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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 September 30, 2000
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.)
8144 WALNUT HILL LANE, SUITE 1050, DALLAS, TX 75231
(Address of principal executive offices) (Zip Code)
(469) 232-1000
(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 October 31, 2000, 11,497,981 shares of the Company's common stock were
outstanding.
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<PAGE>
MICROGRAFX, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
PART I.
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
September 30, 2000 (unaudited), and June 30, 2000
Consolidated Statements of Operations for the three 5
months ended September 30, 2000 and 1999 (unaudited)
Consolidated Statements of Cash Flows for the 6
three months ended September 30, 2000 and 1999 (unaudited)
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II.
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
<S> <C> <C>
SEPTEMBER 30, JUNE 30,
2000 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,153 $ 2,843
Accounts receivable, net of allowances of $2,074 and $2,788 4,211 3,926
Inventories 340 458
Other current assets 1,115 1,019
----------- -----------
Total current assets 7,819 8,246
Property and equipment, net 1,413 1,570
Capitalized software development costs, net 5,563 5,530
Acquired product rights, net 1,231 1,612
Goodwill, net 1,656 1,749
Other assets 722 772
----------- -----------
Total assets $ 18,404 $ 19,479
=========== ===========
See accompanying notes.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
(Unaudited)
<S> <C> <C>
SEPTEMBER 30, JUNE 30,
2000 2000
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,597 $ 3,606
Accrued compensation and benefits 1,743 1,597
Other accrued liabilities 2,933 3,503
Deferred revenue 1,386 1,584
Notes payable 138 138
Receivable facility 231 767
Income taxes payable 281 271
----------- -----------
Total current liabilities 10,309 11,466
Long-term debt 5,797 5,797
Other non-current liabilities 345 437
Redeemable preferred stock:
Preferred stock, $.01 par value, 10,000 shares authorized;
issued series A convertible 1,120 shares at stated value 1,680 -
Shareholders' equity:
Common stock, $.01 par value, 20,000 shares authorized;
12,263 shares issued 123 123
Additional capital 38,048 38,029
Accumulated deficit (30,322) (28,915)
Accumulated other comprehensive loss
(1,777) (1,659)
Less - treasury stock (766 shares), at cost
(5,799) (5,799)
----------- -----------
Total shareholders' equity 273 1,779
----------- -----------
Total liabilities and shareholders' equity $ 18,404 $ 19,479
=========== ===========
See accompanying notes.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<S> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
------------- --------------
Net revenues $ 6,839 $ 8,522
Cost of revenues 1,703 2,183
------------- --------------
Gross profit 5,136 6,339
Operating expenses:
Sales and marketing 3,915 6,482
General and administrative 1,115 2,207
Net research and development 1,239 2,158
------------- --------------
Total operating expenses 6,269 10,847
------------- --------------
Loss from operations (1,133) (4,508)
Interest income 16 28
Interest expense (210) (150)
Other (expense) income, net (31) 137
------------- --------------
Total non operating (expense) income (225) 15
------------- --------------
Loss before income taxes (1,358) (4,493)
Income tax provision 42 116
------------- --------------
Net loss (1,400) (4,609)
Preferred stock dividends (7) -
------------- --------------
Net loss applicable to common shareholders $ (1,407) $ (4,609)
============= ==============
Basic and diluted loss per common share $ (0.12) $ (0.41)
============= ==============
See accompanying notes.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<S> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
----------------- -------------------
Cash flows from operating activities:
Net loss $ (1,400) $ (4,609)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Depreciation and amortization 1,187 1,673
Deferred income taxes and other (54) 46
Changes in operating assets and liabilities:
Accounts receivable (285) (63)
Inventories 118 48
Other current assets (96) 159
Payables and accruals (433) 28
Deferred revenue (198) -
Income taxes payable 10 33
----------------- -------------------
Net cash (used in) provided by operating activities (1,151) (2,685)
----------------- -------------------
Cash flows from investing activities:
Proceeds from maturities of short-term investments - 1,577
Purchases of short-term investments - (1,039)
