UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 16, 1999
MICROGRAFX, INC.
(Exact name of registrant as specified in its charter)
TEXAS 0-18708 75-1952080
- ---------------------------- ----------------------- -------------------
(State or other jurisdiction Commission File Number) (IRS Employer
of incorporation) Identification No.)
1303 E. Arapaho Road, Richardson, Texas 75081
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 234-1769
--------------
(NOT APPLICABLE)
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OF ASSETS
On April 16, 1999, Micrografx, Inc. ("Micrografx"), a Texas corporation (the
"Company"), entered into and consummated 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. As a result of the merger, the Company acquired all of the capital stock
of InterCAP and InterCAP became a wholly owned subsidiary of the Company. Under
the terms of the Agreement, the Company paid $12.15 million for the purchase
consisting of a combination of cash, a promissory note and convertible debt
securities. The Company made a payment of $3.85 million in cash at closing,
issued to Intergraph a promissory note for $2.5 million, payable with interest
on August 31, 1999, and issued to Intergraph a convertible subordinated
debenture for $5.8 million due March 31, 2002.
Based in Annapolis, Maryland, InterCAP provides standards-based solutions for
publishing technical graphics on the Internet to aerospace, defense and
manufacturing industries. InterCAP was instrumental in the development of
WebCGM, the first vector standard to earn a recommendation from the World Wide
Web Consortium (W3C). InterCAP also was a founder of the CGM Open consortium and
is an innovator in standards-based solutions development and consulting. By
leveraging CGM (Computer Graphics Metafile), the preferred graphics format
standard in manufacturing companies worldwide, as well as server-based
technologies, InterCAP provides customers with the fastest way to create
Web-based product information and commerce solutions from existing engineering
and technical data.
The purchase price was determined through negotiations conducted by
representatives of Micrografx and Intergraph. There are no material
relationships known to Micrografx between Intergraph and Micrografx or any of
its affiliates, any director or any officer of Micrografx or any associate of
any such director or officer.
Micrografx intends that InterCAP will continue to conduct its business
substantially as it is now being conducted, except now it will be a wholly owned
subsidiary of Micrografx.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following financial statements and pro forma financial information omitted
from Form 8-K for the event dated April 16, 1999, in reliance upon 7(a)(4) and
7(b)(2) of Form 8-K, are filed herewith in Exhibits 99.2 and 99.3.
<TABLE>
<CAPTION>
<S> <C>
PAGE NO.
(a) Financial Statements of the Business Acquired.
Financial Statements of InterCAP Graphics Systems, Inc.
Report of Independent Auditors 6
Consolidated Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998 and
1997 7
Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998
(unaudited) and for the years ended December 31, 1998 and 1997 8
Consolidated Statements of Shareholder's Equity for the three months ended March 31,
1999 (unaudited) and for the years ended December 31, 1998 and 1997 9
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998
(unaudited) and for the years ended December 31, 1998 and 1997 10
Notes to Consolidated Financial Statements 11
(b) Unaudited Pro Forma Combined Financial Statements.
Unaudited Pro Forma Combined Balance Sheet as of March 31, 1999 17
Unaudited Pro Forma Combined Statements of Operations for the nine months ended March
31, 1999 and for the year ended June 30, 1998 18
Notes to Unaudited Pro Forma Combined Financial Statements 20
</TABLE>
(c) Exhibits
2.1 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 (incorporated by reference to
Exhibit 2.1 to the Registrant's Form 8-K, filed on May 3, 1999)
10.1 Subordinated Convertible Debenture dated April 16, 1999 between
Micrografx, Inc. and Intergraph Corporation (incorporated by reference
to Exhibit 10.1 to the Registrant's Form 8-K, filed on May 3, 1999)
23 Consent of Ernst & Young LLP.
99.1 Text of Press Release dated April 19, 1999 issued by Micrografx, Inc.
(incorporated by reference to Exhibit 99.1 to the Registrant's Form
8-K, filed on May 3, 1999)
99.2 Financial Statements of InterCAP Graphics Systems, Inc. for the three
months ended March 31, 1999 and 1998 (unaudited) and the years ended
December 31, 1998 and 1997 with Report of Independent Auditors.
99.3 Unaudited Pro Forma Combined Balance Sheet of Micrografx, Inc. and
InterCAP Graphics Systems, Inc. as of March 31, 1999; and Unaudited
Pro Forma Combined Statements of Operations of Micrografx, Inc. and
InterCAP Graphics Systems, Inc. for the nine months ended March 31,
1999 and for the year ended June 30, 1998.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MICROGRAFX, INC.
(Registrant)
Date: July 1, 1999 By: /S/ JOHN M. CARRADINE
-------------------------------------------------
John M. Carradine, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
4
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
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 May 28, 1999, with respect to the consolidated financial statements
of InterCAP Graphics Systems, Inc. included in this Current Report (Form 8-K/A)
of Micrografx, Inc.
