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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
8144 WALNUT HILL LANE, SUITE 1050, DALLAS, TX 75231
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (469) 232-1000
____________
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
_____________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant at September 15, 2000, was approximately $19,115,000.
On September 15, 2000, there were 11,497,981 shares outstanding of the
registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders
in connection with the Annual Meeting of Stockholders to be held December 12,
2000, are incorporated by reference into Part III.
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MICROGRAFX, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE
PART I.
Item 1. Business.............................................................1
Item 2. Properties..........................................................11
Item 3. Legal Proceedings...................................................11
Item 4. Submission of Matters to a Vote of Security Holders.................11
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................12
Item 6. Selected Financial Data............................................13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...............................14
Item 7 (a) Quantitative and Qualitative Disclosures About Market Risk.........34
Item 8. Financial Statements and Supplementary Data........................35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................61
PART III.
Item 10. Directors and Executive Officers of the Registrant.................61
Item 11. Executive Compensation.............................................61
Item 12. Security Ownership of Certain Beneficial Owners
and Management.....................................................61
Item 13. Certain Relationships and Related Transactions.....................61
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...61
Signatures.........................................................64
Financial Statement Schedule ......................................65
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PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
In September 2000, James L. Hopkins, formerly Managing Director of the
Austin, Texas office of the technology investment-banking firm of Hoak Breedlove
Wesneski & Co., was hired as the new Chief Executive Officer and President of
Micrografx, Inc. ("Micrografx" or the "Company"). He will begin transitioning to
his new responsibilities in October 2000. Mr. Hopkins, who was also recently
appointed to the Company's Board of Directors will also become Chairman of the
Board. Douglas M. Richard, formerly Chief Executive Officer and President of
Micrografx, will assume full-time responsibility as Chief Executive Officer and
President of Image2Web, Inc. ("Image2Web"), a wholly owned subsidiary of the
Company. In addition, Douglas M. Richard and three other members of the
Company's Board of Directors stepped down in September 2000. The Board will
appoint their replacements to stand for election at the Company's annual meeting
to be held in November 2000.
Also in September 2000, the Company received approximately $1.7 million
from the issuance of Series A Convertible Preferred Stock ("Preferred Stock").
The purchasers of the Preferred Stock consisted of certain institutional
investors and other unaffiliated parties. The Preferred Stock is convertible
into common stock of Micrografx, or its subsidiary, Image2Web, Inc., based on
certain requirements. The holders of the Preferred Stock have the right to elect
two directors of the Company. While the issuance of this preferred stock helps
to alleviate some of the Company's current liquidity challenges, it, in itself
is insufficient to ensure the Company's ability to continue as a going concern.
The Company is continuing to investigate and pursue additional opportunities to
increase liquidity such as the sale of additional Preferred Stock, other
issuances of preferred stock or debt securities, and independent financing for
any or all of the Company's business units. See "Liquidity" in "Notes to
Consolidated Financial Statements" for further information.
CREATION OF BUSINESS UNITS
During fiscal year 2000, management concluded that it was necessary to
significantly modify the operating structure of the Company in order for
Micrografx to sustain viability and put itself in a position to return to
profitability. Accordingly, at the Board of Directors meeting in June 2000, the
decision to operationally divide the Company into three major business units, to
decentralize operations, and to reduce the size and scope of the organization
was made pursuant to a plan submitted by the management of the Company.
Since the Company's acquisition of InterCAP Graphics Systems, Inc.
("InterCAP") in April 1999, management has characterized revenues into three
categories: Enterprise Process Management ("EPM"), Technical Graphics, and
Heritage. EPM products include longstanding Micrografx process documentation
technologies used in products such as FlowCharter(R), the simulation technology
obtained through the acquisition of AdvanEdge Technologies, Inc. ("AdvanEdge")
used in products such as Optima(R), and the combination of these technologies
evidenced in current products iGRAFX FlowCharter(R) Professional and iGrafx
Process(TM). Technical Graphics products consist of longstanding Micrografx
technical drawing technologies used in Designer(R) and technical illustration
tools such as Illustrator and Mondello, as well as the web-based technical
drawing tools ("ActiveCGM(TM)") obtained from the acquisition of InterCAP. EPM
and Technical Graphics products are designed and marketed to solve specific
corporate problems. Heritage products are primarily older technologies no longer
actively developed which were aimed at the consumer market to create artistic
images and designs.
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While management monitored revenues according to these categories,
operations were viewed at a Company-wide level because of the existing
structure. The Company had significant operations for each functional area
(sales, marketing, general and administrative, and development) in each of its
Allen, Texas; Portland, Oregon; and Annapolis, Maryland offices. Certain tasks
within each functional area, though, were centralized in the Company's former
headquarters in Allen, Texas. For example, the EPM products were developed in
Oregon and the ActiveCGM(TM) products were developed in Maryland, but quality
and assurance testing was performed in Texas. Management sought to eliminate the
inefficiencies inherent in this structure and created distinct business units to
encompass all the sales, marketing and development activities, while keeping
administrative activities such as accounting and information technology at a
corporate level. The result of the restructuring is that the EPM business unit
is primarily located in Oregon, the Technical Graphics business unit is located
in Maryland, and principal executive and administrative tasks are concentrated
in Texas.
CREATION OF IMAGE2WEB SUBSIDIARY
Image2Web was founded in November 1999 as a wholly owned subsidiary of
Micrografx to create a platform that could capitalize on Micrografx's imaging
technology. All discussions included herein referring to the Company's "visual
commerce" business unit refer to the Image2Web subsidiary. Image2Web has spent
most of fiscal year 2000 defining and refining its product offering, creating
the infrastructure to execute its business strategy, and pursuing financial
investments from various third parties.
FOURTH QUARTER CHARGES
In the fourth quarter of fiscal 2000, the Company took charges for
restructuring of approximately $1.7 million and for the write-down of long-lived
assets of approximately $8.2 million. The restructuring charge primarily
consisted of costs related to the Company's June 30, 2000 elimination of
approximately 74 positions, the costs related to moving the Texas workforce to a
smaller facility, and the write-down of leasehold improvements and other assets
no longer utilized subsequent to the move. The write-down of long-lived assets
is primarily due to the impairment of goodwill arising from the acquisition of
InterCAP in the fourth quarter of fiscal 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" under Item 7 for a
complete discussion of these charges.
GENERAL
Micrografx 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.
Historically, the Company has developed a variety of graphics oriented
software products. These products included various technologies such as image
editing, 3D object rendering, basic drawing tools for both the consumer and
corporate markets, greeting card software for the personal creativity market,
flowcharting, process simulation, and technical drawing. In fiscal year 1997,
management and the board of directors concluded that Micrografx did not have the
critical mass to continue to support the number of technologies it was pursuing.
As a result, several changes were made in the management team and structure of
the Company. In 1997, the new management team began the process of determining
which technologies the Company should pursue as part of its long-term strategy.
It was determined that the greatest potential value was in pursuing solutions
for the corporate market and to de-emphasize the consumer market. While pursuing
this change in direction, the challenge has been to achieve profitability in the
face of phasing out technologies that did not fit into the long-term strategy of
the Company and changing the internal infrastructure and employee skill sets to
line up with the Company's long-term strategy.
The first significant steps in the strategic change process were the
licensing of Micrografx consumer technologies: drawing, greeting card and
consumer image editing, to Cendant Software Corporation ("Cendant") effective
June 30, 1998 and the assignment of the Company's distribution rights for
American Greetings(R) CreataCard(R) Gold(TM) and CreataCard(R) Plus(TM) to The
Learning Company ("TLC") in August of 1998. These agreements ended Micrografx
development and distribution of these products and mostly completed the
Company's de-emphasis of the consumer market in order to focus on the enterprise
process management and technical graphics markets. The combined value of these
licensing and assignment agreements was approximately $21 million. The $21
million was recognized as technology licensing revenue in varying amounts from
the fourth quarter of 1998 through the fourth quarter of 1999, depending upon
the actual delivery of the technologies and services associated with the
agreements.
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Management is currently concentrating on three areas of corporate software:
enterprise process management, technical graphics and visual commerce. The
principal enterprise process management products are iGrafx Professional(TM),
iGrafx Process(TM), Micrografx FlowCharter(R) and Optima(R). The principal
technical graphics products are iGrafx Designer(TM) and ActiveCGM(TM). Visual
commerce is represented by software and services related to Image2Web's OnSwitch
product. These categories represent the greatest potential as the underlying
technologies provide the opportunity to develop significant solutions for
corporations in addition to licensing the basic technologies to corporations for
general use.
The Company was initially organized as a partnership in June 1982 and was
subsequently incorporated in the State of Texas in March 1984. The principal
executive offices of the Company are located at 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 in Dallas, Texas, Portland, Oregon and Annapolis, Maryland.
International subsidiaries are located in the United Kingdom, France, Germany,
Italy, the Netherlands, Switzerland, Australia, and Japan.
BUSINESS STRATEGY AND PRODUCTS
The Company develops and markets software tools and solutions that are
targeted toward corporate needs for enterprise process management, technical
graphics and visual commerce. The Company also sells general use graphics
software. Additionally, the Company seeks to partner with organizations to
maximize the value of its technology base. While some of the technical graphics
applications are written for the UNIX(R) environment, the Company's products are
generally designed for personal computers and servers utilizing the Microsoft
Windows(R) operating environments, which include Windows 95, Windows 98, Windows
2000, and Windows NT.
Due to the rapid change in technology related to personal computers and
competitive market conditions, the Company is continually updating and refining
its products. To keep pace with the market, the Company seeks to release new
versions of its products every 18 to 24 months with minor upgrade releases more
often. Significant versions and the release date for English versions of the
Company's products are discussed below with the product to which it relates.
ENTERPRISE PROCESS MANAGEMENT APPLICATIONS
Every business has key processes that can be broken down into smaller
processes, each eventually describing specific activities across the
organization. Enterprise Process Management ("EPM") tools exist to help
management supervise this key sequence of events and to assist the organization
to perform at optimal levels. Benefits of this effort may include faster time to
market with products, improved cost effectiveness, and increased product
quality. Today, most businesses address these issues in the context of a single
department or project. While this by-department or by-project methodology can
yield short-term success, it is a self-limiting approach. EPM delves deeper by
providing a disciplined, systematic approach with the potential to yield greater
long-term benefits across departments and functional areas of the organization.
The Company believes that graphical visualization software tools provide
the best way to document and communicate process information, allowing people to
comprehend more information and mentally process more complexity than was
possible before. Sophisticated process management tools - when used to their
fullest potential - can add significant value, extending far beyond electronic
processes. These tools can be used to assess all of the critical factors (such
as cycle times, costs, etc.) tied to each step in any kind of process, and can
reveal ways to make the system faster, more cost-effective, more efficient or
quality oriented, or any combination of these.
Process management is a cycle that occurs in three stages: documentation,
improvement, and management. The purpose of the documentation stage is to create
a snapshot of how the business operates today. This stage can be the most
labor-intensive, often requiring a great deal of information gathering and data
entry. The best tools for this stage make input intuitive and fast.
Documentation can be made far more efficient by drawing the process rather than
manually writing out each process. Also, when the process must be communicated
to others, the Company believes that it is far easier for the human mind to
digest and understand the flow of a process when it is presented visually.
The improvement stage addresses such issues as lowering costs, reducing
time-to-market, and improving quality. In some cases, just the act of
documentation identifies obvious inefficiencies that can be easily remedied.
Aside from the obvious process flaws that reveal themselves, however, process
simulation is the cornerstone of process improvement initiatives. Process
simulation tools allow users to enter key variables and constraints into a
process flow, run the simulation, then see where inefficiencies lie. Simulation
also allows for "what-if" analysis to determine the optimal solution in a
process.
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The highest level of sophistication in process management is the management
of all of an organization's process information by providing efficient storage,
access, and distribution systems across an organization. At this point, the
question is no longer "What is the best process?" but rather "How can I apply
this best process so that it is utilized across my organization consistently?"
Micrografx provides tools for each stage of the cycle:
iGRAFX(TM) PROFESSIONAL provides a leading-edge technology base for
Micrografx's ongoing process management tool development initiatives. Below the
surface, iGrafx Professional(TM) incorporates one of the industry's most
advanced graphics engines, with superior display and printing technologies
designed specifically for the needs of process management. iGrafx
Professional(TM) creates powerful, interactive diagrams of business processes,
workflow, computer networks, Web sites, and databases, among others. iGrafx
Professional(TM) is fully extensible via Microsoft's Visual Basic for
Applications (VBA) for powerful custom solutions and incorporates iGrafx
iShapes(TM) technology. iGrafx Professional(TM) is the next generation of the
Company's FlowCharter(R) product. iGrafx Professional(TM) was released in March
1999, and iGrafx FlowCharter 2000 Professional is expected to be released in the
first half of fiscal 2001.
iGRAFX(TM) PROCESS, an extension of the iGRAFX Professional(TM) technology,
is a process management tool that wraps an easy-to-use interface around a
high-end process simulation engine. iGRAFX Process(TM) provides robust modeling
and simulation capabilities for companies striving to improve internal
processes. It is designed to model business processes and perform "what-if"
simulations on most business scenarios, allowing the management team to analyze
and experiment with company processes without directly impacting the business.
Customers are using iGRAFX Process(TM) to communicate about processes, reduce
cycle times, eliminate bottlenecks, understand capacity constraints, re-deploy
limited resources, and more. iGRAFX Process(TM) is fully extensible via VBA for
powerful custom solutions and incorporates iShapes(TM) technology. iGRAFX
Process(TM) is the next generation of the Company's Optima(R) product, which is
no longer actively marketed. iGRAFX Process(TM) was released in March 1999, and
iGRAFX Process(TM) 2000 is expected to be released in the first half of fiscal
2001.
iGRAFX(TM) PROCESS CENTRAL is a central repository that integrates with
iGRAFX Professional(TM) and iGRAFX Process(TM) to give stakeholders "real-time",
quick access to all enterprise process data and save users time developing
enterprise models by linking and reusing models whenever possible. It also
provides comprehensive repository capabilities such as access and security
control, concurrency control, versioning, and configuration management. iGRAFX
Process Central Viewer is available only with iGRAFX Process Central, the freely
deployed iGRAFX Process Central Viewer gives read-only and query access to
iGRAFX Process Central repositories. iGRAFX Process Central is expected to be
released in the first half of fiscal 2001.
TECHNICAL GRAPHICS APPLICATIONS
Corporations are looking for help to increase productivity and
profitability by exploiting the power of the Web and related technologies.
Micrografx offers standards-based products and services that enable companies to
leverage valuable investments in engineering drawings, technical illustrations,
schematics, and diagrams, and to optimize them for use in innovative web-based
applications such as parts catalogs, technical documentation, shop-floor
viewing, and real-time monitoring and control systems. The transferability and
reusability of technical graphics, particularly for production-oriented
companies, enable the development of web-based product information systems that
span the organization - from the main office to engineering and from design to
the shop floor. This information system is particularly valuable when companies
use the Company's technology to hotspot graphics and hyperlink to related data,
creating "intelligent graphics."
INTELLIGENT GRAPHICS SERVER ("iGS") is a high performance server
specifically designed for creating graphics on demand or quickly and easily
changing existing graphics in high volume Internet-enabled enterprise
applications. iGS is able to merge drawings with other drawings and with data
from external sources such as database tables or flat files. Some of the
intended uses for iGS include illustrated parts catalogs, interactive electronic
technical manuals, computer-based training, real-time monitoring and control
systems, and geographical information system applications. iGS was released in
May 2000.
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iGRAFX DESIGNER(TM) is the technical graphics solution that bridges the gap
between CAD and camera-ready, providing a rich graphical tool set that supports
an incredibly diverse range of file types, including many UNIX-based CAD/CAM
systems. Engineering departments and technical publishers alike can take
advantage of iGRAFX Designer's powerful, flexible functionality to create rich,
presentation-quality graphics that can be easily utilized in Microsoft Office
documents, presentations, web and intranet pages, and much more. With leading
edge, full-featured tools for image editing and 3D, iGRAFX Designer(TM) is a
complete graphics solution designed for the exacting needs of today's designers
and technical graphics users. iGRAFX Designer(TM) is the next generation of the
Company's Designer(R) product, which is no longer actively marketed. iGRAFX
Designer(TM) was released in June 1999.
ACTIVECGM PUBLISHING SUITE lets users create, view, and add hyperlinks and
animation to technical graphics. ActiveCGM(TM) allows attribute information to
be linked to graphics components. Using ActiveCGM(TM) and HTML, the text markup
language for the Web, authors can easily create high-quality, interactive
graphics-driven documents that are compact and efficient for Internet
distribution. The suite is comprised of ActiveCGM Author, ActiveCGM Runtime,
ActiveCGM Browser, and VP-Active and is based on a native implementation of CGM.
It is the first standards-based software suite designed to support the creation
and delivery of intelligent graphics on the Web. ActiveCGM(TM) was obtained from
Intergraph Corporation with the purchase of InterCAP in April 1999, and
ActiveCGM(TM) version 7 was released in March 2000.
ILLUSTRATOR2 AND MONDELLO are for professional technical illustrators
working in manufacturing, aerospace, defense, electronics, and heavy equipment
industries. They provide the missing link in computer-aided publishing by
replacing the drawing board and automating the graphics segment of the
publishing process. These products help professional illustrators create, edit,
and manage high-quality artwork containing raster images, continuous-tone
images, and vector line art. Illustrator2 is for a UNIX based platform while
Mondello is for Windows NT and both were obtained from Intergraph with the
purchase of InterCAP in April 1999.
SOLUTIONS CONSULTING
In order to address specific customer needs, the Company has created
solutions consulting groups to assist the enterprise process management and
technical graphics business units. During the selling process, if it is
determined that a customer needs functionality beyond that of the current
applications, the solutions consulting groups will provide a means to meet the
customer's requirements. In the enterprise process management area, the solution
generally involves VBA coding in the iGRAFX Development application, which was
created specifically for this purpose. In the technical graphics area,
modifications are generally made to the existing product to satisfy the customer
need. These groups are comprised of a highly specialized consultative team of
engineers, software developers, and technical graphics artists who deliver
innovative process, Web, and eCommerce-based solutions to companies who want to
exploit the Internet and related technologies for competitive advantage. The
Company packages standards-based technology with industry best practices through
customization of its applications often with other custom or off-the-shelf
software tools. Whether acting as the project lead or as part of a multi-vendor
partnership, the Company's flexibility, adaptability and proven methodology
empowers organizations to maximize their solutions investments.
VISUAL COMMERCE/IMAGE2WEB
The World Wide Web is being transformed from a series of static pages to a
visually rich, commerce driven set of inter-related marketplaces. This
transformation requires a new, robust infrastructure capable of tailoring images
and related data for a particular individual. To support this level of service,
large e-commerce sites and markets will be required to rapidly transform large
volumes of images and related data on both a pre-generate and a real-time basis.
The marketplace that offers the customer the greatest number of choices and the
most complete information will possess the competitive advantage.
This move to "visual commerce" is an attempt to more closely replicate a
real-world purchasing environment, where the arts of packaging, branding and
presentation have been perfected. As bandwidth increases and e-commerce matures,
customers are becoming more demanding. The sites that provide a visually rich
and tailored experience receive more Web site hits, yield higher close ratios
and realize a higher incidence of repeat customers. Such a capability provides
compelling economic arguments as sites increase in size and complexity and
competition increases. Image2Web addresses an urgent need for a richer
experience that can be offered economically.
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Currently, the delivery of content is inefficient, labor intensive and
dependent on hard-to-find and harder-to-keep employees. Images and their related
meta-data are normally transformed with minimal automation, predominately by
hand. The data that relates to the image is often disconnected, misplaced or
lost during the transformation so that even the most basic information such as
product description, list price, sale price, model number or SKU (stock keeping
unit) may not be available in a timely, efficient manner or may not match up
with the delivery of the image to the Web site. Additionally, the ability to
generate images in real-time in response to personalization criteria or business
rules does not exist. The cost and complexity in managing this visual commerce
data prevents sites from offering their visitors the minimum necessary
experience to fully portray their wares and effectively engage in e-commerce.
