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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 0-18708
MICROGRAFX, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1952080
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
505 MILLENNIUM DRIVE, ALLEN, TX 75013
(Address of principal executive offices) (Zip Code)
(214) 495-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
As of January 31, 2000, 11,375,869 shares of the Company's common stock
were outstanding.
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<PAGE>
MICROGRAFX, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
PART I.
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
December 31, 1999, and June 30, 1999
Consolidated Statements of Operations for the three and 5
six months ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the 6
six months ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II.
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<S> <C> <C>
DECEMBER 31, JUNE 30,
1999 1999
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,118 $ 8,819
Short-term investments 40 2,401
Accounts receivable, less allowances of $3,325 and $2,825 5,332 6,480
Inventories 661 570
Other current assets 1,358 1,478
----------- -----------
Total current assets 10,509 19,748
Property and equipment, net 2,941 2,143
Capitalized software development costs, net 6,097 5,994
Acquired product rights, net 2,776 3,601
Goodwill, net 9,356 9,907
Other assets 872 990
----------- -----------
Total assets $ 32,551 $ 42,383
=========== ===========
See accompanying notes.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<S> <C> <C>
DECEMBER 31, JUNE 30,
1999 1999
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,478 $ 3,833
Accrued compensation and benefits 1,643 2,189
Other accrued liabilities 3,004 2,567
Deferred revenue 1,676 1,651
Notes payable 400 3,500
Income taxes payable 501 403
----------- -----------
Total current liabilities 10,702 14,143
Long-term debt 5,797 5,797
Other non-current liabilities 37 11
Shareholders' equity:
Common stock, $.01 par value, 20,000 shares authorized;
12,188 and 12,131 shares issued 122 122
Additional capital 37,752 37,622
Accumulated deficit (14,030) (6,746)
Accumulated other comprehensive loss (1,605) (1,610)
Less - treasury stock (814 and 909 shares), at cost (6,224) (6,950)
Deferred compensation - (6)
----------- -----------
Total shareholders' equity 16,015 22,432
----------- -----------
Total liabilities and shareholders' equity $ 32,551 $ 42,383
=========== ===========
See accompanying notes.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net revenues $ 9,656 $ 17,045 $ 18,178 $ 32,783
Cost of revenues 2,226 3,350 4,216 6,434
------------- ------------- ------------- -------------
Gross profit 7,430 13,695 13,962 26,349
Operating expenses:
Sales and marketing 6,441 9,027 13,119 17,305
General and administrative 1,754 1,753 3,957 3,315
Net research and development 1,631 2,060 3,790 4,145
------------- ------------- ------------- -------------
Total operating expenses 9,826 12,840 20,866 24,765
------------- ------------- ------------- -------------
(Loss) income from operations (2,396) 855 (6,904) 1,584
Interest income 15 264 43 626
Interest expense (126) (5) (276) (110)
Other (expense) income, net (9) (22) 128 (108)
------------- ------------- ------------- -------------
Total non operating (expense) income (120) 237 (105) 408
------------- ------------- ------------- -------------
(Loss) income before income taxes (2,516) 1,092 (7,009) 1,992
Income tax provision 159 382 275 697
------------- ------------- ------------- -------------
Net (loss) income $ (2,675) $ 710 $ (7,284) $ 1,295
============= ============= ============= =============
Basic (loss) income per share $ (0.24) $ 0.06 $ (0.64) $ 0.12
============= ============= ============= =============
Diluted (loss) income per share $ (0.24) $ 0.06 $ (0.64) $ 0.11
============= ============= ============= =============
See accompanying notes.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<S> <C> <C>
SIX MONTHS ENDED DECEMBER 31,
--------------------------------------
1999 1998
----------------- ------------------
Cash flows from operating activities:
Net (loss) income $ (7,284) $ 1,295
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 3,601 4,994
Deferred compensation 6 91
Deferred income taxes and other 46 261
Changes in operating assets and liabilities:
Accounts receivable 1,148 4,011
Inventories (91) 378
Other current assets 121 (12)
Payables and accruals (464) (2,443)
Deferred revenue 25 (6,399)
Income taxes payable 98 57
----------------- ------------------
Net cash (used in) provided by operating activities (2,794) 2,233
----------------- ------------------
Cash flows from investing activities:
Proceeds from maturities of short-term investments 3,399 4,873
Purchases of short-term investments (1,039) (12,917)
Capitalization of software development costs and
purchases of acquired product rights (1,592) (3,708)
Purchases of property and equipment (1,435) (732)
----------------- ------------------
Net cash used in investing activities (667) (12,484)
----------------- ------------------
Cash flows from financing activities:
Proceeds from employee stock programs 255 2,585
Treasury stock acquired - (3,657)
Payments of notes payable (2,500) (125)
Tax benefits realized from stock transactions - 145
----------------- ------------------
Net cash used in financing activities (2,245) (1,052)
----------------- ------------------
Effect of exchange rates on cash and cash equivalents 5 458
----------------- ------------------
Net decrease in cash and cash equivalents (5,701) (10,845)
Cash and cash equivalents, beginning of period 8,819 26,483
----------------- ------------------
Cash and cash equivalents, end of period $ 3,118 $ 15,638
================= ==================
See accompanying notes.
