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================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
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
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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 E. ARAPAHO ROAD, RICHARDSON, TEXAS 75081
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 234-1769
---------------
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant at August 31, 1997 was approximately $76,260,460.
On August 31, 1997, there were 10,473,187 shares outstanding of the registrant's
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held November 4, 1997
are incorporated by reference into Part III.
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MICROGRAFX, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
TABLE OF CONTENTS
PAGE
----
PART I.
Item 1. Business............................................... 1
Item 2. Properties............................................. 8
Item 3. Legal Proceedings...................................... 8
Item 4. Submission of Matters to a Vote of Security Holders.... 8
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 8
Item 6. Selected Financial Data................................ 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 10
Item 8. Financial Statements and Supplementary Data............ 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 39
PART III.
Item 10. Directors and Executive Officers of the Registrant..... 39
Item 11. Executive Compensation................................. 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 39
Item 13. Certain Relationships and Related Transactions......... 39
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................... 39
Item 14 (a) Index to Financial Statements and Financial
Statement Schedules.................................... 42
Signatures.......................................... 43
Financial Statement Schedule........................ 45
i
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this Annual Report, the
matters discussed herein are forward-looking statements that involve risks and
uncertainties. These statements reflect management's best judgment based on
factors known to them at the time of such statements. The Company's actual
results may differ materially from the results discussed in these forward-
looking statements. There are several important factors that could cause
actual results to differ materially from those anticipated by the forward-
looking statements contained in the following discussion. Readers should pay
particular attention to the risk factors set forth in this section and in the
section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Trends and Risk Factors."
GENERAL
Micrografx, Inc. develops and markets graphics software which enhances visual
communication and empowers creative expression. As used herein, the "Company"
refers to Micrografx, Inc. and its wholly owned subsidiaries. The Company's
graphics applications software products range from greeting card software for
families and children to enterprise-wide graphics suites which are capable of
managing all the graphic imagery for the world's largest corporations. The
Company's U.S. operations are based in Richardson, Texas, with development
offices located in San Francisco, Los Angeles, and Portland, Oregon.
International subsidiaries are located in the United Kingdom, France, Germany,
Italy, The Netherlands, Australia, and Japan.
On June 30, 1997 the Company acquired the assets and assumed certain
liabilities of AdvanEdge Technologies, Inc. ("AdvanEdge") for approximately
$3.7 million. AdvanEdge is a developer of enterprise process mapping,
modeling and simulation tools and Micrografx intends to continue the business
of AdvanEdge. The merger has been accounted for as a purchase.
The Company was initially organized as a partnership in June 1982 and was
subsequently incorporated in the State of Texas in March 1984. The principal
executive offices of the Company are located at 1303 E. Arapaho Road,
Richardson, Texas 75081, and its telephone number is (972) 234-1769.
PRODUCTS
The Company competes in the graphics segment of the software market. The
Company's products are designed for personal computers utilizing the Microsoft
Windows/R/ operating environments, which include Windows 3.1, Windows 95 and
Windows NT.
The Company views its application software products in three product
categories: Enterprise Graphics Products (Graphics Suite/TM/, FlowCharter/R/,
Optima!/TM/, and Designer/TM/), Web Graphics Products (Webtricity/TM/, Simply
3D/TM/, and Picture Publisher/R/) and Personal Creativity Products (Windows
Draw/R/, American Greetings CreataCard/R/ Gold/TM/ and CreataCard/R/
Plus/TM/).
Due to the rapid change in technology related to personal computers and
competitive market conditions, the Company is continually updating and
refining its products. To keep pace with the market, the Company seeks to
release new versions of its products every 12 to 18 months. Different
releases of a software application are denoted by a version number which is
generally incremented by one for each release. Significant versions and the
release date for English versions of the Company's products are discussed
below with the product to which it relates.
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Enterprise Graphics Products
GRAPHICS SUITE. This graphics application suite integrates powerful
diagramming, image editing, illustration, three-dimensional ("3D"), and clip-
art management capabilities within Windows 95 or Windows NT and is
complementary to the Microsoft/R/ Office/R/ 95 environment. Graphics Suite
offers a comprehensive graphics solution to business professionals. Graphics
Suite 2 includes FlowCharter 7, Designer 7, Picture Publisher 7, Simply 3D 2,
Micrografx Media Manager/TM /(a tool that manages the clip-art libraries), and
over 35,000 illustrations, clip-art and photo images. Graphics Suite 2 was
released in February 1997.
FLOWCHARTER. FlowCharter is a business drawing, diagramming, and charting
tool. FlowCharter works interactively with the user to communicate ideas,
processes, data, and concepts visually. This powerful application provides
tools for analyzing, updating and understanding Total Quality Management,
Business Process Engineering and Business Process Modeling. FlowCharter 7 was
released in January 1997.
OPTIMA! Optima! is an integrated tool for creating process maps, modeling
process behavior, doing simulation, and performing "what if?" analysis.
Optima! is designed for Business Process Reengineering, Total Quality
Management, and other process improvement efforts. This product was obtained
through the acquisition of AdvanEdge in June 1997.
DESIGNER. Designer is a professional illustration and graphics package that
contains free-hand drawing capabilities, computer-aided design features, and
import and export capabilities for popular graphics formats. Designer
provides useful tools for technical illustration. Designer 7 is available in
Graphics Suite 2.
Web Graphics Products
WEBTRICITY. Webtricity is a suite of applications designed for the creation
of graphical content and effects for Web pages. This suite includes Simply 3D
2, Picture Publisher 7, Designer 7, and Micrografx Media Manager. Webtricity
was released in February 1997.
SIMPLY 3D. Simply 3D is an easy to use 3D software package for creating
stills and animations for the Internet, documents, and presentations. A
complete set of 3D graphics tools and tutorials lets even the novice artist
transform drawings, typography and charts into 3D objects using over 100
seamless textures like wood, stone or even dinosaur skin. Simply 3D links
with popular 2D draw and paint applications and over 400 pre-built 3D objects
are included to make the creation of 3D imagery even easier. Simply 3D 2 was
released in March 1997.
PICTURE PUBLISHER. Picture Publisher is a professional comprehensive imaging
application for creating photo effects and web graphics. Picture Publisher
allows the user to design and assemble complex image montages, to paint and
retouch images, and to add special effects. Picture Publisher contains tools
to crop, size, rotate, mirror, and calibrate the image for dependable, high
quality output. Picture Publisher 7 was released in June 1997.
Personal Creativity Products
AMERICAN GREETINGS CREATACARD PRODUCTS. American Greetings Corporation is the
largest publicly owned greeting card company in the world. Working together,
American Greetings and Micrografx have made American Greetings social
expression products available for today's computer user. Customers can shop
on-line for cards or use CreataCard software to combine a selection of
professional American Greetings graphics with their own personalized message
and print the results using their own inkjet or laser printer. Orders can
also be sent via modem to American Greetings where the cards will be
individually printed and mailed. CreataCard Plus was introduced in September
1996 with 3,000 pre-designed cards and CreataCard Gold was introduced in March
1997 with over 4,000 cards, additional artistic designs, and Avery/R/American
Greetings card stock. The Company expects to release version 2 of both
products in time for the Christmas selling season of calendar 1997.
2
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WINDOWS DRAW. This Windows 95 graphics and printing studio for the home and
office includes drawing, diagramming, 3D text and graphics, internet graphics,
photo editing, painting, and a drag-and-drop clip art manager, plus more than
20,000 clip art and photo images. Over 150 custom templates are included
helping users instantly create their own banners, certificates, announcements,
family trees and organization charts. Photos can easily be scanned into
layouts and over 250 customizable TrueType fonts are available to fit any
artistic need. This application brings a full range of sophisticated, user-
friendly graphics tools within reach of any PC user. Windows Draw 5 Graphics
and Print Studio was introduced in September 1996, and the Company expects to
release version 6 during the first quarter of fiscal 1998.
In the year ended June 30, 1997, the Company also marketed software products
designed in conjunction with Hallmark Cards, Incorporated ("Hallmark") and its
subsidiary, Binney & Smith Properties, Inc. ("Binney & Smith"). The Company's
licenses for these products have expired. See "Licensing Agreements" under
"Trends and Risk Factors" in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 for further
discussion of these products.
LICENSING AGREEMENTS
American Greetings Licensing and Development Agreement. The Company entered
into a licensing agreement with American Greetings Corporation for products in
the consumer greeting card market, pursuant to which the Company has developed
American Greetings CreataCard Plus, which shipped in September 1996, and
American Greetings CreataCard Gold, which shipped in March 1997. The Company
pays American Greetings a quarterly fee for the right to use the trademark and
certain creative content based upon sales of the American Greetings products.
The agreement expires on August 31, 1999, and automatically renews for
successive terms of one year each, unless terminated by either party prior to
the expiration of the initial term. See "Licensing Agreements" under "Trends
and Risk Factors" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 for further discussion of the
American Greetings brand name products.
Crayola Licensing and Development Agreement. The Company's product offerings
in fiscal 1997 included Crayola Art Studio 2 and Crayola Art, 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. (a subsidiary of Hallmark Cards, Inc.)
pursuant to license agreements between the Company and Binney & Smith. The
Company paid Binney & Smith a quarterly fee for the right to use the Crayola
trademark based upon sales of the Crayola products. The license agreement to
sell these products expired December 31, 1996, however Micrografx had the
right to sell off inventory on hand at the expiration of the license through
March 31, 1997. See "Licensing Agreements" under "Trends and Risk Factors" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 for further discussion of the Crayola brand name
products.
Hallmark Licensing and Development Agreement. In May 1994, the Company
entered into an agreement with Hallmark Cards, Incorporated ("Hallmark") for
the joint development of personal computer software programs utilizing various
trademarks licensed from Hallmark. Pursuant to this agreement, the Company
developed a software product, Hallmark Connections Card Studio, utilizing the
Hallmark trademark, which was released in the first quarter of fiscal 1996.
The Company paid Hallmark a quarterly fee for the right to use the trademark
and certain creative content based upon sales of the Hallmark product.
Hallmark introduced a product for the consumer greeting card market in
conjunction with Microsoft Corporation which competes directly with the
Company's greeting card products, and Hallmark terminated the Company's
license agreement for the Hallmark Connections Card Studio product effective
in September 1996. See "Licensing Agreements" under "Trends and Risk Factors"
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 for further discussion of Hallmark brand name products.
3
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LOCALIZATION
The Company localizes its business products for distribution in countries
other than the United States, generally by translating user interfaces,
packaging and marketing materials, and product documentation. Windows Draw
and most of the Company's enterprise graphics products and web graphics
products have been localized into various product languages, including German,
French, Japanese, Italian and Spanish. Currently, the personal creativity
products other than Windows Draw are distributed only in English language
versions.
MARKETING AND DISTRIBUTION
The Company maintains sales organizations in most major markets in the world,
including the United States, Germany, France, the United Kingdom, Italy,
Australia and Japan. In addition, the Company has appointed agents in The
Netherlands, Denmark, Switzerland, Spain and Poland. Approximately 52% of the
Company's revenues were generated outside the United States in fiscal 1997,
with 32% from Europe and 17% from Asia Pacific. See Segment Information in
Notes to Consolidated Financial Statements included under Item 8 for
geographical segmentation of revenues, operating results and identifiable
assets.
The Company typically operates with very little backlog of unshipped orders,
due to its capability to ship product within a few days of receipt of a
purchase order. The Company distributes its products through the following
channels: distributors and resellers, corporate sales force, direct to end
users, and through OEMs (original equipment manufacturers).
Distributors and resellers. The Company markets its products primarily through
independent, non-exclusive distributors and resellers located in 27 countries
around the world. Distributors include Computer 2000, Ingram Micro, Merisel,
Inc. and Tech Data Corporation. Resellers include Corporate Software, Inc.,
Gruber Consultrade, MicroCenter, Inc., Snapp LLC and Softmart, Inc. In fiscal
1997, sales to Ingram Micro and Tech Data accounted for 22% and 16% of the
Company's net revenues, respectively, while no other customer accounted for
more than 10% of the Company's net revenues. In fiscal 1996, sales to Ingram
Micro accounted for 17% of the Company's net revenues. The Company offers
sales incentives, training, technical support, and promotional aids to some
resellers. The Company has distributorship agreements with all distributors
and resellers. These agreements are cancelable by either party with specified
prior written notice, and none of these agreements contain minimum or required
purchase commitments by the distributor or reseller.
Corporate sales force. The Company has corporate sales representatives
located at the Company's corporate headquarters in the United States as well
as in Germany, France, the United Kingdom, Italy, The Netherlands, Australia,
Japan, Denmark, Switzerland, Spain and Poland. The Company's corporate sales
representatives provide sales support and assistance to the Company's
resellers and distributors. As such, sales made by the corporate sales force
are generally fulfilled through the distributor and reseller channels.
Direct sales to end users. The Company promotes its products through direct
marketing techniques designed to reach existing and potential customers, and
one-on-many seminars and trade show events. Fulfillment of product to the end
user is accomplished primarily through the services of third-party fulfillment
companies located in the United States, Europe and Japan.
Original Equipment Manufacturers. The Company licenses certain of its products
to OEMs under agreements that grant the OEMs the right to distribute copies of
the Company's products with the OEM's equipment, typically personal computers,
printers and scanners. During fiscal 1997, the Company had OEM agreements
with many companies including Canon Computer Systems, Inc., Landis & Staefa,
Seiko Epson, Mustek, Inc., and Vobis AG.
4
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PROMOTION AND ADVERTISING
The Company's marketing organization is responsible for worldwide product
marketing, planning, positioning, market strategy, and communicating marketing
plans to the Company's sales offices. Local personnel in each sales territory
develop the marketing mix by coordinating media placement, direct mail, public
relations, and channel sales management. The Company utilizes outside
agencies in the development of marketing literature, advertisements,
brochures, demonstration diskettes, and packaging, as well as an outside
public relations agency.
The Company routinely conducts promotions with resellers, distributors, OEMs,
and major customers in an effort to increase sales of its products. The
Company advertises in the personal computer industry trade press and certain
other business publications. To build awareness, the Company offers trial and
preview versions with certain of its software products and participates in
industry trade events.
PRODUCT SUPPORT
The Company offers technical support to its customers through telephone
support, Internet support and fax response. Technical support for the
Company's business products is provided free for 30 days to customers
beginning with the first phone call. Technical support after the grace period
is provided on a charged basis through a priority access toll line, or by
credit card charge or through a pre-purchased annual support plan. Technical
support for the Company's consumer products is provided free on an unlimited
basis. Technical support business hours are from 7:00 a.m. to 5:00 p.m.
Central Standard Time Monday through Friday in the United States. Internet
support is provided 24 hours a day, 7 days per week. The Company generally
outsources product support activities to independent, third-party service
providers in the United States, Europe, Japan and Australia.
PRODUCT DEVELOPMENT
The Company has a continuing program of product development directed toward
the enhancement of existing products based upon current and anticipated
customer needs. The Company's research and product development effort also
emphasizes introduction of new products to broaden the Company's product line
and to reach larger segments of the market.
In order to foster an entrepreneurial spirit among its developers and to
assure better quality control and encourage innovation, the Company adopted a
program to provide certain incentives to developers for the design and
development of versions of key products. Under the program, developers are
eligible to receive stock options under the Company's Incentive and
Nonstatutory Stock Option Plan. Options are granted based upon a formula
involving quarterly gross margins and the closing market price of the
Company's common stock on the last day of each such quarter.
