<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-18708
MICROGRAFX, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1952080
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1303 E. ARAPAHO ROAD, RICHARDSON, TEXAS 75081
(Address of principal executive offices) (Zip Code)
(972) 234-1769
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
As of January 31, 1997, 10,239,642 shares of the Company's common stock
were outstanding.
================================================================================
<PAGE> 2
MICROGRAFX, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of 3
December 31, 1996 and June 30, 1996
Consolidated Statements of Operations for the three 4
and six months ended December 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows for 5
the six months ended December 31, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II.
Item 1. Legal Proceedings 12
Item 4. Submission of Matters to a vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
<PAGE> 3
MICROGRAFX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,059 $ 13,790
Short-term investments 5,388 4,844
Accounts receivable, less allowances of $4,358 and $3,092 11,777 9,417
Inventories 1,766 1,284
Deferred tax asset 1,493 497
Other current assets 2,279 1,709
---------- ----------
Total current assets 33,762 31,541
Property and equipment, net 2,972 3,150
Capitalized software development costs
and acquired product rights, net 5,555 5,282
Other assets 124 125
---------- ----------
Total assets $ 42,413 $ 40,098
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,173 $ 4,230
Other accrued liabilities 8,090 6,079
---------- ----------
Total current liabilities 14,263 10,309
Deferred income taxes and other liabilities 711 684
Shareholders' equity 27,439 29,105
---------- ----------
Total liabilities and shareholders' equity $ 42,413 $ 40,098
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 4
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 16,113 $ 22,143 $ 32,703 $ 37,821
Cost of revenues 5,339 5,085 9,941 8,833
-------- -------- -------- --------
Gross profit 10,774 17,058 22,762 28,988
Operating expenses:
Sales and marketing 8,760 10,177 16,708 18,336
General and administrative 2,506 2,341 4,459 4,339
Research and development 1,613 2,101 3,433 3,804
Restructuring charge 1,964 -- 1,964 --
-------- -------- -------- --------
Total operating expenses 14,843 14,619 26,564 26,479
-------- -------- -------- --------
Income (loss) from operations (4,069) 2,439 (3,802) 2,509
Non operating expense (income) 74 18 (166) 258
-------- -------- -------- --------
Income (loss) before income taxes (4,143) 2,421 (3,636) 2,251
Income taxes (1,409) 726 (1,236) 675
-------- -------- -------- --------
Net income (loss) $ (2,734) $ 1,695 $ (2,400) $ 1,576
======== ======== ======== ========
Income (loss) per share $ (0.27) $ 0.17 $ (0.23) $ 0.16
======== ======== ======== ========
Shares used in computing
income (loss) per share 10,239 9,997 10,231 9,956
======== ======== ======== ========
</TABLE>
See accompanying notes
4
<PAGE> 5
MICROGRAFX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
----------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net cash flows provided by operating activities $ 1,533 $ 3,852
Cash flows from investing activities:
Proceeds from maturities of short-term investments 3,909 2,128
Purchases of short-term investments (4,453) (2,130)
Capitalization of software development costs and
purchases of acquired product rights (3,487) (2,976)
Purchases of property and equipment (979) (822)
------------ ------------
Net cash used in investing activities (5,010) (3,800)
Cash flows from financing activities:
Proceeds from employee stock programs 399 926
Other -- 106
------------ ------------
Net cash provided by financing activities 399 1,032
Effect of exchange rates on cash and cash equivalents 347 (366)
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,731) 718
Cash and cash equivalents, beginning of period 13,790 11,329
------------ ------------
Cash and cash equivalents, end of period $ 11,059 $ 12,047
============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
MICROGRAFX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS COMBINATION
On April 2, 1996, Micrografx, Inc. and subsidiaries ("Micrografx" or "the
Company") acquired all of the issued and outstanding capital stock and options
of Visual Software, Inc., a California corporation ("Visual"). The acquisition
has been accounted for as a pooling of interests. Accordingly, the accompanying
consolidated financial statements have been restated to retroactively include
the accounts and operations of Visual for all periods presented.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Micrografx at
December 31, 1996 and for the three and six-month periods ended December 31,
1996 and 1995 are unaudited but reflect all adjustments which are of a normal
recurring nature and, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations for the
periods presented. The accompanying financial statements and notes thereto
should be read in conjunction with the Company's audited financial statements
for the year ended June 30, 1996, included in the 1996 Annual Report to
Shareholders. The results of operations for the periods ended December 31, 1996
are not necessarily indicative of results to be expected for the year ending
June 30, 1997.