/S/ ERNST & YOUNG LLP
---------------------
Dallas, TX
June 30, 1999
5
<PAGE>
EXHIBIT 99.2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder
InterCAP Graphics Systems, Inc.
We have audited the accompanying consolidated balance sheets of InterCAP
Graphics Systems, Inc. and subsidiaries (the Company), a wholly-owned subsidiary
of Intergraph Corporation, as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholder's equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We 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 InterCAP Graphics
Systems, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
By: /S/ ERNST & YOUNG, LLP
--------------------------
Dallas, Texas
May 28, 1999
6
<PAGE>
<TABLE>
INTERCAP GRAPHICS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<CAPTION>
<S> <C> <C> <C>
MARCH 31, DECEMBER 31,
------------- -------------------------
1999 1998 1997
------------- ----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 461 $ 117 $ 106
Accounts receivable, net 795 1,257 436
Note receivable from Parent 1,600 1,600 -
Prepaids, deposits and other current assets 75 42 44
------------- ----------- -----------
Total current assets 2,931 3,016 586
Property and equipment, net 87 79 113
Goodwill, net 990 1,320 2,640
Other assets 58 20 20
------------- ----------- -----------
Total assets $ 4,066 $ 4,435 $ 3,359
============= =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 109 $ 137 $ 233
Accrued compensation and benefits 201 172 155
Other accrued liabilities 77 191 58
Deferred revenue 1,052 747 833
Payable to Parent 793 995 106
------------- ----------- -----------
Total current liabilities 2,232 2,242 1,385
Commitments - - -
Shareholder's equity
Common stock, $0.10 par value, 9,000,000 shares
authorized; 1,000 shares issued and outstanding - - -
Additional capital 7,780 7,780 7,780
Accumulated deficit (6,017) (5,584) (5,901)
Accumulated other comprehensive income (loss) 71 (3) 95
------------- ----------- -----------
Total shareholder's equity 1,834 2,193 1,974
------------- ----------- -----------
Total liabilities and shareholder's equity $ 4,066 $ 4,435 $ 3,359
============= =========== ===========
See accompanying notes.
</TABLE>
7
<PAGE>
<TABLE>
INTERCAP GRAPHICS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------------------- ------------------------------
1999 1998 1998 1997
--------------- ------------- -------------- -------------
(UNAUDITED)
License revenue $ 342 $ 1,993 $ 3,344 $ 1,872
Maintenance revenue 427 424 1,583 1,575
Consulting revenue 140 36 407 92
--------------- ------------- -------------- -------------
Net revenues 909 2,453 5,334 3,539
License cost of sales 26 121 171 62
Maintenance cost of sales 116 193 797 789
Consulting cost of sales 85 33 284 92
--------------- ------------- -------------- -------------
Cost of revenues 227 347 1,252 943
--------------- ------------- -------------- -------------
Gross profit 682 2,106 4,082 2,596
Operating expenses:
Sales and marketing 293 384 1,226 1,282
General and administrative 208 130 548 524
Research and development 279 300 1,154 1,157
Goodwill amortization 330 330 1,320 1,320
--------------- ------------- -------------- -------------
Total operating expenses 1,110 1,144 4,248 4,283
--------------- ------------- -------------- -------------
Income (loss) from operations (428) 962 (166) (1,687)
Interest income (18) - (70) (2)
Interest expense - 4 4 9
Other income - (1,000) (1,000) -
Foreign currency (gain) loss and other 59 (14) (42) 58
--------------- ------------- -------------- -------------
Total non-operating (income) expense 41 (1,010) (1,108) 65
--------------- ------------- -------------- -------------
Income (loss) before income taxes (469) 1,972 942 (1,752)
Income tax provision (benefit) (36) 625 625 -
--------------- ------------- -------------- -------------
Net income (loss) $ (433) $ 1,347 $ 317 $ (1,752)
=============== ============= ============== =============
See accompanying notes.
</TABLE>
8
<PAGE>
<TABLE>
INTERCAP GRAPHICS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(in thousands, except share data)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ACCUMULATED
COMMON STOCK OTHER
-------------------------- ADDITIONAL ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 1,000 - $ 7,780 $ (4,149) $ 14 $ 3,645
Translation of foreign currency
financial statements - - - - 81 81
Net loss - - - (1,752) - (1,752)
--------------
Total comprehensive loss - - - - - (1,671)
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 1,000 - 7,780 (5,901) 95 1,974
Translation of foreign currency
financial statements - - - - (98) (98)
Net income - - - 317 - 317
--------------
Total comprehensive income - - - - - 219
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 1,000 - 7,780 (5,584) (3) 2,193
Translation of foreign currency
financial statements
(unaudited) - - - - 74 74
Net loss (unaudited) - - - (433) - (433)
--------------
Total comprehensive loss
(unaudited) - - - - - (359)
--------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 (UNAUDITED) 1,000 - $ 7,780 $ (6,017) $ 71 $ 1,834
======================================================================================
See accompanying notes.