See the Consolidated Statements of Operations and Intangible Assets in the
Notes to Consolidated Financial Statements included under Item 8 for a
discussion of research and development expenditures.
COMPETITION
The personal computer graphics software market is highly competitive. The
Company's competitors include many independent applications software vendors,
such as Adobe Systems Incorporated, Broderbund Software, Inc., Corel Systems
Corporation, Macromedia, Inc., Microsoft Corporation, and Visio Corporation.
The primary competitor for FlowCharter is Visio; and the primary competitors
for Graphics Suite are Adobe, Corel, and Macromedia. Competitors of the
Company's Personal Creativity products include Broderbund and Microsoft.
5
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Most of the Company's existing competitors, as well as a number of potential
competitors, have larger technical staffs, more established and larger
marketing and sales organizations, and significantly greater financial
resources than does the Company. There can be no assurance that competitors
will not develop products that are superior to the Company's applications
software products or that will achieve greater market acceptance at the
Company's expense, possibly resulting in reduced sales of the Company's
applications software products.
The Company believes that the principal competitive factors in the software
applications market include customer demand, product capabilities, ease of
understanding and operating the software, product reliability,
price/performance characteristics, name recognition, and availability and
quality of support services. The Company believes that its products currently
compete favorably with respect to these factors.
See "Trends and Risk Factors" in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7.
PRODUCT PROTECTION
The Company attempts to protect its ownership rights in its software products
with patents, trademarks, copyrights, trade secret laws, and nondisclosure
safeguards, as well as contractual restrictions on copying, disclosure, and
transferability that are incorporated into its software license agreements.
Despite these restrictions, it may be possible for competitors or users to
copy aspects of the Company's products to obtain information that the Company
regards as proprietary. Existing laws protecting intellectual property are
helpful but imperfect aids in preventing unauthorized copying and use of the
Company's products. Monitoring and identifying unauthorized copying and use
of software can be difficult, and software piracy is a persistent problem for
the software industry.
The Company believes that because of the rapid technological change in the
computer software industry, trade secret and copyright protection are less
significant than factors such as the knowledge, ability, and experience of the
Company's personnel, name recognition, and ongoing product innovation.
TRADEMARKS
Micrografx, the Micrografx logo, Picture Publisher, PhotoMagic and Visual
Reality are registered trademarks of Micrografx, Inc. Optima, Webtricity,
Small Business Graphics and Print Studio, Micrografx FlowCharter, Micrografx
Graphics Suite, Micrografx Media Manager, Micrografx Designer, ABC ToolKit,
Simply 3D and Instant 3D are trademarks of Micrografx, Inc. American
Greetings, CreataCard Gold, and CreataCard Plus are either registered
trademarks or trademarks of American Greetings Corporation. ABC SnapGraphics
is a trademark of Cardinal Technologies, used with permission. Crayola
Amazing Art Adventure, Crayola Art Studio and Crayola Art Studio 2 are
trademarks of Binney & Smith. Crayola is a registered trademark of Binney &
Smith, used with permission. Hallmark Connections and Card Studio are
trademarks of Hallmark Licensing, Inc. Microsoft, Windows, and Windows Draw
are either registered trademarks or trademarks of Microsoft Corporation in the
United States and/or other countries. All other products are trademarks or
registered trademarks of their respective holders.
MANUFACTURING
The Company assembles products in the United States and The Netherlands. The
principal materials and components used in the Company's products include
disks, books, other printed material and packaging. The Company outsources a
portion of its manufacturing activity to third parties, including disk
duplication and product assembly. The Company has multiple sources of raw
materials, supplies, and components, and the Company does not currently
anticipate difficulty in securing the raw materials required in connection
with its operations.
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EMPLOYEES
As of June 30, 1997, the Company employed 302 associates, of which 129 were in
product development, 109 in sales, marketing and customer support, and 64 in
finance, operations, and administration. The Company's continued success is
dependent in part upon its ability to attract and retain qualified employees.
Competition for employees in the software industry is intense. To date, the
Company believes that it has been successful in its efforts to recruit and
retain highly qualified employees. None of the Company's employees is subject
to a collective bargaining agreement. The Company believes that its relations
with its employees are good.
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Douglas M. Richard 38 Chief Executive Officer
Larry G. Morris 59 Chief Financial Officer and Treasurer
John E. Dearborn 41 Executive Vice President of Sales and
Marketing
Robert Gutekunst 38 Vice President of Development and
Development Services
Edwin Pearce 43 Vice President Corporate Development,
General Counsel and Secretary
Jeffrey Lewis 37 Managing Director, Asia Pacific
Grant Wickes 38 Vice President Business Development
Douglas M. Richard was appointed Chief Executive Officer in February 1997
after serving as the Company's Interim President since December 1996. A
successful entrepreneur with more than 10 years experience in the technology
industry, Mr. Richard founded Visual Software in 1991, which was acquired by
Micrografx in April 1996. Previously, Mr. Richard founded ITAL Computers, the
largest CAD systems integrator in California, in 1985.
Larry G. Morris was appointed Chief Financial Officer in September 1996 after
serving as the Company's Interim Chief Financial Officer since July 1996.
Prior to joining the Company, Mr. Morris held several key management positions
in his seven years at ADVO, Inc., including Senior Executive Vice President,
Chief Financial Officer, and Chief Administrative and Process Development
Officer.
John E. Dearborn was appointed Executive Vice President of Sales and Marketing
in May 1997. Mr. Dearborn joined the Company as Director of OEM Sales in
February 1991 and has held various positions with the Company, including Vice
President and General Manager, United States; Vice President of Sales; Vice
President, Business Development; and Director of Sales. Prior to joining the
Company, Mr. Dearborn was a co-founder and Vice President, Sales and Marketing
for Astral Development Company, which was acquired by the Company in February
1991.
Robert Gutekunst was appointed Vice President of Development and Development
Services in March, 1996. Mr. Gutekunst joined Micrografx in 1988 and has
served in a number of development positions including Vice President of
Product Development, managing the overall research, development and design of
new and existing products.
Edwin Pearce joined the Company in June, 1996 as Vice President Corporate
Development, General Counsel and Secretary. Prior to joining the Company, he
served since 1984 as Senior Vice President, General Counsel and Secretary for
Hogan Systems Inc., a developer and marketer of computer software systems for
the financial services and banking industries.
Jeffrey Lewis was appointed Managing Director, Asia Pacific in July 1997. Mr.
Lewis joined the Company in July 1996 as Managing Director, Australia & New
Zealand. Prior to joining the Company, Mr. Lewis served WordPerfect and
Novell Inc. in various positions including Regional Education Director, Japan
and India and Enterprise Account Director, International Accounts.
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Grant Wickes was appointed Vice President Business Development in July 1997.
Mr. Wickes joined the Company in October 1989 as Canadian Sales Manager and
has held various positions within the Company, including Vice President
Product Management and Vice President Intercontinental Region.
ITEM 2. PROPERTIES
The Company's headquarters are located in Richardson, Texas, and includes
approximately 67,000 square feet of leased space under an agreement that
expires on August 31, 1999. The leased space is used for research and
development, sales and marketing, manufacturing, operations, and
administration. The Company currently leases office space for development and
sales offices in Los Angeles and San Francisco, California; Portland, Oregon,
and international sales offices in Woking, United Kingdom; Paris, France;
Munich, Germany; Chatswood, Australia and Tokyo, Japan; and a production
control office in Venlo, The Netherlands.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's security holders during the
fourth quarter ended June 30, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on NASDAQ/NMS under the symbol MGXI. As
of June 30, 1997, there were 263 holders of record which represents
approximately 4,500 beneficial shareholders of the Company's common stock.
The Company has not paid any cash dividends on its common stock in the three
most recent fiscal years and has no intention of paying cash dividends in the
foreseeable future.
The following are the high and low sale prices of the Company's stock per the
NASDAQ National Market System:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ------- -------
<S> <C> <C>
September 30, 1995 $13.875 $ 7.625
December 31, 1995 $14.000 $ 9.188
March 31, 1996 $15.125 $11.500
June 30, 1996 $18.625 $12.000
September 30, 1996 $15.125 $ 5.625
December 31, 1996 $ 7.000 $ 5.000
March 31, 1997 $ 6.500 $ 4.000
June 30, 1997 $ 7.750 $ 4.500
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS (in thousands, except per share data)/(1)/
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
- ----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues $64,862 $72,919 $64,345 $61,505 $56,477
Income (loss) from operations $(8,405) $ 1,078 $ 529 $(6,355) $(4,327)
Net income (loss) $(6,187) $ 1,112 $ 695 $(5,768) $(3,472)
Earnings (loss) per share $(0.60) $0.11 $0.07 $(0.64) $(0.40)
Shares used in computing earnings
(loss) per share 10,342 10,136 9,480 8,986 8,754
</TABLE>
BALANCE SHEET DATA (in thousands)/(1)/
<TABLE>
<CAPTION>
AS OF JUNE 30,
- ----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $14,765 $18,634 $16,641 $18,098 $13,656
Working capital $12,937 $21,232 $16,726 $13,861 $16,701
Total assets $39,112 $40,098 $39,290 $38,577 $40,739
Total long-term liabilities $ 1,414 $ 684 $ 903 $ 1,152 $ 4,138
Debt to banks $ - $ - $ 700 $ 1,687 $ 2,951
Shareholders' equity $23,528 $29,105 $25,976 $23,711 $27,315
</TABLE>
(1) On April 2, 1996, Micrografx, Inc. acquired Visual Software, Inc. in a
stock-for-stock acquisition accounted for as a pooling of interest. The
above financial data has been retroactively adjusted to include the results
of Visual for all periods presented. See Notes to Consolidated Financial
Statements.
9
<PAGE>
ITEM 7. 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 is a global leader in
enterprise graphics and personal creativity software and is the acknowledged
pioneer of Windows business and consumer graphics software.
For the fiscal year ended June 30, 1997, the Company reported net revenues of
$64.9 million which represents a decrease of 11% from the $72.9 million for
the year ended June 30, 1996. Including the in-process research and
development charge of $2.3 million, the net loss for the year ended June 30,
1997 was $6.2 million, or $0.60 per share. This compares to net income of
$1.1 million, or $0.11 per share, for fiscal 1996.
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>
YEARS ENDED JUNE 30,
----------------------
1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Net revenues 100% 100% 100%
Cost of revenues 31% 24% 25%
Gross profit 69% 76% 75%
Operating expenses:
Sales and marketing 53% 49% 54%
General and administrative 12% 11% 12%
Research and development 11% 10% 8%
In-process research and development 3% - -
charge
Restructuring charges 3% - -
Acquisition charges - 5% -
Total operating expenses 82% 75% 74%
Income (loss) from operations (13%) 1% 1%
Non operating (income) expense (1%) (1%) (1%)
Income (loss) before income taxes (12%) 2% 2%
Income taxes (2%) 1% 1%
Net income (loss) (10%) 1% 1%
</TABLE>
10
<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
NET REVENUES
Net revenues for fiscal 1997 were $64.9 million, compared to net revenues for
fiscal 1996 of $72.9 million.
The following table sets forth net revenues by product category and the
percentage relationship to total net revenues. The Enterprise Graphics
category includes Micrografx FlowCharter/(R)/, Micrografx Graphics Suite/TM/,
Small Business Graphics and Print Studio/(R)/, Micrografx Designer/TM/, Designer
Power Pack, ABC ToolKit/TM/ and ABC SnapGraphics/TM/. The Web Graphics category
includes Webtricity/TM/, Simply 3D/TM/, Picture Publisher/(R)/, PhotoMagic/(R)/,
Instant 3D/TM/ and Visual Reality/(R)/. The Personal Creativity category
includes American Greetings/(R)/ CreataCard/(R)/ Plus/TM/, American
Greetings/(R)/ CreataCard/(R)/ Gold/TM/, Crayola/TM/ Amazing Art Adventure/TM/,
Crayola/TM/ Art Studio/TM/, Crayola/TM/Art Studio/TM/2, Crayola/TM/Art/TM/, and
Hallmark Connections/TM/ Card Studio/TM/. Revenues from Windows Draw/(R)/ are
categorized as either Enterprise Graphics or Personal Creativity depending on
the Company's assessment of the market or channel into which the product is
sold. Optima!/TM/ was acquired on June 30, 1997 through the acquisition of
AdvanEdge and therefore did not contribute revenue in either year.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1997 % 1996 %
-----------------------------
<S> <C> <C> <C> <C>
Enterprise Graphics $41,542 64% $47,079 64%
Web Graphics 6,250 10% 9,325 13%
Personal Creativity 17,070 26% 16,515 23%
-----------------------------
Total revenues $64,862 100% $72,919 100%
</TABLE>
ENTERPRISE GRAPHICS
The twelve percent decline in Enterprise Graphics revenues resulted from the
decline in sales relating to products that the Company no longer actively
markets which was not fully offset by growth in the sales of products which
the Company continues to actively market. The lack of growth in sales of
products the Company actively markets was primarily a result of a delayed
product release cycle in fiscal 1997. Due to the rapid change in technology
related to personal computers and software, the majority of sales for a
version of a software product occur within the first year of its release.
During the first quarter of fiscal 1997, the Company decided to shift the
release of its Enterprise Graphics software to the third quarter of fiscal
1997, after the close of the Christmas season. While the Company did release
new versions of FlowCharter and Graphics Suite during the third quarter of
fiscal 1997, the delay in introducing these products meant that older titles
such as Designer Power Pack had lost their prior year sales momentum. The
decline in revenue is also attributable to the delay in corporations adopting
Windows 95 and Windows NT, the operating systems for which the Company's
principal business products are designed. The Company's future business
graphics revenues are expected to continue to be substantially dependent upon
sales of Micrografx Graphics Suite and FlowCharter as companies migrate to
Windows 95 and Windows NT software applications. During the year, revenues
from the Micrografx Graphics Suite and the standalone versions of Micrografx
FlowCharter combined represented more than two-thirds of the Company's
Enterprise Graphics revenues. Additionally, the Company released the Small
Business Graphics and Print Studio in the first quarter and revenues for
Windows Draw sold through international corporate channels almost doubled
compared to the prior year. In this category, the Company is continuing to
focus on increasing its corporate license sales.
WEB GRAPHICS
The thirty-three percent decline in Web Graphics resulted from the same
factors that caused the decline in Enterprise Graphics, partially offset by
the introduction of a new product. Web Graphics and Enterprise Graphics
products have the same development and release cycle, thus Webtricity, Simply
3D, and Picture Publisher were released in the third and fourth quarters of
fiscal 1997. While initial sales of these products were strong, it was not
sufficient to offset the decline in revenues related to older products such as
Instant 3D, Visual Reality, and PhotoMagic. The change in the product release
cycle also resulted in lower revenues for Simply 3D and Picture
11
<PAGE>
Publisher in 1997 versus 1996. In this category, the Company is working with
OEM (original equipment manufacturer) customers and has recently announced
alliances with companies such as STB Systems and Matrox Graphics to bundle
certain of these products with graphics accelerator boards they produce.