The initial Image2Web service, OnSwitch(TM), radically changes the
efficiency and the economics of preparing and maintaining visual commerce
information. Where organizations are struggling to prepare 100 images per hour,
often exclusive of the related data, OnSwitch allows them to render thousands of
images per hour while simultaneously maintaining and updating a relationship
with a complex data set. The OnSwitch service addresses complex image and data
transformation issues such as additions, updates, moves and deletions from
diverse distributed users while ensuring quality and accuracy. The PowerGrid(TM)
technology, the underlying technology for OnSwitch, enables users to create
customized and automated processes. This service allows them significant
differentiation from sites without such a capability while lowering the net cost
of creation and maintenance.
Image2Web's solution provides the following benefits:
o Dramatic reduction in the lead-time required to post and manage images
on an e-commerce Web site;
o Synchronous management of images and data
resulting in a high degree or certainty that all product information
will be posted to the right place at the right time;
o Institutionalized visual commerce data transformation processes
rather than the current situation where the processes are only
resident in the minds of the employees performing the tasks;
o Significant reduction in the overall cost of managing visual commerce
data and the personnel resources currently devoted to the problem;
o Integration with back-office systems enabling the back-office systems
to automatically drive updates to the Web site;
o Visually rich sites that are updated frequently; and
o Higher customer satisfaction leading to increased revenue and repeat
business.
The management of Image2Web is currently seeking capital from various third
parties to fund the subsidiary's infrastructure and growth of their visual
commerce strategy. Image2Web is currently in the start-up phase and therefore
involves risks and uncertainties. There are no assurances that Image2Web will be
successful in its efforts to obtain funding or implement its business
strategies. It is unknown if this subsidiary will continue to be wholly owned,
or even majority owned, by Micrografx.
HERITAGE APPLICATIONS
Micrografx also provides the following graphics tools:
GRAPHICS SUITE(R) is a suite of four software applications: Picture
Publisher(R), Simply3D(R), Designer(R), and FlowCharter(R). Graphics Suite(R) 2
Enterprise was released in December 1997.
PICTURE PUBLISHER(R), the long-time leader in easy-to-use, yet powerful,
full-featured image editing, also provides full functionality for creating
compelling Web pages. Picture Publisher(R) contains 10,000 stock photos and clip
art images, 500 seamless Internet textures, 250 TrueType(TM) fonts, as well as
effects, filters, creative macros, templates, interactive wizards, and on-line
tutorials. Picture Publisher(R) 8 was released in February 1998.
SIMPLY3D(R), an innovative, intuitive tool, takes three-dimensional ("3D")
technical power from simple logos to complex, micron-accurate technical
illustrations, with rendering and animation easy enough for the occasional user.
Simply3D allows the user to create professional-quality 3D text, Web graphics,
and animations for all kinds of projects, including web sites, print, video,
multimedia, and even interactive 3D scenes for Microsoft PowerPoint(R)
presentations. Simply3D contains 1,000 3D drag-and-drop objects and 800
professional-quality textures as well as many lighting setups, animations, and
deformations. Simply3D 3 was released in February 1998.
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WEBTRICITY(TM) is a suite of three powerful, professional-level
applications that give users the ability to make compelling graphics and
animation for the Web. The suite includes Picture Publisher(R), Simply3D, Draw
6, and Media Manager(R). Webtricity(TM) 2 was released in May 1998.
TECHNOLOGY DEVELOPMENT AND LICENSING
Micrografx desires to use its library of graphics software in selective
licensing and in the creation of solutions for specific market niches in
response to client demand. As opportunities arise, Micrografx will continue to
look for ways to build relationships with companies by licensing them the use of
Micrografx-developed technologies for use in markets in which the Company does
not compete. In doing so, the Company's strategy is not to sell the asset that
has been developed, but only license the technology. In all cases thus far, the
Company has retained the right to software source code that the Company has
developed. The previously mentioned agreements with Cendant and TLC are
representative of the type of transactions that fall into this business
category.
LOCALIZATION
The Company localizes its business products for distribution in countries
other than the United States, generally by translating user interfaces,
packaging and marketing materials, and product documentation. Most of the
Company's products have been localized into various languages including German,
French, Japanese, Italian, and Spanish.
MARKETING AND DISTRIBUTION
The Company maintains sales organizations in most major markets of the
world, including the United States, Germany, France, the United Kingdom, Italy,
Switzerland, Australia and Japan. In addition, the Company has appointed agents
in the Netherlands, Denmark, Switzerland, Spain and Poland. Approximately 61
percent of the Company's revenues were generated outside the United States in
fiscal 2000, with approximately 52 percent from Europe and approximately 9
percent from Asia Pacific. See "Segment Information" in "Notes to Consolidated
Financial Statements" included under Item 8 for geographical segmentation of
revenues, and property, plant, and equipment.
The Company typically operates with very little backlog of unshipped
orders, due to its capability to ship product within a few days of receipt of a
purchase order. The Company distributes its products through the following
channels: corporate sales force, distributors and resellers, direct to end
users, and through original equipment manufacturers ("OEMs").
Corporate sales force. The Company has corporate sales representatives
located in the Company's offices in the United States as well as in Germany,
France, the United Kingdom, Italy, the Netherlands, Australia, Japan, Denmark,
Switzerland, Spain, and Poland. The direct sales organization consists of
regionally based sales representatives. Sales made by the corporate sales force
are often fulfilled through the distributor and reseller channels.
Distributors and resellers. The Company also markets its products through
independent, non-exclusive distributors and resellers located in approximately
35 countries around the world. Distributors include Computer 2000, Ingram Micro,
Merisel, Inc., and Tech Data Corporation. Resellers include Corporate Software,
Inc., Gruber Consultrade, MicroCenter, Inc., Snapp LLC, and Softmart, Inc. In
fiscal 2000, sales to Ingram Micro accounted for 15 percent of the Company's net
revenues, while no other customer accounted for more than 10 percent of the
Company's net revenues. In fiscal 1999, sales to Ingram Micro accounted for 12
percent of the Company's net revenues, while no other customer accounted for
more than 10 percent of the Company's net revenues. The Company offers sales
incentives, training, technical support, and promotional aids to some resellers.
The Company has distributorship agreements with all distributors and resellers.
These agreements are cancelable by either party with specified prior written
notice, and none of these agreements contain minimum or required purchase
commitments by the distributor or reseller.
Direct sales to end-users. The Company promotes its products through direct
marketing techniques designed to reach existing and potential customers, and
one-on-many seminars and trade show events. Fulfillment of product to the end
user is accomplished primarily through the services of third-party fulfillment
companies located in the United States, Europe, and Japan.
7
<PAGE>
Original Equipment Manufacturers. The Company licenses certain of its
products to OEMs under agreements that grant the OEMs the right to distribute
copies of the Company's products with the OEM's equipment, typically personal
computers, printers and scanners. During fiscal 2000, the Company had OEM
agreements with companies including Matrox Graphics, Point Group Corporation,
and Seimens Building Technologies, Inc. The Company also generated revenue from
previous agreements for Heritage personal creativity products with companies
including Avery Dennison and Seiko Epson.
PROMOTION AND ADVERTISING
The Company's marketing organization is responsible for worldwide product
marketing, planning, positioning, market strategy, and communicating marketing
plans to the Company's sales offices. Local personnel in each sales territory
develop the marketing mix by coordinating media placement, direct mail, public
relations, and channel sales management. The Company utilizes outside agencies
in the development of marketing literature, advertisements, brochures,
demonstration diskettes, and packaging, and also uses the services of outside
public relations agencies.
The Company routinely conducts promotions with resellers, distributors,
OEMs, and major customers in an effort to increase sales of its products. On a
limited basis, the Company advertises in the personal computer industry trade
press and certain other business publications. To build awareness, the Company
offers trial and preview versions with certain of its software products and
participates in industry trade events.
PRODUCT SUPPORT
The Company offers technical support to its customers through telephone or
Internet support. Technical support is provided for a fee on a pay-per-incident
plan paid by credit card charge or through a pre-purchased annual support plan.
Technical support business hours are from 8:00 a.m. to 6:00 p.m. Dallas, Texas
Time Monday through Friday in the United States. Internet support is provided 24
hours a day, 7 days per week via support databases, user forums, or downloadable
files. The Company has product support internally for North American customers
and generally outsources these activities to independent, third party service
providers in Europe, Japan, and Australia.
PRODUCT DEVELOPMENT
The Company has a continuing program of product development directed toward
the enhancement of existing products based upon current and anticipated customer
needs. The Company's research and product development effort also emphasizes
introduction of new products to broaden the Company's product line and to reach
larger segments of the market.
See "Consolidated Statements of Operations" and "Capitalized Software
Development Costs and Acquired Product Rights" in the "Notes to Consolidated
Financial Statements" included under Item 8 for a discussion of research and
development expenditures.
COMPETITION
The personal computer graphics software market is highly competitive. The
Company's competitors include many independent applications software vendors,
such as Microsoft Corporation ("Microsoft"), Adobe Systems Incorporated
("Adobe"), Corel Systems Corporation ("Corel"), and Macromedia, Inc.
("Macromedia"). The primary competitor for the Company's enterprise process
management products is Microsoft's Visio product; and the primary competitors
for the Company's technical graphics products are Autotrol, Macromedia, Inc.,
Enigma, Inc., Adobe, Corel, and ITEDO Software.
8
<PAGE>
Most of the Company's competitors, as well as a number of potential
competitors, have larger technical staffs, more established and larger marketing
and sales organizations, and significantly greater financial resources than the
Company. There can be no assurance that competitors will not develop products
that are superior to the Company's applications software products or that will
achieve greater market acceptance at the Company's expense, possibly resulting
in reduced sales of the Company's applications software products.
The Company believes that the principal competitive factors in the software
applications market include customer demand, product capabilities, ability to
extend product to meet specific customer needs, ease of understanding and
operating the software, product reliability, price/performance characteristics,
name recognition, and availability and quality of support services. The Company
believes that its products currently compete favorably with respect to these
factors.
See "Trends and Risk Factors" in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7.
PRODUCT PROTECTION
The Company attempts to protect its ownership rights in its software
products with patents, trademarks, copyrights, trade secret laws, and
nondisclosure safeguards, as well as contractual restrictions on copying,
disclosure, and transferability that are incorporated into its software license
agreements. Despite these restrictions, it may be possible for competitors or
users to copy aspects of the Company's products to obtain information that the
Company regards as proprietary. Existing laws protecting intellectual property
are helpful but imperfect aids in preventing unauthorized copying and use of the
Company's products. Monitoring and identifying unauthorized copying and use of
software can be difficult, and software piracy is a persistent problem for the
software industry.
The Company believes that because of the rapid technological change in the
computer software industry, trade secret and copyright protection are less
significant than factors such as the knowledge, ability, and experience of the
Company's personnel, name recognition, and ongoing product innovation.
TRADEMARKS
Micrografx, the Micrografx logo, Picture Publisher(R), PhotoMagic,
Optima(R), Micrografx FlowCharter(R), NetworkCharter(TM), Micrografx Graphics
Suite(R), Micrografx Designer(R), Simply 3D(R), and Instant 3D are registered
trademarks of the Company. iGRAFX, iGrids, Webtricity(TM), Small Business
Graphics and Print Studio, Micrografx Media Manager, and ABC ToolKit, are
trademarks of the Company. American Greetings(R), CreataCard(R) Gold(TM), and
CreataCard(R) Plus(TM) are either registered trademarks or trademarks of
American Greetings Corporation. Microsoft, Windows, and Windows Draw(R) are
either registered trademarks or trademarks of Microsoft Corporation in the
United States and/or other countries. All other products are trademarks or
registered trademarks of their respective holders.
MANUFACTURING
The Company assembles products in the United States and the Netherlands.
The principal materials and components used in the Company's products include
disks, books, other printed material and packaging. The Company outsources a
significant portion of its manufacturing activity to third parties, including
disk duplication and product assembly. The Company has multiple sources of raw
materials, supplies, and components, and the Company does not currently
anticipate difficulty in securing the raw materials required in connection with
its operations.
9
<PAGE>
EMPLOYEES
As of June 30, 2000, the Company employed 187 associates, of which 50 were
in product development, 98 in sales, marketing, and customer support, and 39 in
finance, operations, and administration. The Company's continued success is
dependent in part upon its ability to attract and retain qualified employees.
Competition for employees in the software industry is intense. To date, the
Company believes that it has been successful in its efforts to recruit and
retain highly qualified employees. None of the Company's employees are subject
to a collective bargaining agreement. The Company believes that its relations
with its employees are good.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
James L. Hopkins 54 President and Chief Executive Officer
John M. Carradine 42 Chief Financial Officer and Corporate
Secretary
Kenneth A. Carraher 41 Executive Vice President of
Product Development
Jim Hopkins was appointed Chairman of the Board of Micrografx in September
2000 and Chief Executive Officer on October 16, 2000. For the previous year, Mr.
Hopkins was Managing Director of the Austin, Texas office of Hoak Breedlove
Wenseski & Co. a technology investment banking firm. From 1991 through May 1999
Mr. Hopkins held a variety of positions with STB Systems, Inc., leading to the
position of Vice President of Strategic Marketing and Chief Financial Officer.
STB was a developer of graphic subsystems for personal computers. When STB was
acquired by 3dfx Interactive, Inc. in May 1999, Mr. Hopkins assumed the position
of Vice President of Finance and Strategic Planning for 3dfx for a short
transition period before joining Hoak Breedlove Wesneski & Co.
John M. Carradine was named Chief Financial Officer and Treasurer in October
1998. In October 1999, Mr. Carradine was also named Corporate Secretary of the
Company. Prior to his appointment at Micrografx, Mr. Carradine was the Chief
Financial Officer and Treasurer of Intellicall, Inc., a telecommunications
company, where he held various financial positions for eight years. From 1983 to
1990, Mr. Carradine was with Computer Language Research, Inc., a data services
and software company where he served as Treasurer. Mr. Carradine is a licensed
CPA in the state of Texas.
Kenneth A. Carraher was named Executive Vice President of Product
Development in June 1999 after serving as the Company's Vice President of
Enterprise Solutions since July 1997. Mr. Carraher was formerly the President of
AdvanEdge Technologies, which was acquired by Micrografx in 1997, where he
pioneered advanced process management solutions with the Optima(R) and Optima
Express software products.
10
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-K of Micrografx, Inc., ("Micrografx" or the "Company")
contains certain "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Specifically, all statements other than statements of historical facts included
in this report regarding the Company's financial position, business strategy and
plans, and objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "anticipate," "believe," "estimate," "expect," and "intend,"
and words or phrases of similar import, as they relate to the Company or Company
management, are intended to identify forward-looking statements. Such statements
(the "cautionary statements") reflect the current view of the Company with
respect to future events and are subject to risks, uncertainties, and
assumptions related to various factors including, without limitation, changes in
the product release schedule, acceptance or the lack thereof of the Company's
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 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.
ITEM 2. PROPERTIES
The Company's headquarters are located in Dallas, Texas. The leased space
is used for sales and marketing, operations, and administration. The Company
outsources its U.S. production to a Dallas, Texas based company. The Company
currently leases office space for development and sales offices in Portland,
Oregon and Annapolis, Maryland; and international sales offices in Woking, the
United Kingdom; Paris, France; Munich, Germany; Chatswood, Australia; and Tokyo,
Japan; and has a production control office in Venlo, the Netherlands. The
Company considers all of its properties, both owned and leased, together with
the related machinery and equipment contained therein, to be well maintained, in
good operating condition, and suitable and adequate for its present and
foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
See "Litigation" in "Notes to Consolidated Financial Statements" included
under Item 8 for commitments and contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's security holders during
the fourth quarter ended June 30, 2000.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on NASDAQ/NMS under the symbol MGXI.
As of June 30, 2000, there were 191 holders of record, which represents
approximately 2,100 beneficial shareholders of the Company's common stock.
The Company has not paid any cash dividends on its common stock in the two
most recent fiscal years and has no intention of paying cash dividends in the
foreseeable future.
The following are the high and low sale prices of the Company's stock per
the NASDAQ National Market System:
------------------------ ------------------------
1999 2000
------------------------ ------------------------
HIGH LOW HIGH LOW
FIRST QUARTER $ 14.438 $ 8.500 $ 6.125 $ 3.375
SECOND QUARTER $ 11.125 $ 7.625 $ 5.688 $ 3.250
THIRD QUARTER $ 12.375 $ 7.625 $ 7.875 $ 4.000
FOURTH QUARTER $ 9.375 $ 5.375 $ 7.500 $ 2.313
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
RESULTS OF OPERATIONS (in thousands, except per share data) (1)
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 36,273 $ 56,962 $ 71,792 $ 64,862 $ 72,919
Net income (loss) $ (22,169) $ (5,852) $ 607 $ (6,187) $ 1,112
Basic earnings (loss) per share $ (1.95) $ (0.53) $ .06 $ (0.60) $ 0.11
Diluted earnings (loss) per share $ (1.95) $ (0.53) $ .05 $ (0.60) $ 0.11
</TABLE>
<TABLE>
BALANCE SHEET DATA (in thousands)(1)
<CAPTION>
AS OF JUNE 30,
---------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 19,479 $ 42,383 $ 55,141 $39,112 $40,098
Total long-term liabilities $ 6,234 $ 5,808 $ 410 $ 1,414 $ 684
Dividends $ - $ - $ - $ - $ -
(1) On April 2, 1996, Micrografx, Inc., acquired Visual Software, Inc.
(Visual) in a stock-for-stock acquisition accounted for as a pooling of
interests. The financial data for 1996 has been retroactively adjusted to
include the results of Visual for fiscal year 1996.
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Micrografx develops and markets graphics software for business use in the
areas of process management, management of technical graphics, 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.
Historically, the Company has developed a variety of graphics oriented
software products. These products included various technologies such as image
editing, 3D object rendering, basic drawing tools for both the consumer and
corporate markets, greeting card software for the personal creativity market,
flowcharting, process simulation, and technical drawing. In fiscal year 1997,
management and the board of directors concluded that Micrografx did not have the
critical mass to continue to support the number of technologies it was pursuing.
As a result, several changes were made in the management team and structure of
the Company. In 1997, the new management team began the process of determining
which technologies the Company should pursue as part of its long-term strategy.
It was determined that the greatest potential value was in pursuing solutions
for the corporate market and to de-emphasize the consumer market. While pursuing
this change in direction, the challenge has been to achieve profitability in the
face of phasing out technologies that did not fit into the long-term strategy of
the Company and changing the internal infrastructure and employee skill sets to
line up with the Company's long-term strategy.
The first significant steps in the strategic change process were the
licensing of Micrografx consumer technologies: drawing, greeting card and
consumer image editing, to Cendant effective June 30, 1998 and the assignment of
the Company's distribution rights for American Greetings(R) CreataCard(R)
Gold(TM) and CreataCard(R) Plus(TM) to TLC in August of 1998. These agreements
ended Micrografx development and distribution of these products and mostly
completed the Company's de-emphasis of the consumer market in order to focus on
the enterprise process management and technical graphics markets. The combined
value of these licensing and assignment agreements was approximately $21
million. The $21 million was recognized as technology licensing revenue in
varying amounts from the fourth quarter of 1998 through the fourth quarter of
1999, depending upon the actual delivery of the technologies and services
associated with the agreements.
Management is currently concentrating on three areas of corporate software:
enterprise process management, technical graphics and visual commerce. The
principal enterprise process management products are iGRAFX Professional(TM),
iGRAFX Process(TM), Micrografx FlowCharter(R) and Optima(R). The principal
technical graphics products are iGRAFX Designer(TM) and ActiveCGM(TM). Visual
commerce is represented by software and services related to the Image2Web
OnSwitch product. These categories represent the greatest potential as the
underlying technologies provide the opportunity to develop significant solutions
for corporations in addition to licensing the basic technologies to corporations
for general use.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues, excluding technology revenues, of certain items in
the Company's Consolidated Statements of Operations. Technology revenues were
excluded from this table as management believes that including these revenues
would not be indicative of the Company's ongoing operations. Historical results
and percentage relationships are not necessarily indicative of operating results
for any future period.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998
---------------------------------------
<S> <C> <C> <C>
Net revenues 100% 100% 100%
Cost of revenues 22% 26% 31%
Gross profit 78% 74% 69%
Operating expenses:
Sales and marketing 68% 86% 50%
General and administrative 20% 17% 11%
Research and development 21% 21% 12%
In-process research and development charge - 5% -
Write down of long-lived assets 20% - -
Restructuring charges 7% - -
Total operating expenses 136% 129% 73%
Loss from operations (58%) (55%) (4%)
Non operating (income) expense 2% (2%) -
Loss before income taxes (60%) (53%) (4%)
Income taxes 1% 8% -
Net loss (61%) (61%) (4%)
</TABLE>
15
<PAGE>
FISCAL 2000 COMPARED TO FISCAL 1999
NET REVENUES
The following table sets forth net revenues by product category and the
percentage relationship to total net revenues. The process management category
includes iGRAFX Professional(TM), iGRAFX Process(TM), Micrografx FlowCharter(R),
Optima(R) and related products. The technical graphics category includes
Micrografx Designer(R), iGRAFX Designer(TM), the ActiveCGM(TM) products, and
related products. The Company has yet to generate revenue from its visual
commerce product category.