Capitalization of software development costs and
purchases of acquired product rights (461) (659)
Purchases of property and equipment, net (103) (981)
----------------- -------------------
Net cash used in investing activities (564) (1,102)
----------------- -------------------
Cash flows from financing activities:
Proceeds from preferred stock issuance 1,680 -
Proceeds from employee stock programs - 15
Payment on receivable facility (536) -
Payments of notes payable - (1,250)
----------------- -------------------
Net cash provided by (used in) financing activities 1,144 (1,235)
----------------- -------------------
Effect of exchange rates on cash and cash equivalents (119) 31
----------------- -------------------
Net decrease in cash and cash equivalents (690) (4,991)
Cash and cash equivalents, beginning of period 2,843 8,819
----------------- -------------------
Cash and cash equivalents, end of period $ 2,153 $ 3,828
================= ===================
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 September 30, 2000, and for the
three-month periods ended September 30, 2000, and 1999 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 consolidated
balance sheet at June 30, 2000 is derived from the audited consolidated
financial statements for the year ended June 30, 2000. 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,
2000, included in the 2000 Annual Report to Shareholders. The results of
operations for the three-month period ended September 30, 2000, are not
necessarily indicative of results to be expected for the year ending June 30,
2001.
REVENUE RECOGNITION
Revenue from packaged product sales to distributors and resellers is recognized
when related products are sold through to the end user. 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):
SEPTEMBER 30, 2000 JUNE 30, 2000
---------------------- ----------------------
(UNAUDITED)
Raw materials $ 281 $ 362
Finished goods 59 96
---------------------- ----------------------
$ 340 $ 458
====================== ======================
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" established 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. Comprehensive loss is approximately $1.5 million for the three
months ended September 30, 2000 compared to comprehensive loss of approximately
$4.6 million for the three months ended September 30,1999.
7
<PAGE>
RESTRUCTURING CHARGE
In the fourth quarter of fiscal 2000, the Company recorded charges for
restructuring and asset writedowns of $9.9 million. The restructuring
initiatives involve the Company's elimination of approximately 74 employee
positions, the relocation of the Allen, Texas workforce from their existing
corporate headquarters to a smaller facility, the decision to abandon the
development and marketing of certain products and the writedown of certain
long-lived assets, including goodwill. See the details of the restructuring
charge and write down of long-lived assets in the "Company's Annual Report on
Form 10-K" for fiscal year June 30, 2000. At September 30, 2000, the
restructuring accrual was approximately $449,000, as compared to the June 30,
2000 balance of approximately $653,000. The reduction in the restructuring
accrual is due to the cash payment of restructuring related items in the first
quarter of fiscal 2001.
REEDEMABLE PREFERRED STOCK
At August 30, 2000, the Company designated 4,000,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock"), with a par value of
$0.01 per share. The shares of Series A Preferred Stock are originally
convertible into equal shares of Micrografx Common Stock at a price that is
initially equal to the purchase price, adjusted for dilutive issuances and
market price. The rights and preferences of preferred stock are established by
the Company's Board of Directors upon issuance. Up to one-half of the Series A
Preferred Stock may be converted into Image2Web, Inc. Common Stock at the
investor's option. At September 30, 2000 Image2Web, Inc. was a wholly-owned
subsidiary of the Company. On September 5, 2000, the Company received
approximately $1.7 million from the issuance of Series A Preferred Stock. The
purchasers of the Series A Preferred Stock consisted of certain institutional
investors and other unaffiliated parties. The purchasers have the right to
appoint two directors to the Company's Board of Directors. At September 30,
2000, 1,120,000 shares of the Company's 10,000,000 authorized shares of
Preferred Stock were issued.
LOSS PER SHARE
Loss per share for all periods presented is based on the weighted average basic
and dilutive equivalent shares outstanding using the treasury stock method.
