Document/Exhibit Description Pages Size
1: 10-Q Form 10-Q for the Period Ending June 30, 1999 21 116K
2: EX-10.1 1995 Stock Option Plan for Nonemployee Directors 8 33K
3: EX-27.1 Financial Data Schedule 2 6K
4: EX-27.2 Financial Data Schedule 2 6K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
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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:
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Class Shares outstanding as of July 30, 1999
-------------------------------------------------- -----------------------------------------------------
Common Stock ($.01 par value) 30,165,749
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VISIO CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1999
Table of Contents
Part I. Financial Information
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Page
----
Item 1. Financial Statements
Balance Sheets as of June 30, 1999 and September 30, 1998.......................................................... 2
Statements of Income for the three and nine months ended June 30, 1999 and 1998.................................... 3
Statements of Cash Flows for the nine months ended June 30, 1999 and 1998.......................................... 4
Statements of Shareholders' Equity for the three and nine months ended June 30, 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.......................................................... 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................................................................... 18
Signatures................................................................................................................... 19
Part I. Financial Information
Item 1. Financial Statements
VISIO CORPORATION
BALANCE SHEETS
(in thousands)
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June 30, September 30,
1999 1998
------------- -------------
(Unaudited)
Assets
Current assets:
Cash.......................................................................... $ 39,861 $ 67,088
Short-term investments........................................................ 72,243 41,930
Accounts receivable........................................................... 27,226 15,934
Inventories................................................................... 894 1,228
Prepaid expenses.............................................................. 6,955 6,662
Deferred income taxes......................................................... 6,504 4,709
------------- -------------
Total current assets..................................................... 153,683 137,551
Equipment and leasehold improvements............................................... 18,197 10,191
Capitalized technology............................................................. 3,959 4,609
Other assets....................................................................... 3,661 380
Non-current deferred tax assets.................................................... 6,981 6,646
------------- -------------
Total assets............................................................. $186,481 $159,377
============= =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable.............................................................. $ 6,651 $ 5,223
Accrued compensation and benefits............................................. 6,407 4,464
Other accrued liabilities..................................................... 16,334 13,717
Deferred revenue.............................................................. 10,305 7,830
Income taxes payable.......................................................... 2,355 936
------------- -------------
Total current liabilities................................................ 42,052 32,170
------------- -------------
Shareholders' equity :
Common stock.................................................................. 65,786 75,434
Retained earnings............................................................. 81,045 50,741
Accumulated other comprehensive income........................................ (2,402) 1,032
------------- -------------
Total retained earnings.................................................. 78,643 51,773
------------- -------------
Total shareholders' equity............................................... 144,429 127,207
------------- -------------
Total liabilities and shareholders' equity.......................... $186,481 $159,377
============= =============
See accompanying notes.
2
VISIO CORPORATION
STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
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Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues............................................... $50,346 $44,186 $149,888 $121,772
Cost of revenues....................................... 4,432 4,140 13,776 11,169
------- ------- -------- --------
Gross profit................................. 45,914 40,046 136,112 110,603
------- ------- -------- --------
Operating expenses:
Research and development.......................... 8,961 6,951 25,639 19,719
Sales and marketing............................... 20,584 18,624 61,588 51,221
General and administrative........................ 4,322 3,436 11,239 9,694
Acquired technology and merger expenses........... -- 976 -- 8,066
-------- -------- -------- --------
Total operating expenses..................... 33,867 29,987 98,466 88,700
-------- -------- -------- --------
Operating income....................................... 12,047 10,059 37,646 21,903
Interest and other income, net......................... 961 1,203 3,306 3,675
-------- -------- -------- --------
Income before income taxes............................. 13,008 11,262 40,952 25,578
Income taxes........................................... 3,383 2,813 10,648 6,425
-------- -------- -------- --------
Net income............................................. $ 9,625 $ 8,449 $ 30,304 $ 19,153
======== ======== ======== ========
Basic earnings per share............................... $ 0.32 $ 0.28 $ 1.00 $ 0.66
======== ======== ======== ========
Shares used in computation of basic earnings
per share......................................... 30,075 29,740 30,185 29,196
======== ======== ======== ========
Diluted earnings per share............................. $ 0.31 $ 0.26 $ 0.96 $ 0.60
======== ======== ======== ========
Shares used in computation of diluted
earnings per share................................ 31,236 32,018 31,416 31,691
======== ======== ======== ========
See accompanying notes.
