ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
Except for the historical information contained in this Annual Report, the matters discussed herein, particularly those identified with the words "expects," "believes," "anticipates" and similar expressions, are forward- looking statements. These statements reflect management's best judgment based on factors known to them at the time of such statements. Such forward-looking statements are subject to certain risks and uncertainties, including without limitation those set forth under "Certain Risk Factors That May Impact Future Results of Operations" contained in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K, many of which are beyond the Company's control, that could cause actual results to differ materially from those anticipated. Such factors should be carefully considered when evaluating the Company's business and prospects, and the forward-looking information provided by Visio pursuant to the safe harbor provisions established by recent securities legislation. Readers should also carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission.
GENERAL
Visio Corporation ("Visio" or the "Company") is a leading supplier of business drawing and diagramming software. Visio(R) software, introduced in 1992, enables business and technical users to create drawings and diagrams using a "drag and drop" approach. Customers use the Company's software for creating drawings and diagrams ranging from simple diagrams such as flowcharts, block diagrams and organizational charts to complex technical drawings such as space plans, electrical schematics and network designs. Visio's flexible product architecture and powerful graphics engine allow organizations to standardize on a single, easy-to-use product that meets a broad range of business drawing and diagramming needs, and thereby realize savings on purchasing, training and support. The Company's mission is to become the single standard for creating, storing and exchanging drawings and diagrams in business.
BACKGROUND
Drawing and diagramming - the visual representation of concepts, processes and relationships - can be as important to businesses as words and numbers for communicating and exchanging ideas. Drawings and diagrams can succinctly communicate abstract concepts and relationships such as organizational structures and technical schematics. Business drawings and diagrams, traditionally done by hand using rulers, templates and graph paper, or delegated to specialists such as graphic artists or drafters, are increasingly created using software products. Just as the advent of personal computers made electronic word processing and spreadsheet preparation possible for the general user, the widespread acceptance of easy-to-use graphical user interfaces has created a similar opportunity for personal computer software to replace traditional paper-based drawing and diagramming for general business users.
Most existing drawing and diagramming software was introduced for narrowly defined drawing needs, for specialists or as secondary features of office suite products. For example, single-purpose products were created for specific tasks such as flowcharting, organizational charting or network diagramming. Users were confronted with a variety of products, each with a different user interface, and the drawings and diagrams they produced were often difficult to integrate into word-processed documents, spreadsheets or presentation materials. Illustration, page layout and CAD software has also been created for graphics artists, designers and drafters. These specialty products generally do not address the needs of nonspecialists who wish to create, share or modify drawings and diagrams. These products are also generally expensive, may require special system configurations, usually require a substantial investment of time to master and must be used regularly for the investment to be justified and the mastery maintained. Although the drawing capabilities of office suite products were developed for general business users, the Company believes that to date they have lacked the depth and breadth of functionality necessary to enable
users to easily create a variety of business drawings and diagrams. The result has been a market highly focused on specific users and fragmented among many applications.
THE VISIO SOLUTION
To address the limitations of existing drawing and diagramming software, the Company introduced Visio in November 1992. The Company's primary products, Visio Standard, Visio Technical and Visio Professional, offer users solutions based on a single, easy-to-use technology for a wide variety of drawing and diagramming needs, while add-on products provide users with additional functionality and shapes for particular applications.
All Visio products are based on a common graphics "engine" that drives parametrically defined SmartShapes(R) symbols, intelligent objects and connectors that maintain relationships within and between shapes as they are moved. Visio's SmartShapes objects, its stencil metaphor and its drag-and-drop features allow users with no prior graphics or CAD training to select shapes easily, combine them with text and manipulate them to create sophisticated drawings and diagrams.
The Visio graphics engine employs Microsoft Windows and ActiveX technology to embed Visio drawings and diagrams into other documents, link documents and incorporate information from other sources into Visio drawings and diagrams. Visio utilizes an open architecture that is easily extensible and customizable in order to facilitate and encourage the development of specific solutions by both end users and third-party solution providers and to enable the Company to expand its products to address new markets.
The Company believes that its software is expanding the market for drawing and diagramming software. Visio replaces hand-drawing and single-use products and moves drawing and diagramming out of the specialist art and drafting departments and onto the desktops of general users throughout business enterprises. The Company's software allows users of Visio Standard, Visio Technical and Visio Professional to share files created with any other Visio product and permits users trained in one product to easily move to another. Most importantly, Visio software enables organizations to realize purchasing, training and support savings by standardizing on a common technology that addresses a wide variety of drawing and diagramming needs.
VISIO'S STRATEGY
Visio's mission is to become the single standard for creating, storing and exchanging drawings and diagrams in business. By becoming the standard, the Company believes it can introduce new users to electronic drawing and diagramming and thereby expand the market for its products. The Company's strategy to achieve this objective includes the following elements:
. Focus on Business Users. The Company has focused on personal computer-based ----------------------- drawing and diagramming for business enterprises such as large corporations, consulting firms and governmental entities. The Company targets enterprises that create durable drawings, share those drawings in electronic form across organizational functions and departments and create custom solutions for specific drawing needs. The Company believes these enterprises are more likely to standardize on a single product and provide the best opportunity for the Company to embed its products broadly within an organization. The Company offers these entities a variety of volume licensing arrangements that encourage wide use of, and standardization on, its products.
. Maintain Leading Technology and Extend Product Line. The Company's strategy --------------------------------------------------- is to maintain and improve the flexibility and extensibility of its graphics engine and increase the ease-of-use and functionality of its products. The Company will continue to expand its product lines to address market segments where the value of drawings is high and is exploring complementary products. In August 1997, the Company released Visio Maps, a desktop mapping software product that allows users to create, share and distribute high-quality, data-rich maps quickly and easily, and in August 1997, the Company released Visio Network Equipment, an add-on solution for the design and documentation of local, wide area and telecommunications networks. Also, in August 1997, the Company announced an upgrade to its core products, Visio Standard, Visio Technical and Visio Professional. IntelliCAD(R),
the Company's new Autodesk AutoCAD-compatible software product, is scheduled to be released in the first calendar quarter of 1998.
. Expand Use of Visio as a Platform. Building on Visio's open architecture and --------------------------------- ease of customization, the Company seeks to develop relationships with third- party solution providers, system integrators, corporate in-house developers, consultants and other software developers who can create specific content for Visio products. Additional content may include new shapes and automated routines that provide solutions to specific industries or businesses. The Company has established the Visio Solutions Library/TM/ which includes solutions, add-ons and content developed by Visio and by Visio's business partners with market expertise in core industries. The Visio Solutions Library will complement Visio's existing products by providing users the tools to accomplish specific business tasks and optimize enterprise standardization on Visio. The Company has established a developer training program which offers a foundation of knowledge for companies and individuals to employ Visio graphics technology to meet a broad range of business needs critical to their business.
. Focus on Microsoft Windows and the Microsoft Strategy. The Company develops ----------------------------------------------------- products primarily for the Windows environment and has historically worked closely with Microsoft to more fully utilize the capabilities of Windows technology. The Company believes that Microsoft's strategies for expansion of the Windows market will ultimately provide a broad market opportunity for Visio products. The Company intends to continue to work closely with Microsoft to gain access to new Windows technology and exploit it fully in Visio products. The Visio license agreement with Microsoft to incorporate Visual Basic for Applications (VBA) into Visio products illustrates the Company's strategy to maintain its position as a key developer of products for Windows.
. Expand International Markets. The Company distributes the Visio product line ---------------------------- in nine languages and in more than 40 countries around the world. International revenues represented approximately 36% and 37% of the Company's revenues in fiscal 1997 and 1996, respectively. The Company plans to continue to expand the number of its products distributed in international markets, the number of languages in which the products are offered and its sales and marketing offices and distribution networks within those markets.
