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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, 1999
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 (I.R.S. Employer
incorporation or organization) Identification No.)
505 MILLENNIUM DRIVE, ALLEN, TEXAS 75013
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 495-4000
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. [ X ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant at August 31, 1999, was approximately $50,929,658.
On August 31, 1999, there were 11,227,962 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, 1999,
are incorporated by reference into Part III.
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MICROGRAFX, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
TABLE OF CONTENTS
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PART I.
Item 1. Business...............................................................1
Item 2. Properties.............................................................9
Item 3. Legal Proceedings.....................................................10
Item 4. Submission of Matters to a Vote of Security Holders...................10
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................................10
Item 6. Selected Financial Data...............................................11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................12
Item 7 (a) Quantitative and Qualitative Disclosures About Market Risk............31
Item 8. Financial Statements and Supplementary Data...........................32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................54
PART III.
Item 10. Directors and Executive Officers of the Registrant....................54
Item 11. Executive Compensation................................................54
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................................54
Item 13. Certain Relationships and Related Transactions........................54
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......54
Item 14 (a)Index to Financial Statements and Financial Statement Schedules.......57
Signatures............................................................58
Financial Statement Schedule .........................................59
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Form 10-K of Micrografx, Inc., ("Micrografx" or the "Company") contains
certain "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Specifically, all statements other than statements of historical facts included
in this report regarding the Company's financial position, business strategy and
plans, and objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "anticipate," "believe," "estimate," "expect," and "intend,"
and words or phrases of similar import, as they relate to the Company or Company
management, are intended to identify forward-looking statements. Such statements
(the "cautionary statements") reflect the current view of the Company with
respect to future events and are subject to risks, uncertainties, and
assumptions related to various factors including, without limitation, changes in
the product release schedule, acceptance or the lack thereof of the Company's
recently announced iGrafx(TM) products, growth or the lack thereof in the
enterprise solutions business of the Company, changes in distribution channels,
changes in the market, new products and announcements from other companies,
changes in technology, interrupted purchasing patterns by customers due to Year
2000 spending and competition from larger, more established competitors.
Although the Company believes that expectations are reasonable, it can give no
assurance that such expectations will prove to be correct. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected, or intended. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the applicable cautionary statements.
GENERAL
Micrografx, Inc. ("Micrografx" or the "Company"), develops and markets graphics
software that gives a company the ability to monitor, evaluate and improve their
business processes. The Company is focusing on graphics applications software
products for business use in the areas of process management and the management
of technical graphics. Additionally, the Company seeks to leverage its
technology base by partnering with organizations to maximize the distribution
and value of its intellectual property.
Historically, the Company has developed a variety of graphics oriented software
products. These products included various technologies such as image editing, 3D
object rendering, basic drawing tools for both the consumer and corporate
markets, greeting card software for the personal creativity market,
flowcharting, process simulation, and technical drawing. In fiscal year 1997, it
became apparent to management and the board of directors that Micrografx did not
have the critical mass to continue to support the number of technologies it was
pursuing. As a result, several changes were made in the management team of the
Company. In 1997, the new management team began the process of determining which
technologies the Company should pursue as part of the long-term strategy of the
Company. It was determined that the greatest potential value was in pursuing
solutions for the corporate market and to de-emphasize the consumer market.
While pursuing this change in direction, the challenge has been to maintain
profitability in the face of phasing out technologies that did not fit into the
long-term strategy of the Company and changing the internal infrastructure and
employee skill sets to line up with the long-term strategy.
The first significant steps in the strategic change process were the licensing
of Micrografx consumer technologies: drawing, greeting card and consumer image
editing, to Cendant Software Corporation ("Cendant") effective June 30, 1998 and
the assignment of the Company's distribution rights for American Greetings
CreataCard Gold and
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CreataCard Plus to The Learning Company ("TLC") in August of 1998. These
agreements ended Micrografx development and distribution of these products and
completed the Company's de-emphasis of the consumer market in order to focus on
the business graphics market. The combined value of these licensing and
assignment agreements was approximately $21 million. The $21 million was
recognized as technology licensing revenue in varying amounts from the fourth
quarter of 1998 through the fourth quarter of 1999, depending upon the actual
delivery of the technologies and services associated with the agreements.
Subsequent to the de-emphasis of the consumer market, Micrografx concentrated on
pursuing three areas of corporate graphics software: process management,
corporate graphics and network design. As a result of a slower than expected
ramp-up rate of the corporate software business, the Company determined in
September of 1999 that it should refine its focus even further to two
categories: process management and technical graphics. The process management
products are iGrafx Professional, iGrafx Process, Micrografx FlowCharter and
Optima. The technical graphics products are iGrafx Designer and ActiveCGM
(acquired from Intergraph Corporation on April 16, 1999). These two categories
represent the greatest potential as the underlying technologies provide the
opportunity to develop significant solutions for corporations in addition to
licensing the basic technologies to corporations for general use.
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 505 Millennium Drive, Allen,
Texas, 75013, and its telephone number is (214) 495-4000. The Company's U.S.
operations are based in Allen, Texas, with a development office located in
Portland, Oregon and a sales and development office in Annapolis, Maryland.
International subsidiaries are located in the United Kingdom, France, Germany,
Italy, the Netherlands, Switzerland, Australia, and Japan.
BUSINESS STRATEGY AND PRODUCTS
The Company develops and markets software tools and solutions that are targeted
toward corporate needs for enterprise process management and technical graphics.
The Company also sells network diagramming and design software and general use
graphics software. Additionally, the Company seeks to partner with organizations
to maximize the value of its technology base. While some of the technical
graphics applications are written for the UNIX(R) environment, the Company's
products are generally designed for personal computers utilizing the Microsoft
Windows(R) operating environments, which include Windows 95, Windows 98, and
Windows NT.
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 18 to 24 months. Significant versions and the
release date for English versions of the Company's products are discussed below
with the product to which it relates.
ENTERPRISE PROCESS MANAGEMENT APPLICATIONS
Every business has key processes that can be broken down into smaller processes,
each eventually describing specific activities across the organization.
Enterprise Process Management ("EPM") tools exist to help management supervise
this key sequence of events and to assist the organization to perform at optimal
levels. Benefits of this effort may include faster time to market with products,
improved cost effectiveness, and increased product quality. Today, most
businesses address these issues in the context of a single department or
project. While this by-department or by-project methodology can yield short-term
success, it is a self-limiting approach. EPM delves deeper by providing a
disciplined, systematic approach with the potential to yield greater long-term
benefits across departments and functional areas of the organization.
The Company believes that graphical visualization software tools provide the
best way to document and communicate process information, allowing people to
comprehend more information and mentally process more complexity than was
possible before. Sophisticated process management tools - when used to their
fullest potential - can add significant value, extending far beyond electronic
processes. These tools can be used to assess all of the
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critical factors (such as cycle times, costs, etc.) tied to each step in any
kind of process, and can reveal ways to make the system faster, more
cost-effective, more efficient or quality oriented, or any combination of these.
Process management is a cycle that occurs in three stages: documentation,
improvement, and management. The purpose of the documentation stage is to create
a snapshot of how the business operates today. This stage can be the most
labor-intensive, often requiring a great deal of information gathering and data
entry. The best tools for this stage make input intuitive and fast.
Documentation can be made far more efficient by drawing the process rather than
manually writing out each process. Also, when the process must be communicated
to others, the Company believes that it is far easier for the human mind to
digest and understand the flow of a process when it is presented visually.
The improvement stage addresses such issues as lowering costs, reducing
time-to-market, and improving quality. In some cases, just the act of
documentation identifies obvious inefficiencies that can be easily remedied.
Aside from the obvious process flaws that reveal themselves, however, process
simulation is the cornerstone of process improvement initiatives. Process
simulation tools allow users to enter key variables and constraints into a
process flow, run the simulation, then see where inefficiencies lie. Simulation
also allows for "what-if" analysis to determine the optimal solution in a
process.
The highest level of sophistication in process management is the management of
all an organization's process information by providing efficient storage,
access, and distribution systems across an organization. At this point, the
question is no longer "What is the best process?" but rather "How can I apply
this best process so that it is utilized across my organization consistently?"
Micrografx provides tools for each stage of the cycle:
IGRAFX(TM) PROFESSIONAL provides a leading-edge technology base for Micrografx's
ongoing process management tool development initiatives. Below the surface,
iGrafx Professional incorporates one of the industry's most advanced graphics
engines, with superior display and printing technologies designed specifically
for the needs of process management. iGrafx Professional creates powerful,
interactive diagrams of business processes, workflow, computer networks, Web
sites, and databases, among others. iGrafx Professional is fully extensible via
Microsoft's Visual Basic for Applications (VBA) version 6.0 for powerful custom
solutions and incorporates iGrafx iShapes(TM) technology. iGrafx Professional is
the next generation of the Company's FlowCharter(R) product, which is no longer
actively marketed. iGrafx Professional was released in March 1999.
IGRAFX(TM) PROCESS, an extension of the iGrafx Professional technology, is a
process management tool that wraps an easy-to-use interface around a high-end
process simulation engine. iGrafx Process provides robust modeling and
simulation capabilities for companies striving to improve internal processes. It
is designed to model business processes and perform "what-if" simulations on
most business scenarios, allowing the management team to analyze and experiment
with company processes without directly impacting the business. Customers are
using iGrafx Process to communicate about processes, reduce cycle times,
eliminate bottlenecks, understand capacity constraints, re-deploy limited
resources, and more. iGrafx Process is fully extensible via VBA 6.0 for powerful
custom solutions and incorporates iShapes(TM) technology. iGrafx Process is the
next generation of the Company's Optima(R) product, which is no longer actively
marketed. iGrafx Process was released in March 1999.
IGRAFX(TM) DEVELOPMENT provides a powerful, flexible, and intelligent
development environment for custom graphics solutions. iGrafx Development is an
Integrated Development Environment (IDE) that offers documentation and
productivity tools on the development features available through iGrafx Process
and iGrafx Professional. This new platform delivers limitless capabilities for
applications integration, extensions and customization, thanks to an extensive
API set and full support for VBA 6.0. This product allows corporate developers
and Independent Software Vendors (ISVs) to benefit from the leading-edge
graphics and process management technologies available in iGrafx Professional
and iGrafx Process. IGrafx Development was released in June 1999.
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TECHNICAL GRAPHICS APPLICATIONS
Corporations are looking for help to increase productivity and profitability by
exploiting the power of the Web and related technologies. Micrografx offers
standards-based products and services that enable companies to leverage valuable
investments in engineering drawings, technical illustrations, schematics, and
diagrams, and to optimize them for use in innovative web-based applications such
as parts catalogs, technical documentation, shop-floor viewing, and real-time
monitoring and control systems. The transferability and reusability of technical
graphics, particularly for production-oriented companies, enable the development
of web-based product information systems that span the organization - from the
main office to engineering and from design to the shop floor. This information
system is particularly valuable when companies use the Company's technology to
hotspot graphics and hyperlink to related data, creating "intelligent graphics."
IGRAFX DESIGNER is the technical graphics solution that bridges the gap between
CAD and camera-ready, providing a rich graphical tool set that supports an
incredibly diverse range of file types, including many UNIX-based CAD/CAM
systems. Engineering departments and technical publishers alike can take
advantage of iGrafx Designer's powerful, flexible functionality to create rich,
presentation-quality graphics that can be easily utilized in Microsoft Office
documents, presentations, web and intranet pages, and much more. With
leading-edge, full-featured tools for image editing and 3D, iGrafx Designer is a
complete graphics solution designed for the exacting needs of today's designers
and technical graphics users. iGrafx Designer is the next generation of the
Company's Designer product, which is no longer actively marketed. iGrafx
Designer was released in June 1999.
ACTIVECGM PUBLISHING SUITE lets users create, view, and add hyperlinks and
animation to technical graphics. ActiveCGM allows attribute information to be
linked to graphics components. Using ActiveCGM and HTML, the text markup
language for the Web, authors can easily create high-quality, interactive
graphics-driven documents that are compact and efficient for Internet
distribution. The suite is comprised of ActiveCGM Author, ActiveCGM Runtime,
ActiveCGM Browser, and VP-Active and is based on a native implementation of CGM.
It is the first standards-based software suite designed to support the creation
and delivery of intelligent graphics on the Web. ActiveCGM was obtained from
Intergraph with the purchase of InterCAP in April 1999.
ILLUSTRATOR2 AND MONDELLO are for professional technical illustrators working in
manufacturing, aerospace, defense, electronics, and heavy equipment industries.
They provide the missing link in computer-aided publishing by replacing the
drawing board and automating the graphics segment of the publishing process.
These products help professional illustrators create, edit, and manage
high-quality artwork containing raster images, continuous-tone images, and
vector line art. Illustrator2 is for a UNIX based platform while Mondello is for
Windows NT and both were obtained from Intergraph with the purchase of InterCAP
in April 1999.
SOLUTIONS CONSULTING
In order to address specific customer needs, the Company has created solutions
consulting groups within the enterprise process management and technical
graphics areas. During the selling process, if it is determined that a customer
needs functionality beyond that of the current applications, the solutions
consulting groups will provide a means to meet the customer's requirements. In
the enterprise process management area, the solution generally involves VBA
coding in the iGrafx Development application, which was created specifically for
this purpose. In the technical graphics area, modifications are generally made
to the existing product to satisfy the customer need. These groups are comprised
of a highly specialized consultative team of engineers, software developers, and
technical graphics artists who deliver innovative process, Web, and
eCommerce-based solutions to companies who want to exploit the Internet and
related technologies for competitive advantage. The Company packages
standards-based technology with industry best practices through customization of
its applications often with other custom or off-the-shelf software tools.
Whether acting as the project lead or as part of a multi-vendor partnership, the
Company's flexibility, adaptability and proven methodology empowers
organizations to maximize their solutions investments.
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CORPORATE GRAPHICS AND LEGACY APPLICATIONS
Micrografx also provides the following graphics tools:
GRAPHICS SUITE(R) is a suite of four legacy software applications: Picture
Publisher(R), Simply3D(R), Designer(R), and FlowCharter(R). Graphics Suite 2
Enterprise was released in December 1997.
PICTURE PUBLISHER(R), the long-time leader in easy-to-use, yet powerful,
full-featured image editing, also provides full functionality for creating
compelling Web pages. Picture Publisher contains 10,000 stock photos and clip
art images, 500 seamless Internet textures, 250 TrueType(TM) fonts, as well as
effects, filters, creative macros, templates, interactive wizards, and on-line
tutorials. Picture Publisher 8 was released in February 1998.
SIMPLY3D(R), an innovative, intuitive tool, takes three-dimensional ("3D")
technical power from simple logos to complex, micron-accurate technical
illustrations, with rendering and animation easy enough for the occasional user.
Simply3D allows the user to create professional-quality 3D text, Web graphics,
and animations for all kinds of projects, including web sites, print, video,
multimedia, and even interactive 3D scenes for Microsoft PowerPoint(R)
presentations. Simply3D contains 1,000 3D drag-and-drop objects and 800
professional-quality textures as well as many lighting setups, animations, and
deformations. Simply3D 3 was released in February 1998.
WEBTRICITY(TM) is a suite of three powerful, professional-level applications
that give users the ability to make compelling graphics and animation for the
Web. The suite includes Picture Publisher, Simply3D, and Media Manager(R).