3
VISIO CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Nine Months Ended
June 30,
----------------------------
1999 1998
-------- --------
Cash flows from operations:
Net income..................................................................... $ 30,304 $ 19,153
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization............................................. 5,642 4,566
Amortization of premiums (discounts) on short-term investments............ 196 (827)
Deferred income taxes.......................................................... (2,131) (817)
Issuance of common stock for acquired technology............................... -- 6,718
Other non-cash items........................................................... (299) 101
Changes:
Accounts receivable....................................................... (11,481) (6,662)
Inventories............................................................... 337 (14)
Prepaid expenses.......................................................... (214) (3,644)
Accounts payable.......................................................... 1,501 65
Accrued compensation and benefits......................................... 1,959 2,552
Deferred revenue.......................................................... 2,550 (1,432)
Other accrued liabilities................................................. 2,686 5,824
Income taxes payable...................................................... 3,832 2,443
-------- --------
Net cash from operations....................................................... 34,882 28,026
-------- --------
Cash flows used for investments:
Purchases of short-term investments............................................ (88,367) (34,502)
Maturities of short-term investments........................................... 57,824 25,500
Purchases of equipment and leasehold improvements.............................. (12,949) (5,507)
Purchases of capitalized technology............................................ (250) (2,532)
Purchases of other assets...................................................... (3,280) (54)
-------- --------
Net cash used for investments.................................................. (47,022) (17,095)
-------- --------
Cash flows from (used for) financing:
Sale of common stock........................................................... 6,823 5,187
Repurchase of common stock..................................................... (18,942) --
Payments on long-term obligations.............................................. -- (448)
-------- --------
Net cash from (used for) financing............................................. (12,119) 4,739
-------- --------
Net increase (decrease) in cash..................................................... (24,259) 15,670
Effect of exchange rate changes on cash............................................. (2,968) (463)
Cash, beginning..................................................................... 67,088 59,840
-------- --------
Cash, ending........................................................................ $ 39,861 $ 75,047
======== ========
See accompanying notes.
4
VISIO CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
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Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
Common stock:
Balance, beginning of period............................... $ 70,189 $ 68,269 $ 75,434 $ 56,367
Stock options exercised............................... 3,302 2,578 6,823 5,187
Common stock issued for acquisitions.................. -- -- -- 7,785
Common stock repurchased.............................. (8,943) -- (18,942) --
Stock option tax benefit.............................. 1,238 1,126 2,471 2,634
-------- -------- -------- --------
Balance, end of period..................................... 65,786 71,973 65,786 71,973
-------- -------- -------- --------
Total retained earnings:
Balance, beginning of period............................... 70,241 32,578 51,773 22,401
Net income............................................ 9,625 8,449 30,304 19,153
Translation adjustments............................... (1,033) 87 (3,100) (533)
Net short-term investment unrealized losses........... (190) (24) (334) (40)
-------- -------- -------- --------
Comprehensive net income......................... 8,402 8,512 26,870 18,580
-------- -------- -------- --------
Acquired company's retained earnings.................. -- -- -- 109
-------- -------- -------- --------
-------- -------- -------- --------
Balance, end of period..................................... 78,643 41,090 78,643 41,090
-------- -------- -------- --------
Total shareholders' equity....................... $144,429 $113,063 $144,429 $113,063
======== ======== ======== ========
See accompanying notes.
