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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 (IRS Employer
incorporation or organization) Identification No.)
1303 E. Arapaho Road, Richardson, Texas 75081
(Address of principal executive offices) (Zip Code)
(972) 234-1769
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
As of May 11, 1999, 11,126,606 shares of the Company's common stock were
outstanding.
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<PAGE>
<TABLE>
<CAPTION>
MICROGRAFX, INC.
FORM 10-Q
For the Quarter Ended March 31, 1999
Table of Contents
PAGE
PART I.
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
March 31, 1999, and June 30, 1998
Consolidated Statements of Operations for the three and 5
nine months ended March 31, 1999, and 1998
Consolidated Statements of Cash Flows for the 6
nine months ended March 31, 1999, and 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II.
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE>
Item 1. Financial Statements
Micrografx, Inc.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------- -----------
<S> <C> <C>
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 9,879 $ 26,483
Short-term investments 10,429 1,584
Accounts receivable, less allowances of $2,543 and $3,049 8,645 12,712
Inventories 508 980
Deferred tax asset 358 1,135
Other current assets 1,668 1,379
----------- -----------
Total current assets 31,487 44,273
Property and equipment, net 1,750 1,946
Capitalized software development costs, net 4,638 3,191
Acquired product rights, net 2,612 2,693
Other assets 2,617 3,038
----------- -----------
Total assets $ 43,104 $ 55,141
=========== ===========
See accompanying notes.
</TABLE>
3
<PAGE>
Micrografx, Inc.
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------- -----------
<S> <C> <C>
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 4,096 $ 4,979
Accrued compensation and benefits 2,366 2,578
Other accrued liabilities 2,872 4,230
Deferred revenue 1,800 11,933
Notes payable to related parties 1,400 1,125
Accrued royalties 264 976
Income taxes payable - 340
----------- -----------
Total current liabilities 12,798 26,161
Notes payable to related parties - non-current - 400
Other liabilities 20 10
Shareholders' equity:
Common stock, $.01 par value, 20,000 shares authorized;
12,018 and 11,474 shares issued 120 115
Additional capital 37,216 33,835
Retained earnings (accumulated deficit) 1,184 (894)
Cumulative translation adjustment (1,217) (1,537)
Less - treasury stock (909 and 438 shares), at cost (6,950) (2,884)
Deferred compensation (67) (65)
----------- -----------
Total shareholders' equity 30,286 28,570
----------- -----------
Total liabilities and shareholders' equity $ 43,104 $ 55,141
=========== ===========
See accompanying notes.
</TABLE>
4
<PAGE>
Micrografx, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 14,472 $ 17,262 $ 47,256 $ 52,150
Cost of revenues 1,592 4,754 8,027 14,968
------------- ------------- ------------- -------------
Gross profit 12,880 12,508 39,229 37,182
Operating expenses:
Sales and marketing 8,447 8,325 25,752 26,215
General and administrative 1,455 1,528 4,769 4,598
Net research and development 1,854 2,364 6,000 6,367
------------- ------------- ------------- -------------
Total operating expenses 11,756 12,217 36,521 37,180
------------- ------------- ------------- -------------
Income from operations 1,124 291 2,708 2
Interest income 197 129 823 470
Other expense, net (115) (75) (333) (110)
------------- ------------- ------------- -------------
Total non operating income, net 82 54 490 360
------------- ------------- ------------- -------------
Income before income taxes 1,206 345 3,198 362
Income tax provision 422 121 1,119 127
------------- ------------- ------------- -------------
Net income $ 784 $ 224 $ 2,079 $ 235
============= ============= ============= =============
Basic income per share $ 0.07 $ 0.02 $ 0.19 $ 0.02
============= ============= ============= =============
Diluted income per share $ 0.07 $ 0.02 $ 0.18 $ 0.02
============= ============= ============= =============
See accompanying notes.
