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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-18708
MICROGRAFX, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1952080
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1303 ARAPAHO ROAD, RICHARDSON, TEXAS 75081
(Address of principal executive offices) (Zip Code)
(972) 234-1769
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
As of October 31, 1996, 10,228,089 shares of the Company's common stock
were outstanding.
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MICROGRAFX, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I.
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of 3
September 30, 1996 and June 30, 1996
Consolidated Statements of Operations for the 4
three months ended September 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows for the 5
three months ended September 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II.
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
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MICROGRAFX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
------------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,491 $13,790
Short-term investments 7,924 4,844
Accounts receivable, net 11,492 9,417
Inventories 1,137 1,284
Other current assets 2,219 2,206
------- -------
Total current assets 32,263 31,541
Property and equipment, net 2,911 3,150
Capitalized software development costs
and acquired product rights, net 5,311 5,282
Other assets 122 125
------- -------
Total assets $40,607 $40,098
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,739 $ 4,230
Other accrued liabilities 5,679 6,079
------- -------
Total current liabilities 10,418 10,309
Deferred income taxes and other liabilities 750 684
Shareholders' equity 29,439 29,105
------- -------
Total liabilities and shareholders' equity $40,607 $40,098
======= =======
See accompanying notes.
</TABLE>
3
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MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
------- -------
<S> <C> <C>
Net revenues $16,589 $15,678
Cost of revenues 4,602 3,748
------- -------
Gross profit 11,987 11,930
Operating expenses:
Sales and marketing 7,948 8,159
General and administrative 1,953 1,998
Research and development 1,821 1,703
------- -------
Total operating expenses 11,722 11,860
------- -------
Income from operations 265 70
Interest income (233) (186)
Other (income) expense, net (9) 426
------- -------
Total non operating (income) expense (242) 240
------- -------
Income (loss) before income taxes 507 (170)
Income taxes 173 (51)
------- -------
Net income (loss) $ 334 $ (119)
======= =======
Income (loss) per share $ 0.03 $ (0.01)
======= =======
Shares used in computing
income (loss) per share 10,443 9,666
======= =======
</TABLE>
See accompanying notes
4
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MICROGRAFX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------
1996 1995
-------- -------
<S> <C> <C>
Net cash flows from operating activities $ 697 $ (83)
Cash flows from investing activities:
Proceeds from maturities of short-term investments 1,483 1,263
Purchases of short-term investments (4,550) (1,144)
Capitalization of software development costs and
purchases of acquired product rights (1,593) (1,555)
Other (337) (149)
------- -------
Net cash used in investing activities (4,997) (1,585)
Net cash flows from financing activities 60 226
Effect of exchange rates on cash and cash equivalents (59) (71)
------- -------
Net decrease in cash and cash equivalents (4,299) (1,513)
Cash and cash equivalents, beginning of period 13,790 11,329
------- -------
Cash and cash equivalents, end of period $ 9,491 $ 9,816
======= =======
See accompanying notes.
</TABLE>
5
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MICROGRAFX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS COMBINATION
On April 2, 1996, Micrografx, Inc. and subsidiaries ("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, the
accompanying consolidated financial statements have been restated to
retroactively include the accounts and operations of Visual for all periods
presented.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Micrografx at
September 30, 1996 and for the three-month periods ended September 30, 1996 and
1995 are unaudited but reflect all adjustments which are of a normal recurring
nature and, in the opinion of management, necessary for a fair presentation of
the financial position and results of operations for the periods presented.
The accompanying financial statements and notes thereto should be read in
conjunction with the Company's audited financial statements for the year ended
June 30, 1996, included in the 1996 Annual Report to Shareholders. The results
of operations for the period ended September 30, 1996 are not necessarily
indicative of results to be expected for the year ending June 30, 1997.
INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------ -------------
<S> <C> <C>
Raw materials $ 715 $ 849
Finished goods 422 435
------------------ -------------
$1,137 $1,284
================== =============
</TABLE>
COMMITMENTS AND CONTINGENCIES
FORWARD CONTRACTS
The Company periodically 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 differences as an unrealized gain or loss. This gain or
loss is included in other (income) expense, net. As of September 30, 1996, the
Company had no foreign exchange contracts outstanding.
6
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MICROGRAFX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INCOME PER SHARE
Income per share (in thousands) for all periods presented is based on the
weighted average common and dilutive equivalent shares outstanding using the
treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Weighted average common stock
outstanding during the period 10,223 9,666
Common stock equivalents of employee
stock programs 220 -
--------- ---------
Shares used in primary income per
share calculation 10,443 9,666
========= =========
</TABLE>
Fully diluted income per share was not materially different from primary income
per share for all periods presented.
7
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MICROGRAFX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Micrografx, Inc. ("Micrografx" or the "Company") was founded in 1982 and
incorporated in 1984 in the state of Texas. Micrografx develops and markets
graphics software which enhances visual communication and empowers creative
expression.