5
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 June 30, 1999 and for the three and nine months ended June 30,
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
nine months ended June 30, 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 June 30, 1999, September 30, 1998 and June 30, 1998
reflect amounts as of and for the periods ended July 2, 1999, October 2, 1998
and July 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.
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 June 30,
1999, the Company repurchased 313,500 shares with an aggregate cost of $8.9
million. Since the inception of the program, the Company has repurchased 696,500
shares with an aggregate cost of $18.9 million.
New Accounting Pronouncements
In December 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions. The SOP will be
effective for transactions entered into in fiscal year 2000. This pronouncement
is not expected to materially impact the Company's revenue recognition
practices.
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement No. 137 Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133. FASB Statement No. 137
is an amendment of FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, to defer for one year the effective date of FASB
Statement No. 133. The statement will be effective for the Company in its fiscal
year 2001. The ultimate implementation of FASB Statement No. 133 is not expected
to have a significant impact on the Company's results of operations or financial
condition.
6
Earnings Per Share
A reconciliation of the numerators and denominators used in the basic and
diluted earnings per share calculations are as follows:
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Three Months Ended June 30,
----------------------------------------------------
Basic Diluted
----------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except earnings per share)
Net income.............................................................. $ 9,625 $ 8,449 $ 9,625 $ 8,449
======== ======== ======== ========
Weighted average common shares outstanding.............................. 30,078 29,778 30,078 29,778
Restricted stock subject to repurchase.................................. (3) (38) 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 1,158 2,240
-------- -------- -------- --------
Total shares............................................................ 30,075 29,740 31,236 32,018
======== ======== ======== ========
Earnings per share...................................................... $ 0.32 $ 0.28 $ 0.31 $ 0.26
======== ======== ======== ========
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Nine Months Ended June 30,
----------------------------------------------------
Basic Diluted
----------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except earnings per share)
Net income.............................................................. $30,304 $19,153 $30,304 $19,153
======== ======== ======== ========
Weighted average common shares outstanding.............................. 30,189 29,262 30,189 29,262
Restricted stock subject to repurchase.................................. (4) (66) 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 1,227 2,429
-------- -------- -------- --------
Total shares............................................................ 30,185 29,196 31,416 31,691
======== ======== ======== ========
Earnings per share...................................................... $ 1.00 $ 0.66 $ 0.96 $ 0.60
======== ======== ======== ========
7
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 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.
This Quarterly Report on Form 10-Q contains forward-looking statements.
There are certain important factors that could cause actual results to differ
materially from those anticipated by some of the statements made in this report.
Among these are fluctuations in quarterly performance, transition in the
Company's distribution channels, timing and customer acceptance of new products,
product lifecycles, potential changes in licensing and marketing methods, the
Company's ability to manage growth and integrate acquired technology, dependence
on other products including Microsoft Windows, competition in the business
drawing and diagramming software market, year 2000 issues, and changes in
general economic conditions. Additional information concerning these and other
risks is described in the section entitled "Certain Risk Factors That May Impact
Future Results of Operations" contained in Visio'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. The
Company undertakes no obligation to publicly release the result of any revisions
to the forward-looking statements contained in this Quarterly Report on Form 10-
Q 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
Results of Operations
Revenues
Revenues include fees from the license of software products and maintenance
and support contracts, net of reserves for estimated future returns and net of
deferrals for revenues attributable to free upgrade rights. License revenues are
derived from packaged software products and volume licenses. Maintenance and
support contracts are deferred and recognized ratably over the contract period.
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 three to nine months. 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.
In March 1999, the Company increased the prices of all of its primary
products sold through the Packaged Product and Direct channels in the North
America, Europe, and Rest of World regions with the exception of Japan. In April
1999, the Company increased the prices of its Visio Technical and Visio
Professional products sold through the Packaged Product and Direct channels in
Japan, the largest source of revenues in the Rest of World region. The Company
is phasing in the price increase on licenses sold through the Volume Licensing
channel in all regions over the next twelve months.