</TABLE>
6
<PAGE>
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Micrografx,
Inc., and subsidiaries (the "Company") at December 31, 1999, and for the three
and six-month periods ended December 31, 1999, and 1998 are unaudited but
reflect all adjustments, which are of a normal recurring nature and, in the
opinion of management, necessary for a fair presentation of the financial
position and results of operations for the periods presented. The accompanying
financial statements and notes thereto should be read in conjunction with the
Company's audited consolidated financial statements for the year ended June 30,
1999, included in the 1999 Annual Report to Shareholders. The results of
operations for the three and six-month periods ended December 31, 1999, are not
necessarily indicative of results to be expected for the year ending June 30,
2000.
REVENUE RECOGNITION
Revenue from packaged product sales to distributors and resellers is recognized
when related products are sold through to the end user. Maintenance and
subscription revenue is recognized ratably over the contract period. Revenue
from products licensed to original equipment manufacturers ("OEMs") is recorded
when OEMs ship licensed products while revenue from multi-user licenses is
recorded when the software has been delivered. In connection with the sale of
certain products, the Company provides free telephone support service to
customers. The Company does not defer the recognition of any revenue associated
with sales of these products, since the cost of providing this free support is
insignificant, the support is provided within one year after the associated
revenue is recognized (the vast majority of the support actually occurs within
three months) and enhancements are minimal and infrequent. The estimated cost of
providing this free support is accrued upon product shipment. Provisions are
recorded for returns and bad debts based on historical experience.
INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1999 JUNE 30, 1999
------------------------- -------------------------
(UNAUDITED)
Raw materials $ 468 $ 404
Finished goods 193 166
------------------------- -------------------------
$ 661 $ 570
========================= =========================
</TABLE>
FOREIGN FORWARD CURRENCY EXCHANGE CONTRACTS
The Company periodically enters into forward foreign currency exchange contracts
to hedge existing or projected exposure to changing foreign exchange rates. This
exposure results from the Company's foreign operations in countries including
Germany, France, the United Kingdom, the Netherlands, and Japan that are
denominated in currencies other than the U.S. dollar. These forward contracts
are not held for trading purposes. At December 31, 1999, the Company had no
forward contracts outstanding.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" established rules for the reporting and presentation of
comprehensive income and its components. The Company's comprehensive income
(loss) is comprised of net income (loss) and foreign currency translation
adjustments. Comprehensive loss is approximately $2.7 million for the three
months ended December 31, 1999 and comprehensive income is $836,000 for the
three months ended December 31, 1998. Comprehensive loss is approximately $7.3
million for the six months ended December 31, 1999 compared to a comprehensive
income of $1.8 million for the six months ended December 31, 1998.
7
<PAGE>
(LOSS) INCOME PER SHARE
(Loss) income per share for all periods presented is based on the weighted
average basic and dilutive equivalent shares outstanding using the treasury
stock method. Amounts are shown in thousands except for per share data.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- ------------------------
1999 1998 1999 1998
---------- ----------- --------- -----------
Numerator:
Net (loss) income $(2,675) $ 710 $(7,284) $ 1,295
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,358 11,024 11,341 11,116
Effect of dilutive employee stock options - 280 - 411
---------- ----------- --------- -----------
Denominator for diluted earnings per
share - weighted average shares and
assumed conversions 11,358 11,304 11,341 11,527
========== =========== ========= ===========
Basic (loss) income per share $ (0.24) $ 0.06 $ (0.64) $ 0.12
========== =========== ========= ===========
Diluted (loss) income per share $ (0.24) $ 0.06 $ (0.64) $ 0.11
========== =========== ========= ===========
</TABLE>
In accordance with FAS 128, options to purchase approximately 3,338,278 shares
of Common Stock were excluded from the diluted loss per share calculation
because they were anti-dilutive for the three and six months ended December 31,
1999. These options included all options outstanding as of December 31, 1999,
plus 579,700 shares related to the subordinated convertible debentures issued in
connection with the InterCAP Graphics Systems, Inc. ("InterCAP") acquisition.