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. The Heritage 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), Simply3D(R)(TM), and
Picture Publisher(R).
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 % 1999 %
---------------------------------------------
<S> <C> <C> <C> <C>
Process management $ 15,363 42% $ 15,182 27%
Technical graphics 9,945 28% 2,537 4%
Heritage and other 10,965 30% 21,268 37%
Technology - - 17,975 32%
---------------------------------------------
Total revenues $ 36,273 100% $ 56,962 100%
=============================================
</TABLE>
ENTERPRISE PROCESS MANAGEMENT REVENUES
Enterprise Process Management ("EPM") revenues were up slightly as the
increase in sales of iGRAFX Professional(TM) and iGRAFX Process(TM) more than
offset the declining revenues from FlowCharter(R). Management believes that this
shift in revenues demonstrates that Micrografx may be achieving momentum in
moving from a general desktop diagramming application to a true process
management and simulation tool. Management also believes that recent agreements
with certain consulting firms focused on training corporations on "six sigma"
methodologies further validate market opportunities and the value-add of
Micrografx products. Revenues from past versions of FlowCharter(R) represent
approximately one-half 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.
TECHNICAL GRAPHICS REVENUES
Technical graphics revenues increased substantially due to new product
offerings. The largest increase resulted from the release of iGRAFX Designer(TM)
in international markets. iGRAFX Designer(TM) is the upgrade to Micrografx
Designer(R) version 7 and was released in English markets in the fourth quarter
of fiscal 1999. The localized versions (German, French, and Japanese in
particular) were released in early fiscal 2000. iGRAFX Designer(TM) has a loyal
installed base and there had been a longer than usual amount of time between
versions, resulting in a high level of demand for the upgraded product,
particularly in international markets. Also, the Company had an increase in
revenue from its InterCAP products. The Company acquired InterCAP in mid-April
1999, resulting in less than a full quarter's worth of revenue in fiscal 1999.
The Company did grow InterCAP revenues from the fiscal 1999 run rates, but the
majority of the InterCAP growth resulted from having a complete year of
operations included in Micrografx results. The Company expects that
Designer-related revenues may decline in fiscal 2001 due to the high volume of
upgrades in fiscal year 2000. The Company expects that acceptance of the
Intelligent Graphics System will be key to the growth or lack thereof in this
category.
16
<PAGE>
HERITAGE REVENUES
The significant decline in this category is the result of the Company's
change in strategic direction as previously discussed. The largest decline has
resulted from the decreased emphasis on general desktop diagramming and drawing
tools such as Graphics Suite(R) and iGRAFX Business(TM). The Company also
experienced significant 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. The
Company expects this category to continue to decline significantly as it
continues to transition to enterprise products.
TECHNOLOGY REVENUES
The technology category contains revenue recognized related to the
previously discussed Cendant and TLC relationships. As of June 30, 1999, all
revenue related to these transactions has been recognized. The Company continues
to seek other licensing relationships in order to leverage its portfolio of
technologies, however, there can be no assurance that the Company will be able
to enter into licensing relationships in the future.
Net revenues by geographic region and as a percentage of total revenues are
as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 % 1999 %
----------------------------------------------
<S> <C> <C> <C> <C>
Americas $ 14,143 39% $ 34,695 61%
Europe 18,847 52% 19,153 34%
Asia Pacific 3,283 9% 3,114 5%
----------------------------------------------
Total net revenues $ 36,273 100% $ 56,962 100%
==============================================
</TABLE>
Net revenues by geographic region and as a percentage of revenues excluding the
technology and heritage revenues.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 % 1999 %
----------------------------------------------
<S> <C> <C> <C> <C>
Americas $ 10,457 41% $ 8,109 46%
Europe 12,427 49% 8,147 46%
Asia Pacific 2,424 10% 1,463 8%
----------------------------------------------
Total net revenues $ 25,308 100% $ 17,719 100%
==============================================
</TABLE>
Revenues increased from fiscal 1999 to fiscal 2000 in all regions when
technology and heritage revenues are excluded. The increase in Americas revenues
resulted from the acquisition of InterCAP, as the majority of InterCAP's
customers are in the United States. The increases in Europe and Japan were
driven mostly by the upgrades to the new version of iGRAFX Designer(TM).
COST OF REVENUES AND GROSS PROFIT
Cost of revenues includes the cost of documentation, diskettes or compact
disks (CDs), packaging and production overhead; amortization of capitalized
software development costs and acquired product rights, and technology
royalties. Excluding technology licensing revenues, cost of revenues declined
from 26% of revenue in fiscal 1999 to 22% of revenue in fiscal 2000. It is
anticipated that as heritage revenues continue to decline, future cost of
revenues should continue to improve. This percentage is reflective of a rising
average sales price and, to a lesser extent, a lower cost of revenues resulting
from the transition to selling to corporate customers. Corporations generally
purchase multi-user licenses that require the delivery of only a few CDs and
manuals rather than a complete boxed software product including CD's and manuals
for each user.
17
<PAGE>
SALES AND MARKETING EXPENSE
Sales and marketing expenses include the cost of advertising, promotions,
cooperative and incentive programs with distributors, trade shows, marketing,
technical support, and the Company's sales force. Sales and marketing expenses
declined due to the change in business structure and lower costs associated with
enterprise sales versus retail sales that were targeted in prior years.
The Company expects that sales and marketing expenses will decline
resulting from the Company's improved efficiency of the sales force as they gain
more experience in the enterprise market, reduced levels of general marketing
expenses replaced by less expensive and more focused marketing efforts, and
continued reduction in focus on the retail distribution channel, the support of
which requires greater sales and marketing expense.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses include principally the costs of the
Company's executive, information systems, human resources, finance, legal, and
administrative functions. The increase in general and administrative expenses
from fiscal 1999 to fiscal 2000 is primarily due to the favorable outcome in
1999 of legal actions, either filed or expected. As a result of the licensing of
technology to Cendant in June 1998, the Company expected American Greetings to
pursue legal action against the Company. The Company accrued a charge based on
management's assessment of likely outcomes. In August 1998, the Company licensed
its technology to TLC, American Greetings new partner in the greeting card
software market, and American Greetings agreed to drop the impending legal
action. As a result, Micrografx was able to reverse in fiscal 1999 the charge
that was taken in fiscal 1998. Excluding the impact of this and other
settlements, general and administrative costs declined from fiscal 1999 to
fiscal 2000.
The Company expects that general and administrative expenses should decline
due to the cost reductions that will be realized in conjunction with the
restructuring plan implemented in the fourth quarter of fiscal year 2000.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses include compensation, benefits, and
incentives paid to developers. In accordance with Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," the Company capitalizes certain software development costs
incurred after technological feasibility is achieved. These costs are amortized
over the estimated economic life of the products. Historically the Company
estimated the economic life of the products to be from 12 to 18 months, which is
consistent with a consumer software model. With the change in strategy to a
corporate software provider, the Company now estimates the economic life of the
corporate software to be approximately 48 months. The longer economic life was
implemented with the release of iGRAFX Professional(TM), iGRAFX Process(TM), and
iGRAFX Designer(TM). No adjustments were made to the amortization rate of any
previously released software, which had lives ranging from 12 to 18 months.
Amortization of capitalized software development costs is included in cost of
revenues.
Research and development expenses (net of amounts capitalized) in fiscal
2000 were $7.4 million, or 21 percent of net revenues, compared to $8.2 million,
or 21 percent of net revenues excluding technology revenues, in fiscal 1999.
Gross research and development expenses, before capitalization, for fiscal 2000
were $10.2 million, or 28 percent of net revenues, compared to $13.9 million, or
36 percent of revenues excluding technology revenues for fiscal 1999. The
decrease in gross research and development expenses resulted from the reduction
in the number of graphics technologies and engines, which occurred in the fourth
quarter of fiscal 1999.
It is anticipated that research and development expenses should continue to
decline in fiscal 2001 due to the cost reductions implemented in the fourth
quarter of fiscal year 2000.
During fiscal 2000, the Company capitalized approximately $2.8 million in
software development costs and amortized $2.4 million in software development
costs. This compares to capitalization of $5.6 million and amortization of $3.0
million for fiscal 1999.
18
<PAGE>
RESTRUCTURING CHARGE
Subject to a restructuring plan submitted to and approved by the Micrografx
Board of Directors in June 2000, the Company took the following actions in June
2000:
o Eliminated 74 employee positions, primarily at its Allen, Texas
headquarters;
o Decided to move from the existing corporate headquarters to a
smaller facility;
o Decided to abandon development and marketing of
certain products;and
o Re-evaluated growth expectations and market strategies.
Related solely to its restructuring and reorganization, the Company
has accrued certain anticipated costs as follows (in thousands):
o Benefits cost for terminated employees $67
o Relocation of the Allen workforce $1,595
The following table shows, in thousands, the results for the periods
leading up to the restructuring:
<TABLE>
<CAPTION>
FY'99 Q1'00 Q2'00 Q3'00
------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net Loss $ (5,852) $ (4,609) $ (2,675) $ (1,969)
Net Cash (Usage) Provided (17,664) (5,529) (2,532) 934
Ending Cash Balance 11,220 5,691 3,159 4,093
</TABLE>
During June of fiscal year 2000, management concluded that it was necessary
to significantly modify the operating structure of the Company in order for
Micrografx to sustain viability and put itself in a position to return to
profitability. Management and the Board of Directors determined that to reach
profitability in an acceptable period of time, certain significant actions were
necessary in the structure and size of the organization. Accordingly, at the
June Board of Directors meeting, the decision to operationally divide the
Company into three major business units, to decentralize operations, and to
reduce the size and scope of the organization was made pursuant to a plan
submitted by the management of the Company.
On June 30, 2000, the restructuring plan was implemented and approximately
74 employee positions were eliminated, the affected employees were notified of
their termination, and their termination benefits were communicated to them. On
July 3, 2000 an announcement of the actions taken and their potential effects on
the Company was distributed to the public by press release and subsequently
filed in a Form 8-K with the SEC. As of June 30, 2000, the expected date of
completion of the restructuring plan was on or around August 31, 2000 and all
actions were substantially completed as of September 1, 2000 when the Company
moved into their new corporate headquarters in Dallas, Texas.
BENEFITS COST FOR TERMINATED EMPLOYEES
The Company eliminated 74 positions and terminated approximately that
number of employees on June 30, 2000. The Company has provided these employees
two months of health benefits, which began on June 30, 2000 and ended August 31,
2000. The Company accrued approximately $67,000 for these termination benefits
based on the current cost of providing these benefits.
RELOCATE THE ALLEN WORKFORCE
Micrografx began the planning and preparation for the move into a new
facility approximately two years ago. At the time the planning began, Micrografx
had more than 300 employees and expected to grow. At that time, the Company was
renting a 60,000 square foot office space in Richardson, Texas. The facility
that the Company designed to move into was approximately 90,000 square feet.
As a result of the licensing of the personal creativity business and the
slower-than-expected ramp of enterprise-related sales, management subsequently
determined that certain actions were necessary to reduce the ongoing operating
expenses. In June 1999, the Company terminated approximately 38 positions and in
September 1999, the Company terminated approximately 10 more positions. Also in
the fourth quarter of fiscal 1999, the Company began curtailing its marketing
efforts in order to lower operating costs.
19
<PAGE>
During the third quarter of fiscal 2000, management decided to begin acting
on the excess capacity in the Allen, Texas facility (150 employees occupied a
space designed for more than 300). Management discussed various alternatives
such as concentrating the remaining employees in certain parts of the building
and subleasing the remaining parts. In the fourth quarter of fiscal 2000,
management had specific discussions with local Dallas firms related to
subleasing part of the facility. Due to the open design of the building and the
common areas, the Company could not come to terms with any potential sublessees.
While formulating the restructuring plan in June 2000, management decided
that it was not feasible to continue leasing the Allen, Texas facility. In June,
management met with the Company's real estate broker to discuss their options
related to finding and moving into a smaller facility and the approach the
Company should take in its discussions and negotiations with the landlord. In
July 2000, management met with the landlord to discuss the Company's situation
and restructuring planand the Company signed a letter of intent to surrender the
property under the current lease of 90,000 square feet and execute a new lease
for approximately 14,000 square feet with the same lessor. In conjunction with
the lease agreement, the Company issued to Prentiss Properties warrants to
purchase 100,000 shares of the Company's Common Stock at $1.03 per share. On
September 1, 2000, the Company moved into the Dallas, Texas facility.
Due to the move, there are costs associated with certain fixed assets to be
disposed of, and costs related to the relocation of corporate facilities. These
costs are not incurred to generate revenues after the commitment date and are
incremental costs that will be incurred as a direct result of the restructuring
plan. These costs were absent from the Company's operational costs prior to the
commitment date. Accordingly, the Company accrued approximately $1.6 million for
these relocation costs as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Abandonment of leasehold improvements $ 615
Write-down of building specific assets to disposal value 395
Liability for the early lease termination and subsequent asset disposal 300
Other move-related costs 285
-------
Total $ 1,595
=======
</TABLE>
WRITE DOWN OF LONG-LIVED ASSETS
In addition, certain other factors discussed below have resulted in an
impairment of certain long-lived assets as of June 30, 2000. The impaired assets
and the amount of the estimated impairment is specified below (in thousands):
o InterCAP acquisition-related long-term assets and intangibles $7,119
o Capitalized software development costs and acquired product rights $1,087
In April 1999, Micrografx completed the acquisition of InterCAP Graphics
Systems, Inc. The Company engaged KPMG Peat Marwick to assist it in determining
the allocation of purchase price among the tangible and intangible assets of the
acquired Company. The final allocation was as follows (in thousands).
Net Assets $ (344)
Workforce 418
Customer List 240
Non-compete Agreement 281
Current Technologies 898
In-process R&D Expense 1,928
Deferred Tax Liability (616)
Goodwill 9,559
----------
Total $ 12,364
==========
20
<PAGE>
During the fourth fiscal quarter, management identified certain conditions
including the lack of available growth capital and increased competition in the
graphics software market as indicators of asset impairment. Accordingly,
management has prepared its evaluation of those assets and has concluded that in
some cases there has in fact been an impairment of value. Based on an evaluation
of these indicators, the Company determined the assets with a carrying value of
$9.8 million were impaired and wrote them down by $7.1 million to their fair
value. Fair value was based on estimated future cash flows to be generated by
the InterCAP operations discounted at a market rate of interest. A description
of the events resulting in the impairment follows.
Lack of Available Capital
At the time of the InterCAP acquisition, Micrografx had total cash and
liquid investments of approximately $20 million and expected to invest
approximately $13.3 million on the InterCAP operations during fiscal 2000. The
Company expected that with the addition of the InterCAP operations, and through
the growth of its other businesses, it could continue investing for the long
term, pursuant to a plan it had initiated as early as 1996. However, due to the
cash flow difficulties described below and in the "Liquidity and Capital
Resources" section below, the Company was only able to spend approximately $4.1
million on the InterCAP operations during fiscal 2000.
The Company engaged an investment banking firm in November 1999 and began
preparing a private placement offering memorandum for Image2Web, and had general
discussions regarding additional funding for Micrografx. However, two factors
complicated and delayed the release of the memorandum and related funding. The
first delay resulted from a basic change in the business model for Image2Web
(from a licensed base software Company to an ASP consulting and services model),
the second resulted from the stock market correction in mid April 2000. Since
the correction primarily related to re-valuation of Internet and other
technology companies, Image2Web's financing prospects were negatively impacted.
The ultimate completion of this financing was significant to Micrografx for
three reasons: (i) it would remove the continuing investment obligation in
Image2Web from the Company, (ii) Micrografx believed that a part of its
historical investment in either pre-existing software, or its prior investment
in the operation of Image2Web would be returned to the Company as either a
license agreement or repayment of charges (between $1,500,000 and $5,000,000),
and (iii) provide needed of growth capital for its InterCAP products. To date,no
funding for Image2Web has occurred and there can be no assurances they will ever
occur. This lack of available growth capital was determined by the Company to be
one of its indicators of impairment.
Additionally, the Intelligent Graphics Server ("iGS"), which is a
significant product component for the Company's technical graphics strategy was
originally scheduled for delivery in January 2000. However, due to delays
partially caused by the less-than-expected investment, the product has recently
completed development although prior market size expectations have been reduced.
Increased Competition and Lower Customer Demand
Management believed at the time of the acquisition there were a limited
number of companies with competitive ability in the technical graphics arena.
The Company believed the market to be a sizeable niche with small competitors
such as Itedo in Germany and Auto-Trol in the United States. With the focus in
the past year on e-marketplaces and tools to support them, the market has
expanded, as have the number and ability of competitors. In May 2000, Macromedia
announced a product called Generator 2, focused on delivering high-impact,
data-driven content to web pages. In June 2000, Macromedia began shipping
Generator 2 and announced its compatibility with tools from leading e-business
providers such as Vignette, Silverstream Software, and Intershop. Macromedia
last year reported revenues of $264 million and currently has a market
capitalization of over $4 billion, thus they have significantly more resources
and momentum than Micrografx in this market. Additionally, a company named
Enigma has surfaced in the past year. Enigma is a private company focused on the
aerospace vertical section of this same market and they were successful in
raising $20 million in a private equity offering earlier this year. As such,
they also have a greater ability to invest and have more momentum at this time.
Management believes that these products do not provide as much functionality as
iGS, but that their feature sets significantly overlap with iGS. Because of
this, Micrografx believes that the market share and revenues it will be able to
gain will be significantly less than expectations set a year ago. When the
Company purchased InterCAP in April 1999, revenue growth was expected at 225%
from fiscal year 1999 to fiscal year 2000. The actual revenue growth from the
prior year has been 2.5%. As a result of the aforementioned factors (lack of
investment ability, delay in the release of iGS, and increasing competition)
management has revised the growth and operating expectations of the Technical
Graphics business unit and specifically, the products and technologies acquired
through InterCAP.
21
<PAGE>
IMPAIRMENT OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND ACQUIRED PRODUCT RIGHTS
The Company's restructuring plan includes dividing itself into three major
business units. These business units have clearly defined business plans that
encompass several key products. The Company has decided to abandon the
development and marketing of several other products that do not fit into the
Company's new business unit structure. These products include iGRAFX
Business(TM), Share, Image and Shared Technologies. The following grid shows the
products actively developed and marketed as enterprise products during fiscal
year 2000, and the business unit to which they relate as of June 30, 2000:
<TABLE>
<CAPTION>
PRODUCT BUSINESS UNIT
<S> <C>
OnSwitch Image2Web
iGRAFX Development Enterprise Process Management(EPM)
iGRAFX Professional(TM) EPM
iGRAFX Process(TM) EPM
FlowCharter(R) EPM
Optima(R) EPM
iGRAFX IDEF0 EPM
ActiveCGM(TM) Technical Graphics (TG)
iGRAFX Designer(TM) TG
Graphics Suite(R) Discontinued
iGRAFX Image Discontinued
iGRAFX Business(TM) Discontinued
iGRAFX Share Discontinued
Picture Publisher(R) Discontinued
Simply3D(R) Discontinued
Webtricity(TM) Discontinued
Shared Technologies* Discontinued
</TABLE>
* Shared technologies contained various tools, such as filters, originally
planned for use in the iGRAFX Business(TM) and Share platforms. These tools were
intended for general purpose desktop diagramming, a market which the Company is
no longer actively pursuing.
The Company recorded a loss of approximately $1.1 million in the fourth
quarter of fiscal 2000 for the abandonment of these products.
22
<PAGE>
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE
On April 16, 1999, the Company acquired InterCAP for approximately $12.4
million. The purchase price consisted of $3.9 million in cash at closing,
issuance of a promissory note to Intergraph for $2.5 million, payable with
interest on August 31, 1999, issuance of a convertible subordinated debenture to
Intergraph for $5.8 million due March 31, 2002, and approximately $213,000 in
costs directly related to the transaction.