Webtricity 2 was released in May 1998.
NETWORKCHARTER(TM) PRO integrates network discovery, design, and documentation
understandably and affordably. This intelligent tool, which includes more than
10,000 devices in its library, simplifies planning and reporting and extends the
network expertise of network managers. It also enables consistent administration
and reporting by local network managers. NetworkCharter Pro incorporates
high-end discovery capabilities with an object-oriented, data-rich device
profiling system. Diagrams created in NetworkCharter are automatically enhanced
with key device attributes and configuration rules, providing intelligent design
assistance and problem assessment before a single cable is connected.
NetworkCharter is geared for IT professionals, systems integrators, systems
resellers, or others charged with maintaining, designing, configuring - or
reconfiguring - computer networks. NetworkCharter Pro was released in September
1999.
TECHNOLOGY DEVELOPMENT AND LICENSING
Micrografx is using its library of graphics software in selective licensing and
in the creation of solutions for specific market niches in response to client
demand. As opportunities come along, Micrografx will continue to look for ways
to build relationships with companies by licensing them the use of
Micrografx-developed technologies for use in markets in which the Company does
not compete. In doing so, the Company's strategy is not to sell the asset that
has been developed, but only license the technology. In all cases thus far, the
Company has retained the right to software source code that the Company has
developed. The previously mentioned agreements with Cendant and TLC are
representative of the type of transactions that fall into this business
category.
LICENSING AND DISTRIBUTION AGREEMENTS
Netformx License Agreement. The Company has entered into a licensing agreement
with Netformx, Ltd., ("Netformx") for network design products NetworkCharter and
NetworkCharter Pro. The Company has the right to distribute the products to end
users and resellers but the Company does not own the source code. The Company
pays Netformx a quarterly fee for the right to distribute the software based
upon sales of the NetworkCharter products, with provisions for certain minimum
payments regardless of sales volume. The Company and Netformx have also agreed
to make a good faith effort to develop NetworkCharter products that utilize the
Company's
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FlowCharter graphics engine. The agreement expires on April 29, 2001, and
automatically renews for successive terms of one year each, unless terminated by
either party prior to the expiration of the initial term.
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. Most of the Company's products
have been localized into various languages including German, French, Japanese,
Italian, and Spanish.
MARKETING AND DISTRIBUTION
The Company maintains sales organizations in most major markets of the world,
including the United States, Germany, France, the United Kingdom, Italy,
Switzerland, Australia and Japan. In addition, the Company has appointed agents
in the Netherlands, Denmark, Switzerland, Spain and Poland. Approximately 39
percent of the Company's revenues were generated outside the United States in
fiscal 1999, with approximately 34 percent from Europe and approximately 5
percent from Asia Pacific. See "Segment Information" in Notes to Consolidated
Financial Statements included under Item 8 for geographical segmentation of
revenues, and property, plant, and equipment.
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 original equipment manufacturers ("OEMs").
Distributors and resellers. The Company markets its products primarily through
independent, non-exclusive distributors and resellers located in 38 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
1999, sales to Ingram Micro accounted for 12 percent of the Company's net
revenues, while no other customer accounted for more than 10 percent of the
Company's net revenues. In fiscal 1998, sales to Ingram Micro and Tech Data each
accounted for 19 percent of the Company's net revenues, while no other customer
accounted for more than 10 percent 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
in the Company's offices 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 1999, the Company had OEM agreements for
its corporate graphics products with companies including Matrox Graphics,
Mustek, Inc, Point Group Corporation,
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and Seimens Building Technologies, Inc. The Company also generated revenue from
previous agreements for legacy personal creativity products with companies
including Avery Dennison, Canon Computer, and Seiko Epson.
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, and also uses the services of 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 or
Internet support. 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 for a fee on a
pay-per-incident plan paid by credit card charge or through a pre-purchased
annual support plan. Technical support business hours are from 8:00 a.m. to 6:00
p.m. Central Standard Time Monday through Friday in the United States. Internet
support is provided 24 hours a day, 7 days per week via support databases, user
forums, or downloadable files. The Company has resumed product support
internally for North American customers and generally outsources these
activities to independent, third party service providers in 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.
See "Consolidated Statements of Operations" and "Capitalized Software
Development Costs and Acquired Product Rights" 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 ("Adobe"), Corel Systems Corporation
("Corel"), Macromedia, Inc. ("Macromedia"), and Visio Corporation ("Visio"). On
September 15, 1999, Microsoft, Inc. announced an agreement to acquire Visio. The
primary competitor for the Company's process management and network design
products is Visio; and the primary competitors for the Company's technical
graphics products are ITEDO Software and its United States subsidiary, the
IsoDraw Company, and IDS Professor Scheer, of Germany.
Most of the Company's 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
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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, ability to
extend product to meet specific customer needs, 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, Optima,
Micrografx FlowCharter, NetworkCharter, Micrografx Graphics Suite, Micrografx
Designer, Simply 3D, and Instant 3D are registered trademarks of Micrografx,
Inc. iGrafx, iGrids, Webtricity, Small Business Graphics and Print Studio,
Micrografx Media Manager, and ABC ToolKit, are trademarks of Micrografx, Inc.
American Greetings, CreataCard Gold, and CreataCard Plus are either registered
trademarks or trademarks of American Greetings Corporation. 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.
EMPLOYEES
As of June 30, 1999, the Company employed 331 associates, of which 121 were in
product development, 143 in sales, marketing, and customer support, and 67 in
finance, operations, and administration. The Company's
8
<PAGE>
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 are 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 41 President and Chief Executive Officer
John M. Carradine 41 Chief Financial Officer and Treasurer
Kenneth A. Carraher 40 Executive Vice President of Product
Development
Frank W. Childers 48 Executive Vice President of Global Sales
R. Edwin Pearce 45 Executive Vice President Corporate
Development, General Counsel and Secretary
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.
John M. Carradine was named Chief Financial Officer and Treasurer in October
1998. Prior to his appointment at Micrografx, Mr. Carradine was the Chief
Financial Officer and Treasurer of Intellicall, Inc., a telecommunications
company, where he held various financial positions for eight years. From 1983 to
1990, Mr. Carradine was with Computer Language Research, Inc., a data services
and software company where he served as Treasurer. Mr. Carradine is a licensed
CPA in the state of Texas.
Kenneth A. Carraher was named Executive Vice President of Product Development in
June 1999 after serving as the Company's Vice President of Enterprise Solutions
since July 1997. Mr. Carraher was formerly the President of AdvanEdge
Technologies, which was acquired by Micrografx in 1997, where he pioneered
advanced process management solutions with the Optima and Optima Express
software products.
Frank W. Childers joined the Company in July 1998, as Executive Vice President
of Global Sales. Prior to joining the Company, he spent 19 years in progressive
sales and marketing management roles for Mentor Graphics Corporation, an
electronic hardware and software design automation company, Automation
Technology Products, Applicon, a division of Schlumberger, and McDonnell
Douglas.
R. Edwin Pearce was named Executive Vice President of Corporate Development,
General Counsel and Secretary in June 1999, after serving as Vice President
Corporate Development, General Counsel and Secretary since June 1996. 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.
ITEM 2. PROPERTIES
The Company's headquarters are located in Allen, Texas, and include
approximately 90,000 square feet of leased space under an agreement that expires
in August 2009. 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 Portland, Oregon and
Annapolis, Maryland; and international sales offices in Woking, United Kingdom;
Paris, France; Munich, Germany; Chatswood, Australia; and Tokyo, Japan; and has
a production control office in Venlo, the Netherlands.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Micrografx has filed litigation in the federal district court for the Northern
District of Texas, asking for declaratory relief that an at-will interim letter
agreement between THINK New Ideas, Inc. (THINK), and Micrografx may be
terminated by Micrografx as of May 3, 1999, without additional payment to THINK.
THINK filed its counterclaim, alleging that the agreement could be terminated
only with 90 days notice, and not without the payment of an additional amount of
compensation in the amount of $889,000, which THINK alleges Micrografx promised
to pay under agreement with THINK. Micrografx disputes the notice period for
termination and that any additional money is owed, beyond an agreed monthly
retainer of $83,000, which was paid to THINK until the termination of the
interim agreement. THINK originally filed its counter-complaint in Los Angeles,
California disputing jurisdiction and venue in Dallas, Texas but since has
agreed to the jurisdiction of the Texas court, but has asked the court to
transfer the case to Los Angeles as a more convenient forum. A hearing date of
October 4, 1999 has been set to adjudicate certain jurisdictional matters in the
California action. No other hearing date has been set on the preliminary
matters, and the parties are in the process of setting discovery and related
schedules.
The Company is also subject to certain legal proceedings and claims that 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, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on NASDAQ/NMS under the symbol MGXI. As of
June 30, 1999, there were 189 holders of record, which represents approximately
2,700 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:
QUARTER ENDED HIGH LOW
September 30, 1997 $ 8.250 $ 5.750
December 31, 1997 $ 10.625 $ 6.500
March 31, 1998 $ 14.000 $ 8.000
June 30, 1998 $ 14.875 $ 10.500
September 30, 1998 $ 14.438 $ 8.500
December 31, 1998 $ 11.125 $ 7.625
March 31,1999 $ 12.375 $ 7.625
June 30, 1999 $ 9.375 $ 5.375
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
RESULTS OF OPERATIONS (in thousands, except per share data) (1)
<CAPTION>
YEARS ENDED JUNE 30,
- -----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 56,962 $ 71,792 $ 64,862 $ 72,919 $ 64,345
Income (loss) from operations $ (3,419) $ 373 $ (8,405) $ 1,078 $ 529
Net income (loss) $ (5,852) $ 607 $ (6,187) $ 1,112 $ 695
Basic earnings (loss) per share $ (0.53) $ .06 $ (0.60) $ 0.11 $ 0.07
Diluted earnings (loss) per share $ (0.53) $ .05 $ (0.60) $ 0.11 $ 0.07
Shares used in computing basic earnings (loss)
per share 11,119 10,613 10,342 9,798 9,455
Shares used in computing diluted
earnings (loss) per share 11,119 11,055 10,342 10,136 9,480
</TABLE>
<TABLE>
BALANCE SHEET DATA (in thousands)(1)
<CAPTION>
AS OF JUNE 30,
- -----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 11,220 $ 28,067 $ 14,765 $ 18,634 $ 16,641
Working capital $ 5,605 $ 18,112 $ 12,937 $ 21,232 $ 16,726
Total assets $ 42,383 $ 55,141 $ 39,112 $ 40,098 $ 39,290
Total long-term liabilities $ 5,808 $ 410 $ 1,414 $ 684 $ 903
Debt to banks $ - $ - $ - $ - $ 700
Shareholders' equity $ 22,432 $ 28,570 $ 23,528 $ 29,105 $ 25,976
(1) On April 2, 1996, Micrografx, Inc., acquired Visual Software, Inc. (Visual)
in a stock-for-stock acquisition accounted for as a pooling of interests.
The above financial data has been retroactively adjusted to include the
results of Visual for fiscal years 1996 and 1995.
</TABLE>
11
<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. The Company develops and markets
graphics software that gives a company the ability to monitor, evaluate and
improve their business processes. The Company is focusing on graphics
applications software products for business use in the areas of process
management and the management of technical graphics. Additionally, the Company
seeks to leverage its technology base by partnering with organizations to
maximize the distribution and value of its intellectual property.
Historically, the Company has developed a variety of graphics oriented software
products. These products included various technologies such as image editing, 3D
object rendering, basic drawing tools for both the consumer and corporate
markets, greeting card software for the personal creativity market,
flowcharting, process simulation, and technical drawing. In fiscal year 1997, it
became apparent to management and the board of directors that Micrografx did not
have the critical mass to continue to support the number of technologies it was
pursuing. As a result, several changes were made in the management team of the
Company. In 1997, the new management team began the process of determining which
technologies the Company should pursue as part of the long-term strategy of the
Company. It was determined that the greatest potential value was in pursuing
solutions for the corporate market and to de-emphasize the consumer market.
While pursuing this change in direction, the challenge has been to maintain
profitability in the face of phasing out technologies that did not fit into the
long-term strategy of the Company and changing the internal infrastructure and
employee skill sets to line up with the long-term strategy.
The first significant steps in the strategic change process were the licensing
of Micrografx consumer technologies: drawing, greeting card and consumer image
editing to Cendant Software Corporation ("Cendant") effective June 30, 1998, and
the assignment of the Company's distribution rights for American Greetings
CreataCard Gold and CreataCard Plus to The Learning Company ("TLC") in August of
1998. These agreements ended Micrografx development and distribution of these
products and completed the Company's de-emphasis of the consumer market in order
to focus on the business graphics market. The combined value of these licensing
and assignment agreements was approximately $21 million. The $21 million was
recognized as technology licensing revenue in varying amounts from the fourth
quarter of 1998 through the fourth quarter of 1999, depending upon the actual
delivery of the technologies and services associated with the agreements.
Subsequent to the de-emphasis of the consumer market, Micrografx concentrated on
pursuing three areas of corporate graphics software: process management,
corporate graphics and network design. As a result of a slower than expected
ramp-up rate of the corporate software business, the Company determined in
September 1999, that it should refine its focus even further to two categories:
process management and technical graphics. The process management products are
iGrafx Professional, iGrafx Process, Micrografx FlowCharter, and Optima. The
technical graphics products are iGrafx Designer and ActiveCGM (acquired from
Intergraph Corporation on April 16, 1999.) These two categories represent the
greatest potential as the underlying technologies provide the opportunity to
develop significant solutions for corporations in addition to licensing the
basic technologies to corporations for general use. See "Liquidity" for a
discussion of the future impact of the decision to focus only on process
management and technical graphics.
12
<PAGE>
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,
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Net revenues 100% 100% 100%
Cost of revenues 18% 30% 31%
Gross profit 82% 70% 69%
Operating expenses:
Sales and marketing 59% 48% 53%
General and administrative 12% 10% 12%
Research and development 14% 12% 11%
In-process research and development charge 3% - 3%
Restructuring charges - - 3%
Total operating expenses 88% 70% 82%
(Loss) income from operations (6%) - (13%)
Non operating (income) expense (1%) (1%) (1%)
(Loss) income before income taxes (5%) 1% (12%)
Income taxes 5% - (2%)
Net (loss) income (10%) 1% (10%)
</TABLE>
13
<PAGE>
FISCAL 1999 COMPARED TO FISCAL 1998
NET REVENUES
The following table sets forth net revenues by product category and the
percentage relationship to total net revenues. The process management category
includes iGrafx Professional(TM), iGrafx Process(TM), Micrografx FlowCharter(R),
Optima(R) and 40 percent of Micrografx Graphics Suite(R) revenues. The technical
graphics category includes Micrografx Designer(R), iGrafx Designer(TM), the
ActiveCGM(TM) products, and 60 percent of Micrografx Graphics Suite(R) revenues.
Micrografx Graphics Suite(TM) is a suite of products that includes Micrografx
FlowCharter(R), Micrografx Designer(R), Picture Publisher(R), and Simply3D(R).
The revenues from Micrografx Graphics Suite are allocated between process
management and technical graphics based on management's estimate of the number
Micrografx Graphics Suite sales where the customer's decision to buy was based
on FlowCharter or based on Designer.