</TABLE>
9
<PAGE>
<TABLE>
INTERCAP GRAPHICS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
------------------------------- -----------------------------
1999 1998 1998 1997
--------------- ------------- ------------- ------------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss) $ (433) $ 1,347 $ 317 $ (1,752)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 15 19 80 87
Amortization of goodwill 330 330 1,320 1,320
Changes in operating assets and liabilities,
(Increase) decrease in accounts receivable 462 (40) (821) 530
(Increase) decrease in prepaids, deposits, note
receivable from Parent, other current assets
and other assets (71) (9) (1,598) (28)
(Decrease) increase in deferred revenue 305 75 (86) (32)
(Decrease) increase in accounts payable, payable to
Parent and accrued compensation and benefits (315) 76 943 (154)
--------------- ------------- ------------- ------------
Total adjustments 726 451 (162) 1,723
--------------- ------------- ------------- ------------
Net cash provided by (used in) operating activities 293 1,798 155 (29)
--------------- ------------- ------------- ------------
Cash flows from investing activities:
Payments for purchases of property and equipment (23) (20) (46) (77)
--------------- ------------- ------------- ------------
Net cash used in investing activities (23) (20) (46) (77)
--------------- ------------- ------------- ------------
Effect of exchange rates on cash and cash equivalents 74 (30) (98) 81
Net increase (decrease) in cash and cash equivalents 344 1,748 11 (25)
Cash and cash equivalents, beginning of period 117 106 106 131
--------------- ------------- ------------- ------------
Cash and cash equivalents, end of period $ 461 $ 1,854 $ 117 $ 106
=============== ============= ============= ============
Supplemental Cash Flow Information
Cash paid for --
Interest $ - $ 3 $ 3 $ 8
=============== ============= ============= ============
Income taxes $ - $ - $ - $ -
=============== ============= ============= ============
See accompanying notes.
</TABLE>
10
<PAGE>
INTERCAP GRAPHICS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
InterCAP Graphics Systems, Inc. ("InterCAP" or the "Company") was incorporated
in 1987 in the state of Delaware. InterCAP is a wholly owned subsidiary of
Intergraph Corporation ("Intergraph" or "Parent"). InterCAP provides
standards-based solutions for publishing technical graphics on the Internet to
aerospace, defense and manufacturing industries.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. The Company subsidiaries consist of
InterCAP Graphics Systems, AG, located in Switzerland, and InterCAP Graphics
Systems, GmbH, located in Germany. 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities of
three months or less to be cash equivalents.
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
three years for computers and equipment, software, furniture and fixtures and
leasehold improvements. Depreciation expense for the year ended December 31,
1998 and 1997 was approximately $80,000 and $87,000, respectively.
GOODWILL
Goodwill, net consists of excess costs over values assigned to tangible assets
in connection with the Parent's acquisition of the Company in 1995 and is
amortized on a straight-line basis over 5 years. The goodwill recorded at the
date of acquisition was approximately $6.6 million. Accumulated amortization of
goodwill was approximately $5.3 million and $4.0 million at December 31, 1998
and 1997, respectively. The carrying value of goodwill is periodically reviewed,
using an undiscounted cash flow analysis, to determine whether impairment
exists, and adjustments to net realizable value will be made as needed.
INCOME TAXES
The Company is included in the consolidated federal income tax return of its
Parent. The Company's income tax provision is computed assuming that the Company
files a separate income tax return and the liability is recorded as a payable to
Parent. 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 non-current 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.
RESEARCH AND DEVELOPMENT
Research and development expenses are charged to operations as incurred. The
Company has not capitalized certain software development costs subsequent to the
establishment of technological feasibility, as these costs have not been
material.
FOREIGN CURRENCY
For 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 the period end exchange rates.
Income and expense items are translated at the average rates of exchange
prevailing during the period.
11
<PAGE>
The adjustments resulting from translating the financial statements of foreign
subsidiaries are reflected in accumulated other comprehensive income, a
component of shareholder's equity.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" during the first quarter of fiscal 1998.
SFAS No. 130 establishes new rules for the reporting and presentation of
comprehensive income and its components. The Company's comprehensive income
(loss) is comprised of net income (loss) and foreign currency translation
adjustments.
REVENUE RECOGNITION
The Company's revenue is generated primarily from three sources: license sales,
maintenance, and consulting. Software license revenues for periods subsequent to
January 1, 1998, are recognized in accordance with the American Institute of
Certified Public Accountants' Statement of Position (SOP) 97-2, "Software
Revenue Recognition." Under SOP 97-2, software license revenues are recognized
upon execution of a contract and delivery of software, provided that the license
fee is fixed and determinable, no significant production, modification or
customization of the software is required, and collection is considered probable
by management. For periods prior to January 1, 1998, software license revenues
were recognized in accordance with SOP 91-1, "Software Revenue Recognition."
