<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-26772
VISIO CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1448389
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2211 Elliott Avenue, Seattle, Washington 98121
(Address of principal executive offices) (Zip code)
(206) 956-6000
(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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Shares outstanding as of April 30, 1999
- ----------------------------------- ---------------------------------------
Common Stock ($.01 par value) 30,227,861
<PAGE>
VISIO CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1999
Table of Contents
Part I. Financial Information
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Balance Sheets as of March 31, 1999 and September 30, 1998............ 2
Statements of Income for the three and six months ended
March 31, 1999 and 1998.............................................. 3
Statements of Cash Flows for the six months ended March 31,
1999 and 1998........................................................ 4
Statements of Shareholders' Equity for the six months ended
March 31, 1999 and 1998.............................................. 5
Notes to Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......... 17
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders................ 17
Item 5. Other Information.................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................... 17
Signatures.................................................................. 18
</TABLE>
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
VISIO CORPORATION
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------- -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash................................................................. $ 49,254 $ 67,088
Short-term investments............................................... 65,615 41,930
Accounts receivable.................................................. 25,012 15,934
Inventories.......................................................... 1,255 1,228
Prepaid expenses..................................................... 7,183 6,662
Deferred income taxes................................................ 6,260 4,709
-------- --------
Total current assets................................................ 154,579 137,551
Equipment and leasehold improvements.................................. 16,217 10,191
Capitalized technology................................................ 4,267 4,609
Other assets.......................................................... 3,602 380
Non-current deferred tax assets....................................... 6,578 6,646
-------- --------
Total assets...................................................... $185,243 $159,377
======== ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable..................................................... $ 7,455 $ 5,223
Accrued compensation and benefits.................................... 5,164 4,464
Other accrued liabilities............................................ 16,884 13,717
Deferred revenue..................................................... 9,740 7,830
Income taxes payable................................................. 5,570 936
-------- --------
Total current liabilities........................................... 44,813 32,170
-------- --------
Shareholders' equity:
Common stock......................................................... 70,189 75,434
Retained earnings.................................................... 70,241 51,773
-------- --------
Total shareholders' equity.......................................... 140,430 127,207
-------- --------
Total liabilities and shareholders' equity........................ $185,243 $159,377
======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
VISIO CORPORATION
STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues..................................... $51,352 $40,089 $99,542 $77,586
Cost of revenues............................. 5,048 3,637 9,344 7,029
------- ------- ------- -------
Gross profit................................. 46,304 36,452 90,198 70,557
------- ------- ------- -------
Operating expenses:
Research and development.................... 8,898 6,646 16,678 12,768
Sales and marketing......................... 20,639 16,538 41,004 32,597
General and administrative.................. 3,608 3,113 6,917 6,258
Acquired technology and merger expenses..... -- 7,090 -- 7,090
------- ------- ------- -------
Total operating expenses.................. 33,145 33,387 64,599 58,713
------- ------- ------- -------
Operating income............................. 13,159 3,065 25,599 11,844
Interest and other income, net............... 1,260 1,359 2,345 2,472
------- ------- ------- -------
Income before income taxes................... 14,419 4,424 27,944 14,316
Provision for income taxes................... 3,749 1,098 7,265 3,612
------- ------- ------- -------
Net income................................... $10,670 $ 3,326 $20,679 $10,704
======= ======= ======= =======
Basic earnings per share..................... $0.35 $0.11 $0.68 $0.37
======= ======= ======= =======
Shares used in computation of basic earnings
per share................................... 30,224 29,243 30,241 28,925
======= ======= ======= =======
Diluted earnings per share................... $0.34 $0.11 $0.66 $0.34
======= ======= ======= =======
Shares used in computation of diluted
earnings per share.......................... 31,443 31,659 31,506 31,527
======= ======= ======= =======
</TABLE>
See accompanying notes.