The technology category results from the Company's use of its library of
graphics software in selective licensing. For fiscal 1999, the technology
category consists of licensing of certain personal creativity software source
code to Cendant. The legacy category includes American Greetings(R)
CreataCard(R) Plus(TM), American Greetings(R) CreataCard(R) Gold(TM), iGrafx
Business(TM), NetworkCharter(TM), Picture Publisher(R), Simply3D(R),
Webtricity(TM), Windows Draw(R), Simply3D(R)(TM), and Picture Publisher(R).
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 % 1998 %
---------------------------------------------
<S> <C> <C> <C> <C>
Process management $ 19,481 34% $ 20,821 29%
Technical graphics 7,574 13% 9,389 13%
Technology 17,975 32% 3,025 4%
Legacy 11,932 21% 38,557 54%
---------------------------------------------
Total revenues $ 56,962 100% $ 71,792 100%
=============================================
</TABLE>
Net revenues by geographic region and as a percentage of total revenues are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 % 1998 %
----------------------------------------------
<S> <C> <C> <C> <C>
Americas $ 34,695 61% $ 39,737 55%
Europe 19,153 34% 24,772 35%
Asia Pacific 3,114 5% 7,283 10%
----------------------------------------------
Total net revenues $ 56,962 100% $ 71,792 100%
==============================================
</TABLE>
14
<PAGE>
Net revenues by geographic region and as a percentage of revenues excluding the
technology and legacy revenues.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 % 1998 %
----------------------------------------------
<S> <C> <C> <C> <C>
Americas $ 9,913 37% $ 10,367 34%
Europe 14,756 54% 16,507 55%
Asia Pacific 2,386 9% 3,336 11%
----------------------------------------------
Total net revenues $ 27,055 100% $ 30,210 100%
==============================================
</TABLE>
ENTERPRISE PROCESS MANAGEMENT
The 6 percent decrease in process management revenues is a reflection of the
Company's change in business. Historically the Company primarily focused on the
sale of boxed product through retail distribution. As the Company changed its
focus to corporate licensing and increased the pricing of its products to be in
line with a corporate licensing model, the Company experienced a decline in the
boxed product sales. The decline in boxed product sales has not been immediately
offset by an increase in corporate licenses for two reasons: (1) the long
corporate sales cycle which can be up to 18 months and (2) the amount of time it
takes for a new corporate sales person to produce revenues at an acceptable
level. The Company only began in fiscal year 1999 the process of building a
sales force to accommodate a corporate sales model and it can take up to 6
months for a new salesperson to produce revenues at an acceptable level.
Additionally, corporations have temporarily curtailed software spending until
they have identified and remedied any problems that may result from the Year
2000 issue.
TECHNICAL GRAPHICS
Technical graphics revenues declined 19 percent due to the same reasons as noted
above in the process management discussion. The decline was partially offset by
revenues from the ActiveCGM products, which were acquired in April 1999. The
decline in technical graphics revenues is more severe than the decline in
process management revenues because of the heavy reliance of the technical
graphics category on Graphics Suite, which accounts for approximately 85 percent
of the category's revenues. Graphics Suite accounts for only approximately 20
percent of the process management category. Graphics Suite historically had a
higher reliance on the retail channel than the other products in the process
management category. As Micrografx reduced its marketing effort on the retail
channel, and due to the age of the current version of Graphics Suite, Micrografx
experienced a substantial decline in Graphics Suite revenues. It is anticipated
that this decline will be offset in the future as the Company begins to grow
revenue relating to the ActiveCGM products.
TECHNOLOGY
The technology category contains revenue recognized related to the previously
discussed Cendant and TLC relationships. As of June 30, 1999, all revenue
related to these transactions has been recognized. The Company continues to seek
other licensing relationships in order to leverage its portfolio of
technologies, however, there can be no assurance that the Company will be able
to enter into licensing relationships in the future.
LEGACY
The significant decline in this category is the result of the Company's change
in strategic direction as previously discussed.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues includes the cost of documentation, diskettes or compact disks
(CDs), packaging and production overhead; amortization of capitalized software
development costs and acquired product rights, and technology royalties. The
decrease in cost of revenues as a percentage of net revenues for fiscal 1999 is
primarily attributable to the technology category revenues, which have very
little direct costs associated with them. The cost of revenues related to the
technology category consists of the amortization of capitalized costs related to
the development of the technology and technology royalty expenses. Also
contributing to the decline in cost of revenues as a percent of
15
<PAGE>
revenues was a favorable shift in product mix from boxed products, which contain
typical content (packaging, manuals, CDs or floppy disks) to multi-user and OEM
license revenues which require substantially less content.
It is anticipated that in the future cost of revenues should be between 15 and
20 percent of revenues. This percentage is reflective of a higher average sales
price and, to a lesser extent, a lower cost of revenues. Sales to corporations
carry a lower cost of revenues than the consumer software products, which the
Company no longer sells due to the multi-user license sales model for
corporations. Multi-user licenses generally require the delivery of only a few
CDs and manuals rather than a boxed software product for each user.
SALES AND MARKETING EXPENSE
Sales and marketing expenses include the cost of advertising, promotions,
cooperative and incentive programs with distributors, trade shows, marketing,
technical support, and the Company's sales force. Sales and marketing expenses
increased as a percentage of revenues primarily due to the costs associated with
launching the new iGrafx products during the year.
The Company expects that sales and marketing expenses will decline both in
absolute dollars and as a percentage of revenue. The decline is expected to
result from the Company's continued reduction in focus on the retail
distribution channel, the support of which requires greater sales and marketing
expense, and improved efficiency of the sales force as they gain more experience
in the enterprise market.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses include principally the costs of the
Company's executive, information systems, human resources, finance, legal, and
administrative functions. The reduction in general and administrative expenses
is primarily due to a reduction in legal expenses. In fiscal 1998, the Company
incurred significant legal expenses relating to its lawsuit with Corel
Corporation and to contract disputes with American Greetings Corporation. Both
of these disputes were resolved during the first half of fiscal 1999 at no
additional cost to the Company.
The Company expects that general and administrative expenses will decline in
absolute dollars, resulting from cost reductions that are being implemented in
the first half of fiscal 2000.
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. Historically the Company estimated the
economic life of the products to be from 12 to 18 months, which is consistent
with a consumer software model. With the change in strategy to a corporate
software provider, the Company now estimates the economic life of the corporate
software to be approximately 48 months. The longer economic life was implemented
with the release of iGrafx Professional, iGrafx Process, and iGrafx Designer. No
adjustments were made to the amortization rate of any previously released
software, which had lives ranging from 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 1999
were $8.2 million, or 14 percent of net revenues, compared to $8.5 million, or
12 percent of net revenues, in fiscal 1998. Gross research and development
expenses, before capitalization, for fiscal 1999 were $13.9 million, or 24
percent of net revenues, compared to $12.7 million, or 18 percent of revenues
for fiscal 1998. The increase in gross research and development expenses
primarily relates to the new versions of software released in fiscal 1999. In
fiscal 1999, the Company released iGrafx Business, iGrafx Professional, iGrafx
Process, iGrafx Designer, iGrafx Share, Network Charter Pro 1.5, iGrafx
Development, and iGrafx OrgCharter. In fiscal 1998, the Company released Optima
2.5, Picture Publisher 8.0, Simply 3D 3.0, Webtricity 2.0, ISO Charter 1.0,
Enterprise Charter 4.0, Network Charter 1.0, Network Charter Pro 1.0, Designer
7.0, Picture Publisher 7.0, FlowCharter 7.0 and Graphics Suite 2e.
It is anticipated that research and development expenses will decline
substantially in the future as the Company will only be developing the iGrafx
Professional, iGrafx Process, iGrafx Designer, and ActiveCGM technologies.
16
<PAGE>
During fiscal 1999, the Company capitalized approximately $5.6 million in
software development costs and amortized $3.0 million in software development
costs. This compares to capitalization of $4.3 million and amortization of $4.4
million for fiscal 1998.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE
On April 16, 1999, the Company acquired InterCAP for approximately $12.4
million. The purchase price consisted of $3.9 million in cash at closing,
issuance of a promissory note to Intergraph for $2.5 million, payable with
interest on August 31, 1999, issuance of a convertible subordinated debenture to
Intergraph for $5.8 million due March 31, 2002, and approximately $213,000 in
costs directly related to the transaction. See "Debt" under Notes to
Consolidated Financial Statements for further information on the payment of the
promissory note to Intergraph.
In connection with the Company's acquisition of InterCAP, the Company recorded a
charge of $1.9 million for purchased in-process research and development
(purchased R&D), based upon the appraised value of the related developmental
projects. The Income Approach, which included an analysis of the markets, cash
flows, and risks associated with achieving such cash flows, was the primary
technique utilized in valuing each purchased R&D project.
InterCAP's research and development relates to WebCGM software products. These
software products allow customers in the aerospace, defense and manufacturing
industries to publish technical graphics on the Internet. Micrografx's goal in
this acquisition was to acquire technology that complemented its iGrafx Designer
technical graphics product. iGrafx Designer, in conjunction with the acquired
technologies, allows Micrografx to create a solution for intelligent technical
illustration and Web-based technical publishing. These complementary products
provide a tiered illustration solution supported by the industry standards and
leading-edge Web publishing solutions.
Significant assumptions used in determining the value of purchased R&D for
InterCAP included projected operating cash flows and the discount rate.
Projected operating cash flows were expected to begin in early fiscal 2000. The
discount rate selected for InterCAP's in-process technologies was 20 percent.
At the time of the acquisition, InterCAP management estimated the remaining cost
and time to complete the purchased R&D projects was approximately $355,000 and
44 engineer-months. The term "engineer-month" refers to the average amount of
research work expected to be performed by an engineer in a month. All the
in-process projects are currently on schedule. Micrografx expects to essentially
meet its original return expectations.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and uncertain
assumptions utilized in the valuation analysis of the in-process research and
development. Uncertainties regarding projected operating cash flows could give
rise to unforeseen budget over-runs and or revenue shortfalls in the event that
Micrografx is unable to successfully commercialize the projects. Micrografx
management is primarily responsible for estimating the value of the purchased
R&D in all acquisitions accounted for under the purchase method.
EFFECT OF EXCHANGE RATES
Exchange rates during fiscal 1999 had an unfavorable impact on net revenues
reported by the Company. If exchange rates had not changed from their 1998
rates, the Company would have reported approximately $0.4 million more in net
revenues in fiscal 1999. 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.
17
<PAGE>
NON OPERATING (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 increased from $0.6 million in fiscal 1998 to $1.0 million in
fiscal 1999, due to the increase in cash on hand during fiscal 1999 resulting
from the licensing of technology to Cendant and TLC. Interest expense increased
in fiscal 1999 as a result of the debt incurred in conjunction with the purchase
of InterCAP.
INCOME TAXES
The Company recognized a tax provision of $3.1 million in fiscal 1999, compared
to $0.3 million in fiscal 1998. For further information on income taxes, see
Notes to Consolidated Financial Statements.
FISCAL 1998 COMPARED TO FISCAL 1997
NET REVENUES
The following table sets forth net revenues by product category and the
percentage relationship to total net revenues. The process management category
includes Micrografx FlowCharter(R), Micrografx EnterpriseCharter(TM), Micrografx
ISOCharter(TM), Optima(R) and 40 percent of Micrografx Graphics Suite(R)
revenues. The technical graphics category includes Micrografx Designer(R), and
60 percent of Micrografx Graphics Suite(R) revenues. Micrografx Graphics
Suite(TM) is a suite of products that includes Micrografx FlowCharter(R),
Micrografx Designer(R), Picture Publisher(R), and Simply3D(R). The revenues from
Micrografx Graphics Suite are allocated between process management and technical
graphics based on management's estimate of the number Micrografx Graphics Suite
sales where the customer's decision to buy was based on FlowCharter or based on
Designer.
The technology category results from the Company's use of its library of
graphics software in selective licensing. For fiscal 1998, the technology
category consists of licensing of certain personal creativity software source
code to Cendant. The legacy category includes American Greetings(R)
CreataCard(R) Plus(TM), American Greetings(R) CreataCard(R) Gold(TM),
Crayola(TM)Art Studio(TM), Hallmark Connections(TM) Card Studio(TM), iGrafx
Business(R), NetworkCharter(TM), Simply3D(TM), Webtricity(TM), Windows Draw(R),
Simply3D(R), and Picture Publisher(R).
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1998 % 1997 %
---------------------------------------------
<S> <C> <C> <C> <C>
Process management $ 20,821 29% $ 21,218 33%
Technical graphics 9,389 13% 13,439 21%
Technology 3,025 4% - 0%
Legacy 38,557 54% 30,205 46%
---------------------------------------------
Total net revenues $ 71,792 100% $ 64,862 100%
=============================================
</TABLE>
PROCESS MANAGEMENT
Process management revenues decreased slightly from fiscal 1997 to fiscal 1998
due to the decline in the Japanese economy, which was partially offset by Optima
revenues. No Optima revenues are included in fiscal 1997 as the acquisition
occurred on June 30, 1997.
TECHNICAL GRAPHICS
Technical graphics revenues decreased by 30 percent from fiscal 1997 to fiscal
1998. The decrease was primarily the result of the decline in the Japanese
economy.
18
<PAGE>
TECHNOLOGY
The technology category contains the portion of the revenue recognized in fiscal
1998 related to the previously discussed Cendant and TLC relationships.
LEGACY
The 28 percent growth in this category resulted from the continued growth of the
greeting card software market. The Company's CreataCard products continued its
market share leadership against stiff competition from products published by
Microsoft and Broderbund. The Company also released a new version of Windows
Draw resulting in a significant sales increase. These gains were partially
offset by declines in other legacy products such as those licensed under the
Crayola brand name, for which the Company's license expired in the third quarter
of fiscal 1997.
Net revenues by geographic region and as a percentage of total revenues are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1998 % 1997 %
----------------------------------------------
<S> <C> <C> <C> <C>
Americas $ 39,737 55% $ 33,287 51%
Europe 24,772 35% 20,839 32%
Asia Pacific 7,283 10% 10,736 17%
----------------------------------------------
Total net revenues $ 71,792 100% $ 64,862 100%
==============================================
</TABLE>
The revenue increase in the Americas resulted from the growth in personal
creativity, most of which is U.S. based. The growth in Europe resulted from the
focus on sales to corporate customers, primarily from sales of Graphics Suite
and FlowCharter. The Asia Pacific decline resulted from the dramatic decline in
the retail sector of the Japanese economy.
Net revenues by geographic region and as a percentage of revenues excluding the
technology and legacy revenues.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1998 % 1997 %
----------------------------------------------
<S> <C> <C> <C> <C>
Americas $ 10,367 34% $ 13,449 39%
Europe 16,507 55% 15,228 44%
Asia Pacific 3,336 11% 5,980 17%
----------------------------------------------
Total net revenues $ 30,210 100% $ 34,657 100%
==============================================
</TABLE>
The revenue decrease in the Americas resulted from the declining sales of
Graphics Suite, due to the age of the current version. As European versions are
typically released one quarter after American releases, the growth in Europe
resulted from the sales of Graphics Suite, which was a new release in Europe.
The Asia Pacific decline resulted from the dramatic decline in the retail sector
of the Japanese economy.