PERSONAL CREATIVITY
The revenue growth in the Company's Personal Creativity products resulted from
the release of two new greeting card products partially offset by the
discontinuance of two products. The Company introduced American
Greetings/(R)/ CreataCard/(R)/ Plus/TM/ and American Greetings/(R)/
CreataCard/(R)/ Gold/TM/ in the first and third fiscal quarters, respectively,
while the Company's agreements to market the Hallmark and Crayola products
expired in the first and third quarters, respectively. Revenues from the
CreataCard products exceeded prior year sales of the Company's Hallmark
product despite lower prices and the introduction and intense competition from
Microsoft's Hallmark Greetings Workshop. Fiscal 1997 revenues for Windows
Draw remained constant with the prior year. For the year, the CreataCard
products represented more than half of the Company's consumer product
revenues. The Company plans to release new versions of Windows Draw and the
CreataCard products in time for the Christmas selling season. In this
category, the Company also bundles products with those of OEMs. See
"Licensing Agreements" under "Trends and Risk Factors" for further discussion
of Hallmark Connections/TM/ Card Studio/TM/ and the Crayola/TM/ brand name
products.
Net revenues by geographic region and as a percentage of total revenues are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1997 % 1996 %
-----------------------------
<S> <C> <C> <C> <C>
Americas $33,287 51% $35,671 49%
Europe 20,839 32% 25,196 34%
Pacific Rim 10,736 17% 12,052 17%
-----------------------------
Total net revenues $64,862 100% $72,919 100%
</TABLE>
Revenue declines were across all geographic regions and resulted from the
change in the product release schedule as discussed earlier and the lack of
localized versions of Personal Creativity products. The effect of delaying
the release schedule approximately two quarters had a more severe impact on
international locations because of the effort required to "localize" the
product. Localization consists of modifying and translating the software as
well as the box and its contents to a suitable product for another market such
as Germany, France, or Japan. This additional work usually results in an
international version of a product being released the quarter following the
product's English release.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues includes the cost of documentation, diskettes or compact
disks (CDs), packaging and production overhead for the Company's application
software products; amortization of capitalized software development costs and
acquired product rights; and external product royalties. Cost of revenues in
fiscal 1997 were $19.8 million, or 31% of net revenues, compared to $17.5
million or 24% of net revenues in fiscal 1996. The increase in cost of
revenues as a percentage of net revenues for fiscal 1997 is attributable to
lower selling prices on the Company's greeting card software products,
increased amortization of acquired product rights, and increased external
royalties. Also contributing to the rise in cost of revenues as a percent of
revenues was an unfavorable shift in product mix to boxed products which
contain typical content (packaging, manuals, CDs or floppy disks) from OEM and
license revenues which require substantially less content. The Company's
objective is to return the product mix to a more historically normal
relationship between boxed products and OEM and license products.
SALES AND MARKETING EXPENSE
Sales and marketing expenses include the cost of advertising, promotions, co-
op, rebate and incentive programs with distributors, trade shows, marketing,
technical support, and the Company's sales force. Sales and marketing
12
<PAGE>
expenses in fiscal 1997 were $34.1 million, or 53% of net revenues, compared
to $35.1 million, or 49% of net revenues, in fiscal 1996. The decrease in
sales and marketing expense in absolute dollars reflects the efficiencies
gained by eliminating duplicate costs subsequent to the acquisition of Visual,
the recent reduction in executive overhead and management layers, and cost
control measures. The rise in sales and marketing expenses as a percent of
revenue was due primarily to the increased promotional costs related to
selling product through retail channels in conjunction with the rise of
Personal Creativity revenues. The effect of the retail promotions coupled
with an overall retail slowdown during the fiscal fourth quarter resulted in
lower revenues with relatively higher costs.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses include the costs of the Company's
information systems, human resources, finance and administrative functions.
General and administrative expenses in fiscal 1997 were $8.0 million, or 12%
of net revenues, compared to $8.2 million, or 11% of net revenues, in fiscal
1996.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses include compensation, benefits, and
incentives paid to developers. In accordance with Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," the Company capitalizes certain software
development costs incurred after technological feasibility is achieved. These
costs are amortized over the estimated economic life of the products,
generally 12 to 18 months. Amortization of capitalized software development
costs is included in cost of revenues.
Research and development expenses (net of amounts capitalized) in fiscal 1997
were $7.2 million, or 11% of net revenues, compared to $7.6 million, or 10% of
net revenues, in fiscal 1996. Gross research and development expenses, before
capitalization, for fiscal 1997 were $11.0 million, or 17% of net revenues,
compared to $10.9 million, or 15% of revenues for fiscal 1996.
During fiscal 1997, the Company capitalized approximately $3.8 million in
software development costs and amortized $4.0 million in software development
costs. This compares to capitalization of $3.3 million and amortization of
$3.3 million for fiscal 1996.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE
On June 30, 1997, the Company acquired AdvanEdge Technologies, Inc. for
approximately $3.7 million. The purchase price consisted of $1 million in
cash paid on June 30, 1997, $2.5 million to be paid in cash or Company stock
over the subsequent 30 months, and the assumption of certain liabilities. The
acquisition was effected by a merger of a wholly owned subsidiary of the
Company into AdvanEdge Technologies, Inc. A substantial portion of the
purchase price was allocated to in-process research and development based on
an independent valuation study as technological feasibility had not been
established and no alternative commercial use had been identified. The
purchase price allocated to in-process research and development resulted in a
$2.3 million charge to expense, with no related tax benefit in fiscal 1997.
The technology acquired will be utilized in future products. The Company
allocated the total purchase price as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Tangible and intangible assets $1,016
Purchased in-process research and 2,250
development
Goodwill 481
------
Total $3,747
</TABLE>
RESTRUCTURING CHARGES
Effective December 31, 1996, J. Paul Grayson resigned as Chairman of the Board
and Chief Executive Officer of the Company. An evaluation of the Company's
organization and operations resulted in the decision to make certain
organization changes. These changes resulted in a charge of $1.8 million for
the termination of seven members of management. The Company also recorded a
$0.2 million charge related to the termination of commitments made by the
previous management for which no future benefit will be received. As of June
30, 1997, the Company has paid approximately $1.1 million in termination
benefits under this restructuring. Approximately $0.7 million of this charge
remains classified as an accrued liability as of June 30, 1997. The Company
expects that the remaining liability will be paid out over the next six
months.
13
<PAGE>
ACQUISITION CHARGES
In fiscal 1996, Micrografx acquired all of the issued and outstanding capital
stock and options of Visual Software, Inc. ("Visual"), which was accounted for
as a pooling of interests. As a result of this acquisition, the Company
incurred charges for professional services, the write-off of costs related to
certain software products which were no longer actively marketed, exit costs,
and costs to eliminate excess personnel and duplicate leases of approximately
$3,379,000, of which $1,359,000 was non-cash. Components of the acquisition
related charges consisted of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Acquisition transaction costs $1,115
Asset write-downs:
Inventory and accounts receivable 840
Acquired product rights 158
Fixed assets 241
Severance and other 1,025
------
Total acquisition charges $3,379
</TABLE>
The severance charges resulted from the closing of Visual's general and
administrative support office and the related termination of 21 Visual
employees. None of this charge remains as an accrued liability as of June
30, 1997.
EFFECT OF EXCHANGE RATES
Exchange rates during fiscal 1997 had an unfavorable impact on net revenues
reported by the Company. If exchange rates had not changed from their 1996
rates, the Company would have reported approximately $2.6 million more in net
revenues in fiscal 1997. This decrease resulted from the change in exchange
rates of European currencies and the Japanese Yen versus the U.S. Dollar.
Since European manufacturing costs and European and Japanese operating
expenses are also incurred in those local currencies, the relative translation
impact of exchange rates on net income (loss) is less than on revenues.
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 in countries including
Germany, France, the United Kingdom, The Netherlands, and Japan that are
denominated in currencies other than the U.S. dollar. See "Foreign Forward
Exchange Contracts" under "Summary of Significant Accounting Policies" in
Notes to Consolidated Financial Statements.
NONOPERATING (INCOME) EXPENSE
Non operating (income) expense includes interest income, interest expense and
other (income) expense. Other (income) expense, net includes the gain or loss
resulting from revaluation of receivables and payables denominated in foreign
currency, and gains or losses when receivables and payables denominated in
foreign currency are settled. Interest income decreased from $0.9 million in
fiscal 1996 to $0.8 million in fiscal 1997, while unfavorable exchange rate
variations charged $0.5 million to other expense in fiscal 1997 and $0.4
million in 1996.
INCOME TAXES
The Company recognized a tax benefit of $1.9 million in fiscal 1997, compared
to a tax provision of $0.5 million in fiscal 1996. For further information on
income taxes, see Notes to Consolidated Financial Statements.
14
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
On April 2, 1996, the Company acquired all the issued and outstanding capital
stock and options of Visual Software, Inc. ("Visual") for approximately
883,000 shares of Micrografx common stock. The merger was accounted for as a
pooling of interests. Accordingly, the financial information of Micrografx
prior to June 30, 1996 has been restated to retroactively include the accounts
and operations of Visual.
NET REVENUES
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1996 % 1995 %
-----------------------------
<S> <C> <C> <C> <C>
Enterprise Graphics $47,079 64% $48,572 75%
Web Graphics 9,325 13% 10,675 17%
Personal Creativity 16,515 23% 5,098 8%
-----------------------------
Total revenues $72,919 100% $64,345 100%
</TABLE>
ENTERPRISE GRAPHICS AND WEB GRAPHICS
The combined revenues from the Company's Enterprise Graphics and Web Graphics
products declined from fiscal 1995 to fiscal 1996 despite the successful
introduction of Micrografx Graphics Suite, which made up more than 25% of the
Company's Enterprise Graphics revenues. During the Company's fiscal 1996,
Microsoft introduced Windows 95 and Windows NT which changed the standard
computer operating systems from a 16-bit architecture to 32-bit. The effect
of the changing standard resulted in the need to re-write software programs to
run efficiently on this new operating system. The Company focused its efforts
on re-writing its software to stay on the forefront of technology instead of
updating its products for the predecessor Windows 3.1. As a result, the
products introduced by the Company were well-suited for the new operating
systems but customers continued buying products made for Windows 3.1. The
decline in revenue reflects the delay of customers adopting Windows 95 and
Windows NT.
PERSONAL CREATIVITY
The revenue growth in the Company's consumer products was primarily
attributable to the release of the initial version of the Hallmark
Connections/TM/ Card Studio/TM/ in August 1995. During the year ended June 30,
1996, revenue from the Hallmark Connections/TM/ Card Studio/TM/ represented
more than half of the Company's Personal Creativity revenues. In addition,
revenue from Windows Draw and the products licensed under the Crayola brand
name increased year over year. See "Licensing Agreements" under "Trends and
Risk Factors" for further discussion of Hallmark Connections/TM/ Card
Studio/TM/ and the Crayola brand name products.
Net revenues by geographic region and as a percentage of total revenues are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1996 % 1995 %
-----------------------------
<S> <C> <C> <C> <C>
Americas $35,671 49% $28,617 45%
Europe 25,196 34% 26,496 41%
Asia Pacific 12,052 17% 9,232 14%
-----------------------------
Total net revenues $72,919 100% $64,345 100%
</TABLE>
The growth of net revenues during the year was greatest in Japan and the
United States, which grew 46% and 24%, respectively, over fiscal 1995.
Revenues in the United States were positively impacted by the release of
Micrografx Graphics Suite and the Company's Personal Creativity offerings.
Revenue declined slightly in Europe
15
<PAGE>
due to general economic conditions, slower transition to Windows 95 and
Windows NT, and that the Company's consumer products are not distributed in
Europe.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues in fiscal 1996 were $17.5 million, or 24% of net revenues,
compared to $16.1 million or 25% of net revenues in fiscal 1995. The
improvement in cost of revenues as a percentage of net revenues for fiscal
1996 is attributable to a product mix that includes more OEM (products bundled
by original equipment manufacturers) and license revenues, which have lower
cost of revenues than full product versions. This improvement was offset in
part by increased external royalties associated with certain of the Company's
consumer products.
SALES AND MARKETING EXPENSE
Sales and marketing expenses in fiscal 1996 were $35.1 million, or 49% of net
revenues, compared to $34.7 million, or 54% of net revenues, in fiscal 1995.
The decrease in sales and marketing expense as a percentage of revenue
reflects the efficiencies gained by marketing fewer products as a result of
their combination into suite offerings.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses in fiscal 1996 were $8.2 million, or 11%
of net revenues, compared to $7.6 million, or 12% of net revenues, in fiscal
1995. The decrease in general and administrative expenses as a percentage of
net revenues reflects efficiencies realized by leveraging the Company's
organization over a larger revenue base.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses (net of amounts capitalized) in fiscal 1996
were $7.6 million, or 10% of net revenues, compared to $5.4 million, or 8% of
net revenues, in fiscal 1995, an increase of $2.2 million. Gross research
and development expenses, before capitalization, for fiscal 1996 were $10.9
million, or 15% of net revenues, compared to $8.9 million, or 14% of revenues
for fiscal 1995. The increase in gross spending is due to increased
investment across all product lines.
During fiscal 1996, the Company capitalized approximately $3.3 million in
software development costs and amortized $3.3 million in software development
costs. This compares to capitalization of $3.5 million and amortization of
$3.3 million for fiscal 1995.
ACQUISITION CHARGES
On April 2, 1996, Micrografx acquired all of the issued and outstanding
capital stock and options of Visual resulting in a charge of approximately
$3,379,000 as previously discussed.
EFFECT OF EXCHANGE RATES
Exchange rates during fiscal 1996 had an unfavorable impact on net revenues
reported by the Company. If exchange rates had not changed from their 1995
rates, the Company would have reported approximately $0.5 million more in net
revenues in fiscal 1996. Exchange rates during fiscal 1996 had no material
net effect on operating expenses reported by the Company as compared to the
1995 rates.
NONOPERATING (INCOME) EXPENSE
Interest income increased from $0.7 million in fiscal 1995 to $0.9 million in
fiscal 1996, primarily as a result of improvements in short-term interest
rates and an increase in the cash equivalents and short-term investments
balances. Unfavorable exchange rate variations charged $0.4 million to other
expense in fiscal 1996, compared to contributing other income of $0.3 million
in fiscal 1995.
INCOME TAXES
The Company recognized a tax provision of $0.5 million in fiscal 1996,
compared to $0.8 million in fiscal 1995. For further information on income
taxes, see Notes to Consolidated Financial Statements.
16
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected financial results for each of the last
eight quarters through June 30, 1997 (in thousands). These financial results
are unaudited and have been restated from the financial results previously
reported to include the operations of Visual in accordance with pooling-of-
interests accounting. In the opinion of management, however, they have been
prepared on the same basis as the audited financial information and include
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the information for the periods presented when read
in conjunction with the accompanying Consolidated Financial Statements and
notes thereto.
<TABLE>
<CAPTION>
QUARTERS ENDED
- ---------------------------------------------------------------------------------------------------
9/30/96 12/31/96 3/31/97 6/30/97
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 16,589 $16,113 $ 17,124 $15,036
Gross profit 11,987 10,774 11,990 10,327
Income (loss) from operations 265 (4,069)/1/ 213 (4,814)/2/
Net income (loss) 334 (2,734)/1/ 121 (3,908)/2/
Income (loss) per share $0.03 $ (0.27)/1/ $0.01 $ (0.37)/2/
Shares used in computing income (loss)
per share 10,443 10,239 10,235 10,427
<CAPTION>
QUARTERS ENDED
- ---------------------------------------------------------------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 15,678 $22,143 $ 18,355 $16,743
Gross profit 11,930 17,058 13,718 12,716
Income (loss) from operations 70 2,439 545 (1,976)/3/
Net income (loss) (119) 1,695 487 (951)/3/
Income (loss) per share $(0.01) $0.17 $ 0.05 (0.09)/3/
Shares used in computing income (loss)
per share 9,666 9,997 10,177 10,091
</TABLE>
/1/ The financial results for the quarter ended December 31, 1996, include the
restructuring related charge of $2.0 million. See Notes to Consolidated
Financial Statements.