RESTRUCTURING CHARGE
In November of 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. The entire
$2.0 million charge is classified as an accrued liability as of December 31,
1996.
INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
----------------- -------------
<S> <C> <C>
Raw materials $ 1,008 $ 849
Finished goods 758 435
---------- ----------
$ 1,766 $ 1,284
========== ==========
</TABLE>
6
<PAGE> 7
MICROGRAFX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS AND CONTINGENCIES
FORWARD CONTRACTS
The Company periodically enters into foreign exchange contracts to hedge
against certain exposure to changes in foreign currency exchange rates. This
exposure results from the Company's foreign operations in countries including
Germany, France, the United Kingdom, the Netherlands, and Japan that are
denominated in currencies other than the U.S. dollar. As of December 31, 1996,
the Company had one foreign exchange forward contract outstanding to sell 16
million Yen at $112.85 expiring January 1997. The difference between the
carrying amount and current market settlement value of the forward contract was
not significant.
INCOME PER SHARE
Income per share (in thousands) for all periods presented is based on the
weighted average common and dilutive equivalent shares outstanding using the
treasury stock method.
Three Months Ended Six Months Ended
December 31, December 31,
--------------- ---------------
1996 1995 1996 1995
------ ------ ------ ------
Weighted average common stock
outstanding during the period 10,239 9,671 10,231 9,668
Common stock equivalents of employee
stock programs -- 326 -- 288
------ ------ ------ ------
Shares used in primary income per
share calculation 10,239 9,997 10,231 9,956
====== ====== ====== ======
Fully diluted income per share was not materially different from primary income
per share for all periods presented.
7
<PAGE> 8
MICROGRAFX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Micrografx, Inc. ("Micrografx" or the "Company") was founded in 1982 and
incorporated in 1984 in the state of Texas. Micrografx develops and markets
graphics software which enhances visual communication and empowers creative
expression.
On April 2, 1996, the Company acquired all of the issued and outstanding
capital stock and options of Visual Software, Inc., a California corporation
("Visual"). The acquisition has been accounted for as a pooling of interests.
Accordingly, the accompanying tables and discussion have been restated to
retroactively include the accounts and operations of Visual for all periods
presented.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues of certain items in the Company's Consolidated
Statements of Operations. Historical results and percentage relationships are
not necessarily indicative of operating results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of revenues 33% 23% 30% 23%
--- --- --- ---
Gross profit 67% 77% 70% 77%
Operating expenses:
Sales and marketing 54% 46% 51% 48%
General and administrative 16% 11% 14% 11%
Research and development 10% 9% 10% 10%
Restructuring charge 12% - 6% -
--- ----- -- -----
Total operating expenses 92% 66% 81% 70%
Income (loss) from operations (25%) 11% (11%) 7%
Non operating (income) expense 1% - - 1%
Income (loss) before income taxes (26%) 11% (11%) 6%
Income taxes (9%) 3% (4%) 2%
Net income (loss) (17%) 8% (7%) 4%
</TABLE>
Net revenues of $16.1 million for the second quarter of fiscal 1997 decreased
twenty-seven percent compared with net revenues of $22.1 million for the second
quarter of fiscal 1996.
8
<PAGE> 9
Revenues by customer category for the three and six month periods ended
December 31, 1996 and 1995 are shown below (in thousands). The Business
category includes the Micrografx Graphics Suite(TM), Micrografx Designer(TM),
Picture Publisher(R), Designer Power Pack, Micrografx FlowCharter(R), Small
Business Graphics and Print Studio(R), ABC ToolKit(TM), ABC SnapGraphics(TM),
PhotoMagic(R), Simply 3D(TM), Instant 3D(TM) and Visual Reality(R). The
Consumer category includes Crayola(TM) Amazing Art Adventure(TM), Crayola(TM)
Art Studio(TM), Crayola(TM)Art Studio(TM)2, Crayola(TM)Art(TM), American
Greetings(R) Creatacard(R) Plus(TM), and Hallmark Connections(TM) Card
Studio(TM). Revenues from Windows Draw(R) are categorized as either business or
consumer depending on the Company's assessment of the market or channel into
which the product is sold.
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
----------------------------------------- -----------------------------------------
1996 % 1995 % 1996 % 1995 %
------------ ------ ------------ ------- ----------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Business $ 11,288 70% $ 16,683 75% $ 22,610 69% $ 29,445 78%
Consumer 4,825 30% 5,460 25% 10,093 31% 8,376 22%
--------- --- --------- --- --------- --- --------- ---
Total $ 16,113 100% $ 22,143 100% $ 32,703 100% $ 37,821 100%
========= === ========= === ========= === ========= ===
</TABLE>
The overall decline in business revenues is primarily attributable to timing of
the product life cycle as well as customer selections of competitive products.