Under SOP 91-1, software license revenues were recognized upon execution of a
contract and shipment of the software and after any customer cancellation right
had expired, provided that no significant vendor obligations remained
outstanding, amounts were due within one year, and collection was considered
probable by management. The application of SOP 97-2 did not have a material
impact on the Company's consolidated financial statements for the year ended
December 31, 1998. The Company provides customer support 120 days following the
effective date of the license agreement at no charge. A portion of the software
license fee is deferred and recognized over the four month warranty period as
maintenance revenue. Annual maintenance fees are recognized ratably over the
life of the maintenance agreement, which is generally twelve months. Consulting
revenues are generally for integration and other services related to software
sales. Consulting revenues are recognized as service is provided.
DEFERRED REVENUE
Deferred revenue represents amounts received under terms specified in
consulting, software licensing, and maintenance contracts for which completion
of contractual terms has not occurred.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial statements as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 reflect all adjustments consisting of normal recurring
items which are, in the opinion of management, necessary for a fair presentation
of the financial position and results of operations for the interim periods.
2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
December 31,
-----------------------------
1998 1997
------------- ------------
Trade receivables $ 1,262 $ 441
Allowances (5) (5)
------------- ------------
Accounts receivable, net $ 1,257 $ 436
============= ============
Allowances consist of reserves for estimated uncollectible accounts receivable.
At December 31, 1998 and 1997, approximately 74 percent and 80 percent,
respectively, of trade receivables represented amounts due from ten customers.
At December 31, 1998, the Company had one customer with a receivable balance of
47 percent of trade receivables. At December 31, 1997, the Company had two
customers with receivable balances of 16 percent and 15 percent of trade
receivables. The credit risk in the Company's trade accounts receivable is
substantially mitigated by the Company's credit evaluation process and
reasonably short collection terms.
The Company distributes its products through authorized resellers and its
corporate sales representatives located throughout the United States and Europe.
In fiscal 1998, two customers' sales accounted for 33 percent and 13
12
<PAGE>
percent of net revenues. In fiscal 1997, the Company had no customers whose
sales accounted for 10 percent or more of net revenues.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
----------------------------
1998 1997
------------ -----------
Computers and equipment $ 977 $ 936
Furniture and fixtures 76 76
Leasehold improvements 23 18
------------ -----------
1,076 1,030
Less - accumulated depreciation and amortization (997) (917)
------------ -----------
Property and equipment, net $ 79 $ 113
============ ===========
4. INCOME TAXES
Components of the provision for income taxes are as follows (in thousands):
Years Ended December 31,
--------------------- --------------------
1998 1997
--------------------- --------------------
Current provision $625 $ -
Deferred provision - -
--------------------- --------------------
Total income tax provision $625 $ -
===================== ====================
The provisions for income taxes differ from the amounts computed by applying the
statutory U.S. federal income tax rate to income before provision for income
taxes primarily due to nondeductible goodwill amortization.
Components of the net deferred income tax assets are as follows (in thousands),
there were no significant deferred tax liabilities:
Years Ended December 31,
---------- ----------
1998 1997
---------- ----------
Deferred Tax Assets
Amortization $ 195 $ 173
Net operating loss carryforward - 155
Depreciation 61 60
Reserves and other accrued expenses
not currently deductible for tax
purposes - 20
---------- ----------
Total deferred tax assets 256 408
Valuation Allowance (256) (408)
---------- ----------
Net Deferred Tax Asset $ - $ -
========== ==========
13
<PAGE>
5. EMPLOYEE BENEFIT PLAN
The InterCAP Graphics Systems, Inc. 401(k) Savings Plan (the "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 and $9,500 in 1998 and 1997, respectively), 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
Parent. During each of fiscal 1998 and 1997, the Company contributed
approximately $49,000 to the Plan. At December 31, 1998, there were
approximately 32 participants in the Plan.
6. COMMITMENTS
The Company leases its office and warehouse space and certain equipment under
non-cancelable operating lease agreements. Rent expense of approximately
$254,000 and $235,000 was recorded for the years ended December 31, 1998 and
1997, respectively. Future minimum lease payments for operating leases are
approximately $202,000 and $112,000 for fiscal 1999 and 2000, respectively.
7. RELATED PARTY TRANSACTIONS
The Company is a party to several transactions with its Parent. In March 1999,
InterCAP entered into an agreement with Intergraph, (the "Agreement"), whereby
the Company granted to Intergraph, a perpetual, non-exclusive, non-transferable,
royalty-free license to certain InterCAP technology. Under the terms of the
Agreement, the Company shall provide Intergraph with maintenance on "Licensed
Technology" as defined in the Agreement and the Company will receive an annual
fee of $25,000 for the performance of this maintenance. Also, under the terms of
the Agreement, the Company is obligated to develop and accelerate the
incorporation of certain capabilities with the Licensed Technology as defined in
the Agreement. For the development and incorporation of these capabilities, the
Company will receive $175,000.