Product Groups
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Three Months Ended June 30,
------------------------------------------
1999 1998 Change
-------------- -------------- ----------
(dollars in thousands)
Revenues:
Business diagramming................ $12,890 26% $11,561 26% 11%
Technical drawing................... 8,534 17 10,753 24 (21)
IT design and documentation......... 28,922 57 21,872 50 32
------- --- ------- --- ---
Total revenues................. $50,346 100% $44,186 100% 14%
======= === ======= === ===
Nine Months Ended June 30,
--------------------------------------------
1999 1998 Change
-------------- -------------- ----------
(dollars in thousands)
Revenues:
Business diagramming................ $ 38,333 26% $ 35,221 29% 9%
Technical drawing................... 27,620 18 28,483 23 (3)
IT design and documentation......... 83,935 56 58,068 48 45
-------- --- -------- --- --
Total revenues................. $149,888 100% $121,772 100% 23%
======== === ======== === ==
The Company classifies its products into the following product groups:
Visio Standard in the Business Diagramming product group, Visio Technical, 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 June 30, 1999, the aggregate number of licenses of Visio
products in the market place grew to 3.2 million up from 2.2 million at June 30,
1998.
The revenue growth in the Business Diagramming product group in the three
and nine months ended June 30, 1999 compared to the same periods in fiscal 1998,
was primarily due to increased revenues from the sale of
9
volume license agreements and from the Company's price increase. This growth was
partially offset by decreased revenue from the sale of packaged products due to
lower unit volumes. The overall average selling prices of products in this
product group increased as a result of the price increase and increased revenues
from maintenance and support contracts. This increase was partially offset as a
result of more units being sold at a discount under volume license agreements.
The revenue decrease in the Technical Drawing product group in the three
and nine months ended June 30, 1999 compared to the same periods in fiscal 1998,
was primarily due to declines in unit volume of the IntelliCAD product. This
decrease was partially offset by increased revenues from the sale of volume
license agreements for Visio Technical in the North America region. As a result
of the Company's price increase and increased revenues from maintenance and
support contracts, the overall average selling prices of products in this
product group increased.
The revenue growth in the IT Design and Documentation product group in the
three and nine months ended June 30, 1999 compared to the same periods in fiscal
1998, was primarily due to increased Visio Professional revenues from the sale
of 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. The average selling price in this
product group increased due to the Company's price increase, increased revenues
from maintenance and support contracts, and from the Visio Enterprise product,
which has a higher average selling price than does Visio Professional. The
increase in average selling price was partially offset by the increase in units
sold at a discount under volume license agreements.
Sales Channels
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Three Months Ended June 30,
-----------------------------------------
1999 1998 Change
-------------- -------------- ---------
(dollars in thousands)
Revenues:
Packaged product............................................. $29,201 58% $30,354 69% (4)%
Direct....................................................... 1,818 4 2,614 6 (30)
Volume licensing............................................. 19,327 38 11,218 25 72
------- --- ------- --- ---
Total revenues.......................................... $50,346 100% $44,186 100% 14 %
======= === ======= === ===
Nine Months Ended June 30,
-----------------------------------------
1999 1998 Change
-------------- -------------- ---------
(dollars in thousands)
Revenues:
Packaged product........................................... $ 89,790 60% $ 85,621 70% 5 %
Direct..................................................... 6,093 4 9,259 8 (34)
Volume licensing........................................... 54,005 36 26,892 22 101
-------- --- -------- --- ---
Total revenues........................................ $149,888 100% $121,772 100% 23 %
======== === ======== === ===
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
the sale of 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.