Amounts are shown in thousands except for per share data.
Three Months Ended
September 30,
-------------------------
2000 1999
----------- ----------
Numerator:
Net loss applicable to common shareholders $ (1,407) $ (4,609)
Denominator:
Weighted average shares 11,498 11,324
----------- -----------
Basic and diluted loss per common share $ (0.12) $ (0.41)
=========== ===========
Options and convertible securities to purchase approximately 5,403,041 shares of
Common Stock were excluded from the diluted loss per share calculation because
they were anti-dilutive for the three months ended September 30, 2000. These
included all options outstanding as of September 30, 2000, plus 579,700 shares
related to the subordinated convertible debentures issued in connection with the
InterCAP Graphics Systems, Inc. ("InterCAP") acquisition as well as 1,120,000
shares related to the Series A Convertible Preferred Stock issuance. Due to
adjustment factors, the Preferred shares are convertible into a range of shares
of Micrografx Common Stock from as low as 560,000 to as high as 1,680,000.
8
<PAGE>
LEGAL PROCEEDINGS
Micrografx filed litigation in the federal district court for the Northern
District of Texas, asking for declaratory relief that an at-will interim letter
agreement between THINK New Ideas, Inc. (THINK), and Micrografx may be
terminated by Micrografx as of May 3, 1999, without additional payment to THINK.
THINK filed its counterclaim, alleging that the agreement could be terminated
only with 90 days notice, and not without the payment of an additional amount of
compensation in the amount of $889,000, which THINK alleges Micrografx promised
to pay under agreement with THINK. Micrografx disputes the notice period for
termination and that any additional money is owed, beyond an agreed monthly
retainer of $83,000, which was paid to THINK until the termination of the
interim agreement. THINK also filed a complaint in federal court in Los Angeles
making the same allegations it asserted in its counterclaim in the Dallas
action. THINK was successful with its motion to transfer the Dallas lawsuit to
Los Angeles on the grounds Los Angeles is a more convenient forum. A trial date
has not yet been set, but there was a conference on September 28, 2000 between
attorneys for both sides and the judge. The Company expects that as a result of
the conference, a trial date will be set as well as time limits for motions and
discovery. Management continues to believe the likely trial date will be in
2001.
By letter dated June 23, 2000 American Greetings notified the Company of a
patent infringement lawsuit filed by Hallmark against American Greetings on June
6, 2000 asserting that American Greetings infringes two of Hallmark's patents. A
copy of the complaint accompanied the notice. American Greetings indicated that
this notice was given pursuant to the Master Agreement between Micrografx and
American Greetings, which provision contains an agreement by Micrografx to
indemnify American Greetings in certain circumstances, and thus suggests that
American Greetings intends to seek indemnification from Micrografx with respect
to the Hallmark claim. The Company is unable to express a view on the ultimate
anticipated outcome.
The Company is party to various other legal proceedings arising from the normal
course of business activities, none of which, in management's opinion, is
expected to have a material adverse impact on the Company's results of
operations or its financial position.
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 iGrafx(TM) and
Image2Web 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, changes in levels of operating expenses 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.
9
<PAGE>
GENERAL
Micrografx, Inc. ("Micrografx" or the "Company") develops and markets graphics
software for business use in the areas of process management, technical
illustration, and visual commerce. Additionally, the Company desires to leverage
its technology base by partnering with organizations to maximize the
distribution and value of its intellectual property.
The Company was initially organized as a partnership in June 1982 and was
subsequently incorporated in the State of Texas in March 1984. The principal
executive offices of the Company are located at 8144 Walnut Hill Lane, Suite
1050, Dallas, Texas, 75231, and its telephone number is (469) 232-1000. The
Company's U.S. operations are based in Dallas, Texas, with business units
located Dallas, Texas, Portland, Oregon and Annapolis, Maryland. International
subsidiaries are located in the United Kingdom, France, Germany, Italy, the
Netherlands, Switzerland, Australia, and Japan.