</TABLE>
5
<PAGE>
Micrografx, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended March 31,
--------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,079 $ 235
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,896 6,440
Deferred income taxes and other 1,193 (852)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 4,067 (2,557)
(Increase) decrease in inventories 472 (184)
(Increase) decrease in other current assets (289) 191
Decrease in payables and accruals (3,169) (491)
Decrease in deferred revenue (10,133) (229)
Increase (decrease) in income taxes payable (340) 454
----------------- ------------------
Total adjustments (2,303) 2,772
----------------- ------------------
Net cash (used in) provided by operating activities (224) 3,007
----------------- ------------------
Cash flows from investing activities:
Proceeds from maturities of short-term investments 6,233 3,003
Purchases of short-term investments (15,078) (2,533)
Capitalization of software development costs and
purchases of acquired product rights (6,060) (4,627)
Purchases of property and equipment (1,007) (830)
Other - (250)
----------------- ------------------
Net cash used in investing activities (15,912) (5,237)
----------------- ------------------
Cash flows from financing activities:
Proceeds from employee stock programs 3,073 1,856
Treasury stock acquired (4,066) -
Payments of notes payable (125) -
Tax benefits realized from stock transactions 329 -
----------------- ------------------
Net cash (used in) provided by financing activities (789) 1,856
----------------- ------------------
Effect of exchange rates on cash and cash equivalents 321 (224)
Net decrease in cash and cash equivalents (16,604) (598)
Cash and cash equivalents, beginning of period 26,483 11,150
----------------- ------------------
Cash and cash equivalents, end of period $ 9,879 $ 10,552
================= ==================
See accompanying notes.
</TABLE>
6
<PAGE>
Micrografx, Inc.
Notes to Consolidated Financial Statements
Basis of Presentation
The accompanying condensed consolidated financial statements of Micrografx,
Inc., and subsidiaries (the "Company") at March 31, 1999, and for the three and
nine-month periods ended March 31, 1999, and 1998 are unaudited but reflect all
adjustments, which are of a normal recurring nature and, in the opinion of
management, necessary for a fair presentation of the financial position and
results of operations for the periods presented. The accompanying financial
statements and notes thereto should be read in conjunction with the Company's
audited consolidated financial statements for the year ended June 30, 1998,
included in the 1998 Annual Report to Shareholders. The results of operations
for the three and nine month periods ended March 31, 1999, are not necessarily
indicative of results to be expected for the year ending June 30, 1999.
Revenue Recognition
Revenue from packaged product sales to distributors and resellers is recorded
when related products are shipped. Maintenance and subscription revenue is
recognized ratably over the contract period. Revenue from products licensed to
original equipment manufacturers ("OEMs") is recorded when OEMs ship licensed
products while revenue from multi-user licenses is recorded when the software
has been delivered. In connection with the sale of certain products, the Company
provides free telephone support service to customers. The Company does not defer
the recognition of any revenue associated with sales of these products, since
the cost of providing this free support is insignificant, the support is
provided within one year after the associated revenue is recognized (the vast
majority of the support actually occurs within three months) and enhancements
are minimal and infrequent. The estimated cost of providing this free support is
accrued upon product shipment. Provisions are recorded for returns and bad debts
based on historical experience.
Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
------------------------- -------------------------
<S> <C> <C>
Raw materials $ 378 $ 720
Finished goods 130 260
------------------------- -------------------------
$ 508 $ 980
========================= =========================
</TABLE>
Foreign Forward Currency Exchange Contracts
The Company periodically enters into forward foreign currency 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. At March 31, 1999, the Company had no forward
contracts outstanding.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" during the first quarter of fiscal 1999.
SFAS No. 130 establishes new rules for the reporting and presentation of
comprehensive income and its components. The Company's comprehensive income is
comprised of net income and foreign currency translation adjustments.
Comprehensive income is $646,000 and $127,000, respectively, for the three
months ended March 31, 1999, and March 31, 1998. Comprehensive income is $2.4
million and $11,000, respectively, for the nine months ended March 31, 1999, and
March 31, 1998.
7
<PAGE>
Income Per Share
Income 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.
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
March 31, March 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 784 $ 224 $2,079 $ 235
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,076 10,636 11,102 10,547
Effect of dilutive employee stock options 328 877 387 606
---------- ----------- ---------- -----------
Denominator for diluted earnings per
share - weighted average
shares adjusted for the dilutive effect
of stock options 11,404 11,513 11,489 11,153
========== =========== ========== ===========
Basic income per share $ 0.07 $ 0.02 $ 0.19 $ 0.02
========== =========== ========== ===========
Diluted income per share $ 0.07 $ 0.02 $ 0.18 $ 0.02
========== =========== ========== ===========
</TABLE>
In accordance with FAS 128, options to purchase 356,105 and 322,419 shares of
Common Stock were excluded from the diluted income per share calculation because
they were anti-dilutive for the three and nine months ended March 31, 1999,
respectively. Options to purchase 21,490 and 524,126 shares of Common Stock were
excluded from the diluted income per share calculation because they were
anti-dilutive for the three and nine months ended March 31, 1998, respectively.