Options to purchase approximately 379,423 and 300,291 shares of Common Stock
were excluded from the diluted income per share calculation because they were
anti-dilutive for the three and six months ended December 31, 1998,
respectively.
LEGAL PROCEEDINGS
As previously reported, Micrografx has filed litigation in the federal district
court for the Northern District of Texas, asking for declaratory relief that an
at-will interim letter agreement between THINK New Ideas, Inc. ("THINK") and
Micrografx may be terminated by Micrografx as of May 3, 1999, without additional
payment to THINK. THINK filed its counterclaim, alleging that the agreement
could be terminated only with ninety 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 also filed in the Dallas court a motion
to transfer the Dallas lawsuit to Los Angeles on the grounds Los Angeles is a
more convenient forum. THINK's motion to transfer the Dallas lawsuit was
granted, and the Dallas lawsuit has been transferred to Los Angeles federal
court.
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.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Specifically, all statements other than statements of
historical facts included in this report regarding the Company's financial
position, business strategy and plans, and objectives of management of the
Company for future operations are forward-looking statements. These
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," and "intend," and words or phrases of similar
import, as they relate to the Company or Company management, are intended to
identify forward-looking statements. Such statements (the "cautionary
statements") reflect the current view of the Company with respect to future
events and are subject to risks, uncertainties, and assumptions related to
various factors including, without limitation, changes in the product release
schedule, acceptance or the lack thereof of the Company's 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, and competition from
larger, more established competitors. Although the Company believes that
expectations are reasonable, it can give no assurance that such expectations
will prove to be correct. Based upon changing conditions, should any one or more
of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected, or intended. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the applicable cautionary statements.
GENERAL
Micrografx, Inc. ("Micrografx" or the "Company"), develops and markets graphics
software that gives a company the ability to monitor, evaluate and improve their
business processes. The Company is focusing on graphics applications software
products for business use in the areas of process management and the management
of technical graphics. Additionally, the Company seeks to leverage its
technology base by partnering with organizations to maximize the distribution
and value of its intellectual property.
Historically, the Company has developed a variety of graphics oriented software
products. These products included various technologies such as image editing, 3D
object rendering, basic drawing tools for both the consumer and corporate
markets, greeting card software for the personal creativity market,
flowcharting, process simulation, and technical drawing. In fiscal year 1997, it
became apparent to management and the board of directors that Micrografx did not
have the critical mass to continue to support the number of technologies it was
pursuing. As a result, several changes were made in the management team of the
Company. In 1997, the new management team began the process of determining which
technologies the Company should pursue as part of 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 maintain profitability in the
face of phasing out technologies that did not fit into the long-term strategy of
the Company and changing the internal infrastructure and employee skill sets to
line up with the 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
CreataCard Gold and CreataCard Plus to The Learning Company ("TLC") in August of
1998. These agreements ended Micrografx development and distribution of these
products and completed the Company's de-emphasis of the consumer market in order
to focus on the 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
9
<PAGE>
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.
Ultimately, Management concentrated on two areas of corporate software:
enterprise process management and technical graphics. The enterprise process
management products are iGrafx Professional, iGrafx Process, Micrografx
FlowCharter and Optima. The technical graphics products are iGrafx Designer and
ActiveCGM (resulting from the acquisition of InterCAP Graphics Systems, Inc.
("InterCAP") from Intergraph Corporation on April 16, 1999). These two
categories represent the greatest potential as the underlying technologies
provide the opportunity to develop significant solutions for corporations in
addition to licensing the basic technologies to corporations for general use.
The Company was initially organized as a partnership in June 1982 and was
subsequently incorporated in the State of Texas in March 1984. The principal
executive offices of the Company are located at 505 Millennium Drive, Allen,
Texas, 75013, and its telephone number is (214) 495-4000. The Company's U.S.
operations are based in Allen, Texas, with a development office located in
Portland, Oregon and a sales and development office in Annapolis, Maryland.