On April 2, 1996, 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, the accompanying tables and discussion have been restated to
retroactively include the accounts and operations of Visual for all periods
presented.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues of certain items in the Company's Consolidated
Statements of Operations. Historical results and percentage relationships are
not necessarily indicative of operating results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Net revenues 100% 100%
Cost of revenues 28% 24%
Gross profit 72% 76%
Operating expenses:
Sales and marketing 48% 52%
General and administrative 12% 13%
Research and development 11% 11%
Total operating expenses 71% 76%
Income from operations 2% -
Non operating (income) expense (1%) 2%
Income (loss) before income taxes 3% (2%)
Income taxes 1% -
Net income (loss) 2% (1%)
</TABLE>
Net revenues of $16.6 million for the first quarter of fiscal 1997 increased
six percent compared with net revenues of $15.7 million for the first quarter
of fiscal 1996.
8
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Revenues by customer category for the three months ended September 30, 1996 and
1995 are shown below (in thousands). The Business category includes the ABC
Graphics Suite(TM), Micrografx Designer(TM), Picture Publisher(R), Designer
Power Pack, ABC FlowCharter(R), ABC ToolKit(TM), ABC SnapGraphics(TM),
PhotoMagic(R), Simply 3D(TM), Instant 3D(TM) and Visual Reality(R). The
Consumer category includes Crayola(TM) Amazing Art Adventure(TM), Crayola(TM)
Art Studio(TM), Crayola(TM) Art Studio(TM)2, Crayola(TM) Art(TM), American
Greetings(R) Creatacard(R) Plus(TM), and Hallmark Connections(TM) Card
Studio(TM). Revenues from Windows Draw(R) are categorized as either business or
consumer depending on the Company's assessment of the market or channel into
which the product is sold.
<TABLE>
<CAPTION>
Three Months Ended September 30,
1996 % 1995 %
-------- ---- ------- ---
<S> <C> <C> <C> <C>
Business $11,322 68% $13,199 84%
Consumer 5,267 32% 2,479 16%
------- --- ------- ---
Total $16,589 100% $15,678 100%
======= === ======= ===
</TABLE>
The Company markets and sells business products for the Windows(R) 3.1,
Windows(R) 95 and Windows(R) NT operating systems. Revenues from the Company's
business products designed for the Windows 3.1 operating system, the
predecessor to Windows 95, declined and were partially offset by revenue from
ABC Graphics Suite and Windows Draw business revenues. During the quarter
ended September 30, 1996, revenue from the ABC Graphics Suite and the
standalone versions of ABC FlowCharter each represented more than 30% of the
Company's business products revenues. During the quarter, the Company also
began shipping ABC FlowCharter 6 as a standalone product. The Company's future
business products revenues are expected to become substantially dependent upon
sales of ABC Graphics Suite as companies migrate to Windows 95 and Windows NT
software applications. The decline in overall business revenue from the prior
year reflects the delay in corporations adopting Windows 95 and Window NT, as
the Company's principal business product is designed for these operating
environments.
The revenue growth in the Company's consumer products was led by the increased
sales of Hallmark Connections(TM) Card Studio(TM), sales of which comprised 56%
of consumer revenues, as well as positive response to the September 1996
introduction of American Greetings(R) Creatacard(R) Plus(TM). Revenues from
the products licensed under the Crayola brand name were even with the same
quarter of the prior year. Additionally, the Company introduced Windows Draw 5
Graphics & Print Studio at the end of September 1996. Consumer revenues may
decline significantly in the coming months due to the cessation of shipments of
the Hallmark product related to the introduction of the Company's Creatacard
Plus product and the expiration of the Company's agreement for marketing
Crayola brand products on December 31, 1996.
Revenues by geographical region for the three months ended September 30, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1996 % 1995 %
------- ---- ------- ----
<S> <C> <C> <C> <C>
Americas $ 8,746 53% $ 7,276 46%
Europe 4,801 29% 5,432 35%
Pacific Rim 3,042 18% 2,970 19%
------- --- ------- ---
Total $16,589 100% $15,678 100%
======= === ======= ===
</TABLE>
9
<PAGE> 10
Revenue growth during the quarter ended September 30, 1996 was greatest in the
United States, which grew 20% over the same quarter in fiscal 1995. This
increase resulted primarily from continued growth in the Company's consumer
product offerings, which are available only in English. These gains were
partially offset by a decline in European Business products due to a slower
transition to Windows 95 and Windows NT.
Cost of revenues for the three months ended September 30, 1996 was $4.6
million, or 28% of net revenues, compared to $3.7 million, or 24% of net
revenues, for the three months ended September 30, 1995. The increase in
cost of revenues for the three months ended September 30, 1996 is attributable
to a product mix that includes more consumer products which have lower margins
due to pricing pressures, higher packaging and selling costs, and external
royalties. The Company anticipates that the product mix will return to a more
historically normal relationship between business and consumer products in the
coming quarter.