In connection with the Company's acquisition of InterCAP, the Company
recorded a charge of $1.9 million for purchased in-process research and
development ("purchased R&D"), based upon the appraised value of the related
developmental projects. The income approach, which included an analysis of the
markets, cash flows, and risks associated with achieving such cash flows, was
the primary technique utilized in valuing each purchased R&D project.
InterCAP's research and development relates to WebCGM software products.
These software products allow customers in the aerospace, defense and
manufacturing industries to publish technical graphics on the Internet.
Micrografx's goal in this acquisition was to acquire technology that
complemented its iGRAFX Designer(TM) technical graphics product. iGRAFX
Designer(TM), in conjunction with the acquired technologies, allows Micrografx
to create a solution for intelligent technical illustration and Web-based
technical publishing. These complementary products provide a tiered illustration
solution supported by the industry standards and leading edge Web publishing
solutions.
Significant assumptions used in determining the value of purchased R&D for
InterCAP included projected operating cash flows and the discount rate.
Projected operating cash flows were expected to begin in early fiscal 2000. The
discount rate selected for InterCAP's in-process technologies was 15 percent.
At the time of the acquisition, InterCAP management estimated the remaining
cost and time to complete the purchased R&D projects was approximately $355,000
and 44 engineer-months. The term "engineer-month" refers to the average amount
of research work expected to be performed by an engineer in a month.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and uncertain
assumptions utilized in the valuation analysis of the in-process research and
development. Uncertainties regarding projected operating cash flows could give
rise to unforeseen budget over-runs and or revenue shortfalls in the event that
Micrografx is unable to successfully commercialize the projects. Micrografx
management is primarily responsible for estimating the value of the purchased
R&D in all acquisitions accounted for under the purchase method.
EFFECT OF EXCHANGE RATES
Exchange rates during fiscal 2000 had an unfavorable impact on net revenues
reported by the Company. If exchange rates had not changed from their 1999
rates, the Company would have reported approximately $1.3 million more in net
revenues and approximately $340,000, or $0.03 per diluted share, in net income
in fiscal 2000. This increase resulted from the change in exchange rates of
European currencies versus the U.S. dollar. Since European manufacturing costs
and operating expenses are incurred in those local currencies, the relative
translation impact of exchange rates on net income (loss) is less than on
revenues.
The Company has historically entered into foreign exchange contracts to
hedge against certain exposure to changes in foreign currency exchange rates.
This exposure results from the Company's foreign operations in countries
including Germany, France, the United Kingdom, the Netherlands, and Japan that
are denominated in currencies other than the U.S. dollar. See "Foreign Forward
Exchange Contracts" under "Summary of Significant Accounting Policies" in "Notes
to Consolidated Financial Statements".
NON-OPERATING (INCOME) EXPENSE
Non-operating (income) expense includes interest income, interest expense,
and other (income) expense. Other (income) expense, net includes the gain or
loss resulting from revaluation of receivables and payables denominated in
foreign currency, and gains or losses when receivables and payables denominated
in foreign currency are settled.
Interest income decreased from $1.0 million in fiscal 1999 to $0.1 million
in fiscal 2000, due to the decrease in cash on hand during fiscal 2000. Interest
expense increased in fiscal 2000 as a result of the debt incurred in conjunction
with the purchase of InterCAP and the receivable-backed financing agreement
entered into on March 31, 2000. See "Debt" under "Notes to Consolidated
Financial Statements" for further information on the receivable-backed financing
agreement.
23
<PAGE>
INCOME TAXES
The Company recognized a tax provision of approximately $454,000 in fiscal
2000, compared to approximately $3.1 million in fiscal 1999. For further
information on income taxes, see "Notes to Consolidated Financial Statements".
FISCAL 1999 COMPARED TO FISCAL 1998
NET REVENUES
The following table sets forth net revenues by product category and the
percentage relationship to total net revenues. The process management category
includes iGRAFX Professional(TM), iGRAFX Process(TM), Micrografx FlowCharter(R),
Optima(R) and related products. The technical graphics category includes
Micrografx Designer(R), iGRAFX Designer(TM), the ActiveCGM(TM) products, and
related products.
The technology category results from the Company's use of its library of
graphics software in selective licensing. For fiscal 1999, the technology
category consists of licensing of certain personal creativity software source
code to Cendant. The Heritage 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 and Picture
Publisher(R).
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 % 1998 %
---------------------------------------------
<S> <C> <C> <C> <C>
Process management $ 15,182 27% $ 15,786 22%
Technical graphics 2,537 4% 1,838 3%
Heritage and other 21,268 37% 51,143 71%
Technology 17,975 32% 3,025 4%
---------------------------------------------
Total revenues $ 56,962 100% $ 71,792 100%
=============================================
</TABLE>
Net revenues by geographic region and as a percentage of total revenues are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 % 1998 %
----------------------------------------------
<S> <C> <C> <C> <C>
Americas $ 34,695 61% $ 39,737 55%
Europe 19,153 34% 24,772 35%
Asia Pacific 3,114 5% 7,283 10%
----------------------------------------------
Total net revenues $ 56,962 100% $ 71,792 100%
==============================================
</TABLE>
Net revenues by geographic region and as a percentage of revenues excluding the
technology and heritage revenues.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 % 1998 %
----------------------------------------------
<S> <C> <C> <C> <C>
Americas $ 8,109 46% $ 7,399 34%
Europe 8,147 46% 8,861 55%
Asia Pacific 1,463 8% 1,364 11%
----------------------------------------------
Total net revenues $ 17,719 100% $17,624 100%
==============================================
</TABLE>
24
<PAGE>
ENTERPRISE PROCESS MANAGEMENT REVENUES
The decrease in process management revenues is a reflection of the
Company's change in business. Historically the Company primarily focused on the
sale of boxed product through retail distribution. As the Company changed its
focus to corporate licensing and increased the pricing of its products to be in
line with a corporate licensing model, the Company experienced a decline in the
boxed product sales. The decline in boxed product sales has not been immediately
offset by an increase in corporate licenses for two reasons: (1) the long
corporate sales cycle which can be up to 18 months and (2) the amount of time it
takes for a new corporate sales person to produce revenues at an acceptable
level. The Company only began in fiscal year 1999 the process of building a
sales force to accommodate a corporate sales model and it can take up to 6
months for a new salesperson to produce revenues at an acceptable level.
Additionally, corporations temporarily curtailed software spending until they
identified and remedied any problems that were expected to result from the Year
2000 issue.
TECHNICAL GRAPHICS REVENUES
Technical graphics revenues declined due to the same reasons as noted above
in the process management discussion. The decline was partially offset by
revenues from the ActiveCGM(TM) products, which were acquired in April 1999. The
decline in technical graphics revenues is more severe than the decline in
process management revenues due to the amount of time between versions of the
Company's Designer product. The previous stand-alone version of Designer,
Designer Technical 4.1, was released in fiscal year 1995. While the Company did
release Designer 7 in fiscal year 1998, it was released as a component of
Graphics Suite(R) 2 rather than as an independent product.
TECHNOLOGY REVENUES
The technology category contains revenue recognized related to the
previously discussed Cendant and TLC relationships. As of June 30, 1999, all
revenue related to these transactions has been recognized. The Company continues
to seek other licensing relationships in order to leverage its portfolio of
technologies, however, there can be no assurance that the Company will be able
to enter into licensing relationships in the future.
HERITAGE REVENUES
The significant decline in this category is the result of the Company's
change in strategic direction as previously discussed.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues includes the cost of documentation, diskettes or compact
disks (CDs), packaging and production overhead; amortization of capitalized
software development costs and acquired product rights, and technology
royalties. The decrease in cost of revenues as a percentage of net revenues for
fiscal 1999 is primarily attributable to the technology category revenues, which
have very little direct costs associated with them. The cost of revenues related
to the technology category consists of the amortization of capitalized costs
related to the development of the technology and technology royalty expenses.
Also contributing to the decline in cost of revenues as a percent of revenues
was a favorable shift in product mix from boxed products, which contain typical
content (packaging, manuals, CDs or floppy disks) to multi-user and OEM license
revenues which require substantially less content.
SALES AND MARKETING EXPENSE
Sales and marketing expenses include the cost of advertising, promotions,
cooperative and incentive programs with distributors, trade shows, marketing,
technical support, and the Company's sales force. Sales and marketing expenses
increased as a percentage of revenues primarily due to the costs associated with
launching the new iGRAFX products during the year.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses include principally the costs of the
Company's executive, information systems, human resources, finance, legal, and
administrative functions. The reduction in general and administrative expenses
is primarily due to a reduction in legal expenses. In fiscal 1998, the Company
incurred significant legal expenses relating to its lawsuit with Corel
Corporation and to contract disputes with American Greetings Corporation. Both
of these disputes were resolved during the first half of fiscal 1999 at no
additional cost to the Company.
25
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses include compensation, benefits, and
incentives paid to developers. In accordance with Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," the Company capitalizes certain software development costs
incurred after technological feasibility is achieved. These costs are amortized
over the estimated economic life of the products. Historically the Company
estimated the economic life of the products to be from 12 to 18 months, which is
consistent with a consumer software model. With the change in strategy to a
corporate software provider, the Company now estimates the economic life of the
corporate software to be approximately 48 months. The longer economic life was
implemented with the release of iGRAFX Professional(TM), iGRAFX Process(TM), and
iGRAFX Designer(TM). No adjustments were made to the amortization rate of any
previously released software, which had lives ranging from 12 to 18 months.
Amortization of capitalized software development costs is included in cost of
revenues.
Research and development expenses (net of amounts capitalized) in fiscal
1999 were $8.2 million, or 14 percent of net revenues, compared to $8.5 million,
or 12 percent of net revenues, in fiscal 1998. Gross research and development
expenses, before capitalization, for fiscal 1999 were $13.9 million, or 24
percent of net revenues, compared to $12.7 million, or 18 percent of revenues
for fiscal 1998. The increase in gross research and development expenses
primarily relates to the new versions of software released in fiscal 1999. In
fiscal 1999, the Company released iGRAFX Business(TM), iGRAFX Professional(TM),
iGRAFX Process(TM), iGRAFX Designer(TM), iGRAFX Share, NetworkCharter(TM) Pro
1.5, iGRAFX Development, and iGRAFX OrgCharter. In fiscal 1998, the Company
released Optima(R) 2.5, Picture Publisher(R) 8.0, Simply 3D 3.0, Webtricity(TM)
2.0, ISO Charter 1.0, Enterprise Charter 4.0, NetworkCharter(TM) 1.0,
NetworkCharter(TM) Pro 1.0, Designer(R) 7.0, Picture Publisher(R) 7.0,
FlowCharter(R) 7.0 and Graphics Suite(R) 2e.
During fiscal 1999, the Company capitalized approximately $5.6 million in
software development costs and amortized $3.0 million in software development
costs. This compares to capitalization of $4.3 million and amortization of $4.4
million for fiscal 1998.
EFFECT OF EXCHANGE RATES
Exchange rates during fiscal 1999 had an unfavorable impact on net revenues
reported by the Company. If exchange rates had not changed from their 1998
rates, the Company would have reported approximately $0.4 million more in net
revenues in fiscal 1999. This decrease resulted from the change in exchange
rates of European currencies and the Japanese yen versus the U.S. dollar. Since
European manufacturing costs and European and Japanese operating expenses are
also incurred in those local currencies, the relative translation impact of
exchange rates on net income (loss) is less than on revenues.
NON OPERATING (INCOME) EXPENSE
Interest income increased from $0.6 million in fiscal 1998 to $1.0 million
in fiscal 1999, due to the increase in cash on hand during fiscal 1999 resulting
from the licensing of technology to Cendant and TLC. Interest expense increased
in fiscal 1999 as a result of the debt incurred in conjunction with the purchase
of InterCAP.
INCOME TAXES
The Company recognized a tax provision of $3.1 million in fiscal 1999,
compared to $0.3 million in fiscal 1998. For further information on income
taxes, see "Notes to Consolidated Financial Statements".
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected financial results for each of the
last eight quarters through June 30, 2000 (in thousands, except per share data).
These financial results are unaudited. In the opinion of management, however,
they have been prepared on the same basis as the audited financial information
and include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the periods presented
when read in conjunction with the accompanying Consolidated Financial Statements
and notes thereto.
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------------------------------
9/30/99 12/31/99 3/31/00 6/30/00
----------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 8,522 $ 9,656 $ 9,932 $ 8,163
Gross profit 6,532 7,430 7,936 6,301
Loss from operations (4,508) (2,396) (1,523) (12,589)
Net loss (4,609) (2,675) (1,969) (12,916)
Basic and diluted loss per share
$ (0.41) $ (0.24) $ (0.17) $ (1.13)
Shares used in computing loss per share:
Basic and diluted 11,324 11,358 11,436 11,476
QUARTERS ENDED
------------------------------------------------------------------------------------------
9/30/98 12/31/98 3/31/99 6/30/99
----------------------------------------------------
Net revenues $ 15,738 $ 17,045 $ 14,472 $ 9,707
Gross profit 12,654 13,695 12,880 7,523
Income (loss) from operations 729 855 1,124 (6,127)
Net income (loss) 585 710 784 (7,931)
Basic and diluted income
(loss) per share $ .05 $ .06 $ .07 $ (.71)
Shares used in computing income (loss) per share:
Basic 11,207 11,024 11,076 11,170
Diluted 11,750 11,304 11,404 11,170
</TABLE>
27
<PAGE>
TRENDS AND RISK FACTORS
The following discusses trends and risk factors inherent in the Company's
business environment.
COMPANY FOCUS CONTINUES TO TRANSITION
During fiscal 1999 and in prior years, the Company generated a significant
portion of its business from the personal creativity software market and the
licensing of personal creativity technology to third parties. Due to aggressive
competition and the Company's belief that its products are well suited to
various high-growth corporate markets, the Company has chosen to pursue
corporate customers. The Company's future financial performance will depend on
the successful transition of internal resources away from its past strength in
the retail market while moving toward solving problems currently experienced by
corporations. In order to accomplish its objective, the Company has hired
employees with skills required for the Company's new direction, and is training
existing employees on how to make this change, but there is no assurance that
management's efforts will be successful. In order to succeed, the Company will
have to convince corporations that its products are able to solve their
problems, the Company will have to identify and develop features which corporate
customers desire, and the Company will have to ensure that it has a sales force
and customer support system sufficient in size and expertise to service
corporate customers. In light of the difficulties associated with the transition
of its business focus from consumer retail products to business product sales to
corporate accounts, the Company may confront unanticipated risks and
uncertainties. Therefore, there can be no assurance that the Company's business
strategy will be successful, and it is possible that the Company's future
results from operations and financial condition will be adversely affected if it
is unable to effectively implement its new business focus.
During fiscal 1999, the first year of the transition, the Company
experienced a loss of $5.9 million despite recognizing nearly $18 million of
technology revenues. Without the technology revenues and the in-process research
and development charge of approximately $1.9 million, the Company would have
reported a loss of $22.0 million resulting entirely from day-to-day on-going
operations. The majority of fiscal 1999 was dedicated to developing Micrografx
existing applications and technologies into applications to solve anticipated
corporate needs. The areas the Company concentrated upon were general desktop
diagramming, enterprise process management, and, to a lesser extent, technical
graphics. As a result, the Company introduced the "iGRAFX" product line
throughout the second half of fiscal 1999, with iGRAFX Business(TM), iGRAFX
Share, iGRAFX Professional(TM), and iGRAFX Process(TM) released in the third
fiscal quarter and iGRAFX Designer(TM) released in the fourth fiscal quarter. In
the fourth quarter of fiscal 1999, the Company refined its focus and decided to
move away from general desktop diagramming products such as iGRAFX Business(TM)
and iGRAFX Share in order to focus on products where Micrografx held a
competitive advantage over competitors such as Microsoft and Adobe.
During fiscal 2000, the Company experienced a loss of $22.2 million which
included restructuring and impairment charges combined of approximately $9.9
million. The loss for fiscal 2000, resulting from day-to-day on-going operations
was $12.3 million.
LIQUIDITY RISKS
During fiscal 2000, the Company used approximately $7.5 million for
operations, software development and capital expenditures. The rate of cash
usage over the past two fiscal years was greater than expected for transitioning
the Company's business from its historical consumer business to its new
enterprise business and due to the amount of the Company's existing cash
resources, such rate of cash usage is unsustainable. At June 30, 2000, cash and
short-term investments had decreased to $2.8 million from $28.1 million at June
30, 1998. Based upon management's current expectations, the Company may also
experience operating losses and usage of cash resources in fiscal 2001.
Management has developed plans to attempt to reduce the rate of cash usage while
transitioning its business model. See "Liquidity and Capital Resources". Should
these plans and steps be insufficient to meet the goal of reducing cash
resources and allowing the Company to meet its obligations from existing
resources, and if the steps to increase revenue growth are unsuccessful, the
Company would then be left with inadequate resources to operate its business.
Therefore, the Company is significantly dependent upon the efforts of management
to reduce expenses, increase revenues, and obtain financing to reduce the
significant cash deficits currently being experienced in its business. There can
be no assurance that management will be successful in its efforts to preserve
the Company's existing sources of liquidity. While management continues to
pursue external funding to meet its cash needs, including possibly the sale of
additional equity in the Company, there is not any assurance that the Company
can identify any further sources of external funding, and, even if such funding
is available, it is possible that the funding could result in significant
dilution to existing shareholders. These risks associated with managing cash
liquidity and efforts to grow revenues presented the Company with significant
challenges in fiscal 2000 and these challenges are expected to continue through
fiscal 2001, with no assurance of a favorable outcome.
28
<PAGE>
NEW PRODUCT INTRODUCTIONS
The Company's future financial performance will depend in significant part
upon the successful development and introduction of new and enhanced versions of
its products and customer acceptance of these products, of which there can be no
assurance. Additionally, the timing of new product introductions, which are
updates of previously released products, can have a significant impact on
profitability of the older version of the product.
TECHNOLOGICAL CHANGE
The personal computer industry is subject to rapid technological change and
continuing development of new and enhanced operating environments. The success
of the Company's products will depend to a large extent upon the Company's
ability to continue to develop and introduce innovative and competitive products
on a cost-effective and timely basis, of which there can be no assurance.
COMPETITION
The personal computer applications software market is highly competitive.
The Company's competitors include many companies that have larger technical
staffs, more established and larger marketing and sales organizations, and
significantly greater financial resources than does the Company. Additionally,
merger activity in the applications software market serves to strengthen the
merging companies' ability to compete. In January 2000, Microsoft Corporation
("Microsoft") acquired Visio, a competitor to the Company in its enterprise
software business. As a result, Microsoft has become a significant competitor to
the Company, with significant competitive advantages due to, among other things,
its ownership and distribution of the operating systems on which the Company's
and Visio's products operate, giving Microsoft a technological advantage in
developing and marketing Visio products. Additionally, Microsoft has vastly
greater marketing, distribution, technological, financial and other resources
than the Company. There can be no assurance that the Company will be able to
compete effectively with Microsoft, which could have a material adverse effect
on the Company and its results of operations and financial condition.
Additionally, as stated previously, the competition in the technical graphics
market has increased significantly, negatively impacting the Company.
INTERNATIONAL OPERATIONS
The Company anticipates that international net revenues will continue to
account for a significant portion of total net revenues, which will result in a
significant portion of the Company's net revenues being subject to the risks
inherent in international operations. These risks include unexpected changes in
regulatory requirements, exchange rates, tariffs and other barriers,
difficulties in staffing and managing foreign subsidiary operations, and
potentially adverse tax consequences.
CHANGES IN DISTRIBUTION CHANNELS
The Company is focusing on corporate customers and has de-emphasized its
personal creativity business. In doing so, it has to transition its
relationships with the distribution channels to coincide with the change. While
the Company does not anticipate a significant change in the channels used, it
must change its sales and marketing programs to suit the corporate customers
buying through those channels. The Company's success depends in part on its
ability to identify and respond to changes in the distribution channel.
SEASONALITY AND QUARTERLY REVENUE FLUCTUATIONS
Historically, the Company has experienced significant quarterly variations
in its results of operations. Causes of these variations included seasonality of
the retail software market, delays in the introduction of new or enhanced
versions of the Company's products, timing and cost of new product upgrades and
introductions, reduced distribution channel sales preceding the introduction of
updated products, and large distribution channel sales following the
introduction of new or updated products. Some level of seasonality is expected
to continue with a higher level of revenues occurring in the December quarter in
connection with the purchasing habits of most corporations as they close out
their fiscal year. A lower level of revenues is expected to occur in the
September quarter principally due to the extended holiday periods in Europe
during the July and August time frame resulting in a lower level of corporate
purchasing.