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.
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2000 1999
------------ --------------
Net revenues 100% 100%
Cost of revenues 25% 26%
--- ---
Gross profit 75% 74%
Operating expenses:
Sales and marketing 57% 76%
General and administrative 17% 26%
Research and development 18% 25%
--- ---
Total operating expenses 92% 127%
Loss from operations (17%) (53%)
Non operating expense, (3%) -
net
Loss before
income (20%) (53%)
taxes
Income taxes - 1%
Net loss (20%) (54%)
10
<PAGE>
The following table sets forth net revenues by product category and the
percentage relationship to total net revenues. The enterprise process management
category includes iGrafx Professional(TM), iGrafx Process(TM), Micrografx
FlowCharter(R), Optima(R) and related products. The technical graphics category
includes Micrografx Designer(R), iGrafx Designer(TM), the ActiveCGM(TM)
products, and related products. The Heritage and other category includes
Micrografx Graphics Suite(R), American Greetings(R), CreataCard(R) Plus(TM),
American Greetings(R) CreataCard(R) Gold(TM), iGrafx Business(TM),
NetworkCharter(TM), Picture Publisher(R), Simply3D(R), Webtricity(TM), Windows
Draw(R), and revenues generated by the Company's Image2Web subsidiary.
Three Months Ended September 30,
-------------------------------------
2000 % 1999 %
----------- ------ ----------- ------
Enterprise process management $ 2,969 43% $ 3,630 43%
Technical graphics 2,079 32% 2,136 25%
Heritage and other 1,791 25% 2,756 32%
----------- ------ ----------- ------
Total net revenues $ 6,839 100% $ 8,522 100%
=========== ====== =========== ======
ENTERPRISE PROCESS MANAGEMENT REVENUES
Enterprise Process Management ("EPM") revenues were lower as the declining
revenues from FlowCharter(R) more than offset the increase in sales of iGrafx
Professional(TM) and iGrafx Process(TM). Consistent with a typical product
revenue curve, EPM revenues continued to decline in the first fiscal quarter.
The iGrafx products were released at the end of the third quarter of fiscal 1999
and sales of the current version peaked in the third quarter of fiscal 2000.
Upgraded versions of iGrafx Professional and iGrafx Process are scheduled for
release in the second quarter of fiscal 2001. Additionally, two new products,
iGrafx Process for Six Sigma(TM) and iGrafx Process Central are also scheduled
for release in the second quarter of fiscal 2001. (Six Sigma(TM) is a trademark
of Motorola, Inc.) Management believes that recent agreements with certain
consulting firms focused on training corporations on Six Sigma(TM) methodologies
further validate market opportunities and the value-add of Micrografx products.
Revenues from past versions of FlowCharter(R) represent approximately one-third
of total EPM revenues, demonstrating the strong brand identity that
FlowCharter(R) has developed. Consequently, the Company has decided to name its
forthcoming version of process documentation software iGrafx FlowCharter 2000
Professional, while the upgraded version of the simulation tool will be iGrafx
Process 2000.
TECHNICAL GRAPHICS REVENUES
Each of the product lines within the technical graphics category were relatively
unchanged in year-to-year comparisons. iGrafx Designer sales declined from the
fourth quarter of fiscal 2000, consistent with a typical product revenue curve.
iGrafx Designer was released in the fourth quarter of fiscal 1999, with
localized versions released in the following quarter, and sales of the current
version peaked in the second quarter of fiscal 2000. Sales of the Company's
ActiveCGM products have been relatively stable as customers are on annual
maintenance contracts that must be renewed to continue to use the product with
the revenue recognized ratably over the term of the contract.