3
<PAGE>
VISIO CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operations:
Net income....................................................... $ 20,679 $ 10,704
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization................................... 3,128 2,877
Amortization of premiums (discounts) on short-term investments.. 24 (623)
Deferred income taxes........................................... (1,484) (212)
Issuance of common stock for acquired technology................ -- 6,964
Other non-cash items............................................ (310) 9
Changes:
Accounts receivable........................................... (9,200) (7,840)
Inventories................................................... (26) (382)
Prepaid expenses.............................................. (469) (2,383)
Accounts payable.............................................. 2,246 160
Accrued compensation and benefits............................. 700 1,159
Deferred revenue.............................................. 1,945 (1,767)
Other accrued liabilities..................................... 3,225 3,370
Income taxes payable.......................................... 5,821 319
-------- --------
Net cash from operations......................................... 26,279 12,355
-------- --------
Cash flows used for investments:
Purchases of short-term investments.............................. (58,449) (29,699)
Maturities of short-term investments............................. 34,906 5,500
Purchases of equipment and leasehold improvements................ (8,833) (3,545)
Purchases of other assets........................................ (3,223) (64)
-------- --------
Net cash used for investments.................................... (35,599) (27,808)
-------- --------
Cash flows (used for) from financing:
Sale of common stock............................................. 3,519 2,609
Repurchase of common stock....................................... (9,998) --
Payments on long-term obligations................................ -- (399)
-------- --------
Net cash (used for) from financing............................... (6,479) 2,210
-------- --------
Net decrease in cash............................................... (15,799) (13,243)
Effect of exchange rate changes on cash............................ (2,035) (464)
Cash, beginning.................................................... 67,088 59,840
-------- --------
Cash, ending....................................................... $ 49,254 $ 46,133
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
VISIO CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Common Stock:
Balance, beginning of period............................................ $ 75,434 $ 56,367
Stock options exercised............................................... 3,519 2,609
Common stock issued for acquisitions.................................. -- 7,785
Common stock repurchased.............................................. (9,998) --
Stock option tax benefit.............................................. 1,234 1,508
-------- --------
Balance, end of period.................................................. 70,189 68,269
-------- --------
Retained Earnings:
Balance, beginning of period............................................ 51,773 22,401
Net income............................................................ 20,679 10,704
Translation adjustments............................................... (2,067) (621)
Net short-term investment unrealized losses........................... (144) (15)
-------- --------
Comprehensive net income........................................... 18,468 10,068
-------- --------
Acquired company's retained earnings.................................. -- 109
Balance, end of period.................................................. 70,241 32,578
-------- --------
Total shareholders' equity......................................... $140,430 $100,847
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Summary of Significant Accounting Policies
Basis of Presentation
The unaudited financial statements of Visio Corporation ("Visio" or the
"Company") at March 31, 1999 and for the three and six months ended March 31,
1999 and 1998 reflect all adjustments consisting of normal recurring items which
are, in the opinion of management, necessary for a fair presentation of the
financial position and results of operations for the interim periods. The
financial statements should be read in conjunction with the financial statements
and notes thereto for the fiscal year ended September 30, 1998 included in
Visio's Annual Report on Form 10-K. The results of operations for the three and
six months ended March 31, 1999 are not necessarily indicative of the results to
be expected for the full fiscal year.
Visio's fiscal year is a 52/53-week period. Accordingly, all references as
of and for the periods ended March 31, 1999, September 30, 1998 and March 31,
1998 reflect amounts as of and for the periods ended April 2, 1999, October 2,
1998 and April 3, 1998, respectively.
During fiscal 1998, Visio merged with MarComp, Inc. ("MarComp") and Kaspia
Systems, Inc. ("Kaspia") in transactions accounted for as poolings of interests.
All financial information has been restated to reflect the combined operations
of Visio and Kaspia. The results of operations of MarComp were not material to
Visio's financial statements, and therefore, amounts prior to the period of the
merger were not combined with Visio's financial statements.