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. Though the Company has new versions of
certain of its business products scheduled for release during the March
quarter, many of the products sold during the second quarter were past this one
year optimal selling period. Declines in sales of these mature products were
offset in part by an increase in Windows Draw business revenues and revenues
from Small Business Graphics and Print Studio which was released during the
quarter. During the quarter, revenues from the Micrografx Graphics Suite and
the standalone versions of Micrografx FlowCharter each represented more than
25% of the Company's business products revenues.
The revenue decline in the Company's consumer products was also attributable to
products that were released over a year ago. Revenues for the products licensed
under the Crayola brand name were $0.9 million during the quarter compared to
$1.8 million for the same quarter of the prior year. This decline is a result
of the Company's decreased focus on the Crayola products in conjunction with
the expiration of the Company's agreement for marketing those products on March
31, 1997. Increasing revenues from the Company's Creatacard Plus product more
than offset the decline in Hallmark revenues resulting from the cessation of
shipments of the Hallmark product on September 30, 1996. For the second
quarter, the Creatacard product represented 72% of the Company's consumer
product revenues.
Revenues by geographical region for the three and six months ended December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
----------------------------------------- ------------------------------------------
1996 % 1995 % 1996 % 1995 %
------------ ------ ----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Americas $ 8,072 50% $ 11,016 50% $ 16,819 51% $ 18,292 48%
Europe 5,999 37% 8,241 37% 10,800 33% 13,673 36%
Pacific Rim 2,042 13% 2,886 13% 5,084 16% 5,856 16%
--------- --- --------- --- --------- --- --------- ---
Total $ 16,113 100% $ 22,143 100% $ 32,703 100% $ 37,821 100%
========= === ========= === ========= === ========= ===
</TABLE>
9
<PAGE> 10
Revenue declines were proportionate across each region during the quarter ended
December 31, 1996. This decrease resulted primarily from the changing product
release schedule explained above.
Cost of revenues for the three months ended December 31, 1996 was $5.3 million,
or 33% of net revenues, compared to $5.1 million, or 23% of net revenues, for
the three months ended December 31, 1995. The increase in cost of revenues for
the three months ended December 31, 1996 is attributable to a product mix that
includes more consumer products which have lower margins due to pricing
pressures, higher packaging and selling costs, and external royalties. Also
contributing to the rise in cost of revenues as a percent of revenues were a
reduction in greeting card pricing and an unfavorable shift in product mix to
boxed products which contain typical content (packaging, manuals, CD's 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 and OEM and license products
over the next two quarters.
The Company's operating results are affected by foreign exchange rates. Had the
exchange rates in effect during the second quarter of the prior year been in
effect during the second quarter of 1997, revenues would have been $0.5 million
higher. 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 is less than on revenues.
Sales and marketing expenses for the three months ended December 31, 1996 were
$8.8 million, or 54% of revenues, compared to $10.2 million, or 46% of revenues
for the same period in the previous year. The decrease in sales and marketing
expense reflects the efficiencies gained by eliminating duplicate costs
subsequent to the acquisition of Visual.
General and administrative expenses increased to $2.5 million for the quarter,
compared to $2.3 million for the second quarter of last year. This increase is
primarily attributable to non-recurring expenses related to the Company's CEO
search.
Net research and development expenses for the three months ended December 31,
1996 were $1.6 million, compared to $2.1 million for the quarter ended December
31, 1995. Gross research and development expenses, before capitalization, for
the three months ended December 31, 1996 remained flat versus the prior year at
$2.7 million.
During the three months ended December 31, 1996, the Company capitalized
approximately $1.1 million in software development costs and amortized $1.1
million in software development costs. This compares to capitalization of $0.6
million and amortization of $0.6 million in the three months ended December 31,
1995.
During the quarter, the Company took a $2.0 million restructuring charge which
was almost entirely related to severance for certain members of the senior
management team in the U.S. and abroad.
For the three months ended December 31, 1996, non-operating expenses of $0.1
million resulted from foreign exchange losses partially offset by interest
income. For the prior year quarter, foreign exchange losses approximately
offset interest income.
10
<PAGE> 11
For the six months ended December 31, 1996, net revenues of $32.7 million
decreased fourteen percent compared with $37.8 million for the six months ended
December 31, 1995. This decrease was across all geographies and is a result of
the timing of the product life cycle, as previously discussed, partially offset
by a growth of 88% in revenues from the Company's greeting card products.