/2/ The financial results for the quarter ended June 30, 1997, include the
AdvanEdge related in-process research and development charge of $2.3
million. See Notes to Consolidated Financial Statements.
/3/ The financial results for the quarter ended June 30, 1996, include the
Visual related acquisition charge of $3.4 million. See Notes to Consolidated
Financial Statements.
17
<PAGE>
The following table presents selected financial results as reported for each
of the last four quarters through June 30, 1996 (in thousands) as previously
reported on Forms 10-Q prior to the restatement for the Visual merger. The
quarter ended June 30, 1996, includes the operations of Visual subsequent to
the April 2, 1996, acquisition. These financial results are unaudited and are
presented for comparative purposes.
<TABLE>
<CAPTION>
QUARTERS ENDED (PREVIOUSLY REPORTED)
- -----------------------------------------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96
---------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 15,050 $ 20,341 $ 17,356 $ 16,743
Gross profit $ 11,466 $ 15,669 $ 13,140 $ 12,716
Income (loss) from operations $ 852 $ 2,886 $ 2,090 $ (1,976)
Net income (loss) $ 440 $ 2,020 $ 1,595 $ (951)
Income (loss) per share $0.05 $0.22 $0.17 $(0.09)
Shares used in computing income
(loss) per share 9,109 9,203 9,369 10,091
</TABLE>
TRENDS AND RISK FACTORS
The following discusses trends and risk factors inherent in the Company's
business environment.
NEW PRODUCT INTRODUCTIONS
The Company's future financial performance will depend in significant part
upon the successful development and introduction of new and enhanced versions
of its products and customer acceptance of these products, of which there can
be no assurance. Additionally, the timing of new product introductions which
are updates of previously released products can have a significant impact on
profitability of the older version of the product. To the extent that the
distributors were unable to sell the older version at the rate they
anticipated when they purchased the product, additional marketing expenditures
are generally required to promote the older version in order to reduce
stocking levels in anticipation of the release of the new version of the
product.
LICENSING AGREEMENTS
The Company's business strategy includes entering into licensing agreements
with third parties in an effort to increase brand awareness for the Company's
products by associating the Micrografx name with products and services which
customers already know. The Company has entered into a licensing agreement
with American Greetings Corporation relating to American Greetings CreataCard
Plus and the American Greetings CreataCard Gold products. The agreement
expires on August 31, 1999, and automatically renews for successive terms of
one year each, unless terminated by either party prior to the expiration of
the initial term.
The Company's product offering in fiscal 1997 included Hallmark Connections
Card Studio, pursuant to a license agreement between the Company and Hallmark
Cards, Inc. This product represented $3.0 million or 4.6% of fiscal 1997
revenues. The license expired in September 1996.
The Company's product offering in fiscal 1997 included Crayola Art and Crayola
Art Studio 2, pursuant to a license agreement between the Company and Binney &
Smith Properties, Inc., a subsidiary of Hallmark Cards, Inc. Together these
products accounted for $2.7 million or 4.1% of fiscal 1997 revenues. This
license agreement expired on December 31, 1996, at which time the Company
discontinued production of these products, except that it was contractually
allowed to sell off existing inventories through March 31, 1997.
18
<PAGE>
TECHNOLOGICAL CHANGE
The personal computer industry is subject to rapid technological change and
continuing development of new and enhanced operating environments. The
success of the Company's products will depend to a large extent upon the
Company's ability to continue to develop and introduce innovative and
competitive products on a cost-effective and timely basis, of which there can
be no assurance.
COMPETITION
The personal computer applications software market is highly competitive. The
Company's competitors include many companies who have larger technical staffs,
more established and larger marketing and sales organizations and
significantly greater financial resources than does the Company.
Additionally, merger activity in the applications software market serves to
strengthen the merging companies' ability to compete.
INTERNATIONAL OPERATIONS
The Company anticipates that international net revenues will continue to
account for a significant portion of net revenues, which will result in a
significant portion of the Company's net revenues being subject to the risks
inherent in international operations. These risks include unexpected changes
in regulatory requirements, exchange rates, tariffs and other barriers,
difficulties in staffing and managing foreign subsidiary operations, and
potentially adverse tax consequences.
CHANGES IN DISTRIBUTION CHANNELS
The retail distribution channel for software products is currently undergoing
significant changes, with the expansion of software products into mass
merchandisers and computer superstores. Additionally, the Company distributes
its consumer products through channels not typically associated with software
products, including mass merchandisers and toy stores. The Company's success
depends in part on the ability to identify and respond to changes in the
distribution channel.
SEASONALITY
The Company's results of operations are subject to significant quarterly
variations. Causes of these variations include seasonality of the retail
software market, delays in the introduction of new or enhanced versions of the
Company's products, timing and cost of new product upgrades and introductions,
reduced distribution channel sales preceding the introduction of updated
products, and large distribution channel sales following the introduction of
new or updated products. Historically, as is typical in the retail software
industry, the Company has experienced some seasonal variations in demand, with
sales declining somewhat in the summer months and increasing somewhat during
the Christmas quarter and first calendar quarter.
UPGRADES
Product upgrades, which enable users to upgrade from earlier versions of the
Company's products, or from competitors' products, typically have lower prices
than new products, resulting in lower gross profit margins. The Company plans
to continue upgrading successful products in the future.
INTERNET
The Company provides products for use in the Internet market. The Internet
market is rapidly evolving and is characterized by an increasing number of
market entrants. As is typical in the case of a new and evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. Critical issues concerning the
commercial use of the Internet (including security, reliability, cost, ease of
use and access, and quality of service) remain unresolved and may impact the
growth of Internet use, together with the software standards and electronic
media employed in such markets.
GROSS PROFIT
Product margins vary according to product mix and the geographical region in
which the products are sold. Changes in product mix, including the mix of
boxed product (full and upgrade product versions) relative to the amount of
non-boxed product (OEM and corporate licenses), the mix of Enterprise and Web
Graphics products to Personal Creativity products (which carry lower margins),
the transition to "suite" products accompanied with value-pricing, as well as
changes in the components of direct costs, have in the past and may in the
future negatively affect the Company's gross profit.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company's principal sources of liquidity consisted of
cash and cash equivalents of $11.2 million and short-term investments of $3.6
million.
CASH FLOWS DURING FISCAL 1997
For the year ended June 30, 1997, cash used in investing activities exceeded
cash provided by operating and financing activities, resulting in a decrease
in cash and cash equivalents of $2.6 million. Cash flows from operating
activities generated $6.0 million in cash during fiscal 1997. The net loss
and resulting increase in deferred tax assets was more than offset by the
adjustments due to depreciation, the in-process research and development
charge, and an increase in accounts payable. Accounts receivable allowances
increased primarily due to increases of $0.7 million in accrued rebates and
incentives and $0.5 million in co-op funds. These increases reflect the
Companies strategic decision to increase the use of distributor rebates.
Cash flows from investing activities used $9.2 million during fiscal 1997 and
consisted primarily of additions to capitalized software development costs and
acquired product rights and purchases of property and equipment. Expenditures
for property and equipment during fiscal 1997 were $1.9 million and consisted
primarily of computer and equipment upgrades. Investments of $7.7 million
were also made in capitalized software development costs and acquired product
rights related to the development of new and enhanced versions of the
Company's products. Cash flows from financing activities provided $0.7
million in cash during fiscal 1997, due primarily to proceeds received from
employee stock programs. As discussed in the footnotes to the financial
statements, approximately $0.7 million of the $2.0 million restructuring
charge remains classified as an accrued liability as of June 30, 1997. The
Company expects to pay this amount during the next six months.
CAPITAL RESOURCES
As of June 30, 1997, the Company had no significant commitments for capital
expenditures.
The Company believes that cash flow from operations and existing cash will be
sufficient to meet the Company's capital requirements in the short term. The
Company believes that thereafter its liquidity requirements could be met with
cash flow from operations, and existing cash and short-term investment
balances.
OTHER MATTERS
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of the respective balance sheet dates,
and revenue and expense accounts of these operations are translated at average
exchange rates during the month the transactions occurred. Unrealized
translation gains and losses are included as an adjustment to shareholders'
equity. The Company has mitigated a portion of its currency exposure through
decentralized sales, marketing and administrative operations. When necessary,
the Company may also hedge to prevent material exposure.
LITIGATION
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", (SFAS 128) which will become effective December 15, 1997. Early
adoption of the standard is not permitted. Upon adoption in the second
quarter of fiscal 1998, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements, the dilutive effect of stock options will be
excluded from primary earnings per share calculation. Adoption of SFAS 128
will not materially impact either primary or fully diluted earnings (loss) per
share for the years ended June 30, 1997, 1996, and 1995 because the dilutive
effect of stock options was not significant.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information". Both standards become effective in 1998. Early adoption of
20
<PAGE>
SFAS130 is permitted, and early adoption of SFAS 131 is encouraged. The
effects of both of these standards on the Company are currently being
determined.
FORWARD-LOOKING STATEMENTS
The Company notes that, with the exception of historical information, the
matters discussed above are forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in these forward-looking statements. Factors that could
cause or contribute to such differences include, without limitation, changes
in the market, new products and announcements from other companies, changes in
technology, and competition from larger, more established competitors as
discussed in the "Trends and Risk Factors" of this item.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30,
------------------
1997 1996
------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,150 $13,790
Short-term investments 3,615 4,844
Accounts receivable, net 9,610 9,417
Inventories 1,287 1,284
Deferred tax asset 404 497
Other current assets 1,041 1,709
------- -------
Total current assets 27,107 31,541
Property and equipment, net 2,703 3,150
Capitalized software development costs, net 3,284 3,451
Acquired product rights, net 3,581 1,831
Other assets 2,437 125
------- -------
Total assets $39,112 $40,098
======= =======
See accompanying notes.
</TABLE>
22
<PAGE>
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
--------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,127 $ 4,230
Accrued compensation and benefits 1,629 1,422
Other accrued liabilities 2,862 2,909
Deferred revenue 1,205 390
Notes payable to related parties 1,100 -
Restructuring accrual 670 -
Accrued royalties 536 538
Income taxes payable 41 820
------- -------
Total current liabilities 14,170 10,309
Notes payable to related parties - noncurrent 1,400 -
Deferred income taxes - 632
Other liabilities 14 52
Shareholders' equity:
Common stock, $.01 par value, 20,000 shares
authorized; 10,940 and 10,800 shares issued 109 108
Additional capital 29,452 28,677
Retained earnings (deficit) (1,501) 4,686
Cumulative translation adjustment (1,344) (1,230)
Less - treasury stock (477 and 469 shares),
at cost (3,188) (3,136)
------- -------
Total shareholders' equity 23,528 29,105
------- -------
Total liabilities and shareholders' equity $39,112 $40,098
======= =======
</TABLE>
See accompanying notes.
23
<PAGE>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Net revenues $64,862 $72,919 $64,345
Cost of revenues 19,784 17,497 16,148
------- ------- -------
Gross profit 45,078 55,422 48,197
Operating expenses:
Sales and marketing 34,121 35,123 34,703
General and administrative 7,938 8,204 7,607
Research and development 7,210 7,638 5,358
In process research and development 2,250 - -
charge
Restructuring charges 1,964 - -
Acquisition charges - 3,379 -
------- ------- -------
Total operating expenses 53,483 54,344 47,668
------- ------- -------
Income (loss) from operations (8,405) 1,078 529
Interest income (778) (878) (734)
Interest expense 16 14 83
Other (income) expense 454 353 (277)
------- ------- -------
Total non operating (income) expense (308) (511) (928)
------- ------- -------
Income (loss) before income taxes (8,097) 1,589 1,457
Income tax provision(benefit) (1,910) 477 762
------- ------- -------
Net income (loss) $(6,187) $ 1,112 $ 695
======= ======= =======
Earnings (loss) per share $ (0.60) $ 0.11 $ 0.07
======= ======= =======
Shares used in computing
earnings (loss) per share 10,342 10,136 9,480
======= ======= =======
</TABLE>
See accompanying notes
24
<PAGE>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
---------------- ADDITIONAL RETAINED TRANSLATION TREASURY
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Software, Inc. 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
Common stock issued under stock
option plan 421 4 2,841 - - - 2,845
Common stock issued under stock
purchase plan 144 2 671 - - - 673
Common stock issued by Visual
Software, Inc. 103 1 418 - - - 419
Translation of foreign currency
financial statements - - - - (951) - (951)
Treasury stock acquired (80 shares) - - - - - (969) (969)
Net income - - - 1,112 - - 1,112
--------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 10,800 108 28,677 4,686 (1,230) (3,136) 29,105
Common stock issued under stock
option plan 12 - 85 - - - 85
Common stock issued under stock
purchase plan 128 1 690 - - - 691
Translation of foreign currency
financial statements - - - - (114) - (114)
Treasury stock acquired (8 shares) - - - - - (52) (52)
Net loss - - - (6,187) (6,187)
--------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 10,940 $109 $29,452 $(1,501) $(1,344) $(3,188) $23,528
==========================================================================
</TABLE>
See accompanying notes
25
<PAGE>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(6,187) $ 1,112 $ 695
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 9,145 8,492 8,113
In-process research and development
charge 2,250 - -
Acquisition related charge - 1,359 -
Deferred income taxes and other (2,327) 187 234
Changes in assets and liabilities,
net of effects of purchase of
AdvanEdge:
(Increase) decrease in accounts receivable (66) (810) (4,141)
(Increase) decrease in inventories (3) (161) 544
(Increase) decrease in other current assets 670 (267) 93
(Decrease) increase in payables and other
current assets 3,311 (1,542) (342)
(Decrease) increase in income taxes payable (797) 110 751
------- ------- --------
Total adjustments 12,183 7,368 5,252
------- ------- --------
Net cash provided by operating activities 5,996 8,480 5,947
------- ------- --------
Cash flows from investing activities:
Proceeds from maturities of short-term investments 8,953 6,778 7,441
Purchases of short-term investments (7,724) (6,310) (5,507)
Payment for purchase of acquisition, net of cash
acquired (918) - -
Capitalization of software development costs
and purchases of acquired product rights (7,686) (6,115) (5,324)
Payments for purchases of property and equipment (1,872) (1,679) (2,447)
Other - 499 518
------- ------- --------
Net cash used in investing activities (9,247) (6,827) (5,319)
------- ------- --------
Cash flows from financing activities:
Proceeds from employee stock programs 777 3,518 779
Treasury stock acquired (52) (969) (833)
Proceeds from notes payable - - 700
Payments of notes payable - (790) (1,570)
Increase in due to related parties - - 938
Tax benefits realized from stock transactions - - 49
------- ------- --------
Net cash provided by financing activities 725 1,759 63
------- ------- --------
Effect of exchange rates on cash and cash equivalents (114) (951) (213)
Net increase (decrease) in cash and cash equivalents (2,640) 2,461 478
Cash and cash equivalents, beginning of year 13,790 11,329 10,851
------- ------- --------
Cash and cash equivalents, end of year $11,150 $13,790 $11,329
======= ======= =======
Supplemental Cash Flow Information
Cash paid for --
Interest $ - $ 4 $ 66
Income taxes $ 1,035 $ 355 $ 9
</TABLE>
See accompanying notes.
26
<PAGE>
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
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.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
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.