. Separate Product Teams. In September 1996, the Company reorganized its ---------------------- internal marketing and development organizations into product teams centering on its key product groups. The Company believes this approach creates greater synergy between marketing and development, clearer focus on market needs and greater accountability to the success of a product.
PRODUCTS
The Company currently sells three core software products, Visio Standard, Visio Technical, and Visio Professional together with add-on software products. These products offer solutions to a wide variety of drawing and diagramming needs based on a single, easy-to-use technology. The Company designs its product features to be intuitive, enabling even occasional users to draw and diagram efficiently. The Company's products integrate well with other desktop applications and can be easily customized to meet individual needs.
Many business drawings and diagrams are composed almost entirely of standard symbols. Accordingly, the Company's products utilize a visual "stencil" metaphor. This metaphor is implemented through a stencil window that displays a collection of standard shapes, including connectors, on a visually distinctive background. The user incorporates these standard shapes into a drawing by dragging the shapes from the stencil window and dropping them into the drawing window. In addition, users can customize the behavior of shapes and create their own shapes. All Visio shapes can have associated text, which moves when the shape is moved. The Company's software allows users to associate nongraphical data with shapes, enabling users to easily generate nongraphical information, such as parts lists and bills of material, from Visio drawings and diagrams.
VISIO STANDARD
The Company's leading product, Visio Standard was first shipped in November 1992. Visio Standard enables general business personal computer users to create a wide variety of diagrams. Many of Visio's features are
designed to optimize its ease of use. Visio Standard also includes wizards for organization charts, time lines and page layouts that automatically generate diagrams based on the data the user provides and the user's formatting preferences. In addition to enabling users to easily create diagrams, Visio Standard also includes features to enhance the information content of diagrams. Visio Standard users can link diagrams to databases and associate nongraphical data with shapes within a diagram. Some of the diagrams that can be created with Visio Standard include:
Flowcharts Organization Charts Timelines Block Diagrams Geographic Maps Marketing Charts
The Company released Visio Standard 5.0 in August 1997. Visio Standard 5.0 is the foundation of the 5.0 product family. It addresses the needs of typical business users who can use Visio diagrams to present complex concepts quickly and make day-to-day communications more powerful and effective. Users can now communicate ideas more efficiently using Visio Standard's 75 new marketing shapes, 175 advanced flowcharting shapes, and a dynamic timeline solution that imports from and exports to Microsoft Project. In addition, the product now includes ODBC database connectivity as well as improved wizards for creating organizational charts and reporting on the contents of a drawing. New to Visio Standard 5.0 is the inclusion of a complete Microsoft Visual Basic, Applications Edition (VBA) programming environment. Visio Standard 5.0 combines a variety of task-specific connectors into a smart dynamic-routing connector that responds immediately to design changes and shape movement. Version 5.0 also offers line jumps, custom line types, fill patterns and line ends. Visio users can now import and export Microsoft's Enhanced Metafile graphics format, as well as Corel Corp.'s CorelDRAW 7 files. Visio Standard 5.0 has an estimated street price (average purchase price paid by end users) of $149.
VISIO TECHNICAL
Visio Technical is designed for technical professionals such as drafters, engineers and architects. It offers all the features and capabilities of Visio Standard, plus shapes and capabilities necessary to create professional-quality technical drawings. Visio Technical enables users to efficiently create two- dimensional drawings and technical schematics without the long learning curve normally associated with CAD software. Visio Technical users can easily share technical drawings with other Windows applications, and can create intelligent drawings by linking them to databases. Visio Technical includes more than 2,000 industry-specific SmartShapes objects. Some of the drawings that can be created with Visio Technical include:
Space Planning Facilities Management Electrical Schematics Construction Drawings Mechanical Engineering Heating, Ventilation and Air Conditioning
The Company released Visio Technical 5.0 in August 1997. Visio Technical 5.0 is a superset of Visio Standard 5.0, including all improvements and new content found in Visio Standard 5.0 as well as additional technical content and features designed to help users create and share 2-D technical drawings and schematics. In addition to its 2,000 industry-specific technical shapes, Visio Technical 5.0 includes more than 350 new SmartShapes symbols for facilities management, HVAC, controls and building automation, process plant design, and mechanical engineering. New add-ons that automate the creation of technical drawing elements include a Valve Builder for fluid power applications, a Netlist Generator for electrical engineering simulation, and an Area Analysis tool for facilities management. Visio Technical 5.0's drafting capabilities have also been improved by the addition of new Move and Offset commands, dynamic page resizing, and the ability to rotate the drawing page. In addition to producing technical schematics and space plans, Visio Technical is ideal for use in annotating CAD drawings and producing technical documentation. Enhanced Autodesk AutoCAD file compatibility in Visio Technical 5.0 includes the display of DWG/DXF files using a new embedded display component inside a Visio drawing. This DWG object gives users control over scale and the display of named views and individual layers. Visio Technical 5.0 has an estimated street price of $349.
VISIO PROFESSIONAL
Visio Professional is a complete diagramming tool for information technology professionals such as LAN managers, database analysts, software developers and web masters as well as business process professionals. The Company released Visio Professional 5.0 in August 1997. Visio Professional 5.0, a superset of Visio Standard 5.0, incorporates all Visio Standard 5.0's new capabilities and content as well as new features specific to IS/IT and business process management professionals. Visio Professional customers typically rely on the product to document networks, diagram software architecture, map and design database structures, and use it as a tool for business process management initiatives. Expanding on the comprehensive collection of wizards, add-ons and more than 1,000 IT-specific SmartShapes symbols in Visio Professional 4.5, version 5.0 includes over 350 new vendor-specific networking device shapes from 3Com Corp., Bay Networks Inc., Cabletron Systems Inc., Cisco Systems Inc. and Hewlett-Packard Co. Visio Professional 5.0 also features new shapes and functionality for software documentation using the unified modeling language (UML) and database design using the Bachman and object role modeling (ORM) data modeling languages. Further, Visio Professional 5.0 includes support for Microsoft Repository, providing a way to store and exchange models described using UML and make them accessible to users of higher-end visual modeling and CASE tools. Visio Professional 5.0 has an estimated street price of $349.
INTELLICAD
IntelliCAD, the Company's new Autodesk AutoCAD-compatible software product, is scheduled to be released in the first calendar quarter of 1998. By utilizing a distinct engine and employing DWG as its native file format, IntelliCAD software seamlessly supports the vast number of legacy drawings created by CAD operators over the years with Autodesk AutoCAD, the dominant PC-based CAD application. IntelliCAD allows users to "round-trip" AutoCAD-generated DWG files without data loss, including the new entities introduced in the latest version of AutoCAD, Release 14. IntelliCAD also supports the same key customization features that have distinguished AutoCAD in the marketplace. These features include full support for the AutoLISP macro language, AutoCAD custom menus and dialog boxes, and the Autodesk Development System (ADS) API, used by third-party software developers to create applications that run on AutoCAD. While maintaining compatibility with legacy data and applications, IntelliCAD software also includes innovative features that enhance and extend the AutoCAD work environment. These enhancements include a full, event-driven implementation of Microsoft Visual Basic, Applications Edition (VBA), a Drawing Explorer for intuitively managing drawing layers, line types and blocks, a visual menu editor for easy customization of AutoCAD-compatible menu structures, and a drag-and- drop button bar editor that easily creates horizontal fly-out structures on toolbars. IntelliCAD supports a feature frequently requested but still not available in AutoCAD -- a multiple document interface (MDI) that permits the simultaneous editing of multiple drawings. This feature also allows IntelliCAD users to cut, copy and paste drawing entities between windows.