29
<PAGE>
MARKET RISK
The risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in foreign currency
exchange rates and interest rates. The U.S. Dollar is the functional currency
for financial reporting. In this regard, the Company had previously used foreign
forward exchange contracts, to minimize the adverse earnings impact from the
effect of exchange rate fluctuations on the Company's non-U.S. dollar net
balance sheet exposures. While the Company had no such contracts as of June 30,
2000, it is required to disclose the hypothetical impact of such contracts. As
an example, at fiscal year end 1999, the Company had foreign forward exchange
contracts outstanding of $554,000 to sell German marks. Similar hedging
activities existed at fiscal year end 1998. A hypothetical 10% plus or minus
fluctuation in non-U.S. currency exchange rates would not be expected to have a
material earnings impact, e.g., based on fiscal year end 1999 balances and
rates, a pretax currency exchange gain or loss of $53,000. The Company's
earnings are also affected by changes in interest rates due to the impact those
changes have on its variable-rate debt instruments. The Company has a
variable-rate debt instrument based on the prime rate representing approximately
11% of its total debt at June 30, 2000. If the prime interest rate increased by
10 percent in 2001, it would result in an immaterial annual change to the
Company's pre-tax earnings and cash flows.
UPGRADES
Product upgrades, which enable users to upgrade from earlier versions of
the Company's products, or from competitors' products, typically have lower
prices than new products, resulting in lower gross profit margins. The Company
plans to continue upgrading successful products in the future.
INTERNET
The Company provides products for use in the Internet market. The Internet
market is rapidly evolving and is characterized by an increasing number of
market entrants. As is typical in the case of a new and evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. Critical issues concerning the
commercial use of the Internet (including security, reliability, cost, ease of
use and access, and quality of service) remain unresolved and may impact the
growth of Internet use, together with the software standards and electronic
media employed in such markets.
GROSS PROFIT
Product margins vary according to product mix and the geographical region
in which the products are sold. Changes in product mix, including the mix of
boxed product (full and upgrade product versions) relative to the amount of
non-boxed product (OEM and multi-user licenses), as well as changes in the
components of direct costs, have in the past and may in the future affect the
Company's gross profit.
30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As discussed previously, in fiscal 1997 the Company began transitioning its
revenue base and business strategy away from consumer related software products
in favor of software and solutions for corporations and other large enterprises.
In line with that strategy, from the period beginning in June 1998 and ending in
August 1998 the Company licensed its consumer technologies in a series of
agreements to Cendant and TLC for $21.0 million. As a result of these
transactions and from prior operations, the Company had cash and short-term
investments totaling approximately $28.1 million at June 30, 1998.
The intended use of the capital provided by the licensing transactions was
to fund the Company's growth into its enterprise model and strategy. As a
result, during fiscal years 1999 and 2000 the Company's cash and short-term
investments declined approximately $25.3 million to $2.8 million at June 30,
2000. The principal components of this change were as follows:
2000 1999
-------- ----------
SOURCES OF CASH
Collections on technology licensing $ - $ 6.8
Proceeds from employee stock programs 0.7 3.9
Proceeds from receivable facility 0.8 -
--------- ---------
Subtotal sources 1.5 10.7
USES OF CASH
Operations $ 2.4 $ 10.1
Software development programs 3.2 8.0
Purchase of treasury stock - 4.1
Acquisition related payments 2.6 3.7
Capital expenditures 1.7 1.7
--------- ---------
Subtotal uses 9.9 27.6
--------- ---------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS $ 8.4 $ 16.9
========= =========
During fiscal years 1999 and 2000, the Company used approximately $27
million for operations, software development and capital expenditures. The rate
of cash usage was greater than expected for transitioning the Company's business
from its historic customer and revenue base and is unsustainable and the Company
may also incur operating losses and further usage of cash resources during
fiscal 2001.
As a result of the Company's reduced liquidity, it has generally been
unable to pay invoices received from vendors according to the agreed upon terms.
As of June 30, 2000, approximately one-third of the $3.6 million in accounts
payable were more than 90 days past due. The Company's vendors have been
cooperative with Micrografx in an effort to establish payment plans that will
allow Micrografx to continue to operate in the short-term and pay off the
outstanding balances as cash flow improves, but there are no assurances such
vendors will remain cooperative.
As a result of the cash and liquidity situation, management has developed
plans for reducing the rate of cash usage and completing the Company's
transition to an enterprise software business model. Those plans include the
following steps and expectations:
1) Implementation of further cost reductions. Cash operating costs
(operating costs before consideration of capitalized software
development and amortization) have declined from a high of $14.0
million at the end of the second quarter of fiscal 1999, to an
expected level between $6.5 and $7.5 million at the end of the first
quarter of fiscal 2001. Further cost reductions are expected in the
second quarter of fiscal 2001.
Cost reductions in fiscal years 1999 and 2000 resulted principally
from substantial changes in marketing and distribution activities, and
to a lesser extent in product development activities. Cost reductions
in fiscal 2001 will include (i) lower personnel costs, in all areas of
the business, (ii) lower sales and marketing costs, and (iii) lower
infrastructure costs (facility and related costs).
31
<PAGE>
Management has already implemented plans to lower personnel costs.
As previously discussed, on June 30, 2000, the Company eliminated
approximately 74 positions in the United States, most of which
were centralized development or administrative functions. The
elimination of these positions is expected to result in
approximate cost savings exceeding $3.3 million per year. The
Company decided to create semi-autonomous business units and to
focus its critical resources in those business units. As a result,
the Company's focus in certain cases shifted to the Portland,
Oregon and Annapolis, Maryland offices where the current
revenue-generating business units (EPM and Technical Graphics,
respectively) reside. The personnel remaining in Allen, Texas were
primarily executive, administrative, and support personnel, as
well as the employees of the Image2Web subsidiary.
Since the majority of the positions eliminated were in the Allen,
Texas office, management also determined that it either needed to
sublease a significant portion of its office or move to another
office with an appropriate amount of space. On September 1, 2000,
the Company moved into the Dallas, Texas office. This move is
expected to save the Company more than $1.0 million per year in
rent and related operating expenses.
Finally, management has identified other areas to pursue cost
savings during the first half of fiscal 2001. Variable marketing
costs including the costs for retail channel distribution support,
general advertising, public relations and other marketing
activities have been reduced or eliminated and replaced with
specific campaigns focused on areas where Micrografx can add value
to the customer or solve a customer's problem. Additional savings
are expected to result from more efficient use of infrastructure
as well as a reduction in general overhead resulting from a
significantly reduced number of employees.
2) Expectation for increasing revenue in target markets. Operational
revenues from the Company's principal target markets - enterprise
process management and technical graphics, did not grow
sufficiently in fiscal 2000 to support operations. In the opinion
of management, the slower than expected revenue growth occurred
principally for the following reasons: (i) a longer than expected
selling cycle for enterprise sales, (ii) a longer than anticipated
conversion of the Company's sales force from its established
retail distribution model expertise to an enterprise selling
strategy, (iii) later than expected delivery of new product
releases, particularly in Europe where product releases occurred
too close to seasonally low corporate spending periods, and (iv)
year 2000 slowdowns and deferrals for software spending by many
corporations.
Starting with the second quarter of fiscal 2001, management
expects revenue to increase sequentially each quarter. The
Company's target markets are large corporations and government
entities, and the number of target customers expressing interest
in process improvement (particulary Six Sigma), and visual
commerce solutions continue to increase significantly. Management
attributes this trend to its sales strategy and methods and to a
significantly improved level of education and knowledge in the
current sales force. However there can be no assurances such
expectations will materialize.
The average transaction size has been increasing and the number of
transactions exceeding $100,000, $250,000 and $500,000 is also
increasing. The total pipeline of sales opportunities has
increased and the number of large transactions in prospect has
also increased. Management also believes that its European
operations will improve from seasonal summer lows.
In addition to its strategic drive in process management,
technical graphics, and visual commerce, management believes the
Company has opportunities for tactical revenue transactions in its
heritage products, and from the potential licensing of
non-strategic technologies.
3) Reduced capital spending. The Company plans to continue to
restrict capital spending principally to requirements for
replacement. Fiscal 2000 capital expenditures, principally related
to the Company moving its corporate headquarters to Allen, Texas,
were uncharacteristically high. As a result of the move to Allen,
the Company replaced old and obsolete office furniture and
fixtures and was required to replace and upgrade a significant
amount of network and telephony equipment. No significant capital
expenditures were necessary for the Company's September 2000 move
from the Allen, Texas facility to the Dallas, Texas office.
32
<PAGE>
Management spent a considerable amount of time in fiscal 2000 pursuing
various financing alternatives. On March 31, 2000, the Company received a
receivable financing line of credit whereby the Company can receive advances on
a significant portion of its domestic receivables. The Company is able to
receive advances for up to $3 million in value of invoices. As of June 30, 2000,
the Company had borrowed approximately $767,000 under this facility, and the
Company expects to keep a similar amount borrowed at any given time. On
September 5, 2000, the Company issued approximately $1.7 million in Series A
Preferred Stock to certain institutional investors and other unaffiliated
parties. This preferred stock is convertible into Micrografx common stock, or,
at the holders option, up to one-half of the preferred stock may be converted
into Image2Web common stock.
Management continues to examine various additional financing methods
that would ensure that the capital resources of the Company are sufficient to
meet its requirements. Such measures may include the sale of additional equity
securities in one or more private transactions, the incurrence of additional
debt, or the sale or spin-off of certain assets to third parties or a
combination thereof. Management believes it will be successful in obtaining the
necessary revenue levels and/or additional necessary funding to operate the
Company in the near term, however, there can be no assurance that under its
current conditions, external funds will be available or, if available, will not
potentially dilute shareholders' interests or returns.
CASH FLOWS DURING FISCAL 2000
During 2000, cash and cash equivalents plus short-term investments
decreased by approximately $6.0 million to approximately $2.8 million. A decline
in net cash flows from operations resulted in an approximate $2.6 million
deficit. The Company paid $2.5 million relating to the acquisition of InterCAP.
Approximately $3.2 million in cash was used in the development of technology and
was capitalized as software development cost. Property and equipment
expenditures amounted to $1.7 million.
CAPITAL RESOURCES
As of June 30, 2000, the Company had no significant commitments for capital
expenditures.
OTHER MATTERS
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of the respective balance sheet dates,
and revenue and expense accounts of these operations are translated at average
exchange rates during the month the transactions occurred. Unrealized
translation gains and losses are included as an adjustment to shareholders'
equity. The Company has mitigated a portion of its currency exposure through
decentralized sales, marketing and administrative operations. When necessary,
the Company may also hedge to prevent material exposure.
LITIGATION
Micrografx 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.
33
<PAGE>
The Company is also subject to certain legal proceedings and claims that
arise in the ordinary course of business. In the opinion of management, the
resolution of these legal proceedings and claims will not have a material effect
on the Company's consolidated financial position and results of operations.
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 June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133" which amends FASB Statement No. 133 by delaying its effective
date for one year, to fiscal years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company is currently assessing the impact
of SFAS 137 and currently believes that the effect, if any, will not have a
material effect on the Company's financial position or overall trends in results
of operations.
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 have a material effect on the
Company's financial position or overall trends in results of operations.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Specifically, all statements other than statements
of historical facts included in this report regarding the Company's financial
position, business strategy and plans, and objectives of management of the
Company for future operations are forward-looking statements. These
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," and "intend," and words or phrases of similar
import, as they relate to the Company or Company management, are intended to
identify forward-looking statements. Such statements (the "cautionary
statements") reflect the current view of the Company with respect to future
events and are subject to risks, uncertainties, and assumptions related to
various factors including, without limitation, changes in the product release
schedule, acceptance or the lack thereof of the Company's 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Trends and Risk Factors" set forth in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" under Item 7 for a
complete discussion of market risk.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,843 $ 8,819
Short-term investments - 2,401
Accounts receivable, less allowances of $2,788 and $2,825 3,926 6,480
Inventories 458 570
Other current assets 1,019 1,478
----------- -----------
Total current assets 8,246 19,748
Property and equipment, net 1,570 2,143
Capitalized software development costs, net 5,530 5,994
Acquired product rights, net 1,612 3,601
Goodwill, net 1,749 9,907
Other assets 772 990
----------- -----------
Total assets $ 19,479 $ 42,383
=========== ===========
See accompanying notes.
</TABLE>
35
<PAGE>
<TABLE>
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,606 $ 3,833
Accrued compensation and benefits 1,597 2,189
Other accrued expenses 3,503 2,567
Deferred revenue 1,584 1,651
Notes payable 138 3,500
Receivable facility 767 -
Income taxes payable 271 403
----------- -----------
Total current liabilities 11,466 14,143
Long-term debt 5,797 5,797
Other non-current liabilities 437 11
Shareholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized;
no shares issued - -
Common stock, $.01 par value, 20,000 shares authorized;
12,263 and 12,131 shares issued 123 122
Additional capital 38,029 37,616
Accumulated deficit (28,915) (6,746)
Accumulated other comprehensive loss (1,659) (1,610)
Less - treasury stock (766 and 909 shares), at cost (5,799) (6,950)
----------- -----------
Total shareholders' equity 1,779 22,432
----------- -----------
Total liabilities and shareholders' equity $ 19,479 $ 42,383
=========== ===========
See accompanying notes.
</TABLE>
36
<PAGE>
<TABLE>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
Net revenues $ 36,273 $ 56,962 $ 71,792
Cost of revenues 8,074 10,210 21,466
------------- ------------ ------------
Gross profit 28,199 46,752 50,326
Operating expenses:
Sales and marketing 24,592 33,361 34,048
General and administrative 7,310 6,637 7,426
Research and development 7,445 8,245 8,479
Write down of long-lived assets 8,206 - -
Restructuring charges 1,662 - -
In-process research and development charge - 1,928 -
------------- ------------ ------------
Total operating expenses 49,215 50,171 49,953
------------- ------------ ------------
(Loss) income from operations (21,016) (3,419) 373
Interest income (65) (1,004) (621)
Interest expense 621 260 5
Other expense 143 85 55
------------- ------------ ------------
Total non operating expense (income) 699 (659) (561)
------------- ------------ ------------
(Loss) income before income taxes (21,715) (2,760) 934
Income tax provision 454 3,092 327
------------- ------------ ------------
Net (loss) income $ (22,169) $ (5,852) $ 607
============= ============ ============
(Loss) earnings per share:
Basic $ (1.95) $ (0.53) $ .06
============= ============ ============
Diluted $ (1.95) $ (0.53) $ .05
============= ============ ============
See accompanying notes.
</TABLE>
37
<PAGE>
<TABLE>
MICROGRAFX, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
<CAPTION>
2000 1999 1998
---- ---- ----
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
COMMON STOCK
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 12,131 $ 122 11,474 $ 115 10,940 $ 109
Issuance under stock purchase plan 112 1 145 2 167 2
Issuance under stock option plan 20 - 509 5 347 4
Restricted stock activity - - 3 - 20 -
-------- -------- --------- ---------- --------- ----------
Ending balance 12,263 123 12,131 122 11,474 115
ADDITIONAL CAPITAL
Beginning balance - 37,616 - 33,770 - 29,452
Issuance under stock purchase plan - 446 - 792 - 779
Issuance under stock option plan - 106 - 3,082 - 2,227
Stock option income tax benefit - - - - - 828
Treasury stock issued related to purchase of AdvanEdge - (307) - - - 296
Restricted stock activity - 6 - 59 - 188
Options issued for services - 162 - (87) - -
-------- -------- --------- ----------- --------- ----------
Ending balance - 38,029 - 37,616 - 33,770
ACCUMULATED DEFICIT
Beginning balance - (6,746) - (894) - (1,501)
Net (loss) income - (22,169) - (5,852) - 607
-------- --------- --------- ---------- --------- ----------
Ending balance - (28,915) - (6,746) - (894)
ACCUMULATED OTHER COMPREHENSIVE LOSS
Beginning balance - (1,610) - (1,537) - (1,344)
Translation of foreign currency financial statements - (49) - (73) - (193)
-------- --------- --------- ----------- --------- -----------
Ending balance - (1,659) - (1,610) - (1,537)
TREASURY STOCK
Beginning balance - (6,950) - (2,884) - (3,188)
Purchases - - - (4,066) - -
Issued related to purchase of AdvanEdge - 1,207 - - - 304
Restricted stock activity - (56) - - - -
-------- --------- --------- ---------- --------- ----------
Ending balance - (5,799) - (6,950) - (2,884)
TOTAL
Beginning balance 12,131 22,432 11,474 28,570 10,940 23,528
Issuance under stock purchase plan 112 446 145 794 167 781
Issuance under stock option plan 20 106 509 3,087 347 2,231
Stock option income tax benefit - - - - - 828
Treasury stock purchased - - - (4,066) - -
Treasury stock issued related to purchase of AdvanEdge - 900 - - - 600
Restricted stock activity - (49) 3 (28) 20 188
Options issued for services - 162 - - - -
Translation of foreign currency financial statements - (49) - (73) - (193)
Net (loss) income - (22,169) - (5,852) - 607
-------- --------- --------- ---------- --------- ----------
Ending balance 12,263 $ 1,779 12,131 $ 22,432 11,474 $ 28,570
======== ======== ========= ========== ========= ==========
See accompanying notes.
</TABLE>
38
<PAGE>
<TABLE>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (22,169) $ (5,852) $ 607
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Asset impairment charge 8,206 - -
Restructuring charge 1,662 - -
Depreciation and amortization 7,152 7,121 10,144
Restricted stock amortization - (28) 188
In-process research and development charge - 1,928 -
Deferred income taxes and other 124 2,383 (1,410)
Changes in operating assets and liabilities,
net of effects of purchase of InterCAP:
Deferred revenue (67) (11,297) 10,728
Accounts receivable 2,553 6,989 (3,102)
Inventories 113 410 307
Other current assets 417 (28) (338)
Payables and accruals (411) (4,762) 939
Income taxes payable (133) 64 299
------------ ------------ ------------
Total adjustments 19,616 2,780 17,755
------------ ------------ ------------
Net cash (used in) provided by operating activities (2,553) (3,072) 18,362
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities of short-term investments 3,440 6,283 6,160
Purchases of short-term investments (1,039) (7,100) (4,129)
Payment for purchase of acquisitions, net of cash acquired - (3,720) (375)
Capitalization of software development costs and
purchases of acquired product rights (3,214) (7,998) (6,617)
Payments for purchases of property and equipment (1,406) (1,674) (1,215)
------------ ------------ ------------
Net cash used in investing activities (2,219) (14,209) (6,176)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from employee stock programs 678 3,881 3,012
Treasury stock acquired - (4,066) -
Payments of notes payable (2,600) (125) (500)
Proceeds from receivable facility 767 - -
Tax benefits realized from stock transactions - - 828
------------ ------------ ------------
Net cash (used in) provided by financing activities (1,155) (310) 3,340
------------ ------------ ------------
Effect of exchange rates on cash and cash equivalents (49) (73) (193)
Net (decrease) increase in cash and cash equivalents (5,976) (17,664) 15,333
Cash and cash equivalents, beginning of year 8,819 26,483 11,150
------------ ------------ ------------
Cash and cash equivalents, end of year $ 2,843 $ 8,819 $ 26,483
============ ============ ============
Supplemental Cash Flow Information
Cash paid for --
Interest $ 621 $ 133 $ -
Income taxes $ 760 $ 388 $ 383
See accompanying notes.
</TABLE>
39
<PAGE>
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Micrografx, Inc. ("Micrografx" or the "Company") was founded in 1982 and
incorporated in 1984 in the state of Texas. Micrografx develops and markets
graphics software for business use in three target categories: enterprise
process management, technical graphics, and visual commerce.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1997 the Company began transitioning its revenue base and
business strategy away from consumer related software products in favor of
software and solutions for corporations and other large enterprises. In line
with that strategy, from the period beginning in June 1998 and ending in August
1998 the Company licensed its consumer technologies in a series of agreements to
Cendant and TLC for $21.0 million. As a result of these transactions and from
prior operations, the Company had cash and short-term investments totaling
approximately $28.1 million at June 30, 1998.