Subsequent Event
On April 16, 1999, the Company purchased InterCAP Graphics Systems, Inc.
("InterCAP") for $12.15 million. The $12.15 million was funded by paying $3.85
million in cash at close, issuing a short-term promissory note for $2.5 million
and issuing a convertible debenture for $5.8 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 acquisition will be accounted for as a purchase. The
acquisition accelerates the Company's strategy to enable corporations to use
graphics and Internet technology to solve real-world business problems.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Form 10-Q 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"), was founded in 1982 and
incorporated in 1984 in the State of Texas. The Company develops and markets
graphics software that serves to make complex problems simple by making graphics
intelligent, so people can gain insight and visualize solutions. The Company is
focusing on graphics applications software products for business use in three
target categories: process management, corporate graphics, and network design
applications, which are capable of managing all the graphic imagery for the
world's largest corporations. Additionally, the Company seeks to leverage its
technology base by partnering with organizations to maximize the distribution
and value of its intellectual property.
Historically, in addition to its business graphics software, the Company
developed and marketed products for the personal creativity consumer market.
Micrografx has been one of the premier companies competing in this market with
such popular titles as Crayola(TM) Art Studio(TM), Hallmark Connections(TM) Card
Studio(TM), American Greetings(R) CreataCard(R) Plus(TM) and CreataCard(R)
Gold(TM), and Windows Draw(R). In light of recent consolidation in the consumer
software market and extremely aggressive retail programs from competitors, the
Company has chosen to shift its resources to the more rapidly growing enterprise
graphics market.
9
<PAGE>
As a result of, and in line with its objective to leverage its strong technology
base, the Company formed a strategic relationship with Cendant Software
Corporation ("Cendant") effective June 30, 1998, whereby Micrografx licensed
Cendant a series of core personal creativity graphics technologies, information
relating to the customers who have purchased products based on the
aforementioned technologies, marketing information related to those products,
and certain associated intellectual property rights. Additionally, Micrografx
entered into a combination of worldwide publishing and distribution agreements
with Cendant for two personal creativity software titles, Windows Draw(R)Print
Studio(R) and Micrografx SnapShot(TM) whereby the Company no longer markets
these products. The agreements with Cendant allow the Company to make
significant progress in de-emphasizing the consumer software market.
Effective August 31, 1998, Micrografx entered into an agreement that assigned
the Company's distribution rights for American Greetings CreataCard Gold and
CreataCard Plus to The Learning Company ("TLC"). This assignment of rights to
TLC concludes all contractual responsibilities and settles all contractual
issues between Micrografx and American Greetings Corporation ("American
Greetings"). With this assignment, the Company no longer markets these products
and has completed its de-emphasis of the consumer marketplace in order to focus
on its business graphics software.
In January 1999, the Company announced its iGrafx(TM) System(R) of business
graphics products. The iGrafx System is intended to meet the needs of all levels
of users, from the person who occasionally views pictures, diagrams or drawings
to the high-end professional who creates very detailed business graphics. The
base level of functionality consists of iGrafx(TM) Business and iGrafx(TM)
Share. Both products are included throughout the entire iGrafx System. iGrafx
Share allows users to view and use existing business graphics in Microsoft
Office and other Windows based applications. iGrafx Business allows the user to
create, edit, or view business graphics, and contains powerful drawing, image
editing, and 3D graphics features. iGrafx Business and iGrafx Share are intended
for deployment on all computers within an organization and English versions are
currently available. In March 1999 the Company also released two new products in
the process management category, iGrafx(TM) Professional and iGrafx(TM) Process.
English versions of these products are currently available. iGrafx Professional
is an extension of the Micrografx FlowCharter(R) product, and iGrafx Process is
an extension of the Optima(R) simulation tool. In the fourth quarter of fiscal
1999, the Company expects to release English versions of iGrafx(TM) Designer,
iGrafx(TM) Development, and NetworkCharter Pro as well as localized versions of
iGrafx Business, iGrafx Share, iGrafx Professional, and iGrafx Process.