OTHER PRODUCTS
In addition to Visio Standard, Visio Technical and Visio Professional, the Company also offers Visio Maps, a desktop mapping software product that allows users to create, share and distribute high-quality, data-rich maps quickly and easily, Visio Network Equipment, an add-on solution for the design and documentation of local, wide area and telecommunications networks, Visio Business Modeler, an add-on designed to expedite implementations of the SAP(R) R/3 system and Visio Shapes, a line of add-on stencil products. These products supplement Visio Standard, Visio Technical and Visio Professional by extending the number and types of drawings available for job-specific drawing needs.
The Company has from time to time offered special versions of its products for specific applications. For example, the Company offers Visio Express, a version of Visio Standard that contains a reduced feature set, for inclusion in certain OEM arrangements.
SALES, MARKETING AND DISTRIBUTION
Visio's marketing efforts were initially directed at creating a new product category - drawing and diagramming software for general business users. Those marketing efforts were directed at individual end users who purchased the Company's products through standard retail software distribution channels. As the need for drawing and diagramming software for general business users has been recognized, the Company has refocused its marketing efforts on strengthening Visio brand name recognition to facilitate the introduction of additional Visio-branded products and on expanding its distribution channels. In addition, the Company is increasingly focusing its sales and marketing efforts on volume licensing arrangements with large accounts. As a result of this effort, volume licensing revenues have been 17%, 10% and 5% of total revenues in fiscal 1997, 1996 and 1995, respectively. The Company expects continued investment in the volume licensing sales staff in fiscal 1998 and as a result, expects this percentage to increase.
In North America, the Company's products are sold primarily through distributors, including Ingram Micro, Inc. ("Ingram"), Merisel, Inc. ("Merisel") and Tech Data Corporation ("Tech Data"). These distributors resell the Company's products to retail software outlets and computer superstores, corporate resellers, value added resellers ("VARs") and mail order and catalog resellers. The Company also sells its products directly to Egghead, Inc. ("Egghead"). The Company has entered into nonexclusive distribution agreements with each of Ingram, Merisel and Tech Data and a nonexclusive reseller agreement with Egghead. The agreements with Egghead, Ingram and Tech Data may be terminated without cause by either party upon 30 days notice. The agreement with Merisel is automatically renewed on an annual basis and may be terminated without cause by either party upon 60 days' notice. In fiscal 1997, 1996, and 1995, sales to the Company's three largest distributors and resellers in North America accounted for the following percentages of the Company's North American revenues: Ingram 49%, 48% and 39%, respectively; Merisel 15%, 21% and 19%, respectively; and Egghead 2%, 11% and 16%, respectively. No other customer accounted for more than 10% of the Company's North American revenues in those fiscal years.
Distribution outside of North America is also primarily through distributors and is managed by the Company's international headquarters in Dublin, its Asia Pacific operations center in Singapore, and its regional sales and marketing offices in London, Munich, Paris, Tokyo, Sydney, Kuala Lumpur and Miami. Internationally, the Company has numerous non-exclusive distributors. In fiscal 1997, 1996, and 1995, sales to the Company's two largest distributors and resellers outside of North America accounted for the following percentages of the Company's non-North American revenues: Ascii Something Good, Inc. 20%, 21% and 0%, respectively; Ingram 11%, 9% and 7%, respectively; and Merisel 6%, 9% and 10%, respectively. No other customer accounted for more than 10% of the Company's non-North American revenues in those fiscal years. The international headquarters and the Asia Pacific operations center personnel are responsible for all international administration, finance, manufacturing, customer support, localization and local content engineering.
The Company from time to time has established OEM arrangements with hardware manufacturers such as Dell Computer Corporation and ACER Incorporated and software vendors such as Microsoft Corporation. The Company also sells products directly to end users.
The Company outsources technical support and customer service. To the extent it remains economically advantageous to do so, the Company expects to continue to outsource these functions in the future.
PRODUCT DEVELOPMENT
The Company believes that its future success will depend in large part on its ability to enhance its current product line, develop new products, maintain technological leadership and satisfy an evolving range of customer requirements and industry standards for drawing and diagramming software. The Company's product development group is actively engaged in identifying, defining and developing new products and product enhancements to meet customer needs. The Company's principal product development efforts focus on continued enhancements to the Visio graphics engine, development of new customer solutions and applications, including increased drawing complexity, increased number of objects, increased "smartness" of SmartShapes objects and improved database connectivity, and development and enhancement of the new IntelliCAD product.
The Company's products have been developed primarily by its product development group. Certain technologies, such as the ability to read and write to AutoCAD files and to spellcheck, have been licensed from other sources and integrated into the Company's products. The Company intends to continue licensing technologies as it increases product offerings. In fiscal 1997, the Company purchased certain technology from Boomerang Technology, Inc. and purchased certain technology from Freedom Solutions Group, Inc. d.b.a. SysDraw Software Company. The Company intends to continue to make substantial investments in product development. The Company's product development expenses totaled $15.5 million, $8.8 million and $5.1 million, or 15.6%, 14.8% and 14.9% of revenues in fiscal 1997, 1996 and 1995, respectively
COMPETITION
The computer software drawing and diagramming markets are intensely competitive and subject to rapidly changing technology and evolving standards. The Company competes primarily with small niche companies and larger software companies with strong market position and technology. The Company's principal competitors are companies with leading products in the special purpose drawing and diagramming, illustration, CAD and office suite categories. Products competing with Visio Standard include Micrografx Flowcharter by Micrografx, CorelFLOW by International Microcomputer Software, Inc. ("IMSI") and CorelDRAW by Corel. Visio Technical competes with various products, including AutoCAD LT and AutoSketch by Autodesk, Designer by Micrografx and Imagineer Technical by Intergraph Corporation. Visio Professional competes with various products including netViz by netViz Corporation, Process Charter by Scitor Corporation, ClickNet by Pinpoint Software Corporation and Micrografx Flowcharter by Micrografx. IntelliCAD is expected to compete with various products including AutoCAD by Autodesk, MicroStation by Bentley Systems, Inc. and TurboCAD by IMSI. In addition, the drawing capabilities included in Microsoft Office, SmartSuite by Lotus and WordPerfect Suite by Corel compete with Visio Standard. If any of these producers of office suites aggressively pursues business drawing and diagramming markets and commits further resources to development in this area, the Company's results of operations could be materially adversely affected. Many of these competitors have significantly greater financial, technical, sales and marketing and other resources than the Company. As business drawing and diagramming software markets develop, the Company believes that additional companies may enter these markets and thereby intensify competition.
The principal competitive factors affecting the computer software drawing and diagramming markets include product functionality, ease of use, performance and reliability; customer service and support; product availability; vendor credibility; brand awareness; ability to keep pace with technological change; and price. Although the Company believes that its products currently compete favorably with respect to these factors, there can be no assurance that the Company can maintain its competitive position in the face of increasing competition from new products and enhancements introduced by existing competitors and new companies entering this market. The markets for the Company's products are characterized by significant price competition, and the Company expects it will face increasing pricing pressures. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, financial condition and results of operations.
PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies primarily on a combination of copyright and trademark laws, trade secret protection, confidentiality procedures and contractual provisions, including nondisclosure agreements with employees and others, to protect is proprietary rights. The Company has no patents or patent applications pending and existing copyright and trade secret laws afford only limited protection. The Company believes that, because of the rapid pace of technological change in the computer software industry, copyright and trade secret protection have less effect on the Company's business and results of operations than factors such as the knowledge, ability and experience of the Company's employees, frequent product enhancements and the timeliness and quality of support services.
The Company provides its products to business enterprises under nonexclusive licenses that are generally nontransferable. The Company also provides its products to individual end users, in which case the Company relies
on "shrink wrap" licenses that are not signed by the end user and therefore may not be enforceable in certain jurisdictions. The Company's products do not contain copy protection. Policing unauthorized use of software is difficult and, while the Company is unable to determine the extent of piracy of its software, it expects software piracy to be a persistent problem in the computer software industry.