COST OF REVENUES AND GROSS PROFIT
The decrease in cost of revenues as a percentage of net revenues for fiscal 1998
is attributable to the technology category revenues that have no direct costs
associated with them, partially offset by the accelerated amortization of costs
capitalized related to the development of the personal creativity titles as well
as increased royalties due from the personal creativity revenues. Also
contributing to the decline in cost of revenues as a percent of revenues was a
favorable shift in product mix from boxed products which contain typical content
(packaging, manuals, CDs or floppy disks) to OEM and multi-user license revenues
which require substantially less content.
19
<PAGE>
SALES AND MARKETING EXPENSE
The Company was able to reduce expenses in absolute dollars despite growing
revenue and adding a significant number of corporate sales people. The
additional cost of the sales people was more than offset by reductions in
variable marketing funds spent in retail channels as well as reduced spending in
Japan due to the continuing economic decline there.
GENERAL AND ADMINISTRATIVE EXPENSE
The decline in fiscal 1998 resulted from savings realized following the
restructuring in fiscal 1997, partially offset by outside legal and professional
fees resulting from the Cendant transaction.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses (net of amounts capitalized) in fiscal 1998
were $8.5 million, or 12 percent of net revenues, compared to $7.2 million, or
11 percent of net revenues, in fiscal 1997. Gross research and development
expenses, before capitalization, for fiscal 1998 were $12.7 million, or 18
percent of net revenues, compared to $11.0 million, or 17 percent of revenues
for fiscal 1997. The increased spending resulted from an increase in the number
of development employees as well as the ongoing development expenses resulting
from the acquisitions of AdvanEdge Technologies, Inc. ("AdvanEdge") on June 30,
1997, and WebKnight, Inc. ("WebKnight"), on December 31, 1997.
During fiscal 1998, the Company capitalized approximately $4.3 million in
software development costs and amortized $4.4 million in software development
costs. This compares to capitalization of $3.8 million and amortization of $4.0
million for fiscal 1997.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE
On June 30, 1997, the Company acquired AdvanEdge 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.
In connection with the Company's acquisitions of AdvanEdge, the Company recorded
a charge of $2.3 million for purchased in-process research and development
(purchased R&D), based upon the appraised value of the related developmental
projects. The Income Approach, which included an analysis of the markets, cash
flows, and risks associated with achieving such cash flows, was the primary
technique utilized in valuing each purchased R&D project.
AdvanEdge's research and development related to business process simulation
software product. This software product allows customers to document their
business processes and simulate the processes in order to assess efficiency of
the process and the impact of possible changes to the process. Micrografx's goal
in this acquisition was to acquire technology that complemented its Micrografx
FlowCharter(R) process management product. Micrografx FlowCharter(R) in
conjunction with the acquired technologies allows Micrografx to create an
extended process management offering which includes a basic process
documentation tool and a process simulation tool.
Significant assumptions used in determining the value of purchased R&D for
AdvanEdge included projected operating cash flows and the discount rate.
Projected operating cash flows were expected to begin in early fiscal 1999. The
discount rate selected for AdvanEdge's in-process technologies was 25 percent.
At the time of the acquisitions, AdvanEdge management estimated the remaining
cost and time to complete the purchased R&D projects was approximately $850,000
and 86 engineer-months. The term "engineer-month" refers to the average amount
of research work expected to be performed by an engineer in a month. All the
in-process projects have been completed within the budget. Micrografx expects to
essentially meet its original return expectations.
20
<PAGE>
EFFECT OF EXCHANGE RATES
Exchange rates during fiscal 1998 had an unfavorable impact on net revenues
reported by the Company. If exchange rates had not changed from their 1997
rates, the Company would have reported approximately $3.0 million more in net
revenues in fiscal 1998. 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.
NON OPERATING (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 $0.8 million in
fiscal 1997 to $0.6 million in fiscal 1998, while unfavorable exchange rate
variations charged $0.1 million to other expenses in fiscal 1998 and $0.5
million in 1997.
INCOME TAXES
The Company recognized a tax provision of $0.3 million in fiscal 1998, compared
to a tax benefit of $1.9 million in fiscal 1997. For further information on
income taxes, see Notes to Consolidated Financial Statements.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected financial results for each of the last
eight quarters through June 30, 1999 (in thousands, except per share data).
These financial results are unaudited. 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
- ------------------------------------------------------------------------------------------
9/30/98 12/31/98 3/31/99 6/30/99
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 15,738 $ 17,045 $ 14,472 $ 9,707
Gross profit 12,654 13,695 12,880 7,523
Income (loss) from operations 729 855 1,124 (6,127)
Net income (loss) 585 710 784 (7,931)
Basic and diluted income
(loss) per share $ .05 $ .06 $ .07 $ (.71)
Shares used in computing income (loss) per share:
Basic 11,207 11,024 11,076 11,170
Diluted 11,750 11,304 11,404 11,170
QUARTERS ENDED
- ------------------------------------------------------------------------------------------
9/30/97 12/31/97 3/31/98 6/30/98
- ------------------------------------------------------------------------------------------
Net revenues $ 15,531 $ 19,357 $ 17,262 $ 19,642
Gross profit 10,825 13,849 12,508 13,144
Income (loss) from operations (919) 631 291 370
Net income (loss) (547) 558 224 372
Basic and diluted income
(loss) per share $ (.05) $ .05 $ .02 $ .03
Shares used in computing income (loss) per share:
Basic 10,472 10,539 10,636 10,783
Diluted 10,472 11,068 11,513 11,424
</TABLE>
22
<PAGE>
TRENDS AND RISK FACTORS
The following discusses trends and risk factors inherent in the Company's
business environment.
CHANGE IN COMPANY FOCUS
During fiscal 1999 and in prior years, the Company has generated a significant
portion of its business from the personal creativity software market and the
licensing of personal creativity technology to third parties. Due to aggressive
competition and the Company's belief that its products are well suited to
various high-growth corporate markets, the Company has chosen to pursue
corporate customers. The Company's future financial performance will depend on
the successful transition of internal resources away from its strength in the
retail market while moving toward solving problems currently experienced by
corporations. In order to accomplish its objective, the Company has hired
employees with skills required for the Company's new direction, and is training
existing employees on how to make this change, but there is no assurance that
management's efforts will be successful. In order to succeed, the Company will
have to convince corporations that its products are able to solve their
problems, the Company will have to identify and develop features which corporate
customers desire, and the Company will have to ensure that it has a sales force
and customer support system sufficient in size and expertise to service
corporate customers. In light of the difficulties associated with the transition
of its business focus from consumer retail products to business product sales to
corporate accounts, the Company may confront unanticipated risks and
uncertainties. Therefore, there can be no assurance that the Company's new
business strategy will be successful, and it is possible that the Company's
future results from operations and financial condition will be adversely
affected if it is unable to effectively implement its new business focus. During
fiscal 1999, the Company experienced a loss of $5.9 million while it attempted
to transition its business model, and it anticipates incurring additional losses
in fiscal 2000.
LIQUIDITY RISKS
During fiscal 1999, the Company used approximately $19.8 million for operations,
software development and capital expenditures. The rate of cash usage was
greater than expected for transitioning the Company's business from its
historical consumer business to its new enterprise business and due to the
amount of the Company's existing cash resources, such rate of cash usage is
unsustainable. At June 30, 1999, cash and short-term investments had decreased
to $11.2 million from $28.1 million at June 30, 1998. Based upon management's
current expectations, the Company will also experience operating losses and
usages of cash resources in fiscal 2000. Management has developed plans for
reducing the rate of cash usage while transitioning its business model. See
"Liquidity and Capital Resources". Should these plans and steps be insufficient
to meet the goal of reducing cash resources and allowing the Company to meet its
obligations from existing resources, and if the steps to increase revenue growth
are unsuccessful, the Company would then be left with inadequate resources to
operate its business. Therefore, the Company is significantly dependent upon the
efforts of management to reduce expenses and increase revenues to reduce the
significant cash deficits currently being experienced in its business. In
addition, the Company was obligated to pay Intergraph $2.5 million on a
promissory note. The note was issued as part of the consideration for the
purchase of InterCAP. The note was originally due in full on August 31, 1999,
but the Company has negotiated with the holder, Intergraph, for payment of $1.25
million plus accrued interest of approximately $110,000 on September 28, 1999,
and for the remaining balance of $1.25 million plus interest to be paid on
October 28, 1999. There can be no assurance that management will be successful
in its efforts to preserve the Company's existing sources of liquidity. While
management intends to pursue, and believes it can do so accordingly, external
funding to meet its cash needs, including possibly the sale of equity in the
Company, there is not any assurance that the Company can identify any sources of
external funding; and, even if such funding is available, it is possible that
the funding could result in significant dilution to existing shareholders. These
risks associated with managing cash liquidity and efforts to grow revenues have
presented the Company with significant challenges in fiscal 1999 and these
challenges are expected to continue through fiscal 2000, with no assurance of a
favorable outcome.
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.
23
<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 that 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. In September 1999, Microsoft Corporation ("Microsoft")
announced an agreement to acquire Visio, a significant competitor to the Company
in its enterprise software business. If the merger is completed, Microsoft will
become a significant competitor to the Company, with significant competitive
advantages due to, among other things, its ownership and distribution of the
operating systems on which the Company's and Visio's products operate, giving
Microsoft a technological advantage in developing and marketing Visio products.
Additionally, Microsoft has vastly greater marketing, distribution,
technological, financial and other resources than the Company. There can be no
assurance that the Company will be able to compete effectively with Microsoft if
the Visio merger is completed which could have a material adverse effect on the
Company and its results of operations and financial condition.
INTERNATIONAL OPERATIONS
The Company anticipates that international net revenues will continue to account
for a significant portion of total 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.
The Company's revenues generated from its Asia Pacific sales offices has
declined significantly from fiscal 1998 to fiscal 1999. This decline resulted
from the economic uncertainty and recession in Japan as well as Micrografx's
de-emphasis of the consumer market. Historically, the majority of the Company's
revenues in Japan were consumer related. The Company has shifted its focus in
Japan to corporate customers in keeping with the Company's overall strategy.
There is no assurance that this strategy will be successful.
CHANGES IN DISTRIBUTION CHANNELS
The Company is focusing on corporate customers and has de-emphasized its
personal creativity business. In doing so, it has to transition its
relationships with the distribution channels to coincide with the change. While
the Company does not anticipate a significant change in the channels used, it
must change its sales and marketing programs to suit the corporate customers
buying through those channels. The Company's success depends in part on its
ability to identify and respond to changes in the distribution channel.
SEASONALITY AND QUARTERLY REVENUE FLUCTUATIONS
Historically, the Company has experienced significant quarterly variations in
its results of operations. Causes of these variations included 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. The Company expects the seasonality to
decline somewhat as a result of its changes in focus from serving the retail
market to selling to corporate customers. Some level of seasonality is expected
to continue with a higher level of revenues occurring in the December quarter in
connection with the purchasing habits of corporations as they close out their
fiscal year. A lower level of revenues is expected to occur in the September
quarter due to the high level of vacations taken in Europe during the July and
August time frame resulting in a low level of corporate purchasing.
24
<PAGE>
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 multi-user licenses), as well as changes in the components of
direct costs, have in the past and may in the future affect the Company's gross
profit.
LIQUIDITY AND CAPITAL RESOURCES
As discussed previously, in fiscal 1997 the Company began transitioning its
revenue base and business strategy away from consumer related software products
in favor of software and solutions for corporations and other large enterprises.
In line with that strategy, from the period beginning in June 1998 and ending in
August 1998 the Company has licensed its consumer technologies in a series of
agreements to Cendant and TLC for $21.0 million. As a result of these
transactions and from prior operations, the Company had cash and short-term
investments totaling approximately $28.1 million at June 30, 1998.
The intended use of the capital provided by the licensing transactions was to
fund the Company's growth into its enterprise model and strategy. As a result,
during fiscal 1999 the Company's cash and short-term investments declined
approximately $16.9 million to $11.2 million at June 30, 1999. The principal
components of this change were as follows:
SOURCES OF CASH
Collections on technology licensing $ 6.8
Proceeds from employee stock programs 3.9
---------
Subtotal sources 10.7
USES OF CASH
Operations $ 10.1
Software development programs 8.0
Purchase of treasury stock 4.1
Acquisition payment for InterCAP 3.7
Capital expenditures 1.7
---------
Subtotal uses 27.6
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS $ 16.9
=========
During fiscal 1999, the Company used approximately $19.8 million for operations,
software development and capital expenditures. The rate of cash usage was
greater than expected for transitioning the Company's business from its historic
customer and revenue base and is unsustainable. However, based on management's
current expectations, the Company will also incur operating losses and further
usage of cash resources during fiscal 2000, although at a reduced rate after its
first fiscal quarter.
25
<PAGE>
As a result of the cash and liquidity situation, management has developed plans
for reducing the rate of cash usage and completing the Company's transition to
an enterprise software business model. Those plans include the following steps
and expectations:
1) Implementation of further cost reductions. Cash operating costs
(operating costs before consideration of capitalized software
development and amortization) have declined from a high of $14.0
million at the end of the second quarter of fiscal 1999, to an
expected level between $11.0 and $12.0 million at the end of
the first quarter of fiscal 2000. Further cost reductions are
planned in the second and third quarters of fiscal 2000.
Cost reductions in fiscal 1999 resulted principally from
substantial changes in marketing and distribution activities, and
to a lesser extent in product development activities. Cost
reductions in fiscal 2000 will include (i) lower personnel costs,
principally in general and administrative and product development
activities, and (ii) lower sales and marketing costs.
Management has already implemented plans to lower general and
administrative, and product development costs. The number of
products supported by development activities has been reduced,
allowing for lower attendant costs of quality assurance and
testing, localization, and production. General and administrative
costs are being reduced through reorganization of the Company's
headquarters staff and a reduction in the number of executive and
support personnel. In addition, plans are being implemented to
lower the cost of legal activities, information technology and
general costs of operation.
Sales and marketing activities, principally in South America and
in regions of Europe, which do not generate sufficient revenue to
warrant the infrastructure required to support those regions are
being restricted. Variable marketing costs including the costs for
retail channel distribution support, advertising, public relations
and other marketing activities have been reduced or eliminated.
2) Expectation for increasing revenue. Operational revenues from the
Company's principal target markets - enterprise process management
and technical graphics, did not grow sufficiently in fiscal 1999
to support operations. In the opinion of management, the slower
than expected revenue growth occurred principally for the
following reasons: (i) year 2000 slowdowns and deferrals for
software spending by many corporations, (ii) later than expected
delivery of new product releases, particularly in Europe where
product releases occurred too close to seasonally low corporate
spending periods, (iii) a longer than expected selling cycle for
enterprise sales, and (iv) a longer than anticipated conversion of
the Company's sales force from its established retail distribution
model expertise to an enterprise selling strategy.
In fiscal 2000, revenues are expected to increase and are already
showing improved indications. The Company's target markets are
large corporations and government entities, and the number of
target customers expressing interest in process improvement and
technical graphics solutions has increased significantly.
Management attributes this trend to its sales strategy and methods
and to a significantly improved level of education and knowledge
in the current sales force. However there can be no assurances
such trends will continue.
The average transaction size is increasing and the number of
transactions exceeding $100,000, $250,000 and $500,000 is also
increasing. The total pipeline of sales opportunities has
increased significantly in the last six months and the number of
large transactions in prospect has also increased. Management also
believes that its European operations will improve from seasonal
summer lows and from overcoming the introductory period for new
products.