In the normal course of business, the Parent sells certain products which
contain InterCAP technology. In connection with the sale of these products, the
Company receives royalties from Intergraph. InterCAP received royalties of
$161,000 and $219,000 during the years ended December 31, 1998 and 1997,
respectively, and these royalties are included in license revenue in the
accompanying consolidated statements of operations.
In addition, the Parent is a distributor for certain of the Company's products
and obtains a commission of up to 55% on such sales. The Parent retains the
commissions from these sales and remits the remaining portion of the sales price
to the Company. For the years ended December 31, 1998 and 1997, the Parent
received $183,000 and $160,000, respectively, and the Company recognized $82,000
and $59,000 of revenue, respectively, relating to this distributor relationship.
These amounts are included in license revenue in the accompanying consolidated
statements of operations.
The Parent also markets consulting services for InterCAP products to certain
customers. These consulting services are provided by InterCAP and the related
revenue is recognized by InterCAP. For the year ended December 31, 1998 the
Company recognized $240,000 in connection with these consulting services and
these amounts are included in consulting revenue in the accompanying
consolidated statements of operations. For the year ended December 31, 1997, the
Company did not recognize any revenues in connection with these consulting
services.
On March 2, 1998, Intergraph entered into a transaction with Unigraphics
Solution, Inc. (USI), a subsidiary of Electronic Data Systems Corporation,
whereby certain assets of the Parent's Solid Edge and Engineering Modeling
System product lines were sold. The products sold included rights to utilize
certain of the Company's proprietary technology. In connection with this
transaction, InterCAP was allocated $1 million from Intergraph to compensate the
Company for the use of its proprietary technology in the products sold and this
amount is included in other income in the accompanying statements of operations.
In April 1998, the Company advanced $1,600,000 to its Parent and obtained a note
receivable. Under the terms of the note receivable, the full principal amount
was due and payable on March 31, 1999, however, in connection with the April 16,
1999 acquisition of the Company by Micrografx, Inc. (see note 9), this note
receivable was charged to shareholder's equity. Also, under the terms of the
note receivable, interest was accrued at a 6.0 percent annual interest rate.
Included in selling, general, and administrative expense is an allocation of
certain administrative overhead costs incurred by the Parent on behalf of
InterCAP of approximately $160,000 and $130,000 for the years ended
14
<PAGE>
December 31, 1998 and 1997, respectively. These costs are allocated to each of
the Parent's subsidiaries based on several factors, such as headcount, square
footage and specific identification and are believed to be appropriate
allocations of such costs and are representative of the costs of such services
obtained on an arms-length basis. Furthermore, the Company believes the results
of operations include all expenses necessary to conduct the Company's
operations.
8. SEGMENT INFORMATION
The Company operates in a single industry segment: the development, marketing
and support of standards-based solutions software products for publishing
technical graphics on the Internet. Virtually all products sold in the United
States and Europe are developed in Annapolis, Maryland.
The following geographic area data includes net revenues, based on product
shipment destination, and property, plant and equipment, based on physical
location (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------ -------------- ---------------------------
1999 1998 1998 1997
------------ -------------- ------------ -------------
(unaudited) (unaudited)
Net revenues:
United States $ 785 $ 2,375 $ 4,782 $ 3,136
Europe 124 78 552 403
------------ -------------- ------------ -------------
Total $ 909 $ 2,453 $ 5,334 $ 3,539
============ ============== ============ =============
Property, Plant & Equipment, net:
United States $ 65 $ 100 $ 61 $ 106
Europe 22 14 18 7
------------ -------------- ------------ -------------
Total $ 87 $ 114 $ 79 $ 113
============ ============== ============ =============
</TABLE>
9. SUBSEQUENT EVENT
On April 16, 1999, Micrografx, Inc. ("Micrografx") purchased InterCAP from
Intergraph for $12.15 million. The $12.15 million was funded through the payment
of $3.85 million in cash at closing, the issuance of a short-term promissory
note for $2.5 million and the issuance of a convertible debenture for
approximately $5.8 million. The convertible debenture may be initially converted
into 579,700 shares of Micrografx common stock.
15
<PAGE>
EXHIBIT 99.3
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Statements of Operations assume that
the acquisition of InterCAP Graphics Systems, Inc. ("InterCAP") had occurred on
July 1, 1997, combining the consolidated results of Micrografx, Inc. and
subsidiaries ("Micrografx") and InterCAP for the year ended June 30, 1998 and
the nine months ended March 31, 1999. The Unaudited Pro Forma Combined Balance
Sheet as of March 31, 1999 reflects the acquisition as if it had occurred on
March 31, 1999. The pro forma information is derived from the historical
financial statements of Micrografx and InterCAP, after giving effect to the
acquisition using the purchase method of accounting and assumptions and
adjustments considered appropriate by Micrografx, which are described in the
accompanying Notes to Unaudited Pro Forma Combined Financial Statements. The
allocation of purchase price to the assets acquired and liabilities assumed has
been made using estimated fair values that include values based on the
preliminary results of an independent appraisal and management estimates. These
estimates are subject to adjustment to reflect the final results of the
independent appraisal. Any subsequent adjustments are expected to occur by
Micrografx's June 30, 1999 fiscal year end. Although the final valuation of the
assets to be acquired is not presently expected to result in values that are
significantly different from management's estimates as included in the unaudited
pro forma combined balance sheet, there can be no assurance with respect
thereto. The unaudited pro forma combined financial statements are provided for
illustrative purposes only and are not necessarily indicative of the results of
operations or financial condition that actually would have been obtained if the
acquisition had occurred on the dates indicated or of the operating results that
may be obtained in the future.
The Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the historical financial statements, and the related notes
thereto, of Micrografx and InterCAP. The historical financial statements of
InterCAP as of and for the years ended December 31, 1998 and 1997 and the
related notes thereto, and the historical financial statements of InterCAP as of
March 31, 1999 and for the three months ended March 31, 1999 and 1998 and the
related notes thereto are included herein. The historical financial statements
of Micrografx and the related notes thereto as of and for the year ended June
30, 1998 and as of and for the nine months ended March 31, 1999 and the related
notes thereto, have been previously filed with the Securities and Exchange
Commission.
16
<PAGE>
<TABLE>
MICROGRAFX, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
MICROGRAFX INTERCAP ADJUSTMENTS COMBINED
------------- -------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,879 $ 461 $ (3,853) (b) $ 6,487
Short-term investments 10,429 - - 10,429
Accounts receivable, net 8,645 795 - 9,440
Note receivable from Parent - 1,600 (1,600) (a) -
Inventories 508 - - 508
Deferred tax asset 358 - - 358
Other current assets 1,668 75 - 1,743
------------- -------------- ------------- -------------
Total current assets 31,487 2,931 (5,453) 28,965
Property and equipment, net 1,750 87 - 1,837
Capitalized software development costs, net 4,638 - - 4,638
Goodwill, net 566 990 8,238 (a) 9,794
Other intangible assets, net 33 - 1,811 (a) 1,844
Acquired product rights, net 2,612 - - 2,612
Other assets 2,018 58 - 2,076
------------- -------------- ------------- -------------
Total assets $ 43,104 $ 4,066 $ 4,596 $ 51,766
============= ============== ============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 4,096 $ 109 $ - $ 4,205
Accrued compensation and benefits 2,366 201 - 2,567
Deferred revenue 1,800 1,052 - 2,852
Accrued liabilities and other 2,872 77 213 (b) 3,162
Deferred tax liability - - 616 (a) 616
Accrued royalties 264 - - 264
Notes payable, current 1,400 - 2,500 (b) 3,900
Payable to Parent - 793 (793) (a) -
------------- -------------- ------------- ------------
Total current liabilities 12,798 2,232 2,536 17,566
Notes payable & other 20 - 5,797 (b) 5,817
------------- -------------- ------------- ------------
Total liabilities 12,818 2,232 8,333 23,383
Shareholder's equity
Common stock, 120 - - 120
Additional capital 37,216 7,780 (7,780) (c) 37,216
Retained earnings (accumulated deficit) 1,184 (6,017) 4,114 (c) (719)
Cumulative translation adjustment (1,217) 71 (71) (c) (1,217)
Less - treasury stock (6,950) - - (6,950)
Deferred compensation (67) - - (67)
------------- -------------- ------------- ------------
Total shareholder's equity 30,286 1,834 (3,737) 28,383
------------- -------------- ------------- ------------
Total liabilities and shareholder's equity $ 43,104 $ 4,066 $ 4,596 $ 51,766
============= ============== ============= ============
See accompanying notes.
</TABLE>
17
<PAGE>
<TABLE>
MICROGRAFX, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999
(in thousands, except per share data)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
ADD
DEDUCT INTERCAP
INTERCAP INTERCAP HISTORICAL INTERCAP MICROGRAFX
HISTORICAL HISTORICAL THREE PRO FORMA HISTORICAL
YEAR ENDED SIX MONTHS MONTHS NINE MONTHS NINE MONTHS
DECEMBER ENDED JUNE ENDED MARCH ENDED MARCH ENDED MARCH PRO FORMA PRO FORMA
31, 1998 30, 1998 31, 1999 31, 1999 31, 1999 ADJUSTMENTS COMBINED
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net revenues $ 5,334 $ 3,280 $ 909 $ 2,963 $ 47,256 $ - $ 50,219
Cost of revenues 1,252 597 227 882 8,027 - 8,909
----------- ----------- ----------- ----------- ----------- ----------- ----------
Gross profit 4,082 2,683 682 2,081 39,229 - 41,310
Operating expenses:
Sales and marketing 1,226 620 293 899 25,752 - 26,651
General and administrative 548 283 208 473 4,769 - 5,242
Research and development 1,154 600 279 833 5,898 - 6,731
Goodwill amortization 1,320 660 330 990 102 9 (a) 1,101
----------- ----------- ----------- ----------- ----------- ----------- ----------
Total operating expenses 4,248 2,163 1,110 3,195 36,521 9 39,725
Income (loss) from operations (166) 520 (428) (1,114) 2,708 (9) 1,585
Interest income (70) (26) (18) (62) (823) 159 (c) (726)
Interest expense 4 4 - - - 260 (b) 260
Other income (1,000) (1,000) - - - - -
Foreign currency (gain) loss and other (42) 5 59 12 333 - 345
----------- ----------- ----------- ----------- ----------- ----------- ----------
Total non operating (income) expense (1,108) (1,017) 41 (50) (490) 419 (121)
Income (loss) before income taxes 942 1,537 (469) (1,064) 3,198 (428) 1,706
Income tax provision (benefit) 625 591 (36) (2) 1,119 (246)(d) 871
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss) $ 317 $ 946 $ (433) $ (1,062) $ 2,079 $ (182) $ 835
=========== =========== =========== =========== =========== =========== ==========
Basic earnings per share: $ 0.19 $ 0.08
=========== ==========
Diluted earnings per share: $ 0.18 $ 0.07
=========== ==========
See accompanying notes.