International subsidiaries are located in the United Kingdom, France, Germany,
Italy, the Netherlands, Switzerland, Australia, and Japan.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues of certain items in the Company's Consolidated
Statements of Operations. For comparative purposes, the pro forma results for
the three and six months ended December 31, 1998 exclude the technology
licensing revenues to Cendant and TLC for 1999. For comparative purposes the pro
forma percentages following (loss) income from operations are not meaningful.
Historical results and percentage relationships are not necessarily indicative
of operating results for any future period.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------------- --------------------------------------------
1999 1998 1998 1999 1998 1998
------------ --------------- --------------- ------------- --------------- ---------------
(AS REPORTED) (PRO FORMA) (AS REPORTED) (PRO FORMA)
Net revenues 100% 100% 100% 100% 100% 100%
Cost of revenues 23% 20% 31% 23% 20% 33%
--- --- --- --- --- ---
Gross profit 77% 80% 69% 77% 80% 67%
Operating expenses:
Sales and marketing 67% 53% 84% 72% 53% 87%
General and administrative 18% 10% 17% 22% 10% 17%
Research and development 17% 12% 19% 21% 12% 21%
--- --- --- --- --- ---
Total operating expenses 102% 75% 120% 115% 75% 125%
(Loss) income from operations (25%) 5% (51%) (38%) 5% (58%)
Non operating (expense) (1%) 1% N.M. - 1% N.M.
income, net
(Loss) income before income (26%) 6% N.M. (38%) 6% N.M.
taxes
Income taxes 2% 2% N.M. 2% 2% N.M.
Net (loss) income (28%) 4% N.M. (40%) 4% N.M.
</TABLE>
11
<PAGE>
The following table sets forth net revenues by product category (in thousands)
and the percentage relationship to total net revenues. The enterprise process
management category includes iGrafx Professional(TM), iGrafx Process(TM),
Micrografx FlowCharter(R), Optima(R) and 40 percent of Micrografx Graphics
Suite(R) revenues. The technical graphics category includes Micrografx
Designer(R), iGrafx Designer(TM), the ActiveCGM(TM) products, and 60 percent of
Micrografx Graphics Suite(R) revenues. Micrografx Graphics Suite(TM) is a suite
of products that includes Micrografx FlowCharter(R), Micrografx Designer(R),
Picture Publisher(R), and Simply3D(R). The revenues from Micrografx Graphics
Suite are allocated between process management and technical graphics based on
management's estimate of the number Micrografx Graphics Suite sales where the
customer's decision to buy was based on FlowCharter or based on Designer.
The technology category results from the Company's use of its library of
graphics software in selective licensing. For fiscal 1999, the technology
category consists of the licensing of certain personal creativity software
source code to Cendant and TLC. The legacy category includes American
Greetings(R) CreataCard(R) Plus(TM), American Greetings(R) CreataCard(R)
Gold(TM), iGrafx Business(TM), NetworkCharter(TM), Picture Publisher(R),
Simply3D(R), Webtricity(TM), Windows Draw(R), Simply3D(R)(TM), and Picture
Publisher(R).
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended December 31, Six Months Ended December 31,
---------------------------------------- -------------------------------------
1999 % 1998 % 1999 % 1998 %
------------ ------- ----------- ------ ----------- ------ ----------- ------
Enterprise process management $ 4,763 49% $ 5,282 31% $ 9,288 51% $ 9,977 30%
Technical graphics 4,587 48% 2,652 16% 8,067 44% 4,311 13%
Technology - - 6,314 37% - - 12,994 40%
Legacy 306 3% 2,797 16% 823 5% 5,501 17%
------------ ------- ----------- ------ ----------- ------ ----------- ------
Total net revenues $ 9,656 100% $17,045 100% $ 18,178 100% $ 32,783 100%
============ ======= =========== ====== =========== ====== =========== ======
</TABLE>
ENTERPRISE PROCESS MANAGEMENT
While process management revenues are below prior year levels, sales of these
products have increased over each of the past two quarters. Revenues from the
FlowCharter and Graphics Suite applications are declining as expected while
revenues from iGrafx Professional and iGrafx Process continue to increase.
Management believes that the lower process management revenues versus the prior
year period is a reflection of the Company's change in business. Historically
the Company focused on the sale of boxed product through retail distribution. As
the Company has changed its focus to corporate licensing and increased the
pricing of its products to be in line with a corporate licensing model, the
Company continues to experience 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. Additionally in calendar year
1999, corporations curtailed software spending to focus on the remediation of
problems expected to result from the Year 2000 issue.