On April 16, 1999, the Company purchased InterCAP Graphics Systems, Inc.
("InterCAP") for $12.15 million. The $12.15 million was funded by paying $3.85
million in cash at close, issuing a short-term promissory note for $2.5 million
and issuing a convertible debenture for $5.8 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 acquisition will be accounted for as a purchase. The
acquisition accelerates the Company's strategy to enable corporations to use
graphics and Internet technology to solve real-world business problems.
10
<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>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of revenues 11% 27% 17% 29%
--- --- --- ---
Gross profit 89% 73% 83% 71%
Operating expenses:
Sales and marketing 58% 48% 54% 50%
General and administrative 10% 9% 10% 9%
Research and development 13% 14% 13% 12%
--- --- --- ---
Total operating expenses 81% 71% 77% 71%
Income from operations 8% 2% 6% --
Non operating income, net -- -- 1% 1%
Income before income taxes 8% 2% 7% 1%
Income taxes 3% 1% 2% --
Net income 5% 1% 5% 1%
</TABLE>
The following table sets forth net revenues by product category (in thousands)
and the percentage relationship to total net revenues. 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 and TLC.
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine months Ended March 31,
---------------------------------------- -------------------------------------
1999 % 1998 % 1999 % 1998 %
------------ ------- ----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Process management $ 4,299 30% $ 4,761 27% $ 11,856 25% $ 12,090 23%
Network design 206 1% -- -- 1,049 2% -- --
Corporate graphics 5,162 36% 7,729 45% 14,519 31% 23,351 45%
Personal creativity 994 7% 4,772 28% 3,027 6% 16,709 32%
Technology 3,811 26% -- -- 16,805 36% -- --
------------ ------- ----------- ------ ----------- ------ ----------- ------
Total net revenues $ 14,472 100% $ 17,262 100% $ 47,256 100% $ 52,150 100%
============ ======= =========== ====== =========== ====== =========== ======
</TABLE>
11
<PAGE>
Process Management
Management believes that process management revenues were lower during both the
three and nine month periods because the sales of historical products declined
faster than new products could achieve sales momentum. The Company announced the
new products, iGrafx Professional and iGrafx Process in January 1999, thus
limiting demand for its two-year-old FlowCharter product. However, the new
product releases were delayed since they include a version of Visual Basic for
Applications, which was delayed by Microsoft. Despite the late release, English
versions of the new products contributed revenue of approximately $900,000.
Localized versions of iGrafx Professional and iGrafx Process are scheduled for
release in the fourth quarter of fiscal 1999. Optima revenues were relatively
unchanged from the prior year.
Network Design
In late September 1998 the Company released its first version of network related
documentation and discovery products, NetworkCharter and NetworkCharter Pro. The
NetworkCharter products are developed in conjunction with another company,
ImageNet, Inc. ("ImageNet"). On November 4, 1998, the United States District
Court, District of Massachusetts, denied a preliminary injunction motion citing
copyright infringement filed by NetSuite Development Corporation ("NetSuite")
against ImageNet. The District Courts ruling removed any current restrictions on
the Company's ability to continue selling the products. However, the future
outcome and effect of any litigation against ImageNet is unknown at this time.
Micrografx was not named in any action against ImageNet. Ultimately, a judgement
in NetSuite's favor could negatively impact the ability of Micrografx to sell
products developed with ImageNet.
Corporate Graphics
Corporate Graphics product revenues declined for both the three-month and
nine-month periods of fiscal 1999 versus the year ago periods. Consistent with
the reasons for declining process management revenues, management of the Company
believes that new product announcements had a negative effect on existing
product sales. The English version of iGrafx Business is available and
contributed more than $500,000 of revenue in the current quarter.
Compounding the natural decline of corporate graphics sales is the decline of
the retail sector of the Japanese economy, resulting in less revenue from
Graphics Suite, a traditional strong seller in Japanese retail software stores.
Europe and Asia Windows Draw revenue, which is classified as Corporate Graphics
revenue, declined $1.5 million and $4.1 million for the three and nine months
ended March 31, 1999, respectively, compared to the same periods in 1998. This
decline is a result of the Company's assignment of its rights to the product to
Cendant as previously described. Revenues are also impacted by the Company's
diminished retail presence with the assignment of its rights to its personal
creativity products.