The Company licenses some software programs from independent developers and incorporates them into the Company's products. Generally, such agreements grant the Company nonexclusive, perpetual, worldwide licenses with respect to the subject program and terminate only upon a material breach by the Company. Certain of these licenses require payment of royalties based on the number of products sold.
No material claims have been made against the Company for infringement of proprietary rights of others; however, there can be no assurance that others will not assert infringement claims in the future. As the number of software products in the industry increases and the functionality of these products further overlaps, the Company believes that software programs will increasingly become subject to infringement claims. The cost of responding to any such assertion may be material, whether or not the assertion is valid.
PRODUCTION
Production of the Company's software products primarily involves duplication of various media and the printing of user manuals and packaging materials. Media for the Company's products include CD-ROMs and 3.5-inch diskettes and are available from multiple sources. The Company outsources procurement of materials for, and production of, its products. To date, the Company has not experienced any material difficulties or delays in production of its software products or documentation. To the extent it remains economically advantageous to do so, the Company intends to continue outsourcing production in the future.
EMPLOYEES
As of September 30, 1997, the Company employed 355 persons, including 114 in sales and marketing, 140 in product development, and 101 in finance, administration and operations, including customer service and technical support. The Company believes that its future success will depend, in part, on its ability to continue to attract and retain skilled product development, technical support, marketing and management personnel. Competition for such personnel in the computer software industry is intense. The Company believes its relations with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's headquarters are located in Seattle, Washington, where it leases approximately 75,000 square feet for administrative, sales and marketing, customer service and product development activities. The Company also leases approximately 13,600 square feet of office space in Dublin, Ireland and an aggregate of 14,900 square feet of office space in London, Munich, Paris, Singapore, Tokyo, Sidney and Kuala Lumpur. The Company believes that its existing facilities and options on additional facilities are adequate to meet its needs for the foreseeable future. The Company believes that it can acquire additional space, if needed, on acceptable terms.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the fourth quarter of its fiscal year ended September 30, 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Visio's common stock has been traded on the Nasdaq National Market under the symbol VSIO since the Company's initial public offering in November 1995. The high and low closing sales prices noted above are as reported on the Nasdaq National Market. On November 28, 1997, there were 119 holders of record of the Company's common stock. The Company has not paid cash dividends on its common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data and other operating information of Visio Corporation. The selected financial data in the table are derived from the financial statements of Visio Corporation. The data should be read in conjunction with the financial statements, related notes and other financial information included herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Visio, 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 3.1, Windows 95 and Windows NT operating systems and are marketed under the Visio brand. The Company's primary products are Visio Standard, Visio Technical and Visio Professional. The Company's first product, Visio Standard, which first shipped in November 1992, began creating a new market for business diagramming. The Company shipped its second significant product, Visio Technical for technical drawing, in November 1994. The Company introduced its third significant product in January 1997: Visio Professional, for information systems and network design and documentation.
RESULTS OF OPERATIONS
The following table sets forth statement of income data as a percentage of revenues for the fiscal years indicated.
REVENUES
Revenues include 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, volume licenses, international royalties and certain OEM arrangements.
The Company's net revenues increased 74% to $59.7 million in the fiscal year ended September 30, 1996, and 67% to $99.5 million in the fiscal year ended September 30, 1997. The increase in revenues was due primarily to sales volume growth across product groups, distribution channels and geographic regions. In addition, revenue growth in fiscal 1997 was positively affected by the release of Visio Professional in January 1997. The average selling price per license has increased primarily because of the mix of Visio Technical and Visio Professional, both of which are priced higher than Visio Standard.
A picture of 5 Visio product boxes, including Visio Standard, Visio Technical, Visio Professional, Visio Maps and Visio Network Equipment, appears here.
Product Groups: The IS design and documentation product group was created in - -------------- fiscal 1997 with the introduction of Visio Professional in January 1997. Visio Professional had a significant impact on the revenue mix within the product groups. In just its first nine months, IS design and documentation contributed 24% of total fiscal 1997 revenues. The technical drawing product group grew 274% and 69% for fiscal 1996 and 1997, respectively. The growth in fiscal 1996 was due to an upgrade to Visio Technical 4.1 as well as the introduction of three localized language versions. The growth in fiscal 1997 of Visio Technical was due to its continued momentum as well as an upgrade to version 4.5. The growth in the business diagramming product group was 46% and 11% for fiscal 1996 and 1997, respectively. An upgrade of Visio Standard to version 4.0 in August 1995 contributed to the growth in fiscal 1996. The decrease in percentage growth in fiscal 1997 was primarily due to cannibalization from Visio Professional. The Company believes that customers who may otherwise have purchased Visio Standard or Visio Technical are choosing Visio Professional for its added features and content. Secondarily, there was a reduction in upgrade revenue because Visio Standard was not upgraded to version 5.0 until August 1997, two years after the release of version 4.0. This 24-month life cycle for Visio Standard has been the longest for any product to date as the Company focused on releasing Visio Professional and upgrades to Visio Technical as well as developing these new markets. Other revenues of $1.2 million, $0.8 million and $0.2 million in fiscal 1995, 1996 and 1997, respectively, consisted primarily of sales of Visio Home and related Visio Shapes products and solution services revenues.
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Sales Channels: Visio classifies its revenues in four sales channels: - -------------- "Distribution," "Direct," "Volume Licensing," and "OEM." Distribution revenues represent sales of packaged products through national distributors and corporate, retail and mail order resellers. Direct revenues represent sales of packaged products directly by the Company, including upgrades, 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 typical sales cycle for a volume license is six to eighteen months. Volume Licensing revenues usually do not include any significant amount of packaged goods, but do include maintenance and support revenues, which are priced separately and recognized over the lives of the contracts. OEM revenues include licenses of Visio products to hardware and software manufacturers for bundling arrangements. OEM revenues include packaged product sales, as well as royalty payments with no associated product costs.
Percentage growth was most significant for the Volume Licensing channel, which grew 198% and 177% for fiscal 1996 and 1997, respectively. This growth is primarily the result of continued infrastructure investment in the volume licensing program. The Company expects to hire additional sales staff in fiscal 1998 and therefore expects the percentage of Volume Licensing to increase as a percentage of total revenues. Direct revenues decreased as a percentage of total revenues in fiscal 1996 and 1997 due to a greater percentage of upgrades being fulfilled through the Distribution channel.
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Revenues by Geography in fiscal 1997:
United States and Canada: $64.0 Million Europe: $22.2 Million Rest of World: $13.3 Million
Countries in Europe include: Austria, Belgium, Czech Republic, Denmark, France, Germany, Greece, Hungary, Ireland, Israel, Netherlands, Norway, Poland, Portugal, Slovenia, Spain, Sweden, Switzerland, Turkey, U.K. and South Africa.
Countries in Rest of World include: Australia, Argentina, Bolivia, Brazil, Chile, China, Columbia, India, Japan, Korea, Malaysia, Mexico, New Zealand, Peru, Singapore, Taiwan, Thailand and Uruguay.
Geography: Revenues in the United States and Canada increased 55% to $37.7 - --------- million in fiscal 1996 and 70% to $64.0 million in fiscal 1997. The increase in revenues in fiscal 1996 primarily reflects the contribution of Visio Technical and the release of upgrade versions of Visio Standard and Visio Technical. The increase in fiscal 1997 is due primarily to the release of Visio Professional and continued growth of Visio Technical. International revenues increased 122% to $22.0 million in fiscal 1996 and 62% to $35.5 million in fiscal 1997. As a percentage of total revenues, international revenues represented 29%, 37% and 36% in fiscal 1995, 1996 and 1997, respectively. The growth in fiscal 1996 primarily reflects the release of upgrade localized versions of Visio Standard, particularly in Japan, and the introduction of Visio Technical in Europe. The decrease of international revenues as a percentage of
total revenues in fiscal 1997 was due primarily to the strong performance of Visio Professional in the United States and a lower growth rate in Europe due to weakness in certain European markets.