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 consolidated financial statements prior to the acquisition
have been restated to retroactively include the accounts and operations of
Visual for all periods presented (Note 2).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
INVENTORIES
Inventories are stated at the lower of cost or market using a weighted-average
method. Finished goods inventories include costs of material, labor and
overhead. Major classes of inventory include the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------
1997 1996
------- --------
<S> <C> <C>
Raw materials $ 822 $ 849
Finished goods 465 435
------- --------
$ 1,287 $ 1,284
======= ========
</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:
Computers and equipment 2-5 Years
Software 2-5 Years
Furniture and fixtures 5-7 Years
Leasehold improvements Shorter of Lease Term or Asset Life
CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND ACQUIRED PRODUCT RIGHTS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," 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, generally 12 to 18
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.
27
<PAGE>
FOREIGN CURRENCY
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 net foreign currency exchange gains (losses) were $(416,000), $(399,000),
and $268,000 in fiscal years 1997, 1996 and 1995, respectively.
FOREIGN FORWARD EXCHANGE CONTRACTS
The Company periodically enters into forward foreign exchange contracts to
hedge existing or projected exposure to changing foreign exchange rates. This
exposure results from the Company's foreign operations in countries including
Germany, France, the United Kingdom, The Netherlands, and Japan that are
denominated in currencies other than the U.S. dollar. These forward contracts
are not held for trading purposes.
These contracts generally have maturities of 90 days or less and contain an
element of risk that the counterparty may be unable to meet the terms of the
contracts. However, the Company minimizes such risk by limiting the
counterparty to major financial institutions. Management believes the risk of
incurring such losses is remote, and any losses therefrom would be immaterial.
Gains and losses associated with these forward contracts are recognized in
other (income) expense. At June 30, 1997 and 1996 the gains and losses
recognized were not material. During fiscal 1995, the Company recognized
approximately $167,000 in losses associated with forward contracts.
At June 30, 1997, the Company had forward contracts outstanding to sell 135
million Japanese Yen for approximately $1.1 million. The difference between
the carrying amount and current market settlement value of the forward
contracts was not significant.
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 resellers.
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 prove to be defective.
The Company periodically offers rebates to distributors, the amounts of which
are primarily based on sales volume and are accrued as reductions in revenue
and in a contra-receivable account. The Company paid rebates of $2,041,000,
$1,249,000, and $0 in 1997, 1996, and 1995, respectively. The Company also
offers distributors and resellers 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 the related revenue is
recognized. The Company paid co-op funds of $2,852,000, $2,197,000, and
$834,000 in 1997, 1996, and 1995, respectively.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was
$5,135,000, $5,528,000, and $8,429,000 in 1997, 1996 and 1995, respectively.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees and
directors with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees," because
the alternative fair value accounting method provided for under FASB Statement
No. 123, "Accounting for Stock-based Compensation," requires the use of
valuation models that were not developed for use in valuing employee stock
options. Accordingly, the Company does not recognize compensation expense for
stock option grants.
28
<PAGE>
EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share is computed by dividing net income (loss) by
the weighted average number of common and common equivalent shares outstanding
during each period. Shares issuable upon exercise of options are included in
the computation of earnings per common and common equivalent share to the
extent they are dilutive. For the year ended June 30, 1997 the common
equivalent shares had an antidilutive effect on the loss per share
calculation. Accordingly, the loss per share calculation for such period is
based on the weighted average number of common shares outstanding during the
year of 10,342,000.
For the years ended June 30, 1996 and 1995, there were 9,798,000 and 9,455,000
weighted average common shares outstanding, respectively, and 338,000 and
25,000 common stock equivalents, respectively, from the Company's stock option
plans.
Fully diluted earnings per share was not materially different from primary
earnings per share for all years presented.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", (SFAS 128) which
will become effective December 15, 1997. Early adoption of the standard is
not permitted. Upon adoption, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements, the dilutive effect of stock options
will be excluded from primary earnings per share calculation. Adoption of
SFAS 128 will not have a material effect on either primary or fully diluted
earnings (loss) per share for the years ended June 30, 1997, 1996 and 1995
because the dilutive effect of stock options was not significant.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform with
current year presentation.
2. ACQUISITIONS
On June 30, 1997, the Company acquired the assets of AdvanEdge Technologies,
Inc. ("AdvanEdge") for approximately $3.7 million, which has been accounted
for as a purchase. Goodwill related to this acquisition will be amortized on
a straight-line basis over a period of seven years.
In connection with the acquisition of AdvanEdge, the Company agreed to make
future payments to the former shareholders of AdvanEdge as a part of the
purchase price. The total consideration to be paid is $2.5 million with $1.1
million due June 30, 1998, $1.0 million due June 30, 1999, and $0.4 million
due January 5, 2000. Of the total consideration, at least $1.0 million is
payable in cash with the remainder payable in cash or the Company's $.01 par
Common Stock at the Company's discretion provided that the average closing
price of the Company's Common Stock on the Nasdaq National Market on each due
date described above is at least $4.50 per share.
On April 2, 1996, the Company acquired all of the issued and outstanding
capital stock and options of 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 were engaged in
the development and marketing of 3D 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 0.2930 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 883,000 shares of the common stock
of Micrografx were issued in connection with these transactions.
29
<PAGE>
3. 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. All short-term investments have
maturities within one year of the balance sheet date. Cash and cash equivalents
and short-term investments consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents:
Cash $ 4,049 $ 2,475
Money market funds 1,484 3,819
Commercial paper 5,617 7,496
------- -------
Total cash and cash equivalents 11,150 13,790
Short-term investments:
U.S. Treasury securities - 1,497
Government backed issues 3,115 3,075
Money market funds - 272
Commercial paper 500 -
------- -------
Total short-term investments 3,615 4,844
Total cash and short-term investments $14,765 $18,634
======= =======
</TABLE>
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 cash equivalents and short-term investments as available-for-
sale. The available-for-sale securities are carried at cost which
approximates fair value. Gross realized and unrealized gains and losses for
these securities were not material at June 30, 1997 and 1996. The fair value
of securities is based on quoted market prices, where available, or quotes
from external pricing sources such as brokers for those or similar investments
and issues. Gross sale proceeds from available-for-sale securities were
$133,269,000, $110,450,000, and $96,290,000 in 1997, 1996, and 1995,
respectively. The cost of available-for-sale securities sold is based on the
specific identification method.
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------
1997 1996
------- -------
<S> <C> <C>
Trade Receivables $13,741 $12,509
Allowances (4,131) (3,092)
------- -------
Accounts receivable, net $ 9,610 $ 9,417
======= =======
</TABLE>
Allowances consist of reserves for returns, reserves for bad debt and accruals
for co-op and incentive programs.
At June 30, 1997 and 1996, approximately 74% and 68%, respectively, of trade
receivables represented amounts due from ten customers. At June 30, 1997, the
Company had two customers with receivable balances of 30% and 21% of trade
receivables. At June 30, 1996, the Company had two customers with receivable
balances of 28% 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.
30
<PAGE>
The Company distributes its products domestically through independent, non-
exclusive distributors, authorized resellers, and its corporate sales
representatives located throughout the United States. The Company distributes
its products internationally through independent, non-exclusive distributors
located primarily in Western Europe and Japan. In fiscal 1997, the Company
had two customers whose sales accounted for 22% and 16% of net revenues; in
fiscal 1996, one customer's sales accounted for 17% of net revenues; in fiscal
1995, two customers' sales accounted for 15% and 11% of net revenues.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------
1997 1996
------- -------
<S> <C> <C>
Computers and equipment $10,231 $ 9,830
Furniture and fixtures 541 522
Leasehold improvements 654 545
------- -------
11,426 10,897
Less - accumulated depreciation (8,723) (7,747)
------- -------
Property and equipment, net $ 2,703 $ 3,150
======= =======
</TABLE>
6. INTANGIBLE ASSETS
Capitalized software development costs and acquired product rights consist
of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------
1997 1996
------- -------
<S> <C> <C>
Capitalized software development costs $ 5,270 $ 6,213
Less - accumulated amortization (1,986) (2,762)
------- -------
Capitalized software development costs, net $ 3,284 $ 3,451
======= =======
Acquired product rights $ 5,940 $ 3,957
Less - accumulated amortization (2,359) (2,126)
------- -------
Acquired product rights, net $ 3,581 $ 1,831
======= =======
</TABLE>
During the years ended June 30, 1997, 1996, and 1995, the Company capitalized
$7,686,000, $6,115,000, and $5,324,000, 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, 1997, 1996, and 1995 were $6,828,000,
$5,573,000, and $5,445,000, respectively. Additionally, the Company wrote down
capitalized software development costs and acquired product rights to net
realizable value by approximately $220,000, $43,000, and $93,000 in fiscal
1997, 1996, and 1995, respectively.
7. LINES OF CREDIT
The Company's $6 million line of credit was renewed effective January 1, 1996
and expired on January 5, 1997. Commitment fees related to the line of credit
were 0.25% of the unused line of credit per year. At June 30, 1996, no
borrowings on the line were outstanding.
8. INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of existing differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Current and noncurrent deferred income tax assets and
liabilities are classified on the
31
<PAGE>
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 for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ - $ 13 $ 143
State and local - - 6
Foreign 402 721 440
------- ------- -------
Total current provision 402 734 589
Deferred provision (benefit) (2,312) (257) 173
------- ------- -------
Total income tax provision (benefit) $(1,910) $ 477 $ 762
======= ======= =======
</TABLE>
The provision for income taxes is reconciled with the federal statutory rate as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------
1997 1996 1995
------- ----- -------
<S> <C> <C> <C>
Provision (benefit) computed at
federal statutory rate $(2,753) $ 540 $ 495
Nondeductible acquisition expenses - 358 -
In-process research and development 765 - -
Foreign tax rate differential - 214 67
Change in valuation allowance - (862) 80
Other 78 227 120
------- ----- -------
Tax provision (benefit) $(1,910) $ 477 $ 762
======= ===== =======
</TABLE>
Components of the net deferred income tax assets (liabilities) are as follows
(in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------
1997 1996
------- -------
<S> <C> <C>
Deferred Tax Assets
Tax credit carryforwards $ 1,949 $ 1,953
Net operating loss carryforward 3,504 2,304
Depreciation 365 326
Reserves and other accrued expenses not
currently deductible for tax purposes 1,499 1,131
Undistributed earnings in foreign
subsidiaries 27 -
------- -------
Total deferred tax assets 7,344 5,714
Deferred Tax Liabilities
Capitalized software development costs
currently deductible for tax purposes (2,334) (1,796)
Undistributed earnings in foreign - (788)
subsidiaries
Other (229) (402)
------- -------
Total deferred tax liabilities (2,563) (2,986)
Total net deferred tax assets 4,781 2,728
Valuation allowance (2,871) (2,863)
------- -------
Net deferred tax assets (liabilities),
net of valuation allowance $ 1,910 $ (135)
======= =======
</TABLE>
32
<PAGE>
At June 30, 1997, the Company has research and development tax credit
carryforwards of $1,690,000 for Federal tax purposes, which expire between
2006 and 2009. In addition, the Company has alternative minimum tax credit
carryforwards of $259,000 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 $5,254,000 exclusive of Visual's losses that
expire between 2009 and 2011. Visual had net operating loss carryforwards of
$5,053,000 for federal tax purposes, which expire between 2006 and 2009. The
annual utilization of these carryforwards will be limited.
As required by SFAS 109, the Company has recognized deferred tax assets for
these tax credit and net operating loss 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 provided a valuation allowance with respect to a portion of the
deferred tax assets as the Company does not deem the full recovery of such
amounts at this time to be more likely than not. The valuation allowance was
increased by $15,000 in fiscal 1997 for stock option deductions, the benefit
of which will be credited to additional capital, rather than a reduction of
income tax expense, when realized. Management's assessment is based upon
current and anticipated operations, current tax laws, and other qualitative
and quantitative factors. In subsequent periods, the Company may adjust the
valuation allowance, to the extent that utilization of the deferred tax asset
is more likely than not, as defined by SFAS 109.
9. SHAREHOLDERS' EQUITY
PREFERRED STOCK
None of the Company's 10,000,000 authorized shares of Preferred Stock are
issued at June 30, 1997.
STOCK OPTIONS
The Company has reserved 4,800,000 shares of its Common Stock for issuance in
connection with its stock option plans for employees and non-employees, which
are administered by the Company's Stock Option Committee.
Each option issued under the plans 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 reissuance.
A summary of the Company's stock option activity, and related information for
the years ended June 30, 1995, 1996, and 1997, follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,487,226 $6.60 1,128,744 $ 6.64 1,213,002 $9.16
Granted 471,338 6.39 625,782 11.80 1,674,024 5.57
Exercised (65,276) 3.68 (421,008) 6.76 (12,053) 7.08
Canceled (764,544) 6.66 (120,516) 7.71 (1,256,332) 8.39
--------- --------- ---------
Outstanding at end of year 1,128,744 1,213,002 1,618,641
========= ========= =========
Exercisable at end of year 322,326 $6.81 183,773 $ 7.48 289,963 $6.98
========= ========= =========
Weighted-average fair
value of options granted
during the year $8.07 $3.84
========= =========
</TABLE>
At June 30, 1997, the exercise price of outstanding options ranged from $4.50
to $16.00 per share with a weighted average exercise price of $6.06. The
weighted average remaining contractual life of such options was 9.0 years.
33
<PAGE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," (SFAS 123) requires the disclosure of pro forma net
income and earnings per share information computed as if the Company had
accounted for its employee stock options granted subsequent to June 30, 1995,
under the fair value method set forth in SFAS 123. The fair value for these
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1996 and
1997, respectively: a risk-free interest rate of 5.5% and 5.8%, a dividend
yield of 0%, and a volatility factor of .8113 for 1996 and 1997. In addition,
the fair value of these options was estimated using an expected life of five
years for options granted by the Company.
On May 1, 1997, the Board of Directors approved a plan to reprice the
Company's outstanding stock options. As a result, 627,600 options with
exercise prices ranging from $4.94 to $16.00 per share were repriced at $4.94
per share, the fair market value at the date of the repricing. These options
will vest 25% pro rata over the first three years following the date of grant
and 75% over the first to occur of four years from the date of the grant or
25% ratably upon the Company's stock price reaching specified thresholds. The
fair value of these options was estimated at the date of grant using the
factors previously described, substituting 6.6% as the May 1, 1997 risk-free
interest rate. This repricing has been reflected in the table above as part
of the options granted and canceled during 1997.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. In addition, because SFAS 123 is applicable only to options granted
subsequent to June 30, 1995, the pro forma information is not necessarily
indicative of future amounts until SFAS 123 is applied to all outstanding
options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
Year ended
June 30,
1997 1996
------- -----
<S> <C> <C>
Pro forma net income (loss) $(6,804) $ 863
======= =====
Pro forma net income (loss)
per common share $ (0.66) $0.09
======= =====
</TABLE>
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,
1997, 800,000 shares were authorized for the plan, approximately 677,000
shares were issued, and approximately $75,000 had been withheld for the
purchase of shares for the November 1997 offering period.
10. EMPLOYEE BENEFIT 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 ($9,500 in 1997),
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 1997, 1996 and 1995, the Company
contributed approximately $192,000, $128,000, and $86,000 to the plan,
respectively. At June 30, 1997, there were approximately 137 participants in
the plan.