TECHNICAL GRAPHICS
Technical graphics revenues increased significantly for the three and six months
ended December 31, 1999 versus December 31, 1998. While the technical graphics
products faced the same challenges described in the process management section,
the technical graphics category benefited from product additions. Active CGM and
other products that were obtained through the InterCAP acquisition in the fourth
quarter of fiscal 1999 represent approximately 20 percent of the first quarter
of fiscal 2000 technical graphics revenues. Additionally, the Company generated
significant revenues from localized versions of iGrafx Designer which were
released during the first quarter of fiscal 2000.
12
<PAGE>
TECHNOLOGY
The technology category contains revenue recognized related to the previously
discussed Cendant and TLC relationships. As of June 30, 1999, all revenue
related to these transactions had been recognized. The Company continues to seek
other licensing relationships in order to leverage its portfolio of
technologies, however, there can be no assurance that the Company will be able
to enter into licensing relationships in the future.
LEGACY
The significant decline in this category is the result of the Company's change
in strategic direction as previously discussed.
Net revenues by geographical region (in thousands) for the three and six months
ended December 31, 1999, and 1998 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
----------------------------------------- ------------------------------------------
1999 % 1998 % 1999 % 1998 %
------------ ------ ----------- ------- ----------- ------- ----------- -------
Americas $ 3,390 35% $ 9,969 59% $ 6,596 36% $ 20,484 62%
Europe 5,342 55% 6,493 38% 9,987 55% 10,755 33%
Asia Pacific 924 10% 583 3% 1,595 9% 1,544 5%
------------ ------ ----------- ------- ----------- ------- ----------- -------
Total $ 9,656 100% $ 17,045 100% $ 18,178 100% $ 32,783 100%
============ ====== =========== ======= =========== ======= =========== =======
</TABLE>
A significant portion of the revenue fluctuations shown above are related to
significant decreases in Windows Draw and CreataCard revenues due to the
licensing of those technologies to Cendant and TLC, respectively. Revenue for
these geographical regions, excluding the technology and legacy revenues (in
thousands), for the three months ended December 31, 1999, and 1998 were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
----------------------------------------- ------------------------------------------
1999 % 1998 % 1999 % 1998 %
------------ ------ ----------- ------- ----------- ------- ----------- -------
Americas $ 3,459 37% $ 2,253 28% $ 6,637 38% $ 4,659 33%
Europe 5,006 54% 5,182 66% 9,207 53% 8,505 59%
Asia Pacific 885 9% 499 6% 1,511 9% 1,124 8%
------------ ------ ----------- ------- ----------- ------- ----------- -------
Total $ 9,350 100% $ 7,934 100% $ 17,355 100% $ 14,288 100%
============ ====== =========== ======= =========== ======= =========== =======
</TABLE>
The higher revenues in Americas for the three and six months ended December 31,
1999, compared to the same periods in 1998, were primarily attributable to sales
of software obtained in the purchase of InterCAP while the increase in
international revenues for the same time period, was primarily the result of the
increased sales of localized versions of iGrafx Designer.
Cost of revenues for the three months ended December 31, 1999, were $2.2
million, or 23 percent of net revenues, compared to $3.4 million, or 20 percent
of net revenues, for the three months ended December 31, 1998. In absolute
dollars and on a pro forma percent of revenue basis, the cost of revenues are
lower for the three months ended December 31, 1999, when compared to the
results for the three months ended December 31, 1998, primarily due to the
Company's focus on enterprise sales and is driven by several factors. In
summary, the principal factors are: (i) an increase in the average selling price
of the Company's products, (ii) a higher percentage of revenue derived from
multi-user licenses and maintenance agreements versus boxed product sales (boxed
product carries significant costs including box design and creation, manuals,
media guides, and CDs, compared to only minor costs associated with multi-user
licenses), (iii) personal creativity revenues also carry a much higher third
party royalty cost than the Company's corporate products, and (iv) amortization
related to capitalized software development costs declined as the majority of
amounts relating to old products previously capitalized became fully amortized
during fiscal 1999.