The intended use of the capital provided by the licensing transactions was
to fund the Company's growth into its enterprise model and strategy. As a
result, during fiscal years 1999 and 2000 the Company's cash and short-term
investments declined approximately $25.3 million to $2.8 million at June 30,
2000. The principal components of this change were as follows:
<TABLE>
<CAPTION>
2000 1999
----------- ------------
<S> <C> <C>
SOURCES OF CASH
Collections on technology licensing $ - $ 6.8
Proceeds from employee stock programs 0.7 3.9
Proceeds from receivable facility 0.8 -
--------- ---------
Subtotal sources 1.5 10.7
USES OF CASH
Operations $ 2.4 $ 10.1
Software development programs 3.2 8.0
Purchase of treasury stock - 4.1
Acquisition related payments 2.6 3.7
Capital expenditures 1.7 1.7
--------- ---------
Subtotal uses 9.9 27.6
--------- ---------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS $ 8.4 $ 16.9
========= =========
</TABLE>
During fiscal years 1999 and 2000, the Company used approximately $27
million for operations, software development and capital expenditures. The rate
of cash usage was greater than expected for transitioning the Company's business
from its historic customer and revenue base and is unsustainable and the Company
may also incur operating losses and further usage of cash resources during
fiscal 2001.
40
<PAGE>
As a result of the Company's reduced liquidity, it has generally been
unable to pay invoices received from vendors according to the agreed upon terms.
As of June 30, 2000, approximately one-third of the $3.6 million in accounts
payable were more than 90 days past due. The Company's vendors have been
cooperative with Micrografx in an effort to establish payment plans that will
allow Micrografx to continue to operate in the short-term and pay off the
outstanding balances as cash flow improves, but there are no assurances such
vendors will remain uncooperative.
As a result of the cash and liquidity situation, management has developed
plans for reducing the rate of cash usage and completing the Company's
transition to an enterprise software business model. Those plans include the
following steps and expectations:
1) Implementation of further cost reductions. Cash operating costs
(operating costs before consideration of capitalized software
development and amortization) have declined from a high of $14.0
million at the end of the second quarter of fiscal 1999, to an
expected level between $6.5 and $7.5 million at the end of the
first quarter of fiscal 2001. Further cost reductions are expected
in the second quarter of fiscal 2001.
Cost reductions in fiscal years 1999 and 2000 resulted principally
from substantial changes in marketing and distribution activities,
and to a lesser extent in product development activities. Cost
reductions in fiscal 2001 will include (i) lower personnel costs,
in all areas of the business, (ii) lower sales and marketing
costs, and (iii) lower infrastructure costs (facility and related
costs).
Management has already implemented plans to lower personnel costs.
On June 30, 2000, the Company eliminated approximately 74
positions in the United States, most of which were centralized
development or administrative functions. The elimination of these
positions is expected to result in approximate cost savings
exceeding $3.3 million per year. The Company decided to create
semi-autonomous business units and to focus its critical resources
in those business units. As a result, the Company's focus in
certain cases shifted to the Portland, Oregon and Annapolis,
Maryland offices where the current revenue-generating business
units (EPM and Technical Graphics, respectively) reside. The
personnel remaining in Allen, Texas were primarily executive,
administrative, and support personnel, as well as the employees of
the Image2Web subsidiary.
Since the majority of the positions eliminated were in the Allen,
Texas office, management also determined that it either needed to
sublease a significant portion of its office or move to another
office with an appropriate amount of space. On September 1, 2000,
the Company moved into the Dallas, Texas office. This move is
expected to save the Company more than $1.0 million per year in
rent and related operating expenses.
Finally, management has identified other areas to pursue cost
savings during the first half of fiscal 2001. Variable marketing
costs including the costs for retail channel distribution support,
general advertising, public relations and other marketing
activities have been reduced or eliminated and replaced with
specific campaigns focused on areas where Micrografx can add value
to the customer or solve a customer's problem. Additional savings
are expected to result from more efficient use of infrastructure
as well as a reduction in general overhead resulting from a
significantly reduced number of employees.
2) Expectation for increasing revenue in target markets. Operational
revenues from the Company's principal target markets - enterprise
process management and technical graphics, did not grow
sufficiently in fiscal 2000 to support operations. In the opinion
of management, the slower than expected revenue growth occurred
principally for the following reasons: (i) a longer than expected
selling cycle for enterprise sales, (ii) a longer than anticipated
conversion of the Company's sales force from its established
retail distribution model expertise to an enterprise selling
strategy, (iii) later than expected delivery of new product
releases, particularly in Europe where product releases occurred
too close to seasonally low corporate spending periods, and (iv)
year 2000 slowdowns and deferrals for software spending by many
corporations.
41
<PAGE>
Starting with the second quarter of fiscal 2001, management
expects revenue to increase sequentially each quarter. The
Company's target markets are large corporations and government
entities, and the number of target customers expressing interest
in process improvement (particularly Six Sigma), and visual
commerce solutions continue to increase significantly. Management
attributes this trend to its sales strategy and methods and to a
significantly improved level of education and knowledge in the
current sales force. However there can be no assurances such
expectations will materialize.
The average transaction size has been increasing and the number of
transactions exceeding $100,000, $250,000 and $500,000 is also
increasing. The total pipeline of sales opportunities has and the
number of large transactions in prospect has also increased.
Management also believes that its European operations will improve
from seasonal summer lows.
In addition to its strategic drive in process management,
technical graphics, and visual commerce, management believes the
Company has opportunities for tactical revenue transactions in its
heritage products, and from the potential licensing of
non-strategic technologies.
3) Reduced capital spending. The Company plans to continue to
restrict capital spending principally to requirements for
replacement. Fiscal 2000 capital expenditures, principally related
to the Company moving its corporate headquarters to Allen, Texas,
were uncharacteristically high. As a result of the move to Allen,
the Company replaced old and obsolete office furniture and
fixtures and was required to replace and upgrade a significant
amount of network and telephony equipment. No significant capital
expenditures were necessary for the Company's September 2000 move
from the Allen, Texas facility to the Dallas, Texas office.
Management spent a considerable amount of time in fiscal 2000 pursuing
various financing alternatives. On March 31, 2000, the Company received a
receivable financing line of credit whereby the Company can receive advances on
a significant portion of its domestic receivables. The Company is able to
receive advances for up to $3 million in value of invoices. As of June 30, 2000,
the Company had borrowed approximately $767,000 under this facility, and the
Company expects to keep a similar amount borrowed at any given time. On
September 5, 2000, the Company issued approximately $1.7 million in Series A
Preferred Stock to certain institutional investors and other unaffiliated
parties. This preferred stock is convertible into Micrografx common stock, or,
at the holders option, up to one-half of the preferred stock may be converted
into Image2Web common stock.
Management continues to examine various additional financing methods that
would ensure that the capital resources of the Company are sufficient to meet
its requirements. Such measures may include the sale of additional equity
securities in a one or more private transactions, the incurrence of additional
debt, the sale or spin-off of certain assets to third parties, or a combination
thereof. Management believes it will besuccessful in obtaining the necessary
revenue levels and/or additional necessary funding to operate the Company in the
near term, however, there can be no assurance that under its current conditions,
external funds will be available or, if available, will not potentially dilute
shareholders' interests or returns.
INVENTORIES
Inventories are stated at the lower of cost or market using a
weighted-average method. Finished goods inventories include costs of material,
labor and overhead. Major classes of inventory include the following (in
thousands):
JUNE 30,
2000 1999
------------- ------------
Raw materials $ 362 $ 404
Finished goods 96 166
------------- ------------
$ 458 $ 570
============= ============
42
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided for using the straight-line method over
the following estimated useful lives:
Computers and equipment 2-5 Years
Software 2-5 Years
Furniture and fixtures 5-7 Years
Leasehold improvements Shorter of Lease Term or Asset Life
CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND ACQUIRED PRODUCT RIGHTS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," the Company capitalizes certain software development costs
incurred after technological feasibility is achieved and also capitalizes costs
of acquiring certain product rights in connection with the development of its
computer software products. Capitalized costs are reported at the lower of
unamortized cost or net realizable value. Capitalized software development costs
and acquired product rights are amortized on a straight-line basis. With the
change in strategy to a corporate software provider, the Company now estimates
the economic life of the corporate software to be approximately 48 months. The
longer economic life was implemented with the release of iGRAFX
Professional(TM), iGRAFX Process(TM), and iGRAFX Designer(TM). No adjustments
were made to the amortization rate of any previously released software, which
had lives ranging from 12 to 18 months. Amortization of capitalized software
development costs is included in cost of revenues. The Company begins
amortization when the products are available for general release to customers.
All other research and development expenditures are charged to research and
development expense in the period incurred.
FOREIGN CURRENCY
For the majority of the Company's foreign subsidiaries, the functional
currency is the local currency of the country. Accordingly, assets and
liabilities of the foreign subsidiaries are translated to U.S. dollars at year
end exchange rates. Income and expense items are translated at the average rates
of exchange prevailing during the year. The adjustments resulting from
translating the financial statements of foreign subsidiaries are reflected as
cumulative translation adjustments, a reduction of shareholders' equity.
In fiscal year 2000, the net foreign currency exchange loss was
approximately $117,000 versus exchange gains of $19,000 and $52,000 in fiscal
years 1999 and 1998, respectively.
FOREIGN FORWARD EXCHANGE CONTRACTS
The Company periodically enters into forward foreign exchange contracts to
hedge existing or projected exposure to changing foreign exchange rates. This
exposure results from the Company's foreign operations in countries including
Germany, France, the United Kingdom, the Netherlands, and Japan that are
denominated in currencies other than the U.S. dollar. These forward contracts
are not held for trading purposes.
These contracts generally have maturities of 180 days or less and contain
an element of risk that the counterparty may be unable to meet the terms of the
contracts. However, the Company minimizes such risk by limiting the counterparty
to major financial institutions. Management believes the risk of incurring such
losses is remote, and any losses therefrom would be immaterial.
Gains and losses associated with these forward contracts are recognized in
other (income) expense. During fiscal 2000, the Company recognized approximately
$11,000 in gains associated with forward contracts. During fiscal 1999, the
Company recognized approximately $58,000 in losses associated with forward
contracts. During fiscal 1998, the Company recognized approximately $77,000 in
gains associated with forward contracts. At June 30, 2000, the Company had no
forward contracts outstanding.
43
<PAGE>
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.
The Company periodically offers rebates to distributors, the amounts of
which are primarily based on sales volume and are accrued as reductions in
revenue and in a contra-receivable account. The Company provided for rebates of
$940,000, $1,180,000, and $3,196,000, in fiscal 2000, 1999, and 1998,
respectively. The Company also offers distributors and resellers co-op funds,
generally 2-10 percent of amounts invoiced, that are used to promote the
Company's products. These funds are generally paid as a credit against
outstanding invoices and are included in sales and marketing expense during the
period in which the related revenue is recognized. The Company provided for
co-op funds of $155,000, $1,251,000, and $3,387,000, in fiscal 2000, 1999, and
1998, respectively.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was
$1,624,000, $4,929,000, and $4,334,000, in fiscal 2000, 1999, and 1998,
respectively.
STOCK-BASED COMPENSATION
The Company grants stock options through employee stock option plans and a
restricted stock plan. Options are granted for a fixed number of shares to
employees and directors with an exercise price equal to the fair value of the
shares at the date of grant for all plans, excluding the restricted stock plan.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," because the alternative fair
value accounting method provided for under FASB Statement No. 123, "Accounting
for Stock-based Compensation," requires the use of valuation models that were
not developed for use in valuing employee stock options. Accordingly, the
Company does not recognize compensation expense for these stock option grants,
as the exercise price is equal to the fair value of the Company's common stock
on the date of grant. Restricted stock shares are granted at $0.01 par value and
compensation expense is recognized over the vesting period.
INCOME (LOSS) PER SHARE
Income (loss) per share for all periods presented is based on the weighted
average basic and dilutive equivalent shares outstanding using the treasury
stock method. Amounts are shown in thousands except for per share data.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998
---------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net (loss) income $ (22,169) $ (5,852) $ 607
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,390 11,119 10,613
Effect of dilutive employee stock options - - 442
---------- ----------- -----------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 11,390 11,119 11,055
========== =========== ===========
Basic income (loss) per share $ (1.95) $ (0.53) $ 0.06
========== =========== ===========
Diluted income (loss) per share $ (1.95) $ (0.53) $ 0.05
========== =========== ===========
</TABLE>
44
<PAGE>
Options to purchase 3,042,262 and 2,746,898 shares of Common Stock were
excluded from the diluted income per share calculation because they were
anti-dilutive for fiscal years ended 2000 and 1999, respectively. These options
included all options outstanding as of June 30, 2000 and June 30, 1999, as well
as 579,700 shares related to the subordinated convertible debentures issued in
connection with InterCAP acquisition. Options to purchase 747,334 shares of
Common Stock were excluded from the diluted income per share calculation because
they were anti-dilutive for the year ended June 30, 1998.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform with
current year presentation.
2. RESTRUCTURING AND IMPAIRMENT 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. Details of the restructuring charge and
write down of long-lived assets are as follows (in thousands):
<TABLE>
<S> <C>
Benefits costs:
Benefits costs for terminated employees $ 67
Relocation costs:
Abandonment of leasehold improvements 615
Liability for the early lease termination and subsequent asset disposal 300
Write-down of building specific assets to disposal value 395
Other move related costs 285
--------------
Total relocation costs 1,595
Total restructuring charge $ 1,662
Impaired asset charges:
Impairment of InterCAP acquisition-related long-term assets and intangibles $ 7,119
Impairment of capitalized software development costs and acquired product rights 1,087
--------------
Total write down of long-lived assets $ 8,206
--------------
Total restructuring and impairment charge $ 9,868
==============
</TABLE>
BACKGROUND
The following table shows, in thousands, the results for the periods leading up
to the restructuring:
<TABLE>
<CAPTION>
FY'99 Q1'00 Q2'00 Q3'00
<S> <C> <C> <C> <C>
Net Loss $ (5,852) $ (4,609) $ (2,675) $ (1,969)
Net Cash Usage (17,664) (5,529) (2,532) 934
Ending Cash Balance 11,220 5,691 3,159 4,093
</TABLE>
During June of fiscal year 2000, management concluded that it was necessary
to significantly modify the operating structure of the Company in order for
Micrografx to sustain viability and put itself in a position to return to
profitability. Management and the Board of Directors determined that to reach
profitability in an acceptable period of time, certain significant actions were
necessary in the structure and size of the organization. Accordingly, at the
June Board of Directors meeting, the decision to operationally divide the
Company into three major business units, to decentralize operations, and to
reduce the size and scope of the organization was made pursuant to a plan
submitted by the management of the Company.
45
<PAGE>
On June 30, 2000, the restructuring plan was implemented and 74 employee
positions were eliminated, the affected employees were notified of their
termination, and their termination benefits were communicated to them. On July
3, 2000 an announcement of the actions taken and their potential effects on the
Company was distributed to the public by press release and subsequently filed in
a Form 8-K with the SEC. As of June 30, 2000, the expected date of completion of
the restructuring plan was on or around August 31, 2000 and all actions were
substantially completed as of September 1, 2000 when the Company moved into
their new corporate headquarters in Dallas, Texas.
BENEFITS COST FOR TERMINATED EMPLOYEES
The Company eliminated 74 positions and terminated approximately that
number of employees on June 30, 2000. The Company has provided these employees
two months of health benefits, which began on June 30, 2000 and ended August 31,
2000. The Company accrued approximately $67,000 for these termination benefits
based on the current cost of providing these benefits.
RELOCATE THE ALLEN WORKFORCE
Micrografx began the planning and preparation for the move into a new
facility approximately two years ago. At the time the planning began, Micrografx
had more than 300 employees and expected to grow. At that time, the Company was
renting a 60,000 square foot office space in Richardson, Texas. The facility
that the Company designed to move into was approximately 90,000 square feet.
As a result of the licensing of the personal creativity business and the
slower-than-expected ramp of enterprise-related sales, management subsequently
determined that certain actions were necessary to reduce the ongoing operating
expenses. In June 1999, the Company terminated approximately 38 positions and in
September 1999, the Company terminated approximately 10 more positions. Also in
the fourth quarter of fiscal 1999, the Company began curtailing its marketing
efforts in order to lower operating costs.
During the third quarter of fiscal 2000, management decided to begin acting
on the excess capacity in the Allen, Texas facility (150 employees occupied a
space designed for more than 300). Management discussed various alternatives
such as concentrating the remaining employees in certain parts of the building
and subleasing the remaining parts. In the fourth quarter of fiscal 2000,
management had specific discussions with local Dallas firms related to
subleasing part of the facility. Due to the open design of the building and the
common areas, the Company could not come to terms with any potential sublessees.
While formulating the restructuring plan in June 2000, management decided
that it was not feasible to continue leasing the Allen, Texas facility. In June,
management met with the Company's real estate broker to discuss their options
related to finding and moving into a smaller facility and the approach the
Company should take in its discussions and negotiations with the landlord. In
July, management met with the landlord to discuss the Company's situation and
restructuring plan and the Company signed a letter of intent to surrender the
property under the current lease of 90,000 square feet and execute a new lease
for approximately 14,000 square feet with the same lessor. In conjunction with
the lease agreement, the Company issued to lessor warrants to purchase 100,000
shares of the Company's Common Stock at the market price of $1.03. These
warrants have a 7-year life. On September 1, 2000, the Company moved into the
Dallas, Texas facility.
Due to the move, there are costs associated with certain fixed assets to be
disposed of, and costs related to the relocation of corporate facilities. These
costs are not incurred to generate revenues after the commitment date and are
incremental costs that will be incurred as a direct result of the restructuring
plan. These costs were absent from the Company's operational costs prior to the
commitment date. Accordingly, the Company accrued approximately $1.6 million for
these relocation costs.
WRITE DOWN OF LONG-LIVED ASSETS
In addition, other factors discussed below have resulted in an impairment of
certain long-lived assets as of June 30, 2000. The impaired assets and the
amount of the estimated impairment is specified below (in thousands):
InterCAP acquisition related long-term assets and intangibles $7,119
Capitalized software development costs and acquired product rights $1,087
46
<PAGE>
In April 1999, Micrografx completed the acquisition of InterCAP Graphics
Systems, Inc. The Company engaged KPMG Peat Marwick to assist it in determining
the allocation of purchase price among the tangible and intangible assets of the
acquired Company. The final allocation was as follows (in thousands).
Net Assets $ (344)
Workforce 418
Customer List 240
Non-compete Agreement 281
Current Technologies 898
In-process R&D Expense 1,928
Deferred Tax Liability (616)
Goodwill 9,559
------------------
Total $ 12,364
==================
During the fourth fiscal quarter, management identified certain conditions
including the lack of available growth capital and increased competition in the
graphics software market as indicators of asset impairment. Accordingly,
management has prepared its evaluation of those assets and has concluded that in
some cases there has in fact been an impairment of value. Based on an evaluation
of these indicators, the Company determined the assets with a carrying value of
$9.8 million were impaired and wrote them down by $7.1 million to their fair
value. Fair value was based on estimated future cash flows to be generated by
the InterCAP operations discounted at a market rate of interest. A description
of the events resulting in the impairment follows.
Lack of Available Capital
At the time of the InterCAP acquisition, Micrografx had total cash and
liquid investments of approximately $20 million and expected to invest
approximately $13.3 million on the InterCAP operations during fiscal 2000. The
Company expected that with the addition of the InterCAP operations, and through
the growth of its other businesses, it could continue investing for the long
term, pursuant to a plan it had initiated as early as 1996. However, due to the
cash flow difficulties described below and in the "Liquidity and Capital
Resources" section below, the Company was only able to spend approximately $4.1
million on the InterCAP operations during fiscal 2000.
The Company engaged an investment-banking firm in November 1999 and began
preparing a private placement offering memorandum for Image2Web, and had general
discussions regarding additional funding for Micrografx. However, two factors
complicated and delayed the release of the memorandum and related funding. The
first delay resulted from a basic change in the business model for Image2Web
(from a licensed base software Company to an ASP consulting and services model),
the second resulted from the stock market correction in mid April 2000. Since
the correction primarily related to re-valuation of Internet and other
technology companies, Image2Web's financing prospects were negatively impacted.
The ultimate completion of this financing was significant to Micrografx for
three reasons: (i) it would remove the continuing investment obligation in
Image2Web from the Company, (ii) Micrografx believed that a part of its
historical investment in either pre-existing software, or its prior investment
in the operation of Image2Web would be returned to the Company as either a
license agreement or repayment of charges (between $1,500,000 and $5,000,000),
and (iii) provide needed growth capital for its InterCAP products. To date, no
funding for Image2Web has occurred and there can be no assurances it will ever
occur. This lack of available growth capital was determined by the Company to be
one of its indicators of impairment.