Personal Creativity
The decline in this category resulted from the Company's assignment of its
rights to these products to Cendant and TLC. Future revenues will be
insignificant and consist of revenues from pre-existing original equipment
manufacturer (OEM) agreements, which expire by the end of the current calendar
year.
Technology
The technology category contains the revenue recognized related to the
previously discussed Cendant and TLC relationships. The Company expects to
recognize total revenue of approximately $21 million from the relationships of
which $3.0 million was recognized in fiscal 1998, $6.7 million was recognized in
the first quarter of fiscal 1999, $6.3 million was recognized in the second
quarter of fiscal 1999, $3.8 million was recognized in the third quarter of
fiscal 1999, and the remainder is anticipated to be recognized in the fourth
quarter of fiscal 1999. Revenue recognition is based on contractual obligations
and risks assumed and the impact on net income varies each quarter depending on
the costs to the Company of those obligations and risks. Although the Company
continues to seek other opportunities to license its intellectual property, its
success in doing so, as well as the timing and magnitude of revenues resulting
from new licensing relationships, is uncertain.
12
<PAGE>
Net revenues by geographical region (in thousands) for the three and nine months
ended March 31, 1999, and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine months Ended March 31,
----------------------------------------- ------------------------------------------
1999 % 1998 % 1999 % 1998 %
------------ ------ ------------ ------ ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Americas $ 9,024 62% $ 9,507 55% $29,509 62% $27,635 53%
Europe 4,628 32% 6,446 37% 15,383 33% 18,588 36%
Asia Pacific 820 6% 1,309 8% 2,364 5% 5,927 11%
------------ ------ ------------ ------ ----------- ------- ----------- -------
Total $ 14,472 100% $ 17,262 100% $47,256 100% $52,150 100%
============ ====== ============ ====== =========== ======= =========== =======
</TABLE>
A significant portion of the revenue fluctuations for the three and nine months
ended March 31, 1999, are related to significant decreases in Windows Draw and
CreataCard revenues due to the licensing of those technologies to Cendant and
TLC, respectively. Revenue for these geographical regions, excluding revenue for
the products that were assigned to TLC or Cendant, for the three and nine months
ended March 31, 1999, and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine months Ended March 31,
----------------------------------------- ------------------------------------------
1999 % 1998 % 1999 % 1998 %
------------ ------ ----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Americas $ 9,024 62% $ 4,745 44% $29,509 62% $11,993 39%
Europe 4,628 32% 5,110 47% 15,383 33% 14,943 49%
Asia Pacific 820 6% 947 9% 2,364 5% 3,689 12%
------------ ------ ----------- ------- ----------- ------- ----------- -------
Total $ 14,472 100% $ 10,802 100% $47,256 100% $30,625 100%
============ ====== =========== ======= =========== ======= =========== =======
</TABLE>
Included in Americas is technology revenue of $3.8 million for the three months
ended March 31, 1999, and $16.8 million for the nine months ended March 31,
1999. Excluding technology revenue, the revenue in Americas and Europe were
lower during both the three and nine month periods due to the age of the product
versions (approximately 24 months) that were available during most of the
quarter and a reduced retail presence related to the Company's focus on sales to
corporate users. The age of the product versions impacts revenues as revenue
tends to decrease near the end of a version's life cycle. Additionally, the Asia
Pacific decline resulted from the continued weakness in the retail sector of the
Japanese economy.
Cost of revenues for the three months ended March 31, 1999, were $1.6 million,
or 11 percent of net revenues, compared to $4.8 million, or 27 percent of net
revenues, for the three months ended March 31, 1998. The lower cost of revenues
for the three months ended March 31, 1999, was primarily attributable to the
Company's de-emphasis of the personal creativity market. This change in focus
has caused an increase in the average selling price of the Company's products
thus higher margins are being recognized. With the focus on selling to corporate
customers, a higher percentage of the Company's revenue is derived from
multi-user licenses versus boxed product sales. Boxed product carries
significant costs including box design and creation, manuals, media guides, and
CDs, compared to only minor costs associated with multi-user licenses. Personal
creativity revenues also carry a much higher third party royalty cost than the
Company's corporate products. Finally, amortization related to capitalized
software development costs declined as the majority of amounts relating to old
products previously capitalized became fully amortized. Amortization of amounts
capitalized for the new products was minimal since the products were released
late in the quarter.
