <C> <C> <C>
U.S. $ 1,301 $ 2,132 $ 1,663
Germany 121 442 285
France 79 52 15
Japan 152 54 5
Rest of World 264 161 155
-------- -------- --------
Total $ 1,917 $ 2,841 $ 2,123
</TABLE>
20