10
Revenues in the Packaged Product channel for the three months ended June
30, 1999 compared to the same period in fiscal 1998 have decreased primarily due
to decreased revenues from the IntelliCAD product and decreased revenues from
the sale of Business Diagramming products. This decrease was partially offset by
increases in revenues from IT Design and Documentation products. Revenues in the
Packaged Product channel for the nine months ended June 30, 1999 compared to the
comparable period in fiscal 1998 have increased primarily due to increased
revenues from IT Design and Documentation products. This increase was partially
offset by the decrease in revenues from the IntelliCAD product. Direct channel
revenues for the three and nine months ended June 30, 1999 compared to the same
periods in fiscal 1998 decreased primarily due to a decrease in the sale of
upgrades. 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 the Volume Licensing channel in the three and nine
months ended June 30, 1999 compared to the same periods in fiscal 1998 reflects
this industry wide trend noted above as well as the Company's continued
investment in its corporate sales force and volume licensing programs. The
Company increased its corporate sales staff to 109 at June 30, 1999 from 62 at
June 30, 1998. The Company expects to hire additional corporate sales staff
throughout fiscal 1999 and therefore expects revenues from the Volume Licensing
channel to continue to increase.
Regions
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Three Months Ended June 30,
---------------------------------------
1999 1998 Change
------------- ------------- ------
(dollars in thousands)
Revenues:
North America.................................... $31,400 62% $27,485 62% 14%
Europe........................................... 12,627 25 10,355 24 22
Rest of world.................................... 6,319 13 6,346 14 -
------- --- ------- --- --
Total international......................... 18,946 38 16,701 38 13
------- --- ------- --- --
Total revenues......................... $50,346 100% $44,186 100% 14%
======= === ======= === ==
Nine Months Ended June 30,
-----------------------------------------
1999 1998 Change
-------------- -------------- ------
(dollars in thousands)
Revenues:
North America.................................... $ 90,914 61% $ 71,724 59% 27%
Europe........................................... 39,626 26 30,601 25 29
Rest of world.................................... 19,348 13 19,447 16 (1)
-------- --- -------- --- --
Total international......................... 58,974 39 50,048 41 18
-------- --- -------- --- --
Total revenues......................... $149,888 100% $121,772 100% 23%
======== === ======== === ==
Revenues in North America and Europe increased over the comparable periods
of fiscal 1998 primarily due to the contribution of the Visio Enterprise product
that was released in November 1998, an increase in revenues from the sale of
volume license agreements, and the Company's price increase. The increase was
partially offset by decreased revenues from the IntelliCAD product. Revenues in
the Rest of World region decreased slightly in the three and nine month periods
ended June 30, 1999 compared to the same periods of fiscal 1998. 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.
11
Cost of Revenues
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Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ---------------------------
(dollars in thousands) 1999 1998 Change 1999 1998 Change
--------------------------------- ------- -------- ------ -------- -------- ------
Cost of revenues................. $4,432 $4,140 7% $13,776 $11,169 23%
% of revenues.................... 9% 9% 9% 9%
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. Revenues from the Volume Licensing channel have the
lowest product cost because they generally do not include any substantial amount
of packaged goods.
The cost of revenues remained flat as a percentage of revenues for the
three and nine months ended June 30, 1999 compared to the same periods in fiscal
1998. Although the cost of revenues as a percentage of revenues has remained
flat, the mix of significant components within cost of revenues has changed. The
increase in volume licensing revenues as a percentage of total revenues in the
three and nine months ended June 30, 1999 compared to the same periods in fiscal
1998 has caused product costs as a percentage of revenues to decrease
significantly. In addition, in the three months ended June 30, 1999, the Company
successfully renegotiated its most significant royalty agreement thereby
lowering its overall royalty costs. The decrease in product and royalty costs
has been offset by increased technical support costs for supporting the
IntelliCAD and Visio Enterprise products, an increase in the amortization of
capitalized technologies, an increase in inventory reserves and an increase in
the Company's manufacturing personnel.