6
<PAGE>
Earnings Per Share
A reconciliation of the numerators and denominators used in the basic and
diluted earnings per share calculations are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------
Basic Diluted
---------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands, except earnings per share)
<S> <C> <C> <C> <C>
Net income................................................ $10,670 $ 3,326 $10,670 $ 3,326
======= ======= ======= =======
Weighted average common shares outstanding................ 30,227 29,297 30,227 29,297
Restricted stock subject to repurchase.................... (3) (54) N/A N/A
Net effect of dilutive stock options and warrants
calculated using the treasury stock method and the
average stock price during the period.................... N/A N/A 1,216 2,362
------- ------- ------- -------
Total..................................................... 30,224 29,243 31,443 31,659
======= ======= ======= =======
Earnings per share........................................ $ 0.35 $ 0.11 $ 0.34 $ 0.11
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------------------------------
Basic Diluted
---------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands, except earnings per share)
<S> <C> <C> <C> <C>
Net income................................................ $20,679 $10,704 $20,679 $10,704
======= ======= ======= =======
Weighted average common shares outstanding................ 30,246 29,005 30,246 29,005
Restricted stock subject to repurchase.................... (5) (80) N/A N/A
Net effect of dilutive stock options and warrants
calculated using the treasury stock method and the
average stock price during the period.................... N/A N/A 1,260 2,522
------- ------- ------- -------
Total..................................................... 30,241 28,925 31,506 31,527
======= ======= ======= =======
Earnings per share........................................ $ 0.68 $ 0.37 $ 0.66 $ 0.34
======= ======= ======= =======
</TABLE>
Common Stock Repurchase Program
On February 2, 1999 the Company's board of directors authorized the
repurchase of up to two million shares of the Company's common stock over the
next two years. Purchases may be made from time to time either in the open
market or in privately negotiated transactions. The primary purpose of the
stock repurchase program is to help offset dilution to earnings per share caused
by the issuance of stock under the Company's employee stock plans. The number of
shares to be purchased and the timing of such purchases will be determined by
the level of stock issued under the employee stock plans, the price of Visio's
stock, available cash balances, general market conditions and other factors. The
Company anticipates that all purchases will be funded from available working
capital. The plan may be suspended at any time. In the quarter ended March 31,
1999, the Company repurchased 383,000 shares with an aggregate cost of $10.0
million.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Visio Corporation ("Visio" or "Company"), which commenced operations in
September 1990, develops drawing and diagramming software for the general
business personal computer user. All of the Company's products have been
developed for the Microsoft Windows operating systems and are marketed under the
Visio/(R)/ brand. The Company's primary products are Visio Standard, Visio
Technical, Visio Professional, Visio Enterprise and IntelliCAD/(R)/.
During fiscal 1998, Visio merged with MarComp, Inc. ("MarComp") and Kaspia
Systems, Inc. ("Kaspia") in transactions accounted for as pooling of interests.
All financial information has been restated to reflect the combined operations
of Visio and Kaspia. The results of operations of MarComp were not material to
Visio's financial statements, and therefore, amounts prior to the period of the
merger were not combined with Visio's financial statements.
When used in this discussion, the words "expects," "believes,"
"anticipates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Factors
which could affect the Company's financial results and cause such results to
differ materially from quarter to quarter include but are not limited to
fluctuations in quarterly performance, dependence on other products including
Microsoft Windows, competition in the business drawing and diagramming software
market, timing and customer acceptance of new products, the Company's ability to
manage growth and integrate acquired technology, potential changes in licensing
and marketing methods and changes in general economic conditions. Additional
information concerning these and other risks is described in the "Certain Risk
Factors that May Impact Future Results of Operations" section of the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and,
from time to time, in other reports filed by the Company with the Securities and
Exchange Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
- - - - - - - - - - - -
VISIO and IntelliCAD are registered trademarks of Visio Corporation in the
United States and/or other countries.
8
<PAGE>
Results of Operations
The following table contains statement of income data as a percentage of
revenues for the fiscal periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues..................................... 100% 100% 100% 100%
Cost of revenues............................. 10 9 9 9
---- ---- ---- ----
Gross profit................................. 90 91 91 91
---- ---- ---- ----
Operating expenses:
Research and development.................... 17 16 17 16
Sales and marketing......................... 40 41 41 42
General and administrative.................. 7 8 7 8
Acquired technology and merger expenses..... -- 18 -- 9
---- ---- ---- ----
Total operating expenses............... 64 83 65 75
---- ---- ---- ----
Operating income............................. 26 8 26 16
Interest and other income, net............... 2 3 2 3
---- ---- ---- ----
Income before income taxes................... 28 11 28 19
Provision for income taxes................... 7 3 7 5
---- ---- ---- ----
Net income................................... 21% 8% 21% 14%
==== ==== ==== ====
</TABLE>
Revenues
Revenues include fees from the license of software products, maintenance
and support contracts, net of reserves for estimated future returns and
allowances. License revenues are derived from packaged software products and
volume licenses. The Company periodically upgrades its products. Revenues from
upgrades are cyclical and are typically highest in the periods of and
immediately following an upgrade. The last significant upgrade occurred in
August 1997 when Visio Standard, Visio Technical and Visio Professional were
upgraded to version 5.0. The Company anticipates releasing significant upgrades
to its existing products over the next six to nine months. In December 1998,
the Company introduced Visio Technical Plus, which was a special upgrade to
include additional content in its Visio Technical product. Included in upgrade
revenues are revenues from "cross-grades" whereby customers purchase upgrades to
move from one Visio product to another. The Company's average selling price per
unit is typically higher on sales of new units of packaged products than sales
of upgrades or volume licenses. Of the Company's primary products, Visio
Professional, Visio Technical, IntelliCAD and Visio Enterprise have higher
average selling prices than does Visio Standard. Volume discounts are generally
granted on products sold through the Volume Licensing channel.