The Company's operating results are affected by foreign exchange rates. Approximately 22%, 20% and 19% of the Company's revenues were collected in foreign currencies during fiscal 1995, 1996 and 1997, respectively. The impact on income from operations due to exchange rate fluctuation is partially offset as most of the Company's international production costs and operating expenses are incurred in foreign currencies. Therefore, the net impact of exchange rate fluctuations on income from operations is less than the impact on revenues.
COST OF REVENUES
Bar charts showing the following information appear here:
Cost of revenues varies with the mix of Distribution, Direct, Volume Licensing and OEM revenues, due to relative variations in the standard product costs associated with each revenue category, and with fluctuations in period costs. Standard product costs consist primarily of documentation, packaging, media duplication, assembly and material management costs. Period costs consist primarily of technical support, production management, freight and fulfillment, certain royalties, amortization of capitalized acquired technology, standard material variances and inventory valuation adjustments.
Standard costs associated with each revenue category are primarily determined by the amount of packaged product delivered in that revenue category. Accordingly, most of the Company's standard costs are associated with Distribution and Direct revenues, all of which are derived from sales of packaged products. Volume Licensing revenues have the lowest standard cost because they generally do not include any significant amount of packaged goods.
The decrease in cost of revenues as a percentage of revenues in fiscal 1996 and 1997 resulted primarily from the increased use of lower-cost CD-ROM media which carry lower cost of goods than disks, disk duplication cost control measures, increased Volume Licensing revenues which have little or no standard costs and an increase in the percentage of revenue from Visio Technical and Visio Professional, which have lower standard costs as a percentage of revenue than Visio Standard. These decreases were partially offset by increased royalty costs for licensed technology including Visual Basic for Applications (VBA) from Microsoft Corporation.
RESEARCH AND DEVELOPMENT
Bar charts showing the following information appear here:
Research and development expenses consist primarily of personnel, contract services, occupancy and equipment costs required to conduct the Company's product development efforts. Product development includes product engineering, documentation development, localization, usability testing, quality assurance and advanced research and development costs. Product localization costs and lump sum payments for technology such as file converters are capitalized and amortized to development over the lesser of the useful life or 18 months. Such amortization has not been significant. Research and development expenses are charged to operations as incurred. The Company has not capitalized certain software development costs subsequent to the establishment of technological feasibility as these costs have been immaterial.
Increases in research and development expenses for fiscal 1996 resulted primarily from planned additions to the Company's development organization and the acquisition of source code and other intellectual property from Arcland, Inc. Research and development expenses for fiscal 1997 increased primarily due to planned additions to the Company's development organization, which included additions associated with the acquisitions of Boomerang Technology Inc. and Sysdraw Software Company. The Company believes increased research and development expenses will be required during fiscal 1998 and beyond to expand its product lines and introduce new language versions to international markets.
SALES AND MARKETING
Bar charts showing the following information appear here:
Sales and marketing expenses have increased in absolute terms as the Company continues building its worldwide sales, marketing and customer service infrastructure. The fiscal 1996 and 1997 growth in these expenses was primarily due to expansion in international markets, increased product marketing costs to support new products and upgrades to existing products as well as continued development of the sales infrastructure. As a percentage of revenues, sales and marketing expenses decreased in fiscal 1996 primarily due to increased revenues and the significant sales and marketing investment made in fiscal 1995. The investment made in fiscal 1995 consisted primarily of brand awareness activities including an advertising campaign aimed at developing the Visio brand and accelerating awareness levels.
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 in absolute terms over time.
GENERAL AND ADMINISTRATIVE
Bar charts showing the following information appear here:
General and administrative expenses increased in absolute terms in fiscal 1996 primarily due to the cost of developing the infrastructure and personnel associated with becoming a public company and with supporting the Company's increased operations. The increase in fiscal 1997 resulted primarily from increased staffing to support the Company's growth as well as the establishment of Visio's operational headquarters for the Asia Pacific region. The Company expects to show increased general and administrative expenses in absolute terms in future periods for infrastructure to support the Company's revenue growth.
ACQUIRED TECHNOLOGY
In connection with the fiscal 1997 acquisition of assets of Boomerang Technology Inc. and Sysdraw Software Company, the Company recorded charges of $6.7 million and $3.6 million, respectively, related to acquired in-process research and development and related acquisition costs. (See Note 9 of Notes to Financial Statements).
INTEREST AND OTHER INCOME, NET
Interest income was $0.2 million, $1.7 million and $3.2 million for fiscal 1995, 1996 and 1997, respectively. The increase in fiscal 1996 was primarily due to interest earned on investment of proceeds from the Company's initial public offering completed in November 1995, and was partially offset by other non- operating expenses. The increase in fiscal 1997 was primarily due to a larger cash and short-term investment balance. Other income includes grant income from the Industrial Development Agency of Ireland and foreign currency transaction gains and losses. Visio began hedging foreign exchange transaction exposures in fiscal 1997.
INCOME TAXES
The Company's effective income tax rate was 35%, 31% and 26% for fiscal 1995, 1996 and 1997, respectively. The declines in the effective tax rate were primarily due to the benefit of the utilization of foreign net operating loss carryforwards in fiscal 1996 as well as tax-exempt interest income and income taxed in other jurisdictions at rates lower than the U.S. rate in both fiscal 1996 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments totaled $79.6 million at September 30, 1997, compared to $61.1 million at September 30, 1996. The investment portfolio consisted of high-quality municipal bonds and investment grade commercial paper. The increase in cash and cash equivalents was due primarily to cash generated from operations and cash proceeds from the issuance of shares through the employee stock option and stock purchase programs. The Company has an unused $1.0 million unsecured bank line of credit, which matures on February 28, 1998. The Company anticipates renewal of this line of credit under substantially similar terms.
At September 30, 1997, the Company's principal commitments consisted primarily of leases on its facilities. The Company's capital expenditures of $7.0 million in fiscal 1997 included the purchase of an enterprisewide business software system that enables the Company to be year 2000 compliant. At September 30,1997, the Company had commitments for capital expenditures of approximately $0.7 million related to facility expansion. The Company believes that its current cash balances, funds available under its line of credit and cash flow from operations will be sufficient to meet its working capital and capital expenditure requirements 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. In fiscal 1997 the Company paid a combined $12.5 million related to the acquisition of technology and other assets from Boomerang Technology Inc. and Sysdraw Software Company. In addition, the Company issued a $1 million note payable to Sysdraw Software Company which matures in fiscal 1998 and agreed to pay contingent consideration based on the achievement of certain performance goals within the next three years. At September 30, 1997, the Company had no other material agreements or commitments with respect to any such transaction.
CERTAIN RISK FACTORS THAT MAY IMPACT FUTURE RESULTS OF OPERATIONS
Except for the historical information contained in this Annual Report, the matters discussed herein, particularly those identified with the words "expects," "believes," "anticipates" and similar expressions, are forward- looking statements. These statements reflect management's best judgment based on factors known to them at the time of such statements. Such forward-looking statements are subject to certain risks and uncertainties, including without limitation those set forth below, many of which are beyond the Company's control, that could cause actual results to differ materially from those anticipated. The factors set forth below should be carefully considered when evaluating the Company's business and prospects, and the forward-looking information provided by Visio pursuant to the safe harbor provisions established by recent securities legislation. Readers should also carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission.