11
<PAGE>
HERITAGE AND OTHER REVENUES
The significant decline in this category is the result of the Company's change
in strategic direction from the consumer market to the enterprise market. The
largest decline has resulted from the decreased emphasis on general desktop
diagramming and drawing tools such as Graphics Suite(R). The Company also
experienced revenue declines from products such as CreataCard(R) and Windows
Draw(R) as OEM agreements in place prior to the Cendant and TLC agreements
expired during fiscal years 1999 and 2000. Lastly, revenues from retail products
such as Picture Publisher(R), Webtricity(TM), and Simply3D(R) have declined as
the Company's importance in retail channels has declined. This category also
includes an insignificant amount of revenues related to the sale of Image2Web's
initial solution, OnSwitch, that was released in August 2000.
GEOGRAPHICAL DISTRIBUTION OF REVENUE
Net revenues by geographical region (in thousands) for the three months ended
September 30, 2000, and 1999 were as follows:
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
2000 % 1999 %
----------- ------- ----------- -------
Americas $ 3,463 52% $ 3,206 38%
Europe 2,792 39% 4,645 54%
Asia Pacific 584 9% 671 8%
----------- ------- ----------- -------
Total $ 6,839 100% $ 8,522 100%
=========== ======= =========== =======
The increase in Americas revenue is primarily due to increased sell-through in
the U.S. retail channels which offset a decline in EPM revenues. The decline in
European revenues was primarily the result of a decline in Graphics Suite
revenues, a heritage product, as well as declines in other products on the
backend of the product revenue cycle. European revenues were also negatively
impacted by foreign currency exchanges rates. If exchange rates had not changed
from their fiscal 2000 levels, European revenues would have been approximately
14% higher. The Asia Pacific decline resulted as sales of iGrafx Professional
have not grown sufficiently to offset the decline in FlowCharter revenues.
Management believes international revenues may improve as the Company is
returning to the strong brand identity that exists with the FlowCharter name.
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. Exchange rates
thus far during fiscal 2001 have had an unfavorable impact on net revenues
reported by the Company. If exchange rates had not changed from their fiscal
2000 levels, the Company would have reported approximately $372,000 more in net
revenues and the operating loss would have been reduced by $159,000 for the
three months ended September 30, 2000. Because European manufacturing costs and
European and Japanese operating expenses are also incurred in those local
currencies, the impact of exchange rates on net loss is less than on revenues.
COST OF REVENUES
Cost of revenues for the three months ended September 30, 2000, were $1.7
million, or 25 percent of net revenues, compared to $2.2 million, or 26 percent
of net revenues, for the three months ended September 30, 1999. Cost of revenues
includes the direct cost of the products manufactured (typically CD-ROMs,
manuals, and boxes), external royalties, and the amortization of capitalized
software and acquired product rights. The Company made the determination in
fiscal 2001 that certain consulting and training costs should be categorized as
cost of revenues. These costs were previously reported as sales and marketing
operating costs. All periods presented have been restated to conform to the
current year presentation.
12
<PAGE>
OPERATING EXPENSES
Sales and marketing expenses have declined to approximately $3.9 million, or 57
percent of net revenues in the three months ended September 30, 2001, as
compared to $6.5 million, or 76 percent of net revenues in the same period last
year. The Company has reduced its spending on variable programs aimed at the
consumer market such as mass market advertisements, and is spending in more
targeted ways such as attendance at industry trade shows and advertising in
specific industry and vertical market publications. Sales and marketing expenses
also declined due to the corporate restructuring and reduction in workforce that
occurred on June 30, 2000. The Company expects sales and marketing expenses
should continue to decline as a percent of revenues through the end of the
fiscal year.
General and administrative expenses for the three months ended September 30,
2000, were $1.1 million, or 17 percent of net revenues, compared to $2.2
million, or 26 percent of net revenues, for the three months ended September 30,
1999. The decrease in general and administrative costs was due to the corporate
restructuring and reduction in workforce that occurred on June 30, 2000, whereby
the Company reduced its U.S. workforce by approximately forty percent. The
Company expects general and administrative costs to remain at the current levels
for the near term.