In addition to its strategic drive in process management and
technical graphics, management believes the Company has a number
of opportunities for tactical revenue transactions in its legacy
products, and from the potential licensing of non-strategic
technologies.
26
<PAGE>
3) Reduced capital spending. After the first quarter of fiscal 2000,
the Company plans to restrict capital spending principally to
requirements for replacement. First quarter capital expenditures,
principally related to the Company moving its corporate
headquarters to Allen, Texas will be uncharacteristically high. As
a result of the move, the Company replaced old and obsolete office
furniture and fixtures and was required to replace and upgrade a
significant amount of network and telephony equipment. However,
the overwhelming majority of first quarter spending was financed
through long-term leasing transactions, thus mitigating the cash
outflow related to the move. See Notes to the Consolidated
Financial Statements for the Company's future lease commitments
Although management of the Company believes that the Company's sales will grow
in fiscal 2000 and therefore, that its results will improve in tandem with
sales, there can be no assurance that the events necessary for such sales growth
will occur as, or when expected. In addition, the Company was obligated to pay
Intergraph $2.5 million on a promissory note. The note was issued as part of the
consideration for the purchase of InterCAP. The note was originally due in full
on August 31, 1999, but the Company has negotiated with the holder, Intergraph,
for payment of $1.25 million plus accrued interest of approximately $110,000 on
September 28, 1999, and for the remaining balance of $1.25 million plus interest
to be paid on October 28, 1999. Management is examining various financing
methods that would ensure that the capital resources of the Company are
sufficient to meet its requirements. Such measures include the sale of equity
securities in a private transaction, and the sale or spin-off of certain assets
to third parties. Management believes it will be successful in obtaining the
necessary revenue levels and/or additional necessary funding to operate the
Company in the near term, however, there can be no assurance that under its
current conditions, external funds will be available or, if available, will not
potentially dilute shareholders' interests or returns.
CASH FLOWS DURING FISCAL 1999
During 1999, cash and cash equivalents plus short-term investments decreased by
$16.9 million to $11.2 million. Net cash flows from operations resulted in a
decline to a $3.1 million deficit. The Company paid $3.7 million relating to the
acquisition of InterCAP. Approximately $8.0 million in cash was used in the
development of technology and was capitalized as software development cost.
Property and equipment expenditures amounted to $1.7 million. The Company
acquired approximately 471,000 shares of treasury stock for $4.1 million,
substantially offset by proceeds of $3.9 million from employee stock programs.
CAPITAL RESOURCES
As of June 30, 1999, the Company had no significant commitments for capital
expenditures.
YEAR 2000 COSTS
The Company is aware of and is addressing a broad range of issues associated
with the programming code in existing computer systems as the Year 2000
approaches. The Year 2000 issue is complex, as many computer systems will be
affected in some way by the rollover of the two-digit year value to 00. Systems
that do not properly recognize such information could generate erroneous data or
cause a system to fail. The Year 2000 issue creates risk for the Company from
unforeseen problems in its own infrastructure and systems, its own products and
from third parties with which the Company deals on financial and other
transactions worldwide. Failures of the Company's and/or third parties' computer
systems could have a material impact on the Company's ability to conduct its
business.
The Company began an infrastructure and systems review of Year 2000 readiness
for the United States operations in May 1998, with the objectives of:
o Inventorying all computer, network, and telephony-related hardware and
software;
o Assessing, through both research and testing, whether or not the equipment and
software are Y2K compliant;
o Developing plans for upgrading hardware and software to Year 2000 compliant
status, decommissioning non-compliant hardware that cannot be upgraded to a
compliant state, and replacing software that cannot be upgraded to Year 2000
compliance.
27
<PAGE>
As of February 1, 1999, all mission critical systems and applications in the
data center were reviewed and plans for upgrade, decommissioning or replacement
were developed for systems and applications that are not Year 2000 compliant.
Software upgrades and replacement are scheduled to be completed by September 30,
1999.
Workstations, desktop and laptop computers used in the development of the
Company's products and in conducting the Company's business are largely newer
machines that are reported by their manufacturers to be Year 2000 compliant. A
small number of machines have been identified, which, due to age or
obsolescence, cannot be brought into compliance. The Company plans to
decommission and/or replace these machines during the year.
The principal software running on the Company's computers is licensed under
corporate maintenance agreements with major vendors that have reported either
that their software is currently Year 2000 compliant or that Year 2000 compliant
upgrades will be available during calendar year 1999. It is the Company's intent
to apply and verify such upgrades as they become available.
Non-compliant hardware was upgraded, decommissioned, or replaced before, or
concurrent with, the completion of the Company's move to its new corporate
headquarters in September of 1999.
The inventory, review, upgrade, replacement, and decommissioning plans described
herein refer specifically to mission critical corporate standard technology and
components. Special purpose hardware and software, such as may be found in some
areas of Development and Quality Assurance, and personal productivity tools that
are not covered by corporate standards, are not covered in this plan because
this hardware is not directly used in the running of the business or development
of products.
The Company's foreign subsidiaries and contractors access mission critical
applications through the services of the Company's wide area network. With
regard to centrally administered applications and systems software, the
Company's foreign operations are at an equal state of Year 2000 readiness with
the Company A small number of remote communications components have been
identified as not being Year 2000 ready, and these components are scheduled for
replacement by September 30, 1999. Foreign operations represent a small
percentage of the Company's hardware assets, and formal review of their Year
2000 readiness status began in March 1999.
The principal costs incurred in addressing Year 2000 issues to date have been
managerial and administrative. All essential third-party software is on
maintenance agreements, and hardware expenses have already been accounted for in
either normal retirement/replacement plans or in the planned expenses for the
infrastructure of the new headquarters building.
A small number of internally developed applications are not currently Year 2000
compliant, and the cost of remediation will not be material to the Company's
operating results. In addition, the historical cost of remediation has not been
material.
Each of the Company's product divisions has completed a Year 2000 assessment of
its currently offered products. While this assessment included internal testing
of the Year 2000 capabilities of these products, the Company has not had, and
has no plans to have, its products tested by an independent third party. The
Company believes that the vast majority of its currently offered products are
Year 2000 compliant, and expects virtually all of its remaining currently
offered products to become compliant through new releases. In any event, the
Company expects that all of its currently offered products will be Year 2000
compliant before the end of 1999. Because Year 2000 compliance is generally
integrated into its normal product development activities, the Company has not
incurred and does not expect to incur any significant incremental expenses in
addressing this issue in its product lines. The Company believes that a small
number of its customers that receive product support from the Company are
operating product versions that may not be Year 2000 compliant or products that
the Company has replaced or intends to replace with comparable, Year 2000
compliant products. The Company believes that the vast majorities of such
customers are migrating and will continue to migrate to compliant versions and
products through new releases, which the Company is strongly encouraging. In
addition, certain former customers may be operating non-compliant versions of
products in respect of which the Company's agreed-upon product support and
warranty periods have expired. The Company has not undertaken an assessment of
whether these former customers are taking appropriate steps to address any
related Year 2000 issues. The Company does not expect customers who
28
<PAGE>
purchase or migrate to current versions of the Company's products to experience
any Year 2000 failures caused by such products. In addition, the Company
believes that its licenses and other agreements contain customary and
appropriate limitations on the Company's obligations with respect to any Year
2000 failures that may be caused by its current or former products. However,
there can be no assurance that the Company's expectations and beliefs as to
these and related matters will prove to be accurate. Moreover, the Company is
aware of a growing number of lawsuits against software vendors and other
information technology firms involving Year 2000 issues. In addition, regardless
of whether the Company's products are Year 2000 compliant, they operate on IT
systems consisting of third-party hardware and software, some of which may not
be fully Year 2000 compliant. In light of the foregoing factors, there can be no
assurance that customers or former customers will not bring claims or
proceedings against the Company seeking compensation for losses associated with
Year 2000-related failures.
The Company has begun a Year 2000 assessment of its material third party
supplier relationships. The assessment is being conducted through formal
communications with such suppliers, testing of supplier equipment, systems or
interfaces, and a review of the Year 2000 information made publicly available by
such suppliers. The Company plans to substantially complete the assessment of
these third parties by the third quarter of calendar year 1999 and, promptly
upon discovery of any readiness issues that are material to the Company, begin
efforts to obtain adequate readiness assurances from the relevant third parties.
There can be no assurance that the Company will receive all information
necessary to fully evaluate the Year 2000 readiness of all material suppliers.
In addition, the Company relies in various ways, both domestically and
internationally, on governments, utilities, communications service providers,
financial institutions and other third parties to conduct normal business
operations. There can be no assurance that suppliers and other third parties
upon which the Company is reliant will not suffer business interruptions caused
by Year 2000 issues. Such interruptions could have a material adverse effect on
the Company's business, financial condition and results of operations.
Other aspects of the Year 2000 issue may pose additional risks to the Company.
Some commentators predict that normal purchasing patterns and trends in the
software industry may be affected by customers replacing or upgrading
applications or systems to address Year 2000 issues. The Company has experienced
a small number of potential customers who have indicated that they will not be
considering any new software purchases until after the first calendar quarter of
2000. However, there currently does not appear to be a discernable trend
indicating a recent or impending material reduction in demand for the Company's
products. However, there can be no assurance that Year 2000 issues will not
affect future customer purchasing patterns, possibly resulting in lower demand
for the Company's products. Furthermore, commentators have predicted that a
significant amount of litigation may arise out of Year 2000 compliance issues.
Although certain potential litigation scenarios have been described above, the
probability of the Company's actual involvement in any lawsuits of this nature
and the range of potential outcomes is not estimable at this time. A material
adverse outcome in a Year 2000 lawsuit - as is the case with any lawsuit - could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Although the Company believes that its Year 2000 readiness efforts are designed
to appropriately identify and address those Year 2000 issues that are within the
Company's control, there can be no assurance that the Company's efforts will be
fully effective or that Year 2000 issues will not have a material adverse effect
on the Company's business, financial condition, or results of operations. The
novelty and complexity of the issues presented, the proposed solutions
therefore, and the Company's dependence on the preparedness of third parties,
are among the factors that could cause the Company's efforts to be less than
fully effective. Moreover, Year 2000 issues present many risks that are simply
beyond the Company's control, for example, the collateral effects of Year 2000
issues on the economy in general and on the Company's business partners and
customers in particular. In light of the foregoing, the Company believes that it
is not possible to specifically describe its most reasonably likely "worst case"
Year 2000 scenario or to quantify the related potential consequences. However,
the risks and the potential consequences described above represent management's
best judgment of these matters based on currently available information. Except
as described above, the Company has not established "contingency plans" to
address potential consequences of the Year 2000 issues. The Company intends to
continue to evaluate both existing and newly identified Year 2000 risks and to
develop and implement such further responsive measures as it deems appropriate.
29
<PAGE>
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
Micrografx has filed litigation in the federal district court for the Northern
District of Texas, asking for declaratory relief that an at-will interim letter
agreement between THINK New Ideas, Inc. (THINK), and Micrografx may be
terminated by Micrografx as of May 3, 1999, without additional payment to THINK.
THINK filed its counterclaim, alleging that the agreement could be terminated
only with 90 days notice, and not without the payment of an additional amount of
compensation in the amount of $889,000, which THINK alleges Micrografx promised
to pay under agreement with THINK. Micrografx disputes the notice period for
termination and that any additional money is owed, beyond an agreed monthly
retainer of $83,000, which was paid to THINK until the termination of the
interim agreement. THINK originally filed its counter-complaint in Los Angeles,
California disputing jurisdiction and venue in Dallas, but since has agreed to
the jurisdiction of the Texas court, but has asked the court to transfer the
case to Los Angeles as a more convenient forum. A hearing date of October 4,
1999 has been set to adjudicate certain jurisdictional matters in the California
action. No other hearing date has been set on the preliminary matters, and the
parties are in the process of setting discovery and related schedules.
The Company is also subject to certain legal proceedings and claims that 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133" which amends FASB Statement No. 133 by delaying its effective date for one
year, to fiscal years beginning after June 15, 2000. SFAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The effect of SFAS 133 and SFAS 137 on the Company
has not yet been determined.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Specifically, all statements other than statements of
historical facts included in this report regarding the Company's financial
position, business strategy and plans, and objectives of management of the
Company for future operations are forward-looking statements. These
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," and "intend," and words or phrases of similar
import, as they relate to the Company or Company management, are intended to
identify forward-looking statements. Such statements (the "cautionary
statements") reflect the current view of the Company with respect to future
events and are subject to risks, uncertainties, and assumptions related to
various factors including, without limitation, changes in the product release
schedule, acceptance or the lack thereof of the Company's recently announced
iGrafx(TM) System(R), growth or the lack thereof in the enterprise solutions
business of the Company, changes in distribution channels, changes in the
market, new products and announcements from other companies, changes in
technology, interrupted purchasing patterns by customers due to Year 2000
spending and competition from larger, more established competitors. Although the
Company believes that expectations are reasonable, it can give no assurance that
such expectations will prove to be correct. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated, expected, or
intended. All subsequent written and oral forward-looking
30
<PAGE>
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the applicable cautionary statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The U.S. Dollar is the functional currency for financial reporting. In this
regard, the Company uses foreign forward exchange contracts, to minimize the
adverse earnings impact from the effect of exchange rate fluctuations on the
Company's non-U.S. dollar net balance sheet exposures. For example, at fiscal
year end 1999, the Company had foreign forward exchange contracts outstanding of
$554,000 to sell German marks. Similar hedging activities existed at fiscal year
end 1998. A hypothetical 10% plus or minus fluctuation in non-U.S. currency
exchange rates would not be expected to have a material earnings impact, e.g.,
based on fiscal year end 1999 balances and rates, a pretax currency exchange
gain or loss of $53,000.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,819 $ 26,483
Short-term investments 2,401 1,584
Accounts receivable, net 6,480 12,712
Inventories 570 980
Deferred tax asset - 1,135
Other current assets 1,478 1,379
----------- -----------
Total current assets 19,748 44,273
Property and equipment, net 2,143 1,946
Capitalized software development costs, net 5,994 3,191
Acquired product rights, net 3,601 2,693
Goodwill 9,907 647
Other assets 990 2,391
----------- -----------
Total assets $ 42,383 $ 55,141
=========== ===========
See accompanying notes.
</TABLE>
32
<PAGE>
<TABLE>
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,833 $ 4,979
Accrued compensation and benefits 2,189 2,578
Other accrued liabilities 2,567 5,206
Deferred revenue 1,651 11,933
Notes payable 3,500 1,125
Income taxes payable 403 340
----------- -----------
Total current liabilities 14,143 26,161
Notes payable - noncurrent - 400
Other liabilities 11 10
Long-term debt 5,797 -
Shareholders' equity:
Common stock, $.01 par value, 20,000 shares authorized;
12,131 and 11,474 shares issued 122 115
Additional capital 37,622 33,835
Accumulated deficit (6,746) (894)
Accumulated other comprehensive loss (1,610) (1,537)
Less - treasury stock (909 and 438 shares), at cost (6,950) (2,884)
Deferred compensation (6) (65)
----------- -----------
Total shareholders' equity 22,432 28,570
----------- -----------
Total liabilities and shareholders' equity $ 42,383 $ 55,141
=========== ===========
See accompanying notes.