</TABLE>
18
<PAGE>
<TABLE>
MICROGRAFX, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
(in thousands, except per share data)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
DEDUCT ADD
INTERCAP INTERCAP INTERCAP
INTERCAP HISTORICAL HISTORICAL PRO FORMA MICROGRAFX
HISTORICAL SIX MONTHS SIX MONTHS TWELVE HISTORICAL
YEAR ENDED ENDED ENDED MONTHS YEAR ENDED
DECEMBER DECEMBER DECEMBER ENDED JUNE JUNE 30, PRO FORMA PRO FORMA
31, 1998 31, 1998 31, 1997 30, 1998 1998 ADJUSTMENTS COMBINED
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net revenues $ 5,334 $ 2,054 $ 1,442 $ 4,722 $ 71,792 $ - $ 76,514
Cost of revenues 1,252 655 536 1,133 21,466 - 22,599
----------- ----------- ----------- ----------- ----------- ----------- ----------
Gross profit 4,082 1,399 906 3,589 50,326 - 53,915
Operating expenses:
Sales and marketing 1,226 606 537 1,157 34,048 - 35,205
General and administrative 548 265 244 527 7,325 - 7,852
Research and development 1,154 553 546 1,147 8,446 - 9,593
Goodwill amortization 1,320 660 660 1,320 134 11 (a) 1,465
----------- ----------- ----------- ----------- ----------- ----------- ----------
Total operating expenses 4,248 2,084 1,987 4,151 49,953 11 54,115
Income (loss) from operations (166) (685) (1,081) (562) 373 (11) (200)
Interest income (70) (45) (1) (26) (616) 212 (c) (430)
Interest expense 4 - 4 8 - 439 (b) 447
Other income (1,000) - - (1,000) - - (1,000)
Foreign currency (gain) loss and other (42) (47) - 5 55 - 60
----------- ----------- ----------- ----------- ----------- ----------- ----------
Total non-operating (income)expense (1,108) (92) 3 (1,013) (561) 651 (923)
Income (loss) before income taxes 942 (593) (1,084) 451 934 (662) 723
Income tax provision (benefit) 625 34 - 591 327 (360)(d) 558
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income (loss) $ 317 $ (627) $(1,084) $ (140) $ 607 $ (302) $ 165
=========== =========== =========== =========== =========== =========== ==========
Basic earnings per share: $ 0.06 $ 0.02
=========== ==========
Diluted earnings per share: $ 0.05 $ 0.01
=========== ==========
See accompanying notes.
</TABLE>
19
<PAGE>
MICROGRAFX, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL
The acquisition of InterCAP will be accounted for as a purchase business
combination by Micrografx. These unaudited pro forma combined financial
statements reflect an aggregate purchase price of approximately $12,363,000,
consisting of the payment of approximately $3.85 million in cash at closing, the
issuance of a short-term promissory note for $2.5 million, the issuance of a
convertible debenture for approximately $5.8 million and approximately $213,000
of other costs related to the acquisition. The subordinated convertible
debenture may be initially converted into 579,700 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.
For purposes of preparing the accompanying unaudited pro forma combined balance
sheet, the aggregate purchase price has been allocated to the net assets
acquired, with the remainder recorded as goodwill on the basis of preliminary
estimates of fair value. These preliminary estimates of fair value were
determined by Micrografx's management based primarily on information furnished
by management of InterCAP and preliminary results of an independent appraisal of
the assets acquired. While the unaudited pro forma combined balance sheet has
been presented based on the best information currently available to Micrografx's
management, the final allocation of the purchase price will be based on a
completed appraisal of the assets and liabilities of InterCAP. Although the
final valuation of the assets to be acquired is not presently expected to result
in values that are significantly different from management's estimates as
included in the unaudited pro forma combined balance sheet, there can be no
assurance with respect thereto.
2. UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The accompanying unaudited pro forma combined balance sheet assumes the
acquisition was consummated on March 31, 1999 and reflects the following pro
forma adjustments:
(a) to record the estimated allocation of the purchase price to the
fair value of assets and liabilities acquired as follows (in
thousands):
Fair value of InterCAP historical net assets - as adjusted $ 37
Purchased in-process research and development to be
charged to expense upon consummation of the acquisition 1,903
Identified intangible assets 1,811
Deferred income tax liability related to identified
intangible assets (616)
Goodwill 9,228
--------
Aggregate purchase price $12,363
========
The historical book value of InterCAP's net assets as of March 31, 1999
reconciles with the fair value of the net assets included in the purchase price
allocation above as follows (in thousands):
Book value of InterCAP's historical net assets $ 1,834
Pro forma adjustment (a):
-to reduce assets for note receivable from Intergraph
discharged as part of the acquisition (1,600)
-to reduce other assets to eliminate InterCAP historical goodwill (990)
-to increase assets for payable to Intergraph discharged
as part of the acquisition 793
--------
Fair value of InterCAP's historical net assets adjusted $ 37
========
20
<PAGE>
The amounts identified as intangible assets were categorized as follows (in
thousands):
CATEGORY
Workforce $ 417
Customer list 240
Non-compete agreement 281
Current technology 873
--------
Total identified intangible assets $ 1,811
========
(b) to record the aggregate cost of the acquisition as described in
Note 1 above. In connection with the acquisition, Micrografx made
payment of approximately $3.85 million in cash at closing, issued
a short-term promissory note for $2.5 million, issued a
subordinated convertible debenture for approximately $5.8 million
and incurred approximately $213,000 in costs directly related to
the transaction. Accordingly, the pro forma transactions will
result in $8.3 million of additional indebtedness on a pro forma
combined basis, of which $2.5 million is recorded as a current
liability and $5.8 million is recorded as a long-term obligation,
according to the terms of the related agreements.
(c) to eliminate InterCAP's historical equity balances and to reflect
the reduction in retained earnings that will result from the
estimated in-process research and development charge of
$1,903,000 to be recorded upon consummation of the acquisition.
3. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The accompanying unaudited pro forma combined statements of operations have been
prepared as if the acquisition was consummated on July 1,1997, and reflect the
following pro forma adjustments:
(a) to record amortization of identified intangibles acquired in the
acquisition computed using the straight-line method over their
estimated economic lives (three to seven years) and amortization
of goodwill over its estimated economic life (ten years). Also
reflects the elimination of InterCAP historical goodwill
amortization:
NINE MONTHS
ENDED YEAR ENDED
3/31/99 6/30/98
------------ -----------
Pro forma amortization of goodwill
and intangibles $ 999 $ 1,331
Elimination of InterCAP historical
goodwill amortization 990 1,320
------------ -----------
Pro forma adjustment $ 9 $ 11
============ ===========
(b) to record estimated interest expense incurred as if the
acquisition had been completed on July 1, 1997. 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%
fixed rate to begin January 5, 2000 and increasing to 8% on
January 4, 2001. The pro forma interest expense adjustment for
the convertible debenture assumes an interest rate of 6% based on
a weighted average interest rate calculated according to the
terms stated above. As described in the Agreement and Plan of
Merger dated April 15, 1999 between Micrografx, Inc. and
Intergraph Corporation, the applicable interest rate for the $2.5
million short-term promissory note issued in the acquisition is a
9.75% fixed rate for the term of the agreement; April 16, 1999 to
August 31, 1999.
(c) to record the reduction of interest income due to payment of
$3.85 million in cash at the closing of the transaction. The
reduction of interest income is calculated using a 5.5% interest
rate that approximates Micrografx's historical pre-tax earnings
on its short-term investments.
21
<PAGE>
(d) to adjust the provision for income taxes to reflect the impact on
the results of operations of the acquisition and related pro
forma adjustments. The effective tax rate on the pro forma
adjustments is higher than the statutory tax rate due to
non-deductible goodwill amortization expense recorded as part of
the adjustment described in Note 3(a).
4. UNAUDITED PRO FORMA COMBINED EARNINGS PER COMMON SHARE DATA
The unaudited pro forma combined basic net income per common share is computed
by dividing unaudited pro forma combined net income by the weighted average
number of shares of Micrografx common stock outstanding during the period. The
unaudited pro forma combined diluted net income per common share is computed by
dividing unaudited pro forma combined net income by the weighted average number
of shares of Micrografx common stock outstanding during the period, as adjusted
for the effect of dilutive stock options calculated using the treasury method.
The unaudited pro forma combined diluted net income per common share excludes
the 579,700 shares related to the convertible debenture issued in connection
with the acquisition, as such shares are anti-dilutive for the periods
presented.
22
<PAGE>