Operating profit for the first two quarters of fiscal 1997 declined due to the
drop in revenue, the degradation of gross margins, and the restructuring
charge, partially offset by efficiencies gained in sales and marketing
resulting from the Visual acquisition.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's principal sources of liquidity consisted of
cash and cash equivalents of $11.1 million and short-term investments of $5.4
million.
For the six months ended December 31, 1996, cash used by investing activities
exceeded cash provided by operating and financing activities, resulting in a
decrease of $2.7 million in cash and cash equivalents but an increase in
short-term investments of $0.5 million. Operating activities provided $1.5
million in cash during the six months ended December 31, 1996, consisting of
depreciation and amortization of $4.4 million and an increase in accounts
payable and accrued liabilities of $4.2 million, partially offset by a net loss
of $2.4 million and increases in accounts receivable of $2.4 million and
deferred tax asset of $1.0 million. During the first half of 1997, the accounts
receivable allowance increased $1.3 million resulting from the overall increase
in receivables and the corresponding increase in days sales outstanding.
Investing activities used $5.0 million in cash during the six months ended
December 31, 1996 primarily due to capitalized software development costs and
purchases of acquired product rights of $3.5 million and capital expenditures
of $1.0 million. Financing activities provided $0.4 million in cash during the
six months ended December 31, 1996, consisting of proceeds from employee stock
programs. As discussed in the footnotes to the financial statements, the $2.0
million restructuring charge appears on the balance sheet as an accrued
liability. The Company expects to pay this amount over the next two quarters.
The Company believes that cash flow from operations and existing cash and
short-term investments will be sufficient to meet the Company's capital
requirements in the short term and thereafter.
FORWARD-LOOKING STATEMENTS
The Company notes that each of the above forward-looking statements are subject
to change based on various important factors including, without limitation,
competitive actions in the market place. Further information on potential
factors which could affect the Company's financial results are included in the
Company's 1996 Annual Report to Shareholders and other SEC reports and filings
of the Company.
11
<PAGE> 12
MICROGRAFX, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the resolution
of these legal proceedings and claims will not have a material effect on the
Company's consolidated financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on November 7, 1996, the
following persons were elected to the Board of Directors:
<TABLE>
<CAPTION>
Affirmative Votes Votes Withheld
----------------- --------------
<S> <C> <C>
J. Paul Grayson 7,889,845 144,664
David S. Gergacz 7,847,497 187,012
Seymour Merrin 7,881,888 152,621
Robert Kamerschen 7,847,206 187,303
Robert S. Miller 7,781,856 252,653
Eugene P. Beard 7,891,467 143,042
</TABLE>
The following proposals were also approved at the Company's Annual Meeting of
Shareholders
<TABLE>
<CAPTION>
Affirmative Negative Broker
Votes Votes Abstentions Non-votes
----- ----- ----------- ---------
<S> <C> <C> <C> <C>
Amendment of the Micrografx, Inc. 1995 5,359,196 2,583,532 36,021 55,760
Director Stock Option Plan increasing the
number of shares subject to options annually
granted to the Company's non-employee
directors from 3,000 to 7,500 options shares
Appointment of Arthur Andersen LLP as 7,958,652 60,090 15,767 0
independent public accountants for he
Company
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. The Financial Data Schedule required by Item 601(b)(27) of Regulation
S-K has been included with the electronic filing of this Form 10-Q.
(b) Reports on Form 8-K.
On January 22, 1997 the Company filed a Form 8-K to announce the approval
of Ernst & Young LLP as its independent auditors for the fiscal year
ending June 30, 1997 to replace the firm of Arthur Andersen LLP, who
resigned as auditors of the Company effective January 14, 1997.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROGRAFX, INC.
Date: February 14, 1996 By /s/ Larry G. Morris
--------------------
Larry G. Morris
Chief Financial Officer
and Treasurer
13
<PAGE> 14
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,059
<SECURITIES> 5,388
<RECEIVABLES> 16,135
<ALLOWANCES> 4,358
<INVENTORY> 1,766
<CURRENT-ASSETS> 33,762
<PP&E> 15,572
<DEPRECIATION> 12,600
<TOTAL-ASSETS> 42,413
<CURRENT-LIABILITIES> 14,263
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 27,330
<TOTAL-LIABILITY-AND-EQUITY> 42,413
<SALES> 32,703
<TOTAL-REVENUES> 32,703
<CGS> 9,941
<TOTAL-COSTS> 9,941
<OTHER-EXPENSES> 26,564
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> (3,636)
<INCOME-TAX> (1,236)
<INCOME-CONTINUING> (2,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,400)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