Net research and development expenses for the three months ended September 30,
2000, were $1.2 million, or 18 percent of net revenues, compared to $2.2
million, or 25 percent of net revenues, for the quarter ended September 30,
1999. Gross research and development expenses, before capitalization, for the
three months ended September 30, 2000, were $1.7 million, or 24 percent of net
revenues, compared to $2.6 million, or 31 percent of net revenues for the
quarter ended September 30, 1999. Gross research and development spending has
declined as a result of the corporate restructuring and reduction in workforce
that occurred on June 30, 2000, and the Company's development of fewer products,
all focused on corporate customers. The Company expects research and development
expenses to remain at current levels for the near term.
During the three months ended September 30, 2000, the Company capitalized
approximately $460,000 in software development costs and amortized approximately
$810,000 in software development costs. This compares to capitalization of
$660,000 and amortization of approximately $1.1 million during the three months
ended September 30, 1999.
For the three months ended September 30, 2000, interest income decreased to
approximately $16,000 compared to approximately $28,000 for the three months
ended September 30, 1999. Interest expense of approximately $210,000 resulted
primarily from the convertible debenture to Intergraph from the InterCAP
acquisition as well as the receivable facility. Changes in exchange rates
resulted in a loss of approximately $48,000 for the three months ended September
30, 2000 compared to a gain of approximately $137,000 for the three months ended
September 30, 1999.
Pursuant to the requirements of SFAS 109, a valuation allowance must be provided
when it is more likely than not that deferred tax assets will not be realized.
Based on the fact that the Company has a cumulative net operating loss for the
prior three years and there are no prior tax payments that could be refunded, it
is the Company's belief that the realization of the deferred tax assets in the
near term is remote. Due to these circumstances, the Company did not record a
net tax benefit from the operating loss, and recorded tax expense resulting from
taxes due in international subsidiaries.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company's principal sources of liquidity consisted of
cash and cash equivalents of approximately $2.2 million.
For the three months ended September 30, 2000, cash used in operating, investing
and financing activities resulted in a net decrease in cash and cash equivalents
of approximately $691,000. The net change in cash for the three months ended
September 30, 2000 includes the approximately $1.7 million proceeds from the
issuance of Series A Preferred Stock. The Company's loss before interest, taxes,
depreciation and amortization, but adjusted for the usage of cash in product
development activities was approximately $520,000. In addition to the operating
losses, working capital changes and payments reducing the Company's receivable
facility accounted for a further reduction in cash of approximately $1.42
million. Capital expenditures for the quarter were approximately $103,000.
Interest expense was approximately $210,000 and the reduction in reported cash
balances from changes in foreign exchange rates was approximately $119,000.
These reductions were offset by proceeds from the issuance of the Company's
Series A Preferred Stock of $1.68 million for a net reduction in cash of
approximately $691,000.
As reported in the Company's 2000 Annual Report, management continues to examine
various financing methods that would ensure that the capital resources of the
Company are sufficient to meet its requirements. Such measures include the
potential sale of equity or debt securities in one or more private transactions,
the sale or spin-off of certain assets to third parties, and/or factoring of
international accounts receivable. The failure of the Company to acquire
additional external financing could result in severe operational difficulties.
Such difficulties could result in a further reduction in workforce, a further
reduction in the scope of operations, or ultimately in a forced reorganization
or bankruptcy. The Company believes it should be successful in obtaining the
necessary revenue levels and/or additional funding necessary to operate the
Company in the near term, however, there can be no assurance that under its
current conditions, external funds will be available or, if available, will not
potentially dilute shareholders' interests or returns.