</TABLE>
33
<PAGE>
<TABLE>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues $ 56,962 $ 71,792 $ 64,862
Cost of revenues 10,210 21,466 19,784
----------- ----------- -----------
Gross profit 46,752 50,326 45,078
Operating expenses:
Sales and marketing 33,361 34,048 34,121
General and administrative 6,637 7,426 7,938
Research and development 8,245 8,479 7,210
In-process research and development charge 1,928 - 2,250
Restructuring charges - - 1,964
----------- ----------- -----------
Total operating expenses 50,171 49,953 53,483
----------- ----------- -----------
(Loss) income from operations (3,419) 373 (8,405)
Interest income (1,004) (621) (778)
Interest expense 260 5 16
Other expense 85 55 454
----------- ----------- -----------
Total non operating (income) expense (659) (561) (308)
----------- ----------- -----------
(Loss) income before income taxes (2,760) 934 (8,097)
Income tax provision (benefit) 3,092 327 (1,910)
----------- ----------- -----------
Net (loss) income $ (5,852) $ 607 $ (6,187)
=========== =========== ===========
(Loss) earnings per share:
Basic $ (0.53) $ .06 $ (0.60)
=========== =========== ===========
Diluted $ (0.53) $ .05 $ (0.60)
=========== =========== ===========
See accompanying notes.
</TABLE>
34
<PAGE>
<TABLE>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
--------------- ADDITIONAL RETAINED COMPREHENSIVE TREASURY DEFERRED
SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK COMPENSATION TOTAL
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Treasury stock purchased - - - - - (52) - (52)
Translation of foreign currency
financial statements - - - - (114) - - (114)
Net loss - - - (6,187) - - - (6,187)
----------
Total comprehensive loss (6,301)
----------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 10,940 $109 $ 29,452 $ (1,501) $ (1,344) $ (3,188) $ - $ 23,528
Common stock issued under stock option
plan 347 4 2,227 - - - - 2,231
Common stock issued under stock purchase
plan 167 2 779 - - - - 781
Treasury stock issued related to purchase
of AdvanEdge - - 296 - - 304 - 600
Stock option income tax benefit - - 828 - - - - 828
Restricted stock plan activity 20 - 253 - - - (65) 188
Translation of foreign currency
financial statements - - - - (193) - - (193)
Net income - - - 607 - - - 607
----------
Total comprehensive income 414
----------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 11,474 $115 $ 33,835 $ (894) $ (1,537) $ (2,884) $ (65) $ 28,570
Common stock issued under stock
option plan 509 5 3,082 - - - - 3,087
Common stock issued under stock purchase
plan 145 2 792 - - - - 794
Treasury stock purchased - - - - - (4,066) - (4,066)
Restricted stock plan activity 3 - (87) - - - 59 (28)
Translation of foreign currency
financial statements - - - - (73) - - (73)
Net loss - - - (5,852) - - - (5,852)
----------
Total comprehensive loss (5,925)
----------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 12,131 $122 $ 37,622 $ (6,746) $ (1,610) $ (6,950) $ (6) $ 22,432
========================================================================================
See accompanying notes.
</TABLE>
35
<PAGE>
<TABLE>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (5,852) $ 607 $ (6,187)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 7,121 10,144 9,145
Restricted stock amortization (28) 188 -
In-process research and development charge 1,928 - 2,250
Deferred income taxes and other 2,383 (1,410) (2,327)
Changes in operating assets and liabilities, net of
effects of purchase of AdvanEdge and InterCAP:
(Decrease) increase in deferred revenue (11,297) 10,728 815
Decrease (increase) in accounts receivable 6,989 (3,102) (66)
Decrease (increase) in inventories 410 307 (3)
(Increase) decrease in other current assets (28) (338) 670
(Decrease) increase in payables and accruals (4,762) 939 2,496
Increase (decrease) in income taxes payable 64 299 (797)
---------- ---------- ----------
Total adjustments 2,780 17,755 12,183
---------- ---------- ----------
Net cash (used in) provided by operating activities (3,072) 18,362 5,996
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from maturities of short-term investments 6,283 6,160 8,953
Purchases of short-term investments (7,100) (4,129) (7,724)
Payment for purchase of acquisitions, net of cash acquired (3,720) (375) (918)
Capitalization of software development costs and
purchases of acquired product rights (7,998) (6,617) (7,686)
Payments for purchases of property and equipment (1,674) (1,215) (1,872)
---------- ---------- ----------
Net cash used in investing activities (14,209) (6,176) (9,247)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from employee stock programs 3,881 3,012 777
Treasury stock acquired (4,066) - (52)
Payments of notes payable (125) (500) -
Tax benefits realized from stock transactions - 828 -
---------- ---------- ----------
Net cash (used in) provided by financing activities (310) 3,340 725
---------- ---------- ----------
Effect of exchange rates on cash and cash equivalents (73) (193) (114)
Net (decrease) increase in cash and cash equivalents (17,664) 15,333 (2,640)
Cash and cash equivalents, beginning of year 26,483 11,150 13,790
---------- ---------- ----------
Cash and cash equivalents, end of year $ 8,819 $ 26,483 $ 11,150
========== ========== ==========
Supplemental Cash Flow Information
Cash paid for --
Interest $ 133 $ - $ -
Income taxes $ 388 $ 383 $ 1,035
See accompanying notes.
</TABLE>
36
<PAGE>
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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 for business use in two target categories: enterprise process
management and technical graphics.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1997, the Company began transitioning its revenue base and business
strategy away from consumer related software products in favor of software and
solutions for corporations and other large enterprises. In line with that
strategy, from the period beginning in June 1998 and ending in August 1998 the
Company has licensed its consumer technologies in a series of agreements to
Cendant and TLC for $21.0 million. As a result of these transactions and from
prior operations, the Company had cash and short-term investments totaling
approximately $28.1 million at June 30, 1998.
The intended use of the capital provided by the licensing transactions was to
fund the Company's growth into its enterprise model and strategy. As a result,
during fiscal 1999, the Company's cash and short-term investments declined
approximately $16.9 million to $11.2 million at June 30, 1999. The principal
components of this change were as follows:
SOURCES OF CASH
Collections on technology licensing $ 6.8
Proceeds from employee stock programs 3.9
---------
Subtotal sources 10.7
USES OF CASH
Operations $ 10.1
Software development programs 8.0
Purchase of treasury stock 4.1
Acquisition payment for InterCAP 3.7
Capital expenditures 1.7
---------
Subtotal uses 27.6
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS $ 16.9
=========
During fiscal 1999, the Company used approximately $19.8 million for operations,
software development and capital expenditures. The rate of cash usage was
greater than expected for transitioning the Company's business
37
<PAGE>
from its historic customer and revenue base and is unsustainable. However, based
on management's current expectations, the Company will also incur operating
losses and further usage of cash resources during fiscal 2000, although at a
reduced rate after its first fiscal quarter.
As a result of the cash and liquidity situation, management has developed plans
for reducing the rate of cash usage and completing the Company's transition to
an enterprise software business model. Those plans include the following steps
and expectations:
1) Implementation of further cost reductions. Cash operating costs
(operating costs before consideration of capitalized software
development and amortization) have declined from a high of $14.0
million at the end of the second quarter of fiscal 1999, to an
expected level between $11.0 and $12.0 million at the end of the
first quarter of fiscal 2000. Further cost reductions are planned
in the second and third quarters of fiscal 2000.
Cost reductions in fiscal 1999 resulted principally from
substantial changes in marketing and distribution activities, and
to a lesser extent in product development activities. Cost
reductions in fiscal 2000 will include (i) lower personnel costs,
principally in general and administrative and product development
activities, and (ii) lower sales and marketing costs.
Management has already implemented plans to lower general and
administrative, and product development costs. The number of
products supported by development activities has been reduced,
allowing for lower attendant costs of quality assurance and
testing, localization, and production. General and administrative
costs are being reduced through reorganization of the Company's
headquarters staff and a reduction in the number of executive and
support personnel. In addition, plans are being implemented to
lower the cost of legal activities, information technology and
general costs of operation.
Sales and marketing activities, principally in South America and
in regions of Europe, which do not generate sufficient revenue to
warrant the infrastructure required to support those regions are
being restricted. Variable marketing costs including the costs for
retail channel distribution support, advertising, public relations
and other marketing activities have been reduced or eliminated.
2) Expectation for increasing revenue. Operational revenues from the
Company's principal target markets - enterprise process management
and technical graphics, did not grow sufficiently in fiscal 1999
to support operations. In the opinion of management, the slower
than expected revenue growth occurred principally for the
following reasons: (i) year 2000 slowdowns and deferrals for
software spending by many corporations, (ii) later than expected
delivery of new product releases, particularly in Europe where
product releases occurred too close to seasonally low corporate
spending periods, (iii) a longer than expected selling cycle for
enterprise sales, and (iv) a longer than anticipated conversion of
the Company's sales force from its established retail distribution
model expertise to an enterprise selling strategy.
In fiscal 2000, revenues are expected to increase and are already
showing improved indications. The Company's target markets are
large corporations and government entities, and the number of
target customers expressing interest in process improvement and
technical graphics solutions has increased significantly.
Management attributes this trend to its sales strategy and methods
and to a significantly improved level of education and knowledge
in the current sales force. However, there can be no assurances
such trends will continue.
The average transaction size is increasing and the number of
transactions exceeding $100,000, $250,000 and $500,000 is also
increasing. The total pipeline of sales opportunities has
increased significantly in the last six months and the number of
large transactions in prospect has also increased. Management also
believes that its European operations will improve from seasonal
summer lows and from overcoming the introductory period for new
products.
38
<PAGE>
In addition to its strategic drive in process management and
technical graphics, management believes the Company has a number
of opportunities for tactical revenue transactions in its legacy
products, and from the potential licensing of non-strategic
technologies.
3) Reduced capital spending. After the first quarter of fiscal 2000,
the Company plans to restrict capital spending principally to
requirements for replacement. First quarter capital expenditures,
principally related to the Company moving its corporate
headquarters to Allen, Texas will be uncharacteristically high. As
a result of the move, the Company replaced old and obsolete office
furniture and fixtures and was required to replace and upgrade a
significant amount of network and telephony equipment. However,
the overwhelming majority of first quarter spending was financed
through long-term leasing transactions, thus mitigating the cash
outflow related to the move. See Notes to the Consolidated
Financial Statements for the Company's future lease commitments
Although management of the Company believes that the Company's sales will grow
in fiscal 2000 and therefore, that its results will improve in tandem with
sales, there can be no assurance that the events necessary for such sales growth
will occur as, or when expected. Therefore management is examining various
financing methods that would ensure that the capital resources of the Company
are sufficient to meet its requirements. Such measures include the sale of
equity securities in a private transaction, and the sale or spin-off of certain
assets to third parties. Management believes it will be successful in obtaining
the necessary revenue levels and/or additional necessary funding to operate the
Company in the near term, however, there can be no assurance that under its
current conditions, external funds will be available or, if available, will not
potentially dilute shareholders' interests or returns.
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):
June 30,
1999 1998
------------- ------------
Raw materials $ 404 $ 720
Finished goods 166 260
------------- ------------
$ 570 $ 980
============= ============
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 on a straight-line basis. With the
change in strategy to a corporate software provider, the Company now estimates
the economic life of the corporate software to be approximately 48 months. The
longer economic life was implemented with the release of iGrafx Professional,
iGrafx Process, and iGrafx
39
<PAGE>
Designer. No adjustments were made to the amortization rate of any previously
released software, which had lives ranging from 12 to 18 months. Amortization of
capitalized software development costs is included in cost of revenues. The
Company begins amortization when the products are available for general release
to customers. All other research and development expenditures are charged to
research and development expense in the period incurred.
FOREIGN CURRENCY
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 losses were $19,000, $52,000, and $416,000, in
fiscal years 1999, 1998, and 1997, 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 180 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. During fiscal 1999, the Company recognized approximately
$58,000 in losses associated with forward contracts. During fiscal 1998, the
Company recognized approximately $77,000 in gains associated with forward
contracts. During fiscal 1997, the gains and losses recognized were not
material.
At June 30,1999, the Company had forward contracts outstanding to sell 1.0
million German marks for approximately $554,000. 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 provided for rebates of $1,180,000,
$3,196,000, and $2,041,000, in fiscal 1999, 1998, and 1997, respectively. The
Company also offers distributors and resellers co-op funds, generally 2-10
percent 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 provided for co-op funds of $1,251,000,
$3,387,000, and $2,852,000, in fiscal 1999, 1998, and 1997, respectively.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was
$4,929,000, $4,334,000, and $5,135,000 in fiscal 1999, 1998, and 1997,
respectively.
40
<PAGE>
STOCK-BASED COMPENSATION
The Company grants stock options through employee stock option plans and a
restricted stock plan. Options are granted 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 for all plans, excluding the restricted stock plan.
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 these stock option grants,
as the exercise price is equal to the fair value of the Company's common stock
on the date of grant. Restricted stock shares are granted at $0.01 par value and
compensation expense is recognized over the vesting period.
INCOME (LOSS) PER SHARE
Income (loss) per share for all periods presented is based on the weighted
average basic and dilutive equivalent shares outstanding using the treasury
stock method. Amounts are shown in thousands except for per share data.
Years Ended June 30,
1999 1998 1997
---------- ---------- ----------
Numerator:
Net (loss) income $ (5,852) $ 607 $(6,187)
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,119 10,613 10,342
Effect of dilutive employee stock options - 442 -
---------- ---------- ----------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 11,119 11,055 10,342
========== ========== ==========
Basic income (loss) per share $ (0.53) $ 0.06 $ (0.60)
========== ========== ==========
Diluted income (loss) per share $ (0.53) $ 0.05 $ (0.60)
========== ========== ==========
Options to purchase 2,746,898 shares of Common Stock were excluded from the
diluted income per share calculation because they were anti-dilutive for fiscal
1999. These options included all options outstanding as of June 30, 1999, as
well as 579,700 shares related to the subordinated convertible debentures issued
in connection with InterCAP acquisition. Options to purchase 747,334 and
1,148,722 shares of Common Stock were excluded from the diluted income per share
calculation because they were anti-dilutive for the years ended June 30, 1998
and 1997, respectively.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform with
current year presentation.
2. ACQUISITIONS
On April 16, 1999, the Company purchased InterCAP for $12.4 million, consisting
of $3.9 million in cash at closing, a short-term promissory note for $2.5
million, a convertible debenture for $5.8 million and transaction costs of
approximately $0.2 million. The convertible debenture may be converted into
approximately 600,000 shares of Micrografx common stock. The actual number of
shares and the timing of the conversion are both subject to terms and conditions
as outlined in the convertible debenture agreement. Prior to the purchase,
InterCAP was a wholly owned subsidiary of Intergraph Corporation. The results of
operations of InterCAP are included in the Company's results of operations from
the date of the InterCAP acquisition.
41
<PAGE>
The InterCAP acquisition has been accounted for in accordance with the purchase
method of accounting. The aggregate purchase price has been allocated to the
assets and liabilities acquired, with the remainder recorded as goodwill, based
on estimates of fair values as follows (in thousands):
Fair value of InterCAP historical net assets $ (344)
Purchased in-process research and development 1,928
Identified intangible assets 1,837
Deferred income tax liability related to identified
intangible assets (616)
Goodwill 9,559
-------
Aggregate purchase price $12,364
=======
In connection with the Company's acquisition of InterCAP, the Company recorded a
charge of $1.9 million for purchased in-process research and development
(purchased R&D), based upon the appraised value of the related developmental
projects. The Income Approach, which included an analysis of the markets, cash
flows, and risks associated with achieving such cash flows, was the primary
technique utilized in valuing each purchased R&D project.