Fluctuations in Quarterly Performance. The Company's quarterly results of - ------------------------------------- operations can be affected substantially by demand for the Company's products, the timing and customer acceptance of new products, product enhancements and promotions by the Company or its competitors, product returns, fluctuations in foreign exchange rates, the impact of acquisitions of other technologies or companies and changes in economic conditions. The Company is increasingly focusing its sales efforts on volume licensing to large accounts. The timing of those licenses could significantly affect quarterly results of operations. A significant portion of the Company's operating expenses are relatively fixed in the short term, and planned expenditures are based on the Company's estimates for quarterly revenues. As a result, variations in timing of revenues can cause significant variations in quarterly results of operations. In general, the Company has experienced the strongest demand for its software products during the December quarter and the weakest demand in the June quarter. These seasonal patterns have been overshadowed in particular quarters by the timing of new product introductions, expansion into international markets, the execution of volume licenses and other factors affecting the Company's business.
Dependence on Microsoft Windows; Relationship With Microsoft. Substantially all - ------------------------------------------------------------ of the Company's revenues are derived from sales of products that are designed to work within a Microsoft Windows environment and are marketed primarily to Windows users. As a result, sales of the Company's products would be materially affected by market developments adverse to Windows-based products. As a developer of products for Windows, the Company has historically enjoyed a collaborative working relationship with Microsoft. If the relationship were disrupted for
any reason, such as a decision by Microsoft to introduce or acquire products that compete directly with the Company's products, the Company's development efforts and results of operations could be materially adversely affected.
Competition. The computer software drawing and diagramming markets are - ----------- intensely competitive and subject to rapidly changing technology and evolving standards. The software industry has limited barriers to entry, and the availability of personal computers with continuously expanding capabilities, at progressively lower prices, contributes to the ease of market entry. Because of this and other factors, competitive conditions in the future are likely to intensify. The markets for the Company's products are characterized by significant price competition, and the Company expects it will face increasing pricing pressures. Increased competition could result in price reductions, reduced profit margins and loss of market share, which could materially adversely affect the Company's results of operations.
Substantial Dependence on a Single Technology; Limited Product Line. The - ------------------------------------------------------------------- Company has derived substantially all of its revenues to date from sales of drawing and diagramming products based on its core technology. The Visio product line and related enhancements are expected to continue to account for a significant percentage of the Company's revenues for the foreseeable future. A decline in demand for these products as a result of competition, technological change or any other reason would have a material adverse effect on the Company's results of operations.
Rapid Technological Change and New Product Development. The markets for the - ------------------------------------------------------ Company's products are characterized by rapidly changing technology, evolving industry standards, changes in customer needs and frequent new product introductions. The Company's future success will depend on its ability to enhance its current products, to develop new products that meet changing customer needs on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes. Any failure by the Company to anticipate or respond adequately to changes in technology and customer preferences, or any significant delays in product development or introduction, would have a material adverse effect on the Company's results of operations.
New Product Introductions. The Company periodically introduces new products and - ------------------------- upgrades its current products in order to meet changing customer needs and anticipated market demand. Due to potential difficulties in the development process, there can be no assurance that such future products and upgrades will be released in a timely manner or that they will receive market acceptance, if and when released. Despite significant testing by the Company and by current and potential customers, errors or "bugs" may still be found in new products or upgrades after commencement of commercial shipments. Delays in the commencement of commercial shipments of new products or upgrades, as well as the discovery of errors or bugs after release, may result in adverse publicity, customer dissatisfaction and delay or loss of product revenues. Furthermore, from time to time the Company and others may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycles of the Company's existing products. There can be no assurance that announcements of currently planned or other new products by the Company, by Microsoft or by the Company's competitors will not cause customers to defer purchasing existing Company products or cause distributors to return products to the Company. Delays or difficulties associated with new product introductions or upgrades could have a material adverse effect on the Company's business, financial condition and results of operations.
Management of Growth and Future Acquisitions. The Company has recently - -------------------------------------------- experienced rapid growth that has placed, and will continue to place, a significant strain on its management and operations. The Company's ability to manage its growth effectively will require it to improve its operating, financial and management information systems and to attract, train, motivate, manage and retain key employees. Furthermore, the Company intends to enter into strategic relationships and make strategic acquisitions of technologies and businesses in order to expand its product lines and the capabilities of its current products. The risks associated with acquisitions including increased costs and uncertain benefits and the ability to integrate operations of acquired companies could adversely affect the Company's results of operations.
Risks Associated With International Operations. The Company expects that - ---------------------------------------------- international sales will account for an increasing portion of its revenues. Most of the Company's international revenues are denominated in foreign
currencies. Consequently, a decrease in the value of a relevant foreign currency in relation to the U.S. dollar occurring after establishing prices and before receipt of payment by the Company would have an adverse effect on the Company's results of operations. Additionally, the Company may be materially and adversely affected by increases in duty rates, exchange or price controls, repatriation restrictions, or other restrictions on foreign currencies. The Company's international operations are subject to certain other risks common to international operations, including without limitation government regulations, import restrictions, and, in certain jurisdictions, reduced protection for the Company's intellectual property rights.
Change in Licensing and Marketing Methods. The Company is increasingly - ----------------------------------------- emphasizing sales to enterprises through volume, installment and enterprise licensing arrangements. These licensing arrangements typically involve a longer cycle (up to 18 months from first contact to execution of an initial license) than sales through other distribution channels, require a greater investment of resources in establishing the enterprise relationship and result in lower operating margins. The timing of the execution of volume licenses, or their nonrenewal or renegotiation by large customers, could cause volatility in the Company's quarterly results of operations and could materially adversely affect it's results of operations.
Continued Reliance on Resellers and Distributors. The Company expects to - ------------------------------------------------ continue to rely on resellers and distributors for sales of its products in domestic and international markets. Sales to the Company's two largest distributors during fiscal 1997, 1996 and 1995 accounted for an aggregate of 47%, 50% and 47% of the Company's revenues, respectively. The distribution channels through which software products are sold have been characterized by rapid change, including consolidations and financial difficulties of certain distributors and resellers, the emergence of new resellers such as general mass merchandisers and the development of new channels such as electronic networks. The Company's resellers and distributors carry competing product lines. There can be no assurance that resellers and distributors will continue to purchase the Company's products or be able to market them effectively or that the Company will be able to effectively distribute its products through new distribution channels.
Reliance on Outsourcing. The Company outsources most of the production of its - ----------------------- products, which primarily involves duplication of various media and the printing of user manuals and packaging materials. In addition, the Company outsources procurement, order fulfillment, technical support, customer service and localization of its products. So long as it remains economically advantageous to do so, the Company intends to continue, and possibly to increase, outsourcing in the future. Although the Company believes that it has adequate alternative suppliers of such services, the loss of a supplier or its inability to perform contracted services could materially adversely affect the Company's results of operations.
Dependence on Proprietary Technology. The Company's ability to compete - ------------------------------------ effectively depends in large part on its ability to develop and maintain proprietary aspects of its technology. The Company relies on a combination of copyright and trademark laws, trade secret protection, confidentiality procedures and contractual provisions, including nondisclosure agreements with employees and others, to protect its proprietary rights. There can be no assurance that such measures will be adequate to protect the Company's proprietary intellectual property or that claims of infringement of third parties' intellectual property rights will not occur and, possibly, prevail. Costs associated with an adverse judgment or settlement of intellectual property litigation, as well as the cost of responding to a claim, both in legal fees and expenses and the diversion of management resources, whether or not the claim is valid, could have a material adverse effect on the Company's results of operations.
Dependence on Key Personnel. The Company's success depends to a significant - --------------------------- extent on a small number of senior management and technical personnel. The Company's growth and future success will depend in large part on its continuing ability to hire, motivate and retain highly qualified management, technical, sales and marketing personnel. Competition for such personnel is intense and there can be no assurance that the Company will be successful in hiring, motivating or retaining such qualified personnel.