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, 2001,
and anticipates no material costs associated with this conversion.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"), providing the SEC's view with respect to the application of generally
accepted accounting principles to selected revenue recognition issues. As
amended by SAB 101B, SAB 101 will become effective for the fourth quarter of
fiscal 2001. The Company has assessed the impact of SAB 101 and currently
believes that the effect, if any, will not be material to the Company's
financial position or overall trends in results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended September 30, 2000, the Company did not experience any
material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's 2000 Annual Report on Form
10-K.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Micrografx filed litigation in the federal district court for the Northern
District of Texas, asking for declaratory relief that an at-will interim letter
agreement between THINK New Ideas, Inc. (THINK), and Micrografx may be
terminated by Micrografx as of May 3, 1999, without additional payment to THINK.
THINK filed its counterclaim, alleging that the agreement could be terminated
only with 90 days notice, and not without the payment of an additional amount of
compensation in the amount of $889,000, which THINK alleges Micrografx promised
to pay under agreement with THINK. Micrografx disputes the notice period for
termination and that any additional money is owed, beyond an agreed monthly
retainer of $83,000, which was paid to THINK until the termination of the
interim agreement. THINK also filed a complaint in federal court in Los Angeles
making the same allegations it asserted in its counterclaim in the Dallas
action. THINK was successful with its motion to transfer the Dallas lawsuit to
Los Angeles on the grounds Los Angeles is a more convenient forum. A trial date
has not yet been set, but there was a conference on September 28, 2000 between
attorneys for both sides and the judge. The Company expects that as a result of
the conference, a trial date will be set as well as time limits for motions and
discovery. Management continues to believe the likely trial date will be in
2001.
By letter dated June 23, 2000 American Greetings notified the Company of a
patent infringement lawsuit filed by Hallmark against American Greetings on June
6, 2000 asserting that American Greetings infringes two of Hallmark's patents. A
copy of the complaint accompanied the notice. American Greetings indicated that
this notice was given pursuant to the Master Agreement between Micrografx and
American Greetings, which provision contains an agreement by Micrografx to
indemnify American Greetings in certain circumstances, and thus suggests that
American Greetings intends to seek indemnification from Micrografx with respect
to the Hallmark claim. The Company is unable to express a view on the ultimate
anticipated outcome.
The Company is party to various legal proceedings arising from the normal course
of business activities, none of which, in management's opinion, is expected to
have a material adverse impact on the Company's results of operations or its
financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
At August 30, 2000, the Company designated 4,000,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock"), with a par value of
$0.01 per share. The shares of Series A Preferred Stock are originally
convertible into equal shares of Micrografx Common Stock at a price that is
initially equal to the purchase price, adjusted for dilutive issuances and
market price. The rights and preferences of preferred stock are established by
the Company's Board of Directors upon issuance. Up to one-half of the Series A
Preferred Stock may be converted into Image2Web, Inc. Common Stock at the
investor's option. At September 30, 2000 Image2Web, Inc. was a wholly-owned
subsidiary of the Company. On September 5, 2000, the Company received
approximately $1.7 million from the issuance of Series A Preferred Stock. The
purchasers of the Series A Preferred Stock consisted of certain institutional
investors and other unaffiliated parties. The purchasers have the right to
appoint two directors to the Company's Board of Directors. At September 30,
2000, 1,120,000 shares of the Company's 10,000,000 authorized shares of
Preferred Stock were issued. Exemption from registration was claimed under
Section 4.2 of the Securities Act of 1933 regarding transactions by an issuer
not involving a public offering.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 The Financial Data Schedule required by Item 601(b)(27) of Regulation
S-K has been included with the electronic filing of this Form 10-Q.
(b) Reports on Form 8-K:
1. On October 5, 2000 the Company filed a current report on form 8-K
reporting a news release dated September 28, 2000 under Item 7
"Exhibits" of the Item 601 of regulation S-K.
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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: November 13, 2000 By: /s/ JOHN M. CARRADINE
---------------------
John M. Carradine
Chief Financial Officer
and Corporate Secretary
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INDEX TO EXHIBITS
Exhibit No. Description
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.
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