The Company's operating results are affected by changes in foreign currency
exchange rates. These variations result from the change in exchange rates of
European currencies and the Japanese yen versus the U.S. dollar. Because
European manufacturing costs and European and Japanese operating expenses are
also incurred in those local currencies, the impact of exchange rates on net
income is mitigated. The impact of year-over-year changes in exchange rates on
revenue and net income was not significant.
13
<PAGE>
Sales and marketing expenses for the three months ended March 31, 1999, were
$8.4 million, or 58 percent of net revenues, compared to $8.3 million, or 48
percent of net revenues for the same period in the previous year. Total sales
and marketing expenses as a percent of revenue increased due to the significant
spending in the third quarter related to the launch of the iGrafx family of
products. The Company expects these expenses to decline in absolute dollars
through the end of the fiscal year.
General and administrative expenses for the three months ended March 31, 1999,
were $1.5 million, or 10 percent of net revenues, compared to $1.5 million, or 9
percent of net revenues, for the three months ended March 31, 1998. The
percentage increase is a result of fixed expenses remaining flat versus a lower
revenue base. The Company expects general and administrative costs to remain at
approximately the current level for the near term.
Net research and development expenses for the three months ended March 31, 1999,
were $1.9 million, or 13 percent of net revenues, compared to $2.4 million, or
14 percent of net revenues, for the quarter ended March 31, 1998. The decrease
is a result of capitalizing more software development costs resulting from the
increased activity associated with new product releases. Gross research and
development expenses, before capitalization, for the three months ended March
31, 1999, were $3.5 million, or 24 percent of net revenues, compared to $3.3
million, or 19 percent of net revenues for the quarter ended March 31, 1998. The
Company expects research and development expenses to remain at approximately the
current level for the near term.
During the three months ended March 31, 1999, the Company capitalized
approximately $1.6 million in software development costs and amortized
approximately $400,000 in software development costs. This compares to
capitalization of $900,000 and amortization of $800,000 during the three months
ended March 31, 1998.
For the three months ended March 31, 1999, interest income increased to $197,000
compared to $130,000 for the three months ended March 31, 1998. For the three
months ended March 31, 1999, and March 31, 1998, exchange rates resulted in no
material gain or loss.
The Company's effective tax rate was 35 percent for all periods presented.
Liquidity and Capital Resources
At March 31, 1999, the Company's principal sources of liquidity consisted of
cash and cash equivalents of $9.9 million and short-term investments of $10.4
million.
For the nine months ended March 31, 1999, cash used in operating, investing and
financing activities exceeded net income, resulting in a decrease in cash and
cash equivalents of $16.6 million. This decrease is primarily a result of
purchases of short-term investments and recognition of deferred revenue. Cash
flows from operating activities used $0.2 million in cash during the nine months
ended March 31, 1999. Of the deferred revenue decrease, $3.8 occurred in the
current quarter and was due to the recognition of revenue generated from the
Cendant and TLC agreements.
The decrease in accounts receivable reserves is primarily due to the reduced
need for rebates and cooperative funds typically associated with personal
creativity products.
Additionally, the Company carries a $5 million line of credit dated as of April
1, 1998, which was amended on March 30, 1999 in order to renew the agreement
until March 29, 2000. The Company believes that existing cash and short-term
investments will be sufficient to meet the Company's capital and operating
requirements in the short term.
14
<PAGE>
Euro Conversion
The Company is addressing issues regarding the European Economic Monetary
Union's ("EMU") single eurocurrency (the "Euro") and is currently able to
transact business using this currency. The Company intends to convert the
appropriate European ledgers to the Euro after fiscal year ended June 30, 2000,
and anticipates no material costs associated with this conversion.
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 of 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.
As of February 1, 1999, all mission critical systems and applications in the
data center have been reviewed and plans for upgrade, decommissioning or
replacement have been developed for systems and applications that are not Year
2000 compliant. Software upgrades and replacement are scheduled to be completed
by June 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 is scheduled to be upgraded, decommissioned, or replaced
before, or concurrent with, the Company's move to its new 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
15
<PAGE>
with the Company. The state of the Company's foreign operations with respect to
hardware Year 2000 readiness has not yet been assessed. These 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.
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 by early 1999 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 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 IT 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 mid-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.
16
<PAGE>
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 not
experienced any 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.