InterCAP's research and development relates to WebCGM software products. These
software products allow customers in the aerospace, defense and manufacturing
industries to publish technical graphics on the Internet. Micrografx's goal in
this acquisition was to acquire technology that complemented its iGrafx Designer
technical graphics product. iGrafx Designer, in conjunction with the acquired
technologies, allows Micrografx to create a solution for intelligent technical
illustration and Web-based technical publishing. These complementary products
provide a tiered illustration solution supported by the industry standards and
leading-edge Web publishing solutions.
Significant assumptions used in determining the value of purchased R&D for
InterCAP included projected operating cash flows and the discount rate.
Projected operating cash flows were expected to begin in early fiscal 2000. The
discount rate selected for InterCAP's in-process technologies was 20 percent.
At the time of the acquisition, InterCAP management estimated the remaining cost
and time to complete the purchased R&D projects was approximately $355,000 and
44 engineer-months. The term "engineer-month" refers to the average amount of
research work expected to be performed by an engineer in a month. All the
in-process projects are currently on schedule. Micrografx expects to essentially
meet its original return expectations.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and uncertain
assumptions utilized in the valuation analysis of the in-process research and
development. Uncertainties regarding projected operating cash flows could give
rise to unforeseen budget over-runs and or revenue shortfalls in the event that
Micrografx is unable to successfully commercialize the projects. Micrografx
management is primarily responsible for estimating the value of the purchased
R&D in all acquisitions accounted for under the purchase method.
The amounts identified as intangible assets were categorized as follows (in
thousands):
CATEGORY
Workforce $ 418
Customer list 240
Non-compete agreement 281
Current technology 898
--------
Total identified intangible assets $ 1,837
========
Goodwill related to this acquisition is being amortized on a straight line basis
over 10 years and the other identified intangible assets are being amortized on
a straight line basis over periods ranging from 3 to 7 years.
42
<PAGE>
The following unaudited pro forma information presents the Company's results of
operations as if the InterCAP acquisition had occurred on July 1, 1997. The pro
forma information has been prepared by combining the results of operations of
the Company and InterCAP for the years ended June 30, 1999 and 1998, adjusted
for the elimination of charges for purchased research and development costs.
This unaudited pro forma information does not purport to be indicative of what
would have occurred had the InterCAP acquisition occurred as of that date or of
results of operations which may occur in the future (in thousands, except per
share data):
Years ended June 30,
1999 1998
---------- ----------
Revenue $ 60,078 $ 76,514
(Loss) before other income (expense) and income taxes (2,665) (200)
Net (loss) income (5,229) 165
Basic (loss) earnings per share $ (0.47) $ .02
Diluted (loss) earnings per share $ (0.47) $ .01
On December 31, 1997, the Company acquired WebKnight, Inc. ("WebKnight") which
was accounted for as a purchase. The total consideration paid was $0.5 million,
with $250,000 paid in December 1997, $125,000 paid in June 1998, and $125,000
paid in December 1998. The entire purchase price was allocated to acquired
product rights and is being amortized over the life of products using the
technologies acquired.
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 is being amortized on a
straight-line basis over seven years. The Company allocated the total purchase
price as follows (in thousands):
Tangible and intangible assets $ 1,016
Purchased in-process research and development 2,250
Goodwill 481
----------
Aggregate purchase price $ 3,747
==========
In connection with the Company's acquisition of AdvanEdge, the Company recorded
a charge of $2.3 million for purchased in-process research and development
(purchased R&D), based upon the appraised value of the related developmental
projects. The Income Approach, which included an analysis of the markets, cash
flows, and risks associated with achieving such cash flows, was the primary
technique utilized in valuing each purchased R&D project.
AdvanEdge's research and development related to business process simulation
software product. This software product allows customers to document their
business processes and simulate the processes in order to assess efficiency of
the process and the impact of possible changes to the process. Micrografx's goal
in this acquisition was to acquire technology that complemented its Micrografx
FlowCharter(R) process management product. Micrografx FlowCharter(R) in
conjunction with the acquired technologies allows Micrografx to create an
extended process management offering which includes a basic process
documentation tool and a process simulation tool.
Significant assumptions used in determining the value of purchased R&D for
AdvanEdge included projected operating cash flows and the discount rate.
Projected operating cash flows were expected to begin in early fiscal 1999. The
discount rate selected for AdvanEdge's in-process technologies was 25%.
At the time of the acquisition, AdvanEdge management estimated the remaining
cost and time to complete the purchased R&D projects was approximately $850,000
and 86 engineer-months. The term "engineer-month" refers to the average amount
of research work expected to be performed by an engineer in a month. All the
in-process projects have been completed within the budget. Micrografx expects to
essentially meet its original return expectations.
43
<PAGE>
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 paid June 30, 1998, $1.0 million paid July 2, 1999, and $0.4 million due
January 5, 2000. The remaining consideration is payable in cash or the Company's
$.01 par value 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.
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):
June 30,
Cash and cash equivalents: 1999 1998
------------- ------------
Cash $ 2,332 $ 4,745
Money market funds 5,987 15,013
Commercial paper - 6,725
Municipal and tax free bond 500 -
------------- ------------
Total cash and cash equivalents 8,819 26,483
Short-term investments:
Municipal and tax free bond 1,801 -
Corporate bonds and notes 500 550
Master notes - 500
Commercial paper - 392
Asset backed securities 100 142
------------- ------------
Total short-term investments 2,401 1,584
------------- ------------
Total cash and short-term investments $ 11,220 $ 28,067
============= ============
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, 1999, or 1998. 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 sales proceeds from available-for-sale securities were
$228,957,000, $124,650,000, and $133,269,000, in fiscal 1999, 1998, and 1997,
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):
June 30,
1999 1998
------------- ------------
Trade Receivables $ 9,305 $ 15,761
Allowances (2,825) (3,049)
------------- ------------
Accounts receivable, net $ 6,480 $ 12,712
============= ============
Allowances consist of reserves for returns, reserves for bad debt and accruals
for co-op and incentive programs.
44
<PAGE>
At June 30, 1999 and 1998, approximately 55 percent and 66 percent,
respectively, of trade receivables represented amounts due from 10 customers. At
June 30, 1999, the Company had two customers with receivable balances of 26
percent and 12 percent of trade receivables. At June 30, 1998, the Company had
two customers with receivable balances of 22 percent and 17 percent 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.
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 1999, one customer's
sales accounted for 12 percent of net revenues. In fiscal 1998, the Company had
two customers whose sales each accounted for 19 percent of net revenues; in
fiscal 1997, two customer's sales accounted for 22 percent and 16 percent of net
revenues.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
June 30,
1999 1998
------------ -------------
Computers and equipment $ 13,006 $ 11,020
Furniture and fixtures 648 544
Leasehold improvements 704 694
------------- -------------
14,358 12,258
Less - accumulated depreciation (12,215) (10,312)
------------- -------------
Property and equipment, net $ 2,143 $ 1,946
============= =============
6. CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND ACQUIRED PRODUCT RIGHTS
Capitalized software development costs and acquired product rights consist of
the following (in thousands):
June 30,
1999 1998
------------ -------------
Capitalized software development costs $ 7,099 $ 9,077
Less - accumulated amortization (1,105) (5,886)
------------ -------------
Capitalized software development costs, net $ 5,994 $ 3,191
============ =============
Acquired product rights $ 4,847 $ 6,477
Less - accumulated amortization (1,246) (3,784)
------------ -------------
Acquired product rights, net $ 3,601 $ 2,693
============ =============
During the years ended June 30, 1999, 1998, and 1997, the Company capitalized
$7,998,000, $6,617,000, and $7,686,000, 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, 1999, 1998, and 1997 were $5,080,000,
$8,070,000, and $6,828,000, respectively. Additionally, the Company wrote down
capitalized software development costs and acquired product rights to net
realizable value by approximately $444,000, $157,000, and $220,000, in fiscal
1999, 1998, and 1997, respectively.
45
<PAGE>
7. DEBT
A portion of the Company's acquisitions has been funded by notes payable and
subordinated convertible debentures. The Company's long-term debt consists of
the following (in thousands):
1999 1998
--------- --------
Note payable issued in connection with acquisition
of AdvanEdge $ 1,000 $ 1,400
Note payable issued in connection with acquisition
of WebKnight - 125
Note payable issued in connection with acquisition
of InterCAP 2,500 -
Subordinated convertible debenture issued in
connection with acquisition of InterCAP, net
of $179 discount 5,797 -
---------- --------
9,297 1,525
Less current portion (3,500) (1,125)
---------- --------
Long-term debt $ 5,797 $ 400
========== ========
The notes issued for the AdvanEdge and WebKnight acquisitions are non-interest
bearing. Of the amount outstanding at June 30, 1999, for the AdvanEdge
acquisition, $600,000 was paid on July 2, 1999 and the remaining $400,000 is due
January 5, 2000. The remaining consideration is payable in cash or the Company's
$.01 par value 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.
The note issued for the InterCAP acquisition had a 9.75 percent fixed interest
rate for the term of the agreement; April 16, 1999 to August 31, 1999. The note
was originally due in full on August 31, 1999, but the Company has negotiated
with the holder, Intergraph, for payment of $1.25 million plus accrued interest
of approximately $110,000 on September 28, 1999, and for the remaining balance
of $1.25 million plus interest to be paid on October 28, 1999. Under the terms
of the renegotiated note, the interest rate was increased to 10.5 percent.
The subordinated convertible debenture issued for the InterCAP acquisition may
be initially converted into 579,700 shares of Micrografx common stock. In July
1999, the Company registered 579,700 shares to cover the agreement should either
Intergraph or the Company elect to convert all or any part of the debenture into
shares of common stock of the Company. The actual number of shares and the
timing of the conversion are both subject to terms and conditions as outlined in
the convertible debenture agreement. As described in the Subordinated
Convertible Debenture dated April 16, 1999 between Micrografx, Inc. and
Intergraph Corporation, the applicable interest rate for the convertible
debenture is a 7 percent fixed rate to begin January 5, 2000 and increasing to 8
percent on January 4, 2001. The debenture matures on March 31, 2002. Interest
expense is being provided for at an effective interest rate of 6 percent.
The note payable and the convertible debenture are both secured by the capital
stock of InterCAP.
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 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.
46
<PAGE>
Components of the provision (benefit) for income taxes are as follows (in
thousands):
Years Ended June 30,
1999 1998 1997
---------- ---------- ----------
Current:
Federal $ (51) $ 1,126 $ -
Foreign 366 693 402
---------- ---------- ----------
Total current provision 315 1,819 402
Deferred provision (benefit) 2,777 (1,492) (2,312)
---------- ---------- ----------
Total income tax provision (benefit) $ 3,092 $ 327 $(1,910)
========== ========== ==========
The provision for income taxes is reconciled with the federal statutory rate as
follows (in thousands):
Years Ended June 30,
1999 1998 1997
---------- ---------- ----------
Provision (benefit) computed at
federal statutory rate $ (945) $ 327 $(2,753)
Nondeductible expenses 73 - -
In-process research and development 656 - 765
Unbenefited foreign losses 1,439 - -
Foreign taxes not benefited 883 - -
Change in valuation allowance 1,037 (32) -
Other (51) 32 78
---------- ---------- ----------
Tax provision (benefit) $ 3,092 $ 327 $(1,910)
========== ========== ==========
Components of the net deferred income tax assets (liabilities) are as follows
(in thousands):
June 30,
1999 1998
---------- ---------
Deferred Tax Assets
Tax credit carryforwards $ 2,838 $ 2,387
Net operating loss carryforwards 4,123 2,592
Depreciation 211 412
Reserves and other accrued expenses not
currently deductible for tax purposes 1,215 2,190
Undistributed earnings in foreign subsidiaries 367 42
Other 31 340
---------- ---------
Total deferred tax assets 8,785 7,963
Deferred Tax Liabilities
Capitalized software development costs
currently deductible for tax purposes (3,538) (2,001)
Other (201) -
---------- ---------
Total deferred tax liabilities (3,739) (2,001)
Total net deferred tax assets 5,046 5,962
Valuation allowance (5,046) (2,560)
---------- ---------
Deferred tax assets, net of valuation allowance $ - $ 3,402
========== =========
47
<PAGE>
At June 30, 1999, the Company has research and development tax credit
carryforwards of $1,781,000 for federal tax purposes, which expire between 2006
and 2013, and the Company has foreign tax credit carryforwards of $750,000,
which expire between 2003 and 2004. In addition, the Company has alternative
minimum tax credit carryforwards of $307,000 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 $12,127,000 for federal tax
purposes that expire between 2009 and 2014. The annual utilization of these
carryforwards will be limited.
Pursuant to the requirements of SFAS 109, a valuation allowance must be provided
when it is more likely than not that deferred tax assets will not be realized.
Based on the fact that the Company has a cumulative net operating loss for the
prior three years and there are no prior tax payments that could be refunded, it
is management's belief that the realization of the net deferred tax assets in
the near term is remote. The impact on the current year provision is a charge
for unbenefited foreign losses of $1,439,000; foreign taxes not benefited of
$883,000; and an increase in the valuation allowance of $1,037,000.
9. SHAREHOLDERS' EQUITY
PREFERRED STOCK
None of the Company's 10,000,000 authorized shares of Preferred Stock are issued
at June 30, 1999.
STOCK OPTIONS
The Company has reserved 6,900,000 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.
Up to 100,000 of the 6,900,000 shares available may be granted as restricted
stock awards. The stock is restricted because recipients receive the stock only
upon completing a specified objective or period of employment, generally one to
five years. Restricted stock shares are granted at $0.01 par value and
compensation expense is deferred until earned. The shares are considered issued
when awarded, but the recipient does not own and cannot sell the shares during
the restriction period.
As of June 30, 1999, approximately 998,000 shares remained available for grant,
of which approximately 71,000 may be granted as restricted shares.
Each option issued under the plans, excluding the restricted stock plan,
terminates at the time designated by the Board of Directors, not to exceed 10
years. The exercise price and vesting schedule for each option is determined by
the Company's Stock Option Committee, based on the fair market value of the
Company's stock at the grant date, and is payable when the option is exercised.
Options that terminate under the provisions of these plans subsequently become
available for reissuance.