On March 1, 1999, the Company increased the prices of its products in the
North America, Europe, and Rest of World regions with the exception of Japan.
The price increases will be effective in Japan, the largest source of revenues
in the Rest of World region, in the June 1999 quarter.
9
<PAGE>
Product Groups
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1999 1998 Change
------------ ------------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Business diagramming................................. $12,030 24% $11,838 29% 2%
Technical drawing.................................... 9,958 19 8,760 22 14
IT design and documentation.......................... 29,364 57 19,491 49 51
------- --- ------- --- --
Total revenues................................... $51,352 100% $40,089 100% 28%
======= === ======= === ==
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------------------
1999 1998 Change
------------ ------------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Business diagramming................................. $25,443 26% $23,661 30% 8%
Technical drawing.................................... 19,086 19 17,729 23 8
IT design and documentation.......................... 55,013 55 36,196 47 52
------- --- ------- --- --
Total revenues................................... $99,542 100% $77,586 100% 28%
======= === ======= === ==
</TABLE>
The Company classifies its products into the following product groups:
Visio Standard in the Business Diagramming product group, Visio Technical, Visio
Technical Design Suite (a bundle of Visio Technical and IntelliCAD), and
IntelliCAD in the Technical Drawing product group, and Visio Professional, Visio
Enterprise and Visio Network Equipment in the IT Design and Documentation
product group. At March 31, 1999, the aggregate number of users of Visio
products in the marketplace grew to 3.0 million up from 2.0 million at March 31,
1998.
The revenue growth in the Business Diagramming product group was primarily
due to increased revenues from volume license agreements. This growth was
partially offset by revenue decreases from the sale of packaged products. As a
result of increased revenues from volume license agreements, the overall average
selling prices on products in this product group have decreased. This decrease
was partially offset by the effects of the Company's price increase in March
1999.
The revenue growth in the Technical Drawing product group was primarily due
to increased revenues from volume license agreements in the North America and
Europe regions and from upgrade revenues from Visio Technical Plus, introduced
in December 1998. As a result of the Company's price increase in March 1999, the
overall average selling prices on products in this product group increased. The
increase was partially offset by increased revenues from volume license
agreements.
The revenue growth in the IT Design and Documentation product group was
primarily due to increased Visio Professional revenues from volume license
agreements and from the sale of packaged products in the North America and
Europe regions. Visio Enterprise, introduced in November 1998, also contributed
significantly to such growth. Average selling prices in this product group
decreased slightly due to increased revenues from volume license agreements.
This decrease was partially offset by the Company's price increase in March
1999, and from the Visio Enterprise product, which has a higher average selling
price than does Visio Professional.
10
<PAGE>
Sales Channels
Visio classifies its revenues into three sales channels: "Packaged
Product," "Direct," and "Volume Licensing." Packaged Product revenues represent
sales of packaged products through national distributors and corporate, value
added, retail and mail order resellers. Direct revenues represent sales of
packaged products directly by the Company generally to end users responding to
advertising or marketing promotions. Volume Licensing revenues are derived from
volume licenses which are generally administered through corporate resellers
after the Company's sales staff has negotiated the sale. The sales cycle for a
volume license can extend up to 24 months on significant volume licenses as
organizations can require extensive time to evaluate and consider a large-scale
implementation. Volume Licensing revenues usually do not include any
significant amount of packaged goods, but do include maintenance and support
revenues that are priced separately and recognized over the terms of the related
contracts.