Sales and marketing expenses for the three months ended September 30, 1996 were
$7.9 million, or 48% of revenues, compared to $8.2 million, or 52% of revenues
for the same period in the previous year. The decrease in sales and marketing
expense as a percentage of revenue reflects the efficiencies gained by
eliminating duplicate costs subsequent to the acquisition of Visual.
General and administrative expenses remained flat at $2.0 million, or 12% and
13% of net revenues, respectively, for the three months ended September 30,
1996 and 1995. Additional expenses resulting from U.S. recruitment charges and
management changes in Europe were offset by efficiencies gained from the Visual
acquisition.
Net research and development expenses for the three months ended September 30,
1996 were $1.8 million, or 11% of net revenues, compared to $1.7 million, or
11% of net revenues, for the quarter ended September 30, 1995. Gross research
and development expenses, before capitalization, for the three months ended
September 30, 1996 were $2.8 million, or 17% of net revenues, compared to $2.6
million, or 17% of net revenues for the quarter ended September 30, 1995.
During the three months ended September 30, 1996, the Company capitalized
approximately $0.9 million in software development costs and amortized $0.9
million in software development costs. This compares to capitalization of $0.9
million and amortization of $0.9 million in the three months ended September
30, 1995.
For the three months ended September 30, 1996, interest income of $0.2 million
remained flat compared to the three months ended September 30, 1995. Non
operating expense was $0.4 million for the three months ended September 30,
1995 and consisted primarily of foreign exchange losses.
The Company's effective tax rate rose to 34% for the three months ended
September 30, 1996 compared to 30% for the three months ended September 30,
1995. This increase is attributable to past utilization of net operating loss
carryforwards and research and development credits.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's principal sources of liquidity consisted
of cash and cash equivalents of $9.5 million and short-term investments of $7.9
million. The Company maintains approximately $6 million in total credit
facilities, all of which was unused at September 30, 1996.
For the three months ended September 30, 1996, cash used in investing
activities exceeded cash provided by operating and financing activities,
resulting in a decrease of $4.3 million in cash and cash equivalents.
Operating activities provided $0.7 million in cash during the three months
ended September 30, 1996, consisting primarily of net income of $0.3 million
and depreciation and amortization of $2.1 million, offset by an increase in
accounts receivable of $2.1 million. Accounts receivable increased primarily
due to
10
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significant sales to U.S. customers near the end of the quarter. Investing
activities used $5.0 million in cash during the three months ended September
30, 1996 primarily due to net purchases of short-term investments of $3.1
million as well as capitalized software development costs and purchases of
acquired product rights of $1.6 million. Financing activities provided $0.1
million in cash during the three months ended September 30, 1996, consisting
primarily of proceeds from employee stock programs.
The Company believes that cash flow from operations, existing cash, and
existing borrowing arrangements will be sufficient to meet the Company's
capital requirements in the short term (the next 12 months). The Company
believes that thereafter its liquidity requirements will be met with cash flow
from operations and existing cash and short-term investment balances.
FORWARD-LOOKING STATEMENTS
The Company notes that each of the above forward-looking statements are subject
to change based on various important factors including, without limitation,
competitive actions in the market place. Further information on potential
factors which could affect the Company's financial results are included in the
Company's 1996 Annual Report to Shareholders and other SEC reports and filings
of the Company.
11
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MICROGRAFX, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the resolution
of these legal proceedings and claims will not have a material effect on the
Company's consolidated financial position and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K - none.
12
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROGRAFX, INC.
Date: November 8, 1996 By /s/ J. Paul Grayson
----------------------------------
J. Paul Grayson
Chairman of the Board of Directors
and Chief Executive Officer
Date: November 8, 1996 By /s/ Larry G. Morris
----------------------------------
Larry G. Morris
Chief Financial Officer
and Treasurer
13
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,491
<SECURITIES> 7,924
<RECEIVABLES> 14,927
<ALLOWANCES> 3,435
<INVENTORY> 1,137
<CURRENT-ASSETS> 32,263
<PP&E> 14,909
<DEPRECIATION> 11,998
<TOTAL-ASSETS> 40,607
<CURRENT-LIABILITIES> 10,418
<BONDS> 0
108
0
<COMMON> 0
<OTHER-SE> 29,331
<TOTAL-LIABILITY-AND-EQUITY> 40,607
<SALES> 16,589
<TOTAL-REVENUES> 16,589
<CGS> 4,602
<TOTAL-COSTS> 4,602
<OTHER-EXPENSES> 11,722
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> 507
<INCOME-TAX> 173
<INCOME-CONTINUING> 334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 334
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