Research and Development
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Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ---------------------------
(dollars in thousands) 1999 1998 Change 1999 1998 Change
--------------------------------- ------- ------- ------ -------- -------- ------
Research and development......... $8,961 $6,951 29% $25,639 $19,719 30%
% of revenues.................... 18% 16% 17% 16%
Research and development expenses increased in absolute dollars and as a
percentage of revenues for the three and nine months ended June 30, 1999
compared to the same periods in fiscal 1998 primarily due to increased research
and development activities related to the Company's upcoming product upgrade
cycle. The Company anticipates releasing significant upgrades to its existing
products over the next three to nine months. Research and development costs also
increased due to a charge of $630,000 in March 1999 for a lease termination
obligation related to the Company's decision to relocate its San Diego personnel
to its Seattle headquarters, and due to planned additions to the Company's
development organization. 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.
12
Sales and Marketing
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Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ----------------------------
(dollars in thousands) 1999 1998 Change 1999 1998 Change
--------------------------------- -------- -------- ------ -------- -------- ------
Sales and marketing.............. $20,584 $18,624 11% $61,588 $51,221 20%
% of revenues.................... 41% 42% 41% 42%
Sales and marketing expenses have increased in absolute dollars for the
three and nine months ended June 30, 1999 compared to the same periods in fiscal
1998 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 force.
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.
General and Administrative
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Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- ---------------------------
(dollars in thousands) 1999 1998 Change 1999 1998 Change
--------------------------------- ------- ------- ------ -------- -------- ------
General and administrative....... $4,322 $3,436 26% $11,239 $9,694 16%
% of revenues.................... 9% 8% 7% 8%
General and administrative expenses increased in absolute dollars in the
three and nine months ended June 30, 1999 over the same periods of fiscal 1998
primarily due to increased staffing and costs required 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 were not 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.
13
Decision Graphics Technology Acquisition. On May 5, 1998, the Company
acquired certain technology from Decision Graphics U.K. Ltd. ("Decision
Graphics"), a privately held provider of computer-aided facilities management
software, located in the U.K., for $729,000. The transaction was accounted for
using the purchase method and resulted in a total charge to acquired technology
and merger expenses of $729,000 for in-process research and development in
fiscal 1998.
Ketiv Technology Acquisition. On June 2, 1998, the Company acquired
certain CAD technology, software products and other assets from Ketiv
Technologies, Incorporated ("Ketiv"), a privately held provider of
architecture, engineering and construction software located in Portland, Oregon,
for approximately $2.7 million. The transaction was accounted for using the
purchase method and resulted in capitalized technology of $2.5 million and a
total charge to acquired technology and merger expenses of $247,000 for in-
process research and development in fiscal 1998. The capitalized technology is
being amortized on a straight-line basis over five years.
Interest and Other Income, Net
Interest income of $1.0 million in the three month period ended June 30,
1999 decreased compared to interest income of $1.2 million recorded in the
comparable prior year period. Interest income of $3.2 million in the nine month
period ended June 30, 1999 remained flat compared to interest income recorded in
the comparable prior year period. Interest income in the three and nine month
periods in fiscal 1999 were negatively impacted by lower interest rates,
however, the impact was partially mitigated by an increase in invested 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 nine
months ended June 30, 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 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 $112.1 million at
June 30, 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 primarily related to the Company's new headquarters facility,
purchases of the Company's common stock through its stock repurchase program,
and the license of technology from a third party for a cash payment of $3.2
million.
In the fourth quarter of fiscal 1999, the Company will relocate its Dublin,
Ireland offices to a new leased facility. At June 30, 1999, the Company had
commitments for capital expenditures of approximately $2.6 million related to
this new facility. In addition, the Company is continuing to build out its
Seattle headquarters and has commitments for capital expenditures of
approximately $3.7 million related to this build out.