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1999 1998 Change
------------ ------------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Packaged product..................................... $31,713 62% $28,007 70% 13%
Direct............................................... 2,177 4 3,305 8 (34)
Volume licensing..................................... 17,462 34 8,777 22 99
------- --- ------- --- ---
Total revenues................................... $51,352 100% $40,089 100% 28%
======= === ======= === ===
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------------------
1999 1998 Change
------------ ------------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Packaged product..................................... $60,590 61% $55,267 71% 10%
Direct............................................... 4,275 4 6,645 9 (36)
Volume licensing..................................... 34,677 35 15,674 20 121
------- --- ------- --- ---
Total revenues................................... $99,542 100% $77,586 100% 28%
======= === ======= === ===
</TABLE>
Growth in the Packaged Product channel was primarily due to the
contribution of Visio Enterprise, introduced in November 1998. Direct channel
revenues decreased primarily due to a decrease in upgrades in the Direct
channel. The Company believes both the Packaged Product and Direct channels have
decreased as a percentage of revenues due to an industry wide shift of corporate
software customers buying through the Volume Licensing channel rather than
through the Packaged Product or Direct channels. The strong growth in Volume
Licensing also reflects the results of the Company's continued investment in its
corporate sales staff and Volume Licensing programs. The Company increased its
corporate sales staff to 90 at March 31, 1999 from 60 at March 31, 1998. The
Company expects to hire additional corporate sales staff throughout fiscal 1999
and therefore expects revenues from Volume Licensing to continue to increase as
a percentage of total revenues.
11
<PAGE>
Geographies
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1999 1998 Change
------------ ------------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
North America........................................ $30,016 58% $22,789 57% 32%
Europe............................................... 13,414 26 10,026 25 34
Rest of world........................................ 7,922 16 7,274 18 9
------- --- ------- --- --
Total international............................ 21,336 42 17,300 43 23
------- --- ------- --- --
Total revenues................................... $51,352 100% $40,089 100% 28%
======= === ======= === ==
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended March 31,
---------------------------------------
1999 1998 Change
------------ ------------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
North America........................................ $59,513 60% $44,240 57% 35%
Europe............................................... 26,999 27 20,245 26 33
Rest of world........................................ 13,030 13 13,101 17 (1)
------- --- ------- --- --
Total international............................ 40,029 40 33,346 43 20
------- --- ------- --- --
Total revenues................................... $99,542 100% $77,586 100% 28%
======= === ======= === ==
</TABLE>
Revenues in North America and Europe increased over the comparable periods
of fiscal 1998 primarily due to the contribution of Visio Enterprise which was
not released until November 1998, as well as an increase in revenues from volume
license agreements. Revenues in Rest of World increased slightly in the quarter
ended March 31, 1999 compared to the corresponding period of fiscal 1998 while
revenues for the comparable six month period were flat. The Company believes the
Rest of World region has been negatively impacted by general weakened economic
conditions in Japan, Southeast Asia and Latin America. These economic conditions
may continue to negatively impact revenues and operating results in the Rest of
World region in upcoming periods.
Cost of Revenues
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
(dollars in thousands) 1999 1998 Change 1999 1998 Change
------ ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Cost of revenues................. $5,048 $3,637 39% $9,344 $7,029 33%
Percent of revenues.............. 10% 9% 9% 9%
</TABLE>
Cost of revenues includes product costs, royalties, technical support
costs, capitalized technology amortization, and costs related to the Company's
manufacturing personnel.
Most of the Company's product costs are associated with the Packaged
Product and Direct channels, the majority of which are derived from sales of
packaged products. Volume Licensing revenues have the lowest product cost
because they generally do not include any substantial amount of packaged goods.
The cost of revenues increased as a percentage of revenues for the quarter
ended March 31, 1999 compared to the comparable period in fiscal 1998 primarily
due to increased technical support costs for the Visio Enterprise and IntelliCAD
products as well as a purchase of user education materials which the Company
recorded as a period cost. Although the cost of revenues as a percentage of
revenues has not changed significantly, the mix of significant components within
cost of revenues has changed. The increase
12
<PAGE>
in Volume Licensing revenues as a percentage of total revenues in the quarter
ended March 31, 1999 compared to the quarter ended March 31, 1998 has caused
product costs as a percentage of revenues to decrease significantly. This
decrease has been offset by increased royalty payments, increased technical
support costs for supporting the IntelliCAD and Visio Enterprise products, an
increase in amortization of capitalized technology and an increase in the
Company's manufacturing personnel.