17
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company is 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 or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Revolving credit agreement dated April 1, 1998 between the
Company and BankBoston, N.A. (incorporated by reference to
Exhibit 10.15 to the Registrant's Annual Report on Form 10-K, for
the year ended June 30, 1998, filed with the SEC on September 23,
1998)
10.2 Amendment to revolving credit agreement dated April 1, 1998
between the Company and BankBoston, N.A.
27. The Financial Data Schedule required by Item 601(b)(27) of
Regulation S-K has been included with the electronic filing of
this Form 10-Q.
(b) Reports on Form 8-K - None
18
<PAGE>
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROGRAFX, INC.
Date: May 14, 1999 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
19
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Revolving credit agreement dated April 1, 1998 between the Company and
BankBoston, N.A. (incorporated by reference to Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K, for the year ended June 30,
1998, filed with the SEC on September 23, 1998)
10.2 Amendment to revolving credit agreement dated April 1, 1998 between
the Company and BankBoston, N.A.
27. The Financial Data Schedule required by Item 601(b)(27) of Regulation
S-K has been included with the electronic filing of this Form 10-Q.
20
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO
REVOLVING CREDIT AGREEMENT
First Amendment dated as of March 30, 1999 to Revolving Credit Agreement
(the "First Amendment"), by and between MICROGRAFX, INC, a Texas corporation
(the "Borrower") and BANKBOSTON, NA (the "Bank"), amending certain provisions of
the Revolving Credit Agreement dated as of April 1, 1998 (as amended and in
effect from time to time, the "Credit Agreement") by and between the Borrower
and the Bank. Terms not otherwise defined herein which are defined in the Credit
Agreement shall have the same respective meanings herein as therein
WHEREAS, the Borrower and the Bank have agreed to modify certain terms
and conditions of the Credit Agreement as specifically set forth in this First
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Amendment to Section 1 of the Credit Agreement. The definition of
"Maturity Date" contained in Section 1 of the Credit Agreement is
hereby amended by deleting the date "March 30, 1999" which
appears in such definition and substituting in place thereof the
date "March 29, 2000".
2. Conditions to Effectiveness. This First Amendment shall not
become effective until the Agent receives the following:
(a) a counterpart of this First Amendment, executed by the
Borrower and the Bank;
(b) receipt by the Bank of evidence that all necessary corporate
action has been taken by the Borrower to authorize the
transactions contemplated hereby; and
(c) an amendment fee for the account of the Bank of $25,000 in
cash from the Borrower.
3. Representations and Warranties. The Borrower hereby represents
that, on and as of the date hereof, each of the representations
and warranties made by it inss.6 of the Credit Agreement remain
true as of the date hereof (except to the extent of changes
resulting from transactions contemplated or permitted by the
Credit Agreement and the other Loan Documents and changes
occurring in the ordinary course of business that singly or in
the aggregate are not materially adverse, and to the extent that
such representations and warranties relate expressly to an
earlier date), provided, that all references therein to the
Credit Agreement shall refer to such Credit Agreement as amended
hereby. In addition, the Borrower hereby represents and warrants
that the execution and delivery by the Borrower of this First
1
<PAGE>
Amendment and the performance by the Borrower of all of its
agreements and obligations under the Credit Agreement and the
other Loan Documents as amended hereby are within the corporate
authority of the Borrower and has been duly authorized by all
necessary corporate action on the part of the Borrower.
4. Ratification, Etc. Except as expressly amended hereby, the Credit
Agreement and all documents, instruments and agreements related
thereto, including, but not limited to the Security Documents,
are hereby ratified and confirmed in all respects and shall
continue in full force and effect. The Credit Agreement and this
First Amendment shall be read and construed as a single
agreement. All references in the Credit Agreement or any related
agreement or instrument to the Credit Agreement shall hereafter
refer to the Credit Agreement as amended hereby.
5. No Waiver. Nothing contained herein shall constitute a waiver of,
impair or otherwise affect any Obligations, any other obligation
of the Borrower or any rights of the Bank consequent thereon.
6. Counterparts. This First Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but which
together shall constitute one and the same instrument
7. Governing Law. THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICT OF LAWS).
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as a document under seal as of the date first above written.
MICROGRAFX, INC.
By: /s/ John M. Carradine
---------------------
Title: Chief Financial Officer and
Treasurer
BANKBOSTON, N.A.
By: /s/ Christine Frisco
--------------------
Title: Director
3
<PAGE>
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