On May 1, 1997, the Company acquired certain assets of Freedom Solutions
Group, Inc., d.b.a. SysDraw Software Company ("SysDraw"), a privately held
network design and documentation solutions provider, located in Lombard,
Illinois. Under the terms of the agreement, the acquisition price included $5.8
million in cash plus the
14
issuance of a $1.0 million note payable; the principal and interest of which
were paid by Visio in August 1998. Visio is required to pay $1.5 million of
additional consideration if revenues of the acquired products meet certain
performance goals within three years of the acquisition date. The performance
goals were met in the quarter ended June 30, 1999. As a result, the Company will
pay $1.5 million of additional consideration in the September 30, 1999 quarter.
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 third 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 June 30, 1999, the Company
repurchased 313,500 shares at an aggregate cost of $8.9 million. Since the
inception of the program, the Company has repurchased 696,500 shares at an
aggregate cost of $18.9 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
June 30, 1999, the Company had no material agreements or commitments with
respect to any such transactions.
Year 2000 Issues
The calendar year 2000 has the potential to cause problems in computer
systems that record years using only the last two digits of the year. For
example, such systems record 1996 as 96, and 2000 as 00. This method of dating
can introduce problems in date calculation so that systems that rely on two-
digit date identifiers may not work as expected after December 31, 1999 or when
handling dates after December 31, 1999. The year 2000 issue creates risks for
the Company from unforeseen problems in its own products or systems or in the
systems of third parties from whom the Company obtains products or services or
with whom the Company otherwise transacts business.
In fiscal 1997 the Company replaced its worldwide accounting/finance,
manufacturing, sales and distribution systems with an enterprisewide business
software system that has been certified as year 2000 compliant; in fiscal 1998
the Company extended the application of such enterprisewide software to its
human resources systems; and in fiscal 1999 the Company upgraded its worldwide
customer management systems with software that has been certified as year 2000
compliant. In addition, the Company has established cross-functional teams to
identify and resolve the Company's year 2000 issues. The primary functions of
these teams include (a) conducting audits of the Company's main internal
systems, including telecommunications and all material software and hardware in
the Company's desktop environments, (b) implementing any necessary plans to
correct deficiencies in such internal systems, (c) communicating with certain
key parties with whom the Company conducts business regarding the year 2000
readiness of such parties' systems and (d) coordinating the testing of the
Company's products to determine the year 2000 readiness of those products.
15
Internal Systems
The Company has completed the audits of its internal systems other than
certain desktop audits for the Company's subsidiaries. In addition, the Company
is continuing to test its recently upgraded customer management system as well
as its other business software systems. The Company currently expects to
complete such audits and tests by October 30, 1999. In connection with such
audits, the Company has identified certain specific hardware, software and other
isolated systems that are not year 2000 compliant, but the Company has not
discovered any material deficiencies. It is currently expected that the
noncompliant systems identified to date will be corrected, replaced or upgraded
to compliant versions by December 31, 1999. Although the Company does not
believe that it will incur any material costs or experience material disruptions
in its business associated with preparing its internal systems for the year
2000, there can be no assurances that the Company will not experience serious
unanticipated negative consequences or material costs caused by undetected
errors or defects in the technology used in its internal systems, which are
composed of third party software, third party hardware that contains embedded
software and the Company's own software. The most reasonably likely worst case
scenarios would include corruption of data contained in the Company's internal
information systems, hardware failure, and the failure of infrastructure
services provided by government agencies and other third parties (e.g.,
electricity, phone service, water transport, internet services, network
monitoring, data storage, etc.). The Company intends to prepare general
contingency plans for such events by September 30, 1999. The Company expects its
contingency plans to include, among other things, manual "work-arounds" for
software and hardware failures, as well as substitution of systems, if
necessary.