Research and Development
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
(dollars in thousands) 1999 1998 Change 1999 1998 Change
------ ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Research and Development......... $8,898 $6,646 34% $16,678 $12,768 31%
Percent of revenues.............. 17% 16% 17% 16%
</TABLE>
Research and Development expenses increased as a percentage of revenues for
the three and six months ended March 31, 1999 compared to the comparable periods
in fiscal 1998 primarily due to a charge of $630,000 for lease termination
obligations related to the Company's decision to relocate its San Diego
personnel to its Seattle headquarters. The Company is expecting the relocation
to be completed over the next several quarters and expects to incur additional
costs of approximately $250,000 during that time period. Research and
development costs also increased due to (a) costs incurred in the development of
the Company's electronic commerce solution, announced in the March 1999 quarter,
that enables customers to purchase the Company's products through the Internet,
(b) planned additions to the Company's development organization, and (c)
staffing additions associated with the acquisition of certain technology and
assets from third parties. The Company believes it will be necessary to continue
to increase research and development spending during fiscal 1999 and beyond to
expand its product lines and introduce new language version products to
international markets.
Sales and Marketing
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
(dollars in thousands) 1999 1998 Change 1999 1998 Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing.............. $20,639 $16,538 25% $41,004 $32,597 26%
Percent of revenues.............. 40% 41% 41% 42%
</TABLE>
Sales and marketing expenses have increased in absolute dollars as the
Company continues building its worldwide sales, marketing and customer service
infrastructure. The increase in sales and marketing expenses in absolute
dollars was primarily due to additions to the corporate sales staff. This
increase was partially offset by certain efficiencies gained as a result of the
merger with Kaspia in July 1998. The Company believes substantial spending on
marketing awareness and corporate sales staffing is essential to achieve revenue
growth and to maintain and enhance the Company's competitive position.
Accordingly, Visio expects sales and marketing expenses will continue to
increase over time.
13
<PAGE>
General and Administrative
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
(dollars in thousands) 1999 1998 Change 1999 1998 Change
------ ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
General and administrative....... $3,608 $3,113 16% $6,917 $6,258 11%
Percent of revenues.............. 7% 8% 7% 8%
</TABLE>
General and administrative expenses increased in absolute dollars in the
second quarter of fiscal 1999 over the corresponding period of fiscal 1998
primarily due to increased staffing to support the Company's growth. This
increase was partially offset by certain efficiencies gained as a result of the
merger with Kaspia in July 1998. The Company expects general and administrative
expenses to continue to increase in absolute dollars as the Company builds
additional infrastructure to support its revenue growth.
Acquired Technology and Merger Expenses
Merger with MarComp. On January 22, 1998, the Company merged with MarComp,
a privately held provider of programming toolkits for access to Autodesk's
AutoCAD .dwg and .dxf file formats, located in Parkton, Maryland. Under the
terms of the merger agreement, Visio exchanged 50,014 shares of its unregistered
common stock for all of the outstanding shares of MarComp. The transaction was
accounted for as a pooling of interests and due to the immateriality of the
amounts involved, prior period financial statements have not been restated. The
transaction resulted in an increase in equity of $109,000 primarily due to the
acquisition of cash and accounts receivable from MarComp and resulted in
approximately $100,000 in merger related costs in fiscal 1998.
InfoModelers Technology Acquisition. On February 10, 1998, the Company
acquired certain technology and assets of InfoModelers, Inc. ("InfoModelers"), a
privately held, leading supplier of database and data warehouse visual design,
access and query tools, located in Bellevue, Washington. Under the terms of the
agreement, Visio issued 200,000 shares of its unregistered common stock for
accounts receivable, fixed assets, tax assets and certain technology assets.
The transaction was accounted for using the purchase method and was valued at
approximately $8.0 million for InfoModeler shareholders. This transaction
resulted in a total charge to acquired technology and merger expenses of $7.0
million for in-process research and development in fiscal 1998. In addition,
the Company recorded approximately $1.0 million in other assets.
Interest and Other Income, Net
Interest income of $1.1 million remained flat for the three month period
ended March 31, 1999, compared to the prior year period. For the sixth month
period ended March 31, 1999, interest income of $2.3 million increased slightly
compared to interest income of $2.1 million in the comparable period of the
prior year. Interest income in the three and six month periods in fiscal 1999
was negatively impacted by lower interest rates, however, the impact was
partially mitigated by an increase in cash and short-term investments. Other
income includes grant income from the Industrial Development Agency of Ireland
and gains and losses from unhedged foreign currency transactions. Visio manages
its foreign currency exposure by hedging certain foreign currency transactions.