Additionally, the Intelligent Graphics Server ("iGS"), which is a
significant product component for the Company's technical graphics strategy was
originally scheduled for delivery in January 2000. However, due to delays
partially caused by the less-than-expected investment, the product has recently
completed development although prior market size expectations have been reduced.
47
<PAGE>
Increased Competition and Lower Customer Demand
Management believed at the time of the acquisition there were a limited
number of companies with competitive ability in the technical graphics arena.
The Company believed the market to be a sizeable niche with small competitors
such as Itedo in Germany and Auto-Trol in the United States. With the focus in
the past year on e-marketplaces and tools to support them, the market has
expanded, as have the number and ability of competitors. In May 2000, Macromedia
announced a product called Generator 2, focused on delivering high-impact,
data-driven content to web pages. In June 2000, Macromedia began shipping
Generator 2 and announced its compatibility with tools from leading e-business
providers such as Vignette, Silverstream Software, and Intershop. Macromedia
last year reported revenues of $264 million and currently has a market
capitalization of over $4 billion, thus they have significantly more resources
and momentum than Micrografx in this market. Additionally, a company named
Enigma has surfaced in the past year. Enigma is a private company focused on the
aerospace vertical section of this same market and they were successful in
raising $20 million in a private equity offering earlier this year. As such,
they also have a greater ability to invest and have more momentum at this time.
Management believes that these products do not provide as much functionality as
iGS, but that their feature sets significantly overlap with iGS. Because of
this, Micrografx believes that the market share and revenues it will be able to
gain will be significantly less than expectations set a year ago. When the
Company purchased InterCAP in April 1999, revenue growth was expected at 225%
from fiscal year 1999 to fiscal year 2000. The actual revenue growth from the
prior year has been 2.5%. As a result of the aforementioned factors (lack of
investment ability, delay in the release of iGS, and increasing competition)
management has revised the growth and operating expectations of the Technical
Graphics business unit and specifically, the products and technologies acquired
through InterCAP.
IMPAIRMENT OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND ACQUIRED PRODUCT RIGHTS
The Company's restructuring plan includes dividing itself into three major
business units. These business units have clearly defined business plans that
encompass several key products. The Company has decided to abandon the
development and marketing of several other products that do not fit into the
Company's new business unit structure. These products include iGRAFX
Business(TM), Share, Image and Shared Technologies. The following grid shows the
products actively developed and marketed as enterprise products during fiscal
year 2000, and the business unit to which they relate as of June 30, 2000:
PRODUCT BUSINESS UNIT
OnSwitch Image2Web
iGRAFX Development Enterprise Process Management (EPM)
iGRAFX Professional(TM) EPM
iGRAFX Process(TM) EPM
FlowCharter(R) EPM
Optima(R) EPM
iGRAFX IDEF0 EPM
ActiveCGM(TM) Technical Graphics (TG)
iGRAFX Designer(TM) TG
Graphics Suite(R) Discontinued
iGRAFX Image Discontinued
iGRAFX Business(TM) Discontinued
iGRAFX Share Discontinued
Picture Publisher(R) Discontinued
Simply3D(R) Discontinued
Webtricity(TM) Discontinued
Shared Technologies* Discontinued
* Shared technologies contained various tools, such as filters, originally
planned for use in the iGRAFX Business(TM) and Share platforms. These tools were
intended for general purpose desktop diagramming, a market which the Company is
no longer actively pursuing.
The Company recorded a loss of approximately $1.1 million in the fourth
quarter of fiscal 2000 for the abandonment of these products.
48
<PAGE>
3. ACQUISITIONS
On April 16, 1999, the Company purchased InterCAP for $12.4 million,
consisting of $3.9 million in cash at closing, a short-term promissory note for
$2.5 million, a convertible debenture for $5.8 million and transaction costs of
approximately $0.2 million. The convertible debenture may be converted into
approximately 600,000 shares of Micrografx common stock. The actual number of
shares and the timing of the conversion are both subject to terms and conditions
as outlined in the convertible debenture agreement. Prior to the purchase,
InterCAP was a wholly owned subsidiary of Intergraph Corporation. The results of
operations of InterCAP are included in the Company's results of operations from
the date of the InterCAP acquisition.
The InterCAP acquisition has been accounted for in accordance with the
purchase method of accounting. The aggregate purchase price has been allocated
to the assets and liabilities acquired, with the remainder recorded as goodwill,
based on estimates of fair values as follows (in thousands):
<TABLE>
<S> <C>
Fair value of InterCAP historical net assets $ (344)
Purchased in-process research and development 1,928
Identified intangible assets 1,837
Deferred income tax liability related to identified intangible assets (616)
Goodwill 9,559
--------------
Aggregate purchase price $ 12,364
==============
</TABLE>
In connection with the Company's acquisition of InterCAP, the Company
recorded a charge of $1.9 million for purchased in-process research and
development ("purchased R&D"), based upon the appraised value of the related
developmental projects. The income approach, which included an analysis of the
markets, cash flows, and risks associated with achieving such cash flows, was
the primary technique utilized in valuing each purchased R&D project.
InterCAP's research and development relates to ActiveCGM software products.
These software products allow customers in the aerospace, defense and
manufacturing industries to publish technical graphics on the Internet.
Micrografx's goal in this acquisition was to acquire technology that
complemented its iGRAFX Designer(TM) technical graphics product. iGRAFX
Designer(TM), in conjunction with the acquired technologies, allows Micrografx
to create a solution for intelligent technical illustration and Web-based
technical publishing. These complementary products provide a tiered illustration
solution supported by the industry standards and leading-edge Web publishing
solutions.
Significant assumptions used in determining the value of purchased R&D for
InterCAP included projected operating cash flows and the discount rate.
Projected operating cash flows were expected to begin in early fiscal 2000. The
discount rate selected for InterCAP's in-process technologies was 15 percent.
At the time of the acquisition, InterCAP management estimated the remaining
cost and time to complete the purchased R&D projects was approximately $355,000
and 44 engineer-months. The term "engineer-month" refers to the average amount
of research work expected to be performed by an engineer in a month.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and uncertain
assumptions utilized in the valuation analysis of the in-process research and
development. Uncertainties regarding projected operating cash flows could give
rise to unforeseen budget over-runs and or revenue shortfalls in the event that
Micrografx is unable to successfully commercialize the projects. Micrografx
management is primarily responsible for estimating the value of the purchased
R&D in all acquisitions accounted for under the purchase method.
The amounts identified as intangible assets were categorized as follows (in
thousands):
CATEGORY
--------
Workforce $ 418
Customer list 240
Non-compete agreement 281
Current technology 898
--------
Total identified intangible assets $ 1,837
========
49
<PAGE>
In fiscal 1999 and fiscal 2000, goodwill related to this acquisition was
being amortized on a straight line basis over 10 years. Subsequent to the
impairment charge and beginning in the first quarter of fiscal 2001, the
amortization of goodwill for the InterCAP acquisition was adjusted to a 5 year
life to conform with assumptions used to calculate the appropriate write-down
charge. The change in estimate from a 10 year life to a 5 year life is expected
to increase amortization expense by approximately $132,000 in fiscal year 2001.
Other identified intangible assets are being amortized on a straight line basis
over periods ranging from 3 to 7 years.
The following unaudited pro forma information presents the Company's
results of operations as if the InterCAP acquisition had occurred on July 1,
1997. The pro forma information has been prepared by combining the results of
operations of the Company and InterCAP for the years ended June 30, 1999 and
1998, adjusted for the elimination of charges for purchased research and
development costs. This unaudited pro forma information does not purport to be
indicative of what would have occurred had the InterCAP acquisition occurred as
of that date or of results of operations which may occur in the future (in
thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Revenue $ 60,078 $ 76,514
(Loss) before other income (expense) and income taxes (2,665) (200)
Net (loss) income (5,229) 165
Basic (loss) earnings per share $ (0.47) $ .02
Diluted (loss) earnings per share $ (0.47) $ .01
</TABLE>
On December 31, 1997, the Company acquired WebKnight, Inc. ("WebKnight")
which was accounted for as a purchase. The total consideration paid was
$500,000, with $250,000 paid in December 1997, $125,000 paid in June 1998, and
$125,000 paid in December 1998. The entire purchase price was allocated to
acquired product rights and is being amortized over the life of products using
the technologies acquired.
On June 30, 1997, the Company acquired the assets of AdvanEdge
Technologies, Inc. ("AdvanEdge") for approximately $3.7 million, which has been
accounted for as a purchase. Goodwill related to this acquisition is being
amortized on a straight-line basis over seven years. The Company allocated the
total purchase price as follows (in thousands):
Tangible and intangible assets $1,016
Purchased in-process research and development 2,250
Goodwill 481
----------
Aggregate purchase price $3,747
==========
In connection with the Company's acquisition of AdvanEdge, the Company
recorded a charge of $2.3 million for purchased R&D, based upon the appraised
value of the related developmental projects. The Income Approach, which
included an analysis of the markets, cash flows, and risks associated with
achieving such cash flows, was the primary technique utilized in valuing each
purchased R&D project.
AdvanEdge's research and development related to business process simulation
software product. This software product allows customers to document their
business processes and simulate the processes in order to assess efficiency of
the process and the impact of possible changes to the process. Micrografx's goal
in this acquisition was to acquire technology that complemented its Micrografx
FlowCharter(R) process management product. Micrografx FlowCharter(R) in
conjunction with the acquired technologies allows Micrografx to create an
extended process management offering which includes a basic process
documentation tool and a process simulation tool.
Significant assumptions used in determining the value of purchased R&D for
AdvanEdge included projected operating cash flows and the discount rate.
Projected operating cash flows were expected to begin in early fiscal 1999. The
discount rate selected for AdvanEdge's in-process technologies was 25%.
50
<PAGE>
At the time of the acquisition, AdvanEdge management estimated the
remaining cost and time to complete the purchased R&D projects was approximately
$850,000 and 86 engineer-months. The term "engineer-month" refers to the average
amount of research work expected to be performed by an engineer in a month. All
the in-process projects have been completed within the budget. Micrografx
expects to essentially meet its original return expectations.
In connection with the acquisition of AdvanEdge, the Company agreed to make
future payments to the former shareholders of AdvanEdge as a part of the
purchase price. The total consideration to be paid was $2.5 million and was
fully paid at June 30, 2000.
4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. All short-term investments have
maturities within one year of the balance sheet date. Cash and cash equivalents
and short-term investments consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
2000 1999
------------- ------------
<S> <C> <C>
Cash and cash equivalents:
Cash $ 2,463 $ 2,332
Money market funds 380 5,987
Municipal and tax free bond - 500
------------- ------------
Total cash and cash equivalents 2,843 8,819
Short-term investments:
Municipal and tax free bond - 1,801
Corporate bonds and notes - 500
Asset backed securities - 100
------------- ------------
Total short-term investments - 2,401
------------- ------------
Total cash and short-term investments $ 2,843 $ 11,220
============= ============
</TABLE>
The appropriate classification of securities is determined at the time of
purchase and reevaluated as of each balance sheet date. The Company has
classified its cash equivalents and short-term investments as
available-for-sale. The available-for-sale securities are carried at cost that
approximates fair value. Gross realized and unrealized gains and losses for
these securities were not material at June 30, 2000, or 1999. The fair value of
securities is based on quoted market prices, where available, or quotes from
external pricing sources such as brokers for those or similar investments and
issues. Gross sales proceeds from available-for-sale securities were
$34,256,000, $228,957,000, and $124,650,000, in fiscal 2000, 1999, and 1998,
respectively. The cost of available-for-sale securities sold is based on the
specific identification method.
5. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
JUNE 30,
2000 1999
------------- ------------
Trade Receivables $ 6,714 $ 9,305
Allowances (2,788) (2,825)
------------- ------------
Accounts receivable, net $ 3,926 $ 6,480
============= ============
Allowances consist of reserves for returns, reserves for bad debt and
accruals for co-op and incentive programs.
51
<PAGE>
At June 30, 2000 and 1999, approximately 53 percent and 55 percent,
respectively, of trade receivables represented amounts due from 10 customers. At
June 30, 2000, the Company had one customer with a receivable balance of 23
percent of trade receivables. At June 30, 1999, the Company had two customers
with receivable balances of 26 percent and 12 percent of trade receivables,
respectively. The credit risk in the Company's trade accounts receivable is
substantially mitigated by the Company's credit evaluation process, credit
insurance policies, reasonably short collection terms and the geographical
diversification of revenues.
The Company distributes its products domestically through independent,
non-exclusive distributors, authorized resellers, and its corporate sales
representatives located throughout the United States. The Company distributes
its products internationally through independent, non-exclusive distributors
located primarily in Western Europe and Japan. In fiscal 2000 and fiscal 1999,
one customer's sales accounted for 15 and 12 percent of net revenues,
respectively. In fiscal 1998, the Company had two customers whose sales each
accounted for 19 percent of net revenues.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
2000 1999
------------ -------------
<S> <C> <C>
Computers and equipment $ 12,630 $ 13,006
Furniture and fixtures 387 648
Leasehold improvements 615 704
------------ --------------
13,632 14,358
Less - accumulated depreciation and amortization (12,062) (12,215)
------------ --------------
Property and equipment, net $ 1,570 $ 2,143
============ ==============
</TABLE>
7. CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND ACQUIRED PRODUCT RIGHTS
Capitalized software development costs and acquired product rights consist of
the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
2000 1999
------------ -------------
<S> <C> <C>
Capitalized software development costs $ 6,847 $ 7,099
Less - accumulated amortization (1,317) (1,105)
------------ -------------
Capitalized software development costs, net $ 5,530 $ 5,994
============ =============
Acquired product rights $ 3,661 $ 4,847
Less - accumulated amortization (2,049) (1,246)
------------ -------------
Acquired product rights, net $ 1,612 $ 3,601
============ =============
</TABLE>
During the years ended June 30, 2000, 1999, and 1998, the Company
capitalized $3,332,000, $7,998,000, and $6,617,000, respectively, of software
development costs and acquired product rights. Amounts amortized and charged to
cost of revenues for capitalized software development costs and acquired product
rights during the years ended June 30, 2000, 1999, and 1998, were $4,577,000,
$5,080,000, and $8,070,000, respectively. Additionally, the Company wrote down
capitalized software development costs and acquired product rights to net
realizable value by approximately $1,208,000, $444,000, and $157,000, in fiscal
2000, 1999, and 1998, respectively.
52
<PAGE>
8. DEBT
The Company's debt consists of the following (in thousands):
<TABLE>
<CAPTION>
2000 1999
----------------- -----------------
<S> <C> <C>
Long-term debt consists of:
Note payable issued in connection with acquisition of AdvanEdge $ - $ 1,000
Note payable issued in connection with acquisition of InterCAP - 2,500
Subordinated convertible debenture issued in connection with acquisition of
InterCAP, net of a discount of $179 at June 30, 1999 5,797 5,797
----------------- -----------------
5,797 9,297
Less current portion - (3,500)
----------------- -----------------
$ 5,797 $ 5,797
================= =================
Short-term debt consists of:
Note payable issued for lease obligations $ 138 $ -
Receivable facility, net of discount of $93 767 -
Current portion of long-term debt - 3,500
----------------- -----------------
$ 905 $ 3,500
================= =================
</TABLE>
The note issued for the AdvanEdge acquisition was non-interest bearing. The
$1 million outstanding at June 30, 1999, for the AdvanEdge acquisition was paid
during fiscal year 2000. Approximately $900,000 of the amount represented
treasury shares issued.
The note issued for the InterCAP acquisition had a 9.75 percent fixed
interest rate for the term of the agreement; April 16, 1999 to August 31, 1999.
The note was originally due in full on August 31, 1999, but the Company
negotiated with the holder, Intergraph, for payment of $1.25 million plus
accrued interest of approximately $110,000 on September 28, 1999 and for the
remaining balance of $1.25 million plus interest to be paid on October 28, 1999.
Both of these payments were made to Intergraph as agreed. Under the terms of the
renegotiated note, the interest rate was increased to 10.5 percent.
The subordinated convertible debenture issued for the InterCAP acquisition
may be initially converted into 579,700 shares of Micrografx common stock. In
July 1999, the Company registered 579,700 shares to cover the agreement should
either Intergraph or the Company elect to convert all or any part of the
debenture into shares of common stock of the Company. The actual number of
shares and the timing of the conversion are both subject to terms and conditions
as outlined in the convertible debenture agreement. As described in the
Subordinated Convertible Debenture dated April 16, 1999 between Micrografx, Inc.
and Intergraph Corporation, the applicable interest rate for the convertible
debenture is a 7 percent fixed rate to begin January 5, 2000 and increasing to 8
percent on January 4, 2001. Since the Company did not reset the conversion price
on the reset date, November 30, 1999, the interest rates were raised by 200
basis points to 9 and 10 percent respectively. The debenture matures on March
31, 2002. Interest expense is being provided for at an effective interest rate
of 8 percent.
The note payable and the convertible debenture are both secured by the
capital stock of InterCAP.
The Company entered into a $3.0 million receivable-backed financing
agreement with Silicon Valley Bank ("SVB") on March 31, 2000. SVB will advance
to the Company 80% of the value of non-distributor domestic invoices and 40% of
distributor invoices and the facility bears interest at prime plus 3.0% of the
gross value of the invoices financed. SVB also charges a fee of 0.375% of the
gross value of the invoices. The Company agreed to issue to SVB warrants to
purchase 25,000 shares of the Company's Common Stock at $7.00 per share. These
warrants have a 7-year life.
53
<PAGE>
9. INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of existing differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Current and noncurrent deferred income tax assets and liabilities
are classified on the balance sheet based on the classification of the assets
and liabilities giving rise to these differences. Deferred tax assets and
liabilities that are not related to an asset or liability for financial
reporting are classified according to the expected reversal of the temporary
difference.
Components of the provision (benefit) for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ - $ (51) $ 1,126
Foreign 454 366 693
----------- ----------- ----------
Total current provision 454 315 1,819
Deferred provision (benefit) - 2,777 (1,492)
----------- ----------- ----------
Total income tax provision $ 454 $ 3,092 $ 327
=========== =========== ==========
</TABLE>
The provision for income taxes is reconciled with the federal statutory
rate as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998
----------- ------------ -----------
<S> <C> <C> <C>
Provision (benefit) computed at
federal statutory rate $ (7,383) $ (945) $ 327
Nondeductible expenses 2,951 73 -
In-process research and development - 656 -
Unbenefited foreign losses - 1,439 -
Foreign taxes not benefited 454 883 -
Change in valuation allowance 4,432 1,037 (32)
Other - (51) 32
----------- ------------ ----------
Tax provision $ 454 $ 3,092 $ 327
=========== ============ ==========
</TABLE>
54
<PAGE>
Components of the net deferred income tax assets (liabilities) are as follows
(in thousands):
<TABLE>
<CAPTION>
JUNE 30,
2000 1999
------------ ------------
<S> <C> <C>
Deferred Tax Assets
Tax credit carryforwards $ 2,602 $ 2,838
Net operating loss carryforwards 7,347 4,123
Depreciation 602 211
Reserves and other accrued expenses not
currently deductible for tax purposes 1,939 1,215
Undistributed earnings in foreign subsidiaries - 367
Other 43 31
------------ ------------
Total deferred tax assets 12,533 8,785
Deferred Tax Liabilities
Capitalized software development costs
currently deductible for tax purposes (2,212) (3,538)
Undistributed earnings in foreign subsidiaries (646) -
Other (201) (201)
------------ ------------
Total deferred tax liabilities (3,059) (3,739)
Total net deferred tax assets 9,474 5,046
Valuation allowance (9,474) (5,046)
------------ ------------
Deferred tax assets, net of valuation allowance $ - $ -
============ ============
</TABLE>
At June 30, 2000, the Company has research and development tax credit
carryforwards of $1,865,000 for federal tax purposes, which expire between 2004
and 2014, and the Company has foreign tax credit carryforwards of $429,000,
which expire between 2003 and 2004. In addition, the Company has alternative
minimum tax credit carryforwards of $307,000 that may be carried forward
indefinitely as a credit against the Company's current tax liability. The
Company also has net operating loss carryforwards of $21,608,000 for federal tax
purposes that expire between 2009 and 2015. The annual utilization of these
carryforwards will be limited.