Reliance on Independent Developers for Future Market Expansion. The Company has - -------------------------------------------------------------- designed its technology with an open architecture and has incorporated certain features to encourage independent solution providers, system integrators and other software developers to design industry or customer-specific drawing and diagramming solutions that will extend the adoption and use of the Company's products. There can be no assurance, however, that
developers will design solutions to extend the Company's products, and the failure of these development efforts to materialize could adversely affect the expansion of the markets for the Company's products. If independent developers do design solutions for specific industries or customers, the Company could be effectively precluded from offering add-on products that address the same industries or customers.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report............................................ 23 Balance Sheets as of September 30, 1997 and 1996........................ 24 Statements of Income for each of the three years ended September 30, 1997.................................................... 25 Statements of Cash Flows for each of the three years ended September 30, 1997.................................................... 26 Statements of Shareholders' Equity (Deficit) for each of the three years ended September 30, 1997.................................. 27 Notes to Financial Statements........................................... 28 Schedule II - Valuation and Qualifying Accounts for each of the three years ended September 30, 1997.................................. 39
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders Visio Corporation
We have audited the accompanying balance sheets of Visio Corporation as of September 30, 1997 and 1996, and the related statements of income, shareholders' equity (deficit), and cash flows for each of the three years in the period ended September 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Visio Corporation at September 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Seattle, Washington October 24, 1997
VISIO CORPORATION
BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes.
VISIO CORPORATION
STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes.
VISIO CORPORATION
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes.
VISIO CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
See accompanying notes.
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business --------
Visio Corporation ("Visio" or the "Company") is a leading supplier of business drawing and diagramming software products. The Company's primary products are Visio Standard, Visio Technical and Visio Professional. Visio software enables business and technical users to create drawings and diagrams ranging from simple diagrams such as flowcharts, block diagrams and organizational charts to complex technical drawings such as space plans, electrical schematics and network designs.
Basis of Presentation ---------------------
The Company's fiscal year is the 52/53-week period that ends on the Friday nearest September 30. For convenience of presentation, all fiscal periods in these financial statements are treated as ending on a calendar month end. The accompanying financial statements are consolidated to include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications were made to prior-year financial statements to conform to the current year presentation.
Use of Estimates ----------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation ----------------------------
Assets and liabilities denominated in foreign currencies are translated to U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average rates of exchange prevailing during the year. The translation adjustment, which is immaterial for all periods presented, resulting from this process is included in retained earnings. Gains and losses on foreign currency transactions are included in other income, net. At September 30,1997, the Company had a contract to deliver $980,000 in a foreign currency, expiring October 1997, which hedges foreign exchange rate risk related to a foreign currency denominated assets. At September 30, 1997, the fair value of the contract approximated its cost.
Revenue Recognition -------------------
Revenues and accounts receivable are principally from distributors and resellers of the Company's products. The Company performs periodic credit evaluations of its customers and maintains reserves for potential credit losses. Revenues are generally recognized at the time of shipment, net of deferrals for inventory at distributors which the Company estimates to be in excess of levels appropriate for that channel and adjustments for estimated future returns. Revenues attributable to free upgrade rights are deferred and not recognized until the free upgrade has been shipped to the customer. Revenues attributable to the sale of extended customer support and maintenance programs are deferred and recognized ratably over the contract period. Revenues from corporate or organization license programs is recorded when the user installs the product. The Company accrues estimated costs of technical support to customers as the related revenues are recognized.
Financial Instruments ---------------------
The Company considers highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents. Management currently classifies its short-term investments consisting primarily of debt securities as available-for-sale. These securities are reported at market value. Unrealized gains and losses are included in shareholders' equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
specific identification method. At September 30, 1997, the short-term investments had contractual maturities of one to eighteen months.
Inventories -----------
Inventories are stated at the lower of cost or market and include adjustments for estimated obsolescence. Cost is principally determined using currently adjusted standard costs, which approximate actual cost on a first-in, first-out basis.
Equipment and Leasehold Improvements ------------------------------------
Equipment and leasehold improvements are recorded at cost. Equipment depreciation is provided on the straight-line method for financial statement purposes over its estimated useful life of two to five years. Leasehold improvements are amortized over the lesser of the lease term or estimated useful life.
Capitalized Technology ----------------------
Capitalized technology represents the amount of developed technology acquired from third parties. Amortization is provided on the straight-line method over its remaining useful life.
Research and Development ------------------------
Research and development costs are expensed as incurred and consist primarily of software development costs. Financial accounting rules requiring capitalization of certain internally developed software costs have not materially affected the Company.
Acquired Technology -------------------
Acquired technology represents the amount of in-process technology acquired from third parties.
Income Taxes ------------
Income taxes are computed using the liability method whereby the provision for income taxes includes income taxes currently payable and deferred taxes arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Per Share Data --------------
Earnings per share is based on weighted average common and dilutive common equivalent shares outstanding using the treasury stock method. Dilutive common equivalent shares include stock options and warrants. Fully diluted earnings per share for all periods presented were not materially different from primary earnings per share.
Recently Issued Accounting Standards ------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share", which is required to be adopted in the quarter ended December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options and warrants will be excluded. The impact is expected to result in an increase in primary earnings per share for the year ended September 30, 1995, 1996 and 1997 of $0.11, $0.04 and $0.04 per share, respectively. The impact of Statement 128 on the calculation of fully diluted earnings per share for these periods is not expected to be material.
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. BALANCE SHEET INFORMATION
Detailed balance sheet data is as follows:
3. BANK LINE OF CREDIT
The Company has an unsecured $1 million working capital line of credit that expires on February 28, 1998. Borrowings under the credit line bear interest at the lending bank's prime interest rate (8.5% at September 30, 1997). The line of credit agreement requires the Company to meet certain financial covenants. There were no borrowings under this line at September 30, 1997.
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
4. COMMITMENTS
Visio rents office facilities and automobiles under operating leases. Certain office facility leases contain renewal and escalation clauses and space expansion provisions. Future minimum lease payments under noncancelable operating leases are:
Rental expenses under operating leases totaled $875,000, $1,100,000 and $1,143,000 in fiscal 1995, 1996 and 1997, respectively.
5. INCOME TAXES
Income before income taxes consists of the following:
The provision for income taxes consists of the following:
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
The effective rate differs from the U.S. federal statutory rate as follows:
Net deferred tax assets consist of the following:
6. EMPLOYEE BENEFITS
401(k) Plan -----------
Effective January 1, 1993, Visio implemented a salary deferral 401(k) plan for all of its domestic employees. Employees may contribute a percentage of their pretax earnings annually, up to the maximum dollar limitation prescribed by the Internal Revenue Service. The plan also provides that Visio contribute an amount equal to 50% of employee contributions, up to 6% of salary. Visio recognized expense of $147,000, $188,000 and $330,000 in fiscal 1995, 1996 and 1997, respectively, related to the plan.
1990 Stock Option Plan ----------------------
In 1990, Visio adopted the 1990 Stock Option Plan, which provided for the granting of incentive stock options and nonqualified stock options to employees, officers, directors, agents, consultants and independent contractors. Options under the 1990 Stock Option Plan have generally been granted at fair market value on the date of grant, expire after ten years, and vest ratably over a period of four years. As a result of the adoption of the 1995 Long-Term Incentive Compensation Plan in May 1995, all previously reserved shares of common stock under the 1990
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
Stock Option Plan were transferred to the 1995 Long-Term Incentive Compensation Plan upon the effective date of the Company's initial public offering.
1995 Non- Employee Director Stock Option Plan ---------------------------------------------
In April 1995, Visio adopted the 1995 Nonemployee Director Stock Option Plan, which took effect upon the effective date of the Company's initial public offering and provides for the granting of options to nonemployee directors of the Company. As of September 30, 1997, a total of 195,000 shares of Common Stock remained available under the plan for future grants. There were 45,000 options granted under the plan in fiscal 1997.