Income Taxes
The Company's effective income tax rate was 26% for the three and six
months ended March 31, 1999, compared to 25% in the comparable periods in
fiscal 1998. The increase in the Company's effective tax rate was primarily due
to non-recurring tax benefits realized in fiscal 1998 which were obtained in the
merger with Kaspia in fiscal 1998. The Company anticipates the effective income
tax rate may increase in future periods should earnings generated in the U.S.
grow at a significantly faster pace than earnings generated internationally,
should the Company expand its business to additional states within the U.S.,
should the Company be unable to continue to invest its excess cash and short-
term investments in non-taxable investments, or should the Company repatriate
funds from its international operations to the U.S. At this time, no provision
has been recorded for federal income taxes on unremitted earnings
14
<PAGE>
of certain of the Company's foreign subsidiaries since the Company plans to
reinvest all such earnings in its foreign subsidiaries for the foreseeable
future.
Liquidity and Capital Resources
The Company's cash and short-term investments totaled $114.9 million at
March 31, 1999 compared to $109.0 million at September 30, 1998. The increase
in cash and short-term investments was due primarily to cash generated from
operations and cash proceeds from the issuance of shares of common stock through
the Company's employee stock plans. The increase in cash and short-term
investments was partially offset by purchases of equipment and leasehold
improvements and purchases of the Company's common stock through its stock
repurchase program. In addition, the Company entered into an agreement in the
quarter ended March 31, 1999 to license certain technology from a third party.
Under the terms of the agreement, the Company paid $3.2 million for other assets
and prepaid expenses in connection with this agreement.
In July 1999, the Company will relocate its Dublin, Ireland offices to a
new leased facility. At March 31, 1999, the Company had commitments for capital
expenditures of approximately $1.1 million related to this new facility.
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, each of which could adversely affect the
value of the Company's investments. The Company does not use derivative
financial instruments for speculative or trading purposes. There was no
material change in the Company's market risk during the second quarter of fiscal
1999.
On February 2, 1999, the Company's board of directors authorized the
repurchase of up to two million shares of the Company's common stock over the
next two years. Purchases may be made from time to time either in the open
market or in privately negotiated transactions. The Company anticipates that all
purchases will be funded from available working capital. The plan may be
suspended at any time. In the quarter ended March 31, 1999, the Company
repurchased 383,000 shares with an aggregate cost of $10.0 million.
The Company believes that its current cash balances, short-term investments
and cash flows from operations will be sufficient to meet its working capital
and capital expenditure requirements as well as fund its stock repurchase
program for at least the next 12 months.
From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
At March 31, 1999, the Company had no material agreements or commitments with
respect to any such transactions.
Year 2000 Issues
For a complete description of the issues faced by the Company in connection
with the year 2000 and the status of the Company's efforts to address such
issues, see the sections entitled "Year 2000 Issues" in (a) Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998 and (b) Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1998, which sections are hereby
incorporated by reference in this Quarterly Report on Form 10-Q. Except as
disclosed in this report, the discussion in the Company's previous SEC reports
is complete and accurate in all material respects.
The Company has completed the audits of its internal systems, other than
the desktop audits, which the Company currently expects to complete by June 30,
1999. The Company still intends to complete any required corrective action by
September 30, 1999.
15
<PAGE>
The Company is continuing to receive responses relating to potential year
2000 issues from its key third party vendors and service providers. As of the
date of this Quarterly Report on Form 10-Q, the Company has received responses
from approximately 75% of such third parties. In addition, Visio International
Limited and Visio Singapore Pte Ltd., the Company's subsidiaries responsible for
European and Asia Pacific operations, have distributed year 2000 questionnaires
to certain of their key vendors and service providers. As of the date of this
Quarterly Report on Form 10-Q, Visio International has received responses from
approximately 20% of such third parties, and Visio Singapore has received
responses from approximately 40% of such third parties. The Company and its
subsidiaries are currently preparing a follow-up distribution of questionnaires
to those third parties who have not yet responded. To date, no significant year
2000 risks have been identified in any third party responses.
European Monetary Union
For a complete description of the issues faced by the Company in connection
with the implementation of the Euro by the European Economic and Monetary Union
and the status of the Company's efforts to address such issues, see the section
entitled "European Monetary Union" in (a) Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and (b)
Item 2 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 1998, which sections are hereby incorporated by
reference in this Quarterly Report on Form 10-Q. Except as disclosed in this
report, the discussion in the Company's previous SEC reports is complete and
accurate in all material respects. As of the date of this Quarterly Report on
Form 10-Q, the Company believes that its accounting and business systems are
capable of adequately handling currency trading and non-cash (banking)
transactions involving the Euro, and the Company has not experienced any
material operational disruptions or incurred any significant costs in connection
with the introduction of the Euro on January 1, 1999. However, there can be no
assurance that the Company will not experience or incur any such material
disruptions or costs in connection with future Euro implementation.