Vendors and Service Providers
In September 1998, the Company began distributing detailed questionnaires
to vendors and service providers to determine the year 2000 status of their
systems, and in May 1999, the Company sent a subsequent mailing to those parties
who did not initially respond. The Company is continuing to receive responses to
its questionnaires. As of the date of this Quarterly Report on Form 10-Q, the
Company has received responses from approximately 80% 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 50% of such third
parties, and Visio Singapore has received responses from approximately 60% of
such third parties. By September 30, 1999, Company employees will attempt to
contact by telephone those third parties who have not responded and who are
providing products, supplies or services that are deemed critical to the
Company's business.
Though the Company expects to receive additional questionnaires or other
responses throughout 1999, there can be no assurance that all of the contacted
third parties will respond. To date, no material year 2000 risks have been
identified during the Company's communications with its key vendors and service
providers. To the extent the Company identifies such risks, the Company will
work with the appropriate third parties to mitigate such risks. However, the
disruption or failure at or after the year 2000 of the systems of key vendors or
service providers, as well as the failure of any contingency plans, remains a
possibility and could have a material adverse effect on the Company's results of
operations or financial condition.
Company Products
With respect to its own products, the Company is continuing to conduct
quality and testing practices regarding the year 2000 transition. Current
information about the year 2000 status of the Company's products is available on
the Company's web site at www.visio.com/yr2000.html. The Company believes its
current products, with any applicable updates, are well prepared for year 2000
issues. However, there can be no guarantee that one or more current Company
products do not contain year 2000 deficiencies that may result in material costs
to the Company. In particular, versions of the Company's products that are not
the most currently released or that are not currently being developed may not be
year 2000 compliant.
Because it is in the business of selling software products, the Company's
risk of being subjected to lawsuits relating to year 2000 issues is likely to be
greater than that of companies in other industries. Because computer systems may
include different hardware, firmware and software components from different
manufacturers, it may be
16
difficult to determine which component in a computer system may cause a year
2000 issue. As a result, the Company may be subjected to year 2000-related
lawsuits independent of whether its products and services are year 2000
compliant. The outcomes of any such lawsuits and the impact on the Company
cannot be predicted at this time.
In addition to risks and uncertainties relating to potential lawsuits, the
Company believes that, as the year 2000 approaches, existing and potential
customers may slow down computer software purchases in order to minimize or
eliminate the risk that new software programs will cause year 2000 problems, or
because they are using their budgeted resources on increased expenditures on
their own year 2000 compliance efforts, rather than new computer software. Such
a slow down could have a material adverse effect on the Company's revenues.
The Company does not expect total costs associated with becoming year 2000
compliant to be material to its financial position or results of operations. To
date, the cost of the year 2000 project has been approximately $100,000 and the
total cost of the project is anticipated to be approximately $175,000. These
amounts do not include the cost of the enterprisewide business software
implemented in fiscal 1997 or the cost of the Company's upgraded customer
management system implemented in fiscal 1999.
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 and March 31, 1999, 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 Securities
and Exchange Commission 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.
New Accounting Pronouncements
In December 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions. The SOP will be
effective for transactions entered into in fiscal year 2000. This pronouncement
is not expected to materially impact the Company's revenue recognition
practices.
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement No. 137 Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133. FASB Statement No. 137
is an amendment of FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, to defer for one year the effective date of FASB
Statement No. 133. The statement will be effective for the Company in its fiscal
year 2001. The ultimate implementation of FASB Statement No. 133 is not expected
to have a significant impact on the Company's results of operations or financial
condition.
17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There was no material change in the Company's market risk during the third
quarter of fiscal 1999.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
10.1 1995 Stock Option Plan for Nonemployee Directors, as
amended and restated.
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, 3, 4, and 5 of this Part II are not applicable and have been
omitted.
18
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.
[Download Table]
Date: August 11, 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)
19
INDEX TO EXHIBITS
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Exhibit No. Description
--------------------- -----------
10.1 1995 Stock Option Plan for Nonemployee Directors, as amended and restated.
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.
20
Dates Referenced Herein and Documents Incorporated by Reference
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