34
<PAGE>
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office and warehouse space and certain equipment under
non-cancelable operating lease agreements. Rent expense of $1,455,000,
$1,348,000, and $1,496,000 was recorded for the years ended June 30, 1997,
1996 and 1995, respectively. Future minimum lease payments for operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending June 30,
- -----------------------
<S> <C>
1998 $1,070
1999 939
2000 505
2001 316
2002 310
Thereafter 115
------
$3,255
======
</TABLE>
LITIGATION
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.
12. RESTRUCTURING AND ACQUISITION CHARGES
RESTRUCTURING CHARGES
Effective December 31, 1996, J. Paul Grayson resigned as Chairman of the Board
and Chief Executive Officer of the Company. An evaluation of the Company's
organization and operations resulted in the decision to make certain
organization changes. These changes resulted in a charge of $1.8 million for
the termination of seven members of management. The Company also recorded a
$0.2 million charge related to the termination of commitments made by the
previous management for which no future benefit will be received. As of June
30, 1997, the Company has paid approximately $1.1 million in termination
benefits under this restructuring. Approximately $0.7 million of this charge
remains classified as an accrued liability as of June 30, 1997.
ACQUISITION CHARGES
On April 2, 1996, Micrografx acquired all of the issued and outstanding
capital stock and options of Visual, which was accounted for as a pooling of
interests. As a result of this acquisition, the Company incurred charges for
professional services, the write-offs of costs related to certain software
products which were no longer actively marketed, exit costs, and costs to
eliminate excess personnel and duplicate leases of approximately $3,379,000,
of which $1,359,000 was non-cash.
The fiscal 1996 charges resulting from the acquisition consisted of the
following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Acquisition transaction costs $1,115
Asset write-downs:
Inventory and accounts receivable 840
Acquired product rights 158
Fixed assets 241
Severance and other 1,025
------
Total acquisition charges $3,379
======
</TABLE>
The severance charges resulted from the closing of Visual's general and
administrative support office and the related termination of 21 Visual
employees.
35
<PAGE>
13. RELATED PARTIES
At June 30, 1996, the Company had guaranteed $1,157,000 in loans from a bank
to certain directors and officers of the Company. The loans bore interest at
the bank's prime rate (8.25% at June 30, 1996) plus 0.5% and matured on
February 10, 1997. Subsequent to June 30, 1996, the Company was released by
the bank from its guarantees on these loans.
At June 30, 1996 the Company had unsecured notes receivable of $90,000 from
certain employees which bore interest at rates ranging from 5% to 6% per
annum.
14. 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 represents net revenues less cost of goods sold and operating
expenses for each geographical region. In fiscal 1997, 1996 and 1995, cost of
revenues include direct costs incurred by each segment and an allocation of
amortization of capitalized software development costs and acquired product
rights. The fiscal 1997 in-process research and development charge and the
fiscal 1996 acquisition related charge are reflected in the U.S. Of the
fiscal 1997 $2.0 million restructuring charge, approximately $0.9 million is
reflected in the U.S., $0.1 million in Germany, and the remaining $1.0 million
in Rest of World.
Summary information regarding the Company's geographical regions is presented
below (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Net revenues
United States $32,071 $34,187 $28,362
Germany 6,254 11,111 12,832
Japan 8,118 10,010 6,849
Rest of World 18,419 17,611 16,302
------- ------- -------
Total $64,862 $72,919 $64,345
======= ======= =======
Income (loss) from operations
United States $(6,560) $ 967 $ (429)
Germany 132 133 63
Japan 346 300 205
Rest of World (2,323) (322) 690
------- ------- -------
Total $(8,405) $ 1,078 $ 529
======= ======= =======
Identifiable assets
United States $29,604 $28,990 $26,030
Germany 257 1,005 1,443
Japan 1,907 2,474 3,058
Rest of World 7,344 7,629 8,759
------- ------- -------
Total $39,112 $40,098 $39,290
======= ======= =======
</TABLE>
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Micrografx, Inc.
We have audited the accompanying consolidated balance sheet of Micrografx,
Inc. and subsidiaries (the Company) as of June 30, 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the year then ended. Our audit also included the financial statement
schedule as of June 30, 1997, listed in the Index at Item 14(a). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Micrografx, Inc.
and subsidiaries at June 30, 1997, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Dallas, Texas
August 5, 1997
37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Micrografx, Inc.:
We have audited the accompanying consolidated balance sheet of Micrografx,
Inc. (a Texas corporation) and subsidiaries as of June 30, 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Visual Software,
Inc., a company acquired during 1996, in a transaction accounted for as a
pooling of interests, as discussed in the Notes to Consolidated Financial
Statements. Such statements are included in the consolidated financial
statements of Micrografx, Inc. and subsidiaries and reflect total revenues of
6 percent in 1995 of the related consolidated total. These statements were
audited by other auditors whose report has been furnished to us and our
opinion, 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Micrografx, Inc. and subsidiaries as of
June 30, 1996, and the results of their operations and their cash flows for
each of the two years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Dallas, Texas
August 2, 1996
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
Information required under this Item has previously been reported on a Current
Report on Form 8-K, dated January 22,1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption "Election of Directors" in the
Company's Proxy Statement is incorporated herein by reference. See Item 1
included herein for information concerning executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the caption "Executive Compensation" in the
Company's Proxy Statement is incorporated herein by reference, except for the
information contained in the sections entitled "Report of the Compensation and
Stock Option Committee on Executive Compensation" and "Stock Performance
Graph" which shall not be deemed incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the caption "Principal Shareholders and Stock
Ownership of Management" in the Company's Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Certain Transactions" in the
Company's Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements included in Item 8, Financial
Statements and Supplementary Data, are set forth in the Index to
Financial Statements and Financial Statement Schedules listed on page
42 of this report
2. Financial Statement Schedules
The consolidated financial statement schedules are set forth in the
Index to Financial Statements and Financial Statement Schedules
listed on page 42 of this report.
3. Exhibits
The following documents are filed or incorporated by reference as
exhibits to this report. The exhibit numbers in the exhibit list
correspond to the numbers assigned to such exhibits in the Exhibit
Table of Item 601 of Regulations S-K.
** 2.1 Agreement and Plan of Merger with Visual Software, Inc. dated as of
February 27, 1996 (the exhibits and schedules listed therein have
been omitted but will be provided to the Commission upon request).
(Exhibit 2)
* 3.1 Articles of Incorporation of the Company, as amended (Exhibit 3.1)
**** 3.2 Amendment to Articles of Incorporation of the Company (Exhibit 3.2)
39
<PAGE>
* 3.3 Amended and Restated Bylaws of the Company (Exhibit 3.3)
**** 3.4 Amendment to Amended and Restated Bylaws of the Company (Exhibit
3.4)
* 4.1 Specimen stock certificate evidencing the Common Stock (Exhibit
4.1)
* 10.1 Incentive and Nonstatutory Stock Option Plan, as amended (Exhibit
10.2)
*** 10.2 Amendment to the Incentive and Nonstatutory Stock Option Plan
(Exhibit 10.3)
* 10.4 Form of International Distributor Agreement used by the Company
(Exhibit 10.3)
* 10.5 Cross Licensing Agreement dated December 15, 1989, between the
Company and Microsoft Corporation (Exhibit 10.12)
*** 10.6 Employee Stock Purchase Plan (Exhibit 10.26)
***** 10.7 Agreement dated September 8, 1993, between the Company and Hallmark
Cards, Incorporated. (Exhibit 10.25)
***** 10.8 Micrografx, Inc. 1995 Stock Option Plan. (Exhibit 10.27)
***** 10.9 Micrografx, Inc. 1993 Restricted Stock Plan. (Exhibit 10.28)
****** 10.10 Micrografx, Inc. 1995 Director Stock Option Plan (Exhibit 10.29)
10.11 Employment Agreement dated February 13, 1997, between the Company
and Doug Richard.
10.12 Compensation agreement dated May 21, 1997, between the Company and
Russell Hogg.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Roth Bookstein & Zaslow LLP
27 Financial Data Schedule
99.1 Report of Independent Public Accountants
* Incorporated by reference to the exhibit shown in parenthesis filed in
the Company's Registration Statement on Form S-1, file No. 33-34842.
** Incorporated by reference to the exhibit shown in parenthesis filed in
the Company's Current Report on Form 8-K, dated April 2, 1996.
*** Incorporated by reference to the exhibit shown in parenthesis filed in
the Company's Registration Statement on Form S-1, file No. 33-42195.
**** Incorporated by reference to the exhibit shown in parenthesis filed in
the Company's Annual Report on Form 10-K for the year ended March 31,
1993.
40
<PAGE>
***** Incorporated by reference to the exhibit shown in parenthesis filed
in the Company's Annual Report on Form 10-K for the year ended March
31, 1994.
****** Incorporated by reference to the exhibit shown in parenthesis filed
in the Company's Annual Report on Form 10-K for the year ended June
30, 1995.
(b) Reports on Form 8-K. None.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
ITEM 14 (A)
<TABLE>
<CAPTION>
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets at June 30, 1997, and 1996................................... 22
Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996, and 1995.. 24
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 1997, 1996, and 1995........................................................... 25
Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996, and 1995.. 26
Notes to Consolidated Financial Statements............................................... 27
Reports of Independent Public Accountants................................................ 37
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants................................................ 44
Schedule II - Valuation and Qualifying Accounts......................................... 45
</TABLE>
All other schedules are omitted as the required information is inapplicable
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on September 15,
1997.
MICROGRAFX, INC.
By: /s/ Douglas M. Richard
-----------------------------------------
Douglas M. Richard
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Larry G. Morris
-----------------------------------------
Larry G. Morris
Chief Financial Officer and Treasurer
(Principal Financial Officer)
By: /s/ Darryl R. Halbert
-----------------------------------------
Darryl R. Halbert
Controller and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Russell Hogg Chairman of the Board of Directors September 15, 1997
- --------------------
Russell Hogg
/s/ Douglas M. Richard Director September 15, 1997
- ----------------------
Douglas M. Richard
/s/ Eugene P. Beard Director September 15, 1997
- ----------------------
Eugene P. Beard
/s/ David S. Gergacz Director September 15, 1997
- ----------------------
David S. Gergacz
/s/ Robert Kamerschen Director September 15, 1997
- ----------------------
Robert Kamerschen
/s/ Seymour Merrin Director September 15, 1997
- ----------------------
Seymour Merrin
/s/ Robert S. Miller Director September 15, 1997
- ----------------------
Robert S. Miller
43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Micrografx, Inc. (a Texas corporation)
and subsidiaries included in this Form 10-K and have issued our report thereon
dated August 2, 1996. Our audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. We
did not audit the financial statements of Visual Software, Inc., a company
acquired during 1996 in a transaction accounted for as a pooling of interests,
as discussed in the Notes to Consolidated Financial Statements. Such
statements are included in the consolidated financial statements of
Micrografx, Inc. and subsidiaries and reflect total revenues of 6 percent in
1995 of the related consolidated total. These statements were audited by other
auditors whose report has been furnished to us and our opinion, insofar as it
relates to the amounts included for Visual Software, Inc., is based solely
upon the report of the other auditors. Schedule II of the Form 10-K is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, based on our audits and
the report of the other auditors, fairly states in all material respects, the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Dallas, Texas
August 2, 1996
44
<PAGE>
SCHEDULE II
MICROGRAFX, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance At Charged Charged Balance
Beginning To Costs To Other at End
Description of Period and Expenses Accounts /(b)/ Deductions of Period
- ---------------------------------------------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C>
Years Ended June 30,
1995
- ---------------------------
Allowance for doubtful
accounts: $ 338 $190 $ - $117 /(a)/ $ 411
Allowance for sales
returns: $3,134 $ - $(1,799) $ - $1,335
1996
- ---------------------------
Allowance for doubtful
accounts: $ 411 $126 $ - $205 /(a)/ $ 332
Allowance for sales
returns: $1,335 600 /(c)/ $ 26 $ - $1,961
1997
- ---------------------------
Allowance for doubtful
accounts: $ 332 $256 $ - $249 /(a)/ $ 339
Allowance for sales
returns: $1,961 $ - $ (9) $ 10 /(a)/ $1,942
</TABLE>
(a) Represents amounts written-off during the year, net of recoveries.
(b) The allowance for sales returns is recorded as a reduction of revenues.
(c) Represents allowance for Visual sales returns included in the acquisition
charges.
45
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
** 2.1 Agreement and Plan of Merger with Visual Software, Inc. dated
as of February 27, 1996 (the exhibits and schedules listed
therein have been omitted but will be provided to the
Commission upon request). (Exhibit 2)
* 3.1 Articles of Incorporation of the Company, as amended (Exhibit
3.1)
**** 3.2 Amendment to Articles of Incorporation of the Company (Exhibit
3.2)
* 3.3 Amended and Restated Bylaws of the Company (Exhibit 3.3)
**** 3.4 Amendment to Amended and Restated Bylaws of the Company
(Exhibit 3.4)
* 4.1 Specimen stock certificate evidencing the Common Stock
(Exhibit 4.1)
* 10.1 Incentive and Nonstatutory Stock Option Plan, as amended
(Exhibit 10.2)
*** 10.2 Amendment to the Incentive and Nonstatutory Stock Option Plan
(Exhibit 10.3)
* 10.4 Form of International Distributor Agreement used by the
Company (Exhibit 10.3)
* 10.5 Cross Licensing Agreement dated December 15, 1989, between the
Company and Microsoft Corporation (Exhibit 10.12)
*** 10.6 Employee Stock Purchase Plan (Exhibit 10.26)
***** 10.7 Agreement dated September 8, 1993, between the Company and
Hallmark Cards, Incorporated. (Exhibit 10.25)
***** 10.8 Micrografx, Inc. 1995 Stock Option Plan. (Exhibit 10.27)
***** 10.9 Micrografx, Inc. 1993 Restricted Stock Plan. (Exhibit 10.28)
****** 10.10 Micrografx, Inc. 1995 Director Stock Option Plan (Exhibit
10.29)
10.11 Employment Agreement dated February 13, 1997, between the
Company and Doug Richard.
10.12 Compensation agreement dated May 21, 1997, between the Company
and Russell Hogg.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Roth Bookstein & Zaslow LLP
27 Financial Data Schedule
<PAGE>
99.1 Report of Independent Public Accountants
* Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Registration Statement on Form S-1,
file No. 33-34842.
** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Current Report on Form 8-K, dated April
2, 1996.
*** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Registration Statement on Form S-1,
file No. 33-42195.
**** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended March 31, 1993.
***** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended March 31, 1994.
****** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended June 30, 1995.
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
This Agreement is made as of this 13th day of February, 1997, by and
between MICROGRAFX, INC., a Texas corporation, having a principal place of
business at 1303 Arapaho, Richardson, Texas 75081, hereinafter referred to as
the "Employer" or "Corporation" and Doug Richard, hereinafter referred to as
the "Executive" or "Employee."
NOW, THEREFORE, in connection with the employment and continued
employment between Executive and Employer, Employer agrees to provide
Executive with the compensation, benefits, and rights set forth herein, and,
Executive agrees to be employed by Employer, and to be bound by the covenants
contained herein, pursuant to the terms of this Employment Agreement,
effective as of the date above.