16
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There was no material change in the Company's market risk during the second
quarter of fiscal 1999.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1999 Annual Meeting of Shareholders was held on February 24,
1999. At the Annual Meeting, shareholders took the following actions:
1. Seven directors were elected to serve on the Company's Board of Directors
until the Company's 2000 Annual Meeting of Shareholders and until their
successors are elected and qualified. Votes were cast for each director as
follows:
<TABLE>
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
J. Jaech 27,844,953 103,301
T. Johnson 27,845,103 103,151
T. Alberg 27,842,506 105,748
T. Byers 27,845,053 103,201
J. Johnston 27,842,935 105,319
D. Mackenzie 27,844,703 103,551
S. Oki 27,844,003 104,251
</TABLE>
2. Shareholders ratified the selection of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending September 30, 1999. Votes were
cast as follows:
<TABLE>
<S> <C>
For 27,926,249
Against 11,738
Abstain 10,267
</TABLE>
Item 5. Other Information
On April 23, 1999, the Company's Board of Directors unanimously appointed
Bob McDowell to the Board of Directors. Mr. McDowell currently serves as vice
president, Enterprise Business Relationships at Microsoft Corporation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
21.1 Subsidiaries of Visio Corporation
27.1 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information purposes only and
not filed.
27.2 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information purposes only and
not filed.
(b) Reports on Form 8-K:
None.
Items 1, 2 and 3 of this Part II are not applicable and have been omitted.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 14, 1999 VISIO CORPORATION
By: /s/ STEVE M. GORDON
----------------------------------
Steve M.Gordon
Senior Vice President, Finance and
Administration; Chief Financial
Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
18
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
21.1 Subsidiaries of Visio Corporation
27.1 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information purposes only
and not filed.
27.2 Financial Data Schedule which is submitted electronically to the
Securities and Exchange Commission for information purposes only
and not filed.
</TABLE>
19
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF VISIO CORPORATION
<TABLE>
<CAPTION>
ENTITY JURISDICTION
- ------ ------------
<S> <C>
Visio International Incorporated Washington
MarComp, Inc. Maryland
Kaspia Systems, Inc. Delaware
Visio Australia Pty Ltd Australia
Visio Canada Inc. Canada
Visio SARL France
Visio GmbH Germany
Visio International Limited Ireland
Visio S.r.l. Italy
Visio Japan K.K. Japan
Visio Korea Ltd. Korea
Visio Business Graphics B.V. Netherlands
Visio Singapore Pte Ltd. Singapore
Visio Business Graphics (Proprietary) Limited South Africa
Visio Business Graphics GmbH Switzerland
Visio International (UK) Limited United Kingdom
Visio Bahamas Limited The Bahamas
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 46,133
<SECURITIES> 46,171
<RECEIVABLES> 15,975
<ALLOWANCES> 1,681
<INVENTORY> 1,434
<CURRENT-ASSETS> 119,086
<PP&E> 17,133
<DEPRECIATION> 7,736
<TOTAL-ASSETS> 136,037
<CURRENT-LIABILITIES> 35,094
<BONDS> 0
0
0
<COMMON> 68,269
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 136,037
<SALES> 77,586
<TOTAL-REVENUES> 77,586
<CGS> 7,029
<TOTAL-COSTS> 7,029
<OTHER-EXPENSES> 58,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 14,316
<INCOME-TAX> 3,612
<INCOME-CONTINUING> 10,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,704
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.34
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 49,254
<SECURITIES> 65,615
<RECEIVABLES> 27,449
<ALLOWANCES> 2,437
<INVENTORY> 1,255
<CURRENT-ASSETS> 154,579
<PP&E> 30,240
<DEPRECIATION> 14,023
<TOTAL-ASSETS> 185,243
<CURRENT-LIABILITIES> 44,813
<BONDS> 0
0
0
<COMMON> 70,189
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 185,243
<SALES> 99,542
<TOTAL-REVENUES> 99,542
<CGS> 9,344
<TOTAL-COSTS> 9,344
<OTHER-EXPENSES> 64,599
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 27,944
<INCOME-TAX> 7,265
<INCOME-CONTINUING> 20,679
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,679
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.66
</TABLE>