1995 Long- Term Incentive Compensation Plan ------------------------------------------- In May 1995, Visio adopted the 1995 Long-Term Incentive Compensation Plan, which provides for the granting of incentives and awards to employees, agents and consultants of the Company and its subsidiaries. The plan is a long-term incentive compensation plan and combines the features of an incentive and a nonqualified stock option plan, a stock appreciation rights plan, a stock award plan and a performance-based plan. In fiscal 1997, the Company's shareholders approved to increase the number of shares of common stock which may be issued under the plan by 1,640,000. As of September 30, 1997, a total of 737,067 shares of common stock remained available under the plan for future grants. There were 1,699,400 options granted under the plan in fiscal 1997. In fiscal 1997, there were 1,794 shares of common stock repurchased by the Company for $43,000 concurrent with the exercise of stock options.
1995 Employee Stock Purchase Plan ---------------------------------
In August 1995, Visio adopted the 1995 Employee Stock Purchase Plan (the "ESPP"). The Company has reserved an aggregate of 750,000 shares of common stock for issuance under the ESPP. The ESPP permits eligible employees of the Company to purchase common stock at not less than 85% of fair market value as defined in the plan through payroll deductions of up to 15% of their compensation, provided that no employee may purchase common stock worth more than $15,000 in any calendar year or more than 10,000 shares of common stock during any offering period. The ESPP will expire in 2005. There were 156,054 shares issued under the ESPP in fiscal 1997.
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
Stock option activity and option price information were as follows:
Balances are as follows:
For various price ranges, weighted average characteristics of outstanding stock options at September 30, 1997 were as follows:
The Company follows APB 25, Accounting for Stock Issued to Employees, to account for stock option and employee stock purchase plans. No compensation cost is recognized because the option exercise price is equal to the market price of the underlying stock on the date of grant. Had compensation cost for these plans been
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
determined based on the Black-Scholes value at the grant dates for awards as prescribed in SFAS Statement 123, "Accounting for Stock-Based Compensation," pro forma net income and earnings per share would have been:
The pro forma disclosures above include the amortization of the fair value of all options vesting during 1996 and 1997 net of stock option tax benefits. The weighted average Black-Scholes value of options granted under the stock option plans during 1996 and 1997 was $15.0 and $27.4 per share, respectively. Value was estimated using an expected life of five years, no dividends, volatility of .38, and risk-free interest rates of 6.0% and 6.5% in 1996 and 1997, respectfully.
Because the method prescribed by SFAS 123 has not been applied to options granted prior to September 30 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
7. SHAREHOLDERS' EQUITY
Common Shares Outstanding -------------------------
Stock Split -----------
In August 1997, shares of common stock were split two-for-one. All share and per share amounts have been retroactively restated to reflect the stock split.
Common Stock Repurchase Rights ------------------------------
In 1994, all employees of Visio were offered the opportunity to accelerate the vesting of stock options and purchase an equal number of restricted common stock shares at the original option price. These restricted shares vest according to the vesting schedule of the corresponding options. The Company has the right of first refusal to purchase vested shares before they can be transferred at the then fair market value. Nonvested shares are not transferable. In fiscal 1997, employees purchased 19,500 restricted shares for $7,000 and the Company repurchased 11,250 shares for $1,000. As of September 30, 1997, a total of 167,676 shares were subject to repurchase.
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
Initial Public Offering -----------------------
In November 1995, the Company completed its initial public offering for the sale of 4,941,000 shares of common stock at $8.00 per share. The net proceeds, after underwriting discounts and offering expenses, from the sale of common stock was $35.7 million. Upon closing, all outstanding shares of preferred stock converted into 10,410,178 shares of common stock.
Warrants --------
In connection with a venture lease agreement entered into in fiscal 1993, Visio granted a warrant to purchase 33,518 shares of Series B preferred stock at $0.60 per share. The warrant is exercisable for ten years after date of issuance or five years after an initial public offering of Visio's common stock, whichever period is shorter. Since the effective date of the initial public offering, the Series B preferred stock converted to common stock, and the warrant became exercisable for 33,518 shares of common stock at a purchase price of approximately $0.60 per share. In fiscal 1997, the warrant was exercised in full. Concurrent with the exercise of this warrant, 890 shares of common stock were repurchased by the Company for $20,000.
In connection with the 1994 sale of Series B preferred stock, Visio granted a warrant to purchase 450,000 shares of Common Stock at approximately $3.34 per share to an officer of the Company. The warrant is exercisable for six years after the date of issuance and vests ratably over a period of four years. In the event of a merger, consolidation, acquisition, reorganization or liquidation of the Company, the warrant will be canceled and all rights will terminate. The Company is required to deliver notice of reorganization no less than 15 business days before the date scheduled for reorganization. The holder has the right immediately prior to the reorganization to exercise the warrant. In fiscal 1997, 112,500 of these warrants were exercised.
Common Shares Reserved ----------------------
Visio has reserved shares of common stock for future issuance as follows:
8. BUSINESS SEGMENT AND OTHER INFORMATION
The Company operates in one business segment: software products and related services for users of personal computers. Sales to unaffiliated customers accounting for greater than 10% of sales are as follows:
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
Information regarding the Company's operations in different geographic areas is set forth below. Revenues, operating income and identifiable assets are reported based on the location of the Company's facilities. Transfers between geographic locations are recorded based on a percentage of list price commensurate with respective costs.
9. ACQUIRED TECHNOLOGY
In February 1997, the Company acquired certain assets of Boomerang Technology Inc., a privately held developer of Autodesk AutoCAD-compatible software, located in San Diego, California. Under the terms of the agreement, the Company primarily acquired source code for cash payments totaling $6.7 million. Visio accounted for the acquisition as a purchase with the entire purchase price allocated to acquired in-process technology and expensed in the period of purchase. The Company expects this technology will be incorporated into a future product offering.
In May 1997, the Company acquired certain assets of Sysdraw Software Company, a privately held network design and documentation solutions provider located in Lombard, Illinois. Visio acquired technology including the world's largest library of network diagramming shapes, an operating organization for creating new network diagramming shapes and solutions and certain other technology and assets for $5.5 million in cash, the issuance of a $1 million note payable as well as contingent consideration based on the achievement of certain performance goals within the next three years. The note payable bears interest at 6% and matures in August 1998. In addition to the purchase price, Visio incurred approximately $0.3 million in related acquisition costs. Visio accounted for the acquisition as a purchase with approximately $3.6 million of the purchase price allocated to acquired in-process
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
technology and the balance of the purchase price of $3.2 million was capitalized and will be amortized on a straight-line basis over its remaining useful life of five years.
The operating results of Boomerang Technology Inc. and Sysdraw Software Company were not considered material to the consolidated financial statements of Visio and, accordingly, pro forma information has not been presented.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information is as follows:
Visio's common stock has been traded on the Nasdaq National Market under the symbol VSIO since the Company's initial public offering in November 1995. The high and low closing sales prices noted above are as reported on the Nasdaq National Market. On November 28, 1997, there were 119 holders of record of the Company's common stock. The Company has not paid cash dividends on its common stock.
SCHEDULE II
VISIO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the sections labeled "Election of Directors" and "Additional Information" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 25, 1998.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the sections labeled "Election of Directors" and "Additional Information" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 25, 1998.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the sections labeled "Additional Information" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 25, 1998.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the sections labeled "Additional Information" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 25, 1998.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements included in Item 8, Financial Statements and Supplementary Data, are set forth in the Index to Financial Statements listed on page 22 of this Annual Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule is set forth in the Index to Financial Statements listed on page 22 of this Annual Report on Form 10-K.
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the financial statements or notes thereto.
3. EXHIBITS
The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index contained herein.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended September 30, 1997.
INDEX TO EXHIBITS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized.
VISIO CORPORATION
/s/ JEREMY A. JAECH ------------------- Jeremy A. Jaech President and Chief Executive Officer
Date: December 23, 1997
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints Jeremy A. Jaech and Theodore C. Johnson, and each of them, with full power of substitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons, on behalf of the registrant, in the capacities and on the days indicated.