In consideration of the mutual promises and benefits to be received by
the Employer and Executive, the receipt and sufficiency of which consideration
is hereby acknowledged, the Employer and Executive hereby agree as follows:
ARTICLE I
PREVIOUS AGREEMENTS
-------------------
The parties acknowledge the existence of certain agreements which have
previously been entered into by and between Executive and Employer. This
Agreement shall be executed in lieu and in place of such agreements, so that
such previous agreements shall have no continuing force and effect, except to
the extent any such provisions are specifically stated to continue as set
forth herein. In the event of any conflict of such surviving provisions and
the terms of this Agreement, the terms of this Agreement shall control and
govern. Such preexisting agreements referred to are as follows:
1. Employment Agreement dated April 1, 1996, except for Articles II and
III therein which shall survive;
2. Executive Severance Agreement dated April 15, 1996, except for
paragraph 13 which shall survive;
3. Executive Severance Policy dated April 15, 1996; and
4. Letter Agreement dated November 27, 1996.
ARTICLE II
EMPLOYMENT
----------
A. TERM. Subject to the provisions hereof, the Employer agrees to employ
----
Executive and Executive agrees to remain in the employment of the Employer for
a period of three (3) years from and after the date hereof. At least ninety
days (90) days prior to the end of the term set forth herein, the parties
shall consider a period of extension of such term in at least one year
increments.
B. PLACE OF EMPLOYMENT. The Employer and Executive agree that
-------------------
Executive shall perform all duties necessary to fulfill this Agreement from
the Employer's headquarters in the Dallas,
<PAGE>
Texas area. The Employer shall not require Executive to relocate either his
residence or business address outside Dallas, Texas as a condition of
continued employment or to receive compensation for Executive's services as
contemplated by this Agreement.
C. RESTRICTION ON USE OF RIGHTS OR INFORMATION OF OTHERS. Executive
-----------------------------------------------------
understands that he is not expected or permitted to use any trade secrets or
confidential information belonging to any former employer or other person or
company and not now owned by Employer, and agrees that he will not use such
information in performing work for the Employer. Executive also confirms that
his work for the Employer will not violate any agreements that Executive has
with any former employer or other person or company.
D. COMPENSATION. Executive will be paid the following compensation
------------
during the term of this Agreement:
(a) a base compensation of $200,000 or more per year for each year of
employment, prorated for partial years;
(b) Executive will be entitled to participate in and will be subject
to the conditions of a bonus program established by Employer in
its reasonable discretion, consistent with terms incumbent on
other participants in the Plan, including conditions such as, but
not limited to, frequency of payment, and threshold targets or
conditions for payment. Executive shall be entitled, under the
program, to earn a bonus of 50% or more of Executive's base
salary by achieving the midpoint of targets specified in the
bonus program. The bonus may be exceeded or reduced based upon
actual performance in relation to the midpoint targets;
(c) Executive will be paid a one-time bonus in the amount of $25,000
within ten days of execution of this Agreement;
(d) the currently existing grant to Executive of the right to
purchase 40,000 shares of the Company's stock on April 26, 1996
shall be repriced so that such option shall continue to vest
ratably on each anniversary of the original date of grant over
the next four years with the exercise price of such option to be
as follows: (a) 20,000 of such options shall have an exercise
price equal to the closing price of the stock on February 12,
1997, that is $4.50; and (b) 20,000 of such stock options shall
have an exercise price equal to $6.00 per share. Other previous
grants of stock options and restricted stock other than this
specific grant shall not be affected or amended.
E. BOARD OF DIRECTORS. Employee shall be elected to the Company's Board
------------------
of Directors on or about the time of execution of this Agreement. Employee
shall be nominated to serve as a director at the Company's next Annual Meeting
with Stockholders. Employee's service as a director shall be governed by the
Bylaws of the Company.
F. EMPLOYMENT BENEFITS. Executive will be covered by and eligible for
-------------------
all benefits of employment available to other Executives of the Employer, as
specified in the Employer's personnel policies, manuals and handbooks.
<PAGE>
ARTICLE III
NONDISCLOSURE AND PROPRIETARY RIGHTS
------------------------------------
A. NONDISCLOSURE. Executive understands that he will have access to and
-------------
will become familiar with various proprietary data and confidential
information, which may include, but not be limited to, computer software and
hardware, development and analytical tools, algorithms, flow charts, designs,
formulas, patterns, specifications, devices, inventions, processes, know-how
and compilations of information, financial information, records and customer
lists and requirements, which are owned by the Employer or which the Employer
may have in its possession, and some of which may be trade secrets of the
Employer (collectively the "Proprietary Information"). Executive agrees not
to disclose any of the Proprietary Information, directly or indirectly, nor
use the Proprietary Information in any way, either during the term of his
employment, or any time thereafter, except as may be required in the course of
his employment with the Employer or except for (i) information which is or
becomes generally available to the public other than as a result of a
disclosure by Executive, (ii) information which Executive reasonably can
demonstrate was known to Executive on a non-confidential basis prior to its
disclosure by Employer; or (iii) information which becomes available to
Executive on a non-confidential basis from a source other than Employer,
provided that such source is not subject to any prohibition against
transmitting such information.
B. PROPRIETARY RIGHTS. Executive agrees that he will promptly from time
------------------
to time fully inform and disclose to the Employer all inventions, designs,
improvements, software, know-how, developments, processes, works and
discoveries created (collectively the "Intellectual Property") within the
reasonable scope of his employment by Employer, which he now has or may later
have during the term of this Agreement that relate to the actual or
anticipated business of the Employer or to any experimental work carried on by
the Employer, whether conceived by the Executive alone or with others and
whether or not conceived during regular working hours. All such Intellectual
Property will be the exclusive property of the Employer. Any works developed
by Executive will be considered a "work made for hire" under applicable
copyright law, and the Employer will have all ownership rights in such works.
Executive confirms and agrees that all Proprietary Information and
Intellectual Property heretofore conceived or developed, in whole or in part,
by him while employed or otherwise engaged by Employer, or heretofore conveyed
by him to Employer, shall be considered a "work made for hire" under
applicable copyright laws and Employer shall have all ownership rights in such
works. If any of such works, whether heretofore conceived and/or developed or
hereafter conceived and/or developed, are not considered a work made for hire,
then Executive agrees to assign to the Employer, for no additional
consideration other than the amounts paid to him as an Executive, all
ownership rights in such works. Executive agrees to assist the Employer in
obtaining patents on all such Intellectual Property that the Employer wishes
to patent, and copyright registrations on all Intellectual Property the
Employer seeks to copyright, and will execute all documents and do all things
necessary to obtain letters patent or copyright registration for the Employer,
and protect such rights against infringement by others.
All files, records, documents, drawings, materials software, equipment
and similar items relating to the business of the Employer, whether prepared
by Executive or otherwise coming into his possession, will remain the
exclusive property of the Employer and will not be removed from the premises
of the Employer under any circumstances without the prior written approval of
the Employer.
<PAGE>
C. LICENSING INTELLECTUAL PROPERTY AND PAYMENT OF ROYALTIES. Executive
--------------------------------------------------------
agrees that the Employer may license others to use any of the Intellectual
Property conceived or developed by the Executive, and that his normal wages
received are sufficient consideration for the use and ownership of same by the
Employer. All questions as to whether, when, how, and to whom licenses will
be granted will be determined by the sole discretion of the Employer.
Executive shall be entitled to receive a royalty on each such license granted
by the Employer, in an amount, if any, solely within the employer's
discretion.
ARTICLE IV
RESTRICTIVE COVENANT
--------------------
Because Executive has had access to Proprietary Information and
Intellectual Property and will receive specialized training from the Employer,
Executive acknowledges that such information and training would provide an
unfair advantage if used to compete with the Employer. In order to avoid
this, Executive agrees that upon termination of his employment, whether by
termination of this Agreement, by wrongful discharge, or otherwise, Executive
shall not directly or indirectly, either as an individual or as a partner or
joint venturer, or as an employee or agent for any person, or as an officer,
director, or shareholder or otherwise, for a period of two (2) years after the
date of termination of his employment within any actual marketing area of the
Employer or any of its subsidiaries at the time of termination of Executive's
employment or any anticipated marketing areas that Executive is personally
aware of due to his duties and responsibilities at such time, enter into or
engage generally in competition with the Employer in the development or
marketing of personal computer software relating to graphical business
applications or development software that compete with the Employer's then
current products or products under development. "Actual marketing area" is
understood to mean where the Employer has a physical presence consisting of a
sales representative, office, authorized dealer, distributor, or authorized
training center, or where its products are being advertised at the time of
Executive's termination. Executive also agrees not to, directly or
indirectly, encourage any (a) supplier, distributor or customer to terminate
its relationship with the Employer and (b) other employee of the Employer to
terminate his/her employment with the Employer. Executive agrees that his
education, experience and abilities are such that he can obtain employment in
a noncompeting business, and that enforcement of this provision will not
prevent Executive from making a living.
ARTICLE V
CERTAIN EMPLOYMENT CONSIDERATIONS
---------------------------------
A. TERMINATION BY EXECUTIVE. If Employer should breach, fail to
------------------------
perform, or not observe, in any material way, any provision, condition or
agreement as required by this Agreement, and if such breach, nonperformance or
non-observance shall continue for a period of ten (10) business days after
notice thereof by Executive to Employer, Executive may thereafter terminate
this Agreement upon three (3) days written notice to Employer, at the address
provided herein or any subsequent address provided, however, the covenants
contained in Articles III and IV shall survive such termination.
B. TERMINATION BY EMPLOYER. Employer may terminate this Agreement at
------------------------
any time within three years from the date hereof, or within the term of this
Agreement, as extended, upon the occurrence of "cause", as hereinafter
defined, without further liability of Employer to Executive. The
<PAGE>
covenants contained in Articles III and IV shall survive any such termination.
If, prior to the third anniversary of this Agreement, or within the term of
this Agreement, as extended, the Employer wrongfully terminates Executive,
without a finding of "cause", such termination shall be considered a breach of
this Agreement by Employer, and Executive shall be entitled to a payment equal
to one (1X) times the Executive's highest base annual salary rate with the
Corporation, and Employer shall bear no further liability hereunder to
Executive. Notwithstanding anything contained herein to the contrary, if such
termination shall occur in connection with a Change in Control as that term is
defined herein, Employee's rights shall be governed by the provisions of
Article VI.
C. TERMINATION FOR CAUSE For purposes of this Agreement, a termination
---------------------
of the Executive's employment for "cause" by the Corporation shall be defined
to mean:
(i) the Executive shall have committed an intentional material
act of fraud or dishonesty in connection with his or her
duties or in the course of his or her employment with the
Corporation, or other intentional act of fraud or dishonesty
which makes the Executive unsuitable for the performance of
his or her duties;
(ii) the Executive shall have committed intentional wrongful
material damage to property of the Corporation;
(iii) the Executive shall have committed an intentional wrongful
disclosure of material secret processes, or disclosed
material confidential information of the Corporation or
engaged in intentional wrongful competitive activity with the
Corporation;
(iv) the Executive shall have made a material misrepresentation to
any of the Corporation's Directors, officers, associates or
third parties in the performance of his or her duties;
(v) any intentional misapplication by Executive of the Employer's
funds, or any other act of dishonesty injurious to the
Employer committed by Executive; or
(vi) Executive's conviction of a crime involving moral turpitude;
(vii) Executive's breach, non-performance or non-observance shall
continue beyond a period of ten (10) business days
immediately after notice thereof by the Employer to
Executive; or
(viii) any other action by Executive involving willful and
deliberate malfeasance or gross negligence in the performance
of Executive's duties
provided, however, that in no event shall the death, disability or physical or
mental incapacity of Executive be deemed a cause for termination for purposes
of this Article V.
It is expressly acknowledged and agreed that the decision as to whether
"cause" exists for the Employer terminating the employment relationship is
delegated to the Board of Directors for determination. In reaching such
determination of cause the Board shall be required to act reasonably and
consistent with past Employer practices and applicable law. Upon reaching a
decision that "cause" exists for the termination of the employment
relationship, the Board of Directors may terminate the employment relationship
by giving written notice of such termination and the termination shall take
effect immediately.
<PAGE>
ARTICLE VI
CHANGE IN CONTROL
A. This Article shall be effective immediately upon execution of this
Agreement; provided, however, the provisions herein shall not be operative and
shall not apply to any termination of employment, for any reason, unless and
until a Change in Control (as such term is defined below) has occurred. As
used in this Agreement, the term "Change in Control" shall mean any of the
following events shall have occurred:
(i) individuals who, as of the period of ninety (90) days before
the occurrence of a Change in Control constitute the Board of
Directors of the Employer, cease for any reason to constitute
at least a majority of the Employer's Board of directors;
(ii) the Employer is merged, or consolidated or reorganized into
or with another corporation or other legal person in any
transaction or series of related transactions (other than a
transaction to which only the Employer and one or more of its
subsidiaries are parties) and as a result of such merger,
consolidation or reorganization, less than 51% of the
combined voting power of the then outstanding voting
securities of the surviving entity or person immediately
after such transaction or series of related transactions, are
held in the aggregate by persons or entities who were holders
of voting securities of the Employer immediately prior to
such transaction;
(iii) the Employer sells all or substantially all of its assets to
any other corporation or other legal person in any sale or
series of related sales (other than a transaction to which
only the Employer and one or more of its subsidiaries are
parties);
(iv) the Employer's Board of Directors approves the distribution
to the Employer's shareholders of all or substantially all of
the Employer's net assets, or the Employer's Board of
Directors, shareholders or a court of competent jurisdiction
approves the dissolution or liquidation of the Employer;
(v) any other transactions or series of related transactions
occur which have substantially the same effect as the
transactions specified in any of the preceding clauses (other
than transactions to which only the Employer and one or more
of its subsidiaries are parties).
B. TERMINATION FOR GOOD REASON. For purposes of this Agreement,
---------------------------
termination for "Good Reason" is defined as the Executive's resignation
(except in connection with his or her termination pursuant to Article V above)
following a Change in Control, caused by and within ninety (90) days of any of
the following:
(i) any duties are assigned to the Executive which are materially
inconsistent with the Executive's positions, duties and
status with the Corporation (other than as a result of any
promotion or advancement) immediately prior to the occurrence
of a Change in Control;
(ii) a reduction in the Executive's base salary as in effect
immediately prior to the occurrence of a Change in Control;
<PAGE>
(iii) a reduction in the potential earnings of the Executive under
any performance based bonus plan of the Corporation in effect
immediately prior to the occurrence of a Change in Control;
(iv) the termination or the substantial reduction in scope or
value of the Executive's rights to any material Executive
benefit to which he or she had been previously entitled
immediately prior to the occurrence of a Change in Control,
without the replacement thereof with a substantially similar
benefit.
(v) the relocation of the Corporation's principal executive
offices to a location outside of the Dallas/Fort Worth, Texas
metropolitan area or the Executive's relocation to any place
other than the Dallas/Fort Worth, Texas metropolitan area,
except for required travel on the Corporation's business to
the extent deemed reasonably necessary by the Corporation's
Board of Directors' or
(vi) the failure of the Corporation to obtain the express
agreement to assume and to perform this Agreement by any
successor as contemplated by Article VI herein.
C. TERMINATION BY CORPORATION WITHOUT CAUSE OR BY THE EXECUTIVE FOR GOOD
---------------------------------------------------------------------
REASON
------
(i) If, during the two (2) year period following the occurrence
of a Change in Control, the Executive's employment with the
Corporation is terminated either
(a) by the Corporation for no reason or for any reason other
than for Cause as defined in Article V. C. herein; or
(b) by the Executive for Good Reason as defined in Article
VI. B. herein; or
(ii) If, during the thirty (30) day period before the occurrence
of a Change in Control, the Executive's employment with the
Corporation is terminated by the Corporation for no reason or
for any reason other than for Cause as defined in Article
V.C. herein;
then the Corporation shall pay to the Executive the Severance Pay (as such
term is defined in Section D below) owed to the Executive as a result of such
termination.