13
<PAGE>
The Company's operating results are affected by changes in foreign currency
exchange rates. These variations result from the change in exchange rates of
European currencies and the Japanese yen versus the U.S. dollar. Exchange rates
thus far during fiscal 2000 have 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 $407,000 more in net
revenues for the three months ended December 31, 1999 and approximately $635,000
more in net revenues for the six months ended December 31, 1999. Because
European manufacturing costs and European and Japanese operating expenses are
also incurred in those local currencies, the impact of exchange rates on net
income (loss) is less than on revenues.
Sales and marketing expenses for the three months ended December 31, 1999, were
$6.4 million, or 67 percent of net revenues, compared to $9.0 million, or 53
percent of net revenues for the same period in the previous year. Total sales
and marketing expenses declined because of the focus on corporate sales. The
Company has reduced its spending on variable programs aimed at the consumer
market such as mass market advertisements, and is spending in more targeted ways
such as attendance at industry trade shows and advertising in specific industry
and vertical market publications. The Company expects sales and marketing
expenses to decline as a percent of revenues through the end of the fiscal year.
General and administrative expenses for the three months ended December 31,
1999, were $1.8 million, or 18 percent of net revenues, compared to $1.8
million, or 10 percent of net revenues, for the three months ended December 31,
1998. Increased general and administrative costs resulting from the acquisition
of InterCAP were approximately offset by cost control measures. The Company
expects general and administrative costs to decrease slightly through the end of
fiscal year 2000.
Net research and development expenses for the three months ended December 31,
1999, were $1.6 million, or 17 percent of net revenues, compared to $2.1
million, or 12 percent of net revenues, for the quarter ended December 31, 1998.
Gross research and development expenses, before capitalization, for the three
months ended December 31, 1999, were $2.5 million, or 25 percent of net
revenues, compared to $3.3 million, or 19 percent of net revenues for the
quarter ended December 31, 1998. Gross research and development spending has
declined resulting from the elimination of certain products, improved quality
assurance processes, lower costs for localization, and the consolidation of
multiple graphics engines. The Company expects research and development expenses
to remain at current levels for the near term.
During the three months ended December 31, 1999, the Company capitalized
approximately $800,000 in software development costs and amortized approximately
$700,000 in software development costs. This compares to capitalization of $1.3
million and amortization of $1.5 million during the three months ended December
31, 1998.
For the three months ended December 31, 1999, interest income decreased to
approximately $15,000 compared to approximately $264,000 for the three months
ended December 31, 1998. Interest expense of approximately $126,000 resulted
primarily from the convertible debenture to Intergraph from the InterCAP
acquisition. Changes in exchange rates resulted in no material gain or loss for
the three months ended December 31, 1999 compared to no material gain or loss
for the three months ended December 31, 1998.
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 deferred tax assets in the
near term is remote. Due to these circumstances, the Company did not record a
net tax benefit from the operating loss, and recorded tax expense for the
quarter due to profitable operations in Europe.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's principal sources of liquidity consisted of
cash and cash equivalents of $3.1 million.
For the six months ended December 31, 1999, cash used in operating, investing
and financing activities resulted in a net decrease in cash and cash equivalents
of $5.7 million. This decrease resulted from the payment of $2.5 million to
Intergraph Corporation, in connection with the acquisition of InterCAP, $1.4
million of purchases of property and equipment, and the use of $2.8 million in
cash from operations during the six months ended December 31, 1999. For the
three months ended December 31, 1999, cash used in operating activities was
$72,000. The Company expects that its cash used in operating activities in the
third fiscal quarter will approximate that used in the second fiscal quarter.
As reported in the Company's 1999 Annual Report, Management continues to examine
various financing methods that would ensure that the capital resources of the
Company are sufficient to meet its requirements. Such measures include the
potential sale of equity securities in one or more private transactions, the
sale or spin-off of certain assets to third parties, asset based lending (i.e.
accounts receivable financing), and/or factoring of international accounts
receivable. The failure of the Company to acquire additional external financing
by March 31, 2000, could result in severe operational difficulties. Such
difficulties could result in a reduction in workforce, a reduction in the scope
of operations, or ultimately in a forced reorganization or bankruptcy.
Management believes it will be successful in obtaining the necessary revenue
levels and/or additional funding necessary to operate the Company in the near
term, however, there can be no assurance that under its current conditions,
external funds will be available or, if available, will not potentially dilute
shareholders' interests or returns.