48
<PAGE>
A summary of the Company's stock option activity, and related information for
the years ended June 30, 1997, 1998, and 1999, follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------------------------------------------------------------------
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 1,213,002 $ 9.16 1,618,641 $ 6.06 2,397,294 $ 7.30
Granted 1,674,024 5.57 1,415,424 8.58 925,019 9.08
Exercised (12,053) 7.08 (353,451) 6.31 (514,846) 5.95
Canceled (1,256,332) 8.39 (283,320) 7.82 (640,269) 8.40
-------------- --------------- --------------
Outstanding at end of year 1,618,641 2,397,294 2,167,198
============== =============== ==============
Exercisable at end of year 289,963 $ 6.98 585,857 $ 6.91 589,672 $ 7.21
============== =============== ==============
Weighted-average fair
value of options granted
during the year $ 3.84 $ 5.02 $ 5.05
============== =============== ==============
Weighted-average fair
value of purchase rights
granted during the year $ 2.45 $ 2.33 $ 3.12
============== =============== ==============
</TABLE>
The following is additional information relating to options outstanding as of
June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------- ---------------------------------
Weighted Average Weighted Weighted Average
Exercise Number Remaining Average Number Exercise Price
Price Range Outstanding Contractual Life Exercise Price Exercisable
- --------------------- --------------- --------------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 6.49 707,075 2.58 $ 5.49 323,197 $ 5.44
$ 6.50 - $ 9.00 672,916 7.20 $ 8.59 66,974 $ 7.87
$ 9.01 - $ 11.00 641,438 4.24 $ 9.56 148,834 $ 9.25
$ 11.01 - $ 16.00 145,769 3.70 $11.44 50,667 $11.69
</TABLE>
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:
Years ended June 30,
1999 1998 1997
------------- ------------ -----------
Expected term:
Stock options 3.5 years 3.6 years 5.0 years
Employee stock purchase plan 1.45 years .95 years .79 years
Interest rate 5.83% 5.80% 5.80%
Volatility 70.19% 69.86% 81.13%
Dividends 0% 0% 0%
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
percent pro rata over the first three years following the date of grant and 75
percent over the first to occur of four years from the date of the grant
49
<PAGE>
or 25 percent 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 and has been reflected in the tables
above as part of the options granted and canceled during 1997.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Because options vest
over several years and additional option grants are expected, the effects of
these hypothetical calculations are not likely to be representative of similar
future calculations. The Company's pro forma information follows:
Years ended June 30,
1999 1998 1997
--------- ---------- ----------
Pro forma net loss $(8,344) $ (1,199) $ (6,804)
========= ========== ==========
Pro forma basic and diluted loss per share $ (0.75) $ (0.11) $ (0.66)
========= ========== ==========
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan allows eligible employees to
authorize the Company to withhold from 1 percent to 10 percent of gross
earnings. Shares are purchased by participants at the lower of 85 percent of the
fair market value per share at the beginning or ending of each offering period.
As of June 30, 1999, 1,300,000 shares were authorized for the plan,
approximately 1,009,000 shares were issued, and approximately $71,000 had been
withheld for the purchase of shares for the November 1999 offering period.
10. EMPLOYEE BENEFIT PLAN
The Micrografx, Inc. 401(k) Savings Plan (Plan) allows eligible employees to
elect to reduce their current compensation by up to 15 percent, subject to
certain maximum dollar limitations prescribed by the Internal Revenue Code
($10,000 in 1999), 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 1999, 1998, and 1997,
the Company contributed approximately $301,000, $244,000, and $192,000, to the
Plan, respectively. At June 30, 1999, there were approximately 181 participants
in the Plan.
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 $1,381,000,
$1,302,000, and $1,455,000, was recorded during fiscal 1999, 1998 and 1997,
respectively. Future minimum lease payments for operating leases are as follows
(in thousands):
Years Ending June 30,
------------------------------------------------------
2000 1,409
2001 1,367
2002 1,062
2003 985
2004 923
Thereafter 4,920
-------------
$ 10,666
=============
LITIGATION
Micrografx has filed litigation in the federal district court for the Northern
District of Texas, asking for declaratory relief that an at-will interim letter
agreement between THINK New Ideas, Inc. (THINK), and Micrografx may be
terminated by Micrografx as of May 3, 1999, without additional payment to THINK.
THINK filed its
50
<PAGE>
counterclaim, alleging that the agreement could be terminated only with 90 days
notice, and not without the payment of an additional amount of compensation in
the amount of $889,000, which THINK alleges Micrografx promised to pay under
agreement with THINK. Micrografx disputes the notice period for termination and
that any additional money is owed, beyond an agreed monthly retainer of $83,000,
which was paid to THINK until the termination of the interim agreement. THINK
originally filed its counter-complaint in Los Angeles, California, disputing
jurisdiction and venue in Dallas, but since has agreed to the jurisdiction of
the Texas court, but has asked the court to transfer the case to Los Angeles as
a more convenient forum. A hearing date of October 4, 1999 has been set to
adjudicate certain jurisdictional matters in the California action. No other
hearing date has been set on the preliminary matters, and the parties are in the
process of setting discovery and related schedules. Management is unable to
predict at this time the final outcome of the THINK lawsuit. A judgement against
the Company in this matter could materially affect the Company's results of
operations, cash flows and financial position.
The Company is party to various other 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. SEGMENT INFORMATION
The Company operates in a single industry segment: the development, marketing
and support of personal computer applications and systems software products. The
Company's Chief Operating Decision Maker (CODM) assesses performance and
allocates resources on an enterprise-wide basis. Therefore, no separately
reportable operating segments exist.
The CODM monitors revenues based on product category and geographic area.
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.
The following product category data includes net revenues (in thousands):
Years Ended June 30,
Net revenues 1999 1998 1997
-------------- ------------ ------------
Process management $ 19,481 $ 20,821 $ 21,218
Technical graphics 7,574 9,389 13,439
Technology 17,975 3,025 -
Legacy 11,932 38,557 30,205
-------------- ------------ ------------
Total revenues $ 56,962 $ 71,792 $ 64,862
============== ============ ============
51
<PAGE>
The following geographic area data includes net revenues, based on product
shipment destination, and property, plant and equipment, based on physical
location (in thousands):
Years Ended June 30,
Net revenues 1999 1998 1997
------------ ------------ ------------
United States $ 34,695 $ 40,212 $ 32,071
Germany 6,925 8,196 6,254
Japan 1,270 4,989 8,118
Rest of World 14,072 18,395 18,419
------------ ------------ ------------
Total $ 56,962 $ 71,792 $ 64,862
=========== ============ ============
Property, Plant & Equipment, net
United States $ 1,570 $ 1,265 $ 2,063
Germany 122 159 152
Japan 41 93 52
Rest of World 410 429 436
----------- ------------ ------------
Total $ 2,143 $ 1,946 $ 2,703
=========== ============ ============
52
<PAGE>
Report of Independent Public Accountants
To the Shareholders of Micrografx, Inc.
We have audited the accompanying consolidated balance sheets of Micrografx,
Inc., and subsidiaries (the Company) as of June 30, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended June 30, 1999. Our audits
also included the financial statement schedule, listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
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 provide 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, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999, 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
September 28, 1999
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure matters
with its independent public accountants to report under this Item 9.
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 57 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 57 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)
54
<PAGE>
++ 2.2 Agreement and Plan of Merger, dated as of April 15, 1999, among
Micrografx, Inc., InterCAP Acquisition Inc., and InterCAP Graphics Systems,
Inc. and Intergraph Corporation [The schedules referred to in the Agreement
have been omitted but will be furnished to the Securities and Exchange
Commission upon request.] (Exhibit 2.1)
* 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. (Exhibit 10.11)
******* 10.12 Compensation agreement dated May 21, 1997, between the Company and
Russell Hogg.(Exhibit 10.12)
******** 10.13 License Agreement between Micrografx, Inc. and Cendant Software
Corporation (Exhibit 10.1)
******** 10.14 Noncompetition Agreement between Micrografx, Inc. and Cendant
Software Corporation (Exhibit 10.2)
+ 10.15 Revolving credit agreement dated April 1, 1998, between the Company
and BankBoston, N.A.
+ 10.16 Lease agreement dated August 31, 1998, between Prentiss Properties
Acquisition Partners, L.P. and the Company.
+ 10.17 Asset Purchase and License Agreement dated September 3, 1998, between
the Company and Learning Company Properties, Inc.
55
<PAGE>
++ 10.18 Subordinated Convertible Debenture dated April 16, 1999 between
Micrografx, Inc. and Intergraph Corporation (Exhibit 10.1)
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
* 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.
******* 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, 1997.
******** Incorporated by reference to the exhibit shown in parenthesis files in
the Company's Current Report on Form 8-K dated June 30, 1998
+ Incorporated by reference to the exhibit shown in parenthesis filed in the
Company's Annual Report on Form 10-K405/A for the year ended June 30, 1998.
++ Incorporated by reference to the exhibit shown in parenthesis files in the
Company's Current Report on Form 8-K dated April 16, 1999
(b) Reports on Form 8-K:
1. On July 26, 1999, the Company filed a Current Report on Form 8-K reporting
a news release dated July 14, 1999 under Item 7 "Exhibits" of Item 601 of
Regulation S-K.
2. On July 1, 1999, the Company filed a Current Report on Form 8-K/A amending
the Current Report on Form 8-K filed on May 3, 1999. Financial Statements
of InterCAP Graphics Systems, Inc. and Unaudited Pro Forma Combined
Financial Statements were included with this filing.
56
<PAGE>
3. On May 3, 1999, the Company filed a Current Report on Form 8-K under Item 2
"Acquisition of Assets" of Item 601 of Regulation S-K. The Company reported
an Agreement and Plan of Merger dated as of April 15, 1999 (the
"Agreement"), among the Company, Intergraph Corporation ("Intergraph"),
InterCAP Graphics Systems, Inc., a Delaware corporation and wholly owned
subsidiary of Intergraph ("InterCAP"), and InterCAP Acquisition, Inc., a
Delaware corporation and a wholly-owned subsidiary of the Company ("Merger
Sub"), pursuant to which the Merger Sub was merged with and into InterCAP
(the "Merger") with InterCAP as the corporation surviving the Merger. No
financial statements were included in such filing.
ITEM 14A. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 1999, and 1998.............................................32
Consolidated Statements of Operations for the Years Ended June 30, 1999, 1998, and 1997............34
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 1999, 1998, and 1997...................................................................35
Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998, and 1997............36
Notes to Consolidated Financial Statements.........................................................37
Report of Independent Public Accountants...........................................................53
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts....................................................59
All other schedules are omitted as the required information is inapplicable
</TABLE>
57
<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 28, 1999.
MICROGRAFX, INC.
By: /S/ DOUGLAS M. RICHARD
-----------------------------------
Douglas M. Richard
Chief Executive Officer and President
(Principal Executive and Financial Officer)
By: /S/ JOHN M.CARRADINE
-----------------------------------
John M.Carradine
Chief Financial Officer and Treasurer
By: /S/ DARRYL R. HALBERT
-----------------------------------
Darryl R. Halbert
Vice President, 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 September 28, 1999
- ------------------------------ Board of Directors
Russell Hogg
/s/ DOUGLAS M. RICHARD Director September 28, 1999
- ------------------------------
Douglas M. Richard
/s/ EUGENE P. BEARD Director September 28, 1999
- ------------------------------
Eugene P. Beard
/s/ ROBERT KAMERSCHEN Director September 28, 1999
- ------------------------------
Robert Kamerschen
/s/ SEYMOUR MERRIN Director September 28, 1999
- ------------------------------
Seymour Merrin
/s/ AVERY MORE Director September 28, 1999
- ------------------------------
Avery More
<TABLE>
58
<PAGE>
SCHEDULE II
MICROGRAFX, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<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,
1997
- -----------------------------
Allowance for doubtful
accounts: $ 332 $ 256 $ - $ 249 (a) $ 339
Allowance for sales
returns: $ 1,961 $ - $ (9) $ 10 (a) $ 1,942
1998
- -----------------------------
Allowance for doubtful
accounts: $ 339 $ 37 $ - $ 33 (a) $ 343
Allowance for sales
returns: $ 1,942 $ - $ (578) $ - $ 1,364
1999
- -----------------------------
Allowance for doubtful
accounts: $ 343 $ 306 $ - $ 44 (a) $ 605
Allowance for sales
returns: $ 1,364 $ - $ 503 $ - $ 1,867
(a) Represents amounts written-off during the year, net of recoveries.
(b) The allowance for sales returns is recorded as a reduction of revenues.
</TABLE>
59
<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)
++ 2.2 Agreement and Plan of Merger, dated as of April 15, 1999, among
Micrografx, Inc., InterCAP Acquisition Inc., and InterCAP Graphics Systems,
Inc. and Intergraph Corporation [The schedules referred to in the Agreement
have been omitted but will be furnished to the Securities and Exchange
Commission upon request.] (Exhibit 2.1)
* 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. (Exhibit 10.11)
******* 10.12 Compensation agreement dated May 21, 1997, between the Company and
Russell Hogg. (Exhibit 10.12)
******** 10.13 License Agreement between Micrografx, Inc. and Cendant Software
Corporation (Exhibit 10.1)
60
<PAGE>
******** 10.14 Noncompetition Agreement between Micrografx, Inc. and Cendant
Software Corporation (Exhibit 10.2)
+ 10.15 Revolving credit agreement dated April 1, 1998, between the Company
and BankBoston, N.A.
+ 10.16 Lease agreement dated August 31, 1998, between Prentiss Properties
Acquisition Partners, L.P. and the Company.
+ 10.17 Asset Purchase and License Agreement dated September 3, 1998, between
the Company and Learning Company Properties, Inc.
++ 10.18 Subordinated Convertible Debenture dated April 16, 1999 between
Micrografx, Inc. and Intergraph Corporation (Exhibit 10.1)
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
* 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.
******* 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, 1997.
******** Incorporated by reference to the exhibit shown in parenthesis
files in the Company's Current Report on Form 8-K dated June 30, 1999
+ 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,
1998.
++ Incorporated by reference to the exhibit shown in parenthesis files in
the Company's Current Report on Form 8-K dated April 16, 1999
61
<PAGE>
EXHIBIT 21.1
MICROGRAFX, INC.
SUBSIDIARIES OF REGISTRANT
Information is set forth below concerning all subsidiaries of the Company as of
June 30, 1999:
NAME OF SUBSIDIARY INCORPORATION COMPANY
InterCAP Graphics Systems Delaware 100%
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%
WebKnight Acquisition, Inc. Delaware 100%
Micrografx Interactive, Inc. Delaware 100%
<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, 33-71008,
33-71010, 33-86368, 33-86370, 33-86372, 333-03427, 333-03429, 333-65497,
333-65499, 333-65501, 333-72395) pertaining to the Micrografx, Inc. Incentive
and Nonstatutory Stock Option Plan, as amended, the Micrografx, Inc. Employee
Stock Purchase Plan, as amended, the Micrografx, Inc. Restricted Stock Purchase
Plan and the Micrografx, Inc. Directors Stock Purchase Plan, as amended, of our
report dated September 28, 1999, 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, 1999.
/s/ Ernst & Young LLP
Dallas, Texas
September 28, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,332
<SECURITIES> 8,888
<RECEIVABLES> 9,305
<ALLOWANCES> 2,825
<INVENTORY> 570
<CURRENT-ASSETS> 19,748
<PP&E> 14,358
<DEPRECIATION> 12,215
<TOTAL-ASSETS> 42,383
<CURRENT-LIABILITIES> 14,143
<BONDS> 0
0
0
<COMMON> 122
<OTHER-SE> 22,310
<TOTAL-LIABILITY-AND-EQUITY> 42,383
<SALES> 56,962
<TOTAL-REVENUES> 56,962
<CGS> 10,210
<TOTAL-COSTS> 10,210
<OTHER-EXPENSES> 50,171
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 260
<INCOME-PRETAX> (2,760)
<INCOME-TAX> 3,092
<INCOME-CONTINUING> (5,852)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,852)
<EPS-BASIC> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