Pursuant to the requirements of SFAS 109, a valuation allowance must be
provided when it is more likely than not that deferred tax assets will not be
realized. Based on the fact that the Company has a cumulative net operating loss
for the prior three years and there are no prior tax payments that could be
refunded, it is management's belief that the realization of the net deferred tax
assets in the near term is remote. The impact on the current year provision is a
charge for foreign taxes not benefited of $454,000.
10. SHAREHOLDERS' EQUITY
PREFERRED STOCK
None of the Company's 10,000,000 authorized shares of Preferred Stock are
issued at June 30, 2000. The rights and preferences of preferred stock are
established by the Company's Board of Directors upon issuance. At August 30,
2000, the Company designated 4,000,000 shares as Series A Convertible Preferred
Stock ("Series A Preferred Stock"), with a par value of $0.01 per share. The
Series A Preferred Stock is convertible into Micrografx Common Stock at a price
that is initially equal to the purchase price. Up to one-half of the Series A
Preferred Stock may be converted into Image2Web Common Stock at the investor's
option. 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.
STOCK OPTIONS
The Company has reserved 7,500,000 shares of its Common Stock for issuance
in connection with its stock option plans for employees and non-employees, which
are administered by the Company's Stock Option Committee.
55
<PAGE>
Up to 100,000 of the 7,500,000 shares available may be granted as
restricted stock awards. The stock is restricted because recipients receive the
stock only upon completing a specified objective or period of employment,
generally one to five years. Restricted stock shares are granted at $0.01 par
value and compensation expense is deferred until earned. The shares are
considered issued when awarded, but the recipient does not own and cannot sell
the shares during the restriction period.
As of June 30, 2000, approximately 1,240,000 shares remained available for
grant, of which approximately 77,000 may be granted as restricted shares.
Each option issued under the plans, excluding the restricted stock plan,
terminates at the time designated by the Board of Directors, not to exceed 10
years. The exercise price and vesting schedule for each option is determined by
the Company's Stock Option Committee, based on the fair market value of the
Company's stock at the grant date, and is payable when the option is exercised.
Options that terminate under the provisions of these plans subsequently become
available for reissuance.
A summary of the Company's stock option activity, and related information
for the years ended June 30, 2000, 1999, and 1998, follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
Beginning of year 2,167,198 $ 8.06 2,397,294 $ 7.30 1,618,641 $ 6.06
Granted 1,520,353 4.22 925,019 9.08 1,415,424 8.58
Exercised (29,567) 3.63 (514,846) 5.95 (353,451) 6.31
Canceled (1,195,422) 7.19 (640,269) 8.40 (283,320) 7.82
-------------- --------------- --------------
Outstanding at end of year 2,462,562 2,167,198 2,397,294
============== =============== ==============
Exercisable at end of year 739,210 $ 7.27 589,672 $ 7.21 585,857 $ 6.91
============== =============== ==============
Weighted-average fair
value of options granted
during the year $ 2.61 $ 5.05 $ 5.02
=============== ============== ==============
Weighted-average fair
value of purchase rights
granted during the year $ 2.44 $ 3.12 $ 2.33
============== =============== ==============
</TABLE>
The following is additional information relating to options outstanding as of
June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------- ---------------------------------
WEIGHTED AVERAGE WEIGHTED
EXERCISE NUMBER REMAINING AVERAGE NUMBER WEIGHTED AVERAGE
PRICE RANGE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------------- --------------- --------------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 4.24 616,224 9.21 $ 3.84 - $ -
$ 4.25 - $ 5.00 715,411 6.94 $ 4.71 216,990 $ 4.88
$ 5.01 - $ 8.99 722,700 4.76 $ 7.60 320,534 $ 7.23
$ 9.00 - $ 16.00 408,227 2.54 $ 9.68 201,686 $ 9.90
</TABLE>
56
<PAGE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," (SFAS 123) requires the disclosure of pro forma net income
and earnings per share information computed as if the Company had accounted for
its employee stock options granted subsequent to June 30, 1995, under the fair
value method set forth in SFAS 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Expected term:
Stock options 3.6 years 3.5 years 3.6 years
Employee stock purchase plan .52 years 1.45 years .95 years
Interest rate 6.53% 5.83% 5.80%
Volatility 78.74% 70.19% 69.86%
Dividends 0% 0% 0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because
options vest over several years and additional option grants are expected, the
effects of these hypothetical calculations are not likely to be representative
of similar future calculations. The Company's pro forma information follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998
------------ ----------- ------------
<S> <C> <C> <C>
Pro forma net loss $ (23,717) $ (8,344) $ (1,199)
============ =========== ============
Pro forma basic and diluted loss per share $ (2.08) $ (0.75) $ (0.11)
============ =========== ============
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan allows eligible employees to
authorize the Company to withhold from 1 percent to 10 percent of gross
earnings. Shares are purchased by participants at the lower of 85 percent of the
fair market value per share at the beginning or ending of each offering period.
As of June 30, 2000, 1,300,000 shares were authorized for the plan,
approximately 1,121,000 shares were issued, and approximately $65,000 had been
withheld for the purchase of shares for the November 2000 offering period.
11. EMPLOYEE BENEFIT PLAN
The Micrografx, Inc. 401(k) Savings Plan (Plan) allows eligible employees
to elect to reduce their current compensation by up to 15 percent, subject to
certain maximum dollar limitations prescribed by the Internal Revenue Code
($10,500 in 2000), and have the amount contributed to the Plan as salary
deferral contributions. The Company may make employer contributions to the Plan
at the discretion of the Board of Directors. During fiscal 2000, 1999, and 1998,
the Company contributed approximately $331,000, $301,000, and $244,000, to the
Plan, respectively. At June 30, 2000, there were approximately 136 participants
in the Plan.
57
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office and warehouse space and certain equipment under
non-cancelable operating lease agreements. Rent expense of $2,055,000,
$1,381,000, and $1,302,000, was recorded during fiscal 2000, 1999, and 1998,
respectively. Future minimum lease payments for operating leases are as follows
(in thousands):
YEARS ENDING JUNE 30,
------------------------------------------------------
2001 1,362
2002 1,066
2003 889
2004 757
2005 327
Thereafter 25
-------------
$ 4,426
=============
LITIGATION
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.
13. SEGMENT INFORMATION
As of June 30, 2000, the Company operated in a single industry segment: the
development, marketing and support of personal computer applications and systems
software products. The Company's Chief Operating Decision Maker (CODM) assesses
performance and allocates resources on an enterprise-wide basis. Therefore, no
separately reportable operating segments exist.
The CODM monitors revenues based on product category and geographic area.
Virtually all products sold in Europe are manufactured in the Netherlands.
Substantially all other products are manufactured in Dallas, Texas. Net revenues
for each segment include only sales to unaffiliated customers; there were no
intra-segment revenues for the periods presented.
58
<PAGE>
The following product category data includes net revenues (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
Net revenues 2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Process management $ 15,363 $ 15,182 $ 15,786
Technical graphics 9,945 2,537 1,838
Heritage and other 10,965 21,268 51,143
Technology - 17,975 3,025
-------------- -------------- --------------
Total revenues $ 36,273 $ 56,962 $ 71,792
============== ============== ==============
</TABLE>
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>
YEARS ENDED JUNE 30,
Net revenues 2000 1999 1998
------------ ------------ -------------
<S> <C> <C> <C>
United States $ 14,935 $ 34,695 $ 40,212
Germany 8,197 6,925 8,196
Japan 2,072 1,270 4,989
Rest of World 11,069 14,072 18,395
------------ ----------- -------------
Total $ 36,273 $ 56,962 $ 71,792
============ =========== =============
Property, Plant & Equipment, net
United States $ 1,148 $ 1,570 $ 1,265
Germany 112 122 159
Japan 15 41 93
Rest of World 295 410 429
------------ ----------- -------------
Total $ 1,570 $ 2,143 $ 1,946
============ =========== =============
</TABLE>
59
<PAGE>
Report of Independent Auditors
To the Shareholders of Micrografx, Inc.
We have audited the accompanying consolidated balance sheets of Micrografx,
Inc., and subsidiaries (the Company) as of June 30, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended June 30, 2000. Our audits
also included the financial statement schedule, listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Micrografx, Inc.,
and subsidiaries at June 30, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
The accompanying financial statements have been prepared assuming that
Micrografx, Inc. will continue as a going concern. As more fully described in
Note 1, the Company has incurred significant operating losses and has a working
capital deficiency. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regards to these
matters are also described in Note 1. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Dallas, Texas
October 11, 2000
60
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure matters
with its independent public accountants to report under this Item 9.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption "Election of Directors" in the Company's
Proxy Statement is incorporated herein by reference. See Item 1 included herein
for information concerning executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the caption "Executive Compensation" in the
Company's Proxy Statement is incorporated herein by reference, except for the
information contained in the sections entitled "Report of the Compensation and
Stock Option Committee on Executive Compensation" and "Stock Performance Graph"
which shall not be deemed incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the caption "Principal Shareholders and Stock
Ownership of Management" in the Company's Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Certain Transactions" in the Company's
Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Consolidated Financial Statements. The following consolidated financial statements of
Micrografx, Inc., are filed as part of this Form 10-K on the pages indicated:
Consolidated Balance Sheets at June 30, 2000, and 1999 35
Consolidated Statements of Operations for the Years Ended June 30, 2000, 1999, and 1998 37
Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 2000, 1999, and 1998 38
Consolidated Statements of Cash Flows for the Years Ended June 30, 2000, 1999, and 1998 39
Notes to Consolidated Financial Statements 40
Report of Independent Public Accountants 60
2. Consolidated Financial Statement Schedules.
PAGE
Schedule II -- Valuation and Qualifying Accounts 65
Schedules other than the one listed above are omitted as the
required information is inapplicable or the information is
presented in the consolidated financial statements or related
notes.
</TABLE>
61
<PAGE>
3. Exhibits
The following documents are filed or incorporated by reference
as exhibits to this report. The exhibit numbers in the exhibit
list correspond to the numbers assigned to such exhibits in
the Exhibit Table of Item 601 of Regulations S-K.
* 2.1 Agreement and Plan of Merger, dated as of April 15, 1999,
among Micrografx, Inc., InterCAP Acquisition Inc.,and InterCAP
Graphics Systems, Inc. and Intergraph Corporation (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K dated
April 16, 1999)
* 3.1 Articles of Incorporation of the Company, as amended (filed as
Exhibit 3.1 to the Company's Registration Statement on
Form S-1, file No. 33-34842)
* 3.2 Amendment to Articles of Incorporation of the Company (filed
as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1993)
3.3 Statement of Resolution Establishing Series of Preferred Stock
of Micrografx, Inc. (Exhibit 3.3)
* 3.4 Amended and Restated Bylaws of the Company (filed as
Exhibit 3.3 to the Company's Registration Statement
on Form S-1, file No. 33-34842)
* 3.5 Amendment to Amended and Restated Bylaws of the Company (filed
as Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1993)
4.1 Warrant to Purchase Common Units granted to Prentiss
Properties Trust by Micrografx, Inc. (Exhibit 4.1)
* 4.2 Specimen stock certificate evidencing the Common Stock (filed
as Exhibit 4.1 to the Company's
Registration Statement on Form S-1, file No. 33-34842)
* 10.1 Incentive and Nonstatutory Stock Option Plan, as amended
(filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1, file No. 33-34842)
* 10.2 Amendment to the Incentive and Nonstatutory Stock Option Plan
(filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1, file No. 33-42195)
* 10.3 Form of International Distributor Agreement used by the
Company (filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1, file No. 33-34842)
* 10.4 Employee Stock Purchase Plan (filed as Exhibit 10.26 to the
Company's Registration Statement on Form
S-1, file No. 33-42195)
* 10.5 Micrografx, Inc. 1995 Stock Option Plan. (filed as
Exhibit 10.27 to the Company's Annual Report on Form
10-K for the year ended March 31, 1994)
* 10.6 Micrografx, Inc. 1993 Restricted Stock Plan. (filed as
Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1994)
* 10.7 Micrografx, Inc. 1995 Director Stock Option Plan (filed as
Exhibit 10.29 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1995)
* 10.8 Employment agreement dated February, 1997, between the Company
and Douglas Richard (Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997)
* 10.9 Compensation agreement dated May 21, 1997, between the Company
and Russell Hogg. (filed as Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997)
62
<PAGE>
* 10.10 License Agreement between Micrografx,Inc. and Cendant Software
Corporation (filed as Exhibit 10.1 to the Company's Curren
Report on Form 8-K dated June 30, 1998)
* 10.11 Noncompetition Agreement between Micrografx, Inc. and Cendant
Software Corporation (filed as Exhibit
10.2 to the Company's Current Report on Form 8-K dated
June 30, 1998)
* 10.12 Revolving credit agreement dated April 1, 1998, between the
Company and BankBoston, N.A. (filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-K405/A for the year ended
June 30, 1998)
* 10.13 Lease agreement dated August 31, 1998, between Prentiss
Properties Acquisition Partners, L.P. and the Company (filed
as Exhibit 10.16 to the Company's Annual Report on Form
10-K405/A for the year ended June 30, 1998)
* 10.14 Asset Purchase and License Agreement dated September 3, 1998,
between the Company and Learning Company Properties, Inc.
(filed as Exhibit 10.17 to the Company's Annual Report on
Form 10-K405/A for the year ended June 30, 1998)
* 10.15 Subordinated Convertible Debenture dated April 16, 1999
between Micrografx, Inc. and Intergraph Corporation (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
April 16, 1999)
* 10.16 Amendment to Promissory Note, dated April 15, 1999,
payable to Intergraph Corporation (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q dated November 11,
1999)
* 10.17 Accounts Receivable Financing Agreement between
Silicon Valley Bank, Specialty Finance Division and
Micrografx, Inc. dated March 31, 2000 (filed as Exhibit 10.1
to the the Company's Quarterly Report on Form 10-Q dated
May 12, 2000)
10.18 Termination of Lease and Release Agreement dated
August 1, 2000, between Prentiss Properties Acquisition
Partners, L.P. and the Company (Exhibit 10.18)
10.19 Lease agreement dated August 1, 2000, between Prentiss
Properties Acquisition Partners, L.P.
and the Company (Exhibit 10.19)
10.20 Stock Purchase Agreement dated September 5, 2000, between
Purchasers and the Company (Exhibit 10.20)
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
* Incorporated herein by reference to the indicated filing.
(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 Item 601 of Regulation S-K.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 13, 2000.
MICROGRAFX, INC.
By: /S/ JOHN M. CARRADINE
--------------------------
John M.Carradine
Chief Financial Officer and Corporate Secretary
(Principal Executive Officer and Principal
Financial Officer)
By: /S/ RONALD K. HERBERT
--------------------------
Ronald K. Herbert
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated.
SIGNATURE TITLE DATE
/s/JAMES L. HOPKINS Chairman of the Board of Directors October 13, 2000
-------------------------
James L. Hopkins
/s/RUSSELL HOGG Director October 13, 2000
-------------------------
Russell Hogg
64
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
MICROGRAFX, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance At Charged Charged Balance
Beginning To Costs To Other at End
Description of Period and Expenses Accounts (b) Deductions(a) of Period
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Years Ended June 30,
1998
-----------------------------
Allowance for doubtful
accounts: $ 339 $ 37 $ - $ 33 $ 343
Allowance for sales
returns: $1,942 $ - $ (578) $ - $ 1,364
Deferred tax valuation
allowance: $2,871 $ (311) $ - $ - $ 2,560
1999
-----------------------------
Allowance for doubtful
accounts: $ 343 $ 306 $ - $ 44 $ 605
Allowance for sales
returns: $1,364 $ - $ 503 $ - $ 1,867
Deferred tax valuation
allowance $2,560 $ 2,486 $ - $ - $ 5,046
2000
-----------------------------
Allowance for doubtful
accounts: $ 605 $ (152) $ - $ (12) $ 465
Allowance for sales
returns: $1,867 $ - $ 121 $ - $ 1,988
Deferred tax valuation
allowance $5,046 $ 4,428 $ - $ - $ 9,474
(a) Represents amounts written-off during the year, net of recoveries.
(b) The allowance for sales returns is recorded as a reduction of revenues.
</TABLE>
65
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
* 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 (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K dated
April 16, 1999)
* 3.1 Articles of Incorporation of the Company, as amended (filed as
Exhibit 3.1 to the Company's Registration
Statement on Form S-1, file No. 33-34842)
* 3.2 Amendment to Articles of Incorporation of the Company (filed
as Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended March 31, 1993)
3.3 Statement of Resolution Establishing Series of Preferred Stock
of Micrografx, Inc. (Exhibit 3.3)
* 3.4 Amended and Restated Bylaws of the Company (filed as
Exhibit 3.3 to the Company's Registration Statement
on Form S-1, file No. 33-34842)
* 3.5 Amendment to Amended and Restated Bylaws of the Company
(filed as Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the year ended March 31, 1993)
4.1 Warrant to Purchase Common Units granted to Prentiss
Properties Trust by Micrografx, Inc. (Exhibit 4.1)
* 4.2 Specimen stock certificate evidencing the Common Stock
(filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-1, file No. 33-34842)
* 10.1 Incentive and Nonstatutory Stock Option Plan, as amended
(filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1, file No. 33-34842)
* 10.2 Amendment to the Incentive and Nonstatutory Stock Option Plan
(filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1, file No. 33-42195)
* 10.3 Form of International Distributor Agreement used by the
Company (filed as Exhibit 10.3 to the Company's
Registration Statement on Form S-1, file No. 33-34842)
* 10.4 Employee Stock Purchase Plan (filed as Exhibit 10.26 to the
Company's Registration Statement on Form
S-1, file No. 33-42195)
* 10.5 Micrografx, Inc. 1995 Stock Option Plan. (filed as Exhibit
10.27 to the Company's Annual Report on Form
10-K for the year ended March 31, 1994)
* 10.6 Micrografx, Inc. 1993 Restricted Stock Plan. (filed as
Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1994)
* 10.7 Micrografx, Inc. 1995 Director Stock Option Plan (filed as
Exhibit 10.29 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1995)
* 10.8 Employment agreement dated February 13, 1997, between the
Company and Douglas Richard (Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997)
* 10.9 Compensation agreement dated May 21, 1997, between the Company
and Russell Hogg (filed as Exhibit 10.12
to the Company's Annual Report on Form 10-K for the year ende
June 30, 1997)
66
<PAGE>
* 10.10 License Agreement between Micrografx, Inc. and Cendant
Software Corporation (filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K dated June 30, 1998)
* 10.11 Noncompetition Agreement between Micrografx, Inc. and Cendant
Software Corporation (filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K dated June 30, 1998)
* 10.12 Revolving credit agreement dated April 1, 1998, between the
Company and BankBoston, N.A. (filed as Exhibit 10.15 to the
Company's Annual Report on Form 10-K405/A for the year ended
June 30, 1998)
* 10.13 Lease agreement dated August 31, 1998, between Prentiss
Properties Acquisition Partners, L.P. and the Company (file
as Exhibit 10.16 to the Company's Annual Report on Form
10-K405/A for the year ended June 30, 1998)
* 10.14 Asset Purchase and License Agreement dated September 3, 1998,
between the Company and Learning Company Properties, Inc.
(filed as Exhibit 10.17 to the Company's Annual Report on
Form 10-K405/A for the year ended June 30, 1998)
* 10.15 Subordinated Convertible Debenture dated April 16, 1999
between Micrografx, Inc. and Intergraph Corporation (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K
dated April 16, 1999)
* 10.16 Amendment to Promissory Note, dated April 15, 1999,
payable to Intergraph Corporation (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q dated November 11,
1999)
* 10.17 Accounts Receivable Financing Agreement between
Silicon Valley Bank, Specialty Finance Division and
Micrografx, Inc. dated March 31, 2000 (filed as Exhibit 10.1
to the the Company's Quarterly Report on Form 10-Q dated
May 12, 2000)
10.18 Termination of Lease and Release Agreement dated
August 1, 2000, between Prentiss Properties Acquisition
Partners, L.P. and the Company (Exhibit 10.18)
10.19 Lease agreement dated August 1, 2000, between Prentiss
Properties Acquisition Partners, L.P.
and the Company (Exhibit 10.19)
10.20 Stock Purchase Agreement dated September 5, 2000, between
Purchasers and the Company (Exhibit 10.20)
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
* Incorporated herein by reference to the indicated filing.
67
<PAGE>