EURO CONVERSION
The Company is addressing issues regarding the European Economic Monetary
Union's ("EMU") single eurocurrency (the "Euro") and is currently able to
transact business using this currency. The Company intends to convert the
appropriate European ledgers to the Euro after fiscal year ended June 30, 2001,
and anticipates no material costs associated with this conversion.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements". SAB 101 summarizes some of the staff's interpretations of
the application of generally accepted accounting principles (GAAP) to revenue
recognition. Application of the accounting and disclosure requirements of SAB
101 is not expected to have a material impact on the financial position or the
results of operations of the Company.
YEAR 2000 COSTS
The Company addressed a broad range of issues associated with the programming
code in existing computer systems as the Year 2000 approached. The Company has
not experienced any significant business interruptions as a result of the Year
2000 issue, nor has any supplier or customer of the Company made them aware of
any significant disruptions as of the date of this report. The Company will
continue to monitor its computer systems and implement such further responsive
measures as it deems necessary. The Company believes any possible occurrences
that may develop are likely to be minor and inexpensive to correct.
IMAGE2WEB
In November 1999, the Company created and incorporated a wholly-owned subsidiary
named Image2Web, Inc. ("Image2Web"). Image2Web has been developing application
software intended for use in electronic commerce. Image2Web expects to introduce
and ship its first product in the quarter ending March 31, 2000. The Company has
hired an investment banking firm in order to secure an equity investor for
Image2Web to meet its anticipated capital needs.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended December 31, 1999, the Company did not experience any
material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's 1999 Annual Report on Form
10-K.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, Micrografx has filed litigation in the federal district
court for the Northern District of Texas, asking for declaratory relief that an
at-will interim letter agreement between THINK New Ideas, Inc. ("THINK") and
Micrografx may be terminated by Micrografx as of May 3, 1999, without additional
payment to THINK. THINK filed its counterclaim, alleging that the agreement
could be terminated only with ninety 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 also filed in the Dallas court a motion
to transfer the Dallas lawsuit to Los Angeles on the grounds Los Angeles is a
more convenient forum. THINK's motion to transfer the Dallas lawsuit was
granted, and the Dallas lawsuit has been transferred to Los Angeles federal
court.
The Company is also subject to certain legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management, the resolution
of these legal proceedings and claims will not have a material effect on the
Company's consolidated financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on November 4, 1999, the
following persons were elected to the Board of Directors:
<TABLE>
<CAPTION>
<S> <C> <C>
Affirmative Votes Votes Withheld
Russell E. Hogg 10,292,312 358,732
Avery More 10,294,312 356,732
Robert Kamerschen 10,294,462 356,582
Seymour Merrin 10,289,532 361,512
Douglas Richard 10,288,358 362,686
</TABLE>
The following proposals were also approved at the Company's Annual Meeting
of Shareholders
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Affirmative Negative Broker
Votes Votes Abstentions Non-Votes
Amendment of the Company's 1995 Incentive and
Nonstatutory Stock Option Plan to increase the 10,022,820 592,999 35,225 -
number of shares of stock subject to options
annually granted to the Company's employees
from 3,100,000 shares to 3,700,000 shares.
Appointment of Ernst & Young LLP as independent
public accountants for the Company. 10,600,772 21,597 28,675 -
</TABLE>
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 The Financial Data Schedule required by Item 601(b)(27) of Regulation S-K
has been included with the electronic filing of this Form 10-Q.
(b) Reports on Form 8-K - None
18
<PAGE>
<
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROGRAFX, INC.
Date: February 11, 2000 By:/s/JOHN M. CARRADINE
---------------------
John M. Carradine
Chief Financial Officer
and Treasurer
19
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
27 The Financial Data Schedule required by Item 601(b)(27) of Regulation S-K
has been included with the electronic filing of this Form 10-Q.
20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,116
<SECURITIES> 1,042
<RECEIVABLES> 8,657
<ALLOWANCES> 3,325
<INVENTORY> 661
<CURRENT-ASSETS> 10,509
<PP&E> 15,508
<DEPRECIATION> 12,567
<TOTAL-ASSETS> 32,551
<CURRENT-LIABILITIES> 10,702
<BONDS> 0
0
0
<COMMON> 122
<OTHER-SE> 15,893
<TOTAL-LIABILITY-AND-EQUITY> 32,551
<SALES> 9,656
<TOTAL-REVENUES> 9,656
<CGS> 2,226
<TOTAL-COSTS> 2,226
<OTHER-EXPENSES> 9,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126
<INCOME-PRETAX> 2,516
<INCOME-TAX> 159
<INCOME-CONTINUING> 2,675
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,675
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