D. SEVERANCE PAY. For purposes of this Agreement, the term "Severance
-------------
Pay" shall include all of the following:
(i) in the case of a termination of the Executive's employment
pursuant to Section B or C above, a lump sum in cash to be
paid by the Corporation on or before the Payment Date (as
such term is defined in Article VII.E., in an amount equal to
one and one-half times (1.5X) the Executive's highest base
annual salary rate with the Corporation;
(ii) to the extent not thereto paid or provided, any compensation
previously deferred by the Executive (together with any
accrued interest or earnings thereon) and any accrued
vacation pay; and
(iii) to the extent not thereto paid or provided, for a period of
twelve (12) months following the Payment Date, the Executive
shall be eligible for participation in and shall receive all
benefits under such benefit plans, practices, policies and
programs of the Corporation that provide medical, disability,
prescription, dental or life insurance coverage, with the
<PAGE>
costs of such participation to be paid by the Corporation to
the same extent as prior to the Payment Date. In the event
that such continued participation is not allowed under the
terms and provisions of such plans or programs, then in lieu
thereof, the Corporation shall acquire individual insurance
policies providing comparable coverage for the Executive,
provided further that if any such individual coverage is
unavailable, the Corporation shall pay to the Executive on or
before the Payment Date, an amount equal to the contributions
that would have been paid by the Corporation for such
coverage on the Executive's behalf if the Executive had
remained in the Corporation's employ for an additional twelve
(12) month period following the Payment Date.
E. VESTING OF STOCK OPTIONS AND RESTRICTED STOCK AWARDS. Notwithstanding
----------------------------------------------------
anything contained herein to the contrary, immediately upon
the occurrence of a Change in Control:
(a) all options to acquire the Corporation's Common Stock which
have previously been granted to the Executive and which have
not previously expired, shall immediately vest and become
exercisable
(b) all restrictions applicable to restricted stock awards of the
Corporation's Common Stock which have previously been granted
to the Executive and which have not previously expired, shall
immediately lapse and such awards shall become fully vested
and nonforfeitable, and on or before the Payment Date, at the
Executive's sole discretion, certificates representing shares
of the Corporation's Common Stock so awarded and vested shall
be issued to the Executive.
F. NO SEVERANCE PAY UPON TERMINATION FOR CAUSE, DEATH OR PERMANENT
---------------------------------------------------------------
DISABILITY.
-----------
If, during the two (2) year period following the occurrence of a Change
in Control, (i) the Executive's employment with the Corporation is terminated
for Cause pursuant to Article V.C., (ii) the Executive dies, (iii) the
Executive is permanently and totally disabled as defined in any long term
disability plan of the Corporation applicable to the Executive as in effect
immediately prior to the occurrence of a Change in Control, or (iv) the
Executive voluntarily terminates his or her employment with the Corporation in
circumstances in which Good Reason does not exist; then the Corporation shall
have no obligations to the Executive for Severance Pay pursuant to this
Agreement.
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
------------------
A. ATTORNEYS' FEES AND COSTS. If any legal action is necessary to
-------------------------
enforce or interpret the terms of this Agreement, the prevailing party will be
entitled to reasonable attorneys' fees, costs, and necessary disbursements in
addition to any other relief that a court may grant.
B. INJUNCTIVE RELIEF. Executive agrees that the remedy at law for any
-----------------
breach of this Agreement will be inadequate and that, in addition to any other
remedies it may have, the Employer will be entitled to temporary and permanent
injunctive relief to prevent the breach of this Agreement, without the
necessity or proving actual damages.
C. SURVIVABILITY. Neither the existence of any claim or cause of
-------------
action of Executive against the Employer, whether based on this Agreement or
otherwise, nor the termination of Executive's employment for any reason, will
constitute a defense to the enforcement by the Employer of the covenants
herein.
D. SEVERABILITY. If any court rules that any part of this Agreement is
------------
unenforceable, such ruling will not affect the enforceability of the rest of
the Agreement. In addition, any term of any restricted covenant set forth in
Article III or Article IV of this Agreement regarding duration, geographic
scope type of work or other restriction will be deemed amended and modified to
the extent necessary to make such term valid and enforceable within that
jurisdiction.
E. PAYMENT DATE. For purposes of this Agreement, "Payment Date" shall
-------------
mean twenty (20) days after the date on which a written notice of termination
is given by the party initiating such termination, in the form and manner
specified in Section J below.
F. SUCCESSORS AND BINDING AGREEMENT.
---------------------------------
(a) The Employer shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the
Employer, to assume and agree to perform this Agreement in the
same manner and to the same extent the Employer would be
required to perform this Agreement. This Agreement shall be
binding upon and inure to the benefit of the Employer and any
successor of or to the Employer, including, without limitation,
any persons acquiring directly or indirectly all or
substantially all of the assets of the Employer whether by
merger, consolidation, sale, reorganization or otherwise (and
such successor shall thereafter be deemed the "Employer" for
purposes of this Agreement), but shall not otherwise be
assignable or delegable by the Employer.
(b) This Agreement shall inure to the benefit of and be enforceable
by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees and
legatees.
G. NO RIGHT TO SET OFF. The Employer is not entitled to set off
--------------------
against any amounts payable to the Executive hereunder, any amounts earned by
the Executive in other employment
<PAGE>
after termination of his employment with the Employer following a Change in
Control, nor any amounts after termination for any reason, which might have
been earned by the Executive in other employment had he sought such other
employment. The amounts payable to the Executive under this Agreement shall
not be treated as damages, but as severance compensation to which the
Executive is entitled by reason of the termination of his employment following
a Change in Control, in the circumstances contemplated by this Agreement.
H. ARBITRATION. Any dispute or controversy arising under or in
------------
connection with this Agreement, other than a dispute or controversy involving
Articles III and IV above, shall be settled exclusively by arbitration in
Dallas, Texas, in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
in any court having valid jurisdiction. Each of the parties shall bear their
respective costs of arbitration. The Employer shall be entitled to injunctive
relief from a court of competent jurisdiction to enforce Articles III and IV.
I. REVIEW. The parties hereto represent that they have had the
-------
opportunity to receive independent legal advice concerning the terms and
conditions of this Agreement, and have not relied upon any representation of
the other party or such party's counsel with respect to any matter contained
in this Agreement. The Executive further represents that he has carefully
read this Agreement and that the Executive has had the opportunity to have
this Agreement fully explained to him by counsel of his choice and that he
fully understands the terms and conditions of this Agreement, that the only
representations made to the Executive in connection with his execution of this
Agreement are those contained herein, and that the execution of this Agreement
by the Executive is his full, free and voluntary act.
J. NOTICES. All notices, requests, demands and other communications
--------
called for herein or contemplated hereunder shall be in writing and in
addition, all termination notices shall set forth (i) the specific provision
in this Agreement relied upon in connection with the Executive's termination,
(ii) facts and circumstances claimed to provide a basis for the Executive's
termination, and (iii) the effective date of such termination (which date
shall be not more than ten (10) days after the giving of such written notice).
No termination shall be effective hereunder unless and until written notice in
the manner called for herein is given by the party initiating such
termination. All notices hereunder shall be deemed to have been duly given
when delivered personally (if to the Employer to the General Counsel), or when
mailed by United States certified or registered mail, postage prepaid,
addressed to the parties, their successors in interest or assignees, at the
following addresses or such other addresses as the parties may designate by
notice in the manner aforesaid:
If to the Employer: Micrografx, Inc.
1303 Arapaho Road
Richardson, Texas 75081
Attention: Legal Department
If to the Executive: Doug Richard
3704 Greenbriar
University Park, TX 75225
<PAGE>
K. VALIDITY. The validity or unenforceability of any provision or
---------
provisions of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force and
effect.
Notwithstanding anything in this Agreement to the contrary, in the event
that it shall be determined that any payment or distribution by the Employer
to, or on behalf of, the Executive, pursuant to the terms of this Agreement or
otherwise (a "Payment"), would constitute an "excess parachute payment" within
the meaning of Section 280G of the Code, the aggregate present value of
amounts payable or distributable to or for the benefit of the Executive
pursuant to this Agreement (such payments or distributions pursuant to this
Agreement are hereinafter referred to as "Agreement Payments") shall be
reduced (but not below zero) to the extent necessary to avoid having any
Payment constitute an "excess parachute payment," within the meaning of
Section 280G of the Code.
Executed at Dallas, Texas, as of the day and year first above written.
EMPLOYER:
MICROGRAFX, INC.
By: /s/ Larry G. Morris
----------------------------
Print Name: Larry G. Morris
--------------------
Title: Chief Financial Officer
-------------------------
EXECUTIVE:
/s/ Doug Richard
--------------------------------
Doug Richard
Print Name: Doug Richard
--------------------
Address:
-----------------------
3704 Greenbriar
--------------------------------
Dallas, TX
--------------------------------
<PAGE>
EXHIBIT 10.12
Robert "Kam" Kamerschen
Chairman and Chief Executive Officer
Advo, Inc.
May 21, 1997
Mr. Russell Hogg
Sunnygables
West Nyack, NY
Dear Russ:
It is with great pleasure that the Board of Micrografx would like to offer you
the position of non executive Chairman of Micrografx as described in the
attached position description. You and I have had some discussion regarding
compensation for this position, and I have been requested by the Board, as
Chairman of the Board's Compensation Committee, to propose the following:
BOARD MEMBER COMPENSATION: Board Members currently receive $20,000 as an
-------------------------
annual retainer and $1,000 for every Board Meeting, Board Committee Meeting,
or Board conference call in which they participate, all paid on a quarterly
basis. New Board Members receive a one time 20,000 stock option grant vesting
in 25% increments on each anniversary of the date of grant. After the first
year, all Board Members currently receive a 7,500 stock option grant on an
annual basis, also vesting in 25% increments on each anniversary date. It is
being proposed at the next Shareholder Meeting (October/November 1997), that
the annual stock option grant be increased to 10,000 option shares. Also, as
part of this proposal, Board Members would receive $10,000 to cover all face-
to-face and conference call meetings which come up during the course of the
year, rather than trying to decipher which Board conference calls are entitled
to have meeting status and which are not.
Finally, it is being proposed that Board Members be given the alternative of
receiving a stock option grant which is equivalent to either or both the
$10,000 meeting stipend and the annual retainer of $20,000. Under the plan
being proposed, Directors who elect stock in lieu of cash will receive two
dollars worth of stock options for every dollar of retainer and/or meeting fee
they chose to exchange. At the current stock price, when applying the Black-
Scholes method of valuing stock options, the total of $30,000 in fees would
equal approximately 14,000 MGX stock options.
ADDITIONAL CHAIRMAN COMPENSATION: To provide the non executive Chairman
---------------------------------
position with the greatest possible flexibility, during the first year only,
you will apply your "normal" consulting fee of $1,500 per diem to each day
that you're working with Micrografx (a "day" being comprised of eight to ten
hours worth of Micrografx activity). A cap of $50,000 would be set for your
first year as non executive Chairman, providing room for an up front, get
acquainted amount of time with the Company in Richardson, Texas, and also
allowing for other exceptional time requests that Micrografx might make for
your services.
The non executive Chairman will also receive- beyond the standard Board Member
stock option grants- an additional 10,000 stock option grant at the time of
election, as well as an additional 5,000 stock option grant in each of the
next three years, all vesting in accord with the schedule outlined above, in
place of the special per diem consulting fee.
<PAGE>
NETTING THIS OUT: The net of the preceding is that in your first year in this
-----------------
position:
1.) You have the potential to receive a total of $80,000 in cash
compensation-comprised of the $20,000 annual retainer, the $10,000
meeting equivalent fee, and the potential of up to $50,000 in
consulting fees.
2.) You will receive a total of 30,000 option shares- comprised of an
immediate grant of 20,000 option shares as a new Board Member and
a special 10,000 option grant to reflect the significance of the
non Executive Chairman position.
The per diem arrangement has a one year duration. However, the 5,000 option
grant above and beyond any regular Board Member stock grants will continue for
at least three years. Director and Officer liability insurance is also
covered by the Company.
Sincerely,
/s/ Kam
Robert Kamerschen
RK/alm
cc: Micrografx Board of Directors
Edward Pearce
Larry G. Morris
<PAGE>
EXHIBIT 21.1
MICROGRAFX, INC.
SUBSIDARIES OF REGISTRANT
Information is set forth below concerning all subsidiaries of the Company as
of June 30, 1997:
<TABLE>
<CAPTION>
Name of Subsidiary Incorporation Company
- ------------------------------------ -------------------- --------
<S> <C> <C>
Micrografx France, SARL France 100%
Micrografx Deutschland GmBH Germany 100%
Micrografx Japan. K.K. Japan 100%
Micrografx B.V. The Netherlands 100%
Micrografx Technology N.V. Netherlands Antilles 100%
Micrografx, Ltd. United Kingdom 100%
Micrografx Australia Pty. Limited Australia 100%
Micrografx Italia S.r.l. Italy 100%
Visual Acquisition, Inc. Delaware 100%
AdvanEdge Acquisition, Inc. Delaware 100%
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-37913, 33-41664, 33-41665, 33-41783, 33-65754, 33-71010, 33-
71008, 33-86368, 33-86370, 33-86372, 333-03429, 333-03427) pertaining to the
Micrografx, Inc. Incentive and Nonstatutory Stock Option Plan, the Micrografx,
Inc. Employee Stock Purchase Plan, the Micrografx, Inc. Restricted Stock
Purchase Plan and the Micrografx, Inc. Directors Stock Purchase Plan of our
report dated August 5, 1997, with respect to the consolidated financial
statements and schedule of Micrografx, Inc. included in the Annual Report
(Form 10-K) for the year ended June 30, 1997.
/s/ Ernst & Young LLP
Dallas, Texas
September 15, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8, File Nos. 33-37913, 33-41664, 33-41665,
33-41783, 33-65754, 33-71010, 33-71008, 33-86368, 33-86370, 33-86372, 333-
03429, and 333-03427. It should be noted that we have not audited any
financial statements of the Company subsequent to June 30, 1996, or performed
any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Dallas, Texas
September 15, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants we hereby consent to the use of our report
on the consolidated financial statements of Visual Software, Inc. and
subsidiaries dated March 18, 1996 included in this Form 10-K of Micrografx,
Inc. It should be noted that we have audited the consolidated financial
statements of Visual Software, Inc. 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 LLP
Los Angeles, California
September 15, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS PRESENTED IN THE 1997 FORM 10-K AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,049
<SECURITIES> 10,716
<RECEIVABLES> 13,741
<ALLOWANCES> 4,131
<INVENTORY> 1,287
<CURRENT-ASSETS> 27,107
<PP&E> 11,426
<DEPRECIATION> 8,723
<TOTAL-ASSETS> 39,112
<CURRENT-LIABILITIES> 14,170
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 23,419
<TOTAL-LIABILITY-AND-EQUITY> 39,112
<SALES> 64,862
<TOTAL-REVENUES> 64,862
<CGS> 19,784
<TOTAL-COSTS> 19,784
<OTHER-EXPENSES> 53,483
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> (8,097)
<INCOME-TAX> (1,910)
<INCOME-CONTINUING> (6,187)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,187)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
<PAGE>
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Visual Software, Inc.
Woodland Hills, California
We have audited the 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 the 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.
The 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 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 for 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
Los Angeles, California
March 18, 1996
